# Finwise Bancorp (FINW) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from Finwise Bancorp's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1856365/000185636525000006/finw-20241231.htm Accession: 0001856365-25-000006 Filing date: 2025-03-26 Report date: 2024-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Confidence: high Company profile: /company/FINW/ All MD&A years: /company/FINW/mda/ Previous year: /company/FINW/mda/fy2023/ (FY 2023) Next year: /company/FINW/mda/fy2025/ (FY 2025) Item 7.    MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion and analysis of our financial condition and results of operations should be read together with our consolidated financial statements and related notes thereto and other financial information included elsewhere in this Report. Overview The Company is a Utah corporation and the parent company of FinWise Bank and FinWise Investment, LLC. The Company’s assets consist primarily of its investment in the Bank and all of its material business activities are conducted through the Bank. The Company is a registered bank holding company that is subject to supervision by the UDFI and the Federal Reserve. As a Utah state-chartered bank that is not a member of the Federal Reserve System, the Bank is separately subject to regulations and supervision by both the UDFI and the FDIC. The Bank’s deposits are federally insured up to the maximum legal limits. Our banking business is our only business line. Our banking business offers a diverse range of commercial and retail banking products and services, and consists primarily of originating loans in a variety of sectors. Attracting nationwide deposits from the general public, businesses and other financial institutions, and investing those deposits, together with borrowings, capital and other sources of funds, is also critical to our banking business. While our commercial and residential real estate lending and other products and services offered from our branch continue to be concentrated in and around the Salt Lake City, Utah MSA, our third-party loan origination relationships have allowed us to expand into new markets across the United States. These relationships were developed to support our ability to generate significant loan volume across diverse consumer and commercial markets and have been the primary source of our significant growth and our consistent ability to operate profitability since developing the third-party loan origination business. Our track record has demonstrated that these factors help deliver such growth and profitability, and that the flexibility inherent in our model enhances our ability to manage credit risk. We gather deposits in the Salt Lake City, Utah MSA through our one branch and nationwide from our Strategic Program service providers, SBA 7(a) borrowers, institutional deposit exchanges, brokered deposit arrangements and other deposit sources. Our financial condition and results of operations depend primarily on our ability to (i) originate loans and leases directly or by using our strategic relationships with third-party loan origination platforms to earn interest and non-interest income, (ii) effectively manage credit and other risks throughout the Bank, (iii) attract and retain low cost, stable deposits, and (iv) efficiently operate in compliance with applicable regulations. Our lending focuses on four main lending areas: (i) SBA 7(a) loans, (ii) Strategic Programs, (iii) residential and commercial real estate and (iv) commercial leasing. For a description and analysis of the Company’s loan categories, see “Financial Condition.” Critical Accounting Estimates The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under current circumstances, results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily available from other sources. We evaluate our estimates on an ongoing basis. Actual results may differ from these estimates under different assumptions or conditions. Accounting policies, as described in detail in the notes to our consolidated financial statements included in Part II, Item 8, are an integral part of our financial statements. A thorough understanding of these accounting policies is essential when reviewing our reported results of operations and our financial position. We believe that the critical accounting policies and estimates discussed below require us to make difficult, subjective or complex judgments about matters that are inherently uncertain. Changes in these estimates, which are likely to occur from period to period, or use of different estimates that we could have reasonably used in the current period, would have a material impact on our financial position, results of operations or liquidity. The JOBS Act permits us an extended transition period for complying with new or revised accounting standards affecting public companies. We have elected to take advantage of this extended transition period, which means that the financial statements included in this Report, as well as any financial statements that we file in the future, will not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as we 47 Table of Contents remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. Our critical accounting estimates primarily relate to the allowance for credit losses. We previously disclosed our stock-based compensation and income taxes as critical accounting estimates. We have determined our stock-based compensation and income taxes are no longer critical accounting estimates as they do not involve a significant level of estimate uncertainty that would likely have a material effect on our financial condition or results of operations. See Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8 for information on our accounting policy related to this critical accounting estimate. Allowance for Credit Losses. On January 1, 2023, the Company adopted ASU 2016-13, Topic 326 which replaced the incurred loss methodology with CECL for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable economic forecasts of future events and circumstances. The allowance for credit losses 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, which is included in accrued interest receivable on the Consolidated Balance Sheets. 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. 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 elsewhere. 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 48 Table of Contents 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 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. 49 Table of Contents 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. The Company generally places loans on a nonaccrual status when: (1) payment is in default for 90 days or more unless the loan is well secured and in the process of collection; 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 loans. A loan is relieved of its nonaccrual status when all principal and interest payments are brought current, the loan is well secured, and an analysis of the borrower’s financial condition provides reasonable assurance that the borrower can repay the loan as scheduled. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. The Company identifies such loans by classified loan grades (also known as risk rating), removes them from the collectively assessed population and adds them to the individually assessed population of loans. Within the individually assessed population, the Company determines whether loan repayment is expected from cash flow or from the liquidation of collateral. For individually assessed cash flow based repayment loans, the Company considers the net of the present value of estimated future cash flows using the original loan terms, including the original effective interest rate. Loans that experience insignificant payment delays and payment shortfalls are generally not individually evaluated. The Company considers the significance of payment delays on a case-by-case basis, taking into consideration the circumstances of the loan and borrower, including the length of delay, the reasons for the delay, the borrower's prior payment record, and the amount of the shortfall in relation to principal and interest owed. For individually assessed collateral based repayment loans, the Company estimates the net realizable value by evaluating the asset's present fair market value (supported by current independent appraisals or evaluations) less liquidation expenses associated with the asset's sale or disposal. Common liquidation expenses considered are commissions paid to brokers or auctioneers, property taxes, force-placed insurance premiums, legal fees, maintenance costs, and other care and preservation of collateral expenses. Within the strategic program loan portfolio, the Company has held-for-investment (“HFI”) strategic programs that it considers active and inactive. Strategic programs are considered active when the Company is continuing to originate and retain vintages of loans with the strategic program. Strategic programs are considered inactive when the Company is no longer originating and retaining vintages of loans with the strategic program. For the inactive HFI strategic programs there may still be outstanding loan balances from previously originated vintages; however, those loan balances decrease month-over-month through a combination of prepayment, charge-off, and regular amortization. For the active HFI strategic programs, the Company evaluates impairment collectively on a vintage basis employing a high-water vintage methodology. For the inactive HFI strategic programs, the Company evaluates impairment collectively by calculating blended loss rates comparing the actual loan tapes against portfolio level data provided by the inactive HFI strategic programs. Executive Summary This executive summary provides certain 2024 and 2023 financial highlights from the discussion and analysis that follows: •Originations of total loans increased by $0.7 billion to $5.0 billion for the year ended December 31, 2024 compared to the year ended December 31, 2023. New Strategic Programs and organic growth through existing programs contributed to the increase in loan originations. •Net interest margin (“NIM”) was 9.99% for the year ended December 31, 2024, compared to 11.65% for the year ended December 31, 2023. NIM is impacted by income earned from interest-earning assets and interest costs incurred on interest-bearing liabilities. NIM decreased principally as a result of FinWise having diversified its revenue sources by lending to lower risk borrowers with lower yields on loans. •FinWise generated net income of $12.7 million and $17.5 million for the year ended December 31, 2024 and 2023, respectively. Net income declined as FinWise invested in expansion of its product offerings and supporting business infrastructure. 