UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

☒
x			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, ~~2018~~

2023

☐
o			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ~~______________~~_______________ to ~~_____________~~

_______________

Commission file number: 001-38589

COASTAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

~~Washington~~	~~56-2392007~~
Washington		56-2392007
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

5415 Evergreen Way, Everett, Washington		98203
(Address of principal executive offices)		(Zip Code)

~~(425) 257-9000~~
(425) 257-9000
(Registrant’s telephone number, including area code)
~~Not Applicable~~
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, no par value per share	CCB	NASDAQ Global Select Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☐x No ☒

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate website, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒x No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an ~~“emerging~~emerging growth company.” See the ~~definition~~definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and ~~“emerging~~emerging growth ~~company”~~company in Rule 12b-2 of the Exchange Act. ~~(Check one)~~

Large Accelerated Filer

☐

Accelerated Filer

☐

Non-Accelerated Filer

☒

Smaller Reporting Company

☐

Emerging Growth Company

☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section ~~7(a)(2)(B)~~13(a) of the ~~Securities~~Exchange Act ☒

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐o No ☒

As of August ~~31, 2018,~~3, 2023, there were ~~11,521,849~~13,301,679 shares of the ~~registrant’s~~issuer’s common stock ~~100,000 shares~~outstanding.

Table of ~~the registrant’s Class B Nonvoting Common Stock, and 261,344 shares of the registrant Class C Nonvoting Common Stock outstanding.~~

Contents,

COASTAL FINANCIAL CORPORATION

Table of Contents

~~Page No.~~

Page No.

Part I. Financial Information

Item 1.

Condensed Consolidated Financial Statements (unaudited)

Condensed Consolidated Balance Sheets as of June 30, ~~2018~~2023 and December 31, ~~2017~~2022 (unaudited)

Condensed Consolidated Statements of Income for the Three and Six Months ~~ended~~ Ended June 30, ~~2018~~2023 and ~~2017~~2022 (unaudited)

Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months ~~ended~~ Ended June 30, ~~2018~~2023 and ~~2017~~2022 (unaudited)

Condensed Consolidated ~~Statement~~Statements of Changes in Shareholders’ Equity for the Three and Six Months ~~ended~~ Ended June 30, ~~2018~~2023 and ~~2017~~2022 (unaudited)

Condensed Consolidated Statements of Cash Flows for the Six Months ~~ended~~ EndedJune 30, ~~2018~~2023 and ~~2017~~2022 (unaudited)

Notes to Condensed Consolidated Financial Statements (unaudited)

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

Item 4.

Controls and Procedures

Part II. Other Information

Unregistered Sales of Equity Securities and Use of Proceeds

Item 3.

Defaults Upon Senior Securities

Item 4.

Mine Safety Disclosures

~~Safe Harbor Statement under the Private Securities Litigation Reform Act~~Table of ~~1995~~

Contents,

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of ~~Section 27A of~~ the Private Securities Litigation Reform Act of ~~1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended.~~1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our management’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. ~~With respect to any such~~All forward-looking statements, ~~we claim~~expressed or implied, included herewith are expressly qualified in their entirety by the ~~protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995, as amended. Any~~cautionary statements contained or ~~all of the forward-looking statements in this report may turn out~~referred to ~~be inaccurate.~~herein. The inclusion of forward-looking information in this report should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

Factors that may affect our results are disclosed in “Item 1A. Risk Factors” in Part II of this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K for the ~~Company’s prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on July 18, 2018.~~year ended December 31, 2022 (“Form 10-K”). Some of the risks and uncertainties that may cause ~~the Company’s~~our actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the difficult market conditions and unfavorable economic conditions and uncertainties in the markets in which we operate and in which our loans are concentrated, including declines in housing markets as a result of global macroeconomic and geopolitical events, an increase in unemployment levels and slowdowns in economic growth; our expected future financial results; the overall health of the local and national real estate market; the impacts related to or resulting from recent bank failures and other economic and industry volatility, including potential increased regulatory requirements and costs and potential impacts to macroeconomic conditions; the credit risk associated with our loan portfolio, such as possible additional credit losses and impairment of collectability of loans as a result of the coronavirus, and variants thereof ("COVID-19") pandemic and policies and programs implemented by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), including its automatic loan forbearance provisions and the effects on our loan portfolio from our Paycheck Protection Program (“PPP”) lending activities, specifically with our commercial real estate loans; our level of nonperforming assets and the costs associated with resolving problem loans; business and economic conditions generally and in the financial services industry, nationally and within our market ~~area;~~area, particularly in the markets in which we operate and in which our loans are concentrated; our ability to maintain an adequate level of allowance for ~~loan~~credit losses; our ability to successfully manage liquidity risk; our ability to implement our growth strategy and manage costs effectively; the composition of our senior leadership team and our ability to attract and retain key personnel; our ability to raise additional capital to implement our business plan; changes in market interest rates and impacts of such changes on our profits and business; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; our ability to maintain our reputation; increased competition in the financial services industry; regulatory guidance on commercial lending concentrations; our relationship with broker-dealers and digital financial service providers; the effectiveness of our risk management framework; the costs and obligations associated with being a publicly traded company; the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; the extensive regulatory framework that applies to us; the impact of recent and future legislative and regulatory ~~changes;~~changes and economic stimulus programs; and other changes in banking, securities and tax laws and regulations, and their application by our regulators; the impact on our operations due to epidemic illnesses, natural or man-made disasters, such as wildfires, the effects of regional or national civil unrest, and political developments that may disrupt or increase volatility in securities or otherwise affect economic conditions; the impact of benchmark interest rate reform in the U.S. and implementation of alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”), to the London Interbank Offered Rate (“LIBOR”); fluctuations in the value of the securities held in our securities portfolio; governmental monetary and fiscal policies; material weaknesses in our internal control over financial reporting; and our success at managing the risks involved in the foregoing items.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. You are cautioned not to place undue reliance on forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated ~~events.~~

events, except as required by law.

Table of Contents ,

PART I. ~~FINANCIAL~~FINANCIAL INFORMATION

Item 1. Financial Statements

~~COASTAL FINANCIAL CORPORATION AND SUBSIDIARY~~

~~CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)~~

~~(dollars in thousands)~~

ASSETS

June 30,

December 31,

2018

2017 (audited)

Cash and due from banks

$
14,217

$
13,787

Interest-bearing deposits with other banks (restricted cash of $16,632 and $17,322)

77,232

75,964

Investment securities, available for sale, at fair value

36,013

36,927

Investment securities, held to maturity, at amortized cost

1,304

1,409

Other investments

3,766

3,680

Loans receivable

700,692

656,788

Allowance for loan losses

(8,540
)

(8,017
)
Total loans receivable, net

692,152

648,771

Premises and equipment, net

12,963

13,121

Accrued interest receivable

2,290

2,274

Bank-owned life insurance, net

6,592

6,500

Deferred tax asset, net

2,253

2,092

Other assets

2,140

1,228

Total assets

$
850,922

$
805,753

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES

Deposits

$
744,468

$
703,295

Federal Home Loan Bank (FHLB) advances

20,000

20,000

Subordinated debt

Principal amount $10,000 (less unamortized debt issuance costs of $43
   and $50 at June 30, 2018 and December 31, 2017, respectively)

9,957

9,950

Junior subordinated debentures

Principal amount $3,609 (less unamortized debt issuance costs of $29
   and $30 at June 30, 2018 and December 31, 2017, respectively)

3,580

3,579

Deferred compensation

1,127

1,175

Accrued interest payable

241

228

Other liabilities

2,059

1,815

Total liabilities

781,432

740,042

SHAREHOLDERS’ EQUITY

Preferred stock, no par value:

Authorized: 25,000,000 shares at June 30, 2018 and December 31, 2017; issued
   and outstanding: zero shares at June 30, 2018 and December 31, 2017

-

-

Common stock, no par value:

Authorized: 300,000,000 shares at June 30, 2018 and December 31,
   2017; 8,937,109 voting and 361,444 nonvoting shares at June 30,
   2018 issued and outstanding and 8,887,457 voting and 361,444
   nonvoting shares at December 31, 2017 issued and outstanding

52,946

52,521

Retained earnings

18,364

14,134

Accumulated other comprehensive loss, net of tax

(1,820
)

(944
)
Total shareholders’ equity

69,490

65,711

Total liabilities and shareholders’ equity

$
850,922

$
805,753


COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands)


ASSETS
	June 30, 2023		December 31, 2022
Cash and due from banks	$	29,783	$	32,722
Interest earning deposits with other banks (restricted cash of $0 at June 30, 2023 and December 31, 2022)	245,277		309,417
Investment securities, available for sale, at fair value	98,167		97,317
Investment securities, held to maturity, at amortized cost	12,563		1,036
Other investments	12,037		10,555
Loans held for sale	35,923		—
Loans receivable	3,007,553		2,627,256
Allowance for credit losses	(110,762)		(74,029)
Total loans receivable, net	2,896,791		2,553,227
CCBX credit enhancement asset	96,928		53,377
CCBX receivable	19,113		10,416
Premises and equipment, net	18,903		18,213
Operating lease right-of-use assets	6,216		5,018
Accrued interest receivable	21,581		17,815
Bank-owned life insurance, net	12,873		12,667
Deferred tax asset, net	25,764		18,458
Other assets	3,364		4,229
Total assets	$	3,535,283	$	3,144,467

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits	$	3,162,572	$	2,817,521

Subordinated debt, net
Principal amount $45,000 (less unamortized debt issuance costs of $931 and $1,001) at June 30, 2023 and December 31, 2022, respectively	44,069		43,999
Junior subordinated debentures, net
Principal amount $3,609 (less unamortized debt issuance costs of $20 at June 30, 2023 and December 31, 2022)	3,589		3,588
Deferred compensation	547		616
Accrued interest payable	766		684
Operating lease liabilities	6,413		5,234
CCBX payable	27,714		20,419
Other liabilities	16,951		8,912
Total liabilities	3,262,621		2,900,973
SHAREHOLDERS’ EQUITY
Preferred stock, no par value:
Authorized: 25,000,000 shares at June 30, 2023 and December 31, 2022; issued and outstanding: zero shares at June 30, 2023 and December 31, 2022	—		—
Common stock, no par value:
Authorized: 300,000,000 shares at June 30, 2023 and December 31, 2022; 13,300,809 shares at June 30, 2023 issued and outstanding and 13,161,147 shares at December 31, 2022 issued and outstanding	128,315		125,830
Retained earnings	146,029		119,998
Accumulated other comprehensive loss, net of tax	(1,682)		(2,334)
Total shareholders’ equity	272,662		243,494
Total liabilities and shareholders’ equity	$	3,535,283	$	3,144,467

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents~~COASTAL FINANCIAL CORPORATION AND SUBSIDIARY~~


COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except for per share data)


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2023		2022		2023		2022
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	80,199	$	40,166	$	146,630	$	69,798
Interest on interest earning deposits with other banks	2,678		956		5,775		1,358
Interest on investment securities	653		563		1,206		634
Dividends on other investments	156		134		186		171
Total interest income	83,686		41,819		153,797		71,961
INTEREST EXPENSE
Interest on deposits	20,675		1,673		35,633		2,226
Interest on borrowed funds	661		260		1,323		581
Total interest expense	21,336		1,933		36,956		2,807
Net interest income	62,350		39,886		116,841		69,154
PROVISION FOR CREDIT LOSSES - LOANS	52,598		14,094		96,142		27,036
RECAPTURE FOR UNFUNDED COMMITMENTS	(345)		—		(192)		—
Net interest income after provision for credit losses - loans and unfunded commitments	10,097		25,792		20,891		42,118
NONINTEREST INCOME
Deposit service charges and fees	989		988		1,899		1,872
Loan referral fees	682		208		682		810
Gain on sales of loans, net	23		—		146		—

Unrealized (loss) gain on equity securities, net	155		—		194		—

Other income	234		396		533		784
Noninterest income, excluding BaaS program income and BaaS indemnification income	2,083		1,592		3,454		3,466
Servicing and other BaaS fees	895		1,159		1,843		2,328
Transaction fees	1,052		814		1,969		1,307
Interchange fees	975		628		1,764		1,060
Reimbursement of expenses	1,026		618		1,947		990
BaaS program income	3,948		3,219		7,523		5,685
BaaS credit enhancements	51,027		14,207		93,389		27,282
BaaS fraud enhancements	1,537		6,474		3,536		11,045
BaaS indemnification income	52,564		20,681		96,925		38,327
Total noninterest income	58,595		25,492		107,902		47,478
NONINTEREST EXPENSE
Salaries and employee benefits	16,309		12,238		31,884		23,323
Occupancy	1,143		1,083		2,362		2,219
Data processing and software licenses	1,972		1,546		3,812		3,050
Legal and professional expenses	4,645		1,002		7,707		1,710
Point of sale expense	814		409		1,567		657
Excise taxes	531		564		986		913
Federal Deposit Insurance Corporation ("FDIC") assessments	570		855		1,165		1,459
Director and staff expenses	519		377		1,145		721
Marketing	115		74		210		173
Other expense	1,722		1,318		2,612		2,795
Noninterest expense, excluding BaaS loan and BaaS fraud expense	28,340		19,466		53,450		37,020
BaaS loan expense	22,033		12,229		39,587		20,519
BaaS fraud expense	1,537		6,474		3,536		11,045
BaaS loan and fraud expense	23,570		18,703		43,123		31,564
Total noninterest expense	51,910		38,169		96,573		68,584

Table of Contents ~~CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)~~

~~(dollars in thousands, except for per share data)~~

Three months ended June 30,

Six months ended June 30,

2018

2017

2018

2017

INTEREST AND DIVIDEND INCOME

Interest and fees on loans

$
8,778

$
7,557

$
16,967

$
14,833

Interest on investment securities

155

132

307

250

Interest on interest-bearing deposits with other banks

236

149

491

287

Dividends on other investments

62

63

73

74

Total interest income

9,231

7,901

17,838

15,444

INTEREST EXPENSE

Interest on deposits

712

492

1,358

986

Interest on borrowed funds

216

185

399

359

Total interest expense

928

677

1,757

1,345

Net interest income

8,303

7,224

16,081

14,099

PROVISION FOR LOAN LOSSES

392

-

893

439

Net interest income after provision for loan losses

7,911

7,224

15,188

13,660

NONINTEREST INCOME

Deposit service charges and fees

771

651

1,458

1,199

Loan referral fees

114

42

244

42

Mortgage broker fees

69

74

106

115

Sublease and lease income

4

55

61

111

Gain on sales of loans, net

78

58

142

84

Other income

177

140

309

300

Total noninterest income

1,213

1,020

2,320

1,851

NONINTEREST EXPENSE

Salaries and employee benefits

3,910

3,174

7,645

6,456

Occupancy

804

740

1,627

1,469

Data processing

492

447

971

848

Director and staff expenses

136

137

280

278

Excise taxes

134

112

258

225

Marketing

86

83

143

150

Legal and professional fees

130

104

210

194

Federal Deposit Insurance Corporation (FDIC) assessments

79

78

164

181

Business development

72

60

160

127

Other expense

511

528

963

911

Total noninterest expense

6,354

5,463

12,421

10,839

Income before provision for income taxes

2,770

2,781

5,087

4,672

PROVISION FOR INCOME TAXES

569

905

1,043

1,483

NET INCOME

$
2,201

$
1,876

$
4,044

$
3,189

Basic and diluted earnings per share

$
0.24

$
0.20

$
0.44

$
0.35

Weighted average number of common shares outstanding:

Basic

9,263,302

9,233,738

9,253,095

9,232,444

Diluted

9,282,816

9,236,815

9,265,647

9,235,521


Income before provision for income taxes	16,782		13,115		32,220		21,012
PROVISION FOR INCOME TAXES	3,876		2,939		6,923		4,606
NET INCOME	$	12,906	$	10,176	$	25,297	$	16,406
Basic earnings per common share	$	0.97	$	0.79	$	1.91	$	1.27
Diluted earnings per common share	$	0.95	$	0.76	$	1.86	$	1.22
Weighted average number of common shares outstanding:
Basic	13,275,640		12,928,061		13,236,517		12,913,485
Diluted	13,597,763		13,442,013		13,603,594		13,458,706

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents~~COASTAL FINANCIAL CORPORATION AND SUBSIDIARY~~

~~CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)~~

~~(dollars in thousands)~~

Three months ended June 30,

Six months ended June 30,

2018

2017

2018

2017

NET INCOME

$
2,201

$
1,876

$
4,044

$
3,189

OTHER COMPREHENSIVE INCOME (LOSS), before tax

Securities available-for-sale

Unrealized holding gain (loss) gain during the quarter

10

524

(872
)

568

Income tax benefit (provision) related to unrealized holding
gain (loss)

(2
)

(178
)

182

(192
)
OTHER COMPREHENSIVE (LOSS) INCOME, net of tax

8

346

(690
)

376

COMPREHENSIVE INCOME

$
2,209

$
2,222

$
3,354

$
3,565


COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2023		2022		2023		2022
NET INCOME	$	12,906	$	10,176	$	25,297	$	16,406
OTHER COMPREHENSIVE INCOME (LOSS), before tax
Securities available-for-sale
Unrealized holding income (loss) during the period	163		(1,351)		841		(1,701)
Income tax (expense) benefit related to unrealized holding gain/loss	(38)		282		(189)		353
OTHER COMPREHENSIVE INCOME (LOSS), net of tax	125		(1,069)		652		(1,348)
COMPREHENSIVE INCOME	$	13,031	$	9,107	$	25,949	$	15,058

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents~~COASTAL FINANCIAL CORPORATION AND SUBSIDIARY~~


COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(dollars in thousands)


	Shares of Common Stock	Amount of Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)		Total
BALANCE, March 31, 2022	12,928,548	$	122,592	$	85,603	$	(275)	$	207,920
Net income	—	—		10,176		—		10,176
Issuance of restricted stock awards	10,396	—		—		—		—
Vesting of restricted stock units	349	—		—		—		—

Exercise of stock options	9,330	69		—		—		69
Stock-based compensation	—	565		—		—		565
Other comprehensive loss, net of tax	—	—		—		(1,069)		(1,069)
BALANCE, June 30, 2022	12,948,623	$	123,226	$	95,779	$	(1,344)	$	217,661

BALANCE, December 31, 2021	12,875,315	$	121,845	$	79,373	$	4	$	201,222
Net income	—	—		16,406		—		16,406
Issuance of restricted stock awards	10,396	—		—		—		—
Vesting of restricted stock units	26,637	—		—		—		—
Exercise of stock options	36,275	277		—		—		277
Stock-based compensation	—	1,104		—		—		1,104
Other comprehensive loss, net of tax	—	—		—		(1,348)		(1,348)
BALANCE, June 30, 2022	12,948,623	$	123,226	$	95,779	$	(1,344)	$	217,661

BALANCE, March 31, 2023	13,281,533	$	127,447	$	133,123	$	(1,807)	$	258,763
Net income	—	—		12,906		—		12,906
Issuance of restricted stock awards	13,538	—		—		—		—
Vesting of restricted stock units	3,618	—		—		—		—
Exercise of stock options	2,120	22		—		—		22
Stock-based compensation	—	846		—		—		846
Other comprehensive income, net of tax	—	—		—		125		125
BALANCE, June 30, 2023	13,300,809	$	128,315	$	146,029	$	(1,682)	$	272,662

BALANCE, December 31, 2022	13,161,147	$	125,830	$	119,998	$	(2,334)	$	243,494
Adjustment to retained earnings; adoption of ASU 2016- 13	—	—		734		—		734
Net income	—	—		25,297		—		25,297
Issuance of restricted stock awards	13,538	—		—		—		—
Vesting of restricted stock units	46,020	—		—		—		—
Exercise of stock options	80,104	589		—		—		589
Stock-based compensation	—	1,896		—		—		1,896
Other comprehensive income, net of tax	—	—		—		652		652
BALANCE, June 30, 2023	13,300,809	$	128,315	$	146,029	$	(1,682)	$	272,662

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents,


COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)


	Six Months Ended June 30,
	2023		2022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	25,297	$	16,406
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses - loans	96,142		27,036
Depreciation and amortization	956		845
Loss on disposition of fixed assets	23		35
Decrease in operating lease right-of-use assets	461		540
Decrease in operating lease liabilities	(480)		(534)
Gain on sales of loans	(146)		—

Net discount accretion on investment securities	(13)		(37)
Unrealized holding loss on equity investment	(194)		—
Stock-based compensation	1,897		1,104

Increase in bank-owned life insurance value	(188)		(178)
Deferred tax benefit	(7,714)		(4,533)
Net change in CCBX receivable	(8,697)		(2,848)
Net change in CCBX credit enhancement asset	(39,086)		(22,003)
Net change in CCBX payable	7,295		10,217
Net change in other assets and liabilities	5,562		(5,238)
Total adjustments	55,818		4,406
Net cash provided by operating activities	81,115		20,812
CASH FLOWS FROM INVESTING ACTIVITIES

Purchase of investment securities available for sale	—		(134,912)
Purchase of investment securities held for investment	(11,576)		—
Change in other investments, net	(1,288)		(1,901)
Principal paydowns of investment securities available-for-sale	4		12
Principal paydowns of investment securities held-to-maturity	48		34
Maturities and calls of investment securities available-for-sale	—		60,000
Purchase of bank owned life insurance	(18)		(53)
Proceeds from sales of loans held for sale	154,061		20,059

Purchase of loans	(47,886)		(165,456)
Increase in loans receivable, net	(585,510)		(512,532)

Purchases of premises and equipment, net	(1,669)		(2,331)
Net cash used by investing activities	(493,834)		(737,080)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and money market, and savings	349,674		340,502
Net decrease in time deposits	(4,623)		(6,984)
Net repayment from long term FHLB borrowing	—		(24,999)



Proceeds from exercise of stock options	589		277
Net cash provided by financing activities	345,640		308,796
NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH	(67,079)		(407,472)
CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year	342,139		813,161
CASH, DUE FROM BANKS AND RESTRICTED CASH, end of quarter	$	275,060	$	405,689
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest paid	$	36,874	$	2,834
Income taxes paid	5,195		5,247

Table of Contents~~CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)~~

~~(dollars in thousands)~~

Shares of
Common
Stock

Common
Stock

Retained
Earnings

Accumulated
Other
Comprehensive
Income (Loss)

Total

BALANCE, January 1, 2017

9,238,788

$
52,215

$
8,698

$
(1,016
)

$
59,897

Net income

-

-

3,189

-

3,189

Issuance of vested stock awards

600

-

-

-

-

Issuance of restricted stock awards

6,208

-

-

-

-

Stock repurchase

(211
)

-

-

-

-

Stock-based compensation

-

138

-

-

138

Other comprehensive income

-

-

-

376

376

BALANCE, June 30, 2017

9,245,385

$
52,353

$
11,887

$
(640
)

$
63,600

BALANCE, January 1, 2018

9,248,901

$
52,521

$
14,134

$
(944
)

$
65,711

Net income

-

-

4,044

-

4,044

Reclassification of stranded tax effect due to federal tax
rate change

-

-

186

(186
)

-

Issuance of restricted stock awards

4,402

-

-

-

-

Exercise of stock options

45,250

273

-

-

273

Stock-based compensation

-

152

-

-

152

Other comprehensive loss

-

-

-

(690
)

(690
)
BALANCE, June 30, 2018

9,298,553

$
52,946

$
18,364

$
(1,820
)

$
69,490


SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Fair value adjustment of securities available-for-sale, gross	$	841	$	(1,705)
Operating lease right-of-use assets	$	1,659	$	—
Operating lease liabilities	$	(1,659)	$	—
Non-cash investing and financing activities:
Transfer from loans to loans held for sale	$	189,838	$	80,058
Adjustment to retained earnings - adoption of ASU 2016-13, net of deferred tax	$	(734)	$	—

See accompanying Notes to Condensed Consolidated Financial Statements.

Table of Contents~~COASTAL FINANCIAL CORPORATION AND SUBSIDIARY~~

~~CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)~~

~~(dollars in thousands)~~

Six months ended June 30,

2018

2017

CASH FLOWS FROM OPERATING ACTIVITIES

Net income

$
4,044

$
3,189

Adjustments to reconcile net income to net cash provided by operating activities

Provision for loan losses

893

439

Depreciation and amortization

521

460

Loss on disposition of fixed assets

-

21

Gain on sales of loans

(142
)

(84
)
Gain on sale of other real estate owned

-

(32
)
Net discount accretion on investment securities

(10
)

(1
)
Stock-based compensation

152

138

Bank-owned life insurance earnings

(92
)

(92
)
Change in other assets and liabilities

(690
)

(908
)
Total adjustments

632

(59
)
Net cash provided by operating activities

4,676

3,130

CASH FLOWS FROM INVESTING ACTIVITIES

Net (increase) decrease in interest-bearing deposits with other banks

(1,268
)

29,274

Purchase of other investments, net

(86
)

(461
)
Principal paydowns of investment securities available-for-sale

57

63

Principal paydowns of investment securities held-to-maturity

100

219

Purchase of participation loans

(32,653
)

-

Purchase of loans

(5,469
)

(4,799
)
Increase in loans receivable, net

(6,010
)

(22,334
)
Proceeds from sale of other real estate owned

-

1,329

Purchases of premises and equipment, net

(363
)

(166
)
Net cash used by investing activities

(45,692
)

3,125

CASH FLOWS FROM FINANCING ACTIVITIES

Net increase (decrease) in demand deposits, Now and money market, and savings

31,978

(2,531
)
Net increase (decrease) in time deposits

9,195

(5,228
)
Net increase in FHLB advances

-

2,000

Proceeds from exercise of stock options

273

-

Net cash provided by financing activities

41,446

(5,759
)
NET (DECREASE) INCREASE IN CASH AND DUE FROM BANKS

430

496

CASH AND DUE FROM BANKS, beginning of quarter

13,787

11,084

CASH AND DUE FROM BANKS, end of quarter

$
14,217

$
11,580

SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES

Interest paid

$
1,744

$
1,306

Income taxes paid

700

1,690

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS

Fair value adjustment of securities available-for-sale, gross

$
(872
)

$
568


COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

~~See accompanying Notes to Condensed Consolidated Financial Statements.~~

~~COASTAL FINANCIAL CORPORATION AND SUBSIDIARY~~

~~NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)~~

Note 1 - Description of Business and Summary of Significant Accounting Policies

Nature of operations - Coastal Financial Corporation ~~(Corporation~~(“Corporation” or ~~Company)~~“Company”) is a registered bank holding company whose wholly owned ~~subsidiary is~~subsidiaries are Coastal Community Bank ~~(Bank)~~(“Bank”) and Arlington Olympic LLC (“LLC”). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank ~~and~~that is a member bank of the Federal Reserve ~~System (Federal Reserve) state member bank.~~

system. Arlington Olympic LLC was formed in 2019 and owns the Company’s Arlington branch site, which the Bank leases from the LLC.

We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. The Company’s business is conducted through three reportable segments: CCBX, the community bank and treasury & administration. The CCBX segment provides Banking as a Service (“BaaS”) that allows our broker dealers and digital financial service partners to offer their customers banking services. Through CCBX’s partners the Company ~~provides~~is able to offer banking services and products across the nation.The community bank segment includes all community banking activities with a ~~full~~primary focus on providing a wide range of banking products and services to consumers and small ~~and~~to medium-sized businesses, professionals, and individuals ~~throughout~~in the ~~greater~~broader Puget Sound ~~area~~region in the state of Washington through its 1314 branches in Snohomish, Island and King Counties, and through the Internet and its mobile banking application. The ~~Bank’s main branch~~treasury & administration segment includes treasury management, overall administration and ~~the headquarters~~all other aspects of the ~~Bank and Company are located in Everett, Washington.~~ Company.

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

Financial statement presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles ~~(GAAP)~~(“GAAP”) for interim reporting requirements and with instructions to Form 10-Q and Article 10 of Regulation S-X, and therefore do not include all the information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included ~~elsewhere~~ in ~~this report.~~the Company’s Annual report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 16, 2023. Operating results for the three and six months ended June 30, ~~2018,~~2023 are not necessarily indicative of the results that may be expected for ~~future periods.~~

the entire year.

Amounts presented in the consolidated financial statements and footnote tables are rounded and presented in thousands of dollars except per-share amounts, which are presented in dollars. In the narrative footnote discussion, amounts are rounded to thousands and presented in dollars.

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

Principles of consolidation - The consolidated financial statements include the accounts of the Company, the Bank and the ~~Bank.~~LLC. All significant intercompany accounts have been eliminated in consolidation.

~~Business Segments -~~ The Company is managed by legal entity and not by lines of business. The entity’s primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its market areas. The Bank offers a wide variety of deposit products to their customers. Lending activities include the origination of real estate, commercial and industrial, and consumer loans. Interest income on loans is the Company’s primary source of revenue, and is supplemented by interest income from investment securities, deposit service charges, and other service provided activities. The performance of the Company is reviewed and monitored by the Company’s executive management and Board of Directors on a monthly basis. The Company has determined that its current business and operations consist of a single reporting segment and, therefore, segment disclosures are not required.

Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that its critical accounting policies include determining the allowance for ~~loan~~credit losses, the ~~fair value~~valuation of the Company’s ~~investment securities,~~ deferred tax assets, and fair value of financial instruments. Actual results could differ significantly from those estimates.

Table of Contents,

Implementation of ASU 2016-13 - On January 1, 2023, the Company adopted ASU 2016-13, Financial Instruments — Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, which replaces the incurred loss with an expected loss methodology that is referred to as the current expected credit loss (CECL) methodology. The measurement of expected credit losses under the CECL methodology is applicable to financial assets measured at amortized costs, including loan receivables and held-to-maturity debt securities. It also applies to off-balance sheet credit exposures not accounted for as insurance (loan commitments, standby letters of credit, financial guarantees, and other similar instruments) and net investments in certain leases. In addition, ASC 326 made changes to the accounting for available-for-sale debt securities. One such change is to require increases or decreases in credit losses be presented as an allowance rather than as a write-down on available-for-sale debt securities management does not intend to sell or believe it is more likely than not the Company will be required to sell the security before recovery of the amortized cost basis.

The Company adopted ASC 326 using the modified retrospective method. Results for the reporting periods beginning after January 1, 2023 are presented under ASC 326 while prior period amounts continue to be reported in accordance with previously applicable GAAP. The day one CECL adjustment for community bank loans included a reduction of $310,000 to the community bank allowance in the first quarter of 2023 and a reduction of $340,000 related to the community bank unfunded commitment reserve in the first quarter of 2023. This was offset by an increase to the CCBX allowance for $4.2 million in the same period. With the mirror image approach accounting related to the credit enhancement for CCBX partner loans, there was a CECL day one increase to the indemnification asset in the amount of $4.5 million. Net, the day one impact to retained earnings for the Bank’s transition to CECL was an increase of $954,000 in the first quarter of 2023, excluding the impact of income taxes.

Management has separately evaluated its held-to-maturity investment securities and determined that no loss reserves were required.

Implementation of ASU 2022-02 - On January 1, 2023, the Company adopted ASU 2022-02, Financial Instruments - Credit Losses (Topic 326): Troubled Debt Restructurings ("TDR") and Vintage Disclosures. The ASU eliminated the accounting guidance for TDR loans by creditors while enhancing disclosure requirements for certain loan refinancings and restructurings by creditors when a borrower is experiencing financial difficulty. Additionally, the ASU requires public business entities to disclose current-period gross write-offs by year of origination for financing receivables and net investments in leases. This ASU was effective upon adoption of ASU 2016-13 and was applied on a prospective basis. During the three and six months ended June 30, 2023, the Company did not have any loans that were modified to borrowers experiencing financial difficulty.

Accounting policyupdate –

Allowance for Credit Losses - effective January 1, 2023 with the adoption of ASU 2016-13

Loans and unfunded commitments

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. 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. 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. 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. 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. 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.

Table of Contents,

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. 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. 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. 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.

For more information and discussion related to the allowance for credit losses on loans, see “Note 4 - Loans and Allowance for Credit Losses” in the Consolidated Financial Statements.

In addition to the ACL on loans held for investment, CECL requires a balance sheet liability for expected losses on unfunded commitments, which is recognized if both the following conditions are met: (1) the Company has a present contractual obligation to extend credit; and (2) the obligation is not unconditionally cancellable by the Company. Loan commitments may have a funded and unfunded portion, of which the liability for unfunded commitments is derived based upon the commitments to extend credit to a borrower (e.g., an estimate of expected credit losses is not established for unfunded portions of loan commitment that are unconditionally cancellable by the Company). The expected credit losses for funded portions are reported in the previously discussed ACL. The Company segments its unfunded commitment portfolio consistent with the ACL calculation, separating between unfunded lines and commitments to originate. The Company incorporates the probability of funding (i.e. estimate of utilization) for each segment and then utilizes the ACL loss rates for each segment on an aggregate basis to calculate the allowance for unfunded commitments

Available-for-sale debt securities

For available-for-sale debt securities with fair value below amortized cost, the security is considered impaired. When the Company does not intend to sell the debt security, and it is more likely than not the Company will not have to sell the security before recovery of its cost basis, then the Company assesses the impairment for potential expected credit losses. Impairment related to a credit loss is measured using the discounted cash flow method. Credit loss recognition is limited to the fair value of the security. The impairment is recognized by establishing an ACL through provision for credit losses. Impairment related to noncredit factors is recognized in accumulated other comprehensive income, net of applicable taxes. The Company evaluates AFS security impairment on a quarterly basis.

Held-to-maturity debt securities

For held-to-maturity debt securities, expected losses are evaluated and calculated on a collective basis for those securities which share risk characteristics. The Company aggregates similar securities and reports the security portfolio segments based on shared risk characteristics. The only segment included in the held-to-maturity portfolio are U.S. Agency Residential Mortgage Backed Securities which have an expected zero credit loss.

Table of Contents,

The following table illustrates the impact of ASU 2016-13:


	January 1, 2023
	As reported under ASC 326		Pre-ASC 326 Adoption		Impact of ASC 326 Adoption
Assets:
Allowance for credit losses	$	77,881	$	74,029	$	3,852
CCBX credit enhancement asset	57,842		53,377		4,465
Deferred tax asset	18,238		18,458		(220)
Liabilities:
Unfunded commitment reserve	634		974		(340)
Shareholders' Equity:
Retained earnings	120,732		119,998		734

Subsequent Events - The Company has evaluated events and transactions subsequent to June 30, ~~2018~~2023 for potential recognition or disclosure.On July 20, 2018, the Company closed its initial public offering (IPO) of 2,577,500 shares of common stock, including the exercise of the over-allotment of 427,500 shares, for approximate net proceeds of $33,240,000 after deducting underwriting discounts, commissions, and estimated offering expenses. An affiliate of one of the two book-running managers for the IPO beneficially owns more than 10% of the Company and is a director. Fees paid by the Company in conjunction with the successful IPO by the book-running manager affiliated with the significant shareholder/director totaled $1,121,000.

~~Accounting policies –~~ Our complete accounting policies are described in Note 1, summary of significant accounting policies of the Company’s audited consolidated financial statements as of and for the years ended December 31, 2017 and 2016 included in the Form S-1 filed with the SEC.

Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements may have been reclassified to conform to the current ~~presentation.~~

presentation with no effect on stockholders’ equity or net income.

Note 2 - Recent accounting standards

Recent Accounting ~~Standards Adopted in 2018~~

~~On January 1, 2018, the Company adopted Accounting Standards Update (ASU) No. 2014-09,~~ ~~Revenue from Contracts with Customers (Topic 606)~~ and all related amendments to all contracts using the modified retrospective approach. The core principle of the guidance is that an entity should recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.

The Company concluded that there is no change to the timing and pattern of revenue recognition for its current revenue streams or the presentation of revenue as gross versus net. No adjustment to retained earnings was required on the adoption date. Because there is no change to the timing and pattern of revenue recognition, there are no material changes to the Company’s processes and internal controls.

All of the Company’s revenue from contracts with customers within the scope of 606 is recognized within noninterest income. A description of the Company’s revenue streams accounted for under ASC 606 is as follows:

~~Service Charges on Deposit Accounts:~~ The Company earns fees from deposit customers for transaction-based, account maintenance and overdraft services. Transaction-based fees, which include services such as ATM use fees, stop payment charges, statement rendering, and ACH fees, are recognized at the time the transaction is executed at the point in the time the Company fulfills the customer’s request. Account maintenance fees, which relate primarily to monthly maintenance, are earned over the course of a month, represented the period over which the Company satisfies the performance obligation. Overdraft fees are recognized at the point in time that the overdraft occurs.

~~Interchange Income:~~ The Company earns interchange fees from debit card holder transactions conducted through various payment networks. Interchange fees from cardholder transactions represent a percentage of the underlying transactions value and are recognized daily, concurrently with the transaction processing services provided by the cardholder. Interchange income is included in Service Charges on Deposit Accounts in the consolidated statements of income.

~~Merchant Service Fees:~~ The Company earns a percentage of fees from cardholder transactions conducted through a third party payment network provider. The Company is obligated to provide sales, customer support, marketing, deployment and installation of equipment, and savings analysis to merchant service customers. An exclusivity agreement is in place between the Company and the third party payment network provider. Fees are recognized on a monthly basis, as earned. Merchant service fees are included Services Charges on Deposit Accounts in the consolidated statements of income.

~~Loan Referral Fees:~~ Loan referral fees are governed by contract arrangements executed with third party banks. The Company earns loan referral fees when our loan client enters into interest rate swap agreement with third party banks and the rate on the swap is in excess of prevailing market rates. The spread or a portion of the spread, between the interest rate swap agreement and the prevailing market rate can be monetized and recognized as loan referral fee income.

~~Mortgage Broker Fees:~~ Mortgage broker fees are governed by contract arrangement executed with a third party mortgage company. The Company earns broker fees by partially underwriting mortgage loans and referring qualified loans to the third party mortgage company. Revenue is recognized at the date the mortgage company funds the mortgage loan. The contract arrangement includes a fee reimbursement requirement for funded mortgage loans that pay off within three months of origination.

~~As of January 1, 2018, the Company applied FASB ASU No. 2016-01,~~ ~~Financial Instruments—Overall (Subtopic 825-10)~~: Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. Guidance

In addition, the amendments in this ASU require an entity to disclose the fair value of financial instruments using the exit price notion. Exit price is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methods of determining the fair value of assets and liabilities are consistent with our methodologies disclosed in Note 15—Fair Value Measurements, except for the valuation of loans held-for-investment which was impacted by the adoption of ASU 2016-01. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash

flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of June 30, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial statements.

~~In August 2016,~~March 2020, the FASB issued ASU ~~No. 2016-15,~~ ~~Statement of Cash Flows~~2020-04, Reference Rate Reform (Topic ~~230)~~848): ~~Classification of Certain Receipts and Cash Payments, a consensus~~Facilitation of the ~~FASB’s Emerging Issues Task Force. The ASU is intended~~Effects of Reference Rate Reform on Financial Reporting, to ~~reduce diversity in practice in how~~provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain ~~transactions~~modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are presented and classified in the statement of cash flows. The standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This standard didmet. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a ~~material impact on the Company’s consolidated financial statements.~~

~~In January 2017, the FASB issued ASU No. 2017-01,~~ ~~Business Combinations (Topic 805): Clarifying the Definition of a Business.~~ ~~The amendments in this update provide a more robust framework~~previous accounting determination. Also, entities can elect various optional expedients that would allow them to ~~use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly~~continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can ~~be difficult~~make a one-time election to ~~apply, stakeholders indicated~~sell and/or reclassify held-to-maturity debt securities that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgement. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

~~In February 2018, the FASB issued ASU No. 2018-02,~~ ~~Income Statement—Reporting Comprehensive Income (Topic 220): Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income.~~ The amendments in this ASU allow a reclassification from accumulated other comprehensive income (AOCI) to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. Consequently, the amendments eliminate the stranded tax effects resulting from the Tax Cuts and Jobs Act and will improve the usefulness of information reported to financial statement users. The amendments in this ASU also require certain disclosures about stranded tax effects. The amendments are effective for fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. Early adoption of the amendments in this ASU is permitted, including adoption in any interim period, (1) for reporting periods for which financial statements have not yet been made available for issuance. The amendments in this ASU should be applied either in the period of adoption or retrospectively to each period (or periods) in which the effect of the change in the U.S. federal corporate income taxreference an interest rate in the Tax Cuts and Jobs Act is recognized. The Company elected to early adopt in the first quarter of 2018. Accordingly, the Company recorded an increase to retained earnings and a decrease to AOCI of $186,000 for stranded tax effects on investment available for sale securities in the first quarter of 2018.

