What changed in this filing

/stocks — the workspaceLOADING

Item 2. Management’s Discussion and Analysis

2022-11-14 compared with 2022-08-15 · 421 added, 427 removed, 563 unchanged (60% of the section changed)

11 unchanged sentences

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

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

The Company is a Utah corporation and the parent company of FinWise Bank.

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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.

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.

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.

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

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(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 “—Financial Condition”.

For a description and analysis of

the Company’s loan categories, see “—Financial Condition”.

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

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.

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

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:

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(ii) approved by the SBA before March 27, 2020;

and (iii) fully disbursed by September 27, 2020.

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 made 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.

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 made 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

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 which were completed in 2021.

As of December 31, 2021, the Bank had 30 qualifying SBA loans totaling approximately $4.5 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 June 30, 2022, 4 of the 30 qualifying SBA loans have been paid in full.

The remaining 26 loans are performing and total

approximately $4.0 million in SBA 7(a) unguaranteed balance.

As of June 30, 2022, none of the remaining 26 loans are entitled to additional Section 1112 payments.

We ceased originating PPP loans after 2020.

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 which were completed in 2021.

As of December 31, 2021, the Bank had 30 qualifying SBA loans totaling approximately $4.5 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 September 30, 2022, 4 of the 30 qualifying SBA loans have been paid in full.

remaining 26 loans are performing and total approximately $3.9 million in SBA 7(a) unguaranteed balance.

As of September 30, 2022, none of the remaining 26 loans are entitled to additional Section 1112 payments.

We ceased originating PPP loans

We believe the Bank’s diversified loan portfolio and associated revenue streams have enabled the Bank to withstand the adverse conditions relating to the Covid-19 pandemic.

For the three months ended

June 30, 2022 the provision for loan losses amounted to $2.9 million.

For the three months ended June 30, 2021, the provision for loan losses amounted to $1.5 million.

For the six months ended June 30, 2022 the provision for loan losses amounted to

$5.9 million.

For the six months ended June 30, 2021, the provision for loan losses amounted to $2.2 million.

While some of the adverse conditions relating to the Covid-19 pandemic began to reverse in 2021, 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.

September 30, 2022 the provision for loan losses amounted to $4.5 million.

For the three months ended September 30, 2021, the provision for loan losses amounted to $3.4 million.

For the nine months ended September 30, 2022 the provision for loan

losses amounted to $10.3 million.

For the nine months ended September 30, 2021, the provision for loan losses amounted to $5.5 million.

While some of the adverse conditions relating to the Covid-19 pandemic began to reverse in 2021, 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

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.

Results of Operations

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For the Three Months

Ended June 30,

For the Six Months

Ended June 30,

Ended September 30,

For the Nine Months

Ended September 30,

($ in thousands)

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Provision for income taxes

Net income for the three months ended June 30, 2022 was $5.5 million, a decrease of $2.2 million or 29.2% from net income of $7.7 million for the three months ended June 30, 2021.

The decrease was

primarily due to an increase of $3.9 million or 55.7% in non-interest expense and an increase of $1.4 million or 89.6% in provision for loan losses, partially offset by an increase of $1.9 million or 16.9% in interest income and a decrease of $0.8

million or 31.5% in provision for income taxes, as described below.

Net income for the six months ended June 30, 2022 was $14.9 million, an increase of $1.9 million or 14.5% from net income of $13.0 million for the six months ended June 30, 2021.

The increase was

primarily due to an increase of $6.3 million or 31.6% in interest income and an increase of $5.9 million or 41.2% in non-interest income, partially offset by an increase of $6.3 million or 46.0% in non-interest expense and an increase of $3.7 million

or 170.2% in provision for loan losses, as described below.

Net income for the three months ended September 30, 2022 was $3.7 million, a decrease of $4.7 million or 56.7% from net income of $8.4 million for the three months ended September 30, 2021.

The decrease was primarily due

to an increase of $1.1 million or 32.4% in provision for loan losses, an increase of $1.1 million or 14.5% in non-interest expense, a decrease of $1.0 million or 11.2% in non-interest income, and a decrease of $1.0 million or 6.7% in interest

income, as described below.

Net income for the nine months ended September 30, 2022 was $18.6 million, a decrease of $2.9 million or 13.5% from net income of $21.5 million for the nine months ended September 30, 2021.

decrease was primarily due to an increase of $7.4 million or 35.0% in non-interest expense and an increase of $4.8 million or 86.4% in provision for loan losses, partially offset by an increase of $5.4 million or 15.9% in interest income and an

increase of $4.9 million or 21.7% in non-interest income, as described below.

Net Interest Income and Net Interest Margin Analysis

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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 three months ended June 30, 2022, our net interest income increased $2.0 million, or 18.2%, to $12.8 million compared to the three months ended June 30, 2021.

This increase was primarily due to

growth in average interest earning assets and a decrease in our cost of funds.

Average interest earning assets increased by $72.1 million, or 24.0%, to $373.2 million for the three months ended June 30, 2022 compared to the three months ended June

30, 2021, while the related yield on average interest earning assets decreased by 84 basis points to 13.95%, resulting in interest income for the three months ended June 30, 2022 of $13.0 million.

