Q4 2022 Finwise Bancorp Earnings Call
Greetings and welcome to the Fin was Bancorp fourth quarter 2022 earnings conference call.
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I will now turn the call over to management.
Good afternoon, and thank you for joining us today for Finn Wise Bancorp's fourth quarter 2022 conference call. 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 Dod send wise Bancorp Dot com.
Today's conference call is being recorded and webcast on the company's web site investors <unk> been 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 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 Wang better CEO , and president of Fin wives Bancorp Mick.
Mr. Jarvis Jacobson, Chief Financial Officer, and Mr. Jin Yoon Chief strategy, and Chief Credit Officer with that I will turn the call over to Mr Land batter.
Good afternoon, everyone and thank you for joining us on our fourth quarter 2022 earnings conference call on today's call. We will provide an update on our financial results and share some perspective on the current operating environment.
And the continued evolution of our business model.
During 2022 we executed well in substantially all facets of our business, even amidst a rapidly deteriorating economic environment.
Our differentiated and diverse business model, coupled with strong execution by our team members allowed us to navigate these macro headwinds and continued to deliver solid loan originations profitable growth and industry, leading returns specifically for the full year 2022 we generated revenue of 89.
$7 million net income of $25 $1 million and diluted earnings per share of $1.87. We also ended the year with solid Q4 results, particularly given the more challenging macro environment.
Revenue was $23.0 million during Q4 led by loan originations of $1 $2 billion.
Net income for Q4 was $6 $5 million compared to $3 $7 million in the prior quarter and diluted earnings per share were up 49 cents for Q4 compared to 27 cents for the previous quarter. We also maintained robust profitability measures, including a return on average equity of <unk>.
19, 1% during the quarter.
We were also good stewards of capital as we continue to buyback our stock below tangible book value, which is accretive to earnings per share and tangible book value per share overall during 'twenty. Two we bought back a total of 120000 shares for approximately $1 $1 million.
We plan to continue to be opportunistic with our capital deployment strategy, including our share buyback strategy.
Is it typically in Q4, the company's tangible book value per common share continued to grow to $10.95 per share or 21, 1% increase over the prior year period.
Although the macro environment is widely expected to remain challenging in 2023, we plan to continue to proactively build on our success and reinvest in the company in order to help to build diversity of income and funding streams. So that we can remain well positioned for continued sustainable and profitable long term growth.
Typically once the environment of crews.
This includes identifying different ways to utilize our balance sheet, including prudently, adding credit risk in a way that gives us more stability in earnings to that end I'd like to provide you with some thoughts to help you understand how we're thinking about key objectives, including how we plan to continue to navigate a potentially challenging macro environment.
In 2023.
As we highlighted on prior calls the environment for loan originations decelerated rapidly throughout 2022 across the industry and fin wise was not immune to this same pattern continued in Q4, 2022 and without a significant improvement in the macro environment. We would expect this trend to continue.
<unk> into 2020 three.
Going forward, we plan to remain focused on our strategic programs business, where I am pleased to say that our relationships with existing platforms remain strong.
It also includes engaging with and working towards launching additional strategic programs, particularly as we continue to see strong interest from potential new platforms. However, it is important to highlight that in addition to the previously mentioned pressure on originations from a tougher macro environment revenue benefit.
Weiss from potential new strategic programs in any given year is typically delayed given one the 90 to 120 days. It has generally taken to launch a strategic program and to the normal operating period before we start seeing originations come through for the new program.
As we also mentioned on last quarter's earnings call. We expect to continue to originate and hold the guaranteed portion of the certain SBA seven eight laws, which although a headwind to the company's SBA gain on sale. We expect will result in stronger held for investment loan growth and an incremental tailwind to our net interest.
Income over the long term.
We are also looking to further develop our leasing business, which would be an expansion of our line of business. We have had in place since 'twenty 11th.
We see this as a great opportunity to expand our traditional product set and further diversify our revenue model. During Q4, we experienced a pickup in expenses driven partly by higher employee head count and increased infrastructure spend.
Along with the deceleration in originations and revenue caused our efficiency ratio to increase as.
As we've mentioned on prior calls our efficiency ratio is likely to increase as we expect to continue to build out infrastructure, including back office and also expand our fintech offerings. Our team will continue to assess the natural evolution of our business model, including three components of banking as a service.
In deposits in payments.
We have also made some key hires to support the growing bank for example, Mick Taylor joined US recently as senior Vice President and Chief Accounting Officer, We plan to remain opportunistic in terms of hiring best in class talent, especially as we evolve towards more banking as a service products.
Accordingly, we intend to focus on making investments in the company that are carefully designed to deepen relationships with our current customers well, helping us to be well prepared to quickly capitalize on growth opportunities, particularly when the macro environment becomes more supportive having.
