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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We are a bank holding company that operates through our wholly owned subsidiaries, Coastal Community Bank (“Bank”) and Arlington Olympic LLC . We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. Our business is conducted through three reportable segments: The community bank, CCBX and treasury & administration. The community bank segment includes all community banking activities, with a primary focus on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 21 partners as of December 31, 2023. The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

As of December 31, 2023, we had total assets of $3.75 billion, total loans receivable of $3.03 billion, total deposits of $3.36 billion and total shareholders’ equity of $295.0 million.

The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relate to activities primarily conducted by the Bank. This discussion and analysis should be read in conjunction with the audited consolidated financial statements and the accompanying notes presented elsewhere in this Annual Report on Form 10-K.

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

Potential Regulatory Reforms in Response to Bank Failures

The failures of Silicon Valley Bank, Santa Clara, California, Signature Bank, New York, New York, and First Republic Bank, San Francisco, California, in March and May, 2023, may lead to regulatory changes and initiatives that could impact the Company. For example, President Biden has encouraged the federal banking agencies to adopt various reforms, including the completion of an incentive compensation rule for bank executives pursuant to Section 956 of the Dodd-Frank Act, in response to these bank failures. On April 28, 2023, the Federal Reserve and the FDIC issued reports on the failures of Silicon Valley Bank and Signature Bank, respectively, identifying the potential causes that the federal banking agencies may seek to address through changes to their supervisory and regulatory policies. Agency officials, including the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, have called for changes to the manner in which banks’ capital, interest rate and liquidity risks are supervised and regulated.

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

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

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

Small Business Lending Data Collection Rule

On March 30, 2023, the CFPB finalized a rule under section 1071 of the Dodd-Frank Act requiring lenders to collect and report data regarding small business lending activity. The Company is evaluating the impact of the new rule. The rule requires compliance by October 1, 2024, April 1, 2025, or January 1, 2026, depending on the number of covered small business loans that a covered lender originates.

On July 31, 2023, the U.S. District Court for the Southern District of Texas enjoined the CFPB from implementing and enforcing the rule with respect to American Bankers Association members, which include the Company, pending the U.S. Supreme Court's consideration of the constitutionality of the CFPB's funding structure in a separate case. The court expanded its stay to cover all covered financial institutions in October 2023.

Third Party Risk Management Guidance

On June 6, 2023, the FDIC, the Federal Reserve and the OCC issued final interagency guidance on sound risk management principles that support developing and implementing risk management practices for all stages in the life cycle of third-party relationships. The Bank has evaluated the impact of this guidance, and is making revisions and enhancements to its programs, policies and procedures to address any gaps and maintain compliance.

Community Reinvestment Act Reform

On October 24, 2023, the FDIC, the Federal Reserve and the OCC released a final rule revising the framework that they use to evaluate banks’ records of community reinvestment under the Community Reinvestment Act (“CRA”). Under the revised framework, banks with assets of at least $2 billion, such as the Bank, are considered large banks and will have their retail lending, retail services and products, community development financing, and community development services subject to periodic evaluation. Depending on a large bank’s geographic concentrations of lending, the evaluation of retail lending may include assessment areas in which the bank extends loans but does not operate any deposit-taking facilities, in addition to assessment areas in which the bank has deposit-taking facilities. The rule becomes effective April 1, 2024. Most provisions of the final rule will apply beginning January 1, 2026, and the remaining provisions will apply beginning January 1, 2027. The Company is evaluating the impact of the final rule.

Key Factors Affecting our Business

Average Balances and Interest Rates

Our operating results depend primarily on our net interest income, which is the largest contributor to our net income and is the difference between the interest and fees earned on interest-earning assets (such as loans and securities) and the interest expense incurred in connection with interest-bearing liabilities (such as deposits and borrowings). Net interest income is primarily a function of the average balances of interest-earning assets and interest-bearing liabilities and the yields and costs with respect to these assets and liabilities. Average balances are influenced by internal considerations such as the types of products we offer and the amount of risk that we are willing to assume as well as external influences such as economic conditions, competition for loans and deposits, and interest rates. The yields generated by our loans and securities are typically affected by short-term and long-term interest rates and, in the case of loans, competition for similar products in our market area. Interest rates are often impacted by the actions of the Federal Reserve. The cost of our deposits and short-term borrowings is primarily based on short-term interest rates, which are largely driven by competition and by the actions of the Federal Reserve. The level of net interest income is influenced by movements in interest rates and the pace at which such movements occur, as well as the relationship between short- and long-term interest rates.

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Credit Quality

We have well established loan policies and underwriting practices that have resulted in low levels of charge-offs and nonperforming assets for the community bank. Through our thorough underwriting process, we strive to originate quality loans that will maintain and enhance the overall credit quality of our loan portfolio, and through our careful monitoring of our community bank loan portfolio and prompt attention to delinquencies, we seek to minimize the impact of problem loans. However, credit trends in the markets in which we operate are largely impacted by economic conditions beyond our control and can adversely impact our financial condition. We originate loans through our CCBX partners and while these loans will have higher levels of charge-offs and nonperforming assets, agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. If our partners are unable to fulfill their contracted obligations then the Bank would be exposed to additional 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. 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. Our efficiency ratio has been impacted by the increase in CCBX income and CCBX expense. Our efficiency ratio was 45.92% at December 31, 2023, compared to 56.26% at December 31, 2022. This change is largely due to an increase in net interest income and credit enhancement income for the year ended December 31, 2023 compared to the year ended December 31, 2022.

Economic Conditions

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. 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.

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. 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. These assumptions, estimates and judgments we use can be influenced by a number of factors, including the general economic environment. Actual results could differ from these judgments and estimates under different conditions, resulting in a change that could have a material impact on the carrying values of our assets and liabilities and our results of operations. We believe that of our accounting policies, the following accounting policies may involve a higher degree of judgment and complexity:

Securities

Securities are classified as available for sale when they might be sold before maturity. 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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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. Securities held to maturity are carried at cost, adjusted for the amortization of premiums and the accretion of discounts and may be pledged.

Interest earned on these assets is included in interest income. Interest income includes amortization of any purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.

Management evaluates debt securities for credit losses, on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment through earnings. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. For more information and discussion related to securities, see “Note 3 - Investment Securities” in the Consolidated Financial Statements.

Loans Held for Investment

Loans held for investment are those that management has the intent and ability to hold for the foreseeable future or until maturity or payoff at the principal and interest balance outstanding, net of deferred loan fees and costs. Loans are typically secured by specific items of collateral including business assets, consumer assets, and commercial and residential real estate. Commercial loans are expected to be repaid from cash flow from operations of businesses. Interest income is accrued on the unpaid principal balance. Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income using a level yield methodology or a method approximating the level yield methodology.

As of December 31, 2023, loans receivable totaled $3.03 billion, an increase of $398.8 million, or 15.2%, compared to $2.63 billion as of December 31, 2022. 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. For more information and discussion related to the loans held for investment, see “Note 4 - Loans and Allowance for Credit Losses” in the Consolidated Financial Statements.

Loans Held for Sale

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

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. Loans are generally sold with servicing of the sold portion retained by the Company when the sale of the loan occurs, the premium received is combined with the estimated present value of future cash flows on the related servicing asset and recorded as a gain on sale of loans in noninterest income. There were no community bank loans held for sale at December 31, 2023 and 2022.

Equity Investments

Equity investments include amounts invested in stock, venture capital funds, partnerships, and other business ventures. Some of these equity investments are in vendors/suppliers, private companies, government agencies, or government sponsored enterprises. 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. 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.

The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. While we believe the assumptions and estimates we have made are reasonable and appropriate, different assumptions or estimates could have resulted in materially different fair values for these equity investments. For more information and discussion related to securities, see Note 3 - Investment Securities” in the Consolidated Financial Statements.

Allowance for Credit Losses

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

•Community Bank Portfolio: The ACL calculation is derived from loan segments utilizing loan level information and relevant available information from internal and external sources related to past events and current conditions. In addition, the Company incorporates a reasonable and supportable forecast.

•CCBX Portfolio: The Bank calculates the ACL on loans on an aggregate basis based on each partner and product level, segmenting the risk inherent in the CCBX portfolio based on qualitative and quantitative trends in the portfolio.

