Coastal Financial Corp: Form 10-Q for the period ended Mar 31, 2025

Overview

We are a bank holding company that operates through our wholly owned subsidiaries, Coastal Community Bank (“Bank”) and Arlington Olympic LLC. We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County, which has an estimated population in 2024 of over 849,000. Our business is conducted through three reportable segments: The community bank, CCBX and treasury & administration. The community bank segment includes all community banking activities, with a primary focus on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides banking as a service (“BaaS”) that allows digital financial service providers, companies and brands to offer their customers banking services. The CCBX segment has 25 partners as of March 31, 2025. The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

As of March 31, 2025, we had total assets of $4.34 billion, total loans receivable of $3.52 billion, total deposits of $3.79 billion and total shareholders’ equity of $449.9 million.

The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relate to activities primarily conducted by the Bank.

We generate most of our community bank revenue from interest on loans and CCBX revenue from BaaS fee income and interest on loans. Our primary source of funding for our loans is commercial and retail deposits from our customer relationships and from our partner deposit relationships. We place secondary reliance on wholesale funding, primarily borrowings from the Federal Home Loan Bank (“FHLB”). Less commonly used sources of funding include borrowings from the Federal Reserve System (“Federal Reserve”) discount window, draws on established federal funds lines from unaffiliated commercial banks, brokered funds, which allows us to obtain deposits from sources that do not have a relationship with the Bank and can be obtained through certificate of deposit listing services, via the internet or through other advertising methods, or a one-way buy through an insured cash sweep (“ICS”) account, which allows us to obtain funds from other institutions that have deposited funds through ICS. Our largest expenses are provision for credit losses - loans, interest on deposits and borrowings, BaaS loan expense, salaries and employee benefits, BaaS fraud expense, legal and professional expenses, data processing and software licenses and occupancy expense. Our principal lending products are commercial real estate loans, consumer loans, residential real estate, commercial and industrial loans and construction, land and land development loans.

Third-Party Risk Management Guidance

On July 25, 2024, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency released a joint statement discussing potential risks related to arrangements between banks and third parties to deliver bank deposit products and services to end users, as well as examples of effective practices for the management of those risks. Additionally, the agencies issued a request for information and comment on the nature of banks’ relationships with financial technology companies and effective risk management practices for those relationships. The agencies also indicated that they are considering whether additional steps, such as enhancements to supervisory guidance, could help ensure that banks effectively manage risks associated with these various types of arrangements. These developments suggest that the agencies are increasing their focus on third-party deposit arrangements and may expect financial institutions involved in these arrangements, such as us, to change their risk management and compliance practices, which may increase the costs of operating a BaaS business.

Recordkeeping for Custodial Accounts

On September 17, 2024, the FDIC issued a proposed rule that would impose recordkeeping and other compliance requirements on custodial deposit accounts with transactional features. Under the proposed rule, FDIC-insured banks maintaining such custodial deposit accounts would be required to maintain updated and accurate account records identifying the beneficial owners of those deposits, the balance attributable to each beneficial owner, and the ownership category in which the deposited funds are held. We are evaluating the potential impact of the proposed rule, if the rule is finalized as proposed, it could increase the costs of operating BaaS arrangements such as the partnerships in our CCBX segment.

Financial Summary

Total loans, net of deferred fees, increased $30.8 million, or 0.9%, during the three months ended March 31, 2025 to $3.52 billion, compared to $3.49 billion at December 31, 2024. Community bank loans decreased $16.5 million, or 0.9%, and CCBX loans increased $47.2 million, or 2.9%. CCBX loan growth is net of $744.6 million in CCBX loans sold during the quarter ended March 31, 2025. We continue to monitor and manage the CCBX loan portfolio, and will continue to sell CCBX loans to the originating partner in the coming months as part of our strategy to optimize our CCBX portfolio, manage credit quality, portfolio limits and partner limits. At the same time we will be focused on increasing our efficiency and using technology to reduce future expense growth. Deposits increased $205.9 million, or 5.7% to $3.79 billion as of March 31, 2025 compared to $3.59 billion as of December 31, 2024. Our liquidity position is supported by diligent management of our liquid assets and liabilities as well as maintaining access to alternative sources of funds. As of March 31, 2025 we had $624.3 million in cash on the balance sheet and the capacity to borrow up to $662.4 million from Federal Home Loan Bank and the Federal Reserve Bank discount window. Cash on the balance sheet and borrowing capacity total $1.29 billion and represented 33.9% of total deposits and exceeded our $558.8 million in uninsured deposits as of March 31, 2025. Our AFS securities portfolio of $34,000 has a weighted average remaining maturity of 3.6 years. Unrealized losses on the AFS securities portfolio were $2,000, or 0.001%, of shareholders' equity as of March 31, 2025.

Our CCBX segment continues to evolve, and we have 25 relationships, at varying stages, as of March 31, 2025. We continue to refine the criteria for CCBX partnerships, exploring relationships with larger more established partners, with experienced management teams, existing customer bases and strong financial positions. We also will consider promising medium and smaller sized partners that align with our approach and terms including financial wherewithal and will continue to exit relationships where it makes sense for us to do so.

As we explore relationships with new partners we continue to expand our product offerings with existing CCBX partners. As we become more proficient in the BaaS space we aim to cultivate new relationships that align with our long-term goals. We believe that a strategy of adding new partnerships and launching new products with existing partners allows us to expand and grow our customer base with a modest increase in regulatory risk given our operational history with them. Increases in partner activity/transaction counts is positively impacting noninterest income and we expect this trend to continue as current products grow and new products are introduced . We plan to continue selling loans as part of our strategy to balance partner and lending limits, and manage the loan portfolio and credit quality. We retain a portion of the fee income for our role in processing transactions on sold credit card balances, and will continue this strategy to provide an on-going and recurring revenue source with no on balance sheet risk or capital requirement.

On April 1, 2025, we went live with the T-Mobile deposit program, which moved their customer deposits to the Bank, and our second quarter deposits will include those balances. As we build out our deposit base, we will be able to sweep deposits off the balance sheet if not needed and along with the ability to sweep them back on if needed. This deposit sweep capability allows us to better manage liquidity and deposit programs. At March 31, 2025 we swept off $406.3 million in deposits for FDIC insurance and liquidity purposes.

Results of Operations

Net Income

Net income for the three months ended March 31, 2025 was $9.7 million, or $0.63 per diluted share, compared to $6.8 million, or $0.50 per diluted share, for the three months ended March 31, 2024. The increase in net income over the comparable period in the prior year was primarily attributable to a $13.2 million increase in interest income due to an increase in average loans receivable and higher interest rates on loan products and portfolio composition, a decrease in interest expense on deposits of $682,000, due to decreases in the Fed funds interest rate, partially offset by an increase of $6.4 million in BaaS loan expense. Also contributing is an increase BaaS program income of $2.2 million. The increase in BaaS program income is related to increased CCBX loan and deposit activity.

Additionally, BaaS credit enhancement income decreased $26.2 million, which is directly related to and offsets the decrease in provision for credit losses of $27.4 million for the quarter ended March 31, 2025. In accordance with GAAP, we recognize as revenue (1) the right to be indemnified or reimbursed for fraud losses on CCBX customer loans and deposits and (2) the right to be indemnified for credit losses by our partners for expected credit losses related to loans they originate and unfunded commitments from such loans. CCBX customer credit losses are recognized in the allowance for credit loss and fraud loss is recognized in BaaS noninterest expense. For more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

Net Interest Income

Net interest income for the three months ended March 31, 2025 was $76.1 million, compared to $62.2 million for the three months ended March 31, 2024, an increase of $13.9 million, or 22.3%. Yield on loans receivable was 11.33% for the three months ended March 31, 2025, compared to 11.01% for the three months ended March 31, 2024. The increase in net interest income compared to the quarter ended March 31, 2024 was largely related to growth in higher yielding loans. The average balance of higher yielding CCBX loans were $364.2 million more for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. Total average loans receivable for the three months ended March 31, 2025 was $3.51 billion, compared to $3.14 billion for the three months ended March 31, 2024. The FOMC last lowered the targeted Federal Funds rate by 0.25% on December 19, 2024; a reduction of 1.00% compared to March 31, 2024.

Total interest and fees on loans totaled $98.1 million for the three months ended March 31, 2025 compared to $85.9 million for the three months ended March 31, 2024. The $12.3 million increase in interest and fees on loans for the quarter ended March 31, 2025, compared to the quarter ended March 31, 2024, was largely due to growth in loans, primarily from CCBX. Total loans receivable was $3.52 billion at March 31, 2025, compared to $3.20 billion at March 31, 2024. CCBX average loans receivable was $1.63 billion for the quarter ended March 31, 2025, compared to $1.27 billion for the quarter ended March 31, 2024, an increase of $364.2 million, or 28.8%. Average CCBX yield of 16.88% was earned on CCBX loans for the quarter ended March 31, 2025, compared to 17.74% for the quarter ended March 31, 2024. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield.

Interest income from interest earning deposits with other banks was $6.1 million for the quarter ended March 31, 2025, an increase of $1.3 million, or 27.0%, primarily due to an increase in balances compared to the quarter ended March 31, 2024. The average balance of interest earning deposits invested with other banks for the three months ended March 31, 2025 was $553.4 million, compared to $350.9 million for the three months ended March 31, 2024. The yield on these interest earning deposits with other banks decreased 1.03%, in line with the 1.0% reduction in Fed funds, to 4.45% compared to 5.48% at March 31, 2024. Interest income on investment securities decreased $384,000 to $650,000 at March 31, 2025, compared to $1.0 million at March 31, 2024. Average investment securities decreased $68.2 million from $115.4 million for the three months ended March 31, 2024, to $47.2 million for the three months ended March 31, 2025, primarily as a result of maturing securities and principal paydowns. Average yield on investment securities increased to 5.59% for the three months ended March 31, 2025, compared to 3.60% for the three months ended March 31, 2024.

Interest expense was $28.8 million for the quarter ended March 31, 2025, a $691,000 decrease from the quarter ended March 31, 2024. Interest expense on deposits was $28.2 million for the quarter ended March 31, 2025, compared to $28.9 million for the quarter ended March 31, 2024. The $682,000 decrease in interest expense on deposits was largely due to lower interest rates despite an increase of $437.5 million in interest bearing deposits compared to the quarter ended March 31, 2024. Interest on borrowed funds was $660,000 for the quarter ended March 31, 2025, compared to $669,000 for the quarter ended March 31, 2024.

Cost of funds was 3.11% for the quarter ended March 31, 2025, which is a decrease of 0.42% from the quarter ended March 31, 2024. Cost of deposits for the quarter ended March 31, 2025 was 3.08%, which was a 0.41% decrease, from 3.49% for the quarter ended March 31, 2024. These decreases were largely due to lower interest rates.

Net interest margin was 7.48% for the three months ended March 31, 2025, compared to 6.92% for the three months ended March 31, 2024. The increase in net interest margin compared to the three months ended March 31, 2024 was largely due to an increase in loan yield partially combined with a decrease in cost of deposits.

