Participants
Kent Landvatter; Chairman of the Board, President, Chief Executive Officer; Finwise Bancorp
James Noone; President, Chief Strategy Officer, Chief Credit Officer of FinWise Bank; Finwise Bancorp
Robert Wahlman; Chief Financial Officer; Finwise Bancorp
Brett Rabatin; Analyst; Hovde Group
Joe Yanchunis; Analyst; Raymond James
Andrew Terrell; Analyst; Stephens Inc
Andrew Liesch; Analyst; Piper Sandler
Presentation
Operator
Greetings. Welcome to FinWise Bancorp's first quarter 2025 earnings conference call. (Operator Instructions) As a reminder, this conference is being recorded. Thank you. You may begin the presentation.
Good afternoon and thank you for joining us today for FinWise Bancorp's first quarter 2025 earnings conference call. Earlier today, we filed our earnings release and investor deck and posted them to our investor website at investors.finwisebancorp.com. Today's conference call is being recorded and webcast on the company's website, investors.finwisebancorp.com. 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, Chairman and CEO; Jim Noone, Bank CEO; and Bob Wahlman, CFO. Kent, please go ahead.
Kent Landvatter
Good afternoon, everyone. The FinWise business model remained resilient in its first quarter, even amidst a more uncertain macro environment. Loans originated totaled approximately $1.3 billion, and we also posted solid asset growth and encouraging credit quality performance as both NPL balances and net charge-offs declined versus the prior quarter. Furthermore, we continue to migrate our loan portfolio to a lower risk profile while still growing profitably and increasing tangible book value. Specifically, our tangible book value per common share ended the quarter at $13.42 versus $13.15 in the prior quarter.
We also remain well capitalized, significantly above regulatory guidelines with a tangible shareholders' equity to assets ratio of 22%, down from 23.3% at year-end 2024. As we have discussed in the past, we expect our capital ratios to decline due to the planned growth in assets. We also remain focused on executing our business strategy, including announcing a new strategic program agreement with fintech Backd subsequent to the end of Q1. As part of our relationship with Backd, FinWise will provide business installment loans to small- and medium-sized businesses, and we will also provide access to our lower-risk credit enhanced balance sheet program. While we will continue to closely monitor the economic environment, we remain very excited about the long-term outlook for our business particularly as our existing and potential strategic partners are enthusiastic about the benefits that our broader banking and payments platform provides them.
For 2025, we continue to look for gradual progression in growth as we move through the year, driven by originations from existing programs as well as incremental growth from programs that were signed late last year and more recently. We also continue to expect our credit enhanced balance sheet program, including a similar extended held-for-sale product to be a meaningful contributor to our earnings in 2025, with most of the growth coming in the second half of the year as we had discussed on our prior earnings call. With that, let me turn the call over to Jim Noone, our bank CEO.
James Noone
Thank you, Kent. As mentioned, our businesses are healthy. We originated approximately $1.3 billion in loans during the first quarter, and we were pleased that several of the strategic programs we announced in 2024 began to contribute. That said, in the second half of the quarter, we saw some seasonal softening in demand from our higher-yielding partners, and this seasonality is in line with our expectations from prior years. Our largest student lending program had a strong seasonal quarter on originations, but we expect this contribution to decelerate in line with school calendars during the second quarter.
Although the lending market could change through the first four weeks of April 2025, loan originations are tracking at a quarterly rate of $1.2 billion. We remain comfortable in the outlook for originations for the year, particularly as the four new programs from 2024 begin to mature more meaningfully with us. Our SBA 7(a) loan originations ticked down a little quarter-over-quarter. This was driven primarily by average loan size coming in slightly lower in the quarter as we have continued to see stable demand with our SBA lending. We also had solid growth in our equipment leasing and owner-occupied commercial real estate lines, both of which have been meaningful contributors to portfolio growth.
During the quarter, we continued to sell some of the guaranteed portions of our SBA loans, as we have previously discussed. We plan to continue to sell SBA loans as long as market conditions remain favorable. Our SBA guaranteed balances and our strategic program loans held-for-sale, both of which carry lower credit risk, in aggregate made up 44% of our total portfolio at the end of Q1. Moving to credit quality; the provision for credit losses was $3.3 million in Q1 compared to $3.9 million in the prior quarter. The decrease was driven by lower charge-offs.
