FinWise (FINW) Q3 2025 Earnings Call Transcript Motley Fool Transcribing, The Motley FoolOctober 29, 2025 at 11:38 PM 0 Logo of jester cap with thought bubble. Image source: The Motley Fool. Wednesday, October 29, 2025 at 5 p.m.
- - FinWise (FINW) Q3 2025 Earnings Call Transcript
Motley Fool Transcribing, The Motley FoolOctober 29, 2025 at 11:38 PM
0
Logo of jester cap with thought bubble.
Image source: The Motley Fool.
Wednesday, October 29, 2025 at 5 p.m. ET
Chairman & CEO — Kent Landvatter
Bank CEO — Jim Noone
Chief Financial Officer — Robert Wahlman
President — Juan Arias
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The federal government shutdown is currently suspending new SBA 7(a) and 504 loan approvals, certain closings, and secondary market loan sales, directly impacting FinWise Bancorp's SBA lending operations as detailed on the call.
SBA 7(a) loan originations declined 7.8% sequentially in Q3 2025, attributed to typical seasonality for the third quarter.
CFO Wahlman noted, "for the fourth quarter, we could see some compression in the margin relative to Q3," referring to Q4 2025 compared to Q3, with anticipated onboarding of Tally portfolio balances shifting a portion of revenue from net interest income to non-interest income, potentially lowering net interest margin in Q4 2025.
Management expects that "there may be periods in which the efficiency ratio may increase," indicating possible variability in cost control dynamics going forward.
Loan Originations -- Reached $1.8 billion in loan originations in Q3 2025, demonstrating a 21% quarter-over-quarter increase and a 24% year-over-year increase, driven primarily by student lending and new program ramp-up.
Credit Enhanced Balances -- Climbed to $41 million at the end of Q3 2025; with monthly organic increases of $8 million projected from October through December 2025, and an anticipated one-time $50 million Tally Technologies addition in December 2025, leading to a year-end estimate of $115 million.
Net Income -- Reported at $4.9 million in Q3 2025, up 19% from the prior quarter up 42% year over year.
Diluted EPS -- Increased to $0.34, up from $0.29 in the previous quarter, and $0.25 in the same quarter last year.
Tangible Book Value Per Share -- Rose to $13.84, compared to $13.51 in the prior quarter and compared to $13.51 at the end of Q2 2025.
Total Provision for Credit Losses -- Recorded at $12.8 million in Q3 2025, of which $8.8 million is attributable to credit enhanced balances, versus $4.7 million total and $2.3 million credit enhanced in the prior quarter (Q2 2025).
Net Charge-Offs -- Totaled $3.1 million in Q3 2025, compared to $2.8 million in the prior quarter. Management cited $3.3 million as a reasonable run rate per quarter.
Non-Performing Loans (NPL) -- Totaled $42.8 million at the end of Q3 2025, with $23.3 million (54%) federally guaranteed as of Q3 2025 and $19.4 million unguaranteed as of Q3 2025; $3 million migrated to NPL status in Q3 2025, below prior guidance of up to $12 million for Q3 2025.
Net Interest Income -- Net interest income increased to $18.6 million in the third quarter, up from $14.7 million in the prior quarter, driven by credit enhanced balances, higher rates, and larger average balances in both held for investment and held for sale portfolios.
Net Interest Margin (NIM) -- Net interest margin increased to 9.01% in the third quarter, compared to 7.81% in the prior quarter, and is expected to compress in Q4 2025 due to revenue mix changes from the Tally partnership.
Fee Income -- Fee income was $18.1 million in the third quarter, up from $10.3 million in the prior quarter, with growth primarily from credit enhancement income, strategic program fees, and loan sale gains.
Noninterest Expense -- Reported at $17.4 million in Q3 2025, up from $14.9 million in the prior quarter, reflecting growth in credit enhancement program and servicing expenses, with other operating expenses rising mainly for portfolio servicing and higher deposit insurance.
Efficiency Ratio -- The efficiency ratio was 47.6% in the third quarter, versus 59.5% in the prior quarter; non-GAAP efficiency ratio excluding credit enhanced loans was 59.7% in Q3 2025.
