FinWise Bancorp — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023 unless noted. FinWise operates through FinWise Bank, with a nationwide lending and fee business that includes third-party Strategic Programs and SBA lending.
Financial performance and position
- Earnings: Net income was $3.3 million, down 14.1% from $3.9 million in Q1 2023. Diluted EPS was $0.25 versus $0.29.
- Revenue and margin: Interest income increased 31.7% to $17.6 million; net interest income rose 15.7% to $14.0 million. Noninterest income increased 20.7% to $5.5 million. Net interest margin fell to 10.12% from 12.51% a year earlier.
- Expenses and credit provision: Noninterest expense rose 35.1% to $11.8 million, while provision for credit losses increased 18.1% to $3.2 million.
- Assets and loans: Total assets were $610.8 million, up 4.2% from year-end. Net loans held for investment were $377.1 million, up $18.5 million; Strategic Program loans held-for-sale were $54.9 million, up $7.4 million.
- Funding and liquidity: Deposits totaled $424.1 million, up 4.8%; time certificates were 58.4% of period-end deposits. Uninsured deposits were $148.8 million. Cash and cash equivalents were $115.8 million, or 19.0% of assets. Management said liquidity sources should meet obligations for at least 12 months.
- Capital and borrowings: Shareholders’ equity was $162.5 million and equity/assets was 26.6%. The Bank’s CBLR leverage ratio was 20.6%, above the 9.0% well-capitalized threshold. The Bank had $0.2 million outstanding under the PPP Liquidity Facility and no outstanding balances on its other reported credit lines.
- Cash flow: Operating activities provided $1.5 million, investing activities used $21.8 million, and financing activities provided $19.1 million. Cash and cash equivalents decreased $1.2 million during the quarter.
Material changes versus comparable periods
- Compared with Q1 2023, net income decreased $0.5 million despite higher net interest income and noninterest income. Management attributed the decline mainly to higher salaries and employee benefits and other infrastructure-related spending.
- Net interest margin declined as the yield on average earning assets fell 110 basis points and funding costs rose 153 basis points. Average interest-earning assets increased 41.8% to $556.8 million.
- Loan originations increased by about $0.2 billion to $1.1 billion, which management attributed mainly to improved conditions affecting borrowers and loan purchasers.
- Compared with year-end 2023, total deposits increased $19.3 million and shareholders’ equity increased $7.4 million. The latter included the $4.1 million BFG interest acquisition, completed in February through issuance of 339,176 shares.
Outlook, risks and unusual items
- No quantitative earnings or margin guidance is provided. Management said nonperforming assets stabilized in Q1 compared with recent quarters and described liquidity as adequate for at least the next 12 months.
- Credit quality remains an important risk: nonperforming assets were $26.0 million, versus $27.1 million at year-end, and included $14.8 million of SBA-guaranteed balances. Gross loan charge-offs were $3.7 million; net charge-offs were $3.4 million, or 3.5% of average loans. The allowance for credit losses was $12.6 million, or 3.2% of loans held for investment.
- SBA loans represented 63.4% of loans held for investment. Strategic Program loans were only 4.4% of that portfolio but accounted for 45.6% of the loan allowance; management notes these retained loans carry higher credit risk. Strategic Program originations, purchaser demand, service-provider oversight and concentration are key dependencies.
- Two material loan modifications occurred in the quarter; the filing reports $0.9 million of material modifications as of March 31. SBA servicing-asset valuations may be volatile with changes in prepayment speeds and interest rates.
- The Company began a repurchase program authorized for up to 641,832 shares through March 31, 2026. It repurchased 17,697 shares for $0.2 million in Q1. It also increased its BFG ownership to 20%; the investment is carried at $8.2 million using valuation methods with significant unobservable inputs.
- The filing identifies risks involving credit losses, interest rates and liquidity, reliance on fintech and other service providers, regulation, cybersecurity, deposit funding and SBA program requirements. No material legal proceedings were reported. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether expense growth and infrastructure investment translate into improved operating efficiency and earnings.
- Trends in net interest margin, deposit pricing and reliance on higher-cost certificates of deposit and brokered or institutional funding.
- Credit performance, collateral values and resolution of nonperforming loans, including the SBA-guaranteed portion and Strategic Program charge-offs.
- Strategic Program origination and loan-sale volumes, purchaser demand, service-provider oversight and reserve-account arrangements.
- The assumptions supporting the BFG valuation and the strategic and financial effects of its increased ownership stake.
- Actual use of the share-repurchase authorization relative to capital needs, loan growth and regulatory requirements.