Q3 2022 Finwise Bancorp Earnings Call
Greetings and welcome to the Cinryze Bancorp third quarter 2022 earnings conference call. At this time I'll call. All participants are in a listen only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance. During the conference. Please press star zero on your cellphone keypad.
As a reminder, this conference is being recorded.
Now I'd like to turn the conference over to management to begin.
Good afternoon, and thank you for joining us today for Finn wife's Bancorp's third quarter 2022 conference call.
In addition to this call we issued an earnings press release earlier this afternoon and posted it to the Investor Relations section of our website at investors thought thin wives Bancorp dotcom.
Today's conference call is being recorded and webcast on the company's website investors thoughts and wife's 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 management's current estimates and fin wife's 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 contained in the company's earnings press release and filings with the Securities and Exchange Commission.
Hosting the call today are Mr. Ken land batter, CEO and president of Fin Wise Bancorp and Mr. Javid Jacobson, Chief financial officer of spin wife's Bancorp with that I will turn the call over to Mr land better.
Good afternoon.
Noon, everyone and thank you for joining us on our third quarter 2022 earnings conference call our.
<unk> business model allowed fin wise to generate solid topline results during the third quarter, even as we faced an economic environment that is becoming increasingly challenging we.
We remain confident that our business model lends itself to flexibility in both weakening and strengthening economic conditions and we remain exceptionally proud of our team's unwavering dedication to providing our clients and customers with best in class value and service, particularly during more challenging market conditions during the.
The third quarter, we generated total revenue of $20 3 million led by loan originations of $1 5 billion. We also bought back 20000 shares for a total of approximately zero point $2 million as part of our previously announced share repurchase program.
Tangible book value per common share continued to grow increasing 32% year over year to $10 44 per share at the end of the third quarter. The overall environment for loan originations has decelerated this year across the industry and fin wise, it's not immune even if the company's relationships with existing.
Strategic platforms and interest from potential new platforms remained strong importantly, going forward, we expect to retain the guaranteed portion of a certain SBA production as gain on sale premiums have decreased and variable loan rates have increased we expect to keep more of the guaranteed portion of certain S. P. A.
Loans on the balance sheet to benefit the company to stronger government guaranteed held for investment loan growth and a higher recurring stream of interest income expenses remained well managed in the quarter. During Q3, the efficiency ratio improved to 42, 3% from 52% in the previous quarter.
As we have publicly discussed while our efficiency ratio is likely to increase longer term as we invest for growth near term. We will continue to be prudent with expenses in light of tougher economic conditions. We also remain pleased with the credit quality and performance of our portfolio, which continues to move in line.
With our expectations for gradual industrywide normalization of credit to pre pandemic market conditions. The company did not have any nonperforming loans for the current quarter compared to nonperforming loans to total loans of <unk>, 3% for the previous quarter and 0.3% for the year ago quarter.
Certainly if the U S economy, where two experienced further deterioration from current levels. The overall industry could experience faster than anticipated credit quality normalization how.
However, as we noted during the past quarter, we slowed strategic program retention to better assess and manage economic risks and we remain confident in our ability to sustain sound credit quality through bearing credit cycles, given our prudent risk management approach and tight underwriting standards.
Yeah.
Additionally, as we have commented before we have not adjusted our lending standards to reach for growth.
We also remained significantly above well capitalized guidelines with a bank leverage ratio of 24, 9%.
Overall, while we manage the company for the long term, we acknowledge the risk of further economic deterioration given headwinds, including installation and rapidly rising interest rates. However, given our cautious view on the direction of the economy, we have been proactively preparing for such a scenario in order to.
A tougher environment asbestos possible, while continuing to serve our clients. We will also continue to execute on items that we can control, including risk management underwriting and it expenses.
And by doing this we believe we will be able to capitalize on growth opportunities that emerge once the market environment stabilizes with that I would now like to turn the call over to our CFO , Jeff Jacobson, who will provide you with more detail on our financial results.
