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
FinWise Bancorp, Inc. is a Utah corporation and the parent company of FinWise Bank and FinWise Investment, LLC. The Company is a registered bank holding company that is subject to supervision by Utah Department of Financial Institutions (“UDFI”) and the Federal Reserve. The Company’s assets consist primarily of its investment in the Bank and all of its material business activities are conducted through the Bank. 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 Federal Deposit Insurance Corporation (“FDIC”). The Bank’s deposits are federally insured up to the maximum legal limits.
Our banking business is our only business line. Our banking business offers a diverse range of commercial and retail banking products and services, and consists primarily of originating loans in a variety of sectors. Attracting nationwide deposits from the general public, businesses and other financial institutions, and investing those deposits, together with borrowings, capital and other sources of funds, is also critical to our banking business. While our commercial and residential real estate lending and other products and services offered from our branch continue to be concentrated in and around the Salt Lake City, Utah MSA, our third-party loan origination relationships have allowed us to expand into 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 growth and our consistent ability to operate profitability since developing our third-party loan origination business. Our track record has demonstrated that our products and delivery of the products help deliver sustainable asset growth and strong profitability, and that the characteristics of our business model enhances our ability to manage credit risk. We gather deposits in the Salt Lake City, Utah MSA through our one branch and nationwide from our Strategic Program service providers, SBA 7(a) borrowers, institutional deposit exchanges, brokered deposit arrangements and other deposit sources.
Our financial condition and results of operations depend primarily on our ability to (i) originate loans and leases directly, or by using our strategic relationships with third-party loan origination platforms to earn interest and non-interest income, (ii) effectively manage credit and other risks throughout the Bank, (iii) attract and retain low cost, stable deposits, and (iv) efficiently operate in compliance with applicable regulations.
Our lending focuses on two main lending areas: (i) traditional lending which includes SBA 7(a) loans, residential and commercial real estate, and commercial leasing; and (ii) Strategic Programs lending which includes held-for-sale, credit enhanced, and retained loans. For a description and analysis of the Company’s loan categories, see “Financial Condition.”
Critical Accounting Estimates
The preparation of our consolidated financial statements in accordance with U.S. GAAP requires us to make estimates and judgments that affect our reported amounts of assets, liabilities, revenues, expenses and related disclosures of contingent assets and liabilities. These estimates are based on historical experience and other reasonable assumptions under current circumstances, the results of which form the basis for making judgments about the carrying value of certain assets and liabilities that are not readily determinable from other sources. We review these estimates regularly. Actual results may differ from these estimates.
Management considers the determination of our allowance for credit losses to be a critical accounting estimate, as it involves making difficult, subjective, or complex judgments about inherently uncertain matters. Changes in this estimate, whether due to evolving circumstances from period to period or the use of other reasonable assumptions, could materially affect our financial position, results of operations, or liquidity. For further details on our accounting policy related to this estimate, refer to Note 1 – Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8.
Allowance for Credit Losses (“ACL”). The ACL represents management’s estimate of expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and measured on a collective basis for loans that share similar risk characteristics. At each reporting date, we assess whether loans within a given pool continue to exhibit similar risk characteristics or whether certain loans should be evaluated individually. Expected credit losses are estimated over the contractual term of each loan, adjusted for expected prepayments. Accordingly, assumptions regarding loan life may have a
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significant impact on the ACL. The Company segments its loan portfolio in a manner consistent with how credit risk is managed.
The Company utilizes multiple approaches to estimate expected credit losses, depending on the loan segment:
•Approach: For certain loan segments, the Company applies a non-discounted cash flow approach using loan‐level assumptions and relevant information from internal and external sources related to historical experience, current conditions, and reasonable and supportable forecasts.
•Approach: For other loan segments, the Company employs a vintage‐based approach that evaluates cumulative loss performance by origination period. Expected losses for each product are anchored to the most severe loss experience observed for comparable vintages at a similar stage of seasoning. This methodology is designed to conservatively estimate losses over the life of the product, even for unseasoned vintages.
The ACL also includes qualitative reserves for expected losses that may not be fully captured by the quantitative models. Qualitative factors considered include, among others, general business and economic conditions, borrower financial condition, and the volume and severity of past‐due and nonaccrual loans. Based on this assessment, the Company records a provision for credit losses to maintain the ACL at a level deemed appropriate by management.
The determination of the ACL is considered a critical accounting estimate, as it requires significant judgment and the use of subjective assumptions, including management’s evaluation of overall portfolio quality. The Company maintains the ACL at an amount it believes is sufficient to cover expected credit losses inherent in the loan portfolio as of each balance sheet date. Changes in economic conditions or portfolio composition may result in fluctuations in the provision for credit losses.
The ACL increased from $13.2 million at December 31, 2024, to $36.8 million at December 31, 2025. This increase was primarily driven by growth in loan balances, including a significant increase in credit‐enhanced balances, which increased from $0.9 million at December 31, 2024 to $108.1 million at December 31, 2025. For additional information, see Note 3 – Loans to the consolidated financial statements included in Part II, Item 8.
Changes in assumptions and estimates may materially affect the ACL and, in turn, the Company’s financial position, liquidity, and results of operations. To assess the sensitivity of the ACL to changes in key assumptions, management performed a hypothetical sensitivity analysis focused on the national unemployment forecast. All model inputs and assumptions were held constant except for unemployment, which was stressed from the baseline 12-month forecast provided by Fannie Mae (ranging from 4.5% to 4.6%) to a theoretical 9.0% over the full 12 month forecast period. Incorporating this stressed forecast into both the quantitative and qualitative components of the CECL framework resulted in an incremental $1.7 million increase in the ACL, representing an approximate 4.7% increase. This stressed forecast scenario would have the allowance to total loans and leases increase from 6.3% to 6.5% atDecember 31, 2025.
Executive Summary
This executive summary provides certain 2025 and 2024 consolidated financial highlights from the discussion and analysis that follows:
•Originations of total loans increased by $1.1 billion to $6.1 billion for the year ended December 31, 2025 compared to the year ended December 31, 2024. New strategic programs and organic growth through certain established strategic programs contributed to the increase in loan originations.
•Net interest margin (“NIM”) was 9.23% for the year ended December 31, 2025, compared to 9.99% for the year ended December 31, 2024. NIM is impacted by income earned from interest-earning assets and interest costs incurred on interest-bearing liabilities.
•FinWise generated net income of $16.1 million and $12.7 million for the year ended December 31, 2025 and 2024, respectively. Net income increased as we benefited from the past investment in expansion of our product offerings.
•Total assets increased by $231.2 million to $977.1 million as of December 31, 2025 compared to December 31, 2024, principally in our Strategic Program loans held-for-sale and credit enhanced Strategic Program loans held-for-investment. We believe our strong capital levels support our current and planned growth strategy.
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Fintech Relationships and Program Launches
During the year ended December 31, 2025, we developed the following relationships and program offerings with fintech companies:
•We announced our new strategic lending program with Backd Business Funding (“Backd”) to provide business installment loans to small and medium-sized businesses. We also provided Backd with access to our credit enhanced balance sheet program.
•We entered into a strategic program agreement with DreamFi, Inc. to support underserved and underbanked communities.
•We entered into a program management, network issuer processor and servicer agreement with Tallied Technologies, Inc. (“Tallied”) with the intent to deliver credit card products and card processing solutions to Fintechs, their businesses, and their customers. As a result of this partnership, FinWise issued two Mastercard co-branded credit cards and purchased an existing credit card portfolio. FinWise will serve as the issuing bank, provide compliance and risk management oversight and credit enhanced balance sheet support for the card programs.
•Launched existing partner Plannery on MoneyRailsTM for payment servicing of loans that the Bank originates.
During the year ended December 31, 2024, we entered into the following new strategic program relationships:
•FinWise Bank and Albert entered into a strategic partnership to jointly launch lending products.
•We enhanced our portfolio of private student loan products through our new strategic lending program with Earnest, to help students and their families with education financing.
•We announced our strategic payments program with FUTR Payments (formerly Hank Payments Corp.) to support automated payment processing and remittance capabilities.
•We announced our new strategic lending program with Plannery to offer a debt consolidation platform exclusively for healthcare professionals. Additionally, we are providing Plannery with access to our Credit Enhancement Program.
•We announced the launch of a new strategic lending program with PowerPay to offer consumers a simple and affordable lending solution for home improvement and elective health care purchases.
Our Payments (MoneyRailsTM) and Bank Identification Number (“BIN”) Sponsorship products which, together with our Strategic Programs, comprise the Bank’s Fintech Banking and Payment Solutions offerings. Payments (MoneyRailsTM) connects our customers to the Bank’s API-driven banking services ledger.
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Results of Operations for the Years Ended December 31, 2025 and 2024
The following table sets forth the principal components of net income for the periods indicated:
Years EndedDecember 31,
Provision for income taxes (5,669) (4,247)
Net Interest Income and NIM
Net interest income was the primary contributor to our earnings in 2025 and 2024. Net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as “volume changes.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as “rate changes.”
Net interest income increased $13.3 million for the year ended December 31, 2025, compared to the year ended December 31, 2024 primarily due to volume increases in the loans held-for-investment and loans held-for-sale portfolios and was partially offset by increased volume in the certificates of deposit portfolio. Average interest-earning assets increased by $192.1 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, while the related yield on average interest earning assets decreased by 77 basis points to 11.83%. Average interest-bearing liabilities increased by $166.4 million for the year ended December 31, 2025 compared to the year ended December 31, 2024, while the related cost of funds decreased 55 basis points to 4.02%.
NIM decreased to 9.23% for the year ended December 31, 2025 from 9.99% for the year ended December 31, 2024 primarily as a result of our increased lending to lower risk borrowers with lower yields on loans as part of our strategy to reduce average credit risk in the loan portfolio, which was offset in part by the growth in the higher yielding credit enhanced portfolio of $107.2 million.
Average Balances and Yields. The following table presents average balances for assets and liabilities, the total dollar amounts of interest income from interest-earning assets, the total dollar amounts of interest expense on interest-bearing liabilities, the resulting average yields and costs, and NIM. The yields and costs for the periods indicated are derived by dividing the annualized income or expense by the average balances for assets or liabilities, respectively, for the periods presented. The weighted average yields and rates include amortization of fees, costs, premiums and discounts, which are considered adjustments to yield/rates. Average balances have been calculated using daily averages. Loan fees are included in interest income on loans and represent net fees of approximately $2.0 million and $2.8 million for the years ended December 31, 2025 and 2024, respectively.
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Years Ended December 31,
Interest-earning assets:
Interest-bearing liabilities:
Total liabilities and shareholders’ equity $ 839,489 $ 637,478
Net interest margin(3) 9.23 % 9.99 %
(1) Loans placed on nonaccrual status are included in loan balances. See “Nonperforming Assets” below.
(2) Interest spread is the weighted average yield on interest-earning assets, less the weighted average rate incurred on interest-bearing liabilities.
(3) Net interest margin is net interest income, expressed as a percentage of average earning assets.
Rate/Volume Analysis. The following table sets forth the effects of changing rates and volumes on our net interest income based on average balances. The rate column shows the effects attributable to changes in average rate. The volume column shows the effects attributable to changes in average volume. For purposes of this table, changes attributable to changes in both average rate and average volume that cannot be segregated have been allocated proportionally based on the changes due to rate and the changes due to volume.
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Year Ended December 31,
Increase (Decrease) Due to Change in
($ in thousands) Rate Volume Total
Interest income:
Interest expense:
Other borrowings — — —
Provision for Credit Losses
The following table presents the components of the provision for credit losses for the periods indicated:
Years EndedDecember 31, Change
Provision for credit losses:
Strategic Program loans - without credit enhancement 8,611 7,729 882 11.4 %
Provision for unfunded commitments 94 325 (231) (71.1) %
The provision for credit losses is a charge to income to bring our ACL to a level deemed appropriate by management and approved by our board of directors. We determine the provision for credit losses monthly in connection with our evaluation of the adequacy of our ACL. For a description of the factors we considered in determining the ACL see Allowance for credit losses presented in Note 1 - Summary of Significant Accounting Policies included in Part II, Item 8.
