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Item 7. Management’s Discussion and Analysis

2023-03-30 compared with 2022-03-30 · 332 added, 1932 removed, 515 unchanged (81% of the section changed)

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thereto and other financial information included elsewhere in this Report.

In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions that could cause

actual results to differ materially from our expectations.

Factors that could cause such differences are discussed in the sections entitled “Risk Factors,” “Cautionary Note Regarding Forward-Looking Statements” and elsewhere in this Report.

no obligation to update any of these forward-looking statements except to the extent required by law.

The following discussion pertains to our historical results, on a consolidated basis.

However, because we conduct all our material business operations through our wholly owned

subsidiary, FinWise Bank, the discussion and analysis relates to activities primarily conducted at the subsidiary level.

For a discussion of trends, uncertainties and risks that will or could impact the Company’s businesses, results of operations and financial condition during 2022, see “Principal

Factors Affecting Our Results of Operations,” and “Principal Factors Affecting Our Financial Condition.”

All dollar amounts in the tables in this section are in thousands of dollars, except per share data or where otherwise specifically noted.

Unless otherwise stated, all

information in this Report gives effect to a six-for-one stock split of our common stock completed effective July 26, 2021.

The effect of the stock split on outstanding shares and per share figures has been retroactively applied to all periods

presented in this Report.

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

The Company’s assets consist primarily of its investment in the Bank and all of its material business activities are

conducted through the Bank.

The Company is a registered bank holding company that is subject to supervision by the UDFI and the Federal Reserve.

As a Utah state-chartered bank that is not a member of the Federal Reserve System, the Bank is separately

subject to regulations and supervision by both the UDFI and the FDIC.

The Bank’s deposits are federally insured up to the maximum legal limits.

See “Supervision and Regulation.”

Our banking business is our only business line.

Our banking business offers a diverse range of commercial and retail banking products and services, and consists primarily of originating loans in a

variety of sectors.

Attracting nationwide deposits from the general public, businesses and other financial institutions, and investing those deposits, together with borrowings and other sources of funds, is also critical to our banking business.

While our commercial and residential real estate lending and other products and services offered from our branch continue to be concentrated in and around the Salt Lake City, Utah MSA, our third-party loan origination relationships have allowed us to

expand into new markets across the United States.

These relationships were developed to support our ability to generate significant loan volume across diverse consumer and commercial markets and have been the primary source of our significant growth

and superior profitability.

Our analytics platform, FinView™, enhances our ability to gather and interpret performance data for our originations and provides management with an ability to identify attractive, risk-adjusted sectors for growth.

insights coupled with the billions of dollars in originations funded annually and our ability to sell loans or retain for investment enhance our unique position.

Our track record has demonstrated that these qualities deliver superior growth and

profitability and that the flexibility inherent in our model enhances our ability to manage credit risk.

Our financial condition and results of operations depend primarily on our ability to (i) originate loans using our strategic relationships with third-party loan origination platforms to earn

interest and noninterest income, (ii) utilize FinView™ to identify attractive risk-adjusted lending opportunities and inform the selection of loans for investment while limiting credit losses, (iii) attract and retain low cost, stable deposits, and

(iv) efficiently operate in compliance with applicable regulations.

Our lending focuses on four main lending areas:

(i) SBA 7(a) loans, (ii) Strategic Programs, (iii) residential and commercial real estate and (iv) consumer lending.

For a description and analysis

of the Company’s loan categories, see “—Principal Factors Affecting Our Financial Condition”.

Covid 19 Pandemic

Since March 2020, our nation has experienced a massive health and economic crisis as a result of the Covid-19 pandemic, which continues to negatively impact the health and finances of millions of

people and businesses and have a pronounced impact on the global and national economy.

To control the spread of the Covid-19 virus, governments around the world instituted widespread shutdowns of the economy which resulted in record unemployment in a

matter of weeks.

The economic turbulence spawned by the Covid-19 pandemic left many banks with potential credit quality and income issues.

These issues are further compounded by uncertainties regarding the length, depth and possible resurgence of the

pandemic and its ultimate long-term effects on the economy.

In an effort to reduce the impact of economic shutdowns, the United States Congress has passed the CARES Act, the Economic Aid to Hard-Hit Small Businesses, Nonprofits, and Venues Act, the

Consolidated Appropriations Act, 2021, and recently the American Rescue Plan Act of 2021.

These relief measures have provided stimulus payments to individuals, expanded unemployment benefits, and created programs that provided critical financing to

small businesses through products such as the EIDL and the PPP, both of which are being administered by the SBA.

Additionally, the United States government agreed to make six months of payments on SBA loans and increase the SBA guaranty on SBA 7(a)

loans to 90% for loans originated from February 1, 2020 through September 30, 2021.

The SBA has made the full monthly P&I payments with respect to our qualifying SBA 7(a) customers in “regular servicing” status for six months.

For most of our SBA

portfolio (the legacy loans), the SBA made borrowers’ principal and interest payments from April 2020 through September 2020.

These were officially referred to as First Round Section 1112 Payments, as they derived from Section 1112 of the CARES Act.

To be eligible for the full six months of First Round Section 1112 Payments, the SBA loans were required to be:

(i) in “regular servicing” status;

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

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

the Economic Aid Act, the SBA will make an additional two payments for eligible SBA customers, capped at $9,000 per month per loan.

Borrowers with loan payments above $9,000 per month are responsible for paying the difference.

For our legacy

portfolio, the SBA will make payment on the lesser of a borrower’s monthly principal and interest payment or $9,000 per month from February 2021 through March 2021.

These are referred to as Second Round Section 1112 Payments.

The SBA released a list of NAICS codes deemed to have been particularly affected by the Covid-19 pandemic.

SBA customers who met all other Section 1112 qualifying criteria and operated within

certain NAICS codes, are entitled to an additional three months of payments.

As of December 31, 2020, the Bank had 35 qualifying SBA loans totaling approximately $4.9 million in SBA 7(a) unguaranteed balance that received an additional three months

of Second Round Section 1112 Payments, which were capped at $9,000 per month and per loan.

As of December 31, 2021, 5 of the 35 qualifying SBA loans have been paid in full.

The remaining 30 loans are all performing and total approximately $4.5

million in SBA 7(a) unguaranteed balance.

As of December 31, 2021, none of the remaining 30 loans are entitled to additional Section 1112 payments.

We participated in the first round of PPP lending and provided PPP loans to approximately 700

businesses totaling approximately $126.6 million during the year ended December 31, 2020.

No PPP loans were originated by the Company during the year ended December 31, 2021.

We believe the Bank’s diversified loan portfolio and associated revenue streams have enabled the Bank to sustain and grow its business despite the adverse conditions relating to the Covid-19

During the first and second quarters of 2020, we recorded higher than normal provisions to position ourselves for the possibility of elevated losses on loans resulting from the pandemic.

The provision amounts reflected our early uncertainty

surrounding the impact of the pandemic.

Provisions ceased in the third and fourth quarters when we determined that our loan portfolios were not materially impacted at that time.

For the year ended December 31, 2020, the provision for loan losses

amounted to $5.2 million.

For the year ended December 31, 2021 the provision for loan losses amounted to $8.0 million.

While some of the adverse conditions relating to the Covid-19 pandemic reversed in 2021, and have continued such reversal in the

beginning of 2022, sustained improvements are highly dependent upon strengthening economic conditions.

The Covid-19 pandemic continues to cause economic uncertainties which may again result in these and other adverse impacts to our financial

condition and results of operations.

We believe our SBA 7(a) underwriting program has remained strong throughout the Covid-19 pandemic and our SBA 7(a) loans are well collateralized when compared to the SBA industry in general.

The dollar amount of

short-term modifications of loans held-for-investment not classified as troubled debt restructurings was $0.5 million and $1.2 million as of December 31, 2021 and 2020, respectively.

Principal Factors Affecting Our Results of Operations

Net income is calculated by taking interest and noninterest income and subtracting our costs to do business, such as

provision for loan losses, interest expense, salaries, taxes and other operational expenses.

Net Interest Income.

Net interest income represents interest income, less interest expense.

We generate interest income from interest and

fees received on interest earning assets, including loans, interest earning deposits in other banks, the Federal Reserve and investment securities we own.

We incur interest expense from interest paid on interest bearing liabilities, including

interest bearing deposits, borrowings and other forms of indebtedness.

Net interest income was the most significant contributor to our net income in 2020 and 2021.

To evaluate net interest income, we measure and monitor:

(i) yields on our loans and

other interest earning assets;

(ii) the costs of our deposits and other funding sources;

(iii) our net interest spread;

and (iv) our net interest margin.

Net interest spread is the difference between rates earned on interest earning assets and rates

paid on interest bearing liabilities.

Net interest margin is a ratio calculated as net interest income divided by average interest earning assets for the same period.

Because noninterest bearing sources of funds, such as noninterest bearing deposits

and shareholders’ equity, also fund interest earning assets, net interest margin includes the benefit of these noninterest bearing sources.

Decreases in interest rates, as well as the ongoing economic uncertainty, may decrease our net interest income and net interest margin in future periods, while increases in interest rates are

expected to increase our net interest income and net interest margin in future periods.

We expect increases in the federal funds rate in 2022 which is anticipated to be beneficial to our net interest income and net interest margin.

In its statement

released on January 26, 2022, the Federal Open Market Committee stated that it would soon be appropriate to raise the target range for the federal funds rate above the range of 0.0% to 0.25% in response to inflation that is above their 2.0% target

and a strong labor market.

As of December 31, 2021, approximately 79.9% of our loans held for investment were indexed to a market rate that is expected to reprice along with the federal funds rate.

Changes in market interest rates and interest we

earn on interest earning assets or pay on interest bearing liabilities, as well as the volume and types of our interest earning assets, liabilities and shareholders’ equity, have the largest impact on our net interest spread, net interest margin and

net interest income.

We measure net interest income before and after our provision for loan losses.

Provision for Loan Losses.

Provision for loan losses is the amount of expense that, based on our judgment at that time, is required to

maintain our ALL at an adequate level to absorb probable losses inherent in our loan portfolio and that, in our management’s judgment, is appropriate under relevant accounting guidance.

Determination of the ALL is complex and involves a high degree

of judgment and subjectivity.

For a description of the factors we considered in determining the ALL see “—Principal Factors Affecting Our Financial Condition—Allowance for Loan Losses.”

Noninterest Income.

Noninterest income consists of, among other things:

(i) Strategic Program fees;

(ii) loan servicing fees;

deposit related fees;

(iv) gain on sale of loans;

and (v) other noninterest income.

Strategic Program fees are paid to us by loan origination platforms and include monthly minimum fees, fees based on the volume of loan originations in each month,

testing and oversight fees, wire transfer fees, ACH fees, and program set up fees.

Deposit related fees include checking fees, account maintenance fees, insufficient funds fees, overdraft fees, stop payment fees, domestic and foreign wire interchange

and card processing fee income.

Noninterest Expense.

Noninterest expense includes, among other things:

(i) salaries and employee benefits;

(ii) occupancy and equipment

(iii) communications and data processing fees (iv) professional services fees;

(v) federal deposit insurance assessments;

(vi) correspondent bank charges;

(vii) marketing costs;

and (viii) other general and administrative expenses.

Salaries and employee benefits include compensation (including employee-related stock compensation), employee benefits and tax expenses for our personnel.

Occupancy expense includes depreciation

expense, lease expense on our leased properties and other occupancy-related expenses.

Equipment expense includes expenses related to our furniture, fixtures, equipment and software.

Data processing fees include expenses paid to our third-party data

processing system provider and other data service providers.

Communications expense includes costs for telephone and internet.

Professional fees include legal, accounting, consulting and other outsourcing arrangements.

Federal deposit insurance

expense relates to FDIC assessments based on the level of our deposits.

Correspondent bank charges include wire transfer fees, transaction fees and service charges related to transactions settled with correspondent relationships.

Marketing expense

includes marketing material production, trade show participation, marketing fees related to Strategic Programs, website enhancement, outsourced marketing and branding services.

Other general and administrative expenses include expenses associated

with travel, meals, advertising, promotions, training, supplies and postage.

Regulatory Environment.

We are subject to federal and state regulation and supervision, which continue to evolve as the legal and

regulatory framework governing our operations continues to change.

The current operating environment includes extensive regulation and supervision in areas such as consumer compliance, the BSA and anti-money laundering compliance, risk management and

internal audit.

We anticipate that this environment of extensive regulation and supervision will continue for the industry.

As a result, changes in the regulatory environment may result in additional costs for additional compliance, risk management

and audit personnel or professional fees associated with advisors and consultants.

Executive Summary

Net income for the year ended December 31, 2022, decreased $6.5 million to $25.1 million when compared to the prior year due primarily to an increase in the provision for loan losses of $5.5 million

as a result of increased charge off rates in our Strategic Programs loan portfolio and an aggregate increase of $9.2 million for all categories of non-interest expenses as the Company continues to build its operating infrastructure by adding

staff in our information technology and security division to support enhancements in the infrastructure as well as an increase in contractual bonuses paid relating to the expansion of our Strategic Programs in the first half of 2022.

offsetting these expense increases were increases in non-interest income of $5.6 million, mainly due to increases in our Strategic Program fees and gain on the sale of loans, net, as well as an increase in net interest income of $2.9 million due

primarily to increased interest rates and loan volumes.

The net interest margin was 14.04% for the year ended December 31, 2022, compared to 15.10% for the prior year.

The decline in net interest margin was due primarily to a $44.7 million increase in

the average balances of interest earning assets along with lower average yields related to the loans held for sale portfolio.

Total assets increased by $20.6 million to $400.8 million as of December 31, 2022 compared to the prior year.

This increase was primarily attributable to a $26.1 million increase in net loans

receivable, a $14.8 million increase in cash and cash equivalents, a $5.0 million increase in operating lease assets, and a $6.2 million increase in net premises and equipment partially offset by a $37.2 million decrease in Strategic Program

loans held-for-sale.

Originations of Strategic Program loans held-for-sale increased by $638.9 million to $7.0 billion the year ended December 31, 2022 compared to the prior year due mainly to the continued maturation

of multiple platforms.

Results of Operations

Net Income Overview

The following table sets forth the principal components of net income for the periods indicated.

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Provision for income taxes

Net income for the year ended December 31, 2021 was $31.6 million, an increase of $20.4 million or 182.0% from net income of $11.2 million for the year ended December 31, 2020.

The increase was

primarily due to an increase of $19.7 million or 66.9% in interest income and an increase of $17.5 million or 121.6% in non-interest income, offset by an increase of $7.8 million or 35.7% in non-interest expense and an increase of $6.7 million or

171.1% in provision for income taxes, as described below.

Net income for the year ended December 31, 2022 was $25.1 million, a decrease of $6.5 million, or 20.5%, from net income of $31.6 million for the year ended December 31, 2021.

The decrease was

primarily due to an increase of $5.5 million, or 68.2%, in the provision for loan losses primarily due to increased charge offs in our Strategic Programs loan portfolio and an aggregate increase of $9.2 million for all categories on non-interest

expenses, or 31.3%, as the Company continues to build on its infrastructure and Strategic Programs.

Partially offsetting these expense increases were increases in non-interest income of $5.6 million, or 17.5%, mainly due to increases in our

Strategic Program fees and gain on the sale of loans, net, as well as an increase in net interest income of $2.9 million, or 6.1%, due primarily to increased interest rates and loan volumes.

Net Interest Income and Net Interest Margin Analysis

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lending opportunities and assist in the selection of Strategic Program loans that we chose to hold for investment.

Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred

to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.”

Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities,

referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.”

For the year ended December 31, 2022, our net interest income increased $2.9 million, or 6.1% to $50.9 million, compared to the year ended December 31, 2021.

This increase

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

Average interest earning assets increased by $64.8 million, or 25.6%, to $317.8 million for the year ended December

31, 2021 compared to the year ended December 31, 2020, while the related yield on average interest earning assets increased by 380 basis points to 15.5%, resulting in increased interest income for the year ended December 31, 2021 of $19.7 million.

A substantial decrease in comparatively low yielding PPP loans during the year ended December 31, 2021 contributed to the increase in yield on average interest earning assets for the year.

While the corresponding cost of funds on interest bearing

liabilities for the year ended December 31, 2021 declined by 40 basis points to 0.9%, the average balance in interest bearing liabilities increased by $12.3 million, or 9.3%.

The general decline of interest rates in the U.S.

financial markets in

2021 is the primary cause for the decline in the cost of funds.

As indicated in the rate/volume table set forth below, the decline in the cost of funds partially offset by the effect of increased volumes of interest-bearing liabilities, resulting

in decreased interest expense for the year ended December 31, 2021 of $0.5 million.

We gather deposits in the Salt Lake City, Utah MSA through our one branch and nationwide from our Strategic Program service providers, SBA 7(a) borrowers,

Institutional Deposit exchanges, and brokered deposit arrangements.

For the year ended December 31, 2021, deposits sourced through our branch, Strategic Programs, SBA 7(a) borrowers, national Institutional Deposit exchanges and brokered deposit

arrangements increased compared to the year ended December 31, 2020.

Our net interest margin increased from 11.0% at December 31, 2020 to 15.1% at December 31, 2021.

