level452.9  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 June 30, 20222023

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 class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, no par value per share

CCB

NasdaqNASDAQ 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 every Interactive Data File required to be submitted 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 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 emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and emerging growth company in Rule 12b-2 of the Exchange Act.

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 13(a) of the Exchange 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 2, 2022,3, 2023, there were 12,950,85313,301,679 shares of the issuer’s common stock outstanding.


Table of Contents,
COASTAL FINANCIAL CORPORATION

Table of Contents

Page No.

Page No.

4

Condensed Consolidated Balance Sheets as ofJune 30, 20222023 and December 31, 20212022 (unaudited)

4

5

6

7

7

8

8

9

9

11

30

45

80

93

81

94

82

96

82

96

82

96

82

96

82

96

82

96

82

96


2

Table of Contents,
Forward-Looking Statements

This report may contain forward-looking statementswithin the meaning of the Private Securities Litigation Reform Act of 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. All forward-looking statements, expressed or implied, included herewith are expressly qualified in their entirety by the cautionary statements contained or referred to 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 year ended December 31, 20212022 (“Form 10-K”). Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the difficult market conditions and unfavorable economic conditions and uncertainties associated with the coronavirus, and variants thereof (“COVID-19”) pandemic, including the emergence of variant strains of the virus, particularly in the markets in which we operate and in which our loans are concentrated, including declines in housing markets as a result of global macroeconomic and geopolitical events, an increase in unemployment levels and slowdowns in economic growth; our expected future financial results; the overall health of the local and national real estate market; the impacts related to or resulting from recent bank failures and other economic and industry volatility, including potential increased regulatory requirements and costs and potential impacts to macroeconomic conditions; the credit risk associated with our loan portfolio, such as possible additional loancredit losses and impairment of collectability of loans as a result of the COVID-19coronavirus, 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, including as a result of the COVID-19 pandemic, 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 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, except as required by law.


3

Table of Contents,
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(dollars in thousands)

ASSETS

 

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Cash and due from banks

 

$

40,750

 

 

$

14,496

 

Interest earning deposits with other banks (restricted cash of $0

   at June 30, 2022 and December 31, 2021)

 

 

364,939

 

 

 

798,665

 

Investment securities, available for sale, at fair value

 

 

108,560

 

 

 

35,327

 

Investment securities, held to maturity, at amortized cost

 

 

1,261

 

 

 

1,296

 

Other investments

 

 

10,379

 

 

 

8,478

 

Loans held for sale, at par

 

 

60,000

 

 

 

-

 

Loans receivable

 

 

2,334,354

 

 

 

1,742,735

 

Allowance for loan losses

 

 

(49,358

)

 

 

(28,632

)

Total loans receivable, net

 

 

2,284,996

 

 

 

1,714,103

 

Premises and equipment, net

 

 

18,670

 

 

 

17,219

 

Operating lease right-of-use assets

 

 

5,565

 

 

 

6,105

 

Accrued interest receivable

 

 

12,430

 

 

 

8,105

 

Bank-owned life insurance, net

 

 

12,485

 

 

 

12,254

 

Deferred tax asset, net

 

 

11,709

 

 

 

6,818

 

Other assets

 

 

37,978

 

 

 

12,651

 

Total assets

 

$

2,969,722

 

 

$

2,635,517

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

$

2,697,305

 

 

$

2,363,787

 

Federal Home Loan Bank ("FHLB") advances

 

 

-

 

 

 

24,999

 

Subordinated debt

 

 

 

 

 

 

 

 

Principal amount $25,000 (less unamortized debt issuance costs of $676 and $712 )

   at June 30, 2022 and December 31, 2021, respectively

 

 

24,324

 

 

 

24,288

 

Junior subordinated debentures

 

 

 

 

 

 

 

 

Principal amount $3,609 (less unamortized debt issuance costs of $22

   and $23 at June 30, 2022 and December 31, 2021, respectively)

 

 

3,587

 

 

 

3,586

 

Deferred compensation

 

 

680

 

 

 

744

 

Accrued interest payable

 

 

330

 

 

 

357

 

Operating lease liabilities

 

 

5,786

 

 

 

6,320

 

Other liabilities

 

 

20,049

 

 

 

10,214

 

Total liabilities

 

 

2,752,061

 

 

 

2,434,295

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, no par value:

 

 

 

 

 

 

 

 

Authorized: 25,000,000 shares at June 30, 2022 and

    December 31, 2021; issued and outstanding: 0 shares at

    June 30, 2022 and December 31, 2021

 

 

-

 

 

 

-

 

Common stock, no par value:

 

 

 

 

 

 

 

 

Authorized: 300,000,000 shares at June 30, 2022 and

    December 31, 2021; 12,948,623 shares at June 30, 2022

    issued and outstanding and 12,875,315 shares at

    December 31, 2021 issued and outstanding

 

 

123,226

 

 

 

121,845

 

Retained earnings

 

 

95,779

 

 

 

79,373

 

Accumulated other comprehensive (loss) income, net of tax

 

 

(1,344

)

 

 

4

 

Total shareholders’ equity

 

 

217,661

 

 

 

201,222

 

Total liabilities and shareholders’ equity

 

$

2,969,722

 

 

$

2,635,517

 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands)
ASSETS
June 30,
2023		December 31,
2022
Cash and due from banks$29,783 $32,722 
Interest earning deposits with other banks (restricted cash of $0 at June 30, 2023 and December 31, 2022)245,277 309,417 
Investment securities, available for sale, at fair value98,167 97,317 
Investment securities, held to maturity, at amortized cost12,563 1,036 
Other investments12,037 10,555 
Loans held for sale35,923 — 
Loans receivable3,007,553 2,627,256 
Allowance for credit losses(110,762)(74,029)
Total loans receivable, net2,896,791 2,553,227 
CCBX credit enhancement asset96,928 53,377 
CCBX receivable19,113 10,416 
Premises and equipment, net18,903 18,213 
Operating lease right-of-use assets6,216 5,018 
Accrued interest receivable21,581 17,815 
Bank-owned life insurance, net12,873 12,667 
Deferred tax asset, net25,764 18,458 
Other assets3,364 4,229 
Total assets$3,535,283 $3,144,467 
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits$3,162,572 $2,817,521 
Subordinated debt, net
Principal amount $45,000 (less unamortized debt issuance costs of $931 and $1,001) at June 30, 2023 and December 31, 2022, respectively44,069 43,999 
Junior subordinated debentures, net
Principal amount $3,609 (less unamortized debt issuance costs of $20 at June 30, 2023 and December 31, 2022)3,589 3,588 
Deferred compensation547 616 
Accrued interest payable766 684 
Operating lease liabilities6,413 5,234 
CCBX payable27,714 20,419 
Other liabilities16,951 8,912 
Total liabilities3,262,621 2,900,973 
SHAREHOLDERS’ EQUITY
Preferred stock, no par value:
Authorized: 25,000,000 shares at June 30, 2023 and December 31, 2022; issued and outstanding: zero shares at June 30, 2023 and December 31, 2022— — 
Common stock, no par value:
Authorized: 300,000,000 shares at June 30, 2023 and December 31, 2022; 13,300,809 shares at June 30, 2023 issued and outstanding and 13,161,147 shares at December 31, 2022 issued and outstanding128,315 125,830 
Retained earnings146,029 119,998 
Accumulated other comprehensive loss, net of tax(1,682)(2,334)
Total shareholders’ equity272,662 243,494 
Total liabilities and shareholders’ equity$3,535,283 $3,144,467 
See accompanying Notes to Condensed Consolidated Financial Statements.


4

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except for per share data)

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

2021

 

 

2022

 

2021

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

40,166

 

$

19,365

 

 

$

69,798

 

$

37,595

 

Interest on interest earning deposits with other banks

 

 

956

 

 

74

 

 

 

1,358

 

 

144

 

Interest on investment securities

 

 

563

 

 

24

 

 

 

634

 

 

52

 

Dividends on other investments

 

 

134

 

 

108

 

 

 

171

 

 

138

 

Total interest income

 

 

41,819

 

 

19,571

 

 

 

71,961

 

 

37,929

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

1,673

 

 

628

 

 

 

2,226

 

 

1,288

 

Interest on borrowed funds

 

 

260

 

 

331

 

 

 

581

 

 

714

 

Total interest expense

 

 

1,933

 

 

959

 

 

 

2,807

 

 

2,002

 

Net interest income

 

 

39,886

 

 

18,612

 

 

 

69,154

 

 

35,927

 

PROVISION FOR LOAN LOSSES

 

 

14,094

 

 

361

 

 

 

27,036

 

 

718

 

Net interest income after provision for loan losses

 

 

25,792

 

 

18,251

 

 

 

42,118

 

 

35,209

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposit service charges and fees

 

 

988

 

 

949

 

 

 

1,872

 

 

1,812

 

Loan referral fees

 

 

208

 

 

806

 

 

 

810

 

 

1,403

 

Gain on sales of loans, net

 

 

-

 

 

31

 

 

 

-

 

 

161

 

Mortgage broker fees

 

 

85

 

 

253

 

 

 

208

 

 

515

 

Gain on sale of bank branch including deposits and loans, net

 

 

-

 

 

1,263

 

 

 

-

 

 

1,263

 

Other income

 

 

311

 

 

56

 

 

 

576

 

 

240

 

Noninterest income, excluding BaaS program income and

  BaaS indemnification income

 

 

1,592

 

 

3,358

 

 

 

3,466

 

 

5,394

 

Servicing and other BaaS fees

 

 

1,159

 

 

1,029

 

 

 

2,328

 

 

1,613

 

Transaction fees

 

 

814

 

 

93

 

 

 

1,307

 

 

239

 

Interchange fees

 

 

628

 

 

110

 

 

 

1,060

 

 

145

 

Reimbursement of expenses

 

 

618

 

 

192

 

 

 

990

 

 

375

 

BaaS program income

 

 

3,219

 

 

1,424

 

 

 

5,685

 

 

2,372

 

BaaS credit enhancements

 

 

14,207

 

 

-

 

 

 

27,282

 

 

-

 

BaaS fraud enhancements

 

 

6,474

 

 

-

 

 

 

11,045

 

 

-

 

BaaS indemnification income

 

 

20,681

 

 

-

 

 

 

38,327

 

 

-

 

Total noninterest income

 

 

25,492

 

 

4,782

 

 

 

47,478

 

 

7,766

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

12,238

 

 

8,913

 

 

 

23,323

 

 

16,599

 

Occupancy

 

 

1,083

 

 

990

 

 

 

2,219

 

 

2,048

 

Software licenses, maintenance and subscriptions

 

 

1,108

 

 

543

 

 

 

2,160

 

 

1,027

 

Legal and professional fees

 

 

1,002

 

 

626

 

 

 

1,710

 

 

1,386

 

Data processing

 

 

1,010

 

 

734

 

 

 

1,819

 

 

1,431

 

Excise taxes

 

 

564

 

 

388

 

 

 

913

 

 

747

 

Federal Deposit Insurance Corporation ("FDIC") assessments

 

 

855

 

 

225

 

 

 

1,459

 

 

420

 

Director and staff expenses

 

 

377

 

 

318

 

 

 

721

 

 

538

 

Marketing

 

 

74

 

 

132

 

 

 

173

 

 

214

 

Other expense

 

 

1,155

 

 

763

 

 

 

2,523

 

 

1,484

 

Noninterest expense, excluding BaaS loan and BaaS fraud expense

 

 

19,466

 

 

13,632

 

 

 

37,020

 

 

25,894

 

BaaS loan expense

 

 

12,229

 

 

99

 

 

 

20,519

 

 

189

 

BaaS fraud expense

 

 

6,474

 

 

-

 

 

 

11,045

 

 

-

 

BaaS loan and fraud expense

 

 

18,703

 

 

99

 

 

 

31,564

 

 

189

 

Total noninterest expense

 

 

38,169

 

 

13,731

 

 

 

68,584

 

 

26,083

 

Income before provision for income taxes

 

 

13,115

 

 

9,302

 

 

 

21,012

 

 

16,892

 

PROVISION FOR INCOME TAXES

 

 

2,939

 

 

2,289

 

 

 

4,606

 

 

3,861

 

NET INCOME

 

$

10,176

 

$

7,013

 

 

$

16,406

 

$

13,031

 

Basic earnings per common share

 

$

0.79

 

$

0.59

 

 

$

1.27

 

$

1.09

 

Diluted earnings per common share

 

$

0.76

 

$

0.56

 

 

$

1.22

 

$

1.05

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

12,928,061

 

 

11,984,927

 

 

 

12,913,485

 

 

11,972,916

 

Diluted

 

 

13,442,013

 

 

12,459,467

 

 

 

13,458,706

 

 

12,423,659

 

