Bancorp (TBBK) Q2 2026 earnings call transcript

Thank you operator. Good morning and thank you for joining us today for the Bancorp 2nd Quarter 2026 financial results conference call. On the call if we today are Damian Kozlowski, Chief Executive Officer and Dominic Knuso, 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 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 to light 31st, 2026. 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 safe harbor provisions of the private security litigation reform act of 1995 and are subject to risk and uncertainty that could cause actual results that differ materially from the expectations and assumptions we mentioned today.

These factors and uncertainties are discussed in our reports and filings with Securities and Exchange Commission. In addition, we will be referring to certain non-gaps in actual measures during this call. Additional details and reconciliations of GAP to adjust that non-gaps in actual measures are in the earnings release. Please note that the Bancorp Hunter takes 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. Now, I'd like to turn the call over to the Bancorp's Chief Executive Officer, Damian Kozlowski. Damian?

Thank you, Andreas. Good morning, everyone. The Bancorp earned $1.45 a share in the second quarter. EPS growth year was 14.2%. ROE was 34.7% continuing on its upward path. That Bancorp already has an ROE roughly triple the average of the banking industry and we expect sizable increases over the next three years. Consistent with our capital return philosophy, profitability increases are expected to be returned to our shareholders through share repurchases. In the last four and a half 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 three years over the next three years. After that, buying back the equivalent of our capital base in two years or less is a reasonable forecast.

This results in annual EPS accretion of approximately 5% to 10% depending on the price of shares purchase and before a projected increase in net income, which should result in dramatic EPS accretion over the next five years. Bintech GDB continued to grow significantly above trend at 22.5% year over year for the second quarter of 26. Fintech revenue growth in the quarter which includes both fee and spread revenue was 21% year over year. Our three main Fintech initiatives that underpin our eight-text 2030 strategy continue to progress quickly and are well positioned for substantial long-term success. Our onboarding with 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 GDB growth and profitability over the coming quarters.

With more material contributions coming in late Q4 and Q1 of 27, credit sponsorship balances continue to suppress our expectations. We anticipate announcing two new programs that subject to implementation timing and other customary factors would be expected to come online next six months. That a 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 are increasing our full year guidance to a range of 595 to 605 EPS for 26. We are targeting a range of 165 to 175 a share in the fourth quarter of 26 and we are maintaining a preliminary guidance for 27 of 810 to 830 a share. Our guidance in 26 and 27 includes anticipated stock buybacks. 2026 buybacks are forecast to be 200 million total or 50 million quarter and we forecast future share repurchases to be near 100% of annual net income. We expect that our three main FinTech initiatives along with platform efficiency and productivity gains from restructuring and AI tools plus a high level of capital return through buybacks will be the driving forces behind continued EPS accretion.

EPS gains are subject to development and implementation timelines in FinTech and our stock price for any future buybacks. And now turn the call over to our CFO Dominic Knusse 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 as 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 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 dollars 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 dollars in fee revenue from our deposit sweeps which would equate to three basis points of additional Nim. Non-interest income excluding credit enhancement was 47.3 million dollars and 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 upper percentage point from the first quarter and four 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% not annualized growth from first quarter specifically from the consumer credit FinTech sea line.

Credit performance was strong across all asset classes with continued improvements in rebel and leasing. Rebel criticized loans were down another 13 million dollars or 22% to 46 million dollars 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 provision of 0.4 million dollars in the quarter consistent with the loan growth and overall credit performance from the traditional lending portfolio. Non-interest expense in the quarter was 56.5 million dollars with an efficiency ratio of 41% cost continue to be managed prudently generating continued positive operating leverage driven by our investments in AI repositioning our revenue towards FinTech and the demonstrated scale of our FinTech platform.

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 one-time change particularly with the credit to the FinTech lending product where we actually accelerated the payment due date but by one 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 is normalized. So this was a one-time 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 balances.

Yes so they're going to be similar to like trying to be balance sheet intensive or you know something a little more higher velocity than I see in terms.