A substantial increase in the average balances of

comparatively low yielding interest-bearing deposits, and a loan mix shift towards loans carrying lower yields within the Strategic Program held for sale portfolio during the three months ended June 30, 2022 contributed to the decrease in yield on

average interest earning assets for the period.

The corresponding cost of funds on interest bearing liabilities for the three months ended June 30, 2022 declined by 20 basis points to 0.76%, and the average balance in interest bearing liabilities

decreased by $11.0 million to $127.8 million, or 7.9%, compared to the prior year period.

Our ability to renew time deposits at lower rates 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 and the effect of decreased volumes of interest-bearing liabilities resulted in decreased interest expense for the three months ended June 30, 2022 to $0.2 million compared to $0.3 million for the prior year

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 three

months ended June 30, 2022, average outstanding balances under our PPPLF decreased compared to the three months ended June 30, 2021.

The decrease in funding from our PPPLF was partially offset by increases in deposits sourced through our brokered

deposit arrangements, Strategic Programs, national Institutional Deposit exchanges, branch, and SBA 7(a) borrowers compared to the three months ended June 30, 2021.

Our net interest margin decreased to 13.69% from 14.35% for the three months ended

June 30, 2022 and 2021, respectively.

For the six months ended June 30, 2022, our net interest income increased $6.5 million, or 33.8%, to $25.7 million compared to the six months ended June 30, 2021.

This increase was primarily due to

growth in average interest earning assets, an increase in asset yields, and a decrease in our cost of funds.

Average interest earning assets increased by $76.1 million, or 25.0%, to $380.4 million for the six months ended June 30, 2022 compared to

the six months ended June 30, 2021, while the related yield on average interest earning assets increased by 69 basis points to 13.79%, resulting in interest income for the six months ended June 30, 2022 of $26.2 million.

A substantial decrease in the

average balances of comparatively low yielding PPP loans and increase in average balances of Strategic Program held for sale loans during the six months ended June 30, 2022 contributed to the increase in yield on average interest earning assets for

The corresponding cost of funds on interest bearing liabilities for the six months ended June 30, 2022 declined by 15 basis points to 0.77%, and the average balance in interest bearing liabilities decreased by $23.2 million to $130.6

million, or 15.1%, compared to the prior year period.

Our ability to renew time deposits at lower rates 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

and the effect of decreased volumes of interest-bearing liabilities resulted in decreased interest expense for the six months ended June 30, 2022 to $0.5 million compared to $0.7 million for the prior year period.

For the six months ended June 30,

2022, average outstanding balances under our PPPLF decreased compared to the six months ended June 30, 2021.

The decrease in funding from our PPPLF was partially offset by increases in deposits sourced through our Strategic Programs, brokered

deposit arrangements, national Institutional Deposit exchanges, branch, and SBA 7(a) borrowers compared to the six months ended June 30, 2021.

Our net interest margin increased to 13.53% from 12.64% for the six months ended June 30, 2022 and 2021,

respectively.

For the three months ended September 30, 2022, our net interest income decreased $1.0 million, or 7.1%, to $12.5 million compared to the three months ended September 30, 2021.

This decrease was

primarily due to lower average loans held for sale balances.

Average loans held for sale balances decreased by $14.8 million or 22.6% to $50.5 million for the three months ended September 30, 2022 compared to the three months ended September 30,

Average interest earning assets increased by $41.0 million, or 14.0%, to $335.4 million for the three months ended September 30, 2022 compared to the three months ended September 30, 2021, while the related yield on average interest earning

assets decreased by 339 basis points to 15.30%, resulting in interest income for the three months ended September 30, 2022 of $12.8 million.

A loan mix shift towards loans carrying lower yields within the Strategic Program held for sale portfolio

during the three months ended September 30, 2022 contributed to the decrease in yield on average interest earning assets for the period.

The corresponding cost of funds on interest bearing liabilities for the three months ended September 30, 2022

increased by 24 basis points to 1.16%, and the average balance in interest bearing liabilities decreased by $16.5 million to $105.1 million, or 13.5%, compared to the prior year period.

The slight increase in cost of funds was primarily due to the

launch in September 2022 of demand deposits sourced through Lively, Inc., a Health Savings Account (HSA) provider, partially offset by the maturity of higher rate time deposits during 2022.

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, demand deposits sourced through Lively, Inc., Institutional Deposit exchanges, and brokered deposit arrangements.

For the three months ended September

30, 2022, average outstanding balances under our PPPLF decreased compared to the three months ended September 30, 2021, due primarily to the decrease in PPP loan balances.

Our net interest margin decreased to 14.93% from 18.31% for the three months

ended September 30, 2022 and 2021, respectively.

For the nine months ended September 30, 2022, our net interest income increased $5.5 million, or 16.9%, to $38.2 million compared to the nine months ended September 30, 2021.

This increase was

primarily due to growth in average interest earning assets and a decrease in our cost of funds, partially offset by a decline in asset yields.

Average interest earning assets increased by $64.3 million, or 21.4%, to $365.2 million for the nine

months ended September 30, 2022 compared to the nine months ended September 30, 2021, while the related yield on average interest earning assets decreased by 67 basis points to 14.26%, resulting in interest income for the nine months ended

September 30, 2022 of $39.1 million.