Quarterly NCOs were $2.2 million this quarter versus $3.2 million in the prior quarter. Regarding NPAs, while we continue to expect roughly $12 million in potential NPA migration during Q2 as a result of higher rates, during Q1, we were successful in reducing our NPA balances to $29.9 million versus $36.5 million balance in the prior quarter. The decline in NPAs was driven by consistent collection efforts by our portfolio team. Of the $29.9 million in total NPAs, $15.1 million is guaranteed by the federal government and $14.7 million is unguaranteed. I will now turn the call over to our CFO, Bob Wahlman, to provide more detail on our financial results.
Robert Wahlman
Thanks, Jim, and good afternoon, everyone. For the first quarter, we generated net income of $3.2 million or $0.23 per diluted common share. Key items that drove our results were softer net interest income, including a sequential NIM decline, driven mainly by a change in the mix of originations during the quarter and adjustment of our variable rate SBA loans for the two Q4 rate reductions, partly offset by solid fee income. Average loan balances, including both held-for-sale and held for investment loans totaled $565 million for the quarter compared to $522 million in the prior quarter. This increase included growth from our SBA 7(a) commercial leases and consumer programs.
Average interest-bearing deposits were $430 million compared to $355 million in the prior quarter. The sequential quarter increase was driven primarily by an increase in interest-bearing demand deposits and brokered time certificates of deposits to meet our funding needs. Net interest income was $14.3 million versus the prior quarter's $15.5 million, primarily due to the previously referenced change in the mix of loan originations, repricing the prime-based variable rate loans and lower rates on additions to the held-for-investment loan portfolio, partially offset by an increase in interest-earning assets. Our net interest margin declined to 8.27% from 10% in the prior quarter, driven primarily by a seasonal decline in origination volume from our three highest-yielding held-for-sale programs, the addition of $40 million of lower risk and lower-yielding loans to our held-for-investment portfolio and a decrease in yield in our SBA and other variable rate loans as the 50 basis point Q4 market interest rate reductions took effect. This overall decline in our net interest margin, while significant, is directionally consistent with our expectations and commentary on prior earnings calls that we would see the NIM decline as we continue to migrate our loan portfolio to a lower risk profile.
We continue to expect the net interest margin to decline over time due to our risk reduction strategy, though the downward progression could be slower in future periods if we have stronger origination from higher-yielding held-for-sale loans or quicker if we fund large amounts of lower risk but lower-yielding assets such as the credit-enhanced loan portfolio. Fee income was $7.8 million in the quarter compared to $5.6 million in the prior quarter. The sequential quarter increase was primarily driven by a modest pickup in strategic program fees, a favorable change in the fair value of our investment in BFG and an increase in miscellaneous income. The increase in other miscellaneous income was due to increased revenue growth from our operating lease portfolio, increased distributions received from BFG and the $900,000 reduction of prior quarter miscellaneous income due to the write-off of the called CDs unamortized premiums that we described in January. Noninterest expense in the first quarter was $14.3 million compared to $13.6 million in the prior quarter.
The increase was primarily due to an increase in salaries and employee benefits and an increase in professional services expense resulting from reduction in accruals for legal services during the three months ended December 31, 2024. Our efficiency ratio was relatively flat quarter-over-quarter at 64.8% versus 64.2% in the prior quarter. We remain committed to generating positive operating leverage as we move through 2025 and begin to realize revenue associated with the new programs that have been developed. Future increases in incremental headcount will primarily be related to increased production, and we do expect to see future decreases in the efficiency ratio. Our effective tax rate was 28.1% for the first quarter compared to 24.3% in the prior quarter.
The change from the prior quarter was due primarily to permanent differences related to executive compensation. We expect an effective tax rate of roughly 27.5% for 2025. Lastly, we remain comfortable with the outlook provided on last quarter's conference call for the credit enhanced balances to increase by $50 million to $100 million by year-end 2025. Positively, we have been working proactively with many of our programs over the last six months and conversations continue to go well. We went live with two credit enhancement balance sheet programs by the end of 2024 and additional discussions continue.
