Earnings Call Transcript - TBBK Q3 2025

Operator, Operator

Good morning, ladies and gentlemen, and welcome to The Bancorp, Inc. Q3 2025 Earnings Conference Call. This call is being recorded on Friday, October 31, 2025. I would now like to turn the conference over to Andres Viroslav. Please go ahead.

Andres Viroslav, Vice President of Investor Relations

Thank you, operator. Good morning, and thank you for joining us today for The Bancorp's Third Quarter 2025 Financial Results Conference Call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Marty 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 the passcode of 37073. Before I turn the call over to Damian, I would like to remind everyone that our comments and responses to your questions reflect management's view as of today, October 31, 2025. Yesterday, we issued our third 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 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?

Damian Kozlowski, CEO

Thank you, Andres. Good morning, everyone. In the third quarter, The Bancorp earned $1.18 earnings per share on revenue growth of 7%, excluding consumer fintech loan credit enhancement income and expense growth of 6%. EPS growth was 13% year-over-year. Fintech GDV continues to grow above trend at 16%. Revenue growth in the quarter, which includes both fee and related interest income revenue was 23%. Our three main fintech initiatives continue to make substantial progress. First, our credit sponsorship balances ended at 785 million, up 15% from the second quarter and 180% year-over-year. We are expecting increasing volumes with new product enhancements and increased utilization. Second, our embedded finance platform development has continued to progress with an expected launch next year. And third, new program implementation timelines, Cash App being the largest, are on track with expected revenue in the first quarter of 2026. All three initiatives should have an increasingly positive effect on our financials as we move forward through 2026 and into 2027. We also made progress in reducing our criticized REBL assets, which include both substandard and special mention assets. These assets declined from $216 million to $185 million or 14% quarter-over-quarter. We expect more progress in the fourth quarter. Under our Project 7 initiative, which aims to achieve a $7 earnings per share run rate by the fourth quarter of 2026, we will be conducting a restructuring of our institutional banking business in the fourth quarter of 2025. Headcount is being reduced by 30 as we deemphasize growth to reallocate space on our balance sheet for credit sponsorship balances. This will reduce run rate expenses by approximately $8 million while incurring approximately $1.3 million restructuring charge in the fourth quarter. We are also implementing our first AI-powered use case. We have developed a new tool to reduce the writing of narratives in financial crimes risk management. For a $300,000 investment, we anticipate that we'll be able to avoid approximately $1.5 million in run rate expenses over time based on increasing volumes. This tool will be operational in the first quarter of 2026. This is the first of many AI tools to come in the future. We expect to develop and implement these tools as quickly and as prudently as possible in areas that will lead to increasing efficiency and productivity of our people and platform. These tools should have an increasingly positive impact on our already best-in-class profitability. Lastly, we are lowering guidance to approximately $5.10 a share for 2025, primarily due to lower projected balances on our traditional lending businesses and an increased credit provision for leasing due to losses on the disposition of previously identified credits in trucking. In addition, we are not giving specific guidance for 2026 other than we are targeting a minimum $7 earnings per share run rate by the end of 2026. We are, however, initiating preliminary guidance for 2027 of $8.25 earnings per share. As discussed, we believe that our three main fintech initiatives, platform efficiency and productivity gains from platform restructuring and AI tools, plus a high level of capital return through continued share buybacks will contribute to EPS accretion. EPS gains are subject to uncertainty, particularly as it relates to the development implementation timelines in fintech and our stock price for buybacks. I will now turn the call over to our Interim CFO, Marty Egan. Marty?

