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What changed in COASTAL FINANCIAL CORP's 10-K — 2023 vs 2024

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Paragraph-level year-over-year comparison of COASTAL FINANCIAL CORP's 2023 and 2024 10-K annual filings, covering the Business, Risk Factors, Legal Proceedings, Cybersecurity, MD&A and Market Risk sections. Every new, removed and edited paragraph is highlighted side-by-side so you can see exactly what management changed in the 2024 report.

+752 added−1001 removedSource: 10-K (2025-03-17) vs 10-K (2024-03-15)

Top changes in COASTAL FINANCIAL CORP's 2024 10-K

752 paragraphs added · 1001 removed · 142 edited across 7 sections

Item 1. Business

Business — how the company describes what it does

28 edited+571 added−316 removed3 unchanged
Biggest changeOur total equity investments as of December 31, 2023 included a $2.2 million equity interest in a specialized bank technology company, an equity interest of $350,000 in a separate bank technology company and a contribution of $50,000 in another technology company during the year ended December 31, 2023.
Biggest changeThe 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. • The Company had a $2.2 million equity interest in a specialized bank technology company as of December 31, 2024 and December 31, 2023 . • The Company had a $350,000 equity interest in a technology company as of the years ended December 31, 2024 and December 31, 2023. • The Company had a $47,000 and $50,000 equity interest in a technology company as of the years ended December 31, 2024, and December 31, 2023, respectively.
The 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.
The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores, hotels and motels, low rise office buildings, mixed-use residential and commercial, and other properties. We originate both fixed- and adjustable-rate loans with terms up to 20 years.
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. Consumer and Other Loans .
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 .
Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by reimbursing most losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and reclassified negative deposit accounts.
Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans, unfunded commitments and negative deposit accounts.
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 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.
Fixed-rate loans typically amortize over a 10-to-25 year period with a final maturity and balloon payment 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 Federal Home Loan Bank rates.
Fixed-rate loans typically amortize over a 10 to 25 year period with balloon payments due at the end of five to ten years. Adjustable-rate loans are generally based on the prime rate and adjust with the prime rate or are based on term equivalent FHLB rates.
Fraud losses, which are substantially comprised of first payment defaults on partner loans, 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.
Fraud losses are recorded when incurred as losses in noninterest expense, and the enhancement received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement.
When the provision for CCBX credit losses and provision for unfunded commitments are recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). Expected losses are recorded in the allowance for credit losses.
When the provision for credit losses - loans and provision for unfunded commitments are recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner's legal commitment to indemnify or reimburse losses.
During the year ended December 31, 2023, the Company contributed $74,500 with investment funds designed to help accelerate technology adoption at banks, and recognized net gains of $278,000, resulting in an equity interest of $809,000 at December 31, 2023.
These equity investments are held at fair value, as reported by the funds. During the year ended December 31, 2024, the Company contributed $72,000 with investment funds designed to help accelerate technology adoption at banks, and recognized net gains of $29,000, resulting in an equity interest of $910,000 at December 31, 2024.
If the partner is unable to fulfill its contracted obligations then the Bank could be exposed to the loss of the reimbursement and credit enhancement income, as a result of this counterparty risk. Agreements with our CCBX partners also provide protection to the Bank from fraud by absorbing incurred fraud losses.
Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations then the Bank would be exposed to additional loan and deposit losses if the cash flows on the loans were not sufficient to fund the reimbursement of loan losses, as a result of this counterparty risk.
The credit enhancement asset is reduced when credit enhancement payments are received from the CCBX partner or taken from the partner's cash reserve account. CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by reimbursing the Bank for the losses.
The credit enhancement asset is relieved as credit enhancement payments and recoveries are received from the CCBX partner or taken from the partner's cash reserve account. Agreements with our CCBX partners also provide protection to the Bank from fraud by indemnifying or reimbursing incurred fraud losses. BaaS fraud includes noncredit fraud losses on loans and deposits originated through partners.
Our last purchase of residential mortgages was in 2018. These purchased loans typically have a fixed rate with a term of 15 to 30 years and are collateralized by one-to-four family residential real estate. We have a defined set of credit guidelines that we use when evaluating these loans.
As of December 31, 2024 and December 31, 2023, we held $6.1 million and $8.1 million, respectively, in purchased residential real estate mortgage loans. These loans purchased typically have a fixed rate with a term of 15 to 30 years and are collateralized by one-to-four family residential real estate.
We also purchase residential mortgages originated through 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. As of December 31, 2023, we held $8.1 million, representing 1.7% of our residential real estate loans, in purchased residential real estate mortgage loans.
In the past, we have purchased residential mortgages originated through other financial institutions to hold for investment for purposes of diversifying our residential mortgage loan portfolio, meeting certain regulatory requirements and increasing our interest income. We last purchased residential mortgage loans in 2018.
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 a total of 21 partners, 19 that are active with two more currently in the testing or implementation stage as of December 31, 2023.
The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment had 24 relationships, at varying stages, including three signed letters of intent as of December 31, 2024.
We also offer reciprocal deposits which enables us to extend FDIC insurance to customers that have balances in excess of the FDIC insurance limit. This reciprocal deposit service trades our customer’s funds in increments under the FDIC insured amount to other participating financial institutions and in exchange we receive customer deposits from participating financial institutions in a reciprocal agreement.
This service trades our customers’ funds as certificates of deposit or interest bearing demand deposits in increments under the FDIC insured amount to other participating financial institutions and in exchange we receive time deposit or interest bearing demand investments from participating financial institutions.
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 capital conservation buffer is an additional 2.5% of the amount necessary to meet the minimum risk-based capital requirements for total, tier 1, and common equity tier 1 risk-based capital.
CCBX deposits are generally classified as interest bearing negotiable order of withdrawal (“NOW”) and money market accounts. CCBX deposit products allow us to offer a broader range of partner specific products, which include products designed to reach specific under-served or under-banked populations served by our CCBX partners.
CCBX deposit products allow us to offer a broader range of partner specific products, which include products designed to reach specific under-served or under-banked populations served by our CCBX partners. Total deposits as of December 31, 2024 were $3.59 billion, an increase of $225.0 million, or 6.7%, compared to $3.36 billion as of December 31, 2023.
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 remain in effect unless and until the reserve ratio of the DIF meets or exceeds 2%.
On October 18, 2022 the FDIC finalized an increase of two basis points in the initial base deposit insurance assessment rates schedules, beginning with the first quarterly assessment period of 2023. The rise is intended to increase the reserve ratio of the Deposit Insurance Fund to 1.35%, the statutory requirement.
This measurement should be applied until the investment has a determinable value or does not qualify for the measurement election (e.g., if the investment has a readily determinable fair value). We will reassess at each reporting period whether our equity investment without a readily determinable fair value qualifies to be measured at cost minus impairment.
This method will be applied until the investments do not qualify for the measurement election 101 Table of Contents (e.g., if the investment has a readily determinable fair value).
Deposit Products Our deposits serve as the primary funding source for lending, investing and other general banking purposes. We provide a full range of deposit products in the community bank and through our CCBX partners that have a wide range of interest rates and terms, including a variety of demand and savings accounts, time deposits, and money market accounts.
Deposits We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, money market, savings, and time accounts as well as IntraFi network sweep deposits. Sweep deposits enable us to provide an FDIC insured deposit option to customers that have balances in excess of the FDIC insurance limit.
Commercial Real Estate . As of December 31, 2023, we had $1.30 billion of commercial real estate loans, representing 43.0% of total loans. We make commercial mortgage loans collateralized by owner- and non-owner-occupied real estate, as well as multi-family residential loans.
We actively seek commercial real estate loans in our markets and our lenders are experienced in competing for these loans and managing these relationships. 89 Table of Contents We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans.
The Company has committed up to $653,000 in capital for these equity funds, however, we are not obligated to fund these commitments prior to a capital call. Competition We operate in a highly competitive industry and in a highly competitive market.
The Company has committed up to $480,000 in capital for these equity funds.
Construction, Land and Land Development Loans . As of December 31, 2023, we had $157.1 million in construction, land and land development loans, representing 5.2% of total loans.
As of December 31, 2024 there was $150.4 million in community bank commercial and industrial loans compared to $149.5 million at December 31, 2023. Construction, Land and Land Development Loans . Construction, land and land development loans decreased $8.9 million, or 5.7%, to $148.2 million as of December 31, 2024, from $157.1 million as of December 31, 2023.
A substantial portion of our loan portfolio consists of commercial and industrial loans and real estate loans secured by commercial real estate properties located in the Puget Sound region, and is dependent upon the economic environment of 7 Table of Content s the Puget Sound region.
Loan Portfolio Our primary source of income is derived through interest earned on loans. A substantial portion of our loan portfolio consists of commercial real estate loans and commercial and industrial loans primarily in the Puget Sound region. Our consumer and other loans also represent a significant portion of our loan portfolio with the growth of our CCBX segment.
At December 31, 2023, approximately 33.6% of the commercial real estate loan portfolio consisted of fixed rate loans. Loan amounts generally do not exceed 75% of the lesser of the appraised value or the purchase price.
At December 31, 2024, approximately 33.0% of the commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans represented 39.4% of our loan portfolio at December 31, 2024 and are a large source of revenue.
Capital call lines represent 30.0% of total commercial and industrial loans, and are included in CCBX commercial and industrial loans. As of December 31, 2023, our total commercial SBA portfolio, excluding PPP loans, was $2.7 million, net of $3.5 million in loans sold, with $1.3 million guaranteed by the SBA.
