Earnings Call Transcript - TBBK Q4 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to The Bancorp Inc. Q4 and Fiscal 2025 Earnings Conference Call. This call is being recorded on Friday, January 30, 2026. I would now like to turn the conference over to Andres Viroslav. Please go ahead.

Andres Viroslav, Investor Relations

Thank you, operator. Good morning, and thank you for joining us today for The Bancorp's Fourth Quarter and Fiscal 2025 Financial Results Conference Call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Dominic Canuso, 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 12:00 p.m. Eastern Time today. The dial-in for the replay is 1-888-660-6264 with the passcode of 65852. 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 30, 2026. 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 mentioned 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. Please note that The Bancorp undertakes no obligation to publicly release the 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'd like to turn the call over to The Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?

Damian Kozlowski, CEO

Thank you, Andres, and thank you for joining our call today. At the beginning of the quarter, we announced the new brand that better represents the future of our company. It is a bold representation of the exciting future in front of us. Please refer to our website and other company marketing materials for transformation. The Bancorp earned $1.28 a share in the fourth quarter. EPS growth year-over-year was 11%. GDV continues to grow above trend with a 16% increase for the quarter versus the fourth quarter of the prior year. Revenue growth in the quarter, which includes both fee and spread revenue and excludes credit enhancement income, was 3% versus the fourth quarter of the prior year. For the year, GDP growth was up 17%. In 2025 over 2024, total fee growth was up 21%. Our three main fintech initiatives ended the year well positioned to create significant shareholder value in the future. First, our credit sponsorship balances ended at $1.1 billion, up 40% from the third quarter and 142% year-over-year. We exceeded our goal of at least $1 billion in credit sponsorship balances ending at approximately $1.1 billion. We hope to add at least two new partners this year and we'll make announcements at the appropriate time. Second, our embedded finance platform development continued to progress on pace with an expected launch early this year. And third, new program implementation timelines, Cash App being the largest, are on track and should deliver meaningful contributions both to GDV and fee revenue in 2026 and beyond. All three initiatives should have an increasingly positive effect on our financials as we move through 2026 and show significant impact as we enter 2027. We also made progress in reducing our criticized assets, which include both substandard and special mention assets. These assets declined from $268 million to $194 million, or 28% quarter-over-quarter. We expect more progress over the next few quarters. Delinquency declined substantially from 2.19% of loans at the end of the third quarter to 1.6% at the end of the fourth quarter. I now turn the call over to our CFO, Dominic Canuso. Dominic?

Dominic Canuso, CFO

Thanks, Damian, and good morning, everyone. Overall, it was a strong fourth quarter and finish to 2025, building momentum on our APEX 2030 strategy. ROE was a record 30.4% in the quarter and 28.9% for the full year, continuing the trend of year-over-year improvements. Ending assets increased to $9.4 billion, up 7% versus the prior year, as the total loan portfolio increased by $919 million to $7.26 billion, driven by $644 million in consumer fintech loans, which now constitutes 15% of our loan portfolio. In addition, in the quarter, we purchased $317 million in bonds, 82 of which were fixed-rate agencies, bringing our investment portfolio to 18% of assets and relatively consistent with year-end 2024. Liquidity continues to be very strong with average deposits in the quarter of $7.6 billion with an average cost of 177 basis points. 95% of our deposits are from fintech partners with 92% of total deposits being short-term. With the continued growth of credit sponsorship and our overall fintech business, noninterest income, when excluding the credit enhancement, accounts for just over 30% of revenue in the quarter, with approximately 90% of fees coming from the fintech business. As Damian mentioned, we continue to see significant improvements in our leading credit metrics, including criticized assets, delinquencies, and nonaccruals. When excluding fintech loans, which are covered through the credit enhancement, the provision for loans in the quarter was $858,000, down significantly from $5.8 million in the third quarter. Similarly, net charge-offs in the quarter were $629,000, also down meaningfully from the $3.3 million in the third quarter and consistent with the low end of recent historical averages. Noninterest expense for the quarter was $56.2 million and included $2 million from a legal settlement relating to a previously disclosed legal proceeding initiated in 2021. We are actively engaged with our insurance company on recovery, including potentially recapturing historical legal fees. When excluding the legal settlement, costs were up only 5% versus the fourth quarter of 2024, as we continue to scale our platform and reallocate resources to support continued top-line growth. Lastly, we purchased $150 million of our stock, or 5% of outstanding shares, in the fourth quarter, bringing our full year repurchases to $375 million, or 12% of outstanding shares. I'll now turn the call back over to Damian.

