Finwise Bancorp 10-K

Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto and other financial information included elsewhere in this Report. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. Factors that could cause such differences are discussed in the sections entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Report. We assume no obligation to update any of these forward-looking statements except to the extent required by law. The following discussion pertains to our historical results, on a consolidated basis. However, because we conduct all our material business operations through our wholly owned subsidiary, FinWise Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level. For a discussion of trends, uncertainties and risks that will or could impact the Company’s businesses, results of operations and financial condition during 2022, see “Principal Factors Affecting Our Results of Operations,” and “Principal Factors Affecting Our Financial Condition.” All dollar amounts in the tables in this section are in thousands of dollars, except per share data or where otherwise specifically noted. Unless otherwise stated, all information in this Report gives effect to a six-for-one stock split of our common stock completed effective July 26, 2021. The effect of the stock split on outstanding shares and per share figures has been retroactively applied to all periods presented in this Report. Overview The Company is a Utah corporation and the parent company of FinWise Bank. The Company’s assets consist primarily of its investment in the Bank and all of its material business activities are conducted through the Bank. The Company is a registered bank holding company that is subject to supervision by the UDFI and the Federal Reserve. As a Utah state-chartered bank that is not a member of the Federal Reserve System, the Bank is separately subject to regulations and supervision by both the UDFI and the FDIC. The Bank’s deposits are federally insured up to the maximum legal limits. See “Supervision and Regulation.” Our banking business is our only business line. Our banking business offers a diverse range of commercial and retail banking products and services, and consists primarily of originating loans in a variety of sectors. Attracting nationwide deposits from the general public, businesses and other financial institutions, and investing those deposits, together with borrowings and other sources of funds, is also critical to our banking business. While our commercial and residential real estate lending and other products and services offered from our branch continue to be concentrated in and around the Salt Lake City, Utah MSA, our third-party loan origination relationships have allowed us to expand into new markets across the United States. These relationships were developed to support our ability to generate significant loan volume across diverse consumer and commercial markets and have been the primary source of our significant growth and superior profitability. Our analytics platform, FinView™, enhances our ability to gather and interpret performance data for our originations and provides management with an ability to identify attractive, risk-adjusted sectors for growth. These insights coupled with the billions of dollars in originations funded annually and our ability to sell loans or retain for investment enhance our unique position. Our track record has demonstrated that these qualities deliver superior growth and profitability and that the flexibility inherent in our model enhances our ability to manage credit risk. Our financial condition and results of operations depend primarily on our ability to (i) originate loans using our strategic relationships with third-party loan origination platforms to earn interest and noninterest income, (ii) utilize FinView™ to identify attractive risk-adjusted lending opportunities and inform the selection of loans for investment while limiting credit losses, (iii) attract and retain low cost, stable deposits, and (iv) efficiently operate in compliance with applicable regulations. Our lending focuses on four main lending areas: (i) SBA 7(a) loans, (ii) Strategic Programs, (iii) residential and commercial real estate and (iv) consumer lending. For a description and analysis of the Company’s loan categories, see “—Principal Factors Affecting Our Financial Condition”. 50 Index Covid 19 Pandemic Since March 2020, our nation has experienced a massive health and economic crisis as a result of the Covid-19 pandemic, which continues to negatively impact the health and finances of millions of people and businesses and have a pronounced impact on the global and national economy. To control the spread of the Covid-19 virus, governments around the world instituted widespread shutdowns of the economy which resulted in record unemployment in a matter of weeks. The economic turbulence spawned by the Covid-19 pandemic left many banks with potential credit quality and income issues. These issues are further compounded by uncertainties regarding the length, depth and possible resurgence of the pandemic and its ultimate long-term effects on the economy. In an effort to reduce the impact of economic shutdowns, the United States Congress has passed the CARES Act, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, the Consolidated Appropriations Act, 2021, and recently the American Rescue Plan Act of 2021. These relief measures have provided stimulus payments to individuals, expanded unemployment benefits, and created programs that provided critical financing to small businesses through products such as the EIDL and the PPP, both of which are being administered by the SBA. Additionally, the United States government agreed to make six months of payments on SBA loans and increase the SBA guaranty on SBA 7(a) loans to 90% for loans originated from February 1, 2020 through September 30, 2021. The SBA has made the full monthly P&I payments with respect to our qualifying SBA 7(a) customers in “regular servicing” status for six months. For most of our SBA portfolio (the legacy loans), the SBA made borrowers’ principal and interest payments from April 2020 through September 2020. These were officially referred to as First Round Section 1112 Payments, as they derived from Section 1112 of the CARES Act. To be eligible for the full six months of First Round Section 1112 Payments, the SBA loans were required to be: (i) in “regular servicing” status; (ii) approved by the SBA before March 27, 2020; and (iii) fully disbursed by September 27, 2020. Under the Economic Aid Act, the SBA will make an additional two payments for eligible SBA customers, capped at $9,000 per month per loan. Borrowers with loan payments above $9,000 per month are responsible for paying the difference. For our legacy portfolio, the SBA will make payment on the lesser of a borrower’s monthly principal and interest payment or $9,000 per month from February 2021 through March 2021. These are referred to as Second Round Section 1112 Payments. The SBA released a list of NAICS codes deemed to have been particularly affected by the Covid-19 pandemic. SBA customers who met all other Section 1112 qualifying criteria and operated within certain NAICS codes, are entitled to an additional three months of payments. As of December 31, 2020, the Bank had 35 qualifying SBA loans totaling approximately $4.9 million in SBA 7(a) unguaranteed balance that received an additional three months of Second Round Section 1112 Payments, which were capped at $9,000 per month and per loan. As of December 31, 2021, 5 of the 35 qualifying SBA loans have been paid in full. The remaining 30 loans are all performing and total approximately $4.5 million in SBA 7(a) unguaranteed balance. As of December 31, 2021, none of the remaining 30 loans are entitled to additional Section 1112 payments. We participated in the first round of PPP lending and provided PPP loans to approximately 700 businesses totaling approximately $126.6 million during the year ended December 31, 2020. No PPP loans were originated by the Company during the year ended December 31, 2021. We believe the Bank’s diversified loan portfolio and associated revenue streams have enabled the Bank to sustain and grow its business despite the adverse conditions relating to the Covid-19 pandemic. During the first and second quarters of 2020, we recorded higher than normal provisions to position ourselves for the possibility of elevated losses on loans resulting from the pandemic. The provision amounts reflected our early uncertainty surrounding the impact of the pandemic. Provisions ceased in the third and fourth quarters when we determined that our loan portfolios were not materially impacted at that time. For the year ended December 31, 2020, the provision for loan losses amounted to $5.2 million. For the year ended December 31, 2021 the provision for loan losses amounted to $8.0 million. While some of the adverse conditions relating to the Covid-19 pandemic reversed in 2021, and have continued such reversal in the beginning of 2022, sustained improvements are highly dependent upon strengthening economic conditions. The Covid-19 pandemic continues to cause economic uncertainties which may again result in these and other adverse impacts to our financial condition and results of operations. We believe our SBA 7(a) underwriting program has remained strong throughout the Covid-19 pandemic and our SBA 7(a) loans are well collateralized when compared to the SBA industry in general. The dollar amount of short-term modifications of loans held-for-investment not classified as troubled debt restructurings was $0.5 million and $1.2 million as of December 31, 2021 and 2020, respectively. Principal Factors Affecting Our Results of Operations Net Income. Net income is calculated by taking interest and noninterest income and subtracting our costs to do business, such as provision for loan losses, interest expense, salaries, taxes and other operational expenses. Net Interest Income. Net interest income represents interest income, less interest expense. We generate interest income from interest and fees received on interest earning assets, including loans, interest earning deposits in other banks, the Federal Reserve and investment securities we own. We incur interest expense from interest paid on interest bearing liabilities, including interest bearing deposits, borrowings and other forms of indebtedness. Net interest income was the most significant contributor to our net income in 2020 and 2021. To evaluate net interest income, we measure and monitor: (i) yields on our loans and other interest earning assets; (ii) the costs of our deposits and other funding sources; (iii) our net interest spread; and (iv) our net interest margin. Net interest spread is the difference between rates earned on interest earning assets and rates paid on interest bearing liabilities. Net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period. Because noninterest bearing sources of funds, such as noninterest bearing deposits and shareholders’ equity, also fund interest earning assets, net interest margin includes the benefit of these noninterest bearing sources. 51 Index Decreases in interest rates, as well as the ongoing economic uncertainty, may decrease our net interest income and net interest margin in future periods, while increases in interest rates are expected to increase our net interest income and net interest margin in future periods. We expect increases in the federal funds rate in 2022 which is anticipated to be beneficial to our net interest income and net interest margin. In its statement released on January 26, 2022, the Federal Open Market Committee stated that it would soon be appropriate to raise the target range for the federal funds rate above the range of 0.0% to 0.25% in response to inflation that is above their 2.0% target and a strong labor market. As of December 31, 2021, approximately 79.9% of our loans held for investment were indexed to a market rate that is expected to reprice along with the federal funds rate. Changes in market interest rates and interest we earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of our interest earning assets, liabilities and shareholders’ equity, have the largest impact on our net interest spread, net interest margin and net interest income. We measure net interest income before and after our provision for loan losses. Provision for Loan Losses. Provision for loan losses is the amount of expense that, based on our judgment at that time, is required to maintain our ALL at an adequate level to absorb probable losses inherent in our loan portfolio and that, in our management’s judgment, is appropriate under relevant accounting guidance. Determination of the ALL is complex and involves a high degree of judgment and subjectivity. For a description of the factors we considered in determining the ALL see “—Principal Factors Affecting Our Financial Condition—Allowance for Loan Losses.” Noninterest Income. Noninterest income consists of, among other things: (i) Strategic Program fees; (ii) loan servicing fees; (iii) deposit related fees; (iv) gain on sale of loans; and (v) other noninterest income. Strategic Program fees are paid to us by loan origination platforms and include monthly minimum fees, fees based on the volume of loan originations in each month, testing and oversight fees, wire transfer fees, ACH fees, and program set up fees. Deposit related fees include checking fees, account maintenance fees, insufficient funds fees, overdraft fees, stop payment fees, domestic and foreign wire interchange and card processing fee income. Noninterest Expense. Noninterest expense includes, among other things: (i) salaries and employee benefits; (ii) occupancy and equipment expense; (iii) communications and data processing fees (iv) professional services fees; (v) federal deposit insurance assessments; (vi) correspondent bank charges; (vii) marketing costs; and (viii) other general and administrative expenses. Salaries and employee benefits include compensation (including employee-related stock compensation), employee benefits and tax expenses for our personnel. Occupancy expense includes depreciation expense, lease expense on our leased properties and other occupancy-related expenses. Equipment expense includes expenses related to our furniture, fixtures, equipment and software. Data processing fees include expenses paid to our third-party data processing system provider and other data service providers. Communications expense includes costs for telephone and internet. Professional fees include legal, accounting, consulting and other outsourcing arrangements. Federal deposit insurance expense relates to FDIC assessments based on the level of our deposits. Correspondent bank charges include wire transfer fees, transaction fees and service charges related to transactions settled with correspondent relationships. Marketing expense includes marketing material production, trade show participation, marketing fees related to Strategic Programs, website enhancement, outsourced marketing and branding services. Other general and administrative expenses include expenses associated with travel, meals, advertising, promotions, training, supplies and postage. Regulatory Environment. We are subject to federal and state regulation and supervision, which continue to evolve as the legal and regulatory framework governing our operations continues to change. The current operating environment includes extensive regulation and supervision in areas such as consumer compliance, the BSA and anti-money laundering compliance, risk management and internal audit. We anticipate that this environment of extensive regulation and supervision will continue for the industry. As a result, changes in the regulatory environment may result in additional costs for additional compliance, risk management and audit personnel or professional fees associated with advisors and consultants. Results of Operations Net Income Overview The following table sets forth the principal components of net income for the periods indicated. ​ For the Years Ended December 31, ($ in thousands) 2021 2020 Interest income $ 49,243 $ 29,506 Interest expense (1,265 ) (1,756 ) Provision for loan losses (8,039 ) (5,234 ) Non-interest income 31,844 14,373 Non-interest expense (29,511 ) (21,749 ) Provision for income taxes (10,689 ) (3,942 ) Net income 31,583 11,198 52 Index Net income for the year ended December 31, 2021 was $31.6 million, an increase of $20.4 million or 182.0% from net income of $11.2 million for the year ended December 31, 2020. The increase was primarily due to an increase of $19.7 million or 66.9% in interest income and an increase of $17.5 million or 121.6% in non-interest income, offset by an increase of $7.8 million or 35.7% in non-interest expense and an increase of $6.7 million or 171.1% in provision for income taxes, as described below. Net Interest Income and Net Interest Margin Analysis Net interest income was the primary contributor to our earnings in 2021 and 2020. We believe our net interest income results were enhanced by using FinView™ to identify attractive risk-adjusted lending opportunities and assist in the selection of Strategic Program loans that we chose to hold for investment. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” For the year ended December 31, 2021, our net interest income increased $20.2 million, or 72.9%, to $48.0 million compared to the year ended December 31, 2020. This increase was primarily due to an increase in asset yields, growth in average interest earning assets, and a decrease in our cost of funds. Average interest earning assets increased by $64.8 million, or 25.6%, to $317.8 million for the year ended December 31, 2021 compared to the year ended December 31, 2020, while the related yield on average interest earning assets increased by 380 basis points to 15.5%, resulting in increased interest income for the year ended December 31, 2021 of $19.7 million. A substantial decrease in comparatively low yielding PPP loans during the year ended December 31, 2021 contributed to the increase in yield on average interest earning assets for the year. While the corresponding cost of funds on interest bearing liabilities for the year ended December 31, 2021 declined by 40 basis points to 0.9%, the average balance in interest bearing liabilities increased by $12.3 million, or 9.3%. The general decline of interest rates in the U.S. financial markets in 2021 is the primary cause for the decline in the cost of funds. As indicated in the rate/volume table set forth below, the decline in the cost of funds partially offset by the effect of increased volumes of interest-bearing liabilities, resulting in decreased interest expense for the year ended December 31, 2021 of $0.5 million. We gather deposits in the Salt Lake City, Utah MSA through our one branch and nationwide from our Strategic Program service providers, SBA 7(a) borrowers, Institutional Deposit exchanges, and brokered deposit arrangements. For the year ended December 31, 2021, deposits sourced through our branch, Strategic Programs, SBA 7(a) borrowers, national Institutional Deposit exchanges and brokered deposit arrangements increased compared to the year ended December 31, 2020. Our net interest margin increased from 11.0% at December 31, 2020 to 15.1% at December 31, 2021. 