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

Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality. The Company maintains the allowance at an amount the Company believes is sufficient to provide for estimated losses expected to occur in the Company’s loan portfolio at each balance sheet date, and fluctuations in the provision for credit losses may result from management’s assessment of the adequacy of the allowance. Changes in these estimates and assumptions are possible and may have a material impact on the Company’s allowance, and therefore the Company’s financial position, liquidity or results of operations. The Company has elected to exclude accrued interest receivable from the amortized cost basis in its ACL calculation as accrued interest is written off in a timely manner when deemed uncollectable.

The Company increased the allowance from $74.0 million at December 31, 2022 to $117.0 million at December 31, 2023. The allowance was significantly increased in response to growth in CCBX loans. The Company uses CCBX partner data, industry data and its own 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

We grant stock options and restricted stock to our employees and directors. We record the related compensation expense based on the grant date fair value calculated in accordance with the authoritative guidance issued by FASB. We recognize these compensation costs on a straight-line basis over the requisite service period of the award. We estimate the grant date fair value of stock options using the Black-Scholes valuation model. Stock-based compensation expense related to awards of restricted stock and restricted stock units is based on the fair value at the grant date.

The determination of fair value using the Black-Scholes model is affected by the price of our common stock, as well as the input of other subjective assumptions. These assumptions include, but are not limited to, the expected term of stock options and our stock price volatility. The factors considered by our board of directors included the prices of known transactions in our common stock, the book value per share of our common stock, and our board of directors’ understanding of pricing multiples for comparable financial institutions that were not publicly traded.

The assumptions underlying these valuations represented management’s best estimate, which involved inherent uncertainties and the application of management’s judgment. As a result, if we had used different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different. For more information and discussion related to stock-based compensation, see “Note 15 – Stock-based Compensation” in the Consolidated Financial Statements.

Revenue Recognition

We record revenue from contracts with customers in accordance with ASU 2014-09, Revenue from Contracts with Customers (“Topic 606”). Under Topic 606, the Company must identify the contract with a customer, identify the performance obligations in the contract, determine the transaction price, allocate the transaction price to the performance obligations in the contract and recognize revenue when (or as) the Company satisfies a performance obligation. Significant revenue has not been recognized in the current reporting period that results from performance obligations satisfied in previous periods. A large portion of the Company’s revenue are derived from interest and fees earned on loans, investment securities and other financial instruments that are not within the scope of Topic 606. The Company generally fully satisfies its performance obligations on its contracts with customers as services are rendered and the transaction prices are typically fixed, charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.

The recording of BaaS income and expense is dependent upon the contractual agreement with each partner, however in accordance with accounting guidance the recording of certain components of BaaS income are consistent across agreements. Agreements with many of our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancement). Incurred losses are recorded in the allowance for credit losses, the credit enhancement asset is relieved when credit enhancement recoveries are received from the CCBX partner. Many agreements with our CCBX partners also provide protection to the Bank from fraud by absorbing incurred fraud losses. Fraud losses are recorded when incurred in noninterest expense, and the recovery received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. Enhancements that provide protection to the Bank from credit and fraud losses, are not within the scope of Topic 606.

For the year ended December 31, 2023, noninterest income subject to Topic 606 increased $3.0 million to $21.2 million, compared to $18.2 million for the year ended December 31, 2022. The increase was largely due to an increase in BaaS fee income resulting from 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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Results of Operations

The following discussion is intended to assist in understanding the financial condition and results of operations of the Company as of and for the year ended December 31, 2023. The information contained in this section should be read together with the December 31, 2022 audited Consolidated Financial Statements and the accompanying Notes included in Item 8. Financial Statements And Supplementary Data of this Form 10-K.

This section of this Form 10-K generally discusses 2023 and 2022 items and year-to-year comparisons between 2023 and 2022. Discussions of 2021 items and year-to-year comparisons between 2022 and 2021 that are not included in this Form 10-K can be found in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Part II, Item 7 of the Company’s Form 10-K for the fiscal year ended December 31, 2022.

Net Income

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 $67.0 million increase in net interest income, $82.5 million increase in noninterest income partially offset by a $104.9 million increase in the provision for credit losses - loans and a $38.0 million increase in noninterest expense. The increase in noninterest income, provision expense and noninterest expense are largely related to CCBX loan and deposit growth. The increase in interest expense is related to higher average interest bearing deposits and an increase in cost of deposits as a result of higher interest rates.

Net Interest Income

Year Ended December 31, 2023, Compared to Year Ended December 31, 2022. Net interest income for the year ended December 31, 2023 was $238.7 million, compared to $171.8 million for the year ended December 31, 2022, an increase of $67.0 million, or 39.0%. Yield on loans receivable was 10.60% 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. Average loans receivable for the year ended December 31, 2023 was $2.94 billion, compared to $2.26 billion for the year ended December 31, 2022.

Interest and fees on loans totaled $311.4 million for the year ended December 31, 2023 compared to $183.4 million for the year ended December 31, 2022. The $128.1 million increase in interest and fees on loans for the year ended December 31, 2023, compared to the year ended December 31, 2022, was largely due to increased yield on loans from growth in higher yielding CCBX and community bank loans and an overall increase in interest rates. Loan growth of $398.8 million, or 15.2%, for the year ended December 31, 2023, compared to December 31, 2022, includes a decrease of $1.7 million in PPP loans that were forgiven or repaid. CCBX average loans receivable grew to $1.21 billion for the year ended December 31, 2023, compared to $742.4 million for the year ended December 31, 2022, an increase of $468.0 million, or 63.0%. Average CCBX yield of 16.89% was earned on CCBX loans for the year ended December 31, 2023, compared to 13.85% for the year ended December 31, 2022. 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. 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. The average balance of interest earning deposits invested with other banks for the year ended December 31, 2023 was $295.8 million, compared to $516.0 million for the year ended December 31, 2022. This decrease was the result of increased loan demand. Additionally, the yield on these interest earning deposits with other banks increased 3.88%, compared to the year ended December 31, 2022. Interest income on investment securities increased to $3.2 million at December 31, 2023, compared to $1.7 million at December 31, 2022. Average investment securities increased $26.9 million from $93.2 million for the year ended December 31, 2022 to $120.2 million for the year ended December 31, 2023 as a result of purchasing additional securities to hold for CRA purposes, and average yield increased to 2.66% for the year ended December 31, 2023, compared to 1.87% for the year ended December 31, 2022.

Interest expense was $91.6 million for the year ended December 31, 2023, a $71.2 million increase from the year ended December 31, 2022. Interest expense on deposits was $89.0 million for the year ended December 31, 2023, compared to $19.0 million for the year ended December 31, 2022. The $70.0 million increase in interest expense on deposits was primarily due to an increase in average interest bearing deposits of $671.0 million. Interest on borrowed funds was $2.6 million for the year ended December 31, 2023, compared to $1.4 million for the year ended December 31, 2022. The $1.3 million increase in interest expense on borrowed funds from the year ended December 31, 2022 was the result of a $16.4 million average balance increase in subordinated debt, which increased during the quarter ended December 31, 2022 partially offset by a decrease in average FHLB borrowings, which were paid off in full during the quarter ended March 31, 2022. The FOMC increased the Fed Funds rate 1.00% during the twelve months ended December 31, 2023, with the most recent increase during such period on July 26, 2023. Interest expense will be impacted by any additional FOMC interest rate changes in future periods.

Net interest margin was 7.10% for the year ended December 31, 2023, compared to 5.97% for the year ended December 31, 2022. The increase in net interest margin compared to the year ended December 31, 2022 was largely a result of an increase in higher rate loans. Average loans increased $679.1 million, compared to the year ended December 31, 2022. Also contributing to the increase in net interest margin compared to the year ended December 31, 2022 was a $8.6 million increase in interest earned on interest earning deposits invested in other banks. These interest earning deposits earned an average rate of 5.19% for the year ended December 31, 2023, compared to an average rate of 1.30% for the year ended December 31, 2022. We expect that interest expense will increase and net interest margin will compress as we increase the interest rates on interest bearing deposits to compete with rates offered by our competitors. Additionally, the sale of higher risk and higher yielding loans during the year ended December 31, 2023 in an effort to optimize and strengthen the balance sheet is expected to further impact net interest margin in future quarters.