~~In May 2018, the FASB issued ASU No. 2018-06,~~ ~~Codification Improvements to Topic 942, Financial Services - Depository and Lending.~~ ~~This ASU updates outdated guidance related to the Office of Comptroller of the Currency’s (OCC) Banking Circular 202,~~ ~~Accounting for Net Deferred Tax~~ ~~Charges, as the guidance has been rescinded~~affected by ~~OCC and is no longer relevant.~~reference rate reform. The amendments in this ASU are effective ~~immediately.~~for all entities upon issuance through December 31, 2024. The ~~adoption of~~LIBOR ceased to be published effective June 30, 2023. Beginning with rate adjustments that occur after June 30, 2023, our trust preferred subordinated debentures will transition to an adjusted three-month CME Term SOFR index in accordance with the Federal Reserve final rule implementing the Adjustable Interest Rate Act. We have identified the loans that utilize LIBOR and they will transition to alternative reference rates at each loans respective reprice date. We are no longer offering LIBOR indexed rates on newly originated loans. ASU ~~No. 2018-06 is~~2020-04 and ASU 2021-01 are not expected to have a material impact on ~~the Company's~~our consolidated financial statements.

~~Recent Accounting Guidance Not Yet Effective~~

~~In February 2016, FASB issued ASU 2016-02,~~ ~~Leases (Topic 842)~~. The new standard is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face

Table of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. The ASU is effective in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is in the early stages of its implementation assessment, which includes identifying the population of Company’s leases that are within the scope of the new guidance and gathering all key lease data that will facilitate application of the new accounting requirements.

Contents~~In June 2016, the FASB issued ASU 2016-13,~~ ~~Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments~~. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those

annual periods. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are assessing our data and the model needs and are evaluating the impact of adopting the amendment. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting. This ASU was issued to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees. Previously, these awards were recorded at the fair value of consideration received or the fair value of the equity instruments issued and was measured as the earlier of the commitment date or date performance was completed. The amendments in this ASU require the awards to be measured at the grant-date fair value of the equity instrument. ASU No. 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, but no earlier than an entity's adoption of Topic 606. The adoption of ASU No. 2018-07 is not expected to have a material impact on the Company's future consolidated financial statements.

Note 3 - Investment Securities

The following table summarizes the amortized cost, fair value, and ~~fair values~~allowance for credit losses and the corresponding amounts of ~~investment~~gross unrealized gains and losses of available-for-sale securities recognized in accumulated other comprehensive income (loss) and gross unrecognized gains and losses of held-to-maturity securities:


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value		Allowance for Credit Losses
	(dollars in thousands; unaudited)
June 30, 2023
Available-for-sale
U.S. Treasury securities	$	99,981	$	—	$	(2,110)	$	97,871	$	—
U.S. Agency collateralized mortgage obligations	50		—		(3)		47		—

Municipal bonds	250		—		(1)		249		—
Total available-for-sale securities	100,281		—		(2,114)		98,167		—

Held-to-maturity
U.S. Agency residential mortgage-backed securities	12,563		—		(404)		12,159		—

Total investment securities	$	112,844	$	—	$	(2,518)	$	110,326	$	—


	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(dollars in thousands; unaudited)
December 31, 2022
Available-for-sale
U.S. Treasury securities	$	99,967	$	—	$	(2,952)	$	97,015
U.S. Agency collateralized mortgage obligations	54		—		(3)		51
U.S. Agency residential mortgage-backed securities	1		—		—		1
Municipal bonds	250		—		—		250
Total available-for-sale securities	100,272		—		(2,955)		97,317
Held-to-maturity
U.S. Agency residential mortgage-backed securities	1,036		—		(120)		916
Total investment securities	$	101,308	$	—	$	(3,075)	$	98,233

Accrued interest on available-for-sale securities was $711,000 and $723,000 at June 30, 2023 and December 31, 2022, respectively, accrued interest on held-to-maturity securities was $50,000 and $3,000 at June 30, 2023 and December 31, 2022, respectively. Accrued interest on securities is excluded from the ~~date indicated are as follows:~~

balances in the preceding table of securities receivable, and is included in accrued interest receivable on the Company's consolidated balance sheets.

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

(dollars in thousands)

June 30, 2018

Available-for-sale

U.S. Treasury securities

$
34,812

$
-

$
(2,238
)

$
32,574

U.S. Government agencies

3,000

-

(55
)

2,945

U.S. Agency collateralized mortgage obligations

197

-

(6
)

191

U.S. Agency residential mortgage-backed securities

47

-

-

47

Municipals

260

-

(4
)

256

Total available-for-sale securities

38,316

-

(2,303
)

36,013

Held-to-maturity

U.S. Agency residential mortgage-backed securities

1,304

-

(72
)

1,232

Total investment securities

$
39,620

$
-

$
(2,375
)

$
37,245

Amortized
Cost

Gross
Unrealized
Gains

Gross
Unrealized
Losses

Fair
Value

(dollars in thousands)

December 31, 2017

Available-for-sale

U.S. Treasury securities

$
34,794

$
-

$
(1,398
)

$
33,396

U.S. Government agencies

3,000

-

(30
)

2,970

U.S. Agency collateralized mortgage obligations

224

-

(3
)

221

U.S. Agency residential mortgage-backed securities

79

1

-

80

Municipals

261

-

(1
)

260

Total available-for-sale securities

38,358

1

(1,432
)

36,927

Held-to-maturity

U.S. Agency residential mortgage-backed securities

1,409

-

(35
)

1,374

Total investment securities

$
39,767

$
1

$
(1,467
)

$
38,301

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The amortized cost and fair value of debt securities at June 30, ~~2018,~~2023, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers or the underlying borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.

Available-for-Sale

Held-to-Maturity

Amortized
Cost

Fair
Value

Amortized
Cost

Fair
Value

(dollars in thousands)

Amounts maturing in

One year or less

$
-

$
-

$
-

$
-

After one year through five years

7,996

7,718

-

-

After five years through ten years

30,076

28,057

-

-

38,072

35,775

-

-

U.S. Agency residential mortgage-backed securities and
collateralized mortgage obligations

244

238

1,304

1,232

$
38,316

$
36,013

$
1,304

$
1,232


	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands; unaudited)
June 30, 2023
Amounts maturing in
One year or less	$	100,231	$	98,120	$	—	$	—

	100,231		98,120		—		—
U.S. Agency residential mortgage-backed securities and collateralized mortgage obligations	50		47		12,563		12,159
	$	100,281	$	98,167	$	12,563	$	12,159

~~Investment~~

Investments in debt securities with ~~carrying values~~an amortized cost of ~~$17,259,000 and $14,526,000~~$22.0 million at June 30, ~~2018~~2023 and $37.8 million as of December 31, ~~2017 respectively,~~2022, were pledged to secure public deposits and for other purposes as required or permitted by law.

During the six months ended June 30, 2023, one security matured for $590,000. During the six months ended June 30, 2023, three securities were purchased for $11.6 million.

There were no sales of ~~investment~~ securities during the six months ended June 30, ~~2018 and~~2023 or 2022.

There were ten securities with a $2.5 million unrealized loss as of June 30, ~~2017.~~

~~Information pertaining to~~2023. There were six securities ~~with~~in an unrealized loss position as of December 31, 2022. The following table shows the investments’ gross unrealized losses ~~at the dates indicated,~~and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position ~~follows:~~

for which an allowance for credit losses has not been recorded:

	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses				Less Than 12 Months				12 Months or Greater				Total
	(dollars in thousands)																Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
June 30, 2018
																	(dollars in thousands; unaudited)
June 30, 2023																June 30, 2023
Available-for-sale																Available-for-sale
U.S. Treasury securities	$	4,746	$	(264	)	$	27,828	$	(1,974	)	$	32,574	$	(2,238	)	U.S. Treasury securities	$	—	$	—	$	97,871	$	2,110	$	97,871	$	2,110
U.S. Government agencies		-		-			2,945		(55	)		2,945		(55	)
U.S. Agency collateralized mortgage obligations		-		-			191		(6	)		191		(6	)	U.S. Agency collateralized mortgage obligations	—		—		47		3		47		3
Municipals		256		(4	)		-		-			256		(4	)	Municipals	249		1		—		—		249		1

Total available-for-sale securities		5,002		(268	)		30,964		(2,035	)		35,966		(2,303	)	Total available-for-sale securities	249		1		97,918		2,113		98,167		2,114
Held-to-maturity																Held-to-maturity
U.S. Agency residential mortgage-backed securities		-		-			1,232		(72	)		1,232		(72	)	U.S. Agency residential mortgage-backed securities	11,261		287		898		117		12,159		404
Total investment securities	$	5,002	$	(268	)	$	32,196	$	(2,107	)	$	37,198	$	(2,375	)	Total investment securities	$	11,510	$	288	$	98,816	$	2,230	$	110,326	$	2,518
December 31, 2017
Available-for-sale
U.S. Treasury securities	$	4,934	$	(77	)	$	28,463	$	(1,321	)	$	33,397	$	(1,398	)
U.S. Government agencies		-		-			2,970		(30	)		2,970		(30	)
U.S. Agency collateralized mortgage obligations		220		(3	)		-		-			220		(3	)
Municipals		260		(1	)		-		-			260		(1	)
Total available-for-sale securities		5,414		(81	)		31,433		(1,351	)		36,847		(1,432	)
Held-to-maturity
U.S. Agency residential mortgage-backed securities		-		-			1,374		(35	)		1,374		(35	)
Total investment securities	$	5,414	$	(81	)	$	32,807	$	(1,386	)	$	38,221	$	(1,467	)

Table of ContentsAt,

Management has evaluated the above securities and does not believe that any individual unrealized loss as of June 30, ~~2018 and December 31, 2017, there were 11 securities in an unrealized loss position.~~2023, will be recognized into income. Unrealized losses have not been recognized into income because management does not intend to sell and does not expect it will be required to sell the investments. The decline is largely due to changes in market conditions and interest rates, rather than credit quality. The fair value is expected to recover

as the underlying securities in the portfolio approach maturity date and market conditions improve. ~~The Company does~~Management believes there is a high probability of collecting all contractual amounts due, because the majority of the securities in the portfolio are backed by government agencies or government sponsored enterprises. However, a recovery in value may not ~~consider~~occur for some time, if at all, and may be delayed for greater than the one year time horizon or perhaps even until maturity. Based on management's analysis no allowance for credit losses was required on these ~~securities to be other than temporarily impaired at June 30, 2018 and December 31, 2017.~~

securities.

Note 4 - Loans and Allowance for ~~Loan~~Credit Losses

During the quarter ended June 30, 2023, $88.6 million in CCBX loans were transferred to loans held for sale, with $80.0 million in loans sold. A portion of these loans were sold at par and a portion were sold with a gain on sale of $23,000. As of June 30, 2023 $35.9 million in residential real estate secured lines of credit loans remain in loans held for sale. At December 31, 2022, there were no loans held for sale.

The Company adopted the CECL methodology for measuring credit losses as of January 1, 2023. All disclosures as of and for the three and six months ended June 30, 2023 are presented in accordance with Topic 326. The Company did not recast comparative financial periods and has presented those disclosures under previously applicable GAAP.

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The composition of the loan portfolio is as follows as of the periods indicated:

June 30,

December 31,

2018

2017

(dollars in thousands)

Commercial and industrial loans

$
89,284

$
88,688

Real estate loans:

Construction, land, and land development

46,356

41,641

Residential real estate

88,422

87,031

Commercial real estate

474,330

437,717

Consumer and other loans

2,670

2,058

Gross loans receivable

701,062

657,135

Net deferred origination fees

(370
)

(347
)
Loans receivable

$
700,692

$
656,788


	June 30,
	2023
	(dollars in thousands; unaudited)
Community Bank
Commercial and industrial loans	$	155,078
Real estate loans:
Construction, land and land development loans	186,706
Residential real estate loans	211,966
Commercial real estate loans	1,164,088
Consumer and other loans:
Other consumer and other loans	1,457
Gross Community Bank loans receivable	1,719,295
CCBX
Commercial and industrial loans:
Capital call lines	$	138,428
All other commercial & industrial loans	60,323
Real estate loans:
Residential real estate loans	251,213
Consumer and other loans:
Credit cards	379,642
Other consumer and other loans	465,360
Gross CCBX loans receivable	1,294,966
Total gross loans receivable	3,014,261
Net deferred origination fees and premiums	(6,708)
Loans receivable	$	3,007,553

~~Included~~


	December 31,
	2022
Consolidated	(dollars in thousands; unaudited)
Commercial and industrial loans	$	312,628
Real estate loans:
Construction, land, and land development	214,055
Residential real estate	449,157
Commercial real estate	1,048,752
Consumer and other loans	608,771
Gross loans receivable	2,633,363
Net deferred origination fees and premiums	(6,107)
Loans receivable	$	2,627,256

Accrued interest on loans, which is excluded from the balances in the preceding table of loans ~~are overdrafts of $33,000~~receivable, was $20.8 million and ~~$76,000~~$17.0 million at June 30, ~~2018~~2023 and December 31, ~~2017,~~2022, respectively, and was included in accrued interest receivable on the Company's consolidated balance sheets.

Included in commercial and industrial loans as of June 30, 2023 and December 31, 2022, is $138.4 million and $146.0 million, respectively in capital call lines, provided to venture capital firms through one of our BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards by our BaaS client and the underwriting is reviewed and approved by the Bank on every line. Also included in commercial and industrial loans are

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Paycheck Protection Program (“PPP”) loans of $3.6 million at June 30, 2023 and $4.7 million at December 31, 2022. PPP loans are 100% guaranteed by the Small Business Administration (“SBA”).

Consumer and other loans includes overdrafts of $2.3 million and $2.7 million at June 30, 2023 and December 31, 2022, respectively. Community bank overdrafts were $13,000 and $94,000 at June 30, 2023 and December 31, 2022, respectively and CCBX overdrafts were $2.2 million and $2.6 million at June 30, 2023 and December 31, 2022.

The Company has pledged loans totaling ~~$164,121,000~~$901.9 million and ~~$147,008,000~~$220.1 million at June 30, ~~2018~~2023 and December 31, ~~2017,~~2022, respectively, for borrowing lines at the FHLB and FRB.

Additional loans were pledged during the first six months of 2023 to significantly increase the borrowing capacity of the Bank in the event of a liquidity crisis.

The balance of SBA and USDA loans and participations sold and serviced for others totaled ~~$26,729,000~~$9.4 million and ~~$29,910,000~~$14.3 million at June 30, ~~2018~~2023 and December 31, ~~2017,~~2022, respectively.

The gross balance of Main Street Lending Program (“MSLP”) loans including participations to others, totaled $58.0 million at June 30, 2023 and December 31, 2022, with $3.1 million in MSLP loans on the balance sheet and included in commercial and industrial loans at June 30, 2023, and December 31, 2022. Servicing is retained on the gross balance.

The Company, at times, purchases individual loans that meet its underwriting standards through the community bank at fair value as of the acquisition date. ~~Purchased~~The Company held purchased loans with remaining balances that totaled ~~$42,460,000~~$9.3 million and ~~$43,213,000~~$9.6 million as of June 30, ~~2018~~2023 and December 31, ~~2017,~~2022, respectively. Unamortized premiums on these loans totaled ~~$683,000~~$162,000 and ~~$718,000~~$167,000 as of June 30, ~~2018~~2023 and December 31, ~~2017,~~2022, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling ~~$40,678,000~~$58.8 million and ~~$8,124,000~~$63.9 million as of June 30, ~~2018~~2023 and December 31, ~~2017,~~2022, respectively.

These loans are included in the applicable loan category depending upon the collateral and purpose of the individual loan and underwritten to the Bank's credit standards.

The Company purchased loans from a CCBX partner, at par, through agreements with that CCBX partner, and those loans had a remaining balance of $144.9 million as of June 30, 2023 and $157.4 million as of December 31, 2022. As of June 30, 2023, $134.2 million is included in consumer and other loans and $10.8 million is included in commercial and industrial loans, compared to $146.1 million in consumer and other loans and $11.3 million in commercial and industrial loans as of December 31, 2022.

The following is a summary of the Company’s loan portfolio segments:

Commercial and industrial loans - – Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment toof businesses located generally in ~~our~~the Company’s primary market ~~area.~~area and capital calls on venture and investment funds. Also included in commercial and industrial loans are $60.3 million in unsecured CCBX partner loans. Loan types include PPP loans, revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. ~~We also issue letters of credit on behalf of our customers.~~Also included in commercial and industrial loans are loans to other financial institutions. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers.

As of June 30, 2023, $138.4 million in outstanding CCBX capital call lines are included in commercial and industrial loans compared to $146.0 million at December 31, 2022. Capital call lines are provided to venture capital firms. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards by our CCBX partner and the underwriting is reviewed by the Bank on every line/loan.

Construction, land and land development loans - ~~We originate~~– The Company originates loans for the construction of 1-4 family, multifamily, and ~~CRE~~Commercial Real Estate (“CRE”) properties in ~~our~~the Company’s market area. Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete

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and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. WeThe Company occasionally ~~originate~~originates land loans for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower’s ability to pay and the inability of the Company to recover its investment due to a material decline in the fair value of the underlying collateral.

Residential real estate - loans – Residential real estate includes various types of loans for which the Company holds real property as collateral. Included in this segment are ~~multi-family loans,~~ first and second lien single family loans, ~~which we~~ occasionally ~~purchase~~purchased by the Company to diversify ~~our~~its loan portfolio, and rental portfolios secured by one-to-four family homes. The primary risks of residential real estate loans include the

borrower’s inability to pay, material decreases in the value of the collateral, and significant increases in interest rates which may make the loan unprofitable.

As of June 30, 2023, $251.2 million in loans originated through CCBX partners are included in residential real estate loans, compared to $244.6 million at December 31, 2022. These home equity lines of credit are secured by residential real estate and are accessed by using a credit card. Home equity lines of credit are classified as residential real estate per regulatory guidelines.

Commercial real estate (includes owner occupied and ~~non-owner~~nonowner occupied) - loans – Commercial real estate ~~includes~~loans include various types of loans for which the Company holds real property as collateral. We have commercial mortgage loans collateralized by $356.0 million of owner-occupied real-estate and $478.2 million of non-owner-occupied real estate, as well as $319.0 million of multi-family residential loans and $11.0 million of farmland loans, as of June 30, 2023. The primary risks of commercial real estate loans include the borrower’s inability to pay, material decreases in the value of the collateralized real estate and significant increases in interest rates, which may make the real estate loan unprofitable. ~~Real~~Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Consumer and other loans - ~~We originate~~– The community bank originates a limited number of consumer loans, generally for banking customers only, which consist primarily of ~~home equity~~ lines of credit, saving account secured loans, and auto loans. CCBX originates consumer loans including credit cards, consumer term loans and secured and unsecured lines of credit. This loan category includes overdrafts. Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying ~~collateral.~~

collateral, if any.

As of June 30, 2023, $845.0 million in CCBX loans are included in consumer and other loans compared to $607.0 million at December 31, 2022.

Table of Contents,

Past Due and Nonaccrual Loans

The following table illustrates an age analysis of past due loans as of the dates indicated:

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)														30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days or More Past Due and Still Accruing
June 30, 2018
															(dollars in thousands; unaudited)
June 30, 2023														June 30, 2023
Community Bank														Community Bank
Commercial and industrial loans	$	501	$	391	$	892	$	88,392	$	89,284		$	-	Commercial and industrial loans	$	97	$	—	$	97	$	154,981	$	155,078	$	—
Real estate loans:														Real estate loans:
Construction, land and land development		-		-		-		46,356		46,356			-	Construction, land and land development	—		66		66		186,640		186,706		—
Residential real estate		75		-		75		88,347		88,422			-	Residential real estate	—		186		186		211,780		211,966		—
Commercial real estate		-		-		-		474,330		474,330			-	Commercial real estate	—		7,142		7,142		1,156,946		1,164,088		—
Consumer and other loans		-		-		-		2,670		2,670			-	Consumer and other loans	32		—		32		1,425		1,457		—
	$	576	$	391	$	967	$	700,095		701,062		$	-
Less net deferred origination fees										(370	)
Total community bank														Total community bank	$	129	$	7,394	$	7,523	$	1,711,772	$	1,719,295	$	—
CCBX														CCBX
Commercial and industrial loans:														Commercial and industrial loans:
Capital call lines														Capital call lines	$	—	$	—	$	—	$	138,428	$	138,428	$	—
All other commercial & industrial loans														All other commercial & industrial loans	1,575		808		2,383		57,940		60,323		808
Real estate loans:														Real estate loans:
Residential real estate loans														Residential real estate loans	2,378		1,722		4,100		$	247,113	$	251,213	1,722
Consumer and other loans:														Consumer and other loans:
Credit cards														Credit cards	17,572		18,306		35,878		$	343,764	$	379,642	18,306
Other consumer and other loans														Other consumer and other loans	21,656		5,492		27,148		438,212		465,360		5,492
Total CCBX														Total CCBX	$	43,181	$	26,328	$	69,509	$	1,225,457	$	1,294,966	$	26,328
Total community bank and CCBX														Total community bank and CCBX	$	43,310	$	33,722	$	77,032	$	2,937,229	3,014,261		$	26,328
Less net deferred origination fees and premiums														Less net deferred origination fees and premiums									(6,708)
Loans receivable									$	700,692				Loans receivable									$	3,007,553

30-89
Days Past
Due

90 Days
or More
Past Due

Total
Past Due

Current

Total
Loans

Recorded
Investment
90 Days or
More Past
Due and
Still
Accruing

(dollars in thousands)

December 31, 2017

Commercial and industrial loans

$
791

$
372

$
1,163

$
87,525

$
88,688

$
-

Real estate loans:

Construction, land and land development

218

-

218

41,423

41,641

-

Residential real estate

76

-

76

86,955

87,031

-

Commercial real estate

333

345

678

437,039

437,717

-

Consumer and other loans

-

-

-

2,058

2,058

-

$
1,418

$
717

$
2,135

$
655,000

657,135

$
-

Less net deferred origination fees

(347
)

Loans receivable

$
656,788

~~A summary~~Table of ~~information pertaining to impaired~~Contents,


Consolidated	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans		90 Days or More Past Due and Still Accruing
	(dollars in thousands; unaudited)
December 31, 2022
Commercial and industrial loans	$	393	$	486	$	879	$	311,749	$	312,628	$	404
Real estate loans:
Construction, land and land development	—		66		66		213,989		214,055		—
Residential real estate	1,016		876		1,892		447,265		449,157		876
Commercial real estate	95		6,901		6,996		1,041,756		1,048,752		—
Consumer and other loans	37,932		24,815		62,747		546,024		608,771		24,815
	$	39,436	$	33,144	$	72,580	$	2,560,783	$	2,633,363	$	26,095
Less net deferred origination fees and premiums									(6,107)
Loans receivable									$	2,627,256

There were $26.3 million in loans past due 90 days or more and still accruing interest as of ~~the period indicated:~~

Unpaid
Contractual
Principal
Balance

Recorded
Investment
With No
Allowance

Recorded
Investment
With
Allowance

Total
Recorded
Investment

Related
Allowance

(dollars in thousands)

June 30, 2018

Commercial and industrial loans

$
1,097

$
820

$
-

$
820

$
-

Real estate loans:

Residential real estate

75

75

-

75

-

Commercial real estate

1,498

1,290

-

1,290

-

Total

$
2,670

$
2,185

$
-

$
2,185

$
-

December 31, 2017

Commercial and industrial loans

$
1,123

$
1,065

$
-

$
1,064

$
-

Real estate loans:

Residential real estate

94

89

-

88

-

Commercial real estate

2,249

1,660

-

1,660

-

Total

$
3,466

$
2,814

$
-

$
2,812

$
-

~~The following tables summarize our average recorded investment and interest income recognized on impaired loans by loan class for the three and six months ended~~ June 30, ~~2018~~2023, and ~~2017:~~

$26.1 million as of December 31, 2022. This is attributed to loans originated through CCBX lending partners which continue to accrue interest up to 180 days past due. As of June 30, 2023 and December 31, 2022, $25.2 million and $25.5 million, respectively, of loans past due 90 days or more are covered by credit enhancements provided by our CCBX partners that protect the Bank against losses.

Three Months Ended

June 30, 2018

June 30, 2017

Average
Recorded
Investment

Interest Income
Recognized

Average
Recorded
Investment

Interest Income
Recognized

(dollars in thousands)

Commercial and industrial loans

$
976

$
10

$
115

$
-

Real estate loans:

Construction, land and land development

-

-

379

-

Residential real estate

416

-

48

-

Commercial real estate

1,297

-

2,656

-

Total

$
2,689

$
10

$
3,198

$
-

Six Months Ended

June 30, 2018

June 30, 2017

Average
Recorded
Investment

Interest Income
Recognized

Average
Recorded
Investment

Interest Income
Recognized

(dollars in thousands)

Commercial and industrial loans

$
1,195

$
25

$
120

$
-

Real estate loans:

Construction, land and land development

-

-

1,281

17

Residential real estate

307

5

97

-

Commercial real estate

1,303

-

5,388

27

Total

$
2,805

$
30

$
6,886

$
44

The ~~Company grants restructurings~~accrual of interest on community bank loans is discontinued when, in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, andmanagement’s opinion, the borrower ~~must~~may be unable to meet payments as they become due or when they are 90 days past due as to either ~~prefund an~~principal or interest, ~~reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.~~

~~The following table presents troubled debt restructurings by accrual versus nonaccrual status~~unless they are well secured and ~~by loan class as of the period indicated:~~

Accrual
Status

Nonaccrual
Status

Total
Restructured
Loans

(dollars in thousands)

June 30, 2018

Commercial real estate

$
-

$
1,290

$
1,290

December 31, 2017

Commercial real estate

$
-

$
1,315

$
1,315

~~No loans were restructured~~ in the ~~six months ended June 30, 2018~~process of collection. Installment/closed-end, and ~~June 30, 2017~~revolving/open-end consumer loans originated through CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively and an allowance is recorded through provision expense for these expected losses. For installment/closed-end and revolving/open-end consumer loans originated through CCBX lending partners with balances outstanding beyond 120 days and 180 days past due, respectively, principal and capitalized interest outstanding is charged off against the allowance and accrued interest outstanding is reversed against interest income. These consumer loans are reported as ~~troubled debt restructurings. The Company has no commitments to loan additional funds to borrowers whose loans were troubled debt restructurings at June 30, 2018.~~

nonperforming/substandard, 90 days or more days past due and still accruing.

When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is removed, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual.

Table of Contents,

An analysis of nonaccrual loans by category consisted of the following at the periods indicated:

	June 30,		December 31,
	2018		2017			June 30,				December 31,
	(dollars in thousands)					2023				2022
						Total Nonaccrual		Nonaccrual with No ACL		Total Nonaccrual
						(dollars in thousands; unaudited)
Community Bank					Community Bank
Commercial and industrial loans	$	703	$	372	Commercial and industrial loans	$	5	$	5	$	113
Real estate loans:					Real estate loans:
Construction, land and land development					Construction, land and land development	66		66		66
Residential real estate		75		88	Residential real estate	186		186		—
Commercial real estate		1,290		1,660	Commercial real estate	7,142		7,142		6,901

Total nonaccrual loans	$	2,068	$	2,120	Total nonaccrual loans	$	7,399	$	7,399	$	7,080

In some circumstances, the Company modifies loans in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. In order for a modified loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.

No loans were modified for borrowers experiencing financial difficulty in the three and six months ended June 30, 2023 and 2022.

Credit Quality and Credit Risk

Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Company’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. The Company establishes loan grades for loans at the origination of the loan. Changes to community bank loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower and after loan reviews. For consumer loans, the Bank follows the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property. The Company classifies some loans as Watch or Other Loans Especially Mentioned (“OLEM”). Loans classified as Watch are performing assets but have elements of risk that require more monitoring than other performing loans and are reported in the OLEM column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Revolving (open-ended loans, such as credit cards) and installment (closed end) consumer loans originated through CCBX partners continue to accrue interest until they are charged-off at 120 days past due for installment loans (primarily unsecured loans to consumers) and 180 days past due for revolving loans (primarily credit cards) and are classified as substandard. Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for ~~loan~~credit losses, thereby reducing that reserve.

Table of Contents,

Management considers the guidance in ASC 310-20 when determining whether a modification, extension, or renewal of loan constitutes a current period origination. As of March 31, 2023 and December 31, 2022, based on the most recent analysis performed, the risk category of community bank loans by year of origination is as follows:


	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted To Term		Total
	(dollars in thousands; unaudited)
As of June 30, 2023
Commercial and industrial loans
Risk rating
Pass	$	11,366	$	59,094	$	16,891	$	11,560	$	14,313	$	1,956	$	35,414	$	1,282	$	151,876
Other Loan Especially Mentioned	—		—		—		122		—		—		3,075		—		3,197
Substandard	—		—		—		—		—		5		—		—		5
Doubtful	—		—		—		—		—		—		—		—		—
Total commercial and industrial loans - All other commercial and industrial loans	$	11,366	$	59,094	$	16,891	$	11,682	$	14,313	$	1,961	$	38,489	$	1,282	$	155,078
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	46	$	—	$	—	$	46

Real estate loans - Construction, land and land development loans
Risk rating
Pass	$	33,017	$	64,143	$	77,446	$	3,329	$	929	$	1,640	$	63	$	—	$	180,567
Other Loan Especially Mentioned	—		—		—		—		—		—		—		—		—
Substandard	—		—		3,148		2,325		—		66		600		—		6,139
Doubtful	—		—		—		—		—		—		—		—		—
Total real estate loans - Construction, land and land development loans	$	33,017	$	64,143	$	80,594	$	5,654	$	929	$	1,706	$	663	$	—	$	186,706
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Table of Contents,


	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted To Term		Total
	(dollars in thousands; unaudited)
Real estate loans - Residential real estate loans
Risk rating
Pass	$	13,210	$	44,823	$	39,501	$	30,636	$	32,348	$	25,474	$	23,673	$	—	$	209,665
Other Loan Especially Mentioned	—		—		2,033		38		—		44		—		—		2,115
Substandard	—		—		—		—		—		—		186		—		186
Doubtful	—		—		—		—		—		—		—		—		—
Total real estate loans - Residential real estate loans	$	13,210	$	44,823	$	41,534	$	30,674	$	32,348	$	25,518	$	23,859	$	—	$	211,966
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Real estate loans - Commercial real estate loans
Risk rating
Pass	$	115,932	$	286,253	$	216,672	$	147,000	$	128,302	$	238,734	$	7,669	$	1,749	$	1,142,311
Other Loan Especially Mentioned	—		3,288		2,212		178		511		7,528		87		—		13,804
Substandard	—		—		—		923		6,901		—		149		—		7,973
Doubtful	—		—		—		—		—		—		—		—		—
Total real estate loans - Commercial real estate loans	$	115,932	$	289,541	$	218,884	$	148,101	$	135,714	$	246,262	$	7,905	$	1,749	$	1,164,088
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Table of Contents,


	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted To Term		Total
	(dollars in thousands; unaudited)
Consumer and other loans - Other consumer and other loans
Risk rating
Pass	$	20	$	299	$	9	$	697	$	54	$	229	$	149	$	—	$	1,457
Other Loan Especially Mentioned	—		—		—		—		—		—		—		—		—
Substandard	—		—		—		—		—		—		—		—		—
Doubtful	—		—		—		—		—		—		—		—		—
Total consumer and other loans - Other consumer and other loans	$	20	$	299	$	9	$	697	$	54	$	229	$	149	$	—	$	1,457
Current period gross write-offs	$	13	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	13

Total community bank loans receivable
Risk rating
Pass	$	173,545	$	454,612	$	350,519	$	193,222	$	175,946	$	268,033	$	66,968	$	3,031	$	1,685,876
Other Loan Especially Mentioned	—		3,288		4,245		338		511		7,572		3,162		—		19,116
Substandard	—		—		3,148		3,248		6,901		71		935		—		14,303
Doubtful	—		—		—		—		—		—		—		—		—
Total community bank loans	$	173,545	$	457,900	$	357,912	$	196,808	$	183,358	$	275,676	$	71,065	$	3,031	$	1,719,295
Current period gross write-offs	$	13	$	—	$	—	$	—	$	—	$	46	$	—	$	—	$	59

Table of Contents,

The Company considers the performance of the CCBX loan portfolio and its impact on the allowance for credit losses. For CCBX loans, the Company also classifies some loans as Watch or Other Loans Especially Mentioned (OLEM). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans and are reported in the Pass column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration inevaluates credit quality based on the aging status of the loan, which was previously presented, and ~~require close monitoring.~~

by payment activity. The following table presents the loans in CCBX based on payment activity:


	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted To Term		Total
	(dollars in thousands; unaudited)
As of June 30, 2023
Commercial and industrial loans - Capital call lines
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	138,428	$	—	$	138,428
Nonperforming	—		—		—		—		—		—		—		—		—
Total commercial and industrial loans - Capital call lines	$	—	$	—	$	—	$	—	$	—	$	—	$	138,428	$	—	$	138,428
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—	$	—

Commercial and industrial loans - All other commercial and industrial loans
Payment performance
Performing	$	43,964	$	13,406	$	68	$	32	$	—	$	—	$	2,045	$	—	$	59,515
Nonperforming	405		312		—		—		—		—		91		—		808
Total commercial and industrial loans - All other commercial and industrial loans	$	44,369	$	13,718	$	68	$	32	$	—	$	—	$	2,136	$	—	$	60,323
Current period gross write-offs	$	124	$	1,005	$	12	$	—	$	—	$	—	$	—	$	—	$	1,141

Real estate loans - Residential real estate loans
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	158,277	$	91,214	$	249,491
Nonperforming	—		—		—		—		—		—		1,722		—		1,722
Total real estate loans - Residential real estate loans	$	—	$	—	$	—	$	—	$	—	$	—	$	159,999	$	91,214	$	251,213
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	1,682	$	—	$	1,682

Table of Contents,


	Term Loans Amortized Cost Basis by Origination Year
	2023		2022		2021		2020		2019		Prior		Revolving Loans Amortized Cost Basis		Revolving Loans Converted To Term		Total
	(dollars in thousands; unaudited)

Consumer and other loans - Credit cards
Payment performance
Performing	$	—	$	—	$	—	$	—	$	—	$	—	$	361,251	$	85	$	361,336
Nonperforming	—		—		—		—		—		—		18,306		—		18,306
Total consumer and other loans - Credit cards	$	—	$	—	$	—	$	—	$	—	$	—	$	379,557	$	85	$	379,642
Current period gross write-offs	$	—	$	—	$	—	$	—	$	—	$	—	$	23,391	$	—	$	23,391

Consumer and other loans - Other consumer and other loans
Payment performance
Performing	$	256,287	$	161,341	$	24,233	$	202	$	755	$	512	$	16,538	$	—	$	459,868
Nonperforming	657		2,560		706		15		19		17		1,518		—		5,492
Total consumer and other loans - Other consumer and other loans	$	256,944	$	163,901	$	24,939	$	217	$	774	$	529	$	18,056	$	—	$	465,360
Current period gross write-offs	$	1,888	$	26,708	$	7,673	$	49	$	182	$	121	$	3,572	$	—	$	40,193








Total CCBX loans receivable
Payment performance
Performing	$	300,251	$	174,747	$	24,301	$	234	$	755	$	512	$	676,539	$	91,299	$	1,268,638
Nonperforming	1,062		2,872		706		15		19		17		21,637		—		26,328
Total CCBX loans	$	301,313	$	177,619	$	25,007	$	249	$	774	$	529	$	698,176	$	91,299	$	1,294,966
Current period gross write-offs	$	2,012	$	27,713	$	7,685	$	49	$	182	$	121	$	28,645	$	—	$	66,407

Table of Contents,

Loans by credit quality risk rating are as follows as of the periods indicated:

	Pass		Other Loans Especially Mentioned		Sub- Standard		Doubtful		Total
	(dollars in thousands)												Pass		Other Loans Especially Mentioned		Sub- Standard		Doubtful		Total
June 30, 2018
													(dollars in thousands; unaudited)

December 31, 2022												December 31, 2022
Commercial and industrial loans	$	87,060	$	1,135	$	1,089	$	-	$	89,284		Commercial and industrial loans	$	304,840	$	7,219	$	569	$	—	$	312,628
Real estate loans:												Real estate loans:
Construction, land, and land development		43,807		2,549		-		-		46,356		Construction, land, and land development	206,304		7,685		66		—		214,055
Residential real estate		88,221		126		75		-		88,422		Residential real estate	448,185		96		876		—		449,157
Commercial real estate		470,744		2,296		1,290		-		474,330		Commercial real estate	1,030,650		11,201		6,901		—		1,048,752
Consumer and other loans		2,670		-		-				2,670		Consumer and other loans	583,956		—		24,815		—		608,771
	$	692,502	$	6,106	$	2,454	$	-		701,062			$	2,573,935	$	26,201	$	33,227	$	—	2,633,363
Less net deferred origination fees										(370	)	Less net deferred origination fees									(6,107)
Loans receivable									$	700,692		Loans receivable									$	2,627,256
December 31, 2017
Commercial and industrial loans	$	87,247	$	376	$	902	$	163	$	88,688
Real estate loans:
Construction, land, and land development		39,081		2,560		-		-		41,641
Residential real estate		86,464		479		88		-		87,031
Commercial real estate		434,421		1,636		1,315		345		437,717
Consumer and other loans		2,058		-		-		-		2,058
	$	649,271	$	5,051	$	2,305	$	508		657,135
Less net deferred origination fees										(347	)
Loans receivable									$	656,788

Allowance for ~~Loan~~Credit Losses

("ACL")

On January 1, 2023, the Company adopted ASU 2016-13, which replaces the incurred loss methodology with an expected loss methodology that is referred to as CECL. See Note 1, Description of Business and Summary of Significant Accounting Policies. As a result of implementing CECL, there was a one-time adjustment to the 2023 opening allowance balance of $3.9 million.

CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. 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. 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. The ~~Company’s ALLL covers estimated~~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. If the partner is unable to fulfill their contracted obligations then the Bank could be exposed to the loss of the reimbursement and credit enhancement income. In accordance with the program agreement for one CCBX partner, the Company is responsible for credit losses on ~~individually evaluated loans~~approximately 10% of a $180.5 million loan portfolio that are ~~determined to be impaired as well as estimated probable~~without credit enhancement reimbursements. At June 30, 2023, 10% of this portfolio represented $18.0 million in loans. The partner is responsible for reimbursing credit losses ~~inherent in the remainder~~on approximately 90% of this portfolio and for fraud losses on 100% of this portfolio. The Company earns 100% of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit review process together with data from peer institutions and economic information gathered from published sources.

~~The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based~~interest income on the ~~type~~aforementioned $18.0 million of ~~loan, the type~~loans.