50 Table of Contents •Total assets increased by $159.8 million to $746.0 million as of December 31, 2024 compared to December 31, 2023, principally in loans and investment securities. We believe our strong capital levels support our current and planned growth strategy. Strategic Program Service Providers During the year ended December 31, 2024, we entered into the following new strategic program relationships: •We enhanced our portfolio of private student loan products through our new strategic lending program with Earnest, to help students and their families with education financing. •We announced our first strategic payments program with Hank Payments Corp. to offer modernized payments and cash management solutions to our customers. •We announced our new strategic lending program with Plannery to offer a debt consolidation platform exclusively for healthcare professionals. Additionally, we are providing Plannery with access to our Credit Enhancement Program. •We announced the launch of a new strategic lending program with PowerPay to offer consumers a simple and affordable lending solution for home improvement and elective health care purchases. We have introduced our Payments (MoneyRails™) and Bank Identification Number (“BIN”) Sponsorship products which, together with our Strategic Programs, comprise the Bank’s Fintech Banking and Payment Solutions offerings. Payments (MoneyRails™) and BIN Sponsorship connect our customers to the Bank’s API-driven banking services ledger. Results of Operations for the Years Ended December 31, 2024 and 2023 The following table sets forth the principal components of net income for the periods indicated: [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["($ in thousands)","2024","","2023"],["Interest income","$","74,352","","","$","64,534"],["Interest expense","(15,440)","","","(9,975)"],["Net interest income","58,912","","","54,559"],["Provision for credit losses","(11,573)","","","(11,638)"],["Non-interest income","22,485","","","21,456"],["Non-interest expense","(52,835)","","","(40,564)"],["Provision for income taxes","(4,247)","","","(6,353)"],["Net income","$","12,742","","","$","17,460"]] [[/GREPCENT_TABLE]] Net Interest Income and NIM Net interest income was the primary contributor to our earnings in 2024 and 2023. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.” Net interest income increased $4.4 million for the year ended December 31, 2024, compared to the year ended December 31, 2023 primarily due to volume increases in the loans held for investment and loans held-for-sale portfolios and was partially offset by increased volume and rate in the certificates of deposit portfolio which also contributed to the increase in our cost of funds. Average interest-earning assets increased by $121.4 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, while the related yield on average interest earning assets decreased by 118 basis points to 12.60%. Average interest-bearing liabilities increased by $101.4 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, while the related cost of funds increased 35 basis points to 4.57%. NIM decreased to 9.99% for the year ended December 31, 2024 from 11.65% for the year ended December 31, 2023 primarily as a result of our increased lending to lower risk borrowers with lower yields on loans as part 51 Table of Contents of our strategy to reduce average credit risk in the loan portfolio combined with the increased cost of funds as the Bank competed in the national deposit market for funds to support our asset growth. Average Balances and Yields. The following table presents average balances for assets and liabilities, the total dollar amounts of interest income from interest-earning assets, the total dollar amounts of interest expense on interest-bearing liabilities, the resulting average yields and costs, and NIM. The yields and costs for the periods indicated are derived by dividing the annualized income or expense by the average balances for assets or liabilities, respectively, for the periods presented. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yield/rates. Average balances have been calculated using daily averages. Loan fees are included in interest income on loans and represent net fees of approximately $2.8 million and $1.0 million for the years ended December 31, 2024 and 2023, respectively. [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2024","","2023"],["($ in thousands)","Average Balance","","Interest","","Average Yield/Rate","","Average Balance","","Interest","","Average Yield/Rate"],["Interest-earning assets:"],["Interest-bearing deposits","$","87,086","","","$","4,563","","","5.24","%","","$","110,866","","","$","5,751","","","5.19","%"],["Investment securities","26,691","","","897","","","3.36","%","","14,731","","","338","","","2.30","%"],["Loans held-for-sale","58,896","","","17,698","","","30.05","%","","39,090","","","15,051","","","38.50","%"],["Loans held-for-investment(1)","417,207","","","51,194","","","12.27","%","","303,784","","","43,394","","","14.28","%"],["Total interest-earning assets","589,880","","","74,352","","","12.60","%","","468,472","","","64,534","","","13.78","%"],["Noninterest-earning assets","47,598","","","","","","","25,269"],["Total assets","$","637,478","","","","","","","$","493,740"],["Interest-bearing liabilities:"],["Demand","$","59,317","","","$","2,108","","","3.55","%","","$","45,454","","","$","1,856","","","4.08","%"],["Savings","9,574","","","66","","","0.69","%","","8,207","","","51","","","0.62","%"],["Money market accounts","12,284","","","452","","","3.68","%","","13,665","","","362","","","2.65","%"],["Certificates of deposit","256,575","","","12,814","","","4.99","%","","168,887","","","7,705","","","4.56","%"],["Total deposits","337,750","","","15,440","","","4.57","%","","236,213","","","9,974","","","4.22","%"],["Other borrowings","126","","","\u2014","","","0.34","%","","251","","","1","","","0.35","%"],["Total interest-bearing liabilities","337,876","","","15,440","","","4.57","%","","236,464","","","9,975","","","4.22","%"],["Noninterest-bearing deposits","107,760","","","","","","","93,126"],["Noninterest-bearing liabilities","26,634","","","","","","","17,250"],["Shareholders\u2019 equity","165,208","","","","","","","146,901"],["Total liabilities and shareholders\u2019 equity","$","637,478","","","","","","","$","493,740"],["Net interest income and interest rate spread(2)","","","$","58,912","","","8.03","%","","","","$","54,559","","","9.56","%"],["Net interest margin(3)","","","","","9.99","%","","","","","","11.65","%"],["Ratio of average interest-earning assets to average interest-bearing liabilities","","","","","174.58","%","","","","","","198.12","%"]] [[/GREPCENT_TABLE]] (1) Loans placed on nonaccrual status are included in loan balances. (2) Interest spread is the weighted average yield on interest-earning assets, less the weighted average rate incurred on interest-bearing liabilities. (3) Net interest margin is net interest income, expressed as a percentage of average earning assets. Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income based on average balances. The rate column shows the effects attributable to changes in average rate. The volume column 52 Table of Contents shows the effects attributable to changes in average volume. For purposes of this table, changes attributable to changes in both average rate and average volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume. [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2024","","2023"],["","Increase (Decrease) Due to Change in","","Increase (Decrease) Due to Change in"],["($ in thousands)","Rate","","Volume","","Total","","Rate","","Volume","","Total"],["Interest income:"],["Interest-bearing deposits with the Federal Reserve, non-U.S. central banks and other banks","$","59","","","$","(1,247)","","","$","(1,188)","","","$","3,777","","","$","794","","","$","4,571"],["Investment securities","203","","","356","","","559","","","88","","","42","","","130"],["Loans held-for-sale","(2,024)","","","4,671","","","2,647","","","5,549","","","(11,735)","","","(6,186)"],["Loans held-for-investment","(4,732)","","","12,532","","","7,800","","","199","","","13,491","","","13,690"],["Total interest income","(6,494)","","","16,312","","","9,818","","","9,613","","","2,592","","","12,205"],["Interest expense:"],["Demand","(186)","","","438","","","252","","","241","","","1,085","","","1,326"],["Savings","6","","","9","","","15","","","43","","","1","","","44"],["Money market accounts","122","","","(32)","","","90","","","273","","","(27)","","","246"],["Certificates of deposit","788","","","4,321","","","5,109","","","4,858","","","2,069","","","6,927"],["Other borrowings","\u2014","","","(1)","","","(1)","","","\u2014","","","(1)","","","(1)"],["Total interest-bearing liabilities","730","","","4,735","","","5,465","","","5,414","","","3,127","","","8,542"],["Net interest income","$","(7,224)","","","$","11,577","","","$","4,353","","","$","4,199","","","$","(536)","","","$","3,664"]] [[/GREPCENT_TABLE]] Provision for Credit Losses On January 1, 2023, the Company adopted ASU 2016-13, Topic 326 which replaced the incurred loss methodology, allowance for loan losses, with CECL for financial instruments measured at amortized cost and other commitments to extend credit. The provision for credit losses is a charge to income to bring our ACL to a level deemed appropriate by management and approved by our board of directors. We determine the provision for credit losses monthly in connection with our evaluation of the adequacy of our ACL. For a description of the factors we considered in determining the ACL see Allowance for credit losses presented in Note 1 - Summary of Significant Accounting Policies included in Part II, Item 8. Our provision for credit losses was substantially flat at $11.6 million for the years ended December 31, 2024 and 2023. Although the held-for-investment loan portfolio balances grew by $93.0 million, the growth occurred in lower risk categories, such as lease financing, residential real estate and the secured balance of SBA loans, all of which have lower expected loss factors contributing to the lower provision. In connection with our review of individual loans migrating to non-performing status for impairment, we released all or a portion of the allowance for credit losses for certain loans, which had the effect of reducing the provision for loan losses, based on strong collateral positions associated with such loans. These factors contributed to in the minimal increase in the provision for credit losses. At December 31, 2024, the Company maintained $158.7 million in loan balances that are guaranteed by the SBA compared to $131.7 million in loan balances that are guaranteed by the SBA balances as of December 31, 2023. 