No

Table of Contents,
UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

☒

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

For the quarterly period ended JuneSeptember 30, 2018

2023

or

☐

oTRANSITION 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 classTrading symbol(s)Name of each exchange on which registered
Common Stock, no par value per shareCCBNASDAQ 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 ☒

o

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 ☐

o

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 “emergingemerging growth company.” See the definitiondefinitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emergingemerging growth company”company in Rule 12b-2 of the Exchange Act.  (Check one)

Large Accelerated Filer

o

☐

Accelerated Filer

☐

x

Non-Accelerated Filer

o

☒

Smaller Reporting Company

☐

o

Emerging Growth Company

☒

x

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 SecuritiesExchange Act ☒

x

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

x

As of August 31, 2018,November 3, 2023, there were 11,521,84913,302,449 shares of the registrant’sissuer’s common stock 100,000 sharesoutstanding.

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.

4

Condensed Consolidated Balance Sheets as of JuneSeptember 30, 20182023 and December 31, 20172022 (unaudited)

4

5

6

7

7

8

Condensed Consolidated Statements of Cash Flows for the SixNine Months ended JuneEndedSeptember 30, 20182023 and 20172022 (unaudited)

8

9

9

11

27

45

46

102

48

103

49

105

49

105

49

105

49

105

49

105

49

105

50

105


2

Safe Harbor Statement under the Private Securities Litigation Reform ActTable 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 suchAll forward-looking statements, we claimexpressed 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. Anycautionary statements contained or all of the forward-looking statements in this report may turn outreferred 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’sour 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; our ability to successfully execute on our strategy for our CCBX segment, CCBX partnerships and our efforts to optimize and strengthen our CCBX balance sheet; 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 loancredit 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.

3

Table of Contents,
PART I. FINANCIALFINANCIAL 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
September 30,
2023		December 31,
2022
Cash and due from banks$29,984 $32,722 
Interest earning deposits with other banks (restricted cash of $0 at September 30, 2023 and December 31, 2022)444,962 309,417 
Investment securities, available for sale, at fair value98,939 97,317 
Investment securities, held to maturity, at amortized cost42,550 1,036 
Other investments11,898 10,555 
Loans receivable2,967,035 2,627,256 
Allowance for credit losses(101,085)(74,029)
Total loans receivable, net2,865,950 2,553,227 
CCBX credit enhancement asset91,867 53,377 
CCBX receivable10,623 10,416 
Premises and equipment, net20,543 18,213 
Operating lease right-of-use assets6,126 5,018 
Accrued interest receivable23,428 17,815 
Bank-owned life insurance, net12,970 12,667 
Deferred tax asset, net4,404 18,458 
Other assets14,021 4,229 
Total assets$3,678,265 $3,144,467 
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits$3,289,700 $2,817,521 
Subordinated debt, net
Principal amount $45,000 (less unamortized debt issuance costs of $894 and $1,001) at September 30, 2023 and December 31, 2022, respectively44,106 43,999 
Junior subordinated debentures, net
Principal amount $3,609 (less unamortized debt issuance costs of $20 at September 30, 2023 and December 31, 2022)3,589 3,588 
Deferred compensation513 616 
Accrued interest payable1,056 684 
Operating lease liabilities6,321 5,234 
CCBX payable38,229 20,419 
Other liabilities10,301 8,912 
Total liabilities3,393,815 2,900,973 
SHAREHOLDERS’ EQUITY
Preferred stock, no par value:
Authorized: 25,000,000 shares at September 30, 2023 and December 31, 2022; issued and outstanding: zero shares at September 30, 2023 and December 31, 2022— — 
Common stock, no par value:
Authorized: 300,000,000 shares at September 30, 2023 and December 31, 2022; 13,302,449 shares at September 30, 2023 issued and outstanding and 13,161,147 shares at December 31, 2022 issued and outstanding129,244 125,830 
Retained earnings156,299 119,998 
Accumulated other comprehensive loss, net of tax(1,093)(2,334)
Total shareholders’ equity284,450 243,494 
Total liabilities and shareholders’ equity$3,678,265 $3,144,467 
See accompanying Notes to Condensed Consolidated Financial Statements.


4

Table of ContentsCOASTAL 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 EndedNine Months Ended
September 30,September 30,
2023202220232022
INTEREST AND DIVIDEND INCOME
Interest and fees on loans$83,652 $52,328 $230,282 $122,126 
Interest on interest earning deposits with other banks3,884 2,273 9,659 3,631 
Interest on investment securities766 554 1,972 1,188 
Dividends on other investments29 24 215 195 
Total interest income88,331 55,179 242,128 127,140 
INTEREST EXPENSE
Interest on deposits25,451 5,717 61,084 7,943 
Interest on borrowed funds651 273 1,974 854 
Total interest expense26,102 5,990 63,058 8,797 
Net interest income62,229 49,189 179,070 118,343 
PROVISION FOR CREDIT LOSSES - LOANS27,157 18,428 123,299 45,464 
PROVISION (RECAPTURE) FOR UNFUNDED COMMITMENTS96 — (96)— 
Net interest income after provision for credit losses - loans
   and unfunded commitments		34,976 30,761 55,867 72,879 
NONINTEREST INCOME
Deposit service charges and fees998 986 2,897 2,858 
Loan referral fees1 — 683 810 
Gain on sales of loans, net107 — 253 — 
Unrealized (loss) gain on equity securities, net5 (133)199 (135)
Other income291 260 824 1,046 
Noninterest income, excluding BaaS program income and BaaS indemnification income1,402 1,113 4,856 4,579 
Servicing and other BaaS fees997 1,079 2,840 3,407 
Transaction fees1,036 940 3,005 2,247 
Interchange fees1,216 738 2,980 1,798 
Reimbursement of expenses1,152 885 3,099 1,875 
BaaS program income4,401 3,642 11,924 9,327 
BaaS credit enhancements25,926 17,928 119,315 45,210 
BaaS fraud enhancements2,850 11,708 6,386 22,753 
BaaS indemnification income28,776 29,636 125,701 67,963 
Total noninterest income34,579 34,391 142,481 81,869 
NONINTEREST EXPENSE    
Salaries and employee benefits18,087 14,506 49,971 37,829 
Occupancy1,224 1,147 3,586 3,366 
Data processing and software licenses2,366 1,670 6,178 4,719 
Legal and professional expenses4,447 2,251 12,154 3,961 
Point of sale expense1,068 742 2,635 1,399 
Excise taxes541 588 1,527 1,501 
Federal Deposit Insurance Corporation ("FDIC") assessments694 850 1,859 2,309 
Director and staff expenses529 475 1,674 1,196 
Marketing169 69 379 242 
Other expense1,523 1,522 4,135 4,318 
Noninterest expense, excluding BaaS loan and BaaS fraud expense30,648 23,820 84,098 60,840 
BaaS loan expense23,003 15,560 62,590 36,079 
BaaS fraud expense2,850 11,707 6,386 22,752 
BaaS loan and fraud expense25,853 27,267 68,976 58,831 
Total noninterest expense56,501 51,087 153,074 119,671 
5
Table of ContentsCONDENSED 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 taxes13,054 14,065 45,274 35,077 
PROVISION FOR INCOME TAXES2,784 2,964 9,707 7,570 
NET INCOME$10,270 $11,101 $35,567 $27,507 
Basic earnings per common share$0.77 $0.86 $2.68 $2.13 
Diluted earnings per common share$0.75 $0.82 $2.61 $2.04 
Weighted average number of common shares outstanding:
Basic13,285,97412,938,20013,253,18412,921,814
Diluted13,675,83313,536,82313,627,93913,484,950

See accompanying Notes to Condensed Consolidated Financial Statements.


6

Table of ContentsCOASTAL 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 September 30,Nine Months Ended September 30,
2023202220232022
NET INCOME$10,270 $11,101 $35,567 $27,507 
OTHER COMPREHENSIVE INCOME (LOSS), before tax
Securities available-for-sale
Unrealized holding income (loss) during the period766 (946)1,607 (2,652)
Income tax (expense) benefit related to unrealized holding gain/loss(177)199 (366)557 
OTHER COMPREHENSIVE INCOME (LOSS), net of tax589 (747)1,241 (2,095)
COMPREHENSIVE INCOME$10,859 $10,354 $36,808 $25,412 
See accompanying Notes to Condensed Consolidated Financial Statements.


7

Table of ContentsCOASTAL 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, June 30, 202212,948,623$123,226 $95,779 $(1,344)$217,661 
Net income—— 11,101 — 11,101 
Issuance of restricted stock awards—— — — — 
Vesting of restricted stock units500— — — — 
Exercise of stock options5,45034 — — 34 
Stock-based compensation—684 — — 684 
Other comprehensive loss, net of tax—— — (747)(747)
BALANCE, September 30, 202212,954,573$123,944 $106,880 $(2,091)$228,733 
BALANCE, December 31, 202112,875,315$121,845 $79,373 $4 $201,222 
Net income—— 27,507 — 27,507 
Issuance of restricted stock awards10,396— — — — 
Vesting of restricted stock units27,137— — — — 
Exercise of stock options41,725311 — — 311 
Stock-based compensation—1,788 — — 1,788 
Other comprehensive loss, net of tax—— — (2,095)(2,095)
BALANCE, September 30, 202212,954,573$123,944 $106,880 $(2,091)$228,733 
BALANCE, June 30, 202313,300,809$128,315 $146,029 $(1,682)$272,662 
Net income—— 10,270 — 10,270 
Exercise of stock options1,64011 — — 11 
Stock-based compensation—918 — — 918 
Other comprehensive income,
   net of tax		—— — 589 589 
BALANCE, September 30, 202313,302,449$129,244 $156,299 $(1,093)$284,450 
BALANCE, December 31, 202213,161,147$125,830 $119,998 $(2,334)$243,494 
Adjustment to retained earnings;
   adoption of ASU 2016- 13		—— 734 — 734 
Net income—— 35,567 — 35,567 
Issuance of restricted stock awards13,538— — — — 
Vesting of restricted stock units46,020— — — — 
Exercise of stock options81,744600 — — 600 
Stock-based compensation—2,814 — — 2,814 
Other comprehensive income,
   net of tax		—— — 1,241 1,241 
BALANCE, September 30, 202313,302,449$129,244 $156,299 $(1,093)$284,450 
See accompanying Notes to Condensed Consolidated Financial Statements.
8
Table of Contents,
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Nine Months Ended September 30,
20232022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income$35,567 $27,507 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses - loans123,299 45,464 
Depreciation and amortization1,563 1,338 
Loss on disposition of fixed assets23 35 
Increase in operating lease right-of-use assets639 812 
Increase in operating lease liabilities(660)(806)
Gain on sales of loans(253)— 
Net discount accretion on investment securities(19)(45)
Unrealized holding (gain) loss on equity investment(199)135 
Stock-based compensation2,814 1,788 
Increase in bank-owned life insurance value(285)(269)
Net change in deferred tax benefit13,468 (6,623)
Net change in CCBX receivable(207)(4,879)
Net change in CCBX credit enhancement asset(34,025)(39,516)
Net change in CCBX payable17,810 13,350 
Net change in other assets and liabilities(13,299)3,733 
Total adjustments110,669 14,517 
Net cash provided by operating activities146,236 42,024 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available for sale— (134,912)
Purchase of investment securities held for investment(41,649)— 
Change in other investments, net(1,144)(2,238)
Principal paydowns of investment securities available-for-sale6 14 
Principal paydowns of investment securities held-to-maturity133 44 
Maturities and calls of investment securities available-for-sale— 70,000 
Purchase of bank owned life insurance(18)(53)
Proceeds from sales of loans held for sale475,065 84,878 
Proceeds from sales of loan participations— 10,300 
Purchase of loans(91,465)(165,790)
Increase in loans receivable, net(823,221)(752,670)
Purchases of premises and equipment, net(3,916)(2,621)
Net cash used by investing activities(486,209)(893,048)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and money market, and savings481,010 482,863 
Net decrease in time deposits(8,830)(9,584)
Net repayment from long term FHLB borrowing— (24,999)
Proceeds from exercise of stock options600 311 
Net cash provided by financing activities472,780 448,591 
NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH132,807 (402,433)
CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year342,139 813,161 
CASH, DUE FROM BANKS AND RESTRICTED CASH, end of quarter$474,946 $410,728 
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest paid$62,686 $9,001 
Income taxes paid5,195 11,430 
9
Table of ContentsCONDENSED 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$1,607 $(2,095)
Operating lease right-of-use assets$1,747 $— 
Operating lease liabilities$(1,747)$— 
Non-cash investing and financing activities:
Transfer from loans to loans held for sale$474,812 $128,193 
Adjustment to retained earnings - adoption of ASU 2016-13, net of deferred tax$(734)$— 

See accompanying Notes to Condensed Consolidated Financial Statements.


10

Table of ContentsCOASTAL 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 issubsidiaries 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 andthat 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 providesis able to offer banking services and products across the nation.The community bank segment includes all community banking activities with a fullprimary focus on providing a wide range of banking products and services to consumers and small andto medium-sized businesses, professionals, and individuals throughoutin the greaterbroader Puget Sound arearegion 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 branchtreasury & administration segment includes treasury management, overall administration and the headquartersall 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’scommunity 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 sixnine months ended JuneSeptember 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 loancredit losses, the fair valuevaluation of the Company’s investment securities, deferred tax assets, and fair value of financial instruments. Actual results could differ significantly from those estimates.

11
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 nine months ended September 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.
12
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.
13
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 asset57,842 53,377 4,465 
Deferred tax asset18,238 18,458 (220)
Liabilities:
Unfunded commitment reserve634 974 (340)
Shareholders' Equity:
Retained earnings120,732 119,998 734 
Subsequent Events - The Company has evaluated events and transactions subsequent to JuneSeptember 30, 20182023 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 Flows2020-04, Reference Rate Reform (Topic 230)848): Classification of Certain Receipts and Cash Payments, a consensusFacilitation of the FASB’s Emerging Issues Task Force. The ASU is intendedEffects of Reference Rate Reform on Financial Reporting, to reduce diversity in practice in howprovide 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 transactionsmodification 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 frameworkprevious 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 broadlycontinue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can be difficultmake a one-time election to apply, stakeholders indicatedsell 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 rescindedaffected 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 ofLIBOR ceased to be published effective June 30, 2023. Beginning with rate adjustments that occur after June 30, 2023, our trust preferred subordinated debentures transitioned 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 no longer offer LIBOR indexed rates on newly originated loans. ASU No. 2018-06 is2020-04 and ASU 2021-01 are not expected to have a material impact on the Company'sour 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

14
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.

ContentsIn 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 valuesallowance for credit losses and the corresponding amounts of investmentgross 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)
September 30, 2023
Available-for-sale
U.S. Treasury securities$99,988 $— $(1,344)$98,644 $— 
U.S. Agency collateralized
   mortgage obligations		49 — (4)45 — 
Municipal bonds250 — — 250 — 
Total available-for-sale
   securities		100,287 — (1,348)98,939 — 
Held-to-maturity   
U.S. Agency residential
   mortgage-backed securities		42,550 — (1,687)40,863 — 
Total investment securities$142,837 $— $(3,035)$139,802 $— 
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 obligations54 — (3)51 
U.S. Agency residential mortgage-backed securities1 — — 1 
Municipal bonds250 — — 250 
Total available-for-sale securities100,272 — (2,955)97,317 
Held-to-maturity
U.S. Agency residential mortgage-backed securities1,036 — (120)916 
Total investment securities$101,308 $— $(3,075)$98,233 
Accrued interest on available-for-sale securities was $184,000 and $723,000 at September 30, 2023 and December 31, 2022, respectively, accrued interest on held-to-maturity securities was $193,000 and $3,000 at September 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

 

15

 

 

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

 

Table of Contents,


The amortized cost and fair value of debt securities at JuneSeptember 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-SaleHeld-to-Maturity
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
(dollars in thousands; unaudited)
September 30, 2023
Amounts maturing in
One year or less$100,238 $98,894 $— $— 
100,238 98,894 — — 
U.S. Agency residential mortgage-backed securities and collateralized mortgage obligations49 45 42,550 40,863 
$100,287 $98,939 $42,550 $40,863 

Investment

Investments in debt securities with carrying valuesan amortized cost of $17,259,000$22.0 million at September 30, 2023 and $14,526,000 at June 30, 2018 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 nine months ended September 30, 2023, one security matured. During the nine months ended September 30, 2023, twelve securities were purchased for $41.6 million.

There were no sales of investment securities during the sixnine months ended JuneSeptember 30, 2018 and June2023 or 2022.
There were eighteen securities with a $3.0 million unrealized loss as of September 30, 2017.

Information pertaining to2023. There were six securities within 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 Months12 Months or GreaterTotal

 

(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)
September 30, 2023September 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$— $— $98,644 $1,344 $98,644 $1,344 

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— — 45 4 45 4 

Municipals

 

 

256

 

 

 

(4

)

 

 

-

 

 

 

-

 

 

 

256

 

 

 

(4

)

Total available-for-sale securities

 

 

5,002

 

 

 

(268

)

 

 

30,964

 

 

 

(2,035

)

 

 

35,966

 

 

 

(2,303

)

Total available-for-sale securities— — 98,689 1,348 98,689 1,348 

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 securities40,026 1,520 837 167 40,863 1,687 

Total investment securities

 

$

5,002

 

 

$

(268

)

 

$

32,196

 

 

$

(2,107

)

 

$

37,198

 

 

$

(2,375

)

Total investment securities$40,026 $1,520 $99,526 $1,515 $139,552 $3,035 

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

)

16
Table of ContentsAt June 30, 2018,
Management has evaluated the above securities and December 31, 2017, there were 11 securities in andoes not believe that any individual unrealized loss position.as of September 30, 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 doesManagement 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 consideroccur 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 LoanCredit Losses

During the quarter ended September 30, 2023, $285.0 million in CCBX loans were transferred to loans held for sale, with $320.9 million in loans sold. A portion of these loans were sold at par and a portion were sold with a gain on sale of $107,000. Pricing is dependent upon the agreement with the partner. The Company sells CCBX loans to manage loan portfolio size by partner and by loan category, with such limits established and documented in the relevant partner agreement. As of September 30, 2023 and 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 nine months ended September 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.
17
Table of Contents,
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

 

September 30,
2023
(dollars in thousands; unaudited)
Community Bank
Commercial and industrial loans$158,232 
Real estate loans:
Construction, land and land development loans167,686 
Residential real estate loans225,372 
Commercial real estate loans1,237,849 
Consumer and other loans:
Other consumer and other loans2,483 
Gross Community Bank loans receivable1,791,622 
CCBX
Commercial and industrial loans:
Capital call lines$114,174 
All other commercial & industrial loans58,869 
Real estate loans:
Residential real estate loans251,775 
Consumer and other loans:
Credit cards440,993 
Other consumer and other loans316,987 
Gross CCBX loans receivable1,182,798 
Total gross loans receivable2,974,420 
Net deferred origination fees and premiums(7,385)
Loans receivable$2,967,035 

Included

December 31,
2022
Consolidated(dollars in thousands; unaudited)
Commercial and industrial loans$312,628 
Real estate loans:
Construction, land, and land development214,055 
Residential real estate449,157 
Commercial real estate1,048,752 
Consumer and other loans608,771 
Gross loans receivable2,633,363 
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 $33,000receivable, was $21.3 million and $76,000$17.0 million at JuneSeptember 30, 20182023 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 September 30, 2023 and December 31, 2022, is $114.2 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/loan. Also included in commercial and
18
Table of Contents,
industrial loans are Paycheck Protection Program (“PPP”) loans of $3.3 million at September 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 $3.3 million and $2.7 million at September 30, 2023 and December 31, 2022, respectively. Community bank overdrafts were $1.0 million and $94,000 at September 30, 2023 and December 31, 2022, respectively and CCBX overdrafts were $2.3 million and $2.6 million at September 30, 2023 and December 31, 2022.
The Company has pledged loans totaling $164,121,000$927.0 million and $147,008,000$220.1 million at JuneSeptember 30, 20182023 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 United States Department of Agriculture ("USDA") loans and participations sold and serviced for others totaled $26,729,000$9.1 million and $29,910,000$14.3 million at JuneSeptember 30, 20182023 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 September 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 September 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. PurchasedThe Company held purchased loans with remaining balances that totaled $42,460,000$9.0 million and $43,213,000$9.6 million as of JuneSeptember 30, 20182023 and December 31, 2017,2022, respectively. Unamortized premiums on these loans totaled $683,000$156,000 and $718,000$167,000 as of JuneSeptember 30, 20182023 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$61.4 million and $8,124,000$63.9 million as of JuneSeptember 30, 20182023 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 $57.1 million as of September 30, 2023 and $157.4 million as of December 31, 2022. As of September 30, 2023, $50.1 million is included in consumer and other loans and $7.0 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 ourthe Company’s primary market area.area and capital calls on venture and investment funds. Also included in commercial and industrial loans are $58.9 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 September 30, 2023, $114.2 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 CRECommercial Real Estate (“CRE”) properties in ourthe 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,
19
Table of Contents,
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 and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. WeThe Company occasionally originateoriginates 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 purchasepurchased by the Company to diversify ourits 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 September 30, 2023, $251.8 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-ownernonowner occupied) - loans – Commercial real estate includesloans include various types of loans for which the Company holds real property as collateral. We have commercial mortgage loans totaling $360.5 million that are collateralized by owner-occupied real-estate and $519.1 million that are collateralized by non-owner-occupied real estate, as well as $347.2 million of multi-family residential loans and $11.2 million of farmland loans, as of September 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. RealCommercial 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 September 30, 2023, $758.0 million in CCBX loans are included in consumer and other loans compared to $607.0 million at December 31, 2022.
20
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		CurrentTotal
Loans		90 Days or
More Past
Due and
Still
Accruing

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands; unaudited)
September 30, 2023September 30, 2023
Community BankCommunity Bank

Commercial and industrial loans

 

$

501

 

 

$

391

 

 

$

892

 

 

$

88,392

 

 

$

89,284

 

 

$

-

 

Commercial and industrial
loans		$18 $— $18 $158,214 $158,232 $— 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

Construction, land and land development

 

 

-

 

 

 

-

 

 

 

-

 

 

 

46,356

 

 

 

46,356

 

 

 

-

 

Construction, land and
land development
— — — 167,686 167,686 — 

Residential real estate

 

 

75

 

 

 

-

 

 

 

75

 

 

 

88,347

 

 

 

88,422

 

 

 

-

 

Residential real estate— — — 225,372 225,372 — 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

474,330

 

 

 

474,330

 

 

 

-

 

Commercial real estate— 7,145 7,145 1,230,704 1,237,849 — 

Consumer and other loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2,670

 

 

 

2,670

 

 

 

-

 

Consumer and other loans48 — 48 2,435 2,483 — 

 

$

576

 

 

$

391

 

 

$

967

 

 

$

700,095

 

 

 

701,062

 

 

$

-

 

Less net deferred origination fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(370

)

 

 

 

 

Total community bankTotal community bank$66 $7,145 $7,211 $1,784,411 $1,791,622 $— 
CCBXCCBX
Commercial and industrial loans:Commercial and industrial loans:
Capital call linesCapital call lines$— $— $— $114,174 $114,174 $— 
All other commercial &
industrial loans
All other commercial &
industrial loans
3,299 1,387 4,686 54,183 58,869 1,387 
Real estate loans:Real estate loans:
Residential real
estate loans		Residential real
estate loans		2,655 1,462 4,117 $247,658 $251,775 1,462 
Consumer and other loans:Consumer and other loans:
Credit cardsCredit cards23,543 24,807 48,350 $392,643 $440,993 24,807 
Other consumer and
other loans		Other consumer and
other loans		30,141 8,561 38,702 278,285 316,987 8,561 
Total CCBXTotal CCBX$59,638 $36,217 $95,855 $1,086,943 $1,182,798 $36,217 
Total ConsolidatedTotal Consolidated$59,704 $43,362 $103,066 $2,871,354 2,974,420 $36,217 
Less net deferred
origination fees and
premiums
Less net deferred
origination fees and
premiums
(7,385)

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

700,692

 

 

 

 

 

Loans receivable$2,967,035 

 

 

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

 

 

 

 

 

21


A summaryTable of information pertaining to impairedContents,
Consolidated30-89
Days Past
Due		90 Days
or More
Past Due		Total
Past Due		CurrentTotal
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 estate1,016 876 1,892 447,265 449,157 876 
Commercial real estate95 6,901 6,996 1,041,756 1,048,752 — 
Consumer and other loans37,932 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 $36.2 million in loans past due 90 days or more and still accruing interest as of September 30, 2023, and $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 120 or 180 days past due, dependent on product type. As of September 30, 2023 and December 31, 2022, $34.7 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 period indicated:

Bank against losses.