This increase was primarily due to

increases in both the yield and volume of our loans held for investment portfolio as well as rate increases on our interest-bearing deposits.

Interest income grew $3.1 million to $52.3 million for the year ended December 31, 2022 compared to the

prior year, primarily attributable to the growth in the average balance of our loans held for investment portfolio of $10.4 million or 5.2%, as well as a 5.9% increase in yield, to 14.19% from 13.40%, due primarily to interest rate increases in

the indices on which our variable rate loans are priced for the two periods.

Interest income generated by interest-bearing deposits increased $1.1 million to $1.2 million for the year ended December 31, 2022 compared to the prior year, due mainly

to the 147 basis points increase in interest yields.

Partially offsetting these increases in interest income was a $1.2 million decrease in interest earned on loans held-for-sale to $21.2 million for the year ended December 31, 2022 compared to

the prior year due to a 542 basis points decrease in the average yield which was partially offset by volume increases in that portfolio.

The net interest margin decreased 106 basis points from 15.10% for the year ended December 31, 2021 to 14.04% for the year ended December 31, 2022.

The decrease in net interest margin was primarily

attributable to a 14.4% decline in average yield on our loans held for sale, to 32.31% for the year ended December 31, 2022 compared to 37.73% for the prior year due primarily to decreases in higher yielding loans average balances for the year

ended December 31, 2022.

Also contributing to the net interest margin decrease was a 215 basis points increase in the average rate paid on our demand account balances primarily due to higher interest rates for the new HSA deposits from Lively,

Inc., a technology focused Health Savings Account provider.

Average Balances and Yields .

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average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs.

The yields and costs for the periods indicated are derived by dividing the income or

expense by the average balances for assets or liabilities, respectively, for the periods presented.

Loan fees are included in interest income on loans and represent approximately $3.6 million (including approximately $1.8 million in SBA fees related

to PPP loans) and $1.4 million (including approximately $1.2 million in SBA fees related to PPP loans), for the years ended December 31, 2021 and December 31, 2020, respectively.

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.

Average balances have been calculated using daily averages.

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

The rate column shows the

effects attributable to changes in rate.

The rate column shows the effects

attributable to changes in rate.

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

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monthly in connection with our monthly evaluation of the adequacy of our ALL.

For a description of the factors we considered in determining the ALL see “—Principal Factors Affecting Our Financial Condition—Allowance for Loan Losses” and “—Critical

Accounting Policies and Estimates—Allowance for Loan Losses.”

For a description of the factors we considered in determining the ALL see “—Principal Factors Affecting Our Financial Condition—Allowance for Loan Losses” and

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

Our provision for loan losses was $13.5 million and $8.0 million for the years ended December 31, 2022 and 2021, respectively.

The increase of $2.8 million was primarily due to an overall increase

in our provision attributable to Strategic Program lending, which was the result of our decision to increase certain retained Strategic Program loan balances during the period, and an overall increase in our provision attributable to SBA lending,

which was the result of our decision to increase SBA 7(a) loan balances during the period.

The increase of $5.5 million for the year ended December 31, 2022

compared to the prior year was primarily due to an increase in charge offs related to our Strategic Program loans portfolio.

Noninterest Income

The largest portion of our noninterest income is associated with our Strategic Program fees.

Other sources of noninterest income include gain on sale of loans, SBA loan servicing fees, change in

fair value on investment in BFG and other miscellaneous fees.

Other sources of noninterest income include gain on sale of loans, net, SBA loan servicing fees, change

in fair value on investment in BFG and other miscellaneous fees.

The following table presents, for the periods indicated, the major categories of noninterest income:

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Strategic Program fees

Gain on sale of loans

Gain on sale of loans, net

SBA loan servicing fees

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For the year ended December 31, 2022, total noninterest income increased $5.6 million, or 17.5%, to $37.4 million compared to the year ended December 31, 2021.

This increase

was primarily due to the increase in Strategic Program fees, gain on sale of loans, the change in fair value on investment in BFG, and SBA loan servicing fees.

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

origination volume in the Strategic Program.

Strategic Program fees were also positively impacted by the launch of three origination platforms during the year ended December 31, 2021.

The increase in gain on sale of loans was primarily due to the

increase in the number of SBA 7(a) loans sold during the year ended December 31, 2021.

The increase in fair value on investment in BFG was primarily due to BFG’s increased profitability and cash position during and for the year ended December 31,

2021 and the appreciation of its peer companies under the Guideline Public Company valuation method during the same period.

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

This increase was primarily due to the

increases in Strategic Program fees and gain on sale of loans, net, and was partially offset by a negative change in fair value on investment in BFG.

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

volume in our Strategic Programs.

Strategic Program fees were also positively impacted by the continued maturation of multiple platforms during the year ended December 31, 2022.

The increase in gain on sale of loans, net was primarily due to an

increase in the number of SBA 7(a) loans sold and the establishment of a new Loan Trailing Fee Asset during the year ended December 31, 2022.

The decrease in fair value on investment in BFG for the year ended December 31, 2022, was primarily due

to a softening in the values of its peer companies under the Guideline Public Company valuation method during the same period.

Noninterest Expense

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Salaries and employee benefits

Professional services

Occupancy and equipment expenses

Impairment of SBA servicing asset

Loss on investment in BFG

Other operating expenses

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For the year ended December 31, 2022, total noninterest expense increased $9.2 million, or 31.3%, to $38.8 million compared to the year ended December 31, 2021.

This increase was

primarily due to the increase in salaries and employee benefits and other operating expenses.

For the year ended December 31, 2021, salaries and employee benefits increased $5.5 million, or 32.9%, to $22.4 million compared to the year ended

December 31, 2020.

This increase was primarily due to the increase in the number of employees during the year ended December 31, 2021.

The increase in employees during this timeframe coincided with an increase in Strategic Program loan volume and

the expansion of our information technology and security division to support enhancements in our infrastructure, and an increase in contractual bonuses paid relating to the expansion of the Strategic

Programs in 2021.

For the year ended December 31, 2021, other operating expense increased $1.4 million, or 32.8%, to $5.5 million compared to the year ended December 31, 2020.

This increase was primarily due to our initiative to develop new and

upgrade existing technology, increased third party financial and business process reviews, increased marketing costs, and increased legal and professional fees, all with the intent of supporting of our growth.

For the year ended December 31, 2022,

2021, an impairment of SBA servicing asset was recognized for $0.8 million due to a softening of the secondary market for SBA 7(a) loans.

Principal Factors Affecting Our Financial Condition

The primary factors we use to evaluate and manage our financial condition include asset quality, capital and liquidity.

Asset Quality.

We manage the diversification and quality of our assets based on factors that include the level, distribution, severity

and trend of problem, classified, delinquent, nonaccrual, nonperforming and restructured assets, the adequacy of our ALL, the diversification and quality of our loan and investment portfolios, the extent of counterparty risks, credit risk

concentrations and other factors.

Financial institution regulators have established guidelines for minimum capital ratios for banks.

As a small bank

holding company, we are expected to be a capital resource to our subsidiary, which is required to be well capitalized.

We, however, are not subject to specific capital ratios as a small bank holding company.

We manage capital based upon factors

that include:

(i) the level and quality of capital and our overall financial condition;

(ii) the trend and volume of problem assets;

(iii) the adequacy of reserves;

(iv) the level and quality of earnings;

(v) the risk exposures in our balance

(vi) the Community Bank Leverage Ratio;

(viii) the state of local and national economic conditions;

and (ix) other factors including our asset growth rate, as well as certain liquidity ratios.

We manage liquidity based on factors that include the amount of core deposits as a percentage of total deposits, the level

of Strategic Program held-for-sale loan balances compared to Strategic Program reserve deposit balances, the level of diversification of our funding sources, the allocation and amount of our deposits among deposit types, the short-term funding

sources, the amount of non-deposit funding, the availability of unused funding sources, off-balance sheet obligations, the availability of assets to be readily converted into cash without undue loss, the amount of cash, interest earning deposits in

other banks and liquid securities we hold, the re-pricing characteristics and maturities of our assets and other factors.

professional services increased $3.8 million to $5.5 million compared to the prior year due primarily to increased costs relating to services provided in connection with our Strategic Programs and legal expenses mainly related to our public

Salaries and employee benefits increased $2.7 million to $24.5 million compared to the prior year due primarily to an increase in the number of our employees as we continue to increase staffing in connection with our growth plan.

$0.9 million increase to $1.7 million in the impairment of the SBA servicing asset compared to the prior year was due primarily to a softening of the secondary market for SBA 7(a) loans.

Financial Condition

The following table summarizes selected components of the Company’s consolidated balance sheets as of December 31, 2022 and 2021.

($ in thousands)

Investment securities held to maturity, at cost

Loans receivable, net

PPP Liquidity Facility

Total shareholders' equity

Total equity to total assets

Weighted average shares outstanding, basic

Weighted average shares outstanding, diluted

Total assets at December 31, 2022 were $400.8 million, an increase of $20.6 million from December 31, 2021.

The increase in total assets was due primarily to increases in our loans receivable, net,

of $26.1 million, cash and due from banks of $14.8 million, operating lease right-of-use asset of $5.0 million, and growth of $6.2 million in premises and equipment primarily due to the buildout of the corporate office.

These increases were

partially offset by a decline in the Strategic Programs loans held-for-sale of $37.2 million.

Loan Portfolio

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

We also monitor the impact of identified

and estimated losses on capital as well as the pricing characteristics of each product.

We also monitor the impact of identified and

estimated losses on capital as well as the pricing characteristics of each product.

The following provides a general description and the risk characteristics relevant to each of the business lines.

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

December 31, 2021 and 2020, we had total SBA 7(a) loans of $141.3 million and $96.2 million, respectively, representing 53.2% and 36.7% of our total loans, respectively.

As of December

31, 2022 and 2021, we had total SBA 7(a) loans of $145.2 million and $142.4 million, respectively, representing 55.8% and 53.6% of our total loans, respectively.

Loans are sourced primarily through our referral relationship with BFG.

Although BFG actively markets throughout the USA, because of its physical location in the New York area we have developed a lending presence in the New York and New Jersey geographies.

actively markets throughout the USA, because of its physical location in the New York area we have developed a lending presence in the New York and New Jersey geographies.

The maximum SBA 7(a) loan amount is $5 million.

Underwriting is

generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow and tertiary is the sale of collateral pledged.

These loans may be secured by commercial and

residential mortgages as well as liens on business assets.

In addition to typical underwriting metrics, we review the nature of the business, use of proceeds, length of time in business and management experience to help us target loans that we

believe have lower credit risk.

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.

SBA Paycheck Protection Program Loans

As an experienced SBA 7(a) lender, we were an active participant in the first round of the PPP, which began in April of 2020 and expired on August 8, 2020.

As a result of our efforts, we provided

PPP loans to approximately 700 businesses, totaling approximately $126.6 million, for the year ended December 31, 2020.

As of December 31, 2021 and 2020, we had total PPP loans of $1.1 million and $107.1 million, respectively, representing 0.4% and

40.9% of our total loans, respectively.

The PPP loans also resulted in fees paid by the SBA to the originating bank for processing PPP loans, which fees are accreted into interest income over the life of the applicable loans.

If a PPP loan is

forgiven or paid off before maturity, the remaining unearned fee is recognized into income at that time.

For the year ended December 31, 2020, the Company recognized $0.4 million in PPP-related SBA accelerated deferred loan fees through interest

income as a result of PPP loan forgiveness.

For the year ended December 31.

2021, the Company recognized a total of $1.8 million in PPP-related accreted fees ($1.5 million of which were accelerated due to loan forgiveness).

A de minimis amount of deferred fees remained as of December 31, 2021.

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 retaining a larger amount of the guaranteed portion of these loans.

Commercial, non-real estate

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commercial non-real estate loans of $11.5 million and $3.4 million, respectively, representing 4.4% and 1.3% of our total loans, respectively.

Any loan, line of credit, or letter of credit (including any unfunded commitments) and any interest

obtained in such loans made by another lender to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, not secured by real estate, but not

for personal expenditure purposes are included in this category.

Any loan, lease, line of credit, or letter of credit (including any unfunded commitments) and any

interest obtained in such loans or leases made by another lender to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, not secured by

real estate, but not for personal expenditure purposes are included in this category.

For example, commercial vehicle term loans and commercial working capital term loans.

Underwriting is generally based on commercial credit metrics where the primary repayment source

is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged.

The nature of the business, use of proceeds, length of time in business, management experience, repayment ability,

credit history, ratio calculations and assessment of collateral adequacy are all considerations.

Underwriting is generally based on commercial credit metrics where the

primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged.

The nature of the business, use of proceeds, length of time in business, management

experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations.

These loans are generally secured by liens on business assets.

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

Historically, we have retained these loans and leases

on our balance sheet for investment.

Residential real estate

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Lot loans may be paid off as the borrower converts to a construction loan.

At the completion

of the construction project, if the loan is converted to permanent financing by us or if scheduled loan amortization begins, it is then reclassified from construction to single-family dwelling.

Underwriting of construction and development loans

typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded.

These loans are

generally secured by mortgages for residential property located primarily in the Salt Lake City, Utah MSA, and we obtain guarantees from responsible parties.

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

completion of the construction project, if the loan is converted to permanent financing by us or if scheduled loan amortization begins, it is then reclassified from construction to single-family dwelling.

Underwriting of construction and

development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded.

These loans are generally secured by mortgages for residential property located primarily in the Salt Lake City, Utah MSA, and we obtain guarantees from responsible parties.

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

Strategic Program loans

We, through our Strategic Program service providers, issue, on a nationwide basis, unsecured consumer and secured or unsecured business loans to borrowers within certain approved credit profiles.

As of December 31, 2021 and December 31, 2020, we had total Strategic Program loans of $85.9 million and $28.3 million, respectively, representing 32.3% and 10.8% of our total loans, respectively.

Loans originated through these programs are limited

to predetermined Bank underwriting criterion, which has been approved by our board of directors.

of December 31, 2022, and December 31, 2021, we had total Strategic Program loans of $47.8 million and $85.9 million, respectively, representing 18.4% and 32.3% of our total loans.

Fluctuations in the balances of the Strategic Program loans we

retain on our books are influenced by management’s current assessments regarding risk management as well as macroeconomic factors.

Loans originated through these programs are limited to predetermined Bank underwriting criterion, which has been

approved by our board of directors.

The primary form of repayment on these loans is from personal or business cash flow.

Business loans may be secured by liens on business assets, as

We have generally sold most of these loans, but as our capital grows and FinView™ evolves, we may choose to hold more of the funded loans and/or receivables.

We reserve the right to sell any portion of funded loans and/or receivables

directly to the Strategic Program service providers or other investors.

We retain the legal right to service all these loans, but contract with the Strategic Program service provider or another approved sub-servicer to service these loans on our

Business loans may be secured by liens on business assets, as applicable.

We have generally sold most of these loans, but as

our capital grows, 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.

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.

Commercial real estate

Commercial real estate loans include loans to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or

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

Commercial real estate loans include loans to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional

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

As of December 31, 2022, and December 31, 2021, we had total commercial real estate loans of $12.1 million and $2.4

million, respectively, representing 4.7% 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.

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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Consumer lending provides financing for personal, family, or household purposes on a nationwide basis.

Most of these loans are originated through our POS platform and come from a variety of

sources, including other approved merchant or dealer relationships and lending platforms.

As of December 31, 2021 and December 31, 2020, we had total consumer loans of $4.6 million, and $5.5 million, respectively, representing 1.7% and 2.1% of our

total loans, respectively.

Most of these loans are originated through our POS platform and come from a variety of sources,

including other approved merchant or dealer relationships and lending platforms.

As of December 31, 2022, and December 31, 2021, we had total consumer loans of $5.8 million, and $4.6 million, respectively, representing 2.2% 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 income.

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.

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.

exceptions are documented and reported.

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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historically lower loss rates such as professional, scientific and technical services (including law firms), non-store retailers (e-commerce), and ambulatory healthcare services.

We believe that these efforts helped minimize our exposure to

industries severely impacted by the Covid-19 pandemic.

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

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Commercial real estate

(1) The amount of SBA loans as of December 31, 2021 and December 31, 2020 includes approximately $1.1 million and $107.1 million of PPP loans.

Loan Maturity and Sensitivity to Changes in Interest Rates

As of December 31, 2021, including the impact of PPP loans, $103.1 million, or 50.3%, of the total held for investment loan balance matures in less than five years.

Loans maturing in greater than

five years totaled $101.9 million as of December 31, 2021.

As of December 31, 2022, $131.4 million, or 55.5%, of the total held for investment loan balance matures in less than five years.

Loans maturing in greater than five years totaled $105.2 million as

of December 31, 2022.

The variable rate portion of our total held for investment loan portfolio at December 31, 2022 was $184.3 million, or 77.9%.

As of December 31, 2020, including the impact of PPP loans,

$173.5 million, or 72.1%, of the total held for investment loan balance matures in less than five years.

Loans maturing in greater than five years totaled $67.3 million as of December 31, 2020.

The variable rate portion of our total held for

investment loan portfolio at December 31, 2020 was $107.7 million, or 44.7%.