53 Index Average Balances and Yields . The following table presents average balances for assets and liabilities, the total dollar amounts of interest income from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented. Loan fees are included in interest income on loans and represent approximately $3.6 million (including approximately $1.8 million in SBA fees related to PPP loans) and $1.4 million (including approximately $1.2 million in SBA fees related to PPP loans), for the years ended December 31, 2021 and December 31, 2020, respectively. Average balances have been calculated using daily averages. ​ Years Ended December 31, ​ 2021 2020 ($ in thousands) Average Balance Interest Average Yield/Rate Average Balance Interest Average Yield/Rate Interest earning assets: Interest-bearing deposits with the Federal Reserve, non U.S. central banks and other banks $ 55,960 $ 61 0.1 % $ 43,892 $ 201 0.5 % Investment securities 3,298 47 1.4 % 1,622 34 2.1 % Loans held for sale 59,524 22,461 37.7 % 20,154 10,560 52.4 % Loans held for investment 198,992 26,674 13.4 % 187,314 18,711 10.0 % Total interest earning assets 317,774 49,243 15.5 % 252,982 29,506 11.7 % Less: ALL (7,548 ) (6,706 ) Non-interest earning assets 17,002 8,130 Total assets $ 327,228 $ 254,406 Interest bearing liabilities: Demand $ 6,060 $ 53 0.9 % $ 3,237 $ 62 1.9 % Savings 7,897 10 0.1 % 6,234 16 0.3 % Money market accounts 21,964 75 0.3 % 16,327 104 0.6 % Certificates of deposit 72,311 1,000 1.4 % 57,496 1,401 2.4 % Total deposits 108,232 1,138 1.1 % 83,294 1,583 1.9 % Other borrowings 36,363 127 0.3 % 49,044 173 0.4 % Total interest bearing liabilities 144,595 1,265 0.9 % 132,338 1,756 1.3 % Non-interest bearing deposits 107,481 80,537 Non-interest bearing liabilities 11,392 3,941 Shareholders’ equity 63,760 37,590 Total liabilities and shareholders’ equity $ 327,228 $ 254,406 Net interest income and interest rate spread $ 47,978 14.6 % $ 27,750 10.3 % Net interest margin 15.1 % 11.0 % Ratio of average interest-earning assets to average interest- bearing liabilities 219.8 % 191.2 % 54 Index Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate. The volume column shows the effects attributable to changes in volume. For purposes of this table, changes attributable to changes in both rate and volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume. Years Ended December 31, ​ 2021 2020 ​ Increase (Decrease) Due to Increase (Decrease) Due to ($ in thousands) Rate Volume Total ​ Rate Volume Total Interest income: ​ Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks $ (219 ) $ 79 $ (140 ) $ ​(790 ) $ 327 $ (463 ) Investment securities (6 ) 19 13 ​(3 ) 21 18 Loans held-for-sale (1,990 ) 13,891 11,901 ​(1,036 ) 3,814 2,778 Loans held for investment 6,735 1,228 7,963 ​(2,185 ) 7,950 5,765 Total interest income 4,520 15,217 19,737 ​(4,014 ) 12,112 8,098 Interest expense: ​ Demand 15 (24 ) (9 ) ​30 32 62 Savings (13 ) 7 (6 ) ​— 4 4 Money market accounts (113 ) 84 (29 ) ​(18 ) 13 (5 ) Certificates of deposit (992 ) 591 (401 ) ​(52 ) 112 60 Other borrowings (2 ) (44 ) (46 ) ​87 86 173 Total interest bearing liabilities (1,105 ) 614 (491 ) ​47 247 294 Net interest income $ 5,625 $ 14,603 $ 20,228 $ ​(4,061 ) $ 11,865 $ 7,804 55 Index Provision for Loan Losses The provision for loan losses is a charge to income to bring our ALL to a level deemed appropriate by management and approved by of board of directors. We determine the provision for loan losses monthly in connection with our monthly evaluation of the adequacy of our ALL. For a description of the factors we considered in determining the ALL see “—Principal Factors Affecting Our Financial Condition—Allowance for Loan Losses” and “—Critical Accounting Policies and Estimates—Allowance for Loan Losses.” Our provision for loan losses was $8.0 million and $5.2 million for the years ended December 31, 2021 and 2020, respectively. The increase of $2.8 million was primarily due to an overall increase in our provision attributable to Strategic Program lending, which was the result of our decision to increase certain retained Strategic Program loan balances during the period, and an overall increase in our provision attributable to SBA lending, which was the result of our decision to increase SBA 7(a) loan balances during the period. Noninterest Income The largest portion of our noninterest income is associated with our Strategic Program fees. Other sources of noninterest income include gain on sale of loans, SBA loan servicing fees, change in fair value on investment in BFG and other miscellaneous fees. The following table presents, for the periods indicated, the major categories of noninterest income: ​ For the Years Ended December 31, Change ($ in thousands) 2021 2020 $ % Noninterest income: Strategic Program fees $ 17,959 $ 9,591 $ 8,368 87.3 % Gain on sale of loans 9,689 2,849 6,840 240.1 % SBA loan servicing fees 1,156 1,028 128 12.5 % Change in fair value on investment in BFG 2,991 856 2,135 249.4 % Other miscellaneous income 49 49 — 0.0 % Total noninterest income $ 31,844 $ 14,373 $ 17,471 121.6 % For the year ended December 31, 2021, total noninterest income increased $17.5 million, or 121.6%, to $31.8 million compared to the year ended December 31, 2020. This increase was primarily due to the increase in Strategic Program fees, gain on sale of loans, the change in fair value on investment in BFG, and SBA loan servicing fees. The increase in Strategic Program fees was primarily due to the increase in loan origination volume in the Strategic Program. Strategic Program fees were also positively impacted by the launch of three origination platforms during the year ended December 31, 2021. The increase in gain on sale of loans was primarily due to the increase in the number of SBA 7(a) loans sold during the year ended December 31, 2021. The increase in fair value on investment in BFG was primarily due to BFG’s increased profitability and cash position during and for the year ended December 31, 2021 and the appreciation of its peer companies under the Guideline Public Company valuation method during the same period. The increase in SBA loan servicing fees was primarily due to the increase in SBA 7(a) loans serviced for others during the year. Noninterest Expense Noninterest expense has increased as we have grown and as we have expanded and modernized our operational infrastructure and implemented our plan to build an efficient, technology-driven banking operation with significant capacity for growth. 56 Index The following table presents, for the periods indicated, the major categories of noninterest expense: ($ in thousands) For the Years Ended December 31, Change ​ 2021 2020 $ % Noninterest expense: Salaries and employee benefits $ 22,365 $ 16,835 $ 5,530 32.9 % Occupancy and equipment expenses 810 694 116 16.7 % Impairment of SBA servicing asset 800 — 800 100.0 % Loss on investment in BFG — 50 (50 ) -100.0 % Other operating expenses 5,536 4,170 1,366 32.8 % Total noninterest expense $ 29,511 $ 21,749 $ 7,762 35.7 % For the year ended December 31, 2021, total noninterest expense increased $7.8 million, or 35.7%, to $29.5 million compared to the year ended December 31, 2020. This increase was primarily due to the increase in salaries and employee benefits and other operating expenses. For the year ended December 31, 2021, salaries and employee benefits increased $5.5 million, or 32.9%, to $22.4 million compared to the year ended December 31, 2020. This increase was primarily due to the increase in the number of employees during the year ended December 31, 2021. The increase in employees during this timeframe coincided with an increase in Strategic Program loan volume and the expansion of our information technology and security division to support enhancements in our infrastructure, and an increase in contractual bonuses paid relating to the expansion of the Strategic Programs in 2021. For the year ended December 31, 2021, other operating expense increased $1.4 million, or 32.8%, to $5.5 million compared to the year ended December 31, 2020. This increase was primarily due to our initiative to develop new and upgrade existing technology, increased third party financial and business process reviews, increased marketing costs, and increased legal and professional fees, all with the intent of supporting of our growth. For the year ended December 31, 2021, an impairment of SBA servicing asset was recognized for $0.8 million due to a softening of the secondary market for SBA 7(a) loans. Principal Factors Affecting Our Financial Condition The primary factors we use to evaluate and manage our financial condition include asset quality, capital and liquidity. Asset Quality. We manage the diversification and quality of our assets based on factors that include the level, distribution, severity and trend of problem, classified, delinquent, nonaccrual, nonperforming and restructured assets, the adequacy of our ALL, the diversification and quality of our loan and investment portfolios, the extent of counterparty risks, credit risk concentrations and other factors. Capital. Financial institution regulators have established guidelines for minimum capital ratios for banks. As a small bank holding company, we are expected to be a capital resource to our subsidiary, which is required to be well capitalized. We, however, are not subject to specific capital ratios as a small bank holding company. We manage capital based upon factors that include: (i) the level and quality of capital and our overall financial condition; (ii) the trend and volume of problem assets; (iii) the adequacy of reserves; (iv) the level and quality of earnings; (v) the risk exposures in our balance sheet; (vi) the Community Bank Leverage Ratio; (viii) the state of local and national economic conditions; and (ix) other factors including our asset growth rate, as well as certain liquidity ratios. Liquidity. We manage liquidity based on factors that include the amount of core deposits as a percentage of total deposits, the level of Strategic Program held-for-sale loan balances compared to Strategic Program reserve deposit balances, the level of diversification of our funding sources, the allocation and amount of our deposits among deposit types, the short-term funding sources, the amount of non-deposit funding, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash, interest earning deposits in other banks and liquid securities we hold, the re-pricing characteristics and maturities of our assets and other factors. Loan Portfolio We manage our loan portfolio based on factors that include concentrations per loan program and aggregated portfolio, industry selection and geographies. We also monitor the impact of identified and estimated losses on capital as well as the pricing characteristics of each product. The following provides a general description and the risk characteristics relevant to each of the business lines. Each loan is assigned a risk grade during the origination and closing process by credit administration personnel based on criteria described later in this section. We analyze the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances. This ratings analysis is performed at least quarterly. 57 Index SBA 7(a) Loans We originate and service loans partially guaranteed by the SBA under its Section 7(a) loan program. SBA 7(a) loans are made to small businesses and professionals throughout the USA. As of December 31, 2021 and 2020, we had total SBA 7(a) loans of $141.3 million and $96.2 million, respectively, representing 53.2% and 36.7% of our total loans, respectively. Loans are sourced primarily through our referral relationship with BFG. Although BFG actively markets throughout the USA, because of its physical location in the New York area we have developed a lending presence in the New York and New Jersey geographies. The maximum SBA 7(a) loan amount is $5 million. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow and tertiary is the sale of collateral pledged. These loans may be secured by commercial and residential mortgages as well as liens on business assets. In addition to typical underwriting metrics, we review the nature of the business, use of proceeds, length of time in business and management experience to help us target loans that we believe have lower credit risk. The SBA 7(a) program generally provides 50%, 75%, 85% and 90% guarantees for eligible SBA 7(a) loans. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper underwriting, closing or servicing by the lender. As such, prudent underwriting, closing and servicing processes are essential to effective utilization of the SBA 7(a) program. Historically, we have generally sold the SBA-guaranteed portion (typically 75% of the principal balance) of a majority of the loans we originate at a premium in the secondary market while retaining all servicing rights and the unguaranteed portion; however, beginning in 2020, we made the decision to drive interest income by temporarily retaining a larger amount of the guaranteed portion of these loans. SBA Paycheck Protection Program Loans As an experienced SBA 7(a) lender, we were an active participant in the first round of the PPP, which began in April of 2020 and expired on August 8, 2020. As a result of our efforts, we provided PPP loans to approximately 700 businesses, totaling approximately $126.6 million, for the year ended December 31, 2020. As of December 31, 2021 and 2020, we had total PPP loans of $1.1 million and $107.1 million, respectively, representing 0.4% and 40.9% of our total loans, respectively. The PPP loans also resulted in fees paid by the SBA to the originating bank for processing PPP loans, which fees are accreted into interest income over the life of the applicable loans. If a PPP loan is forgiven or paid off before maturity, the remaining unearned fee is recognized into income at that time. For the year ended December 31, 2020, the Company recognized $0.4 million in PPP-related SBA accelerated deferred loan fees through interest income as a result of PPP loan forgiveness. For the year ended December 31. 2021, the Company recognized a total of $1.8 million in PPP-related accreted fees ($1.5 million of which were accelerated due to loan forgiveness). A de minimis amount of deferred fees remained as of December 31, 2021. Commercial, non-real estate Commercial non-real estate loans consist of loans and leases made to commercial enterprises that are not secured by real estate. As of December 31, 2021 and December 31, 2020, we had total commercial non-real estate loans of $3.4 million and $4.0 million, respectively, representing 1.3% and 1.5% of our total loans, respectively. Any loan, line of credit, or letter of credit (including any unfunded commitments) and any interest obtained in such loans made by another lender to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, not secured by real estate, but not for personal expenditure purposes are included in this category. For example, commercial vehicle term loans and commercial working capital term loans. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. These loans are generally secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment. Residential real estate Residential real estate loans include construction, lot and land development loans that are for the purpose of acquisition and development of property to be improved through the construction of residential buildings, and loans secured by other residential real estate. As of December 31, 2021 and December 31, 2020, we had total residential real estate loans of $27.1 million and $17.7 million, respectively, representing 10.2% and 6.8% of our total loans, respectively. Construction loans are usually paid off through the conversion to permanent financing from third-party lending institutions. Lot loans may be paid off as the borrower converts to a construction loan. At the completion of the construction project, if the loan is converted to permanent financing by us or if scheduled loan amortization begins, it is then reclassified from construction to single-family dwelling. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded. These loans are generally secured by mortgages for residential property located primarily in the Salt Lake City, Utah MSA, and we obtain guarantees from responsible parties. Historically, we have retained these loans on our balance sheet for investment. Strategic Program loans We, through our Strategic Program service providers, issue, on a nationwide basis, unsecured consumer and secured or unsecured business loans to borrowers within certain approved credit profiles. As of December 31, 2021 and December 31, 2020, we had total Strategic Program loans of $85.9 million and $28.3 million, respectively, representing 32.3% and 10.8% of our total loans, respectively. Loans originated through these programs are limited to predetermined Bank underwriting criterion, which has been approved by our board of directors. The primary form of repayment on these loans is from personal or business cash flow. Business loans may be secured by liens on business assets, as applicable. We have generally sold most of these loans, but as our capital grows and FinView™ evolves, we may choose to hold more of the funded loans and/or receivables. We reserve the right to sell any portion of funded loans and/or receivables directly to the Strategic Program service providers or other investors. We retain the legal right to service all these loans, but contract with the Strategic Program service provider or another approved sub-servicer to service these loans on our behalf. 58 Index Commercial real estate Commercial real estate loans include loans to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, secured by real estate primarily located in the Salt Lake City, Utah MSA, but not for personal expenditure purposes. As of December 31, 2021 and December 31, 2020, we had total commercial real estate loans of $2.4 million and $2.9 million, respectively, representing 0.9% and 1.1% of our total loans, respectively. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. In addition to real estate, these loans may also be secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment. Consumer Consumer lending provides financing for personal, family, or household purposes on a nationwide basis. Most of these loans are originated through our POS platform and come from a variety of sources, including other approved merchant or dealer relationships and lending platforms. As of December 31, 2021 and December 31, 2020, we had total consumer loans of $4.6 million, and $5.5 million, respectively, representing 1.7% and 2.1% of our total loans, respectively. We use a debt-to-income (“DTI”) ratio to determine whether an applicant will be able to service the debt. The DTI ratio compares the applicant’s anticipated monthly expenses and total monthly obligations to the applicant’s monthly gross income. Our policy is to limit the DTI ratio to 45% after calculating interest payments related to the new loan. Loan officers, at their discretion, may make exceptions to this ratio if the loan is within their authorized lending limit. DTI ratios of no more than 50% may be approved subject to an increase in interest rate. Strong offsetting factors such as higher discretionary income or large down payments are used to justify exceptions to these guidelines. All exceptions are documented and reported. While the loans are generally for the purchase of goods which may afford us a purchase money security interest, they are underwritten as if they were unsecured. On larger loans, we may file a Uniform Commercial Code financing form. Historically, we have retained these loans on our balance sheet for investment. Loan Portfolio Program Summary Through our diversification efforts and FinView™, we have built a portfolio that we believe positions us to withstand economic shifts. For example, we focus on industries and loan types that have historically lower loss rates such as professional, scientific and technical services (including law firms), non-store retailers (e-commerce), and ambulatory healthcare services. We believe that these efforts helped minimize our exposure to industries severely impacted by the Covid-19 pandemic. The following table summarizes our loan portfolio by loan program as of the dates indicated: ​ As of December 31, ​ 2021 2020 ​ Amount % of total loans Amount % of total loans SBA (1) $ 142,392 53.6 % $ 203,317 77.7 % Commercial, non real estate 3,428 1.3 % 4,020 1.5 % Residential real estate 27,108 10.2 % 17,740 6.8 % Strategic Program loans 85,850 32.3 % 28,265 10.8 % Commercial real estate 2,436 0.9 % 2,892 1.1 % Consumer 4,574 1.7 % 5,543 2.1 % Total $ 265,788 100.0 % $ 261,777 100.0 % (1) The amount of SBA loans as of December 31, 2021 and December 31, 2020 includes approximately $1.1 million and $107.1 million of PPP loans. 59 Index Loan Maturity and Sensitivity to Changes in Interest Rates As of December 31, 2021, including the impact of PPP loans, $103.1 million, or 50.3%, of the total held for investment loan balance matures in less than five years. Loans maturing in greater than five years totaled $101.9 million as of December 31, 2021. The variable rate portion of our total held for investment loan portfolio at December 31, 2021 was $163.8 million, or 79.9%. As of December 31, 2020, including the impact of PPP loans, $173.5 million, or 72.1%, of the total held for investment loan balance matures in less than five years. Loans maturing in greater than five years totaled $67.3 million as of December 31, 2020. The variable rate portion of our total held for investment loan portfolio at December 31, 2020 was $107.7 million, or 44.7%. The variable rate portion of the total held for investment loans reflects our strategy to minimize interest rate risk through the use of variable rate products. The following tables detail maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2021 and 2020: At December 31, 2021 Remaining Contractual Maturity Held for Investment ($ in thousands) One Year or Less After One Year and Through Five Years After Five Years and Through Fifteen Years After Fifteen Years Total Fixed rate loans: SBA (1) $​ 644 $ 732 $ 259 $ 114 $ 1,749 Commercial, non-real estate 1,168 2,112 142 6 3,428 Residential real estate 2,876 1,519 — — 4,395 Strategic Program loans 18,121 6,981 — — 25,102 Commercial real estate 1,565 639 7 1 2,212 Consumer 1,500 2,793 66 — 4,359 ​ Variable rate loans: SBA 7,920 31,598 58,493 42,632 140,643 Commercial, non-real estate — — — — — Residential real estate 22,234 291 188 — 22,713 Strategic Program loans — — — — — Commercial real estate 224 — — — 224 Consumer 62 153 — — 215 Total $ 56,314 $ 46,818 $ 59,155 $ 42,753 $ 205,040 (1) The amount of SBA fixed rate loans includes approximately $1.1 million of PPP loans. PPP loans originated prior to June 5, 2020, have a two year term. PPP loans originated on or after June 5, 2020, have a five year term. For PPP borrowers who submit completed applications for forgiveness, loan payments are automatically deferred until the SBA renders a decision on the forgiveness request. PPP borrowers who fail to submit timely forgiveness applications are required to make monthly payments beginning ten months from the end of the chosen “covered period”. The “covered period” is a maximum of 24 weeks from the origination date. Assuming a 24 week covered period, PPP borrowers are not required to begin making payments until 16 months after the origination date. At the time payments begin, if the borrower and lender of a two year PPP loan mutually agree to extend the term of the loan it can be extended to a five year term. As of December 31, 2021, three PPP loans have been granted maturity date extensions. At December 31, 2020 Remaining Contractual Maturity Held for Investment ($ in thousands) One Year or Less After One Year and Through Five Years After Five Years and Through Fifteen Years After Fifteen Years Total Fixed rate loans: SBA (1) $ 53,093 $ 54,376 $ 339 $ 158 $ 107,966 Commercial, non-real estate 1,746 2,203 70 1 4,020 Residential real estate 4,788 1,392 — — 6,180 Strategic Program loans 6,547 770 — — 7,317 Commercial real estate 1,902 766 17 — 2,685 Consumer 1,737 3,226 20 — 4,983 Variable rate loans: SBA 5,762 23,009 39,866 26,714 95,351 Commercial, non-real estate — — — — — Residential real estate 10,696 747 117 — 11,560 Strategic Program loans — — — — — Commercial real estate 207 — — — 207 Consumer 191 369 — — 560 Total $ 86,669 $ 86,858 $ 40,429 $ 26,873 $ 240,829 (1) The amount of SBA fixed rate loans includes approximately $107.1 million of PPP loans. 60 Index Nonperforming Assets Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were contractually due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether such loans are actually past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also generally place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent recoveries received (either from payments received from the customer, derived from the disposition of collateral or from legal action, such as judgment enforcement) exceed liquidation expenses incurred and outstanding principal. A non-accrual asset may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and we expect repayment of the remaining contractual principal and interest, or (2) when asset otherwise becomes well secured and is not in the process of collection. Any loan which we deem to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss. In general, loans that are past due for 90 days or more are charged off unless the loan is both well secured and in the process of collection. We believe our disciplined lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our loan officers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions. 61 Index The following table provides information with respect to our nonperforming assets and troubled debt restructurings at the dates indicated: ​ As of December 31, ($ in thousands) 2021 2020 Nonaccrual loans: SBA $ 657 $ 816 Commercial, non real estate — — Residential real estate — — Strategic Program loans — 15 Total nonperforming loans $ 657 $ 831 ​ Total accruing loans past due 90 days or more $ 54 $ 1 Nonaccrual troubled debt restructuring $ 25 $ 53 Total troubled debt restructurings 106 870 Other Real Estate Owned — — Less nonaccrual troubled debt restructurings (25 ) (53 ) Total nonperforming assets and troubled debt restructurings $ 763 $ 1,701 Total nonperforming loans to total loans 0.2 % 0.3 % Total nonperforming loans to total assets 0.2 % 0.3 % Total nonperforming assets and troubled debt restructurings to total loans 0.3 % 0.6 % Total nonperforming assets and troubled debt restructurings to total assets 0.2 % 0.5 % Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans) (1) 0.2 % 0.8 % (1) See “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a reconciliation of this measure to its most comparable GAAP measure. Our total nonperforming assets and troubled debt restructurings at December 31. 2021 were $0.8 million, which represented a reduction of $0.9 million from December 31, 2020. The largest troubled debt restructuring attributable to a single borrower at December 31, 2020 with balance of $0.8 million paid in full including interest in May 2021. Total nonperforming assets at December 31, 2021 were composed of $0.7 million in nonaccrual loans and $0.1 million of troubled debt restructurings. Total nonperforming assets at December 31, 2020 were composed of $0.8 million in nonaccrual loans and $0.9 million of troubled debt restructurings. We do not classify loans that experience insignificant payment delays and payment shortfalls as impaired. We consider an “insignificant period of time” from payment delays to be a period of 90 days or less, or 180 days or less in certain Strategic Programs. We will customarily attempt to provide a modification for a customer experiencing what we consider to be a short-term event that has temporarily impacted cash flow. In those cases, we will review the request to determine if the customer is experiencing cash flow strain and how the event has impacted the ability of the customer to repay in the long term. Short-term modifications are not classified as troubled debt restructurings because they do not meet the definition set by the FDIC or our accounting policy for identifying troubled debt restructurings. The FDIC issued statements in March and April of 2020 that encouraged banks to work with all borrowers, especially those from industry sectors particularly vulnerable to economic volatility. The FDIC clarified that prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism, and that certain loan modifications made in response to Covid-19 are not troubled debt restructurings. The dollar amount of short-term modifications of loans held for investment as of December 31, 2021 was $0.5 million, substantially all of which are attributable to our Strategic Program loans. The dollar amount of short-term modifications of loans held for investment as of December 31, 2020 was $1.2 million. Of this, approximately $0.6 million, or 46.7%, is attributable to our Strategic Program loans, $0.5 million, or 46.5%, is attributable to our SBA 7(a) portfolio, and $0.1 million, or 6.8%, is attributable to our Commercial, non-real estate portfolio. Interest income that would have been recorded for the years ended December 31, 2021 and 2020 had nonaccrual loans been current throughout the period amounted to $0.1 million and $0.1 million, respectively. 62 Index Credit Risk Profile We believe that we underwrite loans carefully and thoroughly, limiting our lending activities to those products and services where we have the resources and expertise to lend profitably without undue credit risk. We require all loans to conform to policy (or otherwise be identified as exceptions to policy and monitored and reported on, at minimum, quarterly) and be granted on a sound and collectable basis. Loans are made with a primary emphasis on loan profitability, credit risk and concentration exposures. We are proactive in our approach to identifying and resolving problem loans and are focused on working with the borrowers and guarantors of problem loans to provide loan modifications when warranted. When considering how to best diversify our loan portfolio, we consider several factors including our aggregate and product-line specific concentration risks, our business line expertise, and the ability of our infrastructure to appropriately support the product. While certain product lines generate higher net charge-offs, our exposure is carefully monitored and mitigated by our concentration policies and reserved for by the loan loss allowance we maintain. Specifically, retention of certain Strategic Program loans with higher default rates account for a disproportionate amount of our charge-offs. In addition to our oversight of the credit policies and processes associated with these programs, we limit within our concentration policies the aggregate exposure of these loans as a percentage of the total loan portfolio, carefully monitor certain vintage loss-indicative factors such as first payment default and marketing channels, and appropriately provision for these balances so that the cumulative charge-off rates remain consistent with management expectations. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, the relative size and composition of the loan portfolio, and our management’s degree of success in resolving problem assets, we believe our proactive stance to early identification and intervention is the key to successfully managing our loan portfolio. As an example, at the beginning of the Covid-19 pandemic we analyzed our portfolio to identify loans that were more likely to be vulnerable to the pandemic’s impact. We then proactively opened a dialogue with potentially affected borrowers to assess their needs and provide assistance. Through this process we were able to not only better understand our portfolio risks but were able to intercede with borrowers if needed. Accurate and timely loan risk grading is considered a critical component of an effective credit risk management system. Loan grades take into consideration the borrower’s financial condition, industry trends, and the economic environment. Loan risk grades are changed as necessary to reflect the risk inherent in the loan. Among other things, we use loan risk grading information for loan pricing, risk and collection management and determining monthly loan loss reserve adequacy. Further, on a quarterly basis, the Loan Committee holds a Loan Risk Grade meeting, wherein all loans in our portfolio are reviewed for accurate risk grading. Any changes are made after the Loan Risk Grade meeting to provide for accurate reporting. Reporting is achieved in Loan Committee minutes, which minutes are reviewed by the Board. We supplement credit department supervision of the loan underwriting, approval, closing, servicing and risk grading process with periodic loan reviews by risk department personnel specific to the testing of controls. We use a grading system to rank the quality of each loan. The grade is periodically evaluated and adjusted as performance dictates. Loan grades 1 through 4 are passing grades, grade 5 is special mention. Collectively, grades 6 (substandard), 7 (doubtful) and 8 (loss) represent classified loans within the portfolio. The following guidelines govern the assignment of these risk grades. We do not currently grade Strategic Program loans held for investment due to their small balances and homogenous nature. As credit quality for Strategic Program loans have been highly correlated with delinquency levels, the Strategic Program loans are evaluated collectively for impairment. Grade 1: Pass - Loans fully secured by deposit accounts. Loans where the borrower has strong sources of repayment, generally 5 years or more of consistent employment (or related field) and income history. Debt of the borrower is modest relative to the borrower’s financial strength and ability to pay with a DTI ratio of less than 25%. Cash flow is very strong as evidenced by significant discretionary income amounts. Borrower will consistently maintain 30% of the outstanding debts in deposit accounts with us, often with the right of offset, holds, etc. Loan to value ratios (LTV) will be 60% or less. Loans in this category require very minimal monitoring. Grade 2: Pass - The borrower has good sources of repayment, generally 3 years or more of consistent employment (or related field) and income history. The debt of the borrower is reasonable relative to the borrower’s financial strength with a DTI ratio of less than 35%. Cash flow is strong as evidenced by exceptional discretionary income amounts. Borrowers will consistently maintain 20% of the outstanding debts in deposit accounts with us. LTV ratios will be 70% or less. These loans require minimal monitoring. Grade 3: Pass - There is a comfortable primary source of repayment, generally 2 years or more of consistent employment (or related field) and income history. Borrowers may exhibit a mix of strengths and weaknesses. For example, they have either adequate cash flow with higher than desired leverage, or marginal cash flow with strong collateral and liquidity. Borrowers will have DTIs less than 45%. Borrowers will generally maintain deposit accounts with us, but the consistency and amount of the deposits are not as strong as Grades 1 and 2. LTV ratios will be within our guidelines. These loans will be monitored on a quarterly basis. Grade 4: Pass Watch – There is adequate primary source of repayment, generally employment time or time in a related field is less than 2 years. Borrowers’ debt to income ratios may fall outside of our guidelines or there is minimal excess cash flow. There may be heavy reliance on collateral, or the loan is large, relative to the financial strength of the borrower. The loans may be maintenance intensive requiring closer monitoring. Grade 5: Special Mention – A loan in this category has a specific weakness or problem but does not currently present a significant risk of loss or default as to any material terms of the loan or financing agreement. A typical problem could include a documentation deficiency. If the deficiency is corrected the account will be re-graded. 63 Index Grade 6: Classified Substandard – A substandard loan has a developing or current weakness or weaknesses that could result in loss or default if deficiencies are not corrected, or adverse conditions arise. Grade 7: Classified Doubtful – A doubtful loan has an existing weakness or weaknesses that make collection or liquidation in full, on the basis of currently existing facts and conditions, highly questionable and improbable. Grade 8: Classified Loss – A loss loan has an existing weakness or weaknesses that render the loan uncollectible and of such little value that continuing to carry as an asset on our book is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical nor desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future. The following table presents, as of the period presented, the loan balances by loan program as well as risk rating. No loans were classified as ‘Loss’ grade during the periods presented. ​ As of December 31, 2021 ($ in thousands) Pass Grade 1-4 Special Mention Grade 5 Classified/ Doubtful Grade 6-7 Loss Grade 8 Total SBA $ 139,985 $ 1,435 $ 972 $ — $ 142,392 Commercial, non real estate 3,382 46 — — 3,428 Residential real estate 27,108 — — — 27,108 Commercial real estate 2,436 — — — 2,436 Consumer 4,574 — — — 4,574 Not Risk Graded Strategic Program (1) loans — — — — 85,850 Total $ 177,485 $ 1,481 $ 972 $ — $ 265,788 64 Index ​ As of December 31, 2020 ($ in thousands) Pass Grade 1-4 Special Mention Grade 5 Classified/ Doubtful Grade 6-7 Loss Grade 8 Total SBA $ 200,360 $ 2,040 $ 917 — $ 203,317 Commercial, non real estate 3,960 60 — — 4,020 Residential real estate 16,984 — 756 — 17,740 Commercial real estate 2,892 — — — 2,892 Consumer 5,543 — — — 5,543 Not Risk Graded Strategic Program (1) loans — — — — 28,265 Total $ 229,739 $ 2,100 $ 1,673 — $ 261,777 (1) The Strategic Program loan balance includes $60.7 million and $21.0 million of loans classified as held-for-sale as of December 31, 2021 and December 31, 2020, respectively. Allowance for Loan Losses We have not adopted Financial Accounting Standards Board Accounting Standards Update No. 2016–13, Financial Instruments – Credit Losses (Topic 326) , commonly referred to as the “CECL model,” but plan to adopt the CECL model in the 2023 calendar year. The ALL, a material estimate which could change significantly in the near-term in the event of rapidly shifting credit quality, is established through a provision for loan losses charged to earnings to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that we consider adequate to absorb potential losses in the loan portfolio. Loan losses are charged against the ALL when we believe that the collectability of the principal loan balance is unlikely. Subsequent recoveries, if any, are credited to the ALL when received. Our judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and as situations and information change. We evaluate the ALL on a monthly basis and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions and trends that may affect the borrower’s ability to repay. The quality of the loan portfolio and the adequacy of the ALL is reviewed by regulatory examinations and the Company’s auditors. The ALL consists of the following two elements: • Specific allowance for identified impaired loans. For such loans that are identified as impaired, an allowance is established when the discounted cash flows (or collateral value if the loan is collateral dependent) or observable market price of the impaired loan are lower than the carrying value of that loan. Independent appraisals are obtained for all collateral dependent loans deemed impaired when collateral value is expected to exceed $5 thousand net of actual and/or anticipated liquidation-related expenses. After initially measured for impairment, new appraisals are ordered on at least an annual basis for all real estate secured loans deemed impaired. Non-real estate secured loan appraisal values are reevaluated and assessed throughout the year based upon interim changes in collateral and market conditions. • General valuation allowance. This component represents a valuation allowance on the remainder of the loan portfolio, after excluding impaired loans. For this portion of the allowance, loans are reviewed based on industry, stage and structure and are assigned allowance percentages based on historical loan loss experience for similar loans with similar characteristics and trends adjusted for qualitative factors. Qualitative factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date, may include changes in lending policies and procedures; changes in national and local economic and business conditions, including the condition of various market sectors; changes in the nature and volume of the portfolio; changes in the experience, ability and depth of lending management and staff; changes in the volume and severity of past due and classified loans and in the volume of nonaccruals, troubled debt restructurings, and other loan modifications; the existence and effect of any concentrations of credit and changes in the level of such concentrations; and the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated and inherent credit losses in our current portfolio. 65 Index The ALL was $9.9 million at December 31, 2021 compared to $6.2 million at December 31, 2020, an increase of $3.7 million, or 59.0%. The increase was primarily due to increased retention of Strategic Program loans with higher loss reserving characteristics. The following table presents a summary of changes in the ALL for the periods and dates indicated: ​ For the Year Ended December 31, ($ in thousands) 2021 2020 ALL: Beginning balance $ 6,199 $ 4,531 Provision for loan losses 8,039 5,234 Charge offs SBA (154 ) (197 ) Commercial, non-real estate (63 ) (332 ) Residential real estate — — Strategic Program loans (4,684 ) (3,262 ) Commercial real estate — — Consumer (4 ) (17 ) Recoveries SBA 46 — Commercial, non-real estate 103 — Residential real estate — — Strategic Program loans 372 236 Commercial real estate — 5 Consumer 1 1 Ending balance $​9,855 $ 6,199 Although we believe that we have established our ALL in accordance with GAAP and that the ALL was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio. 66 Index The following table shows the allocation of the ALL among loan categories and certain other information as of the dates indicated. The ALL related to Strategic Programs constitutes 66.5% and 66.3% of the total ALL while comprising 32.3% and 10.8% of total loans as of December 31, 2021 and December 31, 2020, respectively. This reflects the increased credit risks associated with certain retained Strategic Program loans. ​ December 31, 2021 ($ in thousands) Amount Total Loans % of Total Allowance % of Loans in Category of Total Loans SBA $ 2,739 $ 142,392 27.8 % 53.6 % Commercial, non real estate 132 3,428 1.3 % 1.3 % Residential real estate 352 27,108 3.6 % 10.2 % Strategic Program loans 6,549 85,850 66.5 % 32.3 % Commercial real estate 21 2,436 0.2 % 0.9 % Consumer 62 4,574 0.6 % 1.7 % Total $ 9,855 $ 265,788 100.0 % 100.0 % ​ December 31, 2020 ($ in thousands) Amount Total Loans % of Total Allowance % of Loans in Category of Total Loans SBA $ 920 $ 203,317 14.8 % 77.7 % Commercial, non real estate 232 4,020 3.8 % 1.5 % Residential real estate 855 17,740 13.8 % 6.8 % Strategic Program loans 4,111 28,265 66.3 % 10.8 % Commercial real estate 19 2,892 0.3 % 1.1 % Consumer 62 5,543 1.0 % 2.1 % Total $ 6,199 $ 261,777 100.0 % 100.0 % The following table reflects the ratio of the ALL to nonperforming loan balances, as well as net charge-offs to average loans outstanding by loan category, as of the dates presented. The ratio of net charge-offs to average loans outstanding generally decreased or remained consistent for loan categories in the year ended December 31, 2021 from the year ended December 31, 2020. The decrease in the ratio for Strategic Programs loans was primarily due to increases in average loan balances in the year ended December 31,2021 while the decreases in Commercial, non-real estate and Consumer were primarily due to lower charge-off amounts in the year ended December 31, 2021. ​ As of December 31, ​ 2021 2020 ALL to nonperforming loans 1,499.1 % 745.7 % Net charge-offs to average loans outstanding by loan category SBA 0.1 % 0.1 % Commercial, non-real estate (1.0 %) 5.9 % Residential real estate 0.0 % 0.0 % Strategic Program loans 5.7 % 9.6 % Commercial real estate 0.0 % (0.1 %) Consumer 0.1 % 0.3 % 67 Index Interest-Bearing Deposits in Other Banks Our interest-bearing deposits in other banks increased to $85.3 million at December 31, 2021 from $47.0 million at December 31, 2020, an increase of $38.3 million, or 81.7%. This increase was primarily due to the net proceeds of $35.6 million from our initial public offering and an increase in loan originations. Interest-bearing deposits in other banks have generally been the primary repository of the liquidity we use to fund our operations. Aside from minimal balances held with our correspondent banks, the majority of our interest-bearing deposits in other banks was held directly with the Federal Reserve. Securities We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. We classify investment securities as either held-to-maturity or available-for-sale based on our intentions and the Company’s ability to hold such securities until maturity. In determining such classifications, securities that we have the positive intent and the ability to hold until maturity are classified as held-to-maturity and carried at amortized cost. All other securities are designated as available-for-sale and carried at estimated fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis. For the year presented, all securities were classified as held-to-maturity. The following tables summarize the contractual maturities and weighted average yields of investment securities at December 31, 2021 and December 31, 2020, and the amortized cost of those securities as of the indicated dates. ​ At December 31. 2021 ​ One Year or Less After One to Five Years ($ in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Mortgage-backed securities $ — — $ — — ​ At December 31, 2021 ​ After Five to Ten Years Weighted After Ten Years Weighted ($ in thousands) Amortized Cost Weighted Average Yield Amortized Cost Weighted Average Yield Total Amortized Cost Mortgage-backed securities $ 1,541 1.3 % $ 9,882 1.5 % $ 11,423 The weighted average yield of investment securities is the sum of all interest that the investments generate, divided by the sum of the book value. There were no calls, sales or maturities of securities during the years ended December 31, 2021 and December 31, 2020. At December 31, 2021, there were 13 securities, consisting of five collateralized mortgage obligations and eight mortgage-backed securities. Four of these securities were in gain positions for greater than 12 months and nine of these securities were in an unrealized loss position as of December 31, 2021. There were no unrealized losses as of December 31, 2020. Deposits Deposits are the major source of funding for the Company, with the exception of the Company’s participation in the PPPLF, which added a significant amount of funding in 2020 (see discussion below in Liquidity and Capital Resources – Liquidity Management ). We offer a variety of deposit products including interest and noninterest bearing demand accounts, money market and savings accounts and certificates of deposit, all of which we market at competitive pricing. We generate deposits from our customers on a relationship basis and through access to national Institutional and brokered deposit sources. We also generate deposits in relation to our Strategic Programs in the form of reserve accounts as discussed above. These deposits add an element of flexibility in that they tend to increase or decrease in relation to the size of or Strategic Program loan portfolio. In addition to the reserve account, some Strategic Program loan originators maintain operating deposit accounts with us. 68 Index The following table presents the end of period and average balances and for the periods indicated (average balances have been calculated using daily averages): For the Years Ended December 31, ​ 2021 2020 ($ in thousands) Total Percent Total Percent Period end: Noninterest-bearing demand deposits $ 110,548 43.9 % $ 88,067 53.5 % Interest-bearing deposits: Demand 5,399 2.1 % 6,095 3.7 % Savings 6,685 2.7 % 7,435 4.5 % Money markets 31,076 12.3 % 17,567 10.7 % Time certificates of deposit 98,184 39.0 % 45,312 27.6 % Total period end deposits $ 251,892 100.0 % $ 164,476 100.0 % Average: Noninterest-bearing demand deposits $ 107,481 49.8 % $ 80,537 49.2 % Interest-bearing deposits: Demand 6,060 2.8 % 3,237 2.0 % Savings 7,897 3.7 % 6,234 3.8 % Money market 21,964 10.2 % 16,327 9.9 % Time certificates of deposit 72,311 33.5 % 57,496 35.1 % Total average deposits $ 215,713 100.0 % $ 163,831 100.0 % Our deposits increased to $251.9 million at December 31, 2021 from $164.5 million at December 31, 2020, an increase of $87.4 million, or 53.1%. This increase was primarily due to an increase in certificates of deposit, noninterest-bearing and interest-bearing demand deposits, and money markets. As an FDIC-insured institution, our deposits are insured up to applicable limits by the DIF of the FDIC. The Dodd-Frank Act raised the limit for federal deposit insurance to $250,000 for most deposit accounts and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000. Our total uninsured deposits were $163.7 million and $92.2 million for the years ended December 31, 2021 and 2020, respectively. The maturity profile of our uninsured time deposits, those amounts that exceed the FDIC insurance limit, at December 31, 2021 is as follows: ($ in thousands) Three months or less More than three months to six months More than six months to twelve months More than twelve months Total Time deposits, uninsured $ — $ 128 $ 501 $ 155 $ 784 69 Index Liquidity and Capital Resources Liquidity Management Liquidity management is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, the sale of loans, repayment of loans and net profits. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, loan sales and security sales are greatly influenced by general interest rates, economic conditions, and competition. On November 23, 2021, we completed our IPO at a price of $10.50 per share. We raised approximately $36.1 million in net proceeds after deducting underwriting discounts and commissions of approximately $3.0 million and certain estimated offering expenses payable by us of approximately of $3.2 million. The net proceeds less $0.5 million in other related expenses, including legal fees totaled $35.6 million. Our primary source of funds to originate new loans (other than the PPPLF program used to fund PPP loans in 2020) is derived from deposits. Deposits are comprised of core and noncore deposits. We use brokered deposits and a rate listing service to advertise rates to banks, credit unions, and other institutional entities. We designate deposits obtained from this source as Institutional Deposits. To date, depositors of brokered and Institutional Deposits have been willing to place deposits with us at rates near the middle of the market. To attract deposits from local and nationwide consumer and commercial markets, we historically paid rates at the higher end of the market, which we have been able to pay due to our high margin and technology oriented business model. We utilize rate listing services and website advertising to attract deposits from consumer and commercial sources. We regularly evaluate new, core deposit products and in 2020, we launched a deposit product targeted to the needs of our PPP borrowers. We intend to have various term offerings to match our funding needs. Plans for 2022 include marketing commercial checking accounts to selected business customers and expanded roll out of our deposit product targeted to the needs of our SBA borrowers. These accounts offer small business cash management tools including ACH and wire capabilities, competitive interest rates, and personalized customer support. The commercial checking account is expected to be a no-fee based account with emphasis on electronic banking. With no current plans to expand our brick-and-mortar branch network, online and mobile banking offers a means to meet customer needs and better efficiency through technology compared to traditional branch networks. We believe that the rise of mobile and online banking provides us the opportunity to further leverage the technological competency we have demonstrated in recent years. We regularly adjust our investment in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management, funds management and liquidity policies. The objective of the liquidity policy is to reduce the risk to our earnings and capital arising from the inability to meet obligations in a timely manner. This entails ensuring sufficient funds are available at a reasonable cost to meet potential demands from both fund providers and borrowers. Liquid assets, defined as cash and due from banks and interest bearing deposits, were 22.6% of total assets at December 31, 2021. We primarily utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below. At December 31, 2021, we had the ability to access $10.9 million from the Federal Reserve Bank’s Discount Window on a collateralized basis. Through Zions Bank, the Bank had an available unsecured line available of $1.0 million. The Bank had an available unsecured line of credit with Bankers’ Bank of the West to borrow up to $1.05 million in overnight funds. We also maintain a $4.1 million line of credit with Federal Home Loan Bank, secured by specific pledged loans. We had no outstanding balances on the unsecured or secured lines of credit as of December 31, 2021. In long term borrowings, we had $1.1 million outstanding at December 31, 2021 related to the PPPLF. The PPPLF is secured by pledged PPP loans. Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2021, liquid assets (defined as cash and due from banks and interest bearing deposits), consisting of cash and due from banks, totaled $85.8 million. We believe that our liquid assets combined with the available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months. Capital Resources Shareholders’ equity increased $69.5 million to $115.4 million at December 31, 2021 compared to $45.9 million at December 31, 2020. The increase in shareholders’ equity was primarily attributable to the net proceeds of $35.6 million from the issuance of 4,025,000 shares of common stock in our IPO and net income recognized of $31.6 million. Stock options exercised, and stock-based compensation increased additional paid-in capital aggregately by approximately $2.4 million. We use several indicators of capital strength. The most commonly used measure is average common equity to average assets, which was 23.1% and 16.0% at December 31, 2021 and 2020, respectively. 70 Index Our return on average equity was 39.2% and 28.4% for the years ended December 31, 2021 and 2020, respectively. Our return on average assets was 9.1% and 4.5% for the years ended December 31, 2021 and 2020, respectively. We seek to maintain adequate capital to support anticipated asset growth, operating needs and unexpected risks, and to ensure that we are in compliance with all current and anticipated regulatory capital guidelines. Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of capital stock or other securities. Expected future use or activities for which capital may be set aside include balance sheet growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Under the prompt corrective action rules, an institution is deemed “well capitalized” if its Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 Capital ratio, and Total Capital ratio meet or exceed 5%, 6.5%, 8%, and 10%, respectively. On September 17, 2019, the federal banking agencies jointly finalized a rule intending to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt into the Community Bank Leverage Ratio framework, as required by Section 201 of the Regulatory Relief Act. The Bank has elected to opt into the Community Bank Leverage Ratio framework starting in 2020. Under these new capital requirements, as temporarily amended by Section 4012 of the CARES Act, the Bank must maintain a leverage ratio greater than 8% for 2020 and 8.5% for 2021. As of December 31, 2021 and 2020, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification we believe have changed the Bank’s category). The following table sets forth the actual capital amounts and ratios for the Bank and the amount of capital required to be categorized as well-capitalized as of the dates indicated. The following table presents the regulatory capital ratios for the Bank as of the dates indicated: ​ December 31, Capital Ratios 2021 2020 Well- Capitalized Requirement Leverage Ratio (under CBLR) 17.7 % 16.6 % 8.5 % (1) (1) The Well-Capitalized Requirement for 2020 was 8.0%. 71 Index Contractual Obligations We have contractual obligations to make future payments on debt and lease agreements. While our liquidity monitoring and management consider both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations and summarizes our contractual obligations as of December 31, 2021. ($ in thousands) Total Less than One Year One to Three Years Three to Five Years More Than Five Years Contractual Obligations Deposits without stated maturity $ 115,947 $​115,947 $ — $ — $ — Time deposits 98,184 41,567 37,023 19,594 — Long term borrowings (1) 1,050 573 — 477 — Operating lease obligations 8,717 946 2,212 2,204 3,355 Total $ 223,898 $ 159,033 $ 39,235 $ 22,275 $ 3,355 (1) Balances in this category pertain to the PPPLF and are fully-collateralized with PPP loans Off-Balance Sheet Items In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated statements of financial condition. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit, which involves, to varying degrees, elements of credit risk and interest rate risk exceeding the amounts recognized in our consolidated statements of financial condition. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments. We are not aware of any accounting loss to be incurred by funding these commitments; if required, we would maintain an allowance for off-balance sheet credit risk which would be recorded in other liabilities on the consolidated balance sheets. Our commitments to extend credit as of the dates indicated are summarized below. Since commitments associated with commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. ​ As of December 31, ($ in thousands) 2021 2020 Revolving, open-end lines of credit $ 1,259 $ 757 Commercial real estate 15,402 14,468 Other unused commitments 377 928 Total commitments $ 17,038 $ 16,153 Critical Accounting Policies and Estimates The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. Accounting policies, as described in detail in the notes to our consolidated financial statements, included elsewhere in this Report, are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below require us to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, which are likely to occur from period to period, or use of different estimates that we could have reasonably used in the current period, would have a material impact on our financial position, results of operations or liquidity. The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this Report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. 72 Index The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or subjective decisions or assessments. Allowance for Loan Losses. The ALL is a valuation allowance for probable incurred credit losses. Loans that are deemed to be uncollectible are charged off and deducted from the ALL. The provision for loan losses and recoveries on loans previously charged off are credited to the ALL. The ALL consists of specific and general components subject to significant judgment and short-term change. The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the contractual terms of the loan agreement. Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired. The general component covers loans that are collectively evaluated for impairment and loans that are not individually identified for impairment evaluation. The general component is based on historical loss experience adjusted for current factors and includes actual loss history experienced for the preceding three fiscal years and the interim period for the current fiscal year. This actual loss experience is supplemented with other qualitative economic factors based on the risks present for each portfolio type. These economic factors include consideration of the following: levels and trends in delinquencies and impaired loans (including TDRs); levels and trends in charge-offs and recoveries, trends in volumes and terms of loans; migration of loans to the classification of special mention, substandard, or doubtful; effects of any change in risk selection and underwriting standards; other changes in lending policies and procedures; national and local economic trends and conditions; and effects of changes in credit concentrations. Generally, our estimate for the ALL does not have significant sensitivity to the changes in the qualitative factors. For a 0.20% increase in the qualitative economic factors assigned by us to each loan category the ALL at December 31, 2021 would have increased by approximately $0.3 million. The Company considered COVID-19 to be the most significant factor the Company uses in the qualitative economic factors estimate of the ALL. The ALL increase associated with the COVID-19 pandemic was $0.7 million as of December 31, 2021 and December 31, 2020. These sensitivity analyses do not represent management’s expectations of the deterioration in risk ratings or the increases in loss rates but are provided as hypothetical scenarios to assess the sensitivity of the allowance for loan and lease losses to changes in key inputs. We believe the risk ratings and loss severities currently in use are appropriate. We estimate the allowance balance required using past loan loss experience, current economic conditions, the nature and volume of the portfolio, information about specific borrower situations, estimated collateral values and other factors. Allocations of the allowance may be made for specific loans, but the entire allowance is available for any loan that, in management’s judgment, should be charged off. Amounts are charged off when available information confirms that specific loans, or portions thereof, are uncollectible. This methodology for determining charge-offs is consistently applied to each group of loans. We group loans into different categories based on loan type to determine the appropriate allowance for each loan group. The Company generally places loans on a nonaccrual status when: (1) payment is in default for 90 days or more unless the loan is well secured and in the process of collection; or (2) full repayment of principal and interest is not foreseen. When a loan is placed on nonaccrual status, all accrued and uncollected interest on that loan is reversed. Past-due interest received on nonaccrual loans is not recognized in interest income but is applied as a reduction of the outstanding principal of the loan consistent with the accounting for impaired loans. A loan is relieved of its nonaccrual status when all principal and interest payments are brought current, the loan is well secured, and an analysis of the borrower’s financial condition provides reasonable assurance that the borrower can repay the loan as scheduled. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. Impairment is evaluated in total for smaller-balance loans of similar nature, such as Strategic Program loans, and on an individual loan basis for commercial real estate secured and SBA and commercial non-real estate and consumer loans. If a loan or pool of loans is impaired, a portion of the allowance is allocated so that the loan or pool of loans is reported, net of the present value of estimated future cash flows using the loan’s original effective rate or at the fair value of collateral less estimated costs to sell if repayment is expected solely from the collateral. Factors considered in determining impairment include payment status, collateral value and the probability of collecting all amounts when due. Loans that experience insignificant payment delays and payment shortfalls are generally not classified as impaired. We considered the significance of payment delays on a case by case basis, taking into consideration all the circumstances of the loan and borrower, including the length of delay, the reasons for the delay, the borrower’s prior payment record, the amount of the shortfall in relation to principal and interest owed. See our consolidated financial statements included elsewhere in this Report and “—Principal Factors Affecting Our Financial Condition—Allowance for Loan Losses” for more information. Stock-based Compensation. Our historical and outstanding stock-based compensation awards are described in Note 10 in our annual consolidated financial statements included elsewhere in this Report. 73 Index We record stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”) and recognize stock-based compensation expense in the period in which an employee or non-employee is required to provide service, which is generally over the vesting period of the individual stock-based payment award. Compensation expense for awards is recognized over the requisite service period on a straight-line basis and we account for forfeitures as they occur. We classify our awards as equity awards and these awards are valued as of the grant date based upon the underlying stock price and a number of assumptions, including volatility, performance period, risk-free interest rate and expected dividends. The determination of the grant date fair value using an option pricing model is affected principally by our estimated fair value of our common stock and requires us to make a number of other assumptions, including the expected term of the award, the expected volatility of the underlying shares, the risk-free interest rate and the expected dividend yield. The assumptions used in our Black-Scholes option-pricing model represent management’s best estimates at the time of measurement. These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently subjective. We will continue to use judgment in evaluating the expected volatility, expected terms and interest rates utilized for our stock-based compensation expense calculations on a prospective basis. If any assumptions change, our stock-based compensation expense could be materially different in the future. These assumptions are estimated as follows: • Expected Term. The expected term represents the period that our awards are expected to be outstanding. We calculated the expected term using a permitted simplified method, which is based on the vesting period and contractual term for each tranche of awards. • Expected Volatility. The expected volatility was based on the historical share volatility of several comparable publicly traded companies over a period of time equal to the expected term of the awards, as we do not have any trading history to use the volatility of our own common shares. The comparable companies were chosen based on their size, stage in life cycle and area of specialty. We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own share price becomes available. • Risk-Free Interest Rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life. • Expected Dividend Yield. We have not paid dividends on our common shares nor do we expect to pay dividends in the foreseeable future. Therefore, we used an expected dividend yield of zero. For the years ended December 31, 2021 and 2020, stock-based compensation expense was $2.1 million and $1.8 million, respectively. As of December 31, 2021, we had $0.3 million of total unrecognized stock-based compensation costs, which we expect to recognize over an estimated weighted-average period of 2.33 years. We expect to continue to grant options and other stock-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase. Fair Value of Common Stock. There was no public market for our common shares prior to the completion of our initial public offering on November 23, 2021. As such, the estimated fair value of our common shares has previously been determined at each grant date by our board of directors, with input from management, based on the information known to us on the grant date and upon a review of any recent events and their potential impact on the estimated per share fair value of our common shares. As part of these fair value determinations, our board of directors obtained and considered valuation reports prepared by a third-party valuation firm in accordance with the guidance outlined in the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation . In estimating the fair value of our common shares prior to the offering completed on November 23, 2021, multiple factors were considered in selecting an appropriate valuation approach, including, without limitation: (i) does the valuation method reflect our going-concern and/or expected time to liquidity status; (ii) does the valuation method assign value to the junior instruments, unless a future exit scenario is being analyzed whereby no cash is being distributed to the junior instruments based on equity class-specific rights; and (iii) is the method appropriate based on our stage of development at the date of the valuation. The valuation method evaluated and utilized, as appropriate, was the Option Pricing Method, or OPM. The OPM is a forward-looking method that considers our current equity value and was used to allocate our total equity value between common stock and stock options granted considering a continuous distribution of outcomes, rather than focusing on distinct future scenarios. We estimated fair value of our common shares using the OPM given the uncertainty associated with both the timing and type of any future exit scenario and applied an Income Approach and Market Approach. The Income Approach attempts to value an asset or security by estimating the present value of the future economic benefits it is expected to produce. These benefits can include earnings, cost savings, tax deductions, and disposition proceeds from the asset. An indication of value may be developed in this approach by discounting expected cash flows to their present value at a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation over the holding period, and the risks associated with realizing the cash flows in the amounts and at the times projected. The discount rate selected is typically based on rates of return available from alternative investments of similar type and quality as of the valuation date. The most commonly employed income approach to valuation is the discounted cash flow analysis. The Market Approach estimates the value of an asset or security by examining observable market values for similar assets or securities. Sales and offering prices for comparable assets are adjusted to reflect differences between the asset being valued and the comparable assets, such as, location, time and terms of sale, utility, and physical characteristics. When applied to the valuation of equity, the analysis may include consideration of the financial condition and operating performance of the company being valued relative to those of publicly traded companies or to those of companies acquired in a single transaction, which operate in the same or similar lines of business. 74 Index The OPM uses option theory to value securities in light of their respective claims to the enterprise value. Total equity value is allocated based upon a series of call options with strike prices at various value levels depending upon the rights and preferences of type of outstanding share. While the OPM is capable of allocating value across distinct share classes, because we have only a single class of stock, the OPM applied was utilized only to estimate the value allocable between common stock and stock options granted. A Black-Scholes closed form option pricing model is typically employed in this analysis, with an option term assumption that is consistent with expected time to a liquidity event and a volatility assumption based on the estimated stock price volatility of a peer group of comparable public companies over a similar term. When estimating our total equity value, we applied both an Income Approach and Market Approach and weighted the results evenly. The Income Approach utilized discounted cash flows using forecasted assumptions of operating income and a discount rate based on the cost of equity. The Market Approach was applied considering a set of guideline comparable companies, known as the Guideline Publicly-Traded Companies Method, or GPTCM. Under the GPTCM, valuation multiples were calculated from the market data and operating metrics of the guideline companies. The selected multiples were evaluated and adjusted based on the characteristics of the Company relative to the comparable companies being analyzed. The selected multiples were ultimately applied to our operating metrics to calculate indications of value. A discount for lack of marketability, or DLOM, was also then applied. We considered various objective and subjective factors to estimate the fair value of the Company’s equity price per share of each grant date, including the value estimated by a third-party valuation firm. The factors considered by the third-party valuation firm and our board of directors included the following: • Our financial performance, capital structure and stage of development; • Our management team and business strategy; • External market conditions affecting our industry, including competition and regulatory landscape; • Our financial position and forecasted operating results; • The lack of an active public or private market for our equity shares; • Historical discussions we have had with potential private investors; • The likelihood of achieving a liquidity event, such as a sale of the Company or an initial public offering of our equity shares; and • Market performance analyses, including with respect to share price valuation, of similar companies in our industry. Application of these approaches involves the use of estimates, judgment and assumptions that are highly complex and subjective, such as those regarding our expected future revenue, expenses and future cash flows, discount rates, market multiples, the selection of comparable companies and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between the assumptions impact our valuations as of each valuation date and may have a material impact on the valuation of our common shares. After the completion of our initial public offering on November 23, 2021, it is no longer be necessary for our board of directors to estimate the fair value of our common stock in connection with our accounting for stock-based awards we may grant, as the fair value of our common stock will be determined based on the closing price of our common stock as reported on the date of grant. Income Taxes. We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carryforward period. Because of our recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is not likely to be realized and, accordingly, has provided a full valuation allowance. 75 Index We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is more likely than not of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available. Our unrecognized tax benefits, if recognized, would not have an impact on our effective tax rate assuming we continue to maintain a full valuation allowance position. We do not expect our unrecognized tax benefits to change significantly over the next 12 months. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. During the years ended December 31, 2021 and 2020, the Company recognized de minimis interest and penalties. GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures Some of the financial measures included in this Report are not measures of financial performance recognized by GAAP. These non-GAAP financial measures are “tangible book value per share,” and “total nonperforming assets and troubled debt restructurings to total assets (less PPP loans).” Our management uses these non-GAAP financial measures in its analysis of our performance. • “Tangible book value per share” is defined as book value per share less goodwill and other intangible assets, divided by the outstanding number of common shares at the end of each period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets as of any of the dates indicated. We have not considered loan servicing rights as an intangible asset for purposes of this calculation. As a result, tangible book value per share is the same as book value per share as of each of the dates indicated. • “Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans)” is defined as the sum of nonperforming assets and troubled debt restructurings divided by total assets minus PPP loans. The most directly comparable GAAP financial measure is the sum of nonperforming assets and troubled debt restructurings to total assets. We believe this measure is important because we believe that PPP loans will not be included in nonperforming assets or troubled debt restructurings since PPP loans are 100% guaranteed by the SBA. We believe that the non-GAAP measure more accurately discloses the proportion of nonperforming assets and troubled debt restructurings to total assets consistently with periods prior to the presence of PPP loans. We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measures have a number of limitations. As such, you should not view these measures as a substitute for results determined in accordance with GAAP, and they are not necessarily comparable to non-GAAP financial measures that other companies use. The following table provides a reconciliation of these non-GAAP financial measures to the most closely related GAAP measure. Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans) ​ Year Ended December 31, ($ in thousands) 2021 2020 Total nonperforming assets and troubled debt restructuring $​ 763 $ 1,701 Total assets $ 380,214 $ 317,515 PPP loans $​ 1,091 $ 107,145 Total assets less PPP loans $ 379,123 $ 210,370 Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans) 0.2 % 0.8 % 76 Index Recently Issued Accounting Pronouncements See our consolidated financial statements included elsewhere in this Report for a full description of recent accounting pronouncements, including the respective expected dates of adoption and anticipated effects on our results of operations and financial condition. Item 7A. Quantitative and Qualitative Disclosures About Market Risk Under the filer category of “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, the Company is not required to provide information requested by Part II, Item 7A of this Report. Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 173) 77 Consolidated Balance Sheet 78 Consolidated Statements of Income 79 Consolidated Statements of Changes in Shareholders’ Equity 80 Consolidated Statements of Cash Flows 81 Notes to Consolidated Financial Statements 82 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of FinWise Bancorp Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of FinWise Bancorp and Subsidiary (the “Company”), as of December 31, 2021 and 2020, the related consolidated statements of income, changes in shareholder’s equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Moss Adams LLP Spokane, Washington March 30, 2022 We have served as the Company’s auditor since 2018. 77 Index FinWise Bancorp Consolidated Balance Sheets (in thousands, except share and par value amounts) ​ December 31, ​ 2021 2020 ASSETS Cash and cash equivalents Cash and due from banks $ 411 $ 405 Interest-bearing deposits 85,343 46,978 Total cash and cash equivalents 85,754 47,383 Investment securities held-to-maturity, at cost 11,423 1,809 Investment in Federal Home Loan Bank (FHLB) stock, at cost 378 205 Loans receivable, net 198,102 232,074 Strategic Program loans held-for-sale, at lower of cost or fair value 60,748 20,948 Premises and equipment, net 3,285 1,264 Accrued interest receivable 1,548 1,629 Deferred taxes, net 1,823 452 SBA servicing asset, net 3,938 2,415 Investment in Business Funding Group (BFG), at fair value 5,900 3,770 Investment in FinWise Investments, LLC 80 — Other assets 7,235 5,566 Total assets $ 380,214 $ 317,515 ​ LIABILITIES AND SHAREHOLDERS' EQUITY Liabilities Deposits Noninterest-bearing $ 110,548 $ 88,067 Interest-bearing 141,344 76,409 Total deposits 251,892 164,476 Accrued interest payable 48 195 Income taxes payable, net 233 709 PPP Liquidity Facility 1,050 101,007 Other liabilities 11,549 5,256 Total liabilities 264,772 271,643 ​ Commitments and contingencies (Note 8) ​ Shareholders' equity Preferred stock, $.001 par value, 4,000,000 authorized; no shares issued and outstanding as of December 31, 2021 and December 31, 2020 — — Common stock, $.001 par value, 40,000,000 shares authorized; 12,772,010 and 8,660,334 shares issued and outstanding as of December 31, 2021 and December 31, 2020, respectively 13 9 Additional paid-in-capital 54,836 16,853 Retained earnings 60,593 29,010 Total shareholders' equity 115,442 45,872 Total liabilities and shareholders' equity $ 380,214 $ 317,515 The accompanying notes are an integral part of these consolidated financial statements. 78 Index FinWise Bancorp Consolidated Statements of Income (in thousands, except share and per share amounts) ​ For the Years Ended December 31, ​ 2021 2020 Interest income Interest and fees on loans $ 49,135 $ 29,271 Interest on securities 47 34 Other interest income 61 201 Total interest income 49,243 29,506 ​ Interest expense Interest on deposits 1,138 1,583 Interest on PPP Liquidity Facility 127 173 Total interest expense 1,265 1,756 Net interest income 47,978 27,750 ​ Provision for loan losses 8,039 5,234 Net interest income after provision for loan losses 39,939 22,516 ​ Non-interest income Strategic Program fees 17,959 9,591 Gain on sale of loans, net 9,689 2,849 SBA loan servicing fees 1,156 1,028 Change in fair value on investment in BFG 2,991 856 Other miscellaneous income 49 49 Total non-interest income 31,844 14,373 ​ Non-interest expense Salaries and employee benefits 22,365 16,835 Occupancy and equipment expenses 810 694 Impairment of SBA servicing asset 800 — Loss on investment in BFG — 50 Other operating expenses 5,536 4,170 Total non-interest expense 29,511 21,749 Income before income tax expense 42,272 15,140 ​ Provision for income taxes 10,689 3,942 Net income $ 31,583 $ 11,198 ​ Earnings per share, basic $​3.44 $​1.29 Earnings per share, diluted $​3.27 $​1.28 ​ Weighted average shares outstanding, basic 8,669,724 8,025,390 Weighted average shares outstanding, diluted 9,108,163 8,069,634 The accompanying notes are an integral part of these consolidated financial statements. 79 Index FinWise Bancorp Consolidated Statements of Changes in Shareholders’ Equity (in thousands, except share amounts) ​ Common Stock ​ Shares Amount Additional Paid-In Capital Retained Earnings Total Shareholders’ Equity Balance at December 31, 2019 8,709,756 $​9 $ 15,274 $ 17,812 $ 33,095 Stock-based compensation expense — — 1,756 — 1,756 Issuance of warrants to BFG — — 50 — 50 Repurchase of restricted stock to pay for employee withholding taxes (73,770 ) — (268 ) — (268 ) Stock options exercised 34,776 — 82 — 82 Repurchase of common stock (10,428 ) — (41 ) — (41 ) Net income — — — 11,198 11,198 Balance at December 31, 2020 8,660,334 $​9 $ 16,853 $ 29,010 $ 45,872 Stock-based compensation expense — — 2,100 — 2,100 Issuance of common stock 4,025,000 4 35,572 — 35,576 Stock options exercised 86,676 — 311 — 311 Net income — — — 31,583 31,583 Balance at December 31, 2021 12,772,010 $​13 $ 54,836 $ 60,593 $ 115,442 The accompanying notes are an integral part of these consolidated financial statements. 80 Index FinWise Bancorp Consolidated Statements of Cash Flows (in thousands) ​ For the Years Ended December 31, ​ 2021 2020 Cash flows from operating activities: Net income $ 31,583 $ 11,198 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 743 1,012 Provision for loan losses 8,039 5,234 Net amortization in securities discounts and premiums 25 14 Capitalized servicing assets (2,753 ) (1,139 ) Gain on sale of SBA loans, net (9,689 ) (2,849 ) Originations of Strategic Program loans held-for-sale (6,335,194 ) (2,312,697 ) Proceeds on Strategic Program loans held-for-sale 6,295,394 2,316,858 Change in fair value of BFG (2,991 ) (856 ) Impairment of SBA servicing asset 800 — Loss on investment in BFG — 50 Stock-based compensation expense 2,100 1,756 Deferred income tax benefit (1,371 ) (312 ) Net changes in: Accrued interest receivable 81 (686 ) Accrued interest payable (147 ) 131 Other assets (1,669 ) (2,212 ) Other liabilities 5,817 4,083 Net cash provided by (used in) operating activities (9,232 ) 19,585 ​ Cash flows from investing activities: Net increase (decrease) in loans receivable 41,622 (128,734 ) Purchase of loan pools (6,000 ) — Investments in FinWise Investments, LLC (80 ) — Distributions from BFG 861 545 Purchase of bank premises and equipment (2,334 ) (592 ) Proceeds from maturities and paydowns of securities held-to-maturity 678 375 Purchases of securities held-to-maturity (10,317 ) (1,745 ) Purchase of FHLB stock (173 ) (65 ) Net cash provided by (used in) investing activities 24,257 (130,216 ) ​ Cash flows from financing activities: Net increase in deposits 87,416 22,455 Proceeds from initial public offering, net 35,576 — Proceeds from exercise of stock options 311 82 Proceeds from PPP Liquidity Facility 5,558 115,975 Repayment of PPP Liquidity Facility (105,515 ) (14,968 ) Repurchase of restricted stock to pay for employee withholding taxes — (268 ) Repurchase of common stock — (41 ) Net cash provided by financing activities 23,346 123,235 ​ Net change in cash and cash equivalents 38,371 12,604 Cash and cash equivalents, beginning of the period 47,383 34,779 Cash and cash equivalents, end of the period $ 85,754 $ 47,383 ​ Supplemental disclosures of cash flow information: Cash paid during the period Income taxes $ 10,473 $ 3,329 Interest $ 1,265 $ 1,625 The accompanying notes are an integral part of these consolidated financial statements. 81 Index 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, dba Utah Community Bank. Utah Community Bank was incorporated in the state of Utah on May 7, 1999. All West Bancorp was incorporated in the state of Utah on October 22, 2002, after which, it acquired 100% of Utah Community Bank. As of March 4, 2016, Utah Community Bank’s articles of incorporation were amended to rename the entity FinWise Bank. As of March 15, 2021, All West 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 U.S. Securities and Exchange Commission (“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 is an independent bank that provides a full range of banking services to individual and corporate customers. The Bank’s primary source of revenue is from loans including Small Business Administration (SBA), commercial, commercial real estate, residential real estate, and consumer. 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. Stock split and changes in authorized shares – On July 26, 2021, the Board of Directors declared a six-for-one stock split of the Company’s issued and outstanding shares of common stock, which was effective on July 26, 2021. Accordingly, except for the amount of authorized shares, all references to share and per share amounts for the periods presented in the condensed consolidated financial statements and accompanying notes to the condensed consolidated financial statements have been retroactively restated to reflect this stock split. As a subsequent event, effective as of July 28, 2021, authorized capital stock was increased to 44,000,000 shares of capital stock, consisting of (i) 40,000,000 shares of common stock, par value $0.001 per share, and (ii) 4,000,000 shares of Preferred Stock, par value $0.001 per share. 82 Index COVID-19 – On 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 remote working 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. During the year ended December 31, 2020, the Company originated 700 PPP loans for a total principal amount of $126.6 million. At December 31, 2020, net deferred loan fees related to PPP loans totaled $1.9 million, which will be recognized over the life of the loans and as borrowers are granted forgiveness. Participation in the PPP will likely have a positive impact on the Company’s financial position and results of operations as this fee income is recognized over the term of the PPP loans. As of December 31, 2020, PPP borrowers have applied for and received forgiveness from the SBA for $19.3 million of PPP loan principal and have made $0.2 million of principal payments leaving $107.1 million of PPP loan principal outstanding. The loan forgiveness resulted in an acceleration of deferred loan fees of $0.4 million for the year ended December 31, 2020. As of December 31, 2021, PPP borrowers have applied for and received forgiveness from the SBA for $125.2 million of PPP loan principal and have made $0.3 million of principal payments leaving $1.1 million of PPP loan principal outstanding. The loan forgiveness resulted in an acceleration of deferred loan fees of $1.5 million for the year ended December 31, 2021. Principles of consolidation – The consolidated financial statements include the accounts of FinWise Bancorp and its wholly-owned subsidiary, FinWise Bank. All significant inter-company balances and transactions have been eliminated in consolidation. Significant concentrations of credit risk – All of the Company’s activities are with customers located throughout the United States. The Company has concentrations in SBA loans, Strategic Program loans, and residential real estate loans. Accordingly, their ultimate collectability is particularly susceptible to changes in market conditions. Ongoing analysis of the Company’s loan portfolio is performed to evaluate whether there is any significant exposure to an individual borrower or group(s) of borrowers as a result of any concentrations of credit risk. Such credit risks (whether on- or off-balance sheet) may occur when groups of borrowers or counterparties have similar economic characteristics and are similarly affected by changes in economic or other conditions. Credit risk also includes the loss that would be recognized subsequent to the reporting date if counterparties failed to perform as contracted. As of December 31, 2021 and 2020, the Company analyzed its exposure to credit risks and concluded that no significant exposure exists from such concentrations of credit risks. Use of estimates – In preparing the consolidated financial statements in accordance with Generally Accepted Accounting Principles (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. 83 Index Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses (ALL), the determination of the fair value of certain financial instruments, deferred income tax assets and stock-based compensation. Management believes the ALL is adequate. While management uses currently available information to recognize losses on loans, future additions to the allowance may be necessary based on economic conditions and individual credit deterioration. Reclassifications – Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation. Cash and cash equivalents – The Company considers all highly liquid debt instruments with an original maturity of three months or less (including cash, amounts due from depository institutions, interest-bearing deposits in other banks, and federal funds sold) to be cash equivalents. The Company maintains its cash in deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents. Investments Investment securities – Debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Securities not classified as held-to-maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The Company did not hold any available for sale securities at December 31, 2021 or 2020. When the estimated fair value of a security is lower than the book value, a security is considered temporarily impaired. On a quarterly basis, the Company evaluates any securities in a loss position to determine whether the impairment is other-than-temporary. If there is intent to sell the security, or if the Company will be required to sell the security, or if the Company believes it will not recover the entire cost basis of the security, the security is other-than-temporarily impaired (“OTTI”) and impairment is recognized. The amount of impairment resulting from credit loss is recognized in earnings and impairment related to all other factors, such as general market conditions, is recognized in AOCI in the case of securities classified as available for sale. Management considers a number of factors in its analysis of whether a decline in a security’s estimated fair value is OTTI. Certain factors considered include, but are not limited to: (a) the length of time and the extent to which the security has been in an unrealized loss position, (b) changes in the financial condition of the issuer, (c) the payment structure of debt securities, (d) adverse changes in ratings issued by rating agencies, (e) and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Purchased premiums and discounts on debt securities are amortized or accreted over the terms of the securities using the effective-yield method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. Equity method investments – Ownership interests in entities for which the Company has significant influence that are not consolidated are accounted for as equity method investments. SEC Staff Announcement: Accounting for Limited Partnership Investments (codified in Accounting Standards Codification (“ASC”) 323-30-S99-1) guidance requires the use of the equity method unless the investor’s interest “is so minor that the limited partner may have virtually no influence over partnership operating and financial policies.” The SEC staff’s position is that investments in limited partnerships and limited liability companies of greater than 3% to 5% are considered more than minor and, therefore, should be accounted for using the equity method or fair value option and are not required to be consolidated. The Company concluded that, consistent with its accounting policy, the Company’s level of ownership in Business Funding Group, LLC (“BFG”) was indicative of significant influence and, as a result, the investment would be accounted for using the equity method. However, the Company elected the fair value option for its investment due to cost-benefit considerations. Pursuant to electing the fair value option, the Company measures its investment in BFG at fair value each reporting period and changes in fair value are recorded in the Consolidated Statements of Income within ‘Change in fair value on investment in BFG.’ See Note 9, Investments, for a discussion about the Company’s investment in BFG. Investment in Federal Home Loan Banks (“FHLB”) stock – FHLB stock are required investments based on the level of the Bank’s assets, capital and/or capital/surplus. FHLB stock is carried at cost and periodically evaluated for impairment. There is no readily determinable fair value for this stock as it has no quoted market value, it is a required investment and it is expected to be redeemed at par value. FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations, and each of the regional FHLBs are jointly and severally liable for repayment of each other’s debt. Cash dividends are reported as a component of Other miscellaneous income in the Consolidated Statements of Income. 84 Index Loans held-for-sale – While the Company sells the vast majority of the loans funded in its Strategic Programs shortly after origination, the Company may choose to retain a portion of the funded loans and/or receivables. The loans and/or receivables the Company intends to sell are carried at lower of cost or estimated fair value in the aggregate. Net unrealized losses are recognized in a valuation allowance by charges to income. Origination fees, net of certain direct costs associated with originating these loans, are recognized in other income when the loans are sold. Loans receivable – Loans receivable are reported at their outstanding principal adjusted for any charge-offs, the ALL, and deferred fees and costs. Loan origination fees, net of certain direct origination costs, if any, are deferred and recognized on an adjustment of the related loan yield using an effective-yield method over the contractual life of the loan. Interest income on loans is recognized on an accrual basis commencing in the month of origination using the interest method. Delinquency fees are recognized in income when chargeable and when collectability is reasonably assured The Company requires most loans to be substantially collateralized by real estate, equipment, vehicles, accounts receivable, inventories or other tangible or intangible assets. Real estate collateral is in the form of first and second mortgages on various types of property. The Company also originates unsecured loans to consumers and businesses. The Company may change intent from holding loans for investment and reclassify them as held-for-sale. Loans held-for-sale are carried at the lower of aggregate cost and fair value. Gains and losses are recorded in non-interest income based on the difference between sales proceeds and carrying value. Allowance for loan losses – The ALL consists of specific and general components. The specific component relates to impaired loans as defined by GAAP. For such loans that are classified as impaired, an allowance is established when the discounted cash flows, or the fair value of the collateral if the loan is collateral dependent, of the impaired loan is lower than the carrying value of that loan. The general component covers all loans not classified as impaired and is based on historical loss experience and general economic factors, adjusted for qualitative risk factors, both internal and external to the Company. The general component is calculated separately for each risk category. The ALL represents the Company’s estimate of probable and estimable losses inherent to the loan portfolio as of the balance sheet date. Losses are charged to the ALL when recognized. Generally, loans are charged off or charged down at the point at which they are determined to be uncollectible in whole or in part unless the loan is well secured and in the process of collection. The Company establishes the amount of the ALL by loan type, at least quarterly, and the Company adjusts the provision for loan losses so the ALL is at an appropriate level at the balance sheet date. The Company determines ALL as the best estimate within a range of estimated losses. The methodologies the Company uses to estimate the ALL depend upon the impairment status and risk category of the loan. After applying historic loss experience, as described above, the Company reviews the quantitatively derived level of ALL for each category using qualitative criteria. The Company tracks various risk factors that influence the judgment regarding the level of the ALL across the risk categories. Risk factors include changes in national, regional, and local economic conditions that affect the borrowers’ business, delinquency, and charge off trends, and data from peer groups, among others. The Company reviews changes in these factors to ensure that changes in the level of the ALL are directionally consistent with changes in these factors. Nonaccrual loans – The Company’s policy is to place loans on a nonaccrual status when: 1) payment is in default for 90 days or more unless the loan is well secured and in the process of collection; or 2) full repayment of principal and interest is not foreseen. When a loan is placed on nonaccrual status, all accrued and uncollected interest on that loan is reversed. Past-due interest received on nonaccrual loans is not recognized in interest income but is applied as a reduction of the outstanding principal of the loan consistent with the accounting for impaired loans. A loan is relieved of its nonaccrual status when all principal and interest payments are brought current, the loan is well secured, and an analysis of the borrower's financial condition provides reasonable assurance that the borrower can repay the loan as scheduled. Impaired loans – Loans are considered impaired when, based on current information and events; it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. When a loan is impaired, the Company estimates a specific reserve for the loan based on the fair value of the loan’s underlying collateral, less the cost to sell, or the projected present value of future cash flows. Payments received on impaired loans that are accruing are recognized in interest income, according to the contractual loan agreement. Payments received on impaired loans that are on nonaccrual status are not recognized in interest income but are applied as a reduction of the outstanding principal. Payments are recognized when cash is received. 85 Index Troubled debt restructurings (TDR) – Loans may be modified in the normal course of business for competitive reasons or to strengthen the Company’s position. Loan modifications and restructurings may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan. These modifications are structured on a loan-by-loan basis and, depending on the circumstances, may include extended payment terms, a modified interest rate, forgiveness of principal, or other concessions. Loans that have been modified to accommodate a borrower who is experiencing financial difficulties, and for which the Company has granted a concession that it would not otherwise consider, are considered a TDR. The Company considers many factors in determining whether to agree to a loan modification involving concessions, and seeks a solution that will both minimize potential loss to the Company and attempt to help the borrower. The Company evaluates borrowers’ current and forecasted future cash flows, their ability and willingness to make current contractual or proposed modified payments, the value of the underlying collateral, the possibility of obtaining additional security or guarantees, and the potential costs related to a repossession or foreclosure and the subsequent sale of the collateral. TDRs may be classified as either accrual or nonaccrual loans. A loan on nonaccrual status and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure for a minimum of six months, and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Premises and equipment, net – Premises and equipment are stated at cost less accumulated depreciation. Depreciation included in the operating expense is computed using the straight-line method over the estimated useful lives of the related assets. Expenditures for new premises and equipment and major improvements are capitalized. Normal costs of maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions are included in non-interest expense. Income taxes – Deferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets. Judgments and tax strategies are subject to audit by various taxing authorities. While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the consolidated financial statements. Transfer of financial assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: 1) the assets have been isolated from the Company, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and 3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. SBA servicing asset, net – Servicing assets are recognized as separate assets when servicing rights are acquired through sale of financial assets. For sales of SBA loans, or portions of SBA loans, with servicing retained, a portion of the cost of originating the loan is allocated to the servicing asset based on relative fair value. Fair value is based on a valuation model that calculates the present value of estimated future servicing income. Servicing assets are subsequently measured using the amortization method which requires servicing assets to be amortized into non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying loans. The SBA servicing asset is evaluated annually for impairment based on the fair value of the asset as compared to amortized cost. Capitalized servicing rights are stated separately on the consolidated balance sheet and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets. Servicing fee income, which is reported in the consolidated statements of income in SBA loan servicing fees, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and recorded as income when earned. The amortization of servicing assets and changes in the valuation allowance are netted against loan servicing income. 86 Index Revenue from contracts with customers – The Company applies the provisions of ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Services that the Company reports as part of non-interest income are subject to ASC 606 and include fees from its deposit customers for transaction-based activities, account maintenance charges and overdraft services. Transaction-based fees, such as ACH and wire transfer fees, overdraft, return and stop payment charges, are recognized at the time such transactions are executed and the services have been fulfilled by the Company. The fees are typically withdrawn from the customer’s deposit account balance. The Company also receives fees from third-parties in its Strategic Programs for setting up systems and procedures to efficiently originate loans in a convenient, compliant and safe manner. Because the third-party simultaneously receives and benefits from the services, revenue is recognized evenly over the term of the loan program. Stock-based compensation – The Company accounts for all stock-based awards to employees and non-employees, including grants of stock options and restricted stock awards, based on their respective grant date fair values. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. Restricted stock awards are valued based on the fair value of the Company’s common stock on the date of grant. The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. The Company expenses stock-based compensation related to stock options and restricted stock over the requisite service period. The Company accounts for forfeitures of stock–based awards as they occur. Stock-based compensation expense pertaining to employees is included in salaries and employee benefits on the income statement. Stock-based compensation expense related to directors and consultants is included in other operating expenses on the income statement. Earnings per share (“EPS”) – Basic EPS is computed by dividing net earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed by dividing net earnings allocated to common shareholders by the weighted average number of common shares outstanding adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental common shares issuable upon exercise of outstanding stock options and non-vested restricted common shares, that are not considered participating securities, using the treasury stock method. The two-class method is used to determine earnings per share based on participation rights of participating securities in any undistributed earnings. Each unvested restricted share granted by the Company to its employees that includes rights to participate in distributed earnings is considered a participating security and the Company uses the two-class method to calculate net income available to the Company’s common shareholders per common share – basic and diluted. Off-balance sheet instruments – In the ordinary course of business, the Company has entered into off-balance sheet financial instrument arrangements consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheet. Losses would be experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral. Segment reporting – The Company operates as one operating segment. Operating segments are defined as components of an enterprise for which separate financial information is evaluated regularly by the chief operating decision maker (“CODM”), consisting of the Company’s chief executive officer, in deciding how to allocate resources and assess the Company’s financial and operational performance. In addition, the Company’s CODM evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis. As a result, management has determined that the Company’s business operates in a single operating segment. Since the Company operates as one operating segment, all required financial segment information can be found in the consolidated financial statements. Recently adopted accounting pronouncements In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurement , which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements. On January 1, 2020, the Company adopted this guidance, which did not have a material impact on the Company’s consolidated financial statements. 87 Index Accounting pronouncements to be adopted 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 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 is currently assessing the impact of the adoption of this ASU on its consolidated financial statements. 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 for smaller reporting companies to calendar year 2023. The Company is currently assessing the impact of the adoption of this ASU 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 December 31, 2021 and 2020, are summarized as follows: ​ December 31, 2021 ($ in thousands) Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Mortgage-backed securities $ 11,423 $ 23 $ (114 ) $ 11,332 ​ December 31, 2020 ($ in thousands) Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Mortgage-backed securities $ 1,809 $ 70 $ — $ 1,879 The Company had nine securities in an unrealized loss position at December 31, 2021, none in an unrealized loss at December 31, 2020. ​ 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 ) 88 Index The amortized cost and estimated market value of debt securities at 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. ($ in thousands) 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 1,541 1,548 Due after ten years 9,882 9,783 ​ $ 11,423 $ 11,332 At December 31, 2021, all held-to-maturity securities were pledged as collateral for a credit line held by the Bank. There were no sales of investment securities during the year ended December 31, 2021 or 2020. 