Total Assets -- Total end-of-period assets reached nearly $900 million in the third quarter, the highest in company history.
Average Loan Balances -- Average loan balances, including held for sale and held for investment loans, totaled $683 million in the third quarter, compared to $634 million in the prior quarter, with growth across strategic program loans, commercial leases, residential, and owner-occupied real estate.
Average Interest-Bearing Deposits -- Average interest-bearing deposits were $524 million in the third quarter, compared to $494 million in the prior quarter, mainly from increased wholesale time CDs and modest deposit growth in other categories.
Effective Tax Rate -- The effective tax rate was 23.7% in the third quarter, compared to 24.5% in the prior quarter; the company projects a 26% effective tax rate for the full year 2025.
Strategic Partnerships -- Executed two new program agreements: one with DreamFi targeting the underbanked, and one with Tally Technologies to add a substantial credit enhanced portfolio for consumer and business credit cards.
SBA 7(a) Loan Originations -- Decreased 7.8% quarter over quarter in Q3 2025, SBA 7(a) loan originations increased 68% year over year in the third quarter. Originations and loan sales are currently affected by the government shutdown.
Pipeline -- Management stated the strategic partnership and program pipeline "continues to be strong," with ongoing partner discussions.
FinWise Bancorp (NASDAQ:FINW) reported record asset growth in Q3 2025, supported by the ongoing expansion of its credit enhanced loan portfolio and significant increases in both net interest and fee income. Strategic partnerships, notably with DreamFi and Tally Technologies, are expected to drive credit enhanced balances above prior guidance to $115 million by the end of Q4 2025, with further growth projected into 2026. The company's efficiency ratio improved in the third quarter due to operating leverage, even as expenses increased to support higher credit enhanced activity. The current federal government shutdown is directly impacting SBA lending. Net interest margin increased to 9.01% in Q3 2025, and disciplined cost control contributed to robust earnings growth, but management warned of possible NIM compression ahead in Q4 2025 as program revenue mix shifts with new partnership onboarding. Looking ahead, FinWise Bancorp is projecting continued credit enhanced loan growth as the primary balance driver, while maintaining concentration policies and risk controls as new programs scale up.
CFO Wahlman stated, "the net interest margin can be affected by specific terms of each new credit enhanced loan program or by the mix of loan growth of existing credit enhanced portfolio," emphasizing the variability of margin outcomes with each partnership structure.
Ken said, "These agreements can drive meaningful increases in portfolio balances and accelerate revenue growth, reinforcing the scalability and strength of our approach," with management projecting organic credit enhanced balance growth of $8 million to $10 million per month in 2026.
SBA guaranteed and strategic program loans held for sale comprised 40% of total portfolio balances at the end of Q3 2025, highlighting management's focus on lower risk asset composition.
Migration to NPL was $3 million in Q3 2025, below prior guidance, attributed to proactive collateral sales, paydowns, and reimbursements on SBA loans.
President Arias clarified that headcount reductions were due to discipline rather than automation, but the company is evaluating AI for future efficiency opportunities.
Credit Enhanced Balances: Loan balances subject to contractual risk-mitigation provisions (e.g., guarantees, cash loss reserves) with third parties bearing potential credit losses, often resulting in different income and loss recognition versus core loan portfolios.
Strategic Program Loans: Loans originated through customized, often partner-driven, third-party programs targeting growth markets or customer segments, sometimes with credit enhancement features.
Non-Performing Loans (NPL): Loans past due or in default, typically 90+ days delinquent, with principal and/or interest payments not being made as scheduled.
SBA 7(a) Loans: Loans guaranteed by the U.S. Small Business Administration, supporting small business borrowers with favorable terms and typically lower credit risk to the lender.
Net Interest Margin (NIM): The ratio of net interest income to average earning assets, reflecting core banking profitability from lending and deposit activities.
Efficiency Ratio: A non-GAAP measure of expense control, calculated as noninterest expense divided by total revenue (net interest income plus noninterest income); lower ratios indicate higher efficiency.