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

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 that they will be booked as loans and you'll see them in the fintech loan line and may have some ancillary impact on GTV.

Okay I'm going to want to handle that.

Sure yeah 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 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.

Dominico go into detail but the we're fairly neutral on the balance sheet we're slightly maybe a little bit acid-sensitive on that side so rate hikes won't really help us that much but it won't definitely will not hurt us. Dominik.

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 intro month or intro quarter impact from the timing of any fed rate changes due to the timing in which the impact loans versus deposit pricing resets but you know over a quarter or two 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 it actually blended up a couple basis points so in summary NII should be flat for the in near flat for the second half of the year with a step down in NIM and a slight flat up on the equivalent.

Okay cash app is a 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 meaningful impact on GDB as we approach the end of the year. It's not really we don't give independent you know for each program will 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 you know it's it's really it's you see across the virtual the neo bank the virtual wallet segment you see it through healthcare corporate payments it's very broad based.

Yeah so we you know 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 health care in certain cases there 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 neo bank segment and we're providing an incredibly scalable middle office platform that can't be replicated by these programs right that costs to go in to replicate it is enormous and we are a very small expense in 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 know 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 to these large programs nevertheless and so we don't think it's going to impact us but okay I mean if they're applying for their chart these started they obviously want to do something with it so like how could these change what your partnership or programs look like and is there any sense of their product base we see more risk or more opportunities as this goes on over that deposits credit sponsorship but it's anywhere else yeah depends on what yeah depends on what charter they want but it's usually a a funding situation where they want to have in some way a deposit and we're talking about a charter that's consumer based that's not an industrial charter right so they become a bank and they are able to sell fun but we're kind of doing that already if you think about it with the chime 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 Kim 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 that 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 would 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 though that particular partner if they had a to hold their own loan after we you know originate and go through our compliance efficiencies that we bring to the table so we think there could be a net benefit in that particular situation okay yeah just to make sure I understand your point here it would make a lot of sense for bank corps to still be the originator of these loans for a lot of the NEO banks because you guys have the expertise on the regulatory side and aiming going back to your comment on my first question about you know how expensive it is to build this out and you guys spend a lot of time this infrastructure I think in the past you guys have shared you know the overall investment cost is took to build the robust you know regulatory compliance infrastructure you guys have over the last like five plus years could you go into that just a little bit um oh yeah the cost is and the cost is on this what's very expensive I mean we spent I mean over the last 10 years you know well north of a hundred million dollar just a hundred million dollars a hundred million dollars just for the base platform so and that's every year you're investing in building for the future so that adds up every 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 you know the regulatory relationships but also the tech stack and we we have that all already we've invested in it you know 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 that say you can do it in three years you're going to balloon your costs and this has been seen when people try to build it out in other places the the cost is this shorter time that you take to try to do it and that's problematic in itself the cost skyrocket so if you're going to get at your banking license and you want to you know have everything done in-house that's first of all it starts with multi-year it doesn't start with you know a six month project this is a three to five-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 you know it's going to be multitudes of what we charge over any reasonable time so there's a real value we believe we bring the the investment is prohibitive to get to where we are and it's 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 but loving very hard to find our point to that is 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 you know ongoing fraud financial crimes that we can transfer the benefit across all of our partners that you just can't get with one program or a few programs and then just to add again you know 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.

Manuel I would say go ahead no go ahead Dominic.

