The Bancorp, Inc. (TBBK) Earnings Call Transcript & Summary

Good afternoon, ladies and gentlemen, and welcome to The Bancorp, Inc. Q1 2025 Earnings Conference Call. [Operator Instructions] This call is being recorded on Friday, April 25, 2025. I would now like to turn the conference over to Andres Viroslav. Please go ahead, sir.

Thank you, operator. Good morning, and thank you for joining us today for The Bancorp's First Quarter 2025 Financial Results Conference Call. On the call with me today are Damian Kozlowski, Chief Executive Officer, and Martin Egan, our Interim 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 a passcode of 80395. 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, April 25, 2025. Yesterday, we issued our first 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 those 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 and the investor presentation. 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?

Thank you, Andres. Good morning, everyone. The Bancorp earned $1.19 per diluted share in the first quarter, reflecting a 12% increase over the first quarter of '24. Net income increased 1% between these periods, while outstanding shares were reduced as a result of increased repurchases that occurred during 2024. Our Fintech Solutions Group continues to show significant momentum with GDV increasing 18% year-over-year and total fees growing 26%. Credit sponsorship balances grew to $574 million or 26% quarter-over-quarter, and we expect these balances to grow to over $1 billion by year-end '25. We believe that growth in the first quarter was slowed by the impact of tax refunds, and we expect greater growth in balances over the next 3 quarters. While loan balances grew 17% year-over-year, net interest income was down 3%. Loan balances, excluding consumer fintech loans, grew 6%. Net interest income reflected in part the impact of a lower rate environment in the latter part of '24 on our loan interest income, which was down 5%. The impact of lower rates was mitigated by our purchase of $900 million of fixed-rate bonds in April 2024 and excess deposit balances held in Fed funds. Those bond purchases and other fixed-rate strategies have reduced our asset sensitivity significantly. We continue to focus on reducing substandard assets in our REBEL portfolio. Respective REBEL substandard and special mention loans at March 31, '25, were down 1% and 20% compared to the prior quarter end. We continue to believe that we are at the peak of substandard assets and believe we will show progress in reducing substandard assets over the next several quarters. Lastly, based on the momentum in our Fintech Solutions Group and our reduced asset sensitivity, we are confirming guidance of $5.25 per diluted share for '25. EPS does not include the impact of $150 million of stock buybacks authorized for 2025. I now turn the call over to our Interim CFO, Martin Egan.

Thank you, Damian. As was the case in the prior quarter, provisions for credit losses for consumer fintech loans and freestanding credit enhancements were recorded in the financial statements in like amounts with no impact on net income. In the current quarter, the provision related to consumer fintech loans was $45.9 million, and the credit enhancement income was also $45.9 million. Net interest income was 3% lower than the first quarter of 2024, while the first quarter net interest margin of 4.07% compared to 4.55% for the fourth quarter of 2024. As Damian noted, the current quarter's net interest income was impacted by a lower rate environment, which also impacted the net interest margin as loan yields fell more than deposit rates. Additionally, fees on the majority of our growing consumer fintech loan balances are recorded as noninterest income. Average Fintech Solutions deposits for the quarter increased 26% to $7.81 billion from $6.18 billion in the first quarter of 2024. As noted in our filings, we have the capacity to transfer deposits from certain of our relationships off our balance sheet, which we utilize for balance sheet management. Excluding consumer fintech loan credit enhancement income, noninterest income for Q1 2025 was $37.8 million, which was 29% higher than Q1 2024. Total fintech fees accounted for most of that increase. Prepaid debit card, ACH, and other payment fees increased 13% to $30.8 million over that period, and consumer credit fintech fees of $3.6 million accounted for the remaining increase in fintech fees. Noninterest expense for Q1 2025 was $53.3 million, which was 14% higher than Q1 2024. The increase included an 11% increase in salaries and benefits. Additional details regarding our loan portfolios are included in the related tables in our press release, as well as our earnings contributions for our payment businesses. I will now turn the call back to Damian.

Thank you, Martin. Operator, could you open the line for questions?

