FinWise Bancorp — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022; comparisons are primarily with Q1 2021 for results and December 31, 2021 for balance-sheet changes. Amounts are U.S. dollars; financial statement figures below are in millions unless noted.
Business context
FinWise Bancorp is the holding company for FinWise Bank. Its banking business combines SBA lending, consumer and business lending through third-party “Strategic Programs,” real estate and other loans, deposit-taking, and loan servicing. Management describes technology and its FinView analytics platform as supporting loan selection and growth. Strategic Programs generate program fees and loan-sale activity, and the bank generally holds some originated loans before selling them.
Financial performance and condition
| Metric | Q1 2022 / March 31, 2022 | Comparable period / prior year-end |
|---|---|---|
| Net income | $9.4 million; diluted EPS $0.70 | Q1 2021: $5.3 million; diluted EPS $0.59 |
| Interest income / expense | $13.2 million / $0.3 million | Q1 2021: $8.8 million / $0.4 million |
| Net interest income | $13.0 million | Q1 2021: $8.4 million |
| Net interest margin | 13.37% | Q1 2021: 10.96% |
| Provision for loan losses | $2.9 million | Q1 2021: $0.6 million |
| Noninterest income / expense | $11.7 million / $9.0 million | Q1 2021: $6.1 million / $6.7 million |
| Total assets | $424.5 million | December 31, 2021: $380.2 million |
| Total deposits | $277.5 million | December 31, 2021: $251.9 million |
| Shareholders’ equity | $125.0 million | December 31, 2021: $115.4 million |
| Cash and cash equivalents | $116.6 million | December 31, 2021: $85.8 million |
| Loans receivable, net | $189.5 million | December 31, 2021: $198.1 million |
| Strategic Program loans held for sale | $73.8 million | December 31, 2021: $60.7 million |
Net income increased 78.3% year over year. Management attributed the improvement chiefly to higher Strategic Program fees, loan-sale gains and interest income. Average interest-earning assets rose 26.0% to $387.8 million, and their average yield increased to 13.64%; management noted that lower average PPP loan balances contributed to the higher yield. The average cost of interest-bearing liabilities declined to 0.79%.
Strategic Program fees were $6.6 million, up 124.3%, and gains on loan sales were $5.1 million, up 94.1%. Salaries and benefits increased 44.9% to $7.1 million, largely with staffing, technology and program expansion. Return on average assets was 9.4% versus 6.5% in Q1 2021; return on average equity was 31.4% versus 43.1%.
Operating cash flow was negative $4.4 million, compared with negative $8.9 million in Q1 2021. Investing activities provided $9.8 million, while financing activities provided $25.5 million, including a $25.6 million increase in deposits. Cash and cash equivalents increased by $30.9 million during the quarter. The large originations and proceeds from Strategic Program loans held for sale are reflected in operating cash flows.
Total loans were $272.6 million, including loans held for sale. Strategic Program loans represented 37.4% of total loans and SBA loans 46.9%. The allowance for loan losses was $10.0 million, compared with $9.9 million at year-end. The Bank’s community bank leverage ratio was 19.1%, above the 9.0% well-capitalized requirement; management reported the Bank remained well-capitalized.
Reported borrowings were limited to a $1.0 million PPP Liquidity Facility balance. The Bank reported no balances on its available FHLB, Federal Reserve discount-window and other credit lines. Management said cash and available credit were adequate for obligations for at least the next 12 months. It reported $187.9 million in uninsured deposits; the filing’s wording gives the comparison as $106.4 million for the prior comparable period.
Material changes and notable items
- Compared with Q1 2021, loan-sale gains and Strategic Program fees rose substantially, while the provision for loan losses increased from $0.6 million to $2.9 million.
- Strategic Program loans grew to $101.8 million from $85.9 million at year-end, while SBA loans declined to $127.8 million from $142.4 million. Total loans increased to $272.6 million from $265.8 million.
- Net charge-offs were $2.8 million, primarily in Strategic Program loans; that category’s net charge-offs were 9.2% of average loans. Total nonperforming loans remained low at $0.7 million, or 0.2% of total loans.
- Held-to-maturity securities had $726,000 of unrealized losses at March 31, 2022, versus $114,000 at year-end; all were pledged as collateral for a credit line.
- Adoption of lease accounting on January 1, 2022 added approximately $7.4 million to assets and liabilities.
- The Company recorded a $0.8 million pretax reduction in interest and fees on loans as an out-of-period adjustment ($0.6 million after tax). Management said it was not material to the quarter or previously reported periods.
Outlook, commentary and risks
The filing provides no specific quantitative earnings or growth guidance. Management’s stated priorities include growing lending and deposits, expanding commercial and SBA-focused deposit offerings, investing in technology and infrastructure, and maintaining well-capitalized status. It said results depend on loan originations and sales, Strategic Program relationships, credit performance, stable low-cost deposits and effective regulatory compliance.
Key risks include the concentration of lending and depositor relationships in Strategic Programs and reliance on third-party providers; credit deterioration, especially in retained Strategic Program loans; interest-rate and funding-cost changes; maintaining deposit relationships; cybersecurity and third-party system risks; and regulatory, SBA-program and compliance risks. The filing also highlights economic uncertainty from COVID-19 and the Russia-Ukraine conflict, including inflation, market volatility, sanctions, supply disruptions and potential cyberattacks. The Company reported no material legal proceedings and said disclosure controls were effective, with no material quarterly change in internal control over financial reporting.
Important facts for investors to verify
- How Strategic Program origination volumes, loan-sale economics, partner concentration and retained-loan credit performance develop; the filing shows higher charge-offs and provision expense in Q1.
- The sustainability of the unusually high reported net interest margin and asset yield, particularly as interest rates and deposit pricing change.
- The amount, stability, pricing and concentration of uninsured and program-related deposits, and the Company’s ability to retain low-cost funding.
- Whether allowance levels remain adequate as retained Strategic Program loans grow and the Company prepares to adopt CECL in 2023.
- The significance of the securities’ unrealized losses and the fact that all held-to-maturity securities are pledged as collateral.
- The out-of-period adjustment and lease-accounting adoption effects, and whether subsequent filings report material changes in guidance, risks or financial performance.