Bancorp (TBBK) Q4 2025 earnings call transcript

Thank you operator. Good morning and thank you for joining us today for the Bancorp's fourth quarter in fiscal 2025 financial results conference call. I'm going to call with me today or Damien Kozlowski, Chief Executive Officer and Dominic Knusso, 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 passcode of 65852.

Before I turn the call over to Damien I would like to remind everyone that our comments and responses to questions reflects management's view as of today January 30th, 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 security litigation reform act of 1995 and are subject to risk and uncertainties that could cause actual results different 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-GAP financial measures during this call.

Additional details and reconciliations of GAP to adjust at non-GAP financial measures are in the owners' release. Please note that the Bancorp undertakes no obligation to publicly release the results in any revisions to forward-looking statements which may be made to reflect events or circumstances after the daycare of or to reflect the occurrence of unanticipated events. Now I'd like to turn the call over to the Bancorp's Chief Executive Officer, Damien Kozlowski. Damien?

Thank you, Andres, and thank you for joining our call today. At the beginning of 2020, we announced a new brand that better represents the future of a company. It is a bold representation of the exciting future in front of us. Please refer to our website and other company marketing materials and information. The Bancorp earned about $28.25. EPS growth year over year was 11%. GDP continues to grow above trend at 16% increase for the quarter versus fourth quarter prior year. Revenue growth in the quarter which includes both fee and spread revenue and excludes credit enhancement income was 3% versus fourth quarter prior year. For the year, GDP growth was up 17%. In 2025, over 2024, enteral 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, continue 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 meaningfully both to GDP and fees revenue in 2026 and beyond. All three initiatives should be increasingly positive effect on our financials as we move through 26 and show significant impact as we under 27. We also made progress in reducing our criticized assets, which include both substandard and special mention assets. These assets declined from 268 to 194 million or 28% quarter of 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 CEO, Dominic Knussev Dominic.

Thanks, Dayton. Good morning, everyone. Overall was a strong fourth quarter and finished 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. Aning assets increased to 9.4 billion up to 7% versus prior year as the total loan portfolio increased 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 with 92% of total deposits in short. With the continued growth of credit sponsorship and our overall FinTech business, non-interest income, when excluding the credit enhancement account for just over 30% of revenue in the quarter, with approximately 90% of fees coming from the FinTech business.

As Damien mentioned, we continue to see significant improvements in our leading credit metrics, including criticized assets, delinquencies, and not accruals. 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 drops in the quarter was 629,000, also down meaning fleet from the 3.3 million in the third quarter, and consistent with the low end of recent historical averages. Non-interest 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 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. And now, turn the call back over to Damien.

Thank you, Dominic. We are initiated guidance of 590 EPS for 2026. We are targeting at least a $1.75 a share in the fourth quarter, 2026. We are maintaining a preliminary guidance for 27 of $8.25 a share. Our guidance in 26 and 27 includes stock buybacks. 26 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 plus a high level of capital return through continued buybacks will be the driving forces behind EPS accretion. EPS gains are subject to development and time lines in FinTech and our stock price for buybacks. Operator, could you please open the lines for questions.

Yeah, so they're large revenue opportunities and we've got more clarity now than we did in the last quarter where we did not issue preliminary guidance for 2026. We're on track with our initiatives. We continue to, 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 bed and 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 26. We're very clear on the, because of other program implementation guidelines, we now can better predict where we're going to be at the end of the confidence that we can hit that 175 number at the end of 26.

And then 27 is, if we stay on track where we are with our plans, 27 could be a really interesting year for the company.

Sure. Good morning, Joe. This is Dominic. Yeah, 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, you know, payments and deposits through the business. So, reducing GDV slightly versus the higher expectation and run rate we had been at earlier in the year. And, you know, affected our balance sheet mix, which were the two primary drivers, again, with the 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 expected throughout the quarter. So, those are the three minor major drivers, and while they affected in the quarter, where we ended the quarter, teased us up to achieve the full year and 24th quarter, 2026 expectations that we've articulated.

Yeah, we don't think so because we're already receiving, it's going to be a very large tax year. There's no doubt about it. We're already receiving a substantial amount of tax remittances that will go through our partner programs. So, it's the first way you never can, you know, it hasn't happened yet, but early indications where, you know, there's been a lot of talk about how good this tax season, we're seeing it, and obviously it's going to go to, you know, the underbanked and newly developed client, wealth clients. So, it should have a very good positive impact. And it should also affect our second quarter, also, as that gets spent through our programs.

