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spk02: Greetings and welcome to Finvise Bancorp fourth quarter and full year 2021 earnings conference call. At this time, all participants are in listen-only mode. A question and answer session will follow the formal presentation. If anyone should require operator assistance during the conference, please press star zero on your telephone keypad. As a reminder, this conference is being recorded. I'd now like to turn the conference over to your host, Juan Arias, SVP in Investor Relations at ICR. Please go ahead.
spk01: Thank you, Operator. Good afternoon, and welcome to Finwise Bank Group's earnings call. The company released its financial results for the quarter-ended December 31, 2021. The earnings press release is available on the Investor Relations section of the company's website at investors.finwisebankgroup.com. I would like to remind everyone 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 for a more detailed discussion of the risk and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements 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 financial information presented in accordance with GAAP. Reconciliation to 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.sec.gov. Hosting the call today are Mr. Kent Landvater, CEO and President of ThinWise Bancorp, and Mr. Javis Jacobson, Chief Financial Officer of ThinWise Bancorp. With that, I will turn the call over to Mr. Landbatter.
spk07: Good afternoon, everyone, and thank you for joining us on our first earnings call as a public company. I also want to thank you for your interest in and support of FinWise Bancorp. On today's call, I will provide an update on our business developments, the current operating environment, and share some perspective on the strength of our business model. Our Chief Financial Officer, Javis Jacobson, We'll then walk you through our financial results in more detail. We'll then open up the call for questions. Also joining us on the call today are Jim Noon, our Chief Credit Officer, and Don Cannon, our Chief Operating Officer. We executed well in the key facets of our business in 2021, including the completion of our company's IPO, which will help us continue the build-out of our operating infrastructure and fund future growth initiatives. We also delivered another year of exceptionally profitable growth, highlighted by a meaningful increase in loan originations, robust operating efficiency, and industry-leading returns. All of this is enabled by our strategic relationships with third-party loan origination platforms, our Finview analytics platform, our relatively low-cost core deposits, which have been highly reliable, and superior execution by our seasoned team members. Before I provide some financial highlights, I want to briefly speak to the FinWISE story to provide some color on the strengths of the company we built, how we provide meaningful value to our customers, and our strategy to maintain our industry-leading performance going forward. Ten years ago, when I was approached about becoming the president of the bank, I quickly recognized a unique opportunity. Finwise had a powerful charter that can reach broader markets and provide access to stable, low-cost funding. Plus, the platform was flexible and wasn't saddled with legacy branch networks or outdated IT systems that could limit innovation. So we set out to build an innovative, technology-focused bank that would stay one step ahead of evolving customer expectations. Innovation is key to who we are and is ingrained in our mindset. We have implemented a strategy that has resulted in a highly profitable fintech lending model with nationwide reach and compelling growth rates. Our evolving data acquisition and analytics platform, fed by multiple loan product types, allows us to capture deep and broad data sets, which may be used for, among other things, building diverse and scalable revenue streams. We have four primary business lines, strategic programs, which is where we form relationships with FinTechs to help us originate loans, which we may then sell, either a portion of the loan or the whole loan, to an investor as identified by us or our strategic program service providers. The other three primary lines of business include SBA 7A lending, residential and commercial real estate lending, and point-of-sale lending, which is where we offer loans to finance the purchase of retail goods and services. These four business lines provide us with diversity across credit classes and income streams. I also wanted to briefly call your attention to how we stack up against traditional banks and non-bank financial service companies. The key takeaway here is that FinWise is essentially a fintech wrapped in a bank charter. We are branch-like, not branchless. Our one branch in Sandy, Utah provides us with a meaningful source of deposits and profitable products. Our funding is generally lower cost, relatively stable, and does not rely directly on capital markets. Technology plays a significant part in defining who we are, and we use it to inform decisions, manage risk, and enhance the customer experience. Overall, our lending products span the credit spectrum from prime to non-prime. The