 

 

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 andaccrual of interest income recognized on impairedcommunity bank loans by loan class for the three and six months ended June 30, 2018 and 2017:

 

 

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 restructuringsis 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 mustmay be unable to meet payments as they become due or when they are 90 days past due as to either prefund anprincipal 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 statusunless 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, 2018process of collection.  Installment/closed-end, and June 30, 2017revolving/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.

22
Table of Contents,
An analysis of nonaccrual loans by category consisted of the following at the periods indicated:

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

September 30,December 31,

 

(dollars in thousands)

 

20232022
Total NonaccrualNonaccrual with No ACLTotal Nonaccrual
(dollars in thousands; unaudited)
Community BankCommunity Bank

Commercial and industrial loans

 

$

703

 

 

$

372

 

Commercial and industrial loans$2 $2 $113 

Real estate loans:

 

 

 

 

 

 

 

 

Real estate loans:
Construction, land and land developmentConstruction, land and land development— — 66 

Residential real estate

 

 

75

 

 

 

88

 

Residential real estate176 176 — 

Commercial real estate

 

 

1,290

 

 

 

1,660

 

Commercial real estate7,145 7,145 6,901 

Total nonaccrual loans

 

$

2,068

 

 

$

2,120

 

Total nonaccrual loans$7,323 $7,323 $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 nine months ended September 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 loancredit losses, thereby reducing that reserve.
23
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 September 30, 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
Community Bank20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted To TermTotal
(dollars in thousands; unaudited)
As of September 30, 2023
Commercial and industrial loans
Risk rating
Pass$12,798 $58,178 $16,236 $10,911 $13,843 $1,689 $40,923 $1,216 $155,794 
Other Loan Especially Mentioned— — — 117 — — 2,319 — 2,436 
Substandard— — — — — 2 — — 2 
Doubtful— — — — — — — — — 
Total commercial and industrial
   loans - All other commercial and
   industrial loans		$12,798 $58,178 $16,236 $11,028 $13,843 $1,691 $43,242 $1,216 $158,232 
Current period gross write-offs$— $— $— $— $— $46 $— $— $46 
Real estate loans -
Construction, land and land
development loans
Risk rating
Pass$53,348 $59,253 $42,564 $3,103 $921 $1,620 $360 $— $161,169 
Other Loan Especially Mentioned— — 444 — — — — — 444 
Substandard— — 3,148 2,325 — — 600 — 6,073 
Doubtful— — — — — — — — — 
Total real estate loans -
   Construction, land and land
   development loans		$53,348 $59,253 $46,156 $5,428 $921 $1,620 $960 $— $167,686 
Current period gross write-offs$— $— $— $— $— $— $— $— $— 
24
Table of Contents,
Term Loans Amortized Cost Basis by Origination Year
Community Bank20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted To TermTotal
(dollars in thousands; unaudited)
As of September 30, 2023
Real estate loans -
Residential real estate loans
Risk rating
Pass$30,510 $41,717 $39,545 $30,465 $32,170 $24,063 $23,521 $— $221,991 
Other Loan Especially Mentioned— 1,102 2,028 33 — 42 — — 3,205 
Substandard— — — — — — — 176 176 
Doubtful— — — — — — — — — 
Total real estate loans -
   Residential real estate loans		$30,510 $42,819 $41,573 $30,498 $32,170 $24,105 $23,521 $176 $225,372 
Current period gross write-offs$— $— $— $— $— $— $— $— $— 
Real estate loans -
Commercial real estate loans
Risk rating
Pass$195,094 $298,253 $201,342 $146,128 $127,437 $239,194 $8,403 $1,734 $1,217,585 
Other Loan Especially Mentioned— 3,273 6,045 175 508 2,115 172 — 12,288 
Substandard— — — 924 6,901 — 151 — 7,976 
Doubtful— — — — — — — — — 
Total real estate loans -
   Commercial real estate loans		$195,094 $301,526 $207,387 $147,227 $134,846 $241,309 $8,726 $1,734 $1,237,849 
Current period gross write-offs$— $— $— $— $— $— $— $— $— 
25
Table of Contents,
Term Loans Amortized Cost Basis by Origination Year
Community Bank20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted To TermTotal
(dollars in thousands; unaudited)
As of September 30, 2023
Consumer and other loans -
Other consumer and other loans
Risk rating
Pass$1,088 $286 $7 $687 $49 $216 $150 $— $2,483 
Other Loan Especially Mentioned— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total consumer and other
   loans - Other consumer and
   other loans		$1,088 $286 $7 $687 $49 $216 $150 $— $2,483 
Current period gross write-offs$16 $— $— $— $— $— $— $— $16 
Total community bank loans receivable
Risk rating
Pass$292,838 $457,687 $299,694 $191,294 $174,420 $266,782 $73,357 $2,950 $1,759,022 
Other Loan Especially Mentioned— 4,375 8,517 325 508 2,157 2,491 — 18,373 
Substandard— — 3,148 3,249 6,901 2 751 176 14,227 
Doubtful— — — — — — — — — 
Total community bank loans$292,838 $462,062 $311,359 $194,868 $181,829 $268,941 $76,599 $3,126 $1,791,622 
Current period gross write-offs$16 $— $— $— $— $46 $— $— $62 
26
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
CCBX20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted To TermTotal
(dollars in thousands; unaudited)
As of September 30, 2023
Commercial and industrial loans -
Capital call lines
Payment performance
Performing$— $— $— $— $— $— $114,174 $— $114,174 
Nonperforming— — — — — — — — — 
Total commercial and industrial
   loans - Capital call lines		$— $— $— $— $— $— $114,174 $— $114,174 
Current period gross write-offs$— $— $— $— $— $— $— $— $— 
Commercial and industrial loans -
All other commercial and industrial loans
Payment performance
Performing$47,770 $7,542 $14 $29 $— $— $2,127 $— $57,482 
Nonperforming629 393 — — — — 365 — 1,387 
Total commercial and industrial
   loans - All other commercial and
   industrial loans		$48,399 $7,935 $14 $29 $— $— $2,492 $— $58,869 
Current period gross write-offs$1,377 $2,012 $12 $— $— $— $68 $— $3,469 
Real estate loans -
Residential real estate loans
Payment performance
Performing$— $— $— $— $— $— $185,484 $64,829 $250,313 
Nonperforming— — — — — — 1,462 — 1,462 
Total real estate loans -
   Residential real estate loans		$— $— $— $— $— $— $186,946 $64,829 $251,775 
Current period gross write-offs$— $— $— $— $— $— $3,158 $— $3,158 

27
Table of Contents,
Term Loans Amortized Cost Basis by Origination Year
CCBX20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted To TermTotal
(dollars in thousands; unaudited)
As of September 30, 2023
Consumer and other loans -
Credit cards
Payment performance
Performing$— $— $— $— $— $— $416,108 $78 $416,186 
Nonperforming— — — — — — 24,807 — 24,807 
Total consumer and other
   loans - Credit cards		$— $— $— $— $— $— $440,915 $78 $440,993 
Current period gross write-offs$— $— $— $— $— $— $38,987 $— $38,987 
Consumer and other loans -
Other consumer and other loans
Payment performance
Performing$215,136 $64,148 $8,753 $106 $516 $368 $19,399 $— $308,426 
Nonperforming2,687 3,405 788 10 28 8 1,635 — 8,561 
Total consumer and other
   loans - Other consumer and
   other loans		$217,823 $67,553 $9,541 $116 $544 $376 $21,034 $— $316,987 
Current period gross write-offs$8,232 $35,329 $9,702 $74 $273 $198 $4,861 $— $58,669 
Total CCBX loans receivable
Payment performance
Performing$262,906 $71,690 $8,767 $135 $516 $368 $737,292 $64,907 $1,146,581 
Nonperforming3,316 3,798 788 10 28 8 28,269 — 36,217 
Total CCBX loans$266,222 $75,488 $9,555 $145 $544 $376 $765,561 $64,907 $1,182,798 
Current period gross write-offs$9,609 $37,341 $9,714 $74 $273 $198 $47,074 $— $104,283 
28
Table of Contents,
Loans by credit quality risk rating are as follows as of the periods indicated:

ConsolidatedConsolidatedPassOther Loans
Especially
Mentioned		Sub-
Standard		DoubtfulTotal

 

Pass

 

 

Other Loans

Especially

Mentioned

 

 

Sub-

Standard

 

 

Doubtful

 

 

Total

 

(dollars in thousands; unaudited)

 

(dollars in thousands)

 

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022December 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 development206,304 7,685 66 — 214,055 

Residential real estate

 

 

88,221

 

 

 

126

 

 

 

75

 

 

 

-

 

 

 

88,422

 

Residential real estate448,185 96 876 — 449,157 

Commercial real estate

 

 

470,744

 

 

 

2,296

 

 

 

1,290

 

 

 

-

 

 

 

474,330

 

Commercial real estate1,030,650 11,201 6,901 — 1,048,752 

Consumer and other loans

 

 

2,670

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

2,670

 

Consumer and other loans583,956 — 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 LoanCredit 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 estimatedcredit 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 loansapproximately 10% of a $231.9 million loan portfolio that are determined to be impaired as well as estimated probablewithout credit enhancement reimbursements. At September 30, 2023, 10% of this portfolio represented $23.2 million in loans. The partner is responsible for reimbursing credit losses inherent in the remainderon 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 basedinterest income on the typeaforementioned $23.2 million of loan, the typeloans.

29
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 lossACL attributed to various segments in the loan portfolio, as of and for the three and sixnine months ended JuneSeptember 30, 2018:

2023 and the allocation and activity of the loans and allowance for loan losses ("ALLL ") attributed to the various segments in the loan portfolio for the three and nine months ended September 30, 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, 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

 

Commercial
and
Industrial		Construction,
Land, and
Land
Development		Residential
Real
Estate		Commercial
Real Estate		Consumer
and Other		UnallocatedTotal
(dollars in thousands; unaudited)
Three Months Ended September 30, 2023
ACL balance, June 30, 2023$9,551 $6,539 $8,849 $6,952 $78,871 $— $110,762 
Provision for credit losses or (recapture)2,771 132 3,517 456 20,281 — 27,157 
12,322 6,671 12,366 7,408 99,152 — 137,919 
Loans charged-off(2,328)— (1,476)— (34,075)— (37,879)
Recoveries of loans previously charged-off1 — 2 — 1,042 — 1,045 
Net charge-offs(2,327)— (1,474)— (33,033)— (36,834)
ACL balance, September 30, 2023$9,995 $6,671 $10,892 $7,408 $66,119 $— $101,085 
       
Nine Months Ended September 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)7,247 835 8,283 698 106,236 123,299 
 13,506 6,671 14,048 7,408 159,547 — 201,180 
Loans charged-off(3,515)— (3,158)— (97,672)— (104,345)
Recoveries of loans previously charged-off4 — 2 — 4,244 — 4,250 
Net charge-offs(3,511)— (3,156)— (93,428)— (100,095)
ACL balance, September 30, 2023$9,995 $6,671 $10,892 $7,408 $66,119 $— $101,085 
       
Three Months Ended September 30, 2022       
ALLL balance, June 30, 2022$4,066 $7,999 $7,171 $4,740 $23,810 $1,572 $49,358 
Provision for loan losses or (recapture)298 (145)2,260 (215)16,402 (172)18,428 
 4,364 7,854 9,431 4,525 40,212 1,400 67,786 
Loans charged-off(360)— (105)— (8,048)— (8,513)
Recoveries of loans previously charged-off2 — — — 7 — 9 
Net (charge-offs) recoveries(358)— (105)— (8,041)— (8,504)
Balance, September 30, 2022$4,006 $7,854 $9,326 $4,525 $32,171 $1,400 $59,282 
       
Nine Months Ended September 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)1,144 870 4,833 (2,065)39,429 1,253 45,464 
4,365 7,854 9,431 4,525 46,521 1,400 74,096 
Loans charged-off(398)— (105)— (14,360)— (14,863)
Recoveries of loans previously charged-off39 — — — 10 — 49 
Net charge-offs(359)— (105)— (14,350)— (14,814)
ALLL Balance, September 30, 2022$4,006 $7,854 $9,326 $4,525 $32,171 $1,400 $59,282 


30

Table of Contents,
The following tables summarizetable summarizes the allocation of the allowance for loan loss, as well as the activity in the allowance for loan losslosses 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		UnallocatedTotal
 (dollars in thousands; unaudited)
As of December 31, 2022       
ALLL amounts allocated to       
Individually evaluated for impairment$95 $— $— $— $— $— $95 
Collectively evaluated for impairment4,736 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  $2,633,363 
The following table presents the collateral dependent loans, which are individually evaluated to determine expected credit losses, and the related ACL allocated to these loans:
Real EstateBusiness AssetsTotalACL
(dollars in thousands; unaudited)
September 30, 2023
Commercial and industrial loans$— $2 $2 $— 
Real estate loans:
Construction, land and land development— — — — 
Residential real estate176 — 176 — 
Commercial real estate7,145 — 7,145 — 
Total$7,321 $2 $7,323 $— 

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 development67 66 — 66 — 
Commercial real estate6,901 6,901 — 6,901 — 
Total$7,092 $6,967 $113 $7,080 $95 
31
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 three and six months ended June 30, 2017:

period indicated:

 

 

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

 

Three Months EndedSix Months Ended
September 30, 2022September 30, 2022
Average
Recorded
Investment		Interest Income
Recognized		Average
Recorded
Investment		Interest Income
Recognized
(dollars in thousands; unaudited)
Commercial and industrial loans$103 $— $125 $— 
Real estate loans:
Construction, land and land development67 — 33 — 
Residential real estate26 — 41 — 
Commercial real estate38 — 19 — 
Total$234 $— $218 $— 

Note 5 - Deposits

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

 

June 30,

 

 

December 31,

 

 

2018

 

 

2017

 

September 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 bearingDemand, noninterest bearing$651,786 $775,012 
NOW and money marketNOW and money market2,532,668 1,804,399 

Savings

 

 

48,509

 

 

 

43,876

 

Savings84,628 107,117 
Total core depositsTotal core deposits3,269,082 2,686,528 
Brokered depositsBrokered deposits1 101,546 

Time deposits less than $250,000

 

 

65,393

 

 

 

60,445

 

Time deposits less than $250,00015,678 21,942 

Time deposits $250,000 and over

 

 

34,451

 

 

 

30,204

 

Time deposits $250,000 and over4,939 7,505 

Total deposits

 

$

744,468

 

 

$

703,295

 

Total deposits$3,289,700 $2,817,521 


The following table presents the maturity distribution of time deposits as of JuneSeptember 30, 2018 (dollars2023:

(dollars in thousands; unaudited)As of September 30, 2023
Twelve months$16,351 
One to two years2,254 
Two to three years1,142 
Three to four years172 
Four to five years698 
Thereafter— 
$20,617 
Included in thousands):

total deposits is $296.4 million in IntraFi network reciprocal NOW and money market sweep accounts as of September 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.
32
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 September 30, 2023 was 3.98%.
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 September 30, 2023, lease expiration dates ranged from 5 months to 21.4 years, with additional renewal options on certain leases typically ranging from 5 to 10 years. At September 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 9.2 years.
Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $292,000 and $933,000, respectively, for the three and nine months ended September 30, 2023, and $351,000 and $1.0 million respectively, for the three and nine months ended September 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 September 30, 2023:
(dollars in thousands; unaudited)September 30,
2023
 October 1 to December 31, 2023$257 
20241,016 
2025974 
2026977 
2027913 
2028 and thereafter3,456 
Total lease payments7,593 
Less: amounts representing interest1,272 
Present value of lease liabilities$6,321 
The following table presents the components of total lease expense and operating cash flows for the three and nine months ended September 30, 2023 and 2022:
Three Months EndedNine Months Ended
September 30,
2023		September 30,
2022		September 30,
2023		September 30,
2022
(dollars in thousands; unaudited)
Lease expense:
Operating lease expense$251 $320 $819 $961 
Variable lease expense69 52 173 137 
Total lease expense (1)$320 $372 $992 $1,098 
Cash paid:    
Cash paid reducing operating lease liabilities$320 $371 $1,013 $1,090 
(1)Included in net occupancy expense in the Condensed Consolidated Statements of Income (unaudited).
33
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(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 bothreplaced 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 madegranted under these previousprior plans. Shares available to be granted under the 2018 plan were 500,000427,419 at JuneSeptember 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

There were used to estimate the value ofno new stock options granted duringin the periods indicated:

nine months ended September 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’s2018 Plan and 2006 Plan during the sixnine months ended JuneSeptember 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

 

OptionsSharesWeighted-
Average
Exercise
Price		Weighted-
Average
Remaining
Contractual
Term (Years)		Aggregate
Intrinsic Value
(dollars in thousands, except per share amounts; unaudited)
Outstanding at December 31, 2022438,103$8.79 4.1$16,968 
Granted—— 
Exercised(81,744)7.34 $2,396 
Expired—— 
Forfeited—— 
Outstanding at September 30, 2023356,359$9.12 3.7$12,040 
Vested or expected to vest at September 30, 2023356,359$9.12 3.7$12,040 
Exercisable at September 30, 2023177,510$8.65 3.4$6,082 

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 sixnine months ended JuneSeptember 30, 20182023 was $67,000. There were no$59,000 and $2.4 million, respectively. The total or aggregate intrinsic value of options exercised during the three and sixnine months ended JuneSeptember 30, 2017.

2022 was $186,000 and $1.6 million, respectively.

As of JuneSeptember 30, 2018,2023, there was $1,759,000$861,000 of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan. Total unrecognized compensation costs will beare adjusted for unvested forfeitures. The Company expects to recognize that cost over a remaining weighted-average period of approximately 7.33.9 years.

Compensation expense recorded related to stock options was $61,000 and $261,000 respectively, for the three and nine months ended September 30, 2023 and $65,000 and $253,000 respectively, for the three and nine months ended September 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 RSUs to an employee which vest ratably over 5 years. In the second quarter of 2023, the Company granted 9,827 RSUs to employees, which vest ratably over 5 years. In the third quarter of
34
Table of Contents,
2023, the Company granted 4,000 RSUs to employees which vest ratably over 3 years and 2,150 RSUs which vest ratably over 5 years.
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 September 30, 2023, there was $10.2 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 3.9 years. Compensation expense recorded related to RSUs was $735,000 and $2.2 million respectively, for the three and nine months ended September 30, 2023 and $518,000 and $1.3 million respectively, for the three and nine months ended September 30, 2022.
A summary of the Company’s nonvested RSUs at September 30, 2023 and changes during the nine month period is presented below:
Nonvested shares - RSUsSharesWeighted-
Average
Grant Date
Fair
Value		Total or Aggregate
Intrinsic Value
(dollars in thousands, except per share amounts; unaudited)
Nonvested shares at December 31, 2022380,151$28.61 $7,187 
Granted90,672$42.61 
Forfeited(8,807)$38.62 
Vested(46,020)$30.56 
Nonvested shares at September 30, 2023415,996$31.23 $4,857 
Restricted Stock Awards

Employees
There were no new restricted stock awards granted in the nine months ended September 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.

As of September 30, 2023, there was $39,000 of total unrecognized compensation cost related to nonvested restricted stock awards. The Company’s nonvested shares at JuneCompany expects to recognize that cost over the remaining weighted-average vesting period of approximately 4.3 years. Compensation expense recorded related to restricted stock awards was $2,000 and $7,000 respectively, for the three and nine months ended September 30, 2023 and $2,000 and $7,000 respectively, for the three and nine months ended September 30, 2022.
Director’s Stock Compensation
Under the 2018 and December 31, 2017 totaled 1,200 and 1,400 shares, respectively, and were issuedPlan, eligible directors are granted stock with weighted average grant date faira total market value of $6.25.

Director’s Stock Bonus

The Company adoptedapproximately $45,000, and subsequently amended the Director’s Stock Bonus Plan (Bonus Plan). The Bonus Plan was frozen on April 30, 2018, whenBoard 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 duringcommittee 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 onto 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

35
Table of Contents,
As of September 30, 2023, there was $313,000 of total unrecognized compensation expense related to director has attainedrestricted 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 recognizedrecognize 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. Compensationapproximately eight months. Director compensation expense recorded related to the 2018 Plan totaled $8,000$120,000 and $312,000 respectively, for the three and nine months ended JuneSeptember 30, 20182023 and 2017$98,000 and $16,000$196,000 respectively, for the sixthree and nine months ended JuneSeptember 30, 2018 and 2017.

Existing awards will vest under the terms granted 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 effect of the split for all periods presented.

2022.

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

During 2017, 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 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 majorityA summary of the Company’s voting securities (not including voting securities such personnonvested shares at September 30, 2023 and changes during the nine-month period 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 - RSAsSharesWeighted-
Average
Grant Date
Fair
Value		Total or Aggregate
Intrinsic Value
(dollars in thousands, except per share amounts; unaudited)
Nonvested shares at December 31, 202213,396$32.94 $195 
Granted13,538$35.10 
Forfeited—$— 
Vested(10,896)$36.41 
Nonvested shares at September 30, 202316,038$32.41 $168 

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

 

September 30, 2023Fair Value Measurements Using

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

Carrying
Value		Estimated
Fair Value		Level 1Level 2Level 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$29,984 $29,984 $29,984 $— $— 

Interest-bearing deposits with other banks

 

 

77,232

 

 

 

77,232

 

 

 

77,232

 

 

 

-

 

 

 

-

 

Interest earning deposits with other banksInterest earning deposits with other banks444,962 444,962 444,962 — — 

Investment securities

 

 

37,317

 

 

 

37,245

 

 

 

32,574

 

 

 

4,671

 

 

 

-

 

Investment securities141,489 139,802 98,644 41,158 — 

Other investments

 

 

3,766

 

 

 

3,766

 

 

 

-

 

 

 

3,766

 

 

 

-

 

Other investments11,898 11,898 — 9,326 2,572 

Loans receivable, net (1)

 

 

692,152

 

 

 

672,645

 

 

 

-

 

 

 

-

 

 

 

672,645

 

Loans receivableLoans receivable2,967,035 2,819,602 — — 2,819,602 

Accrued interest receivable

 

 

2,290

 

 

 

-

 

 

 

-

 

 

 

2,290

 

 

 

-

 

Accrued interest receivable23,428 23,428 — 23,428 — 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Financial liabilities

Deposits (1)

 

$

744,468

 

 

$

743,311

 

 

$

-

 

 

$

743,311

 

 

$

-

 

FHLB advances

 

 

20,000

 

 

 

20,000

 

 

 

-

 

 

 

20,000

 

 

 

-

 

DepositsDeposits$3,289,700 3,289,038 $— $3,289,038 $— 

Subordinated debt

 

 

9,957

 

 

 

9,020

 

 

 

-

 

 

 

9,020

 

 

 

-

 

Subordinated debt44,106 42,329 — 42,329 — 

Junior subordinated debentures

 

 

3,580

 

 

 

3,016

 

 

 

-

 

 

 

3,016

 

 

 

-

 

Junior subordinated debentures3,589 3,498 — 3,498 — 

Capital lease

 

 

105

 

 

 

102

 

 

 

-

 

 

 

102

 

 

 

-

 

Accrued interest payable

 

 

241

 

 

 

-

 

 

 

-

 

 

 

241

 

 

 

-

 

Accrued interest payable1,056 1,056 — 1,056 — 

(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.