So, we do expect to continue to generate, as Damien mentioned, particularly with the tax season coming up, generating deposit growth outpacing our demand for it. And so, we will continue to look at the mix of our deposits and on-balance sheet, the lower costing deposits while we mix shift, the higher costing deposits off-balance sheet. And I think we continue to see this as an opportunity to not only optimize our earnings, but generate revenue through this excess liquidity into the systems like Intrify. And we look to monetize that, particularly as we continue to grow in the second half of the year.

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

Sure. Yeah, so some of the refinancings were with new partners. Some were recapitalizations. At the end of the day, the existing properties were incredibly stronger positions than when they're originated. And then given the lower interest rate environment, there was some step down in the yield in the portfolio. But all the positions are stronger than when we originated them with stronger sponsorships and some existing partners, but mostly new.

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. So in last year, we've over doubled the available rooms and continued to see occupancy of available rooms in the 80s. We're getting close to break even on a cash flow basis, which we expect in the second quarter. So at this point, we continue to look for exit opportunities. But given the strength and the performance we expect in both occupancy and future positive cash flow after we get through the break even by mid-year, we will look for broader opportunities as a stabilized property exit, which would increase the potential value that we get relative to not only our balance sheet, but the estimates that are there.

And the appraisal is over 50. We had it re-appraised. And at a stabilized level now, we're getting, if we're renting 80% available rooms, we have good line of sight to have completing the all buildings and then having easily an 80% occupancy rate over the next couple of quarters. And then that say, once you get to that level, the number of buyers multiply significantly.

And we have a potential to monetize, obviously, again on the property. So if we're going to exit in a prudent way, this was probably the most difficult situation that we've had in our portfolio over the last five years. But we're working out of it. We've retained the value. We've had multiple partners. There's a lot of people interested, but we're at a stage where we want to exit it in the right way. And now that it's approaching cash flow positive, we're excited about it exiting, but we're also going to be prudent for our shareholders to make sure we get as much value out of the questions.

Yeah, so in our, with our partners, there are many partners that will, that aren't ever going to get a license, right? So we're doing corporate payments. We're doing a lot of things across our 15 verticals, governments, that you're never going to need a license, right? Or you're never going to obtain a license. It's really more narrow in some of the credit sponsorship areas, but also, you know, the chimes and the pay pals of the world. Many of them do have types of licenses like Utah, industrial banks and stuff where they might issue credit and everything. But we don't see our major partners. The reason is, is valuation and oversight. It's, once you, once you, there was a lot of concentration a few years ago, and a few people did get licenses, but you then get all the scrutiny.

You don't remember our, what we delivered to clients is a middle office, very scalable platform at a very low cost. And as you enter our ecosystem, you get to benefit all the information of all the programs. And we have 1.1 trillion going to the bank. So it's incredibly scalable. It's at very low cost. Even if you do get a license, you may use our infrastructure. So it doesn't even preclude somebody getting a license. And many of our partners have limited licenses of them using us because it's beneficial to them. So we don't see an impact right now on our portfolio. And we don't expect to have a major impact in the future.

Sure, Emily, this is Dominic. We had just mentioned in Joe's question that as of now the leveraging the balance sheet off balance sheet deposits was really a function to optimize our funding and increase our net interest margin. We believe going forward as we continue to generate larger amounts of lower cost deposits, that's when we'll turn it into a revenue generator. Now we do have plans this year to have deposit growth exceeding our balance sheet capacity and loan growth. And so we do expect some revenue generation from off balance sheeting this, but we look for more potential as we continue to add partners and grow programs.

It should over time our funding costs as we continue to generate, you know, there's like savings deposits at our higher cost. As we take those off the balance sheet, on a relative basis to Fed funds, our deposit costs will go down, right? It will go down. And if you've net out some of the fees that we will generate by taking even lower cost deposits off balance sheet because they'll be under Fed funds, you'll continue. If you add that back, you'll have even a lower funding cost. So it's very, we're in a very liquid position with a downward pressure on deposit costs based on the liquidity of the balance sheet.

Well, they were in a bunch of different. It was there wasn't a single concentration. So we're in red and really red and purple states. We really aren't in California, New York, those type of markets. And the reason we've done that is because that's where the growing markets are. But that's also where the legal and structural environment in real estate is advantageous. So for example, when we took over our asset in Houston. So we really focus in the it's really the southeast. A lot in Texas and Florida, but also places like Georgia.

