Bancorp Q4 2024 Earnings Call Transcript

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Provided by Quartr
January 31, 2025

Key Takeaways

  • EPS Up: The Bancorp reported Q4 EPS of $1.15 and FY24 EPS of $4.29, increases of ~41% and ~23% driven by 8% higher revenue excluding consumer fintech noninterest income, 16% deposit growth and a 10% share reduction from $250 M buybacks.
  • Fintech Momentum: Total fintech fees rose 18% year-over-year (29% in Q4) led by a 78% gain in ACH, card and rapid-funds fees, while Fintech Solutions Group deposits climbed 16% to $7.0 B.
  • Credit Sponsorship Scale-Up: Credit sponsorship fees jumped 91% quarter-over-quarter with balances up 62% to $454 M, and the company expects sponsorship loans to approach $1 B by year-end with new partnerships.
  • Asset Quality & NIM: Substandard “rebel” loans fell 14% in Q4 and are expected to decline further via loan sales and repayments, while net interest margin of 4.55% (4.78% prior) may compress near-term as fee-only loan programs grow but should recover with interest-bearing fintech offerings.
  • 2025 Guidance & Capital: The Bancorp affirmed 2025 EPS guidance of $5.25 excluding $150 M of buybacks, plans $150 M of repurchases, will repay $96 M of senior secured debt and may reissue $100 M+ of debt to fund further buybacks.
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Earnings Conference Call
Bancorp Q4 2024
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Operator

Good morning, ladies and gentlemen, and welcome to The Bancorp, Inc. Q4 and fiscal 2024 earnings conference call. At this time, all lines are in a listen-only mode. Following the presentation, we will conduct a question and answer session. If at any time during this call you require immediate assistance, please press star zero for the operator. This call is being recorded on Friday, January 31st, 2025. I would now like to introduce your speaker for today, Andres Viroslav. Please go ahead.

Andres Viroslav
Andres Viroslav
Director of Investor Relations at The Bancorp Inc

Thank you, Operator. Good morning, and thank you for joining us today for The Bancorp's fourth quarter and fiscal 2024 financial results conference call. On the call with me today are Damian Kozlowski, Chief Executive Officer, and Paul Frenkiel, 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 a passcode of 18739. 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 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.

Andres Viroslav
Andres Viroslav
Director of Investor Relations at The Bancorp Inc

These statements are subject to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995 and are subject to risk 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 and the investor presentation. Please note that The Bancorp 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 hereof or to reflect the occurrence of unanticipated events. Now, I would like to turn the call over to The Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Thank you, Andres. Good morning, everyone. The Bancorp 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 year-end deposits, and a significant reduction of shares year-over-year of approximately 10% due to an enhanced 2024 buyback of $250 million. Fintech Solutions continue to build volumes and are the major driver of profitability growth from both fees and lower-cost stable deposits. For full year 2024, GDV grew 15% over the prior year. However, the fourth quarter saw significant acceleration, with GDV growing 19% year-over-year.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

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 ACH 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 $1 billion by the end of 2025 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-$454 million, or 62%. Year-end substandard loans in our Revel portfolio declined 14% compared to September 30, 2024, 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.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

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 2025 guidance of $5.25 a share. The guidance does not include $150 million of share buybacks for 2025, or $37.5 million per quarter. Buybacks have been reduced $100 million in 2025 from 2024 to facilitate the 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 Frenkiel. Paul?

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

Thank you, Damian. 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.

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

The majority of the increase in year end loan balances compared to September 30th, 2024, was comprised of consumer Fintech loans. The fourth quarter net interest margin of 4.55% compared to 4.78% for third quarter 2024 and reflected $1.3 million of prior period interest reversals on Revel loans included in an $82 million year-end Revel loan sale. Average Fintech Solutions 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 $1 million resulting from growth in loan principal between the third and fourth quarters of 2023, against which CECL loss and qualitative percentages are applied. An additional $1 million resulted from increasing the CECL economic factor on real estate bridge loans.

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

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 Bancorp's 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% 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.

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

Significantly, outstanding modified Revel loans have respective as-is and as-stabilized weighted average LTVs of 73% and 63%. Excluding the consumer Fintech accounting offsets noted previously, non-interest income for Q4 2024 was $34.7 million, which was 28% higher than Q4 2023. Prepaid debit card ACH and other payment fees increased 16%, 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% higher than Q4 2023.

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

The increase included a 22% 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 Bancorp's 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 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.

