Finwise Bancorp 10-K

Item 7A. Quantitative and Qualitative Disclosures About Market Risk Under the filer category of “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act, the Company is not required to provide information requested by Part II, Item 7A of this Report. 77 Index Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 173 ) 78 Consolidated Balance Sheet 79 Consolidated Statements of Income 80 Consolidated Statements of Changes in Shareholders’ Equity 81 Consolidated Statements of Cash Flows 82 Notes to Consolidated Financial Statements 83 REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM To the Shareholders and the Board of Directors of FinWise Bancorp and Subsidiaries Opinion on the Consolidated Financial Statements We have audited the accompanying consolidated balance sheets of FinWise Bancorp and Subsidiaries (the “Company”), as of December 31, 2022 and 2021, 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, 2022 and 2021, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. Emphasis of Matter As discussed in Note 1 to the consolidated financial statements, in 2022 the Company adopted new accounting guidance Accounting Standards Codification Topic 842, Leases. Our opinion is not modified with respect to this matter. /s/ Moss Adams LLP Spokane, Washington March 30, 2023 We have served as the Company’s auditor since 2018. 78 Index FinWise Bancorp Consolidated Balance Sheets (in thousands, except share and par value amounts) ​ December 31, ​ 2022 2021 ASSETS Cash and cash equivalents Cash and due from banks $ 386 $ 411 Interest-bearing deposits 100,181 85,343 Total cash and cash equivalents 100,567 85,754 Investment securities held-to-maturity, at cost 14,292 11,423 Investment in Federal Home Loan Bank (FHLB) stock, at cost 449 378 Strategic Program loans held-for-sale, at lower of cost or fair value 23,589 60,748 Loans receivable, net 224,217 198,102 Premises and equipment, net 9,478 3,285 Accrued interest receivable 1,818 1,548 Deferred taxes, net 1,167 1,823 SBA servicing asset, net 5,210 3,938 Investment in Business Funding Group (BFG), at fair value 4,800 5,900 Operating lease right-of-use (“ROU”) assets 5,041 — Other assets 10,152 7,315 Total assets $ 400,780 $ 380,214 ​ LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Deposits Noninterest bearing $ 78,817 $ 110,548 Interest-bearing 164,181 141,344 Total deposits 242,998 251,892 Accrued interest payable 54 48 Income taxes payable 1,077 233 PPP Liquidity Facility 314 1,050 Operating lease liabilities 7,020 — Other liabilities 8,858 11,549 Total liabilities 260,321 264,772 ​ Commitments and contingencies (Note 8) ​ Shareholders’ equity Preferred stock, $ 0.001 par value, 4,000,000 authorized; no shares issued and outstanding as of December 31, 2022 and December 31, 2021 — — Common stock, $ 0.001 par value, 40,000,000 shares authorized; 12,831,345 and 12,772,010 shares issued and outstanding as of December 31, 2022 and December 31, 2021 , respectively 13 13 Additional paid-in-capital 54,614 54,836 Retained earnings 85,832 60,593 Total shareholders’ equity 140,459 115,442 Total liabilities and shareholders’ equity $ 400,780 $ 380,214 The accompanying notes are an integral part of these consolidated financial statements. 79 Index FinWise Bancorp Consolidated Statements of Income (in thousands, except share and per share amounts) ​ For the Years Ended December 31, ​ 2022 2021 Interest income Interest and fees on loans $ 50,941 $ 49,135 Interest on securities 208 47 Other interest income 1,180 61 Total interest income 52,329 49,243 ​ Interest expense Interest on deposits 1,432 1,138 Interest on PPP Liquidity Facility 2 127 Total interest expense 1,434 1,265 Net interest income 50,895 47,978 ​ Provision for loan losses 13,519 8,039 Net interest income after provision for loan losses 37,376 39,939 ​ Non-interest income Strategic Program fees 22,467 17,959 Gain on sale of loans, net 13,550 9,689 SBA loan servicing fees 1,603 1,156 Change in fair value on investment in BFG ( 478 ) 2,991 Other miscellaneous income 269 49 Total non-interest income 37,411 31,844 ​ Non-interest expense Salaries and employee benefits 24,489 21,744 Professional services 5,454 1,670 Occupancy and equipment expenses 2,204 882 Impairment of SBA servicing asset 1,728 800 Other operating expenses 4,881 4,415 Total non-interest expense 38,756 29,511 Income before income tax expense 36,031 42,272 ​ Provision for income taxes 10,916 10,689 Net income $ 25,115 $ 31,583 ​ Earnings per share, basic $ 1.96 $ 3.44 Earnings per share, diluted $ 1.87 $ 3.27 ​ Weighted average shares outstanding, basic 12,729,898 8,669,724 Weighted average shares outstanding, diluted 13,357,022 9,108,163 The accompanying notes are an integral part of these consolidated financial statements. 80 Index FinWise Bancorp Consolidated Statements of Changes in Shareholders’ Equity (in thousands, except share amounts) ​ Common Stock ​ Shares Amount Additional Paid-In Capital Retained Earnings Total Shareholders’ Equity Balance at December 31, 2020 8,660,334 $ 9 $ 16,853 $ 29,010 $ 45,872 Stock-based compensation expense — — 2,100 — 2,100 Issuance of common stock 4,025,000 4 35,572 — 35,576 Stock options exercised 86,676 — 311 — 311 Net income — — — 31,583 31,583 Balance at December 31, 2021 12,772,010 $ 13 $ 54,836 $ 60,593 $ 115,442 Stock-based compensation expense 123,055 — 778 — 778 Stock options exercised 56,280 — 260 — 260 Repurchase of common stock ( 120,000 ) — ( 1,260 ) 124 ( 1,136 ) Net income — — — 25,115 25,115 Balance at December 31, 2022 12,831,345 $ 13 $ 54,614 $ 85,832 $ 140,459 The accompanying notes are an integral part of these consolidated financial statements. 81 Index FinWise Bancorp Consolidated Statements of Cash Flows (in thousands) ​ For the Years Ended December 31, ​ 2022 2021 Cash flows from operating activities: Net income $ 25,115 $ 31,583 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 2,107 1,038 Provision for loan losses 13,519 8,039 Noncash operating lease cost 2,339 — Net amortization in securities discounts and premiums 28 25 Capitalized servicing assets ( 4,087 ) ( 3,048 ) Capitalized loan trailing fee asset ( 2,347 ) — Gain on sale of SBA loans, net ( 13,550 ) ( 9,689 ) Originations of Strategic Program loans held-for-sale ( 6,974,133 ) ( 6,335,194 ) Proceeds on Strategic Program loans held-for-sale 7,011,292 6,295,394 Change in fair value of BFG 478 ( 2,991 ) Impairment of SBA servicing asset 1,728 800 Stock-based compensation expense 778 2,100 Deferred income tax benefit (expense) 656 ( 1,371 ) Net changes in: Accrued interest receivable ( 270 ) 81 Accrued interest payable 6 ( 147 ) Other assets ( 299 ) ( 1,669 ) Operating lease liabilities ( 360 ) — Other liabilities ( 1,847 ) 5,817 Net cash provided by (used in) operating activities 61,153 ( 9,232 ) ​ Cash flows from investing activities: Net increase (decrease) in loans receivable ( 17,330 ) 41,622 Purchase of loan pools ( 8,754 ) ( 6,000 ) Investments in FinWise Investments, LLC ( 191 ) ( 80 ) Distributions from BFG 622 861 Purchase of bank premises and equipment ( 7,213 ) ( 2,334 ) Proceeds from maturities and paydowns of securities held-to-maturity 1,954 678 Purchases of securities held-to-maturity ( 4,851 ) ( 10,317 ) Purchase of FHLB stock ( 71 ) ( 173 ) Net cash provided by (used in) investing activities ( 35,834 ) 24,257 ​ Cash flows from financing activities: Net increase (decrease) in deposits ( 8,894 ) 87,416 Proceeds from initial public offering, net — 35,576 Common stock repurchased ( 1,136 ) — Proceeds from exercise of stock options 260 311 Proceeds from PPP Liquidity Facility — 5,558 Repayment of PPP Liquidity Facility ( 736 ) ( 105,515 ) Net cash provided by (used in) financing activities ( 10,506 ) 23,346 ​ Net change in cash and cash equivalents 14,813 38,371 Cash and cash equivalents, beginning of the period 85,754 47,383 Cash and cash equivalents, end of the period $ 100,567 $ 85,754 ​ Supplemental disclosures of cash flow information: Cash paid during the period Income taxes $ 9,360 $ 10,473 Interest $ 1,428 $ 1,412 Supplemental disclosures of noncash activities: Operating cash flows from operating leases $ 1,928 $ — Right-of-use assets obtained in exchange for operating lease liabilities $ 7,380 $ — The accompanying notes are an integral part of these consolidated financial statements. 