Bancorp (TBBK) Q2 2025 earnings call transcript

I would not like to turn the conference call over to Andres Burislob. Please go ahead. Thank you, operator. Good morning, and thank you for joining us today for the Bancorp 2nd quarter 2025 financial results conference call. On the call to me today are Damon Kozlowski, Chief Executive Officer, and Marty Egan, our Interim Chief Financial Officer. This morning's call is being webcast on our website at www. bancorp. com. There will be a replay of the call available via webcast on our website beginning approximately 12 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 Damon, I would like to remind everyone that our comments and responses to questions reflects management for you as of today, July 25th, 2025. Yesterday, we issued our 2nd 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 State Harbor provisions of the private security litigation reform act of 1995 and are subject to risk and uncertainty that could cause actual results to different materially from the expectations and assumptions we mentioned today. These factors are uncertainties are discussed in our reports and filings with the Securities and Exchange Commission.

In addition, we will be referring to certain non-GAP financial measures during this call. Additional details and reconciliations of GAP to adjust at non-GAP 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 here of or to reflect the occurrence of unanticipated events.

I would like to turn the call over to the Bancorp's Chief Executive Officer, Damien Kozlowski.

Thank you, Andres. Good morning, everyone. The Bancorp earned $1.27 per deluded share in the 2nd quarter on year over year revenue growth of 11%, excluding FinTech loan credit and 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. GDB climbed 18% year over year, with total fee and related interest income growth from all FinTech activities grew 30%. On July 14th, we announced a five-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 GDB 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 quarter mings 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 200 and 25 million, or 300% over the current buyback of 75 million for the last two 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 525 earnings per share for 2025. We also are 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 were appropriate.

I now turn the call over to Marty Egan, our interim CFO.

Thank you, Damien. Basically, the consumer FinTech loan credit enhancement income, non-interest income for the second quarter of 2025, was $40.5 million, which was 32% higher than the second quarter of 2004. Total FinTech fees accounted for most of that increase. Free pay, debit card, ACH and other payment fees increased 14% to $31.7 million over that period. The 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 balance grew 17% year over year, but loan balance is excluding consumer FinTech loans through 6%. Consumer FinTech loans increased 871% year over year to $680.5 million, and 19% over the link 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, but 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 a $3.1 million of interest on CRE2, which was repaid in that quarter as a result of the sales underlying collateral. Additionally, fees on the majority of our growing consumer FinTech loan balance is recorded as non-interest income, which impacts both net interest income and net interest margin. Not interest 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 related tables in our first release as our earnings contributions over our payments list, and now the turn to call back to Damien.

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

No. So we know this is the card issuance. So we already do the rapid funds transfer. There's 15 use cases that were transferred well as Fargo during last year, and you saw that growth in our other payment in ACH line of our business. This is the entire portfolio of the card issuance for block. Whether they use us exclusively or like in many other cases, they use, you know, another bank. We'll see. But this is one of the big programs. You know, there are three dominant programs, Time, PayPal, and Block. And so we now have the RFT business and the card issuance business. This is a, as everyone knows, this is one of the major players in the FinTech world, and they have over 50 million customers.

So it's very meaningful to, it will be very meaningful in the future to, well, GDB and T growth.

Correct issue.

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

Correct. That's, there was a couple of that there's tax receipts during that part of the year. And 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.

Yeah. So this is, it's not like a point in time. We're always working with these borrowers. So we have a lot of visibility as to their business plans and whether they plan to recap or do something else potentially if there's a problem or just simply to repay or extend the loan. So in the case where they're doing their business plan and need a little bit more time, there's kind of a natural extension. And that's gone up over recent times just because of market conditions, which we're fine with, obviously, if you have a performing property and it's cash flowing and it's metal, it's requirements, extensions are a good thing for us. In the case where, and what happens is that you see this way before, while many of these loans were done in this vintage, we have a lot of visibility.

So if there's any issues with that, they would have already appeared in the criticized or substandard assets. So it's not like there's this date and then we don't know what's going on and we don't know what's going to happen with the borrowers. So we've been working through that over the last year. So you don't, we don't expect a big another spike in substandard assets. We had kind of a spike in the third fourth quarter of last year, went down a little bit in the fourth quarter, and it's been a little bit stable. Hopefully, we'll be able to work through that. It's taking a little longer than we want. We had the Aubrey situation where we weren't able to close the property, but we are hoping over the next two quarters that will go down meaningfully.