Commercial and industrial loans included $48.6 million in loans to financial institutions as of December 31, 2024, and December 31, 2023. 88 Table of Contents Included in the commercial and industrial loan balance is $109.0 million and $87.5 million in capital call lines resulting from relationships with our CCBX partners as of December 31, 2024 and December 31, 2023, respectively, and $34.0 million and $54.3 million in CCBX other commercial loans as of December 31, 2024 and December 31, 2023, respectively.
The CCBX segment provides BaaS that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has a total of 21 partners, 19 that are active with two more currently in the testing or implementation stage as of December 31, 2023.
The increase was largely due to overall increases resulting from growth for the year ended December 31, 2023, as compared to the same period last year. 78 Table of Contents 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.
The CCBX partner determines the rate paid to the end consumer and we determine the rates paid to the partner as indicated in the partner agreement. Additionally, as of December 31, 2023 we have access to $69.4 million in CCBX customer deposits that are currently being transferred off the Bank’s balance sheet for FDIC insurance purposes.
This does not include an additional $273.2 million in CCBX deposits that were transferred off balance sheet to provide for increased FDIC insurance coverage to certain customers and to manage concentration levels, compared to $69.4 million as of December 31, 2023.
Removed
Item 1. Business Our Company Coastal Financial Corporation (“Company”) is a registered bank holding company, whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC (“LLC”). The Company is a Washington state corporation that was organized in 2003.
Added
Item 1. Business - Concentrations of Credit Risk section. If our partners are unable to fulfill their 57 Table of Contents contracted obligations then the Bank would be exposed to additional credit losses as a result of this counterparty risk. Management regularly evaluates and manages this counterparty risk.
Removed
The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank and Federal Reserve System (“Federal Reserve”) member bank. The LLC was formed in 2019 and owns the Company’s Arlington branch, which the Bank leases from the LLC.
Added
Operating Efficiency The largest component of noninterest expense is BaaS loan expense and salaries and employee benefits. Other significant operating expenses include BaaS fraud expense, legal and professional expenses, data processing and software licenses and occupancy expense.
Removed
Our executive offices are located at 5415 Evergreen Way, Everett, Washington 98203 and our telephone number is (425) 257-9000. Our website address is www.coastalbank.com. Information on our website should not be considered a part of this Report on Form 10-K.
Added
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.
Removed
We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. Our business is conducted through three reportable segments: The community bank, CCBX and treasury & administration.
Added
When we make substantial investments in our infrastructure and make investments to increase our operating capacity, our operating efficiency ratio decreases until we generate enough revenue growth to offset the increased costs however, prior to making such investments, we focus on how best and most expediently we can achieve the revenue growth necessary to offset the costs of these investments or new branches.
Removed
The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”).
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Our efficiency ratio has been impacted by the increase in CCBX income and CCBX expense. Our efficiency ratio was 42.38% at December 31, 2024, compared to 44.66% at December 31, 2023.
Removed
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.
Added
This ratio decreased as a result of the increase in net interest income and credit enhancement income for the year ended December 31, 2024 compared to the year ended December 31, 2023.
Removed
As of December 31, 2023, we had total assets of $3.75 billion, total loans receivable of $3.03 billion, total deposits of $3.36 billion and total shareholders’ equity of $295.0 million. Throughout this Report on Form 10-K, references to “we,” “us” or “our” refer to the Company or the Bank, or both, as the context indicates.
Added
Economic Conditions Our business and financial performance are affected by economic conditions generally in the United States for CCBX and more directly for the community bank in the markets in the Puget Sound region where we operate.
Removed
Our Markets We define our community bank market broadly as the Puget Sound region in the state of Washington, which encompasses King, Kitsap, Pierce, Snohomish, Skagit, Thurston and Island Counties.
Added
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.
Removed
The Puget Sound region, which comprises over 62% of the population of the state of Washington, and approximately 62% of the number of businesses located therein has a population of approximately 5.0 million, over 174,000 businesses and $159.5 billion of deposits with us and other banking institutions located in the region.
Added
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.
Removed
We are the largest locally headquartered bank by deposit market share in Snohomish County, according to data from the FDIC as of June 30, 2023, at which date we had a 15.8% deposit market share in Snohomish County, which was up from 13.0% in 2022 and 9.0% in 2021.
Added
The economic environment is continuously changing with bank failures, mergers, inflation, changing interest rates, global unrest, the war in Ukraine, conflicts in the Middle East, political environment, natural disasters, and trade issues that contribute to economic uncertainty which has caused increased market volatility and may lead to a significant decrease in consumer confidence and business generally.
Removed
We aim to continuously enhance our customer base, increase loans and deposits and expand our overall market share in Snohomish County.
Added
Critical Accounting Estimates and Significant Accounting Policies Our accounting policies are integral to understanding our results of operations. Our accounting policies are described in greater detail in Note 1 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
Removed
In light of our market position and our business strategy, we do not regularly compete for commercial or retail deposits in the city of Seattle, and we believe this strategic decision has enabled us to generate low cost core deposits to fund our loan growth.
Added
Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. Our critical accounting estimates are included and discussed below. These assumptions, estimates and judgments we use can be influenced by a number of factors, including the general economic environment.
Removed
Our CCBX market extends throughout the United States through our broker dealers and digital financial services partners. Our CCBX partners make our banking products and services available to their consumers, partners and workforce through integration with our banking platform. In doing so, our addressable market expands to a broader spectrum of consumers as well as small businesses.
Added
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.
Removed
Working with our CCBX partners allows us to provide a broader range of services for different demographics through their offerings.
Added
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.
Removed
Developing the kind of unique offerings to specific under-served or under-banked populations would be difficult for a bank our size, but through our CCBX partnerships we are able to use our banking charter to support this effort in a much broader scope. 3 Table of Content s Segment Reporting The Company has three reportable segments: The community bank, CCBX and treasury & administration.
Added
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.
Removed
The community bank segment includes all community banking activities, with a primary focus on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application.
Added
Interest earned on these assets is included in interest income. Interest income includes amortization of any purchase premium or discount. Premiums and discounts on securities are amortized using the level-yield method, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
Removed
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).
Added
Management evaluates debt securities for credit losses, on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
Removed
The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments. For more information about each of the Company’s reportable segments, please refer to “ Note 21 – Segment Reporting ” of the accompanying notes to the consolidated financial statements included elsewhere in this report.
Added
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. 58 Table of Contents 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.
Removed
Our Banking Services Lending Activities We focus primarily on commercial lending, with an emphasis on commercial real estate in the community bank. We offer a variety of loans to business owners, including commercial and industrial loans and commercial real estate loans secured by owner-occupied commercial properties.
Added
If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment through earnings. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
Removed
We also offer non-owner occupied commercial real estate loans, multi-family loans, and construction and development loans to investors and developers. We also offer residential real estate loans and to a lesser extent, consumer loans in the community bank. We offer commercial and consumer loans through CCBX. Commercial and Industrial Loans .
Added
For more information and discussion related to securities, see “ Note 3 - Investment Securities” in the Consolidated Financial Statements.
Removed
As of December 31, 2023, we had $291.3 million of commercial and industrial loans, representing 9.6% of total loans. Included in the commercial and industrial loan balance is $149.5 million in community bank loans and $141.8 million in CCBX commercial loans.
Added
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.
Removed
We make commercial and industrial loans, including term loans, commercial lines of credit, capital call lines working capital loans, equipment financing, borrowing base loans, Small Business Administration (“SBA”) loans, and other loan products, that are underwritten on the basis of the borrower’s ability to service the debt from income.
Added
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.
Removed
We take as collateral a lien on general business assets including, among other things, available real estate, accounts receivable, inventory and equipment and generally obtain a personal guaranty from the borrower or principal. Our commercial lines of credit typically have a term of one year and have variable interest rates that adjust monthly based on the prime rate.
Added
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, 2024, loans receivable totaled $3.49 billion, an increase of $465.0 million, or 15.4%, compared to $3.02 billion as of December 31, 2023.
Removed
Other commercial and industrial loans generally have fixed interest rates and terms that typically range from one to five years depending on factors such as the type and size of the loan, the financial strength of the borrower/guarantor and the age, type and value of the collateral.
Added
Total loans receivable is net of $6.5 million in net deferred origination fees. The increase in loans is largely attributed to growth in our CCBX segment as a result of growth from existing and new partners, combined with loan growth in the community bank segment.
Removed
Terms greater than five years may be appropriate in some circumstances, based upon the useful life of the underlying asset being financed or if some form of credit enhancement, such as an SBA guarantee, is obtained. Commercial and industrial loans are often larger and involve greater risks than other types of lending.
Added
For more information and discussion related to the loans held for investment, see “ Note 4 - Loans and Allowance for Credit Losses” in the Consolidated Financial Statements.
Removed
Because payments on commercial and industrial loans are often dependent on the operating cash flows of the borrower’s business, repayment of these loans is often more sensitive to adverse conditions in the general economy, which in turn increases repayment risk.
Added
Loans Held for Sale CCBX loans held for sale consist of the portion of CCBX originated loans that the Company intends to sell back to the originating CCBX partner or its affiliate generally at par. The Company sells loans to manage credit positions and concentrations with partners and across loan categories.

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Item 1A. Risk Factors

Risk Factors — what could go wrong, per management

92 edited+28 added−9 removed235 unchanged
Biggest changeIn support of its goals, the FOMC decided to maintain the current target range for the federal funds rate at its most recent meeting. 28 Table of Content s 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.
Biggest changeInflation has eased over the past year but remains elevated. The economic outlook is uncertain, and 31 Table of Contents the FOMC remains highly attentive to inflation risks. In support of its goals, the FOMC decided to maintain the current target range for the federal funds rate at its most recent meeting.
We expect our funding costs will continue to increase if interest rates continue to remain high if we are required to maintain or increase higher cost deposit products as depositors seek such higher rate products.
We expect our funding costs will continue to increase if interest rates continue to remain high, or if we are required to maintain or increase higher cost deposit products as depositors seek such higher rate products.
If a CCBX lending partner is unable to fulfill its contractual obligations with the Bank, then the Bank would be exposed to additional credit losses as a result of this counterparty risk and would have to absorb any credit losses associated with the CCBX partner that cannot fulfill its contractual obligations.
If a CCBX lending partner is unable to fulfill its contractual obligations with the Bank, then the Bank would be exposed to additional credit losses as a result of this counterparty risk and would have to absorb any credit losses associated with any CCBX partner that cannot fulfill its contractual obligations.
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.
Our critical accounting policies, which are included in the section entitled “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in this Annual Report on Form 10-K, describe those significant accounting policies and methods used in the preparation of our consolidated financial statements that we consider “critical” because they require judgments, assumptions and estimates that materially affect our consolidated financial statements and related disclosures.
Because we primarily serve individuals and businesses in the Northwest, a natural disaster, epidemic illness, significant effect of climate change or other major catastrophe in the Northwest likely would have a greater impact on our business, financial condition and results of operation than if our business were more geographically diverse.
Because we serve individuals and businesses in the Northwest, a natural disaster, epidemic illness, significant effect of climate change or other major catastrophe in the Northwest likely would have a greater impact on our business, financial condition and results of operation than if our business were more geographically diverse.
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.
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 Annual Report on Form 10-K. You should carefully consider these material risks and uncertainties when investing in our common stock.
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; • 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; • eliminate cumulative voting in elections of directors; • 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 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.
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; • establish a classified board of directors, with directors of each class serving a three-year term; 43 Table of Contents • 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; • 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 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.
The principal risks and uncertainties affecting our business include the following: • 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 credit losses is insufficient to absorb actual credit 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 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. 27 Table of Content s • 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 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 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 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. • 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.
The principal risks and uncertainties affecting our business include the following: • 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 credit losses is insufficient to absorb actual credit 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. 30 Table of Contents • 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. • 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 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 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 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. • 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.
A deterioration of the economy in the market areas we serve could result in the following consequences, any of which would have an adverse impact, which could be material, on our business, financial condition, and results of operations: • high short-term interest rates may cause deposits to decline and deposit costs to increase as depositors seek higher returns on their deposits; • 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; • certain securities within our investment portfolio could become other than temporarily impaired, requiring a write-down through earnings to fair value, thereby reducing equity; 32 Table of Content s • CCBX partners may experience financial difficulties or fail, our BaaS revenue may decrease, and credit losses could increase if the partner cannot fulfill its credit enhancement obligations; • low cost or noninterest bearing deposits may decrease; and • demand for our loan and other products and services may decrease.
A deterioration of the economy in the market areas we serve could result in the following consequences, any of which would have an adverse impact, which could be material, on our business, financial condition, and results of operations: • high short-term interest rates may cause deposits to decline and deposit costs to increase as depositors seek higher returns on their deposits; • loan delinquencies may increase; • problem assets and foreclosures may increase; 35 Table of Contents • 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; • CCBX partners may experience financial difficulties or fail, our BaaS revenue may decrease, and credit losses could increase if the partner cannot fulfill its credit enhancement obligations; • low-cost or noninterest bearing deposits may decrease; and • demand for our loan and other products and services may decrease.
Management also recognizes that significant new growth in loan portfolios, through the community bank and/or CCBX, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and will increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.
Management also recognizes that significant new growth in loan portfolios, in the community bank and/or CCBX, new loan products and the refinancing of existing loans can result in portfolios comprised of unseasoned loans that may not perform in a historical or projected manner and may increase the risk that our allowance may be insufficient to absorb losses without significant additional provisions.
If any of these valuations are inaccurate, our financial statements may not reflect the correct value of our OREO, and our allowance for credit losses may not reflect accurate loan impairments. This could adversely affect our business, financial condition and results of operations. As of December 31, 2023, we did not hold any OREO or repossessed property and equipment.
If any of these valuations are inaccurate, our financial statements may not reflect the correct value of our OREO, and our allowance for credit losses may not reflect accurate loan impairments. This could adversely affect our business, financial condition and results of operations. As of December 31, 2024, we did not hold any OREO or repossessed property and equipment.
While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our loan portfolio is comprised of loans secured by property located in the Puget Sound region and substantially all of our loan and deposit customers are businesses and individuals in greater Puget Sound region.
While there is not a single employer or industry in our market area on which a significant number of our customers are dependent, a substantial portion of our community bank loan portfolio is comprised of loans secured by property located in the Puget Sound region and substantially all of our community bank loan and deposit customers are businesses and individuals in greater Puget Sound region.
While we believe that our allowance for credit losses was adequate at December 31, 2023, there is no assurance that it will be sufficient to cover future credit losses, especially if there is a significant deterioration in economic conditions.
While we believe that our allowance for credit losses was adequate at December 31, 2024, there is no assurance that it will be sufficient to cover future credit losses, especially if there is a significant deterioration in economic conditions.
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.
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 community bank loans in our portfolio are secured by real estate.
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.
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 44 Table of Contents and regulations.
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.
Further, because of the complexity inherent in these approaches, misunderstanding or misuse of their outputs could similarly result in suboptimal decision-making. 40 Table of Contents 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.
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.
Accordingly, any such business expansion can be expected to negatively impact our earnings for some period of time until certain economies of scale are 42 Table of Contents reached. Our expenses could be further increased if we encounter delays in modernizing existing facilities, opening new branches or deploying new 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.
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 48 Table of Contents entering new business lines.
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 43 Table of Content s remove officers and directors.
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.
Although we have not recognized other-than-temporary impairment related to our investment portfolio as of December 31, 2023, changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, among other factors, may cause us to recognize losses in future periods, which could have an adverse effect on our business, financial condition and results of operations.
Although we have not recognized an impairment related to our investment portfolio as of December 31, 2024, changing economic and market conditions affecting interest rates, the financial condition of issuers of the securities and the performance of the underlying collateral, among other factors, may cause us to recognize losses in future periods, which could have an adverse effect on our business, financial condition and results of operations.
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.
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 impairment in future periods and result in realized losses.
Our interest rate sensitivity profile was liability sensitive as of December 31, 2023, meaning that we estimate our net interest income would increase more from falling interest rates than from rising interest rates. Loans and deposits in our CCBX segment are more sensitive to interest rate changes than our community bank segment.
Our interest rate sensitivity profile was modestly liability sensitive as of December 31, 2024, meaning that we estimate our net interest income would increase more from falling interest rates than from rising interest rates. Loans and deposits in our CCBX segment are more sensitive to interest rate changes than our community bank segment.
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.
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 33 Table of Contents repay its loan.
Additionally, the SEC recently enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on an annual basis material information regarding their cybersecurity risk management, strategy and governance.
Additionally, the SEC enacted rules, effective as of December 18, 2023, requiring public companies to disclose material cybersecurity incidents that they experience on Form 8-K within four business days of determining that a material cybersecurity incident has occurred and to disclose on an annual basis material information regarding their cybersecurity 45 Table of Contents risk management, strategy and governance.
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.
In determining whether to approve a proposed acquisition, federal banking regulators will consider, among other factors, the effect of the 47 Table of Contents acquisition on competition, our financial condition, our future prospects, and the impact of the proposal on U.S. financial stability.
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. 33 Table of Content s The laws, regulations and standard operating procedures that are applicable to SBA loan products may change in the future.
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.
Changes in any of these policies are influenced by 46 Table of Content s 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.
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.
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 35 Table of Content s be limited or may cease altogether.
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.
When we originate SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a customer defaults on a loan, we share any loss and recovery related to the loan pro-rata with the SBA.
When we originate SBA loans, we incur credit risk on the non-guaranteed portion of the loans, and if a 36 Table of Contents customer defaults on a loan, we share any loss and recovery related to the loan pro-rata with the SBA.
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. We adopted this accounting pronouncement effective for our fiscal year beginning January 1, 2023.
The FASB recently adopted an accounting standard referred to as CECL which requires financial institutions to determine periodic estimates of lifetime expected credit losses on loans and recognize the expected credit losses as allowances for credit losses. We adopted this accounting pronouncement effective for our fiscal year beginning January 1, 2023.
As compared to commercial real estate loans, which are secured by real property, the value 29 Table of Content s of which tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.
As compared to commercial real estate loans, which are secured by real property, the value of which tends to be more easily ascertainable, commercial business loans are of higher risk and typically are made on the basis of the borrower’s ability to make repayment from the cash flow of the borrower’s business.
This has been exacerbated by the bank failures in the first half of 2023 and the resulting heightened competition for deposits, which has also affected the interest we pay on deposits.
This has been exacerbated by the bank failures due to liquidity in the first half of 2023 and the resulting heightened competition for deposits, which has also affected the interest we pay on deposits.
Our ability to 38 Table of Content s successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competition from other financial institutions in our market area and our ability to manage our growth.
Our ability to successfully grow will depend on a variety of factors, including our ability to attract and retain experienced bankers, the continued availability of desirable business opportunities, competition from other financial institutions in our market area and our ability to manage our growth.
Further, to the extent that the activities of our third-party service providers or 41 Table of Content s the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation costs and other possible liabilities.
Further, to the extent that the activities of our third-party service providers or the activities of our customers involve the storage and transmission of confidential information, security breaches and viruses could expose us to claims, regulatory scrutiny, litigation costs and other possible liabilities.
Both we and our regulators perform a variety of analyses of our assets, including the 42 Table of Content s preparation of stress case scenarios, and as a result of those assessments we could determine, or our regulators could require us, to raise additional capital.
Both we and our regulators perform a variety of analyses of our assets, including the preparation of stress case scenarios, and as a result of those assessments we could determine, or our regulators could require us, to raise additional capital.
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.
The process for determining whether impairment exists usually requires difficult, subjective judgments about the future financial performance of the issuer and any collateral underlying the security in order to assess the probability of receiving all contractual principal and interest payments on the security.
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 $1.1 billion and represented 238.3% and 269.2% of its capital, at December 31, 2023 and 2022, respectively.
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 $1.1 billion and represented 184.2% and 269.2% of its capital, at December 31, 2024 and 2023, respectively.
If our borrowers are unable to repay their loans, our business, financial condition and earnings could be adversely affected. 30 Table of Content s We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
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.
A decline in residential real estate values as a result of a downturn in the Puget Sound housing market could reduce the value of the real estate collateral securing these types of loans. As of December 31, 2023, $161.3 million of our residential mortgage loans made through the community bank were made to investors.
A decline in residential real estate values as a result of a downturn in the Puget Sound housing market could reduce the value of the real estate collateral securing these types of loans. As of December 31, 2024, $137.1 million of our residential mortgage loans made through the community bank were made to investors.
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, 2023, $463.4 million, or 15.3%, of our loan portfolio was secured by one-to-four family real estate.
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, 2024, $469.8 million, or 13.4%, of our loan portfolio was secured by one-to-four family real estate.
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 credit losses. At December 31, 2023, our commercial real estate loan portfolio totaled $1.30 billion, or 43.0% of our total loan portfolio.
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 credit losses. At December 31, 2024, our commercial real estate loan portfolio totaled $1.37 billion, or 39.4% of our total loan portfolio.
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.
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.
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. 37 Table of Content s Dependency on external security systems expose us to greater operational risk.
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.
While we attempt to invest a significant majority of our total assets in loans (our loan-to-asset ratio was 80.6% as of December 31, 2023), we invest a percentage of our total assets (4.0% as of December 31, 2023) in investment securities with the primary objectives of providing a source of liquidity and meeting pledging requirements.
While we attempt to invest a significant majority of our total assets in loans (our loan-to-asset ratio was 85.1% as of December 31, 2024), we invest a percentage of our total assets (1.1% as of December 31, 2024) in investment securities with the primary objectives of providing a source of liquidity and meeting pledging requirements.
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.
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.
As of December 31, 2023, the balance of owned SBA loans and SBA loans net of the sold portion was $8.0 million, which includes $3.0 million in PPP loans that are 100% guaranteed, and an additional $1.9 million in non-PPP SBA loans which are also guaranteed.
As of December 31, 2024, the balance of owned SBA loans and SBA loans net of the sold portion was $22.8 million, which includes $2.3 million in PPP loans that are 100% guaranteed, and an additional $1.5 million in non-PPP SBA loans which are also guaranteed.
Although our control testing has not identified any material weaknesses in our internal control system, a breakdown in our internal control system, improper operation of our systems or improper employee actions could result in material financial loss to us, the imposition of regulatory action, and damage to our reputation.
Any material weakness in our internal control system, a breakdown in our internal control system, improper operation of our systems or improper employee actions could result in material financial loss to us, the imposition of regulatory action, and damage to our reputation.
As of December 31, 2023, the balance of SBA loans sold and serviced was $8.7 million, resulting in $49,000 in servicing income for the year ended December 31, 2023. Our SBA lending program is dependent upon the U.S. federal government.
As of December 31, 2024, the balance of SBA loans sold and serviced was $4.1 million, resulting in $104,000 in servicing income for the year ended December 31, 2024. Our SBA lending program is dependent upon the U.S. federal government.
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 $1.86 billion, or 55.4% of total deposits at December 31, 2023. We provide oversight over these relationships, which must meet all internal and regulatory requirements.
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 $2.06 billion, or 57.6% of total deposits at December 31, 2024. We provide oversight over these relationships, which must meet all internal and regulatory requirements.
The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.
Based on this analysis, the Company records a provision for credit losses to maintain the allowance at appropriate levels. The determination of the appropriate level of the allowance for credit losses inherently involves a high degree of subjectivity and requires us to make significant estimates of current credit risks and future trends, all of which may undergo material changes.
Over time we anticipate that this will increase sensitivity to both increasing and decreasing interest rates. Interest rates have risen significantly following the historically low levels during the COVID-19 pandemic. As interest rates have increased, so have competitive pressures on the deposit cost of funds.
Over time we anticipate that this will increase sensitivity to both increasing and decreasing interest rates. Interest rates remain significantly higher following the historically low levels during the COVID-19 pandemic. While rates have decreased some in 2024, competitive pressures on the deposit cost of funds remains.
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.
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.
Additionally, on October 24, 2023, the FDIC, the Federal Reserve and the OCC released a final rule revising the framework that they use to evaluate banks’ records of community reinvestment under the CRA that may make it more challenging and/or costly for insured depository institutions to achieve an “Outstanding” or “Satisfactory” CRA rating, which could negatively impact our ability to obtain regulatory approval for an acquisition. 44 Table of Content s 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.
Additionally, on October 24, 2023, the FDIC, the Federal Reserve and the OCC released a final rule revising the framework that they use to evaluate banks’ records of community reinvestment under the CRA that may make it more challenging and/or costly for insured depository institutions to achieve an “Outstanding” or “Satisfactory” CRA rating, which could negatively impact our ability to obtain regulatory approval for an acquisition.
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.
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. 49 Table of Contents We could be adversely affected by the soundness of other financial institutions.
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.
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. 38 Table of Contents Our agreements with BaaS partners may produce limited revenue and may expose us to liability for compliance violations by BaaS partners.
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 at both the federal and state level. The Bank’s deposits are insured in whole or in part by the FDIC.
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, including as a result of the new administration. We are subject to extensive government regulation, supervision and examination at both the federal and state level.
At December 31, 2023, $1.20 billion, or 39.4% of our total loans were originated or purchased through CCBX partners. Our partners underwrite these loans in compliance with our credit standards and policies. Our CCBX partners service $1.11 billion of these loans.
At December 31, 2024, $1.60 billion, or 45.9% of our total loans were originated or purchased through CCBX partners. Our partners underwrite these loans in compliance with our credit standards and policies. Our CCBX partners service $1.49 billion of these loans.
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, • increased operational costs to remediate the consequences of the external party’s security breach, • negative impact on future revenues; and • harm to reputation arising from the perception that our systems may not be secure.
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. 41 Table of Contents 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, • increased operational costs to remediate the consequences of the external party’s security breach, • negative impact on future revenues; and • harm to reputation arising from the perception that our systems may not be secure.
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 their intent to “continue to pay special attention” to commercial real estate lending activities and concentrations going forward.
In the 2015 Statement, the federal banking regulators, among other things, indicate their intent to “continue to pay special attention” to commercial real estate lending activities and concentrations going forward.
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.
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. 39 Table of Contents Changes in U.S. trade policies, including the imposition of tariffs and retaliatory tariffs, may adversely impact our business, financial condition, and results of operations.
Additionally, we may be adversely affected by the soundness of other financial institutions even when we do not have direct or indirect relationships with those institutions.
Any such losses could adversely affect our business, financial condition and results of operations. Additionally, we may be adversely affected by the soundness of other financial institutions even when we do not have direct or indirect relationships with those institutions.
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.
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 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.
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.
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.
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.
Any such losses could adversely affect our business, financial condition and results of operations. General Risk Factors National and global economic and other conditions could adversely affect our future results of operations or market price of our stock.
National and global economic and other conditions could adversely affect our future results of operations or market price of our stock.
As of December 31, 2023, the fair value of our available for sale investment securities portfolio was $99.5 million, which included a net unrealized loss of $537,000, and the fair value of our held to maturity investment securities was $51.0 million, which included a net unrealized gain of $181,000.
As of December 31, 2024, the fair value of our available for sale investment securities portfolio was $35,000, which included a net unrealized loss of $2,000, and the fair value of our held to maturity investment securities was $46.7 million, which included a net unrealized loss of $581,000.
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 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.
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.
The preparation of financial statements and related disclosures in conformity with GAAP requires us to make judgments, assumptions and estimates that affect the amounts reported in our consolidated financial statements and related notes to those financial statements.
As of December 31, 2023, $225.4 million of our residential mortgage loans were made through the community bank, and 82.1% are secured by property in Washington State, and a significant majority of that is located in the Puget Sound region.
These home equity lines of credit are secured by residential real estate and are accessed by using a credit card. As of December 31, 2024, $202.1 million of our residential mortgage loans were made through the community bank, and 79.0% are secured by property in Washington State, and a significant majority of that is located in the Puget Sound region.
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. 39 Table of Content s 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.
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.
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.
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.
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. 36 Table of Content s 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.
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.
To a lesser degree, we also originate land acquisition loans for the purpose of facilitating the ultimate construction of a home or commercial building.
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.
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.
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. 51 Table of Contents 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.
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. 34 Table of Content s Our business is subject to the risks of epidemic illnesses, earthquakes, tsunamis, floods, fires and other natural catastrophic events or effects of climate change.
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.
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 40 Table of Content s certain circumstances in the event of a security breach.
Various state and federal laws and regulations impose data security breach notification requirements with varying levels of individual, consumer, regulatory or law enforcement notification in certain circumstances in the event of a security breach. Ensuring that our collection, use, transfer and storage of personal information complies with all applicable laws and regulations can increase our costs.
In addition, the Company incorporates a reasonable and supportable forecast. • CCBX Portfolio: The Bank calculates the ACL on loans on an aggregate basis based on each partner and product level, segmenting the risk inherent in the CCBX portfolio based on qualitative and quantitative trends in the portfolio. 31 Table of Content s Also included in the ACL are qualitative reserves to cover losses that are expected, but in the Company’s assessment may not be adequately represented in the quantitative method.
In addition, the Company incorporates a reasonable and supportable forecast. 34 Table of Contents • CCBX Portfolio: The Bank calculates the ACL on loans on an aggregate basis based on each partner and product level, segmenting the risk inherent in the CCBX portfolio based on qualitative and quantitative trends in the portfolio.
It is not possible to predict the pace and magnitude of changes in interest rates, or the impact rate changes will have on our results of operations.
It is not possible to predict the pace and magnitude of changes in interest rates, or the impact rate changes will have on our results of operations. The Federal Open Market Committee (the “FOMC”) began reducing the federal funds rate in September 2024, and most recently decreased the federal funds rate to 4.50% as of December 31, 2024.
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.
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.
The federal banking agencies, the CFPB, the U.S. Department of Justice and other federal agencies are responsible for enforcing these laws and regulations.
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.

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Item 1C. Cybersecurity

Cybersecurity — threats and controls disclosure

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Biggest changeThe Technology Subcommittee of the Management Risk Committee focuses on 3 pillars: Technology Strategy, InfoSec/Cyber, and Data.
Biggest changeThe SVP of Technology also has responsibility for cybersecurity matters and reports to the Management Risk Committee, which consists of members of senior management. 52 Table of Contents The Technology Subcommittee of the Management Risk Committee focuses on three pillars: Technology Strategy, InfoSec/Cyber, and Data.
These third-party service providers may store or process confidential information and personally identifiable information related to our customers or on behalf of our partners in order to perform those services for which they were engaged. Coastal has implemented a vendor management program to help ensure third party relationships are effectively managed.
These third-party service providers may store or process confidential information and personally identifiable information related to our customers or on behalf of our partners to perform those services for which they were engaged. Coastal has implemented a vendor management program to help ensure third-party relationships are effectively managed.
Coastal’s Information Security Officer (“ISO”) is designated by the Board and is responsible for implementing and monitoring the Information Security Program. The ISO is a Senior Vice President and has served in such role since 2010. The ISO has over 38-years of financial institution experience, which includes, compliance, BSA, operations, physical security along with information security.
Coastal’s Information Security Officer (“ISO”) is designated by the Board and is responsible for implementing and monitoring the Information Security Program. The ISO is a Senior Vice President and has served in such role since 2010. The ISO has over 38-years of combined financial institution experience, which includes compliance, BSA, operations, physical security and information security.
These controls are designed to be implemented prior to a threat event to avoid the likelihood and potential impact of inadvertent or intentional misuse, improper disclosure, damage or loss.
These controls are designed to be implemented before a threat event to avoid the likelihood and potential impact of inadvertent or intentional misuse, improper disclosure, damage or loss.
Coastal engages third party assessors, consultants and auditors in connection with the Information Security Program, including to conduct external penetration testing, independent audits and risk assessments. Coastal also utilizes third party service providers in the ordinary course of business to provide services to customers and partners.
Coastal engages third party auditors and consultants in connection with the Information Security Program, including conducting external penetration testing, independent audits and risk assessments. Coastal also utilizes third party service providers in the ordinary course of business to provide services to customers and partners.
In addition, the Information Security Program includes internal and external penetration testing, regular vulnerability assessments, detailed 47 Table of Content s vulnerability management, data loss prevention controls, file access and integrity monitoring and reporting and threat intelligence. The Information Security Program is coordinated and primarily executed by our information security, technology, IT and operations personnel.
In addition, the Information Security Program includes internal and external penetration testing, regular vulnerability assessments, detailed vulnerability management, data loss prevention controls, file access, controls, data integrity monitoring and reporting, and threat intelligence. The Information Security Program is coordinated and primarily executed by our information security, technology, and operations personnel.
Cybersecurity risk management is also incorporated into Coastal’s overall enterprise risk management framework, which is updated on an annual basis and subject to oversight by the Management Risk Committee and the Board.
The Board exercises oversight over the Information Security Program and reviews and approves the Information Security Program at least annually. Cybersecurity risk management is also incorporated into Coastal’s overall enterprise risk management framework, which is updated on an annual basis and subject to oversight by the Management Risk Committee and the Board.
The ISO provides an annual report to the Board on the overall status of the Information Security Program and on information technology incidents as necessary. The SVP of Technology also has responsibility for cybersecurity matters and reports to the Management Risk Committee, which consists of members of senior management.
The ISO provides an annual report to the Board on the overall status of the Information Security Program and information technology incidents as necessary.
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The SVP of Technology has served in that role since 2005 and the SVP, Head of Technology Operations and Implementation, who also supports the Information Security Program, has 23 years of financial technology experience, including previously as Director, Application Development and Vice President, Integration and Analytics.
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The Information Security Program is further supported by other members of Coastal’s management team, including the President, Chief Risk Officer, and the Chief Audit Executive. The Board exercises oversight over the Information Security Program and reviews and approves the Information Security Program at least annually.

Item 2. Properties

Properties — owned and leased real estate

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Biggest changeItem 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, 2023 for our 48 Table of Content s community bank and CCBX segments.
Biggest changeItem 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, 2024 for our community bank and CCBX segments.

Item 3. Legal Proceedings

Legal Proceedings — active lawsuits and investigations

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We have determined such disclosure threshold to be $1,000,000.

Item 5. Market for Registrant's Common Equity

Market for Common Equity — stock, dividends, buybacks

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Biggest changeWe neither make nor endorse any predictions as to stock performance. 2018 2019 2020 2021 2022 2023 Coastal Financial Corporation $ 100.00 $ 108.14 $ 137.89 $ 332.37 $ 312.02 $ 291.60 S&P 600 Small Cap 100.00 122.78 136.64 173.29 145.39 168.73 S&P United States SmallCap Banks (Industry Group) Index 100.00 125.46 113.94 158.62 139.85 140.55 Source: S&P Global Market Intelligence The information set forth under the heading “Performance Graph” shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically requests that such information to be treated as soliciting material or specifically to be incorporated by reference into a filing under the Securities Act of 1933 or the Exchange Act.
Biggest changeWe neither make nor endorse any predictions as to stock performance. 2019 2020 2021 2022 2023 2024 Coastal Financial Corporation 100.00 127.50 307.35 288.52 269.64 515.54 S&P 600 Small Cap 100.00 111.29 141.13 118.41 137.42 149.37 S&P United States SmallCap Banks (Industry Group) Index 100.00 90.82 126.43 111.47 112.03 132.44 Source: S&P Global Market Intelligence The information set forth under the heading “Performance Graph” shall not be deemed to be “soliciting material” or to be “filed” with the SEC or subject to the liabilities of Section 18 of the Exchange Act, except to the extent that the Company specifically requests that such information to be treated as soliciting material or specifically to be incorporated by reference into a filing under the Securities Act of 1933, as amended, or the Exchange Act.
Total return includes appreciation or depreciation in market value of the Company’s common stock as well as actual cash and stock dividends paid to common shareholders. The graph assumes the value of the investment in Company’s common stock and each index was $100 on December 31, 2018, and all dividends were reinvested.
Total return includes appreciation or depreciation in market value of the Company’s common stock as well as actual cash and stock dividends paid to common shareholders. The graph assumes the value of the investment in Company’s common stock and each index was $100 on December 31, 2019, and all dividends were reinvested.
The Bank is not obligated to pay us dividends. 50 Table of Content s Securities Authorized for Issuance under Equity Compensation Plan For information regarding securities authorized for issuance under the Company’s equity compensation plans, see subparagraph (d) in Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” of this Form 10-K , which is incorporated herein by reference.
The Bank is not obligated to pay us dividends. 54 Table of Contents Securities Authorized for Issuance under Equity Compensation Plan For information regarding securities authorized for issuance under the Company’s equity compensation plans, see subparagraph (d) in Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters” of this Form 10-K , which is incorporated herein by reference.
Performance Graph The following graph shows the five-year comparison of the total return to shareholders of the Company’s common stock as compared to the total returns of the S&P United States SmallCap Banks (Industry Group) Index and S&P 600 Small Cap during the five-year period beginning December 31, 2018 and ending December 31, 2023.
Performance Graph The following graph shows the five-year comparison of the total return to shareholders of the Company’s common stock as compared to the total returns of the S&P United States SmallCap Banks (Industry Group) Index and S&P 600 Small Cap during the five-year period beginning December 31, 2019 and ending December 31, 2024.
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, 2024, there were 279 holders of record of the Company’s common stock.
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 5, 2025, there were 259 holders of record of the Company’s common stock.
Purchases of Equity Securities The Company did not purchase any shares of its common stock during the year ended December 31, 2023. 51 Table of Content s
Purchases of Equity Securities The Company did not purchase any shares of its common stock during the year ended December 31, 2024. 55 Table of Contents

Item 7. Management's Discussion & Analysis

Management's Discussion & Analysis (MD&A) — revenue / margin commentary

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Biggest changeItem 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.
Biggest changeSee “Note 23, Restatement of Prior Period Financial Statements” in Item 8 of this Form 10-K, for additional information related to the restatement, including descriptions of the misstatements and the impacts on our consolidated financial statements. We are a bank holding company that operates through our wholly owned subsidiaries, Coastal Community Bank (“Bank”) and Arlington Olympic LLC.
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. 53 Table of Content s 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.
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.
The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 21 partners as of December 31, 2023. The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments.
The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment had 24 partners as of December 31, 2024. The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments.
We originate loans through our CCBX partners and while these loans will have higher levels of charge-offs and nonperforming assets, agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses.
We originate loans through our CCBX partners and while these loans will have higher levels of charge-offs and nonperforming assets, agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. For additional information on credit enhancements see
As of December 31, 2023, we had total assets of $3.75 billion, total loans receivable of $3.03 billion, total deposits of $3.36 billion and total shareholders’ equity of $295.0 million. The following discussion and analysis presents our financial condition and results of operations on a consolidated basis.
As of December 31, 2024, we had total assets of $4.12 billion, total loans receivable of $3.49 billion, total deposits of $3.59 billion and total shareholders’ equity of $438.7 million. The following discussion and analysis presents our financial condition and results of operations on a consolidated basis.
Our largest expenses are provision for credit losses - loans, BaaS loan expense, BaaS fraud expense, salaries and employee benefits, interest on deposits and borrowings, occupancy expense, legal and professional expenses and data processing. Our principal lending products are commercial real estate loans, consumer loans, residential real estate, commercial and industrial loans and construction, land and land development loans.
Our largest expenses are provision for credit losses - loans, interest on deposits and borrowings, BaaS loan expense, salaries and employee benefits, BaaS fraud expense, legal and professional expenses, data processing and software licenses and occupancy expense.
Our business is conducted through three reportable segments: The community bank, CCBX and treasury & administration.
We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. Our business is conducted through three reportable segments: The community bank, CCBX and treasury & administration.
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Potential Regulatory Reforms in Response to Bank Failures The failures of Silicon Valley Bank, Santa Clara, California, Signature Bank, New York, New York, and First Republic Bank, San Francisco, California, in March and May, 2023, may lead to regulatory changes and initiatives that could impact the Company.
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Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview This discussion should be read in conjunction with the consolidated financial statements and the related notes that appear elsewhere in this Form 10-K.
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For example, President Biden has encouraged the federal banking agencies to adopt various reforms, including the completion of an incentive compensation rule for bank executives pursuant to Section 956 of the Dodd-Frank Act, in response to these bank failures.
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The Company restated its financial statements for the year ended December 31, 2023 and the quarters ended March 31, June 30, and September 30, 2023 and 2024 for misstatements between the balance sheet, income statement and statement of cash flows that were determined to be material to previously issued financial statements.
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On April 28, 2023, the Federal Reserve and the FDIC issued reports on the failures of Silicon Valley Bank and Signature Bank, respectively, identifying the potential causes that the federal banking agencies may seek to address through changes to their supervisory and regulatory policies.
Added
Our principal lending products are commercial real estate loans, consumer loans, residential real estate, commercial and industrial loans and construction, land and land development loans. Brokered Deposits Rulemaking On July 30, 2024, the Board of Directors of the FDIC approved a proposed rule that would amend the FDIC’s regulations governing the classification and treatment of brokered deposits.
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Agency officials, including the Vice Chair for Supervision of the Board of Governors of the Federal Reserve System, have called for changes to the manner in which banks’ capital, interest rate and liquidity risks are supervised and regulated.
Added
The proposal would, among other changes, broaden the definition of deposit broker to include agents that place or facilitate the placement of third-party deposits at 56 Table of Contents only one insured depository institution and narrow the exception to the definition of deposit broker for agents whose primary purpose is not the placement of funds with depository institutions.
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In the second half of 2023, the federal banking agencies issued multiple proposed rules in these areas that would largely apply only to large banking organizations and would not apply to the Company if finalized as proposed.
Added
While the Company is evaluating the potential impact of the proposed rule, if the rule is finalized as proposed, the Bank may be required to classify a greater amount of its deposits obtained with the involvement of third parties, such as CCBX partners, as brokered deposits.
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These proposed 52 Table of Content s rules include a July 2023 interagency proposal to revise the capital framework applicable to banking organizations with total assets of $100 billion or more or with significant trading activity, an August 2023 FDIC proposal to require covered insured depository institutions with total assets of $50 billion or more to develop and submit resolution plans, and an August 2023 interagency proposal to require bank holding companies with total assets of $100 billion or more to issue and maintain minimum amounts of long-term debt.
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An increase in the amount of brokered deposits on the Bank’s balance sheet could, among other consequences, increase the Bank’s deposit insurance assessment costs. Recordkeeping for Custodial Accounts On September 17, 2024, the FDIC issued a proposed rule that would impose recordkeeping and other compliance requirements on custodial deposit accounts with transactional features.
Removed
The extent of final actions to be taken by the federal banking agencies in responses to these bank failures, including the potential changes discussed by the Federal Reserve Vice Chair or highlighted in the Federal Reserve and FDIC reports, remain unclear.
Added
Under the proposed rule, FDIC-insured banks maintaining such custodial deposit accounts would be required to maintain updated and accurate account records identifying the beneficial owners of those deposits, the balance attributable to each beneficial owner, and the ownership category in which the deposited funds are held.
Removed
Small Business Lending Data Collection Rule On March 30, 2023, the CFPB finalized a rule under section 1071 of the Dodd-Frank Act requiring lenders to collect and report data regarding small business lending activity. The Company is evaluating the impact of the new rule.
Added
While we are evaluating the potential impact of the proposed rule, if the rule is finalized as proposed, it could increase the costs of operating BaaS arrangements such as the partnerships in our CCBX segment.
Removed
The rule requires compliance by October 1, 2024, April 1, 2025, or January 1, 2026, depending on the number of covered small business loans that a covered lender originates. On July 31, 2023, the U.S.
Added
Third Party Risk Management Guidance On July 25, 2024, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency released a joint statement discussing potential risks related to arrangements between banks and third parties to deliver bank deposit products and services to end users, as well as examples of effective practices for the management of those risks.
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District Court for the Southern District of Texas enjoined the CFPB from implementing and enforcing the rule with respect to American Bankers Association members, which include the Company, pending the U.S. Supreme Court's consideration of the constitutionality of the CFPB's funding structure in a separate case. The court expanded its stay to cover all covered financial institutions in October 2023.
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Additionally, the agencies issued a request for information and comment on the nature of banks’ relationships with financial technology companies and effective risk management practices for those relationships. The agencies also indicated that they are considering whether additional steps, such as enhancements to supervisory guidance, could help ensure that banks effectively manage risks associated with these various types of arrangements.
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Third Party Risk Management Guidance On June 6, 2023, the FDIC, the Federal Reserve and the OCC issued final interagency guidance on sound risk management principles that support developing and implementing risk management practices for all stages in the life cycle of third-party relationships.
Added
These developments suggest that the agencies are increasing their focus on third-party deposit arrangements and may expect financial institutions involved in these arrangements, such as us, to change their risk management and compliance practices, which may increase the costs of operating a BaaS business.
Removed
The Bank has evaluated the impact of this guidance, and is making revisions and enhancements to its programs, policies and procedures to address any gaps and maintain compliance.
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Community Reinvestment Act Reform On October 24, 2023, the FDIC, the Federal Reserve and the OCC released a final rule revising the framework that they use to evaluate banks’ records of community reinvestment under the Community Reinvestment Act (“CRA”).
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Under the revised framework, banks with assets of at least $2 billion, such as the Bank, are considered large banks and will have their retail lending, retail services and products, community development financing, and community development services subject to periodic evaluation.
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Depending on a large bank’s geographic concentrations of lending, the evaluation of retail lending may include assessment areas in which the bank extends loans but does not operate any deposit-taking facilities, in addition to assessment areas in which the bank has deposit-taking facilities. The rule becomes effective April 1, 2024.
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Most provisions of the final rule will apply beginning January 1, 2026, and the remaining provisions will apply beginning January 1, 2027. The Company is evaluating the impact of the final rule.
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If our partners are unable to fulfill their contracted obligations then the Bank would be exposed to additional credit losses as a result of this counterparty risk. Management regularly evaluates and manages this counterparty risk. The Company is responsible for credit losses on approximately 10% of a $288.1 million CCBX loan portfolio.
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At December 31, 2023, 10% of this portfolio represented $29.1 million in loans. Operating Efficiency The largest component of noninterest expense is BaaS loan and fraud expense. Other significant operating expenses include salaries and employee benefits, occupancy expense, legal and professional expenses, data processing expense, director and staff expense and marketing expense.
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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.
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When we make substantial investments in the infrastructure of new segments, open new branches or make investments to increase our operating capacity, our operating efficiency decreases until we generate enough revenue growth to offset the increased costs however, prior to making such investments, we focus on how best and most expediently we can achieve the revenue growth necessary to offset the costs of these investments or new branches.
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Our efficiency ratio has been impacted by the increase in CCBX income and CCBX expense. Our efficiency ratio was 45.92% at December 31, 2023, compared to 56.26% at December 31, 2022.
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This change is largely due to an increase in net interest income and credit enhancement income for the year ended December 31, 2023 compared to the year ended December 31, 2022.
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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.
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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.
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The economic environment is continuously changing, due to GDP, inflation, higher interest rates, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment, and trade issues all contribute to economic uncertainty which has caused increased market volatility and may lead to an economic recession and/or a significant decrease in consumer confidence and business generally.
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Critical Accounting Estimates and Significant Accounting Policies Our accounting policies are integral to understanding our results of operations. Our accounting policies are described in greater detail in Note 1 to our consolidated financial statements included elsewhere in this Report on Form 10-K.
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Certain accounting policies involve significant judgments and assumptions by us that have a material impact on the carrying value of certain assets and liabilities. We consider the items discussed below to be critical accounting estimates. These assumptions, estimates and judgments we use can be influenced by a number of factors, including the general economic environment.
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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.
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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.
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Unrealized gains and losses are excluded from earnings and reported in other comprehensive 54 Table of Content s income. Securities within the available for sale portfolio may be used as part of our asset/liability strategy and may be pledged or sold in response to changes in interest rate risk, prepayment risk or other similar economic factors.
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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.
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Premiums and discounts on securities are amortized using the level-yield method, except for mortgage backed securities where prepayments are anticipated. Gains and losses on sales are recorded on the trade date and determined using the specific identification method.
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Management evaluates debt securities for credit losses, on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation. For securities in an unrealized loss position, management considers the extent and duration of the unrealized loss, and the financial condition and near-term prospects of the issuer.
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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.
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If either of the criteria regarding intent or requirement to sell is met, the entire difference between amortized cost and fair value is recognized as an impairment through earnings. The credit loss is defined as the difference between the present value of the cash flows expected to be collected and the amortized cost basis.
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For more information and discussion related to securities, see “ Note 3 - Investment Securities” in the Consolidated Financial Statements.
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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.
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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.
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Loan origination fees and certain direct origination costs are deferred and recognized as adjustments to interest income using a level yield methodology or a method approximating the level yield methodology. As of December 31, 2023, loans receivable totaled $3.03 billion, an increase of $398.8 million, or 15.2%, compared to $2.63 billion as of December 31, 2022.
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Total loans receivable is net of $7.3 million in net deferred origination fees, $47,000 of which is attributed to PPP loans.
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The increase in loans is largely attributed to growth in our CCBX segment as a result of growth from existing and new partners, combined with loan growth in the community bank segment, slightly offset by forgiveness or principal paydowns on PPP loans.
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For more information and discussion related to the loans held for investment, see “ Note 4 - Loans and Allowance for Credit Losses” in the Consolidated Financial Statements.
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Loans Held for Sale CCBX loans held for sale consist of the portion of CCBX originated loans that the Company intends to sell back to the originating CCBX partner or its affiliate generally at par. The Company sells loans to manage credit positions and concentrations with partners and across loan categories.
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During the twelve months ended December 31, 2023, the Company transferred $599.9 million in CCBX loans receivable to loans held for sale and subsequently sold these loans. As of December 31, 2023 and 2022 there were no CCBX loans held for sale.
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Community bank loans held-for-sale consist of the guaranteed portion of SBA loans and United States Department of Agriculture (“USDA”) loans the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value.
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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.
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There were no community bank loans held for sale at December 31, 2023 and 2022. Equity Investments Equity investments include amounts invested in stock, venture capital funds, partnerships, and other business ventures. Some of these equity investments are in vendors/suppliers, private companies, government agencies, or government sponsored enterprises.
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The Company directly holds stock in organizations such as the Federal Reserve Bank, Federal Home Loan Bank of Des Moines, private companies, and venture capital funds. Equity investments are subject to 55 Table of Content s the risk of loss if these organizations experience financial difficulties or fall on hard times.
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The Company carries these investments at market value or cost if market value is not readily determinable. During 2023, net contributions to private company equity investments totaled $125,000 and increased in value by $278,000 in response to a redemption of a fund and to a decline in value in the stock based financial performance and growth rates.
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In 2022, net contributions to private company equity investments totaled $699,000 and increased in value by $153,000 (unrealized gain) mostly in response to one company’s issuance of common equity awards, identical to the Company’s holdings, at a higher value. The assumptions underlying these valuations represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment.
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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 Credit Losses The allowance for credit losses ("ACL") is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and calculated on a collective basis for those loans which share similar risk characteristics.
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At each reporting period, the Company evaluates whether the loans in a pool continue to exhibit similar risk characteristics as the other loans in the pool and whether it needs to evaluate the allowance on an individual basis. The Company must estimate expected credit losses over the loans’ contractual terms, adjusted for expected prepayments.
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In estimating the life of the loan, the Company cannot extend the contractual term of the loan for expected extensions, renewals, and modifications, unless the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Company.
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Because expected credit losses are estimated over the contractual life adjusted for estimated prepayments, determination of the life of the loan may significantly affect the ACL.
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The Company has chosen to segment its portfolio consistent with the manner in which it manages the risk of the type of credit. • Community Bank Portfolio: The ACL calculation is derived from loan segments utilizing loan level information and relevant available information from internal and external sources related to past events and current conditions.
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In addition, the Company incorporates a reasonable and supportable forecast. • CCBX Portfolio: The Bank calculates the ACL on loans on an aggregate basis based on each partner and product level, segmenting the risk inherent in the CCBX portfolio based on qualitative and quantitative trends in the portfolio.
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Also included in the ACL are qualitative reserves to cover losses that are expected, but in the Company’s assessment may not be adequately represented in the quantitative method. For example, factors that the Company considers include environmental business conditions, borrower’s financial condition, credit rating and the volume and severity of past due loans and non-accrual loans.
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Based on this analysis, the Company records a provision for credit losses to maintain the allowance at appropriate levels. Determining the amount of the allowance is considered a critical accounting estimate, as it requires significant judgment and the use of subjective measurements, including management’s assessment of overall portfolio quality.
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The Company maintains the allowance at an amount the Company believes is sufficient to provide for estimated losses expected to occur in the Company’s loan portfolio at each balance sheet date, and fluctuations in the provision for credit losses may result from management’s assessment of the adequacy of the allowance.
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Changes in these estimates and assumptions are possible and may have a material impact on the Company’s allowance, and therefore the Company’s financial position, liquidity or results of operations. The Company has elected to exclude accrued interest receivable from the amortized cost basis in its ACL calculation as accrued interest is written off in a timely manner when deemed uncollectable.
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The Company increased the allowance from $74.0 million at December 31, 2022 to $117.0 million at December 31, 2023. The allowance was significantly increased in response to growth in CCBX loans. The Company uses CCBX partner data, industry data and its own credit loss data to develop an appropriate allowance for the risk inherent in the CCBX new loan volume.

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