Bancorp, Inc. Q4 FY2024 Earnings Call

Good morning, ladies and gentlemen, and welcome to The Bancorp, Inc. Q4 and Fiscal 2024 Earnings Conference Call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question-and-answer session. This call is being recorded on Friday, January 31, 2025. I would now like to introduce your speaker for today, Andres Viroslav. Please go ahead.

Thank you, operator. Good morning, and thank you for joining us today for the Bancorp's fourth quarter and fiscal 2024 financial results conference call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Paul Frenkiel, our Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call available via webcast on our website beginning at approximately 12 p.m. Eastern Time today. The dial-in for the replay is 1-888-660-6264 with a passcode of 18739. Before I turn the call over to Damian, I would like to remind everyone that our comments and responses to questions reflect management's view as of today, January 31, 2025. Yesterday, we issued our fourth quarter earnings release and updated investor presentation. Both are available on our Investor Relations website. We will make certain forward-looking statements on this call. These statements are subject to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risks and uncertainties that could cause actual results to differ materially from the expectations and assumptions we mention today. These factors and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures during this call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are in the earnings release and the investor presentation. Please note that the Bancorp undertakes no obligation to publicly release results of any revisions to forward-looking statements which may be made to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. Now I would like to turn the call over to the Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?

Thank you, Andres. Good morning, everyone. The Bancorp earned $1.15 a share for the fourth quarter and $4.29 for the full year 2024. The year-over-year EPS increase for the quarter was 41% and 23% for the full year. EPS was driven by higher total revenue year-over-year of 8%, excluding $19.6 million of consumer fintech non-interest income correlated with related provision for credit losses. The increase in EPS was led by the growth of total fintech fees, 16% year-over-year growth in year-end deposits and a significant reduction of shares year-over-year of approximately 10% due to an enhanced '24 buyback of $250 million. Fintech Solutions continues to build volumes and is the major driver of profitability growth from both fees and lower cost stable deposits. For full year '24, GDV grew 15% over the prior year. However, the fourth quarter saw a significant acceleration with GDV growing 19% year-over-year. Total fee growth was 18% for the year from all fintech activities, which ballooned to 29% in the fourth quarter year-over-year, driven by credit sponsorship and 78% growth in ACH card and other payment processing fees, which includes rapid funds transfers. The Fintech Solutions Group continues to add new partnerships and expand existing programs. For example, credit sponsorship continues to grow significantly and we anticipate balances to approach $1 billion by the end of '25 with the addition of new partnerships. Fourth quarter credit sponsorship fee grew 91% quarter-over-quarter with quarter-end loan balances growing from $280 million to $454 million or 62%. Year-end substandard loans in our REBL portfolio declined 14% compared to September 30, '24 due to a loan portfolio sale and the percentage further declined on January 2, with a loan repayment. We expect this trend to continue with little to no loss. We continue to maintain significant coverage on these loans with low leverage and expect further progress by the end of the first quarter. Lastly, led by the broad-based and increasing growth in our Fintech Solutions Group, we are affirming '25 guidance of $5.25 a share. The guidance does not include $150 million of share buybacks for '25 or $37.5 million per quarter. Buybacks have been reduced $100 million in '25 from '24 to facilitate the repayment of $96 million of senior secured debt. Depending on prevailing rates, we may reissue $100 million or more of senior secured debt. Those proceeds would likely be used for further buybacks of shares.