53 Table of Contents Non-interest Income The following table presents, for the periods indicated, the major categories of non-interest income: [[GREPCENT_TABLE]] [["","Years Ended December 31,","","Change"],["($ in thousands)","2024","","2023","","$","","%"],["Non-interest income:"],["Strategic Program fees","$","17,762","","","$","15,914","","","$","1,848","","","11.6","%"],["Gain on sale of loans, net","2,036","","","1,684","","","352","","","20.9","%"],["SBA loan servicing fees, net","1,137","","","1,842","","","(705)","","","(38.3)","%"],["Change in fair value on investment in BFG","(625)","","","(600)","","","(25)","","","4.2","%"],["Credit enhancement income","111","","","\u2014","","","111","","","100.0","%"],["Other miscellaneous income","2,064","","","2,616","","","(552)","","","(21.1)","%"],["Total non-interest income","$","22,485","","","$","21,456","","","$","1,029","","","4.8","%"]] [[/GREPCENT_TABLE]] The increase in total non-interest income for the year ended December 31, 2024, compared to the same period in 2023, was primarily due to increased fees associated with the higher origination volume of Strategic Program loans, partially offset by a decrease in other miscellaneous income due to a $0.9 million charge-off of unamortized premium on approximately $160.0 million of callable CDs which were called during the fourth quarter of 2024 and replaced with lower cost CDs. This decrease was partially offset by a $0.5 million gain on sale of the guaranteed portion of SBA loans that occurred during the fourth quarter of 2024. Non-interest Expense Non-interest expense has increased as we have grown and as we have expanded and modernized our operational infrastructure and continued to implement our plan to build an efficient, integrated fintech banking operation with significant capacity for growth. The following table presents, for the periods indicated, the major categories of non-interest expense: [[GREPCENT_TABLE]] [["","Years Ended December 31,","","Change"],["($ in thousands)","2024","","2023","","$","","%"],["Non-interest expense:"],["Salaries and employee benefits","$","35,205","","","$","25,751","","","$","9,454","","","36.7","%"],["Professional services","4,736","","","4,961","","","(225)","","","(4.5)","%"],["Occupancy and equipment expenses","4,240","","","3,312","","","928","","","28.0","%"],["Credit enhancement expense","8","","","\u2014","","","8","","","100.0","%"],["Other operating expenses","8,646","","","6,540","","","2,106","","","32.2","%"],["Total non-interest expense","$","52,835","","","$","40,564","","","$","12,271","","","30.3","%"]] [[/GREPCENT_TABLE]] The increase in total non-interest expense for the year ended December 31, 2024, compared to the same period in 2023, was primarily due to an increase in salaries and employee benefits due mainly to an increase in the number of employees, expenses related to our increase in commercial operating lease activity as well as software amortization, and other operating expenses primarily driven by increases in data processing costs of $0.8 million, SBA program fees and underwriting related to SBA loans of $0.4 million, and a charge related to potential bad debt expense on our program receivables of $0.3 million. Provision for Income Taxes The provision for income taxes totaled $4.2 million at an effective tax rate of 25.0% for the year ended December 31, 2024, compared to $6.4 million at an effective tax rate of 26.7% for the year ended December 31, 2023. The decrease in 54 Table of Contents provision for income taxes from the prior year period was primarily due to a reduction in permanent differences impacting income tax expense. Net Income The decrease in net income for the year ended December 31, 2024, compared to the same period in 2023, was primarily the result of the factors discussed above. Financial Condition The following table summarizes selected components of our consolidated balance sheets as of December 31, 2024 and 2023. [[GREPCENT_TABLE]] [["","As of December 31,","","Change"],["($ in thousands)","2024","","2023","","$","","%"],["Interest-bearing deposits in other banks","$","99,562","","","$","116,564","","","$","(17,002)","","","(14.6)","%"],["Investment securities available-for-sale, at fair value","29,930","","","\u2014","","","29,930","","","100.0","%"],["Investment securities held-to-maturity, net","12,565","","","15,388","","","(2,823)","","","(18.3)","%"],["Strategic Program loans held-for-sale, at lower of cost or fair value","91,588","","","47,514","","","44,074","","","92.8","%"],["Loans held-for-investment, net","447,812","","","358,560","","","89,252","","","24.9","%"],["Total assets","745,976","","","586,221","","","159,755","","","27.3","%"],["Deposits","544,952","","","404,833","","","140,119","","","34.6","%"],["Total liabilities","572,256","","","431,165","","","141,091","","","32.7","%"],["Total shareholders' equity","173,720","","","155,056","","","18,664","","","12.0","%"],["Total equity to total assets","23.3","%","","26.5","%","","","","(3.2)","%"]] [[/GREPCENT_TABLE]] Interest-Bearing Deposits in Other Banks The decrease in interest-bearing deposits in other banks from December 31, 2024 to December 31, 2023, was primarily due to the purchase of the investment securities available-for-sale. Aside from minimal balances held with our correspondent banks, the majority of our interest-bearing deposits are at the Federal Reserve. Securities We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. We classify investment securities as either HTM or AFS based on our intentions and our ability to hold such securities until maturity. In determining such classifications, securities that we have the positive intent and the ability to hold until maturity are classified as HTM and carried at amortized cost. All other securities are designated as AFS and carried at estimated fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis. 55 Table of Contents The following table summarizes the weighted-average yields of our investment securities at December 31, 2024. The weighted average yield of investment securities was calculated using the sum of all interest that the investments generate, divided by the average book value. There are no tax-exempt securities. [[GREPCENT_TABLE]] [["","1 Year or Less","","1 - 5 Years","","5 - 10 Years","","Over 10 Years","","Total"],["Securities available-for-sale:"],["U.S. Treasuries","4.68","%","","4.19","%","","\u2014","%","","\u2014","%","","4.23","%"],["Securities held-to-maturity:"],["Mortgage-backed securities","\u2014","%","","3.29","%","","1.32","%","","1.73","%","","1.85","%"],["Collateralized mortgage obligations","\u2014","%","","3.18","%","","\u2014","%","","3.08","%","","3.09","%"],["Total","4.68","%","","4.14","%","","1.32","%","","2.50","%","","3.72","%"]] [[/GREPCENT_TABLE]] There were no calls, sales or maturities of securities during the years ended December 31, 2024 and December 31, 2023. At December 31, 2024, there were 22 securities, consisting of eight collateralized mortgage obligations, four U.S. Treasuries and ten mortgage-backed securities, in an unrealized loss position as of December 31, 2024 and 19 securities, consisting of nine collateralized mortgage obligations and ten mortgage-backed securities, in an unrealized loss position as of December 31, 2023. Strategic Program Loans Held-for-Sale We, through our Strategic Program service providers, issue, on a nationwide basis, unsecured and secured consumer and business loans to borrowers within certain approved credit profiles. Loans originated through these programs are limited to predetermined Bank underwriting criteria, which has been approved by our board of directors. 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. Our Strategic Program loans held-for-sale increased $44.1 million as of December 31, 2024 compared to December 31, 2023, primarily as a result of greater hold periods for new originations for certain programs and a higher level of originations in the fourth quarter of 2024 compared to the same period in 2023. Loans Held-for-Investment Portfolio Through our diversification efforts we have built a portfolio that we believe positions us to withstand economic shifts. For example, we focus on industries and loan types that have historically lower loss rates such as professional, scientific and technical services (including law firms), non-store retailers (e-commerce), and ambulatory healthcare services. 