82 Index FinWise Bancorp Notes to 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 subsidiaries FinWise Investments, LLC, and 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, FinWise Investments, LLC, and FinWise Bank collectively and on a consolidated basis. References to the “Bank” refer to FinWise Bank on a standalone basis. On July 15, 2021, the Company publicly filed a Registration Statement on Form S-1 with the U.S. Securities and Exchange Commission (“SEC”) in connection with its Initial Public Offering (“IPO”) (the “Registration Statement”), which was subsequently amended on July 30, 2021, August 4, 2021, November 1, 2021, and November 16, 2021. The Registration Statement was declared effective by the SEC on November 18, 2021. In connection with the IPO, the Company issued 4,025,000 shares of common stock, par value of $ 0.001 , which included 525,000 shares sold pursuant to the underwriters’ exercise of their option to purchase additional shares. The securities were sold to the public at a price of $ 10.50 per share and began trading on the Nasdaq Stock Market LLC on November 19, 2021. On November 23, 2021, the closing date of the IPO, the Company received total net proceeds of $ 39.3 million. The net proceeds less other related expenses, including audit fees, legal fees, listing fees, and other expenses, totaled $ 35.6 million. The Bank is an independent bank that provides a full range of banking services to individual and corporate customers. The Bank’s primary source of revenue is from loans including Small Business Administration (SBA), commercial, commercial real estate, residential real estate, and consumer. The Bank also has established Strategic Programs with various third-party loan origination platforms that use technology to streamline the origination of unsecured consumer and secured or unsecured business loans to borrowers within certain approved credit profiles. The Bank earns monthly program fees based on the volume of loans originated in these Strategic Programs, as well as interest during the time the Bank holds the loans. The Company is subject to competition from other financial institutions and to the regulations of certain federal and state agencies and undergoes periodic examinations by those agencies. Stock split and changes in authorized shares – On July 26, 2021, the Board of Directors declared a six -for-one stock split of the Company’s issued and outstanding shares of common stock, which was effective on July 26, 2021. Accordingly, except for the amount of authorized shares, all references to share and per share amounts for the periods presented in the condensed consolidated financial statements and accompanying notes to the condensed consolidated financial statements have been retroactively restated to reflect this stock split. As a subsequent event, effective as of July 28, 2021, authorized capital stock was increased to 44,000,000 shares of capital stock, consisting of (i) 40,000,000 shares of common stock, par value $ 0.001 per share, and (ii) 4,000,000 shares of Preferred Stock, par value $ 0.001 per share. 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, 2022 and 2021, the Company analyzed its exposure to credit risks and concluded that no significant exposure exists from such concentrations of credit risks. 83 Index Paycheck Protection Program – The Coronavirus Aid, Relief and Economic Security (“CARES”) Act was passed by Congress on March 27, 2020, in relation to the COVID-19 pandemic and included guidance on loan modifications. Also included in the CARES Act was a total allocation of $659 billion for loans to be issued by financial institutions through the Small Business Administration (“SBA”). This program is known as the Paycheck Protection Program (“PPP”). PPP loans are forgivable, in whole or in part, if the proceeds are used for eligible payroll costs and other permitted purposes in accordance with the requirements of the PPP. These loans carry a fixed rate of 1.00%. PPP loans originated prior to June 5, 2020, have a term of two years, while PPP loans originated on or after June 5, 2020, have a term of five years. Payments are deferred for at least the first six months of the loan and the loans are 100 % guaranteed by the SBA. The SBA pays the originating bank a processing fee ranging from 1 % to 5 %, based on the size of the loan. During the year ended December 31, 2020, the Company originated PPP loans for a total principal amount of $ 126.6 million. As of December 31, 2022, PPP borrowers have applied for and received forgiveness from the SBA for $ 125.5 million of PPP loan principal and have made $ 0.5 million of principal payments leaving $ 0.6 million of PPP loan principal outstanding. The loan forgiveness resulted in an acceleration of deferred loan fees of $ 1.5 million for the year ended December 31, 2021. The loan payments resulted in a de minimis amount of deferred loan fees recognized in the year ended December 31, 2022. Principles of consolidation – The consolidated financial statements include the accounts of FinWise Bancorp and its wholly-owned subsidiaries, FinWise Investments, LLC and FinWise Bank. All significant inter-company balances and transactions have been eliminated in consolidation. Out-of-period adjustments – During the first quarter of 2022, the Company recognized a $( 0.8 ) million ($( 0.6 ) million net of tax) reduction of interest and fees on loans and loans receivable, net, as an out-of-period adjustment. The adjustment was due to a deferred loan cost associated with the Company’s SBA 7(a) loans that was implemented in 2021. Upon the sales of the guaranteed portions of the SBA 7(a) loans, the acceleration of the deferred loan costs was improperly applied to interest income rather than reducing the balance sheet deferred costs asset and was compounded further by the continued amortization of the deferred cost asset over the life of the loans. The impact associated with this correction was not considered material to the interim unaudited consolidated financial statements for the three months ended March 31, 2022, year ended December 31, 2022, or the financial statements of any previously filed interim or annual periods. During the third quarter of 2022, the Company identified an error in the calculation of the Company’s tax provision which understated income tax expense for previously reported financial statements. The error was related to an incorrect application of Section 162(m) of the Internal Revenue Code, which limits tax deductions relating to executive compensation of certain executives of publicly held companies. The Company recorded an out-of-period adjustment during the third quarter of 2022 to correct the previously understated income tax expense. The adjustment resulted in a decrease to after-tax income of $( 0.9 ) million for the year ended December 31, 2022. The impact associated with this correction was not considered material to the interim unaudited consolidated financial statements for the three months ended September 30, 2022, year ended December 31, 2022, or the financial statements of any previously filed interim or annual periods. During the fourth quarter of 2022, the Company established a new loan trailing fee asset which is included in “Other assets” on the Consolidated Balance Sheets of approximately $ 2.3 million and recognized $ 2.1 million in gain on sale of loans ($ 1.5 million net of tax) as an out-of-period adjustment of which $ 1.2 million ($ 0.9 million net of tax) would have been recorded in the first three quarters of 2022 with the remaining $ 0.9 million ($ 0.6 million net of tax) associated with years prior to 2022. Before this correction, the loan trailing fees had been recognized in revenue during the month payment was owed by the Strategic Program rather than as a gain to be recognized upon sale of the loan receivables. The impact associated with this correction was not considered material to the interim unaudited consolidated financial statements for the three months ended December 31, 2022, year ended December 31, 2022, or the financial statements of any previously filed interim or annual periods. 84 Index 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 year’s 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. Federal Reserve Board Regulations require maintenance of certain minimum reserve balances based on certain average deposits; however, on March 15, 2020, the Federal Reserve announced that reserve requirement ratios would be reduced to zero percent effective March 26, 2020, due to economic conditions, which eliminated the reserve requirement for all depository institutions. The reserve requirement is still at zero percent as of December 31, 2022. Investments Investment securities – Debt securities that management has the positive intent and ability to hold to maturity are classified as “held-to-maturity” and recorded at amortized cost. Securities not classified as held-to-maturity are classified as “available for sale” and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The Company did no t hold any available for sale securities at December 31, 2022 or 2021. When the estimated fair value of a security is lower than the book value, a security is considered temporarily impaired. On a quarterly basis, the Company evaluates any securities in a loss position to determine whether the impairment is other-than-temporary. If there is intent to sell the security, or if the Company will be required to sell the security, or if the Company believes it will not recover the entire cost basis of the security, the security is other-than-temporarily impaired (“OTTI”) and impairment is recognized. The amount of impairment resulting from credit loss is recognized in earnings and impairment related to all other factors, such as general market conditions, is recognized in AOCI in the case of securities classified as available for sale. Management considers a number of factors in its analysis of whether a decline in a security’s estimated fair value is OTTI. Certain factors considered include, but are not limited to: (a) the length of time and the extent to which the security has been in an unrealized loss position, (b) changes in the financial condition of the issuer, (c) the payment structure of debt securities, (d) adverse changes in ratings issued by rating agencies, (e) and the intent and ability of the Company to hold the security for a period of time sufficient to allow for any anticipated recovery in fair value. Purchased premiums and discounts on debt securities are amortized or accreted over the terms of the securities using the effective-yield method. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method. 85 Index 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 Bank (“FHLB”) stock – FHLB stock are required investments based on the level of the Bank’s assets, capital and/or capital/surplus. FHLB stock is carried at cost and periodically evaluated for impairment. There is no readily determinable fair value for this stock as it has no quoted market value, it is a required investment and it is expected to be redeemed at par value. FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations, and each of the regional FHLBs are jointly and severally liable for repayment of each other’s debt. Cash dividends are reported as a component of Other miscellaneous income in the Consolidated Statements of Income. 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. Loans receivable – Loans receivable are reported at their outstanding principal adjusted for any charge-offs, the ALL, and deferred fees and costs. Loan origination fees, net of certain direct origination costs, if any, are deferred and recognized on an adjustment of the related loan yield using an effective-yield method over the contractual life of the loan. Interest income on loans is recognized on an accrual basis commencing in the month of origination using the interest method. Delinquency fees are recognized in income when chargeable and when collectability is reasonably assured The Company requires most loans to be substantially collateralized by real estate, equipment, vehicles, accounts receivable, inventories or other tangible or intangible assets. Real estate collateral is in the form of first and second mortgages on various types of property. The Company also originates unsecured loans to consumers and businesses. The Company may change intent from holding loans for investment and reclassify them as held-for-sale. Loans held-for-sale are carried at the lower of aggregate cost and fair value. Gains and losses are recorded in non-interest income based on the difference between sales proceeds and carrying value. Allowance for loan losses – The ALL consists of specific and general components. The specific component relates to impaired loans as defined by GAAP. For such loans that are classified as impaired, an allowance is established when the discounted cash flows, or the fair value of the collateral if the loan is collateral dependent, of the impaired loan is lower than the carrying value of that loan. The general component covers all loans not classified as impaired and is based on historical loss experience and general economic factors, adjusted for qualitative risk factors, both internal and external to the Company. The general component is calculated separately for each risk category. 86 Index The ALL represents the Company’s estimate of probable and estimable losses inherent to the loan portfolio as of the balance sheet date. Losses are charged to the ALL when recognized. Generally, loans are charged off or charged down at the point at which they are determined to be uncollectible in whole or in part unless the loan is well secured and in the process of collection. The Company establishes the amount of the ALL by loan type, at least quarterly, and the Company adjusts the provision for loan losses so the ALL is at an appropriate level at the balance sheet date. The Company determines ALL as the best estimate within a range of estimated losses. The methodologies the Company uses to estimate the ALL depend upon the impairment status and risk category of the loan. After applying historic loss experience, as described above, the Company reviews the quantitatively derived level of ALL for each category using qualitative criteria. The Company tracks various risk factors that influence the judgment regarding the level of the ALL across the risk categories. Risk factors include changes in national, regional, and local economic conditions that affect the borrowers’ business, delinquency, and charge off trends, and data from peer groups, among others. The Company reviews changes in these factors to ensure that changes in the level of the ALL are directionally consistent with changes in these factors. Nonaccrual loans – The Company’s policy is to place loans on a nonaccrual status when: 1) payment is in default for 90 days or more unless the loan is well secured and in the process of collection; or 2) full repayment of principal and interest is not foreseen. When a loan is placed on nonaccrual status, all accrued and uncollected interest on that loan is reversed. Past-due interest received on nonaccrual loans is not recognized in interest income but is applied as a reduction of the outstanding principal of the loan consistent with the accounting for impaired loans. A loan is relieved of its nonaccrual status when all principal and interest payments are brought current, the loan is well secured, and an analysis of the borrower’s financial condition provides reasonable assurance that the borrower can repay the loan as scheduled. Impaired loans – Loans are considered impaired when, based on current information and events; it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. When a loan is impaired, the Company estimates a specific reserve for the loan based on the fair value of the loan’s underlying collateral, less the cost to sell, or the projected present value of future cash flows. Payments received on impaired loans that are accruing are recognized in interest income, according to the contractual loan agreement. Payments received on impaired loans that are on nonaccrual status are not recognized in interest income but are applied as a reduction of the outstanding principal. Payments are recognized when cash is received. Troubled debt restructurings (TDR) – Loans may be modified in the normal course of business for competitive reasons or to strengthen the Company’s position. Loan modifications and restructurings may also occur when the borrower experiences financial difficulty and needs temporary or permanent relief from the original contractual terms of the loan. These modifications are structured on a loan-by-loan basis and, depending on the circumstances, may include extended payment terms, a modified interest rate, forgiveness of principal, or other concessions. Loans that have been modified to accommodate a borrower who is experiencing financial difficulties, and for which the Company has granted a concession that it would not otherwise consider, are considered a TDR. The Company considers many factors in determining whether to agree to a loan modification involving concessions, and seeks a solution that will both minimize potential loss to the Company and attempt to help the borrower. The Company evaluates borrowers’ current and forecasted future cash flows, their ability and willingness to make current contractual or proposed modified payments, the value of the underlying collateral, the possibility of obtaining additional security or guarantees, and the potential costs related to a repossession or foreclosure and the subsequent sale of the collateral. 87 Index TDRs may be classified as either accrual or nonaccrual loans. A loan on nonaccrual status and restructured as a TDR will remain on nonaccrual status until the borrower has proven the ability to perform under the modified structure for a minimum of six months, and there is evidence that such payments can and are likely to continue as agreed. Performance prior to the restructuring, or significant events that coincide with the restructuring, are included in assessing whether the borrower can meet the new terms and may result in the loan being returned to accrual status at the time of restructuring or after a shorter performance period. If the borrower’s ability to meet the revised payment schedule is uncertain, the loan remains classified as a nonaccrual loan. Premises and equipment, net – Premises and equipment are stated at cost less accumulated depreciation. Depreciation included in the operating expense is computed using the straight-line method over the estimated useful lives of the related assets. Expenditures for new premises and equipment and major improvements are capitalized. Normal costs of maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions are included in non-interest expense. Leases – The Company accounts for leases according to ASU 2016-02, Leases (Topic 842) , and applies a right -of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. The Company elected to apply the package of practical expedients permitting entities to not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. Additionally, as provided by ASU 2016-02, the Company elected to not apply the recognition requirements of ASC 842 to short-term leases, defined as leases with a term of twelve months or less, and to recognize the lease payments in net income on short-term leases on a straight-line basis over the lease term. Income taxes – Deferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets. Judgments and tax strategies are subject to audit by various taxing authorities. While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the consolidated financial statements. Transfer of financial assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: 1) the assets have been isolated from the Company, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and 3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. SBA servicing asset, net – Servicing assets are recognized as separate assets when servicing rights are acquired through sale of financial assets. For sales of SBA loans, or portions of SBA loans, with servicing retained, a portion of the cost of originating the loan is allocated to the servicing asset based on relative fair value. Fair value is based on a valuation model that calculates the present value of estimated future servicing income. Servicing assets are subsequently measured using the amortization method which requires servicing assets to be amortized into non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying loans. The SBA servicing asset is carried at the lower of cost or market value. 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. 