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 ) 74 Consolidated Balance Shee ts 75 Consolidated Statements of Income 76 Consolidated Statements of Comprehensive Income 77 Consolidated Statements of Changes in Shareholders’ Equity 78 Consolidated Statements of Cash Flows 79 Notes to Consolidated Financial Statements 80 73 Table of Contents REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM 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, 2024 and 2023, the related consolidated statements of income, comprehensive 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, 2024 and 2023, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America. Basis for Opinion These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion. /s/ Moss Adams LLP Everett, Washington March 26, 2025 We have served as the Company’s auditor since 2018. 74 Table of Contents FinWise Bancorp Consolidated Balance Sheets (in thousands, except share and par value amounts) December 31, 2024 2023 ASSETS Cash and cash equivalents Cash and due from banks $ 9,600 $ 411 Interest-bearing deposits in other banks (restricted cash of $ 3.1 million and $ 0 , respectively) 99,562 116,564 Total cash and cash equivalents 109,162 116,975 Investment securities available-for-sale, at fair value, net of allowance for credit losses of $ 0 , (amortized cost of $ 30.0 million) 29,930 — Investment securities held-to-maturity, net of allowance for credit losses of $ 0 , (fair value of $ 11.1 million and $ 13.8 million, respectively) 12,565 15,388 Investment in Federal Home Loan Bank (“FHLB”) stock, at cost 349 238 Strategic Program loans held-for-sale, at lower of cost or fair value 91,588 47,514 Loans held-for-investment, net of allowance for credit losses of $ 13.2 million and $ 12.9 million, respectively 447,812 358,560 Credit enhancement asset 111 — Premises and equipment, net 16,328 14,630 Accrued interest receivable 3,566 3,573 Small Business Administration (“SBA”) servicing asset, net 3,273 4,231 Investment in Business Funding Group (“BFG”), at fair value 7,700 4,200 Operating lease right-of-use (“ROU”) assets 3,564 4,293 Income taxes receivable, net 8,868 2,400 Other assets 11,160 14,219 Total assets $ 745,976 $ 586,221 LIABILITIES AND SHAREHOLDERS’ EQUITY Liabilities Deposits Noninterest-bearing $ 126,782 $ 95,486 Interest-bearing 418,170 309,347 Total deposits 544,952 404,833 Accrued interest payable 1,494 619 Income taxes payable, net 4,423 1,873 Deferred income taxes, net 899 748 Paycheck Protection Program Liquidity Facility 64 190 Operating lease liabilities 5,302 6,296 Other liabilities 15,122 16,606 Total liabilities 572,256 431,165 Commitments and contingencies (Note 9) Shareholders’ equity Preferred stock, $ 0.001 par value, 4,000,000 authorized; no shares issued and outstanding as of December 31, 2024 and December 31, 2023 — — Common stock, $ 0.001 par value, 40,000,000 shares authorized; 13,211,640 and 12,493,565 shares issued and outstanding as of December 31, 2024 and December 31, 2023, respectively 13 12 Additional paid-in-capital 56,926 51,200 Retained earnings 116,594 103,844 Accumulated other comprehensive income, net of tax 187 — Total shareholders’ equity 173,720 155,056 Total liabilities and shareholders’ equity $ 745,976 $ 586,221 The accompanying notes are an integral part of these consolidated financial statements. 75 Table of Contents FinWise Bancorp Consolidated Statements of Income (in thousands, except share and per share amounts) Years Ended December 31, 2024 2023 Interest income Interest and fees on loans $ 68,892 $ 58,445 Interest on securities 897 338 Other interest income 4,563 5,751 Total interest income 74,352 64,534 Interest expense Interest on deposits 15,440 9,974 Other interest expense — 1 Total interest expense 15,440 9,975 Net interest income 58,912 54,559 Provision for credit losses 11,573 11,638 Net interest income after provision for credit losses 47,339 42,921 Non-interest income Strategic Program fees 17,762 15,914 Gain on sale of loans, net 2,036 1,684 SBA loan servicing fees, net 1,137 1,842 Change in fair value on investment in BFG ( 625 ) ( 600 ) Credit enhancement income 111 — Other miscellaneous income 2,064 2,616 Total non-interest income 22,485 21,456 Non-interest expense Salaries and employee benefits 35,205 25,751 Professional services 4,736 4,961 Occupancy and equipment expenses 4,240 3,312 Credit enhancement expense 8 — Other operating expenses 8,646 6,540 Total non-interest expense 52,835 40,564 Income before income taxes 16,989 23,813 Provision for income taxes 4,247 6,353 Net income $ 12,742 $ 17,460 Earnings per share, basic $ 0.98 $ 1.38 Earnings per share, diluted $ 0.93 $ 1.33 Weighted average shares outstanding, basic 12,612,455 12,488,564 Weighted average shares outstanding, diluted 13,228,869 12,909,648 The accompanying notes are an integral part of these consolidated financial statements. 76 Table of Contents FinWise Bancorp Consolidated Statements of Comprehensive Income (in thousands) Years Ended December 31, 2024 2023 Net income $ 12,742 $ 17,460 Other comprehensive income items, net of tax: Unrealized loss on securities available-for-sale $ ( 97 ) $ — Tax effect 24 — Unrealized gain on interest rate swaps 509 — Recognition of previously unrealized gain on interest rate swaps in net income ( 164 ) — Tax effect ( 85 ) — Other comprehensive income, net of tax 187 — Comprehensive income $ 12,929 $ 17,460 The accompanying notes are an integral part of these consolidated financial statements. 77 Table of Contents FinWise Bancorp Consolidated Statements of Changes in Shareholders’ Equity (in thousands, except share amounts) Common Stock Shares Amount Additional Paid-In Capital Retained Earnings Accumulated Other Comprehensive Income, Net of Tax Total Shareholders’ Equity 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 Common stock repurchased and retired ( 524,241 ) ( 1 ) ( 5,504 ) 764 — ( 4,741 ) Stock options exercised, net 17,640 — 44 — — 44 Net income — — — 17,460 — 17,460 Balance at December 31, 2023 12,493,565 $ 12 $ 51,200 $ 103,844 $ — $ 155,056 Stock-based compensation expense 393,910 — 2,046 — — 2,046 Stock options exercised, net 29,597 — 25 — — 25 Common stock repurchased and retired ( 44,608 ) — ( 469 ) 8 — ( 461 ) BFG ownership purchase 339,176 1 4,124 — — 4,125 Other comprehensive income — — — — 187 187 Net income — — — 12,742 — 12,742 Balance at December 31, 2024 13,211,640 $ 13 $ 56,926 $ 116,594 $ 187 $ 173,720 The accompanying notes are an integral part of these consolidated financial statements. 78 Table of Contents FinWise Bancorp Consolidated Statements of Cash Flows (in thousands) Years Ended December 31, 2024 2023 Cash flows from operating activities: Net income $ 12,742 $ 17,460 Adjustments to reconcile net income to net cash (used in) provided by operating activities Depreciation and amortization 5,289 3,811 Provision for credit losses 11,573 11,638 Noncash operating lease cost 729 748 Net (accretion) amortization in securities discounts and premiums ( 25 ) 1 Additions to servicing asset ( 269 ) ( 150 ) Gain on sale of loans, net ( 2,036 ) ( 1,684 ) Originations of Strategic Program loans held-for-sale ( 4,829,497 ) ( 4,077,855 ) Proceeds from sale of Strategic Program loans held-for-sale 4,785,423 4,053,929 Change in fair value of BFG 625 600 Recovery of SBA servicing asset ( 865 ) ( 376 ) Stock-based compensation expense 2,046 2,046 Deferred income taxes 90 1,915 Net changes in: Accrued interest receivable 7 ( 1,755 ) Other assets ( 1,770 ) ( 6,448 ) Accrued interest payable 875 565 Operating lease liabilities ( 994 ) ( 724 ) Other liabilities 1,066 8,544 Net cash (used in) provided by operating activities ( 14,991 ) 12,265 Cash flows from investing activities: Net increase in loans receivable ( 64,995 ) ( 114,902 ) Purchase of lease pools ( 35,831 ) ( 29,606 ) Proceeds from sale of loans and leases 632 — Investment in equity securities — ( 18 ) Purchase of investment securities available-for-sale ( 30,018 ) — Purchase of bank premises and equipment, net ( 4,895 ) ( 7,458 ) Proceeds from maturities and paydowns of securities held-to-maturity 2,839 1,843 Purchases of securities held-to-maturity — ( 2,939 ) (Purchase) redemption of FHLB stock ( 111 ) 210 Net cash used in investing activities ( 132,379 ) ( 152,870 ) Cash flows from financing activities: Net increase in deposits 140,119 161,835 Common stock repurchased ( 461 ) ( 4,741 ) Proceeds from exercise of stock options 25 44 Repayment of PPP Liquidity Facility ( 126 ) ( 125 ) Net cash provided by financing activities 139,557 157,013 Net change in cash, cash equivalents and restricted cash ( 7,813 ) 16,408 Cash, cash equivalents and restricted cash, beginning of the period 116,975 100,567 Cash, cash equivalents and restricted cash, end of the period $ 109,162 $ 116,975 Supplemental disclosures of cash flow information: Cash paid for income taxes $ 8,057 $ 6,626 Cash paid for interest $ 14,565 $ 9,410 Supplemental disclosures of noncash investing and financing activities: Increase in BFG investment in exchange for shares of the Company's common stock $ 4,125 $ — The accompanying notes are an integral part of these consolidated financial statements. 79 Table of Contents 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, formerly known as Utah Community Bank, and FinWise Investment, LLC. FinWise Bank was incorporated in the state of Utah on May 7, 1999. FinWise Bancorp, formerly known as 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, residential real estate loans, and commercial leases. 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, 2024 and 2023, 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 accounts of FinWise Bancorp and its wholly-owned subsidiaries, FinWise Bank and FinWise Investment, LLC. All significant inter-company balances and transactions have been eliminated in consolidation. Use of estimates – In preparing the consolidated financial statements in accordance with United States generally accepted accounting principles (“U.S. GAAP”), management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities as of the date of the consolidated balance sheets and certain revenues and expenses for the period. Actual results could differ, either positively or negatively, from those estimates. Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses (“ACL”). 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. Reclassifications – Reclassifications have been made to prior year amounts to conform to the current year presentation. Certain of these reclassifications relate to the change in fair value of our SBA servicing asset, which was reclassified from non-interest expense to non-interest income to better align with the SBA servicing asset revenue and the associated costs. The effect of these reclassifications were not material to the previously reported consolidated financial statements. 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. 80 Table of Contents 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, 2024. Restricted cash – The Company established a restricted cash balance required by the Company’s credit card merchant for payment processing and card management services. Investments Investment securities available-for-sale – U.S. Treasury securities that the Company intends to hold for an indefinite period of time, but which may be sold in response to changes in liquidity needs, interest rates, or other similar factors, are classified as available-for-sale (“AFS”). Such securities are recorded in the Company’s consolidated balance sheets at their respective fair values and increases or decreases in those values, other than credit losses, are recorded as unrealized gains or losses, respectively, and are reported as other comprehensive income (loss) in the Company’s consolidated balance sheets, rather than included in or deducted from the Company’s earnings. The Company performs a quarterly analysis of its investment securities AFS to assess and record any expected credit losses through an allowance for credit losses, limited to the amount that fair value was less than the amortized cost basis. Interest on securities classified as AFS are recorded in interest on securities in the Company’s Consolidated Statements of Income. Investment securities held-to-maturity – Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity (“HTM”) and recorded at amortized cost. 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 is recognized through the provision for credit losses on the Company’s Consolidated Statements 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 6 - Investment in Business Funding Group, LLC , for a discussion about the Company’s investment in BFG. 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 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 81 Table of Contents 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. Loans held-for-investment – Loans held-for-investment 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 commercial 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. Allowance for credit losses - On January 1, 2023, the Company adopted ASU 2016-13, Topic 326 which replaced the incurred loss methodology with a current expected credit losses (“CECL”) model 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 is reported as a reduction of the amortized cost basis of loans held-for-investment, 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. 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 credit and fraud losses assumed to be credit related 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 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 82 Table of Contents 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 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 83 Table of Contents 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. See Note 3 - Loans for more information about the Company’s Strategic Program loan portfolio. Certain agreements with our Strategic Program Service Providers provide for a credit enhancement, which protects the Bank by indemnifying or reimbursing incurred credit and fraud losses. The Company estimates and records a provision for expected losses for these Strategic Program loans. When the provision for the credit losses is recorded, a credit enhancement asset is also recorded on the balance sheet through non-interest income (credit enhancement income) equal to the provision for credit losses estimated for the credit enhanced loans. The credit enhancement asset is reduced when payments for the credit losses charged to the ACL are taken from the Strategic Program Service Provider’s cash reserve account created to absorb the credit losses incurred. The cash reserve account is replenished monthly from cash flows due to the Program Service provider related to the credit enhanced loans. 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 expense, which is included in occupancy and equipment expenses, 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. Lessor accounting – The Company leases commercial operating equipment to a variety of customers. At lease inception the Company determines if an arrangement is a lease. The equipment underlying the operating lease is reported at cost as commercial operating lease equipment within premises and equipment, net in the Company’s Consolidated Balance Sheets and depreciated based on their useful lives on a straight-line basis to the residual value. These residual values are reviewed annually to ensure the recorded amount does not exceed the fair market value at the lease termination. Revenue consists of the contractual lease payments and is recognized on a straight-line basis over a specified lease term. The Company also has net investments in commercial operating equipment leased to customers, which are classified as sales-type leases or direct financing leases. Investments in sales-type leases and direct financing leases are recorded on a net basis. Profit on sales- 84 Table of Contents type leases is recognized at lease commencement and recorded in other miscellaneous income. Unearned income on direct financing leases is deferred, included in the net investment in the lease, and recognized over the lease term, yielding a constant periodic rate of return on the net investment in the lease. Sales from sales-type and operating leases are presented net of sales tax and other related taxes. Interest income is recognized over the lease term using the effective interest method. Lessee accounting – The Company accounts for leases according to ASU 2016-02, Leases (Topic 842), and applies a right -of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. The Company elected to apply the package of practical expedients permitting entities to not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. Additionally, as provided by ASU 2016-02, the Company elected to not apply the recognition requirements of ASC 842 to short-term leases, defined as leases with a term of twelve months or less, and to recognize the lease payments in net income on short-term leases on a straight-line basis over the lease term. Income taxes – Deferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority. Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets. Judgments and tax strategies are subject to audit by various taxing authorities. While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the consolidated financial statements. Transfer of financial assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: 1) the assets have been isolated from the Company, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and 3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity. Loans held on the Company’s Consolidated Balance Sheets are classified as either held-for-investment or held-for-sale. Held-for-sale loan sales typically occur two to four days after the origination of the loans. When the Company determines that control over the transfer of financial assets has been surrendered, the transaction will be accounted for as a completed sale in which the underlying loans are derecognized and a resulting gain or loss, if any, is recorded. 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. Derivative instruments – In the normal course of business, the Company is exposed to interest rate fluctuations. Consistent with the Company’s strategy for financial risk management, the Company has established a program that utilizes interest rate swaps to offset the risks associated with the effects of this exposure. The Company utilizes cash flow hedge accounting treatment for interest rate swaps. Cash flow hedges are accounted for by recording the changes in the fair 85 Table of Contents value of the derivative instrument in other comprehensive income (loss) and are recognized in the consolidated statements of income when the hedged item affects earnings. Derivative instruments are recognized on the consolidated balance sheet as other assets or other liabilities, at their respective fair values. See Note 13 - Derivatives for additional information. Stock repurchase program – On March 7, 2024, the Company announced that its Board of Directors (the “Board”) had 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 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. 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 Share Repurchase Committee, designated by the Board of Directors, will determine the actual timing, number and value of any shares repurchased in its discretion depending on a variety of factors, including but not limited to, the market price and trading volume of the Company’s common stock, general market and economic conditions, the ongoing assessment of the Company’s capital needs, and applicable legal and regulatory requirements. The repurchase program does not obligate the Company to purchase any particular number of shares and may be limited or terminated at any time at the Company’s discretion without notice. Since the repurchase program’s inception, the Company has repurchased and subsequently retired a total of 44,608 shares for $ 0.5 million at an average price of $ 10.30 per share. 