56 Table of Contents The following table summarizes our gross loan portfolio held-for-investment by loan program as of the periods indicated: [[GREPCENT_TABLE]] [["","As of December 31,"],["","2024","","2023"],["($ in thousands)","Amount","","% of total loans","","Amount","","% of total loans"],["SBA(1)","$","255,056","","","54.8","%","","$","239,922","","","64.5","%"],["Commercial leases","70,153","","","15.1","%","","38,110","","","10.2","%"],["Commercial, non real estate","3,691","","","0.8","%","","2,457","","","0.7","%"],["Residential real estate","51,574","","","11.1","%","","38,123","","","10.2","%"],["Strategic Program loans","20,122","","","4.3","%","","19,408","","","5.2","%"],["Commercial real estate:"],["Owner occupied","41,046","","","8.8","%","","20,798","","","5.6","%"],["Non-owner occupied","1,379","","","0.3","%","","2,025","","","0.5","%"],["Consumer","22,212","","","4.8","%","","11,372","","","3.1","%"],["Total loans held-for-investment, gross","$","465,233","","","100.0","%","","$","372,215","","","100.0","%"]] [[/GREPCENT_TABLE]] (1)SBA loans as of December 31, 2024 and December 31, 2023 include $158.7 million and $131.7 million, respectively, of SBA 7(a) loan balances that are guaranteed by the SBA. We manage our loan portfolio based on factors that include concentrations per loan program and aggregated portfolio, industry of operation and geographies. We also monitor the impact of identified and estimated losses on capital as well as the pricing characteristics of each product. The following provides a general description and the risk characteristics relevant to each of the products. Each loan is assigned a risk grade during the origination and closing process by credit administration personnel based on criteria described later in this section. We analyze the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances. This ratings analysis is performed at least quarterly. SBA loans We originate and service loans partially guaranteed by the SBA under its Section 7(a) loan program for small businesses and professionals throughout the USA. Through our diversification efforts, we have built an SBA 7(a) portfolio that we believe positions us to better withstand economic shifts. For example, we focus on industries such as non-store retailers (e-commerce), ambulatory healthcare services, professional, scientific and technical services (including law firms), and merchant wholesalers. As of December 31, 2024 and December 31, 2023, we had total SBA 7(a) loans of $255.1 million and $239.9 million, respectively, representing 54.8% and 64.5% of our total loans held-for-investment, respectively. Loans are sourced primarily through our referral relationship with BFG. Although BFG actively markets throughout the USA, because of its physical location in the New York area we have developed a lending presence in the New York and New Jersey geographies. The maximum SBA 7(a) loan amount is $5 million. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow and tertiary is the sale of collateral pledged. These loans may be secured by commercial and residential mortgages as well as liens on business assets. In addition to typical underwriting metrics, we review the nature of the business, use of proceeds, length of time in business and management experience to help us target loans that we believe have lower credit risk. The SBA 7(a) program generally provides 50%, 75%, 85% and 90% guarantees for eligible SBA 7(a) loans. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper underwriting, closing or servicing by the lender. As such, prudent underwriting, closing and servicing processes are essential to effective utilization of the SBA 7(a) program. Historically, we have generally sold the SBA-guaranteed portion (typically 75% of the principal balance) of a majority of the loans we originate at a premium in the secondary market while retaining all servicing rights and the unguaranteed portion. In light of suppressed gain-on-sale premiums and increasing variable loan rates during 2023, we retained on our balance sheet a greater percentage of the guaranteed portion of certain SBA loans that we originated than we have historically, which we believe will benefit us through stronger government guaranteed held-for-investment loan growth and an increased recurring stream of interest income and partially offset the decline in gain-on-sale revenue. 57 Table of Contents Commercial leases As of December 31, 2024 and December 31, 2023, we had total commercial leases of $70.2 million and $38.1 million, respectively, representing 15.1% and 10.2% of our total loans held-for-investment, respectively. Underwriting for smaller credit requests is generally scorecard-based. Underwriting for smaller credit requests from customers is generally based on an internal credit scorecard, incorporating several customer and structure attributes including: severity and aging of delinquency; number of credit inquiries; loan-to-value ratio; term; and payment-to-income ratio. We periodically update our underwriting scorecard, which can have an impact on our credit tier scoring. Underwriting for larger credit requests from customers is generally based on commercial credit metrics where the primary repayment source considered is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are also considerations. These leases are generally secured by liens on business assets leased or purchased with our funds. Historically, we have retained these leases on our balance sheet for investment; however, we may sell leases to certain purchasers from time to time. Commercial, non-real estate Commercial non-real estate loans consist of loans and leases made to commercial enterprises that are not secured by real estate. As of December 31, 2024 and December 31, 2023, we had total commercial non-real estate loans of $3.7 million and $2.5 million, respectively, representing 0.8% and 0.7% of our total loans held-for-investment, respectively. Any loan, lease, line of credit, or letter of credit (including any unfunded commitments) and any interest obtained in such loans made by another lender to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, not secured by real estate, but not for personal expenditure purposes are included in this category. For example, commercial vehicle term loans and commercial working capital term loans. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. These loans are generally secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment. Residential real estate Residential real estate loans include construction, lot and land development loans that are for the purpose of acquisition and development of property to be improved through the construction of residential buildings, and loans secured by other residential real estate. As of December 31, 2024 and December 31, 2023, we had total residential real estate loans of $51.6 million and $38.1 million, respectively, representing 11.1% and 10.2% of our total loans held-for-investment, respectively. Construction loans are usually paid off through the conversion to permanent financing from third-party lending institutions. Lot loans may be paid off as the borrower converts to a construction loan. At the completion of the construction project, if the loan is converted to permanent financing by us or if scheduled loan amortization begins, it is then reclassified from construction to single-family dwelling. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded. These loans are generally secured by mortgages for residential property located primarily in the Salt Lake City, Utah MSA, and we obtain guarantees from responsible parties. Historically, we have retained these loans on our balance sheet for investment. Strategic Program loans We, through our Strategic Program service providers, issue, on a nationwide basis, unsecured and secured consumer and business loans to borrowers within certain approved credit profiles. Although we have generally sold most of these loans, we may choose to hold more of the funded loans and/or receivables based on a number of factors including the amount of our available capital. As of December 31, 2024 and December 31, 2023, we had total Strategic Program loans held-for-investment of $20.1 million and $19.4 million, respectively, representing 4.3% and 5.2% of our total loans held-for-investment, respectively. Loans originated through these programs are limited to predetermined Bank underwriting criteria, which has been approved by our board of directors. The primary form of repayment on these loans is from personal or business cash flow. Secured loans are secured by liens on consumer or business assets, as applicable. We reserve the right to sell any portion of funded loans and/or receivables directly to the Strategic Program service providers or other investors. We generally retain the legal right to service all these loans, but contract with the Strategic Program service provider or another approved sub-servicer to service these loans on our behalf. 58 Table of Contents Commercial real estate Commercial real estate loans include loans to individuals, sole proprietors, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, secured by real estate, but not for personal expenditure purposes. As of December 31, 2024 and December 31, 2023, we had total commercial real estate loans of $42.4 million and $22.8 million, respectively, representing 9.1% and 6.1% of our total loans held-for-investment, respectively. Of these amounts, $41.0 million and $20.8 million represented owner occupied properties as of December 31, 2024 and December 31, 2023, respectively. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. In addition to real estate, these loans may also be secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment. Consumer Consumer lending provides financing for personal, family, or household purposes on a nationwide basis. Most of these loans are originated through our POS platform and come from a variety of sources, including other approved merchant or dealer relationships and lending platforms. As of December 31, 2024 and December 31, 2023, we had total consumer loans of $22.2 million and $11.4 million, respectively, representing 4.8% and 3.1% of our total loans held-for-investment, respectively. We use a debt-to-income (“DTI”) ratio to determine whether an applicant will be able to service the debt. The DTI ratio compares the applicant’s anticipated monthly expenses and total monthly obligations to the applicant’s monthly gross income. Our policy is to limit the DTI ratio to 45% after calculating interest payments related to the new loan. Loan officers, at their discretion, may make exceptions to this ratio if the loan is within their authorized lending limit. DTI ratios of no more than 50% may be approved subject to an increase in interest rate. Strong offsetting factors such as higher discretionary income or large down payments are used to justify exceptions to these guidelines. All exceptions are documented and reported. While the loans are generally for the purchase of goods which may afford us a purchase money security interest, they are underwritten as if they were unsecured. On larger loans, we may file a Uniform Commercial Code financing form. Historically, we have retained these loans on our balance sheet for investment. Loan Maturity As of December 31, 2024, $279.8 million, or 60.1%, of the total held-for-investment loan balance matures in less than five years. Loans maturing in greater than five years totaled $185.4 million as of December 31, 2024. The variable rate portion of our total held-for-investment loan portfolio at December 31, 2024 was $329.7 million or 70.9%. The variable rate portion of the total held-for-investment loans reflects our strategy of limiting interest rate risk through the use of variable rate products. 59 Table of Contents The following table details the contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and variable rates in each maturity range as of December 31, 2024: [[GREPCENT_TABLE]] [["As of December 31, 2024","Remaining Contractual Maturity Held-for-Investment"],["($ in thousands)","One Year or Less","","After One Year and Through Five Years","","After Five Years and Through Fifteen Years","","After Fifteen Years","","Total"],["Fixed rate loans:"],["SBA","$","529","","","$","1,236","","","$","2,367","","","$","1,354","","","$","5,486"],["Commercial leases","18,744","","","48,984","","","2,425","","","\u2014","","","70,153"],["Commercial, non-real estate","772","","","2,332","","","587","","","\u2014","","","3,691"],["Residential real estate","7,079","","","3,031","","","39","","","\u2014","","","10,149"],["Strategic Program loans","15,041","","","4,605","","","444","","","\u2014","","","20,090"],["Commercial real estate"],["Owner occupied","1,883","","","494","","","\u2014","","","\u2014","","","2,377"],["Non-owner occupied","133","","","426","","","764","","","56","","","1,379"],["Consumer","5,925","","","15,102","","","1,185","","","\u2014","","","22,212"],["Subtotal fixed rate loans","50,106","","","76,210","","","7,811","","","1,410","","","135,537"],["Variable rate loans:"],["SBA","19,435","","","76,944","","","106,457","","","46,734","","","249,570"],["Commercial leases","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Commercial, non-real estate","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Residential real estate","38,140","","","1,830","","","1,455","","","\u2014","","","41,425"],["Strategic Program loans","2","","","10","","","20","","","\u2014","","","32"],["Commercial real estate"],["Owner occupied","3,587","","","13,557","","","17,741","","","3,784","","","38,669"],["Non-owner occupied","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Consumer","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Subtotal variable rate loans","61,164","","","92,341","","","125,673","","","50,518","","","329,696"],["Total","$","111,270","","","$","168,551","","","$","133,484","","","$","51,928","","","$","465,233"]] [[/GREPCENT_TABLE]] Nonperforming Assets Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were contractually due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by regulatory provisions. Loans may be placed on nonaccrual status regardless of whether such loans are actually past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also generally place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. When interest accrual is discontinued, all unpaid accrued interest is reversed from income. Interest income is subsequently recognized only to the extent recoveries received (either from payments received from the customer, derived from the disposition of collateral or from legal action, such as judgment enforcement) exceed liquidation expenses incurred and outstanding principal. A nonaccrual asset may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and we expect repayment of the remaining contractual principal and interest, or (2) when asset otherwise becomes well secured and is not in the process of collection. 60 Table of Contents Any loan which we deem to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss. In general, commercial loans that are past due for 90 days or more are charged off unless the loan is both well secured and in the process of collection. Consumer loans and credit card balances are charged off at 120 days and 180 days, respectively. We believe our disciplined lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our loan officers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions. We had a total of $36.5 million in nonperforming assets, which included $0.8 million in material loan modifications at December 31, 2024. The amount of nonperforming assets as of December 31, 2024 includes $19.2 million of SBA 7(a) loan balances that are guaranteed by the SBA. We had $27.1 million in nonperforming assets, which included $0.5 million in material loan modifications at December 31, 2023. The amount of nonperforming assets as of December 31, 2023 includes $15.0 million of SBA 7(a) loan balances that are guaranteed by the SBA. The increase in nonperforming assets and material loan modifications from the prior period was primarily attributable to multiple loans in the SBA 7(a) loan portfolio moving to nonperforming status. Due to elevated interest rates, the slowdown of consumer spending and the variable rate nature of our SBA portfolio, the risk of default is elevated and may result in additional delinquencies in future periods. Our Strategic Program service providers also provide for loan modifications to borrowers. As of December 31, 2024 and 2023, the balance of outstanding modified loans to individuals in the Strategic Program retained portfolio was approximately $4.4 million and $4.5 million, respectively. Credit Risk Profile We believe that we underwrite loans carefully and thoroughly, limiting our lending activities to those products and services where we have the resources and expertise to lend profitably without undue credit risk. We require all loans to conform to policy (or otherwise be identified as exceptions to policy and monitored and reported on, at minimum, quarterly) and be granted on a sound basis. Loans are made with a primary emphasis on loan profitability, credit risk and concentration exposures. We are proactive in our approach to identifying and resolving problem loans and are focused on working with the borrowers and guarantors of problem loans to provide loan modifications when warranted. When considering how to best diversify our loan portfolio, we consider several factors including our aggregate and product-line specific concentration risks, our business line expertise, and the ability of our infrastructure to appropriately support the product. While certain product lines generate higher net charge-offs, our exposure is carefully monitored and mitigated by our concentration policies and reserved for by the loan loss allowance we maintain. Specifically, retention of certain Strategic Program loans with higher default rates accounts for a disproportionate amount of our charge-offs. In addition to our oversight of the credit policies and processes associated with these programs, we limit within our concentration policies the aggregate exposure of these loans as a percentage of the total loan portfolio, carefully monitor certain vintage loss-indicative factors such as first payment default and marketing channels, and appropriately provision for these balances so that the cumulative charge-off rates remain consistent with management expectations. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, the relative size and composition of the loan portfolio, and our management’s degree of success in resolving problem assets, we believe our proactive stance to early identification and intervention is the key to successfully managing our loan portfolio. Accurate and timely loan risk grading is considered a critical component of an effective credit risk management system. Loan grades take into consideration the borrower’s financial condition, industry trends, and the economic environment. Loan risk grades are changed as necessary to reflect the risk inherent in the loan. Among other things, we use loan risk grading information for loan pricing, risk and collection management and determining credit loss reserve adequacy. Further, on a quarterly basis, the Loan Committee holds a Loan Risk Grade meeting, wherein all loans in our portfolio are reviewed for accurate risk grading. Any changes are made after the Loan Risk Grade meeting to provide for accurate reporting. Reporting is achieved in Loan Committee minutes, which minutes are reviewed by the Board. We supplement credit department supervision of the loan underwriting, approval, closing, servicing and risk grading process with periodic loan reviews by risk department personnel specific to the testing of controls. We use a grading system to rank the quality of each loan. The grade is periodically evaluated and adjusted as performance dictates. Internal loan grades are based on current financial information, historical payment experience, and credit 61 Table of Contents documentation, among other factors. The following guidelines govern the assignment of these risk grades. We do not currently grade Strategic Program loans held for investment due to their small balances and homogenous nature. As credit quality for Strategic Program loans have been highly correlated with delinquency levels, the Strategic Program loans are evaluated collectively for impairment. 