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spk09: Greetings. Welcome to the FinWISE Bancorp First Quarter 2022 Earnings Conference Call. At this time, all participants are in a 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. Please note this conference is being recorded. I will now turn the conference over to your host.
spk05: Thank you, operator. Good afternoon and welcome to Finwise Bankrupt's first quarter 2022 earnings call. The earnings press release is available on the investor relations section of the company's website at investors.finwisebankrupt.com. I would like to remind you that certain statements made in the course of this call are not based on historical information and may constitute forward-looking statements covered by the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements are based on management's current expectations and beliefs and are subject to a number of trends and uncertainties that could cause actual results to differ materially from those described in the forward-looking statements. I refer you to the company's filings made with the SEC, including its earnings press release issued earlier today. for a more detailed discussion of the risks and factors that could cause actual results to differ materially from those expressed or implied in any forward-looking statements made today. The company undertakes no duty to update any forward-looking statements that may be made during the course of this call. Additionally, certain non-GAAP financial measures will be discussed on this conference call. Our presentation of this information is not intended to be considered in isolation or as a substitute for the 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. Posting the call today are Mr. Kent Landvatter, CEO and President of FinWise Bancorp, and Mr. Javis Jacobson, Chief Financial Officer of FinWise Bancorp. With that, I will turn the call over to Mr. Landvatter.
spk06: Good afternoon, everyone. FinWise delivered solid results for the first quarter of 2022, including net income of $10.3 million, or 76 cents per diluted share, along with industry-leading profitability. Our strong financial performance during the quarter was driven by robust loan originations of $2.5 billion, combined with solid operating efficiency. We also had an increase in non-interest income due to higher strategic program fees, which are generated when we originate loans, as well as higher gain on sale of loans resulting from a higher number of loans sold. Credit quality also remained very strong as non-performing loans were 0.2% of total loans at the end of the first quarter, unchanged compared to the previous quarter. Lastly, with a bank leverage ratio of 19.3%, we remained significantly above well-capitalized guidelines. Overall, these impressive results continue to validate our differentiated FinTech lending model and value proposition. I'd like to take a few minutes to illustrate several aspects of our business model, which should add clarity in understanding our credit risk profile. A key driver to ongoing loan growth for FinWISE lies in accelerating volumes from existing strategic partners, sourcing of new loan origination platforms, as well as our exceptional ability to efficiently scale through our robust platform. Specifically, Of the $272.6 million in total loans in March 31, 2022, Strategic Program Hailed for Sale loans comprised $73.8 million, or 27.1% of our total loans. We generally retain Strategic Program loans for several days after we originate them, after which we may sell the loan receivables or hold loans to the Strategic Program platform or other investors. The terms governing our strategic programs generally require each strategic program platform to establish a reserve account with the bank, which partially protects the bank in the event a purchaser of loans receivable originated through our strategic programs cannot meet its contractual obligation to purchase the loans we choose not to retain. Further, of the $272.6 million in total loans at March 31, 2022, The guaranteed portion of the SBA 7 loans comprised $53.2 million or 19.5% of our total loans. The bank typically sells the SBA guaranteed portion of the loans we originate at a premium in the secondary market while retaining all servicing rights on the loan sold and the entire unguaranteed portion. The strategic program held for investment loan balance at March 31, was $28.0 million, or 10.3% of total period and loans receivable. Beginning in 2018, we began selectively retaining a portion of the loans or receivables for investment based on our analytics platform and the capacity and appetite of the bank. Importantly, while constituting only 10.3% of period and loans receivable at March 31, 2022, These strategic programs provide us with access to strong risk-adjusted yields on held for investment loans, for which we are also well-reserved. Moreover, strategic programs held for investment loans are about evenly distributed between loans with annual interest rates above and below 36% at March 31, 2022. Overall, while we acknowledge a higher level of economic uncertainty and we can't control macroeconomic factories, we remain focused on what we can control and believe that our business model and prudent risk management should allow us to sustain our strengths through different cycles. With that, I would now like to turn the call over to our Chief Financial Officer, Javis Jacobson, who will discuss our financial results for the quarter in more detail.
