Q3 2023 FinWise Bancorp Earnings Call
Greetings welcome to fin wives Bancorp's third quarter 2023 earnings conference call. At this time all participants are in a listen only mode. A question and answer session will follow the flow of my presentation.
Once you require operator assistance during the conference. Please press Star Zero and you kind of phone keypad. Please note. This conference is being recorded I will now turn the conference over to Nathan knows Investor Relations. Thank you you may begin.
Thank you operator, good afternoon, and welcome to defend wife's Bancorp's third quarter 2023 conference call.
Our earnings press release is available on the Investor Relations section of the company's website at investors <unk> Bancorp Dot com.
Note that this conference call is being recorded I would now.
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 of 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.
I refer you to the company's filings made with the SEC, including its earnings press release issued earlier today.
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.
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 for the <unk>.
Financial information presented in accordance with GAAP.
Reconciliation 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 our earnings press release issued earlier today at Www Dot SEC Gov.
Hosting the call today are Mr can't learn better CEO and president of the thin wives Bancorp.
Sure, Jeff Jacobson, Chief Financial Officer, and Mr. Jim in Presidents have been wise bank with that I will turn the call over to Mr land better.
Good afternoon, everyone and thank you for joining us on our third quarter 2023 earnings conference call on today's call, we will discuss our third quarter financial results and provide color on how we navigated the turbulence in the macro economy and share progress on our strategic priorities.
Delivered yet another quarter of solid results driven by 16, 2% quarter over quarter growth in our loans held for investment portfolio, coupled with steady originations in our strategic programs language business.
Our third party focused business model, along with prudent underwriting effective portfolio management and exceptional execution in our core competencies have remained sources of strength for us during the third quarter minimize remain profitable and our loan portfolios continue to perform generally as anticipated.
Our credit quality remained solid as evidenced in the relatively low charge offs for the quarter notwithstanding unexpected rise in non performing loans. These factors along with our above peer average capital enabled us to continue investing in our core competencies and laying the groundwork for future growth.
Third quarter of 2023, we generated revenue of $22 4 million led by interest from our growing loan portfolio and loan originations of $1 1 billion.
This resulted in net income of $4 8 million or diluted earnings per share of 37.
With a return on average equity of 12, 8%.
While we are pleased with these results. We believe are higher for longer interest rate outlook and tight capital markets will continue to weigh on industry wide loan originations and then the softness may persist throughout the remainder of 2023 and potentially well into 2024. Despite these macro challenges we continue to add.
We manage what we can control our focus on providing reliable and uninterrupted services with our current third party relationships remain strong and we.
We are actively forging new relationships. This is integral to our strategy and its expected to continue to drive our success.
Importantly, we have demonstrated our ability to perform well in this current environment I believe.
Well positioned for growth as the economy begins to recover.
Turning to capital at the end of the third quarter. The company's tangible book value per common share was $12 four as compared to 59 at the end of the prior quarter, our bank capital levels remain significantly above well capitalized guidelines with a bank leverage ratio of 22, 1%, while our total shareholders equity to <unk>.
It'll assets ratio remains high it is important to note that since the end of 2022. The ratio has declined as our balance sheet continued to grow and we repurchased our stock.
During the third quarter, we repurchased all of the remaining shares under the board approved buyback plan, while management and our board of directors are always evaluating our use of capital. Our primary focus has been the deployment of capital to support organic growth opportunities to expand the business and to maintain balance sheet flexibility during what is.
Uncertain economic and geopolitical environment.
I'll provide an update on our key objectives as we move through the remainder of 2023 and beyond are.
We are strategically any programs had been a key driver of our revenues and our support to their existing platforms continued throughout the quarter. Our teams have also been actively working to bring new relationships through due diligence to expand and diversify revenue in this business line R.
Our SBA seven lending continued to be a key driver of our portfolio growth and we are pleased with both the growth and performance in the quarter.
Well, our expected increase in nonperforming loans in the quarter was primarily attributable to our SBA loans, we are confident in our team's underwriting and collateral management expertise and historically manage credit performance quite effectively.