Marty Egan, Interim CFO

Thank you, Damian. Excluding consumer fintech loan credit enhancement income, noninterest income for the third quarter of 2025 was $40.6 million, which was 27% higher than the third quarter of 2024. Total fintech fees accounted for most of that increase. Prepaid, debit card, ACH and other payment fees increased 10% to $30.6 million over that period, and consumer credit fintech fees increased $2.9 million to $4.5 million. Additionally, in the third quarter, we reached an agreement on the earnest money deposit on the terminated sale of a property in other real estate. The $2.3 million settlement amount is included in other income. The provision for credit losses on nonconsumer fintech loans was $5.8 million for the quarter, of which $4.8 million was related to the leasing portfolio. The leasing provision was driven by the third quarter net charge-offs of $2.8 million, primarily related to the trucking and transportation industry. Average fintech solutions deposits for the quarter increased 10% to $7.3 billion from $6.6 billion in the third quarter of 2024. Noninterest expense for the third quarter of 2025 was $56.4 million, which was 6% higher than the third quarter of 2024. The increase included a 10% increase in salaries and benefits. As Damian mentioned earlier, we made progress on reducing our substandard and special mention on REBL assets. We expect that trend to continue in the fourth quarter as $102 million of those loans are under contract and expected to close during the quarter, of which $12 million is already closed and $74 million is expected to close in the next five days. Additional details regarding our loan portfolios are included in the related tables in our press release as are the earnings contributions of our Payments business. I will now turn the call back to Damian.

Damian Kozlowski, CEO

Thank you, Marty. Operator, could you please open the lines for questions?

Operator, Operator

Our first question comes from the line of Tim Switzer with KBW.

Timothy Switzer, Analyst

You guys doing well. First question I have is, can you guys provide an update on Square and the Cash App program, some of the other new programs you guys have going on? Is there a timeline for when all the volume has transitioned over to you? And when should we start to see this ramp in GDV and the associated fees?

Damian Kozlowski, CEO

Yes. So it's on track and revenue is expected in Q1. We're not sure exactly the ramp-up schedule because it's really dependent on timelines at Block at Cash App. We do have confidence that as we work through the year, though, we will have substantial fee revenue generated by the third and fourth quarter of next year.

Timothy Switzer, Analyst

Okay. That's very helpful. And then can you provide an update on the $27 million REBL loan that was scheduled to sell, I think, in Q3 according to the 10-Q, and it just looks like it hasn't closed yet. I would just love an update on that.

Damian Kozlowski, CEO

Yes. So that $27 million is expected to close in the next five days. So it's either today or at the beginning of next week, and that's that substandard loan.

Timothy Switzer, Analyst

Okay. And it seems like there's just a lot of either momentum or activity in terms of closing new loan sales with some of the criticized assets. I guess, could you just provide an update on how discussions with borrowers and new sponsors are going? Do you expect more sales in the future? And any kind of color you can provide.

Damian Kozlowski, CEO

Yes, these situations typically take more time. However, it's essential not to panic during minor disruptions. We've been collaborating with the borrowers, some of whom are in deferrals, and those deferrals are nearing their end, leading to resolutions. The overall market for these assets has improved, giving us greater clarity. I believe we will make significant progress in the fourth quarter and the first quarter of this year. The fourth quarter is already set, and while it could vary slightly based on future developments, we are quite confident about the 102 reduction.

Timothy Switzer, Analyst

Great. Good to hear. And the last question I have is deposits moved a little bit lower. I know you guys are trying to manage the balance sheet quite a bit. I would just love some color on that.

Damian Kozlowski, CEO

You mean the end-of-period deposits?

Timothy Switzer, Analyst

Correct.

Damian Kozlowski, CEO

We experience fluctuations in deposits depending on the specific program, with significant seasonal influences. Currently, there may be some effects from drawdowns related to the government shutdown, though it's uncertain. Typically, we see considerable volatility; however, we maintain strong primary liquidity and have removed deposits from our balance sheet, so we aren't worried. We anticipate a growth in deposits starting in the fourth quarter, with tax season in the first quarter historically showing a notable increase compared to last year. Traditionally, we've seen a spike in the fourth quarter followed by a substantial decline. Now, due to our regulatory limits, it's become more about managing excess deposits off the balance sheet. We have an ample supply of deposits, and the challenge lies in managing them throughout the cycle to avoid significant fluctuations. We've improved at removing deposits from the balance sheet when they're unnecessary.