88 Index Revenue from contracts with customers – The Company applies the provisions of ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. Services that the Company reports as part of non-interest income are subject to ASC 606 and include fees from its deposit customers for transaction-based activities, account maintenance charges and overdraft services. Transaction-based fees, such as ACH and wire transfer fees, overdraft, return and stop payment charges, are recognized at the time such transactions are executed and the services have been fulfilled by the Company. The fees are typically withdrawn from the customer’s deposit account balance. The Company also receives fees from third-parties in its Strategic Programs for setting up systems and procedures to efficiently originate loans in a convenient, compliant and safe manner. Because the third-party simultaneously receives and benefits from the services, revenue is recognized evenly over the term of the loan program. Program Fees received in connection with the Company’s Strategic Programs are recorded at the time services are provided. 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. The table below summarizes the weighted average assumptions used in determining the Black-Scholes option pricing model for options granted during 2022 and 2021: ​ 2022 2021 Risk-free interest rate 3.10 % 0.4 % - 1.3 % Expected term in years 5.5 - 6.5 5.0 - 7.5 Expected volatility 45.8 % - 46.7 % 45.7 % - 47.6 % Expected dividend yield - - Earnings per share (“EPS”) – Basic EPS is computed by dividing net earnings allocated to common shareholders by the weighted average number of common shares outstanding. Diluted EPS is computed by dividing net earnings allocated to common shareholders by the weighted average number of common shares outstanding adjusted to include the effect of potentially dilutive common shares. Potentially dilutive common shares include incremental common shares issuable upon exercise of outstanding stock options and non-vested restricted common shares, that are not considered participating securities, using the treasury stock method. The two-class method is used to determine earnings per share based on participation rights of participating securities in any undistributed earnings. Each unvested restricted share granted by the Company to its employees that includes rights to participate in distributed earnings is considered a participating security and the Company uses the two-class method to calculate net income available to the Company’s common shareholders per common share – basic and diluted. 89 Index Stock Repurchase Program – On August 18, 2022, the Company announced that its Board of Directors (the “Board”) has authorized, effective August 16, 2022, a common stock repurchase program to purchase up to 644,241 shares of the Company’s common stock in the aggregate. The repurchase program expires on August 31, 2024 but may be limited or terminated at any time without prior notice. The repurchase program authorizes the repurchase by the Company of its common stock in open market transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or privately negotiated transactions. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. Repurchases may also be made pursuant to a trading plan under Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The actual means and timing of any shares purchased under the program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The repurchase program does not obligate the Company to purchase any particular number of shares. The Company has repurchased 120,000 shares for approximately $ 1.1 million as of December 31, 2022 and retired them at cost. 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. 90 Index Recent accounting pronouncements 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 to January 1, 2023 for smaller reporting companies with less than $250 million in public float as defined by the SEC’s rules. The Company adopted this ASU effective January 1, 2023 and will apply the amendment’s provisions as a cumulative-effect adjustment to retained earnings as of the date of adoption. In anticipation of the adoption of this ASC, the Company formed a team that worked on an implementation plan to adopt the amendment and included developing policies, procedures, and internal controls over the model. The Company continues to work with a software vendor to measure expected losses required by the amendment. Based on current model results, management estimates the adoption of this ASU will result in a combined increase to its Allowance for Credit Loss and Reserve for Unfunded Loan Commitments of 2 % to 5 %. The increase is primarily the result of an upward adjustment in the allowance allocated to the core portfolio as well as the retained partner portfolio and was offset by the lowering of qualitative factors. The increase will be recorded as an adjustment to equity as of the adoption date. Based on the credit quality of our held-to-maturity debt security portfolio, no allowance for credit losses is expected to be recorded at adoption on this portfolio. In March 2022, the FASB issued ASU 2022-02, Financial Instruments – Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures . These amendments eliminate the TDR recognition and measurement guidance and, instead, require that an entity evaluate (consistent with the accounting for other loan modifications) whether the modification represents a new loan or a continuation of an existing loan. The amendments also enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. For public business entities, these amendments require that an entity disclose current-period gross write-offs by year of origination for financing receivables and net investment in leases within the scope of Subtopic 326-20. This ASU is effective on January 1, 2023, the same effective date as ASU 2016-13. The effects that the adoption of this amendment will have on the Company’s consolidated financial statements is not deemed to be material. 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, 2022 and 2021, are summarized as follows: ​ December 31, 2022 ($ in thousands) Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Mortgage-backed securities $ 14,292 $ 5 $ ( 1,569 ) $ 12,728 ​ December 31, 2021 ($ in thousands) Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Mortgage-backed securities $ 11,423 $ 23 $ ( 114 ) $ 11,332 91 Index The Company had seventeen securities in an unrealized loss position at December 31, 2022, nine in an unrealized loss at December 31, 2021. ​ December 31, 2022 Less than 12 months 12 Months or More Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Mortgage-backed securities $ 5,126 $ ( 286 ) $ 6,671 $ ( 1,283 ) $ 11,797 $ ( 1,569 ) December 31, 2021 Less than 12 months 12 Months or More Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Mortgage-backed securities $ 8,961 $ ( 114 ) $ — $ — $ 8,961 $ ( 114 ) The amortized cost and estimated market value of debt securities at December 31, 2022 and 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. December 31, 2022 December 31, 2021 ($ in thousands) Amortized Cost Estimated Fair Value Amortized Cost Estimated Fair Value Securities held-to-maturity Due in one year or less $ — $ — $ — $ — Due after one year through five years — — — — Due after five years through ten years 3,388 3,202 1,541 1,548 Due after ten years 10,904 9,526 9,882 9,784 ​Total Securities held-to-maturity $ 14,292 $ 12,728 $ 11,423 $ 11,332 At December 31, 2022, held-to-maturity securities in the amount of $ 12.4 million were pledged to the Federal Reserve Bank of San Francisco as collateral for a credit line held by the Bank. There were no sales or transfers of investment securities and no realized gains or losses on these securities during the years ended December 31, 2022 or 2021. FHLB stock The Bank is a member of the FHLB system. Members are required to own FHLB stock of at least the greater of 1 % of FHLB membership asset value or 4.0 % of outstanding FHLB advances. At December 31, 2022 and 2021, the Bank owned $ 0.4 million and $ 0.4 million, respectively, of FHLB stock, which is carried at cost. The Company evaluated the carrying value of its FHLB stock investment at December 31, 2022 and determined that it was not impaired. This evaluation considered the long-term nature of the investment, the current financial and liquidity position of the FHLB, repurchase activity of excess stock by the FHLB at its carrying value, the return on the investment from recurring and special dividends, and the Company’s intent and ability to hold this investment for a period of time sufficient to recover our recorded investment. 