The increase in the provision for credit losses for the year ended December 31, 2025, compared to the same period in 2024 resulted primarily from growth in the credit enhancement loan portfolio as well as higher net charge-offs resulting from the adoption of more conservative servicing and administration standards which prompted an accelerated classification of nonperforming loans and charge-offs.
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Non-interest Income
The following table presents the major categories of non-interest income for the periods indicated:
Years EndedDecember 31, Change
Non-interest income:
The increase in total non-interest income for the year ended December 31, 2025, compared to the same period in 2024, was primarily due to increases in credit enhanced loan balances of $107.2 million which generated higher credit enhancement income. Additionally, the increased sales of the guaranteed portions of SBA 7(a) loans led to an increase in gains on loan sales, while higher originations resulted in increased Strategic Program fees. Other miscellaneous income also increased, largely because of a charge in the prior year period of $0.9 million to remove unamortized broker premiums upon calling $160.0 million of callable certificates of deposits, an increase in dividends received from our investment in BFG of $0.9 million as well as an increase in operating lease rental income of $1.0 million. Offsetting these non-interest income increases in part was a decrease in SBA loan servicing fees, net, due to an increase in the provision for SBA servicing losses resulting from a change in assumptions used in valuing the SBA servicing asset.
Non-interest Expense
Non-interest expense has increased as we have grown and as we have expanded and modernized our operational infrastructure and continued to implement our plan to build an efficient, integrated fintech banking operation with significant capacity for growth.
The following table presents the major categories of non-interest expense for the periods indicated:
Years EndedDecember 31, Change
Non-interest expense:
The increase in total non-interest expense for the year ended December 31, 2025, compared to the same period in 2024, was primarily due to an increase in credit enhancement program expenses related to growth in credit enhanced loans and an increase in salaries and employee benefits of which $1.7 million was attributable to the amortization of deferred compensation awards incurred to retain and motivate our employees. The increases in other operating expenses were primarily due to expenditures on computer software of $1.5 million and operating lease depreciation of $0.8 million.
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Partially offsetting these non-interest expense increases was a decrease in professional services primarily resulting from a reduction in contract services of $1.0 million connected to the development of various programs that launched during 2025.
Provision for Income Taxes
The provision for income taxes totaled $5.7 million at an effective tax rate of 26.1% for the year ended December 31, 2025, compared to $4.2 million at an effective tax rate of 25.0% for the year ended December 31, 2024. The increase in provision for income taxes and the effective tax rate from the prior year period was principally due to an increase in the exclusion of compensation expense for highly compensated individuals and the apportionment of income between states with various tax rates.
Net Income
The increase in net income for the year ended December 31, 2025, compared to the same period in 2024, was primarily the result of the factors discussed in the foregoing sections.
Segment Results
As further described in Note 17, Segments, in Part I, Item 8 of this Report, during the third quarter of 2025, we implemented segment reporting following the completion of a technology initiative to capture segment-specific financial data and develop reports used by our chief operating decision maker (“CODM”) to review our financial performance and determine how to allocate resources. Our operations are comprised of three reportable segments: traditional banking, banking as a service and treasury and administration.
The traditional banking segment provides loan and deposit products and services to consumers and businesses nationally and in and around the Salt Lake City, Utah MSA. The BaaS segment provides lending, card and payments solutions nationally to fintech brands. The treasury and administration segment consists of investments, deposits sourced nationally to support the business segments, interest charged to the traditional banking and BaaS segments on funding provided to those businesses, and other items not specific to the traditional banking or BaaS segments.
For periods prior to July 1, 2025, our operations were managed and reported as a single segment, and historical financial data by segment was not maintained. Accordingly, it is not practicable to present segment information for prior periods. In the segment reporting below, a non-GAAP subtotal is shown, captioned “Income before other operating expense allocation”. That subtotal presents an income subtotal before consideration of allocated corporate expenses which might be fixed, semi-fixed or otherwise resist changes without regard to a particular line of business. The following table provides segment information for the period indicated (dollars in thousands):
For the Year Ended December 31, 2025
Traditional Banking BaaS Treasury/Other Intersegment Eliminations(1) Total
Non-interest expense:
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(1) Interest income and expense are allocated to segments based on their respective funding requirements using an internal transfer pricing methodology. The treasury and administration segment earns interest income from providing funds to the traditional banking and BaaS segments, and incurs interest expense for the deposits or borrowings obtained to support the businesses. The internal interest flows are eliminated at the consolidated level through the intersegment/eliminations column.
The BaaS segment’s strong performance for the year ended December 31, 2025 underscores the success of our Strategic Program initiatives, while traditional banking continues to provide a stable business. Treasury and administration remains focused on optimizing liquidity and supporting the funding needs of our other operating segments.
Looking ahead, we expect continued growth in BaaS as we expand our fintech partnerships and product offerings. Traditional banking performance will be influenced by interest rate trends and treasury and administration will remain focused on optimizing liquidity and supporting business growth. We continue to monitor regulatory developments and market conditions that may impact segment performance.
Financial Condition
The following table summarizes selected components of our consolidated balance sheets as of December 31, 2025 and 2024.
As ofDecember 31, Change
Total equity to total assets 19.8 % 23.3 % (3.5) %
Interest-Bearing Deposits in Other Banks
The increase in interest-bearing deposits in other banks from December 31, 2025 to December 31, 2024, was primarily due to deposits received in late December from strategic partners with student loan programs in anticipation of increased activity in January 2026. Aside from minimal balances held with our correspondent banks, the majority of our interest-bearing deposits are held at the Federal Reserve.
Securities
We use our securities portfolio to provide a source of liquidity, provide an appropriate return on funds invested, manage interest rate risk, meet collateral requirements and meet regulatory capital requirements.
We classify investment securities as either held-to-maturity (“HTM”) or available-for-sale (“AFS”) based on our intentions and our ability to hold such securities until maturity. In determining such classifications, securities that we have the intent and the ability to hold until maturity are classified as HTM and carried at amortized cost. All other securities are designated as AFS and carried at estimated fair value with unrealized gains and losses included in shareholders’ equity on an after-tax basis.
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The following table summarizes the weighted-average yields of our investment securities at December 31, 2025. 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.
1 Year or Less 1 - 5 Years 5 - 10 Years Over 10 Years Total
Securities available-for-sale:
Securities held-to-maturity:
Collateralized mortgage obligations — % 3.14 % — % 2.53 % 2.61 %
There were no sales or transfers of investment securities between classifications during the years ended December 31, 2025 and December 31, 2024.
At December 31, 2025, there were seventeen securities, consisting of eight collateralized mortgage obligations and nine mortgage-backed securities, in an unrealized loss position as of December 31, 2025 and twenty-two securities, consisting of four U.S. Treasuries, eight collateralized mortgage obligations and ten mortgage-backed securities, in an unrealized loss position as of December 31, 2024.
Strategic Program Loans Held-for-Sale
We, through our Strategic Program service providers, offer unsecured and secured consumer and business loans to borrowers within certain approved credit profiles nationwide. Loans originated through these programs are limited to predetermined Bank underwriting criteria, which has been approved by our board of directors. We generally retain the loans and/or receivables for one to four business days after origination before selling the loans and/or receivables to the Strategic Program provider or another investor. Interest income is earned by us while holding the loans. These loans are classified as held-for-sale on the balance sheet and measured at the lower of cost or market.
Our Strategic Program loans held-for-sale increased $54.9 million as of December 31, 2025 compared to December 31, 2024, primarily as a result of greater hold periods for new originations for certain programs and a higher level of originations in 2025 compared to 2024.
Loans Held-for-Investment Portfolio
Through our diversification efforts we have built a portfolio that we believe positions us to withstand economic shifts. For example, we focus on industries and loan types that have historically lower loss rates such as professional, scientific and technical services (including law firms), non-store retailers (e-commerce), and ambulatory healthcare services.
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The following table summarizes our gross loan portfolio held-for-investment by loan program as of the periods indicated:
As of December 31,
($ in thousands) Amount % oftotalloans Amount % oftotalloans
Strategic Program loans:
Strategic Program loans - with credit enhancement 108,131 18.5 % 891 0.2 %
Strategic Program loans - without credit enhancement 21,637 3.7 % 19,231 4.1 %
Commercial real estate:
(1)SBA loans as of December 31, 2025 and December 31, 2024 include $102.7 million and $158.7 million, respectively, of SBA 7(a) loan balances that are guaranteed by the SBA.
We manage our loan portfolio based on factors that include concentrations per loan program and aggregated portfolio, industry of operation and geographies. We also monitor the impact of identified and estimated losses on capital as well as the pricing characteristics of each product. The following provides a general description and the risk characteristics relevant to each of our loan products. Each loan is assigned a risk grade during the origination and closing process by credit administration personnel based on criteria described later in this section. We analyze the resulting ratings, as well as other external statistics and factors such as delinquency, to track the migration performance of the portfolio balances. This ratings analysis is performed at least quarterly.
SBA
We originate and service loans partially guaranteed by the SBA under its Section 7(a) loan program for small businesses and professionals throughout the United States. Through our diversification efforts, we have built an SBA 7(a) portfolio that we believe positions us to better withstand economic shifts. For example, we focus on industries such as non-store retailers (e-commerce), ambulatory healthcare services, professional, scientific and technical services (including law firms), and merchant wholesalers.
As of December 31, 2025 and December 31, 2024, we had total SBA 7(a) loans of $205.6 million and $255.1 million, respectively, representing 35.1% and 54.8% of our total loans held-for-investment, respectively. Loans are sourced primarily through our referral relationship with BFG. Although BFG actively markets throughout the United States, we have developed a lending presence in the New York and New Jersey geographies due to its physical location in New York. The maximum SBA 7(a) loan amount is $5.0 million. Underwriting is generally based on commercial credit metrics where the primary repayment source is borrower cash flow, secondary is personal guarantor cash flow and tertiary is the sale of collateral pledged. These loans may be secured by commercial and residential mortgages as well as liens on business assets. In addition to typical underwriting metrics, we review the nature of the business, use of proceeds, length of time in business and management experience to help us target loans that we believe have lower credit risk. The SBA 7(a) program generally provides 50%, 75%, 85% and 90% guarantees for eligible SBA 7(a) loans. The guaranty is conditional and covers a portion of the risk of payment default by the borrower, but not the risk of improper underwriting, closing or servicing by the lender. As such, prudent underwriting, closing and servicing processes are essential to effective utilization of the SBA 7(a) program. Historically, we have generally sold the SBA-guaranteed portion (typically 75% of the principal balance) of a majority of the loans we originate at a premium in the secondary market while retaining all servicing rights and the unguaranteed portion. In light of suppressed gain-on-sale premiums and increasing variable loan rates during 2023, we retained on our balance sheet a greater percentage of the guaranteed portion of certain SBA loans that we originated than we have historically, which we believe will benefit us through stronger government guaranteed held-for-investment
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loan growth and an increased recurring stream of interest income and partially offset the decline in gain-on-sale revenue. During the third quarter of 2024 and considering the wider spreads on sale of SBA loans available, FinWise resumed selling limited amounts of SBA loans.
Commercial leases
As of December 31, 2025 and December 31, 2024, we had total commercial leases of $78.7 million and $70.2 million, respectively, representing 13.4% and 15.1% of our total loans held-for-investment, respectively. Underwriting for smaller credit requests is generally scorecard-based. Underwriting for smaller credit requests from customers is generally based on an internal credit scorecard, incorporating several customer and structure attributes including: severity and aging of delinquency; number of credit inquiries; loan-to-value ratio; term; and payment-to-income ratio. We periodically update our underwriting scorecard, which can have an impact on our credit tier scoring. Underwriting for larger credit requests from customers is generally based on commercial credit metrics where the primary repayment source considered is borrower cash flow, secondary is personal guarantor cash flow (when applicable) and tertiary is the sale of collateral pledged. The nature of the business, use of proceeds, length of time in business, management experience, repayment ability, credit history, ratio calculations and assessment of collateral adequacy are also underwriting considerations. These leases are generally secured by liens on business assets leased or purchased with our funds. Historically, we have retained these leases on our balance sheet for investment; however, we may sell leases to certain purchasers from time to time.
