Earnings Call Transcript - TBBK Q2 2025

Operator, Operator

Good morning, everyone, and welcome to The Bancorp, Inc. Second Quarter 2025 Earnings Conference Call. I will now hand the call over to Andres Viroslav. Please proceed.

Andres Viroslav, Moderator

Thank you, operator. Good morning, and thank you for joining us today for The Bancorp's Second Quarter 2025 Financial Results Conference Call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Martin Egan, our Interim Chief Financial Officer. This morning's call is being webcast on our website at www.thebancorp.com. There will be a replay of the call available via webcast on our website beginning at approximately 12:00 p.m. Eastern Time today. The dial-in for the replay is 1 (888) 660-6264 with a passcode of 45285. 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, July 25, 2025. Yesterday, we issued our second 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 or 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 M. Kozlowski, CEO

Thank you, Andres. Good morning, everyone. The Bancorp earned $1.27 per diluted share in the second quarter on year-over-year revenue growth of 11%, excluding fintech loan credit enhancement income with expense growth year-over-year of 11%. EPS growth was 21% year-over-year. Our fintech ecosystem continued to be the driver of revenue growth. GDV climbed 18% year-over-year, with total fee and related interest income growth from all fintech activities growing 30%. On July 14, we announced a 5-year expansion of our relationship with Block, in which we added debit and prepaid card issuance and related services for Cash App customers. Subject to program implementation timelines, the additional services are expected to begin as early as the first quarter of '26, and we expect this program to enhance growth of GDV and fees into the future. We also announced a substantial increase to our share repurchase program over the next 18 months to $500 million beginning in the third quarter of '25. This buyback will be funded by core earnings growth and replacement of maturing senior unsecured debt at The Bancorp holding company of $100 million aggregate outstanding with approximately $200 million of new senior unsecured debt at The Bancorp holding company. We anticipate that $300 million of shares will be purchased for the remainder of '25. This is an increase of $225 million or 300% over the current buyback of $75 million for the last 2 quarters of 2025. In 2026, $200 million worth of shares are planned to be purchased with $50 million of purchases each quarter. Lastly, we are continuing to maintain our guidance of $5.25 earnings per share for 2025. We are also announcing Project 7, a project in which we are targeting at least a $7 earnings per share run rate by the end of '26. We plan to accomplish this goal through fintech revenue growth, buybacks of shares and efficiency and productivity gains by reallocating and/or reducing resources where appropriate. I now turn the call over to Martin Egan, our Interim CFO.

Martin F. Egan, Interim CFO

Thank you, Damian. Excluding the consumer fintech loan credit enhancement income, noninterest income for the second quarter of 2025 was $40.5 million, which was 32% higher than the second quarter of 2024. Total fintech fees accounted for most of that increase. Prepaid, debit card, ACH and other payment fees increased 14% to $31.7 million over that period, and consumer credit fintech fees increased $3.8 million to $4 million. In the second quarter, credit enhancement income was $43.2 million, and the provision for consumer fintech loans was also $43.2 million. Overall, loan balances grew 17% year-over-year, while loan balances, excluding consumer fintech loans grew 6%. Consumer fintech loans increased 871% year-over-year to $680.5 million and 19% over the linked quarter. Average Fintech solution deposits for the quarter increased 20% to $7.76 billion from $6.44 billion in the second quarter of 2024. Net interest income was 4% higher than second quarter 2024. The second quarter net interest margin was 4.44% compared to 4.07% for the first quarter of 2025. The second quarter of 2025 included $3.1 million of interest on CRE-2, which was repaid in that quarter as a result of the sale of underlying collateral. Additionally, fees on the majority of our growing consumer fintech loan balances are recorded as noninterest income, which impacts both net interest income and net interest margin. Noninterest expense for the second quarter of 2025 was $57.2 million, which was 11% higher than the second quarter of 2024. The increase included a 10% increase in salaries and benefits. Additional details regarding our loan portfolios are included in the related tables in our press release as our earnings contributions of our payments business. And now I'll turn the call back to Damian.

Damian M. Kozlowski, CEO

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

Operator, Operator

And our first question is from Tim Switzer from KBW.

Timothy Jeffrey Switzer, Analyst

Congratulations on the new partnership with Block and Cash App. Can you provide some details on whether this is a completely new product for them or if you are sponsoring an existing product? Please go ahead.

Damian M. Kozlowski, CEO

No, go ahead.

Timothy Jeffrey Switzer, Analyst

I was going to ask any color you could provide on what exactly you'll be doing? Like, is this part of your rapid funds transfer offering like your other programs with Block?

