Q3 2024 FinWise Bancorp Earnings Call
Speaker Change: Greetings and welcome to the finalized bank court, third quarter 2024 earnings conference call. At this time, all participants are in a listen-only mode. A question answer session will follow the formal presentation.
Speaker Change: Thank you for joining us. Thank you for joining us. Thank you for joining us.
Speaker Change: His name is Pleasure, I introduce Juan Ares, head of corporate management and investor relations. Thank you, you may begin.
Juan Ares: Good afternoon and thank you for joining us today for Finn Wise Bank Orps third quarter 2024 earnings conference call. Earlier today we filed our earnings release and posted it to our investor website at investors.sinwisebankorps.com.
Juan Ares: Today's concert call is being recorded and webcast on the company's website, investors.sinwisebankhorpe.com
Juan Ares: On today's call, Management's Prepare of a Marx and answers to your questions, may contain forward-looking statements that are subject to risk and uncertainties that could cause actual results to differ from those discussed today.
Juan Ares: Forward-looking statements represent management's current estimates, expectations and beliefs, and thin-wise bankour pursuits, no obligation to update any forward-looking statements in the future.
Juan Ares: 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 security and exchange commission.
Speaker Change: Posting the call today are Kent Landvatter, CEO, Jim Noone, President and Bob Wahlman, CFO. With that, I will turn to call over to Kent.
Kent Landvatter: Good afternoon, everyone. Our results during the third quarter of 2024 reflect the resiliency of our existing business, as well as the actions we have taken to enhance the company's long-term growth.
Kent Landvatter: Loan originations during the quarter grew to 1.4 billion, a notable step up from the approximately 1.1 billion in average originations of the prior five quarters.
Kent Landvatter: Furthermore, we generated solid revenue, particularly strategic program freeze, coupled with a deceleration of our expense growth.
Kent Landvatter: Moreover, we continue to gain traction with new strategic programs. During the quarter we announced one new lending program which brings our total to three, so far in 2024. And we are optimistic about our pipeline.
Kent Landvatter: These programs with leading Fintech companies are a testament to the strength of the thin-wise multi-product platform, which includes lending, deposit, payments and card products.
Kent Landvatter: As more Fintech companies increasingly recognize the benefits of our enhanced product offering.
Kent Landvatter: Coupled with our strong compliance oversight and risk management, we see the opportunity to expand our market share with new and existing strategic programs as well as through product cross selling.
Kent Landvatter: The company's tangible book value for common share increased at 1290 from the prior quarters 1261.
Kent Landvatter: As a reminder, our company's profitability over the past year has been partly impacted by planned infrastructure investments to support organic growth and the build out of key strategic initiatives.
Kent Landvatter: Similarly, our return on average equity is also partly suppressed by our high capital levels.
Kent Landvatter: We are optimistic that as we have completed most of the incremental investments on strategic initiatives, as we continue to utilize capital effectively, these metrics will gradually improve.
Kent Landvatter: Overall, I am pleased with the operational performance of our company and am excited about the outlook.
Kent Landvatter: Specifically, our strategic landing business continues to gradually rebound after facing industry-wide pressures in 2023.
Kent Landvatter: We are delivering tangible results on our new strategic initiatives ahead of schedule and we are seeing a deceleration in expense growth. With that, let me turn the call over to Jim Moon, our president.
Jim Moon: Thank you, Kent. I will now provide some color on originations, review the portfolio trends and then close with an update on our product initiatives.
Jim Moon: 3rd quarter of our reginations total 1.4 billion. A solid step up compared to the 1.1 billion dollar average of the prior 5 quarters, and the 1.2 billion in Q2 of 24.
Jim Moon: This quarter includes the first meaningful contribution from Ernest and Plenary, which we announced earlier this year, as well as a gradual rebound from our legacy programs.
Jim Moon: Specifically of the incremental quarter of Requeter Change and Originations, roughly one-third is from the new programs and the remainder of the increase is from the legacy strategic programs.
Jim Moon: Through the first three weeks of October 2024, the regulations are tracking at a pace modestly lower than the third quarter 2020-24 regulations.
Jim Moon: As a reminder, Q3 included an expected seasonal pickup from Ernest, our student loan program, and we do not expect the same level of contribution in Q4.
Jim Moon: Also, the first three weeks of October do not include any contribution from PowerPay. The agreement that we announced during Q3, there is typically a lag of a couple of quarters until we see a notable contribution from new programs.
Jim Moon: RSBA 7A loan originations increased this quarter, versus last quarter, driven by a gradual pick-up in qualified applicants, as rates have started to move lower.