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

Further, SBLOC and IBLOC loans are respectively collateralized by marketable securities and 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%-60% 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 Damian.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

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

Operator

Thank you. And ladies and gentlemen, we will now begin the question and answer session. To ask a question, you may press the star followed by the number one on your telephone keypad. If you're using a speakerphone, please pick up your handset before pressing any keys. To withdraw your question, please press star two. Your first question comes from the line of Frank Schiraldi with Piper Sandler. Please go ahead.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Good morning. Just on the acceleration of GDV, Damian, in the quarter, curious if you can what you're seeing so far in early 2025, thoughts on 2025 in terms of year-over-year growth in GDV. And then how do we think about pickup in terms of the fee income piece? I know, obviously, the consumer credit stuff is driving some decent fee income growth, but if I just think about the deposit-related kind of fees, what is the pickup for a given 15%-20% GDV growth? Thanks.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Okay. So the first part of it, the GDV has continued to be accelerated. So in January, we're still seeing 19%, 20% GDV growth. So that is, I was kind of a liar last year. I said we would be above trend on GDV, and 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 GDV 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. Rapid Funds, we were an early adopter, and now with 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.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

So, 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 $1 billion for this year. So you're going to get a fee growth 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 GDV 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.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

And if you take that out, you're still at our GDV 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 GDV, and well, obviously, ever in fee growth, but we 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.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Okay. All right. Great. That's great color. And then just on non-interest income on the NIM, obviously you had the interest reversal in the quarter, but then you also have these significantly higher consumer balances that seem to be earning more on the fee side than maybe in terms of yield. So I'm just curious if you can talk through, is that kind of the name of the game? Can we continue to see maybe some margin compression and more pickup on fee income, or what are your thoughts on margin in 2025?

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

So near term, as you can see, we have a very strong growth in deposits, which adds, 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, the MyPay product, 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 an accounting basis, it's a fee.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

However, that's our payment for that product. In the near term, there might be some NIM 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 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 interest income will increase.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Okay.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

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. It would be traditionally, it's not NIM, but we're calculating the economic benefit of having the program.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Sure. No, understood. And then just lastly, I noticed in the footnote in the release, you mentioned you had two smaller non-accruals after the quarter end of, I think, just under $10 million. I believe that's in the Revel book. Can you just talk about those? Because I didn't see any increase in delinquency in the quarter. And also, just your confidence in criticized classified, it sounds like you talked about it getting near peak or maybe peaking, and obviously, you had the loan sales and balances were down. But just wondering your confidence going forward in those have reaching peak level. And do you need or expect to continue to have additional loan sales to kind of offset what otherwise would be inflows into those categories?

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Yeah. So we think we're over the peak now, right? So 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 those loans. And additionally, 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 we should show real good progress this quarter and going into the next quarter.

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

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 Damian said, 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 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 substandards 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 did disclose that.

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Okay. So just on those two loans, I mean, at this point, I guess there's no additional color. They're in non-accrual, so I guess we'll assume well collateralized, but potentially sitting in.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

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

Frank Schiraldi
Frank Schiraldi
Managing Director and Senior Research Analyst at Piper Sandler

Okay. Okay. Thank you.

Operator

Thank you. And your next question comes from the line of Tim Switzer with KBW. Please go ahead.

Tim Switzer
Tim Switzer
VP and Equity Research Analyst at KBW

Hey, good morning. Thank you for taking my question.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Good morning, Tim.

Tim Switzer
Tim Switzer
VP and Equity Research Analyst at KBW

My first question is on some of the disclosures around the loan agreements with the consumer Fintech loans where you're, I guess, being reimbursed for the credit provision. Can you give us some, and I know you can't go into specific customers, but can you go into some details broadly about how those contracts are written? And do you get the collateral if they're not able to cover the losses? And do they provide the cash for the losses upfront before they occur, or is it as they occur? Any details you can provide on that would be really helpful?

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Yeah. So we do. We have an offset. So it's really backed up by the client on these types of loans that we're currently doing. So the way it works, you got to remember when we're working with a client, these large clients, we're holding the entire profitability of the bank at us. We get everything first. So it's interchange, whatever, right? They also post collateral for these loans additionally. So we have the offset. It far outweighs what would be in the loss category would be the interchange for these large programs. That's first. Plus, we have the backstop. Plus, we have they post collateral. So it's very, very low. It's nothing zero, but it's as close to zero that you can on the riskiness of the loans.

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

As far as your other question on the contract and how the accounting relates, there's really technical accounting guidance that we're looking at those agreements. We obviously would rather not have somewhat of a distortion by showing a big number in a provision and a big number that's equal to that in the non-interest income. 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.

Tim Switzer
Tim Switzer
VP and Equity Research Analyst at KBW

Okay. And just to be clear, so the collateral you have on your loans, you've received more than the $19.6 million you received. That's just when it gets recognized through the income statement. When exactly do you receive the collateral? And is it equivalent to what you put up on the reserve side, or is it a little bit higher?

