FinWise Bancorp — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Dollar amounts are in millions unless otherwise indicated. FinWise Bancorp operates through FinWise Bank, with lending that includes SBA, real estate, consumer and nationwide third-party Strategic Programs.
Financial performance and position
| Metric | Q3 2022 | Q3 2021 | Nine months 2022 | Nine months 2021 |
|---|---|---|---|---|
| Net interest income | $12.5 | $13.5 | $38.2 | $32.7 |
| Provision for loan losses | $4.5 | $3.4 | $10.3 | $5.5 |
| Noninterest income | $7.5 | $8.5 | $27.6 | $22.7 |
| Noninterest expense | $8.5 | $7.4 | $28.5 | $21.1 |
| Net income | $3.7 | $8.4 | $18.6 | $21.5 |
| Diluted EPS | $0.27 | $0.91 | $1.37 | $2.36 |
| Net interest margin | 14.93% | 18.31% | 13.96% | 14.49% |
Q3 net income fell 56.7%; nine-month net income fell 13.5%. The quarter’s lower net interest income and noninterest income, higher credit provision and higher expenses weighed on results. Nine-month net interest income and noninterest income increased, but higher expenses and provision more than offset those gains.
Balance sheet at September 30, 2022: Total assets were $385.6, versus $380.2 at December 31, 2021; cash and cash equivalents were $92.5, versus $85.8; net loans were $200.5, versus $198.1; deposits were $232.8, versus $251.9; and shareholders’ equity was $134.3, versus $115.4. Total loans, including held-for-sale loans, were $256.8, down from $265.8. The allowance for loan losses was $12.0, up from $9.9.
Cash flow for nine months: Operating activities provided $36.3, compared with $21.5 used in 2021; investing activities used $9.6, versus $52.1 provided; financing activities used $19.9, versus $9.9 used. Cash increased $6.7 to $92.5. Operating cash flow included very large Strategic Program loan originations and proceeds from loan sales.
Liquidity, funding and capital: Deposits declined $19.1 from year-end, while interest-bearing demand deposits increased following the launch of HSA deposits sourced through Lively. Uninsured deposits were $129.3. Management reported liquid assets at 24.0% of total assets and said liquidity, together with available credit lines, was adequate for obligations over at least the next 12 months. No amounts were outstanding on the reported credit lines; $0.345 of PPPLF borrowings remained. The Bank’s community-bank leverage ratio was 24.9%, above the 9.0% well-capitalized threshold.
Material changes and management commentary
- Strategic Program fees rose 51.4% for the first nine months, primarily on higher loan origination volume. Strategic Program loans totaled $70.3, down from $85.9 at year-end.
- Q3 gain on loan sales fell 33.1%, mainly due to lower premiums on SBA 7(a) loans. For the nine-month period, gain on sale increased 19.2%, partly reflecting more SBA 7(a) loan sales.
- Credit costs increased: nine-month provision rose 86.4%, which management attributed primarily to higher net charge-offs and growth in unguaranteed loans. Strategic Program loans accounted for $8.5 of the $8.9 in gross charge-offs over the nine months. Past-due loans totaled $2.7; there were no nonaccrual loans at quarter-end.
- Nine-month noninterest expense rose 35.0%. Increases included professional services, employee costs and a $0.9 SBA servicing-asset impairment, which management linked primarily to rising rates and faster market-wide SBA loan prepayments. The quarter also included a $0.1 recovery of that servicing asset.
- Management said suppressed SBA sale premiums and rising variable loan rates informed its plan to retain a greater amount of the guaranteed portion of certain SBA loans, supporting held-for-investment growth and recurring interest income.
Outlook, risks and unusual items
- The filing provides no numerical earnings or revenue guidance. Management’s discussion describes strategy and risks, not a quantified forecast.
- Key risks include dependence on Strategic Program and fintech partners, concentration of origination and deposit relationships, partners’ regulatory compliance and oversight, loan credit deterioration and charge-offs, deposit retention and funding costs, interest-rate changes, cybersecurity and third-party systems, and regulatory compliance.
- The allowance for loan losses is based on estimates and may change as credit conditions evolve. Strategic Program loans represented 27.4% of total loans but 59.7% of the allowance at quarter-end. The company planned to adopt the CECL expected-credit-loss standard in 2023 and was still evaluating the impact.
- Held-to-maturity securities had $1.6 of unrealized losses at September 30, 2022, compared with $0.1 at year-end 2021; all were pledged as collateral. The BFG investment was carried at $4.5, down from $5.9, including a $0.9 nine-month fair-value loss based on significant unobservable inputs.
- The company recorded a third-quarter out-of-period tax adjustment related to Section 162(m), decreasing after-tax income by $1.4 for Q3 and $0.9 for the nine-month period. It also recorded a first-quarter out-of-period adjustment reducing interest income by $0.8 pretax ($0.6 after tax); management said it was not material to the periods involved.
- The company adopted lease accounting (ASC 842) on January 1, 2022, adding $7.4 of lease assets and liabilities. The Inflation Reduction Act’s corporate minimum tax and stock-repurchase excise tax provisions were to take effect in 2023; the company was evaluating their effects.
- The board authorized repurchases of up to 644,241 shares through August 31, 2024. The company repurchased 20,000 shares for approximately $0.2 during the quarter. Management reported no material legal proceedings and concluded disclosure controls were effective.
Important facts for investors to verify
- Whether the rising Strategic Program charge-offs and provision reflect a continuing loss trend, and how management’s CECL adoption may affect reserves.
- How higher rates affect asset yields, deposit costs, liquidity and the value or prepayment assumptions of SBA servicing assets and securities.
- The stability and concentration of deposits, including uninsured balances and funding sourced through Strategic Program relationships.
- Whether SBA loan-retention plans and Strategic Program volumes can offset lower sale premiums without increasing credit or concentration risk.
- The basis and materiality of the Section 162(m) tax correction and first-quarter interest-income adjustment, as well as the effects of BFG valuation assumptions and upcoming tax provisions.