Table of Contents,
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except for per share data)
Three Months EndedSix Months Ended
June 30,June 30,
2023202220232022
INTEREST AND DIVIDEND INCOME
Interest and fees on loans$80,199 $40,166 $146,630 $69,798 
Interest on interest earning deposits with other banks2,678 956 5,775 1,358 
Interest on investment securities653 563 1,206 634 
Dividends on other investments156 134 186 171 
Total interest income83,686 41,819 153,797 71,961 
INTEREST EXPENSE
Interest on deposits20,675 1,673 35,633 2,226 
Interest on borrowed funds661 260 1,323 581 
Total interest expense21,336 1,933 36,956 2,807 
Net interest income62,350 39,886 116,841 69,154 
PROVISION FOR CREDIT LOSSES - LOANS52,598 14,094 96,142 27,036 
RECAPTURE FOR UNFUNDED COMMITMENTS(345)— (192)— 
Net interest income after provision for credit losses - loans
   and unfunded commitments		10,097 25,792 20,891 42,118 
NONINTEREST INCOME
Deposit service charges and fees989 988 1,899 1,872 
Loan referral fees682 208 682 810 
Gain on sales of loans, net23 — 146 — 
Unrealized (loss) gain on equity securities, net155 — 194 — 
Other income234 396 533 784 
Noninterest income, excluding BaaS program income and BaaS indemnification income2,083 1,592 3,454 3,466 
Servicing and other BaaS fees895 1,159 1,843 2,328 
Transaction fees1,052 814 1,969 1,307 
Interchange fees975 628 1,764 1,060 
Reimbursement of expenses1,026 618 1,947 990 
BaaS program income3,948 3,219 7,523 5,685 
BaaS credit enhancements51,027 14,207 93,389 27,282 
BaaS fraud enhancements1,537 6,474 3,536 11,045 
BaaS indemnification income52,564 20,681 96,925 38,327 
Total noninterest income58,595 25,492 107,902 47,478 
NONINTEREST EXPENSE    
Salaries and employee benefits16,309 12,238 31,884 23,323 
Occupancy1,143 1,083 2,362 2,219 
Data processing and software licenses1,972 1,546 3,812 3,050 
Legal and professional expenses4,645 1,002 7,707 1,710 
Point of sale expense814 409 1,567 657 
Excise taxes531 564 986 913 
Federal Deposit Insurance Corporation ("FDIC") assessments570 855 1,165 1,459 
Director and staff expenses519 377 1,145 721 
Marketing115 74 210 173 
Other expense1,722 1,318 2,612 2,795 
Noninterest expense, excluding BaaS loan and BaaS fraud expense28,340 19,466 53,450 37,020 
BaaS loan expense22,033 12,229 39,587 20,519 
BaaS fraud expense1,537 6,474 3,536 11,045 
BaaS loan and fraud expense23,570 18,703 43,123 31,564 
Total noninterest expense51,910 38,169 96,573 68,584 
5
Table of Contents,
Income before provision for income taxes16,782 13,115 32,220 21,012 
PROVISION FOR INCOME TAXES3,876 2,939 6,923 4,606 
NET INCOME$12,906 $10,176 $25,297 $16,406 
Basic earnings per common share$0.97 $0.79 $1.91 $1.27 
Diluted earnings per common share$0.95 $0.76 $1.86 $1.22 
Weighted average number of common shares outstanding:
Basic13,275,64012,928,06113,236,51712,913,485
Diluted13,597,76313,442,01313,603,59413,458,706
See accompanying Notes to Condensed Consolidated Financial Statements.


6

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands)

Table of Contents

,

 

 

Three Months Ended June 30,

 

 

Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

NET INCOME

 

$

10,176

 

 

$

7,013

 

 

$

16,406

 

 

$

13,031

 

OTHER COMPREHENSIVE LOSS, before tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding loss during the period

 

 

(1,351

)

 

 

(28

)

 

 

(1,701

)

 

 

(41

)

Income tax benefit related to unrealized holding loss

 

 

282

 

 

 

6

 

 

 

353

 

 

 

9

 

OTHER COMPREHENSIVE LOSS, net of tax

 

 

(1,069

)

 

 

(22

)

 

 

(1,348

)

 

 

(32

)

COMPREHENSIVE INCOME

 

$

9,107

 

 

$

6,991

 

 

$

15,058

 

 

$

12,999

 

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

Three Months Ended June 30,Six Months Ended June 30,
2023202220232022
NET INCOME$12,906 $10,176 $25,297 $16,406 
OTHER COMPREHENSIVE INCOME (LOSS), before tax
Securities available-for-sale
Unrealized holding income (loss) during the period163 (1,351)841 (1,701)
Income tax (expense) benefit related to unrealized holding gain/loss(38)282 (189)353 
OTHER COMPREHENSIVE INCOME (LOSS), net of tax125 (1,069)652 (1,348)
COMPREHENSIVE INCOME$13,031 $9,107 $25,949 $15,058 
See accompanying Notes to Condensed Consolidated Financial Statements.


7

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(dollars in thousands)

 

 

Shares of

Common

Stock

 

 

Amount of Common

Stock

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

BALANCE, March 31, 2021

 

 

11,988,636

 

 

$

88,329

 

 

$

58,386

 

 

$

24

 

 

$

146,739

 

Net income

 

 

-

 

 

 

-

 

 

 

7,013

 

 

 

-

 

 

 

7,013

 

Issuance of restricted stock awards

 

 

4,736

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Vesting of restricted stock units

 

 

425

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeiture of restricted stock awards

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

13,872

 

 

 

99

 

 

 

-

 

 

 

-

 

 

 

99

 

Stock-based compensation

 

 

-

 

 

 

271

 

 

 

-

 

 

 

-

 

 

 

271

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(22

)

 

 

(22

)

BALANCE, June 30, 2021

 

 

12,007,669

 

 

$

88,699

 

 

$

65,399

 

 

$

2

 

 

$

154,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2020

 

 

11,954,327

 

 

$

87,815

 

 

$

52,368

 

 

$

34

 

 

$

140,217

 

Net income

 

 

-

 

 

 

-

 

 

 

13,031

 

 

 

-

 

 

 

13,031

 

Issuance of restricted stock awards

 

 

10,714

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Vesting of restricted stock units

 

 

7,851

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

34,777

 

 

 

250

 

 

 

-

 

 

 

-

 

 

 

250

 

Stock-based compensation

 

 

-

 

 

 

634

 

 

 

-

 

 

 

-

 

 

 

634

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(32

)

 

 

(32

)

BALANCE, June 30, 2021

 

 

12,007,669

 

 

$

88,699

 

 

$

65,399

 

 

$

2

 

 

$

154,100

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, March 31, 2022

 

 

12,928,548

 

 

$

122,592

 

 

$

85,603

 

 

$

(275

)

 

$

207,920

 

Net income

 

 

-

 

 

 

-

 

 

 

10,176

 

 

 

-

 

 

 

10,176

 

Issuance of restricted stock awards

 

 

10,396

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Vesting of restricted stock units

 

 

349

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

9,330

 

 

 

69

 

 

 

-

 

 

 

-

 

 

 

69

 

Stock-based compensation

 

 

-

 

 

 

565

 

 

 

-

 

 

 

-

 

 

 

565

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,069

)

 

 

(1,069

)

BALANCE, June 30, 2022

 

 

12,948,623

 

 

$

123,226

 

 

$

95,779

 

 

$

(1,344

)

 

$

217,661

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2021

 

 

12,875,315

 

 

$

121,845

 

 

$

79,373

 

 

$

4

 

 

$

201,222

 

Net income

 

 

-

 

 

 

-

 

 

 

16,406

 

 

 

-

 

 

 

16,406

 

Issuance of restricted stock awards

 

 

10,396

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Vesting of restricted stock units

 

 

26,637

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

36,275

 

 

 

277

 

 

 

-

 

 

 

-

 

 

 

277

 

Stock-based compensation

 

 

-

 

 

 

1,104

 

 

 

-

 

 

 

-

 

 

 

1,104

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1,348

)

 

 

(1,348

)

BALANCE, June 30, 2022

 

 

12,948,623

 

 

$

123,226

 

 

$

95,779

 

 

$

(1,344

)

 

$

217,661

 

Table of Contents,
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(dollars in thousands)
Shares of
Common
Stock
Amount of Common
Stock
Retained
Earnings
Accumulated Other
Comprehensive
Income (Loss)
Total
BALANCE, March 31, 202212,928,548$122,592 $85,603 $(275)$207,920 
Net income—— 10,176 — 10,176 
Issuance of restricted stock awards10,396— — — — 
Vesting of restricted stock units349— — — — 
Exercise of stock options9,33069 — — 69 
Stock-based compensation—565 — — 565 
Other comprehensive loss, net of tax—— — (1,069)(1,069)
BALANCE, June 30, 202212,948,623$123,226 $95,779 $(1,344)$217,661 
BALANCE, December 31, 202112,875,315$121,845 $79,373 $4 $201,222 
Net income—— 16,406 — 16,406 
Issuance of restricted stock awards10,396— — — — 
Vesting of restricted stock units26,637— — — — 
Exercise of stock options36,275277 — — 277 
Stock-based compensation—1,104 — — 1,104 
Other comprehensive loss, net of tax—— — (1,348)(1,348)
BALANCE, June 30, 202212,948,623$123,226 $95,779 $(1,344)$217,661 
BALANCE, March 31, 202313,281,533$127,447 $133,123 $(1,807)$258,763 
Net income—— 12,906 — 12,906 
Issuance of restricted stock awards13,538— — — — 
Vesting of restricted stock units3,618— — — — 
Exercise of stock options2,12022 — — 22 
Stock-based compensation—846 — — 846 
Other comprehensive income,
   net of tax		—— — 125 125 
BALANCE, June 30, 202313,300,809$128,315 $146,029 $(1,682)$272,662 
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—— 25,297 — 25,297 
Issuance of restricted stock awards13,538— — — — 
Vesting of restricted stock units46,020— — — — 
Exercise of stock options80,104589 — — 589 
Stock-based compensation—1,896 — — 1,896 
Other comprehensive income,
   net of tax		—— — 652 652 
BALANCE, June 30, 202313,300,809$128,315 $146,029 $(1,682)$272,662 
See accompanying Notes to Condensed Consolidated Financial Statements.


8

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

 

 

Six months ended June 30,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

16,406

 

 

$

13,031

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

27,036

 

 

 

718

 

Depreciation and amortization

 

 

845

 

 

 

802

 

Loss on disposition of fixed assets

 

 

35

 

 

 

-

 

Decrease in operating lease right-of-use assets

 

 

540

 

 

 

524

 

Decrease in operating lease liabilities

 

 

(534

)

 

 

(519

)

Gain on sales of loans

 

 

-

 

 

 

(161

)

Proceeds from sale of loans related to sale of bank branch

 

 

-

 

 

 

2,415

 

Net (discount accretion) premium amortization on investment securities

 

 

(37

)

 

 

19

 

Stock-based compensation

 

 

1,104

 

 

 

634

 

Gain on sale of bank branch, including deposits and loans

 

 

-

 

 

 

(1,263

)

Increase in bank-owned life insurance value

 

 

(178

)

 

 

(4,974

)

Deferred tax benefit

 

 

(4,533

)

 

 

-

 

Net change in CCBX receivable

 

 

(24,851

)

 

 

-

 

Net change in other assets and liabilities

 

 

4,979

 

 

 

(407

)

Total adjustments

 

 

4,406

 

 

 

(2,212

)

Net cash provided by operating activities

 

 

20,812

 

 

 

10,819

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in interest earning deposits with other banks

 

 

433,726

 

 

 

(107,264

)

Purchase of investment securities available for sale

 

 

(134,912

)

 

 

(19,998

)

Change in other investments, net

 

 

(1,901

)

 

 

(780

)

Principal paydowns of investment securities available-for-sale

 

 

12

 

 

 

18

 

Principal paydowns of investment securities held-to-maturity

 

 

34

 

 

 

725

 

Maturities and calls of investment securities available-for-sale

 

 

60,000

 

 

 

15,000

 

Purchase of bank owned life insurance

 

 

(53

)

 

 

-

 

Proceeds from sales of loans held for sale

 

 

20,059

 

 

 

-

 

Purchase of loans

 

 

(165,456

)

 

 

-

 

Increase in loans receivable, net

 

 

(512,532

)

 

 

(115,204

)

Net cash transfer for branch sale

 

 

-

 

 

 

(19,980

)

Purchases of premises and equipment, net

 

 

(2,331

)

 

 

(1,796

)

Net cash used by investing activities

 

 

(303,354

)

 

 

(249,279

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net increase in demand deposits, NOW and money market, and savings

 

 

340,502

 

 

 

411,958

 

Net decrease in time deposits

 

 

(6,984

)

 

 

(7,524

)

Net repayment from long term FHLB borrowing

 

 

(24,999

)

 

 

-

 

Net advances from Paycheck Protection Program Liquidity Facility

 

 

-

 

 

 

(153,716

)

Proceeds from exercise of stock options

 

 

277

 

 

 

250

 

Net cash provided by financing activities

 

 

308,796

 

 

 

250,968

 

NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH

 

 

26,254

 

 

 

12,508

 

CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year

 

 

14,496

 

 

 

18,965

 

CASH, DUE FROM BANKS AND RESTRICTED CASH, end of quarter

 

$

40,750

 

 

$

31,473

 

SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Interest paid

 

$

2,834

 

 

$

2,354

 

Income taxes paid

 

 

5,247

 

 

 

4,269

 

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS

 

 

 

 

 

 

 

 

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

 

$

(1,705

)

 

$

(41

)

In conjunction with ASU 2016-02 as detailed in Note 6 to the Unaudited Consolidated

   Financial Statements, the following assets and liabilities were recognized:

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

-

 

 

$

41

 

Operating lease liabilities

 

$

-

 

 

$

(41

)

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Transfer from loans to loans held for sale

 