Having said that we will also focus on managing expenses prudently and making decisions accordingly, keeping in mind tougher economic conditions.
We also plan to maintain our disciplined approach to underwriting and overall strong risk management in order to sustain sound credit quality two bearing credit cycles. So far we remain pleased with the overall credit performance of our portfolios as we have not seen any outsize deterioration aside from the.
The expected gradual industrywide normalization of credit to pre pandemic levels.
All of you on this call who have been following our story may recall that we proactively slowed strategic program loan retention in our sub 36% held for investment portfolio early in 2022.
Accordingly, while reducing these balances has the effect of increasing our ratio of net charge offs as a percentage of total loans given the denominator effect of lower balances. It does not necessarily imply that we are seeing significantly faster than expected credit normalization as.
As I've mentioned before we do not intend to sacrifice credit quality for the sake of growth that said any further deterioration to the U S economy from current levels could drive faster than expected industry wide credit quality normalization.
Overall, while we acknowledge the risk of further economic deterioration, we believe that we are well positioned to navigate such a scenario.
We remain focused on maximizing long term shareholder value, but in order to do that we plan to proactively built with the long term, while continuing to work with our strategic programs and serve our clients by doing this we believe we will position the company to capitalize on growth opportunities that emerge once.
The market environment stabilizes.
With that let me turn the call over to Chavez Jacobsen, our CFO , who will provide you with more detail on our financial result.
Thank you and good afternoon.
<unk> mentioned for the full year 2022 we grew our balance sheet and delivered meaningful net income of $25 1 million or $1.87 per diluted common share.
We also posted solid profitability as we generated return on average assets was six 4% and return on average equity of 19, 6% for the year ended December 31 2022.
Let's turn to Q4 results loan originations totaled $1.2 billion during Q4 compared to $1 5 billion in Q3, 22, and $2 3 billion in Q4 'twenty one.
Average loan balances comprising held for sale and held for investment loans were 261 4 million during Q4 as compared to $263 6 million in Q3, 22, and $286 8 million in Q4 'twenty one.
Total average interest, earning assets were $354 4 million during Q4 compared to $335 4 million for Q3, 22, and 367 6 million for Q4 'twenty one as Ken noted earlier industrywide deceleration in originations continued in Q4.
And fin wise generally follows a similar pattern.
And without a significant improvement in the macro environment. We expect this trend to continue as we move into 2023.
Average interest bearing deposits were $126 1 million during Q4 compared to $104 8 million. During Q3, 22, and 148 million during Q4 'twenty. One the increase from Q3 22 was driven mainly by an increase in interest bearing demand deposits, partially offset by a.
Decline in money market deposits and certificates of deposit.
The decrease from the prior year period was driven primarily by a decline in certificates of deposit and money market deposits, partially offset by an increase in interest bearing demand deposits. As we have noted previously non interest bearing deposit levels generally have a high correlation with origination volume.
Let's look at the income statement net income was $6 5 million in Q4 compared to $3 7 million in Q3, 22, and $10 1 million in Q4 'twenty one.
Sequential quarter increase was primarily driven by higher gain on sale of loans lower provision for income taxes, and a lower provision for loan losses, partially offset by higher non interest expense.
Net interest income for Q4 was $12 6 million compared to $12 5 million for the previous quarter and $15 3 million during Q4 'twenty one.
The change relative to the prior year period was driven primarily by lower average loans held for sale balances.
Net interest margin for Q4 was 14.27% compared to 14 point, 93% in Q3, 22, and 16.62% in Q4 'twenty one but.
The sequential quarter decline was primarily driven by lower average balances in our loans held for sale portfolio and the shift of the deposit portfolio mix from lower cost deposits to higher cost deposits.
The net interest margin decreased from Q4, 'twenty, one was driven mainly by lower average loans held for sale balances and an increase in higher rate deposit balances as we've noted on prior calls we expect our net interest margin to fluctuate from quarter to quarter due to shifts in our asset mix.
Noninterest income was $9 8 million in Q4 compared to $7 5 million during the previous quarter and $9 1 million in Q4 'twenty one.
The sequential quarter change was driven primarily by a one time gain on sale of loans recorded to establish a new loan trailing fee asset of approximately $2 $3 million and an increase in the fair value of our business funding group LLC BFG investment.
Partially offset by lower strategic program fees due to a decrease in loan origination volumes certainly this one time adjustment impacted some of our after tax metrics during the quarter.
This increase compared to Q4 'twenty, one was primarily due to an increase in gain on sale of loans, partially offset by a decline in strategic program fees, resulting primarily from lower originations. We expect a fair value of our investment in BFG will continue to experience quarterly fluctuations, partially driven by general market.
Movements.
