Q2 2024 FinWise Bancorp Earnings Call
Good afternoon, and thank you for joining us today for <unk> Bancorp second quarter 'twenty 'twenty four earnings conference call earlier today, we filed our earnings release and posted it to our Investor website at investors thought spend wise Bancorp dotcom.
Today's conference call is being recorded and webcast on the company's website investors thought Cinryze Bancorp Dot com.
On today's call management's prepared remarks and answers to your questions may contain forward looking statements that are subject to risks and uncertainties that could cause actual results to differ from those discussed today.
Forward looking statements represent managements current estimates expectations and beliefs and fin wise Bancorp assumes no obligation to update any forward looking statements in the future.
We encourage listeners to review the more detailed discussions related to these forward looking statements contained in the company's earnings press release and filings with the Securities and Exchange Commission.
Hosting the call today are Kent land batter CEO, Jim noon, President and Bob Walden, CFO with that I will turn the call over to Kent.
Kent: Good afternoon, everyone.
Speaker Change: <unk> continued its strong momentum into the second quarter building on the positive results. We achieved in the first quarter. Our performance. This quarter was supported by continued growth in loan originations to nearly $1 2 billion solid revenue and stable credit quality importantly, our profitable results were achieved with.
Any contribution from the recently announced new strategic programs and other initiatives highlighting the strength and resiliency of our existing business.
In addition to our solid quarterly performance, it's worth mentioning the significant progress we have made since our November 2021, IPO in strengthening and diversifying our business.
Our compliance and risk management first culture has positioned <unk> as a strong competitor in the Fintech lending space.
Speaker Change: We've also enhanced our product offerings and improved our strategic program lending diversification as the percentage of originations from the top three fintech programs has declined substantially in the past two years, leading to a more diversified revenue mix.
Furthermore, our credit quality has performed relatively well, which is a testament to our rigorous underwriting and risk management practices and it's led to a diversified and lower risk loan portfolio.
Turning to our payments hub initiatives, we remain on track to become operational later this year, we should position us well for future growth and revenue diversification.
Our capital position remains strong with our bank leverage ratio significantly above well capitalized regulatory requirements and the peer average. We also continued to execute on our share repurchase program announced last quarter acquiring 44608 shares for roughly $460000 in the <unk>.
Speaker Change: Second quarter.
Looking ahead, we remain confident in the strength of our business model and our ability to further expand and diversify our product offerings and revenue streams to enhanced long term growth.
We will also continue our efforts to generate operating leverage in 2025 as a significant level of incremental investments. We have made in the business to drive future growth start to decelerate.
Overall, we remain firmly committed to executing our strategic goals to further enhance long term value for our shareholders with that let me turn the call over to Jim noon or precedent.
Thank you can I will now provide a bit more detail on originations and credit quality and then we'll provide an update on our business initiatives.
As Ken mentioned, we're very pleased with another quarter of solid performance in the existing business.
Accordingly. These results do not include contribution from the recently announced strategic program agreements.
Speaker Change: We're also pleased with the level of originations, we are seeing and although the lending environment could change intra quarter through.
Through the first three weeks of July originations are tracking at roughly the same rate as the second quarter of 2024.
Our SBA seven loan originations were modestly lower this quarter versus last quarter and this was the result of a more cautious approach by small business borrowers as widely expected during this period of elevated interest rates.
While we were successful in continuing to grow our SBA portfolio, our newer products, including equipment leasing and owner occupied commercial real estate loans.
Continued to gain traction and help to diversify our origination mix during the quarter.
Speaker Change: Turning to our portfolio, we continued to retain substantially all of the guaranteed portion of our SBA loans.
Speaker Change: On a sequential quarter basis. These guaranteed balances increased four 3% and were a primary driver of the 6% growth in total loans held for investment.
As of the end of Q2, our SBA guaranteed balances and our strategic program loans held for sale, both of which carry lower credit risk made up 44, 6% of our total portfolio, including Hff's loans.
Moving to credit quality, we are pleased that our disciplined approach continues to serve us well.
The provision for credit losses was $2 4 million in the second quarter compared.
Compared to $3 2 million in the first quarter.
Speaker Change: The change was driven by continued improvement in net charge offs compared to the prior quarter.
The bank's loss rate in our SBA portfolio has been more than 70% lower than that of the SBA seven day industry as a whole.
This is based on loan performance data from the federal government for the periods since the bank began its SBA program in 2014.
The net charge off rate as a percentage of average loans held for investment improved to one 9% in the second quarter.
Three 5% in the first quarter.
Importantly, our lowered net charge offs are the result of the decisions, we made and began implementing two years ago.
To purposefully reduce our S. P H F high balances in certain categories.
While simultaneously growing the overall portfolio with lower yielding and safer assets.
We continue to feel comfortable with this positioning.
NPL balances ticked up modestly this quarter to $27 9 million versus $26 million in the prior quarter.
Speaker Change: Which was driven by two new relatively small SBA accounts.
Importantly of the $27 9 million $15 8 million is guaranteed by the federal government.
Overall this is in line with our prior commentary regarding the potential for sporadic conditions to our NPL balances, while we remain in a higher interest rate environment.
We remain confident in our portfolio and we are not currently seeing any broad based negative trends.
Our allowance for credit losses, as a percentage of total loans held for investment remained stable at three 2%.
Speaker Change: Our reserve position the continued positive shift in credit mix.
The strong collateral and our SBA loans, and our consistent and prudent underwriting standards have all contributed to our solid credit quality, particularly during macro uncertainties.
Speaker Change: Turning to an update on our business initiatives. We are happy to announce that we have delivered ahead of schedule on multiple fintech banking initiatives that we outlined late last year.
These include our first payments program the start of our credit enhanced balance sheet program.
Speaker Change: And now the launch of our first card product.
As you May recall, our first payments program was announced with Hank payments at the end of Q1 and.
Speaker Change: And we are excited that we have already started to gradually process incoming payments.
This is a new source of lower cost deposits and fee income for 10 months.
Additionally, during Q2, we announced a strategic relationship with planning and with it the start of our credit enhanced balance sheet program.
As we mentioned in our first quarter earnings call, we have deepened our relationship with one of our existing strategic lending programs upstart.
<unk>.
Speaker Change: Through a new auto loan product.
Speaker Change: And subsequent to quarter end, we also expanded our collaboration with another existing strategic program through the successful launch of our first card program.
We have not yet formally announced this program as it is still in its pilot stage, but anticipate providing more details later this year.
Finally, we remain on schedule to be operational with our payments hub later this year.
All of these initiatives represent significant opportunities for Finn wise to deepen relationships with fintech programs diversify our revenue and improve our deposit costs.
Robert Andrew Terrell: Now I'll turn the call over to our CFO, Bob woman to provide more detail on our financial results.
Good afternoon. Thank you Jim.
I will now briefly review some key financial metrics and provide insight as appropriate in.
In the second quarter, we generated net income of $3 2 million or 24 cents per diluted common share.
Average loan balances comprising held for sale and held for investment loans were $449 9 million during the quarter compared to $429 8 million in the prior quarter.
This increase was primarily driven by continued growth in our commercial lease programs. The SBA seven a program and strategic program loans held for sale.
Average interest bearing deposits were $318 9 million compared to $310 7 million in the prior quarter. The sequential quarter increase was driven primarily by an increase in brokered time certificates of deposit.
Speaker Change: Moving to the income statement net interest income for the quarter was $14 6 million compared to 14.0 a million in the prior quarter driven by increased volumes on loans held for sale and loans held for investment portfolios, partially offset by rate and volume increases on the bank's average balances of certificates of.
Positive.
Net interest margin was 10, three 1% this quarter compared to 10.12% last quarter. The sequential quarter increase was due primarily to increased average balances of loans held for sale associated with partners with interest rates well above our average interest rate, partially offset by slightly lower <unk>.
Average yield on our investment loan portfolio and an increase in our cost of funding the growing loan portfolio as competition for deposits continue.
Noninterest income was $4 8 million in the quarter compared to $5 5 million in the prior quarter. The change from the prior quarter was due primarily to acceleration of servicing fee amortization due to increased payoffs and higher rate SBA loans positively strategic program fees were up modestly compared to the prior.
Quarter.
Noninterest expense in the second quarter was $12 9 million compared to $11 8 million in the prior quarter.
Sequential quarter change was primarily due to an increase in salaries and employee benefits and other operating expenses as we continued to build out of our business infrastructure to stand up the new initiatives and enhance our governance structure. We continue to expect the pace of growth and expenses to slow down in the second half of <unk>.
<unk> 24, as we finish the build out of our new initiatives. Additionally, as we move into 2025, we also expect incremental head count related expenses to align more closely with increases in production.
Speaker Change: One other item I want to call out we expect our fully diluted share count to increase modestly in Q3 due to a deferred compensation awards that were made in mid second quarter with some made at the tail end of the quarter.
Finally, our effective tax rate was 23, 9% for the second quarter compared to 26, 5% in the prior quarter.
Speaker Change: From the prior quarter was due primarily to more favorable resolution of state tax matters than previously estimated as of now we expect the effective tax rate for the remaining two quarters of the year to be approximately at the level of the first quarter of 2024.
With that we would like to open the call for Q&A operator.
Speaker Change: Yeah, if he would like to ask a question. Please press star one on your telephone keypad it transformation.
Your line is in the question queue.
Speaker Change: 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 Liesch with Piper Sandler. Please proceed.
Hey, guys good afternoon.
Speaker Change: Hum No question here the strategic program yields here it sounds like a lot higher than I was looking at it on an average maybe three percentage points higher is this a shift in consumer demand that might continue here. So this is just a good I guess interest rate to use on an average basis.
For the product going forward.
So.
If you take a look at the long term trend I'll answer. This question. If you take a look at the long term trend NIM has been declining over time as we move to decrease our risk profile by expanding exposure and lower risk loans as.
Speaker Change: As we such as the SBA portfolio, but it's not necessarily smooth and predictable path with a long term trend is I think the best indicator until something occurs to disruptive to disrupt that plan and what we saw in the second what we saw in the second quarter appears to be.
A little bit unexpected behavior by these by two principal vendors.
That may be tied to that looks like it is in part tied to the fact that charge offs went down so the reversal of <unk>.
Interest receivable.
Speaker Change: <unk> is less because because charge offs were down.
Got it okay.
That's helpful. So really the trend on the margin should be downward.
Speaker Change: Like a nice little benefit that he had in this quarter is that the right way to think about it.
Based upon the information we have available that's the way I'm thinking about it. This is probably just an aberration because it's not as smooth that everything goes up and down.
Sometimes lower sometimes faster.
Got it.
And then on the ground.
Speaker Change: Fences are.
Back out the SBA servicing adjustment there.
Up about 10% I know you suggested that it is going to the pace of increase is going to slow here in the back half, but is this a good run rate.
A good number to build off of going in there or do you think expenses might be a bit lower here in the third quarter.
So.
And we don't provide official guidance.
But I will provide a bit of insight on what we're thinking about the expense trends.
I'm estimating that the growth in expenses in Q3, we'll run about half of what we experienced in the growth in Q2.
And then Q4 will run about half of what we experienced in Q3.
I do want to note that a significant portion of the increase that we experienced in Q3, and then increase experienced in Q4.
It will be for the full quarter expense carry for new hires that we made in the prior quarter and Youll see that our expense increases driven pre.
Predominantly by increases in compensation expense.
Gotcha Yeah.
Speaker Change: That there alright, thanks for taking my questions here I will step back.
Our next question is from Andrew tear out with Stephens. Please proceed.
Hey, good afternoon.
Hi.
Maybe to start for me it looks like.
I'm thinking about this right the dwell times or the hold times on the Hff's loan portfolio moved up this quarter or so higher kind of average hff's loan balances.
I know, we discussed it a little bit last quarter, but is this kind of the right level to think about the hff's overall.
Average balance or do you think theres still kind of tweaking you can do on hold times going forward. So that we could actually see a lift in and the average balance from here.
Okay.
Have a lot of production.
And based upon our current.
Clients and given our level of originations I think that it's fair to say that this will be about the average run rate on loans held for investment that makes it held for sale portfolio.
Okay got it it'll be it'll be consistent.
Okay very good.
Amit SBA loan servicing line item I appreciate the color you guys can add their but just how should we think about I guess like that that normalize moving forward does this does it step back up to the kind of previous.
The levels, we had seen that line running at call it three or $400000 of corner.
So from what I am saying this is the first period, where we've had such a significant change.