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. New loans pursuant to the SBA 7(a) program are classified as watch loans until they have a demonstrated period of satisfactory performance, typically 18 months. 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, we believe 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 we 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 certain Strategic Program and consumer loans, we do not evaluate and risk rate the loans in the same manner as other loans in our portfolio. The Not Rated loans are typically homogenous, smaller dollar balances approved using abridged underwriting methods that allow us to streamline the loan approval process and increase efficiency. Credit quality for Strategic Program loans has been highly correlated with delinquency levels. See Note 3 - Loans to the consolidated financial statements included in Part II, Item 8 for more information on the credit quality of our loans held-for-investment (“LHFI”) portfolio. Allowance for Credit Losses We adopted Financial Accounting Standards Board Accounting Standards Update No. 2016–13, Financial Instruments – Credit Losses (Topic 326), commonly referred to as the “CECL model,” on January 1, 2023. 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. Our judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and as situations and information change. We evaluate the ACL on at least a quarterly basis and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions and trends that may affect the borrower’s ability to repay. The quality of the loan portfolio and the adequacy of the ACL is reviewed by regulatory examinations and our auditors. Credit losses are charged against the ACL when we believe that the collectability of the principal loan balance is unlikely. Subsequent recoveries, if any, are credited to the ACL when received. The amortized cost basis of loans does not include accrued interest receivable, which is included in accrued interest receivable on the Consolidated Balance Sheets. 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. 62 Table of Contents The following tables present a summary of changes in the ACL for the periods indicated: [[GREPCENT_TABLE]] [["","Year Ended December 31,"],["($ in thousands)","2024","","2023"],["ACL:"],["Beginning balance","$","12,888","","","$","11,985"],["Impact of ASU 2016-13 adoption(1)","\u2014","","","257"],["Adjusted beginning balance","12,888","","","12,242"],["Provision for loan losses","11,248","","","11,525"],["Charge-offs"],["Construction and land development","\u2014","","","\u2014"],["Residential real estate","(297)","","","(225)"],["Residential real estate multifamily","\u2014","","","\u2014"],["Commercial real estate"],["Owner occupied","(1,039)","","","(714)"],["Non-owner occupied","(221)","","","\u2014"],["Commercial and industrial","(889)","","","(472)"],["Consumer","(134)","","","(68)"],["Commercial leases","(293)","","","\u2014"],["Strategic Program loans","(9,796)","","","(10,946)"],["Recoveries"],["Construction and land development","\u2014","","","\u2014"],["Residential real estate","65","","","90"],["Residential real estate multifamily","\u2014","","","\u2014"],["Commercial real estate"],["Owner occupied","334","","","1"],["Non-owner occupied","\u2014","","","378"],["Commercial and industrial","17","","","21"],["Consumer","6","","","2"],["Commercial leases","92","","","\u2014"],["Strategic Program loans","1,195","","","1,054"],["Ending balance","$","13,176","","","$","12,888"]] [[/GREPCENT_TABLE]] (1) ASU 2016-13 (CECL) was adopted January 1, 2023. The following tables show the allocation of the ACL as of December 31, 2024, and 2023. The ACL related to Strategic Programs constitutes 47.8% and 54.8% of the total ACL while comprising 4.3% and 5.2%, respectively, of total loans held-for-investment as of December 31, 2024 and 2023, respectively. The percentage of ACL related to Strategic Program loans retained reflects the increased credit risks associated with certain retained Strategic Program loans. 63 Table of Contents [[GREPCENT_TABLE]] [["","December 31, 2024"],["($ in thousands)","Amount","","% ofTotalAllowance"],["Construction and land development","$","374","","","2.8","%"],["Residential real estate","788","","","6.0","%"],["Residential real estate multifamily","38","","","0.3","%"],["Commercial real estate"],["Owner occupied","2,834","","","21.5","%"],["Non-owner occupied","113","","","0.9","%"],["Commercial and industrial","700","","","5.3","%"],["Consumer","638","","","4.8","%"],["Commercial leases","1,387","","","10.5","%"],["Strategic Program loans","6,304","","","47.8","%"],["Total","$","13,176","","","100.0","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","December 31, 2023"],["($ in thousands)","Amount","","% of Total Allowance"],["Construction and land development","$","316","","","2.5","%"],["Residential real estate","956","","","7.4","%"],["Residential real estate multifamily","6","","","\u2014","%"],["Commercial real estate"],["Owner occupied","3,336","","","25.9","%"],["Non-owner occupied","282","","","2.2","%"],["Commercial and industrial","361","","","2.8","%"],["Consumer","211","","","1.6","%"],["Commercial leases","355","","","2.8","%"],["Strategic Program loans","7,065","","","54.8","%"],["Total","$","12,888","","","100.0","%"]] [[/GREPCENT_TABLE]] The following table reflects the ratios of the ACL to total LHFI, nonaccrual loans to total loans held-for-investment, and the ACL to nonaccrual loans by CECL loan category as of December 31, 2024. [[GREPCENT_TABLE]] [["","ACL to Total LHFI","","Nonaccrual loans to Total LHFI","","ACL to Nonaccrual loans"],["Construction and land development","0.9","%","","\u2014","%","","\u2014","%"],["Residential real estate","1.3","%","","11.8","%","","10.9","%"],["Residential real estate multifamily","2.3","%","","\u2014","%","","\u2014","%"],["Commercial real estate"],["Owner occupied","1.5","%","","12.4","%","","12.0","%"],["Non-owner occupied","0.9","%","","21.8","%","","4.1","%"],["Commercial and industrial","1.6","%","","4.0","%","","39.2","%"],["Consumer","2.9","%","","\u2014","%","","\u2014","%"],["Commercial leases","2.0","%","","0.5","%","","385.4","%"],["Strategic Program loans","31.3","%","","\u2014","%","","\u2014","%"],["Total","2.8","%","","7.7","%","","36.9","%"]] [[/GREPCENT_TABLE]] 64 Table of Contents The following table reflects the ratios of the ACL to total LHFI, nonaccrual loans to total loans held-for-investment, and the ACL to nonaccrual loans by CECL loan category as of December 31, 2023. [[GREPCENT_TABLE]] [["($ in thousands)","ACL to Total LHFI","","Nonaccrual to Total LHFI","","ACL to Nonaccrual loans"],["Construction and land development","1.1","%","","\u2014","%","","\u2014","%"],["Residential real estate","1.9","%","","3.1","%","","60.3","%"],["Residential real estate multifamily","1.0","%","","\u2014","%","","\u2014","%"],["Commercial real estate"],["Owner occupied","1.8","%","","11.6","%","","15.4","%"],["Non-owner occupied","1.8","%","","15.4","%","","12.0","%"],["Commercial and industrial","1.7","%","","1.3","%","","128.2","%"],["Consumer","1.9","%","","\u2014","%","","\u2014","%"],["Commercial leases","0.9","%","","\u2014","%","","\u2014","%"],["Strategic Program loans","36.4","%","","\u2014","%","","\u2014","%"],["Total","3.5","%","","7.0","%","","49.8","%"]] [[/GREPCENT_TABLE]] When comparing December 31, 2024 to December 31, 2023, the decrease in ACL to total LHFI as well as the decrease in ACL to total nonaccrual loans was primarily due to the shifting of SBA loans from the collectively assessed population to the individually assessed population where the loans are assessed based on the net realizable value of the collateral. The increase in nonaccrual loans to total loans held-for-investment from December 31, 2023 to December 31, 2024 was primarily related to SBA loans that were moved to nonaccrual status during 2024. The following table summarizes net charge-offs (“NCO”), average loans and the ratio of NCO to average loans for the periods indicated: [[GREPCENT_TABLE]] [["","Years Ended"],["","December 31, 2024","","December 31, 2023"],["($ in thousands)","NetCharge-Offs (Recoveries)","","Average Loans","","NCO (Recovery) to Average Loans","","Net Charge- Offs (Recoveries)","","Average Loans","","NCO (Recovery) to Average Loans"],["Construction and land development","$","\u2014","","","$","31,558","","","\u2014","%","","$","\u2014","","","$","27,074","","","\u2014","%"],["Residential real estate","232","","","54,964","","","0.4","%","","135","","","38,211","","","0.4","%"],["Residential real estate multifamily","\u2014","","","1,219","","","\u2014","%","","\u2014","","","545","","","\u2014","%"],["Commercial real estate"],["Owner occupied","705","","","190,214","","","0.4","%","","713","","","157,489","","","0.5","%"],["Non-owner occupied","221","","","16,407","","","1.3","%","","(378)","","","11,972","","","(3.2)","%"],["Commercial and industrial","872","","","31,065","","","2.8","%","","451","","","17,638","","","2.6","%"],["Consumer","128","","","16,478","","","0.8","%","","66","","","6,558","","","1.0","%"],["Lease financing receivables","201","","","56,675","","","0.4","%","","\u2014","","","23,163","","","\u2014","%"],["Strategic Program loans","8,601","","","18,627","","","46.2","%","","9,892","","","21,134","","","46.8","%"],["Total","$","10,960","","","$","417,207","","","2.6","%","","$","10,879","","","$","303,784","","","3.6","%"]] [[/GREPCENT_TABLE]] The ratio of net charge-offs to average loans outstanding by loan category was lower during the year ended December 31, 2024 as compared to the year ended December 31, 2023, due primarily to the increase in our average loans held-for-investment balances. The decrease in the ratio for Strategic Programs loans was primarily due to a reduction in the average loan balances as well as a reduction in net charge-offs during the year ended December 31, 2024. 