The variable rate portion of the total held for investment loans reflects our strategy to minimize interest rate risk through the use of variable rate products.

The following tables detail maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2021 and 2020:

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

At December 31, 2022

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Commercial real estate

(1) The amount of SBA fixed rate loans includes approximately $1.1 million of PPP loans.

originated prior to June 5, 2020, have a two year term.

PPP loans originated on or after June 5, 2020, have a five year term.

For PPP borrowers who submit completed applications for forgiveness, loan payments are automatically deferred

until the SBA renders a decision on the forgiveness request.

PPP borrowers who fail to submit timely forgiveness applications are required to make monthly payments beginning ten months from the end of the chosen “covered period”.

“covered period” is a maximum of 24 weeks from the origination date.

Assuming a 24 week covered period, PPP borrowers are not required to begin making payments until 16 months after the origination date.

At the time payments begin, if the

borrower and lender of a two year PPP loan mutually agree to extend the term of the loan it can be extended to a five year term.

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

At December 31, 2022

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Commercial real estate

(1) The amount of SBA fixed rate loans includes approximately $107.1 million of PPP loans.

Nonperforming Assets

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were contractually due.

Loans are placed on nonaccrual status

when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.

Loans are placed on nonaccrual status when,

in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions.

Loans may be placed on nonaccrual status regardless of whether such loans are actually past

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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.

A non-accrual asset may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and we expect repayment of the remaining contractual principal and interest,

or (2) when asset otherwise becomes well secured and is not in the process of collection.

interest accrual is discontinued, all unpaid accrued interest is reversed from income.

Interest income is subsequently recognized only to the extent recoveries received (either from payments received from the customer, derived from the

disposition of collateral or from legal action, such as judgment enforcement) exceed liquidation expenses incurred and outstanding principal.

A non-accrual asset may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and we expect repayment of the remaining contractual principal and interest, or

(2) when asset otherwise becomes well secured and is not in the process of collection.

Any loan which we deem to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss.

In general, loans that are past due for 90 days or more are charged off

unless the loan is both well secured and in the process of collection.

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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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.

The following table provides information with respect to our nonperforming assets and troubled debt restructurings at the dates indicated:

As of December 31,

($ in thousands)

Nonaccrual loans:

Commercial, non real estate

Residential real estate

Strategic Program loans

Total nonperforming loans

Total accruing loans past due 90 days or more

Nonaccrual troubled debt restructuring

Total troubled debt restructurings

Other Real Estate Owned

Less nonaccrual troubled debt restructurings

Total nonperforming assets and troubled debt restructurings

Total nonperforming loans to total loans

Total nonperforming loans to total assets

Total nonperforming assets and troubled debt restructurings to total loans

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 December 31.

2021 were $0.8 million, which represented a reduction of $0.9 million from December 31, 2020.

The largest troubled

debt restructuring attributable to a single borrower at December 31, 2020 with balance of $0.8 million paid in full including interest in May 2021.

Total nonperforming assets at December 31, 2021 were composed of $0.7 million in nonaccrual loans

and $0.1 million of troubled debt restructurings.

Total nonperforming assets at December 31, 2020 were composed of $0.8 million in nonaccrual loans and $0.9 million of troubled debt restructurings.

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

We consider an “insignificant period of time” from payment delays to be a period of 90

days or less, or 180 days or less in certain Strategic Programs.

We will customarily attempt to provide a modification for a customer experiencing what we consider to be a short-term event that has temporarily impacted cash flow.

In those cases, we

will review the request to determine if the customer is experiencing cash flow strain and how the event has impacted the ability of the customer to repay in the long term.

Short-term modifications are not classified as troubled debt restructurings

because they do not meet the definition set by the FDIC or our accounting policy for identifying troubled debt restructurings.

The FDIC issued statements in March and April of 2020 that encouraged banks to work with all borrowers, especially those

from industry sectors particularly vulnerable to economic volatility.

The FDIC clarified that prudent efforts to modify the terms on existing loans for affected customers will not be subject to examiner criticism, and that certain loan

modifications made in response to Covid-19 are not troubled debt restructurings.

The dollar amount of short-term modifications of loans held for investment as of December 31, 2021 was $0.5 million, substantially all of which are attributable to our Strategic Program loans.

The dollar amount of short-term modifications of loans held for investment as of December 31, 2020 was $1.2 million.

Of this, approximately $0.6 million, or 46.7%, is attributable to our

Strategic Program loans, $0.5 million, or 46.5%, is attributable to our SBA 7(a) portfolio, and $0.1 million, or 6.8%, is attributable to our Commercial, non-real estate portfolio.

Interest income that would have been recorded for the years ended December 31, 2021 and 2020 had nonaccrual loans been current throughout the period amounted to $0.1 million and $0.1 million,

respectively.

The Company had no nonperforming assets and $0.1 million in troubled debt restructurings at December 31, 2022.

Total nonperforming assets at December 31, 2021 comprised $0.7 million in nonaccrual

loans and $0.1 million of troubled debt restructurings.

Credit Risk Profile

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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.

retention of certain Strategic Program loans with higher default rates accounts 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.

Accurate and timely loan risk grading is considered a critical component of an effective credit risk management system.

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Pass - The borrower has good sources of repayment, generally 3 years or more of consistent employment (or related field) and income history.

The debt of the borrower is reasonable

relative to the borrower’s financial strength with a DTI ratio of less than 35%.

The debt of the borrower is reasonable relative

to the borrower’s financial strength with a DTI ratio of less than 35%.

Cash flow is strong as evidenced by exceptional discretionary income amounts.

Borrowers will consistently maintain 20% of the outstanding debts in deposit accounts

Borrowers will consistently maintain 20% of the outstanding debts in deposit accounts with us.

LTV ratios will be 70% 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 weaknesses.

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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Pass Watch – There is adequate primary source of repayment, generally employment time or time in a related field is less than 2 years.

Borrowers’ debt to income ratios may fall outside

of our guidelines or there is minimal excess cash flow.

Borrowers’ debt to income ratios may fall outside of

our guidelines or there is minimal excess cash flow.

There may be heavy reliance on collateral, or the loan is large, relative to the financial strength of the borrower.

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If the deficiency is corrected the account will be re-graded.

Classified Substandard – A substandard loan has a developing or current weakness or weaknesses that could result in loss or default if deficiencies are not corrected, or adverse

conditions arise.

Classified Substandard – A substandard loan has a developing or current weakness or weaknesses that could result in loss or default if deficiencies are not corrected, or adverse conditions

Classified Doubtful – A doubtful loan has an existing weakness or weaknesses that make collection or liquidation in full, on the basis of currently existing facts and conditions, highly

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in the future.

The following table presents, as of the period presented, the loan balances by loan program as well as risk rating.

No loans were classified as ‘Loss’ grade during the periods presented.

As of December 31, 2021

($ in thousands)

Commercial, non real estate

Residential real estate

Commercial real estate

Not Risk Graded

Strategic Program (1) loans

As of December 31, 2020

($ in thousands)

Commercial, non real estate

Residential real estate

Commercial real estate

Not Risk Graded

Strategic Program (1) loans

(1) The Strategic Program loan balance includes $60.7 million

and $21.0 million of loans classified as held-for-sale as of December 31, 2021 and December 31, 2020, respectively.

Allowance for Loan Losses

We have not adopted Financial Accounting Standards Board Accounting Standards Update No.

2016–13, Financial Instruments – Credit Losses (Topic 326) ,

commonly referred to as the “CECL model,” but plan to adopt the CECL model in the 2023 calendar year.

The ALL, a material estimate which could change significantly in the near-term in the event of rapidly shifting credit quality, is established through a provision for loan losses charged to

earnings to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that we consider adequate to absorb potential losses in the loan portfolio.

Loan losses are charged against the ALL when we

believe that the collectability of the principal loan balance is unlikely.

The ALL, a material estimate which could change significantly in the near-term in the event of rapidly shifting credit quality, is established through a provision for loan losses charged to earnings

to account for losses that are inherent in the loan portfolio and estimated to occur, and is maintained at a level that we consider adequate to absorb potential losses in the loan portfolio.

Loan losses are charged against the ALL when we believe

that the collectability of the principal loan balance is unlikely.

Subsequent recoveries, if any, are credited to the ALL when received.

Our judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and

as situations and information change.

We evaluate the ALL on a monthly basis and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem

loans and current economic conditions and trends that may affect the borrower’s ability to repay.

Our judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and as

situations and information change.

We evaluate the ALL on a monthly basis and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans

and current economic conditions and trends that may affect the borrower’s ability to repay.

The quality of the loan portfolio and the adequacy of the ALL is reviewed by regulatory examinations and the Company’s auditors.

The ALL consists of the following two elements:

Specific allowance for identified impaired loans.

For such loans that are identified as impaired, an allowance is established when the discounted

cash flows (or collateral value if the loan is collateral dependent) or observable market price of the impaired loan are lower than the carrying value of that loan.

Independent appraisals are obtained for all collateral dependent loans deemed impaired when collateral value is expected to exceed $5 thousand net of actual and/or anticipated

liquidation-related expenses.

After initially measured for impairment, new appraisals are ordered on at least an annual basis for all real estate secured loans deemed impaired.

Non-real estate secured loan appraisal values are reevaluated and

assessed throughout the year based upon interim changes in collateral and market conditions.

General valuation allowance.

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

For this portion of the allowance, loans are reviewed based on industry, stage and structure and are assigned allowance percentages based on historical loan loss experience for similar loans with similar characteristics and trends

adjusted for qualitative factors.

Qualitative factors that, in management’s judgment, affect the collectability of the portfolio as of the evaluation date, may include changes in lending policies and procedures;

changes in national and

local economic and business conditions, including the condition of various market sectors;

changes in the nature and volume of the portfolio;

changes in the experience, ability and depth of lending management and staff;

changes in the

volume and severity of past due and classified loans and in the volume of nonaccruals, troubled debt restructurings, and other loan modifications;

the existence and effect of any concentrations of credit and changes in the level of such

concentrations;

and the effect of external factors, such as competition and legal and regulatory requirements, on the level of estimated and inherent credit losses in our current portfolio.

The ALL was $9.9 million at December 31, 2021 compared to $6.2 million at December 31, 2020, an increase of $3.7 million, or 59.0%.

The increase was primarily due to increased retention of

Strategic Program loans with higher loss reserving characteristics.

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

For the Year Ended

The following table shows the allocation of the ALL among loan categories, the ratio of the ALL to nonperforming loan balances and certain other information as of the dates indicated.

As of December 31,

($ in thousands)

Beginning balance

Provision for loan losses

Commercial, non-real estate

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Commercial real estate

(1) The held for sale balance on Strategic Program loans as of December 31, 2022 and 2021 were $23.6 million and $60.7 million.

The following table reflects the ratio of net charge-offs to average loans outstanding by loan category, as of the dates indicated.

Years Ended December 31,

($ in thousands)

Commercial, non-real estate

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Commercial real estate

Ending balance

Although we believe that we have established our ALL in accordance with GAAP and that the ALL was adequate to provide for known and inherent losses in the portfolio at all times shown above,

future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio.

The following table shows the allocation of the ALL among loan categories and certain other information as of the dates indicated.

The ALL related to Strategic Programs constitutes 66.5% and

66.3% of the total ALL while comprising 32.3% and 10.8% of total loans as of December 31, 2021 and December 31, 2020, respectively.

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

(1) The average held for sale balance on Strategic Program loans for the years ended December 31, 2022 and 2021 were $65.7 million and $59.5 million.

The ALL was $12.0 million at December 31, 2022 compared to $9.9 million at December 31, 2021, an increase of $2.1 million, or 21.6%.

The increase was primarily due to increased unguaranteed SBA

loans and increased retention of Strategic Program loans with higher loss reserving characteristics.

December 31, 2022

($ in thousands)

% of Loans in

Commercial, non real estate

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($ in thousands)

% of Loans in

Commercial, non real estate

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Commercial real estate

The following table reflects the ratio of the ALL to nonperforming loan balances, as well as net charge-offs to average loans outstanding by loan category, as of the dates

The ratio of net charge-offs to average loans outstanding generally decreased or remained consistent for loan categories in the year ended December 31, 2021 from the year ended December 31, 2020.

The decrease in the ratio for Strategic

Programs loans was primarily due to increases in average loan balances in the year ended December 31,2021 while the decreases in Commercial, non-real estate and Consumer were primarily due to lower charge-off amounts in the year ended December

As of December 31,

ALL to nonperforming loans

Net charge-offs to average loans outstanding by loan category

Commercial, non-real estate

Residential real estate

Strategic Program loans

Commercial real estate

Interest-Bearing Deposits in Other Banks

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This increase was

primarily due to the net proceeds of $35.6 million from our initial public offering and an increase in loan originations.

Interest-bearing deposits in other banks have generally been the primary repository of the liquidity we use to fund our

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 requirements.

primarily due to the decrease in our loans held-for-sale balances of $37.2 million.

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.

We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital

requirements.

We classify investment securities as either held-to-maturity or available-for-sale based on our intentions and the Company’s ability to hold such securities until maturity.

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classifications, securities that we have the positive intent and the ability to hold until maturity are classified as held-to-maturity and carried at amortized cost.

All other securities are designated as available-for-sale and carried at estimated

fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis.

All other securities are designated as available-for-sale and carried at

estimated fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis.

For the year presented, all securities were classified as held-to-maturity.

The following tables summarize the contractual maturities and weighted average yields of investment securities at December 31, 2021 and December 31, 2020, and the amortized cost of those

securities as of the indicated dates.

At December 31.

One Year or Less

After One to Five Years

($ in thousands)

Average Yield

Mortgage-backed securities

The following tables summarize the contractual maturities and weighted average yields of investment securities at December 31, 2022, and the amortized cost of those securities as of the indicated

At December 31, 2022

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There were no calls, sales or maturities of securities during the years ended December 31, 2022, and December 31, 2021.

At December 31, 2022, there were 18 securities, consisting of eight collateralized mortgage obligations and ten mortgage-backed securities.

Seventeen of these securities were in an unrealized loss

position as of December 31, 2022.

At December 31, 2021, there were 13 securities, consisting of five collateralized mortgage obligations and eight mortgage-backed securities.

Four of these securities were in gain positions for

greater than 12 months and nine of these securities were in an unrealized loss position as of December 31, 2021.

There were no unrealized losses as of December 31, 2020.

Deposits 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 ).

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

December 31, 2021.

Total Liabilities

Total liabilities at December 31, 2022, saw a decrease from its December 31, 2021, balance primarily due to a decrease in total deposits and was offset by an $7.0 million increase associated with

operating lease liabilities.

Deposits are the major source of funding for the Company.

We offer a variety of deposit products including interest and noninterest bearing demand accounts, money market and savings accounts and

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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.

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

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 our Strategic Program loan portfolio.

addition to the reserve account, some Strategic Program loan originators maintain operating deposit accounts with us.

The following tables present the end of period balances as well as the average balances for the deposit portfolio for the periods indicated (average balances have been calculated using daily

For the Years Ended December 31,

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Total period end deposits

December 31, 2022

December 31, 2021

($ in thousands)

Noninterest-bearing demand deposits

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Total average deposits

Our deposits increased to $251.9 million at December 31, 2021 from $164.5 million at December 31, 2020, an increase of $87.4 million, or 53.1%.

This increase was primarily due to an increase in

certificates of deposit, noninterest-bearing and interest-bearing demand deposits, and money markets.

Our deposits decreased by $8.9 million to $243.0 million at December 31, 2022, from $251.9 million at December 31, 2021, or 3.5%.

This decrease was primarily due to decreases in our

noninterest-bearing demand deposits and money markets account balances.

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

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($ in thousands)

to six months

Time deposits, uninsured

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Liquidity management is the ability to meet current and future financial obligations of a short-term nature.

Our primary sources of funds consist of deposit inflows, the sale of loans, repayment

of loans and net profits.

While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, loan sales and security sales are greatly influenced by general interest rates,

economic conditions, and competition.

Our primary sources of funds consist of deposit inflows, the sale of loans, repayment of

loans and net profits.

conditions, and competition.

On November 23, 2021, we completed our IPO at a price of $10.50 per share.

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

Our primary source of funds to originate new loans (other than the PPPLF program used to fund PPP loans in 2020) is derived from deposits.

Our primary source of funds to originate new loans is derived from deposits.

Deposits are comprised of core and noncore deposits.

use brokered deposits and a rate listing service to advertise rates to banks, credit unions, and other institutional entities.

We use brokered deposits and a rate listing service to advertise

rates to banks, credit unions, and other institutional entities.

We designate deposits obtained from this source as Institutional Deposits.

To date, depositors of brokered and

Institutional Deposits have been willing to place deposits with us at rates near the middle of the market.

To attract deposits from local and nationwide consumer and commercial markets, we historically paid rates at the higher end of the market,

which we have been able to pay due to our high margin and technology oriented business model.

To attract deposits from local and nationwide consumer and commercial markets, we historically paid rates

at the higher end of the market, which we have been able to pay due to our high margin and technology-oriented business model.

We utilize rate listing services and website advertising to attract deposits from consumer and commercial sources.

We regularly evaluate new, core deposit products and in 2020, we launched a deposit product targeted to the needs of our PPP borrowers.

