FinWise Bancorp — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023; unaudited. Comparisons are with the same 2022 periods unless otherwise noted. The company operates through FinWise Bank, with lending and deposit relationships that include nationwide third-party Strategic Programs.
Key financial results
| Metric | Q2 2023 | Q2 2022 | Six months 2023 | Six months 2022 |
|---|---|---|---|---|
| Net interest income | $13.7 million | $12.8 million | $25.8 million | $25.7 million |
| Provision for credit losses | $2.7 million | $2.9 million | $5.4 million | $5.9 million |
| Noninterest income | $5.3 million | $8.4 million | $9.8 million | $20.1 million |
| Noninterest expense | $10.0 million | $11.0 million | $18.7 million | $20.1 million |
| Net income | $4.6 million | $5.5 million | $8.5 million | $14.9 million |
| Diluted EPS | $0.35 | $0.41 | $0.64 | $1.10 |
- Margins: Net interest margin was 12.14% for Q2, down from 13.69%; for the first half it was 12.31%, down from 13.53%. Higher deposit costs and reduced average loans held for sale weighed on margin.
- Balance sheet at June 30: Assets were $495.6 million, up 23.7% from year-end 2022. Net loans were $277.7 million, up 23.8%; deposits were $332.5 million, up 36.8%; shareholders’ equity was $147.4 million.
- Cash flow: Cash and cash equivalents increased $18.5 million in the first half to $119.0 million. Operating activities used $6.1 million and investing activities used $62.5 million; financing activities provided $87.1 million, principally from deposit growth.
- Funding and capital: Interest-bearing deposits cost 4.02% on average in Q2, compared with 0.77% a year earlier. The Bank’s CBLR leverage ratio was 22.4%, above the 9.0% well-capitalized requirement. The company reported $0.3 million outstanding under the PPP Liquidity Facility and no outstanding balances on its other reported credit lines at quarter-end.
Material changes and management commentary
- Q2 net income fell 15.4%; first-half net income fell 43.0%. Management attributed the declines mainly to lower Strategic Program fees and lower gains on loan sales. Strategic Program originations declined amid more adverse market and economic conditions.
- Strategic Program fees fell 34.8% in Q2 and 39.7% in the first half. Loan-sale gains fell 71.0% and 88.1%, respectively. Management said it retained more SBA-guaranteed loan portions to increase recurring interest income, reducing gain-on-sale revenue.
- Interest income increased, but higher deposit expense substantially offset the increase: first-half interest income rose $3.0 million while interest expense also rose about $3.0 million. Management cited a shift toward higher-cost deposits, including time deposits.
- Deposits grew primarily through brokered time deposits used to fund lending. At June 30, 36.3% of Bank deposits were uninsured; the filing also identifies 8.1% as required Strategic Program deposits. Liquid assets—cash and interest-bearing deposits—were 24.0% of total assets. Management said liquidity, including available lines, was adequate for at least the next 12 months.
- Loans held for investment were $290.7 million gross; SBA loans represented 65.0%. Strategic Program loans retained were $20.7 million, while $42.4 million of Strategic Program loans were held for sale. The allowance for credit losses was $12.3 million; Strategic Program loans accounted for 58.9% of the allowance. First-half net charge-offs were $5.3 million, primarily associated with retained Strategic Program loans.
- Nonperforming assets were $0.9 million at June 30, compared with none at year-end 2022. The filing reports $2.0 million of past-due loans and $0.9 million of nonaccrual loans at quarter-end. Management notes that credit-loss estimates require significant judgment and may not cover future losses.
- The company adopted the CECL expected-credit-loss standard on January 1, 2023; adoption increased the allowance by $0.3 million and reduced retained earnings by $0.2 million, net of tax. The company reported no material loan modifications subject to the new disclosure rules in the first half.
Outlook, risks, and contingencies
- The filing provides no specific earnings or revenue guidance. Management’s stated strategy includes using retained SBA-guaranteed loans to build interest income; actual benefit depends on loan growth, credit performance, funding costs, and interest rates.
- Key disclosed risks include reliance on Strategic Program providers and third-party servicing, technology and cybersecurity risks, changes in fintech regulation, deposit stability and funding costs, credit deterioration, interest-rate exposure, and the ability to maintain growth and low-cost deposits.
- On July 25, 2023, the company agreed to acquire an additional 10% of BFG, which would bring its voting ownership to 20%. Consideration is 372,132 shares, subject to specified share-price conditions, regulatory approval, and other closing conditions; the transaction was not completed as of the filing.
- After quarter-end, the Bank pledged additional loans to the FHLB, increasing available capacity by $30.9 million; no borrowings against the increase were reported through the filing date. Zions Bank also notified the Bank in August that it was reinstating an unsecured line and increasing borrowing capacity to $5.0 million.
- The company repurchased 269,690 shares in Q2 for $2.4 million, averaging $8.03 per share. At quarter-end, 230,978 shares remained available under the repurchase authorization. Management reported no material legal proceedings and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether Strategic Program origination volumes, fees, loan-sale gains, and retained-loan credit performance stabilize or continue to decline.
- How deposit mix, uninsured deposits, brokered funding, and deposit pricing affect liquidity and net interest margin.
- Whether Strategic Program charge-offs and the allowance remain adequate as the retained portfolio and broader loan book change.
- Whether the BFG transaction receives required approvals and closes on the disclosed terms, including its share-price conditions.
- How retaining more SBA-guaranteed loans affects recurring interest income, capital usage, liquidity, and future gain-on-sale income.