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FinWise Bancorp(FINW) - 2022 Q2 - Quarterly Report

PART I. FINANCIAL INFORMATION Item 1. Financial Statements (Unaudited) Unaudited Q2 2022 financials show decreased assets and quarterly net income, but increased six-month net income from strong revenue growth Consolidated Balance Sheets Total assets decreased to $366.0 million by June 30, 2022, primarily due to reduced loans held-for-sale, while shareholders' equity increased to $130.5 million Consolidated Balance Sheet Highlights (in thousands) | Account | June 30, 2022 | December 31, 2021 | | :--- | :--- | :--- | | Total Assets | $365,987 | $380,214 | | Cash and cash equivalents | $96,528 | $85,754 | | Strategic Program loans held-for-sale | $31,599 | $60,748 | | Loans receivable, net | $189,670 | $198,102 | | Total Liabilities | $235,450 | $264,772 | | Total deposits | $219,359 | $251,892 | | Total Shareholders' Equity | $130,537 | $115,442 | Consolidated Statements of Income Q2 2022 net income decreased to $5.5 million due to higher provisions and expenses, while six-month net income increased to $14.9 million from strong revenue growth Quarterly Income Statement Highlights (in thousands) | Metric | Q2 2022 | Q2 2021 | | :--- | :--- | :--- | | Net Interest Income | $12,769 | $10,802 | | Provision for loan losses | $2,913 | $1,536 | | Non-interest Income | $8,431 | $8,161 | | Non-interest Expense | $11,019 | $7,079 | | Net Income | $5,482 | $7,739 | | Diluted EPS | $0.41 | $0.84 | Six-Month Income Statement Highlights (in thousands) | Metric | 6M 2022 | 6M 2021 | | :--- | :--- | :--- | | Net Interest Income | $25,730 | $19,236 | | Provision for loan losses | $5,860 | $2,169 | | Non-interest Income | $20,113 | $14,240 | | Non-interest Expense | $20,067 | $13,742 | | Net Income | $14,916 | $13,030 | | Diluted EPS | $1.10 | $1.45 | Consolidated Statements of Cash Flows Net cash from operating activities significantly improved to $37.5 million for the six months ended June 30, 2022, leading to a $10.8 million increase in cash and equivalents Six-Month Cash Flow Summary (in thousands) | Cash Flow Category | 6M 2022 | 6M 2021 | | :--- | :--- | :--- | | Net cash provided by (used in) operating activities | $37,491 | $(25,494) | | Net cash provided by investing activities | $6,450 | $67,172 | | Net cash used in financing activities | $(33,167) | $(49,195) | | Net change in cash and cash equivalents | $10,774 | $(7,517) | Notes to Unaudited Consolidated Financial Statements Notes detail accounting policies, including ASC 842 adoption, loan portfolio composition, allowance for loan losses, investment portfolio, and capital adequacy - The company operates through its subsidiary, FinWise Bank, providing a full range of banking services, with a primary revenue source from consumer, SBA, commercial, and real estate loans, as well as Strategic Programs with third-party loan origination platforms3739 - On January 1, 2022, the Company adopted the new lease accounting standard, ASU 2016-02 (Topic 842), which resulted in the recognition of right-of-use (ROU) assets and lease liabilities of $7.4 million on the consolidated financial statements51 - The company plans to adopt the Current Expected Credit Loss (CECL) model (ASU 2016-13) on January 1, 2023, which will change how it measures expected credit losses53 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion highlights a 14.5% increase in six-month net income driven by strong revenue growth, despite higher expenses and loan loss provisions, with the bank remaining well-capitalized Results of Operations Six-month net income increased 14.5% to $14.9 million, driven by strong growth in net interest and non-interest income, partially offset by higher expenses and loan loss provisions Net Income Comparison (in thousands) | Period | Net Income | Change (%) | | :--- | :--- | :--- | | Q2 2022 vs Q2 2021 | $5,482 vs $7,739 | -29.2% | | 6M 2022 vs 6M 2021 | $14,916 vs $13,030 | +14.5% | - The increase in non-interest income for the first six months of 2022 was primarily due to a $5.9 million (86.3%) increase in Strategic Program fees and a $2.5 million (49.3%) increase in gain on sale of loans193 - Non-interest expense for the first six months of 2022 rose by $6.3 million (46.0%), driven by a $3.9 million increase in salaries and benefits from headcount growth and a $1.1 million impairment of the SBA