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. The majority of our revenue-generating transactions are not subject to ASC 606, including interest generated from loans. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the consolidated statements of income was not necessary. Services that the Company reports as part of non-interest income are subject to ASC 606 and include fees from its deposit customers for transaction-based activities, account maintenance charges and overdraft services. Transaction-based fees, such as ACH and wire transfer fees, overdraft, return and stop payment charges, are recognized at the time such transactions are executed and the services have been fulfilled by the Company. The fees are typically withdrawn from the customer’s deposit account balance. The Company also receives fees from third-parties in its Strategic Programs for setting up systems and procedures to efficiently originate loans in a convenient, compliant and safe manner. Because the third-party simultaneously receives and benefits from the services, revenue is recognized evenly over the term of the loan program. Program fees are received monthly in connection with continuing program services provided for 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. The assumptions used in calculating the fair value of stock option grants represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment and include consideration of historical experience. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Expected volatility is based on the Company's data for the expected option term. The expected dividend yield was zero as the Company is not expected to pay dividends in the foreseeable future. Restricted stock awards are valued based on the fair value of the Company’s common stock on the date of grant. The Company expenses stock-based compensation related to stock options and restricted stock awards over the requisite service period (generally the vesting period of the equity grant) using the graded-vesting method. The Company accounts for forfeitures of stock–based awards as they occur. Stock-based compensation expense is included in salaries and employee benefits on the income statement. The table below summarizes the weighted-average assumptions used in the Black-Scholes option pricing model at the grant date for stock options granted during 2023. No stock options were granted during the year ended December 31, 2024. 86 Table of Contents 2023 Risk-free interest rate 3.68 % Expected term in years 6 Expected volatility 44.2 % 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 EPS based on participation rights of participating securities in any undistributed earnings. Each unvested share of restricted stock 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. Comprehensive income (loss) – Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on securities AFS and unrealized gains and losses on interest rate swaps designated as cash flow hedges, are reported as a separate component of equity in the accompanying consolidated balance sheets, net of income taxes, and such items, along with net income, are components of comprehensive income (loss). The Company’s policy is to release income tax effects from accumulated other comprehensive income at such time as the earnings or loss of the related activity are recognized in earnings Off-balance sheet instruments – In the ordinary course of business, the Company has entered into off-balance sheet financial instrument arrangements consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheet. Losses would be experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default. Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral. 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 – 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 determined it has one reportable operating segment, the Bank. The Company’s Chief Executive Officer and its President, who are together considered to be its chief operating decision maker (“CODM”), review consolidated financial information to manage the 87 Table of Contents Company’s operations. Since the Company operates and manages its business in one operating and one reportable segment, all required financial segment information can be found in the consolidated financial statements and the notes thereto. Recently adopted accounting pronouncements In November 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-07, “Segment Reporting (Topic 280): Improvements to Reportable Segment Disclosures”, which requires disclosure, on an annual and interim basis, of significant segment expenses that are regularly provided to the chief operating decision maker (“CODM”), as well as the aggregate amount of other segment items included in the reported measure of segment profit or loss. The ASU requires that a public entity disclose the title and position of the CODM and an explanation of how the CODM uses the reported measure(s) of segment profit or loss. Public entities will be required to provide all annual disclosures currently required by Topic 280 in interim periods, and entities with a single reportable segment are required to provide all the disclosures required by the amendments in the update and existing segment disclosures in Topic 280. The Company adopted ASU 2023-07 on January 1, 2024 on a retrospective basis. The adoption modified disclosures but did not have an impact on the Company's consolidated financial statements. Recent accounting pronouncements In November 2024, the FASB issued ASU 2024-03, “Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses”, which requires additional disclosure of the nature of expenses included in the income statement. The standard requires disclosures about specific types of expenses included in the expense captions presented in the income statement. This ASU is effective for fiscal years beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted. The requirements should be applied on a prospective basis while retrospective application is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its disclosures. In December 2023, the FASB issued ASU 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. ASU 2023-09 improves the transparency of income tax disclosures by requiring entities to provide greater disaggregation of information on income taxes paid and on the rate reconciliation disclosures. This pronouncement also requires qualitative discussion of the primary state and local jurisdictions for income taxes and the type of reconciling categories. For public business entities, this ASU is effective for fiscal years beginning after December 15, 2024. The guidance will be applied on a prospective basis with the option to apply the standard retrospectively. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its disclosures. Note 2 – Investments Investment Securities Available-for-Sale, at Fair Value The Company’s AFS investment portfolio consists of U.S. Treasury securities. The Company reports debt securities AFS on the Company’s Consolidated Balance Sheets at fair value. The amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities AFS as of December 31, 2024, are summarized as follows: December 31, 2024 ($ in thousands) Amortized Cost Unrealized Gain Unrealized Loss Estimated Fair Value U.S. Treasury securities $ 30,027 $ 4 $ ( 101 ) $ 29,930 The following table presents the amortized cost and estimated fair value of investment securities AFS as of the period ended, by contractual maturity: December 31, 2024 ($ in thousands) Amortized Cost Estimated Fair Value Due in one year or less $ 2,478 $ 2,482 Due after one year through five years 27,549 27,448 Total securities AFS $ 30,027 $ 29,930 88 Table of Contents At December 31, 2024, debt securities AFS in the amount of $ 30.0 million were pledged as collateral for a credit line held by the Bank. Accrued interest receivable on debt securities AFS totaled $ 0.5 million at December 31, 2024 and was included in accrued interest receivable on the Consolidated Balance Sheet. Investment Securities Held-to-Maturity, at Cost The Company's HTM investment portfolio consists of agency mortgage-backed securities and agency collateralized mortgage obligations. The Company reports debt securities HTM on the Company's Consolidated Balance Sheets at carrying value which is amortized cost. The amortized cost, unrealized gains and losses, and estimated fair values of the Company’s debt securities HTM at December 31, 2024 and December 31, 2023, are summarized as follows: December 31, 2024 ($ in thousands) Amortized Cost Allowance for Credit Losses Unrealized Gain Unrealized Loss Estimated Fair Value Mortgage-backed securities $ 5,910 $ — $ — $ ( 746 ) $ 5,164 Collateralized mortgage obligations 6,656 — 8 ( 770 ) 5,893 Total securities held-to-maturity $ 12,565 $ — $ 8 $ ( 1,516 ) $ 11,057 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 Credit Quality Indicators & Allowance for Credit Losses - HTM and AFS On January 1, 2023, the Company adopted ASU 2016-13, which replaced the legacy U.S. GAAP other-than-temporary impairment (“OTTI”) model with an expected credit loss model (“CECL”). ASU 2016-13 requires an allowance on lifetime expected credit losses on debt securities HTM and AFS but retains the concept from the OTTI model that credit losses are recognized once securities become impaired. For debt securities HTM and AFS, the Company evaluates the credit risk of its securities on at least a quarterly basis. The Company estimates expected credit losses on debt securities HTM and AFS on a collective basis by major security type. Accrued interest receivable on debt securities HTM and AFS is excluded from the estimate of credit losses. At December 31, 2024 and at adoption of CECL on January 1, 2023, there was no ACL related to debt securities HTM or AFS due to the composition of the portfolio which is generally considered not to have credit risk given the United States government issuance or guarantee associated with these agency