COSO 10-K & 10-Q changes, risk factors and insider trading

The purpose of this discussion and analysis of financial condition and results of operations, also referred to hereafter as this MD&A, is to aid in understanding significant changes in the financial condition of CoastalSouth Bancshares, Inc. and our wholly owned subsidiary, Coastal States Bank, fromas of December 31, 2025 throughand MarchJune 31,30, 20262026, and on our results of operations for the three and six months ended MarchJune 31,30, 2026 and 2025. This discussion and analysis should be read in conjunction with our audited consolidated financial statements and notes thereto for the year ended December 31, 2025 included on the Company’s 2025 Form 10-K and information presented elsewhere in this Quarterly Report on Form 10‑Q, particularly the unaudited consolidated financial statements and related notes appearing in Item 1.

the impact of adverse developmentsdevelopments, or actual or perceived instability, in the banking industry, on client confidence, liquidity, and regulatory responses to these developments (including increases in the cost of our deposit insurance assessments and increased regulatory scrutiny), our ability to effectively manage our liquidity risk and any growth plans, and the availability of capital and funding;

a breach in security of our information systems, including the occurrence of cyber-attack incidents or a deficiencies in cyber security;

In addition, changes in market conditions may reduce the availability of quoted prices or observable date. See Note 6 of our consolidated financial statements as of MarchJune 31,30, 2026, included elsewhere in this Quarterly Report on Form 10-Q, for a complete discussion of fair value of financial assets and liabilities and their related measurement practices.

The following table sets forth unaudited selected financial data for the most recent five quarters and the threesix months ended MarchJune 31,30, 2026 and 2025. This data should be read in conjunction with the unaudited consolidated financial statements and accompanying notes included in Item 1 and the information contained in this Item 2.

Results of Operations — Comparison of Results of Operations for the Three Months Ended MarchJune 31,30, 2026 and 2025

The following discussion of our results of operations compares the three months ended MarchJune 31,30, 2026 and 2025. We reported net income for the three months ended MarchJune 31,30, 2026 of $6.3$7.3 million compared to net income of approximately $5.1$6.0 million for the three months ended MarchJune 31,30, 2025. The increase of approximately $1.3$1.4 million was principally attributable to a higher net interest income, offset by higher noninterest expense, primarily salaries and employee benefits.

Increases and decreases in interest income and interest expense result from changes in average balances (volume) of interest-earning assets and interest-bearing liabilities, as well as changes in average interest rates. The following tables set forth the effects of changing interest rates and volumes on our net interest income during the periods indicated. The information is provided with respect to (i) effects on interest income attributable to changes in volume (change in volume multiplied by prior rate) and (ii) effects on interest income attributable to changes in rate (changes in rate multiplied by prior volume). ChangeChanges applicable to both volumes and rate have been allocated to volume.

Net interest income for the three months ended MarchJune 31,30, 2026 was $19.7$20.7 million compared to $16.8$18.1 million for the three months ended MarchJune 31,30, 2025, an increase of $3.0$2.6 million, or 17.8%.14.3%. This increase was primarily due to an increase in the average balance of our total interest-earning assets coupled with a decrease in the average rate paid on interest-bearing liabilities. The increase in the average balance for the interest-earning assets was primarily due to an increase in average federalloans funds soldoutstanding and investment securities; offset by a net increasedecrease in averageother loanscategories, outstanding.primarily federal funds sold. The yield on total earning assets and interest-bearing liabilities decreased by 1314 and 3635 basis points, respectively, during the same period.

Total interest income for the three months ended MarchJune 31,30, 2026 was $32.6$33.6 million compared to $30.0$31.8 million for the three months ended MarchJune 31,30, 2025, an increase of $2.5$1.8 million, or 8.5%.5.6%. This increase was primarily due to growth in our loan portfoliosportfolios, notwithstanding with lower yields.yields; offset by a modest net decrease in other categories, primarily federal funds sold.

