Q2 2023 FinWise Bancorp Earnings Call
Greetings and welcome to the sudden wise Bancorp second Quart second quarter 2023 earnings conference call.
At this time all participants are in a listen only mode.
A brief question and answer session will follow the formal presentation.
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As a reminder, this conference is being recorded.
It is now my pleasure to introduce your host Brad Cohen with ICR. Thank you. Mr. Cohen you may begin.
Thank you operator, good afternoon, and welcome to Fenway Bank Corp, second quarter 2023.
Conference call. The earnings press release is available on the Investor Relations section of the company's website at investors that's been why Bank Corp Dotcom.
This conference call is being recorded I would like to remind you that certain statements made in the course of this call are not based on historical information and May constitute forward looking statements covered by the safe Harbor.
Provisions in the private Securities Litigation Reform Act of 1995.
These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward looking statements.
Are you to the company's filings made with the SEC, including its earnings press release issued earlier today or.
For a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward looking statements made today.
The company undertakes no duty to update any forward looking statements that may be made during the course of this call I.
Additionally, certain non-GAAP financial measures will be discussed on this conference call.
Our presentation of this information is not intended to be considered in isolation or as a substitute because the financial information presented in accordance with GAAP.
I can tell the Asian of these non-GAAP financial measures to the most comparable measures prepared in accordance with GAAP can be accessed through our filings with the SEC, including.
The earnings press release issued earlier today at Www Dot FCC Dot Gov.
Hosting the call today are Mr. Ken land better.
Executive Officer, and President I've been like Bank Corp.
Mr <unk>.
Savage Jacobson, Chief Financial Officer, and Mr. Jim Young President I've been Wise Bank.
With that I will turn the call over to Mr. Mann better. Thank you.
Good afternoon, everyone and thank you for joining us on our second quarter 2023 earnings Conference call.
On today's call, we will provide some color on our second quarter financial results discuss the impact of the macroeconomic environment on the company and our strategic priorities.
We delivered solid second quarter results, notwithstanding the challenging macro headwinds there.
It's just a testament to our resilient and differentiated business model.
Exceptionally proud of our team's ongoing execution and dedication to providing our clients and customers with best in class value and service, especially during more challenging market conditions, our differentiated and diverse business model that focuses on leveraging strategic relationships with third party loan origination platforms.
Utilizing proprietary automation and analytics technology, along with a strong and growing balance sheet continued to deliver growth and profitability.
Together with our focused strategic priorities and strong execution thin why it's just been adapted it picks up really navigating a multitude of economic cycles.
This was evidenced again in the second quarter as we continued to generate positive results supported by prudent credit underwriting, while we continued our investment in future growth opportunities.
For the second quarter of 2023, we generated revenue of $21 2 million led by growth in our loan portfolio and better than anticipated loan originations of $1 2 billion producing a net income of $4 6 million or diluted earnings per share 35 cents with return on average equity.
At 12, 8%.
While we recognize the originations for the quarter was stronger than anticipated most of the outperformance was driven by a single strategic platform that benefited from additional funding during the quarter. We continue to believe that the interest rate outlook and tightness in the capital markets will weigh on our originations and that's industry wide.
Office and loan originations may persist through the remainder of 2023.
Therefore, our near term outlook for loan originations remains cautious and unchanged. In addition, it is important to note that our long term strategy and focus have not shifted.
We continue to demonstrate that our business model is sound through various economic cycles and believe we are well positioned for growth when the market rebounds, we.
To prudently and conservatively manage capital. This included investing in our business to fuel future growth as well as selectively repurchasing our shares below tangible book value.
At the end of the second quarter, the company's tangible book value per common share was 11 59 as compared to 11 26 at the end of the prior quarter and our bank capital levels remain significantly above well capitalized guidelines with a bank leverage ratio of 22, 4%.
I will now provide an update on our key objectives as we move through the second half of 2023 and beyond.
Our strategic programs business, we continue to support our current platforms, while working to expand our strategic program to drive growth and diversify revenue streams are wide dispersion in the performance of loan originations by various strategic platforms in the quarter continued with some down while others did relatively better.