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 December 31, 2021 and 2020, the Bank owned $0.4 million and $0.2 million, respectively, of FHLB stock, which is carried at cost. The Company evaluated the carrying value of its FHLB stock investment at December 31, 2021 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment from recurring and special dividends, and the Company’s intent and ability to hold this investment for a period of time sufficient to recover our recorded investment. Note 3 – Loans and Allowance for Loan Losses Loans are summarized as follows according to major risk category as of December 31, 2021 and 2020: ​ December 31, ​ 2021 2020 ($ in thousands) SBA $ 142,392 $ 203,317 Commercial, non-real estate 3,428 4,020 Residential real estate 27,108 17,740 Strategic Program loans 85,850 28,265 Commercial real estate 2,436 2,892 Consumer 4,574 5,543 Total loans $ 265,788 $ 261,777 Loans held-for-sale (60,748 ) (20,948 ) Total loans held for investment $ 205,040 $ 240,829 Deferred loan costs (fees), net 2,917 (2,556 ) Allowance for loan losses (9,855 ) (6,199 ) Net loans $ 198,102 $ 232,074 89 Index 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 does not fall below the dollar amount of the total loans outstanding currently held by the Company for the specific Strategic Program. If necessary, the Company has the right to withdraw amounts from the reserve account to fulfill loan purchaser obligations created under the program agreements. Total cash held in reserve by Strategic Programs at the Company at December 31, 2021 and 2020, was $39.6 million and $18.6 million, respectively. Strategic Program loans retained and held-for-sale as of December 31, 2021 and 2020, are summarized as follows: ​ December 31, ​ 2021 2020 ($ in thousands) Retained Strategic Program loans $ 25,102 $ 7,317 Strategic Program loans held-for-sale 60,748 20,948 Total Strategic Program loans $ 85,850 $ 28,265 Changes in the ALL are summarized as follows: December 31, 2021 ($ in thousands) SBA Commercial, Non-Real Estate Residential Real Estate Strategic Program Loans Commercial Real Estate Consumer Total Beginning balance $ 920 $ 232 $ 855 $ 4,111 $ 19 $ 62 $ 6,199 Charge-offs (154 ) (63 ) — (4,684 ) — (4 ) (4,905 ) Recoveries 46 103 — 372 — 1 522 Provision 1,927 (140 ) (503 ) 6,750 2 3 8,039 Balance at end of year $ 2,739 $ 132 $ 352 $ 6,549 $ 21 $ 62 $ 9,855 Ending balance individually evaluated for impairment — — — — — — — Ending balance collectively evaluated for impairment $ 2,739 $ 132 $ 352 $ 6,549 $ 21 $ 62 $ 9,855 Loans receivable $ 142,392 $ 3,428 $ 27,108 $ 25,102 $ 2,436 $ 4,574 $ 205,040 Ending balance individually evaluated for impairment 972 — — — — — 972 Ending balance collectively evaluated for impairment $ 141,420 $ 3,428 $ 27,108 $ 25,102 $ 2,436 $ 4,574 $ 204,068 90 Index December 31, 2020 ($ in thousands) SBA Commercial, Non-Real Estate Residential Real Estate Strategic Program Loans Commercial Real Estate Consumer Total Beginning balance $ 907 $ 64 $ 55 $ 3,430 $ 14 $ 61 $ 4,531 Charge-offs (197 ) (332 ) — (3,262 ) — (17 ) (3,808 ) Recoveries — — — 236 5 1 242 Provision (recapture) 210 500 800 3,707 — 17 5,234 Balance at end of year $ 920 $ 232 $ 855 $ 4,111 $ 19 $ 62 $ 6,199 Ending balance individually evaluated for impairment — — — — — — — Ending balance collectively evaluated for impairment $ 920 $ 232 $ 855 $ 4,111 $ 19 $ 62 $ 6,199 Loans receivable $ 203,317 $ 4,020 $ 17,740 $ 7,317 $ 2,892 $ 5,543 $ 240,829 Ending balance individually evaluated for impairment 917 — 756 — — — 1,673 Ending balance collectively evaluated for impairment $ 202,400 $ 4,020 $ 16,984 $ 7,317 $ 2,892 $ 5,543 $ 239,156 The following tables summarize impaired loans as of December 31, 2021 and 2020: December 31, 2021 ​ Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized ($ in thousands) With no related allowance recorded SBA $ 972 $ 972 $ — $ 945 $ 47 Commercial, non-real estate — — — — — Residential real estate — — — 189 — Strategic Program loans — — — — — Commercial real estate — — — — — Consumer — — — — — Total $ 972 $ 972 $ — $ 1,134 $ 47 91 Index December 31, 2020 ​ Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized ($ in thousands) With no related allowance recorded SBA $ 917 $ 917 $ — $ 892 $ 45 Commercial, non-real estate — — — 123 — Residential real estate 756 756 — 378 — Strategic Program loans — — — — — Commercial real estate — — — — — Consumer — — — — — Total $ 1,673 $ 1,673 $ — $ 1,393 $ 45 For the years ending December 31, 2021 and 2020, there were no impaired loans with an allowance recorded. Nonaccrual and past due loans are summarized below as of December 31, 2021 and 2020: December 31, 2021 ($ in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due & Still Accruing Total Past Due Non-Accrual Total ​ SBA $ 141,488 $ 247 $ — $ — $ 247 $ 657 $ 142,392 Commercial, non-real estate 3,428 — — — — — 3,428 Residential real estate 27,108 — — — — — 27,108 Strategic Program loans 84,065 1,041 690 54 1,785 — 85,850 Commercial real estate 2,436 — — — — — 2,436 Consumer 4,554 20 — — 20 — 4,574 Total $ 263,079 $ 1,308 $ 690 $ 54 $ 2,052 $ 657 $ 265,788 December 31, 2020 ($ in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due & Still Accruing Total Past Due Non-Accrual Total SBA $ 202,501 $ — $ — $ — $ — $ 816 $ 203,317 Commercial, non-real estate 4,020 — — — — — 4,020 Residential real estate 17,740 — — — — — 17,740 Strategic Program loans 27,886 235 128 1 364 15 28,265 Commercial real estate 2,892 — — — — — 2,892 Consumer 5,543 — — — — — 5,543 Total $ 260,582 $ 235 $ 128 $ 1 $ 364 $ 831 $ 261,777 92 Index The amount of interest income for the years ended December 31, 2021 and 2020, that was not recorded on nonaccrual loans was approximately $0.1 million and $0.1 million, respectively. In addition to past due and nonaccrual status criteria, the Company also evaluates loans using a loan grading system. Internal loan grades are based on current financial information, historical payment experience, and credit documentation, among other factors. Performance-based grades are summarized below: Pass (Loan Grades 1-4) – A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is considered remote. Special Mention (Loan Grade 5) – A Special Mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, the Company is currently protected and loss is considered unlikely and not imminent. Classified Substandard (Loan Grade 6) – A Substandard asset is inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have well defined weaknesses and are characterized by the distinct possibility that the Company may sustain some loss if deficiencies are not corrected. Classified Doubtful (Loan Grade 7) – A Doubtful asset has all the weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable. Classified Loss (Loan Grade 8) – A loss loan has an existing weakness or weaknesses that render the loan uncollectible and of such little value that continuing to carry as an asset on the Bank’s book is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical nor desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future. The Company does not currently grade retained Strategic Program loans due to their small balances and homogenous nature. Credit quality for Strategic Program loans is highly correlated with delinquency levels. The Strategic Program loans are evaluated collectively for impairment. Outstanding loan balances categorized by these credit quality indicators are summarized as follows at December 31, 2021 and 2020: December 31, 2021 ($ in thousands) Pass Grade 1-4 Special Mention Grade 5 Classified/ Doubtful/Loss Grade 6-8 Total SBA $ 139,985 $ 1,435 $ 972 $ 142,392 Commercial, non-real estate 3,382 46 — 3,428 Residential real estate 27,108 — — 27,108 Commercial real estate 2,436 — — 2,436 Consumer 4,574 — — 4,574 Not Risk Graded Strategic Program loans 85,850 Total at December 31, 2021 $ 177,485 $ 1,481 $ 972 $ 265,788 93 Index December 31, 2020 ($ in thousands) Pass Grade 1-4 Special Mention Grade 5 Classified/ Doubtful/Loss Grade 6-8 Total SBA $ 200,360 $ 2,040 $ 917 $ 203,317 Commercial, non-real estate 3,960 60 — 4,020 Residential real estate 16,984 — 756 17,740 Commercial real estate 2,892 — — 2,892 Consumer 5,543 — — 5,543 Not Risk Graded Strategic Program loans 28,265 Total at December 31, 2020 $ 229,739 $ 2,100 $ 1,673 $ 261,777 Loans modified and recorded as TDR’s during the years ended December 31, 2021 and 2020, consist of the following: ($ in thousands) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment December 31, 2021 SBA 2 $ 106 $ 106 Total at December 31, 2021 2 $ 106 $ 106 Non-Accrual SBA 1 $ 25 $ 25 December 31, 2020 SBA 3 $ 114 $ 114 Residential real estate 1 756 756 Total at December 31, 2020 4 $ 870 $ 870 Non-Accrual SBA 1 $ 53 $ 53 At December 31, 2021 and 2020, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR. Loans modified and recorded as TDR’s during the years ended December 31, 2021 and 2020 included modifications to rate and term. There were no principal charge-offs recorded related to TDRs during the years ended December 31, 2021 and 2020. 94 Index During the year ended December 31, 2021, there was one new loan modification representing $0.01 million in principal and two previously reported TDRs representing $0.02 million in principal were paid in full with interest. Separately, one restructured loan incurred a default within 12 months of the restructure date during the year ended December 31, 2021. This same loan was paid in full with interest on May 28, 2021. The Company had a payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) for a TDR modified within the previous 12 months pertaining to $0.1 million in principal for a SBA loan during the year ended December 31, 2020. The Company evaluated the restructuring for possible impairment but concluded that no impairment existed because payments were being received in arrears and adequate collateral existed. As a result, the Company did not recognize any provisions for loan losses or net charge-offs as a result of defaulted TDRs for the year ended December 31, 2020 COVID-Related Loan Deferments As discussed in Note 1, the federal banking agencies issued guidance in March 2020 that short -term modifications (for example, six months) made to a borrower affected by the COVID -19 pandemic does not need to be identified as a TDR if the loan was current at the time of modification. This relief applies to loan modifications executed between March 1, 2020 and January 1, 2022. The CARES Act also addressed COVID-19 related modifications and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs. None of these modifications were on deferment status as of December 31, 2021. The dollar amount of other short-term modifications of loans held-for-investment not classified as troubled debt restructurings as of December 31, 2021 and December 31, 2020 was $0.5 million and $1.2 million. Note 4 – Premises and Equipment Premises and equipment at December 31, 2021 and 2020, consist of the following: ​ December 31, ​ 2021 2020 ($ in thousands) Leasehold improvements $ 80 $ 80 Furniture, fixtures, and equipment 2,218 1,782 Construction in progress 2,333 436 Total premises and equipment $ 4,632 $ 2,298 Less accumulated depreciation (1,347 ) (1,034 ) Premises and equipment, net $ 3,285 $ 1,264 Depreciation expense was approximately $0.3 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively. The Company leases its facilities under noncancelable operating leases. Rent expense for 2021 and 2020 was $0.5 million and $0.4 million, respectively. Future minimum annual rental payments for these leases are as follows ($ in thousands): Year Ended December 31, 2022 $ 946 Year Ended December 31, 2023 1,108 Year Ended December 31, 2024 1,104 Year Ended December 31, 2025 1,086 Year Ended December 31, 2026 1,118 Thereafter 3,355 Total $ 8,717 95 Index Note 5 – Deposits Major classes of deposits at December 31, 2021 and 2020, are as follows: ​ December 31, ​ 2021 2020 ($ in thousands) Demand $ 115,947 $ 94,162 Savings 6,685 7,435 Money markets 31,076 17,567 Time certificates of deposit 98,184 45,312 Total deposits $ 251,892 $ 164,476 At December 31, 2021, the scheduled maturities of time deposits are as follows ($ in thousands): Year Ended December 31, 2022 $ 41,567 Year Ended December 31, 2023 20,721 Year Ended December 31, 2024 16,302 Year Ended December 31, 2025 10,070 Year Ended December 31, 2026 8,784 Thereafter 740 Total 98,184 Time deposits with balances equal or greater than $250,000 totaled $3.7 million and $3.1 million at December 31, 2021 and 2020, respectively. Note 6 – SBA Servicing Asset The Company periodically sells portions of SBA loans and retains rights to service the loans. Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of SBA loans serviced for others was $210.2 million and $140.1 million at December 31, 2021 and 2020, respectively. The following table summarizes SBA servicing asset activity for the periods indicated: ​ For the Years Ended December 31, ($ in thousands) 2021 2020 Beginning balance $ 2,415 $ 2,034 Additions to servicing asset 2,753 1,139 Impairment of SBA servicing asset (800 ) — Amortization of servicing asset (430 ) (758 ) Ending balance $ 3,938 $ 2,415 The fair market value of the SBA servicing asset as of December 31, 2021 and 2020, was $3.94 million and $2.53 million, respectively. Fair value adjustments to servicing rights are mainly due to market-based assumptions associated with discounted cash flows, loan prepayment speeds, and changes in interest rates. A significant change in prepayments of the loans in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of servicing rights. The SBA servicing asset recognized an impairment in the year ending December 31, 2021. The Company believes future recovery of the amortized carrying value is likely. 96 Index The Company assumed a weighted average prepayment rate of 14.37%, weighted average term of 4.02 years, and a weighted average discount rate of 11.38% at December 31, 2021. The Company assumed a weighted average prepayment rate of 16.42%, weighted average term of 3.64 years, and a weighted average discount rate of 10.00% at December 31, 2020. Note 7 – Capital Requirements The Bank is subject to various regulatory capital requirements administered by federal and State of Utah banking agencies (the regulators). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off -balance-sheet items as calculated under regulatory accounting practices. The Bank's capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk -weighting, and other factors. Prompt corrective action provisions are not applicable to the bank holding company. Beginning January 1, 2020, the bank qualified and elected to use the community bank leverage ratio (CBLR) framework for quantitative measures which requires the Bank to maintain minimum amounts and ratios of Tier 1 capital to average total consolidated assets. Management believes, as of December 31, 2020 and December 31, 2021, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2021 and 2020, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification that management believes have changed the Bank’s category). The following table sets forth the actual capital amounts and ratios for the Bank and the minimum ratio and amount of capital required to be categorized as well-capitalized and adequately capitalized as of the dates indicated. The Bank's actual capital amounts and ratios are presented in the following table: ​ Actual Well-Capitalized Requirement ($ in thousands) Amount Ratio Amount Ratio December 31, 2021 Leverage ratio (CBLR election) $ 65,503 17.7 % $ 31,442 * 8.5 % December 31, 2020 Leverage ratio (CBLR election) $ 37,806 16.6 % $ 18,212 * 8.0 % * On March 27, 2020 the CARES Act became law. Section 4012 of the CARES Act directs the agencies to issue an interim final rule reducing the CBLR ratio requirement from 9% to 8% for the last two quarters of the year 2020, 8.5% for the calendar year 2021, and 9% thereafter. Federal Reserve Board Regulations require maintenance of certain minimum reserve balances based on certain average deposits. The Bank had reserve requirements of $0.0 million as of December 31, 2021 and 2020, respectively. The Federal Reserve’s policy statement and supervisory guidance on the payment of cash dividends by a Bank Holding Company (“BHC”), such as FinWise Bancorp, expresses the view that a BHC should generally pay cash dividends on common stock only to the extent that (1) the BHC’s net income available over the past year is sufficient to cover the cash dividend, (2) the rate of earnings retention is consistent with the organization’s expected future needs and financial condition, and (3) the minimum regulatory capital adequacy ratios are met. Should an insured depository institution controlled by a bank holding company be “significantly undercapitalized” under the applicable federal bank capital ratios, or if the bank subsidiary is “undercapitalized” and has failed to submit an acceptable capital restoration plan or has materially failed to implement such a plan, federal banking regulators (in the case of the Bank, the FDIC) may choose to require prior Federal Reserve approval for any capital distribution by the BHC. In addition, since FinWise Bancorp is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, an ability to pay dividends depends on the ability of the Bank to pay dividends to FinWise Bancorp and the FDIC and the Utah Department of Financial Institutions (“UDFI”) may, under certain circumstances, prohibit the payment of dividends to FinWise Bancorp from the Bank. Utah corporate law also requires that dividends can only be paid out of funds legally available. 97 Index The Company has not paid any cash dividends on its common stock since inception and it currently has no plans to pay cash dividends in the foreseeable future. However, the Company’s Board of Directors may declare a cash or stock dividend out of retained earnings provided the regulatory minimum capital ratios are met. The Company plans to maintain capital ratios that meet the well-capitalized standards per the regulations and, therefore, would limit dividends to amounts that are appropriate to maintain those well-capitalized regulatory capital ratios. Note 8 – Commitments and Contingent Liabilities Federal Home Loan Bank Secured Line of Credit As of December 31, 2021 and 2020, the Bank’s available line of credit with the FHLB to borrow in overnight funds was $4.1 million and $4.4 million, respectively. All borrowings are short-term and the interest rate is equal to the correspondent bank's daily federal funds purchase rate. As of December 31, 2021, no amounts were outstanding under the line of credit. Loans totaling $5.4 million and $6.1 million were pledged to secure the FHLB line of credit as of December 31, 2021 and 2020, respectively. Line of Credit At December 31, 2021, we had the ability to access $10.9 million from the Federal Reserve Bank’s Discount Window on a collateralized basis. Through Zions Bank, the Bank had an available unsecured line available of $1.0 million. The Bank had an available line of credit with Bankers’ Bank of the West to borrow up to $1.05 million in overnight funds. We had no outstanding balances on the unsecured or secured lines of credit as of December 31, 2021. Paycheck Protection Program Liquidity Facility On April 20, 2020, the Bank was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility (“PPPLF”) through the discount window. The PPPLF enables the Company to fund PPP loans without taking on additional liquidity or funding risks because the Company is able to pledge PPP loans as collateral to secure extensions of credit under the PPPLF on a non-recourse basis. Borrowings under the PPPLF have a fixed-rate of 0.35%, with a term that matches the underlying loans. The Bank pledged $101.0 million of PPP loans as eligible collateral under the PPPLF borrowing arrangement at December 31, 2020. The Bank pledged $1.0 million of PPP loans as eligible collateral under the PPPLF borrowing arrangement at December 31, 2021. The average outstanding borrowings were $49.0 million during the year ended December 31, 2020 and $36.4 million during the year ended December 31, 2021. Commitments to Extend Credit In the ordinary course of business, the Bank has entered into commitments to extend credit to customers which have not yet been exercised. These financial instruments include commitments to extend credit in the form of loans. Those instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. At December 31, 2021 and 2020, financial instruments with off-balance-sheet risk were as follows: ​ December 31, ($ in thousands) 2021 2020 Revolving, open-end lines of credit $ 1,259 $ 757 Commercial real estate 15,402 14,468 Other unused commitments 377 928 ​ $ 17,038 $ 16,153 Note 9 – Investment in Business Funding Group, LLC On December 31, 2019, the Company purchased from certain members of BFG a 10% membership interest in exchange for an aggregate of 950,784 shares of par value $0.001 Common Stock of the Company. The exchange was accounted for at fair value based on the fair value of the Company’s shares of approximately $3.5 million. 98 Index The Company’s 10% membership interests of BFG are comprised of Class A Voting Units representing 4.96% of the aggregate membership interests of BFG and Class B Non-Voting Units representing 5.04% of the aggregate membership interests of BFG. The other existing members of BFG jointly own the remaining 90% of the outstanding membership interests, on a fully-diluted basis – all of which membership interests are Class A Voting Units. Based on the Company’s accounting policy with respect to investments in limited liability companies, the Company concluded that its level of ownership was indicative of significant influence and, as a result, the investment would be accounted for using the equity method. However, the Company elected the fair value option for its investment due to cost-benefit considerations. The Company received distributions from BFG in the amounts of $0.9 million and $0.5 million for the years ended December 31, 2021 and 2020, respectively. These distributions were recorded in the Consolidated Balance Sheets as decreases in the investment in BFG. On March 31, 2020, the Company entered into an agreement with BFG whereby the Company has the right of first refusal to purchase additional interests in BFG from any selling members. Additionally, the Company was granted an option to purchase all, but not less than all, of the interests in BFG from the remaining members for an earnings multiple between 10 times and 15 times net profit based on the fiscal year ended immediately prior to the exercise of the option. The option period begins on January 1, 2021 and expires on January 1, 2028. In consideration of granting the first right of refusal and the option, BFG members received 270,000 warrants in the aggregate. The warrants have an exercise price of $6.67 per share and the warrants expire on March 31, 2028. The warrants are free-standing equity instruments and, as a result, are classified within equity at the fair value on the issuance date. The fair value of the warrants was determined by our board of directors with input from management, relying in part upon valuation reports prepared by a third-party valuation firm using a Black-Scholes option pricing model adjusted for a lack of marketability since the Company’s stock is not publicly traded. The resulting fair value of the warrants was $0.19 per share. For further discussion on the Company’s investment in BFG, see Note 15 Related Parties. Note 10 – Stock-Based Compensation Stock option plans The Company utilizes stock-based compensation plans, as well as discretionary grants, for employees, directors and consultants to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives and to promote the success of the Company’s business. The 2019 Stock Option Plan (“2019 Plan”) was adopted on June 20, 2019 following approval by the Company’s Board of Directors and shareholders. The 2019 Plan provides for the issuance of non-statutory stock options and restricted stock to employees, directors and consultants. The 2019 Plan also provides for the issuance of incentive stock options only to employees. The 2019 Plan authorizes the issuance of 780,000 common shares. The 2019 Plan will terminate as to future awards 10 years from the later of the effective date or the earlier of the most recent Board or stockholder approval of an increase in the number of shares reserved for issuance under the 2019 Plan. At December 31, 2021, 296,226 shares are available for future issuance. The 2016 Stock Option Plan (“2016 Plan”) was adopted on April 20, 2017 following approval by the Company’s Board of Directors and shareholders. The 2016 Plan provides for the issuance of non-statutory stock options and restricted stock to employees, directors and consultants. The 2016 Plan also provides for the issuance of incentive stock options only to employees. The 2016 Plan authorizes the issuance of 299,628 common shares. The 2016 Plan will terminate as to future awards 10 years from the later of the effective date or the earlier of the most recent Board or stockholder approval of an increase in the number of shares reserved for issuance under the 2016 Plan. At December 31, 2021, 24,612 shares under 2016 Plan are available for future issuance. The stock-based incentive awards for both the 2019 Plan and the 2016 Plan (collectively, the “Plans”) are granted at an exercise price not less than the fair market value of the shares on the date of grant, which is based on a Black-Scholes valuation model, in the case of options, or based on the fair value of the stock at the grant date, in the case of restricted stock. Vesting of the options vary by employee or director and can have a term no more than 10 years, with the options generally having vesting periods ranging from 1 to 5 years. No shares had been granted under the 2016 Plan prior to 2018. Under both Plans, if an award expires or becomes un-exercisable without having been exercised in full, or is surrendered pursuant to an exchange program, the unpurchased shares that were subject thereto shall become available for future grant or sale under the Plans. However, shares that have actually been issued under the Plans, upon exercise of an award, shall not be returned to the Plans and shall not become available for future distribution under the Plans, except that if unvested shares of restricted stock are repurchased by the Company at their original purchase price, such shares shall become available for future grant under the Plans. 