UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
 


FORM 10-Q
 


(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended September 30, 2022
 
OR


TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from                   to                .
 
Commission File Number: 001-40721



FINWISE BANCORP
(Exact Name of Registrant as Specified in its Charter)



Utah
83-0356689
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
756 East Winchester, Suite 100
Murray, Utah
84107
(Address of principal executive offices)
(Zip Code)
 
Registrant’s telephone number, including area code: (801) 501-7200
 

 
Securities registered pursuant to Section 12(b) of the Act:

Title of each class
 
Trading
Symbol(s)
 
Name of each exchange on which registered
Common Stock, par value $0.001 per share
 
FINW
 
The NASDAQ Stock Market LLC
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  ☒    No  ☐
 
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).     Yes  ☒    No  ☐
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer
 
 
Accelerated filer
 
Non-accelerated filer
 
 
Smaller reporting company
 

       
Emerging growth company
 


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes      No  ☒
 
As of November 14, 2022, the registrant had 12,850,357 shares of common stock, $0.001 par value per share, outstanding.



Table of Contents

   
Page
     
PART I.
5
     
Item 1.
5
 
5
 
6
 
7
 
8
 
9
Item 2.
32
Item 3.
55
Item 4.
55
     
PART II.
56
     
Item 1.
56
Item 1A.
56
Item 2.
57
Item 3.
57
Item 4.
57
Item 5.
57
Item 6.
58
59


CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q (this “Report”) contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995.  These forward-looking statements reflect the Company’s current views with respect to, among other things, future events and its financial performance. These statements are often, but not always, made through the use of words or phrases such as “may,” “might,” “should,” “could,” “predict,” “potential,” “believe,” “will likely result,” “expect,” “continue,” “will,” “anticipate,” “seek,” “estimate,” “intend,” “plan,” “project,” “projection,” “forecast,” “budget,” “goal,” “target,” “would,” “aim” and “outlook,” or the negative version of those words or other comparable words or phrases of a future or forward-looking nature. These forward-looking statements are not historical facts, and are based on current expectations, estimates and projections about our industry and management’s beliefs and certain assumptions made by management, many of which, by their nature, are inherently uncertain and beyond our control. The inclusion of these forward-looking statements should not be regarded as a representation by us or any other person that such expectations, estimates and projections will be achieved. Accordingly, we caution you that any such forward-looking statements are not guarantees of future performance and are subject to risks, assumptions and uncertainties that are difficult to predict. Although we believe that the expectations reflected in these forward-looking statements are reasonable as of the date made, actual results may prove to be materially different from the results expressed or implied by the forward-looking statements.

The following factors, among others, could cause our financial performance to differ materially from that expressed in such forward-looking statements, including, but not limited to, the following:

the success of the financial technology industry, the development and acceptance of which is subject to a high degree of uncertainty, as well as the continued evolution of the regulation of this industry;

the ability of our Strategic Program service providers to comply with regulatory regimes, including laws and regulations applicable to consumer credit transactions, and our ability to adequately oversee and monitor our Strategic Program service providers;

our ability to maintain and grow our relationships with our Strategic Program service providers;

changes in the laws, rules, regulations, interpretations or policies relating to financial institutions, accounting, tax, trade, monetary and fiscal matters, including the application of interest rate caps or maximums;

our ability to keep pace with rapid technological changes in the industry or implement new technology effectively;

conditions relating to the Covid-19 pandemic, including the severity and duration of the associated economic slowdown either nationally or in our market areas, and the response of governmental authorities to the Covid-19 pandemic and our participation in Covid-19-related government programs such as the Paycheck Protection Program (“PPP”);

system failure or cybersecurity breaches of our network security;

our reliance on third-party service providers for core systems support, informational website hosting, internet services, online account opening and other processing services;

general economic conditions, either nationally or in our market areas (including interest rate environment, government economic and monetary policies, the strength of global financial markets and inflation and deflation), that impact the financial services industry and/or our business;

increased competition in the financial services industry, particularly from regional and national institutions and other companies that offer banking services;

our ability to measure and manage our credit risk effectively and the potential deterioration of the business and economic conditions in our primary market areas;

the adequacy of our risk management framework;

the adequacy of our allowance for loan losses (“ALL”);

the financial soundness of other financial institutions;

new lines of business or new products and services;

changes in Small Business Administration (“SBA”) rules, regulations and loan products, including specifically the Section 7(a) program, changes in SBA standard operating procedures or changes to the status of the Bank as an SBA Preferred Lender;

changes in the value of collateral securing our loans;

possible increases in our levels of nonperforming assets;

potential losses from loan defaults and nonperformance on loans;

our ability to protect our intellectual property and the risks we face with respect to claims and litigation initiated against us;

the inability of small- and medium-sized businesses to whom we lend to weather adverse business conditions and repay loans;

our ability to implement aspects of our growth strategy and to sustain our historic rate of growth;

our ability to continue to originate, sell and retain loans, including through our Strategic Programs;

