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Item 7. Management’s Discussion and Analysis

2024-03-15 compared with 2023-03-16 · 820 added, 596 removed, 1153 unchanged (55% of the section changed)

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We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County.

Our business is conducted through two reportable segments:

The community bank and CCBX.

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.

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 our broker-dealer and digital financial service partners to offer their customers banking services.

The CCBX segment had 27 partners as of December 31, 2022.

The CCBX segment has 21 partners as of December 31, 2023.

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”).

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This discussion and analysis should be read in conjunction with the audited consolidated financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K.

We generate most of our community bank revenue from interest on loans and investments and CCBX revenue from BaaS fee income.

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 any funding from our CCBX partner deposit relationships that are transferred off our balance sheet and wholesale funding, primarily borrowings from the Federal Home Loan Bank (“FHLB”).

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 loan losses, salaries and employee benefits, interest on deposits and borrowings, legal and professional expenses and data processing.

Our principal lending products are commercial real estate loans, commercial and industrial loans, residential real estate loans, construction, land and land development loans, and consumer loans.

Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and PPP Overview

Our financial results for the years ended December 31, 2022 and 2021 were impacted by the coronavirus, and variants thereof, including the Delta and Omicron variants (“COVID-19”) pandemic.

On March 27, 2020, the CARES Act was enacted, providing wide ranging economic relief for individuals and businesses impacted by the COVID-19 pandemic.

Among other things, the statute created the Paycheck Protection Program (“PPP”), which was a stimulus response to the potential economic impacts of the COVID-19 pandemic.

The purpose of the PPP was to provide forgivable loans to smaller businesses, sole proprietorships, independent contractors, and self-employed individuals that used the proceeds of the loans for payroll and certain other qualifying expenses.

In total, we funded $763.9 million in PPP loans, since the first round of PPP loans opened in March 2020 through the close of round three.

Total net deferred fees on these loans were $26.3 million.

As of December 31, 2022, there were $4.7 million in PPP loans outstanding, compared to $111.8 million as of December 31, 2021.

London Interbank Offered Rate (“LIBOR”) Transition

On December 16, 2022, the Federal Reserve Board adopted a final rule that implements the LIBOR Act by identifying benchmark rates based on SOFR (Secured Overnight Financing Rate) that will replace LIBOR formerly known as the London Interbank Offered Rate, in certain financial contracts after June 30, 2023.

Congress enacted the LIBOR Act, which was signed into law in March 2022, to provide a uniform, nationwide solution for so-called tough legacy contracts that do not have clear and practicable provisions for replacing LIBOR after June 30, 2023.

The LIBOR Act also establishes a litigation safe harbor for lenders that select a LIBOR replacement under certain situations, including the use of a replacement rate selected by the Federal Reserve.

As required by the law, the final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts subject to the Act.

These contracts include U.S.

contracts that do not mature before LIBOR ends and that lack adequate "fallback" provisions that would replace LIBOR with a practicable replacement benchmark rate.

As of December 31, 2022, we had 51 loans totaling $206.6 million that are tied to LIBOR.

We have $3.6 million in floating rate junior subordinated debentures to Coastal (WA) Statutory Trust I, which was formed for the issuance of trust preferred securities.

These debentures are also tied to LIBOR.

The move to an alternate index may impact the rates we receive on loans and rates we pay on our junior subordinated debentures.

We have identified the loans and debt instruments impacted, and we believe we will be able to use other benchmark replacements and transition protections provided by the LIBOR Act, Federal Reserve rule and relevant accounting guidance to manage through the transition away from LIBOR.

We no longer issue any loans or debt tied to LIBOR .

Our largest expenses are provision for credit losses - loans, BaaS loan expense, BaaS fraud expense, salaries and employee benefits, interest on deposits and borrowings, occupancy expense, legal and professional expenses and data processing.

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.

Potential Regulatory Reforms in Response to Bank Failures

The failures of Silicon Valley Bank, Santa Clara, California, Signature Bank, New York, New York, and First Republic Bank, San Francisco, California, in March and May, 2023, may lead to regulatory changes and initiatives that could impact the Company.

For example, President Biden has encouraged the federal banking agencies to adopt various reforms, including the completion of an incentive compensation rule for bank executives pursuant to Section 956 of the Dodd-Frank Act, in response to these bank failures.

On April 28, 2023, the Federal Reserve and the FDIC issued reports on the failures of Silicon Valley Bank and Signature Bank, respectively, identifying the potential causes that the federal banking agencies may seek to address through changes to their supervisory and regulatory policies.

Agency officials, including the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, have called for changes to the manner in which banks’ capital, interest rate and liquidity risks are supervised and regulated.

In the second half of 2023, the federal banking agencies issued multiple proposed rules in these areas that would largely apply only to large banking organizations and would not apply to the Company if finalized as proposed.

These proposed

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rules include a July 2023 interagency proposal to revise the capital framework applicable to banking organizations with total assets of $100 billion or more or with significant trading activity, an August 2023 FDIC proposal to require covered insured depository institutions with total assets of $50 billion or more to develop and submit resolution plans, and an August 2023 interagency proposal to require bank holding companies with total assets of $100 billion or more to issue and maintain minimum amounts of long-term debt.

The extent of final actions to be taken by the federal banking agencies in responses to these bank failures, including the potential changes discussed by the Federal Reserve Vice Chair or highlighted in the Federal Reserve and FDIC reports, remain unclear.

Small Business Lending Data Collection Rule

On March 30, 2023, the CFPB finalized a rule under section 1071 of the Dodd-Frank Act requiring lenders to collect and report data regarding small business lending activity.

The Company is evaluating the impact of the new rule.

The rule requires compliance by October 1, 2024, April 1, 2025, or January 1, 2026, depending on the number of covered small business loans that a covered lender originates.

On July 31, 2023, the U.S.

District Court for the Southern District of Texas enjoined the CFPB from implementing and enforcing the rule with respect to American Bankers Association members, which include the Company, pending the U.S.

Supreme Court's consideration of the constitutionality of the CFPB's funding structure in a separate case.

The court expanded its stay to cover all covered financial institutions in October 2023.

Third Party Risk Management Guidance

On June 6, 2023, the FDIC, the Federal Reserve and the OCC issued final interagency guidance on sound risk management principles that support developing and implementing risk management practices for all stages in the life cycle of third-party relationships.

The Bank has evaluated the impact of this guidance, and is making revisions and enhancements to its programs, policies and procedures to address any gaps and maintain compliance.

Community Reinvestment Act Reform

On October 24, 2023, the FDIC, the Federal Reserve and the OCC released a final rule revising the framework that they use to evaluate banks’ records of community reinvestment under the Community Reinvestment Act (“CRA”).

Under the revised framework, banks with assets of at least $2 billion, such as the Bank, are considered large banks and will have their retail lending, retail services and products, community development financing, and community development services subject to periodic evaluation.

Depending on a large bank’s geographic concentrations of lending, the evaluation of retail lending may include assessment areas in which the bank extends loans but does not operate any deposit-taking facilities, in addition to assessment areas in which the bank has deposit-taking facilities.

The rule becomes effective April 1, 2024.

Most provisions of the final rule will apply beginning January 1, 2026, and the remaining provisions will apply beginning January 1, 2027.

The Company is evaluating the impact of the final rule.

Key Factors Affecting our Business

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Interest rates are often impacted by the actions of the Federal Reserve.

Since March 2022, in response to inflation, the FOMC of the Federal Reserve has increased the target range for the federal funds rate by 425 basis points, including 125 basis points during the fourth calendar quarter of 2022, to a range of 4.25% to 4.50% as of December 31, 2022.

As it seeks to control inflation without creating a recession, the FOMC has indicated there may be further increases in the federal funds rate during calendar year 2023.

The cost of our deposits and short-term borrowings is primarily based on short-term interest rates, which are largely driven by competition and by the actions of the Federal Reserve.

The level of net interest income is influenced by movements in interest rates and the pace at which such movements occur, as well as the relationship between short- and long-term interest rates.

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Credit Quality

We have well established loan policies and underwriting practices that have resulted in low levels of charge-offs and nonperforming assets for the community bank.

Through our thorough underwriting process, we strive to originate quality loans that will maintain and enhance the overall credit quality of our loan portfolio, and through our careful monitoring of our loan portfolio and prompt attention to delinquencies, we seek to minimize the impact of problem loans.

Through our thorough underwriting process, we strive to originate quality loans that will maintain and enhance the overall credit quality of our loan portfolio, and through our careful monitoring of our community bank loan portfolio and prompt attention to delinquencies, we seek to minimize the impact of problem loans.

However, credit trends in the markets in which we operate are largely impacted by economic conditions beyond our control and can adversely impact our financial condition.

We originate loans through our CCBX partners and while these loans will have higher levels of charge-offs and nonperforming assets, agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses.

If our partners are unable to fulfill their contracted obligations then the Bank would be exposed to additional loan losses as a result of this counterparty risk.

If our partners are unable to fulfill their contracted obligations then the Bank would be exposed to additional credit losses as a result of this counterparty risk.

Management regularly evaluates and manages this counterparty risk.

The Company is responsible for credit losses on approximately 10% of a $288.1 million CCBX loan portfolio.

At December 31, 2023, 10% of this portfolio represented $29.1 million in loans.

Operating Efficiency

The largest component of noninterest expense is salaries and employee benefits.

Other significant operating expenses include BaaS expense, occupancy expense, legal and professional expenses, data processing expense, director and staff expense and marketing expense.

The largest component of noninterest expense is BaaS loan and fraud expense.

Other significant operating expenses include salaries and employee benefits, occupancy expense, legal and professional expenses, data processing expense, director and staff expense and marketing expense.

Our operating efficiency, as measured by our efficiency ratio, has gradually improved primarily because the growth of our deposits and loans has enabled our net interest income and noninterest income to outpace the growth of our expenses.

When we make substantial investments in the infrastructure of new divisions, open new branches or make investments to increase our operating capacity, our operating efficiency decreases until we generate enough revenue growth to offset the increased costs however, prior to making such investments, we focus on how best and most expediently we can achieve the revenue growth necessary to offset the costs of these investments or new branches.

When we make substantial investments in the infrastructure of new segments, open new branches or make investments to increase our operating capacity, our operating efficiency decreases until we generate enough revenue growth to offset the increased costs however, prior to making such investments, we focus on how best and most expediently we can achieve the revenue growth necessary to offset the costs of these investments or new branches.

Our efficiency ratio has been impacted by the increase in CCBX income and CCBX expense.

Our efficiency ratio was 45.92% at December 31, 2023, compared to 56.26% at December 31, 2022.

This change is largely due to an increase in net interest income and credit enhancement income for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Economic Conditions

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In recent years, the Puget Sound region has experienced significant population gain, fueled in large part by the region’s technology industry, low unemployment and rising real estate values, all of which positively impacted our business.

The economic environment is continuously changing, due to increased inflation, global unrest, the war in Ukraine, the political environment, and trade issues all contribute to economic uncertainty which has caused increased market volatility and may lead to an economic recession and/or a significant decrease in consumer confidence and business generally.

Critical Accounting Policies

The economic environment is continuously changing, due to GDP, inflation, higher interest rates, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment, and trade issues all contribute to economic uncertainty which has caused increased market volatility and may lead to an economic recession and/or a significant decrease in consumer confidence and business generally.

Critical Accounting Estimates and Significant Accounting Policies

Our accounting policies are integral to understanding our results of operations.

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Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities.

We consider these accounting policies, which are discussed below, to be critical accounting policies.

We consider the items discussed below to be critical accounting estimates.

These assumptions, estimates and judgments we use can be influenced by a number of factors, including the general economic environment.

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Securities available for sale are carried at fair value.

Unrealized gains and losses are excluded from earnings and reported in other comprehensive income.

Unrealized gains and losses are excluded from earnings and reported in other comprehensive

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Securities within the available for sale portfolio may be used as part of our asset/liability strategy and may be pledged or sold in response to changes in interest rate risk, prepayment risk or other similar economic factors.

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Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates debt securities for other-than-temporary impairment (“OTTI”), on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

Management evaluates debt securities for credit losses, on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.

Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis.

If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings.

For debt securities that do not meet the aforementioned criteria, the amount of impairment is

split into two components as follows:

(1) OTTI related to credit loss, which must be recognized in the income statement, and (2) OTTI related to other factors, which is recognized in other comprehensive income, net of applicable taxes.

If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment through earnings.

The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.

The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security.

For more information and discussion related to securities, see “ Note 3 - Investment Securities” in the Consolidated Financial Statements.

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Total loans receivable is net of $7.3 million in net deferred origination fees, $47,000 of which is attributed to PPP loans.

The increase is largely attributed to growth in our CCBX segment as a result of adding new partners, combined with loan growth in the community bank segment, partially offset by forgiveness or principal paydowns on PPP loans.

For more information and discussion related to the loans held for investment, see “ Note 4 - Loans and Allowance for Loan Losses” in the Consolidated Financial Statements.

The increase in loans is largely attributed to growth in our CCBX segment as a result of growth from existing and new partners, combined with loan growth in the community bank segment, slightly offset by forgiveness or principal paydowns on PPP loans.

For more information and discussion related to the loans held for investment, see “ Note 4 - Loans and Allowance for Credit Losses” in the Consolidated Financial Statements.

Loans Held for Sale

CCBX loans held for sale consist of the portion of CCBX originated loans that the Company intends to sell back to the originating CCBX partner or its affiliate generally at par.

The Company sells loans to manage credit positions with partners and across loan categories.

The Company sells loans to manage credit positions and concentrations with partners and across loan categories.

During the twelve months ended December 31, 2023, the Company transferred $599.9 million in CCBX loans receivable to loans held for sale and subsequently sold these loans.

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The Company directly holds stock in organizations such as the Federal Reserve Bank, Federal Home Loan Bank of Des Moines, private companies, and venture capital funds.

Equity investments are subject to the risk of loss if these organizations experience financial difficulties or fall on hard times.

Equity investments are subject to

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the risk of loss if these organizations experience financial difficulties or fall on hard times.

The Company carries these investments at market value or cost if market value is not readily determinable.

During 2022, net contributions to private company equity investments totaled $699,000 and decreased in value by $153,000 in response to a decline in value in the stock based financial performance and growth rates.

In 2021, net contributions to private company equity investments totaled $163,000 and increased in value by $1.5 million (unrealized gain) mostly in response to one company’s issuance of common equity awards, identical to the Company’s holdings, at a higher value.

During 2023, net contributions to private company equity investments totaled $125,000 and increased in value by $278,000 in response to a redemption of a fund and to a decline in value in the stock based financial performance and growth rates.

In 2022, net contributions to private company equity investments totaled $699,000 and increased in value by $153,000 (unrealized gain) mostly in response to one company’s issuance of common equity awards, identical to the Company’s holdings, at a higher value.

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.

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For more information and discussion related to securities, see Note 3 - Investment Securities” in the Consolidated Financial Statements.

Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable and reasonably estimable credit losses inherent in the loan portfolio.

In determining the allowance, the Company estimates losses on individual impaired loans, or groups of loans which are not impaired, where the probable loss can be identified and reasonably estimated.

On a quarterly basis, the Company assesses the risk inherent in the Company’s loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors on the quality of the loan portfolio.

Community bank loans are assessed at the individual loan level and CCBX loans are pooled and evaluated at both the partner and product level.

Based on this analysis, the Company records a provision for loan losses to maintain the allowance at appropriate levels.

Allowance for Credit Losses

The allowance for credit losses ("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 Company must estimate expected credit losses over the loans’ contractual terms, adjusted for expected prepayments.

In estimating the life of the loan, the Company 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 Company.

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 from loan segments utilizing loan level information and relevant available 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.

Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality.

The Company maintains the allowance at an amount the Company believes is sufficient to provide for estimated losses inherent in the Company’s loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses may result from management’s assessment of the adequacy of the allowance.

The Company maintains the allowance at an amount the Company believes is sufficient to provide for estimated losses expected to occur in the Company’s loan portfolio at each balance sheet date, and fluctuations in the provision for credit losses may result from management’s assessment of the adequacy of the allowance.

Changes in these estimates and assumptions are possible and may have a material impact on the Company’s allowance, and therefore the Company’s financial position, liquidity or results of operations.

The Company has elected to exclude accrued interest receivable from the amortized cost basis in its ACL calculation as accrued interest is written off in a timely manner when deemed uncollectable.

The Company increased the allowance from $74.0 million at December 31, 2022 to $117.0 million at December 31, 2023.

The allowance was significantly increased in response to growth in CCBX loans.

The Company uses CCBX partner data, industry data and its own loan loss data to develop an appropriate allowance for the risk inherent in the CCBX new loan volume.

The Company uses CCBX partner data, industry data and its own credit loss data to develop an appropriate allowance for the risk inherent in the CCBX new loan volume.

The Company increased the allowance from $28.6 million to $74.0 million in 2022 largely due to an increase in CCBX consumer loans.

For more information and discussion related to the allowance for loan losses, see “ Note 4 - Loans and Allowance for Loan Losses” in the Consolidated Financial Statements.

For more information and discussion related to the allowance for credit losses, see “ Note 4 - Loans and Allowance for Credit Losses” in the Consolidated Financial Statements.

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Stock-based Compensation

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A large portion of the Company’s revenue are derived from interest and fees earned on loans, investment securities and other financial instruments that are not within the scope of Topic 606.

The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically

fixed, charged either on a periodic basis or based on activity.

The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed, charged either on a periodic basis or based on activity.

Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

The recording of BaaS income and expense is dependent upon the contractual agreement with each partner, however in accordance with accounting guidance the recording of certain components of BaaS income are as follows:

Agreements with many of our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses.

In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans.

When the provision for loan losses and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement).

Incurred losses are recorded in the allowance for loan losses, the credit enhancement asset is relieved when credit enhancement recoveries are received from the CCBX partner.

