Bancorp (TBBK) Q3 2025 earnings call transcript

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 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. thebancorp. com. There will be a replay of the call available via webcast on our website beginning at approximately 12 p. m. 7073.

Before I call over to Damon, I would like to remind everyone that our comments and responses to questions reflects management's view as of today, October 31st, 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 State 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-gapped financial measures during this call, additional details and reconciliations of GAP to adjusted non-gapped financial measures are in the earnings release and the investor presentation. Please note that the Bancorp undertakes no obligation to publicly release the results with 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.

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

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 GDP 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 balance is ended at 785, up 15% from second quarter, and 180% year over year. We are expecting increasing bonds with new product announcements 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 26 and into 2027.

We also made progress in reducing our criticized rebel assets, which include both substandard and special mention assets. These assets declined from 216 to 185 million or 14% quarter over quarter. We expect more progress in the fourth quarter. Under our project seven initiative, which looks to achieve $7 earnings per share run rate by the fourth quarter of 26, we will be conducting a restructuring of our institutional banking business in the fourth quarter of 25.

Headcount is being reduced by 30 as we de-emphasize growth, reallocate space in 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 also are implementing our first AI powered use case. We have developed a new tool to reduce the writing of narratives and financial crime risk management.

For a $300,000 investment, we anticipate that we will be able to avoid approximately 1.5 million run rate expenses over time based on increasing volumes. This tool will be operational in the first quarter of 26. 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 increasing positive impact and are already best in class profitability. Lastly, we are lowering guidance to $510 a share for $25,000, 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 in $26, other than we are targeting a minimum $7 earning per share run rate by the end of 26.

We are, however, initiating preliminary guidance for 27 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 and implementation timelines in FinTech and our stock price for buybacks. We will now turn the call over to our interim CFO, Marty again. Marty?

Thank you, Damien. Excluding consumer FinTech low and credit enhancement income. Non-interesting 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. Pre-paids, 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, the third quarter 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 non-consumer 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 that charged us at $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.

Non-interest 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 Damien mentioned earlier, we made progress on reducing our substandard and special mentioned revenue assets. We expect that to try 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 and our press release as are the earnings contributions of our payments business. I will now turn the call back to Damien.

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

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 as we work through the year, though. We will have substantial fee revenue generated by the third and fourth quarter of next year.

Yeah, so that's 27 is expected to close in the next five days. So it's either today or the beginning of next week. And that's some standard loan.

Yeah, so these things usually take longer. But if you're going to get all the value out of the last thing you need to do is panic when you have a little dislocation, which we didn't. And so we've just been working with the borrowers, some in deferrals, right? And so those deferrals are coming to an end, so we're getting resolutions.

And the market is improved generally for these assets. And we've gotten much more clarity. So I think we're going to make really good progress in the fourth quarter and in the first quarter of this year. The fourth quarter has already been ringed since. It could be a little bit better or worse depending on what happens. But we're fairly confident of the 102 reduction.

You mean the end of period deposits?

So it's, you know, we get up some downs and deposits depending on the program. There's a big seasonality part of it.

We're looking at it now. There might be some portion of an impact on drawdowns because the government shut down. You know, we're not sure there's usually a lot of volatility. But we have a lot of primary liquidity. So we have a, you know, we've taken deposits off the balance sheet. So we don't have any concerns. We expect that the positive starts to grow in the fourth quarter. And then the first quarter is obviously tax season is where we, as you if you look back in last year, you could see the dramatic difference as it ramped up in the fourth quarter.

And what's happened generally is that you get a, you get a ramp up in that fourth quarter and over the last, and traditionally you go back five, six, seven years ago, you'd get that big ramp down. But what's happened now is that because we have our regai limit, it's more about managing deposits off the balance sheet. You know, we have plenty of deposits.

The question is how do we manage it through the cycle so that we don't have these big ups and downs? And so we've gotten much better at taking deposits off the balance sheet when we don't need them.

Thanks, David.

Yep. And so it's we're continuing to lease up the property. There's units available. We're finishing up on I think about 10% of the units that still need to be refurbished.

You know, we're continuing to lease it up. We have people looking at the property to do a transaction. I can't give you any assurances today when that will happen. But we think we'll, over the next, you know, 30 to 60 days get more clarity on the property. There's definitely a market out there for the property. The appraisal, if you recall, came in higher last time we reported in the second quarter earnings.

So we feel comfortable. I mean, it's in a very different state than it was when we had to take the property over, you know, all the major construction, the roofs and the foundations have been done. So it's just a lease up situation. And we do have available over 20 units available for rental. So I think we're in a fairly good position in the property.

Yeah, so it's, we've got a lot going on. So we, we have three big initiatives that we're not sure exactly of the timing, right? So we have the new programs, including cash app with embedded finance, which we're launching. And we also have the leveraging up of the credit sponsorship business, right? And there's ambiguity around new partners exactly when the revenue will be realized.

And then we have the big share buybacks and what the stock price is. So what we've done is kind of looked at both and modeled them out and saying, okay, what happens if we get the aggressive versus most likely versus downside case and then looked at the potential stock price with the multiple and said, okay, let's look at all these cases and run a bunch of scenarios. And what do we feel comfortable with on both the, both on the revenue side, but also on the buyback side. And then also the expense side because we're implementing, you know, we have a whole game plan around AI now, which will have an impact on our ongoing cost structure.

So, you know, this is probably a, we don't want to put something out that because of the volatility of where we are right now. As we get better visibility as to as things play out in the beginning of next year, you know, we could give you more guidance on it. But we didn't want to give guidance for the first couple of quarters. We feel very confident at this point that we expect that we'll get to the $7 run rate. And then if you play it out, that $8, a 25 is very doable. In 2017, you have everything hitting at once. You have got them all the revenue initiatives, you've got all the buybacks because we would continue to do the significant amount of our net income.

And then you have the cost reduction at the same time. So that we feel fairly confident, regardless of the stock price of the buyback that we'd be able to hit it. But we can't give you the exact, we kind of run it at a bunch of different prices. And then we look at the revenue expense side and try to triangulate on what, what best never to go out with.

Yeah, yes, right. So it includes the buyback. And if, you know, obviously if it lowers share price, or we get better clarity exactly on the implementation timelines, we'll give that guidance to the market once we get clarity. We just know that under all the things that are going on, that $7 is very attainable to get to the run rate. And if we get to that run rate, then you have a whole bunch of things hitting in 27, because you've already ramped everything up.

As for the tradition, which has not been approved by the board, our tradition is that we're going to return, depending on the multiple of the company, 100% of our net income and buybacks. At that point, it'll be 300 plus million dollars of net income. So that would be, you know, similar to the buyback that we did this year.

Yeah, there's a lot of volatility. There's incentive fees. There's a whole bunch of things in there. And there's seasonality in there, too. So you're coming off the the income period.

But, you know, they're volatile. So, you know, I think you look year over year as the best metric to understand that. And over a couple of quarters. So you look at the trend and you look year over year. So sometimes we do have a slight depression quarter to quarter, especially coming off the first to the second, but sometimes the second to the third. But then it starts ramping up again. So I would encourage looking at it longer term and looking at it year over year. So we're definitely above, remember, we have not implemented some of these, you know, things like embedded finance. We have not implemented cash app yet. There's no volume there. Even on the volume that we currently have, we're above trend right now in GDP growth.

So that's without, you know, the large addition of the next program. So I think you're going to still see the above trend if that higher going into next year. And that will obviously drive fee growth, as well as the adoption of more credit sponsor partners and also the launch of embedded finance.

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

Well, embedded finance is where they're not just 27, but, you know, over the next few years. Yeah, so the embedded finance opportunity is very large, right? So we haven't traditionally done any program management for our partners. And what embedded finance really does is package all the capabilities that we have today. We've talked about this whole layer cake of the opportunities and it delivers the entire menu to somebody who wants to embed it in their app, such as a gig economy company.

And so that makes that we not only because we have such scale in the other things, and obviously we're profitable doing it, if you're able to deliver the program management element, and that's a big growing market is going to be in the future, it's a big opportunity. If you recall the program manager, you'd have to rebate this obviously to your partner, but that is the biggest part of where you get the fees, right? So that typically can be up to 80% of the interchange structure in the program management. That's where they get all their revenue from, right? So today we're a few percent, maybe 4% at the max of those fees. So if you're able to layer on the program management element, you still obviously have to pay things like Visa, MasterCard, and Networks, but then there's a much richer fee environment, of which of course you'll share that with your partner, but that makes our platform much more profitable than it would have been if we just sold it piecemeal, or for some partners like Chime, we sell all layers of the cake, but in certain cases we only sell parts of that offer, but that's kind of packaging that entire offer, and then it increases the fee environment for us to monetize the platform.

