Bancorp (TBBK) Q4 2024 earnings call transcript

Thank you, operator. Good morning, and thank you for joining us today for the Bancorp's fourth quarter in fiscal 2024 financial results conference call. On the call to me today are Damien Kozlowski, Chief Executive Officer, and Paul Frankel, 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 1-87-39. Before I turn the call over to Damien, I would like to remind everyone that our comments and responses to questions reflects Manage's view as of today, January 31st, 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 state public provisions of the private securities litigation reform act of 1995 and are subject to risk and uncertainty 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-gapped financial measures during this call, additional details and reconciliations of gaps to adjust the non-gapped financial measures are in the earnings release and the investor presentation.

Please note that the bank corp 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 here of or to reflect the occurrence of unanticipated events. Now I would like to turn the call over to the bank corp's chief executive officer, Damien Kudelowski. Damien?

Thank you, Andre. Good morning, everyone. The bank were 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 urine deposits, and a significant reduction of shares year-over-year of approximately 10% due to an enhanced 24-by-back of $250 million.

Fintech solutions continues to build volume volumes and is the major driver profitability growth from both fees and lower-cost stable deposits. For full year, 24, GDB grew 15% over the prior year. However, the fourth quarter saw significant acceleration with GDB 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 the BCH 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 a 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%. Your end-substandard loans in our Rebel portfolio declined 14% compared to September 30, 24 due to a loan portfolio sale, and the percentage further declined on January 2nd 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 525 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 a 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. I now turn the call over to my colleague and CFO Paul Frankel.

Paul Frankel Thank you, Damien. 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 30th, 2024 was comprised of consumer fintech loans.

The fourth quarter in net interest margin of 4.55% compared to 4.78% for third quarter 2024 and reflected $1.3 million of prior period interest reversal on rebel loans included in an $82 million year-end rebel 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 and reflected $1 million resulting from growth in loan principle between the third and fourth quarters of 2023 against which CSEL loss and qualitative percentages are applied.

An additional $1 million resulted from increasing the CSEL economic factor on rate real estate bridge loans. The balance of the provision in fourth quarter 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 31st, 2024, while the macroeconomic environment has challenged the multifamily bridge space. The stability of the bank corps 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 as is LTV of 70 percent 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 rebel loans have respected as is and as stabilized weighted average LTVs of 73 percent and 63 percent.

Excluding the consumer FinTech accounting offsets noted previously, non-interest income for Q4 2024 was $34.7 million which was 28 percent higher than Q4 2023. Prepaid debit card, ACH and other payment fees increased 16 percent 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 long-standing 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 percent higher than Q4 2023. The increase included a 22 percent increase in salaries and benefits which reflected higher staffing costs related to payments related to financial crime, IT and incentive compensation expense including stock compensation expense.

In summary, the bank works 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 workhouse housing, 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 in the cash value of life insurance while SBA loans are either SBA 7A loans that come with significant government guarantees or 504 loans that are made at 50 to 60 percent 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. I will now turn the call back to Damien.

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

Okay. So the first part of it, the GDB has continued to be accelerated. So in January, we're still seeing 19, 20% GDB growth. So that is, you know, I was kind of a liar last year. I said we would be above trend on GDB and we just, we just were a little too late on implementations to get the real kick at the end, but you saw it in the fourth quarter. So GDB is very strong.

That's number one. Number two is the fee. What's happening is that we've worked very hard to expand the product set, as you know, credit sponsorship.

We're expanding the programs with our primary client, but then with new clients. So it's kind of building a layer cake now. So you're getting kind of fees on top of fees from our primary relationship.

So, you know, where we were in the fourth quarter, if you look over the year over year, a lot of that is run rate business and then you're going to have the additional balances. The balances on the credit sponsorship could be over a billion dollars for this year. So, so you're going to get a fee growth in the, at least in the high 20s for, if you look at all the fees, right? So if you look at the ACH, the base fees that we have, which are less determinative with GDB, because the relationships have expanded so much and have additional fee sources and they're kind of all additive to each other. So if you look at the whole fee structure, it's going to be at least in the high 20s if you include the credit sponsorship piece.

And if you take that out, you're still with, at our GDB growth now, you're in the high teens if you have the ACH and related fees and the base card fees. So it's very strong historically and we haven't seen this type of growth in GDB and well, obviously ever in fee growth, but we've haven't seen this type of volume growth since the pandemic with massive government stimulus.