During the first quarter, we were also pleased to see material growth in an extended held-for-sale program. In this case, our strategic partner needed balance sheet access, but for a period of less than the full term of the underlying loans, which varies from our credit enhancement program where FinWise typically holds the loans to maturity or payoff. That said, this enhanced held-for-sale structure also generates incremental bank earnings for FinWise through a yield split model with low credit risk, and the bank is happy to initiate the program. This is another example of how FinWise delivers innovative lending products that support our strategic partners' growth and further enhances our revenue opportunities. With that, we would like to open the call for Q&A.
For your information, Kent had to step away as he has a travel conflict. But Jim and I are here to answer your questions. Operator?
Question and Answer Session
Operator
(Operator Instructions) Brett Rabatin, Hovde Group.
Brett Rabatin
I 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?
Robert Wahlman
Thanks for your question. Yeah, 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.
Brett Rabatin
Okay. That's great color. And then just wanted to get a little better sense of the path on the margin from here. And maybe a different way to tackle it might just be thinking about top line NII growth and just thinking about the margin continuing to atrophy with the risk reduction. Can you still have -- can NII growth can be high single digit this year given what's transpiring with the margin?
Robert Wahlman
Yeah. Sure, sure. So yeah, we did see a significant drop in net interest income, and that's been reflected in the NIM. And I can -- to answer your question, I think, directly, the expected growth that we have in NII will come from -- as we move forward into the second quarter and throughout the year comes really from two sources. First of all, there was the seasonal decline in the -- amongst the three highest earning partners that we have in that held-for-sale portfolio.
The total originations in the quarter were down approximately $47 million to $50 million for quarter one. That has an outsized effect because of the higher yields on those portfolios. That traditionally has been seasonal, and we do expect that to come back. So we do expect to see net interest income come up as that origination production returns to -- migrates towards its normal level. The second area that we would see net interest income come up that you did not see this period will be from increase in the loan portfolio.
And the loan portfolio growth will come from what we call -- what I call the traditional banking products, particularly owner-occupied commercial real estate and lease portfolio, which we saw growth in both of those books this quarter. But you'll also -- we also -- as we move forward through the year, you'll see the growth in the credit enhanced portfolio. Now all three of those products that I mentioned, their yields are below the average yield. So those will have a dilutive effect on the NIM. So your question wasn't specifically about the NIM, but was about NII.
So you'll see NII grow. We expect to see NII grow, but we will continue to see, particularly from the increase in the volume of loans, we'll see NIM come down from that offset in part or maybe depending upon how much of those we do in the next quarter or the next few quarters, there'll be the balance between those two in terms of what actually happens to the overall NIM rate.
Brett Rabatin
Okay. That's helpful. And if I could sneak in one last one just around the buyback. You guys didn't buy back any stock this quarter. We were closer to tangible book in certain parts of the quarter.
Is there levels that you would start to think about needing to buyback more or is this the growth that you're anticipating in the next few years just too much of an opportunity relative to maybe doing some accretive buyback?
Robert Wahlman
Yeah. I think that's a great question. And what we have tended to do in terms of our buyback is exercise that buyback option if we were to see the share price drop below what our current book value is, and it hasn't done that for some time and maybe it would even go to a discount. So we haven't been active for that reason, plus we also try to balance it against the need to maintain liquidity in our stock and enough shares out there. So we don't want to bring in too many shares and not leave enough out there for active trading.
Operator
Joe Yanchunis, Raymond James.
Joe Yanchunis
So thanks everyone -- 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 tacking on to that, how long will it take for Backd to be able to generate or begin to generate credit enhanced loans?
James Noone
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 Backd 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 Backd plays into that $50 million to $100 million guidance, I would just say that, that's a back-end number. Backd 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.
Robert Wahlman
So at the end of the year, the balance was -- of the credit enhanced portfolio was slightly under $2 million as we were developing the application and making sure everything was working right. It takes a while to bring on new partners. And so we're working with the older partners that were in the test mode. And the balance is probably around -- is about $2 million at this point in time.
Joe Yanchunis
Got it. Okay. So $2 million exiting March quarter. And then (inaudible) for me in your prepared remarks, you discussed the credit enhance kind of balance sheet held-for-sale product. Wait, I'm sorry.
No, no, I'm sorry. Yeah, the held-for-sale product, kind of given your focus to derisk the balance sheet why did you sell these loans? And what's that demand for that type of product?