3

the concentration of our lending and depositor relationships through Strategic Programs in the financial technology industry generally;

our ability to attract additional merchants and retain and grow our existing merchant relationships;

interest rate risk associated with our business, including sensitivity of our interest earning assets and interest bearing liabilities to interest rates, and the impact to our earnings from changes in interest rates;

the effectiveness of our internal control over financial reporting and our ability to remediate any future material weakness in our internal control over financial reporting;

potential exposure to fraud, negligence, computer theft and cyber-crime and other disruptions in our computer systems relating to our development and use of new technology platforms;

our dependence on our management team and changes in management composition;

the sufficiency of our capital, including sources of capital and the extent to which we may be required to raise additional capital to meet our goals;

compliance with laws and regulations, supervisory actions, the Dodd-Frank Act, capital requirements, the Bank Secrecy Act, anti-money laundering laws, predatory lending laws, and other statutes and regulations;

our ability to maintain a strong core deposit base or other low-cost funding sources;

results of examinations of us by our regulators, including the possibility that our regulators may, among other things, require us to increase our ALL or to write-down assets;

our involvement from time to time in legal proceedings, examinations and remedial actions by regulators;

further government intervention in the U.S. financial system;

natural disasters and adverse weather, acts of terrorism, pandemics, an outbreak of hostilities or other international or domestic calamities, and other matters beyond our control;

compliance with requirements associated with being a public company;

level of coverage of our business by securities analysts;

future equity and debt issuances; and

other factors listed from time to time in the Company’s filings with the Securities and Exchange Commission (the “SEC”), including, without limitation, this Report, the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 (the “2021 Form 10-K”) and subsequent reports on Form 10-Q and Form 8-K.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this Report, including those discussed in the section entitled “Risk Factors.” If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from our forward-looking statements. Accordingly, you should not place undue reliance on any such forward-looking statements. Any forward-looking statement speaks only as of the date of this Report, and we do not undertake any obligation to publicly update or review any forward-looking statement, whether because of new information, future developments or otherwise, except as required by law. New risks and uncertainties may emerge from time to time, and it is not possible for us to predict their occurrence. In addition, we cannot assess the impact of each risk and uncertainty on our business or the extent to which any risk or uncertainty, or combination of risks and uncertainties, may cause actual results to differ materially from those contained in any forward-looking statements.

PART I

Item 1.
Financial Statements

FinWise Bancorp
Consolidated Balance Sheets (Unaudited)
(in thousands, except share and par value amounts)

 
September 30,
   
December 31,
 
    2022     2021  
ASSETS
           
Cash and cash equivalents
           
Cash and due from banks
 
$
410
   
$
411
 
Interest-bearing deposits
   
92,053
     
85,343
 
Total cash and cash equivalents
   
92,463
     
85,754
 
Investment securities held-to-maturity, at cost
   
13,925
     
11,423
 
Investment in Federal Home Loan Bank (FHLB) stock, at cost
   
449
     
378
 
Strategic Program loans held-for-sale, at lower of cost or fair value
    43,606
      60,748
 
Loans receivable, net
   
200,485
     
198,102
 
Premises and equipment, net
   
6,830
     
3,285
 
Accrued interest receivable
   
1,672
     
1,548
 
Deferred taxes, net
   
2,164
     
1,823
 
SBA servicing asset, net
   
5,269
     
3,938
 
Investment in Business Funding Group (BFG), at fair value
   
4,500
     
5,900
 
Investment in FinWise Investments, LLC
   
271
     
80
 
Operating lease right-of-use (“ROU”) assets
   
6,691
     
 
Other assets
   
7,244
     
7,235
 
Total assets
 
$
385,569
   
$
380,214
 
               
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Liabilities
               
Deposits
               
Noninterest-bearing
 
$
97,654
   
$
110,548
 
Interest-bearing
   
135,184
     
141,344
 
Total deposits
   
232,838
     
251,892
 
Accrued interest payable
   
30
     
48
 
Income taxes payable, net
   
1,066
     
233
 
PPP Liquidity Facility
   
345
     
1,050
 
Operating lease liabilities
   
7,249
     
 
Other liabilities
   
9,756
     
11,549
 
Total liabilities
   
251,284
     
264,772
 
               
Commitments and contingencies (Note 8)
   