36

 

 

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

 

 

 

-

 

Table of Contents,

December 31, 2022Fair Value Measurements Using
Carrying
Value		Estimated
Fair Value		Level 1Level 2Level 3
(dollars in thousands; unaudited)
Financial assets
Cash and due from banks$32,722 $32,722 $32,722 $— $— 
Interest earning deposits with other banks309,417 309,417 309,417 — — 
Investment securities98,353 98,233 97,015 1,218 — 
Other investments10,555 10,555 — 7,983 2,572 
Loans receivable, net2,627,256 2,580,183 — — 2,580,183 
Accrued interest receivable17,815 17,815 — 17,815 — 
Financial liabilities     
Deposits$2,817,521 $2,816,602 $— $2,816,602 $— 
Subordinated debt43,999 42,743 — 42,743 — 
Junior subordinated debentures3,588 3,484 — 3,484 — 
Accrued interest payable684 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-bindingnonbinding 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.

37
Table of Contents,
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 1Level 2Level 3Total
Fair Value

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands; unaudited)
September 30, 2023September 30, 2023

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

U.S. Treasury securities

 

$

32,574

 

 

$

-

 

 

$

-

 

 

$

32,574

 

U.S. Treasury securities$98,644 $— $— $98,644 

U.S. Government agencies

 

 

-

 

 

 

2,945

 

 

 

-

 

 

 

2,945

 

U.S. Agency collateralized mortgage obligationsU.S. Agency collateralized mortgage obligations— 45 — 45 
MunicipalsMunicipals— 250 — 250 
$98,644 $295 $— $98,939 
December 31, 2022December 31, 2022
Available-for-saleAvailable-for-sale
U.S. Treasury securitiesU.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 JuneSeptember 30, 20182023 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 1Level 2Level 3Total
Fair Value

June 30, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands; unaudited)
September 30, 2023September 30, 2023
Equity securitiesEquity securities$— $— $2,572 $2,572 
TotalTotal$— $— $2,572 $2,572 
December 31, 2022December 31, 2022

Impaired loans

 

$

-

 

 

$

-

 

 

$

493

 

 

$

493

 

Impaired loans$— $— $7,080 $7,080 
Equity securitiesEquity 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
38
Table of Contents,
allocations of the allowance for credit losses. For collateral dependent real estate loans, fair value is considered impaired when it is probable that paymentcommonly based on recent real estate appraisals. These appraisals may utilize a single valuation approach or a combination of interestapproaches including comparable sales and principal will not bethe income approach. Adjustments are routinely made in accordance with the contractual termsappraisal 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. Impairmentinputs 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 loancredit losses - loans in the same manner in which impairmentit initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loansLoans 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 impairedindividually 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 loancredit losses or charges off the impairmentthat 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 September 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
September 30,		For the Nine Months Ended
September 30,
(dollars in thousands; unaudited)2023202220232022
Carrying value, beginning of period$2,572 $2,672 $2,572 $2,322 
Purchases— — — 350 
Observable price change— (100)— (100)
Carrying value, end of period$2,572 $2,572 $2,572 $2,572 
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 date indicated:
(unaudited)Valuation TechniqueUnobservable Inputs
December 31, 2022
Weighted
Average Rate
Impaired loansCollateral valuationsDiscount to appraised value8.0%
39
Table of Contents,
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 EndedNine Months Ended

 

June 30, 2018

 

 

June 30, 2017

 

 

June 30, 2018

 

 

June 30, 2017

 

September 30, 2023September 30, 2022September 30, 2023September 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$10,270 $11,101 $35,567 $27,507 

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 outstanding13,285,97412,938,20013,253,18412,921,814

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 awardsDilutive effect of equity-based awards389,859598,623374,755563,136
Diluted weighted average number common shares outstandingDiluted weighted average number common shares outstanding13,675,83313,536,82313,627,93913,484,950

Basic earnings per share

 

$

0.24

 

 

$

0.20

 

 

$

0.44

 

 

$

0.35

 

Basic earnings per share$0.77 $0.86 $2.68 $2.13 

Diluted earnings per share

 

$

0.24

 

 

$

0.20

 

 

$

0.44

 

 

$

0.35

 

Diluted earnings per share$0.75 $0.82 $2.61 $2.04 
Antidilutive stock options and restricted stock outstandingAntidilutive stock options and restricted stock outstanding87,00052,840146,91252,840

For

Under the threetwo-class method, earnings available to common shareholders for the period are allocated between common shareholders and six month periods ended June 30, 2018participating 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
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 purchasemake 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 701,848internal performance measurement accounting system, which provides line of business results. This system uses various techniques to assign balance sheet and 648,936 sharesincome 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 JuneSeptember 30, 20182023. The treasury & administration segment includes investments, debt and 2017, respectively, wereother reporting items that are not includedspecific 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
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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 computationfollowing tables for the periods indicated:
September 30, 2023December 31, 2022
Community BankCCBXTreasury & AdministrationConsolidatedCommunity BankCCBXTreasury & AdministrationConsolidated
Assets(dollars in thousands; unaudited)
Cash and Due from Banks$4,858 $10,485 $459,603 $474,946 $4,603 $12,899 $324,637 $342,139 
Intrabank assets— 560,463 (560,463)— — 254,096 (254,096)— 
Securities— — 141,489 141,489 — — 98,353 98,353 
Loans held for sale— — — — — — — — 
Total loans receivable1,784,661 1,182,374 — 2,967,035 1,614,752 1,012,504 — 2,627,256 
Allowance for credit losses(21,316)(79,769)— (101,085)(20,636)(53,393)— (74,029)
All other assets30,983 118,859 46,038 195,880 25,508 76,111 49,129 150,748 
Total assets$1,799,186 $1,792,412 $86,667 $3,678,265 $1,624,227 $1,302,217 $218,023 $3,144,467 
Liabilities
Total deposits$1,537,468 $1,752,232 $— $3,289,700 $1,538,218 $1,279,303 $— $2,817,521 
Total borrowings— — 47,695 47,695 — — 47,587 47,587 
Intrabank liabilities254,268 — (254,268)— 80,392 — (80,392)— 
All other liabilities7,450 40,180 8,790 56,420 5,617 22,914 7,334 35,865 
Total liabilities$1,799,186 $1,792,412 $(197,783)$3,393,815 $1,624,227 $1,302,217 $(25,471)$2,900,973 
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Table of diluted earnings per common share because their effect resulted in them being anti-dilutive.

Contents,

Three months ended September 30, 2023Three months ended September 30, 2022
Community BankCCBXTreasury & AdministrationConsolidatedCommunity BankCCBXTreasury & AdministrationConsolidated
(dollars in thousands; unaudited)
Net interest income, before
   intrabank transfer		$22,306 $35,895 $4,028 $62,229 $20,237 $26,374 $2,578 $49,189 
Interest (expense) income
   intrabank transfer		(3,036)5,095 (2,059)— 441 1,321 (1,762)— 
Provision/(recapture) for
   credit losses - loans		664 26,493 — 27,157 (238)18,666 — 18,428 
Provision for
   unfunded commitments		— 96 — 96 — — — — 
Noninterest income (1)
1,162 33,296 121 34,579 1,139 33,291 (39)34,391 
Noninterest expense10,065 38,555 7,881 56,501 8,368 34,858 7,861 51,087 
Net income before income taxes9,703 9,142 (5,791)13,054 13,687 7,462 (7,084)14,065 
Income taxes2,068 1,951 (1,235)2,784 2,883 1,572 (1,491)2,964 
Net Income$7,635 $7,191 $(4,556)$10,270 $10,804 $5,890 $(5,593)$11,101 
(1)For the three months ended September 30, 2023, CCBX noninterest income includes credit enhancements of $25.9 million, fraud enhancements of $2.9 million, and BaaS program income of $4.4 million. For the three months ended September 30, 2022, CCBX noninterest income includes credit enhancements of $17.9 million, fraud enhancements of $11.7 million and BaaS program income of $3.6 million.

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Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
Community BankCCBXTreasury & AdministrationConsolidatedCommunity BankCCBXTreasury & AdministrationConsolidated
(dollars in thousands; unaudited)
Net interest income, before
   intrabank transfer		$66,887 $102,311 $9,872 $179,070 $56,011 $58,172 $4,160 $118,343 
Interest income (expense)
   intrabank transfer		(6,605)11,234 (4,629)— 872 2,051 (2,923)— 
Provision for credit
   losses - loans		1,045 122,254 — 123,299 214 45,250 — 45,464 
(Recapture)/Provision for
   unfunded commitments		(203)107 — (96)— — — — 
Noninterest income(1)
3,866 138,094 521 142,481 4,052 77,681 136 81,869 
Noninterest expense28,748 102,192 22,134 153,074 23,735 77,792 18,144 119,671 
Net income before income taxes34,558 27,086 (16,370)45,274 36,986 14,862 (16,771)35,077 
Income taxes7,409 5,807 (3,509)9,707 7,982 3,207 (3,619)7,570 
Net Income$27,149 $21,279 $(12,861)$35,567 $29,004 $11,655 $(13,152)$27,507 
(1)For the nine months ended September 30, 2023, CCBX noninterest income includes credit enhancements of $119.3 million, fraud enhancements of $6.4 million and BaaS program income of $11.9 million. For the nine months ended September 30, 2022, CCBX noninterest income includes credit enhancements of $45.2 million, fraud enhancements of $22.8 million and BaaS program income of $9.3 million.
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Item 2. Management’s Discussion and Analysis ofAnalysis of Financial Condition and Results of Operations

Overview

Coastal Financial Corporation (the “Company”) is

We are a bank holding company that operates through itsour 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 threetwo of which are located in neighboring counties (one in King County and twoone 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 September 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 September 30, 2023, we had total assets of $3.68 billion, total loans receivable of $2.97 billion, total deposits of $3.29 billion and total shareholders’ equity of $284.5 million.
The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relate to activities primarily conducted by the Bank.

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 estaterule 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
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requires compliance by October 1, 2024, April 1, 2025, or January 1, 2026, depending on the number of covered small business loans that a covered lender originates.
On July 31, 2023, the U.S. District Court for the Southern District of Texas enjoined the CFPB from implementing and enforcing the rule with respect to American Bankers Association members, which include the Company, pending the U.S. Supreme Court's consideration of the constitutionality of the CFPB's funding structure in a separate case. The court expanded its stay to cover all covered financial institutions in October 2023.
London Interbank Offered Rate (“LIBOR”) Transition
LIBOR, a benchmark interest rate that was widely referenced in the past, ceased publication after June 30, 2023. On December 16, 2022, the Federal Reserve Board adopted a final rule that implemented the Adjustable Interest Rate (“LIBOR”) Act (the “LIBOR Act”) by designating benchmark rates based on SOFR (Secured Overnight Financing Rate) to 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 September 30, 2023, 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 the first rate adjustment after June 30, 2023, the rate is based off three-month CME Term SOFR plus 0.26%. The move to this alternate index may impact the rates we receive on loans and consumer loans.

rates we pay on our junior subordinated debentures. 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 Office of the Comptroller of the Currency (the"OCC") issued final guidance providing sound principles that support a risk-based approach to third-party risk management. The Company closedis evaluating the impact of this guidance on its initial public offeringpractices.
Community Reinvestment Act Reform
On October 24, 2023, the FDIC, the Federal Reserve and the OCC released a final rule revising the framework that they use to evaluate banks’ records of 2,577,500 sharescommunity reinvestment under the Community Reinvestment Act (“CRA”). Under the revised framework, banks with assets of at least $2 billion, such as the Bank, are considered large banks and will have their retail lending, retail services and products, community development financing, and community development services subject to periodic evaluation. Depending on a large bank’s geographic concentrations of lending, the evaluation of retail lending may include assessment areas in which the bank extends loans but does not operate any deposit-taking facilities, in addition to assessment areas in which the bank has deposit-taking facilities. The rule becomes effective April 1, 2024. Most provisions of the final rule will apply beginning January 1, 2026, and the remaining provisions will apply beginning January 1, 2027. The Company is evaluating the impact of the final rule.
Financial Indicators
Below are a select number of financial highlights from our third quarter.
•Total loans, net of deferred fees decreased $40.5 million, or 1.3%, to $2.97 billion for the quarter ended September 30, 2023 as management sold loans as part of our strategy to reduce risk, optimize the CCBX loan portfolio and strengthen the balance sheet through enhanced credit standards.
◦Community bank loans increased $71.6 million, or 4.2%, to $1.78 billion.
◦CCBX loans decreased $112.1 million, or 8.7%, to $1.18 billion.
▪$320.9 million in CCBX loans were sold.
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•Deposits increased $127.1 million, or 4.0%, to $3.29 billion as of September 30, 2023 compared to June 30, 2023.
◦CCBX deposit growth of $99.1 million, or 6.0%, to $1.75 billion.
▪CCBX deposit growth is net proceeds of $33.2 million. For further discussion see “Initial Public Offering – Capitalization”an additional $51.9 million in CCBX deposits that were transferred off balance sheet to provide increased FDIC insurance coverage for those customers.
◦Community bank deposits increased $28.0 million, or 1.9%, to $1.54 billion.
▪Includes noninterest bearing deposits of $584.0 million or 38.0% of total community bank deposits.
▪Community bank cost of deposits was 1.31%.

◦Uninsured deposits of $599.0 million, or 18.2% of total deposits as of September 30, 2023, compared to $632.1 million, or 20.0% of total deposits as of June 30, 2023.
•Liquidity/Borrowings as of September 30, 2023:
◦Capacity to borrow up to $577.9 million from Federal Home Loan Bank and the Federal Reserve Bank discount window with no borrowings taken under these facilities during the quarter or nine months ended September 30, 2023.
•Investment Portfolio as of September 30, 2023:
◦Available for sale ("AFS") investments of $98.9 million, compared to $98.2 million as of June 30, 2023, of which 99.7% are U.S. Treasuries, with a weighted average remaining life of 5 months as of September 30, 2023.
◦Held to maturity ("HTM") investments of $42.6 million, of which 100% are U.S. Agency mortgage backed securities held for CRA purposes. The carrying value of the HTM investments is $1.7 million more than the fair value, the weighted average remaining life is 18.6 years as of September 30, 2023 and the weighted average yield is 5.00% for the quarter ended September 30, 2023.
•Net interest margin of 7.10% for the quarter ended September 30, 2023.
•Cost of deposits of 3.14% for the quarter ended September 30, 2023.
Deposits increased $127.1 million, or 4.0%, during the three months ended September 30, 2023. Fully insured IntraFi network reciprocal deposits increased $56.1 million to $296.4 million as of September 30, 2023, compared to $240.3 million as of June 30, 2023. These fully insured sweep deposits allow the Bank to fully insure their larger customer deposits through a sweep and exchange of deposits with other financial institutions. As part of our plan to optimize and strengthen our balance sheet, we decreased loans receivable by $40.5 million, or 1.3%, during the three months ended September 30, 2023. We anticipate that additional loans will be sold in the coming months as we continue working to optimize our CCBX portfolio through new partners, products and building on our existing relationships. We expect this process to take two to three quarters. At the same time we will be focused on increasing our efficiency and using technology to reduce future expense growth. 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 September 30, 2023 we had $474.9 million in cash on the balance sheet and the capacity to borrow up to $577.9 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 nine months ending September 30, 2023.Cash on the balance sheet and borrowing capacity total $1.05 billion and represented 32.0% of total deposits and exceeded our $599.0 million in uninsured deposits as of September 30, 2023. Our AFS securities portfolio has a weighted average remaining maturity of just 5 months and U.S. Treasury securities represent 99.7% of that portfolio as of September 30, 2023. Unrealized losses on the AFS securities portfolio were $1.3 million, or 0.47%, of shareholders' equity as of September 30, 2023.
As we continue to focus on our BaaS business, we intend to concentrate on working with larger partners and optimizing our CCBX loan portfolio so we can grow and advance our presence in the BaaS space. Our strategy for new CCBX partnerships is to focus on larger, more established partners, including national and publicly-traded companies with experienced management teams, existing customer bases and strong financial positions. This strategy will likely yield fewer, but larger, CCBX partnerships moving forward. We are being more intentional in our selection of products and partnerships that best serve our customers and shareholders in order to achieve our long term profitability objective. During the quarter ended September 30, 2023 we sold $320.9 million in higher yielding CCBX loans that have a greater potential for credit deterioration in an effort to optimize our CCBX loan portfolio. As we work to optimize our CCBX loan portfolio through enhanced credit standards, we expect lower earnings in the short term with lower loan yields and compressed margins but we continue to focus on strengthening the portfolio with new loans that we believe will provide for long term stability and profitability. We anticipate continuing to look for opportunities to grow our Company and will focus on the long term, holding down deposits costs when possible and managing expense through efficient use of technology.
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Results of Operations
Net Income
Comparison of Operating Results for the Three Months Ended Junequarter ended September 30, 2018 and June 30, 2017

Net Income

2023 to the comparable quarter in the prior year

Net income for the three months ended JuneSeptember 30, 2018,2023 was $2.2$10.3 million, or $0.24$0.75 per diluted share, compared to $1.9$11.1 million, or $0.20$0.82 per diluted share, for the three months ended JuneSeptember 30, 2017.2022. The decrease in net income over the comparable period in the prior year was primarily attributable to a $20.1 million increase in interest expense due to an increase in average interest bearing deposits and an increase of in cost of deposits as a result of higher interest rates, an increase in the provision for credit losses - loans of $8.7 million, related to CCBX loan growth, and $5.4 million more in noninterest expense, also largely related to CCBX loan growth, and increases in salary expense and professional fees. These increases in expense were partially offset by a $33.2 million increase in interest income and $188,000 increase in noninterest income. The increase in noninterest income, provision expense and noninterest expense are all largely related to increased CCBX loan and deposit activity. In accordance with GAAP, we recognize as revenue (1) the right to be indemnified or reimbursed for fraud losses on CCBX customer loans and deposits and (2) the right to be indemnified for credit losses by our partners for expected credit losses related to loans they originate and unfunded commitments from such loans. CCBX customer credit losses are recognized in the allowance for 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 nine months ended September 30, 2023 to the comparable period in the prior year
Net income for the nine months ended September 30, 2023 was $35.6 million, or $2.61 per diluted share, compared to $27.5 million, or $2.04 per diluted share, for the nine months ended September 30, 2022. The increase in net income over the comparable period in the prior year was primarily attributable to a $1.1$115.0 million increase in net interest income primarily arising from increased interest-earning assets from our loan growth initiatives, as well as a $192,000and $60.6 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 $891,000an increase in the provision for credit losses - loans of $77.8 million, related primarily to CCBX loan growth, $54.3 million increase in interest expense and $33.4 million more in noninterest expense. The increase in noninterest expense.

income, provision expense and noninterest expense are largely related to CCBX loan and deposit growth. The increase in interest expense is related to higher average interest bearing deposits and an increase in cost of deposits as a result of higher interest rates.

Net Interest Income

Comparison of the quarter ended September 30, 2023 to the comparable quarter in the prior year
Net interest income for the three months ended JuneSeptember 30, 2018,2023 was $8.3$62.2 million, compared to $7.2$49.2 million for the three months ended JuneSeptember 30, 2017,2022, an increase of $1.1$13.0 million, or 15.3%26.5%. Yield on loans receivable was 10.84% for the three months ended September 30, 2023, compared to 8.46% for the three months ended September 30, 2022. The increase in net interest income consisted of a $1.3 million, or 16.5%,compared to the quarter ended September 30, 2022 was largely related to increased yield on loans from growth in higher yielding loans, primarily from CCBX, and the overall increase in interest income partially offset by a $251,000, or 34.9%rates resulting from the Federal Open Market Committee (“FOMC”) raising rates 2.25% since September 30, 2022 to 5.50%, with the last increase during such period on July 26, 2023. As of September 30, 2022, the FOMC had set the interest rates at 3.25%. This increase in interest expense.

The growthrates since then impacts our existing variable rate loans as well as rates on new loans. We continue to monitor the impact of these increases in interest income was primarily attributable to a $81.8 million, or 13.5%, increase inrates. Total average loans outstandingreceivable for the three months ended JuneSeptember 30, 2018,2023 was $3.06 billion, 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$2.45 billion for the three months ended JuneSeptember 30, 2018, was primarily related2022.