92 Index Note 3 – Loans and Allowance for Loan Losses Loans are summarized as follows according to major risk category as of December 31, 2022 and 2021: ​ December 31, ​ 2022 2021 ($ in thousands) SBA $ 145,172 $ 142,392 Commercial, non-real estate 11,484 3,428 Residential real estate 37,815 27,108 Strategic Program loans 47,848 85,850 Commercial real estate 12,063 2,436 Consumer 5,808 4,574 Total loans $ 260,190 $ 265,788 Loans held-for-sale ( 23,589 ) ( 60,748 ) Total loans held for investment $ 236,601 $ 205,040 Deferred loan costs (fees), net ( 399 ) 2,917 Allowance for loan losses ( 11,985 ) ( 9,855 ) Net loans $ 224,217 $ 198,102 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 generally earns monthly minimum program fees from these third parties. Based on the volume of loans originated by the Company related to each Strategic Program, an additional fee equal to a percentage of the loans generated under the Strategic Program may be collected. The program fee is included within non-interest income on the Consolidated Statements of Income. The Company generally retains the loans and/or receivables for a number of business days after origination before selling the loans and/or receivables to the Strategic Program platform or another investor. Interest income is recognized by the Company while holding the loans. These loans are classified as held-for-sale on the balance sheet. The Company may also hold a portion of the loans or receivable and sell the remainder directly to the Strategic Programs or other investors. The Company generally services the loans originated through the Strategic Programs in consideration of servicing fees equal to a percentage of the loans generated under the Strategic Programs. In turn, the Strategic Program service providers, subject to the Company’s approval and oversight, serve as sub-servicer and perform typical primary servicing duties including loan collections, modifications, charging-off, reporting and monitoring. Each Strategic Program establishes a “reserve” deposit account with the Company. The agreements generally require that the reserve account deposit balance does not fall below an agreed upon dollar or percentage threshold related to the total loans currently outstanding as held for sale by the Company for the specific Strategic Program. If necessary, the Company has the right to withdraw amounts from the reserve account to fulfill loan purchaser obligations created under the program agreements. Total cash held in reserve by Strategic Programs at the Company at December 31, 2022 and 2021, was $ 16.6 million and $ 39.6 million, respectively. 93 Index Strategic Program loans retained and held-for-sale as of December 31, 2022 and 2021, are summarized as follows: ​ December 31, ​ 2022 2021 ($ in thousands) Retained Strategic Program loans $ 24,259 $ 25,102 Strategic Program loans held-for-sale 23,589 60,748 Total Strategic Program loans $ 47,848 $ 85,850 Changes in the ALL are summarized as follows: December 31, 2022 ($ in thousands) SBA Commercial, Non-Real Estate Residential Real Estate Strategic Program Loans Commercial Real Estate Consumer Total Beginning balance $ 2,739 $ 132 $ 352 $ 6,549 $ 21 $ 62 $ 9,855 Charge-offs ( 392 ) — — ( 11,948 ) — ( 66 ) ( 12,406 ) Recoveries 66 2 — 885 — 64 1,017 Provision for loan and lease losses 1,881 267 145 11,215 6 5 13,519 Balance at end of year $ 4,294 $ 401 $ 497 $ 6,701 $ 27 $ 65 $ 11,985 Ending balance individually evaluated for impairment — — — — — — — Ending balance collectively evaluated for impairment $ 4,294 $ 401 $ 497 $ 6,701 $ 27 $ 65 $ 11,985 Loans receivable $ 145,172 $ 11,484 $ 37,815 $ 24,259 $ 12,063 $ 5,808 $ 236,601 Ending balance individually evaluated for impairment 450 — — — — — 450 Ending balance collectively evaluated for impairment $ 144,722 $ 11,484 $ 37,815 $ 24,259 $ 12,063 $ 5,808 $ 236,151 94 Index December 31, 2021 ($ in thousands) SBA Commercial, Non-Real Estate Residential Real Estate Strategic Program Loans Commercial Real Estate Consumer Total Beginning balance $ 920 $ 232 $ 855 $ 4,111 $ 19 $ 62 $ 6,199 Charge-offs ( 154 ) ( 63 ) — ( 4,684 ) — ( 4 ) ( 4,905 ) Recoveries 46 103 — 372 — 1 522 Provision (recapture) for loan and lease losses 1,927 ( 140 ) ( 503 ) 6,750 2 3 8,039 Balance at end of year $ 2,739 $ 132 $ 352 $ 6,549 $ 21 $ 62 $ 9,855 Ending balance individually evaluated for impairment — — — — — — — Ending balance collectively evaluated for impairment $ 2,739 $ 132 $ 352 $ 6,549 $ 21 $ 62 $ 9,855 Loans receivable $ 142,392 $ 3,428 $ 27,108 $ 25,102 $ 2,436 $ 4,574 $ 205,040 Ending balance individually evaluated for impairment 972 — — — — — 972 Ending balance collectively evaluated for impairment $ 141,420 $ 3,428 $ 27,108 $ 25,102 $ 2,436 $ 4,574 $ 204,068 The following tables summarize impaired loans as of December 31, 2022 and 2021: December 31, 2022 ​ Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized ($ in thousands) With no related allowance recorded SBA $ 450 $ 450 $ — $ 711 $ 36 Commercial, non-real estate — — — — — Residential real estate — — — — — Strategic Program loans — — — — — Commercial real estate — — — — — Consumer — — — — — Total $ 450 $ 450 $ — $ 711 $ 36 95 Index December 31, 2021 ​ Recorded Investment Unpaid Principal Balance Related Allowance Average Recorded Investment Interest Income Recognized ($ in thousands) With no related allowance recorded SBA $ 972 $ 972 $ — $ 945 $ 47 Commercial, non-real estate — — — — — Residential real estate — — — 189 — Strategic Program loans — — — — — Commercial real estate — — — — — Consumer — — — — — Total $ 972 $ 972 $ — $ 1,134 $ 47 For the years ending December 31, 2022 and 2021, there were no impaired loans with an allowance recorded. Nonaccrual and past due loans are summarized below as of December 31, 2022 and 2021: December 31, 2022 ($ in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due & Still Accruing Total Past Due Non-Accrual Total ​ SBA $ 144,803 $ 369 $ — $ — $ 369 $ — $ 145,172 Commercial, non-real estate 11,484 — — — — — 11,484 Residential real estate 37,387 428 — — 428 — 37,815 Strategic Program loans 45,669 1,184 802 193 2,179 — 47,848 Commercial real estate 12,063 — — — — — 12,063 Consumer 5,776 32 — — 32 — 5,808 Total $ 257,182 $ 2,013 $ 802 $ 193 $ 3,008 $ — $ 260,190 December 31, 2021 ($ in thousands) Current 30-59 Days Past Due 60-89 Days Past Due 90+ Days Past Due & Still Accruing Total Past Due Non-Accrual Total SBA $ 141,488 $ 247 $ — $ — $ 247 $ 657 $ 142,392 Commercial, non-real estate 3,428 — — — — — 3,428 Residential real estate 27,108 — — — — — 27,108 Strategic Program loans 84,065 1,041 690 54 1,785 — 85,850 Commercial real estate 2,436 — — — — — 2,436 Consumer 4,554 20 — — 20 — 4,574 Total $ 263,079 $ 1,308 $ 690 $ 54 $ 2,052 $ 657 $ 265,788 96 Index The amount of interest income for the years ended December 31, 2022 and 2021, 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, 2022 and 2021: December 31, 2022 ($ in thousands) Pass Grade 1-4 Special Mention Grade 5 Classified/ Doubtful/Loss Grade 6-8 Total SBA $ 144,149 $ 573 $ 450 $ 145,172 Commercial, non-real estate 11,484 — — 11,484 Residential real estate 37,815 — — 37,815 Commercial real estate 12,063 — — 12,063 Consumer 5,808 — — 5,808 Not Risk Graded Strategic Program loans 47,848 Total at December 31, 2022 $ 211,319 $ 573 $ 450 $ 260,190 97 Index December 31, 2021 ($ in thousands) Pass Grade 1-4 Special Mention Grade 5 Classified/ Doubtful/Loss Grade 6-8 Total SBA $ 139,985 $ 1,435 $ 972 $ 142,392 Commercial, non-real estate 3,382 46 — 3,428 Residential real estate 27,108 — — 27,108 Commercial real estate 2,436 — — 2,436 Consumer 4,574 — — 4,574 Not Risk Graded Strategic Program loans 85,850 Total at December 31, 2021 $ 177,485 $ 1,481 $ 972 $ 265,788 There were no loans modified as TDRs during the years ended December 31, 2022, and 2021. Loans classified as TDRs, consist of the following at December 31, 2022 and 2021: ($ in thousands) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment December 31, 2022 SBA 1 $ 94 $ 94 December 31, 2021 SBA 2 $ 106 $ 106 Non-Accrual SBA 1 $ 25 $ 25 At December 31, 2022 and 2021, there were no commitments to lend additional funds to debtors whose loan terms have been modified in a TDR. There was one principal charge-off recorded related to TDRs during the year ended December 31, 2022 for $ 0.01 million. There were no principal charge-offs recorded related to TDRs during the year ended December 31, 2021. During 2022, one restructured loan incurred a default within twelve months of the restructure date and was paid in full including interest during 2022. During 2021, one restructured loan incurred a default within twelve months of the restructure date and was paid in full including interest during 2021. 98 Index 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, 2022 and 2021. Note 4 – Premises and Equipment Premises and equipment at December 31, 2022 and 2021, consist of the following: ​ December 31, ​ 2022 2021 ($ in thousands) Leasehold improvements $ 3,720 $ 80 Furniture, fixtures, and equipment (1) 6,501 2,219 Construction in progress 1,514 2,333 Total premises and equipment $ 11,735 $ 4,632 Less accumulated depreciation ( 2,257 ) ( 1,347 ) Premises and equipment, net $ 9,478 $ 3,285 (1) The Furniture, fixtures, and equipment include commercial operating leases of $ 2.8 million issued during the year ended 2022. Net book value of the operating leases as of December 31, 2022 was $ 2.7 million. Depreciation expense was approximately $ 1.0 million and $ 0.3 million for the years ended December 31, 2022 and 2021, respectively. Rental income from operating leases for the years ended December 31, 2022 was $ 0.2 million. Lease Liabilities The Company leases its facilities under noncancelable operating leases. Rent expense for 2022 and 2021 was $ 1.1 million and $ 0.5 million, respectively. Future minimum annual undiscounted rental payments for these operating leases are as follows ($ in thousands): Year Ended December 31, 2023 $ 850 Year Ended December 31, 2024 1,104 Year Ended December 31, 2025 1,086 Year Ended December 31, 2026 1,118 Year Ended December 31, 2027 1,152 Thereafter 2,203 Total $ 7,513 Less present value discount ( 493 ) Operating lease liabilities $ 7,020 99 Index The Company entered into one lease during the year ended December 31, 2022 to provide additional space while the Murray office construction was completed. ASC 842 allows for a short-term lease exception which the Company has chosen to apply due to the short-term period of this lease and immateriality. The tables below present information regarding the Company’s lease assets and liabilities. Comparative periods and disclosures are not presented here due to adoption of ASC 842 on January 1, 2022. ​ Year Ended ​ December 31, 2022 Weighted-average remaining lease term – operating leases (in years) 6.7 Weighted-average discount rate – operating leases 1.9 % The components of lease expense were as follows (in thousands): ​ Year Ended December 31, 2022 (in thousands) Operating leases Operating lease cost $ 1,044 Variable lease cost 16 Operating lease expense 1,060 Short-term lease rent expense 38 Net rent expense $ 1,098 100 Index Note 5 – Deposits Major classes of deposits at December 31, 2022 and 2021, are as follows: ​ December 31, ​ 2022 2021 ($ in thousands) Demand $ 129,563 $ 115,947 Savings 8,289 6,685 Money markets 10,882 31,076 Time certificates of deposit 94,264 98,184 Total deposits $ 242,998 $ 251,892 At December 31, 2022, the scheduled maturities of time deposits are as follows ($ in thousands): Year Ended December 31, 2023 $ 57,721 Year Ended December 31, 2024 17,514 Year Ended December 31, 2025 9,314 Year Ended December 31, 2026 8,160 Year Ended December 31, 2027 1,555 Thereafter — Total 94,264 Time deposits with balances equal or greater than $ 250,000 totaled $ 6.4 million and $ 3.7 million at December 31, 2022 and 2021, respectively. Note 6 – SBA Servicing Asset The Company periodically sells portions of SBA loans and retains rights to service the loans. Loans serviced for others are not included in the accompanying balance sheet. The unpaid principal balances of SBA loans serviced for others was $ 318.6 million and $ 210.2 million at December 31, 2022 and 2021, respectively. The following table summarizes SBA servicing asset activity for the periods indicated: ​ For the Years Ended December 31, ($ in thousands) 2022 2021 Beginning balance $ 3,938 $ 2,415 Additions to servicing asset 4,087 3,048 Impairment of SBA servicing asset ( 1,728 ) ( 800 ) Amortization of servicing asset ( 1,087 ) ( 725 ) Ending balance $ 5,210 $ 3,938 The SBA servicing asset is carried at the lower or amortized cost or fair market value. The fair market value of the SBA servicing asset as of December 31, 2022 and 2021, was $ 5.2 million and $ 3.9 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 years ending December 31, 2022 and 2021. 101 Index The Company assumed a weighted average prepayment rate of 14.24 %, weighted average term of 4.45 years, and a weighted average discount rate of 18.79 % at December 31, 2022. The Company assumed a weighted average prepayment rate of 14.37 %, weighted average term of 4.02 years, and a weighted average discount rate of 11.38 % at December 31, 2021. Note 7 – Capital Requirements The Bank is subject to various regulatory capital requirements administered by federal and State of Utah banking agencies (the regulators). Failure to meet minimum capital requirements can initiate certain mandatory, and possibly additional discretionary, actions by regulators that, if undertaken, could have a direct material effect on the Bank’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of the Bank’s assets, liabilities, and certain off -balance-sheet items as calculated under regulatory accounting practices. The Bank’s capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk -weighting, and other factors. Prompt corrective action provisions are not applicable to the bank holding company. Beginning January 1, 2020, the bank qualified and elected to use the community bank leverage ratio (CBLR) framework for quantitative measures which requires the Bank to maintain minimum amounts and ratios of Tier 1 capital to average total consolidated assets. Management believes, as of December 31, 2022 and December 31, 2021, that the Bank meets all capital adequacy requirements to which it is subject. 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 that management believes have changed the Bank’s category). The following table sets forth the actual capital amounts and ratios for the Bank and the minimum ratio and amount of capital required to be categorized as well-capitalized and adequately capitalized as of the dates indicated. The Bank’s actual capital amounts and ratios are presented in the following table: ​ Actual Well-Capitalized Requirement ($ in thousands) Amount Ratio Amount Ratio December 31, 2022 Leverage ratio (CBLR election) $ 91,674 25.1 % $ 32,898 * 9.0 % December 31, 2021 Leverage ratio (CBLR election) $ 65,503 17.7 % $ 31,442 * 8.5 % * On March 27, 2020 the CARES Act became law. Section 4012 of the CARES Act directs the agencies to issue an interim final rule reducing the CBLR ratio requirement from 9% to 8% for the last two quarters of the year 2020, 8.5% for the calendar year 2021, and 9% thereafter. 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. 102 Index In addition, since FinWise Bancorp is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, an ability to pay dividends depends on the ability of the Bank to pay dividends to FinWise Bancorp and the FDIC and the Utah Department of Financial Institutions (“UDFI”) may, under certain circumstances, prohibit the payment of dividends to FinWise Bancorp from the Bank. Utah corporate law also requires that dividends can only be paid out of funds legally available. The Company has not paid any cash dividends on its common stock since inception and it currently has no plans to pay cash dividends in the foreseeable future. However, the Company’s Board of Directors may declare a cash or stock dividend out of retained earnings provided the regulatory minimum capital ratios are met. The Company plans to maintain capital ratios that meet the well-capitalized standards per the regulations and, therefore, would limit dividends to amounts that are appropriate to maintain those well-capitalized regulatory capital ratios. Note 8 – Commitments and Contingent Liabilities Federal Home Loan Bank Secured Line of Credit As of December 31, 2022 and 2021, the Bank’s available line of credit with the FHLB to borrow in overnight funds was $ 2.6 million and $ 4.1 million, respectively. All borrowings are short-term and the interest rate is equal to the correspondent bank’s daily federal funds purchase rate. As of December 31, 2022, no amounts were outstanding under the line of credit. Loans totaling $ 4.0 million and $ 5.4 million were pledged to secure the FHLB line of credit as of December 31, 2022 and 2021, respectively. Lines of Credit At December 31, 2022, we had the ability to access $ 10.6 million from the Federal Reserve Bank’s Discount Window on a collateralized basis. Through Zions Bank, the Bank had an available unsecured line 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, 2022. Paycheck Protection Program Liquidity Facility On April 20, 2020, the Bank was approved by the Federal Reserve to access its SBA Paycheck Protection Program Liquidity Facility (“PPPLF”) through the discount window. The PPPLF enables the Company to fund PPP loans without taking on additional liquidity or funding risks because the Company is able to pledge PPP loans as collateral to secure extensions of credit under the PPPLF on a non-recourse basis. Borrowings under the PPPLF have a fixed-rate of 0.35 %, with a term that matches the underlying loans. The Bank pledged $ 1.0 million of PPP loans as eligible collateral under the PPPLF borrowing arrangement at December 31, 2021. The Bank pledged $ 0.3 million of PPP loans as eligible collateral under the PPPLF borrowing arrangement at December 31, 2022. The average outstanding borrowings were $ 36.4 million during the year ended December 31, 2021 and $ 0.6 million during the year ended December 31, 2022. Commitments to Extend Credit In the ordinary course of business, the Bank has entered into commitments to extend credit to customers which have not yet been exercised. These financial instruments include commitments to extend credit in the form of loans. Those instruments involve to varying degrees, elements of credit and interest rate risk in excess of the amount recognized in the balance sheets. 103 Index At December 31, 2022 and 2021, financial instruments with off-balance-sheet risk were as follows: ​ December 31, ($ in thousands) 2022 2021 Revolving, open-end lines of credit $ 1,683 $ 1,259 Commercial real estate 17,886 15,402 Other unused commitments 253 377 ​ $ 19,822 $ 17,038 Note 9 – Investment in Business Funding Group, LLC On December 31, 2019, the Company purchased from certain members of BFG a 10 % membership interest in exchange for an aggregate of 950,784 shares of par value $ 0.001 Common Stock of the Company. The exchange was accounted for at fair value based on the fair value of the Company’s shares of approximately $ 3.5 million. The Company’s 10 % membership interests of BFG are comprised of Class A Voting Units representing 4.96 % of the aggregate membership interests of BFG and Class B Non-Voting Units representing 5.04 % of the aggregate membership interests of BFG. The other existing members of BFG jointly own the remaining 90 % of the outstanding membership interests, on a fully-diluted basis – all of which membership interests are Class A Voting Units. Based on the Company’s accounting policy with respect to investments in limited liability companies, the Company concluded that its level of ownership was indicative of significant influence and, as a result, the investment would be accounted for using the equity method. However, the Company elected the fair value option for its investment due to cost-benefit considerations. The Company received distributions from BFG in the amounts of $ 0.6 million and $ 0.9 million for the years ended December 31, 2022 and 2021, respectively. These distributions were recorded in the Consolidated Balance Sheets as decreases in the investment in BFG. On March 31, 2020, the Company entered into an agreement with BFG whereby the Company has the right of first refusal to purchase additional interests in BFG from any selling members. Additionally, the Company was granted an option to purchase all, but not less than all, of the interests in BFG from the remaining members for an earnings multiple between 10 times and 15 times net profit based on the fiscal year ended immediately prior to the exercise of the option. The option period begins on January 1, 2021 and expires on January 1, 2028. In consideration of granting the first right of refusal and the option, BFG members received 270,000 warrants in the aggregate. The warrants have an exercise price of $ 6.67 per share and the warrants expire on March 31, 2028. The warrants are free-standing equity instruments and, as a result, are classified within equity at the fair value on the issuance date. The fair value of the warrants was determined by our board of directors with input from management, relying in part upon valuation reports prepared by a third-party valuation firm using a Black-Scholes option pricing model adjusted for a lack of marketability since the Company’s stock was 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. 