So that was one time items, now it's based on diversity of product and also on the new larger programs that we put on our platform.

So it's near term. We have, as you can see, we have a very strong growth and deposits with ads, obviously to our cash balances. However, what's going to happen in the near term, it's depending on implementation of which programs, lending programs, and credit sponsorship primarily because what happens is some of these products are only fee based, like, for example, they might pay products, right? We do have additional liquidity because they're funded with a demand deposit, but the result for us is all fee based. Even though you kind of on a counting basis, it's a fee. However, that's our payment for that product.

In the near term, there might be some minimum erosion, even though we're getting more profitable. However, that'll turn around substantially as new programs that are interest based and not primarily fee based, get implemented. And those are on our platform now with our client. So you'll see, you might see a depression because it's in the credit sponsorship fee line, but then it'll reverse and the fees will slow down and then the non interest, the interest income will increase.

But the result is basically the same. It's just in the wrong category, right? You're seeing a fee that is really the payment would be traditionally. It's not NAMM, but we're calculating the economic benefit of having the program.

Yeah, so we think we're over the peak now, right? There might be a couple of modifications, a couple of substandard loans, but we can see a significant decrease over the next quarter, potentially, or two quarters. So we have the Aubrey sale, but we have other, there may be additional loan sales and we know where we are with, we're closely tracking all the, all those loans.

In addition, remember, we had a third party review of the portfolio. So we're very confident now, I think, that we're on the other side of the peak and they should, we should show real good progress this quarter and going into the next quarter.

Yeah, and on the $10 million, it's a developing situation where we think we have an issue with that amount of loans. And as Damien said, we have, we all believe that we've reached the peak and we have the Aubrey sale coming up and we have other things. And other loan sales are, in fact, possible. So it's not going to be a perfect, you know, reduce, reduce, reduce, you may have a small loan, like the $10 million that might become an issue. But again, even with that, as with all the modified loans, we have very strong protection against loss in the LTVs and we don't expect, number one, we don't expect net increases in the sub standards and in those types of loans with issues, they're going down.

They should consistently go down. We think they're going to go down in the first quarter. But in fairness to the presentation, we do disclose that.

Yeah. We really can't. It's a developing thing. We'll fully disclose it when we can. And we think we, there will be no loss.

Yeah. So we, we do. We have an offset. So they're, you know, there's, it's really backed up by the client on these types of loans that we're currently doing. So this, the way it works, you got to remember when we, when we're working with a client, these large clients, we're holding the entire profitability of the bank at us. We, we get everything first. So it's interchange, whatever, right? We also, they also post collateral for these loans on additional, additionally.

So we have the offset, which far outweighs the, what would be in the, the loss category would be the interchange for these large programs. That's first plus we have the backstop plus we have, you know, they post collateral. So it's very, very low. You know, it's nothing zero, but it's as close to zero that you can on the, on the, on the riskiness of the loans.

And, and as far as your other question on the contract and how the accounting relates, they're, they're really technical accounting guidance that, that we're looking at those agreements. And we obviously would rather not have, have like a somewhat of a distortion by, 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'll be an issue going forward if we can make those minor tweaks to the agreement.

You know, 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 Damien had said, in these, in these cases, the bank is fully protected to the extent that it can be like the dollars are really there. So there's, there's really no, no significant issues. Remember, we're holding all the interchange prior and we, we're a very small part of it. So we, we kind of dole it out to everybody else. That's the first part of it. That is a huge number, right? This is very small compared to that. However, we do also have collateral, but it's, it's a one to one offset.

When, when it goes over a certain amount of time, I'm not going to disclose, but it's a couple of, we have an exact day when that day happens, then that is funded and that offset happens. So if it goes a certain amount of time, that, that loan isn't paid back. Remember, these are very quick loans, right? So if it isn't paid back, then the offset occurs.

Not necessarily. Like if 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 of the income. Yeah. So we have, the way we implemented the program was kind of secured, we have a credit builder program, which is secure credit card. We have SPOTME, which is a kind of a fully secured overdraft that, and this, in my pay is kind of a free loan, if you remember, this is the highest growing one so far.

It's a free loan to the client. And the only reason that the client pays anything for that loan is because they want it immediately. And that's the source of fees for our partner and for us, right? And with that comes a deposit at zero.

