FinWise Bancorp(FINW) - 2025 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Financial Statements (Unaudited) The unaudited statements show asset growth to $842.5 million and a net income increase to $7.3 million for the six months ended June 30, 2025 Consolidated Balance Sheets Total assets grew 13.0% to $842.5 million, driven by loan portfolio expansion and funded by a 16.6% increase in deposits - Total assets increased by 13.0% to $842.5 million as of June 30, 2025, from $746.0 million at December 31, 2024, primarily driven by a 60.8% increase in Strategic Program loans held-for-sale and a 13.1% increase in loans held-for-investment[16] - Total deposits grew by 16.6% to $635.2 million, funded mainly by an increase in interest-bearing deposits, while total shareholders' equity rose to $182.0 million from $173.7 million[16] Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2025 | December 31, 2024 | | :--- | :--- | :--- | | Total Assets | $842,488 | $745,976 | | Total cash and cash equivalents | $90,100 | $109,162 | | Strategic Program loans held-for-sale | $147,282 | $91,588 | | Loans held-for-investment, net | $506,503 | $447,812 | | Total Liabilities | $660,529 | $572,256 | | Total deposits | $635,174 | $544,952 | | Total Shareholders' Equity | $181,959 | $173,720 | Consolidated Statements of Income Net income rose 12.2% year-over-year to $7.3 million, propelled by a 67.6% surge in non-interest income - Net income for the six months ended June 30, 2025, increased by 12.2% year-over-year to $7.3 million, driven by a 67.6% surge in non-interest income that offset higher credit loss provisions and non-interest expenses[18] - For Q2 2025, non-interest income more than doubled to $10.3 million from $5.2 million in Q2 2024, primarily due to a significant increase in credit enhancement income and gain on sale of loans[18] Key Income Statement Data (in thousands, except EPS) | Metric | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | | :--- | :--- | :--- | | Net Interest Income | $29,008 | $28,621 | | Provision for credit losses | $8,062 | $5,539 | | Total Non-interest Income | $18,147 | $10,828 | | Total Non-interest Expense | $29,230 | $25,223 | | Net Income | $7,286 | $6,495 | | Diluted EPS | $0.52 | $0.49 | Notes to Consolidated Financial Statements The notes detail business operations through subsidiaries, a stock repurchase program, and a post-quarter data breach with related litigation - The company operates through its subsidiaries, FinWise Bank and FinWise Investment, LLC, with the Bank providing solutions to fintech brands and originating loans through third-party Strategic Programs[33] - A stock repurchase program was authorized on March 6, 2024, to purchase up to 641,832 shares; as of June 30, 2025, 44,608 shares have been repurchased for $0.5 million, with no repurchases in Q2 2025[38] - Subsequent to the quarter end, the company notified approximately 600,000 individuals of a data breach and is now facing class action lawsuits, though management believes any related losses will not be material[147] Management's Discussion and Analysis of Financial Condition and Results of Operations Asset and net income growth were driven by Strategic Program loans, though net interest margin compressed and credit loss provisions increased Results of Operations Net income grew 12.2% despite a compressed net interest margin, driven by a 67.6% increase in non-interest income - Net interest margin (NIM) decreased to 8.03% for the six months ended June 30, 2025, from 10.19% in the prior-year period, due to loan repricing and a strategic shift to higher quality, lower-yielding loans[160][161] - Non-interest income for the first six months of 2025 grew by 67.6% YoY, primarily due to higher Strategic Program fees, a significant increase in credit enhancement income, and higher gains on the sale of SBA loans[169] - Non-interest expense rose 15.9% YoY for the first six months of 2025, mainly due to a 25.6% increase in salaries and employee benefits from increased headcount and compensation adjustments[171] Net Income Components Comparison (in thousands) | Component | Six Months Ended June 30, 2025 | Six Months Ended June 30, 2024 | % Change | | :--- | :--- | :--- | :--- | | Net interest income | $29,008 | $28,621 | 1.4% | | Provision for credit losses | ($8,062) | ($5,539) | 45.5% | | Non-interest income | $18,147 | $10,828 | 67.6% | | Non-interest expense | ($29,230) | ($25,223) | 15.9% | | Net income | $7,286 | $6,495 | 12.2% | Financial Condition Total assets grew 12.9% to $842.5 million, led by increases in Strategic Program and held-for-investment loans - Total assets grew by $96.5 million (12.9%) to $842.5 million at