The Bancorp, Inc. (NASDAQ:TBBK) Q2 2025 Earnings Call Transcript

The Bancorp, Inc. (NASDAQ:TBBK) Q2 2025 Earnings Call Transcript July 25, 2025

Operator: Good morning, ladies and gentlemen, and welcome to The Bancorp, Inc. Second Quarter 2025 Earnings Conference Call. [Operator Instructions] I would now like to turn the conference call over to Andres Viroslav. Please go ahead.

Andres Viroslav: 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: 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 grew 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 time lines, 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 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 where appropriate. I now turn the call over to Martin Egan, our Interim CFO.

Martin F. Egan: 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 a $3.1 million of interest on CRE-2, which was repaid in that quarter as a result of 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: Thank you, Marty. Operator, could you please open the lines for questions?

Q&A Session

Operator: [Operator Instructions] And our first question is from Tim Switzer from KBW.

Timothy Jeffrey Switzer: Congratulations on the new partnership with Block and Cash App. Can you provide some details on if this is an entirely new product for them or if you are a new sponsor for a current product? And any color — sorry, go ahead.

Damian M. Kozlowski: No, go ahead.

Timothy Jeffrey Switzer: 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: No. So we — no, this is the card issuance. So we already do the rapid funds transfer. There’s 15 use cases that were transferred Wells Fargo during last year, and you saw that growth in our other payment and 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 another bank, we’ll see. But this is one of the big programs. There are 3 dominant programs, Chime, 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 both GDV and fee growth.

Timothy Jeffrey Switzer: Okay. So this is for the Cash App Card…

Damian M. Kozlowski: Correct.

Timothy Jeffrey Switzer: Issuance? Okay. Okay. And are you supplementing Sutton Bank who is currently the issuer or replacing them?

Damian M. Kozlowski: Well, the mandate is to replace that volume over time.

Timothy Jeffrey Switzer: 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: 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 driven.

Timothy Jeffrey Switzer: Got you. Okay. And then we saw the criticized loans and nonaccrual step up a little bit in the REBL book. Can you — with the bulk of that portfolio reaching maturity over the next year, can you provide some color on borrowers’ ability to make the balloon payment? How many have taken the 1-year extension versus paying off the loan entirely? How many needed to inject additional equity or find another lender?

Damian M. Kozlowski: Yes. 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 met all its 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 the next — it’s taken 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 2 quarters, that will go down meaningfully.

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

Joseph Peter Yanchunis: 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: Yes. So there are about 20 units available to rent. So the occupancy has gone up dramatically over the last 8 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 purchasers of the property, and that will really depend over the next 6 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% 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 leased up the property, then we would look not only to get out of the base loan that we have, but we would also look to get a gain on the property at that point if we were able to lease it up to its — to the 90% region.

Joseph Peter Yanchunis: 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: 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, in the next year or 2. 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 will 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.

Joseph Peter Yanchunis: And then just kind of sticking with the productivity gains. You mentioned in your release targeting 4Q ’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: Well, there’s 2 things. That’s one thing. The first thing, though, is that we really have had 2 banks kind of operating synergistically, but 2 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 — it’s not no longer a payments bank. It’s really a middle office fintech and technology platform 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 resources as the fintech business increases its use of the balance sheet, right?

In many cases, that’s just a reallocation. We want to get to a situation in 3 years, 5 years, where we add a couple of hundred people. We go from 800 to 1,000 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 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’re already using tools. It’s in our — we’re using broad tools for people to get more productive, but we’re using tools and say for legal contracts, et cetera, 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 make sure the quality control is there and testing is there. But we think it’s going to have an impact going into especially the end part of ’26 and ’27. They’re becoming just better tools. We’re finding out use cases are being tested in the industry, and we think it will 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 GDV, which we expect.

right? We’ve been over trend for a while. Adding Block is going to add another leg to the GDV 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.

Operator: [Operator Instructions] And your next question is from [indiscernible].

Unidentified 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: Well, once again, if they’re on their business, we have two 1-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 a 5-year fixed. It’s really about their — when you have a maturing performing loan, that’s really about the sponsor’s planning. Are they waiting for an interest rate decrease or not, which is obviously on top of mind for everybody. The ones — once again, we’re working with these borrowers all the time.

So there’s not — 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. Those have 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 maturities, and we’ll also see a decline in substandard loans.

Unidentified 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 6 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: Yes. Well, that — 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 went 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 and to resolve. So we’re working very hard to do that.

Unidentified 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: Yes. 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 Aubrey Houston website and see it. The property is business as usual. It’s in a very different state than it was 8 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 million to, I think it was $51 million.

So it went up $3 million based on those criteria and obviously, a stabilized increase as the property has 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, the rents realized, 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.

Unidentified 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 it somehow there’s a reserve on it? If you can help us understand how you’ve accounted for that, please?

Damian M. Kozlowski: Yes. So it would be a — because of the appraisal [indiscernible], it would be — if we take that — if we get that deposit, they’ve objected to it, which is we don’t think — we think we will get that deposit, but you can’t object to it in these situations. So it will be income. It hasn’t been recognized as income yet because of — it’s been disputed, but we expect to get that and that will be realized in income.

Operator: And our next question is from Tim Switzer from KBW.

Timothy Jeffrey Switzer: I wanted to follow up on the question about the earnest money. How quickly should this earnest money litigation be resolved? And like 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: 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. The — 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 deposits should come to us without a lot of delay. We’re hoping to resolve it in the next quarter.

Timothy Jeffrey Switzer: 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: Yes, it was very little. It was one or one big one, and it really wasn’t a lot. We aren’t seeing a deterioration really in the portfolio. I mean it’s very low. And obviously, in these cases, there’s — in many of these cases, there’s backstops, obviously, through the SBA program. So we’re not worried about that. There was a little tick up. 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 in the leasing portfolio, and that’s kind of run off. We’re not seeing the same thing anymore that’s kind of — 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 substandards down in the REBL portfolio, but also the maturity, what people see as a wall, but we see more as a very — a 12-month process of working with buyers to refinance or extend their loans.

So it’s — we think we’re in good shape in that area at this point.

Timothy Jeffrey Switzer: Okay. And then if I 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: Yes. 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 — and 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 5x the volume that we have today. We have a process to take the deposits off the balance sheet or a way of working with our partners where we have clearing accounts. We’ve had this — we’ve been building this since 2018, really focused on building this very — redoing the entire tech stack, redoing our infrastructure so that we can accommodate dramatically higher gross dollar volume.

Now to be honest, we never envisioned 5 years ago that would be this much opportunity. And with the addition of Block, having the 3 largest — really the 3 largest digital wallet neobanks, which dominate the marketplace with marketing spend and everything and have other opportunities with those 3 that go beyond that is really a big driver, right? And — but that’s across our verticals. Do you have the winners in these fintech spaces? In many cases, we do. And so they have disproportionate opportunity out there because they have the ability to invest in their businesses with marketing spend. And we believe we can support it. We could have easily multitudes of volume, and we’ve been preparing for this for the better part of at least 5 years, if not more years.

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

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