Commercial, non-real estate
Commercial non-real estate loans consist of loans and leases made to commercial enterprises that are not secured by real estate. As of December 31, 2025 and December 31, 2024, we had total commercial non-real estate loans of $4.2 million and $3.7 million, respectively, representing 0.7% and 0.8% 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 are included in this product loan category. 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, 2025 and December 31, 2024, we had total residential real estate loans of $59.6 million and $51.6 million, respectively, representing 10.2% and 11.1% 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 the general market conditions associated with the area and type of project being funded in addition to the borrower’s financial condition and ability to meet the required debt obligation. 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 consolidated balance sheets for investment.
Strategic Program loans
Through our Strategic Program service providers, we issue unsecured and secured consumer and business loans to borrowers within certain approved credit profiles nationwide. 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. Loans originated through the Strategic Program 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 the borrower’s 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
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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.
Strategic Program loans with credit enhancement
The Strategic Program loans with credit enhancement are distinct from our traditional loan portfolio in that the sponsoring fintech company guarantees the credit and fraud losses associated with these loans. Credit enhanced Strategic Program loans totaled $108.1 million and $0.9 million as of December 31, 2025 and 2024, representing 18.5% and 0.2% of our total loans held-for-investment, respectively. This significant increase reflects the expansion of the credit enhanced program and its impact on our balance sheet. The Reconciliations of Non-GAAP Financial Measures section of this report below further details the impact of the credit enhancement program on our allowance for credit losses and related non-GAAP financial measures.
Strategic Program loans without credit enhancement
Strategic Program loans without credit enhancement totaled $21.6 million and $19.2 million as of December 31, 2025 and December 31, 2024, representing 3.7% and 4.1% of our total loans held-for-investment, respectively. Unlike the credit enhanced loans, these non-credit enhanced loans do not benefit from a third-party guarantee or indemnification of credit and fraud losses by the Strategic Program service provider. As a result, the Bank retains the full credit and fraud losses associated with these loans, and they are subject to our standard credit risk management, monitoring, and allowance for credit losses under the CECL model. The accounting for non-credit enhanced Strategic Program loans is consistent with our other held-for-investment loan portfolios. While the non-credit enhanced Strategic Program loans represent a smaller portion of our overall loan portfolio, they provide additional diversification and support our broader fintech strategy.
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, 2025 and December 31, 2024, we had total commercial real estate loans of $85.7 million and $42.4 million, respectively, representing 14.6% and 9.1% of our total loans held-for-investment, respectively. Of these amounts, $84.0 million and $41.0 million represented owner occupied properties as of December 31, 2025 and December 31, 2024, 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 loan origination system platform and come from a variety of sources, including other approved merchant or dealer relationships and lending platforms. As of December 31, 2025 and December 31, 2024, we had total consumer loans of $21.9 million and $22.2 million, respectively, representing 3.8% and 4.8% of our total loans held-for-investment, respectively. We use a debt-to-income (“DTI”) ratio test 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, these loans 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.
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Loan Maturity
The following table details the contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and variable rates in each maturity range as of December 31, 2025:
As of December 31, 2025 Remaining Contractual Maturity Held-for-Investment
Fixed rate loans:
Commercial real estate
Variable rate loans:
Commercial leases — — — — —
Commercial, non-real estate — — — — —
Strategic Program loans — — — — —
Commercial real estate
Non-owner occupied — — — — —
Consumer 3 — — — 3
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 unless they are both well secured and in the process of collection. We also 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.
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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.
Any loan, or portion of a loan, which we deem to be uncollectible is charged off to the extent of the anticipated loss. In general, the reported balance of commercial loans that are past due for 90 days or more are reduced to the estimated net realizable value. Consumer loans and credit card balances are charged off at no later than 120 days and 180 days, respectively. We believe our disciplined lending approach and focused management of nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have several procedures in place to assist us in maintaining the overall quality of our loan portfolio. We have established underwriting guidelines to be followed by our loan officers, and we also monitor our delinquency levels for any negative or adverse trends. There can be no assurance, however, that our loan portfolio will not become subject to increasing pressures from deteriorating borrower credit due to general economic conditions.
We had a total of $43.7 million in nonperforming assets, which included $0.5 million in material loan modifications, at December 31, 2025. The amount of nonperforming assets as of December 31, 2025 includes $24.2 million of SBA 7(a) loan balances that are guaranteed by the SBA. We had $36.5 million in nonperforming assets, which included $0.8 million in material loan modifications, at December 31, 2024. The amount of nonperforming assets as of December 31, 2024 includes $19.2 million of SBA 7(a) loan balances that are guaranteed by the SBA. The increase in nonperforming assets and material loan modifications from the prior year was primarily attributable to the increase in the SBA 7(a) loan portfolio being classified as nonaccrual mainly due to the negative impact of sustained elevated interest rates on our small business borrowers. Due to elevated interest rates, the slowdown of consumer spending and the variable rate nature of our SBA portfolio, the risk of default has become and continues to be elevated and may result in additional delinquencies in future periods.
Our Strategic Program service providers also provide for loan modifications to borrowers. The service providers are authorized to make the loan modifications without prior FinWise consent to react immediately to borrower contact and optimize collections. As of December 31, 2025 and 2024, the balance of outstanding loan modifications was approximately $0.2 million and $4.4 million, respectively.
Credit Risk Profile
We believe that we underwrite loans carefully and thoroughly, limiting our lending activities to those products and services where we have the resources and expertise to lend profitably without undue credit risk. We require all loans to conform to our underwriting policies (or otherwise be identified as exceptions to policy and monitored and reported on, at minimum, quarterly) and be granted on a sound basis. Loans are made with a primary emphasis on loan profitability, credit risk and concentration exposures.
We are proactive in our approach to identifying and resolving problem loans and are focused on working with the borrowers and guarantors of problem loans to provide loan modifications when warranted. When considering how to best diversify our loan portfolio, we consider several factors including our aggregate and product-line specific concentration risks, our business line expertise, and the ability of our infrastructure to appropriately support the product. While certain product lines generate higher net charge-offs, our exposure is carefully monitored and mitigated by our concentration policies and reserved for by the credit loss allowance we maintain. Specifically, retention of certain Strategic Program loans with higher default rates accounts for a disproportionate amount of our charge-offs. In addition to our oversight of the credit policies and processes associated with these programs, we limit within our concentration policies the aggregate exposure of these loans as a percentage of the total loan portfolio, carefully monitor certain vintage loss-indicative factors such as first payment default and marketing channels, and appropriately provision for these balances so that the cumulative charge-off rates remain consistent with management expectations. While the level of nonperforming assets fluctuates in response to changing economic and market conditions, the relative size and composition of the loan portfolio, and our management’s degree of success in resolving problem assets, we believe our proactive stance to early identification and intervention is the key to successfully managing our loan portfolio.
Accurate and timely loan risk grading is considered a critical component of an effective credit risk management system. Loan grades take into consideration the borrower’s financial condition, industry trends, and the economic environment. Loan risk grades are changed as necessary to reflect the risk inherent in the loan. Among other things, we use loan risk grading information for loan pricing, risk and collection management and determining credit loss reserve adequacy. Further, on a quarterly basis, the Loan Committee holds a Loan Risk Grade meeting, to review all loans in our portfolio for accurate risk grading. Any required changes to the loan risk grading are made after the Loan Risk Grade meeting to provide
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for accurate reporting. Reporting is achieved in Loan Committee minutes, which minutes are reviewed by the Board. We supplement credit department supervision of the loan underwriting, approval, closing, servicing and risk grading process with periodic loan reviews by risk department personnel specific to the testing of controls.
We use a grading system to rank the quality of each loan. The grade is periodically evaluated and adjusted as performance dictates. Internal loan grades are based on current financial information, historical payment experience, and credit documentation, among other factors. The following guidelines govern the assignment of these risk grades. We do not currently grade Strategic Program loans held-for-investment due to their small balances and similar characteristics. As credit quality for Strategic Program loans have been highly correlated with delinquency levels, the Strategic Program loans are evaluated collectively for impairment.
Pass - A Pass asset is higher quality and does not fit any of the other categories described below. The likelihood of loss is believed to be remote.
Watch – A Watch asset may be a larger loan or one that places a heavier reliance on collateral due to the relative financial strength of the borrower. The assets may be maintenance intensive requiring closer monitoring. The obligor is believed to have an adequate primary source of repayment. New loans pursuant to the SBA 7(a) program are classified as watch loans until they have a demonstrated period of satisfactory performance, typically 18 months.
Special Mention – A Special Mention asset has potential weaknesses that may be temporary or, if left uncorrected, may result in a loss. While concerns exist, we believe that it is currently protected against a default and loss is considered unlikely and not imminent.
Substandard – A Substandard asset is believed to be inadequately protected by the current sound worth and paying capacity of the obligor or of the collateral pledged, if any. Assets so classified have identified weaknesses and are characterized by the possibility that we may sustain some loss if deficiencies are not corrected.
Doubtful - A doubtful asset has an existing weakness or weaknesses that make collection or liquidation in full, on the basis of currently existing facts and conditions, highly questionable and improbable.
Loss - A loss asset has an existing weakness or weaknesses that render the loan uncollectible and of such little value that continuing to carry as an asset on our books is not warranted. This classification does not mean that the loan has absolutely no recovery or salvage value, but rather it is not practical nor desirable to defer writing off this basically worthless asset, even though partial recovery may be affected in the future.
Not Rated - For certain Strategic Program and consumer loans, we do not evaluate and risk rate the loans in the same manner as other loans in our portfolio. The Not Rated loans are typically homogenous, smaller dollar balances approved using abridged underwriting methods that allow us to streamline the loan approval process and increase efficiency. Credit quality for Strategic Program loans has been highly correlated with delinquency levels.
See Note 3 - Loans to the consolidated financial statements included in Part II, Item 8 for more information on the credit quality of our loans held-for-investment (“LHFI”) portfolio.
Allowance for Credit Losses
The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates. Our judgment in determining the adequacy of the allowance is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available and as situations and information change. We evaluate the ACL on at least a quarterly basis and take into consideration such factors as changes in the nature and volume of the loan portfolio, overall portfolio quality, review of specific problem loans and current economic conditions and trends that may affect the borrower’s ability to repay. The quality of the loan portfolio and the adequacy of the ACL is reviewed by regulatory examinations and our auditors.
Credit losses are charged against the ACL when we believe that the collectability of the principal loan balance is unlikely. Subsequent recoveries, if any, are credited to the ACL when received. The amortized cost basis of loans does not include accrued interest receivable, which is included in accrued interest receivable on the Consolidated Balance Sheets. The provision for credit losses on the Consolidated Statements of Income is a combination of the provision for credit losses and the provision for unfunded loan commitments.
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The following tables present a summary of changes in the ACL for the periods indicated:
Year Ended December 31,
ACL:
Charge-offs
Construction and land development — —
Residential real estate (954) (297)
Residential real estate multifamily — —
Commercial real estate
Non-owner occupied — (221)
Commercial and industrial (933) (889)
Recoveries
Construction and land development — —
Residential real estate 11 65
Residential real estate multifamily — —
Commercial real estate
Non-owner occupied — —
Commercial and industrial 15 17
Commercial leases 29 92
The following table shows the allocation of the ACL and the percentage of loans in each category to total loans as of December 31, 2025, and 2024. The ACL related to Strategic Programs constitutes 77.0% and 47.8% of the total ACL while comprising 22.2% and 4.3%, respectively, of total loans held-for-investment as of December 31, 2025 and 2024, respectively. The percentage of ACL related to Strategic Program loans retained reflects the increased credit risks associated with certain retained Strategic Program loans.