99 Index Other stock-based compensation On December 24, 2019, the Board approved a restricted stock discretionary grant of 1,072,746 shares to certain employees. Pursuant to the awards agreement, 351,852 shares vested on the grant date and were repurchased by the Company on December 31, 2019 to pay for employee withholding taxes. Pursuant to the awards agreement, 73,770 shares subsequently vested and were repurchased by the Company on April 6, 2020 to pay for employee income taxes. Granted shares vest based on the accelerated attribution method on a schedule where all shares would be fully vested on December 1, 2023. On November 18, 2021, pursuant to the awards agreement, the 424,458 remaining unvested shares became vested because the Company’s registration statement was declared effective. Stock options The grant date fair value is determined using the Black-Scholes option valuation model. The assumptions for expected life reflected management’s judgment and include consideration of historical experience. Expected volatility is based on data from comparable public companies for the expected option term. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Expected forfeitures are estimated based on the Company’s historical forfeiture experience. Management believes that the assumptions used in the option-pricing model are highly subjective and represent only one estimate of possible value, as there is no active market for the options granted. The table below summarizes the assumptions used: ​ For the Years Ended December 31, ​ 2021 2020 Risk-free interest rate 0.4% - 1.3 % 0.5% - 1.8 % Expected term in years 5.0 - 7.5 5.0 - 7.5 Expected volatility 45.7% - 47.6 % 41.3% - 43.7 % Expected dividend yield - - The following summarizes stock option activity for the years ended December 31, 2021 and 2020: ​ Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value Outstanding at December 31, 2019 507,840 $ 3.16 9.3 $ 243,061 Options granted 390,600 4.7 4.0 70,626 Options exercised (34,776 ) 2.36 68,863 Options forfeited (225,000 ) 4.87   22,235 Outstanding at December 31, 2020 638,664 $ 3.54 8.6 $ 653,991 Options granted 906,600 6.27 3.3 Options exercised (86,676 ) 3.6 511,339 Options forfeited (596,100 ) 6.42   1,460,581 Outstanding at December 31, 2021 862,488 $ 4.41 8.2 $ 8,088,660 Options vested and exercisable at December 31, 2021 492,756 $ 4.23 8.2 $ 4,712,963 The weighted average grant-date fair value of options per share granted was $1.55 and $1.37 during 2021 and 2020, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2021 and 2020 were $0.51 million and $0.07 million, respectively. During 2021, the Company received proceeds of approximately $0.3 million from the exercise of stock options and recognized a tax benefit of $0 million from the exercise of stock options. Upon exercise of the stock options, the Company will issue new authorized shares. 100 Index Restricted stock The following table summarizes restricted stock awards activities: ​ Number of Shares Weighted Average Grant Price Unvested as of as of January 1, 2020 720,870 $ 3.64 Vested (99,204 ) 3.64 Unvested as of December 31, 2020 621,666 $ 3.64 Vested (621,666 ) 3.64 Unvested as of December 31, 2021 — $ — The aggregate fair value of restricted stock that vested was approximately $2.3 million and $0.4 million for the year ended December 31, 2021 and 2020, respectively. Stock-based compensation expense The following tables present pre-tax and after-tax stock-based compensation expense recognized: ​ For the Years Ended December 31, ($ in thousands) 2021 2020 Pre-tax Stock options $ 934 $ 389 Restricted shares 1,166 1,367 Total $ 2,100 $ 1,756 After-tax Stock options $ 778 $ 357 Restricted shares 1,166 1,658 Total $ 1,944 $ 2,015 As of December 31, 2020, the Company had unrecognized stock-based compensation expense related to stock options of approximately $0.3 million, respectively, which is expected to be recognized over the remaining weighted average recognition period of 2.3 years. Employee stock-based compensation expense is recorded within Salaries and employee benefits and was $1.6 million and $1.7 million for the years ending December 31, 2021 and 2020, respectively. Stock-based compensation for all others is recorded within Other operating expenses and was $0.5 million and $0.1 million for the years ending December 31, 2021 and 2020, respectively. Note 11 – Fair Value of Financial Instruments The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the standard requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy. 101 Index Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data. Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from nonbinding single dealer quotes not corroborated by observable market data. In developing Level 3 measurements, management incorporates whatever market data might be available and uses discounted cash flow models where appropriate. These calculations include projections of future cash flows, including appropriate default and loss assumptions, and market-based discount rates. The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period. The following methods were used to estimate the fair value of each class of financial instruments: Cash and cash equivalents : The carrying amount of these items is a reasonable estimate of their fair value. Investment securities held-to-maturity : The estimated fair values of investment securities are priced using current active market quotes, if available, which are considered Level 1 measurements. For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value. These measurements are considered Level 2. Investment in Federal Home Loan Bank stock : The fair value is based upon the redemption value of the stock, which equates to the carrying value. Strategic Program loans held-for-sale : The carrying amount of these items is a reasonable estimate of their fair value. Loans held for investment : The fair value is estimated by discounting the future cash flows and estimated prepayments using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining term. Some loan types’ fair value approximated carrying value because of their floating rate or expected maturity characteristics. SBA servicing asset : The fair value of servicing assets is based on, in part, third -party valuations that project estimated future cash inflows that include servicing fees and outflows that include market rates for costs of servicing. The present value of the future cash flows are calculated utilizing market-based discount rates. The market-based discount rates represent risk spreads based on secondary market transactions utilizing calculated prepayment curves. Due to the fact that observable loan transactions are used to determine the risk spreads, the Company considers the measurement to be Level 2. Investment in BFG : The Company purchased its ownership interest in BFG on December 31, 2019. The Company’s valuation utilized the average of the discounted cash flow method and the Guideline Public Company method. A 20% lack of marketability discount was applied to the valuation as well as a 4.50% discount to non-voting shares to arrive at fair value. Deposits : The carrying amount of deposits with no stated maturity, such as savings and checking accounts, is a reasonable estimate of their fair value. The market value of certificates of deposit is based upon the discounted value of contractual cash flows. The discount rate is determined using the rates currently offered on comparable instruments. Accrued interest receivable and payable : The fair value of accrued interest receivable and payable approximates their carrying amount. 102 Index PPP Liquidity Facility : The fair value of PPPLF is estimated using a discounted cash flow based on the remaining contractual term and current borrowing rates for similar terms. ​ December 31, 2021 December 31, 2020 ($ in thousands) Level Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: Cash and cash equivalents 1 $ 85,754 $ 85,754 $ 47,383 $ 47,383 Investment securities held-to-maturity 2 11,423 11,332 1,809 1,879 Investment in FHLB stock 2 378 378 205 205 Loans held for investment 3 198,102 197,412 232,074 211,299 Loans held-for-sale 2 60,748 60,743 20,948 20,948 Accrued interest receivable 2 1,548 1,548 1,629 1,629 SBA servicing asset 2 3,938 3,938 2,415 2,532 Investment in BFG 3 5,900 5,900 3,770 3,770 Financial liabilities: Total deposits 2 251,892 249,488 164,476 164,845 Accrued interest payable 2 48 48 195 195 PPP Liquidity Facility 2 1,050 1,050 101,007 105,886 Assets measured at fair value on a nonrecurring basis are summarized as follows: ($ in thousands) Fair Value Measurements Using Description of Financial Instrument Fair Value Level 1 Level 2 Level 3 December 31, 2021 Nonrecurring assets Impaired loans $ 972 $ — $ — $ 972 December 31, 2020 Nonrecurring assets Impaired loans $ 1,673 $ — $ — $ 1,673 Impaired loans – The loan amount above represents loans impaired as of year-end that have been adjusted to fair value. When collateral dependent loans are identified as impaired, the impairment is measured using the current fair value of the collateral securing these loans, less selling costs. The fair value of real estate collateral is determined using collateral valuations or a discounted cash flow analysis using inputs such as discount rates, sale prices of similar assets, and term of expected disposition. Some appraised values are adjusted based on management’s review and analysis, which may include historical knowledge, changes in market conditions, estimated selling and other anticipated costs, and/or expertise and knowledge. The loss represents charge-offs or impairments on loans for adjustments made based on the fair value of the collateral. 103 Index Quantitative information for Level 3 fair value measurements – The range and weighted average of the significant unobservable inputs used to fair value Level 3 nonrecurring assets during the years ended December 31, 2021 and 2020, along with the valuation techniques used, are shown in the following table: ($ in thousands) Fair Value Valuation Technique Unobservable Input Range (Weighted Average) December 31, 2021 Impaired loans $ 972 Market comparable Adjustment to appraisal value 0.50 % ​ December 31, 2020 Impaired loans $ 1,673 Market comparable Adjustment to appraisal value 0.73 % Note 12 – Income Taxes The components of income tax expense consist of the following: ​ For the Years Ended December 31, ($ in thousands) 2021 2020 Current tax expense Federal $ 9,589 $ 3,385 State 2,471 869 Deferred tax expense (benefit) Federal (1,156 ) (252 ) State (215 ) (60 ) Income tax expense $ 10,689 $ 3,942 The components of net deferred income tax assets and liabilities on the balance sheet at December 31, 2021 and 2020, are as follows: ​ December 31, ($ in thousands) 2021 2020 Deferred tax assets Reserve for loan loss $ 1,630 $ 872 Accrued bonuses 72 11 Nonqualified stock options 156 32 Other 250 15 Total deferred tax assets 2,108 930 Deferred tax liabilities Stock compensation — (291 ) Intangibles (3 ) (2 ) Net book value of fixed assets (217 ) (185 ) Other (65 ) — Total deferred tax liabilities (285 ) (478 ) Net deferred tax asset $ 1,823 $ 452 104 Index The income tax expense recorded differs from the expected income tax expense and the reconciliation of these differences is as follows at December 31, 2021 and 2020: ​ For the Years Ended December 31, ($ in thousands) 2021 2020 Federal income tax expense at statutory rates $ 8,877 $ 3,171 Effect of permanent differences 50 67 State income tax expense, net 1,662 603 Other 100 101 Income tax expense $ 10,689 $ 3,942 The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2021 and 2020, the Company recognized approximately $0 million of interest or penalties. The Company files a United States federal income tax return and state income tax returns in Utah, Florida, and New York. Open tax years that are potentially subject to examination related to the U.S. federal jurisdiction are 2018 and subsequent years. The Company had no unrecognized tax benefits at December 31, 2021. Note 13 – Shareholders’ Equity Stock Repurchases During 2020, the Company repurchased 84,198 shares of its common stock at an average price of $3.68 and a total cost of $0.3 million. The repurchase of shares by the Company are considered authorized but unissued shares upon acquisition. Note 14 – Retirement Plan The Company has established an employee directed 401(k) plan (Plan). The Plan requires the Company to annually contribute a “Safe Harbor” profit sharing contribution for all eligible participants. In addition, the Plan allows the Company, at its discretion, to make a matching contribution or additional profit sharing contribution based on each eligible employee's compensation for the Plan year. The participants must be at least 21 years of age and have at least one year of service in order to be eligible for matching and profit-sharing contributions. The Company made profit-sharing contributions to the Plan of $0.4 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively. Note 15 – Related Parties In the ordinary course of business, the Company may grant loans to certain executive officers and directors and the companies with which they are associated. The Company had loans outstanding to related parties of $0.0 million as of December 31, 2021 and 2020, respectively. Total deposits from certain executive officers and directors and the companies with which they are associated were $0.5 million and $0.7 million as of December 31, 2021 and 2020, respectively. BFG is a small business loan broker, primarily under the SBA’s 7(a) loan program. As noted in Note 9 Investments above, the Company has a 10% ownership in the outstanding membership units of BFG. The Company underwrites loans sourced by BFG in its normal course of business. If approved and funded, the Company pays BFG a commission fee based on the amount funded. There is no guarantee or commitment made by the Company to BFG to approve or fund loans referred by BFG. The Company is able to use its sole discretion in deciding to approve and fund loans referred by BFG. 105 Index Note 16 – Earnings per Share The following table is a reconciliation of the components used to derive basic and diluted EPS for the years ended December 31, 2021 and 2020 ($ in thousands, except share and per share amounts): ​ For the Years Ended December 31, ​ 2021 2020 Numerator: Net income $ 31,583 $ 11,198 Amount allocated to participating common shareholders (1) (1,780 ) (837 ) Net income allocate to common shareholders $ 29,803 $ 10,361 Denominator: Weighted average shares outstanding, basic 8,669,724 8,025,390 Weighted average effect of dilutive securities: Stock options 371,240 44,244 Warrants 67,199 — Weighted average shares outstanding, diluted 9,108,163 8,069,634 Earnings per share, basic $ 3.44 $​1.29 Earnings per share, diluted $ 3.27 $​1.28 (1) Represents earnings attributable to holders of unvested restricted stock issued outside of the Plan to the Company's employees. There were no anti-dilutive options for the periods reported in the table above. Note 17 – Revenue Recognition The following is a summary of the Company’s revenue disaggregated by contracts with customers and revenue outside the scope of ASC 606: ​ For the Years Ended December 31, ($ in thousands) 2021 2020 Interest income Interest income, not-in-scope Interest and fees on loans $ 49,135 $ 29,271 Interest on securities 47 34 Other interest income 61 201 Total interest income $ 49,243 $ 29,506 Non-interest income Non-interest income, in-scope Service charges on deposit accounts $ 31 $ 35 Strategic Program set up fees 96 148 Non-interest income, not in-scope Strategic Program fees 17,119 8,992 Gain on sale of loans 9,689 2,849 SBA loan servicing fees 1,156 1,028 Unrealized gain on investment in BFG 2,991 856 Other miscellaneous income 18 14 Strategic Program service charges 744 451 Total non-interest income $ 31,844 $ 14,373 106 Index Note 18 – Condensed Financial Statements of Parent Financial information pertaining only to FinWise Bancorp, on a parent-only basis, is as follows as of and for the years ended December 31, 2021 and 2020: Balance Sheets ​ December 31, ($ in thousands) 2021 2020 ASSETS Cash and cash equivalents $ 38,697 $ 2,217 Investment in subsidiary bank 71,186 40,717 Investment in Business Funding Group (BFG), at fair value 5,900 3,770 Investment in FinWise Investments, LLC 80 — Deferred taxes, net 82 — Other assets 322 105 Total assets $ 116,267 $ 46,809 LIABILITIES AND SHAREHOLDERS' EQUITY Deferred taxes, net $ — $ 46 Income taxes payable 233 11 Other liabilities 592 880 Shareholders' equity 115,442 45,872 Total liabilities and shareholders' equity $ 116,267 $ 46,809 107 Index Statement of Income ​ For the Years Ended December 31, ($ in thousands) 2021 2020 Non-interest income Change in fair value on investment in BFG $ 2,991 $ 856 Equity in undistributed earnings of subsidiary 30,469 11,390 Total non-interest income 33,460 12,246 Non-interest expense Salaries and employee benefits 742 572 Loss on investment in BFG — 50 Other operating expenses 680 485 Total non-interest expense 1,422 1,107 Income before income tax expense 32,038 11,139 Provision for income taxes 455 (59 ) Net income $ 31,583 $ 11,198 Statements of Cash Flows ​ For the Years Ended December 31, ($ in thousands) 2021 2020 Cash flows from operating activities: Net income $ 31,583 $ 11,198 Adjustments to reconcile net income to net cash from operating activities Change in fair value of BFG (2,991 ) (856 ) Loss on investment in BFG — 50 Stock-based compensation expense 2,100 1,756 Deferred income tax expense 222 (56 ) Net changes in: Income tax receivable (128 ) 46 Other assets (217 ) (74 ) Other liabilities (288 ) 866 Net cash provided by operating activities 30,281 12,930 Cash flows from investing activities: Investment in subsidiary bank (30,469 ) (11,390 ) Investment in FinWise Investments, LLC (80 ) — Distributions of BFG 861 545 Net cash used in investing activities (29,688 ) (10,845 ) Cash flows from financing activities: Proceeds from exercise of stock options 311 82 Proceeds from initial public offering, net 35,576 — Repurchase of restricted stock to pay for employee withholding taxes — (268 ) Repurchase of common stock — (41 ) Net cash used in financing activities 35,887 (227 ) Net change in cash and cash equivalents 36,480 1,858 Cash and cash equivalents, beginning of year 2,217 359 Cash and cash equivalents, end of year $ 38,697 $ 2,217 Non-cash financing and investing activities: Issuance of common stock for investment in BFG $ — $ — Issuance of common stock in lieu of cash bonus $ — $ — 108 Index Note 19 – Subsequent Events Subsequent events are events or transactions that occur after the date of the most recent balance sheet but before the financial statements are available to be issued. The Company recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing of the financial statements. The Company’s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the date of the balance sheet and before the financial statements are available to be issued. The Company has evaluated subsequent events through March 30, 2022, which is the date the consolidated financial statements are available to be issued. Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures Not applicable.