Table of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

Contents,

The following tables summarize the allocation of the ~~allowance for loan loss,~~ACL, as well as the activity in the ~~allowance for loan loss~~ACL attributed to various segments in the loan portfolio, as of and for the three and six months ended June 30, ~~2018:~~

Commercial
and
Industrial

Construction,
Land, and
Land
Development

Residential
Real
Estate

Commercial
Real Estate

Consumer
and Other

Unallocated

Total

(dollars in thousands)

Three Months Ended June 30, 2018

Balance, March 31, 2018

$
2,028

$
1,133

$
1,328

$
2,088

$
53

$
1,793

$
8,423

Provision for loan losses or (recapture)

64

105

67

215

3

(62
)

392

2,092

1,238

1,395

2,303

56

1,731

8,815

Loans charged-off

(272
)

-

-

-

(9
)

-

(281
)
Recoveries of loans previously charged-off

1

-

-

-

5

-

6

Net (charge-offs) recoveries

(271
)

-

-

-

(4
)

-

(275
)
Balance, June 30, 2018

$
1,821

$
1,238

$
1,395

$
2,303

$
52

$
1,731

$
8,540

Six Months Ended June 30, 2018

Balance, December 31, 2017

$
1,864

$
1,063

$
1,343

$
2,014

$
43

$
1,690

$
8,017

Provision for loan losses or (recapture)

236

175

52

373

16

41

893

2,100

1,238

1,395

2,387

59

1,731

8,910

Loans charged-off

(281
)

-

-

(84
)

(14
)

-

(379
)
Recoveries of loans previously charged-off

2

-

-

-

7

-

9

Net (charge-offs) recoveries

(279
)

-

-

(84
)

(7
)

-

(370
)
Balance, June 30, 2018

$
1,821

$
1,238

$
1,395

$
2,303

$
52

$
1,731

$
8,540

As of June 30, 2018

Amounts allocated to

Individually evaluated for impairment

$
-

$
-

$
-

$
-

$
-

$
-

$
-

Collectively evaluated for impairment

1,821

1,238

1,395

2,303

52

1,731

8,540

Balance, June 30, 2018

$
1,821

$
1,238

$
1,395

$
2,303

$
52

$
1,731

$
8,540

Loans individually evaluated for impairment

$
820

$
-

$
75

$
1,290

$
-

$
2,185

Loans collectively evaluated for impairment

88,464

46,356

88,347

473,040

2,670

698,877

Balance, June 30, 2018

$
89,284

$
46,356

$
88,422

$
474,330

$
2,670

$
701,062

~~The following tables summarize~~2023 and the allocation and activity of the loans and allowance for loan ~~loss, as well as the activity in the allowance for loan loss~~losses ("ALLL ") attributed to the various segments in the loan ~~as of and~~portfolio for the three and six months ended June 30, ~~2017:~~

2022:

Commercial
and
Industrial

Construction,
Land, and
Land
Development

Residential
Real
Estate

Commercial
Real Estate

Consumer
and Other

Unallocated

Total

(dollars in thousands)

Three Months Ended June 30, 2017

Beginning balance, March 31, 2017

$
1,596

$
1,121

$
1,339

$
1,495

$
37

$
2,205

$
7,793

Provision for loan losses or (recapture)

284

(49
)

(158
)

473

-

(550
)

-

1,880

1,072

1,181

1,968

37

1,655

7,793

Loans charged-off

-

-

-

-

(1
)

-

(1
)
Recoveries of loans previously charged-off

1

95

-

-

1

-

97

Net (charge-offs) recoveries

1

95

-

-

-

-

96

Ending balance, June 30, 2017

$
1,881

$
1,167

$
1,181

$
1,968

$
37

$
1,655

$
7,889

Six Months Ended June 30, 2017

Beginning balance, December 31, 2016

$
1,606

$
1,398

$
1,495

$
1,474

$
26

$
1,545

$
7,544

Provision for loan losses or (recapture)

288

(326
)

(314
)

667

14

110

439

1,894

1,072

1,181

2,141

40

1,655

7,983

Loans charged-off

(14
)

-

-

(173
)

(4
)

-

(191
)
Recoveries of loans previously charged-off

1

95

-

-

1

-

97

Net (charge-offs) recoveries

(13
)

95

-

(173
)

(3
)

-

(94
)
Balance, June 30, 2017

$
1,881

$
1,167

$
1,181

$
1,968

$
37

$
1,655

$
7,889

As of June 30, 2017

Amounts allocated to

Individually evaluated for impairment

$
65

$
-

$
-

$
-

$
-

$
-

$
65

Collectively evaluated for impairment

1,816

1,167

1,181

1,968

37

1,655

7,824

Balance, June 30, 2017

$
1,881

$
1,167

$
1,181

$
1,968

$
37

$
1,655

$
7,889

Loans individually evaluated for impairment

$
220

$
-

$
-

$
-

$
-

$
220

Loans collectively evaluated for impairment

84,572

46,288

68,802

422,170

1,795

623,627

Balance, June 30, 2017

$
84,792

$
46,288

$
68,802

$
422,170

$
1,795

$
623,847


	Commercial and Industrial		Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate		Consumer and Other		Unallocated		Total
	(dollars in thousands; unaudited)
Three Months Ended June 30, 2023
ACL balance, March 31, 2023	$	8,651	$	5,744	$	6,986	$	7,506	$	60,236	$	—	$	89,123

Provision for credit losses or (recapture)	1,311		795		2,808		(554)		48,238		—		52,598
	9,962		6,539		9,794		6,952		108,474		—		141,721
Loans charged-off	(411)		—		(945)		—		(30,943)		—		(32,299)
Recoveries of loans previously charged-off	—		—		—		—		1,340		—		1,340
Net charge-offs	(411)		—		(945)		—		(29,603)		—		(30,959)
ACL balance, June 30, 2023	$	9,551	$	6,539	$	8,849	$	6,952	$	78,871	$	—	$	110,762

Six Months Ended June 30, 2023
ALLL balance, December 31, 2022	$	4,831	$	7,425	$	4,142	$	5,470	$	50,996	$	1,165	$	74,029
Impact of adopting CECL (ASC 326)	1,428		(1,589)		1,623		1,240		2,315		(1,165)		$	3,852
Provision for credit losses or (recapture)	4,476		703		4,766		242		85,955				96,142
	10,735		6,539		10,531		6,952		139,266		—		174,023
Loans charged-off	(1,187)		—		(1,682)		—		(63,597)		—		(66,466)
Recoveries of loans previously charged-off	3		—		—		—		3,202		—		3,205
Net charge-offs	(1,184)		—		(1,682)		—		(60,395)		—		(63,261)
ACL balance, June 30, 2023	$	9,551	$	6,539	$	8,849	$	6,952	$	78,871	$	—	$	110,762










Three Months Ended June 30, 2022
ALLL balance, March 31, 2022	$	3,514	$	7,592	$	5,758	$	5,317	$	15,114	$	1,475	$	38,770
Provision for loan losses or (recapture)	550		407		1,413		(577)		12,204		97		14,094
	4,064		7,999		7,171		4,740		27,318		1,572		52,864
Loans charged-off	(33)		—		—		—		(3,509)		—		(3,542)
Recoveries of loans previously charged-off	35		—		—		—		1		—		36
Net (charge-offs) recoveries	2		—		—		—		(3,508)		—		(3,506)
Balance, June 30, 2022	$	4,066	$	7,999	$	7,171	$	4,740	$	23,810	$	1,572	$	49,358

Six Months Ended June 30, 2022
ALLL Balance, December 31, 2021	$	3,221	$	6,984	$	4,598	$	6,590	$	7,092	$	147	$	28,632
Provision for credit losses or (recapture)	846		1,015		2,573		(1,850)		23,027		1,425		27,036
	4,067		7,999		7,171		4,740		30,119		1,572		55,668
Loans charged-off	(38)		—		—		—		(6,312)		—		(6,350)
Recoveries of loans previously charged-off	37		—		—		—		3		—		40
Net charge-offs	(1)		—		—		—		(6,309)		—		(6,310)
ALLL Balance, June 30, 2022	$	4,066	$	7,999	$	7,171	$	4,740	$	23,810	$	1,572	$	49,358

Table of Contents,

The following table summarizes the allocation of the allowance for loan losses attributed to various segments in the loan portfolio as of December 31, 2022.


	Commercial and Industrial		Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate		Consumer and Other		Unallocated		Total
	(dollars in thousands; unaudited)
As of December 31, 2022
ALLL amounts allocated to
Individually evaluated for impairment	$	95	$	—	$	—	$	—	$	—	$	—	$	95
Collectively evaluated for impairment	4,736		7,425		4,142		5,470		50,996		1,165		73,934
ALLL balance, December 31, 2022	$	4,831	$	7,425	$	4,142	$	5,470	$	50,996	$	1,165	$	74,029
Loans individually evaluated for impairment	$	113	$	66	$	—	$	6,901	$	—			$	7,080
Loans collectively evaluated for impairment	312,515		213,989		449,157		1,041,851		608,771				2,626,283
Loans receivable balance, December 31, 2022	$	312,628	$	214,055	$	449,157	$	1,048,752	$	608,771			$	2,633,363

The following table presents the collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:


	Real Estate		Business Assets		Total		ACL
	(dollars in thousands; unaudited)
June 30, 2023
Commercial and industrial loans	$	—	$	5	$	5	$	—
Real estate loans:
Construction, land and land development	66		—		66		—
Residential real estate	186		—		186		—
Commercial real estate	7,142		—		7,142		—
Total	$	7,394	$	5	$	7,399	$	—

The following table is a summary of information pertaining to impaired loans as of the period indicated. Loans originated through CCBX partners are reported using pool accounting and are not subject to impairment analysis, therefore CCBX loans are not included in this table.


	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
	(dollars in thousands; unaudited)
December 31, 2022
Commercial and industrial loans	$	124	$	—	$	113	$	113	$	95
Real estate loans:
Construction, land and land development	67		66		—		66		—

Commercial real estate	6,901		6,901		—		6,901		—
Total	$	7,092	$	6,967	$	113	$	7,080	$	95

Table of Contents,

The following tables summarize the Company’s average recorded investment and interest income recognized on impaired loans by loan class for the period indicated:


		Three Months Ended				Six Months Ended
	June 30, 2022			June 30, 2022
		Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
		(dollars in thousands; unaudited)
Commercial and industrial loans		$	120	$	—	$	136	$	—
Real estate loans:
Construction, land and land development		13		—		9		—
Residential real estate		54		—		54		—

Total		$	187	$	—	$	199	$	—

Note 5 - Deposits

The composition of consolidated deposits consisted of the following at the periods indicated:

	June 30,		December 31,
	2018		2017			June 30, 2023		December 31, 2022
	(dollars in thousands)					(dollars in thousands; unaudited)
Demand, noninterest-bearing	$	259,449	$	242,358
Now and money market		336,666		326,412
Demand, noninterest bearing					Demand, noninterest bearing	$	725,592	$	775,012
NOW and money market					NOW and money market	2,323,164		1,804,399
Savings		48,509		43,876	Savings	88,991		107,117
Total core deposits					Total core deposits	3,137,747		2,686,528
Brokered deposits					Brokered deposits	1		101,546
Time deposits less than $250,000		65,393		60,445	Time deposits less than $250,000	17,437		21,942
Time deposits $250,000 and over		34,451		30,204	Time deposits $250,000 and over	7,387		7,505
Total deposits	$	744,468	$	703,295	Total deposits	$	3,162,572	$	2,817,521

The following table presents the maturity distribution of time deposits as of June 30, ~~2018 (dollars~~2023:


(dollars in thousands; unaudited)	As of June 30, 2023
Twelve months	$	20,182
One to two years	2,248
Two to three years	1,499
Three to four years	255
Four to five years	640
Thereafter	—
	$	24,824

Included in ~~thousands):~~

total deposits is $240.3 million in IntraFi network NOW and money market sweep accounts as of June 30, 2023, which provides our customers with fully insured deposits through a sweep and exchange of deposits with other financial institutions.

Twelve months

$
50,791

One to two years

35,468

Two to three years

8,616

Three to four years

3,192

Four to five years

1,777

$
99,844

Note 6 - Leases

The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.

Table of Contents,

Operating lease right-of-use (“ROU”) assets represent a right to use an underlying asset for the contractual lease term. Operating lease liabilities represent an obligation to make lease payments arising from the lease. An operating lease ROU asset and operating lease liability will be recognized for any new operating leases at the commencement of the new lease.

The Company’s leases do not provide an implicit interest rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities. The weighted average discount rate as of June 30, 2023 was 3.88%.

The Company’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Company’s lease agreements do not contain any residual value guarantees.

Operating leases with terms of 12 months or less are not included in ROU assets and operating lease liabilities recorded in the Company’s consolidated balance sheet. Operating lease terms include options to extend when it is reasonably certain that the Company will exercise such options, determined on a lease-by-lease basis. At June 30, 2023, lease expiration dates ranged from 8 months to 21.7 years, with additional renewal options on certain leases typically ranging from 5 to 10 years. At June 30, 2023, the weighted average remaining lease term inclusive of renewal options that the Company is reasonably certain to renew for the Company’s operating leases was 9.5 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $284,000 and $642,000, respectively, for the three and six months ended June 30, 2023, and $347,000 and $693,000 respectively, for the three and six months ended June 30, 2022. Variable lease components, such as inflation adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at June 30, 2023:


(dollars in thousands; unaudited)	June 30, 2023

July 1 to December 31, 2023	$	499
2024	986
2025	943
2026	947
2027	895
2028 and thereafter	3,456
Total lease payments	7,726
Less: amounts representing interest	1,313
Present value of lease liabilities	$	6,413

The following table presents the components of total lease expense and operating cash flows for the three and six months ended June 30, 2023 and 2022:


	Three Months Ended				Six Months Ended
	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
	(dollars in thousands; unaudited)
Lease expense:
Operating lease expense	$	247	$	320	$	568	$	675
Variable lease expense	52		45		104		87
Total lease expense (1)	$	299	$	365	$	672	$	762
Cash paid:
Cash paid reducing operating lease liabilities	$	313	$	362	$	692	$	756

(1)Included in net occupancy expense in the Condensed Consolidated Statements of Income (unaudited).

Table of Contents,

Note 7 - Stock-Based Compensation

Stock Options and Restricted Stock

In April 2006, the Company adopted the 2006 Stock Option and Equity Compensation Plan (Plan), which is unlimited in duration. Provisions of the Plan and Internal Revenue Service (IRS) Code limit Incentive Stock Options to be granted on a date that is not more than ten years from the Plan date or the date the Plan was amended to increase the shares available.

The Plan provides for the issuance of incentive stock options, nonqualified stock options, stock appreciation rights, restricted stock and restricted stock units. Stock awards may be issued to directors, officers, and employees of the Company and the Bank. The Plan permits revisions and amendments, requiring approval of shareholders of the Company.

~~On April 30,~~ 2018 ~~the Company’s shareholders approved the~~ Coastal Financial Corporation ~~2018~~ Omnibus ~~Incentive~~ Plan (2018 Plan)~~. The 2018 Plan~~ authorizes the Company to grant awards, including but not limited to, stock options, restricted stock units, and restricted stock awards, to eligible employees, directors or individuals that provide service to the Company, up to an aggregate of 500,000 shares of common stock. On May 24, 2021, the Company’s shareholders approved the First Amendment to the 2018 Plan, which increased the authorized plan shares by 600,000. The 2018 Plan ~~replaces both~~replaced the 2006 Plan ~~and our Directors’ Stock Bonus Plan.~~for new awards. Existing awards will vest under the terms granted and no further awards will be ~~made~~granted under these ~~previous~~prior plans. Shares available to be granted under the 2018 plan were ~~500,000~~433,297 at June 30, ~~2018.~~

2023.

Stock Option Awards

In January 2018, the Company granted 28,546 nonqualified stock options to an employee, which vest ratably over 10 years. The Company also granted 87,500 qualified stock options to employees, which vest ratably over 10 years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing ~~model that uses the assumptions noted in the following table.~~model. Expected volatilities are based on historical volatility of the Company’s stock and other factors. The Company uses the vesting term and contractual life to determine the expected life. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense related to unvested stock option awards is reversed at date of ~~forfeiture.~~

~~The following assumptions~~forfeiture.

There were ~~used to estimate the value of~~no new stock options granted ~~during~~in the ~~periods indicated:~~

six months ended June 30, 2023 and 2022.

Six months ended
June 30, 2018

Expected term

10.0 years

Expected stock price volatility

41.89
%
Risk-free interest rate

2.66
%
Expected dividends

Zero

Weighted average grant date fair value

$
3.95

A summary of stock option activity under the ~~Company’s~~2018 Plan and 2006 Plan during the six months ended June 30, ~~2018:~~

2023:

Options

Shares

Weighted-
Average
Exercise
Price

Weighted-
Average
Remaining
Contractual
Term

Outstanding at December 31, 2017

668,934

$
6.12

6.36

Granted

116,046

7.10

-

Exercised

(45,250
)

6.03

-

Forfeited or expired

(32,270
)

6.51

-

Outstanding at June 30, 2018

707,460

$
6.27

6.84

Exercisable at June 30, 2018

208,635

$
5.94

5.37


Options	Shares	Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)	Aggregate Intrinsic Value
	(dollars in thousands, except per share amounts; unaudited)
Outstanding at December 31, 2022	438,103	$	8.79	4.1	$	16,968
Granted	—	—
Exercised	(80,104)	7.35			$	2,337
Expired	—	—
Forfeited	—	—
Outstanding at June 30, 2023	357,999	$	9.11	3.9	$	10,216
Vested or expected to vest at June 30, 2023	357,999	$	9.11	3.9	$	10,216
Exercisable at June 30, 2023	172,470	$	8.68	3.7	$	4,996

The total or aggregate intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three and six months ended June 30, ~~2018~~2023 was ~~$67,000. There were no~~$62,000 and $2.3 million, respectively. The total or aggregate intrinsic value of options exercised during the three and six months ended June 30, ~~2017.~~

2022 was $302,000 and $1.4 million, respectively.

As of June 30, ~~2018,~~2023, there was ~~$1,759,000~~$922,000 of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan. Total unrecognized compensation costs ~~will be~~are adjusted for unvested forfeitures. The Company expects to recognize that cost over a remaining weighted-average period of approximately ~~7.3~~4.1 years.

Compensation expense recorded related to stock options was $60,000 and $200,000 respectively, for the three and six months ended June 30, 2023 and $68,000 and $188,000 respectively, for the three and six months ended June 30, 2022.

Restricted Stock Units

In the first quarter of 2023, the Company granted 73,611 restricted stock units ("RSUs") under the 2018 Plan to employees, which vest ratably over 4 years and 1,084 restricted stock units which vest ratably over 5 years. In the second quarter of 2023, the Company granted 9,827 restricted stock units to employees which vest ratably over 5 years.

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RSUs provide for an interest in Company common stock to the recipient, the underlying stock is not issued until certain conditions are met. Vesting requirements include time-based, performance-based, or market-based conditions. Recipients of RSUs do not pay any cash consideration to the Company for the units and the holders of the restricted units do not have voting rights. The fair value of time-based and performance-based units is equal to the fair market value of the Company’s common stock on the grant date. The fair value of market-based units is estimated on the grant date using the Monte Carlo simulation model. Compensation expense is recognized over the vesting period that the awards are based. RSUs are nonparticipating securities.

As of June 30, 2023, there was $10.7 million of total unrecognized compensation cost related to nonvested RSUs. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 4.2 years. Compensation expense recorded related to RSUs was $688,000 and $1.5 million respectively, for the three and six months ended June 30, 2023 and $453,000 and $827,000 respectively, for the three and six months ended June 30, 2022.

A summary of the Company’s nonvested RSUs at June 30, 2023 and changes during the six month period is presented below:


Nonvested shares - RSUs	Shares	Weighted- Average Grant Date Fair Value		Total or Aggregate Intrinsic Value
	(dollars in thousands, except per share amounts; unaudited)
Nonvested shares at December 31, 2022	380,151	$	28.61	$	7,187
Granted	84,522	$	42.57
Forfeited	(8,535)	$	38.41
Vested	(46,020)	$	30.56
Nonvested shares at June 30, 2023	410,118	$	31.07	$	2,700

Restricted Stock Awards

Employees

There were no new restricted stock awards granted in the six months ended June 30, 2023. The fair value of restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities.

~~The Company’s nonvested shares at~~

As of June 30, 2023, there was $41,000 of total unrecognized compensation cost related to nonvested restricted stock awards. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 4.6 years. Compensation expense recorded related to restricted stock awards was $2,000 and $4,000 respectively, for the three and six months ended June 30, 2023 and $2,000 and $4,000 respectively, for the three and six months ended June 30, 2022.

Director’s Stock Compensation

Under the 2018 ~~and December 31, 2017 totaled 1,200 and 1,400 shares, respectively, and were issued~~Plan, eligible directors are granted stock with ~~weighted average grant date fair~~a total market value of ~~$6.25.~~

~~Director’s Stock Bonus~~

~~The Company adopted~~approximately $45,000, and ~~subsequently amended~~ the ~~Director’s Stock Bonus Plan (Bonus Plan). The Bonus Plan was frozen on April 30, 2018, when~~Board Chair is granted stock with a total market value of approximately $75,000. Committee chairs receive additional stock in an amount that varies depending upon the ~~shareholders approved the 2018 Omnibus Incentive Plan.~~

~~Under the Bonus Plan, the Company could grant up to 50,000 shares. Stock was granted to directors who have attended at least 75%~~nature and frequency of the ~~scheduled board meetings during~~committee meetings. The audit committee chair receives additional stock with a market value of approximately $10,000, non-financial risk and compensation committee chairs receive additional stock with a market value of approximately $7,500, and the asset liability & investment, credit and nominating & governance chairs receive additional stock with a market value of approximately $5,000. Stock is granted as of each annual meeting date and vest one day prior ~~year. Grants cliff vest over two years from date awarded, contingent on~~to the ~~director still being a director of the Company.~~next annual meeting date. During the vesting period, the grants are considered participating securities. ~~Grants immediately vest when a~~

As of June 30, 2023, there was $433,000 of total unrecognized compensation expense related to director ~~has attained~~restricted stock awards which the ~~retirement age of 72 and retires from the Board.~~

The Bonus Plan grants shares with total market value of $5,000 per director, per year, with the exception of the board chairman receiving $7,500 per year, and committee chairmen receiving $6,250 per year. Directors unableCompany expects to ~~receive stock will receive cash in lieu upon completion of the vesting period. Cash awards are recognized~~recognize over the remaining average vesting period ~~and recorded in other liabilities until paid. The amended Bonus Plan would have expired on May 31, 2018 if it was not frozen on April 30, 2018.~~

~~In January 2018, there were 4,405 shares granted to five directors at an estimated fair value~~ of ~~$7.10 per share. During 2017, there were 4,808 shares granted to five directors at an estimated fair value of $6.50 per share. Compensation~~approximately 11 months. Director compensation expense recorded related to the 2018 Plan totaled ~~$8,000~~$96,000 and $192,000 respectively, for

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the three ~~months ended June 30, 2018~~ and ~~2017 and $16,000 for the~~ six months ended June 30, ~~2018~~2023 and ~~2017.~~

~~Existing awards will vest under~~$60,000 and $98,000 respectively, for the ~~terms granted~~three and ~~no further awards will be made under this plan.~~

~~Note 7 - Shareholders’ Equity~~

On May 4, 2018 the Company effected a 1-for-5 reverse stock split, decreasing the number of issued shares from 46,268,359 to 9,254,073, including 401 additional shares issued to shareholders with fractional shares. Authorized shares were not impacted by the reverse stock split. Share and per share amounts included in the consolidated financial statements and accompanying notes reflect the effectsix months ended June 30, 2022.

A summary of the ~~split for all periods presented.~~

~~During 2017, the Articles of Incorporation were amended to increase the total authorized preferred stock from 500,000~~Company’s nonvested shares ~~to 25,000,000 shares. There was zero issued and outstanding preferred stock~~ at June 30, ~~2018~~2023 and ~~December 31, 2017.~~

~~During 2017,~~changes during the Articles of Incorporation were amended to increase total authorized common shares to 300,000,000 shares, an increase of 200,000,000 from the 100,000,000 common shares previously authorized. At June 30, 2018 and December 31, 2017, there were 8,937,109 and 8,887,457 common shares issued and outstanding.

During 2017, the Articles of Incorporation were amended to provide that 1,000,000 shares of common stock, out of the 300,000,000 shares authorized, be designated as Class B nonvoting common stock. At June 30, 2018 and December 31, 2017, there were 100,000 shares of Class B nonvoting common stock issued and outstanding.

~~Class B nonvoting common stock~~six-month period is ~~identical to and has the same rights as common stock, except that it does not have the right to vote on any matter requiring the approval of shareholders, unless specifically required by law.~~

During 2017, the Articles of Incorporation were amended to provide that up to 100,000,000 shares of common stock, out of the 300,000,000 shares authorized, may be designated as Class C nonvoting common stock. At June 30, 2018 and December 31, 2017, there were 261,444 shares of Class C nonvoting common stock issued and outstanding.

~~Class C nonvoting common stock is identical to common stock except with respect to voting rights, restrictions on transfer and conversion rights.~~

~~Voting rights -~~ ~~Class C nonvoting common stock has no voting rights, except as may be required by law.~~

~~Restrictions on transfer -~~ The shares of Class C nonvoting common stock may not be transferred by the original purchaser of the shares except: (1) to the Company; (2) in a widely distributed public offering that is registered under the Securities Act of 1933; (3) to a person that is acquiring a majority of the Company’s voting securities (not including voting securities such person is acquiring from the transferor); or (4) in transfers in which no transferee (or group of associated transferees) would receive 2% or more of any class of voting securities of the Company (including pursuant to a related series of transactions), provided that the transferee or transferees are not affiliated with the original purchaser of the Class C nonvoting common stock.

~~Conversion rights -~~ Class C nonvoting common stock is not convertible into common stock or any other class or series of the Company’s equity by the original purchaser of the shares. Following a permissible transfer of the Class C nonvoting common stock, as described above, with the approval of our board of directors, the Class C nonvoting common stock may be converted into common stock by the transferee or transferees on terms and conditions approved by our board of directors.

presented below:


Nonvested shares - RSAs	Shares	Weighted- Average Grant Date Fair Value		Total or Aggregate Intrinsic Value
	(dollars in thousands, except per share amounts; unaudited)
Nonvested shares at December 31, 2022	13,396	$	32.94	$	195
Granted	13,538	$	35.10
Forfeited	—	$	—
Vested	(10,896)	$	36.41
Nonvested shares at June 30, 2023	16,038	$	32.41	$	84

Note 8 - Fair Value Measurements

The following tables present estimated fair values of the Company’s financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:


	June 30, 2018				Fair Value Measurements Using							June 30, 2023				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3			Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)											(dollars in thousands; unaudited)
Financial assets											Financial assets
Cash and due from banks	$	14,217	$	14,217	$	14,217	$	-	$	-	Cash and due from banks	$	29,783	$	29,783	$	29,783	$	—	$	—
Interest-bearing deposits with other banks		77,232		77,232		77,232		-		-
Interest earning deposits with other banks											Interest earning deposits with other banks	245,277		245,277		245,277		—		—
Investment securities		37,317		37,245		32,574		4,671		-	Investment securities	110,730		110,326		97,871		12,455		—
Other investments		3,766		3,766		-		3,766		-	Other investments	12,037		12,037		—		9,465		2,572
Loans receivable, net (1)		692,152		672,645		-		-		672,645
Loans held for sale											Loans held for sale	35,923		35,923		—		35,923
Loans receivable											Loans receivable	3,007,553		2,953,342		—		—		2,953,342
Accrued interest receivable		2,290		-		-		2,290		-	Accrued interest receivable	21,581		21,581		—		21,581		—
Financial liabilities											Financial liabilities
Deposits (1)	$	744,468	$	743,311	$	-	$	743,311	$	-
FHLB advances		20,000		20,000		-		20,000		-
Deposits											Deposits	$	3,162,572	3,161,753		$	—	$	3,161,753	$	—
Subordinated debt		9,957		9,020		-		9,020		-	Subordinated debt	44,069		42,861		—		42,861		—
Junior subordinated debentures		3,580		3,016		-		3,016		-	Junior subordinated debentures	3,589		3,489		—		3,489		—
Capital lease		105		102		-		102		-
Accrued interest payable		241		-		-		241		-	Accrued interest payable	766		766		—		766		—

~~(1)~~

The estimated fair value of loans receivable, net and deposits for June 30, 2018 reflect exit price assumptions. The December 31, 2017 fair value estimates may not reflect based on exit price assumptions.

December 31, 2017

Fair Value Measurements Using

Carrying
Value

Estimated
Fair Value

Level 1

Level 2

Level 3

(dollars in thousands)

Financial assets

Cash and due from banks

$
13,787

$
13,787

$
13,787

$
-

$
-

Interest-bearing deposits with other banks

75,964

75,891

75,891

-

-

Investment securities

38,336

38,301

33,396

4,905

-

Other investments

3,680

3,680

-

3,680

-

Loans receivable, net

648,771

636,334

-

-

636,334

Accrued interest receivable

2,274

-

-

2,274

-

Financial liabilities

Deposits

$
703,295

$
702,525

$
-

$
702,525

$
-

FHLB advances

20,000

20,000

-

20,000

-

Subordinated debt

9,950

9,601

-

9,601

-

Junior subordinated debentures

3,579

2,978

-

2,978

-

Capital lease

137

134

-

134

-

Accrued interest payable

228

-

-

228

-

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	December 31, 2022				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands; unaudited)
Financial assets
Cash and due from banks	$	32,722	$	32,722	$	32,722	$	—	$	—
Interest earning deposits with other banks	309,417		309,417		309,417		—		—
Investment securities	98,353		98,233		97,015		1,218		—
Other investments	10,555		10,555		—		7,983		2,572
Loans receivable, net	2,627,256		2,580,183		—		—		2,580,183
Accrued interest receivable	17,815		17,815		—		17,815		—
Financial liabilities
Deposits	$	2,817,521	$	2,816,602	$	—	$	2,816,602	$	—

Subordinated debt	43,999		42,743		—		42,743		—
Junior subordinated debentures	3,588		3,484		—		3,484		—
Accrued interest payable	684		684		—		684		—

The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the accounting standard requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy:

•Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

•Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.

•

Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.

•Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from ~~non-binding~~nonbinding single dealer quotes not corroborated by observable market data.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for certain financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

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Items measured at fair value on a recurring basis – The following fair value hierarchy table presents information about the Company’s assets that are measured at fair value on a recurring basis at the dates indicated:

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands)									Level 1		Level 2		Level 3		Total Fair Value
June 30, 2018
										(dollars in thousands; unaudited)
June 30, 2023									June 30, 2023
Available-for-sale									Available-for-sale
U.S. Treasury securities	$	32,574	$	-	$	-	$	32,574	U.S. Treasury securities	$	97,871	$	—	$	—	$	97,871
U.S. Government agencies		-		2,945		-		2,945
U.S. Agency collateralized mortgage obligations									U.S. Agency collateralized mortgage obligations	—		47		—		47

Municipals									Municipals	—		249		—		249
										$	97,871	$	296	$	—	$	98,167
December 31, 2022									December 31, 2022
Available-for-sale									Available-for-sale
U.S. Treasury securities									U.S. Treasury securities	$	97,015	$	—	$	—	$	97,015
U.S. Agency collateralized mortgage obligations		-		256		-		256	U.S. Agency collateralized mortgage obligations	—		51		—		51
U.S. Agency residential mortgage-backed securities		-		47		-		47	U.S. Agency residential mortgage-backed securities	—		1		—		1
Municipals		-		191		-		191	Municipals	—		250		—		250
	$	32,574	$	3,439	$	-	$	36,013		$	97,015	$	302	$	—	$	97,317

December 31, 2017
Available-for-sale
U.S. Treasury securities	$	33,396	$	-	$	-	$	33,396
U.S. Government agencies		-		2,970		-		2,970
U.S. Agency collateralized mortgage obligations		-		260		-		260
U.S. Agency residential mortgage-backed securities		-		81		-		81
Municipals		-		220		-		220
	$	33,396	$	3,531	$	-	$	36,927

The following methods were used to estimate the fair value of the class of financial instruments above:

Investment securities - The fair value of securities is based on quoted market prices, pricing models, quoted prices of similar securities, independent pricing sources, and discounted cash flows.

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of June 30, ~~2018~~2023 and December 31, ~~2017.~~2022. The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

~~Assets measured at fair value using significant unobservable inputs (Level 3)~~

The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated:

Valuation Technique

Unobservable Inputs

June 30, 2018
Weighted Average Rate

December 31, 2017
Weighted Average Rate

Impaired loans

Collateral valuations

Discount to appraised value

8
%

13
%

Items measured at fair value on a nonrecurring basis – The following table presents financial assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at the dates indicated:

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands)									Level 1		Level 2		Level 3		Total Fair Value
June 30, 2018
										(dollars in thousands; unaudited)
June 30, 2023									June 30, 2023

Equity securities									Equity securities	$	—	$	—	$	2,572	$	2,572
Total									Total	$	—	$	—	$	2,572	$	2,572

December 31, 2022									December 31, 2022
Impaired loans	$	-	$	-	$	493	$	493	Impaired loans	$	—	$	—	$	7,080	$	7,080
Equity securities									Equity securities	—		—		2,572		2,572
Total	$	-	$	-	$	493	$	493	Total	$	—	$	—	$	9,652	$	9,652
December 31, 2017
Impaired loans	$	-	$	-	$	508	$	508
Total	$	-	$	-	$	508	$	508

The amounts disclosed above represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported on.

~~Impaired~~

Individually evaluated loans - AFair values for individually evaluated loans are estimated using the fair value of the collateral less selling costs if the loan results in a Level 3 classification. Individually evaluated loan amounts are initially valued at the lower of cost or fair value. Individually evaluated loans carried at fair value generally receive specific

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allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is ~~considered impaired when it is probable that payment~~commonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of ~~interest~~approaches including comparable sales and ~~principal will not be~~the income approach. Adjustments are routinely made in ~~accordance with~~ the ~~contractual terms~~appraisal process by the independent appraisers to adjust for differences between the comparable sales and income data available. Such adjustments are usually significant and typically result in a Level 3 classification of the ~~loan agreement. Impairment~~inputs for determining fair value. Non-real estate collateral may be valued using an appraisal, net book value per the borrower’s financial statements, or aging reports, adjusted or discounted based on management’s historical knowledge, changes in market conditions from the time of the valuation, and management’s expertise and knowledge of the client and client’s business, resulting in a Level 3 fair value classification. Individually evaluated loans are evaluated on a quarterly basis for additional credit losses and adjusted accordingly. The estimated fair values of financial instruments disclosed above follow the guidance in ASU 2016-01 which prescribes an “exit price” approach in estimating and disclosing fair value of financial instruments incorporating discounts for credit, liquidity, and marketability factors. Valuation is measured based on the fair value of the underlying collateral or the discounted cash expected future cash flows. Subsequent changes in the value of ~~impaired~~ loans are included within the provision for ~~loan~~credit losses - loans in the same manner in which ~~impairment~~it initially was recognized or as a reduction in the provision that would otherwise be reported. ~~Impaired loans~~Loans are evaluated quarterly to determine if valuation adjustments should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the ~~impaired~~individually evaluated loan is less than the carrying value of the loan, the Company either establishes an ~~impairment~~ reserve as a specific component of the allowance for ~~loan~~credit losses or charges off ~~the impairment~~that amount. These valuation adjustments are considered nonrecurring fair value adjustments.

Equity securities – The Company measures equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer, with price changes recognized in earnings.

Assets measured at fair value using significant unobservable inputs (Level 3)

The following table presents the carrying value of equity securities without readily determinable fair values, as of June 30, 2023, with adjustments recorded during the periods presented for those securities with observable price changes, if applicable. These equity securities are included in other investments on the balance sheet.


	For the Three Months Ended June 30,				For the Six Months Ended June 30,
(dollars in thousands; unaudited)	2023		2022		2023		2022
Carrying value, beginning of period	$	2,572	$	2,672	$	2,572	$	2,322
Purchases	—		—		—		350
Observable price change	—		—		—		—
Carrying value, end of period	$	2,572	$	2,672	$	2,572	$	2,672

(unaudited)

Valuation Technique

Unobservable Inputs

December 31, 2022

Weighted

Average Rate

Impaired loans

Collateral valuations

Discount to appraised value

8.0%

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Note 9 - Earnings Per Common Share

The following is a computation of basic and diluted earnings per common share at the periods indicated:


	Three months ended				Six months ended					Three Months Ended				Six Months Ended
	June 30, 2018		June 30, 2017		June 30, 2018		June 30, 2017			June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
	(dollars in thousands, except share data)				(dollars in thousands, except share data)					(dollars in thousands, except earnings per share data; unaudited)
Net Income	$	2,201	$	1,876	$	4,044	$	3,189	Net Income	$	12,906	$	10,176	$	25,297	$	16,406
Basic weighted average number common shares outstanding		9,263,302		9,233,738		9,253,095		9,232,444	Basic weighted average number common shares outstanding	13,275,640		12,928,061		13,236,517		12,913,485
Dilutive effect of share-based compensation		19,514		3,077		12,552		3,077
Diluted weighted average number common shares oustanding		9,282,816		9,236,815		9,265,647		9,235,521
Dilutive effect of equity-based awards									Dilutive effect of equity-based awards	322,123		513,952		367,077		545,221
Diluted weighted average number common shares outstanding									Diluted weighted average number common shares outstanding	13,597,763		13,442,013		13,603,594		13,458,706
Basic earnings per share	$	0.24	$	0.20	$	0.44	$	0.35	Basic earnings per share	$	0.97	$	0.79	$	1.91	$	1.27
Diluted earnings per share	$	0.24	$	0.20	$	0.44	$	0.35	Diluted earnings per share	$	0.95	$	0.76	$	1.86	$	1.22
Antidilutive stock options and restricted stock outstanding									Antidilutive stock options and restricted stock outstanding	229,436		299,743		177,364		234,649

~~For~~

Under the ~~three~~two-class method, earnings available to common shareholders for the period are allocated between common shareholders and ~~six month periods ended June 30, 2018~~participating securities according to dividends declared (or accumulated) and ~~2017,~~participation rights in undistributed earnings, however the difference in ~~earnings per share under~~ the two-class method was not significant. ~~Options~~

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Note 10 – Segment Reporting

As defined in ASC 280, Segment Reporting, an operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to ~~purchase~~make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluate performance based on an ~~additional 701,848~~internal performance measurement accounting system, which provides line of business results. This system uses various techniques to assign balance sheet and ~~648,936 shares~~income statement amounts to the business segments, including allocations of ~~common stock,~~income and expense. A primary objective of this measurement system and related internal financial reporting practices are to produce consistent results that reflect the underlying financial impact of the segments on the Company and to provide a basis of support for strategic decision making. The accounting policies applicable to our segments are those that apply to our preparation of the accompanying Consolidated Financial Statements. Based on these criteria, we have identified three segments: the community bank, CCBX, and treasury & administration. The community bank segment includes all community banking activities, with a primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 22 partners as of June 30, ~~2018~~2023. The treasury & administration segment includes investments, debt and ~~2017, respectively, were~~other reporting items that are not ~~included~~specific to the community bank or CCBX segments.

The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data.Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. The Company continues to evaluate its methodology on allocating items to the Company’s various segments to support strategic business decisions by the Company’s executive leadership. Income and expenses that are specific to a segment are directly posted to each segment. Additionally, certain indirect expenses are allocated to each segment utilizing various metrics, such as number of employees, utilization of space, and allocations based on loan and deposit balances. We have implemented a transfer pricing process that credits or charges the community bank and CCBX segments with intrabank interest income or expense for the difference in average loans and average deposits, with the treasury & administration segment as the offset for those entries.

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Summarized financial information concerning the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the ~~computation~~following tables for the periods indicated:


	June 30, 2023								December 31, 2022
	Community Bank		CCBX		Treasury & Administration		Total		Community Bank		CCBX		Treasury & Administration		Total
Assets	(dollars in thousands; unaudited)
Cash and Due from Banks	$	4,382	$	7,179	$	263,499	$	275,060	$	4,603	$	12,899	$	324,637	$	342,139
Intrabank assets	—		304,408		(304,408)		—		—		254,096		(254,096)		—
Securities	—		—		110,730		110,730		—		—		98,353		98,353
Loans held for sale	—		35,923		—		35,923		—		—		—		—
Total loans receivable	1,713,034		1,294,519		—		3,007,553		1,614,752		1,012,504		—		2,627,256
Allowance for credit losses	(20,653)		(90,109)		—		(110,762)		(20,636)		(53,393)		—		(74,029)
All other assets	27,164		131,260		58,355		216,779		25,508		76,111		49,129		150,748
Total assets	$	1,723,927	$	1,683,180	$	128,176	$	3,535,283	$	1,624,227	$	1,302,217	$	218,023	$	3,144,467
Liabilities
Total deposits	$	1,509,458	$	1,653,114	$	—	$	3,162,572	$	1,538,218	$	1,279,303	$	—	$	2,817,521
Total borrowings	—		—		47,658		47,658		—		—		47,587		47,587
Intrabank liabilities	207,651		—		(207,651)		—		80,392		—		(80,392)		—
All other liabilities	6,818		30,066		15,507		52,391		5,617		22,914		7,334		35,865
Total liabilities	$	1,723,927	$	1,683,180	$	(144,486)	$	3,262,621	$	1,624,227	$	1,302,217	$	(25,471)	$	2,900,973

Table of ~~diluted earnings per common share because their effect resulted in them being anti-dilutive.~~

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	Three months ended June 30, 2023								Three months ended June 30, 2022
	Community Bank		CCBX		Treasury & Administration		Total		Community Bank		CCBX		Treasury & Administration		Total
	(dollars in thousands; unaudited)
Net interest income, before intrabank transfer	$	22,904	$	36,620	$	2,826	$	62,350	$	18,568	$	19,926	$	1,392	$	39,886
Interest income (expense) intrabank transfer	(2,490)		3,487		(997)		—		303		532		(835)		—
(Recapture)/Provision for credit losses - loans	(47)		52,645		—		52,598		108		13,986		—		14,094
(Recapture)/Provision for unfunded commitments	(340)		(5)		—		(345)		—		—		—		—
Noninterest income (1)	1,613		56,718		264		58,595		1,355		24,048		89		25,492
Noninterest expense	9,592		35,196		7,122		51,910		7,721		24,527		5,921		38,169
Net income before income taxes	12,822		8,989		(5,029)		16,782		12,397		5,993		(5,275)		13,115
Income taxes	2,949		2,089		(1,162)		3,876		2,777		1,344		(1,182)		2,939
Net Income	$	9,873	$	6,900	$	(3,867)	$	12,906	$	9,620	$	4,649	$	(4,093)	$	10,176

(1)For the three months ended June 30, 2023, CCBX noninterest income includes credit enhancements of $51.0 million, fraud enhancements of $1.5 million, and BaaS program income of $3.9 million. For the three months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $14.2 million, fraud enhancements of $6.5 million and BaaS program income of $3.2 million.

