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Item 7. Management’s Discussion and Analysis

2025-03-17 compared with 2024-03-15 · 566 added, 486 removed, 1487 unchanged (41% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

This discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this Form 10-K.

The Company restated its financial statements for the year ended December 31, 2023 and the quarters ended March 31, June 30, and September 30, 2023 and 2024 for misstatements between the balance sheet, income statement and statement of cash flows that were determined to be material to previously issued financial statements.

See “Note 23, Restatement of Prior Period Financial Statements” in Item 8 of this Form 10-K, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our consolidated financial statements.

We are a bank holding company that operates through our wholly owned subsidiaries, Coastal Community Bank (“Bank”) and Arlington Olympic LLC.

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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 as of December 31, 2023.

The CCBX segment had 24 partners as of December 31, 2024.

The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments.

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Less commonly used sources of funding include borrowings from the Federal Reserve System (“Federal Reserve”) discount window, draws on established federal funds lines from unaffiliated commercial banks, brokered funds, which allows us to obtain deposits from sources that do not have a relationship with the Bank and can be obtained through certificate of deposit listing services, via the internet or through other advertising methods, or a one-way buy through an insured cash sweep (“ICS”) account, which allows us to obtain funds from other institutions that have deposited funds through ICS.

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

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

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.

Brokered Deposits Rulemaking

On July 30, 2024, the Board of Directors of the FDIC approved a proposed rule that would amend the FDIC’s regulations governing the classification and treatment of brokered deposits.

The proposal would, among other changes, broaden the definition of deposit broker to include agents that place or facilitate the placement of third-party deposits at

only one insured depository institution and narrow the exception to the definition of deposit broker for agents whose primary purpose is not the placement of funds with depository institutions.

While the Company is evaluating the potential impact of the proposed rule, if the rule is finalized as proposed, the Bank may be required to classify a greater amount of its deposits obtained with the involvement of third parties, such as CCBX partners, as brokered deposits.

An increase in the amount of brokered deposits on the Bank’s balance sheet could, among other consequences, increase the Bank’s deposit insurance assessment costs.

Recordkeeping for Custodial Accounts

On September 17, 2024, the FDIC issued a proposed rule that would impose recordkeeping and other compliance requirements on custodial deposit accounts with transactional features.

Under the proposed rule, FDIC-insured banks maintaining such custodial deposit accounts would be required to maintain updated and accurate account records identifying the beneficial owners of those deposits, the balance attributable to each beneficial owner, and the ownership category in which the deposited funds are held.

While we are evaluating the potential impact of the proposed rule, if the rule is finalized as proposed, it could increase the costs of operating BaaS arrangements such as the partnerships in our CCBX segment.

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.

On July 25, 2024, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency released a joint statement discussing potential risks related to arrangements between banks and third parties to deliver bank deposit products and services to end users, as well as examples of effective practices for the management of those risks.

Additionally, the agencies issued a request for information and comment on the nature of banks’ relationships with financial technology companies and effective risk management practices for those relationships.

The agencies also indicated that they are considering whether additional steps, such as enhancements to supervisory guidance, could help ensure that banks effectively manage risks associated with these various types of arrangements.

These developments suggest that the agencies are increasing their focus on third-party deposit arrangements and may expect financial institutions involved in these arrangements, such as us, to change their risk management and compliance practices, which may increase the costs of operating a BaaS business.

Key Factors Affecting our Business

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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

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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 credit losses as a result of this counterparty risk.

For additional information on credit enhancements see Item 1.

Business - Concentrations of Credit Risk section.

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 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.

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

Other significant operating expenses include BaaS fraud expense, legal and professional expenses, data processing and software licenses and occupancy 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 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.

When we make substantial investments in our infrastructure and make investments to increase our operating capacity, our operating efficiency ratio 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 42.38% at December 31, 2024, compared to 44.66% at December 31, 2023.

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.

This ratio decreased as a result of the increase in net interest income and credit enhancement income for the year ended December 31, 2024 compared to the year ended December 31, 2023.

Economic Conditions

Our business and financial performance are affected by economic conditions generally in the United States and more directly in the markets in the Puget Sound region where we operate.

Our business and financial performance are affected by economic conditions generally in the United States for CCBX and more directly for the community bank in the markets in the Puget Sound region where we operate.

The significant economic factors that are most relevant to our business and our financial performance include, but are not limited to, real estate values, interest rates and unemployment rates.

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 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.

The economic environment is continuously changing with bank failures, mergers, inflation, changing interest rates, global unrest, the war in Ukraine, conflicts in the Middle East, political environment, natural disasters, and trade issues that contribute to economic uncertainty which has caused increased market volatility and may lead to 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.

Our accounting policies are described in greater detail in Note 1 to our consolidated financial statements included elsewhere in this Report on Form 10-K.

Our accounting policies are described in greater detail in Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

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 the items discussed below to be critical accounting estimates.

Our critical accounting estimates are included and discussed below.

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

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

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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As of December 31, 2024, loans receivable totaled $3.49 billion, an increase of $465.0 million, or 15.4%, compared to $3.02 billion as of December 31, 2023.

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 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.

Total loans receivable is net of $6.5 million in net deferred origination fees.

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.

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.

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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.

As of December 31, 2023 and 2022 there were no CCBX loans held for sale.

During the twelve months ended December 31, 2024, the Company transferred $1.55 billion in CCBX loans receivable to loans held for sale and subsequently sold $1.52 billion these loans.

As of December 31, 2024 there were $20.6 million CCBX loans held for sale and no CCBX loans were held for sale as of December 31, 2023.

Community bank loans held-for-sale consist of the guaranteed portion of SBA loans and United States Department of Agriculture (“USDA”) loans the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value.

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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

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

Equity investments are subject to 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 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.

During 2024, net contributions to private company equity investments totaled $72,000 and increased in value by $26,000.

In 2023, net contributions to private company equity investments totaled $125,000 and increased in value by $278,000.

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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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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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 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 uncollectible.

The Company increased the allowance from $117.4 million at December 31, 2023 to $177.0 million at December 31, 2024.

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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 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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For the year ended December 31, 2024, noninterest income subject to Topic 606 increased $6.6 million to $24.7 million, compared to $18.1 million for the year ended December 31, 2023.

The increase was largely due to an increase in BaaS fee income resulting from growth with active CCBX partners.

The increase was largely due to an increase in BaaS fee income resulting from increased activity and growth with active CCBX partners.

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

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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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, 2024, see “ Note 2 – Recent Accounting Standards ” in the accompanying notes to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.

Results of Operations

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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, 2024, Compared to Year Ended December 31, 2023 .

Net income for the year ended December 31, 2024 was $45.2 million, or $3.26 per diluted share, compared to $44.6 million, or $3.27 per diluted share, for the year ended December 31, 2023.

The increase in net income over the prior year was attributable to a $41.5 million increase in net interest income, $104.1 million increase in noninterest income partially offset by a $93.6 million increase in

the provision for credit losses - loans and a $51.7 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.

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 $59.8 million increase in net interest income, $81.2 million increase in noninterest income partially offset by a $104.9 million increase in the provision for credit losses - loans and a $29.5 million increase in noninterest expense.

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Yield on loans receivable was 11.20% for the year ended December 31, 2024, compared to 10.36% for the year ended December 31, 2023.

The increase in net interest income compared to the year ended December 31, 2023 was largely related to growth in loans from CCBX and the community bank.

Interest and fees on loans totaled $372.0 million for the year ended December 31, 2024 compared to $304.3 million for the year ended December 31, 2023.

The $67.8 million increase in interest and fees on loans for the year ended December 31, 2024, compared to the year ended December 31, 2023, was largely due to growth in CCBX and community bank loans.

Total average loans receivable for the year ended December 31, 2024 was $3.32 billion, compared to $2.94 billion for the year ended December 31, 2023.

CCBX average loans receivable grew to $1.43 billion for the year ended December 31, 2024, compared to $1.21 billion for the year ended December 31, 2023, an increase of $217.2 million, or 17.9%.

Average CCBX yield of 17.39% and 16.30% was earned on CCBX loans for the years ended December 31, 2024 and December 31, 2023, respectively.

CCBX yield does not include the impact of BaaS loan expense.

BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans.

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

Community bank average loans receivable grew to $1.89 billion for the year ended December 31, 2024, compared to $1.73 billion for the year ended December 31, 2023, an increase of $166.5 million, or 9.6%.

Average yield of 6.54% was earned on community bank loans for the year ended December 31, 2024, compared to 6.20% for the year ended December 31, 2023.

Interest income from interest earning deposits with other banks was $21.3 million for the year ended December 31, 2024, an increase of $5.9 million largely due to an increase in balances, compared to the year ended December 31, 2023.

The average balance of interest earning deposits invested with other banks for the year ended December 31, 2024 was $405.5 million, compared to $295.8 million for the year ended December 31, 2023.

Additionally, the yield on these interest earning deposits with other banks increased 0.05%, compared to the year ended December 31, 2023.

Interest income on investment securities decreased $141,000 to $3.1 million, with a yield of 4.67% at December 31, 2024, compared to $3.2 million, and a yield of 2.66%, at December 31, 2023.

Average investment securities decreased $54.7 million from $120.2 million for the year ended December 31, 2023 to $65.5 million for the year ended December 31, 2024 as a result of available for sale (“AFS”) U.S.

Treasury securities that matured earlier in the year, partially offset by an increase in HTM securities resulting from securities purchased for CRA purposes.

Interest expense was $123.7 million for the year ended December 31, 2024, a $32.1 million increase from the year ended December 31, 2023.

Interest expense on deposits was $120.9 million for the year ended December 31, 2024, compared to $89.0 million for the year ended December 31, 2023.

The $31.9 million increase in interest expense on deposits was due to an increase in average interest bearing deposits of $510.2 million and an increase in interest rates.

Interest on borrowed funds was $2.8 million for the year ended December 31, 2024 and $2.6 million for the year ended December 31, 2023.

The $173,000 increase in interest expense on borrowed funds from the year ended December 31, 2023

is primarily the result of an increase in interest rates on the junior subordinated debt, which increased 0.22% to 7.77% for the year ended December 31, 2024, compared to 7.55% for the year ended December 31, 2023.

Net interest margin was 7.18% for the year ended December 31, 2024, compared to 6.88% for the year ended December 31, 2023.

The increase in net interest margin compared to the year ended December 31, 2023 was largely a result of an increase of 0.84% for yield on loans partially offset by an increase of 0.59% for cost of deposits, primarily due to growth in CCBX deposits.

Interest expense has increased and net interest margin was compressed as a result of growth in higher rate CCBX deposits.

Interest bearing deposits increased an average of $510.2 million for the year ended December 31, 2024, compared to the year ended December 31, 2023, and these deposits were tied to a higher Fed Funds rate for most of 2024.

Also contributing is the sale of higher risk and higher yielding loans during the quarters ended September 30, 2023, December 31, 2023 and March 31, 2024 in an effort to optimize and strengthen the balance sheet which increased year to date net interest margin.

Cost of funds was 3.49% for the year ended December 31, 2024, compared to 2.91% for the year ended December 31, 2023.

Cost of deposits for the year ended December 31, 2024 was 3.46%, which was a 0.58% increase, from 2.87% for the year ended December 31, 2023.

These increases were largely due to growth in CCBX interest bearing deposits tied to a higher Fed Funds rate for most of 2024, compared to the year ended December 31, 2023.

We expect the recent decrease in the Fed Funds rate will help to decrease the cost of deposits.