     
 
               
Shareholders’ equity
               
Preferred stock, $0.001 par value, 4,000,000 authorized; no shares issued and outstanding as of September 30, 2022 and December 31, 2021
   
     
 
Common stock, $0.001 par value, 40,000,000 shares authorized; 12,864,821 and 12,772,010 shares issued and outstanding as of September 30, 2022 and December 31, 2021, respectively
   
13
     
13
 
Additional paid-in-capital
   
55,113
     
54,836
 
Retained earnings
   
79,159
     
60,593
 
Total shareholders’ equity
   
134,285
     
115,442
 
Total liabilities and shareholders’ equity
 
$
385,569
   
$
380,214
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FinWise Bancorp
Consolidated Statements of Income (Unaudited)
(in thousands, except share and per share amounts)

   
For the Three Months
Ended September 30,
   
For the Nine Months
Ended September 30,
 
   
2022
   
2021
   
2022
   
2021
 
Interest income
                       
Interest and fees on loans
 
$
12,481
   
$
13,726
   
$
38,501
   
$
33,635
 
Interest on securities
   
52
     
7
     
135
     
19
 
Other interest income
   
290
     
16
     
423
     
36
 
Total interest income
   
12,823
     
13,749
     
39,059
     
33,690
 
                                 
Interest expense
                               
Interest on deposits
   
303
     
271
     
808
     
859
 
Interest on PPP Liquidity Facility
   
1
     
8
     
2
     
125
 
Total interest expense
   
304
     
279
     
810
     
984
 
Net interest income
   
12,519
     
13,470
     
38,249
     
32,706
 
                                 
Provision for loan losses
   
4,457
     
3,367
     
10,317
     
5,536
 
Net interest income after provision for loan losses
   
8,062
     
10,103
     
27,932
     
27,170
 
                                 
Non-interest income
                               
Strategic Program fees
   
5,136
     
4,982
     
17,980
     
11,877
 
Gain on sale of loans, net
   
1,923
     
2,876
     
9,387
     
7,876
 
SBA loan servicing fees
   
327
     
337
     
1,056
     
800
 
Change in fair value on investment in BFG
   
65
     
266
     
(908
)
   
2,127
 
Other miscellaneous income
   
72
     
14
     
121
     
35
 
Total non-interest income
   
7,523
     
8,475
     
27,636
     
22,715
 
                                 
Non-interest expense
                               
Salaries and employee benefits
   
5,137
     
5,930
     
18,684
     
16,313
 
Professional services
    1,701       253       3,845       762  
Occupancy and equipment expenses
   
640
     
205
     
1,361
     
602
 
(Recovery) impairment of SBA servicing asset
   
(127
)
   
     
949
     
 
Other operating expenses
   
1,118
     
1,010
     
3,697
     
3,463
 
Total non-interest expense
   
8,469
     
7,398
     
28,536
     
21,140
 
Income before income tax expense
   
7,116
     
11,180
     
27,032
     
28,745
 
                                 
Provision for income taxes
   
3,462
     
2,738
     
8,462
     
7,273
 
Net income
 
$
3,654
   
$
8,442
   
$
18,570
   
$
21,472
 
                                 
Earnings per share, basic
 
$
0.28
   
$
0.97
   
$
1.45
   
$
2.47
 
Earnings per share, diluted
 
$
0.27
   
$
0.91
   
$
1.37
   
$
2.36
 
                                 
Weighted average shares outstanding, basic
   
12,784,298
     
8,255,953
     
12,727,555
     
8,177,575
 
Weighted average shares outstanding, diluted
   
13,324,059
     
8,810,829
     
13,404,564
     
8,545,501
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FinWise Bancorp
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(in thousands, except share amounts)
Three Months Ended September 30, 2021

   
Common Stock
                   
 
Shares
   
Amount
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Total
Shareholders’
Equity
 
