Finwise Bancorp

Previous wording

The accompanying management’s discussion and analysis of financial condition and results of operations is based upon our unaudited consolidated financial statements included in Part I, Item 1 of this Report. The preparation of these unaudited consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure 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. There have been no material changes during the six months ended June 30, 2024 to the items that we disclosed as our critical accounting policies and estimates in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in the 2023 Form 10-K.

Current wording

The accompanying management’s discussion and analysis of financial condition and results of operations is based upon our unaudited consolidated financial statements included in Part I, Item 1 of this Report. The preparation of these unaudited consolidated financial statements in accordance with GAAP requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues, expenses and related disclosure 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.

Previous wording

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. 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. 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. 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 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.

Current wording

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. 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 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.

Previous wording

This executive summary provides highlights from the discussion and analysis that follows:

Current wording

This executive summary provides certain 2024 and 2023 financial highlights from the discussion and analysis that follows:

Previous wording

Originations remained substantially flat at $1.2 billion for the three months ended June 30, 2024 when compared to the three months ended June 30, 2023. For the six months ended June 30, 2024, originations increased $0.2 billion to $2.3 billion when compared to the six months ended June 30, 2023.

Current wording

•For the three months ended September 30, 2024, originations increased to $1.4 billion from $1.1 billion when compared to the three months ended September 30, 2023. For the nine months ended September 30, 2024, originations increased to $3.7 billion from $3.1 billion when compared to the nine months ended September 30, 2023. New Strategic Programs and organic growth through existing programs contributed to the increase in loan originations for both comparative periods.

Previous wording

Average Balances and Yields. The following table presents average balances for assets and liabilities, the total dollar amounts of interest income from interest-earning assets, the total dollar amounts of interest expense on interest-bearing liabilities, 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 $1.2 million and $0.4 million for the six months ended June 30, 2024 and 2023, respectively. Average balances have been calculated using daily averages.

Current wording

Average Balances and Yields. The following tables present average balances for assets and liabilities, the total dollar amounts of interest income from interest-earning assets, the total dollar amounts of interest expense on interest-bearing liabilities, the resulting average yields and costs, and NIM. The yields and costs for the periods indicated are derived by dividing the annualized income or expense by the average balances for assets or liabilities, respectively, for the periods presented. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yield/rates. Average balances have been calculated using daily averages.

Previous wording

The following table presents, for the periods indicated, the major categories of non-interest income:

Current wording

The following tables present, for the periods indicated, the major categories of non-interest income:

Previous wording

The following table presents, for the periods indicated, the major categories of non-interest expense:

Current wording

The following tables present, for the periods indicated, the major categories of non-interest expense:

Previous wording

Interest-bearing deposits in other banks decreased $32.7 million, or 28.1%, to $83.9 million at June 30, 2024 from $116.6 million at December 31, 2023. This decrease was primarily due to the funding of loans held for investment. Interest-bearing deposits have generally been the primary source 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 are at the Federal Reserve.

Current wording

The decrease in interest-bearing deposits in other banks from December 31, 2023 to September 30, 2024, was primarily due to the purchase of the investment securities available-for-sale. Aside from minimal balances held with our correspondent banks, the majority of our interest-bearing deposits are at the Federal Reserve.

Previous wording

We classify investment securities as either held-to-maturity or available-for-sale based on our intentions and our ability to hold such securities until maturity. In determining such classifications, securities that we have the positive intent and the ability to hold until maturity are classified as 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 periods presented, all securities were classified as held-to-maturity.

Current wording

We classify investment securities as either held-to-maturity or available-for-sale based on our intentions and our ability to hold such securities until maturity. In determining such classifications, securities that we have the positive intent and the ability to hold until maturity are classified as 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.

Previous wording

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.

Current wording

The following table summarizes the weighted-average yields of our investment securities at September 30, 2024. The weighted average yield of investment securities was calculated using the sum of all interest that the investments generate, divided by the average book value. There are no tax-exempt securities.