[Operator Instructions]. Your first question comes from Frank Schiraldi with Piper Sandler.

I wonder if you guys could -- just in terms of the margin, which has obviously been a little bit of a moving target here. You mentioned the reduced asset sensitivity. And obviously, with the fintech loans, you get income elsewhere. But just for modeling purposes, I was wondering if you could provide the average yield on the fintech loans over the last couple of quarters? And also, if you could give what your asset sensitivity is now in terms of, given a 25 basis point rate cut.

So, for the fintech loans, it's a Fed fund, we get a 0% interest rate deposit, and we get 5% on the loans. So, that portion of it is translated into a fee. So, that's for modeling purposes. That does move if it is based on an enhancement of Fed funds, which stops at some point. So that might move a little bit, but that's not really very sensitive generally for a bracketed kind of fee base. So that will help maintain the NIM, even if you went down to 0 interest rates, that would still be significantly above Fed funds. What was the other question?

The asset sensitivity, how much of --

So that moves around based on both the liabilities and the assets. So when we purchased, we got it down to almost a neutral. It moves around temporarily depending on our modeling, but we reduced it a lot. At one point, it was 8%. And I think in the last quarter, it was close to 1%, right? But it moves around. So, depending on whether we get a surge in deposits, what those deposits are, it can move from 1% to 3%, depending on the utilization of the balance sheet. And we still target to be in that 1% zone and be just slightly asset sensitive.

And sorry, just on the fintech stuff, did you say the yield is 5% on that? Is a lot of that flowing through fees as opposed to NII?

Yes. Currently, it is. A couple of things. It's the average balance. There are payoffs. So you see, an average balance is really the thing to use, not the end-of-period balance. And it goes through cycles. So, there's a lot of velocity on these loans. So, you get a lot of variability in balances over the quarter. So, if you use the 3.6% and you look at the average balance, it won't be exact, but it should be fairly close.

So that's 5%. So you're really not getting these balances on the balance sheet and in the average balance sheet, but you're not getting any yield running through NII for these?

Well, we get loan balances, but we don't get any. Yes, we have one small program that's growing. So you will see it. I think there's a little bit of interest in the current income statement. There are 4 different programs, remember. And there's something called Insta loan. When we roll out these programs, our partner is kind of gated. They go in stages. So that one is growing now. So that one was approximately $25 million at the end of last quarter. So that one will be growing. And that won't show up in fees, that will enhance the NIM.

But overall, as these things grow, as you go from $500 million to $1 billion, your NIM is just going to fall because the denominator is higher, and most of the stuff is coming through fees?

Correct.

And then just a couple of quick ones on credit, or just in terms of the REBEL migration, you continue to grow that book. How successful are you guys? I mean, I would imagine some stuff is starting to move off the balance sheet, is stabilized, and moving into permanent financing. Do you have any numbers you can share on those outflows in the first quarter?

We haven't disclosed that. We don't have that in our disclosures. We'll think about putting that in. But we haven't disclosed that in the earnings release. So, we'll have to look at that. The book has been fairly stable. The deal market isn't great right now. So we're being very selective. We put on enhanced underwriting because of the tariffs. So we have greater reserves on the loans. We have questionnaires for different borrowers, like things in the SBA. So we're going through based on the current market environment, we're being very careful. Spreads were very narrow, and they've widened. But theirs deals still getting done, and we enhanced underwriting, and we're putting additional reserves and things like the REBEL portfolio to make sure that there's not any disruption and that there's plenty of funds available to rehab apartments.

The next question comes from Tim Switzer with KBW.

I have a follow-up on the margin trajectory in Q1. So, we saw the loan yields come down similar to Q4. But the deposit costs didn't come down quite as much. And I know you guys kind of have a contractual, almost 40% beta embedded within the portfolio. Is there a timing difference here that we should see a catch-up in Q2? Or what drove the more stable deposit costs?

Yes, it was a mixed issue. So our programs vary greatly, not on the economics of the program, but how it's split between deposit and fees. And so we had one of our programs that is more deposit-based, has a much higher deposit that we pay out, ballooned in the first quarter due to insurance payments. And so you saw a higher funding cost, which will roll off over the next quarter or so. So, it was about $500 million of deposits that are related to insurance settlements, and that will roll off. And that was part of the reason you saw a higher deposit cost.