Operator, Operator

And your next question comes from the line of Joe Yanchunis with Raymond James.

Joseph Yanchunis, Analyst

So I was hoping I could just ask one more on credit. Can you provide an update on what's going on with the ARIA, and potentially share any occupancy rates that are there and any conversations that you might be having?

Damian Kozlowski, CEO

Yes, we are continuing to lease the property. There are still available units, and we are finishing up about 10% that need refurbishment. We will keep leasing it out, and there are interested parties looking at the property for a potential transaction. While I can't provide assurances on the timing, we expect to gain more clarity in the next 30 to 60 days. There is definitely a market for this property, and the appraisal came in higher during our last report in the second quarter. We feel confident about the current state of the property, which has improved significantly since we took it over. Major construction, including the roofs and foundations, has been completed. Now, it's just a matter of leasing up, and we have over 20 units available for rental. Overall, we believe we are in a strong position with this property.

Joseph Yanchunis, Analyst

I'm glad to hear that. Moving on to your outlook, could you discuss the share repurchases included in your guidance for 2025 and 2027? I remember that your initial 2025 outlook mentioned some share repurchases, and I believe your guidance for the fourth quarter of 2026 and 2027 also reflects share repurchases. If you could clarify that, I would appreciate it.

Damian Kozlowski, CEO

We have several important initiatives underway, though the timing is still uncertain. These include new programs like Cash App, launching embedded finance, and expanding our credit sponsorship business. There is some uncertainty regarding new partnerships and the timing of revenue recognition. Additionally, we're considering significant share buybacks and their relation to the stock price. We've analyzed various scenarios, including aggressive, likely, and downside cases, to assess potential stock prices and revenue, along with buyback and expense considerations. We've developed a strategy around AI that will influence our ongoing costs. Given the current volatility, we prefer not to provide guidance for the first few quarters. However, we are quite confident in reaching a $7 run rate and believe hitting $8 in 2025 and achieving significant growth by 2027 is attainable. All our revenue initiatives, ongoing buybacks with a substantial portion of our net income, and simultaneous cost reductions will support this. While we can't specify exact figures due to varying stock prices, we evaluate multiple price points against revenue and expenses to determine the best guidance.

Joseph Yanchunis, Analyst

Totally understand that you're juggling a lot of things right now. But just in relation to the share repurchases aspect of the guide, should 2027, should we think about the same amount of repurchases, $50 million a quarter, what you have in 2026? And then would that '25 new guide include share repurchases? Just trying to think of where the jumping off point is as we enter next year.

Damian Kozlowski, CEO

Yes, it includes the buyback. If the share price decreases or we gain better clarity on the implementation timelines, we will provide guidance to the market once we have that clarity. We believe that reaching the $7 run rate is very achievable. If we achieve that run rate, there will be several developments in 2027 since we will have already ramped everything up. Regarding the buyback strategy, which has not yet been approved by the Board, our intention is to return, based on the company's multiple, 100% of our net income through buybacks. This would amount to over $300 million in net income, similar to the buyback we executed this year.

Joseph Yanchunis, Analyst

Okay. I appreciate that color. And then just kind of shifting focus here. In the quarter, we did see total fintech fees drop sequentially, kind of driven by a decline in ACH fees. Can you discuss what occurred here and how we should think about the trend for this line item moving forward?