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Construction and land development $ 970 8.4 % $ 374 9.1 %
Residential real estate multifamily 62 0.5 % 38 0.4 %
Commercial real estate
Strategic Program loans:
Strategic Program loans - with credit enhancement 22,396 18.5 % 111 0.2 %
Strategic Program loans - without credit enhancement 5,930 3.7 % 6,193 4.1 %
The following table reflects the ratios of the ACL to total LHFI, nonaccrual loans to total LHFI, and the ACL to nonaccrual loans by CECL loan category as of December 31, 2025:
ACL to TotalLHFI Nonaccrual loansto Total LHFI ACL toNonaccrual loans
Construction and land development 2.0 % 4.7 % 42.4 %
Residential real estate 1.4 % 19.9 % 6.9 %
Residential real estate multifamily 2.0 % — % — %
Commercial real estate
Non-owner occupied 1.1 % 28.8 % 3.8 %
Commercial and industrial 2.9 % 8.6 % 34.4 %
Strategic Program loans 21.8 % — % — %
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The following table reflects the ratios of the ACL to total LHFI, nonaccrual loans to total LHFI, and the ACL to nonaccrual loans by CECL loan category as of December 31, 2024:
($ in thousands) ACL toTotal LHFI Nonaccrualto Total LHFI ACL toNonaccrual loans
Construction and land development 0.9 % — % — %
Residential real estate 1.3 % 11.8 % 10.9 %
Residential real estate multifamily 2.3 % — % — %
Commercial real estate
Non-owner occupied 0.9 % 21.8 % 4.1 %
Commercial and industrial 1.6 % 4.0 % 39.2 %
Consumer 2.9 % — % — %
Strategic Program loans 31.3 % — % — %
When comparing December 31, 2025 to December 31, 2024, the increase in ACL to total LHFI was primarily due to the growth in the credit enhanced loans included in the Strategic Program loans held-for-investment. The decrease in nonaccrual loans to total loans held-for-investment from December 31, 2024 to December 31, 2025 was primarily due to the growth in the loans held-for-investment portfolio. The increase in the ACL to nonaccrual loans ratio as shown above primarily pertained to growth in the credit enhanced loans included in the Strategic Program loans held-for-investment offset in part by the increase in nonaccrual loans, concentrated in the SBA product.
The following table summarizes net charge-offs (“NCO”), average loans and the ratio of NCO to average loans for the periods indicated:
Years Ended
Construction and land development $ — $ 48,971 — % $ — $ 31,558 — %
Residential real estate multifamily — 2,231 — % — 1,219 — %
Commercial real estate
The ratio of net charge-offs to average loans outstanding by loan category increased slightly during the year ended December 31, 2025 as compared to the year ended December 31, 2024, due primarily to a higher growth rate in the average balances of Strategic Program loans related to the credit enhanced program when compared to the growth rate of net charge-offs in that program.
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Total Assets
Total assets at December 31, 2025 were $977.1 million, an increase of $231.2 million from December 31, 2024. The increase in total assets was due primarily to increases in loans held-for-investment, net, of $93.7 million, Strategic Program loans held-for-sale of $54.9 million, interest-bearing cash deposits of $51.8 million, and credit enhancement asset of $22.3 million. The increased loan balances are generally consistent with our strategy to grow the loan portfolio with higher quality lower risk assets.
Deposits
Deposits are the major source of funding for us. We offer a variety of deposit products including interest and noninterest bearing demand accounts, HSA demand deposits, money market and savings accounts and certificates of deposit, all of which we market at competitive pricing. We generate deposits from our customers on a relationship basis and through access to national institutional and brokered deposit sources. We also generate deposits in relation to our Strategic Programs in the form of reserve accounts as discussed above. These deposits add an element of flexibility in that they tend to increase or decrease in relation to the size of our Strategic Program loan portfolio. In addition to the reserve account, some Strategic Program loan originators maintain operating deposit accounts with us.
The following table presents the end of period balances of our deposit portfolio for the periods indicated:
($ in thousands) Total Percent Total Percent
Interest-bearing deposits:
The increase in total deposits as of December 31, 2025, compared to December 31, 2024, was primarily due to an increase in brokered time deposits of $153.4 million, which were added to fund loan growth and increase balance sheet liquidity. Additionally, noninterest bearing demand deposits increased $41.7 million, primarily related to collateral deposits by certain strategic programs in anticipation of increased volumes in student loan fundings in January 2026.
As an FDIC-insured institution, our deposits are insured up to applicable limits by the DIF of the FDIC. The Dodd-Frank Act raised the limit for federal deposit insurance to $250,000 for most deposit accounts and increased the cash limit of Securities Investor Protection Corporation protection from $100,000 to $250,000. Our total estimated uninsured deposits were $204.1 million and $183.2 million as of December 31, 2025 and December 31, 2024, respectively. Estimated uninsured deposits at the Bank as of December 31, 2025 include $62.1 million of total deposits contractually required to be maintained at the Bank pursuant to our Strategic Program agreements and an additional $58.2 million of total deposits associated with accounts owned by the parent holding company or the Bank. The maturity profile of our estimated uninsured time deposits, those amounts that exceed the FDIC insurance limit, at December 31, 2025 is as follows:
Total Liabilities
Total liabilities increased from $572.3 million at December 31, 2024 to $783.9 millionat December 31, 2025 primarily due to an increase in deposits as discussed above.
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Liquidity and Capital Resources
Liquidity Management
Liquidity management is the ability to meet current and future financial obligations of a short-term nature. Our primary sources of funds consist of deposit inflows, the sale of loans, principal repayments and interest on loans and net profits. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit flows, loan prepayments, loan sales and security sales are greatly influenced by general interest rates, economic conditions, and competition.
Our primary source of funds to support new loan originations are deposits. Deposits are comprised of core and non-core deposits. To attract core deposits from local and nationwide consumer and commercial markets, we have paid rates at the higher end of the market. We have been able to pay higher rates due to the higher rates earned on our loan portfolio. We utilize rate listing services and website advertising to attract deposits from consumer and commercial sources. Non-core deposits generally include brokered deposits and deposits acquired through the utilization of a listing service.
We intend to have various term offerings to match our funding needs. With no current plans to expand our brick-and-mortar branch network, online and mobile banking offers a means to meet customer needs and aggregate deposits more efficiently compared to a traditional branch network. We believe that the rise of mobile and online banking provides us the opportunity to further leverage the technological competency we have demonstrated in recent years.
We regularly adjust our investment in liquid assets based upon our assessment of (1) expected loan demand, (2) expected deposit flows, (3) yields available on interest-earning deposits and securities and (4) the objectives of our asset/liability management, funds management and liquidity policies. The objective of our liquidity policy is to control the risk to our earnings and capital arising from the inability to meet obligations in a timely manner. This entails ensuring sufficient funds are available at all times and at a reasonable cost to meet potential demands from both fund providers and borrowers.
We primarily utilize short-term and long-term borrowings to supplement deposits to fund our lending and investment activities. At December 31, 2025, we had the ability to access $193.8 million from the Federal Reserve Bank on a collateralized basis. The Bank had an available unsecured line of credit with three correspondent banks to borrow up to $16.1 million in overnight funds. We also maintain a $20.5 million line of credit with Federal Home Loan Bank, secured by specific pledged loans. We had no outstanding balances on any unsecured or secured lines of credit as of December 31, 2025.
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, 2025, liquid assets (defined as cash and due from banks and interest-bearing deposits) totaled $163.4 million and constituted 16.7% of total assets. We believe that our liquid assets combined with the available lines of credit and our ability to generate core and non-core funding provides adequate liquidity to meet our current financial obligations for at least the next 12 months.
Capital Resources
We seek to maintain adequate capital to support anticipated asset growth, operating needs and unexpected risks, and to ensure that we are in compliance with all current and anticipated regulatory capital guidelines. Our primary sources of new capital include retained earnings and proceeds from the sale and issuance of capital stock or other securities. Expected future use or activities for which capital may be set aside include balance sheet growth and associated relative increases in market or credit exposure, investment activity, potential product and business expansions, acquisitions and strategic or infrastructure investments.
Shareholders’ equity increased $19.5 million to $193.2 million at December 31, 2025 compared to $173.7 million at December 31, 2024, primarily due to earnings of $16.1 million reported for the period. The Company did not pay a dividend in 2024 or 2025.
We use several indicators of capital strength. The most commonly used measure is total equity to total assets, which was 19.8% and 23.3% as of December 31, 2025 and December 31, 2024, respectively.
Our return on average equity was 8.9% and 7.7% for the years ended December 31, 2025 and 2024, respectively. Our return on average assets was 1.9% and 2.0% for the years ended December 31, 2025 and 2024, respectively.
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The Bank is subject to various regulatory capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a material effect on our business. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of its assets, liabilities, and certain off-balance-sheet items as calculated pursuant to regulatory definitions and requirements. The sufficiency of capital and the Bank’s capital classifications are also subject to qualitative judgments by the regulators about risk weightings and other factors.
Under the prompt corrective action rules, an institution is deemed “well capitalized” if its Tier 1 leverage ratio, Common Equity Tier 1 ratio, Tier 1 Capital ratio, and Total Capital ratio meet or exceed 5%, 6.5%, 8%, and 10%, respectively. On September 17, 2019, the federal banking agencies jointly issued a rule intending to simplify the regulatory capital requirements described above for qualifying community banking organizations that opt into the Community Bank Leverage Ratio framework, as required by Section 201 of the Regulatory Relief Act. The Bank elected to opt into the Community Bank Leverage Ratio framework starting in 2020. Under these capital requirements the Bank must maintain a leverage ratio greater than 9.0% to be considered well-capitalized.
As of December 31, 2025, the most recent notification from the FDIC categorized the Bank as well-capitalized under the regulatory framework for prompt corrective action (there are no conditions or events since that notification we believe have changed the Bank’s category). See Note 8 - Capital Requirements to the consolidated financial statements included in Part II, Item 8 for additional information regarding our regulatory capital requirements.
Stock Repurchase Program
We have a stock repurchase program authorized by our Board of Directors. The stock repurchase program became effective as of March 6, 2024 and authorizes us to repurchase up to 641,832 shares of our common stock in the aggregate in open market transactions, privately negotiated transactions, or any manner that complies with the provisions of Rule 10b-18 of the Exchange Act, as well as pursuant to a trading plan under Rule 10b5-1 under the Exchange Act. Our decision to repurchase shares will depend on a variety of factors, including but not limited to, the market price and trading volume of our common stock, general market and economic conditions, the ongoing assessment of our capital needs, and applicable legal and regulatory requirements. The repurchase program does not obligate us to purchase any particular number of shares and may be limited or terminated at any time without prior notice. The repurchase program expires on March 31, 2026. During the three months ended December 31, 2025, there were no open-market share repurchases. Since the repurchase program’s inception, we have repurchased and subsequently retired a total of 44,608 shares for $0.5 million at an average price of $10.30 per share. See Note 1 - Summary of Significant Accounting Policies to the consolidated financial statements included in Part II, Item 8 for more information.
Contractual Obligations
We have contractual obligations to make future payments on debt and lease agreements. While our liquidity monitoring and management consider both present and future demands for and sources of liquidity, the following table of contractual commitments focuses only on future obligations and summarizes our significant contractual obligations as of December 31, 2025:
Contractual Obligations
Deposits without stated maturity $ 276,293 $ 276,293 $ — $ — $ —
Off-Balance Sheet Financing Arrangements
In the normal course of business, we enter into certain off-balance sheet arrangements to meet the financing needs of our customers. These transactions include commitments to extend credit, which involves, to varying degrees, elements of credit risk and interest rate risk exceeding the amounts recognized in our consolidated statements of financial condition. Our exposure to credit loss is represented by the contractual amounts of these commitments. The same credit policies and
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procedures are used in making these commitments as for on-balance sheet instruments. With the exception of these off-balance sheet arrangements, we have no off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. For details of our commitments to extend credit please see Note 9 - Commitments and Contingencies to the consolidated financial statements included in Part II, Item 8.
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Reconciliations of Non-GAAP Financial Measures
We believe that both management and investors benefit from certain non-GAAP financial measures in assessing our performance and when planning, forecasting, and analyzing future periods. These non-GAAP financial measures also facilitate management’s internal comparisons to our historical performance. We believe these non-GAAP financial measures are useful to investors both because (1) they allow for greater transparency with respect to key metrics used by management in its financial and operational decision-making and (2) they are used by our institutional investors and the analyst community to help them analyze the health of our business. Accordingly, we believe that these non-GAAP financial measures provide useful information to investors and others in understanding and evaluating our operating results in the same manner as our management team. Our calculation of these non-GAAP financial measures may differ from similarly-titled non-GAAP measures, if any, reported by our peers. These non-GAAP financial measures should not be considered in isolation from, or as substitutes for, financial information prepared in accordance with U.S. GAAP.
FinWise has entered into agreements with certain of its Strategic Program service providers pursuant to which the service providers provide credit enhancement on loans which protects the Bank by indemnifying or reimbursing the Bank for incurred credit and fraud losses. We estimate and record a provision for expected losses for these Strategic Program loans in accordance with GAAP, which requires estimation of the provision without consideration of the credit enhancement. When the provision for expected losses over the life of the loans that are subject to such credit enhancement is recorded, a credit enhancement asset reflecting the future recovery of those estimated credit losses pursuant to the strategic partner’s guarantee to assume the Bank’s credit losses on each of the loans in the respective guaranteed portfolio is also recorded on the balance sheet in the form of non-interest income (credit enhancement income). Reimbursement or indemnification for incurred losses is provided for in the form of a deposit reserve account that is replenished periodically by the respective Strategic Program service provider. The credit enhancement asset is reduced as credit enhancement payments and recoveries are received from the Strategic Program service provider or taken from its cash reserve account. If the Strategic Program service provider is unable to fulfill its contracted obligations under its credit enhancement agreement, then the Bank could be exposed to the loss of the reimbursement and credit enhancement income as a result of this counterparty risk. In the event the Strategic Program service provider is not able to perform according to the contractual terms, the Bank is entitled to receive all the income on the loans. The Bank incurs expenses for the amounts owed to the strategic partner for the credit guarantee and for servicing of the credit enhanced portfolio, if applicable (credit enhancement program expenses). See the following reconciliations of non-GAAP measures for the impact of the credit enhancement on our financial condition and results.
The following non-GAAP measures are presented to illustrate the impact of certain credit enhancement program expenses on total interest income on LHFI and average yield on LHFI:
As of and for the Year Ended As of and for the Year Ended
Less: credit enhancement program expenses (9,755) (9)
Total interest income on LHFI net of credit enhancement program expenses and the average yield on LHFI are non-GAAP measures that include the impact of credit enhancement program expenses on total interest income on LHFI and the respective average yield on LHFI, the most directly comparable GAAP measures.
The following non-GAAP measures are presented to illustrate the impact of certain credit enhancement program expenses on net interest income and NIM:
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As of and for the Year Ended As of and for the Year Ended
Less: credit enhancement program expenses (9,755) (9)
Net interest income and net interest margin net of credit enhancement program expenses are non-GAAP measures that include the impact of credit enhancement program expenses on net interest income and net interest margin, the most directly comparable GAAP measures.
Non-interest expenses less credit enhancement program expenses is a non-GAAP measure presented to illustrate the impact of credit enhancement program expenses on non-interest expense:
Less: credit enhancement program expenses (9,755) (9)
Total non-interest expense less credit enhancement program expenses is a non-GAAP measure that illustrates the impact of credit enhancement program expenses on non-interest expense, the most directly comparable GAAP measure.
Total non-interest income less credit enhancement income is a non-GAAP measure to illustrate the impact of credit enhancement income resulting from credit enhanced loans on non-interest income:
Less: credit enhancement income (23,924) (111)
Total non-interest income less credit enhancement income $ 34,559 $ 22,374
Total non-interest income less indemnification income is a non-GAAP measure that illustrates the impact of credit enhancement income on non-interest income. The most directly comparable GAAP measure is non-interest income.
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The following non-GAAP measure is presented to illustrate the effect of the credit enhancement program that creates the credit enhancement on the allowance for credit losses:
($ in thousands; unaudited) As of December 31, 2025 As of December 31, 2024
The allowance for credit losses excluding the effect of the allowance for credit losses related to credit enhanced loans is a non-GAAP measure that reflects the effect of the credit enhancement program on the allowance for credit losses. The total outstanding balance of loans held-for-investment with credit enhancement as of December 31, 2025 and 2024 was approximately $108.1 million and $0.9 million, respectively.
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Many assumptions are used to calculate the impact of interest rate fluctuations on our net interest income, such as asset prepayments, non-maturity deposit price sensitivity and decay rates, and key rate drivers. Because of the inherent use of these estimates and assumptions in the model, our actual results may, and very likely will, differ from our static earnings at risk (“EAR”) results. In addition, static EAR results do not include actions that our management may undertake to manage the risks in response to anticipated changes in interest rates or client behavior. For example, as part of our asset/liability management strategy, management has the ability to increase asset duration and decrease liability duration in order to reduce asset sensitivity, or to decrease asset duration and increase liability duration in order to increase asset sensitivity.
The following table summarizes the results of our EAR analysis in simulating the change in net interest income and fair value of equity over a 12-month horizon as of December 31, 2025:
IMPACT ON NET INTEREST INCOME UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK
Utilizing an economic value of equity (“EVE”) approach, we analyze the risk to capital from the effects of various interest rate scenarios through a long-term discounted cash flow model. This measures the difference between the economic value of our assets and the economic value of our liabilities, which is a proxy for our liquidation value. While this provides some value as a risk measurement tool, management believes EAR is more appropriate in accordance with the going concern principle.
The following table illustrates the results of our EVE analysis as of December 31, 2025:
ECONOMIC VALUE OF EQUITY ANALYSIS UNDER A STATIC BALANCE SHEET, PARALLEL INTEREST RATE SHOCK
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Interest Rate Sensitivity and Market Risk
As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We endeavor to manage our sensitivity position within our established guidelines.
Fluctuations in interest rates will ultimately impact both the level of income and the market value of all interest earning assets and interest-bearing liabilities, other than those that have a short term to maturity. Interest rate risk is the potential of economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a loss of current fair market values. The objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.
We endeavor to manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, financial options or financial futures contracts for the purpose of reducing interest rate risk. Based on the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.
Our exposure to interest rate risk is managed by the Bank’s Asset/Liability Management Committee (“ALCO”) in accordance with policies approved by our board of directors. The ALCO formulates strategies based on perceived levels of interest rate risk. In determining the appropriate level of interest rate risk, the committee considers the impact on earnings and capital of the current outlook for interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. The ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, the ALCO reviews liquidity, capital planning, cash flow flexibility, maturities of deposits and consumer and commercial deposit activity. Management employs methodologies to manage interest rate risk, which include an analysis of relationships between interest earning assets and interest-bearing liabilities and an interest rate shock simulation model.
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Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID 173) 77
Consolidated Balance Sheets 78
Consolidated Statements of Income 79
Consolidated Statements of Comprehensive Income 80
Consolidated Statements of Changes in Shareholders’ Equity 81
Consolidated Statements of Cash Flows 82
Notes to Consolidated Financial Statements 83
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and the Board of Directors of
FinWise Bancorp and Subsidiaries
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of FinWise Bancorp and Subsidiaries (the “Company”) as of December 31, 2025 and 2024, the related consolidated statements of income, comprehensive income, changes in shareholders’ equity and cash flows for the years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2025 and 2024, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
Basis for Opinion
These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.
Our audits included performing procedures to assess the risks of material misstatement of the consolidatedfinancial statements, whether due to error or fraud, and performing procedures to respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidatedfinancial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits providea reasonable basis for our opinion.
/s/ Baker Tilly US, LLP
Everett, Washington
March 20, 2026
We have served as the Company’s auditor since 2018.
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FinWise Bancorp
Consolidated Balance Sheets
(in thousands, except share and par value amounts)
December 31,
ASSETS
Cash and cash equivalents
Investment in Federal Home Loan Bank (“FHLB”) stock, at cost 440 349
Deferred income taxes, net 2,345 —
Small Business Administration (“SBA”) servicing asset, net 3,547 3,273
Investment in Business Funding Group (“BFG”), at fair value 9,000 7,700
Operating lease right-of-use (“ROU”) assets 2,963 3,564
LIABILITIES AND SHAREHOLDERS’ EQUITY
Liabilities
Deposits
Deferred income taxes, net — 899
Commitments and contingencies (Note 9)
Shareholders’ equity
Accumulated other comprehensive income, net of tax 26 187
Total liabilities and shareholders’ equity $ 977,135 $ 745,976
The accompanying notes are an integral part of these consolidated financial statements.
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FinWise Bancorp
Consolidated Statements of Income
(in thousands, except share and per share amounts)
Years Ended December 31,
Interest income
Interest expense
Net interest income after provision for credit losses 33,610 47,339
Non-interest income
SBA loan servicing fees, net (156) 1,137
Change in fair value on investment in BFG 1,300 (625)
Non-interest expense
Occupancy and equipment expenses 1,877 2,179
Credit enhancement servicing expense 1,222 1
Credit enhancement guarantee expense 8,533 8
Earnings per share, basic $ 1.20 $ 0.98
Earnings per share, diluted $ 1.13 $ 0.93
The accompanying notes are an integral part of these consolidated financial statements.
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FinWise Bancorp
Consolidated Statements of Comprehensive Income
(in thousands)
Years Ended December 31,
Other comprehensive income (loss) items:
Unrealized gain (loss) on securities available-for-sale 321 (97)
Unrealized gain (loss) on interest rate swaps (147) 509
Other comprehensive income (loss), net of tax (161) 187
The accompanying notes are an integral part of these consolidated financial statements.
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FinWise Bancorp
Consolidated Statements of Changes in Shareholders’ Equity
(in thousands, except share amounts)
Common Stock
Common stock repurchased and retired (44,608) — (469) 8 (461)
Other comprehensive income, net of tax 187 187
Other comprehensive loss, net of tax — — — — (161) (161)
The accompanying notes are an integral part of these consolidated financial statements.
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FinWise Bancorp
Consolidated Statements of Cash Flows
(in thousands)
Years EndedDecember 31,
Cash flows from operating activities:
Adjustments to reconcile net income to net cash used in operating activities
Depreciation and amortization 4,864 5,289
Noncash operating lease cost 601 729
Net (accretion) amortization in securities (discounts) and premiums (18) (25)
Gain on sale of loans, net (6,373) (2,036)
Originations of Strategic Program loans held-for-sale (5,719,396) (4,829,497)
Proceeds from sale of Strategic Program loans held-for-sale 5,665,342 4,785,423
Change in fair value of BFG (1,300) 625
Impairment (recovery) of SBA servicing asset 924 (865)
Stock-based compensation expense 3,579 2,046
Noncash change in credit enhancement asset (22,300) (111)
Deferred income taxes (3,192) 90
Net changes in:
Accrued interest receivable (141) 7
Operating lease liabilities (894) (994)
Net cash used in operating activities (28,424) (14,991)
Cash flows from investing activities:
Proceeds from sales of loans held-for-investment 105,863 529
Proceeds from sales of assets subject to operating leases 468 103
Purchase of investment securities available-for-sale — (30,018)
Purchase of bank premises and equipment, net (219) (1,076)
Purchase of assets subject to operating leases (5,548) (3,819)
Proceeds from maturities of securities available-for-sale 2,500 —
Proceeds from maturities and paydowns of securities held-to-maturity 2,653 2,839
(Purchase) redemption of FHLB stock (91) (111)
Cash flows from financing activities:
Common stock repurchased — (461)
Proceeds from exercise of stock options 481 25
Payment of taxes related to net share settlement of equity awards (516) —
Repayment of PPP Liquidity Facility — (126)
Net change in cash, cash equivalents and restricted cash 54,238 (7,813)
Supplemental disclosures of cash flow information:
Supplemental disclosures of noncash investing and financing activities:
The accompanying notes are an integral part of these consolidated financial statements.
