What changed in this filing

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Item 1A. Risk Factors

2025-03-17 compared with 2024-03-15 · 87 added, 75 removed, 529 unchanged (23% of the section changed)

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Our business is subject to numerous material risks and uncertainties, including those described in Part I Item 1A.

“Risk Factors” in this Report on Form 10-K.

“Risk Factors” in this Annual Report on Form 10-K.

You should carefully consider these material risks and uncertainties when investing in our common stock.

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• We may be unable to effectively manage our growth, which could have an adverse effect on our business, financial condition and results of operations.

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• The success of our relationship with broker dealers, digital financial service providers and other partners to provide BaaS is subject to risks associated with managing such relationships.

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Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international economic weakness and disorder and instability in domestic and foreign financial markets.

Our interest rate sensitivity profile was liability sensitive as of December 31, 2023, meaning that we estimate our net interest income would increase more from falling interest rates than from rising interest rates.

Our interest rate sensitivity profile was modestly liability sensitive as of December 31, 2024, meaning that we estimate our net interest income would increase more from falling interest rates than from rising interest rates.

Loans and deposits in our CCBX segment are more sensitive to interest rate changes than our community bank segment.

Over time we anticipate that this will increase sensitivity to both increasing and decreasing interest rates.

Interest rates have risen significantly following the historically low levels during the COVID-19 pandemic.

As interest rates have increased, so have competitive pressures on the deposit cost of funds.

This has been exacerbated by the bank failures in the first half of 2023 and the resulting heightened competition for deposits, which has also affected the interest we pay on deposits.

We expect our funding costs will continue to increase if interest rates continue to remain high if we are required to maintain or increase higher cost deposit products as depositors seek such higher rate products.

Interest rates remain significantly higher following the historically low levels during the COVID-19 pandemic.

While rates have decreased some in 2024, competitive pressures on the deposit cost of funds remains.

This has been exacerbated by the bank failures due to liquidity in the first half of 2023 and the resulting heightened competition for deposits, which has also affected the interest we pay on deposits.

We expect our funding costs will continue to increase if interest rates continue to remain high, or if we are required to maintain or increase higher cost deposit products as depositors seek such higher rate products.

It is not possible to predict the pace and magnitude of changes in interest rates, or the impact rate changes will have on our results of operations.

Due to elevated levels of inflation and corresponding pressure to raise interest rates, the Federal Reserve announced in January of 2022 that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time.

The FOMC since has increased the federal funds rate to 5.50% as of December 31, 2023.

The FOMC stated that recent indicators suggest that economic activity has been expanding at a solid pace, job gains have moderated since early last year but remain strong, and the unemployment rate has remained low.

The Federal Open Market Committee (the “FOMC”) began reducing the federal funds rate in September 2024, and most recently decreased the federal funds rate to 4.50% as of December 31, 2024.

Inflation has eased over the past year but remains elevated.

The economic outlook is uncertain, and the FOMC remains highly attentive to inflation risks.

The economic outlook is uncertain, and

the FOMC remains highly attentive to inflation risks.

In support of its goals, the FOMC decided to maintain the current target range for the federal funds rate at its most recent meeting.

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Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default and could result in a decrease in the demand for loans.

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We make commercial business loans in our market area to a variety of professionals, sole proprietorships, partnerships and corporations.

As compared to commercial real estate loans, which are secured by real property, the value

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of which tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.

As compared to commercial real estate loans, which are secured by real property, the value of which tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.

As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself and the conditions in the general economy.

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Declines in real estate values could cause some of our residential mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.

As of December 31, 2023, $225.4 million of our residential mortgage loans were made through the community bank, and 82.1% are secured by property in Washington State, and a significant majority of that is located in the Puget Sound region.

A decline in residential real estate values as a result of a downturn in the Puget Sound housing market could reduce the value of the real estate collateral securing these types of loans.

As of December 31, 2023, $161.3 million of our residential mortgage loans made through the community bank were made to investors.

These loans may behave more like multi-family loans than individual 1-4 family loans that are occupied by their owners.

