FinWise Bancorp — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. FinWise Bancorp operates through FinWise Bank, with lending and deposit funding as its core banking activities. Figures below are in U.S. dollars; financial statement amounts are in millions unless noted.
Financial performance and position
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Interest income | $17.2 | $12.8 | $46.5 | $39.1 |
| Net interest income | $14.4 | $12.5 | $40.2 | $38.2 |
| Provision for credit losses | $3.1 | $4.5 | $8.4 | $10.3 |
| Non-interest income | $5.2 | $7.5 | $15.0 | $27.6 |
| Non-interest expense | $10.1 | $8.5 | $28.8 | $28.5 |
| Net income | $4.8 | $3.7 | $13.3 | $18.6 |
| Diluted EPS | $0.37 | $0.27 | $1.01 | $1.37 |
| Net interest margin | 11.77% | 14.93% | 12.11% | 13.96% |
- Q3 net income rose 31.5% year over year; nine-month net income declined 28.4%. Q3 growth reflected higher interest income and lower credit-loss provision, partly offset by lower Strategic Program fees and loan-sale gains, and higher expenses.
- Nine-month non-interest income fell $12.6 million, primarily because loan-sale gains declined $8.1 million and Strategic Program fees declined $6.3 million. Management attributed lower program fees mainly to reduced loan origination volume; lower sale gains also reflected greater retention of SBA-guaranteed loan portions.
- Net interest margin contracted in both comparisons. Management cited fewer average loans held for sale and a funding mix shift toward higher-cost deposits; growth in loans held for investment partly offset these effects. Q3 interest expense increased to $2.8 million from $0.3 million.
- At September 30, total assets were $555.1 million, up 38.5% from year-end 2022; net loans were $324.2 million, up 44.6%; deposits were $386.8 million, up 59.2%; and shareholders’ equity was $150.4 million. Equity-to-assets was 27.1%, versus 34.9% at year-end.
- Cash and cash equivalents were $126.8 million. Nine-month operating cash flow was $2.5 million, investing cash outflow $115.3 million, and financing cash inflow $139.0 million. Deposit growth was the main financing source. The filing says liquid assets plus available credit lines were adequate for obligations for at least 12 months.
- Deposits are the primary funding source; growth was driven mainly by brokered time and demand deposits. Time certificates were 46.7% of period-end deposits. Uninsured deposits totaled $133.1 million.
- The Bank reported a 22.1% community bank leverage ratio, above the 9.0% well-capitalized requirement. It had no outstanding balances on its available FHLB, Federal Reserve, and other credit lines; the $0.2 million PPP Liquidity Facility balance was its reported borrowing.
- Held-to-maturity securities had amortized cost of $15.8 million and estimated fair value of $13.9 million, a $2.0 million unrealized loss. The securities were agency-backed; no credit-loss allowance was recorded.
Material changes, risks, and unusual items
- Loans held for investment grew to $337.6 million from $236.6 million at year-end. SBA loans were $219.3 million, or 65.0% of the portfolio; $112.5 million was SBA-guaranteed. Management said it retained more guaranteed SBA balances to build recurring interest income amid lower sale premiums.
- Strategic Program originations were $1.1 billion in Q3, down $0.4 billion year over year; nine-month originations were $3.1 billion, down $3.0 billion. Management linked the decrease to adverse market and economic conditions affecting borrowers and loan purchasers.
- Nonaccrual loans were $10.4 million at September 30, compared with none at December 31, 2022. Management attributed the increase primarily to several SBA 7(a) loans affected by higher interest rates and slower consumer spending. The filing also reports $10.7 million of nonperforming assets; the text does not clearly reconcile that figure with the nonaccrual-loan balance.
- The allowance for credit losses was $13.0 million, including $7.2 million, or 55.4%, allocated to retained Strategic Program loans, which represented 5.9% of loans held for investment. Strategic Program loans generated $7.5 million of net charge-offs in the first nine months; the reported ratio was 68.6% of average balances. The company adopted CECL on January 1, 2023, so credit-loss comparisons with 2022 use a different accounting methodology.
- Management identified credit quality, adequacy of the allowance, deposit stability and cost, interest-rate exposure, and dependence on third-party Strategic Program providers among the business risks. The company also cited regulatory, compliance, cybersecurity, and economic risks. Strategic Program relationships are important to both loan activity and funding.
- The company repurchased 230,978 shares for $2.4 million in Q3 and completed its authorized 644,241-share repurchase program, totaling $5.9 million. No cash dividend was planned for the foreseeable future.
- A July 2023 agreement contemplated acquiring an additional 10% voting interest in Business Funding Group (BFG) in exchange for 372,132 FinWise shares, subject to conditions including regulatory approval and share-price limits. The agreement allowed termination if conditions were not met by September 30, 2023; the filing text does not clearly state the transaction’s status as of the report date. The BFG investment’s fair value was $4.0 million, down $0.8 million year to date.
- No material legal proceedings were reported. Management said disclosure controls were effective and there were no material changes in internal control over financial reporting during the quarter. No specific earnings or financial guidance was provided.
Most important facts for investors to verify
- Whether the BFG purchase agreement closed, was extended, or was terminated, and any resulting share issuance or regulatory conditions.
- Whether nonaccrual and nonperforming-asset balances, especially the SBA exposures, continue to rise and how much is ultimately covered by SBA guarantees or collateral.
- Strategic Program loan performance, charge-offs, allowance assumptions, origination volumes, and the concentration of the allowance in retained program loans.
- Deposit mix, brokered funding reliance, deposit pricing, uninsured balances, and the effect of funding costs on net interest margin.
- Whether management’s increased retention of SBA-guaranteed loans can offset weaker loan-sale gains and Strategic Program fee income without worsening liquidity or credit risk.