Thank you Kent.
Been wise continued to move forward, despite faster than anticipated deterioration in economic conditions during the quarter.
The company's loan originations were $1 $5 billion during Q3, 'twenty, two and average loan balances comprising held for sale and held for investment loans were $263 $6 million. During Q3, 22 as compared to $279 $3 million in Q2, 22 and 238.
$3 million in Q3 21.
Total average interest, earning assets were $335 $4 million during Q3 compared to $373 2 million for Q2, 22, and $294 3 million for Q3 21.
As we've highlighted on prior calls our loan originations have generally followed typical industry seasonality, including a general rebound in the third and fourth quarters of the year.
However, if the current challenging economic environment continues or deteriorates further we believe loan origination growth on a sequential quarter basis could be pressured and the typical seasonal rebound in originations in the second half of the year could be negatively impacted.
Average interest bearing deposits were $104.8 million during Q3 compared to $127 $2 million during Q2, 'twenty, two and $112 $2 million. During Q3 'twenty one the decrease from Q2 'twenty two and Q3 'twenty one was driven mainly by a decrease in certificates.
Deposits and money market accounts as we have noted before our noninterest bearing deposits have generally been highly correlated with our origination volume due to the relationship between strategic platform deposit reserve accounts and total held for sale loans outstanding.
Turning to the income statement net income was $3 $7 million in Q3 compared to $5 $5 million in Q2, 'twenty, two and $8 $4 million in Q3, 'twenty one the sequential quarter change was primarily driven by a onetime tax expense correction higher provision for loan losses and low.
Our fee income due primarily to lower strategic program origination volume, partly offset by a decrease in noninterest expense certainly this one time tax correction impacted some of our after tax metrics during the quarter.
The change in net income versus the prior year period was primarily driven by an increase in the provision for loan losses, and non interest expense and a decrease in gain on sale of loans and interest income.
Net interest income for Q3 was $12 $5 million compared to $12 $8 million for the previous quarter and $13 $5 million for Q3 'twenty one.
On a sequential quarter basis net interest income declined primarily due to lower average loans held for sale balances, partially offset by higher loan yields and higher average loans held for investment balances realm.
Relative to the prior year period net interest income was lower primarily due to lower average loans held for sale balances and lower overall loan yield.
Net interest margin for Q3 was $14, 93% at 124 basis point increase from $13 six 9% in Q2, 'twenty, two and down compared to 18.31% in Q3, 'twenty one but.
Sequential quarter increase was primarily driven by an increase in variable rates on SBA loans, and a loan mix shift away from loans carrying lower yields within the strategic program held for sale portfolio.
Net interest margin declined from Q3, 'twenty, one was driven mainly by a loan mixed shift towards loans carrying lower yields.
We continue to expect fluctuations in net interest margin from quarter to quarter due to shifts in our asset mix that said our focus continues to be on generating strong and sustainable net interest income growth over the long term driven by continued growth in loan originations.
Noninterest income was $7.5 million in Q3 dollars 22, compared to $8 $4 million in the previous quarter and $8.5 million in Q3, 'twenty. One the sequential quarter change was driven primarily by lower strategic program fees due to a decrease in loan origination volume.
The decrease compared to Q3 'twenty, one was primarily due to lower gain on sale of loans due to a decrease in the premium received for SBA seven loans sold we continue to expect quarterly fluctuations in the fair value of our investment in BFG driven by general market movements.
As Ken noted earlier, given our current plan to retain the guaranteed portion of certain of our SBA seven day production longer due to suppress gain on sale premiums and increasing variable loan rates. We would expect to see a continued decline on SBA gain on sale, which is a headwind to our fee income.
The Tivoli. However, we believe this should result in stronger held for investment loan growth and a tailwind to our net interest income over the long term.