Thank you, Damian. Based upon applicable accounting guidance, lending agreements related to consumer fintech loans had certain provisions accounted for as freestanding credit enhancements, which resulted in the company recording a $19.6 million provision for credit losses and $19.6 million in non-interest income, resulting in no impact to net income. In the fourth quarter, the company recognized a $1 million recovery from the trust preferred security, which was written off in the fourth quarter of 2023. One of the primary strategies of the company is to create a meaningful footprint in credit sponsorship lending after having begun to generate balances in the third quarter of 2024. We are proceeding prudently in our fintech credit strategies and currently are generating balances with lower potential loss exposure. We believe we will be able to originate loans with higher yields and/or fees in the future. The majority of the increase in year-end loan balances compared to September 30, 2024 was comprised of consumer fintech loans. The fourth quarter net interest margin of 4.55% compared to 4.78% for the third quarter 2024 and reflected $1.3 million of prior period interest reversal on REBL loans included in an $82 million year-end REBL loan sale. Average Fintech Solution Group deposits for the quarter increased 16% to $6.99 billion from $6 billion in fourth quarter 2023. Excluding the consumer fintech accounting offsets noted previously, the provision for credit losses on loans was $2 million in Q4 2024 compared to $4.1 million in Q4 2023. Q4 2023 reflected a $1 million resulting from growth in loan principal between the fourth and the third and fourth quarters of 2023 against which CECL loss and qualitative percentages are applied. An additional $1 million resulted from increasing the CECL economic factor on real estate bridge loans. The balance of the provision in the fourth quarter of 2023 primarily reflected the impact of leasing-related charges, approximately $900,000 of which were in long haul and local trucking. The largest component of the 2024 fourth quarter provision also reflected the impact of the trucking and related categories. Total principal exposure in those trucking categories was approximately $32 million at December 31, 2024. While the macroeconomic environment has challenged the multifamily bridge space, the stability of the Bancorp's rehabilitation bridge loan portfolio is evidenced by the estimated values of the underlying collateral. The $2.1 billion apartment bridge lending portfolio has a weighted average origination date and an LTV of 70% based on third-party appraisals. Further, the weighted average origination date as stabilized LTV, which measures the estimated value of the apartments after the rehabilitation is complete, may provide even greater protection from losses. Significantly, outstanding modified REBL loans have respective as-is and as-stabilized weighted average LTVs of 73% and 63%. Excluding the consumer fintech accounting offsets noted previously, non-interest income for Q4 2024 was $34.7 million, which was 28% higher than Q4 2023. Prepaid, debit card, ACH, and other payment fees increased 16%, accounting for the majority of the increase. Those increases reflected both higher rapid funds transfer income and higher prepaid and debit program sponsorship income driven by both new client relationships achieving scale and the continued organic growth of longstanding client relationships. The increase in non-interest income also reflected consumer fintech fees of $3 million, reflecting the company's third quarter 2024 entry into credit sponsorship. As previously noted, we believe we will be able to originate loans with higher yields and/or fees in the future. Non-interest expense for Q4 2024 was $51.8 million, which was 14% higher than Q4 2023. The increase included a 22% increase in salaries and benefits, which reflected higher staffing costs related to payments for financial crime, IT, and incentive compensation expense, including stock compensation expense. In summary, the Bancorp's balance sheet has a risk profile enhanced by the special nature of the collateral supporting its loan niches and related underwriting. Those loan niches have contributed to increased earnings levels even during periods in which markets have experienced various economic stresses. Real estate bridge lending is comprised of workforce housing, which we consider to be working-class apartments at more affordable rental rates in selected states. We believe that our underwriting requirements provide significant protection against loss as supported by LTV ratios based on third-party appraisals. Further, S-block and I-block loans are respectively collateralized by marketable securities and the cash value of life insurance, while SBA loans are either SBA 7(a) loans that come with significant government guarantees or 504 loans that are made at 50% to 60% LTVs. Additional details regarding our loan portfolio are included in the related tables in our press release, as are the earnings contributions of our payments businesses, which further enhances our risk profile. The risk profile inherent in the company's loan portfolios, payments funding sources, and earnings levels may present opportunities to further increase shareholder value while still prudently maintaining capital levels. Such opportunities include stock repurchases, which are planned in 2025.

Thank you, Paul. Operator, please open the line for questions.

Thank you, ladies and gentlemen. We will now begin the question-and-answer session. Your first question comes from Frank Schiraldi with Piper Sandler. Please go ahead.

Good morning. Regarding the acceleration of GDV in the quarter, Damian, I’m interested to hear your observations so far for early 2025, as well as your thoughts on year-over-year growth in GDV for that year. Additionally, could you discuss the increase in fee income? I know that consumer credit is contributing to some good fee income growth, but if we focus on deposit-related fees, what kind of increase can we expect with a GDV growth of 15% or 20%? Thanks.

The GDV has continued to accelerate, showing growth of 19% to 20% in January. Last year, I underestimated our GDV performance, as we were slightly late on implementation to fully capitalize at the end of the year, but we did see strong results in the fourth quarter. The GDV is robust. Additionally, we have made significant efforts to expand our product offerings. As early adopters of rapid funds and now with credit sponsorship, we are broadening our programs with both existing and new clients, effectively creating a layered revenue structure. This results in accumulating fees from our primary relationships. Looking at the fourth quarter year-over-year, much of our performance is from steady business, with expected additional balances. The credit sponsorship could contribute over $1 billion this year, leading to fee growth projected to be in the high 20s across all fees. The ACH and base fees, while influenced by GDV, have become less defined due to the expanded relationships and multiple fee sources that complement each other. Hence, the overall fee structure is likely to be at least in the high 20s, including the credit sponsorship aspect. Excluding that, our continuing GDV growth suggests high teens for ACH, related fees, and base card fees. Historically, this performance is exceptionally strong, and it's noteworthy that we haven't experienced such GDV and fee growth since the pandemic, which was driven by one-time government stimulus events. Now, our growth is fueled by a diverse product lineup and new larger programs on our platform.