So, you know, the interest income that would have been charged is actually being generated in a fee for rapid advance, right? So, but the way we implemented these programs, these were trying to make sure that we build it in the right way is to start with those type of programs with a primary client like we did, but then add the interest more complicated products and then expand it to other programs, which is we're in the process. So you'll see those balances like you've saw in the fourth quarter rapidly grow, and then you'll see rapid product diversification.

And so some will be fee-based. In the future, it'll be very diversified, but there'll be a lot more interest income at much higher rates.

It's some will, right? So, if they're kind of renting our balance sheet, like in this, in that particular program, it'll be fee-based. It probably won't have the interest component. It'll be programs like that, but as into the future, there'll be programs where, say, they're all, they could be much higher interest rates, right? And we would hold that many times they'll be securitized within three or 30 days. So that'll be very fee-based with a lot of velocity, right? So it will be small balances, but a lot of loans will be going through the balance sheet, which will generate both spread, but fee income. But then we will also hold a very diversified set in the future, but maybe ten programs, right?

A very small stretch. They'll be small balances, but they could add up to a billion dollars, but it would be very diversified. We'd get a lot of interest income. In that case, they would not be backed up by the partner, but then those would be extremely profitable because you get much much higher. It's a small strip. They're very quick, terminating loans. We hold a small strip and they're very diversified. So those would be, that's where we want to go at the end of the day, to have a portfolio of multiple programs, very small. Very small, because if you think about it, if you have a billion of those over ten programs, that is immensely profitable because the velocity on those ones are so quick.

You get not only high interest rates, but you also get high fees. And then the majority of it is securitized outside, and that generates a fee additionally. So those loans are incredibly profitable, and it makes your balance sheet much larger than it is. For example, on the 454, right? So if you look at that 454, even in our current programs that we have, that 454 really represented about two billion of loans. It actually went through the system and were repaid. And the 19 million being part of the loss of people who didn't pay it back, but that is far outweighed by the fees that were generated for people wanting the money early.

That 19, that hasn't been disclosed. You see our part of it. You don't see our partners part of it. But that is far, that loss is far outweighed by the fees generated.

No, that's not really, 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 GDP number is really the main driver. We also have other temporary flow businesses, like B2B payments and stuff that are growing very quickly, that money goes through the bank and that bank is here temporarily.

So it's really a volume drive. That's the deposit number. If you look at our GDP growth was 15 and the deposit growth was 16. That tells you that right there. So the extra 1% is what probably the credit bills are part of it.

Yes. So we do. Yes. We do. We have a conservative, depending on the programs we have, we go through a process and we basically set a limit. And I think they would be there will be a use of our balance sheet and it depends on the types of products. But when we do this, we will set a limit. And we even though this is kind of fully secured at this time, we have set a limit on the balance sheet that we think is conservative and we go through a risk management process.

So, and the ramp up is, you know, we really do see clear vision to a billion plus this year. Most of that will come from our current partner, but it will will be ramping up other programs. And so it's very possible. And if you recall Apex 2030, we had a $3 billion kind of target for 2030. It's very possible that that $3 billion will be reached at the end of 26.

So it's our perspective has changed on the people who want to work with us and build out these programs. But you'll see the, like we said before, you'll see that lower risk business is kind of the first option. And then you'll see the diversification, securitization, and you'll also see higher rate loans in a very diversified manner being put on the balance sheet. It won't, you know, if you think about it just conceptually, if we had $3 billion in a couple of years, probably up to $2 billion would be this very, very low risk business.

And then you'd have the diversified strips of business for maybe a billion on the balance sheet. And that probably wouldn't grow substantially over the next couple of years. But we would be working with more and more partners and there would probably be more securitization of those assets.

It's going to vary. But remember, it's rolling over, right? So, so to the extent that there are losses where we have credit enhancements in that way. So the money gets, or it would be either the bad loan or the unpaid loans are sold or otherwise repaid. It's a constant flow. So that balance is never really going to grow that significantly.

It's a very, it's the same thing for the last couple of years. We're going to add, you know, three, four partners a year.

The, their expanded needs. So our conversations are not only on the expanding to the credit side, or maybe on the debit side of your credit provider, but also things like we're building out in embedded finance. So the conversations are more broad. The disruption in industry has made the industry for us at least far less price sensitive, right? So people, especially the large complex players are looking for a long term. If they've decided, and I think most of them have, not to be a financial institution per se, they are looking for a, you know, a five year minimum, 10 year, 20 year solution. Somebody that they can work with to provide access to the banking system, but then also grow with them and be an enabler.