securities. The Company had twenty-two securities, consisting of eight collateralized mortgage obligations, ten mortgage-backed securities and four U.S. Treasury securities, in an unrealized loss position at December 31, 2024 and nineteen securities, consisting of nine collateralized mortgage obligations and ten mortgage-backed securities, in an unrealized loss position at December 31, 2023. The following table presents the estimated fair value and gross unrealized losses of debt securities 89 Table of Contents HTM and AFS, aggregated by category and length of time in a continuous unrealized loss position at December 31, 2024 and 2023: December 31, 2024 Less than 12 months 12 Months or More Total ($ in thousands) Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses Available-for-sale: U.S. Treasury securities $ 27,448 $ ( 101 ) $ — $ — $ 27,448 $ ( 101 ) Total $ 27,448 $ ( 101 ) $ — $ — $ 27,448 $ ( 101 ) Held-to-maturity: Mortgage-backed securities $ — $ — $ 5,164 $ ( 746 ) $ 5,164 $ ( 746 ) Collateralized mortgage obligations 633 ( 17 ) 3,588 ( 753 ) 4,221 ( 770 ) Total $ 633 $ ( 17 ) $ 8,752 $ ( 1,499 ) $ 9,385 $ ( 1,516 ) 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 $ 1,614 $ ( 20 ) $ 10,274 $ ( 1,564 ) $ 11,888 $ ( 1,583 ) The amortized cost and estimated market value of debt securities HTM at December 31, 2024 and December 31, 2023, 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, 2024 December 31, 2023 ($ 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 1,365 1,301 — — Due after five years through ten years 807 734 2,745 2,577 Due after ten years 10,393 9,022 12,643 11,232 Total securities held-to-maturity $ 12,565 $ 11,057 $ 15,388 $ 13,809 At December 31, 2024, debt securities HTM in the amount of $ 12.6 million were pledged as collateral for a credit line held by the Bank. There were no sales or transfers of investment securities and no realized gains or losses on these securities during the years ended December 31, 2024 or 2023. 90 Table of Contents FHLB Stock The Bank is a member of the FHLB system. As a member, we are required to maintain a minimum level of investment in FHLB stock based on a percentage of our previous year-end assets and our FHLB advances outstanding. At December 31, 2024 and December 31, 2023, the Bank owned $ 0.3 million and $ 0.2 million, respectively, of FHLB stock, which is carried at cost. The Company evaluated the carrying value of its FHLB stock investment at December 31, 2024 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. Note 3 – Loans Loans held-for-investment outstanding by general ledger classification as of December 31, 2024 and December 31, 2023, consisted of the following: December 31, December 31, 2024 2023 ($ in thousands) SBA (1) $ 255,056 $ 239,922 Commercial leases 70,153 38,110 Commercial, non-real estate 3,691 2,457 Residential real estate 51,574 38,123 Strategic Program loans 20,122 19,408 Commercial real estate: Owner occupied 41,046 20,798 Non-owner occupied 1,379 2,025 Consumer 22,212 11,372 Total loans held-for-investment, gross $ 465,233 $ 372,215 Deferred loan fees, net ( 4,245 ) ( 767 ) Allowance for credit losses ( 13,176 ) ( 12,888 ) Loans held-for-investment, net $ 447,812 $ 358,560 (1) Included in the SBA loans held-for-investment above are $ 158.7 million and $ 131.7 million of loans guaranteed by the SBA as of December 31, 2024 and December 31, 2023, respectively. The Bank sells participation interests in some loans it originates and may acquire a participation interest in loans originated by others. All reported amounts reflect only the Bank’s ownership interest in the loans. Strategic Program Loans – The Company originates loans with various third-party loan origination platforms that use technology and other innovative systems to streamline the origination of unsecured and secured consumer and business loans to a wide array of borrowers within certain approved credit profiles. Loans issued by the Company through these programs 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 provider or another investor. Interest income is earned by the Company while holding the loans. These loans are classified as held-for-sale on the balance sheet and measured at the lower of cost or market. The Company may also hold loans or a portion of the loans or receivables and sell the remainder directly to the Strategic Program provider or other investors. The Company is generally the servicer of the loans it originates through Strategic Programs. The Company earns a servicing fee equal to a percentage of the outstanding balance of the loans generated under 91 Table of Contents Strategic Programs for servicing such loans. In turn, the Strategic Program service providers, subject to the Company’s approval and oversight, typically serve as sub-servicer and perform primary servicing duties including loan collections, modifications, charging-off, reporting and monitoring. Each Strategic Program provider establishes a “reserve” deposit account with the Company to reasonably ensure the strategic programs will have sufficient funds available to purchase the loans. The agreements generally require that the reserve account deposit balance does not fall below an agreed upon dollar or percentage threshold related to the total loans currently outstanding as held-for-sale by the Company for the specific Strategic Program. If necessary, the Company has the right to withdraw amounts from the reserve account to fulfill loan purchaser obligations created under the program agreements. Total cash held in reserve by Strategic Program providers at the Company at December 31, 2024 and December 31, 2023, was $ 54.0 million and $ 29.8 million, respectively. Strategic Program loans retained and held-for-sale as of December 31, 2024 and December 31, 2023, are summarized as follows: December 31, December 31, 2024 2023 ($ in thousands) Retained Strategic Program loans $ 20,122 $ 19,408 Strategic Program loans held-for-sale 91,588 47,514 Total Strategic Program loans $ 111,710 $ 66,922 Allowance for Credit Losses In determining an appropriate amount for the allowance, the Bank segmented and aggregated the loan portfolio based on the FDIC Consolidated Reports of Condition and Income (“Call Report”) codes. These classifications, which in general are based upon the nature of the collateral and type of borrower, are different than the classifications adopted for other financial reporting purposes, which are based upon the proposed use of the loan proceeds. The following pool segments identified as of December 31, 2024 and 2023 are based on the CECL methodology: December 31, December 31, 2024 2023 ($ in thousands) Construction and land development $ 42,331 $ 28,330 Residential real estate 61,316 51,428 Residential real estate multifamily 1,692 647 Commercial real estate: Owner occupied 190,286 186,550 Non-owner occupied 12,849 15,354 Commercial and industrial 44,329 21,399 Consumer 22,155 10,989 Lease financing receivables 70,153 38,110 Retained Strategic Program loans 20,122 19,408 Total loans held-for-investment, gross $ 465,233 $ 372,215 92 Table of Contents Activity in the ACL by common characteristic loan pools based on the CECL methodology was as follows for the periods indicated: Year Ended December 31, 2024 ($ in thousands) Beginning Balance Provision for (Reversal of) Credit Losses Charge-Offs Recoveries Ending Balance Construction and land development $ 316 $ 58 $ — $ — $ 374 Residential real estate 956 64 ( 297 ) 65 788 Residential real estate multifamily 6 32 — — 38 Commercial real estate: Owner occupied 3,336 203 ( 1,039 ) 334 2,834 Non-owner occupied 282 52 ( 221 ) — 113 Commercial and industrial 361 1,211 ( 889 ) 17 700 Consumer 211 555 ( 134 ) 6 638 Lease financing receivables 355 1,233 ( 293 ) 92 1,387 Retained Strategic Program loans 7,065 7,840 ( 9,796 ) 1,195 6,304 Total allowance for credit losses on financing receivables $ 12,888 $ 11,248 $ ( 12,669 ) $ 1,709 $ 13,176 Unfunded lending commitments 139 325 — — 464 Total allowance for credit losses $ 13,027 $ 11,573 $ ( 12,669 ) $ 1,709 $ 13,640 Year Ended December 31, 2023 ($ in thousands) Beginning Balance Impact of ASU 2016-13 adoption Provision for (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 Lease financing receivables 339 ( 105 ) 121 — — 355 Retained Strategic Program loans 6,701 1,131 9,125 ( 10,946 ) 1,054 7,065 Total allowance for credit losses on financing receivables $ 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 93 Table of Contents Nonaccrual and past due loans are summarized below as of December 31, 2024 and December 31, 2023: December 31, 2024 Loans Past Due and Still Accruing ($ in thousands) 30-89 Days Past Due 90 Days and Greater Total Nonaccrual Loans with no ACL (1) Nonaccrual Loans with ACL Current Loans Total Loans Construction and land development $ — $ — $ — $ — $ — $ 42,331 $ 42,331 Residential real estate — — — 7,141 101 54,074 61,316 Residential real estate multifamily — — — — 1,692 1,692 Commercial real estate: — Owner occupied 2,070 — 2,070 17,435 6,102 164,679 190,286 Non-owner occupied — — — 2,796 — 10,053 12,849 Commercial and industrial — — — 1,788 — 42,541 44,329 Consumer 286 13 299 — — 21,856 22,155 Commercial leases 279 — 279 158 202 69,513 70,153 Retained Strategic Program loans 1,553 62 1,615 — — 18,507 20,122 Total $ 4,188 $ 75 $ 4,263 $ 29,318 $ 6,405 $ 425,246 $ 465,233 (1) Included in the nonaccrual loan balances are $ 18.9 million of SBA 7(a) loan balances guaranteed by the SBA. December 31, 2023 Loans Past Due and Still Accruing ($ in thousands) 30-89 Days Past Due 90 Days and Greater Total Nonaccrual Loans with no ACL (1) Nonaccrual 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. There was no interest income recognized for the years ended December 31, 2024 and 2023, while loans were classified as nonaccrua l. The amount of accrued interest for the years ended December 31, 2024 and 2023, that was reversed against interest income on nonaccrual loans was approximately $ 0.5 million and $ 0.7 million, respectively. 