We do expect that to continue to improve both with our existing partners and the pipeline the exact amount is a function of the timing of the launch of partners and the velocity and product that are launched so we do expect it to increase we talked about working towards a two billion dollar level by the end of this year we expect to work towards that however we could have programs that just have higher velocity and lower average balances but ultimately deliver the fourth quarter expectations and full year 2027 outlook that we've provided and with just the kind of confirm on the client side on the customer side there was no disruption in any services from this payment date processing shift not at all in fact it was just an acceleration of a couple days of the payment from the credit builder my chime card product to align with the actual terms and conditions so it was seamless and effectively unnoticeable it just changed the ending balance by one or two days depending so again no change in economics customer impact customer terms or performance okay and the progression and growth of that program is going as expected I thought it was kind of you know figuring out some nuts and bolts but the progression of that program continues well absolutely it's on it's not better and as you've seen in the average balance of growth that we demonstrated in the quarter yes and then switching over you know have the range on the two thousand twenty seven based on this quarter's results your progression with with the programs are expected to hit what what are kind of like the updated factors driving the low end or the high end of the twenty seven eps guide please sure at the end of the day the range that we're talking about is twenty cents on eight dollars so it's incredibly small range from a percentage perspective and just captures the recognition of significant growth from where we are today to the fourth quarter into a full year next year and recognizes the fact that our pipeline is strong and that the exact timing and launch and phasing of those programs have some variability to it which we're comfortable with because we when we launch new products and partners we want to be disciplined to have the right controls around it the enterprise risk management around it so the range we're offering is really really tight and it demonstrates that there could be some phasing but the overall economics and growth in ROA and ROE hold to be significantly above this year I appreciate that thank you after I can take you the next question comes from Joe Yachunas with Freeman James Joe your line is now open please go ahead Hey guys thanks for letting me back in the queue here this one asked a couple more so as sponsored lending becomes a larger part of the balance sheet can you discuss how the framework for monitoring fintech counter parties has evolved like beyond credit enhancements what ongoing financial liquidity or operational metrics you track to ensure your partners remain capable of supporting their obligation yeah first of all you got to remember we're dealing with very large enterprises many of which are public companies okay so the disclosure there is enormous and we go through a very rigorous process around all our partners in third party risk management so we delve into understanding their liquidity their business plans their metrics what what they expect to spend on things like marketing we get a full disclosure of not only their current financial position but their future forecasts and we test that and we monitor it very closely and ensure that the partner has the wherewithal the continue business and build build its own business and we do disengage when and we do it early we don't wait we monitor these things and we've done smaller programs in the past and we've disengaged from those programs when they're not successful before you get to a point where there will be a some type of impact so we take very proactive the heights group me and this is this is you know continuous through our third party risk management process thank you for that and then I was also hoping you could provide an update on your AI initiatives you know are the product you're also tracking alignment your expectations and where do you see the next opportunities for efficiency it's incredibly exciting you know it's the improvement in AI has been dramatic over the last year where it's really impacting us first of all is in two ways on an enterprise level where our people are getting you know more empowered through AI to you know make their jobs more interesting even and cut the and get their productivity up substantially and then secondly in use cases one for example is a financial crimes where we have a AI empowered narrative writing capability that's improving you know monthly and making our people much more productive and this really helps us manage the number of employees and make them much more efficient and productive make their job better and it's improving rapidly so you know we're growing these this gdv and and you know four five six times what the market is growing and we're able to handle that new volume by using some of these tools so it's very exciting it's getting better we we really are embedding it in the way we do business in both way in both ways enterprise level and then use case level and it's it's going to have a dramatic impact on our ability to continue to grow and control our expenses going into the future that was very helpful please save my follow-ups your next question comes from the line of eriff gandat with sickness capital eriff your line is now open please go ahead good morning guys thanks for taking my questions had a question about the the debt balance on the balance sheet it increased meaningfully both you know sequentially and year over year if you could please kind of you know share your thinking around you know funding the business with additional debt and if we should expect that to continue Dominic if you want to handle it sure yes when you're looking over the financials year over year clearly that's impacted by the up sizing of the debt issuance and late 2025 which was very strategic for us as we saw an opportunity opportunistic position to raise debt repurchase our shares and having a creative impact to our shareholders which has played out meaningfully over the past year and aligns with our capital return philosophy which we talk about there was an increased quarter over quarter in some short-term borrowings more from a liquidity perspective as we just manage the balance sheet we're very focused on optimizing our returns and have significant access to borrowing first of which is the fact that you know 95 percent of our deposits are from FinTech and FDIC insured so they're very stable and granular and low cost we have 1.1 billion dollars of deposits off balance sheet which we have the ability to pull back and optimize both to fund the business and to our generate revenue we have more than 50 percent of our deposit base in readily accessible borrowings at market costs and most importantly strategically we expect our business our core business on the FinTech side to continue to grow deposits and so with the fact that we're near maxed out on the asset side of the balance sheet with the run rate to continue to grow deposits we see ample opportunity to continue to fund the business without taking on any long-term debt and any short-term borrowings would be to fund intra-month or intra-quarter seasonality.

