Finwise Bancorp 10-Q

Item 1. Financial Statements FinWise Bancorp Consolidated Balance Sheets (Unaudited) (in thousands, except share and par value amounts) ​ March 31, December 31, 2022 2021 ASSETS Cash and cash equivalents Cash and due from banks $ 414 $ 411 Interest-bearing deposits 116,232 85,343 Total cash and cash equivalents 116,646 85,754 Investment securities held-to-maturity, at cost 10,986 11,423 Investment in Federal Home Loan Bank (FHLB) stock, at cost 449 378 Strategic Program loans held-for-sale, at lower of cost or fair value 73,805 60,748 Loans receivable, net 189,549 198,102 Premises and equipment, net 4,531 3,285 Accrued interest receivable 1,347 1,548 Deferred taxes, net 1,788 1,823 SBA servicing asset, net 5,225 3,938 Investment in Business Funding Group (BFG), at fair value 5,400 5,900 Investment in FinWise Investments, LLC 80 80 Operating lease right-of-use (“ROU”) assets 7,178 — Other assets 7,500 7,235 Total assets $ 424,484 $ 380,214 ​ LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Deposits Noninterest-bearing $ 127,330 $ 110,548 Interest-bearing 150,130 141,344 Total deposits 277,460 251,892 Accrued interest payable 39 48 Income taxes payable, net 3,411 233 PPP Liquidity Facility 952 1,050 Operating lease liabilities 7,386 — Other liabilities 10,281 11,549 Total liabilities 299,529 264,772 ​ Commitments and contingencies (Note 8) ​ Shareholders’ equity Preferred stock, $ 0.001 par value, 4,000,000 authorized; no shares issued and outstanding as of March 31, 2022 and December 31, 2021 — — Common stock, $ 0.001 par value, 40,000,000 shares authorized; 12,788,810 and 12,772,010 shares issued and outstanding as of March 31, 2022 and December 31, 2021, respectively 13 13 Additional paid-in-capital 54,915 54,836 Retained earnings 70,027 60,593 Total shareholders’ equity 124,955 115,442 Total liabilities and shareholders’ equity $ 424,484 $ 380,214 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 5 Index FinWise Bancorp Consolidated Statements of Income (Unaudited) (in thousands, except share and per share amounts) ​ For the Three Months Ended March 31, ​ 2022 2021 Interest income Interest and fees on loans $ 13,156 $ 8,790 Interest on securities 39 6 Other interest income 28 10 Total interest income 13,223 8,806 ​ Interest expense Interest on deposits 261 297 Interest on PPP Liquidity Facility 1 75 Total interest expense 262 372 Net interest income 12,961 8,434 ​ Provision for loan losses 2,947 633 Net interest income after provision for loan losses 10,014 7,801 ​ Non-interest income Strategic Program fees 6,623 2,953 Gain on sale of loans, net 5,052 2,603 SBA loan servicing fees 387 152 Change in fair value on investment in BFG ( 398 ) 360 Other miscellaneous income 18 11 Total non-interest income 11,682 6,079 ​ Non-interest expense Salaries and employee benefits 7,092 4,895 Occupancy and equipment expenses 302 194 (Recovery) impairment of SBA servicing asset ( 59 ) — Other operating expenses 1,713 1,574 Total non-interest expense 9,048 6,663 Income before income tax expense 12,648 7,217 ​ Provision for income taxes 3,214 1,926 Net income $ 9,434 $ 5,291 ​ Earnings per share, basic $ 0.74 $ 0.61 Earnings per share, diluted $ 0.70 $ 0.59 ​ Weighted average shares outstanding, basic 12,777,237 8,091,186 Weighted average shares outstanding, diluted 13,567,311 8,335,772 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 6 Index FinWise Bancorp Consolidated Statements of Changes in Shareholders’ Equity (Unaudited) (in thousands, except share amounts) Common Stock ​ ​ Shares Amount Additional Paid-In Capital Retained Earnings Total Shareholders’ Equity Balance at January 1, 2021 8,660,334 $​ 9 $ 16,853 $ 29,010 $ 45,872 Stock-based compensation expense — — 981 — 981 Stock options exercised 55,776 — 166 — 166 Net Income — — — 5,291 5,291 Balance at March 31, 2021 8,716,110 $ 9 $ 18,000 $ 34,301 $ 52,310 Common Stock ​ ​ Shares Amount Additional Paid-In Capital Retained Earnings Total Shareholders’ Equity Balance at January 1, 2022 12,772,010 $​ 13 $ 54,836 $ 60,593 $ 115,442 Stock-based compensation expense — — 39 — 39 Stock options exercised 16,800 — 40 — 40 Net Income — — — 9,434 9,434 Balance