94 Table of Contents 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. 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. Doubtful - A doubtful asset has an existing weakness or weaknesses that make collection or liquidation in full, on the basis of currently existing facts and conditions, highly questionable and improbable. Loss - A loss asset has an existing weakness or weaknesses that render the loan uncollectible and of such little value that continuing to carry as an asset on our books is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical nor desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future. Not Rated – For Strategic Program 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 amortized cost of the Company's loan and lease portfolio by collateral type, risk rating and origination year as of December 31, 2024, in addition to the gross writeoff by collateral type for the year ended December 31, 2024. The loans are grouped based on how they are assessed under CECL. Loans and Leases Amortized Cost Basis by Origination Year December 31, 2024 2024 2023 2022 2021 Prior Revolving Loans Total ($ in thousands) Construction and land development Pass $ 18,008 $ 9,080 $ 12,687 $ 2,556 $ — $ — 42,331 Watch — — — — — — — Special Mention — — — — — — — Substandard — — — — — — — Total 18,008 9,080 12,687 2,556 — — 42,331 Current period gross writeoff — — — — — — — Residential real estate 95 Table of Contents Pass 4,025 1,172 575 1,332 1,655 — 8,759 Watch 14,268 18,766 4,134 1,103 1,333 — 39,604 Special Mention — 3,719 1,758 — 80 — 5,557 Substandard — — 7,129 50 217 — 7,396 Total 18,293 23,657 13,596 2,485 3,285 — 61,316 Current period gross writeoff — — — ( 252 ) ( 45 ) — ( 297 ) Residential real estate multifamily Pass 1,039 293 256 78 — — 1,666 Watch — — — — 26 — 26 Special Mention — — — — — — — Substandard — — — — — — — Total 1,039 293 256 78 26 — 1,692 Current period gross writeoff — — — — — — — Commercial real estate-owner occupied Pass 26,160 3,897 3,468 1,180 9,112 — 43,817 Watch 25,137 51,350 28,462 5,904 3,342 — 114,195 Special Mention — 4,553 1,736 — 2,207 — 8,496 Substandard — 16,150 5,142 1,414 1,072 — 23,778 Total 51,297 75,950 38,808 8,498 15,733 — 190,286 Current period gross writeoff — ( 364 ) ( 369 ) ( 109 ) ( 197 ) — ( 1,039 ) Commercial real estate-non-owner occupied Pass 36 — 1,254 — 343 — 1,633 Watch 1,215 4,111 1,841 1,117 136 — 8,420 Special Mention — — — — — — — Substandard — — 2,796 — — — 2,796 Total 1,251 4,111 5,891 1,117 479 — 12,849 Current period gross writeoff — — ( 221 ) — — — ( 221 ) Commercial and industrial Pass 3,588 336 529 322 463 — 5,238 Watch 23,559 9,134 2,945 442 606 — 36,686 Special Mention — — 217 — 32 — 249 Substandard — 1,438 351 — 367 — 2,156 Total 27,147 10,908 4,042 764 1,468 — 44,329 Current period gross writeoff — ( 393 ) ( 227 ) ( 178 ) ( 91 ) — ( 889 ) Consumer Pass 15,951 4,294 1,257 319 286 — 22,107 Watch 43 5 — — — — 48 Special Mention — — — — — — — Substandard — — — — — — — Total 15,994 4,299 1,257 319 286 — 22,155 96 Table of Contents Current period gross writeoff — ( 65 ) ( 31 ) ( 19 ) ( 19 ) — ( 134 ) Lease financing receivables Pass 43,279 22,456 4,338 — 80 — 70,153 Watch — — — — — — — Special Mention — — — — — — — Substandard — — — — — — — Total 43,279 22,456 4,338 — 80 — 70,153 Current period gross writeoff — ( 293 ) — — — — ( 293 ) Retained Strategic Program loans Pass — — — — — — — Watch — — — — — — — Special Mention — — — — — — — Substandard — — — — — — — Not Rated 17,084 1,540 1,109 389 — — 20,122 Total 17,084 1,540 1,109 389 — — 20,122 Current period gross writeoff ( 3,801 ) ( 4,683 ) ( 927 ) ( 385 ) — — ( 9,796 ) Total portfolio loans receivable, gross $ 193,392 $ 152,294 $ 81,984 $ 16,206 $ 21,357 $ — $ 465,233 Total current period gross writeoff $ ( 3,801 ) $ ( 5,798 ) $ ( 1,775 ) $ ( 943 ) $ ( 352 ) $ — $ ( 12,669 ) The following table presents the amortized cost of the Company's loan and lease portfolio by collateral type, risk rating and origination year as of December 31, 2023, in addition to the gross writeoff by collateral type for the year ended December 31, 2023. The loans are grouped based on how they are assessed under CECL. Loans and Leases Amortized Cost Basis by Origination Year 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 97 Table of Contents Pass 278 263 80 — — 621 Watch — — — 26 — 26 Special Mention — — — — — — Substandard — — — — — — 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 ) Lease financing receivables Pass 31,313 6,559 — 238 — 38,110 Watch — — — — — — Special Mention — — — — — — Substandard — — — — — — Total 31,313 6,559 — 238 — 38,110 Current period gross writeoff — — — — — — 98 Table of Contents Retained Strategic Program loans Pass — — — — — — Watch — — — — — — 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 writeoff ( 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 writeoff $ ( 4,181 ) $ ( 6,415 ) $ ( 1,289 ) $ ( 540 ) $ — $ ( 12,425 ) Modified Loans to Troubled Borrowers 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. On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings and Vintage Disclosures. In the year ended December 31, 2024 there were three material loan modifications reportable under the new guidance. Subsequent to December 31, 2024, there was a payment default of $ 0.2 million on a loan to a borrower whose loan was modified due to financial difficulties within the previous twelve months and the loan was placed on nonaccrual status. As of December 31, 2024 ($ in thousands) Principal deferment (Months) Outstanding Balance % of Total Loan Type Commercial real estate - owner occupied 11 months $ 241 0.13 % Commercial and industrial 11 months $ 367 0.83 % Residential real estate 11 months $ 153 0.25 % Total $ 761 In the year ended December 31, 2023 there was one material loan modification reportable under the new guidance. This loan did not go into default during the twelve months following its modification. As of December 31, 2023 ($ in thousands) Principal deferment (Months) Outstanding Balance % of Total Loan Type Residential real estate 12 months $ 156 0.30 % Modified Retained Strategic Program Loans Retained Strategic Program loans of $ 20.1 million and $ 19.4 million as of December 31, 2024 and 2023, respectively, consist primarily of personal loans to individuals. A significant amount of the retained Strategic Program loans are made to subprime borrowers. The subprime borrowers’ ability to repay the loans according to the original loan terms can be compromised by both short-term financial challenges, such as unexpected car repairs or physical injury, and longer-term financial challenges, such as a job loss or more serious injury or illness. In certain circumstances, some of our strategic programs will modify the original loan terms to optimize the recovery of principal and interest. The loan modifications typically include i) a delay in payment and extension of the loan term, or ii) accrued interest forgiveness and interest rate and payment reductions. As of December 31, 2024, the balance of outstanding modified loans to individuals in the retained portfolio was approximately $ 4.4 million. As of December 31, 2023, the 99 Table of Contents balance of outstanding modified loans to individuals in the retained portfolio was approximately $ 4.5 million. The Company does not have any obligation to fund additional amounts to the borrowers. If after modification, some or all of the loan is determined to be uncollectible, the full balance determined to be uncollectible is charged off. The amount charged off is included in the Company’s vintage analysis used to estimate the Company’s allowance for credit losses. Collateral-Dependent Loans A collateral-dependent loan is a nonaccrual loan for which the Bank 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 amortized cost basis of collateral-dependent loans by class of loans as of the periods indicated: ($ in thousands) Collateral Type As of December 31, 2024 Allowance for Credit Losses Real Estate Personal Property Total Construction and land development $ — $ — $ — $ — Residential real estate 10 7,243 — 7,243 Commercial real estate: Owner occupied 9 23,536 — 23,536 Non-owner occupied — 2,796 — 2,796 Commercial and industrial — — 1,789 1,789 Commercial leases 36 — 359 359 Total $ 55 $ 33,575 $ 2,148 $ 35,723 The amount of collateral-dependent loans as of December 31, 2024 include $ 18.9 million of SBA 7(a) loan balances that are guaranteed by the SBA. ($ 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 loans as of December 31, 2023 include $ 15.0 million of SBA 7(a) loan balances that are guaranteed by the SBA. 100 Table of Contents Note 4 – Premises and Equipment and Leases Premises and equipment at December 31, 2024 and 2023, consist of the following: December 31, 2024 2023 ($ in thousands) Leasehold improvements $ 3,700 $ 3,700 Commercial operating lease equipment 12,874 9,300 Furniture, fixtures, and equipment 6,102 3,298 Construction in progress 605 2,153 Total premises and equipment $ 23,281 $ 18,451 Less accumulated depreciation ( 6,953 ) ( 3,821 ) Premises and equipment, net $ 16,328 $ 14,630 Total depreciation and amortization expense, included in occupancy and equipment expenses, was $ 3.2 million and $ 2.3 million for the years ended December 31, 2024 and 2023, respectively, which included depreciation expense on assets leased and available for lease of $ 1.6 million and $ 1.0 million for the years ended December 31, 2024 and 2023, respectively. Leasing as a Lessor - Commercial Operating Lease Equipment The Company includes commercial operating leases within premises and equipment. The net book value of the commercial operating leases as of December 31, 2024 and December 31, 2023 was $ 10.4 million and $ 8.2 million. Rental income from commercial operating leases for the years ended December 31, 2024 and 2023 was $ 2.2 million and $ 1.3 million, respectively. Leasing as a Lessee The Company leases its facilities under noncancelable operating leases. Rent expense was as follows: Years Ended