FinWise Bancorp — 2022 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2022. This is an annual report, not a standalone fourth-quarter report. FinWise Bancorp is a Utah bank holding company operating through FinWise Bank and primarily serves consumers and small businesses through SBA lending, real estate and consumer lending, and nationwide third-party Strategic Programs.
Financial results and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Interest income | $52.3 million | $49.2 million |
| Net interest income | $50.9 million | $48.0 million |
| Noninterest income | $37.4 million | $31.8 million |
| Provision for loan losses | $13.5 million | $8.0 million |
| Noninterest expense | $38.8 million | $29.5 million |
| Net income | $25.1 million | $31.6 million |
| Diluted earnings per share | $1.87 | $3.27 |
| Net interest margin | 14.04% | 15.10% |
- Net income fell 20.5%. Higher loan-loss provision and operating expenses more than offset growth in net interest income and noninterest income. Noninterest income increased 17.5%, led by Strategic Program fees and loan-sale gains; the BFG investment fair-value change was a $478,000 loss versus a $3.0 million gain in 2021.
- Loan-loss provision rose $5.5 million, mainly reflecting increased charge-offs in Strategic Program loans. Net charge-offs were $11.4 million, or 4.1% of average loans, versus $4.4 million, or 1.7%, in 2021. Strategic Program loans had an 11.9% net charge-off ratio.
- Total assets rose 5.4% to $400.8 million. Net loans were $224.2 million; gross loans were $260.2 million, including $145.2 million in SBA loans and $47.8 million in Strategic Program loans. Strategic Program loans held for sale declined to $23.6 million from $60.7 million.
- Deposits declined 3.5% to $243.0 million. Noninterest-bearing demand deposits were $78.8 million, or 32.5% of deposits; uninsured deposits totaled $108.4 million. Strategic Program-related deposits were approximately $49.7 million, or 20.4% of deposits.
- Cash and cash equivalents were $100.6 million, and management said liquid assets and available credit lines were sufficient for obligations over at least the next 12 months. No balances were outstanding on the disclosed secured or unsecured credit lines; the PPPLF balance was $314,000.
- Operating cash flow was $61.2 million versus cash used of $9.2 million in 2021. Cash increased $14.8 million to $100.6 million. Cash-flow movements reflect the high-volume originate-and-sell Strategic Program model and should not be read as recurring earnings.
- Shareholders’ equity was $140.5 million; equity to assets was 34.9%. The Bank’s CBLR leverage ratio was 25.1%, above its 9.0% well-capitalized threshold. Return on average assets was 6.4% and return on average equity was 19.6%, down from 9.1% and 39.2%, respectively.
- All investment securities were held to maturity. Their $14.3 million amortized cost compared with estimated fair value of $12.7 million, including $1.6 million of unrealized losses. The filing reports no securities sales during 2022.
Material changes and unusual items
- Strategic Program originations held for sale increased to approximately $7.0 billion in 2022. The Bank originated approximately $7.1 billion through Strategic Programs overall; these programs generated approximately 68.7% of total revenue, according to the risk-factor discussion.
- Noninterest expense increased 31.3% to $38.8 million, including higher professional services, staffing, occupancy and equipment costs, and a $1.7 million impairment of the SBA servicing asset. Management cited investment in infrastructure, technology and security staffing, and contractual bonuses associated with Strategic Program growth.
- The filing describes three out-of-period adjustments: a $0.8 million reduction in interest income related to SBA deferred loan costs; a $0.9 million after-tax reduction for correction of an income-tax provision error; and recognition of a roughly $2.3 million loan trailing-fee asset with a $2.1 million gain on loan sales, including amounts attributable to earlier periods. Management said the adjustments were not material to the specified periods or previously filed statements.
- The Company repurchased 120,000 shares for approximately $1.1 million during 2022, including 100,000 shares in the fourth quarter. It has not paid cash dividends and reported no foreseeable plans to do so.
- The Company adopted lease accounting guidance in 2022. CECL became effective for the Company on January 1, 2023; management estimated a 2%–5% combined increase in the allowance for credit losses and reserve for unfunded commitments, to be recorded as an adjustment to equity at adoption.
Outlook, risks and contingencies
- The filing provides no quantified earnings or revenue guidance. Management described continued investment in operating infrastructure and growth capacity. It noted that inflation, rising interest rates, economic uncertainty and the end of pandemic-related support could affect borrowers, loan demand, credit quality and funding costs.
- Key business risks include reliance on third-party Strategic Program providers and BFG, regulatory and consumer-protection uncertainty around bank-fintech arrangements and “true lender” issues, high Strategic Program charge-offs, SBA program dependence, interest-rate sensitivity, and concentration in real estate and SBA lending. BFG referred 99.58% of the Bank’s SBA 7(a) originations in 2022.
- Liquidity risks include deposit outflows, dependence on Strategic Program-related deposits, and potential reliance on more costly wholesale funding. The Company also disclosed $19.8 million in unfunded credit commitments.
- Management concluded disclosure controls and internal control over financial reporting were ineffective at year-end because of a material weakness involving accounting expertise and controls for complex transactions, including transfers and servicing of financial instruments and income taxes. Remediation actions included hiring SEC-reporting and GAAP personnel and reviewing and enhancing controls. The external auditor issued an unmodified opinion on the financial statements but did not audit internal-control effectiveness.
- No material legal proceedings were reported. The Bank was categorized as well-capitalized, and its most recent CRA rating was satisfactory.
Important facts for investors to verify
- Whether Strategic Program delinquency, charge-off and reserve trends improve, and whether provider or regulatory issues affect loan volume and fees.
- The actual CECL adoption impact compared with management’s estimated 2%–5% allowance and unfunded-commitment reserve increase.
- Progress and testing of the internal-control remediation plan, particularly controls over complex transactions and tax accounting.
- Deposit stability, uninsured and Strategic Program-related deposit concentrations, deposit pricing, and access to contingent funding.
- How much of 2022 earnings growth in revenue depended on loan-sale activity, trailing-fee recognition and other unusual adjustments, and whether those sources recur.
- Whether held-to-maturity securities’ unrealized losses, BFG valuation assumptions, and SBA servicing-asset impairment change materially.