FinWise Bancorp beats earnings expectations. Reported EPS is $0.32, expectations were $0.3. FINW isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
Operator: Greetings, and welcome to FinWise Bancorp Fourth Quarter 2023 Earnings Conference Call. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation [Operator Instructions]. As a reminder this conference is being recorded. At this time, I would now like to turn the floor over to the FinWise Bancorp team. Thank you. You may begin.
Unidentified Company Representative: Good afternoon. And thank you for joining us today for FinWise Bancorp's fourth quarter 2023 conference call. Earlier today, we filed our earnings release and posted it to our investor Web site 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, CEO and President of FinWise Bancorp; Jim Noone, President of FinWise Bank; and Javvis Jacobson, Chief Financial Officer. With that, I will turn the call over to Kent.
Kent Landvatter: Good afternoon, everyone. And thank you for joining us on our fourth quarter 2023 earnings conference call. 2023 was another successful year as our differentiated business model, coupled with a disciplined approach and strong execution, continued to demonstrate resilience. We produced solid loan originations and delivered positive returns. Specifically, for the fourth quarter, we had approximately $1.2 billion in loan originations. Credit quality continued to perform as expected and generally in line with industry trends, notwithstanding an increase in nonperforming loans in the fourth quarter. This increase was driven primarily by the continued impact of higher rates on our SBA loan portfolio. While our collateral and portfolio management processes continued to serve us well, the level of net charge-offs increased quarter-over-quarter.
We continue to feel positive about the SBA portfolio, its growth and credit characteristics and the level of net charge-offs at the bank, which have been generally in line with our expectations. Turning to capital. At the end of the fourth quarter, our bank leverage ratio remains significantly above well capitalized regulatory guidelines, which we believe provides us with sufficient capital to continue to support growth. Tangible book value per common share also continued to increase this quarter. I would now like to provide a brief update on our key objectives for 2024 and beyond. Our previously communicated strategy of expanding into an integrated Banking as a Service bank or BaaSBank, continues to make meaningful progress. To that end, we are very excited about our Payments Hub and BIN Sponsorship platforms, which are expected to be operational later in the year.
This provides us with key pieces for an integrated BaaS offering. We firmly believe that an integrated BaaS infrastructure, coupled with the strength of our regulatory due diligence and oversight functions, are key differentiators in the market. Longer term, we also believe this expansion could create stickier relationships with our strategic platforms and offer multiple benefits to our business model. These could include additional recurring revenue, diversifying both revenue and deposit composition, more tools to manage our cost of funds through relationship banking and providing additional flexibility to manage our loan mix. This past quarter, we also completed an internal core system conversion as part of our overall business evolution.
We believe this conversion should increase our operational efficiency and better position us to meet the needs of our growing organization. Our team worked diligently to complete this process by quarter end, and I want to thank them for their effort. Turning to our SBA 7(a) loan program. We are pleased that the business continues to grow and perform as we expected, particularly amidst the higher rate environment that these credits have been managing through. While some market participants expect a potential economic soft landing, we believe uncertainties remain, at least through the first half of 2024, which could impact industry wide loan originations across all the bank's lending products. The external environment, notwithstanding, we will remain disciplined and continue to actively manage areas of the business we can control, including our strict underwriting and collateral management processes.
As we move ahead, we believe we're at an inflection point in the evolution of our model with the potential to enhance the company's long term earnings power. We plan to continue our efforts to expand the business towards an integrated BaaS offering coupled with continued focus on our existing lending programs. In line with our culture, we will be patient and disciplined in our approach to rolling out the new businesses and expect the benefits to accrue over time. With that, let me turn the call over to Jim Noone, our Bank President.
Jim Noone: Thank you, Kent. I will now walk through some additional detail on the quarterly originations, the growth and performance of our loan portfolio and credit quality and then discuss progress on our business initiatives. Total loan originations were $1.2 billion in Q4 versus $1.1 billion in Q3. Our fintech lending continued a gradual recovery in origination levels during the fourth quarter. Our SBA 7(a) loan originations during the fourth quarter were lower on a sequential quarter basis, primarily due to reduced application demand for the types of transactions we generally finance as well as our continued adherence to disciplined underwriting. We did not chase loan volume as we always focus on balancing loan growth with credit quality.
A woman using her mobile device to access her online banking account on a sunny day.
And as a result, we saw our SBA pipeline contract some quarter-over-quarter. Moving to our portfolio. Our growth in earning assets has continued according to plan. We continued to retain the guaranteed portion of our SBA loans, given the current dynamics where the underlying note rates remained high and secondary market loan sale premiums remained low. On a sequential quarter basis, the 17.1% increase in guaranteed balances of our SBA loans was the primary driver of the 10.2% growth in total loans held for investment. Overall, we continue to be successful in identifying and funding creditworthy businesses in both our SBA and leasing lines, and both contributed meaningfully to our growth in earning assets. Turning to credit quality. The provision for credit losses was $3.2 million in Q4 compared to $3.1 million in the prior quarter.
The sequential increase in provision was driven primarily by strict adherence to our CECL methodology, an increase in net charge-offs in our SBA portfolio and an increase in the qualitative factor overlay that was implemented during Q3 and which remained in place due to the increase in special mention, nonaccrual and nonperforming assets. During Q4, net charge-offs were $3.4 million compared to $2.2 million in the prior quarter. The increase was primarily related to our SBA portfolio. As a reminder, during Q3, we had a large recovery of $390,000. The net charge-off rate as a percentage of average loans held for investment was 3.8% in Q4 compared to 2.8% in the prior quarter. We continue to believe we are well reserved for potential loan losses with an allowance as a percentage of total loans held for investment of 3.5% at the end of Q4.
Nonperforming loans at the end of Q4 were $27.1 million compared to $10.7 million at the end of the prior quarter. Of the $27.1 million, $15 million is guaranteed by the SBA and $12.1 million is the balance of loans, which do not carry SBA guarantees. The increase in NPLs versus the prior quarter related primarily to our SBA portfolio as this program continued to be impacted by the higher interest rate environment. As a reminder, our SBA note rates adjust calendar quarterly based on a spread over the Wall Street Journal prime rate in place at quarter end. We expect to see additional increases in our NPL balances while the prime rate remains elevated. Further, while $12.1 million of our NPL balances do not carry SBA guarantees, we believe our strict collateral policies in this portfolio should continue to help mitigate net charge-offs.
Finally, let me give you an update on our business initiatives. Within strategic program lending, we executed program agreements with Earnest, a subsidiary of Navient and a leader in the private student lending market. We are humbled by the trust and the team in Earnest placed in FinWise to support their growth plans and believe this is a testament to the strength of our offering in the market. We look forward to working with the Earnest team and welcome them to the FinWise family. We are also quite proud of our continued investment in the compliance and risk management infrastructure at the bank. We believe this focus, which is at the core of our offering, is embedded in our systems, processes and culture and allows us to continue to provide strong support to our Fintech lending platforms.
Lastly, in anticipation of our further expansion into BaaS, we continued to make progress on our Payments Hub and BIN Sponsorship products. As Kent mentioned earlier, we anticipate them being operational later in the year. We will continue to provide you with additional details on these initiatives as certain milestones are achieved. Now, let me turn the call over to our CFO, Javvis Jacobson, to provide more detail on our financial results.
Javvis Jacobson: Thank you, and good afternoon. For the fourth quarter, we generated net income of $4.2 million or $0.32 per diluted common share. We posted solid profitability with a return on average assets of 2.9% and a return on average equity of 10.8%. These results were achieved while continuing to invest in infrastructure to support growth in key strategic initiatives. Average loan balances comprising held for sale and held for investment loans were $396.2 million during the quarter compared to $354.6 million last quarter. This increase was primarily driven by continued growth in our SBA 7(a) and commercial loan programs. Average interest bearing deposits were $303.4 million compared to $255.8 million in the prior quarter.
The sequential quarter increase was driven primarily by an increase in brokered certificates of deposit. As of the end of the quarter, approximately 87% of the bank deposits are either insured or our own capital or are contractually required in our strategic lending business. Now turning to the income statement. Net interest income for the quarter was $14.4 million, nearly flat versus last quarter. Positively, the increase in average balances of loans held for investments substantially offset the impact of higher interest rates and average interest bearing liability balances. Net interest margin was 10.61% this quarter compared to 11.77% last quarter. Decrease was mainly due to a loan mix shift towards loans carrying lower yields in the held-for-investment portfolio and an increase in the volume of CDs. Noninterest income was $6 million in the quarter compared to $5.2 million in the third quarter.
The quarter-over-quarter increase was primarily due to the change in fair value of our investment in BFG, partially offset by a decline in other miscellaneous income related to the resolution of a forbearance agreement last quarter, resulting in income, which did not recur in Q4. Noninterest expense in Q4 was $11.4 million compared to $10.1 million in the prior quarter. The sequential quarter increase was primarily driven by an increase in salaries and employee benefits due to an increase in the headcount as well as higher professional service expenses as we continue to build out infrastructure to accommodate our growth. The efficiency ratio was 55.8% in Q4 compared to 51.3% for the prior quarter. We continue to expect the efficiency ratio to remain elevated as we further build out our infrastructure to move forward with our strategic initiatives that position the company for long term growth.
With a 20.7% leverage ratio, the bank's capital remained significantly above the 9% well capitalized requirement. The company's tangible book value per common share continued to increase to $12.41 compared to $12.04 at the end of the prior quarter. Lastly, the effective tax rate was 28.5% for Q4 compared to 26.1% in the prior quarter. With that, we would like to open the call for Q&A. Operator?