We intend to have various term offerings to match our

funding needs.

Plans for 2022 include marketing commercial checking accounts to selected business customers and expanded roll out of our deposit product targeted to the needs of our SBA borrowers.

These accounts offer small business cash management

tools including ACH and wire capabilities, competitive interest rates, and personalized customer support.

The commercial checking account is expected to be a no-fee based account with emphasis on electronic banking.

With no current plans to expand

our brick-and-mortar branch network, online and mobile banking offers a means to meet customer needs and better efficiency through technology compared to traditional branch networks.

We believe that the rise of mobile and online banking provides us

the opportunity to further leverage the technological competency we have demonstrated in recent years.

We regularly evaluate new, core deposit products.

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

With no current plans to expand our brick-and-mortar branch network, online and

mobile banking offers a means to meet customer needs and better efficiency through technology compared to traditional branch networks.

We believe that the rise of mobile and online banking provides us the opportunity to further leverage the

technological competency we have demonstrated in recent years.

We regularly adjust our investment in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and

securities and (4) the objectives of our asset/liability management, funds management and liquidity policies.

The objective of the liquidity policy is to reduce the risk to our earnings and capital arising from the inability to meet obligations in

a timely manner.

The objective of the liquidity policy is to reduce the risk to our earnings and capital arising from the inability to meet obligations

in a timely manner.

This entails ensuring sufficient funds are available at a reasonable cost to meet potential demands from both fund providers and borrowers.

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At December 31, 2022,

2021, liquid assets (defined as cash and due from banks and interest bearing deposits), consisting of cash and due from banks, totaled $85.8 million.

We believe that our liquid assets combined with the available lines of credit provide adequate

liquidity to meet our current financial obligations for at least the next 12 months.

liquid assets (defined as cash and due from banks and interest bearing deposits), consisting of cash and due from banks, totaled $100.6 million of which $0.3 million is above the FDIC insurance limit and uninsured.

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

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The increase in shareholders’ equity was primarily attributable

to the net proceeds of $35.6 million from the issuance of 4,025,000 shares of common stock in our IPO and net income recognized of $31.6 million.

Stock options exercised, and stock-based compensation increased additional paid-in capital aggregately

by approximately $2.4 million.

to net income recognized for the year ended December 31, 2022.

We use several indicators of capital strength.

The most commonly used measure is average common equity to average assets, which was 23.1% and 16.0% at December 31, 2021 and 2020, respectively.

The most commonly used measure is total equity to total assets, which was 34.9% and 30.4% at December 31, 2022 and 2021, respectively.

Our return on average equity was 19.6% and 39.2% for the years ended December 31, 2022 and 2021, respectively.

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The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.

Failure to meet minimum capital requirements can initiate certain mandatory and

possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank

must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and classifications are also subject

to qualitative judgments by the regulators about components, risk weightings, and other factors.

Under the prompt corrective action rules, an institution is deemed “well capitalized” if its Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 Capital ratio, and Total Capital ratio meet

or exceed 5%, 6.5%, 8%, and 10%, respectively.

On September 17, 2019, the federal banking agencies jointly finalized a rule intending to simplify the regulatory capital requirements described above for qualifying community banking organizations

that opt into the Community Bank Leverage Ratio framework, as required by Section 201 of the Regulatory Relief Act.

The Bank has elected to opt into the Community Bank Leverage Ratio framework starting in 2020.

Under these new capital requirements,

as temporarily amended by Section 4012 of the CARES Act, the Bank must maintain a leverage ratio greater than 8% for 2020 and 8.5% for 2021.

Failure to meet minimum capital requirements can initiate certain mandatory and possibly

additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must

meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices.

The capital amounts and classifications are also subject to

qualitative judgments by the regulators about components, risk weightings, and other factors.

Under the prompt corrective action rules, an institution is deemed “well capitalized” if its Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 Capital ratio, and Total Capital ratio meet or

exceed 5%, 6.5%, 8%, and 10%, respectively.

On September 17, 2019, the federal banking agencies jointly finalized a rule intending to simplify the regulatory capital requirements described above for qualifying community banking organizations that

opt into the Community Bank Leverage Ratio framework, as required by Section 201 of the Regulatory Relief Act.

The Bank elected to opt into the Community Bank Leverage Ratio framework starting in 2020.

Under these new capital requirements, as

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

As of December 31, 2022 and 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 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:

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We are not aware of any accounting loss to be incurred by funding these commitments;

if required, we would maintain an allowance for off-balance sheet credit risk which would be recorded in other liabilities on the consolidated balance

if required, we would maintain an allowance for off-balance sheet credit risk which would be recorded in other liabilities on the consolidated

balance sheets.

Our commitments to extend credit as of the dates indicated are summarized below.

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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.

Changes in these estimates, which are likely to occur from period to period, or use of different estimates that we could have reasonably used in the current period,

would have a material impact on our financial position, results of operations or liquidity.

The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies.

We have elected to take advantage of this extended

transition period, which means that the financial statements included in this Report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public

companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.

We have elected to take advantage of this extended transition

period, which means that the financial statements included in this Report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for

the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act.

The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or subjective decisions or assessments.

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The ALL is a valuation allowance for probable incurred credit losses.

Loans that are deemed to be

uncollectible are charged off and deducted from the ALL.

Loans that are deemed to be uncollectible

are charged off and deducted from the ALL.

The provision for loan losses and recoveries on loans previously charged off are credited to the ALL.

The ALL consists of specific and general components subject to significant judgment and

short-term change.

The specific component relates to loans that are individually classified as impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due according to the

contractual terms of the loan agreement.

The ALL consists of specific and general components subject to significant judgment and short-term

terms of the loan agreement.

Loans for which the terms have been modified resulting in a concession, and for which the borrower is experiencing financial difficulties, are considered TDRs and classified as impaired.

The general component covers loans that are collectively evaluated for impairment and loans that are not individually identified for impairment evaluation.

component is based on historical loss experience adjusted for current factors and includes actual loss history experienced for the preceding three fiscal years and the interim period for the current fiscal year.

This actual loss experience is

supplemented with other qualitative economic factors based on the risks present for each portfolio type.

The general component is based on

historical loss experience adjusted for current factors and includes actual loss history experienced for the preceding three fiscal years and the interim period for the current fiscal year.

This actual loss experience is supplemented with other

qualitative economic factors based on the risks present for each portfolio type.

These economic factors include consideration of the following:

levels and trends in delinquencies and impaired loans (including TDRs);

and trends in charge-offs and recoveries, trends in volumes and terms of loans;

levels and trends in

charge-offs and recoveries, trends in volumes and terms of loans;

migration of loans to the classification of special mention, substandard, or doubtful;

effects of any change in risk selection and underwriting standards;

changes in lending policies and procedures;

other changes in lending

policies and procedures;

national and local economic trends and conditions;

and effects of changes in credit concentrations.

Generally, our estimate for the ALL does not have significant sensitivity to the changes in the

qualitative factors.

For a 0.20% increase in the qualitative economic factors assigned by us to each loan category the ALL at December 31, 2021 would have increased by approximately $0.3 million.

The Company considered COVID-19 to be the most

significant factor the Company uses in the qualitative economic factors estimate of the ALL.

The ALL increase associated with the COVID-19 pandemic was $0.7 million as of December 31, 2021 and December 31, 2020.

These sensitivity analyses do not represent management’s expectations of the deterioration in risk ratings or the increases in loss rates but are provided as hypothetical scenarios to assess the

sensitivity of the allowance for loan and lease losses to changes in key inputs.

We believe the risk ratings and loss severities currently in use are appropriate.

Generally, our estimate for the ALL does not have significant sensitivity to the changes in the qualitative factors.

We estimate the allowance balance required using past loan loss experience, current economic conditions, the nature and volume of the portfolio, information about specific borrower situations,

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This methodology for determining charge-offs is consistently applied to each group of loans.

We group loans into different categories based on loan type to

determine the appropriate allowance for each loan group.

We group loans into different categories based on loan type

to determine the appropriate allowance for each loan group.

The Company generally places loans on a nonaccrual status when:

(1) payment is in default for 90 days or more unless the loan is well secured and in the process of collection;

repayment of principal and interest is not foreseen.

or (2) full repayment

of principal and interest is not foreseen.

When a loan is placed on nonaccrual status, all accrued and uncollected interest on that loan is reversed.

Past-due interest received on nonaccrual loans is not recognized in interest income but

is applied as a reduction of the outstanding principal of the loan consistent with the accounting for impaired loans.

A loan is relieved of its nonaccrual status when all principal and interest payments are brought current, the loan is well

secured, and an analysis of the borrower’s financial condition provides reasonable assurance that the borrower can repay the loan as scheduled.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of

the loan agreement, including scheduled interest payments.

Past-due interest received on nonaccrual loans is not recognized in interest income but is

applied as a reduction of the outstanding principal of the loan consistent with the accounting for impaired loans.

A loan is relieved of its nonaccrual status when all principal and interest payments are brought current, the loan is well secured,

and an analysis of the borrower’s financial condition provides reasonable assurance that the borrower can repay the loan as scheduled.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the

loan agreement, including scheduled interest payments.

Impairment is evaluated in total for smaller-balance loans of similar nature, such as Strategic Program loans, and on an individual loan basis for commercial real estate secured and SBA and

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consolidated financial statements included elsewhere in this Report.

We record stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”) and recognize stock-based compensation

expense in the period in which an employee or non-employee is required to provide service, which is generally over the vesting period of the individual stock-based payment award.

Compensation expense for awards is recognized over the requisite

service period on a straight-line basis and we account for forfeitures as they occur.

We classify our awards as equity awards and these awards are valued as of the grant date based upon the underlying stock price and a number of assumptions,

including volatility, performance period, risk-free interest rate and expected dividends.

We record stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”) and recognize stock-based compensation expense

in the period in which an employee or non-employee is required to provide service, which is generally over the vesting period of the individual stock-based payment award.

Compensation expense for awards is recognized over the requisite service

period on a straight-line basis and we account for forfeitures as they occur.

We classify our awards as equity awards and these awards are valued as of the grant date based upon the underlying stock price and a number of assumptions, including

volatility, performance period, risk-free interest rate and expected dividends.

The determination of the grant date fair value using an option pricing model is affected principally by our estimated fair value of our common stock and requires us to make a number of other

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The expected term represents the period that our awards are expected to be outstanding.

We calculated the expected term using a

permitted simplified method, which is based on the vesting period and contractual term for each tranche of awards.

We calculated the expected term using a permitted simplified

method, which is based on the vesting period and contractual term for each tranche of awards.

Expected Volatility.

The expected volatility was based on the historical share volatility of several comparable publicly traded companies over a

period of time equal to the expected term of the awards, as we do not have any trading history to use the volatility of our own common shares.

The comparable companies were chosen based on their size, stage in life cycle and area of

We will continue to apply this process until a sufficient amount of historical information regarding the volatility of our own share price becomes available.

Prior to our initial public offering, the expected volatility was based on the historical share volatility of several comparable publicly traded

companies over a period of time equal to the expected term of the awards, as we did not have any trading history to use the volatility of our own common shares.

After the completion of our initial public offering, it is no longer

necessary to utilize the volatility of comparable publicly traded companies as we now have historical trading volatility data on our own common shares.

Risk-Free Interest Rate.

The risk-free rate is based on the U.S.

Treasury yield curve in effect at the time of grant for periods corresponding

with the expected life.

Treasury yield curve in effect at the time of grant for periods corresponding with the expected life.

Expected Dividend Yield.

We have not paid dividends on our common shares nor do we expect to pay dividends in the foreseeable future.

we used an expected dividend yield of zero.

Therefore, we used an expected

dividend yield of zero.

For the years ended December 31, 2022 and 2021, stock-based compensation expense was $0.8 million and $2.1 million, respectively.

As of December 31, 2021, we had $0.3 million of total

unrecognized stock-based compensation costs, which we expect to recognize over an estimated weighted-average period of 2.33 years.

We expect to continue to grant options and other stock-based awards in the future, and to the extent that we do, our

stock-based compensation expense recognized in future periods will likely increase.

As of December 31, 2022, we had $0.5 million of total unrecognized

stock-based compensation costs, which we expect to recognize over an estimated weighted-average period of 1.8 years.

We expect to continue to grant options and other stock-based awards in the future, and to the extent that we do, our stock-based

compensation expense recognized in future periods will likely increase.

Fair Value of Common Stock.

There was no public market for our common shares prior to the completion of our initial public offering

on November 23, 2021.

As such, the estimated fair value of our common shares has previously been determined at each grant date by our board of directors, with input from management, based on the information known to us on the grant date and upon a

review of any recent events and their potential impact on the estimated per share fair value of our common shares.

As part of these fair value determinations, our board of directors obtained and considered valuation reports prepared by a

third-party valuation firm in accordance with the guidance outlined in the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities

Issued as Compensation .

There was no public market for our common shares prior to the completion of our initial public offering on November 23, 2021.

such, the estimated fair value of our common shares has previously been determined at each grant date by our board of directors, with input from management, based on the information known to us on the grant date and upon a review of any recent

events and their potential impact on the estimated per share fair value of our common shares.

As part of these fair value determinations, our board of directors obtained and considered valuation reports prepared by a third-party valuation firm in

accordance with the guidance outlined in the American Institute of Certified Public Accountants Accounting and Valuation Guide, Valuation of Privately-Held-Company Equity Securities Issued as Compensation .

In estimating the fair value of our common shares prior to the offering completed on November 23, 2021, multiple factors were considered in selecting an appropriate valuation approach, including,

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(i) does the valuation method reflect our going-concern and/or expected time to liquidity status;

(ii) does the valuation method assign value to the junior instruments, unless a future exit scenario is being analyzed whereby no

cash is being distributed to the junior instruments based on equity class-specific rights;

(ii) does the valuation method assign value to the junior instruments, unless a future exit scenario is being analyzed whereby

no cash is being distributed to the junior instruments based on equity class-specific rights;

and (iii) is the method appropriate based on our stage of development at the date of the valuation.

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appropriate, was the Option Pricing Method, or OPM.

The OPM is a forward-looking method that considers our current equity value and was used to allocate our total equity value between common stock and stock options granted considering a continuous

distribution of outcomes, rather than focusing on distinct future scenarios.

The OPM is a forward-looking method that considers our current equity value and was used to allocate our total equity value between common stock and stock options granted considering a

continuous distribution of outcomes, rather than focusing on distinct future scenarios.

We estimated fair value of our common shares using the OPM given the uncertainty associated with both the timing and type of any future exit scenario and applied an Income Approach and Market

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inflation over the holding period, and the risks associated with realizing the cash flows in the amounts and at the times projected.

The discount rate selected is typically based on rates of return available from alternative investments of similar

type and quality as of the valuation date.

The discount rate selected is typically based on rates of return available from alternative investments of

similar type and quality as of the valuation date.

The most commonly employed income approach to valuation is the discounted cash flow analysis.

The Market Approach estimates the value of an asset or security by examining observable market values for

similar assets or securities.

The Market Approach estimates the value of an asset or security by examining observable market values

for similar assets or securities.

Sales and offering prices for comparable assets are adjusted to reflect differences between the asset being valued and the comparable assets, such as, location, time and terms of sale, utility, and physical

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companies acquired in a single transaction, which operate in the same or similar lines of business.

The OPM uses option theory to value securities in light of their respective claims to the enterprise value.

Total equity value is allocated based upon a series of call options with strike prices

at various value levels depending upon the rights and preferences of type of outstanding share.

While the OPM is capable of allocating value across distinct share classes, because we have only a single class of stock, the OPM applied was utilized

only to estimate the value allocable between common stock and stock options granted.

A Black-Scholes closed form option pricing model is typically employed in this analysis, with an option term assumption that is consistent with expected time to a

liquidity event and a volatility assumption based on the estimated stock price volatility of a peer group of comparable public companies over a similar term.

When estimating our total equity value, we applied both an Income Approach and Market Approach and weighted the results evenly.

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A discount for lack of marketability, or DLOM, was also then applied.

We considered various objective and subjective factors to estimate the fair value of the Company’s equity price per share of each grant date, including the value estimated by a third-party

valuation firm.

We considered various objective and subjective factors to estimate the fair value of the Company’s equity price per share of each grant date, including the value estimated by a third-party valuation

The factors considered by the third-party valuation firm and our board of directors included the following:

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We account for income taxes under the asset and liability method.

Under this method, deferred tax assets and

liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates expected to be in effect for the year in which the differences are expected to

Under this method, deferred tax assets and liabilities

are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates expected to be in effect for the year in which the differences are expected to reverse.

Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized.

Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income

within the carryforward period.

Because of our recent history of operating losses, management believes that recognition of the deferred tax assets arising from the above-mentioned future tax benefits is not likely to be realized and, accordingly,

has provided a full valuation allowance.

We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant

taxing authorities.

Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within

the carryforward period.

We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing

Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is more likely than not of being realized upon ultimate settlement.

As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still

of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still

The recognition and measurement of tax benefits requires significant judgment.

4 unchanged sentences

Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit.

During the years ended December 31, 2021 and 2020, the Company recognized

de minimis interest and penalties.

During the years ended December 31, 2022 and 2021, the Company recognized de minimis interest and penalties.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

Some of the financial measures included in this Report are not measures of financial performance recognized by GAAP.

These non-GAAP financial measures are “tangible book value per share,” and

“total nonperforming assets and troubled debt restructurings to total assets (less PPP loans).” Our management uses these non-GAAP financial measures in its analysis of our performance.

One of the financial measures included in this Report is not a measure of financial performance recognized by GAAP.

This non-GAAP financial measure is “tangible book value per share.” Our management

uses this non-GAAP financial measure in its analysis of our performance.

“Tangible book value per share” is defined as book value per share less goodwill and other intangible assets, divided by the outstanding number of common shares at the end of each period.

The most directly comparable GAAP financial measure is book value per share.

The most directly

comparable GAAP financial measure is book value per share.

We had no goodwill or other intangible assets as of any of the dates indicated.

We have not considered loan servicing rights as an intangible asset for purposes of

this calculation.

We have not considered loan servicing rights or loan trailing fee asset as intangible assets for

purposes of this calculation.

As a result, tangible book value per share is the same as book value per share as of each of the dates indicated.

“Total nonperforming assets and troubled debt restructurings to total assets (less PPP loans)” is defined as the sum of nonperforming assets and troubled debt restructurings divided by

total assets minus PPP loans.

The most directly comparable GAAP financial measure is the sum of nonperforming assets and troubled debt restructurings to total assets.

We believe this measure is important because we believe that PPP loans

will not be included in nonperforming assets or troubled debt restructurings since PPP loans are 100% guaranteed by the SBA.

We believe that the non-GAAP measure more accurately discloses the proportion of nonperforming assets and troubled

debt restructurings to total assets consistently with periods prior to the presence of PPP loans.

We believe these non-GAAP financial measures provide useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed

in accordance with GAAP;

however, we acknowledge that our non-GAAP financial measures have a number of limitations.

As such, you should not view these measures as a substitute for results determined in accordance with GAAP, and they are not

We believe this non-GAAP financial measure provides 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 measure has a number of limitations.

As such, you should not view this measure as a substitute for results determined in accordance with GAAP, and such measure is 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)

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)

Recently Issued Accounting Pronouncements

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anticipated effects on our results of operations and financial condition.

Quantitative and Qualitative Disclosures About Market Risk

Under the filer category of “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, the Company is not required to provide information requested by Part II, Item 7A of this

Financial Statements and Supplementary Data

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Report of Independent Registered Public Accounting Firm (PCAOB ID 173)

Consolidated Balance Sheet

Consolidated Statements of Income

Consolidated Statements of Changes in Shareholders’ Equity

Consolidated Statements of Cash Flows

Notes to Consolidated Financial Statements

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To the Shareholders and the Board of Directors of

FinWise Bancorp

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of FinWise Bancorp and Subsidiary (the “Company”), as of December 31, 2021 and 2020, the related

consolidated statements of income, changes in shareholder’s equity, and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”).

In our opinion, the consolidated financial

statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2021 and 2020, and the consolidated results of its operations and its cash flows for the years then ended, in conformity

with accounting principles generally accepted in the United States of America.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management.

Our responsibility is to express an opinion on the Company’s consolidated

financial statements based on our audits.

We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with

federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB.

Those standards require that we plan and perform the audit to obtain reasonable assurance about

whether the consolidated financial statements are free of material misstatement, whether due to error or fraud.

The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.

part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.

Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial

statements, whether due to error or fraud, and performing procedures to respond to those risks.

Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements.

Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

believe that our audits provide a reasonable basis for our opinion.

/s/ Moss Adams LLP

Spokane, Washington

March 30, 2022

We have served as the Company’s auditor since 2018.

FinWise Bancorp

Consolidated Balance Sheets

(in thousands, except share and par value amounts)

Cash and cash equivalents

Cash and due from banks

Interest-bearing deposits

Total cash and cash equivalents

Investment securities held-to-maturity, at cost

Investment in Federal Home Loan Bank (FHLB) stock, at cost

Loans receivable, net

Strategic Program loans held-for-sale, at lower of cost or fair value

Premises and equipment, net

Accrued interest receivable

Deferred taxes, net

SBA servicing asset, net

Investment in Business Funding Group (BFG), at fair value

Investment in FinWise Investments, LLC

LIABILITIES AND SHAREHOLDERS' EQUITY

Noninterest-bearing

Interest-bearing

Total deposits

Accrued interest payable

Income taxes payable, net

PPP Liquidity Facility

Other liabilities

Total liabilities

Commitments and contingencies (Note 8)

Shareholders' equity

Preferred stock, $.001 par value, 4,000,000 authorized;

no shares issued and outstanding as of December 31, 2021 and December 31, 2020

Common stock, $.001 par value, 40,000,000 shares authorized;

12,772,010 and 8,660,334 shares issued and outstanding as of December 31, 2021 and December 31, 2020,

Additional paid-in-capital

Retained earnings

Total shareholders' equity

Total liabilities and shareholders' equity

The accompanying notes are an integral part of these consolidated financial statements.

FinWise Bancorp

Consolidated Statements of Income

(in thousands, except share and per share amounts)

For the Years Ended December 31,

Interest income

Interest and fees on loans

Interest on securities

Other interest income

Total interest income

Interest expense

Interest on deposits

Interest on PPP Liquidity Facility

Total interest expense

Net interest income

Provision for loan losses

Net interest income after provision for loan losses

Non-interest income

Strategic Program fees

Gain on sale of loans, net

SBA loan servicing fees

Change in fair value on investment in BFG

Other miscellaneous income

Total non-interest income

Non-interest expense

Salaries and employee benefits

Occupancy and equipment expenses

Impairment of SBA servicing asset

Loss on investment in BFG

Other operating expenses

Total non-interest expense

Income before income tax expense

Provision for income taxes

Earnings per share, basic

Earnings per share, diluted

Weighted average shares outstanding, basic

Weighted average shares outstanding, diluted

The accompanying notes are an integral part of these consolidated financial statements.

FinWise Bancorp

Consolidated Statements of Changes in Shareholders’ Equity

(in thousands, except share amounts)

Shareholders’

Balance at December 31, 2019

Stock-based compensation expense

Issuance of warrants to BFG

Repurchase of restricted stock to pay for employee withholding taxes

Stock options exercised

Repurchase of common stock

Balance at December 31, 2020

Stock-based compensation expense

Issuance of common stock

Stock options exercised

Balance at December 31, 2021

The accompanying notes are an integral part of these consolidated financial statements.

FinWise Bancorp

Consolidated Statements of Cash Flows

(in thousands)

For the Years Ended December 31,

Cash flows from operating activities:

Adjustments to reconcile net income to net cash from operating activities

Depreciation and amortization

Provision for loan losses

Net amortization in securities discounts and premiums

Capitalized servicing assets

Gain on sale of SBA loans, net

Originations of Strategic Program loans held-for-sale

Proceeds on Strategic Program loans held-for-sale

Change in fair value of BFG

Impairment of SBA servicing asset

Loss on investment in BFG

Stock-based compensation expense

Deferred income tax benefit

Net changes in:

Accrued interest receivable

Accrued interest payable

Other liabilities

Net cash provided by (used in) operating activities

Cash flows from investing activities:

Net increase (decrease) in loans receivable

Purchase of loan pools

Investments in FinWise Investments, LLC

Distributions from BFG

Purchase of bank premises and equipment

Proceeds from maturities and paydowns of securities held-to-maturity

Purchases of securities held-to-maturity

Purchase of FHLB stock

Net cash provided by (used in) investing activities

Cash flows from financing activities:

Net increase in deposits

Proceeds from initial public offering, net

Proceeds from exercise of stock options

Proceeds from PPP Liquidity Facility

Repayment of PPP Liquidity Facility

Repurchase of restricted stock to pay for employee withholding taxes

Repurchase of common stock

Net cash provided by financing activities

Net change in cash and cash equivalents

Cash and cash equivalents, beginning of the period

Cash and cash equivalents, end of the period

Supplemental disclosures of cash flow information:

Cash paid during the period

The accompanying notes are an integral part of these consolidated financial statements.

Note 1 – Summary of Significant Accounting Policies

Nature of business and organization – FinWise Bancorp is a Utah Corporation headquartered in Murray, Utah and operates all business activities through its

wholly-owned banking subsidiary, FinWise Bank, dba Utah Community Bank.

Utah Community Bank was incorporated in the state of Utah on May 7, 1999.

All West Bancorp was incorporated in the state of Utah on October 22, 2002, after which, it acquired

100% of Utah Community Bank.

As of March 4, 2016, Utah Community Bank’s articles of incorporation were amended to rename the entity FinWise Bank.

As of March 15, 2021, All West Bancorp’s articles of incorporation were amended and restated to rename

the entity FinWise Bancorp.

References herein to “FinWise Bancorp,” “Bancorp” or the “holding company,” refer to FinWise Bancorp on a standalone basis.

The word “Company” refers to FinWise Bancorp and FinWise Bank collectively and on a consolidated

References to the “Bank” refer to FinWise Bank on a standalone basis.

On July 15, 2021, the Company publicly filed a Registration Statement on Form S-1 with the U.S.

Securities and Exchange Commission (“SEC”) in connection with its Initial Public Offering (“IPO”)

(the “Registration Statement”), which was subsequently amended on July 30, 2021, August 4, 2021, November 1, 2021, and November 16, 2021.

The Registration Statement was declared effective by the SEC on November 18, 2021.

In connection with the IPO,

the Company issued 4,025,000 shares of common stock, par value of $0.001, which included 525,000 shares sold pursuant to the underwriters’ exercise of their option to purchase additional shares.

The securities were sold to the public at a price of

$10.50 per share and began trading on the Nasdaq Stock Market LLC on November 19, 2021.

On November 23, 2021, the closing date of the IPO, the Company received total net proceeds of $39.3 million.

The net proceeds less other related expenses,

including audit fees, legal fees, listing fees, and other expenses, totaled $35.6 million.

The Bank is an independent bank that provides a full range of banking services to individual and corporate customers.

The Bank’s primary source of revenue is from loans including Small Business

Administration (SBA), commercial, commercial real estate, residential real estate, and consumer.

The Bank also has established Strategic Programs with various third-party loan origination platforms that use technology to streamline the origination

of unsecured consumer and secured or unsecured business loans to borrowers within certain approved credit profiles.

The Bank earns monthly program fees based on the volume of loans originated in these Strategic Programs, as well as interest during

the time the Bank holds the loans.

The Company is subject to competition from other financial institutions and to the regulations of certain federal and state agencies and undergoes periodic examinations by those agencies.

Stock split and changes in authorized shares – On July 26, 2021, the Board of Directors declared a six-for-one stock split of the Company’s issued and

outstanding shares of common stock, which was effective on July 26, 2021.

Accordingly, except for the amount of authorized shares, all references to share and per share amounts for the periods presented in the condensed consolidated financial

statements and accompanying notes to the condensed consolidated financial statements have been retroactively restated to reflect this stock split.

As a subsequent event, effective as of July 28, 2021, authorized capital stock was increased to

44,000,000 shares of capital stock, consisting of (i) 40,000,000 shares of common stock, par value $0.001 per share, and (ii) 4,000,000 shares of Preferred Stock, par value $0.001 per share.

COVID-19 – On March 11, 2020, the World Health Organization declared COVID-19 to be a global pandemic.

Local and national governments and regulatory

authorities have systematically implemented remedial measures to try to slow and curb the spread of COVID-19, including business closures and operating restrictions, travel bans, shelter in place, stay home, and similar directives and orders.

response to the COVID-19 pandemic and in adherence with state and local guidelines, the Company has implemented the business continuity plan and other measures and activities to protect the Company’s employees and, at the same time, to assist the

Company’s clients and the communities of which the Company is a part, including remote working for the majority of the Company’s employees, increased mobile banking and electronic transaction options for clients, payment deferral assistance to

commercial and consumer borrowers, and participation in the SBA’s Paycheck Protection Program (“PPP”) for loans to qualifying small businesses.

On March 22, 2020, the federal banking agencies issued an “Interagency Statement on Loan Modifications and Reporting for Financial Institutions Working with Customers Affected by the

Coronavirus”.

This guidance encourages financial institutions to work prudently with borrowers that may be unable to meet their contractual obligations because of the effects of COVID-19.

The guidance goes on to explain that in consultation with

the Financial Accounting Standards Board (“FASB”) staff that the federal banking agencies concluded that short-term modifications (e.g., six months) made on a good faith basis to borrowers who were current as of the implementation date of a relief

program are not troubled debt restructurings (“TDRs”).

The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020.

The CARES Act also addressed COVID-19 related modifications and specified that COVID-19

related modifications on loans that were current as of December 31, 2019 are not TDRs.

The Bank has applied this guidance related to payment deferrals and other COVID-19 related loan modifications.

The CARES Act also included a total allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”).

is known as the Paycheck Protection Program (“PPP”).

PPP loans are forgivable, in whole or in part, if the proceeds are used for eligible payroll costs and other permitted purposes in accordance with the requirements of the PPP.

These loans carry a

fixed rate of 1.00%.

PPP loans originated prior to June 5, 2020 have a term of two years, while PPP loans originated on or after June 5, 2020 have a term of five years.

Payments are deferred for at least the first six months of the loan and the

loans are 100% guaranteed by the SBA.

The SBA pays the originating bank a processing fee ranging from 1% to 5%, based on the size of the loan.

During the year ended December 31, 2020, the Company originated 700 PPP loans for a total principal

amount of $126.6 million.

At December 31, 2020, net deferred loan fees related to PPP loans totaled $1.9 million, which will be recognized over the life of the loans and as borrowers are granted forgiveness.

Participation in the PPP will likely

have a positive impact on the Company’s financial position and results of operations as this fee income is recognized over the term of the PPP loans.

As of December 31, 2020, PPP borrowers have applied for and received forgiveness from the SBA for

$19.3 million of PPP loan principal and have made $0.2 million of principal payments leaving $107.1 million of PPP loan principal outstanding.

The loan forgiveness resulted in an acceleration of deferred loan fees of $0.4 million for the year ended

December 31, 2020.

As of December 31, 2021, PPP borrowers have applied for and received forgiveness from the SBA for $125.2 million of PPP loan principal and have made $0.3 million of principal payments leaving $1.1 million of PPP loan principal

The loan forgiveness resulted in an acceleration of deferred loan fees of $1.5 million for the year ended December 31, 2021.

Principles of consolidation – The consolidated financial statements include the accounts of FinWise Bancorp and its wholly-owned subsidiary, FinWise Bank.

All significant inter-company balances and transactions have been eliminated in consolidation.

Significant concentrations of credit risk – All of the Company’s activities are with customers located throughout the United States.

The Company has

concentrations in SBA loans, Strategic Program loans, and residential real estate loans.

Accordingly, their ultimate collectability is particularly susceptible to changes in market conditions.

Ongoing analysis of the Company’s loan portfolio is performed to evaluate whether there is any significant exposure to an individual borrower or group(s) of borrowers as a result of any

concentrations of credit risk.

Such credit risks (whether on- or off-balance sheet) may occur when groups of borrowers or counterparties have similar economic characteristics and are similarly affected by changes in economic or other conditions.

Credit risk also includes the loss that would be recognized subsequent to the reporting date if counterparties failed to perform as contracted.

As of December 31, 2021 and 2020, the Company analyzed its exposure to credit risks and concluded that

no significant exposure exists from such concentrations of credit risks.

Use of estimates – In preparing the consolidated financial statements in accordance with Generally Accepted Accounting Principles (GAAP), management is

required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities as of the date of the consolidated balance sheets and certain revenues and expenses for the period.

Actual results could differ, either

positively or negatively, from those estimates.

Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for loan losses (ALL), the determination of the fair

value of certain financial instruments, deferred income tax assets and stock-based compensation.

Management believes the ALL is adequate.

While management uses currently available information to recognize losses on loans, future additions to the allowance may be necessary based on economic

conditions and individual credit deterioration.

Reclassifications – Certain amounts in the prior years’ financial statements have been reclassified to conform to the current year’s presentation.

Cash and cash equivalents – The Company considers all highly liquid debt instruments with an original maturity of three months or less (including cash,

amounts due from depository institutions, interest-bearing deposits in other banks, and federal funds sold) to be cash equivalents.

The Company maintains its cash in deposit accounts that, at times, may exceed federally insured limits.

The Company has not experienced any losses in such accounts and believes it is not exposed

to any significant credit risk on cash and cash equivalents.

Investment securities – Debt securities that management has the positive intent and ability to hold to maturity are classified as

“held-to-maturity” and recorded at amortized cost.

Securities not classified as held-to-maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other

comprehensive income.

The Company did not hold any available for sale securities at December 31, 2021 or 2020.

When the estimated fair value of a security is lower than the book value, a security is considered temporarily impaired.

On a quarterly basis, the Company evaluates any securities in a loss

position to determine whether the impairment is other-than-temporary.

If there is intent to sell the security, or if the Company will be required to sell the security, or if the Company believes it will not recover the entire cost basis of the

security, the security is other-than-temporarily impaired (“OTTI”) and impairment is recognized.

The amount of impairment resulting from credit loss is recognized in earnings and impairment related to all other factors, such as general market

conditions, is recognized in AOCI in the case of securities classified as available for sale.

Management considers a number of factors in its analysis of whether a decline in a security’s estimated fair value is OTTI.

Certain factors considered include, but are not limited to:

length of time and the extent to which the security has been in an unrealized loss position, (b) changes in the financial condition of the issuer, (c) the payment structure of debt securities, (d) adverse changes in ratings issued by rating

agencies, (e) and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value.

Purchased premiums and discounts on debt securities are amortized or accreted over the terms of the securities using the effective-yield method.

Gains and losses on the sale of securities are

recorded on the trade date and are determined using the specific identification method.

Equity method investments – Ownership interests in entities for which the Company has significant influence that are not consolidated

are accounted for as equity method investments.

SEC Staff Announcement:

Accounting for Limited Partnership Investments (codified in Accounting Standards Codification (“ASC”) 323-30-S99-1) guidance requires the use of the equity method unless the

investor’s interest “is so minor that the limited partner may have virtually no influence over partnership operating and financial policies.” The SEC staff’s position is that investments in limited partnerships and limited liability companies of

greater than 3% to 5% are considered more than minor and, therefore, should be accounted for using the equity method or fair value option and are not required to be consolidated.

The Company concluded that, consistent with its accounting policy,

the Company’s level of ownership in Business Funding Group, LLC (“BFG”) was indicative of significant influence and, as a result, the investment would be accounted for using the equity method.

However, the Company elected the fair value option for

its investment due to cost-benefit considerations.

Pursuant to electing the fair value option, the Company measures its investment in BFG at fair value each reporting period and changes in fair value are recorded in the Consolidated Statements of

Income within ‘Change in fair value on investment in BFG.’ See Note 9, Investments, for a discussion about the Company’s investment in BFG.

Investment in Federal Home Loan Banks (“FHLB”) stock – FHLB stock are required investments based on the level of the Bank’s assets, capital and/or

capital/surplus.

FHLB stock is carried at cost and periodically evaluated for impairment.

There is no readily determinable fair value for this stock as it has no quoted market value, it is a required investment and it is expected to be redeemed at

FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system.

government does not guarantee these obligations, and each of the regional FHLBs are jointly and severally liable for repayment

of each other’s debt.

Cash dividends are reported as a component of Other miscellaneous income in the Consolidated Statements of Income.

Loans held-for-sale – While the Company sells the vast majority of the loans funded in its Strategic Programs shortly after origination, the Company may

choose to retain a portion of the funded loans and/or receivables.

The loans and/or receivables the Company intends to sell are carried at lower of cost or estimated fair value in the aggregate.

Net unrealized losses are recognized in a valuation

allowance by charges to income.

Origination fees, net of certain direct costs associated with originating these loans, are recognized in other income when the loans are sold.

Loans receivable – Loans receivable are reported at their outstanding principal adjusted for any charge-offs, the ALL, and deferred fees and costs.

origination fees, net of certain direct origination costs, if any, are deferred and recognized on an adjustment of the related loan yield using an effective-yield method over the contractual life of the loan.

Interest income on loans is recognized

on an accrual basis commencing in the month of origination using the interest method.

Delinquency fees are recognized in income when chargeable and when collectability is reasonably assured

The Company requires most loans to be substantially collateralized by real estate, equipment, vehicles, accounts receivable, inventories or other tangible or intangible assets.

collateral is in the form of first and second mortgages on various types of property.

The Company also originates unsecured loans to consumers and businesses.

The Company may change intent from holding loans for investment and reclassify them as held-for-sale.

Loans held-for-sale are carried at the lower of aggregate cost and fair value.

losses are recorded in non-interest income based on the difference between sales proceeds and carrying value.

Allowance for loan losses – The ALL consists of specific and general components.

The specific component relates to impaired loans as defined by GAAP.

such loans that are classified as impaired, an allowance is established when the discounted cash flows, or the fair value of the collateral if the loan is collateral dependent, of the impaired loan is lower than the carrying value of that loan.

general component covers all loans not classified as impaired and is based on historical loss experience and general economic factors, adjusted for qualitative risk factors, both internal and external to the Company.

The general component is

calculated separately for each risk category.

The ALL represents the Company’s estimate of probable and estimable losses inherent to the loan portfolio as of the balance sheet date.

Losses are charged to the ALL when recognized.

loans are charged off or charged down at the point at which they are determined to be uncollectible in whole or in part unless the loan is well secured and in the process of collection.

The Company establishes the amount of the ALL by loan type, at

least quarterly, and the Company adjusts the provision for loan losses so the ALL is at an appropriate level at the balance sheet date.

The Company determines ALL as the best estimate within a range of estimated losses.

The methodologies the Company uses to estimate the ALL depend upon the impairment status and risk category of

After applying historic loss experience, as described above, the Company reviews the quantitatively derived level of ALL for each category using qualitative criteria.

The Company tracks various risk factors that influence the judgment

regarding the level of the ALL across the risk categories.

Risk factors include changes in national, regional, and local economic conditions that affect the borrowers’ business, delinquency, and charge off trends, and data from peer groups, among

The Company reviews changes in these factors to ensure that changes in the level of the ALL are directionally consistent with changes in these factors.

Nonaccrual loans – The Company’s policy is to place loans on a nonaccrual status when:

1) payment is in default for 90 days or more unless the loan is well

secured and in the process of collection;

or 2) full repayment of principal and interest is not foreseen.

When a loan is placed on nonaccrual status, all accrued and uncollected interest on that loan is reversed.

Past-due interest received on

nonaccrual loans is not recognized in interest income but is applied as a reduction of the outstanding principal of the loan consistent with the accounting for impaired loans.

A loan is relieved of its nonaccrual status when all principal and

interest payments are brought current, the loan is well secured, and an analysis of the borrower's financial condition provides reasonable assurance that the borrower can repay the loan as scheduled.

Impaired loans – Loans are considered impaired when, based on current information and events;

it is probable that the Company will be unable to collect all

amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments.

When a loan is impaired, the Company estimates a specific reserve for the loan based on the fair value of the loan’s underlying

collateral, less the cost to sell, or the projected present value of future cash flows.

Payments received on impaired loans that are accruing are recognized in interest income, according to the contractual loan agreement.

Payments received on

impaired loans that are on nonaccrual status are not recognized in interest income but are applied as a reduction of the outstanding principal.

Payments are recognized when cash is received.

Troubled debt restructurings (TDR) – Loans may be modified in the normal course of business for competitive reasons or to strengthen the Company’s

Loan modifications and restructurings may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan.

These modifications are structured on a

loan-by-loan basis and, depending on the circumstances, may include extended payment terms, a modified interest rate, forgiveness of principal, or other concessions.

Loans that have been modified to accommodate a borrower who is experiencing

financial difficulties, and for which the Company has granted a concession that it would not otherwise consider, are considered a TDR.

The Company considers many factors in determining whether to agree to a loan modification involving concessions, and seeks a solution that will both minimize potential loss to the Company and

attempt to help the borrower.

The Company evaluates borrowers’ current and forecasted future cash flows, their ability and willingness to make current contractual or proposed modified payments, the value of the underlying collateral, the

possibility of obtaining additional security or guarantees, and the potential costs related to a repossession or foreclosure and the subsequent sale of the collateral.

TDRs may be classified as either accrual or nonaccrual loans.

A loan on nonaccrual status and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to

perform under the modified structure for a minimum of six months, and there is evidence that such payments can and are likely to continue as agreed.

Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the

loan being returned to accrual status at the time of restructuring or after a shorter performance period.

If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan.

Premises and equipment, net – Premises and equipment are stated at cost less accumulated depreciation.

Depreciation included in the operating expense is

computed using the straight-line method over the estimated useful lives of the related assets.

Expenditures for new premises and equipment and major improvements are capitalized.

Normal costs of maintenance and repairs are charged to expense as

Gains and losses on dispositions are included in non-interest expense.

Income taxes – Deferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting

and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse.

The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be

sustained upon an audit by the taxing authority.

Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state

income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets.

Judgments and tax strategies are

subject to audit by various taxing authorities.

While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a material

adverse effect on the consolidated financial statements.

Transfer of financial assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered.

transferred assets is deemed to be surrendered when:

1) the assets have been isolated from the Company, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the

transferred assets, and 3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.

SBA servicing asset, net – Servicing assets are recognized as separate assets when servicing rights are acquired through sale of financial assets.

sales of SBA loans, or portions of SBA loans, with servicing retained, a portion of the cost of originating the loan is allocated to the servicing asset based on relative fair value.

Fair value is based on a valuation model that calculates the

present value of estimated future servicing income.

Servicing assets are subsequently measured using the amortization method which requires servicing assets to be amortized into non-interest income in proportion to, and over the period of,

estimated future net servicing income of the underlying loans.

The SBA servicing asset is evaluated annually for impairment based on the fair value of the asset as compared to amortized cost.

Capitalized servicing rights are stated separately on the

consolidated balance sheet and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.

Servicing fee income, which is reported in the consolidated statements of income in SBA loan servicing fees, is recorded for fees earned for servicing loans.

The fees are based on a contractual

percentage of the outstanding principal and recorded as income when earned.

The amortization of servicing assets and changes in the valuation allowance are netted against loan servicing income.

Revenue from contracts with customers – The Company applies the provisions of ASC 606, Revenue from Contracts with

Customers (“ASC 606”).

The core principle of this standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company

expects to be entitled in exchange for those goods or services.

Services that the Company reports as part of non-interest income are subject to ASC 606 and include fees from its deposit customers for transaction-based activities, account

maintenance charges and overdraft services.

Transaction-based fees, such as ACH and wire transfer fees, overdraft, return and stop payment charges, are recognized at the time such transactions are executed and the services have been fulfilled by

The fees are typically withdrawn from the customer’s deposit account balance.

The Company also receives fees from third-parties in its Strategic Programs for setting up systems and procedures to efficiently originate loans in a

convenient, compliant and safe manner.

Because the third-party simultaneously receives and benefits from the services, revenue is recognized evenly over the term of the loan program.

Stock-based compensation – The Company accounts for all stock-based awards to employees and non-employees, including grants of stock options and restricted

stock awards, based on their respective grant date fair values.

The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model.

Restricted stock awards are valued based on the fair value of the Company’s

common stock on the date of grant.

The assumptions used in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment.

The Company expenses

stock-based compensation related to stock options and restricted stock over the requisite service period.

The Company accounts for forfeitures of stock–based awards as they occur.

Stock-based compensation expense pertaining to employees is included

in salaries and employee benefits on the income statement.

Stock-based compensation expense related to directors and consultants is included in other operating expenses on the income statement.

Earnings per share (“EPS”) – Basic EPS is computed by dividing net earnings allocated to common shareholders by the weighted average number of common

shares outstanding.

Diluted EPS is computed by dividing net earnings allocated to common shareholders by the weighted average number of common shares outstanding adjusted to include the effect of potentially dilutive common shares.

dilutive common shares include incremental common shares issuable upon exercise of outstanding stock options and non-vested restricted common shares, that are not considered participating securities, using the treasury stock method.

The two-class method is used to determine earnings per share based on participation rights of participating securities in any undistributed earnings.

Each unvested restricted share granted by the

Company to its employees that includes rights to participate in distributed earnings is considered a participating security and the Company uses the two-class method to calculate net income available to the Company’s common shareholders per common

share – basic and diluted.

Off-balance sheet instruments – In the ordinary course of business, the Company has entered into off-balance sheet financial instrument arrangements

consisting of commitments to extend credit.

Such financial instruments are recorded in the consolidated financial statements when they are funded.

They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the

consolidated balance sheet.

Losses would be experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as

they were when the commitment was originally made.

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract.

Commitments generally have fixed expiration dates or

other termination clauses and may require payment of a fee.

The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default.

Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements.

The Company evaluates each

customer’s creditworthiness on a case-by-case basis.

The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party.

The commitments are collateralized by the

same types of assets used as loan collateral.

Segment reporting – The Company operates as one operating segment.

Operating segments are defined as components of an enterprise for which separate

financial information is evaluated regularly by the chief operating decision maker (“CODM”), consisting of the Company’s chief executive officer, in deciding how to allocate resources and assess the Company’s financial and operational performance.

In addition, the Company’s CODM evaluates the Company’s financial information and resources and assesses the performance of these resources on a consolidated basis.

As a result, management has determined that the Company’s business operates in a

single operating segment.

Since the Company operates as one operating segment, all required financial segment information can be found in the consolidated financial statements.

Recently adopted accounting pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), - Disclosure Framework - Changes to the Disclosure Requirements for Fair Value

Measurement , which makes a number of changes meant to add, modify or remove certain disclosure requirements associated with the movement amongst or hierarchy associated with Level 1, Level 2 and Level 3 fair value measurements.

1, 2020, the Company adopted this guidance, which did not have a material impact on the Company’s consolidated financial statements.

Accounting pronouncements to be adopted

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842) , to increase transparency and comparability among organizations by, among other

provisions, recognizing lease assets and lease liabilities on the balance sheet for those leases classified as operating leases under previous GAAP.

The new standard establishes a right-of-use model (“ROU”) that requires a lessee to recognize a ROU

asset and lease liability on the balance sheet for all leases with a term longer than 12 months.

Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the income

A modified retrospective transition approach is required, applying the new standard to all leases existing at the date of initial application.

The guidance was initially effective for fiscal years beginning after December 15, 2020, and

interim periods within fiscal years beginning after December 15, 2021.

However, the FASB issued ASU 2020-05, Revenue from Contracts with Customers (Topic 606) and Leases (Topic 842):

Effective Dates for Certain

Entities , delaying the effective date to fiscal years beginning after December 15, 2021, and interim periods within fiscal years beginning after December 15, 2022.

In transition, entities may also elect a package of practical expedients

that must be applied in its entirety to all leases commencing before the adoption date, unless the lease is modified, and permits entities to not reassess (a) the existence of a lease, (b) lease classification or (c) determination of initial direct

costs, as of the adoption date, which effectively allows entities to carryforward accounting conclusions under previous U.S.

In July 2018, the FASB issued ASU 2018-11, Leases (Topic 842):

Improvements , which provides entities an optional transition method to apply the guidance under ASC Topic 842 as of the adoption date, rather than as of the earliest period presented.

The Company is currently assessing the impact of the

adoption of this ASU on its consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326) .

The ASU sets forth a “current expected credit loss” (CECL)

model which requires the Company to measure all expected credit losses for financial instruments held at the reporting date based on historical experience, current conditions, and reasonable supportable forecasts.

This replaces the existing

incurred loss model and is applicable to the measurement of credit losses on financial assets measured at amortized cost, available-for-sale debt securities and applies to certain off-balance sheet credit exposures.

This ASU was initially effective

for fiscal years beginning after December 15, 2019, including interim periods within those fiscal years, with early adoption permitted.

However, the FASB issued an ASU to delay adoption for smaller reporting companies to calendar year 2023.

Company is currently assessing the impact of the adoption of this ASU on its consolidated financial statements.

Note 2 – Investments

Investment securities held-to-maturity, at cost

The amortized cost, unrealized gains and losses, and estimated fair values of the Company’s held-to-maturity securities at December 31, 2021 and 2020, are summarized as follows:

December 31, 2021

($ in thousands)

Mortgage-backed securities

December 31, 2020

($ in thousands)

Mortgage-backed securities

The Company had nine securities in an unrealized loss position at December 31, 2021, none in an unrealized loss at December 31, 2020.

December 31, 2021

Less than 12 months

12 Months or More

($ in thousands)

Mortgage-backed securities

The amortized cost and estimated market value of debt securities at December 31, 2021, by contractual maturity are shown below.

Actual maturities may differ from contractual maturities because

borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.

($ in thousands)

Securities held-to-maturity

Due in one year or less

Due after one year through five years

Due after five years through ten years

Due after ten years

At December 31, 2021, all held-to-maturity securities were pledged as collateral for a credit line held by the Bank.

There were no sales of investment securities during the year ended December

31, 2021 or 2020.

The Bank is a member of the FHLB system.

Members are required to own FHLB stock of at least the greater of 1% of FHLB membership asset value or 2.7% of outstanding FHLB advances.

At December 31,

2021 and 2020, the Bank owned $0.4 million and $0.2 million, respectively, of FHLB stock, which is carried at cost.

The Company evaluated the carrying value of its FHLB stock investment at December 31, 2021 and determined that it was not impaired.

This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment from recurring and

special dividends, and the Company’s intent and ability to hold this investment for a period of time sufficient to recover our recorded investment.

Note 3 – Loans and Allowance for Loan Losses

Loans are summarized as follows according to major risk category as of December 31, 2021 and 2020:

($ in thousands)

Commercial, non-real estate

Residential real estate

Strategic Program loans

Commercial real estate

Loans held-for-sale

Total loans held for investment

Deferred loan costs (fees), net

Allowance for loan losses

Strategic Program Loans – In 2016, the Company began originating loans with various third-party loan origination platforms that use technology and other

innovative systems to streamline the origination of unsecured consumer and secured or unsecured business loans to a wide array of borrowers within certain approved credit profiles.

Loans issued by the Company through these programs generally follow

and are limited to specific predetermined underwriting criteria.

The Company earns monthly minimum program fees from these third parties.

Based on the volume of loans originated by the Company related to each Strategic Program, an additional fee

equal to a percentage of the loans generated under the Strategic Program may be collected.

The program fee is included within non-interest income on the Consolidated Statements of Income.

The Company generally retains the loans and/or receivables for a number of business days after origination before selling the loans and/or receivables to the Strategic Program platform or another

Interest income is recognized by the Company while holding the loans.

These loans are classified as held-for-sale on the balance sheet.

The Company may also hold a portion of the loans or receivable and sell the remainder directly to the Strategic Programs or other investors.

The Company generally services the loans originated

through the Strategic Programs in consideration of servicing fees equal to a percentage of the loans generated under the Strategic Programs.

In turn, the Strategic Program service providers, subject to the Company’s approval and oversight, serve as

sub-servicer and perform typical primary servicing duties including loan collections, modifications, charging-off, reporting and monitoring.

Each Strategic Program establishes a “reserve” deposit account with the Company.

The agreements generally require that the deposit reserve account balance does not fall below the dollar amount of

the total loans outstanding currently held by the Company for the specific Strategic Program.

If necessary, the Company has the right to withdraw amounts from the reserve account to fulfill loan purchaser obligations created under the program

Total cash held in reserve by Strategic Programs at the Company at December 31, 2021 and 2020, was $39.6 million and $18.6 million, respectively.

Strategic Program loans retained and held-for-sale as of December 31, 2021 and 2020, are summarized as follows:

($ in thousands)

Retained Strategic Program loans

Strategic Program loans held-for-sale

Total Strategic Program loans

Changes in the ALL are summarized as follows:

December 31, 2021

($ in thousands)

Program Loans

Beginning balance

Balance at end of year

Ending balance individually evaluated for impairment

Ending balance collectively evaluated for impairment

Loans receivable

Ending balance individually evaluated for impairment

Ending balance collectively evaluated for impairment

December 31, 2020

($ in thousands)

Program Loans

Beginning balance

Provision (recapture)

Balance at end of year

Ending balance individually evaluated for impairment

Ending balance collectively evaluated for impairment

Loans receivable

Ending balance individually evaluated for impairment

Ending balance collectively evaluated for impairment

The following tables summarize impaired loans as of December 31, 2021 and 2020:

December 31, 2021

Interest Income

($ in thousands)

With no related allowance recorded

Commercial, non-real estate

Residential real estate

Strategic Program loans

Commercial real estate

December 31, 2020

Interest Income

($ in thousands)

With no related allowance recorded

Commercial, non-real estate

Residential real estate

Strategic Program loans

Commercial real estate

For the years ending December 31, 2021 and 2020, there were no impaired loans with an allowance recorded.

Nonaccrual and past due loans are summarized below as of December 31, 2021 and 2020:

December 31, 2021

($ in thousands)

Still Accruing

Commercial, non-real estate

Residential real estate

Strategic Program loans

Commercial real estate

December 31, 2020

($ in thousands)

Still Accruing

Commercial, non-real estate

Residential real estate

Strategic Program loans

Commercial real estate

The amount of interest income for the years ended December 31, 2021 and 2020, that was not recorded on nonaccrual loans was approximately $0.1 million and $0.1 million, respectively.

In addition to past due and nonaccrual status criteria, the Company also evaluates loans using a loan grading system.

Internal loan grades are based on current financial information, historical

payment experience, and credit documentation, among other factors.

Performance-based grades are summarized below:

Pass (Loan Grades 1-4) – A Pass asset is higher quality and does not fit any of the other categories described below.

The likelihood of loss is considered remote.

Special Mention (Loan Grade 5) – A Special Mention asset has potential

weaknesses that may be temporary or, if left uncorrected, may result in a loss.

While concerns exist, the Company is currently protected and loss is considered unlikely and not imminent.

Classified Substandard (Loan Grade 6) – A Substandard asset is

inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any.

Assets so classified have well defined weaknesses and are characterized by the

distinct possibility that the Company may sustain some loss if deficiencies are not corrected.

Classified Doubtful (Loan Grade 7) – A Doubtful asset has all the

weaknesses inherent in a Substandard asset with the added characteristics that the weaknesses make collection or liquidation in full highly questionable.

Classified Loss (Loan Grade 8) – A loss loan has an existing weakness or weaknesses that render the loan uncollectible and of such little value that

continuing to carry as an asset on the Bank’s book is not warranted.

This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical nor desirable to defer writing off this basically

worthless asset, even though partial recovery may be affected in the future.

The Company does not currently grade retained Strategic Program loans due to their small balances and homogenous nature.

Credit quality for Strategic

Program loans is highly correlated with delinquency levels.

The Strategic Program loans are evaluated collectively for impairment.

Outstanding loan balances categorized by these credit quality indicators are summarized as follows at December 31, 2021 and 2020:

December 31, 2021

($ in thousands)

Special Mention

Doubtful/Loss

Commercial, non-real estate

Residential real estate

Commercial real estate

Not Risk Graded

Strategic Program loans

Total at December 31, 2021

December 31, 2020

($ in thousands)

Special Mention

Doubtful/Loss

Commercial, non-real estate

Residential real estate

Commercial real estate

Not Risk Graded

Strategic Program loans

Total at December 31, 2020

Loans modified and recorded as TDR’s during the years ended December 31, 2021 and 2020, consist of the following:

($ in thousands)

December 31, 2021

Total at December 31, 2021

December 31, 2020

Residential real estate

Total at December 31, 2020

At December 31, 2021 and 2020, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR.

Loans modified and recorded as TDR’s during the years

ended December 31, 2021 and 2020 included modifications to rate and term.

There were no principal charge-offs recorded related to TDRs during the years ended December 31, 2021 and 2020.

During the year ended December 31, 2021, there was one new loan modification representing $0.01 million in principal and two previously reported TDRs representing $0.02 million in principal were

paid in full with interest.

Separately, one restructured loan incurred a default within 12 months of the restructure date during the year ended December 31, 2021.

This same loan was paid in full with interest on May 28, 2021.

The Company had a

payment default (defined as the loan becoming more than 90 days past due, being moved to nonaccrual status, or the collateral being foreclosed upon) for a TDR modified within the previous 12 months pertaining to $0.1 million in principal for a SBA

loan during the year ended December 31, 2020.

The Company evaluated the restructuring for possible impairment but concluded that no impairment existed because payments were being received in arrears and adequate collateral existed.

As a result, the

Company did not recognize any provisions for loan losses or net charge-offs as a result of defaulted TDRs for the year ended December 31, 2020

COVID-Related Loan Deferments

As discussed in Note 1, the federal banking agencies issued guidance in March 2020 that short -term modifications (for example, six months) made to a borrower affected by the COVID -19 pandemic

does not need to be identified as a TDR if the loan was current at the time of modification.

This relief applies to loan modifications executed between March 1, 2020 and January 1, 2022.

The CARES Act also addressed COVID-19 related modifications

and specified that such modifications made on loans that were current as of December 31, 2019 are not TDRs.

None of these modifications were on deferment status as of December 31, 2021.

The dollar amount of other short-term modifications of loans

held-for-investment not classified as troubled debt restructurings as of December 31, 2021 and December 31, 2020 was $0.5 million and $1.2 million.

Note 4 – Premises and Equipment

Premises and equipment at December 31, 2021 and 2020, consist of the following:

($ in thousands)

Leasehold improvements

Furniture, fixtures, and equipment

Construction in progress

Total premises and equipment

Less accumulated depreciation

Premises and equipment, net

Depreciation expense was approximately $0.3 million and $0.3 million for the years ended December 31, 2021 and 2020, respectively.

The Company leases its facilities under noncancelable operating leases.

Rent expense for 2021 and 2020 was $0.5 million and $0.4 million, respectively.

Future minimum annual rental payments for

these leases are as follows ($ in thousands):

Year Ended December 31, 2022

Year Ended December 31, 2023

Year Ended December 31, 2024

Year Ended December 31, 2025

Year Ended December 31, 2026

Note 5 – Deposits

Major classes of deposits at December 31, 2021 and 2020, are as follows:

($ in thousands)

Money markets

Time certificates of deposit

Total deposits

At December 31, 2021, the scheduled maturities of time deposits are as follows ($ in thousands):

Year Ended December 31, 2022

Year Ended December 31, 2023

Year Ended December 31, 2024

Year Ended December 31, 2025

Year Ended December 31, 2026

Time deposits with balances equal or greater than $250,000 totaled $3.7 million and $3.1 million at December 31, 2021 and 2020, respectively.

Note 6 – SBA Servicing Asset

The Company periodically sells portions of SBA loans and retains rights to service the loans.

Loans serviced for others are not included in the accompanying balance sheet.

The unpaid principal

balances of SBA loans serviced for others was $210.2 million and $140.1 million at December 31, 2021 and 2020, respectively.

The following table summarizes SBA servicing asset activity for the periods indicated:

For the Years Ended December 31,

($ in thousands)

Beginning balance

Additions to servicing asset

Impairment of SBA servicing asset

Amortization of servicing asset

Ending balance

The fair market value of the SBA servicing asset as of December 31, 2021 and 2020, was $3.94 million and $2.53 million, respectively.

Fair value adjustments to servicing rights are mainly due to

market-based assumptions associated with discounted cash flows, loan prepayment speeds, and changes in interest rates.

A significant change in prepayments of the loans in the servicing portfolio could result in significant changes in the valuation

adjustments, thus creating potential volatility in the carrying amount of servicing rights.

The SBA servicing asset recognized an impairment in the year ending December 31, 2021.

The Company believes future recovery of the amortized carrying value

The Company assumed a weighted average prepayment rate of 14.37%, weighted average term of 4.02 years, and a weighted average discount rate of 11.38% at December 31, 2021.

The Company assumed a weighted average prepayment rate of 16.42%, weighted average term of 3.64 years, and a weighted average discount rate of 10.00% at December 31, 2020.

Note 7 – Capital Requirements

The Bank is subject to various regulatory capital requirements administered by federal and State of Utah banking agencies (the regulators).

Failure to meet minimum capital requirements can

initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank's financial statements.

Under capital adequacy guidelines and the regulatory framework for

prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank's assets, liabilities, and certain off -balance-sheet items as calculated under regulatory accounting practices.

capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk -weighting, and other factors.

Prompt corrective action provisions are not applicable to the bank holding company.

Beginning January 1, 2020, the bank qualified and elected to use the community bank leverage ratio (CBLR) framework for quantitative measures which requires the Bank to maintain minimum amounts

and ratios of Tier 1 capital to average total consolidated assets.

Management believes, as of December 31, 2020 and December 31, 2021, that the Bank meets all capital adequacy requirements to which it is subject.

As of December 31, 2021 and 2020, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no

conditions or events since that notification that management believes have changed the Bank’s category).

The following table sets forth the actual capital amounts and ratios for the Bank and the minimum ratio and amount of capital required to be

categorized as well-capitalized and adequately capitalized as of the dates indicated.

The Bank's actual capital amounts and ratios are presented in the following table:

Well-Capitalized

($ in thousands)

December 31, 2021

Leverage ratio (CBLR election)

December 31, 2020

Leverage ratio (CBLR election)

* On March 27, 2020 the CARES Act became law.

Section 4012 of the CARES Act directs the agencies to issue an interim final rule reducing the CBLR ratio requirement from 9% to 8% for the last two quarters of the

year 2020, 8.5% for the calendar year 2021, and 9% thereafter.

Federal Reserve Board Regulations require maintenance of certain minimum reserve balances based on certain average deposits.

The Bank had reserve requirements of $0.0 million as of December 31,

2021 and 2020, respectively.

The Federal Reserve’s policy statement and supervisory guidance on the payment of cash dividends by a Bank Holding Company (“BHC”), such as FinWise Bancorp, expresses the view that a BHC should

generally pay cash dividends on common stock only to the extent that (1) the BHC’s net income available over the past year is sufficient to cover the cash dividend, (2) the rate of earnings retention is consistent with the organization’s expected

future needs and financial condition, and (3) the minimum regulatory capital adequacy ratios are met.

Should an insured depository institution controlled by a bank holding company be “significantly undercapitalized” under the applicable federal

bank capital ratios, or if the bank subsidiary is “undercapitalized” and has failed to submit an acceptable capital restoration plan or has materially failed to implement such a plan, federal banking regulators (in the case of the Bank, the FDIC)

may choose to require prior Federal Reserve approval for any capital distribution by the BHC.

In addition, since FinWise Bancorp is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, an ability to pay dividends depends on

the ability of the Bank to pay dividends to FinWise Bancorp and the FDIC and the Utah Department of Financial Institutions (“UDFI”) may, under certain circumstances, prohibit the payment of dividends to FinWise Bancorp from the Bank.

corporate law also requires that dividends can only be paid out of funds legally available.

The Company has not paid any cash dividends on its common stock since inception and it currently has no plans to pay cash dividends in the foreseeable future.

However, the Company’s Board of

Directors may declare a cash or stock dividend out of retained earnings provided the regulatory minimum capital ratios are met.

The Company plans to maintain capital ratios that meet the well-capitalized standards per the regulations and,

therefore, would limit dividends to amounts that are appropriate to maintain those well-capitalized regulatory capital ratios.

Note 8 – Commitments and Contingent Liabilities

Federal Home Loan Bank Secured Line of Credit

As of December 31, 2021 and 2020, the Bank’s available line of credit with the FHLB to borrow in overnight funds was $4.1 million and $4.4 million, respectively.

All borrowings are short-term and

the interest rate is equal to the correspondent bank's daily federal funds purchase rate.

As of December 31, 2021, no amounts were outstanding under the line of credit.

Loans totaling $5.4 million and $6.1 million were pledged to secure the FHLB

line of credit as of December 31, 2021 and 2020, respectively.

Line of Credit

At December 31, 2021, we had the ability to access $10.9 million from the Federal Reserve Bank’s Discount Window on a collateralized basis.

Through Zions Bank, the Bank had an available unsecured

line available of $1.0 million.

The Bank had an available line of credit with Bankers’ Bank of the West to borrow up to $1.05 million in overnight funds.

We had no outstanding balances on the unsecured or secured lines of credit as of December 31,

Paycheck Protection Program Liquidity Facility

On April 20, 2020, the Bank was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility (“PPPLF”) through the discount window.

The PPPLF enables the

Company to fund PPP loans without taking on additional liquidity or funding risks because the Company is able to pledge PPP loans as collateral to secure extensions of credit under the PPPLF on a non-recourse basis.

Borrowings under the PPPLF have

a fixed-rate of 0.35%, with a term that matches the underlying loans.

The Bank pledged $101.0 million of PPP loans as eligible collateral under the PPPLF borrowing arrangement at December 31, 2020.

The Bank pledged $1.0 million of PPP loans as

eligible collateral under the PPPLF borrowing arrangement at December 31, 2021.

The average outstanding borrowings were $49.0 million during the year ended December 31, 2020 and $36.4 million during the year ended December 31, 2021.

Commitments to Extend Credit

In the ordinary course of business, the Bank has entered into commitments to extend credit to customers which have not yet been exercised.

These financial instruments include commitments to

extend credit in the form of loans.

Those instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets.

At December 31, 2021 and 2020, financial instruments with off-balance-sheet risk were as follows:

($ in thousands)

Revolving, open-end lines of credit

Commercial real estate

Other unused commitments

Note 9 – Investment in Business Funding Group, LLC

On December 31, 2019, the Company purchased from certain members of BFG a 10% membership interest in exchange for an aggregate of 950,784 shares of par value $0.001 Common Stock of the Company.

The exchange was accounted for at fair value based on the fair value of the Company’s shares of approximately $3.5 million.

The Company’s 10% membership interests of BFG are comprised of Class A Voting Units representing 4.96% of the aggregate membership interests of BFG and Class B Non-Voting Units representing 5.04%

of the aggregate membership interests of BFG.

The other existing members of BFG jointly own the remaining 90% of the outstanding membership interests, on a fully-diluted basis – all of which membership interests are Class A Voting Units.

the Company’s accounting policy with respect to investments in limited liability companies, the Company concluded that its level of ownership was indicative of significant influence and, as a result, the investment would be accounted for using the

equity method.

However, the Company elected the fair value option for its investment due to cost-benefit considerations.

The Company received distributions from BFG in the amounts of $0.9 million and $0.5 million for the years ended December 31,

2021 and 2020, respectively.

These distributions were recorded in the Consolidated Balance Sheets as decreases in the investment in BFG.

On March 31, 2020, the Company entered into an agreement with BFG whereby the Company has the right of first refusal to purchase additional interests in BFG from any selling members.

Additionally, the Company was granted an option to purchase all, but not less than all, of the interests in BFG from the remaining members for an earnings multiple between 10 times and 15 times net profit based on the fiscal year ended immediately

prior to the exercise of the option.

The option period begins on January 1, 2021 and expires on January 1, 2028.

In consideration of granting the first right of refusal and the option, BFG members received 270,000 warrants in the aggregate.

warrants have an exercise price of $6.67 per share and the warrants expire on March 31, 2028.

The warrants are free-standing equity instruments and, as a result, are classified within equity at the fair value on the issuance date.

The fair value of

the warrants was determined by our board of directors with input from management, relying in part upon valuation reports prepared by a third-party valuation firm using a Black-Scholes option pricing model adjusted for a lack of marketability since

the Company’s stock is not publicly traded.

The resulting fair value of the warrants was $0.19 per share.

For further discussion on the Company’s investment in BFG, see Note 15 Related Parties.

Note 10 – Stock-Based Compensation

Stock option plans

The Company utilizes stock-based compensation plans, as well as discretionary grants, for employees, directors and consultants to attract and retain the best available personnel for positions of

substantial responsibility, to provide additional incentives and to promote the success of the Company’s business.

The 2019 Stock Option Plan (“2019 Plan”) was adopted on June 20, 2019 following approval by the Company’s Board of Directors and shareholders.

The 2019 Plan provides for the issuance of

non-statutory stock options and restricted stock to employees, directors and consultants.

The 2019 Plan also provides for the issuance of incentive stock options only to employees.

The 2019 Plan authorizes the issuance of 780,000 common shares.

2019 Plan will terminate as to future awards 10 years from the later of the effective date or the earlier of the most recent Board or stockholder approval of an increase in the number of shares reserved for issuance under the 2019 Plan.

31, 2021, 296,226 shares are available for future issuance.

The 2016 Stock Option Plan (“2016 Plan”) was adopted on April 20, 2017 following approval by the Company’s Board of Directors and shareholders.

The 2016 Plan provides for the issuance of

non-statutory stock options and restricted stock to employees, directors and consultants.

The 2016 Plan also provides for the issuance of incentive stock options only to employees.

The 2016 Plan authorizes the issuance of 299,628 common shares.

2016 Plan will terminate as to future awards 10 years from the later of the effective date or the earlier of the most recent Board or stockholder approval of an increase in the number of shares reserved for issuance under the 2016 Plan.

31, 2021, 24,612 shares under 2016 Plan are available for future issuance.

The stock-based incentive awards for both the 2019 Plan and the 2016 Plan (collectively, the “Plans”) are granted at an exercise price not less than the fair market value of the shares on the

date of grant, which is based on a Black-Scholes valuation model, in the case of options, or based on the fair value of the stock at the grant date, in the case of restricted stock.

Vesting of the options vary by employee or director and can have a

term no more than 10 years, with the options generally having vesting periods ranging from 1 to 5 years.

No shares had been granted under the 2016 Plan prior to 2018.

Under both Plans, if an award expires or becomes un-exercisable without having been exercised in full, or is surrendered pursuant to an exchange program, the unpurchased shares that were subject

thereto shall become available for future grant or sale under the Plans.

However, shares that have actually been issued under the Plans, upon exercise of an award, shall not be returned to the Plans and shall not become available for future

distribution under the Plans, except that if unvested shares of restricted stock are repurchased by the Company at their original purchase price, such shares shall become available for future grant under the Plans.

Other stock-based compensation

On December 24, 2019, the Board approved a restricted stock discretionary grant of 1,072,746 shares to certain employees.

Pursuant to the awards agreement, 351,852 shares vested on the grant date

and were repurchased by the Company on December 31, 2019 to pay for employee withholding taxes.

Pursuant to the awards agreement, 73,770 shares subsequently vested and were repurchased by the Company on April 6, 2020 to pay for employee income

Granted shares vest based on the accelerated attribution method on a schedule where all shares would be fully vested on December 1, 2023.

On November 18, 2021, pursuant to the awards agreement, the 424,458 remaining unvested shares became

vested because the Company’s registration statement was declared effective.

Stock options

The grant date fair value is determined using the Black-Scholes option valuation model.

The assumptions for expected life reflected management’s judgment and include consideration of historical experience.

Expected volatility is based on data from comparable public companies for the

expected option term.

The risk-free interest rate is based on the U.S.

Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option.

Expected forfeitures are estimated based on the Company’s

historical forfeiture experience.

Management believes that the assumptions used in the option-pricing model are highly subjective and represent only one estimate of possible value, as there is no active market for the options granted.

below summarizes the assumptions used:

For the Years Ended December 31,

Risk-free interest rate

Expected term in years

Expected volatility

Expected dividend yield

The following summarizes stock option activity for the years ended December 31, 2021 and 2020:

Stock Options

Exercise Price

Life (in years)

Intrinsic Value

Outstanding at December 31, 2019

Options granted

Options exercised

Options forfeited

Outstanding at December 31, 2020

Options granted

Options exercised

Options forfeited

Outstanding at December 31, 2021

Options vested and exercisable at December 31, 2021

The weighted average grant-date fair value of options per share granted was $1.55 and $1.37 during 2021 and 2020, respectively.

The aggregate intrinsic value of options exercised during the years

ended December 31, 2021 and 2020 were $0.51 million and $0.07 million, respectively.

During 2021, the Company received proceeds of approximately $0.3 million from the exercise of stock options and recognized a tax benefit of $0 million from the

exercise of stock options.

Upon exercise of the stock options, the Company will issue new authorized shares.

Restricted stock

The following table summarizes restricted stock awards activities:

Unvested as of as of January 1, 2020

Unvested as of December 31, 2020

Unvested as of December 31, 2021

The aggregate fair value of restricted stock that vested was approximately $2.3 million and $0.4 million for the year ended December 31, 2021 and 2020, respectively.

Stock-based compensation expense

The following tables present pre-tax and after-tax stock-based compensation expense recognized:

For the Years Ended December 31,

($ in thousands)

Stock options

Restricted shares

Stock options

Restricted shares

As of December 31, 2020, the Company had unrecognized stock-based compensation expense related to stock options of approximately $0.3 million, respectively, which is expected to be recognized

over the remaining weighted average recognition period of 2.3 years.

Employee stock-based compensation expense is recorded within Salaries and employee benefits and was $1.6 million and $1.7 million for the years ending December 31, 2021 and 2020, respectively.

Stock-based compensation for all others is recorded within Other operating expenses and was $0.5 million and $0.1 million for the years ending December 31, 2021 and 2020, respectively.

Note 11 – Fair Value of Financial Instruments

The Company measures and discloses certain assets and liabilities at fair value.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an

orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale).

GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value

measurements.

Among other things, the standard requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Observable inputs reflect market data obtained from independent sources,

while unobservable inputs reflect the Company’s estimates for market assumptions.

These two types of inputs create the following fair value hierarchy.

Level 1 – Quoted prices in active markets for identical instruments.

An active market is a market in which transactions occur with sufficient frequency

and volume to provide pricing information on an ongoing basis.

A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for

identical or similar instruments, or other observable inputs that can be corroborated by observable market data.

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models,

discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from nonbinding single dealer quotes

not corroborated by observable market data.

In developing Level 3 measurements, management incorporates whatever market data might be available and uses discounted cash flow models where appropriate.

These calculations include projections of future

cash flows, including appropriate default and loss assumptions, and market-based discount rates.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies.

However, considerable

judgment is required to interpret data to develop the estimates of fair value.

Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date.

The use of different market

assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts.

In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation

techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments.

This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these

estimated fair values.

Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period.

The following methods were used to estimate the fair value of each class of financial instruments:

Cash and cash equivalents :

The carrying amount of these items is a reasonable estimate of their fair value.

Investment securities held-to-maturity :

The estimated fair values of investment securities are priced using current active market quotes, if available,

which are considered Level 1 measurements.

For most of the portfolio, matrix pricing based on the securities’ relationship to other benchmark quoted prices is used to establish the fair value.

These measurements are considered Level 2.

Investment in Federal Home Loan Bank stock :

The fair value is based upon the redemption value of the stock, which equates to the carrying value.

Strategic Program loans held-for-sale :

The carrying amount of these items is a reasonable estimate of their fair value.

Loans held for investment :

The fair value is estimated by discounting the future cash flows and estimated prepayments using the current rates at which

similar loans would be made to borrowers with similar credit ratings and for the same remaining term.

Some loan types’ fair value approximated carrying value because of their floating rate or expected maturity characteristics.

SBA servicing asset :

The fair value of servicing assets is based on, in part, third -party valuations that project estimated future cash inflows that

include servicing fees and outflows that include market rates for costs of servicing.

The present value of the future cash flows are calculated utilizing market-based discount rates.

The market-based discount rates represent risk spreads based on

secondary market transactions utilizing calculated prepayment curves.

Due to the fact that observable loan transactions are used to determine the risk spreads, the Company considers the measurement to be Level 2.

Investment in BFG :

The Company purchased its ownership interest in BFG on December 31, 2019.

The Company’s valuation utilized the average of the discounted

cash flow method and the Guideline Public Company method.

A 20% lack of marketability discount was applied to the valuation as well as a 4.50% discount to non-voting shares to arrive at fair value.

The carrying amount of deposits with no stated maturity, such as savings and checking accounts, is a reasonable estimate of their fair value.

market value of certificates of deposit is based upon the discounted value of contractual cash flows.

The discount rate is determined using the rates currently offered on comparable instruments.

Accrued interest receivable and payable :

The fair value of accrued interest receivable and payable approximates their carrying amount.

PPP Liquidity Facility :

The fair value of PPPLF is estimated using a discounted cash flow based on the remaining contractual term and current borrowing

rates for similar terms.

December 31, 2021

December 31, 2020

($ in thousands)

Estimated Fair

Financial assets:

Cash and cash equivalents

Investment securities held-to-maturity

Investment in FHLB stock

Loans held for investment

Loans held-for-sale

Accrued interest receivable

SBA servicing asset

Investment in BFG

Financial liabilities:

Total deposits

Accrued interest payable

PPP Liquidity Facility

Assets measured at fair value on a nonrecurring basis are summarized as follows:

($ in thousands)

Fair Value Measurements Using

Description of Financial Instrument

December 31, 2021

Nonrecurring assets

Impaired loans

December 31, 2020

Nonrecurring assets

Impaired loans

Impaired loans – The loan amount above represents loans impaired as of year-end that have been adjusted to fair value.

When collateral dependent loans are

identified as impaired, the impairment is measured using the current fair value of the collateral securing these loans, less selling costs.

The fair value of real estate collateral is determined using collateral valuations or a discounted cash flow

analysis using inputs such as discount rates, sale prices of similar assets, and term of expected disposition.

Some appraised values are adjusted based on management’s review and analysis, which may include historical knowledge, changes in market

conditions, estimated selling and other anticipated costs, and/or expertise and knowledge.

The loss represents charge-offs or impairments on loans for adjustments made based on the fair value of the collateral.

Quantitative information for Level 3 fair value measurements – The range and weighted average of the significant unobservable inputs used to fair value

Level 3 nonrecurring assets during the years ended December 31, 2021 and 2020, along with the valuation techniques used, are shown in the following table:

($ in thousands)

(Weighted Average)

December 31, 2021

Impaired loans

Adjustment to

appraisal value

December 31, 2020

Impaired loans

Adjustment to

appraisal value

Note 12 – Income Taxes

The components of income tax expense consist of the following:

For the Years Ended December 31,

($ in thousands)

Current tax expense

Deferred tax expense (benefit)

Income tax expense

The components of net deferred income tax assets and liabilities on the balance sheet at December 31, 2021 and 2020, are as follows:

($ in thousands)

Deferred tax assets

Reserve for loan loss

Accrued bonuses

Nonqualified stock options

Total deferred tax assets

Deferred tax liabilities

Stock compensation

Net book value of fixed assets

Total deferred tax liabilities

Net deferred tax asset

The income tax expense recorded differs from the expected income tax expense and the reconciliation of these differences is as follows at December 31, 2021 and 2020:

For the Years Ended December 31,

($ in thousands)

Federal income tax expense at statutory rates

Effect of permanent differences

State income tax expense, net

Income tax expense

The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense.

During the years ended December 31, 2021 and 2020, the Company recognized approximately

$0 million of interest or penalties.

The Company files a United States federal income tax return and state income tax returns in Utah, Florida, and New York.

Open tax years that are potentially subject to examination related to the U.S.

jurisdiction are 2018 and subsequent years.

The Company had no unrecognized tax benefits at December 31, 2021.

Note 13 – Shareholders’ Equity

Stock Repurchases

During 2020, the Company repurchased 84,198 shares of its common stock at an average price of $3.68 and a total cost of $0.3 million.

The repurchase of shares by the Company are considered

authorized but unissued shares upon acquisition.

Note 14 – Retirement Plan

The Company has established an employee directed 401(k) plan (Plan).

The Plan requires the Company to annually contribute a “Safe Harbor” profit sharing contribution for all eligible

participants.

In addition, the Plan allows the Company, at its discretion, to make a matching contribution or additional profit sharing contribution based on each eligible employee's compensation for the Plan year.

The participants must be at least

21 years of age and have at least one year of service in order to be eligible for matching and profit-sharing contributions.

The Company made profit-sharing contributions to the Plan of $0.4 million and $0.3 million for the years ended December 31,

2021 and 2020, respectively.

Note 15 – Related Parties

In the ordinary course of business, the Company may grant loans to certain executive officers and directors and the companies with which they are associated.

The Company had loans outstanding to

related parties of $0.0 million as of December 31, 2021 and 2020, respectively.

Total deposits from certain executive officers and directors and the companies with which they are associated were $0.5 million and $0.7 million as of December 31, 2021

and 2020, respectively.

BFG is a small business loan broker, primarily under the SBA’s 7(a) loan program.

As noted in Note 9 Investments above, the Company has a 10% ownership in the outstanding membership units of BFG.

The Company underwrites loans sourced by BFG in its normal course of business.

If approved and funded, the Company pays BFG a commission fee based on the amount funded.

There is no guarantee or commitment made by the Company to BFG to approve or

fund loans referred by BFG.

The Company is able to use its sole discretion in deciding to approve and fund loans referred by BFG.

Note 16 – Earnings per Share

The following table is a reconciliation of the components used to derive basic and diluted EPS for the years ended December 31, 2021 and 2020 ($ in thousands, except share and per share amounts):

For the Years Ended December 31,

Amount allocated to participating common shareholders (1)

Net income allocate to common shareholders

Weighted average shares outstanding, basic

Weighted average effect of dilutive securities:

Stock options

Weighted average shares outstanding, diluted

Earnings per share, basic

Earnings per share, diluted

(1) Represents earnings attributable to holders of unvested restricted stock issued outside of the Plan to the Company's

There were no anti-dilutive options for the periods reported in the table above.

Note 17 – Revenue Recognition

The following is a summary of the Company’s revenue disaggregated by contracts with customers and revenue outside the scope of ASC 606:

For the Years Ended December 31,

($ in thousands)

Interest income

Interest income, not-in-scope

Interest and fees on loans

Interest on securities

Other interest income

Total interest income

Non-interest income

Non-interest income, in-scope

Service charges on deposit accounts

Strategic Program set up fees

Non-interest income, not in-scope

Strategic Program fees

Gain on sale of loans

SBA loan servicing fees

Unrealized gain on investment in BFG

Other miscellaneous income

Strategic Program service charges

Total non-interest income

Note 18 – Condensed Financial Statements of Parent

Financial information pertaining only to FinWise Bancorp, on a parent-only basis, is as follows as of and for the years ended December 31, 2021 and 2020:

Balance Sheets

($ in thousands)

Cash and cash equivalents

Investment in subsidiary bank

Investment in Business Funding Group (BFG), at fair value

Investment in FinWise Investments, LLC

Deferred taxes, net

LIABILITIES AND SHAREHOLDERS' EQUITY

Deferred taxes, net

Income taxes payable

Other liabilities

Shareholders' equity

Total liabilities and shareholders' equity

Statement of Income

For the Years Ended December 31,

($ in thousands)

Non-interest income

Change in fair value on investment in BFG

Equity in undistributed earnings of subsidiary

Total non-interest income

Non-interest expense

Salaries and employee benefits

Loss on investment in BFG

Other operating expenses

Total non-interest expense

Income before income tax expense

Provision for income taxes

Statements of Cash Flows

For the Years Ended December 31,

($ in thousands)

Cash flows from operating activities:

Adjustments to reconcile net income to net cash from

operating activities

Change in fair value of BFG

Loss on investment in BFG

Stock-based compensation expense

Deferred income tax expense

Net changes in:

Income tax receivable

Other liabilities

Net cash provided by operating activities

Cash flows from investing activities:

Investment in subsidiary bank

Investment in FinWise Investments, LLC

Distributions of BFG

Net cash used in investing activities

Cash flows from financing activities:

Proceeds from exercise of stock options

Proceeds from initial public offering, net

Repurchase of restricted stock to pay for employee withholding taxes

Repurchase of common stock

Net cash used in financing activities

Net change in cash and cash equivalents

Cash and cash equivalents, beginning of year

Cash and cash equivalents, end of year

Non-cash financing and investing activities:

Issuance of common stock for investment in BFG

Issuance of common stock in lieu of cash bonus

Note 19 – Subsequent Events

Subsequent events are events or transactions that occur after the date of the most recent balance sheet but before the financial statements are available to be issued.

The Company recognizes in

the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing of the financial statements.

The Company’s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the date of the balance sheet and before the financial statements are

available to be issued.

The Company has evaluated subsequent events through March 30, 2022, which is the date the consolidated financial statements are available to be issued.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosures

Not applicable.

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-K

Item 7. Management’s Discussion and Analysis