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

You could really get into the technicalities, like you're suggesting with T-accounts and when we get the money. The bottom line, as Damian had said, in these cases, the bank is fully protected to the extent that it can be. The dollars are really there. So there's really no significant issues.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Yeah. Remember, we're holding all the interchange prior, and we're a very small part of it. So 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 a one-to-one offset. 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 loan isn't paid back. Remember, these are very quick loans, right? So if it isn't paid back, then the offset occurs.

Tim Switzer
Tim Switzer
VP and Equity Research Analyst at KBW

Okay. Yeah. Yeah. No, that helps a lot. And so is it fair to say you guys give up the interest income but still receive all the interchange for this arrangement?

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

Not necessarily. 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.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Yeah, so the way we implemented the program was kind of secured. We have a Credit Builder program, which is a secured credit card. We have SpotMe, which is kind of a fully secured overdraft, and MyPay 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.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

And that's the source of fees for our partner and for us, right? And with that comes a deposit at zero. So the interest income that would have been charged is actually being generated in a fee for RapidAdvance, right? But the way we implemented these programs, because we're trying to make sure that we build it in the right way, is to start with those types 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 saw in the fourth quarter, rapidly grow. And then you'll see Rapid product diversification. And so some will be fee-based, but in the future, it'll be very diversified, but there'll be a lot more interest income at much higher rates.

Tim Switzer
Tim Switzer
VP and Equity Research Analyst at KBW

Okay. Okay. Got it. And in the future, as you continue to diversify your products, do you plan for the loan agreements to include you being reimbursed for the credit losses, or are you going to do any kind of arrangement that makes economic sense for you guys?

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

It's somewhat, right? So if they're kind of renting our balance sheet, in that particular program, it'll be fee-based. It probably won't have the interest component. There'll be programs like that. But into the future, there'll be programs where, say, they could be much higher interest rates, right? And we would hold, many times, they'll be securitized within 30 or 60 days. So that'll be very fee-based with a lot of velocity, right? So it'll 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 of maybe 10 programs, right? Very small strips. There'll be small balances, but they could add up to $1 billion, but it would be very diversified. We'd get a lot of interest income.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

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 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 10 programs, that is immensely profitable because the velocity on those loans is so quick that 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?

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

So if you look at that 454, even under our current programs that we have, that 454 really represented about $2 billion of loans that 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 partner's part of it. But that loss is far outweighed by the fees generated.

Tim Switzer
Tim Switzer
VP and Equity Research Analyst at KBW

Wow. Yeah. It seems like a good product to get some strong risk-adjusted returns here. If I can switch topics just a little bit here, the really strong deposit growth and influx of cash balances, was that related at all to the collateral you receive related to these loans? And then separately, do you plan to deploy that or move the balance sheet lower? Just looking for some color there. Thank you.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

No, that's not really the driver. So the volume is the driver on that one.

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

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.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

But the GDV number is really the main driver.

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

It's the main driver.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

And we also have, you got to remember, 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 balance is here temporarily. So it's really a volume driven. That deposit number, if you look at our GDV growth, it was 15, right? And the deposit growth was 16. That tells you that right there. The extra 1% is probably the credit builder part of it.

Tim Switzer
Tim Switzer
VP and Equity Research Analyst at KBW

Got you. Okay. Appreciate all the color, guys. Thank you.

Operator

Your next question comes from the line of Joe Yanchunis with Raymond James. Please go ahead.

Joe Yanchunis
Joe Yanchunis
Senior Equity Research Associate at Raymond James

Good morning.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Hey, how are you? Good morning.

Joe Yanchunis
Joe Yanchunis
Senior Equity Research Associate at Raymond James

Doing well. I was hoping I could discuss your credit-enhanced program a bit more. Do you have any internal concentration limits on the size of the program? And should we think about the bulk of the near-term ramp coming from new partners or from existing partners adopting the program?

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Yeah. So we do. Yes. We do. We have a conservative approach. Depending on the programs we have, we go through a process, and we basically set a limit. I think there'll be a use of our balance sheet, and it depends on the types of products. But when we redo this, we will set a limit. 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. The ramp-up is we really do see clear vision to a $1 billion+ this year. Most of that will come from our current partner, but we'll be ramping up other programs. So it's very possible. If you recall, Apex 2030, we had a $3 billion kind of target for 2030.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

It's very possible that that $3 billion will be reached at the end of 2026, so our perspective has changed on the people who want to work with us and build out these programs, but like we said before, you'll see that lower-risk business is kind of the first adoption, 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.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

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 a diversified strips of business for maybe $1 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'd probably be more securitization of those assets.