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	Six Months Ended June 30, 2023								Six Months Ended June 30, 2022
	Community Bank		CCBX		Treasury & Administration		Total		Community Bank		CCBX		Treasury & Administration		Total
	(dollars in thousands; unaudited)
Net interest income, before intrabank transfer	$	44,582	$	66,415	$	5,844	$	116,841	$	35,773	$	31,799	$	1,582	$	69,154
Interest income (expense) intrabank transfer	(3,569)		6,139		(2,570)		—		431		730		(1,161)		—
Provision for credit losses - loans	381		95,761		—		96,142		452		26,584		—		27,036
(Recapture)/Provision for unfunded commitments	(203)		11		—		(192)		—		—		—		—
Noninterest income(1)	2,704		104,798		400		107,902		2,912		44,389		177		47,478
Noninterest expense	18,685		63,634		14,254		96,573		15,367		42,934		10,283		68,584
Net income before income taxes	$	24,854	$	17,946	$	(10,580)	$	32,220	$	23,297	$	7,400	$	(9,685)	$	21,012
Income taxes	5,340		3,856		(2,273)		6,923		5,103		1,626		(2,123)		4,606
Net Income	19,514		14,090		(8,307)		25,297		18,194		5,774		(7,562)		16,406

(1)For the six months ended June 30, 2023, CCBX noninterest income includes credit enhancements of $93.4 million, fraud enhancements of $3.5 million and BaaS program income of $7.5 million. For the six months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $27.3 million, fraud enhancements of $11.0 million and BaaS program income of $5.7 million.

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Item 2. Management’s Discussion and An~~alysis o~~fAnalysis of Financial Condition and Results of Operations

Overview

~~Coastal Financial Corporation (the “Company”) is~~

We are a bank holding company that operates through ~~its~~our wholly owned ~~subsidiary,~~subsidiaries, Coastal Community Bank ~~(the “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. WeOur business is conducted through three reportable segments: The community bank CCBX and treasury & administration. The community bank segment includes all community banking activities, with a

primary focus on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of ~~Washington.~~Washington and through the Internet and our mobile banking application. We currently operate 1314 full-service banking locations, 1012 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and ~~three~~two of which are located in neighboring counties (one in King County and ~~two~~one in Island County).

The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 22 partners as of June 30, 2023. The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

As of June 30, 2023, we had total assets of $3.54 billion, total loans receivable of $3.01 billion, total deposits of $3.16 billion and total shareholders’ equity of $272.7 million.

The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relate to activities primarily conducted by the Bank.

~~As a bank holding company that operates through one segment, community banking, we~~

We generate most of our community bank revenue from interest on loans and ~~investments.~~CCBX revenue from BaaS fee income and interest on loans. Our primary source of funding for our loans is commercial and retail ~~deposits.~~deposits from our customer relationships and from our partner deposit relationships. We place secondary reliance on wholesale funding, primarily borrowings from the Federal Home Loan Bank (“FHLB”). Less commonly used sources of funding include borrowings from the Federal Reserve System (“Federal Reserve”) discount window, draws on established federal funds lines from unaffiliated commercial banks, brokered funds, which allows us to obtain deposits from sources that do not have a relationship with the Bank and can be obtained through certificate of deposit listing services, via the internet or ~~FHLB.~~through other advertising methods, or a one-way buy through an insured cash sweep (“ICS”) account, which allows us to obtain funds from other institutions that have deposited funds through ICS. Our largest expenses are provision for credit losses - loans, BaaS loan expense, BaaS fraud expense, salaries and ~~related~~ employee benefits, ~~occupancy,~~ interest on deposits and borrowings, legal and professional expenses and data ~~processing, and provision for loan losses.~~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.

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. 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. 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. Additionally, 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. The extent of final actions to be taken by the regulatory agencies in responses to these bank failures, including the potential changes discussed by the Vice Chair or highlighted in the Federal Reserve and FDIC reports, remain unclear.

Small Business Lending Data Collection Rule

On March 30, 2023, the CFPB finalized a ~~lesser extent residential real estate~~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. The rule is

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scheduled to take effect on August 29, 2023, and 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.

London Interbank Offered Rate (“LIBOR”) Transition

LIBOR, a benchmark interest rate that was widely referenced in the past, is no longer published after June 30, 2023. On December 16, 2022, the Federal Reserve Board adopted a final rule that implements the Adjustable Interest Rate (“LIBOR”) Act (the “LIBOR Act”) by identifying benchmark rates based on SOFR (Secured Overnight Financing Rate) that will replace LIBOR formerly known as the London Interbank Offered Rate, in certain financial contracts after June 30, 2023. Congress enacted the LIBOR Act, which was signed into law in March 2022, to provide a uniform, nationwide solution for so-called tough legacy contracts that do not have clear and practicable provisions for replacing LIBOR after June 30, 2023. The LIBOR Act also establishes a litigation safe harbor for lenders that select a LIBOR replacement under certain situations, including the use of a replacement rate selected by the Federal Reserve. As required by the law, the final rule identifies replacement benchmark rates based on SOFR to replace overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts subject to the Act. These contracts include U.S. contracts that do not mature before LIBOR ends and that lack adequate "fallback" provisions that would replace LIBOR with a practicable replacement benchmark rate. For more information on the Company’s approach to LIBOR transition planning, please see the risk factors discussed in the Company’s annual report on Form 10-K for the year ended December 31, 2022.

As of June 30, 2023, we had 44 loans totaling $196.6 million that are tied to LIBOR. We have $3.6 million in floating rate junior subordinated debentures to Coastal (WA) Statutory Trust I, which was formed for the issuance of trust preferred securities. These debentures have been tied to LIBOR, but beginning with rate adjustments that occur after June 30, 2023, the rate will be based off three-month CME Term SOFR plus 0.26%. The move to an alternate index may impact the rates we receive on loans and ~~consumer loans.~~

rates we pay on our junior subordinated debentures. We have identified the loans and debt instruments impacted, and we believe we will be able to use other benchmark replacements and transition protections provided by the LIBOR Act, Federal Reserve rule and relevant accounting guidance to manage through the transition away from LIBOR. We no longer issue any loans or debt tied to LIBOR.

Third Party Risk Management Guidance

On ~~July 20, 2018,~~June 6, 2023, the FDIC, the Federal Reserve and the OCC issued final guidance providing sound principles that support a risk-based approach to third-party risk management. The Company ~~closed~~is evaluating the impact of this guidance on its ~~initial public offering~~practices.

Financial Indicators

Below are a select number of ~~2,577,500 shares~~financial highlights from our second quarter.

•Deposits increased $67.3 million, or 2.2%, to $3.16 billion as of June 30, 2023 compared to March 31, 2023.

◦CCBX deposit growth of $89.3 million, or 5.7%, to $1.65 billion.

▪Additional $9.9 million in CCBX deposits transferred off balance sheet.

◦Community bank deposits decreased $21.9 million, or 1.4%, to $1.51 billion

▪Includes noninterest bearing deposits of $621.0 million or 41.1% of total community bank deposits.

▪Community bank cost of deposits was 0.98%.

◦Uninsured deposits of $632.1 million, or 20.0% of total deposits as of June 30, 2023, compared to $768.3 million, or 24.8% of total deposits as of March 31, 2023.

•Total revenue increased $17.1 million, or 16.5%, for ~~net proceeds~~the three months ended June 30, 2023, compared to the three months ended March 31, 2023

•Total revenue excluding Banking as a Service ("BaaS") credit enhancements and BaaS fraud enhancements increased $8.9 million, or 15.0%, to $68.4 million for the three months ended June 30, 2023, compared to the three months ended March 31, 2023. (A reconciliation of ~~$33.2 million. For further discussion see “Initial Public Offering – Capitalization~~this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”)

•Liquidity/Borrowings as of June 30, 2023:

◦Capacity to borrow up to $559.8 million from Federal Home Loan Bank and the Federal Reserve Bank discount window with no borrowings taken under these facilities during the quarter ended June 30, 2023.

•Investment Portfolio as of June 30, 2023:

◦Available for sale ("AFS") investments of $98.2 million, compared to $98.0 million as of March 31, 2023, of which 99.7% are U.S. Treasuries, with a weighted average remaining duration of 8 months as of June 30, 2023.

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◦Held to maturity ("HTM") investments of $12.6 million, of which 100% are U.S. Agency mortgage backed securities held for Community Reinvestment Act ("CRA") purposes, with a fair value of $404,000 less than the carrying value as of June 30, 2023 and a weighted average remaining duration of 6.7 years as of June 30, 2023.

•Net interest margin of 7.58% for the quarter ended June 30, 2023

•Cost of deposits of 2.72% for the quarter ended June 30, 2023.

Deposits increased $67.3 million, or 2.2%, during the three months ended June 30, 2023. Fully insured IntraFi network sweep deposits increased $146.0 million to $240.3 million as of June 30, 2023, compared to $94.3 million as of March 31, 2023.

These fully insured sweep deposits allow our larger deposit customers to fully insure their deposits through a sweep and exchange of deposits with other financial institutions. Our liquidity position is supported by diligent management of our liquid assets and liabilities as well as maintaining access to alternative sources of funds. As of June 30, 2023 we had $275.1 million in cash on the balance sheet and the capacity to borrow up to $559.8 million from Federal Home Loan Bank and the Federal Reserve Bank discount window. We did not draw down on either facility at any point in the six months ending June 30, 2023.Cash on the balance sheet and borrowing capacity total $834.8 million and represented 26.4% of total deposits and exceeded our $632.1 million in uninsured deposits as of June 30, 2023. Our AFS securities portfolio has a weighted average remaining duration of just 8 months and U.S. Treasury securities represent 99.7% of that portfolio as of June 30, 2023. Unrealized losses on the AFS securities portfolio were just $2.1 million, or 0.78%, of shareholders' equity as of June 30, 2023.

Results of Operations

Net Income

Comparison of ~~Operating Results for~~ the ~~Three Months Ended~~quarter ended June 30, ~~2018 and June 30, 2017~~

~~Net Income~~

2023 to the comparable quarter in the prior year

Net income for the three months ended June 30, ~~2018,~~2023 was ~~$2.2~~$12.9 million, or ~~$0.24~~$0.95 per diluted share, compared to ~~$1.9~~$10.2 million, or ~~$0.20~~$0.76 per diluted share, for the three months ended June 30, ~~2017.~~2022. The increase in net income over the comparable period in the prior year was primarily attributable to a ~~$1.1~~$41.9 million increase in ~~net~~ interest income ~~primarily arising from increased interest-earning assets from our loan growth initiatives, as well as a $192,000~~and $33.1 million increase in fee income from raising our deposit service charges and fees and revenue from loan referral fees and $336,000 in lower taxes resulting from the decrease in the corporate tax rate under the Tax Cuts and Jobs Act.noninterest income. These ~~positive factors~~ were partially offset by ~~a $891,000~~an increase in the provision for credit losses - loans of $38.5 million, related to CCBX loan growth, and $13.7 million more in noninterest expense, also largely related to CCBX loan growth, and increases in salary expense and professional fees. 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 loan 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.”

Comparison of the six months ended June 30, 2023 to the comparable period in the prior year

Net income for the six months ended June 30, 2023 was $25.3 million, or $1.86 per diluted share, compared to $16.4 million, or $1.22 per diluted share, for the six months ended June 30, 2022. The increase in net income over the comparable period in the prior year was primarily attributable to a $81.8 million increase in interest income and $60.4 million increase in noninterest income. These were partially offset by an increase in the provision for credit losses - loans of $69.1 million, related primarily to CCBX loan growth, and $28.0 million more in noninterest expense.

The increase in noninterest income, provision expense and noninterest expense are largely related to CCBX loan and deposit growth.

Net Interest Income

Comparison of the quarter ended June 30, 2023 to the comparable quarter in the prior year

Net interest income for the three months ended June 30, ~~2018,~~2023 was ~~$8.3~~$62.4 million, compared to ~~$7.2~~$39.9 million for the three months ended June 30, ~~2017,~~2022, an increase of ~~$1.1~~$22.5 million, or ~~15.3%~~56.3%. ~~The increase in net interest income consisted of a $1.3 million, or 16.5%, increase in interest income~~ ~~partially~~ ~~offset by a $251,000, or 34.9%, increase in interest expense.~~

~~The growth in interest income~~Yield on loans receivable was ~~primarily attributable to a $81.8 million, or 13.5%, increase in average loans outstanding~~10.85% for the three months ended June 30, ~~2018,~~2023, compared to the prior year, combined with a 12 basis point increase in the yield on total loans. We have continued to focus on our loan growth initiatives, including the deepening of relationships with existing customers and developing new loan and deposit relationships. We have also focused on organically growing loans through our existing lenders and by adding new lenders to assist with our efforts.

~~The increase in interest expense~~7.34% for the three months ended June 30, ~~2018,~~2022. The increase in net interest income compared to the quarter ended June 30, 2022 was ~~primarily~~largely related to ~~a 15 basis point~~increased yield on loans from growth in higher yielding loans, primarily from CCBX, and the overall increase in interest rates resulting from the Federal Open Market Committee (“FOMC”) raising rates 3.50% since June 30, 2022 to 5.25%, with the last increase during such period on

May 3, 2023. As of June 30, 2022, the FOMC had set the interest rates at 1.75%. This increase in interest rates impacts our existing variable rate loans as well as rates on new loans. We continue to monitor the impact of these increases in interest rates. Total average loans receivable for the three months ended June 30, 2023 was $2.97 billion, compared to $2.19 billion for the three months ended June 30, 2022.

Total interest and fees on loans totaled $80.2 million for the three months ended June 30, 2023 compared to $40.2 million for the three months ended June 30, 2022. The $40.0 million increase in interest and fees on loans for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022, was largely due to increased yield on loans from growth in higher yielding loans, primarily from CCBX, combined with the overall increase in interest rates. Total loans receivable was $3.01 billion at June 30, 2023, compared to $2.33 billion at June 30, 2022. CCBX loan growth was strong during the quarter with average loans receivable of $1.27 billion for the quarter ended June 30, 2023, compared to $691.3 million for the quarter ended June 30, 2022, an increase of $578.1 million, or 83.6%. Average CCBX yield of 16.95% was earned on CCBX loans for the quarter ended June 30, 2023, compared to 12.35% for the quarter ended June 30, 2022. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Also impacting the increase in loan interest is the increase in interest rates on variable rate loans resulting from the FOMC raising rates. The FOMC has increased interest rates from 1.75% as of June 30, 2022 to 5.25% as of June 30, 2023. We continue to monitor the impact of these increases in interest rates.

Interest income from interest earning deposits with other banks was $2.7 million for the quarter ended June 30, 2023, an increase of $1.7 million, or 180.1%, due to higher interest rates, compared to the quarter ended June 30, 2022. The average balance of interest earning deposits invested with other banks for the three months ended June 30, 2023 was $211.4 million, compared to $499.9 million for the three months ended June 30, 2022. This decrease was a result of increased loan demand. The yield on these interest earning deposits with other banks increased 4.31%, to 5.08% compared to 0.77% at June 30, 2022. Interest income on investment securities increased $90,000 to $653,000 at June 30, 2023, compared to $563,000 at June 30, 2022. Average investment securities decreased $10.9 million from $121.3 million for the three months ended June 30, 2022, to $110.3 million for the three months ended June 30, 2023, and, as a result of higher interest rates, average yield increased to 2.37% for the three months ended June 30, 2023, compared to 1.86% for the three months ended June 30, 2022.

Interest expense was $21.3 million for the quarter ended June 30, 2023, a $19.4 million increase from the quarter ended June 30, 2022. Interest expense on deposits was $20.7 million for the quarter ended June 30, 2023, compared to $1.7 million for the quarter ended June 30, 2022. The $19.0 million increase in interest expense on deposits was due to an increase of $534.6 million in interest bearing deposits as well as a 3.19% increase in interest rates on deposit accounts. Interest on borrowed funds was $661,000 for the quarter ended June 30, 2023, compared to $260,000 for the quarter ended June 30, 2022. The $401,000 increase in interest expense on borrowed funds from the quarter ended June 30, 2022 is the result of an average balance increase of $19.7 million in subordinated debt, which increased during the quarter ended December 31, 2022, and an increase in interest rates. Interest expense on interest bearing deposits increased compared to the quarter ended June 30, 2022 as a result of an increase in CCBX deposits that are tied to, and reprice when, the FOMC raises rates, just like our CCBX loans which also reprice when the FOMC raises interest rates. Interest expense is expected to increase as a result of the FOMC increasing rates. Any additional FOMC interest rate increases will result in higher interest expense on interest bearing deposits which we expect will be primarily offset by higher interest rates on CCBX loans and excess cash invested in the Federal Reserve Bank or other banks.

Net interest margin was 7.58% for the three months ended June 30, 2023, compared to 5.66% for the three months ended June 30, 2022. The increase in net interest margin compared to the three months ended June 30, 2022 was largely due to an increase in total loans combined with higher interest rates on new and existing variable rate loans as they reprice. Average loans increased $770.5 million compared to the three months ended June 30, 2022. Also contributing to the increase in net interest margin compared to the three months ended June 30, 2022 was interest earning deposits invested in other banks, which earned an average rate of 5.08% for the quarter ended June 30, 2023, compared to an average rate of 0.77% for the quarter ended June 30, 2022.

Cost of funds was 2.77% for the quarter ended June 30, 2023, which is an increase of 2.48% from the quarter ended June 30, 2022. Cost of deposits for the quarter ended June 30, 2023 was 2.72%, which was an 2.47% increase, from 0.25% for the quarter ended June 30, 2022. These increases were largely due to an increase in higher cost CCBX deposits and a higher interest rate environment compared to June 30, 2022. CCBX deposit growth also contributed to the increase in interest expense.

Total yield on loans receivable for the quarter ended June 30, 2023 was 10.85%, compared to 7.34% for the quarter ended June 30, 2022. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. For the quarter ended June 30, 2023, average CCBX loans increased $578.1 million, or 83.6%, with an average CCBX yield of 16.95%, compared to 12.35% at the quarter ended June 30, 2022. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating &servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Average community bank loans increased $192.4 million, or 12.8%. This increase includes a decrease in average PPP loans of $29.9 million, compared to the quarter ended June 30, 2022. Average yield on community bank loans for the three months ended June 30, 2023 was 6.28% compared to 5.04% for the three months ended June 30, 2022.

The following tables show the average yield on loans and cost of ~~interest-bearing~~ deposits ~~combined with~~by segment and also illustrates the impact of BaaS loan expense on CCBX yield on loans:


	For the Three Months Ended
	June 30, 2023		June 30, 2022
(unaudited)	Yield on Loans (2)	Cost of Deposits (2)	Yield on Loans (2)	Cost of Deposits (2)
Community Bank	6.28%	0.98%	5.04%	0.08%
CCBX(1)	16.95%	4.42%	12.35%	0.56%
Consolidated	10.85%	2.72%	7.34%	0.25%

(1)CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans. See the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a ~~$41.9~~reconciliation of the impact of BaaS loan expense on CCBX yield on loans.

(2)Annualized calculations shown for periods presented.


	For the Three Months Ended
	June 30, 2023				June 30, 2022
(dollars in thousands, unaudited)	Income / Expense		Income / expense divided by average CCBX loans (2)		Income / Expense		Income / expense divided by average CCBX loans (2)
BaaS loan interest income	$	53,632	16.95	%	$	21,281	12.35	%
Less: BaaS loan expense	22,033		6.96	%	12,229		7.10	%
Net BaaS loan income (1)	$	31,599	9.98	%	$	9,052	5.25	%
Average BaaS Loans(3)	$	1,269,406			$	691,294

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

(2)Annualized calculations shown for periods presented.

(3)Includes loans held for sale.

For the three months ended June 30, 2023, net interest margin (net interest income divided by the average total interest earning assets) and net interest spread (average yield on total interest earning assets minus average cost of total interest bearing liabilities) were 7.58% and 6.57%, respectively, compared to 5.66% and 5.51%, respectively, for the three months ended June 30, 2022.

The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan costs included in interest income totaled $1.2 million and loan fees included in interest income totaled $1.2 million for the three months ended June 30, 2023 and 2022, respectively. For the three months ended June 30, 2023 and 2022, the amount of interest income not recognized on nonaccrual loans was not material.


	Average Balance Sheets For the Three Months Ended June 30,
	2023						2022
(dollars in thousands; unaudited)	Average Balance		Interest & Dividends		Yield / Cost (1)		Average Balance		Interest & Dividends		Yield / Cost (1)
Assets
Interest earning assets:
Interest earning deposits with other banks	$	211,369	$	2,678	5.08	%	$	499,918	$	956	0.77	%
Investment securities, available for sale (2)	100,278		534		2.14		119,975		554		1.85
Investment securities, held to maturity (2)	10,047		119		4.75		1,280		9		2.82
Other investments	11,773		156		5.31		10,225		134		5.26
Loans receivable (3)	2,965,287		80,199		10.85		2,194,761		40,166		7.34
Total interest earning assets	3,298,754		83,686		10.18		2,826,159		41,819		5.94
Noninterest earning assets:
Allowance for credit losses	(87,713)						(46,354)
Other noninterest earning assets	194,747						115,788
Total assets	$	3,405,788					$	2,895,593

Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	2,326,702	$	20,675	3.56	%	$	1,792,119	$	1,673	0.37	%


Subordinated debt	44,047		596		5.43		24,313		231		3.81
Junior subordinated debentures	3,589		65		7.26		3,587		29		3.24
Total interest bearing liabilities	2,374,338		21,336		3.60		1,820,019		1,933		0.43
Noninterest bearing deposits	717,256						839,562
Other liabilities	49,085						19,550
Total shareholders' equity	265,109						216,462
Total liabilities and shareholders' equity	$	3,405,788					$	2,895,593
Net interest income			$	62,350					$	39,886
Interest rate spread					6.57	%					5.51	%
Net interest margin (4)					7.58	%					5.66	%

(1)Yields and costs are annualized.

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

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

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

The following table presents an analysis of certain average balances, interest income and interest expense by segment:


	For the Three Months Ended
	June 30, 2023						June 30, 2022
(dollars in thousands, unaudited)	Average Balance		Interest & Dividends		Yield / Cost (1)		Average Balance		Interest & Dividends		Yield / Cost (1)
Community Bank
Assets
Interest earning assets:
Loans receivable (2)	$	1,695,881	$	26,567	6.28	%	$	1,503,467	$	18,885	5.04	%
Intrabank asset	—		—		—		158,607		303		0.77
Total interest earning assets	1,695,881		26,567		6.28		1,662,074		19,188		4.63
Liabilities
Interest bearing liabilities:
Interest bearing deposits	$	875,760	$	3,663	1.68	%	$	921,499	$	317	0.14	%
Intrabank liability	196,552		2,490		5.08		—		—		—
Total interest bearing liabilities	1,072,312		6,153		2.30		921,499		317		0.14
Noninterest bearing deposits	623,570						740,575
Net interest income			$	20,414					$	18,871

Net interest margin(3)					4.83	%					4.55	%

CCBX
Assets
Interest earning assets:
Loans receivable (2)(4)	$	1,269,406	$	53,632	16.95	%	$	691,294	$	21,281	12.35	%
Intrabank asset	275,222		3,487		5.08		278,312		532		0.77
Total interest earning assets	1,544,628		57,119		14.83		969,606		21,813		9.02
Liabilities
Interest bearing liabilities:
Interest bearing deposits	$	1,450,942	$	17,012	4.70	%	$	870,620	$	1,356	0.62	%

Total interest bearing liabilities	1,450,942		17,012		4.70		870,620		1,356		0.62
Noninterest bearing deposits	93,686						98,987
Net interest income			$	40,107					$	20,457


Net interest margin(3)					10.41	%					8.46	%
Net interest margin, net of Baas loan expense (5)					4.69	%					3.40	%


	For the Three Months Ended
	June 30, 2023						June 30, 2022
(dollars in thousands, unaudited)	Average Balance		Interest & Dividends		Yield / Cost (1)		Average Balance		Interest & Dividends		Yield / Cost (1)
Treasury & Administration
Assets
Interest earning assets:
Interest earning deposits with other banks	$	211,369	$	2,678	5.08	%	$	499,918	$	956	0.77	%
Investment securities, available for sale (6)	100,278		534		2.14		119,975		554		1.85
Investment securities, held to maturity (6)	10,047		119		4.75		1,280		9		2.82
Other investments	11,773		156		5.31		10,225		134		5.26

Total interest earning assets	333,467		3,487		4.19		631,398		1,653		1.05	%
Liabilities
Interest bearing liabilities:

Subordinated debt	44,047		596		5.43		24,313		231		3.81
Junior subordinated debentures	3,589		65		7.26		3,587		29		3.24
Intrabank liability, net (7)	78,670		997		5.08		436,919		835		0.77
Total interest bearing liabilities	126,306		1,658		5.27		464,819		1,095		0.94
Net interest income			$	1,829					$	558

Net interest margin(3)					2.20	%					0.35	%

(1)Yields and costs are annualized.

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

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

(4)CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or ~~9.9%,~~payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. See the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a reconciliation of the impact of BaaS loan expense on CCBX loan yield.

(5)Net interest margin, net of BaaS loan expense includes the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, originating & servicing CCBX loans. A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

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

(7)Intrabank assets and liabilities are consolidated for period calculations and presented as intrabank asset, net or intrabank liability, net in the table above.

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. The table illustrates the $19.2 million increase in ~~average interest-bearing deposits over~~loan interest income that is attributed to an increase in loan rates and $20.8 million increase in loan interest income that is attributed to an increase in loan volume. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.


	Three months ended June 30, 2023 Compared to Three months ended June 30, 2022
	Increase (Decrease) Due to				Total Increase (Decrease)
(dollars in thousands; unaudited)	Volume		Rate
Interest income:
Interest earning deposits	$	(3,656)	$	5,378	$	1,722
Investment securities, available for sale	(105)		85		(20)
Investment securities, held to maturity	104		6		110
Other Investments	21		1		22
Loans receivable	20,840		19,193		40,033
Total increase in interest income	17,204		24,663		41,867

Interest expense:
Interest bearing deposits	4,750		14,252		19,002


Subordinated debt	267		98		365
Junior subordinated debentures	—		36		36
Total increase in interest expense	5,017		14,386		19,403
Increase in net interest income	$	12,187	$	10,277	$	22,464

Comparison of the ~~same~~six months ended June 30, 2023 to the comparable period in the prior ~~year.~~year

Net interest income for the six months ended June 30, 2023, was $116.8 million, compared to $69.2 million for the six months ended June 30, 2022, an increase of $47.7 million, or 69.0%. Yield on loans receivable was 10.42% for the six months ended June 30, 2023, compared 7.10% for the six months ended June 30, 2022. The increase in net interest income compared to the ~~cost~~six months ended June 30, 2022 was largely related to increased yield on loans from growth in higher yielding loans primarily from CCBX and higher interest rates. Total average loans receivable for the six months ended June 30, 2023 was $2.84 billion, compared to $1.98 billion for the six months ended June 30, 2022.

Interest and fees on loans totaled $146.6 million for the six months ended June 30, 2023 compared to $69.8 million for the six months ended June 30, 2022. The $76.8 million increase in interest and fees on loans for the six months ended June 30, 2023, compared to the six months ended June 30, 2022, was largely due to increased yield on loans from growth in higher yielding CCBX loans and an overall increase in interest rates. Loan growth of $673.2 million, or 28.8%, for the six months ended June 30, 2023, compared to June 30, 2022, includes a decrease of $12.8 million in PPP loans that were forgiven or repaid. CCBX average loans receivable grew to $1.17 billion for the six months ended June 30, 2023, compared to $537.6 million for the six months ended June 30, 2022, an increase of $629.8 million, or 117.2%. Average CCBX yield of 16.56% was earned on CCBX loans for the six months ended June 30, 2023, compared to 12.48% for the six months ended June 30, 2022. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating &servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Also impacting the increase in loan interest is the increase in interest rates on variable rate loans resulting from the FOMC raising rates from 1.75% as of June 30, 2022 to 5.25% as of June 30, 2023, with the most recent increase during such period on May 3, 2023. We continue to monitor the impact of these increases in interest rates.

Table of Contents,

Interest income from interest earning deposits with other banks was $5.8 million for the six months ended June 30, 2023, an increase of $4.4 million due to higher interest rates, despite a decrease in balances, compared to the six months ended June 30, 2022. The average balance of interest earning deposits invested with other banks for the six months ended June 30, 2023 was $241.4 million, compared to $671.0 million for the six months ended June 30, 2022. This decrease was a result of increased loan demand. Additionally, the yield on these interest earning deposits with other banks increased 4.41%, compared to the six months ended June 30, 2022. Interest income on investment securities increased $572,000 to $1.2 million, and a yield 2.29% at June 30, 2023, compared to $634,000, and a yield of 1.53%, at June 30, 2022. Average investment securities increased $22.6 million from $83.7 million for the six months ended June 30, 2022 to $106.3 million for the six months ended June 30, 2023 as a result of purchasing additional securities to hold for CRA purposes, and average yield increased to 2.29% for the six months ended June 30, 2023, compared to 1.53% for the six months ended June 30, 2022.

Interest expense was $37.0 million for the six months ended June 30, 2023, a $34.1 million increase from the six months ended June 30, 2022. Interest expense on deposits was $35.6 million for the six months ended June 30, 2023, compared to $2.2 million for the six months ended June 30, 2022. The $33.4 million increase in interest expense on deposits was primarily due to an increase in ~~the rate paid~~average interest bearing deposits of $735.3 million. Interest on ~~NOW and money market accounts and on time deposits, as market interest rates increased over the prior year. The increase in average interest-bearing deposits~~borrowed funds was $1.3 million for the ~~three~~six months ended June 30, ~~2018,~~2023, compared to $581,000 for the six months ended June 30, 2022. The $742,000 increase in interest expense on borrowed funds from the six months ended June 30, 2022 is the result of a decrease in average FHLB borrowings, which were paid off in full during the quarter ended March 31, 2022, partially offset by a $19.7 million average balance increase in subordinated debt, which increased during the quarter ended December 31, 2022. Interest expense is expected to increase as a result of the FOMC increasing the Fed Funds rate 0.75% during the six months ended June 30, 2023, with the most recent increase during such period on May 3, 2023. Interest expense is expected to increase as a result of the FOMC increasing rates. Any additional FOMC interest rate increases will result in higher interest expense on interest bearing deposits which we expect will be primarily offset by higher interest rates on CCBX loans and excess cash invested in the Federal Reserve Bank or other banks.

Net interest margin was 7.37% for the six months ended June 30, 2023, compared to 5.08% for the six months ended June 30, 2022. The increase in net interest margin compared to the same period in 2017 is attributable to growth in all deposit categories. The average balance of NOW and money market accounts grew $13.3 million, or 4.3%, the average balance of savings accounts grew $6.5 million, or 16.0%, and the average balance of customer time deposits grew $22.2 million, or 32.2%. We do not regularly advertise time deposit rates or money market rates, although we occasionally advertise promotional rates in targeted portions of our market area. Our branch managers, business development officers, and lenders collaborate to provide consistent and coordinated customer service and to seek deposits from new and existing customers.

~~For the three~~six monthsended June 30, ~~2018,~~2022 was largely a result of an increase in higher rate loans. Average loans increased $854.7 million, compared to the six months ended June 30, 2022; the increase includes an average decrease in PPP loans of $52.6 million. Also contributing to the increase in net interestmargin~~(annualized~~ compared to the six months ended June 30, 2022 was a $4.4 million increase in interest earned on interest earning deposits invested in other banks. These interest earning deposits earned an average rate of 4.82% for the six months ended June 30, 2023, compared to an average rate of 0.41% for the six months ended June 30, 2022.

Cost of funds was 2.49% for the six months ended June 30, 2023, compared to 0.22% for the six months ended June 30, 2022. Cost of deposits for the six months ended June 30, 2023 was 2.44%, which was a 2.26% increase, from 0.18% for the six months ended June 30, 2022. These increases were largely due to an increase in interest rates and an increase in interest bearing deposits. CCBX deposit growth also contributed to the increase in interest expense.

Total yield on loans receivable for the six months ended June 30, 2023 was 10.42%, compared to 7.10% for the six months ended June 30, 2022. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. For the six months ended June 30, 2023, average CCBX loans increased $629.8 million, or 117.2%, with an average CCBX yield of 16.56%, compared to 12.48% for the six months ended June 30, 2022. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements andoriginating & servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. There was an increase in average community bank loans of $225.0 million, or 15.6%, which includes an average $52.6 million decrease in PPP loans as a result of loan forgiveness/ repayments, compared to the six months ended June 30, 2022. Average yield on community bank loans for the six months ended June 30, 2023 was 6.13%. compared to 5.10% for the six months ended June 30, 2022.

Table of Contents,

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


	For the Six Months Ended
	June 30, 2023		June 30, 2022
(unaudited)	Yield on Loans (2)	Cost of Deposits (2)	Yield on Loans (2)	Cost of Deposits (2)
Community Bank	6.13%	0.82%	5.10%	0.09%
CCBX (1)	16.56%	4.18%	12.48%	0.34%
Consolidated	10.42%	2.44%	7.10%	0.18%

(1)CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans. A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

(2)Annualized calculations shown for periods presented.


	For the Six Months Ended
	June 30, 2023				June 30, 2022
(dollars in thousands; unaudited)	Income / Expense		Income / expense divided by average CCBX loans (2)		Income / Expense		Income / expense divided by average CCBX loans (2)
BaaS loan interest income	$	95,851	16.56	%	$	33,273	12.48	%
Less: BaaS loan expense	39,587		6.84	%	20,519		7.70	%
Net BaaS loan income (1)	$	56,264	9.72	%	$	12,754	4.78	%
Average BaaS Loans(3)	$	1,167,366			$	537,577

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

(2)Annualized calculations shown for periods presented.

(3)Includes loans held for sale.

For the six months ended June 30, 2023, net interest margin (net interest incomedividedby the averagetotal~~interest-earning~~ interest earning assets) and net interestspread~~(average~~ (average yieldon total~~interest-earning~~ interest earning assetsminusaveragecost of total~~interest-bearing~~ interest bearing liabilities)were ~~4.26%~~7.37% and ~~3.96%~~6.39%, respectively,comparedto ~~4.12%~~5.08% and ~~3.89%~~4.90%, respectively, for the ~~three~~six monthsended June 30, ~~2017.~~

2022.

Table of Contents,

The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan fees included in interest income totaled ~~$321,000~~$2.3 million and ~~$152,000~~$4.0 million for the ~~three~~six months ended June 30, ~~2018~~2023 and ~~2017,~~2022, respectively. For the ~~three~~six months ended June 30, ~~2018~~2023 and ~~2017,~~2022, the amount of interest income not recognized on nonaccrual loans was not material.

Average balance sheets

For the Three Months Ended June 30,

2018

2017

Average

Interest &

Yield /

Average

Interest &

Yield /

(Dollars in thousands)

Balance

Dividends

Cost (4)

Balance

Dividends

Cost (4)

Assets:

Interest earning assets:

Interest-bearing deposits

$
50,750

$
236

1.87
%

$
56,240

$
149

1.06
%
Investment securities, available for sale (1)

38,325

148

1.55

34,604

122

1.41

Investment securities, held to maturity (1)

1,317

7

2.13

1,684

10

2.38

Other Investments

3,200

62

7.77

2,975

63

8.49

Loans receivable (2)

688,975

8,778

5.11

607,197

7,557

4.99

Total interest earning assets

782,567

9,231

4.73
%

702,700

7,901

4.51
%
Noninterest earning assets:

Allowance for loan losses

(8,522
)

(7,861
)

Other noninterest earning assets

36,277

38,094

Total assets

$
810,322

$
732,933

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest-bearing deposits

$
464,133

$
712

0.62
%

$
422,166

$
492

0.47
%
FHLB advances and other borrowings

5,972

30

2.01

2,544

7

1.10

Subordinated debt

9,955

147

5.92

9,941

148

5.97

Junior subordinated debentures

3,580

39

4.37

3,578

30

3.36

Total interest-bearing liabilities

483,640

928

0.77
%

438,229

677

0.62
%
Noninterest bearing deposits

255,615

229,084

Other liabilities

2,610

2,889

Total shareholders' equity

68,457

62,731

Total liabilities and shareholders' equity

$
810,322

$
732,933

Net interest income

$
8,303

$
7,224

Interest rate spread

3.96
%

3.89
%
Net interest margin (3)

4.26
%

4.12
%

~~(1)~~

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

~~(2)~~

~~Includes nonaccrual loans.~~


	Average Balance Sheets For the Six Months Ended June 30,
	2023						2022
(dollars in thousands; unaudited)	Average Balance		Interest & Dividends		Yield / Cost (1)		Average Balance		Interest & Dividends		Yield / Cost (1)
Assets
Interest earning assets:
Interest earning deposits with other banks	$	241,368	$	5,775	4.82	%	$	670,974	$	1,358	0.41	%
Investment securities, available for sale (2)	100,276		1,069		2.15		82,431		615		1.50
Investment securities, held to maturity (2)	6,023		137		4.59		1,286		19		2.98
Other investments	11,206		186		3.35		9,729		171		3.54
Loans receivable (3)	2,837,442		146,630		10.42		1,982,700		69,798		7.10
Total interest earning assets	3,196,315		153,797		9.70		2,747,120		71,961		5.28
Noninterest earning assets:
Allowance for credit losses	(84,417)						(38,554)
Other noninterest earning assets	183,516						104,159
Total assets	$	3,295,414					$	2,812,725

Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	2,199,168	$	35,633	3.27	%	$	1,463,875	$	2,226	0.31	%

FHLB advances and borrowings	—		—		0.00		12,154		69		1.14
Subordinated debt	44,028		1,195		5.47		24,304		461		3.83
Junior subordinated debentures	3,588		128		7.19		3,587		51		2.87
Total interest bearing liabilities	2,246,784		36,956		3.32		1,503,920		2,807		0.38
Noninterest bearing deposits	746,436						1,078,525
Other liabilities	43,299						17,790
Total shareholders' equity	258,895						212,490
Total liabilities and shareholders' equity	$	3,295,414					$	2,812,725
Net interest income			$	116,841					$	69,154
Interest rate spread					6.39	%					4.90	%
Net interest margin (4)					7.37	%					5.08	%

~~(3)~~

~~Net interest margin represents annualized net interest income divided by average total interest-earning assets.~~

(1)Yields and costs are annualized.

~~(4)~~

~~Yields and rates are annualized.~~

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

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

Table of Contents,

The followingtablepresents an analysis of certain average balances, interest income and interest expense by segment:


	For the Six Months Ended
	June 30, 2023						June 30, 2022
(dollars in thousands; unaudited)	Average Balance		Interest & Dividends		Yield / Cost (1)		Average Balance		Interest & Dividends		Yield / Cost (1)
Community Bank
Assets
Interest earning assets:
Loans receivable (2)	$	1,670,076	$	50,779	6.13	%	$	1,445,123	$	36,525	5.10	%
Intrabank asset	—		—		0.00		213,207		431		0.41
Total interest earning assets	1,670,076		50,779		6.13		1,658,330		36,956		4.49
Liabilities
Interest bearing liabilities:
Interest bearing deposits	$	864,518	$	6,197	1.45	%	$	928,602	$	752	0.16	%
Intrabank liability	145,890		3,569		4.93		—		—		—
Total interest bearing liabilities	1,010,408		9,766		1.95		928,602		752		0.16
Noninterest bearing deposits	659,668						729,728
Net interest income			$	41,013					$	36,204

Net interest margin(3)					4.95	%					4.40	%


CCBX
Assets
Interest earning assets:
Loans receivable (2)(4)	$	1,167,366	$	95,851	16.56	%	$	537,577	$	33,273	12.48	%
Intrabank asset	254,052		6,139		4.87		346,493		730		0.42
Total interest earning assets	1,421,418		101,990		14.47		884,070		34,003		7.76
Liabilities
Interest bearing liabilities:
Interest bearing deposits	$	1,334,650	$	29,436	4.45	%	$	535,273	$	1,474	0.56	%

Total interest bearing liabilities	1,334,650		29,436		4.45		535,273		1,474		0.56
Noninterest bearing deposits	86,768						348,797
Net interest income			$	72,554					$	32,529


Net interest margin(3)					10.29	%					7.42	%
Net interest margin, net of Baas loan expense (5)					4.68	%					2.74	%

Table of Contents,


	For the Six Months Ended
	June 30, 2023						June 30, 2022
	Average Balance		Interest & Dividends		Yield / Cost (1)		Average Balance		Interest & Dividends		Yield / Cost (1)
Treasury & Administration
Assets
Interest earning assets:
Interest earning deposits with other banks	$	241,368	$	5,775	4.82	%	$	670,974	$	1,358	0.41	%
Investment securities, available for sale (6)	100,276		1,069		2.15		82,431		615		1.50
Investment securities, held to maturity (6)	6,023		137		4.59		1,286		19		2.98
Other investments	11,206		186		3.35		9,729		171		3.54

Total interest earning assets	358,873		7,167		4.03	%	764,420		2,163		0.57	%
Liabilities
Interest bearing liabilities:
FHLB advances and borrowings	$	—	$	—	0.00	%	$	12,154	$	69	1.14	%
Subordinated debt	44,028		1,195		5.47		24,304		461		3.83
Junior subordinated debentures	3,588		128		7.19		3,587		51		2.87
Intrabank liability, net (7)	108,162		2,570		4.79		559,700		1,161		0.42
Total interest bearing liabilities	155,778		3,893		5.04		599,745		1,742		0.59
Net interest income			$	3,274					$	421

Net interest margin(3)					1.84	%					0.11	%

(1)Yields and costs are annualized.

