FinWise Bancorp — Q1 2023 Form 10-Q
Business context and reporting period. This unaudited filing covers the three months ended March 31, 2023; income and cash-flow comparisons are against Q1 2022, while balance-sheet changes are generally against December 31, 2022. FinWise Bancorp operates through FinWise Bank and FinWise Investments, LLC. Its banking business includes SBA, commercial and real-estate lending, consumer lending, and nationwide Strategic Programs with third-party loan platforms.
Financial performance and condition
| Metric | Q1 2023 / March 31, 2023 | Comparison |
|---|---|---|
| Net income | $3.9 million; diluted EPS $0.29 | Down 59.1% from $9.4 million; diluted EPS was $0.70 in Q1 2022 |
| Interest income / expense | $13.4 million / $1.3 million | Interest income up 1.4%; interest expense was $0.3 million in Q1 2022 |
| Net interest income / margin | $12.1 million / 12.51% | Net interest income down 6.6%; margin was 13.37% in Q1 2022 |
| Provision for credit losses | $2.7 million | $2.9 million in Q1 2022 |
| Noninterest income | $4.5 million | Down 61.3% from $11.7 million |
| Noninterest expense | $8.7 million | Down 3.4% from $9.0 million |
| Total assets | $442.3 million | Up $41.5 million, or 10.4%, from year-end 2022 |
| Net loans / deposits | $260.2 million / $283.2 million | Net loans up $36.0 million; deposits up $40.2 million from year-end |
| Cash and cash equivalents | $105.6 million | Up $5.0 million from year-end |
| Equity / regulatory capital | Shareholders’ equity $144.4 million; Bank CBLR 24.0% | Equity-to-assets 32.6%; Bank’s well-capitalized CBLR threshold was 9.0% |
| Debt and credit lines | $0.3 million PPPLF outstanding; no other listed credit-line balances outstanding | PPPLF balance was $0.3 million at year-end 2022 |
Cash flow. Operating activities provided $3.3 million, investing activities used $38.3 million, and financing activities provided $40.0 million. Cash increased $5.0 million to $105.6 million. Investing outflows included a $33.3 million net increase in loans and $5.4 million for lease pools; deposit growth was the main financing inflow.
Liquidity and deposits. Management reported liquid assets of 23.9% of total assets and stated that cash plus available credit lines were adequate for obligations for at least 12 months. Deposits included $116.1 million of uninsured deposits; management reported 36.1% of Bank deposits were uninsured. Time deposits rose to $140.3 million, or 49.5% of period-end deposits. The filing also reports that 15.4% of Bank deposits were associated with Company accounts and 5.8% were required Strategic Program deposits.
Asset quality. Loans held for investment totaled $272.3 million, with an allowance for loan losses of $12.0 million; the allowance for credit losses including unfunded commitments was $12.1 million. Nonaccrual loans were $0.7 million, and total past-due loans were $1.8 million. Strategic Program loans represented 7.9% of loans held for investment but 60.1% of the allowance for loan losses. The Strategic Program portfolio recorded $2.7 million of net charge-offs in the quarter.
Material changes versus comparable periods
- Net income fell $5.6 million year over year. The largest drivers were a $4.9 million decrease in gain on loan sales and a $2.9 million reduction in Strategic Program fees.
- Management attributed lower gain-on-sale income principally to retaining more SBA-guaranteed loan balances to generate recurring interest income. Strategic Program originations held for sale were $0.9 billion, down $1.6 billion from Q1 2022, primarily due to market deceleration.
- Average interest-bearing deposit costs increased to 3.18% from 0.79%; average interest-bearing liabilities rose 23.9%. The resulting funding-cost pressure contributed to the lower net interest margin.
- Loans grew, with SBA loans increasing to $178.7 million, or 60.0% of total loans. Strategic Program loans were $46.8 million, or 15.7% of total loans.
- On January 1, 2023, the Company adopted CECL. Adoption increased the opening allowance for credit losses by $0.3 million, net of the reported portfolio-level adjustments, and reduced retained earnings by $0.2 million net of tax. The filing notes that CECL estimates involve significant management judgment.
Outlook, risks, contingencies and unusual items
- The filing provides no specific numerical earnings or growth guidance. Management described retaining more SBA-guaranteed loans as a strategy to increase interest income and partly offset lower loan-sale gains.
- Management discussed first-quarter banking-industry disruptions, including bank failures, deposit outflows, liquidity concerns, and unrealized securities losses. It said the Bank’s capital buffers remained well above the applicable threshold. In April 2023, the Bank was notified that Zions Bank was eliminating its previously available $1.0 million unsecured line and would limit advances to secured arrangements.
- Interest-rate, deposit-retention, liquidity, credit-quality, Strategic Program partner oversight, fintech regulation, and third-party service-provider risks are highlighted. The loan book is variable-rate, with 78.1% of held-for-investment loans variable-rate at quarter-end.
- Held-to-maturity securities had $1.6 million of unrealized losses at March 31, 2023; the Company reported no credit-loss allowance for these agency securities. Securities with $12.1 million amortized cost were pledged as collateral for a credit line.
- Management concluded disclosure controls and procedures were not effective at quarter-end because of a previously reported material weakness in internal accounting expertise and controls over complex accounting, including transfers and servicing of financial instruments and income taxes. Remediation actions included hiring additional SEC-reporting and GAAP personnel and enhancing controls.
- The Company reported no material legal proceedings and no material loan modifications under the new 2023 disclosure guidance. One previously modified SBA loan with a $94,000 balance remained outstanding.
- The Company repurchased 23,573 shares for $0.2 million during the quarter at an average price of $9.12. The broader authorization permits repurchases of up to 644,241 shares and expires August 31, 2024.
Key facts for investors to verify
- Whether SBA loan retention and lower Strategic Program volumes persist, and how they affect the mix of recurring interest income versus gains and program fees.
- Trends in deposit costs, time-deposit reliance, uninsured deposits, and access to contingent borrowing facilities following the Zions line change.
- Strategic Program credit performance, charge-offs, and the adequacy of the allowance under CECL, especially given the portfolio’s share of total reserves.
- Progress in remediating the material weakness and whether disclosure controls are later determined to be effective.
- Actual results against management’s stated liquidity assessment and the Bank’s substantial regulatory capital buffer.