Total yield on loans receivable for the year ended December 31, 2024 was 11.20%, compared to 10.36% for the year ended December 31, 2023.

This increase in yield on loans receivable is primarily attributed to a 0.34% increase in yield and $166.5 million increase in average community bank loans compared to the year ended December 31, 2023.

For the year ended December 31, 2024, average CCBX loans increased $217.2 million, or 17.9%, with an average CCBX yield of 17.39%, compared to 16.30% for the year ended December 31, 2023.

CCBX yield does not include the impact of BaaS loan expense.

BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans.

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

In light of our recent efforts to optimize and strengthen the balance sheet by selling higher yield CCBX loans back to the originating partners, combined with the recent decrease in the Fed Funds rate, total yield on loans have and may continue to flatten out as new CCBX loans are replacing higher risk and higher yielding loans that were sold or allowed to mature during the quarters ended September 30, 2023, December 31, 2023 and March 31, 2024.

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

Net interest income for the year ended December 31, 2023 was $231.6 million, compared to $171.8 million for the year ended December 31, 2022, an increase of $59.8 million, or 34.8%.

Yield on loans receivable was 10.36% for the year ended December 31, 2023, compared to 8.12% for the year ended December 31, 2022.

The increase in net interest income compared to the year ended December 31, 2022 was largely related to increased yield on loans from growth in higher yielding CCBX and community bank loans and interest rate increases on variable rate and new loans.

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The $120.9 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.

Loan growth was $394.3 million, or 15.0%, for the year ended December 31, 2023, compared to December 31, 2022.

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%.

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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.

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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.

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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 6.88% for the year ended December 31, 2023, compared to 5.97% for the year ended December 31, 2022.

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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.

Cost of deposits for the year ended December 31, 2023 was 2.87%, which was a 2.16% increase, from 0.71% for the year ended December 31, 2022.

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

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

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.

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There was an 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 (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:

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December 31, 2024 December 31, 2023 December 31, 2022

(unaudited) Yield on

Loans Cost of

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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) See Note 23, Restatement of Prior Period Financial Statements.

For the Year Ended

December 31, 2024 December 31, 2023 (3) December 31, 2022

(dollars in thousands;

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

(dollars in thousands) 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 $ 248,286 17.39 % $ 197,306 16.30 % $ 102,808 13.85 %

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(2) Includes loans held for sale.

(3) See Note 23, Restatement of Prior Period Financial Statements.

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.

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

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Loan costs, net of fees included in interest income, totaled $8.9 million and $6.3 million for the years ended December 31, 2024 and 2023, respectively and loan fees, net of costs included in interest income totaled $3.2 million for the year ended December 31, 2022.

Average Balance Sheets

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Interest bearing deposits $ 2,905,202 $ 120,932 4.16 % $ 2,395,012 $ 89,000 3.72 % $ 1,724,020 $ 19,004 1.10 %

PPPLF borrowings — — — — — — 68,699 240 0.35

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

FHLB advances and other borrowings 2,854 144 5.05 — — — 6,029 69 1.14

Subordinated debt 44,216 2,394 5.41 44,066 2,373 5.39 27,626 1,179 4.27

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

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(4) See Note 23, Restatement of Prior Period Financial Statements.

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:

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December 31, 2024 December 31, 2023 (7) December 31, 2022

(dollars in thousands;

unaudited) Average

(dollars in thousands) Average

Balance Interest &

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Intrabank asset, net (6)

— — — 123,156 796 0.65 n/a n/a n/a

— — — — — — 123,156 796 0.65

Total interest earning assets 1,893,011 123,735 6.54 1,726,495 106,983 6.20 1,638,551 81,340 4.96

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Intrabank liability, net (6)

198,176 10,404 5.25 — — — n/a n/a n/a

401,027 21,265 5.30 198,176 10,404 5.25 — — —

Total interest bearing liabilities 1,369,233 48,162 3.52 1,098,692 27,758 2.53 905,447 2,896 0.32

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Intrabank asset, net (6)

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

572,124 30,221 5.28 363,921 19,071 5.24 285,164 4,106 1.44

Total interest earning assets 1,999,695 278,507 13.93 1,574,334 216,377 13.74 1,027,556 106,914 10.40

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3.30 % 4.13 % 3.65 %

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For the Year Ended

December 31, 2024 December 31, 2023 December 31, 2022

(dollars in thousands;

unaudited) Average

(dollars in thousands) Average

Balance Interest &

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Interest bearing liabilities:

PPPLF borrowings — — — 68,699 240 0.35

FHLB advances and borrowings 2,854 144 5.05 % — — — % 6,029 69 1.14 %

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Intrabank liability, net (6)

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

171,097 8,956 5.23 165,745 8,667 5.23 408,320 4,902 1.20

Total interest bearing liabilities 221,757 11,773 5.31 213,400 11,311 5.30 445,562 6,293 1.41

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

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(7) See Note 23, Restatement of Prior Period Financial Statements.

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates.

The table illustrates the $56.1 million increase in loan interest income that is attributable to an increase in loan rates and $72.0 million increase in loan interest income that is attributable to an increase in loan volume.

The table illustrates the $42.9 million increase in loan interest income that is attributable to an increase in loan volume and $24.8 million increase in loan interest income that is attributable to an increase in loan rates.

For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.

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Increase in net interest income $ 27,069 $ 14,384 $ 41,453 $ 34,388 $ 25,412 $ 59,800

(1) See Note 23, Restatement of Prior Period Financial Statements

Provision for Credit Losses

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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 economic environment is continuously changing, due to the pace of economic growth, inflation, changing interest rates, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment, natural disasters, and trade issues that may impact the provision and therefore the allowance.

Gross loans, excluding loans held for sale, totaled $3.49 billion at December 31, 2024.

The allowance for credit losses as a percentage of loans was 5.08% at December 31, 2024, compared to 3.88% at December 31, 2023.

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

CCBX partners bear most of the responsibility for credit losses incurred which consequently gives them vested interests in the performance of the portfolio.

We believe that this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio.

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

When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner's legal commitment to indemnify or reimburse losses.

When the provision for credit losses - loans and provision for unfunded commitments are recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner's legal commitment to indemnify or reimburse losses.

The credit enhancement asset is relieved as credit enhancement payments are received from the CCBX partner or taken from the partner's cash reserve account.

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The provision for credit losses - loans for the year ended December 31, 2024, was $275.7 million compared to $184.0 million for the year ended December 31, 2023.

The increase in the Company’s provision for credit losses - loans during the year ended December 31, 2024, is largely related to the provision for CCBX partner loans due to significant loan growth, a change in the mix of loans and an increase in loan balances with higher loss rates.

During the year ended December 31, 2024, a $277.8 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 recapture of $2.1 million was needed for the year ended December 31, 2024 due in part to a change in remaining average lives.

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

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

(dollars in thousands;

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

(dollars in thousands) December 31, 2024 December 31, 2023 December 31, 2022

Community bank $ (2,130) $ 1,322 $ 719

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Net charge-offs were up significantly in 2024 compared to 2023 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.

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 5% of a $324.6 million loan portfolio.

At December 31, 2024, our portion of this portfolio represented $20.6 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.

Provision expense on these loans was $6.0 million and $5.1 million for the years ended December 31, 2024 and 2023, respectively, with net charge-offs of $5.6 million in 2024 and $3.6 million in 2023.

In 2024, $540,000 of net charge-offs were recognized for community bank loans and $215.5 million of net-charge-offs were recognized for CCBX loans.

In 2023, $52,000 of net charge-offs were recognized for community bank loans and $144.5 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.

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Net charge-offs for the year ended December 31, 2023 totaled $144.5 million, or 4.92% 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.

Provision expense for the one CCBX partner that the Company is responsible for credit losses for 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 $144.5 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 obligation then the Bank would be exposed to additional loan and deposit losses (counterparty risk) if the cash flows on the loans were not sufficient to fund the reimbursement of loan losses.

If a CCBX partner does not replenish their cash reserve account the Bank may consider an alternative plan for funding the cash reserve, such as adjusting the funding amounts or timelines to better align with the partner's specific situation.

If a mutually agreeable funding plan is not achieved then the Bank could declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements.

The Bank would evaluate any remaining credit enhancement asset from the CCBX partner in the event the partner failed to determine if a write-off is appropriate.

If a write-off occurs, the Bank would retain the full yield and any fee income on the loan portfolio going forward, and our BaaS loan expense would decrease once default occurs and payments to the CCBX partner are stopped.

For more information on activity within the credit enhancement asset account, see the discussion and table in “ Financial Condition - Allowance for Credit Losses - Loans”.

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

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average loans 0.03 % 15.10 % 6.51 % 0.00 % 11.94 % 4.92 % 0.03 % 4.48 % 1.49 %

% of CCBX charge-offs

covered by credit

enhancement 97.4 % 97.5 % 99.4 %

(1) See Note 23, Restatement of Prior Period Financial Statements

Noninterest Income

Our primary sources of recurring noninterest income are BaaS indemnification income, Baas program income and deposit service charges and fees.

Our primary sources of recurring noninterest income are BaaS indemnification income, Baas program income and service charges and fees.

Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method.

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For the year ended December 31, 2024, noninterest income totaled $308.2 million, an increase of $104.1 million, or 51.0%, compared to $204.1 million for the year ended December 31, 2023.

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

For the year ended December 31, 2023, noninterest income totaled $204.1 million, an increase of $81.2 million, or 66.0%, compared to $122.9 million for the year ended December 31, 2022.

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

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(Decrease) (1) Percent

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

Service charges and fees $ 3,738 $ 3,854 $ 3,804 $ (116) (3.0 %) $ 50 1.3 %

Loan referral fees 168 683 810 (515) (75.4) (127) (15.7)

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 — (253) (100.0) 253 100.0

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Total noninterest income $ 308,205 $ 204,122 $ 122,943 $ 104,083 51.0 % $ 81,179 66.0 %

(1) See Note 23, Restatement of Prior Period Financial Statements

A description of our largest noninterest income categories are below:

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

Servicing and other BaaS fees are typically higher with new partners who have minimum contractual fees.

Transaction and interchange fees increase as partner activity increases.

As a result, we generally expect servicing and other fees to decrease and transaction and interchange fees to increase as partner activity grows and contracted minimum fees are replaced with recurring fees which then exceed the minimum contractual fees.

Increases in BaaS reimbursement of fees offsets increases in noninterest expense from BaaS expenses covered by CCBX partners.

In accordance with GAAP, we recognize the reimbursement of noncredit fraud losses on loans and deposits originated through partners and credit enhancements related to the allowance for credit losses and reserve for unfunded commitments provided by the partner as revenue in BaaS income.

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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.”

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For the year ended December 31, 2024, we earned $302.7 million in BaaS fees, which was an increase of $104.6 million, or 52.8%, over the year ended December 31, 2023, where we earned $198.2 million in BaaS fees.

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

Friends and family / testing 1 1

Implementation / onboarding 1 0

Signed letters of intent 0 5

Wind down - preparing to exit relationship 0 2

Total CCBX relationships 21 27

Deposit Service Charges and Fees.

Deposit service charges and fees include service charges on accounts, point-of-sale fees, merchant services fees and overdraft fees.

The increase over the year ended December 31, 2023 was primarily due to an increase of $95.1 million in BaaS credit enhancements related to the allowance for credit losses and reserve for unfunded commitments and an increase of $2.7 million in BaaS fraud enhancements, and an increase of $6.8 million in total BaaS fee program income, which was the result of increased partner activity.

For the year ended December 31, 2023, we earned $198.2 million in BaaS fees, which was an increase of $81.0 million, or 69.2%, over the year ended December 31, 2022, where we earned $117.1 million in BaaS fees.

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 $2.0 million in total BaaS fee program income, which was the result of increased partner activity.

Service Charges and Fees.

S ervice charges and fees include service charges on accounts, point-of-sale fees, merchant services fees and overdraft fees.

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

Service charges and fees were $3.7 million for the year ended December 31, 2024, a decrease of $116,000, or 3.0%, over the prior year primarily due to decreases in point-of-sale fees of $174,000 partially offset by an increase in service charges on deposit accounts of $87,000.

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.

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

December 31, 2024 compared to 2023 2023 compared to 2022

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Merchant services 487 498 508 (11) (2.2) (10) (2.0)

Overdraft and NSF fees 213 310 316 (97) (31.3) (6) (1.9)

ATM fees 259 239 218 20 8.4 21 9.6

Overdraft and NSF fees 198 213 310 (15) (7.0) (97) (31.3)

Cash management fees 78 98 118 (20) (20.5) (20) (16.9)

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

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.

Gain on Sale of Loans, net .

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 sales of loans occurs when we sell certain CCBX loans to the originating partner, in accordance with partner agreements, however most partner loan sales are at par.

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.

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We hold $3.1 million in equity securities focused on entities providing products to the BaaS and financial services space.

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 increased $640,000, or 72.4%, for the year ended December 31, 2024 compared to the year ended December 31, 2023, due in part to increased Federal Reserve Bank fee income resulting from higher incoming ACH activity.

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.

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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 combined and salaries and employee

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

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.

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Noninterest expense, excluding BaaS loan and BaaS fraud expense totaled $117.9 million and increased $10.3 million or 9.5%.

For the year ended December 31, 2023, noninterest expense totaled $194.6 million, an increase of $29.5 million, or 17.9%, compared to $165.0 million for the year ended December 31, 2022.

Noninterest expense, excluding BaaS loan and BaaS fraud expense totaled $107.7 million and increased $25.5 million or 31.0%.

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

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Data processing and software licenses 15,313 9,349 6,816 5,964 63.8 2,533 37.2

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

Point of sale expense 325 481 368 (156) (32.4) 113 30.7

Occupancy 3,936 4,172 4,219 (236) (5.7) (47) (1.1)

FDIC assessments 2,863 2,524 2,859 339 13.4 (335) (11.7)

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Total noninterest expense $ 246,309 $ 194,572 $ 165,033 $ 51,737 26.6 % $ 29,539 17.9 %

(1) See Note 23, Restatement of Prior Period Financial Statements

Salaries and Employee Benefits.

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Salaries and employee benefits were $70.1 million for the year ended December 31, 2024, an increase of $3.6 million, or 5.5%, compared to $66.5 million for the year ended December 31, 2023.

Salaries and employee benefits expense growth has slowed but continues to increase primarily due to hiring staff for our CCBX segment and additional staff for our ongoing growth initiatives.

As our CCBX activities grow, and we invest more in technology we expect some continued growth in number of employees to support these lines of business but we are also working to automate our processes to reduce and/or slow future growth in hiring.

As of December 31, 2024, we had 488 full-time equivalent employees, compared to 507 at December 31, 2023.

Salaries and employee benefits were $66.5 million for the year ended December 31, 2023, an increase of $14.2 million, or 27.3%, compared to $52.2 million for the year ended December 31, 2022.

The increase was primarily due to hiring staff for our CCBX segment and additional staff for our ongoing community bank related growth initiatives.

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Legal and Professional Expenses .

Legal and professional expenses include legal, audit and accounting expenses, consulting fees, fees for recruiting and hiring employees, and IT related security expenses.

Legal and professional expenses include legal (for contracts, program agreements, regulatory and other business issues, etc.), audit and accounting expenses, consulting fees, fees for recruiting and hiring employees, and IT related security expenses.

These expenses fluctuate with the development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services.

The expenses also reflect the costs associated with our infrastructure enhancement projects to improve our processing, automate processes, reduce compliance costs and enhance our data management.

Legal and professional expenses were $15.5 million for the year ended December 31, 2024 compared to $14.8 million for the year ended December 31, 2023, which is an increase of $703,000, or 4.7%.

Legal and professional expenses were $14.8 million for the year ended December 31, 2023 compared to $6.8 million for the year ended December 31, 2022, an increase of $8.0 million, or 119.0%.

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.

Data processing and s oftware licenses includes expenses related to obtaining and maintaining software required for our various functions.

Data processing and s oftware licenses includes expenses related to obtaining and maintaining software required for our various functions and additional investments in software development and the amortization of those costs.

Capitalized software totaled $15.7 million as of December 31, 2024, compared to $5.8 million as of December 31, 2023.

Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs.

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

Amortization of capitalized software totaled $3.0 million for the year ended December 31, 2024, compared to $754,000 for the year ended December 31, 2023.

Data processing costs were $15.3 million for the year ended December 31, 2024, compared to $9.3 million for the year ended December 31, 2023, an increase of $6.0 million, or 63.8%.

Data processing costs were $9.3 million for the year ended December 31, 2023, compared to $6.8 million for the year ended December 31, 2022, an increase of $2.5 million, or 37.2% due to higher data processing expenses resulting from growth and the addition of new products as well as increased investments in technology to automate and create efficiencies.

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%.

Occupancy expenses were $3.9 million for the year ended December 31, 2024, compared to $4.2 million for the year ended December 31, 2023, a decrease of $236,000, or 5.7%.

This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $1.5 million and $1.6 million for years ended December 31, 2024 and 2023, 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.

The decrease of $236,000 in occupancy expenses for 2024 compared to 2023, was primarily the result of $157,000 less in maintenance and repairs expenses.

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.

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

Occupancy expenses were $4.2 million for the year ended December 31, 2023, compared to $4.2 million for the year ended December 31, 2022, a decrease of $47,000, or 1.1%.

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.

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.

Generally, point of sale expense increases as point of sale activity increases, as does point of sale income which is recognized in other income for the community bank and in BaaS program income for CCBX.

Point of sale expenses were $325,000 for the year ended December 31, 2024, compared to $481,000 for the year ended December 31, 2023, a decrease of $156,000, or 32.4%.

Point of sale expenses were $481,000 for the year ended December 31, 2023, compared to $368,000 for the year ended December 31, 2022, an increase of $113,000, or 30.7%

FDIC Assessment s.

FDIC assessments are assessed to fund the Deposit Insurance Fund (“DIF”) to insure and protect the depositors of insured banks and to resolve failed banks.

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

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.

On October 18, 2022 the FDIC finalized an increase of two basis points in the initial base deposit insurance assessment rates schedules, beginning with the first quarterly assessment period of 2023.

The rise is intended to increase the reserve ratio of the Deposit Insurance Fund to 1.35%, the statutory requirement.

The increase in the base rates will remain in place until the reserve ratio reaches or exceeds 2.0%.

The reserve ratio is 1.21% as of June 30, 2024.

The reserve ratio is negatively affected by growth in assets and bank failures.

FDIC assessments were $2.9 million for the year ended December 31, 2024, compared to $2.5 million for the year ended December 31, 2023, an increase of $339,000, or 13.4%.

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%

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Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses.

Director and staff expenses were $2.1 million for the year ended December 31, 2024 compared to $2.2 million for the year ended December 31, 2023, a decrease of $40,000, or 1.9%.

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%.

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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 $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.

Although excise taxes increased as a result of increased income subject to excise taxes, expense was down compared to last year as a result of an apportionment study to quantify revenue earned outside the state of Washington that resulted in a $1.2 million refund during the second quarter of 2024.

CCBX income is sourced to the state where the partner does business, and the majority of partners are located outside the state of Washington.

Therefore, taxes we paid on CCBX income sourced to other states was in excess of what was actually owed.

Excise taxes were $1.2 million for the year ended December 31, 2024, compared to $2.0 million for the year ended December 31, 2023, a decrease of $822,000, or 41.6%.

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, a decrease of $228,000, or 10.3%.

Marketing and promotion costs were $162,000 for the year ended December 31, 2024, compared to $517,000 for the year ended December 31, 2023, a decrease of $355,000, or 68.7%.

Marketing and promotion costs will vary depending upon the deployment of branding and targeted advertising for the community bank and CCBX.

We are using more cost-effective advertising options, but expect costs to increase as we expand our marketing plan.

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, an increase of $166,000, or 47.3%

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 $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%.

Other noninterest expense increased to $6.5 million for the year ended December 31, 2024, compared to $5.2 million for the year ended December 31, 2023, an increase of $1.3 million, or 24.1%.

The increase was due to $600,000 for exit costs associated with a fraud/compliance vendor, higher business development & sponsorships, and increased operational losses of which $120,000 was a nonrecurring one-time loss.

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

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Fraud losses are recorded when incurred as losses in noninterest expense, and the reimbursement from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement.

For the year ended December 31, 2023, BaaS loan and fraud expense was $94.1 million, compared to $82.9 million for the year ended December 31, 2022 as a result of increased partner activity.

For the year ended December 31, 2024, BaaS loan and fraud expense was $128.4 million, compared to $86.9 million for the year ended December 31, 2023 and $82.9 million for the year ended December 31, 2022 as a result of increased partner activity.

as a result of increased partner activity.

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

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(Decrease) Increase

(Decrease) (1)

BaaS loan expense $ 118,536 $ 79,748 $ 53,294 $ 38,788 $ 26,454

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Total BaaS loan and fraud expense $ 128,370 $ 86,913 $ 82,865 $ 41,457 $ 4,048

(1) See Note 23, Restatement of Prior Period Financial Statements

Income Tax Expense

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The Company is subject to various state taxes that are assessed as CCBX activities and employees expand into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods.

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 were effective beginning January 1, 2023.

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

Year Ended December 31, 2024, Compared to Year Ended December 31, 2023.

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Our effective tax rates for the years ended December 31, 2024, and 2023, was 21.1% and 22.0%, respectively.

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The $456,000 decrease in income tax expense, despite higher net income, was a result of the deductibility of certain equity awards.

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

For the year ended December 31, 2023, income tax expense totaled $12.6 million, compared to $10.0 million for the year ended December 31, 2022.

Our effective tax rate for the year ended December 31, 2022 was 19.7%.

Segment Information

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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 CCBX segment had 24 relationships, at varying stages, including three signed letters of intent as of December 31, 2024.

The treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.

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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, 2024 December 31, 2023 (1)

(dollars in thousands;

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

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

Cash and due from banks $ 4,510 $ 10,894 $ 437,109 $ 452,513 $ 4,702 $ 9,601 $ 468,825 $ 483,128

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Total liabilities $ 1,896,846 $ 2,099,808 $ (314,150) $ 3,682,504 $ 1,843,430 $ 1,896,924 $ (285,327) $ 3,455,027

(1) See Note 23, Restatement of Prior Period Financial Statements

Community Bank

Community bank total assets as of December 31, 2024 increased $53.4 million, or 2.9%, to $1.90 billion, compared to $1.84 billion as of December 31, 2023.

Loans receivable net of deferred fees for the community bank segment increased $52.8 million, or 2.9%, to $1.88 billion as of December 31, 2024, compared to $1.83 billion as of December 31, 2023.

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.

The increase in community bank loans receivable was the result of gross loan growth of $51.8 million.

Total community bank deposits increased $23.6 million, or 1.58%, to $1.52 billion, as of December 31, 2024, compared to $1.50 billion as of December 31, 2023.

The overall increase in community bank deposits was a result of exception pricing tactics added as a strategy at the end of the first quarter of 2024 to retain deposits and more effectively compete in the market.

Our cost of deposits for the community bank increased to 1.80% for the year ended December 31, 2024, compared to 1.14% for the year ended December 31, 2023, partially as a result of such measures and also due to higher interest rates.

CCBX total assets as of December 31, 2024 increased $202.9 million, or 10.7%, to $2.10 billion, compared to $1.90 billion as of December 31, 2023.

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.

During the year ended December 31, 2024, $1.55 billion in CCBX loans were transferred to loans held for sale, with $1.52 billion in loans sold and $20.6 million loans remaining in loans held for sale as of December 31, 2024 compared to none at December 31, 2023.

We continue to sell loans back to the originating partner as part of our strategy to balance partner and lending limits, and manage the loan portfolio and credit quality.

Additionally, we retain a portion of the fee income for our role in processing transactions on sold credit card balances.

This is expected to provide an on-going and passive revenue stream with no on balance sheet risk.

Total CCBX loans receivable increased $412.2 million, or 34.6%, to $1.60 billion as of December 31, 2024, compared to $1.19 billion as of December 31, 2023.

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.

The increase in loans receivable was

the result of increased activity with CCBX partners.

After deliberately reducing our other consumer and other loans portfolio during the third and fourth quarters of 2023 and first quarter of 2024 in an effort to optimize our loan portfolio, we have built back the CCBX portfolio with new loans that are more aligned with our long term objectives.

CCBX allowance for credit losses increased to $158.1 million as of December 31, 2024, compared to $95.8 million as of December 31, 2023, as a result of increased loan balances and the mix of loans with increased loss rates which has increased the allowance calculation/requirement.

CCBX partner agreements provide for credit enhancements that cover $223.0 million, or 97.4%, of the total gross charge-offs on CCBX loans for the twelve months ended December 31, 2024.

CCBX partners bear most of the responsibility for credit losses incurred which consequently gives them a vested interest in the performance of the portfolio.

We believe that this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio.

Total CCBX deposits increased $201.3 million, or 10.8%, to $2.06 billion, compared to $1.86 billion as of December 31, 2023, 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.

This does not include an additional $273.2 million in CCBX deposits that were transferred off balance sheet to provide for increased FDIC insurance coverage to certain customers and to manage concentration levels, compared to $69.4 million as of December 31, 2023.

Treasury & Administration

Treasury & administration total assets as of December 31, 2024 increased $114.9 million, or 1,190.6%, to $124.6 million, compared to $9.7 million as of December 31, 2023.

Total securities decreased $103.0 million, or 68.5%, to $47.3 million as of December 31, 2024, compared to $150.4 million as of December 31, 2023, as a result of maturing AFS securities.

Total borrowings were $47.9 million as of December 31, 2024 and $47.7 million as of December 31, 2023.

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, 2024 December 31, 2023 (1) December 31, 2022

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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 $ 123,735 $ 248,286 $ 24,756 $ 396,777 $ 106,983 $ 197,306 $ 18,930 $ 323,219 $ 80,544 $ 102,808 $ 8,818 $ 192,170

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

intrabank transfer (21,265) 30,221 (8,956) — (10,404) 19,071 (8,667) — 796 4,106 (4,902) —

Interest expense 26,897 94,035 2,817 123,749 17,354 71,646 2,644 91,644 2,896 16,108 1,391 20,395

Net interest income 75,573 184,472 12,983 273,028 79,225 144,731 7,619 231,575 78,444 90,806 2,525 171,775

Provision for credit

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

losses - loans (2,130) 277,793 — 275,663 1,322 182,721 — 184,043 719 78,345 — 79,064

(Recapture)/Provision for

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

unfunded commitments 757 1,187 — 1,944 (211) 160 — (51) — — — —

Net interest income

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

after provision (recovery)

for credit losses - loans and

unfunded commitments 76,946 (94,508) 12,983 (4,579) 78,114 (38,150) 7,619 47,583 77,725 12,461 2,525 92,711

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

Service charges and fees 3,691 47 — 3,738 3,810 44 — 3,854 3,757 47 — 3,804

Other income 751 76 892 1,719 1,165 433 501 2,099 1,411 356 234 2,001

BaaS program income — 20,075 — 20,075 — 13,240 — 13,240 — 11,193 — 11,193

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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income — 282,673 — 282,673 — 184,929 — 184,929 — 105,945 — 105,945

Noninterest income 4,442 302,871 892 308,205 4,975 198,646 501 204,122 5,168 117,541 234 122,943

December 31, 2024 December 31, 2023 (1) December 31, 2022

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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

benefits 24,432 28,909 16,743 70,084 24,104 25,159 17,198 66,461 20,476 18,007 13,745 52,228

Occupancy 3,401 333 202 3,936 3,741 321 110 4,172 3,843 257 119 4,219

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

software licenses 4,759 4,029 6,525 15,313 4,595 2,321 2,433 9,349 3,285 1,806 1,725 6,816

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

expenses 99 8,904 6,503 15,506 1,580 9,645 3,578 14,803 213 3,163 3,384 6,760

Other expense 3,845 4,727 4,528 13,100 3,954 3,759 5,161 12,874 5,202 1,285 5,658 12,145

BaaS loan expense — 118,536 — 118,536 — 79,748 — 79,748 — 53,294 — 53,294

BaaS fraud expense — 9,834 — 9,834 — 7,165 — 7,165 — 29,571 — 29,571

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

expense 36,536 175,272 34,501 246,309 37,974 128,118 28,480 194,572 33,019 107,383 24,631 165,033

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

taxes $ 44,852 $ 33,091 $ (20,626) $ 57,317 $ 45,115 $ 32,378 $ (20,360) $ 57,133 $ 49,874 $ 22,619 $ (21,872) $ 50,621

Income taxes 8,870 7,999 (4,771) 12,098 9,913 7,116 (4,475) 12,554 10,068 4,248 (4,320) 9,996

Net Income 35,982 25,092 (15,855) 45,219 35,202 25,262 (15,885) 44,579 39,806 18,371 (17,552) 40,625

(1) See Note 23, Restatement of Prior Period Financial Statements

Community Bank

Year Ended December 31, 2024, Compared to Year Ended December 31, 2023.

Net interest income for the community bank was $75.6 million for the year ended December 31, 2024, a decrease of $3.7 million, or 4.6%, compared to $79.2 million for the year ended December 31, 2023.

The decrease in net interest income was largely due to increased interest expense on deposit accounts due to higher interest rates, partially offset by an increase in interest on loans receivable resulting from growth and higher loan yield.

As a result of the community bank having higher average loans than deposits for the year ended December 31, 2024 compared to the year ended December 31, 2023, intrabank interest expense for the community bank was $21.3 million for the year ended December 31, 2024, compared to intrabank interest expense of $10.4 million for the year ended December 31, 2023.

There was a recapture of the provision for credit losses - loans for the community bank of $2.1 million for the year ended December 31, 2024, compared to a provision for credit losses -loans of $1.3 million for the year ended December 31, 2023.

Net charge-offs to average loans for the community bank segment have remained consistently low and were 0.03% and 0.00% for the year ended December 31, 2024, and 2023, respectively.

Noninterest income for the community bank was $4.4 million for the year ended December 31, 2024, a decrease of $533,000, or 10.7%, compared to $5.0 million for the year ended December 31, 2023.

Loan referral fees decreased $515,000 for the year ended December 31, 2024 compared to the year ended December 31, 2023.

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 decreased $1.4 million, or 3.8%, to $36.5 million as of December 31, 2024, compared to $38.0 million as of December 31, 2023.

The decrease in noninterest expense is largely due to lower legal and professional expenses as some of our risk management infrastructure projects are being completed.

We continue to invest in our infrastructure and automation of our processes so that they are scalable.

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

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.

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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.

Year Ended December 31, 2024, Compared to Year Ended December 31, 2023.

Net interest income for CCBX was $184.5 million for the year ended December 31, 2024, an increase of $39.8 million, or 27.5%, compared to $144.7 million for the year ended December 31, 2023.

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

During the year ended December 31, 2024, we sold $1.52 billion in CCBX loans as part of our strategy to optimize our CCBX portfolio and manage credit quality, portfolio limits and partner limits.

We are retaining a portion of the transaction processing fee income on sold credit card balances which provides on-going passive income without balance sheet risk.

As a result of having higher average deposits than loans for the year ended December 31, 2024 compared to the year ended December 31, 2023, intrabank interest income for CCBX was $30.2 million for the year ended December 31, 2024, compared to $19.1 million for the year ended December 31, 2023.

Provision for credit losses - loans was $277.8 million for the year ended December 31, 2024, compared to $182.7 million for the year ended December 31, 2023, as a result of loan origination growth and as a result of the mix of loan balances with increased loss rates which has impacted the allowance calculation.

Noninterest income for CCBX was $302.9 million for the year ended December 31, 2024, an increase of $104.2 million, or 52.5%, compared to $198.6 million for the year ended December 31, 2023, due to an increase of $95.1 million in BaaS credit enhancements related to the allowance for credit losses, $6.8 million increase in total BaaS program income, which was the result of increased activity with our CCBX partners, and a $2.7 million increase in BaaS fraud enhancements as a result of lower fraud.

Noninterest expenses for CCBX increased $47.2 million, or 36.8%, to $175.3 million as of December 31, 2024, compared to $128.1 million as of December 31, 2023.

The increase in noninterest expense was largely due to growth from active CCBX relationships resulting in an increase in BaaS loan expense and salaries and benefits, for the year ended December 31, 2024, compared to the year ended December 31, 2023.

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

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

Net interest income for CCBX was $144.7 million for the year ended December 31, 2023, an increase of $53.9 million, or 59.4%, 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.

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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.

We expect 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.

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 $198.6 million for the year ended December 31, 2023, an increase of $81.1 million, or 69.0%, compared to $117.5 million for the year ended December 31, 2022, due to an increase of $2.0 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.

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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.”.

Treasury & Administration

Year Ended December 31, 2024, Compared to Year Ended December 31, 2023.

Net interest income for treasury & administration was $13.0 million for the year ended December 31, 2024, an increase of $5.3 million, or 70.4%, compared to $7.6 million for the year ended December 31, 2023, as a result of increased balances on interest earning assets and higher interest rates.

Noninterest income increased $391,000, or 78.0%, to $892,000 for the year ended December 31, 2024, compared to $501,000 for the year ended December 31, 2023.

Noninterest expense increased $6.0 million, or 21.1%, to $34.5 million for the year ended December 31, 2024, compared to $28.5 million for the year ended December 31, 2023, largely as a result of increased data processing and software license expense as a result of growth, partially offset by the $1.2 million credit in excise taxes due to the refund from the State of Washington as a result of an apportionment study we completed to quantify revenue earned outside of the state of Washington.

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

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 income increased $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 $371.2 million to $4.12 billion, or 9.9% at December 31, 2024, compared to $3.75 billion at December 31, 2023.

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.

This increase was largely the result of a $465.0 million increase in loans receivable, partially offset by a decrease of $99.5 million in AFS securities and a decrease of $35.8 million in interest earning deposits with other banks.

Loans Held For Sale

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.

During the year ended December 31, 2024, $1.55 billion in CCBX loans were transferred to loans held for sale, with $1.52 billion in loans sold at par during the year ended December 31, 2024.

As of December 31, 2024 there were $20.6 million in loans held for sale and none as of December 31, 2023.

Loan Portfolio

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As of December 31,

2024 2023 (1)

(dollars in thousands) Amount Percent Amount Percent

Commercial and industrial loans:

PPP loans $ 3,033 0.1 % $ 4,699 0.2 %

Capital call lines $ 109,017 3.1 % $ 87,494 2.9 %

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Gross loans receivable 3,493,019 100.0 % 3,028,842 100.0 %

Net deferred origination fees - PPP loans (47) (82)

Net deferred origination fees - all other loans (7,253) (6,025)

Net deferred origination fees (6,454) (7,300)

Loans receivable $ 3,486,565 $ 3,021,542

Loan Yield 11.20 % 10.36 %

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(1) See Note 23, Restatement of Prior Period Financial Statements

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

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December 31, 2024 December 31, 2023

(dollars in thousands;

unaudited) Balance % to Total Balance % to Total

(dollars in thousands) Balance % to Total Balance % to Total

Commercial and industrial loans:

PPP loans $ 3,033 0.2 % $ 4,699 0.3 %

All other commercial & industrial loans 146,469 8.0 146,982 9.1

Commercial and industrial loans $ 150,395 8.0 % $ 149,502 8.2 %

Real estate loans:

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December 31, 2024 December 31, 2023 (2)

(dollars in thousands;

unaudited) Balance % to Total Balance % to Total

(dollars in thousands) Balance % to Total Balance % to Total

Commercial and industrial loans:

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See the reconciliation of non-GAAP measures set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for the impact of BaaS loan expense on CCBX yield.

(2) See Note 23, Restatement of Prior Period Financial Statements

Commercial and Industrial Loans .

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

Commercial and industrial loans increased $2.1 million, or 0.7%, to $293.4 million as of December 31, 2024, from $291.3 million as of December 31, 2023.

The increase in commercial and industrial loans receivable over December 31, 2023 was due to an increase of $21.5 million in capital call lines partially offset by a $19.4 million decrease in other commercial and industrial loans.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively.

These loans are primarily made based on the borrower’s ability to service the debt from

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These loans are primarily made based on the borrower’s ability to service the debt from income.

Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable, inventory or equipment, and we generally obtain personal guarantees on these loans.

Commercial and industrial loans includes $48.6 million and $45.1 million in loans to financial institutions as of December 31, 2023, and December 31, 2022, respectively.

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.

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.

Commercial and industrial loans included $48.6 million in loans to financial institutions as of December 31, 2024, and December 31, 2023.

Included in the commercial and industrial loan balance is $109.0 million and $87.5 million in capital call lines resulting from relationships with our CCBX partners as of December 31, 2024 and December 31, 2023, respectively, and $34.0 million and $54.3 million in CCBX other commercial loans as of December 31, 2024 and December 31, 2023, respectively.

As of December 31, 2024 there was $150.4 million in community bank commercial and industrial loans compared to $149.5 million at December 31, 2023.

Construction, Land and Land Development Loans .

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Unfunded loan commitments for construction, land and land development loans were $47.8 million at December 31, 2024, compared to $113.5 million at December 31, 2023.

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.

Although we have seen a strong commercial and residential real estate market in the Puget Sound region in 2024, the economic environment is continuously changing with bank failures and mergers, inflation, higher interest rates, global unrest, the war in Ukraine, conflicts in the Middle East, political uncertainty, natural disasters and trade issues that have resulted in 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.

The properties securing these loans are primarily located in the Puget Sound region and are comprised of both residential and commercial properties, including owner occupied properties and investor properties.

As of December 31, 2023, construction, land and land development loans included $81.5 million in commercial construction loans, $7.9 million in undeveloped land loans, $34.2 million in residential construction loans and $33.5 million in other construction, land and land development loans, compared to $100.7 million in commercial construction loans, $44.6 million in undeveloped land loans, $32.9 million in residential construction loans and $35.9 million in other construction, land and land development loans as of December 31, 2022.

As of December 31, 2024, construction, land and land development loans included $83.2 million in commercial construction loans, $40.9 million in residential construction loans, $15.4 million in other construction, land and land development loans and $8.7 million in undeveloped land loans, compared to $81.5 million in commercial construction loans, $34.2 million in residential construction loans and $33.5 million in other construction, land and land development loans and $7.9 million in undeveloped land loans as of December 31, 2023.

Residential Real Estate Loans .

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.

Our one-to-four family residential real estate loans increased $6.3 million, or 1.4%, to $469.8 million as of December 31, 2024, from $463.4 million as of December 31, 2023 due to a decrease of $23.3 million in community bank loans partially offset by an increase of $29.7 million in CCBX loans.

As of December 31, 2024, there were $267.7 million in CCBX home equity loans included in residential real estate, compared to $238.0 million at December 31, 2023.

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

These are first and second lien residential loans and require 18 months of home ownership.

Term lengths are up to 30 years and lines range from $50,000 to $400,000.

We sold $506.7 million in CCBX residential real estate loans during the year ended December 31, 2024.

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Commercial real estate loans increased $71.3 million, or 5.5%, to $1.37 billion as of December 31, 2024, from $1.30 billion as of December 31, 2023.

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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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We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans.

The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores, hotels and motels, office buildings, mixed-use residential and commercial, and other properties.

The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores, hotels and motels, low rise office buildings, mixed-use residential and commercial, and other properties.

We originate both fixed- and adjustable-rate loans with terms up to 20 years.

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At December 31, 2024, approximately 33.0% of the commercial real estate loan portfolio consisted of fixed rate loans.

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

Commercial real estate loans represented 39.4% of our loan portfolio at December 31, 2024 and are a large source of revenue.

As of December 31, 2024, we held $20.1 million in purchased commercial real estate loans, compared to $43.0 million at December 31, 2023.

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Consumer and Other Loans .

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.

CCBX consumer loans include installment loans, credit cards, lines of credit and other loans.

Consumer and other loans increased $393.5 million, or 48.4%, to $1.21 billion, from $813.5 million as of December 31, 2023, as a result of growth in CCBX loans originated through our partners.

We sold $850.9 million in CCBX credit cards loans and $167.3 million in CCBX consumer and other loans during the year ended December 31, 2024.

We expect that we will continue to sell CCBX loans as part of our on-going strategy to manage the loan portfolio and credit quality.

New loans are being booked with enhanced credit standards, which typically results in a lower interest rate than some of the higher risk loans that have paid off or that we have chosen to sell.

CCBX consumer loans totaled $1.19 billion as of December 31, 2024, compared to $811.9 million at December 31, 2023.

CCBX consumer loans include cash secured and unsecured consumer loans, loan products designed to help consumers build credit, lines of credit, credit cards, other loans and overdrafts.

Consumer credit cards are open-ended and have interest rates ranging from 7.75% to the maximum rate allowable by state.

For short-term consumer loans, both secured and unsecured options are available and typically have fully-amortizing terms ranging from three months to five years.

Interest rates can be fixed or variable and range from 3.99% to the maximum allowable rate by state.

Our community bank consumer and other loans totaled $13.5 million as of December 31, 2024, compared to $1.6 million at December 31, 2023 and are comprised of personal lines of credit, automobile, boat, and recreational vehicle loans, and secured term loans.

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Commercial and industrial loans:

PPP loans $ — $ 3,033 $ — $ — $ 3,033

Capital call lines $ 104,017 $ 5,000 $ — $ — $ 109,017

All other commercial and industrial loans 37,238 93,743 53,375 — 184,356

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Total $ 489,640 $ 1,928,062 $ 936,727 $ 138,590 $ 3,493,019

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The following table sets forth all loans at December 31, 2024, that are due after December 31, 2025, and have either fixed interest rates or floating or adjustable interest rates:

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Commercial and industrial loans:

PPP loans 3,033 $ — $ 3,033

Capital call lines — $ 5,000 $ 5,000

All other commercial and industrial loans 84,943 62,175 147,118

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When combined with $1.96 billion in unused commitments the total of these categories is $5.46 billion.

However, total exposure on CCBX loans is subject to portfolio and partner maximum limits.

However, total exposure on CCBX loans is subject to portfolio and partner maximum limits and adjusted for those limits, unused commitments are limited to $750.8 million .

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

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Convenience Store 139,735 575 140,310 2.6 2,329 60

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

Office 122,897 7,687 130,584 2.4 1,366 90

Retail 103,312 414 103,726 1.9 993 104

Warehouse 103,130 — 103,130 1.9 1,748 59

Mixed use 91,607 5,365 96,972 1.8 1,160 79

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

Mini Storage 80,837 10,183 91,020 1.7 3,674 22

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Total $ 1,374,801 $ 34,222 $ 1,409,023 25.8 % $ 2,102 654

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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 $1,000.

The following table summarizes our exposure by category for our consumer and other loan portfolio as of December 31, 2024:

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

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

Total Outstanding Balance & Available Commitment (1)

CCBX Portfolio Maximum Limit (1)

% of Total Loans

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CCBX consumer loans

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

Installment loans $ 656,797 $ 15,806 $ 672,603 $ 1,774,533 12.3 % $ 1.0 690,596

Credit cards 528,554 717,198 1,245,752 820,000 22.8 1.8 301,799

Lines of credit 722 1 723 5,398 0.0 1.4 524

Other loans 2,545 — 2,545 0.1 0.2 10,993

Other loans 7,261 — 7,261 n/a 0.1 — 163,026

Community bank consumer loans

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

Lines of credit 181 344 525 n/a 0.0 5.7 32

Installment loans 1,917 2 1,919 n/a 0.1 68.5 28

Other loans 11,444 2,400 13,844 n/a 0.3 30.6 374

Total $ 1,206,876 $ 735,751 $ 1,942,627 $ 2,599,931 35.6 % $ 1.0 1,156,379

(1) Total exposure on CCBX loans is subject to portfolio maximum limits.

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

The following table summarizes our exposure by category for our residential real estate portfolio as of December 31, 2024:

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

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

Total Outstanding Balance & Available Commitment (1)

CCBX Portfolio Maximum Limit (1)

% of Total Loans

(Outstanding Balance &

Available Commitment) Average Loan Balance Number of Loans

Available Commitment)

Average Loan Balance Number of Loans

CCBX residential real estate loans

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Community bank residential real estate loans

Closed end, secured by first liens 192,805 3,268 196,073 3.7 610 316

Home equity line of credit 23,049 42,048 65,097 1.2 106 217

Closed end, second liens 9,537 1,810 11,347 0.2 281 34

Closed end, secured by first liens 165,433 2,080 167,513 n/a 3.1 537 308

Home equity line of credit 25,506 43,102 68,608 n/a 1.3 109 234

Closed end, second liens 11,125 965 12,090 n/a 0.2 371 30

Total $ 469,771 $ 499,516 $ 969,287 $ 375,000 17.8 % $ 44 10,664

(1) Total exposure on CCBX loans is subject to portfolio maximum limits.

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

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The following table summarizes our concentration by industry for our commercial and industrial loan portfolio as of December 31, 2024:

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

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

Total Outstanding Balance & Available Commitment (1)

CCBX Portfolio Maximum Limit (1)

% of Total Loans

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Average Loan Balance Number of Loans

CCBX C&I Loans

Capital Call Lines $ 109,017 $ 550,948 $ 659,965 $ 350,000 12.1 % $ 808 135

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

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

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

Retail and other loans 33,960 19,104 53,064 480,069 1.0 11 3,064

Community bank C&I Loans

Construction/Contractor Services 24,367 36,343 60,710 n/a 1.1 121 202

Financial Institutions 48,648 — 48,648 n/a 0.9 4,054 12

Medical / Dental / Other Care 7,074 2,641 9,715 n/a 0.2 544 13

Manufacturing 5,604 4,581 10,185 n/a 0.2 147 38

Groups < 0.20% of total 64,703 31,920 96,623 n/a 1.7 246 263

Total $ 293,373 $ 645,537 $ 938,910 $ 830,069 17.2 % $ 79 3,727

(1) Total exposure on CCBX loans is subject to portfolio maximum limits.

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

The following table details our concentration by category for our construction, land and land development loan portfolio as of December 31, 2024:

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Total $ 148,198 $ 47,802 $ 196,000 3.6 % $ 2,087 71

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Nonperforming Assets

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As a result of the type of loans (primarily consumer loans) originated through our CCBX partners, we anticipate that balances 90 days past due or more and still accruing will increase as those loans grow.

We continue to refine our credit approach with partners, widening the scope of loans that we are moving to nonaccrual status.

Additionally, some CCBX partners have instituted a collection practice that places certain loans on nonaccrual status to improve collectability.

As of December 31, 2024, $17.2 million in CCBX nonaccrual loans were less than 90 days past due.

When loans are placed on nonaccrual status, all unpaid accrued interest is reversed from income and all interest accruals are stopped.

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We actively manage problem assets to reduce our risk for loss.

We had $53.8 million in nonperforming assets as of December 31, 2023, compared to $33.2 million as of December 31, 2022.

We had $62.7 million, or 1.52%, in nonperforming assets as of December 31, 2024, compared to $53.8 million, or 1.44%, as of December 31, 2023.

This includes $43.1 million in CCBX loans more than 90 days past due and still accruing interest as of December 31, 2024, compared to $46.5 million at December 31, 2023.

All of our nonperforming assets were nonperforming loans as of December 31, 2024 and December 31, 2023.

The increase in nonperforming assets was due to an increase in CCBX nonaccrual loans of $19.5 million as a result of a new collection practice that places certain loans on nonaccrual status to improve collectability, $17.2 million of these loans are less than 90 days past due as of December 31, 2024.

This increase was partially offset by a $3.4 million decrease in CCBX partner loans that are 90 days or more past due and still accruing interest, and a decrease in community bank nonaccrual loans of $7.2 million during the twelve months ended December 31, 2024.

The balance of our nonperforming assets increased as a result of certain CCBX loans that are less than 90 days past due, which were placed on nonaccrual status.

Our nonperforming loans to loans receivable ratio was 1.80% at December 31, 2024, compared to 1.78% at December 31, 2023.

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.

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.

Our community bank credit quality remains strong, as demonstrated by the low level of community bank nonperforming loan balances for the year ended December 31, 2024.

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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CCBX partners bear most of the responsibility for credit losses incurred which consequently gives them a vested interest in the performance of the portfolio.

We believe this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio.

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

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

(dollars in thousands) December 31,

2024 December 31,

Nonaccrual loans:

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Commercial real estate — 7,145

Consumer and other loans:

Credit cards 10,262 —

Other consumer and other loans 8,967 —

Total nonaccrual loans 19,563 7,315

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Repossessed assets — —

Modified loans for borrowers experiencing financial difficulty — —

Total nonperforming assets $ 62,656 $ 53,837

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Total nonperforming assets to total assets 1.52 % 1.44 %

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(1) See Note 23, Restatement of Prior Period Financial Statements

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

Community Bank As of

(dollars in thousands;

unaudited) December 31,

(dollars in thousands) December 31,

2024 December 31,

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Commercial and industrial loans $ 100 $ —

Construction, land and land development — 66

Residential real estate — 170

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

(dollars in thousands;

unaudited) December 31,

(dollars in thousands) December 31,

2024 December 31,

Nonaccrual loans:

Commercial and industrial loans:

All other commercial & industrial loans

Consumer and other loans:

Credit cards $ 10,262 $ —

Other consumer and other loans 8,967 —

Total nonaccrual loans 19,463 —

Accruing loans past due 90 days or more:

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Total nonperforming CCBX loans to total loans receivable 1.79 % 1.54 %

(1) See Note 23, Restatement of Prior Period Financial Statements

As of December 31, 2024, $60.8 million of the $62.6 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.

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.

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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.

In estimating the life of the loan, the Bank cannot extend the contractual term of the loan for expected extensions, renewals, and modifications, unless the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Bank.

Because expected credit losses are estimated over the contractual life adjusted for estimated prepayments, determination of the life of the loan may significantly affect the ACL.

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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.

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

As of December 31, 2024, the allowance for credit losses totaled $177.0 million, or 5.08% 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.

As of December 31, 2023, the allowance for credit losses totaled $117.4 million, or 3.88% of total loans.

The increase in the Company’s allowance for credit losses for the year ended December 31, 2024 compared to December 31, 2023, was largely related to the growth and composition for CCBX partner loans.

During the year ended December 31, 2024, a $277.8 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.

The factors used in management’s analysis for community bank credit losses indicated that a recapture for credit losses - loans of $2.1 million was needed for the year ended December 31, 2024, largely due to the resolution and recapture of a specific allowance and a change in the average remaining life of community bank loans.

The economic environment is continuously changing with bank failures and mergers, inflation, higher interest rates, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment, natural disasters, and trade issues that have resulted in economic uncertainty.

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

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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.

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

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

When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner legal commitment to indemnify or reimburse losses.

The credit enhancement asset is relieved as credit enhancement payments and recoveries are received from the CCBX partner or taken from the partner's cash reserve account.

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

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

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 credit enhancement asset is an amount due from CCBX partners related to losses in the loan portfolio.

It is determined by the provision for credit and other losses, such as fraud, and increases due to credit loss recoveries, which is ultimately reduced as partners reimburse for incurred losses.

Identified below is the portion of incurred losses that are pending settlement with partners as of each period indicated.

The CCBX provision for credit losses and CCBX net-charge-offs include partner accounts that are not covered by credit enhancement, therefore those items are included on a separate line item to reflect the exclusion from the credit enhancement asset.

At December 31, 2024 the Company was responsible for credit losses on approximately 5% of a $324.6 million CCBX loan portfolio and represented $20.6 million in loans.

The table below shows the activity in the credit enhancement asset for the periods indicated:

As of or for the Twelve Months Ended December 31,

(dollars in thousands) 2024 2023 (1)

Credit enhancement at beginning of period 112,894 53,377

CECL Day 1 Adjustment — 4,465

CCBX Provision for credit losses - loans 277,793 182,721

CCBX Provision for credit losses - unfunded commitments 1,187 160

Credit losses settled with partner during period (228,537) (151,933)

Credit recoveries settled with partner during period 13,027 7,442

Net losses pending settlement with partner 5,998 18,156

Net (provision) charge-offs without credit enhancement (472) (1,494)

Credit enhancement at end of period 181,890 112,894

(1) See Note 23, Restatement of Prior Period Financial Statements

Many CCBX partners also pledge a cash reserve account at the Bank as collateral for loss exposure which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval.

Credit losses and recoveries typically flow through the cash reserve account.

These cash reserve accounts are included in total deposits on the balance sheet.

Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligation then the Bank would be exposed to additional loan and deposit losses if the cash flows on the loans were not sufficient to fund the reimbursement of loan losses, as a result of this counterparty risk.

The Bank would evaluate any remaining credit enhancement asset from the CCBX partner in the event the partner failed to fulfill its obligations and would determine if a write-off is appropriate.

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

December 31, 2024 December 31, 2023 (1)

(dollars in thousands;

unaudited) Community Bank CCBX Total Community Bank CCBX Total

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

Gross charge-offs $ 554 $ 228,537 $ 229,091 $ 64 $ 151,933 $ 151,997

3 unchanged sentences

average loans 0.03 % 15.10 % 6.51 % 0.00 % 11.94 % 4.92 %

covered by credit

enhancement 97.4 % 97.5 %

(1) See Note 23, Restatement of Prior Period Financial Statements

December 31, 2022

(dollars in thousands;

unaudited) Community Bank CCBX Total

(dollars in thousands) Community Bank CCBX Total

Gross charge-offs $ 428 $ 33,321 $ 33,749

2 unchanged sentences

Net charge-offs to average loans

0.03 % 4.48 % 1.49 %

% of CCBX charge-offs covered by

credit enhancement 99.4 %

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

1 unchanged sentence

(dollars in thousands) 2024 2023 (1) 2022

unaudited) 2023 2022 2021

Allowance at beginning of period $ 117,381 $ 74,029 $ 28,632

3 unchanged sentences

Residential real estate 5,006 4,641 452

Commercial real estate 264 — —

Consumer and other 208,265 140,705 32,742

9 unchanged sentences

Allowance to loans receivable 5.08 % 3.88 % 2.82 %

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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.

(1) See Note 23, Restatement of Prior Period Financial Statements

The allowance for credit losses to nonaccrual loans ratio decreased as of December 31, 2024, compared to December 31, 2023 as a result of an increase in nonaccrual loans of $12.2 million due to an increase in CCBX nonaccrual loans as a result of a new collection practice that places certain loans on nonaccrual status to improve collectability, partially offset by a decrease in nonaccrual community bank loans and a decrease in CCBX loans past due 90 days or more.

The allowance for credit losses increased $59.6 million for the year ended December 31, 2024 compared to the year ended December 31, 2023, largely due to the increase in loans originated through our CCBX partners.

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

CCBX partners bear most of the responsibility for credit losses incurred which consequently gives them a vested interest in the performance of the portfolio.

We believe that this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio.

Net charge-offs on CCBX loans for the year ended December 31, 2024 that were covered by credit enhancements was $223.0 million.

At December 31, 2024, the allowance for credit losses for CCBX partner loans totaled $158.1 million, compared to $95.8 million at December 31, 2023.

1 unchanged sentence

As of December 31, 2024 As of December 31, 2023 (1)

(dollars in thousands;

unaudited) Community Bank CCBX Total Community Bank CCBX Total

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

Loans receivable $ 1,882,988 $ 1,603,577 $ 3,486,565 $ 1,830,154 $ 1,191,388 $ 3,021,542

2 unchanged sentences

total loans receivable 1.00 % 9.86 % 5.08 % 1.18 % 8.04 % 3.88 %

(1) See Note 23, Restatement of Prior Period Financial Statements

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.

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 credit losses.

We continue to have a low level of community bank charge-offs and nonperforming loans, however, the economic environment is continuously changing with potential for bank failures and mergers, inflation, higher interest rates, global unrest, the war in Ukraine, conflicts in the Middle East, political uncertainty, natural disasters and trade issues that have resulted in economic uncertainty.

If economic conditions worsen then Washington state and Puget Sound region may experience a more severe economic downturn, and our asset quality could deteriorate, which may require material additional provisions for credit losses.

The following table shows the allocation of the allowance for credit losses among loan categories and certain other information as of the dates indicated.

2 unchanged sentences

At December 31,

2024 2023 (1)

(dollars in thousands) Allowance

8 unchanged sentences

Consumer and other loans 141,798 34.6 81,611 27.0

Total allocated 116,958 72,864

Unallocated — 1,165

Total allowance for credit losses $ 176,994 $ 117,381

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.

At December 31, 2023, 66.1% of our investment portfolio consisted primarily of U.S.

Treasury securities.

The remainder of our securities portfolio was invested in U.S.

Agency collateralized mortgage

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obligations and U.S.

(1) See Note 23, Restatement of Prior Period Financial Statements

We use our securities portfolio primarily as a source of liquidity and collateral that can be readily sold or pledged for public deposits, for CRA purposes or other business purposes.

At December 31, 2024, our securities portfolio was invested in U.S.

Agency collateralized mortgage 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, 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.

To the extent our securities represent more than 5% of assets, absent an immediate need for liquidity, we anticipate investing excess funds to provide a higher return.

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 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, 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.

At December 31, 2024, our loan-to-deposit ratio was 97.8% due to our growth in both loans and deposits.

When our securities portfolio represents less than 5% of assets we focus on liquid securities.

To the extent our securities represent more than 5% of assets, absent an immediate need for liquidity, we may invest excess funds to provide a higher return.

As of December 31, 2024, the amortized cost of our investment securities totaled $47.3 million, a decrease of $103.6 million, or 68.6%, compared to $150.9 million as of December 31, 2023.

The decrease in the securities portfolio was due to $100.0 million of securities in the AFS portfolio maturing during the year ended December 31, 2024 partially offset by the purchase of HTM securities for CRA purposes.

Our investment portfolio consists of only $35,000 in securities classified as AFS and $47.3 million in held-to-maturity.

The carrying values of our investment securities classified as AFS are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.

As of December 31, 2024, our AFS portfolio had an unrealized loss of $2,000, compared to an unrealized loss of $537,000 as of December 31, 2023.

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

5 unchanged sentences

Agency collateralized mortgage obligations 37 35 45 43

Agency residential mortgage-backed securities

Municipal bonds — — 250 250

Total available-for-sale securities 37 35 100,041 99,504

11 unchanged sentences

Government and its agencies, for which aggregate adjusted cost exceeded 10.0% of consolidated shareholders’ equity.

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.

Restricted equity securities totaled $7.3 million as of December 31, 2024 and $6.8 million as of December 31, 2023 The increase was attributable to 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.

1 unchanged sentence

The Company has the following equity investments which do not have a readily determinable fair value and are held at cost minus impairment if any, plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer.

This method will be applied until the investments do not qualify for the measurement election (e.g., if the investment has a readily determinable fair value).

This method will be applied until the investments do not qualify for the measurement election

(e.g., if the investment has a readily determinable fair value).

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.

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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 Company had a $2.2 million equity interest in a specialized bank technology company as of December 31, 2024 and December 31, 2023 .

• The Company had a $350,000 equity interest in a technology company as of the years ended December 31, 2024 and December 31, 2023.

• The Company had a $47,000 and $50,000 equity interest in a technology company as of the years ended December 31, 2024, and December 31, 2023, respectively.

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

9 unchanged sentences

The Company has committed up to $480,000 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:

5 unchanged sentences

Carrying value, end of period $ 910 $ 809 $ 456

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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.

1 unchanged sentence

As of December 31, 2024

One Year or Less More than One

Year to Five Years

More than Five

Years to Ten Years

More than Ten Years Total

2 unchanged sentences

Value Weighted

Securities available-for-sale:

Treasury securities $ 99,461 2.138 % $ - 0.000 % $ - 0.000 % $ - 0.000 % $ 99,461 2.138 %

Agency collateralized mortgage obligations $ 37 3.091 % $ 37 3.091 %

4 unchanged sentences

Total $ 47,323 5.466 % $ 47,323 5.466 %

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.

Deferred tax assets, net decreased $206,000 to $3.6 million and other assets decreased $1.7 million to $13.6 million as of December 31, 2024, compared to December 31, 2023.

We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, money market, savings, and time accounts as well as IntraFi network sweep deposits.

Sweep deposits enable us to provide an FDIC insured deposit option to customers that have balances in excess of the FDIC insurance limit.

This service trades our customers’ funds as certificates of deposit or interest bearing demand deposits in increments under the FDIC insured amount to other participating financial institutions and in exchange we receive time deposit or interest bearing demand investments from participating financial institutions in a reciprocal agreement.

We rely primarily on competitive pricing policies, convenient locations, electronic delivery channels (internet and mobile), and personalized service to attract new deposits and retain existing deposits.

Additionally, we offer deposit products through our CCBX segment.

CCBX deposits are generally classified as interest bearing negotiable order of withdrawal (“NOW”) and money market accounts.

CCBX deposits are generally classified as interest bearing demand and money market accounts.

CCBX deposit products allow us to offer a broader range of partner specific products, which include products designed to reach specific under-served or under-banked populations served by our CCBX partners.

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Total deposits as of December 31, 2024 were $3.59 billion, an increase of $225.0 million, or 6.7%, compared to $3.36 billion as of December 31, 2023.

The increase in deposits was largely in core deposits, which increased $655.5 million to $3.34 billion from $2.69 billion at December 31, 2022.

We define core deposits as all deposits except time deposits and brokered deposits.

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.

The increase in deposits was largely in due to an increase of $201.3 million in CCBX deposits.

Core deposits ended the quarter at $3.12 billion compared to $3.34 billion at December 31, 2023.

We define core deposits as all deposits except time deposits and brokered/other deposits.

Our cost of deposits for the community bank was 1.80% for the year ended December 31, 2024.

Additionally, as of December 31, 2024, there was $273.2 million in CCBX deposits that were transferred off balance sheet for increased FDIC insurance coverage and to manage deposit concentrations.

Included in total deposits is $2.06 billion in CCBX deposits, an increase of $201.3 million, or 10.8%, compared to $1.86 billion as of December 31, 2023.

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.

Our cost of deposits for the CCBX segment was 4.55% for the year ended December 31, 2023.

The deposits from our CCBX segment are generally classified as interest bearing demand and money market accounts.

Total noninterest bearing deposits as of December 31, 2024 were $527.5 million, a decrease of $97.7 million, or 15.6%, compared to $625.2 million as of December 31, 2023.

Noninterest bearing deposits represent 14.7% and 18.6% of total deposits for December 31, 2024 and December 31, 2023, respectively.

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.

The decrease is due to the strong increase in core deposits, and our focus on core deposits and letting higher rate deposits run off as they mature.

Community bank noninterest bearing deposits totaled $471.8 million and $561.6 million at December 31, 2024 and December 31, 2023, respectively.

Total interest bearing balances, excluding time deposits, as of December 31, 2024 were $3.04 billion, an increase of $323.5 million, or 11.9%, compared to $2.72 billion as of December 31, 2023.

The $323.5 million increase is due to CCBX growth in interest bearing deposits combined with an increase in community bank interest bearing deposits of $114.2 million.

Included in total deposits is $414.0 million in IntraFi network interest bearing demand and money market sweep accounts as of December 31, 2024, which provides our customers with fully insured deposits through a sweep and exchange of deposits with other financial institutions.

The increase in community bank deposits was a result of the addition of some exception pricing tactics as a strategy at the end of the first quarter of 2024 to retain accounts and more effectively compete in the market.

Total time deposit balances as of December 31, 2024 were $17.5 million, a decrease of $811,000, or 4.4%, from $18.4 million as of December 31, 2023.

The decrease is due to our focus on core deposits and letting higher rate time deposits run off as they mature.

We have seen competitors increase rates on time deposits, and we have not globally matched their rates in response as we focus on growing and retaining less costly core deposits.

4 unchanged sentences

Demand, noninterest bearing $ 527,524 14.7 % $ 625,202 18.6 %

NOW and money market 2,640,240 78.6 1,804,399 64.0

Interest bearing demand and

money market 2,529,084 70.5 2,640,240 78.6

Savings 66,826 1.9 76,562 2.3

Total core deposits 3,123,434 87.1 3,342,004 99.5

Brokered deposits 1 — 101,546 3.6

Other deposits 444,351 12.4 1 —

Time deposits less than $100,000 5,920 0.2 8,109 0.2

3 unchanged sentences

3.46 % 2.87 %

Table of Content s

The following table presents the community bank deposits which are included in the total deposit portfolio table above:

3 unchanged sentences

Demand, noninterest bearing $ 471,838 31.0 % $ 561,572 37.5 %

NOW and money market 846,072 56.5 709,490 46.1

Interest bearing demand and

money market 570,625 37.5 846,072 56.5

Savings 61,116 4.0 71,598 4.8

Total core deposits 1,103,579 72.5 1,479,242 98.8

Brokered deposits 1 0.0 1 0.0

Other deposits 400,118 26.3 1 0.0

Time deposits less than $100,000 5,920 0.4 8,109 0.5

7 unchanged sentences

Demand, noninterest bearing $ 55,686 2.7 % $ 63,630 3.4 %

NOW and money market 1,794,168 96.3 1,094,909 85.6

Interest bearing demand and

money market 1,958,459 94.9 1,794,168 96.3

Savings 5,710 0.3 4,964 0.3

Total core deposits 2,019,855 97.9 1,862,762 100.0

BaaS-brokered deposits — — 101,545 7.9

Other deposits 44,233 2.1 — —

Total CCBX deposits $ 2,064,088 100.0 % $ 1,862,762 100.0 %

12 unchanged sentences

Average deposits for the year ended December 31, 2024, were $3.49 billion, an increase of $389.0 million, or 12.5%, compared to $3.10 billion for the year ended December 31, 2023.

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.

We expect deposits to increase with continued growth in CCBX as well as in the community bank through our primary market areas, the increase in commercial lending relationships for which we also seek deposit balances and the results of business development efforts by branch managers, treasury service personnel and lenders.

The average rate paid on total 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 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 increase in average deposits was primarily in interest bearing deposits.

We expect deposits to increase with continued growth in our primary market areas, increase in commercial lending relationships through which we seek deposit balances and continued business development efforts by branch managers, treasury service personnel and lenders.

The average rate paid on total deposits was 3.46% for the year ended December 31, 2024, compared to 2.87% for the year ended December 31, 2023.

The average rate paid on interest bearing demand and money market accounts increased 0.46% for the year ended December 31, 2024 compared to the year ended December 31, 2023.

The average rate paid on other deposits decreased 0.31% for the year ended December 31, 2024, compared to the year ended December 31, 2023.

The average rate paid on time deposits of less than $100,000 increased 0.42% for the year ended December 31, 2024, compared to the year ended December 31, 2023.

The average rate paid on time deposits greater than $100,000 increased 0.91% for the year ended December 31, 2024 compared to the year ended December 31, 2023.

The average rate paid on savings increased 0.15% for the year ended December 31, 2024, compared to the year ended December 31, 2023.

The overall higher average rate paid on interest bearing accounts in the year ended December 31, 2024 compared to the year ended December 31, 2023 was due to a higher interest rate environment.

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

3 unchanged sentences

Demand, noninterest bearing $ 586,477 0.00 % $ 707,641 0.00 % $ 942,087 0.00 %

NOW and money market 2,254,138 3.89 1,509,492 1.17 740,045 0.24 %

Interest bearing demand and

money market 2,445,848 4.35 2,254,138 3.89 1,509,492 1.17 %

Savings 70,090 0.40 90,705 0.25 106,061 0.05 %

BaaS-brokered deposits 25,969 4.08 71,532 1.46 26,020 0.35 %

Other deposits 373,560 3.78 25,969 4.08 71,532 1.46 %

Time deposits less than $100,000 6,733 0.77 9,999 0.35 13,980 0.28 %

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The Bank is using sweep deposits to provide our customers with fully insured deposits through a sweep and exchange of deposits with other financial institutions.

Estimated uninsured time deposits totaled $3.0 million as of December 31, 2024.

The table below shows the estimated uninsured time deposits, by account, for the maturity periods indicated:

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Total $ 3,045

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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, 2024 and December 31, 2023, we had borrowing capacity of $173.3 million and $204.6 million, respectively, with the FHLB.

During the year ended December 31, 2022, we repaid a total of $25.0 million in FHLB term advances.

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 .

As of December 31, 2024 and 2023, FHLB advances totaled zero.

The following table presents details on FHLB advance borrowings for the periods indicated:

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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%.

Beginning with rate adjustments subsequent to June 30, 2023, the rate is based off three-month CME Term SOFR plus a spread adjustment of 0.26% and margin of 2.10%.

The effective rate as of December 31, 2024 and 2023, was 6.72% and 7.75%, respectively.

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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 when they come due at a reasonable cost.

Liquidity refers to our capacity to meet our cash obligations at a reasonable cost.

Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations.

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Changes in economic conditions or exposure to credit, market, and operational, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity management.

The Company considers various deposit run-off scenarios in its liquidity management process including that all community bank uninsured deposits exit the Bank in an economic downturn.

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 so we model a deposit run-off scenario that simulates the loss of deposits from our largest CCBX deposit partner.

If a relationship with a large CCBX partner terminates, the exit of those deposits could have an adverse impact on liquidity.

Partner program agreements govern the relationship and are valid for a given period of time.

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those options are more fully discussed below.

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.

As of December 31, 2024, we had two partners with deposits that are in excess of 10% of total deposits and represent 44% of total deposits.

Our maximum concentration for any one partner is 30% of total assets.

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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We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary and are closely monitoring liquidity in this uncertain economic environment.

The Company has pledged loans and securities totaling $1.03 billion and $220.1 million at December 31, 2023 and December 31, 2022, respectively, for borrowing lines at the FHLB and FRB.

The Company has pledged loans and securities totaling $957.9 million and $1.03 billion at December 31, 2024 and December 31, 2023, 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.

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There were no borrowings taken under these facilities during the twelve-months ended December 31, 2024 so the Bank has the maximum capacity in the event of a liquidity emergency.

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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 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 ($543.0 million at December 31, 2024 and alternative sources of funds including the capacity to borrow up to $642.1 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 $1.14 billion represented 31.9% of total deposits and exceeded the $543.0 million in uninsured deposits as of December 31, 2024.

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.

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Uninsured deposits totaled $543.0 million at December 31, 2024 and totaled $558.6 million at December 31, 2023.

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.

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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.

During the quarter ended December 31, 2024, the Company completed a public offering of 1,380,000 shares of its common stock at a price to the public of $71.00 per share.

Gross proceeds from the offering of $98.0 million, before deducting underwriting discounts and offering expenses, will be used for general corporate purposes, including, without limitation, to support investment opportunities and the Bank’s growth.

A total of $50.0 million of those proceeds were contributed to the Bank in 2024, and the balance of the amount was retained in cash at the Company level.

The Company currently holds $47.7 million in cash for debt servicing and operating purposes.

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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’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, 2024, and December 31, 2023, 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.

however, the capital raise completed in December 2024 strengthened our regulatory capital levels.

We expect to monitor and control growth in order to remain in compliance with all regulatory capital standards applicable to us.

In addition, the Company maintains an effective registration statement on Form S-3 with the Securities and Exchange Commission which allows the Company to raise additional capital in an amount up to $102.0 million.

The Company raised $34.5 million in December 2021.

The Company raised $98.0 million in December 2024 and $34.5 million in December 2021.

The Company, through a private placement, raised $25.0 million in subordinated debt in 2021 and repaid $10.0 million of subordinated debt with the proceeds and used the remainder for general corporate purposes.

On November 1, 2022 the

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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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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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Deferred compensation plans 390 86 304 —

Operating leases 7,335 1,016 6,319 —

Operating and finance leases 6,385 1,013 5,372 —

Non-maturity deposits 3,123,434 — — 3,123,434

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As of December 31, 2024 we had $1.96 billion in commitments to extend credit, compared to $2.34 billion as of December 31, 2023.

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 $381.6 million decrease is largely attributed to a decrease of $297.8 million in credit cards, $57.9 million decrease in commercial and industrial capital call line commitments, $55.8 million decrease in commercial construction loans, partially offset by a $33.6 million increase in residential real estate commitments, related to CCBX loans and an increase of $17.8 million in consumer and other loan commitments, related to CCBX consumer 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:

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Commercial real estate loans 34,222 54,289

Credit cards 717,198 1,014,959

Consumer and other loans 18,553 779

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Commercial and industrial loans $ 19,104 $ 9,144

Commercial and industrial loans - capital call lines 550,948 608,837

Residential real estate loans 453,369 418,761

Consumer and other loans 1,015,156 792,447

Credit cards, consumer and other loans 733,005 1,015,156

Total commitments to extend credit $ 1,756,426 $ 2,051,898

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Total Existing Portfolio Size $ 1,603,577 $ 1,195,938 $ 407,639

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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.

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CCBX – BaaS Reporting Information

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.

During the twelve months ended months ended December 31, 2024, $62.1 million was recognized in noninterest income BaaS credit enhancements related to the establishment of a credit enhancement asset for credit losses indemnified by our strategic partners and reserved for unfunded commitments for CCBX partner loans and deposits.

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

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

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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.

BaaS fraud 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.

CCBX partners bear most of the responsibility for credit and fraud losses incurred which consequently gives them a vested interest in the performance of the portfolio.

We believe that this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio.

Credit losses and recoveries typically flow through the cash reserve account.

These cash reserve accounts are included in total deposits on the balance sheet.

Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations then the Bank would be exposed to additional loan and deposit losses if the cash flows on the loans were not sufficient to fund the reimbursement of loan losses, as a result of this counterparty risk.

If a CCBX partner does not replenish their cash reserve account, the Bank may consider an alternative plan for funding the cash reserve.

This may involve the possibility of adjusting the funding amounts or timelines to better align with the partner's specific situation.

If a mutually agreeable funding plan is not achieved, then the Bank could declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements.

The Bank would evaluate any remaining credit enhancement asset from the CCBX partner in the event the partner failed to fulfill its obligations and would determine if a write-off is appropriate.

If a write-off occurs, the Bank would retain the full yield and any fee income on the loan portfolio going forward, and our BaaS loan expense would decrease once default 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.

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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.

(2) See Note 23, Restatement of Prior Period Financial Statements.

The increased activity of CCBX partners has resulted in increases in direct fees, expenses and interest for the year ended December 31, 2024 compared to the year ended December 31, 2023.

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Interest income Year Ended

(dollars in thousands;

unaudited) December 31,

(dollars in thousands) December 31,

2024 December 31,

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Total BaaS interest income $ 248,286 $ 197,306 $ 102,808

(1) See Note 23, Restatement of Prior Period Financial Statements.

Interest expense Year Ended

(dollars in thousands;

unaudited) December 31,

(dollars in thousands) December 31,

2024 December 31,

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Total BaaS interest expense $ 94,035 $ 71,646 $ 16,108

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(dollars in thousands;

unaudited) December 31,

(1) See Note 23, Restatement of Prior Period Financial Statements.

(dollars in thousands) December 31,

2024 December 31,

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Interchange fees 6,933 4,252 2,583

Baas program income before reimbursement of expenses 17,586 12,118 10,202

Reimbursement of expenses 2,489 1,122 991

BaaS program income 16,293 12,934 6,716

Total BaaS program income 20,075 13,240 11,193

BaaS indemnification income:

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Total noninterest BaaS income $ 302,748 $ 198,169 $ 117,138

(dollars in thousands;

unaudited) December 31,

(1) See Note 23, Restatement of Prior Period Financial Statements.

Servicing and other BaaS fees increased $888,000 in the year ended December 31, 2024 compared to the year ended December 31, 2023, while transaction fees and interchange fees increased $4.6 million, in the year ended December 31, 2024 compared to the year ended December 31, 2023.

We expect servicing and other BaaS fees to decrease and transaction and interchange fees to increase, as partner activity grows and contracted minimum fees are replaced with recurring fees, which exceed those minimum fees.

Additionally, we expect reimbursement of expenses to increase as we continue to bill partners for incurred expenses.

(dollars in thousands) December 31,

2024 December 31,

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Total BaaS loan and fraud expense $ 128,370 $ 86,913 $ 82,865

(1) See Note 23, Restatement of Prior Period Financial Statements.

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

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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.

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Net BaaS loan income divided by average CCBX loans 9.09 % 9.71 % 6.67 %

Net interest margin, net of BaaS loan expense:

CCBX net interest margin, net of BaaS loan expense:

CCBX interest margin 9.23 % 9.19 % 8.84 %

CCBX earning assets 1,999,695 1,574,334 1,027,556

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

Net interest income (GAAP) 184,472 144,731 90,806

BaaS loan expense (118,536) (79,748) (53,294)

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CCBX net interest margin, net of BaaS loan expense 3.30 % 4.13 % 3.65 %

(1) See Note 23, Restatement of Prior Period Financial Statements.

Quantitative and Qualitative Disclosures about Market Risk

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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 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.

During the third quarter 2024, the FOMC lowered interest rates, for the first time since 2023, by 0.50% then two more times during the fourth quarter, totaling a decrease of 0.50% resulting in a Fed Funds target rate of 4.50% as of December 31, 2024.

The timing and magnitude of any future and potential rate changes, expected to be further rate cuts, remains uncertain but will likely be closely tied to future inflationary trends.

The impact of this and any future increases or decreases will impact financial results.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business.

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ALCO formulates strategies based on appropriate levels of interest rate risk.

In determining the appropriate level of interest rate risk, ALCO considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors.

In determining the

appropriate level of interest rate risk, ALCO considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors.

ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings.

Additionally, ALCO reviews liquidity, cash flows, maturities of deposits and consumer and commercial deposit activity.

Management employs various methodologies to manage interest rate risk including an analysis of relationships between interest earning assets and interest bearing liabilities and interest rate

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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 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 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.

Non-parallel simulations are also conducted and involve analysis of interest income and expense under various changes in the shape of the yield curve including a forward curve, flat curve, steepening curve, and an inverted curve.

Our internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one- and two-year period should not decline by more than 10% for a 100 basis point shift, 15% for a 200 basis point shift, 20% for a 300 basis point shift, and 25% for a 400 basis point shift.

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

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-400 basis points 3.3% (2.8)%

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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.

The results illustrate that the Company’s static balance sheet remains liability sensitive, however, the dynamic balance sheet is slightly more neutral to rate shifts.

As the Company’s composition has shifted over time due to the growth of the CCBX segment to more variable/adjustable in nature, our interest rate risk profile has been mitigated, reducing variability in both rising and falling rate environments, as the community bank and CCBX segments work to offset one another.

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We have found that, historically, offering rates on these community bank deposits change more slowly than changes in short-term market rates.

For the CCBX segment, the offering rates on the loan portfolio are modeled using partner contractual net yields which mostly adjust 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.

For the CCBX segment, the offering rates on the loan portfolio are modeled using partner contractual net yields which mostly adjust immediately with market shifts.

For this CCBX portfolio, the offering rates on approximately 60% of loans and the majority of deposits nearly fully reprice with changes in market rates.

During 2023, one of the material CCBX lending partners contractual yields converted to a fixed rate product, continuing to reduce the overall variability in the Company’s balance sheet.

As of December 31, 2024, the Company’s overall funding mix continues to be more heavily weighted towards the CCBX deposits which are primarily variable rate deposits aiding with the neutrality of the balance sheet and the overall shift to liability sensitive in the static model.

The assumptions incorporated into the simulation model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact that fluctuations in market interest rates have on net interest income.

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Impact of Inflation

Our consolidated financial statements and related notes to those financial statements included elsewhere in this Report on Form 10-K have been prepared in accordance with GAAP.

Our consolidated financial statements and related notes to those financial statements included elsewhere in this Annual Report on Form 10-K have been prepared in accordance with GAAP.

GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

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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