Joe Yanchunis
Joe Yanchunis
Senior Equity Research Associate at Raymond James

Got it. I appreciate it. That was very helpful. And then just maybe to attack the collateral question for your credit-enhanced program in a different way, if you reach that billion-dollar balance at some point in the year, what would be the range of maybe associated deposits that would come with that that you would hold?

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

It's going to vary. But remember, it's rolling over, right? So to the extent that there are losses where we have credit enhancements in that way, so the money gets 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.

Joe Yanchunis
Joe Yanchunis
Senior Equity Research Associate at Raymond James

Got it.

Paul Frenkiel
Paul Frenkiel
CFO at The Bancorp Inc

Yeah. Okay.

Joe Yanchunis
Joe Yanchunis
Senior Equity Research Associate at Raymond James

Okay, and then just kind of switching gears here, can you discuss any themes or trends that have emerged from recent contract negotiations with your partners?

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

It's the same thing for the last couple of years. We're going to add three, four partners a year. 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 embedded finance, so the conversations are more broad. The disruption in the 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 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.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

And at the end of the day, we're not the innovator. We're the enabler. So do we have 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. I think we're going to have, like we saw in the fourth quarter, we're going to have a dramatic 2025. If you just take our run-rate and just multiply it by four, you'll see substantial growth. But what's most exciting isn't that for us.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

It's these new product development areas. And once again, it's a layer cake. So we've got the base business growing double-digits. And then you add on new products, a rapid expansion of things like Rapid Funds. And then you also have new product categories, which are all fee-based, and they're totally connected to all the other fees that we're generating that create sustainable GDV. So they're 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 pricer, too. We have such scale that when we do these big contracts, they have tiers. So as we grow with our client and they expand their product set on our base business, they reach certain levels. We make more money, and they make more money. And if you recall, we're a very small piece of the interchange story.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

So we're the last person. We have all the money in the beginning, but we don't keep a lot of it. We give it to every Visa. 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 bit of remuneration into, because there's so much going through the bank. We can be very efficient for our partner, but we can make a lot of money while we're doing that.

Joe Yanchunis
Joe Yanchunis
Senior Equity Research Associate at Raymond James

No, that was very thorough. And then last one for me here. What is the timing on the repayment of your sub-debt that you called out? And then separately, is there any reason buyback activity wouldn't snap back in 2026?

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Yes.

Joe Yanchunis
Joe Yanchunis
Senior Equity Research Associate at Raymond James

Are there any other capital deployment priorities to consider?

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

No. Unless there is some inorganic thing that we did and we don't expect to do anything big like that. We are dedicated to 100% repatriation of our net income. It's senior secured debt. We never had any sub-debt. We raised $100 million at low interest rates. It was at a very low coupon when that was. We did $100 million kind of to test it. It was way oversubscribed. 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 stress period because we actually got it at a discount. We bought our own debt back. We could substantially the only reason we would borrow probably is the stock wasn't fairly valued in an extreme way.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

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. We don't need any more capital because of Reg II and the Durbin limit. Unless they raise the Durbin limit, 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 Revel loans and packages and stuff like we have in the past.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

And that will make our balance sheet appear to be a lot more productive than the average balance sheet, which will allow us to continue to generate substantial fees. Now, if you think about I'm going to give you one more thing. And if you thought about the last few years, we had a filling up of the balance sheet in the NIM 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 and lowered our asset sensitivity last year in April when we bought almost $1 billion of bonds, right? So interest rates go down. It's not really going to affect us very much, about a 1% for 100. But now it's the inflection point.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

Now it's not those businesses that are driving. And the NIM business is levering up. And then it was locking it in because we went from variable to fixed. Now the whole story now is credit sponsorship. It's Fintech, 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 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 what we called Project Flex was the balance sheet management during the pandemic. And now 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. Questions.

Operator

All right. Thank you. There are no further questions at this time. I would like to turn it back to our CEO, Damian Kozlowski, for closing remarks.

Damian Kozlowski
Damian Kozlowski
CEO at The Bancorp Inc

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

Operator

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for participating. You may now disconnect. Have a lovely day.

Executives
    • Andres Viroslav
      Andres Viroslav
      Director of Investor Relations
    • Paul Frenkiel
      Paul Frenkiel
      CFO
    • Damian Kozlowski
      Damian Kozlowski
      CEO
Analysts
    • Tim Switzer
      VP and Equity Research Analyst at KBW
    • Frank Schiraldi
      Managing Director and Senior Research Analyst at Piper Sandler
    • Joe Yanchunis
      Senior Equity Research Associate at Raymond James
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