Okay. All right. Great. That's great color. And then, just on net interest income and the NIM, obviously, you had the interest reversal in the quarter. But then, you also have these significantly higher consumer balances that seem to be earning more on the fee side than maybe in terms of yield. So I'm just curious, if you can talk through, is that kind of the name of the game? Can we continue to see maybe some margin compression and more pickup on fee income or what are your thoughts on margin in 2025?

In the near term, we are experiencing strong growth in deposits, which contributes to our cash balances. However, what will take place in the near future depends on the implementation of various lending programs and credit sponsorship. Some of these products, like the MyPay offerings, are primarily fee-based. While we have additional liquidity from these products funded through demand deposits, the revenue we generate from them is entirely fee-based. Although it may appear as a fee on the accounting side, it represents our payment for that product. In the near term, we might see some net interest margin erosion even as we become more profitable. However, this is expected to change significantly as new interest-based programs, rather than fee-based ones, are launched. These programs are currently available on our platform with our clients. You may initially notice a decline in the credit sponsorship fee line, but this will eventually reverse, leading to a slowdown in fees and an increase in interest income.

Okay.

But the result is essentially the same; it’s just classified incorrectly. You’re observing a fee that is typically associated with payment, although it doesn’t fall under net interest margin. However, we are assessing the economic advantage of having the program.

Sure, I understand. Lastly, I noticed in the footnote of the release that you mentioned having two smaller non-accruals after the quarter ended, amounting to just under $10 million. I believe these are in the REBL book. Can you discuss those, as I didn’t see any increase in delinquency during the quarter? Additionally, I’d like to hear your confidence regarding criticized classified loans, as it seems you indicated they might be nearing or have already peaked. Given that you had loan sales and balances have decreased, I wonder about your outlook going forward for these reaching peak levels. Do you anticipate needing or expecting to continue additional loan sales to offset possible inflows into those categories?

We believe we have passed the peak now. There may be a few adjustments and some substandard loans, but we anticipate a significant decline over the next quarter or possibly two. While we have the Aubrey sale, there may be more loan sales, and we are carefully monitoring all those loans. Additionally, we had a third-party assessment of the portfolio. We feel very confident that we are beyond the peak and expect to show substantial progress this quarter and into the next quarter.

We are currently addressing a situation with the $10 million in loans. As Damian mentioned, we believe we have reached the peak, and we have the upcoming RB sale, along with other potential loan sales. It won't be a simple process of just reducing numbers; there might be smaller loans like the $10 million that could pose challenges. However, we have strong safeguards against losses due to the loan-to-value ratios. We do not anticipate an increase in the substandard loans or loans with problems; rather, we expect them to continue decreasing, especially in the first quarter. We have transparently disclosed this information in our presentation.

Okay. So just on those two loans, I mean, at this point, I guess there's no additional color. They're in non-accruals. So, I guess, we assume, well collateralized but potentially fitting in?

We really can't provide specifics at this time as it is still an evolving situation. We will fully disclose it when we are able, and we believe there will be no loss.

Thank you. And your next question comes from the line of Tim Switzer with KBW. Please go ahead.

Hey, good morning. Thank you for taking my questions.

Good morning, Tim.

My first question is about the disclosures related to the loan agreements with the consumer fintech loans, specifically regarding reimbursement for the credit provision. Can you provide some general details about how those contracts are structured? Do you receive collateral if they cannot cover the losses? Also, do they supply the cash for the losses upfront or as they happen? Any information you can share on this would be very helpful.

We have an offset in place due to the backing from our clients on these types of loans. It's important to remember that when we engage with large clients, their profitability significantly impacts our bank. We receive the full benefit, including interchange fees. Additionally, clients provide collateral for these loans, which strengthens our position. This offset greatly exceeds any potential losses from the interchange associated with these large programs. We also have a safety net in place due to the collateral. As a result, the risk associated with these loans is extremely low, essentially negligible.

And as far as your other question on the contracts and how the accounting relates, they're really technical accounting guidance that we're looking at those agreements and we obviously would rather not have like somewhat of a distortion by showing a big number in a provision and a big number that's equal to that in the non-interest income. So we're looking at those technical requirements and we don't anticipate that it will be an issue going forward if we can make those minor tweaks to the agreement.