And so it's safe to assume that's also the reason we saw basically a $600 million increase to average cash on the balance sheet, which also weighed on the NIM?

Yes, that was definitely one of the drivers. We had very good deposit growth. The tax season was extremely strong. And we had, for the first time, deposit balances on many end of weekends that were $9 billion. We've never hit that type of number before. And so, there were a lot of tax receipts. It actually had an impact on things like MyPay because people got their tax returns, so they didn't take as much of the fintech loans in February, which reduced our fee income in February. So it can be very volatile.

And if we think about the NII and NIM trajectory going forward, the mechanics of it is it NIM improves in Q2 as those higher cost deposits roll off, and NII, I guess, is probably fairly flat plus some growth given loan growth?

It should be. Yes. So that's exactly, that's correct.

So the deposit cost should move back down, kind of, in line with that 40% beta [indiscernible]

Depending on when those deposits are made, there's more than that going on. We're offloading high-cost deposits. So we have variability in our deposit base. And so, some higher cost deposits, like saving deposits, we've been moving off the balance sheet for some of our programs. So that also will help the NIM and lower the deposit cost.

And then I have another quick question on the take rate on GDV. It looks like it went down a little bit. Were there any one-timers in there? Or should we expect that to be a new run rate going forward?

Once again, that's very volatile. I think you have to look at that over. That's a mix. Once again, it's a mixed issue quarter-to-quarter. And it's once again based on -- it's hard in the first quarter because it's the anomalous quarter due to the tax receipts. So that was lower than usual. That's the first part. The second part is the 1:1 that we used to experience is better if you put the 2 lines together. So if you put that ACH and other fee line together with the card line, it's because our pricing has more and more moved to multiple products. And because of that, it's multiple fees coming from the same programs. So it's better to look at it by the 13% number is the way to look at the GDV. So if we had 18% growth and 13% total fee growth for the first 2 lines in the financial statements, you can keep the credit sponsorship out, that's even additive. But once again, that's the same program. So for a chime, you're getting a triple layers. We call it the layer cake, but you got triple layers of fees coming from the program. And if you look in the past and try to compare it, there weren't these other ancillary services. So it's much better to take the first 2 lines, the card fees, and the other fees together versus GDV, and now give you the first 2 fee sources for our larger programs. And that's why that's a more relevant measure than it was, say, 5 years ago.

And if I can have one more, please. There's been a lot of disruption in the Banking-as-a-Service space, with some smaller competitors looking to exit or pull back at least, and there's another competitor exploring strategic alternatives. Has this created any opportunities for Bancorp to maybe acquire new programs or portfolios, or entire business lines? And what's your approach to that?

So we're working with the largest, highest-growth partners, and so we've been preparing ourselves. Many of the competitors in the space have programs that we wouldn't necessarily be interested in. We're looking at expanding our large relationships and then adding product capabilities. And I think we have some very exciting things. We think we can sustain this GDV level for multiple years. I think we'll have interesting things to tell the market. Things aren't done until they're done. But I think as we add these larger programs, they will be meaningful to the financial statements. And when they happen and when they're ready to be announced, we'll either have a press release or 8-Ks. So we think our current GDV, that 18, 13, is sustainable. Now with the enhancement of credit sponsorship, we can think mid-20s is a CAGR of 25% is not out of the question. And we're still building other delivery models like embedded finance, which would enhance that additionally and add other credit sponsorship programs. So we're preparing ourselves to have expanded relationships with more products and a sustained level of higher GDV, which has a lot of implications. So, we have to invest in our platform and make it extremely robust. It's systemically important to the financial industry when you have such a big exposure to the largest programs that span 15 different verticals, but span every state of the union and almost every person. So we're investing in it. We expect sustained levels of higher GDV growth. And when we get a product or new relationship expansion that's meaningful, we will announce it at the appropriate time.

The next question comes from Joe Yancunis with Raymond James.