On the expenses front, we continue to demonstrate cost discipline with the second quarter efficiency ratio of 52, 7% compared to 52, 5% in the previous quarter.
As previously communicated we expect that our efficiency ratio will fluctuate and it remained elevated as we invest to position the company for future growth.
We believe that investing in our team and infrastructure, including administrative support technology systems and the expansion of our banking as a service product line is the best approach to secure future diversified growth.
We believe these investments are crucial in expanding and deepening relationships with our current customers and then rolling out more products to meet client demand and further diversify our revenue streams.
Turning to credit we maintained our disciplined approach to growing our loan book.
In the second quarter overall credit performance of our portfolios remained strong with no significant deterioration beyond the ongoing industry wide normalization of credit to pre pandemic levels.
Jim will provide further details regarding our credit performance later in this call.
We are excited to announce that subsequent to the end of the second quarter, we entered into a definitive agreement with B F. G and for membership P. F. G to acquire an additional 10% of its membership interests subject to regulatory approval and other customary closing conditions. Upon closing this will bring our total ownership to.
20%.
Increasing our equity ownership at BSG has been one of our long term initiatives as outlined in our previous public filings, we have a right of first refusal and an option to acquire 100% to be F. G.
As we look ahead, we continue to manage the company for the long term, we've been proactively positioning the business to be flexible and responsive to the prevailing environment, while pursuing opportunities. We will remain disciplined in our underwriting invest for future growth and explore new opportunities and manage capital prudently.
We believe that these strategies have served us well, thus far and we are laser focused on seeking to grow the business responsibly and maximizing shareholder value.
With that let me turn the call over to Jim Newton, Our Bank President who will provide you with more detail on our strategic program initiatives and credit performance.
Thank you Kent and good afternoon.
Given the market's focus on credit quality and growth opportunities I will take a few minutes to walk you through our strategic program initiatives credit performance and how we believe we are uniquely positioned to weather the current challenging environment and achieve long term growth.
As part of our strategy to increase and diversify revenue.
Have continued to invest in new products, such as card offerings and our payments hub.
We believe that an integrated banking as a service offering is core to our future and could provide been wise with additional opportunities to offer lending deposits cards and payment services to our platforms.
We are pleased with the progress we have made on these initiatives to date.
Our SBA seven loan originations remained solid for the quarter.
Similar to the previous quarter, we continued to hold the majority of the guaranteed portion of these loans on our balance sheet.
Gain on sale premiums lower and interest income had risen due to underlying adjustable rates.
As a result, our SBA gain on sale revenue was much lower than in the same quarter last year.
We continue to believe that over the longer term.
This shift may benefit the company.
Higher balance of government guaranteed loans in our portfolio and.
And the higher level of recurring interest income, but this is expected to deliver.
Now turning to credit.
Our loan book performed as anticipated.
With nonperforming loans to total loans held for investment of 0.3% at the end of the second quarter.
The previous quarter and the same quarter last year.
Yeah.
The companys provision for credit losses was $2 7 million for the quarter compared to $2 7 million for the first quarter and a provision for loan losses of $2 9 million for the same quarter last year.
The change in the provision over the same quarter last year was primarily due to a reduction in the balance of our strategic program loans held for investment.
During the quarter net charge offs were $2 4 million compared to $2 9 million in the first quarter and $2 3 million during the same quarter last year.
The company's net charge off rate as a percentage of average loans held for investment was three 4%.
Compared to four 5% in the first quarter.
And four 5% in the same quarter last year.
The decrease in net charge offs compared to the prior quarter.
Primarily due to lower net charge offs in our strategic program loans.
The increase in net charge offs compared to the same quarter last year was primarily due to higher net charge offs related to our SBA loans.
We believe we continued to be well reserved within the allowance as a percentage of total loans held for investment of four 2% in the quarter.
Compared to four 4% last quarter.
And five 3% in the same quarter last year.
Overall, we believe our team's extensive experience in the industry, along with our technology automation and underwriting positions us well to me.
Managed potential credit risks.
Now, let me turn the call over to Jos Luis who will provide more detail on our financial results.
Thank you and good afternoon.
Turning to discuss our financial results for the second quarter relative to the prior quarter and to the second quarter of the prior year.
Loan originations totaled 1.2 billion for the second quarter compared to point 9 billion for the first quarter and 2.1 billion in the prior year.
Relative to prior quarter.
The increase was driven by better than anticipated performance in our strategic programs, while the decrease from the prior year was primarily due to a continued contraction in the capital markets for certain loan assets as a result of the challenging macro environment and our conservative underwriting to manage credit risk.
Average loan balances comprising held for sale and held for investment loans were up 11, 6%.
$324 1 million during the quarter from $290 4 million last quarter and up 16% from $279 3 million in the prior year.
Increased from the previous quarter in the prior year period was primarily driven by continued growth in our SBA seven day program.
Yeah.
Despite industry wide liquidity pressure, our balance sheet and liquidity position remains strong during the quarter.
Average interest bearing deposits were $219 1 million compared to $165 2 million in the first quarter and $127 2 million during the prior year period.
The sequential quarter increase was driven primarily by an increase in certificates of deposit the.
The year over year increase was due mainly to increases in certificates of deposit and interest bearing demand deposits, partially offset by a reduction in money market deposits. As we have noted previously non interest bearing deposit levels have historically had a high correlation with held for sale loan balances and origination volume from.
Our strategic programs.
As we highlighted last quarter, our differentiated business model has provided us with a stable and sticky deposit base specifically the origination platforms have been contractually obligated to maintain certain levels of deposits, what's been wise, while a significant portion of the uninsured deposits on the bank's balance sheet.
I have been our own capital.
Taken together as of the end of the quarter approximately 85% of the bank deposits are either insured or our own capital or our contractually required in our strategic lending business.
Now turning to the income statement net income for the quarter was $4 6 million compared to $3 9 million last quarter and 5.5 million in the same quarter last year.
The improvement from the prior quarter was primarily due to an increase in net interest income driven by growth in our loans held for investment portfolio.
The decrease from the prior year period was primarily due to lower strategic program fees higher interest expense on deposits and lower gain on sale, partially offset by higher interest income and a reduction in non interest expense.
Net interest income for the quarter grew 13% to $13 7 million compared to $12 1 million last quarter and was up seven 1% over the $12 8 million in the same quarter last year.
The improvement relative to the prior quarter and year was primarily due to increases in the bank's average balances on loans held for investment portfolio, coupled with increasing yields on variable rate interest, earning assets due to the rising rate environment.
Partially offset by an increase in the interest rates being paid and average interest bearing liability balances over the same periods.
Net interest margin for the quarter was 37 basis points lower at $12, one, 4% compared to 12.51% last quarter, and 155 basis points lower than $13 six 9% in the prior year period.
The change from the prior quarter was mainly due to an increase in interest bearing liabilities, primarily associated with a rise of certificates of deposit balances and rates.
The decrease from the prior year period was primarily due to a reduction in average balances in our loans held for sale portfolio, along with the shift in our deposit portfolio mix.
From lower to higher costing deposits, partially offset by an increase in average balances in our loans held for investment portfolio.
Non interest income was $5 3 million in the quarter compared to $4 5 million in the first quarter and $8 4 million in the same quarter last year the.
The increase from the prior quarter was primarily due to an increase in the number of SBA seven loans sold the.
The decrease from the prior year period was primarily due to lower originations of strategic program loans and the associated strategic program fees a reduction in gain on sale of loans, primarily attributable to our increased retention of the guaranteed portion of SBA loans to increase interest income, which resulted in a corresponding D.
Kris and gain on sale income, partially offset by an increase in the fair value of our investment in B M cheap.
We expect that the fair value of our investment in BHG will continue to experience quarterly fluctuations, partially due to general market movements.
Noninterest expense during the quarter was 10 million compared to $8 7 million in the prior quarter and 11 million in the same quarter last year. The increase from the prior quarter was primarily due to an increase in salaries and employee benefits related to higher accruals for performance bonuses based on higher company profitability the decrease from.
The prior year period was primarily due to a recovery on our SBA servicing asset during the quarter, which did not occur in the prior year period.
The company's efficiency ratio was 52, 7% during the quarter compared to 52, 5% during the prior quarter and 52% in the same quarter last year.
As we've noted in past calls, we expect the company's efficiency ratio to increase as we continue to build out our infrastructure to position the company for sustainable long term growth.
With respect to capital levels with a 22, 4% leverage ratio the bank remained significantly above the 9% well capitalized requirement.
The company's effective tax rate was 26, 1% for the second quarter as it was last quarter.
This compares to 24, 6% for the same quarter last year.
As part of our effort to be good stewards of capital during the quarter, we bought back a total of 269690 shares for approximately $2 $2 million.
With that we would like to open up the call for Q&A operator.
Thank you we will now be conducting a question and answer session.
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One moment, please while we poll for questions.
Thank you.
Our first question is from Andrew <unk> with Stephens, Inc. Please proceed with your question.
Hey, good afternoon.
Hey.
Hmm.
Hey can I, maybe just start on the origination volume for the corner came out of that unexpected and I was obviously up in the corner and Ken I heard your comments towards the beginning of the call about maybe some still kind of a cautious outlook into the back half of the year, but I guess like.
As you look at it today does it feel like we've.
Kind of relatively hit a trough around this billion dollar level in terms of originations.
Yeah, Hey, Andrea this is Jim.
So yeah, I mean originations in the quarter were better than expected, but like cant mentioned.
You know on the script most of the Delta quarter over quarter came from a single partner rather than a broad trend across all of our platforms.
And we don't currently see enough.
Broad strength and market conditions were across all of our partners that would change our outlook on originations for the rest of the year and so we would continue to point you to Q1 origination levels as more likely than the current quarters.
Yeah understood Okay.
And.
I mean, the charge offs stepped down pretty considerably again this quarter after kind of peaking out in the back half of last year just on the overall loan portfolio.
Wanted to get maybe refreshed thoughts on incremental balance sheet retention of SBA loans here I know, you're you're focusing on retaining more and SBA credit, but wanted to get the refreshed thoughts on the strategic partner or strategic program balance retention.
Yeah.
Yeah, I think specifically you're talking about like the U S. T H F I portfolio right, Yes, correct correct.
Yeah. Okay. So generally you know we've been measured and purposeful and kind of how we grow the balance sheet now not just in that program, but across our other portfolios as well if you look at the S. P. H F I balance at the end of the second quarter of 2002, it was about $27 5 million and Matthew.
Fast forward it this quarter.
Our balance is about $27 million so beyond remixing. The composition there that we've talked about some in previous quarters. You also saw us reduce the out risk portfolio, thereby about $6 7 million or about 25% over the last 12 months.
No.
Theres not a specific balance or size, so that S. P. H F portfolio that we're targeting but we monitor and review the trends just like we do with all the rest of our programs to make decisions on what we're comfortable retaining and.
You can see how we position that you know over the last 12 months.
Got it okay.
And then Jim going back to some of your prepared remarks about or some of the prepared remarks around the continued investment in kind of in payments haven't any card offerings.
Wanted to get maybe a status update there and anything you can share around maybe how the pipeline is looking in terms of the build out of some of that just any any additional color there would be helpful.
Yeah, Yeah, no problem. So we continue to make good progress with new lending partner launches Andrew.
And we're comfortable with the stated goal of two to three launches in the second half of this year.
Kind of a new lending partners and then you asked about kind of the new product initiatives as well and it's mostly processes and infrastructure.
The new debit and credit card issuance business, that's being stood up as we speak.
We think that you know and we believe this will be stood up in the next few quarters with our first customers soon thereafter.
Then we've also started the diligence on scoping process on our payments hub and we expect this to be operational in the next few quarters as well.
Okay.
Very good I appreciate it and then if I could just ask one more really quick the.
