Finwise Bancorp Q1 FY2025 earnings call

• FinWise model remained resilient in Q1 amidst uncertain macro environment. - Loans originated ~$1.3B, solid asset growth, credit quality improved with NPL and net charge-offs declining. - Tangible book value per share increased to $13.42. - Well capitalized with tangible shareholders equity to assets ratio 22%. - Announced new strategic program agreement with Bakkt. - Migrating loan portfolio to lower risk profile while growing profitably. - Credit enhanced balance sheet program expected to be meaningful contributor in 2025 with growth in second half.

Loans originated totaled approximately $1.3 billion. Net income for the first quarter was $3.2 million or $0.23 per diluted common share. Net interest income was $14.3 million versus the prior quarter's $15.5 million. Fee income was $7.8 million in the quarter compared to $5.6 million in the prior quarter. Tangible book value per common share ended the quarter at $13.42. The tangible shareholders equity to assets ratio was 22% down from 23.3% at year-end 2024. Average loan balances totaled $565 million for the quarter compared to $522 million in the prior quarter. Average interest bearing deposits were $430 million, compared to $355 million in the prior quarter.

• Expect gradual progression in growth in 2025 driven by originations from existing and new programs. - Credit enhanced balance sheet program, including extended held-for-sale product, expected to be meaningful contributor in 2025 with most growth in second half. - Target credit enhanced balances to increase by $50 million to $100 million by year-end 2025.

• Macro environment uncertainty could impact origination volumes. - Potential credit quality risks despite current improvements. - Fluctuations in interest rates and their impact on net interest margin.

Q: Hey, good afternoon, everyone. Wanted to start on the expense run rate. It seems like despite possible easing of regulatory levels that the fintech space people continue to spend money and just wanted to get a sense of if the build rate may have changed at all in terms of thinking about what you have to do with expense levels for either technology or people or back office from here.

A: Good afternoon. Thanks for your question. Yes, we saw -- well we're coming in right now at about a 65% efficiency ratio, 64.8% which is relatively flat to what it was last period. From our perspective, the build that we had in terms of the BIN sponsorship and the payments business are substantially complete. We will continue to see some additional expenses. Our expenses in the period came from really in compensation related to FICA income taxes and the fact that the -- we didn't have to pay FICA income tax for those people that had already -- compensation already exceeded $168,600 and we didn't have that in the fourth quarter and yet that clock restarts this quarter. And then we also had just a normal fluctuation, some cleanup of accruals in Q4 that came through this year. So I think that we are -- as we said in the past, we're expecting our expenses to be relatively flat and increase as we see revenues increase.

Q: So kind of starting off here, sorry if I missed this, but what were the credit enhanced loan balances exiting the quarter? And then can you reach that $50 million to $100 million year-end target with your current partners and kind of tack it onto that? How long will it take for Bakkt to be able to generate or begin to generate credit enhanced loans?

A: I can take the first two, Joe. This is Jim and I'll let Bob take the balance figure. So how quickly -- I think the first question was how quickly can we get to that guidance of $50 million to $100 million with the existing partners? Yes, we absolutely can. As far as, how quickly Bakkt specifically scales up, I would say that that's more of a, all of our programs, it typically takes one to two quarters of after we've launched them and made the announcement before meaningful volumes start coming through. So how Bakkt plays into that $50 million to $100 million guidance, I would just say that that's a back end number. Bakkt is probably scaling up more in Q4 with us, but we do have other partners that we expect to contribute to that $50 million to $100 million balance by the end of the year. And then Bob, I don't know if you want to touch on what the balance was.

Q: Maybe just to start on margin, specifically the held-for-sale yields, thank you for calling out the -- I think it was $0.5 million impact from -- it sounds like more seasonal drop in originations from a few partners. Does that come back in the second quarter? And then there's I think you called out $300,000 or so, outside of that it was kind of a net yield impact from, sounds like lower rates somewhere, but higher volumes. Can you just explain what drove the rest of the delta there? We're seeing in the drop in HFS yields?

A: Certainly. So in regards to the expectations as to how the held-for-sale for those three higher yielding partners will behave here as we move forward through the second quarter of the year. I would expect roughly two quarters -- two-thirds, I'm sorry to three quarters of that to come back during the second quarter and then the remainder to ramp up during the third and the fourth quarter. As it relates to the other activity that drove that, that moved that NIM down, there was in the investment -- in the healthcare investment portfolio, we have a significant part of the Federal Reserve, significant part of SD -- excuse me, I'm sorry, the small business lending. The SBA loans are largely variable rate and the Federal Reserve dropped 50 basis points during the Q4 and those re-priced at the beginning of each quarter. So we had that flow through during the entire quarter which accounted for a significant piece of it. And then there was a reduction in yield related to our strategy to diversify a loan portfolio with the lower risk, lower yielding loans. And you see that happen particularly as it related to the owner occupied commercial real estate and the lease portfolio and the held-for-investment portfolio. And then also there was the effect in the held-for-sale portfolio of the program that we brought on, which was the extended held-for-sale program that also came in at a lower rate and diluted that.