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

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

(4)CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. See the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a reconciliation of the impact of BaaS loan expense on CCBX loan yield.

(7)Intrabank assets and liabilities are consolidated for period calculations and presented as intrabank asset, net or intrabank liability, net in the table above.

Table of Contents,

The following table presents informationregardingthe dollaramountof changes in interestincomeand interestexpense for the periodsindicatedfor each majorcomponentof ~~interest-earning~~interest earning assetsand ~~interest-~~interest bearingliabilitiesand distinguishesbetween the changes attributableto changes in volumeand changes attributableto changes in interestrates. The table illustrates the $32.7 million increase in loan interest income that is attributed to an increase in loan rates and $44.2 million increase in loan interest income that is attributed to an increase in loan volume. For purposesof thistable,changes attributableto both rateand volume thatcannot be segregatedhave been allocatedto volume.

	Three Months Ended June 30, 2018
	Compared to										Six Months Ended June 30, 2023 compared to Six Months Ended June 30, 2022
	Three Months Ended June 30, 2017										Increase (Decrease) Due to				Total Increase (Decrease)
	Increase (Decrease)														Total Increase (Decrease)
	Due to						Total Increase
(Dollars in thousands)	Volume			Rate			(Decrease)
(dollars in thousands; unaudited)										(dollars in thousands; unaudited)	Volume		Rate		Total Increase (Decrease)
Interest income:										Interest income:					Total Increase (Decrease)
Interest-bearing deposits	$	(15	)	$	102		$	87
Interest earning deposits										Interest earning deposits	$	(10,279)	$	14,696	$	4,417
Investment securities, available for sale		13			13			26		Investment securities, available for sale	190		264		454
Investment securities, held to maturity		(2	)		(1	)		(3	)	Investment securities, held to maturity	108		10		118
Other Investments		5			(6	)		(1	)	Other Investments	25		(10)		15
Loans receivable		1,018			203			1,221		Loans receivable	44,170		32,662		76,832
Total increase in interest income		1,019			311			1,330		Total increase in interest income	34,214		47,622		81,836

Interest expense:										Interest expense:
Interest-bearing deposits		49			171			220
Interest bearing deposits										Interest bearing deposits	11,914		21,493		33,407

FHLB advances		10			13			23		FHLB advances	—		(69)		(69)
Subordinated debt		-			(1	)		(1	)	Subordinated debt	535		199		734
Junior subordinated debentures		-			9			9		Junior subordinated debentures	—		77		77
Total increase in interest expense		59			192			251		Total increase in interest expense	12,449		21,700		34,149
Increase in net interest income	$	960		$	119		$	1,079		Increase in net interest income	$	21,765	$	25,922	$	47,687

Provision for ~~Loan~~Credit Losses

The provision for ~~loan~~credit losses - loans is an expense we incur to maintain an allowance for ~~loan~~credit losses at a level that ~~is deemed~~management deems appropriate ~~by management~~ to absorb inherent losses on existing loans. For a description of the factors taken into account by our management in determining the allowance for ~~loan~~credit losses see “—Financial Condition—Allowance for ~~Loan~~Credit Losses.”

The economic environment is continuously changing with the bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, political uncertainty and trade issues that may impact the provision and therefore the allowance. Effective January 1, 2023 the Company implemented the CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the incurred loss model, which is what we were previously using. Gross loans, excluding loans held for sale, totaled $3.01 billion at June 30, 2023 and included $3.6 million in PPP loans, which are 100% guaranteed, and are excluded from the provision for credit losses - loans calculation. The allowance for credit losses as a percentage of loans was 3.68% at June 30, 2023, compared to 2.11% at June 30, 2022.

Table of Contents,

Comparison of the quarter ended June 30, 2023 to the comparable quarter in the prior year

The provision for ~~loan~~credit losses - loans for the three months ended June 30, ~~2018,~~2023 was ~~$392,000,~~$52.6 million, compared to ~~no such provision~~$14.1 million for the three months ended June 30, ~~2017.~~2022. The increase in the Company’s provision for credit losses - loans during the quarter ended June 30, 2023, is largely related to the provision for CCBX partner loans. During the quarter ended June 30, 2023, a $52.6 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a small adjustment (recapture) for loan loss of ~~$392,000~~$47,000 was ~~primarily~~needed for the quarter ended June 30, 2023.

The following table shows the provision expense by segment for the periods indicated:


	Three Months Ended
(dollars in thousands; unaudited)	June 30, 2023		June 30, 2022
Community bank	$	(47)	$	109
CCBX	52,645		13,985
Total provision expense	$	52,598	$	14,094

Net charge-offs for the quarter ended June 30, 2023 totaled $31.0 million, or 4.19% of total average loans, compared to $3.5 million, or 0.64% of total average loans, for the quarter ended June 30, 2022. Net charge-offs were up in 2023 compared to 2022 due to loans originated through CCBX partners. In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for a credit enhancement that indemnifies or reimburses the Bank for net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company is responsible for credit losses on approximately 10% of a $180.5 million loan ~~growth. The allowance for loan losses as a percentage of loans was 1.22% at~~portfolio. At June 30, ~~2018, compared to 1.27% at June 30, 2017. The lower allowance that resulted from stronger credit quality reduced the amount~~2023, our portion of ~~provision needed for 2018.~~

~~Net charge-offs for~~this portfolio represented $18.0 million in loans. For the three months ended June 30, ~~2018,~~2023, $31.0 million of net charge-offs were recognized for CCBX loans and $9,000 of net charge-offs were recognized on community bank loans. For the three months ended June 30, 2022, $3.5 million of net charge-offs were recognized on CCBX loans and $33,000 of net recoveries were recognized for community bank loans.

The following table shows the total charge-off activity by segment for the periods indicated:


	Three Months Ended
	June 30, 2023									June 30, 2022
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	9		$	32,290		$	32,299		$	3		$	3,539		$	3,542
Gross recoveries	—			(1,340)			(1,340)			(36)			—			(36)
Net charge-offs	$	9		$	30,950		$	30,959		$	(33)		$	3,539		$	3,506
Net charge-offs to average loans (1)	—		%	9.78		%	4.19		%	(0.01)		%	2.05		%	0.64		%

(1) Annualized calculations shown for periods presented.

Comparison of the six months ended June 30, 2023 to the comparable period in the prior year

The provision for credit losses - loans for the six months ended June 30, 2023 was $96.1 million, compared to $27.0 million for the six months ended June 30, 2022. The increase in the Company’s provision for credit losses - loans during the quarter ended June 30, 2023, is largely related to the provision for CCBX partner loans. During the six months ended June 30, 2023, a $95.8 million provision for credit losses - loans was recorded for loans originated through CCBX partners based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a provision for loan loss of $381,000 was needed for the six months ended June 30, 2023.

Table of Contents,

The following table shows the provision expense by segment for the periods indicated:


	Six Months Ended
(dollars in thousands; unaudited)	June 30, 2023		June 30, 2022
Community bank	$	381	$	452
CCBX	95,761		26,584
Total provision expense	$	96,142	$	27,036

Net charge-offs for the six months ended June 30, 2023 totaled ~~$275,000,~~$63.3 million, or ~~0.16% (annualized)~~4.50% of total average loans, as compared to net ~~recoveries~~charge-offs of ~~$96,000,~~$6.3 million, or ~~(0.06)% (annualized)~~0.64% of total average loans, for the ~~three~~six months ended June 30, ~~2017.~~2022. Net charge-offs increased in the first six months of 2023 compared to the same period of 2022 as a result of the growth in loans originated through CCBX partners. In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for ~~both~~a credit enhancement that indemnifies or reimburses the Bank for net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company is responsible for credit losses on approximately 10% of a $180.5 million loan portfolio. At June 30, 2023, our portion of this portfolio represented $18.0 million in loans. For the six months ended June 30, 2023, $63.2 million of net charge-offs were recognized for CCBX loans and $54,000 of net charge-offs recognized for community bank loans. For the six months ended June 30, 2022, $6.3 million of net charge-offs were recognized for CCBX and $33,000 of net recoveries were recognized for community bank loans.


	Six Months Ended
	June 30, 2023									June 30, 2022
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	59		$	66,407		$	66,466		$	7		$	6,343		$	6,350
Gross recoveries	(5)			(3,200)			(3,205)			(40)			—			(40)
Net charge-offs	$	54		$	63,207		$	63,261		$	(33)		$	6,343		$	6,310
Net charge-offs to average loans(1)	0.01		%	10.92		%	4.50		%	0.00		%	2.38		%	0.64		%

(1) Annualized calculations shown for periods ~~were low and demonstrate the strong credit quality of our loan portfolio and a healthy economic environment in our market area.~~

presented.

Noninterest Income

Our primary sources of recurring noninterest income are BaaS indemnification income, Baas program income and deposit ~~account~~ service charges ~~loan referral fees, mortgage broker fees,~~ and ~~sublease and lease income.~~fees. Noninterest income does not include loan origination fees, ~~to the extent they exceed the direct loan origination costs,~~ which are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method.

Comparison of the quarter ended June 30, 2023 to the comparable quarter in the prior year

For the three months ended June 30, ~~2018,~~2023, noninterest income totaled ~~$1.2~~$58.6 million, an increase of ~~$193,000,~~$33.1 million, or ~~18.9%~~129.9%, compared to ~~$1.0~~$25.5 million for the three months ended June 30, ~~2017.~~

2022.

Table of Contents,

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

	Three Months
	Ended June 30,				Increase			Percent				Three Months Ended June 30,				Increase (Decrease)			Percent Change
(Dollars in thousands)	2018		2017		(Decrease)			Change
(dollars in thousands; unaudited)											(dollars in thousands; unaudited)	2023		2022				Increase (Decrease)			Percent Change
Deposit service charges and fees	$	771	$	651	$	120			18.4	%	Deposit service charges and fees	$	989	$	988
Loan referral fees		114		42		72			171.4		Loan referral fees	682		208		474			227.9
Mortgage broker fees		69		74		(5	)		(6.8	)
Sublease and lease income		4		55		(51	)		(92.7	)

Unrealized gain on equity securities, net											Unrealized gain on equity securities, net	155		—		155			100.0
Gain on sales of loans, net		78		58		20			34.5		Gain on sales of loans, net	23		—		23			100.0
Other		177		140		37			26.4		Other	234		396		(162)			(40.9)
Total Noninterest income	$	1,213	$	1,020	$	193			18.9	%
Noninterest income, excluding BaaS program income and BaaS indemnification income											Noninterest income, excluding BaaS program income and BaaS indemnification income	2,083		1,592		491			30.8
Servicing and other BaaS fees											Servicing and other BaaS fees	895		1,159		(264)			(22.8)
Transaction fees											Transaction fees	1,052		814		238			29.2
Interchange fees											Interchange fees	975		628		347			55.3
Reimbursement of expenses											Reimbursement of expenses	1,026		618		408			66.0
BaaS program income											BaaS program income	3,948		3,219		729			22.6
BaaS credit enhancements											BaaS credit enhancements	51,027		14,207		36,820			259.2
Baas fraud enhancements											Baas fraud enhancements	1,537		6,474		(4,937)			(76.3)
BaaS indemnification income											BaaS indemnification income	52,564		20,681		31,883			154.2
Total BaaS income											Total BaaS income	56,512		23,900		32,612			136.5
Total noninterest income											Total noninterest income	$	58,595	$	25,492	$	33,103		129.9	%

Comparison of the six months ended June 30, 2023 to the comparable period in the prior year

For the six months ended June 30, 2023, noninterest income totaled $107.9 million, an increase of $60.4 million, or 127.3%, compared to $47.5 million for the six months ended June 30, 2022.

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


	Six Months Ended June 30,				Increase (Decrease)		Percent Change
(dollars in thousands; unaudited)	2023		2022
Deposit service charges and fees	$	1,899	$	1,872	$	27	1.4	%
Loan referral fees	682		810		(128)		(15.8)


Gain on sales of loans, net	146		—		146		100.0
Unrealized (loss) gain on equity securities, net	194		—		194		100.0
Other	533		784		(251)		(32.0)
Noninterest income, excluding BaaS program income and BaaS indemnification income	3,454		3,466		(12)		(0.3)
Servicing and other BaaS fees	1,843		2,328		(485)		(20.8)
Transaction fees	1,969		1,307		662		50.7
Interchange fees	1,764		1,060		704		66.4
Reimbursement of expenses	1,947		990		957		96.7
BaaS program income	7,523		5,685		1,838		32.3
BaaS credit enhancements	93,389		27,282		66,107		242.3
BaaS fraud enhancements	3,536		11,045		(7,509)		(68.0)
BaaS indemnification income	96,925		38,327		58,598		152.9
Total BaaS income	104,448		44,012		60,436		137.3
Total noninterest income	$	107,902	$	47,478	$	60,424	127.3	%

Table of Contents,

Summary of significant noninterest income for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022

A description of our largest noninterest income categories are below:

BaaS Income. Our CCBX segment provides BaaS offerings that enable our broker dealer and digital financial service providers to offer their customers banking services. In exchange for providing these services, we earn fixed fees, volume-based fees and reimbursement of costs depending on the program agreement. In accordance with GAAP, we recognize the reimbursement of noncredit fraud losses on loans and deposits originated through partners and credit enhancements related to the allowance for credit losses and reserve for unfunded commitments provided by the partner as revenue in BaaS income. CCBX credit losses are recognized in the allowance for loan loss and fraud losses are expensed in noninterest expense under BaaS fraud expense. Also in accordance with GAAP, we establish a credit enhancement asset for expected future credit losses through the recognition of BaaS credit enhancement revenue at the same time we establish an allowance for those loans though a provision for credit losses - loans. For more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

Our CCBX segment continues to evolve, and now has 22 relationships, at varying stages, as of June 30, 2023. We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense and are focusing more on selecting larger and more established partners, with experienced management teams, existing customer bases and strong financial positions.

The following table illustrates the activity and evolution in CCBX relationships for the periods presented.


	As of
(unaudited)	June 30, 2023	June 30, 2022
Active	18	23
Friends and family / testing	1	2
Implementation / onboarding	1	0
Signed letters of intent	1	4
Wind down - preparing to exit relationship	1	0
Total CCBX relationships	22	29

Deposit Service Charges and Fees. Deposit service charges and fees~~which are~~ include service charges on accounts, point-of-sale fees,~~fromour customersfor deposit-related~~ merchant services fees and overdraft fees. Together they constitutethe largestcomponentof our noninterest~~income. Servicechargeson depositaccountswere$771,000 for the threemonthsended June 30, 2018, an increase~~ income, outside of ~~$120,000, or 18.4%, over the sameperiodin the prioryear. The increasein depositaccountservicecharges~~ ~~was~~ ~~primarilythe resultof a fee incomeinitiativeto adjustthe pricingof fees,types of fees,and features of our depositaccounts,as well as growth in depositbalances.We were able to increasefeeswithout losing customers.~~

BaaS income.

Loan Referral Fees. We earn loan referralfeeswhenweoriginatea variablerateloan and the borrowerenters into an interestrateswap agreementwith a thirdpartyto fix the interestratefor an extendedperiod,usually20 or 25 years.We recognizethe loan referralfee for arrangingthe interestrateswap. Byfacilitatinginterestrate swaps to our clients,weare able to providethemwith a long-term,fixedinterestratewithout ~~the~~ assumingthe interestraterisk.~~Loan referralfeeswere $114,000 for the threemonthsended June 30, 2018, comparedto $42,000in the sameperiodin the prioryear.~~ Interestratevolatility,swap rates,and the timingof loan closings allimpactthe demand for long-termfixedrateswaps. The recognitionof loan referralfees~~fluctuate~~ fluctuates in response to thesemarketconditionsand as a resultwe may recognize more or less, or may not recognizeany, loan referralfeesin some periods.

~~Mortgage Broker Fees. We earn mortgagebrokerfeesfor residentialmortgageloans that~~we~~brokerthrough Quicken Loans. Mortgagebrokerfeesdecreased$5,000~~ Current market conditions are making interest rate swap agreements less attractive in the ~~threemonthsended June 30, 2018, compared~~higher rate environment.

Gain on Sales of Loans, net. Gain on sales of loans occurs when we sell certain CCBX loans to the ~~sameperiod~~originating partner, in ~~2017 as a resultof highermortgageinterestratesand lower inventoryof housing in our key markets,which decreasedthe demand for new and refinancedmortgages.~~

~~Gain on Sale of Loans. We typicallysellin the secondarymarketthe guaranteedportion(generally75% of the principalbalance)of the SBAand United StatesDepartmentof Agricultureloans that~~we~~originate.~~accordance with partner agreements. Gain on sale of loans ~~increased$20,000 to $78,000~~may also occur when we sell in the secondary market the guaranteed portion (generally 75% of the principal balance) of the SBA and U.S. Department of Agriculture (“USDA”) loans that we originate. This activity fluctuates based on SBA and USDA loan activity.

Unrealized (loss)/gain on equity securities, net. During the three and six monthsended June 30, ~~2018, comparedto the sameperiodin 2017 as a result~~2023, we recognized an unrealized gain on equity securities of ~~increasedfocus on productionafterrestructuringour SBAloan programin 2017.~~

~~Other.~~ ~~This categoryincludesa varietyof otherincome-producingactivities,annuitybrokerfees,~~$155,000 and ~~SBA servicingfees.Other noninterestincomeincreased$37,000 in the threemonthsended June 30, 2018,~~$194,000, respectively, compared to the same~~periodin 2017 as a result of reimbursement of wholesale banking customer costs in the current quarter, partially offset by lower annuity fees and SBA servicing fees. Additionally, during the three months~~ periods ended June 30, ~~2017, the Company incurred~~2022, when there was no unrealized holding gain or loss.

Other. This category includes a ~~loss~~variety of other income-producing activities, credit card fee income, wire transfer fees, interest earned on ~~fixed asset disposal~~bank owned life insurance (“BOLI”), and SBA and USDA servicing fees.

Table of ~~$21,000.~~

Contents,

Noninterest Expense

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

other expenses.

Comparison of the quarter ended June 30, 2023 to the comparable quarter in the prior year

For the three months ended June 30, ~~2018,~~2023, noninterest expense totaled ~~$6.4~~$51.9 million, an increase of ~~$891,000,~~$13.7 million, or ~~16.3%~~36.0%, compared to ~~$5.5~~$38.2 million for the three months ended June 30, ~~2017.~~

2022.

The followingtablepresents,for the periodsindicated,the majorcategoriesof noninterestexpense:

	Three Months
	Ended June 30,				Increase			Percent				Three Months Ended June 30,				Increase (Decrease)			Percent Change
(Dollars in thousands)	2018		2017		(Decrease)			Change
(dollars in thousands; unaudited)											(dollars in thousands; unaudited)	2023		2022				Increase (Decrease)			Percent Change
Salaries and employee benefits	$	3,910	$	3,174	$	736			23.2	%	Salaries and employee benefits	$	16,309	$	12,238
Legal and professional expenses											Legal and professional expenses	4,645		1,002		3,643			363.6
Data processing and software licenses											Data processing and software licenses	1,972		1,546		426			27.6
Occupancy		804		740		64			8.6		Occupancy	1,143		1,083		60			5.5
Data processing		492		447		45			10.1
FDIC assessments											FDIC assessments	570		855		(285)			(33.3)
Point of sale expense											Point of sale expense	814		409		405			99.0
Excise taxes											Excise taxes	531		564		(33)			(5.9)
Director and staff expenses		136		137		(1	)		(0.7	)	Director and staff expenses	519		377		142			37.7
Excise taxes		134		112		22			19.6
Marketing		86		83		3			3.6		Marketing	115		74		41			55.4
Legal and professional fees		130		104		26			25.0
FDIC assessments		79		78		1			1.3
Business development		72		60		12			20.0
Other		511		528		(17	)		(3.2	)	Other	1,722		1,318		404			30.7
Total Noninterest expense	$	6,354	$	5,463	$	891			16.3	%
Noninterest expense, excluding BaaS loan and BaaS fraud expense											Noninterest expense, excluding BaaS loan and BaaS fraud expense	28,340		19,466		8,874			45.6
BaaS loan expense											BaaS loan expense	22,033		12,229		9,804			80.2
BaaS fraud expense											BaaS fraud expense	1,537		6,474		(4,937)			(76.3)
BaaS loan and fraud expense											BaaS loan and fraud expense	23,570		18,703		4,867			26.0
Total noninterest expense											Total noninterest expense	$	51,910	$	38,169	$	13,741		36.0	%

Comparison of the six months ended June 30, 2023 to the comparable period in the prior year

For the six months ended June 30, 2023, noninterest expense totaled $96.6 million, an increase of $28.0 million, or 40.8%, compared to $68.6 million for the six months ended June 30, 2022.

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


	Six Months Ended June 30,				Increase (Decrease)		Percent Change
(dollars in thousands; unaudited)	2023		2022
Salaries and employee benefits	$	31,884	$	23,323	$	8,561	36.7	%
Data processing and software licenses	3,812		3,050		762		25.0
Legal and professional expenses	7,707		1,710		5,997		350.7
Occupancy	2,362		2,219		143		6.4
FDIC assessments	1,165		1,459		(294)		(20.2)
Excise taxes	986		913		73		8.0
Point of sale expense	1,567		657		910		138.5
Director and staff expenses	1,145		721		424		58.8
Marketing	210		173		37		21.4
Other	2,612		2,795		(183)		(6.5)
Noninterest expense, excluding BaaS loan and BaaS fraud expense	53,450		37,020		16,430		44.4
BaaS loan expense	39,587		20,519		19,068		92.9
BaaS fraud expense	3,536		11,045		(7,509)		(68.0)
BaaS loan and fraud expense	43,123		31,564		11,559		36.6
Total noninterest expense	$	96,573	$	68,584	$	27,989	40.8	%

Summary of significant noninterest expense for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022

A description of our largest noninterest expense categories are below:

Salaries and Employee Benefits. Salariesand employeebenefitsare one of the largest~~component~~ components of noninterest expense and includepayrollexpense, incentivecompensationcosts, equity compensation, benefitplans, healthinsuranceand payroll taxes.Salariesand employeebenefits~~were $3.9 million~~ continue to increase primarily due to continued hiring staff for ~~the threemonthsended~~our CCBX segment and additional staff for our ongoing banking related growth initiatives. As our CCBX activities grow, we expect to continue to add employees to support these lines of business. As of June 30, ~~2018,~~2023, we had 482 full-time equivalent employees, compared to 433 at June 30, 2022, a 11.3% increase.

Data Processing and Software Licenses. Data processing and software licenses includes expenses related to obtaining and maintaining software required for our various functions. Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs. Data processing costs grow as we grow and add new products, customers and branches. Additionally, CCBX data processing expenses and software that aids in the reporting of CCBX activities and monitoring of transactions that helps to automate and create other efficiencies in reporting have resulted in increased expenses in the category. These expenses are expected to increase as we invest more in automated processing and as we grow product lines and our CCBX segment.

Legal and Professional Expenses. Legal and professional costs include legal, audit and accounting expenses, consulting fees, fees for recruiting and hiring employees, and IT related security expenses. These expenses fluctuate with the consulting costs related to risk management, development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services. The expenses also reflect the costs associated with our infrastructure enhancement projects to improve our processing, automate processes, reduce compliance costs and enhance our data management.

Occupancy. Occupancy expenses include rent, utilities, janitorial and other maintenance expenses, property insurances and taxes. Also included is depreciation on building, leasehold, furniture, fixtures and equipment. Although our hybrid and remote workforce is increasing, which helps keep some occupancy expenses down, we do expect occupancy expenses to increase as we continue to grow.

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FDIC Assessments. FDIC assessments are assessed to fund the DIF to insure and protect the depositors of insured banks and to resolve failed banks. The assessment rate is based on a number of factors and recalculated each quarter. As deposits increase, the FDIC assessment expense will generally increase. However, our rate has decreased in 2023 as a result of improvement in the ratios that determine the rate at which insured deposits are assessed, compared to the comparable prior year period. On October 18, 2022 the FDIC finalized an increase of ~~$736,000,~~2 basis points in the initial base deposit insurance assessment rates schedules. The rise is intended to increase the reserve ratio of the Deposit Insurance Fund to 1.35%, the statutory requirement. The increase in the base rates will remain in place until the reserve ratio reaches or ~~23.2%, compared~~exceeds 2.0%.

Excise Taxes. Excise taxes are assessed on Washington state income and are based on gross income. Gross income is reduced by certain allowed deductions and income attributed to ~~$3.2 million~~other states is also removed to arrive at the taxable base. Excise taxes increased as a result of increased income subject to excise taxes.

Point of Sale Expenses. Point of sale expenses are incurred as part of the process that allows businesses to accept payment for goods or services. Generally, point of sale expense increases as point of sale activity increases, as does point of sale income which is recognized in other income.

Director and Staff Expenses. Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses. As conferences and other professional events have resumed we have seen increased expenses related to employee travel, and continuing education.

Marketing. Marketing and promotion costs were flat because we are using more cost-effective advertising options; however, we expect to see advertising expenses increase as we deploy more branding and targeted advertising for the ~~threemonthsended June 30, 2017. The increasewas primarilydue to hiringadditionalstafffor our Woodinvillebranch, which opened in October 2017,~~community bank and ~~hiring additional~~ ~~higher-earning~~ ~~staff~~ ~~(generally lenders and credit staff)~~ ~~for our ongoing growth initiatives.~~As~~of June 30, 2018, wehad 170 full-timeequivalentemployees,comparedto 147 at June 30, 2017, a 16% increase.~~

~~Occupancy Expenses.~~ ~~Occupancy expenseswere $804,000 for the threemonthsended June 30, 2018, comparedto $740,000 for the threemonthsended June 30, 2017. This categoryincludesbuilding,leasehold,furniture,fixturesand equipmentdepreciationtotaling$268,000 and$229,000 for the threemonthsended June 30, 2018 and 2017, respectively.The increaseof 8.6%, in occupancy expensesfor the threemonthsended June 30, 2018, comparedto the sameperiodin the prioryear was primarilydue to opening our Woodinvillebranch in October 2017 and higherbuildingmaintenancecosts.We opened our~~ 13^th~~branch in Woodinvillein the fall~~of~~2017. This newbranch increasedour lease,depreciation,maintenance,and utilitycostsfor 2018.~~

~~Data Processing.~~ ~~Data processingcostswere $492,000 for the threemonthsended June 30, 2018, compared to $447,000 for the threemonthsended June 30, 2017. Data processing costsincludeallof our customerprocessing,computerprocessing,and network costs.~~

CCBX.

Other. This category includes dues and ~~subscriptions,~~memberships, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and ~~officers~~officer’s insurance, donations ~~provision~~and miscellaneous other expenses. Provision for unfunded commitments is only included in this category for three and ~~miscellaneous other expenses.Other noninterest expense was $511,000 for the three~~six months ended June 30, ~~2018, compared to$528,000~~2022 as the expense/credit for the three and six months ended June 30, ~~2017. The decrease was primarily due~~2023 is included in the provision/recapture for unfunded commitments.

BaaS loan and fraud expense. Included in BaaS loan and fraud expense is partner loan expense including overdraft balances and partner fraud expense. Partner loan expense represents the amount paid or payable to ~~less cost associated with problem~~partners for credit enhancements, fraud enhancements andoriginating & servicing CCBX loans. Partner fraud expense represents noncredit fraud losses on loans and ~~lower deposit~~deposits originated through partners. Fraud losses are recorded when incurred as losses in noninterest expense, and the reimbursement from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. For more information on the accounting for BaaS loan and fraud expenses see the section titled “CCBX – BaaS Reporting Information.”

The following table presents, for the ~~three months ended June 30, 2018 as compared to~~periods indicated, the ~~same period last year.~~

BaaS loan and fraud expenses:


	Three Months Ended				Six Months Ended
(dollars in thousands; unaudited)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
BaaS loan expense	$	22,033	$	12,229	$	39,587	$	20,519
BaaS fraud expense	1,537		6,474		3,536		11,045
Total BaaS loan and fraud expense	$	23,570	$	18,703	$	43,123	$	31,564

Income Tax Expense

The amount of income tax expense we incur is impacted by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce our deferred tax assets to the amount expected to be realized. The Company is subject to various state taxes that are assessed as CCBX activities and employees expand into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods. On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which, among other things, implements a new 15%

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corporate alternative minimum tax for certain large corporations, a 1% excise tax on stock buybacks, and several tax incentives to promote clean energy and climate initiatives. These provisions were effective beginning January 1, 2023. Based on its current analysis of the provisions, we do not expect this legislation to have a material impact on our consolidated financial statements.

Comparison of the quarter ended June 30, 2023 to the comparable quarter in the prior year

For the three months ended June 30, ~~2018,~~2023, income tax expense totaled ~~$569,000,~~$3.9 million, compared to ~~$905,000~~$2.9 million for the three months ended June 30, ~~2017. Our~~2022. The $937,000 increase in income tax expense is the result of higher net income, combined with the addition of various state taxes that are being assessed as CCBX activities and employees expanding into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods. The effective tax ~~rates~~rate was 23.1% for the three months ended June 30, ~~2018 and 2017, were 20.5% and 32.5%, respectively.~~2023, compared to 22.4% for the three months ended June 30, 2022. The ~~lower~~effective tax rate ~~in 2018~~ was ~~the result of the reduction in the corporate income tax rate under the Tax Cuts and Jobs Act.~~

~~Comparison of Operating Results~~higher for the ~~Six Months Ended~~three months ended June 30, ~~2018~~2023 due to the addition of various state taxes that are being assessed as CCBX activities and ~~June 30, 2017~~

~~Net Income~~

~~Net income for~~employees expand into other states.

Comparison of the six months ended June 30, ~~2018, was $4.0 million, or $0.44 per diluted share, compared~~2023 to ~~$3.2 million, or $0.35 per diluted share, for~~the comparable period in the prior year

For the six months ended June 30, ~~2017. The increase in net~~2023 income ~~over the comparable period in the prior year was~~

~~attributableto a $2.0 million increasein net interestincome,primarily arisingfromincreasedinterest-earningassetsfromour loan growth initiatives,as well as a $461,000 increase~~in~~fee incomefromraisingour depositservicechargesand feesand revenuefromloan referralfeesand $440,000 in lower taxesresultingfromthe decreasein the corporate~~tax ~~rateunder the Tax Cuts and Jobs Act. These positive factorswere partiallyoffsetby a $1.6 million increasein noninterestexpense.~~

~~Net Interest Income~~

~~Net interest income for the six months ended June 30, 2018, was $16.1~~expense totaled $6.9 million, compared to ~~$14.1~~$4.6 million for the six months ended June 30, ~~2017, an increase of $2.0 million, or 14.2%.~~2022. The ~~increase in net interest income consisted of a $2.4 million, or 15.6%, increase in interest income offset by a $500,000, or 38.5%, increase in interest expense.~~

The growth in interest income was primarily attributable to a $69.3 million, or 11.5%, increase in average loans outstanding for the six months ended June 30, 2018, compared to the prior year, combined with a 13 basis point increase in the yield on total loans.

The increase in interest expense for the six months ended June 30, 2018, was primarily related to a 12 basis point increase in the cost of interest-bearing deposits combined with a $40.7 million, or 9.6%, increase in average interest-bearing deposits over the same period in the prior year. The increase in the cost of deposits was primarily due to an increase in the rate paid on NOW and money market accounts and on time deposits, as market interest rates increased over the prior year. The increase in average interest-bearing deposits for the six months ended June 30, 2018, compared to the same period in 2017 is attributable to growth in all deposit categories. The average balance of NOW and money market accounts grew $15.1 million, or 4.8%, the average balance of savings accounts grew $6.6 million, or 16.5%, and the average balance of customer time deposits grew $19.0 million, or 26.7%.

For the six months ended June 30, 2018, net interest margin (annualized net interest income divided by average total interest-earning assets) and net interest spread (average yield on total interest-earning assets minus average cost of total interest-bearing liabilities) were 4.19% and 3.91%, respectively, compared to 4.07% and 3.84% for the six months ended June 30, 2017.

~~The followingtablepresentsan analysisof net interestincome,net interestspreadand net interestmarginfor the periodsindicated.Loan feesincludedin interestincometotaled$632,000 and $270,000 for the six months ended June 30, 2018 and 2017, respectively.For the six monthsended June 30, 2018 and 2017, the amount of interestincomenot recognizedon nonaccrualloans was not material.~~

Average balance sheets

For the Six Months Ended June 30,

2018

2017

Average

Interest &

Yield /

Average

Interest &

Yield /

(Dollars in thousands)

Balance

Dividends

Cost (4)

Balance

Dividends

Cost (4)

Assets:

Interest earning assets:

Interest-bearing deposits

$
59,407

$
491

1.67
%

$
57,466

$
287

1.01
%
Investment securities, available for sale (1)

38,333

293

1.54

34,619

240

1.40

Investment securities, held to maturity (1)

1,346

14

2.10

1,717

10

1.17

Other Investments

3,057

73

4.82

2,790

74

5.35

Loans receivable (2)

671,867

16,967

5.09

602,619

14,833

4.96

Total interest earning assets

774,010

17,838

4.65
%

699,211

15,444

4.45
%
Noninterest earning assets:

Allowance for loan losses

(8,323
)

(7,771
)

Other noninterest earning assets

36,178

41,361

Total assets

$
801,865

$
732,801

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest-bearing deposits

$
464,176

$
1,358

0.59
%

$
423,501

$
986

0.47
%
FHLB advances and other borrowings

3,397

34

2.02

1,611

10

1.25

Subordinated debt

9,954

291

5.90

9,940

291

5.90

Junior subordinated debentures

3,580

74

4.17

3,578

58

3.27

Total interest-bearing liabilities

481,107

1,757

0.74
%

438,630

1,345

0.62
%
Noninterest bearing deposits

250,473

225,769

Other liabilities

2,724

2,820

Total shareholders' equity

67,561

65,582

Total liabilities and shareholders' equity

$
801,865

$
732,801

Net interest income

$
16,081

$
14,099

Interest rate spread

3.91
%

3.84
%
Net interest margin (3)

4.19
%

4.07
%

~~(1)~~

~~(2)~~

~~Includes nonaccrual loans.~~

~~(3)~~

~~Net interest margin represents annualized net interest income divided by average total interest-earning assets.~~

~~(4)~~

~~Yields and rates are annualized.~~

~~The followingtablepresentsinformationregardingthe dollaramountof changes in interestincomeand interestexpense for the periodsindicatedfor each majorcomponentof interest-earningassetsand interest- bearingliabilitiesand distinguishesbetween the changes attributableto changes in volumeand changes attributableto changes in interestrates.For purposesof thistable,changes attributableto both rateand volume thatcannot be segregatedhave been allocatedto volume.~~

Six Months Ended June 30, 2018

Compared to

Six Months Ended June 30, 2017

Increase (Decrease)

Due to

Total Increase

(Dollars in thousands)

Volume

Rate

(Decrease)

Interest income:

Interest-bearing deposits

$
10

$
194

$
204

Investment securities, available for sale

26

28

54

Investment securities, held to maturity

(2
)

5

3

Other Investments

7

(8
)

(1
)
Loans receivable

1,705

429

2,134

Total increase in interest income

1,746

648

2,394

Interest expense:

Interest-bearing deposits

95

277

372

FHLB advances

11

13

24

Subordinated debt

-

-

-

Junior subordinated debentures

-

16

16

Total increase in interest expense

106

306

412

Increase in net interest income

$
1,640

$
342

$
1,982

~~Provision for Loan Losses~~

The provision for loan losses for the six months ended June 30, 2018, was $893,000, compared to $439,000 for the six months ended June 30, 2017. The increase of $454,000 was primarily due to loan growth. The allowance for loan losses as a percentage of loans was 1.22% at June 30, 2018, compared to 1.27% at June 30, 2017. The lower allowance that resulted from stronger credit quality reduced the amount of provision needed for 2018.

Net charge-offs for the six months ended June 30, 2018, totaled $370,000, or 0.11% (annualized) of total average loans, as compared to net charge-offs of $94,000, or 0.03% (annualized) of total average loans, for the six months ended June 30, 2017. Net charge-offs for both periods were low, and demonstrate the strong credit quality of our loan portfolio and a healthy economic environment in our market area.

~~Noninterest Income~~

~~For the six months ended June 30, 2018, noninterest income totaled~~ $2.3 million an increase ~~of $469,000, or 25.3%, compared to $1.9 million for the six months ended June 30, 2017.~~

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

Six Months

Ended June 30,

Increase

Percent

(Dollars in thousands)

2018

2017

(Decrease)

Change

Deposit service charges and fees

$
1,458

$
1,199

$
259

21.6
%
Loan referral fees

244

42

202

481.0

Mortgage broker fees

106

115

(9
)

(7.8
)
Sublease and lease income

61

111

(50
)

(45.0
)
Gain on sales of loans, net

142

84

58

69.0

Other

309

300

9

3.0

Total Noninterest income

$
2,320

$
1,851

$
469

25.3
%

~~Deposit ServiceCharges and Fees.~~ ~~Servicechargeson depositaccountswere$1.5 million for the six monthsended June 30, 2018, an increaseof $259,000, or 21.6%, over the sameperiod~~in ~~the prioryear. The increasein depositaccountservicecharges~~ ~~was~~ ~~primarilythe resultof a fee incomeinitiativeto adjustthe pricingof fees,types of fees,and features of our depositaccounts,as well as growth in depositbalances.~~

~~Loan Referral Fees. Loan referralfeeswere $244,000 for the six monthsended June 30, 2018, comparedto $42,000in the sameperiodin the prioryear. The recognitionof loan referralfeesfluctuatein response to thesemarketconditionsand as a result~~we~~may not recognizeany loan referralfeesin some periods.~~

~~Mortgage Broker Fees. Mortgagebrokerfeesdecreased$9,000 in the six monthsended June 30, 2018, comparedto the sameperiodin 2017 as a resultof highermortgageinterestratesand lower inventoryof housing in our key markets,which decreasedthe demand for new~~ ~~and refinanced~~ ~~mortgages.~~

~~Gain on Sale of Loans. Gain on sale of loans increased$58,000 to $142,000 in the six monthsended June 30, 2018, comparedto the sameperiodin 2017 as a resultof increasedfocus on productionafterrestructuringour SBAloan programin 2017.~~

~~Other.~~ ~~Other noninterestincomeincreased$9,000 in the six monthsended June 30, 2018, compared to the sameperiodin 2017. The most significant variances were a result~~of additional income related to reimbursement of wholesale banking customer costs in the current quarter. The increase was offset by lower annuity fees and lower SBA servicing fees for the six months ended June 30, 2018, as compared to the same period last year. Additionally, during the six months ended June 30, 2017, the Company incurred a loss on fixed asset disposal of $21,000.

~~Noninterest Expense~~

~~For the six months ended June 30, 2018, noninterest expense totaled $12.4 million, an increase of $1.6 million, or 14.6%, compared to $10.8 million for the six months ended June 30, 2017.~~

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

Six Months

Ended June 30,

Increase

Percent

(Dollars in thousands)

2018

2017

(Decrease)

Change

Salaries and employee benefits

$
7,645

$
6,456

$
1,189

18.4
%
Occupancy

1,627

1,469

158

10.8

Data processing

971

848

123

14.5

Director and staff expenses

280

278

2

0.7

Excise taxes

258

225

33

14.7

Marketing

143

150

(7
)

(4.7
)
Legal and professional fees

210

194

16

8.2

FDIC assessments

164

181

(17
)

(9.4
)
Business development

160

127

33

26.0

Other

963

911

52

5.7

Total Noninterest expense

$
12,421

$
10,839

$
1,582

14.6
%

~~Salaries and Employee Benefits.~~ ~~Salariesand employeebenefitswere $7.6 millionfor the six monthsended June 30, 2018, an increase of $1.2 million, or 18.4%, comparedto $6.5 millionfor the six monthsended June 30, 2017. As noted previously, the increasewas primarilydue to hiringadditionalstafffor our Woodinvillebranch, which opened in October 2017, and hiring additional~~ ~~higher-earning~~ ~~staff~~ ~~(primarily lenders and credit staff)~~ ~~for our ongoing growth initiatives.~~As~~of June 30, 2018, wehad 170 full-timeequivalentemployees,comparedto 147 at June 30, 2017, a 16% increase.~~

~~Occupancy Expenses.~~ ~~Occupancy expenseswere $1.6 million for the six monthsended June 30, 2018, comparedto $1.5 million for the six monthsended June 30, 2017. This categoryincludesbuilding,leasehold,furniture,fixturesand equipmentdepreciationtotaling$521,000 and$460,000 for the six monthsended June 30, 2018 and 2017, respectively.The increaseof 10.8%, in occupancy expensesfor the six monthsended June 30, 2018, comparedto the sameperiodin the prioryear was primarilydue to opening our Woodinvillebranch in October 2017.~~

~~Data Processing.Data processingcostswere $971,000 for the six monthsended June 30, 2018, compared to $848,000 for the six monthsended June 30, 2017. Data processing costsincludeallof our customerprocessing,computerprocessing,and network costs.~~

~~Other.~~ ~~Other noninterestexpense were $963,000 for the six monthsended June 30, 2018, compared~~to~~$911,000 for the six monthsended June 30, 2017. The increasewas primarilydue to costsassociatedwith supportingthe communities~~we~~servethrough membershipsand sponsorshipsand slightincreasesin office suppliesand losseson depositaccounts.~~

~~Income Tax Expense~~

~~For the six months ended June 30, 2018,~~ income tax expense ~~totaled $1.0 million, compared to $1.5 million for~~is the ~~six months ended June 30, 2017.~~result of higher net income. Our effective tax rates for the six months ended June 30, ~~2018~~2023 and ~~2017,~~2022 were ~~20.5%~~21.5% and ~~31.7%~~21.9%, respectively.

