Forbright, Inc. (FRBT) Earnings Call Transcript & Summary

Good day, and thank you for standing by. Welcome to Forbright, Inc. Q2 2026 Earnings Conference Call. [Operator Instructions] Please be advised that today's conference is being recorded. I would now like to hand the conference over to your first speaker today, Ben Wakana, Chief Public Affairs and Investor Relations Officer at Forbright. Please go ahead.

Thanks, Rivka. Before we begin, I'd like to remind listeners that remarks on this call may contain forward-looking statements that are subject to risks and uncertainties. Please refer to the safe harbor statements found in today's earnings release and in our investor presentation for additional details. Management may also reference non-GAAP financial measures during this call. A reconciliation of non-GAAP measures can be found in our earnings release and investor presentation slides. Finally, I'll identify the speakers on the call this morning. They are John Delaney, Chairman and Chief Executive Officer of Forbright Inc.; Don Cole, President and Chief Operating Officer of Forbright Inc. and Chief Executive Officer of Forbright Bank; and Chris Lynch, our Chief Financial Officer. We'll also be joined for Q&A by Aaron Juda, our Chief Strategy Officer. And with that, I'll turn it over to John.

Thank you, Ben, and good morning, everyone. This is Forbright's first call as a public company. So we're very excited and grateful to our new shareholders and the research analysts who have become involved in the company and who have joined us this morning. At a high level, 3 things stood out this quarter. Loan growth was very strong. Credit trends continue to be favorable. And probably even more important, our outlook on credit is very positive based on the insights we have into our portfolio. And then finally, our digital deposit platform is outperforming what I would describe as our very high expectations for it. So let me go through some of these in a little more detail before I turn it over to Don. Our total loans were up about $275 million this quarter compared to the first quarter, and we continue to see very attractive lending opportunities across our 6 national lending strategies. And again, importantly, our pipeline in each of these businesses is very strong, which is why we would expect second half loan growth to be greater than first half because we see it accelerating as we go into the second half. Loan originations were up 13% compared to the first quarter. The growth was pretty evenly distributed across our lending strategies with Healthcare and Lender Finance having the largest share of the $1.2 billion of new and upsized loan commitments for the quarter. Just as important, pricing and structures remain disciplined. Loan yields increased slightly by about 3 basis points in the quarter. And as I noted, our credit metrics remained very favorable. We are also pleased that our new Asset Finance business closed its first transaction this quarter. It was a small deal, but it was important because it was a few months ahead of schedule. As we've mentioned to some of our new shareholders, we're very excited about the team we've assembled for Asset Finance. They complement the other 5 lending teams very well. And just to put it in perspective, the team that is running our asset finance business has collectively run a business in just that business that is bigger than all of Forbright, which puts into context why we're excited about that new team. So loan growth and credit remains strong, and those are the 2 probably most important measures you'll hear from us in the future. And again, as we go into the second half of the year, we feel very good about both of them. On the deposit side, the feedback we're getting from the market continues to validate our digital deposit gathering model. We've now crossed 100,000 accounts on our proprietary digital banking platform and approximately 90% of those deposits are FDIC insured. As the quarter ended, our digital deposits were up 9% from the first quarter, which allowed us to decrease some of our other higher cost funding, leading to a small improvement in cost of funds for the quarter. We successfully launched our digital deposit promotion capability at the end of the second quarter on June 15, it launched. It's performing meaningfully better than we projected. And that's good because it will position us to have more deposits than we had planned at the end of the third quarter, significantly more. And it will also position us to make progress on our cost of funds sooner than we had projected. We expect continued investments in technology to further enhance this capability so that we can have additional successful deposit gathering promotion, but we are pleased to be ahead of schedule with what we've launched thus far. And this is a good example of the value of a flexible API-driven technology stack rather than a cumbersome legacy core system. We saw an opportunity in the marketplace to add deposits. We launched this promotion capability very quickly, and we're reaping the benefits now. And I think it's also an example of the entrepreneurial culture that is pervasive across the Forbright platform. Don will talk more about expenses in a minute, but I wanted to emphasize that we remain very focused on expense management, and we are on track to meet our 2027 expense targets and perhaps even exceed them. And we talk a lot about expense management, not only because spending less drives higher returns, but our aim is to continue to simplify the business, not tolerate distractions or unnecessary activities, allocate our resources as intelligently as possible and create the capacity to invest more aggressively in technology and the strong growth opportunities we see in our business. So again, I'll turn it over to Don in a second. But as we head into the second half of the year, we have very high convictions about the key drivers of the business: loan growth, credit quality, funding cost and operating efficiency. Execution is our central responsibility. We concentrate on the drivers that matter most, value to our clients, producing responsible growth, maintaining rigorous credit and risk standards, managing expenses with intensity, allocating our capital intelligently and investing in the capabilities that will strengthen the franchise for years to come. Our commitment is straightforward: focus on what matters, avoid distraction and continuously improve the company. In my judgment, the second quarter was a good example of us doing just that. Don?