Balance at June 30, 2021
   
8,716,110
   
$
9
   
$
18,274
   
$
42,040
   
$
60,323
 
Stock-based compensation expense
   
     
     
230
     
     
230
 
Stock options exercised     30,000             143             143  
Net Income
   
     
     
     
8,442
     
8,442
 
Balance at September 30, 2021
   
8,746,110
   
$
9
   
$
18,647
   
$
50,482
   
$
69,138
 

Nine Months Ended September 30, 2021

   
Common Stock
                   
 
Shares
   
Amount
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Total
Shareholders’
Equity
 
Balance at January 1, 2021
   
8,660,334
   
$
9
   
$
16,853
   
$
29,010
   
$
45,872
 
Stock-based compensation expense
   
     
     
1,485
     
     
1,485
 
Stock options exercised
   
85,776
     
     
309
     
     
309
 
Net Income
   
     
     
     
21,472
     
21,472
 
Balance at September 30, 2021
   
8,746,110
   
$
9
   
$
18,647
   
$
50,482
   
$
69,138
 

FinWise Bancorp
Consolidated Statements of Changes in Shareholders’ Equity (Unaudited)
(in thousands, except share amounts)
Three Months Ended September 30, 2022

   
Common Stock
                   
 
Shares
   
Amount
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Total
Shareholders’
Equity
 
Balance at June 30, 2022
   
12,884,821
   
$
13
   
$
55,015
   
$
75,509
   
$
130,537
 
Stock-based compensation expense
   
     
     
308
     
     
308
 
Common stock repurchased
    (20,000 )           (210 )     (4 )     (214 )
Net Income
   
     
     
     
3,654
     
3,654
 
Balance at September 30, 2022
   
12,864,821
   
$
13
   
$
55,113
   
$
79,159
   
$
134,285
 

Nine Months Ended September 30, 2022

   
Common Stock
                   
 
Shares
   
Amount
   
Additional
Paid-In
Capital
   
Retained
Earnings
   
Total
Shareholders’
Equity
 
Balance at January 1, 2022
   
12,772,010
   
$
13
   
$
54,836
   
$
60,593
   
$
115,442
 
Stock-based compensation expense
   
96,011
     
     
447
     
     
447
 
Common stock repurchased     (20,000 )           (210 )     (4 )     (214 )
Stock options exercised
   
16,800
     
     
40
     
     
40
 
Net Income
   
     
     
     
18,570
     
18,570
 
Balance at September 30, 2022
   
12,864,821
   
$
13
   
$
55,113
   
$
79,159
   
$
134,285
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

FinWise Bancorp
Consolidated Statements of Cash Flows (Unaudited)
(in thousands)

   
For the Nine Months
Ended September 30,
 
   
2022
   
2021
 
Cash flows from operating activities:
           
Net income
 
$
18,570
   
$
21,472
 
                 
Adjustments to reconcile net income to net cash from operating activities
               
Depreciation and amortization
   
1,345
     
750
 
Provision for loan losses
   
10,317
     
5,536
 
Amortization of operating lease ROU asset
   
689
     
 
Net amortization in securities discounts and premiums
   
26
     
19
 
Capitalized servicing assets
   
(3,164
)
   
(2,474
)
Gain on sale of SBA loans, net
   
(9,387
)
   
(7,876
)
Originations of Strategic Program loans held-for-sale
   
(5,863,965
)
   
(4,064,999
)
Proceeds on Strategic Program loans held-for-sale
   
5,881,107
     
4,023,245
 
Change in fair value of BFG
   
908
     
(2,127
)
Impairment of SBA servicing asset
   
949
     
 
Stock-based compensation expense
   
447
     
1,485
 
Deferred income tax benefit
   
(341
)
   
(1,145
)
Net changes in:
               
Accrued interest receivable
   
(124
)
   
332
 
Accrued interest payable
   
(18
)
   
(152
)
Other assets
   
(9
)
   
(3,416
)
Operating lease liabilities
   
(131
)
   
 
Other liabilities
   
(960
)
   
7,875
 
Net cash provided by (used in) operating activities
   
36,259
     
(21,475
)
                 
Cash flows from investing activities:
               
Net decrease in loans receivable
   
6,916
     
61,665
 
Purchase of loan pools
    (10,267 )     (6,000 )
Investments in FinWise Investments, LLC
    (191 )      
Distributions from BFG
   
492
     
656
 
Purchase of bank premises and equipment
   
(3,968
)
   
(1,448
)
Proceeds from maturities and paydowns of securities held-to-maturity
   
1,413
     
381
 
Purchases of securities held to maturity
   
(3,941
)
   
(3,005
)
Purchase of FHLB stock
   
(71
)
   
(172
)
Net cash (used in) provided by investing activities
   
(9,617
)
   
52,077
 
                 
Cash flows from financing activities:
               
Net increase (decrease) in deposits
   
(19,054
)
   
88,560
 
Common stock repurchased
    (214 )      
Proceeds from exercise of stock options
   
40
     
309
 
Proceeds from PPP Liquidity Facility
   
     
5,558
 
Repayment of PPP Liquidity Facility
   
(705
)
   
(104,306
)
Net cash used in financing activities
   
(19,933
)
   
(9,879
)
                 
Net change in cash and cash equivalents
   
6,709
     
20,723
 
Cash and cash equivalents, beginning of the period
   
85,754
     
47,383
 
Cash and cash equivalents, end of the period
 
$
92,463
   
$
68,106
 
                 
Supplemental disclosures of cash flow information:
               
Cash paid during the period
               
Income taxes
 
$
7,957
   
$
6,240
 
Interest
 
$
828
   
$
1,136
 
                 
Supplemental disclosures of noncash operating activities:
               
Right-of-use assets obtained in exchange for operating lease liabilities (ASC 842 adoption effective January 1, 2022)
 
$
7,380
   
$
 

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

Note 1 – Summary of Significant Accounting Policies

Nature of business and organization – FinWise Bancorp is a Utah Corporation headquartered in Murray, Utah and operates all business activities through its wholly-owned banking subsidiary, FinWise Bank, f/k/a Utah Community Bank. FinWise Bank was incorporated in the state of Utah on May 7, 1999. FinWise Bancorp, f/k/a All West Bancorp, was incorporated in the state of Utah on October 22, 2002, after which, it acquired 100% of FinWise Bank. As of March 4, 2016, FinWise Bank’s articles of incorporation were amended to rename the entity FinWise Bank. As of March 15, 2021, FinWise Bancorp’s articles of incorporation were amended and restated to rename the entity FinWise Bancorp. References herein to “FinWise Bancorp,” “Bancorp” or the “holding company,” refer to FinWise Bancorp on a standalone basis. The word “Company” refers to FinWise Bancorp and FinWise Bank collectively and on a consolidated basis. References to the “Bank” refer to FinWise Bank on a standalone basis.

On July 15, 2021, the Company publicly filed a Registration Statement on Form S-1 with the SEC in connection with its Initial Public Offering (“IPO”) (the “Registration Statement”), which was subsequently amended on July 30, 2021, August 4, 2021, November 1, 2021, and November 16, 2021. The Registration Statement was declared effective by the SEC on November 18, 2021. In connection with the IPO, the Company issued 4,025,000 shares of common stock, par value of $0.001, which included 525,000 shares sold pursuant to the underwriters’ exercise of their option to purchase additional shares. The securities were sold to the public at a price of $10.50 per share and began trading on the Nasdaq Stock Market LLC on November 19, 2021. On November 23, 2021, the closing date of the IPO, the Company received total net proceeds of $39.3 million. The net proceeds less other related expenses, including audit fees, legal fees, listing fees, and other expenses, totaled $35.6 million.

The Bank provides a full range of banking services to individual and commercial customers. The Bank’s primary source of revenue is from loans including consumer, Small Business Administration (SBA), commercial, commercial real estate, and residential real estate. The Bank also has established Strategic Programs with various third-party loan origination platforms that use technology to streamline the origination of unsecured consumer and secured or unsecured business loans to borrowers within certain approved credit profiles. The Bank earns monthly program fees based on the volume of loans originated in these Strategic Programs, as well as interest during the time the Bank holds the loans.

The Company is subject to competition from other financial institutions and to the regulations of certain federal and state agencies and undergoes periodic examinations by those agencies.