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FinWise Bancorp
Notes to Consolidated Financial Statements
Note 1 – Business, Basis of Presentation and Summary of Significant Accounting Policies
Nature of business and organization – FinWise Bancorp is a Utah corporation headquartered in Murray, Utah. The Company operates all business activities through its wholly-owned subsidiaries: FinWise Bank and FinWise Investment, LLC. FinWise Bank was originally incorporated as Utah Community Bank in the state of Utah on May 7, 1999. On March 4, 2016, Utah Community Bank amended its articles of incorporation to change its name to FinWise Bank. FinWise Bancorp, formerly known as All West Bancorp, was incorporated in Utah on October 22, 2002. Following its incorporation, All West Bancorp acquired 100% of Utah Community Bank. On March 15, 2021, All West Bancorp amended and restated its articles of incorporation to change its name to FinWise Bancorp. FinWise Investment, LLC was established to hold and manage private investments made by the Company and the Bank.
References herein to “FinWise Bancorp,” “Bancorp” or the “holding company,” refer to FinWise Bancorp on a standalone basis. The word “Company” refers to FinWise Bancorp, FinWise Investment, LLC, and FinWise Bank collectively and on a consolidated basis. References to the “Bank” refer to FinWise Bank on a standalone basis.
The Bank provides a full range of banking services to individual and commercial customers. The Bank’s primary source of revenue is from loans including consumer, Small Business Administration (“SBA”), commercial, commercial real estate, and residential real estate. The Bank also has established Strategic Programs with various third-party loan origination platforms that use technology to streamline the origination of unsecured consumer and secured or unsecured business loans to borrowers within certain approved credit profiles. The Bank earns monthly program fees based on the volume of loans originated in these Strategic Programs, as well as interest during the time the Bank holds the loans.
Principles of consolidation – The consolidated financial statements include the accounts of FinWise Bancorp and its wholly-owned subsidiaries, FinWise Bank and FinWise Investment, LLC. All significant inter-company balances and transactions have been eliminated in consolidation.
Emerging Growth Company status – The Company is an emerging growth company as defined in the Jumpstart our Business Startups Act of 2012 (the “JOBS Act”). The JOBS Act permits the Company to extend the transition period for complying with new or revised accounting standards affecting public companies. The Company has elected to take advantage of this extended transition period, which means that the financial statements included in this annual report, as well as any financial statements that we file in the future, may not be subject to all new or revised accounting standards generally applicable to public companies for the transition period for so long as the Company remains an emerging growth company or until the Company affirmatively and irrevocably opts out of the extended transition period under the JOBS Act.
Significant concentrations of credit risk – The Company's lending and leasing activities are conducted with customers located throughout the United States. The Company’s loan portfolio may, from time to time, have concentrations in significant balances in certain loan categories, such as SBA loans or Strategic Program loans. The relative significance and composition of the portfolio may change over time based on business strategy and market conditions. The collectibility of loans and leases is particularly susceptible to changes in market conditions, such as shifts in interest rates and economic downturns.
Ongoing analysis of the Company's loan portfolio is performed to evaluate whether there is any significant exposure to an individual borrower or group(s) of borrowers as a result of any concentrations of credit risk. Such credit risks (whether on- or off-balance sheet) may occur when groups of borrowers or counterparties have similar economic characteristics and are similarly affected by changes in economic or other conditions. Credit risk also includes the loss that would be recognized subsequent to the reporting date if counterparties failed to perform as contracted. As of December 31, 2025 and 2024, the Company analyzed its exposure to credit risks and concluded that no significant exposure exists from such concentrations of credit risk.
Use of estimates – In preparing the consolidated financial statements in accordance with United States generally accepted accounting principles (“U.S. GAAP”), management is required to make estimates and assumptions that affect the reported amounts of certain assets and liabilities as of the date of the consolidated balance sheets and certain revenues and expenses for the period. Actual results could differ, either positively or negatively, from those estimates.
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Material estimates that are particularly susceptible to significant changes in the near term relate to the determination of the allowance for credit losses (“ACL”). While management uses currently available information to recognize credit losses on loans, future additions to the allowance may be necessary based on economic conditions and individual credit deterioration.
Reclassifications – Reclassifications have been made to prior year amounts to conform to the current year presentation. The effect of these reclassifications were not material to the previously reported consolidated financial statements.
Cash and cash equivalents – For purposes of reporting cash flows, the Company defines cash and cash equivalents as cash, cash due from banks, interest-bearing deposits in other banks, other interest-bearing deposits, and federal funds sold.
The Company maintains its cash in deposit accounts that, at times, may exceed federally insured limits. The Company has not experienced any losses in such accounts and believes it is not exposed to any significant credit risk on cash and cash equivalents.
Federal Reserve Board Regulations require maintenance of certain minimum reserve balances based on certain average deposits; however, on March 15, 2020, the Federal Reserve announced that reserve requirement ratios would be reduced to zero percent effective March 26, 2020, due to economic conditions, which eliminated the reserve requirement for all depository institutions. The reserve requirement is still at zero percent as of December 31, 2025.
Restricted cash – The Company has restricted cash balances required by the Company’s credit card merchant for payment processing and card management services as well as a restricted cash held as collateral against the Company’s derivatives.
Investments
Investment securities available-for-sale – U.S. Treasury securities that the Company intends to hold for an indefinite period of time, but which may be sold in response to changes in liquidity needs, interest rates, or other similar factors, are classified as available-for-sale (“AFS”). Such securities are recorded in the Company’s consolidated balance sheets at their respective fair values and increases or decreases in those values, other than credit losses, are recorded as unrealized gains or losses, respectively, and are reported as other comprehensive income (loss) in the Company’s consolidated balance sheets, rather than included in or deducted from the Company’s earnings. The Company performs a quarterly analysis of its investment securities AFS to assess and record any expected credit losses through an allowance for credit losses, limited to the amount that fair value was less than the amortized cost basis. Interest on securities classified as AFS are recorded in interest on securities in the Company’s Consolidated Statements of Income.
Investment securities held-to-maturity–Debt securities that management has the positive intent and ability to hold to maturity are classified as held-to-maturity (“HTM”) and recorded at amortized cost.
Each quarter management evaluates impairment where there has been a decline in fair value below the amortized cost basis of a security to determine whether there is a credit loss associated with the decline in fair value. Management considers the nature of the collateral, potential future changes in collateral values, default rates, delinquency rates, third-party guarantees, credit ratings, interest rate changes since purchase, volatility of the security's fair value and historical loss information for financial assets secured with similar collateral among other factors. Credit losses are calculated individually, rather than collectively, using a discounted cash flow method, whereby management compares the present value of expected cash flows with the amortized cost basis of the security. The credit loss component is recognized through the provision for credit losses on the Company’s Consolidated Statements of Income. (See Note 2 - Investments.)
Equity method investments – Ownership interests in entities for which the Company has significant influence that are not consolidated are accounted for as equity method investments. SEC Staff Announcement: Accounting for Limited Partnership Investments (codified in Accounting Standards Codification (“ASC”) 323-30-S99-1) guidance requires the use of the equity method unless the investor’s interest “is so minor that the limited partner may have virtually no influence over partnership operating and financial policies.” The SEC staff’s position is that investments in limited partnerships and limited liability companies of greater than 3% to 5% are considered more than minor and, therefore, should be accounted for using the equity method or fair value option and are not required to be consolidated. The Company concluded that, consistent with its accounting policy, the Company’s level of ownership in Business Funding Group, LLC (“BFG”) was indicative of significant influence and, as a result, the investment would be accounted for using the equity method. However, the Company elected the fair value option for its investment due to cost-benefit considerations. Pursuant to electing the fair value option, the Company measures its investment in BFG at fair value each reporting period and changes in fair value are recorded in the Consolidated Statements of Income within change in fair value on investment in BFG’ See Note 6 - Investment in Business Funding Group, LLC, for a discussion about the Company’s investment in BFG.
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Investment in Federal Home Loan Bank (“FHLB”) stock –FHLB stock investments are required based on the level of the Bank’s assets, capital and/or capital/surplus. FHLB stock is carried at cost and periodically evaluated for impairment. There is no readily determinable fair value for this stock as it has no quoted market value, it is a required investment and it is expected to be redeemed at par value. FHLB obtains its funding primarily through issuance of consolidated obligations of the FHLB system. The U.S. government does not guarantee these obligations, and each of the regional FHLBs are jointly and severally liable for repayment of each other’s debt. Cash dividends are reported as a component of other miscellaneous income in the Consolidated Statements of Income.
Loans held-for-sale –Loans held-for-sale are carried at the lower of aggregate cost or fair value. Gains and losses are recorded in non-interest income based on the difference between sales proceeds and carrying value. While the Company sells the vast majority of the loans funded in its Strategic Programs shortly after origination, the Company may choose to retain a portion of the funded loans and/or receivables.
Loans held-for-investment –Loans held-for-investment are reported at their outstanding principal adjusted for any charge-offs, the allowance for credit losses, and deferred fees and costs. Loan origination fees, net of certain direct origination costs, if any, are deferred and recognized on an adjustment of the related loan yield using an effective-yield method over the contractual life of the loan. Interest income on loans is recognized on an accrual basis commencing in the month of origination using the interest method. Delinquency fees are recognized in income when chargeable and when collectability is reasonably assured.
The Company requires most commercial loans and leases to be substantially collateralized by real estate, equipment, vehicles, accounts receivable, inventories or other tangible or intangible assets. Real estate collateral is generally in the form of first and second mortgages on various types of property. The Company also originates unsecured loans to consumers and businesses.
The Company may change its intent from holding loans for investment and reclassify them as held-for-sale.
Allowance for credit losses –The allowance for credit losses is calculated under the current expected credit loss (“CECL”) model for financial instruments measured at amortized cost and other commitments to extend credit. CECL requires the immediate recognition of estimated credit losses expected to occur over the estimated remaining life of the asset. The forward-looking concept of CECL requires loss estimates to consider historical experience, current conditions and reasonable and supportable economic forecasts of future events and circumstances.
The allowance for credit losses is reported as a reduction of the amortized cost basis of loans held-for-investment, while the reserve for unfunded loan commitments is included within other liabilities on the Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates. Accrued interest receivable is excluded from the ACL calculation. The amortized cost basis of loans does not include accrued interest receivable. The provision for credit losses on the Consolidated Statements of Income is a combination of the provision for credit losses and the provision for unfunded loan commitments.
ACL in accordance with CECL methodology
With respect to the Bank's core portfolio which consists of SBA 7(a), local lending, retail point of sale, and equipment finance and leasing, the Bank pools similar loans that are collectively evaluated and determines an appropriate level of general allowance by portfolio segment using a non-discounted cash flow model taking into account probability of default, loss in the event of default, and prepayment speed estimates based on industry specific collected data. The model captures credit and fraud losses assumed to be credit related losses over the historical charge-off and prepayment cycle and applies those losses at a loan level over the remaining maturity of the loan. The model then calculates a historical loss rate using the average losses over the reporting period, which is then applied to each segment utilizing a standard reversion rate. With respect to the Bank's active retained Strategic Program loan portfolio, the Bank is using a methodology that compares the actual loan performance of a vintage to the worst performing loans within that vintage, known as the high-water mark. The Bank records the expected credit losses based on the high-water mark loss rate. With respect to the Bank's inactive retained Strategic Program loan portfolio, performance data at the summary level provided by the Strategic Programs is banded by credit profile and original loan term and compared to actual loan performance on a quarterly basis. The expected loss rate is supplemented with adjustments for reasonable and supportable forecasts of relevant economic indicators, including but not limited to national unemployment rate forecasts. Expected credit losses are estimated over the contractual term of the loans, adjusted for expected prepayments when appropriate. Also included in the ACL are qualitative factors based on the risks present for each portfolio segment. These qualitative factors include the following that are derived from the Interagency
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Policy Statement on Allowance for Credit Losses: changes in lending policies and procedures; changes in international, national, regional, and local economic and business conditions and developments that affect the collectability of the loan portfolio; changes in the nature and volume of the loan portfolio and in the terms of loans; changes in the experience, ability, and depth of lending management and staff; changes in the volume and severity of past due loans, nonaccrual loans, and classified or graded loans; changes in the quality of the Bank's loan review system; changes in the value of underlying collateral for loans that are not collateral-dependent; changes in the level of concentration of credit; changes in the effect of competition, legal, and regulatory requirements on the level of estimated credit losses; and, if applicable, changes in the composition and volume of the loan portfolio due to mergers, acquisitions, and other significant transactions not considered elsewhere. The Bank also considers as an additional qualitative factor any lingering "ripple" effects of the Covid-19 pandemic, including lasting changes to consumer behavior, lending, and society at large. It is also possible that these factors could include social, political, economic, and terrorist events or activities. All of these factors are susceptible to change, which may be significant.