A substantial decrease in the average balances of comparatively low yielding PPP loans and increase in average balances of Strategic Program held for sale loans during the nine months ended September 30, 2022

contributed to the increase in yield on average interest earning assets for the period.

The corresponding cost of funds on interest bearing liabilities for the nine months ended September 30, 2022 declined by 4 basis points to 0.88%, and the

average balance in interest bearing liabilities decreased by $20.9 million to $122.1 million, or 14.6%, compared to the prior year period.

The maturity of higher rate time deposits during 2022 is the primary cause for the decline in the cost of

For the nine months ended September 30, 2022, average outstanding balances under our PPPLF decreased compared to the nine months ended September 30, 2021, due primarily to the decrease in PPP loan balances.

Our net interest margin decreased

to 13.96% from 14.49% for the nine months ended September 30, 2022 and 2021, respectively.

Average Balances and Yields .

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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 net fees of approximately $0.1 million (including de minimis

SBA fees related to PPP loans) and $1.2 million (including approximately $0.7 million in SBA fees related to PPP loans) included in interest income on loans for the three months ended June 30, 2022 and 2021, respectively.

Loan fees are included in

interest income on loans and represent a net cost of approximately $0.3 million (including de minimis SBA fees related to PPP loans) for the six months ended June 30, 2022, and $2.5 million (including

approximately $1.6 million in SBA fees related to PPP loans) of net loan fees are included in interest income on loans for the six months ended June 30, 2021.

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 net fees of approximately $0.2 million (including de

minimis SBA fees related to PPP loans) and $0.7 million (including approximately $0.2 million in SBA fees related to PPP loans) included in interest income on loans for the three months ended September 30, 2022 and 2021, respectively.

fees are included in interest income on loans and represent a net cost of approximately $0.1 million (including de minimis SBA fees related to PPP loans) for the nine months ended September 30, 2022, and

$3.2 million (including approximately $1.8 million in SBA fees related to PPP loans) of net loan fees are included in interest income on loans for the nine months ended September 30, 2021.

Average balances have been calculated using daily averages.

Three Months Ended June 30,

Three Months Ended September 30,

($ in thousands)

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Ratio of average interest-earning assets to average interest- bearing liabilities

Six Months Ended June 30,

Nine Months Ended September 30,

($ in thousands)

21 unchanged sentences

Rate/Volume Analysis.

The following table sets forth the

effects of changing rates and volumes on our net interest income based on average balances .

The rate column shows the effects attributable to changes in average rate.

The following table sets forth the effects of changing rates and volumes on our net interest income based on average balances.

column shows the effects attributable to changes in average rate.

The volume column shows the effects attributable to changes in average volume.

For purposes of this table,

changes attributable to changes in both average rate and average volume that cannot be segregated have

been allocated proportionally based on the changes due to rate and the changes due to volume.

For purposes of this table, changes attributable to changes in both average rate and average volume

that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.

($ in thousands)

Three Months Ended June 30,

Six Months Ended June 30,

Three Months Ended September 30,

Nine Months Ended September 30,

Increase (Decrease) Due to

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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 “—Financial Condition—Allowance for Loan Losses” and “—Critical Accounting Policies and Estimates.”

Our provision for loan losses was $2.9 million and $1.5 million for the three months ended June 30, 2022 and 2021, respectively.

Our provision for loan losses was $5.9 million and $2.2 million for the

six months ended June 30, 2022 and 2021, respectively.

The increase over both comparative periods was primarily due to substantial growth in unguaranteed loans.

The provision for loan losses is a charge to income to bring our ALL to a level deemed appropriate by management and approved by our 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 “—Financial Condition—Allowance for Loan Losses” and “—Critical Accounting Policies and

Our provision for loan losses was $4.5 million and $3.4 million for the three months ended September 30, 2022 and 2021, respectively.

Our provision for loan losses was $10.3 million and $5.5 million

for the nine months ended September 30, 2022 and 2021, respectively.

The increase over both comparative periods was primarily due to higher net charge-offs and growth in unguaranteed loans.

Noninterest Income

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For the Three Months

September 30,

($ in thousands)

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Total noninterest income

For the three months ended June 30, 2022, total noninterest income increased $0.3 million, or 3.3%, to $8.4 million compared to the three months ended June 30, 2021.

This increase was primarily due to

the increase in Strategic Program fees.

The increase in Strategic Program fees was mainly due to the increase in loan origination volume in the Strategic Program.

These increases were partially offset by a decrease in the fair value of the Company’s

investment in BFG due primarily to the softening of comparable company values used in determining BFG fair value.

For the Six Months

For the three months ended September 30, 2022, total noninterest income decreased $1.0 million, or 11.2%, to $7.5 million compared to the three months ended September 30, 2021.

This decrease was

primarily due to the decrease in gain on sale of loans.

The decrease in gain on sale of loans was mainly due to a decrease in the premium received for SBA 7(a) loans sold.

For the Nine Months

September 30,

($ in thousands)

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Total noninterest income

For the six months ended June 30, 2022, total noninterest income increased $5.9 million, or 41.2%, to $20.1 million compared to the six months ended June 30, 2021.

This increase was primarily due to the

increase in Strategic Program fees, gain on sale of loans, and SBA loan servicing fees.