Not in spend, and it's hard to tell, we're seeing momentum in things like the short term, my pay, and instalone world, right? So you're seeing some momentum, but we can't tell if that's just adoption, or an economic reason. So we haven't seen the stress on the economy yet. So people are still spending, remember the vast majority of our program partners, are, you know, we have corporate payments, that's not going to be, insurance payments aren't going to really be affected. And then we're, we generally paycheck to paycheck in a lot of our universe.

So people are still employed, they're still spending, and we haven't seen the stress yet.

Yeah, we still have momentum in the bounces in the, in the, but we can't tell generally if it's driven. You would, you would think that it was, but you know, we can't be sure that it's, you would think that it'd have to have some impact, right, just logically. But we can't tell if it's just more adoption of the product set through our partner's marketing.

It hasn't, let's say it hasn't doubled, right? So you, it's not so odd, it's maybe a little elevated in the adoption level, but I'm not enough to say that it's from a specific group, other than just the normal business marketing.

Thank you.

You know, some of that will be resolved in that $102 million since on their contract. So that's expected to improve in the quarter. We should expect when we see the same data for Q4, a lower pass due, you know, line item for rebel loans.

Yeah, so that's, this is only all our consumer fintech loans are now chime, okay, we haven't added another partner as of yet. And as has been disclosed before, we have $1.8 billion that we've have a limit on their use of our balance sheet. There's five different products and they have their own, I won't speak for chime, but they have their own, obviously they have plenty of, you can look at their financials, they have plenty wherewithal to sustain the losses. So they do it for various reasons, I want to speak for them, but it's, I believe it's a profitable activity even with the charge offs, but there's other marketing reasons that they do the loans in order to make relationships more sticky and to add relationships.

But I can't really speak to their strategy. And they, they, all I could say is that if you look at their own, what they say about their, they're definitely in that business and they have the ability to, you know, change the dynamics around how they lend and that's up to them. We're just providing the infrastructure in the balance sheet at this time to the limit of 1.8 and they make the decisions ultimately about what losses they like to bear and at what rate and then what is your benefit to do that either financially or for marketing?

Well, once again, that's, that's their decision and that's a question for chime.

I can't just, I obviously can't disclose any, any conversations we've had. That's really a chime question. We're, we're here to support our partner. We, we have obviously an incredibly close strategic relationship. We've provided them with enablement for them to help their business plan and then we've given them a limit of 1.8 billion. So they could change that to, they can change their view of how they want to build their business tomorrow and I'd ask you to look to their own announcements and stuff of what their intentions are.

Are you referring to launching a single program or just the platform broadly? So we already have a workable, you know, mock-up platform that's actually live, right? So we're in the development process. So we started on the track several years ago of, because it wasn't like we discovered a bunch of our partners had asked us if we had the capability to do this aspect. So, and if we could help them build out a capability within their own user experience, right? So that's where the journey started. It became clear to us that the market wants a bank solution, right? They want the entire infrastructure, you know, you're going to have third parties, but they want it to be a bank solution.

And that's where there is a lot of demand, especially if you think about the types of companies that need this and where it's not their primary business model. It's mostly the gig economy, but it's not only that, right? So that's where we're focused at first, but it's clear that embedded finance, if you look at any industry study, it's something that's sometimes mentioned as much as AI is, but it's something that's going to be broadly accepted. People want that financial services capability. So our journey is focused on the use cases that will kind of deliver our entire capability set. Most of that in the early days will be gig economy, types of companies, but then there are many other use cases as those companies adopt this type of capability that will build on those capabilities and have a large potential market.

Now, the market is obviously a very large market. And the revenue strings from this type of activity can be very large. And they could be costly, right, for the provider. But because of the investments we've made in the key core capabilities that are needed, such as financial crime risk management, compliance risk management, we believe we have an economic advantage in delivering embedded finance to the marketplace over many of the competitors.