servicing asset due to rising interest rates197 - The provision for loan losses for the six months ended June 30, 2022, increased by $3.7 million (170.2%) compared to the prior year, primarily due to substantial growth in unguaranteed loans179190 Financial Condition As of June 30, 2022, the company maintained a strong financial condition with a diversified loan portfolio, low nonperforming assets, and increased allowance for loan losses Loan Portfolio Composition (in thousands) | Loan Program | June 30, 2022 | % of Total | | :--- | :--- | :--- | | SBA | $124,477 | 53.6% | | Strategic Program loans | $59,066 | 25.5% | | Residential real estate | $30,965 | 13.3% | | Commercial, non real estate | $7,847 | 3.4% | | Consumer | $5,062 | 2.2% | | Commercial real estate | $4,722 | 2.0% | | Total | $232,139 | 100.0% | Nonperforming Assets (in thousands) | Metric | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total nonperforming loans | $633 | $657 | | Total nonperforming assets and TDRs | $728 | $763 | | Total nonperforming assets to total assets | 0.2% | 0.2% | - The Allowance for Loan Losses (ALL) for Strategic Program loans was $6.4 million, representing 60.8% of the total ALL, while these loans only constitute 25.5% of the total loan portfolio, indicating a higher provision for this segment258259 - Total deposits decreased by $32.5 million, or 12.9%, to $219.4 million at June 30, 2022, from year-end 2021, primarily due to a decline in the Strategic Program loan program275276 Liquidity and Capital Resources The company maintains strong liquidity with $96.5 million in liquid assets and remains well-capitalized, with shareholders' equity growing to $130.5 million - Shareholders' equity increased by $15.1 million to $130.5 million at June 30, 2022, compared to December 31, 2021, primarily due to $14.9 million in net income285 Bank Capital Ratios | Capital Ratio | June 30, 2022 | Well-Capitalized Requirement | | :--- | :--- | :--- | | Leverage Ratio (under CBLR) | 21.4% | 9.0% | - The company has various sources of liquidity, including $10.0 million from the Federal Reserve's Discount Window, a $1.0 million line of credit with Zions Bank, and a $3.2 million line with the Federal Home Loan Bank283 Commitments to Extend Credit (in thousands) | Type | June 30, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total commitments | $25,764 | $17,038 | Item 3. Quantitative and Qualitative Disclosures About Market Risk As a 'smaller reporting company,' the Company is exempt from providing quantitative and qualitative disclosures about market risk - The Company is not required to provide information for this item as it qualifies as a "smaller reporting company" under Exchange Act Rule 12b-2309 Item 4. Controls and Procedures Management concluded that disclosure controls and procedures were effective, with no material changes to internal controls over financial reporting during the quarter - The CEO and CFO concluded that the Company's disclosure controls and procedures were effective as of June 30, 2022310 - There were no changes in the Company's internal controls over financial reporting during the fiscal quarter that have materially affected, or are reasonably likely to materially affect, these controls311 PART II. OTHER INFORMATION Item 1. Legal Proceedings The company is not currently subject to any material legal proceedings, with ordinary course claims deemed unlikely to have a material adverse effect - The Company is not currently subject to any material legal proceedings but is subject to claims and litigation arising in the ordinary course of business314 Item 1A. Risk Factors This section supplements and updates previously disclosed risk factors from the 2021 Form 10-K and Q1 2022 Form 10-Q - This section supplements and updates risk factors from the 2021 Form 10-K and the Q1 2022 Form 10-Q, incorporating information known since those filings316 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales or repurchases of the company's equity securities during the second quarter of 2022 - There were no unregistered sales of the Company's stock during the second quarter of 2022318 - The Company did not repurchase any of its shares during the second quarter of 2022 and does not have an authorized share repurchase program318 Item 6. Exhibits This section lists all exhibits filed with the Form 10-Q, including required certifications and XBRL data files