Loan trailing piece referred to revenue generated from sold strategic program loans that are still performing.
Noninterest expenses rose to $10 2 million compared to $8 5 million in Q3, 22, and $8 4 million during Q4, 'twenty, one but pick up compared to the previous quarter was primarily due to an impairment on the company's SBA servicing assets in Q4, and higher employee head count related to developing it.
Creating new and existing technology and business infrastructure.
Relative to Q4 'twenty one the increase was mostly due to increased professional services relating to primarily to an increase in consulting fees and increased depreciation from the build out of our corporate office, which was partially offset by a decrease in salaries and employee benefits.
The company's efficiency ratio was 45, 6% during Q4 versus 42, 3% in the prior quarter and 34, 3% during Q4 'twenty one as we've noted in past calls we expect the company's efficiency ratio to continue to increase gradually as we continue to build out.
Our infrastructure to position the company for sustainable long term growth.
We will strive to be prudent with expenses in light of the tougher macro environment.
Credit quality remains solid with nonperforming loans to total loans.
1% at the end of Q4 compared to <unk>, 2% for Q4 'twenty. One the company did not have any nonperforming loans as of September 32020 to.
The company's provision for loan losses was $3 2 million for Q4 compared to $4 5 million for Q3, 22, and $2 5 million for Q4 'twenty one.
The sequential quarter decline in our provision was primarily driven by a decrease in strategic program loans held for investment the.
The increase compared to the previous year is primarily driven by higher net charge offs and growth of guaranteed loans held for investment.
Net charge offs for Q4 were $30 2 million compared to $3 1 million in the prior quarter and $2 3 million for Q4 'twenty one.
The company's net charge off rate as a percentage of average loans for Q4 was four 9% compared to four 7% for Q3, 22, and three 2% for Q4 'twenty one but.
The change in net charge offs for Q4 compared to the prior quarter was primarily driven by higher net charge offs related to stroke C. G programs.
The change in net charge offs for Q4 compared to Q4 'twenty. One was primarily driven by some normalization of credit losses to pre pandemic market conditions and growth in guaranteed loans held for investment balances imports.
Importantly, while net charge offs this quarter represent the higher end of our historical range over the past several years. They remain in line with our expectations as Kent mentioned earlier. The primary reason for the pickup in our ratio of net charge offs to average loans is due to our proactive effort to lower balances of sub.
36% held for investment loans since early 2022, as we deemed the risk reward on these loans to be less favorable compared to the rest of our portfolio rather than faster than expected credit quality normalization.
Given our team's experience and the data advantages of our business model, we have been exposed to credit across a wide range of different quality tranches in segments, which has enhanced our ability to price risk appropriately and create value through the underwriting process. Overall, we remain prudent in our underwriting process and we expect to.
We maintained our already tight underwriting standards that impact our reserve levels.
As of the end of Q4, the bank's capital levels remain strong and significantly above the 9% well capitalized guidelines with a 25, 1% leverage ratio.
The company's effective tax rate was 27, 3% for Q4 compared to 48, 7% for Q3, 22, and 25, 3% for Q4 'twenty one.
With that I would like to open up the call for Q&A operator.
Thank you.
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Please while we poll for questions.
And our first question comes from the line of Andrew Liesch with Piper Sandler. Please proceed.
Hey, good afternoon, everyone.
Hi, Andrew.
Good good thanks, guys I'm, just looking at the balance sheet construction here recognizing that strategic program production still probably.
The volume is going to trend lower.
I guess I expecting the held for sale portfolio to continue to decline and I guess, where you think that's we're in a good level for that to plateau and then similarly on the held for investment portfolio that continues to put up really good growth.
Should that portfolio continue to rise at a double digit non.
Non annualized pace.
Yeah.
Andrew This is Jeff I'll take a stab at that question on the loans held for sale.
It's a very highly correlated with our loan originations. We can talk about that later I'm sure you'll have questions related to that but we have seen a decline in loan originations quarter over quarter.
That's probably your goalposts to to use there and then on held loans held for investment.
We continue to have very strong originations in areas like SBA lending.
And our local local lending product so we're.
We've seen good growth and as long as conditions don't change Andrew It seems like we should expect that to continue.
Gotcha.
I mean, if I just look at production here, the total origination down 19% sequentially than the end of period held for sale portfolio was down nearly by half.
Yes.
I mean, I would imagine at some point, it's kind of be at a floor level at some point right our continued trending down towards zero.
Just given where that's.
We're originating are going or do you intend to.
The sell out he's not want to retain any of it.
As originations declined.
Yeah, Andrew I think it's it's more.
Insightful to look at the average loans than the ending balance as we've talked about we're on those held for sale balances. It could just depend on the day of the week, where the where the quarter ended but if you look at the loans held for sale average balances quarter over quarter. We went from $50 5 million to 43.7 not quite hesitant.
