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Financial report summary
?Risks
- We are subject to interest rate risk and fluctuations in interest rates may adversely affect our earnings.
- Our commercial real estate lending activities expose us to increased lending risks and related credit losses.
- We may be subject to environmental liabilities in connection with the real properties we own and the foreclosure on real estate assets securing our loan portfolio.
- Our commercial business lending activities expose us to additional lending risks.
- Our origination of construction loans exposes us to increased lending risks.
- Our focus on lending to the small to medium-sized businesses may adversely affect our business, financial condition and results of operations.
- We may not be able to adequately measure and limit our credit risk, which could lead to unexpected losses.
- We originate and purchase loans through our CCBX partners, which exposes us to increased lending and compliance risks.
- Our allowance for credit losses may prove to be insufficient to absorb losses in our loan portfolio.
- The current economic condition in the market areas we serve may adversely impact our earnings and could increase the credit risk associated with our loan portfolio.
- Our SBA lending program is dependent upon the U.S. federal government, and we face specific risks associated with originating SBA loans.
- Economic conditions could increase our level of nonperforming loans and/or reduce demand for our products and services, which could have an adverse effect on our results of operations.
- Nonperforming assets take significant time and resources to resolve and adversely affect our business, financial condition and results of operations.
- Risks Related to Compliance and Operational Matters
- Imposition of limits by the bank regulators on commercial real estate lending activities could curtail our growth and adversely affect our earnings.
- Our business is subject to the risks of epidemic illnesses, earthquakes, tsunamis, floods, fires and other natural catastrophic events or effects of climate change.
- Appraisals and other valuation techniques we use in evaluating and monitoring loans secured by real property, OREO and repossessed personal property may not accurately reflect the net value of the asset.
- We derive a percentage of our deposits, total assets and income from deposit accounts generated through our BaaS relationships.
- Our strategy of partnering with broker dealers and digital financial service providers to offer BaaS has been adopted by other institutions with which we compete.
- Our agreements with BaaS partners may produce limited revenue and may expose us to liability for compliance violations by BaaS partners.
- We may be adversely affected by changes in U.S. tax laws and regulations.
- We are subject to additional state and local taxes as a result of CCBX operations.
- Because the nature of the financial services business involves a high volume of transactions, we face significant operational risks, including, but not limited to, customer, employee or third-party fraud and data processing system failures and errors.
- We are dependent on the use of data and modeling in our management’s decision-making, and faulty data or modeling approaches could negatively impact our decision-making ability or possibly subject us to regulatory scrutiny in the future.
- 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.
- 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.
- Dependency on external security systems expose us to greater operational risk.
- We are highly dependent on the accuracy and effectiveness of our operational processes and systems and the operational processes and systems of external parties related to the community bank and CCBX.
- We may be subject to potential business risk from actions by our regulators related to CCBX relationships.
- Risks Related to Strategic and Reputational Matters
- Our business strategy includes growth, and our business, financial condition and results of operations could be negatively affected if we fail to grow or fail to manage our growth effectively. Growing our operations could also cause our expenses to increase faster than our revenues.
- Strong competition within our market area could hurt our profits and slow growth.
- We rely heavily on our executive management team and other key employees, and we could be adversely affected by the unexpected loss of their services.
- 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.
- We are subject to laws regarding the privacy, information security and protection of personal information and any violation of these laws or another incident involving personal, confidential or proprietary information of individuals could damage our reputation and otherwise adversely affect our business, financial condition and earnings.
- We are dependent on our information technology and telecommunications systems and third-party service providers; systems failures, interruptions, security breaches and cybersecurity threats could have an adverse effect on our business, financial condition and results of operations.
- Risks Related to Our Capital and Liquidity
- Ineffective liquidity management could adversely affect our business, financial condition and results of operations.
- We may need to raise additional capital in the future, and such capital may not be available when needed or at all.
- There may be future sales or other dilution of our equity, which may adversely affect the market price of our securities.
- Regulation of the financial services industry is intense, and we may be adversely affected by changes in laws and regulations.
- Additional increases in Federal Deposit Insurance Corporation insurance premiums could adversely affect our earnings and results of operations.
- Federal banking agencies periodically conduct examinations of our business, including compliance with laws and regulations, and our failure to comply with any supervisory actions to which we are or become subject as a result of such examinations could adversely affect us.
- Many of our new activities and expansion plans require regulatory approvals, and failure to obtain these approvals may restrict our growth.
- Financial institutions, such as the Bank, face a risk of noncompliance with and enforcement action under the Bank Secrecy Act and other anti-money laundering statutes and regulations.
- We are subject to numerous laws designed to promote community reinvestment or protect consumers, including the CRA and fair lending laws, and failure to comply with these laws could lead to a wide variety of sanctions.
- Federal, state and local consumer lending laws may restrict our ability to originate certain mortgage loans or increase our risk of liability with respect to such loans and could increase our cost of doing business.
- The expanding body of federal, state and local regulations and/or the licensing of loan servicing, collections or other aspects of our business and our sales of loans to third parties may increase the cost of compliance and the risks of noncompliance and subject us to litigation.
- The Federal Reserve may require us to commit capital resources to support the Bank.
- We could be adversely affected by the soundness of other financial institutions.
- We could be adversely affected by the soundness of our CCBX partners.
- National and global economic and other conditions could adversely affect our future results of operations or market price of our stock.
- We are subject to certain risks in connection with growing through mergers and acquisitions.
- We must keep pace with technological change to remain competitive.
- 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.
Management Discussion
- Net income for the three months ended March 31, 2024 was $6.8 million, or $0.50 per diluted share, compared to $12.4 million, or $0.91 per diluted share, for the three months ended March 31, 2023. The decrease in net income over the comparable period in the prior year was primarily attributable to a $13.9 million increase in interest expense due to an increase in average interest bearing deposits and an increase of in cost of deposits as a result of higher interest rates, an increase in the provision for credit losses - loans of $39.5 million, related to CCBX loan growth, and $11.4 million more in noninterest expense, also largely related to CCBX loan growth, increases in salary expense and professional fees and a number of unanticipated expenses incurred during the quarter ended March 31, 2024 described in more detail below. These increases in expense were partially offset by a $20.4 million increase in interest income and $37.6 million increase in noninterest income. The increase in noninterest income, provision expense and noninterest expense are all largely related to increased CCBX loan and deposit activity. In accordance with GAAP, we recognize as revenue (1) the right to be indemnified or reimbursed for fraud losses on CCBX customer loans and deposits and (2) the right to be indemnified for credit losses by our partners for expected credit losses related to loans they originate and unfunded commitments from such loans. CCBX customer credit losses are recognized in the allowance for credit loss and fraud loss is recognized in BaaS noninterest expense. For more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”