COASTAL FINANCIAL CORP

Previous wording

This discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this Form 10-K. The Company restated its financial statements for the year ended December 31, 2023 and the quarters ended March 31, June 30, and September 30, 2023 and 2024 for misstatements between the balance sheet, income statement and statement of cash flows that were determined to be material to previously issued financial statements. See “Note 23, Restatement of Prior Period Financial Statements” in Item 8 of this Form 10-K, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our consolidated financial statements.

Current wording

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

Previous wording

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 had 24 partners as of December 31, 2024. The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments. 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.

Current wording

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) and have one loan production office in King County. The CCBX segment provides banking as a service (“BaaS”) that allows our digital financial service partners to offer their customers banking services. The CCBX segment had 28 partners as of December 31, 2025. The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

Previous wording

As of December 31, 2024, we had total assets of $4.12 billion, total loans receivable of $3.49 billion, total deposits of $3.59 billion and total shareholders’ equity of $438.7 million.

Current wording

As of December 31, 2025, we had total assets of $4.74 billion, total loans receivable of $3.75 billion, total deposits of $4.14 billion and total shareholders’ equity of $491.0 million.

Previous wording

The largest component of noninterest expense is BaaS loan expense and salaries and employee benefits. Other significant operating expenses include BaaS fraud expense, legal and professional expenses, data processing and software licenses and occupancy expense. Our operating efficiency, as measured by our efficiency ratio, has gradually improved primarily because the growth of our deposits and loans has enabled our net interest income and noninterest income to outpace the growth of our expenses. When we make substantial investments in our infrastructure and make investments to increase our operating capacity, our operating efficiency ratio decreases until we generate enough revenue growth to offset the increased costs however, prior to making such investments, we focus on how best and most expediently we can achieve the revenue growth necessary to offset the costs of these investments or new branches. Our efficiency ratio has been impacted by the increase in CCBX income and CCBX expense. Our efficiency ratio was 42.38% at December 31, 2024, compared to 44.66% at December 31, 2023. This ratio decreased as a result of the increase in net interest income and credit enhancement income for the year ended December 31, 2024 compared to the year ended December 31, 2023.

Current wording

The largest component of noninterest expense is BaaS loan expense and salaries and employee benefits. Other significant operating expenses include BaaS fraud expense, legal and professional expenses, data processing and software licenses and occupancy expense. Our operating efficiency, as measured by our efficiency ratio, has gradually improved primarily because the growth of our deposits and loans has enabled our net interest income and noninterest income to outpace the growth of our expenses. When we make substantial investments in our infrastructure and make investments to increase our operating capacity, our operating efficiency ratio decreases until we generate enough revenue growth to offset the increased costs however, prior to making such investments, we focus on how best and most expediently we can achieve the revenue growth necessary to offset the costs of these investments or new branches. Our efficiency ratio has been impacted by the increase in CCBX income and CCBX expense. Our efficiency ratio was 53.13% at December 31, 2025, compared to 42.38% at December 31, 2024. This ratio increased as a result of an increase in net interest income, decrease in credit enhancement income and higher noninterest expenses for the year ended December 31, 2025 compared to the year ended December 31, 2024.

Previous wording

Our business and financial performance are affected by economic conditions generally in the United States for CCBX and more directly for the community bank in the markets in the Puget Sound region where we operate. The significant economic factors that are most relevant to our business and our financial performance include, but are not limited to, real estate values, interest rates and unemployment rates. In recent years, the Puget Sound region has experienced significant population gain, fueled in large part by the region’s technology industry, low unemployment and rising real estate values, all of which positively impacted our business. The economic environment is continuously changing with bank failures, mergers, inflation, changing interest rates, global unrest, the war in Ukraine, conflicts in the Middle East, political environment, natural disasters, and trade issues that contribute to economic uncertainty which has caused increased market volatility and may lead to a significant decrease in consumer confidence and business generally.

Current wording

Our business and financial performance are affected by economic conditions generally in the United States for CCBX and more directly for the community bank in the markets in the Puget Sound region where we operate. The significant economic factors that are most relevant to our business and our financial performance include, but are not limited to, real estate values, interest rates and unemployment rates. In recent years, the Puget Sound region has experienced significant population gain, fueled in large part by the region’s technology industry, low unemployment and rising real estate values, all of which positively impacted our business. The macro economic environment is continuously changing, primarily due to the pace of economic growth, inflation, changing interest rates, global trade tensions, tariffs, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, political uncertainty, natural disasters and trade issues that contribute to economic uncertainty which has caused increased market volatility and may lead to a significant decrease in consumer confidence and business generally.

Previous wording

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

Current wording

The Company decreased the allowance from $177.0 million at December 31, 2024 to $169.5 million at December 31, 2025. The change is largely related to improved credit quality decreasing the provision for 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 loan portfolio. 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.

Previous wording

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.

Current wording

The recording of BaaS income and expense is in accordance with accounting guidance, and is dependent upon the contractual agreement with each partner with certain components of BaaS income being consistent across agreements. Agreements with many of our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred credit and fraud losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for 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, and the credit enhancement asset is relieved when credit enhancement payments and 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.

Previous wording

For the year ended December 31, 2024, noninterest income subject to Topic 606 increased $6.6 million to $24.7 million, compared to $18.1 million for the year ended December 31, 2023. The increase was largely due to an increase in BaaS fee income resulting from increased activity and growth with active CCBX partners. For more information and discussion related to revenue recognition, see “Note 19 – Revenue Recognition” in the Consolidated Financial Statements.

Current wording

For the year ended December 31, 2025, noninterest income subject to Topic 606 increased $9.7 million to $34.3 million, compared to $24.7 million for the year ended December 31, 2024. The increase was largely due to an increase in BaaS program income resulting from increased activity and growth with active CCBX partners. For more information and discussion related to revenue recognition, see “Note 19 – Revenue Recognition” in the Consolidated Financial Statements.

Previous wording

Year Ended December 31, 2024, Compared to Year Ended December 31, 2023. Net income for the year ended December 31, 2024 was $45.2 million, or $3.26 per diluted share, compared to $44.6 million, or $3.27 per diluted share, for the year ended December 31, 2023. The increase in net income over the prior year was attributable to a $41.5 million increase in net interest income, $104.1 million increase in noninterest income partially offset by a $93.6 million increase in the provision for credit losses - loans and a $51.7 million increase in noninterest expense. The increase in noninterest income, provision expense and noninterest expense are largely related to CCBX loan and deposit growth. The increase in interest expense is related to higher average interest bearing deposits and an increase in cost of deposits as a result of higher interest rates.

Current wording

Year Ended December 31, 2025, Compared to Year Ended December 31, 2024. Net income for the year ended December 31, 2025 was $47.0 million, or $3.06 per diluted share, compared to $45.2 million, or $3.26 per diluted share, for the year ended December 31, 2024. Net income is up; however, net income per diluted share is down as a result of the capital raise in December 2024 that increased the number of shares outstanding. The increase in net income over the comparable period in the prior year was primarily attributable to an increase of $37.0 million in net interest income, partially offset by an increase of $10.6 million in BaaS loan expense. The increase in interest income and BaaS loan expense is largely related to growth in CCBX loans. Also contributing to the variance is an increase in BaaS program income of $9.4 million. The increase is partially offset by a $15.8 million increase in salaries and employee benefits, a $4.7 million increase in legal and professional expenses and an $8.0 million increase in data processing and software licenses all related to growth and investments in technology. Additionally, there was an increase in the provision for income taxes of $2.2 million as a result of higher net income, an increase in effective tax rate resulting from an increase in state taxes, and the taxability of certain equity awards.

Previous wording

Interest and fees on loans totaled $372.0 million for the year ended December 31, 2024 compared to $304.3 million for the year ended December 31, 2023. The $67.8 million increase in interest and fees on loans for the year ended December 31, 2024, compared to the year ended December 31, 2023, was largely due to growth in CCBX and community bank loans. Total average loans receivable for the year ended December 31, 2024 was $3.32 billion, compared to $2.94 billion for the year ended December 31, 2023.

Current wording

Interest and fees on loans totaled $397.6 million for the year ended December 31, 2025 compared to $372.0 million for the year ended December 31, 2024. The $25.6 million increase in interest and fees on loans for the year ended December 31, 2025, compared to the year ended December 31, 2024, was largely due to growth in CCBX and community bank loans. Total average loans receivable for the year ended December 31, 2025 was $3.61 billion, compared to $3.32 billion for the year ended December 31, 2024.

Previous wording

CCBX average loans receivable grew to $1.43 billion for the year ended December 31, 2024, compared to $1.21 billion for the year ended December 31, 2023, an increase of $217.2 million, or 17.9%. Average CCBX yield of 17.39% and 16.30% was earned on CCBX loans for the years ended December 31, 2024 and December 31, 2023, respectively. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield.

Current wording

CCBX average loans receivable grew to $1.73 billion for the year ended December 31, 2025, compared to $1.43 billion for the year ended December 31, 2024, an increase of $302.4 million, or 21.2%. Average CCBX yield of 15.87% and 17.39% was earned on CCBX loans for the years ended December 31, 2025 and December 31, 2024, respectively. This decrease in yield on loans receivable is the result of lower rates compared to the prior year period as well as a change in the loan mix. Lower rate capital call lines were $101.5 million higher compared to December 31, 2024. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield.

Previous wording

Community bank average loans receivable grew to $1.89 billion for the year ended December 31, 2024, compared to $1.73 billion for the year ended December 31, 2023, an increase of $166.5 million, or 9.6%. Average yield of 6.54% was earned on community bank loans for the year ended December 31, 2024, compared to 6.20% for the year ended December 31, 2023.

Current wording

Community bank average loans receivable was fairly flat at $1.88 billion for the year ended December 31, 2025, compared to $1.89 billion for the year ended December 31, 2024, representing a decrease of $8.5 million, or 0.4%. Average yield of 6.52% was earned on community bank loans for the year ended December 31, 2025, compared to 6.54% for the year ended December 31, 2024.

Previous wording

Interest income from interest earning deposits with other banks was $21.3 million for the year ended December 31, 2024, an increase of $5.9 million largely due to an increase in balances, compared to the year ended December 31, 2023. The average balance of interest earning deposits invested with other banks for the year ended December 31, 2024 was $405.5 million, compared to $295.8 million for the year ended December 31, 2023. Additionally, the yield on these interest earning deposits with other banks increased 0.05%, compared to the year ended December 31, 2023. Interest income on investment securities decreased $141,000 to $3.1 million, with a yield of 4.67% at December 31, 2024, compared to $3.2 million, and a yield of 2.66%, at December 31, 2023. Average investment securities decreased $54.7 million from $120.2 million for the year ended December 31, 2023 to $65.5 million for the year ended December 31, 2024 as a result of available for sale (“AFS”) U.S. Treasury securities that matured earlier in the year, partially offset by an increase in HTM securities resulting from securities purchased for CRA purposes.

Current wording

Interest income from interest earning deposits with other banks was $29.0 million for the year ended December 31, 2025, an increase of $7.7 million largely due to an increase in balances, compared to the year ended December 31, 2024. The average balance of interest earning deposits invested with other banks for the year ended December 31, 2025 was $671.7 million, compared to $405.5 million for the year ended December 31, 2024. Interest income on investment securities decreased $529,000 to $2.5 million. Average investment securities decreased $19.2 million from $65.5 million for the year ended December 31, 2024 to $46.2 million for the year ended December 31, 2025 as a result of maturing securities and principal paydowns.

Previous wording

Interest expense was $123.7 million for the year ended December 31, 2024, a $32.1 million increase from the year ended December 31, 2023. Interest expense on deposits was $120.9 million for the year ended December 31, 2024, compared to $89.0 million for the year ended December 31, 2023. The $31.9 million increase in interest expense on deposits was due to an increase in average interest bearing deposits of $510.2 million and an increase in interest rates. Interest on borrowed funds was $2.8 million for the year ended December 31, 2024 and $2.6 million for the year ended December 31, 2023. The $173,000 increase in interest expense on borrowed funds from the year ended December 31, 2023 is primarily the result of an increase in interest rates on the junior subordinated debt, which increased 0.22% to 7.77% for the year ended December 31, 2024, compared to 7.55% for the year ended December 31, 2023.

Current wording

Interest expense was $119.6 million for the year ended December 31, 2025, a $4.2 million decrease from the year ended December 31, 2024. Interest expense on deposits was $116.9 million for the year ended December 31, 2025, compared to $120.9 million for the year ended December 31, 2024. The $4.0 million decrease in interest expense on deposits was due to decreases in interest rates despite an increase in average interest bearing deposits of $439.2 million. Interest on borrowed funds was $2.6 million for the year ended December 31, 2025 and $2.8 million for the year ended December 31, 2024. The $179,000 decrease in interest expense on borrowed funds from the year ended December 31, 2024 is primarily the result of a decrease in interest rates on the junior subordinated debt, which decreased 1.00% to 6.77% for the year ended December 31, 2025, compared to 7.77% for the year ended December 31, 2024.

Previous wording

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 2.16% increase, from 0.71% for the year ended December 31, 2022. These increases were largely due to an increase in interest rates and an increase in interest bearing deposits. CCBX deposit growth also contributed to the increase in interest expense.

Current wording

Cost of funds was 3.02% for the year ended December 31, 2025, compared to 3.49% for the year ended December 31, 2024. Cost of deposits for the year ended December 31, 2025 was 2.99%, which was a 0.48% decrease, from 3.46% for the year ended December 31, 2024. These decreases were largely due to lower interest rates compared to the prior year period.

Previous wording

Total yield on loans receivable for the year ended December 31, 2023 was 10.36%, 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 16.30%, 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. There was an increase in average community bank loans of $211.1 million, or 13.9%, which is net of an average $28.6 million decrease in PPP loans as a result of loan forgiveness and repayments, compared to the year ended December 31, 2022. Average yield on community bank loans for the year ended December 31, 2023 was 6.20% compared to 5.32% for the year ended December 31, 2022.

Current wording

Total yield on loans receivable for the year ended December 31, 2025 was 11.00%, compared to 11.20% for the year ended December 31, 2024. This decrease in yield on loans receivable is primarily attributed to lower interest rates and a change in loan mix. For the year ended December 31, 2025, average CCBX loans increased $302.4 million, or 21.2%, with an average CCBX yield of 15.87%, compared to 17.39% for the year ended December 31, 2024. There was a decrease in average community bank loans of $8.5 million, or 0.4%, compared to the year ended December 31, 2024. Average yield on community bank loans for the year ended December 31, 2025 was 6.52%. compared to 6.54% for the year ended December 31, 2024.

Previous wording

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:

Current wording

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

Previous wording

The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan costs, net of fees included in interest income, totaled $8.9 million and $6.3 million for the years ended December 31, 2024 and 2023, respectively and loan fees, net of costs included in interest income totaled $3.2 million for the year ended December 31, 2022.

Current wording

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, net of loan costs included in interest income, totaled $9.3 million, $8.9 million and $6.3 million for the years ended December 31, 2025, 2024 and 2023, respectively.

Previous wording

The following table presents an analysis of certain average balances, interest income and interest expense that are specific to each segment. Items are that not directly attributed to the segment are not listed:

Current wording

The following table presents an analysis of certain average balances, interest income and interest expense that are specific to each segment. Items that are not directly attributed to the segment are not listed:

Previous wording

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 $42.9 million increase in loan interest income that is attributable to an increase in loan volume and $24.8 million increase in loan interest income that is attributable to an increase in loan rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.

Current wording

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 $32.4 million increase in loan interest income that is attributable to an increase in loan volume partially offset by a decrease of $6.8 million in loan interest income attributed to a decrease in loan rates. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.

Previous wording

The economic environment is continuously changing, due to the pace of economic growth, inflation, changing interest rates, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment, natural disasters, and trade issues that may impact the provision and therefore the allowance. Gross loans, excluding loans held for sale, totaled $3.49 billion at December 31, 2024. The allowance for credit losses as a percentage of loans was 5.08% at December 31, 2024, compared to 3.88% at December 31, 2023.

Current wording

The macro economic environment is continuously changing, primarily due to the pace of economic growth, inflation, changing interest rates, global trade tensions, tariffs, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, political uncertainty, natural disasters, and trade issues that may impact the provision and therefore the allowance. Gross loans, excluding loans held for sale, totaled $3.75 billion at December 31, 2025. The allowance for credit losses as a percentage of loans was 4.52% at December 31, 2025, compared to 5.08% at December 31, 2024.

Previous wording

Year Ended December 31, 2024, Compared to Year Ended December 31, 2023. The provision for credit losses - loans for the year ended December 31, 2024, was $275.7 million compared to $184.0 million for the year ended December 31, 2023. The increase in the Company’s provision for credit losses - loans during the year ended December 31, 2024, is largely related to the provision for CCBX partner loans due to significant loan growth, a change in the mix of loans and an increase in loan balances with higher loss rates. During the year ended December 31, 2024, a $277.8 million provision for credit losses - loans was recorded for loans originated through CCBX partners based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a recapture of $2.1 million was needed for the year ended December 31, 2024 due in part to a change in remaining average lives.

Current wording

Year Ended December 31, 2025, Compared to Year Ended December 31, 2024. The provision for credit losses - loans for the year ended December 31, 2025, was $189.4 million compared to $275.7 million for the year ended December 31, 2024. The decrease in the Company’s provision for credit losses - loans during the year ended December 31, 2025, is largely related to improvement in the performance of the CCBX portfolio and our focus on originating higher quality CCBX loans resulting in lower historical loss factors. During the year ended December 31, 2025, a $190.0 million provision for credit losses - loans was recorded for loans originated through CCBX partners based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a recapture of $666,000 was needed for the year ended December 31, 2025 due to a change in loan mix and updated prepayment speeds, partially offset by a slight increase in economic uncertainty.

Previous wording

Net charge-offs for the year ended December 31, 2024 totaled $216.1 million, or 6.51% of total average loans, as compared to net charge-offs of $144.5 million, or 4.92% of total average loans, for the year ended December 31, 2023. Net charge-offs were up significantly in 2024 compared to 2023 as a result of the growth in loans originated through CCBX partners. In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for a credit enhancement that indemnifies and as a result CCBX partners reimburse the Bank for net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company is responsible for credit losses on approximately 5% of a $324.6 million loan portfolio. At December 31, 2024, our portion of this portfolio represented $20.6 million in loans. Provision expense on these loans was $6.0 million and $5.1 million for the years ended December 31, 2024 and 2023, respectively, with net charge-offs of $5.6 million in 2024 and $3.6 million in 2023. In 2024, $540,000 of net charge-offs were recognized for community bank loans and $215.5 million of net-charge-offs were recognized for CCBX loans. In 2023, $52,000 of net charge-offs were recognized for community bank loans and $144.5 million of charge-offs were recognized for CCBX loans.

Current wording

Net charge-offs for the year ended December 31, 2025 totaled $196.8 million, or 5.45% of total average loans, as compared to net charge-offs of $216.1 million, or 6.51% of total average loans, for the year ended December 31, 2024. Net charge-offs decreased in 2025 compared to 2024 as a result of the improvement in the performance of loans originated through CCBX partners and our focus on originating higher quality CCBX loans. In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for a credit enhancement that indemnifies the Bank from incurred losses, and as a result CCBX partners reimburse the Bank for net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company is responsible for credit losses on approximately 5% of a $321.3 million loan portfolio. At December 31, 2025, our portion of this portfolio represented $22.1 million in loans. Provision expense on these loans was $4.9 million and $6.0 million for the years ended December 31, 2025 and 2024, respectively, with net charge-offs of $4.6 million in 2025 and $5.6 million in 2024. In 2025, $196.8 million of net-charge-offs were recognized for CCBX loans and $27,000 of net charge-offs were recognized for community bank loans. In 2024, $215.5 million of charge-offs were recognized for CCBX loans and $540,000 of net charge-offs were recognized for community bank loans.

Previous wording

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. Servicing and other BaaS fees are typically higher with new partners who have minimum contractual fees. Transaction and interchange fees increase as partner activity increases. As a result, we generally expect servicing and other fees to decrease and transaction and interchange fees to increase as partner activity grows and contracted minimum fees are replaced with recurring fees which then exceed the minimum contractual fees. Increases in BaaS reimbursement of fees offsets increases in noninterest expense from BaaS expenses covered by CCBX partners. In accordance with GAAP, we recognize the reimbursement of noncredit fraud losses on loans and deposits originated through partners and credit enhancements related to the allowance for credit losses and reserve for unfunded commitments provided by the partner as revenue in BaaS income. CCBX credit losses are recognized in the allowance for credit losses -loans and fraud losses are expensed in noninterest expense under BaaS fraud expense. Also in accordance with GAAP, we establish a credit enhancement asset for expected future credit losses through the recognition of BaaS credit enhancement revenue at the same time we establish an allowance for those loans though a provision for credit losses - loans. For more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

Current wording

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

Previous wording

For the year ended December 31, 2023, we earned $198.2 million in BaaS fees, which was an increase of $81.0 million, or 69.2%, over the year ended December 31, 2022, where we earned $117.1 million in BaaS fees. The increase over the year ended December 31, 2022 was primarily due to an increase of $101.4 million in BaaS credit enhancements related to the allowance for credit losses and reserve for unfunded commitments partially offset by $22.4 million less in BaaS fraud enhancements as a result of lower reported fraud, and an increase of $2.0 million in total BaaS fee program income, which was the result of increased partner activity.

Current wording

For the year ended December 31, 2025, we earned $225.2 million in BaaS fees, which was a decrease of $77.6 million, or 25.6%, over the year ended December 31, 2024, when we earned $302.7 million in BaaS fees. The decrease from the year ended December 31, 2024 was primarily due to a decrease of $85.2 million in BaaS credit enhancements related to the allowance for credit losses and reserve for unfunded commitments and a decrease of $1.8 million in BaaS fraud enhancements, partially offset by an increase of $9.4 million in total BaaS fee program income, which was the result of increased partner activity.

Previous wording

Service Charges and Fees. Service charges and fees include service charges on accounts, point-of-sale fees, merchant services fees and overdraft fees. Together they constitute the largest component of our noninterest income, outside of BaaS fee income. Service charges and fees were $3.7 million for the year ended December 31, 2024, a decrease of $116,000, or 3.0%, over the prior year primarily due to decreases in point-of-sale fees of $174,000 partially offset by an increase in service charges on deposit accounts of $87,000.

Current wording

Service Charges and Fees. Service charges and fees include service charges on accounts, point-of-sale fees, merchant services fees and overdraft fees. Together they constitute the largest component of our noninterest income, outside of BaaS fee income. Service charges and fees were $3.6 million for the year ended December 31, 2025, a decrease of $180,000, or 4.8%, from the prior year primarily due to decreases in point-of-sale fees of $194,000 partially offset by an increase in service charges on deposit accounts of $9,000.

Previous wording

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 $168,000 for the year ended December 31, 2024, a decrease of $515,000, or 75.4%, over the year ended December 31, 2023. Interest rate volatility, swap rates, and the timing of loan closings all impact the demand for long-term fixed rate swaps.

Current wording

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 $0 for the year ended December 31, 2025, a decrease of $168,000, or 100.0%, from the year ended December 31, 2024. Interest rate volatility, swap rates, and the timing of loan closings all impact the demand for long-term fixed rate swaps.

Previous wording

Unrealized gain (loss) on equity securities, net. During the year ended December 31, 2024, we recognized an unrealized gain on equity securities of $27,000, compared to the year ended December 31, 2023, when we recognized a $279,000 unrealized holding loss on equity securities. We hold $3.1 million in equity securities focused on entities providing products to the BaaS and financial services space.

Current wording

Unrealized gain (loss) on equity securities, net. During the year ended December 31, 2025, we recognized an unrealized loss on equity securities of $414,000, compared to the year ended December 31, 2024, when we recognized a $27,000 unrealized holding gain on equity securities. We hold $3.3 million in equity securities focused on entities providing products to the BaaS and financial services space.

Previous wording

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

Current wording

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 increased $1.8 million, or 116.9%, for the year ended December 31, 2025 compared to the year ended December 31, 2024, due in large part to the addition of sweep fee income in 2025.

Previous wording

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 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.

Current wording

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

Previous wording

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 $70.1 million for the year ended December 31, 2024, an increase of $3.6 million, or 5.5%, compared to $66.5 million for the year ended December 31, 2023. Salaries and employee benefits expense growth has slowed but continues to increase primarily due to hiring staff for our CCBX segment and additional staff for our ongoing growth initiatives. As our CCBX activities grow, and we invest more in technology we expect some continued growth in number of employees to support these lines of business but we are also working to automate our processes to reduce and/or slow future growth in hiring. As of December 31, 2024, we had 488 full-time equivalent employees, compared to 507 at December 31, 2023.

Current wording

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 $85.8 million for the year ended December 31, 2025, an increase of $15.8 million, or 22.7%, compared to $69.9 million for the year ended December 31, 2024. Contributing to the year-over-year variance in salaries and employee benefits was $2.1 million of employee restructuring costs related to organizational changes, including severance and other termination-related expenses. These costs included approximately $2.5 million of non-recurring stock-based compensation associated with accelerated vesting and modification-date fair value adjustments of equity awards in connection with employee departures, partially offset by a $2.0 million credit to salaries and employee benefits due to the forfeiture of other equity awards. As our CCBX activities grow and we invest more in technology, we expect some continued growth in number of employees to support these lines of business but are also working to automate our processes to reduce and/or slow future growth in hiring.

Previous wording

Legal and Professional Expenses. Legal and professional expenses include legal (for contracts, program agreements, regulatory and other business issues, etc.), audit and accounting expenses, consulting fees, fees for recruiting and hiring employees, and IT related security expenses. These expenses fluctuate with the development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services. The expenses also reflect the costs associated with our infrastructure enhancement projects to improve our processing, automate processes, reduce compliance costs and enhance our data management. Legal and professional expenses were $15.5 million for the year ended December 31, 2024 compared to $14.8 million for the year ended December 31, 2023, which is an increase of $703,000, or 4.7%.

Current wording

Legal and Professional Expenses. Legal and professional costs include legal, audit and accounting expenses, consulting fees, and fees for recruiting and hiring employees. These expenses fluctuate with the development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services. The expenses also reflect the costs associated with our infrastructure enhancement projects to improve our processing, automate processes, reduce compliance costs and enhance our data management. Legal and professional expenses were $20.3 million for the year ended December 31, 2025 compared to $15.5 million for the year ended December 31, 2024, which is an increase of $4.7 million, or 30.6%.

Previous wording

Data Processing and Software Licenses. Data processing ands oftware licenses includes expenses related to obtaining and maintaining software required for our various functions and additional investments in software development and the amortization of those costs. Capitalized software totaled $15.7 million as of December 31, 2024, compared to $5.8 million as of December 31, 2023. Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs. 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. Amortization of capitalized software totaled $3.0 million for the year ended December 31, 2024, compared to $754,000 for the year ended December 31, 2023. Data processing costs were $15.3 million for the year ended December 31, 2024, compared to $9.3 million for the year ended December 31, 2023, an increase of $6.0 million, or 63.8%.

Current wording

Data Processing and Software Licenses. Data processing and software licenses include expenses related to obtaining and maintaining software required for our various functions and additional investments in software development and the amortization of those costs. Capitalized software totaled $17.3 million as of December 31, 2025, compared to $15.7 million as of December 31, 2024. 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. Amortization of capitalized software totaled $5.1 million for the year ended December 31, 2025, compared to $3.0 million for the year ended December 31, 2024. Data processing costs were $23.5 million for the year ended December 31, 2025, compared to $15.5 million for the year ended December 31, 2024, an increase of $8.0 million, or 52.0%.

Previous wording

Occupancy Expenses. Occupancy expenses were $3.9 million for the year ended December 31, 2024, compared to $4.2 million for the year ended December 31, 2023, a decrease of $236,000, or 5.7%. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $1.5 million and $1.6 million for years ended December 31, 2024 and 2023, respectively. The decrease of $236,000 in occupancy expenses for 2024 compared to 2023, was primarily the result of $157,000 less in maintenance and repairs expenses. Occupancy expenses rent, utilities, janitorial and other maintenance expenses, property insurances and taxes. Also included is depreciation on building, leasehold, furniture, fixtures and equipment. Our hybrid and remote workforce has increased, which helps keep some occupancy expenses down, however do expect occupancy expenses to increase as we continue to grow.

Current wording

Occupancy Expenses. Occupancy expenses were $4.0 million for the year ended December 31, 2025, compared to $3.9 million for the year ended December 31, 2024, an increase of $56,000, or 1.4%. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $1.5 million for years ended December 31, 2025 and 2024. Occupancy expenses include rent, utilities, janitorial and other maintenance expenses, property insurances and taxes. Also included is depreciation on building, leasehold, furniture, fixtures and equipment. Our hybrid and remote workforce has increased, which helps keep some occupancy expenses down, however we do expect occupancy expenses to increase as we continue to grow.

Previous wording

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

Current wording

Director and Staff Expenses. Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses. Expenses will fluctuate depending upon conferences and other professional events that are attended by employees as well as expenses related to employee travel, and continuing education. Director and staff expenses were $2.7 million for the year ended December 31, 2025 compared to $2.1 million for the year ended December 31, 2024, an increase of $545,000, or 25.8%.

Previous wording

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. Although excise taxes increased as a result of increased income subject to excise taxes, expense was down compared to last year as a result of an apportionment study to quantify revenue earned outside the state of Washington that resulted in a $1.2 million refund during the second quarter of 2024. CCBX income is sourced to the state where the partner does business, and the majority of partners are located outside the state of Washington. Therefore, taxes we paid on CCBX income sourced to other states was in excess of what was actually owed. Excise taxes were $1.2 million for the year ended December 31, 2024, compared to $2.0 million for the year ended December 31, 2023, a decrease of $822,000, or 41.6%.

Current wording

Excise Taxes. Excise taxes are assessed on Washington state income and are based on gross income. Gross income is reduced by certain allowed deductions, and income attributed to other states is also removed to arrive at the taxable base. Excise taxes increased primarily as a result of increased income subject to excise taxes. CCBX income is sourced to the state where the partner does business, and the majority of partners are located outside the state of Washington. The year-over-year $1.7 million increase is largely due to a $1.2 million refund recorded during the year ended December 31, 2024, for which there was no similar entry in 2025. Excise taxes were $2.9 million for the year ended December 31, 2025, compared to $1.2 million for the year ended December 31, 2024, an increase of $1.7 million, or 147.4%.

Previous wording

Marketing. Marketing and promotion costs were $162,000 for the year ended December 31, 2024, compared to $517,000 for the year ended December 31, 2023, a decrease of $355,000, or 68.7%. Marketing and promotion costs will vary depending upon the deployment of branding and targeted advertising for the community bank and CCBX. We are using more cost-effective advertising options, but expect costs to increase as we expand our marketing plan.

Current wording

Marketing. Marketing and promotion costs were $631,000 for the year ended December 31, 2025, compared to $162,000 for the year ended December 31, 2024, an increase of $469,000, or 289.5%. Marketing and promotion costs will vary depending upon the deployment of branding and targeted advertising for the community bank and CCBX. We expect costs to increase as we expand our marketing plan.

Previous wording

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 $6.5 million for the year ended December 31, 2024, compared to $5.2 million for the year ended December 31, 2023, an increase of $1.3 million, or 24.1%. The increase was due to $600,000 for exit costs associated with a fraud/compliance vendor, higher business development & sponsorships, and increased operational losses of which $120,000 was a nonrecurring one-time loss.

Current wording

Other. This category includes dues and memberships, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and officer’s insurance, donations and other expenses. Other noninterest expense increased to $7.5 million for the year ended December 31, 2025, compared to $6.5 million for the year ended December 31, 2024, an increase of $1.0 million, or 15.5%. Contributing to the increase was the $700,000 recognition of a payable related to the settlement of an employment-related matter.

Previous wording

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, 2024, BaaS loan and fraud expense was $128.4 million, compared to $86.9 million for the year ended December 31, 2023 and $82.9 million for the year ended December 31, 2022 as a result of increased partner activity. as a result of increased partner activity. For more information on the accounting for BaaS loan and fraud expenses see the section titled “CCBX – BaaS Reporting Information.”

Current wording

BaaS loan and fraud expense. Our CCBX segment provides BaaS offerings that enable our 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, 2025, BaaS loan and fraud expense was $137.1 million, compared to $128.4 million for the year ended December 31, 2024 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.”

Previous wording

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.

Current wording

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 new states, which increases the overall tax rate used in calculating the provision for income taxes in the current and future periods.