Q2 2022 Finwise Bancorp Earnings Call
Greetings and welcome to the spin Wise Bancorp second quarter 2022 earnings Conference call.
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A question and answer session will follow the formal presentation.
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The presentation will now begin.
Good afternoon, and thank you for joining us today for Finn Wise Bancorp's second quarter 2022 conference call in.
In addition to this call we issued an earnings press release earlier this afternoon and posted to the Investor Relations section of our website at investors <unk> been wise Bancorp dotcom.
Today's conference call is being recorded and webcast on the company's website investors Dod fin wise Bancorp dotcom.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements that are subject to risks and uncertainties that could cause actual results to differ from those discussed today.
Forward looking statements represent managements current estimates and fin wise Bancorp assumes no obligation to update any forward looking statements in the future.
We encourage listeners to review the more detailed discussions related to these forward looking statements.
And in the company's earnings press release and filings with the Securities and Exchange Commission.
During the call today are Mr can land batter CEO and president of thin wise Bancorp and Mr. Javid Jacobson, Chief Financial Officer of Fin Wise Bancorp, but that I will turn the call over to Mr land better.
Good afternoon, everyone and thank you for joining us on our second quarter 2022 earnings Conference call.
Our results for the second quarter further validating our differentiated business model, we have built over the past several years, including continued strength in our risk management and profitability. Despite a very challenging economic environment deteriorated rapidly throughout the quarter and also factoring in the typical seasonal.
And originations the resilience of our business model was evident as during the quarter ended June 32022, we generated total revenue of $21 $4 million led by loan originations of $2 $1 billion.
Our results for the quarter also included net income of $5 5 million or 41 cents per diluted share.
Net income during the quarter was primarily impacted by a decline in noninterest income from lower gain on sale of loans due to a decrease in the number of SBA seven loans sold and an impairment of the company's SBA servicing asset.
As we've noted on our prior calls irrespective of the results of any single quarter. Our primary focus remains on generating sustainable net interest income growth over the long term driven by continued loan growth. Furthermore, loan originations generally have driven strategic program fees.
Which enhance our non interest income a key differentiating factor of our business model.
Importantly, given that all strategic platforms fund deposit reserve accounts tied to total held for sale loan outstanding deposits have generally declined as origination volumes slowed.
We are pleased with our credit quality, which remains strong.
Nonperforming loans declined to a total of 0.6 million as of June 32022, compared to 0.7 million at March 31, 2022, the ratio of nonperforming loans was 0.3% of total loans at the end of the second quarter.
Compared to 0.2% the previous quarter. This small increase in our nonperforming loans ratio. This quarter is primarily due to total loan balances being lower during the quarter.
Net charge offs declined 18, 4% to $2 3 million during this quarter from $2 8 million during last quarter.
This strong credit quality is a testament to our prudent risk management approach, including maintaining tight underwriting standards.
We have also slowed retention to better assess and manage economic risks one point I'd like to make clear we have not adjusted our lending standards to reach for growth. Overall, we believe these attributes of our risk management process are best in class and enhance our ability to sustain sound credit quality.
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During the quarter, we had an additional impairment of our SBA servicing asset as the market was impacted by rising market interest rates and SBA loan pre payment speeds importantly, we remained significantly above well capitalized guidelines with a bank leverage ratio of 21 point.
4%.
Furthermore, we believe that our relationship with existing strategic platforms remained strong as does the interest of potential new platforms in entering into relationships with the bank.
This again validates our business model and brand as an innovative technology in April bank that efficiently serves a wide array of clients as we've noted in the past. These strategic lending programs have been a key driver to continued loan growth for cinryze in various ways to accelerating volumes from existing.
<unk> platforms sourcing of new loan origination platforms, and our exceptional ability to efficiently scale through our technology, driven and robust infrastructure.
Against a significantly more challenging economic backdrop, we are committed to staying the course and managing the business for the long term, while continuing to closely monitor economic trends.
However, while we believe our business model lends itself to flexibility in both weakening and strengthening economic conditions. If current adverse macro trends were to persist. We believe there would be a greater risk that the seasonal rebound in loan originations that we traditionally see in the second half of the year could be tempered. This.
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Looking ahead, despite challenging external macro factors, we will remain focused on what we can influence providing best in class service to our clients and customers, while prudently managing risk and controlling costs. We also continue to enhance our business model by exploring ways to deploy.
Our capital into opportunities that allow us to remain well positioned to take advantage of growth opportunities when the environment improves we.
We believe these actions bolster our strategy to continue to generate solid long term operating efficiency and profitability.
Overall, we remain exceptionally proud of our differentiated business model, which continues to provide our clients and customers with best in class value and service, particularly during more challenging conditions with that I would now like to turn the call over to our Chief Financial Officer, Jeff Jacobson, who will.