Damian Kozlowski, CEO

Thank you, Dominic. We are initiating guidance of $5.90 EPS for 2026. We are targeting at least $1.75 a share in the fourth quarter of 2026. We are maintaining preliminary guidance for 2027 of $8.25 a share. Our guidance in 2026 and 2027 includes stock buybacks. 2026 buybacks are forecast to be $200 million total or $50 million a quarter. Our three major fintech initiatives, platform efficiency, and productivity gains from platform restructuring and AI tools, coupled with a high level of capital return through continued buybacks, will be the driving forces behind EPS accretion. EPS gains are subject to development implementation timelines in fintech and our stock price for buybacks. Operator, could you please open the lines for questions?

Operator, Operator

Your first question comes from Joe Yanchunis with Raymond James.

Joseph Yanchunis, Analyst

So your outlook calls for a rather steep EPS ramp. And I understand some of the underlying revenue drivers are dependent on partner activity, such as launching embedded finance and the new Cash App cards. Having said that, are you able to give us some more building blocks to help us bridge the EPS gap?

Damian Kozlowski, CEO

Yes. So they are large revenue opportunities. And we've got more clarity now than we did at the end of last quarter where we did not issue preliminary guidance for 2026. We're on track with our initiatives. I think we're going to have some interesting announcements on the credit sponsorship over the next few quarters. And then we're going to be launching our embedded finance platform because we're at the stage now where we're confident that we'll be able to complete the platform for certain use cases by the beginning of 2026. We're very clear on the projections because of other program implementation guidelines. We now can better predict where we're going to be at the end of the year. And we think we're confident that we can hit that $1.75 billion number at the end of 2026. And if we stay on track with our plans, 2027 could be a really interesting year for the company.

Joseph Yanchunis, Analyst

Okay. I appreciate that. And if we just go back to the fourth quarter, you called out a couple of drivers or a few drivers that kind of weighed on results. Are you able to unpack those a little bit more?

Dominic Canuso, CFO

Sure. Joe, this is Dominic. Yes, I think the first, obviously, we called out the legal fees. The second driver was just the unexpected duration of the government shutdown, which we believe affected the global economy and flow of both payments and deposits through the business, reducing GDV slightly versus the higher expectation and run rate we had been at earlier in the year and affected our balance sheet mix, which were the two primary drivers, again, with GDV being part of that. And then lastly, while you saw significant growth in our credit sponsorship balances, most of that was at the end of the fourth quarter, which demonstrates the anticipated growth we expect through 2026. But it occurred later in the quarter than we expected, so we didn't generate as much average balance income that we had anticipated throughout the quarter. So those are the three major drivers. And while they affected the quarter where we ended the quarter, they set us up to achieve the full year and fourth quarter 2026 expectations that we've articulated.

Joseph Yanchunis, Analyst

Okay. So a potential weekend government shutdown is not expected to be a potential headwind for the first quarter of 2026 if everything comes back online.

Damian Kozlowski, CEO

Yes. We don't think so because we're already receiving a substantial amount of tax remittances that will go through our partner programs. It's going to be a very large tax year, there's no doubt about it. We're already seeing the positive impacts of tax season. And obviously, it's going to go to the underbanked and newly developed clients, so it should have a very good positive impact. It should also affect our second quarter as that gets processed through our programs.

Joseph Yanchunis, Analyst

Got it. And then one more for me here. So in your deck, you talked about exiting the quarter with $400 million in off-balance sheet deposits. Can you talk about the economics of this program? And should we expect all future deposit flows to be swept off balance sheet?

Dominic Canuso, CFO

So we do expect to continue to generate, as Damian mentioned, particularly with the tax season coming up, generating deposit growth that outpaces our demand for it. We will continue to look at the mix of our deposits on the balance sheet, prioritizing the lower-cost deposits while shifting towards higher-cost deposits off balance sheet. We see this as an opportunity to optimize our earnings as we generate revenue through this excess liquidity into systems like IntraFi, and we look to monetize that particularly as we continue to grow in the second half of the year.

