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  Title	Q3 2024 Finwise Bancorp Earnings Call
  ID	3610485
  External ID	181908938
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  Published Date	Oct. 25, 2024, 1:19 p.m.
  Summary	Q3 2024 Finwise Bancorp Earnings Call Thomson Reuters StreetEvents Fri, Oct 25, 2024, 1:19 PM 23 min read In This Article: FINW +0.06% Participants Juan Arias; Head of Corporate Management, Investor R
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  Content	Q3 2024 Finwise Bancorp Earnings Call Thomson Reuters StreetEvents Fri, Oct 25, 2024, 1:19 PM 23 min read In This Article: FINW +0.06% Participants Juan Arias; Head of Corporate Management, Investor Relations; Finwise Bancorp Kent Landvatter; Chairman of the Board, Chief Executive Office; FinWise Bancorp James Noone; President; FinWise Bancorp Robert Wahlman; Chief Financial Officer; FinWise Bancorp Andrew Liesch; Analyst; Piper Sandler Andrew Terrell; Analyst; Stephens Incorporated Presentation Operator Greetings and welcome to the FinWise Bancorp third quarter, 2024 earnings conference call. At this time, all participants are in a listen-only mode. The question and answer session will follow the formal presentation. If you want to require operator assistance, please (Operator Instructions) on your telephone keypad. As a reminder, this conference is being recorded. It is now my pleasure to introduce Juan Arias, Head of Corporate Management and Investor relations. Thank you. You may begin. Juan Arias Good afternoon and thank you for joining us today for FinWise Bancorp's third quarter, 2024 earnings conference call earlier today we filed our earnings release. (Event Instructions) On today's call, management's prepared remarks and answers to your questions may contain forward-looking statements that are subject to risks and uncertainties that could cause actual results to differ from those discussed today. Forward-looking statements represent management's current estimates, expectations and beliefs. And FinWise 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 Landvatter, CEO, James Noone, President, and Robert Wallman, CFO. With that, I will turn the 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. 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. Furthermore, we generated solid revenue, particularly strategic program freeze coupled with a deceleration of our expense growth. Moreover, we continue to gain traction with new strategic programs. During the quarter, we announced 1 new lending program which brings our total to three. So far, in 2024, we are optimistic about our pipeline. These programs with leading fintech companies are testament to the strength of the FinWise multiproduct platform which includes lending, deposits, payments and card products. As more fintech companies increasingly recognize the benefits of our enhanced product offering 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. The company tangible book value per common share increased to 1290 from the prior quarters 1,261. As a reminder, our company profitability over the past year has been partly impacted by planned infrastructure investments to support organic growth and build out of key strategic initiatives. Similarly, our return on average equity is also partly suppressed by our high capital levels. 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. Overall, I am pleased with the operational performance of our company, and I am excited about the outlook. Specifically, our strategic lending business continues to gradually rebound after facing industry wide pressures in 2023. 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 James Noone, our President, Story Continues James Noone 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. Third quarter, originations totaled $1.4 billion, a solid step up compared to the $1.1 billion average of the prior 5 quarters and the $1.2 billion in Q2 of 2024. This quarter includes the first meaningful contribution from Earnest and Plannery, which we announced earlier this year, as well as a gradual rebound from our legacy programs. Specifically, of the incremental quarter over quarter change in originations, roughly third is from the new programs and the remainder of the increase is from the legacy strategic programs. Through the first 3 weeks of October 2024 originations are tracking at a pace modestly lower than the 3rd quarter 2024 originations. As a reminder, Q3 included an expected seasonal pickup from Earnest our student loan program and we do not expect the same level of contribution in Q4. Also, the first 3 weeks of October do not include any contribution from PowerPay. The agreement that we announced during Q3 as there is typically a lag of a couple of quarters until we see a notable contribution from new programs. Our Small Business Administration (SBA) step-up in loan originations increased this quarter versus last quarter driven by a gradual pickup in qualified applicants as rates have started to move lower. We were cautiously optimistic about the outlook for SBA volumes if we continue to see a decisive reduction in interest rates. 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. During the quarter, we continue to retain all the guaranteed portion of our SBA loans on a sequential quarter basis. These guaranteed balances increased 5.8%. Our commercial leases increased 13.7% quarter over quarter. And along with the SBA guaranteed balance increase. We are the primary drivers of the 4.9% growth in total loans held for investment. At the end of Q3, our SBA guaranteed 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. Moving to credit quality. The provision for credit losses was $2.2 million in Q3 compared to $2.4 million in the 2nd quarter. 