Finwise Bancorp annual report, FY2023

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FinWise Bancorp — 2023 Form 10-K

Business context and period. This annual report covers the fiscal year ended December 31, 2023, compared with 2022; it is not a standalone fourth-quarter report. FinWise is a Utah bank holding company operating through FinWise Bank. Its nationwide lending model includes SBA 7(a), third-party Strategic Programs, commercial leasing, and local real estate and consumer lending.

Financial performance and condition

  • Earnings: Net income was $17.5 million, down 30.5% from $25.1 million. Diluted EPS declined to $1.33 from $1.87. Return on average assets was 3.5% versus 6.4%; return on average equity was 11.9% versus 19.6%.
  • Interest income and margins: Net interest income rose 7.2% to $54.6 million. Net interest margin fell to 11.65% from 14.04%; the yield on average interest-earning assets was 13.78%, while the cost of interest-bearing liabilities increased to 4.22% from 1.16%.
  • Noninterest income and expenses: Noninterest income fell 43.7% to $21.1 million, including Strategic Program fees of $15.9 million and loan-sale gains of $1.7 million. Noninterest expense increased 3.7% to $40.2 million.
  • Credit costs: Provision for credit losses was $11.6 million, down from $13.5 million. The year-end allowance for credit losses was $12.9 million. Net charge-offs were $10.9 million; retained Strategic Program loans accounted for $9.9 million of net charge-offs.
  • Balance sheet and funding: Assets rose 46.3% to $586.2 million; net loans were $358.6 million, up $134.3 million. Deposits increased 66.6% to $404.8 million, with time deposits at $239.0 million. Shareholders’ equity was $155.1 million, or 26.5% of assets, versus 35.0% a year earlier.
  • Liquidity and borrowings: Cash and cash equivalents were $117.0 million, about 20% of assets. Management said liquidity and available facilities were adequate for current obligations for at least 12 months. The Bank had $0.2 million outstanding under the PPP Liquidity Facility and no borrowings on reported secured or unsecured credit lines. Its CBLR was 20.7%, above the 9.0% well-capitalized threshold.
  • Cash flow: Operating cash flow was $12.3 million, investing cash flow was negative $152.9 million, and financing cash flow was positive $157.0 million. Cash and cash equivalents increased $16.4 million. The large loan-origination and sale flows affect operating cash flow comparability.

Material changes versus 2022

  • Loan originations declined by $3.0 billion to $4.3 billion, which management attributed mainly to adverse market and economic conditions affecting borrowers and loan purchasers.
  • Strategic Program fees declined $6.6 million, primarily due to lower originations. Loan-sale gains declined $11.9 million as the Bank retained more guaranteed SBA loan portions to earn ongoing interest income.
  • Interest expense increased $8.5 million as deposit costs rose and funding shifted toward higher-cost deposits. Higher interest income partly offset the effects of lower fee and loan-sale revenue.
  • Loans held for investment grew 57.3% to $372.2 million. SBA loans were 64.5% of the portfolio, including $131.7 million guaranteed by the SBA.
  • Nonperforming assets increased from none reported at year-end 2022 to $27.1 million at year-end 2023. Management attributed the increase mainly to several SBA loans affected by elevated interest rates; $15.0 million of the nonaccrual balance was SBA-guaranteed.
  • The Company adopted CECL on January 1, 2023, increasing the opening allowance for credit losses by $0.3 million and reducing opening retained earnings by $0.2 million net of tax. The 2022 credit-loss provision uses the prior incurred-loss method and is not directly comparable.

Outlook, risks, contingencies and unusual items

  • The filing provides no specific numerical earnings, margin, origination, or credit-loss guidance. Management described continued growth and technology-enabled banking as strategic priorities, while noting the 2023 origination slowdown.
  • Key exposures include dependence on third-party Strategic Program providers and loan purchasers, their regulatory compliance and oversight, consumer-lending and “true lender” challenges, and concentration in SBA lending. Strategic Programs generated approximately 57.4% of 2023 revenue, and BFG referred 100% of SBA 7(a) originations.
  • Other important risks include worsening borrower credit and collateral values, rising funding costs or deposit outflows, interest-rate sensitivity, cybersecurity and vendor disruption, and regulatory changes. Strategic Program loans held for investment were $19.4 million; Strategic Program loans held for sale were $47.5 million.
  • The Bank reported no material cybersecurity incident in 2023. Management concluded disclosure controls and internal control over financial reporting were effective; the independent auditor issued an unqualified opinion on the financial statements but did not audit internal control effectiveness.
  • No material legal proceedings were reported. The Company completed its previously authorized repurchase of 644,241 shares for approximately $5.9 million in 2023 and reported no cash-dividend plans for the foreseeable future.
  • After year-end, on February 5, 2024, the Company issued 339,176 shares to acquire an additional 10% non-voting interest in BFG, bringing its ownership to 20%. On March 7, 2024, it announced authorization for a new repurchase program of up to 641,832 shares.
  • The filing describes several 2022 out-of-period adjustments, including corrections involving loan interest, income taxes, and loan-sale trailing fees; management said each was not material to the relevant reported periods.

Important facts for investors to verify

  • Whether the increase in nonperforming assets and the performance of large SBA credits persist or worsen, including the recoverability of the non-guaranteed portions.
  • Whether SBA retention improves recurring interest income enough to offset lower loan-sale gains, and how the shift affects liquidity and risk-adjusted returns.
  • Strategic Program originations, fees, charge-offs, reserve deposits, loan-purchaser performance, and the concentration of deposits and revenue tied to those relationships.
  • Deposit mix, time-deposit maturities and pricing, uninsured deposits, available borrowing capacity, and the effect of funding costs on net interest margin.
  • The assumptions underlying the CECL allowance, especially the high concentration of allowance and charge-offs in retained Strategic Program loans.
  • The final accounting and share dilution effects of the BFG acquisition, and the extent and price of any purchases under the new repurchase authorization.