When management identifies loans that do not share common risk characteristics (i.e., are not similar to other loans within a pool) they are evaluated on an individual basis. These loans are not included in the collective evaluation. For loans identified as having a likelihood of foreclosure or that the borrower is experiencing financial difficulty, a collateral- dependent approach is used. These are loans for which the repayment is expected to be provided substantially through the operation or sale of the collateral. Under CECL, for collateral-dependent loans, the Company has adopted the practical expedient method to measure the allowance for credit losses based on the fair value of collateral. The allowance for credit losses is calculated on an individual loan basis based on the shortfall between the fair value of the loan's collateral, which is adjusted for liquidation costs/discounts, and amortized cost. If the fair value of the collateral exceeds the amortized cost, no allowance is required.
The CECL methodology requires a significant amount of management judgment in determining the appropriate allowance for credit losses. Several of the steps in the methodology involve judgment and are subjective in nature including, among other things: segmenting the loan portfolio; determining the amount of loss history to consider; selecting predictive econometric regression models that use appropriate macroeconomic variables; determining the methodology to forecast prepayments; selecting the most appropriate economic forecast scenario; determining the length of the reasonable and supportable forecast and reversion periods; estimating expected utilization rates on unfunded loan commitments; and assessing relevant and appropriate qualitative factors. In addition, the CECL methodology is dependent on economic forecasts, which are inherently imprecise and will change from period to period. Although the allowance for credit losses is considered appropriate, there can be noassurance that it will be sufficient to absorb future losses.
In determining an appropriate amount for the allowance, the Bank segments and aggregates the loan portfolio based on common characteristics. The following segments have been identified:
Commercial Real Estate. These loans are generally secured by owner-occupied nonfarm, nonresidential properties, or by other nonfarm, nonresidential properties. Owner-occupied commercial real estate loans are typically repaid first by the cash flows generated by the underlying business. Factors that may influence a business' cash flows include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions. Non-owner occupied commercial real estate loans are generally considered to have a higher degree of credit risk as they may be dependent on the ongoing success and operating viability of a fewer number of tenants who are occupying the property and who may have a greater degree of exposure to economic conditions.
Commercial and Industrial. These loans are generally secured by business assets such as furniture, fixtures, equipment, accounts receivable, inventory, business vehicles, and other business personal property. Commercial and industrial loans are typically repaid first by the cash flows generated by the borrower's business operations. The primary risk characteristics are specific to the underlying business and its ability to generate sustainable profitability and resulting positive cash flows. Factors that may influence a business' profitability include, but are not limited to, demand for its products or services, quality and depth of management, degree of competition, regulatory changes, and general economic conditions.
Commercial Leases. Equipment financing and leasing typically involve the use of equipment as collateral for the loan. If the borrower defaults on the loan, the Bank may need to repossess and sell the equipment to recover the outstanding debt. However, the value of the equipment may depreciate over time, or disappear, making it difficult for the Bank to recover the full amount of the lease. In equipment leasing, the residual value of the equipment is an important consideration. The residual value is the estimated value of the equipment at the end of the lease term.
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If the actual value of the equipment is lower than the residual value, the lessor may not be able to recover the full amount of the lease payments.
Construction and Land Development. Risks common to construction loans are cost overruns, changes in market demand for property, supply chain interruption affecting construction materials, inadequate long-term financing arrangements and declines in real estate values. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values, and higher interest rates. Risks common to residential lot loans are those similar to other types of real estate construction loans, as many customers finance the purchase of improved lots in anticipation of constructing a 1 to 4 family residence. Accordingly, common risks are changes in market demand for property, supply chain interruption affecting construction materials, inadequate long-term financing arrangements and declines in real estate values. Changes in market demand for property could lead to longer marketing times resulting in higher carrying costs, declining values and higher interest rates.
Consumer. These are loans to individuals for household, family, and other personal expenditures. Consumer loans generally have higher interest rates and shorter terms than residential loans but tend to have higher credit risk due to the type of collateral securing the loan or in some cases the absence of collateral.
Residential Real Estate. These loans are generally secured by 1 to 4 family residential properties. The primary risk characteristics associated with residential mortgage loans typically involve: major living or lifestyle changes to the borrower, including unemployment or other loss of income; unexpected significant expenses, such as for major medical issues or catastrophic events; and divorce or death. In addition, residential mortgage loans that have adjustable rates could expose the borrower to higher debt service requirements in a rising interest rate environment. Further, real estate values could drop significantly and cause the value of the property to fall below the loan amount, creating additional potential loss exposure for the Bank.
Residential Real Estate Multifamily. Risks common to multifamily loans are poor management, high vacancy rates and regulatory changes. The value of multi-family properties can be impacted by changes in the local real estate market. If property values decline, the Bank may not be able to recover the full amount of the loan if the property needs to be foreclosed.
Strategic Program Loans Held-for-Investment. Unsecured consumer loans and secured or unsecured business loans issued by the Company through these programs generally follow and are limited to specific predetermined underwriting criteria. Strategic Program loans cover a wide range of borrower credit profiles, loan terms and interest rates. Strategic Program loans generally have higher interest rates and shorter terms similar to consumer loans and tend to have higher credit risk due to the type of collateral securing the loan or in most cases the absence of collateral. See Note 3 - Loans for more information about the Company’s Strategic Program loan portfolio.
Certain agreements with our Strategic Program Service Providers provide for a credit enhancement, which protects the Bank by indemnifying or reimbursing incurred credit and fraud losses. The Company estimates and records a provision for expected losses for these Strategic Program loans. When the provision for the credit losses is recorded, a credit enhancement asset is also recorded on the balance sheet through non-interest income (credit enhancement income) equal to the provision for credit losses estimated for the credit enhanced loans. The credit enhancement asset is reduced when payments for the credit losses charged to the ACL are taken from the Strategic Program Service Provider’s cash reserve account created to absorb the credit losses incurred. The cash reserve account is replenished monthly from cash flows due to the Program Service provider related to the credit enhanced loans.
Nonaccrual loans – The Company's policy is to place loans on a nonaccrual status when: 1) payment is in default for 90 days or more unless the loan is well secured and in the process of collection; or 2) full repayment of principal and interest is not foreseen. When a loan is placed on nonaccrual status, all accrued and uncollected interest on that loan is reversed. Past-due interest received on nonaccrual loans is not recognized in interest income but is applied as a reduction of the outstanding principal of the loan. A loan is relieved of its nonaccrual status when all principal and interest payments are brought current, the loan is well secured, and an analysis of the borrower's financial condition provides reasonable assurance that the borrower can repay the loan as scheduled.
Premises and equipment, net – Premises and equipment are stated at cost less accumulated depreciation. Depreciation expense, which is included in occupancy and equipment expenses, is computed using the straight-line method over the estimated useful lives of the related assets. Expenditures for new premises and equipment and major improvements are
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capitalized. Normal costs of maintenance and repairs are charged to expense as incurred. Gains and losses on dispositions are included in non-interest expense.
Lessor accounting - assets subject to operating leases, net – The Company leases commercial operating equipment to a variety of customers. At lease inception the Company determines if an arrangement is a lease. The equipment underlying the operating lease is reported at cost and depreciated based on their useful lives on a straight-line basis to the residual value. These residual values are reviewed annually to ensure the recorded amount does not exceed the fair market value at the lease termination. Revenue consists of the contractual lease payments and is recognized on a straight-line basis over a specified lease term. The Company also has net investments in commercial operating equipment leased to customers, which are classified as sales-type leases or direct financing leases. Investments in sales-type leases and direct financing leases are recorded on a net basis. Profit on sales-type leases is recognized at lease commencement and recorded in other miscellaneous income. Unearned income on direct financing leases is deferred, included in the net investment in the lease, and recognized over the lease term, yielding a constant periodic rate of return on the net investment in the lease. Sales from sales-type and operating leases are presented net of sales tax and other related taxes. Interest income is recognized over the lease term using the effective interest method.
Lessee accounting – The Company accounts for leases according to ASU 2016-02, Leases (Topic 842), and applies a right -of-use (“ROU”) model that requires a lessee to record, for all leases with a lease term of more than 12 months, an asset representing its right to use the underlying asset and a liability to make lease payments. The Company elected to apply the package of practical expedients permitting entities to not reassess: 1) whether any expired or existing contracts are or contain leases; 2) the lease classification for any expired or existing leases; and 3) initial direct costs for any existing leases. Additionally, as provided by ASU 2016-02, the Company elected to not apply the recognition requirements of ASC 842 to short-term leases, defined as leases with a term of twelve months or less, and to recognize the lease payments in net income on short-term leases on a straight-line basis over the lease term.
Income taxes – Deferred income tax assets and deferred income tax liabilities represent the tax effect of temporary differences between financial reporting and tax reporting measured at enacted tax rates in effect for the year in which the differences are expected to reverse. The Company recognizes only the impact of tax positions that, based on their technical merits, are more likely than not to be sustained upon an audit by the taxing authority.
Developing the provision for income taxes, including the effective tax rate and analysis of potential tax exposure items, if any, requires significant judgment and expertise in federal and state income tax laws, regulations and strategies, including the determination of deferred income tax assets and liabilities and any estimated valuation allowances deemed necessary to value deferred income tax assets. Judgments and tax strategies are subject to audit by various taxing authorities. While the Company believes it has no significant uncertain income tax positions in the consolidated financial statements, adverse determinations by these taxing authorities could have a material adverse effect on the consolidated financial statements.
Transfer of financial assets – Transfers of financial assets are accounted for as sales, when control over the assets has been surrendered. Control over transferred assets is deemed to be surrendered when: 1) the assets have been isolated from the Company, 2) the transferee obtains the right (free of conditions that constrain it from taking advantage of that right) to pledge or exchange the transferred assets, and 3) the Company does not maintain effective control over the transferred assets through an agreement to repurchase them before their maturity.
Loans held on the Company’s Consolidated Balance Sheets are classified as either held-for-investment or held-for-sale. Held-for-sale loan sales typically occur two to four days after the origination of the loans. When the Company determines that control over the transfer of financial assets has been surrendered, the transaction will be accounted for as a completed sale in which the underlying loans are derecognized and a resulting gain or loss, if any, is recorded.
SBA servicing asset, net – Servicing assets are recognized as separate assets when servicing rights are acquired through sale of financial assets. For sales of SBA loans, or portions of SBA loans, with servicing retained, a portion of the cost of originating the loan is allocated to the servicing asset based on relative fair value. Fair value is based on a valuation model that calculates the present value of estimated future servicing income. Servicing assets are subsequently measured using the amortization method which requires servicing assets to be amortized into non-interest income in proportion to, and over the period of, estimated future net servicing income of the underlying loans. The SBA servicing asset is carried at the lower of cost or market value.
The SBA servicing asset is evaluated annually for impairment based on the fair value of the asset as compared to amortized cost. Capitalized servicing rights are stated separately on the consolidated balance sheet and are amortized into non-interest income in proportion to, and over the period of, the estimated future net servicing income of the underlying financial assets.