Total yield on loans receivable for the quarter ended March 31, 2025 was 11.33%, compared to 11.01% for the quarter ended March 31, 2024. This increase in yield on loans receivable is primarily attributed to an increase in the average balance of higher yielding CCBX loans even though the yield on CCBX loans slightly declined. The yield on community bank loans also contributed as it was up slightly. The composition of the loan portfolio is shifting with CCBX average loans increasing to 46.4% of the total loan portfolio for the quarter ended March 31, 2025, compared to 40.3% for the quarter ended March 31, 2024, and the average community bank loans decreasing to 53.6% of the loan portfolio for the quarter ended March 31, 2025, compared to 59.7% for the quarter ended March 31, 2024. For the quarter ended March 31, 2025, average CCBX loans increased $364.2 million, or 28.8%, with an average CCBX yield of 16.88%, compared to 17.74% at the quarter ended March 31, 2024. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Average community bank loans increased $10.2 million, or 0.5%. Average yield on community bank loans for the three months ended March 31, 2025 was 6.53% compared to 6.46% for the three months ended March 31, 2024.

The following tables (1) show the average yield on loans and cost of deposits by segment and (2) illustrate how BaaS loan interest income is affected by BaaS loan expense resulting in net BaaS loan income and the associated yield for the periods indicated:

(unaudited)

(1) CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans. See the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a reconciliation of the impact of BaaS loan expense on CCBX yield on loans.

(2) Annualized calculations shown for periods presented.

(dollars in thousands, unaudited)

(1) A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

(2) Annualized calculations shown for periods presented.

(3) Includes loans held for sale.

For the three months ended March 31, 2025, net interest margin (net interest income divided by the average total interest earning assets) and net interest spread (average yield on total interest earning assets minus average cost of total interest bearing liabilities) were 7.48% and 6.68%, respectively, compared to 6.92% and 5.93%, respectively, for the three months ended March 31, 2024.

The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan costs, net of fees included in interest income totaled $2.1 million and $1.9 million for the three months ended March 31, 2025 and 2024, respectively. For the three months ended March 31, 2025 and 2024, the amount of interest income not recognized on nonaccrual loans was not material.

(dollars in thousands; unaudited)

(1) Yields and costs are annualized.

(2) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(3) Includes loans held for sale and nonaccrual loans.

(4) Net interest margin represents net interest income divided by the average total interest earning assets.

The following table presents an analysis of certain average balances, interest income and expense by segment:

(dollars in thousands, unaudited)

53

(dollars in thousands, unaudited)

(1) Yields and costs are annualized.

(2) Includes loans held for sale and nonaccrual loans.

(3) Net interest margin represents net interest income divided by the average total interest earning assets.

(4) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. See the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a reconciliation of the impact of BaaS loan expense on CCBX loan yield.

(5) Net interest margin, net of BaaS loan expense includes the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, servicing CCBX loans. A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

(6) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(7) Intrabank assets and liabilities are consolidated for period calculations and presented as intrabank asset, net or intrabank liability, net in the table above.

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. The table illustrates the $2.5 million increase in loan interest income that is attributed to an increase in loan rates and $9.8 million increase in loan interest income that is attributed to an increase in loan volume. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.

(dollars in thousands; unaudited)

Provision for Credit Losses

The provision for credit losses - loans is an expense we incur to maintain an allowance for credit losses at a level that management deems appropriate to absorb expected losses on existing loans in accordance with GAAP. For a description of the factors taken into account by our management in determining the allowance for credit losses see “—Financial Condition—Allowance for Credit Losses.”

The macro economic environment is continuously changing, primarily due to the pace of economic growth, inflation, changing interest rates, global trade tensions, tariffs, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, political uncertainty, natural disasters, and trade issues that may impact the provision and therefore the allowance. Gross loans, excluding loans held for sale, totaled $3.52 billion at March 31, 2025. The allowance for credit losses as a percentage of loans was 5.21% at March 31, 2025, compared to 4.38% at March 31, 2024.

Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying or reimbursing incurred losses. CCBX partners bear most of the responsibility for credit losses incurred which consequently gives them vested interests in the performance of the portfolio. We believe that this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and reclassified negative deposit accounts. When the provision for credit losses - loans and provision for unfunded commitments are recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner's legal commitment to indemnify or reimburse losses. The credit enhancement asset is relieved as credit enhancement payments are received from the CCBX partner or taken from the partner's cash reserve account.

The provision for credit losses for the three months ended March 31, 2025 was $55.8 million, compared to $83.2 million for the three months ended March 31, 2024. This includes a provision for credit losses - loans for the three months ended March 31, 2025 of $54.4 million, compared to $79.5 million for the three months ended March 31, 2024. The decrease in the Company’s provision for credit losses - loans during the quarter ended March 31, 2025, is largely related to the provision for CCBX partner loans. During the quarter ended March 31, 2025, a $54.3 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a provision for credit losses - loans of $65,000 was needed for the quarter ended March 31, 2025, largely due to a change in loan mix. Additionally, a provision for unfunded commitments of $613,000 was recorded for the quarter ended March 31, 2025, primarily as a result of a change in the loan mix of available balance, compared to $3.6 million for the three months ended March 31, 2024. A provision for accrued interest receivable of $784,000 was recorded for the quarter ended March 31, 2025 on CCBX loans, compared to zero for the quarter ended March 31, 2024.

The following table shows the provision expense for loans by segment for the periods indicated:

(dollars in thousands; unaudited)

Net charge-offs for the quarter ended March 31, 2025 totaled $48.2 million, or 5.57% of total average loans, compared to $57.0 million, or 7.30% of total average loans, for the quarter ended March 31, 2024. Net charge-offs were down in 2025 compared to 2024, primarily due to our on-going efforts to improve the credit quality of CCBX loans. However, loans originated through CCBX partners have a higher level of expected losses than our community bank loans as reflected in the factors for allowance for credit losses. In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for a credit enhancement that indemnifies or reimburses the Bank for net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where, effective April 1, 2024, the Company was responsible for credit losses on approximately 5% of a $299.8 million loan portfolio; prior to April 1, 2024, the Company was responsible for 10% of that portfolio. At March 31, 2025, our portion of this portfolio represented $19.9 million in loans. For the three months ended March 31, 2025, $48.2 million of net charge-offs were recognized for CCBX loans and $3,000 net recoveries were recognized on community bank loans. For the three months ended March 31, 2024, $56.9 million of net charge-offs were recognized on CCBX loans and $11,000 net charge-offs were recognized for community bank loans.

Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligation then the Bank would be exposed to additional loan and deposit losses (counterparty risk) if the cash flows on the loans were not sufficient to fund the reimbursement of loan losses. If a CCBX partner does not replenish their cash reserve account the Bank may consider an alternative plan for funding the cash reserve, such as adjusting the funding amounts or timelines to better align with the partner's specific situation. If a mutually agreeable funding plan is not achieved then the Bank could declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would evaluate any remaining credit enhancement asset from the CCBX partner in the event the partner failed to determine if a write-off is appropriate. If a write-off occurs, the Bank would retain the full yield and any fee income on the loan portfolio going forward, and our BaaS loan expense would decrease once default occurs and payments to the CCBX partner are stopped.

The following table shows the total charge-off activity by segment for the periods indicated:

(dollars in thousands; unaudited)

(1) Annualized calculations shown for periods presented.

Noninterest Income

Our primary sources of recurring noninterest income are BaaS indemnification income, BaaS program income and service charges and fees. Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method.

Comparison of the quarter ended March 31, 2025 to the comparable quarter in the prior year

For the three months ended March 31, 2025, noninterest income totaled $63.5 million, a decrease of $22.7 million, or 26.3%, compared to $86.2 million for the three months ended March 31, 2024.

The following table presents, for the periods indicated, the major categories of noninterest income:

(dollars in thousands; unaudited)

Summary of significant noninterest income for the three months ended March 31, 2025 compared to the three months ended March 31, 2024

A description of our largest noninterest income categories are below:

BaaS Income. Our CCBX segment provides BaaS offerings that enable digital financial service providers, companies and brands to provide financial services to their customers through the Bank's CCBX segment. In exchange for providing these services, we earn fixed fees, volume-based fees and reimbursement of costs depending on the program agreement. Servicing and other BaaS fees are typically higher with new partners who have minimum contractual fees. Transaction and interchange fees increase as partner activity increases. As a result, we generally expect servicing and other fees to decrease and transaction and interchange fees to increase as partner activity grows and contracted minimum fees are replaced with recurring fees which then exceed the minimum contractual fees. Increases in BaaS reimbursement of fees offsets increases in noninterest expense from BaaS expenses covered by CCBX partners. In accordance with GAAP, we recognize the reimbursement of noncredit fraud losses on loans and deposits originated through partners and credit enhancements related to the allowance for credit losses and reserve for unfunded commitments provided by the partner as revenue in BaaS income. CCBX credit losses are recognized in the allowance for credit losses -loans and fraud losses are expensed in noninterest expense under BaaS fraud expense. Also in accordance with GAAP, we establish a credit enhancement asset for expected future credit losses through the recognition of BaaS credit enhancement revenue at the same time we establish an allowance for those loans though a provision for credit losses - loans. For more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

Service Charges and Fees. Service charges and fees include service charges on accounts, point-of-sale fees, merchant services fees and overdraft fees. Together they constitute the largest component of our noninterest income, outside of BaaS income.

Loan Referral Fees. We earn loan referral fees when we originate a variable rate loan and the borrower enters into an interest rate swap agreement with a third party to fix the interest rate for an extended period, usually 20 or 25 years. We recognize a loan referral fee for arranging the interest rate swap. By facilitating interest rate swaps to our clients, we are able to provide them with a long-term, fixed interest rate without the Bank assuming the interest rate risk. Interest rate volatility, swap rates, and the timing of loan closings all impact the demand for long-term fixed rate swaps. The recognition of loan referral fees fluctuates in response to these market conditions and as a result we may recognize more or less, or may not recognize any, loan referral fees in some periods. Current market conditions have made interest rate swap agreements less attractive.

Unrealized (loss)/gain on equity securities, net. During the three months ended March 31, 2025, we recognized an unrealized gain on equity securities of $16,000 compared to the same period ended March 31, 2024, when there was an unrealized gain of $15,000 recognized. We hold $3.6 million in total equity funds and investments, $3.2 million of which is in equity securities of entities that are focused on providing products to the BaaS and financial services space.

Other. This category includes a variety of other income-producing activities, credit card fee income, wire transfer fees, interest earned on bank owned life insurance (“BOLI”), and SBA and USDA servicing fees.

Noninterest Expense

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest components of noninterest expense are BaaS loan and fraud expense and salaries and employee benefits. Noninterest expense also includes operational expenses, such as legal and professional expenses, data processing and software licenses, occupancy, points of sale expense, FDIC assessment, director and staff expenses, marketing, excise taxes and other expenses.