He's not.
A drastic decrease and then I don't know if you wanted to talk about Jim Yeah sure on originations Andrew.
They continue to be challenged just because of the impact of capital markets on a larger partners.
Also many of our partners proactively pulled back on originations I think we talked about some last quarter.
Due to the uncertainty around inflation.
The rate environment.
But you know I think as Jarvis was referencing there was a quarterly decrease we saw in Q4.
That slowed versus the prior quarter.
But it's tough to say whether the deceleration in the trend line will continue or whether there'll be renewed pressure on originations, but we're keeping an eye on it and proactively working with our partners to support them.
Got you.
And then just a question on expenses here, recognizing that the hiring and building for the future but.
But if I break out and if I take out the fair value service that sort of thing asset Mark about 9.4 million is that a good number to build off of going into 'twenty three.
Yes, we as we've mentioned in the past we plan to continue to invest in the company. So we're ready for this.
To spring back when more quickly when the macro becomes more supportive so.
Yeah, I think the way you were thinking about it makes sense.
Got it alright. Thanks.
Thanks for taking the questions I'll step back here.
Thanks, Andrew.
Our next question comes from the line of Andrew <unk> with Stephens Inc. Please proceed.
Hey, good afternoon.
Andrew Andrew.
Maybe if I could start with.
I think you gave a lot of good color.
Opening remarks, just around kind of how youre thinking about the business model.
I was hoping just to.
A little more color there.
The way to phrase the question from a timing standpoint.
Over the next kind of one.
135 years, I know we've talked about.
You mentioned the three components.
Hey, Matthew mentioned.
They are obviously incremental kind of partners.
I would like to bring on board I'm sure can you just talk about over the next few years, how we should be thinking about the growth and the development.
Of your franchise.
Yeah sure first off let me say that even though the economy has been challenging and of course this last year.
We feel confident that the business model will continue to play out as we've expected. So so we're very confident that a continuation of execution. The way we have in the paas will be in the future for us So when I say investing in the company.
This is in line with the evolution of our business model.
We've been describing since we went public we haven't and this is an important point, we haven't pivoted peak at all because of the macro environment that we're in it's just the next phase in our evolution and so when I think about that when we think about that we're talking about building thing.
The structure that not only <unk>.
Further cordless into the banking as a service ecosystem, but also our positions ourself to springboard when the market returns and so.
The one thing I would just add to this is that I in my experience have been through many cycles and I've seen that the banks that are well positioned prior to a down cycle and build within the cycle usually come out very strong win when the economy turns and that's what we're looking for it and so specific to your question of you know.
What comes out and when we don't have that type of guidance, but I can tell you that we are looking very closely this year at our deposits and payments and expanding the lending aspect of our banking as a service and we'll keep you posted as we make progress there, but it is a major focus.
Once again and natural evolution of the bank.
Understood.
As we think about kind of.
And the payments arena.
Would you be interested in acquisitions.
Sure.
Kind of development payments type offering.
Just kind of incremental.
At the bank.
So so we would actually think of it not only incremental partnerships at the bank that allow us to Oh.
And also with existing partners to provide stickier relationships some of our services within that but we also definitely would explore something beyond that as well, but right now it's focused on what what I've just said.
Understood Okay.
Can you maybe just speak briefly about <unk>.
For capital return.
Yeah.
Back in the fourth quarter.
I mean, just given where capital levels.
And the valuation.
We remain the case moving forward.
Capital kind of return thoughts.
Yeah. So.
Let me start out and Javits, if you want to add anything. Please sales so that we feel that when you're buying yourself investing in ourselves basically yeah, especially at below tangible book value that that was a real good move for the bank and for the shareholders I think that we will consider that strongly going for.
<unk>. This is a decision made by the board, but we've been very active and we.
The one thing as I mentioned before is we just want to make certain that we have enough capital should some opportunity arise and that we don't find ourselves short on something like that.
Okay got it.
And then last one for me just on the.
SBA gain on sale.
The $2 3 million.
This quarter.
Okay.
For the fourth quarter, I guess, just with incremental SBA.
Tension I presume going forward.
Is that a fair way to think about the quarterly cadence.
SBA gain on sale income.
29.
9 million level.
So Andrew.
We're not giving the forward guidance, but I think that you can look at our trend and see that it is declining.
Order over quarter and has been declining quarter over quarter and as the interest rates continue to increase we'll we saw another.
Jump in.
In the interest rate for that portfolio on the first of January 2023. It just makes it that much more compelling to retain those loans without selling them.
Okay.
Understood Alright, thanks for taking the questions.
Okay.
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Okay.
Okay.
There are no further questions at this time.
And this will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
Yeah.