December 31, 2024 2023 ($ in thousands) Operating leases Operating lease cost $ 840 $ 876 Variable lease cost 85 35 Operating lease expense 925 911 Short-term lease rent expense 37 — Total rent expense $ 962 $ 911 101 Table of Contents Future minimum annual undiscounted rental payments for the Company’s operating leases are as follows as of December 31, 2024 ($ in thousands): Year ended December 31, 2025 $ 1,122 Year ended December 31, 2026 1,118 Year ended December 31, 2027 1,152 Year ended December 31, 2028 1,186 Year ended December 31, 2029 1,017 Thereafter — Total future minimum lease payments 5,595 Less present value discount ( 293 ) Total operating lease liabilities $ 5,302 The weighted-average lease term and discount rate used are as follows: As of December 31, 2024 December 31, 2023 Weighted-average remaining lease term – operating leases (in years) 4.8 5.8 Weighted-average discount rate – operating leases 1.9 % 1.9 % Supplemental cash flow information related to leases was as follows: Years Ended December 31, 2024 2023 ($ in thousands) Cash paid for operating leases $ 1,142 $ 850 Note 5 – SBA Servicing Asset, Net The Company periodically sells the guaranteed 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 $ 218.4 million and $ 275.2 million at December 31, 2024 and 2023, respectively. The following table summarizes SBA servicing asset, net activity for the periods indicated: Years Ended December 31, ($ in thousands) 2024 2023 Balance at beginning of period $ 4,231 $ 5,210 Additions to servicing asset 269 150 Amortization of servicing asset ( 2,092 ) ( 1,505 ) Change in valuation allowance 865 376 Balance at end of period $ 3,273 $ 4,231 SBA servicing asset, fair value $ 3,273 $ 4,231 Activity in the valuation allowance for the SBA servicing asset was as follows for the periods indicated: 102 Table of Contents Years Ended December 31, ($ in thousands) 2024 2023 Balance at beginning of period $ ( 2,151 ) $ ( 2,527 ) Recovery 865 376 Balance at end of period $ ( 1,286 ) $ ( 2,151 ) The fair market value of the SBA servicing asset as of December 31, 2024 and December 31, 2023, was $ 3.3 million and $ 4.2 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 these assumptions could result in a significant change in the SBA servicing asset carrying amount. The Company assumed a weighted average prepayment rate of 21.1 %, weighted average term of 3.30 years, and a weighted average discount rate of 12.1 % at December 31, 2024. 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. Note 6 – 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 the Company’s common stock. The exchange was accounted for at fair value based on the fair value of the Company’s shares of approximately $ 3.5 million. On July 25, 2023, the Company entered into a definitive agreement, as amended, to purchase from certain members of BFG an additional 10 % membership interest in exchange for shares of the Company’s common stock. On February 5, 2024, the transaction was consummated and the Company issued an aggregate 339,176 shares of the Company’s common stock in a private placement to the sellers in exchange for the additional membership interest in BFG. The second transaction increased the Company’s total ownership interest in BFG to 20 %. The ownership interest consists of Class A Voting Units representing 4.7 % of the aggregate membership interests of BFG and Class B Non-Voting Units representing 15.3 % of the aggregate membership interests of BFG. The remaining 80 % of the outstanding 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. On March 31, 2020, the Company entered into a right of first refusal and option agreement with the members of BFG whereby the Company has the right of first refusal to purchase additional interests in BFG from any selling members and the option to purchase all, but not less than all, of the interests in BFG from the remaining members. The purchase price for the remaining members’ interests is based on an earnings multiple between 10 times and 15 times BFG’s net profit for 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. The Company issued an aggregate 270,000 warrants to the BFG members as consideration for entering into the agreement. 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. For further information on the Company’s investment in BFG, see Note 14 - Related Party Transactions. 103 Table of Contents Note 7 – Deposits Major classes of deposits are as follows: December 31, 2024 2023 ($ in thousands) Demand $ 198,185 $ 145,544 Savings 9,287 8,633 Money markets 16,709 11,661 Time certificates of deposit 320,771 238,995 Total deposits $ 544,952 $ 404,833 The aggregate amount that exceed the $250 thousand insurance limit of time deposits at December 31, 2024 and 2023 were $ 3.2 million and $ 2.0 million, respectively. At December 31, 2024 , the scheduled maturities of time deposits are as follows ($ in thousands): Year ended December 31, 2025 $ 245,180 Year ended December 31, 2026 26,676 Year ended December 31, 2027 2,953 Year ended December 31, 2028 3,857 Year ended December 31, 2029 31,437 Thereafter 10,668 Total $ 320,771 Note 8 – 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, 2024 and December 31, 2023, that the Bank’s capital levels exceed the regulatory floors required to be classified as a well-capitalized bank. As of December 31, 2024 and December 31, 2023, 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 presents the actual and required capital amounts and ratios for the Bank as of the periods indicated: 104 Table of Contents Actual Well-Capitalized Requirement ($ in thousands) Amount Ratio Amount Ratio December 31, 2024 Leverage ratio (CBLR election) $ 135,375 20.6 % $ 59,196 9.0 % December 31, 2023 Leverage ratio (CBLR election) $ 116,108 20.7 % $ 50,441 9.0 % Bank Dividends 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 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. 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 does not intend 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 capital ratio requirements are met. The Company plans to maintain capital ratios that meet or exceed 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 9 – Commitments and Contingencies Federal Home Loan Bank Secured Line of Credit As of December 31, 2024 and December 31, 2023, the Bank’s available line of credit with the FHLB to borrow funds was $ 25.0 million and $ 30.5 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, 2024 and December 31, 2023, no amounts were outstanding under the line of credit. Loans totaling $ 41.6 million and $ 46.9 million were pledged to secure the FHLB line of credit as of December 31, 2024 and December 31, 2023, respectively. Other Lines of Credit At December 31, 2024 and December 31, 2023, the Bank had the ability to borrow $ 239.2 million and $ 11.4 million, respectively, from the FRB’s Discount Window on a collateralized basis. Loans totaling $ 240.8 million and $ 0.0 million and securities of $ 42.6 million and $ 13.0 million were pledged to secure the line of credit with the FRB’s Discount Window as of December 31, 2024 and December 31, 2023, respectively. The FRB’s Bank Term Funding Program was officially closed in March 2024. At December 31, 2023, the Bank had the ability to access $ 0.8 million from the FRB’s Bank Term Funding Program on a collateralized basis. Through Zions Bank, the Bank had an available unsecured line of credit of $ 5.0 million at December 31, 2024 and December 31, 2023. 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, 2024 and December 31, 2023. The Bank had no outstanding balances on such unsecured or secured lines of credit as of December 31, 2024 and December 31, 2023. 105 Table of Contents Borrower-In-Custody (“BIC”) During 2024, the Bank was accepted into the FRB’s borrower-in-custody program, which allows financial institutions to pledge loans as collateral for FRB’s Discount Window advances, that are not pledged to the FHLB, while retaining possession or control of the collateral. As of December 31, 2024, the Bank had secured unused borrowing capacity of $ 198.8 million and had $ 240.8 million in loans that were pledged as collateral under the BIC program (the $ 198.8 million unused borrowing capacity is included in the $ 239.2 million of funds available to borrow from the FRB’s Discount Window in the preceding paragraph). The Company had no advances outstanding under the BIC program as of December 31, 2024. Financial Instruments with Off-Balance Sheet Risk 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. The Company’s commitments to extend credit as of the periods indicated are summarized below. Since commitments associated with commitments to extend credit may expire unused, the amounts shown in the table below do not necessarily reflect the actual future cash funding requirements. At December 31, 2024 and December 31, 2023, financial instruments with off-balance-sheet risk were as follows: December 31, December 31, ($ in thousands) 2024 2023 Revolving, open-end lines of credit $ 2,365 $ 1,630 Undisbursed commercial real estate loans 23,200 17,421 Other unused commitments 830 724 Total unfunded loan commitments $ 26,395 $ 19,775 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 $ 0.5 million and $ 0.1 million as of December 31, 2024 and December 31, 2023, respectively. Note 10 – Stock-Based Compensation and Employee Benefit Plans 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 will terminate as to future awards 10 years from the later of the effective date or the earlier of the most recent Board or shareholder approval of an increase in the number of shares reserved for issuance under the 2019 Plan. On June 27, 2024, the shareholders of the Company approved an amendment to the 2019 Plan increasing the number of shares of common stock reserved for issuance under the plan by an additional 500,000 shares to 1,780,000 . At December 31, 2024, 445,440 shares under the 2019 Plan were 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 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 