Jim Moon: We are cautiously optimistic about the outlook for SVA volumes if we continue to see a decisive reduction in interest rates.
Jim Moon: We also continue to see solid origination levels in our equipment, leasing, and owner occupied commercial real estate loans. Both of which contribute meaningfully to our overall portfolio diversification.
Jim Moon: During the quarter, we continue to retain all the guaranteed portion of RSBA loans.
Jim Moon: On a sequential quarter basis, these guaranteed balances increased 5.8%.
Jim Moon: Our commercial lease is increased 13.7% quarter over quarter, and along with the SBA guarantee balance increase, we're the primary drivers of the 4.9% growth in total loans health for investment.
Jim Moon: At the end of Q3, RSBA Guarantee balances and our strategic program loans held for sale. Both of which carry lower credit risk made up 46.4% of our total portfolio, including HFS loans.
Jim Moon: Moving to credit quality, the provision for credit losses was 2.2 million in Q3 compared to 2.4 million in the second quarter.
Jim Moon: The decrease was due primarily to the company's periodic assessment of the qualitative factors, resulting in the removal of the factor related to COVID and its implications.
Jim Moon: Partially offset by an increase in other quality to factors, and slightly higher charge off, stemming mostly from the SPHFI portfolio.
Jim Moon: The net charge-off rate as a percentage of average loans held for investment, picked up slightly to 2.3% in the third quarter, from 1.9% in the second quarter.
Jim Moon: and was well within the 2.8% for the same quarter last year.
Jim Moon: NPL balances were up modestly this quarter to 30.6 million versus 27.9 million in the prior quarter.
Jim Moon: of the total 30.6 million, 17.8 million is guaranteed by the federal government.
Jim Moon: Importantly, our unguarantied MPL balances only increased modestly to 12.8 million in this quarter, versus 12.1 million in the prior quarter.
Jim Moon: As discussed on prior calls, you have expected to see some sporadic increases in MPLs, as rates were elevated, and this will likely lead to an increase in MPLs in the next two quarters.
Jim Moon: While the total NPL balances have an impact on our NIM, the bank's credit risk is limited to the $12.8 million in unguerantied NPL balances, and we believe our strict collateral policies should help mitigate net charge loss.
Jim Moon: Positively, if interest rates continue to decline, we are optimistic that over time it could gradually have a positive impact on our MPL metrics.
Jim Moon: In terms of an update on our strategic landing programs, we continued to build a mystery of success this year by announcing our third new landing program this year with PowerPay during Q3.
Jim Moon: As part of our agreement, the Banco Officer Consumer Loans for Home Improvement and Elective Healthcare purchases.
Jim Moon: We welcome powerpages of the Finland family and thank them for the trust they placed in us.
Jim Moon: To summarize, we're very proud of what we have accomplished so far in 24, in terms of strategic initiatives. And as Kent mentioned earlier, we're optimistic about the play-blorn.
Speaker Change: I will now turn the call over to our CFO Bob Wahlman to provide more detail on our financial results.
Bob Wahlman: Thank you, Jim, and good afternoon.
Bob Wahlman: I will now briefly review some key financial metrics and provide insight as appropriate.
Bob Wahlman: In the third quarter, we generated net income of 3.5 million, or 25 cents per diluted common share.
Bob Wahlman: Average loan balances comprising health for sale and health for investment loans were $492.9 million during the quarter compared to $449.9 million in the prior quarter.
Bob Wahlman: This increase was primarily driven by continued growth in our commercial lease programs, SBA 7A program, and Consumer and Strategic Program, Loans Health for Sale.
Bob Wahlman: Average interest during deposits with 341.2 million compared to 318.9 million in the prior quarter. This sequential quarter increase was driven primarily by an increase in interest bearing demand deposits and broker-time certificates of deposits.
Bob Wahlman: Moving to the income statement, Net Interestingcome for the quarter was 14.8 million, compared to 14.6 million in the prior quarter, driven by increased volumes in the loan health for sale and loans health for investment for folials, partly offset by yield decreases in both portfolios.
Bob Wahlman: During the third quarter, we had a one-time adjustment for a true-day interest associated with loans that we determined to be non-performing in prior periods, which decreased net interest income in Q3 by approximately $500,000.
Bob Wahlman: Our net interest margin was 9.7% is quarter, which includes this one time adjustment just mentioned compared to 10.31% last quarter.
Bob Wahlman: The change from the fire quarter is attributable to the company's continued strategy to reduce average credit risk in the portfolio, as well as the previously described one-time adjustment that decreased net interest income.