As of December 31, 2024, $267.7 million of our residential mortgage loans were made through CCBX partners and are located in different regions across the U.S.

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

As of December 31, 2024, $202.1 million of our residential mortgage loans were made through the community bank, and 79.0% are secured by property in Washington State, and a significant majority of that is located in the Puget Sound region.

A decline in residential real estate values as a result of a downturn in the Puget Sound housing market could reduce the value of the real estate collateral securing these types of loans.

As of December 31, 2024, $137.1 million of our residential mortgage loans made through the community bank were made to investors.

These loans may behave more like multi-family loans than individual 1-4 family loans that are occupied by their owners.

Our origination of construction loans exposes us to increased lending risks.

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Small to medium-sized businesses frequently have smaller market shares than larger firms, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan.

In addition, the success of a small and medium-sized business often depends on the management skills, talents and efforts of a small group of people, and the death, disability or resignation of one or more of these people could have an adverse effect on the business and its ability to repay its loan.

repay its loan.

If our borrowers are unable to repay their loans, our business, financial condition and earnings could be adversely affected.

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We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.

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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.

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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.

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If our estimates are incorrect, the allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in the need for increases in our allowance for credit losses through the provision for losses on loans which is charged against income.

Management also recognizes that significant new growth in loan portfolios, through the community bank and/or CCBX, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.

Management also recognizes that significant new growth in loan portfolios, in the community bank and/or CCBX, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and may increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.

Many of the agreements with our CCBX partners provide for a credit enhancement which helps protect the Bank by absorbing incurred losses.

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In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans, without regard to the credit enhancement.

If a CCBX lending partner is unable to fulfill its contractual obligations with the Bank, then the Bank would be exposed to additional credit losses as a result of this counterparty risk and would have to absorb any credit losses associated with the CCBX partner that cannot fulfill its contractual obligations.

If a CCBX lending partner is unable to fulfill its contractual obligations with the Bank, then the Bank would be exposed to additional credit losses as a result of this counterparty risk and would have to absorb any credit losses associated with any CCBX partner that cannot fulfill its contractual obligations.

Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our control, may require an increase in the allowance for credit losses.

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While we believe that our allowance for credit losses was adequate at December 31, 2024, there is no assurance that it will be sufficient to cover future credit losses, especially if there is a significant deterioration in economic conditions.

The FASB adopted a new accounting standard referred to as CECL which requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses.

The FASB recently adopted an accounting standard referred to as CECL which requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses.

We adopted this accounting pronouncement effective for our fiscal year beginning January 1, 2023.

The current economic condition in the market areas we serve may adversely impact our earnings and could increase the credit risk associated with our loan portfolio.

While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our loan portfolio is comprised of loans secured by property located in the Puget Sound region and substantially all of our loan and deposit customers are businesses and individuals in greater Puget Sound region.

While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our community bank loan portfolio is comprised of loans secured by property located in the Puget Sound region and substantially all of our community bank loan and deposit customers are businesses and individuals in greater Puget Sound region.

A deterioration of the economy in the market areas we serve could result in the following consequences, any of which would have an adverse impact, which could be material, on our business, financial condition, and results of operations:

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• certain securities within our investment portfolio could become other than temporarily impaired, requiring a write-down through earnings to fair value, thereby reducing equity;

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• CCBX partners may experience financial difficulties or fail, our BaaS revenue may decrease, and credit losses could increase if the partner cannot fulfill its credit enhancement obligations;

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A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are geographically diverse.

Many of the loans in our portfolio are secured by real estate.

Many of the community bank loans in our portfolio are secured by real estate.

Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan.

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Furthermore, even if we are able to continue to originate and sell SBA 7(a) loans in the secondary market, we might not continue to realize premiums upon the sale of the guaranteed portion of these loans or the premiums may decline due to economic and competitive factors.

When we originate SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on a loan, we share any loss and recovery related to the loan pro-rata with the SBA.

When we originate SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a

customer defaults on a loan, we share any loss and recovery related to the loan pro-rata with the SBA.

If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us.

Generally, we do not maintain reserves or loss allowances for such potential claims and any such claims could adversely affect our business, financial condition and results of operations.

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The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future.

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The outstanding balance of the Bank’s regulatory CRE portfolio has increased by 5.1%, 16.8%, and 30.9%, for the years ended December 31, 2024, 2023, and 2022 respectively.

The level of CRE has exceeded regulatory guidelines in the previous 36 months, it was 305.1% at December 31, 2021, but the growth rate was within regulatory guidelines.

In December 2015, the federal banking regulators released a new statement on prudent risk management for commercial real estate lending, referred to herein as the 2015 Statement.

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If the Federal Reserve, our primary federal regulator, were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, for reasons noted above or otherwise, our earnings would be adversely affected.

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Our business is subject to the risks of epidemic illnesses, earthquakes, tsunamis, floods, fires and other natural catastrophic events or effects of climate change.

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These activities may increase as the effects of climate change increase.

Because we primarily serve individuals and businesses in the Northwest, a natural disaster, epidemic illness, significant effect of climate change or other major catastrophe in the Northwest likely would have a greater impact on our business, financial condition and results of operation than if our business were more geographically diverse.

Because we serve individuals and businesses in the Northwest, a natural disaster, epidemic illness, significant effect of climate change or other major catastrophe in the Northwest likely would have a greater impact on our business, financial condition and results of operation than if our business were more geographically diverse.

The occurrence of any of these natural disasters.

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The agreements have varying terms and may be terminated by the parties under certain circumstances.

If our BaaS partners are not successful in achieving customer acceptance of their programs or terminate the agreement before the end of its term, our revenue under the agreement may

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be limited or may cease altogether.

If our BaaS partners are not successful in achieving customer acceptance of their programs or terminate the agreement before the end of its term, our revenue under the agreement may be limited or may cease altogether.

In addition, because we will provide banking services with respect to the cash features of our BaaS partner account programs, our bank regulators may hold us responsible for their activities with respect to the marketing or administration of their programs, which may result in increased compliance costs for us or potentially compliance violations as a result of BaaS partner activities.

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Additionally, financial weaknesses at our BaaS partners could cause us to record greater expenses or losses or suffer reputational harm.

Significant changes to the size, structure, powers and operations of the federal government may cause economic disruptions that could, in turn, adversely impact our business, results of operations and financial condition.

The new administration has begun to implement significant changes to the size and scope of the federal government to achieve stated goals including reducing the federal budget deficit and national debt, improving the efficiency of government operations, and promoting innovation and economic growth.

To date, these efforts have been carried out through a mix of executive actions aimed at eliminating or modifying federal agency and federal program funding, reducing the size of the federal workforce, reducing or altering the scope of activities conducted by, and possibly eliminating, various federal agencies and bureaus, and encouraging the use of artificial intelligence and other advanced technologies within the public and private sectors.

If implemented, these changes may have varied effects on the economy that are difficult to predict.

For instance, the delivery of government services and the distribution of federal program funds and benefits may be disrupted or, in some cases, eliminated as a result of funding cuts or recasting of federal agency mandates.

Further, a substantial reduction of the federal workforce could adversely affect regional and local economies, both directly and indirectly, in geographies with significant concentrations of federal employees and contractors.

It is possible that the velocity of such comprehensive changes to the federal government may be materially adverse to the market area where we conduct business and to our customers, which, in turn, could be materially adverse to our business, financial condition and results of operations.

We may be adversely affected by changes in U.S.

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The added recordkeeping burden as well as additional expense that could result from the expansion of CCBX into new regions may have an adverse impact on our business, financial condition and results of operations.

Changes in U.S.

trade policies, including the imposition of tariffs and retaliatory tariffs, may adversely impact our business, financial condition, and results of operations.

The new administration has signaled it will impose certain tariffs against U.S.

trading partners.

On February 1, 2025, an Executive Order was issued imposing tariffs at various levels on imports from Canada, Mexico, and China.

The newly imposed tariffs have resulted in immediate threats of retaliatory tariffs against U.S.

goods and resulted in discussions with the countries which have delayed many of the U.S.

imposed tariffs while discussions with each trading partner continue.

The above and other potential tariffs and trade restrictions may cause the prices of our customers’ products to increase, which could reduce demand for such products, or reduce our customers’ margins, and adversely impact their revenues, financial results, and ability to service debt.

This in turn could adversely affect our financial condition and results of operations.

In addition, to the extent changes in the political environment have a negative impact on us or on the markets in which we operate our business, our results of operations and financial condition could be materially and adversely impacted in the future.

At this time, it remains unclear what the U.S.

government or trading partners will or will not do with respect to additional tariffs that may be imposed or international trade agreements and policies.

Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks, including, but not limited to, customer, employee or third-party fraud and data processing system failures and errors.

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It is not always possible to prevent employee or third-party errors or misconduct.

Although our control testing has not identified any material weaknesses in our internal control system, a breakdown in our internal control system, improper operation of our systems or improper employee actions could result in material financial loss to us, the imposition of regulatory action, and damage to our reputation.

Any material weakness in our internal control system, a breakdown in our internal control system, improper operation of our systems or improper employee actions could result in material financial loss to us, the imposition of regulatory action, and damage to our reputation.

We are dependent on the use of data and modeling in our management’s decision-making, and faulty data or modeling approaches could negatively impact our decision-making ability or possibly subject us to regulatory scrutiny in the future.

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While we are not subject to stress testing under the Dodd-Frank Act, we anticipate that model-derived testing may become more extensively implemented by regulators in the future.

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We anticipate data-based modeling will penetrate further into bank decision-making, particularly risk management efforts, as the capacities developed to meet rigorous stress testing requirements are able to be employed more widely and in differing applications.

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While we attempt to invest a significant majority of our total assets in loans (our loan-to-asset ratio was 85.1% as of December 31, 2024), we invest a percentage of our total assets (1.1% as of December 31, 2024) in investment securities with the primary objectives of providing a source of liquidity and meeting pledging requirements.

As of December 31, 2023, the fair value of our available for sale investment securities portfolio was $99.5 million, which included a net unrealized loss of $537,000, and the fair value of our held to maturity investment securities was $51.0 million, which included a net unrealized gain of $181,000.

As of December 31, 2024, the fair value of our available for sale investment securities portfolio was $35,000, which included a net unrealized loss of $2,000, and the fair value of our held to maturity investment securities was $46.7 million, which included a net unrealized loss of $581,000.

Factors beyond our control can significantly and adversely influence the fair value of securities in our portfolio.

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Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and instability in the credit markets.

Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses.

The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.

Although we have not recognized other-than-temporary impairment related to our investment portfolio as of December 31, 2023, changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, among other factors, may cause us to recognize losses in future periods, which could have an adverse effect on our business, financial condition and results of operations.

Any of the foregoing factors could cause impairment in future periods and result in realized losses.

The process for determining whether impairment exists usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.

Although we have not recognized an impairment related to our investment portfolio as of December 31, 2024, changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, among other factors, may cause us to recognize losses in future periods, which could have an adverse effect on our business, financial condition and results of operations.

The accuracy of our financial statements and related disclosures could be affected if the judgments, assumptions or estimates used in our critical accounting policies are inaccurate.

The preparation of financial statements and related disclosures in conformity with U.S.

Generally Accepted Accounting Principles (“GAAP”) requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and related notes to those financial statements.

Our critical accounting policies, which are included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report on Form 10-K, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures.

The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and related notes to those financial statements.

Our critical accounting policies, which are included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures.

As a result, if future events or regulatory views concerning such analysis differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures, in each case resulting in our needing to revise or restate prior period financial statements, cause damage to our reputation and the price of our common stock, and adversely affect our business, financial condition and results of operations.

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Dependency on external security systems expose us to greater operational risk.

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Achieving such growth will require us to attract customers that currently bank at other financial institutions in our market area.

Our ability to

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successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competition from other financial institutions in our market area and our ability to manage our growth.

Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competition from other financial institutions in our market area and our ability to manage our growth.

Growth opportunities may not be available or we may not be able to manage our growth successfully.

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Furthermore, there can be considerable costs involved in expanding deposit and lending capacity that generally require a period of time to generate the necessary revenues to offset these costs, especially in areas in which we do not have an established presence and that require alternative delivery methods.

Accordingly, any such business expansion can be expected to negatively impact our earnings for some period of time until certain economies of scale are reached.

Accordingly, any such business expansion can be expected to negatively impact our earnings for some period of time until certain economies of scale are

Our expenses could be further increased if we encounter delays in modernizing existing facilities, opening new branches or deploying new services.

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If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, or at all, which could have an adverse effect on our business, financial condition and results of operations.

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Anti-takeover provisions in our corporate organizational documents and provisions of federal and state law may make an attempted acquisition or replacement of our board of directors or management more difficult.

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and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches.

Various state and federal laws and regulations impose data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in

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certain circumstances in the event of a security breach.

Various state and federal laws and regulations impose data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach.

Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs.

While we have implemented a vendor management program with the third-party service providers, to help ensure third party relationships are effectively managed by providing risk-focused controls and processes that are designed to monitor our vendors’ compliance with relevant laws, regulations, and industry standards, we may not be able to ensure that all of our clients, suppliers, counterparties, broker dealers and financial providers in CCBX, and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means.

If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under personal information laws and regulations.

and regulations.

Concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues.

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and cause a loss of confidence in our products and services, all of which could adversely affect our business, financial condition and results of operations.

Further, to the extent that the activities of our third-party service providers or

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the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation costs and other possible liabilities.

Further, to the extent that the activities of our third-party service providers or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation costs and other possible liabilities.

For further information, see the section titled “Cybersecurity” in Part I, Item 1C of this Annual Report on Form 10-K.

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Failure to comply with these requirements in the event of such an incident could result in sanctions by regulatory agencies, civil money penalties, and/or damage to our reputation, all of which could have an adverse effect on our business, financial condition and results of operations.

Additionally, the SEC recently enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy and governance.

Additionally, the SEC enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on an annual basis material information regarding their cybersecurity

risk management, strategy and governance.

If we fail to comply with these new requirements we could incur regulatory fines in addition to other adverse consequences to our reputation, business, financial condition and results of operations.

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The market price of our common stock could decline as a result of an equity offering, as well as other sales of a large block of shares of our common stock or similar securities in the market after an equity offering, or the perception that such sales could occur.

Both we and our regulators perform a variety of analyses of our assets, including the

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preparation of stress case scenarios, and as a result of those assessments we could determine, or our regulators could require us, to raise additional capital.

Both we and our regulators perform a variety of analyses of our assets, including the preparation of stress case scenarios, and as a result of those assessments we could determine, or our regulators could require us, to raise additional capital.

Risks Related to Our Industry

Regulation of the financial services industry is intense, and we may be adversely affected by changes in laws and regulations.

Regulation of the financial services industry is intense, and we may be adversely affected by changes in laws and regulations, including as a result of the new administration.

We are subject to extensive government regulation, supervision and examination at both the federal and state level.

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The Dodd-Frank Act, which imposed significant regulatory and compliance changes on financial institutions, is an example of this type of federal law.

Any future legislative changes could have a material impact on our profitability, the value of assets held for investment or the value of collateral for loans.

Any future legislative changes, including as a result of the new administration, could have a material impact on our profitability, the value of assets held for investment or the value of collateral for loans.

Future legislative changes could also require changes to business practices and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.

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If, as a result of an examination, either of these banking agencies were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, asset sensitivity, risk management or other aspects of any of our operations had become unsatisfactory, or that our Company, the Bank or their respective management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate.

The Federal Reserve may enjoin “unsafe or unsound” practices or violations of law, require affirmative actions to correct any conditions resulting from any violation or practice, issue an administrative order that can be judicially enforced, direct an increase in our capital levels, restrict our growth, assess civil monetary penalties against us, the Bank or their respective officers or directors, and

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remove officers and directors.

The FDIC also has authority to review our financial condition, and, if the FDIC were to conclude that the Bank or its directors were engaged in unsafe or unsound practices, that the Bank was in an unsafe or unsound condition to continue operations, or the Bank or the directors violated applicable law, the FDIC could move to terminate the Bank’s deposit insurance.

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Generally, we must receive federal and state regulatory approval before we can acquire a depository institution or related business insured by the FDIC or before we open a de novo branch.

In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on competition, our financial condition, our future prospects, and the impact of the proposal on U.S.

In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the

acquisition on competition, our financial condition, our future prospects, and the impact of the proposal on U.S.

financial stability.

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Additionally, 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 CRA that may make it more challenging and/or costly for insured depository institutions to achieve an “Outstanding” or “Satisfactory” CRA rating, which could negatively impact our ability to obtain regulatory approval for an acquisition.

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In addition, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions.

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The broad rulemaking powers of the CFPB have potential to have a significant impact on the operations of financial institutions offering consumer financial products or services.

A successful regulatory challenge to an institution’s performance under fair lending laws or regulations, or other consumer lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines.

entering new business lines.

Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation.

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Business—Regulation and Supervision—Bank Regulation and Supervision—Prompt Corrective Action.” Accordingly, we could be required to provide financial assistance to the Bank if it experiences financial distress.

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A capital injection may be required at a time when our resources are limited, and we may be required to borrow the funds or raise capital to make the required capital injection.

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General Risk Factors

We have identified material weaknesses in our internal control over financial reporting.

Such material weaknesses could adversely affect our results of operations and financial condition.

In the future, we may identify additional material weaknesses or otherwise fail to maintain an effective system of internal control over financial reporting or adequate disclosure controls and procedures, which may result in material errors in our financial statements or cause us to fail to meet our period reporting obligations.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, evaluating the effectiveness of our internal controls and disclosing any changes or material weaknesses identified through such evaluation.

A material weakness is a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected on a timely basis.

In March 2025, we determined that certain interest income, non-interest income, BaaS loan expense, and non-interest expense amounts in our financial statements were not recognized in accordance with GAAP.

As a result, we determined that there were material errors in the financial statements that required a restatement of our financial statements for the year ended December 31, 2023 and for the quarterly periods ended March 31, June 30, and September 30, 2023 and 2024.

Those restatements are included in this Annual Report on Form 10-K.

In addition, management determined that material weaknesses existed, and, as a result, that our internal control over financial reporting was not effective as of December 31, 2023 or December 31, 2024 due to control, design and implementation deficiencies with respect to third-party reports.

Management is implementing enhanced internal controls to remediate the material weaknesses that were identified.

Specifically, we are in the process of implementing controls to enhance our risk assessment, control and evaluation procedures over third-party reports to ensure compliance with the Company’s accounting policies.

The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have their intended effects.

Effective internal controls over financial reporting are necessary for us to provide reliable financial reports and, together with adequate disclosure controls and procedures, are designed to prevent fraud.

Any failure to implement required new or improved controls, or difficulties encountered in their implementation, could cause us to fail to meet our reporting obligations.

If we are not able to comply with the requirements of the Sarbanes-Oxley Act or if we are unable to maintain effective internal control over financial reporting, we may not be able to produce timely and accurate financial

statements or guarantee that information required to be disclosed by us in the reports that we file with the SEC, is recorded, processed, summarized, and reported within the time periods specified in SEC rules and forms.

Any failure of our internal control over financial reporting or disclosure controls and procedures could cause our investors to lose confidence in our publicly reported information, cause the market price of our stock to decline, expose us to sanctions or investigations by the SEC or other regulatory authorities, or impact our results of operations.

National and global economic and other conditions could adversely affect our future results of operations or market price of our stock.

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federal government, its agencies and government-sponsored entities.

Changes in any of these policies are influenced by

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macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have an adverse effect on our business, financial condition and results of operations.

Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have an adverse effect on our business, financial condition and results of operations.

We are subject to certain risks in connection with growing through mergers and acquisitions.

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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 1A. Risk Factors