And there was no, you know, it was across our portfolio. There's really no concentration in that number.

Yeah. So we so when we do these, there's a there's a very good marketplace after the event that happened. It happened across the industry, right? But there were definitely people pulls a capital that formed that, you know, they're looking to take out other sponsors. Because if you think about what happened was these are three year loans, you transition a property. After two years is when you might have a problem. You can't finish your property, but now you've invested substantial amount of money in remediating the property. Our worst asset with the Aubrey, and that's close to stabilize now. But generally, it's they get tapped out. These will have multiple and these properties usually might have multiple investors.

And at some point, they get tapped out. But there there's pulls a capital there that we can. And we have a great industry knowledge, locally in these markets. So there's always someone who's willing to take over, in most cases, willing to take over the property, infuse more capital. Usually the buyer will just either walk away or get some type of note. So when they monetize the property, they will get some of their investment back. So they're that formed after the, as people got in trouble and that started a lot of these sponsors. And we didn't have that many, to be honest, it was like close to 10 or 12 issues in our portfolio of 150 plus loans.

But other players, as you're aware, I'm sure, had much more severe issues. And since we had exit debt yields that were fairly high and our loan to values were fairly low, we were able to find additional sponsors with liquidity as it started to appear in with investors to work out these properties and to stabilize the loan and get the path forward to full stabilization and take out usually from government entities.

Yes. So we want to add at least two partners, at least two partners. And I think we've got two good visibility on two partners. So we'll make announcements when appropriate. We're targeting and remember the CHIME program is growing pretty aggressively. So if you look at that level of growth, we've been announcing exactly where they're going to be. That's up to them. But with their growth, and if you've seen the growth over time, it's going to be at least two billion, but it could be as high as three, right? So it really depends on the on ramp of new partners because we have great visibility on the CHIME relationship. But I think we're going to, we could easily be double where we are today at the end of 26.

And that's probably a good, you know, when we look at it, double where we are today is probably a good estimate of where we're going to be.

Oh, yeah. So we've already did some restructuring that we announced. So we have a very good idea of the economics of these businesses. So the first area where we reduced our participation was in our institutional business, where we do non-purpose securities loans. We also did loans for life insurance, you know, the whole value. And it's obviously liquid value of life insurance. And then we also did investor finance, which is really acquisitions in the RIA market. So we've stopped originating new loans in iBlock and also in that RIA acquisition business. So we think we have enough liquidity. We also have pools of capital in multiple areas where we can room. For example, we have SBA guaranteed paper that we don't have to hold.

And we'll just de-emphasize. We have a, you know, we have very good understanding of the economics. So obviously, the lower spread will de-emphasize first. And we have already have, we think we have enough room for 26 to do business. And it gives us plenty of runway. But ultimately, as credit sponsorship grows, we will continue to refine our businesses to distribute the loans. If you think about what we've, the businesses we have, we either have a demand loan or in many cases, even in the real estate area, and we've done this before, we securitize the loans into CLO structures or conduit structures. So we have a very good visibility. We won't have a problem around getting the liquidity we need to invest in new loan areas.

And the real trick of our balance sheet is velocity. So as we continue to emphasize credit sponsorship, but also in the traditional businesses, we set them up so that we can distribute them through usual market means.

Sure, Joe, this is Dominic. So 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. And maximize the leverage, but also create room for the growth of the FinTech business. So that, you know, that mix that we'll see on balance, you will affect the NIMM. We do expect some compression of the NIMM throughout the year, particularly as we shift more towards FinTech and double that, you know, that consumption on balance sheet, which generates more fee revenue and lower cost deposits than interest income. So that, as that happens naturally, you know, our profitability will increase, but net interest margin will come down a bit, but that will be replaced by a larger mix of the revenue as a portion of total revenue.

So I think we expect NIMM to compress near 4%, but as we grow, the income to be 35% of total revenue when excluding the credit enhancement.

Yeah, you could always add back. We have a line that's very clear in our financials that basically is interest, because that's the way we base it. We get it in fees because that's the way we need to book it through the GAP system, but you can always add that number back. And that'll give you a better idea of what total NIMM is. Now, this is a non-GAP measure, but just to make that clear, but the, we get a fee, but that fee represents an interest rate that we're, that we're agreed with our partner on. And if you add that back, you get a better sense of the total NIMM of the company, even though that is, once again, a non-GAP measure.

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.