Damian M. Kozlowski, CEO

No, this is about card issuance. We already handle rapid funds transfer. Last year, we took on 15 use cases from Wells Fargo, which contributed to the growth in our other payment and ACH sectors. This encompasses the full range of card issuance for Block, whether they rely solely on us or partner with another bank, as is often the case. This is a significant initiative. The three main programs are Chime, PayPal, and Block. We now have the rapid funds transfer and card issuance businesses. As everyone knows, this is a major player in the fintech sector with over 50 million customers, making it very important for both gross dollar volume and fee growth in the future.

Timothy Jeffrey Switzer, Analyst

Okay. So this is for the Cash App Card issuance? Okay. Okay. And are you supplementing Sutton Bank who is currently the issuer or replacing them?

Damian M. Kozlowski, CEO

Well, the mandate is to replace that volume over time.

Timothy Jeffrey Switzer, Analyst

Okay. Okay. Great. And then I also wanted to ask about the lower deposits this quarter. Was that kind of an action by you to manage the balance sheet? Or what was the driver there?

Damian M. Kozlowski, CEO

Correct. There were a couple of factors: tax receipts during that part of the year. We actually took some savings deposits off balance sheet, and we also had $500 million of insurance deposits through our corporate payments partners for the California wildfires. So that's running off, plus the tax season. It was a very big tax season this year. And then we took some of the excess liquidity also off balance sheet. So that was all balance sheet management driven.

Timothy Jeffrey Switzer, Analyst

Got you. Okay. We noticed an increase in criticized loans and nonaccrual in the REBL book. With most of that portfolio maturing in the next year, can you share insights on the borrowers' capacity to make the balloon payment? How many opted for the one-year extension instead of paying off the loan in full? How many had to inject additional equity or seek another lender?

Damian M. Kozlowski, CEO

Yes. We are continually in touch with our borrowers, allowing us to have significant visibility into their business plans, whether they intend to recapitalize, address potential issues, or simply repay or extend their loans. When borrowers need extra time for their business plans, it often leads to a natural extension, which has increased recently due to market conditions. We're pleased with this, especially when the properties are performing well and generating cash flow. If any issues arise, they would have already surfaced in our criticized or substandard assets, so we maintain a good understanding of our borrowers' situations. We've been managing this over the past year and do not anticipate another significant increase in substandard assets. Although there was a spike in the third and fourth quarters last year, it decreased somewhat in the fourth quarter and has stabilized. We hope to resolve these issues in the upcoming quarters, although it has taken longer than expected due to situations like the Aubrey property closure. We expect to see meaningful progress in the next two quarters.

Operator, Operator

And our next question is from Joe Yanchunis from Raymond James.

Joseph Peter Yanchunis, Analyst

So I was hoping to kind of continue the credit discussion there. With respect to the Aubrey, I believe it was undergoing some renovations before the prior contract was terminated. Are those renovations continuing? And are you guys funding those?

Damian M. Kozlowski, CEO

There are currently about 20 units available for rent, and occupancy has significantly increased over the past eight months from the mid-30s to the mid-60s. We have 20 units that are fully reconditioned and ready to be leased. While there is some additional work needed, we are actively discussing with potential buyers for the property, which will largely depend on progress over the next six weeks. If we do not secure a buyer, we will likely complete the remaining units, which constitute around 10% to 15%. We will finance this, of course, as we have the deposit, and we hope to recapture that investment. If we fully lease the property, we will not only aim to pay off our existing loan but also seek to profit from the property if we manage to reach approximately 90% occupancy.

Joseph Peter Yanchunis, Analyst

I appreciate that. And one more on your expanded partnership with Block. Are there going to be any associated expenses leading up to the new card program?

Damian M. Kozlowski, CEO

We're looking to leverage our existing infrastructure across various categories, and while we will be making some incremental hires, the numbers will be minimal. We're experiencing significant efficiencies and productivity improvements through advancements like machine learning, and we anticipate that AI will start contributing within the next year or two. There may be a slight increase in resources during the third and fourth quarters as we ramp up. Typically, we'll need to evaluate the need for additional resources as traffic increases; while the immediate need might be small, significant volume and revenue increases will allow us to offset these costs. Thus, we may see a small increase in staffing, but as volume rises, we'll assess the need for further resources based on our productivity improvements.

Joseph Peter Yanchunis, Analyst

And then just kind of sticking with the productivity gains. You mentioned in your release targeting Q4 '26 EPS of at least $1.75, which will be driven by several factors, including these productivity gains. Can you talk about where you see the benefits of AI impacting your business? And it sounds like that might be a latter half of '26 event, if I kind of read the tea leaves right in your prior answer.