Full Conference Call Transcript
Good afternoon, everyone. Our strong third quarter results demonstrate that the strategic investments we have made over the past two years are starting to deliver meaningful results. During the quarter, we posted robust loan originations of $1.8 billion, and credit enhanced balances reached $41 million. Revenue growth was solid, driven by both fee and spread income growth, and disciplined expense management further supported profitability. Tangible book value per share continued to increase to $13.84 compared with $13.51 in the prior quarter, reflecting ongoing value creation for our shareholders. Following the close of the third quarter, we announced two additional strategic program agreements that we are very excited about.
First is with DreamFi, a startup financial technology company that will provide financial products and services to underbanked communities. The second is with Tally Technologies, a program manager and network issuer processor, which will bring FinWise a substantial credit enhanced portfolio balance in Q4 2025 to support both business and consumer credit card programs. As a reminder, while the credit enhanced loans acquired in the Tally transactions will increase our balance sheet, the credit risk is low because of the guarantee provisions of the agreement supported by the cash loss reserve deposit account that Tally must maintain at FinWise to absorb credit loss, as well as the cash flows generated by the assets.
We remain actively engaged in discussions with several other potential strategic partners to further expand our strategic initiatives, and our pipeline continues to be strong. Importantly, this partnership with Tally underscores the uniqueness of our one-to-many business model, which we have outlined previously. While our model can appear lumpy, and securing strategic agreements may sometimes take longer than anticipated, each completed agreement has the potential to unlock substantial value for us. These agreements can drive meaningful increases in portfolio balances and accelerate revenue growth, reinforcing the scalability and strength of our approach. As we discussed last quarter, we are carefully evaluating a measured increase in dollar balances of higher-yielding loans, particularly as our loan portfolio continues to grow.
However, we will remain within the internal limits established in 2018 as our policy. Overall, we are very pleased with our performance this quarter and the solid momentum we are seeing across the business. These results underscore the strength of our strategic execution and our unwavering commitment to long-term value creation rather than prioritizing short-term gains. As we move forward, we will continue to focus on disciplined growth and operational excellence, key drivers of sustained progress and meaningful returns for our shareholders. With that, let me turn the call over to Jim Noone, our bank CEO.
Jim Noone: Thank you, Ken. The strong momentum from recent quarters continued into Q3, as evidenced by loan origination volume totaling $1.8 billion, a 21% increase quarter over quarter and a 24% increase year over year. Key drivers included a seasonal uptick from our largest student lending partner, in line with the academic calendar, and continued ramp and maturation from new programs we have launched over the past several years. While macroeconomic conditions and demand trends may shift intra-quarter, from originations through the first four weeks of October 2025 are tracking at a quarterly rate of approximately $1.4 billion. This reflects the expected seasonal deceleration from our largest student lending partner and fewer business days in the quarter due to multiple holidays.
We expect a 5% annualized rate of growth in originations from this $1.4 billion quarterly level during 2026 is appropriate based on organic growth right now. We are also pleased that Credit Enhanced balances reached $41 million at the end of the third quarter. To support your modeling efforts of these assets, let me provide an outlook for the remainder of 2025 and into 2026. Incremental organic growth in credit enhanced balances is running at approximately $8 million in October. We are currently comfortable projecting $8 million per month in incremental organic balances for each November and December 2025. Additionally, as previously mentioned, our recently announced agreement with program manager, Tally Technologies, is scheduled to close on December 1.
We anticipate this transaction to approximately $50 million in credit enhanced balances late in the quarter, for a projected total of approximately $115 million in credit enhanced balances by the end of the fourth quarter. This compares to our prior expectations for $50 million to $100 million by the end of the fourth quarter of this year. Looking ahead to 2026, we are currently comfortable with organic growth in credit enhanced balances of $8 to $10 million per month right now. Quarterly SBA 7(a) loan declined 7.8% quarter over quarter and are up 68% year over year. The quarter over quarter decrease primarily reflects typical third quarter seasonality.
