The Bancorp Inc. 2026 Q3 Earnings Call

Good morning, and thank you for joining us today for The Bancorp's Third Quarter 2026 Financial Results Conference Call. On the call with me today is Damian Kozlowski, our Chief Executive 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 comments made during today's call, including responses to any questions, reflect management's view as of today, October 30, 2026. Yesterday, we issued our third quarter earnings release and updated investor presentation. Both are available on our investor relations website. We may make certain forward-looking statements on this call.

These statements are forward-looking statements within the meaning 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 discuss today. These statements include, but are not limited to, statements regarding our future financial and operational performance, business strategies, growth initiatives, expectations, projections, and guidance. These factors and uncertainties are discussed in more detail on our most recent annual report on Form 10-K, including the sections entitled Forward-Looking Statements and Risk Factors, as well as our subsequent quarterly reports on Form 10-Q and other filings with the Securities and Exchange Commission. These documents are available through the commission's website and our investor relations website. In addition, we may be referring to certain non-GAAP financial measures during this call.

Additional details and reconciliations of GAAP to adjusted non-GAAP financial measures can be found in our earnings release. Please note that The Bancorp undertakes no obligation to publicly update or revise any forward-looking statements to reflect events or circumstances occurring after today, except as required by applicable law. Now, I would like to turn the call over to Bancorp's Chief Executive Officer, Damian Kozlowski.

Damian? Thank you, Dominic. Good morning, everyone.

The Bancorp earned a $1.47 core EPS in the third quarter. Core EPS growth year-over-year was 25%. GDV growth continues above trend at 23%, with fintech fee growth of 19% year-over-year. Fintech fee growth, including interest income, was 27% year-over-year. The Bancorp had an extremely busy and eventful third quarter. Our three major fintech initiatives continue to show positive results and substantial momentum. First, in our banking-as-a-service ecosystem, we continue to ramp up Cash App, and we expect volumes will start contributing more to our financials as we approach the end of the year, with a meaningful impact in the beginning of the first quarter of 2027. However, our partner Chime announced the proposed acquisition of Stride Bank.

We will be redeploying our balance sheet and employing cost management and other strategies that we believe will help mitigate the profitability impact. We have updated our 2027 EPS guidance for the likely impact and added EPS guidance for 2028. Second, we signed a new major fintech lending relationship. Our partner will announce this initiative soon, in line with its marketing product rollout timelines. Third, we have launched our embedded Finetics platform, branded Finetics. We believe we can provide a comprehensive bank-led solution and look forward to announcing significant partnerships in the future. We also initiated a restructuring in the third quarter. In order to provide room for our fintech loan growth and more profitable traditional niche credits, we have decided to discontinue origination of our SBL loans by the end of the year. The SBL loan portfolio is long-tenured, with an average life of more than seven years.

The portfolio will slowly run off to provide balance sheet room, and if needed, we can sell guaranteed portions of the portfolio, which should result in gains. In connection with these changes to the SBL business and broader business needs across other departments, the bank also implemented staffing reductions. Anticipated restructuring costs are approximately $5 million. The restructuring decision, together with additional positions we have decided not to backfill, will reduce employee positions by 80, which we expect will result in annual run rate savings of $14 million. As we grow our fintech business, we plan to reallocate this headcount to support our main fintech initiatives. Our target is to manage to approximately 700 employees over the next three years by both reallocating resources and through efficiency gains using AI and other tools.

In addition, we are implementing a tax credit strategy that will lower our tax burden, but also provide benefits in the development of alternative energy sources for the U.S. economy. Dominic will talk more about this in a moment. Lastly, we are maintaining our guidance to $5.95-$6.04 core EPS for 2026. We are providing a core EPS baseline for 2027 of $7-$7.20 a share due to update our expectations on Chime, our current expectations on our pipeline, and the interest rate environment. In addition, we are initiating preliminary core EPS guidance for 2028 of $8-$8.20 a share. Our guidance in 2026, 2027, and 2028 includes the buybacks. 2026 buybacks are forecast to be $200 million total, or $50 million a quarter. Our capital return philosophy is to continue to return nearly 100% of adjusted net income.

We expect our three major fintech initiatives, along with platform efficiency and productivity gains from platform restructuring and AI tools, plus a high level of capital return through continued buybacks, will be the driving forces behind EPS accretion. EPS gains are subject to development and implementation timelines in fintech and our stock price for buybacks. I now turn the call over to our CFO, Dominic Canuso.

Dominic? Thanks, Damien. It was a strong quarter on both a GAAP and core basis.

As you will see in our earnings materials, we are now breaking out non-core items in our reporting to provide a more consistent and indicative view of our business and earnings over time. Each quarter, in both our earnings release and investor presentation, we will provide a breakdown of any non-core impacts in the quarter or comparative periods, and reconciliation of these core measures to most comparable GAAP measure. In addition, any forward guidance for EPS will be on a core basis. In the quarter, there were three non-core items, which I will provide details on now before jumping into core results. First, the restructuring that Damien mentioned resulted in a restructuring charge of $4.3 million, or $0.08 per share, in the quarter.

An additional non-core charge associated with the restructuring of approximately $750,000 will occur in the fourth quarter. Second, there was a $1.9 million, or $0.04 per share, impact from a legal settlement accrual for a legacy item, and as of now, we do not believe there will be future impacts associated with this specific situation. Third, we have initiated a tax optimization strategy through the purchase of transferable renewable energy tax credits in the form of both production tax credits and investment tax credits, and focused our purchases in states where we do meaningful business, specifically Texas and South Dakota.

By year-end, we will have purchased approximately $161 million in tax credits at a discount of 8.5%, generating a total 2026 tax benefit of $13.7 million, with $9.7 million attributable to prior year carryback provisions under tax law, which is considered non-core, and $4 million attributable to the current period's tax allowance, which will be considered core, as it represents the future annual expected benefit from this strategy. For the third quarter specifically, we recognized year-to-date benefit of $10.3 million, with $7.3 million, or $0.18 per share, attributable to prior tax years, and $3 million attributable to core. Going forward, we expect our core tax rate to be approximately 24%, or 100 basis points lower than our historical rate.