Bob Wahlman: There are two items that will affect next quarter's name, but I want to highlight due to the Federal Reserve's 50-basic point reduction in interest rates during September.
Bob Wahlman: First, our FDA portfolio generally floats with primary and resets at the beginning of each quarter. Second, early on Q4, we initiated a program to call our callable CDs and replace them with lower rate wholesale funding.
Bob Wahlman: Non-interesting gum was 6.1 million in the quarter compared to 5.2 million in the prior quarter. The sequential quarter increase was driven primarily by an increase in origination fees related to our strategic programs.
Bob Wahlman: Non-interest expands in the second quarter was 14 million compared to 13.2 million in the prior quarter.
Bob Wahlman: The sequential quarter change was primarily due to an increase in salaries and employee benefits, which included a one-time catch-up in bonus accrual expense of approximately $400,000 to reflect updated performance award estimates.
Bob Wahlman: The pace of growth and expenses desalered in the third quarter as we discussed what happened on our second quarter call, even including the one-time catch-up in bonus accrual expense.
Bob Wahlman: We continue to expect the pace of growth and experiences to further diselerate in the fourth quarter of 2024 as we finished the buildout of our new initiatives.
Bob Wahlman: As we move forward through 2025, we also expect incremental hit count related expenses to be more aligned with increases in production.
Speaker Change: Finally, our Executive Tatary.
Speaker Change: was 25.1% for the third quarter compared to 23.9% in the prior quarter. As of now, we expect the effective tax rate for Q4, 2024 to run around 25.1% and full year 2024 to run around 25.5%.
Speaker Change: With that, we would like to open the call for questions and answers. Operator?
Speaker Change: Thank you.
Speaker Change: We will now be conducting a question in that discussion.
Speaker Change: Please wait while you fold the questions.
Speaker Change: it
Speaker Change: Now, first question comes from Andrew Lees, Piper Sandler. Please, please, proceed with your question.
Andrew Lees: Thanks, hey everyone.
Andrew Lees: Thanks for taking the questions here.
Andrew Lees: On the loan production so far, what you've seen in this quarter, I know in the past there's been some seasonality to the benefit in the fourth quarter. Is that going to be offset by the seasonality that's going to flow out from the, from Ernest? Trying to get a sense of if we could see production pick up here in the next couple months.
Andrew Lees: Yeah, hey Andrew, this is Jim Nune.
Andrew Lees: So we're really excited about the trends that we're seeing in originations, you know, even backing out the expected seasonality of earnest during the third quarter. You know, we're optimistic about the step up in originations that happened again this quarter.
Andrew Lees: and the Outlook going forward. I'd say, you know, as far as specific trends, you know, we're starting to see the benefits of the announced programs from earlier in the year.
Andrew Lees: The environment is also improving for some of our legacy programs and we're optimistic about the pipeline for new partners.
Andrew Lees: and if you take all of that, you know, within the strategic programs, you know, the lower rates, we're also seeing some early signs of increased activity in SBA, Originations.
Andrew Lees: So I'd say overall we're optimistic, but there is some seasonality in that third quarter from Ernest and the student loan or academic year.
Speaker Change: Got it. All right, that's helpful. And then Bob on the commentary on the early fourth quarter actions on the margin.
Speaker Change: Do you think though that the callable CD is in the SBA? Are those going to be up setting? And then I guess what other rate moves have you done on maybe another deposit account? Will there be a lag on the CD? It's trying to get a sense on how the margins in that interesting come-contrent here with these actions.
Speaker Change: Yes, sure Andrew. And him is always a, him is always a complicated area to take a look at. And it's hard to forecast what's going to happen because there's so many things that will affect it, particularly here at Finland. The Regination Value on our high rate loan programs, how quickly we're growing the higher quality lower rate portfolios.
Speaker Change: and significant increases in non-performing assets with related at interest reversals that we saw in this quarter. What happens with the FBI loan funding and what happens to the prime rate?
Speaker Change: and you know how we're replacing this with our callable CDs.
Speaker Change: So, and these things work in opposite directions.
Speaker Change: I do expect overall that hasn't any future Federal Reserve actions. We would expect the NEM to continue to decline during the fourth quarter. I just can't put up, you know, I can't.
Speaker Change: I can't put a stick of fork in it and tell you and say this is how much it's going to be because of all these different variable activities.
Speaker Change: But I will tell you a little bit more.
Speaker Change: About the global cities that we have done.
Speaker Change: We have our $262 million of CDs, $25 million of those are callable CDs, of which $160 million we can call currently and the rest of them will be called during the first and second quarter of the next year.
Speaker Change: The average interest rate on those were about 5.6% and we were able to replace that funding at a cost of about 3.7%. I'm not sure, you know, the market has moved, we are able to take advantage of the quick dip in the market after, you know, an early October. Not sure we can do the rest of it that rate, but we're sure we're going to take a look at it and try to.
Speaker Change: Got it, that's very helpful. Thanks for the camp commentary there.
Speaker Change: And then just one last question for me to start on the payments and the card revenue obviously a lot of investments gone in there. Any sort of update on when we could start to see revenue fall to the bottom line?
Speaker Change: Just from the move that folks have been waiting for for a while and hope to get an update there. Thanks.
Speaker Change: Well, maybe I'll take a first stab at that, this is Kent High Andrew.
Kent Landvatter: We will, we're still on track to complete the payments hub by the end of this year. As the reminder, we have launched one partner earlier this year, also one card partner earlier this year. We take some time to pilot those before we really expand them and we want to do an external readiness assessment before we do full expansion. But we expect a full year of 2025 to be ready for a full year of launching and seeing the revenues from those. We don't have specific KPIs or anything for you at this quarter. We hope to have a little more insight on what this looks like at the in our Q4 earnings call.
Kent Landvatter: where I hope that helps.
Speaker Change: Yeah, so that's what I look forward to do it. Thank you so much for taking the questions. I will step back.
Speaker Change: Hey!
Speaker Change: Thank you, our next question comes from Andrew Torel, Steven's Incorporated.
Speaker Change: Thank you, everyone.
Speaker Change: Hey, Andrew.
Andrew Torel: So, they 80 million that you have been able to call on the Broker CD side.
Andrew Torel: You know, I think he's a 205 million-a-total. Can you just give us a sense for the incremental of what's called a bullet that you have now yet called, you know, timing potentially you could get a look to replace some of that higher cost funding?
Speaker Change: So a few other facts about the other $80 million that we've called today. It carries about the same average interest rate, about 5.6%.
Speaker Change: and the eligible to call today will probably do them in two buckets. We just don't want to be doing everything at one point in time.
Speaker Change: and one bucket will probably go out in November and one in December unless we choose to change the timing, depending upon what markets or circumstances are at that point in time.
Speaker Change: Got it? Okay, that's all for. And then, you know, I'm looking at the average balance of the HFS loans this quarter. And this is a point we've talked about, so I'm, you know, in the past.
Speaker Change: The average balance really stepped up quite a lot this quarter and just curious, you know, if that's intentional, you're increasing on a whole times on loans, whether it's related to some of the new partner launches, they contribute to the origination increases quarter.
Speaker Change: and then just kind of overall, you know, should we expect this like this $70 million of per quarter of average HFS loans is kind of a new normal. I know it was hovering around the $40 million territory for a while, so it's 70 kind of a new average balance we should think about.
Speaker Change: Yeah, as far as the HFS balanced Andrew, you know, that's mostly a derivative of the origination volume in the quarter. So I would go back to the comments there. You know, we're optimistic. We did see another step up in kind of baseline originations from legacy programs.
Speaker Change: but there's also some seasonal, you know, factor with the student loan program and the two new partners. I think we talked about, you know, for peer remarks, about a third of the incremental quarter over quarter change in our engineering was from the new programs.
Speaker Change: and to kind of help with your modeling, you know, earnest will still generate her reginations in Q4. They're just not going to be at the same level as Q3. Since that's the start of the school year, and that's really the key point that we want to dilate.
Speaker Change: Got it. Okay, so maybe some moderation there just predicated around the kind of tracking of the loan originations.
Speaker Change: Correct.
Speaker Change: Okay, Karen.
Speaker Change: I want to ask on the C-income side that the change in fair value and investment in BFG.
Speaker Change: [inaudible] And you know, it will show we expect continued. I get thinking it kind of fluctuates some, but you know, it's, it's, it's, it's, it's like it's in a drag on the fuse.
Speaker Change: and recorded this year or so any kind of update and expectations there.
Speaker Change: Well, let's take a look at the monodoprogram where they're revenue that they generate. It relates to the generation of SBA loans in the fees that are paid.
Speaker Change: of the originations that are paid for the generation of those FDA loans and it has been a slower market.
Speaker Change: and Flias Day Lone so that they...
Speaker Change: Revenues that they have generated has been running a little bit behind what they had generated in past years and will have been below budgeted expectations.
Speaker Change: and it's the, and so it's that revenue generation that is the driver to the, to the, to the, to the, to the valuation.
Speaker Change: and then we are seeing signs of SBA landing picking up.
Speaker Change: and so, while it's been a negative the last few quarters, you know, as that activity picks up and as they develop other business activities, we do expect to see that valuation turn around and go the other way.
Speaker Change: Yeah, okay, make sense.
Speaker Change: The expense side of the house. I think it was pretty impressive that the moderation expense growth even acknowledging the one time.
Speaker Change: and the Institute of the Curl Catch-Up. This quarter, I think, if you...
Speaker Change: If you back that out, obviously an even lower level of expense growth this quarter, you know, with that in mind, like if I'm just going back to some of your comments and the prepared remarks about...
Speaker Change: You know, continued declines in the pace of operating expense growth. I guess if we're to normalize 400 grand out of the run rate in the fourth quarter, it seems like you've got a decent shot at.
Speaker Change: Only since it's flat it's the kind of core rate of reinvestment is also flowing. Is that an unfair assumption going on in the fourth quarter or should we expect expenses to continue to build off this 3Q, 3Q base?
Speaker Change: Well, and during the second quarter call, we said to anticipate for the third quarter is about half the growth rate of what happened in the, of what happened in Q2. And we said looking forward to Q4, about half the growth rate of what we expected to happen in Q3.
Speaker Change: and so that would lead us with a little bit of growth, not flat, little bit of growth in Q4 and so I don't think I don't.
Speaker Change: I mean, what you model I guess is what you choose to model, but I think no one increase in expenses might be a little bit aggressive.
Speaker Change: Okay, I got it, I appreciate it. Thank you guys for taking the questions off that back.
Speaker Change: If there's anyone that would like to ask a question please press star 1 or a telephone keypad, confirmation to own in the case you're placing in line. You may press star 2 to remove yourself from the queue.
Speaker Change: The End
Speaker Change: Okay, it doesn't look like we have any more questions at this time. I would like to turn the floor back to Juan Ares for any further remarks.
Juan Ares: Thanks operator, we did receive a few questions via email.
Juan Ares: Can you provide us with some detail on the potential increase in the amount of MPLs for 4Q24?
Speaker Change: Yeah, hey, welcome to this trip. Aside from the high rating environment, what we would point to as far as MPL balances in the portfolio is, there's no broad-based areas of stress in the portfolio. This is mostly lingering stress from the higher rates.
Speaker Change: If you look at the quarter over quarter uptick, you know, an on-ganty bounce of NPLs, those are modest moving from 11.9 to 12.8. And then if you look at the NCOs, you know, those are relatively flat year over year.
Speaker Change: But, you know, in addressing your question on outlook, you know, what you'll see is about $9 million and 30 plus data linkancies for SBA coming through on the call report.
Speaker Change: and I'd say something around ten million dollars total is what you could expect to migrate into MPL in the fourth quarter. You know this is in line with our expectations and you know prior comments about sporadic pickups and MPLs.
Speaker Change: Due to the higher rates and as rates have now started to decline, we're optimistic this may start to provide some relief to borrowers.
Speaker Change: A couple more questions via email. What's the opportunity to cross-sell different product offerings to new and existing partners giving you expanded product platform?
Speaker Change: Here I can take that one. Yeah, we're really excited about the multi-product platform. You know, we now have lending payments and cards.
Speaker Change: and we've had a lot of discussions with both new and existing partners and most of these are really reversing queries coming in. So it's something that we're very happy to see continue to build on our leadership position in the industry. It's also the rationale for the investments that we made.
Speaker Change: is really to expand our product set, increase the thickness of the relationship in ultimately increased revenue.
Speaker Change: and the last question that team in, you've accomplished quite a bit in 2024. How do you feel about 2025 and what should we expect to see if something was?
Speaker Change: Yeah, I'll take that one one, um...
Speaker Change: and the
Speaker Change: We're very proud of what we've accomplished in 24. We...
Speaker Change: Have done everything we said we did, we do and a lot of it ahead of schedule, but importantly, that leads to a very strong foundation for 2025.
Speaker Change: So for 2025 we expect to start repeating some of the benefits from the initiatives including now a stronger and multi-throttic platform, which we originally set out to diversify and stable revenue stream. So we're very excited about what we've...
Speaker Change: The End
Speaker Change: Thanks, Operator, there are no more questions. Okay, thank you. And thank you for today's participants. This does conclude today's telecomference.
Speaker Change: and you made disconnecture lines at this time.
Speaker Change: The End
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