spk03: Thank you, Kent. Let's get right into the financial results for the first quarter. We continued to grow loan originations in Q1, even factoring in typical origination seasonality, and delivered strong net income of $10.3 million, or $0.76 per diluted common share. Specifically, loan originations totaled $2.5 billion during the quarter, up 9% compared to the prior quarter and more than doubled from Q1 2021. We remind that historically our loan origination activity tends to follow seasonal industry patterns. 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. Average loan balances comprising held for sale and held for investment loans were 296.7 million during Q1, an increase of 3.5% from 286.8 million in Q4 2021, and a 14.5% increase from 259.1 million in Q1 2021. Total average interest earning assets grew 5.5% to 387.8 million during Q1, compared to 367.6 million for Q4 2021 and increased 26% from $307.7 million for Q1 2021. Average interest-bearing deposits declined to $132.5 million during Q1 compared to $148 million during Q4 2021 and increased 62.1% compared to $81.8 million during Q1 2021. The decline as compared to Q4 2021 was driven mainly by a decrease in certificates of deposits due to the maturity of brokered CDs. Compared to Q1 2021, the substantial increase in average deposits can be mainly attributed to a step up in both money market accounts and certificate of deposits. Our cost of funding remained relatively low during Q1. The rate on average interest-bearing liabilities increased four basis points compared to Q4 2021 to 79 basis points and was down nine basis points from 88 basis points during Q1 2021. Net interest margin for Q1 was 14.5%, representing a 210 basis point decline from 16.6% in Q4 2021. and up substantially compared to 11% in Q1 2021. Importantly, our net interest margin is a function of the underlying mix and type of loans on our balance sheet. During Q1 2022 and the previous quarter, we continued to shift the underlying loan mix by increasing our balances of held for sale and held for investment loans with lower yields from our strategic programs. the net interest margin increase from Q1 2021 was primarily due to a substantial reduction in average PPP loans with a notional interest rate of 1% outstanding. Overall, our primary focus remains on generating sustainable net interest income growth over the long term, driven by ongoing growth in originations. Additionally, higher origination levels generally drive rising strategic program fees, which would enhance our non-interest income, a key differentiating factor of our revenue model. Now turning to the income statement. Net income for Q1 was $10.3 million compared to $10.1 million for Q4 2021 and nearly doubled at $5.3 million for Q1 2021. Compared to Q4 2021, growth was primarily driven by a step up in non-interest income from gain on sale of SBA 7A loans and higher strategic program fees, partially offset by a modest increase in non-interest expense. Compared to Q1 2021, net income growth was primarily driven by an increase in net interest income and non-interest income, partially offset by higher non-interest expenses and provision for loan loss. Net interest income for Q1 was $14.1 million compared to $15.3 million for the previous quarter and $8.4 million for Q1 2021. The modest decline compared to Q4 2021 reflects a change in the mix of held-for-sale loans, reflecting higher average balances from strategic programs with lower-yielding loans. Compared to Q1 2021, the main driver of growth in net interest income was an increase in average interest-earning assets due to higher loan balances resulting from significant loan growth. Non-interest income increased 28% to $11.7 million in Q1 compared to the previous quarter and contributed substantially to our results. The primary drivers include higher gain on sale of loans due to an increase in the number of SBA 7A loans sold as well as solid strategic program fees of $6.6 million, which compares to $6.1 million in Q4 2021 and $3 million in Q1 2021. Partially offsetting the increase compared to Q4 2021 was a decrease in the change in fair value on investment in business funding group LLC, or BFG, due primarily to the softening of comparable company values used in determining BFG fair value. We continue to expect general market movements to drive quarterly fluctuations in fair value of BFG. The growth in strategic program fees over both prior periods was mainly driven by the increase in loan origination volumes, which, as I noted earlier, is an important differentiating feature of our revenue model. Non-interest expense during Q1 was $9 million compared to $8.4 million in Q4 2021, and up from $6.7 million during Q1 2021. The increase over both prior periods continues to be driven by higher employee headcount related to an increase in strategic program loan volume, the expansion of the company's IT and security division, and contractual bonuses paid relating to the expansion of the strategic programs, partially offset by the minor recovery and lack of additional impairment on SBA servicing asset. Positively, we continue to drive strong operating efficiency during Q1 with an efficiency ratio of 35.1 as compared to 34.3% for Q4 2021 and 45.9% for Q1 2021. As we have previously noted, we expect to make further investments in our technology platform and our workforce, which could result in incremental headcount growth. Additionally, we expect to continue to methodically invest to expand our strategic programs to continue to grow our market share. Now turning to asset quality. We remain pleased with the continued strength of our portfolio with non-performing loans representing 0.2% of total loans compared to 0.2% for the previous quarter and 0.3% for Q1 2021. The provision for loan losses was 2.9 million for Q1 compared to 2.5 million for Q4 2021 and 0.6 million for Q1 2021. The modest increase in the provision compared to the previous quarter was mainly driven by loan growth on unguaranteed loans held for investment and an increase in net charge-offs. The higher provision compared to Q1 2021 was driven by substantial loan growth and an increase in net charge-offs. During Q1, net charge-offs were $2.8 million compared to $2.3 million during Q4 2021 and $0.6 million during Q1 2021. Our net charge-off rate as a percentage of average loans for Q1 was 3.8% compared to 3.2% for Q4 2021 and 1% for Q1 2021. The increase in charge-offs during Q1 compared to Q4 2021 was mainly driven by normalization of credit losses and by growth in the company's health for investment balances. We believe that we are well-reserved with an allowance as a percentage of total loans, less PPP loans, of 3.7% for Q1, which compares to 3.7% for Q4 2021 and 3.4% for Q1 2021. As we have previously noted, our reserve levels for these strategic programs are set according to high water charge-off rates plus additional environmental factors. Moreover, the performance of these portfolios continues to be in line with management expectations. And while we expect credit quality to gradually normalize, we remain confident in our overall portfolio underwriting. With respect to capital levels, with a 19.3% leverage ratio, the bank remains significantly above the 9% well-capitalized requirement. Lastly, our effective tax rate was approximately 25.4% for Q1 compared to 25.3% for Q4 2021 and 26.7% for Q1 2021. With that, I would like to open up the call for Q&A.
spk09: And at this time, we will be conducting a question and answer session. If you would like to ask a question, please press star 1 on your telephone keypad. A confirmation tone will indicate your line is in the question queue. You may press star 2 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. And our first question comes from the line of Michael Hultquist with Piper Sandler. Please proceed with your question.
spk10: Hey, good afternoon. If we could start with origination volume this quarter, is there anything that you can point to to the increase in overall activity despite the first half of the year typically being softer than others?
spk03: Yeah, Michael, this is Javis. We attribute the quarter's solid growth, despite the effects of seasonality, significant amount of resources that we've put in to work over the past few years in building a platform to allow us to scale with both existing and future programs. Just to remind you, there is a normal industry seasonality in our originations. Does that help, Michael?
spk10: Yeah, that's helpful. And then I guess, you know, the next question would be looking ahead, you know, this quarter, is there still going to be some softening expected, or is it just going to depend on underlying strategic program activity?
spk03: Yeah, Michael, I think that it will, as always, depend on the underlying activity from the programs.
spk10: Got it. That's helpful. And then if we could switch over to loans here. Obviously, a strong quarter for Help for Investment and Strategic Program loans. Can you provide some color on what you retain this quarter versus subprime or rates above 36%? Travis, do you want to start?
spk05: Maybe Jim?
spk03: We're currently retaining from four of our 11 strategic partners. And so, you know, the mix between the two on the health for investment between the above 36 and below 36% is about even. Does that help, Michael? Mm-hmm.
spk10: And then, you know, sticking here on the SBA portfolio, I guess, you know, what caused these loans to decline? Were they refinanced, financed away from other lenders or more related to the sales that drove the big increase on gain on sale revenue?
spk03: It's the sales that drove that. Maybe give a little color on that, Jim. Jim, do you have color to add?
spk04: No, I think what you said is accurate.
spk01: Yeah. Okay, great. That's all from me. I'll step back. Thank you. Thanks, Michael.
spk09: Our next question comes from the line of Samuel Varga with Stevens. Please proceed with your question.
spk02: Good afternoon. Hey, Sam. Hey, Samuel. I'm hoping to follow up on the origination question. Do you happen to have a breakdown of that $2.5 billion total volume between SB and then the below and above 36%?
spk03: But for competitive reasons, Samuel, we are not disclosing the breakout this time.
spk02: Okay, understood. No problem. And then on PPP, could you give what the fees were for the quarter?
spk03: Minimal. Okay. It wouldn't even round up to be noticeable.
spk02: Understood. Another question on yield. So, you noted that the mix is changing a little bit, skewing towards the below 36. So, I wanted to ask on the above 36, has there been any sort of material change in the yield profile?