<unk> remained well managed with a third quarter efficiency ratio of 51, 3% compared to 52, 7% in the previous quarter.
42, 3% in the same period last year.
However, it is important to note that the promise of one point.
6 million miscellaneous income recognized upon the resolution of the forbearance agreement related to a previously reported nonaccrual SBA mode played a part in the improved efficiency ratio during the quarter.
While this level of miscellaneous income is not expected on a recurring basis. It does demonstrate the expertise of our portfolio and collateral management teams and maximizing bank proceeds related to the non accrual balances.
As previously noted we expect our efficiency ratio to fluctuate and remained elevated as we bring our new initiatives online. We believe this investment is critical to expanding our business relationships and will serve to further diversify and support our revenue in the years ahead in summary, we continue to be excited about our pipeline.
Potential lending programs the growth and performance of our SBA portfolio and the continued progress we've made on the expansion of our banking as a service initiative.
We remain disciplined and focused on items that we can't control, including risk management of third party programs.
Management, our underwriting and collateral management and investment for future growth opportunities and things like that.
Let me turn the call over to Jim noon, our bank President who will provide you with more detail on strategic program initiatives and credit performance.
You can and good afternoon.
I will take a few minutes to walk you through our lending card and payment initiatives as well as the details of the loan portfolio growth and credit performance.
During the quarter the bank continued to invest in the strategic programs business won by hiring professionals and building on our strengths in the areas of business development product and marketing along with compliance third party risk operations change management and <unk>.
Our lending programs pipeline remained strong and we have been working to potentially launch additional lending programs. Prior to this calendar year end.
With regard to product Rollouts, we are excited about our work on building the cards sponsorship business and payments out.
Which we expect to be operational in the first half of 2024.
And we anticipate that our first customers will be on boarded in the second half of 'twenty 'twenty four.
As we have noted we believe that integrated banking as a service remains an important aspect of our strategy and meeting the needs of the market and in our positioning for the future.
Our SBA seven loan originations were strong during the third quarter and we maintained our strategy of not selling the guaranteed portion of these loans.
While the level of fun and inquiries was more tempered than in previous quarters, our SBA pipeline remained stable.
The decision to retain substantially all of the guaranteed portions of our SBA seven eight loans has been the primary factor in the 16, 2% increase in our loans held for investment portfolio quarter over quarter.
We continue to be comfortable with the strategy of holding a higher balance of government guaranteed loans as a way to generate meaningful and recurring growth in our interest income with minimal credit risk.
Especially while the secondary market premiums remained subdued and.
The underlying loan interest rates remained elevated.
Now turning to credit.
The company's provision for credit losses was $3 1 million for the quarter compared to $2 7 million for the second quarter.
And a provision for loan losses of $4 5 million for the same quarter last year.
The increase in provision over the prior quarter was primarily attributable to management selection to increase the qualitative factor adjustments based primarily on the Q3 growth of special mention nonaccrual and nonperforming assets.
Which related primarily to the bank's SBA loan portfolio.
The improvement in provision over the same quarter last year was primarily due to the continued reduction in the balance of our strategic program loans held for investment.
We have discussed the repositioning of this strategic program H five portfolio, which started roughly 18 months ago.
And there were substantially no change to this strategy.
During the quarter net charge offs were $2 2 million compared to $2 4 million in the second quarter and $3 1 million during the same quarter last year.
The decrease compared to the prior quarter was primarily due to a large recovery in the SBA portfolio.
The year over year decrease was primarily due to lower net charge offs from strategic programs and a large recovery in the SBA portfolio.
The company's net charge off rate as a percentage of average loans held for investment was two 8%.
Compared to three 4% in the second quarter and five 8% during the same quarter last year.
We believe we are well reserved for potential loan losses within the allowance as a percentage of total loans held for investment at three 8% in the quarter.
Compared to four 2% last quarter.
And five 6% in the same quarter last year.