For the nine months ended September 30, 2022, total noninterest income increased $4.9 million, or 21.7%, to $27.6 million compared to the nine months ended September 30, 2021.

This increase was

primarily due to the increase in Strategic Program fees and gain on sale of loans.

The increase in Strategic Program fees was primarily due to the increase in loan origination volume in the Strategic Program.

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 six months ended June 30, 2022.

The increase in SBA loan servicing fees was primarily due to the increase in SBA 7(a) loans serviced for others during the

These increases were partially offset by a decrease in the fair value of the Company’s investment in BFG due primarily to the softening of comparable company values used in determining BFG fair value.

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 nine months ended September 30, 2022.

These increases were partially offset by a decrease in the fair value of the Company’s investment in BFG due primarily to the

softening of comparable company values used in determining BFG fair value.

Noninterest Expense

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For the Three Months

September 30,

Noninterest expense:

Salaries and employee benefits

Professional Services

Occupancy and equipment expenses

Impairment of SBA servicing asset

(Recovery) impairment of SBA servicing asset

Other operating expenses

Total noninterest expense

For the three months ended June 30, 2022, total noninterest expense increased $3.9 million, or 55.7%, to $11.0 million compared to the three months ended June 30, 2021.

This increase was primarily due

to the increase in salaries and employee benefits, impairment of the Company’s SBA servicing asset, and other operating expenses.

For the three months ended June 30, 2022, salaries and employee benefits increased $1.7 million, or 30.9%, to $7.2

million compared to the three months ended June 30, 2021.

This increase was primarily due to the increased number of employees as compared to the three months ended June 30, 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 2022.

For the three months ended June 30, 2022, an impairment of the Company’s SBA servicing asset was recognized for $1.1 million due primarily to rising market interest rates and market-wide increasing prepayment speeds on SBA loans.

For the three months ended June 30, 2022, other operating expense increased $0.9 million, or 64.5%, to $2.3 million compared to the three months ended June 30, 2021.

This increase was primarily due to increased legal and professional fees.

For the three months ended September 30, 2022, total noninterest expense increased $1.1 million, or 14.5%, to $8.5 million compared to the three months ended September 30, 2021.

This increase was

primarily due to the increase in professional services, partially offset by a reduction in salaries and employee benefits.

For the three months ended September 30, 2022, professional services increased $1.4 million, or 572.3%, to $1.7 million

compared to the three months ended September 30, 2021.

This increase was primarily due to an increase in consulting fees as well as legal and audit fees.

For the three months ended September 30, 2022, salaries and employee benefits decreased $0.8

million, or 13.4%, to $5.1 million compared to the three months ended September 30, 2021.

This decrease was primarily due to the cessation in June 2022 of commission accruals related to the Company’s strategic lending program.

($ in thousands)

For the Six Months

For the Nine Months

September 30,

Noninterest expense:

Salaries and employee benefits

Professional Services

Occupancy and equipment expenses

Impairment of SBA servicing asset

(Recovery) impairment of SBA servicing asset

Other operating expenses

Total noninterest expense

For the six months ended June 30, 2022, total noninterest expense increased $6.3 million, or 46.0%, to $20.1 million compared to the six months ended June 30, 2021.

This increase was primarily due to

the increase in salaries and employee benefits, impairment of the Company’s SBA servicing asset, and other operating expenses.

For the six months ended June 30, 2022, salaries and employee benefits increased $3.9 million, or 37.5%, to $14.3 million

compared to the six months ended June 30, 2021.

This increase was primarily due to the increased number of employees as compared to the six months ended June 30, 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

For the six months ended June 30, 2022, an impairment of the Company’s SBA servicing asset was recognized for $1.1 million due primarily to rising market interest rates and market-wide increasing prepayment speeds on SBA loans.

months ended June 30, 2022, other operating expense increased $1.0 million, or 34.9%, to $4.0 million compared to the six months ended June 30, 2021.

This increase was primarily due to increased legal and professional fees.

For the nine months ended September 30, 2022, total noninterest expense increased $7.4 million, or 35.0%, to $28.5 million compared to the nine months ended September 30, 2021.

This increase was

primarily due to the increase in professional services, salaries and employee benefits, and impairment of the Company’s SBA servicing asset.

For the nine months ended September 30, 2022, professional services increased $3.1 million, or 404.6%, to

$3.8 million compared to the nine months ended September 30, 2021.

This increase was primarily due to increased consulting fees as well as legal and audit fees.

For the nine months ended September 30, 2022, salaries and employee benefits increased

$2.4 million, or 14.5%, to $18.7 million compared to the nine months ended September 30, 2021.

This increase was primarily due to the increased number of employees as compared to the nine months ended September 30, 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 the first half of 2022.

For the nine months ended September 30, 2022, an impairment of the Company’s SBA servicing asset was recognized for $0.9 million due primarily to rising market interest

rates and market-wide increasing prepayment speeds on SBA loans.

Financial Condition

Loan Portfolio

We manage our loan portfolio based on factors that include concentrations per loan program and aggregated portfolio, industry selection and geographies.

We manage our loan portfolio based on factors that include concentrations per loan program and aggregated portfolio, industry of operation and geographies.

We also monitor the impact of identified and

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SBA 7(a) loans are made to small businesses and professionals throughout the USA.