June 30, 2025, from year-end 2024, led by a $55.7 million increase in Strategic Program loans held-for-sale and a $58.7 million increase in loans held-for-investment[174] - Nonperforming assets increased to $39.7 million as of June 30, 2025, from $36.5 million at year-end 2024; however, $21.2 million of these are SBA 7(a) loan balances guaranteed by the SBA[198] - The Allowance for Credit Losses (ACL) increased to $16.2 million (3.1% of total loans) from $13.2 million (2.8% of total loans) at year-end, driven by growth in credit-enhanced Strategic Program loans[216][217] Loan Portfolio Composition (Gross, in thousands) | Loan Category | June 30, 2025 | % of Total | Dec 31, 2024 | % of Total | | :--- | :--- | :--- | :--- | :--- | | SBA | $246,903 | 46.6% | $255,056 | 54.8% | | Commercial leases | $88,957 | 16.8% | $70,153 | 15.1% | | Commercial real estate (Owner occupied) | $77,871 | 14.7% | $41,046 | 8.8% | | Residential real estate | $54,132 | 10.2% | $51,574 | 11.1% | | Strategic Program loans | $30,699 | 5.8% | $20,122 | 4.3% | | Other | $33,482 | 6.3% | $27,281 | 5.9% | | Total Loans Held-for-Investment | $530,044 | 100.0% | $465,233 | 100.0% | Liquidity and Capital Resources The company maintains strong liquidity and a 'well-capitalized' status, with a leverage ratio of 18.0% - The primary source of funding is deposits, which increased by $90.2 million since year-end 2024, mainly through brokered time deposits to fund loan growth[222][223] - The company maintains significant liquidity sources, including $90.1 million in cash, a $257.6 million line with the Federal Reserve Bank, and a $24.9 million line with the FHLB, with no outstanding balances[230][231] - The Bank remains 'well-capitalized' under the Community Bank Leverage Ratio (CBLR) framework, with a leverage ratio of 18.0% as of June 30, 2025, well above the 9.0% requirement[91][236] Key Performance Ratios | Ratio | Three Months Ended June 30, 2025 | Three Months Ended June 30, 2024 | | :--- | :--- | :--- | | Return on Average Equity | 9.2% | 7.9% | | Return on Average Assets | 2.0% | 2.1% | | Total Equity to Total Assets | 21.6% | 23.3% (as of 12/31/24) | Quantitative and Qualitative Disclosures About Market Risk The company is asset-sensitive, with a +100 basis point rate shock projected to increase net interest income by 2.7% - The company's Asset/Liability Management Committee (ALCO) manages interest rate risk by structuring the balance sheet and does not use leveraged derivatives, options, or futures contracts for this purpose[254][255] Earnings at Risk (EAR) Analysis as of June 30, 2025 | Interest Rate Shock | Impact on Net Interest Income | | :--- | :--- | | +300 bps | +8.7% | | +200 bps | +5.8% | | +100 bps | +2.7% | | -100 bps | (2.0)% | | -200 bps | (4.5)% | Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls - The CEO and CFO concluded that disclosure controls and procedures were effective as of the end of the period covered by the report[257] - No changes in internal control over financial reporting occurred during the quarter that have materially affected, or are reasonably likely to materially affect, these controls[258] PART II. OTHER INFORMATION Legal Proceedings The company is not subject to any material legal proceedings outside the ordinary course of business - The company is not subject to any material legal proceedings, only claims and litigation from the ordinary course of business[260] Risk Factors A new risk factor regarding counterparty default in credit enhancement arrangements for Strategic Program loans has been identified - A new risk factor highlights the counterparty risk from credit enhancement agreements with Strategic Program service providers; if a provider defaults on its obligation to reimburse for credit or fraud losses, the Bank would assume that risk[263] Unregistered Sales of Equity Securities and Use of Proceeds No shares were repurchased in the quarter, with 597,224 shares remaining available under the current program - No shares of common stock were repurchased during the three months ended June 30, 2025; there are 597,224 shares remaining for repurchase under the current program[264] Other Information No directors or officers engaged in changes to Rule 10b5-1(c) trading arrangements during the quarter - No directors or officers adopted, modified, or terminated a Rule 10b5-1(c) trading arrangement during the quarter[267] Exhibits This section lists exhibits filed with the Form 10-Q, including bylaws, stock plans, and officer certifications - Exhibits filed include Amended and Restated Bylaws, the 2019 and 2016 Stock Plans, and certifications from the Principal Executive Officer and Principal Financial Officer[270]