Okay. And just to be clear, so the collateral you have on your loans, you've received more than the $19.6 million you received, that's just when it gets recognized through the income statement. When exactly do you receive the collateral? And like, is it equivalent to like what you put up on the reserve side or is it a little bit higher?

Like, you could really get into the technicalities like you're suggesting with key accounts and when we get the money. The bottom line, as Damian had said, in these cases, the bank is fully protected to the extent that it can be like the dollars are really there, so there's really no significant issues.

We manage all the interchange upfront, but we only account for a small portion of it. We distribute it to others, and while that figure is substantial, our part is minimal. We also have collateral, which offsets on a one-to-one basis. After a certain period, which I won't specify, there is a specific day when funding occurs and the offset takes place. If the loan isn't repaid within that timeframe, which is typically short, the offset will happen.

Okay. Yeah. No, that helps a lot. And so is it fair to say you guys give up the interest income but still receive all the interchange for this arrangement?

Not necessarily, like it varies on different credit products. We price each credit product and each relationship differently. So you really have to. And at this point with the mix, we're not certain really ultimately what the mix is going to be. But as I said in my presentation, ultimately we expect we'll do other programs with higher yields and more fee income.

We have implemented a secured program that includes a credit builder program, which is a secured credit card, and SpotMe, which is a fully secured overdraft service. MyPay is a free loan option that has seen the highest growth. Clients only incur a charge for this loan if they want immediate access, creating a source of fees for both us and our partners. This setup does not require any deposits, so the interest income that would typically be charged is instead generated through rapid advance fees. We designed these programs carefully, starting with basic offerings tailored for primary clients before adding more complex products and expanding to a broader range of programs. You can expect to see the balances grow quickly, as well as an increase in product diversity. Some of these will be fee-based, but in the future, we anticipate a much larger proportion of interest income at significantly higher rates.

Okay. Understood. As you continue to diversify your products in the future, do you intend to include provisions in the loan agreements for reimbursement of credit losses, or will you pursue arrangements that are economically beneficial for your organization?

Some will, right. So if they're renting our balance sheet in that particular program, it will be fee-based and probably won't involve interest. There will be programs like that. However, in the future, there will be others where the interest rates could be much higher, and we would hold these, which are often securitized within three to thirty days. This will generate both spread and fee income, often involving small balances and a high volume of loans passing through the balance sheet. We aim to hold a diversified set of around ten programs with small strips, which might amount to a billion dollars, but still be very diversified, allowing us to earn significant interest income. These would not be backed by our partner, making them very profitable due to the higher interest rates. They would involve quick-terminating loans. Ultimately, we want a portfolio of multiple programs that are very small. If we have a billion dollars split across these ten programs, it could be immensely profitable because of the fast turnover of these loans, yielding both high interest rates and high fees. Additionally, most of it will be securitized outside, generating even more fees. For instance, considering the 454, it really represented about two billion dollars of loans that went through the system and were prepaid, with 19 million dollars lost due to defaults. However, that amount is greatly overshadowed by the fees generated from those seeking early access to funds. That 19 million hasn't been fully disclosed; you see our share but not our partner’s. Nevertheless, the fees received far exceed the losses incurred.

Well, yeah, it seems like a good product to get some strong risk adjusted returns here. If I can switch topics just a little bit here, the really strong deposit growth and influx of cash balances, was that related at all to the collateral you receive related to these loans? And then separately, do you plan to deploy that or move the balance sheet lower? Just looking for some color there. Thank you.

No, that's not really the driver. So the volume is the driver on that one.

The volume is the driver. There is some because the secured credit card obviously is secured with deposits. You do have some of that in the growth.

But the GDV number is really the ...

It's the main driver.

It's the main driver. We also have other temporary flow businesses like B2B payments that are growing very quickly. That money passes through the bank, which is only here temporarily. So, it's really a volume-driven deposit figure. If we look at our GDV growth, it was 15%, and the deposit growth was 16%. That indicates that the extra 1% is likely due to the credit builder aspect.

Got you. Okay. I appreciate all the color, guys. Thank you.

And your next question comes from the line of Joe Yanchunis with Raymond James. Please go ahead.

Good morning.

Hey, how are you? Good morning.

Doing well. I would like to discuss your credit enhanced program a bit more. Do you have any internal concentration limits on the size of the program? Should we expect the majority of the near-term growth to come from new partners or from existing partners adopting the program?

Yes, we do have a conservative approach. Depending on the programs, we go through a process to set a limit. There will be a use of our balance sheet, and it varies based on the types of products. As we review this, we will establish a limit which we believe is conservative, and we engage in a risk management process. We see a clear path to reaching over $1 billion this year, primarily from our current partner, while also expanding other programs. It’s quite possible we could meet our $3 billion target for 2030 by the end of 2026. Our perspective has shifted with increased interest from others who want to collaborate on these programs. Initially, you will observe lower-risk business as the primary form of adoption, followed by diversification, securitization, and the introduction of higher-rate loans in a diversified way on the balance sheet. Conceptually, if we achieve $3 billion in a couple of years, approximately $2 billion would likely come from very low-risk business, with around $1 billion coming from a diversified mix that wouldn’t see substantial growth in the near term. We will continue to partner with more entities, leading to an increase in the securitization of those assets.

Got it. I appreciate it. That was very helpful. And then just maybe to attack the collateral question for your credit enhanced program a different way. If you reach that $1 billion balance, at some point in the year, what would be the range of, maybe associated deposits that would come with that, that you would hold?

It will vary, but keep in mind that it's constantly changing. If there are losses where we have credit enhancements, the money will be either from the sale of unpaid loans or from repayments, resulting in a continuous flow. Therefore, that balance is unlikely to grow significantly.

Got it.

Yeah. Okay.

Okay. And then just kind of switching gears here. Can you discuss any themes or trends that have emerged from recent contract negotiations with your partners?

It's been consistent over the past few years. We're adding three to four partners each year to meet their expanded needs. Our discussions now cover not just credit and debit provisions for credit providers, but also areas like embedded finance. The industry's disruption has made it less sensitive to pricing for us. Larger, more complex players are seeking long-term solutions, typically spanning five to twenty years, as they look to access the banking system and grow alongside us. We're not the innovators; rather, we enable innovation. We leverage our past experiences and industry relationships to address their needs, as many fintech companies are pursuing diversified portfolios that include not just debit and credit, but also securities trading among other service offerings. We're adapting our capabilities to align with this evolving landscape, and the demand is considerable. As we saw in the fourth quarter, we expect a significant performance in 2025. If we take our current run rate and project it, we anticipate substantial growth. However, what's most exciting for us is in product development. Our base business is growing at double digits, and we're also seeing rapid expansion in products like rapid funds, with new fee-based categories that connect to our existing fee generation, creating sustainable growth. Our offerings are becoming more complex and product-focused, and currently, there is minimal pricing pressure. We approach pricing fairly, and due to our scale, our larger contracts are structured in tiers. As we grow with our clients and they expand their product offerings, both parties benefit financially. We're just a small component of the interchange landscape; we gather significant funds initially but distribute most of it to networks and program managers. Nevertheless, our scale allows us to convert a relatively small portion of revenue into substantial profits, while remaining efficient for our partners.

No, that was very thorough. And then last one for me here. What is the timing on the repayment of your sub-debt that you called out? And then separately, is there any reason buyback activity wouldn't snap back in 2026?

Yes. We were...

Or are there any other capital deployment priorities to consider?

Unless there is something unusual, we don't expect to make any significant changes. We are committed to fully returning our net income. This debt is senior secured, and we've never had any subordinated debt. We raised $100 million at low interest rates, which was highly oversubscribed, and we had it for five years. It’s now being repaid, with $96 million remaining. We even repurchased some of it in the open market at a discount during a stressful period. The only reason we might borrow is if our stock is undervalued. We plan to pay back the $96 million from cash flow while maintaining our capital. As we continue to grow our net income next year, stock buybacks will reflect that growth since we have no other debt. We don’t require more capital due to regulatory limits. Unless the Durbin limit is increased—which would greatly benefit us—we plan to return capital while significantly increasing the efficiency of our balance sheet through credit sponsorship and possibly selling SBA-guaranteed loans. This approach will enhance our balance sheet productivity and allow us to generate meaningful fees. Over the past few years, we filled our balance sheet with low-risk businesses to diversify our products in preparation for future opportunities. We secured nearly $1 billion in bonds last year, which reduced our asset sensitivity. Current interest rate changes won't significantly impact us. Now, our growth story focuses on credit sponsorship and fintech; fee growth is set to increase over the next couple of years, supported by our credit sponsorship initiatives. The narrative has shifted as we manage the balance sheet, reflecting the importance of fintech in our future growth and fee generation.

All right. Thank you. And there are no further questions at this time. I would like to turn it back to our CEO, Damian Kozlowski, for closing remarks.

Thank you, everyone, for joining us today. Operator, you may disconnect the call.

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect. Have a lovely day.