As of June 30, 2022

As of September

30, 2022 and December 31, 2021, we had total SBA 7(a) loans of $126.8 million and $141.3 million, respectively, representing 49.3% and 53.2% of our total loans, respectively.

Loans are sourced primarily through our referral relationship with 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.

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

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.

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.

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.

In light of suppressed gain-on-sale premiums and increasing variable loan rates during 2022, we plan to keep on our balance sheet a greater

amount of the guaranteed portion of certain SBA loans that we originate, which we believe will benefit the Company through stronger government guaranteed held for investment loan growth and an increased recurring stream of interest income and

partially offset the expected decline of gain-on-sale revenue.

SBA Paycheck Protection Program Loans

As of June 30, 2022 and December 31, 2021, we had total PPP loans of $0.7 million and $1.1 million, respectively, representing 0.3% and 0.4% 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 three months ended June 30, 2021, the Company recognized a total of $0.7 million in PPP-related accreted fees ($0.6 million of which were accelerated due to loan forgiveness).

A de minimis amount was recognized during the three months ended June 30, 2022 and a de minimis amount of deferred fees remained as of June 30, 2022.

For the six months ended June 30, 2021,

the Company recognized a total of $1.6 million in PPP-related accreted fees ($1.2 million of which were accelerated due to loan forgiveness).

A de minimis amount was recognized during the six months ended

June 30, 2022 and a de minimis amount of deferred fees remained as of June 30, 2022.

As of September 30, 2022 and December 31, 2021, we had total PPP loans of $0.7 million and $1.1 million, respectively, representing 0.3% and 0.4% 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 three months ended September 30, 2021, the Company recognized a total of $0.2 million in PPP-related accreted fees ($0.2 million of which were accelerated due to loan forgiveness).

A de minimis amount was recognized during the three months ended September 30, 2022 and a de minimis amount of deferred fees remained as of September 30, 2022.

nine months ended September 30, 2021, the Company recognized a total of $1.8 million in PPP-related accreted fees ($1.4 million of which were accelerated due to loan forgiveness).

A de minimis amount was

recognized during the nine months ended September 30, 2022 and a de minimis amount of deferred fees remained as of September 30, 2022.

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 June 30, 2022 and December 31, 2021, we had total commercial

As of September 30, 2022 and December 31, 2021, we had total commercial

non-real estate loans of $13.0 million and $3.4 million, respectively, representing 5.1% and 1.3% of our total loans, respectively.

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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.

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.

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residential buildings, and loans secured by other residential real estate.

As of June 30, 2022 and December 31, 2021, we had total residential real estate loans of $31.0 million and $27.1 million, respectively, representing 13.3% and 10.2% of our

total loans, respectively.

As of September 30, 2022 and December 31, 2021, we had total residential real estate loans of $34.5 million and $27.1 million, respectively, representing 13.4% and 10.2% 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.

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.

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.

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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.

June 30, 2022 and December 31, 2021, we had total Strategic Program loans of $59.1 million and $85.9 million, respectively, representing 25.5% and 32.3% 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.

of September 30, 2022 and December 31, 2021, we had total Strategic Program loans of $70.3 million and $85.9 million, respectively, representing 27.4% and 32.3% 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.

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We have generally sold most of these loans, but as our capital grows, 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 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.

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purposes, secured by real estate primarily located in the Salt Lake City, Utah MSA, but not for personal expenditure purposes.

As of June 30, 2022 and December 31, 2021, we had total commercial real estate loans of $4.7 million and $2.4 million,

respectively, representing 2.0% and 0.9% 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.

As of September 30, 2022 and December 31, 2021, we had total commercial real estate loans of $6.1 million and $2.4

million, respectively, representing 2.4% and 0.9% 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.

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including other approved merchant or dealer relationships and lending platforms.

As of June 30, 2022 and December 31, 2021, we had total consumer loans of $5.1 million and $4.6 million, respectively, representing 2.2% and 1.7% of our total loans,

respectively.

As of September 30, 2022 and December 31, 2021, we had total consumer loans of $5.4 million and $4.6 million, respectively, representing 2.1% and 1.7% 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

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.

Loan officers, at their discretion, may make exceptions to this ratio if the loan is within their authorized lending

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

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.

On larger loans, we may file a Uniform Commercial Code

financing form.

Historically, we have retained these loans on our balance sheet for investment.

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Through our diversification efforts, 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.

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.

The following table summarizes our loan portfolio by loan program as of the dates indicated:

As of June 30,

As of September 30,

As of December 31,

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Commercial real estate

(1) The amount of SBA loans as of June 30, 2022 and December 31, 2021 includes approximately $0.7 million and $1.1 million of PPP loans.

SBA loans as of June 30, 2022 and December 31, 2021 include $46.0

million and $75.7 million, respectively, of SBA 7(a) loan balances that are guaranteed by the SBA.

(1) The amount of SBA loans as of September 30, 2022 and December 31, 2021 includes approximately $0.7 million and $1.1 million of PPP loans.

SBA loans as of September 30, 2022 and December 31, 2021

include $42.6 million and $75.7 million, respectively, of SBA 7(a) loan balances that are guaranteed by the SBA.

Loan Maturity and Sensitivity to Changes in Interest Rates

As of June 30, 2022, including the impact of PPP loans, $113.8 million, or 56.7%, of the total held for investment loan balance matures in less than five years.