Robert Wahlman
Sorry, say that again, Joe, as far as why do we sell the loans?
Joe Yanchunis
Yeah, the credit enhanced loans. If the focus on derisking the balance sheet, when do you want to load up on those a little bit more?
Robert Wahlman
Sorry. So I think you might be referring to the extended held-for-sale in the prepared remarks. The extended held-for-sale with a partner, like when we first developed the credit enhanced balance sheet product, obviously, we're going to existing partners that have good profiles for us to offer this to, whether it's through loan performance or kind of their capital strength, et cetera. And so one of those partners was very interested in the product, but they're a regular user of the securitization markets. And so in that case, we tailored for them this extended held-for-sale product because it's not their intention to leave those loan accounts or those loan balances with us through payoff charge-off on the underlying loan, but they did need this balance sheet capacity for a period of time.
And that period of time is really during a consolidation period for credit card balances and the refinancing thereof. And so they needed a little bit more than what we typically do, which is a 2- to 4-day held-for-sale period. And -- but they didn't need the full life of loan balance sheet capacity. So this extended held-for-sale model worked for them. It worked for us with the yield split.
So it was a good product to roll out.
James Noone
I would add just as a note that it still carries a very low risk because the purchase price is all contractual principal and interest.
Joe Yanchunis
Got it. Appreciate that. And then just one more for me. Given the current market uncertainty, how would you characterize the health of your strategic partners at this time? Is there any concern that you have about a particular one without naming names?
Robert Wahlman
No concerns right now, Joe. I'd say origination levels continue to be healthy, and we're comfortable with the guidance, which is a gradual pickup from newer partners throughout '25. As far as macro-related stuff, there's a fair amount of stuff going on. But a lot of this, we've been through at some point in the past, whether it's economic interruption with COVID, whether it's the significant and quick succession of rate increases and the effects that, that has. I would say one impact that I don't think any of us have control over is just a meaningful slowdown in consumer spending and the impact that, that could have kind of across the board in lending, whether it's demand within our FinTech originations, whether it's delinquencies in SBA or other portfolios.
I mean we're not seeing any of that right now. But if you're talking about macro risks that are out there, that's certainly something we keep an eye on.
Operator
Andrew Terrell, Stephens Inc.
Andrew Terrell
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? Is there any reason it would not 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 -- it 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?
Robert Wahlman
Certainly. So in regards to the expectations as to how the 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 moved that NIM down, there was in the investment -- in the held-for-investment portfolio, we have a significant part of the Federal Reserve, significant part -- 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 reprice 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 our loan portfolio with a 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 in 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.
Andrew Terrell
Got it. Okay. But the SBA and the diversification of the lower risk would all be in HFI. I guess specifically, there was a note on the HFS yields in the release, $0.5 million for what sounds like the seasonal drop and then $0.3 million from just a decrease in yield outside of that. So I guess I was just trying to figure out what the $0.3 million there was referencing.
Robert Wahlman
Well, actually, it comes from the $500,000. And then in the retained portfolio, the drop related to those three higher-yielding partners was about an additional $250,000. And then the residual was, as I said, the dilution.
Andrew Terrell
Okay, got it. If I can move on just the -- on the commercial real estate portfolio, I mean, it's kind of -- it's a little bit interesting the pace of the CRE growth right now when it sounds like loan growth for the credit enhanced piece can go from basically zero this quarter to reach that $50 million, $100 million over the next three quarters. It's obviously a pretty big pace of balance sheet growth. But I'm curious like specifically, what are you growing commercial real estate wise? And we're not seeing too much commercial real estate or loan growth broadly out there right now.
So I'm curious what's driving the CRE growth? And what specifically asset or industry-wise are you putting on?
James Noone
Yes. Andrew, this is Jim. I'd say the -- just to be clear, these are all -- this is owner-occupied commercial real estate. So it's not going to be the same asset or loan product type that when banks reference commercial real estate loans, this is different. These are always going to be at minimum 51% owner-occupied by the small business.
Generally, they are very similar profiles to what we have in SBA. In some cases, actually, originally, this was almost a defensive product, right? As we saw SBA borrowers refinancing out, we wanted to get a product out there that met their needs. It's going to be for a better LTV. They're going to get a better rate.