$

80,058

 

 

$

-

 

Table of Contents,
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
Six Months Ended June 30,
20232022
CASH FLOWS FROM OPERATING ACTIVITIES
Net income$25,297 $16,406 
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses - loans96,142 27,036 
Depreciation and amortization956 845 
Loss on disposition of fixed assets23 35 
Decrease in operating lease right-of-use assets461 540 
Decrease in operating lease liabilities(480)(534)
Gain on sales of loans(146)— 
Net discount accretion on investment securities(13)(37)
Unrealized holding loss on equity investment(194)— 
Stock-based compensation1,897 1,104 
Increase in bank-owned life insurance value(188)(178)
Deferred tax benefit(7,714)(4,533)
Net change in CCBX receivable(8,697)(2,848)
Net change in CCBX credit enhancement asset(39,086)(22,003)
Net change in CCBX payable7,295 10,217 
Net change in other assets and liabilities5,562 (5,238)
Total adjustments55,818 4,406 
Net cash provided by operating activities81,115 20,812 
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of investment securities available for sale— (134,912)
Purchase of investment securities held for investment(11,576)— 
Change in other investments, net(1,288)(1,901)
Principal paydowns of investment securities available-for-sale4 12 
Principal paydowns of investment securities held-to-maturity48 34 
Maturities and calls of investment securities available-for-sale— 60,000 
Purchase of bank owned life insurance(18)(53)
Proceeds from sales of loans held for sale154,061 20,059 
Purchase of loans(47,886)(165,456)
Increase in loans receivable, net(585,510)(512,532)
Purchases of premises and equipment, net(1,669)(2,331)
Net cash used by investing activities(493,834)(737,080)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and money market, and savings349,674 340,502 
Net decrease in time deposits(4,623)(6,984)
Net repayment from long term FHLB borrowing— (24,999)
Proceeds from exercise of stock options589 277 
Net cash provided by financing activities345,640 308,796 
NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH(67,079)(407,472)
CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year342,139 813,161 
CASH, DUE FROM BANKS AND RESTRICTED CASH, end of quarter$275,060 $405,689 
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest paid$36,874 $2,834 
Income taxes paid5,195 5,247 
9
Table of Contents,
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Fair value adjustment of securities available-for-sale, gross$841 $(1,705)
Operating lease right-of-use assets$1,659 $— 
Operating lease liabilities$(1,659)$— 
Non-cash investing and financing activities:
Transfer from loans to loans held for sale$189,838 $80,058 
Adjustment to retained earnings - adoption of ASU 2016-13, net of deferred tax$(734)$— 
See accompanying Notes to Condensed Consolidated Financial Statements.


10

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

Table of Contents,
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
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” or “Company”) is a registered bank holding company whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC (“LLC”). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank that is a member bank of the Federal Reserve 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 2three reportable segments: TheCCBX, the community bank and CCBX.treasury & administration.  The primary focus ofCCBX 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 is able to offer banking services and products across the nation.The community bank issegment 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, professionals, and individuals in the broader Puget Sound region in the state of Washington through its 14 branches in Snohomish, Island and King Counties, and through the Internet and its mobile banking application. The CCBXtreasury & administration segment provides Banking as a Service (“BaaS”) that allows our broker dealersincludes treasury management, overall administration and digital financial service partners to offer their customers banking services.  Through CCBX’s partnersall other aspects of the Company is able to offer banking services and products across the nation.

Company.

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

Financial statement presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) 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 in the Company’s Annual report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 14, 2022.16, 2023. Operating results for the three months and six months ended June 30, 20222023 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 LLC. All significant intercompany accounts have been eliminated in consolidation.

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 valuation of the Company’s deferred tax assets, and fair value of financial instruments. Actual results could differ significantly from those estimates.

Accounting policy

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. update–
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 quarterthree and six months ended June 30, 2022,2023, the Company transferred $80.1 milliondid 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 sale.  These CCBX loans heldinvestment, CECL requires a balance sheet liability for sale consistexpected 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 portionsecurity. 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 CCBX partner loans thatapplicable 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 Company intends to sell back tosecurity portfolio segments based on shared risk characteristics. The only segment included in the originating CCBX partner at par.  Asheld-to-maturity portfolio are U.S. Agency Residential Mortgage Backed Securities which have an expected zero credit loss.
13
Table of June 30, 2022 there were $60.0 million in CCBX partner loans held for sale recorded at par, compared to 0 at December 31, 2021.  Contents

Community bank loans held-for-sale consist,

The following table illustrates the impact of the guaranteed portion of SBA loans and United States Department of Agriculture (“USDA”) loans the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value. Loans are

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 

generally sold with servicing of the sold portion retained by the Company when the sale of the loan occurs, the premium received is combined with the estimated present value of future cash flows on the related servicing asset and recorded as a gain on sale of loans in noninterest income. There were no community bank loans held for sale at June 30, 2022 or December 31, 2021.

Subsequent Events - The Company has evaluated events and transactions subsequent to June 30, 20222023 for potential recognition or disclosure.

Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements may have been reclassified to conform to the current presentation with no effect on stockholders’ equity or net income.

Note 2 - Recent accounting standards

Recent Accounting Guidance Not Yet Effective

In September 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. The Company’s implementation of ASU 2016-13 will be effective January 1, 2023.  The Company is actively assessing the data and the model needs and is evaluating the impact of adopting the amendment. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period, January 2023,  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. The actual magnitude of the change will be impacted by the growth, composition and performance of the loan portfolio and economic conditions at January 1, 2023.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022.2024. The Company is currently evaluatingLIBOR ceased to be published effective June 30, 2023. Beginning with rate adjustments that occur after June 30, 2023, our trust preferred subordinated debentures will transition to an adjusted three-month CME Term SOFR index in accordance with the Federal Reserve final rule implementing the Adjustable Interest Rate Act. We have identified the loans that utilize LIBOR and they will transition to alternative reference rates at each loans respective reprice date. We are no longer offering LIBOR indexed rates on newly originated loans. ASU 2020-04 and ASU 2021-01 are not expected to have a material impact the adoptionon our consolidated financial statements.

14
Table of the standard will have on the Company’s financial position or results of operations.

Contents,

Note 3 - Investment Securities

The following table summarizes the amortized cost, fair value, and fair valuesallowance for credit losses and the corresponding amounts of investmentsgross unrealized gains and losses of available-for-sale securities recognized in debtaccumulated other comprehensive income (loss) and gross unrecognized gains and losses of held-to-maturity securities:
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value		Allowance for Credit Losses
(dollars in thousands; unaudited)
June 30, 2023
Available-for-sale
U.S. Treasury securities$99,981 $— $(2,110)$97,871 $— 
U.S. Agency collateralized
   mortgage obligations		50 — (3)47 — 
Municipal bonds250 — (1)249 — 
Total available-for-sale
   securities		100,281 — (2,114)98,167 — 
Held-to-maturity   
U.S. Agency residential
   mortgage-backed securities		12,563 — (404)12,159 — 
Total investment securities$112,844 $— $(2,518)$110,326 $— 
Amortized
Cost		Gross
Unrealized
Gains		Gross
Unrealized
Losses		Fair
Value
(dollars in thousands; unaudited)
December 31, 2022
Available-for-sale
U.S. Treasury securities$99,967 $— $(2,952)$97,015 
U.S. Agency collateralized mortgage 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 $711,000 and $723,000 at June 30, 2023 and December 31, 2022, respectively, accrued interest on held-to-maturity securities was $50,000 and $3,000 at June 30, 2023 and December 31, 2022, respectively. Accrued interest on securities is excluded from the date indicated are as follows:

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

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands; unaudited)

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

��

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

109,950

 

 

$

-

 

 

$

(1,699

)

 

$

108,251

 

U.S. Agency collateralized mortgage obligations

 

 

59

 

 

 

-

 

 

 

(2

)

 

 

57

 

U.S. Agency residential mortgage-backed securities

 

 

1

 

 

 

-

 

 

 

-

 

 

 

1

 

Municipal bonds

 

 

251

 

 

 

-

 

 

 

-

 

 

 

251

 

Total available-for-sale securities

 

 

110,261

 

 

 

-

 

 

 

(1,701

)

 

 

108,560

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency residential mortgage-backed securities

 

 

1,261

 

 

 

-

 

 

 

(97

)

 

 

1,164

 

Total investment securities

 

$

111,522

 

 

$

-

 

 

$

(1,798

)

 

$

109,724

 

15

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands; unaudited)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

34,999

 

 

$

-

 

 

$

(1

)

 

$

34,998

 

U.S. Agency collateralized mortgage obligations

 

 

68

 

 

 

2

 

 

 

-

 

 

 

70

 

U.S. Agency residential mortgage-backed securities

 

 

3

 

 

 

-

 

 

 

-

 

 

 

3

 

Municipal bonds

 

 

252

 

 

 

4

 

 

 

-

 

 

 

256

 

Total available-for-sale securities

 

 

35,322

 

 

 

6

 

 

 

(1

)

 

 

35,327

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency residential mortgage-backed securities

 

 

1,296

 

 

 

52

 

 

 

-

 

 

 

1,348

 

Total investment securities

 

$

36,618

 

 

$

58

 

 

$

(1

)

 

$

36,675

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Table of Contents,

The amortized cost and fair value of debt securities at June 30, 2022,2023, 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; unaudited)

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts maturing in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

9,997

 

 

$

9,993

 

 

$

-

 

 

$

-

 

After one year through five years

 

 

100,204

 

 

 

98,509

 

 

 

-

 

 

 

-

 

 

 

 

110,201

 

 

 

108,502

 

 

 

-

 

 

 

-

 

U.S. Agency residential mortgage-backed securities and

   collateralized mortgage obligations

 

 

60

 

 

 

58

 

 

 

1,261

 

 

 

1,164

 

 

 

$

110,261

 

 

$

108,560

 

 

$

1,261

 

 

$

1,164

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-SaleHeld-to-Maturity
Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value
(dollars in thousands; unaudited)
June 30, 2023
Amounts maturing in
One year or less$100,231 $98,120 $— $— 
100,231 98,120 — — 
U.S. Agency residential mortgage-backed securities and collateralized mortgage obligations50 47 12,563 12,159 
$100,281 $98,167 $12,563 $12,159 


Investments in debt securities with an amortized cost of $38.0 million and $36.0$22.0 million at June 30, 20222023 and $37.8 million as of December 31, 2021, respectively,2022, were pledged to secure public deposits and for other purposes as required or permitted by law. During the quartersix months ended June 30, 2022, $25.0 million in U.S. Treasury securities matured.2023, one security matured for $590,000. During the six months ended June 30, 2022, 5 U.S. Treasury2023, three securities were purchased for $135.0 million for their higher yielding return compared to cash on deposit with other banks, and $60.0 million in U.S. Treasury$11.6 million.

There were no sales of securities matured during the six months ended June 30, 2023 or 2022.

There were 0 sales of securities during the three months ended June 30, 2022 or 2021.

There were 8ten securities with a $1.8$2.5 million unrealized loss as of June 30, 2022.2023. There were 4six securities in an unrealized loss position as of December 31, 2021.2022. The following table shows the investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

position 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; unaudited)

 

Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses		Fair
Value		Gross
Unrealized
Losses

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

U.S. Treasury securities

 

$

108,251

 

 

$

1,699

 

 

$

-

 

 

$

-

 

 

$

108,251

 

 

$

1,699

 

U.S. Treasury securities$— $— $97,871 $2,110 $97,871 $2,110 

U.S. Agency collateralized mortgage obligations

 

 

57

 

 

 

2

 

 

 

-

 

 

 

-

 

 

 

57

 

 

 

2

 

U.S. Agency collateralized mortgage obligations— — 47 3 47 3 
MunicipalsMunicipals249 1 — — 249 1 

Total available-for-sale securities

 

 

108,308

 

 

 

1,701

 

 

 

-

 

 

 

-

 

 

 

108,308

 

 

 

1,701

 

Total available-for-sale securities249 1 97,918 2,113 98,167 2,114 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Held-to-maturity    

U.S. Agency residential mortgage-backed

securities

 

 

1,164

 

 

 

97

 

 

 

-

 

 

 

-

 

 

 

1,164

 

 

 

97

 

U.S. Agency residential mortgage-backed securities11,261 287 898 117 12,159 404 

Total investment securities

 

$

109,472

 

 

$

1,798

 

 

$

-

 

 

$

-

 

 

$

109,472

 

 

$

1,798

 

Total investment securities$11,510 $288 $98,816 $2,230 $110,326 $2,518 

16
Table of Contents,
Management has evaluated the above securities and does not believe that any individual unrealized loss as of June 30, 2022, represents an other-than-temporary impairment (“OTTI”).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. Management believes there is a high probability of collecting all contractual amounts due, because the majority of the securities in the portfolio are backed by government agencies or government sponsored enterprises. However, a recovery in value may not occur for some time, if at all, and may be delayed for greater than the one year time horizon or perhaps even until maturity.

Based on management's analysis no allowance for credit losses was required on these securities.