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Servicing fee income, which is reported in the consolidated statements of income in SBA loan servicing fees, is recorded for fees earned for servicing loans. The fees are based on a contractual percentage of the outstanding principal and recorded as income when earned. The amortization of servicing assets and changes in the valuation allowance are netted against loan servicing income.
Derivative instruments – In the normal course of business, the Company is exposed to interest rate fluctuations. Consistent with the Company’s strategy for financial risk management, the Company has established a program that utilizes interest rate swaps to offset the risks associated with the effects of this exposure. The Company utilizes cash flow hedge accounting treatment for interest rate swaps. Cash flow hedges are accounted for by recording the changes in the fair value of the derivative instrument in other comprehensive income (loss) and are recognized in the consolidated statements of income when the hedged item affects earnings. Derivative instruments are recognized on the consolidated balance sheet as other assets or other liabilities, at their respective fair values. See Note 13 - Derivatives for additional information.
Stock repurchase program – On March 7, 2024, the Company announced that its Board of Directors (the “Board”) had authorized, effective March 6, 2024, a common stock repurchase program to purchase up to 641,832 shares of the Company’s common stock in the aggregate. The repurchase program authorizes the repurchase by the Company of its common stock in open market transactions, including pursuant to a trading plan in accordance with Rule 10b-18 promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or privately negotiated transactions. Repurchases could also be made pursuant to a trading plan under Rule 10b5-1 under the Exchange Act, which would permit shares to be repurchased when the Company might otherwise be precluded from doing so because of self-imposed trading blackout periods or other regulatory restrictions. The Share Repurchase Committee, designated by the Board of Directors, will determine the actual timing, number and value of any shares repurchased in its discretion depending on a variety of factors, including but not limited to, the market price and trading volume of the Company’s common stock, general market and economic conditions, the ongoing assessment of the Company’s capital needs, and applicable legal and regulatory requirements. The repurchase program does not obligate the Company to purchase any particular number of shares and may be limited or terminated at any time at the Company’s discretion without notice. Since the repurchase program’s inception, the Company has repurchased and subsequently retired a total of 44,608 shares for $0.5 million at an average price of $10.30 per share. The repurchase program will expire on March 31, 2026 unless extended by the Company’s Board of Directors.
Revenue from contracts with customers – The Company applies the provisions of ASC 606, Revenue from Contracts with Customers (“ASC 606”). The core principle of this standard is that a company should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the company expects to be entitled in exchange for those goods or services. The majority of our revenue-generating transactions are not subject to ASC 606, including interest generated from loans. The Company has evaluated the nature of its contracts with customers and determined that further disaggregation of revenue from contracts with customers into more granular categories beyond what is presented in the consolidated statements of income was not necessary. Services that the Company reports as part of non-interest income are subject to ASC 606 and include fees from its deposit customers for transaction-based activities, account maintenance charges and overdraft services. Transaction-based fees, such as ACH and wire transfer fees, overdraft, return and stop payment charges, are recognized at the time such transactions are executed and the services have been fulfilled by the Company. The fees are typically withdrawn from the customer’s deposit account balance. The Company also receives fees from third-parties in its Strategic Programs for setting up systems and procedures to efficiently originate loans in a convenient, compliant and safe manner. Because the third-party simultaneously receives and benefits from the services, revenue is recognized evenly over the term of the loan program. Program fees are received monthly in connection with continuing program services provided for the Company’s Strategic Programs are recorded at the time services are provided.
Stock-based compensation – The Company accounts for all stock-based awards to employees and non-employees, including grants of stock options and restricted stock awards, based on their respective grant date fair values. The Company estimates the fair value of stock option grants using the Black-Scholes option pricing model. The assumptions used in calculating the fair value of stock option grants represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment and include consideration of historical experience. The risk free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods corresponding with the expected life of the option. Expected volatility is based on the Company's data for the expected option term. The expected dividend yield was zero as the Company is not expected to pay dividends in the foreseeable future. Restricted stock awards are valued based on the fair value of the Company’s common stock on the date of grant. The Company expenses stock-based compensation related to stock options and restricted stock awards over the requisite service period (generally the vesting
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period of the equity grant) using the graded-vesting method. The Company accounts for forfeitures of stock–based awards as they occur. Stock-based compensation expense is included in salaries and employee benefits on the income statement.
Earnings per share (“EPS”) – Basic EPS is computed by dividing net earnings allocated to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS is calculated by dividing net earnings allocated to common shareholders by the weighted average number of common shares outstanding during the period adjusted for the effect of potentially dilutive securities. Potentially dilutive securities include incremental common shares issuable upon the exercise of stock options and unvested restricted shares, that are not considered participating securities, using the treasury stock method.
The Company uses the two-class method to determine EPS when participating securities are present. Unvested restricted stock awards that contain nonforfeitable rights to dividends qualify as participating securities, unless the rights were waived by the employee. For these securities, net income is allocated between common shareholders and participating securities, and EPS is calculated for both basic and diluted shares.
Comprehensive income (loss) – Accounting principles generally require that recognized revenue, expenses, gains and losses be included in net income. However, certain changes in assets and liabilities, such as unrealized gains and losses on securities AFS and unrealized gains and losses on interest rate swaps designated as cash flow hedges, are reported as a separate component of equity in the accompanying consolidated balance sheets, net of income taxes, and such items, along with net income, are components of comprehensive income (loss). The Company’s policy is to release income tax effects from accumulated other comprehensive income at such time as the earnings or loss of the related activity are recognized in earnings
Off-balance sheet instruments – In the ordinary course of business, the Company has entered into off-balance sheet financial instrument arrangements consisting of commitments to extend credit. Such financial instruments are recorded in the consolidated financial statements when they are funded. They involve, to varying degrees, elements of credit risk in excess of amounts recognized in the consolidated balance sheet. Losses would be experienced when the Company is contractually obligated to make a payment under these instruments and must seek repayment from the borrower, which may not be as financially sound in the current period as they were when the commitment was originally made. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. The Company enters into credit arrangements that generally provide for the termination of advances in the event of a covenant violation or other event of default.
Since many of the commitments are expected to expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Company evaluates each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if deemed necessary by the Company upon extension of credit, is based on management’s credit evaluation of the party. The commitments are collateralized by the same types of assets used as loan collateral.
The Company records a reserve on its unfunded loan commitments which is included within other liabilities on the Consolidated Balance Sheets. The estimate of credit loss incorporates assumptions for both the likelihood and amount of funding over the estimated life of the commitments, including adjustments for current conditions and reasonable and supportable forecasts. Management periodically reviews and updates its assumptions for estimated funding rates.
Segment reporting – As further described in Note 17 - Segments, during the third quarter of 2025, the Company implemented segment reporting following the completion of a technology initiative to capture segment-specific financial data and develop reports used by the Company’s chief operating decision maker (“CODM”) to review the Company’s financial performance and determine how to allocate resources. The Company established three reportable segments: traditional banking, banking as a service (“BaaS”) and treasury and administration. For periods prior to July 1, 2025, the Company operated under one operating segment, consistent with the information that was presented to the Company’s CODM.
Recently adopted accounting pronouncements
In December 2023, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2023-09, “Income Taxes (Topic 740): Improvements to Income Tax Disclosures”. ASU 2023-09 improves the transparency of annual income tax disclosures by requiring entities to provide greater disaggregation of information on income taxes paid and on the rate reconciliation disclosures. This pronouncement also requires qualitative discussion of the primary state and local jurisdictions for income taxes and the type of reconciling categories. The Company adopted ASU
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2023-09 on a retrospective basis effective January 1, 2025 and included the incremental disclosures in Note 12 - Income Taxes.
Recent accounting pronouncements
In November 2025, the FASB issued ASU 2025-08, “Financial instruments – Credit Losses (Topic 326): Purchased Loans,” which amends the guidance in ASC 326 on the accounting for certain purchased loans. Under ASU 2025-08, entities must account for acquired loans (excluding credit cards) that meet certain criteria at acquisition (purchased seasoned loans) by recognizing them at their purchase price plus an allowance for expected credit losses (gross-up approach). Purchased seasoned loans are defined as either: (1) non-PCD loans that are obtained in a business combination, or (2) non-PCD loans that (a) are obtained in an asset acquisition or upon consolidation of a variable interest entity that is not a business and (b) are acquired more than 90 days after their origination date by a transferee that was not involved in their origination. ASU 2025-08 also introduces an accounting policy election related to the subsequent measurement of expected credit losses for entities that use a method other than a discounted cash flow analysis to estimate credit losses on purchased seasoned loans. If this accounting policy is elected, entities can use the amortized cost basis of the asset to subsequently measure their credit loss allowance. ASU 2025-08 is effective for interim and annual reporting periods beginning after December 15, 2026. Early adoption is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In September 2025, the FASB issued ASU 2025-06 “Intangibles – Goodwill and Other - Internal-Use Software (Subtopic 350-40): Targeted Improvements to the Accounting for Internal-Use Software.” ASU 2025-06 eliminates the consideration of project development stages in determining whether a cost is eligible for capitalization. Instead, cost capitalization will be based on a “probable to complete” threshold. This guidance will be effective for the Company on January 1, 2028. The Company is currently evaluating the impact that the adoption of this guidance will have on its consolidated financial statements.
In November 2024, the FASB issued ASU 2024-03, “Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic 220-40): Disaggregation of Income Statement Expenses”, which requires additional disclosure of the nature of expenses included in the income statement. The standard requires disclosures about specific types of expenses included in the expense captions presented in the income statement. This ASU is effective for fiscal years beginning after December 15, 2026, and interim periods beginning after December 15, 2027, with early adoption permitted. The requirements should be applied on a prospective basis while retrospective application is permitted. The Company is currently evaluating the impact that the adoption of this guidance will have on its disclosures.
Note 2 – Investments
Investment Securities Available-for-Sale, at Fair Value
The Company’s AFS investment portfolio consists of U.S. Treasury securities. The Company reports debt securities AFS on the Company’s Consolidated Balance Sheets at fair value. The amortized cost, gross unrealized gains and losses, and estimated fair value of investment securities AFS as of December 31, 2025 and 2024, are summarized as follows:
($ in thousands) AmortizedCost UnrealizedGain UnrealizedLoss EstimatedFair Value
($ in thousands) AmortizedCost UnrealizedGain UnrealizedLoss EstimatedFair Value
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The following table presents the amortized cost and estimated fair value of investment securities AFS at December 31, 2025, by contractual maturity:
($ in thousands) AmortizedCost EstimatedFair Value
Due after one year through five years 25,030 25,243
At December 31, 2025, debt securities AFS with a fair value of $27.8 million were pledged as collateral for a credit line held by the Bank. Accrued interest receivable on debt securities AFS totaled $0.5 million and $0.5 million at December 31, 2025 and 2024, respectively, and was included in accrued interest receivable on the Consolidated Balance Sheets.
Investment Securities Held-to-Maturity, at Cost
The Company's HTM investment portfolio consists of agency mortgage-backed securities and agency collateralized mortgage obligations. The Company reports debt securities HTM on the Company's Consolidated Balance Sheets at carrying value which is amortized cost. The amortized cost, unrealized gains and losses, and estimated fair values of the Company’s debt securities HTM at December 31, 2025 and December 31, 2024, are summarized as follows:
Total securities held-to-maturity $ 9,927 $ — $ 6 $ (951) $ 8,982
Mortgage-backed securities $ 5,910 $ — $ — $ (746) $ 5,164
The amortized cost and estimated market value of debt securities HTM at December 31, 2025 by contractual maturity are shown below. Actual maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
($ in thousands) AmortizedCost EstimatedFair Value
Due in one year or less $ — $ —
Due after one year through five years 1,049 1,026
Due after five years through ten years 1,277 1,177
At December 31, 2025, debt securities HTM in the amount of $9.9 million were pledged as collateral for a credit line held by the Bank.
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