Total interest and fees on loans totaled $83.7 million for the three months ended September 30, 2023 compared to a 15 basis point$52.3 million for the three months ended September 30, 2022. The $31.3 million increase in interest and fees on loans for the cost of interest-bearing depositsquarter ended September 30, 2023, compared to the quarter ended September 30, 2022, was largely due to increased yield on loans from growth in higher yielding loans, primarily from CCBX, combined with a $41.9the overall increase in interest rates. Total loans receivable was $2.97 billion at September 30, 2023, compared to $2.51 billion at September 30, 2022. CCBX average loans receivable was $1.31 billion for the quarter ended September 30, 2023, compared to $893.7 million for the quarter ended September 30, 2022, an increase of $415.7 million, or 9.9%46.5%. Average CCBX yield of 17.05% was earned on CCBX loans for the quarter ended September 30, 2023, compared to 13.96% for the quarter ended September 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 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
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in interest rates on variable rate loans resulting from the FOMC raising rates. The FOMC has increased interest rates from 3.25% as of September 30, 2022 to 5.50% as of September 30, 2023. We continue to monitor the impact of these increases in interest rates. During the quarter ended September 30, 2023 we sold $320.9 million in higher yielding CCBX loans that have a greater potential for credit deterioration. As a result, we expect to see lower net income in the short term with lower loan yields and compressed margins but we will work to continue growing our CCBX portfolio with loans that we believe will strengthen the balance sheet and provide for long term stability and profitability.
Interest income from interest earning deposits with other banks was $3.9 million for the quarter ended September 30, 2023, an increase of $1.6 million, or 70.9%, due to higher interest rates, compared to the quarter ended September 30, 2022. The average balance of interest earning deposits invested with other banks for the three months ended September 30, 2023 was $285.6 million, compared to $397.6 million for the three months ended September 30, 2022. The yield on these interest earning deposits with other banks increased 3.13%, to 5.40% compared to 2.27% at September 30, 2022. Interest income on investment securities increased $212,000 to $766,000 at September 30, 2023, compared to $554,000 at September 30, 2022. Average investment securities increased $14.3 million from $103.7 million for the three months ended September 30, 2022, to $118.0 million for the three months ended September 30, 2023, and, as a result of higher interest rates, average yield increased to 2.58% for the three months ended September 30, 2023, compared to 2.12% for the three months ended September 30, 2022. The increase in average interest-bearinginvestment securities is a result of purchasing additional U.S. Agency mortgage backed securities for CRA purposes. CRA securities are designated held-to-maturity ("HTM") and the weighted average yield of those securities was 5.00% for the quarter ended September 30, 2023.
Interest expense was $26.1 million for the quarter ended September 30, 2023, a $20.1 million increase from the quarter ended September 30, 2022. Interest expense on deposits overwas $25.5 million for the same periodquarter ended September 30, 2023, compared to $5.7 million for the quarter ended September 30, 2022. The $19.7 million increase in interest expense on deposits was due to an increase of $561.9 million in interest bearing deposits as well as a 2.85% increase in interest rates on deposit accounts. While we continue working to hold down deposit costs, any additional FOMC interest rate increases will increase our cost of deposits and result in higher interest expense on interest bearing deposits. Interest on borrowed funds was $651,000 for the quarter ended September 30, 2023, compared to $273,000 for the quarter ended September 30, 2022. The $378,000 increase in interest expense on borrowed funds from the quarter ended September 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 September 30, 2022 as a result of an increase in CCBX deposits that are tied to, and reprice when, the FOMC raises rates. Similarly, most of our CCBX loans 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 prior year.Federal Reserve Bank or other banks.
Net interest margin was 7.10% for the three months ended September 30, 2023, compared to 6.58% for the three months ended September 30, 2022. The increase in net interest margin compared to the cost of depositsthree months ended September 30, 2022 was primarilylargely due to an increase in the rate paid on NOW and money market accounts and on time deposits, as markettotal loans combined with higher interest rates on new and existing variable rate loans as they reprice. Average loans increased over$609.4 million compared to the prior year. Thethree months ended September 30, 2022. Also contributing to the increase in net interest margin compared to the three months ended September 30, 2022 was interest earning deposits invested in other banks, which earned an average interest-bearingrate of 5.40% for the quarter ended September 30, 2023, compared to an average rate of 2.27% for the quarter ended September 30, 2022. We expect that higher interest rates on interest bearing deposits will continue to compress net interest margin as a result of our decision to increase rates on our interest bearing deposits in light of rate increases from our competitors and CCBX deposit pricing being tied to the Fed Funds rate.
Cost of funds was 3.18% for the quarter ended September 30, 2023, which is an increase of 2.33% from the quarter ended September 30, 2022. Cost of deposits for the quarter ended September 30, 2023 was 3.14%, which was a 2.32% increase, from 0.82% for the quarter ended September 30, 2022. These increases were largely due to an increase in higher cost CCBX deposits and a higher interest rate environment compared to September 30, 2022 as the FOMC raised the Fed funds rate 2.25% from September 30, 2022 to September 30, 2023. CCBX deposit growth also contributed to the increase in interest expense.
Total yield on loans receivable for the quarter ended September 30, 2023 was 10.84%, compared to 8.46% for the quarter ended September 30, 2022. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. For the quarter ended September 30, 2023, average CCBX loans increased $415.7 million, or 46.5%, with an average CCBX yield of 17.05%, compared to 13.96% at the quarter ended September 30, 2022. CCBX yield does not
49
Table of Contents,
include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Average community bank loans increased $193.7 million, or 12.4%. Average yield on community bank loans for the three months ended JuneSeptember 30, 2018,2023 was 6.20% compared to 5.31% for the same period in 2017 is attributable to growth in all deposit categories. three months ended September 30, 2022.
The average balance of NOW and money market accounts grew $13.3 million, or 4.3%,following tables show the average balanceyield on loans and cost of savings accounts grew $6.5 million,deposits by segment and also illustrates the impact of BaaS loan expense on CCBX yield on loans:
For the Three Months Ended
September 30, 2023September 30, 2022
(unaudited)
Yield on
Loans (2)
Cost of
Deposits (2)
Yield on
Loans (2)
Cost of
Deposits (2)
Community Bank6.20%1.31%5.31%0.16%
CCBX(1)
17.05%4.80%13.96%1.79%
Consolidated10.84%3.14%8.46%0.82%
(1)CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or 16.0%,payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans. 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 yield on loans.
(2)Annualized calculations shown for periods presented.
For the Three Months Ended
September 30, 2023September 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$56,279 17.05 %$31,449 13.96 %
Less: BaaS loan expense23,003 6.97 %15,560 6.91 %
Net BaaS loan income (1)
$33,276 10.08 %$15,889 7.05 %
Average BaaS Loans(3)
$1,309,380 $893,655 
(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 September 30, 2023, net interest margin (net interest income divided by 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 threemonthsended June 30, 2018, nettotal interestmargin(annualizednet interestincomedividedby averagetotalinterest-earning earning assets) and net interestspread(average (average yieldon totalinterest-earning interest earning assetsminusaveragecost of totalinterest-bearing interest bearing liabilities)were 4.26%7.10% and 3.96%6.04%, respectively,comparedto 4.12%6.58% and 3.89%6.18%, respectively, for the threemonthsended JuneSeptember 30, 2017.

2022.


50
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 costs included in interest income totaled $2.0 million and loan costs included in interest income totaled $100,000 for the three months ended September 30, 2023 and 2022, respectively. For the three months ended September 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 September 30,
20232022
(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		$285,596 $3,884 5.40 %$397,621 $2,273 2.27 %
Investment securities, available for sale (2)
100,283 543 2.15 102,438 545 2.11 
Investment securities, held to maturity (2)
17,703 223 5.00 1,257 9 2.84 
Other investments11,943 29 0.96 10,520 24 0.91 
Loans receivable (3)
3,062,214 83,652 10.84 2,452,815 52,328 8.46 
Total interest earning assets3,477,739 88,331 10.08 2,964,651 55,179 7.38 
Noninterest earning assets:
Allowance for credit losses(100,329)(51,259)
Other noninterest earning assets220,750 128,816 
Total assets$3,598,160 $3,042,208 
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits$2,515,093 $25,451 4.01 %$1,953,170 $5,717 1.16 %
Subordinated debt44,084 580 5.22 24,331 234 3.82 
Junior subordinated debentures3,589 71 7.85 3,587 39 4.31 
Total interest bearing liabilities2,562,766 26,102 4.04 1,981,088 5,990 1.20 
Noninterest bearing deposits698,532 807,952 
Other liabilities57,865 25,662 
Total shareholders' equity278,997 227,506 
Total liabilities and shareholders' equity$3,598,160 $3,042,208 
Net interest income$62,229 $49,189 
Interest rate spread6.04 %6.18 %
Net interest margin (4)
7.10 %6.58 %
(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.
51
Table of Contents,
The following table presents an analysis of certain average balances, interest income and expense by segment:
For the Three Months Ended
September 30, 2023September 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)
$1,752,834 $27,373 6.20 %$1,559,160 $20,879 5.31 %
Intrabank asset— — — 77,217 441 2.27 
Total interest earning assets1,752,834 27,373 6.20 1,636,377 21,320 5.17 
Liabilities
Interest bearing liabilities:
Interest bearing deposits$920,707 $5,067 2.18 %$901,339 $642 0.28 %
Intrabank liability223,221 3,036 5.40 — — — 
Total interest bearing liabilities1,143,928 8,103 2.81 901,339 642 0.28 
Noninterest bearing deposits608,906 735,038 
Net interest income$19,270 $20,678 
Net interest margin(3)
4.36 %5.01 %
CCBX
Assets
Interest earning assets:
Loans receivable (2)(4)
$1,309,380 $56,279 17.05 %$893,655 $31,449 13.96 %
Intrabank asset374,632 5,095 5.40 231,090 1,321 2.27 
Total interest earning assets1,684,012 61,374 14.46 1,124,745 32,770 11.56 
Liabilities
Interest bearing liabilities:
Interest bearing deposits$1,594,386 $20,384 5.07 %$1,051,831 $5,075 1.91 %
Total interest bearing liabilities1,594,386 20,384 5.07 1,051,831 5,075 1.91 
Noninterest bearing deposits89,626 72,914 
Net interest income$40,990 $27,695 
Net interest margin(3)
9.66 %9.77 %
Net interest margin, net of
   Baas loan expense (5)
4.24 %4.28 %
52
Table of Contents,
For the Three Months Ended
September 30, 2023September 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		$285,596 $3,884 5.40 %$397,621 $2,273 2.27 %
Investment securities, available for
     sale (6)
100,283 543 2.15 102,438 545 2.11 
Investment securities, held to
     maturity (6)
17,703 223 5.00 1,257 9 2.84 
Other investments11,943 29 0.96 10,520 24 0.91 
Total interest earning assets415,525 4,679 4.47 511,836 2,851 2.21 %
Liabilities
Interest bearing liabilities:
Subordinated debt44,084 580 5.22 24,331 234 3.82 
Junior subordinated debentures3,589 71 7.85 3,587 39 4.31 
Intrabank liability, net (7)
151,411 2,059 5.40 308,307 1,762 2.27 
Total interest bearing liabilities199,084 2,710 5.40 336,225 2,035 2.40 
Net interest income$1,969 $816 
Net interest margin(3)
1.88 %0.63 %
(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 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, 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.
53
Table of Contents,
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 $14.7 million increase in loan interest income that is attributed to an increase in loan rates and $16.6 million increase in loan interest income that is attributed to an increase in loan volume. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.
Three months ended September 30, 2023
Compared to Three months ended September 30, 2022
Increase (Decrease)
Due to		Total Increase
(Decrease)
(dollars in thousands; unaudited)VolumeRate
Interest income:
Interest earning deposits$(1,523)$3,134 $1,611 
Investment securities, available for sale(12)10 (2)
Investment securities, held to maturity207 7 214 
Other Investments3 2 5 
Loans receivable16,647 14,677 31,324 
Total increase in interest income15,322 17,830 33,152 
Interest expense:
Interest bearing deposits5,686 14,048 19,734 
Subordinated debt260 86 346 
Junior subordinated debentures— 32 32 
Total increase in interest expense5,946 14,166 20,112 
Increase in net interest income$9,376 $3,664 $13,040 
Comparison of the nine months ended September 30, 2023 to the comparable period in the prior year
Net interest income for the nine months ended September 30, 2023, was $179.1 million, compared to $118.3 million for the nine months ended September 30, 2022, an increase of $60.7 million, or 51.3%. Yield on loans receivable was 10.57% for the nine months ended September 30, 2023, compared 7.63% for the nine months ended September 30, 2022. The increase in net interest income compared to the nine months ended September 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 nine months ended September 30, 2023 was $2.91 billion, compared to $2.14 billion for the nine months ended September 30, 2022.
Interest and fees on loans totaled $230.3 million for the nine months ended September 30, 2023 compared to $122.1 million for the nine months ended September 30, 2022. The $108.2 million increase in interest and fees on loans for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022, was largely due to increased yield on loans from growth in higher yielding CCBX loans and an overall increase in interest rates. CCBX average loans receivable grew to $1.22 billion for the nine months ended September 30, 2023, compared to $657.6 million for the nine months ended September 30, 2022, an increase of $557.7 million, or 84.8%. Average CCBX yield of 16.74% was earned on CCBX loans for the nine months ended September 30, 2023, compared to 13.16% for the nine months ended September 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 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 3.25% as of September 30, 2022 to 5.50% as of September 30, 2023, with the most recent increase during such period on July 26, 2023. We continue to monitor the impact of these increases in interest rates.
54
Table of Contents,
Interest income from interest earning deposits with other banks was $9.7 million for the nine months ended September 30, 2023, an increase of $6.0 million due to higher interest rates, despite a decrease in balances, compared to the nine months ended September 30, 2022. The average balance of interest earning deposits invested with other banks for the nine months ended September 30, 2023 was $256.3 million, compared to $578.9 million for the nine months ended September 30, 2022. This decrease was a result of increased loan demand. Additionally, the yield on these interest earning deposits with other banks increased 4.20%, compared to the nine months ended September 30, 2022. Interest income on investment securities increased $784,000 to $2.0 million, with a yield of 2.39% at September 30, 2023, compared to $1.2 million, and a yield of 1.76%, at September 30, 2022. Average investment securities increased $19.8 million from $90.4 million for the nine months ended September 30, 2022 to $110.2 million for the nine months ended September 30, 2023 as a result of purchasing additional securities to hold for CRA purposes, and average yield increased to 2.39% for the nine months ended September 30, 2023, compared to 1.76% for the nine months ended September 30, 2022.
Interest expense was $63.1 million for the nine months ended September 30, 2023, a $54.3 million increase from the nine months ended September 30, 2022. Interest expense on deposits was $61.1 million for the nine months ended September 30, 2023, compared to $7.9 million for the nine months ended September 30, 2022. The $53.2 million increase in interest expense on deposits was due to an increase in average interest bearing deposits of $676.9 million and an increase in interest rates. Interest on borrowed funds was $2.0 million for the nine months ended September 30, 2023, compared to $854,000 for the nine months ended September 30, 2022. The $1.1 million increase in interest expense on borrowed funds from the nine months ended September 30, 2022 is the result of a $19.7 million average balance increase in subordinated debt, which increased during the quarter ended December 31, 2022 partially offset by a decrease in average FHLB borrowings, which were paid off in full during the quarter ended March 31, 2022. The FOMC increased the Fed Funds rate 1.00% during the nine months ended September 30, 2023, with the most recent increase during such period on July 26, 2023. Interest expense is expected to increase as a result of the FOMC increasing rates and any additional FOMC interest rate increases will result in higher interest expense on interest bearing deposits which will compress net interest margin in future periods.
Net interest margin was 7.27% for the nine months ended September 30, 2023, compared to 5.61% for the nine months ended September 30, 2022. The increase in net interest margin compared to the nine months ended September 30, 2022 was largely a result of an increase in higher rate loans. Average loans increased $772.1 million, compared to the nine months ended September 30, 2022. Also contributing to the increase in net interest margin compared to the nine months ended September 30, 2022 was a $6.0 million increase in interest earned on interest earning deposits invested in other banks. These interest earning deposits earned an average rate of 5.04% for the nine months ended September 30, 2023, compared to an average rate of 0.84% for the nine months ended September 30, 2022. We expect that interest expense will increase and net interest margin will compress as we increase the interest rates on interest bearing deposits to compete with rates offered by our competitors and CCBX deposit pricing increases as a result of being tied to the Fed Funds rate.Additionally, the sale of higher risk and higher yielding loans during the quarter ended September 30, 2023 in an effort to optimize and strengthen the balance sheet is expected to further impact net interest margin in future quarters.
Cost of funds was 2.73% for the nine months ended September 30, 2023, compared to 0.44% for the nine months ended September 30, 2022. Cost of deposits for the nine months ended September 30, 2023 was 2.69%, which was a 2.28% increase, from 0.41% for the nine months ended September 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 nine months ended September 30, 2023 was 10.57%, compared to 7.63% for the nine months ended September 30, 2022. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. For the nine months ended September 30, 2023, average CCBX loans increased $557.7 million, or 84.8%, with an average CCBX yield of 16.74%, compared to 13.16% for the nine months ended September 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 servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. In light of our efforts to optimize and strengthen the balance sheet by selling higher yield CCBX loans, total yield on loans may not continue increasing and average CCBX loans may decrease in the short term as a we work to grow the CCBX portfolio with enhanced credit standards and lower potential for future credit deterioration. There was an increase in average community bank loans of $214.4 million, or 14.5%, compared to the nine months ended September 30, 2022. Average yield on community bank loans for the nine months ended September 30, 2023 was 6.15%. compared to 5.17% for the nine months ended September 30, 2022.
55
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 Nine Months Ended
September 30, 2023September 30, 2022
(unaudited)
Yield on
Loans (2)
Cost of
Deposits (2)
Yield on
Loans (2)
Cost of
Deposits (2)
Community Bank6.15%0.99%5.17%0.11%
CCBX (1)
16.74%4.41%13.16%0.91%
Consolidated10.57%2.69%7.63%0.41%
(1)CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans. 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 Nine Months Ended
September 30, 2023September 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$152,131 16.74 %$64,721 13.16 %
Less: BaaS loan expense62,590 6.89 %36,079 7.34 %
Net BaaS loan income (1)
$89,541 9.85 %$28,642 5.82 %
Average BaaS Loans(3)
$1,215,224 $657,574 
(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 nine months ended September 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 7.27% and 6.26%, respectively, compared to 5.61% and 5.32%, respectively, for the nine months ended September 30, 2022.
56
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$4.4 million and $152,000$3.9 million for the threenine months ended JuneSeptember 30, 20182023 and 2017,2022, respectively. For the threenine months ended JuneSeptember 30, 20182023 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 Nine Months Ended September 30,
20232022
(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		$256,272 $9,659 5.04 %$578,855 $3,631 0.84 %
Investment securities, available for sale (2)
100,278 1,612 2.15 89,173 1,160 1.74 
Investment securities, held to maturity (2)
9,959 360 4.83 1,276 28 2.93 
Other investments11,455 215 2.51 9,996 195 2.61 
Loans receivable (3)
2,913,189 230,282 10.57 2,141,127 122,126 7.63 
Total interest earning assets3,291,153 242,128 9.84 2,820,427 127,140 6.03 
Noninterest earning assets:
Allowance for credit losses(89,780)(42,836)
Other noninterest earning assets196,065 112,468 
Total assets$3,397,438 $2,890,059 
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits$2,305,634 $61,084 3.54 %$1,628,765 $7,943 0.65 %
FHLB advances and borrowings— — — 8,058 69 1.14 
Subordinated debt44,047 1,775 5.39 24,313 695 3.82 
Junior subordinated debentures3,589 199 7.41 3,587 90 3.35 
Total interest bearing liabilities2,353,270 63,058 3.58 1,664,723 8,797 0.71 
Noninterest bearing deposits730,292 987,343 
Other liabilities48,206 20,442 
Total shareholders' equity265,670 217,551 
Total liabilities and shareholders' equity$3,397,438 $2,890,059 
Net interest income$179,070 $118,343 
Interest rate spread6.26 %5.32 %
Net interest margin (4)
7.27 %5.61 %

(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.

(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.

57
Table of Contents,
The followingtablepresents an analysis of certain average balances, interest income and interest expense by segment:
For the Nine Months Ended
September 30, 2023September 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)
$1,697,965 $78,151 6.15 %$1,483,553 $57,405 5.17 %
Intrabank asset— — — 167,379 872 0.70 
Total interest earning assets1,697,965 78,151 6.15 1,650,932 58,277 4.72 
Liabilities
Interest bearing liabilities:
Interest bearing deposits$883,454 $11,264 1.70 %$919,415 $1,394 0.20 %
Intrabank liability171,950 6,605 5.14 — — — 
Total interest bearing liabilities1,055,404 17,869 2.26 919,415 1,394 0.20 
Noninterest bearing deposits642,561 731,517 
Net interest income$60,282 $56,883 
Net interest margin(3)
4.75 %4.61 %
CCBX
Assets
Interest earning assets:
Loans receivable (2)(4)
$1,215,224 $152,131 16.74 %$657,574 $64,721 13.16 %
Intrabank asset294,687 11,234 5.10 307,602 2,051 0.89 
Total interest earning assets1,509,911 163,365 14.47 965,176 66,772 9.25 
Liabilities
Interest bearing liabilities:
Interest bearing deposits$1,422,180 $49,820 4.68 %$709,350 $6,549 1.23 %
Total interest bearing liabilities1,422,180 49,820 4.68 709,350 6,549 1.23 
Noninterest bearing deposits87,731 255,826 
Net interest income$113,545 $60,223 
Net interest margin(3)
10.05 %8.34 %
Net interest margin, net of
   Baas loan expense (5)
4.51 %3.34 %
58
Table of Contents,
For the Nine Months Ended
September 30, 2023September 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		$256,272 $9,659 5.04 %$578,855 $3,631 0.84 %
Investment securities, available for
     sale (6)
100,278 1,612 2.15 89,173 1,160 1.74 
Investment securities, held to
     maturity (6)
9,959 360 4.83 1,276 28 2.93 
Other investments11,455 215 2.51 9,996 195 2.61 
Total interest earning assets377,964 11,846 4.19 %679,300 5,014 0.99 %
Liabilities
Interest bearing liabilities:
FHLB advances and borrowings$— $— — %$8,058 $69 1.14 %
Subordinated debt44,047 1,775 5.39 24,313 695 3.82 
Junior subordinated debentures3,589 199 7.41 3,587 90 3.35 
Intrabank liability, net (7)
122,737 4,629 5.04 474,981 2,923 0.82 
Total interest bearing liabilities170,373 6,603 5.18 510,939 3,777 0.99 
Net interest income$5,243 $1,237 
Net interest margin(3)
1.85 %0.24 %
(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 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 and 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.
59
Table of Contents,
The following table presents informationregardingthe dollaramountof changes in interestincomeand interestexpense for the periodsindicatedfor each majorcomponentof interest-earninginterest earning assetsand interest-interest bearingliabilitiesand distinguishesbetween the changes attributableto changes in volumeand changes attributableto changes in interestrates. The table illustrates the $47.1 million increase in loan interest income that is attributed to an increase in loan rates and $61.0 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

 

Nine Months Ended September 30, 2023
compared to Nine Months Ended September 30, 2022

 

Three Months Ended June 30, 2017

 

Increase (Decrease)
Due to		Total Increase
(Decrease)

 

Increase (Decrease)

 

 

 

 

 

 

Due to

 

 

Total Increase

 

(Dollars in thousands)

 

Volume

 

 

Rate

 

 

(Decrease)

 

(dollars in thousands; unaudited)(dollars in thousands; unaudited)VolumeRateTotal Increase
(Decrease)

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

Interest-bearing deposits

 

$

(15

)

 

$

102

 

 

$

87

 

Interest earning depositsInterest earning deposits$(12,158)$18,186 $6,028 

Investment securities, available for sale

 

 

13

 

 

 

13

 

 

 

26

 

Investment securities, available for sale179 273 452 

Investment securities, held to maturity

 

 

(2

)

 

 

(1

)

 

 

(3

)

Investment securities, held to maturity314 18 332 

Other Investments

 

 

5

 

 

 

(6

)

 

 

(1

)

Other Investments27 (7)20 

Loans receivable

 

 

1,018

 

 

 

203

 

 

 

1,221

 

Loans receivable61,030 47,126 108,156 

Total increase in interest income

 

 

1,019

 

 

 

311

 

 

 

1,330

 

Total increase in interest income49,392 65,596 114,988 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

Interest-bearing deposits

 

 

49

 

 

 

171

 

 

 

220

 

Interest bearing depositsInterest bearing deposits17,933 35,208 53,141 

FHLB advances

 

 

10

 

 

 

13

 

 

 

23

 

FHLB advances(69)— (69)

Subordinated debt

 

 

-

 

 

 

(1

)

 

 

(1

)

Subordinated debt795 285 1,080 

Junior subordinated debentures

 

 

-

 

 

 

9

 

 

 

9

 

Junior subordinated debentures— 109 109 

Total increase in interest expense

 

 

59

 

 

 

192

 

 

 

251

 

Total increase in interest expense18,659 35,602 54,261 

Increase in net interest income

 

$

960

 

 

$

119

 

 

$

1,079

 

Increase in net interest income$30,733 $29,994 $60,727 

Provision for LoanCredit Losses

The provision for loancredit losses - loans is an expense we incur to maintain an allowance for loancredit losses at a level that is deemedmanagement 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 loancredit losses see “—Financial Condition—Allowance for LoanCredit Losses.”

The economic environment is continuously changing with the bank failures earlier this year, inflation, higher interest rates, global unrest, the war in Ukraine and Middle East, political uncertainty including a potential shutdown of the U.S. government, 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 $2.97 billion at September 30, 2023 and included $3.3 million in PPP loans, which are 100% guaranteed, and are excluded from the provision for loancredit losses for the three months ended June 30, 2018, was $392,000, compared to no such provision for the three months ended June 30, 2017. The increase of $392,000 was primarily due to loan growth.- loans calculation. The allowance for loancredit losses as a percentage of loans was 1.22%3.41% at JuneSeptember 30, 2018,2023, compared to 1.27%2.36% at JuneSeptember 30, 2017.2022.
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 lower allowance that resultedcredit enhancement asset is relieved as credit enhancement payments are received from strongerthe CCBX partner or taken from the partner's cash reserve account.
60
Table of Contents,
Comparison of the quarter ended September 30, 2023 to the comparable quarter in the prior year
The provision for credit quality reduced the amount of provision needed for 2018.