Thank you, John. First, I'd like to echo John's welcome to our shareholders, both old and new and to our analysts to this, which is our first earnings call as a public company. And to also echo John's description of our second quarter as a positive one that sets us up for continued success in the back half of 2026 and beyond. I'll spend a few minutes touching on some additional drivers and key metrics from the quarter. On loans and credit, as John said, loan growth and credit performance were strong this quarter. Our core net charge-off rate, which reflects our 6 national lending strategies was 8 basis points, in line with the previous quarter. And the second quarter ended with total net charge-offs of just $2.7 million, down from $4.1 million in the first quarter. Our limited credit issues are currently concentrated in our discontinued and shrinking legacy Community Bank and forward flow small balance portfolios, while our national lending businesses continue to perform very well. On expenses, as John said, we continue to maintain expense discipline in the quarter while investing in key growth areas of the business and absorbing the costs associated with becoming a public company. As we noted in our investor presentation, expenses for the quarter were higher versus the first quarter, and they increased by about $7 million due to 3 very notable factors. First, there was an employee retention program that was implemented earlier in the year before our IPO. This program runs for 3 years, but the way the GAAP treatment works is that it recognizes over 60% of the expense over the first year. That resulted in $3.9 million of increased expenses during Q2. Second, pass-through of expenses relative to our Solar Servicing business resulted in an increase of $3.2 million. As a background, we advance these expenses through Solar Servicing on behalf of the loan owners who then will pay us back. The advances show up as expenses and the paybacks revenue and other noninterest income. These expenses can be volatile each quarter, but ultimately do not materially affect net income as they are grossed up through noninterest income. The third notable driver of increased expenses was from the acquisition of our corporate headquarter building during the quarter. The acquisition resulted in $900,000 of additional expenses during the quarter. But similar to Solar Servicing, ownership of the building brings with it rental income that offsets these expenses. And in the case of the building, the revenue more than offsets the expenses, resulting in about $400,000 of pretax income net recognized during the quarter. We acquired the building primarily to give us strategic control over our primary office space, but we also expect it to continue to generate a small net profit going forward. Excluding those discrete items, our operating expenses would have been relatively flat quarter-over-quarter, which is reflective of the operating leverage we strongly believe exists in the business. Further demonstrating that point, our head count has remained relatively stable over the last 6 quarters despite a roughly 40% increase in loans and the doubling of our digital deposits. In fact, if you exclude the employees in our Solar Servicing business as it was added during the period, our head count is up only a total of 5 people. The stability of our baseline expenses is why we are confident in our belief that our efficiency ratio can move from the 77% level it was in Q2 to our medium-term target of 50% or below, simply through executing on our strategy and growing loans in our national lending businesses and deposits on our digital platform, while as John said, just simplifying the business and focusing on the things that matter. Finally, on earnings and some additional key performance metrics. Our net income was $4.1 million for the quarter or $0.09 per share on a fully diluted basis. Net interest income was $63.1 million, up 6% from last quarter, and our net interest margin expanded by 9 basis points this quarter as our asset mix improved, loan yields increased modestly and cost of funds moved lower. That combination is important because it shows the model working on both sides of the balance sheet. Net of the Solar Servicing pass-through income, our core net interest income was relatively stable despite some government agency delays in processing transactions in our FHA/HUD business that delayed some of our expected 2Q activity into this -- the third quarter. We continue to be optimistic about that pipeline and its ability to contribute increasing levels of noninterest income to the bank. Finally, our pre-provision net revenue was up 15% from last quarter to about $19 million. In sum, the results this quarter add to our confidence in the fundamentals of our business. We saw our underlying margin dynamics move in the right direction even as reported earnings absorbed the expected cost of the IPO and related public company transition items. With that, I'll turn it over to Chris for more detail on some other areas of the financials.