Damian M. Kozlowski, CEO

We are currently managing two banks that have been working together, although they operate differently. One has taken a more traditional banking approach, while the other focuses on leveraging our strengths, particularly through increased spreads that have boosted profitability. However, this is shifting as we move away from being just a payments bank to becoming a middle office fintech and technology platform that supports the fintech industry. This transition is happening rapidly, as we are expanding our partnerships and product offerings. Consequently, we are concentrating more on the fintech side of the business. As we shift our focus, we've indicated for some time that we'll be removing certain traditional businesses from our balance sheet, which means reallocating resources as the fintech sector grows. We envision a future where our workforce could increase from 800 to about 1,000 people over the next three to five years while doubling our net income, but we won't just double our headcount alongside that income growth. Hence, resource reallocation from traditional to fintech operations will be essential. On the AI front, there is significant activity, and we're already utilizing various tools to enhance productivity, such as those for legal contracts where AI excels. Looking ahead, we see opportunities for productivity improvements in tasks like SARs filing. While we aren’t aiming to be the first to adopt these technologies, we are actively studying them and looking to embrace them by '26. We are searching for practical applications aggressively and understand that these AI models need to be tested and validated for quality control. We expect AI to have a considerable impact, especially toward the end of '26 and into '27, as the tools improve and industry use cases are validated. This progress will allow us to grow without having to increase our workforce proportionately, especially as we anticipate significant growth in GDV, amplified by the addition of Block, and we want to ensure we are effectively resourced to support that growth with the latest tools, particularly in AI.

Operator, Operator

And your next question is from indiscernible.

Unidentified Analyst, Analyst

I have a few questions about the REBL portfolio. First is, we haven't seen your June 10-Q yet, but from March, the disclosure was roughly $1.4 billion of REBL loans would be maturing within the next 12 months. And so my first question is, given where interest rates are, third-party capital availability for these types of properties, would you expect that the majority of that $1.4 billion would be refinanced by third parties? Or should we instead expect that you guys will end up having to extend and modify those loan maturities?

Damian M. Kozlowski, CEO

If borrowers are on track with their business plans, we have two one-year extensions available. Most borrowers are managing their cash-flowing properties well, and we’re willing to extend loans if they prefer to wait for lower interest rates. Many stabilized properties can exit through government-sponsored enterprises or take a five-year fixed option. The key concern is the sponsors' strategies regarding whether they will wait for lower interest rates, which is a significant consideration for everyone. We're in constant communication with these borrowers. Although there is a maturity wall from loans made about a year after the pandemic began, we are well-prepared for this situation and have identified the handful of loans that fall into the substandard category. We are diligently addressing these issues and do not anticipate a significant rise in substandard loans. We believe we have reached a peak and expect to manage these maturities effectively while also seeing a reduction in substandard loans in the coming months.

Unidentified Analyst, Analyst

Okay. Appreciate that. And since you mentioned the sort of peak in substandard loans, I'm going back to sort of Q3 of last year, where I think you made some similar comments around not expecting to see a significant increase in criticized REBL loans. But looking at the disclosure from the press release, it looks like nonaccrual loans did tick up sequentially as did special mention and substandard went down a little bit. So help us understand kind of versus six months ago when we were all together on the Q3 call, what's kind of driven the higher nonaccrual, higher special mention loans versus your prior view around Q3 being the prior peak?

Damian M. Kozlowski, CEO

Yes. Well, the first thing is the Aubrey. We expected that to be closed and off the books. There was a lot of momentum on that property, and we were holding obviously a deposit on that property. So that was a surprise. So that's the first thing. So that would have rolled off and obviously, substandard ORE would have gone down. The nonaccrual is actually in a recap process. So we're hoping to get that off the books also next quarter. It took a little bit longer than we thought. And as a matter of prudence, we put it in nonaccrual until that recap was done. It's just taking longer than we had expected to reduce the substandard. So it hasn't really increased. The classified assets have gone down a touch. So we have a little bit of movement in other categories. But once again, we're working on it. It's a handful of loans. It's very manageable. We have a lot of visibility. We're working very proactively. And when you have these situations, sometimes they just take a little bit longer to resolve. So we're working very hard to do that.

Unidentified Analyst, Analyst

Okay. No, I appreciate that color. And just last couple of questions, quick ones on the Aubrey. I noted the new appraisal that was done, $51 million as is and ballpark $59 million has stabilized. If you could help us reconcile those higher appraised values versus the prior one, which is something in the $40 million range, reconcile why the appraisal went up in value when you've gone through a process now for the better part of 15 months where you haven't been able to find a buyer at a value even at the outstanding loan amount. Meaning really what I'm asking is that market test versus funding a spreadsheet, putting a cap rate on NOI, help us reconcile the appraisal versus market test process.

