Company Update

Q1 Message from Gilles

Gilles Gade

April 27, 2023

4 min read

Dear All,

We recently closed the first quarter of the year strong and on target despite a turbulent macro environment. We are in line with our revenue targets and strategic plan for 2023.

A few highlights:

Revenue Growth: Excluding the wind down of PPP, Cross River posted another quarter of revenue growth, with substantial accomplishments across our differentiated business verticals.

  • Strong trend of upward growth in Fintech Lending gross revenue (32% increase YoY).

  • CRE & SBA saw 57% YoY revenue growth, led by Construction & Lender Finance lines.

  • Strategic Direct Lending saw an increase of 263% YoY revenue, driven by increased yields and higher funded balances from new and existing clients.

  • Cards & BaaS revenue increased 110% YoY, primarily due to a ramp-up in activity from both existing marquee clients as well as new clients onboarded in the quarter.

  • Under all circumstances, we expected a reduction in Adjusted EBITDA as the positive impact of PPP rolled off our books. With the increase in loan loss reserves and higher rate environment, we have seen some further compression. At the same time, while interest rates are putting pressure on our industry and partners, our net interest margin is still quite resilient, and the returns on the portfolio remain on target.

Credit Performance:  Like others, we are seeing some decay in consumer credit performance, but it is largely in below prime credit scores, where we have a very small part of our portfolio. We have seen no meaningful change in the performance of our CRE portfolio. Regardless, we have increased our reserves as a buffer against future potential impacts of a weakening economy.

Capital Markets and Liquidity: Over the last few months, there has been stress in the capital markets, with further tightening more recently given the concern surrounding bank deposits. Fortunately, we have seen net inflows for a variety of reasons:

  • We have attracted new blue-chip deposit and payments clients looking to diversify their banking relationships.

  • KBRA reaffirmed our debt rating, providing a public vote of confidence in our current position and business model.

  • The SBA has accelerated repayment of forgiven and guaranty PPP loans.

  • Funding sources remain stable with uninsured deposits accounting for ~25% of total deposits, well below industry peers.

Regulatory: Regulatory scrutiny on banks in general is increasing and the events with SVB will only expand those efforts with a specific focus on banks that support fintech. Cross River is the largest of these banking institutions and as such, we have regulatory examiners reviewing some elements of our business on a continuous basis. We view our compliance capability as a strategic advantage and are proud to lead our industry in maintaining the highest levels of compliance, transparency, and responsibility.

New Business: All businesses are continuing to grow. Particularly in the last quarter, with the collapse of some competing banks and our well-known, longstanding leadership in executing fast and secure payments, we saw increased demand for payments services from businesses engaged in digital assets and successfully brought on new blue-chip customers. As a reminder, at no time do we touch, hold, advise, or store the digital asset itself.

Innovation: We remain committed to our mission of ensuring that every qualified consumer and small business has access to the financial services they need to prosper, grow, and fulfill their potential. This mission can only be fulfilled by transformative innovation in financial services. We believe that innovation can and should be led by fintech companies and we are proud to serve them.

As I shared in our YE 2022 letter, I believe that bank-partnered fintechs that put a premium on compliance, transparency, accountability, and risk management will emerge stronger—we are the ones who are responsible for the future of financial services.

For Cross River, these times provide us with a golden opportunity to continue to collaborate with our partners, regulators, and peers for regulatory modernization. This will ensure we level the playing field and open responsible financial services to the world. Now, more than ever, we thank you for being a part of the Cross River family.

I welcome your feedback and opinions, and most of all, I look forward to answering any questions you may have.