# Finwise Bancorp (FINW) FY 2023 MD&A Verbatim Item 7 Management's Discussion and Analysis from Finwise Bancorp's 10-K for fiscal year 2023. SEC filing source: https://www.sec.gov/Archives/edgar/data/1856365/000185636524000013/finw-20231231.htm Accession: 0001856365-24-000013 Filing date: 2024-03-25 Report date: 2023-12-31 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/FINW/ All MD&A years: /company/FINW/mda/ Previous year: /company/FINW/mda/fy2022/ (FY 2022) Next year: /company/FINW/mda/fy2024/ (FY 2024) 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 and other sources of funds, is also critical to our banking business. While our commercial and residential real estate lending and other products and services offered from our branch continue to be concentrated in and around the Salt Lake City, Utah MSA, our third-party loan origination relationships have allowed us to expand into new markets across the United States. These relationships were developed to support our ability to generate significant loan volume across diverse consumer and commercial markets and have been the primary source of our significant growth and superior profitability. Our track record has demonstrated that these factors help deliver superior 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, demand deposits sourced through Lively, Inc., institutional deposit exchanges, and brokered deposit arrangements. Our financial condition and results of operations depend primarily on our ability to (i) originate loans using our strategic relationships with third-party loan origination platforms to earn interest and noninterest income, (ii) 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 Policies and Estimates The preparation of our consolidated financial statements in accordance with GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues and 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 elsewhere in this Report, 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 47 Index new or revised accounting standards generally applicable to public companies for the transition period for so long as we remain an emerging growth company or until we affirmatively and irrevocably opt out of the extended transition period under the JOBS Act. The following is a discussion of the critical accounting policies and significant estimates that we believe require us to make the most complex or subjective decisions or assessments. 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 ACL on loans held for investment is the combination of the allowance for credit losses and the reserve for unfunded loan commitments. The allowance for credit losses is reported as a reduction of the amortized cost basis of loans, while the reserve for unfunded loan commitments is included within "other liabilities" on the Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates. 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 commercial real estate, residential real estate, commercial and industrial, commercial leases and consumer loans, the Bank pools similar loans that are collectively evaluated and determines an appropriate level of general allowance by portfolio segment using a non-discounted cash flow model taking into account probability of default, loss in the event of default, and prepayment speed estimates based on industry specific collected data. The model captures losses over the historical charge-off and prepayment cycle and applies those losses at a loan level over the remaining maturity of the loan. The model then calculates a historical loss rate using the average losses over the reporting period, which is then applied to each segment utilizing a standard reversion rate. With respect to the Bank's active retained Strategic Program loan portfolio, the Bank is using a methodology that compares the actual loan performance of a vintage to the worst performing loans within that vintage, known as the high-water mark. The Bank records the expected credit losses based on the high-water mark loss rate. With respect to the Bank's inactive retained Strategic Program loan portfolio, performance data at the summary level provided by the Strategic Programs is banded by credit profile and original loan term and compared to actual loan performance on a quarterly basis. The expected loss rate is supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, including but not limited to national unemployment rate forecasts. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the ACL are qualitative factors based on the risks present for each portfolio segment. These qualitative factors include the following that are derived from the Interagency Policy Statement on Allowance for Credit Losses: changes in lending policies and procedures; changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio; changes in the nature and volume of the loan portfolio and in the terms of loans; changes in the experience, ability, and depth of lending management and staff; changes in the volume and severity of past due loans, nonaccrual loans, and classified or graded loans; changes in the quality of the Bank's loan review system; changes in the value of underlying collateral for loans that are not collateral-dependent; changes in the level of concentration of credit; changes in the effect of competition, legal, and regulatory requirements on the level of estimated credit losses; and, if applicable, changes in the composition and volume of the loan portfolio due to mergers, acquisitions, and other significant transactions not considered elsewhere. The Bank also considers as an additional qualitative factor any lingering "ripple" effects of the Covid-19 pandemic, including lasting changes to consumer behavior, lending, and society at large. It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are susceptible to change, which may be significant. When management identifies loans that do not share common risk characteristics (i.e., are not similar to other loans within a pool) they are evaluated on an individual basis. These loans are not included in the collective evaluation. For loans identified as having a likelihood of foreclosure or that the borrower is experiencing financial difficulty, a collateral dependent approach is used. These are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. Under CECL, for collateral dependent loans, the Company has adopted the practical expedient method to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is 48 Index 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 loan. 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 49 Index could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank. Residential Real Estate Multifamily. Risks common to multifamily loans are poor management, high vacancy rates and regulatory changes. The value of multi-family properties can be impacted by changes in the local real estate market. If property values decline, the Bank may not be able to recover the full amount of the loan if the property needs to be foreclosed. Strategic Program Loans. 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 loan consistent with the accounting for impaired loans. A loan is relieved of its nonaccrual status when all principal and interest payments are brought current, the loan is well secured, and an analysis of the borrower’s financial condition provides reasonable assurance that the borrower can repay the loan as scheduled. A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts due in accordance with the contractual terms of the loan agreement, including scheduled interest payments. Impaired loans, identified by classified loan grades (also know as risk rating), are removed from the collectively assessed population and added 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. Stock-based Compensation. Our historical and outstanding stock-based compensation awards are described in Note 10 in our annual consolidated financial statements included elsewhere in this Report. We record stock-based compensation in accordance with ASC 718, Compensation — Stock Compensation (“ASC 718”) and recognize stock-based compensation expense in the period in which an employee or non-employee is required to provide service, which is generally over the vesting period of the individual stock-based payment award. Compensation expense for awards is recognized over the requisite service period on a straight-line basis and we account for forfeitures as they occur. We classify our awards as equity awards and these awards are valued as of the grant date based upon the underlying stock price and a number of assumptions, including volatility, performance period, risk-free interest rate and expected dividends. 