FinWise Bancorp Q2 FY2025 earnings call

• Kent Landvatter noted the company is executing its strategy, with strong loan originations, solid revenue, and disciplined expense management, leading to increased tangible book per share to $13.51. Stock added to U.S. Small Cap Russell 2000 Index.
• Jim Noone highlighted strong loan originations, including SBA 7(a) growth, credit enhanced balances reaching $12 million by quarter end, and near-term plans tied to market conditions. Credit quality saw provision for credit losses at $4.7 million, net charge-offs at $2.8 million, and NPA migration up to $39.7 million.
• Rob Wahlman discussed financial results: net income of $4.1 million, average interest-bearing deposits up to $494 million, fee income increase driven by credit enhancement and strategic program fees, and efficiency ratio at 59.5%.

During the second quarter, FinWise Bancorp saw strong loan originations totaling $1.5 billion, a 17% quarter-over-quarter increase and 27% year-over-year increase. Key drivers included strategic programs launched late in 2024, seasonal rebounds from higher-yielding partners, and growth from new and existing programs. SBA 7(a) loan originations increased 24% quarter-over-quarter and over 140% year-over-year. Credit enhanced balances ended the quarter at $12 million, with expectations to reach $50 million to $100 million by the end of the fourth quarter. Average loan balances, including held-for-sale and held-for-investment loans, totaled $634 million compared to $565 million in the prior quarter. Net interest income was $14.7 million versus $14.3 million in the prior quarter. Fee income was $10.3 million in the quarter compared to $7.8 million in the prior quarter.

• Growth expected to progress gradually through 2025-2026 from credit enhanced products, existing SP programs, and new programs signed late 2024/early 2025.
• Optimistic about SBA lending with stable environment and healthy demand. Evaluating measured increase in higher-yielding loans (under 10% of portfolio).
• BIN and payment products expected to impact profitability later, with material impact in 2026, potential for 2027 growth with return on average equity rebounding to low-mid teens and return on average assets over 2%.

• NPA migration lumpy, particularly with variable rate SBA loans.
• Market conditions impacting SBA loan sales.
• Uncertainty in macro conditions and demand trends affecting origination volumes.

Q: Can you talk about the relationship between credit enhanced income and balances as the year progresses?

A: Kent Landvatter explained that credit enhanced income reflects the reserve calculated using the same CECL methodology as the regular portfolio, so as balances increase, the fee income will rise. Credit enhancement expense is the excess spread passed to the counterparty.

Q: How is FinWise planning to fund loan growth and what about funding costs?

A: Robert Wahlman said short-term funding is via wholesale CDs, focusing on 1-year CDs. Long-term, payments business could bring lower-cost deposits.

Q: Thoughts on AI impact on the bank?

A: Kent Landvatter mentioned AI used in IT development, fraud protection, and back-office functions like policy comparison for fintech partners.

Q: Health of partners and partner pipeline?

A: James Noone stated partners are healthy with solid origination growth from recent programs, consumer loan demand, and rebound in higher-yielding partners. Pipeline has 4 new programs launched in 2024, targeting 2-3 new lending partners annually, with one new partner announced in May and others expected by year-end.

Q: Thoughts on average held-for-sale loans and credit enhanced targets?

A: Kent Landvatter said average held-for-sale balance is fair, and the $50-100 million credit enhanced target by end of 2025 is still on track as the product has strong demand.

Q: Expenses and operating leverage?

A: Robert Wahlman said Q2 expense increase was from annual reviews and salary adjustments, with no notable investments on the horizon and expected positive operating leverage as revenues increase.