In terms of expenses, we held the line well in Q3, 'twenty, two with noninterest expense of $8 $5 million compared to $11 million in Q2, 'twenty, two and up from $74 million during Q3, 2021.
The sequential quarter decline was primarily due to the cessation in June 2022, O Commission accruals related to the company's strategic lending program and an impairment on the company's SBA servicing asset in the previous quarter, which did not occur in the third quarter of 2022.
Compared to Q3 'twenty one the increase was primarily due to higher other operating expenses driven primarily by an increase in consulting fees, partially offset by the cessation in June 2022, a commission accruals related to the company's strategic lending program.
The company's efficiency ratio improved significantly during Q3 coming in at 42, 3% versus 52% in the prior quarter and 33, 7% during Q3 'twenty one.
As Kent mentioned, while we still expect to look for opportunities to invest for long term growth.
We will strive to be prudent with expenses given the tougher macro environment.
The bank's credit quality remains solid and we did not have any nonperforming loans at the end of this quarter, which compares to nonperforming loans as a percent of total loans receivable of 0.3% for the previous quarter and 0.3% for Q3 21.
The company's provision for loan losses was $4 $5 million for Q3 compared to $2 $9 million for Q2, 'twenty, two and $3 $4 million for Q3 21.
Quarter and previous year to increase in the provision is primarily driven by an increase in net charge offs and buy them guaranteed loan growth.
We also remain prudent as we continue to expect gradual normalization of credit quality throughout the industry, which is something we mentioned on prior earnings calls.
Net charge offs for Q3 were $3 $1 million compared to $2 $3 million in the prior quarter and $1 million for Q3 'twenty one.
The company's net charge off rate as a percentage of average loans for Q3 was four 7% compared to three 3% for Q2, 'twenty two and one 6% for Q3 'twenty one the.
The change in net charge offs for Q3 dollars 22 compared to the prior quarter and Q3 'twenty. One was primarily driven by higher net charge offs related to strategic program, an SBA seven loan balances that are not guaranteed by the S. P. A that had previously been held as classified assets.
As we've noted previously back in March 2020, we proactively tightened factors that impact our reserve levels in conjunction with the heightened economic uncertainty at the start of the COVID-19 pandemic.
We have not lowered these environmental factors sense and do not have any current plans to lower them in the near term, which is something that we believe should benefit the company as we enter a potential new credit cycle.
It's worth reminding that reserve levels for our strategic programs are set according to high water charge off rates by vintage and program plus additional external factors and.
In fact, we made an adjustment to one of our platforms reserved levels during the third quarter as a result of this high water charge off rate methodology.
The bank's capital levels remained strong with a 24, 9% leverage ratio, which keeps the bank significantly above the 9% well capitalized requirement.
Lastly, our effective tax rate was 48, 7% for Q3 compared to 24, 6% for Q2, 'twenty, one and 24, 5% for Q3 'twenty one but.
Current quarter's increase in the effective tax rate over both prior periods is primarily due to the correction of an immaterial error in the calculation of the company's tax provision.
With that I would like to open up the call for Q&A operator.
Thank you.
Ladies and gentlemen, we will now be conducting a question and answer session. If you would like to ask a question. Please press star one on your telephone keypad and a confirmation tone will indicate that your line is in the Q you.
You May press Star two if you would like to remove your question from the queue for participants using speaker equipment and may be necessary to pick up your handset before pressing the star keys, one moment, please while we poll for questions.
Our first question is from Andrew <unk> with Stephens. Please proceed.
Hey, Ken Hey, Jonathan.
Hey, Hey, how are you good how are you guys.
Great. Thanks.
Maybe just to start.
Just kind of a housekeeping Janice you have the.
The amount of the tax expense kind of catch up this quarter.
I bet outside of just what a normalized tax rate would have been this quarter or what the dollar amount of that impact was.
Yeah, Andrew Let me, let me give you some context for the correction right now I think I think this will help the matter stems from the from the section 162 M tax rule that applies to public companies and restricts the deduction of certain executives compensation over $1 million in the calendar year that.