Segment Information

As defined in ASC 280, Segment Reporting, an operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluate performance based on an internal performance measurement accounting system, which provides line of business results. This system uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income and expense. A primary objective of this measurement system and related internal financial reporting practices are to produce consistent results that reflect the underlying financial impact of the segments on the Company and to provide a basis of support for strategic decision making. The ~~lower tax rate~~accounting policies applicable to our segments are those that apply to our preparation of the accompanying Consolidated Financial Statements. Based on these criteria, we have identified three segments: the community bank, CCBX and treasury & administration. The primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium sized businesses in ~~2018 was~~the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 22 partners as of June 30, 2023. The treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.

The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The Company continues to evaluate its methodology on allocating items to the Company’s various segments to support strategic business decisions by the Company’s executive leadership. Income and expenses that are specific to a segment are directly posted to each segment. Additionally, certain indirect expenses are allocated to each segment utilizing various metrics, such as number of employees, utilization of space, and allocations based on loan and deposit balances. We have implemented a transfer pricing process that credits or charges the community bank and CCBX segments with intrabank interest income or expense for the difference in average loans and average deposits, with the treasury & administration segment as the offset for those entries. The accounting policies of the segments are the same as those described in “Note 1 – Description of Business and Summary of Significant Accounting Policies” in the accompanying notes to the consolidated financial statements included in the Company's most recently filed 10-K report.

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The following table presents summary financial information for each segment for the periods indicated:


	June 30, 2023								December 31, 2022
(dollars in thousands; unaudited)	Community Bank		CCBX		Treasury & Administration		Total		Community Bank		CCBX		Treasury & Administration		Total
Assets
Cash and Due from Banks	$	4,382	$	7,179	$	263,499	$	275,060	$	4,603	$	12,899	$	324,637	$	342,139
Intrabank asset	—		304,408		(304,408)		—		—		254,096		(254,096)		—
Securities	—		—		110,730		110,730		—		—		98,353		98,353
Loans held for sale	—		35,923		—		35,923		—		—		—		—
Total loans receivable	1,713,034		1,294,519		—		3,007,553		1,614,752		1,012,504		—		2,627,256
Allowance for credit losses	(20,653)		(90,109)		—		(110,762)		(20,636)		(53,393)		—		(74,029)
All other assets	27,164		131,260		58,355		216,779		25,508		76,111		49,129		150,748
Total assets	$	1,723,927	$	1,683,180	$	128,176	$	3,535,283	$	1,624,227	$	1,302,217	$	218,023	$	3,144,467
Liabilities
Total deposits	$	1,509,458	$	1,653,114	$	—	$	3,162,572	$	1,538,218	$	1,279,303	$	—	$	2,817,521
Total borrowings	—		—		47,658		47,658		—		—		47,587		47,587
Intrabank liability	207,651		—		(207,651)		—		80,392		—		(80,392)		—
All other liabilities	6,818		30,066		15,507		52,391		5,617		22,914		7,334		35,865
Total liabilities	$	1,723,927	$	1,683,180	$	(144,486)	$	3,262,621	$	1,624,227	$	1,302,217	$	(25,471)	$	2,900,973

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Community bank total assets as of June 30, 2023 increased $99.7 million, or 6.1%, to $1.72 billion, compared to $1.62 billion as of December 31, 2022. Loans receivable net of deferred fees for the community bank segment increased $98.3 million, or 6.1%, to $1.71 billion as of June 30, 2023, compared to $1.61 billion as of December 31, 2022. The increase in community bank loans receivable is the result of gross loan growth of $98.5 million, which includes $1.1 million in PPP loan forgiveness and paydowns during the ~~reduction~~six months ended June 30, 2023. Total community bank deposits decreased $28.8 million, or 1.9%, to $1.51 billion, as of June 30, 2023, compared to $1.54 billion as of December 31, 2022. The decrease in community bank deposits was a result of pricing disciplines as some customer sought higher rate products elsewhere. Our cost of deposits for the ~~corporate income tax rate under~~community bank was 0.98% for the ~~Tax Cuts and Jobs Act.~~

~~Financial Condition~~

~~Our~~three months ended June 30, 2023.

CCBX total assets as of June 30, 2023 increased ~~$45.1~~$381.0 million, or ~~5.6%~~29.3%, to ~~$850.9~~$1.68 billion, compared to $1.30 billion as of December 31, 2022. During the six months ended June 30, 2023, $189.8 million in CCBX loans were transferred to loans held for sale, with $153.9 million in loans sold and $35.9 million remaining in loans held for sale as of June 30, 2023; we had no loans held for sale as of December 31, 2022. Total CCBX loans receivable increased $282.0 million, or 27.9%, to $1.29 billion as of June 30, 2023, compared to $1.01 billion as of December 31, 2022. The increase in loans receivable is the result of increased activity with CCBX partners. CCBX allowance for credit losses increased to $90.1 million as of June 30, ~~2018, from $805.8~~2023, compared to $53.4 million as of December 31, ~~2017. Our asset~~2022 as a result of increased loss rates and balances on CCBX loans which has impacted the allowance calculation. CCBX partner agreements provide for, and the Company has collected in full, credit enhancements that cover the $31.0 million and $63.2 million in net charge-offs on CCBX loans for the three and six months ended June 30, 2023. Total CCBX deposits increased $373.8 million, or 29.2%, to $1.65 billion, compared to $1.28 billion as of December 31, 2022 as a result of growth within the CCBX relationships. This does not include an additional $9.9 million in CCBX deposits that are transferred off the balance sheet as of June 30, 2023.

Treasury & administration total assets as of June 30, 2023 decreased $89.8 million, or 41.2%, to $128.2 million, compared to $218.0 million as of December 31, 2022. Total securities increased $12.4 million, or 12.6%, to $110.7 million as of June 30, 2023, compared to $98.4 million as of December 31, 2022. Total borrowings were $47.7 million as of June 30, 2023 and $47.6 million as of December 31, 2022.

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


	Three months ended June 30, 2023								Three months ended June 30, 2022
(dollars in thousands; unaudited)	Community Bank		CCBX		Treasury & Administration		Total		Community Bank		CCBX		Treasury & Administration		Total
Net interest income, before intrabank transfer	$	22,904	$	36,620	$	2,826	$	62,350	$	18,568	$	19,926	$	1,392	$	39,886
Interest income (expense) intrabank transfer	(2,490)		3,487		(997)		—		303		532		(835)		—
(Recapture)/Provision for credit losses - loans	(47)		52,645		—		52,598		108		13,986		—		14,094
(Recapture)/Provision for unfunded commitments	(340)		(5)		—		(345)		—		—		—		—
Noninterest income (1)	1,613		56,718		264		58,595		1,355		24,048		89		25,492
Noninterest expense	9,592		35,196		7,122		51,910		7,721		24,527		5,921		38,169
Net income before income taxes	12,822		8,989		(5,029)		16,782		12,397		5,993		(5,275)		13,115
Income taxes	2,949		2,089		(1,162)		3,876		2,777		1,344		(1,182)		2,939
Net Income	$	9,873	$	6,900	$	(3,867)	$	12,906	$	9,620	$	4,649	$	(4,093)	$	10,176

(1)For the three months ended June 30, 2023, CCBX noninterest income includes credit enhancements of $51.0 million, fraud enhancements of $1.5 million, and BaaS program income of $3.9 million. For the three months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $14.2 million, fraud enhancements of $6.5 million and BaaS program income of $3.2 million.


	Six Months Ended June 30, 2023								Six Months Ended June 30, 2022
(dollars in thousands; unaudited)	Community Bank		CCBX		Treasury & Administration		Total		Community Bank		CCBX		Treasury & Administration		Total
Net interest income, before intrabank transfer	$	44,582	$	66,415	$	5,844	$	116,841	$	35,773	$	31,799	$	1,582	$	69,154
Interest income (expense) intrabank transfer	(3,569)		6,139		(2,570)		—		431		730		(1,161)		—
Provision for credit losses - loans	381		95,761		—		96,142		452		26,584		—		27,036
(Recapture)/Provision for unfunded commitments	(203)		11		—		(192)		—		—		—		—
Noninterest income(1)	2,704		104,798		400		107,902		2,912		44,389		177		47,478
Noninterest expense	18,685		63,634		14,254		96,573		15,367		42,934		10,283		68,584
Net income before income taxes	24,854		17,946		(10,580)		32,220		23,297		7,400		(9,685)		21,012
Income taxes	5,340		3,856		(2,273)		6,923		5,103		1,626		(2,123)		4,606
Net Income	$	19,514	$	14,090	$	(8,307)	$	25,297	$	18,194	$	5,774	$	(7,562)	$	16,406

(1)For the six months ended June 30, 2023, CCBX noninterest income includes credit enhancements of $93.4 million, fraud enhancements of $3.5 million and BaaS program income of $7.5 million. For the six months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $27.3 million, fraud enhancements of $11.0 million and BaaS program income of $5.7 million.

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Comparison of the quarter ended June 30, 2023 to the comparable quarter in the ~~first~~ ~~half~~ prior year

Net interest income before intrabank interest expense for the community bank was $22.9 million for the quarter ended June 30, 2023, an increase of ~~2018~~$4.3 million, or 23.4%, compared to $18.6 million for the quarter ended June 30, 2022. The increase in net interest income is largely due to increased yield on loans resulting from loan growth and higher interest rates. As a result of the community bank having higher average loans than deposits for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, intrabank interest expense for the community bank was $2.5 million for the quarter ended June 30, 2023, compared to intrabank interest income of $303,000 for the quarter ended June 30, 2022. There was a small recapture for credit losses - loans for the community bank of $47,000 for the quarter ended June 30, 2023, compared to a provision of $108,000 for the quarter ended June 30, 2022. Net charge-offs (recoveries) to average loans for the community bank segment have remained consistently low and were 0.00% for the quarter ended June 30, 2023 and (0.01)% for the quarter ended June 30, 2022. Noninterest income for the community bank was $1.6 million, for the quarter ended June 30, 2023, an increase of $258,000, or 19.0%, compared to $1.4 million for the quarter ended June 30, 2022 and primarily due to ~~$43.4~~a $474,000 increase in loan referral fees. Noninterest expenses for the community bank increased $1.9 million, or 24.2%, to $9.6 million as of June 30, 2023, compared to $7.7 million as of June 30, 2022. The increase in noninterest expense is largely due to increased salaries and employee benefits as a result of growth, higher software licenses maintenance and subscription costs related to new reporting software that helps monitor and assess risk and to automate and create efficiencies in reporting, and other expense increases related to growth.

Net interest income for CCBX before intrabank interest income was $36.6 million for the quarter ended June 30, 2023, an increase of $16.7 million, or 83.8%, compared to $19.9 million for the quarter ended June 30, 2022. The increase in net interest income is due to loan growth and higher interest rates from active CCBX relationships. As a result of having higher average deposits than loans for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 intrabank interest income for CCBX was $3.5 million for the quarter ended June 30, 2023, compared to $532,000 for the quarter ended June 30, 2022. Provision for credit losses - loans was $52.6 million as a result of loan origination growth and as a result of increased loss rates and balances on CCBX loans which has impacted the allowance calculation for the quarter ended June 30, 2023, compared to $14.0 million for the quarter ended June 30, 2022. CCBX partner agreements provide for, and the Company has collected in full, credit enhancements that cover the $31.0 million in net charge-offs on CCBX loans for the quarter ended June 30, 2023. The $52.6 million provision on CCBX loans includes $51.0 million for partner loans with credit enhancement on them and $1.6 million on CCBX loans that the Company is responsible for. In accordance with the program agreement, the Company is responsible for credit losses on approximately 10% of a $180.5 million loan portfolio, or $18.0 million in partner loans at June 30, 2023. Noninterest income for CCBX was $56.7 million for the quarter ended June 30, 2023, an increase of $32.7 million, or 135.9%, compared to $24.0 million for the quarter ended June 30, 2022, due to an increase of $36.8 million in BaaS credit enhancements to establish a credit enhancement asset for future credit losses due from our CCBX partners, $4.9 million decrease in BaaS fraud enhancements and $729,000 in BaaS program income, which was the result of increased activity with broker dealers and digital financial service providers. Noninterest expenses for CCBX increased $10.7 million, or 43.5%, to $35.2 million as of June 30, 2023, compared to $24.5 million as of June 30, 2022. The increase in noninterest expense is largely due to growth from active CCBX relationships resulting in an increase in BaaS loan expense, BaaS fraud expense from increased CCBX loan originations and increased salaries and benefits, for the quarter ended June 30, 2023, compared to the quarter ended June 30, 2022. For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”

Net interest income before intrabank interest expense for treasury & administration was $2.8 million for the quarter ended June 30, 2023, an increase of $1.4 million, or 103.0%, compared to $1.4 million for the quarter ended June 30, 2022, as a result of increased interest rates. Noninterest income increased $175,000, or 196.6%, to $264,000 for the quarter ended June 30, 2023, compared to $89,000 for the quarter ended June 30, 2022. Noninterest expense increased $1.2 million, or 20.3%, to $7.1 million for the quarter ended June 30, 2023, compared to $5.9 million for the quarter ended June 30, 2022, largely as a result of increased salaries and employee benefits and legal and professional fees associated with our infrastructure enhancement projects to improve processing, automate processes, reduce compliance costs, and enhance our data management as a result of growth.

Comparison of the six months ended June 30, 2023 to the comparable period in the prior year

Net interest income before intrabank interest expense for the community bank was $44.6 million for the six months ended June 30, 2023, an increase of $8.8 million, or 24.6%, compared to $35.8 million for the six months ended June 30, 2022. The increase in net interest income is largely due to increased yield on loans resulting from loan growth and higher interest rates. As a result of the community bank having higher average loans than deposits for the six months ended June 30, 2023

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compared to the six months ended June 30, 2022, intrabank interest expense for the community bank was $3.6 million for the six months ended June 30, 2023, compared to intrabank interest income of $431,000 for the six months ended June 30, 2022. Provision for credit losses - loans for the community bank was $381,000 for the six months ended June 30, 2023, compared to $452,000 for the six months ended June 30, 2022. Net charge-offs to average loans for the community bank segment have remained consistently low and was 0.01% and 0.00% for the six months ended June 30, 2023, and 2022, respectively. Noninterest income for the community bank was $2.7 million for the six months ended June 30, 2023, a decrease of $208,000, or 7.1%, compared to $2.9 million for the six months ended June 30, 2022. Loan referral fees decreased $128,000 for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The recognition of loan referral fees fluctuates in response to market conditions and as a result we may recognize more or less, or may not recognize any, loan referral fees in some periods. Additionally, in the six months ended June 30, 2022, there was a no net unrealized gain on equity securities recognized compared to an unrealized gain of $194,000 in the six months ended June 30, 2023. Noninterest expenses for the community bank increased $3.3 million, or 21.6%, to $18.7 million as of June 30, 2023, compared to $15.4 million as of June 30, 2022. The increase in noninterest expense is largely due to increased salaries and employee benefits as a result of growth, higher software licenses maintenance and subscription costs related to new reporting software that helps monitor and assess risk and to automate and create efficiencies in reporting, and increased legal and professional fees associated with our infrastructure enhancement projects to improve processing, automate processes, reduce compliance costs, and enhance our data management.

Net interest income for CCBX before intrabank interest income was $66.4 million for the six months ended June 30, 2023, an increase of $34.6 million, or 108.9%, compared to $31.8 million for the six months ended June 30, 2022. The increase in net interest income is due to loan growth from active CCBX relationships. As a result of having higher average deposits than loans for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 intrabank interest income for CCBX was $6.1 million for the six months ended June 30, 2023, compared to $730,000 for the six months ended June 30, 2022. Provision for credit losses - loans was $95.8 million for the six months ended June 30, 2023, compared to $26.6 million for the six months ended June 30, 2022, as a result of loan origination growth and as a result of increased loss rates and balances on CCBX loans which has impacted the allowance calculation. Noninterest income for CCBX was $104.8 million for the six months ended June 30, 2023, an increase of $60.4 million, or 136.1%, compared to $44.4 million for the six months ended June 30, 2022, due to an increase of $66.1 million in BaaS credit enhancements related to the allowance for credit losses, $7.5 million decrease in BaaS fraud enhancements and $1.8 million increase in ~~cash~~total BaaS program income, which was the result of increased activity with broker dealers and ~~cash equivalents, offset by~~digital financial service providers. Noninterest expenses for CCBX increased $20.7 million, or 48.2%, to $63.6 million as of June 30, 2023, compared to $42.9 million as of June 30, 2022. The increase in noninterest expense is largely due to growth from active CCBX relationships resulting in an increase in BaaS loan expense, BaaS fraud expense and increased salaries and benefits, for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. Also contributing to the increase in noninterest expense is higher legal and professional fees associated with our infrastructure enhancement projects to improve processing, automate processes, reduce compliance costs, and enhance our data management. For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”

Net interest income before intrabank interest expense for treasury & administration was $5.8 million for the six months ended June 30, 2023, an increase of $4.3 million, or 269.4%, compared to $1.6 million for the six months ended June 30, 2022, as a ~~decrease~~result of ~~$1.0~~increased interest rates. Noninterest income increased $223,000, or 126.0%, to $400,000 for the six months ended June 30, 2023, compared to $177,000 for the six months ended June 30, 2022. Noninterest expense increased $4.0 million, or 38.6%, to $14.3 million for the six months ended June 30, 2023, compared to $10.3 million for the six months ended June 30, 2022, largely as a result of increased salaries and employee benefits and legal and professional fees as a result of growth.

Financial Condition

Our total assets increased $390.8 million, or 12.4%, to $3.54 billion at June 30, 2023 from $3.14 billion at December 31, 2022. The increase is primarily the result of $380.3 million increase in loans receivable during the six months ended June 30, 2023.

Loans Held For Sale

During the quarter ended June 30, 2023, $88.6 million in ~~investment securities. Our growth was primarily funded by $41.2~~CCBX loans were transferred to loans held for sale, with $80.0 million in ~~deposit growth during the first half~~loans sold. A portion of ~~2018.~~

these loans were sold at par and a portion were sold with a gain on sale of $23,000. As

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of June 30, 2023 $35.9 million in residential real estate secured lines of credit loans remain in loans held for sale. At December 31, 2022, there were no loans held for sale.

Loan Portfolio

Our primary source of income is derived through interest earned on loans. A substantial portion of our loan portfolio consists of commercial ~~and industrial loans and~~ real estate loans ~~secured by~~and commercial ~~real estate properties located~~and industrial loans in the Puget Sound region. Our consumer and other loans also represent a significant portion of our loan portfolio with the growth of our CCBX segment. Our loan portfolio represents the highest yielding component of our earning assets.

As of June 30, ~~2018,~~2023, loans receivable totaled ~~$700.7 million,~~$3.01 billion, an increase of ~~$43.9~~$380.3 million, or ~~6.7%~~14.5%, compared to December 31, ~~2017.~~2022. Total loans receivable is net of $6.7 million in net deferred origination fees, $60,000 of which is attributed to PPP loans. The increase ~~was primarily~~includes CCBX loan growth of $282.0 million, or 27.9%, and community bank loan growth of $98.5 million, or 6.1%, which includes a $1.1 million, or 23.5%, reduction in PPP loans due to ~~our efforts to increase income by building a diversified loan portfolio while maintaining strong credit quality.~~

forgiveness and principal paydowns.

Loans as a percentage of deposits were ~~94.1%~~96.2% as of June 30, ~~2018,~~2023, compared to ~~93.4%~~93.2% as of December 31, ~~2017.~~2022. We ~~are~~remain focused on serving our communities and markets by growing loans and funding those loans with customer deposits.

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

	As of June 30, 2018						As of December 31, 2017
(Dollars in thousands)	Amount			Percent			Amount			Percent
Commercial and industrial loans	$	89,284			12.7	%	$	88,688			13.5	%
Real estate:
														As of June 30, 2023					As of December 31, 2022
(dollars in thousands; unaudited)													(dollars in thousands; unaudited)	Amount			Percent		Amount			Percent
Commercial and industrial loans:													Commercial and industrial loans:
PPP loans													PPP loans	$	3,595		0.1	%	$	4,699		0.2	%
Capital call lines													Capital call lines	138,428			4.6		146,029			5.5
All other commercial & industrial loans													All other commercial & industrial loans	211,806			7.0		161,900			6.1
Total commercial and industrial loans:													Total commercial and industrial loans:	353,829			11.7		312,628			11.8
Real estate loans:													Real estate loans:
Construction, land and land development		46,356			6.6			41,641			6.3		Construction, land and land development	186,706			6.2		214,055			8.1
Residential real estate		88,422			12.6			87,031			13.3		Residential real estate	463,179			15.4		449,157			17.1
Commercial real estate		474,330			67.7			437,717			66.6		Commercial real estate	1,164,088			38.6		1,048,752			39.8
Consumer and other loans		2,670			0.4			2,058			0.3		Consumer and other loans	846,459			28.1		608,771			23.2
Gross loans receivable		701,062			100.0	%		657,135			100.0	%	Gross loans receivable	3,014,261			100.0	%	2,633,363			100.0	%
Net deferred origination fees		(370	)					(347	)
Net deferred origination fees - PPP loans													Net deferred origination fees - PPP loans	(60)					(82)
Net deferred origination fees - all other loans													Net deferred origination fees - all other loans	(6,648)					(6,025)
Loans receivable	$	700,692					$	656,788					Loans receivable	$	3,007,553				$	2,627,256
Loan Yield (1)													Loan Yield (1)	10.85		%			8.12		%

(1)Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.

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The following tables detail the loans by segment which are included in the total loan portfolio table above:


Community Bank	As of
	June 30, 2023					December 31, 2022
(dollars in thousands; unaudited)	Balance			% to Total		Balance			% to Total
Commercial and industrial loans:
PPP loans	$	3,595		0.2	%	$	4,699		0.3	%
All other commercial & industrial loans	151,483			8.8		146,982			9.1
Real estate loans:
Construction, land and land development loans	186,706			10.9		214,055			13.2
Residential real estate loans	211,966			12.3		204,581			12.6
Commercial real estate loans	1,164,088			67.7		1,048,752			64.7
Consumer and other loans:
Other consumer and other loans	1,457			0.1		1,725			0.1
Gross Community Bank loans receivable	1,719,295			100.0	%	1,620,794			100.0	%
Net deferred origination fees	(6,261)					(6,042)
Loans receivable	$	1,713,034				$	1,614,752
Loan Yield(1)	6.28		%			5.32		%

(1)Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.


CCBX	As of
	June 30, 2023					December 31, 2022
(dollars in thousands; unaudited)	Balance			% to Total		Balance			% to Total
Commercial and industrial loans:
Capital call lines	$	138,428		10.7	%	$	146,029		14.4	%
All other commercial & industrial loans	60,323			4.7		14,918			1.5
Real estate loans:
Residential real estate loans	251,213			19.4		244,576			24.2
Consumer and other loans:
Credit cards	379,642			29.3		279,644			27.6
Other consumer and other loans	465,360			35.9		327,402			32.3
Gross CCBX loans receivable	1,294,966			100.0	%	1,012,569			100.0	%
Net deferred origination (fees) costs	(447)					(65)
Loans receivable	$	1,294,519				$	1,012,504
Loan Yield - CCBX (1)(2)	16.95		%			13.85		%

(1)CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans. Net BaaS loan income is a non-GAAP measure. See the reconciliation of non-GAAP measures set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for the impact of BaaS loan expense on CCBX yield.

(2)Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.

Commercial and Industrial Loans. Commercialand industrialloans increased~~$600,000,~~ $41.2 million, or ~~0.70%~~13.2%, to ~~$89.3~~$353.8 millionas of June 30, ~~2018,~~2023, from ~~$88.7~~$312.6 millionas of December31, ~~2017.~~

2022. The increase in commercial and industrial loans receivable over December 31, 2022 was due to a $49.9 million increase in other commercial and industrial loans partially offset by $1.1 million in forgiven and repaid PPP loans and a decrease of $7.6 million in capital call lines. Included in the commercial and industrial loan balance is $138.4 million and $146.0 million in capital call lines resulting from relationships with our CCBX partners as of June 30, 2023 and December 31, 2022, respectively. As of June 30, 2023, there were $60.3 million in CCBX other commercial loans, compared to $14.9 million at December 31, 2022.

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Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. These loans are primarily made based on the borrower’s ability to service the debt from income. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable, inventory or equipment, and we generally obtain personal guarantees on these loans. Commercial and industrial loans includes $48.6 million and $45.1 million in loans to financial institutions as of June 30, 2023 and December 31, 2022, respectively.

Also included in commercial and industrial loans is $3.6 million and $4.7 million in PPP loans as of June 30, 2023, and December 31, 2022, respectively. The impact of PPP loans on the Company’s financial statements has significantly lessened as nearly all of the PPP loans have been paid off and/or forgiven.

Construction, Land and Land Development Loans. Construction,land and land developmentloans ~~increased$4.8~~decreased $27.3 million,or ~~11.5%~~12.8%, to ~~$46.4 millionas of June 30, 2018, from$41.6 millionas of December31, 2017. The increasewas primarilydue to favorable weatherconditionsfor buildingin our marketarea.Unfunded loan commitmentsfor construction,land and land developmentloans increasedto $43.8 millionat June 30, 2018, from$30.8 millionat December31, 2017. Because of the strongresidentialrealestatemarketin the Puget Soundregion,~~we~~expect to see constructionand developmentloans continueto pay off morequicklythan wehave experienced historically even though the balances have continued to grow.~~

~~ResidentialReal EstateLoans.~~As~~of June 30, 2018, purchasedresidentialrealestateloans totaled$34.6 million.We also make one-to-fourfamilyloans to investors to financetheirrentalpropertiesand to businessowners to securetheirbusinessloans. Asof June 30, 2018, residentialrealestateloans made to investorsand businessowners totaled$33.9 million.In addition,we originatehome equitylinesof creditand home equitytermloans for our portfolio.~~

~~Our residential loans increased $1.4 million, or 1.6%, to $88.4~~$186.7 million as of June 30, ~~2018,~~2023, from ~~$87.0~~$214.1 million as of December 31, ~~2017.~~2022. The ~~increases~~decrease is attributed to the completion of a few construction and development projects.

Unfunded loan commitments for construction, land and land development loans were $159.1 million at June 30, 2023, compared to $142.5 million at December 31, 2022. Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2023, the economic environment is continuously changing with bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, political uncertainty and trade issues that have resulted in some economic uncertainty and slowing in construction lending.

Construction, land and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing these loans are primarily located in the Puget Sound region and are comprised of both residential and commercial properties, including owner occupied properties and investor properties. As of June 30, 2023, construction, land and land development loans included $78.1 million in commercial construction loans, $42.5 million in undeveloped land loans, $35.0 million in residential construction loans and $31.1 million in other construction, land and land development loans, compared to $100.7 million in commercial construction loans, $44.6 million in undeveloped land loans, $32.9 million in residential construction loans and $35.9 million in other construction, land and land development loans as of December 31, 2022.

Residential Real Estate Loans. Our one-to-four family residential real estate loans increased $14.0 million, or 3.1%, to $463.2 million as of June 30, 2023, from $449.2 million as of December 31, 2022 due to an increase of $7.4 million in community bank loans combined with an increase of $6.6 million in CCBX loans.

As of June 30, 2023, there were $251.2 million in CCBX home equity loans included in residential real estate, compared to $244.6 million at December 31, 2022, as a result of increased activity. These home equity lines of credit are secured by residential real estate and are accessed by using a credit card.

We have purchased residential mortgages originated through other financial institutions to hold for investment with the intent to diversify our ~~diversification strategy~~residential mortgage loan portfolio, meet certain regulatory requirements and increase our interest income. We last purchased residential mortgage loans in 2018. As of June 30, 2023 and December 31, 2022, we held $9.3 million and $9.4 million, respectively, in purchased residential real estate mortgage loans. These loans purchased typically have a fixed rate with a term of 15 to ~~supplement existing loan growth with~~30 years and are collateralized by one-to-four family residential real estate. We have a defined set of credit guidelines that we use when evaluating these loans. Although purchased loans ~~from a local community bank~~were originated and underwritten by another institution, our mortgage, credit, and compliance departments conduct an independent review of each underlying loan that ~~were individually underwritten~~includes re-underwriting each of these loans to our credit ~~standards~~and compliance standards.

Like our commercial real estate loans, our residential real estate loans are secured by real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in the area in which the real estate is located. Adverse developments affecting real estate values in our market areas could therefore increase the credit risk associated with these loans, impair the value of property pledged as collateral on loans, and affect our ability to sell the collateral upon foreclosure without a loss or additional losses.

Commercial Real Estate Loans. Commercial real estate loans increased $115.3 million, or 11.0%, to $1.16 billion as of June 30, 2023, from $1.05 billion as of December 31, 2022.

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These increases, which occurred across the various segments of our portfolio, were due to our commitment to grow the portfolio in the Puget Sound region. ~~Most~~We actively seek commercial real estate loans in our markets and our lenders are experienced in competing for these loans and managing these relationships.

We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores, hotels and motels, 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. 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. At June 30, 2023, approximately 33.2% of the ~~one-to-four family~~commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans ~~that~~represented 38.6% of our loan portfolio at June 30, 2023 and are historically our largest source of revenue. As of June 30, 2023, we held $42.1 million in purchased ~~over time are from~~commercial real estate loans, compared to $42.4 million at December 31, 2022. Our credit administration team has substantial experience in underwriting, managing, monitoring and working out commercial real estate loans, and remains diligent in communicating and proactively working with borrowers to help mitigate potential credit deterioration.

Consumer and Other. Consumer and other ~~lenders in the Puget Sound region or in California.~~

~~Commercial Real Estate Loans.~~ ~~Commercialrealestate~~loans increased~~$36.6~~ $237.7 million,or ~~8.4%~~39.0%, to ~~$474.3~~$846.5 million, from $608.8 million as of December 31, 2022, as a result of growth in CCBX loans originated through our partners.

CCBX consumer loans totaled $845.0 million as of June 30, ~~2018, from $437.7~~2023, compared to $607.0 millionas at December 31, 2022. CCBX consumer loans include installment loans, credit cards, lines of ~~December31, 2017. The increaseoccurredbecause we activelyseek commercialrealestateloans in our marketsand our lendersare experiencedin competingfor these~~loans. We funded $74.9 million of new commercial real estate loans over the six months period ended June 30, 2018, of which $32.7 million were participations with other community banks. We also occasionally consider purchasing participations from other community banks we know under terms acceptable to us. All participations are individually underwritten to our credit ~~standards and are from our market or the other community bank’s market.~~

~~Consumer and Other Loans.~~ ~~Consumer~~ and other loans. Our community bank consumer and other loans ~~increased $600,000, or 28.6%, to $2.7~~totaled $1.5 millionas of June 30, ~~2018, from$2.1~~2023, compared to $1.7 million at December 31, 2022 and are comprised of personal lines of credit, automobile, boat, and recreational vehicle loans, and secured term loans.

Industry Exposure and Categories of Loans

We have a diversified loan portfolio, representing a wide variety of industries. Our major categories of loans are commercial real estate, consumer and other loans, residential real estate, commercial and industrial, and construction, land and land development loans. Together they represent $3.01 billion in outstanding loan balances. When combined with $2.34 billion in unused commitments the total of these categories is $5.36 billion. However, total exposure on CCBX loans is subject to portfolio and partner maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

The following table summarizes our community bank loan commitments by industry for our commercial real estate portfolio as of ~~December31, 2017. The increasein theseloans was primarilya result~~June 30, 2023:

Table of ~~strongconsumer confidenceand economicstrength~~Contents,


(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Outstanding Balance & Available Commitment		% of Total Loans (Outstanding Balance & Available Commitment)		Average Loan Balance		Number of Loans
Community bank commercial real estate loans
Apartments	$	305,459	$	11,819	$	317,278	5.9	%	$	3,117	98
Hotel/Motel	164,098		2,577		166,675		3.1		6,311		26
Convenience Store	107,568		2,585		110,153		2.1		1,992		54
Mixed use	89,926		2,752		92,678		1.7		1,046		86
Warehouse	89,222		2,122		91,344		1.7		1,652		54
Office	87,322		3,194		90,516		1.7		939		93
Retail	88,307		675		88,982		1.7		920		96
Mini Storage	55,774		1,792		57,566		1.1		2,935		19
Strip Mall	45,729		—		45,729		0.9		5,716		8
Manufacturing	37,297		1,800		39,097		0.7		1,130		33
Groups < 0.70% of total	93,386		4,923		98,309		1.8		1,139		82
Total	$	1,164,088	$	34,239	$	1,198,327	22.4	%	$	1,794	649

As illustrated in the ~~Puget Soundregion.~~

table below, our CCBX partners originate a large number of mostly smaller dollar loans, resulting in an average consumer loan balance of just $1,500.

The following table summarizes our loan commitments by category for our consumer and other loan portfolio as of June 30, 2023:


(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Outstanding Balance & Available Commitment (1)		% of Total Loans (Outstanding Balance & Available Commitment)		Average Loan Balance		Number of Loans
CCBX consumer loans
Credit cards	$	379,642	$	990,447	$	1,370,089	25.6	%	$	1.5	248,853
Installment loans	459,391		—		459,391		8.6		1.7		269,592
Lines of credit	3,704		296		4,000		0.1		0.1		25,826
Other loans	2,265		—		2,265		0.0		0.1		17,261
Community bank consumer loans
Installment loans	1,254		—		1,254		0.0		52.3		24
Lines of credit	149		585		734		0.0		3.5		43
Other loans	54		—		54		0.0		0.2		315
Total	$	846,459	$	991,328	$	1,837,787	34.3	%	$	1.5	561,914

(1)Total exposure on CCBX capital call lines is subject to a portfolio maximum limit of $350.0 million. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

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The following table summarizes our loan commitments by category for our residential real estate portfolio as of June 30, 2023:


(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure (1)		% of Total Loans (Outstanding Balance & Available Commitment)		Average Loan Balance		Number of Loans
CCBX residential real estate loans
Home equity line of credit	$	251,213	$	413,473	$	664,686	12.4	%	$	23	10,976
Community bank residential real estate loans
Closed end, secured by first liens	181,507		3,597		185,104		3.4		603		301
Home equity line of credit	21,803		41,764		63,567		1.2		98		222
Closed end, second liens	8,656		1,170		9,826		0.2		321		27
Total	$	463,179	$	460,004	$	923,183	17.2	%	$	40	11,526

(1)Total exposure on CCBX loans is subject to portfolio maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

The following table summarizes our loan commitments by industry for our commercial and industrial loan portfolio as of June 30, 2023:


(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Outstanding Balance & Available Commitment (1)		% of Total Loans (Outstanding Balance & Available Commitment)		Average Loan Balance		Number of Loans
Capital Call Lines	$	138,428	$	622,319	$	760,747	14.2	%	$	876	158
Retail	60,344		6,362		66,706		1.2		22		2,718
Construction/Contractor Services	24,067		27,329		51,396		1.0		131		184
Financial Institutions	48,648		—		48,648		0.9		4,054		12
Medical / Dental / Other Care	19,046		8,610		27,656		0.5		705		27
Manufacturing	9,286		3,905		13,191		0.3		202		46
Groups < 0.30% of total	54,010		31,017		85,027		1.6		150		359
Total	$	353,829	$	699,542	$	1,053,371	19.7	%	$	101	3,504

(1)Total exposure on CCBX loans is subject to portfolio maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

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The following table details our community bank loan commitments by category for our construction, land and land development loan portfolio as of June 30, 2023:


(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Outstanding Balance & Available Commitment		% of Total Loans (Outstanding Balance & Available Commitment)		Average Loan Balance		Number of Loans
Community bank construction, land and land development loans
Commercial construction	$	78,079	$	127,352	$	205,431	3.8	%	$	4,109	19
Undeveloped land loans	42,530		9,718		52,248		1.0		2,835		15
Residential construction	35,032		16,833		51,865		1.0		1,208		29
Developed land loans	18,735		400		19,135		0.4		669		28
Land development	12,330		4,774		17,104		0.3		822		15
Total	$	186,706	$	159,077	$	345,783	6.5	%	$	1,761	106

Nonperforming Assets

Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by applicable regulations. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. Installment (closed end) consumer loans and revolving (open-ended loans, such as credit cards) originated through CCBX partners continue to accrue interest until they are charged-off at 120 days past due for installment loans (primarily unsecured loans to consumers) and 180 days past due for revolving loans (primarily credit cards). These consumer loans are reported out as nonperforming/substandard loans, 90+ days past due and still accruing. As a result of the type of loans (primarily consumer loans) originated through our CCBX partners, we anticipate that balances 90 days past due or more and still accruing will increase as those loans grow. When loans are placed on nonaccrual status, all unpaid accrued interest is reversed from income and all interest accruals are stopped. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal balance. Loans are returned to accrual status if we believe that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual status.

We define nonperforming loans as loans on nonaccrual status and accruing loans 90 days or more past due. Nonperforming assets also include other real estate owned and repossessed assets.

We believe our lending practices and active approach to managing nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have ~~several~~ procedures in place to assist us in maintaining the overall credit quality of our loan portfolio. We have established underwriting guidelines, concentration limits and we also monitor our delinquency levels for any negative or adverse trends. We actively manage problem assets to reduce our risk for loss.

We had ~~$2.1~~$33.7 million in nonperforming assets ~~including performing troubled debt restructurings, or TDRs,~~ as of June 30, ~~2018,~~2023, compared to ~~$2.1~~$33.2 million as of December 31, ~~2017.~~

2022. This includes $26.3 million in CCBX loans more than 90 days past due and still accruing interest as of June 30, 2023, compared to $26.1 million at December 31, 2022. All of our nonperforming assets were nonperforming loans as of June 30, 2023 and December 31, 2022. Our nonperforming loans to loans receivable ratio was 1.12% at June 30, 2023, compared to 1.26% at December 31, 2022. The ~~followingtablepresentsinformationregarding~~increase in nonperformingassetsat was due to a $233,000 increase in CCBX partner loans that are 90 days or more past due and still accruing interest. Additionally, community bank nonaccrual loans increased $319,000 during the ~~datesindicated:~~

six months ended June 30, 2023 due to the addition of three loans partially offset by principal reductions.

As of

As of

June 30,

December 31,

(Dollars in thousands)

2018

2017

Nonaccrual loans:

Commercial and industrial loans

$
703

$
372

Real estate:

Construction, land and land development

-

-

Residential

75

88

Commercial real estate

1,290

1,660

Consumer and other loans

-

-

Total nonaccrual loans

$
2,068

$
2,120

Accruing loans past due 90 days or more:

Commercial and industrial loans

$
-

$
-

Real estate:

Construction, land and land development

-

-

Residential

-

-

Commercial real estate

-

-

Consumer and other

-

-

Total accruing loans past due 90 days or more

$
-

$
-

Total nonperforming loans

$
2,068

$
2,120

Real estate owned

-

-

Repossessed assets

-

-

Troubled debt restructurings, accruing

-

-

Total nonperforming assets

$
2,068

$
2,120

Total nonperforming loans to loans receivable

0.30
%

0.32
%

Total nonperforming assets to total assets

0.24
%

0.26
%

~~Allowance~~Our community bank credit quality remains strong, as demonstrated by the low level of community bank charge-offs and nonperforming loan balance for ~~Loan Losses~~

~~We maintain an allowance~~the six months ended June 30, 2023. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for ~~loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of~~ the allowance for ~~loan~~credit losses. Agreements with our

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CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses, ~~should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining~~when accruing consumer loans originated through CCBX partners are charged-off at 120 days past due for installment loans (primarily unsecured loans to consumers) and 180 days past due for revolving loans (primarily credit cards).

The following table presents information regarding nonperforming assets at the ~~allowance for loan losses, we estimate losses on specific loans, or groups~~dates indicated:


(dollars in thousands; unaudited)	As of June 30, 2023			As of December 31, 2022
Nonaccrual loans:
Commercial and industrial loans	$	5		$	113
Real estate loans:
Construction, land and land development	66			66
Residential real estate	186			—
Commercial real estate	7,142			6,901
Total nonaccrual loans	7,399			7,080
Accruing loans past due 90 days or more:
Commercial & industrial loans	808			404
Real estate loans:
Residential real estate loans	1,722			876
Consumer and other loans:
Credit cards	18,306			10,570
Other consumer and other loans	5,492			14,245
Total accruing loans past due 90 days or more	26,328			26,095
Total nonperforming loans	33,727			33,175
Real estate owned	—			—
Repossessed assets	—			—
Modified loans for borrowers experiencing financial difficulty	—			—
Total nonperforming assets	$	33,727		$	33,175
Total nonaccrual loans to loans receivable	0.25		%	0.27		%
Total nonperforming loans to loans receivable	1.12		%	1.26		%
Total nonperforming assets to total assets	0.95		%	1.06		%

Table of ~~loans, where the probable loss can be identified and reasonably determined.~~ Contents,

The ~~balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes~~following tables detail nonperforming assets by segment which are included in the ~~nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, and current economic factors.~~

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

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

total nonperforming assets table above:

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


Community Bank	As of
(dollars in thousands; unaudited)	June 30, 2023		December 31, 2022
Nonaccrual loans:
Commercial and industrial loans	$	5	$	113
Real estate:
Construction, land and land development	66		66
Residential real estate	186		—
Commercial real estate	7,142		6,901
Total nonaccrual loans	7,399		7,080

Accruing loans past due 90 days or more:
Total accruing loans past due 90 days or more	—		—
Total nonperforming loans	7,399		7,080
Other real estate owned	—		—
Repossessed assets	—		—
Total nonperforming assets	$	7,399	$	7,080

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


CCBX	As of
(dollars in thousands; unaudited)	June 30, 2023		December 31, 2022
Nonaccrual loans	$	—	$	—
Accruing loans past due 90 days or more:
Commercial & industrial loans	808		404
Real estate loans:
Residential real estate loans	1,722		876
Consumer and other loans:
Credit cards	18,306		10,570
Other consumer and other loans	5,492		14,245
Total accruing loans past due 90 days or more	26,328		26,095
Total nonperforming loans	26,328		26,095
Other real estate owned	—		—
Repossessed assets	—		—
Total nonperforming assets	$	26,328	$	26,095

•

~~for construction,land and land developmentloans, the perceivedfeasibilityof the projectincludingthe abilityto selldevelopedlotsor improvementsconstructedfor resaleor the abilityto leaseproperty constructedfor lease,the qualityand natureof contractsfor presaleor prelease,if any, experienceand abilityof the developerand loan-to-valueratio.~~

As of June 30, ~~2018,~~2023, $25.2 million of the $26.3 million in nonperforming CCBX loans were covered by CCBX partner credit enhancements. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses. Under the agreement, the CCBX partner will indemnify or reimburse the Bank for its loss/charge-off on these loans.

Allowance for credit losses

The 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. 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 Bank must estimate expected credit losses over the loans’ contractual terms, adjusted for expected prepayments. In estimating the life of the loan, the Bank 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 Bank. Because expected credit losses are estimated over the contractual life adjusted for estimated prepayments, determination of the life

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of the loan may significantly affect the ACL. 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 for loan segments utilizing loan level information and relevant information from internal and external sources related to past events and current conditions. In addition, the Company incorporates a reasonable and supportable forecast.

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. Based on this analysis, the Company records a provision for loan losses to maintain the allowance at appropriate levels.

As of June 30, 2023, the allowance for credit losses totaled $110.8 million, or 3.68% of total loans. As of December 31, 2022, the allowance for loan losses totaled ~~$8.5~~$74.0 million, or ~~1.22%~~2.82% of total loans. ~~Our~~Effective January 1, 2023 the Company implemented the CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the incurred loss model, which is what we were previously using. As a result of implementing CECL, there was a one-time adjustment to the 2023 opening allowance balance of $3.9 million. The day one CECL adjustment for community bank loans included a reduction of $310,000 to the community bank allowance driven by the reversal of the unallocated balance and a reduction of $340,000 related to the community bank unfunded commitment reserve also driven by the reversal of the unallocated balance. This was offset by an increase to the CCBX allowance for ~~loan~~$4.2 million. With the mirror image approach accounting related to the contingent credit enhancement asset for CCBX partner loans, there was a CECL day one increase to the indemnification asset in the amount of $4.5 million. Net, the day one impact to retained earnings for the Bank’s transition to CECL was an increase of $954,000, excluding the impact of income taxes.

The increase in the Company’s allowance for credit losses ~~as of~~for the quarter ended June 30, ~~2018, increased by $500,000, or 6.3%,~~2023 compared to December 31, ~~2017, primarily due~~2022, is largely related to ~~growth~~the provision for CCBX partner loans. During the six months ended June 30, 2023, a $95.8 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a provision for credit losses - loans of $381,000 was needed for the six months ended June 30, 2023. The economic environment is continuously changing with the bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, political uncertainty and trade issues that have resulted in some economic uncertainty. As described above, CCBX loans have a higher level of expected losses than our ~~loan portfolio. As of December 31, 2017,~~community bank loans, which is reflected in the factors for the allowance for credit losses.

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 and reclassified negative deposit accounts. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner's legal commitment to indemnify or reimburse 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. Partner fraud includes noncredit fraud losses on loans and deposits originated through partners. Agreements with our CCBX partners also provide protection to the Bank from fraud by indemnifying or reimbursing incurred fraud losses. 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. CCBX partners also pledge a cash reserve account at the Bank which the Bank can collect from when losses occur. That account is then replenished by the partner on a regular interval. 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 to replenish their cash reserve account then the Bank would be exposed to additional losses, as a result of this counterparty risk. If a CCBX partner does not replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan ~~losses totaled $8.0 million, or 1.22%~~and providing credit enhancements. The Bank would write-off any remaining credit enhancement asset from the CCBX partner but would retain the full yield and any fee income on the loan portfolio going forward, and BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.

Table of ~~total loans.~~

Contents,

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


	Three Months Ended
	June 30, 2023									June 30, 2022
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	9		$	32,290		$	32,299		$	3		$	3,539		$	3,542
Gross recoveries	—			(1,340)			(1,340)			(36)			—			(36)
Net charge-offs	$	9		$	30,950		$	30,959		$	(33)		$	3,539		$	3,506
Net charge-offs to average loans (1)	—		%	9.78		%	4.19		%	(0.01)		%	2.05		%	0.64		%

(1)Annualized calculations shown for periods presented.


	Six Months Ended
	June 30, 2023									June 30, 2022
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	59		$	66,407		$	66,466		$	7		$	6,343		$	6,350
Gross recoveries	(5)			(3,200)			(3,205)			(40)			—			(40)
Net charge-offs	$	54		$	63,207		$	63,261		$	(33)		$	6,343		$	6,310
Net charge-offs to average loans (1)	0.01		%	10.92		%	4.50		%	0.00		%	2.38		%	0.64		%

(1)Annualized calculations shown for periods presented.

The following table presents, as of and for the periods indicated, an analysis of the allowance for ~~loan~~credit losses and other related data:

	As of or for the Three						As of or for the Six
	Months Ended						Months Ended							As of or for the Three Months Ended June 30,						As of or for the Six Months Ended June 30,
	June 30,						June 30,
(Dollars in thousands)	2018			2017			2018			2017
(dollars in thousands; unaudited)													(dollars in thousands; unaudited)	2023			2022			2023			2022
Allowance at beginning of period	$	8,423		$	7,793		$	8,017		$	7,544		Allowance at beginning of period	$	89,123		$	38,770		$	74,029		$	28,632
Provision for loan losses		392			-			893			439
Impact of adopting CECL (ASC 326)													Impact of adopting CECL (ASC 326)	—			—			3,852			—
Provision for credit losses													Provision for credit losses	52,598			14,094			96,142			27,036
Charge-offs:													Charge-offs:
Commercial and industrial loans		272			-			281			15		Commercial and industrial loans	411			33			1,187			38
Real estate:
Construction, land and land development		-			-			-			-
Residential		-			-			-			-
Commercial real estate		-			-			84			173
Residential real estate													Residential real estate	945			—			1,682			—
Consumer and other		9			1			14			3		Consumer and other	30,943			3,509			63,597			6,312
Total charge-offs	$	281		$	1		$	379		$	191		Total charge-offs	32,299			3,542			66,466			6,350
Recoveries:													Recoveries:
Commercial and industrial loans	$	1		$	1		$	2		$	1		Commercial and industrial loans	—			35			3			37
Real estate:
Construction, land and land development		-			95			-			95
Residential		-			-			-			-
Commercial real estate		-			-			-			-
Consumer and other		5			1			7			1		Consumer and other	1,340			1			3,202			3
Total recoveries	$	6		$	97		$	9		$	97		Total recoveries	1,340			36			3,205			40
Net (charge-offs ) recoveries		(275	)		96			(370	)		(94	)
Net charge-offs													Net charge-offs	30,959			3,506			63,261			6,310
Allowance at end of period	$	8,540		$	7,889		$	8,540		$	7,889		Allowance at end of period	$	110,762		$	49,358		$	110,762		$	49,358
Allowance for credit losses to nonaccrual loans													Allowance for credit losses to nonaccrual loans	1496.99		%	21367.10		%	1496.99		%	21367.10		%
Allowance to nonperforming loans		412.96	%		335.13	%		412.96	%		335.13	%	Allowance to nonperforming loans	328.41		%	849.39		%	328.41		%	849.39		%
Allowance to loans receivable		1.22	%		1.27	%		1.22	%		1.27	%	Allowance to loans receivable	3.68		%	2.11		%	3.68		%	2.11		%
Net charge-offs (recoveries) to average loans (1)		0.16	%		-0.06	%		0.11	%		0.03	%

~~(1)~~

~~Ratio for the three and six months ended June 30, 2018, are annualized.~~

(1)Annualized calculations shown for periods presented.

Table of Contents,

The allowance for credit losses to nonaccrual loans ratio decreased as of June 30, 2023, compared to June 30, 2022 as a result of an increase of $7.2 million in nonaccrual community bank loans, combined with an increase of $61.4 million in the allowance for credit losses. The increase in the allowance for credit losses for the three and six June 30, 2023 compared to the three and six June 30, 2022, is largely related to the increase in the allowance for loans originated through our CCBX partners. CCBX partner agreements provide for, and the Company has collected in full, credit enhancements that cover the $31.0 million and $63.2 million in net charge-offs on CCBX loans for the three and six months ended June 30, 2023. At June 30, 2023, the allowance for credit losses for CCBX partner loans totaled $90.1 million, compared to $28.6 million at June 30, 2022.

The following table presents the loans receivable and allowance for credit losses by segment for the periods indicated:


	As of June 30, 2023									As of December 31, 2022
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Loans receivable	$	1,713,034		$	1,294,519		$	3,007,553		$	1,614,752		$	1,012,504		$	2,627,256
Allowance for credit losses	(20,653)			(90,109)			(110,762)			(20,636)			(53,393)			(74,029)
Allowance for credit losses to total loans receivable	1.21		%	6.96		%	3.68		%	1.28		%	5.27		%	2.82		%

Although we believe that we have established our allowance for ~~loan~~credit losses in accordance with GAAP and that the allowance for ~~loan~~credit losses was adequate to provide for ~~known and inherent~~expected losses in the portfolio at all times shown above, future provisions for ~~loan~~credit losses will be subject to ongoing evaluations of the risks in our loan portfolio. We have not seen an increase in community bank credit losses due to COVID-19 as originally anticipated, as evidenced by the low level of charge-offs and nonperforming loans, however, the economic environment is continuously changing with the bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, political uncertainty and trade issues that have resulted in some economic uncertainty. If ~~the~~economic conditions worsen then Washington state and Puget Sound region ~~experiences an~~may experience a more severe economic downturn, and our asset quality could deteriorate, ~~or if we are successful in continuing to grow our loan portfolio, our allowance~~which may ~~become inadequate and~~require material additional provisions for ~~loan losses could be necessary.~~

credit losses.

Securities

We use our securities portfolio primarily as a source of liquidity and collateral that can be readily sold or ~~pledge~~pledged for public deposits or other business purposes. At June 30, ~~2018, 87.9%~~2023, 88.6% of our investment portfolio consisted of U.S. Treasury securities. The remainder of our securities portfolio was invested in municipal bonds, U.S. ~~Government agency securities, agency~~Agency collateralized mortgage obligations and U.S. Agency residential mortgage-backed ~~securities, and municipal bonds.~~securities. Because we target a loan-to-deposit ratio in the range of 90% to 100%, we prioritize liquidity over the earnings of our securities portfolio. At June 30, ~~2018,~~2023, our loan-to-deposit ratio was ~~94.1%~~96.2% due to our significant growth in both loans and ~~our~~deposits. Our securities portfolio represented less than 5% of assets. To the extent our securities represent more than 5% of assets, absent an immediate need for liquidity, we anticipate investing excess funds to provide a higher return.

Asof June 30, ~~2018,~~2023, the ~~carryingamount~~amortized cost of our investmentsecuritiestotaled~~$37.2~~ $112.8 million,~~a decrease~~ an increase of~~$1.1~~ $11.5 million,or ~~2.8%~~11.4%, comparedto ~~$38.3~~$101.3 millionas of December31, ~~2017.~~2022. The ~~decrease~~increase in the securities portfoliowas ~~primarily~~due to the ~~result~~purchase of three securities for $11.6 million during the ~~decline~~six months ended June 30, 2023. These securities were purchased for CRA purposes and placed in ~~fairvalue~~our held-to-maturity portfolio. The existing securities in our held-to-maturity portfolio were previously purchased for and ~~pay-downs on mortgage-backedsecurities.~~

are being held for CRA purposes.

Our investment portfolio consists of securities classified as ~~available for sale~~AFS and, to a lesser amount, ~~held to maturity.~~held-to-maturity. The carrying values of our investment securities classified as ~~available for sale~~AFS are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.

As of June 30, 2023, our AFS portfolio has an unrealized loss of $2.1 million, compared to an unrealized loss of $3.0 million as of December 31, 2022.

Table of Contents,

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

	As of				As of
	June 30, 2018				December 31, 2017					As of June 30, 2023				As of December 31, 2022
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
(dollars in thousands; unaudited)									(dollars in thousands; unaudited)	Amortized Cost		Fair Value		Amortized Cost		Fair Value
Securities available-for-sale:									Securities available-for-sale:
U.S. Treasury securities	$	34,812	$	32,574	$	34,794	$	33,396	U.S. Treasury securities	$	99,981	$	97,871	$	99,967	$	97,015
U.S. Government securities		3,000		2,945		3,000		2,970
U.S. Agency collateralized mortgage obligations		197		191		224		221	U.S. Agency collateralized mortgage obligations	50		47		54		51
U.S. Agency residential mortgage-backed securities		47		47		79		80	U.S. Agency residential mortgage-backed securities	—		—		1		1
Municipal bonds		260		256		261		260	Municipal bonds	250		249		250		250
Total available-for-sale securities		38,316		36,013		38,358		36,927	Total available-for-sale securities	100,281		98,167		100,272		97,317
Securities held-to-maturity:									Securities held-to-maturity:
U.S. Agency residential mortgage-backed securities		1,304		1,232		1,409		1,374	U.S. Agency residential mortgage-backed securities	12,563		12,159		1,036		916
Total held-to-maturity securities		1,304		1,232		1,409		1,374	Total held-to-maturity securities	12,563		12,159		1,036		916
Total investment securities	$	39,620	$	37,245	$	39,767	$	38,301	Total investment securities	$	112,844	$	110,326	$	101,308	$	98,233

We held a $2.2 million equity interest in a financial technology company as of June 30, 2023 and December 31, 2022, which consists of common stock and preferred shares.

Additionally, we held a $350,000 equity interest in a technology company of June 30, 2023 and December 31, 2022.

We invest in investment funds that are designed to help accelerate technology adoption at banks and have invested in three separate funds. These funds are carried at fair value as reported by the funds. During the six months ended June 30, 2023, we contributed $180,000 with investment funds designed to help accelerate technology adoption at banks, and recognized net gains of $194,000, resulting in an equity interest of $830,000 at June 30, 2023. The Company has committed up to $763,000 in capital for these investment funds, however, the Company is not obligated to fund these commitments prior to a capital call.

Deposits

We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, ~~savings,~~ money market, savings, and time ~~accounts.~~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. 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 in a reciprocal agreement. We rely primarily on competitive pricing policies, convenient locations, electronic delivery channels (internet and mobile), and personalized service to attract new deposits and retain ~~these~~existing deposits.

Additionally, we offer deposit products through our CCBX segment. 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.

Total deposits as of June 30, ~~2018,~~2023 were ~~$744.5 million,~~$3.16 billion, an increase of ~~$41.2~~$345.1 million, or ~~5.9%~~12.2%, compared to ~~$703.3~~$2.82 billion as of December 31, 2022. The increase in deposits was largely in core deposits, which increased $451.2 million to $3.14 billion from $2.69 billion at December 31, 2022. We define core deposits as all deposits except time deposits and brokered deposits. The $451.2 million increase in core deposits is also largely from growth in the CCBX segment, which accounted for $475.4 million of the increase, partially offset by a decrease of $24.1 million in community bank deposits. The slight decrease in community bank deposits was a result of pricing disciplines as some customer sought higher rate products elsewhere. Our cost of deposits for the community bank was 0.98% for the three months ended June 30, 2023. BaaS-brokered deposits are now classified as NOW accounts due to a change in the relationship agreement with one of our partners; these deposits increased $173.6 million to $275.2 million as of June 30, 2023. These deposits increased as a result of sweeping them back on the balance sheet. Additionally, as of June 30, 2023 we have access to $9.9 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. If a portion of these deposits are retained, they would be classified as NOW accounts.

Table of Contents,

Included in total deposits is $1.65 billion in CCBX deposits, an increase of $373.8 million, or 29.2%, compared to $1.28 billion as of December 31, 2022. CCBX customer deposit relationships include deposits with CCBX end customers, operating and non-operating deposit accounts. The deposits from our CCBX segment are generally classified as interest bearing NOW and money market accounts.

Total noninterest bearing deposits as of June 30, 2023 were $725.6 million, a decrease of $49.4 million, or 6.4%, compared to $775.0 million as of December 31, ~~2017. The increase was primarily related to our successful execution~~2022. Noninterest bearing deposits represent 22.9% and 27.5% of ~~our strategy of deepening relationships with existing customers~~total deposits for June 30, 2023 and ~~actively seeking new customers.~~

~~Noninterest-bearing~~December 31, 2022, respectively.

Total interest bearing account balances, excluding time deposits, as of June 30, ~~2018,~~2023 were ~~$259.4 million,~~$2.41 billion, an increase of ~~$17.1~~$399.1 million, or ~~7.1%~~19.8%, compared to ~~$242.4 million~~$2.01 billion as of December 31, ~~2017.~~2022. The $399.1 million increase ~~was~~is the due in part to former BaaS-brokered deposits now being classified as NOW accounts in the first quarter of 2023 due to a change in the ~~collaboration~~relationship agreement with one of our ~~branch managers, business development offices~~partners, combined with CCBX growth in interest bearing deposits and ~~lenders to grow core deposits. As~~ a ~~team, we actively pursue the business~~community bank increase in interest bearing deposits of ~~new customers.~~

~~Total interest-bearing account balances~~$49.0 million. Included in total deposits is $240.3 million in IntraFi network NOW and money market sweep accounts as of June 30, ~~2018, were $385.2 million, an increase~~2023, which provides our customers with fully insured deposits through a sweep and exchange of ~~$14.9 million, or 4.0% from $370.3 million as of December 31, 2017. The increase was due to our team focusing on growing core deposits.~~

deposits with other financial institutions.

Total time deposit balances as of June 30, ~~2018,~~2023 were ~~$99.8~~$24.8 million, ~~an increase~~a decrease of ~~$9.2~~$4.6 million, or ~~10.1%~~15.7%, from ~~$90.6~~$29.4 million as of December 31, ~~2017.~~2022. The decrease is due to the strong increase in ~~total~~core deposits, ~~during the period was primarily a result of several short-term growth initiatives during the second quarter of 2018.~~

and our focus on core deposits and letting higher rate deposits run off as they mature. We have seen competitors increase rates on time deposits, and we have not globally matched their rates in response as we focus on growing and retaining less costly core deposits.

The followingtablesetsforthdepositbalancesat the dates~~indicated.~~

indicated:

	As of					As of
	June 30, 2018					December 31, 2017						As of June 30, 2023					As of December 31, 2022
			Percent of					Percent of
(Dollars in thousands)	Amount		Total Deposits			Amount		Total Deposits
(dollars in thousands; unaudited)											(dollars in thousands; unaudited)	Amount			Percent of Total Deposits		Amount			Percent of Total Deposits
Demand, noninterest bearing	$	259,449		34.9	%	$	242,358		34.5	%	Demand, noninterest bearing	$	725,592		22.9	%	$	775,012		27.5	%
Now and money market		336,666		45.2			326,412		46.4
NOW and money market											NOW and money market	2,323,164			73.5		1,804,399			64.0
Savings		48,509		6.5			43,876		6.2		Savings	88,991			2.8		107,117			3.8
Total core deposits											Total core deposits	3,137,747			99.2		2,686,528			95.3
Brokered deposits											Brokered deposits	1			—		101,546			3.6
Time deposits less than $100,000		28,274		3.8			27,059		3.8		Time deposits less than $100,000	9,741			0.3		12,596			0.5
Time deposits $100,000 and over		71,570		9.6			63,590		9.0		Time deposits $100,000 and over	15,083			0.5		16,851			0.6
Total	$	744,468		100.0	%	$	703,295		100.0	%	Total	$	3,162,572		100.0	%	$	2,817,521		100.0	%
Cost of deposits (1)											Cost of deposits (1)	2.72		%			1.56		%

(1)Cost of deposits is annualized for the three months ended for each period presented.

Table of Contents,

The following tables detail the deposits for the segments which are included in the total deposit portfolio table above:


Community Bank	As of
	June 30, 2023					December 31, 2022
(dollars in thousands; unaudited)	Balance			% to Total		Balance			% to Total
Demand, noninterest bearing	$	621,012		41.1	%	$	694,179		45.2	%
NOW and money market	778,475			51.6		709,490			46.1
Savings	85,146			5.7		105,101			6.8
Total core deposits	1,484,633			98.4		1,508,770			98.1
Brokered deposits	1			0.0		1			0.0
Time deposits less than $100,000	9,741			0.6		12,596			0.8
Time deposits $100,000 and over	15,083			1.0		16,851			1.1
Total Community Bank deposits	$	1,509,458		100.0	%	$	1,538,218		100.0	%
Cost of deposits(1)	0.98		%			0.37		%

(1)Cost of deposits is annualized for the three months ended for each period presented.


CCBX	As of
	June 30, 2023					December 31, 2022
(dollars in thousands; unaudited)	Balance			% to Total		Balance			% to Total
Demand, noninterest bearing	$	104,580		6.3	%	$	80,833		6.3	%
NOW and money market	1,544,689			93.5		1,094,909			85.6
Savings	3,845			0.2		2,016			0.2
Total core deposits	1,653,114			100.0		1,177,758			92.1
BaaS-brokered deposits	—			—		101,545			7.9
Total CCBX deposits	$	1,653,114		100.0	%	$	1,279,303		100.0	%
Cost of deposits (1)	4.42		%			3.13		%

(1)Cost of deposits is annualized for the three months ended for each period presented.

The following table sets forth the Company’s time deposits of $100,000 or more by time remaining until maturity as of the dates indicated:

(Dollars in thousands)	As of June 30, 2018		As of December 31, 2017

(dollars in thousands; unaudited)					(dollars in thousands; unaudited)	As of June 30, 2023		As of December 31, 2022
Maturity Period:					Maturity Period:
Three months or less	$	6,427	$	6,510	Three months or less	$	3,798	$	4,067
Over three through six months		7,608		8,324	Over three through six months	3,619		2,957
Over six through twelve months		20,057		14,185	Over six through twelve months	5,374		5,892
Over twelve months		37,478		34,571	Over twelve months	2,292		3,935
Total	$	71,570	$	63,590	Total	$	15,083	$	16,851
Weighted average maturity (in years)					Weighted average maturity (in years)	0.80		0.76

Average deposits for the three ~~and six~~ months ended June 30, ~~2018,~~2023 were ~~$719.7 million and $714.6 million, respectively,~~$3.04 billion, an increase of ~~10.5% and 10.1%, respectively,~~ 15.7% compared to $2.63 billion for the three ~~and six~~ months ended June 30, ~~2017.~~2022. The increase in average deposits was primarily due to ~~our~~an increase in core deposits, primarily in interest rate bearing deposits. We expect deposits to increase with continued growth in our primary market areas, ~~and~~ the increase in commercial lending relationships for which we also seek deposit balances and the results of business development efforts by ~~our business development officers,~~ branch managers, treasury service personnel and lenders.

The average rate paid on total ~~interest-bearing~~ deposits was ~~0.62% and 0.59%~~2.72% for the three ~~and six~~ months ended June 30, ~~2018,~~2023, compared to ~~0.47% and 0.47%~~0.25% for the three ~~and six~~ months ended June 30, ~~2017.~~

2022. The average rate paid on NOW and money market accounts increased 3.35% for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The average rate paid on time

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deposits of less than $100,000 increased 0.09% for the three months ended June 30, 2023, compared to the three months ended June 30, 2022. The average rate paid on time deposits greater than $100,000 increased 0.05% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The average rate paid on savings increased 0.21% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The average rate paid on BaaS brokered deposits decreased 0.50% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The overall higher average rate paid on interest bearing accounts in the three months ended June 30, 2023 compared to the three months ended June 30, 2022 is due to the recent interest rate increases by the FOMC. Increased Fed Funds rates along with competition are expected to continue to impact future cost of deposits and our pricing strategies.

The average rate paid on total deposits was 2.44% for the six months ended June 30, 2023, compared to 0.18% for the six months ended June 30, 2022. The average rate paid on NOW and money market accounts increased 3.14% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022. The average rate paid on time deposits of less than $100,000 decreased 0.03% for the six months ended June 30, 2023, compared to the six months ended June 30, 2022. The average rate paid on time deposits greater than $100,000 decreased 1.05% for the six months ended June 30, 2023 compared to the six months ended June 30, 2022, due to the recognition of additional interest expense of $130,000 during the six months ended June 30, 2022 to correct interest on CDs from a previous period. The average rate paid on savings was 0.19% for the six months ended June 30, 2023, compared to 0.03% for the six months ended June 30, 2022. The average rate paid on BaaS brokered deposits increased 3.66% compared to the six months ended June 30, 2022. The overall higher average rate paid on interest bearing accounts in the six months ended June 30, 2023 compared to the six months ended June 30, 2022 is due to the recent interest rate increases by the FOMC.

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

	For the Three Months Ended June 30,										For the Six Months Ended June 30,
	2018					2017					2018					2017						For the Three Months Ended June 30,								For the Six Months Ended June 30,
(Dollars in thousands)	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
																						2023				2022				2023				2022
(dollars in thousands; unaudited)																					(dollars in thousands; unaudited)	Average Balance		Average Rate(1)		Average Balance		Average Rate(1)		Average Balance		Average Rate(1)		Average Balance		Average Rate(1)
Demand, noninterest bearing	$	255,615		0.00	%	$	229,084		0.00	%	$	250,473		0.00	%	$	225,769		0.00	%	Demand, noninterest bearing	$	717,256	0.00	%	$	839,562	0.00	%	$	746,436	0.00	%	$	1,078,525	0.00	%
Now and money market		326,066		0.49			312,777		0.39			327,544		0.47			312,397		0.39
NOW and money market																					NOW and money market	2,206,791		3.74		1,579,970		0.39		2,020,946		3.44		1,250,353		0.30
Savings		47,005		0.03			40,492		0.03			46,506		0.03			39,925		0.03		Savings	93,818		0.24		104,356		0.03		98,828		0.19		104,283		0.03
BaaS-brokered deposits																					BaaS-brokered deposits	1		0.00		68,876		0.50		52,367		4.08		68,848		0.42
Time deposits less than $100,000		26,496		1.09			26,137		0.78			26,521		1.05			27,241		0.81		Time deposits less than $100,000	10,517		0.34		14,462		0.25		11,174		0.27		14,652		0.30
Time deposits $100,000 and over		64,566		1.48			42,760		1.25			63,605		1.43			43,938		1.24		Time deposits $100,000 and over	15,575		0.36		24,455		0.31		15,853		0.31		25,739		1.36
Total deposits	$	719,748		0.40	%	$	651,250		0.31	%	$	714,649		0.38	%	$	649,270		0.31	%	Total deposits	$	3,043,958	2.72	%	$	2,631,681	0.25	%	$	2,945,604	2.44	%	$	2,542,400	0.18	%

(1)Annualized calculations shown for periods presented.

The ratio of average ~~noninterest-bearing~~noninterest bearing deposits to average total deposits for the three ~~months ended June 30, 2018~~ and ~~2017, was 35.5% and 35.2%, respectively. The ratio of average noninterest-bearing deposits to average total deposits for the~~ six months ended June 30, ~~2018~~2023 was 23.6% and ~~2017, was 35.0%~~25.3%, respectively, compared to31.9% and ~~34.8%~~42.4%, ~~respectively.~~

respectively, for the three and six months ended June 30, 2022.

Uninsured Deposits

The FDIC insures our deposits up to $250,000 per depositor, per insured bank for each account ownership category. Deposits that exceed insurance limits are uninsured. At June 30, 2023, deposits totaled $3.16 billion, of which total estimated uninsured deposits were $632.1 million, or 20.0% of total deposits, compared to $835.8 million, or 29.7% of total deposits as of December 31, 2022. At June 30, 2022, deposits totaled $2.70 billion, of which total estimated uninsured deposits were $812.1 million, or 30.1% of total deposits. The Bank is using sweep deposits to provide our customers with fully insured deposits through a sweep and exchange of deposits with other financial institutions.

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Estimated uninsured time deposits totaled $2.6 million as of June 30, 2023. The table below shows the estimated uninsured time deposits, by account, for the maturity periods indicated:


(dollars in thousands; unaudited)	As of June 30, 2023
Maturity Period:
Three months or less	$	947
Over three through six months	257
Over six through twelve months	1,287
Over twelve months	146
Total	$	2,637

Borrowings

We have the ability to utilize short-term to long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.

Federal ~~Home Loan~~Reserve Bank ~~(FHLB) Advances.~~ Line of Credit. The ~~FHLB~~Federal Reserve allows us to borrow againstour lineof credit through a borrower in custody agreement utilizing the discount window, which is collateralizedby certainloans. Asof June 30, ~~2018,~~2023 and ~~December31, 2017,~~June 30, 2022, totalborrowing capacityof ~~$70.7~~$433.8 million and~~$59.3~~ $28.9 million,respectively,was availableunder thisarrangement. As of June 30, 2023 and 2022, Federal Reserve advances totaled zero. Additional loans were pledged during the first six months of 2023 to significantly increase the borrowing capacity of the Bank in the event of a liquidity crisis.

Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of June 30, 2023 and June 30, 2022, we had borrowing capacity of$126.0 millionand$109.0 million, respectively, with the FHLB. As of June 30, 2023 and 2022, FHLB advances totaled ~~$20.0 million as of June 30, 2018, compared to $20.0 million and December31, 2017.~~

zero.

The table below provides details on the FHLB advance borrowings for the periods indicated:


	As of and For the Three Months Ended June 30,						As of and For the Six Months Ended June 30,
(dollars in thousands; unaudited)	2023			2022			2023			2022
Maximum amount outstanding at any month-end during period:	$	—		$	—		$	—		$	24,999
Average outstanding balance during period:	$	—		$	—		$	—		$	12,154
Weighted average interest rate during period:	0.00		%	0.00		%	0.00		%	1.13		%
Balance outstanding at end of period:	$	—		$	—		$	—		$	—
Weighted average interest rate at end of period:	0.00		%	0.00		%	0.00%			0.00		%

Junior Subordinated Debentures. In 2004, weissued~~$3.6~~ $3.6 millionin juniorsubordinateddebenturesto Coastal (WA) StatutoryTrust I ~~or the Trust,~~(the “Trust”), of which weownallof the outstandingcommonsecurities.The Trust used the proceedsfromthe issuanceof itsunderlyingcommonsecuritiesand preferredsecuritiesto purchasethe debenturesissuedby the Company. These debenturesare the Trust’sonly assetsand the interestpaymentsfrom the debenturesfinancethe distributionspaid on the preferredsecurities.The debenturesbear interestat a rateper annum equal to the 3-monthLIBORplus 2.10%. The effectiverateas of June 30, ~~2018,~~2023 and December31, ~~2017,~~2022 was ~~4.44%~~7.65% and ~~3.69%~~6.87%, respectively. Beginning with rate adjustments that occur after June 30, 2023, the rate will be based off three-month CME Term SOFR plus 0.26%. We generallyhave the rightto deferpaymentof intereston the debenturesat any timeor fromtimeto timefor a periodnot exceedingfiveyearsprovidedthatno extensionperiodmay extend beyond the statedmaturityof the debentures.During any such extensionperiod, distributionson the ~~trust’s~~Trust’s preferredsecuritieswill also be deferred,and our abilityto pay dividendson our commonstock will be restricted.The Trust’spreferredsecuritiesare mandatorilyredeemableupon maturityof the debentures,or upon earlierredemptionas providedin the ~~indenture.~~indenture, subject to Federal Reserve approval. If the debenturesare redeemedpriorto maturity,the redemptionpricewill be the principalamountand any accruedbut unpaid interest.Weunconditionallyguaranteepaymentof accruedand unpaid distributionsrequiredto be paid on the Trust ~~Securities~~securities subjectto certainexceptions,the redemptionpricewith respectto any Trust securitiescalledfor redemptionand amountsdue if the Trust is liquidatedor terminated.

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Subordinated Debt. In ~~2016,~~August 2021, the Company issueda subordinatednote ~~to a commercialbank~~ in the amountof~~$10.0~~ $25.0 million.The note matureson ~~August~~September 1, ~~2026,~~2031, and bearsinterestat the rateof ~~5.65%~~3.375% per year for fiveyears and, thereafter, reprices quarterly beginning September 1, 2026, at a rateequal to the three-month SOFR plus 2.76%. The ~~Wall Street Journal~~ ~~primerateplus 2.50%. Principalpaymentsof $500,000 per quartercommenceNovember~~five-year 3.375% interest period ends on September 1, ~~2021.~~2026. We may redeemthe subordinatednote, in whole or in part,without premiumor penalty, in principal redemption multiples of $1,000, after~~July 29, 2021,~~ August 18, 2026, subjectto any requiredregulatoryapprovals.

Proceeds were used to repay $10.0 million in existing 5.65% interest subordinated debt on August 9, 2021 and $11.5 million was contributed to the Bank as capital during the quarter ended September 30, 2021.

As of and For the Three

As of and For the Six

Months Ended

Months Ended

June 30,

June 30,

(Dollars in thousands)

2018

2017

2018

2017

Maximum amount outstanding at any month-end
during period:

FHLB Advances

$
20,000

$
17,000

$
20,000

$
17,000

Average outstanding balance during period:

FHLB Advances

$
5,862

$
2,374

$
3,279

$
1,442

Weighted average interest rate during period:

FHLB Advances

2.05
%

1.17
%

2.03
%

1.15
%
Balance outstanding at end of period:

FHLB Advances

$
20,000

$
17,000

$
20,000

$
17,000

Weighted average interest rate at end of period:

FHLB Advances

2.10
%

1.31
%

2.10
%

1.31
%

In November 2022, the Company issued subordinated notes in the aggregate amount of $20.0 million. The notes mature on November 1, 2032, and bear interest at the rate of 7.00% per year for five years and, thereafter, reprices quarterly beginning November 1, 2027, at a rate equal to the three-month SOFR plus 2.9%. The five-year 7.00% interest period ends on November 1, 2027. We may redeem the subordinated notes, in whole or in part, without premium or penalty, in principal redemption multiples of $1,000, after November 1, 2027, subject to any required regulatory approvals.

Liquidity and Capital Resources

Liquidity Management

Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds and the ability to convert assets into cash. Changes in economic conditions or exposure to credit, market, and operational, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity management.

Deposits obtained through our CCBX segment are a significant source of liquidity for us. If a relationship with a large CCBX partner terminates, the exit of those deposits could have an adverse impact on liquidity. Partner program agreements govern the relationship and are valid for a given period of time. Prior to exiting, the partner would need to provide us adequate notice as stipulated in the agreement that they were not going to renew the program agreement and intend to move the deposits. The movement to an alternate BaaS provider is cumbersome and would be over a period of time, which would allow us the opportunity to put alternate liquidity in place; those options are more fully discussed below. As of June 30, 2023, we have 1 partner with deposits that are in excess of 10% of total deposits and represent 27% of total deposits.

We continuallymonitorour liquiditypositionto ensurethatour assetsand liabilitiesare managedin a manner to meetallreasonablyforeseeableshort-term,long-termand strategicliquiditydemands.Managementhas establisheda comprehensiveprocessfor identifying,measuring,monitoringand controllingliquidityrisk. Because of itscriticalimportanceto the viabilityof the Bank,liquidityriskmanagementis fullyintegratedinto our riskmanagementprocesses.Criticalelementsof our liquidityriskmanagementinclude:effectivecorporate governanceconsistingof oversightby the board of directorsand activeinvolvementby management;appropriate strategies,policies,procedures,and limitsused to manageand mitigateliquidityrisk;comprehensiveliquidity riskmeasurementand monitoringsystemsthatare commensuratewith the complexityof our businessactivities; activemanagementof intradayliquidityand collateral;an appropriatelydiversemix of existingand potential futurefunding sources;adequatelevelsof readily available cash, deposits and highly liquidmarketablesecuritiesfreeof legal,regulatory,or operationalimpediments,thatcan be used to meetliquidityneeds in stressfulsituations;contingencyfunding policiesand plans thatsufficientlyaddresspotentialadverseliquidityeventsand emergencycash flow requirements;and internalcontrolsand internalauditprocessessufficientto determinethe adequacy of the Bank’s liquidityriskmanagementprocess.

Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash on hand, cash at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and ~~wholesale~~BaaS deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, funds from online

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rate services, brokered deposits, a one-way buy through an ICS account, and the issuance of debt or equity securities. Additionally, the Bank, as of June 30, 2023, has access to $9.9 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. We believe we have ample liquidity resources to fund future growth and meet other cash needs as ~~necessary.~~

necessary and are closely monitoring liquidity in this uncertain economic environment.

The Company is a corporation separate and apart from our Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its subordinated note and junior subordinated debentures. The Company’s main source of cash flow has been through equity and debt offerings. The Company has consistently retained a portion of the funds from equity and debt offerings so that is has sufficient funds for its operating and debt ~~costs~~costs. During the six months ended June 30, 2023, the Company contributed $15.0 million to the Bank. The Company currently holds $6.8 million in cash for ~~the next two or three years.~~debt servicing and operating purposes. In addition, the Bank can declare and pay dividends to the Company to meet the Company’s debt and operating expenses. There are statutory and regulatory limitations that affect the ability of the Bank to pay dividends to the Company. We believe that these limitations will not impact the ability of the Bank to pay dividends to the Company to meet ongoing operating needs.

For contingency purposes, the Company maintains a minimum level of cash to fund one year’s projected operating cash flow needs and ~~the Bank manages to~~targets a ~~minimum~~ liquidity ratio of 10% ~~of assets.~~. Both of these minimum liquidity levels are on-balance sheet sources. Per policy and the Bank’s liquidity contingency plan, in event of a liquidity emergency the Bank can utilize wholesale funds in an amount up to 30% of assets. Since the Bank uses only a small portion of its borrowing or wholesale funding capacity, the Bank has access to borrow funds if needed in a liquidity emergency.

Capital Adequacy

Capital management consists of providing equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital levels relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank level. ~~The~~Because the Company’s consolidated assets exceeded $3.0 billion as of September 30, 2022, the Company is no longer eligible for the Federal Reserve’s Small Bank Holding Company Policy Statement and will be evaluated relative to the capital adequacy standards established by the Federal Reserve. Additionally, as of June 30, 2023, the Company’s consolidated assets are in excess of $3.0 billion, and as a consequence, beginning in March 2024, the Company will ~~become subject to regulatory capital requirements once its consolidated assets exceed $3.0 billion.~~

no longer prepare and file financial reports with the Federal Reserve as a small bank holding company.

As of June 30, ~~2018,~~2023, and December 31, ~~2017,~~2022, the Company and the Bank ~~was~~were in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the Federal Reserve’s prompt corrective action regulations. As we deploy ~~our~~ capital and continue to grow ~~our~~ operations, ~~our~~ regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control ~~our~~ growth in order to remain in compliance with all regulatory capital standards applicable to us.

In addition, the Company maintains an effective registration statement on Form S-3 with the Securities and Exchange Commission that would allow the Company to raise additional capital in an amount up to $115.5 million. The Company raised $34.5 million in December 2021. The Company, through a private placement, raised $25.0 million in subordinated debt in 2021 and repaid $10.0 million of subordinated debt with the proceeds and used the remainder for general corporate purposes. On November 1, 2022 the Company, through a private placement, raised $20.0 million of subordinated debt with the proceeds to be used for general corporate purposes. The Company contributed $15.0 million of the capital raised to the Bank in March 2023.

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The followingtablepresentsthe Company’s and the Bank’s regulatorycapitalratiosas of the datespresented,as well as the regulatorycapitalratiosthatare requiredby FederalReserve regulationsto maintain~~“well-capitalized”~~ “well-capitalized” status:

	Actual					Minimum Required for Capital Adequacy Purposes					Required to be Well Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio				Actual				Minimum Required for Capital Adequacy Purposes(1)				Required to be Well Capitalized Under the Prompt Corrective Action Provisions
	(dollars in thousands)
June 30, 2018
Common Equity Tier I risk-based capital ratio (to risk-weighted assets)
(dollars in thousands; unaudited)																(dollars in thousands; unaudited)	Amount		Ratio		Amount		Ratio		Amount	Ratio
June 30, 2023																June 30, 2023
Tier 1 Leverage Capital (to average assets)																Tier 1 Leverage Capital (to average assets)
Company	$	71,139		9.76	%	$	32,793		4.50	%	$	47,367		6.50	%	Company	$	277,812	8.16	%	$	136,230	4.00	%	N/A	N/A
Bank Only		82,443		11.30			32,831		4.50			47,422		6.50		Bank Only	311,723		9.16	%	136,101		4.00	%	170,126	5.00	%
Leverage Capital (to average assets)
Common Equity Tier 1 Capital (to risk-weighted assets)																Common Equity Tier 1 Capital (to risk-weighted assets)
Company		74,639		9.21			32,406		4.00			40,508		5.00		Company	274,312		8.36	%	147,575		4.50	%	N/A	N/A
Bank Only		82,443		10.18			32,394		4.00			40,492		5.00		Bank Only	311,723		9.52	%	147,353		4.50	%	212,843	6.50	%
Tier I Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)																Tier 1 Capital (to risk-weighted assets)
Company		74,639		10.24			43,724		6.00			58,298		8.00		Company	277,812		8.47	%	196,767		6.00	%	N/A	N/A
Bank Only		82,443		11.30			43,775		6.00			58,366		8.00		Bank Only	311,723		9.52	%	196,471		6.00	%	261,961	8.00	%
Total Capital (to risk-weighted assets)																Total Capital (to risk-weighted assets)
Company		93,407	12.82				58,298		8.00			72,873		10.00		Company	364,672		11.12	%	262,356		8.00	%	N/A	N/A
Bank Only		91,211		12.50			58,366		8.00			72,958		10.00		Bank Only	353,522		10.80	%	261,961		8.00	%	327,451	10.00	%

December 31, 2017
Common Equity Tier I risk-based capital ratio (to risk-weighted assets)
December 31, 2022																December 31, 2022
Tier 1 Leverage Capital (to average assets)																Tier 1 Leverage Capital (to average assets)
Company	$	66,494		9.98	%	$	29,990		4.50	%	$	43,319		6.50	%	Company	$	249,250	7.97	%	$	125,141	4.00	%	N/A	N/A
Bank Only		77,756	11.67				29,984		4.50			43,311		6.50		Bank Only	267,699		8.56	%	125,025		4.00	%	156,281	5.00	%
Leverage Capital (to average assets)
Common Equity Tier 1 Capital (to risk-weighted assets)																Common Equity Tier 1 Capital (to risk-weighted assets)
Company		69,994	8.95				31,286		4.00			39,107		5.00		Company	245,750		8.92	%	124,027		4.50	%	N/A	N/A
Bank Only		77,756	9.94				31,280		4.00			39,099		5.00		Bank Only	267,699		9.73	%	123,822		4.50	%	178,854	6.50	%
Tier I Capital (to risk-weighted assets)
Tier 1 Capital (to risk-weighted assets)																Tier 1 Capital (to risk-weighted assets)
Company		69,994		10.50			39,987		6.00			53,316		8.00		Company	249,250		9.04	%	165,370		6.00	%	N/A	N/A
Bank Only		77,756	11.67				39,979		6.00			53,306		8.00		Bank Only	267,699		9.73	%	165,096		6.00	%	220,128	8.00	%
Total Capital (to risk-weighted assets)																Total Capital (to risk-weighted assets)
Company		88,222	13.24				53,316		8.00			66,645		10.00		Company	329,203		11.94	%	220,493		8.00	%	N/A	N/A
Bank Only		85,983		12.90			53,306		8.00			66,632		10.00		Bank Only	302,595		11.00	%	220,128		8.00	%	275,160	10.00	%

~~Contractual Obligations~~

(1)Presents the minimum capital adequacy requirements (excluding the capital conservation buffer) that apply to the Bank and the Company.

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Material Cash Requirements and Capital Resources

The following table ~~summarizes~~provides the material cash requirements from known contractual ~~obligations~~ and other ~~commitments to make future payments (other than non-time deposit obligations), which consist~~obligations as of ~~future cash payments associated with our contractual obligations,~~ as of June 30, ~~2018.~~

2023:

Payments Due by Period

Less than

1 to 2

2 to 5

More than

(Dollars in thousands)

Total

1 Year

Years

Years

5 Years

Contractual Cash Obligations

Time Deposits

$
99,844

$
50,791

$
35,468

$
13,585

$
-

FHLB advances

20,000

20,000

-

-

-

Subordinated note

10,000

-

-

3,500

6,500

Junior subordinated debentures

3,609

-

-

-

3,609

Deferred compensation plans

1,724

175

175

526

848

Operating leases

7,935

1,153

1,165

3,207

2,410

Capital Leases

99

61

38

-

-


			Payments Due by Period
(dollars in thousands; unaudited)	Total		Less than 1 Year		Over 1 year		Other (1)
Cash requirements
Time Deposits	$	24,824	$	20,182	$	4,642	$	—
Subordinated notes	45,000		—		45,000		—
Junior subordinated debentures	3,609		—		3,609		—
Deferred compensation plans	848		175		673		—
Operating leases	7,726		995		6,731		—
Non-maturity deposits	3,137,748		—		—		3,137,748
Equity investment commitment	763		763		—		—

~~For a discussion~~(1)Represents the undefined maturity of ~~our borrowings,see “—FinancialCondition—Borrowings.”~~

non-maturing deposits, including noninterest bearing demand deposits, interest bearing demand deposits, money market accounts, savings accounts and brokered deposits, which can generally be withdrawn on demand.

We ~~believe that will we be able~~maintain sufficient cash and cash equivalents and investment securities to meet short-term cash requirements and the levels of these assets are dependent on our ~~contractual obligations as they come due. Adequate~~operating, investing and financing activities during any given period. Cash on hand, cash ~~levels~~at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are ~~expected~~our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and BaaS deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, funds from online rate services, brokered funds, a one-way buy through ~~profitability, repayments from loans~~an ICS account, and ~~securities, deposit gathering activity, access to borrowing sources and periodic loan sales.~~

~~Off-Balance Sheet Items~~

the issuance of debt or equity securities.

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

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

As of

As of

June 30,

December 31,

(Dollars in thousands)

2018

2017

Commitments to extend credit:

Residential real estate

$
14,906

$
12,488

Construction – residential real estate

29,162

27,447

Construction – commercial real estate

14,686

3,343

Commercial and industrial loans

41,336

38,958

Other

7,737

5,603

Total commitments to extend credit

$
107,827

$
87,839

Standby letters of credit

$
1,760

$
2,004

As of June 30, 2023 we had $2.34 billion in commitments to extend credit, compared to $2.20 billion as of December 31, 2022. The $144.0 million increase is largely attributed to an increase of $197.8 million in consumer and other loan commitments, related to CCBX consumer loans, $150.4 million decrease in commercial and industrial capital call line commitments, $22.1 million increase in commercial construction loans and $85.3 million increase in residential real estate commitments, related to CCBX loans.

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The following table presents commitments associated with outstanding commitments to extend credit, standby and commercial letters of credit and equity investment commitments as of the periods indicated:


(dollars in thousands; unaudited)	As of June 30, 2023		As of December 31, 2022
Commitments to extend credit:
Commercial and industrial loans	$	77,223	$	81,568
Commercial and industrial loans - capital call lines	622,319		772,732
Construction – commercial real estate loans	131,820		109,715
Construction – residential real estate loans	27,257		32,827
Residential real estate loans	460,004		374,735
Commercial real estate loans	34,239		35,024
Consumer and other loans	991,328		793,563
Total commitments to extend credit	$	2,344,190	$	2,200,164
Standby letters of credit	$	1,299	$	3,064
Equity investment commitment	$	763	$	988

We have portfolio limits with our each of our partners to manage loan concentration risk, liquidity risk, and counter-party partner risk. For example, as of June 30, 2023, capital call lines outstanding balance totaled $138.4 million, and while commitments totaled $622.3 million the commitments are cancelable, and are also limited to a maximum of $350.0 million by agreement with the partner.

The following table shows the CCBX maximum portfolio sizes by loan category as of June 30, 2023.


		As of June 30, 2023		As of December 31, 2022
(dollars in thousands; unaudited)	Type of Lending	Maximum Portfolio Size				Increase/(decrease)
Commercial and industrial loans:
Capital call lines	Business - Venture Capital	$	350,000	$	350,000	$	—
All other commercial & industrial loans	Business - Small Business	309,573		65,856		243,717
Real estate loans:
Home equity lines of credit	Home Equity - Secured Credit Cards	375,000		250,000		125,000
Consumer and other loans:
Credit cards	Credit Cards - Primarily Consumer	526,520		600,770		(74,250)
Installment loans	Consumer	1,160,868		1,048,134		112,734
Other consumer and other loans	Consumer - Secured Credit Builder & Unsecured consumer	603,039		190,240		412,799
		$	3,325,000	$	2,505,000	$	820,000
Total Existing Portfolio Size		$	1,294,519	$	1,012,504	$	282,015

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.

As of June 30, 2023, $1.61 billion in commitments to extend credit are unconditionally cancelable, compared to $1.57 billion at December 31, 2022. The increase in unconditionally cancelable commitments is attributed to growth in CCBX loans. Commitments that are unconditionally cancelable allow us to better manage loan growth, credit concentrations and liquidity. We also limit CCBX partners to a maximum aggregate customer loan balance originated and held on our balance sheet, as shown in the table above.

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

~~Initial Public Offering – Capitalization~~

~~The Company successfully closed its initial public offering on July 20, 2018, raising net proceeds~~

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

Critical Accounting Policies

Our accounting policies are integral to understanding our results of ~~$33.2 million~~operations. Our accounting policies are described in greater detail in “Note 1 - Description of Business and ~~issuing 2,577,500 shares~~Summary of ~~common stock in exchange. We intend to use the net proceeds to support or growth, organically or through mergers~~Significant Accounting Policies” and ~~acquisitions,~~“Item 7. Management’s Discussion and ~~for general corporate purposes, which may include the repayment or refinancing~~Analysis of ~~debit~~Financial Condition and ~~maintenance~~Results of Operations - Critical Accounting Policies” of our ~~required regulatory capital levels.~~

Form 10-K. We have procedures and processes in place to facilitate making these judgments. Actual results in these areas could differ from management’s estimates. There have been no significant changes concerning our critical accounting policies as described in our Form 10-K except as indicated in Note 1 of the condensed consolidated financial statements included elsewhere in this report.

Selected Financial Data

The following table ~~sets forth our consolidated capitalization~~shows the Company’s key performance ratios for the periods indicated.


	Three Months Ended										Six Months Ended
(unaudited)	June 30, 2023		March 31, 2023		December 31, 2022		September 30, 2022		June 30, 2022		June 30, 2023		June 30, 2022

Return on average assets (1)	1.52	%	1.58	%	1.66	%	1.45	%	1.41	%	1.55	%	1.18	%
Return on average equity (1)	19.53	%	19.89	%	21.86	%	19.36	%	18.86	%	19.70	%	15.57	%
Yield on earnings assets (1)	10.18	%	9.19	%	8.47	%	7.38	%	5.94	%	9.70	%	5.28	%
Yield on loans receivable (1)	10.85	%	9.95	%	9.33	%	8.46	%	7.34	%	10.42	%	7.10	%



Cost of funds (1)	2.77	%	2.19	%	1.61	%	0.85	%	0.29	%	2.49	%	0.22	%
Cost of deposits (1)	2.72	%	2.13	%	1.56	%	0.82	%	0.25	%	2.44	%	0.18	%
Net interest margin (1)	7.58	%	7.15	%	6.96	%	6.58	%	5.66	%	7.37	%	5.08	%
Noninterest expense to average assets (1)	6.11	%	5.69	%	5.97	%	6.66	%	5.29	%	5.91	%	4.92	%
Noninterest income to average assets (1)	6.90	%	6.28	%	5.43	%	4.48	%	3.53	%	6.60	%	3.40	%
Efficiency ratio	42.92	%	43.03	%	48.94	%	61.12	%	58.38	%	42.97	%	58.80	%
Loans receivable to deposits (2)	96.23	%	92.55	%	93.25	%	89.92	%	88.77	%	96.23	%	88.77	%

(1)Annualized calculations shown for periods presented.

(2)Including loans held for sale.

CCBX – BaaS Reporting Information

During the three and ~~regulatory capital ratios as of~~six months ended June 30, ~~2018:~~

~~on an actual basis:~~

~~on an adjusted basis, after giving effect~~2023, $51.0 million and $93.4 million, respectively was recognized in noninterest income BaaS credit enhancements related to the ~~net proceeds~~establishment of a credit enhancement asset for future credit losses indemnified by our strategic partners and reserve for unfunded commitments for CCBX partner loans and deposits. Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying or reimbursing incurred losses on accounts originated through the partner. In accordance with accounting guidance, we estimate and record a provision for expected losses on these CCBX loans and deposit overdrafts. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through the recognition of noninterest income (BaaS credit enhancements) in recognition of the CCBX partner’s indemnification obligation and legal commitment to indemnify or reimburse losses. Incurred credit losses are recorded in the allowance for credit losses, and as the credit enhancement payments are received from the ~~sale~~CCBX

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partner or taken from the partner's cash reserve account, the credit enhancement asset is relieved. Agreements with our CCBX partners also provide protection to the Bank from fraud by usrequiring the CCBX partners to indemnify or reimburse the Bank for incurred fraud losses. Fraud losses are recorded when incurred as losses in noninterest expense, and the recovery received from the CCBX partner is recorded in noninterest income, resulting in a net impact of ~~shares of common stock~~zero to the income statement. CCBX partners also pledge cash reserves in ~~this offering~~a restricted deposit account at the ~~initial public offering price~~Bank which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Although agreements with our CCBX partners provide for 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 its contracted obligations beyond its cash reserve account then the Bank would be exposed to additional loan and deposit losses, as a result of ~~$14.50 per share.~~

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

For CCBX partner loans the Bank records contractual interest earned from the borrower on loans in interest income, adjusted for origination costs which are paid or payable to the CCBX partner. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements andoriginating &servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Bank takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can then be compared to interest income on the Company’s community bank loans.

The following table illustrates how CCBX partner loan income and expenses are recorded in the financial statements:


Loan income and related loan expense	Three Months Ended						Six Months Ended
(dollars in thousands; unaudited)	June 30, 2023			June 30, 2022			June 30, 2023			June 30, 2022
BaaS loan interest income	$	53,632		$	21,281		$	95,851		$	33,273
Less: BaaS loan expense	22,033			12,229			39,587			20,519
Net BaaS loan income (1)	31,599			9,052			56,264			12,754
Net BaaS loan income divided by average BaaS loans (1)	9.98		%	5.25		%	9.72		%	4.78		%
Yield on loans (2)	16.95		%	12.35		%	16.56		%	12.48		%

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

(2)Annualized calculations shown for periods presented.

The increased activity of CCBX partners has resulted in increases in direct fees, expenses and interest for the three and six months ended June 30, 2023 compared to the three and six months ended June 30, 2022. The following tables are a summary of the direct fees, expenses and interest components of BaaS for the periods indicated and are not inclusive of all income and expense related to BaaS.


Interest income	Three Months Ended				Six Months Ended
(dollars in thousands; unaudited)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
Loan interest income	$	53,632	$	21,281	$	95,851	$	33,273
Total BaaS interest income	$	53,632	$	21,281	$	95,851	$	33,273


Interest expense	Three Months Ended				Six Months Ended
(dollars in thousands; unaudited)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
BaaS interest expense	$	17,012	$	1,356	$	29,436	$	1,474
Total BaaS interest expense	$	17,012	$	1,356	$	29,436	$	1,474

At June 30, 2018

(Dollars in thousands, except for per share data)

Actual

As Adjusted

Long-Term Debt:

Subordinated debt

$
9,957

$
9,957

Junior subordinated debentures

3,580

3,580

Total long-term debt

13,537

13,537

Shareholders’ Equity:

Preferred stock, no par value, 25,000,000 shares authorized; none issued and
   outstanding

-

-

Common stock, no par value,

300,000,000 shares authorized, 8,937,109 voting and 361,444 nonvoting shares issued
   and outstanding, actual; 11,514,609 voting and 361,444 nonvoting shares issued and
   outstanding, as adjusted

52,946

86,193

Retained earnings

18,364

18,364

Accumulated other comprehensive loss, net of tax

(1,820
)

(1,820
)
Total shareholders’ equity

69,490

102,737

Total Capitalization:

$
83,027

$
116,274

Capital Ratios: (1)

Total shareholders’ equity to total assets

8.17
%

12.07
%
Tangible equity to tangible assets (2)

8.17
%

12.07
%
Common equity tier 1 capital ratio

9.76
%

14.32
%
Tier 1 leverage ratio

9.21
%

13.32
%
Tier 1 risk-based capital ratio

10.24
%

14.80
%
Total risk-based capital ratio

12.82
%

17.38
%

Per Share Data: (3)

Book value per share

$
7.47

$
8.65

Tangible book value per share (4)

$
7.47

$
8.65

(1) Except as otherwise noted, capital ratios are for the Company.

(2) Tangible equity to tangible assets is a non-GAAP financial measure. The most directly comparable GAAP financial measure is total shareholders’ equity to total assets. The Company had no goodwill or other intangible assets as of the date indicated. As a result, tangible equity to tangible assets is the same as total shareholders’ equity to total assets as of the date indicated.

(3) Per share amounts are based on total common shares outstanding, which includes common stock and nonvoting common stock.

(4) Tangible book value per share is a non-GAAP financial measure. The most directly comparable GAAP financial measure is book value per share. The Company had no goodwill or other intangible assets as of the date indicated. As a result, tangible book value per share is the same as book value per share as of the date indicated.

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	Three Months Ended				Six Months Ended
(dollars in thousands; unaudited)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
BaaS program income:
Servicing and other BaaS fees	$	895	$	1,159	$	1,843	$	2,328
Transaction fees	1,052		814		1,969		1,307
Interchange fees	975		628		1,764		1,060
Reimbursement of expenses	1,026		618		1,947		990
BaaS program income	3,948		3,219		7,523		5,685
BaaS indemnification income:
BaaS credit enhancements	51,027		14,207		93,389		27,282
BaaS fraud enhancements	1,537		6,474		3,536		11,045
BaaS indemnification income	52,564		20,681		96,925		38,327
Total BaaS income	$	56,512	$	23,900	$	104,448	$	44,012


	Three Months Ended				Six Months Ended
(dollars in thousands; unaudited)	June 30, 2023		June 30, 2022		June 30, 2023		June 30, 2022
BaaS loan and fraud expense:
BaaS loan expense	$	22,033	$	12,229	$	39,587	$	20,519
BaaS fraud expense	1,537		6,474		3,536		11,045
Total BaaS loan and fraud expense	$	23,570	$	18,703	$	43,123	$	31,564

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies.

The following non-GAAP measure is presented to illustrate the impact of BaaS loan expense on net loan income and yield on CCBX loans.

Net BaaS loan income divided by average CCBX loans is a non-GAAP measure that includes the impact BaaS loan expense on net BaaS loan income and the yield on CCBX loans. The most directly comparable GAAP measure is yield on CCBX loans.

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Reconciliations of the GAAP and non-GAAP measures are presented in the following table.


	As of and for the Three Months Ended			As of and for the Six Months Ended
(dollars in thousands; unaudited)	June 30, 2023				June 30, 2022			June 30, 2023			June 30, 2022
Net BaaS loan income divided by average CCBX loans:
CCBX loan yield (GAAP)(1)	16.95		%		12.35		%	16.56		%	12.48		%
Total average CCBX loans receivable	$	1,269,406			$	691,294		$	1,167,366		$	537,577
Interest and earned fee income on CCBX loans (GAAP)	53,632				21,281			95,851			33,273
BaaS loan expense	(22,033)				(12,229)			(39,587)			(20,519)
Net BaaS loan income	$	31,599			$	9,052		$	56,264		$	12,754
Net BaaS loan income divided by average CCBX loans (1)	9.98		%		5.25		%	9.72		%	4.78		%

(1) Annualized calculations for periods presented.

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Item 3. Quantitative and Qualitative Disclosure about Market Risk

Quantitative and Qualitative Disclosures about Market Risk

As a financial institution, our primary component of market risk is interest rate volatility. Our asset liability and funds management policy provides management with the guidelines for effective funds management, and we have established a measurement system for monitoring our net interest rate sensitivity position. We have historically managed our sensitivity position within our established guidelines.

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all ~~interest-earning~~interest earning assets and ~~interest-bearing~~interest bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a decrease in current fair market values. Our objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income.

The FOMC raised interest rates 0.25% in mid-March 2022, 1.25% in the second quarter of 2022, 1.50% in the third quarter of 2022, 1.25% in the fourth quarter of 2022, 0.50% in the first quarter 2023, and 0.25% in the second quarter 2023 and 0.25% so far in the third quarter of 2023, with a potential for further increases expected in the future. The impact of this and any future increases will impact financial results.

We manageour exposureto interestratesby structuringour balancesheetin the ordinarycourseof business. We do not enterinto instrumentssuch as leveragedderivatives,financialoptions,financialfuturecontractsor forwarddeliverycontractsfor the purpose of reducinginterestraterisk.Based upon the natureof our operations, weare not subjectto foreignexchange or commoditypricerisk.We do not ownany tradingassets.

Our exposure to interest rate risk is managed by the Asset Liability Committee ~~or ALCO,~~(“ALCO”), of the Bank and reviewed by the Asset Liability and Investment Committee of our board of directors in accordance with policies approved by our board of directors. ALCO formulates strategies based on appropriate levels of interest rate risk. In determining the appropriate level of interest rate risk, ALCO considers the impact on earnings and capital on the current outlook on interest rates, potential changes in interest rates, regional economies, liquidity, business strategies and other factors. ALCO meets regularly to review, among other things, the sensitivity of assets and liabilities to interest rate changes, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sale activities, commitments to originate loans and the maturities of investments and borrowings. Additionally, ALCO reviews liquidity, cash flows, maturities of deposits and consumer and commercial deposit activity. Management employs various methodologies to manage interest rate risk including an analysis of relationships between ~~interest-earning~~interest earning assets and ~~interest-bearing~~interest bearing liabilities and interest rate simulations using a model. The Asset Liability and Investment Committee of our board of directors meets ~~quarterly~~regularly to review the Bank’s interest rate risk profile, liquidity position, including contingent liquidity, and investment portfolio.

We use interest rate risk simulation models to test interest rate sensitivity of net interest income and fair value of equity, and the impact of changes in interest rates on other financial metrics. Contractual maturities andre-pricing opportunities of loans are incorporated in the model, as are prepayment assumptions, maturity data and call options within the investment portfolio. Average life of non-maturity deposit accounts are based on historical decay rates and assumptions and are incorporated into the model. The assumptions used are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and the application and timing of various management strategies.

To help ensure the accuracy of the model, we perform a quarterly back test against our actual results.

On a quarterly basis, we run multiple simulations under two different premises of which one is a static balance sheet and the other is a dynamic growth balance sheet. The static balance sheet approach produces results that show the interest risk currently inherent in our balance sheet at that point in time. The dynamic balance sheet includes our projected growth levels going forward and produces results that shows how net income, net interest income, and interest risk change based on our projected growth. These simulations test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic approaches, rates are shocked instantaneously and ramped over a 12-month horizon assuming parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulations are also conducted and involve analysis of interest income and expense under various changes in the shape of the yield curve including a forward curve, flat curve, steepening curve, and an inverted curve. Our internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the

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subsequent one- and two-year period should not decline by more than 10% for a 100 basis point shift, 15% for a 200 basis point shift, 20% for a 300 basis point shift, and 25% for a 400 basis point shift.

The followingtablessummarizethe simulatedchange in net interestincomeover a 12-monthhorizonas of the datesindicated:

	Estimated Increase (Decrease) in Net Interest Income
(unaudited)				(unaudited)
Change in Market Interest Rates	Twelve Months Ended June 30, 2018		Twelve Months Ended December 31, 2017	Change in Market Interest Rates	Twelve Month Projection As of June 30, 2023	Twelve Month Projection As of December 31, 2022
Immediate Shifts
Static Balance Sheet and Rate Shifts				Static Balance Sheet and Rate Shifts
+400 basis points	11.5%		13.2%	+400 basis points	10.6%	15.2%
+300 basis points	8.4		9.7	+300 basis points	8.0%	11.4%
+200 basis points	5.6		6.4	+200 basis points	5.3%	7.6%
+100 basis points	2.8		3.2	+100 basis points	2.7%	3.8%
-100 basis points	(1.8)		(2.8)	-100 basis points	(2.9)%	(4.1)%
-200 basis points	(8.1)		(8.1)	-200 basis points	(6.0)%	(8.5)%
-300 basis points	(11.1)		(10.4)	-300 basis points	(9.4)%	(13.0)%
-400 basis points				-400 basis points	(13.0)%	(18.8)%

Dynamic Balance Sheet and Rate Shifts				Dynamic Balance Sheet and Rate Shifts
+400 basis points	18.3		16.1	+400 basis points	13.3%	17.6%
+300 basis points	13.5		11.9	+300 basis points	9.9%	13.2%
+200 basis points		9.0	7.8	+200 basis points	6.6%	8.8%
+100 basis points	4.5		3.9	+100 basis points	3.3%	4.4%
-100 basis points	(3.5)		(3.6)	-100 basis points	(3.5)%	(4.6)%
-200 basis points	(11.5)		(9.8)	-200 basis points	(7.2)%	(9.5)%
-300 basis points	(15.6)		(12.5)	-300 basis points	(10.9)%	(14.5)%
-400 basis points				-400 basis points	(14.6)%	(20.8)%

The results illustrate that the ~~Bank~~ Company is asset sensitive and generally performs better inan increasing interest rate environment. ~~The results~~As the Company’s composition has shifted overtime due to the growth of the CCBX segment to more variable/adjustable in nature, our interest rate risk profile has migrated, slightly reducing our exposure to interest rate risk from declining rates. For the community bank, the drivers are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, ~~interest~~offering rates on ~~these~~ our community bank deposits change more slowly than changes in short-term market rates. For the ~~discount~~CCBX segment, the offering rates on the loan portfolio are modeled using partner contractual net yields which adjust with market shifts. For this CCBX portfolio, the offering rates on both the loans and ~~federal funds~~the deposits nearly fully reprice with changes in market rates. ~~This assumption~~ is ~~incorporated into the simulation model.~~ The assumptions incorporated into the simulation model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact ofthat fluctuations in market interest rates have on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions, the shape of the interest yield curve, and the application and timing of various ~~strategies.~~

~~Impact of Inflation~~

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

strategies.

Item 4. Controls and Procedures

~~The Company’s~~

Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the ~~Company’s principal executive officer~~Chief Executive Officer and ~~principal financial officer, have evaluated~~the Chief Financial Officer, of the effectiveness of the ~~Company’s “disclosure~~design and operation of the Company's disclosure controls and procedures~~” as such term is~~ (as defined in Rule ~~13a-15(f)~~13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based ~~upon their~~on that evaluation, the ~~principal executive officer~~Company's Chief Executive Officer and ~~principal financial officer~~the Chief Financial Officer concluded that, as of the end of the period covered by this report, the ~~Company’s~~Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the ~~Securities and Exchange Commission (the “SEC”)~~SEC (1) is recorded,

Table of Contents,

processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure. ~~In addition, based on that evaluation,~~

Change in Internal Control over Financial Reporting. There were no ~~change~~changes in the Company’s internal control over financial reporting occurred during the ~~three~~six months ended June 30, ~~2018,~~2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

Table of Contents ,

PART II. ~~OTHE~~ROTHER INFORMATION

Item 1. Legal Proceedings

From time to time, we are a party to various litigation matters incidental to the conduct of our business. We do not believe that any currently pending legal proceedings will have a material adverse effect on our business, financial condition or earnings.

Item 1A. Risk Factors

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s ~~prospectus, filed with~~Annual Report on Form 10-K for the ~~Securities and Exchange Commission pursuant to Rule 424(b)(4) on July 18, 2018.~~fiscal year ended December 31, 2022, which are incorporated by reference herein. As of June 30, ~~2018,~~2023, the risk factors of the Company have not changed materially from those disclosed in the ~~prospectus.~~

Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of the Company’s ~~stock~~equity securities during the ~~quarter.~~

On July 20, 2018, subsequent to the period covered by this report, the Company issued and sold 2,577,500 shares of its common stock, including 427,500 shares of common stock sold pursuant to the underwriters’ full exercise of their option to purchase additional shares, in the Company’s initial public offering at an offering price of $14.50 per share. The aggregate offering price for the shares sold by the Company was $37.4 million, and after deducting $2.2 million of underwriting discounts and offering expenses paid to third parties, the Company received total net proceeds of $35.2 million. In addition, a selling shareholder participated in the offering and sold an aggregate of 700,000 shares of common stock at an aggregate offering price of $10.2 million. All of the shares issued and sold in the initial public offering were registered under the Securities Act pursuant to a Registration Statement on Form S-1 (File No. 333-225715), which was declared effective by the SEC on July 17, 2018. Keefe, Bruyette & Woods, ~~a Stifel Company~~, and Hovde Group, LLC acted as joint book-running managers for the offering. An affiliate of Hovde Group, LLC beneficially owns more than 10% of the Company’s common stock. The offering commenced on July 17, 2018, did not terminate until the sale of all of the shares offered, and was closed on July 20, 2018. There has been no material change in the planned use of proceeds from the initial public offering as described in the Company’s prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on July 18, 2018. The Company intends to use the net proceeds from the offering to support its growth, organically or through mergers and acquisitions, and for general corporate purposes, which may include the repayment or refinancing of debt and maintenance of required regulatory capital levels.

six months ended June 30, 2023.

The Company did not repurchase any of its ~~shares~~equity securities during the ~~quarter~~six months ended June 30, 2023 and does not have any authorized share repurchase programs.

Item 3. Defaults Upon Senior Securities

~~Not applicable.~~

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

~~Not applicable.~~

During the period covered by this Quarterly Report on Form 10-Q, no director or officer of the Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.

Item 6. Exhibits


31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

~~31.1~~ 31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) ~~Certification~~ of the Securities Exchange Act of 1934, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1		Certifications of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~31.2~~ 32.2		~~Rule 13a-14(a)/15d-14(a) Certification~~Certifications of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32 101		~~Section 1350 Certification of Chief Executive Officer and Chief Financial Officer~~

~~101.0~~	The following materials from the Company’s Quarterly Report on Form 10-Q for the ~~three and six~~quarter months ended June 30, ~~2018,~~2023, formatted in inline XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

104		Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101 filed herewith)

Table of Contents ~~SIGNATURES~~

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

COASTAL FINANCIAL CORPORATION

Dated:

August ~~31, 2018~~

7, 2023

By:

~~By:~~

/s/ Eric M. Sprink

Eric M. Sprink

~~President and~~ Chief Executive Officer

(~~principal executive officer)~~

Principal Executive Officer)

Dated:

August ~~31, 2018~~

7, 2023

By:

~~By:~~

/s/ Joel G. Edwards

Joel G. Edwards

Executive Vice President and

Chief Financial Officer

(~~principal financial officer)~~

Principal Financial Officer)

	Shares of Common Stock			Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
BALANCE, January 1, 2017		9,238,788		$	52,215	$	8,698	$	(1,016	)	$	59,897
Net income		-			-		3,189		-			3,189
Issuance of vested stock awards		600			-		-		-			-
Issuance of restricted stock awards		6,208			-		-		-			-
Stock repurchase		(211	)		-		-		-			-
Stock-based compensation		-			138		-		-			138
Other comprehensive income		-			-		-		376			376
BALANCE, June 30, 2017		9,245,385		$	52,353	$	11,887	$	(640	)	$	63,600
BALANCE, January 1, 2018		9,248,901		$	52,521	$	14,134	$	(944	)	$	65,711
Net income		-			-		4,044		-			4,044
Reclassification of stranded tax effect due to federal tax rate change		-			-		186		(186	)		-
Issuance of restricted stock awards		4,402			-		-		-			-
Exercise of stock options		45,250			273		-		-			273
Stock-based compensation		-			152		-		-			152
Other comprehensive loss		-			-		-		(690	)		(690	)
BALANCE, June 30, 2018		9,298,553		$	52,946	$	18,364	$	(1,820	)	$	69,490

	Accrual Status		Nonaccrual Status		Total Restructured Loans
	(dollars in thousands)
June 30, 2018
Commercial real estate	$	-	$	1,290	$	1,290
December 31, 2017
Commercial real estate	$	-	$	1,315	$	1,315

Twelve months	$	50,791
One to two years		35,468
Two to three years		8,616
Three to four years		3,192
Four to five years		1,777
	$	99,844

	Six months ended June 30, 2018
Expected term	10.0 years
Expected stock price volatility		41.89	%
Risk-free interest rate		2.66	%
Expected dividends	Zero
Weighted average grant date fair value	$	3.95

	Average balance sheets
	For the Three Months Ended June 30,
	2018								2017
	Average			Interest &		Yield /			Average			Interest &		Yield /
(Dollars in thousands)	Balance			Dividends		Cost (4)			Balance			Dividends		Cost (4)
Assets:
Interest earning assets:
Interest-bearing deposits	$	50,750		$	236		1.87	%	$	56,240		$	149		1.06	%
Investment securities, available for sale (1)		38,325			148		1.55			34,604			122		1.41
Investment securities, held to maturity (1)		1,317			7		2.13			1,684			10		2.38
Other Investments		3,200			62		7.77			2,975			63		8.49
Loans receivable (2)		688,975			8,778		5.11			607,197			7,557		4.99
Total interest earning assets		782,567			9,231		4.73	%		702,700			7,901		4.51	%
Noninterest earning assets:
Allowance for loan losses		(8,522	)							(7,861	)
Other noninterest earning assets		36,277								38,094
Total assets	$	810,322							$	732,933

Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest-bearing deposits	$	464,133		$	712		0.62	%	$	422,166		$	492		0.47	%
FHLB advances and other borrowings		5,972			30		2.01			2,544			7		1.10
Subordinated debt		9,955			147		5.92			9,941			148		5.97
Junior subordinated debentures		3,580			39		4.37			3,578			30		3.36
Total interest-bearing liabilities		483,640			928		0.77	%		438,229			677		0.62	%
Noninterest bearing deposits		255,615								229,084
Other liabilities		2,610								2,889
Total shareholders' equity		68,457								62,731
Total liabilities and shareholders' equity	$	810,322							$	732,933
Net interest income				$	8,303							$	7,224
Interest rate spread							3.96	%							3.89	%
Net interest margin (3)							4.26	%							4.12	%

	Six Months Ended June 30, 2018
	Compared to
	Six Months Ended June 30, 2017
	Increase (Decrease)
	Due to						Total Increase
(Dollars in thousands)	Volume			Rate			(Decrease)
Interest income:
Interest-bearing deposits	$	10		$	194		$	204
Investment securities, available for sale		26			28			54
Investment securities, held to maturity		(2	)		5			3
Other Investments		7			(8	)		(1	)
Loans receivable		1,705			429			2,134
Total increase in interest income		1,746			648			2,394

Interest expense:
Interest-bearing deposits		95			277			372
FHLB advances		11			13			24
Subordinated debt		-			-			-
Junior subordinated debentures		-			16			16
Total increase in interest expense		106			306			412
Increase in net interest income	$	1,640		$	342		$	1,982

	Six Months
	Ended June 30,				Increase			Percent
(Dollars in thousands)	2018		2017		(Decrease)			Change
Deposit service charges and fees	$	1,458	$	1,199	$	259			21.6	%
Loan referral fees		244		42		202			481.0
Mortgage broker fees		106		115		(9	)		(7.8	)
Sublease and lease income		61		111		(50	)		(45.0	)
Gain on sales of loans, net		142		84		58			69.0
Other		309		300		9			3.0
Total Noninterest income	$	2,320	$	1,851	$	469			25.3	%

	As of and For the Three						As of and For the Six
	Months Ended						Months Ended
	June 30,						June 30,
(Dollars in thousands)	2018			2017			2018			2017
Maximum amount outstanding at any month-end during period:
FHLB Advances	$	20,000		$	17,000		$	20,000		$	17,000
Average outstanding balance during period:
FHLB Advances	$	5,862		$	2,374		$	3,279		$	1,442
Weighted average interest rate during period:
FHLB Advances		2.05	%		1.17	%		2.03	%		1.15	%
Balance outstanding at end of period:
FHLB Advances	$	20,000		$	17,000		$	20,000		$	17,000
Weighted average interest rate at end of period:
FHLB Advances		2.10	%		1.31	%		2.10	%		1.31	%

			Payments Due by Period
			Less than		1 to 2		2 to 5		More than
(Dollars in thousands)	Total		1 Year		Years		Years		5 Years
Contractual Cash Obligations
Time Deposits	$	99,844	$	50,791	$	35,468	$	13,585	$	-
FHLB advances		20,000		20,000		-		-		-
Subordinated note		10,000		-		-		3,500		6,500
Junior subordinated debentures		3,609		-		-		-		3,609
Deferred compensation plans		1,724		175		175		526		848
Operating leases		7,935		1,153		1,165		3,207		2,410
Capital Leases		99		61		38		-		-

	At June 30, 2018
(Dollars in thousands, except for per share data)	Actual			As Adjusted
Long-Term Debt:
Subordinated debt	$	9,957		$	9,957
Junior subordinated debentures		3,580			3,580
Total long-term debt		13,537			13,537
Shareholders’ Equity:
Preferred stock, no par value, 25,000,000 shares authorized; none issued and outstanding		-			-
Common stock, no par value,
300,000,000 shares authorized, 8,937,109 voting and 361,444 nonvoting shares issued and outstanding, actual; 11,514,609 voting and 361,444 nonvoting shares issued and outstanding, as adjusted		52,946			86,193
Retained earnings		18,364			18,364
Accumulated other comprehensive loss, net of tax		(1,820	)		(1,820	)
Total shareholders’ equity		69,490			102,737
Total Capitalization:	$	83,027		$	116,274

Capital Ratios: (1)
Total shareholders’ equity to total assets		8.17	%		12.07	%
Tangible equity to tangible assets (2)		8.17	%		12.07	%
Common equity tier 1 capital ratio		9.76	%		14.32	%
Tier 1 leverage ratio		9.21	%		13.32	%
Tier 1 risk-based capital ratio		10.24	%		14.80	%
Total risk-based capital ratio		12.82	%		17.38	%

Per Share Data: (3)
Book value per share	$	7.47		$	8.65
Tangible book value per share (4)	$	7.47		$	8.65

(1) Except as otherwise noted, capital ratios are for the Company.
(2) Tangible equity to tangible assets is a non-GAAP financial measure. The most directly comparable GAAP financial measure is total shareholders’ equity to total assets. The Company had no goodwill or other intangible assets as of the date indicated. As a result, tangible equity to tangible assets is the same as total shareholders’ equity to total assets as of the date indicated.
(3) Per share amounts are based on total common shares outstanding, which includes common stock and nonvoting common stock.
(4) Tangible book value per share is a non-GAAP financial measure. The most directly comparable GAAP financial measure is book value per share. The Company had no goodwill or other intangible assets as of the date indicated. As a result, tangible book value per share is the same as book value per share as of the date indicated.