The increase in noninterest expenses for the quarter ended March 31, 2025 compared to the quarter ended March 31, 2024 was largely due to a a $6.4 million increase in BaaS loan expense, a $1.1 million increase in BaaS fraud expense, a $2.8 million increase in legal and professional expenses, a $3.5 million increase in salary and employee benefits, and a $1.3 million increase in data processing and software licenses, largely due to enhancements in technology all of which are related to the growth of Company and investments in technology and risk management.

The following table presents, for the periods indicated, the major categories of noninterest expense:

(dollars in thousands; unaudited)

Summary of significant noninterest expense for the three months ended March 31, 2025 compared to the three months ended March 31, 2024

A description of our largest noninterest expense categories are below:

Salaries and Employee Benefits. Salaries and employee benefits are one of the largest components of noninterest expense and include payroll expense, incentive compensation costs, equity compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits expense continues to increase, primarily due to hiring staff for our CCBX segment and additional staff for our ongoing growth initiatives. As our CCBX activities grow, and we invest more in technology we expect some continued growth in employees to support these lines of business but we are also working to automate our processes to reduce and/or slow future growth in hiring.

Legal and Professional Expenses. Legal and professional costs include legal, audit and accounting expenses, consulting fees, fees for recruiting and hiring employees, and IT related security expenses. These expenses fluctuate with the development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services. The expenses also reflect the costs associated with our infrastructure enhancement projects to improve our processing, automate processes, reduce compliance costs and enhance our data management.

Data Processing and Software Licenses. Data processing and software licenses includes expenses related to obtaining and maintaining software required for our various functions and includes the amortization of software development costs. Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs. Data processing costs grow as we grow and add new products, customers and branches and enhance technology. Additionally, CCBX data processing expenses and software that aids in the reporting of CCBX activities and monitoring of transactions that helps to automate and create other efficiencies in reporting have resulted in increased expenses in the category. These expenses are expected to increase as we invest more in automated processing and as we grow product lines and our CCBX segment.

Occupancy. Occupancy expenses include rent, utilities, janitorial and other maintenance expenses, property insurances and taxes. Also included is depreciation on building, leasehold, furniture, fixtures and equipment. Our hybrid and remote workforce has increased, which helps keep some occupancy expenses down, however we do expect occupancy expenses to increase as we continue to grow.

Point of Sale Expenses. Point of sale expenses are incurred as part of the process that allows businesses to accept payment for goods or services. Generally, point of sale expense increases as point of sale activity increases, as does point of sale income which is recognized in other income. Point of sale expenses are primarily incurred by the community bank.

FDIC Assessments. FDIC assessments are assessed to fund the Deposit Insurance Fund (“DIF”) to insure and protect the depositors of insured banks and to resolve failed banks. The assessment rate is based on a number of factors and recalculated each quarter. As deposits increase, the FDIC assessment expense will generally increase. On October 18, 2022 the FDIC finalized an increase of 2 basis points in the initial base deposit insurance assessment rates schedules, beginning with the first quarterly assessment period of 2023. The rise is intended to increase the reserve ratio of the Deposit Insurance Fund to 1.35%, the statutory requirement. The increase in the base rates will remain in place until the reserve ratio reaches or exceeds 2.0%. The reserve ratio is 1.21% as of June 30, 2024. The reserve ratio is negatively affected by growth in assets and bank failures.

Director and Staff Expenses. Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses. Expenses will fluctuate depending upon conferences and other professional events that are attended by employees as well as expenses related to employee travel, and continuing education.

Excise Taxes. Excise taxes are assessed on Washington state income and are based on gross income. Gross income is reduced by certain allowed deductions and income attributed to other states is also removed to arrive at the taxable base. Excise taxes increased primarily as a result of increased income subject to excise taxes. CCBX income is sourced to the state where the partner does business, and the majority of partners are located outside the state of Washington.

Marketing. Marketing and promotion costs will vary depending upon the deployment of branding and targeted advertising for the community bank and CCBX. We are using more cost-effective advertising options, but expect costs to increase as we expand our marketing plan.

Other. This category includes dues and memberships, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and officer’s insurance, donations, and miscellaneous other expenses.

BaaS loan and fraud expense. Our CCBX segment provides BaaS offerings that enable digital financial service providers, companies and brands to provide financial services to their customers through the Bank's CCBX segment. Included in BaaS loan and fraud expense is partner loan expense including overdraft balances and BaaS fraud expense. Partner loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. BaaS fraud expense represents noncredit fraud losses on loans and deposits originated through partners. Fraud losses are recorded when incurred as losses in noninterest expense, and the reimbursement from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. For more information on the accounting for BaaS loan and fraud expenses see the section titled “CCBX – BaaS Reporting Information.”

The following table presents, for the periods indicated, the BaaS loan and fraud expenses:

(dollars in thousands; unaudited)

Income Tax Expense

The amount of income tax expense we incur is impacted by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce our deferred tax assets to the amount expected to be realized. The Company is subject to various state taxes that are assessed as CCBX activities and employees expand into other states, which increases the overall tax rate used in calculating the provision for income taxes in the current and future periods.

For the three months ended March 31, 2025, income tax expense totaled $2.0 million, compared to $1.9 million for the three months ended March 31, 2024. The $124,000 increase in income tax expense is the result of higher net income, partially offset by the deductibility of certain equity awards. The effective tax rate was 17.3% for the three months ended March 31, 2025, compared to 22.0% for the three months ended March 31, 2024. The effective tax rate was lower for the three months ended March 31, 2025, largely due to the impact of stock equity award deductions which fluctuate based on employee driven equity award activity, vesting terms and stock price.

Segment Information

Based on the criteria of ASC 280, Segment Reporting, we have identified three segments: the community bank, CCBX and treasury & administration. The primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides BaaS that enables digital financial service providers, companies and brands to provide financial services to their customers. The CCBX segment has 25 partners as of March 31, 2025, 19 that are active with six more currently in the testing or implementation stage as of March 31, 2025. The treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.

The Company’s reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The Company continues to evaluate its methodology on allocating items to the Company’s various segments to support strategic business decisions by the Company’s executive leadership. The difference in total loans receivable and total deposits in the community bank and CCBX segments is recorded on the balance sheet of each segment as an intrabank asset or intrabank liability, with the treasury & administration segment as the offset to those entries. Income and expenses that are specific to a segment are directly posted to each segment. Additionally, certain indirect expenses are allocated to each segment utilizing various metrics, such as number of employees, utilization of space, and allocations based on loan and deposit balances. We have implemented a transfer pricing process that credits or charges the community bank and CCBX segments with intrabank interest income or expense for the difference in average loans and average deposits, with the treasury & administration segment as the offset for those entries. The accounting policies of the segments are the same as those described in “Note 1 – Description of Business and Summary of Significant Accounting Policies” in the accompanying notes to the consolidated financial statements included in the Company's most recently filed 10-K report.

The following table presents summary financial information for each segment for the periods indicated:

(dollars in thousands; unaudited)

62

Community Bank

Community bank total assets as of March 31, 2025 decreased $17.4 million, or 0.9%, to $1.88 billion, compared to $1.90 billion as of December 31, 2024. Loans receivable net of deferred fees for the community bank segment decreased $16.5 million, or 0.9%, to $1.87 billion as of March 31, 2025, compared to $1.88 billion as of December 31, 2024. The decrease in community bank loans receivable is the result of normal balance fluctuations. Total community bank deposits increased $3.0 million, or 0.20%, as of March 31, 2025, compared to $1.52 billion as of December 31, 2024. The overall increase in community bank deposits was primarily a result of exception pricing tactics added as a strategy at the end of the first quarter of 2024 to retain deposits and more effectively compete in the market. Our cost of deposits for the community bank decreased to 1.76% for the three months ended March 31, 2025, primarily as a result of lower interest rates.

CCBX

CCBX total assets as of March 31, 2025 increased $202.3 million, or 9.6%, to $2.30 billion, compared to $2.10 billion as of December 31, 2024. During the three months ended March 31, 2025, $766.1 million in CCBX loans were transferred to loans held for sale, with $744.6 million in loans sold and $42.1 million loans remaining in loans held for sale as of March 31, 2025 compared to $20.6 million at December 31, 2024. We continue to sell loans back to the originating partner as part of our strategy to balance partner and lending limits, and manage the loan portfolio and credit quality. We retain a portion of the fee income for our role in processing transactions on sold credit card balances. This is expected to provide an on-going and recurring revenue stream without the additional on balance sheet risk. Total CCBX loans receivable increased $47.2 million, or 2.9%, to $1.65 billion as of March 31, 2025, compared to $1.60 billion as of December 31, 2024. The increase in loans receivable is the result of increased activity with CCBX partners. After deliberately reducing our other consumer and other loans portfolio during the third and fourth quarters of 2023 and first quarter of 2024 in an effort to optimize our loan portfolio, we have built back the CCBX portfolio with new loans that are more aligned with our long term objectives. CCBX allowance for credit losses increased to $164.2 million as of March 31, 2025, compared to $158.1 million as of December 31, 2024, primarily as a result of increased loan balances and the mix of loans with increased loss rates which has increased the allowance calculation/requirement. CCBX partner agreements provide for credit enhancements that cover $52.6 million, or 97.8%, of the total gross charge-offs on CCBX loans for the three months ended March 31, 2025. CCBX partners bear most of the responsibility for credit losses incurred which consequently gives them a vested interest in the performance of the portfolio. We believe that this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio. Total CCBX deposits increased $202.9 million, or 9.8%, to $2.27 billion, compared to $2.06 billion as of December 31, 2024, primarily as a result of growth within the CCBX relationships and new partnerships. This does not include an additional $406.3 million in CCBX deposits that were transferred off balance sheet to provide for increased FDIC insurance coverage to certain customers, compared to $273.2 million as of December 31, 2024.

Treasury & Administration

Treasury & administration total assets as of March 31, 2025 increased $33.2 million, or 26.7%, to $157.8 million, compared to $124.6 million as of December 31, 2024, primarily due to an increase in cash and due from banks. Total securities decreased $330,000, or 0.7%, to $47.0 million as of March 31, 2025, compared to $47.3 million as of December 31, 2024, primarily as a result of principal repayments on securities. Total borrowings were $47.9 million as of both March 31, 2025 and December 31, 2024.

The following tables present summary financial information for each segment for the periods indicated:

(dollars in thousands; unaudited)

64

(1) For the three months ended March 31, 2025, CCBX noninterest income includes credit enhancements of $53.6 million, fraud enhancements of $2.0 million, and BaaS program income of $6.3 million. For the three months ended March 31, 2024, CCBX noninterest income includes credit enhancements of $79.8 million, fraud enhancements of $923,000 and BaaS program income of $4.0 million.

Community Bank

Net interest income for the community bank was $19.8 million for the quarter ended March 31, 2025, an increase of $1.3 million, or 7.3%, compared to $18.4 million for the quarter ended March 31, 2024. The increase in net interest income is largely due an increase in loan interest income combined with lower cost of deposits resulting from lower interest rates. As a result of the community bank having higher average loans than deposits for the quarter ended March 31, 2025 compared to the quarter ended March 31, 2024, less intrabank interest expense was allocated to the community bank. The community bank intrabank interest expense was $3.9 million for the quarter ended March 31, 2025, compared to intrabank interest expense of $5.6 million for the quarter ended March 31, 2024. There was a provision for credit losses - loans for the community bank of $507,000 for the quarter ended March 31, 2025, compared to a provision expense of $2.0 million for the quarter ended March 31, 2024; the provision in the current period was largely due to a change in the mix of community bank loans. Net charge-offs to average loans for the community bank segment was 0.00% for the quarters ended March 31, 2025, and March 31, 2024. Noninterest income for the community bank was $1.0 million, for the quarter ended March 31, 2025, a decrease of $165,000, or 14.0%, compared to $1.2 million for the quarter ended March 31, 2024. Noninterest expenses for the community bank increased $1.4 million, or 15.5%, to $10.4 million as of March 31, 2025, compared to $9.0 million as of March 31, 2024. The increase in noninterest expense is largely due to higher salaries and employee benefits and data processing and software licenses which are related to the growth of Company and investments in technology and risk management.

CCBX

Net interest income for CCBX was $52.4 million for the quarter ended March 31, 2025, an increase of $11.2 million, or 27.3%, compared to $41.1 million for the quarter ended March 31, 2024. The increase in net interest income is primarily due to loan growth from active CCBX relationships. During the quarter ended March 31, 2025 we sold $744.6 million in CCBX loans as part of our strategy to optimize our CCBX portfolio and manage credit quality, portfolio limits and partner limits. We are retaining a portion of the transaction processing fee income on sold credit card balances which provides an on-going and recurring income without balance sheet risk. As a result of having higher average deposits than loans for the quarter ended March 31, 2025 compared to the quarter ended March 31, 2024 intrabank interest income for CCBX was $6.1 million for the quarter ended March 31, 2025, compared to $8.2 million for the quarter ended March 31, 2024. Provision for credit losses - loans was $55.3 million as a result of loan origination growth and the mix of loans for the quarter ended March 31, 2025, compared to $81.1 million for the quarter ended March 31, 2024. CCBX partner agreements provide for credit enhancements that cover $47.1 million, or 97.8% of total gross charge-offs on CCBX loans for the quarter ended March 31, 2025. The $54.3 million provision on CCBX loans includes $53.5 million for partner loans with credit enhancement on them and $847,000 on CCBX loans that the Company is responsible for. In accordance with the program agreement, the Company was responsible for credit losses on approximately 5% of a $299.8 million loan portfolio, or $19.9 million in partner loans at March 31, 2025. Noninterest income for CCBX was $61.9 million for the quarter ended March 31, 2025, a decrease of $22.9 million, or 27.0%, compared to $84.9 million for the quarter ended March 31, 2024, largely due to a decrease of $26.2 million in BaaS credit enhancements to establish a credit enhancement asset for future credit losses due from our CCBX partners, partially offset by a $2.2 million increase in BaaS program income, which was the result of increased activity with digital financial service providers and a $1.1 million increase in BaaS fraud enhancements. Noninterest expenses for CCBX increased $10.2 million, or 26.4%, to $48.6 million as of March 31, 2025, compared to $38.4 million as of March 31, 2024. The increase in noninterest expense is largely due to an increase in salaries and employee benefits, data processing and software licenses and legal and professional expenses, all of which are related to the growth of Company and investments in technology and risk management. For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”

Treasury & Administration

Net interest income for treasury & administration was $3.9 million for the quarter ended March 31, 2025, an increase of $1.3 million, or 49.2%, compared to $2.6 million for the quarter ended March 31, 2024, primarily as a result of higher interest earning deposits with other banks and lower interest expense. Noninterest income increased $404,000, or 292.8%, to $542,000 for the quarter ended March 31, 2025, compared to $138,000 for the quarter ended March 31, 2024. Noninterest expense was $13.0 million for the quarter ended March 31, 2025, and $9.1 million for the quarter ended March 31, 2024, with the increase in data processing and software license expense largely as a result of growth.

Financial Condition

Our total assets increased $218.1 million, or 5.3%, to $4.34 billion at March 31, 2025 from $4.12 billion at December 31, 2024. The increase is primarily comprised of a $164.9 million increase in interest earning deposits with other banks and a $30.8 million increase in loans receivable.

During the three months ended March 31, 2025, $766.1 million in CCBX loans were transferred to loans held for sale, with $744.6 million in loans sold. As of March 31, 2025 there were $42.1 million in loans held for sale and $20.6 million as of December 31, 2024. We will continue to sell loans back to the originating partner as part of our strategy to optimize our CCBX portfolio, manage credit quality, portfolio limits and partner limits. Additionally, on sold credit card balances we are retaining a portion of the fee income for our role in processing transactions. This is expected to provide an on-going and recurring revenue stream without the additional on balance sheet risk.

Loan Portfolio

Our primary source of income is derived through interest earned on loans. A substantial portion of our loan portfolio consists of commercial real estate loans and commercial and industrial loans in the Puget Sound region. Our consumer and other loans also represent a significant portion of our loan portfolio with the growth of our CCBX segment. Our loan portfolio represents the highest yielding component of our earning assets.

As of March 31, 2025, loans receivable totaled $3.52 billion, an increase of $30.8 million, or 0.9%, compared to December 31, 2024. Total loans receivable is net of $6.5 million in net deferred origination fees. The increase includes gross CCBX loan growth of $47.3 million, or 2.9%, and a decrease in gross community bank loans of $16.5 million, or 0.9%.

Loans as a percentage of deposits were 93.9% as of March 31, 2025, compared to 97.8% as of December 31, 2024. We remain focused on serving our communities and markets by growing loans and funding those loans with customer deposits.

The following table summarizes our loan portfolio by type of loan as of the dates indicated:

(dollars in thousands; unaudited)

(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.

The following tables detail the loans by segment which are included in the total loan portfolio table above:

(dollars in thousands; unaudited)

(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.

(dollars in thousands; unaudited)

(1) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans. Net BaaS loan income is a non-GAAP measure. See the reconciliation of non-GAAP measures set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for the impact of BaaS loan expense on CCBX yield.

(2) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.

Commercial and Industrial Loans. Commercial and industrial loans increased $18.9 million, or 6.4%, to $312.3 million as of March 31, 2025, from $293.4 million as of December 31, 2024. The increase in commercial and industrial loans receivable over December 31, 2024 was largely due to an increase of $24.4 million in capital call lines partially offset by a $5.6 million decrease in other commercial and industrial loans.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. These loans are primarily made based on the borrower’s ability to service the debt from income. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable, inventory or equipment, and we generally obtain personal guarantees on these loans. Commercial and industrial loans includes $48.6 million in loans to financial institutions as of both March 31, 2025 and December 31, 2024.

Included in the commercial and industrial loan balance is $133.5 million and $109.0 million in capital call lines resulting from relationships with our CCBX partners as of March 31, 2025 and December 31, 2024, respectively, and $29.7 million and $34.0 million in CCBX other commercial loans as of March 31, 2025 and December 31, 2024, respectively. As of March 31, 2025 there was $149.1 million in community bank commercial and industrial loans compared to $150.4 million at December 31, 2024.

Construction, Land and Land Development Loans. Construction, land and land development loans increased $18.4 million, or 12.4%, to $166.6 million as of March 31, 2025, from $148.2 million as of December 31, 2024. The increase is attributed to some new construction and development projects.

Unfunded loan commitments for construction, land and land development loans were $72.5 million at March 31, 2025, compared to $47.8 million at December 31, 2024. Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2025, the macro economic environment is continuously changing, primarily due to the pace of economic growth, inflation, changing interest rates, global trade tensions, tariffs, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, political uncertainty, natural disasters, and trade issues that have resulted in economic uncertainty.

Construction, land and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing these loans are primarily located in the Puget Sound region and are comprised of both residential and commercial properties, including owner occupied properties and investor properties. As of March 31, 2025, construction, land and land development loans included $96.7 million in commercial construction loans, $39.4 million in residential construction loans, $13.8 million in other construction, land and land development loans and $16.7 million in undeveloped land loans, compared to $83.2 million in commercial construction loans, $8.7 million in undeveloped land loans, $40.9 million in residential construction loans and $15.4 million in other construction, land and land development loans as of December 31, 2024.

Residential Real Estate Loans. Our one-to-four family residential real estate loans increased $18.5 million, or 3.9%, to $488.3 million as of March 31, 2025, from $469.8 million as of December 31, 2024, primarily due to an increase of $17.6 million in CCBX loans combined with an increase of $856,000 in community bank loans.

As of March 31, 2025, there were $285.4 million in CCBX home equity loans included in residential real estate, compared to $267.7 million at December 31, 2024, primarily as a result of increased activity. These home equity lines of credit are secured by residential real estate and are accessed by using a credit card. These are first and second lien residential loans and require 18 months of home ownership. Term lengths are up to 30 years and lines range from $50,000 to $400,000. We sold $118.5 million in CCBX residential real estate loans year to date as of March 31, 2025.

In the past, we have purchased residential mortgages originated through other financial institutions to hold for investment for purposes of diversifying our residential mortgage loan portfolio, meeting certain regulatory requirements and increasing our interest income. We last purchased residential mortgage loans in 2018. As of both March 31, 2025 and December 31, 2024, we held $6.1 million in purchased residential real estate mortgage loans. These loans purchased typically have a fixed rate with a term of 15 to 30 years and are collateralized by one-to-four family residential real estate. We have a defined set of credit guidelines that we use when evaluating these loans. Although purchased loans were originated and underwritten by another institution, our mortgage, credit, and compliance departments conduct an independent review of each underlying loan that includes re-underwriting each of these loans to our credit and compliance standards.

Like our commercial real estate loans, our residential real estate loans are secured by real estate, the value of which may fluctuate significantly over a short period of time primarily as a result of market conditions in the area in which the real estate is located. Adverse developments affecting real estate values in our market areas could therefore increase the credit risk associated with these loans, impair the value of property pledged as collateral on loans, and affect our ability to sell the collateral upon foreclosure without a loss or additional losses.

Commercial Real Estate Loans. Commercial real estate loans decreased $34.2 million, or 2.5%, to $1.34 billion as of March 31, 2025, from $1.37 billion as of December 31, 2024.

We are committed to growing the community bank portfolio in the Puget Sound region. We actively seek commercial real estate loans in our markets and our lenders are experienced in competing for these loans and managing these relationships.

We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores, hotels and motels, low rise office buildings, mixed-use residential and commercial, and other properties. We originate both fixed- and adjustable-rate loans with terms up to 20 years. Fixed-rate loans typically amortize over a 10 to 25 year period with balloon payments due at the end of five to ten years. Adjustable-rate loans are generally based on the prime rate and adjust with the prime rate or are based on term equivalent FHLB rates. At March 31, 2025, approximately 32.3% of the commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans represented 38.0% of our loan portfolio at March 31, 2025 and are a large source of revenue. As of March 31, 2025, we held $15.9 million in purchased commercial real estate loans, compared to $20.1 million at December 31, 2024. Our credit administration team has substantial experience in underwriting, managing, monitoring and working out commercial real estate loans, and remains diligent in communicating and proactively working with borrowers to help mitigate potential credit deterioration.

Consumer and Other. Consumer and other loans increased $9.4 million, or 0.8%, to $1.22 billion, from $1.21 billion as of December 31, 2024, primarily as a result of growth in CCBX loans originated through our partners. We sold $570.5 million in CCBX credit cards loans and $55.5 million in CCBX consumer and other loans year to date as of March 31, 2025. We expect that we will continue to sell CCBX loans as part of our on-going strategy to manage the loan portfolio and credit quality. New loans are being booked with enhanced credit standards, which typically results in a lower interest rate than some of the higher risk loans that have paid off or that we have chosen to sell.

CCBX consumer loans totaled $1.20 billion as of March 31, 2025, compared to $1.19 billion at December 31, 2024. CCBX consumer loans include installment loans, credit cards, lines of credit and other loans. CCBX consumer loans include cash secured and unsecured consumer loans, loan products designed to help consumers build credit, lines of credit, credit cards, other loans and overdrafts. Consumer credit cards are open-ended and have interest rates ranging from 7.75% to the maximum rate allowable by state. For short-term consumer loans, both secured and unsecured options are available and typically have fully-amortizing terms ranging from three months to five years. Interest rates can be fixed or variable and range from 3.99% to the maximum allowable rate by state.

Our community bank consumer and other loans totaled $13.3 million as of March 31, 2025, compared to $13.5 million at December 31, 2024 and are comprised of personal lines of credit, automobile, boat, and recreational vehicle loans, and secured term loans.

Industry Exposure and Categories of Loans

We have a diversified loan portfolio, representing a wide variety of industries. Our major categories of loans are commercial real estate, consumer and other loans, residential real estate, commercial and industrial, and construction, land and land development loans. Together they represent $3.52 billion in outstanding loan balances. When combined with $2.14 billion in unused commitments the total of these categories is $5.67 billion. However, total exposure on CCBX loans is subject to portfolio and partner maximum limits and adjusted for those limits, unused commitments are limited to $2.14 billion. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

The following table summarizes our community bank loan commitments by industry for our commercial real estate portfolio as of March 31, 2025:

(dollars in thousands; unaudited)

Community bank commercial real estate loans

As illustrated in the table below, our CCBX partners originate a large number of mostly smaller dollar loans, resulting in an average consumer loan balance of just $1,000.

The following table summarizes our loan commitments by category for our consumer and other loan portfolio as of March 31, 2025:

(dollars in thousands; unaudited)

CCBX consumer loans

(1) Total exposure on CCBX loans is subject to portfolio maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

The following table summarizes our loan commitments by category for our residential real estate portfolio as of March 31, 2025:

(dollars in thousands; unaudited)

CCBX residential real estate loans

(1) Total exposure on CCBX loans is subject to portfolio maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

The following table summarizes our loan commitments by industry for our commercial and industrial loan portfolio as of March 31, 2025:

(dollars in thousands; unaudited)

CCBX C&I loans

(1) Total exposure on CCBX loans is subject to portfolio maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

The following table details our community bank loan commitments by category for our construction, land and land development loan portfolio as of March 31, 2025:

(dollars in thousands; unaudited)

Community bank construction, land and land development loans

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 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 applicable regulations. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. 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. Installment (closed end) consumer loans and revolving (open-ended loans, such as credit cards) originated through CCBX partners typically continue to accrue interest until they are charged-off at 120 days past due for installment loans (primarily unsecured loans to consumers) and 180 days past due for revolving loans (primarily credit cards). These consumer loans are reported out as substandard loans, 90+ days past due and still accruing. As a result of the type of loans (primarily consumer loans) originated through our CCBX partners, we anticipate that balances 90 days past due or more and still accruing will increase as those loans grow. Additionally, some CCBX partners have instituted a collection practice that places certain loans on nonaccrual status to improve collectability. As of March 31, 2025, $16.1 million in CCBX nonaccrual loans were less than 90 days past due.

When loans are placed on nonaccrual status, all unpaid accrued interest is reversed from income and all interest accruals are stopped. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal balance. Loans are returned to accrual status if we believe that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual status. We define nonperforming loans as loans on nonaccrual status and accruing loans 90 days or more past due. Nonperforming assets also include other real estate owned and repossessed assets.

We believe our lending practices and active approach to managing nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have procedures in place to assist us in maintaining the overall credit quality of our loan portfolio. We have established underwriting guidelines, concentration limits and we also monitor our delinquency levels for any negative or adverse trends. We actively manage problem assets to reduce our risk for loss.

We had $56.4 million in nonperforming assets as of March 31, 2025, compared to $62.7 million as of December 31, 2024. This includes $36.0 million in CCBX loans more than 90 days past due and still accruing interest as of March 31, 2025, compared to $43.1 million at December 31, 2024. All of our nonperforming assets were nonperforming loans as of March 31, 2025 and December 31, 2024. This decrease was partially offset by an increase of $707,000 in CCBX nonaccrual loans primarily as a result of a new collection practice that places certain loans on nonaccrual status to improve collectibility, $16.1 million of these loans are less than 90 days past due as of March 31, 2025. Additionally, there was an increase in community bank nonaccrual loans of $89,000 during the three months ended March 31, 2025. Our nonperforming loans to loans receivable ratio was 1.60% at March 31, 2025, compared to 1.80% at December 31, 2024.

Our community bank credit quality remains strong, as demonstrated by the low level of community bank nonperforming loan balances for the three months ended March 31, 2025. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses, when accruing consumer loans originated through CCBX partners are charged-off at 120 days past due for installment loans (primarily unsecured loans to consumers) and 180 days past due for revolving loans (primarily credit cards). CCBX partners bear most of the responsibility for credit losses incurred which consequently gives them a vested interest in the performance of the portfolio. We believe this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio.

The following table presents information regarding nonperforming assets at the dates indicated:

(dollars in thousands; unaudited)

74

The following tables detail nonperforming assets by segment which are included in the total nonperforming assets table above:

(dollars in thousands; unaudited)

(dollars in thousands; unaudited)

As of March 31, 2025, $54.1 million of the $56.2 million in nonperforming CCBX loans were covered by CCBX partner credit enhancements. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses. Under the agreement, the CCBX partner will indemnify or reimburse the Bank for its loss/charge-off on these loans.

Allowance for credit losses

The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and calculated on a collective basis for those loans which share similar risk characteristics. At each reporting period, the Company evaluates whether the loans in a pool continue to exhibit similar risk characteristics as the other loans in the pool and whether it needs to evaluate the allowance on an individual basis. The Bank must estimate expected credit losses over the loans’ contractual terms, adjusted for expected prepayments. In estimating the life of the loan, the Bank cannot extend the contractual term of the loan for expected extensions, renewals, and modifications, unless the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Bank. Because expected credit losses are estimated over the contractual life adjusted for estimated prepayments, determination of the life of the loan may significantly affect the ACL. The Company has chosen to segment its portfolio consistent with the manner in which it manages the risk of the type of credit.

• Community Bank Portfolio: The ACL calculation is derived for loan segments utilizing loan level information and relevant information from internal and external sources related to past events and current conditions. In addition, the Company incorporates a reasonable and supportable forecast.
• CCBX Portfolio: The Bank calculates the ACL on loans on an aggregate basis based on each partner and product level, segmenting the risk inherent in the CCBX portfolio based on qualitative and quantitative trends in the portfolio.

Also included in the ACL are qualitative reserves to cover losses that are expected, but in the Company’s assessment may not be adequately represented in the quantitative method. For example, factors that the Company considers include environmental business conditions, borrower’s financial condition, credit rating and the volume and severity of past due loans and non-accrual loans. Based on this analysis, the Company records a provision for credit losses to maintain the allowance at appropriate levels.

As of March 31, 2025, the allowance for credit losses totaled $183.2 million, or 5.21% of total loans. As of December 31, 2024, the allowance for credit losses totaled $177.0 million, or 5.08% of total loans.

The increase in the Company’s allowance for credit losses for the three months ended March 31, 2025 compared to December 31, 2024, is largely related to the provision for CCBX partner loans. During the three months ended March 31, 2025, a $55.3 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a provision for credit losses - loans of $507,000 was needed for the three months ended March 31, 2025, largely due to a a change in the mix of community bank loans. The macro economic environment is continuously changing, primarily due to the pace of economic growth, inflation, changing interest rates, global trade tensions, tariffs, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, political uncertainty, natural disasters, and trade issues that have resulted in economic uncertainty. As described above, CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses.

Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans, unfunded commitments and negative deposit accounts. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner legal commitment to indemnify or reimburse losses. The credit enhancement asset is relieved as credit enhancement payments and recoveries are received from the CCBX partner or taken from the partner's cash reserve account. Agreements with our CCBX partners also provide protection to the Bank from fraud by indemnifying or reimbursing incurred fraud losses. BaaS fraud includes noncredit fraud losses on loans and deposits originated through partners. Fraud losses are recorded when incurred as losses in noninterest expense, and the enhancement received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement.

Many CCBX partners also pledge a cash reserve account at the Bank as collateral for loss exposure which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Credit losses and recoveries typically flow through the cash reserve account. These cash reserve accounts are included in total deposits on the balance sheet. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligation then the Bank would be exposed to additional loan and deposit losses if the cash flows on the loans were not sufficient to fund the reimbursement of loan losses, largely as a result of this counterparty risk. If a CCBX partner does not replenish their cash reserve account the Bank may consider an alternative plan for funding the cash reserve, such as adjusting the funding amounts or timelines to better align with the partner's specific situation. If a mutually agreeable funding plan is not achieved then the Bank could declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would evaluate any remaining credit enhancement asset from the CCBX partner in the event the partner failed to fulfill its obligations and would determine if a write-off is appropriate. If a write-off occurs, the Bank would retain the full yield and any fee income on the loan portfolio going forward, and our BaaS loan expense would decrease once default occurs and payments to the CCBX partner are stopped.

The following table presents, as of and for the periods indicated, net charge-off information by segment:

(dollars in thousands; unaudited)

(1) Annualized calculations shown for periods presented.

The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data:

(dollars in thousands; unaudited)

The allowance for credit losses to nonaccrual loans ratio decreased as of March 31, 2025, compared to March 31, 2024, primarily as a result of an increase in nonaccrual loans of $12.4 million, largely due to an increase in CCBX nonaccrual loans as a result of a new collection practice that places certain loans on nonaccrual status to improve collectibility, partially offset by a decrease in nonaccrual community bank loans. The allowance for credit losses increased $43.2 million for the three months ended March 31, 2025 compared to the three months ended March 31, 2024, largely due to the increase in loans originated through our CCBX partners. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses. CCBX partners bear most of the responsibility for credit losses incurred which consequently gives them a vested interest in the performance of the portfolio. We believe that this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio. Net charge-offs on CCBX loans for the three months ended March 31, 2025 that were covered by credit enhancements were $47.1 million. At March 31, 2025, the allowance for credit losses for CCBX partner loans totaled $164.2 million, compared to $158.1 million at December 31, 2024.

The following table presents the loans receivable and allowance for credit losses by segment for the periods indicated:

(dollars in thousands; unaudited)

Although we believe that we have established our allowance for credit losses in accordance with GAAP and that the allowance for credit losses was adequate to provide for expected losses in the portfolio at all times shown above, future provisions for credit losses will be subject to ongoing evaluations of the risks in our loan portfolio. We continue to have a low level of community bank charge-offs and nonperforming loans, however, the macro economic environment is continuously changing, primarily due to the pace of economic growth, inflation, changing interest rates, global trade tensions, tariffs, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, political uncertainty, natural disasters, and trade issues that have resulted in economic uncertainty. If economic conditions worsen then Washington state and Puget Sound region may experience a more severe economic downturn, and our asset quality could deteriorate, which may require material additional provisions for credit losses.

Securities

We use our securities portfolio primarily as a source of liquidity and collateral that can be readily sold or pledged for public deposits, for CRA purposes or other business purposes. At March 31, 2025, our securities portfolio was invested in U.S. Agency collateralized mortgage obligations and U.S. Agency residential mortgage-backed securities for Community Reinvestment Act ("CRA") purposes. Because we target a loan-to-deposit ratio in the range of 90% to 100%, we prioritize liquidity over the earnings of our securities portfolio. At March 31, 2025, our loan-to-deposit ratio was 93.9%, due primarily to our growth in both loans and deposits. When our securities portfolio represents less than 5% of assets we focus on liquid securities. To the extent our securities represent more than 5% of assets, absent an immediate need for liquidity, we may invest excess funds to provide a higher return.

As of March 31, 2025, the amortized cost of our investment securities totaled $47.0 million, a decrease of $330,000, or 0.7%, compared to $47.3 million as of December 31, 2024. The decrease in the securities portfolio was due to principal paydowns during the three months ended March 31, 2025.

Our investment portfolio consists of only $34,000 in securities classified as AFS and $47.0 million in held-to-maturity securities for CRA purposes. The carrying values of our investment securities classified as AFS are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. As of March 31, 2025 and December 31, 2024, our AFS portfolio had an unrealized loss of $2,000 .

The following table summarizes the amortized cost and estimated fair value of our investment securities as of the dates shown:

(dollars in thousands; unaudited)

We have the following equity investments which do not have a readily determinable fair value and are held at cost minus impairment if any, plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer. This method will be applied until the investments do not qualify for the measurement election (e.g., if the investment has a readily determinable fair value). We will reassess at each reporting period whether the equity investments without a readily determinable fair value qualifies to be measured at cost minus impairment.

• The Company had a $2.2 million equity interest in a specialized bank technology company as of the quarters ended March 31, 2025, and March 31, 2024.
• The Company had a $350,000 equity interest in a technology company as of the quarters ended March 31, 2025, and March 31, 2024.
• The Company had a $47,000 and $50,000 equity interest in a technology company as of the quarters ended March 31, 2025, and March 31, 2024, respectively.

The following table shows the activity in equity investments without a readily determinable fair value for the dates shown:

(dollars in thousands; unaudited)

We invest in investment funds that are accelerating technology adoption by banks. These equity investments are held at fair value as reported by the funds. During the three months ended March 31, 2025, we had a net capital return of $12,499 with investment funds designed to help accelerate technology adoption at banks, and recognized net earnings of $17,000, resulting in an equity interest of $939,000 at March 31, 2025. The Company has committed up to $468,000 in capital for these investment funds, however, the Company is not obligated to fund these commitments prior to a capital call.

The following table shows the activity in investment funds for the dates shown:

(dollars in thousands; unaudited)

Other Assets

Deferred tax assets, net increased $312,000 to $3.9 million and other assets decreased $2.9 million to $10.7 million as of March 31, 2025, compared to December 31, 2024.

Deposits

We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, money market, savings, and time accounts as well as IntraFi network sweep deposits. Sweep deposits enable us to provide an FDIC insured deposit option to customers that have balances in excess of the FDIC insurance limit. This service trades our customers’ funds as certificates of deposit or interest bearing demand deposits in increments under the FDIC insured amount to other participating financial institutions and in exchange we receive time deposit or interest bearing demand investments from participating financial institutions. We rely primarily on competitive pricing policies, convenient locations, electronic delivery channels (internet and mobile), and personalized service to attract new deposits and retain existing deposits. Additionally, we offer deposit products through our CCBX segment. CCBX deposits are generally classified as interest bearing demand and money market accounts. CCBX deposit products allow us to offer a broader range of partner specific products, which include products designed to reach specific under-served or under-banked populations served by our CCBX partners.

Total deposits as of March 31, 2025 were $3.79 billion, an increase of $205.9 million, or 5.7%, compared to $3.59 billion as of December 31, 2024. The increase in deposits was largely in due to an increase of $202.9 million in CCBX deposits. Core deposits ended the quarter at $3.32 billion compared to $3.12 billion at December 31, 2024. We define core deposits as all deposits except time deposits and brokered deposits. Our cost of deposits for the community bank was 1.76% for the three months ended March 31, 2025. Additionally, as of March 31, 2025 there was $406.3 million in CCBX deposits that were transferred off balance sheet for increased FDIC insurance coverage and liquidity purposes.

Included in total deposits is $2.27 billion in CCBX deposits, an increase of $202.9 million, or 9.8%, compared to $2.06 billion as of December 31, 2024. CCBX customer deposit relationships include deposits with CCBX end customers, operating and non-operating deposit accounts. The deposits from our CCBX segment are generally classified as interest bearing demand and money market accounts.

Total noninterest bearing deposits as of March 31, 2025 were $539.6 million, an increase of $12.1 million, or 2.3%, compared to $527.5 million as of December 31, 2024. Noninterest bearing deposits represent 14.2% and 14.7% of total deposits for March 31, 2025 and December 31, 2024, respectively. Community bank noninterest bearing deposits totaled $481.2 million and $471.8 million at March 31, 2025 and December 31, 2024, respectively.

Total interest bearing balances, excluding time deposits, as of March 31, 2025 were $3.24 billion, an increase of $195.6 million, or 6.4%, compared to $3.04 billion as of December 31, 2024. The $195.6 million increase is primarily due to CCBX growth in interest bearing deposits combined with a decrease in community bank interest bearing deposits of $4.6 million. Included in total deposits is $420.9 million in IntraFi network interest bearing demand and money market sweep accounts as of March 31, 2025, which provides our customers with fully insured deposits through a sweep and exchange of deposits with other financial institutions. The decrease in community bank deposits is a result of normal balance fluctuations.

Total time deposit balances as of March 31, 2025 were $15.7 million, a decrease of $1.8 million, or 10.5%, from $17.5 million as of December 31, 2024. The decrease is largely due to our focus on core deposits and letting higher rate time deposits run off as they mature. We have seen competitors increase rates on time deposits, and have not globally matched their rates in response as we focus on growing and retaining less costly core deposits.

The following table sets forth deposit balances at the dates indicated:

(dollars in thousands; unaudited)

(1) Cost of deposits is annualized for the three months ended for each period presented.

The following tables detail the deposits for the segments which are included in the total deposit portfolio table above:

(dollars in thousands; unaudited)

(1) Cost of deposits is annualized for the three months ended for each period presented.

(dollars in thousands; unaudited)

(1) Cost of deposits is annualized for the three months ended for each period presented.

The following table sets forth the Company’s time deposits of $100,000 or more by time remaining until maturity as of the dates indicated:

(dollars in thousands; unaudited)

Average deposits for the three months ended March 31, 2025 were $3.71 billion, an increase of 11.6% compared to $3.32 billion for the three months ended March 31, 2024. The increase in average deposits was primarily in interest bearing deposits. We expect deposits to increase with continued growth in our primary market areas, the increase in commercial lending relationships for which we also seek deposit balances and the results of business development efforts by branch managers, treasury service personnel and lenders.

The average rate paid on total deposits was 3.08% for the three months ended March 31, 2025, compared to 3.49% for the three months ended March 31, 2024. The average rate paid on interest bearing demand and money market accounts decreased 0.64% for the three months ended March 31, 2025, compared to the three months ended March 31, 2024. The average rate paid on other deposits increased 3.38% for the three months ended March 31, 2025, compared to the three months ended March 31, 2024. The average rate paid on time deposits of less than $100,000 increased 0.30% for the three months ended March 31, 2025, compared to the three months ended March 31, 2024. The average rate paid on time deposits greater than $100,000 increased 1.49% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The average rate paid on savings decreased 0.03% for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The overall lower average rate of 3.08% paid on interest bearing accounts in the three months ended March 31, 2025 compared to 3.49% for the three months ended March 31, 2024 is due to lower interest rates.

The following table presents the average balances and average rates paid on deposits for the periods indicated:

(dollars in thousands; unaudited)

(1) Annualized calculations shown for periods presented.

The ratio of average noninterest bearing deposits to average total deposits for the three months ended March 31, 2025 was 14.7% compared to 17.9% three months ended March 31, 2024.

Uninsured Deposits

The FDIC insures our deposits up to $250,000 per depositor, per insured bank for each account ownership category. Deposits that exceed insurance limits are uninsured. At March 31, 2025, deposits totaled $3.79 billion, of which total estimated uninsured deposits were $558.8 million, or 14.7% of total deposits, compared to $543.0 million, or 15.1% of total deposits as of December 31, 2024. The Bank is using sweep deposits to provide our customers with fully insured deposits through a sweep and exchange of deposits with other financial institutions.

Estimated uninsured time deposits totaled $2.5 million as of March 31, 2025. The table below shows the estimated uninsured time deposits, by account, for the maturity periods indicated:

(dollars in thousands; unaudited)

83

Borrowings

We have the ability to utilize short-term to long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.

Federal Reserve Bank Line of Credit. The Federal Reserve allows us to borrow against our line of credit through a borrower in custody agreement utilizing the discount window, which is collateralized by certain loans. As of March 31, 2025 and March 31, 2024, total borrowing capacity of $475.5 million and $468.7 million, respectively, was available under this arrangement. As of March 31, 2025 and 2024, Federal Reserve advances totaled zero. Additional loans were pledged in 2023 to significantly increase the borrowing capacity of the Bank in the event of a liquidity crisis.

Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of March 31, 2025 and March 31, 2024, we had borrowing capacity of $186.8 million and $173.3 million, respectively, with the FHLB. As of March 31, 2025 and 2024, FHLB advances totaled zero.

