Finwise Bancorp 10-K

Item 8. Financial Statements and Supplementary Data INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Page Report of Independent Registered Public Accounting Firm (PCAOB ID 173 ) 77 Consolidated Balance Sheet 78 Consolidated Statements of Income 79 Consolidated Statements of Changes in Shareholders’ Equity 80 Consolidated Statements of Cash Flows 81 Notes to Consolidated Financial Statements 82 76 Ind ex 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, 2023 and 2022, 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, 2023 and 2022, 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. Change in Accounting Principle As discussed in Notes 1 and 3 to the consolidated financial statements, the Company has changed its method of accounting for credit losses due to the adoption of Accounting Standards Update No. 2016-13, Financial Instruments - Credit Losses . Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Moss Adams LLP Spokane, Washington March 25, 2024 We have served as the Company’s auditor since 2018. 77 Ind ex FinWise Bancorp Consolidated Balance Sheets (in thousands, except share and par value amounts) December 31, 2023 2022 ASSETS Cash and cash equivalents Cash and due from banks $ 411 $ 386 Interest-bearing deposits 116,564 100,181 Total cash and cash equivalents 116,975 100,567 Investment securities held-to-maturity,net of allowance for credit losses of none , (fair value of $ 13.8 million and $ 12.7 million, respectively) 15,388 14,292 Investment in Federal Home Loan Bank (FHLB) stock, at cost 238 449 Strategic Program loans held-for-sale, at lower of cost or fair value 47,514 23,589 Loans receivable, net of allowance for credit losses of $ 12.9 million and $ 12.0 million, respectively 358,560 224,217 Premises and equipment, net 14,630 9,478 Accrued interest receivable 3,573 1,818 Deferred taxes, net — 1,167 Small Business Administration servicing asset, net 4,231 5,210 Investment in Business Funding Group (BFG), at fair value 4,200 4,800 Operating lease right-of-use (“ROU”) assets 4,293 5,041 Income taxes receivable, net 2,400 — Other assets 14,219 10,152 Total assets $ 586,221 $ 400,780 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Deposits Noninterest-bearing $ 95,486 $ 78,817 Interest-bearing 309,347 164,181 Total deposits 404,833 242,998 Accrued interest payable 619 54 Income taxes payable, net 1,873 1,077 Deferred taxes, net 748 — Paycheck Protection Program Liquidity Facility 190 314 Operating lease liabilities 6,296 7,020 Other liabilities 16,606 8,858 Total liabilities 431,165 260,321 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, 2023 and December 31, 2022 — — Common stock, $ 0.001 par value, 40,000,000 shares authorized; 12,493,565 and 12,831,345 shares issued and outstanding as of December 31, 2023 and December 31, 2022, respectively 12 13 Additional paid-in-capital 51,200 54,614 Retained earnings 103,844 85,832 Total shareholders’ equity 155,056 140,459 Total liabilities and shareholders’ equity $ 586,221 $ 400,780 The accompanying notes are an integral part of these consolidated financial statements. 78 Ind ex FinWise Bancorp Consolidated Statements of Income (in thousands, except share and per share amounts) For the Years Ended December 31, 2023 2022 Interest income Interest and fees on loans $ 58,445 $ 50,941 Interest on securities 338 208 Other interest income 5,751 1,180 Total interest income 64,534 52,329 Interest expense Interest on deposits 9,974 1,432 Interest on PPP Liquidity Facility 1 2 Total interest expense 9,975 1,434 Net interest income 54,559 50,895 Provision for credit losses 11,638 13,519 Net interest income after provision for loan losses 42,921 37,376 Non-interest income Strategic Program fees 15,914 22,467 Gain on sale of loans, net 1,684 13,550 SBA loan servicing fees 1,466 1,603 Change in fair value on investment in BFG ( 600 ) ( 478 ) Other miscellaneous income 2,616 269 Total non-interest income 21,080 37,411 Non-interest expense Salaries and employee benefits 25,751 24,489 Professional services 4,961 5,454 Occupancy and equipment expenses 3,312 2,204 (Recovery) impairment of SBA servicing asset ( 376 ) 1,728 Other operating expenses 6,540 4,881 Total non-interest expense 40,188 38,756 Income before provision for income tax 23,813 36,031 Provision for income taxes 6,353 10,916 Net income $ 17,460 $ 25,115 Earnings per share, basic $ 1.38 $ 1.96 Earnings per share, diluted $ 1.33 $ 1.87 Weighted average shares outstanding, basic 12,488,564 12,729,898 Weighted average shares outstanding, diluted 12,909,648 13,357,022 The accompanying notes are an integral part of these consolidated financial statements. 79 Ind ex 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, 2021 12,772,010 $ 13 $ 54,836 $ 60,593 $ 115,442 Stock-based compensation expense 123,055 — 778 — 778 Common stock repurchased ( 120,000 ) — ( 1,260 ) 124 ( 1,136 ) Stock options exercised 56,280 — 260 — 260 Net Income — — — 25,115 25,115 Balance at December 31, 2022 12,831,345 $ 13 $ 54,614 $ 85,832 $ 140,459 Impact of the adoption of ASC 326 Credit Losses — — — ( 212 ) ( 212 ) Stock-based compensation expense 168,821 — 2,046 — 2,046 Stock options exercised 17,640 — 44 — 44 Common stock repurchased ( 524,241 ) ( 1 ) ( 5,504 ) 764 ( 4,741 ) Net Income — — — 17,460 17,460 Balance at December 31, 2023 12,493,565 $ 12 $ 51,200 $ 103,844 $ 155,056 The accompanying notes are an integral part of these consolidated financial statements. 80 Ind ex FinWise Bancorp Consolidated Statements of Cash Flows (in thousands) For the Years Ended December 31, 2023 2022 Cash flows from operating activities: Net income $ 17,460 $ 25,115 Adjustments to reconcile net income to net cash from operating activities Depreciation and amortization 3,811 2,107 Provision for credit losses 11,638 13,519 Noncash operating lease cost 748 2,339 Net amortization in securities discounts and premiums 1 28 Capitalized servicing assets ( 150 ) ( 4,087 ) Capitalized loan trailing fee asset — ( 2,347 ) Gain on sale of loans, net ( 1,684 ) ( 13,550 ) Originations of Strategic Program loans held-for-sale ( 4,077,855 ) ( 6,974,133 ) Proceeds on Strategic Program loans held-for-sale 4,053,929 7,011,292 Change in fair value of BFG 600 478 (Recovery) impairment of SBA servicing asset ( 376 ) 1,728 Stock-based compensation expense 2,046 778 Deferred income tax benefit 1,915 656 Net changes in: Accrued interest receivable ( 1,755 ) ( 270 ) Accrued interest payable 565 6 Other assets ( 6,448 ) ( 299 ) Operating lease liabilities ( 724 ) ( 360 ) Other liabilities 8,544 ( 1,847 ) Net cash provided by operating activities 12,265 61,153 Cash flows from investing activities: Net increase in loans receivable ( 114,902 ) ( 17,330 ) Purchase of lease pools ( 29,606 ) ( 8,754 ) Investment in equity investment ( 18 ) ( 191 ) Distributions from BFG — 622 Purchase of bank premises and equipment, net ( 7,458 ) ( 7,213 ) Proceeds from maturities and paydowns of securities held-to-maturity 1,843 1,954 Purchases of securities held to maturity ( 2,939 ) ( 4,851 ) Purchase of FHLB stock 210 ( 71 ) Net cash used in investing activities ( 152,870 ) ( 35,834 ) Cash flows from financing activities: Net increase (decrease) in deposits 161,835 ( 8,894 ) Common stock repurchased ( 4,741 ) ( 1,136 ) Proceeds from exercise of stock options 44 260 Repayment of PPP Liquidity Facility ( 125 ) ( 736 ) Net cash provided by (used in) financing activities 157,013 ( 10,506 ) Net change in cash and cash equivalents 16,408 14,813 Cash and cash equivalents, beginning of the period 100,567 85,754 Cash and cash equivalents, end of the period $ 116,975 $ 100,567 Supplemental disclosures of cash flow information: Cash paid during the period Income taxes $ 6,626 $ 9,360 Interest $ 9,410 $ 1,428 Supplemental disclosures of noncash operating activities: Right-of-use assets obtained in exchange for operating lease liabilities (ASC 842 adoption effective January 1, 2022) $ — $ 7,380 Impact of current expected credit loss model (ASU 2016-13 adoption effective January 1, 2023) $ 283 $ — The accompanying notes are an integral part of these consolidated financial statements. 81 Ind ex 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 Bank, f/k/a Utah Community Bank and FinWise Investment, LLC. FinWise Bank was incorporated in the state of Utah on May 7, 1999. FinWise Bancorp, f/k/a All West Bancorp, was incorporated in the state of Utah on October 22, 2002, after which, it acquired 100 % of FinWise Bank. As of March 4, 2016, FinWise Bank’s articles of incorporation were amended to rename the entity FinWise Bank. As of March 15, 2021, FinWise 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 Investment, LLC, and FinWise Bank collectively and on a consolidated basis. References to the “Bank” refer to FinWise Bank on a standalone basis. The Bank provides a full range of banking services to individual and commercial customers. The Bank’s primary source of revenue is from loans including consumer, Small Business Administration (SBA), commercial, commercial real estate, and residential real estate. 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. 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, 2023 and 2022, the Company analyzed its exposure to credit risks and concluded that no significant exposure exists from such concentrations of credit risk. Principles of consolidation – The consolidated financial statements include the account of FinWise Bancorp and its wholly-owned subsidiaries, FinWise Investment, 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 impact associated with this correction was not considered material to the interim unaudited consolidated financial statements for the 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 82 Ind ex 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 year ended December 31, 2022, or the financial statements of any previously filed interim or annual periods. Use of estimates – In preparing the consolidated financial statements in accordance with 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 credit losses (ACL), the determination of the fair value of certain financial instruments, deferred income tax assets and stock-based compensation. Management believes the ACL is adequate. While management uses currently available information to recognize credit losses on loans, future additions to the allowance may be necessary based on economic conditions and individual credit deterioration. Cash and Cash Equivalents – For purposes of reporting cash flows, the Company defines cash and cash equivalents as cash, cash due from banks, interest-bearing deposits in other banks, other interest-bearing deposits, and federal funds sold. 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, 2023. Investments Investment securities – Debt securities that management has the positive intent and ability to hold to maturity are classified as "held-to-maturity" and recorded at amortized cost. Securities not classified as held-to-maturity are classified as "available for sale" and recorded at fair value, with unrealized gains and losses excluded from earnings and reported in other comprehensive income. The Company did not hold any available for sale securities at December 31, 2023 or 2022. Management no longer evaluates securities for other-than-temporary impairment after the adoption of ASU 2016-13, Topic 326 which changed the accounting for recognizing impairment on available for sale and held to maturity debt securities. Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. Management considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security's fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component recognized through the Provision for Credit Losses on the Consolidate Statement of Income. (See Note 2 - Investments.) 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, Investment in Business Funding Group, LLC , for a discussion about the Company’s investment in BFG. 83 Ind ex Investment in Federal Home Loan Bank ("FHLB") stock – FHLB stock investments are required 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 Receivable – Loans receivable are reported at their outstanding principal adjusted for any charge-offs, the allowance for credit losses, 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 and leases to be substantially collateralized by real estate, equipment, vehicles, accounts receivable, inventories or other tangible or intangible assets. Real estate collateral is generally 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 its intent from holding loans for investment and reclassify them as held-for-sale. Loans Held For Sale - Loans held-for-sale are carried at the lower of aggregate cost or fair value. Gains and losses are recorded in non-interest income based on the difference between sales proceeds and carrying value. 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. Allowance for Credit Losses - On January 1, 2023, the Company adopted ASU 2016-13, Topic 326 which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable economic forecasts of future events and circumstances. The allowance for credit losses (“ACL”) on loans held for investment is the combination of the allowance for loan losses and the reserve for unfunded loan commitments. The allowance for loan losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "other liabilities" on the Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates. Accrued interest receivable is excluded from the ACL calculation. The amortized cost basis of loans does not include accrued interest receivable, which is included in "accrued interest receivable" on the Consolidated Balance Sheets. As of December 31, 2023 and 2022 the Company had balances of accrued interest receivable of $ 3.6 million and $ 1.8 million, respectively. The amount related to investments held-to-maturity was de minimis as of December 31, 2023 and 2022. The "Provision for credit losses" on the Consolidated Statements of Income is a combination of the provision for credit losses and the provision for unfunded loan commitments. ACL in accordance with CECL methodology With respect to the Bank's core portfolio which consists of SBA 7(a), local lending, retail point of sale, and equipment finance and leasing, the Bank pools similar loans that are collectively evaluated and determines an appropriate level of general allowance by portfolio segment using a non-discounted cash flow model taking into account probability of default, loss in the event of default, and prepayment speed estimates based on industry specific collected data. The model captures losses over the historical charge-off and prepayment cycle and applies those losses at a loan level over the remaining maturity of the loan. The model then calculates a historical loss rate using the average losses over the reporting period, which is then applied to each segment utilizing a standard reversion rate. With respect to the Bank's active retained Strategic Program loan portfolio, the Bank is using a methodology that compares the actual loan performance of a vintage to the worst performing loans within that vintage, known as the high-water mark. The Bank records the expected credit losses based on the high-water mark loss rate. With respect to the Bank's inactive retained Strategic Program loan portfolio, performance data at the summary level provided by the Strategic Programs is banded by credit profile and original loan term and compared to actual loan performance on a quarterly basis. The expected loss rate is supplemented with 84 Ind ex adjustments for reasonable and supportable forecasts of relevant economic indicators, including but not limited to national unemployment rate forecasts. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the ACL are qualitative factors based on the risks present for each portfolio segment. These qualitative factors include the following that are derived from the Interagency Policy Statement on Allowance for Credit Losses: changes in lending policies and procedures; changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio; changes in the nature and volume of the loan portfolio and in the terms of loans; changes in the experience, ability, and depth of lending management and staff; changes in the volume and severity of past due loans, nonaccrual loans, and classified or graded loans; changes in the quality of the Bank's loan review system; changes in the value of underlying collateral for loans that are not collateral-dependent; changes in the level of concentration of credit; changes in the effect of competition, legal, and regulatory requirements on the level of estimated credit losses; and, if applicable, changes in the composition and volume of the loan portfolio due to mergers, acquisitions, and other significant transactions not considered elsewhere. The Bank also considers as an additional qualitative factor any lingering "ripple" effects of the Covid-19 pandemic, including lasting changes to consumer behavior, lending, and society at large. It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are susceptible to change, which may be significant. When management identifies loans that do not share common risk characteristics (i.e., are not similar to other loans within a pool) they are evaluated on an individual basis. These loans are not included in the collective evaluation. For loans identified as having a likelihood of foreclosure or that the borrower is experiencing financial difficulty, a collateral dependent approach is used. These are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient method to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required. The CECL methodology requires a significant amount of management judgment in determining the appropriate allowance for credit losses. Several of the steps in the methodology involve judgment and are subjective in nature including, among other things: segmenting the loan portfolio; determining the amount of loss history to consider; selecting predictive econometric regression models that use appropriate macroeconomic variables; determining the methodology to forecast prepayments; selecting the most appropriate economic forecast scenario; determining the length of the reasonable and supportable forecast and reversion periods; estimating expected utilization rates on unfunded loan commitments; and assessing relevant and appropriate qualitative factors. In addition, the CECL methodology is dependent on economic forecasts, which are inherently imprecise and will change from period to period. Although the allowance for credit losses is considered appropriate, there can be no assurance that it will be sufficient to absorb future losses. In determining an appropriate amount for the allowance, the Bank segments and aggregates the loan portfolio based on common characteristics. The following segments have been identified: Commercial Real Estate . These loans are generally secured by owner-occupied nonfarm, nonresidential properties, or by other nonfarm, nonresidential properties. Owner-occupied commercial real estate loans are typically repaid first by the cash flows generated by the underlying business. Factors that may influence a business' cash flows include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. Non-owner occupied commercial real estate loans are generally considered to have a higher degree of credit risk as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to economic conditions. Commercial and Industrial . These loans are generally secured by business assets such as furniture, fixtures, equipment, accounts receivable, inventory, business vehicles, and other business personal property. Commercial and industrial loans are typically repaid first by the cash flows generated by the borrower's business operations. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flows. Factors that may influence a business' profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. Commercial Leases . Equipment financing and leasing typically involve the use of equipment as collateral for the loan. If the borrower defaults on the loan, the Bank may need to repossess and sell the equipment to recover the 85 Ind ex outstanding debt. However, the value of the equipment may depreciate over time, or disappear, making it difficult for the Bank to recover the full amount of the lease. In equipment leasing, the residual value of the equipment is an important consideration. The residual value is the estimated value of the equipment at the end of the lease term. If the actual value of the equipment is lower than the residual value, the lessor may not be able to recover the full amount of the lease payments. Construction and Land Development . Risks common to construction loans are cost overruns, changes in market demand for property, supply chain interruption affecting construction materials, inadequate long-term financing arrangements and declines in real estate values. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates. Risks common to residential lot loans are those similar to other types of real estate construction loans, as many customers finance the purchase of improved lots in anticipation of constructing a 1 to 4 family residence. Accordingly, common risks are changes in market demand for property, supply chain interruption affecting construction materials, inadequate long-term financing arrangements and declines in real estate values. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values and higher interest rates. Consumer . These are loans to individuals for household, family, and other personal expenditures. Consumer loans generally have higher interest rates and shorter terms than residential loans but tend to have higher credit risk due to the type of collateral securing the loan or in some cases the absence of collateral. Residential Real Estate . These loans are generally secured by 1 to 4 family residential properties. The primary risk characteristics associated with residential mortgage loans typically involve: major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, residential mortgage loans that have adjustable rates could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank. Residential Real Estate Multifamily . Risks common to multifamily loans are poor management, high vacancy rates and regulatory changes. The value of multi-family properties can be impacted by changes in the local real estate market. If property values decline, the Bank may not be able to recover the full amount of the loan if the property needs to be foreclosed. Strategic Program Loans Held for Investment . Unsecured consumer loans and secured or unsecured business loans issued by the Company through these programs generally follow and are limited to specific predetermined underwriting criteria. Strategic Program loans cover a wide range of borrower credit profiles, loan terms and interest rates. Strategic Program loans generally have higher interest rates and shorter terms similar to consumer loans and tend to have higher credit risk due to the type of collateral securing the loan or in most cases the absence of collateral. 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. 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. 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 86 Ind ex 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. Stock Repurchase Program – On August 18, 2022, the Company announced that its Board of Directors (the “Board”) had 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 authorized 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 permitted management to repurchase shares of the Company’s common stock from time to time at management’s discretion. Repurchases could 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 depended 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 did not obligate the Company to purchase any particular number of shares. As of December 31, 2023, the Company has repurchased a total of 644,241 shares for $ 5.9 million and retired them at cost thereby completing the Company's share repurchase program. 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 87 Ind ex 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 and include consideration of historical experience. Expected volatility is based on the Company's data for the expected option term.The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. 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 2023 and 2022: 2023 2022 Risk-free interest rate 3.68 % 3.10 % Expected term in years 6 5.5 - 6.5 Expected volatility 44.2 % 45.8 % - 46.7 % 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. 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 88 Ind ex management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral. The Company records a reserve on its unfunded loan commitments which is included within "other liabilities" on the Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates. Segment Reporting – Operating segments are components of a business where separate financial information is available and evaluated regularly by the chief operating decision makers ("CODMs") in deciding how to allocate resources and in assessing performance. ASC Topic 280, Segment Reporting , requires information to be reported about a company's operating segments using a "management approach", meaning it is based on the way management organizes segments internally to make operating decisions and assess performance. Based on this guidance, the Company has one reportable operating segment, the Bank. Recently adopted accounting pronouncements On January 1, 2023, the Company adopted ASU 2016-13, Topic 326 which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable economic forecasts of future events and circumstances. The Company adopted ASC 326 using the modified retrospective method for all financial assets measured at amortized cost and off-balance-sheet credit exposure. Results for the reporting periods beginning after January 1, 2023 are presented under ASC 326. The adoption resulted in an increase in our allowance for credit losses on loans of $ 0.3 million, a de minimis increase to our allowance for unfunded commitments, and a net-of-tax cumulative effect adjustment of $ 0.2 million to decrease the beginning balance of retained earnings. The Company finalized the adoption of ASC 326 as of January 1, 2023 as detailed in the following table: 12/31/2023 1/1/2024 ($ in thousands) Pre-ASU 2016-13 adoption Impact of ASU 2016-13 adoption After ASU 2016-13 Adoption Construction and land development $ 424 $ ( 67 ) $ 357 Residential real estate 876 ( 58 ) 818 Residential real estate multifamily 3 1 4 Commercial real estate Owner occupied 3,030 ( 532 ) 2,498 Non-owner occupied 208 ( 42 ) 166 Commercial and industrial 339 ( 85 ) 254 Consumer 65 14 79 Commercial leases 339 ( 105 ) 234 Strategic Program loans 6,701 1,131 7,832 Total allowance for loan losses $ 11,985 $ 257 $ 12,242 Unfunded lending commitments — 26 26 Total allowance for credit losses $ 11,985 $ 283 $ 12,268 On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures which eliminated the accounting guidance for troubled debt restructurings by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. The amendments in the ASU also require an entity disclose current-period gross writeoffs by year of origination for financing receivables and net investments in leases within the scope of Subtopic 89 Ind ex 326-20. The Company applied the amendments in this ASU prospectively. The adoption of ASU 2022-02 did not have a material impact on the consolidated financial statements. Recent accounting pronouncements In December 2023, the FASB issued ASU 2023-09, Improvements to Income Tax Disclosures, which requires consistent categories and greater disaggregation of information in the rate reconciliation and income taxes paid disaggregated by jurisdiction. The amendments are intended to address investors’ requests for income tax disclosures that provide more information to help them better understand an entity’s exposure to potential changes in tax laws and the ensuing risks and opportunities and to assess income tax information that affects cash flow forecasts and capital allocation decisions. The guidance also eliminates certain existing requirements related to uncertain tax positions and unrecognized deferred tax. The guidance is effective for annual periods beginning after December 15, 2024. The Company is evaluating the effect that ASU 2023-09 will have on its consolidated financial statements and related disclosures. In November 2023, the FASB issued ASU 2023-07, Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures. The amendments improve reportable segment disclosure requirements, primarily through enhanced disclosures about significant segment expenses. In addition, the amendments enhance interim disclosure requirements, clarify circumstances in which an entity can disclose multiple segment measures of profit or loss, provide new segment disclosure requirements for entities with a single reportable segment, and contain other disclosure requirements. The purpose of the amendments is to enable investors to better understand an entity’s overall performance” and assess “potential future cash flows. The ASU applies to all public entities that are required to report segment information in accordance with ASC 280. The amendments in ASU 2023-07 are effective for all public entities for fiscal years beginning after December 15, 2023 and interim periods within fiscal years beginning after December 15, 2024. The Company is evaluating the effect that ASU 2023-06 will have on its consolidated financial statements and related disclosures. On October 9, 2023, the FASB issued ASU 2023-06, “Disclosure Improvements: Codification Amendments in Response to the SEC’s Disclosure Update and Simplification of Initiative.” ASU 2023-06 amends the disclosure or presentation requirements related to various subtopics in the FASB Accounting Standards Codification (the “Codification”). The ASU was issued in response to the SEC’s August 2018 final rule that updated and simplified disclosure requirements that the SEC believed were “redundant, duplicative, overlapping, outdated, or superseded.” The new guidance is intended to align U.S. GAAP requirements with those of the SEC and to facilitate the application of U.S. GAAP for all entities. ASU 2023-06 applies to all reporting entities within the scope of the amended subtopics. Note that some of the amendments introduced by the ASU are technical corrections or clarifications of the FASB’s current disclosure or presentation requirements. The effective date for each amendment of ASU 2023-06 will be the date on which the SEC’s removal of that related disclosure requirement from Regulation S-X or Regulation S-K becomes effective, with early adoption prohibited. The Company will apply the amendments in ASU 2023-06 prospectively after the effective dates. The Company is evaluating the effect that ASU 2023-06 will have on its consolidated financial statements and related disclosures. Note 2 – Investments Investment securities held-to-maturity, at cost The Company's held-to-maturity ("HTM") investment portfolio consists of Agency mortgage-backed securities and Agency collateralized mortgage obligations. The Company reports HTM securities on the Company's Consolidated Balance Sheets at carrying value which is amortized cost. The amortized cost, allowance for credit losses, unrealized gains and losses, and estimated fair values of the Company’s held-to-maturity securities at December 31, 2023 and December 31, 2022, are summarized as follows: December 31, 2023 ($ in thousands) Amortized Cost Allowance for Credit Losses Unrealized Gain Unrealized Loss Estimated Fair Value Mortgage-backed securities $ 6,959 $ — $ — $ ( 817 ) $ 6,142 Collateralized mortgage obligations 8,429 — 4 ( 766 ) 7,667 Total securities held-to-maturity $ 15,388 $ — $ 4 $ ( 1,583 ) $ 13,809 90 Ind ex December 31, 2022 ($ in thousands) Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value Mortgage-backed securities $ 8,087 $ 5 $ ( 825 ) $ 7,267 Collateralized mortgage obligations 6,205 — ( 744 ) 5,461 Total securities held-to-maturity $ 14,292 $ 5 $ ( 1,569 ) $ 12,728 Credit Quality Indicators & Allowance for Credit Losses - HTM On January 1, 2023, the Company adopted ASU 2016-13, which replaced the legacy GAAP other-than-temporary impairment ("OTTI") model with a credit loss model. ASU 2016-13 requires an allowance on lifetime expected credit losses on HTM debt securities but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. For HTM securities, the Company evaluates the credit risk of its securities on at least a quarterly basis. The Company estimates expected credit losses on HTM debt securities on a collective basis by major security type. Accrued interest receivable on HTM debt securities is excluded from the estimate of credit losses. At December 31, 2023 and at adoption of CECL on January 1, 2023, there was no ACL related to HTM securities due to the composition of the portfolio which is generally considered to have minimal credit risk given the government guarantee associated with these agencies. The Company had nineteen securities, consisting of nine collateralized mortgage obligations and ten mortgage-backed securities, in an unrealized loss position at December 31, 2023 and seventeen securities, consisting of eight collateralized mortgage obligations and nine mortgage-backed securities, in an unrealized loss position at December 31, 2022, as summarized in the following tables: December 31, 2023 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 $ 680 $ ( 16 ) $ 5,462 $ ( 802 ) $ 6,142 $ ( 817 ) Collateralized mortgage obligations 934 ( 4 ) 4,812 ( 762 ) 5,746 ( 766 ) Total securities held-to-maturity $ 1,614 $ ( 20 ) $ 10,274 $ ( 1,564 ) $ 11,888 $ ( 1,583 ) 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 $ 2,374 $ ( 190 ) $ 3,962 $ ( 635 ) $ 6,336 $ ( 825 ) Collateralized mortgage obligations 2,752 ( 96 ) 2,709 ( 648 ) 5,461 ( 744 ) Total securities held-to-maturity $ 5,126 $ ( 286 ) $ 6,671 $ ( 1,283 ) $ 11,797 $ ( 1,569 ) 91 Ind ex The amortized cost and estimated market value of debt securities at December 31, 2023 and December 31, 2022, by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. December 31, 2023 December 31, 2022 ($ 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 2,745 2,577 3,388 3,202 Due after ten years 12,643 11,233 10,904 9,526 Total Securities held-to-maturity $ 15,388 $ 13,809 $ 14,292 $ 12,728 At December 31, 2023, held-to-maturity securities in the amount of $ 13.8 million were pledged as collateral for credit lines held by the Bank at the Federal Reserve Bank of San Francisco. There were no sales or transfers of investment securities and no realized gains or losses on these securities during the years ended December 31, 2023 or 2022. FHLB stock The Bank is a member of the FHLB system. Members are required to own FHLB stock of at least the greater of 0.06 % of FHLB membership asset value or 4.50 % of outstanding FHLB advances. At December 31, 2023 and December 31, 2022, the Bank owned $ 0.2 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, 2023 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 its recorded investment. 92 Ind ex Note 3 – Loans Held for Investment and Allowance for Credit Losses Loans held for investment outstanding by general ledger classification as of December 31, 2023 and December 31, 2022, consisted of the following: December 31, December 31, 2023 2022 ($ in thousands) SBA (1) $ 239,922 $ 145,172 Commercial leases 38,110 9,252 Commercial, non-real estate 2,457 2,232 Residential real estate 38,123 37,815 Strategic Program loans 19,408 24,259 Commercial real estate: Owner occupied 20,798 8,733 Non-owner occupied 2,025 3,330 Consumer 11,372 5,808 Total loans held for investment $ 372,215 $ 236,601 Deferred loan fees, net ( 767 ) ( 399 ) Allowance for credit losses (2) ( 12,888 ) ( 11,985 ) Net loans $ 358,560 $ 224,217 (1) Included in the SBA loans held for investment above are $ 131.7 million and $ 49.5 million of loans guaranteed by the SBA as of December 31, 2023 and December 31, 2022, respectively. (2) The Company adopted ASU 2016-13 as of January 1, 2023. The 2022 amounts presented are calculated under the prior accounting standard. Strategic Program Loans – In 2016, the Company began originating loans with various third-party loan origination platforms that use technology and other innovative systems to streamline the origination of unsecured consumer and secured or unsecured business loans to a wide array of borrowers within certain approved credit profiles. Loans issued by the Company through these programs generally follow and are limited to specific predetermined underwriting criteria. The Company earns monthly minimum program fees from these third parties. Based on the volume of loans originated by the Company related to each Strategic Program, an additional fee equal to a percentage of the loans generated under the Strategic Program may be collected. The program fee is included within non-interest income on the Consolidated Statements of Income. The Company generally retains the loans and/or receivables for a number of business days after origination before selling the loans and/or receivables to the Strategic Program platform or another investor. Interest income is recognized by the Company while holding the loans. These loans are classified as held-for-sale on the balance sheet. The Company may also hold a portion of the loans or receivable and sell the remainder directly to the Strategic Programs or other investors. The Company generally services the loans originated through the Strategic Programs in consideration of servicing fees equal to a percentage of the loans generated under the Strategic Programs. In turn, the Strategic Program service providers, subject to the Company’s approval and oversight, serve as sub-servicer and perform typical primary servicing duties including loan collections, modifications, charging-off, reporting and monitoring. Each Strategic Program establishes a “reserve” deposit account with the Company. The agreements generally require that the 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 deposits held in reserve by Strategic Programs at the Company at December 31, 2023 and December 31, 2022, was $ 29.8 million and $ 16.6 million, respectively. 93 Ind ex Strategic Program loans retained and held-for-sale as of December 31, 2023 and December 31, 2022, are summarized as follows: December 31, December 31, 2023 2022 ($ in thousands) Retained Strategic Program loans $ 19,408 $ 24,259 Strategic Program loans held-for-sale 47,514 23,589 Total Strategic Program loans $ 66,922 $ 47,848 Allowance for Credit Losses In determining the estimate for the allowance, the Bank segmented and aggregated the loan portfolio based on the Federal Deposit Insurance Corporation ("FDIC") Consolidated Reports of Condition and Income ("Call Report") codes. The following pool segments identified as of December 31, 2023 are based on the CECL methodology: ($ in thousands) Construction and land development $ 28,330 Residential real estate 51,428 Residential real estate multifamily 647 Commercial real estate: Owner occupied 186,550 Non-owner occupied 15,354 Commercial and industrial 21,399 Consumer 10,989 Commercial leases 38,110 Retained Strategic Program loans 19,408 Total loans $ 372,215 The portfolio classes identified as of December 31, 2022 are based on the incurred loss methodology and are segmented by general ledger classification as detailed below. ($ in thousands) SBA $ 145,172 Commercial leases 9,252 Commercial, non-real estate 2,232 Residential real estate 37,815 Retained Strategic Program loans 24,259 Commercial real estate 12,063 Consumer 5,808 Total loans $ 236,601 94 Ind ex Activity in the ACL by common characteristic loan pools based on the CECL methodology was as follows: Years Ended December 31, 2023 ($ in thousands) Beginning Balance Impact of ASU 2016-13 adoption Provision (Reversal) of Credit Losses Charge-Offs Recoveries Ending Balance Construction and land development $ 424 $ ( 67 ) $ ( 41 ) $ — $ — $ 316 Residential real estate 876 ( 58 ) 273 ( 225 ) 90 956 Residential real estate multifamily 3 1 2 — — 6 Commercial real estate: Owner occupied 3,030 ( 532 ) 1,551 ( 714 ) 1 3,336 Non-owner occupied 208 ( 42 ) ( 262 ) — 378 282 Commercial and industrial 339 ( 85 ) 558 ( 472 ) 21 361 Consumer 65 14 198 ( 68 ) 2 211 Commercial leases 339 ( 105 ) 121 — — 355 Retained Strategic Program loans 6,701 1,131 9,124 ( 10,946 ) 1,054 7,065 Total allowance for loan losses $ 11,985 $ 257 $ 11,525 $ ( 12,425 ) $ 1,546 $ 12,888 Unfunded lending commitments — 26 113 — — 139 Total allowance for credit losses $ 11,985 $ 283 $ 11,638 $ ( 12,425 ) $ 1,546 $ 13,027 Activity in the allowance for loan losses by general ledger classification based on the incurred loss methodology was as follows: Years Ended December 31, 2022 ($ in thousands) Beginning Balance Provision of Loan Losses Charge-Offs Recoveries Ending Balance SBA $ 2,739 $ 1,881 $ ( 392 ) $ 66 $ 4,294 Commercial leases 56 289 — — 345 Commercial, non-real estate 76 ( 22 ) — 2 56 Residential real estate 352 145 — — 497 Retained Strategic Program loans 6,549 11,215 ( 11,948 ) 885 6,701 Commercial real estate 21 6 — — 27 Consumer 62 5 ( 66 ) 64 65 Total allowance for loan losses $ 9,855 $ 13,519 $ ( 12,406 ) $ 1,017 $ 11,985 95 Ind ex The following table presents the loan balances by portfolio class, based on impairment method, and the corresponding balances in the allowance as of December 31, 2022 . For the year ended December 31, 2022 , the allowance was calculated based on the incurred loss methodology. Allowance for Loan Losses Portfolio Loan Balances ($ in thousands) Individually Evaluated Collectively Evaluated Total Individually Evaluated Collectively Evaluated Total SBA $ — $ 4,294 $ 4,294 $ 450 $ 144,722 $ 145,172 Commercial leases — 345 345 — 9,252 9,252 Commercial, non-real estate — 56 56 — 2,232 2,232 Residential real estate — 497 497 — 37,815 37,815 Retained Strategic Program loans — 6,701 6,701 — 24,259 24,259 Commercial real estate — 27 27 — 12,063 12,063 Consumer — 65 65 — 5,808 5,808 Total loans $ — $ 11,985 $ 11,985 $ 450 $ 236,151 $ 236,601 The following table presents, under previously applicable GAAP, loans individually evaluated for impairment as of 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 leases — — — — — Commercial, non-real estate — — — — — Residential real estate — — — — — Retained Strategic Program loans — — — — — Commercial real estate — — — — — Consumer — — — — — Total $ 450 $ 450 $ — $ 711 $ 36 96 Ind ex Nonaccrual and past due loans are summarized below as of December 31, 2023 and December 31, 2022: December 31, 2023 Loans Past Due and Still Accruing ($ in thousands) 30-89 Days Past Due 90 Days and Greater Total Non- Accrual Loans with no ACL (1) Non-Accrual Loans with ACL Current Loans Total Loans Construction and land development $ 1,648 $ 297 $ 1,945 $ — $ — $ 26,385 $ 28,330 Residential real estate 23 — 23 1,585 — 49,820 51,428 Residential real estate multifamily — — — — — 647 647 Commercial real estate: — Owner occupied — — — 21,643 640 164,267 186,550 Non-owner occupied — — — 2,362 — 12,992 15,354 Commercial and industrial — — — 282 — 21,117 21,399 Consumer 81 47 128 — — 10,860 10,989 Commercial leases — — — — — 38,110 38,110 Retained Strategic Program loans 1,953 96 2,049 — — 17,359 19,408 Total $ 3,705 $ 440 $ 4,145 $ 25,872 $ 640 $ 341,558 $ 372,215 (1) Included in the nonaccrual loan balances are $ 15.0 million of SBA 7(a) loan balances guaranteed by the SBA. December 31, 2022 ($ in thousands) Current 30-59 Days Due Due 60-89 Days Due Due 90+ Days Past Due & Still Accruing Total Past Due Non- Accrual Total SBA $ 143,733 $ 1,439 $ — $ — $ 1,439 $ — $ 145,172 Commercial leases 9,252 — — — — — 9,252 Commercial, non-real estate 2,232 — — — — — 2,232 Residential real estate 37,387 428 — — 428 — 37,815 Retained Strategic Program loans 22,080 1,184 802 193 2,179 — 24,259 Commercial real estate 12,063 — — — — — 12,063 Consumer 5,776 32 — — 32 — 5,808 Total $ 232,523 $ 3,083 $ 802 $ 193 $ 4,078 $ — $ 236,601 There was no interest income for the years ended December 31, 2023 and 2022, recognized on nonaccrual loans. The amount of accrued interest for the years ended December 31, 2023 and 2022, that was reversed against interest income on nonaccrual loans was approximately $ 0.7 million and zero , respectively. The allowance for credit losses represents management’s estimate of lifetime credit losses inherent in loans as of the balance sheet date. The allowance for credit losses is estimated by management using relevant available information, from both internal and external sources, relating to past events, current conditions, and reasonable and supportable forecasts. The Bank measures expected credit losses for loans on a pooled basis when similar risk characteristics exist. Generally, collectively assessed loans are grouped by Call Report code and then risk grade grouping. 97 Ind ex 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 – A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is believed to be remote. Watch – A Watch asset may be a larger loan or one that places a heavier reliance on collateral due to the relative financial strength of the borrower. The assets may be maintenance intensive requiring closer monitoring. The obligor is believed to have an adequate primary source of repayment. Special Mention – 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 believes that it is currently protected against a default and loss is considered unlikely and not imminent. Substandard – A Substandard asset is believed to be inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have identified weaknesses and are characterized by the possibility that the Company may sustain some loss if deficiencies are not corrected. Not Rated – For certain Strategic Program and consumer loans, the Company does not evaluate and risk rate the loans in the same manner as other loans in the Company’s portfolio. The Not Rated loans are typically homogenous, smaller dollar balances approved using abridged underwriting methods that allow the Company to streamline the loan approval process and increase efficiency . Credit quality for Strategic Program loans is highly correlated with delinquency levels. The following table presents the ending balances of the Company's loan and lease portfolio including non-performing loans by class of receivable and originating year and considering certain credit quality indicators as of the date indicated along with gross chargeoffs for the year ended December 31, 2023 : December 31, 2023 2023 2022 2021 Prior Revolving Loans Total ($ in thousands) Construction and land development Pass $ 12,919 $ 10,345 $ 4,354 $ 97 $ — $ 27,715 Watch — — — — — — Special Mention — — — — — — Substandard — 615 — — — 615 Total 12,919 10,960 4,354 97 — 28,330 Current period gross writeoff — — — — — — Residential real estate Pass 2,209 874 1,480 2,947 2,249 9,759 Watch 23,614 12,399 1,661 2,035 — 39,709 Special Mention — — 208 11 — 219 Substandard — 1,585 — 156 — 1,741 Total 25,823 14,858 3,349 5,149 2,249 51,428 Current period gross writeoff — ( 121 ) — ( 104 ) — ( 225 ) Residential real estate multifamily Pass 278 263 80 — — 621 Watch — — — 26 — 26 Special Mention — — — — — — Substandard — — — — — — 98 Ind ex Total 278 263 80 26 — 647 Current period gross writeoff — — — — — — Commercial real estate owner occupied Pass 12,566 1,234 854 12,207 — 26,861 Watch 62,360 53,832 11,871 7,654 — 135,717 Special Mention — 192 — 1,498 — 1,690 Substandard 16,466 3,712 1,066 1,038 — 22,282 Total 91,392 58,970 13,791 22,397 — 186,550 Current period gross writeoff ( 318 ) ( 21 ) ( 97 ) ( 278 ) — ( 714 ) Commercial real estate non-owner occupied Pass 2,805 1,294 — 419 — 4,518 Watch 4,382 2,635 1,223 234 — 8,474 Special Mention — — — — — — Substandard — 2,362 — — — 2,362 Total 7,187 6,291 1,223 653 — 15,354 Current period gross writeoff — — — — — — Commercial and industrial Pass 2,090 601 744 821 31 4,287 Watch 10,157 4,600 764 930 — 16,451 Special Mention — — — 8 — 8 Substandard 260 — — 393 — 653 Total 12,507 5,201 1,508 2,152 31 21,399 Current period gross writeoff ( 87 ) ( 114 ) ( 122 ) ( 149 ) — ( 472 ) Consumer Pass 7,792 1,975 637 558 2 10,964 Watch 24 — — 1 — 25 Special Mention — — — — — — Substandard — — — — — — Total 7,816 1,975 637 559 2 10,989 Current period gross writeoff ( 3 ) ( 5 ) ( 53 ) ( 7 ) — ( 68 ) Commercial leases Pass 31,313 6,559 — 238 — 38,110 Watch — — — — — — Special Mention — — — — — — Substandard — — — — — — Total 31,313 6,559 — 238 — 38,110 Current-period gross writeoffs — — — — — — Retained Strategic Program loans Pass — — — — — — Watch — — — — — — 99 Ind ex Special Mention — — — — — — Substandard — — — — — — Not Rated 14,506 3,609 1,292 1 — 19,408 Total 14,506 3,609 1,292 1 — 19,408 Current-period gross writeoffs ( 3,773 ) ( 6,154 ) ( 1,017 ) ( 2 ) — ( 10,946 ) Total portfolio loans receivable, gross 203,741 108,686 26,234 31,272 2,282 372,215 Total current-period gross writeoffs ( 4,181 ) ( 6,415 ) ( 1,289 ) ( 540 ) — ( 12,425 ) Commercial The following table presents the ending balances of the Company's loan and lease portfolio including non-performing loans by class of receivable and considering certain credit quality indicators as of the date indicated: 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 leases 9,252 — — 9,252 Commercial, non-real estate 2,232 — — 2,232 Residential real estate 37,815 — — 37,815 Commercial real estate 12,063 — — 12,063 Consumer 5,808 — — 5,808 Not Risk Graded Retained Strategic Program loans 24,259 Total $ 211,319 $ 573 $ 450 $ 236,601 Effective January 1, 2023 loan modifications to borrowers experiencing financial difficulty are required to be disclosed by type of modification and by type of loan. Prior accounting guidance classified loans which were modified as troubled debt restructurings ("TDRs") only if the modification reflected a concession from the lender in the form of a below market interest rate or other concession in addition to borrower financial difficulty. Under the new guidance (ASU 2022-02), loans with modifications made after January 1, 2023, will be reported under the new loan modification guidance whether a concession is made or not. As of January 1, 2023, the Company has ceased to recognize or measure new TDRs but those existing at December 31, 2022 will remain until settled. In the year ended December 31, 2023 there was one material loan modification reportable under the new guidance. This loan was current as of December 31, 2023. As of December 31, 2023 ($ in thousands) Principal deferment (Months) Outstanding Balance Residential real estate 12 months $ 156 100 Ind ex Loans modified and recorded as TDR’s at December 31, 2022, c onsist of the following: ($ in thousands) Number of Contracts Pre- Modification Outstanding Recorded Investment Post- Modification Outstanding Recorded Investment December 31, 2022 SBA 1 $ 377 $ 377 Total at December 31, 2022 1 $ 377 $ 377 The amount of SBA loans as of December 31, 2022 includes $ 0.3 million of SBA 7(a) loan balances that are guaranteed by the SBA. At December 31, 2022, 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 a de minimis amount. During the year ended December 31, 2022, there were no loan modifications to TDRs. Separately, one restructured loan incurred a default within 12 months of the restructure date during the year ended December 31, 2022. This same loan was paid in full with interest on June 2, 2022. Collateral-Dependent Financial Loans A collateral-dependent financial loan relies substantially on the operation or sale of the collateral for repayment. In evaluating the overall risk associated with a loan, the Company considers (1) character, overall financial condition and resources, and payment record of the borrower; (2) the prospects for support from any financially responsible guarantors; and (3) the nature and degree of protection provided by the cash flow and value of any underlying collateral. The loan may become collateral-dependent when foreclosure is probable or the borrower is experiencing financial difficulty and its sources of repayment become inadequate over time. At such time, the Company develops an expectation that repayment will be provided substantially through the operation or sale of the collateral. The following tables present the allowance for credit losses and the amortized cost basis of collateral-dependent loans by class of loans as of the dates indicated: ($ in thousands) Collateral Type As of December 31, 2023 Allowance for Credit Losses Real Estate Personal Property Total Construction and land development $ — $ 615 $ — $ 615 Residential real estate — 1,585 — 1,585 Commercial real estate: Owner occupied 45 21,643 — 21,643 Non-owner occupied — 2,362 — 2,362 Commercial and industrial — — 282 282 Total $ 45 $ 26,205 $ 282 $ 26,487 The amount of collateral-dependent SBA loans as of December 31, 2023 include $ 15.0 million of SBA 7(a) loan balances that are guaranteed by the SBA. ($ in thousands) Collateral Type As of December 31, 2022 Real Estate Personal Property Total Commercial real estate $ 1,426 $ — $ 1,426 101 Ind ex The amount of collateral-dependent SBA loans as of December 31, 2022 include $ 1.1 million of SBA 7(a) loan balances that are guaranteed by the SBA. Note 4 – Premises and Equipment Premises and equipment at December 31, 2023 and 2022, consist of the following: December 31, 2023 2022 ($ in thousands) Leasehold improvements $ 3,700 $ 3,720 Commercial operating lease equipment 9,300 2,803 Furniture, fixtures, and equipment 3,298 3,698 Construction in progress 2,153 1,514 Total premises and equipment $ 18,451 $ 11,735 Less accumulated depreciation ( 3,821 ) ( 2,257 ) Premises and equipment, net $ 14,630 $ 9,478 Commercial Operating Leases Net book value of the operating leases as of December 31, 2023 and December 31, 2022 was $ 8.2 million and $ 2.7 million. Rental income from operating leases for the years ended December 31, 2023 and 2022 was $ 1.3 million and $ 0.2 million, respectively. Depreciation expense for the related premises and equipment was $ 1.0 million and $ 0.2 million for the years ended December 31, 2023 and 2022, respectively. Lease Liabilities The Company leases its facilities under noncancelable operating leases. Rent expense for the years ended December 31, 2023 and 2022 was $ 0.9 million and $ 1.1 million, respectively. Future minimum annual undiscounted rental payments for these operating leases are as follows ($ in thousands): 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 Year Ended December 31, 2028 1,186 Thereafter 1,017 Total 6,663 Less present value discount ( 367 ) Operating lease liabilities $ 6,296 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 does not apply due to the short-term period of this lease and immateriality. The tables below present information regarding the Company’s lease assets and liabilities. Years Ended December 31, 2023 2022 Weighted-average remaining lease term – operating leases (in years) 5.8 6.7 Weighted-average discount rate – operating leases 1.9 % 1.9 % 102 Ind ex Supplemental cash flow information related to leases were as follows (in thousands): For the Years Ended December 31, 2023 2022 ($ in thousands) Operating cash flows from operating leases $ 850 $ 1,928 Right-of-use assets obtained in exchange for operating lease liabilities — 7,380 The components of lease expense were as follows (in thousands): For the Years Ended December 31, 2023 2022 (in thousands) Operating leases Operating lease cost $ 876 $ 1,044 Variable lease cost 35 16 Operating lease expense 911 1,060 Short-term lease rent expense — 38 Net rent expense $ 911 $ 1,098 Note 5 – Deposits Major classes of deposits are as follows: December 31, 2023 2022 ($ in thousands) Demand $ 145,544 $ 129,563 Savings 8,633 8,289 Money markets 11,661 10,882 Time certificates of deposit 238,995 94,264 Total deposits $ 404,833 $ 242,998 The aggregate amount that exceed the $250 thousand insurance limit of time deposits at December 31, 2023 and 2022 were $ 2.0 million and $ 1.7 million, respectively. At December 31, 2023 , the scheduled maturities of time deposits are as follows ($ in thousands): Year Ended December 31, 2024 $ 76,322 Year Ended December 31, 2025 11,434 Year Ended December 31, 2026 81,060 Year Ended December 31, 2027 3,049 Year Ended December 31, 2028 66,591 Thereafter 539 Total $ 238,995 103 Ind ex 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 $ 253.2 million and $ 318.6 million at December 31, 2023 and 2022, respectively. The following table summarizes SBA servicing asset activity for the periods indicated: For the Years Ended December 31, ($ in thousands) 2023 2022 Beginning balance $ 5,210 $ 3,938 Additions to servicing asset 150 4,087 Recovery (impairment) of SBA servicing asset 376 ( 1,728 ) Amortization of servicing asset ( 1,505 ) ( 1,087 ) Ending balance $ 4,231 $ 5,210 The fair market value of the SBA servicing asset as of December 31, 2023 and December 31, 2022, was $ 4.2 million and $ 5.2 million, respectively. Recovery or impairment 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 Company assumed a weighted average prepayment rate of 18.2 %, weighted average term of 3.72 years, and a weighted average discount rate of 15.4 % at December 31, 2023. The Company assumed a weighted average prepayment rate of 14.2 %, weighted average term of 4.45 years, and a weighted average discount rate of 18.8 % at December 31, 2022. 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, 2023 and December 31, 2022, that the Bank meets all capital adequacy requirements to which it is subject. As of December 31, 2023 and December 31, 2022, 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. 104 Ind ex 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, 2023 Leverage ratio (CBLR election) $ 116,108 20.7 % $ 50,441 9.0 % December 31, 2022 Leverage ratio (CBLR election) $ 91,674 25.1 % $ 32,898 9.0 % Federal Reserve Board Regulations require maintenance of certain minimum reserve balances based on certain average deposits. The Bank had no reserve requirements as of December 31, 2023 and December 31, 2022. The Federal Reserve’s policy statement and supervisory guidance on the payment of cash dividends by a Bank Holding Company (“BHC”), such as FinWise Bancorp, expresses the view that a BHC should generally pay cash dividends on common stock only to the extent that (1) the BHC’s net income available over the past year is sufficient to cover the cash dividend, (2) the rate of earnings retention is consistent with the organization’s expected future needs and financial condition, and (3) the minimum regulatory capital adequacy ratios are met. Should an insured depository institution controlled by a bank holding company be “significantly undercapitalized” under the applicable federal bank capital ratios, or if the bank subsidiary is “undercapitalized” and has failed to submit an acceptable capital restoration plan or has materially failed to implement such a plan, federal banking regulators (in the case of the Bank, the FDIC) may choose to require prior Federal Reserve approval for any capital distribution by the BHC. In addition, since FinWise Bancorp is a legal entity separate and distinct from the Bank and does not conduct stand-alone operations, an ability to pay dividends depends on the ability of the Bank to pay dividends to FinWise Bancorp and the FDIC and the Utah Department of Financial Institutions (“UDFI”) may, under certain circumstances, prohibit the payment of dividends to FinWise Bancorp from the Bank. Utah corporate law also requires that dividends can only be paid out of funds legally available. 