Damian Kozlowski, CEO

Yes, there's significant volatility, driven by incentive fees and seasonality as well. We are coming out of an income period, but these factors contribute to that volatility. I suggest looking at year-over-year data as the most informative metric, along with trends over a few quarters. Typically, we may observe slight declines from one quarter to the next, particularly from the first to the second or from the second to the third, but eventually, it tends to ramp up again. It's important to consider the longer-term perspective and year-over-year comparisons. We are currently performing above trend, even without implementing features like embedded finance or Cash App, which have yet to generate volume. Presently, our growth in gross dollar volume is above expectations, and I anticipate that we’ll continue to see above-trend growth, if not higher, as we move into next year. This growth will likely drive fee increases and facilitate the onboarding of more credit sponsor partners, as well as the rollout of embedded finance.

Joseph Yanchunis, Analyst

You talked about these several initiatives which are going to drive growth, which aren't really hitting the numbers now. Is there any way to kind of rank order these opportunities in terms of potential magnitude?

Damian Kozlowski, CEO

Well, embedded finance is where the market...

Joseph Yanchunis, Analyst

Not just in '27, but over the next few years.

Damian Kozlowski, CEO

The embedded finance opportunity is very substantial. Historically, we haven't engaged in program management for our partners. Embedded finance essentially consolidates all the capabilities we currently offer. We've discussed the various fee opportunities, and it provides a comprehensive set of services for those looking to integrate it into their applications, like gig economy companies. Our significant scale and profitability in this area highlight its potential. Delivering the program management aspect of this service taps into a large and growing market. The program manager typically has to share a portion of the fees with their partner, which accounts for a major part of their revenue, potentially up to 80% of the interchange structure in program management. Currently, we capture only a small fraction, maybe around 4% at most, of those fees. By adding program management to our offerings, while still accounting for expenses from networks like Visa and Mastercard, we can take advantage of a more lucrative fee structure. This approach not only increases profitability compared to selling services individually but also enhances our offerings, as seen with partners like Chime for whom we provide the entire package, whereas for others, we might only supply parts of it. Overall, this strategy allows us to better monetize our platform.

Joseph Yanchunis, Analyst

That was a very thorough answer. I appreciate that. And then last one for me here. Can you talk about the health of the consumer, particularly on the lower end? Obviously, you've discussed how GDV growth remains above trend. But I was just wondering if you're seeing any underlying trends within the data.

Damian Kozlowski, CEO

We aren't currently observing any significant spending challenges, making it difficult to assess the situation. There is noticeable momentum in areas like MyPay and InstaLoan, but we can't determine whether this is due to increased adoption or economic factors. So far, we haven't detected any economic stress, as people continue to spend. Most of our program partners, especially in corporate payments and insurance, are not expected to be significantly impacted. Ultimately, many individuals are still living paycheck to paycheck, but they remain employed and continue to spend, indicating that we haven't yet seen any stress.

Joseph Yanchunis, Analyst

Have you noticed any increased demand for early wage access from furloughed government workers? I realize that this isn't the primary focus of the programs you provide, but I'm curious if there has been a rise in interest.

Damian Kozlowski, CEO

Yes, we still have momentum in the balances, but we can't determine if it's specifically driven by our efforts. You would logically assume that it has some impact, but we can't be sure. It could be attributed to increased adoption of our product set through our partners' marketing. It hasn't significantly doubled, so while we see a slight elevation in the adoption level, we cannot specifically attribute it to any particular group beyond normal business marketing.

Operator, Operator

And your next question comes from the line of Arif Gangat with Cygnus Capital.

Arif Gangat, Analyst

I have two questions. My first question is on the loan delinquency data in your press release. It looks like sequentially, the REBL loans past due doubled from June to September, ballpark $37 million to $74 million. So my first question is, what's driving that? And should we expect continued migration as we step through this quarter of more past due loans in the REBL portfolio.

Marty Egan, Interim CFO

No. Some of that will be resolved in that $102 million that's under contract. So that's expected to improve in the quarter.

Arif Gangat, Analyst

So we should expect when we see the same data for Q4, a lower past due line item for REBL loans.

Marty Egan, Interim CFO

Yes.