spk03: The yield profile isn't changing. It's just the mix that's changing.
spk02: Okay. Okay, great. Then you noted that you currently have a lot of partners. I wanted to ask if there's any sort of acceleration or deceleration in the annual goal of adding a couple partners every year. Is that shaping up to be the case this year?
spk07: We're not seeing any deceleration in wanting to add partners. We continue on the same cadence that we discussed.
spk02: Okay, great. And then I just have a couple more. With regards to Upstart, do you expect to participate in any sort of new personal loan categories that they might expand into?
spk07: David, are you on the line?
spk08: Yeah, great question. I mean, just like with all our strategic programs, anytime they're looking to create a new product, we obviously engage with them and see if we could be of assistance to both help them and obviously help the consumer.
spk02: Okay, thank you. And then on credit, I appreciate the commentary that you gave. I guess I wanted to ask, especially obviously on the subprime and the things with the securitization data, kind of clear at this point of the trend, do you see any sort of, I guess, There's clearly a change, but is there a change in the velocity of that change that you're seeing?
spk04: Sure. Thanks, Samuel. This is Jim Noon, the Chief Credit Officer. You know, it varies by program. One thing I would point to I think also follows up on Michael's previous question about the subprime HFI portfolio is, you know, our internal policies limit, you know, our exposure of greater than 36%. a strategic program held for investment portfolio to not more than 10% of the total portfolio. So we still have an ability to move this up over time. But the mix does fluctuate some quarter over quarter, and it's not a straight line where the 36% plus gets the 10% of the total portfolio. Because we manage exposure in that portfolio in conjunction with the risks and yields available in the other programs. So hopefully that gives you a little bit more information for your model.
spk02: Yeah, that's great. Thank you, Jim. And then on the SBA loan sales, I just want to get a sense for, I guess, what are the puts and takes that you consider when you have the chance to sell some of that origination and kind of generate the fee income instead of the interest income on that? I guess, what's your thought process around that in general?
spk03: Yes, Samuel, our strategy hasn't changed. We continue to sell all the loans eventually. So that's really the thinking. It's a rare loan that we keep, but we do keep some.
spk02: Okay, okay, thank you. I just have two more. I wanted to ask, again, specifically regarding Upstart, I understand that there's a lot of room for growth for you guys with them. So there's no limitation even if some of the overall pie of upstart kind of slows to grow, I guess. So I wanted to ask, is there any sort of indication from them or any, you know, strategic partners in general of whether the cadence of their growth is slowing or tapering or is it still just kind of up and to the right?
spk08: David? Yeah, I mean, most of our strategic programs are obviously very aware of what's going on in the market. But right now, I mean, most of them are focusing on new verticals where they could add additional value to their membership. So, you know, again, we're feeling really good with our existing programs and just overall with the level of potential strategic relationships we have coming on.
spk02: Understood. Thank you, David. And then my last question. We noticed that in the latest Upstart Securitization Trust, there was a note in there about loan modification policies. And so I wanted to ask, I guess, what's the dollar value maybe, or just in general, what segment of your book is impacted by that? by this loosening of credit standards? And I guess, is that in any way going to potentially impact fee income or net interest income moving forward?
spk04: Yeah. So, Samuel, I would just point you to, like, if you're looking for the number as it relates to the impact on book, if you go back to the 10.3% of the strategic programs held for investment, it's 10.3% of the total portfolio. And then that's fairly evenly split between the 36% greater than and less than 36% programs. But then the second part to the answer is really that when we look at retention programs, if you go back to like our capital raise process and I think some of the things we talked about last quarter, you know, we have a framework for, you know, retained programs that we're going to retain with and products that we're going to retain with. So just simply because one program, there might be underwriting changes in one program, doesn't mean that that's going to flow through to our retention balances. So we look at a framework that has four pillars. We require maturity of the program and the product at the bank, satisfactory compliance review cycle, a depth of performance data, and an ability to price appropriate to the credit risk. So hopefully that answers your question.
spk02: Yes, I appreciate that, Collin, and thanks for answering all these questions I had. I appreciate it very much. No problem.
spk09: And just double-checking to see if there are any more questions. And if there are any more questions, it looks like we have reached the end of the question and answer session. And this also concludes today's conference, in which you may disconnect your lines at this time. Thank you for your participation.
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