Thanks, Don, and good morning to everyone. I'll start with capital and liquidity, which positions the company well for continued growth. Capital ratios increased in the quarter with the closing of the IPO. CET1 ratios were 13% for the parent and 14.1% for the bank. Tier 1 leverage ratios were 10.4% for the parent and 11.2% for the bank. These do not reflect the $18 million of gross proceeds from the exercise of the overallotment option, which closed in July. Cash and AFS investments at quarter end totaled over $2 billion, and our loan-to-deposit ratio was 83.5%, up approximately 2 percentage points from Q1. Turning to taxes. Tax expense and the tax rate for the quarter were $9.2 million and 69%, which were up from $1.6 million and 12% in Q1. The increase was due to tax rules that limit deductions of executive compensation for public companies. This became effective for Forbright with the IPO and increased tax expense for compensation estimated to be disallowed for IRS purposes, including a $5.6 million write-down of deferred tax assets at year-end '25 for stock compensation. Tax expense for the quarter was offset by a benefit of $1.1 million from accretion of the deferred credit, which reduced the tax rate by 8.6%. This relates to the deferred economic gain from the acquisition of Solar Services. For accounting rules, the transaction was treated as an asset acquisition and the gain is recorded as a liability. The liability is recognized as a benefit in income tax expense as the acquired tax assets are realized, which were mainly NOLs. The estimated deferred credit balance at quarter end was $49.1 million. For the second half of this year, we estimate the tax rate to be approximately 20%, which is net of deferred credit accretion of approximately 10.5%. This is lower than the tax rate for Q2, which included the DTA write-down and 2 quarters of disallowed compensation expense since we were not a public company in Q1. For fiscal year '27, we estimate the tax rate to be approximately 17.5%, which is also net of deferred credit accretion of approximately 10.5%. This is lower than the estimated tax rate for the second half of '26 due to the declining rate impact of the disallowed compensation. The estimated tax rates exclude discrete type effects such as vesting restricted stock, option exercises, true-ups for tax returns, et cetera. With that, I'll turn it back to John.

Thanks, Chris. And before we open up to questions, I just wanted to close by reiterating our view that a very significant shift is happening in banking, again, in our opinion, to compete moving forward, banks will need to adjust to rapidly evolving needs of both their borrowers who are increasingly national and specialized and their depositors who in this age of technology are seeking better rates and a much better digital experience. We believe we have built a business model and designed the platform, assembled the right talent and established a culture that uniquely positions Forbright to thrive in this evolving environment for banking. So we're grateful that you joined us here this morning. And with that, I'd love to open it up to your questions. Operator?

[Operator Instructions] Our first question comes from the line of Moshe Orenbuch of TD Cowen.

Great. And welcome back, John and team.

I was going to start by saying here we go again.

Right. So I guess you talked about the loan growth and commitments and gave us some statistics and mentioned that loan growth should be accelerating into the second half. Maybe if you could just flesh that out a little bit more. Like are there any of the verticals that you think are going to be sort of changing as you look through this? And how you see that kind of shaking out like by how much could that acceleration be? And maybe talk about that a little bit, if you would.