So I just wanted to follow up on some of the commentary you made on your credit sponsorship program. So, you have 4 programs that are currently contributing to your growth right now. Just to reiterate, you have 3 that run solely through fee income and one that has little NII. Can you reach your '25 and '26 year-end targets with just these 4 programs?

So in our plan, there's a difference between our plan and just those 4 programs' plan. So in our own budget, it's in the $850 million range. And just those 4 programs are over $1 billion. So yes, the answer is yes. Even if we don't add a program, we'll be able to meet that $1 billion target. And we're already well on the way. We're at $571 million at the end of the quarter. The growth we're experiencing is very robust. So, we think we'll be able to get there even just with those 4.

And then shifting gears here. In the prior quarter, you used about 1/4 of your 2025 share repurchase authorization. Given the recent dislocation in the stock, should we expect you to lean into the buyback a little more and front-load your repurchase activity for the year?

So and I've mentioned this before, but nothing has been decided, and that's subject to Board approval and everything else. Our net income kind of target is around the $250 million level. And $100 million of that is going to repay debt, approximately $100 million. We have one senior secured facility at the holding company level, and we plan to repay that debt. And that's why our buyback is $150 million. At that repayment, we're basically at where we want to be on our capital levels. So, we could refinance that debt or add more. It's doubtful that we just do $100 million. We would do more than that. And then we would use all those proceeds, depending on the rates in the market and our stock price, we would use that to enhance our buyback. However, I just want to reiterate, nothing has been decided. We're on the track right now just to repay the debt, but it is being considered that we would raise probably more than the debt that's going to be repaid and use those for buybacks, depending on the prevailing rates and the stock price.

And then last one for me here. Just going back to the GDP growth, and I certainly understand your commentary about continuing to maintain at these current levels, if not accelerate. But is there any way to kind of look into all this payment volume that you see? And are you able to see any changes in the behavior of the consumer in light of the heightened economic uncertainty?

Yes. So our data has been used by even institutions like the Fed, it's so broad to understand activity. So the thing I would say is that we're nominally based, not real dollars. So things like inflation, so say you have consumer spending go down by 4%, but inflation was 8%, we'd actually have a 4% positive. It's all nominal. And a lot of our payment volume is necessary payment volume. It's coming from the normal everyday people doing transactions that are absolutely necessary. They're buying milk or they're going to the theater or whatever it is. And so even if consumer spending goes down, in a deflationary environment, it would be bad for us. You got that environment, and consumer spending went down; that would be very bad for us. But what's good for us, inflation is actually good for our realization of revenue. So you'd have to have, unless inflation goes down much lower, and consumer spending is down much lower. But remember, our consumer spending is definitely not discretionary. A lot of our spending is necessary. You get a paycheck, and a lot of people are paycheck to paycheck. Our portfolio tends to be more paycheck to paycheck individuals.

The next question comes from Frank Schiraldi with Piper Sandler.

Damian, just one follow-up. Just on the OREO property that is going to be or has been delayed to May, the closing date of the sale, and I know you're supposed to get that deposit in a couple of days. You mentioned in the release, you talked about the change in ownership, I think, at the buyer. And just wondering your thoughts there. Are you still confident? Is it more tenuous now that we have a change in ownership of the buyer? Or just your general thoughts on that closing in May?

I don't think so. They had a change in their group. This is a group that's trying to build a portfolio of assets. And this change in ownership strengthened that group. It didn't take away from that group. And so they had to work out among themselves through several different filings and negotiations. And so they're continuing to support the property, and they paid insurance, and they're fixing the -- it's been leased up. It's not all the way leased up, but it's in a much better position, almost at the breakeven level. It's at the 65%, 70% level now. This is where the property starts making money. So everything is a green light. We've been very flexible with them because they've been a great partner, and they say what they're going to do, and they had this issue, and we wanted to make sure that they're still investing in the property. So it's a very good faith situation. We're still expecting the deposit and the close date to be held.

There are no further questions at this time. I'll turn the call over to Damian Kozlowski, the Chief Executive Officer. Please go ahead, sir.

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

Thank you. Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.