To discuss our financial results for the quarter in more detail.
Thank you Kent.
Despite facing an economic environment that deteriorated quickly during the quarter loan originations were $2 1 billion down from $2 5 billion in the prior quarter and higher compared to $1 4 billion in Q2 'twenty one.
Average loan balances comprising held for sale and held for investment loans were $279 3 million. During Q2 'twenty two a decrease of five 9% from $296 7 million in Q1, 'twenty, two and an 11, 8% increase from $249 7 million in Q2.
21, total average interest, earning assets declined three 8% to $373 2 million during Q2 compared to $387 8 million for Q1, 'twenty, two and increased 24% from $301 1 billion for Q2 'twenty one.
As we've mentioned on the past calls our loan originations and balances have tended to decelerate in the first and second quarters of the year due to typical seasonality and this quarter was no exception.
Generally we have seen a rebound in the third and fourth quarters of the year, but as Kent mentioned, if economic conditions remain challenging or deteriorate. Further we believe there would be a greater risk that the seasonal rebound in the originations could be more muted this year.
Average interest bearing deposits declined 4% to $127 2 million during Q2 compared to $132 $5 million during Q1, 'twenty, two and increased 41% compared to $90 2 million during Q2 'twenty one the decline.
As compared to Q1 'twenty two was driven mainly by a decrease in certificate of deposits.
And money market accounts compared to Q2 'twenty one the significant increase in average interest bearing deposits was driven mostly by higher certificate of deposits money market accounts and demand deposits.
Kent mentioned earlier due to the relationship between strategic platform deposit reserve accounts and total held for sale loans outstanding our deposits have generally declined as our origination volume slows.
Positively our cost of funding declined modestly during Q2 the rate on average interest bearing liabilities decreased three basis points to 76 basis points from Q1, 'twenty, two and was down 20 basis points from 96 basis points. During Q2 'twenty one the primary reason for both periods.
Lines is a continued drop in the rate on new or renewing certificate of deposits.
Net interest margin for Q2 was $13 six 9%, representing a 32 basis point increase from $13 three 7% in Q1, 'twenty, two and down compared to 22, 9% in Q2 'twenty one.
The increase from the previous quarter was primarily driven by our loan mix shift away from loans carry lower yields within the strategic program are held for sale portfolio.
The net interest margin decreased from the second quarter of 2021 was driven mainly by a substantial increase in lower yielding cash and cash equivalents raised in the company's IPO and a loan mix shift towards loans carrying lower yields within the strategic program held for sale portfolio.
As we've highlighted on prior calls, we expect shifting asset mix to drive quarterly fluctuations in the NIM from quarter to quarter.
Importantly, as we've noted on prior calls our primary focus is on generating solid and a sustainable net interest income growth over the long term driven by continued growth in originations.
Let's turn to the income statement net income for Q2 was $5 5 million compared to $9 4 million for Q1, 'twenty, two and $7 7 million for Q2 'twenty one.
The sequential quarter decline was primarily driven by lower gain on sale of loans and an impairment of the company's SBA servicing assets.
The decline compared to the prior year period was primarily driven by the increase in noninterest expenses and a decrease in the fair value of the company's investment in business funding group LLC BFG, partially offset by increases in non interest income and net interest income.
Net interest income for Q2 was $12 8 million compared to $13 billion for the previous quarter and $10 8 million for Q2 'twenty one.
The modest decline on a sequential basis was primarily due to lower average loans held for sale balances.
Growth over the prior year period, primarily reflects strong loan growth, resulting in higher average balances and an increase in the other interest earning asset classes.
Noninterest income was $8 4 million in Q2 dollars 22, compared to $11 7 million during the previous quarter and $8 2 million in Q2 'twenty one.
The sequential quarter decline was driven primarily by a lower gain on sale of loans due to a decrease in the number of SBA seven loans sold.
The increase compared to the prior year period was primarily due to an increase in strategic program fees due to significant loan origination volume growth, partially offset by a decrease in the fair value of the company's investment in BFG as we've highlighted on prior calls we expect general market movements to drive quarterly flood.
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Noninterest expense during Q2 was $11 million compared to $9 million in Q1, 'twenty, two and up from $7 1 million during Q2 'twenty one the.
The sequential quarter increase was primarily due to an impairment of the company's SBA servicing asset in Q2, 'twenty two driven by rising market interest rates in the market wide, increasing prepayment speeds on SBA loans compared to Q2 'twenty. One the increase was primarily due to higher expenses from incremental employee head count.
Related to an increase in strategic program loan volume and an impairment of the company's SBA servicing asset.