Note 4 - Loans and Allowance for LoanCredit Losses

During the quarter ended June 30, 2022 $80.12023, $88.6 million in CCBX loans were transferred to loans held for sale, with $20.1$80.0 million in loans sold. A portion of these loans were sold at par during the quarter endedand a portion were sold with a gain on sale of $23,000. As of June 30, 2022; $60.02023 $35.9 million remainsin residential real estate secured lines of credit loans remain in loans held for sale as of June 30, 2022.  Previouslysale. At December 31, 2022, there were no loans held for sale.
The loans heldCompany adopted the CECL methodology for salemeasuring credit losses as of January 1, 2023. All disclosures as of and for the three and six months ended June 30, 2023 are residential real estate secured linespresented 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 credit.

Contents,

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

 

 

June 30,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

(dollars in thousands; unaudited)

 

Commercial and industrial loans

 

$

401,964

 

 

$

419,060

 

Real estate loans:

 

 

 

 

 

 

 

 

Construction, land, and land development

 

 

225,512

 

 

 

183,594

 

Residential real estate

 

 

326,661

 

 

 

204,389

 

Commercial real estate

 

 

956,320

 

 

 

835,587

 

Consumer and other loans

 

 

430,083

 

 

 

108,871

 

Gross loans receivable

 

 

2,340,540

 

 

 

1,751,501

 

Net deferred origination fees and premiums

 

 

(6,186

)

 

 

(8,766

)

Loans receivable

 

$

2,334,354

 

 

$

1,742,735

 

June 30,
2023
(dollars in thousands; unaudited)
Community Bank
Commercial and industrial loans$155,078 
Real estate loans:
Construction, land and land development loans186,706 
Residential real estate loans211,966 
Commercial real estate loans1,164,088 
Consumer and other loans:
Other consumer and other loans1,457 
Gross Community Bank loans receivable1,719,295 
CCBX
Commercial and industrial loans:
Capital call lines$138,428 
All other commercial & industrial loans60,323 
Real estate loans:
Residential real estate loans251,213 
Consumer and other loans:
Credit cards379,642 
Other consumer and other loans465,360 
Gross CCBX loans receivable1,294,966 
Total gross loans receivable3,014,261 
Net deferred origination fees and premiums(6,708)
Loans receivable$3,007,553 

Included

December 31,
2022
Consolidated(dollars in thousands; unaudited)
Commercial and industrial loans$312,628 
Real estate loans:
Construction, land, and land 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 commercialthe preceding table of loans receivable, was $20.8 million and industrial loans are PPP loans of $16.4$17.0 million at June 30, 20222023 and $111.8 million at December 31, 2021.  PPP loans are 100% guaranteed by2022, respectively, and was included in accrued interest receivable on the Small Business Administration (“SBA”).  PPP loans had net deferred origination fees of $396,000 as of June 30, 2022, and $3.6 million as of December 31, 2021.   Also includedCompany's consolidated balance sheets.
Included in commercial and industrial loans as of June 30, 20222023 and December 31, 2021,2022, is $224.9$138.4 million and $202.9$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.

IncludedAlso included in consumercommercial and otherindustrial loans are overdrafts

18
Table of $2.7 million and $1.3Contents,
Paycheck Protection Program (“PPP”) loans of $3.6 million at June 30, 20222023 and $4.7 million at December 31, 2022. PPP loans are 100% guaranteed by the Small Business Administration (“SBA”).
Consumer and other loans includes overdrafts of $2.3 million and $2.7 million at June 30, 2023 and December 31, 2021,2022, respectively.

Community bank overdrafts were $13,000 and $94,000 at June 30, 2023 and December 31, 2022, respectively and CCBX overdrafts were $2.2 million and $2.6 million at June 30, 2023 and December 31, 2022.

The Company has pledged loans totaling $195.6$901.9 million and $183.5$220.1 million at June 30, 20222023 and December 31, 2021,2022, respectively, for borrowing lines at the FHLB and FRB.

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

The balance of SBA and USDA loans and participations sold and serviced for others totaled $16.6$9.4 million and $19.3$14.3 million at June 30, 20222023 and December 31, 2021,2022, respectively.

The gross balance of Main Street Lending Program (“MSLP”) loans participated and servicedincluding participations to others, totaled $58.0 million and $56.3 million at June 30, 20222023 and December 31, 2021, respectively,2022, with $3.1 million and $4.8 million in MSLP loans on the balance sheet and included in commercial and industrial loans at June 30, 2022,2023, and December 31, 2021, respectively.  

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 $10.5$9.3 million and $12.8$9.6 million as of June 30, 20222023 and December 31, 2021,2022, respectively. Unamortized premiums on these loans totaled $181,000$162,000 and $223,000$167,000 as of June 30, 20222023 and December 31, 2021,2022, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $24.2$58.8 million and $27.9$63.9 million as of June 30, 20222023 and December 31, 2021,2022, 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 $204.8$144.9 million as of June 30, 20222023 and $59.7$157.4 million as of December 31, 2021.  The Company recorded the small dollar consumer and business loans.2022. As of June 30, 2022, $186.72023, $134.2 million is included in consumer and other loans and $18.1$10.8 million is included in commercial and industrial loans, compared to $59.4$146.1 million in consumer and other loans and $281,000$11.3 million in commercial and industrial loans as of December 31, 2021.

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 of businesses located generally in the Company’s primary market area and capital calls on venture and investment funds. Also included in commercial and industrial loans are $18.1$60.3 million in unsecured CCBX partner loans. Loan types include PPP loans, revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. Also included in commercial and industrial loans are loans to other financial institutions.  Additionally, the Company issues letters of credit on behalf of its customers. 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.

For the three months ended

As of June 30, 2022, $224.92023, $138.4 million in outstanding CCBX capital call lines are included in commercial and industrial loans compared to $202.9$146.0 million at December 31, 2021.2022. 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 – The Company originates loans for the construction of 1-4 family, multifamily, and Commercial Real Estate (“CRE”) properties in the Company’s market area. Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete
19
Table of Contents,
and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. The Company occasionally originates land loans for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower’s ability to pay and the inability of the Company to recover its investment due to a material decline in the fair value of the underlying collateral.

Residential real estate loans – Residential real estate includes various types of loans for which the Company holds real property as collateral. Included in this segment are first and second lien single family loans, whichoccasionally purchased by the Company occasionally purchases to diversify its loan portfolio, and rental portfolios secured by one-to-four family homes. The primary risks of residential real estate loans include the borrower’s inability to pay, material decreases in the value of the collateral, and significant increases in interest rates which may make the loan unprofitable.

For the three months ended

As of June 30, 2022, $133.12023, $251.2 million in loans originated through CCBX loanspartners are included in residential real estate loans, compared to $36.9$244.6 million at December 31, 2021.

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

Consumer and other loans – 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 also includes overdrafts. Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying collateral, if any.

For the three months ended

As of June 30, 2022, $428.22023, $845.0 million in CCBX loans are included in consumer and other loans compared to $106.8$607.0 million at December 31, 2021.       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; unaudited)

 

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, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Commercial and industrial loans

 

$

1,196

 

 

$

108

 

 

$

1,304

 

 

$

400,660

 

 

$

401,964

 

 

$

10

 

Commercial and industrial
loans		$97 $— $97 $154,981 $155,078 $— 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

Construction, land and land development

 

 

-

 

 

 

67

 

 

 

67

 

 

 

225,445

 

 

 

225,512

 

 

 

-

 

Construction, land and
land development
— 66 66 186,640 186,706 — 

Residential real estate

 

 

431

 

 

 

176

 

 

 

607

 

 

 

326,054

 

 

 

326,661

 

 

 

123

 

Residential real estate— 186 186 211,780 211,966 — 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

956,320

 

 

 

956,320

 

 

 

-

 

Commercial real estate— 7,142 7,142 1,156,946 1,164,088 — 

Consumer and other loans

 

 

18,863

 

 

 

5,447

 

 

 

24,310

 

 

 

405,773

 

 

 

430,083

 

 

 

5,447

 

Consumer and other loans32 — 32 1,425 1,457 — 

 

$

20,490

 

 

$

5,798

 

 

$

26,288

 

 

$

2,314,252

 

 

$

2,340,540

 

 

$

5,580

 

Total community bankTotal community bank$129 $7,394 $7,523 $1,711,772 $1,719,295 $— 
CCBXCCBX
Commercial and industrial loans:Commercial and industrial loans:
Capital call linesCapital call lines$— $— $— $138,428 $138,428 $— 
All other commercial &
industrial loans
All other commercial &
industrial loans
1,575 808 2,383 57,940 60,323 808 
Real estate loans:Real estate loans:
Residential real
estate loans		Residential real
estate loans		2,378 1,722 4,100 $247,113 $251,213 1,722 
Consumer and other loans:Consumer and other loans:
Credit cardsCredit cards17,572 18,306 35,878 $343,764 $379,642 18,306 
Other consumer and
other loans		Other consumer and
other loans		21,656 5,492 27,148 438,212 465,360 5,492 
Total CCBXTotal CCBX$43,181 $26,328 $69,509 $1,225,457 $1,294,966 $26,328 
Total community bank
and CCBX		Total community bank
and CCBX		$43,310 $33,722 $77,032 $2,937,229 3,014,261 $26,328 

Less net deferred origination fees and premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,186

)

 

 

 

 

Less net deferred
origination fees and
premiums
(6,708)

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,334,354

 

 

 

 

 

Loans receivable$3,007,553 

 

 

30-89

Days Past

Due

 

 

90 Days

or More

Past Due

 

 

Total

Past Due

 

 

Current

 

 

Total

Loans

 

 

Recorded

Investment

90 Days or

More Past

Due and

Still

Accruing

 

 

 

(dollars in thousands; unaudited)

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

259

 

 

$

38

 

 

$

297

 

 

$

418,763

 

 

$

419,060

 

 

$

-

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

-

 

 

 

-

 

 

 

-

 

 

 

183,594

 

 

 

183,594

 

 

 

-

 

Residential real estate

 

 

809

 

 

 

94

 

 

 

903

 

 

 

203,486

 

 

 

204,389

 

 

 

39

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

835,587

 

 

 

835,587

 

 

 

-

 

Consumer and other loans

 

 

3,901

 

 

 

1,467

 

 

 

5,368

 

 

 

103,503

 

 

 

108,871

 

 

 

1,467

 

 

 

$

4,969

 

 

$

1,599

 

 

$

6,568

 

 

$

1,744,933

 

 

 

1,751,501

 

 

$

1,506

 

Less net deferred origination fees and premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,766

)

 

 

 

 

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,742,735

 

 

 

 

 

21

Table of Contents,
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 $5.8$26.3 million in loans past due 90 days or more and still accruing interest as of June 30, 2022,2023, and $1.5$26.1 million as of December 31, 2021.   The increase2022. This is attributed to installment/closed-end, and revolving/open-end consumer loans originated bythrough CCBX lending partners which continue to accrue interest until 120 andup to 180 days past due. As of June 30, 2023 and December 31, 2022, $25.2 million and $25.5 million, respectively, of loans past due respectively.


The following table is a summary of information pertaining to impaired loans as of the period indicated.  Loans originated90 days or more are covered by credit enhancements provided by our 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)

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

121

 

 

$

-

 

 

$

111

 

 

$

111

 

 

$

84

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

68

 

 

 

67

 

 

 

-

 

 

 

67

 

 

 

-

 

Residential real estate

 

 

68

 

 

 

53

 

 

 

-

 

 

 

53

 

 

 

-

 

Total

 

$

257

 

 

$

120

 

 

$

111

 

 

$

231

 

 

$

84

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

173

 

 

$

-

 

 

$

166

 

 

$

166

 

 

$

132

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

69

 

 

 

55

 

 

 

-

 

 

 

55

 

 

 

-

 

Total

 

$

242

 

 

$

55

 

 

$

166

 

 

$

221

 

 

$

132

 

The following tables summarizethat protect 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, 2022 and 2021:

Bank against losses.

 

 

Three Months Ended

 

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized

 

 

 

(dollars in thousands; unaudited)

 

Commercial and industrial loans

 

$

120

 

 

$

-

 

 

$

485

 

 

$

-

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

13

 

 

 

-

 

 

 

-

 

 

 

-

 

Residential real estate

 

 

54

 

 

 

-

 

 

 

170

 

 

 

-

 

Total

 

$

187

 

 

$

-

 

 

$

655

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended

 

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized

 

 

 

(dollars in thousands; unaudited)

 

Commercial and industrial loans

 

$

136

 

 

$

-

 

 

$

503

 

 

$

-

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

9

 

 

 

-

 

 

 

-

 

 

 

-

 

Residential real estate

 

 

54

 

 

 

-

 

 

 

171

 

 

 

-

 

Total

 

$

199

 

 

$

-

 

 

$

674

 

 

$

-

 

The Company grants restructurings 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, 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.


NaN loans were restructured in the three and six months ended June 30, 2022 and 2021 that qualified as TDRs. The Company has 0 commitments to loan additional funds to borrowers whose loans were classified as TDRs at June 30, 2022, as there were 0 outstanding TDRs at June 30, 2022.