Previous wording

There were no calls, sales or maturities of securities during the six months ended June 30, 2024 and June 30, 2023.

Current wording

There were no calls, sales or maturities of securities during the nine months ended September 30, 2024 and 2023.

Previous wording

At June 30, 2024, there were twenty securities, consisting of ten collateralized mortgage obligations and ten mortgage-backed securities, in an unrealized loss position at June 30, 2024 and nineteen securities, consisting of nine collateralized mortgage obligations and ten mortgage-backed securities, in an unrealized loss position as of December 31, 2023.

Current wording

At September 30, 2024, we had a total of seventeen securities in an unrealized loss position, consisting of eight collateralized mortgage obligations and nine mortgage-backed securities. At December 31, 2023, we had a total of nineteen securities in an unrealized loss position, consisting of nine collateralized mortgage obligations and ten mortgage-backed securities.

Previous wording

(1)SBA loans as of June 30, 2024 and December 31, 2023 include $147.8 million and $131.7 million, respectively, of SBA 7(a) loan balances that are guaranteed by the SBA.

Current wording

(1)SBA loans as of September 30, 2024 and December 31, 2023 include $154.5 million and $131.7 million, respectively, of SBA 7(a) loan balances that are guaranteed by the SBA.

Previous wording

We manage our loan portfolio based on factors that include concentrations per loan program and aggregated portfolio, industry of operation and geographies. We also monitor the impact of identified and estimated losses on capital as well as the pricing characteristics of each product. The following provides a general description and the risk characteristics relevant to each of the 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.

Current wording

We manage our loan portfolio based on factors that include concentrations per loan program and aggregated portfolio, industry of operation and geographies. We also monitor the impact of identified and estimated losses on capital as well as the pricing characteristics of each product. The following provides a general description and the risk characteristics relevant to each of the products. Each loan is assigned a risk grade during the origination and closing process by credit administration personnel based on criteria described later in this section. We analyze the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances. This ratings analysis is performed at least quarterly.

Previous wording

As of June 30, 2024 and December 31, 2023, we had total SBA 7(a) loans of $249.3 million and $239.9 million, respectively, representing 60.2% and 64.5% of our total loans held for investment, respectively. Loans are sourced primarily through our referral relationship with BFG. Although BFG actively markets throughout the USA, because of its physical location in the New York area we have developed a lending presence in the New York and New Jersey geographies. The maximum SBA 7(a) loan amount is $5 million. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow and tertiary is the sale of collateral pledged. These loans may be secured by commercial and residential mortgages as well as liens on business assets. In addition to typical underwriting metrics, we review the nature of the business, use of proceeds, length of time in business and management experience to help us target loans that we believe have lower credit risk. The SBA 7(a) program generally provides 50%, 75%, 85% and 90% guarantees for eligible SBA 7(a) loans. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper underwriting, closing or servicing by the lender. As such, prudent underwriting, closing and servicing processes are essential to effective utilization of the SBA 7(a) program. Historically, we have generally sold the SBA-guaranteed portion (typically 75% of the principal balance) of a majority of the loans we originate at a premium in the secondary market while retaining all servicing rights and the unguaranteed portion; however, beginning in 2020, we made the decision to drive interest income by retaining a larger amount of the guaranteed portion of these loans. In light of suppressed gain-on-sale premiums and increasing variable loan rates during 2023, we retained on our balance sheet a greater percentage of the guaranteed portion of certain SBA loans that we originated than we have historically, which we believe will benefit us through stronger government guaranteed held for investment loan growth and an increased recurring stream of interest income and partially offset the decline in gain-on-sale revenue.