Importantly, the recent federal government shutdown may impact FinWise's SBA lending operations in the following ways. First, loan approvals. While FinWise can work with applicants to prepare documentation and complete bank underwriting, all new loan approvals for the 7(a) and 504 loan programs are currently suspended. Second, loan closings. FinWise can close previously approved loans if there are no change actions requiring SBA approval. Some loan closings will be impacted until the government reopens. Third, secondary market sales. Loan sales require approval by the fiscal transfer agent, and this is currently suspended during the government shutdown.
Loan servicing is not materially impacted by the shutdown, and we also do not anticipate the government closure will be detrimental to credit quality as FinWise does not need SBA approval for most of the actions we take in servicing and liquidation. While our SBA lending is impacted by the current government shutdown, this has happened in the past when Congress was unable to agree on budgetary matters, and FinWise was successful in managing its pipeline of loan applicants, loan closings, and loan sales through similar periods. We continue to monitor the situation closely and remain focused on maintaining strong pipeline activity heading into Q4.
During the past quarter, we continued to sell guaranteed portions of our SBA loans, as market premiums remained favorable. We will continue to follow this strategy as long as market conditions remain favorable. That said, the current government shutdown may impact the amount of loans that we can sell in the fourth quarter. Importantly, our SBA guaranteed balances and strategic program loans held for sale, both characterized by lower credit risk, collectively represent 40% of our total portfolio at the end of Q3, underscoring the lower risk composition of our loan portfolio.
Turning to credit quality, the total provision for credit losses was $12.8 million in the third quarter, of which $8.8 million is attributable to growth of credit enhanced balances in the quarter. This compares to a total provision of $4.7 million in the prior quarter, of which $2.3 million was attributable to growth of credit balances. As a reminder, the provision for credit losses associated with the credit enhanced loan portfolio is different from core portfolio provisions because it's fully offset by the recognition of future recoveries pursuant to the partner guarantee of an exact amount described as credit enhancement income in our noninterest income.
Quarterly net charge-offs were $3.1 million in the third quarter versus $2.8 million in the prior quarter. For modeling purposes, continue to believe that approximately $3.3 million is a good quarterly number to use. This level has remained consistent on a quarterly basis over the last two years, and it's in line with our expectations following the portfolio derisking initiative we implemented a little over two years ago. During Q3, only $3 million in loans migrated to NPL, bringing our total NPL balance to $42.8 million at the end of the quarter.
This modest increase was mostly due to SBA 7(a) loans classified as NPL and compares to guidance on our prior call that up to $12 million in balances could migrate during the third quarter. The lower than expected migration reflects the team's proactive efforts in selling collateral, securing paydowns, and receiving reimbursements on the guaranteed portions of SBA loans that have become classified. Of the $42.8 million in total NPL balances, $23.3 million or 54% is guaranteed by the federal government, and $19.4 million is unguaranteed. Looking ahead, while we expect a gradual moderation in NPL migration, as loans underwritten in lower interest rate environments continue to season, migration may remain lumpy.
For the fourth quarter, we anticipate that approximately $10 million to $12 million in watch list loans could migrate to NPL. I will now turn the call over to our CFO, Bob Wahlman, to provide more detail on our financial results.
Bob Wahlman: Thanks, Jim. And good afternoon, everyone. We reported net income of $4.9 million for the third quarter, representing a 19% increase from the $4.1 million reported in the prior quarter and a 42% increase year over year. Diluted earnings per share rose to $0.34, up from $0.29 in the previous quarter, and $0.25 the same quarter last year. These results reflect strong operational execution and sustained business momentum across our core segments. Our strong performance was driven by several factors, including a notable increase in loan originations and a significant rise in credit enhanced balances. These trends contributed to higher net interest income, reflecting increased average loan balances across both our held for investment and our held for sale portfolios.
This was partially offset by the reversal of interest income on newly classified non-accrual loans. We also posted solid non-interest income, largely driven by a substantial increase in strategic program fees and higher gain on sale of loans. As a reminder, for accounting purposes, credit enhanced income is an offset to the provision for credit losses on the credit enhanced loan balances and net does not have an effect on net income. On the expense side, the increase in credit enhanced expenses is for the servicing and the guarantee on the credit enhanced loans. So reflects the growth in the credit enhanced loan portfolio. Excluding the credit enhanced expenses, we remain disciplined with our compensation and other operating expenses.
Total end of period assets reached nearly $900 million for the first time in the company's history. This achievement reflects robust balance sheet expansion fueled by sustained loan growth and our disciplined approach to capital deployment. Average loan balances, including held for sale and held for investment loans, totaled $683 million for the quarter compared to $634 million in the prior quarter. This increase included notable growth in strategic program loans with credit enhancement, commercial leases, residential real estate, and owner-occupied commercial real estate. Average interest-bearing deposits were $524 million, compared to $494 million in the prior quarter.
The sequential quarter increase was driven mainly by an increase in wholesale time certificates of deposits, but we also had a modest pickup in other deposit categories, including demand, savings, and money market deposits. Net interest income increased to $18.6 million from the prior quarter's $14.7 million, primarily due to an increase in credit enhanced balances and rates in the held for investment portfolio and the higher average balances in the strategic program loans in the held for sale portfolio, partially offset by higher average balances of brokered CD accounts.
Net interest margin increased to 9.01% compared to 7.81% in the prior quarter, driven mainly by growth in the credit enhanced portfolio, offset in part by accrued interest reversals on loan migrating to non during the prior quarter. As a reminder, the net interest margin can be affected by specific terms of each new credit enhanced loan program or by the mix of loan growth of existing credit enhanced portfolio. While generally, new credit enhanced agreements will expand the NIM from the current level, some agreements could cause NIM to compress. In terms of a net interest margin outlook, for the fourth quarter, we could see some compression in the margin relative to Q3.
This is primarily driven by the onboarding of a substantial volume of average balances through our new strategic partnership with Tally. While this initiative supports overall revenue growth, the revenue contribution from these balances is bifurcated between net interest income and interchange fees. As a result, a portion of the revenue generated by this agreement will be captured in net interest income, and a portion will be captured in non-interest income. As a portion of the economic benefit to FinWise will be captured in non-interest income, the resulting net interest margin from adding this program may be lower than expected.
Looking beyond the fourth quarter, we suggest thinking about our net interest margin in two distinct ways: including and excluding credit enhanced balances. When including credit enhanced balances, the margin is projected to increase, supported by the continued expansion of our credit enhanced loan portfolio and strategic efforts to lower our cost of funding. This upward trend is expected to persist until growth in these balances begins to moderate. Conversely, excluding credit enhanced balances, we anticipate a gradual decline in margin consistent with our ongoing risk reduction strategy. Fee income was $18.1 million in the quarter compared to $10.3 million in the prior quarter.
The sequential quarter increase was primarily driven by the substantial increase in credit enhancement income, continued growth in strategic program fees due to stronger originations, and gains on sale of loans. As noted earlier, credit enhancement income is fully offset by the provision for loan losses related to credit enhanced loans and increases as we grow our credit enhanced loan balances outstanding each quarter. Noninterest expense for the quarter totaled $17.4 million, an increase from $14.9 million in the prior quarter. The pickup was primarily driven by higher credit enhancement expenses, including the servicing and cost of the guarantees on the credit enhanced loans, reflecting the continued growth in the credit enhanced loan portfolios.
Importantly, when excluding credit enhancement costs, operating expenses increased only modestly, with the uptick largely concentrated in other operating expenses. This was mainly due to servicing expenses associated with the balance sheet programs of our strategic programs. The reported efficiency ratio is 47.6% versus 59.5% in the prior quarter. The decline was due mainly to the increase in credit enhanced fee income and gain on SBA loan sales previously discussed. Removing the income statement effects of the credit enhanced loans, a non-GAAP measure, the efficiency ratio was 59.7% versus 65.3% in the prior quarter, implying solid operating leverage in the quarter due to strong revenue growth and disciplined expense management.
Although further improvement in efficiency ratio may be less pronounced in future periods, we remain focused on driving sustainable, positive operating leverage with a long-term goal of steadily lowering our core efficiency ratio. That said, there may be periods in which the efficiency ratio may increase. Our effective tax rate was 23.7% for the quarter, compared to 24.5% in the prior quarter. The decrease in the prior quarter was due primarily to the increase in deferred tax assets related to restricted stock, increased allowances for loan losses, and accrued bonuses. While multiple factors may influence the actual tax rate, we currently expect the 2025 tax rate to be approximately 26%.
With that, we would like to open up the call for questions and answers. Operator,
Operator: Thank you. We will now be conducting a question and answer session. You may press 2 if you would like to remove your question from the queue. Before pressing the star keys. And, again, that is 1 to ask a question. And our first question will come from Joe Yanchunis with Raymond James.
Joe Yanchunis: Good afternoon.
Juan Arias: Hi, Joe. Hey, Joe. Good afternoon.
Joe Yanchunis: Hey. So as you outlined in your prepared remarks, Credit Enhanced loan balances are gonna exceed your year-end target, you know, largely due to receiving the Tally loans. You know, given your outlook for credit enhanced loans, can you discuss what level of concentration you're comfortable with?
Juan Arias: For these for this in your loan portfolio? Yeah. So some of the concentration policies is Joe, really are limited by percent of the portfolio by program. I would tell you that they top out at about 15%. Per program.
Joe Yanchunis: Okay. That's per program, not for loan type.
Juan Arias: That's correct. Yes. It is.
Joe Yanchunis: And then can you talk a little more about the net reductions in FTEs and compliance and risk functions? I understand the percent of employees in these oversight roles remained unchanged, but was there any new systems that you put in place to automate certain functions to allow fewer employees to receive more volume?
Bob Wahlman: The employee right now, number has dropped a little bit. Not it's not due to any AI or what have you in the system. It's just us being very disciplined about what we're doing here. However, we are analyzing, as many other banks are, potential efficiency impacts from AI.
Joe Yanchunis: Okay. I appreciate it. And then just a couple kinda clarification questions for me. And forgive me if this has already been covered, but what is the difference between credit enhancement program expenses and credit enhancement guaranteed expenses?
Bob Wahlman: So, we're just being more specific. What was in previous periods, references credit enhancement expenses. Is referring to the actual the amount that we're paying for guarantees on those credit enhancement programs. The other component piece that's included in the expense section, but is not specified was not being included in what was previously described as credit enhanced expenses. Is a servicing cost related to those credit enhancement loans. But that's rather insignificant relative to the guarantee amounts that are being paid.
Joe Yanchunis: Okay. Perfect. And then just kinda last clarification question for me. You talked about some accrued interest reversals in the quarter. Can you quantify that impact?
Juan Arias: Could you repeat the question, please?
Joe Yanchunis: The accrued interest reversals in the quarter that boosted loan yields in the NIM? Yeah. That was the accrued the accrued interest reversal during the period was a prop was about a $175,000 So that is when a loan goes nonperforming and we have to reverse the interest that had previously been accrued on loan when it reaches ninety days past due, that was $175,000 in this quarter compared to $514,000 last quarter.
Joe Yanchunis: Alright. Well, I appreciate that. For taking my questions.
Juan Arias: Thanks, Joe.
Operator: Our next question comes from Andrew Terrell with Stephens Inc.
Andrew Terrell: Hey, good afternoon. Hey, Andrew. Just thinking about kind of net growth of the balance sheet. Into the coming year. Jim, I appreciate the guidance you gave around credit enhanced. That's really helpful. But should we expect the entirety of you know, your loan growth going forward to come from that Credit Enhance product or products? Or should we expect growth in any areas outside of that?
Jim Noone: I think you'll see growth, you know, across the board, Andrew. I think that would be the primary driver, though. That's where you'll see the biggest pickup. You know, if you look at our SBA portfolio, we've kind of been, excuse me, selling about as much production as we're putting on the guaranteed portions. At least in the last, you know, quarter or two. You're getting you know, in the equipment leasing, you see, you know, upticks each quarter. But, yes, generally, the credit enhanced portfolio is where the meaningful growth, the portfolio side will come from.
Andrew Terrell: Okay. Got it. And then, you know, you've you're gonna outperform this 50 to 100,000,000 guide It sounds like by the time we end this year and, you know, if we kinda extrapolate the baseline you're talking of monthly growth for 2026, it implies, you know, just a little more than a $100,000,000. Of credit enhanced growth in 2026. I'm I'm just curious, you know, what could cause you to deviate either positively or even negatively versus, you know, kind of this established baseline we're thinking about for 2026?
Jim Noone: Yeah. So, yeah. We're looking at about 115,000,000 by the end of the year, and that's above previous guidance of the 50 to a 100. So we're happy about that. You know, like you mentioned, you know, we're currently comfortable with organic growth there. You know, call it starting January 1 of about 8 to 10,000,000. Based on what we're currently seeing in trends. Uh-huh. So what would cause us to you know, outperform that? It would be an acceleration. You know, there's four live programs today, Andrew. And then there's the fifth program coming online in December with Tally. You know, of the four live programs, two have kind of good established trends month over month.
I would say two are still kind of lagging as far as just you know, growth. So if you have, you know, those two programs start to hit more of the stride, you could have upside. On the downside, I would say, really, you know, if you have some material weakness in performance, you know, when we underwrite these, we stress them, you know, pretty we stress them pretty highly. Both with a 50% and a 100% stress on charge off rates, and then we look at high watermarks.
But, you know, if we have meaningful deterioration in performance there, and we have to you know, stop originations for one of those programs, that's where you would see you know, underperformance versus the kinda trend that we're talking about. You know, a 115 to start the year, and then 8 to $10,000,000 of organic growth monthly throughout the year.
Andrew Terrell: Got it. Okay. And if I could clarify one on the expenses I'm looking at the credit enhancement guarantee expense of one point, $7.02 0 in the quarter. Compared to, you know, the adjustment section, you're breaking out the total credit enhancement program expense of one spot $9.06 8. Is the delta of that what you're referring to is the, you know, kinda service the incremental servicing costs that I'm assuming would be kind of variable as this loan portfolio grows?
Bob Wahlman: Yes. It is. That would be the difference.
Andrew Terrell: Okay. And it is it is variable, so increases going forward?
Bob Wahlman: Like, the servicing cost is typically stated as a percentage of the assets, and so that will Right. Vary as the program matures and grows.
Andrew Terrell: Yep. Okay. And so if I if I if I look at that, that was in kind of the other expense line in the third quarter that stepped up. Essentially implies, you know, the other expense stepped up, you know, 400,000 or so. In the quarter. I'm just curious any other specific drivers to the step up in the other expense? I'm just trying to get kind of a clean run rate.
Bob Wahlman: Well, the largest one that you noted there was the servicing expenses on these port these credit enhanced portfolios. The other changes that are included in there is deposits are higher We have a little bit higher FDIC deposit insurance assessment. And then just generally data services and software costs are included in there that also increase.
Andrew Terrell: Yep. Okay. Perfect. Well, thank you for taking the questions.
Jim Noone: No problem. Thanks, Andrew.
Operator: And as a reminder, if you'd like to ask a question, please press 1 on your telephone keypad. And we'll go next to Brett Rabatin with Hubd Group.
Brett Rabatin: Hey, guys. Good afternoon. Good afternoon. That's great. To ask a question on the credit enhancement You know, some of some of the loans that you're adding through these programs are credit enhanced and some are not guaranteed. Can you maybe break apart the decision on what you're doing with the with the two pieces there and why there's two buckets?
Jim Noone: Yeah. So I think you're you're probably looking at the table on page five of the earnings release spread. Is that right?
Brett Rabatin: Yep. Yeah. Yeah. Yeah. Okay. So the you've got two kinda sub line items there under strategic program one. One with credit enhancement, and that's that's a credit enhancement program that we've been talking about, and it's been a meaningful starting to become a meaningful growth driver of assets in the portfolio. The without enhancement, those are you can call them, like, full risk retention programs that we have. We have three there's four active programs there. Most of them were retention programs that have we've been active with really over the last four or five years.
Brett Rabatin: We had those balances have been pretty stable. We talked in the last quarter or two about the fact that they may start ticking up here. So you see them know, they were pretty flat. June in the June quarter versus you know, the same period last year. But you did see them pick up a little bit. $3,000,000 or so in this quarter. And we had talked about that. The In that program, you're getting full yield, but you're you're taking full NCO exposure as well.
And so with a few of our partners, we've got you know, anywhere from two to 5% retention rates So every loan that comes through that we originate at the bank, you know, we will hold two to 5% of the receivable and then we sell 98 to 95% of the receivable, you know, to an SPV or back to the partner. And then that loan balance will stay on our balance sheet through payoff or charge off. And so we're capturing all of the yield. We're capturing all of the of the credit risk, but that's been a you know, it's been a fairly stable number. It's to tick up a little bit.
And I think Ken, in some of his remarks, you know, over the last quarter or two, has had mentioned that we're looking at, you know, potentially growing that a little bit here. That help?
Brett Rabatin: Okay. Yeah. That's helpful. I just for some reason, I was thinking that you guys were gonna transfer those programs into the strategic with credit enhancement. And so those balances were gonna go down instead of up, but that makes sense. Yeah. Difference at different set of programs. Right. Right. Wanted to, ask you know, you mentioned the margin down in the fourth quarter with continued derisking. You maybe talk about the you know, how much you're expecting? And then when I look at the CDs that cost $4.22, in the third quarter, you know, with rate cuts, I'm wondering if the CD book might be an opportunity on the margin.
Bob Wahlman: Sure. Let me tackle that one. So what I was referring to in my comments was that, we have tallied coming on. And during the fourth during the fourth quarter, late in the fourth quarter, And talent is a little bit of a different structure of transaction. Where the revenue is in part related to interest income, which is a low which is going to be only part of the revenue we collect from it. And then we're also going to collect from that portfolio the addition additional fees, the Interchange. Interchange fee. Thank you.
So depending upon when that program comes on, and how quickly these other programs continue to wrap up, that could result in a little bit of toss-up in regards to whether we end up with margin increase or margin decrease during the fourth quarter.
Brett Rabatin: Okay. That's helpful. And then on money rails and payments, you know, any do we have to wait for to January for some maybe some thoughts on potential revenue in '26 and if we do, okay. But was hoping for maybe any early color you could give. And then just you know, particularly money rails and payments, just, you know, maybe any pipeline on potential partners from here?
Juan Arias: Sure. So as far as pay cards go first, we just announced Dream five and Tali. We actually expect Dream five will generate deposits for us in 2026 especially. But also, we have the standard banking behind that, so we would be moving money back and forth on MoneyGrills with them. We also have additional partners that are that we expect to generate not only deposits but, money rails, fee income, as well as some BIM opportunities as well. In the pipeline right now. So did that answer your question?
Brett Rabatin: Yeah. That's that's helpful. And then just you know, I don't know if you wanna give any kind of early thoughts around potential revenue magnitude, but that would be helpful if you think about the coming year.
Juan Arias: I don't think we're ready at this time, but what we said before is it will become more meaningful in the latter half of twenty six, and we think you'll get more of a steady state in '27. It's more predictable, but as we get more information here, you know, we'll share that with you.
Brett Rabatin: Okay. Last one for me just around expenses, and you mentioned earlier that you know, AI was not a driver, for 3Q. I know 36% of your FTE count is in compliance IT. Etcetera. Is that an opportunity you guys think over the next year?
Juan Arias: You know, that's a great question. The way we kind of think of it is we have built a platform to continue to launch partners, and we really don't look at it as in the terms of head count reduction. What we do look at it as is the ability to moderate head count as especially production related headcount as we grow. And so that's really where we see the lift there. Because we do have a lot of requirements and oversight and forth that we think we're right sized there, but future growth is where we see the opportunity.
Operator: Okay.
Juan Arias: Fair enough. Thanks for all the color, guys. No problem.
Operator: And ladies and gentlemen, thank you for your participation. This does conclude today's teleconference. You may disconnect your lines and have a wonderful day.
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