Generally, the accrual of interest on community bank loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due or when they are 90 days past due as to either principal or interest, unless they are well secured and in the process of collection.  Installment/closed-end, and revolving/open-end consumer loans originated bythrough 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 probable incurredexpected losses. Any principalFor installment/closed-end and interestrevolving/open-end consumer loans originated through CCBX lending partners with balances outstanding on revolving/open-end loans at greater thanbeyond 120 days and 180 days past due, respectively, principal and capitalized interest outstanding is charged off against the allowance.  Anyallowance and accrued interest outstanding on installment/closed-end loans at 120 days past due is reversed against interest income. These consumer loans are reported as nonperforming/substandard, 90 daydays 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,

 

 

2022

 

 

2021

 

June 30,December 31,

 

(dollars in thousands; unaudited)

 

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

Commercial and industrial loans

 

$

111

 

 

$

166

 

Commercial and industrial loans$5 $5 $113 

Real estate loans:

 

 

 

 

 

 

 

 

Real estate loans:

Construction, land and land development

 

 

67

 

 

 

-

 

Construction, land and land development66 66 66 

Residential real estate

 

 

53

 

 

 

55

 

Residential real estate186 186 — 
Commercial real estateCommercial real estate7,142 7,142 6,901 

Total nonaccrual loans

 

$

231

 

 

$

221

 

Total nonaccrual loans$7,399 $7,399 $7,080 

In some circumstances, the Company modifies loans in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. In order for a modified loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.
No loans were modified for borrowers experiencing financial difficulty in the three and six months ended June 30, 2023 and 2022.
Credit Quality and Credit Risk

Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Company’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. The Company establishes loan grades for loans at the origination of the loan. Changes to community bank loan grades are considered at the time new information about the performance of a loan becomes available, including the receipt of updated financial information from the borrower and after loan reviews. For consumer loans, the Bank follows the Federal Financial Institutions Examination Council’s Uniform Retail Credit Classification and Account Management Policy for subsequent classification in the event of payment delinquencies or default. Typically, an individual loan grade will not be changed from the prior period unless there is a specific indication of credit deterioration or improvement. Credit deterioration is evidenced by delinquency, direct communications with the borrower or other borrower information that becomes known to management. Credit improvements are evidenced by known facts regarding the borrower or the collateral property. The Company classifies some loans as Watch or Other Loans Especially Mentioned (“OLEM”). Loans classified as Watch are performing assets but have elements of risk that require more monitoring than other performing loans and are reported in the OLEM column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Revolving (open-ended loans, such as credit cards) and installment (closed end) consumer loans originated bythrough 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 March 31, 2023 and December 31, 2022, based on the most recent analysis performed, the risk category of community bank loans by year of origination is as follows:
Term Loans Amortized Cost Basis by Origination Year
20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted To TermTotal
(dollars in thousands; unaudited)
As of June 30, 2023
Commercial and industrial loans
Risk rating
Pass$11,366 $59,094 $16,891 $11,560 $14,313 $1,956 $35,414 $1,282 $151,876 
Other Loan Especially Mentioned— — — 122 — — 3,075 — 3,197 
Substandard— — — — — 5 — — 5 
Doubtful— — — — — — — — — 
Total commercial and industrial
   loans - All other commercial and
   industrial loans		$11,366 $59,094 $16,891 $11,682 $14,313 $1,961 $38,489 $1,282 $155,078 
Current period gross write-offs$— $— $— $— $— $46 $— $— $46 
Real estate loans -
Construction, land and land
development loans
Risk rating
Pass$33,017 $64,143 $77,446 $3,329 $929 $1,640 $63 $— $180,567 
Other Loan Especially Mentioned— — — — — — — — — 
Substandard— — 3,148 2,325 — 66 600 — 6,139 
Doubtful— — — — — — — — — 
Total real estate loans -
   Construction, land and land
   development loans		$33,017 $64,143 $80,594 $5,654 $929 $1,706 $663 $— $186,706 
Current period gross write-offs$— $— $— $— $— $— $— $— $— 
24
Table of Contents,
Term Loans Amortized Cost Basis by Origination Year
20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted To TermTotal
(dollars in thousands; unaudited)
Real estate loans -
Residential real estate loans
Risk rating
Pass$13,210 $44,823 $39,501 $30,636 $32,348 $25,474 $23,673 $— $209,665 
Other Loan Especially Mentioned— — 2,033 38 — 44 — — 2,115 
Substandard— — — — — — 186 — 186 
Doubtful— — — — — — — — — 
Total real estate loans -
   Residential real estate loans		$13,210 $44,823 $41,534 $30,674 $32,348 $25,518 $23,859 $— $211,966 
Current period gross write-offs$— $— $— $— $— $— $— $— $— 
Real estate loans -
Commercial real estate loans
Risk rating
Pass$115,932 $286,253 $216,672 $147,000 $128,302 $238,734 $7,669 $1,749 $1,142,311 
Other Loan Especially Mentioned— 3,288 2,212 178 511 7,528 87 — 13,804 
Substandard— — — 923 6,901 — 149 — 7,973 
Doubtful— — — — — — — — — 
Total real estate loans -
   Commercial real estate loans		$115,932 $289,541 $218,884 $148,101 $135,714 $246,262 $7,905 $1,749 $1,164,088 
Current period gross write-offs$— $— $— $— $— $— $— $— $— 
25
Table of Contents,
Term Loans Amortized Cost Basis by Origination Year
20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted To TermTotal
(dollars in thousands; unaudited)
Consumer and other loans -
Other consumer and other loans
Risk rating
Pass$20 $299 $9 $697 $54 $229 $149 $— $1,457 
Other Loan Especially Mentioned— — — — — — — — — 
Substandard— — — — — — — — — 
Doubtful— — — — — — — — — 
Total consumer and other
   loans - Other consumer and
   other loans		$20 $299 $9 $697 $54 $229 $149 $— $1,457 
Current period gross write-offs$13 $— $— $— $— $— $— $— $13 
Total community bank loans receivable
Risk rating
Pass$173,545 $454,612 $350,519 $193,222 $175,946 $268,033 $66,968 $3,031 $1,685,876 
Other Loan Especially Mentioned— 3,288 4,245 338 511 7,572 3,162 — 19,116 
Substandard— — 3,148 3,248 6,901 71 935 — 14,303 
Doubtful— — — — — — — — — 
Total community bank loans$173,545 $457,900 $357,912 $196,808 $183,358 $275,676 $71,065 $3,031 $1,719,295 
Current period gross write-offs$13 $— $— $— $— $46 $— $— $59 
26
Table of Contents,
The Company considers the performance of the CCBX loan portfolio and its impact on the allowance for credit losses. For CCBX loans, the Company also evaluates credit quality based on the aging status of the loan, which was previously presented, and by payment activity. The following table presents the loans in CCBX based on payment activity:
Term Loans Amortized Cost Basis by Origination Year
20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted To TermTotal
(dollars in thousands; unaudited)
As of June 30, 2023
Commercial and industrial loans -
Capital call lines
Payment performance
Performing$— $— $— $— $— $— $138,428 $— $138,428 
Nonperforming— — — — — — — — — 
Total commercial and industrial
   loans - Capital call lines		$— $— $— $— $— $— $138,428 $— $138,428 
Current period gross write-offs$— $— $— $— $— $— $— $— $— 
Commercial and industrial loans -
All other commercial and industrial loans
Payment performance
Performing$43,964 $13,406 $68 $32 $— $— $2,045 $— $59,515 
Nonperforming405 312 — — — — 91 — 808 
Total commercial and industrial
   loans - All other commercial and
   industrial loans		$44,369 $13,718 $68 $32 $— $— $2,136 $— $60,323 
Current period gross write-offs$124 $1,005 $12 $— $— $— $— $— $1,141 
Real estate loans -
Residential real estate loans
Payment performance
Performing$— $— $— $— $— $— $158,277 $91,214 $249,491 
Nonperforming— — — — — — 1,722 — 1,722 
Total real estate loans -
   Residential real estate loans		$— $— $— $— $— $— $159,999 $91,214 $251,213 
Current period gross write-offs$— $— $— $— $— $— $1,682 $— $1,682 
27
Table of Contents,
Term Loans Amortized Cost Basis by Origination Year
20232022202120202019PriorRevolving Loans Amortized Cost BasisRevolving Loans Converted To TermTotal
(dollars in thousands; unaudited)
Consumer and other loans -
Credit cards
Payment performance
Performing$— $— $— $— $— $— $361,251 $85 $361,336 
Nonperforming— — — — — — 18,306 — 18,306 
Total consumer and other
   loans - Credit cards		$— $— $— $— $— $— $379,557 $85 $379,642 
Current period gross write-offs$— $— $— $— $— $— $23,391 $— $23,391 
Consumer and other loans -
Other consumer and other loans
Payment performance
Performing$256,287 $161,341 $24,233 $202 $755 $512 $16,538 $— $459,868 
Nonperforming657 2,560 706 15 19 17 1,518 — 5,492 
Total consumer and other
   loans - Other consumer and
   other loans		$256,944 $163,901 $24,939 $217 $774 $529 $18,056 $— $465,360 
Current period gross write-offs$1,888 $26,708 $7,673 $49 $182 $121 $3,572 $— $40,193 
Total CCBX loans receivable
Payment performance
Performing$300,251 $174,747 $24,301 $234 $755 $512 $676,539 $91,299 $1,268,638 
Nonperforming1,062 2,872 706 15 19 17 21,637 — 26,328 
Total CCBX loans$301,313 $177,619 $25,007 $249 $774 $529 $698,176 $91,299 $1,294,966 
Current period gross write-offs$2,012 $27,713 $7,685 $49 $182 $121 $28,645 $— $66,407 
28
Table of Contents,
Loans by credit quality risk rating are as follows as of the periods indicated:

 

Pass

 

 

Other Loans

Especially

Mentioned

 

 

Sub-

Standard

 

 

Doubtful

 

 

Total

 

 

(dollars in thousands; unaudited)

 

PassOther Loans
Especially
Mentioned		Sub-
Standard		DoubtfulTotal

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands; unaudited)
December 31, 2022December 31, 2022

Commercial and industrial loans

 

$

391,345

 

 

$

10,437

 

 

$

182

 

 

$

-

 

 

$

401,964

 

Commercial and industrial loans$304,840 $7,219 $569 $— $312,628 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

Construction, land, and land development

 

 

225,445

 

 

 

-

 

 

 

67

 

 

 

-

 

 

 

225,512

 

Construction, land, and land development206,304 7,685 66 — 214,055 

Residential real estate

 

 

326,376

 

 

 

109

 

 

 

176

 

 

 

-

 

 

 

326,661

 

Residential real estate448,185 96 876 — 449,157 

Commercial real estate

 

 

939,988

 

 

 

9,431

 

 

 

6,901

 

 

 

-

 

 

 

956,320

 

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

Consumer and other loans

 

 

424,636

 

 

 

-

 

 

 

5,447

 

 

 

-

 

 

 

430,083

 

Consumer and other loans583,956 — 24,815 — 608,771 

 

$

2,307,790

 

 

$

19,977

 

 

$

12,773

 

 

$

-

 

 

 

2,340,540

 

$2,573,935 $26,201 $33,227 $— 2,633,363 

Less net deferred origination fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,186

)

Less net deferred origination fees(6,107)

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,334,354

 

Loans receivable$2,627,256 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

416,642

 

 

$

2,180

 

 

$

238

 

 

$

-

 

 

$

419,060

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land, and land development

 

 

183,594

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

183,594

 

Residential real estate

 

 

204,173

 

 

 

122

 

 

 

94

 

 

 

-

 

 

 

204,389

 

Commercial real estate

 

 

824,676

 

 

 

10,911

 

 

 

-

 

 

 

-

 

 

 

835,587

 

Consumer and other loans

 

 

107,404

 

 

 

-

 

 

 

1,467

 

 

 

-

 

 

 

108,871

 

 

$

1,736,489

 

 

$

13,213

 

 

$

1,799

 

 

$

-

 

 

 

1,751,501

 

Less net deferred origination fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(8,766

)

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,742,735

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for LoanCredit Losses

The Company’s ALLL covers estimated credit losses on individually evaluated loans ("ACL")

On January 1, 2023, the Company adopted ASU 2016-13, which replaces the incurred loss methodology with an expected loss methodology that are determinedis referred to be impaired as well as estimated probable losses inherent inCECL. 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 remainder2023 opening allowance balance of the loan portfolio. The ALLL for the community bank is prepared using the information provided by the Company’s credit review process and our historical loss data, together with data from peer institutions and economic information gathered from published sources.

The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated from the community bank’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.

$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 loancredit losses. Estimated loss rates for CCBX loans vary by partner, and might be based on actual partner experience, realized losses or losses for comparable products or industry averages. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurredreimbursing most losses. In accordance with accounting guidance, we estimate and record a provision for probableexpected losses for these CCBX loans and reclassified negative deposit overdrafts.accounts. When the provision for loanCCBX credit losses isand provision for unfunded commitments are recorded, a receivablecredit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). IncurredExpected losses are recorded in the allowance for loan losses, and as thecredit losses. The credit enhancement recoveriesasset is reduced when credit enhancement payments are received from the CCBX partner or taken from the receivable is relieved.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 a CCBX lendingthe partner is unable to fulfill their contractualcontracted obligations under the credit enhancement, then the Bank wouldcould be exposed to additionalthe 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 approximately 10% of a $180.5 million loan losses as a resultportfolio that are without credit enhancement reimbursements. At June 30, 2023, 10% of this counterparty riskportfolio represented $18.0 million in loans. The partner is responsible for reimbursing credit losses on approximately 90% of this portfolio and would have to absorb any loanfor fraud losses associated withon 100% of this portfolio. The Company earns 100% of the CCBX partner that cannot fulfill its contractual obligations.

interest income on the aforementioned $18.0 million of loans.

