Executive Summary / Key Takeaways

• FinWise Bancorp is strategically evolving beyond traditional lending and its core Strategic Program model into a diversified fintech-enabled financial institution by building out Payments, Card, and Credit Enhanced balance sheet capabilities.
• Recent financial performance reflects this investment phase, with Q1 2025 net income slightly lower year-over-year due to infrastructure spending, despite growth in net interest income driven by expanding assets.
• The Net Interest Margin (NIM) is experiencing compression, decreasing to 8.27% in Q1 2025 from 10.12% in Q1 2024, a deliberate outcome of the strategy to reduce overall portfolio credit risk by adding lower-yielding, higher-quality assets like SBA guaranteed portions and Credit Enhanced loans.
• Management forecasts significant growth in the Credit Enhanced balance sheet program, targeting an increase of $50 million to $100 million by year-end 2025, primarily in the second half, which is expected to be a meaningful earnings contributor with low credit risk.
• While macro risks like elevated interest rates and potential consumer spending slowdown persist, contributing to expected near-term NPA migration, management remains confident in its disciplined underwriting, risk management, and the low-risk nature of its strategic growth areas, supported by strong capital levels well above regulatory minimums.

The Evolution of a Fintech-Focused Bank

FinWise Bancorp, operating primarily through its wholly-owned subsidiary FinWise Bank, has strategically positioned itself at the intersection of traditional banking and financial technology. What began as a regional bank offering standard services has evolved into a technology-focused institution leveraging API-driven platforms to power lending, payments, and card programs for fintech brands nationwide. This evolution, marked by the establishment of Strategic Programs and culminating in its 2021 IPO, reflects a deliberate strategy to diversify revenue streams, enhance operational efficiency, and build a more resilient business model.

At the heart of FinWise's differentiation lies its technological infrastructure. The API-driven platforms enable streamlined loan origination and payment processing, offering partners speed and customization. While precise, directly comparable quantitative metrics for all niche competitors are not publicly detailed, the company's focus on this technology is intended to provide efficiency advantages over traditional banking processes. The recent build-out of the Payments Hub, now operational, and the launch of BIN Sponsorship and Card products are strategic expansions of this core technological capability. These initiatives aim to create a multi-product platform under one roof, enabling a wider range of use cases for fintech partners and fostering stickier, recurring revenue streams that are expected to accelerate as programs scale. This technological foundation is crucial in a competitive landscape that includes larger regional banks like Zions Bancorporation (ZION) and KeyCorp (KEY), as well as fintech-enabled banks like Customers Bancorp (CUBI) and pure fintech players like SoFi Technologies (SOFI). While larger banks benefit from scale and established networks, and pure fintechs boast rapid user acquisition, FinWise leverages its regulatory licenses (like its SBA Preferred Lender status) and its compliance-first culture to guide fintechs through regulatory complexities, positioning this oversight as a competitive strength.

Strategic Diversification and Risk Reduction

FinWise's strategy is currently centered on expanding its product offerings and intentionally shifting its balance sheet towards assets with lower credit risk. This is evident in the development and launch of new initiatives beyond its traditional Strategic Program lending and SBA activities.

A key pillar of this strategy is the Credit Enhanced Balance Sheet program. This program allows FinWise to provide balance sheet capacity for partner-originated loans while minimizing credit risk through contractual indemnification or reimbursement for losses from the partner, often supported by reserve deposit accounts held at the bank. This structure generates interest income for FinWise with significantly reduced exposure to credit defaults compared to holding the full credit risk. An extended held-for-sale variant further demonstrates flexibility, providing balance sheet access for partners needing capacity for periods shorter than the full loan term, still generating incremental earnings with low credit risk via a yield split model. Management views this program as a meaningful immediate growth opportunity with substantial interest from existing and prospective partners.

Simultaneously, the company is activating its investments in BIN Sponsorship and Payments (MoneyRails™). These services aim to attract lower-cost deposits and generate fee income, diversifying funding sources away from reliance on brokered deposits and adding non-interest income streams. The Card program, currently in piloting, represents another avenue for partnership and revenue diversification.

This strategic pivot towards lower-risk assets, including the retention of SBA guaranteed portions and the growth of the Credit Enhanced portfolio, is the primary driver behind the expected compression in the Net Interest Margin. While NIM may decline, the goal is to achieve overall Net Interest Income growth through increased asset volume and enhance profitability through diversified, lower-risk revenue streams. This positions FinWise differently from competitors like CUBI, which emphasizes cost efficiency, or SOFI, which focuses on high-growth consumer segments. FinWise aims for a niche in providing compliant, technology-enabled banking infrastructure to fintechs, leveraging its regulatory expertise as a moat.

Recent Performance Reflecting Investment and Transition

The financial results for the first quarter of 2025 illustrate the current phase of FinWise's strategic journey – a period of investment and transition towards its diversified model.

Net income for the three months ended March 31, 2025, was $3.2 million, a slight decrease from $3.3 million in the same period of 2024. This was primarily a result of increased operating expenses associated with building out the infrastructure for new product offerings, even as revenue streams showed growth.

Net Interest Income (NII) increased to $14.3 million in Q1 2025, up from $14.0 million in Q1 2024. This growth was driven by a significant increase in average interest-earning assets, which rose by $143.7 million year-over-year. However, the Net Interest Margin (NIM) compressed notably, falling to 8.27% from 10.12%. This decline is directly linked to the strategic shift towards lower-yielding assets, such as lower-risk loans added to the held-for-investment portfolio and the impact of repricing on variable-rate SBA loans following market interest rate reductions in late 2024. Seasonal factors affecting originations from higher-yielding Strategic Programs also contributed to the NIM pressure.

Non-interest income saw robust growth, increasing to $7.8 million in Q1 2025 from $5.7 million in Q1 2024. This was fueled by higher Strategic Program fees resulting from increased originations ($1.3 billion in Q1 2025 vs. $1.1 billion in Q1 2024), a favorable change in the fair value of the investment in BFG, and a significant increase in other miscellaneous income, including revenue from the growing operating lease portfolio and distributions from BFG.

Operating expenses rose to $14.3 million in Q1 2025 from $12.0 million in Q1 2024. This increase was primarily driven by higher salaries and employee benefits due to increased headcount and stock-based compensation, as well as other operating expenses supporting the growth in business infrastructure. The efficiency ratio remained relatively flat quarter-over-quarter at 64.8%, reflecting the ongoing investment phase. Management anticipates future improvements in this ratio as revenue from new initiatives scales.

Total assets expanded by $58.2 million to $804.1 million as of March 31, 2025, compared to December 31, 2024, primarily driven by growth in both held-for-investment ($24.6 million increase) and held-for-sale ($27.2 million increase) loan portfolios. This asset growth was funded largely by an increase in total deposits of $60.8 million, primarily through brokered time deposits ($53.0 million increase), which also contributed to increased interest-bearing cash balances. Total estimated uninsured deposits stood at $191.6 million. The company maintains strong liquidity, with $120.3 million in liquid assets and substantial available borrowing capacity ($246.3 million from the FRB, $6.1 million unsecured, $25.7 million from FHLB).

Capital levels remain strong, with tangible book value per share increasing to $13.42 and the total equity to total assets ratio at 22.0%. The Bank's leverage ratio of 18.80% significantly exceeds the 9.0% threshold for a well-capitalized institution under the CBLR framework. Management is comfortable with capital ratios declining into the mid-teens as low-risk assets grow, indicating ample capacity for future balance sheet expansion.

Credit Quality and Risk Management

FinWise maintains a disciplined approach to credit risk, which is critical given its exposure across various lending segments, including higher-risk Strategic Program loans and the variable-rate SBA portfolio sensitive to interest rate fluctuations.

The provision for credit losses increased slightly to $3.3 million in Q1 2025 from $3.2 million in Q1 2024, primarily reflecting the growth in the held-for-investment portfolio. Net charge-offs, however, decreased to $2.2 million in Q1 2025 from $3.2 million in Q4 2024, and the annualized NCO to average loans ratio was lower year-over-year. This improvement is attributed to the strategic shift towards a lower overall credit risk profile in the portfolio.