104 Index 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 as well as issuance of incentive stock options only to employees. The 2019 Plan originally authorized the issuance of 780,000 common shares but was later amended on April 19, 2022 to increase the number of shares of the Company’s common stock available for awards under the 2019 Plan by 500,000 shares to 1,280,000 shares. This amendment along with an amendment to change its name from the All West Bancorporation 2019 Stock Option Plan to the FinWise Bancorp 2019 Stock Option Plan was approved by the Company’s shareholders at the Company’s 2022 Annual Meeting of Shareholders on June 9, 2022. The 2019 Plan will terminate as to future awards 10 years from the later of the effective date or the earlier of the most recent Board or stockholder approval of an increase in the number of shares reserved for issuance under the 2019 Plan. At December 31, 2022, 621,472 shares are available for future issuance. The 2016 Stock Option Plan (“2016 Plan”) was adopted on April 20, 2017 following approval by the Company’s Board of Directors and shareholders. The 2016 Plan provides for the issuance of non-statutory stock options and restricted stock to employees, directors and consultants. The 2016 Plan also provides for the issuance of incentive stock options only to employees. The 2016 Plan authorizes the issuance of 299,628 common shares. The 2016 Plan will terminate as to future awards 10 years from the later of the effective date or the earlier of the most recent Board or stockholder approval of an increase in the number of shares reserved for issuance under the 2016 Plan. At December 31, 2022, 894 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. 105 Index The following summarizes stock option activity for the years ended December 31, 2022 and 2021: ​ Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value Outstanding at December 31, 2020 638,664 $ 3.54 8.6 $ 653,991 Options granted 906,600 6.27 3.3 Options exercised ( 86,676 ) 3.6 511,339 Options forfeited ( 596,100 ) 6.42 1,460,581 Outstanding at December 31, 2021 862,488 $ 4.41 8.2 $ 8,088,660 Options granted 89,415 13.04 9.9 Options exercised ( 56,280 ) 4.62 393,534 Options forfeited ( 13,998 ) 4.40 124,874 Outstanding at December 31, 2022 881,625 $ 5.27 7.5 $ 3,871,667 Options vested and exercisable at December 31, 2022 600,396 $ 4.47 7.3 $ 2,878,478 The weighted average grant-date fair value of options per share granted was $ 6.26 and $ 1.55 during 2022 and 2021, respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2022 and 2021 were $ 0.39 million and $ 0.51 million, respectively. During 2022, the Company received proceeds of approximately $ 0.3 million from the exercise of stock options and recognized a de minimis tax benefit from the exercise of stock options. Upon exercise of the stock options, the Company will issue new authorized shares. Restricted stock The Company from time-to-time grants shares of restricted stock to key employees or directors. These awards typically hold service requirements over various vesting periods. The value of the stock awarded is established as the fair market value of the stock at the time of the grant. The Company recognizes expense, equal to the total value of such awards, ratably over the vesting period of the stock grants. All restricted stock agreements are conditioned upon continued employment. Termination of employment prior to a vesting date, as described below, would terminate any interest in non-vested shares. Nonvested restricted stock for the years ended December 31, 2022 and 2021 is summarized in the following table. ​ Number of Shares Weighted Average Grant Price Unvested as of December 31, 2020 621,666 $ 3.64 Vested ( 621,666 ) 3.64 Unvested as of December 31, 2021 — $ — Granted 123,055 $ 12.28 Unvested as of December 31, 2022 123,055 $ 12.28 The restricted stock vests as follows: 59,048 shares in 2023, 32,003 shares in 2024, and 32,004 shares in 2025. 106 Index The aggregate fair value of restricted stock that vested was approximately $ 2.3 million for the year ended December 31, 2021, respectively. The aggregate fair value of restricted stock outstanding was approximately $ 5.4 million for the year ended December 31, 2022. 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) 2022 2021 Pre-tax Stock options $ 320 $ 934 Restricted shares 458 1,166 Total $ 778 $ 2,100 After-tax Stock options $ 322 $ 778 Restricted shares 344 1,166 Total $ 666 $ 1,944 As of December 31, 2022, the Company had unrecognized stock-based compensation expense related to stock options and restricted stock of approximately $ 0.5 million and $ 1.1 million, respectively, which is expected to be recognized over the remaining weighted average recognition period of 1.8 and 1.4 years. Employee stock-based compensation expense is recorded within Salaries and employee benefits and was $ 0.8 million and $ 1.6 million for the years ending December 31, 2022 and 2021, respectively. Stock-based compensation for all others is recorded within Other operating expenses and was $ 0.0 million and $ 0.5 million for the years ending December 31, 2022 and 2021, 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. 107 Index 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. Because observable loan transactions are used to determine the risk spreads, the Company considers the measurement to be Level 2. 108 Index Investment in BFG : The Company purchased its ownership interest in BFG on December 31, 2019. The Company’s valuation technique 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 as of December 31, 2022 and December 31, 2021. The calculation of fair value utilized significant unobservable inputs, including projected cash flows, growth rates, and discount rates. The fair value of the investment in BFG was $ 4.8 million and $ 5.9 million as of December 31, 2022 and December 31, 2021, respectively. The following table summarizes investment in BFG activity for the periods indicated: ​ For the Years Ended December 31, ($ in thousands) 2022 2021 Beginning balance $ 5,900 $ 3,770 Distributions from BFG ( 622 ) ( 861 ) Change in fair value of BFG ( 478 ) 2,991 Ending balance $ 4,800 $ 5,900 Deposits : The carrying amount of deposits with no stated maturity, such as savings and checking accounts, is a reasonable estimate of their fair value. The market value of certificates of deposit is based upon the discounted value of contractual cash flows. The discount rate is determined using the rates currently offered on comparable instruments. Accrued interest receivable and payable : The fair value of accrued interest receivable and payable approximates their carrying amount. 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. The table below presents the carrying amount and fair value of the Company’s financial instruments: ​ December 31, 2022 December 31, 2021 ($ in thousands) Level Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: Cash and cash equivalents 1 $ 100,567 $ 100,567 $ 85,754 $ 85,754 Investment securities held-to-maturity 2 14,292 12,728 11,423 11,332 Investment in FHLB stock 2 449 449 378 378 Loans held for investment 3 224,217 237,225 198,102 197,412 Loans held-for-sale 2 23,589 23,586 60,748 60,743 Accrued interest receivable 2 1,818 1,818 1,548 1,548 SBA servicing asset 2 5,210 5,210 3,938 3,938 Investment in BFG 3 4,800 4,800 5,900 5,900 Financial liabilities: Total deposits 2 242,998 221,287 251,892 249,488 Accrued interest payable 2 54 54 48 48 PPP Liquidity Facility 2 314 314 1,050 1,050 109 Index Assets measured at fair value on a nonrecurring basis are summarized as follows: ($ in thousands) Fair Value Measurements Using Description of Financial Instrument Fair Value Level 1 Level 2 Level 3 December 31, 2022 Nonrecurring assets Impaired loans $ 450 $ — $ — $ 450 December 31, 2021 Nonrecurring assets Impaired loans $ 972 $ — $ — $ 972 Impaired loans – The loan amount above represents loans impaired as of year-end that have been adjusted to fair value. When collateral dependent loans are identified as impaired, the impairment is measured using the current fair value of the collateral securing these loans, less selling costs. The fair value of real estate collateral is determined using collateral valuations or a discounted cash flow analysis using inputs such as discount rates, sale prices of similar assets, and term of expected disposition. Some appraised values are adjusted based on management’s review and analysis, which may include historical knowledge, changes in market conditions, estimated selling and other anticipated costs, and/or expertise and knowledge. The loss represents charge-offs or impairments on loans for adjustments made based on the fair value of the collateral. 