Loans maturing in greater than five years

totaled $86.7 million as of June 30, 2022.

The variable rate portion of our total held for investment loan portfolio at June 30, 2022 was $151.2 million, or 75.4%.

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.

As of September 30, 2022, including the impact of PPP loans, $121.2 million, or 56.9%, of the total held for investment loan balance matures in less than five years.

Loans maturing in greater than

five years totaled $92.0 million as of September 30, 2022.

The variable rate portion of our total held for investment loan portfolio at September 30, 2022 was $159.0 million, or 74.6%.

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%.

The variable rate portion of our total held for

investment loan portfolio at December 31, 2021 was $163.8 million, or 79.9%.

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 June 30, 2022 and December 31, 2021:

At June 30, 2022

The following tables detail maturities and sensitivity to interest rate changes for our loan portfolio at September 30, 2022 and December 31, 2021:

At September 30, 2022

Remaining Contractual Maturity Held for Investment

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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”.

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.

June 30, 2022, six PPP loans have been granted maturity date extensions.

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

As of September 30, 2022, six PPP loans have been granted maturity date extensions.

At December 31, 2021

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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”.

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.

December 31, 2021, three PPP loans have been granted maturity date extensions.

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

As of December 31, 2021, three PPP loans have been granted maturity date extensions.

Nonperforming Assets

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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.

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)

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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.

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.

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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.

We have established underwriting guidelines to be followed by our loan officers, and we also monitor our delinquency levels for any negative or adverse

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.

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($ in thousands)

June 30, 2022

September 30, 2022

December 31, 2021

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Total nonperforming assets and troubled debt restructurings to total assets

Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans) (1)

(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 June 30, 2022 and December 31, 2021 was $0.7 million and $0.8 million.

Total nonperforming assets at June 30, 2022 and December 31,

2021 were composed of $0.6 million and $0.7 million in nonaccrual loans and $0.1 million of troubled debt restructurings.

Our total nonperforming assets and troubled debt restructurings at September 30, 2022 and December 31, 2021 was $0.1 million and $0.8 million.

Total nonperforming assets at September 30, 2022 and

December 31, 2021 were composed of $0.0 million and $0.7 million in nonaccrual loans and $0.1 million of troubled debt restructurings.

We do not classify loans that experience insignificant payment delays and payment shortfalls as impaired.

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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.

Interest income that would have been recorded for the six months ended June 30, 2022 and 2021 had nonaccrual loans been current throughout the period amounted to de

minimis amounts for each period.

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.

Interest income that would have been recorded for the nine months ended September 30, 2022 and 2021 had nonaccrual loans been current throughout the period amounted to de minimis amounts for each period.

Credit Risk Profile

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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

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.

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

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.

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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.

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.

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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.

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.

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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

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.

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.

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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

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

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 June 30, 2022

As of September 30, 2022

($ in thousands)

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Strategic Program loans (1)

(1) The Strategic Program loan balance includes $31.6 million and $60.7 million of loans classified as held-for-sale as of June 30, 2022 and December 31, 2021, respectively.

(1) The Strategic Program loan balance includes $43.6 million and $60.7 million of loans classified as held-for-sale as of September 30, 2022 and December 31, 2021, respectively.

Allowance for Loan Losses

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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.

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.

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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.

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.

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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.

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

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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.

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.

This component represents a valuation allowance on the remainder of the loan portfolio, after excluding impaired

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;

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.

The ALL was $10.6 million at June 30, 2022 compared to $9.9 million at December 31, 2021, an increase of $0.7 million, or 7.6%.

The increase was primarily due to increased unguaranteed loan balances.

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.

The ALL was $12.0 million at September 30, 2022 compared to $9.9 million at December 31, 2021, an increase of $2.1 million, or 21.4%.

The increase was primarily due to higher net charge-offs and

increased unguaranteed loan balances.

The following table presents a summary of changes in the ALL for the periods and dates indicated:

For the Three Months

For the Six Months

September 30,

For the Nine Months

September 30,

($ in thousands)

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The ALL related to Strategic Programs constitutes 59.7% and 66.5% of

the total ALL while comprising 25.5% and 32.3% of total loans as of June 30, 2022 and December 31, 2021, respectively.

the total ALL while comprising 27.4% and 32.3% of total loans as of September 30, 2022 and December 31, 2021, respectively.

This reflects the increased credit risks associated with certain retained Strategic Program loans.

June 30, 2022

September 30, 2022

($ in thousands)

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The following tables reflect the ratio of the ALL to nonperforming loan balances and net charge-offs to average loans outstanding by loan category, for the periods presented.

Due primarily to some

normalization of credit losses to pre-pandemic market conditions, the ratio of net charge-offs to average loans outstanding was generally higher for loan categories in the three months ended June 30, 2022 as compared to the three months ended June

The increase in the ratio for Strategic Programs loans, Commercial non-real estate loans, and SBA loans was primarily due to increases in net charge-offs in the three months ended June 30, 2022.

Due primarily to some normalization of credit

losses to pre-pandemic market conditions, the ratio of net charge-offs to average loans outstanding was generally higher for loan categories in the six months ended June 30, 2022 as compared to the six months ended June 30, 2021.