And at the end of the day, we're not the innovator, we're the enabler. So do we have the, the wisdom from past experience, but also the relationships in the industry of which we obviously do to solve problems for them because they want to innovate. I mean, it's clear that all these FinTechs now want to have a very diversified portfolio and it's not even debit credit embedded finance. It might even be things like securities trading, etc. So that's where this industry is going.

And so we're developing our capabilities along with it, right? And that demand is definitely there. We don't, I think we're going to have, like we saw in the fourth quarter, we're going to have a dramatic 25. You should, if you just take a run rate and just multiply it by four, you'll see substantial growth. But what's most exciting isn't that for us. It's these new product development areas. And, and it's once again, it's a layer cake. So we've got the base business growing double digits. And then you add on two products, a rapid expansion of things like rapid funds, and then you also have new product categories, which are all fee based. And then have totally connected to all the other fees that we're generating that create sustainable GDP.

So the more complex, they're much more product focused. There's not a lot of pricing pressure, at least now on us. But we're a fair price or two. We're not, we have such scale that, you know, we, we, when we do these big contracts, they have tears. So as we grow with our client and expand the product set, they, on our base business, they get, they reach certain levels.

We make more money and they make more money. So everybody, and we're very, if you recall, we're very small piece of the interchange story. So, you know, we're, we're, we're the last person to, we have all the money in the beginning, but we don't keep a lot of it. We give it to every, you know, we, you know, we give it to the networks, we give it to our program managers. But because of our scale and sophistication, we can turn a very little, a bit of redo meringation into, because there's so much going through the bank.

We can be very efficient for a partner, but we can make a lot of money while we're doing that.

Yes, no, we're in the other capital deployment priorities. No, unless there is some inorganic thing that we did the, and we don't expect to do anything big like that. So the, the, we are dedicated to 100% repatriation of our net income.

So the, it's senior secured debt. We never had any sub debt. We, we raised $100 million at low interest rates. It was at a very low coupon when that was, and we did 100 million kind of to test it. It was way oversubscribed. And we had it for five years. And now it's being repaid. There's 96 million left of it. We actually bought some of it in the open market during the. You know, the stress period because we actually got it at a discount. And so we put our own debt back. But so the, the, we could substantially, the only reason we would borrow.

Probably is to the stock was unfairly valued in an extreme way. So we don't, we expect just to pay back the 96 million. We can do that out of cash flow and sustain our capital next year. As we continue to grow net income, buybacks will mirror net income because we have no other debt. That's our only debt. There's no other use of it. So we don't, and we don't need any more capital because the red guy, I, and the Durban limit. So unless they raise the Durban limit to, and there's some discussion that that might happen, which would be enormously beneficial for us.

If that happened, unless that happens, we're going to stay giving all the money back, but increasing the velocity of our balance sheet dramatically through things like credit sponsorship, through the sale of maybe SBA guaranteed by selling, you know, rebel loans and packages and stuff like we have in the past. And that will make our balance sheet appear to be a lot more productive than the average balance sheet, which would continue, will allow us to continue to generate substantial fees. Now, if you think about, I'm going to give you one more thing. And that's, if you thought about the last few years, we had a filling up to the balance sheet in the NIMC category, right?

So we were building what we consider low risk businesses, and we were kind of building for the future of this product diversification. And then we got that balance sheet opportunity. We hadn't bought a bond, and we locked in our, in lowered our asset sensitivity last year in April when we bought almost a billion dollars of bonds, right? So interest rates go down. It's not really going to affect us very much. About a 1% for a hundred, it's a very, but now it's the inflection point. Now it's not those businesses that are driving.

And the man, you know, is the businesses, the NIM businesses, levering up, and then it was locking it in. We went from variable to fixed. Now, the whole story now is, is credit sponsorship. It's syntax, right? So now fee growth is going to take over. At least for the next couple of years until we get a lot of these other programs that are much higher spread in the consumer fintech world. But they'll, but it'll all be fintech. So you're going to get a reordering of how our balance sheet has grown.

And then the big bump from the, what we call project flex was the balance sheet management during the pandemic. And now it's the whole story is the fintech story. The growth is there, the fee growth is there. Even on the credit side, it's going to be mostly the credit sponsorship story.

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