65 Table of Contents Total Assets Total assets at December 31, 2024 were $746.0 million, an increase of $159.8 million from December 31, 2023. The increase in total assets was due primarily to increases in loans receivable, net, of $89.3 million, Strategic Program loans held-for-sale of $44.1 million, and investment securities available-for-sale of $29.9 million. These increases were partially offset by a decrease in interest-bearing deposits in other banks of $7.8 million. These changes were consistent with our strategy to grow assets in lower risk revenue producing products. Deposits Deposits are the major source of funding for us. We offer a variety of deposit products including interest and noninterest bearing demand accounts, HSA demand deposits, money market and savings accounts and certificates of deposit, all of which we market at competitive pricing. We generate deposits from our customers on a relationship basis and through access to national institutional and brokered deposit sources. We also generate deposits in relation to our Strategic Programs in the form of reserve accounts as discussed above. These deposits add an element of flexibility in that they tend to increase or decrease in relation to the size of or Strategic Program loan portfolio. In addition to the reserve account, some Strategic Program loan originators maintain operating deposit accounts with us. The following tables present the end of period and average balances of our deposit portfolio for the periods indicated (average balances have been calculated using daily averages): [[GREPCENT_TABLE]] [["","December 31, 2024","","December 31, 2023"],["($ in thousands)","Total","","Percent","","Total","","Percent"],["Period end:"],["Noninterest-bearing demand deposits","$","126,782","","","23.3","%","","$","95,486","","","23.6","%"],["Interest-bearing deposits:"],["Demand","71,403","","","13.1","%","","50,058","","","12.4","%"],["Savings","9,287","","","1.7","%","","8,633","","","2.1","%"],["Money markets","16,709","","","3.0","%","","11,661","","","2.9","%"],["Time certificates of deposit","320,771","","","58.9","%","","238,995","","","59.0","%"],["Total period end deposits","$","544,952","","","100.0","%","","$","404,833","","","100.0","%"]] [[/GREPCENT_TABLE]] The increase in total deposits as of December 31, 2024, compared to December 31, 2023, was primarily due to an increase in brokered time deposits and noninterest bearing demand deposits utilized in the funding of our lending programs. Also, during the fourth quarter of 2024, we called $160.0 million of higher-yielding time certificates of deposit and replaced them with lower cost time certificates of deposit. As an FDIC-insured institution, our deposits are insured up to applicable limits by the DIF of the FDIC. The Dodd-Frank Act raised the limit for federal deposit insurance to $250,000 for most deposit accounts and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000. Our total estimated uninsured deposits were $183.2 million and $136.9 million as of December 31, 2024 and December 31, 2023, respectively. Estimated uninsured deposits at the Bank as of December 31, 2024 include $54.0 million of total deposits contractually required to be maintained at the Bank pursuant to our Strategic Program agreements and an additional $42.1 million of total deposits associated with accounts owned by the parent holding company or the Bank. The maturity profile of our estimated uninsured time deposits, those amounts that exceed the FDIC insurance limit, at December 31, 2024 is as follows: [[GREPCENT_TABLE]] [["","December 31, 2024"],["($ in thousands)","Three months or less","","More than three months to six months","","More than six months to twelve months","","More than twelve months","","Total"],["Time deposits, uninsured","$","\u2014","","","$","1,277","","","$","1,746","","","$","183","","","$","3,206"]] [[/GREPCENT_TABLE]] 66 Table of Contents Total Liabilities Total liabilities increased from $431.2 million at December 31, 2023 to $572.3 million at December 31, 2024 primarily due to an increase in total deposits as discussed above. Liquidity and Capital Resources Liquidity Management Liquidity management is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, the sale of loans, principal repayments and interest on loans and net profits. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, loan sales and security sales are greatly influenced by general interest rates, economic conditions, and competition. Our primary source of funds to support new loan originations are deposits. Deposits are comprised of core and non-core deposits. To attract core deposits from local and nationwide consumer and commercial markets, we have paid rates at the higher end of the market. We have been able to pay higher rates due to the higher rates earned on our loan portfolio. We utilize rate listing services and website advertising to attract deposits from consumer and commercial sources. Non-core deposits generally include brokered deposits and deposits acquired through the utilization of a listing service. We intend to have various term offerings to match our funding needs. With no current plans to expand our brick-and-mortar branch network, online and mobile banking offers a means to meet customer needs and aggregate deposits more efficiently compared to a traditional branch network. We believe that the rise of mobile and online banking provides us the opportunity to further leverage the technological competency we have demonstrated in recent years. We regularly adjust our investment in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management, funds management and liquidity policies. The objective of our liquidity policy is to control the risk to our earnings and capital arising from the inability to meet obligations in a timely manner. This entails ensuring sufficient funds are available at all times and at a reasonable cost to meet potential demands from both fund providers and borrowers. We primarily utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities. At December 31, 2024, we had the ability to access $239.2 million from the FRB’s Discount Window on a collateralized basis. The Bank had an available unsecured line of credit with two correspondent banks to borrow up to $6.1 million in overnight funds. We also maintain a $25.0 million line of credit with Federal Home Loan Bank, secured by specific pledged loans. We had no outstanding balances on any unsecured or secured lines of credit as of December 31, 2024. In long term borrowings, we had $0.1 million outstanding at December 31, 2024 related to the PPPLF. The PPPLF is secured by pledged PPP loans. Our most liquid assets are cash and cash equivalents. The levels of these assets depend on our operating, financing, lending and investing activities during any given period. At December 31, 2024, liquid assets (defined as cash and due from banks and interest-bearing deposits) totaled $109.2 million and constituted 14.6% of total assets. In addition, during the third quarter of 2024, we purchased U.S. Treasury securities, which are classified as investment securities AFS. These investment securities totaled $29.9 million at December 31, 2024 (4.0% of total assets) and can be readily sold. We believe that our liquid assets combined with the available lines of credit and our ability to generate core and non-core funding provides adequate liquidity to meet our current financial obligations for at least the next 12 months. Capital Resources We seek to maintain adequate capital to support anticipated asset growth, operating needs and unexpected risks, and to ensure that we are in compliance with all current and anticipated regulatory capital guidelines. Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of capital stock or other securities. Expected future use or activities for which capital may be set aside include balance sheet growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments. Shareholders’ equity increased $18.7 million to $173.7 million at December 31, 2024 compared to $155.1 million at December 31, 2023, primarily due to the purchase of additional equity interests in BFG in exchange for $4.1 million in FinWise Bancorp common stock and net income of $12.7 million. 67 Table of Contents We use several indicators of capital strength. The most commonly used measure is total equity to total assets, which was 23.3% and 26.5% as of December 31, 2024 and December 31, 2023, respectively. Our return on average equity was 7.7% and 11.9% for the years ended December 31, 2024 and 2023, respectively. Our return on average assets was 2.0% and 3.5% for the years ended December 31, 2024 and 2023, respectively. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our business. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated pursuant to regulatory definitions and requirements. The sufficiency of capital and the Bank’s capital classifications are also subject to qualitative judgments by the regulators about risk weightings and other factors. Under the prompt corrective action rules, an institution is deemed “well capitalized” if its Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 Capital ratio, and Total Capital ratio meet or exceed 5%, 6.5%, 8%, and 10%, respectively. On September 17, 2019, the federal banking agencies jointly issued a rule intending to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt into the Community Bank Leverage Ratio framework, as required by Section 201 of the Regulatory Relief Act. The Bank elected to opt into the Community Bank Leverage Ratio framework starting in 2020. Under these capital requirements the Bank must maintain a leverage ratio greater than 9.0% to be considered well-capitalized. As of December 31, 2024, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification we believe have changed the Bank’s category). See Note 8 - Capital Requirements to the consolidated financial statements included in Part II, Item 8 for additional information regarding our regulatory capital requirements. Stock Repurchase Program We have a stock repurchase program authorized by our Board of Directors. The stock repurchase program became effective as of March 6, 2024 and authorizes us to repurchase up to 641,832 shares of our common stock in the aggregate in open market transactions, privately negotiated transactions, or any manner that complies with the provisions of Rule 10b-18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as pursuant to a trading plan under Rule 10b5-1 under the Exchange Act. Our decision to repurchase shares will depend on a variety of factors, including but not limited to, the market price and trading volume of our common stock, general market and economic conditions, the ongoing assessment of our capital needs, and applicable legal and regulatory requirements. The repurchase program does not obligate us to purchase any particular number of shares and may be limited or terminated at any time without prior notice. The repurchase program expires on March 31, 2026. During the three months ended December 31, 2024, there were no open-market share repurchases. Since the repurchase program’s inception, we have repurchased and subsequently retired a total of 44,608 shares for $0.5 million at an average price of $10.30 per share. See Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8 for more information. Contractual Obligations We have contractual obligations to make future payments on debt and lease agreements. While our liquidity monitoring and management consider both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations and summarizes our significant contractual obligations as of December 31, 2024: [[GREPCENT_TABLE]] [["($ in thousands)","Total","","Less thanOne Year","","One to Three Years","","Three toFive Years","","MoreThan FiveYears"],["Contractual Obligations"],["Deposits without stated maturity","$","224,181","","","$","224,181","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Time deposits","320,771","","","245,180","","","29,629","","","35,294","","","10,668"],["Operating lease obligations","5,595","","","1,122","","","2,270","","","2,203","","","\u2014"],["Total","$","550,547","","","$","470,483","","","$","31,899","","","$","37,497","","","$","10,668"]] [[/GREPCENT_TABLE]] 68 Table of Contents Off-Balance Sheet Financing Arrangements In the normal course of business, we enter into certain off-balance sheet arrangements to meet the financing needs of our customers. These transactions include commitments to extend credit, which involves, to varying degrees, elements of credit risk and interest rate risk exceeding the amounts recognized in our consolidated statements of financial condition. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and procedures are used in making these commitments as for on-balance sheet instruments. With the exception of these off-balance sheet arrangements, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. For details of our commitments to extend credit please see Note 9 - Commitments and Contingencies to the consolidated financial statements included in Part II, Item 8.. Reconciliations of Non-GAAP Financial Measures We believe that both management and investors benefit from certain non-GAAP financial measures in assessing our performance and when planning, forecasting, and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparisons to our historical performance. We believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business. Accordingly, we believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team. Our calculation of these non-GAAP financial measures may differ from similarly-titled non-GAAP measures, if any, reported by our peers. These non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with U.S. GAAP. FinWise has entered into agreements with certain of its Strategic Program service providers pursuant to which the service providers provide credit enhancement on loans which protects the Bank by indemnifying or reimbursing the Bank for incurred credit and fraud losses. We estimate and record a provision for expected losses for these Strategic Program loans in accordance with U.S. GAAP, which requires estimation of the provision without consideration of the credit enhancement. When the provision for expected losses over the life of the loans that are subject to such credit enhancement is recorded, a credit enhancement asset reflecting the potential future recovery of those losses is also recorded on the balance sheet in the form of non-interest income (credit enhancement income). Reimbursement or indemnification for incurred losses is provided for in the form of a deposit reserve account that is replenished periodically by the respective Strategic Program service provider. Any remaining income on such loans in excess of the amounts retained by FinWise and placed in the deposit reserve account are paid to the Strategic Program service provider. Income on such loans in excess of amounts retained by FinWise are expensed for services provided by the Strategic Program service provider including its legal commitment to indemnify or reimburse all credit or fraud losses pursuant to credit enhancement agreements. The credit enhancement asset is reduced as credit enhancement payments and recoveries are received from the Strategic Program service provider or taken from its cash reserve account. If the Strategic Program service provider is unable to fulfill its contracted obligations under its credit enhancement agreement, then the Bank could be exposed to the loss of the reimbursement and credit enhancement income as a result of this counterparty risk. See the following reconciliations of non-GAAP measures for the impact of the credit enhancement on our financial condition and results. The following non-GAAP measures are presented to illustrate the impact of certain credit enhancement expenses on total interest income on loans HFI and average yield on loans HFI: [[GREPCENT_TABLE]] [["","","","As of and for the Year Ended"],["","","","12/31/2024"],["($ in thousands; unaudited)","","","","","","","Total Average Loans HFI","","Total Interest Income on Loans HFI","","Average Yield on Loans HFI"],["Before adjustment for credit enhancement","","","","","","","$","417,207","","","$","51,194","","","12.27","%"],["Less: credit enhancement expense","","","","","","","","","(8)"],["Net of adjustment for credit enhancement expenses","","","","","","","$","417,207","","","$","51,186","","","12.27","%"]] [[/GREPCENT_TABLE]] Total interest income on loans HFI net of credit enhancement expense and the average yield on loans HFI are non-GAAP measures that include the impact of credit enhancement expense on total interest income on loans HFI and the respective average yield on loans HFI, the most directly comparable GAAP measures. 69 Table of Contents The following non-GAAP measures are presented to illustrate the impact of certain credit enhancement expenses on net interest income and NIM: [[GREPCENT_TABLE]] [["","","","As of and for the Year Ended"],["","","","12/31/2024"],["($ in thousands; unaudited)","","","","","","","Total Average Interest-Earning Assets","","Net Interest Income","","Net Interest Margin"],["Before adjustment for credit enhancement","","","","","","","$","589,880","","","$","58,912","","","9.99","%"],["Less: credit enhancement expense","","","","","","","","","(8)"],["Net of adjustment for credit enhancement expenses","","","","","","","$","589,880","","","$","58,904","","","9.99","%"]] [[/GREPCENT_TABLE]] Net interest income and net interest margin net of credit enhancement expense are non-GAAP measures that include the impact of credit enhancement expenses on net interest income and net interest margin, the most directly comparable GAAP measures. Non-interest expenses less credit enhancement expenses is a non-GAAP measure presented to illustrate the impact of credit enhancement expense on non-interest expense: [[GREPCENT_TABLE]] [["($ in thousands; unaudited)","","","Year Ended December 31, 2024"],["Total non-interest expense","","","$","52,835"],["Less: credit enhancement expense","","","(8)"],["Total non-interest expense less credit enhancement expenses","","","$","52,827"]] [[/GREPCENT_TABLE]] Total non-interest expense less credit enhancement expense is a non-GAAP measure that illustrates the impact of credit enhancement expenses on non-interest expense, the most directly comparable GAAP measure. Total non-interest income less credit enhancement income is a non-GAAP measure to illustrate the impact of credit enhancement income resulting from credit enhanced loans on non-interest income: [[GREPCENT_TABLE]] [["($ in thousands; unaudited)","","","Year Ended December 31, 2024"],["Total non-interest income","","","$","22,485"],["Less: credit enhancement income","","","(111)"],["Total non-interest income less credit enhancement income","","","$","22,374"]] [[/GREPCENT_TABLE]] Total non-interest income less indemnification income is a non-GAAP measure that illustrates the impact of credit enhancement income on non-interest income. The most directly comparable GAAP measure is non-interest income. The following non-GAAP measure is presented to illustrate the effect of the credit enhancement program that creates the credit enhancement on the allowance for credit losses: [[GREPCENT_TABLE]] [["($ in thousands; unaudited)","","As of December 31, 2024"],["Allowance for credit losses","","$","(13,176)"],["Less: allowance for credit losses related to credit enhanced loans","","(111)"],["Allowance for credit losses excluding the effect of the allowance for credit losses related to credit enhanced loans","","$","(13,065)"]] [[/GREPCENT_TABLE]] The allowance for credit losses excluding the effect of the allowance for credit losses related to credit enhanced loans is a non-GAAP measure that reflects the effect of the credit enhancement program on the allowance for credit losses. The total outstanding balance of loans held-for-investment with credit enhancement as of December 31, 2024 was approximately $0.9 million. 70 Table of Contents