The Bancorp, Inc. (TBBK) Q4 2025 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen, and welcome to The Bancorp Inc. Q4 and Fiscal 2025 Earnings Conference Call. [Operator Instructions] 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.

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 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?

Thank you, Andres, and thank you for joining our call today. At the beginning of -- 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 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 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 and total fee growth was up 21%. Our 3 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 2 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 time lines, Cash App being the largest are on track and should deliver meaningfully both to GDV and fee revenue in 2026 and beyond. All 3 initiatives should be an increasingly positive effect on our financials as we move through '26 and show significant impact as we enter '27. 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?

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 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, noninterest 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 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 was $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 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.

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 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 3 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 beat EPS accretion. EPS gains are subject to development implementation time lines in fintech and our stock price for buybacks. Operator, could you please open the lines for questions?

[Operator Instructions] Your first question comes from Joe Yanchunis with Raymond James.

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?

Yes. So the -- they're large revenue opportunities. And we've got more clarity now than we did last -- end of 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 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 '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 year. And we think we're confident that we can hit that $175 million number at the end of '26. And then if we stay on track where we are with our plans, '27 could be a really interesting year for the company.

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?

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. So 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 2 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 expected throughout the quarter. So those are the 3 minor major drivers. And while they affected in the quarter where we ended the quarter, tees us up to achieve the full year and fourth quarter 2026 expectations that we've articulated.

Okay. So a potential weekend government shutdown is not going to have -- that wouldn't be called out as a potential 1Q '26 headwind should everything come back online?

Yes. 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 you never -- it hasn't happened yet, but early indications where 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 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.

Got it. And then one more for me here. So in your deck, you talked about -- you exited 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?

So we do expect to continue to generate, as Damian 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 to the higher cost 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 IntraFi, and we look to monetize that particularly as we continue to grow in the second half of the year.

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

Your next question comes from Emily Lee with KBW.

This is Emily stepping in for Tim Switzer. So 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 rate versus old ones?

Sure. Yes. 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 yield in the portfolio. But all of the positions are stronger than when we originated them with stronger sponsorships and some existing partners, but mostly new.

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

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 the last year, we've over 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. 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 breakeven 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 out there.

Yes. And the appraisal is over 50. We had it reappraised 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 all buildings and then having easily an 80% occupancy rate over the next couple of quarters. And then that's a -- once you get to that level, the number of buyers multiply significantly, and we have a potential to monetize, obviously, a gain on the property. So we're going to exit -- 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 5 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 going to be -- we're excited about in exiting, but we're also going to be prudent for our shareholders to make sure we get as much value out of the property as we can.

Great. That was helpful. And then I have 2 more questions. Just there's been a lot of discussion lately about fintechs obtaining their own bank charters. And most of that in the BaaS world has then how it could be a threat to partners, no longer needing a bank sponsor. So can you respond to that? And also just outline how there might be any opportunities here, if any?

Yes. 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 the Chimes and the PayPals 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 valuation and oversight. It's 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 deliver 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 through 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.

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 off of that? And is the expectation going forward that most incremental deposit growth will flow from there?

Sure, Emily, this is Dominic. We had just mentioned in Joe's question that as of now, the leveraging the balance sheet to 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 sheet in this but we look for more potential as we continue to add partners and grow programs. .

It should, over time, our funding cost as we continue to generate -- there's like savings deposits that are higher cost. As we take those off the balance sheet, on a relative basis to Fed funds or deposit costs will go down right? It will go down. And if you 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.

Your next question comes from Stephen Farrell with Oppenheimer.

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?

Well, they were in a bunch of different -- 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 structural environment in real estate is advantageous. So for example, when we took over our asset in Houston. So we really focus on the -- it's really the Southeast, a lot in Texas and Florida, but also places like Georgia. And there was no -- it was across our portfolio. There's really no concentration in that number.

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?

Yes. So we -- so when we do these, there's a very good marketplace after the event that happened. It happened across the industry, right? But there were definitely people -- pools of capital that formed that they're looking to take out other sponsors because if you think about what happened was these are 3-year loans, you transition a property after 2 years is when you might have a problem. You can't finish your property, but now you've invested substantial amount of money and remediating the property. Our worst asset was the Aubrey, and that's close to stabilize now. But generally, it's -- they get tapped out. These will have multiple of these properties usually might have multiple investors and at some point, they get tapped out. But there's pulls of 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 to materialize in '24 and late '23, there was 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 are 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 takeout usually from government entities.

Your next question comes from Joe Yanchunis with Raymond James.

So I believe you mentioned earlier in the call that you were looking to add potentially 2 new partners to your credit sponsorship lending portfolio. Do you have a sense for kind of 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 kind of start?

Yes. So we want to add at least 2 partners. And I think we've got good visibility on 2 partners. So we'll make announcements when appropriate. We're targeting -- and remember, the China program is growing pretty aggressively. So if you look at that level of growth, we haven't announced 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, we're -- it's going to be at least $2 billion, but it could be as high as $3 billion, right? So it's -- 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 -- when we look at it, double where we are today is probably a good estimate of where we're going to be.

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

Yes. 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 nonpurpose securities loans. We also did loans for life insurance, 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 IBLOC 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 deemphasize -- we have very good understanding of the economics. So obviously, the lower spread will deemphasize first, and we 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, we -- and we've done this before, we've securitized 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've set them up so that we can distribute them through usual market means.

Okay. And then last one for me here. So just kind of taking your prior answer of potentially doubling your credit sponsorship loans kind of winding down some of the lower-yielding portfolios. I was hoping you could kind of put all that in the blender as well as some of your other comments and help us think about the NIM a little bit more, which has been kind of volatile, jumping around a little bit.

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 as Damian mentioned, what we want to do is maintain the flexibility of the balance sheet to maximize the leverage but also create room for the growth of the fintech business. So that mix that we'll see on balance sheet will affect the NIM. We do expect some compression of the NIM throughout the year, particularly as we shift more towards fintech and double that consumption on balance sheet, which generates more fee revenue and lower cost deposits than interest income. So that -- as that happens naturally, our profitability will increase, but net interest margin will come down a bit, but that will be replaced by a larger mix of fee revenue as a portion of total revenue. So I think we expect NIM to compress near 4%, but as we grow fee income to be 35% of total revenue when excluding the credit enhancement.

Yes, you can 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 on. We get it in fees because that's the way we need to book it through the GAAP system, but you can always add that number back and that will give you a better idea of what total NIM is. Now this is a non-GAAP measure but just to make that clear, but we get a fee, but that fee represents an interest rate that were agreed with our partner on and if you add that back, you get a better sense of the total NIM of the company, even though that is once again a non-GAAP measure.

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

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.

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