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, 2023 and December 31, 2022, the Bank’s available line of credit with the FHLB to borrow in overnight funds was $ 30.5 million and $ 2.6 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, 2023 and December 31, 2022, no amounts were outstanding under the line of credit. Loans totaling $ 46.9 million and $ 4.0 million were pledged to secure the FHLB line of credit as of December 31, 2023 and December 31, 2022, respectively. Lines of Credit At December 31, 2023 and December 31, 2022, the Bank had the ability to access $ 11.4 million and $ 10.6 million from the Federal Reserve Bank’s Discount Window on a collateralized basis. At December 31, 2023, the Bank had the ability to access $ 0.8 million from the Federal Reserve Bank’s Bank Term Funding Program on a collateralized basis. Through Zions Bank, the Bank had an available unsecured line available of $ 5.0 million and $ 1.0 million at December 31, 2023 and December 31, 2022. The Bank had an available line of credit with Bankers’ Bank of the West to borrow up to $ 1.1 million in overnight funds at December 31, 2023 and December 31, 2022. The Bank had no outstanding balances on such unsecured or secured lines of credit as of December 31, 2023 and December 31, 2022. 105 Ind ex 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 Paycheck Protection Program ("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 $ 0.2 million of PPP loans as eligible collateral under the PPPLF borrowing arrangement at December 31, 2023. 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 $ 0.3 million during the year ended December 31, 2023 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. At December 31, 2023 and December 31, 2022, financial instruments with off-balance-sheet risk were as follows: December 31, December 31, ($ in thousands) 2023 2022 Revolving, open-end lines of credit $ 1,630 $ 1,683 Commercial real estate 17,421 17,886 Other unused commitments 724 253 $ 19,775 $ 19,822 Allowance for Credit Losses on Unfunded Commitments The Company estimates expected credit losses over the contractual period in which the Company is exposed to credit risk via a contractual obligation to extend credit, unless that obligation is unconditionally cancelable by the Company. The allowance for credit losses on unfunded commitments is included in other liabilities on the consolidated balance sheets and is adjusted through a charge to provision for credit loss expense on the consolidated statements of income. The allowance for credit losses on unfunded commitments estimate includes consideration of the likelihood that funding will occur and an estimate of expected credit losses on commitments expected to be funded over its estimated life. The allowance for credit losses on unfunded commitments was $ 0.1 million as of December 31, 2023. 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 4.7 % of the aggregate membership interests of BFG and Class B Non-Voting Units representing 5.3 % 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 $ 0.7 million and $ 0.5 million for the year ended December 31, 2023 and 2022, respectively. These distributions were recorded in the Consolidated Income Statement as non-interest income. 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 10 106 Ind ex 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 at that time. The resulting fair value of the warrants was $ 0.19 per share. On July 25, 2023, the Company entered into a Membership Purchase Agreement, as amended (the "Purchase Agreement") with BFG and four members of BFG ("Sellers"). Pursuant to the Purchase Agreement, the Company acquired an additional 10 % non-voting ownership interest in BFG (the "Transaction"). On February 5, 2024, the Transaction was consummated and the Company issued in the aggregate 339,176 shares of Common Stock of the Company, par value $ 0.001 per share, in a private placement to the Sellers in exchange for their 10 % aggregate non-voting ownership interest in BFG. When combined with the Company’s existing 5.3 % non-voting ownership interest in BFG and, the Company's existing 4.7 % voting ownership interest, the Company has a 20 % ownership interest in BFG, comprising a 4.7 % voting ownership interest and a 15.3 % non-voting ownership interest. For further discussion on the Company’s investment in BFG, see Note 13 Related Parties and Note 19 Subsequent Events. Note 10 – Stock-Based Compensation Stock option plans The Company utilizes stock-based compensation plans, as well as discretionary grants, for employees, directors and consultants to attract and retain the best available personnel for positions of substantial responsibility, to provide additional incentives and to promote the success of the Company’s business. The 2019 Stock Option Plan (“2019 Plan”) was adopted on June 20, 2019 following approval by the Company’s Board of Directors and shareholders. The 2019 Plan provides for the issuance of non-statutory stock options and restricted stock to employees, directors and consultants. The 2019 Plan also provides for the issuance of incentive stock options only to employees. The 2019 Plan, as amended, authorizes the issuance of 1,280,000 common shares. The 2019 Plan will terminate as to future awards 10 years from the later of the effective date or the earlier of the most recent Board or stockholder approval of an increase in the number of shares reserved for issuance under the 2019 Plan. At December 31, 2023, 333,853 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, 2023, 2,189 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 in the case of options or based on the fair market 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. 107 Ind ex Stock options The following summarizes stock option activity for the years ended December 31, 2023 and 2022: Stock Options Weighted Average Exercise Price Weighted Average Contractual Life (in years) Aggregate Intrinsic Value 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 0 124,874 Outstanding at December 31, 2022 881,625 $ 5.27 7.5 $ 3,871,667 Options granted 126,406 8.64 9.9 — Options exercised ( 17,640 ) 2.45 — 120,229 Options forfeited ( 8,903 ) 9.52 — 12,089 Outstanding at December 31, 2023 981,488 $ 5.72 6.9 $ 8,429,619 Options vested and exercisable at December 31, 2023 716,175 $ 4.75 6.4 $ 6,847,964 The weighted average grant-date fair value of options per share granted during the years ended December 31, 2023 and 2022 was $ 4.11 and $ 6.26 , respectively. The aggregate intrinsic value of options exercised during the years ended December 31, 2023 and 2022 was $ 0.1 million and $ 0.4 million, respectively. During the years ended December 31, 2023, and 2022 the Company received de minimis and $ 0.3 million, respectively, in proceeds from the exercise of stock options and recognized a de minimis tax benefit from the exercise of stock options for both years. 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. Non-vested restricted stock for the years ended December 31, 2023, and 2022 is summarized in the following table: Number of Shares Weighted Average Grant Price Unvested as of December 31, 2021 — $ — Granted 123,055 12.28 Unvested as of December 31, 2022 123,055 $ 12.28 Granted 168,821 8.63 Vested ( 92,668 ) 10.43 Unvested as of December 31, 2023 199,208 $ 10.05 108 Ind ex 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) 2023 2022 Pre-tax Stock options $ 493 $ 320 Restricted shares 1,553 458 Total $ 2,046 $ 778 After-tax Stock options $ 477 $ 312 Restricted shares 1,166 344 Total $ 1,644 $ 656 As of December 31, 2023, the Company had unrecognized stock-based compensation expense related to stock options and restricted stock of approximately $ 0.5 million and $ 1.0 million, respectively, which is expected to be recognized over the remaining weighted average vesting period of 1.5 years and 1.5 years, respectively. Note 11 – Fair Value of Financial Instruments The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the standard requires us to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy. Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data. Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation also includes observable inputs from nonbinding single dealer quotes not corroborated by observable market data. In developing Level 3 measurements, management incorporates whatever market data might be available and uses discounted cash flow models where appropriate. These calculations include projections of future cash flows, including appropriate default and loss assumptions, and market-based discount rates. The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for many of the financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Transfers between levels of the fair value hierarchy are deemed to occur at the end of the reporting period. 109 Ind ex 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 each item is a reasonable estimate of their fair value as loans classified as held-for-sale are generally maintained on balance sheet for a period of a few days. Loans receivable : 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. Investment in BFG : The Company’s valuation technique utilized the average of the discounted cash flow method and the Guideline Public Company method. The valuation was also adjusted using a Guideline Transaction method based on the potential transaction announced on July 25, 2023 and the share price on December 31, 2023. 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, 2023 and December 31, 2022. 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 $ 4.2 million and $ 4.8 million as of December 31, 2023 and December 31, 2022, respectively. The following table summarizes investment in BFG activity for the periods indicated: For the Years Ended December 31, ($ in thousands) 2023 2022 Beginning balance $ 4,800 $ 5,900 Distributions from BFG — ( 622 ) Change in fair value of BFG ( 600 ) ( 478 ) Ending balance $ 4,200 $ 4,800 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. 110 Ind ex 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, 2023 December 31, 2022 ($ in thousands) Level Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value Financial assets: Cash and cash equivalents 1 $ 116,975 $ 116,975 $ 100,567 $ 100,567 Investment securities held-to-maturity 2 15,388 13,809 14,292 12,728 Investment in FHLB stock 2 238 238 449 449 Loans held for investment 3 358,560 360,032 224,217 237,225 Loans held-for-sale 2 47,514 47,509 23,589 23,589 Accrued interest receivable 2 3,573 3,573 1,818 1,818 SBA servicing asset 2 4,231 4,231 5,210 5,210 Investment in BFG 3 4,200 4,200 4,800 4,800 Financial liabilities: Total deposits 2 404,833 394,195 242,998 221,287 Accrued interest payable 2 619 619 54 54 PPP Liquidity Facility 2 190 190 314 314 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, 2023 Nonrecurring assets Individually evaluated loans $ 27,127 $ — $ — $ 27,127 December 31, 2022 Nonrecurring assets Individually evaluated loans $ 450 $ — $ — $ 450 Individually evaluated loans – The loan amount above represents loans individually evaluated that have been adjusted to fair value. When collateral dependent loans are individually evaluated, they are 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 on loans for adjustments made based on the fair value of the collateral. 111 Ind ex Quantitative information for Level 3 fair value measurements – The range and weighted average of the significant unobservable inputs used to fair value Level 3 nonrecurring assets as of December 31, 2023 and as of December 31, 2022, 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, 2023 Individually evaluated loans $ 27,127 Market comparable Adjustment to appraisal value 7.57 % December 31, 2022 Individually evaluated loans $ 450 Market comparable Adjustment to appraisal value 0.20 % 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, 2023 and as of December 31, 2022 are shown in the following table: ($ in thousands) December 31, 2023 Range (Weighted Average) December 31, 2022 Range (Weighted Average) Discounted Cash Flows Revenue growth rate 11.0 % 10.8 % Expense growth rate 13.4 % 11.5 % Discount rate 20.0 % 30.0 % Guideline Public Company Multiples of enterprise value 3.5 x to 5.5 x 3.0 x to 5.0 x As mentioned above, the valuation as of December 31, 2023 was also adjusted using a Guideline Transaction method based on the potential transaction announced on July 25, 2023 and the share price on December 31, 2023. Note 12 – Income Taxes The components of income tax expense consist of the following: For the Years Ended December 31, ($ in thousands) 2023 2022 Current tax expense Federal $ 3,446 $ 8,315 State 992 1,945 Deferred tax expense Federal 1,614 553 State 301 103 Income tax expense $ 6,353 $ 10,916 112 Ind ex The components of net deferred income tax assets and liabilities on the balance sheet at December 31, 2023 and 2022 , are as follows: December 31, ($ in thousands) 2023 2022 Deferred tax assets Operating lease liabilities $ 1,568 $ 1,749 Allowance for loan losses 693 1,639 Accrued bonuses — 61 Nonqualified stock options 151 124 Restricted stock 242 114 Other 226 290 Total deferred tax assets 2,880 3,977 Deferred tax liabilities ROU asset ( 1,069 ) ( 1,256 ) Intangibles — ( 3 ) Net book value of fixed assets ( 2,216 ) ( 1,230 ) Other ( 343 ) ( 321 ) Total deferred tax liabilities ( 3,628 ) ( 2,810 ) Deferred taxes, net $ ( 748 ) $ 1,167 The income tax expense recorded differs from the expected income tax expense and the reconciliation of these differences is as follows at December 31, 2023 and 2022 : For the Years Ended December 31, ($ in thousands) 2023 2022 Federal income tax expense at statutory rates $ 5,001 $ 7,567 Effect of permanent differences 323 811 State income tax expense, net 991 1,560 Other 38 978 Income tax expense $ 6,353 $ 10,916 The Company recognizes interest accrued and penalties related to unrecognized tax benefits in tax expense. During the years ended December 31, 2023 , and 2022 , the Company recognized approximately $ 0.3 million and de minimis interest or penalties. The Company files a United States federal income tax return and state income tax returns in Utah, Florida, and New York. Open tax years that are potentially subject to examination related to the U.S. federal jurisdiction are 2020 and subsequent years. The Company had no unrecognized tax benefits at December 31, 2023 and 2022 . 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. 113 Ind ex 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 644,241 shares for approximately $ 5.9 million and retired them at cost thereby completing the Company's share repurchase program during the third quarter of 2023. 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 $ 0.6 million and $ 0.5 million for the years ended December 31, 2023 and 2022 , respectively. Note 15 – Related Parties In the ordinary course of business, the Company may grant loans to certain executive officers and directors and the companies with which they are associated. The Company had de minimis loans outstanding to related parties as of December 31, 2023 and December 31, 2022. Total deposits from certain executive officers and directors and the companies with which they are associated were $ 1.5 million and $ 1.2 million as of December 31, 2023 and December 31, 2022, respectively. 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 8 Investments above, the Company has a 10 % ownership in the outstanding membership units of BFG, as of December 31, 2023. 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. 114 Ind ex 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, 2023 and 2022 ($ in thousands, except share and per share amounts): For the Years Ended December 31, ($ in thousands) 2023 2022 Numerator: Net income $ 17,460 $ 25,115 Amount allocated to participating common shareholders (1) ( 288 ) ( 193 ) Net income allocate to common shareholders $ 17,172 $ 24,922 Denominator: Weighted average shares outstanding, basic 12,488,564 12,729,898 Weighted average effect of dilutive securities: Stock options 343,642 508,056 Warrants 77,442 119,068 Weighted average shares outstanding, diluted 12,909,648 13,357,022 Earnings per share, basic $ 1.38 $ 1.96 Earnings per share, diluted $ 1.33 $ 1.87 (1) Represents earnings attributable to holders of unvested restricted stock issued to the Company’s directors and employees. There were 220,100 and 373,569 anti-dilutive options for the years ended December 31, 2023 and 2022, respectively, that were excluded from the computation in the table above. There were 192,558 shares and 150,932 anti-dilutive warrants for the years ended December 31, 2023 and 2022, respectively, also excluded from the table above. 115 Ind ex 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) 2023 2022 Interest income Interest income, not-in-scope Interest and fees on loans $ 58,445 $ 50,941 Interest on securities 338 208 Other interest income 5,751 1,180 Total interest income $ 64,534 $ 52,329 Non-interest income Non-interest income, in-scope Service charges on deposit accounts $ 26 $ 31 Strategic Program set up fees 223 195 Non-interest income, not in-scope Strategic Program fees 15,362 21,438 Gain on sale of loans 1,684 13,550 SBA loan servicing fees 1,466 1,603 Change in fair value on investment in BFG ( 600 ) ( 478 ) Other miscellaneous income 2,590 239 Strategic Program service charges 329 834 Total non-interest income $ 21,080 $ 37,411 116 Ind ex 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, 2023 and 2022 : Balance Sheets December 31, ($ in thousands) 2023 2022 ASSETS Cash and cash equivalents $ 28,510 $ 36,321 Investment in subsidiary bank 122,055 100,276 Investment in Business Funding Group (BFG), at fair value 4,200 4,800 Investment in FinWise Investments, LLC 290 271 Deferred taxes, net 188 127 Income taxes receivable 828 — Other assets 41 37 Total assets $ 156,112 $ 141,832 LIABILITIES AND SHAREHOLDERS’ EQUITY Income taxes payable — 1,077 Other liabilities 1,056 296 Shareholders’ equity 155,056 140,459 Total liabilities and shareholders’ equity $ 156,112 $ 141,832 Statement of Income For the Years Ended December 31, ($ in thousands) 2023 2022 Non-interest income Change in fair value on investment in BFG $ ( 600 ) $ ( 1,100 ) Equity in undistributed earnings of subsidiary 21,992 29,090 Other miscellaneous income 685 622 Total non-interest income 22,077 28,612 Non-interest expense Salaries and employee benefits 3,565 2,316 Professional services 1,765 1,990 Other operating expenses 860 470 Total non-interest expense 6,190 4,776 Income before income tax expense 15,887 23,836 Income tax benefit ( 1,574 ) ( 1,279 ) Net income $ 17,461 $ 25,115 117 Ind ex Statements of Cash Flows For the Years Ended December 31, ($ in thousands) 2023 2022 Cash flows from operating activities: Net income $ 17,461 $ 25,115 Adjustments to reconcile net income to net cash from operating activities Change in fair value of BFG 600 1,100 Stock-based compensation expense 2,046 778 Deferred income tax expense ( 61 ) ( 45 ) Net changes in: Income tax payable (receivable) ( 1,905 ) 844 Other assets ( 4 ) 285 Other liabilities 760 ( 296 ) Net cash provided by operating activities 18,897 27,781 Cash flows from investing activities: Investment in subsidiary bank ( 21,992 ) ( 29,090 ) Investment in FinWise Investments, LLC ( 19 ) ( 191 ) Net cash used in investing activities ( 22,011 ) ( 29,281 ) Cash flows from financing activities: Proceeds from exercise of stock options 44 260 Common stock repurchased ( 4,741 ) ( 1,136 ) Net cash used in financing activities ( 4,697 ) ( 876 ) Net change in cash and cash equivalents ( 7,811 ) ( 2,376 ) Cash and cash equivalents, beginning of year 36,321 38,697 Cash and cash equivalents, end of year $ 28,510 $ 36,321 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 25, 2024 , which is the date the consolidated financial statements are available to be issued. On February 5, 2024, the Transaction was consummated and the Company issued in the aggregate 339,176 shares of Common Stock of the Company, par value $ 0.001 per share, in a private placement to the Sellers in exchange for their 10 % aggregate non-voting ownership interest in BFG. On March 7, 2024, the Company announced that its Board of Directors (the “Board”) has authorized, effective March 6, 2024, a common stock repurchase program to purchase up to 641,832 shares of the Company’s common stock in the aggregate. The repurchase program expires on March 31, 2026, 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 118 Ind ex 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. 119 Ind ex Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosures None.