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, partially offset by an increase in other qualitative factors and slightly higher charge-offs stemming mostly from the SBA portfolio. The net charge-offs rate as a percentage of average loans held for investment ticked up slightly to 2.3% in the third quarter, from 1.9% in the second quarter, and was lower than the 2.8% for the same quarter last year. NPL balances were up modestly this quarter to $30.6 million versus $27.9 million in the prior quarter of the total $30.6 million. $17.8 million is guaranteed by the Federal Government. Importantly, our unguaranteed NPL balances only increased modestly to $12.8 million this quarter versus $12.1 million in the prior quarter. As discussed on prior calls. We have expected to see some sporadic increases in NPLs as rates were elevated and this will likely lead to an increase in NPLs in the next two quarters. While the total NPL balances have an impact on our Net Interest Margin, the bank's credit risk is limited to the $12.8 million in unguaranteed NPL balances. And we believe our strict collateral policies should help mitigate net charge offs positively if interest rates continue to decline. We are optimistic that over time, it could gradually have a positive impact on our NPL metrics. In terms of an update on our strategic lending programs, we continue to build on the string of success this year, by announcing our third new lending program this year, with PowerPay during Q3. As part of our agreement, the bank will offer consumer loans for home improvement and elective healthcare purchases. We welcome PowerPay to the FinWise family and thank them for the trust to place in us. To summarize, we are very proud of what we have accomplished so far in 2024, in terms of strategic initiatives, and as Kent mentioned earlier, we are optimistic about the pipeline. I will now turn the call over to our CFO Robert Wahlman to provide more detail on our financial results. Robert Wahlman Thank you, James, Good afternoon. I will now briefly review some key financial metrics and provide insight as appropriate. In the third quarter. We generated net income of $3.5 million or $0.25 cents per diluted common share. Average loan balances comprising held for sale and held for investment loans were $492.9 million during the quarter compared to $449.9 million in the prior quarter. This increase was primarily driven by continued growth in our commercial lease programs, SBA lending program and Company's Strategic program, and loans held-for-sale. Average interest-bearing deposits were $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 brokered time certificates of deposits. Moving to the income statement, net interest income for the quarter was $14.8 million compared to $14.6 million in the prior quarter, driven by increased volumes in the loans held-for-sale investment portfolios partly offset by yield decreases in both portfolios. During the third quarter. We had a onetime adjustment for true interest associated with loans that were determined to be non-performing in prior periods which decreased net interest income in Q3 by approximately $500,000. Our net interest margin was 9.7% this quarter which includes this one-time adjustment just mentioned compared to 10.31% last quarter. The change from the prior 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. There are 2 items that will affect next quarters now, but I want to highlight due to the Federal Reserve's 50 basis point reduction in interest rates during September. First, our SBA portfolio generally floats with prime rate and resets at the beginning of each quarter. Second, early in Q4, we initiated a program to call our callable CDs and replace them with lower rate wholesale funding. Non-interest income 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. Non-interest expense in the second quarter was $14 million compared to $13.2 million in the prior quarter. 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. The pace of growth and expenses decelerated in the third quarter. As we discussed what happened on our second quarter call even including the one-time catch up and bonus accrual expense. We continue to expect the pace of growth and expenses to further decelerate in the fourth quarter of 2024, as we finish the build out of our new initiatives. As we move forward through 2025, we also expect incremental head count related expenses to be more aligned with increases in production. Finally, our effective tax rate 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%. With that, we would like to open the call for questions and answers operator. Question and Answer Session Operator Thank you. We will now be conducting a question and answer session. Please wait while you pull up the questions. Our first question comes from Andrew Liesch from Piper Sandler. Please proceed with your question. Andrew Liesch Thanks everyone. Thanks for taking the questions here. Just the on the loan production so far. What you've seen this quarter? I know in the past there has been some seasonality to the benefit in the fourth quarter. Is that going to be offset by the seasonality that is going to flow out from the from earnest. I was trying to get a sense of if we could see production pick up here in the next couple of months. James Noone Yeah. Hey, Andrew, this is James Noone. We are really excited about the trends that we are seeing in originations. You know, even backing out the expected seasonality of earnest during the third quarter. You know, we are optimistic about the step up in originations that happened again this quarter and the outlook going forward. I would say, as far as specific trends, we were starting to see the benefits of the announced programs from earlier in the year, the environment is also improving, you know, for some of our legacy programs and then we are optimistic about the pipeline for, for new partners. And if you take all of that, you know, within the strategic programs, the lower rates, we are also seeing some early signs of increased activity in SBA originations. I would say overall we're optimistic but there is some seasonality in that third quarter from, from Earnest and you know, the student loan of academic year. Andrew Liesch Got it. All right, that is helpful. And then Robert, on the commentary, on your the early fourth quarter actions on the margin. Do you think though that the callable CDs and the SBA are, are those going to be upsetting? And then I guess what other rate moves have you done on other deposit accounts? Will there be a lag on the CDs? That is trying to get a sense on how the margin and net interest income can trend here with, with these actions? Robert Wahlman Yeah, sure, Andrew. And Net Interest Margin (NIM) is always a complicated area to take a look at. And it is hard to forecast what is going to happen because there is so many things that will affect it, particularly here at FinWise, the origination volume on our higher rate loan programs, how quickly we are growing the higher quality lower rate portfolios, significant increases in non-performing assets with related at, interest reversals that we saw in this quarter. You know, what happens with the SBA loan funding and what happens with the prime rate, and you know how we are replacing this with our callable CDs. So, and these things work in opposite directions. I do expect overall that absent any future Federal Reserve actions; we would contend we would expect them to continue to decline during the fourth quarter. I just cannot put a stick a fork in it and tell you and say this is how much it is going to be because of all these different variable activities. But I will tell you a little bit more about the callable CDs that we have done. We have our $262 million of C DS, $205 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 quarters of next year. And of those that we have called about half of those that we have the ability to call about $80 million is what we have called to date. And of those, 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 am not sure, you know, the market has moved, we were able to take advantage of the quick dip in the market after, in early October. Not sure we can do the rest of them at that rate, but we are sure going to take a look at it and try to. Andrew Liesch Got it, you know, that that is very helpful. Thanks for the commentary there and then just one last question for me, just on the payments and the card revenue. Obviously, a lot of investments have gone, gone in there. Any sort of update on when we could start to see revenue fall to the bottom line. Just something that folks have been waiting for for a while and hope to get an update there. Thanks. Kent Landvatter Well, maybe I will take a first stab at that. This is Kent, Andrew. We were still on track to complete the payments hub by the end of this year. As a 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 do not have a 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, but I hope that helps. Andrew Liesch Yeah, sure does look forward to it. Thank you so much for taking the questions. I will step back. Operator Okay, thank you. Our next question comes from Andrew Terrell Stephens Incorporated. Andrew Terrell Hey, good afternoon. Operator Hey, Andrew Terrell Andrew and you guys have it easy with both of us named Andrew here. I cannot mix up any names. Hey, just a few questions for me. So the $80 million that you have been able to call on the brokered CDs side, you know, I think you said $205 million of total. Can you just give us a sense for the incremental of what is callable, but you have not yet called. You know, timing potentially you could kind of look to, to, to replace some of that higher cost funding. Robert Wahlman A few other facts about the other $80 million that we can call today, it carries about the same average interest rate, about 5.6%. And the eligible to call today, we will probably do them in two buckets. We just do not want to be doing everything at one point in time. And one bucket will probably go out in November, and one in December unless we choose to change the timing depending upon what market circumstances are at that point in time. Andrew Terrell Got it. Okay. That is helpful. And then, you know, I am looking at the, the average balance of the HFS loans this quarter and this is a point we have talked about some, in the past, the average balance really stepped up quite a lot this quarter. And just curious, you know, if that is intentional, you are increasing kind of hold times on loans, whether, you know, it is related to some of the new partner launches that contribute to the origination increase this quarter. And then just kind of overall, you know, should we expect just like the $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 is 70 kind of the new average balance. We should think about, James Noone Yeah. As far as the HFS balance, Andrew, you know, that is mostly a derivative of the origination volume in the quarter. I would go back to the comments there, you know, we are optimistic. We did see another step up in kind of baseline originations from legacy programs, but there is also some seasonal, you know, factor with the student loan program and the two new partners. I think we talked about, in our prepared remarks, that about a third of the incremental quarter, over quarter change in origination was from the new programs. And to kind of help with your modeling, you know, earnest will still generate originations in Q4. They are just not going to be at the same level as Q3 since that is the start of the school year. And that is really the key point that we wanted to highlight. Andrew Terrell Got it. Okay. So maybe some moderation there just predicated around the kind of tracking of the loan originations, correct? Okay. Got it. You know, I wanted to ask on the fee income side that the change in fair value and investment in BFG. It has been negative past few quarters; I am just curious what the kind of current baseline valuation is, or the value of your investment is. And you know, what should we expect continued? I get, they can kind of fluctuate some, but, you know, it seems like it has been a drag on the fees every quarter this year. So, any kind of updated expectations there. Robert Wahlman Well, a significant amount of that program or the revenue that they generate relates to the generation of SBA loans and the fees that are paid the origination, generation of those SBA loans. And it has been a slower market, for the SBA loan so that the revenues that they have generated has been running a little bit behind what they had generated in past years and a little bit below budgeted expectation. And it is the revenue generation, that is the driver to the valuation. And then, but we are seeing signs of SBA lending picking up. While it has been negative last few quarters, 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. Andrew Terrell Yeah. Okay. Makes sense. The expense side of the house. You know, I think it was, it was pretty impressive the the moderation expense growth even acknowledging the, you know, the one time incentive accrual catch up this quarter. I think if you back that out, obviously an even lower level of expense growth this quarter. With that in mind, like if I am just going back to some of your comments in the prepared to marks about, you know, continued declines in the in the pace of operating expense growth. I guess if we are to normalize, 400 grand out of the run rate in the fourth quarter. It seems like you have got a decent shot at, only expenses flat if the kind of core rate of reinvestment is also slowing. Is that an unfair, assumption going into the fourth quarter or should we expect expenses to continue to build off this Q3 base? Robert Wahlman Well, and, during the second quarter call, what we said to anticipate for the third quarter is about half the growth rate 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. And so that would leave us with a little bit of growth, not flat but a little bit of growth in Q4. You know, so, so I do not think, I mean, I guess is what you choose to model. But I think no increase in expenses might be a little bit aggressive. Andrew Terrell Okay. Got it. I appreciate it. Thank you, guys, for taking the questions. I will step back. Operator Thank you. If there is anyone that would like to ask a question (Operator Instructions) Okay? Does not look like we have any more questions at this time, I would like to turn the floor back to Juan Arias for any further remarks. Juan Arias Thanks operator, we did receive a few questions via email, so I will just read those out. Can you provide us with some detail on the potential increase in the amount of NPL for 4Q 2024? James Noone Yeah. Hey Juren, this is James. You know, aside from the high-rate environment where we would point to as far as NPL balances in the portfolio is, you know, there is not really, there is no broad-based areas of stress in the portfolio. This is mostly lingering stress from the higher rates. If you look at the quarter over quarter uptick, an unguaranteed balance of NPLs, those are modest moving from 11.9 to 12.8. And then if you look at the NCO, you know, those are relatively flat year over year. But, you know, in addressing your question on outlook, what you will see is about $9 million, 30 plus day delinquencies for SBA coming through on the call report and I would say something around $10 million total is what you could expect to migrate into NPL in the fourth quarter. You know, this is in line with our expectations and, you know, prior comments about sporadic pickups and NPL due to the higher rates. And as rates have now started to decline, you know, we are optimistic, this may start to provide some relief to borrowers. Juan Arias Great. A couple more questions via email. What is the opportunity to cross sell different product offerings to new and existing partners? Giving you expanded product platform? James Noone Sure, I can take that one. Yeah, we are really excited about the multi-product platform, you know, we now have lending payments and cards, and we have got a lot of discussions with both new and existing partners. And most of these are really reverse inquiries coming in. It is something that we are very happy to see continue to build on, you know, our leadership position in the industry. It is also the rationale for the investments that we made. It is really to expand our product set, increase the stickiness of the relationship and ultimately increase revenue. Juan Arias And the last question that came in, you have accomplished quite a bit in 2024. How do you feel about 2025? And what should we expect to see from FinWise? Kent Landvatter Yeah, I'll take that one. We are very proud of what we have accomplished in 2024. We have done everything we said we did a lot of it ahead of schedule. But importantly, that leads to a very strong foundation for 2025. For 2025, we expect to start some of the benefits from the initiatives including now a stronger multi-product platform which we, you know, originally set out to diversify and stable revenue stream. So we are very excited about what we have created and the foundation is created for 2025. Juan Arias Thanks operator. There are no more questions. Operator Okay. Thank you and thank you for today's participants. This does conclude today's teleconference. You may disconnect your lines at this time. View Comments Terms and Privacy Policy Privacy Dashboard Recommended Stories
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