106 Table of Contents shareholder approval of an increase in the number of shares reserved for issuance under the 2016 Plan. At December 31, 2024, 2,189 shares under the 2016 Plan were available for future issuance. The 2019 Plan and the 2016 Plan (collectively, the “Plans”) provide for the issuance of non-statutory stock options and restricted stock to employees, directors and consultants. The Plans also provide for the issuance of incentive stock options only to employees. The stock-based incentive awards for the Plans are granted at an exercise price not less than the fair market value of the Company’s common stock on the date of grant in the case of stock options. Restricted stock is valued based on the fair market value of the Company’s common stock on the grant date. Vesting of the stock 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. Restricted stock vests over periods ranging from approximately 1 to 5 years. Under the 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, or 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. Stock Options The following summarizes stock option activity for the year ended December 31, 2024: Stock Options Weighted Average Exercise Price Weighted Average Remaining Contractual Life (in years) Aggregate Intrinsic Value Outstanding at December 31, 2023 981,488 $ 5.72 6.9 $ 8,429,619 Options exercised ( 45,420 ) $ 4.10 Options forfeited ( 30,886 ) $ 7.47 Outstanding at December 31, 2024 905,182 $ 5.74 5.9 $ 9,266,286 Options vested and exercisable at December 31, 2024 766,442 $ 5.23 5.6 $ 8,241,070 The weighted average grant date fair value of options per share granted during the year ended December 31, 2023 was $ 4.11 , respectively. The total intrinsic value of options exercised during the years ended December 31, 2024 and 2023 was $ 0.3 million and $ 0.1 million, respectively. During the years ended December 31, 2024, and 2023 the Company received de minimis proceeds from the exercise of stock options and recognized a de minimis tax benefit from the exercise of stock options for both years. Upon exercise of the stock options, the Company issued 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. The following summarizes unvested restricted stock activity for the year ended December 31, 2024: 107 Table of Contents Number of Shares Weighted Average Grant Date Fair Value Unvested as of December 31, 2023 199,208 $ 10.05 Granted 419,299 $ 10.18 Vested ( 96,475 ) $ 10.39 Forfeited ( 25,389 ) $ 10.12 Unvested as of December 31, 2024 496,643 $ 10.09 The weighted average grant date fair value of restricted stock granted in the year ended December 31, 2023 was $ 8.63 . The total fair value of restricted stock that vested during the years ended December 31, 2024 and 2023 was $ 1.2 million and $ 1.0 million, respectively. Stock-based Compensation Expense The following tables present stock-based compensation expense recognized: Years Ended December 31, ($ in thousands) 2024 2023 Stock options $ 237 $ 493 Restricted stock 1,809 1,553 Total $ 2,046 $ 2,046 As of December 31, 2024, the Company had unrecognized stock-based compensation expense related to stock options and restricted stock of approximately $ 0.1 million and $ 3.2 million, respectively, which is expected to be recognized over the remaining weighted average vesting period of 1.0 years and 2.4 years, respectively. Defined Contribution Plan The Company has established an employee directed 401(k) plan (“Plan”) for employees meeting certain eligibility requirements. The Plan requires the Company to contribute a safe harbor amount annually. 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 $ 1.1 million and $ 0.6 million for the years ended December 31, 2024 and 2023 , 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). U.S. 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 108 Table of Contents 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. There were no transfers between fair value levels for the years ended December 31, 2024 and 2023. The following methods were used to estimate the fair value of each class of financial instruments on a recurring basis: Investment securities available-for-sale: Investment securities AFS consist of U.S. Treasury securities and are carried at fair value. The Company estimates the fair value of investment securities AFS using current active market quotes, if available, which are considered Level 1 measurements. Level 1 measurements include securities issued by the U.S. Treasury. Investment in BFG : The Company’s valuation technique utilized the average of the discounted cash flow method and the Guideline Public Company method. A 20 % lack of marketability discount was applied to the valuation as well as a 4.50 % discount to non-voting shares to arrive at fair value as of December 31, 2024 and December 31, 2023. The calculation of fair value utilized significant unobservable inputs, including projected cash flows, growth rates, and discount rates. See Note 6 - Investment in Business Funding Group, LLC and Note 14 - Related Party Transactions for more information. Derivative instruments : The Company’s derivative instruments consist of interest rate swaps accounted for as cash flow hedges. The Company’s derivative instruments are carried at fair value and considered Level 2 measurements. The Company measures fair value of interest rate swaps utilizing market observable inputs, such as forecasted yield curves. The table below presents the Company’s financial instruments valued on a recurring basis as of the periods indicated: December 31, 2024 December 31, 2023 ($ in thousands) Level Estimated Fair Value Estimated Fair Value Financial assets: U.S. Treasury securities 1 $ 29,930 $ — Investment in BFG 3 $ 7,700 $ 4,200 Derivative asset 2 $ 509 $ — The table below presents a reconciliation of our investment in BFG classified as a Level 3 financial instrument and measured at fair value on a recurring basis for the periods indicated: Years Ended December 31, ($ in thousands) 2024 2023 Beginning balance $ 4,200 $ 4,800 Purchase of BFG ownership interest 4,125 — Change in fair value of BFG ( 625 ) ( 600 ) Ending balance $ 7,700 $ 4,200 109 Table of Contents The table below presents the Company’s financial instruments valued on a nonrecurring basis as of the periods indicated: ($ in thousands) Fair Value Measurements Using Description of Financial Instrument Fair Value Level 1 Level 2 Level 3 December 31, 2024 Nonrecurring assets: Individually evaluated loans $ 35,723 $ — $ — $ 35,723 December 31, 2023 Nonrecurring assets: Individually evaluated loans $ 27,127 $ — $ — $ 27,127 Individually evaluated loans – The loan amount above represents loans individually evaluated that have been adjusted to the lower of cost or 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, if any, represents charge-offs on loans when the fair value of the collateral is less than the carrying amount of the loan. Quantitative information for Level 3 fair value measurements – The following table presents information about quantitative inputs and assumptions used to fair value Level 3 nonrecurring assets as of December 31, 2024 and 2023: ($ in thousands) Fair Value Valuation Technique Unobservable Input Range (Weighted Average) December 31, 2024 Individually evaluated loans $ 35,723 Market comparable Discount to appraisal value for estimated selling costs 11.40 % December 31, 2023 Individually evaluated loans $ 27,127 Market comparable Discount to appraisal value for estimated selling costs 7.57 % The range and weighted average of the significant unobservable inputs used to fair value the investment in BFG as of December 31, 2024 and as of December 31, 2023 are shown in the following table: ($ in thousands) December 31, 2024 Range (Weighted Average) December 31, 2023 Range (Weighted Average) Discounted Cash Flows Revenue growth rate 15.3 % 11.0 % Expense growth rate 14.9 % 13.4 % Discount rate 27.5 % 20.0 % Guideline Public Company Multiples of enterprise value 3.5 x to 5.8 x 3.5 x to 5.5 x The tables below present the carrying amount and estimated fair value of the Company's financial instruments as of the periods indicated: 110 Table of Contents December 31, 2024 Fair Value Measurements Using ($ in thousands) Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and cash equivalents $ 109,162 $ 109,162 $ 109,162 $ — $ — Investment securities available-for-sale 29,930 29,930 29,930 — — Investment securities held-to-maturity 12,565 11,057 — 11,057 — Investment in FHLB stock 349 349 — 349 — Loans held-for-investment, net 447,812 478,919 — — 478,919 Strategic Program loans held-for-sale 91,588 91,588 — 91,588 — Accrued interest receivable 3,566 3,566 — 3,566 — SBA servicing asset, net 3,273 3,273 — 3,273 — Investment in BFG 7,700 7,700 — — 7,700 Derivative asset 509 509 — 509 — Financial liabilities: Total deposits 544,952 528,253 — 528,253 — Accrued interest payable 1,494 1,494 — 1,494 — PPPLF 64 64 — 64 — December 31, 2023 Fair Value Measurements Using ($ in thousands) Carrying Amount Estimated Fair Value Level 1 Level 2 Level 3 Financial assets: Cash and cash equivalents $ 116,975 $ 116,975 $ 116,975 $ — $ — Investment securities held-to-maturity 15,388 13,809 — 13,809 — Investment in FHLB stock 238 238 — 238 — Loans held-for-investment, net 358,560 360,032 — — 360,032 Strategic Program loans held-for-sale 47,514 47,509 — 47,509 — Accrued interest receivable 3,573 3,573 — 3,573 — SBA servicing asset, net 4,231 4,231 — 4,231 — Investment in BFG 4,200 4,200 — — 4,200 Financial liabilities: Total deposits 404,833 394,195 — 394,195 — Accrued interest payable 619 619 — 619 — PPPLF 190 190 — 190 — Note 12 – Income Taxes The components of income tax expense consist of the following: 111 Table of Contents December 31, ($ in thousands) 2024 2023 Current tax expense Federal $ 3,030 $ 3,446 State 1,127 992 Deferred tax expense Federal 425 1,614 State ( 335 ) 301 Income tax expense $ 4,247 $ 6,353 The components of net deferred income tax assets and liabilities on the balance sheet at December 