products we offer are diverse and federally regulated, and they range from deposit to loan products and services, and provide millions of dollars in loans to small business owners. We also take pride in our strategic relationships that provide a wide range of loans and support the call for banks to expand access to credit for hardworking American families at have limited access to credit. With these products, borrowers are offered an alternative to significantly inferior, less regulated, and substantially more expensive financing options. Our hope is that these loan products not only address short-term financial needs but also provide our customers with the opportunity to lower their cost of credit. We also have a very rigorous process for selecting strategic program service providers, and we seek to work with companies that have strong values and that also follow strict regulatory guidelines. Lastly, we follow a very disciplined internal underwriting infrastructure designed to prudently manage credit risk. So with that, let me give you a brief summary of our financial highlights. For the full year of 2021, we generated $31.6 million in net income, a meaningful increase versus the full year of 2020. For the fourth quarter of 2021, net income was $10.1 million, a substantial increase from $8.4 million in the third quarter of 2021, and more than double the net income from the fourth quarter of 2020. Growth over both of these periods was powered mainly by solid net interest income driven by substantial pickup in loan originations, as well as solid non-interest income reflecting significant strategic program fees. Lastly, we maintained robust profitability measures. In summary, I am tremendously proud of what we have created at FinWise Bancorp. We believe our value proposition has clearly resonated in the market. bolstered by our team's talent, as well as our third-party relationships, without whom none of this would be possible. I'm very excited for our future and our ability to continue to deliver long-term value for our customers, third-party relationships, and shareholders. With that, I now would like to turn the call over to our Chief Financial Officer, Javis Jacobson, who will discuss our financial operations in more detail. Javis?
spk04: Thank you and good afternoon. As Kent pointed out, our company's results by key measures were solid in both the fourth quarter and full year 2021. For the full year 2021, we grew our balance sheet at a very healthy clip and delivered meaningful net income of $31.6 million, or $3.27 per diluted common share. We also posted solid profitability as we generated return on average assets of 9.1%, and return on average equity of 39.2% for the year ended December 31st, 2021. Now turning to the fourth quarter of 2021, let's start with loan originations and the balance sheet. Loan originations totaled $2.3 billion during the fourth quarter of 2021, up 26.4% from $1.8 billion in the third quarter of 2021, and more than doubled the fourth quarter of 2020. Average loan balances comprising held for sale and held for investment loans were $286.8 million during the fourth quarter of 2021, an increase of 20.3% from $238.4 million in the third quarter of 2021, and a 5.8% increase from $270.9 million in the fourth quarter of 2020. Total average interest earning assets grew 24.9% to $367.6 million during the fourth quarter of 2021 compared to $294.3 million for the third quarter of 2021 and increased 17.5% from $313 million for the fourth quarter of 2020. Average total deposits continued to grow and reached $148 million during the fourth quarter of 2021, up 31.9% compared to the third quarter of 2021, driven mainly by a pickup in demand deposits and certificates of deposit. Furthermore, our cost of funds decreased with the rate on average interest bearing liabilities declining 10 basis points from 90 basis points during the third quarter of 2021, to 80 basis points during the fourth quarter of 2021. Net interest margin from the fourth quarter of 2021 was 16.6%, representing a decline of 170 basis points from 18.3% for the third quarter of 2021 and up substantially compared to 10.4% in the fourth quarter of 2020. The decline from the third quarter of 2021 was primarily due to significantly higher average held for sale loan balances from strategic programs with lower yielding loans. Additionally, there was a change in the underlying mix of held for investment loans driven primarily by an increase in SBA 7A loans. These factors were partially offset by lower rates on our deposit portfolio. The increase from the fourth quarter of 2020 was primarily due to the substantial reduction in average PPP loans with a notional interest rate of 1% outstanding. One additional item we wanted to provide perspective on is loan origination seasonality. Historically, our loan origination activity tends to follow seasonal industry patterns. For example, loan originations and balances tend to decelerate in the first and second quarters of the year and rebound in the third and fourth quarters of the year, primarily due to seasonality of income tax refunds and borrower spending patterns. Let me now turn to the income statement. Net income for the fourth quarter of 2021 was $10.1 million, or a 19.8% increase over the third quarter of 2021. and more than double the $4.6 million for the fourth quarter of 2020. The growth over both of these prior periods reflected a substantial increase in net interest income reflecting higher loan balances. As noted, we had solid growth in net interest income, which increased 13.4% to $15.3 million for the fourth quarter of 2021, from $13.5 million for the third quarter of 2021. and increased 87.1% from 8.2 million for the fourth quarter of 2020. The main driver of this growth in net interest income over both prior periods was an increase in average interest earning assets due to higher loan balances resulting from significant loan growth. Non-interest income also contributed to our solid results during the fourth quarter of 2021. mainly driven by a pickup in strategic program fees, which increased 22.1% to $6.1 million from $5 million in the third quarter of 2021 and was up significantly versus $2.7 million in the fourth quarter of 2020. The growth in our strategic program fees over both prior periods was mainly driven by the increase in loan origination volume. The increase in non-interest income in the fourth quarter of 2021 compared to the fourth quarter of 2020 was also due to more SBA 7A loans being sold during the fourth quarter of 2021 versus the fourth quarter of 2020. Additionally, during the fourth quarter of 2021, our non-interest income was positively impacted by an increase in the fair value on investment in business funding group LLC, BFG. the SBA referral relationship that we own 10% of. This change was primarily the result of an increase in BFG's profitability and cash position during the fourth quarter of 2021 compared to both the third quarter of 2021 and the fourth quarter of 2020. Partially offsetting all of these increases in non-interest income was a decline on gain on sale of loans during the fourth quarter of 2021 from the third quarter of 2021. which was driven primarily by the decrease in the number of SBA 7A loans sold during the fourth quarter of 2021. Non-interest expense during the fourth quarter of 2021 was $8.4 million compared to $7.4 million in the third quarter of 2021 and was up from $5.7 million during the fourth quarter of 2020. The increase over both prior periods is mainly a result of our growth as we added to our employee headcount primarily due to a pickup in strategic program loan volume and also paid contractual bonuses relating to the strategic programs. We also expanded and modernized our operational infrastructure and implemented our plan to build an efficient technology-driven banking operation with a significant capacity for growth. Positively, our efficiency ratio has improved since 2020 as both net interest income and non-interest income have increased at a faster rate than our expenses. During the fourth quarter of 2021, we posted an efficiency ratio of 34.3% as compared to 33.7% for the third quarter of 2021 and 48.8% for the fourth quarter of 2020. Now let's pivot to asset quality, which remains strong with non-performing loans representing 0.2% of total loans compared to 0.3% for both the third quarter of 2021 and the fourth quarter of 2020. The provision for loan losses was $2.5 million for the fourth quarter of 2021 compared to $3.4 million for the third quarter of 2021. This decrease in the provision from the third quarter of 2021 was mainly driven by a decline in the rate of growth on help for investment loans. Also worth highlighting, during the fourth quarter of 2020, we determined that a provision for loan losses was not needed, as we had previously recorded a higher-than-normal provision to position for the possibility of elevated losses on loans resulting from the pandemic. During the fourth quarter of 2021, the company's net charge-offs were $2.3 million compared to $1 million during the third quarter of 2021, and 0.8 million during the fourth quarter of 2020. The increase over both prior periods was mainly driven by growth in our health for investment balances related to two of our strategic programs. We note that our reserve levels for these programs are set according to high water charge off rates plus additional environmental factors. Additionally, the performance of these portfolios continues to be in line with management expectations, which include a general normalization of consumer credit. Our net charge-off rate as a percentage of average loans for the fourth quarter of 2021 was 3.2% compared to 1.6% for the third quarter of 2021 and 1.2% for the fourth quarter of 2020. Overall, we believe we are well-reserved with an allowance as a percentage of total loans, less Triple P loans, of 3.7% for the fourth quarter of 2021, which compares to 3.9% for the third quarter of 2021 and 4% for the fourth quarter of 2020. In terms of capital levels, with a leverage ratio of 17.7%, the bank remains significantly above the 8.5% well-capitalized requirement as of the end of the fourth quarter of 2021. Lastly, the company's effective tax rate was approximately 25.3% for the fourth quarter of 2021, compared to 24.5% for the third quarter of 2021, and 22.2% for the fourth quarter of 2020. With that, I would now like to open up the call for Q&A. Operator?