29

Table of Contents,
The following tables summarize the allocation of the ALLL,ACL, as well as the activity in the ALLLACL attributed to various segments in the loan portfolio, as of and for the three and six months ended June 30, 20222023 and 2021:

 

 

Commercial

and

Industrial

 

 

Construction,

Land, and

Land

Development

 

 

Residential

Real

Estate

 

 

Commercial

Real Estate

 

 

Consumer

and Other

 

 

Unallocated

 

 

Total

 

 

 

(dollars in thousands; unaudited)

 

Three Months Ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL balance, March 31, 2022

 

$

3,514

 

 

$

7,592

 

 

$

5,758

 

 

$

5,317

 

 

$

15,114

 

 

$

1,475

 

 

$

38,770

 

Provision for loan losses or (recapture)

 

 

550

 

 

 

407

 

 

 

1,413

 

 

 

(577

)

 

 

12,204

 

 

 

97

 

 

 

14,094

 

 

 

 

4,064

 

 

 

7,999

 

 

 

7,171

 

 

 

4,740

 

 

 

27,318

 

 

 

1,572

 

 

 

52,864

 

Loans charged-off

 

 

(33

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,509

)

 

 

-

 

 

 

(3,542

)

Recoveries of loans previously charged-off

 

 

35

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

36

 

Net (charge-offs) recoveries

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3,508

)

 

 

-

 

 

 

(3,506

)

ALLL balance, June 30, 2022

 

$

4,066

 

 

$

7,999

 

 

$

7,171

 

 

$

4,740

 

 

$

23,810

 

 

$

1,572

 

 

$

49,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL balance, December 31, 2021

 

$

3,221

 

 

$

6,984

 

 

$

4,598

 

 

$

6,590

 

 

$

7,092

 

 

$

147

 

 

$

28,632

 

Provision for loan losses or (recapture)

 

 

846

 

 

 

1,015

 

 

 

2,573

 

 

 

(1,850

)

 

 

23,027

 

 

 

1,425

 

 

 

27,036

 

 

 

 

4,067

 

 

 

7,999

 

 

 

7,171

 

 

 

4,740

 

 

 

30,119

 

 

 

1,572

 

 

 

55,668

 

Loans charged-off

 

 

(38

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,312

)

 

 

-

 

 

 

(6,350

)

Recoveries of loans previously charged-off

 

 

37

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3

 

 

 

-

 

 

 

40

 

Net (charge-offs) recoveries

 

 

(1

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(6,309

)

 

 

-

 

 

 

(6,310

)

ALLL balance, June 30, 2022

 

$

4,066

 

 

$

7,999

 

 

$

7,171

 

 

$

4,740

 

 

$

23,810

 

 

$

1,572

 

 

$

49,358

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL amounts allocated to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

84

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

84

 

Collectively evaluated for impairment

 

 

3,982

 

 

 

7,999

 

 

 

7,171

 

 

 

4,740

 

 

 

23,810

 

 

 

1,572

 

 

 

49,274

 

ALLL balance, June 30, 2022

 

$

4,066

 

 

$

7,999

 

 

$

7,171

 

 

$

4,740

 

 

$

23,810

 

 

$

1,572

 

 

$

49,358

 

Loans individually evaluated for impairment

 

$

111

 

 

$

67

 

 

$

53

 

 

$

-

 

 

$

-

 

 

 

 

 

 

$

231

 

Loans collectively evaluated for impairment

 

 

401,853

 

 

 

225,445

 

 

 

326,608

 

 

 

956,320

 

 

 

430,083

 

 

 

 

 

 

 

2,340,309

 

Loan balance, June 30, 2022

 

$

401,964

 

 

$

225,512

 

 

$

326,661

 

 

$

956,320

 

 

$

430,083

 

 

 

 

 

 

$

2,340,540

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Three Months Ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, March 31, 2021

 

$

3,387

 

 

$

3,982

 

 

$

3,171

 

 

$

7,953

 

 

$

108

 

 

$

1,009

 

 

$

19,610

 

Provision for loan losses or (recapture)

 

 

(68

)

 

 

538

 

 

 

131

 

 

 

104

 

 

 

(21

)

 

 

(323

)

 

 

361

 

 

 

 

3,319

 

 

 

4,520

 

 

 

3,302

 

 

 

8,057

 

 

 

87

 

 

 

686

 

 

 

19,971

 

Loans charged-off

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(10

)

 

 

-

 

 

 

(12

)

Recoveries of loans previously charged-off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

7

 

 

 

-

 

 

 

7

 

Net (charge-offs) recoveries

 

 

(2

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3

)

 

 

-

 

 

 

(5

)

Balance, June 30, 2021

 

$

3,317

 

 

$

4,520

 

 

$

3,302

 

 

$

8,057

 

 

$

84

 

 

$

686

 

 

$

19,966

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six Months Ended June 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2020

 

$

3,353

 

 

$

3,545

 

 

$

3,410

 

 

$

7,810

 

 

$

127

 

 

$

1,017

 

 

$

19,262

 

Provision for loan losses or (recapture)

 

 

(25

)

 

 

975

 

 

 

(108

)

 

 

247

 

 

 

(40

)

 

 

(331

)

 

 

718

 

 

 

 

3,328

 

 

 

4,520

 

 

 

3,302

 

 

 

8,057

 

 

 

87

 

 

 

686

 

 

 

19,980

 

Loans charged-off

 

 

(16

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(14

)

 

 

-

 

 

 

(30

)

Recoveries of loans previously charged-off

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

11

 

 

 

-

 

 

 

16

 

Net (charge-offs) recoveries

 

 

(11

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(3

)

 

 

-

 

 

 

(14

)

Balance, June 30, 2021

 

$

3,317

 

 

$

4,520

 

 

$

3,302

 

 

$

8,057

 

 

$

84

 

 

$

686

 

 

$

19,966

 

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 six months ended June 30, 2022:

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 June 30, 2023
ACL balance, March 31, 2023$8,651 $5,744 $6,986 $7,506 $60,236 $— $89,123 
Provision for credit losses or (recapture)1,311 795 2,808 (554)48,238 — 52,598 
9,962 6,539 9,794 6,952 108,474 — 141,721 
Loans charged-off(411)— (945)— (30,943)— (32,299)
Recoveries of loans previously charged-off— — — — 1,340 — 1,340 
Net charge-offs(411)— (945)— (29,603)— (30,959)
ACL balance, June 30, 2023$9,551 $6,539 $8,849 $6,952 $78,871 $— $110,762 
       
Six Months Ended June 30, 2023       
ALLL balance, December 31, 2022$4,831 $7,425 $4,142 $5,470 $50,996 $1,165 $74,029 
Impact of adopting CECL (ASC 326)1,428 (1,589)1,623 1,240 2,315 (1,165)$3,852 
Provision for credit losses or (recapture)4,476 703 4,766 242 85,955 96,142 
 10,735 6,539 10,531 6,952 139,266 — 174,023 
Loans charged-off(1,187)— (1,682)— (63,597)— (66,466)
Recoveries of loans previously charged-off3 — — — 3,202 — 3,205 
Net charge-offs(1,184)— (1,682)— (60,395)— (63,261)
ACL balance, June 30, 2023$9,551 $6,539 $8,849 $6,952 $78,871 $— $110,762 
       
Three Months Ended June 30, 2022       
ALLL balance, March 31, 2022$3,514 $7,592 $5,758 $5,317 $15,114 $1,475 $38,770 
Provision for loan losses or (recapture)550 407 1,413 (577)12,204 97 14,094 
 4,064 7,999 7,171 4,740 27,318 1,572 52,864 
Loans charged-off(33)— — — (3,509)— (3,542)
Recoveries of loans previously charged-off35 — — — 1 — 36 
Net (charge-offs) recoveries2 — — — (3,508)— (3,506)
Balance, June 30, 2022$4,066 $7,999 $7,171 $4,740 $23,810 $1,572 $49,358 
       
Six Months Ended June 30, 2022       
ALLL Balance, December 31, 2021$3,221 $6,984 $4,598 $6,590 $7,092 $147 $28,632 
Provision for credit losses or (recapture)846 1,015 2,573 (1,850)23,027 1,425 27,036 
4,067 7,999 7,171 4,740 30,119 1,572 55,668 
Loans charged-off(38)— — — (6,312)— (6,350)
Recoveries of loans previously charged-off37 — — — 3 — 40 
Net charge-offs(1)— — — (6,309)— (6,310)
ALLL Balance, June 30, 2022$4,066 $7,999 $7,171 $4,740 $23,810 $1,572 $49,358 

30
Table of Contents,
The following table summarizes the allocation of the ALLLallowance for loan losses attributed to various segments in the loan portfolio as of December 31, 2021.

2022.

 

 

Commercial

and

Industrial

 

 

Construction,

Land, and

Land

Development

 

 

Residential

Real

Estate

 

 

Commercial

Real Estate

 

 

Consumer

and Other

 

 

Unallocated

 

 

Total

 

 

 

(dollars in thousands; unaudited)

 

As of December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL amounts allocated to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

132

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

132

 

Collectively evaluated for impairment

 

 

3,089

 

 

 

6,984

 

 

 

4,598

 

 

 

6,590

 

 

 

7,092

 

 

 

147

 

 

 

28,500

 

ALLL balance, December 31, 2021

 

$

3,221

 

 

$

6,984

 

 

$

4,598

 

 

$

6,590

 

 

$

7,092

 

 

$

147

 

 

$

28,632

 

Loans individually evaluated for impairment

 

$

166

 

 

$

-

 

 

$

55

 

 

$

-

 

 

$

-

 

 

 

 

 

 

$

221

 

Loans collectively evaluated for impairment

 

 

418,894

 

 

 

183,594

 

 

 

204,334

 

 

 

835,587

 

 

 

108,871

 

 

 

 

 

 

 

1,751,280

 

Loan balance, December 31, 2021

 

$

419,060

 

 

$

183,594

 

 

$

204,389

 

 

$

835,587

 

 

$

108,871

 

 

 

 

 

 

$

1,751,501

 

 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)
June 30, 2023
Commercial and industrial loans$— $5 $5 $— 
Real estate loans:
Construction, land and land development66 — 66 — 
Residential real estate186 — 186 — 
Commercial real estate7,142 — 7,142 — 
Total$7,394 $5 $7,399 $— 

The following table is a summary of information pertaining to impaired loans as of the period indicated. Loans originated through CCBX partners are reported using pool accounting and are not subject to impairment analysis, therefore CCBX loans are not included in this table.
Unpaid
Contractual
Principal
Balance		Recorded
Investment
With No
Allowance		Recorded
Investment
With
Allowance		Total
Recorded
Investment		Related
Allowance
(dollars in thousands; unaudited)
December 31, 2022
Commercial and industrial loans$124 $— $113 $113 $95 
Real estate loans:
Construction, land and land 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 period indicated:
Three Months EndedSix Months Ended
June 30, 2022June 30, 2022
Average
Recorded
Investment		Interest Income
Recognized		Average
Recorded
Investment		Interest Income
Recognized
(dollars in thousands; unaudited)
Commercial and industrial loans$120 $— $136 $— 
Real estate loans:
Construction, land and land development13 — 9 — 
Residential real estate54 — 54 — 
Total$187 $— $199 $— 
Note 5 - Deposits

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

 

June 30,

 

 

December 31,

 

 

2022

 

 

2021

 

June 30,
2023		December 31,
2022

 

(dollars in thousands; unaudited)

 

(dollars in thousands; unaudited)

Demand, noninterest bearing

 

$

818,052

 

 

$

1,355,908

 

Demand, noninterest bearing$725,592 $775,012 

NOW and money market

 

 

1,660,315

 

 

 

789,709

 

NOW and money market2,323,164 1,804,399 

Savings

 

 

106,464

 

 

 

103,956

 

Savings88,991 107,117 

Total core deposits

 

 

2,584,831

 

 

 

2,249,573

 

Total core deposits3,137,747 2,686,528 

BaaS-brokered deposits

 

 

76,001

 

 

 

70,757

 

Brokered depositsBrokered deposits1 101,546 

Time deposits less than $250,000

 

 

26,676

 

 

 

31,057

 

Time deposits less than $250,00017,437 21,942 

Time deposits $250,000 and over

 

 

9,797

 

 

 

12,400

 

Time deposits $250,000 and over7,387 7,505 

Total deposits

 

$

2,697,305

 

 

$

2,363,787

 

Total deposits$3,162,572 $2,817,521 

The following table presents the maturity distribution of time deposits as of June 30, 2022:

2023:

(dollars in thousands; unaudited)

 

 

 

 

Twelve months

 

$

27,857

 

One to two years

 

 

5,795

 

Two to three years

 

 

1,306

 

Three to four years

 

 

1,322

 

Four to five years

 

 

193

 

 

 

$

36,473

 

(dollars in thousands; unaudited)As of June 30, 2023
Twelve months$20,182 
One to two years2,248 
Two to three years1,499 
Three to four years255 
Four to five years640 
Thereafter— 
$24,824 

Our CCBX partners originate

Included in total deposits is $240.3 million in IntraFi network NOW and thesemoney market sweep accounts as of June 30, 2023, which provides our customers with fully insured deposits were primarily noninterest bearing prior to the recent rate increases by the Federal Open Market Committee (“FOMC”). Manythrough a sweep and exchange of these CCBX deposits became interest bearing during the quarter ended March 31, 2022, and were reclassified to interest bearing deposits from noninterest bearing deposits, when the FOMC raised rates 0.25% in mid-March 2022.   With the additional interest rate increases in the second quarter of 2022 the remaining CCBX deposits that were subject to reclassification were moved from noninterest bearing to interest bearing deposits. This reclassification is because the current rate exceeds the minimum interest rate set in their respective program agreements, as a result of the first and second quarter 2022 Fed Funds rate increases.    We do not currently expect to have any additional CCBX deposits that will be reclassified as a result of any future Fed Funds rate increases that may be implemented.  

with other financial institutions.

