Some General Thoughts and The Bancorp (TBBK)

One of the many lessons in Reminiscences of a Stock Operator is that when you are handed a bull market, the most important and hardest thing to do is just sit and be patient.

“It never was my thinking that made the big money for me. It always was my sitting. Got that? My sitting tight! It is no trick at all to be right on the market. You always find lots of early bulls in bull markets and early bears in bear markets. I’ve known many men who were right at exactly the right time, and began buying or selling stocks when prices were at the very level which should show the greatest profit. And their experience invariably matched mine–that is, they made no real money out of it. Men who can both be right and sit tight are uncommon.”

This is not an easy time to add to the stocks you own. It is likely not the right time to add too many new names to the list (which is why I have not posted too much the last few weeks). But at the same time, you have to be careful about saying that this is the time to get out, if your reason is simply because the market is going up.

I imagine that we have to be in some sort of bubble, at least in so far as many tech names. The numbers of the SaaS names are truly outlandish. And for a company like Zoom, with a vaccine on the horizon, I just cannot fathom how the comps will be favorable to their results come next fall and winter.

I did not take heed of the great Livermore’s advice in this case. I pared back many of my SaaS names even before news of the vaccine and let the rest of them go on the day or two after (With SharpSpring and Intellicheck, if that is really SaaS, being the exceptions). But I was wrong. Names like Atlassian, PagerDuty, and Slack, all names I owned in the summer and early fall, have powered far higher then where I sold. I was simply not patient enough.

If I am to be honest, also at play is that my style is just not well suited to these mid-to-large cap high-priced names. It is too easy to sell Atlassian or Slack at the drop of a hat and on the first hint of fear that the multiples will crash. I am simply a micro-to-nano-cap investor, and it is in that horribly frustrating and insensible space that I am at home.

Fortunately, we really are in a bull market for these names. I tweeted a week or so ago about the moves in some of the small-green stock names – ENG, OEG, IPWR, and BEEM (none of which I owned at the time but all of which I have owned at various times). Insane moves that really make little sense for companies that are of a questionable business model.

But even the good businesses – like the one’s I like to think I own – are doing well right now. It is a bull market. While the first lesson is to be patient, the second, I think, is not to fall prey to the belief that your particular stock picking abilities are anything special. You may feel quite smart because your names are all going up, but right now, all names are going up. What’s more, the names that are going up the most are the one’s that are probably not the best selections in more normal times. So don’t get a full head from it.

The only conclusion that can be drawn in this market is if your names aren’t going up, or if they are worse – going down, then you must conclude you are doing something wrong and it is time to regroup. But otherwise, I don’t think it is helpful to draw any other conclusion, other than that axiom – it’s a bull market.

With that said I did find another bank I like. Two actually – the other being Megalith, the soon to be spin-off of Customers which I dug into this week and decided I liked quite a bit, but I will talk about that one later. I will talk about The Bancorp now. I’m going to refer to them as TBBK, because the The Bancorp sounds weird to me, a little presumptuous.

TBBK is a little like Silvergate. A “little” I say – for unlike Silvergate I do not expect the stock to more than double in two months or triple in three. TBBK is not involved in blockchain or anything like that. But TBBK, like Silvergate, has developed a business line that is largely independent of their deposit base and their net interest margin. And this business is growing because of shifts in the financial landscape that seem likely to continue. Together this factors give TBBK, like Silvergate, the opportunity to grow far beyond their book value, if all goes well.

TBBK acts as the back-end, FDIC bank holding partner for the group of companies collectively being called the “challenger bank service companies”. These are names like chime, SoFi, venmo, even PayPal though they are so large it is hard to call them a challenger.

Some of these names are growing their business extremely quickly. chime quadrupled their customer base in 2019. They doubled it again in the first few months of 2020. I am not sure where chime’s customer base is now because chime, like most of these names, is private and so you only get snippits from articles.

Challenger banks like chime seem to resonate with the millennial. According to Forbes, 2/3 of chime’s customers are under-40.

But these bank challengers are not banks. Unless they get a bank charter of their own, they need a partner to take the deposits and get direct access to the payment system.

That is where TBBK steps in. TBBK operates two businesses that act as the back-end bank to the front end challenger.

Their payment solutions business issues prepaid cards and private label debit cards with TBBK as the sponsor. They offer these cards for chime, incomm, PayPal, SoFi, HealthEquity, SMI and others.

Their payment acceptance business processes payments and transfers. Major customers are PayPal, venmo, ACI, and Intuit.

From what I can tell, the revenue TBBK derives from these businesses is directly proportional to the transactions on the challenger bank platforms. As TBBK says in their 10-K:

The majority of fees we earn result from contractual fees paid by third-party sponsors, computed on a per transaction basis, and monthly service fees.

So as the challenger bank space grows, so will the fees earned by TBBK.

One question that comes up is will chime and others just go ahead and get a bank charter of their own? I can’t be sure, but I don’t think so.

If you listen to what chime says, they are clearly trying to differentiate themselves as not being a bank. This is because they do not want a bank multiple, they want a fintech/SaaS multiple. Getting a bank charter would not help them in this regard.

What is funny to me, is that from what I can tell these bank challengers are generating revenue in much the same way as banks always did. chime, for example, seems to get nearly all their revenue from interchange fees, the fee paid when a transaction is performed. These are the same fees TBBK is getting, they probably just split them with TBBK. But chime, when it goes public, will get an outlandish multiple for that fee income, while TBBK barely trades over book (it is about 1.3x right now).

TBBK is estimating next years earnings at $1.70 per share. The stock is $13. That does not seem right to me.

Admittedly, the bank does not have a perfect history. There have been some bad loans. Until it was lifted just a month ago, TBBK was under a consent order from the FDIC for unsafe banking practices, which goes all the way back to 2012.

Nevertheless, I think the stock is more likely to go up than down, particularly given all my previously mentioned vaccine tailwinds on top of this undemanding valuation. And, its a bull market of course. I do have notes on the stock and will add them to this post in a bit.