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, 2022 and 2021, along with the valuation techniques used, are shown in the following table: ($ in thousands) Fair Value Valuation Technique Unobservable Input Range (Weighted Average) December 31, 2022 Impaired loans $ 450 Market comparable Adjustment to appraisal value 0.20 % ​ December 31, 2021 Impaired loans $ 972 Market comparable Adjustment to appraisal value 0.50 % The range and weighted average of the significant unobservable inputs used to fair value the investment in BFG Level 3 recurring asset as of December 31, 2022 and as of December 31, 2021 are shown in the following table: December 31, 2022 December 31, 2021 ($ in thousands) Range (Weighted Average) Range (Weighted Average) Discounted Cash Flows Revenue growth rate 10.8 % 16.6 % Expense growth rate 11.5 % 16.3 % Discount rate 30.0 % 25.0 % Guideline Public Company Multiples of enterprise value 3.0 x to 5.0 x 4.0 x to 6.0 x 110 Index Note 12 – Income Taxes The components of income tax expense consist of the following: ​ For the Years Ended December 31, ($ in thousands) 2022 2021 Current tax expense Federal $ 8,315 $ 9,589 State 1,945 2,471 Deferred tax expense (benefit) Federal 553 ( 1,156 ) State 103 ( 215 ) Income tax expense $ 10,916 $ 10,689 The components of net deferred income tax assets and liabilities on the balance sheet at December 31, 2022 and 2021, are as follows: ​ December 31, ($ in thousands) 2022 2021 Deferred tax assets Operating lease liabilities $ 1,749 $ — Allowance for loan losses 1,639 1,630 Accrued bonuses 61 72 Nonqualified stock options 124 156 Restricted stock 114 — Other 290 250 Total deferred tax assets 3,977 2,108 Deferred tax liabilities ROU asset ( 1,256 ) — Intangibles ( 3 ) ( 3 ) Net book value of fixed assets ( 1,230 ) ( 217 ) Other ( 321 ) ( 65 ) Total deferred tax liabilities ( 2,810 ) ( 285 ) Net deferred tax asset $ 1,167 $ 1,823 The income tax expense recorded differs from the expected income tax expense and the reconciliation of these differences is as follows at December 31, 2022 and 2021: ​ For the Years Ended December 31, ($ in thousands) 2022 2021 Federal income tax expense at statutory rates $ 7,567 $ 8,877 Effect of permanent differences 811 50 State income tax expense, net 1,560 1,662 Other 978 100 Income tax expense $ 10,916 $ 10,689 111 Index The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2022, and 2021, 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, New York, Ohio, and Washington. Open tax years that are potentially subject to examination related to the U.S. federal jurisdiction are 2019 and subsequent years. The Company had no unrecognized tax benefits at December 31, 2022 and 2021. Note 13 – Shareholders’ Equity Stock Repurchases On August 18, 2022, the Company announced that its Board of Directors (the “Board”) has authorized, effective August 16, 2022, a common stock repurchase program to purchase up to 644,241 shares of the Company’s common stock in the aggregate. The repurchase program expires on August 31, 2024, but may be limited or terminated at any time without prior notice. The repurchase program authorizes the repurchase by the Company of its common stock in open market transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or privately negotiated transactions. The authorization permits management to repurchase shares of the Company’s common stock from time to time at management’s discretion. Repurchases may also be made pursuant to a trading plan under Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The actual means and timing of any shares purchased under the program will depend on a variety of factors, including the market price of the Company’s common stock, general market and economic conditions, and applicable legal and regulatory requirements. The repurchase program does not obligate the Company to purchase any particular number of shares. The Company has repurchased 120,000 shares for approximately $ 1.1 million as of December 31, 2022 and retired them at cost. 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 $ 0.5 million and $ 0.4 million for the years ended December 31, 2022 and 2021, 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 did no t have loans outstanding to any related party as of December 31, 2022 and 2021. Total deposits from certain executive officers and directors and the companies with which they are associated were $ 1.2 million and $ 0.5 million as of December 31, 2022 and 2021, respectively. 112 Index On October 21, 2022, Mr. Alan Weichselbaum, who was elected as a director of the Company on October 6, 2022, repaid in full the $ 0.1 million aggregate principal amount plus interest owed under a secured promissory note, dated as of June 1, 2022 (the “2022 Note”), between the Company and Mr. Weichselbaum in accordance with the terms of the 2022 Note. As such, the obligations of the parties under the 2022 Note and a related security agreement were discharged and the 2022 Note and the security agreement were terminated. 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, 2022 and 2021 ($ in thousands, except share and per share amounts): ​ For the Years Ended December 31, ​ 2022 2021 Numerator: Net income $ 25,115 $ 31,583 Amount allocated to participating common shareholders (1) ( 193 ) ( 1,780 ) Net income allocate to common shareholders $ 24,922 $ 29,803 Denominator: Weighted average shares outstanding, basic 12,729,898 8,669,724 Weighted average effect of dilutive securities: Stock options 508,056 371,240 Warrants 119,068 67,199 Weighted average shares outstanding, diluted 13,357,022 9,108,163 Earnings per share, basic $ 1.96 $ 3.44 Earnings per share, diluted $ 1.87 $ 3.27 (1) Represents earnings attributable to holders of unvested restricted stock issued outside of the Plan to the Company’s employees. There were no anti-dilutive options for the periods reported in the table above. 113 Index 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) 2022 2021 Interest income Interest income, not-in-scope Interest and fees on loans $ 50,941 $ 49,135 Interest on securities 208 47 Other interest income 1,180 61 Total interest income $ 52,329 $ 49,243 Non-interest income Non-interest income, in-scope Service charges on deposit accounts $ 30 $ 31 Strategic Program set up fees 195 96 Strategic Program fees 21,438 17,119 Non-interest income, not in-scope Gain on sale of loans, net 13,550 9,689 SBA loan servicing fees 1,603 1,156 Unrealized gain on investment in BFG ( 478 ) 2,991 Other miscellaneous income 239 18 Strategic Program service charges 834 744 Total non-interest income $ 37,411 $ 31,844 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, 2022 and 2021: Balance Sheets ​ December 31, ($ in thousands) 2022 2021 ASSETS Cash and cash equivalents $ 36,321 $ 38,697 Investment in subsidiary bank 100,276 71,186 Investment in Business Funding Group (BFG), at fair value 4,800 5,900 Investment in FinWise Investments, LLC 271 80 Deferred taxes, net 127 82 Other assets 37 322 Total assets $ 141,832 $ 116,267 LIABILITIES AND SHAREHOLDERS’ EQUITY Income taxes payable 1,077 233 Other liabilities 296 592 Shareholders’ equity 140,459 115,442 Total liabilities and shareholders’ equity $ 141,832 $ 116,267 114 Index Statement of Income ​ For the Years Ended December 31, ($ in thousands) 2022 2021 Non-interest income Change in fair value on investment in BFG $ ( 478 ) $ 2,991 Equity in undistributed earnings of subsidiary 29,090 30,469 Total non-interest income 28,612 33,460 Non-interest expense Salaries and employee benefits 2,316 742 Professional services 1,990 320 Other operating expenses 470 360 Total non-interest expense 4,776 1,422 Income before income tax expense 23,836 32,038 Provision for income taxes ( 1,279 ) 455 Net income $ 25,115 $ 31,583 Statements of Cash Flows ​ For the Years Ended December 31, ($ in thousands) 2022 2021 Cash flows from operating activities: Net income $ 25,115 $ 31,583 Adjustments to reconcile net income to net cash from operating activities Change in fair value of BFG 478 ( 2,991 ) Stock-based compensation expense 778 2,100 Deferred income tax expense 844 222 Net changes in: Income tax receivable ( 45 ) ( 128 ) Other assets 285 ( 217 ) Other liabilities ( 296 ) ( 288 ) Net cash provided by operating activities 27,159 30,281 Cash flows from investing activities: Investment in subsidiary bank ( 29,090 ) ( 30,469 ) Investment in FinWise Investments, LLC ( 191 ) ( 80 ) Distributions of BFG 622 861 Net cash used in investing activities ( 28,659 ) ( 29,688 ) Cash flows from financing activities: Proceeds from exercise of stock options 260 311 Proceeds from initial public offering, net — 35,576 Common stock repurchased ( 1,136 ) — Net cash provided by (used in) financing activities ( 876 ) 35,887 Net change in cash and cash equivalents ( 2,376 ) 36,480 Cash and cash equivalents, beginning of year 38,697 2,217 Cash and cash equivalents, end of year $ 36,321 $ 38,697 115 Index Note 19 – Subsequent Events Subsequent events are events or transactions that occur after the date of the most recent balance sheet but before the financial statements are available to be issued. The Company recognizes in the financial statements the effects of all subsequent events that provide additional evidence about conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing of the financial statements. The Company’s financial statements do not recognize subsequent events that provide evidence about conditions that did not exist at the date of the balance sheet but arose after the date of the balance sheet and before the financial statements are available to be issued. The Company has evaluated subsequent events through March 30, 2023, which is the date the consolidated financial statements are available to be issued. 116 Index Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures Not applicable.