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. During the period the Company extended one lease for an additional five year term and added two additional five year options.

The weighted average discount rate as of June 30, 2023 was 3.88%.

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

Operating leases with terms of 12 months or less are not included in ROU assets and operating lease liabilities recorded in the Company’s consolidated balance sheets.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. As of June 30, 2022, the Company had 1 sublease commence during the period.  At June 30, 2022,2023, lease expiration dates ranged from seven8 months to 22.721.7 years, with additional renewal options on certain leases typically ranging from 5 to 10 years. At June 30, 2022,2023, 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 8.39.5 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $284,000 and $642,000, respectively, for the three and six months ended June 30, 2023, and $347,000 and $693,000 respectively, for the three and six months ended June 30, 2022, and $341,000 and $682,000 respectively, for the three and six months ended June 30, 2021.2022. Variable lease components, such as inflation adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at June 30, 2022:

 

 

June 30,

 

(dollars in thousands; unaudited)

 

2022

 

 

 

 

 

 

July 1, 2022 to December 31, 2022

 

$

645

 

2023

 

 

1,272

 

2024

 

 

864

 

2025

 

 

713

 

2026

 

 

719

 

2027 and thereafter

 

 

2,490

 

Total lease payments

 

 

6,703

 

Less:  amounts representing interest

 

 

917

 

Present value of lease liabilities

 

$

5,786

 

2023:

(dollars in thousands; unaudited)June 30,
2023
 July 1 to December 31, 2023$499 
2024986 
2025943 
2026947 
2027895 
2028 and thereafter3,456 
Total lease payments7,726 
Less: amounts representing interest1,313 
Present value of lease liabilities$6,413 

The following table presents the components of total lease expense and operating cash flows for the three and six months ended June 30, 20222023 and 2021:

2022:

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

June 30,

 

 

June 30,

 

June 30,

 

Three Months EndedSix Months Ended

 

2022

 

2021

 

 

2022

 

2021

 

June 30,
2023		June 30,
2022		June 30,
2023		June 30,
2022

 

(dollars in thousands; unaudited)

 

(dollars in thousands; unaudited)

Lease expense:

 

 

 

 

 

 

 

 

 

 

 

 

Lease expense:

Operating lease expense

 

$

320

 

$

321

 

 

$

675

 

$

642

 

Operating lease expense$247 $320 $568 $675 

Variable lease expense

 

 

45

 

 

36

 

 

 

87

 

 

70

 

Variable lease expense52 45 104 87 

Total lease expense (1)

 

$

365

 

$

357

 

 

$

762

 

$

712

 

Total lease expense (1)$299 $365 $672 $762 

Cash paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid:    

Cash paid reducing operating lease liabilities

 

$

362

 

$

353

 

 

$

756

 

$

706

 

Cash paid reducing operating lease liabilities$313 $362 $692 $756 

 

 

 

 

 

 

 

 

 

 

 

 

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

 

The Company entered into a

five-year(1) prepaid capital lease for ATM machines beginning October 1, 2021.  The equipment is recorded as fixed assets onIncluded in net occupancy expense in the Company’s balance sheet and depreciation expense is recognized on a straight-line basis over the termCondensed Consolidated Statements of the lease.  Depreciation expense was $32,000 and $64,000, respectively, for the three and six months ended June 30, 2022 and $33,000 and $66,000, respectively, for the three and six months ended June 30, 2021, with $416,000 remaining asIncome (unaudited).
33
Table of June 30, 2022.  

Contents,

Note 7 - Stock-Based Compensation -

Stock Options and Restricted Stock

The 2018 Coastal Financial Corporation Omnibus Plan (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 the Directors’ Stock Bonus Plan (2006 Plan).for new awards. Existing awards will vest under the terms granted and 0no further awards will be granted under these prior plans. Shares available to be granted under the 2018 plan were 537,328433,297 at June 30, 2022.

2023.

Stock Option Awards

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing 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.

forfeiture.

There were 0no new stock options granted in the three and six months ended June 30, 20222023 and 2021.

2022.

A summary of stock option activity under the 2018 Plan and 2006 Plan during the threesix months ended June 30, 2022:

2023:

Options

 

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term (Years)

 

 

Aggregate

Intrinsic Value

 

 

 

(dollars in thousands, except per share amounts; unaudited)

 

Outstanding at December 31, 2021

 

 

694,519

 

 

$

7.79

 

 

 

4.0

 

 

$

29,744

 

Granted

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Exercised

 

 

(36,275

)

 

$

7.63

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(2,400

)

 

 

11.91

 

 

 

 

 

 

 

 

 

Outstanding at June 30, 2022

 

 

655,844

 

 

$

7.79

 

 

 

3.5

 

 

$

19,894

 

Vested or expected to vest at June 30, 2022

 

 

655,844

 

 

$

7.79

 

 

 

3.5

 

 

$

19,894

 

Exercisable at June 30, 2022

 

 

393,444

 

 

$

6.77

 

 

 

2.5

 

 

$

12,336

 

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(80,104)7.35 $2,337 
Expired—— 
Forfeited—— 
Outstanding at June 30, 2023357,999$9.11 3.9$10,216 
Vested or expected to vest at June 30, 2023357,999$9.11 3.9$10,216 
Exercisable at June 30, 2023172,470$8.68 3.7$4,996 

The total or aggregate intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three and six months ended June 30, 20222023 was $302,000$62,000 and $1.4$2.3 million, respectively. The total or aggregate intrinsic value of options exercised during the three and six months ended June 30, 20212022 was $317,000$302,000 and $674,000,$1.4 million, respectively.

As of June 30, 2022,2023, there was $1.3 million$922,000 of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan. Total unrecognized compensation costs are adjusted for unvested forfeitures. The Company expects to recognize that cost over a remaining weighted-average period of approximately 4.94.1 years. Compensation expense recorded related to stock options was $68,000$60,000 and $188,000$200,000 respectively, for the three and six months ended June 30, 2022,2023 and $68,000 and $188,000 respectively, and $92,000 and $181,000 for the three and six months ended June 30, 2021, respectively.

2022.

Restricted Stock Units

In the first quarter of 2022,2023, the Company granted 53,72173,611 restricted stock units ("RSUs") under the 2018 Plan to employees, which vest ratably over 4 years and 1501,084 restricted stock units which vest ratably over 105 years. In the second quarter of 2022,2023, the Company granted 9,8319,827 restricted stock units under the 2018 Plan to employees which vest ratably over 5 years and 7,000 restricted stock units that vest ratably over 3 years.  Additionally, the Company granted 53,000 performance-based restricted stock units under the 2018 Plan to an employee, that vest on June 1, 2028, the quantity
34
Table of which is dependent upon achievement of specified performance goals.

Contents,

Restricted stock unitsRSUs 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 restricted stock unitsRSUs 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. Restricted stock unitsRSUs are nonparticipating securities.

As of June 30, 2022,2023, there was $9.3$10.7 million of total unrecognized compensation cost related to nonvested restricted stock units.RSUs. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 4.04.2 years. Compensation expense recorded related to restricted stock unitsRSUs was $453,000$688,000 and $827,000$1.5 million respectively, for the three and six months ended June 30, 2022,2023 and $453,000 and $827,000 respectively, and $133,000 and $234,000 for the three and six months ended June 30, 2021, respectively.

2022.

A summary of the Company’s nonvested RSUs at June 30, 20222023 and changes during the threesix month period is presented below:

Nonvested shares

 

Shares

 

 

Weighted-

Average

Grant Date

Fair

Value

 

 

Total or Aggregate

Intrinsic Value

 

 

(dollars in thousands, except per share amounts; unaudited)

 

Nonvested shares at December 31, 2021

 

 

269,844

 

 

$

21.70

 

 

$

7,803

 

Nonvested shares - RSUsNonvested 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, 2022Nonvested shares at December 31, 2022380,151$28.61 $7,187 

Granted

 

 

123,702

 

 

$

39.66

 

 

 

 

 

Granted84,522$42.57 

Forfeited

 

 

(2,486

)

 

$

22.00

 

 

 

 

 

Forfeited(8,535)$38.41 

Vested

 

 

(26,137

)

 

$

19.93

 

 

 

 

 

Vested(46,020)$30.56 

Nonvested shares at June 30, 2022

 

 

364,923

 

 

$

27.92

 

 

$

3,723

 

Nonvested shares at June 30, 2023Nonvested shares at June 30, 2023410,118$31.07 $2,700 

Restricted Stock Awards

Employees

There were 0no new restricted stock awards granted in the three or six months ended June 30, 2022.2023. 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 June 30, 2022,2023, there was $50,000$41,000 of total unrecognized compensation cost related to nonvested restricted stock awards. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 5.64.6 years. Compensation expense recorded related to restricted stock awards was $2,000 and $4,000 respectively, for the three and six months ended June 30, 2022, respectively2023 and $2,000 and $129,000$4,000 respectively, for the three and six months ended June 30, 2021, respectively.

2022.

Director’s Stock Compensation

Under the 2018 Plan, eligible directors are granted stock with a total market value of $35,000,approximately $45,000, and the Board Chair is granted stock with a total market value of $55,000.approximately $75,000. Committee chairs willreceive additional stock in an amount that varies depending upon the nature and frequency of the committee meetings. The audit committee chair receives additional stock with a market value of approximately $10,000, non-financial risk and compensation committee chairs receive additional stock with a market value of $2,500 for each committee chaired.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 will cliff vest one day prior to the next annual meeting date. During the vesting period, the grants are considered participating securities.

There were 10,396 new shares were granted during the three and six months ended June 30, 2022.  

As of June 30, 2022,2023, there was $347,000$433,000 of total unrecognized compensation expense related to director restricted stock awards which the Company expects to recognize over the remaining average vesting period of approximately 0.9 years.11 months. Director compensation expense recorded related to the 2018 Plan totaled $96,000 and $192,000 respectively, for
35
Table of Contents,
the three and six months ended June 30, 2023 and $60,000 and $98,000 respectively, for the three and six months ended June 30, 2022, respectively, and $44,000 and $90,000 for the three and six months ended June 30, 2021, respectively.

2022.

A summary of the Company’s nonvested shares at June 30, 20222023 and changes during the three-monthsix-month period is presented below:

Nonvested shares

 

Shares

 

 

Weighted-

Average

Grant Date

Fair

Value

 

 

Total or Aggregate

Intrinsic Value

 

 

(dollars in thousands, except per share amounts; unaudited)

 

Nonvested shares at December 31, 2021

 

 

10,203

 

 

$

23.78

 

 

$

274

 

Nonvested shares - RSAsNonvested 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, 2022Nonvested shares at December 31, 202213,396$32.94 $195 

Granted

 

 

10,396

 

 

$

37.30

 

 

 

 

 

Granted13,538$35.10 

Forfeited

 

 

0

 

 

$

0

 

 

 

 

 

Forfeited—$— 

Vested

 

 

(7,203

)

 

$

26.27

 

 

 

 

 

Vested(10,896)$36.41 

Nonvested shares at June 30, 2022

 

 

13,396

 

 

$

32.94

 

 

$

69

 

Nonvested shares at June 30, 2023Nonvested shares at June 30, 202316,038$32.41 $84 

Note 8 - Fair Value Measurements

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

 

 

June 30, 2022

 

 

Fair Value Measurements Using

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands; unaudited)

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

40,750

 

 

$

40,750

 

 

$

40,750

 

 

$

-

 

 

$

-

 

Interest earning deposits with other banks

 

 

364,939

 

 

 

364,939

 

 

 

364,939

 

 

 

-

 

 

 

-

 

Investment securities

 

 

109,821

 

 

 

109,724

 

 

 

108,251

 

 

 

1,473

 

 

 

-

 

Other investments

 

 

10,379

 

 

 

10,379

 

 

 

-

 

 

 

7,707

 

 

 

2,672

 

Loans held for sale

 

 

60,000

 

 

 

60,000

 

 

 

-

 

 

 

60,000  

 

 

 

 

 

Loans receivable

 

 

2,334,354

 

 

 

2,287,734

 

 

 

-

 

 

 

-

 

 

 

2,287,734

 

Accrued interest receivable

 

 

12,430

 

 

 

12,430

 

 

 

-

 

 

 

12,430

 

 

 

-

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,697,305

 

 

 

2,696,607

 

 

$

-

 

 

$

2,696,607

 

 

$

-

 

Subordinated debt

 

 

24,324

 

 

 

22,421

 

 

 

-

 

 

 

22,421

 

 

 

-

 

Junior subordinated debentures

 

 

3,587

 

 

 

3,332

 

 

 

-

 

 

 

3,332

 

 

 

-

 

Accrued interest payable

 

 