Such behaviour I'm not at this point in time, I'm not anticipating that behavior to continue at the level that we saw here in the in the second quarter I would expect to see that return to a more normalized positive.
Net fees on that activity.
Understood and then just broadly on fee income I mean, it's really good to hear you guys kind of ahead of schedule.
In terms of some of the newer initiatives that we've spoken about for the past few quarters. Here curious on you know did that provide any contribution to the to the to Q fee income amount. If so is it a quantifiable amount and then.
Speaker Change: Just how youre thinking about positive progression in terms of fee income recognition throughout the year.
In regards to the effect on the second quarter and these initiatives.
Pilots and the new initiatives as it relates to credit enhanced program.
The violence in the activities and those activities are in those products and activities.
Is low at this point in time expected to build in the future did not have a significant impact at all on the on the second quarter.
Okay.
Yeah Okay.
And then I also wanted to ask just around you know kind of the charge off level and kind of just more broadly what you're seeing from a credit standpoint I mean.
You guys have pretty intentionally taken risk out of the balance sheet by diversifying our loan growth for for quite a while now and it seems like it's manifesting itself within charge offs.
Just curious like from your from your seat did charge offs come in abnormally low this quarter was there anything nuance, we should appreciate and just more broadly how are you thinking about charge offs going forward.
Yes, Andrew this is Jim.
Jim: Basically you had everything in your statement right, which is that those lower charge offs. This quarter as the result of decisions. We've made about two years ago.
When we started purposefully reducing no categories of that each by portfolio.
We're simultaneously growing lower yielding and safer assets.
And the overall portfolio of the bank.
And we continue to feel comfortable with that positioning.
The general trend in Ncos as Vince has been downward and stable, but in this quarter it was materially lower quarter over quarter, and that's not a level that I would expect in the second half specifically because SBA is little Chunkier and you didn't see as much of that come through for that product in this quarter.
Okay.
Right Okay.
And actually just one more for me I mean this is the first quarter the strategic program H F. I loans are up.
Call it modestly quarter on quarter, but.
That kind of Bucks the trend we've seen them declining for the past couple of years now shall we read into that at all as you may be a little more comfortable on holding specific pieces of credit does it does it have something to do with kind of.
Some of the new partnership expansions, you've you've talked about or just help us help us think about the kind of strategic program H F I balances specifically.
Jim: So.
That's exactly right like the couple of programs that we had stopped retention with at this point then numbers are the balances are so low that you know as.
As they continue to run off Youre, not seeing a material reductions in the overall balance of that HFC portfolio and then the three active programs that we have continue to originate at very stable levels. So the overall balance in that <unk> portfolio is.
Basically now stabilized rate youre not going to see much new.
Near term either positive or negative.
Changes there.
Jim: So plenary was our.
First credit enhanced program and none of the benefit of that program has come through in this quarter.
Specifically.
Okay.
Jim: Okay.
Okay understood. That's it for me thank you for taking the questions.
Jim: Yeah.
Yeah.
We do have some questions that we received via email.
Would you like to read those out for us.
Sure.
Three questions.
Jim: The first one can.
Can you clarify how many shares were repurchased in two key 24.
Yeah.
In the second quarter of 'twenty, four we bought 26911 shares.
For a total of 44608 shares or roughly $460000 through the second quarter.
Okay.
Second question is can you discuss the growth opportunities between your legacy business and the new initiatives.
Yeah sure. It's our legacy business is more mature it's differentiated and we will continue to offer a strong foundation for our future growth, but by adding the payments and cards business. We feel we're strengthening the synergies and diversification of the entire company.
So we've invested a lot also in the compliance and regulatory oversight of that so we think we're well positioned to further diversify the company.
Yes.
And the last question is can you discuss the appointment of a new Board member you recently announced.
Oh sure Yeah, we're very excited to have Susan Ehrlich join our board.
We've always believed that a key component of effective governance is having a board with experience in the activities of the bank.
So this was a natural for us as we enter this next phase of our evolution. We felt it's important to have expertise in this area and Susan brings specific fintech lending and payments experience as well as experiencing growing business. So she I think really supports our philosophy of governance on the board.
There are no more further questions at this time this will conclude today's conference. Thank.
Thank you for your participation you may now disconnect.
Yeah.
Yeah.