The company's efficiency ratio for Q2 was 52% as compared to 36, 7% for Q1, 'twenty, two and 37, 3% for Q2 'twenty one although we look to make long term investments in our technology platform and our workforce, we will do so carefully, particularly if the economic environment were to <unk>.
Further deteriorate.
We also plan to make continued investments to expand our strategic program infrastructure and to enable growth in our market share.
Credit quality remains strong with nonperforming loans, representing 0.3% of total loans receivable compared to 0.2% for the previous quarter and 0.3% for Q2 'twenty one.
The provision for loan losses was $2 9 million for Q2 compared to $2 9 million for Q1 'twenty two.
$1 5 million for Q2 'twenty one the.
The provision for Q2, 'twenty two reflected growth of guaranteed loans held for investment and lower net charge offs compared to the first quarter.
The increase in the company's provision for loan losses compared to the year ago period was primarily due to the substantial non PPP loan growth and an increase in net charge offs.
Net charge offs for Q2 were $2 3 million compared to $2 8 million for Q1, 'twenty, two and 0.5 million for Q2, 'twenty one our net charge off rate as a percentage of average loans for Q2 was three 3% compared to three 8% for Q1, 'twenty, two and 0.8% for Q2 'twenty one.
The decrease in net charge offs for Q2 dollars 22 compared to Q1 'twenty two was primarily driven by lower gross charge offs and increased recoveries related to our strategic programs. The.
The increase in net charge offs compared to Q2 'twenty.
'twenty, one was mainly driven by growth in the company's held for investment balances have some normalization of credit losses to pre pandemic market conditions.
We continue to be pleased with the performance of these portfolios as they remain in line with management expectations, and we remind everyone that our reserve levels for these strategic programs are set according to high water charge off rates by vintage and program plus additional factors.
Moreover, as we've noted previously in March 2020, we proactively increased environmental factors that impact our reserve levels in conjunction with the heightened economic uncertainty at the start of the COVID-19 pandemic and we have not lowered these environmental factors.
Overall, we remain confident in our portfolio underwriting and overall risk management and while we expect credit quality to continue to normalize in line with industry trends are relatively high reserve levels provide us with a formidable cushion.
Our capital levels remained strong with a 21, 4% leverage ratio, which keeps the bank significantly above the 9% well capitalized requirement.
Lastly, our effective tax rate was approximately 24, 6% for Q2 compared to 25, 4% for Q1, 'twenty, two and 25, 2% for Q2 'twenty one.
With that I would like to open up the call for Q&A operator.
Thank you.
At this time, we'll be conducting a question and answer session. If you'd like to ask a question. Please press star one on your telephone keypad.
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Our first question comes from the line of Andrew <unk> with Stephens. Please proceed with your question.
Hey, good afternoon.
Hello, Andrew.
And maybe I just wanted to start on.
The origination volumes.
Are you able to bifurcate.
Just how originations progressed by month throughout the quarter I'm, just trying to get a sense of where the monthly kind of run rate heading into <unk>.
Okay.
Yes, so we haven't we.
We haven't disclosed the.
The run rate by by month, but I think you can just kind of look at the economic general economic conditions and that we are that we're operating under right now and kind of assume a trend.
Okay.
And I guess, maybe just a bit more so let's say I hear some of your comments around kind of.
Caution on originations.
Originations rebounding like you might expect in the back half with normal seasonality, but should we expect origination volumes declining from this $2 1 billion level in the back half of the year.
It's hard to.
Look into the second half of the year because things are happening so quickly in the.
And the economy right now that we do not look at that as a.
Is something thats out of the realm.
Okay.
Yeah.
I understand you slowed down retention this quarter.
It makes sense Kevin.
Just the backdrop, we're in right now I guess, what would you need to see in order to kind of step the retention rate on loans back up.
Us comp stabilization.
<unk> and capital markets I think.
Andrew I think there is a fair.
First indicator I think we track all of this on a monthly basis, both monitoring and review of it it's.
It's not just the performance of the static pools, but also.
Early indicators of those whether its first payment default point C level et cetera, and so all of those are or data points that we track regularly and deciding how.
How much more retention, we're going to add or additional programs we may add.
Got it thank you.
And if I could ask one more just on the SBA gain on sale line item I might've missed it but did you disclose the dollar amount of SBA loans that were sold this quarter.
No no we didn't disclose the dollar amount.
Okay.
Can you just speak but it wasn't like it was sorry.
Sorry, Andrew it was less than it was in the first quarter fewer dollars yes.
Yes.
Are you able to speak to just trends youre seeing in SBA right now and maybe provide any kind of expectation you have for solid production volume or gain on sale income from SBA, specifically and then should we expect it to contribute the balance sheet growth in the back half of the year as well.
Okay.
So let me touch on like the pipeline and origination volumes.