Damian Kozlowski, CEO

Up to now, it's all been about reducing our funding costs as we've taken the high-cost deposits off balance sheet. In the future, though, as we have larger amounts of excess deposits, we will generate some income over the reduction in funding costs, but we haven't experienced that revenue yet.

Operator, Operator

Your next question comes from Emily Lee with KBW.

Emily Noelle Lee, Analyst

This is Emily stepping in for Tim Switzer. I have a few questions related to the REBL book. Can you confirm that all the announced refinancings were with entirely new partners? And was there any additional equity put in? And what were the new interest rates versus the old ones?

Dominic Canuso, CFO

Sure. Yes. So some of the refinancings were with new partners, and some were recapitalizations. At the end of the day, the existing properties were in a significantly stronger position than when they were originated, and given the lower interest rate environment, there was some step-down in yield in the portfolio. But all of the positions are stronger than when we originated them with stronger sponsorships and mostly new partners.

Emily Noelle Lee, Analyst

Got it. And then what is the plan for the Aubrey now? I think on the Q3 call, you indicated you hoped to get more clarity in the next 30 to 60 days, so just wondering if you have any update.

Dominic Canuso, CFO

So we continue to see the benefits of the investments we've made to stabilize the property. Every incremental room we add increases occupancy rates. In the last year, we've more than doubled the available rooms and continue to see occupancy of available rooms in the 80s. We're getting close to breakeven on a cash flow basis, which we expect in the second quarter. At this point, we continue to look for exit opportunities. Given the strength and the performance we expect in both occupancy and future positive cash flow after breakeven, we will look for broader opportunities as a stabilized property exit, which would increase the potential value relative to our balance sheet and the estimates out there.

Damian Kozlowski, CEO

Yes. And the appraisal is over $50 million. We had it reappraised and at a stabilized level now we're getting good line of sight to completing all buildings and achieving an 80% occupancy rate over the next couple of quarters. Once we get there, the number of buyers multiplies significantly, and we have the potential to monetize a gain on the property. We're excited about exiting, but we will be prudent for our shareholders to ensure we maximize the property's value.

Emily Noelle Lee, Analyst

Great. That was helpful. And then I have two more questions. There's been a lot of discussion lately about fintechs obtaining their own bank charters. Most of that has focused on how it could be a threat to partners, as they may no longer need a bank sponsor. Can you respond to that and also outline any potential opportunities?

Damian Kozlowski, CEO

Yes. With our partners, there are many that will never need to get a license. We're conducting corporate payments and many activities across our verticals, especially in government sectors, where there will be no need for a license. While some of the credit sponsorship areas, such as Chime and PayPal, may have types of licenses, we don't see our major partners transitioning towards licensing. The reason is valuation and oversight; the scrutiny that comes with licensing outweighs the benefits. What we deliver to clients is a scalable middle office platform at low cost. Many of our partners are limited in their capabilities but benefit from our infrastructure, which remains advantageous for them. Therefore, we do not foresee significant impacts on our portfolio or from future developments.

Emily Noelle Lee, Analyst

Okay. Great. And then just if I could do one more. Can you walk us through the economics of your off-balance sheet deposits in the sweep program, specifically how much you generate from that? And is it expected that most incremental deposit growth will flow from there?

Dominic Canuso, CFO

Sure, Emily, this is Dominic. We just mentioned in Joe's question that leveraging the balance sheet to off-balance sheet deposits was primarily for optimizing our funding and increasing our net interest margin. Going forward, as we generate larger amounts of lower-cost deposits, that is when we’ll turn it into a revenue generator. We do plan this year for deposit growth to exceed our balance sheet capacity and loan growth. Therefore, we expect some revenue generation from off-balance sheet activity, but we anticipate more potential as we continue to add partners and grow our programs.

Damian Kozlowski, CEO

Over time, our funding costs will reduce as we continue to generate excess deposits. As we shift higher-cost savings deposits off of the balance sheet, our funding costs relative to federal funds should decrease. If we account for fees, our overall funding costs will decline further. We're in a very liquid position with downward pressure on deposit costs, given the balance sheet's liquidity.

Operator, Operator

Your next question comes from Stephen Farrell with Oppenheimer.