Junior Subordinated Debentures. In 2004, we issued $3.6 million in junior subordinated debentures to Coastal (WA) Statutory Trust I (the “Trust”), of which we own all of the outstanding common securities. The Trust used the proceeds from the issuance of its underlying common securities and preferred securities to purchase the debentures issued by the Company. These debentures are the Trust’s only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. Prior to June 30, 2023, the debentures bore interest at a rate per annum equal to the three-month LIBOR plus 2.10%. Beginning with rate adjustments subsequent to June 30, 2023, the rate is based off three-month CME Term SOFR plus a spread adjustment of 0.26% and margin of 2.10%. The effective rate as of March 31, 2025 and December 31, 2024 was 6.66% and 6.72%, respectively. We generally have the right to defer payment of interest on the debentures at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the debentures. During any such extension period, distributions on the Trust’s preferred securities will also be deferred, and our ability to pay dividends on our common stock will be restricted. The Trust’s preferred securities are mandatorily redeemable upon maturity of the debentures, or upon earlier redemption as provided in the indenture, subject to Federal Reserve approval. If the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. We unconditionally guarantee payment of accrued and unpaid distributions required to be paid on the Trust securities subject to certain exceptions, the redemption price with respect to any Trust securities called for redemption and amounts due if the Trust is liquidated or terminated.

Subordinated Debt. In August 2021, the Company issued a subordinated note in the amount of $25.0 million. The note matures on September 1, 2031, and bears interest at the rate of 3.375% per year for five years and, thereafter, reprices quarterly beginning September 1, 2026, at a rate equal to the three-month SOFR plus 2.76%. The five-year 3.375% interest period ends on September 1, 2026. We may redeem the subordinated note, in whole or in part, without premium or penalty, in principal redemption multiples of $1,000, after August 18, 2026, subject to any required regulatory approvals. Proceeds were used to repay $10.0 million in existing 5.65% interest subordinated debt on August 9, 2021 and $11.5 million was contributed to the Bank as capital during the quarter ended September 30, 2021.

In November 2022, the Company issued subordinated notes in the aggregate amount of $20.0 million. The notes mature on November 1, 2032, and bear interest at the rate of 7.00% per year for five years and, thereafter, reprices quarterly beginning November 1, 2027, at a rate equal to the three-month SOFR plus 2.9%. The five-year 7.00% interest period ends on November 1, 2027. We may redeem the subordinated notes, in whole or in part, without premium or penalty, in principal redemption multiples of $1,000, after November 1, 2027, subject to any required regulatory approvals.

Liquidity and Capital Resources

Liquidity Management

Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds and the ability to convert assets into cash. Changes in economic conditions or exposure to credit, market, and operational, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity management. Deposits obtained through our CCBX segment are a significant source of liquidity for us. If a relationship with a large CCBX partner terminates, the exit of those deposits could have an adverse impact on liquidity. Partner program agreements govern the relationship and are valid for a given period of time. Prior to exiting, the partner would need to provide us adequate notice as stipulated in the agreement that they were not going to renew the program agreement and intend to move the deposits. The movement to an alternate BaaS provider is cumbersome and would be over a period of time, which would allow us the opportunity to put alternate liquidity in place; those options are more fully discussed below. As of March 31, 2025, we have two partners with deposits that are in excess of 10% of total deposits and represent 46% of total deposits.

We continually monitor our liquidity position to ensure that our assets and liabilities are managed in a manner to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. Management has established a comprehensive process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of readily available cash, deposits and highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; contingency funding policies and plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity risk management process. Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash on hand, cash at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and BaaS deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, funds from online rate services, brokered deposits, a one-way buy through an ICS account, and the issuance of debt or equity securities. We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary and are closely monitoring liquidity in this uncertain economic environment.

The Company has pledged loans and securities totaling $979.5 million and $957.9 million at March 31, 2025 and December 31, 2024, respectively, for borrowing lines at the FHLB and FRB. Additional loans were pledged during 2023 to significantly increase the borrowing capacity of the Bank in the event of a liquidity crisis. The Bank had the ability and capacity to borrow up to $662.4 million from FHLB and the FRB discount window at March 31, 2025. There were no borrowings taken under these facilities during the twelve-months ended March 31, 2025 so the Bank has the maximum capacity in the event of a liquidity emergency.

The Bank’s current liquidity position is supported by liquid assets (cash and investments on the balance sheet), liabilities (capacity to borrow funds the same day), low levels of uninsured deposits ($558.8 million at March 31, 2025) and alternative sources of funds including the capacity to borrow up to $662.4 million from FHLB, the FRB discount window, on a same day basis and a $50.0 million line of credit with a banker’s bank. Cash on the balance sheet and borrowing capacity of $1.34 billion represented 35.3% of total deposits and exceeded the $558.8 million in uninsured deposits as of March 31, 2025. The board of directors and management is cognizant of the risk of uninsured deposits and has used fully insured IntraFi Network reciprocal deposits to reduce uninsured deposit. Fully insured IntraFi network reciprocal deposits totaled $420.9 million and $414.0 million at March 31, 2025 and December 31, 2024, respectively. Uninsured deposits totaled $558.8 million at March 31, 2025 and totaled $543.0 million at December 31, 2024.

The Company is a corporation separate and apart from our Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its subordinated note and junior subordinated debentures. The Company’s main source of cash flow has been through equity and debt offerings. The Company has consistently retained a portion of the funds from equity and debt offerings so that is has sufficient funds for its operating and debt costs. During the quarter ended December 31, 2024, the Company completed a public offering of 1,380,000 shares of its common stock at a price to the public of $71.00 per share. Gross proceeds from the offering of $98.0 million, before deducting underwriting discounts and offering expenses, will be used for general corporate purposes, including, without limitation, to support investment opportunities and the Bank’s growth. A total of $50.0 million of those proceeds were contributed to the Bank in 2024, and the balance of the amount was retained in cash at the Company level. The Company currently holds $45.5 million in cash for debt servicing and operating purposes. In addition, the Bank can declare and pay dividends to the Company to meet the Company’s debt and operating expenses. There are statutory and regulatory limitations that affect the ability of the Bank to pay dividends to the Company. We believe that these limitations will not impact the ability of the Bank to pay dividends to the Company to meet ongoing operating needs.

For contingency purposes, the Company maintains a minimum level of cash to fund one year’s projected operating cash flow needs and targets a minimum liquidity ratio of 10%. Both of these minimum liquidity levels are on-balance sheet sources. Per policy and the Bank’s liquidity contingency plan, in event of a liquidity emergency the Bank can utilize wholesale funds in an amount up to 30% of assets. Since the Bank uses only a small portion of its borrowing or wholesale funding capacity, the Bank has access to borrow funds if needed in a liquidity emergency.

Capital Adequacy

Capital management consists of providing equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital levels relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank level. Because the Company’s consolidated assets exceeded $3.0 billion as of September 30, 2022, the Company is no longer eligible for the Federal Reserve’s Small Bank Holding Company Policy Statement and is evaluated relative to the capital adequacy standards established by the Federal Reserve.

As of March 31, 2025, and December 31, 2024, the Company and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as "well capitalized" for purposes of the Federal Reserve's prompt corrective action regulations. As we deploy capital and continue to grow operations, regulatory capital levels may decrease depending on our level of earnings; however, the capital raise completed in December 2024 strengthened our regulatory capital levels. We expect to monitor and control growth in order to remain in compliance with all regulatory capital standards applicable to us. In addition, the Company maintains an effective registration statement on Form S-3 with the Securities and Exchange Commission which allows the Company to raise additional capital in an amount up to $102.0 million. The Company raised $98.0 million in December 2024 and $34.5 million in December 2021. The Company, through a private placement, raised $25.0 million in subordinated debt in 2021 and repaid $10.0 million of subordinated debt with the proceeds and used the remainder for general corporate purposes. On November 1, 2022 the Company, through a private placement, raised $20.0 million of subordinated debt with the proceeds to be used for general corporate purposes. The Company contributed $15.0 million of the capital raised to the Bank in March 2023.

The following table presents the Company’s and the Bank’s regulatory capital ratios as of the dates presented, as well as the regulatory capital ratios that are required by Federal Reserve regulations to maintain “well-capitalized” status:

(dollars in thousands; unaudited)

(1) Presents the minimum capital adequacy requirements that apply to the Bank (excluding the capital conservation buffer) and the Company. The capital conservation buffer is an additional 2.5% of the amount necessary to meet the minimum risk-based capital requirements for total, tier 1, and common equity tier 1 risk-based capital. Prior to September 30, 2022, the Company operated under the Small Bank Holding Company Policy Statement and therefore was not subject to Basel III capital adequacy requirements.

Material Cash Requirements and Capital Resources

The following table provides the material cash requirements from known contractual and other obligations as of as of March 31, 2025:

(dollars in thousands; unaudited)

(1) Represents the undefined maturity of non-maturing deposits, including noninterest bearing demand deposits, interest bearing demand deposits, money market accounts, savings accounts and brokered deposits, which can generally be withdrawn on demand.

We maintain sufficient cash and cash equivalents and investment securities to meet short-term cash requirements and the levels of these assets are dependent on our operating, investing and financing activities during any given period. Cash on hand, cash at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and BaaS deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, funds from online rate services, brokered funds, a one-way buy through an ICS account, and the issuance of debt or equity securities.

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

Our commitments associated with outstanding commitments to extend credit and standby and commercial letters of credit are summarized in the following table. Since commitments associated with commitments to extend credit and letters of credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

As of March 31, 2025 we had $2.14 billion in commitments to extend credit, compared to $1.96 billion as of December 31, 2024. The $180.1 million increase is largely attributed to a $151.8 million increase in credit cards, related to CCBX loans, a $29.8 million increase in residential real estate commitments, related to CCBX loans, an increase of $23.2 million in consumer and other loan commitments, related to CCBX consumer loans, and a $13.3 million increase in commercial construction loans, partially offset by a $36.1 million decrease in commercial and industrial capital call line commitments.

The following table presents commitments associated with outstanding commitments to extend credit, standby and commercial letters of credit and equity investment commitments as of the periods indicated:

(dollars in thousands; unaudited)

We have portfolio limits with our each of our partners to manage loan concentration risk, liquidity risk, and counter-party partner risk. For example, as of March 31, 2025, capital call lines outstanding balance totaled $133.5 million, and while commitments totaled $514.9 million the commitments are cancelable, and are also limited to a maximum of $350.0 million by agreement with the partner. These limits allow us to manage portfolio concentrations with partners and by loan type.

The following table shows the CCBX maximum portfolio sizes by loan category as of March 31, 2025.

(dollars in thousands; unaudited)

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. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer. As of March 31, 2025, $1.43 billion in commitments to extend credit are unconditionally cancelable, compared to $1.30 billion at December 31, 2024. The increase in unconditionally cancelable commitments is attributed to growth and a change in the mix of the CCBX loan portfolio. Commitments that are unconditionally cancelable allow us to better manage loan growth, credit concentrations and liquidity. We also limit CCBX partners to a maximum aggregate customer loan balance originated and held on our balance sheet, as shown in the table above.

Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. Our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our customers.

We believe that we will be able to meet our long-term cash requirements as they come due. Adequate cash levels are generated through profitability, repayments from loans and securities, deposit gathering activity, access to borrowing sources and periodic loan sales.

Critical Accounting Policies

Our accounting policies are integral to understanding our results of operations. Our accounting policies are described in greater detail in “Note 1 - Description of Business and Summary of Significant Accounting Policies” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” of our Form 10-K. We have procedures and processes in place to facilitate making these judgments. Actual results in these areas could differ from management’s estimates. There have been no significant changes concerning our critical accounting policies as described in our Form 10-K except as indicated in Note 1 of the condensed consolidated financial statements included elsewhere in this report.

Selected Financial Data

The following table shows the Company’s key performance ratios for the periods indicated.

(unaudited)

(1) Annualized calculations shown for periods presented.

(2) Including loans held for sale.

CCBX – BaaS Reporting Information

During the three months ended March 31, 2025, $53.6 million was recognized in noninterest income BaaS credit enhancements related to the establishment of a credit enhancement asset for credit losses indemnified by our strategic partners and reserved for unfunded commitments for CCBX partner loans and deposits. Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans, unfunded commitments and negative deposit accounts. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner legal commitment to indemnify or reimburse losses. The credit enhancement asset is relieved as credit enhancement payments and recoveries are received from the CCBX partner or taken from the partner's cash reserve account. Agreements with our CCBX partners also provide protection to the Bank from fraud by indemnifying or reimbursing incurred fraud losses. BaaS fraud includes noncredit fraud losses on loans and deposits originated through partners. Fraud losses are recorded when incurred as losses in noninterest expense, and the enhancement received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. CCBX partners bear most of the responsibility for credit and fraud losses incurred which consequently gives them a vested interest in the performance of the portfolio. We believe that this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio. Many CCBX partners also pledge a cash reserve account at the Bank which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligation then the Bank would be exposed to additional loan and deposit losses if the cash flows on the loans were not sufficient to fund the reimbursement of loan losses, as a result of this counterparty risk. If a CCBX partner does not replenish their cash reserve account the Bank may consider an alternative plan for funding the cash reserve. This may involve the possibility of adjusting the funding amounts or timelines to better align with the partner's specific situation. If a mutually agreeable funding plan is not achieved then the Bank could declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would evaluate any remaining credit enhancement asset from the CCBX partner in the event the partner failed to determine if a write-off is appropriate. If a write-off occurs the Bank would retain the full yield and any fee income on the loan portfolio going forward, and our BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.

For CCBX partner loans the Bank records contractual interest earned from the borrower on loans in interest income, adjusted for origination costs which are paid or payable to the CCBX partner. BaaS loan expense represents the amount paid or payable to partners for credit and fraud enhancements and servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Bank takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can then be compared to interest income on the Company’s community bank loans.

The following table illustrates how CCBX partner loan income and expenses are recorded in the financial statements:

(dollars in thousands; unaudited)

(1) Annualized calculations shown for periods presented.

(2) A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

The increased activity of CCBX partners has resulted in increases in program fees and interest for the three months ended March 31, 2025 compared to the three months ended March 31, 2024. The following tables are a summary of the direct fees, expenses and interest components of BaaS for the periods indicated and are not inclusive of all income and expense related to BaaS.

(dollars in thousands; unaudited)

91

(dollars in thousands; unaudited)

(dollars in thousands; unaudited)

Servicing and other BaaS fees increased $288,000 three months ended March 31, 2025 compared to the three months ended March 31, 2024, while transaction and interchange fees increased $1.2 million in the three months ended March 31, 2025 compared to the three months ended March 31, 2024. We expect servicing and other BaaS fees to decrease and transaction and interchange fees to increase as partner activity grows and contracted minimum fees are replaced with recurring fees, which exceed those minimum fees. Additionally, we expect reimbursement of expenses to increase as we continue to bill partners for incurred expenses.

(dollars in thousands; unaudited)

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies.

The following non-GAAP measure is presented to illustrate the impact of BaaS loan expense on net loan income and yield on CCBX loans.

Net BaaS loan income divided by average CCBX loans is a non-GAAP measure that includes the impact BaaS loan expense on net BaaS loan income and the yield on CCBX loans. The most directly comparable GAAP measure is yield on CCBX loans.

The following non-GAAP measure is presented to illustrate the impact of BaaS loan expense on net interest income and net interest margin.

Net interest income net of BaaS loan expense is a non-GAAP measure that includes the impact BaaS loan expense on net interest income. The most directly comparable GAAP measure is net interest income.

Net interest margin, net of BaaS loan expense is a non-GAAP measure that includes the impact of BaaS loan expense on net interest rate margin. The most directly comparable GAAP measure is net interest margin.

Reconciliations of the GAAP and non-GAAP measures are presented in the following table.

(dollars in thousands; unaudited)

(1) Annualized calculations for periods presented.

Quantitative and Qualitative Disclosures about 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 effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential for 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 decrease in current fair market values. Our 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. The FOMC raised interest rates 0.25% in mid-March 2022, 1.25% in the second quarter of 2022, 1.50% in the third quarter of 2022, 1.25% in the fourth quarter of 2022, 0.50% in the first quarter 2023, and 0.25% in the second quarter 2023 and 0.25% in the third quarter of 2023. During the third quarter 2024, the FOMC lowered interest rates, for the first time since 2023, by 0.50% resulting with a Fed Funds target rate of 5.00%. After both the November 7th and December 18th FOMC meeting, the Fed Funds target rate was lowered by 0.25%, resulting in a Fed Funds target rate of 4.50%. No further changes were made to the Fed Funds target rate during the first quarter of 2025, therefore it remains at 4.50% as of March 31, 2025. The timing and magnitude of any future and potential rate changes, expected to be further rate cuts, remains uncertain but will likely be closely tied to future inflationary trends. The impact of this and any future increases or decreases will impact financial results.

We 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, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon 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 Asset Liability Committee (“ALCO”), of the Bank and reviewed by the Asset Liability and Investment Committee of our board of directors in accordance with policies approved by our board of directors. ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, ALCO considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. 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, ALCO reviews liquidity, cash flows, maturities of deposits and consumer and commercial deposit activity. Management employs various methodologies to manage interest rate risk including an analysis of relationships between interest earning assets and interest bearing liabilities and interest rate simulations using a model. The Asset Liability and Investment Committee of our board of directors meets regularly to review the Bank’s interest rate risk profile, liquidity position, including contingent liquidity, and investment portfolio.

We use interest rate risk simulation models to test interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities and re-pricing opportunities of loans are incorporated in the model, as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of non-maturity deposit accounts are based on historical decay rates and assumptions and are incorporated into the model. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies. To help ensure the accuracy of the model, we perform a quarterly back test against our actual results.

On a quarterly basis, we run multiple simulations under two different premises of which one is a static balance sheet and the other is a dynamic growth balance sheet. The static balance sheet approach produces results that show the interest risk currently inherent in our balance sheet at that point in time. The dynamic balance sheet includes our projected growth levels going forward and produces results that shows how net income, net interest income, and interest risk change based on our projected growth. These simulations test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic approaches, rates are shocked instantaneously and ramped over a 12-month horizon assuming parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulations are also conducted and involve analysis of interest income and expense under various changes in the shape of the yield curve including a forward curve, flat curve, steepening curve, and an inverted curve. Our internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one- and two-year period should not decline by more than 10% for a 100 basis point shift, 15% for a 200 basis point shift, 20% for a 300 basis point shift, and 25% for a 400 basis point shift.

The following tables summarize the simulated change in net interest income over a 12-month horizon as of the dates indicated:

(unaudited)

The results illustrate that the Company’s static balance sheet remains liability sensitive, however, the dynamic balance sheet is slightly more neutral to rate shifts. As the Company’s composition has shifted over time due to the growth of the CCBX segment to more variable/adjustable in nature, our interest rate risk profile has been mitigated, reducing variability in both rising and falling rate environments, as the community bank and CCBX segments work to offset one another. The community bank segment remains asset sensitive and generally performs better in an increasing interest rate environment. For the community bank, the drivers are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, offering rates on these community bank deposits change more slowly than changes in short-term market rates. For the CCBX segment, the offering rates on the loan portfolio are modeled using partner contractual net yields which mostly adjust immediately with market shifts. For this CCBX portfolio, the offering rates on approximately 75% of loans and the majority of deposits nearly fully reprice with changes in market rates. During 2023, one of the material CCBX lending partners contractual yields converted to a fixed rate product, continuing to reduce the overall variability in the Company’s balance sheet. As of March 31, 2025, the Company’s overall funding mix continues to be more heavily weighted towards the CCBX deposits which are primarily variable rate deposits aiding with the neutrality of the balance sheet and the overall shift to liability sensitive in the static model. The assumptions incorporated into the simulation model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact that fluctuations in market interest rates have on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions, the shape of the interest yield curve, and the application and timing of various assumptions and strategies.

Disclosure Controls and Procedures.

An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company's Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Previously Identified Material Weaknesses

As previously reported in our Annual Report on Form 10-K filed with the SEC on March 17, 2025, we have identified material weaknesses in internal control over financial reporting. These material weaknesses resulted from (i) an ineffective control environment, which did not maintain the risk assessment and control activities components of the COSO framework resulting in the Company not appropriately designing and implementing sufficient internal controls around the accounting and financial reporting related to information provided by BaaS partners; (ii) a deficiency in the design of controls related to the BaaS lending partner accounting policies reflected in BaaS partner reports that could impact the Company’s use of such reports to record interest income, BaaS loan expense and the related balance sheet accounts; and (iii) a deficiency in the design of controls related to the proper presentation of BaaS partner interchange fees on point of sale transactions that conforms with the Company’s adopted accounting policies. As a result, certain amounts included in interest income, non-interest income, BaaS loan expense, non-interest expense, and the related balance sheet accounts were not recognized in accordance with U.S. generally accepted accounting principles, which required a restatement of the financial statements for the year ended December 31, 2023, and the interim quarterly periods in 2024 and 2023.

Remediation Plan

Since identifying the material weaknesses, management, under the oversight of the Audit Committee has committed to remediate these deficiencies. The Company continues to execute on its remediation plan, which includes implementing controls to:

• Enhance our risk assessment procedures over third-party reports to identify whether additional control activities are needed to conform third party reports to the Company’s accounting policies.
• Periodically verify the accounting policies used by a specific BaaS partner
• Evaluate whether any entries are needed to adjust the interest income and BaaS loan expense reflected on the specific BaaS partner’s system reports
• Evaluate whether any adjustments are needed to third party revenue reports to comply with the Company’s accounting policies.

Change in Internal Control over Financial Reporting.

Other than the remediation efforts described above, there were no changes in the Company’s internal control over financial reporting occurred during the three months ended March 31, 2025, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2024, which are incorporated by reference herein. As of March 31, 2025, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.