Nonperforming assets (NPAs) decreased to $29.9 million at March 31, 2025, from $36.5 million at December 31, 2024. This reduction was driven by the resolution of certain loans, although some migration of smaller SBA loans to nonperforming status occurred. Importantly, a significant portion of the NPLs ($15.1 million at March 31, 2025) are guaranteed by the SBA, limiting the bank's direct credit risk exposure on these balances.

The Allowance for Credit Losses (ACL) related to Strategic Program loans remains a disproportionate percentage of the total ACL (43.3% at March 31, 2025) compared to its share of the total held-for-investment portfolio (4.1%). This reflects the higher inherent credit risk in certain retained Strategic Program loans, which is managed through concentration limits, rigorous oversight of partners, and appropriate provisioning.

While management acknowledges the elevated risk of default in the current environment due to higher rates and potential slowdowns in consumer spending, they emphasize their proactive approach to early identification and intervention. They anticipate approximately $12 million in potential NPA migration during Q2 2025 as a lingering effect of higher rates but remain confident in their underwriting and portfolio management practices to mitigate losses. Counterparty risk associated with the credit enhancement program is also a consideration, though reserve accounts and contractual obligations are in place to mitigate this. Regulatory compliance and cybersecurity are ongoing areas of vigilance.

Outlook and Investment Thesis

FinWise Bancorp's investment thesis is centered on its strategic evolution into a diversified, technology-enabled financial institution with a focus on lower-risk asset growth and expanded fintech partnerships. The company is transitioning from a period of significant infrastructure investment to one focused on realizing revenue from its new initiatives.

Management's outlook for 2025 anticipates gradual growth throughout the year, driven by stable contributions from existing Strategic Programs and increasing volume from newer partnerships. A key driver of this growth is expected to be the Credit Enhanced balance sheet program, with management providing specific guidance for balances to increase by $50 million to $100 million by year-end 2025, with the majority of this growth anticipated in the second half. This program is expected to be a meaningful contributor to earnings due to its low-risk, yield-generating structure.

The BIN Sponsorship and Payments initiatives are also expected to gain gradual traction throughout 2025, building momentum over the year and contributing to revenue diversification and potentially lower funding costs. While NIM compression is expected to continue as the portfolio mix shifts towards lower-yielding, lower-risk assets, the anticipated increase in asset volume is expected to drive Net Interest Income growth.

Expense growth is expected to decelerate as the build-out of new initiatives concludes, with future headcount increases primarily tied to production growth. This is intended to lead to positive operating leverage and an improved efficiency ratio as new revenue streams scale.

Key risks to this outlook include the pace of adoption and scaling of new programs, the ability of partners to meet their obligations (particularly in credit enhancement), potential impacts from sustained high interest rates or economic slowdowns on credit quality and loan demand, and the evolving regulatory landscape for fintech partnerships.

Conclusion

FinWise Bancorp is executing a deliberate strategy to transform into a more diversified and lower-risk financial institution by leveraging its technology platform and expanding its product suite for fintech partners. While the recent financial performance in Q1 2025 reflects the costs associated with this investment phase, key indicators like growing assets, increasing non-interest income, and improving net charge-off trends signal progress. The core investment thesis hinges on the successful scaling of the newly launched Credit Enhanced balance sheet program and the Payments/BIN Sponsorship initiatives. Management's guidance for significant growth in the Credit Enhanced portfolio in 2025 provides a concrete target for investors to monitor. Despite expected near-term NIM compression and ongoing macro uncertainties that may impact credit quality, the company's strong capital position and focus on lower-risk asset growth, coupled with its differentiated technology and compliance expertise in the fintech space, position it for potential long-term value creation as its strategic initiatives mature and contribute more meaningfully to the bottom line. The recent addition to the Russell 2000 Index underscores increasing market recognition of its evolving profile.