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 enhancement).

Incurred losses are recorded in the allowance for credit losses, the credit enhancement asset is relieved when credit enhancement recoveries are received from the CCBX partner.

Many agreements with our CCBX partners also provide protection to the Bank from fraud by absorbing incurred fraud losses.

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For more information and discussion related to revenue recognition, see “ Note 19 – Revenue Recognition” in the Consolidated Financial Statements.

Emerging Growth Company

The Jumpstart Our Business Startups Act of 2012, (the “JOBS Act”) permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies.

However, we have decided not to take advantage of this provision.

As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies.

Our decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Recent Pronouncements

For a discussion of the expected impact of accounting pronouncements recently adopted and accounting pronouncements recently issued but not yet adopted by us as of December 31, 2023, see “ Note 2 – Recent Accounting Standards ” in the accompanying notes to our audited consolidated financial statements included elsewhere in this Report on Form 10-K.

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Results of Operations

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the year ended December 31, 2023.

The information contained in this section should be read together with the December 31, 2022 audited Consolidated Financial Statements and the accompanying Notes included in Item 8.

Financial Statements And Supplementary Data of this Form 10-K.

This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022.

Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Form 10-K for the fiscal year ended December 31, 2022.

Year Ended December 31, 2023, Compared to Year Ended December 31, 2022 .

Net income for the year ended December 31, 2023 was $44.6 million, or $3.27 per diluted share, compared to $40.6 million, or $3.01 per diluted share, for the year ended December 31, 2022.

The increase in net income over the prior year was attributable to a $92.3 million increase in net interest income, $96.6 million increase in noninterest income partially offset by a $103.5 million increase in noninterest expense and a $69.1 million increase in the provision for loan losses.

The increase in net income over the prior year was attributable to a $67.0 million increase in net interest income, $82.5 million increase in noninterest income partially offset by a $104.9 million increase in the provision for credit losses - loans and a $38.0 million increase in noninterest expense.

The increase in noninterest income, provision expense and noninterest expense are largely related to CCBX loan and deposit growth.

The increase in interest expense is related to higher average interest bearing deposits and an increase in cost of deposits as a result of higher interest rates.

Net Interest Income

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Interest and fees on loans totaled $311.4 million for the year ended December 31, 2023 compared to $183.4 million for the year ended December 31, 2022.

The $101.2 million increase in interest and fees on loans for the year ended December 31, 2022, compared to the year ended December 31, 2021, was largely due to increased yield on loans from growth in higher yielding CCBX loans and an overall increase in interest rates.

The $128.1 million increase in interest and fees on loans for the year ended December 31, 2023, compared to the year ended December 31, 2022, was largely due to increased yield on loans from growth in higher yielding CCBX and community bank loans and an overall increase in interest rates.

Loan growth of $398.8 million, or 15.2%, for the year ended December 31, 2023, compared to December 31, 2022, includes a decrease of $1.7 million in PPP loans that were forgiven or repaid.

CCBX average loans receivable grew to $742.4 million for the year ended December 31, 2022, compared to $146.3 million for the year ended December 31, 2021, an increase of $596.1 million, or 407.4%.

CCBX average loans receivable grew to $1.21 billion for the year ended December 31, 2023, compared to $742.4 million for the year ended December 31, 2022, an increase of $468.0 million, or 63.0%.

Average CCBX yield of 16.89% was earned on CCBX loans for the year ended December 31, 2023, compared to 13.85% for the year ended December 31, 2022.

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The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield.

Also impacting the increase in loan interest is the increase in interest rates on variable rate loans resulting from the FOMC raising rates 4.25% during the year ended December 31, 2022.

Also impacting the increase in loan interest is the increase in interest rates on variable rate loans resulting from the FOMC raising rates from 4.50% as of December 31, 2022 to 5.50% as of December 31, 2023, with the most recent increase during such period on July 26, 2023.

We continue to monitor the impact of these increases in interest rates.

Interest income from interest earning deposits with other banks was $6.7 million at December 31, 2022, an increase of $6.1 million due to an increase in balances and higher interest rates, compared to December 31, 2021.

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Interest income from interest earning deposits with other banks was $15.3 million at December 31, 2023, an increase of $8.6 million due to higher interest rates, compared to December 31, 2022.

The average balance of interest earning deposits invested with other banks for the year ended December 31, 2023 was $295.8 million, compared to $516.0 million for the year ended December 31, 2022.

This decrease was the result of increased loan demand.

Additionally, the yield on these interest earning deposits with other banks increased 3.88%, compared to the year ended December 31, 2022.

Interest income on investment securities increased to $1.7 million at December 31, 2022, compared to $79,000 at December 31, 2021.

Average investment securities increased $63.2 million from $30.0 million for the year ended December 31, 2022 to $93.2 million for the year ended December 31, 2022, and average yield increased to 1.87% for the year ended December 31, 2022, compared to 0.26% for the year ended December 31, 2021.

Interest income on investment securities increased to $3.2 million at December 31, 2023, compared to $1.7 million at December 31, 2022.

Average investment securities increased $26.9 million from $93.2 million for the year ended December 31, 2022 to $120.2 million for the year ended December 31, 2023 as a result of purchasing additional securities to hold for CRA purposes, and average yield increased to 2.66% for the year ended December 31, 2023, compared to 1.87% for the year ended December 31, 2022.

Interest expense was $91.6 million for the year ended December 31, 2023, a $71.2 million increase from the year ended December 31, 2022.

2 unchanged sentences

Interest on borrowed funds was $2.6 million for the year ended December 31, 2023, compared to $1.4 million for the year ended December 31, 2022.

The $72,000 increase in interest expense on borrowed funds from the year ended December 31, 2021 is the result of a decrease in average PPPLF and FHLB borrowings, which were paid off in full during the quarter ended June 30, 2021 and March 31, 2022, respectively, partially offset by a $12.2 million average balance increase in subordinated debt, which increased during the year ended December 31, 2022.

Interest expense is expected to increase as a result of the FOMC increasing the Fed Funds rate 4.25% during the year ended December 31, 2022.

In addition, as a result of the FOMC rate increase, CCBX deposits that were below their floor to earn interest due to the low interest rate environment and were not earning interest were reclassified to interest bearing deposits from noninterest bearing deposits during the first and second quarters of 2022.

We anticipate additional rate increases in 2023, which we expect will result in higher interest expense on interest bearing deposits which will be offset by higher interest rates on CCBX loans and excess cash invested in the Federal Reserve Bank or other banks.

The $1.3 million increase in interest expense on borrowed funds from the year ended December 31, 2022 was the result of a $16.4 million average balance increase in subordinated debt, which increased during the quarter ended December 31, 2022 partially offset by a decrease in average FHLB borrowings, which were paid off in full during the quarter ended March 31, 2022.

The FOMC increased the Fed Funds rate 1.00% during the twelve months ended December 31, 2023, with the most recent increase during such period on July 26, 2023.

Interest expense will be impacted by any additional FOMC interest rate changes in future periods.

Net interest margin was 7.10% for the year ended December 31, 2023, compared to 5.97% for the year ended December 31, 2022.

Interest rate spread was 5.52%, and 3.54% for the years ended December 31, 2022 and 2021, respectively.

The increase in net interest margin and spread compared to the year ended December 31, 2021 was largely a result of an increase in higher rate loans.

The increase in net interest margin compared to the year ended December 31, 2022 was largely a result of an increase in higher rate loans.

Average loans increased $679.1 million, compared to the year ended December 31, 2022.

the increase includes an average decrease in PPP loans of $340.3 million.

Also contributing to the increase in net interest margin and spread compared to the year ended December 31, 2021 was a $113.9 million increase in average interest earning deposits invested in other banks.

These interest earning deposits earned an average rate of 130 basis points for the year ended December 31, 2022, compared to an average rate of 15 basis points for the year ended December 31, 2021.

Also contributing to the increase in net interest margin compared to the year ended December 31, 2022 was a $8.6 million increase in interest earned on interest earning deposits invested in other banks.

These interest earning deposits earned an average rate of 5.19% for the year ended December 31, 2023, compared to an average rate of 1.30% for the year ended December 31, 2022.

We expect that interest expense will increase and net interest margin will compress as we increase the interest rates on interest bearing deposits to compete with rates offered by our competitors.

Additionally, the sale of higher risk and higher yielding loans during the year ended December 31, 2023 in an effort to optimize and strengthen the balance sheet is expected to further impact net interest margin in future quarters.

Cost of funds was 2.91% for the year ended December 31, 2023, compared to 0.75% for the year ended December 31, 2022.

Cost of deposits for the year ended December 31, 2023 was 2.87%, which was a 216 basis point increase, from 0.71% for the year ended December 31, 2022.

These increases were largely due to an increase in interest bearing deposits from CCBX and an increase in interest rates.

CCBX deposit growth and the aforementioned reclassification of CCBX noninterest bearing deposits to interest bearing deposits significantly contributed to the increase in interest expense.

These increases were largely due to an increase in interest rates and an increase in interest bearing deposits.

CCBX deposit growth also contributed to the increase in interest expense.

Total yield on loans receivable for the year ended December 31, 2023 was 10.60%, compared to 8.12% for the year ended December 31, 2022.

4 unchanged sentences

The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield.

There was a decrease in average community bank loans of $27.2 million, or 1.8%, which is attributed to an average $340.3 million decrease in PPP loans as a result of loan forgiveness and repayments, compared to the year ended December 31, 2021.

In light of our efforts to optimize and strengthen the balance sheet by selling higher yield CCBX loans, total yield on loans may not continue increasing and average CCBX loans may decrease and/or not increase at the rate they previously have as we work to grow the CCBX portfolio with enhanced credit standards and lower potential for future credit deterioration.

There was a increase in average community bank loans of $211.1 million, or 13.9%, which is net of an average $28.6 million decrease in PPP loans as a result of loan forgiveness and repayments, compared to the year ended December 31, 2022.

Average yield on community bank loans for the year ended December 31, 2023 was 6.20%.

compared to 5.32% for the year ended December 31, 2022.

The following tables show the average yield on loans and cost of deposits by segment and also illustrates the impact of BaaS loan expense on CCBX yield on loans:

Table of Content s

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:

For the Year Ended

December 31, 2022 December 31, 2021

December 31, 2023 December 31, 2022 December 31, 2021

(unaudited) Yield on

Loans Cost of

Deposits Yield on

Loans Cost of

Deposits Yield on

Loans Cost of

Community Bank 6.20% 1.14% 5.32% 0.18% 4.90% 0.14%

4 unchanged sentences

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.

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

For the Year Ended

December 31, 2022 December 31, 2021

December 31, 2023 December 31, 2022 December 31, 2021

(dollars in thousands;

unaudited) Income / Expense Income / expense divided by average CCBX loans Income / Expense Income / expense divided by average CCBX loans

unaudited) Income / Expense Income / expense divided by average CCBX loans Income / Expense Income / expense divided by average CCBX loans Income / Expense Income / expense divided by average CCBX loans

BaaS loan interest income $ 204,458 16.89 % $ 102,808 13.85 % $ 6,532 4.46 %

3 unchanged sentences

Average BaaS Loans (2)

$ 1,210,413 $ 742,392 $ 146,304

(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) Includes loans held for sale.

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 fees included in interest income totaled $4.4 million and $3.2 million for the years ended December 31, 2023 and 2022, respectively.

Of the $18.4 million in fees recognized in 2021, $15.5 million were from PPP loans.

For the years ended December 31, 2023 and 2022, the amount of interest income not recognized on nonaccrual loans was not material.

Table of Content s

Average Balance Sheets

For the Year Ended December 31,

2023 2022 2021

(dollars in thousands) Average

3 unchanged sentences

Dividends Yield /

Balance Interest &

Dividends Yield /

Interest earning assets:

10 unchanged sentences

Noninterest earning assets:

Allowance for loan losses (46,769) (19,870)

Allowance for credit losses (91,194) (46,769) (19,870)

Other noninterest earning assets 198,071 119,817 74,088

17 unchanged sentences

(1) 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.

(2) Includes nonaccrual loans.

(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.

Table of Content s

The following table presents an analysis of certain average balances, interest income and interest expense that are specific to each segment.

The segment structure changed after 2021, therefore some items are reported as “n/a” for the year ended December 31, 2021.

Items are that not directly attributed to the segment are not listed:

For the Year Ended

December 31, 2022 December 31, 2021

December 31, 2023 December 31, 2022 December 31, 2021

(dollars in thousands;

4 unchanged sentences

Dividends Yield /

Balance Interest &

Dividends Yield /

Community Bank

Interest earning assets:

Loans receivable (1)

$ 1,726,495 $ 106,983 6.20 % $ 1,515,395 $ 80,544 5.32 % $ 1,542,621 $ 75,580 4.90 %

Intrabank asset, net (6)

— — — 123,156 796 0.65 n/a n/a n/a

Total interest earning assets 1,726,495 106,983 6.20 1,638,551 81,340 4.96 1,542,621 75,580 4.90

Interest bearing liabilities:

Interest bearing deposits 900,516 17,354 1.93 905,447 2,896 0.32 877,389 2,228 0.25

Intrabank liability, net (6)

198,176 10,404 5.25 — — — n/a n/a n/a

Total interest bearing liabilities 1,098,692 27,758 2.53 905,447 2,896 0.32 877,389 2,228 0.25

Noninterest bearing deposits 627,803 733,104 674,509

Total deposits $ 1,638,551 $ 2,896 0.18 $ 1,551,898 $ 2,228 0.14

Interest rate spread 5.14 % 4.76 %

Net interest income $ 79,225 $ 78,444 $ 73,352

Net interest margin (2)

4.59 % 4.79 % 4.76 %

Interest earning assets:

Loans receivable (1)(3)

$ 1,210,413 $ 204,458 16.89 % $ 742,392 $ 102,808 13.85 % $ 146,304 $ 6,532 4.46 %

Intrabank asset, net (6)

363,921 19,071 5.24 285,164 4,106 1.44 n/a n/a n/a

Total interest earning assets 1,574,334 223,529 14.20 1,027,556 106,914 10.40 146,304 6,532 4.46

Interest bearing liabilities:

Interest bearing deposits 1,494,496 71,646 4.79 818,573 16,108 1.97 32,717 99 0.30

Total interest bearing liabilities 1,494,496 71,646 4.79 818,573 16,108 1.97 32,717 99 0.30

Noninterest bearing deposits 79,838 208,983 315,436

Total deposits $ 1,027,556 $ 16,108 1.57 $ 348,153 $ 99 0.03

Interest rate spread 12.28 % 4.43 %

Net BaaS loan income interest

rate spread (3)

Net interest income $ 151,883 $ 90,806 $ 6,433

Net interest margin (2)

9.65 % 8.84 % 4.40 %

Net interest margin, net of

Baas loan expense (4)

4.13 % 3.65 % 4.40 %

Table of Content s

For the Year Ended

December 31, 2023 December 31, 2022 December 31, 2021

(dollars in thousands;

unaudited) Average

Balance Interest &

Dividends Yield /

Balance Interest &

Dividends Yield /

Balance Interest &

Dividends Yield /

Treasury & Administration

Interest earning assets:

Interest earning deposits with

other banks $ 295,808 $ 15,346 5.19 % $ 515,967 $ 6,728 1.30 % $ 402,081 $ 608 0.15 %

Investment securities, available for

100,260 2,158 2.15 91,970 1,710 1.86 27,908 49 0.18

Investment securities, held to

19,918 1,039 5.22 1,266 35 2.76 2,137 30 1.40

Other investments 11,512 387 3.36 10,146 345 3.40 7,052 284 4.03

Total interest earning assets 427,498 18,930 4.43 619,349 8,818 1.42 439,178 971 0.22

Interest bearing liabilities:

PPPLF borrowings — — — 68,699 240 0.35

FHLB advances and borrowings — — — % 6,029 69 1.14 % 24,999 284 1.14 %

Subordinated debt 44,066 2,373 5.39 27,626 1,179 4.27 15,379 711 4.62

Junior subordinated debentures 3,589 271 7.55 3,587 143 3.99 3,585 84 2.34

Intrabank liability, net (6)

165,745 8,667 5.23 408,320 4,902 1.20 n/a n/a n/a

Total interest bearing liabilities 213,400 11,311 5.30 445,562 6,293 1.41 112,662 1,319 1.17

Net interest income $ 7,619 $ 2,525 $ (348)

Net interest margin (2)

1.78 % 0.41 % (0.08) %

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

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

(3) 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.

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

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.

(4) 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, and 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.

(5) 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.

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

Table of Content s

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.

3 unchanged sentences

Year Ended December 31, 2022

Year Ended December 31, 2021

Increase (Decrease)

Due to Total Increase

(dollars in thousands) Volume Rate

(Decrease) Increase (Decrease)

Due to Total Increase

(dollars in thousands) Volume Rate Volume Rate

Interest income:

13 unchanged sentences

Increase in net interest income $ 36,042 $ 30,910 $ 66,952 $ 39,916 $ 52,422 $ 92,338

Provision for Loan Losses

The provision for loan losses is an expense we incur to maintain an allowance for loan losses at a level that is deemed appropriate by management to absorb inherent losses on existing loans.

For a description of the factors taken into account by our management in determining the allowance for loan losses see “Item 7.

Management’s Discussion and Analysis of Financial Condition and Operations—Financial Condition—Allowance for Loan Losses.”

The economic environment is continuously changing, due to increased inflation, higher interest rates, global unrest, the war in Ukraine, the political environment and trade issues that may impact the provision and therefore the allowance.

Gross loans, excluding loans held for sale, totaled $2.63 billion at December 31, 2022 and included $4.7 million in PPP loans, which are 100% guaranteed, and are excluded from the provision for loan losses calculation.

The allowance for loan losses as a percentage of loans was 2.82% at December 31, 2022, compared to 1.64% at December 31, 2021.

Agreements with our CCBX partners provide for an indemnification of loan losses, also known as a credit enhancement, which protects the Bank by absorbing incurred losses.

In accordance with accounting guidance, we estimate and record a provision for probable losses for CCBX loans and deposit overdrafts.

When the provision for loan losses and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded in other assets on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner legal commitment to cover the Bank’s loan losses related to loans they originate on behalf of the Bank.

Incurred loan losses are recorded in the allowance for loan losses, and as the credit enhancement obligations are received from the CCBX partner, the credit enhancement asset is relieved.

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 is deemed appropriate by management to absorb expected losses on existing loans.

For a description of the factors taken into account by our management in determining the allowance for credit losses see “Item 7.

Management’s Discussion and Analysis of Financial Condition and Operations—Financial Condition—Allowance for Credit Losses.”

Gross loans, excluding loans held for sale, totaled $3.03 billion at December 31, 2023 and included $3.0 million in PPP loans, which are 100% guaranteed, and are excluded from the provision for credit losses - loans calculation.

The allowance for credit losses as a percentage of loans was 3.86% at December 31, 2023, compared to 2.82% at December 31, 2022.

Table of Content s

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 and reclassified negative deposit accounts.

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 Company adopted the Current Expected Credit Loss (“CECL”) accounting standard effective January 1, 2023.

The CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio

characteristics, economic outlook, and other key methodology assumptions versus the current accounting practice that utilizes the incurred loss model.

The adoption of this ASU will result in a one-time cumulative-effect adjustment to the allowance for loan losses as of the day of adoption.

The Company currently estimates a combined increase to our allowance for credit losses and reserve for unfunded loan commitments of 3% to 10%.

This change will decrease the opening retained earnings balance as of January 1, 2023.

The above range is disclosed due to the fact that the Company is still in the process of finalizing the CECL allowance model, including the review of assumptions related to qualitative adjustments and economic forecasts;

finalizing the execution of internal controls;

and evaluating the impact to our financial statement disclosures.

The CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the prior accounting practice that utilized the incurred loss model.

The adoption of this ASU resulted in a one-time cumulative-effect adjustment to the allowance for credit losses as of the day of adoption.

Year Ended December 31, 2023, Compared to Year Ended December 31, 2022 .

The provision for loan losses for the year ended December 31, 2022, was $79.1 million compared to $9.9 million for the year ended December 31, 2021.

The increase in the Company’s provision for loan losses during the year ended December 31, 2022, is largely related to the provision for CCBX partner loans.

During the year ended December 31, 2022, a $78.3 million provision for loan losses was recorded for loans originated through CCBX partners based on management’s analysis.

The factors used in management’s analysis for community bank loan losses indicated that a provision for loan loss of $719,000 was needed for the year ended December 31, 2022.

The $78.3 million provision on CCBX loans includes $76.9 million for partner loans with credit enhancement on them and $1.4 million is attributed to loans originated through one CCBX partner for which the Company is responsible for credit losses.

In accordance with the program agreement and for one CCBX partner only, the Company is responsible for credit losses on approximately 10% of a $114.5 million loan portfolio, or $11.5 million of that loan portfolio at December 31, 2022.

The provision for credit losses - loans for the year ended December 31, 2023, was $ 184.0 million compared to $ 79.1 million for the year ended December 31, 2022.

The increase in the Company’s provision for credit losses - loans during the year ended December 31, 2023, is largely related to the provision for CCBX partner loans.

During the year ended December 31, 2023, a $182.7 million provision for credit losses - loans was recorded for loans originated through CCBX partners 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 $1.3 million was needed for the year ended December 31, 2023.

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

(dollars in thousands;

unaudited) December 31, 2022 December 31, 2021

unaudited) December 31, 2023 December 31, 2022 December 31, 2021

Community bank $ 1,322 $ 719 $ 1,275

1 unchanged sentence

Total provision expense $ 184,043 $ 79,064 $ 9,915

Net charge-offs for the year ended December 31, 2022 totaled $33.7 million, or 1.49% of total average loans, as compared to net charge-offs of $545,000, or 0.03% of total average loans, for the year ended December 31, 2021.

Net charge-offs were up significantly in 2022 compared to 2021 due to CCBX partner loans.

In 2022, $382,000 in net charge-offs were for the community bank and $33.3 million were for CCBX.

In 2021, $172,000 were for the community bank and $373,000 of the charge-offs were for the CCBX.

Net charge-offs for the year ended December 31, 2023 totaled $145.0 million, or 4.94% of total average loans, as compared to net charge-offs of $33.7 million, or 1.49% of total average loans, for the year ended December 31, 2022.

Net charge-offs were up significantly in 2023 compared to 2022 as a result of the growth in loans originated through CCBX partners.

In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for a credit enhancement that indemnifies and as a result CCBX partners reimburse the Bank for net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company is responsible for credit losses on approximately 10 % of a $ 288.1 million loan portfolio.

At December 31, 2023, our portion of this portfolio represented $ 29.1 million in loans.

Provision expense on these loans was $5.1 million and $1.4 million for the years ended December 31, 2023 and 2022, respectively, with net charge-offs of $ 3.6 million in 2023 and $216,000 in 2022.

In 2023, $52,000 of net charge-offs were recognized for community bank loans and $144.9 million of net-charge-offs were recognized for CCBX loans.

In 2022, $382,000 of net charge-offs were recognized for community bank loans and $33.3 million of charge-offs were recognized for CCBX 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 obligations to replenish their cash reserve account then the Bank would be exposed to additional losses, as a result of this counterparty risk.

If a CCBX partner does not replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements.

The Bank would write-off any remaining credit enhancement asset from the CCBX partner but would retain the full yield and any fee income on the loan portfolio going forward, and BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.

Table of Content s

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

1 unchanged sentence

December 31, 2022

(dollars in thousands) Community Bank CCBX Total Community Bank CCBX Total

December 31, 2021

(dollars in thousands) Community Bank CCBX Total Community Bank CCBX Total Community Bank CCBX Total

Gross charge-offs $ 64 $ 151,933 $ 151,997 $ 428 $ 33,321 $ 33,749 $ 255 $ 385 $ 640

1 unchanged sentence

Net charge-offs $ 52 $ 144,914 $ 144,966 $ 382 $ 33,285 $ 33,667 $ 172 $ 373 $ 545

Net charge-offs to average loans 0.03 % 4.48 % 1.49 % 0.01 % 0.25 % 0.03 %

Net charge-offs to

average loans 0.00 % 11.97 % 4.94 % 0.03 % 4.48 % 1.49 % 0.01 % 0.25 % 0.03 %

% of CCBX charge-offs

covered by credit

enhancement 97.5 % 99.4 % 100.0 %

Noninterest Income

1 unchanged sentence

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.

Table of Content s

For the year ended December 31, 2023, noninterest income totaled $207.2 million, an increase of $82.5 million, or 66.2%, compared to $124.7 million for the year ended December 31, 2022.

1 unchanged sentence

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

December 31, Increase

December 31, 2023 compared to 2022 2022 compared to 2021

(dollars in thousands) 2023 2022 2021 Increase

(Decrease) Percent

(dollars in thousands) 2022 2021

Change Increase

(Decrease) Percent

Deposit service charges and fees $ 3,854 $ 3,804 $ 3,698 $ 50 1.3 % $ 106 2.9 %

Loan referral fees 683 810 2,126 (127) (15.7) (1,316) (61.9)

Mortgage broker fees 257 920 (663) (72.1)

Gain on sale of bank branch including deposits and loans, net — — 1,263 — 0.0 (1,263) (100.0)

Gain on sales of loans, net 253 — 396 253 100.0 (396) (100.0)

Unrealized (loss) gain on equity securities, net (153) 1,469 (1,622) (110.4)

Unrealized gain (loss) on equity securities, net 279 (153) 1,469 432 (282.4) (1,622) (110.4)

Other 884 1,344 1,859 (460) (34.2) (515) (27.7)

8 unchanged sentences

BaaS indemnification income 184,929 105,945 10,591 78,984 74.6 95,354 900.3

Total BaaS income $ 201,222 $ 118,879 $ 17,307 $ 82,343 69.3 $ 101,572 586.9

Total noninterest income $ 207,175 $ 124,684 $ 28,118 $ 82,491 66.2 % $ 96,566 343.4 %

A description of our largest noninterest income categories are below:

BaaS Income .

Our CCBX segment provides BaaS offerings that enable our broker dealer and digital financial service providers to offer their customers banking services.

In exchange for providing these services, we earn fixed fees, volume-based fees and reimbursement of costs depending on the program agreement.

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 loan losses and reserve for unfunded commitments provided by the partner as revenue in BaaS income.

CCBX credit losses are recognized in the allowance for loan loss and noncredit 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 loan losses through the recognition of BaaS credit enhancement revenue at the same time we establish an allowance for those loans though a provision for loan losses.

For more information on the accounting for BaaS allowance for loan losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

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.”

Table of Content s

For the year ended December 31, 2023, we earned $201.2 million in BaaS fees, which was an increase of $82.3 million, or 69.3%, over the year ended December 31, 2022, where we earned $118.9 million in BaaS fees.

The increase over the year ended December 31, 2021 was primarily due to an increase of $6.2 million in total BaaS fee program income, which was the result of increased relationships with broker dealers and digital financial service providers, $67.3 million in BaaS fees – credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, $28.1 million in BaaS fees – fraud recovery, and $1.7 million increase in reimbursement of expenses.

The following table presents the BaaS fee income for the periods indicated:

December 31, Increase

(dollars in thousands) 2022 2021

Program income:

Servicing and other BaaS fees $ 4,408 $ 4,467 (59)

Transaction fees 3,211 544 2,667

Interchange fees 2,583 701 1,882

Reimbursement of expenses 2,732 1,004 1,728

Program income 12,934 6,716 6,218

Indemnification income:

Credit enhancements 76,374 9,086 67,288

Fraud enhancements 29,571 1,505 28,066

Indemnification income 105,945 10,591 95,354

Total BaaS income $ 118,879 $ 17,307 101,572

Our CCBX segment continues to evolve, and now has 27 relationships, at varying stages, as of December 31, 2022.

As of December 31, 2022, we had 19 active relationships.

We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense for both parties and are focusing on selecting larger and more established partners, with experienced management teams.

We are winding down two partner relationships;

these programs are not material in terms of income, deposits or loans.

The following table illustrates the activity in CCBX for the periods indicated:

The increase over the year ended December 31, 2022 was primarily due to an increase of $101.4 million in BaaS credit enhancements related to the allowance for credit losses and reserve for unfunded commitments partially offset by $22.4 million less in BaaS fraud enhancements as a result of lower reported fraud, and an increase of $3.4 million in total BaaS fee program income, which was the result of increased activity.

Our CCBX segment continues to evolve, and we now have 21 relationships, at varying stages, as of December 31, 2023.

We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense and are focusing on expanding and developing relationships with larger and more established partners, with experienced management teams, existing customer bases and strong financial positions.

The sale of $599.9 million in CCBX loans during the year ended December 31, 2023 is part of our strategy to strengthen the balance sheet and lower the overall potential credit risk in our loan portfolio.

We expect net interest margin will tighten as higher quality loans yield less than higher risk loans and we also expect the size of our CCBX loan portfolio will be smaller than in previous quarters while we work to grow the portfolio with loans that are subject to increased underwriting standards.

We expect this process to take another quarter or two.

At the same time we will be focused on increasing our efficiency and using technology to reduce future expense growth.

The following table illustrates the activity and evolution in CCBX relationships for the periods indicated:

(unaudited) December 31, 2023 December 31, 2022

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Together they constitute the largest component of our noninterest income, outside of BaaS fee income.

Deposit service charges and fees were $3.8 million for the year ended December 31, 2022, an increase of $106,000, or 2.9%, over the prior year primarily due to increases in point-of-sale fees of $96,000 and service charges on deposit accounts of $58,000, partially offset by decreases in merchant services revenue of $60,000, ATM fees of $9,000, and overdraft fees of $6,000.

NSF and overdraft fees were $310,000 for the year ended December 31, 2022, compared to $316,000 for the year ended December 31, 2021.

During 2022 consumer overdraft fees were eliminated.

Consumer overdraft fees are not a significant source of income, and the elimination of these fees will not have a significant impact on income.

Deposit service charges and fees were $3.9 million for the year ended December 31, 2023, an increase of $50,000, or 1.3%, over the prior year primarily due to increases in point-of-sale fees of $121,000 and service charges on deposit accounts of $32,000, partially offset by a decrease in overdraft fees of $97,000.

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The following table presents deposit service charges and fees for the periods indicated:

December 31, Increase

December 31, 2023 compared to 2022 2022 compared to 2021

(dollars in thousands) 2023 2022 2021 Increase

(Decrease) Percent

(dollars in thousands) 2022 2021

Change Increase

(Decrease) Percent

Point of sale fees $ 2,176 $ 2,055 $ 1,959 121 5.9 % $ 96 4.9 %

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Current market conditions are making interest rate swap agreements less attractive in the higher rate environment.

Loan referral fees were $810,000 for the year ended December 31, 2022, a decrease of $1.3 million, or 61.9%, over the year ended December 31, 2021.

Loan referral fees were $683,000 for the year ended December 31, 2023, a decrease of $127,000, or 15.7%, over the year ended December 31, 2022.

Interest rate volatility, swap rates, and the timing of loan closings all impact the demand for long-term fixed rate swaps.

Mortgage Broker Fees .

We earn mortgage broker fees for residential mortgage loans that we broker through mortgage lenders.

Mortgage broker fees decreased $663,000, or 72.1%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The mortgage market is slowing down as a result of higher interest rates on mortgages.

Gain on Sale of Branch, net.

The sale of our Freeland branch closed on April 30, 2021.

Noninterest income included $1.3 million gain from sale of the branch in 2021, there was no similar income in 2022.

Gain on Sale of Loans, net .

Gain on sales of loans occurs when we sell in the secondary market the guaranteed portion (generally 75% of the principal balance) of the SBA and USDA loans that we originate.

Gain on sales of loans occurs when we sell certain CCBX loans to the originating partner, in accordance with partner agreements.

We sold $599.9 million in CCBX loans during the year ended December 31, 2023 and expect to continue selling CCBX loans over the next several months in an effort to optimize and strengthen our portfolio.

Gain on sale of loans may also occur when we sell in the secondary market the guaranteed portion (generally 75% of the principal balance) of the SBA and U.S.

Department of Agriculture (“USDA”) loans that we originate.

This activity fluctuates based on SBA and USDA loan activity.

Gain on sale of loans decreased $396,000, or 100.0%, to zero for the year ended December 31, 2022 compared to the prior year, due to decreased activity.

Unrealized gain (loss) on equity securities, net.

During the year ended December 31, 2022, we recognized an unrealized loss on equity securities of $153,000, compared to the year ended December 31, 2021, when we recognized a $1.5 million unrealized holding gain on an equity security as a result of an observable price change.

This category includes a variety of other income-producing activities, annuity broker fees, and SBA and USDA servicing fees.

Other noninterest income increased $148,000, or 15.8%, for the year ended December 31, 2022 compared to the year ended December 31, 2021.

During the year ended December 31, 2023, we recognized an unrealized gain on equity securities of $279,000, compared to the year ended December 31, 2022, when we recognized a $153,000 unrealized holding loss on equity securities.

We hold $3.0 million in equity securities focused on entities providing products to the BaaS and financial services space.

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.

Other noninterest income decreased $460,000, or 34.2%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, due in part to the one-time cost of converting an existing BOLI policy to one that will yield higher returns in the future, which reduced BOLI earnings by $212,000.

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, FDIC assessment, points of sale expense, excise taxes, director and staff expenses, marketing and other expenses.

The largest components of noninterest expense are BaaS loan and fraud expense combined and salaries and employee

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Noninterest expense also includes operational expenses, such as legal and professional expenses, data processing and software licenses, occupancy, point of sale expense, FDIC assessment, director and staff expenses, excise taxes, marketing and other expenses.

For the year ended December 31, 2023, noninterest expense totaled $204.8 million, an increase of $38.0 million, or 22.8%, compared to $166.8 million for the year ended December 31, 2022.

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

December 31, Increase

December 31, 2023 compared to 2022 2022 compared to 2021

(dollars in thousands) 2023 2022 2021 Increase

(Decrease) Percent

(dollars in thousands) 2022 2021

Change Increase

(Decrease) Percent

Salaries and employee benefits $ 66,461 $ 52,228 $ 37,101 $ 14,233 27.3 % $ 15,127 40.8 %

Occupancy 4,548 4,128 420 10.2

Legal and professional expenses 14,803 6,760 3,133 8,043 119.0 3,627 115.8

Data processing and software licenses 8,595 6,487 4,951 2,108 32.5 1,536 31.0

Occupancy 4,926 4,548 4,128 378 8.3 420 10.2

Point of sale expense 3,534 2,109 671 1,425 67.6 1,438 214.3

Legal and professional expenses 6,760 3,133 3,627 115.8

FDIC assessments 2,524 2,859 1,632 (335) (11.7) 1,227 75.2

Excise taxes 2,204 1,589 615 38.7

Director and staff expenses 2,152 1,711 1,205 441 25.8 506 42.0

Excise taxes 1,976 2,204 1,589 (228) (10.3) 615 38.7

Marketing 517 351 451 166 47.3 (100) (22.2)

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As of December 31, 2023, we had 507 full-time equivalent employees, compared to 448 at December 31, 2022.

Occupancy Expenses.

Occupancy expenses were $4.5 million for the year ended December 31, 2022, compared to $4.1 million for the year ended December 31, 2021, an increase of $420,000, or 10.2%.

This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $1.8 million and $1.6 million for years ended December 31, 2022 and 2021, respectively.

The increase of $420,000 in occupancy expenses for 2022 compared to 2021, was primarily the result of $222,000 increase in depreciation expense, resulting from increased costs associated with the increase in FTE and growth in CCBX and $138,000 increase in maintenance and repairs expense.

Occupancy expenses rent, utilities, janitorial and other maintenance expenses, property insurances and taxes.

Also included is depreciation on building, leasehold, furniture, fixtures and equipment.

Although our hybrid and remote workforce has increased, which helps keep some occupancy expenses down, we do expect occupancy expenses to increase as we continue to grow.

Legal and Professional Expenses.

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The increase in legal and professional expenses were primarily focused on building infrastructure for future growth.

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Data Processing and Software Licenses.

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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.

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.

These expenses are expected to increase as we invest more in automated processing and as we grow product lines and our CCBX segment.

Data processing costs were $8.6 million for the year ended December 31, 2023, compared to $6.5 million for the year ended December 31, 2022, an increase of $2.1 million, or 32.5%.

Occupancy Expenses.

Occupancy expenses were $4.9 million for the year ended December 31, 2023, compared to $4.5 million for the year ended December 31, 2022, an increase of $378,000, or 8.3%.

This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $ 2.3 million and $ 1.8 million for years ended December 31, 2023 and 2022, respectively.

The increase of $378,000 in occupancy expenses for 2023 compared to 2022, was primarily the result of $222,000 increase in depreciation expense, resulting from increased costs associated with the increase in FTE and growth in CCBX and $138,000 increase in maintenance and repairs expense.

Occupancy expenses rent, utilities, janitorial and other maintenance expenses, property insurances and taxes.

Also included is depreciation on building, leasehold, furniture, fixtures and equipment.

Although our hybrid and remote workforce has increased, which helps keep some occupancy expenses down, 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 were $3.5 million for the year ended December 31, 2023, compared to $2.1 million for the year ended December 31, 2022, an increase of $1.4 million, or 67.6%.

FDIC Assessments.

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As deposits increase, the FDIC assessment expense will generally increase.

FDIC assessments were $2.8 million for the year ended December 31, 2022, compared to $1.6 million for the year ended December 31, 2021, an increase of $1.2 million, or 75.2%.

Deposit growth in the community bank and CCBX contributed to this increase.

On October 18, 2022 the FDIC finalized an increase of 2 basis points in the initial base deposit insurance assessment rates schedules.

The rise is intended to increase the reserve ratio of the Deposit Insurance Fund, which was at 1.26% as of September 30, 2022, to 1.35%, the statutory requirement.

However, our rate has decreased in 2023 as a result of improvement in the various ratios that determine the rate at which insured deposits are assessed, compared to the comparable prior year period.

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 increase will take effect in the first quarterly assessment period of 2023 and will increase the FDIC assessment expense for the Bank.

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 were $2.2 million for the year ended December 31, 2022, compared to $1.6 million for the year ended December 31, 2021, an increase of $615,000, or 38.7%.

Excise taxes increased as a result of increased income subject to excise taxes.

Partially offsetting that increase is a credit we received in 2022 against excise taxes owed in the amount of $109,000 as a result of our participation in the Washington State Main Street Program, which reduced our calculated 2022 expense.

Excise taxes are based on gross income of $316.9 million and $111.2 million for the years ended December 31, 2022 and 2021, respectively.

Gross income is reduced by certain allowed deductions to arrive at the taxable base;

however, as gross income increases, so does the excise tax expense.

FDIC assessments were $2.5 million for the year ended December 31, 2023, compared to $2.9 million for the year ended December 31, 2022, a decrease of $335,000, or 11.7%.

Director and Staff Expenses.

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Director and staff expenses were $2.2 million for the year ended December 31, 2023 compared to $1.7 million for the year ended December 31, 2022, an increase of $441,000, or 25.8%.

In 2022 we saw an increase in employee travel and training return to a more typical level after a year of reduced activity in 2021 as a result of restrictions related to the COVID-19 pandemic.

In 2023 we saw an increase in these expenses as the number of employees increased.

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 were $2.0 million for the year ended December 31, 2023, compared to $2.2 million for the year ended December 31, 2022, an decrease of $228,000, or 10.3%.

Marketing and promotion.

Marketing and promotion costs were $351,000 for the year ended December 31, 2022, compared to $451,000 for the year ended December 31, 2021, a decrease of $100,000, or 22.2%.

Marketing and promotion costs decreased because we are using more cost-effective advertising options;

however, we expect to see advertising expenses increase as we deploy more branding and targeted advertising for the community bank and CCBX.

Marketing and promotion costs were $517,000 for the year ended December 31, 2023, compared to $351,000 for the year ended December 31, 2022, a increase of $166,000, or 47.3%.

Marketing and promotion costs are starting to increase as we deploy more 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.

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, provision for unfunded commitments, and miscellaneous other expenses.

The provision for unfunded commitments has increased with the addition of CCBX loan partners.

Other noninterest expense increased to $4.7 million for the year ended December 31, 2022, compared to $3.9 million for the year ended December 31, 2021, an increase of $731,000, or 18.6%.

The increase was largely due to a $551,000 increase in dues and memberships and $91,000 increase in business development and overall increases resulting from growth for the year ended December 31, 2022, as compared to the same period last year.

Other noninterest expense increased to $5.2 million for the year ended December 31,

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2023, compared to $4.7 million for the year ended December 31, 2022, an increase of $572,000, or 12.3%.

The increase was largely due to overall increases resulting from growth for the year ended December 31, 2023, as compared to the same period last year.

BaaS loan and fraud expense.

Our CCBX segment provides BaaS offerings that enable our broker dealer and digital financial service providers to offer their customers banking services.

Included in BaaS loan and fraud expense is partner loan expense including overdraft balances and partner fraud expense.

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.

Partner fraud expense represents noncredit fraud losses on loans and deposits originated through partners.

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.

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

December 31, Increase

(dollars in thousands) 2022 2021

December 31, 2023 compared to 2022 2022 compared to 2021

(dollars in thousands) 2023 2022 2021 Increase

(Decrease) Increase

BaaS loan expense $ 86,900 $ 53,294 $ 2,976 $ 33,606 $ 50,318

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On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which, among other things, implements a new 15% corporate alternative minimum tax for certain large corporations, a 1% excise tax on stock buybacks, and several tax incentives to promote clean energy and climate initiatives.

These provisions are effective beginning January 1, 2023.

Based on its current analysis of the provisions, we do not expect this legislation to have a material impact on our consolidated financial statements.

These provisions were effective beginning January 1, 2023.

This legislation did not have a material impact on our consolidated financial statements.

Year Ended December 31, 2023, Compared to Year Ended December 31, 2022.

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Our effective tax rates for the years ended December 31, 2023, and 2022, was 22.0% and 19.7%, respectively.

The effective tax rate was lower for 2022 due to an update in the state apportionment of the revenues in the states in which we operate combined with tax benefits that resulted from stock based compensation activity.

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Segment Information

For financial reporting purposes our Company has two reportable segments:

The community bank and CCBX, which has been determined based upon the Company's relationship with the end customer.

This determination also gave consideration to the structure and management of our various products.

The community bank segment includes the operations of the Bank, and excludes the CCBX BaaS operations.

The community bank segment derives its revenue primarily from interest on loans and investments as well as noninterest income typical for the banking industry.

The CCBX segment includes BaaS operations.

The CCBX segment derives its revenue from BaaS partnerships that allow our broker-dealer and digital financial partners to offer their customers banking services such as loans and deposits.

Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions.

Based on the criteria of ASC 280, Segment Reporting, we have identified three segments:

the community bank, CCBX and treasury & administration.

The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services.

The CCBX segment has 21 partners, 19 that are active with two more currently in the testing or implementation stage as of December 31, 2023.

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 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 elsewhere in this report.

Community bank total assets as of December 31, 2022 decreased $184.6 million, or 8.1%, to $2.10 billion, compared to $2.28 billion as of December 31, 2021.

Total community bank loans receivable increased $218.7 million, or 15.7%, to $1.61 billion as of December 31, 2022, compared to $1.40 billion as of December 31, 2021.

The increase in loans receivable is the result of strong loans growth net of $107.1 million in PPP loan forgiveness and paydowns during the year ended December 31, 2022.

Non-PPP community bank loan growth was $325.8 million, or 25.4%, as a result of increased loan activity.

Total community bank deposits decreased $109.3 million, or 6.6%, to $1.54 billion, as of December 31, 2022, compared to $1.65 billion as of December 31, 2021.

The decrease in deposits is largely due our decision to let some deposits runoff instead of retaining them based on price.

The overall increase in deposits was achieved

despite a decrease of $25.6 million in total deposits due to the sale of our Freeland branch, which were included in the total deposits as of December 31, 2021.

Net interest income for the community bank was $85.1 million for the year ended December 31, 2022, an increase of $12.1 million, or 16.5%, compared to $73.0 million for the year ended December 31, 2021.

The increase in net interest income is largely due to loan growth and increased interest rates on new and variable rate loans.

Provision for loan losses was $719,000 for the year ended December 31, 2022, compared to $1.3 million for the year ended December 31, 2021.

The provision for loan losses was increased in 2021 as a result of economic uncertainties of the COVID-19 pandemic and loan growth, however losses have not realized as anticipated.

Noninterest income for the community bank was $5.7 million, for the year ended December 31, 2022, a decrease of $5.1 million, or 47.2%, compared to $10.7 million for the year ended December 31, 2021 In 2021, there was a $1.5 million unrealized holding gain on an equity investment and $1.3 million gain on sale of a branch, compared to $153,000 unrealized loss on equity securities, no gain on sale of branch and $1.3 million less in loan referral fees in 2022.

Noninterest expenses for the community bank increased $12.6 million, or 24.4%, to $64.1 million as of December 31, 2022, compared to $51.5 million as of December 31, 2021.

The increase in noninterest expense is largely due to increased salaries and employee benefits as a result of growth, higher software licenses maintenance and subscription costs related to new reporting software that helps to automate and create efficiencies in reporting, and other expense increases related to growth.

CCBX total assets as of December 31, 2022 increased $693.6 million, or 196.5%, to $1.05 billion, compared to $353.0 million as of December 31, 2021.

Total CCBX loans receivable increased $665.8 million, or 192.1%, to $1.01 billion as of December 31, 2022, compared to $346.7 million as of December 31, 2021.

The increase in loans receivable is the result of growth in CCBX relationships.

CCBX allowance for loan losses increased to $53.4 million as of December 31, 2022, compared to $8.3 million as of December 31, 2021 as a result of loan growth and portfolio mix.

Total CCBX deposits increased $563.0 million, or 78.6%, to $1.28 billion, compared to $716.3 million as of December 31, 2021 as a result of growth in CCBX.

Included in noninterest expense for the community bank is administrative overhead of $27.2 million and $19.0 million for the year ended December 31, 2022 and December 31, 2021, respectively.

Both the community bank and the CCBX segment benefit from this administrative overhead and services, which includes shared operational activities such as data management, compliance monitoring and other administration functions.

Net interest income for CCBX was $86.7 million for the year ended December 31, 2022, an increase of $80.3 million, or 1,247.7%, compared to $6.4 million for the year ended December 31, 2021.

The increase in net interest income is due to loan growth from CCBX relationships.

Provision for loan losses was $78.3 million for the year ended December 31, 2022, compared to $8.6 million for the year ended December 31, 2021, as a result of loan growth from CCBX partners.

Noninterest income for CCBX was $119.0 million, for the year ended December 31, 2022, an increase of $101.6 million, or 583.9%, compared to $17.4 million for the year ended December 31, 2021, due to an increase of $6.2 million in BaaS fee program income, which was the result of increased activity with broker dealers and digital financial service providers, $67.3 million in BaaS fees – credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, and $28.1 million in BaaS fees – fraud enhancements.

Noninterest expenses for CCBX increased $90.9 million, or 776.2%, to $102.7 million as of December 31, 2022, compared to $11.7 million as of December 31, 2021.

The increase in noninterest expense is largely due to an increase in BaaS loan expense, BaaS fraud expense and increased salaries and benefits, for the year ended December 31, 2022, compared to the year ended December 31, 2021.

For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”.

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

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 this report.

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

December 31, 2023 December 31, 2022

(dollars in thousands) Bank CCBX Total Bank CCBX Total

Total assets $ 2,097,885 $ 1,046,582 $ 3,144,467 $ 2,282,514 $ 353,003 $ 2,635,517

(dollars in thousands;

unaudited) Community Bank CCBX Treasury & Administration Consolidated Community Bank CCBX Treasury & Administration Consolidated

Cash and due from banks $ 4,702 $ 9,601 $ 468,825 $ 483,128 $ 4,603 $ 12,899 $ 324,637 $ 342,139

Intrabank asset $ — $ 653,178 $ (653,178) $ — $ — $ 254,096 $ (254,096) $ —

Securities — — 150,364 150,364 — — 98,353 98,353

Loans held for sale — — — — — — — —

Total loans receivable 1,830,154 1,195,938 — 3,026,092 1,614,752 1,012,504 — 2,627,256

Allowance for loan losses

Allowance for credit losses

(21,595) (95,363) — (116,958) (20,636) (53,393) — (74,029)

All other assets 30,169 136,931 43,640 210,740 25,508 76,111 49,129 150,748

Total assets $ 1,843,430 $ 1,900,285 $ 9,651 $ 3,753,366 $ 1,624,227 $ 1,302,217 $ 218,023 $ 3,144,467

Total deposits $ 1,497,601 $ 1,862,762 $ — $ 3,360,363 $ 1,538,218 $ 1,279,303 $ — $ 2,817,521

December 31, 2022 December 31, 2021

(dollars in thousands) Bank CCBX Total Bank CCBX Total

Total borrowings — — 47,734 47,734 — — 47,587 47,587

Intrabank liability $ 338,614 $ — $ (338,614) $ — $ 80,392 $ — $ (80,392) $ —

All other liabilities 7,215 37,523 5,553 50,291 5,617 22,914 7,334 35,865

Total liabilities $ 1,843,430 $ 1,900,285 $ (285,327) $ 3,458,388 $ 1,624,227 $ 1,302,217 $ (25,471) $ 2,900,973

Community bank total assets as of December 31, 2023 increased $219.2 million, or 13.5%, to $1.84 billion, compared to $1.62 billion as of December 31, 2022.

Loans receivable net of deferred fees for the community bank segment increased $215.4 million, or 13.3%, to $1.83 billion as of December 31, 2023, compared to $1.61 billion as of December 31, 2022.

The increase in community bank loans receivable is the result of gross loan growth of $216.4 million.

Total community bank deposits decreased $40.6 million, or 2.64%, to $1.50 billion, as of December 31, 2023, compared to $1.54 billion as of December 31, 2022.

The decrease in community bank deposits was a result of pricing disciplines as some customers sought higher rate products elsewhere.

Our cost of deposits for the community bank was 1.57% for the three months ended December 31, 2023.

The intrabank liability, which is the difference in total community bank assets and total community bank liabilities, increased $258.2 million, or 321.2%, to $338.6 million at December 31, 2023, compared to $80.4 million at December 31, 2022.

This increase is the result of the increase in community bank loans and the decrease in community bank deposits discussed above.

CCBX total assets as of December 31, 2023 increased $598.1 million, or 45.9%, to $1.90 billion, compared to $1.30 billion as of December 31, 2022.

During the twelve months ended December 31, 2023, $599.9 million in CCBX loans were transferred to loans held for sale, with $599.9 million in loans sold and no loans remaining in loans held for sale as of December 31, 2023 and December 31, 2022.

A portion of these loans were sold at par and a portion were sold with a gain on sale.

Pricing is dependent upon the agreement with the partner.

The Company sells CCBX loans to manage loan portfolio size by partner and by loan category, with such limits established and documented in the relevant partner agreements.

Total CCBX loans receivable increased $183.4 million, or 18.1%, to $1.20 billion as of December 31, 2023, compared to $1.01 billion as of December 31, 2022.

The increase in loans receivable is the result of increased activity with CCBX partners.

During the quarter ended December 31, 2023, we deliberately reduced our other consumer and other loans portfolio in an effort to optimize loan portfolio and will work to continue growing the CCBX portfolio in future quarters with loans that have lower potential risk of credit deterioration and are more aligned with our long term objectives.

CCBX allowance for credit losses increased to $95.4 million as of December 31, 2023, compared to $53.4 million as of December 31, 2022 as a result of increased loss rates and balances on CCBX loans which has increased the allowance calculation/requirement.

CCBX partner agreements provide credit enhancements that cover the $144.9

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million in net charge-offs on CCBX loans for the twelve months ended months ended December 31, 2023.

Total CCBX deposits increased $583.5 million, or 45.6%, to $1.86 billion, compared to $1.28 billion as of December 31, 2022 as a result of growth within the CCBX relationships.

This does not include an additional $69.4 million in CCBX deposits that were transferred off balance sheet to provide for increased FDIC insurance coverage to certain customers.

The intrabank asset, which is the difference in total CCBX assets and total CCBX liabilities, increased $399.1 million, or 157.1%, to $653.2 million at December 31, 2023, compared to $254.1 million at December 31, 2022.

This increase is the result of the increase in CCBX deposits partially offset by the increase in CCBX loans receivable as discussed above.

Treasury & administration total assets as of December 31, 2023 decreased $208.4 million, or 95.6%, to $9.7 million, compared to $218.0 million as of December 31, 2022.

Total securities increased $52.0 million, or 52.9%, to $150.4 million as of December 31, 2023, compared to $98.4 million as of December 31, 2022, as we increased the amount of CRA qualified securities we hold.

Total borrowings were $47.7 million as of December 31, 2023 and $47.6 million as of December 31, 2022.

The intrabank asset and intrabank liability are part of the transfer pricing process.

The treasury & administration segment offsets intrabank asset and/or intrabank liability at the community bank and CCBX segments.