Good morning, David.

Yeah, so there are about 20 units available to rent. So the occupancy has gone up dramatically over the last eight months from the mid 30s to the mid 60s. And so there's already 20 units that have been totally reconditioned that are ready to be leased out. There are some additional work to do, but we're in active discussions with potential purchases of the property and that will really depend over the next six weeks. If we don't get that traction to dispose of the property, then we'll probably finish the balance of the units. I think about it's in the 10 to 15 percent range. We will fund it obviously that we have the deposit. Hopefully we'll be able to recapture that.

And then the equation would be at that point, if we levered, excuse me, fully but we would also look to get a gain on the property at that point. If we were able to lease it up to it's to the 90 percent region.

We're very, yes. So it's our base infrastructure is very leverageable in many of the categories, but there will be incremental hires. So there won't be a lot. We'll have to, and we're getting a lot of efficiencies over time and productivity enhancements through things like machine learning, hopefully AI will kick in the next year or two. But there will be additional resources. So there might be a little bit extra in the third and fourth quarters ramping up, but usually as the volume, that's maybe a few, but when the volume starts kicking in, then we'll have to assess adding additional resources. But then of course, we'll be getting large volume and revenue increases, so it'll be offset obviously.

So a little bit of build maybe, but then when the volume comes in, yet we'll have to add additional resources depending on where we are with our productivity gains.

And then just kind of sticking with the productivity gains, you know, you mentioned in your release, you know, targeting, you know, 4226 EPS of at least $1.75, which will be driven by several factors, including, you know, these productivity gains. Can you talk about, you know, where you see the benefits of AI impacting your business? And it sounds like that might be a, you know, latter half of 26 events, if I kind of read the tea leaves right in your prior answer. Well, there's two, there's two things. That's one thing. The first thing though, is that we really have had two, two banks, kind of operating synergistically, but two banks. One was more of a traditional bank while we were levering up the bank spread increases dominated kind of our profitability, but that's switching to our, you know, it's not no longer a payments bank.

It's really a middle office FinTech and technology platform, that ecosystem that we built for the FinTech industry. And so that is rapidly, obviously growing very, very quickly, adding new partners and product sets. And so we're becoming much more focused on that FinTech bank. So as that happens, we've already said for years that we're going to take some of the traditional businesses off the balance sheet that will be lower on balance sheet for those businesses. And we'll need to reallocate the resources as the FinTech business increases its use of the balance sheet, right? And in many cases, that's just a reallocation. We want to get to a situation in three years, five years, where we add a couple hundred people, we go from 800 to 1000 people.

But when we double the net income, we're not going to go from 800 people to 1,600 people, right? So some of that is that we reallocating resources from the traditional to the FinTech bank.

Now on the AI front, there's so much happening in this space. One of the key areas where it's likely that we were already using tools, it's in our, we're using broad tools for people to get more productive, what we're using, tools and say for legal contracts, etc. , where AI is very well suited. But going into the future, there are things like SARS filing, doing the initial work where there could be big productivity gains. And so we're not going to be the first person to do it, but we're already studying those things. And we really want to lean into it in 26. So we're looking for use cases very aggressively. We don't, of course, these are models, so they have to be tested and they have to be robust.

We have to mention the quality control is there and testing is there. But we think it's going to have an impact going into, especially in part of 26 and 27. They're becoming just better tools. We're finding out, you know, use cases are being tested in the industry. And we think it'll make good gains, which means that obviously, as we grow to the first point, we won't have to go from doubling the amount of people into the future when we have sizable gains in a GDB, which we expect, right? We've been over-trend for a while.

Adding block is going to add another leg to the GDB growth. And we want to make sure that we can resource that very effectively and productively with the best use of tools in areas like AI.

Well, once again, if they're on their business, we have two one-year extensions available to borrowers. And if they're on their business, with the vast majority are on their business plan, cash flowing properties, we're more than happy to extend those loans with the if they want to wait for lower interest rates. Most of the exits of if they're stabilized properties can exit through the GSEs. So that's the main refinance or, you know, five-year fixed. It's really about when you have a maturing performing loan that's really about the sponsor's planning. You know, are they waiting for an interest rate once again, we're working with these borrowers all the time. So there's that while there is a lot of kind of a maturity wall because a lot of these were done a year pretty much into the pandemic when we restarted the business.