at March 31, 2022 12,788,810 $ 13 $ 54,915 $ 70,027 $ 124,955 The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 7 Index FinWise Bancorp Consolidated Statements of Cash Flows (Unaudited) (in thousands) ​ For the Three Months Ended March 31, ​ 2022 2021 Cash flows from operating activities: Net income $ 9,434 $ 5,291 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 272 268 Provision for loan losses 2,947 633 Amortization of operating lease ROU asset 202 — Net amortization in securities discounts and premiums 9 7 Capitalized servicing assets ( 1,408 ) ( 856 ) Gain on sale of SBA loans, net ( 5,052 ) ( 2,603 ) Originations of Strategic Program loans held-for-sale ( 2,423,186 ) ( 955,539 ) Proceeds on Strategic Program loans held-for-sale 2,410,129 938,640 Change in fair value of BFG 398 ( 360 ) Recovery of SBA servicing asset ( 59 ) — Stock-based compensation expense 39 981 Deferred income tax benefit (expense) 35 ( 218 ) Net changes in: Accrued interest receivable 201 234 Accrued interest payable ( 9 ) 23 Other assets ( 265 ) 1,266 Operating lease liabilities 6 — Other liabilities 1,910 3,345 Net cash used in operating activities ( 4,397 ) ( 8,888 ) ​ Cash flows from investing activities: Net increase in loans receivable 10,658 32,908 Distributions from BFG 102 257 Purchase of bank premises and equipment ( 1,338 ) ( 295 ) Proceeds from maturities and paydowns of securities held-to-maturity 428 132 Purchase of FHLB stock ( 71 ) ( 173 ) Net cash provided by investing activities 9,779 32,829 ​ Cash flows from financing activities: Net increase in deposits 25,568 24,035 Proceeds from exercise of stock options 40 166 Proceeds from PPP Liquidity Facility — 5,558 Repayment of PPP Liquidity Facility ( 98 ) ( 26,861 ) Net cash provided by financing activities 25,510 2,898 ​ Net change in cash and cash equivalents 30,892 26,839 Cash and cash equivalents, beginning of the period 85,754 47,383 Cash and cash equivalents, end of the period $ 116,646 $ 74,222 ​ Supplemental disclosures of cash flow information: Cash paid during the period Income taxes $ — $ 1,926 Interest $ 1,274 $ 349 Supplemental disclosures of noncash operating activities: Right-of-use assets obtained in exchange for operating lease liabilities (ASC 842 adoption effective January 1, 2022) 7,380 — The accompanying notes are an integral part of these unaudited condensed consolidated financial statements. 8 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 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. 9 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. At March 31, 2022, net deferred loan fees related to PPP loans was a de minimis amount, which will be recognized over the life of the loans. 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, 2021, PPP borrowers had 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 as of December 31, 2021. During the three months ended March 31, 2022, PPP borrowers made $ 0.1 million of principal payments leaving $ 1.0 million of PPP loan principal outstanding as of March 31, 2022. The loan forgiveness resulted in the recognition of a de minimis amount of deferred loan fees for the three months ended March 31, 2022. Basis of Presentation – The consolidated financial statements are comprised of the accounts of FinWise Bancorp and its wholly-owned subsidiaries, FinWise Investments, LLC and FinWise Bank (collectively, the “Company”). All significant inter-company transactions have been eliminated in consolidation. In the opinion of management, all the adjustments (consisting of normal and recurring adjustments) necessary for the fair presentation of the consolidated financial condition and the consolidated results of operations for the unaudited periods presented have been included. The results of operations and other data presented for three months ended March 31, 2022 are not necessarily indicative of the results of operations that may be expected for subsequent periods or the full year results. Certain information and note disclosures usually included in financial statements prepared in accordance with U.S. generally accepted accounting principles (“U.S. GAAP”) have been condensed or omitted pursuant to the rules and regulations of the SEC for the presentation of the Form 10-Q. The unaudited consolidated financial statements presented should be read in conjunction with the Company’s audited consolidated financial statements and notes to the audited consolidated financial statements included in the Company’s December 31, 2021 Annual Report on Form 10-K. 10 Index Out-of-period adjustment – During the first quarter of 2022, we recognized a $( 0.8 ) million ($( 0.6 ) million net of tax) reduction of interest and fees on loans and loans receivable, net as an out-of-period adjustment. The adjustment was not considered material to the interim consolidated financial statements for the quarter ended March 31, 2022 or the financial statements of any previously filed interim or annual periods. Use of estimates – In preparing the consolidated financial statements in accordance with U.S. GAAP, management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities as of the date of the consolidated balance sheets and certain revenues and expenses for the period. Actual results could differ, either positively or negatively, from those estimates. Recently adopted accounting pronouncements In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , to increase transparency and comparability among organizations by, among other provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous U.S. GAAP. The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU asset and lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income statement. A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application. The guidance was initially effective for fiscal years beginning after December 15, 2020, and interim periods within fiscal years beginning after December 15, 2021. However, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842): Effective Dates for Certain Entities , delaying the effective date to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022. In transition, entities may also elect a package of practical expedients that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S. GAAP. In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842): Targeted Improvements , which provides entities an optional transition method to apply the guidance under ASC Topic 842 as of the adoption date, rather than as of the earliest period presented. The Company adopted this guidance on January 1, 2022, which resulted in an increase in assets and liabilities by $ 7.4 million on the Company’s consolidated financial statements. 11 Index Accounting pronouncements to be adopted In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) . The ASU sets forth a “current expected credit loss” (CECL) model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts. This replaces the existing incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, available-for-sale debt securities and applies to certain off-balance sheet credit exposures. This ASU was initially effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted. However, the FASB issued an ASU to delay adoption 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 March 31, 2022 and December 31, 2021, are summarized as follows: ​ March 31, 2022 ($ in thousands) Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Mortgage-backed securities $ 10,986 $ 3 $ ( 726 ) $ 10,263 ​ December 31, 2021 ($ in thousands) Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Mortgage-backed securities $ 11,423 $ 23 $ ( 114 ) $ 11,332 The Company had twelve securities in an unrealized loss position at March 31, 2022 and nine securities in an unrealized loss position at December 31, 2021, as summarized in the following tables: ​ March 31, 2022 Less than 12 months 12 Months or More Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Mortgage-backed securities $ 10,042 $ ( 726 ) $ — $ — $ 10,042 $ ( 726 ) ​ 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 ) 12 Index The amortized cost and estimated market value of debt securities at March 31, 2022, 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 1,462 1,402 Due after ten years 9,524 8,861 ​Total Securities held-to-maturity $ 10,986 $ 10,263 At March 31, 2022, 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 three months ended March 31, 2022 or 2021. FHLB stock The Bank is a member of the FHLB system. Members are required to own FHLB stock of at least the greater of 1 % of FHLB membership asset value or 2.7 % of outstanding FHLB advances. At March 31, 2022 and December 31, 2021, the Bank owned $ 0.4 million, respectively, of FHLB stock, which is carried at cost. The Company evaluated the carrying value of its FHLB stock investment at March 31, 2022 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment from recurring and special dividends, and the Company’s intent and ability to hold this investment for a period of time sufficient to recover our recorded investment. Note 3 – Loans and Allowance for Loan Losses Loans are summarized as follows according to major risk category as of March 31, 2022 and December 31, 2021: ​ March 31, December 31, ​ 2022 2021 ($ in thousands) SBA $ 127,778 $ 142,392 Commercial, non-real estate 3,285 3,428 Residential real estate 30,772 27,108 Strategic Program loans 101,819 85,850 Commercial real estate 4,187 2,436 Consumer 4,711 4,574 Total loans $ 272,552 $ 265,788 Loans held-for-sale ( 73,805 ) ( 60,748 ) Total loans held for investment $ 198,747 $ 205,040 Deferred loan costs (fees), net 789 2,917 Allowance for loan losses ( 9,987 ) ( 9,855 ) Net loans $ 189,549 $ 198,102 13 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 March 31, 2022 and December 31, 2021, was $ 50.8 million and $ 39.6 million, respectively. Strategic Program loans retained and held-for-sale as of March 31, 2022 and December 31, 2021, are summarized as follows: ​ March 31, December 31, ​ 2022 2021 ($ in thousands) Retained Strategic Program loans $ 28,014 $ 25,102 Strategic Program loans held-for-sale 73,805 60,748 Total Strategic Program loans $ 101,819 $ 85,850 Changes in the ALL are summarized as follows: Three Months Ended March 31, 2022 ($ in thousands) SBA Commercial, Non-Real Estate Residential Real Estate Strategic Program Loans Commercial Real Estate Consumer Total Beginning balance $ 2,739 $ 132 $ 352 $ 6,549 $ 21 $ 62 $ 9,855 Charge-offs ( 31 ) — — ( 2,878 ) — — ( 2,909 ) Recoveries — 1 — 93 — — 94 Provision (recapture) 356 ( 26 ) 59 2,558 — — 2,947 Balance at end of period $ 3,064 $ 107 $ 411 $ 6,322 $ 21 $ 62 $ 9,987 Ending balance individually evaluated for impairment — — — — — — — Ending balance collectively evaluated for impairment $ 3,064 $ 107 $ 411 $ 6,322 $ 21 $ 62 $ 9,987 Loans receivable $ 127,778 $ 3,285 $ 30,772 $ 28,014 $ 4,187 $ 4,711 $ 198,747 Ending balance individually evaluated for impairment 951 — 200 — — — 1,151 Ending balance collectively evaluated for impairment $ 126,827 $ 3,285 $ 30,572 $ 28,014 $ 4,187 $ 4,711 $ 197,596 14 Index Three Months Ended March 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 ( 7 ) ( 41 ) — ( 741 ) — ( 2 ) ( 791 ) Recoveries 11 — — 132 — — 143 Provision — — — 633 — — 633 Balance at end of period $ 924 $ 191 $ 855 $ 4,135 $ 19 $ 60 $ 6,184 Ending balance individually evaluated for impairment — — — — — — — Ending balance collectively evaluated for impairment $ 924 $ 191 $ 855 $ 4,135 $ 19 $ 60 $ 6,184 Loans receivable $ 167,824 $ 3,867 $ 21,712 $ 6,580 $ 2,589 $ 4,807 $ 207,379 Ending balance individually evaluated for impairment 890 — 756 — — — 1,646 Ending balance collectively evaluated for impairment $ 166,934 $ 3,867 $ 20,956 $ 6,580 $ 2,589 $ 4,807 $ 205,733 The following tables summarize impaired loans as of March 31, 2022 and December 31, 2021: March 31, 2022 ​ Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized ($ in thousands) With no related allowance recorded SBA $ 951 $ 951 $ — $ 962 $ 48 Commercial, non-real estate — — — — — Residential real estate 200 200 — 100 — Strategic Program loans — — — — — Commercial real estate — — — — — Consumer — — — — — Total $ 1,151 $ 1,151 $ — $ 1,062 $ 48 15 Index 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 For the three months ending March 31, 2022 and December 31, 2021, there were no impaired loans with an allowance recorded. Nonaccrual and past due loans are summarized below as of March 31, 2022 and December 31, 2021: March 31, 2022 ($ 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 $ 126,894 $ 227 $ — $ — $ 227 $ 657 $ 127,778 Commercial, non-real estate 3,285 — — — — — 3,285 Residential real estate 30,572 — — 200 200 — 30,772 Strategic Program loans 100,105 981 573 159 1,713 1 101,819 Commercial real estate 4,187 — — — — — 4,187 Consumer 4,707 4 — — 4 — 4,711 Total $ 269,750 $ 1,212 $ 573 $ 359 $ 2,144 $ 658 $ 272,552 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 16 Index The amount of interest income for the three months ended March 31, 2022 and 2021, that was not recorded on nonaccrual loans was de minimis . 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 March 31, 2022 and December 31, 2021: March 31, 2022 ($ in thousands) Pass Grade 1-4 Special Mention Grade 5 Classified/ Doubtful/Loss Grade 6-8 Total SBA $ 125,366 $ 1,461 $ 951 $ 127,778 Commercial, non-real estate 3,285 — — 3,285 Residential real estate 30,572 — 200 30,772 Commercial real estate 4,187 — — 4,187 Consumer 4,711 — — 4,711 Not Risk Graded Strategic Program loans 101,819 Total at March 31, 2022 $ 168,121 $ 1,461 $ 1,151 $ 272,552 17 Index 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 Loans modified and recorded as TDR’s during the three months ended March 31, 2022 and March 31, 2021, consist of the following: ($ in thousands) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment March 31, 2022 SBA 1 $ 96 $ 96 Total at March 31, 2022 1 $ 96 $ 96 Non-Accrual SBA 1 $ 25 $ 25 March 31, 2021 SBA 3 $ 114 $ 114 Residential real estate 1 756 756 Total at March 31, 2021 4 $ 870 $ 870 Non-Accrual SBA 1 $ 53 $ 53 At March 31, 2022 and 2021, 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 three months ended March 31, 2022 and 2021 included modifications to rate and term. There was one principal charge-off recorded related to TDRs during the three months ended March 31, 2022 for $ 0.01 million. There were no principal charge-offs recorded related to TDRs during the three months ended March 31, 2021. 18 Index During the three months ended March 31, 2022 and 2021, there were no loan modifications to TDRs. Separately, one restructured loan incurred a default within 12 months of the restructure date and continues to be in default during the three months ended March 31, 2022. One restructured loan incurred a default within 12 months of the restructure date during the three months ended March 31, 2021. This same loan was paid in full with interest on May 28, 2021. Note 4 – Premises and Equipment Premises and equipment at March 31, 2022 and December 31, 2021, consist of the following: March 31, December 31, ​ 2022 2021 ($ in thousands) Leasehold improvements $ 80 $ 80 Furniture, fixtures, and equipment 2,437 2,219 Construction in progress 3,453 2,333 Total premises and equipment $ 5,970 $ 4,632 Less accumulated depreciation ( 1,439 ) ( 1,347 ) Premises and equipment, net $ 4,531 $ 3,285 Depreciation expense was approximately $ 0.1 million and $ 0.1 million for the three months ended March 31, 2022 and 2021, respectively. Lease Liabilities The Company leases its facilities under noncancelable operating leases. Rent expense for three months ended March 31, 2022 and 2021 was $ 0.2 million and $ 0.1 million, respectively. Future minimum annual rental payments for these operating leases are as follows ($ in thousands): Nine Months Ended December 31, 2022 $ 469 Year Ended December 31, 2023 850 Year Ended December 31, 2024 1,104 Year Ended December 31, 2025 1,086 Year Ended December 31, 2026 1,118 Year Ended December 31, 2027 1,152 Thereafter 2,203 Total 7,982 Less present value discount ( 596 ) Operating lease liabilities $ 7,386 The Company entered into one lease during the three months ended March 31, 2022 to provide additional space while the Murray office construction is completed. ASC 842 does not apply due to the short-term period of this lease and immateriality. The tables below present information regarding the Company’s lease assets and liabilities. Comparative periods and disclosures are not presented here due to adoption of ASC 842 on January 1, 2022. ​ Three Months Ended March 31, ​ 2022 Operating cash flows from operating leases (in thousands) $ 28 Weighted-average remaining