Current wording

As of September 30, 2024 and December 31, 2023, we had total SBA 7(a) loans of $251.4 million and $239.9 million, respectively, representing 57.9% and 64.5% of our total loans held for investment, respectively. Loans are sourced primarily through our referral relationship with BFG. Although BFG actively markets throughout the USA, because of its physical location in the New York area we have developed a lending presence in the New York and New Jersey geographies. The maximum SBA 7(a) loan amount is $5 million. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow and tertiary is the sale of collateral pledged. These loans may be secured by commercial and residential mortgages as well as liens on business assets. In addition to typical underwriting metrics, we review the nature of the business, use of proceeds, length of time in business and management experience to help us target loans that we believe have lower credit risk. The SBA 7(a) program generally provides 50%, 75%, 85% and 90% guarantees for eligible SBA 7(a) loans. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper underwriting, closing or servicing by the lender. As such, prudent underwriting, closing and servicing processes are essential to effective utilization of the SBA 7(a) program. Historically, we have generally sold the SBA-guaranteed portion (typically 75% of the principal balance) of a majority of the loans we originate at a premium in the secondary market while retaining all servicing rights and the unguaranteed portion; however, beginning in 2020, we made the decision to drive interest income by retaining a larger amount of the guaranteed portion of these loans. In light of suppressed gain-on-sale premiums and increasing variable loan rates during 2023, we retained on our balance sheet a greater percentage of the guaranteed portion of certain SBA loans that we originated than we have historically, which we believe will benefit us through stronger government guaranteed held for investment loan growth and an increased recurring stream of interest income and partially offset the decline in gain-on-sale revenue.

Previous wording

As of June 30, 2024 and December 31, 2023, we had total commercial leases of $56.5 million and $38.1 million, respectively, representing 13.7% and 10.2% of our total loans held for investment, respectively. Underwriting for smaller credit requests from customers is generally based on an internal credit scorecard, incorporating several customer and structure attributes including: severity and aging of delinquency; number of credit inquiries; LTV ratio; term; and payment-to-income ratio. We periodically update our underwriting scorecard, which can have an impact on our credit tier scoring. Underwriting for larger credit requests from customers is generally based on commercial credit metrics where the primary repayment source considered is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are also considerations. These leases are generally secured by liens on business assets leased or purchased with Company funds. Historically, we have retained these leases on our balance sheet for investment; however, we may sell leases to certain purchasers from time to time.

Current wording

As of September 30, 2024 and December 31, 2023, we had total commercial leases of $64.3 million and $38.1 million, respectively, representing 14.8% and 10.2% of our total loans held for investment, respectively. Underwriting for smaller credit requests from customers is generally based on an internal credit scorecard, incorporating several customer and structure attributes including: severity and aging of delinquency; number of credit inquiries; LTV ratio; term; and payment-to-income ratio. We periodically update our underwriting scorecard, which can have an impact on our credit tier scoring. Underwriting for larger credit requests from customers is generally based on commercial credit metrics where the primary repayment source considered is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are also considerations. These leases are generally secured by liens on business assets leased or purchased with Company funds. Historically, we have retained these leases on our balance sheet for investment; however, we may sell leases to certain purchasers from time to time.

Previous wording

Commercial non-real estate loans consist of loans and leases made to commercial enterprises that are not secured by real estate. As of June 30, 2024 and December 31, 2023, we had total commercial non-real estate loans of $2.0 million and $2.5 million, respectively, representing 0.5% and 0.7% of our total loans held for investment, respectively. Any loan, lease, line of credit, or letter of credit (including any unfunded commitments) and any interest obtained in such loans made by another lender to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, not secured by real estate, but not for personal expenditure purposes are included in this category. For example, commercial vehicle term loans and commercial working capital term loans. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. These loans are generally secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment.

Current wording

Commercial non-real estate loans consist of loans and leases made to commercial enterprises that are not secured by real estate. As of September 30, 2024 and December 31, 2023, we had total commercial non-real estate loans of $3.0 million and $2.5 million, respectively, representing 0.7% and 0.7% of our total loans held for investment, respectively. Any loan, lease, line of credit, or letter of credit (including any unfunded commitments) and any interest obtained in such loans made by another lender to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, not secured by real estate, but not for personal expenditure purposes are included in this category. For example, commercial vehicle term loans and commercial working capital term loans. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. These loans are generally secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment.