The increase in the

ratio for Strategic Programs loans and Commercial non-real estate loans was primarily due to increases in net charge-offs in the six months ended June 30, 2022 while the decrease in Consumer loans was primarily due to lower net charge-off amounts in

the six months ended June 30, 2022.

Due primarily to the

normalization of credit losses to pre-pandemic market conditions, the ratio of net charge-offs to average loans outstanding was generally higher for loan categories in the three months ended September 30, 2022 as compared to the three months ended

September 30, 2021.

The increase in the ratio for Strategic Programs loans and Consumer loans was primarily due to increases in net charge-offs in the three months ended September 30, 2022.

The increase in the ratio for SBA loans in the three

months ended September 30, 2022 was primarily due to the charge-off of loans previously carried as classified assets.

Due primarily to the normalization of credit losses to pre-pandemic market conditions, the ratio of net charge-offs to average

loans outstanding was generally higher for loan categories in the nine months ended September 30, 2022 as compared to the nine months ended September 30, 2021.

The increase in the ratio for Strategic Programs loans was primarily due to increases in

net charge-offs in the nine months ended September 30, 2022 and the increase in the ratio for SBA loans was primarily due to the charge-off of loans previously carried as classified assets in the nine months ended September 30, 2022.

For the Three Months

For the Six Months

September 30,

For the Nine Months

September 30,

Net charge-offs to average loans outstanding by loan category

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Commercial real estate

September 30,

ALL to nonperforming loans

Interest-Bearing Deposits in Other Banks

Our interest-bearing deposits in other banks increased to $96.1 million at June 30, 2022 from $85.3 million at December 31, 2021, an increase of $10.8 million, or 12.6%.

This increase was primarily due

to a decrease in loan balances.

Our interest-bearing deposits in other banks increased to $92.1 million at September 30, 2022 from $85.3 million at December 31, 2021, an increase of $6.8 million, or 7.9%.

This increase was primarily

due to a decrease in held-for-sale loan balances.

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.

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.

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

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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 June 30, 2022, and the amortized cost of those securities as of the indicated dates.

At June 30, 2022

The following tables summarize the contractual maturities and weighted average yields of investment securities at September 30, 2022, and the amortized cost of those securities as of the indicated

At September 30, 2022

One Year or Less

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Mortgage-backed securities

At June 30, 2022

At September 30, 2022

After Five to Ten Years Weighted

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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 six months ended June 30, 2022 and June 30, 2021.

At June 30, 2022, there were 15 securities, consisting of six collateralized mortgage obligations and nine mortgage-backed securities.

All of these securities were in an unrealized loss position as of

June 30, 2022.

There were no calls, sales or maturities of securities during the nine months ended September 30, 2022 and September 30, 2021.

At September 30, 2022, there were seventeen securities, consisting of seven collateralized mortgage obligations and ten mortgage-backed securities.

All of these securities were in an unrealized loss

position as of September 30, 2022.

There were nine securities in an unrealized loss position as of December 31, 2021.

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 offer a variety of deposit products including interest and noninterest bearing demand accounts, HSA demand deposits sourced through Lively, Inc., 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.

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.

The following table presents the end of period and average balances and for the periods indicated (average balances have been calculated using daily averages):

June 30, 2022

September 30, 2022

December 31, 2021

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Three Months Ended

June 30, 2022

September 30, 2022

December 31, 2021

June 30, 2021

September 30, 2021

($ in thousands)

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Total average deposits

Six Months Ended

June 30, 2022

June 30, 2021

Nine Months Ended

September 30, 2022

September 30, 2021

($ in thousands)

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Total average deposits

Our deposits decreased to $219.4 million at June 30, 2022 from $251.9 million at December 31, 2021, a decrease of $32.5 million, or 12.9%.

This decrease was primarily due to the decline in our Strategic Program loan program.

Our deposits decreased to $232.8 million at September 30, 2022 from $251.9 million at December 31, 2021, a decrease of $19.1 million, or 7.6%.

This decrease was primarily due to the decline in our

Strategic Program loan program.

Our Interest-bearing demand deposits increased to $55.2 million at September 30, 2022 from $5.4 million at December 31, 2021, an increase of $49.8 million, or 921.5%.

This increase was primarily due to new HSA

deposits from Lively, Inc.

As an FDIC-insured institution, our deposits are insured up to applicable limits by the DIF of the FDIC.

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accounts and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000.

Our total uninsured deposits were $128.3 million and $163.7 million as of June 30, 2022 and December 31, 2021, respectively.

maturity profile of our uninsured time deposits, those amounts that exceed the FDIC insurance limit, at June 30, 2022 is as follows:

June 30, 2022

Our total uninsured deposits were $129.3 million and $163.7 million as of September 30, 2022 and December 31, 2021,

respectively.

The maturity profile of our uninsured time deposits, those amounts that exceed the FDIC insurance limit, at September 30, 2022 is as follows:

September 30, 2022

($ in thousands)

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The net proceeds less $0.5 million in other related expenses, including legal fees totaled $35.6 million.

On August 18, 2022, the Company announced that the Board has authorized, effective August 16, 2022, a common stock repurchase program to purchase up to 644,241 shares of the Company’s common stock in

the aggregate.