lease term – operating leases (in years) 7.4 Weighted-average discount rate – operating leases 1.9 % 19 Index The components of lease expense were as follows (in thousands): ​ Three Months Ended March 31, 2022 (in thousands) Operating leases Operating lease cost $ 236 Variable lease cost 4 Operating lease expense 240 Short-term lease rent expense — Net rent expense $ 240 Note 5 – Deposits Major classes of deposits at March 31, 2022 and December 31, 2021, are as follows: ​ March 31, December 31, ​ 2022 2021 ($ in thousands) Demand $ 135,249 $ 115,947 Savings 7,089 6,685 Money markets 53,434 31,076 Time certificates of deposit 81,688 98,184 Total deposits $ 277,460 $ 251,892 At March 31, 2022, the scheduled maturities of time deposits are as follows ($ in thousands): Year Ended December 31, 2022 $ 24,444 Year Ended December 31, 2023 21,461 Year Ended December 31, 2024 16,156 Year Ended December 31, 2025 10,073 Year Ended December 31, 2026 8,676 Thereafter 878 Total 81,688 Time deposits with balances equal or greater than $ 250,000 totaled $ 3.5 million and $ 3.7 million at March 31, 2022 and December 31, 2021, 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 $ 256.3 million and $ 210.2 million at March 31, 2022 and December 31, 2021, respectively. The following table summarizes SBA servicing asset activity for the periods indicated: ​ For the Three Months Ended March 31, ($ in thousands) 2022 2021 Beginning balance $ 3,938 $ 2,415 Additions to servicing asset 1,408 856 Recovery on SBA servicing asset 59 — Amortization of servicing asset ( 180 ) ( 197 ) Ending balance $ 5,225 $ 3,074 The fair market value of the SBA servicing asset as of March 31, 2022 and December 31, 2021, was $ 5.23 million and $ 3.94 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. 20 Index The Company assumed a weighted average prepayment rate of 14.25 %, weighted average term of 4.26 years, and a weighted average discount rate of 9.70 % at March 31, 2022. 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. 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, 2021 and March 31, 2022, that the Bank meets all capital adequacy requirements to which it is subject. As of March 31, 2022 and December 31, 2021, 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 March 31, 2022 Leverage ratio (CBLR election) $ 74,437 19.1 % $ 35,057 * 9.0 % December 31, 2021 Leverage ratio (CBLR election) $ 65,503 17.7 % $ 31,442 * 8.5 % * 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 March 31, 2022 and December 31, 2021, 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. 21 Index 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. 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 March 31, 2022 and December 31, 2021, the Bank’s available line of credit with the FHLB to borrow in overnight funds was $ 3.9 million and $ 4.1 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 March 31, 2022 and December 31, 2021, no amounts were outstanding under the line of credit. Loans totaling $ 5.2 million and $ 5.4 million were pledged to secure the FHLB line of credit as of March 31, 2022 and December 31, 2021, respectively. Line of Credit At March 31, 2022 and December 31, 2021, we had the ability to access $ 9.6 million and $ 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 at March 31, 2022 and December 31, 2021. The Bank had an available line of credit with Bankers’ Bank of the West to borrow up to $ 1.05 million in overnight funds at March 31, 2022 and December 31, 2021. We had no outstanding balances on such unsecured or secured lines of credit as of March 31, 2022 and 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 $ 1.0 million of PPP loans as eligible collateral under the PPPLF borrowing arrangement at December 31, 2021. The Bank pledged $ 1.0 million of PPP loans as eligible collateral under the PPPLF borrowing arrangement at March 31, 2022. The average outstanding borrowings were $ 87.3 million during the three months ended March 31, 2021 and $ 1.0 million during the three months ended March 31, 2022. 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 March 31, 2022 and December 31, 2021, financial instruments with off-balance-sheet risk were as follows: ​ March 31, December 31, ($ in thousands) 2022 2021 Revolving, open-end lines of credit $ 1,224 $ 1,259 Commercial real estate 22,167 15,402 Other unused commitments 255 377 ​ $ 23,646 $ 17,038 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. 22 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 $ 0.1 million and $ 0.3 million for the three months ended March 31, 2022 and 2021, 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 13 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 March 31, 2022, 297,786 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 March 31, 2022, 29,712 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. 23 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. No option grants took place in the three months ended March 31, 2022. The following summarizes stock option activity for the three months ended March 31, 2022: ​ Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value Outstanding at December 31, 2021 862,488 $ 4.41 8.2 $ 8,088,660 Options exercised ( 16,800 ) 2.37 248,312 Options forfeited ( 6,660 ) 3.28 92,357 Outstanding at March 31, 2022 839,028 $ 4.46 8.0 $ 10,645,951 Options vested and exercisable at March 31, 2022 592,632 $ 4.58 8.0 $ 7,447,226 The weighted average grant-date fair value of options per share granted was $ 1.55 during the three months ended March 31, 2022. The aggregate intrinsic value of options exercised during the three months ended March 31, 2022 was $ 0.25 million. During the three months ended March 31, 2022, the Company received de minimis proceeds from the exercise of stock options and recognized a de minimis tax benefit from the exercise of stock options. Upon exercise of the stock options, the Company will issue new authorized shares. 24 Index Stock-based compensation expense The following tables present pre-tax and after-tax stock-based compensation expense recognized: ​ For the Three Months Ended March 31, ($ in thousands) 2022 2021 Pre-tax Stock options $ 39 $ 747 Restricted shares — 234 Total $ 39 $ 981 After-tax Stock options $ 38 $ 681 Restricted shares — 478 Total $ 38 $ 1,159 As of March 31, 2022, the Company had unrecognized stock-based compensation expense related to stock options of approximately $ 0.2 million, respectively, which is expected to be recognized over the remaining weighted average recognition period of 2.2 years. 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. 25 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. 26 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. ​ March 31, 2022 December 31, 2021 ($ in thousands) Level Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: Cash and cash equivalents 1 $ 116,646 $ 116,646 $ 85,754 $ 85,754 Investment securities held-to-maturity 2 10,986 10,263 11,423 11,332 Investment in FHLB stock 2 449 449 378 378 Loans held for investment 3 189,549 192,172 198,102 197,412 Loans held-for-sale 2 73,805 73,800 60,748 60,743 Accrued interest receivable 2 1,347 1,347 1,548 1,548 SBA servicing asset 2 5,225 5,225 3,938 3,938 Investment in BFG 3 5,400 5,400 5,900 5,900 Financial liabilities: Total deposits 2 277,460 265,883 251,892 249,488 Accrued interest payable 2 39 39 48 48 PPP Liquidity Facility 2 952 952 1,050 1,050 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 March 31, 2022 Nonrecurring assets Impaired loans $ 1,151 $ — $ — $ 1,151 December 31, 2021 Nonrecurring assets Impaired loans $ 972 $ — $ — $ 972 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. 27 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 as of March 31, 2022 and as of December 31, 2021, along with the valuation techniques used, are shown in the following table: ($ in thousands) Fair Value Valuation Technique Unobservable Input Range (Weighted Average) March 31, 2022 Impaired loans $ 1,151 Market comparable Adjustment to appraisal value 0.61 % ​ December 31, 2021 Impaired loans $ 972 Market comparable Adjustment to appraisal value 0.50 % Note 12 – Income Taxes The Company accounts for income taxes by recognizing deferred tax assets and liabilities based upon temporary differences between the amounts for financial reporting purposes and tax basis of its assets and liabilities. Deferred tax assets changed a de minimis amount from December 31, 2021 to March 31, 2022 as a result of changes to temporary timing differences associated with accounting for bad debts. Deferred tax assets are reduced by a valuation allowance when, in the opinion of management, it is more-likely-than-not that some portion, or all, of the deferred tax asset will not be realized. In assessing the realization of deferred tax assets, management evaluates both positive and negative evidence, including the forecasts of future income, applicable tax planning strategies, and assessments of current and future economic and business conditions. This analysis is updated quarterly and adjusted as necessary. Based on this analysis, management has determined that a valuation allowance for deferred tax assets was not required at March 31, 2022. For the three months ended March 31, 2022 and 2021, income tax expense was $ 3.2 million and $ 1.9 million, respectively, resulting in an effective income tax rate of 25.4 % and 26.7 %, respectively. The effective tax rate differs from the statutory rate of 26.0 % during the three months ended March 31, 2022 and 2021, respectively, due primarily to the tax effect of stock-based compensation. The Company had no unrecognized tax benefits at March 31, 2022. On March 27, 2020, the U.S. government enacted the CARES Act. Among other provisions, the CARES Act makes several modifications to federal net operating losses, including requiring a taxpayer with a net operating loss (“NOL”) arising in a taxable year beginning in 2018, 2019, or 2020 to carry that loss back to each of the five preceding years unless the taxpayer elects to waive or reduce the carryback. The Company did not generate NOLs in 2018, 2019 and 2020. 28 Index Note 13 – 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 March 31, 2022 and December 31, 2021. Total deposits from certain executive officers and directors and the companies with which they are associated were $ 0.9 million and $ 0.5 million as of March 31, 2022 and December 31, 2021, 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. 29 Index Note 14 – Earnings per Share The following table is a reconciliation of the components used to derive basic and diluted EPS for the three months ended March 31, 2022 and 2021 ($ in thousands, except share and per share amounts): ​ For the Three Months Ended March 31, ​ 2022 2021 Numerator: Net income $ 9,434 $ 5,291 Amount allocated to participating common shareholders (1) — ( 357 ) Net income allocate to common shareholders $ 9,434 $ 4,934 Denominator: Weighted average shares outstanding, basic 12,777,237 8,091,186 Weighted average effect of dilutive securities: Stock options 619,516 244,586 Warrants 170,558 — Weighted average shares outstanding, diluted 13,567,311 8,335,772 Earnings per share, basic $ 0.74 $ 0.61 Earnings per share, diluted $ 0.70 $ 0.59 (1) Represents earnings attributable to holders of unvested restricted stock issued outside of the Plan to the Company’s employees. There were 219,512 and 698,302 anti-dilutive options for March 31, 2022 and 2021 reported in the table above. There were 99,442 shares and 270,000 anti-dilutive warrants for March 31, 2022 and 2021 reported in the table above. Note 15 – 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 Three Months Ended March 31, ($ in thousands) 2022 2021 Interest income Interest income, not-in-scope Interest and fees on loans $ 13,156 $ 8,790 Interest on securities 39 6 Other interest income 28 10 Total interest income $ 13,223 $ 8,806 Non-interest income Non-interest income, in-scope Service charges on deposit accounts $ 8 $ 6 Strategic Program set up fees 49 — Non-interest income, not in-scope Strategic Program fees 6,166 2,873 Gain on sale of loans 5,052 2,603 SBA loan servicing fees 387 152 Change in fair value on investment in BFG ( 398 ) 360 Other miscellaneous income 10 5 Strategic Program service charges 408 80 Total non-interest income $ 11,682 $ 6,079 30 Index Note 16 – 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 May 16, 2022, which is the date the unaudited consolidated financial statements are available to be issued.