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

The segment structure changed after 2021, therefore some items are reported as “N/A” for the year ended December 31, 2021.

December 31, 2023 December 31, 2022 December 31, 2021

(dollars in thousands) Community Bank CCBX Treasury & Administration Total Community Bank CCBX Treasury & Administration Total Community Bank CCBX Treasury & Administration Total

INTEREST INCOME AND EXPENSE

Interest income $ 106,983 $ 204,458 $ 18,930 $ 330,371 $ 80,544 $ 102,808 $ 8,818 $ 192,170 $ 76,551 $ 6,532 N/A $ 83,083

Interest income (expense)

intrabank transfer (10,404) 19,071 (8,667) — 796 4,106 (4,902) — N/A N/A N/A —

Interest expense 17,354 71,646 2,644 91,644 2,896 16,108 1,391 20,395 3,547 99 N/A 3,646

Net interest income 79,225 151,883 7,619 238,727 78,444 90,806 2,525 171,775 73,004 6,433 N/A 79,437

Provision for credit

losses - loans 1,322 182,721 — 184,043 719 78,345 — 79,064 1,275 8,640 N/A 9,915

(Recapture)/Provision for

unfunded commitments (211) 160 — (51) — — — — — — N/A —

Net interest income

Provision for loan losses $ 719 $ 78,345 79,064 $ 1,275 $ 8,640 9,915

after provision

(recovery)for credit

losses - loans and

commitments 78,114 (30,998) 7,619 54,735 77,725 12,461 2,525 92,711 71,729 (2,207) N/A 69,522

NONINTEREST INCOME

Deposit service charges

and fees 3,810 44 — 3,854 3,757 47 — 3,804 3,698 — N/A 3,698

Other income 1,165 433 501 2,099 1,411 356 234 2,001 7,015 98 N/A 7,113

BaaS program income — 16,293 — 16,293 — 12,934 — 12,934 — 6,716 N/A 6,716

BaaS indemnification

income — 184,929 — 184,929 — 105,945 — 105,945 — 10,591 N/A 10,591

Noninterest income 4,975 201,699 501 207,175 5,168 119,282 234 124,684 10,713 17,405 N/A 28,118

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December 31, 2023 December 31, 2022 December 31, 2021

(dollars in thousands) Community Bank CCBX Treasury & Administration Total Community Bank CCBX Treasury & Administration Total Community Bank CCBX Treasury & Administration Total

NONINTEREST EXPENSE

Salaries and employee

benefits 24,104 25,159 17,198 66,461 20,476 18,007 13,745 52,228 32,562 4,539 N/A 37,101

Occupancy 3,815 339 772 4,926 3,956 317 275 4,548 4,039 89 N/A 4,128

Data processing and

software licenses 4,521 2,303 1,771 8,595 3,172 1,746 1,569 6,487 4,509 442 N/A 4,951

Legal and professional

expenses 1,580 9,645 3,578 14,803 213 3,163 3,384 6,760 2,654 479 N/A 3,133

Other expense 3,954 6,812 5,161 15,927 5,202 3,026 5,658 13,886 7,783 1,686 N/A 9,469

BaaS loan expense — 86,900 — 86,900 — 53,294 — 53,294 — 2,976 N/A 2,976

BaaS fraud expense — 7,165 — 7,165 — 29,571 — 29,571 — 1,505 N/A 1,505

Total noninterest

expense 37,974 138,323 28,480 204,777 33,019 109,124 24,631 166,774 51,547 11,716 N/A 63,263

Net income before income

taxes $ 45,115 $ 32,378 $ (20,360) $ 57,133 $ 49,874 $ 22,619 $ (21,872) $ 50,621 $ 30,895 $ 3,482 N/A $ 34,377

Income taxes 9,913 7,116 (4,475) 12,554 10,068 4,248 (4,320) 9,996 6,638 734 N/A 7,372

Net Income 35,202 25,262 (15,885) 44,579 39,806 18,371 (17,552) 40,625 24,257 2,748 N/A 27,005

Net interest income for the community bank was $79.2 million for the year ended December 31, 2023, an increase of $781,000, or 1.0%, compared to $78.4 million for the year ended December 31, 2022.

The increase in net interest income is largely due to loan growth and increased interest rates on new and variable rate loans.

As a result of the community bank having higher average loans than deposits for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022, intrabank interest expense for the community bank was $10.4 million for the twelve months ended December 31, 2023, compared to intrabank interest income of $796,000 for the twelve months ended December 31, 2022.

Increased interest rates also contributed to the increase in intrabank interest expense.

Provision for credit losses - loans for the community bank was $1.3 million for the year ended December 31, 2023, compared to $719,000 for the year ended December 31, 2022, as a result of loan growth.

Net charge-offs to average loans for the community bank segment have remained consistently low and were 0.00% and 0.03% for the twelve months ended December 31, 2023, and 2022, respectively.

Noninterest income for the community bank was $5.0 million, for the year ended December 31, 2023, a decrease of $193,000, or 3.7%, compared to $5.2 million for the year ended December 31, 2022.

Loan referral fees decreased $127,000 for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022.

The recognition of loan referral fees fluctuates in response to market conditions and as a result we may recognize more or less, or may not recognize any, loan referral fees in some periods.

Noninterest expenses for the community bank increased $5.0 million, or 15.0%, to $38.0 million as of December 31, 2023, compared to $33.0 million as of December 31, 2022.

The increase is largely due to increased salaries and employee benefits as a result of growth, higher data processing and software licensing costs related to new reporting software that helps monitor and assess risk and to automate and create efficiencies in reporting, and increased legal and professional fees associated with our infrastructure enhancement projects to improve processing, automate processes, reduce compliance costs, and enhance our data management.

Net interest income for CCBX was $151.9 million for the year ended December 31, 2023, an increase of $61.1 million, or 67.3%, compared to $90.8 million for the year ended December 31, 2022.

The increase in net interest income is due largely to loan growth from CCBX relationships.

During the year ended December 31, 2023, we sold $599.9 million in higher yielding CCBX loans that have a greater potential for credit deterioration in an effort to optimize our CCBX loan portfolio.

The impact of these sales and the changes we are making in an effort to optimize and strengthen the balance sheet are expected to be reflected in our earnings in future periods.

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to see lower net income in the short term with lower loan yields and compressed margins but we will work to continue growing the CCBX portfolio with loans that we believe will strengthen the balance sheet and provide for long term stability and profitability.

As a result of having higher average deposits than loans for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022 intrabank interest income for CCBX was $19.1 million for the twelve months ended December 31, 2023, compared to $4.1 million for the twelve months ended December 31, 2022.

Increased interest rates also contributed to the increase in intrabank interest income.

Provision for credit losses - loans for CCBX was $182.7 million for the year ended December 31, 2023, compared to $78.3 million for the year ended December 31, 2022, as a result of loan growth and higher loss rates from CCBX partners.

Noninterest income for CCBX was $201.7 million for the year ended December 31, 2023, an increase of $82.4 million, or 69.1%, compared to $119.3 million for the year ended December 31, 2022, due to an increase of $3.4 million in BaaS fee program income, which was the result of increased activity with Baas partners, including $101.4 million in BaaS credit enhancements related to the allowance for credit losses, and $22.4 million in BaaS fraud enhancements.

Noninterest expenses for CCBX increased $29.2 million, or 26.8%, to $138.3 million as of December 31, 2023, compared to $109.1 million as of December 31, 2022.

The increase in noninterest expense is largely due to growth from active CCBX relationships resulting in an increase in BaaS loan expense, BaaS fraud expense and increased salaries and benefits, for the twelve months ended December 31, 2023, compared to the twelve months ended December 31, 2022.

Also contributing to the increase in noninterest expense is higher legal and professional fees associated with our infrastructure enhancement projects to improve processing, automate processes, reduce compliance costs, and enhance our data management.

For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”.

Net interest income for treasury & administration was $7.6 million for the twelve months ended December 31, 2023, an increase of $5.1 million, or 201.7%, compared to $2.5 million for the twelve months ended December 31, 2022, as a result of increased interest rates.

Noninterest income increase $267,000, or 114.1%, to $501,000 for the twelve months ended December 31, 2023, compared to $234,000 for the twelve months ended December 31, 2022.

Noninterest expense increased $3.8 million, or 15.6%, to $28.5 million for the twelve months ended December 31, 2023, compared to $24.6 million for the twelve months ended December 31, 2022, largely as a result of increased salaries and employee benefits and legal and professional fees as a result of growth.

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Financial Condition

Our total assets increased $608.9 million to $3.75 billion, or 19.4% at December 31, 2023, compared to $3.14 billion at December 31, 2022.

This increase was largely the result of a $884.5 million increase in loans receivable, combined with a decrease of $489.2 million in interest earning deposits with other banks.

This increase was largely the result of a $398.8 million increase in loans receivable, combined with a increase of $142.4 million in interest earning deposits with other banks.

Loans Held For Sale

During the year ended December 31, 2022, $152.5 million in CCBX loans were transferred to loans held for sale, with $152.5 million in loans sold, at par, during the year ended December 31, 2022 and zero remaining in loans held for sale as of December 31, 2022.

During the year ended December 31, 2023, $599.9 million in CCBX loans were transferred to loans held for sale, with $599.9 million in loans sold during the year ended December 31, 2023 and zero remaining in loans held for sale as of December 31, 2023.

A portion of these loans were sold at par and a portion were sold with a gain on sale of $253,000.

Loan Portfolio

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As of December 31, 2023, loans receivable totaled $3.03 billion, an increase of $398.8 million, or 15.2%, compared to December 31, 2022.

Total loans receivable is net of $6.1 million in net deferred origination fees, $82,000 of which is attributed to PPP loans.

The increase includes CCBX loan growth of $665.8 million, or 192.1%, and community bank loan growth of $215.9 million, or 15.4%, which includes a $107.1 million, or 95.8%, reduction in PPP loans due to forgiveness and principal paydowns.

Additionally, unused loan commitments increased including unused commitments on capital call lines which increased $356.8 million to $772.7 million at December 31, 2022, compared to $416.0 million at December 31, 2021, which may translate into loan growth as the commitments are utilized.

Total loans receivable is net of $7.3 million in net deferred origination fees.

The increase includes CCBX loan growth of $183.4 million, or 18.1%, and community bank loan growth of $216.4 million, or 13.3%.

Loans as a percentage of deposits were 90.1% as of December 31, 2023, compared to 93.2% as of December 31, 2022.

We remain focused on serving our communities and markets by growing loans and funding those loans with customer deposits.

The increase in the loan to deposit ratio was due to loan growth.

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

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Loan Yield 10.60 % 8.12 %

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

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Commercial and industrial loans decreased $21.3 million, or 6.8%, to $291.3 million as of December 31, 2023, from $312.6 million as of December 31, 2022.

The decrease in commercial and industrial loans receivable over December 31, 2021 was due to $107.1 million in forgiven and repaid PPP loans and a decrease of $56.9 million in capital call lines, partially offset by a $57.5 million increase in other commercial and industrial loans.

The decrease in commercial and industrial loans receivable over December 31, 2022 was due to a decrease of $58.5 million in capital call lines and $1.7 million in forgiven and repaid PPP loans partially offset by a $38.9 million increase in other commercial and industrial loans.

Included in the commercial and industrial loan balance is $87.5 million and $146.0 million in capital call lines resulting from relationships with our CCBX partners as of December 31, 2023 and December 31, 2022, respectively.

As of December 31, 2022, there were $14.9 million in CCBX other commercial loans, compared to zero at December 31, 2021.

As of December 31, 2023, there were $54.3 million in CCBX other commercial loans, compared to $14.9 million at December 31, 2022.

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

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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.

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Also included in commercial and industrial loans is $3.0 million and $4.7 million in PPP loans as of December 31, 2023, and December 31, 2022, respectively.

As of December 31, 2022, $4.7 million in PPP loans remained with $82,000 in net deferred fees, which will be recognized in interest income in future periods.

The impact of PPP loans on the Company’s financial statements has significantly decreased as nearly all of the PPP loans have been paid off and/or forgiven.

The impact of PPP loans on the Company’s financial statements has significantly lessened as nearly all of the PPP loans have been paid off and/or forgiven.

Construction, Land and Land Development Loans .

Construction, land and land development loans increased $30.5 million, or 16.6%, to $214.1 million as of December 31, 2022, from $183.6 million as of December 31, 2021.

The increase is attributed to growth in community bank primarily for commercial construction and some land and land development loans.

Construction, land and land development loans decreased $57.0 million, or 26.6%, to $157.1 million as of December 31, 2023, from $214.1 million as of December 31, 2022.

The decrease is attributed in part to the completion of projects related to these community bank loans.

Unfunded loan commitments for construction, land and land development loans were $113.5 million at December 31, 2023, compared to $142.5 million at December 31, 2022.

Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2022, the economic environment is continuously changing and is impacted by increased inflation, higher interest rates, global unrest, the war in Ukraine, the political environment and trade issues that have resulted in some economic uncertainty and slowing in construction lending.

Although we have seen a strong commercial and residential real estate market in the Puget Sound region in 2023, the economic environment is continuously changing and is impacted by GDP, unemployment, inflation, higher interest rates, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment and trade issues that have resulted in some economic uncertainty and slowing in construction lending.

Construction, land and land development loans are comprised of loans to fund construction, land acquisition and land development construction.

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Residential Real Estate Loans .

Our one-to-four family residential real estate loans increased $244.8 million, or 119.8%, to $449.2 million as of December 31, 2022, from $204.4 million as of December 31, 2021 largely due to an increase of $207.7 million in CCBX loans.

CCBX home equity lines of credit are secured by residential real estate and are accessed by using a credit card.

We originate one-to-four family residential real estate adjustable-rate mortgage (“ARM”), loans for our portfolio and operate as a mortgage broker for mortgage lenders we have agreements with for customers who want a 15-year to 30-year, fixed-rate mortgage loan.

As of December 31, 2022, the balance of our ARM portfolio loans was $28.0 million, compared to $22.2 million at December 31, 2021.

Our ARM loans typically do not meet the guidelines for sale in the secondary market due to characteristics of the property, the loan terms or exceptions from agency underwriting guidelines, which enables us to earn a higher interest rate.

We also purchase residential mortgages originated through other financial institutions to hold for investment with the intent to diversify our residential mortgage loan portfolio, meet certain regulatory requirements and increase our interest income.

Our one-to-four family residential real estate loans increased $14.3 million, or 3.2%, to $463.4 million as of December 31, 2023, from $449.2 million as of December 31, 2022 due to an increase of $20.8 million in community bank loans partially offset by a decrease of $6.5 million in CCBX loans.

As of December 31, 2023, there were $238.0 million in CCBX home equity loans included in residential real estate, compared to $244.6 million at December 31, 2022.

These home equity lines of credit are secured by residential real estate and are accessed by using a credit card.

We sold $321.5 million in CCBX residential real estate loans during the year ended December 31, 2023.

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 December 31, 2022, we held $9.4 million in purchased residential real estate mortgage loans, compared to $11.9 million at December 31, 2021.

These purchased loans typically are variable rate and are collateralized by one-to-four family residential real estate.

As of December 31, 2023 and December 31, 2022, we held $8.1 million and $9.4 million, respectively, 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.

We also make one-to-four family loans to investors to finance their rental properties and to business owners to secure their business loans.

As of December 31, 2022, residential real estate loans made to investors and business owners totaled $140.7 million.

As of December 31, 2021, residential real estate loans made to investors and business owners totaled $114.0 million.

As of December 31, 2022, there were $244.6 million in CCBX home equity loans included in residential real estate, compared to $36.9 million at December 31, 2021, 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.

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 as a result of market conditions in the area in which the real estate is

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 increased $213.2 million, or 25.5%, to $1.05 billion as of December 31, 2022, from $835.6 million as of December 31, 2021.

Commercial real estate loans increased $254.8 million, or 24.3%, to $1.30 billion as of December 31, 2023, from $1.05 billion as of December 31, 2022.

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These increases, which occurred across the various segments of our portfolio, were due to our commitment to continue growing the portfolio in the Puget Sound region.

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At December 31, 2023, approximately 33.6% of the commercial real estate loan portfolio consisted of fixed rate loans.

Commercial real estate loans represented 39.8% of our loan portfolio at December 31, 2022 and are historically our largest source of revenue.

Commercial real estate loans represented 43.0% of our loan portfolio at December 31, 2023.

As of December 31, 2023, we held $43.0 million in purchased commercial real estate loans, compared to $42.4 million at December 31, 2022.

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Consumer and other loans increased $209.3 million, or 34.4%, to $818.0 million, from $608.8 million as of December 31, 2022, as a result of growth in CCBX loans originated through our partners.

We sold $278.4 million in CCBX consumer and other loans during the year ended December 31, 2023.

We intentionally reduced the CCBX portfolio in an effort to optimize and strengthen our balance sheet and expect that additional loans will be sold in the coming months as we continue working to optimize our balance sheet.

We will continue growing our CCBX portfolio with loans that we believe are lower risk and more aligned with our long term portfolio and profitability objectives.

CCBX consumer loans totaled $816.4 million as of December 31, 2023, compared to $607.0 million at December 31, 2022.

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Total $ 418,627 $ 1,433,685 $ 1,021,007 $ 160,073 $ 3,033,392

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The following table sets forth all loans at December 31, 2023, that are due after December 31, 2024, and have either fixed interest rates or floating or adjustable interest rates:

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The following table summarizes our exposure by industry for our commercial real estate portfolio as of December 31, 2023:

(dollars in thousands;

unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans

(dollars in thousands) Outstanding Balance Available Loan Commitments Total Outstanding Balance & Available Commitment % of Total Loans

(Outstanding Balance &

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Average Loan Balance Number of Loans

Community bank commercial real estate loans

Apartments $ 356,046 $ 10,783 $ 366,829 6.8 % $ 3,359 106

Hotel/Motel 172,437 2,345 174,782 3.2 6,387 27

Retail 82,257 4,116 86,373 1.8 904 91

Office 101,205 3,744 104,949 2.2 1,043 97

Mixed use 83,640 4,632 88,272 1.8 950 88

Convenience Store 132,007 1,086 133,093 2.5 2,164 61

Warehouse 114,572 2,166 116,738 2.2 1,975 58

Retail 101,688 719 102,407 1.9 987 103

Mixed use 93,850 3,475 97,325 1.8 1,079 87

Office 89,007 3,447 92,454 1.7 989 90

Mini Storage 65,731 23,979 89,710 1.7 3,130 21

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Total $ 1,303,533 $ 54,289 $ 1,357,822 25.2 % $ 1,928 676

As illustrated in the table below, our CCBX partners originate a large number of mostly smaller dollar loans, resulting in an average consumer loan of just $1,400.

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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 $1,200.

The following table summarizes our exposure by category for our consumer and other loan portfolio as of December 31, 2023:

(dollars in thousands;

unaudited) Outstanding Balance Available Loan Commitments Total Exposure (1)

(dollars in thousands) Outstanding Balance Available Loan Commitments Total Outstanding Balance & Available Commitment (1)

% of Total Loans

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CCBX consumer loans

Installment loans $ 320,017 $ — $ 320,017 6.6 % $ 1.5 211,547

Credit cards $ 505,837 $ 1,014,959 $ 1,520,796 28.3 % $ 1.6 308,955

Installment loans 302,241 134 302,375 5.6 1.1 266,203

Lines of credit 5,788 63 5,851 0.1 0.1 102,805

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Community bank consumer loans

Lines of credit 162 1,116 1,278 0.0 3.4 47

Installment loans 1,151 — 1,151 0.0 57.6 20

Lines of credit 147 582 729 0.0 3.5 42

Other loans 330 — 330 0.0 1.1 314

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The following table summarizes our exposure by category for our residential real estate portfolio as of December 31, 2023:

(dollars in thousands;

unaudited) Outstanding Balance Available Loan Commitments Total Exposure (1)

(dollars in thousands) Outstanding Balance Available Loan Commitments Total Exposure (1)

% of Total Loans

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See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

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The following table summarizes our concentration by industry for our commercial and industrial loan portfolio as of December 31, 2023:

(dollars in thousands;

unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans

(dollars in thousands) Outstanding Balance Available Loan Commitments Total Outstanding Balance & Available Commitment (1)

% of Total Loans

(Outstanding Balance &

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Capital Call Lines $ 87,494 $ 608,837 $ 696,331 12.9 % $ 537 163

$ 146,029 $ 772,732 $ 918,761 19.0 % $ 859 170

Construction/Contractor Services 24,360 31,020 55,380 1.0 129 189

Retail 52,208 1,842 54,050 1.0 18 2,887

Financial Institutions 48,648 — 48,648 0.9 4,054 12

Manufacturing 13,341 4,793 18,134 0.4 226 59

Medical / Dental / Other Care 20,732 3,852 24,584 0.5 942 22

Retail 15,991 6,245 22,236 0.5 26 623

Manufacturing 8,022 3,967 11,989 0.2 187 43

Groups < 0.20% of total 49,830 45,453 95,283 1.8 67 744

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The following table details our concentration by category for our construction, land and land development loan portfolio as of December 31, 2023:

(dollars in thousands;

unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans

(dollars in thousands) Outstanding Balance Available Loan Commitments Total Outstanding Balance & Available Commitment % of Total Loans

(Outstanding Balance &

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Average Loan Balance Number of Loans

Community bank construction, land and land development loans

Commercial construction $ 81,489 $ 85,584 $ 167,073 3.1 % $ 5,433 15

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Total $ 157,100 $ 113,534 $ 270,634 5.0 % $ 1,746 90

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Nonperforming Assets

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The increase in nonperforming assets was due to a $20.4 million increase in CCBX partner loans that are 90 days or more past due and still accruing interest.

Community bank nonaccrual loans increased $6.9 million during the year ended December 31, 2022 primarily due to the addition of one new nonaccrual loan partially offset by other nonaccrual principal reductions/charge-offs.

The $6.9 million nonaccrual balance in commercial real estate loans shown below consists of one loan, is well secured with an original loan to value ratio of 62%, and an updated loan to value ratio of 75% as of January 2023.

Management anticipates this loan being resolved in the first half of 2023.

Additionally, community bank nonaccrual loans increased $235,000 during the twelve months ended December 31, 2023 to $7.3 million and includes a multifamily loan for $6.9 million which we believe is well secured.

Our community bank credit quality remains strong, as demonstrated by the low level of community bank charge-offs and nonperforming loan balance for the year ended December 31, 2023.

CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses.

Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses.

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).

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

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).

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The following table presents information regarding community bank and CCBX nonperforming assets at the dates indicated:

(dollars in thousands) As of December 31, 2023 As of December 31, 2022

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Repossessed assets — —

Troubled debt restructurings, accruing — —

Modified loans for borrowers experiencing financial difficulty — —

Total nonperforming assets $ 53,839 $ 33,175

2 unchanged sentences

Total nonperforming assets to total assets 1.43 % 1.06 %

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The following tables detail the community bank and CCBX nonperforming assets which are included in the total nonperforming assets table above.

15 unchanged sentences

Total nonperforming assets $ 7,315 $ 7,080

Total nonperforming community bank loans to total loans receivable 0.24 % 0.27 %

(dollars in thousands;

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Total nonperforming assets $ 46,524 $ 26,095

Potential Problem Loans

From a credit risk standpoint, we classify most categories of our loans in one of five categories:

pass, other loans especially mentioned, substandard, doubtful or loss.

Within the pass category, we classify loans into one of the following five subcategories based on perceived credit risk, including repayment capacity and collateral security:

minimal risk, low risk, modest risk, average risk and acceptable risk.

For consumer loans we follow the uniform retail credit classification approach, where we classify loans into three categories:

pass, substandard (over 90 days and still accruing) and loss (installment/closed-end, and revolving/open-end consumer loans originated through CCBX lending partners more than 120 and 180 days past due, respectively).

The classifications of loans reflect a judgment about the risks of default and loss given default.

We review the risk ratings of our credits on an annual basis, or more frequently if circumstances warrant.

Risk ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit as of each monthly reporting period.

Our methodology is structured so that specific reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

• Credits rated as other loans especially mentioned show clear signs of financial weaknesses or deterioration in creditworthiness;

however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term.

Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.

• Credits rated as substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses in the collateral for the loan.

A protracted workout on these credits is a distinct possibility.

Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower.

Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

• Credits rated as doubtful have weaknesses of substandard assets that are sufficient to make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.

• Credits rated as loss are charged-off.

We have no expectation of the recovery of any payments in respect of credits rated as loss.

• CCBX credits are rated following the uniform retail credit classification approach, where we classify loans into three categories:

Installment/closed-end, and revolving/open-end consumer loans originated through CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively and an

allowance is recorded through provision expense for these probable incurred losses.

For installment/closed-end and revolving/open-end consumer loans originated through CCBX lending partners with balances outstanding beyond 120 days and 180 days, respectively, principal and capitalized interest outstanding is charged off against the allowance and accrued interest outstanding is reversed against interest income.

The following table summarizes the internal ratings of our loans as of the dates indicated:

As of December 31, 2022

Mentioned Sub-

Standard Doubtful Total

Total nonperforming CCBX loans to total loans receivable 1.54 % 0.99 %

As of December 31, 2023, $44.3 million of the $46.5 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 - Loans

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.

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

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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:

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.

Based on this analysis, the Company records a provision for credit losses - loans to maintain the allowance at appropriate levels.

As of December 31, 2023, the allowance for credit losses totaled $117.0 million, or 3.86% of total loans.

As of December 31, 2022, the allowance for loan losses totaled $74.0 million, or 2.82% of total loans.

Effective January 1, 2023 the Company implemented the CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the incurred loss model, which is what we were previously using.

As a result of implementing CECL, there was a one-time adjustment to the 2023 opening allowance balance of $3.9 million.

The day one CECL adjustment for community bank loans included a reduction of $310,000 to the community bank allowance driven by the reversal of the unallocated balance and a reduction of $340,000 related to the community bank unfunded commitment reserve also driven by the reversal of the unallocated balance.

This was offset by an increase to the CCBX allowance for $4.2 million.

With the mirror image approach accounting related to the contingent credit enhancement asset for CCBX partner loans, there was a CECL day one increase to the indemnification asset in the amount of $4.5 million.

Net, the day one impact to retained earnings for the Bank’s transition to CECL was an increase of $954,000, excluding the impact of income taxes.

The increase in the Company’s allowance for credit losses for the year ended December 31, 2023 compared to December 31, 2022, is largely related to the provision for CCBX partner loans.

During the year ended December 31, 2023, a $182.7 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 $1.3 million was needed for the year ended December 31, 2023.

The economic environment is continuously changing with the GDP, inflation, higher interest rates, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment, including a potential shutdown of the U.S.

government, and trade issues that have resulted in some 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.

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Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying and/or reimbursing incurred losses.

In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and reclassified negative deposit accounts.

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.

BaaS fraud includes noncredit fraud losses on loans and deposits originated through partners.

Agreements with our CCBX partners also provide protection to the Bank from fraud by indemnifying and/or reimbursing incurred fraud losses.

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 also pledge a cash reserve account at the Bank which the Bank can collect from when losses occur.

That account 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 its contracted obligations to replenish its cash reserve account then the Bank would be exposed to additional losses, as a result of this counterparty risk.

If a CCBX partner does not replenish its cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements.

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

December 31, 2023 December 31, 2022

(dollars in thousands;

Commercial and industrial loans $ 304,840 $ 7,219 $ 569 $ - $ 312,628

Real estate loans:

Construction, land, and land development 206,304 7,685 66 - 214,055

Residential real estate 448,185 96 876 - 449,157

Commercial real estate 1,030,650 11,201 6,901 - 1,048,752

Consumer and other loans 583,956 - 24,815 - 608,771

$ 2,573,935 $ 26,201 $ 33,227 $ - 2,633,363

Less net deferred origination fees (6,107)

Loans receivable $ 2,627,256

As of December 31, 2021

Mentioned Sub-

Standard Doubtful Total

unaudited) Community Bank CCBX Total Community Bank CCBX Total

Gross charge-offs $ 64 $ 151,933 $ 151,997 $ 428 $ 33,321 $ 33,749

Gross recoveries (12) (7,019) (7,031) (46) (36) (82)

Net charge-offs $ 52 $ 144,914 $ 144,966 $ 382 $ 33,285 $ 33,667

Net charge-offs to

average loans 0.00 % 11.97 % 4.94 % 0.03 % 4.48 % 1.49 %

December 31, 2021

(dollars in thousands;

Commercial and industrial loans $ 416,642 $ 2,180 $ 238 $ - $ 419,060

Real estate loans:

Construction, land, and land development loans 183,594 - - - 183,594

Residential real estate loans 204,173 122 94 - 204,389

Commercial real estate loans 824,676 10,911 - - 835,587

Consumer and other loans 107,404 - 1,467 - 108,871

$ 1,736,489 $ 13,213 $ 1,799 $ - 1,751,501

Less net deferred origination fees (8,766)

Loans receivable $ 1,742,735

Allowance for Loan Losses

We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio.

The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts.

In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined.

The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, and current economic factors.

See “—Critical Accounting Policies—Allowance for Loan Losses.”

In connection with our allowance for loan loss review, we consider risk elements applicable to particular loan types or categories in assessing the quality of individual loans.

Some of the risk elements we consider include:

• for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, professional or agricultural enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral;

• for commercial real estate loans, the debt service coverage ratio, operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type;

• for residential real estate loans, the borrower’s ability to repay the loan, including a consideration of the debt-to-income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral;

• for construction, land and land development loans, the perceived market feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan-to-value ratio.

• for consumer and other loans, the borrower’s ability to repay the loan, including a consideration of delinquency status, consumer credit scores, debt-to-income ratio and employment and income stability, and loan-to-value ratios, as applicable.

As of December 31, 2022, the allowance for loan losses totaled $74.0 million, or 2.82% of total loans.

As of December 31, 2021, the allowance for loan losses totaled $28.6 million, or 1.64% of total loans.

The increase in the Company’s allowance for loan losses for the year ended December 31, 2022 compared to December 31, 2021, is largely related to the provision for CCBX partner loans.

During the year ended December 31, 2022, a $78.3 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis.

The factors used in management’s analysis for community bank loan losses indicated that a provision for loan losses of $719,000 was needed for the year ended December 31, 2022.

The economic environment is continuously changing with increased inflation, higher interest rates, global unrest, the war in Ukraine, the political environment and trade issues that have resulted in some 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 loan losses.

Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by absorbing incurred losses.

In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans and negative deposit accounts.

The credit enhancement asset is relieved as credit enhancement recoveries are received from the CCBX partner.

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 losses by absorbing incurred credit losses, if our partner is unable to fulfill its contracted obligations to replenish its cash reserve account then the Bank would be exposed to additional loan and deposit losses, as a result of this counterparty risk.

The Bank would write-off any remaining receivable from the CCBX partner but would retain the full yield on the loan going forward, and BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.

The Company adopted the CECL accounting standard effective January 1, 2023 and accounted for the allowance for credit losses under the incurred loss model at December 31, 2022 and for prior periods.

The following table presents the loans receivable and allowance for loan losses by segment for the period indicated:

As of December 31, 2022 As of December 31, 2021

(dollars in thousands) Community Bank CCBX Total Community Bank CCBX Total

Loans receivable $ 1,614,751 $ 1,012,505 $ 2,627,256 $ 1,396,060 $ 346,675 $ 1,742,735

Allowance for loan losses (20,636) (53,393) (74,029) (20,299) (8,333) (28,632)

Allowance for loan losses to total loans receivable 1.28 % 5.27 % 2.82 % 1.45 % 2.40 % 1.64 %

The following tables present, as of and for the periods indicated, an analysis of the allowance for loan losses and other related data:

unaudited) Community Bank CCBX Total

Gross charge-offs $ 255 $ 385 $ 640

Gross recoveries (83) (12) (95)

Net charge-offs $ 172 $ 373 $ 545

Net charge-offs to average loans 0.01 % 0.25 % 0.03 %

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

As of or for the Year Ended December 31,

(dollars in thousands;

unaudited) 2023 2022 2021

Allowance at beginning of period $ 74,029 $ 28,632 $ 19,262

Provision for loan losses 79,064 9,915

Impact of adopting CECL (ASC 326) 3,852 — —

Provision for credit losses 184,043 79,064 9,915

Commercial and industrial loans 6,651 555 222

3 unchanged sentences

Commercial and industrial loans 5 40 67

Residential real estate 4 — —

Consumer and other 7,022 42 28

2 unchanged sentences

Allowance at end of period $ 116,958 $ 74,029 $ 28,632

Allowance for loan losses to nonaccrual loans 1045.61 % 12955.66 %

Allowance for credit losses to nonaccrual loans 1598.88 % 1045.61 % 12955.66 %

Allowance to nonperforming loans 217.24 % 223.15 % 1657.90 %

Allowance to loans receivable 3.86 % 2.82 % 1.64 %

Net charge-offs to average loans 1.49 % 0.03 %

The allowance for loan losses to nonaccrual loans ratio decreased as of December 31, 2022, compared to December 31, 2021 as a result of an increase of $6.9 million in nonaccrual community bank loans, combined with an increase of $45.4 million in the allowance for loan losses.

The decrease in the allowance to nonperforming loans ratio is due to an increase in CCBX loans 90+ days past due and accruing as a result of growth in the CCBX loan portfolio.

The increase in the allowance for loan losses for the year ended December 31, 2022 compared to the year ended December 31, 2021, is largely related to the increase in the allowance for loans originated through our CCBX partners.

CCBX partner agreements provide for, and the Company has collected in full, credit enhancements that cover the $33.3 million in net-charge-offs on CCBX loans for the year ended December 31, 2022.

At December 31, 2022, the allowance for loan losses for CCBX partner loans totaled $53.4 million, compared to $8.3 million at December 31, 2021 .

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

December 31, 2022 December 31, 2021

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The allowance for credit losses to nonaccrual loans ratio increased as of December 31, 2023, compared to December 31, 2022 as a result of an increase of $235,000 in nonaccrual community bank loans, combined with an increase of $42.9 million in the allowance for credit losses.

The increase in the allowance for credit losses for the twelve months ended months ended December 31, 2023 compared to the twelve months ended months ended December 31, 2022, is largely related to the increase in the allowance for loans originated through our CCBX partners.

CCBX partner agreements provide credit enhancements that cover the $144.9 million in net charge-offs on CCBX loans for the twelve months ended months ended December 31, 2023.

At December 31, 2023, the allowance for credit losses for CCBX partner loans totaled $95.4 million, compared to $53.4 million at December 31, 2022.

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

As of December 31, 2023 As of December 31, 2022

(dollars in thousands;

unaudited) Community Bank CCBX Total Community Bank CCBX Total

Gross charge-offs $ 428 $ 33,321 $ 33,749 $ 255 $ 385 $ 640

Gross recoveries (46) (36) (82) (83) (12) (95)

Net charge-offs $ 382 $ 33,285 $ 33,667 $ 172 $ 373 $ 545

Net charge-offs to average loans 0.03 % 4.48 % 1.49 % 0.01 % 0.25 % 0.03 %

Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio.

We have not seen an increase in community bank loan losses due to COVID-19 as originally anticipated, as evidenced by the low level of charge-offs and nonperforming loans, however, the economic environment is continuously changing with increased inflation, higher interest rates, global unrest, the war in Ukraine, the political environment and trade issues that have resulted in some economic uncertainty.

If economic conditions worsen then the U.S., 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 loan losses.

The following table shows the allocation of the allowance for loan losses among loan categories and certain other information as of the dates indicated.

The allocation of the allowance for loan losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions.

Loans receivable $ 1,830,154 $ 1,195,938 $ 3,026,092 $ 1,614,752 $ 1,012,504 $ 2,627,256

Allowance for credit losses (21,595) (95,363) (116,958) $ (20,636) $ (53,393) (74,029)

Allowance for credit losses to

total loans receivable 1.18 % 7.97 % 3.86 % 1.28 % 5.27 % 2.82 %

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 low levels of charge-offs and nonperforming community bank loans, however, the economic environment is continuously changing with inflation, higher interest rates, GDP, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment and trade issues that have resulted in some economic uncertainty.

The following table shows the allocation of the allowance for credit losses among loan categories and certain other information as of the dates indicated.

The allocation of the allowance for credit losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions.

The total allowance is available to absorb losses from any loan category.

12 unchanged sentences

Unallocated — 1,165

Total allowance for loan losses $ 74,029 $ 28,632

Total allowance for credit losses $ 116,958 $ 74,029

We use our securities portfolio primarily as a source of liquidity and collateral that can be readily sold or pledged for public deposits or other business purposes.

1 unchanged sentence

Treasury securities.

The remainder of our securities portfolio was invested in municipal bonds, U.S.

Agency collateralized mortgage obligations and U.S.

The remainder of our securities portfolio was invested in U.S.

Agency collateralized mortgage

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obligations and U.S.

Agency residential mortgage-backed securities.

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 December 31, 2022, our loan-to-deposit ratio was 93.2% due to our significant growth in both loans and deposits.

At December 31, 2023, our loan-to-deposit ratio was 90.1% due to our strong growth in both loans and deposits.

Our securities portfolio represented less than 5% of assets.

1 unchanged sentence

As of December 31, 2023, the amortized cost of our investment securities totaled $150.9 million, an increase of $49.6 million, or 49.0%, compared to $101.3 million as of December 31, 2022.

The increase in the securities portfolio was due to the purchase of five Treasury securities for $135.0 million during the year ended December 31, 2022, to invest excess funds, replace maturing securities and pledge to secure public deposits and for other purposes as required or permitted by law, partially offset by $70.0 million in U.S.

Treasury maturities and other principal paydowns.

The increase in the securities portfolio was due to the purchase of 16 government agency backed securities for $50.2 million during the year ended December 31, 2023.

These securities were purchased for CRA purposes and placed in our held-to-maturity portfolio and the average yield of these securities is 5.22% for the year ended December 31, 2023.

Our investment portfolio consists of securities classified as available for sale and, to a lesser amount, held to maturity.

The carrying values of our investment securities classified as available for sale 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 December 31, 2022, our available for sale portfolio has an unrealized loss of $3.0 million, compared to an unrealized loss of $38,000 as of December 31, 2021.

As of December 31, 2023, our available for sale portfolio has an unrealized loss of $537,000, compared to an unrealized loss of $3.0 million as of December 31, 2022.

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

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As of December 31, 2023, we did not hold any Fannie Mae or Freddie Mac preferred stock, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, or second lien elements in our investment portfolio.

Our management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

As of December 31, 2023 and 2022, we did not own securities of any one issuer, other than the U.S.

Government and its agencies, for which aggregate adjusted cost exceeded 10.0% of consolidated shareholders’ equity.

Restricted equity securities totaled $7.5 million as of December 31, 2022 and $6.0 million as of December 31, 2021 The increase was attributable to net additions of Federal Reserve and FHLB stock.

Restricted equity securities totaled $6.8 million as of December 31, 2023 and $7.5 million as of December 31, 2022 The decrease was attributable to a reduction of the amount of FHLB stock that we are required to hold.

Federal Reserve and FHLB stock are carried at par and do not have a readily determinable fair value.

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The Company will reassess at each reporting period whether the equity investments without a readily determinable fair value qualifies to be measured at cost minus impairment.

As of December 31, 2022 and December 31, 2021 the Company held a $2.2 million equity interest in a specialized bank technology company which consists of 1.6 million shares of common stock and 873,853 preferred shares.

During the year ended December 31, 2021, the Company reassessed the value and recognized a $1.5 million unrealized holding gain as a

result of an observable price change.

During the year ended 2022, the Company reviewed the carrying value of $2.2 million and determined it was still the appropriate carrying value.

During the year ended December 31, 2022, the Company re-evaluated the value on a $500,000 equity investment in a technology company and recorded an impairment of $100,000.

This equity investment consists of 9,000 shares of stock and is carried at cost less impairment, which approximates its fair value.

Additionally, the Company contributed $350,000 in a technology company during the year ended December 31, 2022.

There was no equity ownership in this company as of December 31, 2021.

The Company invests in investment funds that are designed to help accelerate technology adoption at banks and has invested in three separate funds.

These funds are carried at fair value as reported by the funds During the year ended December 31, 2022, the Company contributed $349,000 with investment funds designed to help accelerate technology adoption at banks, and recognized losses of $53,000, resulting in an equity interest of $456,000 at December 31, 2022.

The Company has committed up to $988,000 in capital for these investment funds, however, the Company is not obligated to fund these commitments prior to a capital call.

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• As of December 31, 2023 and December 31, 2022 the Company has a $2.2 million equity interest in a specialized bank technology company.

• The Company has a $350,000 equity interest in a technology company as of the years ended December 31, 2023 and December 31, 2022.

• The Company contributed $50,000 in a technology company during the year ended December 31, 2023.

There was no equity ownership as of December 31, 2022.

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

For the Twelve Months Ended

(dollars in thousands) 2023 2022 2021

Carrying value, beginning of period $ 2,572 $ 2,322 850

Purchases 50 350 —

Observable price change — (100) 1,472

Carrying value, end of period $ 2,622 $ 2,572 $ 2,322

The Company has invested in funds that are accelerating technology for adoption by banks.

These equity investments are held at fair value, as reported by the funds.

During the year ended December 31, 2023, the Company contributed $74,500 with investment funds designed to help accelerate technology adoption at banks, and recognized net gains of $278,000, resulting in an equity interest of $809,000 at December 31, 2023.

The Company has committed up to $653,000 in capital for these equity funds.

One firm decided to wind down their technology fund and their fund balance decreased $176,000 in 2023, leaving $22,000 in that fund as of December 31, 2023.

The following table shows the activity in equity fund investments held at fair value for the dates shown:

For the Twelve Months Ended

(dollars in thousands) 2023 2022 2021

Carrying value, beginning of period 456 160 —

Purchases/capital calls/capital returns, net 75 349 163

Net change recognized in earnings 278 (53) (3)

Carrying value, end of period 809 456 160

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The following table sets forth the amortized cost of held to maturity securities and the fair value of available for sale securities, maturities and approximated weighted average yield based on estimated annual income divided by the average amortized cost of our securities portfolio as of the dates indicated.

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Agency collateralized mortgage obligations - 0.000 % - 0.000 % 43 2.924 % — 0.000 % 43 2.924 %

Agency residential mortgage-backed securities 1 2.751 % — 0.000 % - 0.000 % - 0.000 % 1 2.751 %

Municipals 250 3.750 % — 0.000 % - 0.000 % - 0.000 % 250 3.750 %

Total available-for-sale 99,461 2.138 % — 0.000 % 43 2.924 % — 0.000 % 99,504 2.138 %

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Total $ 99,461 2.138 % $ — 0.000 % $ 43 2.924 % $ 51,041 5.489 % $ 150,545 3.267 %

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 reciprocal deposits.

Reciprocal deposits enable us to provide an FDIC insured deposit option to customers that have balances in excess of the FDIC insurance limit.

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 reciprocal 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 in a reciprocal agreement.

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Additionally, we offer deposit products through our CCBX segment.

CCBX deposits are generally classified as interest bearing negotiable order of withdrawal (“NOW”) and money market accounts, and a portion of such CCBX deposits may be classified as brokered deposits as a result of the relationship agreement.

CCBX deposits are generally classified as interest bearing negotiable order of withdrawal (“NOW”) 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.

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Total deposits as of December 31, 2023 were $3.36 billion, an increase of $542.8 million, or 19.3%, compared to $2.82 billion as of December 31, 2022.

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We define core deposits as all deposits except time deposits and brokered deposits.

The $437.0 million increase in core deposits is also largely from growth in the CCBX segment, which accounted for $532.3 million of the increase, partially offset by a decrease of $95.3 million in community bank deposits.

Additionally, as of December 31, 2022 we have access to $225.0 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis.

Depending on the circumstances of how the Bank would retain these deposits and its relationship with the customer, these retained deposits could be classified as brokered deposits.

Included in total deposits is $1.28 billion in CCBX deposits, an increase of $563.0 million, or 78.6%, compared to $716.3 million as of December 31, 2021.

The $655.5 million increase in core deposits was largely a result of customer movement from noninterest to interest bearing accounts.

Our cost of deposits for the community bank was 1.57% for the three months ended December 31, 2023.

BaaS-brokered deposits are now classified as NOW accounts due to a change in the relationship agreement with one of our partners;

these deposits increased $153.1 million to $254.7 million as of December 31, 2023.

Additionally, we started sweeping deposits for an additional CCBX partner as a result of deposit growth, which increased the amount of CCBX deposits that were transferred off balance sheet for increased FDIC insurance coverage to $69.4 million as of December 31, 2023.

Included in total deposits is $1.86 billion in CCBX deposits, an increase of $583.5 million, or 45.6%, compared to $1.28 billion as of December 31, 2022.

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 NOW and money market accounts, and a portion of such CCBX deposits may be classified as brokered deposits as a result of the relationship agreement.

During the first and second quarter of 2022, the majority of CCBX deposits were reclassified from noninterest bearing to interest bearing.

This is because the current rate exceeds the minimum interest rate set in their respective program agreements, as a result of the increases in interest rates by the FOMC.

Total noninterest bearing deposits as of December 31, 2022 were $775.0 million, a decrease of $580.9 million, or 42.8%, compared to $1.36 billion as of December 31, 2021.

The $580.9 million decrease is primarily the result of reclassifying CCBX noninterest bearing deposits to interest bearing as a result of the increase in interest rates by the FOMC, partially offset by growth in CCBX noninterest deposits and growth in community bank noninterest deposits.

The deposits from our CCBX segment are generally classified as interest bearing NOW and money market accounts.

Our cost of deposits for the CCBX segment was 4.55% for the year ended December 31, 2023.

Total noninterest bearing deposits as of December 31, 2023 were $625.2 million, a decrease of $149.8 million, or 19.3%, compared to $775.0 million as of December 31, 2022.

Noninterest bearing deposits represent 18.6% and 27.5% of total deposits for December 31, 2023 and December 31, 2022, respectively.

Total interest bearing account balances, excluding time deposits, as of December 31, 2022 were $2.01 billion, an increase of $1.05 billion, or 108.7%, compared to $964.4 million as of December 31, 2021.

The $1.05 billion increase is the result of reclassifying CCBX noninterest bearing deposits to interest bearing as a result of the increases in interest rates by the FOMC, combined with CCBX growth in interest bearing deposits partially offset by community bank decrease in interest bearing deposits of $70.2 million.

Included in interest bearing account balances is $101.5 million in BaaS-brokered deposits, an increase of $30.8 million from December 31, 2021.

Also included in interest bearing deposits is $12.5 million in reciprocal deposits.

Community bank noninterest bearing deposits represent 37.5% and 45.2% of community bank deposits as of December 31, 2023 and December 31, 2022, respectively.

Total interest bearing account balances, excluding time deposits, as of December 31, 2023 were $2.72 billion, an increase of $703.7 million, or 35.0%, compared to $2.01 billion as of December 31, 2022.

The $703.7 million increase is the due in part to former BaaS-brokered deposits now being classified as NOW accounts due to a change in the relationship agreement with one of our partners in the first quarter of 2023, combined with CCBX growth in interest bearing deposits and a community bank increase in interest bearing deposits of $103.1 million.

Included in total deposits is $340.1 million in IntraFi network reciprocal NOW and money market sweep accounts as of December 31, 2023, which provides our customers with fully insured deposits through a sweep and exchange of deposits with other financial institutions.

Total time deposit balances as of December 31, 2023 were $18.4 million, a decrease of $11.1 million, or 37.7%, from $29.4 million as of December 31, 2022.

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Total core deposits 3,342,004 99.5 2,686,528 95.3

BaaS-brokered deposits 101,546 3.6 70,757 3.0

Brokered deposits 1 — 101,546 3.6

Time deposits less than $100,000 8,109 0.2 12,596 0.5

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3.36 % 1.56 %

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The following table presents the community bank deposits which are included in the total deposit portfolio table above:

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Weighted average maturity (in years) 0.75 0.76

Average deposits for the year ended December 31, 2022, were $2.67 billion, an increase of $766.1 million, or 40.3%, compared $1.90 billion for the year ended December 31, 2021.

The increase in average deposits was primarily due to an increase in core deposits, both in noninterest bearing deposits and in interest bearing deposits.

Average deposits for the year ended December 31, 2023, were $3.10 billion, an increase of $436.5 million, or 16.4%, compared to $2.67 billion for the year ended December 31, 2022.

The increase in average deposits was primarily due to an increase in core deposits, in interest bearing deposits.

Included in this increase is growth in CCBX deposits.

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The average rate paid on total interest-bearing deposits was 2.87% for the year ended December 31, 2023, compared to 0.71% for the year ended December 31, 2022.

The average rate paid on total interest-bearing deposits was 1.10% for the year ended December 31, 2022, compared to 0.26% for the year ended December 31, 2021.

The average rate paid on BaaS-brokered deposits increased 1.11% for the year ended December 31, 2022, compared to December 31, 2021, and NOW and money market accounts increased 0.93%, for the year ended December 31, 2022.

The increase in average rate paid on deposit accounts for the year ended December 31, 2022, is the result of the increased Fed funds rates throughout 2022.

Any further changes to the Fed funds rate and rate pressure from market competition is expected to continue to impact future cost of deposits and our pricing strategies.

The average rate paid on total interest-bearing deposits was 3.72% for the

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year ended December 31, 2023, compared to 1.10% for the year ended December 31, 2022.

NOW and money market account interest rates increased 2.72%, for the year ended December 31, 2023.

The increase in average rate paid on deposit accounts for the year ended December 31, 2023, is the result of the increased interest rates by the FOMC.

Further changes to the Fed funds rate and rate pressure from market competition is expected to continue to impact future cost of deposits and our pricing strategies.

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

For the Year Ended December 31,

2023 2022 2021

(dollars in thousands) Average

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Our cost of total interest-bearing liabilities was 3.75% and 1.16% for the years ended December 31, 2023 and 2022, respectively.

The increase in our cost of deposits in 2022 was primarily due to rate increases from the Federal Reserve.

We actively manage our interest rates on deposits, however, rate changes from the Federal Reserve and competition can and do impact our deposit costs.

The increase in our cost of deposits in 2023 was primarily due to rate increases from the FOMC.

We actively manage our interest rates on deposits, however, rate changes from the FOMC and competition can and do impact our deposit costs.

Uninsured Deposits

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Deposits that exceed insurance limits are uninsured.

At December 31, 2022, deposits totaled $2.82 billion, of which total estimated uninsured deposits were $835.8 million.

At December 31, 2021, deposits totaled $2.36 billion, of which total estimated uninsured deposits were $823.5 million.

At December 31, 2023, deposits totaled $3.36 billion, of which total estimated uninsured deposits were $558.6 million, or 16.6% of total deposits.

At December 31, 2022, deposits totaled $2.82 billion, of which total estimated uninsured deposits were $835.8 million, or 29.7% of total deposits.

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.

The table below shows the estimated uninsured time deposits, by account, for the maturity periods indicated:

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Total $ 1,691

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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.

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As of December 31, 2023, and December 31, 2022, Federal Reserve borrowings against our line of credit totaled zero.

We are able to pledge additional loans to increase out borrowing capacity, should we decide to do so.

Paycheck Protection Program Liquidity Facility.

The borrowing was paid in full in June 2021 and as of December 31, 2022 and 2021, no PPPLF advances were outstanding.

To bolster the effectiveness of the SBA’s PPP loan program, the Federal Reserve supplied liquidity to participating financial institutions through term financing backed by PPP loans to small businesses.

The PPP provided loans to small businesses so that they can keep their employees on the payroll and pay for other allowed expenses.

If the borrowers meet certain criteria, the loan may be forgiven.

The PPPLF extended credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.

The interest rate was 0.35% and as PPP loans were paid down, the borrowing line also had to be paid down.

PPPLF advances were a new borrowing arrangement beginning in 2020 that had favorable capital treatment and was specific to the PPP loan program.

The last day to take new advances on the PPPLF was July 31, 2021.

The table below provides details on PPPLF advance borrowings for the periods indicated:

As of and For the Year Ended December 31,

(dollars in thousands) 2021

Maximum amount outstanding at any month-end during period:

Average outstanding balance during period:

Weighted average interest rate during period:

Balance outstanding at end of period:

Weighted average interest rate at end of period:

Additional loans were pledged during 2023 to significantly increase the borrowing capacity of the Bank in the event of a liquidity crisis.

Federal Home Loan Bank Advances.

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This included a $10.0 million advance that would have matured in March of 2023 and $15.0 million advance that would have matured in March 2025.

We have sufficient liquidity for our current loan demand, and

with no prepayment penalty for early repayment, management opted to repay these term advances and save the unnecessary interest expense .

We have sufficient liquidity for our current loan demand, and with no prepayment penalty for early repayment, management opted to repay these term advances and save the unnecessary interest expense .

The following table presents details on FHLB advance borrowings for the periods indicated:

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Maximum amount outstanding at any month-end during period:

$ 24,999 $ 24,999

Average outstanding balance during period:

$ 6,029 $ 24,999

Weighted average interest rate during period:

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These debentures are the Trust’s only assets and the interest payments from the debentures finance the distributions paid on the preferred securities.

The debentures bear interest at a rate per annum equal to the 3-month LIBOR plus 2.10%.

Prior to June 30, 2023, the debentures bore interest at a rate per annum equal to the 3-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 0.26%.

The effective rate as of December 31, 2023 and 2022, was 7.75% and 6.87%, respectively.

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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.

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.

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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.

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In November 2022, the Company issued a subordinated note in the amount of $20.0 million.

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We may redeem the subordinated note, 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.

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Liquidity and Capital Resources

Liquidity Management

Liquidity refers to our capacity to meet our cash obligations at a reasonable cost.

Liquidity refers to our capacity to meet our cash obligations when they come due 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.

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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.

If a relationship with a large CCBX partner terminates, the exit of those deposits could have an adverse impact on liquidity so we model a deposit run-off scenario that simulates the loss of deposits from our largest CCBX deposit partner.

Partner program agreements govern the relationship and are valid for a given period of time.

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those options are more fully discussed below.

As of December 31, 2022, we have 1 partner with deposits that are in excess of 10% of total deposits and represent 25% of total deposits.

The Company also considers the immediate loss of a significant deposit partner as a liquidity scenario in its liquidity management process.

As of December 31, 2023, we have 2 partners with deposits that are in excess of 10% of total deposits and represent 40% of total deposits.

Our deposit concentration limit for any one partner is 30% 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.

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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.

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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.

Additionally, the Bank, as of December 31, 2022, has access to $225.0 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis.

The Bank could retain these deposits for liquidity and funding purposes if needed.

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 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 notes and junior subordinated debentures.

The Company has pledged loans and securities totaling $1.03 billion and $220.1 million at December 31, 2023 and December 31, 2022, 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 $640.1 million from FHLB and the FRB discount window at December 31, 2023.

There were no borrowings taken under these facilities during the twelve-months ended December 31, 2023 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 ($558.6 million at December 31, 2023

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and alternative sources of funds including the capacity to borrow up to $640.1 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 $1.17 billion represented 34.9% of total deposits and exceeded the $558.6 million in uninsured deposits as of December 31, 2023.

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 $340.1 million and $12.5 million at December 31, 2023 and December 31, 2022, respectively.

Uninsured deposits totaled $558.6 million at December 31, 2023 and totaled $835.8 million at December 31, 2022.

The Bank significantly increased its liquidity and ability to borrow funds on a same day basis to help it prepare and avoid the liquidity events that besieged regional banks during the liquidity crisis in March 2023 which resulted in two bank failures due to liquidity.

The board of directors adopted a policy requiring management take various actions, in its discretion, to return the liquidity ratio 10% or greater within 10 business days of the liquidity ratio being below 10% before the Bank’s liquidity contingency funding plan would be invoked.

If the liquidity ratio goes below 7.5% then the board of directors will be notified immediately, and the liquidity contingency funding plan would be invoked until the ratio is returned to 10% or more.

These liquidity risk measures provide the board of directors and management with a framework for managing liquidity risk and taking action early so liquidity events are avoided or managed in a timely manner.

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 it has sufficient funds for its operating and debt costs.

During the year ended December 31, 2022, the Company contributed $21.0 million in capital to the Bank.

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 year ended December 31, 2023, the Company contributed $15.0 million to the Bank.

The Company currently holds $5.5 million in cash for debt servicing and operating purposes.

In addition, the Bank can

declare and pay dividends to the Company if needed, to meet the Company’s debt and operating expenses.

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 if needed, 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 the Bank established a minimum liquidity ratio of 5% of assets, and usually maintains a liquidity ratio in excess of 10%.

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 the Bank established a minimum (regulatory calculation) liquidity ratio of 10%, and usually targets a liquidity ratio between 12% and 15%.

Both of these minimum liquidity levels are on-balance sheet sources.

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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 required to meet the generally applicable regulatory capital requirements of the Federal Reserve and the FDIC at the company and bank level.

Historically, the Company had been operating under the Small Bank Holding Company Policy Statement, which exempts bank holding companies that have total consolidated assets of less than $3.0 billion and meet other criteria from the Federal Reserve’s risk-based- and leverage capital rules.

Because the Company’s total consolidated assets exceeded $3.0 billion as of September 30, 2022, the Company is no longer subject to the Federal Reserve’s Small Bank Holding Company Policy Statement and will be evaluated relative to the capital adequacy standards established by the Federal Reserve going forward.

We are subject to regulatory capital requirements at the bank and holding company level.

Because the Company’s consolidated assets exceeded $3.0 billion as of September 30, 2022, the Company is no longer subject to the Federal Reserve’s Small Bank Holding Company Policy Statement and is evaluated relative to the capital adequacy standards established by the Federal Reserve.

A bank holding company that crosses the $3.0 billion total consolidated assets threshold as of June 30 of a particular year is no longer permitted to file reports as a small holding company beginning the following March.

The Company was not in excess of $3.0 billion as of June 30, 2022, and accordingly prepared and filed financial reports with the Federal Reserve as a small bank holding company.

Currently, the Federal Reserve assesses the capital position of the Company based on these reports by reviewing its debt-to-equity ratio and its capacity to serve as a source of strength to the Bank.

If the Company’s total consolidated assets remain in excess of $3.0 billion as of June 30, 2023, starting in March 2024 the Company will cease filing financial reports with the Federal Reserve as though it were a small bank holding company.

As of December 31, 2022, the Company was in compliance with all applicable regulatory capital requirements.

As of December 31, 2022, and December 31, 2021, the Bank was 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 our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings.

However, we expect to monitor and control our 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 that would allow the Company to raise additional capital in an amount up to $115.5 million.

The Company’s total assets were in excess of $3.0 billion as of June 30, 2023, and as a consequence, beginning in March 2024, the Company will no longer prepare and file financial reports with the Federal Reserve as a small bank holding company.

As of December 31, 2023, and December 31, 2022, 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, 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 $115.5 million.

The Company raised $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.

On November 1, 2022 the

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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:

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December 31, 2023

Leverage Capital (to average assets)

Tier 1 Leverage Capital (to average assets)

Company $ 298,920 8.10 % $ 147,616 4.00 % N/A N/A

Bank Only 333,848 9.06 % 147,469 4.00 % 184,336 5.00 %

Common Equity Tier I Capital (to risk-weighted assets)

Common Equity Tier 1 Capital (to risk-weighted assets)

Company 295,450 9.10 % 146,137 4.50 % N/A N/A

Bank Only 333,848 10.30 % 145,875 4.50 % 210,708 6.50 %

Tier I Capital (to risk-weighted assets)

Tier 1 Capital (to risk-weighted assets)

Company 298,920 9.20 % 194,849 6.00 % N/A N/A

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December 31, 2022

Leverage Capital (to average assets)

Tier 1 Leverage Capital (to average assets)

Company $ 204,585 8.07 % $ 101,460 4.00 % N/A N/A

Bank Only 201,783 7.96 % 101,350 4.00 % 126,687 5.00 %

Common Equity Tier I Capital (to risk-weighted assets)

Common Equity Tier 1 Capital (to risk-weighted assets)

Company 201,085 11.06 % 81,834 4.50 % N/A N/A

Bank Only 201,783 11.12 % 81,623 4.50 % 117,900 6.50 %

Tier I Capital (to risk-weighted assets)

Tier 1 Capital (to risk-weighted assets)

Company 204,585 11.25 % 109,112 6.00 % N/A N/A

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Bank Only 224,545 12.38 % 145,107 8.00 % 181,384 10.00 %

(1) This table presents the minimum capital adequacy requirements that apply to the Bank (excluding the capital conservation buffer) and the Company.

(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.

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Material Cash Requirements and Capital Resources

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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 December 31, 2022, we had $2.20 billion in commitments to extend credit, compared to $909.6 million as of December 31, 2021.

The $1.29 billion increase is largely attributed to growth in our CCBX segment, due to the addition of new partners, resulting in an increase of $1.25 billion in commitments to extend credit on CCBX loans.

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:

As of December 31, 2023 we had $2.34 billion in commitments to extend credit, compared to $2.20 billion as of December 31, 2022.

The $144.3 million increase is largely attributed to an increase of $222.2 million in consumer and other loan commitments, related to CCBX consumer loans, $163.9 million decrease in commercial and industrial capital call line commitments, $17.0 million decrease in commercial construction loans and $91.2 million increase in residential real estate commitments, related to CCBX loans.

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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) As of December 31, 2023 As of December 31, 2022

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The following table shows the CCBX maximum portfolio sizes by loan category as of December 31, 2023.

(dollars in thousands;

unaudited) Type of Lending Maximum Portfolio Size

As of December 31, 2023 As of December 31, 2022

(dollars in thousands) Type of Lending Maximum Portfolio Size Increase/(decrease)

Commercial and industrial loans:

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Other consumer and other loans Consumer - Secured Credit Builder & Unsecured consumer 709,108 190,240 518,868

$ 3,430,001 $ 2,505,000 $ 925,001

Total Existing Portfolio Size $ 1,195,938 $ 1,012,504 $ 183,434

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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.

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 December 31, 2022, $1.57 billion in commitments to extend credit are unconditionally cancelable, compared to $162.3 million at December 31, 2021.

As of December 31, 2023, $1.63 billion in commitments to extend credit are unconditionally cancelable, compared to $1.57 billion at December 31, 2022.

The increase in unconditionally cancelable commitments is attributed to growth in CCBX loans.

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Adequate cash levels are generated through profitability, repayments from loans and securities, deposit gathering activity, access to borrowing sources and periodic loan sales.

Selected Financial Information

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

Twelve Months Ended

2023 December 31,

2022 December 31,

2020 December 31,

2019 December 31,

Return on average assets 1.28 % 1.38 % 0.98 % 1.28 % 1.14 %

Return on average equity 16.41 % 18.24 % 11.44 % 11.29 % 11.40 %

Yield on earnings assets 9.82 % 6.68 % 4.21 % 4.90 % 4.72 %

Yield on loans receivable 10.60 % 8.12 % 4.64 % 5.38 % 5.18 %

Cost of funds 2.91 % 0.75 % 0.40 % 0.73 % 0.52 %

Cost of deposits 2.87 % 0.71 % 0.35 % 0.65 % 0.42 %

Net interest margin 7.10 % 5.97 % 3.83 % 4.23 % 4.24 %

Noninterest expense to average assets 5.90 % 5.65 % 2.47 % 3.01 % 3.09 %

Noninterest income to average assets 5.97 % 4.23 % 0.53 % 0.80 % 0.64 %

Efficiency ratio 45.92 % 56.26 % 58.14 % 61.79 % 65.08 %

Loans receivable to deposits (1)

90.1 % 93.2 % 108.9 % 97.0 % 95.6 %

(1) Including loans held for sale

CCBX – BaaS Reporting Information

During the year ended December 31, 2022, $76.4 million was recognized in noninterest income BaaS credit enhancements related to the establishment of a credit enhancement asset for future loan losses indemnified by our strategic partners and reserve 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 absorbing incurred losses on accounts originated through the partner.

In accordance with accounting guidance, we estimate and record a provision for probable losses on these CCBX loans and deposit overdrafts.

When the provision for loan losses and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through the recognition of noninterest income (BaaS credit enhancements) in recognition of the CCBX partner’s indemnification obligation and legal commitment to cover losses.

Incurred credit losses are recorded in the allowance for loan losses, and as the credit enhancement payments are received from the CCBX partner, the credit enhancement asset is relieved.

Agreements with our CCBX partners also provide protection to the Bank from fraud by absorbing incurred fraud losses.

Fraud losses are recorded when incurred as losses in noninterest expense, and the recovery received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement.

CCBX partners also pledge cash reserves in a restricted deposit 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 enhancements that provide protection to the Bank from credit and fraud losses by absorbing incurred credit and fraud losses, if our partner is unable to fulfill its contracted obligations beyond its cash reserve account then the Bank would be exposed to additional loan and deposit losses, as a result of this counterparty risk.

If a CCBX partner does not adequately replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements.

During the year ended December 31, 2023, $177.8 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 and/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.

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.

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includes noncredit fraud losses on loans and deposits originated through partners.

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 its contracted obligations to replenish its cash reserve account then the Bank would be exposed to additional loan and deposit losses, as a result of this counterparty risk.

The Bank would write-off any remaining credit enhancement asset from the CCBX partner not covered by the cash pledge account but would retain the full yield and any fee income on the loan going forward, and BaaS loan expense for that CCBX partner would cease 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 enhancements, fraud enhancements and servicing CCBX loans.

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.

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Loan income and related loan expense Year.

(dollars in thousands;

unaudited) December 31,

(dollars in thousands) December 31,

2023 December 31,

2022 December 31,

BaaS loan interest income $ 204,458 $ 102,808 $ 6,532

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Net BaaS loan income (1)

117,558 49,514 3,556

Net BaaS loan income divided by average BaaS loans (1)

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(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.

The addition of new CCBX partners has resulted in increases in direct fees, expenses and interest for the year ended December 31, 2022 compared to the year ended December 31, 2021.

The increased activity of CCBX partners has resulted in increases in direct fees, expenses and interest for the year ended December 31, 2023 compared to the year ended December 31, 2022.

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.

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2023 December 31,

2022 December 31,

Loan interest income $ 204,458 $ 102,808 $ 6,532

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2023 December 31,

2022 December 31,

BaaS interest expense $ 71,646 $ 16,108 $ 99

Total BaaS interest expense $ 71,646 $ 16,108 $ 99

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(dollars in thousands;

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2023 December 31,

Program income:

2022 December 31,

BaaS program income:

Servicing and other BaaS fees $ 3,855 $ 4,408 $ 4,467

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Reimbursement of expenses 4,175 2,732 1,004

Program income 12,934 6,716

Indemnification income:

Credit enhancements 76,374 9,086

Fraud enhancements 29,571 1,505

Indemnification income 105,945 10,591

Total BaaS income $ 118,879 $ 17,307

BaaS program income 16,293 12,934 6,716

BaaS indemnification income:

BaaS credit enhancements 177,764 76,374 9,086

BaaS fraud enhancements 7,165 29,571 1,505

BaaS indemnification income 184,929 105,945 10,591

Total noninterest BaaS income $ 201,222 $ 118,879 $ 17,307

(dollars in thousands;

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2023 December 31,

2022 December 31,

BaaS loan expense $ 86,900 $ 53,294 $ 2,976

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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 financial measures are presented to illustrate the impact of BaaS loan expense on net loan income, yield on CCBX loans and interest rate spread.

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.

Net BaaS loan interest income interest rate spread is a non-GAAP measure that includes the impact of BaaS loan expense on interest rate spread.

The most directly comparable GAAP measure is interest rate spread .

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.

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

As of and for the Year Ended

(dollars in thousands;

unaudited) December 31,

(dollars in thousands) December 31,

2023 December 31,

2022 December 31,

Net BaaS loan income divided by average CCBX loans:

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Interest and earned fee income on CCBX loans (GAAP) 204,458 102,808 6,532

loan expense on CCBX loans (53,294) (2,976)

BaaS loan expense (86,900) (53,294) (2,976)

Net BaaS loan income $ 117,558 $ 49,514 $ 3,556

Net BaaS loan income divided by average CCBX loans 9.71 % 6.67 % 2.43 %

Net BaaS loan income interest rate spread:

CCBX interest rate spread (GAAP) 12.28 % 4.43 %

Net BaaS loan income divided by average CCBX loans 6.67 % 2.43 %

CCBX cost of funds 1.57 % 0.03 %

Net BaaS loan income interest

rate spread 5.10 % 2.40 %

Net interest margin, net of BaaS loan expense:

CCBX interest margin 9.65 % 8.84 % 4.40 %

CCBX earning assets 1,574,334 1,027,556 146,304

Net interest income 151,883 90,806 6,433

BaaS loan expense (86,900) (53,294) (2,976)

Net interest income, net of BaaS loan expense

$ 64,983 $ 37,512 $ 3,457

CCBX net interest margin, net of BaaS loan expense 4.13 % 3.65 % 2.36 %

Quantitative and Qualitative Disclosures about Market Risk

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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.

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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 Federal Open Market Committee 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 and 1.50% in the fourth quarter of 2022 with additional increases expected in the future.

The impact of this and any future increases will impact financial results.

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 and then pausing at an upper Fed Funds target range of 5.50% through the fourth quarter of 2023.

A potential decrease in rates is expected in the future although the timing and magnitude of such decreases is still uncertain.

The impact of this and any future changes will impact financial results.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business.

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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.

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

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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.

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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.

Non-parallel simulations are also conducted and involve analysis of net 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 interest 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:

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-300 basis points 2.1% (13.0)%

-400 basis points 2.2% (18.8)%

Dynamic Balance Sheet and Rate Shifts

6 unchanged sentences

-300 basis points (1.5)% (14.5)%

The results illustrate that the Company is asset sensitive and generally performs better in an increasing interest rate environment.

-400 basis points (2.8)% (20.8)%

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The results illustrate that the Company’s static balance sheet has shifted to liability sensitive, however, the dynamic balance sheet is fairly 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 adjust with market shifts.

For this CCBX portfolio, the offering rates on both the loans and the deposits nearly fully reprice with changes in market rates.

For the CCBX segment, the offering rates on the loan portfolio are modeled using partner contractual net yields which mostly adjust with market shifts.

For this CCBX portfolio, the offering rates on the majority of the loans and the deposits nearly fully reprice with changes in market rates.

However, during the fourth quarter 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 December 31, 2023 the overall Company’s funding mix is now 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.

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.

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However, other operating expenses do reflect general levels of inflation.

For further discussion of the risks to our business resulting from inflation, see “Item 1A.

Risk Factors” and the section captioned “Risks Related to Credit Matters-We are subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.”

Quantitative and Qualitative Disclosure About Market Risk

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis