8-K: FinWise Bancorp Increases Stake in Business Funding Group, Reports Q4 2023 Results

FinWise Bancorp will acquire an additional 10% nonvoting ownership interest in Business Funding Group (BFG) and reported a net income of $4.2 million for the fourth quarter of 2023.

Summary

• FinWise Bancorp has agreed to increase its ownership in Business Funding Group (BFG) by acquiring an additional 10% nonvoting interest, bringing its total stake to 20%.
• The acquisition will be completed through a private placement of 339,176 shares of FinWise common stock to the sellers of the BFG interest.
• The deal is subject to customary closing conditions and may be terminated by either party if not completed by February 29, 2024.
• FinWise Bancorp reported a net income of $4.2 million for the fourth quarter of 2023, a decrease from $4.8 million in the previous quarter and $6.5 million in the same quarter of the prior year.
• Diluted earnings per share (EPS) for the quarter were $0.32, down from $0.37 in the previous quarter and $0.49 in the fourth quarter of 2022.
• Loan originations remained strong at $1.2 billion for the quarter, consistent with the previous quarter and the fourth quarter of 2022.
• Net interest income was $14.4 million, flat compared to the previous quarter but up from $12.6 million in the same quarter of the prior year.
• Non-performing loans increased significantly to $27.1 million as of December 31, 2023, compared to $10.7 million as of September 30, 2023, and $0.4 million as of December 31, 2022.
• The efficiency ratio was 55.8%, up from 51.3% in the previous quarter and 45.6% in the fourth quarter of the prior year.
• The annualized return on average equity (ROAE) was 10.8%, down from 12.8% in the previous quarter and 19.1% in the fourth quarter of the prior year.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the decrease in profitability, increase in non-performing loans, and higher efficiency ratio, despite strong loan originations and deposit growth. The BFG acquisition adds some complexity and risk.

Positives

• Loan originations remained strong at $1.2 billion for the quarter.
• Net interest income increased to $14.4 million compared to $12.6 million in the same quarter of the prior year.
• Total assets increased to $586.2 million as of December 31, 2023, up from $555.1 million as of September 30, 2023 and $400.8 million as of December 31, 2022.
• Total deposits increased to $404.8 million as of December 31, 2023, up from $386.8 million as of September 30, 2023 and $243.0 million as of December 31, 2022.
• The bank's capital levels remain significantly above well-capitalized guidelines.

Negatives

• Net income decreased to $4.2 million for the fourth quarter of 2023, down from $4.8 million in the previous quarter and $6.5 million in the same quarter of the prior year.
• Diluted EPS decreased to $0.32 for the quarter, down from $0.37 in the previous quarter and $0.49 in the fourth quarter of 2022.
• Non-performing loans increased significantly to $27.1 million as of December 31, 2023.
• The efficiency ratio increased to 55.8% for the quarter, indicating higher operating costs relative to revenue.
• Annualized return on average equity (ROAE) decreased to 10.8% for the quarter.

Risks

• The acquisition of the additional stake in BFG may not close if regulatory approvals are not received or other conditions are not met by February 29, 2024.
• The company may be required to modify the terms of the BFG acquisition to obtain regulatory approval.
• The anticipated benefits of the BFG acquisition may not be realized due to economic or competitive factors.
• The increase in non-performing loans, particularly in the SBA portfolio, poses a risk to asset quality.
• The company faces risks related to the financial technology industry, regulatory compliance, cybersecurity, and economic conditions.

Future Outlook

The company plans to continue building its strategic initiatives, including its Payments Hub and BIN Sponsorship businesses, which are expected to become operational later this year and provide an integrated banking-as-a-service capability.

Management Comments

• 2023 marked another year of achievements and progress for our team, highlighting the resilience of our differentiated business model, despite a challenging macroeconomic backdrop, said Kent Landvatter, Chief Executive Officer and President of FinWise.
• Our ongoing strategy to drive profitable growth through the strength of our existing businesses continued to progress as envisioned and as we communicated since our IPO.
• Looking ahead, we plan to continue building our strategic initiatives, including our Payments Hub and BIN Sponsorship businesses expected to become operational later this year, which we expect will provide us with an integrated banking-as-a-service capability.

Industry Context

The announcement reflects a trend of banks seeking to diversify their revenue streams through strategic partnerships and investments in fintech companies. The increase in non-performing loans may indicate broader challenges in the small business lending sector due to rising interest rates.

Comparison to Industry Standards

• FinWise's efficiency ratio of 55.8% is higher than the industry average for well-performing banks, which typically aim for a ratio below 50%.
• The increase in non-performing loans to 7.3% of total loans is significantly higher than the industry average, which is typically below 1%.
• The ROAE of 10.8% is below the industry average for well-performing banks, which often achieve ROAEs above 12%.
• Compared to regional banks like Zions Bancorporation and Western Alliance Bancorporation, FinWise's loan portfolio is more concentrated in SBA and strategic program loans, which can carry higher risks.
• The growth in deposits, particularly time certificates of deposit, is a common strategy for banks to fund loan growth, but it can also increase funding costs.

Stakeholder Impact

• Shareholders may be concerned about the decrease in profitability and the increase in non-performing loans.
• Employees may be impacted by the company's strategic initiatives and potential changes in operations.
• Customers may benefit from the company's new banking-as-a-service capabilities.
• Suppliers and creditors may be affected by the company's financial performance and strategic direction.

Next Steps

• The company will continue to work towards closing the BFG acquisition by February 29, 2024.
• The company will focus on launching its Payments Hub and BIN Sponsorship businesses later this year.
• The company will host a conference call to discuss the financial results.

Key Dates

Keywords

FinWise Bancorp, Business Funding Group, BFG, acquisition, non-performing loans, loan originations, net income, earnings per share, efficiency ratio, SBA loans, financial results, banking, capital ratios