FinWise Bancorp — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022; balance-sheet comparisons are primarily with December 31, 2021. Figures below are in U.S. dollars; financial amounts are in millions unless otherwise stated.
Business context
FinWise Bancorp operates through FinWise Bank, offering commercial and retail banking products. Its model includes SBA lending and nationwide Strategic Programs with third-party loan platforms, through which it earns loan interest, program fees and loan-sale gains. Management identifies these partnerships as an important source of loan volume and growth.
Financial performance
| Metric | Q2 2022 | Q2 2021 | First half 2022 | First half 2021 |
|---|---|---|---|---|
| Interest income | $13.0 | $11.1 | $26.2 | $19.9 |
| Net interest income | $12.8 | $10.8 | $25.7 | $19.2 |
| Provision for loan losses | $2.9 | $1.5 | $5.9 | $2.2 |
| Noninterest income | $8.4 | $8.2 | $20.1 | $14.2 |
| Noninterest expense | $11.0 | $7.1 | $20.1 | $13.7 |
| Net income | $5.5 | $7.7 | $14.9 | $13.0 |
| Diluted EPS | $0.41 | $0.84 | $1.10 | $1.45 |
| Net interest margin | 13.69% | 14.35% | 13.53% | 12.64% |
Q2 net income fell 29.2% year over year, as higher operating expenses and loan-loss provision more than offset growth in interest income. First-half net income increased 14.5%; higher interest income and noninterest income were partly offset by increased expenses and credit provision. The larger share count following the 2021 IPO also contributed to lower comparative EPS.
Q2 Strategic Program fees were $6.2 million, up 57.8%; first-half fees were $12.8 million, up 86.3%. First-half loan-sale gains increased to $7.5 million from $5.0 million. These gains were partly offset by a negative $0.6 million Q2 and negative $1.0 million first-half fair-value change in the BFG investment, compared with gains in 2021.
Financial position, liquidity and capital
- At June 30, 2022, total assets were $366.0 million, down from $380.2 million at year-end 2021. Cash and cash equivalents were $96.5 million; net loans were $189.7 million.
- Total deposits were $219.4 million, down 12.9% from $251.9 million. Noninterest-bearing deposits were $83.5 million, versus $110.5 million at year-end. Uninsured deposits totaled $128.3 million.
- Shareholders’ equity was $130.5 million, up from $115.4 million, mainly reflecting first-half net income. The Bank’s CBLR leverage ratio was 21.4%, against a 9.0% well-capitalized requirement; the filing says the Bank remained well-capitalized.
- The only reported borrowing balance was $0.4 million under the PPP Liquidity Facility. No amounts were outstanding on the other listed credit lines; available facilities included a $3.2 million FHLB line and $10.0 million of Federal Reserve discount-window capacity.
- First-half operating cash flow was $37.5 million, compared with cash used of $25.5 million in 2021. Investing activities provided $6.5 million, versus $67.2 million; financing activities used $33.2 million, versus $49.2 million. Cash increased $10.8 million during the period.
Material changes, outlook and risks
- Loans totaled $232.1 million, down from $265.8 million at year-end, with Strategic Program loans decreasing to $59.1 million from $85.9 million. SBA loans were $124.5 million. Strategic Program credit exposure remains notable: the allowance for these loans was $6.4 million, or 60.8% of the total allowance.
- The total allowance for loan losses increased to $10.6 million from $9.9 million. First-half net charge-offs on Strategic Program loans were $5.0 million after recoveries; the filing reports a 9.0% six-month net charge-off ratio for that category. Management attributes the higher provision in part to growth in unguaranteed loans and describes credit losses as normalizing toward pre-pandemic conditions.
- Nonperforming loans were $0.6 million, or 0.3% of total loans. Total nonperforming assets and troubled debt restructurings were $0.7 million, broadly lower than year-end.
- The SBA servicing asset had a $1.1 million impairment in the first half, attributed primarily to rising market rates and faster market-wide SBA loan prepayments. Held-to-maturity securities had $1.4 million of unrealized losses at June 30, compared with $0.1 million at year-end; they were carried at amortized cost and pledged as collateral.
- Management did not provide numerical earnings or growth guidance. It stated that cash and available credit facilities were adequate for obligations over at least the next 12 months. Risks highlighted include credit deterioration, interest-rate sensitivity, deposit funding and maintaining low-cost core deposits, reliance on Strategic Program partners and fintech platforms, cybersecurity and third-party service providers, and regulatory and SBA program changes.
- The company plans to adopt CECL on January 1, 2023 and was evaluating the effect; the filing does not provide a clear estimated adoption impact. It adopted lease accounting in January 2022, adding $7.4 million of right-of-use assets and lease liabilities. A first-quarter out-of-period adjustment reduced loan interest income and net loans by $0.8 million before tax; management said it was not material.
- The company reported no material legal proceedings, no material changes in internal control during the quarter, and effective disclosure controls. It reported no cash dividends paid and no current plan to pay them in the foreseeable future.
Important facts for investors to verify
- Whether Strategic Program loan performance, charge-offs and partner concentration evolve as expected, and how much of originations the Bank retains versus sells.
- Deposit stability and funding mix, particularly the decline in deposits and the $128.3 million uninsured balance.
- Whether rising rates affect asset yields, deposit costs, securities values and SBA servicing asset valuations as management anticipates.
- The eventual CECL transition adjustment and any resulting changes to reserves, earnings or capital.
- Drivers of elevated expense growth and whether revenue growth can outpace staffing, infrastructure, legal and professional costs.