Damian M. Kozlowski, CEO

Yes, we had a buyer who invested money and made a substantial deposit on the property but was unable to complete the transaction, which is disappointing. However, during that period, we made significant improvements to the property. The occupancy rate increased from 35% to the mid-60s, which has positively impacted the rent revenue. Investors can see this on the Aubrey Houston website. The property is operating normally now and has greatly improved over the last 8 to 12 months. The appraisal, conducted by a third party, assessed comparable properties and resulted in an increase from $48 million to approximately $51 million. This rise of $3 million reflects the property's enhanced condition and stabilized returns. We are not the appraisers; this evaluation is independent. Given the metrics—rental income, occupancy rate, and favorable market conditions—this property is situated in a good neighborhood and is now one of our top assets, featuring excellent amenities. The appraised value comes from the appraisal firm, not from us.

Unidentified Analyst, Analyst

Okay. And then last question for me, please. You referenced the earnest money deposits in the dispute with the buyer around who gets that money since the deal didn't close. From a financial statement point of view, how have you accounted for that $3 million? Have you kind of reflected a receivable expecting to collect it? Or is there somehow there's a reserve on it? If you can help us understand how you've accounted for that, please?

Damian M. Kozlowski, CEO

Yes. Due to the appraisal dispute, if we receive the deposit, there has been an objection to it, which we believe we will overcome. In these situations, objections can't be made. This will ultimately be recognized as income. Although it hasn't been classified as income yet because of the dispute, we anticipate that we will receive it, and it will be recognized in our income statement.

Operator, Operator

And our next question is from Tim Switzer from KBW.

Timothy Jeffrey Switzer, Analyst

I wanted to follow up on the question about the earnest money. How quickly should this earnest money litigation be resolved? And what is the legal process for that? Are you guys pretty confident you'll be retaining all the money currently in escrow?

Damian M. Kozlowski, CEO

We hope so. We have a clear understanding of the situation. There was a deposit made for the purchase of the property. Naturally, when this happens, objections can arise. It is ultimately up to the court to evaluate the evidence, but we believe it is quite straightforward that the deposits should be returned to us without significant delay. We are hopeful to resolve this matter in the next quarter.

Timothy Jeffrey Switzer, Analyst

Okay. Good to hear. And then outside of the REBL book, there's a little bit of an increase in NPAs. It looks like it was largely in the SBL book. Could you provide some color there? We've seen across the industry for small business lending. There's been a little bit of credit migration.

Damian M. Kozlowski, CEO

Yes, it was very minimal. It was either one or just one significant instance, and it really wasn't much. We aren't observing any decline in the portfolio; it's very low. Additionally, in many of these situations, there are safety nets provided by the SBA program, so we are not concerned about that. There was a slight increase. Our primary focus is that we believe we are in a strong position with the SBA and the leasing portfolio. Like many others, we faced some minor trucking issues in the leasing portfolio, but that has mostly subsided. We are not experiencing the same challenges anymore, and we don't have much left in that area either. Thus, those portfolios appear to be in excellent condition. The main priority has been to reduce those substandard assets in the REBL portfolio, along with managing what people perceive as a significant maturity wall; however, we view it as more of a 12-month process of collaborating with buyers to refinance or extend their loans. Therefore, we believe we are in a solid position in that sector at this time.

Timothy Jeffrey Switzer, Analyst

Okay. And then if I could get one more. You guys are bringing on a lot of volume with the new programs with Chime, new partners like Block. How much more capacity do you have for new partners or new programs? There's obviously a lot of demand out there. So just wondering if you guys are still able to continue taking share.

Damian M. Kozlowski, CEO

Yes, the share is influenced by the companies you include in your portfolio. Do you hold the successful players in the fintech sector? In many of these areas, the outcomes have largely been established. You can see this in the commercials aired during any sporting event, where our name often appears. We have created an ecosystem where our transaction volume could potentially be five times what it is now. We have a strategy to manage deposits off the balance sheet and collaborate with our partners through clearing accounts. This has been in development since 2018, as we focused on completely overhauling our technology and infrastructure to enable significantly higher transaction volumes. To be honest, we did not anticipate this level of opportunity five years ago. With the addition of Block, we now have the three largest digital wallet neobanks, which dominate the market with their marketing budgets, providing us with additional opportunities that extend beyond these three. This is a significant advantage across our sectors. Do we have the successful players in these fintech areas? In many cases, we do, which gives them a disproportionate opportunity since they can invest in their businesses through marketing. We believe we can support this. We could easily handle much greater volumes and have been preparing for this for at least five years, if not longer.

Operator, Operator

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

Damian M. Kozlowski, CEO

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

Operator, Operator

Thank you. Ladies and gentlemen, the conference has now ended. Thank you all for joining. You may disconnect your lines.