Our decision to retain most of the originated guaranteed portions of our SBA seven eight loan program.
Has been the primary factor in the decrease in this ratio from the prior quarter and year.
Nonperforming loans for the quarter were $10 7 million compared to $1 8 million in the second quarter and none in the same quarter last year.
Of the $10 7 million $4 7 million is guaranteed by the SBA.
This compares to $1 1 million and SBA guaranteed NPL balances in the second quarter.
And none during the same quarter last year.
The increase in Npls compared to the prior quarter and year was primarily driven by increases in npls in our SBA portfolio.
As we discussed in prior quarters.
The portfolio was comprised of variable rate loans would you just on the calendar quarterly basis.
And we had seen some informal and formal stress in this portfolio, resulting from the series of increases in the prime rate over the last 18 months.
Consistent with our policies, we moved several loans to nonaccrual status during the quarter.
Well in SBA loan is 90 days past due or management determined that the borrower is not expected to repay the principal and interest on the loan from operating cash flow.
The loan becomes collateral dependent.
Is evaluated for charged down or charge off.
And any net balances placed into non accrual status.
We believe we will continue to see some stress to the extent rates stay elevated and the consumer spending slowdown continues to affect a segment of our small business customers.
While the increase in our non accrual loan balances was expected our gross charge offs within the SBA portfolio during the quarter were slightly lower than each of the prior two quarters and.
And we would point to the additional miscellaneous income recognized from our previously reported non accrual account.
As evidence of the expertise of our portfolio and collateral management teams and maximizing bank proceeds related to non accrual balances.
We feel confident in our team's experience managing this portfolio, even as the rate environment may continue to stress the segment of our borrowers.
Looking ahead, we expect npls to trend higher due to the rate increases and associated increases in bar with monthly payments.
Customary loan seasoning and the general impact of the persistent and ongoing macroeconomic headwinds.
Overall, we believe we are well positioned to continue to manage growth and credit performance in our portfolio due to our experienced team.
Prudent underwriting and portfolio management capabilities and significant capital and reserve levels.
Now, let me turn the call over to Jack who will provide more detail on our financial results.
Thank you and good afternoon, I plan to discuss our financial results for the third quarter relative to the prior quarter ended the third quarter of the prior year.
Loan originations totaled $1 1 billion for the third quarter compared to $1 2 billion in the second quarter and $1 5 billion in the prior year as we expected and communicated last quarter. The decrease in originations relative to the previous quarter was due to a return to more typical origination volumes.
You know our strategic programs from better than anticipated performance in the second quarter that was primarily driven by a single strategic platform that benefited from additional funding during the quarter. The decrease from the prior year was primarily due to a continued contraction in capital markets for certain loan assets due to the challenging macro.
Environment and changes in the underwriting in our strategic lending program to manage credit risk.
Average loan balances comprising held for sale and held for investment loans were up nine 4% to $354 6 million during the quarter from $324 1 million last quarter and up 34, 5% from $263 6 million in the prior year.
The increase from the previous quarter and the prior year period was primarily driven by continued growth in our SBA seven day program.
Despite industry wide liquidity pressure, our balance sheet and liquidity position remains strong during the quarter.
Average interest bearing deposits were $255 8 million compared to $219 1 million in the second quarter and $104 8 million during the prior year period.
The sequential quarter increase was driven primarily by an increase in brokered interest bearing demand deposits and certificates of deposit.
The year over year increase was due mainly to increases in certificates of deposits and interest bearing demand deposits.
As we have noted previously non interest bearing deposit levels have historically had a high correlation with loan balances held for sale in origination volumes from our strategic programs. Our differentiated business model has provided us with a stable and sticky deposit base.
Specifically the origination platforms had been contractually obligated to maintain certain levels of deposits with full wise, while a significant portion of the uninsured deposits on the bank's balance sheet have been our own capital taken together as of the end of the quarter approximately 86% of the bank deposits are either insured.
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 8 million compared to $4 6 million last quarter and $3 7 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 increase from the prior year period was primarily due to an increase in net interest income and a decrease in the provision for credit losses, partially offset by higher noninterest expense lower gain on sale of loans and lower strategic program fees.
Net interest income for the quarter grew five 4% to $14 4 million compared to $13 7 million last quarter and was up 15, 1% over the $12 5 million in the same quarter last year.
Improvement relative to the prior quarter and year was primarily due to increases in the base average balances on the loans held for investment portfolio, partially offset by an increase in the interest expense being paid in average interest bearing liability balances over the same periods.
Net interest margin for the quarter was 37 basis points lower at 11.77% compared to $12, one 4% last quarter and 316 basis points lower than 14 49, 3% in the prior year period. The decrease from the prior quarter was mainly due to a loan mix shifts.
Towards loans carry lower yields in the held for investment portfolio and an increase in the volume of certificates of deposit.
The decrease from the prior year period was primarily due to a reduction in the average balances in our loans held for sale portfolio, along with a 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.
Noninterest income was $5 2 million in the quarter compared to $5 3 million in the second quarter.
Seven 5 million in the same quarter last year.
The decrease from the prior quarter was primarily due to the change in the fair value of our investment in BMT, along with a decrease in the number of SBA seven loans sold.
And was partially offset by an increase in other miscellaneous income primarily related to a $6 million gain on the resolution of a forbearance agreement and our SBA lending program.
Decrease from the prior year period was mainly due to 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 decrease in gain on sale income.
Lower fees associated with originations of strategic program loans and a decrease in the fair value of our investment in V. O. G. Also contributed to the decrease from the prior year period.
We expect that the fair value of our investment in BSG will continue to experience quarterly fluctuations.
Noninterest expense during the quarter was $10 1 million compared to $10 million in the prior quarter and $8 5 million in the same quarter last year.
The increase from the prior quarter was primarily due to an impairment of our SBA servicing asset partially offset by a reduction in professional services expense, primarily from a reduction in consulting fees.
Increase from the prior year period was primarily due to an increase in salaries and employee benefits related to a higher number of employees.
An impairment on our SBA servicing assets, which did not occur in the prior year period.
And an increase in other operating expenses, primarily related to occupancy and equipment expense and was partially offset by a decrease in professional service expense primarily from a reduction in consulting fees.
The company's efficiency ratio was 51, 3% for the third quarter compared to 52, 7% for the prior quarter and 42, 3% for the prior year period.
While the third quarter's efficiency ratio certainly benefited from the additional miscellaneous income related to our SBA loan portfolio. As we've noted in past calls we expect the company's efficiency ratio to remain elevated 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, 1% leverage ratio the bank remains significantly above the 9% well capitalized requirement.
As Kent mentioned as part of our effort to be good stewards of capital during the quarter. We bought 230978 shares for $2 $4 million at a discount to book value and completed the share buyback program announced in August of 2022, we continued to deploy capital to grow our balance sheet responsibly.
We invest in our business for long term growth opportunities and maintain flexibility for potential strategic and accretive transactions.
The company's effective tax rate was 26, 1% for the third and second quarters. This compares to 48, 7% for the same quarter last year with that we would like to open up the call for Q&A operator.
Thank you yeah, if he would like to ask a question. Please press star one on your telephone keypad, a confirmation tone will indicate your line is in the question queue. You May press star two if he would like to remove your question from the queue and for participants using speaker equipment. It may be necessary to pick up your handset before pressing the star keys.
Our first question is from Andrew <unk> with Stephens. Please proceed.
Yeah.
Hey, good afternoon.
Hello, Andrew.
Hey, maybe just to start I think I might have missed this in the prepared remarks, but the the left in the non accruals this quarter or about 10 million.
How long should that specifically with SBA and then how much specifically is guaranteed versus non guaranteed.
Yeah, Andrew this is Jim.
So 10 four of the $10 seven is attributable to the SBA portfolio.
And then four seven is guaranteed by SBA.
Got it.
Thank you I appreciate that and then.
Maybe just sticking with you here I heard the commentary about the card programs in the payments hub sounds like rollout first half of 2024.
But wed love to get any color you have on that point.
Yeah sure. So just like as a reminder, you know on the product initiatives and kind of why we feel that a comprehensive <unk> solution is important for the future of the bank is that it allows for stickier relationships with our current programs. We can attract more mature programs generally means higher overall volumes.
For each product.
Alps, diversify revenue and our funding sources and finally, we're still highly profitable even in the downturn and believe by reinvesting in our strengths now we're building a leadership position in the market.
And then as far as like the update on both the card sponsorship and the payments hub.
We said in our remarks will be operational in the first half of 'twenty four.
With the first customers.
Soon thereafter in the second half of next year a lot of the work that has occurred has been kind of expanding of third party risk and program oversight policies and procedures scoping and bringing on new vendors through bank due diligence and then risk assessments commensurate with regulatory requirements.
The early success is really our staffing additions we've been the recipient of.
Excellent staff additions here at the bank I think just because of our reputation in the market because of our history and regulatory exams. So both business development and compliance operations change management Nike are all departments that have benefited from those <unk>.
<unk>.
The last thing I'll just touch on quickly Andrew is you know wild cards and payments hub.
Or are kind.
The next phase of our growth.
We've been working really hard to bring a couple of lending programs through due diligence.
Essentially launch these by by year end here and so business development compliance and operations teams have been heavily involved to launch a couple of new programs by the end of this year and we still feel really good that we'll be able to accomplish that goal.
Yeah I appreciate all the all the extra of added color there John that's very helpful.
Specifically on the on the point.
Adding the now new partners I'm thinking potentially maybe benefit originations just wanted to get a sense of relative to kind of a base you have today for the partners that are in the pipeline right now that youre working to get through by year end, just how incremental you think that could be in terms of overall dollar of originations and maybe trying to marry that with someone.
The commentary it sounded like.
Originations could remain a little pressured throughout.
Throughout the balance of the year and into 2024, just given the backdrop.
Yep.
So yeah like on the originations front, we did $1 1 billion this quarter versus one two in Q2 and roughly $900 million in Q1, this quarter was better than expected.
We didn't think we'd see Q2 origination levels again this year, but we were happy to see things rebound from Q1 levels, which is still a low point.
While most of the programs were stable quarter over quarter that Delta against Q1, we're still from that single partner rather than a broader uptrend across all the programs and so we continue to point to Q1 origination levels is the most appropriate for the next two to three quarters as far as the incremental lift from.
New programs to potentially launch by year end.
You're more likely looking at a list you know in the second half of next year.
Those programs a lot of that has to deal with just getting even once they're launched and lives.
As a scaling up period, there may be seasonality with the underlying program. So we feel pretty good about where we're at with those potential launches, but as far as incremental lift in the top line is probably the second half of next year.
Yeah understood, Okay and then.
Last one before I hop back in the queue that the loan growth this quarter and those SBA driven as.
Just maybe a little bit stronger than what I was expecting for the corner anything unusual about the just the production you saw and the opportunity you saw to to bring a high quality paper onto the balance sheet within the SBA group I mean can you just talk about.
What.
What kind of targets you might have laid out over the next the next 12 months or so I mean, your capital is incredibly robust what kind of balance sheet growth rate targets are you are you contemplating over the next year.
Yeah. So yeah I mean, the so the two things the pipeline to date has been stable, but I would also mentioned we mentioned in the remarks some of the.
Hum.
Front end inquiries I'd say are a little bit more tempered than there were in previous quarters.
This quarter, we originated about 35 $36 million in SBA loans during the third quarter. It was about a $24 million in Q2 $36 million in Q1 of this year. So the pipeline has been stable but.
But what I would point you to as you know.
It's possible you see SBA originations ticked down a little bit over the next few quarters, just because there's less confidence in the economy right now and you know that generally leads to a swing in the Capex cycle now if you're a business owner, you're less confident youre less likely to secure financing for expansion. So we still feel really good.
But I would just.
We're cautious Andrew.
Yeah totally totally appreciate that point and thanks for all the all the color and I'll step back in the queue.
As a reminder, the star one on your telephone keypad, if he would like to ask a question, we'll pause for a brief moment to see if there's any final questions.
Okay, and we do have that follow up from Andrew Andrew.
Andrew Please proceed.
Perfect. Okay, I've got a couple more I'll keep rolling through.
On the capital side I'm, just maybe following up on the last last question here Your T. CS still definitely very strong at 27% can you remind us just the the guardrail of where you like to manage that to over time, and what you're comfortable with running the bank out from a capital perspective, and then I'll.
Also just any thought you completed the buyback this quarter, obviously, a very advantageous price any thoughts on an incremental incremental buyback in the coming quarters.
Sure so let.
Let me just take the first stab and then Javits you can maybe answer some other questions as well.
The the capital just but we're noting that each quarter. This year. The capital ratio has dropped as the balance sheet continues to grow and so we can see a trajectory toward that.
The question you asked about the buyback is a great question and I I would just say that if we continually assess the best uses of the capital. We include additional buybacks as part of that but we weigh that against other factors such as continued growth of the balance sheet buildout of the infrastructure.
The flexibility to take advantage of opportunities and we want to make certain that we have sufficient capital to to.
Take us through the growth that we're thinking may come over the next little while of.
Of course, not certain of how easy it will be able to raise capital next year or what have you. If the macroeconomic conditions don't improve we also don't think it's a bad thing to have higher levels of capital in this current market, but would you say once again as we did last time the board takes into account.
All factors market conditions, and if it is deemed the best option, Yeah, we would consider another buyback.
And Andrew as far as the capital.
Capital ratio total TCE well we.
We talked about in the past really hasnt changed somewhere in the mid to upper teens level for our business bottle of pills feels right to us.
Got it okay I appreciate it and then.
Javits on the on the expense side it looks like.
If I, if I pull the SBA servicing asset impairment aside it looks like what I, what I would deem kind of core expenses actually ticked down so maybe like a high 9 million dollar range. This corner can you just talk about expectation on the operating expense side heading into the fourth quarter and then.
Just more broadly how we should think about the cadence of expense growth into 2024, just given some of the reinvestment.
You guys are doing are making into the franchise and just maybe 99 together with like the efficiency ratio.
Low 50% right now would you expect it to creep creep up from here or do you think you can maintain in a low fifty's territory.
Yeah.
Yeah, Andrew I think are maybe the best place to start is just on the professional services line you can see we've really come down quite a bit on that line of noninterest expense.
This is.
Primarily due as we mentioned in the prepared remarks.
<unk>.
The lack of consulting fees.
So we talked about a couple of quarters ago.
Would be coming off by the end of the second quarter that was what we were expect expecting so.
<unk> growth wise from from here.
We believe that we're going to continue to build our infrastructure as we've talked about.
The pace, probably similar to what you've been seeing between the first second and third quarter in the history as long as the conditions remain.
Similar will will likely see that level of continued expense growth as far as the efficiency ratio.
Thank you.
You gave pretty good goalposts on the efficiency ratio.
We expect to see better efficiency than generally seen in the market.
But until we can start having the revenue come in from these new.
Projects in our endeavors.
Endeavour's, then youre going to see you're going to see some pressure on the efficiency ratio.
Okay. So maybe thinking about it near term just modest lift in efficiency from here as you as you reinvest some of them, maybe we can step back and reassess as we started talking more about revenue from some of the initiatives.
That's right.
Great well I appreciate all the time this afternoon.
Okay.
Thanks, Andrew.
That will conclude the question and answer session I would like to turn it back over to Kevin for closing comments.
Been a it's been a good quarter, we're very excited still about the initiatives that we're on.
<unk> launching we feel we're on track we've got a great team and so we really appreciate the support of our investors and look for good things to come.
Thank you. This will conclude today's conference you may disconnect. Your lines at this time and thank you for your participation.
Okay.
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