We continue to have good origination volumes in the SBA product line.
We have we're just a small.
Piece of that market right.
Less than 1% of the total market and so our ability to attract.
Qualified applicants for that product continues to be strong.
As far as the secondary market and margins there I'll defer to <unk>.
I think I think it's the conditions are.
Our deteriorating slightly on the on the premium amounts, but our big our big driver for the fluctuations quarter to quarter is not the.
The premium amount necessarily it's more focused on the number of loans that we sell.
As we mentioned in the call.
Last quarter.
It was an unusually high number of loans that we sold in Q1 of 2022.
This quarter is pretty consistent with what we've seen in the past.
Okay great.
Great got it. Thank you for taking my questions I'll step back in the queue.
Thank you thanks, Andrew.
Our next question comes from the line of Andrew Liesch with Piper Sandler. Please proceed with your question.
Hey, guys good afternoon.
Just wanted to talk about some of the investments that you have planned and I recognize that's in the face of slowing revenue growth.
These may be pushed out but I'm just curious like what are the things that are most important for you right now that you're going to continue to invest in even in the face of slowing revenue and then what things might get pushed out and.
Where ultimately do you think the efficiency ratio could could.
Could end up in the near term it with lower revenue, but also rising expenses and given some of the investments you want to make.
Yes, Andrew that's a great question I appreciate that.
We've.
There are certain types of expenses that we can pull back fairly easily.
Those would be like production related expenses.
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Production that we have are the ones that were less inclined to.
Pull back on right now with both feed those that further our strategic positioning.
We want to make certain that we are ready when the rebound comes that we can take full advantage as soon as possible of that so continued investment in the basic basic such as BSA compliance oversight.
And continuing to build and evolve.
Platform to become more scalable those are more strategic for us and we'd be reluctant in the short term to to do something there.
Course of things.
Seriously deteriorate, we always take a look and everything's on the table, but more more so than the production related.
And less so in the strategic foundational aspects of the bank does that help.
Yeah, absolutely. Thank you and then the Genesis if you can just give us some thoughts on how you look at the efficiency ratio and managing expense growth versus revenue trends.
Sure the expense obviously the.
The efficiency ratio this quarter isn't like isn't where we'd like to see it and it isn't where it's been in recent quarters.
I think as far as giving you some goalposts on the efficiency ratios I would say it's somewhere between.
Where we've been in previous quarters.
In the mid to upper <unk>.
<unk> and the industry.
We're in that range is good gold goalposts for the for the efficiency ratios.
But more specifically to US you know the other expenses line item you might have seen a slight tick up in that in that category. That's that's.
That's where a lot of our public expenses.
Expenses are rolling into so the legal and professional fees are going into that and we don't think that we're going to see any any softening in those expenses going forward. We have those obligations are.
Going forward. So that's that's probably not where we're going to see any changes there and then as Kent mentioned related to headcount and salaries.
We will be very careful as we expand into the areas that he described.
Got it alright, that's helpful.
And then just following up on the loan origination question and the outlook there what's the pipeline for for new strategic programs are you still thinking two to three new programs a year what have been what's been the thought process and what our perspective program is telling you about a.
But their outlook.
Sure So our pipeline remains full.
We also continued to deliver value and build on the relationships that we have with existing programs.
So even though you've seen some dislocations in capital markets. It is important to note that our.
Our partners covenants in wise, because theres a market need for a tech enabled bank program and.
And we've been delivering this since 2016 continue doing so today.
Got it.
Thanks for taking the questions I'll step back.
Thanks, Sanjay et cetera, Thanks Ana.
Ladies and gentlemen, we have reached the end of our question and answer session.
Please disregard it does look like we have a follow up from Andrew <unk> with Stephens. Please proceed with your question.
Hey, Thank you for the follow up just one quick one maybe for Jim.
I think you are required to adopt Cecil starting in 2023 and I heard the comments earlier about the.
The allowance ratio in kind of qualitative or environmental factors that are in there, but I was curious if you're running parallel seasonal right now.
Do you have what the allowance ratio would have been under kind of a Stifel framework this quarter.
And was it relatively in line with kind of the reserve you you put up this quarter.
Sure. So we are running it side by side and we're planning to do that for the duration of this year. We're on track to adopt in January of 2023, but I do not have that number for you Andrew.
Okay.
No problem I appreciate it.
Yep.
Thank you, ladies and gentlemen, I am now showing no further questions in the queue I would now like to turn the call over to management for closing remarks.
Yes. Thank you we just want to thank all of you for attending the call and your interest in <unk> Bank and I wish you a wonderful afternoon.
This concludes today's conference you may disconnect. Your lines at this time. Thank you for your participation and have a wonderful day.
Okay.
Sure.
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