Interest and fees on LHFI were $25.1$26.0 million for the three months ended MarchJune 31,30, 2026 compared to $22.3$23.8 million for the three months ended MarchJune 31,30, 2025, an increase of $2.8$2.2 million, or 12.6%.9.1%. This increase was primarily attributable to an increase in average LHFI of $189.9$161.8 million, or 13.3%,10.7%, despite a decrease in yield. The yield on gross LHFI decreased by 39 basis points compared to the same period in 2025. Interest and fees on LHFS were $2.9$3.2 million for the three months ended MarchJune 31,30, 2026 compared to $2.8$3.3 million for the three months ended MarchJune 31,30, 2025. This increasedecrease was primarily due to a decreased yield by 43 basis points, notwithstanding an increase in the average balance of LHFS outstanding whereas the yield decreased by 90 basis points compared to the same period in 2025.

Interest income on investment securities wasremained $3.6flat at $3.9 million for the three months ended MarchJune 31,30, 2026 compared to $3.8 million for the three months ended March 31,and 2025. ThisInvestment decrease was primarily due to the fact that thesecurities average balance increased by $8.5$20.0 millionmillion, coupled withnotwithstanding a 3424 basis points decrease in yield on investment securities during the period.

Interest expense for the three months ended MarchJune 31,30, 2026 was $12.8$12.9 million compared to $13.3$13.7 million for the three months ended MarchJune 31,30, 2025.2025, a decrease of $822 thousand, or 6.0%. This decrease was primarily driven by lower average time deposits and borrowings,deposits, coupled with a 3635 basis point decrease in the average cost of overall total interest-bearing liabilities, primarily in borrowings, due to the payoff of the Company's subordinated debt during the third quarter of 2025, and money market and time deposit accounts, as the rates were adjustedcontinues to align with the market.

Net interest margin for the three months ended MarchJune 31,30, 2026 and 2025 was 3.59%3.66% and 3.38%,3.46%, respectively. Net interest margin and net interest income are influenced by internal and external factors. Internal factors include balance sheet changes on both volume and mix and pricing decisions, and external factors include changes in market interest rates, competition and the shape of the interest rate yield curve. This increase in our net interest margin was primarily due to a combination of average total earning assets growth and a decrease in yield for average total interest-bearing liabilities. Average earning assets for the three months ended MarchJune 31,30, 2026 increased by $219.7$169.0 million compared to the three months ended MarchJune 31,30, 2025, principally due to growth of our loan portfolios. Average interest-bearing liabilities for the three months ended MarchJune 31,30, 2026 increased by $129.1$83.4 million compared to the three months ended MarchJune 31,30, 2025, driven by growth in average interest-bearing deposits, primarily money market and demand deposits accounts.accounts; offset by a net decrease in other interest-bearing liabilities categories, primarily time deposits.

Provision for credit losses for the three months ended MarchJune 31,30, 2026 was $382$658 thousand compared to $629$752 thousand for the three months ended MarchJune 31,30, 2025, a decrease of $247$94 thousand or 39.3%.12.5%. This decrease was primarily due to changes in loss rates and economic conditions, and higher loan production during the three months ended MarchJune 31,30, 2025, compared to the three months ended MarchJune 31,30, 2026, offset by a change to individual loan reserves and updates to loss rates and economic scenarios between the comparative periods. Our allowance for credit losses as a percentage of gross LHFI was 1.16% and 1.15% at MarchJune 31,30, 2026 and 2025.2025, respectively.

Noninterest income for the three months ended MarchJune 31,30, 2026 was approximately $2.0$2.2 million, an increase of $86$407 thousand or 4.6%,22.7%, compared to approximately $1.9$1.8 million for the three months ended MarchJune 31,30, 2025. This increase was primarilyprincipally inacross gainthe onboard, salebut of government guaranteed loans ("GGL") and mortgage related income, offset by a net decrease in other categories of noninterest income, primarilymostly in other noninterest income.

Mortgage banking related income increased by $173$77 thousand to $394$403 thousand for the three months ended MarchJune 31,30, 2026 compared to $221$326 thousand for the three months ended MarchJune 31,30, 2025. This increase was primarily due to higher secondary market mortgage production which is comprised primarily of activity related to the sale of consumer mortgage loans as well as loan origination fees such as closing charges, document review fees, application fees, other loan origination fees, and loan processing fees.

Gain on sale of GGL increased by $337$42 thousand for the three months ended MarchJune 31,30, 2026.2026 Therecompared wereto no$265 GGLthousand sales duringfor the three months ended MarchJune 31,30, 2025. The Company's gain on the sale of GGL volume increases or decreases based on the attractiveness of market premiums and the amount of inventory of loans that are saleable.

Other noninterest income decreasedincreased by $468$251 thousand to $275$534 thousand for the three months ended MarchJune 31,30, 2026 compared to $743$283 thousand for the three months ended MarchJune 31,30, 2025. This decreaseincrease was primarily due to nonrecurringgain $438 thousand recognized income from a Small Business Investment Companies ("SBIC") partnership investment recognized during three months ended March 31, 2025 related to theon sale of oneother of the underlying fund investments,loans, coupled with a net decreaseincrease in other categories within other noninterest income.

Changes to income from bank-owned life insurance policies ("BOLI"), interchange and card fee income, and service charges on deposit accounts remained fairly comparable between three months ended MarchJune 31,30, 2026 and three months ended MarchJune 31,30, 2025.

Noninterest expense for the three months ended MarchJune 31,30, 2026 was $13.0$13.4 million compared to $11.4$12.1 million for the three months ended MarchJune 31,30, 2025, an increase of $1.6$1.3 million, or 14.2%.10.6%. This increase was across multiple noninterest expense categories primarily in salaries and employee benefits, occupancyoffset and equipment, and software and other technology expense, coupled withby a net increasedecrease in all other noninterest expense categories.categories, primarily other professional services.

The following table sets forth the major components of our noninterest expense for the three months ended MarchJune 31,30, 2026 and 2025:

Salaries and employee benefits expense for the three months ended MarchJune 31,30, 2026 was $8.0$8.3 million compared to $6.7$7.0 million for the three months ended MarchJune 31,30, 2025, an increase of $1.4$1.3 million, or 20.2%.18.8%. This increase was attributable to hiring new employees with skills and experience necessary to support our strategic goals coupled with annual merit increases. The average number of full-time equivalent employees was 201 for the three months ended MarchJune 31,30, 2026 compared to 180188 for three months ended MarchJune 31,30, 2025.

Occupancy and equipment expense for the three months ended MarchJune 31,30, 2026 was $886$875 thousand compared to $788$814 thousand for the three months ended MarchJune 31,30, 2025, an increase of $98$61 thousand, or 12.4%.7.5%. This increase was primarily due to new leases and rental increases, property taxes and depreciation, and upkeep related to the properties.

Software and technology expense for the three months ended MarchJune 31,30, 2026 was $826$861 thousand compared to $703$719 thousand for the three months ended MarchJune 31,30, 2025, an increase of $123$142 thousand, or 17.5%.19.7%. This expense was primarily comprised of our information technology services, software licenses and maintenance and commensurate with the CompanyCompany's growth.

Marketing and advertising expense for the three months ended MarchJune 31,30, 2026 was $279$276 thousand compared to $233$269 thousand for the three months ended MarchJune 31,30, 2025. Marketing and advertising costs are associated with digital advertising, mailings, and sponsorship. Marketing and advertising expense is included in Other noninterest expenses in our Company’s Consolidated Statements of Operations.Income.

Other noninterest expenses,expense, excluding marketing and advertising expense, for the three months ended MarchJune 31,30, 2026 were $1.4 million compared to $1.3 million for the three months ended MarchJune 31,30, 2025, an increase of $63$102 thousand, or 4.8%.7.7%. This increase was primarily attributable to increases in othergeneral noninterestadministrative expense and generalother andloan administrative expense,expense; offset primarily by decreases in Board of Directors feesfees, andcoupled OREOwith write-downsa asnet theredecrease werein noother write-downsnoninterest duringexpense the current period.categories. Included in other noninterest expense for the three months ended MarchJune 31,30, 2026 and 2025 were directors’ fees of $156$113 thousand and $176 thousand, respectively.

Changes to other professional services expense, data processing expense, and FDIC insurance and regulatory assessment expense remained relatively comparable between the three months ended MarchJune 31,30, 2026 and three months ended March 31, 2025.

Income tax expense for the three months ended MarchJune 31,30, 2026 and 2025 was $2.0$1.5 million and $1.5$1.1 million, respectively. Effective tax rates were 23.6%17.0% and 23.4%15.1% for the three months ended MarchJune 31,30, 2026 and 2025, respectively. The increase in effective tax rate comparedwas to the three months ended March 31, 2025 wasprimarily due to avarying lower recognitionamounts of low income housing tax credits duringrecognized in the threecomparative months ended March 31, 2026.periods.