Net charge-offslosses - loans for the three months ended JuneSeptember 30, 2018,2023 was $27.2 million, compared to $18.4 million for the three months ended September 30, 2022. The increase in the Company’s provision for credit losses - loans during the quarter ended September 30, 2023, is largely related to the provision for CCBX partner loans. During the quarter ended September 30, 2023, a $26.5 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 $664,000 was needed for the quarter ended September 30, 2023.

The following table shows the provision expense by segment for the periods indicated:
Three Months Ended
(dollars in thousands; unaudited)September 30, 2023September 30, 2022
Community bank$664 $(238)
CCBX26,493 18,666 
Total provision expense$27,157 $18,428 
Net charge-offs for the quarter ended September 30, 2023 totaled $275,000,$36.8 million, or 0.16% (annualized)4.77% of total average loans, compared to $8.5 million, or 1.38% of total average loans, for the quarter ended September 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 $231.9 million loan portfolio. At September 30, 2023, our portion of this portfolio represented $23.2 million in loans. For the three months ended September 30, 2023, $36.8 million of net charge-offs were recognized for CCBX loans and no net charge-offs were recognized on community bank loans. For the three months ended September 30, 2022, $8.1 million of net charge-offs were recognized on CCBX loans and $408,000 of net charge-offs were recognized for community bank loans.
The following table shows the total charge-off activity by segment for the periods indicated:
Three Months Ended
September 30, 2023September 30, 2022
(dollars in thousands; unaudited)Community BankCCBXTotalCommunity BankCCBXTotal
Gross charge-offs$3 $37,876 $37,879 $411 $8,102 $8,513 
Gross recoveries(3)(1,042)(1,045)(3)(6)(9)
Net charge-offs$— $36,834 $36,834 $408 $8,096 $8,504 
Net charge-offs to average loans (1)
— %11.16 %4.77 %0.10 %3.59 %1.38 %
(1) Annualized calculations shown for periods presented.
Comparison of the nine months ended September 30, 2023 to the comparable period in the prior year
The provision for credit losses - loans for the nine months ended September 30, 2023 was $123.3 million, compared to $45.5 million for the nine months ended September 30, 2022. The increase in the Company’s provision for credit losses - loans during the quarter ended September 30, 2023, is largely related to the provision for CCBX partner loans due to significant loan growth and increased loss rates. During the nine months ended September 30, 2023, a $122.3 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 $1.0 million was needed for the nine months ended September 30, 2023.
61
Table of Contents,
The following table shows the provision expense by segment for the periods indicated:
Nine Months Ended
(dollars in thousands; unaudited)September 30, 2023September 30, 2022
Community bank$1,045 $214 
CCBX122,254 45,250 
Total provision expense$123,299 $45,464 
Net charge-offs for the nine months ended September 30, 2023 totaled $100.1 million, or 4.59% of total average loans, as compared to net recoveriescharge-offs of $96,000,$14.8 million, or (0.06)% (annualized)0.93% of total average loans, for the threenine months ended JuneSeptember 30, 2017.2022. Net charge-offs increased in the first nine 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 botha credit enhancement that indemnifies and CCBX partners reimburse 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 $231.9 million loan portfolio. At September 30, 2023, our portion of this portfolio represented $23.2 million in loans. For the nine months ended September 30, 2023, $100.0 million of net charge-offs were recognized for CCBX loans and $54,000 of net charge-offs recognized for community bank loans. For the nine months ended September 30, 2022, $14.4 million of net charge-offs were recognized for CCBX and $375,000 of net charge-offs were recognized for community bank loans.
Nine Months Ended
September 30, 2023September 30, 2022
(dollars in thousands; unaudited)Community BankCCBXTotalCommunity BankCCBXTotal
Gross charge-offs$62 $104,283 $104,345 $418 $14,445 $14,863 
Gross recoveries(8)(4,242)(4,250)(43)(6)(49)
Net charge-offs$54 $100,041 $100,095 $375 $14,439 $14,814 
Net charge-offs to average loans(1)
0.00 %11.01 %4.59 %0.03 %2.94 %0.93 %
(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 September 30, 2023 to the comparable quarter in the prior year
For the three months ended JuneSeptember 30, 2018,2023, noninterest income totaled $1.2$34.6 million, an increase of $193,000,$188,000, or 18.9%0.5%, compared to $1.0$34.4 million for the three months ended JuneSeptember 30, 2017.

2022.

62

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 September 30,Increase
(Decrease)		Percent
Change

(Dollars in thousands)

 

2018

 

 

2017

 

 

(Decrease)

 

 

Change

 

(dollars in thousands; unaudited)(dollars in thousands; unaudited)20232022Increase
(Decrease)		Percent
Change

Deposit service charges and fees

 

$

771

 

 

$

651

 

 

$

120

 

 

 

18.4

%

Deposit service charges and fees$998 $986 
Gain on sales of loans, netGain on sales of loans, net107 — 107 100.0 
Unrealized gain on equity securities, netUnrealized gain on equity securities, net5 (133)138 (103.8)

Loan referral fees

 

 

114

 

 

 

42

 

 

 

72

 

 

 

171.4

 

Loan referral fees1 — 1 100.0 

Mortgage broker fees

 

 

69

 

 

 

74

 

 

 

(5

)

 

 

(6.8

)

Sublease and lease income

 

 

4

 

 

 

55

 

 

 

(51

)

 

 

(92.7

)

Gain on sales of loans, net

 

 

78

 

 

 

58

 

 

 

20

 

 

 

34.5

 

Other

 

 

177

 

 

 

140

 

 

 

37

 

 

 

26.4

 

Other291 260 31 11.9 

Total Noninterest income

 

$

1,213

 

 

$

1,020

 

 

$

193

 

 

 

18.9

%

Noninterest income, excluding BaaS program income and BaaS indemnification incomeNoninterest income, excluding BaaS program income and BaaS indemnification income1,402 1,113 289 26.0 
Servicing and other BaaS feesServicing and other BaaS fees997 1,079 (82)(7.6)
Transaction feesTransaction fees1,036 940 96 10.2 
Interchange feesInterchange fees1,216 738 478 64.8 
Reimbursement of expensesReimbursement of expenses1,152 885 267 30.2 
BaaS program incomeBaaS program income4,401 3,642 759 20.8 
BaaS credit enhancementsBaaS credit enhancements25,926 17,928 7,998 44.6 
Baas fraud enhancementsBaas fraud enhancements2,850 11,708 (8,858)(75.7)
BaaS indemnification incomeBaaS indemnification income28,776 29,636 (860)(2.9)
Total BaaS incomeTotal BaaS income33,177 33,278 (101)(0.3)
Total noninterest incomeTotal noninterest income$34,579 $34,391 $188 0.5 %

Comparison of the nine months ended September 30, 2023 to the comparable period in the prior year
For the nine months ended September 30, 2023, noninterest income totaled $142.5 million, an increase of $60.6 million, or 74.0%, compared to $81.9 million for the nine months ended September 30, 2022.
The following table presents, for the periods indicated, the major categories of noninterest income:
Nine Months Ended September 30,Increase
(Decrease)		Percent
Change
(dollars in thousands; unaudited)20232022
Deposit service charges and fees$2,897 $2,858 $39 1.4 %
Loan referral fees683 810 (127)(15.7)
Gain on sales of loans, net253 — 253 100.0 
Unrealized (loss) gain on equity securities, net199 (135)334 (247.4)
Other824 1,046 (222)(21.2)
Noninterest income, excluding BaaS program income and BaaS indemnification income4,856 4,579 277 6.0 
Servicing and other BaaS fees2,840 3,407 (567)(16.6)
Transaction fees3,005 2,247 758 33.7 
Interchange fees2,980 1,798 1,182 65.7 
Reimbursement of expenses3,099 1,875 1,224 65.3 
BaaS program income11,924 9,327 2,597 27.8 
BaaS credit enhancements119,315 45,210 74,105 163.9 
BaaS fraud enhancements6,386 22,753 (16,367)(71.9)
BaaS indemnification income125,701 67,963 57,738 85.0 
Total BaaS income137,625 77,290 60,335 78.1 
Total noninterest income$142,481 $81,869 $60,612 74.0 %
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Summary of significant noninterest income for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 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 we now have 22 relationships, at varying stages, as of September 30, 2023.  We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense and are focusing on expanding and developing relationships with larger and more established partners, with experienced management teams, existing customer bases and strong financial positions. The sale of $320.9 million in CCBX loans during the quarter ended September 30, 2023 is part of our strategy to strengthen the balance sheet and lower the overall potential credit risk in our loan portfolio. We expect net interest margin will tighten as higher quality loans yield less than higher risk loans and we also expect the size of our CCBX loan portfolio will be smaller than in previous quarters while we work to grow the portfolio with loans that are subject to increased underwriting standards. We expect this process to take two to three quarters. At the same time we will be focused on increasing our efficiency and using technology to reduce future expense growth.
The following table illustrates the activity and evolution in CCBX relationships for the periods presented.
As of
(unaudited)September 30, 2023September 30, 2022
Active1819
Friends and family / testing12
Implementation / onboarding10
Signed letters of intent15
Wind down - preparing to exit relationship13
Total CCBX relationships2229
Deposit Service Charges and Fees. Deposit service charges and feeswhich 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 noninterestincome. 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 a loan referralfee for arrangingthe interestrateswap. Byfacilitatinginterestrate swaps to our clients,weare able to providethemwith a long-term,fixedinterestratewithout the Bank 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 referralfeesfluctuate 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 thatwebrokerthrough Quicken Loans. Mortgagebrokerfeesdecreased$5,000 Current market conditions are making interest rate swap agreements less attractive in the threemonthsended June 30, 2018, comparedhigher rate environment.

Gain on Sales of Loans, net. Gain on sales of loans occurs when we sell certain CCBX loans to the sameperiodoriginating partner, in 2017 as a resultof highermortgageinterestratesaccordance with partner agreements. We sold $320.9 million in CCBX loans during the quarter ended September 30, 2023 and lower inventoryof housingexpect to continue selling CCBX loans over the next several months in an effort to optimize and strengthen 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 thatweoriginate.portfolio. Gain on sale of loans increased$20,000 to $78,000may also occur when we sell in the threemonthsended June 30, 2018, comparedtosecondary market the sameperiodin 2017 as a resultguaranteed portion (generally

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75% of the principal balance) of the SBA and U.S. Department of Agriculture (“USDA”) loans that we originate. This activity fluctuates based on productionafterrestructuringour SBA and USDA loan programin 2017.

Other. This categoryincludesa varietyof otherincome-producingactivities,annuitybrokerfees,and SBA servicingfees.Other noninterestincomeincreased$37,000 inactivity.

Unrealized (loss)/gain on equity securities, net. During the three and nine monthsended JuneSeptember 30, 2018,2023, we recognized an unrealized gain on equity securities of $5,000 and $199,000, respectively, compared to the sameperiod periods ended September 30, 2022, when there was an unrealized loss of $133,000 and $135,000, respectively, recognized. We hold $2.9 million in 2017 asequity securities focused on entities providing products to the BaaS and financial services space.
Other. This category includes a resultvariety of reimbursement of wholesale banking customer costs in the current quarter, partially offset by lower annuityother income-producing activities, credit card fee income, wire transfer fees, interest earned on bank owned life insurance (“BOLI”), and SBA and USDA servicing fees. Additionally, during the three months ended June 30, 2017, the Company incurred a loss on fixed asset disposal of $21,000.

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 componentcomponents 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, points of sale expense, FDIC assessment, excise taxes, director and staff expense,expenses, marketing expense, and legal and professional fees.

other expenses.

Comparison of the quarter ended September 30, 2023 to the comparable quarter in the prior year
For the three months ended JuneSeptember 30, 2018,2023, noninterest expense totaled $6.4$56.5 million, an increase of $891,000,$5.4 million, or 16.3%10.6%, compared to $5.5$51.1 million for the three months ended JuneSeptember 30, 2017.

2022.

The followingtablepresents,for the periodsindicated,the majorcategoriesof noninterestexpense:

 

Three Months

 

 

 

 

 

 

 

 

 

 

Ended June 30,

 

 

Increase

 

 

Percent

 

Three Months Ended September 30,Increase
(Decrease)		Percent
Change

(Dollars in thousands)

 

2018

 

 

2017

 

 

(Decrease)

 

 

Change

 

(dollars in thousands; unaudited)(dollars in thousands; unaudited)20232022Increase
(Decrease)		Percent
Change

Salaries and employee benefits

 

$

3,910

 

 

$

3,174

 

 

$

736

 

 

 

23.2

%

Salaries and employee benefits$18,087 $14,506 
Legal and professional expensesLegal and professional expenses4,447 2,251 2,196 97.6 
Data processing and software licensesData processing and software licenses2,366 1,670 696 41.7 

Occupancy

 

 

804

 

 

 

740

 

 

 

64

 

 

 

8.6

 

Occupancy1,224 1,147 77 6.7 

Data processing

 

 

492

 

 

 

447

 

 

 

45

 

 

 

10.1

 

Point of sale expensePoint of sale expense1,068 742 326 43.9 
FDIC assessmentsFDIC assessments694 850 (156)(18.4)
Excise taxesExcise taxes541 588 (47)(8.0)

Director and staff expenses

 

 

136

 

 

 

137

 

 

 

(1

)

 

 

(0.7

)

Director and staff expenses529 475 54 11.4 

Excise taxes

 

 

134

 

 

 

112

 

 

 

22

 

 

 

19.6

 

Marketing

 

 

86

 

 

 

83

 

 

 

3

 

 

 

3.6

 

Marketing169 69 100 144.9 

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

)

Other1,523 1,522 1 0.1 

Total Noninterest expense

 

$

6,354

 

 

$

5,463

 

 

$

891

 

 

 

16.3

%

Noninterest expense, excluding BaaS loan and BaaS fraud expenseNoninterest expense, excluding BaaS loan and BaaS fraud expense30,648 23,820 6,828 28.7 
BaaS loan expenseBaaS loan expense23,003 15,560 7,443 47.8 
BaaS fraud expenseBaaS fraud expense2,850 11,707 (8,857)(75.7)
BaaS loan and fraud expenseBaaS loan and fraud expense25,853 27,267 (1,414)(5.2)
Total noninterest expenseTotal noninterest expense$56,501 $51,087 $5,414 10.6 %

Comparison of the nine months ended September 30, 2023 to the comparable period in the prior year
For the nine months ended September 30, 2023, noninterest expense totaled $153.1 million, an increase of $33.4 million, or 27.9%, compared to $119.7 million for the nine months ended September 30, 2022.
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The following table presents, for the periods indicated, the major categories of noninterest expense:
Nine Months Ended September 30,Increase
(Decrease)		Percent
Change
(dollars in thousands; unaudited)20232022
Salaries and employee benefits$49,971 $37,829 $12,142 32.1 %
Legal and professional expenses12,154 3,961 8,193 206.8 
Data processing and software licenses6,178 4,719 1,459 30.9 
Occupancy3,586 3,366 220 6.5 
Point of sale expense2,635 1,399 1,236 88.3 
FDIC assessments1,859 2,309 (450)(19.5)
Director and staff expenses1,674 1,196 478 40.0 
Excise taxes1,527 1,501 26 1.7 
Marketing379 242 137 56.6 
Other4,135 4,318 (183)(4.2)
Noninterest expense, excluding BaaS loan and BaaS fraud expense84,098 60,840 23,258 38.2 
BaaS loan expense62,590 36,079 26,511 73.5 
BaaS fraud expense6,386 22,752 (16,366)(71.9)
BaaS loan and fraud expense68,976 58,831 10,145 17.2 
Total noninterest expense$153,074 $119,671 $33,403 27.9 %
Summary of significant noninterest expense for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 30, 2022
A description of our largest noninterest expense categories are below:
Salaries and Employee Benefits. Salariesand employeebenefitsare one of the largestcomponent components of noninterest expense and includepayrollexpense, incentivecompensationcosts, equity compensation, benefitplans, healthinsuranceand payroll taxes.Salariesand employeebenefitswere $3.9 million continue to increase primarily due to continued hiring staff for 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. During the three and nine monthsended JuneSeptember 30, 2018,2023 salaries and employee benefits included one time expenses of $494,000 as part of our initiative to manage costs going forward. This strategy will focus on improving efficiencies while holding staffing fairly level in 2024. As of September 30, 2023, we had 528 full-time equivalent employees, compared to 442 at September 30, 2022, a 19.5% increase.
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. The increase in legal and professional fees was related to data and risk management, building out our infrastructure and increased consulting expenses for projects and enhanced monitoring. We anticipate that our legal and professional fees will decline as projects have been completed and initiatives are achieved, with legal and professional fees leveling off to approximate first quarter 2023 levels staring in fourth quarter 2023.
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 and enhance technology. 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. We believe that these investments will give us the ability to hold staffing fairly level in 2024.
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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.
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.
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 various 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%, comparedexceeds 2.0%.
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 $3.2 millionemployee travel, and continuing education.
Excise Taxes. Excise taxes are assessed on Washington state income and are based on gross income. Gross income is reduced by certain allowed deductions and income attributed to other states is also removed to arrive at the taxable base. Excise taxes increased as a result of increased income subject to excise taxes.
Marketing. Marketing and promotion costs are starting to increase as we deploy more branding and targeted advertising for the threemonthsended June 30, 2017. Thecommunity bank and CCBX. We are using more cost-effective advertising options, but expect costs to increasewas primarilydue to hiringadditionalstafffor as we expand our Woodinvillebranch, which opened in October 2017, and hiring additional higher-earning staff (generally lenders and credit staff) for our ongoing growth initiatives.Asof 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 13thbranch in Woodinvillein the fallof2017. 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.

marketing plan.

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 officersofficer’s insurance, donations provisionand miscellaneous other expenses. Provision for unfunded commitments and miscellaneous other expenses.Other noninterest expense was $511,000is included in this category for the three and nine months ended JuneSeptember 30, 2018, compared to$528,0002022 and included as a provision/recapture for unfunded commitments as an expense/credit for the three and nine months ended JuneSeptember 30, 2017. The decrease was primarily due2023.
BaaS loan and fraud expense. Included in BaaS loan and fraud expense is partner loan expense including overdraft balances and BaaS fraud expense. Partner loan expense represents the amount paid or payable to less cost associated with problempartners for credit enhancements, fraud enhancements andservicing CCBX loans. BaaS fraud expense represents noncredit fraud losses on loans and lower depositdeposits 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 toperiods indicated, the same period last year.

BaaS loan and fraud expenses:

Three Months EndedNine Months Ended
(dollars in thousands; unaudited)September 30,
2023		September 30,
2022		September 30,
2023		September 30,
2022
BaaS loan expense$23,003 $15,560 $62,590 $36,079 
BaaS fraud expense2,850 11,707 6,386 22,752 
Total BaaS loan and fraud expense$25,853 $27,267 $68,976 $58,831 
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
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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% 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 September 30, 2023 to the comparable quarter in the prior year
For the three months ended JuneSeptember 30, 2018,2023, income tax expense totaled $569,000,$2.8 million, compared to $905,000$3.0 million for the three months ended JuneSeptember 30, 2017.2022. The $180,000 decrease in income tax expense is the result of slightly lower net income, partially offset by 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 rate was 21.3% for the three months ended September 30, 2023, compared to 21.1% for the three months ended September 30, 2022. The effective tax rate was higher for the three months ended September 30, 2023 due to the addition of various state taxes that are being assessed as CCBX activities and employees expand into other states.
Comparison of the nine months ended September 30, 2023 to the comparable period in the prior year
For the nine months ended September 30, 2023 income tax expense totaled $9.7 million, compared to $7.6 million for the nine months ended September 30, 2022. The $2.1 million increase in income tax expense is the result of higher net income. Our effective tax rates for the nine months ended September 30, 2023 and 2022 were 21.4% and 21.6%, 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 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 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 September 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
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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:
September 30, 2023December 31, 2022
(dollars in thousands; unaudited)Community BankCCBXTreasury & AdministrationConsolidatedCommunity BankCCBXTreasury & AdministrationConsolidated
Assets
Cash and Due from Banks$4,858 $10,485 $459,603 $474,946 $4,603 $12,899 $324,637 $342,139 
Intrabank asset— 560,463 (560,463)— — 254,096 (254,096)— 
Securities— — 141,489 141,489 — — 98,353 98,353 
Loans held for sale— — — — — — — — 
Total loans receivable1,784,661 1,182,374 — 2,967,035 1,614,752 1,012,504 — 2,627,256 
Allowance for credit losses(21,316)(79,769)— (101,085)(20,636)(53,393)— (74,029)
All other assets30,983 118,859 46,038 195,880 25,508 76,111 49,129 150,748 
Total assets$1,799,186 $1,792,412 $86,667 $3,678,265 $1,624,227 $1,302,217 $218,023 $3,144,467 
Liabilities
Total deposits$1,537,468 $1,752,232 $— $3,289,700 $1,538,218 $1,279,303 $— $2,817,521 
Total borrowings— — 47,695 47,695 — — 47,587 47,587 
Intrabank liability254,268 — (254,268)— 80,392 — (80,392)— 
All other liabilities7,450 40,180 8,790 56,420 5,617 22,914 7,334 35,865 
Total liabilities$1,799,186 $1,792,412 $(197,783)$3,393,815 $1,624,227 $1,302,217 $(25,471)$2,900,973 
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Community bank total assets as of September 30, 2023 increased $175.0 million, or 10.8%, to $1.80 billion, compared to $1.62 billion as of December 31, 2022. Loans receivable net of deferred fees for the community bank segment increased $169.9 million, or 10.5%, to $1.78 billion as of September 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 $170.8 million. Total community bank deposits decreased $750,000, or 0.05%, to $1.54 billion, as of September 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 community bank was 1.31% for the three months ended JuneSeptember 30, 20182023.
CCBX total assets as of September 30, 2023 increased $490.2 million, or 37.6%, to $1.79 billion, compared to $1.30 billion as of December 31, 2022. During the nine months ended September 30, 2023, $474.8 million in CCBX loans were transferred to loans held for sale, with $474.8 million in loans sold and 2017,no loans remaining in loans held for sale as of September 30, 2023 and December 31, 2022. A portion of these loans were 20.5%sold at par and 32.5%a portion were sold with a gain on sale. Pricing is dependent upon the agreement with the partner. The Company sells CCBX loans to manage loan portfolio size by partner and by loan category, with such limits established and documented in the relevant partner agreements. Total CCBX loans receivable increased $169.9 million, or 16.8%, respectively.to $1.18 billion as of September 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. During the quarter ended September 30, 2023, we deliberately reduced our other consumer and other loans portfolio in an effort to optimize loan portfolio and will work to continue growing the CCBX portfolio in future quarters with loans that have lower tax ratepotential risk of credit deterioration and are more aligned with our long term objectives. CCBX allowance for credit losses increased to $79.8 million as of September 30, 2023, compared to $53.4 million as of December 31, 2022 as a result of increased loss rates and balances on CCBX loans which has increased the allowance calculation/requirement. CCBX partner agreements provide for, and the Company has collected in 2018full, credit enhancements that cover the $36.8 million and $100.0 million in net charge-offs on CCBX loans for the three and nine months ended September 30, 2023. Total CCBX deposits increased $472.9 million, or 37.0%, to $1.75 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 $51.9 million in CCBX deposits that were transferred off balance sheet to provide for increased FDIC insurance coverage to certain customers.
Treasury & administration total assets as of September 30, 2023 decreased $131.4 million, or 60.2%, to $86.7 million, compared to $218.0 million as of December 31, 2022. Total securities increased $43.1 million, or 43.9%, to $141.5 million as of September 30, 2023, compared to $98.4 million as of December 31, 2022, as we increased the amount of CRA qualified securities we hold. Total borrowings were $47.7 million as of September 30, 2023 and $47.6 million as of December 31, 2022.
71
Table of Contents,
The following tables present summary financial information for each segment for the periods indicated:
Three months ended September 30, 2023Three months ended September 30, 2022
(dollars in thousands; unaudited)Community BankCCBXTreasury & AdministrationConsolidatedCommunity BankCCBXTreasury & AdministrationConsolidated
Net interest income, before
   intrabank transfer		$22,306 $35,895 $4,028 $62,229 $20,237 $26,374 $2,578 $49,189 
Interest (expense) income
   intrabank transfer		(3,036)5,095 (2,059)— 441 1,321 (1,762)— 
Provision/(recapture) for
   credit losses - loans		664 26,493 — 27,157 (238)18,666 — 18,428 
Provision for
   unfunded commitments		— 96 — 96 — — — — 
Noninterest income (1)
1,162 33,296 121 34,579 1,139 33,291 (39)34,391 
Noninterest expense10,065 38,555 7,881 56,501 8,368 34,858 7,861 51,087 
Net income before income taxes9,703 9,142 (5,791)13,054 13,687 7,462 (7,084)14,065 
Income taxes2,068 1,951 (1,235)2,784 2,883 1,572 (1,491)2,964 
Net Income$7,635 $7,191 $(4,556)$10,270 $10,804 $5,890 $(5,593)$11,101 
(1)For the three months ended September 30, 2023, CCBX noninterest income includes credit enhancements of $25.9 million, fraud enhancements of $2.9 million, and BaaS program income of $4.4 million. For the three months ended September 30, 2022, CCBX noninterest income includes credit enhancements of $17.9 million, fraud enhancements of $11.7 million and BaaS program income of $3.6 million.
Nine Months Ended September 30, 2023Nine Months Ended September 30, 2022
(dollars in thousands; unaudited)Community BankCCBXTreasury & AdministrationTotalCommunity BankCCBXTreasury & AdministrationTotal
Net interest income, before
   intrabank transfer		$66,887 $102,311 $9,872 $179,070 $56,011 $58,172 $4,160 $118,343 
Interest (expense) income
   intrabank transfer		(6,605)11,234 (4,629)— 872 2,051 (2,923)— 
Provision for credit losses - loans1,045 122,254 — 123,299 214 45,250 — 45,464 
(Recapture)/Provision for unfunded
   commitments		(203)107 — (96)— — — — 
Noninterest income(1)
3,866 138,094 521 142,481 4,052 77,681 136 81,869 
Noninterest expense28,748 102,192 22,134 153,074 23,735 77,792 18,144 119,671 
Net income before income taxes34,558 27,086 (16,370)45,274 36,986 14,862 (16,771)35,077 
Income taxes7,409 5,807 (3,509)9,707 7,982 3,207 (3,619)7,570 
Net Income$27,149 $21,279 $(12,861)$35,567 $29,004 $11,655 $(13,152)$27,507 
(1)For the nine months ended September 30, 2023, CCBX noninterest income includes credit enhancements of $119.3 million, fraud enhancements of $6.4 million and BaaS program income of $11.9 million. For the nine months ended September 30, 2022, CCBX noninterest income includes credit enhancements of $45.2 million, fraud enhancements of $22.8 million and BaaS program income of $9.3 million.
72
Table of Contents,
Comparison of the quarter ended September 30, 2023 to the comparable quarter in the prior year
Net interest income before intrabank interest expense for the community bank was $22.3 million for the quarter ended September 30, 2023, an increase of $2.1 million, or 10.2%, compared to $20.2 million for the quarter ended September 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 September 30, 2023 compared to the quarter ended September 30, 2022, intrabank interest expense for the community bank was $3.0 million for the quarter ended September 30, 2023, compared to intrabank interest income of $441,000 for the quarter ended September 30, 2022. There was a provision for credit losses - loans for the community bank of $664,000 for the quarter ended September 30, 2023, compared to a small recapture of $238,000 for the quarter ended September 30, 2022. Net charge-offs to average loans for the community bank segment have remained consistently low and were 0.00% for the quarter ended September 30, 2023 and 0.10% for the quarter ended September 30, 2022. Noninterest income for the community bank was $1.2 million, for the quarter ended September 30, 2023, an increase of $23,000, or 2.0%, compared to $1.1 million for the quarter ended September 30, 2022. Noninterest expenses for the community bank increased $1.7 million, or 20.3%, to $10.1 million as of September 30, 2023, compared to $8.4 million as of September 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, increased legal and professional fees related to data and risk management, building out our infrastructure and increased consulting expenses for projects and enhanced monitoring and other expense increases related to growth.
Net interest income for CCBX before intrabank interest income was $35.9 million for the quarter ended September 30, 2023, an increase of $9.5 million, or 36.1%, compared to $26.4 million for the quarter ended September 30, 2022. The increase in net interest income is due to loan growth and higher interest rates from active CCBX relationships. During the quarter ended September 30, 2023 we sold $320.9 million in higher yielding CCBX loans that have a greater potential for credit deterioration in an effort to optimize our CCBX loan portfolio. The impact of these sales and the changes we are making in an effort to optimize and strengthen the balance sheet are expected to be reflected in our earnings in future periods. We expect to see lower net income in the short term with lower loan yields and compressed margins but we will work to continue growing the CCBX portfolio with loans that we believe will strengthen the balance sheet and provide for long term stability and profitability. As a result of having higher average deposits than loans for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 intrabank interest income for CCBX was $5.1 million for the quarter ended September 30, 2023, compared to $1.3 million for the quarter ended September 30, 2022. Provision for credit losses - loans was $26.5 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 September 30, 2023, compared to $18.7 million for the quarter ended September 30, 2022. CCBX partner agreements provide for, and the Company has collected in full, credit enhancements that cover the $36.8 million in net charge-offs on CCBX loans for the quarter ended September 30, 2023. The $26.5 million provision on CCBX loans includes $25.8 million for partner loans with credit enhancement on them and $664,000 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 $231.9 million loan portfolio, or $23.2 million in partner loans at September 30, 2023. Noninterest income for CCBX was $33.3 million for the quarter ended September 30, 2023, an increase of $5,000, or 0.0%, compared to $33.3 million for the quarter ended September 30, 2022, due to an increase of $8.0 million in BaaS credit enhancements to establish a credit enhancement asset for future credit losses due from our CCBX partners, $8.9 million decrease in BaaS fraud enhancements and $759,000 in BaaS program income, which was the result of the reductionincreased activity with broker dealers and digital financial service providers. Noninterest expenses for CCBX increased $3.7 million, or 10.6%, to $38.6 million as of September 30, 2023, compared to $34.9 million as of September 30, 2022. The increase in the corporate income tax rate under the Tax Cutsnoninterest 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 Jobs Act.

Comparison of Operating Resultsincreased salaries and benefits, for the Six Months Ended Junequarter ended September 30, 20182023, compared to the quarter ended September 30, 2022. For more information on the accounting for BaaS income and June 30, 2017

expenses see the section titled “CCBX – BaaS Reporting Information.”

Net Income

Netinterest income before intrabank interest expense for the six months ended June 30, 2018,treasury & administration was $4.0 million for the quarter ended September 30, 2023, an increase of $1.4 million, or $0.44 per diluted share,56.2%, compared to $3.2$2.6 million or $0.35 per diluted share, for the sixquarter ended September 30, 2022, as a result of increased interest rates. Noninterest income increased $160,000, or 410.3%, to $121,000 for the quarter ended September 30, 2023, compared to $(39,000) for the quarter ended September 30, 2022. Noninterest expense was flat at $7.9 million for the quarter ended September 30, 2023 and for the quarter ended September 30, 2022.

73
Table of Contents,
Comparison of the nine months ended JuneSeptember 30, 2017. The increase in net income over2023 to 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 increaseinfee incomefromraisingour depositservicechargesand feesand revenuefromloan referralfeesand $440,000 in lower taxesresultingfromthe decreasein the corporatetax rateunder the Tax Cuts and Jobs Act. These positive factorswere partiallyoffsetby a $1.6 million increasein noninterestexpense.

Net Interest Income

Net interest income before intrabank interest expense for the six months ended June 30, 2018,community bank was $16.1 million compared to $14.1$66.9 million for the sixnine months ended JuneSeptember 30, 2017,2023, an increase of $2.0$10.9 million, or 14.2%.19.4%, compared to $56.0 million for the nine months ended September 30, 2022. The increase in net interest income consistedis largely due to increased yield on loans resulting from loan growth and higher interest rates. As a result 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 inthe community bank having higher average loans outstandingthan deposits for the sixnine months ended JuneSeptember 30, 2018,2023 compared to the prior year, combined with a 13 basis point increase in the yield on total loans.

The increase innine months ended September 30, 2022, intrabank interest expense for the sixcommunity bank was $6.6 million for the nine months ended JuneSeptember 30, 2018,2023, compared to intrabank interest income of $872,000 for the nine months ended September 30, 2022. Provision for credit losses - loans for the community bank was primarily related$1.0 million for the nine months ended September 30, 2023, compared to $214,000 for the nine months ended September 30, 2022. Net charge-offs to average loans for the community bank segment have remained consistently low and was 0.00% and 0.03% for the nine months ended September 30, 2023, and 2022, respectively. Noninterest income for the community bank was $3.9 million for the nine months ended September 30, 2023, a 12 basis point increasedecrease of $186,000, or 4.6%, compared to $4.1 million for the nine months ended September 30, 2022. Loan referral fees decreased $127,000 for the nine months ended September 30, 2023 compared to the nine months ended September 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 costnine months ended September 30, 2022, there was a $135,000 net unrealized loss on equity securities recognized compared to an unrealized gain of interest-bearing deposits combined with a $40.7$199,000 in the nine months ended September 30, 2023. Noninterest expenses for the community bank increased $5.0 million, or 9.6%21.1%, increase in average interest-bearing deposits over the same period in the prior year.to $28.7 million as of September 30, 2023, compared to $23.7 million as of September 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 $102.3 million for the costnine months ended September 30, 2023, an increase of $44.1 million, or 75.9%, compared to $58.2 million for the nine months ended September 30, 2022. The increase in net interest income is due to loan growth from active CCBX relationships. During the quarter ended September 30, 2023, we sold $320.9 million in higher yielding CCBX loans that have a greater potential for credit deterioration in an effort to optimize our CCBX loan portfolio. The impact of these sales and the changes we are making in an effort to optimize and strengthen the balance sheet are expected to be reflected in our earnings in future periods. We expect to see lower net income in the short term with lower loan yields and compressed margins but we will work to continue growing the CCBX portfolio with loans that we believe will strengthen the balance sheet and provide for long term stability and profitability. As a result of having higher average deposits than loans for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 intrabank interest income for CCBX was primarily$11.2 million for the nine months ended September 30, 2023, compared to $2.1 million for the nine months ended September 30, 2022. Provision for credit losses - loans was $122.3 million for the nine months ended September 30, 2023, compared to $45.3 million for the nine months ended September 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 $138.1 million for the nine months ended September 30, 2023, an increase of $60.4 million, or 77.8%, compared to $77.7 million for the nine months ended September 30, 2022, due to an increase of $74.1 million in BaaS credit enhancements related to the rate paid on NOWallowance for credit losses, $16.4 million decrease in BaaS fraud enhancements and money market accounts and on time deposits, as market interest rates increased over the prior year. The$2.6 million 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 interesttotal BaaS program 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)

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

(2)

Includes nonaccrual loans.

(3)

Net interest margin represents 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 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.

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 resultwemay 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 resultof 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.Asof 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, comparedto$911,000 for the six monthsended June 30, 2017. The increasewas primarilydue to costsassociatedwith supportingthe communitiesweservethrough 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 the six months ended June 30, 2017. Our effective tax rates for the six months ended June 30, 2018 and 2017, were 20.5% and 31.7%, respectively. The lower tax rate in 2018 was the result of increased activity with broker dealers and digital financial service providers. Noninterest expenses for CCBX increased $24.4 million, or 31.4%, to $102.2 million as of September 30, 2023, compared to $77.8 million as of September 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 reductionnine months ended September 30, 2023, compared to the nine months ended September 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 corporateaccounting for BaaS income tax rate underand expenses see the Tax Cutssection titled “CCBX – BaaS Reporting Information.”

Net interest income before intrabank interest expense for treasury & administration was $9.9 million for the nine months ended September 30, 2023, an increase of $5.7 million, or 137.3%, compared to $4.2 million for the nine months ended September 30, 2022, as a result of increased interest rates. Noninterest income increased $385,000, or 283.1%, to $521,000 for the nine months ended September 30, 2023, compared to $136,000 for the nine months ended September 30, 2022. Noninterest expense increased $4.0 million, or 22.0%, to $22.1 million for the nine months ended September 30,
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2023, compared to $18.1 million for the nine months ended September 30, 2022, largely as a result of increased salaries and Jobs Act.

employee benefits and legal and professional fees as a result of growth.

Financial Condition

Our total assets increased $45.1$533.8 million, or 5.6%17.0%, to $850.9 million as of June$3.68 billion at September 30, 2018,2023 from $805.8 million as of$3.14 billion at December 31, 2017. Our asset growth in2022. The increase is primarily the first half result of 2018 was primarily due to $43.4 million in loan growth and a $1.6$339.8 million increase in cash and cash equivalents, offset by a decrease of $1.0loans receivable during the nine months ended September 30, 2023.
Loans Held For Sale
During the quarter ended September 30, 2023, $285.0 million in investment securities. Our growth was primarily funded by $41.2CCBX loans were transferred to loans held for sale, with $320.9 million in deposit growth during the first halfloans sold. A portion of 2018.

these loans were sold at par and a portion were sold with a gain on sale of $107,000. As of September 30, 2023 and December 31, 2022 there were no loans in 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 byand commercial real estate properties locatedand 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 JuneSeptember 30, 2018,2023, loans receivable totaled $700.7 million,$2.97 billion, an increase of $43.9$339.8 million, or 6.7%12.9%, compared to December 31, 2017.2022. Total loans receivable is net of $7.4 million in net deferred origination fees. The increase was primarily due to our efforts to increase income by building a diversifiedincludes CCBX loan portfolio while maintaining strong credit quality.

growth of $169.9 million, or 16.8%, and community bank loan growth of $170.8 million, or 10.5%.

Loans as a percentage of deposits were 94.1%90.2% as of JuneSeptember 30, 2018,2023, compared to 93.4%93.3% as of December 31, 2017.2022. We areremain 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 September 30, 2023As of December 31, 2022
(dollars in thousands; unaudited)(dollars in thousands; unaudited)AmountPercentAmountPercent
Commercial and industrial loans:Commercial and industrial loans:
PPP loansPPP loans$3,310 0.1 %$4,699 0.2 %
Capital call linesCapital call lines114,174 3.8 146,029 5.5 
All other commercial & industrial loansAll other commercial & industrial loans213,791 7.2 161,900 6.1 
Total commercial and industrial loans:Total commercial and industrial loans:331,275 11.1 312,628 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 development167,686 5.6 214,055 8.1 

Residential real estate

 

 

88,422

 

 

 

12.6

 

 

 

87,031

 

 

 

13.3

 

Residential real estate477,147 16.1 449,157 17.1 

Commercial real estate

 

 

474,330

 

 

 

67.7

 

 

 

437,717

 

 

 

66.6

 

Commercial real estate1,237,849 41.6 1,048,752 39.8 

Consumer and other loans

 

 

2,670

 

 

 

0.4

 

 

 

2,058

 

 

 

0.3

 

Consumer and other loans760,463 25.6 608,771 23.2 

Gross loans receivable

 

 

701,062

 

 

 

100.0

%

 

 

657,135

 

 

 

100.0

%

Gross loans receivable2,974,420 100.0 %2,633,363 100.0 %

Net deferred origination fees

 

 

(370

)

 

 

 

 

 

 

(347

)

 

 

 

 

Net deferred origination fees - PPP loansNet deferred origination fees - PPP loans(52)(82)
Net deferred origination fees - all other loansNet deferred origination fees - all other loans(7,333)(6,025)

Loans receivable

 

$

700,692

 

 

 

 

 

 

$

656,788

 

 

 

 

 

Loans receivable$2,967,035 $2,627,256 
Loan Yield (1)
Loan Yield (1)
10.84 %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 BankAs of
September 30, 2023December 31, 2022
(dollars in thousands; unaudited)Balance% to TotalBalance% to Total
Commercial and industrial loans:
PPP loans$3,310 0.2 %$4,699 0.3 %
All other commercial & industrial loans154,922 8.6 146,982 9.1 
Real estate loans:
Construction, land and land development loans167,686 9.4 214,055 13.2 
Residential real estate loans225,372 12.6 204,581 12.6 
Commercial real estate loans1,237,849 69.1 1,048,752 64.7 
Consumer and other loans:
Other consumer and other loans2,483 0.1 1,725 0.1 
Gross Community Bank loans receivable1,791,622 100.0 %1,620,794 100.0 %
Net deferred origination fees(6,961)(6,042)
Loans receivable$1,784,661 $1,614,752 
Loan Yield(1)
6.20 %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.
CCBXAs of
September 30, 2023December 31, 2022
(dollars in thousands; unaudited)Balance% to TotalBalance% to Total
Commercial and industrial loans:
Capital call lines$114,174 9.6 %$146,029 14.4 %
All other commercial & industrial loans58,869 5.0 14,918 1.5 
Real estate loans:
Residential real estate loans251,775 21.3 244,576 24.2 
Consumer and other loans:
Credit cards440,993 37.3 279,644 27.6 
Other consumer and other loans316,987 26.8 327,402 32.3 
Gross CCBX loans receivable1,182,798 100.0 %1,012,569 100.0 %
Net deferred origination (fees) costs(424)(65)
Loans receivable$1,182,374 $1,012,504 
Loan Yield - CCBX (1)(2)
17.05 %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 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, $18.6 million, or 0.70%6.0%, to $89.3$331.3 millionas of JuneSeptember 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 $51.9 million increase in other commercial and industrial loans partially offset by a decrease of $31.9 million in capital call lines. Included in the commercial and industrial loan balance is $114.2 million and $146.0 million in capital call lines resulting from relationships with our CCBX partners as of September 30, 2023 and December 31, 2022, respectively. As of September 30, 2023, there were $58.9 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 September 30, 2023 and December 31, 2022, respectively.
Also included in commercial and industrial loans is $3.3 million and $4.7 million in PPP loans as of September 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$4.8decreased $46.4 million,or 11.5%21.7%, 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,weexpect to see constructionand developmentloans continueto pay off morequicklythan wehave experienced historically even though the balances have continued to grow.


ResidentialReal EstateLoans.Asof 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$167.7 million as of JuneSeptember 30, 2018,2023, from $87.0$214.1 million as of December 31, 2017.2022. The increasesdecrease is attributed to the completion of a few construction and development projects.

Unfunded loan commitments for construction, land and land development loans were $133.7 million at September 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 the bank failures earlier this year, inflation, higher interest rates, global unrest, the war in Ukraine and Middle East, political uncertainty, including a potential shutdown of the U.S. government, 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 September 30, 2023, construction, land and land development loans included $91.4 million in commercial construction loans, $8.3 million in undeveloped land loans, $34.0 million in residential construction loans and $34.0 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 $28.0 million, or 6.2%, to $477.1 million as of September 30, 2023, from $449.2 million as of December 31, 2022 due to an increase of $20.8 million in community bank loans combined with an increase of $7.2 million in CCBX loans.
As of September 30, 2023, there were $251.8 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.
In the past, we have purchased residential mortgages originated through other financial institutions to hold for investment for purposes of diversifying our diversification strategyresidential mortgage loan portfolio, meeting certain regulatory requirements and increasing our interest income. We last purchased residential mortgage loans in 2018. As of September 30, 2023 and December 31, 2022, we held $9.0 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 with30 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 bankwere originated and underwritten by another institution, our mortgage, credit, and compliance departments conduct an independent review of each underlying loan that were individually underwrittenincludes re-underwriting each of these loans to our credit standardsand 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 $189.1 million, or 18.0%, to $1.24 billion as of September 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 of the one-to-four family loans that we purchased over time are from other lenders in the Puget Sound region or in California.

Commercial Real Estate Loans. Commercialrealestateloans increased$36.6 million,or 8.4%, to $474.3 millionas of June 30, 2018, from $437.7 millionas of December31, 2017. The increaseoccurredbecause weWe activelyseek commercialrealestateloans in our marketsand our lendersare experiencedin competingfor theseloans.  We funded $74.9 million of new 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 six months period ended Juneend 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 September 30, 2018,2023, approximately 32.6% 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 tothe commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans represented 41.6% of our credit standardsloan portfolio at September 30, 2023 and are fromhistorically our market or the other community bank’s market.

largest source of revenue. As of September 30, 2023, we held $43.1 million in purchased 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 Loans. Other. Consumer and otherloans increased $600,000,$151.7 million, or 28.6%24.9%, to $2.7$760.5 million,as of June 30, 2018, from$2.1 $608.8 millionas of December31, 2017. The increasein theseloans was primarily2022, as a resultof stronggrowth in CCBX loans originated through our partners. We sold $320.9 million in CCBX loans during the quarter ended September 30, 2023. We intentionally reduced the CCBX other consumer confidenceand economicstrengthother loans portfolio in an effort to optimize and strengthen our balance sheet and expect that additional loans will be sold in the Puget Soundregion.

coming months as we continue working to optimize our balance sheet. We will continue growing our CCBX portfolio with loans that we believe are lower risk and more aligned with our long term portfolio and profitability objectives.