50 Index The determination of the grant date fair value using an option pricing model is affected principally by our estimated fair value of our common stock and requires us to make a number of other assumptions, including the expected term of the award, the expected volatility of the underlying shares, the risk-free interest rate and the expected dividend yield. The assumptions used in our Black-Scholes option-pricing model represent management’s best estimates at the time of measurement. These estimates are complex, involve a number of variables, uncertainties and assumptions and the application of management’s judgment, as they are inherently subjective. We will continue to use judgment in evaluating the expected volatility, expected terms and interest rates utilized for our stock-based compensation expense calculations on a prospective basis. If any assumptions change, our stock-based compensation expense could be materially different in the future. These assumptions are estimated as follows: •Expected Term. The expected term represents the period that our awards are expected to be outstanding. We calculated the expected term using a permitted simplified method, which is based on the vesting period and contractual term for each tranche of awards. •Expected Volatility. Prior to our initial public offering, the expected volatility was based on the historical share volatility of several comparable publicly traded companies over a period of time equal to the expected term of the awards, as we did not have any trading history to use the volatility of our own common shares. After the completion of our initial public offering, it is no longer necessary to utilize the volatility of comparable publicly traded companies as we now have historical trading volatility data on our own common shares. •Risk-Free Interest Rate. The risk-free rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life. •Expected Dividend Yield. We have not paid dividends on our common shares nor do we expect to pay dividends in the foreseeable future. Therefore, we used an expected dividend yield of zero. For the years ended December 31, 2023 and 2022, stock-based compensation expense was $2.0 million and $0.8 million, respectively. As of December 31, 2023, we had $1.4 million of total unrecognized stock-based compensation costs, which we expect to recognize over an estimated weighted-average period of 1.5 years. We expect to continue to grant options and other stock-based awards in the future, and to the extent that we do, our stock-based compensation expense recognized in future periods will likely increase. Income Taxes. We account for income taxes under the asset and liability method. Under this method, deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and tax bases of assets and liabilities using enacted tax rates expected to be in effect for the year in which the differences are expected to reverse. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts more likely than not to be realized. Realization of the future tax benefits is dependent on our ability to generate sufficient taxable income within the carryforward period. We assess all material positions taken in any income tax return, including all significant uncertain positions, in all tax years that are still subject to assessment or challenge by relevant taxing authorities. Assessing an uncertain tax position begins with the initial determination of the position’s sustainability and is measured at the largest amount of benefit that is more likely than not of being realized upon ultimate settlement. As of each balance sheet date, unresolved uncertain tax positions must be reassessed, and we will determine whether (i) the factors underlying the sustainability assertion have changed and (ii) the amount of the recognized tax benefit is still appropriate. The recognition and measurement of tax benefits requires significant judgment. Judgments concerning the recognition and measurement of a tax benefit might change as new information becomes available. Our unrecognized tax benefits, if recognized, would not have an impact on our effective tax rate assuming we continue to maintain a full valuation allowance position. We do not expect our unrecognized tax benefits to change significantly over the next 12 months. Our policy is to recognize interest and penalties related to the underpayment of income taxes as a component of income tax expense or benefit. During the years ended December 31, 2023 and 2022, the Company recognized $0.3 million and de minimis interest and penalties, respectively. Executive Summary Net income for the year ended December 31, 2023 decreased $7.7 million to $17.5 million when compared to the year ended December 31, 2022 due primarily to a $11.9 million reduction in gain on sale of loans primarily attributable to the Company's increased retention of the guaranteed portion of SBA loans the Company originates to increase the interest income the Company receives from such loans, a $6.6 million reduction in strategic program fees resulting primarily from 51 Index a decline in loan origination volumes, and an increase in non-interest expense of $1.4 million. Partially offsetting these declines were a $4.6 million reduction in the provision for income taxes, a $3.7 million increase in net interest income, a $1.9 million reduction in the provision for credit losses, and a $2.3 million increase in other miscellaneous income. The net interest margin was 11.65% for the year ended December 31, 2023, compared to 14.04% for the year ended December 31, 2022. The decline in net interest margin was due primarily to a $26.6 million decrease in the average balances of loans held for sale along with a shift in the Company's deposit portfolio mix from lower costing deposits to higher costing deposits, partially offset by an increase in average yield and balances in the Company's interest bearing deposits. Total assets increased by $185.4 million to $586.2 million as of December 31, 2023 compared to December 31, 2022. This increase was primarily attributable to increased brokered deposits utilized to fund a $134.3 million increase in net loans receivable, a $23.9 million increase in Strategic Program loans held-for-sale, and a $16.4 million increase in the Company's interest-bearing deposits. Originations decreased by $3.0 billion to $4.3 billion for the year ended December 31, 2023 compared to the year ended December 31, 2022 due mainly to adverse market and economic conditions affecting loan purchasers and borrowers. Results of Operations Net Income The following table sets forth the principal components of net income for the periods indicated. [[GREPCENT_TABLE]] [["","For the Years Ended December 31,"],["($ in thousands)","2023","","2022"],["Interest income","$","64,534","","","$","52,329"],["Interest expense","(9,975)","","","(1,434)"],["Provision for loan losses","(11,638)","","","(13,519)"],["Non-interest income","21,080","","","37,411"],["Non-interest expense","(40,188)","","","(38,756)"],["Provision for income taxes","(6,353)","","","(10,916)"],["Net income","$","17,460","","","$","25,115"]] [[/GREPCENT_TABLE]] Net income for the year ended December 31, 2023 was $17.5 million, a decrease of $7.7 million, or 30.5%, from net income of $25.1 million for the year ended December 31, 2022. The decrease was primarily attributable to an $11.9 million, or 87.6%, reduction in the gain on sale of loans primarily attributable to the Company's increased retention of the guaranteed portion of SBA loans the Company originates to increase the interest income the Company receives from such loans, lower strategic program fees of $6.6 million, or 29.2%, resulting primarily from a decline in loan origination volume, and an increase of $8.5 million, or 595.5%, in interest expense primarily associated with a shift in our deposit portfolio mix from lower costing deposits to higher costing deposits. Partially offsetting the decrease in net income were an increase in total interest income of $12.2 million, or 23.3%, a reduction in provision for income taxes of $4.6 million, or 41.8%, a decrease of $1.9 million, or 13.9%, in provision for credit losses, and an increase of $2.3 million, or 871.3%, in other miscellaneous income due primarily to an increase of $1.1 million in rental income earned on the Company's operating lease portfolio and a $0.6 million gain on the resolution of a forbearance agreement in the Company's SBA lending program. Net Interest Income and Net Interest Margin Analysis Net interest income was the primary contributor to our earnings in 2023 and 2022. 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.” 52 Index For the year ended December 31, 2023, our net interest income increased $3.7 million, or 7.2%, to $54.6 million compared to the year ended December 31, 2022. This increase was primarily due to increases in the yields on all interest earning asset categories and was partially offset by decreases in the loans held-for-sale volume as well as increased rates on our certificate of deposit portfolio. Average interest earning assets increased by $106.0 million, or 29.2%, to $468.5 million for the year ended December 31, 2023 compared to the year ended December 31, 2022, while the related yield on average interest earning assets decreased by 66 basis points to 13.78%. The cost of funds on interest bearing liabilities for the year ended December 31, 2023 increased by 306 basis points to 4.22%, and the average balance in interest bearing liabilities increased by $113.3 million, or 92.0%, to $236.5 million compared to the prior year period. The increase in cost of funds was primarily due to rate increases in time deposits as well as volume growth in our interest bearing demand accounts. Our net interest margin decreased to 11.65% for the year ended December 31, 2023 from 14.04% for the year ended December 31, 2022. Average Balances and Yields. The following table presents average balances for assets and liabilities, the total dollar amounts of interest income from average interest-earning assets, the total dollar amounts of interest expense on average interest-bearing liabilities, and the resulting average yields and costs. The yields and costs for the periods indicated are derived by dividing the income or expense by the average balances for assets or liabilities, respectively, for the periods presented. Loan fees are included in interest income on loans and represent net fees of approximately $1.0 million and 53 Index $0.1 million for the year ended December 31, 2023 and 2022, respectively. Average balances have been calculated using daily averages. [[GREPCENT_TABLE]] [["","Years Ended December 31,"],["","2023","","2022"],["($ in thousands)","Average Balance","","Interest","","Average Yield/Rate","","Average Balance","","Interest","","Average Yield/Rate"],["Interest earning assets:"],["Interest-bearing deposits with the Federal Reserve, non"],["U.S. central banks and other banks","$","110,866","","","$","5,751","","","5.19","%","","$","74,920","","","$","1,180","","","1.58","%"],["Investment securities","14,731","","","338","","","2.30","%","","12,491","","","208","","","1.67","%"],["Loans held for sale","39,090","","","15,051","","","38.50","%","","65,737","","","21,237","","","32.31","%"],["Loans held for investment","303,784","","","43,394","","","14.28","%","","209,352","","","29,704","","","14.19","%"],["Total interest earning assets","468,472","","","64,534","","","13.78","%","","362,500","","","52,329","","","14.44","%"],["Non-interest earning assets","25,269","","","","","","","19,325"],["Total assets","$","493,740","","","","","","","$","381,825"],["Interest bearing liabilities:"],["Demand","$","45,454","","","$","1,856","","","4.08","%","","$","17,564","","","$","531","","","3.02","%"],["Savings","8,207","","","51","","","0.62","%","","7,310","","","7","","","0.10","%"],["Money market accounts","13,665","","","362","","","2.65","%","","26,054","","","116","","","0.45","%"],["Certificates of deposit","168,887","","","7,705","","","4.56","%","","71,661","","","778","","","1.09","%"],["Total deposits","236,213","","","9,974","","","4.22","%","","122,589","","","1,432","","","1.17","%"],["Other borrowings","251","","","1","","","0.35","%","","566","","","2","","","0.35","%"],["Total interest bearing liabilities","236,464","","","9,975","","","4.22","%","","123,155","","","1,434","","","1.16","%"],["Non-interest bearing deposits","93,126","","","","","","","114,174"],["Non-interest bearing liabilities","17,250","","","","","","","15,781"],["Shareholders\u2019 equity","146,901","","","","","","","128,715"],["Total liabilities and shareholders\u2019 equity","$","493,740","","","","","","","$","381,825"],["Net interest income and interest rate spread","","","$","54,559","","","9.56","%","","","","$","50,895","","","13.28","%"],["Net interest margin","","","","","11.65","%","","","","","","14.04","%"],["Ratio of average interest-earning assets to average interest- bearing liabilities","","","","","198.12","%","","","","","","294.34","%"]] [[/GREPCENT_TABLE]] Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income. The rate column shows the effects attributable to changes in rate. The volume column shows the effects attributable to 54 Index changes in volume. For purposes of this table, changes attributable to changes in both rate and 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,"],["","2023","","2022"],["","Increase (Decrease) Due to","","Increase (Decrease) Due to"],["($ 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","$","3,777","","","$","794","","","$","4,571","","","$","1,092","","","$","27","","","$","1,119"],["Investment securities","88","","","42","","","130","","","9","","","152","","","161"],["Loans held-for-sale","5,549","","","(11,735)","","","(6,186)","","","(4,460)","","","3,236","","","(1,224)"],["Loans held for investment","199","","","13,491","","","13,690","","","1,603","","","1,427","","","3,030"],["Total interest income","9,613","","","2,592","","","12,205","","","(1,756)","","","4,842","","","3,086"],["Interest expense:"],["Demand","241","","","1,085","","","1,326","","","270","","","208","","","478"],["Savings","43","","","1","","","44","","","(2)","","","(1)","","","(3)"],["Money market accounts","273","","","(27)","","","246","","","25","","","16","","","41"],["Certificates of deposit","4,858","","","2,069","","","6,927","","","(213)","","","(9)","","","(222)"],["Other borrowings","\u2014","","","(1)","","","(1)","","","\u2014","","","(125)","","","(125)"],["Total interest bearing liabilities","5,414","","","3,127","","","8,542","","","80","","","89","","","169"],["Net interest income","$","4,199","","","$","(536)","","","$","3,664","","","$","(1,836)","","","$","4,753","","","$","2,917"]] [[/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 ("ALL"), 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 allowance for credit losses ("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 Recently adopted accounting pronouncements - Allowance for Credit Losses presented in Note 1 - "Summary of Significant Accounting Policies" in Part I, Item 1 of this Report. Our provision for credit losses was $11.6 million and $13.5 million for the years ended December 31, 2023 and 2022, respectively. The decrease of $1.9 million for the year ended December 31, 2023 compared to the prior year was primarily due to an increase in the proportion of loan balances that are guaranteed by the SBA in our loans held for investment portfolio. Although the held for investment loan portfolio balances grew by $135.6 million, the majority of that growth was in loan balances that are guaranteed by the SBA. At December 31, 2023, the Company maintained $131.7 million in loan balances that are guaranteed by the SBA compared to $49.5 million in loan balances that are guaranteed by the SBA balances as of December 31, 2022. Also contributing to the decrease from the prior year was a reduction in strategic program loans held for investment to which higher risk is attributable. In addition, the provision for the prior year period was calculated under the incurred loss model rather than the current expected credit loss methodology as required under ASU 2016-13 and is not necessarily comparable to the provisions charged in 2023. Noninterest Income The largest portion of our noninterest income is associated with our Strategic Program fees. Other sources of noninterest income include gain on sale of loans, SBA loan servicing fees, change in fair value on investment in BFG and other miscellaneous income. 55 Index The following table presents, for the periods indicated, the major categories of noninterest income: [[GREPCENT_TABLE]] [["","For the Years Ended December 31,","","Change"],["($ in thousands)","2023","","2022","","$","","%"],["Noninterest income:"],["Strategic Program fees","$","15,914","","","$","22,467","","","$","(6,553)","","","(29.2)","%"],["Gain on sale of loans, net","1,684","","","13,550","","","(11,866)","","","(87.6)","%"],["SBA loan servicing fees","1,466","","","1,603","","","(137)","","","(8.5)","%"],["Change in fair value on investment in BFG","(600)","","","(478)","","","(122)","","","25.5","%"],["Other miscellaneous income","2,616","","","269","","","2,347","","","872.5","%"],["Total noninterest income","$","21,080","","","$","37,411","","","$","(16,331)","","","(43.7)","%"]] [[/GREPCENT_TABLE]] For the year ended December 31, 2023, total noninterest income decreased $16.3 million, or 43.7%, to $21.1 million compared to the year ended December 31, 2022. This decrease was primarily due to an $11.9 million, or 87.6%, reduction in the gain on sale of loans primarily attributable to the Company's increased retention of the guaranteed portion of SBA loans the Company originates to increase the interest income the Company receives from such loans and lower strategic program fees of $6.6 million, or 29.2%, primarily resulting from a decline in loan origination volume. Noninterest Expense Noninterest expense has increased as we have grown and as we have expanded and modernized our operational infrastructure and continued to implement our plan to build an efficient, integrated fintech banking operation with significant capacity for growth. The following table presents, for the periods indicated, the major categories of noninterest expense: [[GREPCENT_TABLE]] [["","For the Years Ended December 31,","","Change"],["($ in thousands)","2023","","2022","","$","","%"],["Noninterest expense:"],["Salaries and employee benefits","$","25,751","","","$","24,489","","","$","1,262","","","5.2","%"],["Professional services","4,961","","","5,454","","","(493)","","","(9.0)","%"],["Occupancy and equipment expenses","3,312","","","2,204","","","1,108","","","50.3","%"],["Impairment of SBA servicing asset","(376)","","","1,728","","","(2,104)","","","(121.8)","%"],["Other operating expenses","6,540","","","4,881","","","1,659","","","34.0","%"],["Total noninterest expense","$","40,188","","","$","38,756","","","$","1,432","","","3.7","%"]] [[/GREPCENT_TABLE]] For the year ended December 31, 2023, total noninterest expense increased $1.4 million, or 3.7%, to $40.2 million compared to the year ended December 31, 2022. This increase was primarily due to an increase in other operating expenses primarily related to data processing costs, an increase in salaries and employee benefits related to a higher number of employees, and increased occupancy and equipment expenses related to our increase in commercial operating lease activity, and was partially offset by a recovery on the SBA servicing asset during 2023 that did not occur in the prior year. 56 Index Financial Condition The following table summarizes selected components of the Company’s consolidated balance sheets as of December 31, 2023 and 2022. [[GREPCENT_TABLE]] [["","As of December 31,","","Change"],["($ in thousands)","2023","","2022","","$","","%"],["Total assets","$","586,221","","","$","400,780","","","$","185,441","","","46.3","%"],["Investment securities held to maturity, at cost","15,388","","","14,292","","","1,096","","","7.7","%"],["Loans receivable, net","358,560","","","224,217","","","134,343","","","59.9","%"],["Deposits","404,833","","","242,998","","","161,835","","","66.6","%"],["Total shareholders' equity","155,056","","","140,459","","","14,597","","","10.4","%"],["Total equity to total assets","26.5","%","","35.0","%","","","","(24.3)","%"],["Weighted average shares outstanding, basic(1)","12,488,564","","12,729,898","","","","(1.9)","%"],["Weighted average shares outstanding, diluted(1)","12,909,648","","13,357,022","","","","(3.3)","%"]] [[/GREPCENT_TABLE]] (1)Average shares presented for December 31, 2023 and December 31, 2022 are for the respective years ended on those dates. Total assets at December 31, 2023 were $586.2 million, an increase of $185.4 million from December 31, 2022. The increase in total assets was due primarily to increases in loans receivable, net, of $134.3 million, Strategic Program loans held-for-sale of $23.9 million, and cash and cash equivalents of $16.4 million. The decline in the total equity to total assets ratio was primarily due to the asset growth achieved during 2023. The reduction in weighted average basic and diluted shares outstanding was primarily the result of the Company's share repurchase program that was completed during the third quarter of 2023. Loan Portfolio We manage our loan portfolio based on factors that include concentrations per loan program and aggregated portfolio, industry selection and geographies. We also monitor the impact of identified and estimated losses on capital as well as the pricing characteristics of each product. The following provides a general description and the risk characteristics relevant to each of the business lines. 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 7(a) Loans We originate and service loans partially guaranteed by the SBA under its Section 7(a) loan program. SBA 7(a) loans are made to small businesses and professionals throughout the USA. As of December 31, 2023 and December 31, 2022, we had total SBA 7(a) loans of $239.9 million and $145.2 million, respectively, representing 64.5% and 61.4% 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 reduced gain-on-sale premiums and increasing variable loan rates during 2022 and 2023, we retained on our balance sheet a greater 57 Index percentage of the guaranteed portion of certain SBA loans that we originated than we have historically, which we believe will benefit the Company through stronger government guaranteed held for investment loan growth and an increased recurring stream of interest income and partially offset the related decline in gain-on-sale revenue. Commercial leases As of December 31, 2023 and December 31, 2022, we had total commercial leases of $38.1 million and $9.3 million, respectively, representing 10.2% and 3.9% of our total loans held for investment, respectively. Underwriting for smaller ticket credit requests is generally scorecard-based. Underwriting for larger ticket credit requests 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 leases are generally secured by liens on business assets leased or purchased with Company funds. Historically, we have retained these leases on our balance sheet for investment; however, the Company may occasionally sell leases to certain purchasers. Commercial, non-real estate Commercial non-real estate loans consist of loans made to commercial enterprises that are not secured by real estate. As of December 31, 2023 and December 31, 2022, we had total commercial non-real estate loans of $2.5 million and $2.2 million, respectively, representing 0.7% and 0.9% of our total loans held for investment, respectively. Any loan, line of credit, or letter of credit (including any unfunded commitments) and any interest obtained in such loans made by another lender to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, not secured by real estate, but not for personal expenditure purposes are included in this category. 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, 2023 and December 31, 2022, we had total residential real estate loans of $38.1 million and $37.8 million, respectively, representing 10.2% and 16.0% 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 consumer and secured or unsecured business loans to borrowers within certain approved credit profiles. Although we have generally sold most of these loans, we may determine to hold more of the funded loans and/or receivables based on a number of factors including the amount of our available capital and risk management considerations. As of December 31, 2023 and December 31, 2022, we had total Strategic Program loans held for investment of $19.4 million and $24.3 million, respectively, representing 5.2% and 10.2% of our total loans held for investment, respectively. Loans originated through these programs are limited to predetermined Bank underwriting criterion, which has been approved by our board of directors. The primary form of repayment on these loans is from personal or business cash flow. Business loans may be secured by liens on business assets, as 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 Index 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, 2023 and December 31, 2022, we had total commercial real estate loans of $22.8 million and $12.1 million, respectively, representing 6.1% and 5.2% of our total loans held for investment, respectively. The commercial real estate loans that are owner occupied as of December 31, 2023 and December 31, 2022 represent 91.1% and 72.4% of the commercial real estate loans, respectively. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. 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, 2023 and December 31, 2022, we had total consumer loans of $11.4 million and $5.8 million, respectively, representing 3.1% and 2.5% of our total loans held for investment, respectively. We use a debt-to-income (“DTI”) ratio to determine whether an applicant will be able to service the debt. The DTI ratio compares the applicant’s anticipated monthly expenses and total monthly obligations to the applicant’s monthly gross income. Our policy is to limit the DTI ratio to 45% after calculating interest payments related to the new loan. Loan officers, at their discretion, may make exceptions to this ratio if the loan is within their authorized lending limit. DTI ratios of no more than 50% may be approved subject to an increase in interest rate. Strong offsetting factors such as higher discretionary income or large down payments are used to justify exceptions to these guidelines. All exceptions are documented and reported. While the loans are generally for the purchase of goods which may afford us a purchase money security interest, they are underwritten as if they were unsecured. On larger loans, we may file a Uniform Commercial Code financing form. Historically, we have retained these loans on our balance sheet for investment. Loan Portfolio Program Summary Through our diversification efforts we have built a portfolio that we believe positions us to withstand economic shifts. For example, we focus on industries and loan types that have historically lower loss rates such as professional, scientific and technical services (including law firms), non-store retailers (e-commerce), and ambulatory healthcare services. The following table summarizes our loan portfolio by loan program as of the dates indicated: [[GREPCENT_TABLE]] [["","As of December 31,"],["","2023","","2022"],["","Amount","","% of total loans","","Amount","","% of total loans"],["SBA(1)","$","239,922","","","64.5","%","","$","145,172","","","61.4","%"],["Commercial leases","38,110","","","10.2","%","","9,252","","","3.9","%"],["Commercial, non real estate","2,457","","","0.7","%","","2,232","","","0.9","%"],["Residential real estate","38,123","","","10.2","%","","37,815","","","16.0","%"],["Strategic Program loans","19,408","","","5.2","%","","24,259","","","10.2","%"],["Commercial real estate"],["Owner occupied","20,798","","","5.6","%","","8,733","","","3.7","%"],["Non-owner occupied","2,025","","","0.5","%","","3,330","","","1.4","%"],["Consumer","11,372","","","3.1","%","","5,808","","","2.5","%"],["Total","$","372,215","","","100.0","%","","$","236,601","","","100.0","%"]] [[/GREPCENT_TABLE]] (1)SBA loans as of December 31, 2023 and December 31, 2022 include $131.7 million and $49.5 million, respectively, of SBA 7(a) loan balances that are guaranteed by the SBA. 59 Index Loan Maturity and Sensitivity to Changes in Interest Rates As of December 31, 2023, $196.0 million, or 52.7%, of the total held for investment loan balance matures in less than five years. Loans maturing in greater than five years totaled $176.2 million as of December 31, 2023. The variable rate portion of our total held for investment loan portfolio at December 31, 2023 was $281.7 million, or 75.7%. The variable rate portion of the total held for investment loans reflects our strategy of minimizing interest rate risk through the use of variable rate products. The following tables detail maturities and sensitivity to interest rate changes for our loan portfolio at December 31, 2023: [[GREPCENT_TABLE]] [["As of December 31, 2023","Remaining Contractual Maturity Held for Investment"],["($ in thousands)","One Year or Less","","Average Yield/Rate","","After One Year and Through Five Years","","Average Yield/Rate","","After Five Years and Through Fifteen Years","","Average Yield/Rate"],["Fixed rate loans:"],["SBA","$","493","","","4.39","%","","$","796","","","9.23","%","","$","1,606","","","10.45","%"],["Commercial leases","10,073","","","6.83","%","","27,413","","","7.16","%","","624","","","7.56","%"],["Commercial, non-real estate","703","","","5.68","%","","1,621","","","5.82","%","","123","","","3.76","%"],["Residential real estate","6,230","","","7.07","%","","4,653","","","7.65","%","","60","","","4.29","%"],["Strategic Program loans","14,305","","","125.05","%","","5,103","","","82.20","%","","\u2014","","","\u2014","%"],["Commercial real estate"],["Owner occupied","1,976","","","7.04","%","","1,725","","","7.85","%","","\u2014","","","\u2014","%"],["Non-owner occupied","101","","","4.60","%","","108","","","3.51","%","","244","","","3.48","%"],["Consumer","3,051","","","6.40","%","","7,668","","","5.79","%","","653","","","9.17","%"],["Variable rate loans:"],["SBA","15,720","","","10.87","%","","62,367","","","10.87","%","","100,880","","","10.70","%"],["Commercial leases","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Commercial, non-real estate","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Residential real estate","23,718","","","9.02","%","","1,941","","","5.85","%","","1,521","","","4.55","%"],["Strategic Program loans","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Commercial real estate"],["Owner occupied","943","","","8.91","%","","3,766","","","8.91","%","","7,384","","","9","%"],["Non-owner occupied","1,541","","","10.50","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Consumer","\u2014","","","\u2014","%","","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Total","$","78,854","","","29.82","%","","$","117,161","","","12.37","%","","$","113,095","","","10.48","%"]] [[/GREPCENT_TABLE]] 60 Index [[GREPCENT_TABLE]] [["As of December 31, 2023","Remaining Contractual Maturity Held for Investment"],["($ in thousands)","After Fifteen Years","","Average Yield/Rate","","Total","","Average Yield/Rate"],["Fixed rate loans:"],["SBA","$","1,143","","","10.41","%","","$","4,038","","","9.46","%"],["Commercial leases","\u2014","","","\u2014","%","","38,110","","","7.08","%"],["Commercial, non-real estate","10","","","3.77","%","","2,457","","","5.67","%"],["Residential real estate","\u2014","","","\u2014","%","","10,943","","","7.30","%"],["Strategic Program loans","\u2014","","","\u2014","%","","19,408","","","113.78","%"],["Commercial real estate"],["Owner occupied","\u2014","","","\u2014","%","","3,701","","","7.42","%"],["Non-owner occupied","31","","","4","%","","484","","","3.73","%"],["Consumer","\u2014","","","\u2014","%","","11,372","","","6.15","%"],["Variable rate loans:"],["SBA","56,917","","","10.45","%","","235,884","","","10.70","%"],["Commercial leases","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Commercial, non-real estate","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Residential real estate","\u2014","","","\u2014","%","","27,180","","","8.54","%"],["Strategic Program loans","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Commercial real estate"],["Owner occupied","5,004","","","10","%","","17,097","","","9.52","%"],["Non-owner occupied","\u2014","","","\u2014","%","","1,541","","","10.50","%"],["Consumer","\u2014","","","\u2014","%","","\u2014","","","\u2014","%"],["Total","$","63,105","","","10.43","%","","$","372,215","","","15.16","%"]] [[/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 non-accrual asset may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and we expect repayment of the remaining contractual principal and interest, or (2) when asset otherwise becomes well secured and is not in the process of collection. Any loan which we deem to be uncollectible, in whole or in part, is charged off to the extent of the anticipated loss. In general, loans that are past due for 90 days or more are charged off unless the loan is both well secured and in the process of collection. 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. 61 Index The Company had a total of $27.1 million in nonperforming assets and $0.5 million in material loan modifications at December 31, 2023. The amount of nonperforming assets and material loan modifications as of December 31, 2023 include $15.0 million and $0.3 million,respectively,of SBA 7(a) loan balances that are guaranteed by the SBA. The Company had no nonperforming assets and $0.4 million in troubled debt restructurings at December 31, 2022. The amount of troubled debt restructurings as of December 31, 2022 include $0.3 million of SBA 7(a) loan balances that are guaranteed by the SBA. The increase in nonperforming assets from the prior period was primarily attributable to several loans in the SBA 7(a) loan portfolio moving to nonperforming status due mainly to the negative impact of elevated interest rates on the Bank's small business borrowers. The following table provides information with respect to our nonperforming assets at the dates indicated: [[GREPCENT_TABLE]] [["December 31, 2023"],["","Loans Past Due and Still Accruing"],["($ in thousands)","30-89 Days Past Due","","90 Days and Greater","","Total","","Non- Accrual Loans with no ACL(1)","","Non-Accrual Loans with ACL","","Current Loans","","Total Loans"],["Construction and land development","$","1,648","","","$","297","","","$","1,945","","","$","\u2014","","","$","\u2014","","","$","26,385","","","$","28,330"],["Residential real estate","23","","","\u2014","","","23","","","1,585","","","\u2014","","","49,820","","","51,428"],["Residential real estate multifamily","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","647","","","647"],["Commercial real estate:","","","","","","","","","\u2014"],["Owner occupied","\u2014","","","\u2014","","","\u2014","","","21,643","","","640","","","164,267","","","186,550"],["Non-owner occupied","\u2014","","","\u2014","","","\u2014","","","2,362","","","\u2014","","","12,992","","","15,354"],["Commercial and industrial","\u2014","","","\u2014","","","\u2014","","","282","","","\u2014","","","21,117","","","21,399"],["Consumer","81","","","47","","","128","","","\u2014","","","\u2014","","","10,860","","","10,989"],["Commercial leases","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","38,110","","","38,110"],["Retained Strategic Program loans","1,953","","","96","","","2,049","","","\u2014","","","\u2014","","","17,359","","","19,408"],["Total","$","3,705","","","$","440","","","$","4,145","","","$","25,872","","","$","640","","","$","341,558","","","$","372,215"],["(1) Included in the nonaccrual loan balances are $15.0 million of SBA 7(a) loan balances guaranteed by the SBA."]] [[/GREPCENT_TABLE]] 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 and collectable 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 62 Index 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 monthly loan 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. Loan grades 1 through 4 are passing grades, grade 5 is special mention. Collectively, grades 6 (substandard), 7 (doubtful) and 8 (loss) represent classified loans within the portfolio. 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. Grade 1: Pass - Loans fully secured by deposit accounts. Loans where the borrower has strong sources of repayment, generally 5 years or more of consistent employment (or related field) and income history. Debt of the borrower is modest relative to the borrower’s financial strength and ability to pay with a DTI ratio of less than 25%. Cash flow is very strong as evidenced by significant discretionary income amounts. Borrower will consistently maintain 30% of the outstanding debts in deposit accounts with us, often with the right of offset, holds, etc. Loan to value ratios (LTV) will be 60% or less. Loans in this category require very minimal monitoring. Grade 2: Pass - The borrower has good sources of repayment, generally 3 years or more of consistent employment (or related field) and income history. The debt of the borrower is reasonable relative to the borrower’s financial strength with a DTI ratio of less than 35%. Cash flow is strong as evidenced by exceptional discretionary income amounts. Borrowers will consistently maintain 20% of the outstanding debts in deposit accounts with us. LTV ratios will be 70% or less. These loans require minimal monitoring. Grade 3: Pass - There is a comfortable primary source of repayment, generally 2 years or more of consistent employment (or related field) and income history. Borrowers may exhibit a mix of strengths and weaknesses. For example, they have either adequate cash flow with higher than desired leverage, or marginal cash flow with strong collateral and liquidity. Borrowers will have DTIs less than 45%. Borrowers will generally maintain deposit accounts with us, but the consistency and amount of the deposits are not as strong as Grades 1 and 2. LTV ratios will be within our guidelines. These loans will be monitored on a quarterly basis. Grade 4: Pass Watch – There is adequate primary source of repayment, generally employment time or time in a related field is less than 2 years. Borrowers’ debt to income ratios may fall outside of our guidelines or there is minimal excess cash flow. There may be heavy reliance on collateral, or the loan is large, relative to the financial strength of the borrower. The loans may be maintenance intensive requiring closer monitoring. Grade 5: Special Mention – A loan in this category has a specific weakness or problem but does not currently present a significant risk of loss or default as to any material terms of the loan or financing agreement. A typical problem could include a documentation deficiency. If the deficiency is corrected the account will be re-graded. Grade 6: Classified Substandard – A substandard loan has a developing or current weakness or weaknesses that could result in loss or default if deficiencies are not corrected, or adverse conditions arise. Grade 7: Classified Doubtful – A doubtful loan has an existing weakness or weaknesses that make collection or liquidation in full, on the basis of currently existing facts and conditions, highly questionable and improbable. Grade 8: Classified Loss – A loss loan has an existing weakness or weaknesses that render the loan uncollectible and of such little value that continuing to carry as an asset on our book is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical nor desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future. 63 Index The following table presents, as of the period presented, the loan balances by loan program as well as risk rating. No loans were classified as 'Loss' grade during the periods presented. [[GREPCENT_TABLE]] [["December 31, 2023","2023","","2022","","2021","","Prior","","Revolving Loans","","Total"],["($ in thousands)"],["Construction and land development"],["Pass","$","12,919","","","$","10,345","","","$","4,354","","","$","97","","","$","\u2014","","","$","27,715"],["Watch","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Special Mention","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Substandard","\u2014","","","615","","","\u2014","","","\u2014","","","\u2014","","","615"],["Total","12,919","","","10,960","","","4,354","","","97","","","\u2014","","","28,330"],["Current period gross writeoff","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Residential real estate"],["Pass","2,209","","","874","","","1,480","","","2,947","","","2,249","","","9,759"],["Watch","23,614","","","12,399","","","1,661","","","2,035","","","\u2014","","","39,709"],["Special Mention","\u2014","","","\u2014","","","208","","","11","","","\u2014","","","219"],["Substandard","\u2014","","","1,585","","","\u2014","","","156","","","\u2014","","","1,741"],["Total","25,823","","","14,858","","","3,349","","","5,149","","","2,249","","","51,428"],["Current period gross writeoff","\u2014","","","(121)","","","\u2014","","","(104)","","","\u2014","","","(225)"],["Residential real estate multifamily"],["Pass","278","","","263","","","80","","","\u2014","","","\u2014","","","621"],["Watch","\u2014","","","\u2014","","","\u2014","","","26","","","\u2014","","","26"],["Special Mention","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Substandard","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total","278","","","263","","","80","","","26","","","\u2014","","","647"],["Current period gross writeoff","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Commercial real estate owner occupied"],["Pass","12,566","","","1,234","","","854","","","12,207","","","\u2014","","","26,861"],["Watch","62,360","","","53,832","","","11,871","","","7,654","","","\u2014","","","135,717"],["Special Mention","\u2014","","","192","","","\u2014","","","1,498","","","\u2014","","","1,690"],["Substandard","16,466","","","3,712","","","1,066","","","1,038","","","\u2014","","","22,282"],["Total","91,392","","","58,970","","","13,791","","","22,397","","","\u2014","","","186,550"],["Current period gross writeoff","(318)","","","(21)","","","(97)","","","(278)","","","\u2014","","","(714)"],["Commercial real estate non-owner occupied"],["Pass","2,805","","","1,294","","","\u2014","","","419","","","\u2014","","","4,518"],["Watch","4,382","","","2,635","","","1,223","","","234","","","\u2014","","","8,474"],["Special Mention","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Substandard","\u2014","","","2,362","","","\u2014","","","\u2014","","","\u2014","","","2,362"],["Total","7,187","","","6,291","","","1,223","","","653","","","\u2014","","","15,354"],["Current period gross writeoff","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"]] [[/GREPCENT_TABLE]] 64 Index [[GREPCENT_TABLE]] [["Commercial and industrial"],["Pass","2,090","","","601","","","744","","","821","","","31","","","4,287"],["Watch","10,157","","","4,600","","","764","","","930","","","\u2014","","","16,451"],["Special Mention","\u2014","","","\u2014","","","\u2014","","","8","","","\u2014","","","8"],["Substandard","260","","","\u2014","","","\u2014","","","393","","","\u2014","","","653"],["Total","12,507","","","5,201","","","1,508","","","2,152","","","31","","","21,399"],["Current period gross writeoff","(87)","","","(114)","","","(122)","","","(149)","","","\u2014","","","(472)"],["Consumer"],["Pass","7,792","","","1,975","","","637","","","558","","","2","","","10,964"],["Watch","24","","","\u2014","","","\u2014","","","1","","","\u2014","","","25"],["Special Mention","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Substandard","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total","7,816","","","1,975","","","637","","","559","","","2","","","10,989"],["Current period gross writeoff","(3)","","","(5)","","","(53)","","","(7)","","","\u2014","","","(68)"],["Commercial leases"],["Pass","31,313","","","6,559","","","\u2014","","","238","","","\u2014","","","38,110"],["Watch","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Special Mention","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Substandard","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Total","31,313","","","6,559","","","\u2014","","","238","","","\u2014","","","38,110"],["Current-period gross writeoffs","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Retained Strategic Program loans"],["Pass","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Watch","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Special Mention","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Substandard","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014","","","\u2014"],["Not Rated","14,506","","","3,609","","","1,292","","","1","","","\u2014","","","19,408"],["Total","14,506","","","3,609","","","1,292","","","1","","","\u2014","","","19,408"],["Current-period gross writeoffs","(3,773)","","","(6,154)","","","(1,017)","","","(2)","","","\u2014","","","(10,946)"],["Total portfolio loans receivable, gross","203,741","","","108,686","","","26,234","","","31,272","","","2,282","","","372,215"],["Total current-period gross writeoffs","(4,181)","","","(6,415)","","","(1,289)","","","(540)","","","\u2014","","","(12,425)"]] [[/GREPCENT_TABLE]] 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 ACL 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 a monthly basis and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions and trends that may affect the borrower’s ability to repay. The quality of the loan portfolio and the adequacy of the ACL is reviewed by regulatory examinations and the Company’s auditors. 65 Index 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. The following tables present a summary of changes in the ACL for the periods and dates indicated: [[GREPCENT_TABLE]] [["($ in thousands)","Year EndedDecember 31, 2023"],["ACL:"],["Beginning balance","$","11,985"],["Impact of ASU 2016-13 adoption(1)","257"],["Adjusted beginning balance","12,242"],["Provision for loan losses","11,525"],["Charge offs"],["Construction and land development","\u2014"],["Residential real estate","(225)"],["Residential real estate multifamily","\u2014"],["Commercial real estate","(714)"],["Commercial and industrial","(472)"],["Consumer","(68)"],["Commercial leases","\u2014"],["Strategic Program loans","(10,946)"],["Recoveries"],["Construction and land development","\u2014"],["Residential real estate","90"],["Residential real estate multifamily","\u2014"],["Commercial real estate","379"],["Commercial and industrial","21"],["Consumer","2"],["Commercial leases","\u2014"],["Strategic Program loans","1,054"],["Ending balance","$","12,888"]] [[/GREPCENT_TABLE]] (1) ASU 2016-13 (CECL) was adopted January 1, 2023. 66 Index [[GREPCENT_TABLE]] [["($ in thousands)","Year EndedDecember 31, 2022"],["ACL(2):"],["Beginning balance","$","9,855"],["Provision for loan losses","13,519"],["Charge offs"],["SBA","(392)"],["Commercial leases","\u2014"],["Commercial, non-real estate","\u2014"],["Residential real estate","\u2014"],["Strategic Program loans","(11,948)"],["Commercial real estate","\u2014"],["Consumer","(66)"],["Recoveries"],["SBA","66"],["Commercial leases","\u2014"],["Commercial, non-real estate","2"],["Residential real estate","\u2014"],["Strategic Program loans","885"],["Commercial real estate","\u2014"],["Consumer","64"],["Ending balance","$","11,985"]] [[/GREPCENT_TABLE]] (2) ASU 2016-13 (CECL) was adopted January 1, 2023. The 2022 amounts presented are calculated under the prior accounting standard. The following tables show the allocation of the ACL as of December 31, 2023, and allowance for loan losses ("ALL") as of December 31, 2022, among loan categories. The ACL related to Strategic Programs constitutes 54.8% of the total ACL while comprising 5.2% of total loans held for investment as of December 31, 2023. The ALL related to Strategic Programs constitutes 55.9% of the total ALL while comprising 10.2% of total loans held for investment as of December 31, 2022. 67 Index The percentage of ACL related to Strategic Program loans retained reflects the increased credit risks associated with certain retained Strategic Program loans. [[GREPCENT_TABLE]] [["","December 31, 2023"],["($ in thousands)","Amount","","% ofTotalAllowance"],["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]] [[GREPCENT_TABLE]] [["","December 31, 2022"],["($ in thousands)","Amount","","% of Total Allowance"],["SBA","$","4,294","","","35.8","%"],["Commercial leases","345","","","2.9","%"],["Commercial, non real estate","56","","","0.5","%"],["Residential real estate","497","","","4.2","%"],["Strategic Program loans","6,701","","","55.9","%"],["Commercial real estate","27","","","0.2","%"],["Consumer","65","","","0.5","%"],["Total","$","11,985","","","100.0","%"]] [[/GREPCENT_TABLE]] The following table reflects the ratios of the ACL to total loans held for investment ("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]] [["","ACL to Total LHFI","","Nonaccrual loans 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]] 68 Index The following table reflects the ratios of the ALL to total loans held for investment, nonaccrual loans to total loans held for investment, and the ALL to nonaccrual loans by loan category as of December 31, 2022. [[GREPCENT_TABLE]] [["($ in thousands)","ALL to Total LHFI","","Nonaccrual to Total LHFI","","ALL to Nonaccrual loans"],["SBA","3.0","%","","\u2014","%","","\u2014","%"],["Commercial leases","4.3","%","","\u2014","%","","\u2014","%"],["Commercial, non-real estate","\u2014","%","","\u2014","%","","\u2014","%"],["Residential real estate","1.3","%","","\u2014","%","","\u2014","%"],["Strategic Program loans","27.6","%","","\u2014","%","","\u2014","%"],["Commercial real estate","0.2","%","","\u2014","%","","\u2014","%"],["Consumer","1.1","%","","\u2014","%","","\u2014","%"],["Total","5.1","%","","\u2014","%","","\u2014","%"]] [[/GREPCENT_TABLE]] The decrease in ACL/ALL to total loans held for investment for the periods presented above was primarily due to growth in the SBA 7(a) loan balances with $131.7 million and $49.5 million of loan balances guaranteed by the SBA at December 31, 2023 and 2022, respectively. The increase in nonaccrual loans to loans held for investment and the increase in ACL to nonaccrual loans ratios from December 31, 2022 to December 31, 2023 was primarily related to a small number of large SBA loans that were moved to nonaccrual status during 2023. The following table reflects the ratio of net charge-offs to average loans outstanding by loan category, as of the dates indicated. [[GREPCENT_TABLE]] [["","For the Years Ended"],["","December 31, 2023","","December 31, 2022"],["($ in thousands)","NetCharge-Offs (Recoveries)","","Average Loans","","NCO to Average Loans","","Net Charge- Offs (Recoveries)","","Average Loans","","NCO (Recovery) to Average Loans"],["SBA","$","903","","","$","196,835","","","0.5","%","","$","326","","","$","132,199","","","0.2","%"],["Commercial leases","\u2014","","","22,227","","","\u2014","%","","\u2014","","","4,483","","","\u2014","%"],["Commercial, non-real estate","(1)","","","3,247","","","\u2014","%","","(2)","","","3,079","","","(0.1)","%"],["Residential real estate","\u2014","","","31,906","","","\u2014","%","","\u2014","","","27,937","","","\u2014","%"],["Strategic program loans","9,892","","","21,483","","","46.0","%","","11,063","","","27,378","","","40.4","%"],["Commercial real estate","19","","","19,716","","","0.1","%","","\u2014","","","8,912","","","\u2014","%"],["Consumer","66","","","8,369","","","0.8","%","","2","","","5,364","","","\u2014","%"],["Total","$","10,879","","","$","303,783","","","7.2","%","","$","11,389","","","$","209,352","","","11.0","%"]] [[/GREPCENT_TABLE]] Due primarily to the increase in our average loans held for investment balances, the ratio of net charge-offs to average loans outstanding by loan category was lower during the year ended December 31, 2023 as compared to the year ended December 31, 2022. The increase in the ratio for Strategic Programs loans was primarily due to a reduction in the average loan balances in the year ended December 31, 2023. Interest-Bearing Deposits in Other Banks Our interest-bearing deposits in other banks increased to $116.6 million at December 31, 2023 from $100.2 million at December 31, 2022, an increase of $16.4 million, or 16.4%. This increase was primarily due to an increase in brokered time deposit balances. Interest-bearing deposits in other banks have generally been the primary repository of the liquidity we use to fund our operations. Aside from minimal balances held with our correspondent banks, the majority of our interest-bearing deposits in other banks was held directly with the Federal Reserve. 69 Index Securities We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements. We classify investment securities as either held-to-maturity or available-for-sale based on our intentions and the Company’s ability to hold such securities until maturity. In determining such classifications, securities that we have the positive intent and the ability to hold until maturity are classified as held-to-maturity and carried at amortized cost. All other securities are designated as available-for-sale and carried at estimated fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis. For the year presented, all securities were classified as held-to-maturity. The following table summarizes the contractual maturities, amortized cost, and weighted average yields of investment securities at December 31, 2023. [[GREPCENT_TABLE]] [["","As of December 31, 2023"],["","After Five to Ten Years Weighted","","After Ten YearsWeighted"],["($ in thousands)","AmortizedCost","","WeightedAverageYield","","AmortizedCost","","WeightedAverageYield","","TotalAmortizedCost"],["Mortgage-backed securities","$","1,975","","","2.7","%","","$","4,984","","","1.8","%","","$","6,959"],["Collateralized mortgage obligations","770","","","3.3","%","","7,659","","","3.2","%","","8,429"],["Total","$","2,745","","","2.8","%","","$","12,643","","","2.7","%","","$","15,388"]] [[/GREPCENT_TABLE]] The weighted average yield of investment securities is the sum of all interest that the investments generate, divided by the sum of the book value. There were no calls, sales or maturities of securities during the years ended December 31, 2023 and December 31, 2022. At December 31, 2023, there were 19 securities, consisting of nine collateralized mortgage obligations and 10 mortgage-backed securities, in an unrealized loss position as of December 31, 2023 and 17 securities, consisting of eight collateralized mortgage obligations and nine mortgage-backed securities, in an unrealized loss position as of December 31, 2022. Total Liabilities Total liabilities increased from $260.3 million at December 31, 2022 to $431.2 million at December 31, 2023 primarily due to an increase in total deposits. Deposits Deposits are the major source of funding for the Company. We offer a variety of deposit products including interest and noninterest bearing demand accounts, HSA demand deposits sourced through Lively, Inc., money market and savings accounts and certificates of deposit, all of which we market at competitive pricing. We generate deposits from our customers on a relationship basis and through access to national institutional and brokered deposit sources. We also generate deposits in relation to our Strategic Programs in the form of reserve accounts as discussed above. These deposits add an element of flexibility in that they tend to increase or decrease in relation to the size of our Strategic Program loan portfolio. In addition to the reserve account, some Strategic Program loan originators maintain operating deposit accounts with us. 70 Index The following tables present the end of period and average balances of our deposit portfolio for the periods indicated (average balances have been calculated using daily averages): [[GREPCENT_TABLE]] [["","December 31, 2023","","December 31, 2022"],["($ in thousands)","Total","","Percent","","Total","","Percent"],["Period end:"],["Noninterest-bearing demand deposits","$","95,486","","","23.6","%","","$","78,817","","","32.5","%"],["Interest-bearing deposits:"],["Demand","50,058","","","12.4","%","","50,746","","","20.8","%"],["Savings","8,633","","","2.1","%","","8,289","","","3.4","%"],["Money markets","11,661","","","2.9","%","","10,882","","","4.5","%"],["Time certificates of deposit","238,995","","","59.0","%","","94,264","","","38.8","%"],["Total period end deposits","$","404,833","","","100.0","%","","$","242,998","","","100.0","%"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["","For the Years Ended"],["","December 31, 2023","","December 31, 2022"],["($ in thousands)","Total","","Weighted Average rate paid","","Percent of total","","Total","","Weighted Average rate paid","","Percent of total"],["Average:"],["Noninterest-bearing demand deposits","$","93,126","","","\u2014","%","","28.3","%","","$","114,174","","","\u2014","%","","48.2","%"],["Interest-bearing deposits:"],["Demand","45,454","","","4.08","%","","13.8","%","","17,564","","","3.02","%","","7.4","%"],["Savings","8,207","","","0.62","%","","2.5","%","","7,310","","","0.10","%","","3.1","%"],["Money market","13,665","","","2.65","%","","4.1","%","","26,054","","","0.45","%","","11.0","%"],["Time certificates of deposit","168,887","","","4.56","%","","51.3","%","","71,661","","","1.09","%","","30.3","%"],["Total average deposits","$","329,339","","","3.03","%","","100.0","%","","$","236,763","","","0.61","%","","100.0","%"]] [[/GREPCENT_TABLE]] Our deposits increased to $404.8 million as of December 31, 2023 from $243.0 million as of December 31, 2022, an increase of $161.8 million, or 66.6%. This increase was primarily due to an increase in brokered time deposits and noninterest-bearing demand deposits utilized in the funding of our lending programs. 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 uninsured deposits were $136.9 million and $108.4 million as of December 31, 2023 and December 31, 2022, respectively. The maturity profile of our uninsured time deposits, those amounts that exceed the FDIC insurance limit, at December 31, 2023 is as follows: [[GREPCENT_TABLE]] [["","December 31, 2023"],["($ 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","$","627","","","$","184","","","$","32","","","$","1,154","","","$","1,997"]] [[/GREPCENT_TABLE]] 71 Index 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, repayment of loans and net profits. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, loan sales and security sales are greatly influenced by general interest rates, economic conditions, and competition. Our primary source of funds to originate new loans is derived from deposits. Deposits are comprised of core and noncore deposits. We use brokered deposits and a rate listing service to advertise rates to banks, credit unions, and other institutional entities. We designate deposits obtained from this source as Institutional Deposits. To attract deposits from local and nationwide consumer and commercial markets, we historically paid rates at the higher end of the market, which we have been able to pay due to our high margin and technology-oriented business model. We utilize rate listing services and website advertising to attract deposits from consumer and commercial sources. We regularly evaluate new, core deposit products. We intend to have various term offerings to match our funding needs. With no current plans to expand our brick-and-mortar branch network, online and mobile banking offers a means to meet customer needs and better efficiency through technology compared to traditional branch networks. We believe that the rise of mobile, online banking, and integrated fintech banking solutions provides us the opportunity to further leverage the technological competency we have demonstrated in recent years. We regularly adjust our investment in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management, funds management and liquidity policies. The objective of the liquidity policy is to reduce the risk to our earnings and capital arising from the inability to meet obligations in a timely manner. This entails ensuring sufficient funds are available at a reasonable cost to meet potential demands from both fund providers and borrowers. Liquid assets, defined as cash and due from banks and interest bearing deposits, were 20.0% of total assets at December 31, 2023. We primarily utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below. At December 31, 2023, we had the ability to access $11.4 million from the Federal Reserve Bank’s Discount Window and $0.8 million from the Federal Reserve Bank's Bank Term Funding Program on a collateralized basis. Through Zions Bank, the Bank had an unsecured line available of $5.0 million at December 31, 2023. The Bank had an available unsecured line of credit with Bankers’ Bank of the West to borrow up to $1.1 million in overnight funds. We also maintain a $30.5 million line of credit with Federal Home Loan Bank, secured by specific pledged loans. We had no outstanding balances on such unsecured or secured lines of credit as of December 31, 2023. In long term borrowings, we had $0.2 million outstanding at December 31, 2023 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, 2023, liquid assets (defined as cash and due from banks and interest bearing deposits), consisting of cash and due from banks, totaled $117.0 million. We believe that our liquid assets combined with the available lines of credit provide adequate liquidity to meet our current financial obligations for at least the next 12 months. Our consolidated financial statements and related notes, which have been prepared in accordance with GAAP, require the measurement of financial position and operating results in terms of historical dollars, without considering the changes in the relative purchasing power of money over time due to inflation. The impact of inflation is primarily reflected in the increased cost of operations. Unlike most industrial companies, nearly all of our assets and liabilities are monetary in nature. As a result, interest rates have a greater impact on our performance than do the effects of general levels of inflation. Interest rates do not necessarily move in the same direction or to the same extent as the price of goods or services. Capital Resources Shareholders’ equity increased $14.6 million to $155.1 million at December 31, 2023 compared to $140.5 million at December 31, 2022. The increase in shareholders’ equity was primarily attributable to net income of $17.5 million recognized for the year ended December 31, 2023. Exercised stock options and stock-based compensation increased additional paid-in capital in the aggregate by approximately $2.1 million while the repurchase of common stock and the adoption of ASC 2016-13 (CECL) reduced additional paid-in capital by approximately $4.7 million and $0.2 million, respectively, for the year ended December 31, 2023. 72 Index We use several indicators of capital strength. The most commonly used measure is total equity to total assets, which was 26.5% and 35.0% as of December 31, 2023 and December 31, 2022, respectively. Our return on average equity was 11.9% and 19.6% for the years ended December 31, 2023 and 2022, respectively. Our return on average assets was 3.5% and 6.4% for the years ended December 31, 2023 and 2022, respectively. 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. The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on the Company’s financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. Under the prompt corrective action rules, an institution is deemed “well capitalized” if its Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 Capital ratio, and Total Capital ratio meet or exceed 5%, 6.5%, 8%, and 10%, respectively. On September 17, 2019, the federal banking agencies jointly finalized a rule intending to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt into the Community Bank Leverage Ratio framework, as required by Section 201 of the Regulatory Relief Act. The Bank has elected to opt into the Community Bank Leverage Ratio framework starting in 2020. Under these new capital requirements the Bank must maintain a leverage ratio greater than 9.0% for each year beginning in 2022. As of December 31, 2023 and December 31, 2022, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification we believe have changed the Bank’s category). The following table sets forth the actual capital amounts and ratios for the Bank and the amount of capital required to be categorized as well-capitalized as of the dates indicated. 73 Index The following table presents the regulatory capital ratios for the Bank as of the dates indicated: [[GREPCENT_TABLE]] [["","As of"],["Capital Ratios","December 31, 2023","","December 31, 2022","","Well-CapitalizedRequirement"],["Leverage Ratio (under CBLR)","20.7","%","","25.1","%","","9.0","%"]] [[/GREPCENT_TABLE]] 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 contractual obligations as of December 31, 2023. [[GREPCENT_TABLE]] [["($ in thousands)","Total","","Less thanOne Year","","One to Three Years","","Three toFive Years","","MoreThan FiveYears"],["Contractual Obligations"],["Deposits without stated maturity","$","145,544","","","$","145,544","","","$","\u2014","","","$","\u2014","","","$","\u2014"],["Time deposits","238,995","","","76,322","","","92,494","","","69,640","","","539"],["Long term borrowings(1)","190","","","\u2014","","","190","","","\u2014","","","\u2014"],["Operating lease obligations","6,663","","","1,104","","","2,204","","","2,338","","","1,017"],["Total","$","391,392","","","$","222,970","","","$","94,888","","","$","71,978","","","$","1,556"]] [[/GREPCENT_TABLE]] (1)Balances in this category pertain to the PPPLF and are fully-collateralized with PPP loans Off-Balance Sheet Items In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated statements of financial condition. We enter into these transactions 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. We are not aware of any accounting loss to be incurred by funding these commitments; if required, we would maintain an allowance for off-balance sheet credit risk which would be recorded in other liabilities on the consolidated balance sheets. Our commitments to extend credit as of the dates indicated are summarized below. Since commitments associated with commitments to extend credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. [[GREPCENT_TABLE]] [["","As of December 31,"],["($ in thousands)","2023","","2022"],["Revolving, open-end lines of credit","$","1,630","","","$","1,683"],["Commercial real estate","17,421","","","17,886"],["Other unused commitments","724","","","253"],["Total commitments","$","19,775","","","$","19,822"]] [[/GREPCENT_TABLE]] GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures One of the financial measures included in this Report is not a measure of financial performance recognized by GAAP. This non-GAAP financial measure is “tangible book value per share.” Our management uses this non-GAAP financial measure in its analysis of our performance. 74 Index •“Tangible book value per share” is defined as book value per share less goodwill and other intangible assets, divided by the outstanding number of common shares at the end of each period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets as of any of the dates indicated. We have not considered loan servicing rights or loan trailing fee asset as intangible assets for purposes of this calculation. As a result, tangible book value per share is the same as book value per share as of each of the dates indicated. We believe this non-GAAP financial measure provides useful information to management and investors that is supplementary to our financial condition, results of operations and cash flows computed in accordance with GAAP; however, we acknowledge that our non-GAAP financial measure has a number of limitations. As such, you should not view this measure as a substitute for results determined in accordance with GAAP, and such measure is not necessarily comparable to non-GAAP financial measures that other companies use. Recently Issued Accounting Pronouncements See our consolidated financial statements included elsewhere in this Report for a full description of recent accounting pronouncements, including the respective expected dates of adoption and anticipated effects on our results of operations and financial condition.