Sure. So we've got the 6 businesses, as you know, Moshe. And in the first -- or in the second quarter and probably for the first half of the year, Lender Finance and Healthcare Finance were our stronger contributors. But it was pretty balanced. I mean they didn't meaningfully outperform the others, but they were the 2 stronger ones. And I would expect that to continue in the second half of the year, although our commercial real estate group has a very good pipeline in particular right now. And so I would expect them to do more in the second half than they did in the first half. The Asset Finance team, again, which is new and really has the potential over time to be as large as any business we have. They'll obviously have a better second half than they did the first half because they literally closed their first deal, which was relatively small in the last couple of weeks of the second quarter. So I think it will be pretty balanced. We're expecting good performance. And one of the reasons we're bullish on loan growth is just looking at the pipeline right now and the deals that are scheduled to close, it's just really promising, and we're very excited with the quality of the pipeline and feel very comfortable that we're going to have a good second quarter on loan growth. And the other thing that I think is important, across kind of '24 and certainly into '25, we did see spreads compressing. We didn't see structures loosening, which is very important because we didn't -- and we wouldn't follow that, but we did see spreads compressing, and we stayed competitive while they compressed. That has largely abated at this point. I certainly wouldn't say they're widening, but they're certainly stable -- and again, at the -- just this week, we did our deep dive, which we do once a quarter into the whole portfolio. From a credit perspective, we do that once a quarter. Obviously, the portfolio is monitored more regularly than that, but a very large group of people get together once a quarter to go through the whole portfolio. And I think we all left that meeting feeling very, very good about the credit quality in the portfolio. So we feel good about loan growth, and we feel good about credit for the remainder of the year.

Great. And maybe just a quick follow-up on the other side of the balance sheet. This -- given the macro changes with respect to rate expectations, what are your thoughts from a deposit pricing standpoint as we are in the second half of this year now?

Yes, I'll start on that, and then I may let Aaron chime in a little bit. But as I mentioned, our deposit promotion capability did extremely well, and it's positioning us to have more deposits at the end of the third quarter than we had planned. And that puts us, we think, in a position to improve cost of funds a little sooner than we had anticipated. We had anticipated doing something next year. We'll pull that into this year. Depending upon what happens with the rate environment, again, we certainly don't make any bets on this. But if there were to be a rate cut, say it's a 25 basis point rate cut, obviously, all our loans reset within 30 days. But I think we would look at not moving on the deposit side. I meant rate increase -- sorry, rate increase. If that were to happen in the fourth quarter, again, all the loans reset right away, but we're in a position where we would not have to follow that rate increase up. But Aaron, do you want to add anything to that?

No. I mean the only thing I would add is that the promotion -- early success, we have dialed back a little bit on the marketing just based on that success. But the promotion is still on until the end of August. So there's still -- we got to let the promotion run out. We're going to see what we have in September. These balances build over time. And then I think we'll be better positioned to take a stronger view on timing of any price action.

Our next question comes from the line of Ryan Nash of Goldman Sachs.

Don, you made a comment on expenses that you're on track for '27 or potentially to exceed your expectations. Maybe just put a finer point on where you're seeing better performance? And what does that mean in terms of achieving your efficiency goals over the short to medium term?

I think overall, we've been fairly stable. And I think the key part I mentioned, our head count growth, which has been outside -- in the current year through June, I think we were slightly down. So I think we're managing and we're being very intentional about new hires. As we said, we believe we have a lot of operating leverage in the business. So one place we're beating is just straight up head count, which is the biggest component, obviously, of our expenses. Some of those pass-throughs get noisy, but if you take those out, we've been flat. And I think we -- John mentioned, we are focused on expense management. We have some initiatives within the company to really analyze each group bottoms up and understand where we can add more efficiencies. And I think the early returns on that or the early reports are there some places we can save, and we're excited about those. So when you look at a forecast where you put in inflation adjustments, et cetera, we think we can continue to hold the line. And that's why I think we feel so bullish about '27, just looking at where head count is today.

Maybe if I could dig in a little bit deeper on some of the verticals. I think, John, you highlighted commercial real estate seeing some good opportunities. Lender Finance, obviously, was very strong in the quarter. Maybe just put a little bit of a finer point where you're seeing the best opportunities within there. And then to Moshe's question regarding the acceleration in the back half of the year, any broad strokes do you think you can maintain or improve on the 5%-ish linked quarter growth that you saw this quarter?