spk02: Thank you very much. At this time, we will be conducting our question and answer session. If you would like to ask a question, please press star one on your telephone keypad. Confirmation tone will indicate your line is in the question queue. You may press star two if you would like to remove your question from the queue. For participants using speaker equipment, it may be necessary to pick up your handset before pressing the star keys. One moment, please, while we poll for questions. We have a first question from the lineup. Andrew Lish with Piper Sandler. Please go ahead.
spk06: Hey, good afternoon, everyone. Thanks for taking the questions. Just want to touch base on the loan origination activity. Obviously, very strong here. Sounds like some of that was seasonal, and you expect some of it to maybe trail off going into the first quarter. I guess if you look at what you've seen so far this quarter and some of the trends, where do you think first quarter originations will sort out and how much of the growth in the fourth quarter was seasonal in nature.
spk04: Hey, Andrew, it's Javis. I think I'll take a crack at that one. First of all, I should note that we're not giving forward guidance, so I'm not going to speak necessarily to what we think that the first quarter will look like. But, you know, the bank has spent a significant amount of resources over the past few years to build a platform that will allow us to scale both with existing and future programs, and now we're seeing the results of those investments. And as we mentioned in the prepared remarks, those loan growth trends and origination trends tend to follow seasonal industry patterns.
spk05: Got it. Okay. Very helpful.
spk06: I guess of the $2.3 billion or so, how much of that was SBA versus strategic programs?
spk04: So, again, Leisha, we're not disclosing the breakout, but I think if you look back into the materials that we provided in the S-1, the year-to-date information through 9-30, the ratios are not significantly different.
spk06: Got it. Okay. Very helpful there. And then just on the on-balance sheet loans, notice that the strategic program loans declined in the quarter. Just curious what was the nature behind that. I know there had been some discussion of wanting to increase that portfolio, especially growing the subprime exposure. So just given the strong origination activity, just curious why the portfolio declined a little bit.
spk04: Yeah, if you're looking at the ending balances, Andrew, there was a slight decrease. But if you focus on the average balances in our earnings release, you can see that the held for sale loans are a significant increase on an average basis quarter over quarter. Got it.
spk05: All right. Thanks for taking those questions. I will step back.
spk02: Thank you. To ask a question, ladies and gentlemen, please press star followed by one on your touchstone phone now.
spk03: Again, if you have a question, please press star 1.
spk02: We have a question from the lineup. Andrew Blish with Piper Sandler. Please go ahead.
spk06: All right, thanks. I guess I'll just jump back in here. Just on the expense number for the quarter, I know going through the IPO process, we talked about some costs that we're going to be encouraged for being a publicly traded company. How much of those are in the run rate, or do you expect them to ramp up over a period of time in 22, or do you expect them to just be in the full first quarter run rate?
spk04: Yeah, Drew, I think we probably haven't seen the full ramp up of being a public company just yet. So that's probably the best way I can answer that.
spk06: Got it. And then are you seeing anything just on the notice that charge-offs were a little bit higher and noted that they were related to a couple of strategic programs. For those SBA loans, as you had spoke about during the IPO process, is that where the losses came from? I mean subprime loans, sorry.
spk00: Jim, maybe you could handle that. Sure. Hey, Andrew. The pickup in Q4 net charge-offs was in line with our loss expectations, and the $2.3 million in net charge-offs for Q4 specifically was comprised of $2.2 million, or 96%, from our strategic program held for investment portfolios, and $100,000, or 4%, from our SBA loan portfolio.
spk06: Got it. Okay. Then just on the quality of the originations, have you seen any change in underwriting or not necessarily underwriting, but like borrower metrics with less government stimulus programs out there? Have you seen any change in the quality of customer?
spk00: So I would say the changes to net charge-offs are consistent with the views we mentioned during the recent capital raise process and our provisioning methodology, which includes our expectation of a normalization of credit.
spk05: Okay. That covers it. I will step back. Thanks, guys. Thank you.
spk02: Thank you. Ladies and gentlemen, we have reached the end of the question and answer session, and I'd like to turn the call back to the management for closing remarks. Over to you, gentlemen.
spk07: Yeah, thank you. This is Kent Landvetter, and I just want to thank each of you for joining us today and your interest in FinWise Bancorp, and we look forward to our next earning call.
spk02: Thank you. Ladies and gentlemen, this concludes today's conference. You may disconnect your lines at this time. Thank you for your participation.
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