FinWise Bancorp Common 2026 Q3 Earnings Call

Third quarter results demonstrate the tangible progress we have made in broadening our platform and building a more capital-efficient sponsor bank. We originated $2.1 billion in loans, and we nearly doubled our credit-enhanced balances to $146 million in the quarter. Even after the cost of those partner arrangements, net interest income rose 17% from the second quarter. We also recognized a one-time gain from our first acquisition transaction. Credit performance also improved during the quarter. Net charge-offs on loans without credit enhancement were $2.6 million in the quarter, well below the range of the last few quarters. Non-performing asset balances also decreased slightly quarter-over-quarter. With tangible book value up 9% over the past year, a leverage ratio of 18.1%, a strong pipeline of prospective partners, and continued share repurchases, we have the capital strength, teams, and operating environment to continue to execute.

I'll now provide some additional context on the factors that drove our core performance during the quarter. First, loan originations increased to $2.1 billion, reflecting both the typical seasonal increase in our student lending program, as well as strong organic growth from a credit-enhanced consumer lending program we launched in 2025. Volume across the remainder of the portfolio was stable quarter-over-quarter. Second, credit-enhanced balances grew to $146.2 million, driven by a meaningful pickup from a partner that we previously noted was slower to ramp during the first half of the year. For modeling purposes, please note that prior period credit-enhanced balances have been recast to reflect the reclassification of the Tallied credit card portfolio to discontinued operations. As a result, comparisons to previously reported amounts may differ.

Long-term growth in credit-enhanced balances will come from new partner additions, and expanding the pipeline for this product remains a key area of focus and an important part of our long-term plans. I want to briefly walk through how we manage partner risk in the credit-enhanced product. We rely first and foremost on the structure and strength of the underlying loans and then look to the fintech partner. Under credit enhancement, the fintech partner contractually agrees to cover credit losses on the loans and keeps a cash reserve at FinWise that we can draw on to recover against any charge-offs. Before any partner launches, they go through our full due diligence, covering compliance, risk, cyber, controls, and financial strength. They must then pass three credit tests. We first model the worst-performing vintage. We then stress historical charge-offs by 50% and 100%.

In each case, the portfolio must demonstrate an ability to replenish the required cash reserve. Finally, we review the partner's indemnity strength, including under the stress scenarios just mentioned. After launch, reserves are contractually required to be replenished weekly. We monitor the portfolio performance monthly and review updated charge-off and vintage analysis quarterly with our loan committee and board. We judge partner strength on existing capitalization, earnings, and resources, not on their ability to raise new capital. Lastly, backup servicing ensures collections continue if a partner ceases operations. Returning to the key drivers of our third quarter performance, credit trends were positive during the quarter. Net charge-offs for non-credit enhanced loans declined to $2.6 million from $5.2 million in the prior quarter, primarily reflecting the resolution of several previously classified credits and a reduced number of accounts migrating to classified status.

Non-performing loan balances decreased slightly quarter-over-quarter from $37.7 million to $37.1 million, with approximately 48% of those balances at the end of Q3 guaranteed by the federal government. As part of our effort to manage risk tolerance levels and streamline our balance sheet, the bank is actively working on a securitization for a portion of our SBA unguaranteed balances. We anticipate transferring these balances at par with a credit enhancement for securitization investors in the form of our retained interest. While we are encouraged by improved credit performance, we do not expect the unusually favorable credit results reported this quarter to be indicative of a new run rate in the near term. Bob will provide additional context around our expectations for net charge-offs and classified asset migration in his remarks. Overall, we remain very comfortable with the quality of our portfolio.

Credit performance across the portfolio remains healthy and generally in line with our expectations. Our pipeline of fintech partners remains very strong, and we believe we are entering a favorable period for new partnership growth over the next 12-24 months across lending, cards, and payments. As we have discussed previously, we expect to announce new partners towards the end of this year, and importantly, the opportunities we are pursuing today are larger, more diverse, and often have greater long-term revenue potential than those we were evaluating just a few years ago. Next, FinWise and Upstart have mutually agreed to end our sponsorship relationship effective September 30, 2026. Upstart contributed an immaterial amount of origination volume and an immaterial amount of revenue in the third quarter. We continue to have no meaningful credit exposure to Upstart loans on our balance sheet.

This termination is not expected to have any material impact on our financial condition or results of operations. Upstart has been a great partner for us since 2019. We are proud of the customers we have served with them, and we wish them the best in their future plans. On a related note, I also want to touch on the increase in fintech charter activity under the current administration, including both de novo and bank merger applications. Our strategy to diversify partners and lines of business is designed to withstand the occasional transition of a fintech partner to that of an insured bank. As many of you know, charter and merger applications are inherently uncertain in both outcome and timing. While a small number of larger fintechs are pursuing charters, the embedded finance market remains heavily dependent on sponsor bank partnerships.

Against that backdrop, we believe our diversified business model, broad product capabilities, regulatory and compliance infrastructure, and strong pipeline position us well to manage through any potential changes over time. We value all of our partnerships and remain focused on continuing to diversify revenue streams across lending, cards, and payments. In closing, this quarter's results reinforce our conviction in the company's long-term trajectory and the significant opportunity that exists. The progress we are making across lending, cards, and payments, coupled with a growing pipeline of increasingly meaningful partners, supports our confidence in the future. We remain focused on disciplined execution, continued improvement in credit quality, and building long-term shareholder value. I will now turn the call over to our CFO, Bob Wahlman, to provide more detail on our financial results.

Thanks, Jim, and good afternoon, everyone. Before reviewing our results, I would like to briefly address the impact of the Tallied transaction completed during the quarter. As part of the transaction, we acquired credit card technology, program management capabilities, and an experienced team that will expand our ability to support card programs for fintech partners. At the same time, we determined that holding credit card receivables was not aligned with our long-term strategy and approved a plan to exit the business while retaining the technology platform and servicing capabilities. As a result, the credit card portfolio and other related assets and liabilities are being reported as discontinued operations while the retained portfolio and the team remain part of continuing operations. This approach allows us to leverage the acquired capabilities through a more capital-efficient model consistent with our broader fintech banking strategy.

Given the impact of the Tallied transaction, discontinued operations presentation, and purchase accounting adjustments, reported results for the quarter are in some respects not directly comparable to prior periods. Accordingly, I will focus today's discussion on the underlying performance of the business and the key trends we are seeing across the platform. For the third quarter, FinWise reported net income of $10 million or $0.73 per diluted share. Continuing operations generated net income of $10.4 million or $0.76 per diluted share while discontinued operations reported a loss of $0.4 million or $0.03 per diluted share. Importantly, continuing operations results in the third quarter included a $6.5 million bargain purchase gain recognized in connection with the Tallied transaction, which was recorded in non-interest income. Net interest income was $41.9 million for the third quarter, reflecting continued growth in the credit-enhanced loan portfolio and improved credit performance.

Lower migration of performing loans to non-performing loans reduced interest reversals on non-accrual loans and contributed to a higher average yield on loans held for investment. Receipt of interest on a tax refund also increased net interest income. Net interest margin was 19.58% for the third quarter. The margin reflected continued growth in the higher yielding credit-enhanced loan portfolio and improved credit performance. Lower migration of performing loans to non-accrual status reduced interest reversals on non-accrual loans and supported higher yields on loans held for investment. These benefits were partially offset by higher interest expense associated with growth in average time certificates of deposit. Non-interest income was $60.8 million in the third quarter. The results reflect higher credit enhancement income associated with growth in the credit-enhanced portfolio.