Yes. I'll let Don chime in as well. As I mentioned, Ryan, when I was talking to Moshe, we look at the pipelines of all the groups, and they're really strong right now. And we have very good visibility across the next 90 days because there's effectively a schedule of deals that we expect to close because they're in some form of closing. Either we've signed them up and they're in diligence and the diligence is going well, and we've aligned with the borrower around a closing date, or it's actually in the legal documentation. So in the near term, 30, 60, 90 days, that visibility is very good, and we obviously feel good about it. But then just looking at the rest of the pipeline, I think in our prescreen meetings, every Monday, we have these prescreen meetings with all the groups where they do what I just described. They prescreen a deal before they sign it up. And those meetings have been longer than they've been in a long time in the last couple of weeks. And the quality of the deals are good. And so I just think a little bit of it is anecdotal, but over time, you get a feel for these things. Just looking at the pipeline, looking at what's in the queue just gives us conviction around loan growth improving. And I think now everyone is super focused. Obviously, in the first half of the year, we also had some distractions. We had the IPO and things like that, which you try not to have impact you, but let's say, it does a little bit. So now everyone is laser-focused on just execution. I don't know, Don, what would you...

Well, look, I would say also in the second quarter, we had a few fairly large payoffs and paydowns that we grew out of. I don't think we see quite as much of that in the third quarter. Those can always happen. But some of -- you can see the commitments in the second quarter that we'll fund up in the third. So just looking at where we are, frankly, quarter-to-date, we feel very strong about the third quarter numbers.

Our next question comes from the line of Jared Shaw of Barclays.

Maybe just going back to the deposit discussion. It was great to see the strong 9% digital deposit growth this quarter. When you mentioned the ability to improve the cost of funds sooner, is that more that you could see continued acceleration of some of the brokered and wholesale funding going down or that you would have the flexibility and maybe desire to be more aggressive with pricing changes?

I would say it's a little bit of both. The brokered did come down. Some of those brokered CDs that we have are a little higher priced than our average. So there is a little bit of room there. It moves it a little bit. I would probably say it's more of the latter just because of the size of that portfolio. And when you position yourself with the deposit balances so far ahead of your targets, you can manage your cost a little better because you don't need to grow quite as much going forward.

And then when you look at...

And...

Sorry, go ahead.

No, I was just asking if Aaron wanted to add to that at all.

No, that's it.

Jared, keep going.

When you look at how the back book is repricing, how has the retention been on existing balances?

Yes. The retention on the existing digital deposit customers has been really strong. And it continues to be -- we have still retained over 96% -- 96% of customers who have opened an account with us are still funded today. So that's been really strong. And again, we haven't moved on that base rate since earlier this year. So that stayed pretty stable. So really strong retention there and then obviously, really strong growth on the promotion side.

Okay. All right. And then shifting over to the fee income. When we look at what happened with Solar Services this quarter, anything to call out there? Because I think you were saying that some of those reimbursements are coming through other fee income. So is that -- what were some of the dynamics of the growth in Solar?

So in the line item by business, those are in Solar Servicing. Sorry if that was confusing. So the growth in Solar Servicing was largely due to the growth in the pass-throughs. The baseline was stable to -- it's a slightly shrinking portfolio, but it's going to take a long time to run off. But the increase was due to the pass-throughs, as I discussed.

Yes. And it's worth dwelling on that just so everyone -- Jared, obviously, you're tracking this, but I want to make sure everyone does because it is somewhat of, I'll just say, a frustrating accounting treatment, but it is what it is. So we manage $8 billion of loans on behalf of a variety of loan owners in our Solar Servicing business. And as there's expenses and most recently litigation because there's a lot of litigation going around the country around residential solar lending, again, we don't -- these $8 billion of loans we manage for other people. We advance the litigation expenses and then we seek the reimbursement, which obviously we can get because we control all the cash. And so we don't have any exposure on that, but it does run through our P&L. When we advance the legal expenses, it's an expense. When we get it recovered, it's other income. I would have thought that would have been in some suspense account because it's not really our money, but that's not the way the accounting works.

And if I could just ask one final one. When you look at the loan yields this quarter and the growth in the loan yields, is most of that from mix shift? And if we are expecting to see continued good strength in the Healthcare and Lender Finance, should we think that in a neutral rate environment, we still have a little bit of tailwind on yields there?