And so that was the original impetus for the product. Why we've been successful with it? I think I would point to our relationship with Business lending group, their ability to continue to deliver qualified applicants, both in SBA and in owner-occupied commercial real estate. We did have a pretty big pickup this quarter. I would tell you that generally, will we have that type of pickup in every quarter throughout '25?
No. It will probably be a little bit more sporadic. But we feel really good about the product. It's a good quality product for us with low credit risk, good LTVs, similar business profiles to what we do in SBA, where we stay out of certain industries. So we're very happy about it.
Andrew Terrell
Yeah. Understood. What's the net yield you're putting that commercial owner-occupied CRE on the books relative to, say, the net yield on credit enhanced lending?
Robert Wahlman
Well, on gross yield, the credit enhanced -- let me think about the difference here. It's probably -- the owner-occupied commercial real estate is likely going to be 300 basis points, 350 basis points below credit enhanced. But again, both of those products are newer. So it's hard for me to go -- it's hard for me to say what the stabilized difference there will be. With the credit enhanced product, that's something that we're still rolling out, and we feel good about the numbers we put out there for '25.
As far as what that yield looks like, it's a little bit still TBD. But it would certainly be higher than the owner-occupied commercial real estate.
Andrew Terrell
Yeah. Okay. Understood. Yeah, I'm sure it even differs partner to partner. If I could also just sneak another one in around -- just I heard Kent's not here anymore, but you mentioned in the prepared remarks, comments about leveraging capital further.
You guys have obviously brought TCE down a bit. Your leverage ratio has come in a bit. Remind us capital goalposts. And then specifically, whether you're comfortable if a majority of the growth later this year is coming from credit enhanced where you're not taking risk, if you're willing to leverage capital further given the risk-free nature of that growth?
Robert Wahlman
So what we've consistently talked about over the last three or four quarters, and we're still staying with is that we have a floor that we could be comfortable with, which would be around 14%. And we would like to maintain our capital with some cushion in excess of the 14%. So that gives us on our balance sheet with our existing capital, that gives us the balance sheet to grow our portfolio and maintain that leverage ratio at that level in excess of $1 billion. So still a lot of room to grow yet.
Operator
Andrew Liesch, Piper Sandler.
Andrew Liesch
Just sticking with the commercial real estate there, do you have the yield on what those loans were added at the owner-occupied CRE?
Robert Wahlman
Sorry, Andrew, you're saying what's the gross yield on the owner-occupied commercial real estate portfolio?
Andrew Liesch
Yeah. Just curious what that came on at.
Robert Wahlman
Yeah, I would tell you, in general, it's going to be a prime minus product. So it's probably prime minus 100.
Andrew Liesch
Got it. And so -- and then these were sourced from BFG. Is that what I heard?
Robert Wahlman
Correct.
Andrew Liesch
Okay, got it. But it also looks like these were funded with brokered CDs. So I mean the spread on that, am I looking at the balance sheet wrong? It just looks like the spread on that is pretty narrow. Is it worth it to grow this owner-occupied CRE?
Robert Wahlman
Yeah, I agree that the margins there are tighter than most of our other products. I think we point to the credit risk there also being meaningfully different. But yes, we hear you on the margin being tighter than the other products and certainly something that we keep an eye on and make sure that we're booking good loans. And that's going to be a growth trajectory that's, I would say, meaningful, but it's not going to be the entire -- it's not going to be where the primary asset growth of the bank is. It's a good way to capture good customers that might be refinancing out or good referrals that are coming in to BFG and to our existing borrowers.
We can make good margins, but there certainly aren't the highest margins at the bank.
Andrew Liesch
Got it. Okay. So just think about like the funding side then, not only for this product, but for other products going forward. When the BIN Sponsorship really gets going, is there opportunities there to bring on deposits? I guess how do you look at funding over the course of maybe the next year rather than looking at the brokered funds, brokered sources?
James Noone
So that is the plan. We expect to see significant deposit growth as it relates to both BIN sponsorship, and we also look for deposit growth from the payments business. In addition to that, we are close to launching our online account opening, which will also give us another source of non-brokered funding or core funding.
Andrew Liesch
Great. That's good to hear. Looking forward to seeing that product.
Operator
There are no further questions at this time. This will conclude today's conference. You may disconnect your lines at this time and thank you for your participation.