Rule was not applicable to us as a private company and was not incorporated in the provision calculations. After we went public late last year.
An understatement of 2021's tax expense of approximately $939000, which is less than 3% of the reported $31 $6 million and net income for 2021 was identified when the reconciliation of our final 2021 income tax returns was made to the tax provision calculation for 2021.
Although the 2022 year is not yet complete we expect that the impact of the 2021 correction in the 2022 year will be less than 5% on an annualized basis. We're also correcting an understatement of tax expense of approximately $108000 from Q1, 'twenty two and $337000.
From Q2 'twenty two in Q3 after discussing the issue thoroughly with our auditors and audit Committee, we're comfortable with a determination that this was an immaterial error corrected in Q3, the 2022 consulting fees paid to this exactly they will not be deductible for tax purposes. As a result of our effective tax rate is expected to be elevated for the rest of <unk>.
2022, but come back to historical norms in Q1 of 'twenty three does that help Andrew.
Yeah, no that's a.
That was great color I appreciate it.
Hum.
Okay.
Okay, I want to move over to the just the comments around retaining a higher portion of guaranteed SBA loans.
I guess I was hoping you could maybe size up the appetite and how should we think about what you might look to retain going forward how that translates into loan growth.
Is it safe to assume that over the near term just with this backdrop, there's not going to be much in the way of kind of incremental SP credit retention or on garen on guaranteed SBA.
Yeah.
Ross I'll start with that one on the SBA retention, we don't really have a specific target that we're that we're talking about but we let the data guide as you know in this and where the SBA loan interest rates are increasing and the secondary market premiums declining you know that's why we're talking about retaining more.
Well the guarantee portion for longer periods.
Think it's a good use of our capital.
And it's important to note that the retention of this guarantee portion doesn't there's not necessarily increase the credit risk.
The profile of the bank as far as you know.
We think that the amount that we intend to retain will be a meaningful amount.
But again, we don't have a target percentage.
Okay understood and then on the other other portfolios as well.
Fair to think that we could see those kind of stable to declining at this point or.
Not an unfair assumption.
Hey, Andrew this is Jim.
Stable is probably the right way to look at it in the near term, but theres different ways that we've looked at monetizing the originations that come across our balance sheet.
I think if you look at our history over the last few quarters, we've been very judicious in how we use that balance sheet, especially at a time of economic uncertainty. So we wouldnt rule out you know the ability to retain in the right circumstances or with the right credit enhancements, but certainly in the current environment.
You know it would have to be a fairly strong.
Fairly strong asset.
Yep understood.
Okay. Thanks, Jim.
And I wanted to talk about just I guess it was good to see that HSA business contribute to this corner.
Do you have how much of net balances that contributed and then.
Do you think we can continue to see kind of net deposit growth in the end of the fourth corner and into 2023.
Yeah.
So so we haven't we haven't broken that out but it'll be in the call report this week Andrew.
As far as the HSA Mel.
It's a significant number in the $30 million range.
Okay.
As far as growing in the future it'll have some fluctuation but.
You know at this point I don't think unless conditions change, where we're going to expect to see much fluctuation in it.
<unk> basis.
Okay understood Alright, all I'll step back in the queue. Thanks for extra time for the questions.
Yes.
Our next question comes from the line of Andrew Liesch with Piper Sandler. Please proceed.
Hey, guys. Good afternoon, thanks for taking the questions.
Just wanted to touch base on the expenses here.
So that's the station of the commission accrual for US. This is not about eight point okay.
Okay.
$8 6 million dollar run rate.
It's a good place to build off going forward and just recognizing there's going to be more investments in the franchise.
You know Andrew when you're looking at that $8 $5 million on a quarterly basis, I think you need to wait.
We are looking at.
The the contract with our with our former executive.