Sure well first is the first quarter is a seasonally high deposit generating quarter and so there is an expectation that there's a seasonal step down from first to second quarter plus the continued average balance growth that we've seen both on the traditional lending side and the FinTech side so the impact from one to Q to two Q is more seasonal in nature and not business trend it's the long-term trend is our ability to fund the business and so as I mentioned we can we expect for the rest of this year to deposit growth to outpace our lending growth so that will bring that amount back lower and again we have many levers to pull to be able to optimize that so when we consider liquidity the cost cost and access of liquidity that's all incorporated in our expectations for continued earnings growth and EPS growth in our guidance that we provided.

Sure just as a reminder you know the rebel portfolio is structured these are structured loans at three year loans with a plus two one-year extensions so in general they're they're naturally short-term in nature so we expect you know at any year a third of the portfolio to churn or redoque and with the continued improvement the maturation of the investments in the loan portfolio the properties themselves the loan to value continues to improve the sponsors are stronger and so and we're comfortable with where pricing is in the market relative to where the pricing is contractual pricing of the book so we do not see a credit or price cliff given the short-term nature of that portfolio we're very comfortable with how it's performing and its expectations to continue to contribute meaningfully on an ROE and ROE basis going forward.

Okay yeah we did have a bump you know just adding to that we did have a bump in the past but we're through that and that was because we got back into the business in the early 2020s you know the 22 vintage which became a you know migrated and credit quality due to all the pandemic that bump we've gotten through so now it's much more on a normal basis because we're originating kind of as a replacement cycle so you're getting a much normal a normal role on the portfolio.

No we don't do new loans what we do unless we had a asset that's been repositioned what usually occurs is that it's a three-or-loan with two options to extend it depending on you know if they've accomplished their business plan and everything they so there's two extensions built in and that's totally dependent on completion of the project after that is done then they go if they choose to they well they will leave right they usually a lot of agency but they'll or refi with another bank we don't do the stabilized finance so that's that's where the role comes from and you can be anywhere in that cycle so when you're looking at that number that could be somebody that's extended already it could be somebody who's just finished their project but we want to keep generally we want to keep loans when you complete a project and they want to extend a year or even two that that's a very good stabilized loan and it's usually at their discretion even though we obviously have a say in it but it's third-stress because they wanted they're waiting for change in interest rates or they're looking up for their own takeout strategy within their portfolio so we accommodate that and that's built into the structure of the credits okay got it very helpful and then lastly you know could we please have an update on the status of the Aubrey stabilization and how you folks thinking about getting that asset you know out of oreo yes so it's it's past 70 percent occupancy right we want to we're so far along we have a few buildings there's a lot of buildings at the site so we still we're down to the last few buildings and we're in three phases of renovation of those buildings we're way north of 70 percent of the buildings that are already completed so we're at the point now that the appraisal's way above 50 and our basis is in the low 40s so now we're at the point that we're going to get to the stabilized takeout and so that's a different market than somebody who's going to be a financial sponsor there's just been so much work done we're at the breakeven point you know and as we continue with the occupancy well actually it'll be a profit positive rather than a drag so we're just we should be able to be completed you know from the first quarter and that's where the stabilization will occur okay great thank you we have reached the end of the Q&A session I will now turn the call back to Damien Kozlowski for closing remarks thank you everyone for joining us on the call today we will be intending various investor conferences during the third quarter and we'll be on the road with investors in the coming weeks we look forward to meeting with many of you throughout the quarter thank you operator you may discontinue the call this concludes today's call thank you for attending you may now disconnect