And that will result in significant profitability enhancements for the bank core. And that's part of the reason why as we build these new capabilities, we don't want to give, and these are all kind of being done at the same time. There's obviously huge potential. And as we get clarity of the market, and as we watch these things, we'll tell the market.

And the potential is large. However, it hasn't been proved out yet. We think these are all going to be within the next 12 months, very important part of our profitability story.

Yeah, so we're very, very different than four years ago when we opened the balance sheet. We're very flat. So we're not very asset sensitive. If it goes, if late through and out 400 basis points, it's only 3% of net interest income, because of the way we've structured the balance sheet. So the question for us is, is when appropriate, and we've got such balance sheet flexibility, for example, obviously we could have made up room on our net interest income deficit by just buying bonds. But we haven't, because the flexibility in this kind of environment is at a premium.

So we'll look at those opportunities, and we haven't gone down the credit curve because of price. So as you know, the spreads are very tight in the marketplace. So we don't feel, with all the things that we're working on, we don't feel a need to go down the credit cycle, go down the price, go down in price, or put on bonds just to make up for the lack of origination on the traditional credit. So that's our position. So we obviously had a little deficit in our net interest income versus what the expectations were, but we don't want to chase in this market, or be forced into a position that many people have been in force in the place of buy bonds, just to supplement some of the net interest income.

I don't think you're going to get any reentering. I think there's, you know, there was a, obviously, a lot of people got into banking as a service. It's more than just the regulatory part of it. It's all the infrastructuriness. There's still what the regulators have basically said. There was, I don't want to say overreach, but there was clearly some standards that were starting to be suggested that were not necessarily consistent with guidance. And what the regulators have said is, listen, we're going to, you know, use the guidance. We're not going to try to create things that are out of guidance. And I think that's helpful to the entire industry, including us, because we're, if you remember, we're kind of the highest volume, largest provider.

So if they're going to set a standard, they're probably going to start with us. So if they're not going to set a new standard, and they're going to manage to previous guidance, we're at previous guidance. So that helps us a lot in that we won't have to meet a new standard, but we'll have to hit the regulatory standard that we've met in the past. So we haven't seen it. You know, we're focused on the largest programs implementation. We haven't seen any, we're still saying, you know, seeing a lot of the business, we don't do it all, right? So we don't see a pipeline difference at all. And I think over time, it's good for everybody.

If they manage to, it's the ambiguity around it. I think that's good for everybody that if the regulators focus on what they, what the regulations are, that you can have a clean understanding of what their perspective is, right? And then you can meet that perspective. You know, people join us. It's not only because of the regulatory expertise, which we have. It's all the other infrastructure. It's the look through the programs through our ability through financial crimes and our data management capability and all that and our fraud list and all that stuff. So it's, that's what only one aspect of it.

So go ahead. The commercial fleet leasing, there's a lot going on that space at the freight recession. I know you typically lease the smaller fleets. You are probably struggling with that. There's also the government shutdown. We have, I think, some exposure to government agencies. What were the issues kind of facing these credits here? And is there continued pressure at all going forward? And I guess, could you just clarify, was this several borrowers, it sounds like? Yes. So there were three borrowers. We don't have a large exposure. So you probably, the transportation segment got hit hard because there was a bubble during the pandemic because everybody was delivering things. Somebody was going to stores, as you know, they closed all the small stores down.

You can only go to Walmart if you recall. But that blew in the trucking industry. And so we never had a very large portfolio. And we only have 12 million left. So we, and we haven't done credit in a couple of years. So this is a legacy disposition of assets where, you know, some people are, it's gotten so bad that there's reports of people abandoning these trailers. Not the truck, but the trailer part, people have actually abandoned them at truck stops. But we get the trucks back and then you go through a process of disposition and just aren't realizing these are the depression of market prey, even in our discounted view because we've usually taken gains on all of our transportation assets, you know, vehicles and trucks.

So it's just, you know, it's a whittled down portfolio. We only have a small exposure left. And it's all centered on losses and disposition of assets.

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

Thank you, Jamie.

I would like to turn it back to Damien Kozlowski for closing remarks. Thank you for, thank you, everyone, for joining us today. Operator, you can just disconnect the call.