Arif Gangat, Analyst

Okay. Great. And then the second question I had is on the consumer fintech loans. Could you help me understand, given the charge-offs in that portfolio, understanding that your partners indemnify you for losses? Help me understand kind of the high charge-off rates in those loans. What's the nature of those loans? Why are they charging off at such a high rate? And for your partners who are indemnifying you on those losses, what's in it for them? Like why are they continuing to suffer those types of losses in these consumer fintech loans?

Damian Kozlowski, CEO

Yes. All our consumer fintech loans are currently with Chime, and we haven't brought in any additional partners yet. It has been previously stated that we have a $1.8 billion limit on the utilization of our balance sheet. There are five different products involved, and while I can't speak for Chime, they certainly have sufficient resources to manage the losses. They pursue these loans for various reasons, and while I believe it remains a profitable endeavor despite the charge-offs, there are also marketing incentives that drive them to offer these loans to foster more enduring relationships. However, I cannot comment on their specific strategy. What I can say is that they are definitely involved in this sector, and they have the capacity to adapt their lending approach as they see fit. Our role is to provide the infrastructure and the balance sheet up to the $1.8 billion limit, while the ultimate decisions regarding loss acceptance and the associated rates rest with them, including the potential financial or marketing advantages they seek to gain.

Arif Gangat, Analyst

Got it. Just to follow up on that then in your conversations with Chime, are they concerned about consumer weakness, slowdown, particularly at the lower-end consumer, the same subprime-related problems we're seeing in other pockets of the market that would then potentially give them pause around lending to the same extent or tightening their underwriting criteria? And I'm really where I'm going with it is, if they do that, how does that impact your fee income and growth prospects in fintech.

Damian Kozlowski, CEO

Well, once again, that's their decision, and that's a question for Chime. I obviously can't disclose any conversations we've had. That's really a Chime question. We're here to support our partner and we have an incredibly close strategic relationship. We've provided them with enablement to help their business plan, and we've given them a limit of $1.8 billion so they can adjust their approach to building their business. I would encourage you to look at their own announcements for their intentions.

Operator, Operator

And we do have a follow-up question coming from Tim Switzer with KBW.

Timothy Switzer, Analyst

Embedded finance is a pretty broad term that captures a lot of different products and activities. And I'm not looking for a specific partner or anything like that, but can you just provide some color on what you'll be doing next year as you launch that platform? And are you referring to launching a single program or just the platform broadly?

Damian Kozlowski, CEO

We already have a functional mockup platform that is currently live and in development. This journey began several years ago when many of our partners asked if we could provide this capability and help them enhance their user experience. We quickly realized there is a strong demand in the market for a banking solution, complete with the necessary infrastructure. While there will be third-party involvement, the primary expectation is for a cohesive banking solution. This demand is particularly pronounced among companies in the gig economy, although it extends beyond that sector. Our initial focus is on addressing these needs. Embedded finance is gaining recognition in the industry, akin to the buzz around AI, as firms increasingly desire financial services integration. Our objective is to develop use cases that will showcase our full range of capabilities, starting with gig economy companies but expanding to many others as they adopt these features, revealing a significant market opportunity. The potential market is vast, and while the revenue from these activities can be substantial, the associated costs for providers can also be high. Fortunately, our investments in core capabilities, such as financial crimes risk management and compliance risk management, position us with a competitive edge in delivering embedded finance solutions. This will significantly enhance Bancorp's profitability. As we introduce these new capabilities, we aim to communicate clearly with the market regarding our progress. The potential remains enormous, although it has yet to be realized. We believe these developments will play a crucial role in our profitability narrative over the next 12 months.

Timothy Switzer, Analyst

Got it. Very helpful. Can you help us think about the trend or trajectory of net interest income given the impact of Fed rate cuts going forward?

Damian Kozlowski, CEO

Yes, we are significantly different now compared to four years ago when we first opened the balance sheet. Currently, we are quite stable and not very sensitive to asset changes. For instance, if rates were to decrease by 400 basis points, it would only impact our net interest income by about 3% due to our balance sheet structure. The key consideration for us is timing, and we have considerable flexibility in our balance sheet. For example, we could have addressed our net interest income challenge by purchasing bonds, but we have chosen not to do that because flexibility is crucial in the current environment. We will explore those opportunities. Additionally, we have avoided moving down the credit curve due to pricing concerns, as spreads in the market are very tight. Given our current focus and initiatives, we do not see the necessity to compromise on price or invest in bonds just to cover a shortfall in our traditional credit origination. Although we have experienced a slight deficit in net interest income compared to expectations, we are cautious about pursuing investments in this market to avoid being forced into buying bonds merely to bolster net interest income.

Timothy Switzer, Analyst

Okay. Got it. That's really helpful. And then can you provide an update on how regulator expectations for BaaS partnerships are changing? And with the administration has been here for nine months now. Have you seen an easing due to that? What areas have you found it easier to operate in? And has this allowed some of your peers, many who were forced to pull back the last several years, has that kind of allowed them to start to reenter and become more of a competitor again?

Damian Kozlowski, CEO

I don't think there will be any reentering. Many people have entered Banking as a Service, but it involves more than just the regulatory aspects; it includes all the infrastructure as well. The regulators have indicated that there were some standards being suggested that weren't necessarily aligned with existing guidance. They've stated that they will adhere to the guidance and not create new standards that deviate from it. This is beneficial for the industry, including us, since we are one of the largest providers with the highest volume. If a standard is to be set, it would likely start with us. Since they are not establishing new standards and are managing according to previous guidance, we are actually compliant with those past standards. This is advantageous because we won’t have to adjust to new requirements, only meet the regulatory standards we previously satisfied. We haven’t observed any changes in that regard, and we’re concentrating on the largest programs during implementation. We continue to see substantial business, though we don't handle everything, so there is no noticeable change in our pipeline. In the long run, it's beneficial for everyone if regulators maintain clarity by adhering to existing regulations. This allows for a clear understanding of their perspective, which we can then align with. Companies collaborate with us not only for our regulatory expertise but also for our comprehensive infrastructure, which includes our financial crime capabilities and data management strategies. This is just one part of what we offer.

Timothy Switzer, Analyst

Okay. And then it hasn't been asked yet. So I'll go ahead, but the commercial fleet leasing, there's a lot going on in that space with the freight recession. I know you typically lease the smaller fleets; you're probably struggling with that. There is also the government shutdown. You have, I think, some exposure to government agencies. What were the issues kind of facing these credits here? And I guess, could you just clarify, was this several borrowers, it sounds like?

Damian Kozlowski, CEO

Yes. There are three borrowers, and our exposure is minimal. The transportation sector was significantly impacted due to a surge during the pandemic, where deliveries increased while retail stores were closed, particularly the smaller ones, which led to the dominance of larger retailers. This caused a boom in the trucking industry. We haven’t had a significant portfolio in this area, and currently, we only have $12 million remaining. Additionally, we haven’t extended credit in the last couple of years. The current situation reflects the legacy disposal of assets, where reports indicate some individuals are abandoning trailers at truck stops, although we recover the trucks. We go through a process for asset disposal but are facing market depressions; even with our conservative approach, we've typically seen gains from our transportation assets. This situation is leading to a reduction in our portfolio, leaving us with only a small exposure that is primarily tied to losses from asset disposals.

Timothy Switzer, Analyst

Got it. And the last question I have is just an update on the CFO search.

Damian Kozlowski, CEO

I can't give you anything today, but I think we'll be able to announce something soon.

Operator, Operator

And that concludes our question-and-answer session. I would like to turn it back to Damian Kozlowski for closing remarks.

Damian Kozlowski, CEO

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

Operator, Operator

Thank you, presenters. And ladies and gentlemen, this concludes today's conference call. Thank you all for joining. You may now disconnect.