Unknown Analyst, Analyst

I just have a quick question about the REBL loans. Regarding the $102 million in criticized loans this quarter, can you provide any color on what markets they were in?

Damian Kozlowski, CEO

Well, they were in several markets; there wasn't a single concentration. We're focusing on growing regions, primarily in the Southeast and places like Texas and Florida, as well as Georgia. We are not engaged in markets like California or New York, where the legal and structural environment is less favorable. This approach enables us to navigate risks more effectively and maximize our opportunities.

Unknown Analyst, Analyst

Okay. And I think you mentioned that some of the LPs were recapitalized, but the principal loan balance and the refinancing was the same, right?

Damian Kozlowski, CEO

Yes. So when we do these, there's a very good marketplace after such events. It was not isolated. But there were definitely capital pools looking to take out other sponsors. If you think about it, these are three-year loans; transitioning a property after two years can present challenges. Our worst asset was the Aubrey, and that is now approaching stabilization. But generally, variables have been favorable for us, with strong demand for sponsorship pools forming as they look to invest in well-positioned properties, enabling us to see these options materialize over time.

Operator, Operator

Your next question comes from Joe Yanchunis with Raymond James.

Joseph Yanchunis, Analyst

So I believe you mentioned earlier in the call that you were looking to add potentially two new partners to your credit sponsorship lending portfolio. Do you have a sense for a year-end exit rate for the size of that portfolio? And should you need to rationalize other portfolios to make room? Can you talk about where you would start?

Damian Kozlowski, CEO

Yes. We want to add at least two partners, and I think we've got good visibility on that. We're targeting, and remember, the Chime program is growing pretty aggressively. If you look at that level of growth, we haven't announced exactly where they're going to be, but we anticipate it's going to be at least $2 billion, potentially up to $3 billion. It really depends on the onboarding of new partners, noting that we have great visibility on the Chime relationship. By the end of 2026, our target is to potentially double where we are today, and that's a good estimate for our growth trajectory.

Joseph Yanchunis, Analyst

And then also, should you need to make room on your balance sheet, what would you prioritize?

Damian Kozlowski, CEO

Yes. We've already done some restructuring. We have a good understanding of the economics of these businesses. The first area where we reduced our participation was in our institutional business concerning non-purpose securities loans. We also stopped loan origination for life insurance and investment finance acquisitions. We have sufficient liquidity to accommodate our credit sponsorship growth and room for enhancements, capitalizing on our strong loan-to-value ratios. If necessary, we have multiple strategies in place for reallocating resources effectively.

Joseph Yanchunis, Analyst

Okay. And then lastly, just kind of taking your previous answer of potentially doubling your credit sponsorship loans and winding down some of the lower-yielding portfolios. I was hoping you could kind of blend all that with your other comments and help us think about the NIM a little bit, which has been volatile.

Dominic Canuso, CFO

Sure, Joe. This is Dominic. There will continue to be some variability quarter-to-quarter in the net interest margin, particularly as deposits flow through and we optimize what's on and off balance sheet. As Damian mentioned, we want to maintain flexibility in our balance sheet to maximize leverage while creating room for growth in the fintech business. That balance sheet mix will inevitably affect the NIM. We expect some compression of the NIM throughout the year, especially as we transition to fintech, doubling down on consumption of lower-cost deposits, which generates more fee revenue than interest income. While we anticipate the NIM to compress near 4%, we expect fee income to represent 35% of total revenue, excluding credit enhancement.

Damian Kozlowski, CEO

Yes, you can always add back some metrics. We have a clear line in our financials for interest; it's essential to note that we receive income from fees based on our agreements with partners. By adding back this fee income, you can get a clearer sense of the overall NIM of the company, even though it's a non-GAAP measure.

Operator, Operator

There are no further questions at this time. I will now turn the call over to Damian for closing remarks.

Damian Kozlowski, CEO

Thank you, everyone, for joining us on the call today. Management will be attending investor conferences and meetings throughout the quarter, including attending the KBW Winter Financial Services Conference in February, and we look forward to meeting with many of you. Have a great day. Operator, you may disconnect the call.

Operator, Operator

Ladies and gentlemen, this concludes your conference call for today. We thank you for participating and ask that you please disconnect your lines.