Greetings. Welcome to the FinWise Bancorp Second 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. [Operator Instructions] Please note, this conference is being recorded. The presentation will now begin.

Good afternoon, and thank you for joining us today for FinWise Bancorp’s second quarter 2022 conference call. In addition to this call, we issued an earnings press release earlier this afternoon and posted it to the Investor Relations section of our 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, 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 Mr. Kent Landvatter, CEO and President of FinWise Bancorp; and Mr. Javvis Jacobson, Chief Financial Officer of FinWise Bancorp. With that, I will turn the call over to Mr. Landvatter.

Good afternoon, everyone, and thank you for joining us on our second quarter 2022 earnings conference call. Our results for the second quarter further validate the differentiated business model we have built over the past several years, including continued strength in our risk management and profitability. Despite a very challenging economic environment that deteriorated rapidly throughout the quarter and also factoring in the typical seasonal slowdown in originations, the resilience of our business model was evident as during the quarter ended June 30, 2022, we generated total revenue of $21.4 million led by loan originations of $2.1 billion. Our results for the quarter also included net income of $5.5 million or $0.41 per diluted share. Net income during the quarter was primarily impacted by a decline in non-interest income from lower gain on sale of loans due to a decrease in the number of SBA 7(a) loans sold and an impairment of the company’s SBA servicing asset. As we’ve noted on our prior calls, irrespective of the results of any single quarter, our primary focus remains on generating sustainable net interest income growth over the long-term driven by continued loan growth. Furthermore, loan originations generally have driven strategic program fees, which enhance our non-interest income, a key differentiating factor of our business model. Importantly, given that all strategic platforms fund deposit reserve accounts tied to total held-for-sale loan outstanding, deposits have generally declined as origination volumes slowed. We are pleased with our credit quality, which remained strong. Non-performing loans declined to a total of $0.6 million as of June 30, 2022, compared to $0.7 million at March 31, 2022. The ratio of non-performing loans was 0.3% of total loans at the end of the second quarter, compared to 0.2% the previous quarter. The small increase in our non-performing loans ratio…

Thank you, Kent. Despite facing an economic environment that deteriorated quickly during the quarter, loan originations were $2.1 billion, down from $2.5 billion in the prior quarter and higher compared to $1.4 billion in Q2 2021. Average loan balances comprising held-for-sale and held-for-investment loans were $279.3 million during Q2 2022, a decrease of 5.9% from $296.7 million in Q1 2022 and an 11.8% increase from $249.7 million in Q2 2021. Total average interest-earning assets declined 3.8% to $373.2 million during Q2, compared to $387.8 million for Q1 2022 and increased 24% from $301.1 million for Q2 2021. As we’ve mentioned on the past calls, our loan originations and balances have tended to decelerate in the first and second quarters of the year due to typical seasonality, and this quarter was no exception. Generally, we have seen a rebound in the third and fourth quarters of the year. But as Kent mentioned, if economic conditions remain challenging or deteriorate further, we believe there would be a greater risk that the seasonal rebound in originations could be more muted this year. Average interest-bearing deposits declined 4% to $127.2 million during Q2 compared to $132.5 million during Q1 2022 and increased 41% compared to $90.2 million during Q2 2021. The decline as compared to Q1 2022 was driven mainly by a decrease in certificate of deposits and money market accounts. Compared to Q2 2021, the significant increase in average interest-bearing deposits was driven mostly by higher certificate of deposits, money market accounts and demand deposits. As Kent mentioned earlier, due to the relationship between strategic platform deposit reserve accounts and total held-for-sale loans outstanding. Our deposits have generally declined as our origination volume slows. Positively, our cost of funding declined modestly during Q2. The rate on average interest-bearing liabilities decreased 3 basis points…

Thank you. At this time, we will be conducting a question-and-answer session. [Operator Instructions] Our first question comes from the line of Andrew Terrell with Stephens. Please proceed with your question.

Hey, good afternoon.

Hello. Hey, Andrew.

Hey. Maybe I just wanted to start on the origination volumes. Are you able to bifurcate just how originations progress kind of by month throughout the quarter? Just trying to get a sense of where the monthly kit of run rate is heading into 3Q.

Yes. So we haven’t disclosed the run rate by month, but I think you can just kind of look at the economic – general economic conditions and that we’re operating under right now and kind of assume a trend.

Okay. And then I guess maybe just a bit more explicitly. I hear some of your comments around kind of caution on originations rebounding like you might expect in the back half with normal seasonality. But should we expect origination volumes declining from this $2.1 billion level in the back half of the year?

It’s hard to look into the second half of the year because things are happening so quickly in the economy right now, but we do not look at that as something that’s out of the realm.

Okay. And I understand you slowed down retention this quarter, makes sense, given just the backdrop we’re in right now. I guess, what would you need to see in order to kind of step the retention rate on loans back up?

Stabilization in capital markets, I think, Andrew, I think it’s a fair first indicator. I think we track all of this on a monthly basis, both monitoring and review of it. It’s not just the performance of the static pools, but also early indicators of those, whether it’s first payment to [indiscernible] level, et cetera. And so all of those are data points that we track regularly and deciding how much more retention we’re going to add or additional programs we may add.

Got it. Thank you. And if I could ask one more just on the SBA gain on sale line item. I might have missed it, but did you disclose the dollar amount of SBA loans that were sold this quarter?

No, we didn’t disclose the dollar amount.

Can you speak – go ahead.

It was flat – sorry, Andrew. It was less than it was in the first quarter, fewer dollars.

Yes. Are you able to speak to just trends you’re seeing in SBA right now and maybe provide any kind of expectation you have for sold production volume or gain on sale income from SBA specifically? And then should we expect it to contribute the balance sheet growth in the back half of the year as well?

So let me touch on like the pipeline and origination volumes. We continue to have good origination volumes in the SBA product line. We have – we’re just a small piece of that market, right? We’re like probably less than 1% of the total market. And so our ability to attract qualified applicants for that product continues to be strong. As far as the secondary market and margins there, I’ll defer to Javvis.

Yes. I think it’s – conditions are deteriorating slightly on the premium amounts. But our big driver for the fluctuations quarter-to-quarter is not the premium amount necessarily. It’s more focused on the number of loans that we sell. As we mentioned in the call last quarter, it was an unusually high number of loans that we sold in Q1 of 2022. This quarter is pretty consistent with what we’ve seen in the past.

Okay. All right. Great. Got it. Thank you for taking my questions. I’ll step back in the queue.

Thank you.

Thanks, Andrew.

Our next question comes from the line of Andrew Liesch with Piper Sandler. Please proceed with your question.

Hey, guys. Good afternoon. Just want to talk about some of the investments that you have planned, and I recognize in the face of falling revenue growth, it seems like some of these may be pushed out. But I’m just curious like what are the things that are most important for you right now that you’re going to continue to invest in even in the face of slowing revenue? And then what things might get pushed out and where ultimately do you think the efficiency ratio could end up in the near-term with lower revenue, but also rising expenses and given some of the investments you want to make?

Yes, Andrew, that’s a great question. I appreciate that. We’ve – there are certain types of expenses that we can pull back fairly easily. Sometimes those would be like production-related expenses, number of bodies per production that we have. The ones that were less inclined to the pull back on right now would be those that further our strategic positioning. We want to make certain that we are ready when a rebound comes that we can take full advantage as soon as possible of that. So continued investment in the basic such as BSA, compliance, oversight, IT and continuing to build and evolve the platform to become more scalable, those are more strategic for us, and we’d be reluctant in the short-term to do something there. Of course, things seriously deteriorate, we always take a look at everything is on the table. But more so in the production-related and less so in the strategic foundational aspects of the bank. Did that help?

Yes, absolutely. Thank you. And then the Javvis, give us some thoughts on how you look at the efficiency ratio in managing expense growth versus revenue trends?

Sure. The expense, obviously the efficiency ratio this quarter isn’t like – isn’t where we’d like to see it. And it isn’t where it’s been in recent quarters. I think as far as giving you some goalposts on the efficiency ratios, I would say it’s somewhere between where we’ve been in previous quarters in the mid to upper 30s and the industry. Somewhere in that range is good goalpost for the efficiency ratios. But more specifically to us, the other expenses line item, you might have seen a slight tick up in that category. That’s where a lot of our public expenses are rolling into. So the legal and professional fees are going into that. We don’t think that we’re going to see any softening in those expenses going forward. We have those obligations going forward. So that’s probably not where we’re going to see any changes there. And then as Kent mentioned, related to headcount and salaries, we’ll be very careful as we expand into the areas that he described.

Got it. All right. That’s helpful. And then just following up on the loan origination question and the outlook there. What’s the pipeline for new strategic programs? Are you still thinking two to three new programs a year? What have been – what’s been the thought process and what our perspective program is telling you about their outlook?

Sure. So our pipeline remains full. We also continue to deliver value and build on the relationships that we have with existing programs. So even though you’ve seen some dislocations in capital markets, it’s important to note that our partners come to FinWise because there’s a market need for a tech-enabled bank program and we’ve been delivering this since 2016 and continue doing so today.

Got it. Thanks for taking the questions. I’ll step back.

Thanks, Andrew.

Thanks, Andrew.

Ladies and gentlemen, we have reached the end of the question-and-answer session. Please disregard, it does look like we have a follow-up from Andrew Terrell with Stephens. Please proceed with your questions.

Hey, thank you for the follow-up. Just one quick one maybe for Jim. I think you’re required to adopt CECL starting in 2023. And I heard the comments earlier about the allowance ratio and kind of the qualitative or environmental factors that are in there. But I was curious if you’re running parallel CECL right now, do you have what the allowance ratio would have been under kind of a CECL framework this quarter. And was it relatively in line with kind of the reserve you put up this quarter?

Sure. So we are running it side by side, and we’re planning to do that for the duration of this year. We’re on track to adopt in January of 2023. But I do not have that number for you, Andrew.

Okay. No problem. I appreciate it.

Yes.

Thank you. Ladies and gentlemen, I am now showing no further questions in the queue. I would now like to turn the call over to management for closing remarks.

Yes. Thank you. We just want to thank all of you for attending the call and your interest in FinWise Bank and wish you a wonderful afternoon.

This concludes today’s conference. You may disconnect your lines at this time. Thank you for your participation and have a wonderful day.