Greetings and welcome to the FinWise Bancorp Fourth 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] As a reminder this conference is being recorded. I will now turn the conference over to management.

Good afternoon, and thank you for joining us today for FinWise Bancorp's fourth 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; Mr. Javvis Jacobson, Chief Financial Officer; and Mr. Jim Noone, Chief Strategy and Chief Credit Officer. With that, I will turn the call over to Mr. Landvatter.

Good afternoon, everyone, and thank you for joining us on our fourth quarter 2022 earnings conference call. On today's call, we will provide an update on our financial results and share some perspective on the current operating environment and the continued evolution of our business model. During 2022, we executed well in substantially all facets of our business even in its rapidly deteriorating economic environment. Our differentiated and diverse business model coupled with strong execution by our team members allowed us to navigate these macro headwinds and continued to deliver solid loan originations, profitable growth and industry leading returns. Specifically for the full-year 2022, we generated revenue of $89.7 million, net income of $25.1 million and diluted earnings per share of $1.87. We also ended the year with solid Q4 results particularly given the more challenging macro environment. Total revenue was $23.0 million during Q4, led by loan originations of $1.2 billion. Net income for Q4 was $6.5 million, compared $3.7 million in the prior quarter and diluted earnings per share were $0.49 for Q4, compared to $0.27 for the previous quarter. We also maintained robust profitability measures, including a return on average equity of 19.1% during the quarter. We were also good stewards of capital as we continue to buyback our stock below tangible book value, which is accretive to earnings per share and tangible book value per share. Overall during ‘22, we bought back a total of 120,000 shares for approximately $1.1 million. We plan to continue to be opportunistic with our capital deployment strategy, including our share buyback strategy. Positively in Q4, the company's tangible book value per common share continued to grow to $10.95 per share or 21.1% increase over the prior year period. Although the macro environment is widely expected to remain challenging in 2023,…

Thank you, and good afternoon. As Kent mentioned for the full-year 2022, we grew our balance sheet and delivered meaningful net income of $25.1 million or $1.87 per diluted common share. We also posted solid profitability as we generated return on average assets of 6.4% and return on average equity of 19.6% for the year ended December 31, 2022. Let's turn to Q4 results. Loan originations totaled $1.2 billion during Q4, compared to $1.5 billion in Q3 ‘22 and $2.3 billion in Q4 ’21. Average loan balances comprising held for sale and held for investment loans were $261.4 million during Q4, as compared to $263.6 million in Q3 ‘22 and $286.8 million in Q4 ’21. Total average interest earning assets were $354.4 million during Q4, compared to $335.4 million for Q3 ‘22 and $367.6 million for Q4 ’21. As Kent noted earlier, industry-wide deceleration in originations continued in Q4 and FinWise generally follows a similar pattern. And without a significant improvement in the macro environment, we expect this trend to continue as we move into 2023. Average interest-bearing deposits were $126.1 million during Q4, compared to $104.8 million during Q3 ‘22 and $148 million during Q4 ‘21. The increase from Q3 ‘22 was driven mainly by an increase in interest-bearing demand deposits, partially offset by a decline in money market deposits and certificates of deposit. The decrease from the prior year period was driven primarily by a decline in certificates of deposit and money market deposits, partially offset by an increase in interest-bearing demand deposits. As we have noted previously, non-interest-bearing deposit levels generally have a high correlation with origination volume. Let's look at the income statement. Net income was $6.5 million in Q4, compared to $3.7 million in Q3 ‘22 and $10.1 million in Q4 ’21. The sequential quarter…

Thank you. Ladies and gentlemen, we will now be conducting a question-and-answer session. [Operator Instructions] And our first question comes from the line of Andrew Liesch with Piper Sandler. Please proceed.

Hey, good afternoon, everyone.

Hi. How are you doing?

Hi, Andrew.

Good. Thanks guys. Just want to look at kind of the balance sheet construction here. Recognizing that strategic program production is still probably, the volume is going to trend lower. I guess, are you expecting the held for sale portfolio to continue to decline? And I guess where you think that -- where is a good level for that to plateau? And then similarly on the held for investment portfolio, that continues to put up really good growth. Should that portfolio continue to rise at a double-digit non-annualized pace?

Andrew, this is Javvis. I'll take a stab at that question. On the loans held for sale, it's a very highly correlated with our loan originations. We can talk about that later. I'm sure you'll have questions related to that. But we have seen a decline in loan originations quarter-over-quarter, so that's probably your goalpost to use there. And then on held -- loans held for investment, we continue to have very strong originations in areas like SBA lending and our local lending product. So we've seen good growth and as long as conditions don't change, Andrew, it seems like we should expect that to continue.

Got you. So if I just look at production here, total originations down 19% sequentially, then the end of period held for sale portfolio is down nearly by half is? I mean, I would have mentioned at some point it's going be at a floor level at some point, right? Or, kind of, continue trending down towards zero, just given where this -- where originations are going? Or do you just intend sell it all. You just don't want to retain any of it as origination decline?

Yes, Andrew. I think it's more insightful to look at the average loans than the ending balance as we've talked about before on those held for sale balances that could just have been depend on the day of the week where the quarter ended. But if you look at the loans held for sale average balances quarter-over-quarter, we went from $50.5 million to 43.7 million, not quite has decreased, not a drastic decrease. And then I don't know, you wanted to talk about, Jim?

Yes, sure. On originations, Andrew, they continue to be challenged just because of the impact of capital markets on our larger partners. So also many of our partners proactively pulled back on originations. I think we talked about some last quarter, due to the uncertainty around inflation and the rate environment. But I think as Javvis was referencing, there was a quarterly decrease we saw in Q4 that slowed versus the prior quarter. But it's tough to say whether the deceleration in the trend line will continue or whether there will be renewed pressure on originations. But we're keeping an eye on it and proactively work with our partners to support them.

Got you. And then just a question on expenses here recognizing the hiring and building for the future. But if I break out -- if I take out the fair value [indiscernible] SBA -- servicing asset mark, about $9.4 million, is that a good number to build off of going into ‘23?

Yes. As we've mentioned in the past, we plan to continue to invest in the company. So we're ready for this spring back when more quickly when the macro becomes more supportive. So yes, I think the way you're thinking about it makes sense.

Got it. All right. Thanks for taking the questions. I'll step back here.

Thanks, Andrew.

Yes.

Our next question comes from the line of Andrew Terrell with Stephens, Inc. Please proceed.

Hey, good afternoon.

Hey, Andrew.

Hey, Andrew.

Hey, maybe if I could start with Kent, I think you gave a lot of good color in some of the opening remarks just around, kind of, how you're thinking about the business model into future years. I was hoping just to maybe get a little more color there. I don't know the best way to phrase the question from a timing standpoint, but if we look over the next kind of one, three, five years, I know we talked about you mentioned the three components of that including payments, you mentioned the leasing business, they are obviously incremental kind of partners that you would like to bring onboard? I'm sure, can you just talk about over the next kind of few years how we should be thinking about the growth and the development of your franchise?

Yes, sure. First off, let me say that even though the economy has been challenging, of course, this last year. We feel confident that the business model will continue to play out as we've expected. So we're very confident that continuation of execution the way we have in the past will be in the future for us. So when I say investing in the company, this is in line with the evolution of our business model that we've been describing since we went public. We haven't and this is an important point. We haven't pivoted at all because of the macro environment that we're in. It's just the next phase in our evolution. And so when I think about that, when we think about that, we're talking about building an infrastructure that not only further pulls us into the banking-as-a-service ecosystem, but also positions ourselves to springboard when the market returns. And so the one thing I would just add to this is that I've -- in my experience, I've been through many cycles. And I've seen that the banks that are well positioned prior to a down cycle and build within the cycle usually come out very strong when the economy turns and that's what we're looking for. And so specific to your question of what comes out and when, we don't have that type of guidance, but I can tell you that we are looking very closely this year at deposits and payments and expanding the lending aspect of our banking-as-a- service and we'll keep you posted as we make progress there, but it is a major focus once again in natural evolution of the bank.

Understood. That's very helpful. I appreciate it. As we think about kind of specifically in the payments arena. Would you be interested in acquisitions or in order to kind of develop the payments type offering? Or are we talking more just kind of incremental partnerships with the bank?

So we would actually think of not only incremental partnerships at the bank that allow us to -- and also with existing partners to provide stickier relationships from our services within that. We also definitely would explore something beyond that as well. But right now it's focused on what I've just said.

Understood, okay. Can you maybe just speak briefly about appetite for capital return, I saw you were active on the buyback in the fourth quarter. I'm presuming just given where capital levels are at today and the valuation that, that would remain the case moving forward, but I would love to hear just updated capital kind of return thoughts?

Yes. So Let me start at and Javvis if you want to add anything, please feel so. But we feel that when you're buying yourself, investing in ourselves basically as especially at the low tangible book value. That was a real good move for the bank and for the shareholders. I think that we will consider that strongly going forward. This is a decision made by the Board, but we've been very active and we -- the one thing as I've mentioned before is we just want to make certain that we have enough capital should some opportunity arise and that we don't find ourselves short on something like that.

Okay. Got it. And then last one for me, just on the SBA gain on sale. I think once I make the $2.3 million adjustment this quarter, I get the run rate of call it $1.9 million or so for the fourth quarter. I guess just with incremental SBA loan retention, I presume going forward. Is that a fair way to think about the quarterly cadence of SBA gain on sale income throughout 2023 that kind of $1.9 million level?

So Andrew, we're not giving the forward guidance, but I think that you can look at our trend and see that it is declining quarter-over-quarter and has been declining quarter-over-quarter. And as the interest rates continue to increase, we saw another bump in the interest rate for that portfolio on the first of January 2023, it just makes it that much more compelling to retain those loans without selling them.

Okay. Understood. All right. Thanks for taking the questions and I'll step back.

[Operator Instructions] There are no further questions at this time. And this will conclude today's conference. You may disconnect your lines at this time. And thank you for your participation.

Thank you.