It's a wall that we understand really well, and we've already identified. So you see the universe of it's just a handful of loans that are the substandard category because they've already been identified if there's a real issue with the business plan. So we're working through it diligently. We don't expect there to be a lot of increases in substandard category. We think we've peaked and we think that over the next few months we'll work through that maturity and we'll also see a decline in substandard loans.

Yeah, well, that, well, the first thing is the Aubrey. We expected that to be closed it off to books. There's 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 or or or e would have went down the the nonacruals 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 nonacrual into that recap as well. It's just taking longer than we had expected to reduce the sub standards.

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 to handful 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 and to resolve. So we're working very hard to do that.

Well, we had a buyer and they put actually money into the property and put a sizable deposit and couldn't close the transaction, which is unfortunate. But during that time, we substantially changed. A lot of investment went into the property. It went from a 35% occupancy all the way up to the mid 60s.

And obviously, a lot of visibility on the rents that are realized. So what people have done, investors have actually done, and you can actually go on the Allbreak Houston website and see it. The property is business as usual. It's in a very different state than it was eight to 12 months ago. And so the appraisal is done totally on a third-party basis looking at comps and everything else. So it went up from 48 to, I think it was 51. So it went up $3 million based on those criteria. And obviously, a stabilized increase as the property is improved. So we don't obviously, we're not the appraiser that's done on a third-party basis. And so because of those metrics to realize the occupancy, the market conditions, this property is in a good neighborhood.

It's obviously in the top, at its current state, it's one of our better properties with good amenities and everything. So that is the appraiser's value. That's not ours.

Yes. So it would be a, because of the appraisal at K-Men, it would be if we take that, if we get that deposit, they've objected to it, which is, you know, we don't think we think we will get that deposit, but you can object to it in these situations. So it will be income. It hasn't been recognized as income yet, because it's been disputed, but we expected that that, and that will be realized in income.

We hope so. I mean, it was, I think we think we have a clear, it's very clear. I mean, there was a deposit put down for the purchase of the property. Of course, you get a situation, you're going to get an objection. And so it's really up the court to weigh the evidence, but we believe it's pretty clear cut that the deposit should come to us without a lot of delay. We're hoping to resolve it in next quarter.

And it really wasn't a lot. We aren't seeing a deterioration really in the portfolio. I mean, very low. And obviously in these cases, there's many of these cases, there's backstops, obviously through the SBA program. So we're not worried about that. There was a little pickup. The main focus really is we think we're in good shape on the SBA and the leasing portfolio. We had a little trucking, like everyone else did, issues and leasing portfolio. And that's kind of run off. We're not seeing the same thing anymore. We don't have that much left either in that space. So those portfolios seem to be in very good shape. The main focus has been getting those sub standards down in the Rebel portfolio, but also the maturity.

What people see as a wall, but we see more as a 12-month process of working with buyers to refinance or extend their loans.

So we think we're in good shape in that area at this point.

Yeah, well, the share is determined by who you have in your portfolio. Do you have the winners in the Fintech space? A lot of this in many of these areas, it's been decided. And so if you see it by looking at commercials during any sporting event, you'll see these commercials. Many times our name will appear on the bottom. We have built an ecosystem where we could have five times the volume that we have today. We have a process to take the deposits off the balance sheet or way of working with our partners where we have clearing accounts.

You know, we've had this. We've been building this since 2018. Really focused on building this. Very, you know, we're doing the entire tech stack. We're doing our infrastructure so that we could accommodate dramatically higher gross dollar volume. Now, to be honest, we never envisioned five years ago that would be this much opportunity. And with the addition of Block, having the three largest, really the three largest digital oil at Neil Banks, which dominates the marketplace with marketing spend and everything, you know, and have other opportunities with those three that go beyond that, is really a big driver, right? But that's across our verticals. Do you have the winners in these FinTech spaces? In many cases, we do.

And so they have this proportionate opportunity out there because they have the ability to invest in their businesses with marketing spend. And we believe we can support it. You know, we could have easily multitude the volume. And we've been preparing for this for the better part of at least five years. It's not more years.

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