CCBX consumer loans totaled $758.0 million as of September 30, 2023, compared to $607.0 million at December 31, 2022. CCBX consumer loans include installment loans, credit cards, lines of credit and other loans. Our community bank consumer and other loans totaled $2.5 million as of September 30, 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 $2.97 billion in outstanding loan balances. When combined with $2.35 billion in unused commitments the total of these categories is $5.33 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 September 30, 2023:
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(dollars in thousands; unaudited)Outstanding BalanceAvailable Loan CommitmentsTotal Outstanding Balance & Available Commitment
% of Total Loans
(Outstanding Balance &
Available Commitment)
Average Loan BalanceNumber of Loans
Community bank commercial real estate loans
Apartments$333,685 $10,653 $344,338 6.5 %$3,178 105
Hotel/Motel164,501 1,328 165,829 3.1 6,327 26
Convenience Store118,821 1,286 120,107 2.2 2,085 57
Mixed use90,423 2,666 93,089 1.7 1,064 85
Warehouse108,568 2,203 110,771 2.1 1,939 56
Office85,214 3,469 88,683 1.7 926 92
Retail96,287 675 96,962 1.8 953 101
Mini Storage60,387 2,942 63,329 1.2 3,019 20
Strip Mall45,657 — 45,657 0.9 5,707 8
Manufacturing38,038 1,800 39,838 0.7 1,153 33
Groups < 0.70% of total96,268 4,772 101,040 1.9 1,174 82
Total$1,237,849 $31,794 $1,269,643 23.8 %$1,861 665
As illustrated in the table below, our CCBX partners originate a large number of mostly smaller dollar loans, resulting in an average consumer loan balance of just $1,400.
The following table summarizes our loan commitments by category for our consumer and other loan portfolio as of September 30, 2023:
(dollars in thousands; unaudited)Outstanding BalanceAvailable Loan Commitments
Total Outstanding Balance & Available Commitment (1)
% of Total Loans
(Outstanding Balance &
Available Commitment)
Average Loan BalanceNumber of Loans
CCBX consumer loans
Credit cards$440,993 $1,000,320 $1,441,313 27.1 %$1.6 279,714
Installment loans310,719 — 310,719 5.8 1.5 213,011
Lines of credit3,934 1,689 5,623 0.1 0.1 39,614
Other loans2,334 — 2,334 0.1 0.1 17,577
Community bank consumer loans
Installment loans1,232 — 1,232 0.0 51.3 24
Lines of credit150 573 723 0.0 3.7 41
Other loans1,101 — 1,101 0.0 3.6 309
Total$760,463 $1,002,582 $1,763,045 33.1 %$1.4 550,290
(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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Table of Contents,
The following table summarizes our loan commitments by category for our residential real estate portfolio as of September 30, 2023:
(dollars in thousands; unaudited)Outstanding BalanceAvailable Loan Commitments
Total Exposure (1)
% of Total Loans
(Outstanding Balance &
Available Commitment)		Average Loan BalanceNumber of Loans
CCBX residential real estate loans
Home equity line of credit$251,775 $429,893 $681,668 12.8 %$24 10,384
Community bank residential real estate loans
Closed end, secured by first liens194,696 3,740 198,436 3.7 620 314
Home equity line of credit21,342 41,943 63,285 1.2 100 214
Closed end, second liens9,334 1,667 11,001 0.2 301 31
Total$477,147 $477,243 $954,390 17.9 %$44 10,943
(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 September 30, 2023:
(dollars in thousands; unaudited)Outstanding BalanceAvailable Loan Commitments
Total Outstanding Balance & Available Commitment (1)
% of Total Loans
(Outstanding Balance &
Available Commitment)
Average Loan BalanceNumber of Loans
Capital Call Lines$114,174 $630,668 $744,842 14.0 %$723 158
Retail58,586 6,131 64,717 1.2 19 3,063
Construction/Contractor Services24,988 25,743 50,731 1.0 134 186
Financial Institutions48,648 — 48,648 0.9 4,054 12
Medical / Dental / Other Care19,249 8,045 27,294 0.5 802 24
Manufacturing8,479 5,093 13,572 0.3 193 44
Groups < 0.30% of total57,151 30,776 87,927 1.6 107 534
Total$331,275 $706,456 $1,037,731 19.5 %$82 4,021
(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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Table of Contents,
The following table details our community bank loan commitments by category for our construction, land and land development loan portfolio as of September 30, 2023:
(dollars in thousands; unaudited)Outstanding BalanceAvailable Loan CommitmentsTotal Outstanding Balance & Available Commitment
% of Total Loans
(Outstanding Balance &
Available Commitment)
Average Loan BalanceNumber of Loans
Community bank construction, land and land development loans
Commercial construction$91,396 $106,144 $197,540 3.7 %$5,376 17
Undeveloped land loans8,310 6,281 14,591 0.3 554 15
Residential construction33,971 13,095 47,066 0.9 1,415 24
Developed land loans21,369 3,732 25,101 0.5 763 28
Land development12,640 4,443 17,083 0.3 843 15
Total$167,686 $133,695 $301,381 5.7 %$1,694 99
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. We have, however, began a process of selling CCBX loans that we believe have a greater risk of credit deterioration and plan to grow the CCBX loan portfolio with loans that we believe have a lower risk of deterioration. 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$43.5 million in nonperforming assets including performing troubled debt restructurings, or TDRs, as of JuneSeptember 30, 2018,2023, compared to $2.1$33.2 million as of December 31, 2017.

2022. This includes $36.2 million in CCBX loans more than 90 days past due and still accruing interest as of September 30, 2023, compared to $26.1 million at December 31, 2022. All of our nonperforming assets were nonperforming loans as of September 30, 2023 and December 31, 2022. Our nonperforming loans to loans receivable ratio was 1.47% at September 30, 2023, compared to 1.26% at December 31, 2022. The increase in nonperforming assets was due to a $10.1 million increase in CCBX partner loans that are 90 days or more past due and still accruing interest. Additionally, community bank nonaccrual loans increased $243,000 during the nine months ended September 30, 2023 to $7.3 million and includes a multifamily loan for $6.9 million which is well secured.

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Table of Contents,
Our community bank credit quality remains strong, as demonstrated by the low level of community bank charge-offs and nonperforming loan balance for the nine months ended September 30, 2023. 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 indemnifying or reimbursing incurred losses, 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 followingtablepresentsinformationregardingnonperformingassetsat the datesindicated:

 

As of

 

 

As of

 

 

June 30,

 

 

December 31,

 

(Dollars in thousands)

 

2018

 

 

2017

 

(dollars in thousands; unaudited)(dollars in thousands; unaudited)As of September 30, 2023As of December 31, 2022

Nonaccrual loans:

 

 

 

 

 

 

 

 

Nonaccrual loans:

Commercial and industrial loans

 

$

703

 

 

$

372

 

Commercial and industrial loans$2 $113 

Real estate:

 

 

 

 

 

 

 

 

Real estate loans:Real estate loans:

Construction, land and land development

 

 

-

 

 

 

-

 

Construction, land and land development— 66 

Residential

 

 

75

 

 

 

88

 

Residential real estateResidential real estate176 — 

Commercial real estate

 

 

1,290

 

 

 

1,660

 

Commercial real estate7,145 6,901 

Consumer and other loans

 

 

-

 

 

 

-

 

Total nonaccrual loans

 

$

2,068

 

 

$

2,120

 

Total nonaccrual loans7,323 7,080 

 

 

 

 

 

 

 

 

Accruing loans past due 90 days or more:

 

 

 

 

 

 

 

 

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

 

 

-

 

 

 

-

 

Commercial & industrial loansCommercial & industrial loans1,387 404 
Real estate loans:Real estate loans:
Residential real estate loansResidential real estate loans1,462 876 
Consumer and other loans:Consumer and other loans:
Credit cardsCredit cards24,807 10,570 
Other consumer and other loansOther consumer and other loans8,561 14,245 

Total accruing loans past due 90 days or more

 

$

-

 

 

$

-

 

Total accruing loans past due 90 days or more36,217 26,095 

Total nonperforming loans

 

$

2,068

 

 

$

2,120

 

Total nonperforming loans43,540 33,175 

 

 

 

 

 

 

 

 

Real estate owned

 

 

-

 

 

 

-

 

Real estate owned— — 

Repossessed assets

 

 

-

 

 

 

-

 

Repossessed assets— — 

 

 

 

 

 

 

 

 

Troubled debt restructurings, accruing

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Modified loans for borrowers experiencing financial difficultyModified loans for borrowers experiencing financial difficulty— — 

Total nonperforming assets

 

$

2,068

 

 

$

2,120

 

Total nonperforming assets$43,540 $33,175 

 

 

 

 

 

 

 

 

Total nonaccrual loans to loans receivableTotal nonaccrual loans to loans receivable0.25 %0.27 %

Total nonperforming loans to loans receivable

 

 

0.30

%

 

 

0.32

%

Total nonperforming loans to loans receivable1.47 %1.26 %

 

 

 

 

 

 

 

 

Total nonperforming assets to total assets

 

 

0.24

%

 

 

0.26

%

Total nonperforming assets to total assets1.18 %1.06 %

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Table of Contents,
The following tables detail nonperforming assets by segment which are included in the total nonperforming assets table above:
Community BankAs of
(dollars in thousands; unaudited)September 30,
2023		December 31,
2022
Nonaccrual loans:
Commercial and industrial loans$2 $113 
Real estate:
Construction, land and land development— 66 
Residential real estate176 — 
Commercial real estate7,145 6,901 
Total nonaccrual loans7,323 7,080 
Accruing loans past due 90 days or more:
Total accruing loans past due 90 days or more— — 
Total nonperforming loans7,323 7,080 
Other real estate owned— — 
Repossessed assets— — 
Total nonperforming assets$7,323 $7,080 
Total nonperforming community bank loans to total loans receivable0.25 %0.27 %
CCBXAs of
(dollars in thousands; unaudited)September 30,
2023		December 31,
2022
Nonaccrual loans$— $— 
Accruing loans past due 90 days or more:
Commercial & industrial loans1,387 404 
Real estate loans:
Residential real estate loans1,462 876 
Consumer and other loans:
Credit cards24,807 10,570 
Other consumer and other loans8,561 14,245 
Total accruing loans past due 90 days or more36,217 26,095 
Total nonperforming loans36,217 26,095 
Other real estate owned— — 
Repossessed assets— — 
Total nonperforming assets$36,217 $26,095 
Total nonperforming CCBX loans to total loans receivable1.22 %0.99 %
As of September 30, 2023, $34.7 million of the $36.2 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 Loan Losses

We maintaincredit 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
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Table of Contents,
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 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.
•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.
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 that represents management’s best estimateto maintain the allowance at appropriate levels.
As of the loan losses and risks inherent in our loan portfolio. The amount ofSeptember 30, 2023, the allowance for loancredit losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the allowance for loan losses, we estimate losses on specific loans,totaled $101.1 million, or groups3.41% of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, and current economic factors.

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 individualtotal loans. Some of the risk elements we consider include:

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

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

for residential 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


•

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,December 31, 2022, the allowance for loan losses totaled $8.5$74.0 million, or 1.22%2.82% of total loans. OurEffective 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 Junefor the quarter ended September 30, 2018, increased by $500,000, or 6.3%,2023 compared to December 31, 2017, primarily due2022, is largely related to growththe provision for CCBX partner loans. During the nine months ended September 30, 2023, a $122.3 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 $1.0 million was needed for the nine months ended September 30, 2023. The economic environment is continuously changing with the bank failures earlier this year, inflation, higher interest rates, global unrest, the war in Ukraine and Middle East, political uncertainty, including a potential shutdown of the U.S. government, 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.
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Table of Contents,
Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying and/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. BaaS 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 and/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% of total loans.

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.

The following tables present,table presents, as of and for the periods indicated, net charge-off information by segment:
Three Months Ended
September 30, 2023September 30, 2022
(dollars in thousands; unaudited)Community BankCCBXTotalCommunity BankCCBXTotal
Gross charge-offs$3 $37,876 $37,879 $411 $8,102 $8,513 
Gross recoveries(3)(1,042)(1,045)(3)(6)(9)
Net charge-offs$— $36,834 $36,834 $408 $8,096 $8,504 
Net charge-offs to average loans (1)
0.00 %11.16 %4.77 %0.10 %3.59 %1.38 %
(1)Annualized calculations shown for periods presented.
Nine Months Ended
September 30, 2023September 30, 2022
(dollars in thousands; unaudited)Community BankCCBXTotalCommunity BankCCBXTotal
Gross charge-offs$62 $104,283 $104,345 $418 $14,445 $14,863 
Gross recoveries(8)(4,242)(4,250)(43)(6)(49)
Net charge-offs$54 $100,041 $100,095 $375 $14,439 $14,814 
Net charge-offs to
    average loans (1)
0.00 %11.01 %4.59 %0.03 %2.94 %0.93 %
(1)Annualized calculations shown for periods presented.
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Table of Contents,
The following table presents, as of and for the periods indicated, an analysis of the allowance for loancredit 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 September 30,As of or for the Nine Months Ended September 30,

 

June 30,

 

 

June 30,

 

(Dollars in thousands)

 

2018

 

 

2017

 

 

2018

 

 

2017

 

(dollars in thousands; unaudited)(dollars in thousands; unaudited)2023202220232022

Allowance at beginning of period

 

$

8,423

 

 

$

7,793

 

 

$

8,017

 

 

$

7,544

 

Allowance at beginning of period$110,762 $49,358 $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 lossesProvision for credit losses27,157 18,428 123,299 45,464 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

Commercial and industrial loans

 

 

272

 

 

 

-

 

 

 

281

 

 

 

15

 

Commercial and industrial loans2,328 360 3,515 398 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Residential

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

84

 

 

 

173

 

Residential real estateResidential real estate1,476 105 3,158 105 

Consumer and other

 

 

9

 

 

 

1

 

 

 

14

 

 

 

3

 

Consumer and other34,075 8,048 97,672 14,360 

Total charge-offs

 

$

281

 

 

$

1

 

 

$

379

 

 

$

191

 

Total charge-offs37,879 8,513 104,345 14,863 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

Commercial and industrial loans

 

$

1

 

 

$

1

 

 

$

2

 

 

$

1

 

Commercial and industrial loans1 2 4 39 

Real estate:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

-

 

 

 

95

 

 

 

-

 

 

 

95

 

Residential

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Residential real estateResidential real estate2 — 2 — 

Consumer and other

 

 

5

 

 

 

1

 

 

 

7

 

 

 

1

 

Consumer and other1,042 7 4,244 10 

Total recoveries

 

$

6

 

 

$

97

 

 

$

9

 

 

$

97

 

Total recoveries1,045 9 4,250 49 

Net (charge-offs ) recoveries

 

 

(275

)

 

 

96

 

 

 

(370

)

 

 

(94

)

Net charge-offsNet charge-offs36,834 8,504 100,095 14,814 

Allowance at end of period

 

$

8,540

 

 

$

7,889

 

 

$

8,540

 

 

$

7,889

 

Allowance at end of period$101,085 $59,282 $101,085 $59,282 
Allowance for credit losses to nonaccrual loansAllowance for credit losses to nonaccrual loans1380.38 %839.57 %1380.38 %839.57 %

Allowance to nonperforming loans

 

 

412.96

%

 

 

335.13

%

 

 

412.96

%

 

 

335.13

%

Allowance to nonperforming loans232.17 %259.08 %232.17 %259.08 %

Allowance to loans receivable

 

 

1.22

%

 

 

1.27

%

 

 

1.22

%

 

 

1.27

%

Allowance to loans receivable3.41 %2.36 %3.41 %2.36 %

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.


The allowance for credit losses to nonaccrual loans ratio increased as of September 30, 2023, compared to September 30, 2022 as a result of an increase of $262,000 in nonaccrual community bank loans, combined with an increase of $41.8 million in the allowance for credit losses. The increase in the allowance for credit losses for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 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 $36.8 million and $100.0 million in net charge-offs on CCBX loans for the three and nine months ended September 30, 2023. At September 30, 2023, the allowance for credit losses for CCBX partner loans totaled $79.8 million, compared to $39.1 million at September 30, 2022.
The following table presents the loans receivable and allowance for credit losses by segment for the periods indicated:
As of September 30, 2023As of December 31, 2022
(dollars in thousands; unaudited)Community BankCCBXTotalCommunity BankCCBXTotal
Loans receivable$1,784,661 $1,182,374 $2,967,035 $1,614,752 $1,012,504 $2,627,256 
Allowance for credit losses(21,316)(79,769)(101,085)(20,636)(53,393)(74,029)
Allowance for credit losses to
    total loans receivable		1.19 %6.75 %3.41 %1.28 %5.27 %2.82 %
Although we believe that we have established our allowance for loancredit losses in accordance with GAAP and that the allowance for loancredit losses was adequate to provide for known and inherentexpected losses in the portfolio at all times shown above, future provisions for loancredit losses will be subject to ongoing evaluations of the risks in our loan portfolio. We continue to have a low level of charge-offs and nonperforming community bank loans, however, the economic environment is continuously changing with the bank failures earlier this year, inflation, higher interest rates, global unrest, the war in Ukraine and Middle East, political uncertainty, including a potential shutdown of the U.S. government, and trade issues that have resulted in some economic uncertainty. If theeconomic conditions worsen then Washington state and Puget Sound region experiences anmay
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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 allowancewhich may become inadequate andrequire 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 pledgepledged for public deposits or other business purposes. At JuneSeptember 30, 2018, 87.9%2023, 70.0% 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, agencyAgency 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 JuneSeptember 30, 2018,2023, our loan-to-deposit ratio was 94.1%90.2% due to our strong growth in both loans and ourdeposits. 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 investingmay invest excess funds to provide a higher return.


Asof JuneSeptember 30, 2018,2023, the carryingamountamortized cost of our investmentsecuritiestotaled$37.2 $142.8 million,a decrease an increase of$1.1 $41.5 million,or 2.8%41.0%, comparedto $38.3$101.3 millionas of December31, 2017.2022. The decreaseincrease in the securities portfoliowas primarilydue to the resultpurchase of twelve securities for $41.6 million during the declinenine months ended September 30, 2023. These securities were purchased for CRA purposes and placed in fairvalue and pay-downs on mortgage-backedsecurities.

our held-to-maturity portfolio.

Our investment portfolio consists of securities classified as available for saleAFS and, to a lesser amount, held to maturity.held-to-maturity. The carrying values of our investment securities classified as available for saleAFS 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 September 30, 2023, our AFS portfolio has an unrealized loss of $1.3 million, compared to an unrealized loss of $3.0 million as of December 31, 2022.

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 September 30, 2023As 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$99,988 $98,644 $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 obligations49 45 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 bonds250 250 250 250 

Total available-for-sale securities

 

 

38,316

 

 

 

36,013

 

 

 

38,358

 

 

 

36,927

 

Total available-for-sale securities100,287 98,939 100,272 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 securities42,550 40,863 1,036 916 

Total held-to-maturity securities

 

 

1,304

 

 

 

1,232

 

 

 

1,409

 

 

 

1,374

 

Total held-to-maturity securities42,550 40,863 1,036 916 

Total investment securities

 

$

39,620

 

 

$

37,245

 

 

$

39,767

 

 

$

38,301

 

Total investment securities$142,837 $139,802 $101,308 $98,233 

We held a $2.2 million equity interest in a financial technology company as of September 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 September 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 nine months ended September 30, 2023, we contributed a net $13,000 with investment funds designed to help accelerate technology adoption at banks, and recognized net gains of $199,000, resulting in an equity interest of $669,000 at September 30, 2023. The Company has committed up to $713,000 in capital for these investment funds, however, the Company is not obligated to fund these commitments prior to a capital call.
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Other Assets
Deferred tax assets, net decreased $14.1 million to $4.4 million and other assets increased $9.8 million to $14.0 million as of September 30, 2023, compared to December 31, 2022. This is the result of a change in estimate related to taxable income. Previously, we included credit enhancement income as taxable income when it was recorded as a receivable. Since the receivable is only realized when a future credit loss occurs and is reversed when a loss does not occur, we revisited the tax treatment. In our re-examination we adjusted the practice to tax the activity at the time the related losses are recognized and the corresponding receivable is realized as income. As a result of this change in estimate, pre-paid taxes, which is included in other assets, is $9.8 million as of September 30, 2023 compared to $1.3 million as of December 31, 2022, and deferred tax assets, net is $4.4 million, as of September 30, 2023 compared to $18.5 million as of December 31, 2022.
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 reciprocal 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 theseexisting 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 JuneSeptember 30, 2018,2023 were $744.5 million,$3.29 billion, an increase of $41.2$472.2 million, or 5.9%16.8%, compared to $703.3$2.82 billion as of December 31, 2022. The increase in deposits was largely in core deposits, which increased $582.6 million to $3.27 billion from $2.69 billion at December 31, 2022. We define core deposits as all deposits except time deposits and brokered deposits. The $582.6 million increase in core deposits was largely a result of customer movement from noninterest to interest bearing accounts. Our cost of deposits for the community bank was 1.31% for the three months ended September 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 $167.7 million to $269.2 million as of September 30, 2023. Additionally, during the quarter we started sweeping deposits for an additional CCBX partner as a result of deposit growth, which increased the amount of CCBX deposits that were transferred off balance sheet for increased FDIC insurance coverage to $51.9 million as of September 30, 2023.
Included in total deposits is $1.75 billion in CCBX deposits, an increase of $472.9 million, or 37.0%, 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 September 30, 2023 were $651.8 million, a decrease of $123.2 million, or 15.9%, compared to $775.0 million as of December 31, 2017. The increase was primarily related to our successful execution2022. Noninterest bearing deposits represent 19.8% and 27.5% of our strategy of deepening relationships with existing customerstotal deposits for September 30, 2023 and actively seeking new customers.

Noninterest-bearingDecember 31, 2022, respectively.

Total interest bearing account balances, excluding time deposits, as of JuneSeptember 30, 2018,2023 were $259.4 million,$2.62 billion, an increase of $17.1$604.2 million, or 7.1%30.0%, compared to $242.4 million$2.01 billion as of December 31, 2017.2022. The $604.2 million increase wasis the due in part to former BaaS-brokered deposits now being classified as NOW accounts due to a change in the collaborationrelationship agreement with one of our branch managers, business development officespartners in the first quarter of 2023, combined with CCBX growth in interest bearing deposits and lenders to grow core deposits. As a team, we actively pursue the businesscommunity bank increase in interest bearing deposits of new customers.

Total interest-bearing account balances$118.3 million. Included in total deposits is $296.4 million in IntraFi network reciprocal NOW and money market sweep accounts as of JuneSeptember 30, 2018, were $385.2 million, an increase2023, 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 JuneSeptember 30, 2018,2023 were $99.8$20.6 million, an increasea decrease of $9.2$8.8 million, or 10.1%30.0%, from $90.6$29.4 million as of December 31, 2017.2022. The decrease is due to the strong increase in totalcore deposits, during the period was primarily a resultand 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.
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Table of several short-term growth initiatives during the second quarter of 2018.  

Contents,

The followingtablesetsforthdepositbalancesat the datesindicated.

indicated:

 

As of

 

 

As of

 

 

June 30, 2018

 

 

December 31, 2017

 

As of September 30, 2023As 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$651,786 19.8 %$775,012 27.5 %

Now and money market

 

 

336,666

 

 

 

45.2

 

 

 

326,412

 

 

 

46.4

 

NOW and money marketNOW and money market2,532,668 77.0 1,804,399 64.0 

Savings

 

 

48,509

 

 

 

6.5

 

 

 

43,876

 

 

 

6.2

 

Savings84,628 2.6 107,117 3.8 
Total core depositsTotal core deposits3,269,082 99.4 2,686,528 95.3 
Brokered depositsBrokered deposits1 — 101,546 3.6 

Time deposits less than $100,000

 

 

28,274

 

 

 

3.8

 

 

 

27,059

 

 

 

3.8

 

Time deposits less than $100,0008,635 0.2 12,596 0.5 

Time deposits $100,000 and over

 

 

71,570

 

 

 

9.6

 

 

 

63,590

 

 

 

9.0

 

Time deposits $100,000 and over11,982 0.4 16,851 0.6 

Total

 

$

744,468

 

 

 

100.0

%

 

$

703,295

 

 

 

100.0

%

Total$3,289,700 100.0 %$2,817,521 100.0 %
Cost of deposits (1)
Cost of deposits (1)
3.14 %1.56 %

(1)Cost of deposits is annualized for the three months ended for each period presented.
The following tables detail the deposits for the segments which are included in the total deposit portfolio table above:
Community BankAs of
September 30, 2023December 31, 2022
(dollars in thousands; unaudited)Balance% to TotalBalance% to Total
Demand, noninterest bearing$584,004 38.0 %$694,179 45.2 %
NOW and money market852,747 55.5 709,490 46.1 
Savings80,099 5.2 105,101 6.8 
Total core deposits1,516,850 98.7 1,508,770 98.1 
Brokered deposits1 0.0 1 0.0 
Time deposits less than $100,0008,635 0.5 12,596 0.8 
Time deposits $100,000 and over11,982 0.8 16,851 1.1 
Total Community Bank deposits$1,537,468 100.0 %$1,538,218 100.0 %
Cost of deposits(1)
1.31 %0.37 %
(1)Cost of deposits is annualized for the three months ended for each period presented.
CCBXAs of
September 30, 2023December 31, 2022
(dollars in thousands; unaudited)Balance% to TotalBalance% to Total
Demand, noninterest bearing$67,782 3.9 %$80,833 6.3 %
NOW and money market1,679,921 95.9 1,094,909 85.6 
Savings4,529 0.2 2,016 0.2 
Total core deposits1,752,232 100.0 1,177,758 92.1 
BaaS-brokered deposits— — 101,545 7.9 
Total CCBX deposits$1,752,232 100.0 %$1,279,303 100.0 %
Cost of deposits (1)
4.80 %3.13 %
(1)Cost of deposits is annualized for the three months ended for each period presented.
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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 September 30, 2023As of December 31, 2022

Maturity Period:

 

 

 

 

 

 

 

 

Maturity Period:

Three months or less

 

$

6,427

 

 

$

6,510

 

Three months or less$4,306 $4,067 

Over three through six months

 

 

7,608

 

 

 

8,324

 

Over three through six months3,630 2,957 

Over six through twelve months

 

 

20,057

 

 

 

14,185

 

Over six through twelve months2,048 5,892 

Over twelve months

 

 

37,478

 

 

 

34,571

 

Over twelve months1,998 3,935 

Total

 

$

71,570

 

 

$

63,590

 

Total$11,982 $16,851 
Weighted average maturity (in years)Weighted average maturity (in years)0.770.76

Average deposits for the three and six months ended JuneSeptember 30, 2018,2023 were $719.7 million and $714.6 million, respectively,$3.21 billion, an increase of 10.5% and 10.1%, respectively, 16.4% compared to $2.76 billion for the three and six months ended JuneSeptember 30, 2017.2022. The increase in average deposits was primarily due to ouran 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%3.14% for the three and six months ended JuneSeptember 30, 2018,2023, compared to 0.47% and 0.47%0.82% for the three and six months ended JuneSeptember 30, 2017.