The repurchase program expires on August 31, 2024, but may be limited or terminated at any time without prior notice.

The repurchase program does not obligate the Company to purchase any particular number of shares.

The Company has

repurchased 20,000 shares for approximately $0.2 million as of September 30, 2022 and retired them at cost.

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.

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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.

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

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 evaluate new, core deposit products and in 2022, we launched an HSA deposit product sourced through Lively, Inc.

We intend to have various term offerings to match our funding needs.

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

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Liquid assets, defined as cash and due from banks and interest bearing deposits, were 24.0% of total

assets at June 30, 2022.

assets at September 30, 2022.

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 June 30, 2022, we had the ability to

access $10.0 million from the Federal Reserve Bank’s Discount Window on a collateralized basis.

At September 30, 2022, we had the

ability to access $10.1 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.

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 $3.2 million line of credit with Federal Home Loan Bank, secured by specific pledged loans.

We had no outstanding balances on such unsecured or secured lines of

credit as of June 30, 2022.

In long term borrowings, we had $0.4 million outstanding at June 30, 2022 related to the PPPLF.

We had no outstanding balances on such unsecured or

secured lines of credit as of September 30, 2022.

In long term borrowings, we had $0.3 million outstanding at September 30, 2022 related to the PPPLF.

The PPPLF is secured by pledged PPP loans.

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The levels of these assets depend on our operating, financing, lending and investing activities during any given period.

At June 30, 2022, liquid

assets (defined as cash and due from banks and interest bearing deposits), consisting of cash and due from banks, totaled $96.5 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.

At September 30, 2022,

liquid assets (defined as cash and due from banks and interest bearing deposits), consisting of cash and due from banks, totaled $92.5 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 $15.1 million to $130.5 million at June 30, 2022 compared to $115.4 million at December 31, 2021.

The increase in shareholders’ equity was primarily attributable to net

income recognized of $14.9 million.

Stock options exercised, and stock-based compensation increased additional paid-in capital aggregately by approximately $0.2 million.

Shareholders’ equity increased $18.9 million to $134.3 million at September 30, 2022 compared to $115.4 million at December 31, 2021.

The increase in shareholders’ equity was primarily attributable to

net income recognized of $18.6 million.

Stock options exercised, and stock-based compensation increased additional paid-in capital aggregately by approximately $0.5 million while the repurchase of common stock reduced additional paid-in capital by

approximately $0.2 million.

We use several indicators of capital strength.

The most commonly used measure is average common equity to average assets, which was 32.3% and 18.2% for the three months ended June 30, 2022 and 2021,

The most commonly used measure is average common equity to average assets, which was 35.2% and 20.7% for the three months ended September 30, 2022 and

2021, respectively.

Average common equity to average assets was 33.0% and 17.5% for the six months ended June 30, 2022 and 2021, respectively.

Our return on average equity was 17.2% and 55.0% for the three months ended June 30, 2022 and 2021, respectively.

Our return on average assets was 5.5% and 10.0% for the three months ended June 30, 2022

Average common equity to average assets was 32.6% and 17.5% for the nine months ended September 30, 2022 and 2021, respectively.

Our return on average equity was 11.0% and 52.2% for the three months ended September 30, 2022 and 2021, respectively.

Our return on average assets was 3.9% and 10.8% for the three months ended

September 30, 2022 and 2021, respectively.

Our return on average equity was 19.8% and 49.8% for the nine months ended September 30, 2022 and 2021, respectively.

Our return on average assets was 6.5% and 8.7% for the nine months ended September 30,

2022 and 2021, respectively.

Our return on average equity was 24.3% and 49.1% for the six months ended June 30, 2022 and 2021, respectively.

Our return on average assets was 8.0% and 8.6% for the six months ended June 30, 2022 and 2021, 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

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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.

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.

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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.

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.

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temporarily amended by Section 4012 of the CARES Act, the Bank must maintain a leverage ratio greater than 8.5% for 2021 and 9.0% for 2022.

As of June 30, 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 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.

As of September 30, 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 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:

September 30,

Capital Ratios

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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 June 30, 2022.

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 September 30, 2022.

($ in thousands)

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($ in thousands)

As of June 30,

As of September 30,

As of December 31,

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Critical Accounting Policies and Estimates

The accompanying management’s discussion and analysis of results of operations and financial condition is based upon our unaudited interim consolidated financial statements, which have been prepared in

accordance with GAAP.

in accordance with GAAP.

The preparation of these financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure 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.

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.

There have been no

significant changes during the six months ended June 30, 2022 to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2021 Form

been no significant changes during the nine months ended September 30, 2022 to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”

in the 2021 Form 10-K.

Accounting policies, as described in detail in the notes to our consolidated financial statements, included in the 2021 Form 10-K, are an integral part of our financial statements.

understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position.

We believe that those critical accounting policies and estimates 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.

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.

This non-GAAP financial measure is “total nonperforming assets and troubled debt

restructurings to total assets (less PPP loans).” Our management uses this non-GAAP financial measures in its analysis of our performance.

“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)

($ in thousands)

June 30, 2022

December 31, 2021

Total nonperforming assets and troubled debt restructuring

Total assets less PPP loans

Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans)

We believe that those critical accounting policies and estimates 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.

Quantitative and Qualitative Disclosures About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis