compensation discussion and analysis and certain other disclosures regarding our executive compensation; and

•we are not required to give our shareholders non-binding advisory votes on executive compensation or golden parachute arrangements.

We will cease to be an “emerging growth company” upon the earliest of:

•

~~the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more;~~

•the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more;

the date on which we become a “large accelerated filer” (the fiscal year end on which the total market value of our common equity securities held by non-affiliates is $700 million or more as of June 30);

•the date on which we become a “large accelerated filer” (the fiscal year end on which the total market value of our common equity securities held by non-affiliates is $700 million or more as of June 30);

~~the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and~~

•the date on which we have, during the previous three-year period, issued more than $1.0 billion in non-convertible debt; and

~~the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering in 2018.~~

•the last day of the fiscal year following the fifth anniversary of the completion of our initial public offering in 2018.

We have elected to adopt certain of the reduced disclosure requirements above with respect to the periodic reports we will file with the Securities and Exchange Commission (the “SEC”), and proxy statements that we use to solicit proxies from our shareholders.

In addition, Section 107 of the JOBS Act permits us to take advantage of an extended transition period for complying with new or revised accounting standards affecting public companies. However, we have irrevocably opted out of the extended transition period and, as a result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.

Diversity, Equity and Inclusion (“DEI”)

We believe that DEI needs to start at the top of an ~~organization, and the Company began this process at the Board level in 2017 when our board of directors began discussing strategic planning and board recruitment.~~organization. As the Company ~~has entered~~enters and expands its presence in more complex arenas including BaaS, we seek out diverse and qualified director candidates who bring a background and expertise in the fintech and digital banking sectors regardless of their gender, race, or other personal characteristics. Additionally, those members of the Company’s board ~~members~~of directors would need to be representative of the diversity found in the fintech’s themselves. Since beginning this effort the board of directors has added three women and two directors from minority backgrounds. We strive to maintain a diverse and inclusive work culture in which individual differences and experiences are valued and all employees have the opportunity to contribute and thrive. We believe that leveraging our employees’ diverse perspectives and capabilities will enhance innovation, foster a collaborative work culture and enable us to better serve our customers and communities.

DEI is also achieved through our CCBX partners and the markets they serve. Our reach extends to a diverse and often underserved market through our BaaS relationships. These partners offer access to credit, promote financial well-being, provide financial education, and other services to a variety of markets. Some of the markets served through our BaaS partnerships are: women, people of color, young adults, immigrants, small businesses and other underserved populations.

DEI extends to our customers as well. We are focused on supporting small businesses throughout our communities. The COVID-19 pandemic exposed the challenges of small business. We are proud to have participated in the Paycheck Protection Program, originating over 5,800 loans totaling more than $763 million. During the COVID-19 pandemic, our company financially supported locally-owned restaurants by providing meals and gift cards for our employees.

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Environment and Sustainability

We are focused on the environment and committed to business practices and activities that encourage sustainability and minimize our environmental impact.

We demonstrate environmental responsibility in various ways, including:

•

~~replacing standard light bulbs with LED bulb that have a longer life and use less energy – most notably many of our parking lot lights have been converted to LED; and~~

•replacing standard light bulbs with LED bulb that have a longer life and use less energy – most notably many of our parking lot lights have been converted to LED; and

~~repurposing existing furniture whenever possible instead of buying new.~~

•repurposing existing furniture whenever possible instead of buying new.

We are focused on sustainability throughout our everyday business practices by:

•

~~using technology that provides for a paperless environment and transactional efficiencies,~~

•using technology that provides for a paperless environment and transactional efficiencies,

~~eCycling old technology equipment to avoid sending it to landfills,~~

•eCycling old technology equipment to avoid sending it to landfills,

~~installation of occupancy sensors that automatically shut off lights in densely populated buildings; and~~

•installation of occupancy sensors that automatically shut off lights in densely populated buildings; and

~~exterior lights are on timers.~~

•exterior lights are on timers.

Services like mobile and online banking, remote deposit capture, electronic loan payments, eStatements and combined statements enable us to support all customers in their efforts to consume less fuel and paper. We continue to digitize loan origination and deposit account opening processes, reducing trips to the bank and paper documents for our customers.

Additionally, we work hard to ensure that our lending activities do not encourage business activities that could cause irreparable damage to our reputation or the environment. As a result, we try to conduct business responsibly, with awareness to environmental, social, and human rights issues while also monitoring credit risks. This process involves management and ~~Board~~board of director oversight. In general, we evaluate each credit or transaction on its individual merits, with larger deals receiving more attention and deeper analysis.

Human Capital

As of December 31, ~~2021,~~2022, we had ~~377~~448 full-time equivalent employees, all were located in the United States, however technology has allowed us to expand our reach to include a larger demographic with more remote employees working outside of our physical locations and throughout the country. We seek to attract, retain and develop the most talented employees possible by promoting a strong, positive culture, maintaining a safe and healthy workplace, emphasizing open communication with management and investing in training and education. In 2022, our retention rate was 88%. We seek to help our employees grow and develop. In 2022, we had 106 internal promotions. None of our employees are parties to a collective bargaining agreement. We consider our relationship with our employees to be good and have not experienced interruptions of operations due to labor disagreements.

Our commitment to diversity starts with our ~~Board~~board of ~~Directors,~~directors, which oversees the culture and holds management accountable to build and maintain a diverse and inclusive environment. We believe a diverse workforce is critical to sustainable success. As of December 31, ~~2021, we employed 387~~2022, 64% of our employees ~~of which 64% are~~were female, ~~20% are~~24% were minorities (non-Caucasian) and 3% ~~are~~were disabled. ~~As of December 31, 2021, 33% of our executive team is female.~~ We are proud of our workforce and the opportunity to further diversify our team going forward.

Culture

We have always led with people, building our Bank on the diverse perspectives, knowledge, and experiences of our employees. Our employees utilize their strengths to set the course and are empowered to do the right things for our clients. We strive to create an inclusive workplace so we can build and maintain a high-performing culture where engaged, satisfied employees embody our core values: stay flexible, take care of each other, embrace gray thinking, be relentless, be the best and be un-bankey.

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We seek out talent that will be a cultural fit to our core values and have backgrounds that are as diverse as the clients we serve in each of our business units.

Pay Equity

We believe our staff should be paid for the roles they fulfill, their experience, and how they do their jobs, and our goal is to attract, retain and develop quality talent. To deliver on that commitment, we benchmark and set pay ranges based on banking market data and consider factors such as an employee’s role and experience, the location of their job, and their performance. We also regularly review our compensation practices, both in terms of our overall workforce and individual employees, to ensure our pay is fair and equitable.

Health, Safety and Wellness

Since the onset of the COVID-19 pandemic, we have taken a people-first approach to help our employees manage their work and personal responsibilities, with a strong focus on employee ~~wellbeing,~~well-being, health and safety. Our human resource team engages the

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staff in an evolving wellness program designed to enhance physical, financial, and mental ~~wellbeing~~well-being for all our employees. We encourage healthy lifestyle behaviors through regular communications, educational sessions, voluntary progress tracking of beneficial health changes, and wellness challenges.

We value the contributions of our employees, particularly in the face of the challenges posed by the COVID-19 pandemic. Where possible, many employees have been working from home to help maintain their health and safety as well as business continuity. The Bank has accommodated staff who are unable to work on site due to health or family issues, and our human resources department works one-on-one to find solutions that are workable for both staff and the Company.

Community Engagement

We are committed to supporting the communities we serve through donations, sponsorships and employee ~~volunteerism~~volunteerism.

We offer employees two options for employees donate to charitable organizations, the Employee Giving Fund and the Employee Workplace Giving ~~Fund. In 2021, the Bank supported 110 organizations~~Portal. The charities that provide critical services in our communities depend on support from donors. This is a testament to our commitment to helping and supporting our neighbors by encouraging employees to give to their charity of choice – wherever they live and work – through ~~donations and event sponsorships.~~

payroll deduction.

The Employee Giving Fund is supported entirely by donations contributed by employees, enabling staff to pool their donations for the greatest impact in ~~each~~the communities served by the community ~~we serve.~~bank. Employees direct the grants from the fund by serving on Bank’s grant advisory committee. Since its inception in 2001, the Employee Giving Fund has awarded ~~436~~449 grants totaling more than ~~$669,000~~$747,000 through the end of ~~2021.~~

~~While volunteering~~2022.

The Employee Workplace Giving Portal, launched in the fourth quarter of 2022, allows employees to support their charity of choice. With staff in 34 states, it is important to encourage and enable employees to support their community, wherever they are located. The Employee Workplace Giving Portal allows employees to support their charity of choice through payroll deduction. The Company pays the administrative fees for the program so 100% of employee donations are directed to their charities of choice.

Volunteering and supporting our communities ~~continued~~is an important part of community engagement. We provide 16 hours of paid volunteer hours (for full time staff) per year to ~~look different in 2021 due to the COVID-19 pandemic,~~encourage and enable employees ~~continued~~ to volunteer in ~~a variety of capacities, and still found many ways to get involved.~~their communities. In ~~2021,~~2022, employees volunteered ~~6,748~~5,545 hours supporting ~~148~~187 organizations.

In 2022, the Bank supported 152 organizations through donations and event sponsorships.

Available Information

The Company's annual reports on Form 10-K, quarterly reports on Form 10-Q, proxy statements, current reports on Form 8-K, amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934 (the “Exchange Act”), and other filings with the SEC are available free of charge at https://ir.coastalbank.com/ under the heading “–Financials - SEC Filings” as soon as reasonably practicable after the Company electronically files such material with, or furnishes it to, the SEC. These reports are also available for free on the SEC's website at http://

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www.sec.gov. The information contained on the Company's website as referenced in this Report on Form 10-K should not be considered a part of this Report.

Regulation and Supervision

General

Insured banks, their holding companies and their affiliates are extensively regulated under federal and state law. As a result, our growth and earnings performance may be affected not only by management decisions and general economic conditions, but also by the requirements of federal and state statutes and by the regulations and policies of various bank regulatory agencies, including the Washington Department of Financial Institutions (“Washington DFI”), the Board of Governors of the Federal Reserve (“Federal Reserve”), the Federal Deposit Insurance Corporation (“FDIC”) and the Consumer Financial Protection Bureau (“CFPB”). Furthermore, tax laws administered by the Internal Revenue Service (“IRS”), and state taxing authorities, accounting rules developed by the ~~Financial Accounting Standards Board (“FASB”),~~FASB, securities laws administered by the SEC and state securities authorities, anti-money laundering laws enforced by the U.S. Department of the Treasury (“Treasury Department”) and mortgage related rules, including with respect to loan securitization and servicing by the U.S. Department of Housing and Urban Development and entities such as Ginnie Mae and Freddie Mac, and SBA regulations with respect to small business loans, have an impact on our business. The effect of these statutes, regulations, regulatory policies and rules are significant to our operations and results, and the nature and extent of future legislative, regulatory or other changes affecting financial institutions are impossible to predict with any certainty.

Federal and state banking laws impose a comprehensive system of supervision, regulation and enforcement on the operations of insured banks, their holding companies and affiliates that is intended primarily for the protection of the FDIC-insured deposits and depositors of banks, rather than their shareholders. These federal and state laws, and the regulations of the bank regulatory agencies issued under them, affect, among other things, the scope of business, the kinds and amounts of investments banks may make, reserve requirements, capital levels relative to operations, the nature and amount of collateral for loans, the establishment of branches, the ability to merge, consolidate and acquire, dealings with insiders and affiliates and the payment of dividends.

This supervisory and regulatory framework subjects banks and bank holding companies to regular examination by their respective regulatory agencies, which results in examination reports and ratings that, while not publicly available, can impact the conduct and growth of their businesses. These examinations consider not only compliance with applicable laws and regulations, but

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also capital levels, asset quality and risk, management ability and performance, earnings, liquidity, sensitivity to market risk and various other factors. The regulatory agencies generally have broad discretion to impose restrictions and limitations on the operations of a regulated entity where the agencies determine, among other things, that such operations are unsafe or unsound, fail to comply with applicable law or are otherwise inconsistent with laws and regulations or with the supervisory policies of these agencies.

The following is a summary of the material elements of the supervisory and regulatory framework applicable to us and the Bank. It does not describe all of the statutes, regulations and regulatory policies that apply, nor does it restate all of the requirements of those that are described. The descriptions are qualified in their entirety by reference to the particular statutory and regulatory provision.

Bank Holding Company Regulation

Since we own all of the capital stock of the Bank, we are a bank holding company under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). As a result, we are primarily subject to the supervision, examination and reporting requirements of the BHC Act and the regulations of the Federal Reserve.

Acquisition of Banks

The BHC Act requires every bank holding company to obtain the Federal Reserve’s prior approval before:

•

acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will, directly or indirectly, own or control more than 5% of the bank’s voting shares;

•acquiring direct or indirect ownership or control of any voting shares of any bank if, after the acquisition, the bank holding company will, directly or indirectly, own or control more than 5% of the bank’s voting shares;

~~acquiring all or substantially all of the assets of any bank; or~~

•acquiring all or substantially all of the assets of any bank; or

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•merging or consolidating with any other bank holding company.

•

~~merging or consolidating with any other bank holding company.~~

Additionally, the BHC Act provides that the Federal Reserve may not approve any of the above transactions if such transaction would result in or tend to create a monopoly or substantially lessen competition or otherwise function as a restraint of trade, unless the anti-competitive effects of the proposed transaction are clearly outweighed by the public interest in meeting the convenience and needs of the community to be served. The Federal Reserve is also required to consider the financial and managerial resources and future prospects of the bank holding companies and banks concerned and the convenience and needs of the community to be served. The Federal Reserve’s consideration of financial resources includes a focus on capital adequacy, which is discussed in the section entitled “—Bank Regulation and Supervision—Capital Adequacy.” The Federal Reserve also considers the effectiveness of the institutions in combating money laundering, including a review of the anti-money laundering programs and compliance records of the parties. Finally, the Federal Reserve takes into consideration the extent to which the proposed transaction would result in greater or more concentrated risks to the stability of the U.S. banking or financial system.

Under the BHC Act, if well-capitalized and well-managed, we or any other bank holding company located in Washington may purchase a bank located outside of Washington without regard to whether such transaction is prohibited under state law. Conversely, a well-capitalized and well-managed bank holding company located outside of Washington may purchase a bank located inside Washington without regard to whether such transaction is prohibited under state law. In each case, however, restrictions may be placed under state law on the acquisition of a bank that has only been in existence for a limited amount of time or will result in concentrations of deposits exceeding limits specified by statute. For example, Washington law currently prohibits a bank holding company from acquiring control of a Washington-based financial institution until the target financial institution has been in operation for at least five years.

Change in Bank Control

Subject to various exceptions, the BHC Act and the Change in Bank Control Act, together with related regulations, require Federal Reserve approval prior to any person or company acquiring “control” of a bank holding company. Under a rebuttable presumption established by the Federal Reserve pursuant to the Change in Bank Control Act, the acquisition of 10% or more of a class of voting stock of a bank holding company would constitute acquisition of control of the bank holding company if no other person will own, control, or hold the power to vote a greater percentage of that class of voting stock immediately after the transaction or the bank holding company has registered securities under the Exchange Act, as we have. In addition, any company, person or group of persons acting in concert must obtain the approval or non-objection of the Federal Reserve under the BHC Act or Change in Bank Control Act before acquiring 25% or more (more than 5% in the case of an acquirer that is already a bank holding company) of the outstanding voting stock of a bank holding company, the right to control in any manner the election of a majority of the company’s directors, or otherwise obtaining control or a “controlling influence” over the bank holding company. Approval of the Washington DFI may also be required under state law before a person can acquire control over us.

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Permitted Activities

Under the BHC Act, a bank holding company is generally permitted to engage in or acquire direct or indirect control of the voting shares of any company engaged in the following activities:

•

~~banking or managing or controlling banks; and~~

•banking or managing or controlling banks; and

~~any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.~~

•any activity that the Federal Reserve determines to be so closely related to banking as to be a proper incident to the business of banking.

Activities that the Federal Reserve has found to be so closely related to banking as to be a proper incident to the business of banking include:

•

~~factoring accounts receivable;~~

•factoring accounts receivable;

~~making, acquiring, brokering or servicing loans and usual related activities in connection with the foregoing;~~

•making, acquiring, brokering or servicing loans and usual related activities in connection with the foregoing;

~~leasing personal or real property under certain conditions;~~

•leasing personal or real property under certain conditions;

~~operating a non-bank depository institution, such as a savings association;~~

•

~~engaging in trust company functions in a manner authorized by state law;~~

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•operating a non-bank depository institution, such as a savings association;

~~financial and investment advisory activities;~~

•engaging in trust company functions in a manner authorized by state law;

~~discount securities brokerage activities;~~

•financial and investment advisory activities;

~~underwriting and dealing in government obligations and money market instruments;~~

•

~~providing specified management consulting and counseling~~•discount securities brokerage activities;

•underwriting and dealing in government obligations and money market instruments;

~~performing selected data processing services and support services;~~

•providing specified management consulting and counseling activities;

~~acting as an agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and~~

•performing selected data processing services and support services;

~~performing selected insurance underwriting activities.~~

•acting as an agent or broker in selling credit life insurance and other types of insurance in connection with credit transactions; and

•performing selected insurance underwriting activities.

The Federal Reserve may order a bank holding company or its subsidiaries to terminate any of these activities or to terminate its ownership or control of any subsidiary when it has reasonable cause to believe that the bank holding company’s continued ownership, activity or control constitutes a serious risk to the financial safety, soundness, or stability of it or any of its bank subsidiaries. In addition to the permissible bank holding company activities listed above, a bank holding company may qualify and elect to become a financial holding company, thereby permitting the bank holding company to engage in activities that are financial in nature or incidental or complementary to financial activity, which are broader activities than are otherwise permissible for bank holding companies.

For us to qualify to become a financial holding company, we must be well-capitalized and well-managed. In addition, the Bank and any other depository institution subsidiary we control must be well-capitalized and well-managed and must have a CRA rating of at least “satisfactory.” Additionally, we must file an election with the Federal Reserve to become a financial holding company and must provide the Federal Reserve with 30 days written notice prior to engaging in a permitted financial activity. We have not elected to become a financial holding company at this time.

Dividends

The Federal Reserve has issued a policy statement on the payment of cash dividends by bank holding companies, which expresses the Federal Reserve’s view that a bank holding company should pay cash dividends only to the extent that the holding company’s net income for the past year is sufficient to cover both the cash dividends and a rate of earning retention that is consistent with the holding company’s capital needs, asset quality and overall financial condition. The Federal Reserve also has indicated that it would be inappropriate for a holding company experiencing serious financial problems to borrow funds to pay dividends. Furthermore, under the prompt corrective action regulations adopted by the Federal Reserve, the Federal Reserve may prohibit a bank holding company from paying any dividends if one or more of the holding company’s bank subsidiaries is classified as undercapitalized.

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Support of Subsidiary Institutions

The Federal Deposit Insurance Act (“FDIA”) and a Federal Reserve regulation require a bank holding company to serve as a source of financial and managerial strength to its bank subsidiaries. In addition, where a bank holding company has more than one FDIC-insured bank or thrift subsidiary, each of the bank holding company’s subsidiary FDIC-insured depository institutions is responsible for any losses to the FDIC as a result of an affiliated depository institution’s failure. As a result of a bank holding company’s source of strength obligation, a bank holding company may be required to provide funds to a bank subsidiary in the form of subordinate capital or other instruments which qualify as capital under bank regulatory rules and at a time when the bank holding company would not otherwise be inclined to do so.

Repurchase or Redemption of Securities

A bank holding company that is not well capitalized or well managed, or that is subject to any unresolved supervisory issues, is required to give the Federal Reserve prior written notice of any purchase or redemption of its own

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then-outstanding equity securities if the gross consideration for the purchase or redemption, when combined with the net consideration paid for all such purchases or redemptions during the preceding 12 months, is equal to 10% or more of the company’s consolidated net worth. The Federal Reserve may disapprove such a purchase or redemption if it determines that the proposal would constitute an unsafe and unsound practice, or would violate any law, regulation, Federal Reserve order or directive, or any condition imposed by, or written agreement with, the Federal Reserve. Additionally, under Federal Reserve guidance, a bank holding company is generally expected to consult with Federal Reserve supervisory staff prior to repurchasing or redeeming stock in a number of circumstances, including when the company is considering expansion.

Bank Regulation and Supervision

The Bank is subject to extensive federal and state banking laws and regulations that impose restrictions on and provide for general regulatory oversight of the operations of the Bank. These laws and regulations are generally intended to protect the safety and soundness of the Bank and the Bank’s depositors, rather than our shareholders. The following discussion describes the material elements of the regulatory framework that applies to the Bank.

Since the Bank is a commercial bank chartered under the laws of the state of Washington and is a member of the Federal Reserve System, it is primarily subject to the supervision, examination and reporting requirements of the Federal Reserve and the Washington DFI. The Federal Reserve and the Washington DFI regularly examine the Bank’s operations and have the authority to approve or disapprove mergers, the establishment of branches and similar corporate actions. Both regulatory agencies have the power to take enforcement action to prevent the development or continuance of unsafe or unsound banking practices or other violations of law. The Bank’s deposits are insured by the FDIC to the maximum extent provided by law. The Bank is also subject to numerous federal and state statutes and regulations that affect its business, activities and operations.

Branching

Under current Washington law, the Bank may open branch offices throughout Washington with the prior approval of the Washington DFI. In addition, with prior regulatory approval, the Bank may acquire branches of existing banks located in Washington. Under federal law, the Bank may establish branch offices with the prior approval of the Federal Reserve. Federal law allows a bank to branch into a new state by setting up a new branch if, under the laws of the state in which the branch is to be located, a state bank chartered by that state would be permitted to establish the branch, and if the bank meets certain supervisory and financial criteria.

FDIC Insurance and Other Assessments

The Bank’s deposits are insured by the FDIC to the full extent provided in the FDIA ~~“currently~~(currently $250,000 per deposit account), and the Bank pays assessments to the FDIC for that coverage. Under the FDIC’s risk-based deposit insurance assessment system, an insured institution’s deposit insurance premium is computed by multiplying the institution’s assessment base by the institution’s assessment rate. An institution’s assessment base equals the institution’s average consolidated total assets during a particular assessment period, minus the institution’s average tangible equity capital (that is, “Tier 1 capital”) during such period. For institutions like the Bank with less than $10.0 billion in total consolidated assets, the assessment rate is calculated using a financial ratios method based on a statistical model estimating the institution’s probability of failure over three years utilizing seven financial ratios (leverage ratio; net income before taxes/total assets; nonperforming loans and leases/gross assets; other real estate owned/gross assets; brokered deposit ratio; one year asset growth; and loan mix index) and a weighted average of supervisory ratings components. The current rules fix the range of assessment rates from 1.5 basis points for an institution posing the least risk, to 30 basis points for an institution posing the most risk, and will further lower the range of assessment rates if the reserve ratio of the Deposit Insurance Fund (“DIF”) increases to 2% or more. The FDIC may also impose special assessments from time to time. Since the outbreak of the COVID-19 pandemic, the amount of total estimated insured deposits has grown rapidly while the funds in the DIF have grown at a normal rate, causing the DIF reserve ratio to fall below the statutory minimum of 1.35%. The FDIC adopted a restoration plan on

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in September ~~15,~~ 2020, which it amended in June 2022, to restore the DIF reserve ratio to at least 1.35% by September 30, 2028. ~~Under the restoration plan,~~On October 18, 2022 the FDIC adopted a final rule to increase initial base deposit insurance assessment rates for insured depository institutions by 2 basis points, beginning with the first quarterly assessment period of 2023. The increased assessment rate schedules will ~~continue to closely monitor~~remain in effect unless and until the ~~factors that affect~~reserve ratio of the DIF meets or exceeds 2%. As a result of the new rule, the FDIC insurance costs of insured depository institutions, including the Bank, will generally increase. The range of assessment rates effective January 1, 2023, and first applicable on invoices dated June 30, 2023, will fall between 2.5 basis points for an established small institution posing the least risk, to 32 basis points for an established small institution posing the most risk. The FDIC will lower the range of assessment rates if the reserve ratio ~~and maintain its current schedule~~ of ~~assessment rates.~~the Deposit Insurance Fund (“DIF”) increases to 2% or more. The FDIC may also impose special assessments from time to time. As of September 30, ~~2021,~~2022, which is the most recent information available, the DIF was at ~~1.27%~~1.26%.

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Termination of Deposit Insurance

The FDIC may terminate its insurance of deposits of a bank if it finds that the bank has engaged in unsafe or unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC.

Community Reinvestment Act

The Community Reinvestment Act (“CRA”) requires that, in connection with examinations of insured depository institutions within their respective jurisdictions, the federal banking agencies will evaluate the record of each financial institution in meeting the credit needs of its local community, including low- and moderate-income neighborhoods. The Federal Reserve periodically evaluates the Bank’s record of performance under the CRA, and these evaluations are publicly available. A bank’s CRA performance is considered in evaluating applications seeking approval for mergers, acquisitions, and new offices or facilities. Failure to adequately meet these criteria could result in additional requirements and limitations being imposed on the bank. Certain regulatory advantages, such as expedited processing of applications, are available only to banks with CRA ratings of Satisfactory or Outstanding. Additionally, we must publicly disclose the terms of certain CRA-related agreements. The Bank received a Satisfactory rating at its most recent evaluation dated ~~September 25, 2017.~~

March 7, 2022.

On May 5, 2022 the federal banking agencies issued a proposed rule that would substantially revise how they evaluate an insured depository institution’s record of satisfying the credit needs of its entire communities, including low- and moderate- income individuals and neighborhoods, under the CRA. If this rule is finalized as proposed, it may become more challenging and/or costly for insured depository institutions to achieve an “Outstanding” or “Satisfactory” CRA rating, which could negatively impact our ability to obtain regulatory approval for an acquisition.

Interest Rate Limitations

Interest and other charges collected or contracted for by the Bank are subject to applicable state usury laws and federal laws concerning interest rates.

Reserves

Pursuant to regulations of the Federal Reserve, an insured depository institution must maintain reserves against its transaction accounts. Because required reserves generally must be maintained in the form of vault cash, with a pass-through correspondent bank, or in the institution’s account at a Federal Reserve Bank, the effect of the reserve requirement may be to reduce the amount of an institution’s assets available for lending or investment. In March 2020, in response to the COVID-19 pandemic, the Federal Reserve reduced all reserve requirement ratios to zero. The Federal Reserve indicated that it may adjust reserve requirement ratios in the future if conditions warrant.

Federal Laws Applicable to Consumer Credit and Deposit Transactions

The Bank’s loan and deposit operations are subject to a number of federal consumer protection laws, including:

•

~~the Federal Truth in Lending Act, governing disclosures of credit terms to consumer borrowers;~~

•the Federal Truth in Lending Act, governing disclosures of credit terms to consumer borrowers;

~~the Real Estate Settlement Procedures Act, imposing requirements on the settlement and servicing of residential mortgage loans;~~

•the Real Estate Settlement Procedures Act, imposing requirements on the settlement and servicing of residential mortgage loans;

the Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communities it serves;

•the Home Mortgage Disclosure Act, requiring financial institutions to provide information to enable the public and public officials to determine whether a financial institution is fulfilling its obligation to help meet the housing needs of the communities it serves;

the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, color, religion, national origin, sex, marital status or certain other prohibited factors in all aspects of credit transactions;

•the Equal Credit Opportunity Act, prohibiting discrimination on the basis of race, color, religion, national origin, sex, marital status or certain other prohibited factors in all aspects of credit transactions;

~~the Fair Credit Reporting Act (“FCRA”), governing the use and provision of information to credit reporting agencies;~~

•the Fair Credit Reporting Act (“FCRA”), governing the use and provision of information to credit reporting agencies;

~~the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by debt collectors;~~

•

~~the Service Members Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service;~~

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•

~~the Gramm-Leach-Bliley Act, governing the disclosure and safeguarding of sensitive non-public personal information of our clients;~~

•the Fair Debt Collection Practices Act, governing the manner in which consumer debts may be collected by debt collectors;

the Right to Financial Privacy Act, imposing a duty to maintain confidentiality of consumer financial records and prescribing procedures for complying with administrative subpoenas of financial records;

•the Service Members Civil Relief Act, governing the repayment terms of, and property rights underlying, secured obligations of persons in military service;

the National Flood Insurance Act, as amended, to provide flood insurance for structures and contents in communities that adopt and enforce an ordinance outlining minimal floodplain management standards
and to identify areas of high and low flood hazard and establish flood insurance rates for structures inside each flood hazard area;

•the Truth in Savings Act, governing disclosure of account terms and costs to consumer depositors;

the Electronic Funds Transfer Act governing automatic deposits to and withdrawals from deposit accounts and clients’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

•the Gramm-Leach-Bliley Act, governing the disclosure and safeguarding of sensitive non-public personal information of our clients;

~~the rules and regulations of the CFPB and various federal agencies charged with the responsibility of implementing these federal laws.~~

•the Right to Financial Privacy Act, imposing a duty to maintain confidentiality of consumer financial records and prescribing procedures for complying with administrative subpoenas of financial records;

•the National Flood Insurance Act, as amended, to provide flood insurance for structures and contents in communities that adopt and enforce an ordinance outlining minimal floodplain management standards and to identify areas of high and low flood hazard and establish flood insurance rates for structures inside each flood hazard area;

•the Electronic Funds Transfer Act governing automatic deposits to and withdrawals from deposit accounts and clients’ rights and liabilities arising from the use of automated teller machines and other electronic banking services; and

•the rules and regulations of the CFPB and various federal agencies charged with the responsibility of implementing these federal laws.

Capital Adequacy

The Federal Reserve has adopted risk-based and leverage capital adequacy requirements, pursuant to which they assess the adequacy of bank holding company and bank capital in examinations and in analyzing bank regulatory applications. Risk-based capital requirements determine the adequacy of capital based on credit and certain other risks inherent in various classes of assets and off-balance sheet items. The federal banking regulators have adopted regulations implementing the Basel Capital Adequacy Accord (“Basel III”), an international capital adequacy framework. The U.S. Basel III rule requires a minimum capital to risk-weighted assets requirements are a common equity Tier 1 capital ratio of 4.5%, a Tier 1 capital ratio of 6.0%, and a total capital ratio of 8.0%. The minimum leverage ratio (Tier 1 capital to total assets) is 4.0%.

In order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must maintain a capital conservation buffer composed of common equity Tier 1 capital above its minimum risk-based capital requirements. The buffer is measured relative to risk-weighted assets. A banking organization with a buffer greater than 2.5% is not subject to limits on capital distributions or discretionary bonus payments; however, a banking organization with a buffer of 2.5% or less ~~than 2.5%~~ would be subject to increasingly stringent limitations as the buffer approaches zero. A banking organization also would be prohibited from making distributions or discretionary bonus payments during any quarter if its eligible retained income is zero or negative in that quarter and its capital conservation buffer ratio was 2.5% or less ~~than 2.5%~~ at the beginning of the quarter. Effectively, the Basel III framework, including the capital conservation buffer, requires the Bank to meet minimum risk-based capital ratios of (i) 7% for common equity Tier 1 capital, (ii) 8.5% Tier 1 capital, and (iii) 10.5% total capital. The eligible retained income of a banking organization is defined as the greater of (1) its net income for the four calendar quarters preceding the current calendar quarter, based on the organization’s quarterly regulatory reports, net of any distributions and associated tax effects not already reflected in net income, and (2) the average of its net income over the preceding four quarters. The minimum capital requirements plus the capital conservation buffer will exceed the prompt corrective action (“PCA”), well-capitalized thresholds for risk-based capital ratios, which are described below under “—Prompt Corrective Action.”

The U.S. Basel III rule includes stringent criteria for capital instruments to qualify as Tier 1 or Tier 2 capital. For instance, the rule effectively disallows newly-issued trust preferred securities as a component of a holding company’s Tier 1 capital. However, depository institution holding companies with less than $15 billion in total assets generally may include non-qualifying instruments that were issued and included in Tier 1 or Tier 2 capital prior to May 19, 2010 in Additional Tier 1 or Tier 2 capital until they redeem such instruments or until the instruments mature. At December 31, ~~2021,~~

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2022 the Company had $3.5 million of non-qualifying instruments includable in Tier 1 capital that were issued prior to May 19, 2010.

The Company ~~operates~~and the Bank are required to meet the generally applicable regulatory capital requirements of the Federal Reserve and the FDIC. Historically, the Company had been operating under the Small Bank Holding Company Policy Statement, which exempts bank holding companies ~~with~~that have total consolidated assets of less than $3.0 billion ~~that are not engaged in significant nonbanking activities, do not conduct significant off-balance sheet activities,~~ and ~~that do not have a material amount of debt or equity securities registered with the SEC~~meet other criteria from the Federal Reserve’s risk-based- and leverage capital rules. ~~Historically,~~Because the Company’s total consolidated assets exceeded $3.0 billion as of September 30, 2022, the Company is no longer subject to the Federal Reserve’s Small Bank Holding Company Policy Statement and will be evaluated relative to the capital adequacy standards established by the Federal Reserve ~~has not usually deemed a~~going forward. A bank holding company ~~ineligible for application~~that crosses the $3.0 billion total consolidated assets threshold as of ~~this policy statement solely because its common stock~~June 30 of a particular year is ~~registered under~~no longer permitted to file reports as a small holding company beginning the ~~Exchange Act. However, there can be no assurance that~~following March. The Company was not in excess of $3.0 billion as of June 30, 2022, and accordingly prepared and filed financial reports with the Federal Reserve ~~will continue this practice, and changes to this practice may result in the loss of our status~~ as a small bank holding ~~company for~~company. Currently, the Federal Reserve assesses the capital position of the Company based on these ~~purposes.~~

reports by reviewing its debt-to-equity ratio and its capacity to serve as a source of strength to the Bank. If the Company’s total consolidated assets remain in excess of $3.0 billion as of June 30, 2023, starting in March 2024 the Company will cease filing financial reports with the Federal Reserve as though it were a small bank holding company.

The Economic Growth, Regulatory Relief and Consumer Protection Act (the “EGRRCPA”) requires the federal banking agencies to develop a community bank leverage ratio (the “CBLR”) (defined as the ratio of tangible equity capital to average total

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consolidated assets) for certain banks and holding companies with total consolidated assets of less than $10 billion. Qualifying banks that exceed the minimum CBLR are deemed to be in compliance with all other capital and leverage requirements. The CBLR is currently set at 9.0%. The Company and Bank have not adopted the CBLR.

Failure to meet statutorily mandated capital guidelines or more restrictive ratios separately established for a banking institution could subject the institution to a variety of enforcement remedies available to federal regulatory authorities, including issuance of a capital directive, the termination of deposit insurance by the FDIC, a prohibition on accepting or renewing brokered deposits, limitations on the rates of interest that the institution may pay on its deposits, and other restrictions on its business.

Prompt Corrective Action

The Federal Deposit Insurance Corporation Improvement Act of 1991 establishes a system of “prompt corrective action” to resolve the problems of undercapitalized insured depository institutions. Under this system, the federal banking regulators have established five capital categories (well-capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized); all insured depository institutions fall into one of these categories. The federal banking agencies have specified by regulation the relevant capital thresholds and other qualitative requirements for each of the categories. For an insured depository institution to be “well-capitalized” under the PCA framework, it must have a common equity Tier 1 capital ratio of ~~6.5%~~6.50%, Tier 1 capital ratio of ~~8.0%~~8.00%, a total capital ratio of ~~10.0%~~10.00%, and a leverage ratio of ~~5.0%~~5.00%, and must not be subject to any written agreement, order or capital directive, or prompt corrective action directive issued by its primary federal regulator to meet and maintain a specific capital level for any capital measure. At December 31, ~~2021,~~2022, the Bank qualified for the well-capitalized category.

Federal banking regulators are required to take various mandatory supervisory actions and are authorized to take other discretionary actions with respect to institutions in the three undercapitalized categories. An undercapitalized institution has a capital ratio below any one of four thresholds: a common equity Tier 1 risk-based capital ratio of 4.5%, a Tier 1 risk-based capital ratio of 6.0%, a total risk-based capital ratio of 8.0%, or a leverage ratio of 4.0%. The severity of the action depends upon the capital category in which the institution is placed. For example, institutions in all three undercapitalized categories are automatically restricted from paying distributions and management fees, whereas only an institution that is significantly undercapitalized or critically undercapitalized is restricted in its compensation paid to senior executive officers. Generally, subject to a narrow exception, the banking regulator must appoint a receiver or conservator for an institution that is critically undercapitalized.

An institution that is categorized as undercapitalized, significantly undercapitalized, or critically undercapitalized is required to submit an acceptable capital restoration plan to its appropriate federal banking agency. Such a plan must include a guarantee from the institution’s bank holding company that the institution will comply with the plan until the institution has been adequately capitalized on average during each of the four consecutive calendar quarters. The holding company’s obligation to fund a capital restoration plan is limited to the lesser of (i) 5% of an undercapitalized subsidiary

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institution’s assets at the time it became undercapitalized and (ii) the amount required to meet regulatory capital requirements. An undercapitalized institution is also generally prohibited from increasing its average total assets, making acquisitions, establishing any branches or engaging in any new line of business, except under an accepted capital restoration plan or with Federal Reserve approval. A critically undercapitalized bank, one with a ratio of tangible equity to total assets of 2% or less, is presumptively subject to a supervisory acquisition or the appointment of a conservator or receiver.

The regulations also establish procedures for downgrading an institution to a lower capital category based on supervisory factors other than capital.

Liquidity

Financial institutions are subject to significant regulatory scrutiny regarding their liquidity positions. Various bank regulatory publications, including Federal Reserve SR 10-6 (Funding and Liquidity Risk Management), address the identification, measurement, monitoring and control of funding and liquidity risk by financial institutions.

The U.S. federal banking regulators have two standardized metrics for large banking organizations. The first metric is the “liquidity coverage ratio,” and it aims to require a financial institution to maintain sufficient high-quality liquid resources to survive an acute stress scenario that lasts for one month. The second metric is the “net stable funding ratio,” and its objective is to require a financial institution to maintain a minimum amount of stable sources relative to the liquidity profiles of the institution’s assets, as well as the potential for contingent liquidity needs arising from off-balance sheet commitments, over a one-year horizon.

While the liquidity coverage ratio and the net stable funding ratio only apply to the largest banking organizations in the country, certain elements may filter down and become applicable to or expected of all insured depository institutions including the Bank.

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Payment of Dividends

We are a legal entity separate and distinct from the Bank. Our principal source of cash flow, including cash flow to pay dividends to our shareholders, is from capital raises and dividends the Bank pays to us as the Bank’s sole shareholder. Statutory and regulatory limitations apply to the Bank’s payment of dividends to us as well as to our payment of dividends to our shareholders. A corollary to the requirement that a bank holding company serve as a source of strength to its subsidiary banks is the Federal Reserve policy that a bank holding company should not maintain a level of cash dividends to its shareholders that places undue pressure on the capital of its bank subsidiaries or that can be funded only through additional borrowings or other arrangements that may undermine the bank holding company’s ability to serve as such a source of strength. Our ability to pay dividends is also subject to the provisions of Washington corporate law that prevent distributions to shareholders if, after giving effect to the distribution, we would not be able to pay our liabilities as they become due in the usual course of business or our total assets would be less than the sum of our total liabilities plus the amount that would be needed, if we were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. In addition, in deciding whether or not to declare a dividend of any particular size, our board of directors must consider our and the Bank’s current and prospective capital, liquidity, and other needs.

The Washington DFI and the Federal Reserve also regulate the Bank’s dividend payments. Under Washington law, a state-chartered bank may not pay a dividend in an amount greater than its retained earnings without approval of the Washington DFI. Under Federal Reserve regulations, the Bank may not declare or pay a dividend if the total of all dividends declared during the calendar year, including the proposed dividend, exceeds the sum of the Bank’s net income during the current calendar year and the retained net income of the prior two calendar years, unless the dividend has been approved by the Federal Reserve.

The Bank’s payment of dividends may also be affected or limited by other factors, such as the requirement to maintain adequate capital above regulatory guidelines. The federal banking agencies have indicated that paying dividends that deplete a depository institution’s capital base to an inadequate level would be an unsafe and unsound banking practice. Under the Federal Deposit Insurance Corporation Improvement Act of 1991, a depository institution may not pay any dividends if payment would cause it to become undercapitalized or if it already is undercapitalized. Moreover, the federal agencies have issued policy statements providing that bank holding companies and insured banks should generally only pay dividends out of current operating earnings.

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Restrictions on Transactions with Affiliates and Insiders

The Bank is subject to Section 23A of the Federal Reserve Act, which places limits on the amount of:

•

~~a bank’s loans or extensions of credit to affiliates;~~

•

~~a bank’s investment in securities issued by~~•a bank’s loans or extensions of credit to affiliates;

•

~~a bank’s purchase of assets from~~•a bank’s investment in securities issued by affiliates;

•

~~loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations~~•a bank’s purchase of assets from affiliates;

•loans or extensions of credit made by a bank to third parties collateralized by the securities or obligations of affiliates;

~~a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate;~~

•a bank’s guarantee, acceptance or letter of credit issued on behalf of an affiliate;

~~a bank’s transactions with an affiliate involving the borrowing or lending of securities to the extent they create credit exposure to the affiliate; and~~

•a bank’s transactions with an affiliate involving the borrowing or lending of securities to the extent they create credit exposure to the affiliate; and

~~a bank’s derivative transactions with an affiliate to the extent they create credit exposure to the affiliate.~~

•a bank’s derivative transactions with an affiliate to the extent they create credit exposure to the affiliate.

Subject to various exceptions, the total amount of the above transactions is limited in amount, as to any one affiliate, to 10% of a bank’s capital and surplus and, as to all affiliates combined, to 20% of a bank’s capital and surplus. In addition to the limitation on the amount of these transactions, the above transactions also must meet specified collateral requirements and safety and soundness requirements. Under no circumstances may a bank purchase a low-quality asset from an affiliate.

The Bank is also subject to Section 23B of the Federal Reserve Act, which, among other things, prohibits a bank from engaging in the above transactions with affiliates, as well as other types of transactions set forth in Section 23B, unless the transactions are on terms substantially the same, or at least as favorable to the bank, as those prevailing at the time for comparable transactions with nonaffiliated companies.

The Bank is also subject to restrictions on extensions of credit to its executive officers, directors, principal shareholders and their related interests. These extensions of credit (i) must be made on substantially the same terms, including interest rates and collateral, as those prevailing at the time for comparable transactions between the bank and third parties, and (ii) must not involve more than the normal risk of repayment or present other unfavorable features. There are also individual and aggregate limitations on loans to insiders and their related interests. The aggregate amount of insider loans generally cannot exceed the institution’s total

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unimpaired capital and surplus. Insiders and banks are subject to enforcement actions for knowingly entering into insider loans in violation of applicable restrictions.

Brokered Deposits

The FDIA prohibits insured banks from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in the bank’s normal market area or nationally (depending upon where the deposits are solicited) unless it is “well-capitalized,” or it is “adequately capitalized” and receives a waiver from the FDIC. A bank that is “adequately capitalized” and that accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates. There are no such restrictions under the FDIA on a bank that is “well-capitalized.” Further, “undercapitalized” institutions are subject to growth limitations.

~~On December 15, 2020, the~~ FDIC ~~issued a final rule to revise and clarify its framework for classifying deposits as brokered deposits, including the~~rules set forth standards for determining whether a person is a “deposit broker” and ~~satisfies the “primary purpose” exemption from~~whether an insured depository institution must therefore treat deposits placed by that ~~definition.~~person as brokered deposits. Among other things, ~~the final rule provided~~these rules provides that a person can generally only be a deposit broker if the person places deposits at more than one insured depository institution.

Single Borrower Credit Limits

Under Washington law, total loans and extensions of credit to a borrower may not exceed 20% of the Bank’s capital and surplus.

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Commercial Real Estate Concentration Limits

In December 2006, the federal banking regulators issued guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management Practices” to address increased concentrations in commercial real estate (“CRE”), loans. In addition, in December 2015, the federal bank agencies issued additional guidance entitled “Statement on Prudent Risk Management for Commercial Real Estate Lending.” Together, these guidelines describe the criteria the agencies will use as indicators to identify institutions potentially exposed to CRE concentration risk. An institution that has (i) experienced rapid growth in CRE lending, (ii) notable exposure to a specific type of CRE, (iii) total reported loans for construction, land development, and other land representing 100% or more of the institution’s capital, or (iv) total CRE loans representing 300% or more of the institution’s capital, and the outstanding balance of the institutions CRE portfolio has increased by 50% or more in the prior 36 months, may be identified for further supervisory analysis of the level and nature of its CRE concentration risk. The Bank’s total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represented ~~305.1%~~269.2% and ~~357.0%~~305.1% of its capital, at December 31, 2022 and 2021, ~~and 2020,~~ respectively. The outstanding balance of the Bank’s CRE portfolio has increased by ~~7.8%~~30.9% and ~~26.3%~~7.8%, for the years ended December 31, 2022 and 2021, ~~and 2020,~~ respectively. ~~Because both the~~The level of CRE ~~and~~has exceeded regulatory guidelines in the previous 36 months but the growth rate ~~exceed~~is within regulatory guidelines, however, the Bank maintains enhanced underwriting and monitoring processes and ~~procedures.~~

procedures to manage its CRE portfolio.

Privacy

Financial institutions are required to disclose their policies for collecting and protecting nonpublic personal information of their clients. Clients generally may prevent financial institutions from sharing non-public personal information with nonaffiliated third parties except under certain circumstances, such as the processing of transactions requested by the consumer or when the financial institution is jointly offering a product or service with a nonaffiliated financial institution. Additionally, financial institutions generally are prohibited from disclosing consumer account numbers to any nonaffiliated third party for use in telemarketing, direct mail marketing or other marketing to consumers.

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Cybersecurity

Federal banking agencies pay close attention to the cybersecurity practices of banks and their holding companies and affiliates. The interagency council of the agencies, the Federal Financial Institutions Examination Council (“FFIEC”), has issued several policy statements and other guidance for banks as new cybersecurity threats arise. FFIEC has recently focused on such matters as compromised customer credentials and business continuity planning. Examinations by the banking agencies now include review of an institution’s information technology and its ability to thwart cyberattacks.

~~Additionally, in November 2021, the federal~~

Federal banking ~~agencies issued a final rule, effective April 1, 2022 with a compliance date of May 1, 2022, that requires~~agency rules require banking organizations to notify their primary federal regulator of significant security incidents within 36 hours of determining that such an incident has occurred as soon as possible anand no later than within 36 hours of a significant cybersecurity incident.

Consumer Credit Reporting

The FCRA imposes, among other things:

•

requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, to place a fraud alert in the consumer’s credit file stating that the consumer may be the victim of identity theft or other fraud;

•requirements for financial institutions to develop policies and procedures to identify potential identity theft and, upon the request of a consumer, to place a fraud alert in the consumer’s credit file stating that the consumer may be the victim of identity theft or other fraud;

requirements for entities that furnish information to consumer reporting agencies to implement procedures and policies regarding the accuracy and integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate;

•requirements for entities that furnish information to consumer reporting agencies to implement procedures and policies regarding the accuracy and integrity of the furnished information and regarding the correction of previously furnished information that is later determined to be inaccurate;

~~requirements for mortgage lenders to disclose credit scores to consumers in certain circumstances; and~~

•requirements for mortgage lenders to disclose credit scores to consumers in certain circumstances; and

~~limitations on the ability of a business that receives consumer information from an affiliate to use that information for marketing purposes.~~

•limitations on the ability of a business that receives consumer information from an affiliate to use that information for marketing purposes.

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Anti-Terrorism, Money Laundering Legislation and OFAC

The Bank is subject to the Bank Secrecy Act and the USA Patriot Act. These statutes and related rules and regulations impose requirements and limitations on specified financial transactions and accounts and other relationships intended to guard against money laundering and terrorism financing. The principal requirements for an insured depository institution include (i) establishment of an anti-money laundering program that includes training and audit components, (ii) establishment of a “know your customer” program involving due diligence to confirm the identities of persons seeking to open accounts and to deny accounts to those persons unable to demonstrate their identities, (iii) the filing of currency transaction reports for deposits and withdrawals of large amounts of cash, (iv) additional precautions for accounts sought and managed for non-U.S. persons and (v) verification and certification of money laundering risk with respect to private banking and foreign correspondent banking relationships. For many of these tasks a bank must keep records to be made available to its primary federal regulator. Anti-money laundering rules and policies are developed by the Treasury Department, including the Financial Crimes Enforcement Network, but compliance by individual institutions is overseen by its primary federal regulator.

The Bank has established appropriate anti-money laundering and customer identification programs. The Bank also maintains records of cash purchases of negotiable instruments, files reports of certain cash transactions exceeding $10,000 (daily aggregate amount), and reports suspicious activity that might signify money laundering, tax evasion, or other criminal activities pursuant to the Bank Secrecy Act. The Bank otherwise has implemented policies and procedures to comply with the foregoing requirements.

The Treasury Department’s Office of Foreign Assets Control (“OFAC”), is responsible for helping to ensure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes lists of persons, organizations and countries suspected of aiding, harboring or engaging in terrorist acts, known as Specially Designated Nationals and Blocked Persons. If the Company or the Bank finds a name on any transaction, account or wire transfer that is on an OFAC list, the Company or the Bank must freeze or block such account or transaction, file a suspicious activity report, and notify the appropriate authorities.

Sarbanes-Oxley Act

The Sarbanes-Oxley Act represents a comprehensive revision of laws affecting corporate governance, accounting obligations and corporate reporting. The Sarbanes-Oxley Act is applicable to all companies with equity securities registered, or that file reports, under the Exchange Act. In particular, the act established (i) requirements for audit committees, including independence, expertise and responsibilities; (ii) responsibilities regarding financial statements for the chief executive officer and chief financial officer of the reporting company and new requirements for them to certify the accuracy of periodic reports; (iii) standards for auditors and

22

regulation of audits; (iv) disclosure and reporting obligations for the reporting company and its directors and executive officers; and (v) civil and criminal penalties for violations of the federal securities laws. The legislation also established an accounting oversight board to enforce auditing standards and restrict the scope of services that accounting firms may provide to their publicly traded company audit clients.

Overdraft Fees

Federal Reserve Regulation E restricts banks’ abilities to charge overdraft fees. The rule prohibits financial institutions from charging fees for paying overdrafts on ATM and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions.

The Dodd-Frank Act and the EGRRCPA

~~As final rules and regulations implementing the~~

The Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) ~~have been adopted, this law has~~ significantly changed the bank regulatory framework and affected the lending, deposit, investment, trading and operating activities of banks and their holding ~~companies.~~

~~A number~~companies, including in the following ways:

•The Dodd-Frank Act imposed additional requirements regarding the origination and servicing of residential mortgage loans. The law created a variety of consumer protections, including limitations, subject to exceptions, on the ~~effects~~manner by which loan originators may be compensated and an obligation on the part of lenders to verify a borrower’s “ability to repay” a residential mortgage loan.

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•The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that affect most U.S. publicly traded companies. The Dodd-Frank Act (i) requires publicly traded companies to give shareholders a non-binding vote on executive compensation and golden parachute payments; (ii) enhances independence requirements for compensation committee members; (iii) requires national securities exchanges to require listed companies to adopt incentive-based compensation clawback policies for executive officers; (iv) authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials; and (v) directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.

•Other rules and regulations implementing the Dodd-Frank Act that may be relevant to us and the Bank are described or otherwise accounted for in various parts of this “~~—Regulation~~-Regulation and Supervision”section. ~~The following items provide a brief description of certain other provisions of the Dodd-Frank Act that may be relevant to us and the Bank.~~

•

The Dodd-Frank Act imposed additional requirements regarding the origination and servicing of residential mortgage loans. The law created a variety of consumer protections, including limitations, subject to exceptions, on the manner by which loan originators may be compensated and an obligation on the part of lenders to verify a borrower’s “ability to repay” a residential mortgage loan.

•

The Dodd-Frank Act addresses many investor protection, corporate governance and executive compensation matters that affect most U.S. publicly traded companies. The Dodd-Frank Act (i) requires publicly traded companies to give shareholders a non-binding vote on executive compensation and golden parachute payments; (ii) enhances independence requirements for compensation committee members; (iii) requires national securities exchanges to require listed companies to adopt incentive-based compensation clawback policies for executive officers; (iv) authorizes the SEC to promulgate rules that would allow shareholders to nominate their own candidates using a company’s proxy materials; and (v) directs the federal banking regulators to issue rules prohibiting incentive compensation that encourages inappropriate risks.

The EGRRCPA made changes to a variety of rules and regulations, including revisions to the Dodd-Frank Act. For example, the EGRRCPA exempts certain lenders from the “ability to repay” requirements. Other EGRRCPA changes are described elsewhere in this section.

Current Expected Credit Losses Model

The FASB adopted a new accounting standard for GAAP that became effective for us on January 1, 2023. This standard, referred to as CECL, requires FDIC-insured institutions and their holding companies (banking organizations) to recognize credit losses expected over the life of certain financial assets. CECL covers a broader range of assets than the current method of recognizing credit losses and generally results in earlier recognition of credit losses. Upon adoption of CECL, a banking organization must record a one-time adjustment to its credit loss allowances as of the beginning of the fiscal year of adoption equal to the difference, if any, between the amount of credit loss allowances under the current methodology and the amount required under CECL. For a banking organization, implementation of CECL is generally likely to reduce retained earnings, and to affect other items, in a manner that reduces its regulatory capital.

Consumer Financial Protection Bureau

The Dodd-Frank Act created the CFPB, an independent federal bureau within the Federal Reserve System having broad rulemaking, supervisory and enforcement powers under various federal consumer financial protection laws, including the Equal Credit Opportunity Act, Truth in Lending Act, Real Estate Settlement Procedures Act, Fair Credit Reporting Act, Fair Debt Collection Practices Act, the consumer financial privacy provisions of the Gramm-Leach-Bliley Act, Truth in Savings Act and certain other statutes. The CFPB has examination and primary enforcement authority with respect to depository institutions with more than $10.0 billion in assets. Smaller institutions, including the Bank, are subject to rules promulgated by the CFPB but continue to be examined and supervised by their primary federal banking agency for compliance with federal consumer protection laws and regulations. The CFPB also has authority to prevent unfair, deceptive or abusive acts or practices in connection with the offering of consumer financial products. The Dodd-Frank Act permits states to adopt consumer protection laws and standards that are more stringent than those adopted at the federal level and, in certain circumstances, permits state attorneys general to enforce compliance with both the state and federal laws and regulations.

The CFPB has proposed or issued a number of important rules affecting a wide range of consumer financial products. The changes resulting from the Dodd-Frank Act and CFPB rulemakings and enforcement policies may impact the profitability of our business activities, limit our ability to make, or the desirability of making, certain types of loans, require us to change our business practices, impose upon us more stringent capital, liquidity and leverage ratio requirements or otherwise adversely affect our business or profitability. The changes may also require us to dedicate significant management attention and resources to evaluate and make necessary changes to comply with the new statutory and regulatory requirements.

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~~The CFPB has concentrated much of its rulemaking efforts on reforms related to residential mortgage transactions.~~

The CFPB has issued rules related to a borrower’s ability to repay and qualified mortgage standards, mortgage servicing standards, loan originator compensation standards, requirements for high cost mortgages, appraisal and escrow standards and requirements for higher-priced mortgages. The CFPB has also issued rules establishing integrated disclosure requirements for lenders and settlement agents in connection with most closed end, real estate secured consumer loans; and rules which, among other things, expand the scope of information lenders must report in connection with mortgage and other housing-related loan applications under the Home Mortgage Disclosure Act. ~~These rules became effective on a rolling basis through January 1, 2019.~~

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The CFPB’s rulemaking and enforcement activities and strategic priorities have shifted as its leadership has changed, and in the future, the CFPB may take a different approach to its implementation of consumer financial protection laws than it has taken in the recent past.

The Volcker Rule

On December 10, 2013, five U.S. financial regulators, including the Federal Reserve, adopted a final rule implementing the “Volcker Rule.” The Volcker Rule was created by Section 619 of the Dodd-Frank Act and generally prohibits “banking entities,” including insured depository institutions and their affiliates, from engaging in “proprietary trading” and from sponsoring or investing in private equity or hedge funds, or extending credit to or engaging in other covered transactions with private equity or hedge funds that they sponsor or advise. The EGRRCPA amended Section 619 to exempt from the Volcker Rule any insured depository institution that has $10.0 billion or less in total consolidated assets and whose total trading assets and trading liabilities are 5% or less of total consolidated assets. We are among the exempt institutions.

Limitations on Incentive Compensation

In April 2016, the Federal Reserve and other federal financial agencies re-proposed restrictions on incentive-based compensation pursuant to Section 956 of the Dodd-Frank Act for financial institutions with $1 billion or more in total consolidated assets. For institutions with at least $1 billion but less than $50 billion in total consolidated assets, the proposal would impose principles-based restrictions that are broadly consistent with existing interagency guidance on incentive-based compensation. Such institutions would be prohibited from entering into incentive compensation arrangements that encourage inappropriate risks by the institution (1) by providing an executive officer, employee, director, or principal shareholder with excessive compensation, fees, or benefits, or (2) that could lead to material financial loss to the institution. The proposal would also impose certain governance and recordkeeping requirements on institutions covered by the rule. Whether or when the agencies will finalize the proposal is uncertain.

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Information About Our Executive Officers

The table below provides information about our executive officers. Ages are as of December 31, ~~2021.~~

2022.

~~Name~~

~~Age~~

~~Position~~

Name

Age

Position

Eric M. Sprink

49

50

~~President,~~ Chief Executive Officer and Director

Curt T. Queyrouze

61

President

Joel G. Edwards

61

62

Chief Financial Officer, Corporate Secretary

Russ A. Keithley

56

57

Chief Banking Officer

John J. Dickson

61

62

Chief Operating Officer

~~Laura L. Byers~~

65

~~Chief Digital Banking Officer~~

The following is a brief discussion of the business and banking background and experience of our executive officers, including their business experience during the last five years.

Eric M. Sprink serves as our ~~President and~~ Chief Executive Officer. Mr. Sprink joined the Company in late 2006 as President and Chief Operating Officer and became Chief Executive Officer in 2010. Mr. Sprink began his banking career working for Security Pacific Bank while enrolled at Arizona State University. He assumed increasing levels of responsibility in the areas of retail operations, consumer and commercial lending and wealth management with Security Pacific Bank and its successor, Bank of America. He then moved to Centura Bank, where he held management positions in retail operations and corporate finance. After Centura Bank was acquired, he held senior management positions at Washington Trust Bank and Global Credit Union. Mr. Sprink is active in industry trade groups and is a director and past chairman of the Community bankers of Washington. Mr. Sprink received a bachelor’s degree from Arizona State University and an M.B.A. from the University of North Carolina. Mr. Sprink brings to our board of directors leadership experience, significant experience in many facets of the financial services business, and familiarity with our market area. Mr. Sprink has been a member of our board of directors since 2006.

Curt T. Queyrouze has served as our President since 2022. Mr. Queyrouze was most recently President and Chief Executive Officer of TAB Bank, UT, from 2016 to 2022 and Chief Credit Officer from 2014 to 2016, where he gained experience in managing a community bank and fintech partnerships through BaaS. Prior to TAB Bank, Mr. Queyrouze was Senior Vice President Loss Mitigation Manager for Hancock Whitney Bank, from 2009 to 2012. His career includes a

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variety of leadership roles at banks ranging from top-ten and regionals to community institutions, and as Chief Operating Officer of a fintech company. He holds a degree in Accounting from Louisiana State University and is active in his community and banking industry organizations. Mr. Queyrouze has a background with expertise in credit, risk management, and financial technology.

Joel G. Edwards has served as Executive Vice President and Chief Financial Officer of the Company since 2012. Mr. Edwards is also the Executive Vice President and Chief Financial Officer of the Bank. Prior to joining the Company and Bank, Mr. Edwards was a Senior Vice President and Administration Officer at AmericanWest Bank. Prior to that experience, he was Executive Vice President and Chief Financial Officer at Viking Bank, Vice President and Chief Financial Officer at Rainier Pacific Bank, and President of the Washington Credit Union Share Guaranty Association. He also was employed in the Farm Credit System for eight years including positions as vice president responsible for administration, budget and policy. Mr. Edwards graduated magna cum laude with a bachelor’s degree in business and concentration in economics from, and completed post-graduate studies in accounting at, Eastern Washington University. He also received an M.B.A. from Eastern Washington University.

Russ A. Keithley has served as Executive Vice President and Chief Banking Officer of the Bank since 2020. From 2015 to 2020, Mr. Keithley held the position of Executive Vice President and Chief Lending Officer. He joined the Bank in 2012 and became Senior Vice President and Chief Credit Officer in 2014. Prior to joining the Bank, he served as Senior Vice President and Chief Lending Officer of North County Bank and Manager Team Lead at InterWest Bank. Mr. Keithley graduated from the University of Washington with a bachelor’s degree in political science. He is an honors graduate of the Pacific Coast Banking School at the University of Washington.

John J. Dickson joined the Bank in 2010 and currently serves as Executive Vice President and Chief Operating Officer of the Bank. Prior to joining the Bank, he served in various roles for Frontier Financial Corporation and Frontier Bank from 1985 to 2010, most recently serving as President of Frontier Bank from 2008 to 2010. In 2010, Frontier Bank was closed by the Washington DFI, and the FDIC was named receiver. Mr. Dickson received a bachelor’s degree in economics from the University of Puget Sound and graduated with honors from the Graduate School of Banking at the University of Wisconsin-Madison. Mr. Dickson practiced accounting as a CPA for three years in the audit division of a large accounting firm. Mr. Dickson is a past Chairman of the Washington Bankers Association.

~~Laura L. Byers~~ serves as Executive Vice President and Chief Digital Banking Officer of the Bank. Byers joined the Bank in 2004 and previously held the position of Executive Vice President, Chief Retail and Marketing Officer. Before joining the Bank she was Vice President and District Manager for EverTrust Bank, and served as Vice President and District Manager at Great American Bank NA and at US Bank where she opened the first in-store branches for the company. Byers attended Northern Arizona University and University of Arizona and is an honors graduate of Pacific Coast Banking School at the University of Washington.

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~~Item 1A.~~

~~Risk Factors~~

Item 1A. Risk Factors

As a financial services organization, we are subject to a number of risks inherent in our transactions and present in the business decisions we make. Described below are the material risks and uncertainties that if realized could have an adverse effect on our business, financial condition, results of operations or cash flows, and our access to liquidity. Consideration should also be given to the other information in this Annual Report on Form 10-K, as well as in the documents incorporated by reference into this Form 10-K. However, other factors not discussed below or elsewhere in this Annual Report on Form 10-K could adversely affect our business, financial condition, results of operations or cash flows and our access to liquidity. Therefore, the risk factors below should not be considered a complete list of potential risks we may face.

Risk Factors Summary

Our business is subject to numerous material risks and uncertainties, including those described in Part I Item 1A. “Risk Factors” in this Report on Form 10-K. You should carefully consider these material risks and uncertainties when investing in our common stock. The principal risks and uncertainties affecting our business include the following:

•

~~Our business and operations are concentrated in the Puget Sound area and we are sensitive to adverse changes in the local economy.~~

•Our business and operations are concentrated in the Puget Sound region and we are sensitive to adverse changes in the local economy.•

~~If our allowance for loan losses is insufficient to absorb actual loan losses, our results of operations would be negatively affected.~~

•If our allowance for loan losses is insufficient to absorb actual loan losses, our results of operations would be negatively affected.•

~~We operate in a highly competitive market and face increasing competition from traditional and new financial services providers.~~

•We operate in a highly competitive market and face increasing competition from traditional and new financial services providers.•

We are subject to the various risks associated with our banking business and operations, including, among others, credit, market, liquidity, interest rate and compliance risks, which may have an adverse effect on our business, financial condition and results of operations if we are unable to manage such risks.

•

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

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•We are subject to the various risks associated with our banking business and operations, including, among others, credit, market, liquidity, interest rate and compliance risks, which may have an adverse effect on our business, financial condition and results of operations if we are unable to manage such risks.•

The success of our relationship with broker dealers, digital financial service providers and other partners to provide banking as a service (“BaaS”) is subject to risks associated with managing such relationships.

•

We ~~operate in a highly regulated industry, and the current regulatory framework and any future legislative and regulatory changes,~~ may be unable to effectively manage our growth, which could have an adverse effect on our business, financial condition and results of operations.

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

We are subject to regulatory requirements, including stringent capital requirements, consumer protection laws, and anti-money laundering laws, and failure to comply with these requirements could have an adverse effect on our business, financial condition and results of operations.

•We operate in a highly regulated industry, and the current regulatory framework and any future legislative and regulatory changes, may have an adverse effect on our business, financial condition and results of operations.•

We are subject to laws regarding privacy, information security and protection of personal information and any violation of these laws or incidents involving personal, confidential or proprietary information of individuals, including, among others, system failures or cybersecurity breaches of our network security, could damage our reputation and otherwise adversely affect our business, financial condition and results of operation.

•We are subject to regulatory requirements, including stringent capital requirements, consumer protection laws, and anti-money laundering laws, and failure to comply with these requirements could have an adverse effect on our business, financial condition and results of operations.•

Our charter documents contain certain provisions, including anti-takeover provision, that limit the ability of our shareholders to take certain actions and could delay or discourage takeover attempts that shareholders may consider favorable.

•We are subject to laws regarding privacy, information security and protection of personal information and any violation of these laws or incidents involving personal, confidential or proprietary information of individuals, including, among others, system failures or cybersecurity breaches of our network security, could damage our reputation and otherwise adversely affect our business, financial condition and results of operation.•

~~We are subject to risks associated with the COVID-19 pandemic, which could have an adverse effect on our business, financial condition and results of operations.~~

•Our charter documents contain certain provisions, including anti-takeover provision, that limit the ability of our shareholders to take certain actions and could delay or discourage takeover attempts that shareholders may consider favorable.

Risks Related to Credit Matters

We are subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.

The majority of our banking assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings are significantly dependent on our net interest income, the principal component of our earnings, which is the difference between interest earned by us from our interest-earning assets, such as loans and investment securities, and interest paid by us on our interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will negatively impact our earnings. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international economic weakness and disorder and instability in domestic and foreign financial markets. Our interest rate sensitivity profile was asset sensitive as of December 31, 2022, meaning that we estimate our net interest income would increase more from rising interest rates than from falling interest rates.

Interest rates have risen significantly following the historically low levels during the COVID-19 pandemic. Due to elevated levels of inflation and corresponding pressure to raise interest rates, the Federal Reserve announced in January of 2022 that it would be slowing the pace of its bond purchasing and increasing the target range for the federal funds rate over time. The FOMC since has increased the target range seven times throughout 2022. As of December 31, 2022, the target range for the federal funds rate had been increased to 4.25% to 4.50% and the FOMC signaled that future increases may be appropriate in order to attain a monetary policy sufficiently restrictive to return inflation to more normalized levels.

Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default and could result in a decrease in the demand for loans. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower

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rates. In addition, in a low interest rate environment, loan customers often pursue long-term fixed rate credits, which could adversely affect our earnings and net interest margin if rates increase. Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have an adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. At the same time, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest income.

Our commercial real estate lending activities expose us to increased lending risks and related loan losses.

At December 31, ~~2021,~~2022, our commercial real estate loan portfolio totaled ~~$835.6 million,~~$1.05 billion, or ~~47.7%~~39.8% of our total loan portfolio. Our current business strategy is to continue our originations of commercial real estate loans. Commercial real estate loans generally expose a lender to greater risk of non-payment or late payment and loss than one-to-four family residential mortgage loans because repayment of the loans often depends on the successful operation of the properties and the income stream of the borrowers. These loans involve larger loan balances to single borrowers or groups of related borrowers compared to one-to-four family residential mortgage loans. To the extent that borrowers have more than one commercial real estate loan outstanding, an adverse development with respect to one loan or one credit relationship could expose us to a significantly greater risk of loss compared to an adverse development with respect to a one-to-four family residential real estate loan. Moreover, if loans that are collateralized by commercial real estate become troubled and the value of the real estate has been significantly impaired, then we may not be able to recover the full contractual amount of principal and interest that we anticipated at the time we originated the loan, which could cause us to increase our provision for loan losses and would adversely affect our business, financial condition and results of operations.

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We may be subject to environmental liabilities in connection with the real properties we own and the foreclosure on real estate assets securing our loan portfolio.

In the course of our business, we may purchase real estate in connection with our acquisition and expansion efforts, or we may foreclose on and take title to real estate or otherwise be deemed to be in control of property that serves as collateral on loans we make. As a result, we could be subject to environmental liabilities with respect to those properties. We may be held liable to a governmental entity or to third parties for property damage, personal injury, investigation and clean-up costs incurred by these parties in connection with environmental contamination, or we may be required to investigate or clean up hazardous or toxic substances or chemical releases at a property. The costs associated with investigation or remediation activities could be substantial. In addition, if we are the owner or former owner of a contaminated site, we may be subject to common law claims by third parties based on damages and costs resulting from environmental contamination emanating from the property.

The cost of removal or abatement may substantially exceed the value of the affected properties or the loans secured by those properties, we may not have adequate remedies against the prior owners or other responsible parties and we may not be able to resell the affected properties either before or after completion of any such removal or abatement procedures. If material environmental problems are discovered before foreclosure, we generally will not foreclose on the related collateral or will transfer ownership of the loan to a subsidiary. It should be noted, however, that the transfer of the property or loans to a subsidiary may not protect us from environmental liability. Furthermore, despite these actions on our part, the value of the property as collateral will generally be substantially reduced or we may elect not to foreclose on the property and, as a result, we may suffer a loss upon collection of the loan. Any significant environmental liabilities could adversely affect our business, financial condition and results of operations.

Our commercial business lending activities expose us to additional lending risks.

As of December 31, ~~2021,~~2022, commercial and industrial loans totaled ~~$419.1~~$312.6 million and represented ~~23.9%~~11.8% of total loans. Included in commercial and industrial loans are ~~$111.8~~$4.7 million in PPP loans, which are 100% guaranteed by the by the U.S. Government. ~~Excluding PPP loans, commercial and industrial loans represented 17.5% of total loans.~~ We make commercial business loans in our market area to a variety of professionals, sole proprietorships, partnerships and corporations. As compared to commercial real estate loans, which are secured by real property, the value of which tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business. As a result, the availability of funds for the repayment of commercial business loans may depend substantially on the success of the business itself and the conditions in the general economy. Further, any losses incurred on a small number of

29

commercial loans could have an adverse impact on our financial condition and results of operations due to the larger average size of commercial loans as compared with other loans and the risk that collateral securing such loans may depreciate over time, may be difficult to appraise, may fluctuate in value and may depend on the borrower’s ability to collect receivables. We have increased our focus on commercial business lending in recent years and intend to continue to focus on this type of lending in the future.

Our concentration of residential mortgage loans exposes us to increased lending risks.

At December 31, ~~2021, $204.4~~2022, $449.2 million, or ~~11.7%~~17.1%, of our loan portfolio was secured by one-to-four family real ~~estate, 73.1% is secured by property in Washington State, and a significant majority of that is located in the Puget Sound region.~~estate. One-to-four family residential mortgage lending is generally sensitive to regional and local economic conditions that significantly impact the ability of borrowers to meet their loan payment obligations, making loss levels difficult to predict. ~~A decline in residential real estate values as a result of a downturn in the Puget Sound housing market could reduce the value of the real estate collateral securing these types of loans.~~ Declines in real estate values could cause some of our residential mortgages to be inadequately collateralized, which would expose us to a greater risk of loss if we seek to recover on defaulted loans by selling the real estate collateral.

As of December 31, ~~2021, $114.0~~2022, $204.6 million of our residential mortgage loans were made through the community bank, and 82.7% are secured by property in Washington State, and a significant majority of that is located in the Puget Sound region. A decline in residential real estate values as a result of a downturn in the Puget Sound housing market could reduce the value of the real estate collateral securing these types of loans. As of December 31, 2022, $140.7 million of our residential mortgage loans made through the community bank were made to investors. These loans may behave more like multi-family loans than individual ~~1-f~~1-4 family loans that are occupied by their owners.

As of December 31, 2022, $244.6 million of our residential mortgage loans were made through CCBX partners and are located in different regions across the U.S. A decline in residential real estate values across the U.S. would reduce the value of this residential real estate collateral. These home equity lines of credit are secured by residential real estate and are accessed by using a credit card.

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

At December 31, ~~2021 $183.6~~2022, $214.1 million, or ~~10.5%~~8.1% of our total loans was construction, land and land development loans. We originate commercial construction loans primarily to professional builders for the construction of one-to-four family residences, apartment buildings, and commercial real estate properties. To a lesser degree, we also originate land acquisition loans for the purpose of facilitating the ultimate construction of a home or commercial building. Our construction loans present a greater level of risk than loans secured by improved, occupied real estate due to: (1) the increased difficulty at the time the loan is made of estimating the building costs and the selling price of the property to be built; (2) the increased difficulty and costs of monitoring the loan; (3) the higher degree of sensitivity to increases in market rates of interest; and (4) the increased difficulty of working out loan problems. In addition, construction costs may exceed original estimates as a result of increased materials, labor or other costs. Construction loans

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also often involve the disbursement of funds with repayment dependent, in part, on the success of the project and the ability of the borrower to sell or lease the property or refinance the indebtedness.

Our focus on lending to the small to medium-sized businesses may adversely affect our business, financial condition and results of operations.

We focus our business development and marketing strategy primarily on small to medium-sized businesses. Small to medium-sized businesses frequently have smaller market shares than larger firms, may be more vulnerable to economic downturns, often need substantial additional capital to expand or compete and may experience substantial volatility in operating results, any of which may impair a borrower’s ability to repay a loan. In addition, the success of a small and medium-sized business often depends on the management skills, talents and efforts of a small group of people, and the death, disability or resignation of one or more of these people could have an adverse effect on the business and its ability to repay its loan. If our borrowers are unable to repay their loans, our business, financial condition and earnings could be adversely affected.

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

The business of lending is inherently risky, including risks that the principal of or interest on any loan will not be repaid timely or at all or that the value of any collateral supporting the loan will be insufficient to cover our outstanding exposure. These risks may be affected by the strength of the borrower’s business sector and local, regional and national market and economic conditions. Many of our loans are made to small to medium-sized businesses that may be less able to

30

withstand competitive, economic and financial pressures than larger borrowers. Our risk management practices, such as monitoring the concentration of our loans within specific industries and our credit approval practices, may not adequately reduce credit risk, and our credit administration personnel, policies and procedures may not adequately adapt to changes in economic or any other conditions affecting customers and the quality of the loan portfolio. A failure to effectively measure and limit the credit risk associated with our loan portfolio could lead to unexpected losses and adversely affect our business, financial condition and results of operations.

We originate and purchase loans through our CCBX partners which exposes us to increased lending and compliance risks.

At December 31, ~~2021, $346.7 million,~~2022, $1.01 billion, or ~~19.9%~~38.5% of our total loans were originated or purchased ~~from~~through CCBX partners. Our partners underwrite these loans in compliance with our credit standards and policies. Our CCBX partners service ~~$143.7~~$866.5 million of these loans. Our partners provide fraud and credit enhancements on many of our CCBX loans, but if they are unable to fulfill their contracted obligations then the Bank would be exposed to writing off all or a part of the credit enhancement asset and to additional loan losses as a result of this counterparty risk. We are subject to compliance and regulatory risk if partners do not follow our servicing policies, lending laws and regulations.

~~If our~~

Our allowance for loan losses ismay prove to be insufficient to absorb ~~actual~~losses in our loan portfolio.

Lending money is a substantial part of our business. Every loan carries a certain risk that it will not be repaid in accordance with its terms or that any underlying collateral will not be sufficient to assure repayment. This risk is affected by, among other things:

•the cash flow of the borrower, guarantors and/or the project being financed;

•the changes and uncertainties as to the future value of the collateral, in the case of a collateralized loan;

•the character and creditworthiness of a particular borrower or guarantor;

•changes in economic and industry conditions; and

•the duration of the loan.

We maintain an allowance for loan losses, which is a reserve established through a provision for loan losses charged against earnings, which we believe is appropriate to absorb probable incurred losses in our ~~results~~loan portfolio. The amount of ~~operations would be negatively affected.~~

~~In determining~~this allowance is determined by our management through a periodic comprehensive review and consideration of several factors, including, but not limited to:

•our general reserve, based on our historical default and loss experience;

•our specific reserve, based on our evaluation of impaired loans and their underlying collateral or discounted cash flows; and

•current macroeconomic factors and regulatory requirements.

The determination of the ~~amount~~appropriate level of the allowance for loan losses ~~we analyze our loss~~inherently involves a high degree of subjectivity and ~~delinquency experience by loan categories~~requires us to make significant estimates of current credit risks and ~~we consider the effect~~future trends, all of existing economic conditions. In addition, we make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of many of our loans.which may undergo material changes. If ~~the actual results are different from~~ our estimates ~~or our analyses~~ are incorrect, ~~our~~the allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, ~~which would require additions to~~resulting in the need for increases in our allowance for loan losses through the provision for losses on loans which is charged against income. Management also recognizes that significant new growth in loan portfolios, through the community bank and/or CCBX, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.

Many of the agreements with our CCBX partners provide for a credit enhancement which helps protect the Bank by absorbing incurred losses. CCBX credit enhancements are free-standing and are accounted separately from the allowance for loan loss. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans, without regard to the credit enhancement. If a CCBX lending partner is unable to fulfill their

31

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

Deterioration in economic conditions affecting borrowers, new information regarding existing loans, identification of additional problem loans and other factors, both within and outside of our ~~net income. Our emphasis~~control, may require an increase in the allowance for loan losses. If current conditions in the housing and real estate markets weaken, we expect we will experience increased delinquencies and credit losses. In addition, bank regulatory agencies periodically review our allowance for loan losses and may require an increase in the provision for loan losses or the recognition of further loan charge-offs, based on their judgments about information available to them at the time of their examination. In addition, if charge-offs in future periods exceed the allowance for loan ~~growth and on increasing our portfolio, as well as any future credit deterioration,~~losses, we will ~~require us~~need additional provisions to increase ~~our~~the allowance ~~further in the future. While~~for loan losses.While we believe that our allowance for loan losses was adequate at December 31, ~~2021,~~2022, there is no assurance that it will be sufficient to cover future loan losses, especially if there is a significant deterioration in economic conditions.

~~In addition, our banking regulators periodically review~~

The FASB adopted a new accounting standard referred to as CECL which requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses. This will change the current method of providing allowances for credit losses that are probable, which may require us to increase our allowance for loan losses, and ~~could require~~may greatly increase the types of data we would need to collect and review to determine the appropriate level of the allowance for credit losses. This accounting pronouncement was adopted by us effective for our fiscal year beginning January 1, 2023. The federal banking regulators, including the Federal Reserve and the FDIC, have adopted a rule that gives a banking organization the option to ~~increase our provision for loan losses.~~phase in over a three year period the day one adverse effects of CECL on its regulatory capital. Any ~~increase~~increases in ~~our~~the allowance for loan losses ~~or loan charge-offs as required by regulatory authorities~~due to the one-time cumulative-effect adjustment will result in a decrease in capital and may ~~adversely affect~~have a material adverse effect on our ~~business,~~ financial condition and results of operations.

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

While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our loan portfolio is comprised of loans secured by property located in the Puget Sound ~~area~~region and substantially all of our loan and deposit customers are businesses and individuals in greater Puget Sound ~~area. Therefore, weak economies in our market area could adversely affect our business, financial condition and results~~region. A deterioration of ~~operations. A deterioration~~the economy in the market areas we serve could result in the following consequences, any of which would have an adverse impact, which could be material, on our business, financial condition, and results of operations:

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•

~~loan delinquencies may increase;~~

•

~~problem assets and foreclosures~~•loan delinquencies may increase;

•problem assets and foreclosures may increase;•

~~collateral for loans made may decline in value, in turn reducing customers’ borrowing power, reducing the value of assets and collateral associated with existing loans;~~

•collateral for loans made may decline in value, in turn reducing customers’ borrowing power, reducing the value of assets and collateral associated with existing loans;•

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

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

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

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

~~low cost or noninterest bearing deposits may decrease; and~~

•low cost or noninterest bearing deposits may decrease; and•

~~demand for our loan and other products and services may decrease.~~

•demand for our loan and other products and services may decrease.

A decline in local economic conditions may have a greater effect on our earnings and capital than on the earnings and capital of larger financial institutions whose real estate loans are geographically diverse. Many of the loans in our portfolio are secured by real estate. Deterioration in the real estate markets where collateral for a mortgage loan is located could negatively affect the borrower’s ability to repay the loan and the value of the collateral securing the loan. Real estate values are affected by various other factors, including changes in general or regional economic conditions, governmental rules or policies and natural disasters such as earthquakes and flooding. Further, deterioration in local economic conditions could drive the level of loan losses beyond the level we have provided for in our allowance for loan losses, which in turn could necessitate an increase in our provision for loan losses and a resulting reduction to our earnings and capital.

In addition, weakening in regional and general economic conditions such as inflation, recession, business closings, restrictions on business activity, unemployment, natural disasters, epidemic illness, or other factors beyond our control

32

could reduce our growth rate and negatively affect demand for loans, the ability of our borrowers to repay their loans and our financial condition and results of operations.

Our SBA lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans.

As of December 31, ~~2021,~~2022, the balance of owned SBA loans and SBA loans net of the sold portion was ~~$120.6~~$12.3 million, which includes ~~$111.8~~$4.7 million in PPP loans that are 100% guaranteed, and an additional ~~$2.7~~$3.1 million in non-PPP SBA loans ~~was~~which are also guaranteed. As of December 31, ~~2021,~~2022, the balance of SBA loans sold and serviced was ~~$16.6~~$14.3 million, resulting in ~~$93,000~~$69,000 in servicing income for the year ended December 31, ~~2021. We also recognized $396,000 in income for the year ended December 31, 2021 for the gain on sale of our SBA loans.~~2022. Our SBA lending program is dependent upon the U.S. federal government. As an approved participant in the SBA Preferred Lender’s Program, referred to herein as an SBA Preferred Lender, we enable our clients to obtain SBA loans without being subject to the potentially lengthy SBA approval process necessary for lenders that are not SBA Preferred Lenders. The SBA periodically reviews the lending operations of participating lenders to assess, among other things, whether the lender exhibits prudent risk management. When weaknesses are identified, the SBA may request corrective actions or impose enforcement actions, including revocation of the lender’s SBA Preferred Lender status. If we lose our status as an SBA Preferred Lender, we may lose some or all of our customers to lenders who are SBA Preferred Lenders, and as a result we could experience an adverse effect to our financial results. Any changes to the SBA program, including but not limited to changes to the level of guarantee provided by the federal government on SBA loans, changes to program specific rules impacting volume eligibility under the guaranty program, as well as changes to the program amounts authorized by Congress or exhaustion of the available funding for SBA programs may also have an adverse effect on our business, financial condition and results of operation. In addition, any default by the U.S. Government on its obligations or any prolonged government shutdown could, among other things, impede our ability to originate SBA loans or sell such loans in the secondary market, which could adversely affect our business, financial condition and results of operations.

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Included in this category are PPP loans, which have a contractual rate of 1.0%, with maturity terms of two to five years, are unsecured, 100% guaranteed and the loan proceeds of which may be forgiven by the U.S. Government / SBA if used for certain purposes. To bolster the effectiveness of the SBA’s PPP loan program, the Federal Reserve supplied liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility (“PPPLF”) extended credit to eligible financial institutions that originated PPP loans, taking the loans as collateral at face value. The interest rate was 0.35% and as PPP loans were paid down, the borrowing line also had to be paid down. The PPPLF closed for new borrowings on July 31, 2021. As of December 31, 2021, there was no balance outstanding on PPPLF borrowings for the Company.

Outside of the PPP, the SBA’s 7(a) Loan Program is the SBA’s primary program for helping start-up and existing small businesses, with financing guaranteed for a variety of general business ~~purposes,.~~purposes. Generally, we sell the guaranteed portion of our non-PPP SBA 7(a) loans in the secondary market. These sales result in premium income for us at the time of sale and create a stream of future servicing income, as we retain the servicing rights to these loans. For the reasons described above, we may not be able to continue originating these loans or sell them in the secondary market. Furthermore, even if we are able to continue to originate and sell SBA 7(a) loans in the secondary market, we might not continue to realize premiums upon the sale of the guaranteed portion of these loans or the premiums may decline due to economic and competitive factors. When we originate SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on a loan, we share any loss and recovery related to the loan pro-rata with the SBA. If the SBA establishes that a loss on an SBA guaranteed loan is attributable to significant technical deficiencies in the manner in which the loan was originated, funded or serviced by us, the SBA may seek recovery of the principal loss related to the deficiency from us. Generally, we do not maintain reserves or loss allowances for such potential claims and any such claims could adversely affect our business, financial condition and results of operations.

The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future. We cannot predict the effects of these changes on our business, financial condition and results of operation. Because government regulation greatly affects the business and financial results of all commercial banks and bank holding companies and especially our organization, changes in the laws, regulations and procedures applicable to SBA loans could adversely affect our ability to operate profitably.

Economic conditions could ~~result in increases in~~increase our level of nonperforming loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.

Prolonged deteriorating economic conditions could significantly affect the markets in which we do business, the value of our loans and investment securities, and our ongoing operations, costs and profitability. Further, declines in real estate values and sales volumes and elevated unemployment levels may result in higher loan delinquencies, increases in our nonperforming and classified assets and a decline in demand for our products and services. These events may cause us to incur losses and may adversely affect our financial condition and earnings. Reduction in problem assets can be slow, and the process can be exacerbated by the condition of the properties securing nonperforming loans and the lengthy foreclosure

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process in Washington. To the extent that we must work through the resolution of assets, economic problems may cause us to incur losses and adversely affect our capital, business, financial condition, results of operations or cash flows and our access to liquidity.

Nonperforming assets take significant time and resources to resolve and adversely affect our business, financial condition and results of operations.

Nonperforming assets adversely affect our net income in various ways. We generally do not record interest income on other real estate owned (“OREO”), or on nonperforming loans, thereby adversely affecting our income and increasing loan administration costs. When we take collateral in foreclosures and similar proceedings, we are required to mark the related asset to the then fair market value of the collateral, which may ultimately result in a loss. An increase in our level of nonperforming assets increases our risk profile and may impact the capital levels regulators believe are appropriate in light of the ensuing risk profile. While we seek to reduce problem assets through loan workouts, restructurings and otherwise, decreases in the value of the underlying collateral, or in these borrowers’ performance or financial condition, whether or not due to economic and market conditions beyond our control, could adversely affect our business, financial condition and results of operations. In addition, the resolution of nonperforming assets requires significant commitments of time from management, which may adversely impact their ability to perform their other responsibilities. We may not experience future increases in the value of nonperforming assets.

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Risks Related to Compliance and Operational Matters

Imposition of limits by the bank regulators on commercial real estate lending activities could curtail our growth and adversely affect our earnings.

In 2006, the federal banking regulators issued joint guidance entitled “Concentrations in Commercial Real Estate Lending, Sound Risk Management ~~Practices,” or the~~ Practices” (“CRE ~~Guidance.~~Guidance”). Although the CRE Guidance did not establish specific lending limits, it provides that a bank’s commercial real estate lending exposure could receive increased supervisory scrutiny where total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, represent 300% or more of an institution’s total risk-based capital, and the outstanding balance of the commercial real estate loan portfolio has increased by 50% or more during the preceding 36 months. Our total non-owner-occupied commercial real estate loans, including loans secured by apartment buildings, investor commercial real estate, and construction and land loans, totaled ~~$703.0~~$920.1 million and represented 269.2% and 305.1% of its ~~total risk-based~~ capital, at December 31, ~~2021. The ratio was 357.0% at December 31, 2020.~~ 2022 and 2021, respectively. The outstanding balance of the Bank’s regulatory CRE portfolio has increased by ~~7.8%~~30.9% and ~~26.3%~~7.8%, for the years ended December 31, 2022 and 2021, ~~and 2020,~~ respectively.

The level of CRE has exceeded regulatory guidelines in the previous 36 months but the growth rate is within regulatory guidelines.

In December 2015, the federal banking regulators released a new statement on prudent risk management for commercial real estate lending, referred to herein as the 2015 Statement. In the 2015 Statement, the federal banking regulators, among other things, indicate ~~the~~their intent to ~~continue “to~~“continue to pay special attention” to commercial real estate lending activities and concentrations going forward. If the Federal Reserve, our primary federal regulator, were to impose restrictions on the amount of commercial real estate loans we can hold in our portfolio, for reasons noted above or otherwise, our earnings would be adversely affected.

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

A major catastrophe, such as an epidemic illness, earthquake, tsunami, flood, fire or other natural disaster or effects of climate change could result in a prolonged interruption of our business. For example, our headquarters are located in Everett, Washington and we serve the broader Puget Sound region, a geographical region that has been and may continue to be affected by earthquake, tsunami, wildfires and flooding activity. These activities may increase as the effects of climate change increase. Because we primarily serve individuals and businesses in the Northwest, a natural disaster, epidemic illness, significant effect of climate change or other major catastrophe in the Northwest likely would have a greater impact on our business, financial condition and results of operation than if our business were more geographically diverse. The occurrence of any of these natural disasters. epidemic illnesses, effects of climate change or other major catastrophes could negatively impact our performance by disrupting our operations or the operations of our customers, which could adversely affect our business, financial condition, results of operations.

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Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, OREO and repossessed personal property may not accurately reflect the net value of the asset.

In considering whether to make a loan secured by real property, we generally require an appraisal of the property. However, an appraisal is only an estimate of the value of the property at the time the appraisal is made, and, as real estate values may change significantly in relatively short periods of time (especially in periods of heightened economic uncertainty), this estimate may not accurately describe the net value of the real property collateral after the loan is made. As a result, we may not be able to realize the full amount of any remaining indebtedness when we foreclose on and sell the relevant property. In addition, we rely on appraisals and other valuation techniques to establish the value of our OREO, and personal property that we acquire through foreclosure proceedings and to determine certain loan impairments. If any of these valuations are inaccurate, our financial statements may not reflect the correct value of our OREO, and our allowance for loan losses may not reflect accurate loan impairments. This could adversely affect our business, financial condition and results of operations. As of December 31, ~~2021,~~2022, we did not hold any OREO or repossessed property and equipment.

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We derive a percentage of our deposits, total assets and income from deposit accounts generated through our BaaS relationships.

Deposit accounts acquired through these relationships totaled ~~$716.3 million,~~$1.28 billion, or ~~30.3%~~45.4% of total deposits at December 31, ~~2021.~~2022. We provide oversight over these relationships, which must meet all internal and regulatory requirements. We may exit relationships where such requirements are not met or be required by our regulators to exit such relationships. Also, our CCBX partner(s) could terminate a relationship with us for many reasons, including being able to obtain better terms from another provider or dissatisfaction with the level or quality of our services. If a relationship were to be terminated, it could materially reduce our deposits, assets and income. We cannot assure you that we could replace such relationship. If we cannot replace such relationship, we may be required to seek higher rate funding sources as compared to the existing relationship and interest expense might increase. We may also be required to sell securities or other assets to meet funding needs which would reduce revenues or potentially generate losses.

Our strategy of partnering with broker dealers and digital financial service providers to offer BaaS has been adopted by other institutions with which we compete.

Several online banking operations as well as the online banking programs of conventional banks have instituted BaaS strategies similar to ours. As a consequence, we have encountered competition in this area and anticipate that we will continue to do so in the future. This competition may increase our costs, reduce our revenues or revenue growth or, because we are a relatively small banking operation without the name recognition of other, more established banking operations, make it difficult for us to compete effectively in obtaining these relationships.

Our agreements with BaaS partners may produce limited revenue and may expose us to liability for compliance violations by BaaS partners.

We have entered into agreements with BaaS partners, which includes broker dealers and digital financial service providers, pursuant to which we will provide certain banking services for the BaaS partner customers, including serving as the issuing bank for debit cards issued to their customers and establishing one or more settlement accounts for the purpose of settling customer transactions in the cash management account program. The agreements have varying terms and may be terminated by the parties under certain circumstances. If our BaaS partners are not successful in achieving customer acceptance of their programs or terminate the agreement before the end of its term, our revenue under the agreement may be limited or may cease altogether. In addition, because we will provide banking services with respect to the cash features of our BaaS partner account programs, our bank regulators may hold us responsible for their activities with respect to the marketing or administration of their programs, which may result in increased compliance costs for us or potentially compliance violations as a result of BaaS partner activities.

~~We are subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.~~

The majority of our banking assets and liabilities are monetary in nature and subject to risk from changes in interest rates. Like most financial institutions, our earnings are significantly dependent on our net interest income, the principal component of our earnings, which is the difference between interest earned by us from our interest-earning assets, such as loans and investment securities, and interest paid by us on our interest-bearing liabilities, such as deposits and borrowings. We expect that we will periodically experience “gaps” in the interest rate sensitivities of our assets and liabilities, meaning that either our interest-bearing liabilities will be more sensitive to changes in market interest rates than our interest-earning assets, or vice versa. In either event, if market interest rates should move contrary to our position, this “gap” will negatively impact our earnings. The impact on earnings is more adverse when the slope of the yield curve flattens, that is, when short-term interest rates increase more than long-term interest rates or when long-term interest rates decrease more than short-term interest rates. Many factors impact interest rates, including governmental monetary policies, inflation, recession, changes in unemployment, the money supply and international economic weakness and disorder and instability in domestic and foreign financial markets. Our interest rate sensitivity profile was asset sensitive as of December 31, 2021, meaning that we estimate our net interest income would increase more from rising interest rates than from falling interest rates.

Interest rate increases often result in larger payment requirements for our borrowers, which increases the potential for default and could result in a decrease in the demand for loans. At the same time, the marketability of the property securing a loan may be adversely affected by any reduced demand resulting from higher interest rates. In a declining interest rate environment, there may be an increase in prepayments on loans as borrowers refinance their loans at lower rates. In addition, in a low interest rate environment, loan customers often pursue long-term fixed rate credits, which could adversely affect our earnings and net interest margin if rates increase. Changes in interest rates also can affect the value of loans, securities and other assets. An increase in interest rates that adversely affects the ability of borrowers to pay the principal or interest on loans may lead to an increase in nonperforming assets and a reduction of income recognized, which could have an adverse effect on our results of operations and cash flows. Further, when we place a loan on nonaccrual status, we reverse any accrued but unpaid interest receivable, which decreases interest income. At the same time, we continue to have a cost to fund the loan, which is reflected as interest expense, without any interest income to offset the associated funding expense. Thus, an increase in the amount of nonperforming assets would have an adverse impact on net interest

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income. If short-term interest rates continue to remain at their historically low levels for a prolonged period, and assuming longer-term interest rates fall further, we could experience net interest margin compression as our interest-earning assets would continue to reprice downward while our interest-bearing liability rates could fail to decline in tandem. Such an occurrence would have an adverse effect on our net interest income and could have an adverse effect on our business, financial condition and results of operations.

Uncertainty relating to the LIBOR calculation process and phasing out of LIBOR may adversely affect our results of operations.

On July 27, 2017, the Chief Executive of the United Kingdom Financial Conduct Authority, which regulates LIBOR, announced that it intends to stop persuading or compelling banks to submit rates for the calibration of LIBOR to the administrator of LIBOR after 2021. In November 2020, the ICE Benchmark Administration, which administers LIBOR, announced its intention to extend the publication of most tenors of LIBOR through June 30, 2023. The U.S. federal banking agencies ~~have continued to~~ encouraged banking organizations to cease entering into new contracts that use US Dollar LIBOR

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as a reference rate by no later than December 31, 2021, and to ensure existing contracts have robust fallback language that includes a clearly defined alternative reference rate.

Several domestic and international groups, including the Alternative Reference Rate Committee and the International Swaps and Derivatives Association, have developed LIBOR replacements, and a consensus appears to have emerged that the SOFR as observed by the Federal Reserve Bank of New York should be the successor rate. In March 2022, President Biden signed into law the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”). The LIBOR Act provides default rules for tough legacy contracts that do not have clearly defined and practicable fallback provisions for replacing LIBOR. The LIBOR Act also establishes a litigation safe harbor for lenders that select a LIBOR replacement under certain situations, including the use of a replacement rate selected by the Federal Reserve. On December 16, 2022, the Federal Reserve adopted a final rule that implements the LIBOR Act by identifying benchmark rates based on SOFR that will replace LIBOR in certain financial contracts after June 30, 2023.

Nevertheless, uncertainty surrounding the transition away from LIBOR may adversely affect LIBOR rates and the value of LIBOR-based loans, and debt instruments. If and when LIBOR rates are no longer available, and we are required to implement substitute indices for the calculation of interest rates under our loan agreements with our borrowers or our existing borrowings, we may incur additional expenses in effecting the transition, and may be subject to disputes or litigation with customers and creditors over the appropriateness or comparability to LIBOR of the substitute indices, which could have an adverse effect on our business, financial condition and results of operations. As of December 31, ~~2021,~~2022, we had ~~$216.9~~51 loans totaling $206.6 million ~~in loans~~ that are tied to LIBOR. ~~This includes $180.3 million in SWAPs that we service.~~ We have $3.6 million in floatingratejuniorsubordinateddebenturesto Coastal(WA)StatutoryTrustI, which was formedfortheissuanceof trustpreferredsecurities.These debentures are also tied to LIBOR. The move to an alternate index may impact the rates we receive on loans and rates we pay on our junior subordinated debentures. We have identified the loans and debt instruments impacted, ~~are reviewing~~and we believe we will be able to use the benchmark replacements and transition protections provided by the LIBOR ~~replacement options~~Act, Federal Reserve rule, and ~~are preparing~~relevant FASB guidance to manage through the transition away from LIBOR. See “Note 2 - Recent accounting standards” in the Consolidated Financial Statements, for ~~and evaluating the impact~~discussion on ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the ~~transition from LIBOR.~~Effects of Reference Rate Reform on Financial Reporting. We ~~are~~ no longer ~~issuing~~issue any loans or debt tied to LIBOR.

We may be adversely affected by changes in U.S. tax laws and regulations.

From time to time, the U.S. Government may introduce new tax laws and regulations, or interpretations of existing income tax laws could change, causing an adverse effect on our business, financial condition and results of operations. For example, changes in tax laws contained in the Tax Cuts and Jobs Act of 2017 (the “Tax Cuts and Jobs Act”), which was enacted in December 2017, include a number of provisions that will have an impact on the banking industry, borrowers and the market for residential real estate. Included in this legislation was a reduction of the corporate income tax rate from 35% to 21%. In addition, other changes included: (i) a lower limit on the deductibility of mortgage interest on single-family residential mortgage loans, (ii) the elimination of interest deductions for home equity loans, (iii) a limitation on the deductibility of business interest expense and (iv) a limitation on the deductibility of property taxes and state and local income taxes.

We are subject to additional state and local taxes as a result of CCBX operations.

We are subject to additional state and local taxes and related reporting requirements related to our CCBX operations. The added recordkeeping burden as well as additional expense that could result from the expansion of CCBX into new regions may have an adverse impact on our business, financial condition and results of operations.

We expect that the implementation of a new accounting standard could require us to increase our allowance for loan losses and may have an adverse effect on our business, financial condition and results of operations.

The FASB, has adopted a new accounting standard, ~~referred to as Current Expected Credit Loss (“CECL”),~~CECL, which requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans, and provide for the expected credit losses as allowances for loan losses. ~~As a smaller reporting company, we will be required to implement~~We adopted CECL ~~beginning as of~~effective January 1, 2023. CECL will change the current method of providing allowances for loan losses that are probable, which we expect could require us to increase our allowance for loan losses, and will likely greatly increase the data we would need to collect and review to determine the appropriate level of the allowance for loan losses. Any increase in our allowance for loan losses, or expenses incurred to determine the appropriate level of the allowance for loan losses, may have an adverse effect on our financial condition and results of operations. In addition, new accounting standards are issued or existing standards are revised periodically, changing the methods for preparing our

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Table of our customers or improper use of confidential information, each of which can be particularly damaging for financial institutions. It is not always possible to prevent employee and vendor errors and misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Employee and vendor errors could also subject us to financial claims for negligence.

financial statements. These changes are not within our control and may significantly impact our business, financial condition and results of operations.

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

We rely on the ability of our employees and systems to process a high number of transactions. Operational risk is the risk of loss resulting from our operations, including but not limited to, the risk of fraud or other misconduct by employees or outside persons, the improper use of confidential information, the execution of

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unauthorized transactions by employees, errors relating to transaction processing and technology, breaches of our internal control system and compliance requirements, high volume of transactions processed for our strategic partners, and business continuation and disaster recovery. Insurance coverage may not be available for such losses, or where available, such losses may exceed insurance limits. This risk of loss also includes the potential legal actions, including claims for negligence, that could arise as a result of an operational deficiency or as a result of noncompliance with applicable regulations, adverse business decisions or their implementation, and customer attrition due to potential negative publicity. We maintain a system of internal controls to mitigate operational risks, including data processing system failures and errors and customer or employee fraud, as well as insurance coverage designed to protect us from material losses associated with these risks, including losses resulting from any associated business interruption. It is not always possible to prevent employee or third-party errors or misconduct. Although our control testing has not identified any significant deficiencies in our internal control system, a breakdown in our internal control system, improper operation of our systems or improper employee actions could result in material financial loss to us, the imposition of regulatory action, and damage to our reputation.

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

The use of statistical and quantitative models and other quantitative analyses is widespread in bank decision-making, and the employment of such analyses is becoming increasingly widespread in our operations. Liquidity stress testing, interest rate sensitivity analysis, and the identification of possible violations of anti-money laundering regulations are all examples of areas in which we are dependent on models and the data that underlies them. The use of statistical and quantitative models is also becoming more prevalent in regulatory compliance. While we are not subject to stress testing under the Dodd-Frank Act, we anticipate that model-derived testing may become more extensively implemented by regulators in the future.

We anticipate data-based modeling will penetrate further into bank decision-making, particularly risk management efforts, as the capacities developed to meet rigorous stress testing requirements are able to be employed more widely and in differing applications. While we believe these quantitative techniques and approaches improve our decision-making, they also create the possibility that faulty data or flawed quantitative approaches could negatively impact our decision-making ability or, if we become subject to regulatory stress testing in the future, adverse regulatory scrutiny. Further, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision-making.

We depend on the accuracy and completeness of information provided to us by our borrowers and counterparties and any misrepresented information could adversely affect our business, financial condition and results of operations.

In deciding whether to approve loans or to enter into other transactions with borrowers and counterparties, we rely on information furnished to us by, or on behalf of, borrowers and counterparties, including financial statements, credit reports and other financial information. We also rely on representations of borrowers and counterparties as to the accuracy and completeness of that information and, with respect to financial statements, on reports of independent auditors. If any of this information is intentionally or negligently misrepresented and such misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than expected and we may be subject to regulatory action. Whether a misrepresentation is made by the loan applicant, another third party, or one of our employees, we generally bear the risk of loss associated with the misrepresentation. Our controls and processes may not have detected, or may not detect all, misrepresented information in our loan originations or from our business clients. Any such misrepresented information could adversely affect our business, financial condition and results of operations.

~~We are subject to certain operational risks, including, but not limited to, customer, vendor, employee or third-party fraud and data processing system failures and errors.~~

Because we are a financial institution, employee errors and employee, vendor or customer misconduct could subject us in particular to financial losses or regulatory sanctions and seriously harm our reputation. Misconduct by our employees or a vendor could include hiding unauthorized activities from us, improper or unauthorized activities on behalf

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We maintain a system of internal controls to mitigate operational risks, including data processing system failures and errors and customer or employee fraud, as well as insurance coverage designed to protect us from material losses associated with these risks, including losses resulting from any associated business interruption. If our internal controls fail to prevent or detect an occurrence, or if any resulting loss is not insured or exceeds applicable insurance limits, it could adversely affect our business, financial condition and results of operations.

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We could recognize losses on investment securities held in our securities portfolio, particularly if interest rates increase or economic and market conditions deteriorate.

While we attempt to invest a significant majority of our total assets in loans (our loan-to-asset ratio was ~~66.1%~~83.6% as of December 31, ~~2021)~~2022), we invest a percentage of our total assets ~~(1.4%~~(3.2% as of December 31, ~~2021)~~2022) in investment securities with the primary objectives of providing a source of liquidity and meeting pledging requirements. As of December 31, ~~2021,~~2022, the fair value of our available for sale investment securities portfolio was ~~$35.3~~$97.3 million, which included a net unrealized ~~gain~~loss of ~~$5,000,~~$3.0 million, and the fair value of our held to maturity investment securities was ~~$1.3 million,~~$916,000, which included a net unrealized ~~gain~~loss of ~~$52,000.~~$120,000. Factors beyond our control can significantly and adversely influence the fair value of securities in our portfolio. For example, fixed-rate securities are generally subject to decreases in market value when interest rates rise. Additional factors include, but are not limited to, rating agency downgrades of the securities, defaults by the issuer or individual borrowers with respect to the underlying securities, and instability in the credit markets. Any of the foregoing factors could cause other-than-temporary impairment in future periods and result in realized losses. The process for determining whether impairment is other-than-temporary usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security. Although we have not recognized other-than-temporary impairment related to our investment portfolio as of December 31, ~~2021,~~2022, changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, among other factors, may cause us to recognize losses in future periods, which could have an adverse effect on our business, financial condition and results of operations.

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

The preparation of financial statements and related disclosures in conformity with U.S. Generally Accepted Accounting Principles (“GAAP”) requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and related notes to those financial statements. Our critical accounting policies, which are included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Report on Form 10-K, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures. As a result, if future events or regulatory views concerning such analysis differ significantly from the judgments, assumptions and estimates in our critical accounting policies, those events or assumptions could have a material impact on our consolidated financial statements and related disclosures, in each case resulting in our needing to revise or restate prior period financial statements, cause damage to our reputation and the price of our common stock, and adversely affect our business, financial condition and results of operations.

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

External security systems with which we are connected, whether directly or indirectly, through the community bank or CCBX, can be sources of risk to us. We may be exposed not only to a systems failure with which we are directly connected, but also to a systems breakdown of a party to CCBX or other relationship to which we are connected. This is particularly the case where activities of customers or those parties are beyond our security and control systems, including through the use of the internet, cloud computing services and personal smart phones and other mobile devices or services.

If that party experiences a breach of its own systems or misappropriates that data, this could result in a variety of negative outcomes for us and our customers, including:

•

~~losses from fraudulent transactions, as well as potential liability for losses that exceed thresholds established in consumer protection laws and regulations,~~

•losses from fraudulent transactions, as well as potential liability for losses that exceed thresholds established in consumer protection laws and regulations,•

~~increased operational costs to remediate the consequences of the external party’s security breach,~~

•increased operational costs to remediate the consequences of the external party’s security breach,•

~~negative impact on future revenues; and~~

•negative impact on future revenues; and•

~~harm to reputation arising from the perception that our systems may not be secure.~~

•harm to reputation arising from the perception that our systems may not be secure.

We are highly dependent on the accuracy and effectiveness of its operational processes and systems and the operational processes and systems of external parties related to the community bank and CCBX.

We rely comprehensively on financial, accounting, transaction execution, data processing and other operational systems to process, record, monitor and report a large number of transactions on a continuous basis, and to do so

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accurately, quickly and securely. In addition to the proper design, installation, maintenance and training of our own operational systems, we rely on the effective functioning of operational systems of external parties related to the community bank and CCBX. Breakdowns in these operational systems could result in:

•

~~the inability to accurately and timely settle transactions,~~

•the inability to accurately and timely settle transactions,•

~~the possibility that funds transfers or other transactions are executed erroneously, or with unintended consequences,~~

•the possibility that funds transfers or other transactions are executed erroneously, or with unintended consequences,

•

financial losses incurred, or possible restitution to customers, resulting from contractual agreements with external parties related to the community bank and CCBX,

•

regulatory issues,

•

higher operational costs, associated with replacing or recovering systems that are inoperable or unavailable,

•

loss of confidence in our ability to protect against and withstand operational disruptions, thus impacting our ability to market and establish new relationships in the CCBX segment, and

•

harm to our reputation.

As the speed, frequency, volume, interconnectivity and complexity of transactions within our CCBX segment continues to increase, it becomes more challenging to effectively maintain systems and mitigate risks such as:

•

~~errors made by us or external parties doing business with the community bank and CCBX, whether inadvertent or malicious; and~~

•errors made by us or external parties doing business with the community bank and CCBX, whether inadvertent or malicious; and•

~~isolated or seemingly insignificant errors or losses, which migrate to other systems or grow in number, to become larger issues or losses.~~

•isolated or seemingly insignificant errors or losses, which migrate to other systems or grow in number, to become larger issues or losses.

We may be subject to potential business risk from actions by our regulators related to CCBX relationships.

Our regulators could impose restrictions on the businesses served in our CCBX segment or restrict the number of different relationships the Company can hold. Regulatory restrictions placed on the parties served in the Company’s CCBX segment could result in reduced demand for services, reduced future revenue in the CCBX segment, or loss of current relationships. Regulatory restrictions that limit the number of relationships the Company can hold in its CCBX segment would result in reduced future revenue and limit the potential for growth in that segment.

Risks Related to Strategic and Reputational Matters

Our business strategy includes growth, and our business, financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.

Our business strategy includes growth in assets, deposits and the scale of our operations. Achieving such growth will require us to attract customers that currently bank at other financial institutions in our market area. Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competition from other financial institutions in our market area and our ability to manage our growth. Growth opportunities may not be available or we may not be able to manage our growth successfully. If we do not manage our growth effectively, our financial condition and operating results could be negatively affected. Furthermore, there can be considerable costs involved in expanding deposit and lending capacity that generally require a period of time to generate the necessary revenues to offset ~~their~~these costs, especially in areas in which we do not have an established presence and that require alternative delivery methods. Accordingly, any such business expansion can be expected to negatively impact our earnings for some period of time until certain economies of scale are reached. Our expenses could be further increased if we encounter delays in modernizing existing facilities, opening new branches or deploying new services.

Our expansion strategy focuses on organic growth of our community bank and the expansion of our CCBX segment. We may not be able to execute on aspects of our expansion strategy, which may impair our ability to sustain our historical rate of growth or prevent us from growing at all. More specifically, we may not be able to generate sufficient new loans and deposits within acceptable risk and expense tolerances, obtain the personnel or funding necessary for additional growth or find suitable ~~acquisition candidates.~~new strategic partners. The success of our strategy also depends on our ability to effectively manage growth, which is dependent upon a number of factors, including our ability to adapt our credit, operational, technology and governance infrastructure to accommodate expanded operations. If we fail to implement one or more aspects of our strategy, we may be unable to maintain our historical earnings trends, which could have an adverse effect on our business, financial condition and results of operations.

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Strong competition within our market area could hurt our profits and slow growth.

Our profitability depends upon our continued ability to compete successfully in our market area. We face intense competition both in making loans and attracting deposits. Our competitors for commercial real estate loans include other community banks and commercial lenders, some of which are larger than us and have greater resources and lending limits than we have and offer services that we do not provide. We face stiff competition for one-to-four family residential loans from other financial service providers, including large national residential lenders and local community banks. Other competitors for one-to-four family residential loans include credit unions and mortgage brokers which keep overhead costs and mortgage rates down by selling loans and not holding or

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servicing them. Price competition for loans and deposits might result in us earning less on our loans and paying more on our deposits, which reduces net interest income. We expect competition to remain strong in the future.

The Washington DFI has entered into a multi-state agreement with six other states that is intended to streamline the licensing process for money service businesses, which include money transmitters and payment service providers. Increasing the relative ease of obtaining a license to operate a money service business within the state of Washington may encourage financial technology, or fintech, companies to offer services in the state, thereby increasing competition for such services.

We rely heavily on our executive management team and other key employees, and we could be adversely affected by the unexpected loss of their services.

Our success depends in large part on the performance of our executive management team and other key personnel, as well as on our ability to attract, motivate and retain highly qualified senior and middle management and other skilled employees. Competition for qualified employees is intense, and the process of locating key personnel with the combination of skills, attributes and business relationships required to execute our business plan may be lengthy. We may not be successful in retaining our key employees, and the unexpected loss of services of one or more of our key personnel could have an adverse effect on our business because of their skills, knowledge of and business relationships within our primary markets, years of industry experience and the difficulty of promptly finding qualified replacement personnel. If the services of any of our key personnel should become unavailable for any reason, we may not be able to identify and hire qualified persons on terms acceptable to us, or at all, which could have an adverse effect on our business, financial condition and results of operations.

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

Our second amended and restated articles of incorporation and our amended and restated bylaws, (“bylaws”), may have an anti-takeover effect and may delay, discourage or prevent an attempted acquisition or change of control or a replacement of our incumbent board of directors or management. Our governing documents include provisions that:

•

~~empower our board of directors, without shareholder approval, to issue preferred stock, the terms of which, including voting power, are to be set by our board of directors;~~

•empower our board of directors, without shareholder approval, to issue preferred stock, the terms of which, including voting power, are to be set by our board of directors;•

~~establish a classified board of directors, with directors of each class serving a three-year term;~~

•establish a classified board of directors, with directors of each class serving a three-year term;•

~~provide that directors may be removed from office without cause only by vote of 80% of the outstanding shares then entitled to vote;~~

•provide that directors may be removed from office without cause only by vote of 80% of the outstanding shares then entitled to vote;•

~~eliminate cumulative voting in elections of directors;~~

•eliminate cumulative voting in elections of directors;•

~~permit our board of directors to alter, amend or repeal our bylaws or to adopt new bylaws;~~

•permit our board of directors to alter, amend or repeal our bylaws or to adopt new bylaws;•

~~require the request of holders of at least one-third of the outstanding shares of our capital stock entitled to vote at a meeting to call a special shareholders’ meeting;~~

•require the request of holders of at least one-third of the outstanding shares of our capital stock entitled to vote at a meeting to call a special shareholders’ meeting;•

require shareholders that wish to bring business before annual meetings of shareholders, or to nominate candidates for election as directors at our annual meeting of shareholders, to provide timely notice of their intent in writing;

•require shareholders that wish to bring business before annual meetings of shareholders, or to nominate candidates for election as directors at our annual meeting of shareholders, to provide timely notice of their intent in writing;•

~~require that certain business combination transactions with a significant shareholder be approved by holders of two-thirds of the shares held by persons other than the significant shareholder; and~~

•

enable our board of directors to increase, between annual meetings, the number of persons serving as directors and to fill the vacancies created as a result of the increase by a majority vote of the directors present at a meeting of directors.

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•require that certain business combination transactions with a significant shareholder be approved by holders of two-thirds of the shares held by persons other than the significant shareholder; and

•enable our board of directors to increase, between annual meetings, the number of persons serving as directors and to fill the vacancies created as a result of the increase by a majority vote of the directors present at a meeting of directors.

In addition, certain provisions of Washington law, including a provision which restricts certain business combinations between a Washington corporation and certain affiliated shareholders, may delay, discourage or prevent an attempted acquisition or change in control. Furthermore, banking laws impose notice, approval, and ongoing regulatory requirements on any shareholder or other party that seeks to acquire direct or indirect “control” of an FDIC-insured depository institution or its holding company. These laws include the BHC Act, the Change in Bank Control Act, and comparable banking laws in the State of Washington. These laws could delay or prevent an acquisition.

We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our business, financial condition and earnings.

Our business requires the collection and retention of large volumes of customer data, including personally identifiable information in various information systems that we maintain and in those maintained by third parties with whom we contract to provide data services. We also maintain important internal company data such as personally identifiable information about our employees and information relating to our operations. We are subject to complex and increasingly demanding laws and regulations

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governing the privacy and protection of personal information of individuals (including customers, employees, suppliers and other third parties). For example, our business is subject to the Gramm-Leach-Bliley Act which, among other things: (i) imposes certain limitations on our ability to share nonpublic personal information about our customers with nonaffiliated third parties; (ii) requires that we provide certain disclosures to customers about our information collection, sharing and security practices and afford customers the right to “opt out” of any information sharing by us with nonaffiliated third parties (with certain exceptions); and (iii) requires that we develop, implement and maintain a written comprehensive information security program containing appropriate safeguards based on our size and complexity, the nature and scope of our activities, and the sensitivity of customer information we process, as well as plans for responding to data security breaches. Various state and federal laws and regulations impose data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs.

Furthermore, we may not be able to ensure that all of our clients, suppliers, counterparties, broker dealers and financial providers in CCBX, and other third parties have appropriate controls in place to protect the confidentiality of the information that they exchange with us, particularly where such information is transmitted by electronic means. If personal, confidential or proprietary information of customers or others were to be mishandled or misused (in situations where, for example, such information was erroneously provided to parties who are not permitted to have the information, or where such information was intercepted or otherwise compromised by third parties), we could be exposed to litigation or regulatory sanctions under personal information laws and regulations. Concerns regarding the effectiveness of our measures to safeguard personal information, or even the perception that such measures are inadequate, could cause us to lose customers or potential customers for our products and services and thereby reduce our revenues. Accordingly, any failure or perceived failure to comply with applicable privacy or data protection laws and regulations may subject us to inquiries, examinations and investigations that could result in requirements to modify or cease certain operations or practices or in significant liabilities, fines or penalties, and could damage our reputation and otherwise adversely affect our business, financial condition and earnings.

We are dependent on our information technology and telecommunications systems and third-party service providers; systems failures, interruptions, security breaches and cybersecurity threats could have an adverse effect on our business, financial condition and results of operations.

Our business is dependent on the successful and uninterrupted functioning of our information technology and telecommunications systems and third-party service providers. The failure of these systems, or the termination of a third-party software license or service agreement on which any of these systems is based, could interrupt our operations. Because our information technology and telecommunications systems interface with and depend on third-party systems, we could experience service denials if demand for such services exceeds capacity or such third-party systems fail or experience

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interruptions. If significant, sustained or repeated, a system failure or service denial could compromise our ability to operate effectively, damage our reputation, result in a loss of customer business, and/or subject us to additional regulatory scrutiny and possible financial liability, any of which could have an adverse effect on our business, financial condition and results of operations.

In the ordinary course of our business, we collect and store sensitive data, including our proprietary business information and that of our customers, suppliers and business partners, as well as personally identifiable information about our customers and employees. The processing that takes place with our strategic partners could potentially have an adverse impact on us in the event of a security breach of their systems. The secure processing, maintenance and transmission of this information is critical to our operations and business strategy. We, our customers, and other financial institutions with which we interact, are subject to increasingly frequent, continuous attempts, including ransomware and malware attacks, to penetrate key systems by individual hackers, organized criminals, and in some cases, state-sponsored organizations. Our systems and our third-party service providers’ systems have been, and will likely continue to be, subject to advanced computer viruses or other malicious codes, ransomware, unauthorized access attempts, denial of service attacks, phishing, social engineering, hacking and other cyber-attacks.

We have a cybersecurity program that includes internal/external penetration testing, regular vulnerability assessments, detailed vulnerability management, data loss prevention controls, file access and integrity monitoring and reporting and threat intelligence. While we have established policies and procedures to prevent or limit the impact of cyber-attacks, there can be no assurance that such events will not occur or will be adequately addressed if they do. In addition, we also outsource certain cybersecurity functions, such as penetration testing, to third-party service providers, and the failure of these service providers to adequately perform such functions could increase our exposure to security breaches and cybersecurity threats. Despite our security measures, our information technology and infrastructure may be vulnerable to attacks by hackers or breached due to employee error, malfeasance or other malicious code and cyber-attacks that could have an impact on information security. Any such breach or attacks could compromise our networks and the information stored there could be accessed, publicly disclosed, lost or stolen. Any such unauthorized access, disclosure or other loss of information could result in legal claims or proceedings, liability under laws that protect the privacy of personal information, and regulatory penalties; disrupt our operations and the services we provide to customers; damage our reputation; and cause a loss of confidence in our products and services, all of which could adversely affect our business, financial condition and results of operations. Further, to the extent that the activities of our third-party service providers or the

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

Risks Related to Our Capital and Liquidity

Ineffective liquidity management could adversely affect our business, financial condition and results of operations.

Effective liquidity management is essential for the operation of our business. We require sufficient liquidity to meet customer loan requests, customer deposit maturities/withdrawals, payments on our debt obligations as they come due and other cash commitments under both normal operating conditions and other unpredictable circumstances causing industry or general financial market stress. Our access to funding sources in amounts adequate to finance our activities on terms that are acceptable to us could be impaired by factors that affect us specifically or the financial services industry or economy generally. Factors that could detrimentally impact our access to liquidity sources include a downturn in the geographic markets in which our loans and operations are concentrated or difficult credit markets. Our access to deposits may also be affected by the liquidity needs of our depositors. In particular, a majority of our liabilities are checking accounts and other liquid deposits, which are payable on demand or upon several days’ notice, while by comparison, a substantial majority of our assets are loans, which cannot be called or sold in the same time frame. Although we have historically been able to replace maturing deposits and advances as necessary, we might not be able to replace such funds in the future, especially if a large number of our depositors seek to withdraw their accounts, regardless of the reason. A failure to maintain adequate liquidity could adversely affect our business, financial condition and results of operations.

We may need to raise additional capital in the future, and such capital may not be available when needed or at all.

We may need to raise additional capital, in the form of additional debt or equity, in the future to have sufficient capital resources and liquidity to meet our commitments and fund our business needs and future growth, particularly if the quality of our assets or earnings were to deteriorate significantly. Our ability to raise additional capital, if needed, will depend on, among other things, conditions in the capital markets at that time, which are outside of our control, and our financial condition. Economic conditions and a loss of confidence in financial institutions may increase our cost of funding

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and limit access to certain customary sources of capital or make such capital only available on unfavorable terms, including interbank borrowings, repurchase agreements and borrowings from the discount window of the Federal Reserve. We may not be able to obtain capital on acceptable terms or at all. Any occurrence that may limit our access to the capital markets, such as a decline in the confidence of debt purchasers, depositors of our bank or counterparties participating in the capital markets or other disruption in capital markets, may adversely affect our capital costs and our ability to raise capital and, in turn, our liquidity. Further, if we need to raise capital in the future, we may have to do so when many other financial institutions are also seeking to raise capital and would then have to compete with those institutions for investors. An inability to raise additional capital on acceptable terms when needed could have an adverse effect on our business, financial condition and results of operations.

There may be future sales or other dilution of our equity, which may adversely affect the market price of our securities.

We may seek to raise additional capital in the future through equity offerings. The issuance of additional shares of common stock or the issuance of convertible securities would dilute the ownership interest of our existing common shareholders. The market price of our common stock could decline as a result of an equity offering, as well as other sales of a large block of shares of our common stock or similar securities in the market after an equity offering, or the perception that such sales could occur. Both we and our regulators perform a variety of analyses of our assets, including the preparation of stress case scenarios, and as a result of those assessments we could determine, or our regulators could require us, to raise additional capital.

Risks Related to Our Industry

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

We are subject to extensive government regulation, supervision and ~~examination.~~examination at both the federal and state level. The Bank’s deposits are insured in whole or in part by the FDIC. The Bank is subject to regulation by the Federal Reserve and the Washington DFI. The Federal Reserve also has supervisory authority over the Company. Such regulation, supervision and examination govern the activities in which we may engage, and are intended primarily for the protection of the deposit insurance fund and the Bank’s depositors, rather than for shareholders.

~~In 2010~~

Compliance with applicable laws and ~~2011, in response~~regulations can be difficult and costly, and changes to ~~the financial crisis~~laws and ~~recession that began in 2008,~~regulations can impose additional compliance costs. The Dodd-Frank Act, which imposed significant regulatory and ~~legislative~~compliance changes ~~resulted in broad reform and increased regulation affecting financial institutions. The Dodd-Frank Act created a significant shift in the way~~on financial institutions, operate. The Dodd-Frank Act also created the CFPB to implement consumer protection and fair lending laws, a function that was formerly performed by the depository institution regulators. The Dodd-Frank Act contains various provisions designed to enhance the regulationis an example of ~~depository institutions and prevent the recurrence~~this type of a financial crisis such as that which occurred in 2008 and 2009. The Dodd-Frank Act has had and may continue to have a material impact on our operations, particularly through increased regulatory burden and compliance costs. On May 24, 2018, the EGRRCPA becamefederal law. ~~Among other things, the EGRRCPA changed certain of the regulatory requirements of the Dodd-Frank Act and includes provisions intended to relieve the regulatory burden on community banks.~~ Any future legislative changes could have a material impact on our profitability, the value of assets held for investment or the value of collateral for loans. Future legislative changes could also require changes to business practices and potentially expose us to additional costs, liabilities, enforcement action and reputational risk.

Federal regulatory agencies have the ability to take strong supervisory actions against financial institutions that have experienced increased loan production and losses and other underwriting weaknesses or have compliance weaknesses. These actions include entering into formal or informal written agreements and cease and desist orders that place certain limitations on their operations. If we were to become subject to a regulatory action, such action could negatively impact our ability to execute our business plan, and result in operational restrictions, as well as our ability to grow, pay dividends, repurchase stock or engage in

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mergers and acquisitions. See “Item 1. Business—Regulation and Supervision—Bank Regulation and Supervision—Capital Adequacy” for a discussion of regulatory capital requirements.

~~Increases~~

Additional increases in Federal Deposit Insurance Corporation insurance premiums could adversely affect our earnings and results of operations.

The deposits of the Bank are insured by the FDIC up to legal limits and, accordingly, subject it to the payment of FDIC deposit insurance assessments. The Bank's regular assessments are determined by the level of its assessment base and its risk classification, which is based on its regulatory capital levels and the level of supervisory concern that it poses, as well as by its usage of brokered deposits. Moreover, the FDIC has the unilateral power to change deposit insurance assessment rates and the manner in which deposit insurance is calculated and also to charge special assessments to FDIC-insured institutions. The FDIC utilized all of these powers during the financial crisis for the purpose of restoring the reserve ratios of the Deposit Insurance ~~Fund.~~ Fund, and more recently increased assessment rates to address extraordinary growth in the amount of insured deposits resulting from the COVID-19 pandemic.

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Any future special assessments, increases in assessment rates or premiums, or required prepayments in FDIC insurance premiums could reduce our profitability or limit our ability to pursue certain business opportunities, which could adversely affect our business, financial condition, and results of operations.

Federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations could adversely affect us.

As part of the bank regulatory process, the Federal Reserve and the Washington DFI periodically conduct comprehensive examinations of our business, including compliance with laws and regulations. If, as a result of an examination, either of these banking agencies were to determine that the financial condition, capital resources, asset quality, earnings prospects, management, liquidity, asset sensitivity, risk management or other aspects of any of our operations had become unsatisfactory, or that our Company, the Bank or their respective management were in violation of any law or regulation, it may take a number of different remedial actions as it deems appropriate. The Federal Reserve may enjoin “unsafe or unsound” practices or violations of law, require affirmative actions to correct any conditions resulting from any violation or practice, issue an administrative order that can be judicially enforced, direct an increase in our capital levels, restrict our growth, assess civil monetary penalties against us, the Bank or their respective officers or directors, and remove officers and directors. The FDIC also has authority to review our financial condition, and, if the FDIC were to conclude that the Bank or its directors were engaged in unsafe or unsound practices, that the Bank was in an unsafe or unsound condition to continue operations, or the Bank or the directors violated applicable law, the FDIC could move to terminate the Bank’s deposit insurance. If we become subject to such regulatory actions, our business, financial condition, and results of operations as well as our reputation could be adversely affected.

Many of our new activities and expansion plans require regulatory approvals, and failure to obtain these approvals may restrict our growth.

We intend to complement and expand our business by growing our BaaS segment, expanding the Bank’s banking location network, or de novo branching, and pursuing strategic acquisitions of financial institutions and other complementary businesses. Generally, we must receive federal and state regulatory approval before we can acquire a depository institution or related business insured by the FDIC or before we open a de novo branch. In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the acquisition on competition, our financial condition, our future prospects, and the impact of the proposal on U.S. financial stability. The regulators also review current and projected capital ratios and levels, the competence, experience and integrity of management and its record of compliance with laws and regulations, the convenience and needs of the communities to be served (including the acquiring institution’s record of compliance under the CRA) and the effectiveness of the acquiring institution in combating money laundering activities. Such regulatory approvals may not be granted on terms that are acceptable to us, or at all.

Federal bank regulators have increasingly focused on the risks related to bank and fintech company partnerships, raising concerns regarding risk management, oversight, internal controls, information security, change management, and information technology operational resilience. This focus is demonstrated by recent regulatory enforcement actions against other banks that have allegedly not adequately addressed these concerns while growing their BaaS offerings. We could be subject to additional regulatory scrutiny with respect to our CCBX business that could have a material adverse effect on the business, financial condition, results of operations and growth prospects of the Company.

Financial institutions, such as the Bank, face a risk of noncompliance with and enforcement action under the Bank Secrecy Act and other anti-money laundering statutes and regulations.

The Bank Secrecy Act, the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (“USA PATRIOT Act”), and other laws and regulations require financial institutions, among other duties, to institute and maintain an effective anti-money laundering program and file suspicious activity and currency transaction reports as appropriate. The Financial Crimes Enforcement Network, established by the Treasury Department to administer the Bank Secrecy Act, has authority to impose significant civil money penalties for violations of these requirements and has recently engaged in coordinated enforcement efforts with the individual federal banking regulators, as well as the U.S. Department of Justice, Drug Enforcement Administration and the Internal Revenue Service. There is also increased scrutiny of compliance with the sanctions programs and rules administered and enforced by the Treasury Department’s Office of Foreign Assets Control.

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In order to comply with regulations, guidelines and examination procedures in this area, we have dedicated significant resources to our anti-money laundering program. If our policies, procedures and systems are deemed deficient, we could be subject to liability, including fines and regulatory actions such as restrictions on our ability to pay dividends and the inability to obtain regulatory approvals to proceed with certain aspects of our business plans, including acquisitions and de novo branching.

We are subject to numerous laws designed to promote community reinvestment or protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.

The CRA requires the Federal Reserve to assess the Bank’s performance in meeting the credit needs of the communities it serves, including low- and moderate-income neighborhoods, and if the Bank performs unsatisfactorily, various adverse regulatory consequences may ensue, including an inability to secure regulatory approval of expansionary transactions or new branches.

Additionally, in May 2022 the federal banking agencies issued a proposed rule that may make it more challenging and/or costly for insured depository institutions to achieve an “Outstanding” or “Satisfactory” CRA rating, which could negatively impact our ability to obtain regulatory approval for an acquisition.

In addition, the Equal Credit Opportunity Act, the Fair Housing Act and other fair lending laws and regulations impose nondiscriminatory lending requirements on financial institutions. The federal banking agencies, the CFPB, the U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations. The CFPB was created under the Dodd-Frank Act to centralize responsibility for consumer financial protection with broad rulemaking authority to administer and carry out the purposes and objectives of federal consumer financial laws with respect to all financial institutions that offer financial products and services to consumers. The CFPB is also authorized to prescribe rules applicable to any covered person or service provider, identifying and prohibiting acts or practices that are “unfair, deceptive, or abusive” in connection with any transaction with a consumer for a consumer financial product or service, or the offering of a consumer financial product or service. The broad rulemaking powers of the CFPB have potential to have a significant impact on the operations of financial institutions offering consumer financial products or services.

A successful regulatory challenge to an institution’s performance under fair lending laws or regulations, or other consumer lending laws and regulations could result in a wide variety of sanctions, including damages and civil money penalties, injunctive relief, restrictions on mergers and acquisitions activity, restrictions on expansion, and restrictions on entering new business lines. Private parties may also have the ability to challenge an institution’s performance under fair lending laws in private class action litigation. Such actions could have an adverse effect on our business, financial condition and results of operations.

Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.

Federal, state and local laws have been adopted that are intended to eliminate certain lending practices considered “predatory.” These laws prohibit practices such as steering borrowers away from more affordable products, selling unnecessary insurance to borrowers, repeatedly refinancing loans and making loans without a reasonable expectation that the borrowers will be able to repay the loans irrespective of the value of the underlying property. It is our policy not to make predatory loans, but these laws create the potential for liability with respect to our lending activities. They increase our cost of doing business and, ultimately, may prevent us from making certain loans and cause us to reduce the average percentage rate or the points and fees on loans that we do make.

The expanding body of federal, state and local regulations and/or the licensing of loan servicing, collections or other aspects of our business and our sales of loans to third parties may increase the cost of compliance and the risks of noncompliance and subject us to litigation.

We service most of our own community bank loans ~~some~~and CCBX partners service most loans ~~they originate for us, and loan~~originated through them. Loan servicing is subject to extensive regulation by federal, state and local governmental authorities, as well as various laws and judicial and administrative decisions imposing requirements and restrictions on those activities. The volume of new or modified laws and regulations has increased in recent years and, in addition, some individual municipalities have begun to enact laws that restrict loan servicing activities, including delaying or temporarily preventing foreclosures or forcing the modification of certain mortgages. If regulators impose new or more restrictive requirements, we may incur additional significant costs to comply with such requirements, which may further adversely affect us. In addition, were we to be subject to regulatory investigation or regulatory action regarding our loan modification and foreclosure practices, our business, financial condition and results of operations could be adversely affected.

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Our failure to comply with applicable laws and regulations could possibly lead to: civil and criminal liability; loss of licensure; damage to our reputation in the industry; fines and penalties and litigation, including class action lawsuits; and administrative enforcement actions. Any of these outcomes could adversely affect us.

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The Federal Reserve may require us to commit capital resources to support the Bank.

The Federal Reserve requires a bank holding company to act as a source of financial and managerial strength to its subsidiary banks and to commit resources to support its subsidiary banks. Under the “source of strength” doctrine that was codified by the Dodd-Frank Act, the Federal Reserve may require a bank holding company to make capital injections into a troubled subsidiary bank at times when the bank holding company may not otherwise be inclined to do so and may charge the bank holding company with engaging in unsafe and unsound practices for failure to commit resources to such a subsidiary bank. Under the prompt corrective action regime, if the Bank were to become undercapitalized, we would be required to guarantee the Bank’s plan to restore its capital subject to certain limits. See “Item 1. Business—Regulation and Supervision—Bank Regulation and Supervision—Prompt Corrective Action.” Accordingly, we could be required to provide financial assistance to the Bank if it experiences financial distress.

A capital injection may be required at a time when our resources are limited, and we may be required to borrow the funds or raise capital to make the required capital injection. Any loan by a bank holding company to its subsidiary bank is subordinate in right of payment to deposits and certain other indebtedness of such subsidiary bank. In the event of a bank holding company’s bankruptcy, the bankruptcy trustee will assume any commitment by the holding company to a federal bank regulatory agency to maintain the capital of a subsidiary bank. Moreover, bankruptcy law provides that claims based on any such commitment will be entitled to a priority of payment over the claims of the holding company’s general unsecured creditors, including the holders of any note obligations. Thus, any borrowing by a bank holding company for the purpose of making a capital injection to a subsidiary bank often becomes more difficult and expensive relative to other corporate borrowings.

We could be adversely affected by the soundness of other financial institutions.

Financial services institutions are interrelated as a result of trading, clearing, counterparty or other relationships. We have exposure to many different industries and counterparties, and routinely execute transactions with counterparties in the financial services industry, including commercial banks, brokers and dealers, investment banks and other institutional clients. Many of these transactions expose us to credit risk in the event of a default by a counterparty or client. In addition, our credit risk may be exacerbated when our collateral cannot be foreclosed upon or is liquidated at prices not sufficient to recover the full amount of the credit or derivative exposure due. Any such losses could adversely affect our business, financial condition and results of operations.

We could be adversely affected by the soundness of our CCBX partners.

A growing portion of our revenue, deposits and loans are derived from CCBX partner activities. If our partners are not operating soundly, we may be adversely impacted through decreased revenue, increased loan losses and reduced deposits. Our CCBX partners originate their loans in compliance with our credit standards and policies. Additionally, partners provide fraud and credit enhancements on ~~all~~many of our CCBX loans. If any CCBX partners encounter operating difficulties, we may experience reduced revenue, increased loan losses if credit and fraud enhancement obligations are not met, and reduced deposits, which may impact liquidity. Any such losses could adversely affect our business, financial condition and results of operations.

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General Risk Factors

~~The effects of COVID-19, and the impact of actions to mitigate it, could adversely affect our business, financial condition and results of operations.~~

The economic effects of the COVID-19 pandemic have had a destabilizing effect on financial markets, key market indices and overall economic activity. The uncertainty regarding the duration of the pandemic and the resulting economic disruption has caused increased market volatility, inflation, unemployment, and reductions in consumer and business spending, consumer confidence and business generally. The continuation of these conditions caused by the COVID-19 pandemic, including the impacts of the CARES Act and other federal and state measures, specifically with respect to loan forbearances, may lead to an economic recession and can be expected to adversely impact our business and results of operations and the operations of our borrowers, customers and business partners. In particular, these events have led to, or can be expected to, among other things:

•

~~impair the ability of borrowers to repay outstanding loans or other obligations, resulting in increases in delinquencies;~~

•

~~impair the value of collateral securing loans (particularly with respect to real estate);~~

•

~~adversely affect our level of charge-offs and require an additional increase in our allowance for loan losses;~~

•

~~adversely affect the stability of our deposit base, or otherwise impair our liquidity;~~

•

~~impair the ability of loan guarantors to honor commitments;~~

•

~~negatively impact our regulatory capital ratios;~~

•

negatively impact the productivity and availability of key personnel and other employees necessary to conduct our business, and of third-party service providers who perform critical services for us, or otherwise cause operational failures due to changes in our normal business practices necessitated by the outbreak and related governmental actions;

•

~~increase cyber and payment fraud risk, given increased online and remote activity; and~~

•

~~broadly result in lost revenue and income.~~

Prolonged measures by health or other governmental authorities encouraging or requiring significant restrictions on travel, assembly or other core business practices have harmed and could further harm our business and those of our customers, in particular our small to medium sized business customers. Although we have business continuity plans and other safeguards in place, there is no assurance that they will be effective.

COVID-19 has led to federal, state and local governments enacting various restrictions in an attempt to limit the spread of the virus, including the declaration of a federal National Emergency; multiple cities’ and states’ declarations of states of emergency; school and business closings; limitations on social or public gatherings and other social distancing measures, such as working remotely, travel restrictions, quarantines and shelter in place orders. Such measures significantly contributed to rising unemployment and reductions in consumer and business spending. In response to the economic and financial effects of COVID-19, the Federal Reserve sharply reduced interest rates and instituted quantitative easing measures as well as domestic and global capital market support programs, including a number of lending facilities designed to provide emergency liquidity to various segments of the U.S. economy and financial markets. Many of these facilities expired December 31, 2020, or were extended for brief periods into 2021. If economic conditions decline, the absence of these facilities could have an adverse effect on the U.S. economy and ultimately on our business, financial condition and results of operations.

In addition, the Biden and Trump Administrations, Congress, various federal agencies and state governments have taken measures to address the economic and social consequences of the pandemic, including the passage of the CARES Act. The CARES Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing, loan forgiveness and automatic forbearance, and provides relief to financial institutions to avoid classifying certain COVID-19 related loan modifications as troubled debt restructurings (“TDRs”).

We processed loan applications under the PPP created under the CARES Act in rounds one and two, and also in round three which opened on January 19, 2021. We also participated in the Federal Reserve’s Main Street Lending Program (“MSLP”) and funded $59.2 million in MSLP loans as of December 31, 2021. Our participation in these programs could subject us to increased

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governmental and regulatory scrutiny, negative publicity or increased exposure to litigation, which could increase our operational, legal and compliance costs and damage our reputation. Moreover, if the federal stimulus measures are not effective in mitigating the effect of the COVID-19 pandemic, credit issues for our loan customers may be severe and adversely affect our business, financial condition and results of operations more substantially over a longer period of time.

The CARES Act and related guidance from the federal banking agencies provided financial institutions the option to temporarily suspend requirements under GAAP related to classification of certain loan modifications as TDRs, to account for the current and anticipated effects of COVID-19. The CARES Act, as amended by the Consolidated Appropriations Act, 2021, specifies that COVID-19 related loan modifications executed between March 1, 2020 and the earlier of (i) 60 days after the date of termination of the national emergency declared by the President and (ii) January 1, 2022, on loans that were current as of December 31, 2019 are not TDRs. Additionally, under guidance from the federal banking agencies, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs under ASC Subtopic 310-40, “Troubled Debt Restructuring by Creditors.” These modifications include short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. As of December 31, 2021, we had no loans on deferral status as a result of the CARES Act and interagency guidance.

Banking regulatory agencies have encouraged lenders to extend additional loans to various sectors, including small businesses. The full impact on our business activities as a result of new government and regulatory policies, programs and guidelines, as well as regulators’ reactions to such activities, remains uncertain.

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

Our business is directly impacted by factors such as economic, political and market conditions, broad trends in industry and finance, changes in government monetary and fiscal policies and inflation, foreign policy, and financial market volatility, all of which are beyond our control. Global economies continue to face significant challenges to achieving normalized economic growth rates and there are continuing concerns related to the level of U.S. government debt and fiscal actions that may be taken to address that debt. There can be no assurance that economic conditions will continue to improve, and these conditions could worsen. Any deterioration in the economies of the nation as a whole or in our markets would have an adverse effect, which could be material, on our business, financial condition, results of operations

46

and could also cause the market price of our stock to decline. While it is impossible to predict how long challenging economic conditions may exist, a slow or fragile recovery could continue to present risks into the future for the industry and our company. Uncertainties regarding the potential for a renegotiation of international trade agreements under the newly elected administration, and the impact such actions and other policies of the current administration may have on economic and market conditions. In addition, concerns about the performance of international economies, especially in Europe and emerging markets, ~~and~~ economic conditions in Asia, particularly the economies of China, South Korea and Japan, and the Russian invasion of Ukraine and resulting economic impact, can impact the economy and financial markets here in the United States. If the national, regional and local economies experience worsening economic conditions, including high levels of unemployment, our growth and profitability could be constrained. Weak economic conditions are characterized by, among other indicators, deflation, elevated levels of unemployment, fluctuations in debt and equity capital markets, increased delinquencies on mortgage, commercial and consumer loans, residential and commercial real estate price declines, and lower home sales and commercial activity. Further, our business could be adversely affected by the effects of a widespread outbreak of epidemic illness in the human population. All of these factors are generally detrimental to our business. Our business is significantly affected by monetary and other regulatory policies of the U.S. federal government, its agencies and government-sponsored entities. Changes in any of these policies are influenced by macroeconomic conditions and other factors that are beyond our control, are difficult to predict and could have an adverse effect on our business, financial condition and results of operations.

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

It is possible that we could acquire other banking institutions, other financial services companies or branches of banks in the future. Acquisitions typically involve the payment of a premium over book and trading values and, therefore, may result in the dilution of our tangible book value per share and/or our earnings per share. Our ability to engage in future mergers and acquisitions depends on various factors, including: (1) our ability to identify suitable merger partners and acquisition opportunities; (2) our ability to finance and complete transactions on acceptable terms and at acceptable prices; and (3) our ability to receive the necessary regulatory and, when required, shareholder approvals. Our inability to engage in an acquisition or merger for any of these reasons could have an adverse impact on the implementation of our business strategies. Furthermore, mergers and acquisitions involve a number of risks and challenges, including our ability to achieve planned synergies and to integrate the branches and operations we acquire, and the internal controls and regulatory functions into our current operations, as well as the diversion of management’s attention from existing operations, which may adversely affect our ability to successfully conduct our business and negatively impact our financial condition and results of operations.

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We must keep pace with technological change to remain competitive.

Financial products and services have become increasingly technology-driven. Our ability to meet the needs of our customers competitively, and in a cost-efficient manner, is dependent on the ability to keep pace with technological advances and to invest in new technology as it becomes available, as well as related essential personnel. In addition, technology has lowered barriers to entry into the financial services market and made it possible for financial technology companies and other non-bank entities to offer financial products and services traditionally provided by banks. The ability to keep pace with technological change is important, and the failure to do so, due to cost, proficiency or otherwise, could have an adverse impact on our business, financial condition and results of operations.

Negative public opinion regarding our company or failure to maintain our reputation in the communities we serve could adversely affect our business, financial condition and results of operations and prevent us from growing our business.

As a community bank, our reputation within the communities we serve, including the BaaS space, is critical to our success. We believe we have set ourselves apart from our competitors by building strong personal and professional relationships with our customers and being active members of the communities we serve. As such, we strive to enhance our reputation by recruiting, hiring and retaining employees who share our core values of being an integral part of the communities we serve and delivering superior service to our customers. If our reputation is negatively affected by the actions of our employees or otherwise, we may be less successful in attracting new talent and customers or may lose existing customers, and our business, financial condition and results of operations could be adversely affected. Further, negative public opinion can expose us to litigation and regulatory action and delay and impede our efforts to implement our expansion strategy, which could further adversely affect our business, financial condition and results of operations.

Item 1B. Unresolved Staff Comments

None.

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Item 2. Properties

Our corporate headquarters is located at 5415 Evergreen Way, Everett, WA 98203. In addition to our corporate headquarters, which includes our Evergreen branch, we operated 13 other branch offices as of December 31, ~~2021~~2022 for our community bank and CCBX segments. Twelve of our branches are located in Snohomish County and two of our branches are located in neighboring counties (one in King County and one in Island County). We own our corporate headquarters and four of our other branch offices and lease the remainder of our branch offices. The leases, excluding renewal periods, on our branch offices expire in ~~2022~~2023 through ~~2040.~~2044. We believe that these facilities and additional or alternative space available to us are adequate to meet our needs for the foreseeable future.

Item 3. Legal Proceedings

From time to time we are a party to various litigation matters incidental to the conduct of our business. We do not believe that any currently pending legal proceedings will have a material adverse effect on our business, financial condition or operations. Item 103 of the SEC’s Regulation S-K requires disclosure of certain environmental matters when a governmental authority is a party to the proceedings and the proceedings involve potential monetary sanctions unless we reasonably believe the monetary sanctions will not equal or exceed a threshold which we determine is reasonably designed to result in disclosure of any such proceeding that is material to our business or financial condition. We have determined such disclosure threshold to be $1,000,000.

Item 4. Mine Safety Disclosures

Not applicable.

45

48

PART II

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information, Holders of Common Stock and Dividends

The Company’s common stock, no par value per share, is traded on the Nasdaq Global Select Market under the symbol “CCB.” On March 7, ~~2022,~~2023, there were ~~305~~294 holders of record of the Company’s common stock.

Holders of our common stock are only entitled to receive dividends when, as and if declared by our board of directors out of funds legally available for dividends. We have not historically declared or paid dividends on our common stock and we do not intend to declare or pay dividends on our common stock in the near-term. Instead, we anticipate that all of our future earnings will be retained to support our operations and to finance the growth and development of our business. Any future determination to pay dividends will be made by our board of directors and will depend on a number of factors, including:

•

~~our historic and projected financial condition, liquidity and results of operations;~~

•our historic and projected financial condition, liquidity and results of operations;

~~our capital levels and needs;~~

•our capital levels and needs;

~~tax considerations;~~

•tax considerations;

~~any acquisitions or potential acquisitions that we may pursue;~~

•any acquisitions or potential acquisitions that we may pursue;

~~statutory and regulatory prohibitions and other limitations;~~

•statutory and regulatory prohibitions and other limitations;

~~the terms of any credit agreements or other borrowing arrangements that restrict our ability to pay cash dividends;~~

•the terms of any credit agreements or other borrowing arrangements that restrict our ability to pay cash dividends;

~~general economic conditions; and~~

•general economic conditions; and

~~other factors that our board of directors may deem relevant.~~

•other factors that our board of directors may deem relevant.

We are not obligated to pay dividends on our common stock and are subject to certain restrictions on paying dividends on our common stock.

As a Washington corporation, we are subject to certain restrictions on distributions to shareholders under the Washington Business Corporation Act. Generally, a Washington corporation is prohibited from making a distribution to shareholders if, after giving effect to the distribution, the corporation would not be able to pay its liabilities as they become due in the usual course of business or the corporation’s total assets would be less than the sum of its total liabilities plus, unless its articles of incorporation provide otherwise, the amount that would be needed, if the corporation were to be dissolved at the time of the distribution, to satisfy the preferential rights upon dissolution of shareholders whose preferential rights are superior to those receiving the distribution. In addition, if required payments on our outstanding junior subordinated debentures are not made or suspended, we may be prohibited from paying dividends on our common stock. We are also subject to certain restrictions on our right to pay dividends on our capital stock in the event we have failed to make any required payment of interest or principal under the terms of our subordinated note.

We are subject to certain restrictions on the payment of cash dividends as a result of banking laws, regulations and policies. Because we are a bank holding company and do not engage directly in business activities of a material nature, our ability to pay dividends on our common stock depends, in large part, upon our receipt of dividends from the Bank, which is also subject to numerous limitations on the payment of dividends under federal and state banking laws, regulations and policies. See “Item 1. Business—Regulation and Supervision—Bank Holding Company Regulation—Dividends.” The present and future dividend policy of the Bank is subject to the discretion of its board of directors. The Bank is not obligated to pay us dividends.

49

Table of unforgiven principal and interest. If the borrower defaults, the loan is guaranteed by the SBA. We accepted and processed applications for the duration of the initial PPP loan program, which closed for new applicants on August 8, 2020. The Consolidated Appropriations Act enacted on December 27, 2020, appropriated additional funding to the PPP and permitted certain PPP borrowers to make “second draw” loans. The American Rescue Plan Act of 2021, enacted on March 11, 2021, expanded the eligibility criteria for both first and second draw PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness. The PPP Extension Act of 2021, enacted on March 25, 2021, extended the PPP through May 31, 2021, at which time the program closed for new applications.

Purchases of Equity Securities

The Company did not purchase any shares of its common stock during the year ended December 31, ~~2021.~~

2022.

Item 6. Reserved~~Reserved~~

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 two reportable segments: The community bank and CCBX. The primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. 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 grown to 28~~had 27 partners as of December 31, ~~2021, compared to 15 as of December 31, 2020.~~2022. 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, ~~2021,~~2022, we had total assets of ~~$2.64~~$3.14 billion, total loans receivable of ~~$1.74~~$2.63 billion, total deposits of ~~$2.36~~$2.82 billion and total shareholders’ equity of ~~$201.2~~$243.5 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 investments and CCBX revenue from BaaS fee income. Our primary source of funding for our loans is commercial and retail deposits from our customer relationships and from our partner deposit relationships. We place secondary reliance on any funding from our CCBX partner deposit relationships that are transferred off our balance sheet and wholesale funding, primarily borrowings from the Federal Home Loan Bank (“FHLB”). Less commonly used sources of funding include borrowings from the Federal Reserve System ~~(Federal Reserve)~~(“Federal Reserve”) discount window, draws on established federal funds lines from unaffiliated commercial banks, brokered funds, which allows us to obtain deposits from sources that do not have a relationship with the Bank and can be obtained through certificate of deposit listing services, via the internet or through other advertising methods, or a one-way buy through an insured cash sweep (“ICS”) account, which allows us to obtain funds from other institutions that have deposited funds through ICS. Our largest expenses are provision for loan losses, salaries and employee benefits, ~~provision for loan losses,~~ interest on deposits and borrowings, ~~occupancy~~legal and professional expenses and data processing. Our principal lending products are commercial real estate loans, commercial and industrial loans, residential real estate loans, construction, land and land development loans, and consumer loans.

~~CARES~~

Coronavirus Aid, Relief, and Economic Security (“CARES”) Act and ~~Paycheck Protection Program (“PPP”)~~

PPP Overview

Our financial results for the ~~year~~years ended December 31, 2022 and 2021 were ~~also~~ impacted by the coronavirus, and variants thereof, including the Delta and Omicron variants (“COVID-19”) pandemic. On March 27, 2020, the ~~Coronavirus Aid, Relief and Economic Security~~CARES Act ~~(“CARES Act”)~~ was enacted, providing wide ranging economic relief for individuals and businesses impacted by the COVID-19 pandemic. Among other things, the statute created the ~~PPP,~~Paycheck Protection Program (“PPP”), which was a stimulus response to the potential economic impacts of the COVID-19 pandemic. The purpose of the PPP was to provide forgivable loans to smaller businesses, sole proprietorships, independent contractors, and self-employed individuals that used the proceeds of the loans for payroll and certain other qualifying expenses. The Small Business Administration (“SBA”) manages the PPP. If a loan is fully forgiven, the SBA will repay the lending bank in full. If a loan is partially forgiven or not forgiven at all, a bank must look to the borrower for repayment

50

47

In total, we funded $763.9 million in PPP loans, since the first round of PPP loans opened in March 2020 through the close of round three. Total net deferred fees on these loans were $26.3 million. As of December 31, ~~2021, $111.8~~2022, there were $4.7 million in PPP loans ~~remained with $3.6~~outstanding, compared to $111.8 million in net deferred fees, which will be recognized in interest income in future periods. Legislation extended the initial payment deferral period on PPP loans originated in 2020, and PPP borrowers with two-year loans can work with their lender to extend their loan to a five-year maturity, which has been a popular approach for customers with PPP loans that are not eligible for forgiveness. There are $4.3 million of these loans remaining as of December 31, 2021. PPP loans originated in 2021 are five-year loans, and $107.5 million remains of these loans as of December 31, 2021. Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower's loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (generally between eight and 24 weeks).

We continue to accept applications from customers for loan forgiveness. To obtain loan forgiveness, a PPP borrower must submit a forgiveness application. We expect PPP forgiveness payments to continue through the second quarter of 2022.

~~The table below summarizes information about total PPP loans originated in 2020 and 2021.~~

Total PPP Loan Origination

Round 1 & 2
2020

Round 3
2021

Total

(Dollars in thousands; unaudited)

Loans Originated

$
452,846

$
311,012

$
763,858

Deferred fees, net

12,933

13,334

$
26,267

Outstanding loans and deferred fees as of December 31, 2021

Loans outstanding

$
4,306

$
107,507

$
111,813

Deferred fees, net

36

3,597

$
3,633

As of December 31, 2021 there was $111.8 million in PPP loans, including $4.3 million from rounds 1 and 2 and $107.5 million from round 3. The table below summarizes key information about the remaining PPP loans originated in 2020 and 2021 as of the period indicated:

Outstanding PPP Loans

Original Loan Size

As of and for the Three Months Ended December 31, 2021

$0.00 -
$50,000.00

$50,0000.01 -
$150,000.00

$150,000.01 -
$350,000.00

$350,000.01 -
$2,000,000.00

> 2,000,000.01

Totals

(Dollars in thousands; unaudited)

Principal outstanding:

Round 1 & 2

$
302

$
459

$
342

$
1,501

$
1,702

$
4,306

Round 3

6,925

10,751

32,061

57,770

—

107,507

Total principal outstanding

7,227

11,210

32,403

59,271

1,702

111,813

Net deferred fees outstanding

Round 1 & 2

$
4

$
5

$
5

$
11

$
11

$
36

Round 3

575

380

1,257

1,385

-

3,597

Total net deferred fees
outstanding

$
579

$
385

$
1,262

$
1,396

$
11

$
3,633

Number of loans:

Round 1 & 2

14

8

4

5

3

34

Round 3

381

116

140

73

-

710

Total loan count

395

124

144

78

3

744

Percent of total

53.1
%

16.7
%

19.3
%

10.5
%

0.4
%

100.0
%

Forgiveness/Payoffs/Paydowns in Three Months Ended December 31, 2021

Dollars

$
17,549

$
30,346

$
29,476

$
68,048

$
10,046

$
155,465

Deferred fee recognized

1,519

1,169

1,280

1,769

47

5,784

~~PPP Overview~~

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These loans have had a significant impact on our financial statements for the year ended December 31, 2021 and 2020 and will continue to impact our results in the future. Throughout this discussion, we will address the impact of these loans on the balance sheet and income statement, including borrowings received through the Paycheck Protection Program Liquidity Facility ( “PPPLF”), which were paid in full during the quarter ended June 30 2021, to help fund these loans and to aid in liquidity, increased customer deposit accounts from unused disbursements, and earnings and expenses related to these activities. Any estimated adjusted ratios that exclude the impact of this activity are non-GAAP measures. For more information about non-GAAP financial measures, see the non-GAAP disclosure “~~GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.~~”

49

~~The Company's Preparations, Responses and Re-Opening to the COVID-19 Pandemic~~

As part of our ongoing risk preparation and mitigation efforts, we developed a detailed plan and action measures related to a possible pandemic scenario. This pandemic plan was implemented on March 12, 2020 and continued through the third quarter of 2021. The Company carefully executed the plan with limited operational disruptions, with attention to ensure continued customer support, and with the utmost care to safeguard employees, customers and vendors. Management continues to monitor and, when appropriate, make changes to our planned response. As of December 31, 2021 our re-opening plan includes the following elements:

•

~~We are serving customers through drive throughs, call center, mobile banking, online banking and ATMs, and have opened branches for customers.~~

•

Since the beginning of the COVID-19 pandemic, we have actively engaged borrowers and other businesses in discussion to identify short-term cash flow and other financial needs, and restructured payments on existing loans to alleviate financial hardship consistent with regulatory guidance. As of December 31, 2021, all loans that were on deferred or modified payment status have successfully returned to active status or paid off.

•

~~We enhanced credit monitoring on loan segments that have been most impacted by the COVID-19 pandemic, monitoring and tracking loan payment deferrals and customer liquidity.~~

•

As of December 31, 2021, Washington state had reopened under the Washington Ready plan. All industry sectors previously covered by the Roadmap to Recovery or the Safe Start plan, with the limited exceptions, were permitted to return to usual capacity and operations.

•

~~We updated and analyzed the Company's liquidity, funding and capital stress forecasts and risk assumptions.~~

•

On July 19, 2021, the Company started its re-opening process, which included some non-remote and hybrid workers returning to the office and in-person gatherings/trainings resuming. Management recognizes this is an evolving situation and continues to monitor federal, state and local recommendations regarding the COVID-19 pandemic and the variant strains of the virus. Management will adjust its re-opening plans and implement precautions to safeguard our employees, customers and vendors based on the information available.

London Interbank Offered Rate (“LIBOR”) Transition

On ~~March 5, 2021,~~December 16, 2022, the ~~United Kingdom’s Financial Conduct Authority, which regulates~~Federal Reserve Board adopted a final rule that implements the LIBOR ~~confirmed~~Act by identifying benchmark rates based on SOFR (Secured Overnight Financing Rate) that will replace LIBOR formerly known as the ~~publication of most LIBOR term rates will end on~~London Interbank Offered Rate, in certain financial contracts after June 30, ~~2023 (excluding 1-week U.S.~~2023. Congress enacted the LIBOR ~~and 2-month U.S. LIBOR, the publication of~~Act, which ~~will end on December 31, 2021). Additionally, on April 6, 2021, New York Governor Cuomo~~was signed into law ~~legislation~~in March 2022, to provide a uniform, nationwide solution for so-called tough legacy contracts that ~~provides~~do not have clear and practicable provisions for replacing LIBOR after June 30, 2023. The LIBOR Act also establishes a litigation safe harbor for lenders that select a LIBOR replacement under certain situations, including the ~~substitution~~use of ~~an alternative reference~~a replacement rate selected by the ~~Secured Overnight Financing Rate,~~Federal Reserve. As required by the law, the final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in ~~any LIBOR-based contract governed by New York state law~~contracts subject to the Act. These contracts include U.S. contracts that ~~does~~do not ~~include clear fallback language, once~~mature before LIBOR ~~is discontinued but no later than December 31, 2021. The Federal Reserve~~ends and ~~other federal banking agencies have continued to encourage banks to transition away from~~that lack adequate "fallback" provisions that would replace LIBOR ~~as soon as practicable.~~

with a practicable replacement benchmark rate.

As of December 31, ~~2021,~~2022, we had ~~$216.9~~51 loans totaling $206.6 million ~~in loans~~ that are tied to ~~LIBOR, and $180.3 million of those are SWAPs.~~LIBOR. We have $3.6 million in floating rate junior subordinated debentures to Coastal (WA) Statutory Trust I, which was formed for the issuance of trust preferred securities. These debentures are also tied to LIBOR. The move to an alternate index may impact the rates we receive on loans and rates we pay on our junior subordinated debentures. We have identified the loans and debt instruments impacted, ~~are reviewing~~and we believe we will be able to use other benchmark replacements and transition protections provided by the LIBOR ~~replacement options~~Act, Federal Reserve rule and ~~are preparing for and evaluating~~relevant accounting guidance to manage through the ~~impact of the~~ transition away from LIBOR. We ~~are~~ no longer ~~issuing~~issue any loans or debt tied to LIBOR.

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. Since March 2022, in response to inflation, the FOMC of the Federal Reserve has increased the target range for the federal funds rate by 425 basis points, including 125 basis points during the fourth calendar quarter of 2022, to a range of 4.25% to 4.50% as of December 31, 2022. As it seeks to control inflation without creating a recession, the FOMC has indicated there may be further increases in the federal funds rate during calendar year 2023. The cost of our deposits and short-term borrowings is primarily based on short-term interest rates, which are largely driven

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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.

Credit Quality

We have well established loan policies and underwriting practices that have resulted in low levels of charge-offs and nonperforming assets for the community bank. Through our thorough underwriting process, we strive to originate quality loans that will maintain and enhance the overall credit quality of our loan portfolio, and through our careful monitoring of our loan portfolio and prompt attention to delinquencies, we seek to minimize the impact of problem loans. 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 ~~business and consumer~~ loans through our CCBX partners and while these loans will have higher levels of charge-offs and nonperforming assets, ~~we also obtain credit enhancements from many of~~agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred ~~charge-offs and losses, but if~~losses. If our partners are unable to fulfill their contracted obligations then the Bank would be exposed to additional loan losses as a result of this counterparty risk.

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Operating Efficiency

The largest component of noninterest expense is salaries and employee benefits. Other significant operating expenses include BaaS expense, occupancy expense, legal and professional ~~fees,~~expenses, data processing expense, director and staff expense and marketing expense. Our operating efficiency, as measured by our efficiency ratio, has gradually improved primarily because the growth of our deposits and loans has enabled our net interest income and noninterest income to outpace the growth of our expenses. When we make substantial investments in the infrastructure of new divisions, open new branches or make investments to increase our operating capacity, our operating efficiency decreases until we generate enough revenue growth to offset the increased costs however, prior to making such investments, we focus on how best and most expediently we can achieve the revenue growth necessary to offset the costs of these investments or new branches. ~~In 2021, we made substantial investments in our BaaS infrastructure and our~~Our efficiency ratio ~~slightly increased~~has been impacted by the increase in CCBX income and CCBX expense. Our efficiency ratio was 56.26% at December 31, 2022, compared to 58.82% at December 31, ~~2021, compared to 58.14% at December 31, 2020.~~

2021.

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 ~~effects of~~environment is continuously changing, due to increased inflation, global unrest, the ~~COVID-19 pandemic have had a destabilizing effect on financial markets, key market indices~~war in Ukraine, the political environment, and ~~overall~~trade issues all contribute to economic ~~activity. The~~ uncertainty ~~regarding the duration of the pandemic and the resulting economic disruption~~which has caused increased market volatility and may lead to an economic recession and/or a significant decrease in consumer confidence and business generally.

Critical Accounting Policies

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

51

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 other-than-temporary impairment (“OTTI”), on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer. Management also assesses whether it intends to sell, or it is more likely than not that it will be required to sell, a security in an unrealized loss position before recovery of its amortized cost basis. If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as impairment through earnings. For debt securities that do not meet the aforementioned criteria, the amount of impairment is

52

split into two components as follows: (1) OTTI related to credit loss, which must be recognized in the income statement, and (2) OTTI related to other factors, which is recognized in other comprehensive income, net of applicable taxes. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis. The previous amortized cost basis less the OTTI recognized in earnings becomes the new amortized cost basis of the security. For more information and discussion related to securities, see “Note 3 - Investment Securities” in the Consolidated Financial Statements.

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, ~~2021,~~2022, loans receivable totaled ~~$1.74~~$2.63 billion, an increase of ~~$195.6~~$884.5 million, or ~~12.6%~~50.8%, compared to ~~$1.55~~$1.74 billion as of December 31, ~~2020.~~2021. Total loans receivable is net of ~~$8.8~~$6.1 million in net deferred origination fees, ~~$3.6 million~~$82,000 of which is attributed to PPP loans. The increase is largely attributed to growth in our CCBX segment as a result of adding new partners, combined with loan growth in the community bank segment, partially offset by forgiveness or principal paydowns on PPP loans. For more information and discussion related to the loans held for investment, see “Note 4 - Loans and Allowance for Loan Losses” in the Consolidated Financial Statements.

Loans Held for Sale

CCBX loans held for sale consist of the portion of CCBX originated loans that the Company intends to sell back to the originating CCBX partner or its affiliate generally at par. The Company sells loans to manage credit positions with partners and across loan categories. During the twelve months ended December 31, 2022, the Company transferred $152.5 million in CCBX loans receivable to loans held for sale and subsequently sold these loans. As of December 31, 2022 and 2021 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, 2022 and 2021.

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 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 ~~2021, one~~2022, net contributions to private company ~~investment~~equity investments totaled $699,000 and decreased in value by $153,000 in response to a decline in value in the stock based financial performance and growth rates. In 2021, net contributions to private company equity investments totaled $163,000 and increased in value by $1.5 million (unrealized gain) mostly in response to ~~the~~one company’s issuance of common equity awards, identical to the Company’s holdings, at a higher value. ~~In 2020, one private company investment decreased in value by $400,000 (unrealized loss) in response to a decline in value in the stock based on that company’s financial performance and growth rate.~~

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.

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Allowance for Loan Losses

The allowance for loan losses represents management’s estimate of probable and reasonably estimable credit losses inherent in the loan portfolio. In determining the allowance, the Company estimates losses on individual impaired loans, or groups of loans which are not impaired, where the probable loss can be identified and reasonably estimated. On a quarterly basis, the Company assesses the risk inherent in the Company’s loan portfolio based on qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors on the quality of the loan portfolio. Community bank loans are assessed at the individual loan level and

52

CCBX loans are pooled and evaluated at both the partner and product level. Based on this analysis, the Company records a provision for loan losses to maintain the allowance at appropriate levels.

Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality. The Company maintains the allowance at an amount the Company believes is sufficient to provide for estimated losses inherent in the Company’s loan portfolio at each balance sheet date, and fluctuations in the provision for loan losses may result from management’s assessment of the adequacy of the allowance. 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 increased the allowance from ~~$19.3 million at December 31, 2020 to~~ $28.6 million at December 31, ~~2021.~~2021 to $74.0 million at December 31, 2022. The allowance was significantly increased in response to growth in CCBX ~~consumer~~ loans. The Company uses CCBX partner data, industry data and its own loan loss data to develop an appropriate allowance for the risk inherent in the CCBX new loan volume. The Company increased the allowance from ~~$11.5~~$19.3 million to ~~$19.3~~$28.6 million in ~~2020 in response~~2021 largely due to ~~the uncertainty of the COVID-19 pandemic,~~ an increase in ~~the unemployment rate, a decrease in GDP, and the unknown effects of the economic shutdown and stay at home orders on our communities, businesses, and consumers.~~CCBX consumer loans. For more information and discussion related to the allowance for loan losses, see “Note 4 - Loans and Allowance for Loan Losses” in the Consolidated Financial Statements.

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. As there has been no public market for our common stock prior to July 20, 2018, the estimated fair value of our common stock was determined by our board of directors as of the date of each option grant, with input from management, based on our board of directors’ assessment of objective and subjective factors that it believed were relevant. 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

54

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

The recording of BaaS income and expense is dependent upon the contractual agreement with each partner, however in accordance with accounting guidance the recording of certain components of BaaS income are as follows: Agreements with many of our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans. When the provision for loan losses and provision for unfunded commitments is recorded, a ~~recovery receivable~~credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement). Incurred losses are recorded in the allowance for loan losses, ~~and as~~ the credit enhancement asset is relieved when credit enhancement recoveries are received from the CCBX ~~partner, the recovery receivable is relieved.~~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

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~~as losses~~ in noninterest expense, and the recovery received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. ~~Credit enhancements~~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, ~~2021~~2022, noninterest income subject to Topic 606 increased ~~$5.5~~$4.3 million to ~~$12.9~~$18.2 million, compared to ~~$7.4~~$13.9 million for the year ended December 31, ~~2020.~~2021. The increase was largely ~~the~~ due to an increase in BaaS fee income resulting from growth with active CCBX ~~partners gaining traction with their services.~~partners. For more information and discussion related to revenue recognition, see “Note 19 – Revenue Recognition” in the Consolidated Financial Statements.

Emerging Growth Company

The Jumpstart Our Business Startups Act of 2012, (the “JOBS Act”) permits an “emerging growth company” to take advantage of an extended transition period to comply with new or revised accounting standards applicable to public companies. However, we have decided not to take advantage of this provision. As a result, we will comply with new or revised accounting standards to the same extent that compliance is required for non-emerging growth companies. Our decision to opt out of the extended transition period under the JOBS Act is irrevocable.

Recent Pronouncements

For a discussion of the expected impact of accounting pronouncements recently adopted and accounting pronouncements recently issued but not yet adopted by us as of December 31, ~~2021,~~2022, 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.

Results of Operations

Net Income

Year Ended December 31, ~~2021,~~2022, Compared to Year Ended December 31, ~~2020~~2021. Net income for the year ended December 31, ~~2021,~~2022 was ~~$27.0~~$40.6 million, or ~~$2.16~~$3.01 per diluted share, compared to ~~$15.1~~$27.0 million, or ~~$1.24~~$2.16 per diluted share, for the year ended December 31, ~~2020.~~2021. The increase in net income over the prior year was attributable to a ~~$22.0~~$92.3 million increase in net interest income, ~~$19.9~~$96.6 million increase in noninterest income partially offset by ~~an $25.1~~a $103.5 million increase in noninterest ~~expense.~~expense and a $69.1 million increase in the provision for loan losses.

Net Interest Income

Year Ended December 31, ~~2021,~~2022, Compared to Year Ended December 31, ~~2020~~2021. Net interest income for the year ended December 31, ~~2021,~~2022, was ~~$79.4~~$171.8 million, compared to $57.4 million for the year ended December 31, 2020, an increase of $22.0 million, or 38.4%. The increase in net interest income consisted of a $20.0 million, or 31.8%, increase in interest income combined with a $2.0 million, or 35.5%, decrease in interest expense.

The $20.0 million increase in interest income for the year ended December 31, 2021 compared to December 31, 2020 is largely related to increased interest income resulting from community bank and CCBX loan growth and the recognition of deferred fees on PPP loans, including forgiven and paid off loans,as well as increased yield on loans resulting from loan growth and a decrease in lower yielding PPP loans. Interest and fees on loans increased $20.2 million, or 32.6%, over the prior year period, and yield on loans receivable increased 22 basis points for the year ended December 31, 2021, compared to the year ended December 31, 2020. Non-PPP loan growth of $449.2 million, or 37.7%, which includes CCBX loan growth of $281.0 million, or 428.2%, for the year ended December 31, 2021, compared to December 31, 2020, also contributed to the increase in interest income. Community bank loan growth increased by $168.2 million, or 15.0%, despite a reduction in PPP loans of $254.0 million, or 69.4%, that were forgiven or repaid, compared to December 31, 2020, and also contributed to the increase in interest income. Net deferred fees recognized on forgiven or repaid PPP loans increased $8.4 million, or 117.1%, to $15.5$79.4 million for the year ended December 31, 2021, an increase of $92.3 million, or 116.2%. Yield on loans receivable was 8.12% for the year ended December 31, 2022, compared to ~~$7.2~~4.86% for the year ended December 31, 2021. The increase in net interest income compared to the year ended December 31, 2021 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, 2022 was $2.26 billion, compared to $1.69 billion for the year ended December 31, 2021.

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Interest and fees on loans totaled $183.4 million for the year ended December 31, ~~2020. Net deferred~~2022 compared to $82.1 million for the year ended December 31, 2021. The $101.2 million increase in interest and fees on loans for the year ended December 31, 2022, compared to the year ended December 31, 2021, was largely due to increased yield on loans from growth in higher yielding CCBX loans and an overall increase in interest rates. Loan growth of $884.5 million, or 50.8%, for the year ended December 31, 2022, compared to December 31, 2021, includes a decrease of $107.1 million in PPP loans ~~are~~that were forgiven or repaid. CCBX average loans receivable grew to $742.4 million for the year ended December 31, 2022, compared to $146.3 million for the year ended December 31, 2021, an increase of $596.1 million, or 407.4%. Average CCBX yield of 13.85% was earned ~~over~~on CCBX loans for the ~~life~~year ended December 31, 2022, compared to 4.46% for the year ended December 31, 2021. 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 ~~as a yield adjustment~~expense on CCBX loan yield. Also impacting the increase in loan interest is the increase in interest ~~income. Forgiveness of principal, early paydowns and payoffs~~rates on ~~PPP~~variable rate loans ~~will increase interest income earned in those periods~~resulting from the ~~recognition~~FOMC raising rates 4.25% during the year ended December 31, 2022. We continue to monitor the impact of ~~PPP net deferred fees.~~ these increases in interest rates.

Interest income from interest earning deposits with other banks was ~~$608,000~~$6.7 million at December 31, 2022, an increase of $6.1 million due to an increase in balances and higher interest rates, compared to December 31, 2021. The average balance of interest earning deposits invested with other banks for the year ended December 31, ~~2021, a decrease of $55,000, or 8.3%,~~2022 was $516.0 million, compared to ~~December 31, 2020, despite an average increase of $268.1 million in interest earning deposits with other banks, as a result of lower interest rates.~~

~~Interest expense decreased $2.0 million, or 35.5%, to $3.7~~$402.1 million for the year ended December 31, ~~2021~~2021. Additionally, the yield on these interest earning deposits with other banks increased 1.15%, compared to ~~$5.7~~the year ended December 31, 2021. Interest income on investment securities increased to $1.7 million at December 31, 2022, compared to $79,000 at December 31, 2021. Average investment securities increased $63.2 million from $30.0 million for the year ended December 31, ~~2020. Lower interest rates resulted in~~2022 to $93.2 million for the year ended December 31, 2022, and average yield increased to 1.87% for the year ended December 31, 2022, compared to 0.26% for the year ended December 31, 2021.

Interest expense was $20.4 million for the year ended December 31, 2022, a ~~decrease~~$16.7 million increase from the year ended December 31, 2021. Interest expense on deposits was $19.0 million for the year ended December 31, 2022, compared to $2.3 million for the year ended December 31, 2021. The $16.7 million increase in interest expense ~~despite a $185.8 million~~on deposits was primarily due to an increase in average interest bearing ~~deposits.~~deposits of $813.9 million. Interest on borrowed funds was $1.4 million for the year ended December 31, 2022, compared to $1.3 million for the year ended December 31, 2021. The $72,000 increase in interest expense on ~~borrowings decreased $45,000 largely due to~~borrowed funds from the year ended December 31, 2021 is the result of a ~~reduction~~decrease in

54

~~outstanding~~ average PPPLF and FHLB borrowings, which were paid off in full during the quarter ended June ~~2021. PPPLF borrowings were used to help fund PPP loans.~~

~~For~~30, 2021 and March 31, 2022, respectively, partially offset by a $12.2 million average balance increase in subordinated debt, which increased during the year ended December 31, ~~2021, net~~2022. Interest expense is expected to increase as a result of the FOMC increasing the Fed Funds rate 4.25% during the year ended December 31, 2022. In addition, as a result of the FOMC rate increase, CCBX deposits that were below their floor to earn interest due to the low interest rate environment and were not earning interest were reclassified to interest bearing deposits from noninterest bearing deposits during the first and second quarters of 2022. We anticipate additional rate increases in 2023, which we expect will result in higher interest expense on interest bearing deposits which will be offset by higher interest rates on CCBX loans and excess cash invested in the Federal Reserve Bank or other banks.

Net interest margin ~~and interest rate spread were 3.73% and 3.54%, respectively, compared to 3.83% and 3.57%~~was 5.97% for the year ended December 31, ~~2020. Contributing~~2022, compared to 3.73% for the year ended December 31, 2021. Interest rate spread was 5.52%, and 3.54% for the years ended December 31, 2022 and 2021, respectively. The increase in net interest margin and spread ~~decline~~ compared to the year ended December 31, ~~2020,~~2021 was largely a result of an increase in higher rate loans. Average loans increased $568.9 million, compared to the ~~$268.1~~year ended December 31, 2021; the increase includes an average decrease in PPP loans of $340.3 million. Also contributing to the increase in net interest margin and spread compared to the year ended December 31, 2021 was a $113.9 million increase in average interest ~~bearing~~earning deposits ~~with~~invested in other ~~banks, which~~banks. These interest earning deposits earned an average rate of ~~0.15% during~~130 basis points for the year ended December 31, 2022, compared to an average rate of 15 basis points for the year ended December 31, 2021.

Cost of funds was 0.75% for the year ended December 31, 2022, compared to 0.18% for the year ended December 31, 2021. Cost of deposits for the year ended December 31, 2022 was 0.71%, which was a 59 basis point increase, from 0.12% for the year ended December 31, 2021. These increases were largely due to an increase in interest bearing deposits from CCBX and an increase in interest rates. CCBX deposit growth and the aforementioned reclassification of CCBX noninterest bearing deposits to interest bearing deposits significantly contributed to the increase in interest expense.

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Total yield on loans receivable for the year ended December 31, 2022 was 8.12%, compared to 4.86% for the year ended December 31, 2021. 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, 2022, average CCBX loans increased $596.1 million, or 407.4%, with an average CCBX yield of 13.85%, compared to 4.46% at December 31, 2021. 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 a decrease in average community bank loans of $27.2 million, or 1.8%, which is attributed to an average $340.3 million decrease in PPP loans as a result of loan forgiveness and repayments, compared to the year ended December 31, 2021. Average yield on community bank loans for the year ended December 31, 2022 was 5.32%. compared to 4.90% for the year ended December 31, 2021.

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:


	For the Year Ended
	December 31, 2022		December 31, 2021
(unaudited)	Yield on Loans (2)	Cost of Deposits	Yield on Loans (2)	Cost of Deposits
Community Bank	5.32%	0.18%	4.90%	0.14%
CCBX (1)	13.85%	1.57%	4.46%	0.03%
Consolidated	8.12%	0.71%	4.86%	0.12%

(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.


	For the Year Ended
	December 31, 2022				December 31, 2021
(dollars in thousands; unaudited)	Income / Expense		Income / expense divided by average CCBX loans		Income / Expense		Income / expense divided by average CCBX loans
BaaS loan interest income	$	102,808	13.85	%	$	6,532	4.46	%
Less: BaaS loan expense	53,294		7.18	%	2,976		2.03	%
Net BaaS loan income (1)	$	49,514	6.67	%	$	3,556	2.43	%
Average BaaS Loans	$	742,392			$	146,304

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

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 ~~$18.4~~$3.2 million and ~~$9.1~~$18.4 millionfor the years ended December 31, ~~2021~~2022 and ~~2020,~~2021, respectively. Of the $18.4 ~~million and $9.1~~ million in fees recognized in 2021, ~~and 2020,~~ $15.5 million ~~and $7.2 million, respectively,~~ were from PPP loans. For the years ended December 31, ~~2021~~2022 and ~~2020,~~2021, the amount of interest income not recognized on nonaccrual loans was not material.

Average Balance Sheets
For the Year Ended December 31,

2021

2020

Interest

Average

Interest

Average

Average

Income/

Yield/

Average

Income/

Yield/

(Dollars in thousands)
Balance

Expense

Rate

Balance

Expense

Rate

Assets

Interest earning assets:

Interest earning deposits
$
402,081

$
608

0.15
%

$
133,951

$
663

0.49
%
Investment securities, available for sale (1)

27,908

49

0.18

20,386

176

0.86

Investment securities, held to maturity (1)

2,137

30

1.40

3,734

54

1.45

Other investments

7,052

284

4.03

5,608

235

4.19

Loans receivable (2)

1,688,925

82,112

4.86

1,333,028

61,910

4.64

Total interest earning assets

2,128,103

83,083

3.90

1,496,707

63,038

4.21

Noninterest earning assets:

Allowance for loan losses

(19,870
)

(14,686
)

Other noninterest earning assets

74,088

58,970

Total assets
$
2,182,321

$
1,540,991

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest bearing deposits
$
910,106

$
2,327

0.26
%

$
724,279

$
4,288

0.59
%
PPPLF borrowings

68,699

240

0.35

124,068

435

0.35

FHLB advances and other borrowings

24,999

284

1.14

20,736

235

1.13

Subordinated debt

15,379

711

4.62

9,986

589

5.90

Junior subordinated debentures

3,585

84

2.34

3,584

105

2.93

Total interest bearing liabilities

1,022,768

3,646

0.36

882,653

5,652

0.64

Noninterest bearing deposits

989,945

513,550

Other liabilities

12,926

12,445

Total shareholders' equity

156,682

132,343

Total liabilities and shareholders' equity
$
2,182,321

$
1,540,991

Net interest income

$
79,437

$
57,386

Interest rate spread

3.54
%

3.57
%
Net interest margin (3)

3.73
%

3.83
%
(1) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

(2) Includes nonaccrual loans.

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

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	Average Balance Sheets For the Year Ended December 31,
	2022						2021
(dollars in thousands)	Average Balance		Interest & Dividends		Yield / Cost (1)		Average Balance		Interest & Dividends		Yield / Cost (1)
Assets
Interest earning assets:
Interest earning deposits with other banks	$	515,967	$	6,728	1.30	%	$	402,081	$	608	0.15	%
Investment securities, available for sale (2)	91,970		1,710		1.86		27,908		49		0.18
Investment securities, held to maturity (2)	1,266		35		2.76		2,137		30		1.40
Other investments	10,146		345		3.40		7,052		284		4.03
Loans receivable (3)	2,257,787		183,352		8.12		1,688,925		82,112		4.86
Total interest earning assets	2,877,136		192,170		6.68		2,128,103		83,083		3.90
Noninterest earning assets:
Allowance for loan losses	(46,769)						(19,870)
Other noninterest earning assets	119,817						74,088
Total assets	$	2,950,184					$	2,182,321

Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	1,724,020	$	19,004	1.10	%	$	910,106	$	2,327	0.26	%
PPPLF borrowings	—		—		—		68,699		240		0.35
FHLB advances and borrowings	6,029		69		1.14		24,999		284		1.14
Subordinated debt	27,626		1,179		4.27		15,379		711		4.62
Junior subordinated debentures	3,587		143		3.99		3,585		84		2.34
Total interest bearing liabilities	1,761,262		20,395		1.16		1,022,768		3,646		0.36
Noninterest bearing deposits	942,087						989,945
Other liabilities	24,097						12,926
Total shareholders' equity	222,738						156,682
Total liabilities and shareholders' equity	$	2,950,184					$	2,182,321
Net interest income			$	171,775					$	79,437
Interest rate spread					5.52	%					3.54	%
Net interest margin (4)					5.97	%					3.73	%

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

(2) Includes nonaccrual loans.

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


	For the Year Ended
	December 31, 2022						December 31, 2021
(dollars in thousands; unaudited)	Average Balance		Interest & Dividends		Yield / Cost		Average Balance		Interest & Dividends		Yield / Cost
Community Bank
Assets
Loans receivable (1)	$	1,515,395	$	80,544	5.32	%	$	1,542,621	$	75,580	4.90	%
Liabilities
Interest bearing deposits	905,447		2,896		0.32		877,389		2,228		0.25
Noninterest bearing deposits	733,104						674,509
Total deposits	$	1,638,551	$	2,896	0.18		$	1,551,898	$	2,228	0.14
Interest rate spread					5.14	%					4.76	%

CCBX
Assets
Loans receivable (1)(2)	$	742,392	$	102,808	13.85	%	$	146,304	$	6,532	4.46	%
Liabilities
Interest bearing deposits	818,573		16,108		1.97		32,717		99		0.30
Noninterest bearing deposits	208,983						315,436
Total deposits	$	1,027,556	$	16,108	1.57		$	348,153	$	99	0.03
Interest rate spread					12.28	%					4.43	%
Net BaaS loan income interest rate spread (3)					5.10	%					2.40	%

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

(2)CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans.

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

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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~~interest earning assets and ~~interest-bearing~~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 $55.0 million increase in loan interest income that is attributable to an increase in loan rates and $46.2 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.

	Year Ended December 31, 2021 Compared to
	Year Ended December 31, 2020										Year Ended December 31, 2022 Compared to Year Ended December 31, 2021
	Increase (Decrease)						Total				Increase (Decrease) Due to				Total Increase (Decrease)
	Due to						Increase
(Dollars in thousands)	Volume			Yield/Rate			(Decrease)
(dollars in thousands)										(dollars in thousands)	Volume		Rate		Total Increase (Decrease)
Interest income:										Interest income:
Interest earning deposits	$	405		$	(460	)	$	(55	)	Interest earning deposits	$	1,485	$	4,635	$	6,120
Investment securities, available for sale		13			(140	)		(127	)	Investment securities, available for sale	1,191		470		1,661
Investment securities, held to maturity		(22	)		(2	)		(24	)	Investment securities, held to maturity	(24)		29		5
Other investments		58			(9	)		49
Other Investments										Other Investments	105		(44)		61
Loans receivable		17,303			2,899			20,202		Loans receivable	46,197		55,043		101,240
Total change in interest income		17,757			2,288			20,045
Total increase in interest income										Total increase in interest income	48,954		60,133		109,087

Interest expense:										Interest expense:
Interest bearing deposits		475			(2,436	)		(1,961	)	Interest bearing deposits	8,972		7,705		16,677
PPPLF borrowings		(195	)		-			(195	)	PPPLF borrowings	(240)		—		(240)
FHLB advances and other borrowings		49			-			49
FHLB advances										FHLB advances	(217)		2		(215)
Subordinated debt		249			(127	)		122		Subordinated debt	523		(55)		468
Junior subordinated debentures		-			(21	)		(21	)	Junior subordinated debentures	—		59		59
Total change in interest expense		578			(2,584	)		(2,006	)
Change in net interest income	$	17,179		$	4,872		$	22,051
Total increase in interest expense										Total increase in interest expense	9,038		7,711		16,749
Increase in net interest income										Increase in net interest income	$	39,916	$	52,422	$	92,338

Provision for Loan Losses

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

~~Year Ended December 31, 2021, Compared to Year Ended December 31, 2020~~. The provision for loan losses for the year ended December 31, 2021, was $9.9 million compared to $8.3 million for the year ended December 31, 2020. The increase in the Company’s provision for loan losses during the year ended December 31, 2021, is largely related to the provision for CCBX partner loans. During the year ended December 31, 2021, a $8.6 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank loan losses indicated that a provision for loan loss of $1.3 million was needed for the year ended December 31, 2021. The expected COVID-19 pandemic related loan losses have not materialized as originally anticipated in 2020, as evidenced by the low level of charge-offs and nonperforming loans.

The economic environment is continuously changing, ~~and has shown some signs of improvement in 2021, with ongoing vaccination of its population and increased re-opening of economic activities, tempered by~~due to increased inflation, higher interest rates, global unrest, the war in Ukraine, the political environment and ~~a rise in new COVID-19 variants~~trade issues that ~~have resulted in some economic uncertainty. The Company is not required to implement~~may impact the ~~provisions of~~provision and therefore the ~~Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model.~~allowance. Gross loans, excluding loans held for sale, totaled ~~$1.74~~$2.63 billion ~~in 2021 compared to $1.55 billion in 2020~~at December 31, 2022 and ~~grew $195.6 million, or 12.6%, in 2021 compared to 2020. Included in total loans for 2021 is $111.8~~included $4.7 million in PPP loans, which are 100% guaranteed, and are excluded from the provision for loan losses calculation. The allowance for loan losses as a percentage of loans was 2.82% at December 31, 2022, compared to 1.64% at December 31, ~~2021, compared~~2021.

Agreements with our CCBX partners provide for an indemnification of loan losses, also known as a credit enhancement, which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for CCBX loans and deposit overdrafts. When the provision for loan losses and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded in other assets on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner legal commitment to ~~1.25% at December 31, 2020. Excluding PPP~~cover the Bank’s loan losses related to loans they originate on behalf of the Bank. Incurred loan losses are recorded in the allowance for loan losses, and as the credit enhancement obligations are received from the CCBX partner, the credit enhancement asset is relieved.

The Company adopted the Current Expected Credit Loss (“CECL”) accounting standard effective January 1, 2023. The CECL allowance model which ~~are 100% guaranteed~~calculates reserves over the life of the loan and is largely driven by portfolio

60

characteristics, economic outlook, and other key methodology assumptions versus the ~~SBA,~~current accounting practice that utilizes the ~~adjusted~~incurred loss model. The adoption of this ASU will result in a one-time cumulative-effect adjustment to the allowance for loan losses as of the day of adoption. The Company currently estimates a ~~percentage~~combined increase to our allowance for credit losses and reserve for unfunded loan commitments of 3% to 10%. This change will decrease the opening retained earnings balance as of January 1, 2023. The above range is disclosed due to the fact that the Company is still in the process of finalizing the CECL allowance model, including the review of assumptions related to qualitative adjustments and economic forecasts; finalizing the execution of internal controls; and evaluating the impact to our financial statement disclosures.

Year Ended December 31, 2022, Compared to Year Ended December 31, 2021. The provision for loan losses for the year ended December 31, 2022, was $79.1 million compared to $9.9 million for the year ended December 31, 2021. The increase in the Company’s provision for loan losses during the year ended December 31, 2022, is largely related to the provision for CCBX partner loans. During the year ended December 31, 2022, a $78.3 million provision for loan losses was recorded for loans originated through CCBX partners based on management’s analysis. The factors used in management’s analysis for community bank loan losses indicated that a provision for loan loss of $719,000 was needed for the year ended December 31, 2022.

The $78.3 million provision on CCBX loans includes $76.9 million for partner loans with credit enhancement on them and $1.4 million is attributed to loans originated through one CCBX partner for which the Company is responsible for credit losses. In accordance with the program agreement and for one CCBX partner only, the Company is responsible for credit losses on approximately ~~1.75%~~10% of a $114.5 million loan portfolio, or $11.5 million of that loan portfolio at December 31, ~~2021. A reconciliation of this non-GAAP measure is set forth in~~2022.

The following table shows the ~~section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.~~”

provision expense by segment for the periods indicated:


	Year Ended
(dollars in thousands; unaudited)	December 31, 2022		December 31, 2021
Community bank	$	719	$	1,275
CCBX	78,345		8,640
Total provision expense	$	79,064	$	9,915

Net charge-offs for the year ended December 31, ~~2021~~2022 totaled ~~$545,000,~~$33.7 million, or ~~0.03%~~1.49% of total average loans, as compared to net charge-offs of ~~$516,000,~~$545,000, or ~~0.04%~~0.03% of total average loans, for the year ended December 31, ~~2020.~~2021. Net charge-offs were up ~~slightly~~significantly in ~~2021~~2022 compared to ~~2020~~2021 due to CCBX partner loans. In ~~2021, $172,000~~2022, $382,000 in net charge-offs were for the community bank and ~~$373,000~~$33.3 million were for CCBX. In ~~2020, all~~2021, $172,000 were for the community bank and $373,000 of the charge-offs were for the ~~community bank.~~

CCBX.

The following table show the total charge-off activity by segment for the ~~period indicated (prior to 2021 CCBX activity was immaterial and therefore not presented):~~

periods indicated:

	Year Ended
	December 31, 2021										Year Ended December 31, 2022									Year Ended December 31, 2021
(Dollars in thousands)	Community bank			CCBX			Total
(dollars in thousands)										(dollars in thousands)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	255		$	385		$	640		Gross charge-offs	$	428		$	33,321		$	33,749		$	255		$	385		$	640
Gross recoveries		(83	)		(12	)		(95	)	Gross recoveries	(46)			(36)			(82)			(83)			(12)			(95)
Net charge-offs	$	172		$	373		$	545		Net charge-offs	$	382		$	33,285		$	33,667		$	172		$	373		$	545
Net charge-offs to average loans										Net charge-offs to average loans	0.03		%	4.48		%	1.49		%	0.01		%	0.25		%	0.03		%

~~The following table show the total provision expense by segment for the period indicated (prior to 2021 CCBX activity was immaterial and therefore not presented):~~

Year Ended

(Dollars in thousands)

December 31, 2021

Community bank

$
1,275

CCBX

8,640

Total provision expense

$
9,915

Noninterest Income

Our primary sources of recurring noninterest income are BaaS ~~fees,~~indemnification income, Baas program income and deposit ~~account~~ service charges and ~~fees, loan referral fees, and mortgage broker~~ fees. Noninterest income does not include loan origination fees, ~~to the extent they exceed the direct loan origination costs,~~ which are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method. ~~Additionally, in 2021 we had non-recurring income for the unrealized gain on an equity investment and a gain on the sale~~

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Table of ~~a branch.~~

For the year ended December 31, ~~2021,~~2022, noninterest income totaled ~~$28.1~~$124.7 million, an increase of ~~$19.9~~$96.6 million, or ~~243.7%~~343.4%, compared to ~~$8.2~~$28.1 million for the year ended December 31, ~~2020.~~2021. 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:

Year Ended

December 31,

Increase

Percent

(Dollars in thousands)

2021

2020

(Decrease)

Change

BaaS fees

$
17,307

$
2,365

14,942

631.8
%
Deposit service charges and fees

3,698

3,091

607

19.6

Loan referral fees

2,126

1,726

400

23.2

Unrealized gain (loss) on equity
securities, net

1,469

(400
)

1,869

(467.3
)
Gain on sale of branch, net

1,263

-

1,263

n/a

Mortgage broker fees

920

655

265

40.5

Gain on sale of loans, net

396

82

314

382.9

Gain on sale of securities, net

-

-

-

n/a

Other

939

663

276

41.6

Total noninterest income

$
28,118

$
8,182

$
19,936

243.7
%


	Year Ended December 31,				Increase (Decrease)		Percent Change
(dollars in thousands)	2022		2021
Deposit service charges and fees	$	3,804	$	3,698	$	106	2.9	%
Loan referral fees	810		2,126		(1,316)		(61.9)
Mortgage broker fees	257		920		(663)		(72.1)
Gain on sale of bank branch including deposits and loans, net	—		1,263		(1,263)		(100.0)
Gain on sales of loans, net	—		396		(396)		(100.0)
Unrealized (loss) gain on equity securities, net	(153)		1,469		(1,622)		(110.4)
Other	1,087		939		148		15.8
Noninterest income, excluding BaaS program income and BaaS indemnification income	5,805		10,811		(5,006)		(46.3)
Servicing and other BaaS fees	4,408		4,467		(59)		(1.3)
Transaction fees	3,211		544		2,667		490.3
Interchange fees	2,583		701		1,882		268.5
Reimbursement of expenses	2,732		1,004		1,728		172.1
BaaS program income	12,934		6,716		6,218		92.6
BaaS credit enhancements	76,374		9,086		67,288		740.6
BaaS fraud enhancements	29,571		1,505		28,066		1,864.9
BaaS indemnification income	105,945		10,591		95,354		900.3
Total noninterest income	$	124,684	$	28,118	$	96,566	343.4	%

A description of our largest noninterest income categories are below:

BaaS Fees. Our CCBX segment provides BaaS offerings that enable our ~~broker dealer~~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 ~~contract.~~program agreement. In accordance with GAAP, we recognize the reimbursement of ~~non-credit~~noncredit fraud losses on ~~partner’s customer~~ loans and deposits originated through partners and credit enhancements related to the allowance for loan losses and reserve for unfunded commitments provided by the partner as ~~revenue. Partner customer~~revenue in BaaS income. CCBX credit losses are recognized in the allowance for loan loss and ~~non-credit~~noncredit fraud ~~loss is recognized~~losses are expensed in ~~BaaS~~ noninterest expense. under BaaS fraud expense. Also in accordance with GAAP, we establish a credit enhancement asset for expected future loan losses through the recognition of BaaS credit enhancement revenue at the same time we establish an allowance for those loans though a provision for loan losses. For more information on the accounting for BaaS allowance for loan losses, reserve for unfunded commitments, credit enhancements and fraud ~~recovery~~enhancements see the section titled “CCBX – BaaS Reporting Information.”

For the year ended December 31, ~~2021,~~2022, we earned ~~$17.3~~$118.9 million in BaaS fees, which was an increase of ~~$14.9~~$101.6 million, or ~~631.8%~~586.9%, over the year ended December 31, ~~2020,~~2021, where we earned ~~$2.4~~$17.3 million in BaaS fees. The increase over the year ended December 31, ~~2020~~2021 was primarily due to an increase of ~~$3.9~~$6.2 million ~~increase~~ in total BaaS fee program income, which was the result of increased relationships with broker dealers and digital financial service providers, ~~$9.1~~$67.3 million in BaaS fees – credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, ~~$1.5~~$28.1 million in BaaS fees – fraud recovery, and ~~$411,000~~$1.7 million increase in reimbursement of expenses.

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

Year Ended

December 31,

Increase

(Dollars in thousands)

2021

2020

(Decrease)

Program income:

Servicing and other BaaS fees

$
5,011

$
1,758

$
3,253

Interchange

701

14

687

Total program income

5,712

1,772

3,940

Reimbursements and guarantees:

Credit enhancement recovery

9,086

-

9,086

Fraud recovery

1,505

-

1,505

Reimbursement of expenses

1,004

593

411

Total reimbursements and guarantees

11,595

593

11,002

Total BaaS fees

$
17,307

$
2,365

$
14,942


	Year Ended December 31,				Increase (Decrease)
(dollars in thousands)	2022		2021
Program income:
Servicing and other BaaS fees	$	4,408	$	4,467	(59)
Transaction fees	3,211		544		2,667
Interchange fees	2,583		701		1,882
Reimbursement of expenses	2,732		1,004		1,728
Program income	12,934		6,716		6,218
Indemnification income:
Credit enhancements	76,374		9,086		67,288
Fraud enhancements	29,571		1,505		28,066
Indemnification income	105,945		10,591		95,354
Total BaaS income	$	118,879	$	17,307	101,572

At

Our CCBX segment continues to evolve, and now has 27 relationships, at varying stages, as of December 31, ~~2021 there were~~2022. As of December 31, 2022, we had 19 active relationships. We continue to refine the criteria for CCBX partnerships and are exiting relationships ~~one CCBX relationship~~where it makes sense for both parties and are focusing on selecting larger and more established partners, with experienced management teams. We are winding down two partner relationships; these programs are not material in ~~friends and family trials, five CCBX relationships in onboarding/implementation, three signed letters~~terms of intent and a solid pipeline of potential new relationships. At December 31, 2020 there were six active CCBX relationships, two CCBX relationship in friends and family trials, three CCBX relationships in onboarding/implementation and four signed letters of intent. As more CCBX customers move to active status, we expect that BaaS fees will increase. income, deposits or loans.

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

	As of
	December 31, 2021	December 31, 2020		As of
(unaudited)			(unaudited)	December 31, 2022	December 31, 2021
Active	19	6	Active	19	19
Friends and family / testing	1	2	Friends and family / testing	1	1
Implementation / onboarding	5	3	Implementation / onboarding	0	5
Signed letters of intent	3	4	Signed letters of intent	5	3
Wind down - preparing to exit relationship			Wind down - preparing to exit relationship	2	0
Total CCBX relationships	28	15	Total CCBX relationships	27	28

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 ~~$3.7~~$3.8 million for the year ended December 31, ~~2021,~~2022, an increase of ~~$607,000,~~$106,000, or ~~19.6%~~2.9%, over the prior year primarily due to increases in point-of-sale fees of ~~$457,000, merchant services revenue of $90,000, ATM fees of $30,000,~~$96,000 and service charges on deposit accounts of ~~$28,000. These increases were~~$58,000, partially offset by ~~a decrease~~decreases in merchant services revenue of ~~$18,000 in~~$60,000, ATM fees of $9,000, and overdraft ~~fees.~~fees of $6,000. NSF and overdraft fees were $310,000 for the year ended December 31, 2022, compared to $316,000 for the year ended December 31, ~~2021, compared to $334,000 for the year ended December 31, 2020. In December 2021, the Bank reduced NSF and~~2021. During 2022 consumer overdraft fees ~~from $35 per item to $15 per item (with a maximum daily fee of $175). We anticipate NSF and overdraft fees will decrease approximately 50% as a result of this change, however, NSF and~~were eliminated. Consumer overdraft fees are not a significant source of ~~revenue for us~~income, and ~~therefore this change~~the elimination of these fees will not have a ~~material~~significant impact on ~~noninterest~~ income.

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63

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

	Year Ended
	December 31,				Increase			Percent				Year Ended December 31,				Increase (Decrease)			Percent Change
(Dollars in thousands)	2021		2020		(Decrease)			Change											Percent Change
(dollars in thousands)											(dollars in thousands)	2022		2021		Increase (Decrease)		Increase (Decrease)			Percent Change
Point of sale fees	$	1,959	$	1,502		457			30.4	%	Point of sale fees	$	2,055	$	1,959			Increase (Decrease)			Percent Change
Service charges on accounts		410		382		28			7.3		Service charges on accounts	468		410		58			14.1
Merchant services		568		478		90			18.8		Merchant services	508		568		(60)			(10.6)
Overdraft and NSF fees		316		334		(18	)		(5.4	)	Overdraft and NSF fees	310		316		(6)			(1.9)
ATM fees		227		197		30			15.2		ATM fees	218		227		(9)			(4.0)
Cash management fees		113		97		16			16.5		Cash management fees	118		113		5			4.4
Other		105		101		4			4.0		Other	127		105		22			21.0
	$	3,698	$	3,091	$	607			19.6	%		$	3,804	$	3,698	$	106		2.9	%

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 ~~the~~ assuming the interest rate risk. ~~Loan referral fees were $2.1 million for the year ended December 31, 2021, an increase of $400,000, or 23.2%, over the year ended December 31, 2020.~~ 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 ~~fewer,~~less, or may not recognize any, loan referral fees in some periods.

~~Unrealized gain (loss) on equity securities, net.~~ ~~During~~ Current market conditions are making interest rate swap agreements less attractive in the ~~year ended December 31, 2021, we recognized a $1.5 million unrealized holding gain on an equity security as a result of an observable price change, compared to a $400,000 unrealized loss~~higher rate environment. Loan referral fees were $810,000 for the year ended December 31, ~~2020, due to~~2022, a ~~write-down on an equity investment.~~

~~Gain on Sale~~decrease of ~~Branch, net.~~ ~~The sale of our Freeland branch closed on April 30, 2021. Noninterest income included a~~ $1.3 million, ~~gain from sale of the branch during~~or 61.9%, over the year ended December 31, 2021. ~~There was no similar income in~~Interest rate volatility, swap rates, and the ~~year ended December 31, 2020.~~ timing of loan closings all impact the demand for long-term fixed rate swaps.

Mortgage Broker Fees. We earn mortgage broker fees for residential mortgage loans that we broker through mortgage lenders. Mortgage broker fees ~~increased $265,000,~~decreased $663,000, or ~~40.5%~~72.1%, for the year ended December 31, ~~2021~~2022 compared to the year ended December 31, ~~2020~~2021. The mortgage market is slowing down as a result ~~increased demand from lower mortgage~~of higher interest rates ~~which continue to make homes more affordable and mortgage refinancing an attractive option.~~ on mortgages.

Gain on Sale of Branch, net. The sale of our Freeland branch closed on April 30, 2021. Noninterest income included $1.3 million gain from sale of the branch in 2021, there was no similar income in 2022.

Gain on Sale of Loans, net. Gain on sales of loans occurs when we sell in the secondary market the guaranteed portion (generally 75% of the principal balance) of the SBA and USDA loans that we originate. This activity fluctuates based on SBA and USDA loan activity. Gain on sale of loans ~~increased $314,000,~~decreased $396,000, or ~~382.9%~~100.0%, to zero for the year ended December 31, ~~2021~~2022 compared to the prior year, ~~to $396,000,~~ due to ~~increased~~decreased activity. In

Unrealized gain (loss) on equity securities, net. During the year ended December 31, ~~2020, our primary focus was~~2022, we recognized an unrealized loss on ~~SBA PPP loans, therefore fewer SBA and USDA loans were originated and sold~~equity securities of $153,000, compared to the ~~secondary market.~~year ended December 31, 2021, when we recognized a $1.5 million unrealized holding gain on an equity security as a result of an observable price change.

Other. This category includes a variety of other income-producing activities, annuity broker fees, and SBA and USDA servicing fees. Other noninterest income increased ~~$276,000,~~$148,000, or ~~41.6%~~15.8%, for the year ended December 31, ~~2021~~2022 compared to the year ended December 31, ~~2020 most significantly because of a $141,000 increase in MSLP servicing fees, and $98,000 increase in credit card income.~~ 2021.

Noninterest Expense

Generally, noninterest expense ~~includes~~is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest ~~component~~components of noninterest expense isare BaaS loan and fraud expense and salaries and employee benefits. Noninterest expense also includes operational expenses, such as ~~BaaS expense, occupancy expense,~~ legal and professional ~~fees,~~expenses, data processing ~~expense,~~ and software licenses, ~~maintenance~~occupancy, FDIC assessment, points of sale expense, excise taxes, director and ~~subscription expense.~~

staff expenses, marketing and other expenses.

For the year ended December 31, ~~2021,~~2022, noninterest expense totaled ~~$63.3~~$166.8 million, an increase of ~~$25.1~~$103.5 million, or ~~66.0%~~163.6%, compared to ~~$38.1~~$63.3 million for the year ended December 31, ~~2020.~~

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2021. Noninterest expense, excluding BaaS loan and BaaS fraud expense totaled $83.9 million and increased $25.1 million or 42.7%.

64

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

Year Ended

December 31,

Increase

Percent

(Dollars in thousands)

2021

2020

(Decrease)

Change

Salaries and employee
benefits

$
37,101

$
23,302

$
13,799

59.2
%
BaaS expense

4,481

294

4,187

1,424.1

Occupancy

4,128

3,977

151

3.8

Legal and professional fees

3,133

1,762

1,371

77.8

Data processing

2,959

2,348

611

26.0

Software licenses,
maintenance and subscription

2,827

1,320

1,507

114.2

FDIC assessments

1,632

522

1,110

212.6

Excise taxes

1,589

1,057

532

50.3

Director and staff expenses

1,205

800

405

50.6

Marketing and promotion

451

317

134

42.3

Other

3,757

2,420

1,337

55.2

Total noninterest expense

$
63,263

$
38,119

$
25,144

66.0
%


	Year Ended December 31,				Increase (Decrease)		Percent Change
(dollars in thousands)	2022		2021
Salaries and employee benefits	$	52,228	$	37,101	$	15,127	40.8	%
Occupancy	4,548		4,128		420		10.2
Data processing and software licenses	6,487		4,951		1,536		31.0
Point of sale expense	2,109		671		1,438		214.3
Legal and professional expenses	6,760		3,133		3,627		115.8
FDIC assessments	2,859		1,632		1,227		75.2
Excise taxes	2,204		1,589		615		38.7
Director and staff expenses	1,711		1,205		506		42.0
Marketing	351		451		(100)		(22.2)
Other	4,652		3,921		731		18.6
Noninterest expense, excluding BaaS loan and BaaS fraud expense	83,909		58,782		25,127		42.7
BaaS loan expense	53,294		2,976		50,318		1,690.8
BaaS fraud expense	29,571		1,505		28,066		1,864.9
BaaS loan and fraud expense	82,865		4,481		78,384		1,749.3
Total noninterest expense	$	166,774	$	63,263	$	103,511	163.6	%

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 $52.2 million for the year ended December 31, 2022, an increase of $15.1 million, or 40.8%, compared to $37.1 million for the year ended December 31, ~~2021, an increase of $13.8 million, or 59.2%, compared to $23.3 million for the year ended December 31, 2020.~~2021. The increase was primarily due to hiring staff for our CCBX segment and additional staff for our ongoing ~~banking~~community bank related growth initiatives. Bonus and incentive expense was $2.3 million higher for the year ended December 31, 2021 compared to the prior year due in part to incentives paid to employees that have been involved in the production and support of PPP loans. The increase in expense would have been greater if not for an increase in deferred loan costs recorded as salary offsets, largely from originating PPP loans, which was $296,000 higher and lowered expense by that same amount, for the year ended December 31, 2021, compared to the year ended December 31, 2020. As our CCBX segment grows, we expect to continue to add employees to support this line of business. As of December 31, ~~2021,~~2022, we had ~~377~~448 full-time equivalent employees, compared to ~~250~~377 at December 31, ~~2020.~~2021.

~~BaaS 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 expense is partner loan expense and partner fraud expense. Partner loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. Partner fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts. For the year ended December 31, 2021, BaaS expense wasOccupancy Expenses. Occupancy expenses were $4.5 million ~~compared to $294,000~~ for the year ended December 31, ~~2020 as a result of increased partner activity. For more information on the accounting for BaaS expenses see the section titled~~ ~~“CCBX – BaaS Reporting Information.”~~

~~The following table presents, for the periods indicated, the BaaS expenses:~~

Year Ended

December 31,

Increase

(Dollars in thousands)

2021

2020

(Decrease)

BaaS loan expense

$
2,976

$
294

$
2,682

BaaS fraud expense

1,505

-

1,505

Total BaaS expense

$
4,481

$
294

$
4,187

~~Occupancy Expenses.~~ ~~Occupancy expenses were~~2022, compared to $4.1 million for the year ended December 31, 2021, ~~compared to $4.0 million for the year ended December 31, 2020,~~ an increase of ~~$151,000,~~$420,000, or ~~3.8%~~10.2%. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling ~~$1.6~~$1.8 million and ~~$1.4~~$1.6 million for years ended December 31, ~~2021~~2022 and ~~2020,~~2021, respectively. The increase of ~~$151,000~~$420,000 in occupancy expenses for ~~2021~~2022 compared to ~~2020,~~2021, was primarily the result of ~~$232,000~~$222,000 increase in depreciation expense, resulting from increased costs associated with the increase in FTE and growth in CCBX ~~partially offset by a decrease~~and $138,000 increase in maintenance and repairs expense. Occupancy expenses rent, ~~expense. As~~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 ~~continue to grow, we~~do expect occupancy expenses to ~~increase.~~ increase as we continue to grow.

Legal and Professional ~~Fees.~~ Expenses. Legal and professional ~~costs were $3.1 million~~expenses include legal, audit and accounting expenses, consulting fees, fees for ~~the year ended December 31, 2021 compared to $1.8 million for the year ended December 31, 2020,~~recruiting and ~~increase of $1.4 million, or 77.8%. The increase in legal~~hiring employees, and

60

~~professional costs is due to~~ IT related security expenses. These expenses fluctuate with the development of contracts for CCBX ~~partners~~customers, audit and ~~also fluctuates based on~~accounting needs, and are impacted by our reporting cycle and timing of legal and professional services.

~~Data Processing.~~ ~~Data processing costs~~Legal and professional expenses were ~~$3.0~~$6.8 million for the year ended December 31, 2022 compared to $3.1 million for the year ended December 31, 2021, ~~compared to $2.3 million for the year ended December 31, 2020,~~ an increase of ~~$611,000,~~$3.6 million, or ~~26.0%~~115.8%. The increase in legal and professional expenses were primarily focused on building infrastructure for future growth.

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. Additionally, CCBX data processing expenses ~~are included in this category~~ and ~~are expected to increase incrementally as this segment grows, and infrastructures are put in place.~~

~~Software Licenses, Maintenance and Subscriptions.~~ ~~Software licenses, maintenance and subscriptions includes expenses related to obtaining and maintaining~~ software required for various functions throughout the Company. Software licenses, maintenance and subscriptions were $2.8 million for the year ended December 31, 2021, compared to $1.3 million for the year ended December 31, 2020. Software that aids in the reporting of CCBX activities and monitoring of transactions that helps to automate and create other efficiencies in reporting ~~contributed to~~have resulted in increased expenses in the ~~increase.~~category. These expenses are expected to increase as we invest more in

65

automated processing and as we grow product lines and our CCBX segment.

Data processing costs were $6.5 million for the year ended December 31, 2022, compared to $5.0 million for the year ended December 31, 2021, an increase of $1.5 million, or 31.0%.

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. FDIC assessments were $2.8 million for the year ended December 31, 2022, compared to $1.6 million for the year ended December 31, 2021, ~~compared to $522,000 for the year ended December 31, 2020,~~ an increase of ~~$1.1~~$1.2 million, or ~~212.6%~~75.2%. Deposit growth in the community bank and CCBX contributed to this increase. On October 18, 2022 the FDIC finalized an increase of 2 basis points in the initial base deposit insurance assessment rates schedules. The rise is intended to increase the reserve ratio of the Deposit Insurance Fund, which was at 1.26% as of September 30, 2022, to 1.35%, the statutory requirement. The increase in the base rates will remain in place until the reserve ratio reaches or exceeds 2.0%. The increase will take effect in the first quarterly assessment period of 2023 and will increase the FDIC assessment expense for the Bank.

Excise Taxes. Excise taxes are assessed on Washington state income and are based on gross income. Gross income is reduced by certain allowed deductions and income attributed to other states is also removed to arrive at the taxable base. Excise taxes were $2.2 million for the year ended December 31, 2022, compared to $1.6 million for the year ended December 31, 2021, ~~compared to $1.1 million for the year ended December 31, 2020,~~ an increase of ~~$532,000,~~$615,000, or ~~50.3%~~38.7%. Excise taxes increased as a result of increased income subject to excise taxes. Partially offsetting that increase is a credit we received in 2022 against excise taxes owed in the amount of $109,000 as a result of our participation in the Washington State Main Street Program, which reduced our calculated 2022 expense. Excise taxes are based on gross income of ~~$111.2~~$316.9 million and ~~$71.2~~$111.2 million for the years ended December 31, ~~2021~~2022 and ~~2020,~~2021, respectively. Gross income is reduced by certain allowed deductions to arrive at the taxable base; however, as gross income increases, so does the excise tax expense. In addition, the Washington State tax rate that is applied to our industry increased 25 basis points effective April 1, 2020, which was assessed and contributed to the increase in excise tax for the full year ended December 31, 2021 and for part of the year ended December 31, 2020.

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 $1.7 million for the year ended December 31, 2022 compared to $1.2 million for the year ended December 31, 2021, ~~compared to $800,000 for the year ended December 31, 2020,~~ an increase of ~~$405,000,~~$506,000, or ~~50.6%~~42.0%. In ~~2021~~2022 we saw an increase in employee travel and training return to a more typical level after a year of reduced activity in ~~2020~~2021 as a result of restrictions related to the COVID-19 pandemic. ~~Additionally, director expense increased in 2021 as a result of a change to the compensation structure for directors that was effective in October 2020.~~

Marketing and promotion. Marketing and promotion costs were $351,000 for the year ended December 31, 2022, compared to $451,000 for the year ended December 31, 2021, ~~compared to $317,000 for the year ended December 31, 2020, an increase~~a decrease of ~~$134,000,~~$100,000, or ~~42.3%~~22.2%. Marketing and promotion costs decreased in 2020 due to a conscious effort to reduce general advertising costs during the COVID-19 pandemic, with marketing and promotion costs starting to return to a more typical level in 2021 compared to 2020. The Bank isbecause we are using more cost-effective advertising options; however, we expect to see advertising expenses increase as we deploy more branding and targeted advertising for the community bank and ~~CCBX .~~ CCBX.

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 ~~$3.8~~$4.7 million for the year ended December 31, 2022, compared to $3.9 million for the year ended December 31, 2021, ~~compared to $2.4 million for the year ended December 31, 2020,~~ an increase of ~~$1.3 million,~~$731,000, or ~~55.2%~~18.6%. The increase was largely due to a ~~$445,000~~$551,000 increase in ~~the unfunded commitment provision, $200,000~~dues and memberships and $91,000 increase in donations, largely made to community-based organizations, $152,000 increase in office equipment, $118,000 in increased operational losses, $90,000 increase in service charges from banks, $89,000 increase in telephone costs,business development and overall increases resulting from growth for the year ended December 31, ~~2021,~~2022, as compared to the same period last year.

BaaS loan and fraud expense. Our CCBX segment provides BaaS offerings that enable our broker dealer and digital financial service providers to offer their customers banking services. Included in BaaS loan and fraud expense is partner loan expense including overdraft balances and partner fraud expense. Partner loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. Partner fraud expense represents noncredit fraud losses on loans and deposits originated through partners. 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, 2022, BaaS loan and fraud expense was $82.9 million, compared to $4.5 million for the year ended December 31, 2021 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.”

66

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


	Year Ended December 31,				Increase (Decrease)
(dollars in thousands)	2022		2021
BaaS loan expense	$	53,294	$	2,976	$	50,318
BaaS fraud expense	29,571		1,505		28,066
Total BaaS loan and fraud expense	$	82,865	$	4,481	$	78,384

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

61

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 are effective beginning January 1, 2023. Based on its current analysis of the provisions, we do not expect this legislation to have a material impact on our consolidated financial statements.

Year Ended December 31, ~~2021,~~2022, Compared to Year Ended December 31, ~~2020.~~ 2021. For the year ended December 31, ~~2021,~~2022, income tax expense totaled ~~$7.4~~$10.0 million, compared to ~~$4.0~~$7.4 million for the year ended December 31, ~~2020.~~2021. Our effective tax rates for the years ended December 31, 2022, and 2021, was 19.7% and ~~2020, was~~ 21.4% ~~and 20.9%~~, respectively. The effective tax rate was lower for 2022 due to an update in the state apportionment of the revenues in the states in which we operate combined with tax benefits that resulted from stock based compensation activity.

Segment Information

For financial reporting purposes our Company has two reportable segments: The community bank and CCBX, which has been determined based upon the Company's relationship with the end customer. This determination also gave consideration to the structure and management of our various products. The community bank segment includes the operations of ~~Coastal Community~~the Bank, ~~excluding~~and excludes the CCBX BaaS operations. The community bank segment derives its revenue primarily from interest on loans and investments as well as noninterest income typical for the banking industry. The CCBX segment includes BaaS operations. The CCBX segment derives its revenue from BaaS partnerships that allow our broker-dealer and digital financial partners to offer their customers banking ~~services.~~

services such as loans and deposits.

Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The accounting policies of the segments are the same as those described in “Note 1 – Description of Business and Summary of Significant Accounting Policies” in the accompanying notes to the consolidated financial statements included elsewhere in this report.

Community bank total assets as of December 31, ~~2021 increased $582.4~~2022 decreased $184.6 million, or ~~34.3%~~8.1%, to ~~$2.28~~$2.10 billion, compared to ~~$1.70~~$2.28 billion as of December 31, ~~2020.~~2021. Total community bank loans receivable ~~decreased $85.4~~increased $218.7 million, or ~~5.8%~~15.7%, to $1.61 billion as of December 31, 2022, compared to $1.40 billion as of December 31, ~~2021, compared to $1.48 billion as of December 31, 2020.~~2021. The ~~decrease~~increase in loans receivable is the result of ~~$254.0~~strong loans growth net of $107.1 million in PPP loan forgiveness and paydowns during the year ended December 31, ~~2021.~~2022. Non-PPP community bank loan growth was ~~$168.2~~$325.8 million, or ~~15.0%~~25.4%, as a result of increased loan activity. Total community bank deposits ~~increased $294.9~~decreased $109.3 million, or ~~21.8%~~6.6%, to $1.54 billion, as of December 31, 2022, compared to $1.65 billion as of December 31, ~~2021, compared to $1.35 billion as of December 31, 2020.~~2021. The ~~increase~~decrease in deposits is largely due our decision to ~~initiatives to expand and grow banking relationships with new customers, including new customers that obtained PPP loans through the bank.~~let some deposits runoff instead of retaining them based on price. The overall increase in deposits was achieved

67

despite a decrease of $25.6 million in total deposits due to the sale of our Freeland branch, which were included in the total deposits as of December 31, ~~2020.~~

2021.

Net interest income for the community bank was $85.1 million for the year ended December 31, 2022, an increase of $12.1 million, or 16.5%, compared to $73.0 million for the year ended December 31, ~~2021, an increase of $16.2 million, or 28.5%, compared to $56.8 million for the year ended December 31, 2020.~~2021. The increase in net interest income is largely due to ~~net deferred fee income recognized on forgiven or repaid PPP loans as well as increased yield on loans resulting from non-PPP~~ loan growth and ~~a decrease in lower yielding PPP~~increased interest rates on new and variable rate loans. Provision for loan losses was $719,000 for the year ended December 31, 2022, compared to $1.3 million for the year ended December 31, ~~2021, compared to $8.2 million for the year ended December 31, 2020.~~2021. The provision for loan losses was increased in ~~2020~~2021 as a result of economic uncertainties of the COVID-19 pandemic and loan growth, however losses have not realized as anticipated. Noninterest income for the community bank was $5.7 million, for the year ended December 31, 2022, a decrease of $5.1 million, or 47.2%, compared to $10.7 million for the year ended December 31, 2021 ~~an increase of $4.9~~In 2021, there was a $1.5 million ~~or 84.2%, compared to $5.8 million for the year ended December 31, 2020, due to an~~ unrealized holding gain on an equity investment and $1.3 million gain on sale of a branch, ~~increased deposit service charges~~compared to $153,000 unrealized loss on equity securities, no gain on sale of branch and ~~higher~~$1.3 million less in loan referral ~~fees.~~fees in 2022. Noninterest expenses for the community bank increased ~~$17.0~~$12.6 million, or ~~49.1%~~24.4%, to $64.1 million as of December 31, 2022, compared to $51.5 million as of December 31, ~~2021, compared to $34.6 million as of December 31, 2020.~~2021. The increase in noninterest expense is largely due to increased salaries and employee benefits as a result of growth, higher software licenses maintenance and subscription costs related to new reporting software that helps to automate and create efficiencies in reporting, and other expense increases related to growth.

CCBX total assets as of December 31, ~~2021~~2022 increased ~~$287.0~~$693.6 million, or ~~434.8%~~196.5%, to ~~$353.0 million,~~$1.05 billion, compared to ~~$66.0~~$353.0 million as of December 31, ~~2020.~~2021. Total CCBX loans receivable increased ~~$281.0~~$665.8 million, or ~~428.0%~~192.1%, to $1.01 billion as of December 31, 2022, compared to $346.7 million as of December 31, ~~2021, compared to $65.7 million as of December 31, 2020.~~2021. The increase in loans receivable is the result of ~~adding new~~growth in CCBX relationships. CCBX allowance for loan losses increased to $53.4 million as of December 31, 2022, compared to $8.3 million as of December 31, 2021 ~~compared to $66,000 as of December 31, 2020~~ as a result of loan growth and portfolio mix. Total CCBX deposits increased ~~$647.6~~$563.0 million, or ~~942.8%~~78.6%, to ~~$716.3 million,~~$1.28 billion, compared to ~~$68.7~~$716.3 million as of December 31, ~~2020~~2021 as a result of ~~adding new CCBX relationships. CCBX partners have grown 86.7% to 28 total CCBX relationships as~~growth in CCBX.

Included in noninterest expense for the community bank is administrative overhead of $27.2 million and $19.0 million for the year ended December 31, 2022 and December 31, 2021, ~~compared to 15 total relationships~~respectively. Both the community bank and the CCBX segment benefit from this administrative overhead and services, which includes shared operational activities such as ~~of December 31, 2020.~~

data management, compliance monitoring and other administration functions.

Net interest income for CCBX was $86.7 million for the year ended December 31, 2022, an increase of $80.3 million, or 1,247.7%, compared to $6.4 million for the year ended December 31, ~~2021, an increase of $5.9 million, or 1,063.3%, compared to $553,000 for the year ended December 31, 2020.~~2021. The increase in net interest income is due to loan growth

62

from ~~new~~ CCBX relationships. Provision for loan losses was $78.3 million for the year ended December 31, 2022, compared to $8.6 million for the year ended December 31, 2021, ~~compared to $66,000 for the year ended December 31, 2020,~~ as a result of loan growth from ~~adding new~~CCBX partners. Noninterest income for CCBX was $119.0 million, for the year ended December 31, 2022, an increase of $101.6 million, or 583.9%, compared to $17.4 million for the year ended December 31, 2021, ~~an increase of $15.0 million, or 635.9%, compared to $2.4 million for the year ended December 31, 2020,~~ due to an increase of ~~$14.9~~$6.2 million in ~~BaaS fees, $3.9 million increase in total~~ BaaS fee program income, which was the result of increased ~~relationships~~activity with broker dealers and digital financial service providers, ~~$9.1~~$67.3 million in BaaS fees – credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, and ~~$1.5~~$28.1 million in BaaS fees – fraud ~~recovery~~enhancements. Noninterest expenses for CCBX increased ~~$8.1~~$90.9 million, or ~~229.5%~~776.2%, to ~~$11.~~7$102.7 million as of December 31, ~~2021,~~2022, compared to ~~$3.6~~$11.7 million as of December 31, ~~2020.~~2021. The increase in noninterest expense is largely due to an increase in BaaS loan expense, BaaS fraud expense and increased salaries and benefits, for the year ended December 31, ~~2021,~~2022, compared to the year ended December 31, ~~2020.~~2021. For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”.

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

	December 31, 2021									December 31, 2020
	Community Bank			CCBX			Total			Community Bank			CCBX			Total				December 31, 2022						December 31, 2021
(dollars in thousands)																			(dollars in thousands)	Bank		CCBX		Total		Bank		CCBX		Total
	(dollars in thousands)
Total assets	$	2,282,514		$	353,003		$	2,635,517		$	1,700,121		$	66,001		$	1,766,122		Total assets	$	2,097,885	$	1,046,582	$	3,144,467	$	2,282,514	$	353,003	$	2,635,517

Total loans receivable	$	1,396,060		$	346,675		$	1,742,735		$	1,481,475		$	65,663		$	1,547,138		Total loans receivable	1,614,751		1,012,505		2,627,256		1,396,060		346,675		1,742,735
Allowance for loan losses	$	(20,299	)	$	(8,333	)	$	(28,632	)	$	(19,196	)	$	(66	)	$	(19,262	)	Allowance for loan losses	(20,636)		(53,393)		(74,029)		(20,299)		(8,333)		(28,632)
Total deposits	$	1,647,529		$	716,258		$	2,363,787		$	1,352,620		$	68,687		$	1,421,307		Total deposits	1,538,218		1,279,303		2,817,521		1,647,529		716,258		2,363,787

Year Ended

December 31, 2021

December 31, 2020

Community Bank

CCBX

Total

Community Bank

CCBX

Total

(dollars in thousands)

Net interest income

$
73,004

$
6,433

$
79,437

$
56,833

$
553

$
57,386

Provision for loan losses

$
1,275

$
8,640

$
9,915

$
8,242

$
66

$
8,308

Noninterest income

$
10,713

$
17,405

$
28,118

$
5,817

$
2,365

$
8,182

Noninterest expense

$
51,547

$
11,716

$
63,263

$
34,563

$
3,556

$
38,119

68


	Year Ended
	December 31, 2022						December 31, 2021
(dollars in thousands)	Bank		CCBX		Total		Bank		CCBX		Total

Net interest income	$	85,075	$	86,700	$	171,775	$	73,004	$	6,433	$	79,437
Provision for loan losses	$	719	$	78,345	79,064		$	1,275	$	8,640	9,915
Noninterest income	$	5,652	$	119,032	124,684		$	10,713	$	17,405	28,118
Noninterest expense	$	64,114	$	102,660	166,774		$	51,547	$	11,716	63,263

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Financial Condition

Our total assets increased ~~$869.4~~$509.0 million to ~~$2.64~~$3.14 billion, or ~~49.2%~~19.3% at December 31, ~~2021,~~2022, compared to ~~$1.77~~$2.64 billion at December 31, ~~2020.~~2021. This increase was largely the result of a ~~$195.6~~$884.5 million increase in loans receivable, combined with ~~an increase~~a decrease of ~~$654.5~~$489.2 million in interest earning deposits with other banks. As

Loans Held For Sale

During the year ended December 31, 2022, $152.5 million in CCBX loans were transferred to loans held for sale, with $152.5 million in loans sold, at par, during the year ended December 31, 2022 and zero remaining in loans held for sale as of December 31, ~~2021, $111.8 million in PPP loans remain on the balance sheet.~~

2022.

Loan Portfolio

We accepted and processed requests for PPP loans from the beginning of the program in March 2020 for the duration of round one and two of the PPP, and throughout round three, which closed for applications on May 31, 2021. As a preferred SBA lender, we worked diligently with the SBA to offer assistance to small businesses as provided in the CARES Act, as amended by subsequent legislation, which significantly impacted our loan totals. These SBA loans are discussed further in this section under ~~“Commercial and Industrial Loans”.~~

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, ~~2021,~~2022, loans receivable totaled ~~$1.74~~$2.63 billion, an increase of ~~$195.6~~$884.5 million, or ~~12.6%~~50.8%, compared to ~~$1.55 billion as of~~ December 31, ~~2020.~~2021. Total loans receivable is net of ~~$8.8~~$6.1 million in net deferred origination fees, ~~$3.6 million~~$82,000 of which is attributed to PPP loans. The increase includes CCBX loan growth of ~~$281.0~~$665.8 million, or ~~428.2%~~192.1%, ~~non-PPP~~and community bank loan growth of ~~$168.2~~$215.9 million, or ~~15.0%~~15.4%, ~~partially offset by~~which includes a ~~reduction of $254.0~~$107.1 million, or ~~69.4%~~95.8%, reduction in PPP loans due to forgiveness and

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principal paydowns. Additionally, unused loan commitments increased ~~with~~including unused commitments on capital call lines ~~increasing $287.7~~which increased $356.8 million to $772.7 million at December 31, 2022, compared to $416.0 million at December 31, 2021, ~~compared to $128.2 million at December 31, 2020,~~ which ~~will likely~~may translate tointo loan growth as the commitments are ~~utilized in future periods.~~

utilized.

Loans as a percentage of deposits were 93.2% as of December 31, 2022, compared to 73.7% as of December 31, ~~2021 and 108.9% as of December 31, 2020.~~2021. We ~~are~~remain focused on serving our communities and markets by growing loans ~~locally~~ and funding those loans with customer deposits. The ~~decrease~~increase in the loan to deposit ratio ~~for 2021 compared to 2020~~ was ~~largely~~ due to ~~the increase in interest earning deposits with other banks, primarily due to the increase in CCBX deposits.~~

loan growth.

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

	As of December 31,
	2021						2020							As of December 31,
(Dollars in thousands)	Amount			Percent			Amount			Percent
														2022					2021
(dollars in thousands)													(dollars in thousands)	Amount			Percent		Amount			Percent
Commercial and industrial loans:													Commercial and industrial loans:
PPP loans	$	111,813			6.4	%	$	365,842			23.5	%	PPP loans	$	4,699		0.2	%	$	111,813		6.4	%
Capital call lines		202,882			11.5			65,559			4.2		Capital call lines	146,029			5.5		202,882			11.5
All other commercial & industrial loans		104,365			6.0			107,799			6.9		All other commercial & industrial loans	161,900			6.1		104,365			6.0
Total commercial and industrial loans:													Total commercial and industrial loans:	312,628			11.8		419,060			23.9
Real estate loans:													Real estate loans:
Construction, land and land development loans		183,594			10.5			94,423			6.1
Residential real estate loans		204,389			11.7			143,869			9.2
Commercial real estate loans		835,587			47.7			774,925			49.8
Construction, land and land development													Construction, land and land development	214,055			8.1		183,594			10.5
Residential real estate													Residential real estate	449,157			17.1		204,389			11.7
Commercial real estate													Commercial real estate	1,048,752			39.8		835,587			47.7
Consumer and other loans		108,871			6.2			3,916			0.3		Consumer and other loans	608,771			23.2		108,871			6.2
Gross loans receivable		1,751,501			100.0	%		1,556,333			100.0	%	Gross loans receivable	2,633,363			100.0	%	1,751,501			100.0	%
Net deferred origination fees - PPP loans		(3,633	)					(5,803	)				Net deferred origination fees - PPP loans	(82)					(3,633)
Net deferred origination fees - Other loans		(5,133	)					(3,392	)
Net deferred origination fees - all other loans													Net deferred origination fees - all other loans	(6,025)					(5,133)
Loans receivable	$	1,742,735					$	1,547,138					Loans receivable	$	2,627,256				$	1,742,735
Loan Yield													Loan Yield	8.12		%			4.86		%

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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
	December 31, 2022					December 31, 2021
(dollars in thousands; unaudited)	Balance			% to Total		Balance			% to Total
Commercial and industrial loans:
PPP loans	$	4,699		0.3	%	$	111,813		8.0	%
All other commercial & industrial loans	146,982			9.1		104,365			7.4
Real estate loans:
Construction, land and land development loans	214,055			13.2		183,594			13.1
Residential real estate loans	204,581			12.6		167,502			11.9
Commercial real estate loans	1,048,752			64.7		835,587			59.5
Consumer and other loans:
Other consumer and other loans	1,725			0.1		2,034			0.1
Gross Community Bank loans receivable	1,620,794			100.0	%	1,404,895			100.0	%
Net deferred origination fees	(6,042)					(8,835)
Loans receivable	$	1,614,752				$	1,396,060
Loan Yield	5.32		%			4.90		%


CCBX	As of
	December 31, 2022					December 31, 2021
(dollars in thousands; unaudited)	Balance			% to Total		Balance			% to Total
Commercial and industrial loans:
Capital call lines	$	146,029		14.4	%	$	202,882		58.6	%
All other commercial & industrial loans	14,918			1.5		—			0.0
Real estate loans:
Residential real estate loans	244,576			24.2		36,887			10.6
Consumer and other loans:
Credit cards	279,644			27.6		11,429			3.3
Other consumer and other loans	327,402			32.3		95,408			27.5
Gross CCBX loans receivable	1,012,569			100.0	%	346,606			100.0	%
Net deferred origination (fees) costs	(65)					69
Loans receivable	$	1,012,504				$	346,675
Loan Yield (1)	13.85		%			4.46		%

(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.~~Loans. Commercial and industrial loans decreased ~~$120.1~~$106.4 million, or ~~22.3%~~25.4%, to $312.6 million as of December 31, 2022, from $419.1 million as of December 31, ~~2021, from $539.2 million as of December 31, 2020.~~2021. The decrease in commercial and industrial loans receivable over ~~the year ended~~ December 31, ~~2020~~2021 was due to ~~$254.0~~$107.1 million in ~~forgiveness~~forgiven and repaid PPP loans and a decrease of $56.9 million in capital call lines, partially offset by ~~an increase of $137.3~~a $57.5 million increase in ~~capital call lines.~~other commercial and industrial loans. Included in the commercial and industrial loan balance is ~~$202.9~~$146.0 million and ~~$65.6~~$202.9 million in capital call lines resulting from relationships with our CCBX ~~customers~~partners as of December 31, ~~2021,~~2022, and December 31, ~~2020,~~2021, respectively. ~~Also included in commercial and industrial loans is $111.8 million and $365.8 million in PPP loans as~~As of December 31, ~~2021, and~~2022, there were $14.9 million in CCBX other commercial loans, compared to zero at December 31, ~~2020, respectively.~~2021.

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.

~~The purpose of the PPP was to provide forgivable~~ Commercial and industrial loans includes $45.1 million and $20.2 million in loans to ~~smaller businesses, sole proprietorships, independent contractors,~~financial institutions as of December 31, 2022, and self-employed individuals that use the proceeds of the loans for payroll and certain other qualifying expenses. The Small Business Administration (“SBA”) manages the PPP. If a loan is fully forgiven, the SBA will repay the lending bank in full. If a loan is partially forgiven or not forgiven at all, a bank must look to the borrower for repayment of unforgiven principal and interest. If the borrower defaults, the loan is guaranteed by the SBA. We accepted and processed applications for the duration of the initial PPP loan program, which closed for new applicants on August 8, 2020. The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, appropriated additional funding to the PPP and permitted certain PPP borrowers to make “second draw” loans. The American Rescue Plan Act of 2021, enacted on March 11, 2021, expanded the eligibility criteria for both first and second draw PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness. The PPP Extension Act of 2021, enacted on March 25, 2021, extended the PPP through May 31, 2021, ~~at which time the program closed for new applications.~~

~~In total, we funded $763.9~~respectively.

Also included in commercial and industrial loans is $4.7 million and $111.8 million in PPP loans ~~since the first round~~as of ~~PPP loans opened in March 2020 through the close of round three on May~~December 31, ~~2021. Total net deferred fees on these loans were $26.3 million.~~2022, and December 31, 2021, respectively. As of December 31, ~~2021, $111.8~~2022, $4.7 million in PPP loans remained with ~~$3.6 million~~$82,000 in net deferred fees, which will be recognized in interest income in future periods. ~~Legislation extended the initial payment deferral period on~~The impact of PPP loans ~~originated in 2020, and PPP borrowers with two-year loans can work with their lender to extend their loan to a five-year maturity, which we anticipate could be a popular approach for customers with~~on the Company’s financial statements has significantly decreased as nearly all of the PPP loans that are not eligible for forgiveness. There are $4.3 million of these loans remaining as of December 31, 2021. PPP loans originated in 2021 are five-year loans, and $107.5 million remains of these loans as of December 31, 2021. Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower's loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (generally between eight and 24 weeks).

We continue to accept applications from customers for loan forgiveness. To obtain loan forgiveness, a PPP borrower must submit a forgiveness application. We expect PPP forgiveness payments to continue through the second quarter of 2022.

have been paid off and/or forgiven.

Construction, Land and Land Development ~~Loans.~~Loans. Construction, land and land development loans increased ~~$89.2~~$30.5 million, or ~~94.4%~~16.6%, to $214.1 million as of December 31, 2022, from $183.6 million as of December 31, ~~2021, from $107.8 million as of December 31, 2020,~~2021. The increase is attributed to growth in community bank primarily ~~due to growth.~~ for commercial construction and some land and land development loans.

Unfunded loan commitments for construction, land and land development loans were $142.5 million at December 31, 2022, compared to $134.3 million at December 31, ~~2021, which is an increase of $45.9 million, or 52.0%, compared to $88.4 million in unfunded commitments at December 31, 2020.~~2021. Although we have ~~not~~ seen a ~~significant drop in our~~strong commercial and residential real estate market in the Puget Sound region thus far in 2022, the ~~full extent of~~economic environment is continuously changing and is impacted by increased inflation, higher interest rates, global unrest, the ~~long-term effects of~~war in Ukraine, the ~~COVID-19 pandemic remain to be seen.~~

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, ~~2021,~~2022, construction, land and land development loans included ~~$28.9~~$100.7 million in commercial construction loans, $44.6 million in undeveloped land loans, $32.9 million in residential construction loans ~~$82.8 million in commercial construction loans~~ and ~~$71.9~~$35.9 million in other construction, land and land development loans, compared to ~~$21.6~~$82.8 million in commercial construction loans, $37.8 million in undeveloped land loans, $28.9 million in residential construction loans ~~$43.5 million in commercial construction loans~~ and ~~$29.3~~$34.1 million in other construction, land and land development loans as of December 31, ~~2020.~~

2021.

Residential Real Estate ~~Loans.~~Loans. Our one-to-four family residential real estate loans increased ~~$60.5~~$244.8 million, or ~~42.1%~~119.8%, to $449.2 million as of December 31, 2022, from $204.4 million as of December 31, 2021 ~~from $143.9~~largely due to an increase of $207.7 million asin CCBX loans. CCBX home equity lines of ~~December 31, 2020.~~credit are secured by residential real estate and are accessed by using a credit card.

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

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mortgage loan. As of December 31, ~~2021,~~2022, the balance of our ARM portfolio loans was ~~$22.2~~$28.0 million, compared to ~~$20.5~~$22.2 million at December 31, ~~2020.~~2021. Our ARM loans typically do not meet the guidelines for sale in the secondary market due to characteristics of the property, the loan terms or exceptions from agency underwriting guidelines, which enables us to earn a higher interest rate. We also purchase residential mortgages originated bythrough other financial institutions to hold for investment with the intent to diversify our residential mortgage loan portfolio, meet certain regulatory requirements and increase our interest income. We last purchased residential mortgage loans in 2018. As of December 31, ~~2021,~~2022, we held ~~$11.9~~$9.4 million in purchased residential real estate mortgage loans, compared to ~~$16.8~~$11.9 million at December 31, ~~2020.~~2021. These purchased loans ~~purchased~~ typically ~~have a fixed~~are variable rate ~~with a term of 15 to 30 years~~ and are collateralized by one-to-four family residential real estate. We have a defined set of credit guidelines that we use when evaluating these loans. Although purchased loans were originated and underwritten by another institution, our mortgage, credit, and compliance departments conduct an independent review of each underlying loan that includes re-underwriting each of these loans to our credit and compliance standards. We also make one-to-four family loans to investors to finance their rental properties and to business owners to secure their business loans. As of December 31, 2022, residential real estate loans made to investors and business owners totaled $140.7 million. As of December 31, 2021, residential real estate loans made to investors and business owners totaled $114.0 million.

As of December 31, ~~2020, residential real estate loans made to investors and business owners totaled $84.3 million.~~

~~As of December 31, 2021~~2022, there were ~~$36.9~~$244.6 million in CCBX home equity loans included in residential real estate, compared to $0$36.9 million at December 31, ~~2020,~~2021, as a result of ~~adding new partners.~~

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

Like our commercial real estate loans, our residential real estate loans are secured by real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in the area in which the real estate is

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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.~~Loans. Commercial real estate loans increased ~~$60.7~~$213.2 million, or ~~7.8%~~25.5%, to $1.05 billion as of December 31, 2022, from $835.6 million as of December 31, ~~2021, from $774.9 million as of December 31, 2020.~~2021.

These increases, which occurred across the various segments of our portfolio, were due to our commitment to ~~grow this~~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~~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 ~~ratesand adjust with the term-equivalent FHLB rate.~~rates. At December 31, ~~2021,~~2022, approximately ~~28.0%~~30.5% of the commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans represented ~~47.7%~~39.8% of our loan portfolio at December 31, ~~2021~~2022 and are historically our largest source of revenue. AtAs of December 31, ~~2020, approximately 41.4% of the commercial real estate loan portfolio consisted of fixed rate loans. The Bank actively seeks~~2022, we held $42.4 million in purchased commercial real estate loans, ~~in our markets and our lenders are experienced in originating, competing for, and managing these loans and relationships.~~compared to $35.9 million at December 31, 2021. 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.~~Loans. Consumer and other loans increased ~~$105.0~~$499.9 million, or ~~2,680.2%~~459.2%, to ~~$108.9~~$608.8 million, from ~~$3.9~~$108.9 million as of December 31, ~~2020, primarily~~2021, as a result of growth in CCBX loans ~~from adding new~~originated through our partners.

CCBX consumer loans totaled $607.0 million as of December 31, 2022, compared to $106.8 million at December 31, 2021. CCBX consumer loans include installment loans, credit cards, lines of credit and other loans. Our community bank consumer and other loans totaled $1.7 million as of December 31, 2022, compared to $2.0 million at December 31, 2021 and are comprised of personal lines of credit, automobile, boat, and recreational vehicle loans, and secured term loans.

Included in consumer and other loans is $106.8 million in CCBX loans as of December 31, 2021, compared to $67,000 as of December 31, 2020. CCBX consumer loans are primarily comprised of credit cards and secured and unsecured consumer loans.

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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:

	As of December 31, 2021
			Due after One		Due after Five							As of December 31, 2022
	Due in One		Year Through		Years Through		Due After		Gross
(Dollars in thousands)	Year or Less		Five Years		Fifteen Years		Fifteen Years		Loans
(dollars in thousands)											(dollars in thousands)	Due in One Year or Less		Due after One Year Through Five Years		Due after Five Years Through Fifteen Years		Due After Fifteen Years		Gross Loans
Commercial and industrial loans:											Commercial and industrial loans:
PPP loans	$	1,549	$	110,264	$	-	$	-	$	111,813	PPP loans	$	—	$	4,699	$	—	$	—	$	4,699
All other commercial and industrial loans		235,964		43,148		-		28,135		307,247	All other commercial and industrial loans	180,872		53,895		73,162		—		307,929
Real estate loans:											Real estate loans:
Construction, land and land development loans		79,544		80,056		7,209		16,785		183,594	Construction, land and land development loans	148,912		36,921		11,114		17,108		214,055
Residential real estate loans		14,683		74,287		37,705		77,714		204,389	Residential real estate loans	24,700		276,526		106,163		41,768		449,157
Commercial real estate loans		71,361		205,051		111,987		447,188		835,587	Commercial real estate loans	71,517		221,532		618,269		137,434		1,048,752
Consumer and other loans		37,345		68,607		2,646		273		108,871	Consumer and other loans	30,377		519,167		59,227		—		608,771
Total	$	440,446	$	581,413	$	159,547	$	570,095	$	1,751,501	Total	$	456,378	$	1,112,740	$	867,935	$	196,310	$	2,633,363

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The following table sets forth all loans at December 31, ~~2021,~~2022, that are due after December 31, ~~2022,~~2023, and have either fixed interest rates or floating or adjustable interest rates:


			Floating or
(Dollars in thousands)	Fixed Rates		Adjustable Rates		Total
(dollars in thousands)							(dollars in thousands)	Fixed Rates		Floating or Adjustable Rates		Total
Commercial and industrial loans:							Commercial and industrial loans:
PPP loans	$	110,264	$	-	$	110,264	PPP loans	4,699		$	—	$	4,699
All other commercial and industrial loans		43,075		28,208		71,283	All other commercial and industrial loans	72,829		235,100		307,929
Real estate loans:							Real estate loans:
Construction, land and land development loans		63,251		40,799		104,050	Construction, land and land development loans	69,209		144,846		214,055
Residential real estate loans		46,506		143,200		189,706	Residential real estate loans	61,636		387,521		449,157
Commercial real estate loans		194,557		569,669		764,226	Commercial real estate loans	320,049		728,703		1,048,752
Consumer and other loans		60,506		11,020		71,526	Consumer and other loans	324,991		283,780		608,771
Total	$	518,159	$	792,896	$	1,311,055	Total	$	853,413	$	1,779,950	$	2,633,363

Industry Exposure and Categories of Loans

We have a diversified loan portfolio, representing a wide variety of industries. ~~Three of our largest~~Our major categories of ~~our loans, excluding PPP~~ loans are commercial real estate, consumer and other loans, residential real estate, commercial and industrial, and construction, land and land development loans. Together ~~as of December 31, 2021,~~ they represent ~~$1.33~~$2.63 billion in outstanding loan ~~balances, or 80.9% of total gross loans outstanding, excluding PPP loans of $111.8 million.~~balances. When combined with ~~the full loan portfolio’s $909.6 million~~$2.20 billion in unused commitments the total of these ~~three~~ categories is ~~$1.97 billion, or 77.3% of total outstanding loans and loan commitments.~~

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~~Commercial real estate loans~~ represent the largest segment of our loans, comprising 51.0% of our total balance of outstanding loans, excluding PPP loans, as of December 31, 2021. Unused commitments to extend credit represents an additional $23.2 million, the combined$4.83 billion. However, total exposure ~~in commercial real estate~~on CCBX loans ~~represents $858.8 million, or 33.8% of our total outstanding~~is subject to portfolio and partner maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans ~~and loan commitments, excluding PPP loans.~~

by category.

The following table summarizes our exposure by industry for our commercial real estate portfolio as of December 31, ~~2021:~~

2022:

(Dollars in thousands, unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure		% of Total Loans (Outstanding Balance & Available Commitment)			Average Loan Balance		Number of Loans

(dollars in thousands; unaudited)														(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure		% of Total Loans (Outstanding Balance & Available Commitment)		Average Loan Balance		Number of Loans
Apartments	$	155,079	$	3,827	$	158,906		6.2	%	$	2,096		74	Apartments	$	215,371	$	5,912	$	221,283	4.6	%	$	2,564	84
Hotel/Motel		115,878		228		116,106		4.6			4,457		26	Hotel/Motel	160,938		4,101		165,039		3.4		5,961		27
Retail														Retail	82,257		4,116		86,373		1.8		904		91
Office		91,370		3,623		94,993		3.7			942		97	Office	101,205		3,744		104,949		2.2		1,043		97
Mixed use														Mixed use	83,640		4,632		88,272		1.8		950		88
Convenience Store														Convenience Store	91,075		3,586		94,661		2.0		1,822		50
Warehouse		76,453		4,085		80,538		3.2			1,499		51	Warehouse	77,716		1,862		79,578		1.6		1,439		54
Convenience Store		79,249		1,093		80,342		3.2			1,843		43
Mixed use		70,713		3,894		74,607		2.9			852		83
Retail		68,886		2,582		71,468		2.8			840		82
Mini Storage														Mini Storage	47,380		1,287		48,667		1.0		2,961		16
Strip Mall														Strip Mall	45,873		—		45,873		0.9		5,734		8
Manufacturing		36,855		600		37,455		1.5			1,152		32	Manufacturing	38,694		1,780		40,474		0.8		1,138		34
Mini Storage		35,041		204		35,245		1.4			2,336		15
Groups < 1.4% of total		106,063		3,112		109,175		4.3			1,326		80
Groups < 0.70% of total														Groups < 0.70% of total	104,603		4,004		108,607		2.2		1,260		83
Total	$	835,587	$	23,248	$	858,835		33.8	%	$	1,433		583	Total	$	1,048,752	$	35,024	$	1,083,776	22.3	%	$	1,659	632

~~Commercial and industrial loans~~

74

~~comprise 18.7%~~Table of Contents

As illustrated in the table below, our CCBX partners originate a large number of ~~our total balance~~mostly smaller dollar loans, resulting in an average consumer loan of outstanding loans, excluding PPP loans, as of December 31, 2021. Unused commitments to extend credit represents an additional $486.8 million, the combined total exposure in commercial and industrial loans represents $794.1 million, or 31.2% of our total outstanding loans and loan commitments, excluding PPP loans.

just $1,400.

The following table summarizes our exposure by category for our consumer and other loan portfolio as of December 31, 2022:


(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure (1)		% of Total Loans (Outstanding Balance & Available Commitment)		Average Loan Balance		Number of Loans
CCBX consumer loans
Installment loans	$	320,017	$	—	$	320,017	6.6	%	$	1.5	211,547
Credit cards	279,644		791,758		1,071,402		22.1		1.5		189,642
Lines of credit	4,822		689		5,511		0.1		0.3		14,349
Other loans	2,563		—		2,563		0.1		0.1		17,987
Community bank consumer loans
Lines of credit	162		1,116		1,278		0.0		3.4		47
Installment loans	1,351		—		1,351		0.1		42.2		32
Other loans	212		—		212		0.0		0.6		332
Total	$	608,771	$	793,563	$	1,402,334	29.0	%	$	1.4	433,936

(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, 2022:


(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure (1)		% of Total Loans (Outstanding Balance & Available Commitment)		Average Loan Balance		Number of Loans
CCBX residential real estate loans
Home equity line of credit	$	244,576	$	329,193	$	573,769	11.9	%	$	28	8,607
Community bank residential real estate loans
Closed end, secured by first liens	178,901		4,625		183,526		3.8		604		296
Home equity line of credit	15,853		39,005		54,858		1.1		79		200
Closed end, second liens	9,827		1,912		11,739		0.2		351		28
Total	$	449,157	$	374,735	$	823,892	17.0	%	$	49	9,131

(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 ~~excluding PPP loans,~~ for our commercial and industrial loan portfolio as of December 31, ~~2021:~~

2022:

(Dollars in thousands, unaudited)

Outstanding Balance

Available Loan Commitments

Total Exposure

% of Total Loans
(Outstanding Balance & Available Commitment)

Average Loan Balance

Number of Loans

Capital Call Lines

$
202,882

$
415,956

$
618,838

24.3
%

$
1,649

123

Construction/Contractor
Services

16,475

33,810

50,285

2.0

102

161

Financial Institutions

20,150

-

20,150

0.8

3,358

6

Manufacturing

13,369

4,857

18,226

0.7

243

55

Medical / Dental /
Other Care

12,203

4,045

16,248

0.6

200

61

Family and Social Services

7,175

2,490

9,665

0.4

478

15

Groups < 0.40% of total

34,993

25,646

60,639

2.4

124

282

Total

$
307,247

$
486,804

$
794,051

31.2
%

$
437

703


(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure		% of Total Loans (Outstanding Balance & Available Commitment)		Average Loan Balance		Number of Loans
Capital Call Lines (1)	$	146,029	$	772,732	$	918,761	19.0	%	$	859	170
Construction/Contractor Services	20,714		32,137		52,851		1.1		116		179
Financial Institutions	45,149		—		45,149		0.9		4,104		11
Manufacturing	13,341		4,793		18,134		0.4		226		59
Medical / Dental / Other Care	21,790		2,464		24,254		0.5		726		30
Retail	15,991		6,245		22,236		0.5		26		623
Groups < 0.30% of total	49,614		35,929		85,543		1.8		168		296
Total	$	312,628	$	854,300	$	1,166,928	24.2	%	$	229	1,368

~~Construction, land~~

(1)Total exposure on CCBX loans is subject to portfolio maximum limits. See "Material Cash Requirements and ~~land development~~ Capital Resources"~~comprise 11.2% of our total balance of outstanding~~ for maximum limits on CCBX loans excluding PPP loans, as of December 31, 2021. Unused commitments to extend credit represents an additional $134.3 million, the combined total exposure in construction, land and land development loans represents $317.9 million, or 12.5% of our total outstanding loans and loan commitments, excluding PPP loans.by category.

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The following table details our ~~exposure~~concentration by category for our construction, land and land development loan portfolio as of December 31, ~~2021:~~2022:


(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure		% of Total Loans (Outstanding Balance & Available Commitment)		Average Loan Balance		Number of Loans
Commercial construction	$	100,714	$	100,647	$	201,361	4.2	%	$	4,196	24
Residential construction	32,879		26,708		59,587		1.2		865		38
Undeveloped land loans	44,578		7,653		52,231		1.1		2,972		15
Developed land loans	20,167		4,315		24,482		0.5		672		30
Land development	15,717		3,219		18,936		0.4		827		19
Total	$	214,055	$	142,542	$	356,597	7.4	%	$	1,699	126

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(Dollars in thousands, unaudited)

Outstanding Balance

Available Loan Commitments

Total Exposure

% of Total Loans
(Outstanding Balance & Available Commitment)

Average Loan Balance

Number of Loans

Commercial construction

$
82,816

$
100,302

$
183,118

7.2
%

$
2,958

28

Residential construction

28,865

19,638

48,503

1.9

722

40

Undeveloped land loans

37,817

3,440

41,257

1.6

2,701

14

Developed land loans

20,457

7,836

28,293

1.1

568

36

Land development

13,639

3,069

16,708

0.7

758

18

Total

$
183,594

$
134,285

$
317,879

12.5
%

$
1,350

136

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. WeInstallment (closed end) consumer loans and revolving (open-ended loans, such as credit cards) originated through CCBX partners continue to accrue interest until they are ~~not required~~charged-off at 120 days past due for installment loans (primarily unsecured loans to ~~report~~consumers) and 180 days past due for revolving loans (primarily credit cards). These consumer loans are reported out as ~~nonperforming~~substandard loans, 90+ days past due and still accruing. As a ~~loan for which~~result of the type of loans (primarily consumer loans) originated through our CCBX partners, we ~~have allowed the borrower to defer payment on a short term basis because of financial pressure related to COVID-19.~~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. CCBX partner loans are placed on nonaccrual status in accordance with the partner’s practice and policy for treatment of nonaccrual loans, and may remain on accrual status beyond such time it becomes 90 days past due. 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 ~~$1.7~~$33.2 million in nonperforming assets ~~and no troubled debt restructurings (“TDRs”),~~ as of December 31, ~~2021,~~2022, compared to ~~$712,000~~$1.7 million as of December 31, ~~2020.~~2021. This includes $26.1 million in CCBX loans more than 90 days past due and still accruing interest as of December 31, 2022, compared to $1.5 million at December 31, 2021. All of our nonperforming assets were nonperforming loans as of December 31, ~~2021~~2022 and ~~2020.~~December 31, 2021. Our nonperforming loans to loans receivable ratio was 1.26% at December 31, 2022, compared to 0.10% at December 31, ~~2021, compared to 0.05% at December 31, 2020.~~2021. The increase in nonperforming assets was ~~the result of $1.5~~due to a $24.6 million increase in CCBX partner ~~accruing~~ loans ~~past due~~that are 90 days or more past due and still accruing interest. Community bank nonaccrual loans increased $6.9 million during the year ended December 31, 2022 primarily due to the addition of one new nonaccrual loan partially offset by ~~a decrease~~other nonaccrual principal reductions/charge-offs. The $6.9 million nonaccrual balance in commercial real estate loans shown below consists of ~~$491,000~~one loan, is well secured with an original loan to value ratio of 62%, and an updated loan to value ratio of 75% as of January 2023. Management anticipates this loan being resolved in ~~nonaccrual~~the first half of 2023.

Our community bank ~~loans.~~

~~To date we have not seen a significant change in our~~ credit quality ~~metrics,~~remains strong, as demonstrated by the low level of community bank charge-offs and nonperforming ~~loans~~loan balance for the year ended December 31, ~~2021. The long-term economic impact~~2022. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the ~~COVID-19 pandemic, political gridlock,~~factors for the allowance for loan losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. Consumer loans originated through CCBX partners are charged-off at 120 days past due for installment loans (primarily unsecured loans to consumers) and ~~trade issues remains unknown; however, the Company remains diligent in its efforts to communicate and proactively work with borrowers to help mitigate potential~~180 days past due for revolving loans (primarily credit ~~deterioration.~~

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cards).

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


(dollars in thousands)	As of December 31, 2022			As of December 31, 2021
Nonaccrual loans:
Commercial and industrial loans	$	113		$	166
Real estate loans:
Construction, land and land development	66			—
Residential real estate	—			55
Commercial real estate	6,901			—
Total nonaccrual loans	7,080			221
Accruing loans past due 90 days or more:
Commercial & industrial loans	404			—
Real estate loans:
Residential real estate loans	876			39
Consumer and other loans:
Credit cards	10,570			155
Other consumer and other loans	14,245			1,312
Total accruing loans past due 90 days or more	26,095			1,506
Total nonperforming loans	33,175			1,727
Real estate owned	—			—
Repossessed assets	—			—
Troubled debt restructurings, accruing	—			—
Total nonperforming assets	$	33,175		$	1,727
Total nonaccrual loans to loans receivable	0.27		%	0.01		%
Total nonperforming loans to loans receivable	1.26		%	0.10		%
Total nonperforming assets to total assets	1.06		%	0.07		%

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, 2022		December 31, 2021
Nonaccrual loans:
Commercial and industrial loans	$	113	$	166
Real estate:
Construction, land and land development	66		—
Residential real estate	—		55
Commercial real estate	6,901		—
Total nonaccrual loans	7,080		221

Accruing loans past due 90 days or more:
Total accruing loans past due 90 days or more	—		—
Total nonperforming loans	7,080		221
Other real estate owned	—		—
Repossessed assets	—		—
Total nonperforming assets	$	7,080	$	221

78

As of

As of

December 31,

December 31,

(Dollars in thousands)

2021

2020

Nonaccrual loans:

Commercial and industrial loans

$
166

$
537

Real estate loans:

Residential real estate loans

55

175

Total nonaccrual loans

221

712

Loans on accrual status and past due 90 days or more:

Total loans on accrual status and past due 90 days or more

1,506

-

Total nonperforming loans

1,727

712

Total nonperforming assets

$
1,727

$
712

Total nonaccrual loans to loans receivable

0.01
%

0.05
%
Total nonperforming loans to loans receivable

0.10
%

0.05
%
Total nonperforming assets to total assets

0.07
%

0.04
%


CCBX	As of
(dollars in thousands; unaudited)	December 31, 2022		December 31, 2021
Nonaccrual loans	$	—	$	—
Accruing loans past due 90 days or more:
Commercial & industrial loans	404		—
Real estate loans:
Residential real estate loans	876		39
Consumer and other loans:
Credit cards	10,570		155
Other consumer and other loans	14,245		1,312
Total accruing loans past due 90 days or more	26,095		1,506
Total nonperforming loans	26,095		1,506
Other real estate owned	—		—
Repossessed assets	—		—
Total nonperforming assets	$	26,095	$	1,506

Potential Problem Loans

From a credit risk standpoint, we classify most categories of our loans in one of five categories: pass, other loans especially mentioned, substandard, doubtful or loss. Within the pass category, we classify loans into one of the following five subcategories based on perceived credit risk, including repayment capacity and collateral security: minimal risk, low risk, modest risk, average risk and acceptable risk. For consumer loans we follow the uniform retail credit classification approach, where we classify loans into three categories: pass, substandard (over 90 days and still accruing) and loss (installment/closed-end, and revolving/open-end consumer loans originated through CCBX lending partners more than 120 and 180 days past due, respectively). The classifications of loans reflect a judgment about the risks of default and loss given default. We review the risk ratings of our credits on an annual basis, or more frequently if circumstances warrant. Risk ratings are adjusted to reflect the degree of risk and loss that is believed to be inherent in each credit as of each monthly reporting period. Our methodology is structured so that specific reserve allocations are increased in accordance with deterioration in credit quality (and a corresponding increase in risk and loss) or decreased in accordance with improvement in credit quality (and a corresponding decrease in risk and loss).

•

Credits rated as other loans especially mentioned show clear signs of financial weaknesses or deterioration in creditworthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.

•Credits rated as other loans especially mentioned show clear signs of financial weaknesses or deterioration in creditworthiness; however, such concerns are not so pronounced that we generally expect to experience significant loss within the short-term. Such credits typically maintain the ability to perform within standard credit terms and credit exposure is not as prominent as credits with a lower rating.•

Credits rated as substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses in the collateral for the loan. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.

•Credits rated as substandard are those in which the normal repayment of principal and interest may be, or has been, jeopardized by reason of adverse trends or developments of a financial, managerial, economic or political nature, or important weaknesses in the collateral for the loan. A protracted workout on these credits is a distinct possibility. Prompt corrective action is therefore required to reduce exposure and to assure that adequate remedial measures are taken by the borrower. Credit exposure becomes more likely in such credits and a serious evaluation of the secondary support to the credit is performed.•

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

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

~~Credits rated as loss are charged-off. We have no expectation of the recovery of any payments in respect of credits rated as loss.~~

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•Credits rated as loss are charged-off. We have no expectation of the recovery of any payments in respect of credits rated as loss.

•CCBX credits are rated following the uniform retail credit classification approach, where we classify loans into three categories: pass, substandard (over 90 days and still accruing) and loss (installment/closed-end, and revolving/open-end consumer loans originated through CCBX lending partners more than 120 and 180 days past due, respectively). Installment/closed-end, and revolving/open-end consumer loans originated through CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively and an

79

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

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

	As of December 31, 2021
	Pass		Other Loans Especially Mentioned		Sub- Standard		Doubtful		Total
	(dollars in thousands)
Commercial and industrial loans	$	416,642	$	2,180	$	238	$	-	$	419,060
Real estate loans:
Construction, land, and land development loans		183,594		-		-		-		183,594
Residential real estate loans		204,173		122		94		-		204,389
Commercial real estate loans		824,676		10,911		-		-		835,587
Consumer and other loans		107,404		-		1,467		-		108,871
	$	1,736,489	$	13,213	$	1,799	$	-		1,751,501
Less net deferred origination fees										(8,766	)
Loans receivable									$	1,742,735

	As of December 31, 2020												As of December 31, 2022
	Pass		Other Loans Especially Mentioned		Sub- Standard		Doubtful		Total				Pass		Other Loans Especially Mentioned		Sub- Standard		Doubtful		Total
	(dollars in thousands)												(dollars in thousands)
Commercial and industrial loans	$	538,149	$	397	$	654	$	-	$	539,200		Commercial and industrial loans	$	304,840	$	7,219	$	569	$	-	$	312,628
Real estate loans:												Real estate loans:
Construction, land, and land development loans		94,423		-		-		-		94,423
Residential real estate loans		143,540		154		175		-		143,869
Commercial real estate loans		763,647		11,278		-		-		774,925
Construction, land, and land development												Construction, land, and land development	206,304		7,685		66		-		214,055
Residential real estate												Residential real estate	448,185		96		876		-		449,157
Commercial real estate												Commercial real estate	1,030,650		11,201		6,901		-		1,048,752
Consumer and other loans		3,916		-		-		-		3,916		Consumer and other loans	583,956		-		24,815		-		608,771
	$	1,543,675	$	11,829	$	829	$	-		1,556,333			$	2,573,935	$	26,201	$	33,227	$	-	2,633,363
Less net deferred origination fees										(9,195	)	Less net deferred origination fees									(6,107)
Loans receivable									$	1,547,138		Loans receivable									$	2,627,256


	As of December 31, 2021
	Pass		Other Loans Especially Mentioned		Sub- Standard		Doubtful		Total
	(dollars in thousands)
Commercial and industrial loans	$	416,642	$	2,180	$	238	$	-	$	419,060
Real estate loans:
Construction, land, and land development loans	183,594		-		-		-		183,594
Residential real estate loans	204,173		122		94		-		204,389
Commercial real estate loans	824,676		10,911		-		-		835,587
Consumer and other loans	107,404		-		1,467		-		108,871
	$	1,736,489	$	13,213	$	1,799	$	-	1,751,501
Less net deferred origination fees									(8,766)
Loans receivable									$	1,742,735

Allowance for Loan Losses

We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, and current economic factors. See “—Critical Accounting Policies—Allowance for Loan Losses.”

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

•

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

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

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

71

•

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

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

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

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

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

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

As of December 31, 2022, the allowance for loan losses totaled $74.0 million, or 2.82% of total loans. As of December 31, 2021, the allowance for loan losses totaled $28.6 million, or 1.64% of total loans. ~~As of December 31, 2020, the allowance for loan losses totaled $19.3 million, or 1.25% of total loans.~~ The increase in the Company’s ~~provision~~allowance for loan losses for the year ended December 31, ~~2021~~2022 compared to ~~the year ended~~ December 31, ~~2020,~~2021, is largely related to the provision for CCBX partner loans. During the year ended December 31, ~~2021,~~2022, a ~~$8.6~~$78.3 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank loan losses indicated that a provision for loan losses of ~~$1.2 million~~$719,000 was needed for the year ended December 31, ~~2021. The expected COVID-19 pandemic related loan losses have not materialized as originally anticipated in 2020, as evidenced by the low level of charge-offs and nonperforming loans.~~2022. The economic environment is continuously changing ~~and has shown some signs of improvement in 2021,~~ with ~~ongoing vaccination of its population and increased re-opening of economic activities, tempered by~~ increased inflation, higher interest rates, global unrest, the war in Ukraine, the political environment and ~~a rise in new COVID-19 variants~~trade issues that have resulted in some economic uncertainty. As described above, CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses. ~~Many agreements~~

Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX ~~loans.~~loans and negative deposit accounts. When the provision for loan losses and provision for unfunded commitments is recorded, a ~~recovery receivable~~credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS ~~fees -credit enhancement). Incurred losses are recorded~~credit enhancements) in recognition of the ~~allowance for loan losses, and~~CCBX partner's legal commitment to cover losses. The credit enhancement asset is relieved as ~~the~~ credit enhancement recoveries are received from the CCBX partner. CCBX partners also pledge a cash reserve account at the Bank which the Bank can collect from when losses occur that is then replenished by the partner ~~the recovery receivable is relieved.~~on a regular interval. Although ~~many~~ agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit ~~and fraud~~ losses by absorbing incurred credit ~~and fraud~~ losses, if our partner is unable to fulfill ~~their~~its contracted obligations to replenish its cash reserve account then the ~~bank~~Bank would be exposed to additional loan and deposit 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 receivable from the CCBX partner but would retain the full yield on the loan going forward, and BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped. The Company ~~is not required to implement the provisions of~~adopted the CECL accounting standard ~~until~~effective January 1, 2023 and ~~continues to account~~accounted for the allowance for credit losses under the incurred loss ~~model.~~

model at December 31, 2022 and for prior periods.

81

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

	As of
	December 31, 2021										As of December 31, 2022									As of December 31, 2021
(Dollars in thousands)	Community Bank			CCBX			Total
(dollars in thousands)										(dollars in thousands)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Loans receivable	$	1,396,060		$	346,675		$	1,742,735		Loans receivable	$	1,614,751		$	1,012,505		$	2,627,256		$	1,396,060		$	346,675		$	1,742,735
Allowance for loan losses		(20,299	)		(8,333	)		(28,632	)	Allowance for loan losses	(20,636)			(53,393)			(74,029)			(20,299)			(8,333)			(28,632)
Allowance for loan losses to total loans receivable		1.45	%		2.40	%		1.64	%	Allowance for loan losses to total loans receivable	1.28		%	5.27		%	2.82		%	1.45		%	2.40		%	1.64		%

Included in total loans is $111.8 million in PPP loans which are 100% guaranteed by the SBA. The allowance for loan losses to loans receivable, excluding the guaranteed PPP loans, is approximately 1.75% and 1.62% at December 31, 2021 and 2020, respectively. A reconciliation of this non-GAAP measure is set forth in the section titled ~~“GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”~~

72

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

	As of or for the Year Ended December 31,
(Dollars in thousands)	2021			2020
								As of or for the Year Ended December 31,
(dollars in thousands)							(dollars in thousands)	2022			2021
Allowance at beginning of period	$	19,262		$	11,470		Allowance at beginning of period	$	28,632		$	19,262
Provision for loan losses		9,915			8,308		Provision for loan losses	79,064			9,915
Charge-offs:							Charge-offs:
Commercial and industrial loans		222			141		Commercial and industrial loans	555			222
Real estate loans:
Construction, land and land development loans		-			369
Residential real estate loans		79			-
Consumer and other loans		339			15
Residential real estate							Residential real estate	452			79
Consumer and other							Consumer and other	32,742			339
Total charge-offs		640			525		Total charge-offs	33,749			640
Recoveries:							Recoveries:
Commercial and industrial loans		67			5		Commercial and industrial loans	40			67
Consumer and other loans		28			4
Consumer and other							Consumer and other	42			28
Total recoveries		95			9		Total recoveries	82			95
Net charge-offs		(545	)		(516	)	Net charge-offs	33,667			545
Allowance at end of period	$	28,632		$	19,262		Allowance at end of period	$	74,029		$	28,632
Allowance for loan losses to nonperforming loans		1657.90	%		2705.34	%
Allowance for loan losses to nonaccrual loans		12955.66	%		2705.34	%	Allowance for loan losses to nonaccrual loans	1045.61		%	12955.66		%
Allowance for loan losses to total loans receivable		1.64	%		1.25	%
Allowance to nonperforming loans							Allowance to nonperforming loans	223.15		%	1657.90		%
Allowance to loans receivable							Allowance to loans receivable	2.82		%	1.64		%
Net charge-offs to average loans		0.03	%		0.04	%	Net charge-offs to average loans	1.49		%	0.03		%

The allowance for loan losses to nonaccrual loans ratio ~~increased substantially at~~decreased as of December 31, ~~2021,~~2022, compared to December 31, ~~2020~~2021 as a result of ~~a decrease~~an increase of ~~$491,000~~$6.9 million in nonaccrual community bank loans, combined with an increase of ~~$9.4~~$45.4 million in the allowance for loan losses. The decrease in the allowance to nonperforming loans ratio is due to an increase in CCBX loans 90+ days past due and accruing as a result of growth in the CCBX loan portfolio. The increase in the allowance for loan losses for the year ended December 31, ~~2021~~2022 compared to the year ended December 31, ~~2020,~~2021, is largely related to the increase in the allowance for loans originated through our CCBX partners. CCBX partner ~~loans.~~agreements provide for, and the Company has collected in full, credit enhancements that cover the $33.3 million in net-charge-offs on CCBX loans for the year ended December 31, 2022. At December 31, ~~2021, there was a balance of $8.3 million in~~2022, the allowance for loan losses for CCBX partner loans totaled $53.4 million, compared to ~~$66,000~~$8.3 million at December 31, ~~2020.~~

2021.

82

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


	Year Ended
	December 31, 2022									December 31, 2021
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	428		$	33,321		$	33,749		$	255		$	385		$	640
Gross recoveries	(46)			(36)			(82)			(83)			(12)			(95)
Net charge-offs	$	382		$	33,285		$	33,667		$	172		$	373		$	545
Net charge-offs to average loans	0.03		%	4.48		%	1.49		%	0.01		%	0.25		%	0.03		%

Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio. ~~As a result of the COVID-19 pandemic and its impact to the economy, we increased our provision during the year ended December 31, 2020. The expected~~We have not seen an increase in community bank loan losses ~~have not materialized~~due to COVID-19 as originally anticipated, ~~in 2020,~~ as evidenced by the low level of charge-offs and nonperforming loans, however, if the ~~COVID-19 pandemic worsens or continues indefinitely, preventing businesses~~economic environment is continuously changing with increased inflation, higher interest rates, global unrest, the war in Ukraine, the political environment and ~~consumers from conducting business~~trade issues that have resulted in some economic uncertainty. If economic conditions worsen then the ~~ordinary course, the~~U.S., Washington state and Puget Sound region may experience a ~~continued~~more severe economic downturn, and our asset quality could deteriorate, which may require material additional provisions for loan losses.

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

	At December 31,
	2021					2020						At December 31,
(Dollars in thousands)	Allowance Allocated to Loan Portfolio		Loan Category as a % of Total Loans			Allowance Allocated to Loan Portfolio		Loan Category as a % of Total Loans
												2022				2021
(dollars in thousands)											(dollars in thousands)	Allowance Allocated to Loan Portfolio		Loan Category as a % of Total Loans		Allowance Allocated to Loan Portfolio		Loan Category as a % of Total Loans
Commercial and industrial loans	$	3,221		11.3	%	$	3,353		18.4	%	Commercial and industrial loans	$	4,831	11.8	%	$	3,221	23.9	%
Real estate loans:											Real estate loans:
Construction, land and land development loans		6,984		24.5			3,545		19.4		Construction, land and land development loans	7,425		8.1		6,984		10.5
Residential real estate loans		4,598		16.2			3,410		18.7		Residential real estate loans	4,142		17.1		4,598		11.7
Commercial real estate loans		6,590		23.1			7,810		42.8		Commercial real estate loans	5,470		39.8		6,590		47.7
Consumer and other loans		7,092		24.9			127		0.7		Consumer and other loans	50,996		23.2		7,092		6.2
Total allocated		28,485					18,245				Total allocated	72,864				28,485

Unallocated		147					1,017				Unallocated	1,165				147
Total allowance for loan losses	$	28,632				$	19,262				Total allowance for loan losses	$	74,029			$	28,632

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

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, ~~2021,~~2022, 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, ~~Alt-A~~ or second lien elements in our investment portfolio.

Our management evaluates securities for other-than-temporary impairment on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.

As of December 31, ~~2021~~2022 and ~~2020,~~2021, we did not own securities of any one issuer, other than the U.S. Government and its agencies, for which aggregate adjusted cost exceeded 10.0% of consolidated shareholders’ equity.

Restricted equity securities totaled $7.5 million as of December 31, 2022 and $6.0 million as of December 31, 2021 ~~and $5.2 million as of December 31, 2020~~ The increase was attributable to net additions of Federal Reserve and FHLB stock. 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 ~~held~~has the following equity investments which do not have a ~~$750,000 equity interest during as of December 31, 2020, which consists of 1.6 million shares of common stock~~readily determinable fair value and ~~873,853 preferred shares. During the year ended December 31, 2021, the Company recognized a $1.5 million~~

75

unrealized holding gain due to an observable price change in the equity. The Company elects to account for the investments under ASC 321 Investments – Equity Securities without Readily Determinable Value. The investments will beare held at cost minus ~~impairment.~~impairment if any, plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issuer. This method ~~should~~will be applied until the ~~investment does~~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 ~~investment~~investments without a readily determinable fair value qualifies to be measured at cost minus impairment.

As of December 31, 2022 and December 31, 2021 wethe Company held ~~$100,000 in corporate equity securities which was recorded in other investments on the balance sheet. The~~a $2.2 million equity interest in a specialized bank technology company which consists of ~~9,000~~1.6 million shares of common stock and was previously carried at cost of $500,000, which approximated fair value at time of purchase. During the year ended December 31, 2020 the Company re-evaluated the value and recorded an unrealized loss on equity investment.

873,853 preferred shares. During the year ended December 31, 2021, the Company ~~entered agreements for~~reassessed the value and recognized a ~~capital commitment~~$1.5 million unrealized holding gain as a

During the year ended December 31, 2022, the Company re-evaluated the value on a $500,000 equity investment in a technology company and recorded an impairment of $100,000. This equity investment consists of 9,000 shares of stock and is carried at cost less impairment, which approximates its fair value.

Additionally, the Company contributed $350,000 in a technology company during the year ended December 31, 2022. There was no equity ownership in this company as of December 31, 2021.

The Company invests in investment funds that are designed to ~~$1.3 million~~help accelerate technology adoption at banks and has invested in three separate funds. These funds are carried at fair value as reported by the funds During the year ended December 31, 2022, the Company contributed $349,000 with investment funds designed to help accelerate technology adoption at ~~banks. During the year the Company contributed $163,000 in with~~banks, and recognized losses of ~~$3,000 during the year~~$53,000, resulting in an equity interest of ~~$160,000 for the year ended~~$456,000 at December 31, ~~2021.~~

2022. The Company has committed up to $988,000 in capital for these investment funds, however, the Company is not obligated to fund these commitments prior to a capital call.

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

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

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

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:

Average deposits for the year ended December 31, ~~2021,~~2022, were ~~$1.90~~$2.67 billion, an increase of ~~$662.2~~$766.1 million, or ~~53.5%~~40.3%, compared ~~$1.24~~$1.90 billion for the year ended December 31, ~~2020.~~2021. The increase in average deposits was primarily due to an increase in core deposits, both in noninterest bearing deposits and in ~~low interest rate~~ interest bearing deposits. Included ~~in this increase is deposit relationships gained from PPP loans made to noncustomers that moved their banking/deposit relationship to the Bank. Also included~~ in this increase is growth in CCBX deposits. We expect deposits to ~~grow~~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 0.71% for the year ended December 31, 2022, compared to 0.12% for the year ended December 31, ~~2021, compared to 0.35% for the year ended December 31, 2020.~~2021. The average rate paid on total interest-bearing deposits was ~~0.26%~~1.10% for the year ended December 31, ~~2021,~~2022, compared to 0.59% for the year ended December 31, 2020. The average rate paid on BaaS-brokered deposits decreased 0.18% for the year ended December 31, 2021, compared to December 31, 2020, and NOW and money market accounts decreased 33 basis points,0.26% for the year ended December 31, 2021. The ~~decrease~~average rate paid on BaaS-brokered deposits increased 1.11% for the year ended December 31, 2022, compared to December 31, 2021, and NOW and money market accounts increased 0.93%, for the year ended December 31, 2022. The increase in average rate paid on deposit accounts for the year ended December 31, ~~2021,~~2022, is the result of the ~~decreased~~increased Fed funds rates since June 2019 and management lowering rates in response to the decrease; the impact of these rate decreases will continue to be reflected in future periods until market conditions change. The market is expecting at least one if not two 25 basis point rate changes from the Federal Open Market Committee (FOMC) in March of

throughout 2022. ~~A rate change in March would likely reverse our downward trend on deposits costs and result in increased deposit costs.~~ Any further changes to the Fed funds rate and rate pressure from market competition is expected to continue to impact future cost of deposits and our pricing strategies.

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

The ratio of average noninterest-bearing deposits to average total deposits for the years ended December 31, 2022 and 2021, was 35.3% and ~~2020, was~~ 52.1% ~~and 41.5%~~, respectively.

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, 2022, deposits totaled $2.82 billion, of which total estimated uninsured deposits were $835.8 million. At December 31, 2021, deposits totaled $2.36 billion, of which total estimated uninsured deposits were $823.5 million. ~~At December 31, 2020, deposits totaled $1.42 billion, of which total estimated uninsured deposits were $618.4 million.~~

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

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.

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

As of and For the Years
Ended December 31,

(Dollars in thousands)

2021

2020

Maximum amount outstanding at any month-end during period:

FHLB Advances

$
100

$
2,260

Average outstanding balance during period:

FHLB Advances

$
-

$
67

Weighted average interest rate during period:

FHLB Advances

0.25
%

1.84
%
Balance outstanding at end of period:

FHLB Advances

$
-

$
-

Weighted average interest rate at end of period:

FHLB Advances

0.00
%

0.00
%


	As of and For the Years Ended December 31,
(dollars in thousands)	2022			2021
Maximum amount outstanding at any month-end during period:	$	24,999		$	24,999
Average outstanding balance during period:	$	6,029		$	24,999
Weighted average interest rate during period:	1.13		%	1.13		%
Balance outstanding at end of period:	$	—		$	24,999
Weighted average interest rate at end of period:	n/a			1.13		%

~~The following table presents details on FHLB medium term borrowings for the periods indicated:~~

Year Ended December 31,

(Dollars in thousands)

2021

2020

Maximum amount outstanding at any month-end during period:

FHLB Advances

$
24,999

$
24,999

Average outstanding balance during period:

FHLB Advances

$
24,999

$
20,669

Weighted average interest rate during period:

FHLB Advances

1.13
%

1.13
%
Balance outstanding at end of period:

FHLB Advances

$
24,999

$
24,999

Weighted average interest rate at end of period:

FHLB Advances

1.13
%

1.13
%

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. The debentures bear interest at a rate per annum equal to the 3-month LIBOR plus 2.10%. The effective rate as of December 31, 2022 and 2021, was 6.87% and ~~2020, was~~ 2.30% ~~and 2.32%~~, 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~~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. 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.

In November 2022, the Company ~~completed~~issued a ~~public offering~~subordinated note in the amount of ~~851,853 shares~~$20.0 million. The note matures on November 1, 2032, and bears interest at the rate of ~~its common stock~~7.00% per year for five years and, thereafter, reprices quarterly beginning November 1, 2027, at a ~~price~~rate equal to the ~~public~~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 $40.50 per share. Gross proceeds from the offering of $34.5 million, before deducting underwriting discounts and offering expenses, will be used for general corporate purposes, including, without limitation,$1,000, after November 1, 2027, subject to ~~support investment opportunities and the Bank’s growth. A total~~ any required regulatory approvals.

The following table provides the material cash requirements from known contractual and other obligations as of December 31, ~~2021:~~

2022:

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.

In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets.

Our commitments associated with outstanding commitments to extend credit and standby and commercial letters of credit are summarized below. Since commitments associated with commitments to extend credit and letters of credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements.

As of December 31, 2021, we held $202.9 million in capital call lines, included in commercial and industrial loans, provided to venture capital firms through one of our BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line.

~~As of December 31, 2021,~~2022, we had ~~$909.6 million~~$2.20 billion in commitments to extend credit, compared to ~~$318.0~~$909.6 million as of December 31, ~~2020.~~2021. The ~~$591.6 million~~$1.29 billion increase is largely attributed to growth in our CCBX segment, due to the addition of new partners, resulting in an increase of ~~$521.5 million~~$1.25 billion in commitments to extend credit on CCBX loans. The following

Commitments to extend credit on CCBX loans are included in the table above and are summarized below:

We have portfolio limits with our each of our partners to manage loan concentration risk, liquidity risk, and counter-party partner risk. For example, as of December 31, 2022, capital call lines outstanding balance totaled $146.0 million, and while commitments totaled $772.7 million the commitments are cancelable, and are also limited to a maximum of $350.0 million by agreement with the partner.

The following table shows the CCBX maximum portfolio sizes by loan category as of December 31, 2022.

Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. Our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our customers.

We believe that we will be able to meet our long-term cash requirements as they come due. Adequate cash levels are ~~expected~~generated through profitability, repayments from loans and securities, deposit gathering activity, access to borrowing sources and periodic loan sales.

During the year ended December 31, ~~2021, $9.1~~2022, $76.4 million was ~~recorded~~recognized in noninterest income BaaS ~~fees -~~ credit enhancements related to the ~~provision~~establishment of a credit enhancement asset for future loan losses indemnified by our strategic partners and reserve for unfunded commitments for CCBX partner ~~loans.~~loans and deposits. Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by absorbing incurred ~~losses.~~losses on accounts originated through the partner. In accordance with accounting

guidance, we estimate and record a provision for probable losses ~~for~~on these CCBX ~~loans.~~loans and deposit overdrafts. When the provision for loan losses and provision for unfunded commitments is recorded, a ~~recovery receivable~~credit enhancement asset is also recorded on the balance sheet through the recognition of noninterest income (BaaS ~~fees -credit enhancement).~~credit enhancements) in recognition of the CCBX partner’s indemnification obligation and legal commitment to cover losses. Incurred credit losses are recorded in the allowance for loan losses, and as the credit enhancement ~~recoveries~~payments are received from the CCBX partner, the ~~recovery receivable~~credit enhancement asset is relieved. Agreements with our CCBX partners also provide protection to the Bank from fraud by absorbing incurred fraud losses. Fraud losses are recorded when incurred as losses in noninterest expense, and the recovery received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. CCBX partners also pledge cash reserves in a restricted deposit account at the Bank which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Although ~~many~~ agreements with our CCBX partners provide for ~~credit~~ enhancements that provide protection to the Bank from credit and fraud losses by absorbing incurred credit and fraud losses, if our partner is unable to fulfill ~~their~~its contracted obligations beyond its cash reserve account then the ~~bank~~Bank would be exposed to additional loan and deposit losses, as a result of this counterparty risk.

If a CCBX partner does not adequately replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would write-off any remaining receivable from the CCBX partner but would retain the full yield on the loan going forward, and BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.

The results illustrate that the ~~Bank~~Company is asset sensitive and generally performs better in an increasing interest rate environment. ~~The results~~As the Company’s composition has shifted over time due to the growth of the CCBX segment to more variable/adjustable in nature, our interest rate risk profile has been mitigated, reducing variability in both rising and falling rate environments, as the community bank and CCBX segments work to offset one another. For the community bank, the drivers are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, ~~interest~~offering rates on these community bank deposits change more slowly than changes in short-term market rates. For the ~~discount~~CCBX segment, the offering rates on the loan portfolio are modeled using partner contractual net yields which adjust with market shifts. For this CCBX portfolio, the offering rates on both the loans and ~~federal funds~~the deposits nearly fully reprice with changes in market rates. ~~This assumption is incorporated into the simulation model.~~ The assumptions incorporated into the simulation model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact ofthat fluctuations in market interest

rates have on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions, the shape of the interest yield curve, and the application and timing of various ~~strategies.~~

~~The -100, -200,~~assumptions and -300 basis point change in market interest rates no longer reflects viable interest rate changes as interest rates would have to go negative since the Fed Funds rate target range is set at 0.00% to 0.25%. Until rates increase, these rate shock scenarios may not reflect what may happen to net interest income if interest rates were to go negative.

strategies.

Our consolidated financial statements and related notes to those financial statements included elsewhere in this Report on Form 10-K have been prepared in accordance with GAAP. GAAP requires the measurement of financial position and operating results in terms of historical dollars, without considering changes in the relative value of money over time due to inflation or recession.

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.

The information required by this item follows.

The Company operates through the Bank and is headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. The Company’s business is conducted through 2two reportable segments: The community bank and CCBX. The community bank offers a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound ~~area~~region through its 14 branches in Snohomish, Island and King Counties, the Internet, and its mobile banking application. The Company also has a CCBX segment which provides Banking as a Service (“BaaS”) enabling broker dealers and digital financial service providers to offer their clients banking services. Through CCBX’s partners the Company is able to offer banking services and products across the nation.

The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The community bank’s loans and deposits are primarily within the greater Puget Sound ~~area,~~region, while CCBX loans and deposits are dependent upon the partner’s market. The Bank’s primary funding source is deposits from customers. The Bank is subject to regulation and supervision by the Board of Governors of the Federal Reserve System and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has regulatory and supervisory authority over the Company.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying consolidated financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation.

Debt securitiesnot classifiedas held-to-maturityareclassifiedas available-for-sale.Such securitiesmaybe soldto facilitatetheCompany’sasset/liabilitymanagementstrategiesand in responseto changesin interestrates and similarforces.Securitiesavailable-for-salearecarriedatfairvaluewith unrealizedgainsand lossesreported in othercomprehensiveincome.Realizedgains(losses)on securitiesavailable-for-saleareincludedin noninterestincomeand, when applicable,arereportedas a reclassificationadjustmentin othercomprehensive income.Gains and losseson salesof securitiesarerecordedon thetradedateand aredeterminedon thespecific-identificationmethod.

Declinesin thefairvalueof individualheld-to-maturityand available-for-salesecuritiesbelow theiramortized costthatareotherthantemporaryresultin write-downsof theindividualsecuritiesto theirfairvalue.The related write-downsareincludedin earningsas realizedlosses.In estimatingother-than-temporaryimpairmentlosses, managementconsiders(1)thelengthof timeand theextentto which thefairvaluehas been lessthancost,(2)the financialconditionand near-termprospectsof theissuer,and (3)theintentand abilityof theCompany to retain itsinvestmentin theissuerfora periodof timesufficientto allowforany anticipatedrecoveryin fair value.

As a FederalReservememberbank, the Bank isrequiredto own stockin theFRB in an amountbased on the Bank’s capital.The recordedamountof theFRBstockequalsitsfairvaluebecausethesharescan only be redeemedby theFRBattheirparvalue.The Bank’s investmentin FRBstockwas $4.3 million and $2.8 million atDecember 31, 2022 and 2021, ~~and 2020.~~

respectively.

The Bank, as a memberof theFHLB, isrequiredto maintainan investmentin capitalstockof FHLBin an amountequalto 4% of advancesoutstanding,plus0.12% of total assetsfromthepriorfiscalyearend. The recordedamountof FHLBstockequalsitsfairvaluebecausetheshares can only be redeemedby FHLBatthe$1 $1 pershareparvalue.The investmentin FHLBstockwas $3.2 million and $3.1 million ~~and $2.4 million~~ atDecember 31, 2022 and 2021, ~~and 2020,~~ respectively.

The investmentin PacificCoast Banker’sBancshares(“PCBB”)stockconsistsof an equitysecurity.This investmentiscarriedatitscostof $100,000 atDecember 31, ~~2021~~2022 and ~~2020,~~2021, which approximatesitsfairvalue.

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.

These equity investments without a readily determined fair value include:

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

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, ~~2021,~~2022, the Company ~~entered into agreements~~contributed $349,000 with ~~two~~ investment funds designed to help accelerate technology adoption at banks. These equity investments are held at fair value. During the year ended December 31, 2021, the Company committed up to $1.1 million in capital for these equity funds, however, the Company is not obligated to fund these commitments prior to a capital call. During the year the Company contributed $163,000 in withbanks, and recognized net losses of ~~$3,000 during the year~~$53,000, resulting in an equity interest of ~~$160,000~~$456,000 at December 31, 2022. The Company has committed up to $988,000 in capital for these equity funds.

The following table shows the activity in equity fund investments held at fair value for the ~~year ended December 31, 2021.~~

dates shown:

The accrual of interest on community bank loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due or when they are 90 days past due as to either principal or interest, unless they are well secured and in the process of collection. When interest accrual is discontinued, all unpaid accrued interest is reversed against current income. If management determines that the ultimate collectability of principal or interest is in doubt, cash receipts on nonaccrual loans are applied to reduce the principal balance on a cash-basis method, until the loans qualify for return to accrual status or principal is paid in full. Loans are returned to accrual status when all principal and interest amounts contractually due are brought current, borrower has demonstrated ability to make regular payments, generally a period of at least six months, and future payments are reasonably assured.

For installment/closed-end, and revolving/open-end consumer loans originated through CCBX lending partners loans will accrue interest until 120 and 180 days past due, respectively, which is consistent with regulatory guidelines for consumer loans of this nature, and an allowance is recorded through provision expense for these probable incurred losses. For installment/closed-end and revolving/open-end consumer loans originated through CCBX lending partners with balances outstanding beyond 120 days and 180 days, respectively, principal and capitalized interest outstanding is charged off against the allowance and accrued interest outstanding is reversed against interest income.

The allowance for loan losses is comprised of amounts charged against income in the form of the provision for loan losses, less charged-off loans, net of recoveries. When available information confirms that specific loans or portions thereof are uncollectible, identified amounts are charged against the allowance for loan losses. The existence of some or all of the following criteria will generally confirm that a loss has been incurred: (1) the loan is significantly delinquent and the borrower has not demonstrated the ability or intent to bring the loan current; (2) the Company has no recourse to the borrower or if it does, the borrower has insufficient assets to pay the debt; (3) the estimated fair value of the loan collateral

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral, and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of specific and general components. The specific component relates to loans that are determined to be impaired. For such loans (including troubled debt restructurings), an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers various loans and is based on the probability of default and loss given default, type of loan, peer information, risk rating and adjusted for qualitative and quantitative trends in the portfolio, including the internal risk classification of loans, historical loss rates, changes in the nature and volume of the loan portfolio, industry or borrower concentrations, delinquency trends, detailed reviews of significant loans with identified weaknesses and the impacts of local, regional and national economic factors on the quality of the loan portfolio. Community bank and CCBX loans are assessed at either the individual loan level or pooled, depending on loan type and characteristics of the loan. Consumer loans and smaller balance loans are typically assessed as homogeneous loan pools. Based on management’s analysis, the Company records a provision for loan losses to maintain the allowance at appropriate levels.

CCBX lending partners originate various loan types, and as of December 31, ~~2021,~~2022, include consumer, commercial and home equity loans. CCBX consumer loans typically have a higher level of expected losses than community bank loans which is reflected in the higher loss factors for the allowance for loan losses. Estimated loss rates for CCBX loans vary by partner, and might be based on actual partner experience, realized losses or losses for comparable products, industry averages, or the Company’s loss rate for similar loans. Many of the agreements with our CCBX partners provide for a credit enhancement which helps protect the Bank by absorbing incurred losses. CCBX credit enhancements are free-standing and isare accounted separately from the allowance for loan loss. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans, without regard to the credit enhancement. When the provision for loan losses is recorded, a free-standing credit enhancement ~~receivable~~asset is recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement). Charge-offs of CCBX partner loans are recorded against the allowance for loan losses. When collected from the credit enhancement cash reserve account or the CCBX partner, the credit enhancement ~~receivable~~asset is relieved. If a CCBX lending partner is unable to fulfill ~~their~~its contractual obligations under the credit enhancement, then the Bank would be exposed to additional loan losses as a result of this counterparty risk and would have to absorb any loan losses associated with the CCBX partner that cannot fulfill its contractual obligations. Management believes the balance would be recoverable in the event of bankruptcy of the partner, but there are no guarantees that bankruptcy court will rule in the Company’s favor. Additionally, CCBX partners are required to maintain and/or regularly replenish funding in their cash reserve accounts. Credit-worthiness of CCBX partners are evaluated as part of initial due diligence and quarterly thereafter.

The Company has not incurred any counterparty losses to date.

A community bank loanisconsideredimpairedwhen, basedon currentinformationand events,itisprobablethattheCompany willbe unableto collectthescheduledpaymentsof principalor interestwhen due accordingto thecontractual termsof the

loanagreement.Factorsconsideredby managementin determiningimpairmentincludepayment status,collateralvalue,and theprobabilityof collectingscheduledprincipaland interestpaymentswhen due. Loans thatexperienceinsignificantpaymentdelaysand paymentshortfallsgenerallyarenot classifiedas impaired.Managementdeterminesthesignificanceof paymentdelaysand paymentshortfallson a case-by-case basis,takingintoconsiderationallof thecircumstancessurroundingtheloanand theborrower,includingthe lengthof thedelay,thereasonsforthedelay,theborrower’spriorpaymentrecord,and theamountof the shortfallin relationto theprincipaland interestowed. Impairmentismeasuredon a loan-by-loanbasisfor commercialand constructionloansby eitherthepresentvalueof expectedfuturecashflowsdiscountedatthe loan’seffectiveinterestrate,theloan’sobtainablemarketprice,or thefairvalueof thecollateraliftheloanis collateral-dependent.CCBX ~~consumer loans and home equity~~ loans are treated as homogenous pools and are not subject to individual impairment analysis.

A troubleddebtrestructuring(“TDR”) isa loanforwhich theCompany, forreasonsrelatedto theborrower’s financialdifficulties,grantsa concessionto theborrowerthattheCompany would not otherwiseconsider.TDRs areindividuallyevaluatedforimpairmentand includedin theseparatelyidentifiedimpairmentdisclosures.TDRs aremeasuredatthepresentvalueof estimatedfuturecashflowsusingtheloan’seffectiverateatinception.Ifa TDRisconsideredto be a collateral-dependentloan,theloanisreported,net,atthefairvalueof thecollateral. For TDRs that subsequently default,

Community bank loans held-for-sale consist of the guaranteedportionof SBA loans and ~~United States Department~~USDA loans the Company intends to sell after origination and are reflected at the lower of ~~Agriculture (USDA) loans~~ ~~theCompany intendsto sellafteroriginationand arereflected~~at~~thelower~~of aggregatecostor fair value.Loans aregenerallysoldwith servicingof thesoldportionretainedby the Company when the sale of the loan occurs, the premium received is combined with the estimated present value of futurecashflowson the relatedservicingassetand recordedas a gainon saleof loansin noninterestincome.Therewere 0no loansheldfor saleatDecember 31, ~~2021~~2022 and ~~2020.~~

2021.

To determinethegainor losson saleof loans,theCompany’sinvestmentin theloanisallocatedamongthe retainedportionof theloan,theservicingretained,and thesoldportionof theloan,basedon therelativefair marketvalueof eachportion.The gainor losson thesoldportionof theloanisbasedon thedifferencebetween thesaleproceedsand theallocatedinvestmentin thesoldportionof theloan.A discountisrecordedagainstthe carryingvalueof theretainedportionof theloanto offsetthefairvalueallocationof saidretainedportion.

The Company retainstheservicingon thesoldguaranteedportionof SBA and USDAloans.The Company receivesa fee forservicingtheloan. The Company also retains the servicing on the sold guaranteed portion of MSLP loans. The net deferred fee on the sold portion of the loan is recognized when sold.

The Company does not retain the servicing on sold CCBX loans.

Maintenanceand repairsarechargedto operatingexpenses.Renewals and bettermentsareadded to theasset accountsand depreciatedovertheperiodsbenefited.Depreciableassetssoldor retiredareremovedfromthe assetand relatedaccumulateddepreciationaccountsand any gainor lossisreflectedin theincome statement.These assetsarereviewedforimpairmentwhen eventsindicatetheircarryingvaluemaynot be recoverable.Ifmanagementdeterminesimpairmentexists,theassetisreducedwith an offsettingchargeto the income statement.

As a lessee, the Company enters into operating leases for certain ~~bank~~Bank branches. The right-of-use assets and lease liabilities are initially recognized based on the net present value of the remaining lease payments which include renewal options where the Company is reasonably certain they will be exercised. The net present value is determined using the incremental collateralized borrowing rate at commencement date. The right-of-use asset is measured at the amount of the lease liability adjusted for any prepaid rent, lease incentives and initial direct costs incurred. The right-of-use asset and lease liability is amortized over the individual lease terms. Lease expense for lease payments is recognized on a straight-line basis over the lease term. For additional information regarding leases, see Note 6.

~~Federal~~

As of December 31, 2022 and 2021, ~~and 2020,~~ theCompany had 0no unrecognized income taxbenefits.The Company recognizes interestaccruedand penaltiesrelatedto unrecognizedtaxbenefitsin othernoninterestexpense.Therewere 0no interestand penaltiesassessed on income taxes during~~2021~~ 2022 or ~~2020.~~

2021.

Basicearningspercommonshareiscomputedby dividingnetearningsallocatedto commonshareholdersby theweighted-averagenumberof commonsharesoutstandingduringtheapplicableperiod,excludingoutstanding participatingsecurities.Dilutedearningspercommonshareiscomputedusingtheweighted-averagenumberof sharesdeterminedforthebasicearningspercommonsharecomputationplusthedilutiveeffectof stockusingthetreasurystockmethod.Stockoptions that are anti-dilutivearenot includedin thecalculationof diluted EPS.

The Company does not expect a material allowance for credit losses to be recorded on its available-for-sale debt securities for losses expected over the life of the ~~first reporting period in~~security under the newly codified available-for-sale debt security impairment model, as the majority of these securities are government agency-backed securities for which the ~~new standard~~risk of credit loss is ~~effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.~~minimal.

There were 0no sales of investments during the year ended December 31, ~~2021~~2022 or December 31, ~~2020.~~

2021.

Information pertaining to securities with gross unrealized losses at the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

At December 31, ~~2021~~2022 and December 31, ~~2020,~~2021, there were ~~4 and0~~six and four securities, respectively, in an unrealized loss position. Unrealized losses have not been recognized into income because management does not intend to sell and does not expect it will be required to sell the investments. The decline is largely due to changes in market conditions and interest rates, rather than credit quality. The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve. The Company does 0tnot consider these securities to be other than temporarily impaired at December 31, ~~2021.~~

2022.

The composition of the loan portfolio is as follows as of the periods indicated:

Included in commercial and industrial loans ~~are Paycheck Protection Program (“PPP”) loans of $111.8~~is $146.0 million and ~~$365.8 million at December 31, 2021 and December 31, 2020, respectively. PPP loans are 100% guaranteed by the SBA. Also included in commercial and industrial loans is~~ $202.9 ~~million and $65.6~~ million in capital call lines, as of December 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, provided to venture capital firms through one of our BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line.

Also included in commercial and industrial loans are Paycheck Protection Program (“PPP”) loans of $4.7 million and $111.8 million at December 31, 2022 and December 31, 2021, respectively. PPP loans are 100% guaranteed by the SBA.

Consumer and other loans includes overdrafts of ~~$1.3~~$2.7 million and ~~$31,000~~$1.3 million at December 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. Community bank overdrafts were ~~$13,000~~$94,000 and ~~$31,000~~$13,000 at December 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively and CCBX overdrafts were ~~$1.3~~$2.6 million and $0$1.3 million at December 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

The Company has pledged loans totaling ~~$183.5~~$220.1 million and ~~$326.7~~$183.5 million at December 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, for borrowing lines at the FHLB and FRB.

The balance of SBA and USDA loans and participations serviced for others totaled ~~$19.3~~$14.3 million and ~~$20.6~~$19.3 million at December 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

The balance of Main Street Lending Program (“MSLP”) loans participated and serviced for others totaled $58.0 million and $56.3 million at December 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively, with ~~$4.8~~$3.1 million and ~~$3.0~~$4.8 million outstanding and included in commercial and industrial loans as of December 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively.

The Company has purchased participation loans with remaining balances totaling ~~$27.9~~$63.9 million and ~~$44.9~~$27.9 million as of December 31, ~~2021~~2022 and December 31, ~~2020,~~2021, respectively. These loans are included in the applicable loan category depending upon the collateral and purpose of the individual loan.

The Company ~~purchase~~purchased loans from a CCBX ~~partner,~~partners, at par, through agreements with ~~that~~those CCBX ~~partner,~~partners, and those loans had a remaining balance of $157.4 million as of December 31, 2022 and $59.7 million as of December 31, ~~2021 and are~~2021. As of December 31, 2022, $146.1 million is included in consumer ~~loans. The Company recorded a receivable from the purchaser, which~~and other loans and $11.3 million is ~~secured by small dollar~~included in commercial and industrial loans, compared to $59.4 million in consumer and ~~business loans. These~~other loans ~~were purchased~~and $281,000 in ~~2021, therefore there was 0 balance at~~commercial and industrial loans as of December 31, ~~2020.~~

2021.

The following is a summary of the Company’s loan portfolio segments:

For the year ended December 31, ~~2021 $202.9~~2022, $146.0 million in CCBX capital call lines are included in commercial and industrial loans compared to ~~$65.6~~$202.9 million at December 31, ~~2020.~~2021. Capital call lines are provided to venture capital firms. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line/loan.

As of December 31, ~~2021 $36.9~~2022, $244.6 million in loans originated through CCBX ~~loans~~partners are included in residential real estate loans, compared to $0$36.9 million at December 31, ~~2020.~~

2021. These home equity lines of credit are secured by residential real estate and are accessed by using a credit card. Home equity lines of credit are classified as residential real estate per regulatory guidelines.

As of December 31, ~~2021 $106.8~~2022 $607.0 million in CCBX loans are included in consumer and other loans, compared to ~~$67,000~~$106.8 million at December 31, ~~2020. CCBX loans include credit cards, consumer term loans, and lines~~ 2021.

The following table illustrates an age analysis of past due loans as of the dates indicated:

30-89
Days Past
Due

90 Days
or More
Past Due

Total
Past Due

Current

Total
Loans

Recorded
Investment
90 Days or
More Past
Due and
Still
Accruing

(dollars in thousands)

December 31, 2021

Commercial and industrial loans

$
259

$
38

$
297

$
418,763

$
419,060

$
-

Real estate loans:

Construction, land and land development loans

-

-

-

183,594

183,594

-

Residential real estate loans

809

94

903

203,486

204,389

39

Commercial real estate loans

-

-

-

835,587

835,587

-

Consumer and other loans

3,901

1,467

5,368

103,503

108,871

1,467

$
4,969

$
1,599

$
6,568

$
1,744,933

$
1,751,501

$
1,506

Less net deferred origination fees and
premiums

(8,766
)

Loans receivable

$
1,742,735

30-89
Days Past
Due

90 Days
or More
Past Due

Total
Past Due

Current

Total
Loans

Recorded
Investment
90 Days or
More Past
Due and
Still
Accruing

(dollars in thousands)

December 31, 2020

Commercial and industrial loans

$
133

$
537

$
670

$
538,530

$
539,200

$
-

Real estate loans:

Construction, land and land development loans

1

-

1

94,422

94,423

-

Residential real estate loans

1,108

60

1,168

142,701

143,869

-

Commercial real estate loans

-

-

-

774,925

774,925

-

Consumer and other loans

-

-

-

3,916

3,916

-

$
1,242

$
597

$
1,839

$
1,554,494

$
1,556,333

$
-

Less net deferred origination fees and
premiums

(9,195
)

Loans receivable

$
1,547,138


	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
December 31, 2022
Commercial and industrial loans	$	393	$	486	$	879	$	311,749	$	312,628	$	404
Real estate loans:
Construction, land and land development	—		66		66		213,989		214,055		—
Residential real estate	1,016		876		1,892		447,265		449,157		876
Commercial real estate	95		6,901		6,996		1,041,756		1,048,752		—
Consumer and other loans	37,932		24,815		62,747		546,024		608,771		24,815
	$	39,436	$	33,144	$	72,580	$	2,560,783	$	2,633,363	$	26,095
Less net deferred origination fees and premiums									(6,107)
Loans receivable									$	2,627,256


	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
December 31, 2021
Commercial and industrial loans	$	259	$	38	$	297	$	418,763	$	419,060	$	—
Real estate loans:
Construction, land and land development	—		—		—		183,594		183,594		—
Residential real estate	809		94		903		203,486		204,389		39
Commercial real estate	—		—		—		835,587		835,587		—
Consumer and other loans	3,901		1,467		5,368		103,503		108,871		1,467
	$	4,969	$	1,599	$	6,568	$	1,744,933	$	1,751,501	$	1,506
Less net deferred origination fees and premiums									(8,766)
Loans receivable									$	1,742,735

121

There were $26.1 million in loans past due 90 days or more and still accruing interest as of December 31, 2022, and $1.5 million as of December 31, 2021. The increase is attributed to loans originated through CCBX ~~loans are reported using pool accounting and are not subject~~lending partners which continue to ~~impairment analysis.~~ accrue interest up to 180 days past due.

The following table is a summary of information pertaining to impaired loans as of the period ~~indicated:~~

indicated. Loans originated through CCBX partners are reported using pool accounting and are not subject to individual impairment analysis, therefore CCBX loans are not included in this table.

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
												Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
												(dollars in thousands)
December 31, 2022											December 31, 2022
Commercial and industrial loans											Commercial and industrial loans	$	124	$	—	$	113	$	113	$	95
Real estate loans:											Real estate loans:
Construction, land and land development											Construction, land and land development	67		66		—		66		—
Residential real estate											Residential real estate	—		—		—		—		—
Commercial real estate											Commercial real estate	6,901		6,901		—		6,901		—
Total											Total	$	7,092	$	6,967	$	113	$	7,080	$	95
	(dollars in thousands)
December 31, 2021											December 31, 2021
Commercial and industrial loans	$	173	$	-	$	166	$	166	$	132	Commercial and industrial loans	$	173	$	—	$	166	$	166	$	132
Real estate loans:											Real estate loans:
Residential real estate loans		69		55		-		55		-
Residential real estate											Residential real estate	69		55		—		55		—
Total	$	242	$	55	$	166	$	221	$	132	Total	$	242	$	55	$	166	$	221	$	132

December 31, 2020
Commercial and industrial loans	$	834	$	537	$	-	$	537	$	-
Real estate loans:
Residential real estate loans		188		175		-		175		-
Total	$	1,022	$	712	$	-	$	712	$	-

The following tables summarize the average recorded investment and interest income recognized on impaired loans by loan class for the year ended December 31, ~~2021~~2022 and ~~2020:~~

2021:

In some circumstances, the Company grants restructurings in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.

~~NaN~~

No loans were restructured in the year ended December 31, ~~2021~~2022 and December 31, ~~2020~~2021 that qualified as troubled debt restructurings. The Company has 0no commitments to loan additional funds to borrowers whose loans were classified as troubled debt restructurings at December 31, ~~2021,~~2022, as there were 0no outstanding troubled debt restructurings at December 31, ~~2021~~2022 and December 31, ~~2020.~~

2021.

When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is removed, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes 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.

An analysis of nonaccrual loans by category consisted of the following at the periods indicated:

Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Company’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. The Company classifies some loans as Watch or Other Loans Especially Mentioned (“OLEM”). Loans classified as Watch are performing assets but have elements of risk that require more monitoring than other performing loans and are reported in the OLEM column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Revolving (open-ended loans, such as credit cards) and installment (closed end) consumer loans 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) and are classified as substandard. Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve. ~~The Company also classifies some loans as Watch or Other Loans Especially Mentioned (“OLEM”). Loans classified as Watch are performing assets and classified as pass credits but have elements~~

The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder of the loan portfolio. The ALLL for the community bank is prepared using the information provided by the Company’s credit review process and our historical loss data, together with data from peer institutions and economic information gathered from published sources.

The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated from the community bank’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses. ~~Estimated loss rates for CCBX loans varies by partner, and might be based on actual partner experience, realized losses or losses for comparable products or industry averages. .Many of the agreements~~Agreements with 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.~~loans and reclassified negative deposit accounts. When the provision for CCBX loan losses isand provision for unfunded commitments are recorded, a ~~recovery receivable~~credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS ~~fees -credit enhancement)~~credit enhancements). Incurred losses are recorded in the allowance for loan ~~losses, and as the~~losses. The credit enhancement asset is relieved when credit enhancement recoveries are received from the CCBX partner. Although agreements with our CCBX partners include credit enhancements that provide protection to the Bank from credit and fraud losses, the Bank would be exposed to additional loan losses if our partner is unable to fulfill its contracted obligations. In accordance with the program agreement for one CCBX partner, the ~~recovery receivable~~Company is ~~relieved.~~

responsible for credit losses on approximately 10% of a $114.5 million loan portfolio. At December 31, 2022, 10% of this portfolio represented $11.5 million in loans. The partner is responsible for credit losses on approximately 90% of this portfolio and for fraud losses on 100% of this portfolio. The Company earns 100% of the revenue on the aforementioned $11.5 million of loans. For the year ended December 31, 2022, there were $216,000 in net charge-offs on the portion of loans for which the Company is responsible for credit losses.

The following tables summarize the allocation of the allowance for loan loss, as well as the activity in the allowance for loan loss attributed to various segments in the loan portfolio, as of and for the year ended December 31, ~~2020:~~

2021:

The investment in premises and equipment consisted of the following at December 31:

The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.

Operating lease right-of-use (“ROU”) assets represent a right to use an underlying asset for the contractual lease term. Operating lease liabilities represent an obligation to make lease payments arising from the lease. Any new operating leases entered into will be recognized as an operating lease ROU asset and operating lease liability at the commencement date of the new lease.

The Company’s leases do not provide an implicit interest rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities. The weighted average discount rate used to discount operating lease liabilities at December 31, ~~2021~~2022 was 3.4%.

The Company’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Company’s lease agreements do not contain any residual value guarantees.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $1.4 million ~~and $1.5 million, respectively,~~ for the years ended December 31, ~~2021~~2022 and ~~2020.~~2021. Variable lease components, such as fair market value adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

The Company leases its Downtown Everett facility from related parties (Note 12). Office space at a small number of branches is leased and sub-leased to a few tenants on month-to-month and multi-year leases. Lease and sublease income was $157,000 and $127,000 for 2022 and ~~$122,000 for~~ 2021, ~~and 2020,~~ respectively.

The following table presents the components of total lease expense and operating cash flows for the year ended December 31, ~~2021:~~

2022:

The composition of consolidated deposits consisted of the following at the periods indicated:

	December 31,		December 31,
	2021		2020
(dollars in thousands)					(dollars in thousands)	December 31, 2022		December 31, 2021
	(dollars in thousands)					(dollars in thousands)
Demand, noninterest bearing	$	1,355,908	$	592,261	Demand, noninterest bearing	$	775,012	$	1,355,908
Now and money market		789,709		658,323
NOW and money market					NOW and money market	1,804,399		789,709
Savings		103,956		77,611	Savings	107,117		103,956
Total core deposits		2,249,573		1,328,195
BaaS brokered deposits		70,757		33,482

BaaS-brokered deposits					BaaS-brokered deposits	101,546		70,757
Time deposits less than $250,000		31,057		41,145	Time deposits less than $250,000	21,942		31,057
Time deposits $250,000 and over		12,400		18,485	Time deposits $250,000 and over	7,505		12,400
Total deposits	$	2,363,787	$	1,421,307	Total deposits	$	2,817,521	$	2,363,787

The following table presents the maturity distribution of time deposits as of December 31, ~~2021 (dollars in thousands):~~

2022:

Twelve months

$
33,985

One to two years

4,670

Two to three years

2,723

Three to four years

990

Four to five years

1,089

$
43,457


(dollars in thousands)
Twelve months	$	22,219
One to two years	4,956
Two to three years	1,401
Three to four years	828
Four to five years	43
	$	29,447

~~Our~~

CCBX deposits are originated through CCBX partners ~~originate~~for true depositor and FDIC insurance purposes. CCBX deposits ~~and these deposits are~~were primarily noninterest bearing prior to usthe rate increases in ~~low interest rate environments, These CCBX deposits will become interest bearing as interest rates increase. As of December 31~~^st~~, 2021, noninterest bearing CCBX deposits total $636.7 million. At December 31, 2021, approximately 79% of our CCBX deposit that are currently noninterest bearing will become interest bearing when~~2022 by the Federal Open Market Committee (“FOMC”) ~~raises~~. As a result of the ~~Fed Funds~~interest rate ~~from 0.25% to 0.50% and the amount~~increases, a significant portion of CCBX deposits that ~~move~~were not earning interest were reclassified to interest bearing ~~will increase~~deposits from noninterest bearing deposits during the first and second quarters of 2022. These CCBX deposits were reclassified because the current interest rate exceeded the minimum interest rate set in their respective program agreements, as ~~rates are raised~~a result of the first and second quarter 2022 interest rate increases by the FOMC, ~~thereafter. Once the Fed Funds rate increases~~we needed to ~~1.00%, most of~~pay interest to the CCBX ~~noninterest bearing~~partners for these deposits. We do not expect additional CCBX deposits will be ~~interest bearing. The CCBX partner determines the~~reclassified as a result of future rate ~~paid to the end consumer and we determine the rates paid to the partner as indicated in the partner agreement.~~

.

increases.

128

Note 8 – Federal Home Loan Bank Advances and Other Borrowings

At December 31, ~~2021 and 2020~~2022 the Company had 0no overnight or term FHLB advances. ~~As of~~During the year ended December 31, ~~2021,~~2022, the Company ~~borrowed~~repaid a total of $25.0 million in FHLB ~~long term~~ advances. This includes a $10.0 million advance that ~~matures~~would have matured in March 2023 and a $15.0 million advance that ~~matures~~would have matured in March ~~2025. FHLB~~2027. We have sufficient liquidity for our current loan demand, and with no prepayment penalty for early repayment, management opted to repay these term advances ~~totaled $25.0 million as of~~and save the unnecessary interest expense. At December 31, 2021 the Company had no FHLB overnight advances and ~~2020. The~~$25.0 million in term advances. FHLB advances are secured by a blanket pledge of eligible collateral including first lien single family and multi-family mortgages with a carrying value of ~~$140.1~~$175.1 million and ~~$129.5~~$140.1 million at December 31, ~~2021~~2022 and ~~2020,~~2021, respectively. The Company has available borrowing capacity of an additional ~~$76.3~~$120.8 million from FHLB at December 31, ~~2021,~~2022, subject to certain collateral requirements and with interest at then stated rate.

The following table provides details on FHLB ~~overnight~~advance borrowings for the periods indicated:

Year Ended December 31,

(Dollars in thousands)

2021

2020

Maximum amount outstanding at any month-end during period:

FHLB Advances

$
100

$
2,260

Average outstanding balance during period:

FHLB Advances

$
-

$
67

Weighted average interest rate during period:

FHLB Advances

0.25
%

1.84
%
Balance outstanding at end of period:

FHLB Advances

$
-

$
-

Weighted average interest rate at end of period:

FHLB Advances

0.00
%

0.00
%


	Year Ended December 31,
(dollars in thousands)	2022			2021
Maximum amount outstanding at any month-end during period:	$	24,999		$	24,999
Average outstanding balance during period:	$	6,029		$	24,999
Weighted average interest rate during period:	1.13		%	1.13		%
Balance outstanding at end of period:	$	—		$	24,999
Weighted average interest rate at end of period:	n/a			1.13		%

~~The following table provides details on FHLB long-term borrowings for the periods indicated:~~

Year Ended December 31,

(Dollars in thousands)

2021

2020

Maximum amount outstanding at any month-end during period:

FHLB Advances

$
24,999

$
24,999

Average outstanding balance during period:

FHLB Advances

$
24,999

$
20,669

Weighted average interest rate during period:

FHLB Advances

1.13
%

1.13
%
Balance outstanding at end of period:

FHLB Advances

$
24,999

$
24,999

Weighted average interest rate at end of period:

FHLB Advances

1.13
%

1.13
%

The Company has established an $50.0 million unsecured line of credit with interest payable at the then-stated rate, with PCBB, which expires in June ~~2022~~.2023. There were 0no borrowings on this line at December 31, ~~2021~~2022 or ~~2020.~~

2021.

The Company has established a Borrower-in-Custody (BIC) arrangement with the FRB, which is secured by eligible loans, with interest payable at the then-stated rate. At December 31, 2022, the Company had pledged commercial real estate loans totaling $45.0 million, which provided available borrowing capacity of $26.7 million. At December 31, 2021, the Company had pledged commercial real estate loans totaling $43.4 million, which provided available borrowing capacity of $21.9 million. ~~At December 31, 2020, the Company had pledged commercial real estate loans totaling $43.5 million, which provided available borrowing capacity of $21.2 million.~~ There were 0no borrowings outstanding on this line of credit at December 31, ~~2021~~2022 or ~~2020.~~

2021.

To bolster the effectiveness of the SBA’s PPP loan program, the Federal Reserve supplied liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provided loans to small businesses so that they could keep their employees on the payroll and pay for other allowed expenses. If the borrowers met certain criteria, the loan may be forgiven. The PPPLF extended credit to eligible financial institutions that originated PPP loans, taking the loans as collateral at face value. The interest rate was 0.35% and as PPP loans were paid down, the borrowing line also had to be paid down. The Company paid the PPPLF borrowing line in full in June 2021, therefore there was 0no outstanding balance as of December 31, 2022 or 2021. ~~As of December 31, 2020, the Bank had $153.7 million in outstanding in PPPLF advances.~~

The following tables provides details on PPPLF advance borrowings for the periods indicated:

Year Ended December 31,

(Dollars in thousands)

2021

2020

Maximum amount outstanding at any month-end during period:

PPPLF Advances

$
185,894

$
202,595

Average outstanding balance during period:

PPPLF Advances

$
68,699

$
124,068

Weighted average interest rate during period:

PPPLF Advances

0.35
%

0.35
%
Balance outstanding at end of period:

PPPLF Advances

$
-

$
153,716

Weighted average interest rate at end of period:

PPPLF Advances

0.00
%

0.35
%


	Year Ended December 31,
(dollars in thousands)		2021
Maximum amount outstanding at any month-end during period:		$	185,894
Average outstanding balance during period:		$	68,699
Weighted average interest rate during period:		0.35		%
Balance outstanding at end of period:		$	—
Weighted average interest rate at end of period:		0.00		%

129

Note 9 – Subordinated Debt

At December 31, ~~2021~~2022 and ~~2020,~~2021, the Company’s subordinated debt was as follows:


	Aggregate Principal Amount December 31, 2021			Aggregate Principal Amount December 31, 2020				Aggregate Principal Amount December 31, 2022		Aggregate Principal Amount December 31, 2021
	(dollars in thousands)							(dollars in thousands)
Total liability, at par	$	25,000		$	10,000		Total liability, at par	$	45,000	$	25,000
Less: unamortized debt issuance costs		(712	)		(7	)	Less: unamortized debt issuance costs	(1,001)		(712)
Total liability, at carrying value	$	24,288		$	9,993		Total liability, at carrying value	$	43,999	$	24,288
Stated Maturity:	September 1, 2031			August 1, 2026
Interest Rate:	Fixed @ 3.375% 5 years; then 3-month SOFR +2.76% starting September 1, 2026			Fixed @ 5.65% 5 years; then Wall Street Prime +2.5% starting August 1, 2021

At December 31, ~~2021~~2022 and ~~2020,~~2021, the Company’s junior subordinated debentures were as follows:

On December15, 2004, theCompany issued~~$3,609,000~~ $3.6 million floatingratejuniorsubordinateddebenturesto Coastal(WA)StatutoryTrustI, which was formedfortheissuanceof trustpreferredsecurities.The debentures bearinterestatthree-monthLIBORplus2.10% (fully indexed rate of ~~2.30%~~6.87% and ~~2.32%~~2.30% atDecember 31, 2022 and 2021, respectively). Interest is payable quarterly. Interest expense of $143,000 and ~~2020, respectively).Interest~~is~~payablequarterly.Interestexpense~~of $84,000 ~~and $105,000~~ was recognizedduring 2022 and 2021, ~~and 2020,~~ respectively,and accruedinterestpayableon thesesecuritiestotaled~~$4,000~~ $12,000 and $4,000 at December 31, 2022 and 2021, ~~and 2020,~~ respectively.Thereare0 no principalpaymentsdue on thesedebenturesin thenext fiveyears.

~~In January 2020,~~

The Trust is not consolidated with the ~~FASB issued ASU 2020-04,~~ ~~Reference Rate Reform (Topic 848): Facilitation of~~Company. Accordingly, the ~~Effects of Reference Rate Reform on Financial Reporting, March 2020, to provide temporary optional expedients and exceptions to~~Company reports the ~~U.S. GAAP guidance on contract modifications and hedge accounting to ease~~subordinated debentures held by the ~~financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such~~Trust as ~~Secured Overnight Financing Rate. The Company is evaluating alternative reference rate options and the impact of the LIBOR change to this borrowing.~~

~~The Trust~~is~~not consolidatedwith theCompany. Accordingly,theCompany reportsthesubordinated debenturesheldby theTrust~~as liabilities.The Company owns allof thecommonsecuritiesof thetrust.The trust preferredsecuritiesissuedby thetrustrankequallywith thecommonsecuritiesin rightof payment,exceptthatif an eventof defaultundertheindenturegoverningthenotehas occurredand iscontinuing,thepreferredsecurities willrankseniorto thecommonsecuritiesin rightof payment.

On December 16, 2022, the Federal Reserve Board adopted a final rule that implements the LIBOR Act by identifying benchmark rates based on SOFR (Secured Overnight Financing Rate) that will replace LIBOR formerly known as the London Interbank Offered Rate, in certain financial contracts after June 30, 2023. Congress enacted the LIBOR Act, which was signed into law in March 2022, to provide a uniform, nationwide solution for so-called tough legacy contracts that do not have clear and practicable provisions for replacing LIBOR after June 30, 2023. The LIBOR Act also establishes a litigation safe harbor for lenders that select a LIBOR replacement under certain situations, including the use of a replacement rate selected by the Federal Reserve. As required by the law, the final rule identifies replacement benchmark

The components of the income tax for the Company consisted of the following at December 31:

At December 31, 2022 the current net income tax receivable was $1.3 million and at December 31, 2021 the ~~current~~ net income tax payable was $1.2 ~~million and at December 31, 2020 the net income tax receivable was $599,000.~~

million.

A reconciliation of the income tax expense (benefit) and the amount computed by applying the statutory federal income tax rate to the income before income taxes is as follows for the year ended December 31:

The Company did not record or accrue any interest and penalties related to income taxes for the years ended December 31, ~~2021~~2022 or ~~2020.~~2021. The Company and Bank have entered into a tax allocation agreement, which provides that income taxes shall be allocated between the parties on a monthly basis. The intent of this agreement is that each member of the consolidated group will incur no greater tax liability than it would have incurred on a stand-alone basis.

The net deferred tax asset consists of the following temporary differences and carryforward items at December 31:

The determinationof theamountof deferredincometaxassetswhich aremorelikelythannot to be realizedis primarilydependenton projectionsof futureearnings,which aresubjectto uncertaintyand estimatesthatmay changegiveneconomicconditionsand otherfactors.The realizationof deferredincometaxassetsis regularlyassessed and a valuationallowanceisrecordedifitis~~“more~~ “more likelythannot”thatallor a portionof thedeferredtaxasset willnot be realized.~~“More~~ “More likelythannot”isdefinedas greaterthana 50% chance.All availableevidence,both positiveand negativeisconsideredto determinewhether,basedon theweightof thatevidence,a valuation allowanceisneeded.Based upon itsanalysisof availableevidence,includingrecentprofitability,management has determinedthatitis~~“more~~ “more likelythannot”thattheCompany’sdeferredincometaxassetsas of December 31, ~~2021~~2022 willbe fullyrealizedand therefore 0 no valuationallowancewas recorded.

At December 31, ~~2021,~~2022, the Company had 0no federal net operating loss carryforwards or tax credit carryforwards. The Company files federal and various state income tax returns. Federal tax returns for the ~~2018~~2019 tax year and later are open for examination. The total amount of unrecognized tax benefits, including interest and penalties, at December 31, ~~2021~~2022 was not material. The amount of tax benefits that would impact the effective rate, if recognized, is not expected to be material. The Company does not anticipate any significant changes with respect to unrecognized tax benefits within the next 12 months.

During 2022 and 2021, ~~and 2020,~~ theCompany had transactionsmadein theordinarycourseof businesswith certainof itsexecutiveofficersand directors.All loansincludedin such transactionswere madeon substantiallythesame terms,includinginterestrateand collateral,as thoseprevailingatthetimeforcomparabletransactionswith other persons,and did not, in theopinionof management,involvemorethannormalcreditriskor presentother unfavorable features.

The Company helddepositsof $5.5 million and $4.5 million ~~and $5.7 million~~ fromdirectors,principalshareholdersand executiveofficersatDecember 31, ~~2021~~2022 and ~~2020,~~2021, respectively. All deposits included in such transactions were made on substantially the same terms, including interest rate, as those prevailing at the time for comparable transactions with other persons.

As discussedin Note 6, theCompany leased 1 one facility from a related party in ~~2021~~2022 and ~~2020~~.2021. The Everettbranchfacilityisleasedfroma group of investors,one of which isa director.The Everettleaseoriginatedin 1997 fortenyearsand has been renewed throughMarch2024. MonthlyrentundertheEverettleaseis~~$46,000~~ $46,000 fortheremainingleaseterm.Rents paidduring~~2021~~ 2022 and ~~2020~~2021 for the related party Everett lease totaled ~~$546,000.~~

$546,000 for each year.

The Company utilizes Adams and Duncan, Inc. P.S. for legal services in which one of the Company’s directors is a partner. The services provided include general legal counsel and specialized CCBX agreement counsel. The Company also uses other law firms for legal counsel and specialties such as regulatory and SEC counsel. For fiscal year ended December 31, 2022 and 2021, total payments for legal services were $864,000 and $816,000, respectively.

In thenormalcourseof business,therearevariousoutstandingcommitmentsand contingentliabilities,such as commitmentsto extendcreditand standbylettersof credit,which arenot reflectedin theconsolidatedfinancial statements.The Company’sexposureto creditlossin theeventof nonperformanceby theotherpartyto the financialinstrumentsforcommitmentsto extendcreditand standbylettersof creditisrepresentedby the contractualor notionalamountof thoseinstruments.The Company usesthesamecreditpoliciesin makingsuch commitmentsas itdoes forinstrumentsthatareincludedin theconsolidatedbalancesheets.

At December 31, 2022 and 2021, ~~and 2020,~~ theCompany had a reserveforunfundedcommitmentsof $974,000 and $1.3 million, ~~and $625,000,~~ respectively,includedin otherliabilitieson the consolidated balance sheet.

Commitmentsto extendcreditareagreementsto lendto a customeras long as thereisno violationof any conditionestablishedin thecontract.Commitmentsgenerallyhave fixedexpirationdatesor othertermination clausesand mayrequirepaymentof a fee.Sincemanyof the commercial and industrial loan commitmentsareexpectedto expirewithoutbeing drawn upon, thetotalcommitmentamountsdo not necessarilyrepresentfuturecashrequirements. As of December 31, 2022, $1.57 billion of the $2.20 billion in total commitments to extend credit were unconditionally cancelable. The Company evaluateseachcustomer’screditworthinesson a case-by-casebasis.The amountof collateralobtained,ifdeemed necessaryby theCompany upon extensionof credit,isbasedon management’screditevaluation.The typeof collateralheldvariesbut mayincludeaccountsreceivable,inventory,propertyand equipment,and income- producingcommercialproperties.

Standby letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. Standby letters of credit generally have fixed expiration dates or other termination clauses and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to customers. The Company’s policy for obtaining collateral, and the nature of such collateral, is essentially the same as that involved in making commitments to extend credit. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. No losses were incurred in 2022 or 2021 under these commitments.

Commitments to extend credit on CCBX loans are included in the table above and are summarized below:

The Company also has agreements with certain key officers that provide for potential payments upon retirement, disability, termination, change in control and death.

~~Standby lettersof creditareconditionalcommitmentsissuedby theCompany to guaranteetheperformanceof a customerto a thirdparty.Standby lettersof creditgenerallyhave fixedexpirationdatesor othertermination clausesand mayrequirepaymentof a fee.The creditriskinvolvedin issuinglettersof credit~~is~~essentiallythe sameas thatinvolvedin extendingloanfacilitiesto customers.The Company’spolicyforobtainingcollateral, and thenatureof such collateral,~~is~~essentiallythesameas thatinvolvedin makingcommitmentsto extendcredit. In theeventthecustomerdoes not performin accordancewith thetermsof theagreementwith thethirdparty, theCompany would be requiredto fund thecommitment.NaN losseswere incurredin 2021 or 2020 underthese commitments.~~

The Company issubjectto claimsand lawsuitswhich ariseprimarilyin theordinarycourseof business.Itis theopinionof managementthatthedispositionor ultimateresolutionof such claimsand lawsuitswillnot have a materialadverseeffecton thefinancialposition~~of theCompany.~~

~~On March 11, 2020, the World Health Organization assessed the COVID-19 outbreak and characterized itas a pandemic. Subsequent to the declaration~~ of the ~~pandemic, a variety~~ Company.

Mostof the~~Company’s~~ community bank’s businessactivityiswith customerswho areconcentratedin thestateof Washington. Investmentsin municipalsecuritiesinvolvegovernmentalentitieswithinthestate.Generally,amountsplacedor investedin bank accountsareinsuredby theFDICup to $250,000 per depositor for each ~~relationship~~account ownership category at a bank. Uninsureddepositsin bank accounts held by the Company and Bank atDecember 31, 2022 and 2021, totaled $45.4 million and ~~2020, totaled~~$~~33.6 million~~ ~~and $46.0~~$33.6 million, respectively.Loans to the same borrower aregenerallylimited,by statebankingregulations,to 20% of theBank’s capital and surplus.The Company managesassetqualityand controlscreditriskthroughdiversificationof theloanportfolio and theapplicationof policiesdesignedto promotesound underwritingand loanmonitoringpractices.The Company regularlyutilizesrealestateas collateralto reducetheriskof creditlossin theloanportfolio.As of December 31, 2022 and 2021, ~~and 2020,~~ theCompany has a concentrationof creditin commercialrealestate.Commercial realestateloansaretypicallysecuredby theBank’s firstlienpositionon thesubjectproperty.Standby lettersof creditwere grantedprimarilyto commercialborrowers.

The 2018 Coastal Financial Corporation Omnibus Plan (2018 Plan) authorizes the Company to grant awards, including but not limited to, stock options, restricted stock units, and restricted stock awards, to eligible employees, directors or individuals that provide service to the Company, up to an aggregate of 500,000 shares of common stock. On May 24, 2021, the Company’s shareholders approved the First Amendment to the 2018 Plan, which increased the authorized plan shares by 600,000. The 2018 Plan replaces both the 2006 Plan and the Directors’ Stock Bonus Plan (2006 Plan). Existing awards will vest under the terms granted and 0no further awards will be granted under these prior plans. Shares available to be granted under the 2018 plan were ~~667,440~~522,822 at December 31, ~~2021.~~

2022.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing ~~model that uses the assumptions noted in the following table.~~model. Expected volatilities are based on historical volatility of the Company’s stock and other factors. The Company uses the vesting term and contractual life to determine the expected life. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense related to unvested stock option awards is reversed at date of forfeiture.

There were 0no new options granted in the ~~years~~year ended December 31, ~~2021 and 2020.~~

2022.

A summary of stock option activity under the Company’s Plan during the year ended December 31, ~~2021:~~

2022:

The total intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the year ended December 31, ~~2021~~2022 was ~~$1.2~~$10.3 million. The intrinsic value of options exercised during the year ended December 31, ~~2020~~2021 was ~~$253,000.~~

$1.2 million.

As of December 31, ~~2021,~~2022, there was ~~$1.5~~$1.1 million of total unrecognized compensation cost related to nonvested stock options granted under the Plan. Total unrecognized compensation costs is adjusted for unvested forfeitures. The Company expects to recognize that cost over a weighted-average period of approximately ~~5.1~~4.5 years. Compensation expense recorded related to stock options was ~~$357,000~~$331,000 and ~~$405,000~~$357,000 for the years ended December 31, 2022 and 2021, ~~and 2020,~~ respectively.

In ~~January 2021,~~the first quarter of 2022, the Company granted ~~84,258~~53,721 restricted stock units under the 2018 Plan to employees, which vest ratably over 4 years and 150 restricted stock units which vest ratably over 10 years. In the second quarter of 2022, the Company granted 9,831 restricted stock units under the 2018 Plan to employees, which vest ratably over 5 years and 7,000 restricted stock units that vest ratably over 3 years. ~~In April 2021,~~Additionally, the Company granted ~~1,000 restricted stock units under the 2018 Plan to an employee, which vest ratably over 5 years. In October 2021, the Company granted 100,000~~53,000 performance-based restricted stock units under the 2018 Plan to an employee, that vest on ~~October 4, 2027,~~June 1, 2028, the quantity of which is dependent upon achievement of specified performance goals.

In the third quarter of 2022, the Company granted 20,000 restricted stock units under the 2018 Plan to employees, which vest in two blocks: 10,000 vest after 5 years and the remaining 10,000 vest after 7.5 years. In the fourth quarter of 2022, the Company granted 1,054 restricted stock units under the 2018 Plan to an employee which vests in two blocks: 527 shares vest after three years and the remaining 527 shares vest after five years.

Restricted stock units provide for an interest in Company common stock to the recipient, the underlying stock is not issued until certain conditions are met. Vesting requirements include time-based, performance-based, or market-based conditions. Recipients

of restricted stock units do not pay any cash consideration to the Company for the units and the holders of the restricted units do not have voting rights. The fair value of time-based and performance-based units is equal to the fair market value of the Company’s common stock on the grant date. The fair value of market-based units is estimated on the grant date using the Monte Carlo simulation model. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock units are nonparticipating securities.

As of December 31, ~~2021,~~2022, there was ~~$5.2~~$8.9 million of total unrecognized compensation cost related to nonvested restricted stock units. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately ~~5.7~~3.4 years. Compensation expense recorded related to restricted stock units was ~~$616,000~~$1.9 million and ~~$151,000~~$616,000 for the year ended December 31, 2022 and 2021, ~~and 2020,~~ respectively.

A summary of the Company’s nonvested restricted stock units at December 31, ~~2021~~2022 and changes during the year is presented below:

The fair value of restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities.

There were ~~5,978 shares~~no new restricted stock awards granted to ~~an employee at an estimated fair value~~ employees in the year ended December 31, 2022.

The fair value of restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities.

As of December 31, ~~2021,~~2022, there was ~~$54,000~~$45,000 of total unrecognized compensation cost related to nonvested restricted stock awards. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately ~~2.1~~5.1 years. Compensation expense recorded related to restricted stock awards was ~~$134,000~~$9,000 and ~~$7,000~~$134,000 for the years ended December 31, 2022 and 2021, ~~and 2020,~~ respectively.

Under the 2018 Plan, in May 2022 eligible directors who attended at least 75% of the scheduled board meetings during the prior year. Grants cliff vest over one or two years from date awarded, contingent on the director still being a director of the Company. During the vesting period, the grants are considered participating securities.

~~Eligible directors are~~were each granted stock with a total market value of ~~$15,000,~~$35,000, and the Board Chair iswas granted stock with a total market value of ~~$25,000.~~$55,000. Committee chairs received additional stock with a market value of $2,500 for each committee chaired at the time of the award. Stock ~~will be~~is granted as of each annual meeting date and will cliff vest one day prior to the next annual meeting date. ~~For stock granted in 2020, $5,000 was subject to a~~ ~~two-year~~ ~~cliff~~During the vesting period, ~~and~~ the ~~remaining stock cliff vested one day prior to this year’s annual meeting date.~~

grants are considered participating securities.

A summary of the Company’s nonvested shares at December 31, ~~2021~~2022 and changes during the year is presented below:

TheCompany determines and sets 401(k) contributions eachyear.Company matchingcontributionswillbe approvedby theboardof directorsannuallyon a discretionarybasis.In 2022 and 2021, ~~and 2020,~~ theCompany provided matchingcontributionstotaling~~$1.1~~ $1.3 million and ~~$760,000,~~$1.1 million, respectively.

Banks and bank holding companies aresubjectto variousregulatorycapitalrequirementsadministeredby federalbankingagencies.Failure to meetminimumcapitalrequirementscan initiatecertainmandatory~~(and~~ (and possiblyadditionaldiscretionary) actionsby regulatorsthat,ifundertaken,couldhave a directmaterialeffecton the~~Bank’s~~ financial~~statements. Under theregulatorycapitaladequacyguidelinesand theregulatoryframeworkforpromptcorrectiveaction,~~ statements of the Bank ~~must~~and the Company.

Historically, the Company had been operating under the Small Bank Holding Company Policy Statement, which exempts bank holding companies that have total consolidated assets of less than $3.0 billion and meet~~specific~~ other criteria from the Federal Reserve’s risk-based- and leverage capital rules.

Because the Company’s consolidated assets exceeded $3.0 billion as of September 30, 2022, the Company is no longer eligible for the Federal Reserve’s Small Bank Holding Company Policy Statement and will also be evaluated relative to the capital adequacy~~guidelines~~ standards established by the Federal Reserve going forward. A bank holding company that~~involvequantitativemeasures~~ crosses the $3.0 billion total consolidated assets threshold as of June 30 of a particular year is no longer permitted to file reports as a small holding company beginning the following March. The Company was not in excess of $3.0 billion as of June 30, 2022, and accordingly prepared and filed financial reports with the Federal Reserve as a small bank holding company. Currently, the Federal Reserve assesses the capital position of the~~Bank’s~~ Company based on these reports by reviewing its debt-to-equity ratio and its capacity to serve as a source of strength to the Bank. If the Company’s total consolidated assets remain in excess of $3.0 billion as of June 30, 2023, starting in March 2024 the Company will cease filing financial reports with the Federal Reserve as though it were a small bank holding company.

Under the regulatory capital adequacy guidelines, the Company and Bank must meet specific capital adequacy guidelines that involve quantitative measures of their assets, liabilitiesand certainoff-balance-sheetitemsas calculatedunderregulatoryaccountingpractices.The Company’s and Bank’s capital~~amounts~~ ratios and the Bank’s classificationunderthepromptcorrectiveactionguidelinesarealsosubjectto qualitative judgmentsby theregulatorsaboutcomponents,riskweightings,and otherfactors.

Quantitativemeasuresestablishedby regulationto ensurecapitaladequacyrequirethe Company and Bank to maintain minimumamountsand ratiosof totalrisk-basedcapital,Tier1 capitaland commonequityTier1 capitalto risk- weightedassets~~(as~~ (as definedin theregulations),and Tier1 capitalto average adjustedtotal consolidated assets~~(as~~ (as defined).According to regulatoryguidelines,only theamountof deferredtaxassetsthatcan be realizedwithinthenext12 months basedon projectedtaxableincomeisallowedin thecomputation.Therewere 0no disalloweddeferredtaxassetsat December 31, ~~2021~~2022 and ~~2020.~~

2021.

Under thecapitaladequacyguidelineson theregulatoryframeworkforpromptcorrectiveaction~~(as~~ (as setforthin thetableon thenextpage),theBank metthecriteriato be consideredwellcapitalizedas of December 31, ~~2021~~2022 and ~~2020.~~2021. Such determinationhas been madebasedon theBank’s total risk-based capital ratio, Tier1 risk-based capital ratio, commonequityTier1 risk-basedcapital

ratio,and leverageratio.Therehave been no conditionsor eventssinceDecember 31, ~~2021,~~2022, thatmanagementbelieves would changetheBank’s category.

Under capital adequacy regulations,the Company and the Bank mustmaintain a capitalconservationbuffer of common equity Tier 1 capital of ~~at least~~more than 2.5% above theminimumrisk-based capitalratios to avoid restrictions on the payment of capital distributions and discretionary bonus payments.

Managementbelievesthe Company and the Bank ~~exceeds~~exceed allcapitaladequacyrequirementsto which itisthey are subject,includingtheratios described below and the capital conservation buffer,as of December 31, ~~2021.~~

2022.

The following tables present estimated fair values of the Company’s financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:

The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the accounting standard requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market

data obtained from independent sources, while

The following methods were used to estimate the fair value of the class of financial instruments above:

Impaired loans - A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted cash expected future cash flows. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are evaluated quarterly to determine if valuation adjustments should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impairment amount. These valuation adjustments are considered nonrecurring fair value adjustments.

Equity securities – The Company measures equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer, with price changes recognized in earnings.

The following table presents the carrying value of equity securities without readily determinable fair values, as of December 31, 2022 and 2021, with adjustments recorded during the periods presented for those securities with observable price changes, if applicable. These equity securities are included in other investments on the balance sheet.

The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated:

All of the Company’s revenue from contracts with customers in the scope of Topic 606 is recognized within noninterest income. The following table presents the Company’s noninterest income by revenue stream for the years ended December 31:

A description of the Company’s revenue streams accounted for under Topic 606 is as follows:

The following tables presents the BaaS fees that are within and not within the scope of Topic 606:

The following is a computation of basic and diluted earnings per common share at the periods indicated:

Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings, however the difference in the two-class method was not significant.

Income and expenses that are specific to CCBX are recorded to the CCBX segment. ~~Additionally, certain indirect expenses are allocated to~~Included in noninterest expense for the community bank is administrative overhead of $27.2 million and $19.0 million for the year ended December 31, 2022 and December 31, 2021, respectively. Both the community bank and the CCBX ~~utilizing various metrics,~~segment benefit from this administrative overhead and services, which includes shared operational activities such as ~~number of employees, utilization of space,~~data management, compliance monitoring and ~~allocations based on loan and deposit balances.~~

other administration functions.

Summarized financial information concerning the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables for the periods indicated:

Condensed financial information of Coastal Financial Corporation follows:

December 31,

December 31,

2021

2020

ASSETS

Cash
$
24,306

$
5,071

Investment in trust equities

109

109

Investment in subsidiaries

202,258

147,749

Other investments

2,482

850

Total loans receivable

350

-

Other assets

124

122

TOTAL ASSETS
$
229,629

$
153,901

LIABILITIES AND SHAREHOLDERS' EQUITY

Junior subordinated debentures, net of issuances costs
$
3,586

$
3,584

Subordinated debt, net of debt issuance costs

24,288

9,993

Interest and dividends payable

290

100

Other liabilities

243

7

Shareholders' equity

201,222

140,217

TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
$
229,629

$
153,901

Year ended December 31,

2021

2020

INCOME

Interest earned loans receivable
$
14

$
-

Interest bearing other investments

3

3

Unrealized gain (loss) on equity investment

1,469

(400
)
Total income

1,486

(397
)
EXPENSE

Interest expense

795

694

Other expenses

576

350

Total expense

1,371

1,044

Loss before income taxes and undistributed net income of subsidiary

115

(1,441
)
Equity in undistributed income of consolidated subsidiaries

26,917

16,299

Income tax expense (benefit)

27

(288
)
NET INCOME
$
27,005

$
15,146


	December 31, 2022		December 31, 2021
ASSETS
Cash	$	22,904	$	24,306
Investment in trust equities	109		109
Investment in subsidiaries	265,741		202,258
Other investments	3,028		2,482
Total loans receivable	—		350
Other assets	(150)		124
TOTAL ASSETS	$	291,632	$	229,629
LIABILITIES AND SHAREHOLDERS' EQUITY
Junior subordinated debentures, net of issuances costs	$	3,588	$	3,586
Subordinated debt, net of debt issuance costs	43,999		24,288
Interest and dividends payable	546		290
Other liabilities	5		243
Shareholders' equity	243,494		201,222
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY	$	291,632	$	229,629

Year ended December 31,

2021

2020

CASH FLOWS FROM OPERATING ACTIVITIES:

Net income
$
27,005

$
15,146

Adjustments to reconcile net income to net cash used by operating activities:

Equity in undistributed income of consolidated subsidiaries

(26,917
)

(16,299
)
Stock-based compensation

162

68

Impairment on equity investment

(1,469
)

400

Decrease (increase) in other assets

5

(70
)
Increase in other liabilities

452

13

Net cash used by operating activities

(762
)

(742
)
CASH FLOWS FROM INVESTING ACTIVITIES:

Investments in subsidiaries

(26,500
)

(7,500
)
Investments in loans receivable

(350
)

-

Investments in other, net

(163
)

(750
)
Net cash used by investing activities

(27,013
)

(8,250
)
CASH FLOWS FROM FINANCING ACTIVITIES:

Proceeds from exercise of stock options

360

202

Proceeds from public offering, net

32,387

-

Proceeds from subordinated debt

24,263

-

Repayment of subordinated debt

(10,000
)

-

Net cash provided by financing activities

47,010

202

NET CHANGE IN CASH

19,235

(8,790
)
Cash, beginning of year

5,071

13,861

Cash, end of year
$
24,306

$
5,071

146


	Year ended December 31,
	2022		2021
INTEREST INCOME
Interest earned loans receivable	$	(14)	$	14
Interest bearing other investments	4		3
Total interest income	(10)		17
INTEREST EXPENSE
Interest on borrowed funds	1,322		795
Total interest expense	1,322		795
Net interest expense	(1,332)		(778)
PROVISION FOR LOAN LOSSES	350		—
Net interest expense after provision for loan losses	(1,682)		(778)
NONINTEREST INCOME
Unrealized (loss) gain on equity investment	(153)		1,469
Other income	23		—
Total noninterest income	(130)		1,469
NONINTEREST EXPENSE
Other expenses	711		576
Total noninterest expense	711		576
Loss before income taxes and undistributed net income of subsidiary	(2,523)		115
Equity in undistributed income of consolidated subsidiaries	42,674		26,917
Income tax (benefit) expense	(474)		27
NET INCOME	$	40,625	$	27,005

147


	Year ended December 31,
	2022		2021
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	40,625	$	27,005
Adjustments to reconcile net income to net cash used by operating activities:
Equity in undistributed income of consolidated subsidiaries	(42,674)		(26,917)
Stock-based compensation	295		162
Unrealized loss (gain) on equity investment	153		(1,469)
Decrease (increase) in other assets	274		5
Increase in other liabilities	106		452
Net cash used by operating activities	(1,221)		(762)
CASH FLOWS FROM INVESTING ACTIVITIES:
Investments in subsidiaries	(20,925)		(26,500)
Investments in loans receivable	350		(350)
Investments in other, net	(699)		(163)
Net cash used by investing activities	(21,274)		(27,013)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options	1,468		360
Proceeds from public offering, net	—		32,387
Proceeds from subordinated debt	19,625		24,263
Repayment of subordinated debt	—		(10,000)
Net cash provided by financing activities	21,093		47,010
NET CHANGE IN CASH	(1,402)		19,235
Cash, beginning of year	24,306		5,071
Cash, end of year	$	22,904	$	24,306

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures

An evaluation was performed under the supervision and with the participation of our management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act) as of December 31, ~~2021.~~2022. In designing and evaluating our disclosure controls and procedures, we and our management recognize that any controls and procedures, no matter how well-designed and operated, can provide only a reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating and implementing possible controls and procedures. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer, concluded that our disclosure controls and procedures are effective to ensure that information required to be disclosed by us in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported as of the end of the period covered by this annual report.

Management’s Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-15(f) and 15d- 15(f) of the Exchange Act). Our internal control system is designed to provide reasonable assurance to our management and ~~Board~~board of ~~Directors~~directors regarding the preparation and fair presentation of published financial statements in accordance with GAAP. Internal control over financial reporting includes self-monitoring mechanisms, and actions are taken to correct deficiencies as they are identified.

148

There are inherent limitations in any internal control over financial reporting, no matter how well designed, misstatements due to error or fraud may occur and not be detected, including the possibility of circumvention or overriding of controls. Accordingly,

even an effective internal control system can provide only reasonable assurance with respect to financial statement preparation. Further, because of changes in conditions, the effectiveness of an internal control system may vary over time.

Our management assessed its internal control structure over financial reporting as of December 31, ~~2021~~2022 using the criteria set forth in Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concluded that we maintained effective internal control over financial reporting as of December 31, ~~2021.~~

2022.

Attestation Report of the Independent Registered Public Accounting Firm

Not applicable for an emerging growth company.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting that occurred during the ~~three months~~year ended December 31, ~~2021~~2022 that have materially affected, or are reasonably likely to materially affect, such ~~controls~~

controls.

Item 9B. Other Information

None.

Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections

Not applicable.

149