Cost of funds was 2.91% for the year ended December 31, 2023, compared to 0.75% for the year ended December 31, 2022. Cost of deposits for the year ended December 31, 2023 was 2.87%, which was a 216 basis point increase, from 0.71% for the year ended December 31, 2022. These increases were largely due to an increase in interest rates and an increase in interest bearing deposits. CCBX deposit growth also contributed to the increase in interest expense.

Total yield on loans receivable for the year ended December 31, 2023 was 10.60%, compared to 8.12% for the year ended December 31, 2022. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. As of the year ended December 31, 2023, average CCBX loans increased $468.0 million, or 63.0%, with an average CCBX yield of 16.89%, compared to 13.85% at December 31, 2022. 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 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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The following tables (1) show the average yield on loans and cost of deposits by segment and (2)illustrate how BaaS loan interest income is affected by BaaS loan expense resulting in net BaaS loan income and the associated yield for the periods indicated:

For the Year Ended

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

For the Year Ended

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

(2) Includes loans held for sale.

The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan fees included in interest income totaled $4.4 million and $3.2 millionfor 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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Average Balance Sheets For the Year Ended December 31,

Assets

Interest earning assets:

Noninterest earning assets:

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

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

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

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

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The following table presents an analysis of certain average balances, interest income and interest expense that are specific to each segment. The segment structure changed after 2021, therefore some items are reported as “n/a” for the year ended December 31, 2021. Items are that not directly attributed to the segment are not listed:

For the Year Ended

Community Bank

Assets

Interest earning assets:

Liabilities

Interest bearing liabilities:

CCBX

Assets

Interest earning assets:

Liabilities

Interest bearing liabilities:

Net interest margin, net of Baas loan expense (4) 4.13 % 3.65 % 4.40 %

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For the Year Ended

Treasury & Administration

Assets

Interest earning assets:

Liabilities

Interest bearing liabilities:

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

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

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

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

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

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

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

(dollars in thousands) Volume Rate Volume Rate

Interest income:

Interest expense:

PPPLF borrowings — — — (240) — (240)

Provision for Credit Losses

The provision for credit losses - loans is an expense we incur to maintain an allowance for credit losses at a level that is deemed appropriate by management to absorb expected losses on existing loans. For a description of the factors taken into account by our management in determining the allowance for credit losses see “Item 7. Management’s Discussion and Analysis of Financial Condition and Operations—Financial Condition—Allowance for Credit Losses.”

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 that may impact the provision and therefore the allowance. Gross loans, excluding loans held for sale, totaled $3.03 billion at December 31, 2023 and included $3.0 million in PPP loans, which are 100% guaranteed, and are excluded from the provision for credit losses - loans calculation. The allowance for credit losses as a percentage of loans was 3.86% at December 31, 2023, compared to 2.82% at December 31, 2022.

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

The Company adopted the Current Expected Credit Loss (“CECL”) accounting standard effective January 1, 2023. The CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the prior accounting practice that utilized the incurred loss model. The adoption of this ASU resulted in a one-time cumulative-effect adjustment to the allowance for credit losses as of the day of adoption.

Year Ended December 31, 2023, Compared to Year Ended December 31, 2022. The provision for credit losses - loans for the year ended December 31, 2023, was $184.0 million compared to $79.1 million for the year ended December 31, 2022. The increase in the Company’s provision for credit losses - loans during the year ended December 31, 2023, is largely related to the provision for CCBX partner loans. During the year ended December 31, 2023, a $182.7 million provision for credit losses - loans was recorded for loans originated through CCBX partners based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a provision for credit losses- loans of $1.3 million was needed for the year ended December 31, 2023.

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

Year Ended

Net charge-offs for the year ended December 31, 2023 totaled $145.0 million, or 4.94% of total average loans, as compared to net charge-offs of $33.7 million, or 1.49% of total average loans, for the year ended December 31, 2022. Net charge-offs were up significantly in 2023 compared to 2022 as a result of the growth in loans originated through CCBX partners. In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for a credit enhancement that indemnifies and as a result CCBX partners reimburse the Bank for net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company is responsible for credit losses on approximately 10% of a $288.1 million loan portfolio. At December 31, 2023, our portion of this portfolio represented $29.1 million in loans. Provision expense on these loans was $5.1 million and $1.4 million for the years ended December 31, 2023 and 2022, respectively, with net charge-offs of $3.6 million in 2023 and $216,000 in 2022. In 2023, $52,000 of net charge-offs were recognized for community bank loans and $144.9 million of net-charge-offs were recognized for CCBX loans. In 2022, $382,000 of net charge-offs were recognized for community bank loans and $33.3 million of charge-offs were recognized for CCBX loans. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations to replenish their cash reserve account then the Bank would be exposed to additional losses, as a result of this counterparty risk. If a CCBX partner does not replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would write-off any remaining credit enhancement asset from the CCBX partner but would retain the full yield and any fee income on the loan portfolio going forward, and BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.

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

% of CCBX charge-offs covered by credit enhancement 97.5 % 99.4 % 100.0 %

Noninterest Income

Our primary sources of recurring noninterest income are BaaS indemnification income, Baas program income and deposit 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, 2023, noninterest income totaled $207.2 million, an increase of $82.5 million, or 66.2%, compared to $124.7 million for the year ended December 31, 2022. The following table presents, for the periods indicated, the major categories of noninterest income:

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

A description of our largest noninterest income categories are below:

BaaS Income. Our CCBX segment provides BaaS offerings that enable our broker dealer and digital financial service providers to offer their customers banking services. In exchange for providing these services, we earn fixed fees, volume-based fees and reimbursement of costs depending on the program agreement. In accordance with GAAP, we recognize the reimbursement of noncredit fraud losses on loans and deposits originated through partners and credit enhancements related to the allowance for credit losses and reserve for unfunded commitments provided by the partner as revenue in BaaS income. CCBX credit losses are recognized in the allowance for credit losses -loans and fraud losses are expensed in noninterest expense under BaaS fraud expense. Also in accordance with GAAP, we establish a credit enhancement asset for expected future credit losses through the recognition of BaaS credit enhancement revenue at the same time we establish an allowance for those loans though a provision for credit losses - loans. For more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

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

As of

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. 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:

Loan Referral Fees. We earn loan referral fees when we originate a variable rate loan and the borrower enters into an interest rate swap agreement with a third party to fix the interest rate for an extended period, usually 20 or 25 years. We recognize the loan referral fee for arranging the interest rate swap. By facilitating interest rate swaps to our clients, we are able to provide them with a long-term, fixed interest rate without assuming the interest rate risk. Interest rate volatility, swap rates, and the timing of loan closings all impact the demand for long-term fixed rate swaps. The recognition of loan referral fees fluctuates in response to these market conditions and as a result we may recognize more or less, or may not recognize any, loan referral fees in some periods. Current market conditions are making interest rate swap agreements less attractive in the higher rate environment. 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 sale of loans may also occur when we sell in the secondary market the guaranteed portion (generally 75% of the principal balance) of the SBA and U.S. Department of Agriculture (“USDA”) loans that we originate. This activity fluctuates based on SBA and USDA loan activity.

Unrealized gain (loss) on equity securities, net. 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.

Other. This category includes a variety of other income-producing activities, credit card fee income, wire transfer fees, interest earned on bank owned life insurance (“BOLI”), and SBA and USDA servicing fees. Other noninterest income decreased $460,000, or 34.2%, for the year ended December 31, 2023 compared to the year ended December 31, 2022, due in part to the one-time cost of converting an existing BOLI policy to one that will yield higher returns in the future, which reduced BOLI earnings by $212,000.

Noninterest Expense

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest components of noninterest expense are BaaS loan and fraud expense combined and salaries and employee

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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.

For the year ended December 31, 2023, noninterest expense totaled $204.8 million, an increase of $38.0 million, or 22.8%, compared to $166.8 million for the year ended December 31, 2022. Noninterest expense, excluding BaaS loan and BaaS fraud expense totaled $110.7 million and increased $26.8 million or 31.9%.

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

Salaries and Employee Benefits. Salaries and employee benefits are the largest component of noninterest expense excluding BaaS loan expense and include payroll expense, incentive compensation costs, benefit plans, health insurance and payroll taxes. 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. As our CCBX segment grows, we expect to continue to add employees to support this line of business. As of December 31, 2023, we had 507 full-time equivalent employees, compared to 448 at December 31, 2022.

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. 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. 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 software licenses includes expenses related to obtaining and maintaining software required for our various functions. Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs. Data processing costs grow as we grow and add new products, customers and branches and enhance technology. Additionally, CCBX data processing expenses and software that aids in the reporting of CCBX activities and monitoring of transactions that helps to automate and create other efficiencies in reporting have resulted in increased expenses in the category. These expenses are expected to increase as we invest more in automated processing and as we grow product lines and our CCBX segment.Data processing costs were $8.6 million for the year ended December 31, 2023, compared to $6.5 million for the year ended December 31, 2022, an increase of $2.1 million, or 32.5%.

Occupancy Expenses. Occupancy expenses were $4.9 million for the year ended December 31, 2023, compared to $4.5 million for the year ended December 31, 2022, an increase of $378,000, or 8.3%. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $2.3 million and $1.8 million for years ended December 31, 2023 and 2022, respectively. The increase of $378,000 in occupancy expenses for 2023 compared to 2022, was primarily the result of $222,000 increase in depreciation expense, resulting from increased costs associated with the increase in FTE and growth in CCBX and $138,000 increase in maintenance and repairs expense. Occupancy expenses rent, utilities, janitorial and other maintenance expenses, property insurances and taxes. Also included is depreciation on building, leasehold, furniture, fixtures and equipment. Although our hybrid and remote workforce has increased, which helps keep some occupancy expenses down, we do expect occupancy expenses to increase as we continue to grow.

Point of Sale Expenses. Point of sale expenses are incurred as part of the process that allows businesses to accept payment for goods or services. Generally, point of sale expense increases as point of sale activity increases, as does point of sale income which is recognized in other income. Point of sale expenses were $3.5 million for the year ended December 31, 2023, compared to $2.1 million for the year ended December 31, 2022, an increase of $1.4 million, or 67.6%.

FDIC Assessments. FDIC assessments are assessed to fund the Deposit Insurance Fund (“DIF”) to insure and protect the depositors of insured banks and to resolve failed banks. The assessment rate is based on a number of factors and recalculated each quarter. As deposits increase, the FDIC assessment expense will generally increase. However, our rate has decreased in 2023 as a result of improvement in the various ratios that determine the rate at which insured deposits are assessed, compared to the comparable prior year period. On October 18, 2022 the FDIC finalized an increase of 2 basis points in the initial base deposit insurance assessment rates schedules, beginning with the first quarterly assessment period of 2023. The rise is intended to increase the reserve ratio of the Deposit Insurance Fund to 1.35%, the statutory requirement. The increase in the base rates will remain in place until the reserve ratio reaches or exceeds 2.0%. FDIC assessments were $2.5 million for the year ended December 31, 2023, compared to $2.9 million for the year ended December 31, 2022, a decrease of $335,000, or 11.7%.

Director and Staff Expenses. 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 $2.2 million for the year ended December 31, 2023 compared to $1.7 million for the year ended December 31, 2022, an increase of $441,000, or 25.8%. In 2023 we saw an increase in these expenses as the number of employees increased.

Excise Taxes. Excise taxes are assessed on Washington state income and are based on gross income. Gross income is reduced by certain allowed deductions and income attributed to other states is also removed to arrive at the taxable base. Excise taxes were $2.0 million for the year ended December 31, 2023, compared to $2.2 million for the year ended December 31, 2022, an decrease of $228,000, or 10.3%.

Marketing and promotion. Marketing and promotion costs were $517,000 for the year ended December 31, 2023, compared to $351,000 for the year ended December 31, 2022, a increase of $166,000, or 47.3%. Marketing and promotion costs are starting to increase as we deploy more branding and targeted advertising for the community bank and CCBX. We are using more cost-effective advertising options, but expect costs to increase as we expand our marketing plan.

Other. This category includes dues and memberships, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and officer’s insurance, donations, 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%. The increase was largely due to overall increases resulting from growth for the year ended December 31, 2023, as compared to the same period last year.

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

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

(dollars in thousands) 2023 2022 2021 Increase (Decrease) Increase (Decrease)

Income Tax Expense

The amount of income tax expense we incur is impacted by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce our deferred tax assets to the amount expected to be realized. The Company is subject to various state taxes that are assessed as CCBX activities and employees expand into other states, which 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, 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 rates for the years ended December 31, 2023, and 2022, was 22.0% and 19.7%, respectively.

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Segment Information

Based on the criteria of ASC 280, Segment Reporting, we have identified three segments: the community bank, CCBX and treasury & administration. The primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 21 partners, 19 that are active with two more currently in the testing or implementation stage as of December 31, 2023. The treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.

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

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

Assets

Loans held for sale — — — — — — — —

Liabilities

Community bank total assets as of December 31, 2023 increased $219.2 million, or 13.5%, to $1.84 billion, compared to $1.62 billion as of December 31, 2022. Loans receivable net of deferred fees for the community bank segment increased $215.4 million, or 13.3%, to $1.83 billion as of December 31, 2023, compared to $1.61 billion as of December 31, 2022. The increase in community bank loans receivable is the result of gross loan growth of $216.4 million. Total community bank deposits decreased $40.6 million, or 2.64%, to $1.50 billion, as of December 31, 2023, compared to $1.54 billion as of December 31, 2022. The decrease in community bank deposits was a result of pricing disciplines as some customers sought higher rate products elsewhere. Our cost of deposits for the community bank was 1.57% for the three months ended December 31, 2023. The intrabank liability, which is the difference in total community bank assets and total community bank liabilities, increased $258.2 million, or 321.2%, to $338.6 million at December 31, 2023, compared to $80.4 million at December 31, 2022. This increase is the result of the increase in community bank loans and the decrease in community bank deposits discussed above.

CCBX total assets as of December 31, 2023 increased $598.1 million, or 45.9%, to $1.90 billion, compared to $1.30 billion as of December 31, 2022. During the twelve months ended December 31, 2023, $599.9 million in CCBX loans were transferred to loans held for sale, with $599.9 million in loans sold and no loans remaining in loans held for sale as of December 31, 2023 and December 31, 2022. A portion of these loans were sold at par and a portion were sold with a gain on sale. Pricing is dependent upon the agreement with the partner. The Company sells CCBX loans to manage loan portfolio size by partner and by loan category, with such limits established and documented in the relevant partner agreements. Total CCBX loans receivable increased $183.4 million, or 18.1%, to $1.20 billion as of December 31, 2023, compared to $1.01 billion as of December 31, 2022. The increase in loans receivable is the result of increased activity with CCBX partners. During the quarter ended December 31, 2023, we deliberately reduced our other consumer and other loans portfolio in an effort to optimize loan portfolio and will work to continue growing the CCBX portfolio in future quarters with loans that have lower potential risk of credit deterioration and are more aligned with our long term objectives. CCBX allowance for credit losses increased to $95.4 million as of December 31, 2023, compared to $53.4 million as of December 31, 2022 as a result of increased loss rates and balances on CCBX loans which has increased the allowance calculation/requirement. CCBX partner agreements provide credit enhancements that cover the $144.9

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million in net charge-offs on CCBX loans for the twelve months ended months ended December 31, 2023. Total CCBX deposits increased $583.5 million, or 45.6%, to $1.86 billion, compared to $1.28 billion as of December 31, 2022 as a result of growth within the CCBX relationships. This does not include an additional $69.4 million in CCBX deposits that were transferred off balance sheet to provide for increased FDIC insurance coverage to certain customers. The intrabank asset, which is the difference in total CCBX assets and total CCBX liabilities, increased $399.1 million, or 157.1%, to $653.2 million at December 31, 2023, compared to $254.1 million at December 31, 2022. This increase is the result of the increase in CCBX deposits partially offset by the increase in CCBX loans receivable as discussed above.