COVID-19On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic. Local and national governments and regulatory authorities have systematically implemented remedial measures to try to slow and curb the spread of COVID-19, including business closures and operating restrictions, travel bans, shelter in place, stay home, and similar directives and orders. In response to the COVID-19 pandemic and in adherence with state and local guidelines, the Company has implemented the business continuity plan and other measures and activities to protect the Company’s employees and, at the same time, to assist the Company’s clients and the communities of which the Company is a part, including enabling remote working capability for the majority of the Company’s employees, increased mobile banking and electronic transaction options for clients, payment deferral assistance to commercial and consumer borrowers, and participation in the SBA’s Paycheck Protection Program (“PPP”) for loans to qualifying small businesses.

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the Coronavirus”. This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19. The guidance goes on to explain that in consultation with the Financial Accounting Standards Board (“FASB”) staff that the federal banking agencies concluded that short-term modifications (e.g., six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief program are not troubled debt restructurings (“TDRs”).

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020. The CARES Act also addressed COVID-19 related modifications and specified that COVID-19 related modifications on loans that were current as of December 31, 2019 are not TDRs. The Bank has applied this guidance related to payment deferrals and other COVID-19 related loan modifications.

The CARES Act also included a total allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the Paycheck Protection Program (“PPP”). PPP loans are forgivable, in whole or in part, if the proceeds are used for eligible payroll costs and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00%. PPP loans originated prior to June 5, 2020 have a term of two years, while PPP loans originated on or after June 5, 2020 have a term of five years. Payments are deferred for at least the first six months of the loan and the loans are 100% guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan. At September 30, 2022, net deferred loan fees related to PPP loans was a de minimis amount, which will be recognized over the life of the loans. As of December 31, 2021, PPP borrowers had applied for and received forgiveness from the SBA for $125.2 million of PPP loan principal and had made $0.3 million of principal payments leaving $1.1 million of PPP loan principal outstanding as of December 31, 2021. During the nine months ended September 30, 2022, PPP borrowers made $0.4 million of principal payments leaving $0.7 million of PPP loan principal outstanding as of September 30, 2022.  The loan forgiveness resulted in the recognition of a de minimis amount of deferred loan fees for the nine months ended September 30, 2022.

Basis of Presentation – The consolidated financial statements are comprised of the accounts of FinWise Bancorp and its wholly-owned subsidiaries, FinWise Investments, LLC and FinWise Bank (collectively, the “Company”). All significant inter-company transactions have been eliminated in consolidation. In the opinion of management, all the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for three and nine months ended September 30, 2022 are not necessarily indicative of the results of operations that may be expected for subsequent periods or the full year results.

Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC for the presentation of the Form 10-Q. The unaudited consolidated financial statements presented should be read in conjunction with the Company’s audited consolidated financial statements and notes to the audited consolidated financial statements included in the Company’s December 31, 2021 Annual Report on Form 10-K.

Out-of-period adjustment – During the first quarter of 2022, we recognized a $(0.8) million ($(0.6) million net of tax) reduction of interest and fees on loans and loans receivable, net as an out-of-period adjustment. The adjustment was not considered material to the interim consolidated financial statements for the three months ended March 31, 2022, nine months ended September 30, 2022, or the financial statements of any previously filed interim or annual periods.

Use of estimates – In preparing the consolidated financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities as of the date of the consolidated balance sheets and certain revenues and expenses for the period. Actual results could differ, either positively or negatively, from those estimates.

Stock Repurchase Program – On August 18, 2022, the Company announced that its Board of Directors (the “Board”) has authorized, effective August 16, 2022, a common stock repurchase program to purchase up to 644,241 shares of the Company’s common stock in the aggregate. The repurchase program expires on August 31, 2024, but may be limited or terminated at any time without prior notice. The repurchase program authorizes the repurchase by the Company of its common stock in open market transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or privately negotiated transactions. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. Repurchases may also be made pursuant to a trading plan under Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The actual means and timing of any shares purchased under the program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The repurchase program does not obligate the Company to purchase any particular number of shares. The Company has repurchased 20,000 shares for approximately $0.2 million as of September 30, 2022 and retired them at cost.

Recently adopted accounting pronouncements

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The guidance was initially effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. However, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities, delaying the effective date to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements, which provides entities an optional transition method to apply the guidance under ASC Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted this guidance on January 1, 2022, which resulted in an increase in assets and liabilities by $7.4 million on the Company’s consolidated financial statements.

Accounting pronouncements to be adopted

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326). The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, available-for-sale debt securities and applies to certain off-balance sheet credit exposures. This ASU was initially effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. However, the FASB issued an ASU to delay adoption to January 1, 2023 for smaller reporting companies with less than $250 million in public float as defined by the SEC’s rules. The Company is a smaller reporting company. The Company plans to apply the amendment’s provisions as a cumulative-effect adjustment to retained earnings at the beginning of the first period the amendment is effective. The Company has formed a team that is working on an implementation plan to adopt the amendment. The implementation plan is expected to include developing policies, procedures, and internal controls over the model. The Company is also working with a software vendor to measure expected losses required by the amendment. The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements and expects that the portfolio composition and economic conditions at the time of adoption will influence the accounting adjustment made at the time the amendment is adopted.

In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty.  For public business entities, these amendments require that an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20.  This ASU is effective on January 1, 2023, the same effective date as ASU 2016-13.  The Company is currently evaluating the effects that the adoption of this amendment will have on its consolidated financial statements.

Enactment of the Inflation Reduction Act of 2022

On August 16, 2022, the U.S. government enacted the Inflation Reduction Act (IRA) which, among other changes, created a new corporate alternative minimum tax (AMT) based on adjusted financial statement income and imposes a 1% excise tax on corporate stock repurchases. The effective date of these provisions is January 1, 2023. The Company is currently evaluating the effects that the enactment of the IRA will have on its consolidated financial statements.

Note 2 – Investments

Investment securities held-to-maturity, at cost

The amortized cost, unrealized gains and losses, and estimated fair values of the Company’s held-to-maturity securities at September 30, 2022 and December 31, 2021, are summarized as follows:

 
September 30, 2022
 
($ in thousands)
 
Amortized
Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
Mortgage-backed securities
 
$
13,925
   
$
   
$
(1,567
)
 
$
12,358
 

 
December 31, 2021
 
($ in thousands)
 
Amortized
Cost
   
Unrealized
Gain
   
Unrealized
Loss
   
Estimated
Fair Value
 
Mortgage-backed securities
 
$
11,423
   
$
23
   
$
(114
)
 
$
11,332
 

The Company had seventeen securities in an unrealized loss position at September 30, 2022 and nine securities in an unrealized loss position at December 31, 2021, as summarized in the following tables:

 
September 30, 2022
 
   
Less than 12 months
   
12 Months or More
   
Total
 
($ in thousands)
 
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
   
Fair
Value
   
Unrealized
Losses
 
Mortgage-backed securities
 
$
12,358
   
$
(1,567
)
 
$
   
$
   
$
12,358
   
$
(1,567
)

 
December 31, 2021
 
   
Less than 12 months
   
12 Months or More
   
Total
 
($ in thousands)
 
Fair Value
   
Unrealized
Losses
   
Fair Value
   
Unrealized
Losses
   

Fair Value
   
Unrealized
Losses
 
Mortgage-backed securities
 
$
8,961
   
$
(114
)
 
$
   
$
   
$
8,961
   
$
(114
)

The amortized cost and estimated market value of debt securities at September 30, 2022 and December 31, 2021, by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

   
September 30, 2022
   
December 31, 2021
 
($ in thousands)
 
Amortized
Cost
   
Estimated
Fair Value
   
Amortized
Cost
   
Estimated
Fair Value
 
Securities held-to-maturity
                       
Due in one year or less
 
$
   
$
   
$
   
$
 
Due after one year through five years
   
     
     
     
 
Due after five years through ten years
   
3,205
     
3,038
     
1,541
     
1,548
 
Due after ten years
   
10,720
     
9,320
     
9,882
     
9,784
 
​Total Securities held-to-maturity
 
$
13,925
   
$
12,358
   
$
11,423
   
$
11,332
 

At September 30, 2022, all held-to-maturity securities were pledged as collateral for a credit line held by the Bank. There were no sales or transfers of investment securities and no realized gains or losses on these securities during the nine months ended September 30, 2022 or 2021.

FHLB stock

The Bank is a member of the FHLB system. Members are required to own FHLB stock of at least the greater of 1% of FHLB membership asset value or 2.7% of outstanding FHLB advances. At September 30, 2022 and December 31, 2021, the Bank owned $0.4 million, respectively, of FHLB stock, which is carried at cost. The Company evaluated the carrying value of its FHLB stock investment at September 30, 2022 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment from recurring and special dividends, and the Company’s intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

Note 3 – Loans and Allowance for Loan Losses

Loans are summarized as follows according to major risk category as of September 30, 2022 and December 31, 2021:

 
September 30,
   
December 31,
 
 
2022
   
2021
 
($ in thousands)
           
SBA
 
$
127,455
   
$
142,392
 
Commercial, non-real estate
   
12,970
     
3,428
 
Residential real estate
   
34,501
     
27,108
 
Strategic Program loans
   
70,290
     
85,850
 
Commercial real estate
   
6,149
     
2,436
 
Consumer
   
5,455
     
4,574
 
Total loans
 
$
256,820
   
$
265,788
 
Loans held-for-sale
   
(43,606
)
   
(60,748
)
Total loans held for investment
 
$
213,214
   
$
205,040
 
Deferred loan costs (fees), net
   
(761
)
   
2,917
 
Allowance for loan losses
   
(11,968
)
   
(9,855
)
Net loans
 
$
200,485
   
$
198,102
 

Strategic Program Loans – In 2016, the Company began originating loans with various third-party loan origination platforms that use technology and other innovative systems to streamline the origination of unsecured consumer and secured or unsecured business loans to a wide array of borrowers within certain approved credit profiles. Loans issued by the Company through these programs generally follow and are limited to specific predetermined underwriting criteria. The Company earns monthly minimum program fees from these third parties. Based on the volume of loans originated by the Company related to each Strategic Program, an additional fee equal to a percentage of the loans generated under the Strategic Program may be collected. The program fee is included within non-interest income on the Consolidated Statements of Income.

The Company generally retains the loans and/or receivables for a number of business days after origination before selling the loans and/or receivables to the Strategic Program platform or another investor. Interest income is recognized by the Company while holding the loans. These loans are classified as held-for-sale on the balance sheet.

The Company may also hold a portion of the loans or receivable and sell the remainder directly to the Strategic Programs or other investors. The Company generally services the loans originated through the Strategic Programs in consideration of servicing fees equal to a percentage of the loans generated under the Strategic Programs. In turn, the Strategic Program service providers, subject to the Company’s approval and oversight, serve as sub-servicer and perform typical primary servicing duties including loan collections, modifications, charging-off, reporting and monitoring.

Each Strategic Program establishes a “reserve” deposit account with the Company. The agreements generally require that the deposit reserve account balance, along with any other collateral, does not fall below the dollar amount of the total loans held-for-sale outstanding currently held by the Company for the specific Strategic Program. Collateral may include deposits held at the Bank, at another institution where the Bank has control of the account or a combination of deposits and other vehicles such as letters of credit. If necessary, the Company has the right to withdraw amounts from these sources to fulfill loan purchaser obligations created under the program agreements. Total cash held in reserve by Strategic Programs at the Company at September 30, 2022 and December 31, 2021, was $23.6 million and $39.6 million, respectively.

Strategic Program loans retained and held-for-sale as of September 30, 2022 and December 31, 2021, are summarized as follows:

 
September 30,
   
December 31,
 
 
2022
   
2021
 
($ in thousands)
           
Retained Strategic Program loans
 
$
26,684
   
$
25,102
 
Strategic Program loans held-for-sale
   
43,606
     
60,748
 
Total Strategic Program loans
 
$
70,290
   
$
85,850
 

Changes in the ALL are summarized as follows:

Three Months Ended
September 30, 2022
       
($ in thousands)
 
SBA
   
Commercial,
Non-Real
Estate
   
Residential
Real
Estate
   
Strategic
Program
Loans
   
Commercial
Real Estate
   
Consumer
   
Total
 
Beginning balance
 
$
3,384
   
$
274
   
$
415
   
$
6,442
   
$
22
   
$
65
   
$
10,602
 
Charge-offs
   
(259
)
   
     
     
(3,070
)
   
     
(4
)
   
(3,333
)
Recoveries
   
9
     
     
     
233
     
     
     
242
 
Provision for loan losses
   
675
     
190
     
38
     
3,542
     
7
     
5
     
4,457
 
Balance at end of period
 
$
3,809
   
$
464
   
$
453
   
$
7,147
   
$
29
   
$
66
   
$
11,968
 
Ending balance individually evaluated for impairment
   
     
     
     
     
     
     
 
Ending balance collectively evaluated for impairment
 
$
3,809
   
$
464
   
$
453
   
$
7,147
   
$
29
   
$
66
   
$