The Bancorp, Inc. (TBBK) Earnings Call Transcript & Summary

Hello, everyone. Thank you for joining us, and welcome to The Bancorp, Inc. Second Quarter 2026 Earnings Conference Call. [Operator Instructions] I will now hand the conference over to Andres Viroslav. Andres, please go ahead.

Thank you, operator. Good morning, and thank you for joining us today for The Bancorp's Second Quarter 2026 Financial Results Conference Call. On the call with me today are Damian Kozlowski, Chief Executive Officer; and Dominic Canuso, our 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. 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 31, 2026. 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 and uncertainties are discussed in our reports and filings with the Securities and Exchange Commission. In addition, we will be referring to certain non-GAAP financial measures during this call. Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures are in the earnings release. 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?

Thank you, Andres. Good morning, everyone. The Bancorp earned $1.45 a share in the second quarter. EPS growth year-over-year was 14.2%. ROE was 34.7%, continuing on its upward path The Bancorp already has an ROE roughly triple the average of the banking industry, and we expect sizable increases over the next 3 years. Consistent with our capital return philosophy, profitability increases are expected to be returned to our shareholders through share repurchases. In the last 4.5 years, The Bancorp has returned the equivalent of 100% of equity capital based back to shareholders through buybacks. We expect that time frame to decrease to around 3 years over the next 3 years. After that buying back the equivalent of our capital base in 2 years or less is a reasonable forecast. This results in annual EPS accretion of approximately 5% to 10% depending on the price of shares purchased and before our projected increase in net income, which should result in dramatic EPS accretion over the next 5 years. Fintech GDV continue to grow significantly above trend at 22.5% year-over-year for the second quarter of Fintech revenue growth in the quarter, which includes both fee and spread revenue was 21% year-over-year. Our 3 main fintech initiatives that underpin our Apex 2030 strategy continue to progress quickly and are well positioned for substantial long-term success. Our onboarding new programs and expansion of current programs continues within or exceeding our targets. The Cash App program is now ramping up and should start contributing to GDP growth and profitability over the coming quarters with more material contributions coming in late Q4 and Q1 of '27. Credit sponsorship balances continue to surpass our expectations. We anticipate announcing 2 new programs that subject to implementation timing and other customary factors would be expected to come online next 6 months. Embedded finance platform development continues with significant progress in building a robust integrated platform connected to our one-of-a-kind ecosystem. We should soon make an announcement on our first embedded finance partner. Lastly, we're increasing our full year guidance to a range of $5.95 to $6.05 EPS for '26. We are targeting a range of $1.65 to $1.75 a share in the fourth quarter of '26 and we are maintaining a preliminary guidance for '27 of $8.10 to $8.30 a share. Our guidance in '26 and '27 includes anticipated stock buybacks. 2026 buybacks are forecast to be $200 million in total or $50 million a quarter, and we forecast future share repurchases to be near 100% of annual net income. We expect that our 3 main fintech initiatives along with platform efficiency and productivity gains from restructuring and AI tools, plus a high level of capital returned through buybacks will be the driving forces behind continued EPS accretion. And gains are subject to development implementation time lines in fintech and our stock price for any future buybacks. I'd now turn the call over to our CFO, Dominic Canuso. Dominic?

Thank you, Damian. The second quarter was a very strong quarter, topping off record level earnings for the first half of the year and positions us well to achieve our expectations for the second half of '26 and full year '27. While ending loans were down from the first quarter, this was due to a change in month-end customer billing cycle and payment due dates with our lending partner. This does not affect customer performance or our economics. Average loans for the quarter of $7.63 billion increased 5%, not annualized from the first quarter and 16% compared to the second quarter of 2025. Average fintech loans in the quarter were $1.39 billion or 18% of average total loans, up from 15% in the first quarter and 8% in the second quarter of '25. Our strategy is to continue to shift the loan mix towards the higher velocity, higher returning credit sponsorship business. Average deposits increased $97 million or 1.2% not annualized from the first quarter and $357 million or 4.4% from the second quarter of last year. The average cost of deposits decreased 7 basis points in the quarter to 1.63%, which is 55 basis points lower than the second quarter of '25. We ended the quarter with $1.1 billion in net deposits swept off the balance sheet, which is down 16% from the first quarter due to seasonality but up 32% from year-end '25. While there may be quarter-to-quarter fluctuations in our off balance sheet sweeps due to seasonality or other factors, due to the strength of our partnership model and their growth, we expect this to increase over time. NIM of 3.85% in the second quarter was relatively flat with the first quarter and consistent with expectations. Our fintech lending fees, which are recognized as fee revenue generates an equivalent to an additional 28 basis points of NIM compared to 24 basis points in the prior quarter and 18 basis points in the second quarter of '25. In addition, we generated $680,000 in fee revenue from our deposit sweeps, which would equate to 3 basis points of additional NIM. Noninterest income, excluding credit enhancement, was $47.3 million, an 8.2% increase not annualized compared to the first quarter and 16.7% versus prior year quarter. This equates to 34.3% of total revenue with 29.7% of total revenue coming from fintech fees, up 1 percentage point from the first quarter and 4 percentage points from the second quarter of '25. As I mentioned last quarter, growth in credit sponsorship loans is a leading indicator of fintech fees due to the velocity of the portfolio and was demonstrated in the growth in the fintech fees in the quarter, including the 17% nonannualized growth from the first quarter, specifically from the consumer credit fintech fee line. Credit performance was strong across all asset classes with continued improvements in Rebel and leasing. Rebel criticized loans were down another $13 million or 22% to $46 million the lowest level since mid-'23. When excluding the fintech credit sponsorship loans, which are supported by full credit enhancement, our traditional lending portfolio saw a provision of $0.4 million in the quarter, consistent with the loan growth and overall credit performance from the traditional lending portfolio. Noninterest expense in the quarter was $56.5 million with an efficiency ratio of 41%. Costs continue to be managed prudently, generating continued positive operating leverage driven by our investments in AI, repositioning our revenues towards fintech and the demonstrated scale of our fintech platform. Operator, you may now open the call for questions.

[Operator Instructions] Your first question comes from the line of Joe Yanchunis with Raymond James.

So I want to talk with the fintech loans. Can you provide a little more detail on the payment timing dynamic that you called out that impacted the period-end balances? And I mean, should we think of average balances as a better indicator of the underlying trajectory? And do you expect like the period end balance to kind of normalize over the next couple of quarters?

Yes. So it's -- sure. It doesn't affect our economics and stuff, but Dominic will go into detail.

Sure. Thanks, Joe. Yes, I would say, overall, average balances in each quarter are more indicative of our economics because traditionally, the fintech lending products are short term in nature and are affected by seasonality. With that said, this was a onetime change, particularly with the credit -- the fintech lending product where we actually accelerated the payment due date by 1 day to actually align with the terms and conditions with the customer. So there was no contractual changes, no changes with our customer performance and no changes in our economics. And you saw that in both the loans stepping down and deposits on an ending balance basis. From here, it's normalized. So this was a onetime change. So while average balances will be more indicative of economic performance. The ending balance from here forward will also be in line with the change in average bounces.

Got it. I appreciate that. And then you mentioned expecting 2 additional sponsored lending programs to come online over the next couple of quarters. Can you help us think about the characteristics of those programs? Are they going to be similar to like Chime and be balance sheet intensive or something a little more higher velocity than [indiscernible]?

No, they will be much higher velocity, our Chime relationship is extremely synergistic. And so it will be less -- it will be -- once again, it will be very structured it will be with partners that you'll know. It will be similar types of loan products, though we'll have changes as we go forward in different categories. But they won't use the balance sheet in the same way that Chime does.

Got it. So would that volume show up under GDV then?

Well, no, the loans will be loans, of course, and there may be some spend in these programs off the back of the loans in certain cases. But no, they will be booked as loans, and you'll see them in the fintech loan line and may have some ancillary impact on GDV.

Understood. And then last one for me here. Just kind of want to talk about your outlook for a moment. I mean, you made a couple of tweaks to the 4Q number, reiterated your preliminary 2027 outlook. Can you walk us through some of the factors behind the change the 4Q number?

Dominic, do you want to handle it?

Sure. Yes, I would say this was a minor change in our expectations, and it really comes down to honing in on the timing of that pipeline that we just talked about, which is why we reiterated our 2027 expectations. So from our perspective, we continue to anticipate a ramp-up in profitability from the second quarter to the fourth quarter and ability for that step-off point to hit our 2027 target. So from our perspective, the changes in that -- to that range is really a function of aligning with the phasing of onboarding and the growth anticipated from those programs.

[Operator Instructions] Your next question comes from the line of Tim Switzer with KBW.

First one I have is on net interest margin or maybe more appropriately NII for you guys. But how should we think about the trajectory NII going forward and the potential impact of Fed rate hikes. And what's the impact of higher rates on your loan yields now that, that portfolio has kind of changed a little?

Dominic will go into detail, but the -- we're fairly neutral on the balance sheet. We're slightly maybe a little bit asset sensitive on that side. So rate hikes won't really help us that much, but it won't definitely will not hurt us. Dominic?

Sure. And just to hone in on that. We are -- we try to manage to the interest rate neutral position. However, there could be some intra month or intra-quarter impact from the timing of any Fed rate changes due to the timing in which they impact loans versus deposit pricing resets. But over a quarter or 2, it's a very neutral impact, and we've been disciplined in managing to that level. From an NII perspective, as we look through the rest of the year, I would say on a dollar basis, it's relatively neutral. We should see some compression in NIM as we migrate further to the fintech lending, but that should be offset by continued strength in the traditional lending average balance for the second half of the year. On a NIM equivalent, just like you saw this quarter, we may see a slight tick down in that traditional calculation of NIM, but when you normalize for the fintech lending fees like we saw this quarter when incorporating those actually blended up a couple of basis points. So in summary, NII should be flat for the -- near flat for the second half of the year with a step down in NIM and a slight flat to up on the equivalent.

Very helpful. Okay. And on the card fees, good to see some of the acceleration in GDV is there any color on how much is driven by Square Cash App and the other new programs versus legacy ones? And Damian, in your comments about cash out making a more significant contribution in late Q4 and Q1 of next year. That seems like it changed from your commentary previously about the second half of this year. So is that a little bit more delayed by other programs? I mean, appear to be making up for it right now?

Cash App is very unique because of the potential volume there because it's an ongoing program is very large compared to for the portfolio. So it can really produce a lot of incremental growth. That's usually not the case where it's that large. And it's really just impacting us now. And will ramp through the end of the year. So it's -- it will have a meaningful impact on GDV as we approach the end of the year. It's not really -- we don't give independent for each program. We'll let the programs give their own dialogue on their growth. But it's very broad-based. It's coming from most of our 15 verticals and it's really -- you see across the virtual, the neobank, the virtual wallet segment, you see it through health care, corporate payments. It's very broad-based.

Okay. All right. So if I'm interpreting what you're saying correctly, it sounds like the acceleration would have happened regardless of Chime -- or sorry, cash app further acceleration over the course of the year, quarter-over-quarter.

Yes, this has nothing -- there's very little of Cash App in there. It's really not impacting your number, maybe up point or less at this point, but it's quickly ramping, and it should really start to affect GDV as we approach the end of the year.

Okay. Great to hear. And then I know this has been a common discussion point on these calls recently, but you have some prominent partners who have applied for a bank charter. Others who have indicated they will eventually maybe apply. And do you provide some examples of how Bancorp could still provide some best services to companies with an ILC or other type of charter and what those partnerships could look like?

Yes. So we provide a very scalable infrastructure, right? And we're talking about there's many segments we're in that you really never going to be a bank, right? It could be corporate payments, it could be healthcare. In certain cases, they're never going to government payments. There's never going to be a bank, they're never going to become a bank. So you're really talking about the neobank segment. And we're providing an incredibly scalable middle office platform that can't be replicated by these programs, right? That cost to go in to replicate it is enormous. And we are a very small expense on their own financial lines. So there's a lot of value we bring. You enter our ecosystem, you benefit from this incredible scale and sophistication that's very hard to replicate on your own. So we don't think -- first of all, it takes a very long time to build these platforms the right way. It would you lose an information, which is, in a lot of cases, a big competitive advantage of us. You lose the sophistication with regulators. So we think that it's not going to impact us especially in the near to the medium term. And as the -- we continue to build our scale and become much more efficient, I think we can add value to those regardless of the license or not, we can add substantial value to these large programs, nevertheless. And so we don't think it's going to impact us.

Okay. [indiscernible] charters, they obviously want to do something with it. So like how could these change what your partnership or programs look like in -- is there any set of your product base we see more risks or more opportunities as this goes on, whether that's deposits, credit sponsorships, the paving [indiscernible] or anywhere else?

Yes. Yes, it depends on what charter they want, but it's usually a funding situation where they want to have, in some way, a deposit. And we're talking about a charter that's consumer base that's not an industrial charter, right? So they become a bank and they are able to self-fund, but we're kind of doing that already, if you think about it with the time where they're using our balance sheet. But for some of these programs that are only lending base, they want that capability to self-fund. And that's where it's mostly coming from.

And Tim, just to add to that one consideration is if you think about the velocity of the loans generated, particularly by neos, having their own balance sheet allows them to be the buyer first choice and control the economics around holding loans. So to the extent there are partners with bank charters that want to hold the loans. We actually see that as a potential benefit because as the velocity increases, we are looking to off-balance sheet these loans over time as we grow that business, and it would be a logical place for that particular partner if they had a charter to hold their own loan after we originate and go through our compliance efficiencies that we bring to the table. So we think there could be a net-net benefit in that particular situation.

Okay. Yes. And just to make sure I understand your point here, it would make a lot of sense for Bancorp to still be the originator of these loans for a lot of the neobanks because you guys have the expertise on the regulatory side? And Damian, going back to your comment on my first question about how expensive it is to build this out and you guys spend a lot of time on infrastructure. I think in the past, you guys have shared the overall investment cost it took to build the robust regulatory compliance infrastructure you guys have over the last, like 5-plus years. Could you go into that just a little bit behind it? [indiscernible].

That's very expensive. I mean, we spent I mean, over the last 10 years, well north of $100 million, $100 million just for the base platform. So -- and that's every year, you're investing in building for the future. So that adds up every year. And it's not just the amount of money, it's the amount of time that it takes to do that. it takes multiple years to build a platform that's robust enough to handle the broad middle office that you need to do in compliance, the regulatory relationships but also the tech stack. And we have that already. We've invested in it to really have the best-in-class over 10 years and to catch up to that in a shorter time frame, just cost more money. So to say you can do it in 3 years, you're going to balloon your costs. And this has been seen when people try to build it out. in other places, the cost -- the shorter time that you take to try to do it, and that's problematic in itself to cause skyrocket. So if you're going to get your banking license and you want to have everything done in-house. That's -- first of all, it starts with multiyear. It doesn't start with a 6-month project. This is a 3- to 5-year project. It requires you to increase your investment upfront because you're going to want to reduce the time and that is going to have a significant premium to what we're charging, right? So the payback on that investment, and you're going to get less quality, of course, especially over the first part of that until you get sophisticated, it's going to be multitudes of what we charge over any reasonable time. So there is a real value we believe we bring the investment is prohibitive to get to where we are. And at the end of the day, it's a time frame issue. I mean we're talking about long-term commitments, ongoing investment and it will never be at scale. No matter how big you are, you'll never be at our scale, not even close. So you can't -- you'll never get to that unit cost that we can get to across our portfolio.

Just to add a [ final ] point to that. There is a significant benefit to all of our partners from what we call the halo effect, right? We're at $200 billion of GDV in the last 12 months. So our ability to see across payment types, across partners, across programs, ongoing fraud financial crimes that we can transfer the benefit across all of our partners that you just can't get with 1 program or a few programs. And then just to add, again, we have added slides in our investor presentation, particularly Slide 11 that demonstrates the scale and efficiency of our platform on a cost per GDV basis and our ability to improve our operating leverage and increase it over time, which, again, comes down to the inability to replicate.

Your next question comes from the line of [ Manuel Navis ] with Piper Sandler.