2022. The average rate paid on NOW and money market accounts increased 2.95% for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The average rate paid on time deposits of less than $100,000 increased 0.17% for the three months ended September 30, 2023, compared to the three months ended September 30, 2022. The average rate paid on time deposits greater than $100,000 increased 0.16% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The average rate paid on savings increased 0.24% for the three months ended September 30, 2023 compared to the three months ended September 30, 2022. The overall higher average rate paid on interest bearing accounts in the three months ended September 30, 2023 compared to the three months ended September 30, 2022 is due to the recent interest rate increases by the FOMC. While we continue working to hold down deposit costs, any additional FOMC interest rate increases will increase our cost of deposits and result in higher interest expense on interest bearing deposits.

The average rate paid on total deposits was 2.69% for the nine months ended September 30, 2023, compared to 0.41% for the nine months ended September 30, 2022. The average rate paid on NOW and money market accounts increased 3.04% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022. The average rate paid on time deposits of less than $100,000 increased 0.03% for the nine months ended September 30, 2023, compared to the nine months ended September 30, 2022. The average rate paid on time deposits greater than $100,000 decreased 0.68% for the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022, due to the recognition of additional interest expense of $130,000 during the nine months ended September 30, 2022 to correct interest on CDs from a previous period. The average rate paid on savings was 0.22% for the nine months ended September 30, 2023, compared to 0.04% for the nine months ended September 30, 2022. The overall higher average rate paid on interest bearing accounts in the nine months ended September 30, 2023 compared to the nine months ended September 30, 2022 is due to the recent interest rate increases by the FOMC.
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Table of Contents,
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 September 30,For the Nine Months Ended September 30,

(Dollars in thousands)

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

2023202220232022
(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$698,532 0.00 %$807,952 0.00 %$730,292 0.00 %$987,343 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 marketNOW and money market2,406,709 4.18 1,734,937 1.23 2,150,947 3.72 1,413,657 0.68 

Savings

 

 

47,005

 

 

 

0.03

 

 

 

40,492

 

 

 

0.03

 

 

 

46,506

 

 

 

0.03

 

 

 

39,925

 

 

 

0.03

 

Savings84,775 0.29 108,097 0.05 94,092 0.22 105,568 0.04 
BaaS-brokered depositsBaaS-brokered deposits1 0.00 74,687 1.67 34,720 4.08 70,815 0.87 

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 $100,0009,260 0.43 13,625 0.26 10,529 0.32 14,306 0.29 

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 over14,348 0.41 21,824 0.25 15,346 0.34 24,419 1.02 

Total deposits

 

$

719,748

 

 

 

0.40

%

 

$

651,250

 

 

 

0.31

%

 

$

714,649

 

 

 

0.38

%

 

$

649,270

 

 

 

0.31

%

Total deposits$3,213,625 3.14 %$2,761,122 0.82 %$3,035,926 2.69 %$2,616,108 0.41 %

(1)Annualized calculations shown for periods presented.
The ratio of average noninterest-bearingnoninterest bearing deposits to average total deposits for the three and nine months ended JuneSeptember 30, 20182023 was 21.7% and 2017, was 35.5%24.1%, respectively, compared to29.3% and 35.2%37.7%, respectively. respectively, for the three and nine months ended September 30, 2022.
Uninsured Deposits
The ratioFDIC 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 September 30, 2023, deposits totaled $3.29 billion, of average noninterest-bearingwhich total estimated uninsured deposits were $599.0 million, or 18.2% of total deposits, compared to $835.8 million, or 29.7% of total deposits as of December 31, 2022. At September 30, 2022, deposits totaled $2.84 billion, of which total estimated uninsured deposits were $867.7 million, or 30.6% of total deposits. The Bank is using sweep deposits to average totalprovide our customers with fully insured deposits through a sweep and exchange of deposits with other financial institutions.
Estimated uninsured time deposits totaled $1.9 million as of September 30, 2023. The table below shows the estimated uninsured time deposits, by account, for the six months ended June 30, 2018 and 2017, was 35.0% and 34.8%, respectively.

maturity periods indicated:

(dollars in thousands; unaudited)As of September 30, 2023
Maturity Period:
Three months or less$248 
Over three through six months1,235 
Over six through twelve months51 
Over twelve months404 
Total$1,938 

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 LoanReserve Bank (FHLB) Advances. Line of Credit. The FHLBFederal Reserve allows us to borrow againstour lineof credit through a borrower in custody agreement utilizing the discount window, which is collateralizedby certainloans. Asof JuneSeptember 30, 2018,2023 and December31, 2017,September 30, 2022, totalborrowing capacityof $70.7$442.2 million and$59.3 $28.2 million,respectively,was availableunder thisarrangement. As of September 30, 2023 and 2022, Federal Reserve advances totaled zero. Additional loans were pledged during the first nine months of 2023 to significantly increase the borrowing capacity of the Bank in the event of a liquidity crisis.
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Table of Contents,
Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of September 30, 2023 and September 30, 2022, we had borrowing capacity of$135.7 millionand$136.6 million, respectively, with the FHLB. As of September 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 September 30,As of and For the Nine Months Ended September 30,
(dollars in thousands; unaudited)2023202220232022
Maximum amount outstanding at any month-end during period:$— $— $— $24,999 
Average outstanding balance during period:$— $— $— $8,058 
Weighted average interest rate during period:— %— %— %1.13 %
Balance outstanding at end of period:$— $— $— $— 
Weighted average interest rate at end of period:— %— %— %— %
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 Prior to June 30, 2023, the debenturesbear bore interestat a rateper annum equal to the 3-monthLIBORplus 2.10%. Beginning with rate adjustments subsequent to June 30, 2023, the rate is based off three-month CME Term SOFR plus 0.26%. The effectiverateas of JuneSeptember 30, 2018,2023 and December31, 2017,2022 was 4.44%7.77% and 3.69%6.87%, respectively.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’sTrust’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 Securitiessecurities subjectto certainexceptions,the redemptionpricewith respectto any Trust securitiescalledfor redemptionand amountsdue if the Trust is liquidatedor terminated.

Subordinated Debt. In 2016,August 2021, the Company issueda subordinatednote to a commercialbank in the amountof$10.0 $25.0 million.The note matureson AugustSeptember 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 quartercommenceNovemberfive-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, afterJuly 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.
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Table of Contents,
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 September 30, 2023, we have 1 partner with deposits that are in excess of 10% of total deposits and represent 28% 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 wholesaleBaaS 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 deposits, a one-way buy through an ICS account, and the issuance of debt or equity securities. 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 costscosts. During the nine months ended September 30, 2023, the Company contributed $15.0 million to the Bank. The Company currently holds $6.5 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.
93
Table of Contents,
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 totargets 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. TheBecause 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 September 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 JuneSeptember 30, 2018,2023, and December 31, 2017,2022, the Company and the Bank waswere 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 which allows 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.

94

Table of Contents,
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)AmountRatioAmountRatioAmountRatio
September 30, 2023September 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$289,014 8.03 %$143,924 4.00 %N/AN/A

Bank Only

 

 

82,443

 

 

 

11.30

 

 

 

32,831

 

 

 

4.50

 

 

 

47,422

 

 

 

6.50

 

Bank Only323,387 8.99 %143,808 4.00 %179,760 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

 

Company285,514 9.00 %142,812 4.50 %N/AN/A

Bank Only

 

 

82,443

 

 

 

10.18

 

 

 

32,394

 

 

 

4.00

 

 

 

40,492

 

 

 

5.00

 

Bank Only323,387 10.21 %142,568 4.50 %205,932 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

 

Company289,014 9.11 %190,416 6.00 %N/AN/A

Bank Only

 

 

82,443

 

 

 

11.30

 

 

 

43,775

 

 

 

6.00

 

 

 

58,366

 

 

 

8.00

 

Bank Only323,387 10.21 %190,091 6.00 %253,455 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

 

Company374,449 11.80 %253,888 8.00 %N/AN/A

Bank Only

 

 

91,211

 

 

 

12.50

 

 

 

58,366

 

 

 

8.00

 

 

 

72,958

 

 

 

10.00

 

Bank Only363,755 11.48 %253,455 8.00 %316,818 10.00 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2017

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common Equity Tier I risk-based capital ratio (to

risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2022December 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/AN/A

Bank Only

 

 

77,756

 

 

11.67

 

 

 

29,984

 

 

 

4.50

 

 

 

43,311

 

 

 

6.50

 

Bank Only267,699 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

 

Company245,750 8.92 %124,027 4.50 %N/AN/A

Bank Only

 

 

77,756

 

 

9.94

 

 

 

31,280

 

 

 

4.00

 

 

 

39,099

 

 

 

5.00

 

Bank Only267,699 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

 

Company249,250 9.04 %165,370 6.00 %N/AN/A

Bank Only

 

 

77,756

 

 

11.67

 

 

 

39,979

 

 

 

6.00

 

 

 

53,306

 

 

 

8.00

 

Bank Only267,699 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

 

Company329,203 11.94 %220,493 8.00 %N/AN/A

Bank Only

 

 

85,983

 

 

 

12.90

 

 

 

53,306

 

 

 

8.00

 

 

 

66,632

 

 

 

10.00

 

Bank Only302,595 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.
95
Table of Contents,
Material Cash Requirements and Capital Resources
The following table summarizesprovides the material cash requirements from known contractual obligations and other commitments to make future payments (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations as of Juneas of September 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)TotalLess than
1 Year		Over
1 year		Other (1)
Cash requirements
Time Deposits$20,617 $16,351 $4,266 $— 
Subordinated notes45,000 — 45,000 — 
Junior subordinated debentures3,609 — 3,609 — 
Deferred compensation plans804 175 629 — 
Operating leases7,593 1,022 6,571 — 
Non-maturity deposits3,269,083 — — 3,269,083 
Equity investment commitment713 713 — — 


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 ablemaintain 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. Adequateoperating, investing and financing activities during any given period. Cash on hand, cash levelsat third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are expectedour 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 loansan 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 September 30, 2023 we had $2.35 billion in commitments to extend credit, compared to $2.20 billion as of December 31, 2022. The $151.6 million increase is largely attributed to an increase of $209.0 million in consumer and other loan commitments, related to CCBX consumer loans, $142.1 million decrease in commercial and industrial capital call line commitments, $791,000 increase in commercial construction loans and $102.5 million increase in residential real estate commitments, related to CCBX loans.

96
Table of Contents,
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 September 30, 2023As of December 31, 2022
Commitments to extend credit:
Commercial and industrial loans$75,788 $81,568 
Commercial and industrial loans - capital call lines630,668 772,732 
Construction – commercial real estate loans110,506 109,715 
Construction – residential real estate loans23,189 32,827 
Residential real estate loans477,243 374,735 
Commercial real estate loans31,794 35,024 
Consumer and other loans1,002,582 793,563 
Total commitments to extend credit$2,351,770 $2,200,164 
Standby letters of credit$1,021 $3,064 
Equity investment commitment$713 $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 September 30, 2023, capital call lines outstanding balance totaled $114.2 million, and while commitments totaled $630.7 million the commitments are cancelable, and are also limited to a maximum of $350.0 million by agreement with the partner. These limits allow us to manage portfolio concentrations with partners and by loan type.
The following table shows the CCBX maximum portfolio sizes by loan category as of September 30, 2023.
As of September 30, 2023As of December 31, 2022
(dollars in thousands; unaudited)Type of LendingMaximum Portfolio SizeIncrease/(decrease)
Commercial and industrial loans:
Capital call linesBusiness - Venture Capital$350,000 $350,000 $— 
All other commercial & industrial loansBusiness - Small Business334,946 65,856 269,090 
Real estate loans:
Home equity lines of creditHome Equity - Secured Credit Cards375,000 250,000 125,000 
Consumer and other loans:
Credit cardsCredit Cards - Primarily Consumer626,832 600,770 26,062 
Installment loansConsumer1,054,741 1,048,134 6,607 
Other consumer and other loansConsumer - Secured Credit Builder & Unsecured consumer608,480 190,240 418,240 
$3,349,999 $2,505,000 $844,999 
Total Existing Portfolio Size$1,182,374 $1,012,504 $169,870 
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 September 30, 2023, $1.64 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

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CCBX partners to a maximum aggregate customer loan balance originated and held on our balance sheet, as shown in the table above.
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 millionoperations. Our accounting policies are described in greater detail in “Note 1 - Description of Business and issuing 2,577,500 sharesSummary of common stock in exchange. We intend to use the net proceeds to support or growth, organically or through mergersSignificant Accounting Policies” and acquisitions,“Item 7. Management’s Discussion and for general corporate purposes, which may include the repayment or refinancingAnalysis of debitFinancial Condition and maintenanceResults 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 capitalizationshows the Company’s key performance ratios for the periods indicated.
Three Months EndedNine Months Ended
(unaudited)September 30,
2023		June 30,
2023		March 31,
2023		December 31,
2022		September 30,
2022		September 30,
2023		September 30,
2022
Return on average assets (1)
1.13 %1.52 %1.58 %1.66 %1.45 %1.40 %1.27 %
Return on average equity (1)
14.60 %19.53 %19.89 %21.86 %19.36 %17.90 %16.90 %
Yield on earnings assets (1)
10.08 %10.18 %9.19 %8.47 %7.38 %9.84 %6.03 %
Yield on loans receivable (1)
10.84 %10.85 %9.95 %9.33 %8.46 %10.57 %7.63 %
Cost of funds (1)
3.18 %2.77 %2.19 %1.61 %0.85 %2.73 %0.44 %
Cost of deposits (1)
3.14 %2.72 %2.13 %1.56 %0.82 %2.69 %0.41 %
Net interest margin (1)
7.10 %7.58 %7.15 %6.96 %6.58 %7.27 %5.61 %
Noninterest expense to average assets (1)
6.23 %6.11 %5.69 %5.97 %6.66 %6.02 %5.54 %
Noninterest income to average assets (1)
3.81 %6.90 %6.28 %5.43 %4.48 %5.61 %3.79 %
Efficiency ratio58.36 %42.92 %43.03 %48.94 %61.12 %47.60 %59.77 %
Loans receivable to deposits (2)
90.19 %96.23 %92.55 %93.25 %89.92 %90.19 %89.92 %
(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 Junenine months ended September 30, 2018:

on an actual basis:

on an adjusted basis, after giving effect2023, $25.9 million and $119.3 million, respectively was recognized in noninterest income BaaS credit enhancements related to the net proceedsestablishment of a credit enhancement asset for credit losses indemnified by our strategic partners and reserved 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 and/or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans, unfunded commitments and negative deposit accounts. When the

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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 legal commitment to indemnify or reimburse losses. The credit enhancement asset is relieved as credit enhancement payments and recoveries are received from the saleCCBX partner or taken from the partner's cash reserve account. Agreements with our CCBX partners also provide protection to the Bank from fraud by usindemnifying or reimbursing incurred fraud losses. BaaS fraud includes noncredit fraud losses on loans and deposits originated through partners. 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 shares of common stock in this offeringzero to the income statement. CCBX partners also pledge a cash reserve account at the initial public offering priceBank 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 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 loan and deposit losses, as a result of $14.50 per share.

this counterparty risk. If a CCBX partner does not replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit and fraud enhancements. The Bank would write-off any remaining credit enhancement asset from the CCBX partner not covered by the cash pledge account but would retain the full yield and any fee income on the loan going forward, and BaaS loan expense for that CCBX partner would cease 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 and fraud enhancements andservicing 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 expenseThree Months EndedNine Months Ended
(dollars in thousands; unaudited)September 30,
2023		September 30,
2022		September 30,
2023		September 30,
2022
BaaS loan interest income$56,279 $31,449 $152,131 $64,721 
Less: BaaS loan expense23,003 15,560 62,590 36,079 
Net BaaS loan income (2)
33,276 15,889 89,541 28,642 
Net BaaS loan income divided by average BaaS loans (1)(2)
10.08 %7.05 %9.85 %5.82 %
Yield on loans (1)
17.05 %13.96 %16.74 %13.16 %
(1)Annualized calculations shown for periods presented.
(2)A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”
The increased activity of CCBX partners has resulted in increases in direct fees, expenses and interest for the three and nine months ended September 30, 2023 compared to the three and nine months ended September 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 incomeThree Months EndedNine Months Ended
(dollars in thousands; unaudited)September 30,
2023		September 30,
2022		September 30,
2023		September 30,
2022
Loan interest income$56,279 $31,449 $152,131 $64,721 
Total BaaS interest income$56,279 $31,449 $152,131 $64,721 
99

 

 

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.

 

Table of Contents,

Interest expenseThree Months EndedNine Months Ended
(dollars in thousands; unaudited)September 30,
2023		September 30,
2022		September 30,
2023		September 30,
2022
BaaS interest expense$20,384 $5,075 $49,820 $6,549 
Total BaaS interest expense$20,384 $5,075 $49,820 $6,549 
Three Months EndedNine Months Ended
(dollars in thousands; unaudited)September 30,
2023		September 30,
2022		September 30,
2023		September 30,
2022
BaaS program income:
Servicing and other BaaS fees$997 $1,079 $2,840 $3,407 
Transaction fees1,036 940 3,005 2,247 
Interchange fees1,216 738 2,980 1,798 
Reimbursement of expenses1,152 885 3,099 1,875 
BaaS program income4,401 3,642 11,924 9,327 
BaaS indemnification income:
BaaS credit enhancements25,926 17,928 119,315 45,210 
BaaS fraud enhancements2,850 11,708 6,386 22,753 
BaaS indemnification income28,776 29,636 125,701 67,963 
Total BaaS income$33,177 $33,278 $137,625 $77,290 
Three Months EndedNine Months Ended
(dollars in thousands; unaudited)September 30,
2023		September 30,
2022		September 30,
2023		September 30,
2022
BaaS loan and fraud expense:
BaaS loan expense$23,003 $15,560 $62,590 $36,079 
BaaS fraud expense2,850 11,707 6,386 22,752 
Total BaaS loan and fraud expense$25,853 $27,267 $68,976 $58,831 
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 EndedAs of and for the Nine Months Ended
(dollars in thousands; unaudited)September 30,
2023		September 30,
2022		September 30,
2023		September 30,
2022
Net BaaS loan income divided by average CCBX loans:
CCBX loan yield (GAAP)(1)
17.05 %13.96 %16.74 %13.16 %
Total average CCBX loans receivable$1,309,380$893,655$1,215,224$657,574
Interest and earned fee income on CCBX loans (GAAP)56,27931,449152,13164,721
BaaS loan expense(23,003)(15,560)(62,590)(36,079)
Net BaaS loan income$33,276$15,889$89,541$28,642
Net BaaS loan income divided by average CCBX loans (1)
10.08 %7.05 %9.85 %5.82 %
(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-earninginterest earning assets and interest-bearinginterest 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% 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-earninginterest earning assets and interest-bearinginterest bearing liabilities and interest rate simulations using a model. The Asset Liability and Investment Committee of our board of directors meets quarterlyregularly 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 RatesTwelve Month Projection
As of September 30, 2023		Twelve Month Projection
As of December 31, 2022

Immediate Shifts

 

 

 

 

 

 

Static Balance Sheet and Rate ShiftsStatic Balance Sheet and Rate Shifts

+400 basis points

 

11.5%

 

 

13.2%

+400 basis points10.7%15.2%

+300 basis points

 

8.4

 

 

9.7

+300 basis points8.0%11.4%

+200 basis points

 

5.6

 

 

6.4

+200 basis points5.4%7.6%

+100 basis points

 

2.8

 

 

3.2

+100 basis points2.7%3.8%

-100 basis points

 

(1.8)

 

 

(2.8)

-100 basis points(4.0)%(4.1)%

-200 basis points

 

(8.1)

 

 

(8.1)

-200 basis points(8.9)%(8.5)%

-300 basis points

 

(11.1)

 

 

(10.4)

-300 basis points(14.0)%(13.0)%
-400 basis points-400 basis points(22.5)%(18.8)%

 

 

 

 

 

 

Dynamic Balance Sheet and Rate Shifts

 

 

 

 

 

 

Dynamic Balance Sheet and Rate Shifts

+400 basis points

 

18.3

 

 

16.1

+400 basis points14.0%17.6%

+300 basis points

 

13.5

 

 

11.9

+300 basis points10.5%13.2%

+200 basis points

 

 

9.0

 

 

7.8

+200 basis points7.0%8.8%

+100 basis points

 

4.5

 

 

3.9

+100 basis points3.5%4.4%

-100 basis points

 

(3.5)

 

 

(3.6)

-100 basis points(4.6)%(4.6)%

-200 basis points

 

(11.5)

 

 

(9.8)

-200 basis points(10.1)%(9.5)%

-300 basis points

 

(15.6)

 

 

(12.5)

-300 basis points(15.7)%(14.5)%
-400 basis points-400 basis points(24.5)%(20.8)%

The results illustrate that the Bank Company is asset sensitive and generally performs better inan increasing interest rate environment. The resultsAs 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, interestoffering rates on these our community bank deposits change more slowly than changes in short-term market rates. For the discountCCBX 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 fundsthe 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 statementsassumptions 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.

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.

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 officerChief Executive Officer and principal financial officer, have evaluatedthe Chief Financial Officer, of the effectiveness of the Company’s “disclosuredesign 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 theiron that evaluation, the principal executive officerCompany's Chief Executive Officer and principal financial officerthe Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’sCompany'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,
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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 changechanges in the Company’s internal control over financial reporting occurred during the threenine months ended JuneSeptember 30, 2018,2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


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Table of Contents,
PART II. OTHEROTHER 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 withAnnual 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 JuneSeptember 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 stockequity 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.

nine months ended September 30, 2023.

The Company did not repurchase any of its sharesequity securities during the quarternine months ended September 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

  31.1

31.2

32.1

  31.2

32.2

  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 sixquarter months ended JuneSeptember 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.
104Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101 filed herewith)


105

Table of ContentsSIGNATURES

,

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

November 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

November 7, 2023

By:

By:

/s/ Joel G. Edwards

Joel G. Edwards

Executive Vice President and

Chief Financial Officer

(principal financial officer)

Principal Financial Officer)

51

106