The increased investment in BFG, one what are the net impacts from a financial standpoint of that increased investment and can you just talk a little bit more about the kind of the rationale there in terms of stepping up the investment.
Yeah, maybe I could start just with the rationale and then I'll turn over to jab is for some of the same.
P S G M S.
As you know it's been a primary source of our SBA loans since 2014 and beyond.
Beyond that we've had a very synergistic very synergistic relationship and we believe that this was a very good acquisition and they've been a very good partner to us and so we were there.
The primary reasons behind the acquisition continue to be strategic and so just strengthening as for strengthening this relationship as we move forward is very important to us and maybe Travis you can dig into the specifics.
Yeah Andrew.
Probably the maybe the place to start is on dilution.
There will be a dilutive impact for existing shareholders. As a result of the transaction when it closes, but we believe that it will be minor compared to the benefits. We expect as a result of the transaction.
Hum.
Okay I guess.
More specifically on the benefit side.
When the transaction closes I guess, what should we expect in terms of net financial impacts and benefits.
Yeah. That's a good question Andrew as you know, we we carry our investment in BFG on our balance sheet at fair value.
So this is a little different than a traditional bank acquisition or or what have you in the community bank space. So once we close the transaction we will update you on that.
The the financial impact, but it.
It isn't expected to change from what we've been doing in the past as far as how we treat our investment.
Okay very good.
Well, thank you for taking the questions I'll step back on the queue.
Okay.
Okay.
Thank you.
A reminder, if you would like to ask a question. Please press star one on your telephone keypad.
Yeah.
There are no further questions at this time.
We have a follow up question from Andrew <unk> with Stephens Inc. Please proceed with your question.
Okay.
Thank you.
I can ask a couple more really quick just on the.
The SBA loan servicing fees, what drove the step down in that line item. This quarter. It looks like it's been run rating around 565% to 600000, a quarter and it came down a fair amount in the second quarter, just curious what drove the step down this quarter and should we expect a normalization higher there.
Yeah, Andrew the step down is as we've talked about in the past when rates continue to rise in the in the market SBA loans tend to pay off.
That's what we had occurred during the second quarter, a couple of SBA loans paid off.
And the associated.
Accruals and deferrals all flushed through the income statement. So that's what you're seeing there.
Okay. So fair to think I kind of run rates around this level moving forward then.
It should be.
Similar to the last couple of quarters.
Okay got it and then maybe just.
I know the compensation increase this corner it sounded like it was higher level of bonus accrual and you guys do continue making investments into the franchise kind of positioning for future growth just.
Could you help us out maybe with a operating expense kind of run rate or target for the next couple of quarters.
Sure as we've talked about in the past Andrew we do plan to continue to build our the structure.
And as you noted.
The major reason for the change between last quarter and this quarter is related to performance of the company and bonuses associated with that so I think the relationships will stay consistent from that standpoint.
Yeah.
Understood Okay.
And then <unk>.
Might have missed it towards the end of the prepared remarks, but did you have the amount of shares bought back in the current quarter and the weighted average price of men.
Expectations for that.
Hmm expectations for buyback moving forward and then what about do you have left outstanding on the authorization.
Mhm.
I have that number it is tough to find here.
Yeah.
We purchased 269690 shares during the quarter or about $2 2 million.
And.
I'm not sure what the I'll have to get back to you Andrew on the amount remaining okay.
Okay. That's all I can I can go back and find the initial one.
Fair enough fair to assume you remain active on the buyback now.
Where we have opportunity, especially below book value, we will we plan to remain active yes.
Okay very.
Very good I'll step back thank you for the questions.
No problem. Thanks, Andrew.
Thank you there are no further questions at this time I would like to turn the floor back over to CEO and President Ken <unk> for closing comments.
Yes. Thank you everyone for joining us on this.
The quarter's call, we're very excited about the future of the bank and we appreciate your support and.
Look forward to future growth in our in our company and shareholder value.
Thank you. This concludes today's teleconference. You may disconnect your lines at this time.
Thank you for your participation.
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