Treasury & administration total assets as of December 31, 2023 decreased $208.4 million, or 95.6%, to $9.7 million, compared to $218.0 million as of December 31, 2022. Total securities increased $52.0 million, or 52.9%, to $150.4 million as of December 31, 2023, compared to $98.4 million as of December 31, 2022, as we increased the amount of CRA qualified securities we hold. Total borrowings were $47.7 million as of December 31, 2023 and $47.6 million as of December 31, 2022. The intrabank asset and intrabank liability are part of the transfer pricing process. The treasury & administration segment offsets intrabank asset and/or intrabank liability at the community bank and CCBX segments.

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The following table presents summary financial information for each segment for the periods indicated. The segment structure changed after 2021, therefore some items are reported as “N/A” for the year ended December 31, 2021.

Year Ended

INTEREST INCOME AND EXPENSE

NONINTEREST INCOME

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Year Ended

NONINTEREST EXPENSE

Net interest income for the community bank was $79.2 million for the year ended December 31, 2023, an increase of $781,000, or 1.0%, compared to $78.4 million for the year ended December 31, 2022. The increase in net interest income is largely due to loan growth and increased interest rates on new and variable rate loans. As a result of the community bank having higher average loans than deposits for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022, intrabank interest expense for the community bank was $10.4 million for the twelve months ended December 31, 2023, compared to intrabank interest income of $796,000 for the twelve months ended December 31, 2022. Increased interest rates also contributed to the increase in intrabank interest expense. Provision for credit losses - loans for the community bank was $1.3 million for the year ended December 31, 2023, compared to $719,000 for the year ended December 31, 2022, as a result of loan growth. Net charge-offs to average loans for the community bank segment have remained consistently low and were 0.00% and 0.03% for the twelve months ended December 31, 2023, and 2022, respectively. Noninterest income for the community bank was $5.0 million, for the year ended December 31, 2023, a decrease of $193,000, or 3.7%, compared to $5.2 million for the year ended December 31, 2022. Loan referral fees decreased $127,000 for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022. The recognition of loan referral fees fluctuates in response to market conditions and as a result we may recognize more or less, or may not recognize any, loan referral fees in some periods. Noninterest expenses for the community bank increased $5.0 million, or 15.0%, to $38.0 million as of December 31, 2023, compared to $33.0 million as of December 31, 2022. The increase is largely due to increased salaries and employee benefits as a result of growth, higher data processing and software licensing costs related to new reporting software that helps monitor and assess risk and to automate and create efficiencies in reporting, and increased legal and professional fees associated with our infrastructure enhancement projects to improve processing, automate processes, reduce compliance costs, and enhance our data management.

Net interest income for CCBX was $151.9 million for the year ended December 31, 2023, an increase of $61.1 million, or 67.3%, compared to $90.8 million for the year ended December 31, 2022. The increase in net interest income is due largely to loan growth from CCBX relationships. During the year ended December 31, 2023, we sold $599.9 million in higher yielding CCBX loans that have a greater potential for credit deterioration in an effort to optimize our CCBX loan portfolio. The impact of these sales and the changes we are making in an effort to optimize and strengthen the balance sheet are expected to be reflected in our earnings in future periods. We expect

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to see lower net income in the short term with lower loan yields and compressed margins but we will work to continue growing the CCBX portfolio with loans that we believe will strengthen the balance sheet and provide for long term stability and profitability. As a result of having higher average deposits than loans for the twelve months ended December 31, 2023 compared to the twelve months ended December 31, 2022 intrabank interest income for CCBX was $19.1 million for the twelve months ended December 31, 2023, compared to $4.1 million for the twelve months ended December 31, 2022. Increased interest rates also contributed to the increase in intrabank interest income. Provision for credit losses - loans for CCBX was $182.7 million for the year ended December 31, 2023, compared to $78.3 million for the year ended December 31, 2022, as a result of loan growth and higher loss rates from CCBX partners. Noninterest income for CCBX was $201.7 million for the year ended December 31, 2023, an increase of $82.4 million, or 69.1%, compared to $119.3 million for the year ended December 31, 2022, due to an increase of $3.4 million in BaaS fee program income, which was the result of increased activity with Baas partners, including $101.4 million in BaaS credit enhancements related to the allowance for credit losses, and $22.4 million in BaaS fraud enhancements. Noninterest expenses for CCBX increased $29.2 million, or 26.8%, to $138.3 million as of December 31, 2023, compared to $109.1 million as of December 31, 2022. The increase in noninterest expense is largely due to growth from active CCBX relationships resulting in an increase in BaaS loan expense, BaaS fraud expense and increased salaries and benefits, for the twelve months ended December 31, 2023, compared to the twelve months ended December 31, 2022. Also contributing to the increase in noninterest expense is higher legal and professional fees associated with our infrastructure enhancement projects to improve processing, automate processes, reduce compliance costs, and enhance our data management. For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”.

Net interest income for treasury & administration was $7.6 million for the twelve months ended December 31, 2023, an increase of $5.1 million, or 201.7%, compared to $2.5 million for the twelve months ended December 31, 2022, as a result of increased interest rates. Noninterest income increase $267,000, or 114.1%, to $501,000 for the twelve months ended December 31, 2023, compared to $234,000 for the twelve months ended December 31, 2022. Noninterest expense increased $3.8 million, or 15.6%, to $28.5 million for the twelve months ended December 31, 2023, compared to $24.6 million for the twelve months ended December 31, 2022, largely as a result of increased salaries and employee benefits and legal and professional fees as a result of growth.

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Financial Condition

Our total assets increased $608.9 million to $3.75 billion, or 19.4% at December 31, 2023, compared to $3.14 billion at December 31, 2022. This increase was largely the result of a $398.8 million increase in loans receivable, combined with a increase of $142.4 million in interest earning deposits with other banks.

Loans Held For Sale

During the year ended December 31, 2023, $599.9 million in CCBX loans were transferred to loans held for sale, with $599.9 million in loans sold during the year ended December 31, 2023 and zero remaining in loans held for sale as of December 31, 2023. A portion of these loans were sold at par and a portion were sold with a gain on sale of $253,000.

Loan Portfolio

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

As of December 31, 2023, loans receivable totaled $3.03 billion, an increase of $398.8 million, or 15.2%, compared to December 31, 2022. Total loans receivable is net of $7.3 million in net deferred origination fees. The increase includes CCBX loan growth of $183.4 million, or 18.1%, and community bank loan growth of $216.4 million, or 13.3%.

Loans as a percentage of deposits were 90.1% as of December 31, 2023, compared to 93.2% as of December 31, 2022. We remain focused on serving our communities and markets by growing loans and funding those loans with customer deposits.

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

As of December 31,

(dollars in thousands) Amount Percent Amount Percent

Commercial and industrial loans:

Real estate loans:

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

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

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

Community Bank As of

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

Commercial and industrial loans:

Real estate loans:

Consumer and other loans:

Net deferred origination fees (7,000) (6,042)

CCBX As of

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

Commercial and industrial loans:

Real estate loans:

Consumer and other loans:

Net deferred origination (fees) costs (300) (65)

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

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 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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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.

Construction, Land and Land Development Loans. Construction, land and land development loans decreased $57.0 million, or 26.6%, to $157.1 million as of December 31, 2023, from $214.1 million as of December 31, 2022. The decrease is attributed in part to the completion of projects related to these community bank loans.

Unfunded loan commitments for construction, land and land development loans were $113.5 million at December 31, 2023, compared to $142.5 million at December 31, 2022. Although we have seen a strong commercial and residential real estate market in the Puget Sound region in 2023, the economic environment is continuously changing and is impacted by GDP, unemployment, inflation, higher interest rates, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment and trade issues that have resulted in some economic uncertainty and slowing in construction lending.

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

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.

As of December 31, 2023, there were $238.0 million in CCBX home equity loans included in residential real estate, compared to $244.6 million at December 31, 2022. These home equity lines of credit are secured by residential real estate and are accessed by using a credit card. We sold $321.5 million in CCBX residential real estate loans during the year ended December 31, 2023.

In the past, we have purchased residential mortgages originated through other financial institutions to hold for investment for purposes of diversifying our residential mortgage loan portfolio, meeting certain regulatory requirements and increasing our interest income. We last purchased residential mortgage loans in 2018. As of December 31, 2023 and December 31, 2022, we held $8.1 million and $9.4 million, respectively, in purchased residential real estate mortgage loans. These loans purchased typically have a fixed rate with a term of 15 to 30 years and are collateralized by one-to-four family residential real estate. We have a defined set of credit guidelines that we use when evaluating these loans. Although purchased loans were originated and underwritten by another institution, our mortgage, credit, and compliance departments conduct an independent review of each underlying loan that includes re-underwriting each of these loans to our credit and compliance standards.

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

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

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These increases, which occurred across the various segments of our portfolio, were due to our commitment to continue growing the portfolio in the Puget Sound region. We actively seek commercial real estate loans in our markets and our lenders are experienced in competing for these loans and managing these relationships.

We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores, hotels and motels, office buildings, mixed-use residential and commercial, and other properties. We originate both fixed- and adjustable-rate loans with terms up to 20 years. Fixed-rate loans typically amortize over a 10 to 25 year period with balloon payments due at the end of five to ten years. Adjustable-rate loans are generally based on the prime rate and adjust with the prime rate or are based on term equivalent FHLB rates. At December 31, 2023, approximately 33.6% 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. As of December 31, 2023, we held $43.0 million in purchased commercial real estate loans, compared to $42.4 million at December 31, 2022. Our credit administration team has substantial experience in underwriting, managing, monitoring and working out commercial real estate loans, and remains diligent in communicating and proactively working with borrowers to help mitigate potential credit deterioration.

Consumer and Other 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. Our community bank consumer and other loans totaled $1.6 million as of December 31, 2023, compared to $1.7 million at December 31, 2022 and are comprised of personal lines of credit, automobile, boat, and recreational vehicle loans, and secured term loans.

Contractual Maturity Ranges. The contractual maturity ranges of loans in our loan portfolio and the amount of such loans with fixed and floating interest rates in each maturity range as of date indicated are summarized in the following tables:

Commercial and industrial loans:

Real estate loans:

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

(dollars in thousands) Fixed Rates Floating or AdjustableRates Total

Commercial and industrial loans:

Real estate loans:

Industry Exposure and Categories of Loans

We have a diversified loan portfolio, representing a wide variety of industries. Our major categories of loans are commercial real estate, consumer and other loans, residential real estate, commercial and industrial, and construction, land and land development loans. Together they represent $3.03 billion in outstanding loan balances. When combined with $2.34 billion in unused commitments the total of these categories is $5.38 billion. However, total exposure on CCBX loans is subject to portfolio and partner maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

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

Community bank commercial real estate loans

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As illustrated in the table below, our CCBX partners originate a large number of mostly smaller dollar loans, resulting in an average consumer loan balance of just $1,200.

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

CCBX consumer loans

Community bank consumer loans

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

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

CCBX residential real estate loans

Community bank residential real estate loans

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

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

(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, 2023:

Community bank construction, land and land development loans

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Nonperforming Assets

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by applicable regulations. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. Installment (closed end) consumer loans and revolving (open-ended loans, such as credit cards) originated through CCBX partners continue to accrue interest until they are charged-off at 120 days past due for installment loans (primarily unsecured loans to consumers) and 180 days past due for revolving loans (primarily credit cards). These consumer loans are reported out as substandard loans, 90+ days past due and still accruing. As a result of the type of loans (primarily consumer loans) originated through our CCBX partners, we anticipate that balances 90 days past due or more and still accruing will increase as those loans grow.

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

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

We had $53.8 million in nonperforming assets as of December 31, 2023, compared to $33.2 million as of December 31, 2022. This includes $46.5 million in CCBX loans more than 90 days past due and still accruing interest as of December 31, 2023, compared to $26.1 million at December 31, 2022. All of our nonperforming assets were nonperforming loans as of December 31, 2023 and December 31, 2022. Our nonperforming loans to loans receivable ratio was 1.78% at December 31, 2023, compared to 1.26% at December 31, 2022. 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. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses, when accruing consumer loans originated through CCBX partners are charged-off at 120 days past due for installment loans (primarily unsecured loans to consumers) and 180 days past due for revolving loans (primarily credit cards).

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

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

Nonaccrual loans:

Commercial and industrial loans $ — $ 113

Real estate loans:

Construction, land and land development — 66

Residential real estate 170 —

Accruing loans past due 90 days or more:

Commercial & industrial loans 2,086 404

Real estate loans:

Residential real estate loans 1,115 876

Consumer and other loans:

Real estate owned — —

Repossessed assets — —

Modified loans for borrowers experiencing financial difficulty — —

Total nonaccrual loans to loans receivable 0.24 % 0.27 %

Total nonperforming loans to loans receivable 1.78 % 1.26 %

Total nonperforming assets to total assets 1.43 % 1.06 %

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

Community Bank As of

(dollars in thousands; unaudited) December 31,2023 December 31,2022

Nonaccrual loans:

Commercial and industrial loans $ — $ 113

Real estate:

Construction, land and land development — 66

Residential real estate 170 —

Accruing loans past due 90 days or more:

Total accruing loans past due 90 days or more — —

Other real estate owned — —

Repossessed assets — —

Total nonperforming assets $ 7,315 $ 7,080

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

CCBX As of

(dollars in thousands; unaudited) December 31,2023 December 31,2022

Nonaccrual loans $ — $ —

Accruing loans past due 90 days or more:

Commercial & industrial loans 2,086 404

Real estate loans:

Residential real estate loans 1,115 876

Consumer and other loans:

Other real estate owned — —

Repossessed assets — —

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

As of December 31, 2023, $44.3 million of the $46.5 million in nonperforming CCBX loans were covered by CCBX partner credit enhancements. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses. Under the agreement, the CCBX partner will indemnify or reimburse the Bank for its loss/charge-off on these loans.

Allowance for Credit Losses - Loans

The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and calculated on a collective basis for those loans which share similar risk characteristics. At each reporting period, the Company evaluates whether the loans in a pool continue to exhibit similar risk characteristics as the other loans in the pool and whether it needs to evaluate the allowance on an individual basis. The Bank must estimate expected credit losses over the loans’ contractual terms, adjusted for expected prepayments. In estimating the life of the loan, the Bank

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cannot extend the contractual term of the loan for expected extensions, renewals, and modifications, unless the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Bank. Because expected credit losses are estimated over the contractual life adjusted for estimated prepayments, determination of the life of the loan may significantly affect the ACL. The Company has chosen to segment its portfolio consistent with the manner in which it manages the risk of the type of credit.

•Community Bank Portfolio: The ACL calculation is derived for loan segments utilizing loan level information and relevant information from internal and external sources related to past events and current conditions. In addition, the Company incorporates a reasonable and supportable forecast.

As of December 31, 2023, the allowance for credit losses totaled $117.0 million, or 3.86% of total loans. As of December 31, 2022, the allowance for loan losses totaled $74.0 million, or 2.82% of total loans. Effective January 1, 2023 the Company implemented the CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the incurred loss model, which is what we were previously using. As a result of implementing CECL, there was a one-time adjustment to the 2023 opening allowance balance of $3.9 million. The day one CECL adjustment for community bank loans included a reduction of $310,000 to the community bank allowance driven by the reversal of the unallocated balance and a reduction of $340,000 related to the community bank unfunded commitment reserve also driven by the reversal of the unallocated balance. This was offset by an increase to the CCBX allowance for $4.2 million. With the mirror image approach accounting related to the contingent credit enhancement asset for CCBX partner loans, there was a CECL day one increase to the indemnification asset in the amount of $4.5 million. Net, the day one impact to retained earnings for the Bank’s transition to CECL was an increase of $954,000, excluding the impact of income taxes.

The increase in the Company’s allowance for credit losses for the year ended December 31, 2023 compared to December 31, 2022, is largely related to the provision for CCBX partner loans. During the year ended December 31, 2023, a $182.7 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a provision for credit losses - loans of $1.3 million was needed for the year ended December 31, 2023. . The economic environment is continuously changing with the GDP, inflation, higher interest rates, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment, including a potential shutdown of the U.S. government, and trade issues that have resulted in some economic uncertainty. As described above, CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses.

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Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying and/or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and reclassified negative deposit accounts. 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. The credit enhancement asset is relieved as credit enhancement payments and recoveries are received from the CCBX partner or taken from the partner's cash reserve account. BaaS fraud includes noncredit fraud losses on loans and deposits originated through partners. Agreements with our CCBX partners also provide protection to the Bank from fraud by indemnifying and/or reimbursing incurred fraud losses. Fraud losses are recorded when incurred as losses in noninterest expense, and the enhancement received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. CCBX partners also pledge a cash reserve account at the Bank which the Bank can collect from when losses occur. That account is then replenished by the partner on a regular interval. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill its contracted obligations to replenish its cash reserve account then the Bank would be exposed to additional losses, as a result of this counterparty risk. If a CCBX partner does not replenish its cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. 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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The following table presents, as of and for the periods indicated, net charge-off information by segment:

Year Ended

(dollars in thousands; unaudited) Community Bank CCBX Total

Gross recoveries (83) (12) (95)

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

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

As of or for the Year Ended December 31,

Impact of adopting CECL (ASC 326) 3,852 — —

Charge-offs:

Recoveries:

Commercial and industrial loans 5 40 67

Residential real estate 4 — —

Allowance to loans receivable 3.86 % 2.82 % 1.64 %

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The allowance for credit losses to nonaccrual loans ratio increased as of December 31, 2023, compared to December 31, 2022 as a result of an increase of $235,000 in nonaccrual community bank loans, combined with an increase of $42.9 million in the allowance for credit losses. The increase in the allowance for credit losses for the twelve months ended months ended December 31, 2023 compared to the twelve months ended months ended December 31, 2022, is largely related to the increase in the allowance for loans originated through our CCBX partners. CCBX partner agreements provide credit enhancements that cover the $144.9 million in net charge-offs on CCBX loans for the twelve months ended months ended December 31, 2023. At December 31, 2023, the allowance for credit losses for CCBX partner loans totaled $95.4 million, compared to $53.4 million at December 31, 2022.

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

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.

The following table shows the allocation of the allowance for credit losses among loan categories and certain other information as of the dates indicated. The allocation of the allowance for credit losses as shown in the table should neither be interpreted as an indication of future charge-offs, nor as an indication that charge-offs in future periods will necessarily occur in these amounts or in the indicated proportions. The total allowance is available to absorb losses from any loan category.

At December 31,

Real estate loans:

Construction, land and land development loans 6,386 5.2 7,425 8.1

Securities

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. 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.

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

As of December 31,

(dollars in thousands) AmortizedCost FairValue AmortizedCost FairValue

Securities available-for-sale:

U.S. Agency collateralized mortgage obligations 45 43 54 51

U.S. Agency residential mortgage-backed securities — — 1 1

Securities held-to-maturity:

All of our U.S. Agency residential mortgage-backed securities and U.S. Agency collateralized mortgage obligations are U.S. Government agency securities. As of December 31, 2023, we did not hold any Fannie Mae or Freddie Mac preferred stock, collateralized debt obligations, collateralized loan obligations, structured investment vehicles, private label collateralized mortgage obligations, subprime, or second lien elements in our investment portfolio.

As of December 31, 2023 and 2022, we did not own securities of any one issuer, other than the U.S. Government and its agencies, for which aggregate adjusted cost exceeded 10.0% of consolidated shareholders’ equity.

Restricted equity securities totaled $6.8 million as of December 31, 2023 and $7.5 million as of December 31, 2022 The decrease was attributable to a reduction of the amount of FHLB stock that we are required to hold. Federal Reserve and FHLB stock are carried at par and do not have a readily determinable fair value. Ownership of FHLB stock is restricted to the FHLB and member institutions, and can only be purchased and redeemed at par.

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

For the Twelve Months EndedDecember 31,

Observable price change — (100) 1,472

The Company has invested in funds that are accelerating technology for adoption by banks. These equity investments are held at fair value, as reported by the funds. During the year ended December 31, 2023, the Company contributed $74,500 with investment funds designed to help accelerate technology adoption at banks, and recognized net gains of $278,000, resulting in an equity interest of $809,000 at December 31, 2023. The Company has committed up to $653,000 in capital for these equity funds. One firm decided to wind down their technology fund and their fund balance decreased $176,000 in 2023, leaving $22,000 in that fund as of December 31, 2023.

The following table shows the activity in equity fund investments held at fair value for the dates shown:

For the Twelve Months EndedDecember 31,

Carrying value, beginning of period 456 160 —

Purchases/capital calls/capital returns, net 75 349 163

Net change recognized in earnings 278 (53) (3)

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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. The contractual maturity of a mortgage-backed security is the date at which the last underlying mortgage matures.

Securities available-for-sale:

Securities held to maturity:

Deposits

We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, money market, savings, and time accounts as well as IntraFi network reciprocal sweep deposits. Sweep deposits enable us to provide an FDIC insured deposit option to customers that have balances in excess of the FDIC insurance limit. This service trades our customers’ funds as certificates of deposit or interest bearing demand deposits in increments under the FDIC insured amount to other participating financial institutions and in exchange we receive time deposit or interest bearing demand investments from participating financial institutions in a reciprocal agreement. 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 deposit products allow us to offer a broader range of partner specific products, which include products designed to reach specific under-served or under-banked populations served by our CCBX partners.

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Total deposits as of December 31, 2023 were $3.36 billion, an increase of $542.8 million, or 19.3%, compared to $2.82 billion as of December 31, 2022. 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.

Included in total deposits is $1.86 billion in CCBX deposits, an increase of $583.5 million, or 45.6%, compared to $1.28 billion as of December 31, 2022. CCBX customer deposit relationships include deposits with CCBX end customers, operating and non-operating deposit accounts. The deposits from our CCBX segment are generally classified as interest bearing NOW and money market accounts. Our cost of deposits for the CCBX segment was 4.55% for the year ended December 31, 2023.

Total noninterest bearing deposits as of December 31, 2023 were $625.2 million, a decrease of $149.8 million, or 19.3%, compared to $775.0 million as of December 31, 2022. Noninterest bearing deposits represent 18.6% and 27.5% of total deposits for December 31, 2023 and December 31, 2022, respectively. 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. 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.

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

As of December 31,

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

Community Bank As of

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

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

CCBX As of

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

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

As of December 31,

Maturity Period:

Over three through six months 1,457 2,957

Over six through twelve months 1,595 5,892

Weighted average maturity (in years) 0.75 0.76

Average deposits for the year ended December 31, 2023, were $3.10 billion, an increase of $436.5 million, or 16.4%, compared to $2.67 billion for the year ended December 31, 2022. The increase in average deposits was primarily due to an increase in core deposits, in interest bearing deposits. Included in this increase is growth in CCBX deposits. 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 following table presents the average balances and average rates paid on deposits for the periods indicated:

For the Year Ended December 31,

The ratio of average noninterest-bearing deposits to average total deposits for the years ended December 31, 2023 and 2022, was 22.8% and 35.3%, respectively.

Factors affecting the cost of funding interest-bearing assets include the volume of noninterest- and interest-bearing deposits, changes in market interest rates and economic conditions in the Puget Sound region and their impact on interest paid on deposits, competition from other financial institutions, as well as the ongoing execution of our growth strategies. Cost of total interest-bearing liabilities is calculated as total interest expense divided by average total interest-bearing deposits plus average total borrowings. Our cost of total interest-bearing liabilities was 3.75% and 1.16% for the years ended December 31, 2023 and 2022, respectively. The increasein our cost of deposits in 2023 was primarily due to rate increases from the FOMC. We actively manage our interest rates on deposits, however, rate changes from the FOMC and competition can and do impact our deposit costs.

Uninsured Deposits

The FDIC insures our deposits up to $250,000 per depositor, per insured bank for each account ownership category. Deposits that exceed insurance limits are uninsured. At December 31, 2023, deposits totaled $3.36 billion, of which total estimated uninsured deposits were $558.6 million, or 16.6% of total deposits. At December 31, 2022, deposits totaled $2.82 billion, of which total estimated uninsured deposits were $835.8 million, or 29.7% of total deposits. The Bank is using sweep deposits to provide our customers with fully insured deposits through a sweep and exchange of deposits with other financial institutions.

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

(dollars in thousands) As of December 31, 2023

Maturity Period:

Three months or less $ 1,479

Over three through six months 52

Over six through twelve months 8

Over twelve months 152

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Borrowings

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

Federal Reserve Bank Line of Credit. The Federal Reserve allows us to borrow against our line of credit through a borrower in custody agreement utilizing the discount window, which is collateralized by certain loans. As of December 31, 2023, and December 31, 2022, total borrowing capacity of $435.5 million and $26.7 million, respectively, was available under this arrangement. As of December 31, 2023, and December 31, 2022, Federal Reserve borrowings against our line of credit totaled zero. Additional loans were pledged during 2023 to significantly increase the borrowing capacity of the Bank in the event of a liquidity crisis.

Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of December 31, 2023 and December 31, 2022, we had borrowing capacity of$204.6 millionand$120.8 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.

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

As of and For the Years Ended December 31,

Maximum amount outstanding at any month-end during period: $ — $ 24,999

Average outstanding balance during period: $ 1 $ 6,029

Weighted average interest rate during period: 5.60 % 1.13 %

Balance outstanding at end of period: $ — $ —

Weighted average interest rate at end of period: 0.00% 0.00 %

Junior Subordinated Debentures. In 2004, we issued $3.6 million in junior subordinated debentures to Coastal (WA) Statutory Trust (the “Trust”), of which we own all of the outstanding common securities. The Trust used the proceeds from the issuance of its underlying common securities and preferred securities to purchase the debentures issued by the Company. These debentures are the Trust’s only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. Prior to June 30, 2023, the debentures bore interest at a rate per annum equal to the 3-month LIBOR plus 2.10%. Beginning with rate adjustments subsequent to June 30, 2023, the rate is based off three-month CME Term SOFR plus 0.26%. The effective rate as of December 31, 2023 and 2022, was 7.75% and 6.87%, respectively. We generally have the right to defer payment of interest on the debentures at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the debentures. During any such extension period, distributions on the Trust’s preferred securities will also be deferred, and our ability to pay dividends on our common stock will be restricted. The Trust’s preferred securities are mandatorily redeemable upon maturity of the debentures, or upon earlier redemption as provided in the indenture, subject to Federal Reserve approval. If the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. We unconditionally guarantee payment of accrued and unpaid distributions required to be paid on the Trust securities subject to certain exceptions, the redemption price with respect to any Trust securities called for redemption and amounts due if the Trust is liquidated or terminated.

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

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In November 2022, the Company issued a subordinated note in the amount of $20.0 million. The note matures on November 1, 2032, and bears interest at the rate of 7.00% per year for five years and, thereafter, reprices quarterly beginning November 1, 2027, at a rate equal to the three-month SOFR plus 2.90%. The five-year 7.00% interest period ends on November 1, 2027. 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. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds and the ability to convert assets into cash. Changes in economic conditions or exposure to credit, market, and operational, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity management. 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. Partner program agreements govern the relationship and are valid for a given period of time. Prior to exiting, the partner would need to provide us adequate notice as stipulated in the agreement that they were not going to renew the program agreement and intend to move the deposits. The movement to an alternate BaaS provider is cumbersome and would be over a period of time, which would allow us the opportunity to put alternate liquidity in place; those options are more fully discussed below. As of December 31, 2023, we have 2 partners with deposits that are in excess of 10% of total deposits and represent 40% of total deposits. Our deposit concentration limit for any one partner is 30% of total deposits.

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

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

The Company has pledged loans and securities totaling $1.03 billion and $220.1 million at December 31, 2023 and December 31, 2022, respectively, for borrowing lines at the FHLB and FRB. Additional loans were pledged during 2023 to significantly increase the borrowing capacity of the Bank in the event of a liquidity crisis. The Bank had the ability and capacity to borrow up to $640.1 million from FHLB and the FRB discount window at December 31, 2023. There were no borrowings taken under these facilities during the twelve-months ended December 31, 2023 so the Bank has the maximum capacity in the event of a liquidity emergency.

The Bank’s current liquidity position is supported by liquid assets (cash and investments on the balance sheet), liabilities (capacity to borrow funds the same day), low levels of uninsured deposits ($558.6 million at December 31, 2023

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and alternative sources of funds including the capacity to borrow up to $640.1 million from FHLB, the FRB discount window on a same day basis and a $50.0 million line of credit with a Banker’s Bank. Cash on the balance sheet and borrowing capacity of $1.17 billion represented 34.9% of total deposits and exceeded the $558.6 million in uninsured deposits as of December 31, 2023. The board of directors and management is cognizant of the risk of uninsured deposits and has used fully insured IntraFi Network reciprocal deposits to reduce uninsured deposit. Fully insured IntraFi network reciprocal deposits totaled $340.1 million and $12.5 million at December 31, 2023 and December 31, 2022, respectively. Uninsured deposits totaled $558.6 million at December 31, 2023 and totaled $835.8 million at December 31, 2022. The Bank significantly increased its liquidity and ability to borrow funds on a same day basis to help it prepare and avoid the liquidity events that besieged regional banks during the liquidity crisis in March 2023 which resulted in two bank failures due to liquidity.

The board of directors adopted a policy requiring management take various actions, in its discretion, to return the liquidity ratio 10% or greater within 10 business days of the liquidity ratio being below 10% before the Bank’s liquidity contingency funding plan would be invoked. If the liquidity ratio goes below 7.5% then the board of directors will be notified immediately, and the liquidity contingency funding plan would be invoked until the ratio is returned to 10% or more. These liquidity risk measures provide the board of directors and management with a framework for managing liquidity risk and taking action early so liquidity events are avoided or managed in a timely manner.

The Company is a corporation separate and apart from our Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its subordinated note and junior subordinated debentures. The Company’s main source of cash flow has been through equity and debt offerings. The Company has consistently retained a portion of the funds from equity and debt offerings so that is has sufficient funds for its operating and debt costs. During the year ended December 31, 2023, the Company contributed $15.0 million to the Bank. The Company currently holds $5.5 million in cash for debt servicing and operating purposes. In addition, the Bank can declare and pay dividends to the Company to meet the Company’s debt and operating expenses. There are statutory and regulatory limitations that affect the ability of the Bank to pay dividends to the Company. We believe that these limitations will not impact the ability of the Bank to pay dividends to the Company to meet ongoing operating needs.

For contingency purposes, the Company maintains a minimum level of cash to fund one year’s projected operating cash flow needs and the Bank established a minimum (regulatory calculation) liquidity ratio of 10%, and usually targets a liquidity ratio between 12% and 15%. Both of these minimum liquidity levels are on-balance sheet sources. Per the Bank’s policies and its liquidity contingency plan, in event of a liquidity emergency the Bank can utilize wholesale funds in an amount up to 30% of assets. Since the Bank uses only a small portion of its borrowing or wholesale funding capacity, the Bank has access to funds if needed in a liquidity emergency.

Capital Adequacy

Capital management consists of providing equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital levels relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank 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, 2023, and December 31, 2022, the Company and the Bank were in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the Federal Reserve’s prompt corrective action regulations. As we deploy capital and continue to grow operations, regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control growth in order to remain in compliance with all regulatory capital standards applicable to us. In addition, the Company maintains an effective registration statement on Form S-3 with the Securities and Exchange Commission which allows the Company to raise additional capital in an amount up to $115.5 million. The Company raised $34.5 million in December 2021. The Company, through a private placement, raised $25.0 million in subordinated debt in 2021 and repaid $10.0 million of subordinated debt with the proceeds and used the remainder for general corporate purposes. On November 1, 2022 the

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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:

(dollars in thousands) Amount Ratio Amount Ratio Amount Ratio

Tier 1 Leverage Capital (to average assets)

Common Equity Tier 1 Capital (to risk-weighted assets)

Tier 1 Capital (to risk-weighted assets)

Total Capital (to risk-weighted assets)

Tier 1 Leverage Capital (to average assets)

Common Equity Tier 1 Capital (to risk-weighted assets)

Tier 1 Capital (to risk-weighted assets)

Total Capital (to risk-weighted assets)

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

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Material Cash Requirements and Capital Resources

The following table provides the material cash requirements from known contractual and other obligations as of December 31, 2023:

Payments Due by Period

(dollars in thousands) Total Less than 1 Year Over 1 year Other (1)

Cash requirements

Junior subordinated debentures 3,609 — 3,609 —

Equity investment commitment 653 653 — —

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

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

CCB US Equity

CCB · 10-K · period ended 2023-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CCB US Equity☆

CCB · 10-K · period ended 2023-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

CCB US Equity