Previous wording

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 June 30, 2024 and December 31, 2023, we had total residential real estate loans of $42.3 million and $38.1 million, respectively, representing 10.2% and 10.2% of our total loans held for investment, respectively. Construction loans are usually paid off through the conversion to permanent financing from third-party lending institutions. Lot loans may be paid off as the borrower converts to a construction loan. At the completion of the construction project, if the loan is converted to permanent financing by us or if scheduled loan amortization begins, it is then reclassified from construction to single-family dwelling. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded. These loans are generally secured by mortgages for residential property located primarily in the Salt Lake City, Utah MSA, and we obtain guarantees from responsible parties. Historically, we have retained these loans on our balance sheet for investment.

Current wording

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 September 30, 2024 and December 31, 2023, we had total residential real estate loans of $41.4 million and $38.1 million, respectively, representing 9.5% and 10.2% of our total loans held for investment, respectively. Construction loans are usually paid off through the conversion to permanent financing from third-party lending institutions. Lot loans may be paid off as the borrower converts to a construction loan. At the completion of the construction project, if the loan is converted to permanent financing by us or if scheduled loan amortization begins, it is then reclassified from construction to single-family dwelling. Underwriting of construction and development loans typically includes analysis of not only the borrower’s financial condition and ability to meet the required debt obligations, but also the general market conditions associated with the area and type of project being funded. These loans are generally secured by mortgages for residential property located primarily in the Salt Lake City, Utah MSA, and we obtain guarantees from responsible parties. Historically, we have retained these loans on our balance sheet for investment.

Previous wording

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 choose to hold more of the funded loans and/or receivables based on a number of factors including the amount of our available capital. As of June 30, 2024 and December 31, 2023, we had total Strategic Program loans held for investment of $17.9 million and $19.4 million, respectively, representing 4.3% and 5.2% of our total loans held for investment, respectively. Loans originated through these programs are limited to predetermined Bank underwriting 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.

Current wording

We, through our Strategic Program service providers, issue, on a nationwide basis, unsecured and secured consumer and business loans to borrowers within certain approved credit profiles. Although we have generally sold most of these loans, we may choose to hold more of the funded loans and/or receivables based on a number of factors including the amount of our available capital. As of September 30, 2024 and December 31, 2023, we had total Strategic Program loans held for investment of $19.4 million and $19.4 million, respectively, representing 4.5% and 5.2% of our total loans held for investment, respectively. Loans originated through these programs are limited to predetermined Bank underwriting criteria, which has been approved by our board of directors. The primary form of repayment on these loans is from personal or business cash flow. Secured loans are secured by liens on consumer or business assets, as applicable. We reserve the right to sell any portion of funded loans and/or receivables directly to the Strategic Program service providers or other investors. We generally retain the legal right to service all these loans, but contract with the Strategic Program service provider or another approved sub-servicer to service these loans on our behalf.

Previous wording

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 June 30, 2024 and December 31, 2023, we had total commercial real estate loans of $30.5 million and $22.8 million, respectively, representing 7.4% and 6.1% of our total loans held for investment, respectively. Of these amounts, $28.3 million and $20.8 million represented owner occupied properties as of June 30, 2024 and December 31, 2023, respectively. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. In addition to real estate, these loans may also be secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment.

Current wording

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 September 30, 2024 and December 31, 2023, we had total commercial real estate loans of $35.2 million and $22.8 million, respectively, representing 8.1% and 6.1% of our total loans held for investment, respectively. Of these amounts, $32.5 million and $20.8 million represented owner occupied properties as of September 30, 2024 and December 31, 2023, respectively. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are all considerations. In addition to real estate, these loans may also be secured by liens on business assets. Historically, we have retained these loans on our balance sheet for investment.