That's not an insignificant number in that figure and as you know the contract has been disclosed that.
That those payments will decrease quarter over quarter through the end of 2023.
Does that help.
Well if.
You're saying that the line.
Eight eight and a half money can decline from here.
Yeah, Yeah, I think just by a function of that contract with the former executive it it should decline.
Okay got it and then just on the loan originations of $1 five you mentioned this quarter.
Can you give us a sense about how that trended like where where our originations in September versus August and if we've tended to see sort of a stabilization and monthly production.
Yes, Andrew this is Jim so we.
We understand the desire to have some kind of intra quarter.
Visibility on origination levels. The issue is this figures are volatile.
You know we've taken note of the request right now we would kind of point to the trend that youre seeing across the last few quarters.
And we don't think that the intra quarter figures are as useful.
Gotcha Alright.
I think that that covers my questions I'll step back thanks.
Thank you.
Our next question comes again from the line of Andrew <unk> with Stephens. Please proceed.
Hey, guys. Thanks for the follow up to that.
Last point on the originations.
Yeah.
Yes, we can we can make an assumption for the fourth quarter I think I heard in your prepared comments.
We shouldn't see a stabilization of our normal kind of seasonal rebound in the fourth quarter.
So I guess when I think about that heading into 2023.
Kind of.
Normally seasonally a high point.
Should we expect I guess flat to down I guess training into the first part of 2023 as well is that a fair way to think.
About it.
Yeah, Yeah, I think Thats, a fair way to think of it.
Yeah, I guess barring an improvement in macro.
Right.
Okay.
And then on the on the buyback I saw there was a little bit done. This corner just wanted to get your thoughts on just appetite.
The repurchase moving forward.
Yeah as you noticed we did purchase shares in the third quarter, we still have a significant number of shares purchased under the recently announced program.
And given the current market conditions, we will certainly look at opportunities to continue our buyback.
Particularly given the stock has been trading below book value Andrew.
Yep Yep.
Yeah, It makes sense okay.
And if I could just ask one more and I saw the charge offs stepped up a bit and in the U S. P. A M. S. P portfolios this quarter.
I was hoping you could just speak a bit about.
Both.
That's P book of business, how does the current level of losses compared to what you were anticipating.
Do you think we see a continued progression of higher from here and then similar question for SBA.
Specifically are you more extensively reviewing any of this credit right now just given the rate move upward that we've seen and are there any areas or pockets of stress or you're seeing develop within the book.
Sure.
The net charge offs for the quarter were comprised of about $2 8 million from the S. P. HSI book and then about 250000 from our SBA portfolio.
On the SBA side, Andrew about 241 of the $2 50 was related to SBA assets that we've carried as classified since 2019.
These accounts started moving through the resolution process again once the courts reopened from Covid earlier this year and so during Q3, we received sizable paydowns on on those two classified accounts.
Commensurate with the partial release of collateral.
So while the accounts continue to be well reserved or I'm, sorry, well secured from an LTV standpoint on the remaining collateral.
We felt it was prudent for our policies to charge off the remaining exposure during the quarter.
And then moving to your question about the SP <unk> portfolio.
No as we mentioned in the last few quarters, we began to see what we expected as far as normalization in net charge offs during the first quarter of the year.
And we've been communicating our expectations on that normalization of credit since our capital raised last year. So the net charge offs are generally in line with our expectations and what we've been communicating since the capital raise.
There is not as far as.
Specific weakness.
There's nothing I would point to it there's nothing that would.
Concern me within the different portfolios that we manage is generally inline with expectations.
Okay understood.
Understood I appreciate the time.
Thank you.
Okay.
Thank you.
Ladies and gentlemen, as a reminder, if you'd like to ask a question. Please press star one on your telephone keypad.
Yeah.
Ladies and gentlemen, there are no further questions at this time and this will conclude today's conference. Thank you very much for your participation you may now disconnect.
Yes.
Okay.