31, 2024 and 2023 , are as follows: December 31, ($ in thousands) 2024 2023 Deferred tax assets Operating lease liabilities $ 1,302 $ 1,560 Allowance for credit losses 2,274 689 Loan servicing rights 316 533 Nonqualified stock options 154 150 Restricted stock 386 240 Deferred loan fees, net — 51 Unrealized losses on securities AFS 24 — Other 438 61 Total deferred tax assets 4,894 3,284 Deferred tax liabilities ROU asset ( 875 ) ( 1,063 ) Deferred loan fees, net ( 2,159 ) — Net book value of fixed assets ( 2,020 ) ( 2,199 ) Loan trailing fees ( 335 ) ( 424 ) Unrealized gains on cash flow hedges ( 85 ) — Other ( 319 ) ( 346 ) Total deferred tax liabilities ( 5,793 ) ( 4,032 ) Deferred taxes, net $ ( 899 ) $ ( 748 ) The income tax expense recorded differs from the expected income tax expense and the reconciliation of these differences is as follows at December 31, 2024 and 2023 : December 31, ($ in thousands) 2024 2023 Federal income tax expense at statutory rates $ 3,568 $ 5,001 Nondeductible compensation 84 323 State income tax expense, net 626 991 Other ( 31 ) 38 Income tax expense $ 4,247 $ 6,353 112 Table of Contents At December 31, 2024 and 2023 , the Company had no material unrecognized tax benefits or accrued interest and penalties recorded. The Company does not expect the total amount of unrecognized tax benefits to significantly increase within the next twelve months. The Company and its subsidiaries are subject to income tax within U.S. federal and various state jurisdictions. The Company remains subject to examination for income tax returns in all federal and state jurisdictions for the years ending on or after December 31, 2021 . Note 13 – Derivatives and Hedging Activities Risk Management Objective of Using Derivatives The Company’s objectives in using interest rate derivatives are to add stability to interest expense and to manage its exposure to interest rate movements. To accomplish this objective, the Company primarily uses interest rate swaps as part of its interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount. During 2024, such derivatives were used to hedge the variable cash flows associated with existing variable-rate deposits. For derivatives designated and that qualify as cash flow hedges of interest rate risk, the gain or loss on the derivative is recorded in accumulated other comprehensive income (“OCI”) and subsequently reclassified into interest expense in the same period(s) during which the hedged transaction affects earnings. Amounts reported in accumulated OCI related to derivatives will be reclassified to interest on deposits as interest payments are made on the Company’s variable-rate deposits. During the twelve months following December 31, 2024 , the Company estimates that an additional $ 0.3 million will be reclassified as a reduction to interest expense. Fair Value of Derivative Instruments on the Consolidated Balance Sheet The table below presents the notional amount, location, and fair value of the Company’s derivative financial instruments on the Consolidated Balance Sheet as of December 31, 2024 : Derivative Assets As of December 31, 2024 ($ in thousands) Notional Amount Balance Sheet Location Fair Value Derivatives designated as hedging instruments: Interest rate swaps $ 80,000 Other assets $ 509 Total $ 509 Effect of Cash Flow Hedge Accounting on Accumulated Other Comprehensive Income The table below presents the pre-tax effect of cash flow hedge accounting on accumulated other comprehensive income as of December 31, 2024 : Year Ended December 31, 2024 Amount of Gain Recognized in OCI on Derivative Location of Gain Recognized from Accumulated OCI into Income Amount of Gain Reclassified from Accumulated OCI into Income Derivatives in Cash Flow Hedging Relationships: Interest rate swaps $ 509 Interest on deposits $ 164 Total $ 509 $ 164 113 Table of Contents The table below presents the effect of the Company’s derivative financial instruments on the Consolidated Statements of Income for the year ended December 31, 2024 : Location and Amount of Gain Recognized in Income on Cash Flow Hedging Relationships 2024 Location of gain recognized in income Interest on deposits Total amount of expense line items presented in the statement of financial performance in which the effects of cash flow hedges are recorded $ 164 The effects of cash flow hedging: Interest rate swaps: Amount of gain reclassified from accumulated OCI into income $ 164 Offsetting Derivative Assets The table below presents derivative instruments that are subject to enforceable master netting arrangements for the periods indicated. The Company has not made a policy election to offset its derivative positions. The net amounts of derivative assets can be reconciled to the tabular disclosure of fair value. The tabular disclosure of fair value provides the location that derivative assets are presented on the consolidated balance sheet. As of December 31, 2024 Gross Amounts Not Offset in the Statement of Financial Position Gross Amounts of Recognized Assets Gross Amounts Offset in the Statement of Financial Position Net Amounts of Assets presented in the Statement of Financial Position Financial Instruments Cash Collateral Received Net Amount Assets: Interest rate swaps $ 509 $ — $ 509 $ — $ — $ 509 Note 14 – Related Party Transactions In the ordinary course of business, the Bank may grant loans to certain executive officers and directors and the companies with which they are associated. The Company had no and de minimis loans outstanding to related parties as of December 31, 2024 and December 31, 2023. Total deposits from certain executive officers and directors and the companies with which they are associated were $ 2.1 million and $ 1.5 million as of December 31, 2024 and December 31, 2023, respectively. BFG is a small business loan broker, primarily under the SBA’s 7(a) loan program. As noted in Note 6 - Investment in Business Funding Group, LLC, the Company has a 20 % ownership in the outstanding membership units of BFG, as of December 31, 2024. 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. SBA 7(a) loans sourced from BFG totaled $ 70.3 million and $ 128.9 million for the years ended December 31, 2024 and 2023, respectively. The Company paid commission fees to BFG in the amounts of $ 2.8 million and $ 5.2 million for the years ended December 31, 2024 and 2023, respectively. The Company received distributions from BFG in the amounts of $ 0.6 million and $ 0.7 million for the years ended December 31, 2024 and 2023, respectively. These distributions were recorded in the Consolidated Statements of Income in other miscellaneous income. 114 Table of Contents Note 15 – 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, 2024 and 2023 ($ in thousands, except per share amounts): Years Ended December 31, 2024 2023 Numerator: Net income $ 12,742 $ 17,460 Amount allocated to participating common shareholders (1) ( 390 ) ( 288 ) Net income allocated to common shareholders $ 12,352 $ 17,172 Denominator: Weighted average shares outstanding, basic 12,612,455 12,488,564 Weighted average effect of dilutive securities: Stock options 491,036 343,642 Warrants 125,378 77,442 Weighted average shares outstanding, diluted 13,228,869 12,909,648 Earnings per share, basic $ 0.98 $ 1.38 Earnings per share, diluted $ 0.93 $ 1.33 Anti-dilutive stock options excluded from the calculation of diluted earnings per share 77,723 220,100 (1) Represents earnings attributable to holders of unvested restricted stock issued to the Company’s directors and employees. Note 16 – Condensed Financial Statements of Parent Company Financial information pertaining only to FinWise Bancorp, on a parent company-only basis, is as follows as of and for the years ended December 31, 2024 and 2023 : Condensed Balance Sheets December 31, ($ in thousands) 2024 2023 Assets Cash and cash equivalents $ 20,764 $ 28,510 Investment in FinWise Bank 140,203 122,055 Investment in BFG, at fair value 7,700 4,200 Investment in FinWise Investment, LLC 290 290 Deferred taxes, net 32 188 Income taxes receivable 5,014 828 Other assets 133 41 Total assets $ 174,134 $ 156,112 Liabilities and shareholders' equity Other liabilities 414 1,056 Shareholders’ equity 173,720 155,056 Total liabilities and shareholders’ equity $ 174,134 $ 156,112 115 Table of Contents Condensed Statements of Income Years Ended December 31, ($ in thousands) 2024 2023 Non-interest income Change in fair value on investment in BFG $ ( 625 ) $ ( 600 ) Equity in undistributed earnings of subsidiary 17,960 21,992 Other miscellaneous income 630 685 Total non-interest income 17,965 22,077 Non-interest expense Salaries and employee benefits 4,606 3,565 Professional services 1,273 1,765 Other operating expenses 943 860 Total non-interest expense 6,822 6,190 Income before income taxes 11,143 15,887 Income tax benefit ( 1,599 ) ( 1,574 ) Net income $ 12,742 $ 17,461 Condensed Statements of Cash Flows Years Ended December 31, ($ in thousands) 2024 2023 Cash flows from operating activities: Net income $ 12,742 $ 17,461 Adjustments to reconcile net income to net cash provided by operating activities Change in fair value of BFG 625 600 Stock-based compensation expense 2,046 2,046 Deferred income tax expense 156 ( 61 ) Net changes in: Income tax payable (receivable) ( 4,186 ) ( 1,905 ) Other assets ( 91 ) ( 4 ) Other liabilities ( 642 ) 760 Net cash provided by operating activities 10,650 18,897 Cash flows from investing activities: Investment in subsidiary bank ( 17,960 ) ( 21,992 ) Investment in FinWise Investment, LLC — ( 19 ) Net cash used in investing activities ( 17,960 ) ( 22,011 ) Cash flows from financing activities: Proceeds from exercise of stock options 25 44 Common stock repurchased ( 461 ) ( 4,741 ) Net cash used in financing activities ( 436 ) ( 4,697 ) Net change in cash and cash equivalents ( 7,746 ) ( 7,811 ) Cash and cash equivalents, beginning of year 28,510 36,321 Cash and cash equivalents, end of year $ 20,764 $ 28,510 116 Table of Contents Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.