Previous wording

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 June 30, 2024 and December 31, 2023, we had total consumer loans of $15.9 million and $11.4 million, respectively, representing 3.8% and 3.1% of our total loans held for investment, respectively. We use a debt-to-income (“DTI”) ratio to determine whether an applicant will be able to service the debt. The DTI ratio compares the applicant’s anticipated monthly expenses and total monthly obligations to the applicant’s monthly gross income. Our policy is to limit the DTI ratio to 45% after calculating interest payments related to the new loan. Loan officers, at their discretion, may make exceptions to this ratio if the loan is within their authorized lending limit. DTI ratios of no more than 50% may be approved subject to an increase in interest rate. Strong offsetting factors such as higher discretionary income or large down payments are used to justify exceptions to these guidelines. All exceptions are documented and reported. While the loans are generally for the purchase of goods which may afford us a purchase money security interest, they are underwritten as if they were unsecured. On larger loans, we may file a Uniform Commercial Code financing form. Historically, we have retained these loans on our balance sheet for investment.

Current wording

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 September 30, 2024 and December 31, 2023, we had total consumer loans of $19.2 million and $11.4 million, respectively, representing 4.4% and 3.1% of our total loans held for investment, respectively. We use a debt-to-income (“DTI”) ratio to determine whether an applicant will be able to service the debt. The DTI ratio compares the applicant’s anticipated monthly expenses and total monthly obligations to the applicant’s monthly gross income. Our policy is to limit the DTI ratio to 45% after calculating interest payments related to the new loan. Loan officers, at their discretion, may make exceptions to this ratio if the loan is within their authorized lending limit. DTI ratios of no more than 50% may be approved subject to an increase in interest rate. Strong offsetting factors such as higher discretionary income or large down payments are used to justify exceptions to these guidelines. All exceptions are documented and reported. While the loans are generally for the purchase of goods which may afford us a purchase money security interest, they are underwritten as if they were unsecured. On larger loans, we may file a Uniform Commercial Code (“UCC”) financing form. Historically, we have retained these loans on our balance sheet for investment.

Previous wording

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.

Current wording

A nonaccrual asset may be restored to accrual status when (1) none of its principal and interest is due and unpaid, and we expect repayment of the remaining contractual principal and interest, or (2) when asset otherwise becomes well secured and is not in the process of collection.

Previous wording

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.

Current wording

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. Consumer loans and credit card balances are charged off at 120 days and 180 days, respectively. We believe our disciplined lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our loan officers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.

Previous wording

We had a total of $27.9 million in nonperforming assets which included $0.9 million in material loan modifications at June 30, 2024. The amount of nonperforming assets as of June 30, 2024 includes $16.0 million of SBA 7(a) loan balances that are guaranteed by the SBA. We had $27.1 million in nonperforming assets which included $0.4 million in material loan modifications at December 31, 2023. The amount of nonperforming assets as of December 31, 2023 includes $15.0 million of SBA 7(a) loan balances that are guaranteed by the SBA. The increase in nonperforming assets and material loan modifications from the prior period was primarily attributable to several loans in the SBA 7(a) loan portfolio moving to nonperforming status. Due to elevated interest rates, the slowdown of consumer spending and the variable rate nature of our SBA portfolio, the risk of default is elevated and may result in additional delinquencies in future periods.

Current wording

We had a total of $30.6 million in nonperforming assets which included $0.9 million in material loan modifications at September 30, 2024. The amount of nonperforming assets as of September 30, 2024 includes $17.8 million of SBA 7(a) loan balances that are guaranteed by the SBA. We had $27.1 million in nonperforming assets which included $0.4 million in material loan modifications at December 31, 2023. The amount of nonperforming assets as of December 31, 2023 includes $15.0 million of SBA 7(a) loan balances that are guaranteed by the SBA. The increase in nonperforming assets and material loan modifications from the prior period was primarily attributable to several loans in the SBA 7(a) loan portfolio moving to nonperforming status. Due to elevated interest rates, the slowdown of consumer spending and the variable rate nature of our SBA portfolio, the risk of default is elevated and may result in additional delinquencies in future periods.

Previous wording

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 credit loss reserve adequacy. Further, on a quarterly basis, the Loan Committee holds a Loan Risk Grade meeting, wherein all loans in our portfolio are reviewed for accurate risk grading. Any changes are made after the Loan Risk Grade meeting to provide for accurate reporting. Reporting is achieved in Loan Committee minutes, which minutes are reviewed by the Board. We supplement credit department supervision of the loan underwriting, approval, closing, servicing and risk grading process with periodic loan reviews by risk department personnel specific to the testing of controls.

Current wording

Accurate and timely loan risk grading is considered a critical component of an effective credit risk management system. Loan grades take into consideration the borrower’s financial condition, industry trends, and the economic environment. Loan risk grades are changed as necessary to reflect the risk inherent in the loan. Among other things, we use loan risk grading information for loan pricing, risk and collection management and determining credit loss reserve adequacy. Further, on a quarterly basis, the Loan Committee holds a Loan Risk Grade meeting, wherein all loans in our portfolio are reviewed for accurate risk grading. Any changes are made after the Loan Risk Grade meeting to provide for accurate reporting. Reporting is achieved in Loan Committee minutes, which minutes are reviewed by the Board. We supplement credit department supervision of the loan underwriting, approval, closing, servicing and risk grading process with periodic loan reviews by risk department personnel specific to the testing of controls.

Previous wording

The following tables show the allocation of the ACL as of June 30, 2024 and December 31, 2023. The ACL related to Strategic Programs constitutes 45.3% and 54.8% of the total ACL while comprising 4.3% and 5.2%, respectively, of total loans held for investment as of June 30, 2024 and December 31, 2023, respectively. The percentage of ACL related to Strategic Program loans retained reflects the increased credit risks associated with certain retained Strategic Program loans.

Current wording

The following tables show the allocation of the ACL as of September 30, 2024 and December 31, 2023. The ACL related to Strategic Programs constitutes 48.1% and 54.8% of the total ACL while comprising 4.5% and 5.2%, respectively, of total loans held for investment as of September 30, 2024 and December 31, 2023, respectively. The percentage of ACL related to Strategic Program loans retained reflects the increased credit risks associated with certain retained Strategic Program loans.

Previous wording

The following table reflects the ratios of the ACL to total loans held for investment, nonaccrual loans to total loans held for investment, and the ACL to nonaccrual loans by loan category as of December 31, 2023.

Current wording

The following table reflects the ratios of the ACL to total LHFI, nonaccrual loans to total loans held for investment, and the ACL to nonaccrual loans by CECL loan category as of December 31, 2023.

Previous wording

When comparing June 30, 2024 to December 31, 2023, the decrease in ACL to total loans held for investment for the periods presented above was primarily due to the reduction in Strategic Program loans held for investment. The decrease in nonaccrual loans to loans held for investment as shown above was primarily due to the growth in the loans held for investment portfolio. The decrease in the ACL to nonaccrual loans ratio as shown above primarily pertained to growth in the nonaccrual loans exceeding the growth in the ACL.

Current wording

When comparing September 30, 2024 to December 31, 2023, the decrease in ACL to total loans held for investment was primarily due to the reduction in Strategic Program loans held for investment. The decrease in nonaccrual loans to total loans held for investment as shown above was primarily due to the growth in the loans held for investment portfolio. The decrease in the ACL to nonaccrual loans ratio as shown above primarily pertained to growth in the nonaccrual loans concentrated in the SBA product which has a lower risk profile than the Strategic Program loans.

Previous wording

The total ratio of NCO to average loans outstanding was lower during the three months ended June 30, 2024 as compared to the three months ended June 30, 2023, primarily due to the increase in our average loans held for investment as well as the decrease in net charge-offs. When comparing the six months ended June 30, 2024 to June 30, 2023, the decrease in the total ratio of NCO to average loans outstanding was primarily due to the increase in our average loans held for investment.

Current wording

The total ratio of NCO to average loans outstanding was lower during the three and nine months ended September 30, 2024 as compared to the three and nine months ended September 30, 2023, primarily due to the loan portfolio growth in loans deemed to have less credit risk.

Previous wording

Total assets at June 30, 2024 were $617.8 million, an increase of $31.6 million from December 31, 2023. The increase in total assets was due primarily to the net increase in loans receivable, net, of $40.0 million mainly attributable to the growth in our commercial lease, SBA and commercial real estate - owner occupied, and Strategic Program loans held-for-sale of

Current wording

Total assets at September 30, 2024 were $683.0 million, an increase of $96.8 million from December 31, 2023. The increase in total assets was primarily due to the increase in loans held for investment, net of $59.5 million, mainly attributable to the growth in our commercial lease, SBA and commercial real estate - owner occupied portfolios, Strategic Program loans held-for-sale of $36.5 million, and investment securities available-for-sale of $30.5 million. These increases were partially offset by a decrease in interest-bearing deposits in other banks of $38.5 million used to purchase the investment securities available-for-sale. These changes were consistent with our strategy to grow assets in lower risk revenue producing products.

Previous wording

Deposits are the major source of funding for us. We offer a variety of deposit products including interest and noninterest bearing demand accounts, HSA demand deposits 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 or Strategic Program loan portfolio. In addition to the reserve account, some Strategic Program loan originators maintain operating deposit accounts with us.

Current wording

Deposits are the major source of funding for us. We offer a variety of deposit products including interest and noninterest bearing demand accounts, HSA demand deposits, money market and savings accounts and certificates of deposit, all of which we market at competitive pricing. We generate deposits from our customers on a relationship basis and through access to national institutional and brokered deposit sources. We also generate deposits in relation to our Strategic Programs in the form of reserve accounts as discussed above. These deposits add an element of flexibility in that they tend to increase or decrease in relation to the size of or Strategic Program loan portfolio. In addition to the reserve account, some Strategic Program loan originators maintain operating deposit accounts with us.

Previous wording

Our deposits increased to $429.2 million as of June 30, 2024 from $404.8 million as of December 31, 2023, an increase of $24.4 million, or 6.0%, and was primarily due to increases in noninterest-bearing demand deposits of $11.6 million, or 12.1%, and brokered time deposits of $8.1 million, or 3.8%, utilized in the funding of our lending programs. As of June 30, 2024, $200.3 million of time certificates of deposit were callable giving us the ability to terminate the callable deposits and replace them with lower cost callable or non-callable deposits should it be economically beneficial for us to do so.

Current wording

Our deposits increased from December 31, 2023 to September 30, 2024 by $83.8 million, or 20.7%, primarily due to increases in noninterest-bearing demand deposits of $47.3 million, or 49.5%, and brokered time deposits of $14.1 million, or 6.6%. Deposits are used to fund our lending programs. As of September 30, 2024, $205.0 million of time certificates of deposit were callable giving us the ability to terminate the callable deposits and replace them with lower cost callable or non-callable deposits should it be economically beneficial for us to do so.

Previous wording

As an FDIC-insured institution, our deposits are insured up to applicable limits by the Deposit Insurance Fund (“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 $144.0 million and $136.9 million as of June 30, 2024 and December 31, 2023, respectively. The maturity profile of our uninsured time deposits, those amounts that exceed the FDIC insurance limit, at June 30, 2024 is as follows:

Current wording

As an FDIC-insured institution, our deposits are insured up to applicable limits by the Deposit Insurance Fund (“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 $183.8 million and $136.9 million as of September 30, 2024 and December 31, 2023, respectively. Uninsured deposits at the Bank as of September 30, 2024 include $44.0 million of total deposits contractually required to be maintained at the Bank pursuant to our Strategic Program agreements and an additional $48.9 million of total deposits associated with accounts owned by the parent holding company or the Bank. The maturity profile of our uninsured time deposits, those amounts that exceed the FDIC insurance limit, at September 30, 2024 is as follows:

Previous wording

Total liabilities increased to $452.0 million, or 4.8%, as of June 30, 2024 from $431.2 million as of December 31, 2023 primarily due to an increase in deposits as discussed above.

Current wording

Total liabilities increased to $512.7 million, or 18.9%, as of September 30, 2024 from $431.2 million as of December 31, 2023 primarily due to an increase in deposits as discussed above.

Previous wording

Our primary source of funds to originate new loans is derived from deposits. Deposits are comprised of core and non-core deposits. Non-core deposits generally include brokered deposits and deposits acquired through the utilization of a listing service. To attract core 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 the higher margin of our technology oriented business model. We utilize rate listing services and website advertising to attract deposits from consumer and commercial sources.

Current wording

Our primary source of funds to originate new loans is derived from deposits. Deposits are comprised of core and non-core deposits. To attract core 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 the higher margin of our technology oriented business model. We utilize rate listing services and website advertising to attract deposits from consumer and commercial sources. Non-core deposits generally include brokered deposits and deposits acquired through the utilization of a listing service.

Previous wording

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 control the risk to our earnings and capital arising from the inability to meet obligations in a timely manner. This entails ensuring sufficient funds are available at 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 14.4% of total assets at June 30, 2024.

Current wording

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 control the risk to our earnings and capital arising from the inability to meet obligations in a timely manner. This entails ensuring sufficient funds are available at 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 12.6% of total assets at September 30, 2024.

Previous wording

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 June 30, 2024, we had the ability to access $10.6 million from the Federal Reserve Bank’s Discount Window on a collateralized basis. 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 $21.2 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 June 30, 2024. In long term borrowings, we had $0.1 million outstanding at June 30, 2024 related to the Paycheck Protection Program Liquidity Facility (“PPPLF”). The PPPLF is secured by pledged Paycheck Protection Program (“PPP”) loans.

Current wording

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 September 30, 2024, we had the ability to access $41.9 million from the Federal Reserve Bank’s Discount Window on a collateralized basis. The Bank had an available unsecured line of credit with two correspondent banks to borrow up to$6.1 million in overnight funds. We also maintain a $25.0 million line of credit with Federal Home Loan Bank, secured by specific pledged loans. We had no outstanding balances on such unsecured or secured lines of credit as of September 30, 2024. In long term borrowings, we had $0.1 million outstanding at September 30, 2024 related to the Paycheck Protection Program Liquidity Facility (“PPPLF”). The PPPLF is secured by pledged Paycheck Protection Program (“PPP”) loans.

Previous wording

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 June 30, 2024, liquid assets (defined as cash and due from banks and interest-bearing deposits) totaled $89.0 million. We believe that our liquid assets combined with the available lines of credit and our ability to generate core and non-core funding provides adequate liquidity to meet our current financial obligations for at least the next 12 months.

Current wording

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 September 30, 2024, liquid assets (defined as cash and due from banks and interest-bearing deposits) totaled $85.8 million and constituted 12.6% of total assets. In addition, during the three months ended September 30, 2024, we purchased U.S. Treasury securities, which are classified as investment securities available-for-sale. These investment securities totaled $30.5 million at September 30, 2024 (4.5% of total assets) and can be readily sold. We believe that our liquid assets combined with the available lines of credit and our ability to generate core and non-core funding provides adequate liquidity to meet our current financial obligations for at least the next 12 months.

Previous wording

We use several indicators of capital strength. The most commonly used measure is total equity to total assets, which was 26.8% and 26.5% as of June 30, 2024 and December 31, 2023, respectively.

Current wording

We use several indicators of capital strength. The most commonly used measure is total equity to total assets, which was 24.9% and 26.5% as of September 30, 2024 and December 31, 2023, respectively.

Previous wording

Our return on average equity was 7.9% and 11.1% for the six months ended June 30, 2024 and 2023, respectively. Our return on average assets was 2.1% and 3.8% for the six months ended June 30, 2024 and 2023, respectively.

Current wording

Our return on average equity was 8.3% and 12.8% for the three months ended September 30, 2024 and 2023, respectively and 8.1% and 12.3% for the nine months ended September 30, 2024 and 2023, respectively. Our return on average assets was 2.1% and 3.7% for the three months ended September 30, 2024 and 2023, respectively, and 6.3% and 3.8% for the nine months ended September 30, 2024 and 2023, respectively.