330

 

 

 

330

 

 

 

-

 

 

 

330

 

 

 

-

 

 

 

December 31, 2021

 

 

Fair Value Measurements Using

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands; unaudited)

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

14,496

 

 

$

14,496

 

 

$

14,496

 

 

$

-

 

 

$

-

 

Interest earning deposits with other banks

 

 

798,665

 

 

 

798,665

 

 

 

798,665

 

 

 

-

 

 

 

-

 

Investment securities

 

 

36,623

 

 

 

36,675

 

 

 

34,998

 

 

 

1,677

 

 

 

-

 

Other investments

 

 

8,478

 

 

 

8,478

 

 

 

-

 

 

 

6,156

 

 

 

2,322

 

Loans receivable, net

 

 

1,714,103

 

 

 

1,686,124

 

 

 

-

 

 

 

-

 

 

 

1,686,124

 

Accrued interest receivable

 

 

8,105

 

 

 

8,105

 

 

 

-

 

 

 

8,105

 

 

 

-

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,363,787

 

 

$

2,363,624

 

 

$

-

 

 

$

2,363,624

 

 

$

-

 

FHLB advances

 

 

24,999

 

 

 

24,447

 

 

 

-

 

 

 

24,447

 

 

 

-

 

Subordinated debt

 

 

24,288

 

 

 

21,891

 

 

 

-

 

 

 

21,891

 

 

 

-

 

Junior subordinated debentures

 

 

3,586

 

 

 

2,771

 

 

 

-

 

 

 

2,771

 

 

 

-

 

Accrued interest payable

 

 

357

 

 

 

357

 

 

 

-

 

 

 

357

 

 

 

-

 


June 30, 2023Fair Value Measurements Using
Carrying
Value		Estimated
Fair Value		Level 1Level 2Level 3
(dollars in thousands; unaudited)
Financial assets
Cash and due from banks$29,783 $29,783 $29,783 $— $— 
Interest earning deposits with other banks245,277 245,277 245,277 — — 
Investment securities110,730 110,326 97,871 12,455 — 
Other investments12,037 12,037 — 9,465 2,572 
Loans held for sale35,923 35,923 — 35,923 
Loans receivable3,007,553 2,953,342 — — 2,953,342 
Accrued interest receivable21,581 21,581 — 21,581 — 
Financial liabilities
Deposits$3,162,572 3,161,753 $— $3,161,753 $— 
Subordinated debt44,069 42,861 — 42,861 — 
Junior subordinated debentures3,589 3,489 — 3,489 — 
Accrued interest payable766 766 — 766 — 

36
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 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 nonbinding single dealer quotes not 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 nonbinding single dealer quotes not corroborated by observable market data.
The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for certain financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

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; unaudited)

 

Level 1Level 2Level 3Total
Fair Value

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands; unaudited)
June 30, 2023June 30, 2023
Available-for-saleAvailable-for-sale
U.S. Treasury securitiesU.S. Treasury securities$97,871 $— $— $97,871 
U.S. Agency collateralized mortgage obligationsU.S. Agency collateralized mortgage obligations— 47 — 47 
MunicipalsMunicipals— 249 — 249 
$97,871 $296 $— $98,167 
December 31, 2022December 31, 2022

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

U.S. Treasury securities

 

$

108,251

 

 

$

-

 

 

$

-

 

 

$

108,251

 

U.S. Treasury securities$97,015 $— $— $97,015 

U.S. Agency collateralized mortgage obligations

 

 

-

 

 

 

57

 

 

 

-

 

 

 

57

 

U.S. Agency collateralized mortgage obligations— 51 — 51 

U.S. Agency residential mortgage-backed securities

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

U.S. Agency residential mortgage-backed securities— 1 — 1 

Municipals

 

 

-

 

 

 

251

 

 

 

-

 

 

 

251

 

Municipals— 250 — 250 

 

$

108,251

 

 

$

309

 

 

$

-

 

 

$

108,560

 

$97,015 $302 $— $97,317 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

34,998

 

 

$

-

 

 

$

-

 

 

$

34,998

 

U.S. Agency collateralized mortgage obligations

 

 

-

 

 

 

70

 

 

 

-

 

 

 

70

 

U.S. Agency residential mortgage-backed securities

 

 

-

 

 

 

3

 

 

 

-

 

 

 

3

 

Municipals

 

 

-

 

 

 

256

 

 

 

-

 

 

 

256

 

 

$

34,998

 

 

$

329

 

 

$

-

 

 

$

35,327

 

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

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

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of June 30, 20222023 and December 31, 2021.2022. 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.


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; unaudited)

 

Level 1Level 2Level 3Total
Fair Value

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

Impaired loans

 

$

-

 

 

$

-

 

 

$

231

 

 

$

231

 

Impaired loans$— $— $7,080 $7,080 

Equity securities

 

 

 

 

 

 

 

 

 

 

2,672

 

 

 

2,672

 

Equity securities— — 2,572 2,572 

Total

 

$

-

 

 

$

-

 

 

$

2,903

 

 

$

2,903

 

Total$— $— $9,652 $9,652 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

-

 

 

$

-

 

 

$

221

 

 

$

221

 

Equity securities

 

 

 

 

 

 

 

 

 

 

2,322

 

 

 

2,322

 

Total

 

$

-

 

 

$

-

 

 

$

2,543

 

 

$

2,543

 

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 June 30, 2022,2023, 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

 

 

For the Six Months Ended

 

 

June 30,

 

 

June 30,

 

For the Three Months Ended
June 30,		For the Six Months Ended
June 30,

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

(dollars in thousands; unaudited)2023202220232022

Carrying value, beginning of period

 

$

2,672

 

 

$

850

 

 

$

2,322

 

 

$

850

 

Carrying value, beginning of period$2,572 $2,672 $2,572 $2,322 

Addition of equity securities

 

 

0

 

 

 

0

 

 

 

350

 

 

 

0

 

PurchasesPurchases— — — 350 
Observable price changeObservable price change— — — — 

Carrying value, end of period

 

$

2,672

 

 

$

850

 

 

$

2,672

 

 

$

850

 

Carrying value, end of period$2,572 $2,672 $2,572 $2,672 

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 datesdate indicated:

(unaudited)

 

Valuation Technique

 

Unobservable Inputs

 

June 30, 2022

Weighted

Average Rate

 

 

December 31, 2021

Weighted

Average Rate

 

Impaired loans

 

Collateral valuations

 

Discount to appraised value

 

8.5%

 

 

8.0%

 

(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 EndedSix Months Ended

 

June 30, 2022

 

June 30, 2021

 

 

June 30, 2022

 

 

June 30, 2021

 

June 30, 2023June 30, 2022June 30, 2023June 30, 2022

 

(dollars in thousands, except share data; unaudited)

 

(dollars in thousands, except earnings per share data; unaudited)

Net Income

 

$

10,176

 

$

7,013

 

 

$

16,406

 

 

$

13,031

 

Net Income$12,906 $10,176 $25,297 $16,406 

Basic weighted average number common shares outstanding

 

 

12,928,061

 

 

11,984,927

 

 

 

12,913,485

 

 

 

11,972,916

 

Basic weighted average number common shares outstanding13,275,64012,928,06113,236,51712,913,485

Dilutive effect of equity-based awards

 

 

513,952

 

 

474,540

 

 

 

545,221

 

 

 

450,743

 

Dilutive effect of equity-based awards322,123513,952367,077545,221

Diluted weighted average number common shares

outstanding

 

 

13,442,013

 

 

12,459,467

 

 

 

13,458,706

 

 

 

12,423,659

 

Diluted weighted average number common shares outstanding13,597,76313,442,01313,603,59413,458,706

Basic earnings per share

 

$

0.79

 

$

0.59

 

 

$

1.27

 

 

$

1.09

 

Basic earnings per share$0.97 $0.79 $1.91 $1.27 

Diluted earnings per share

 

$

0.76

 

$

0.56

 

 

$

1.22

 

 

$

1.05

 

Diluted earnings per share$0.95 $0.76 $1.86 $1.22 

Antidilutive stock options and restricted stock outstanding

 

 

299,743

 

 

159,668

 

 

 

234,649

 

 

 

173,472

 

Antidilutive stock options and restricted stock outstanding229,436299,743177,364234,649

Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings, however the difference in the two-class method was not significant.
40
Table of Contents

,

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 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 2three segments: the community bank, CCBX, and treasury & administration. The community bank and CCBX.

Income and expenses that are specific to CCBX are recorded to the CCBX segment.  Additionally, certain indirect expenses are allocated to CCBX utilizing various metrics, such as number of employees, utilization of space, and allocations based on loan and deposit balances. Included in noninterest expense for the bank is administrative overhead/expenses from which both thesegment includes all community bank and CCBX benefit.  

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

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

Bank

 

 

CCBX

 

 

Total

 

 

Bank

 

 

CCBX

 

 

Total

 

 

 

(dollars in thousands; unaudited)

 

Total assets

 

$

2,079,317

 

 

$

890,405

 

 

$

2,969,722

 

 

$

2,282,514

 

 

$

353,003

 

 

$

2,635,517

 

Loans held for sale

 

 

-

 

 

 

60,000

 

 

 

60,000

 

 

 

-

 

 

 

-

 

 

 

-

 

Total  loans receivable

 

 

1,530,402

 

 

 

803,952

 

 

 

2,334,354

 

 

 

1,396,060

 

 

 

346,675

 

 

 

1,742,735

 

Allowance for

    loan losses

 

 

(20,785

)

 

 

(28,573

)

 

 

(49,358

)

 

 

(20,299

)

 

 

(8,333

)

 

 

(28,632

)

Total deposits

 

 

1,631,190

 

 

 

1,066,115

 

 

 

2,697,305

 

 

 

1,647,529

 

 

 

716,258

 

 

 

2,363,787

 

 

 

Three months ended June 30, 2022

 

 

Three months ended June 30, 2021

 

 

 

Bank

 

 

CCBX

 

 

Total

 

 

Bank

 

 

CCBX

 

 

Total

 

 

 

(dollars in thousands; unaudited)

 

Net interest income

 

$

19,960

 

 

$

19,926

 

 

$

39,886

 

 

$

17,753

 

 

$

859

 

 

$

18,612

 

Provision for loan losses

 

 

108

 

 

 

13,986

 

 

 

14,094

 

 

 

364

 

 

 

(3

)

 

 

361

 

Noninterest income (1)

 

 

1,510

 

 

 

23,982

 

 

 

25,492

 

 

 

3,356

 

 

 

1,426

 

 

 

4,782

 

Noninterest expense

 

 

15,143

 

 

 

23,026

 

 

 

38,169

 

 

 

12,208

 

 

 

1,523

 

 

 

13,731

 

(1) For the three months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $14.2 million, fraud enhancements of $6.5 million, and BaaS program income of $3.2 million.  For the three months ended June 30, 2021, CCBX noninterest income includes BaaS program income of $1.4 million.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Six months ended June 30, 2022

 

 

Six months ended June 30, 2021

 

 

 

Bank

 

 

CCBX

 

 

Total

 

 

Bank

 

 

CCBX

 

 

Total

 

 

 

(dollars in thousands; unaudited)

 

Net interest income

 

$

37,355

 

 

$

31,799

 

 

$

69,154

 

 

$

34,679

 

 

$

1,248

 

 

$

35,927

 

Provision for loan losses

 

 

452

 

 

 

26,584

 

 

 

27,036

 

 

 

685

 

 

 

33

 

 

 

718

 

Noninterest income (1)

 

 

3,314

 

 

 

44,164

 

 

 

47,478

 

 

 

5,392

 

 

 

2,374

 

 

 

7,766

 

Noninterest expense

 

 

28,708

 

 

 

39,876

 

 

 

68,584

 

 

 

23,348

 

 

 

2,735

 

 

 

26,083

 

(1) For the six months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $27.3 million, fraud enhancements of $11.0 million and BaaS program income of $5.7 million.  For the six months ended June 30, 2021, CCBX noninterest income includes BaaS program income of $2.4 million.

 


Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

We arebanking activities, with a bank holding company that operates through our wholly owned subsidiaries, Coastal Community Bank (“Bank”) and Arlington Olympic LLC.  We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. Our business is conducted through two reportable segments:  The community bank and CCBX.  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 2922 partners as of June 30, 2022, compared2023. The treasury & administration segment includes investments, debt and other reporting items that are not specific to 24the community bank or CCBX segments.

The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data.Furthermore, changes in management structure or allocation methodologies and procedures may result in changes in reported segment financial data. The Company continues to evaluate its methodology on allocating items to the Company’s various segments to support strategic business decisions by the Company’s executive leadership. Income and expenses that are specific to a segment are directly posted to each segment. Additionally, certain indirect expenses are allocated to each segment utilizing various metrics, such as number of employees, utilization of space, and allocations based on loan and deposit balances. We have implemented a transfer pricing process that credits or charges the community bank and CCBX segments with intrabank interest income or expense for the difference in average loans and average deposits, with the treasury & administration segment as the offset for those entries.
41
Table of Contents,
Summarized financial information concerning the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables for the periods indicated:
June 30, 2023December 31, 2022
Community BankCCBXTreasury & AdministrationTotalCommunity BankCCBXTreasury & AdministrationTotal
Assets(dollars in thousands; unaudited)
Cash and Due from Banks$4,382 $7,179 $263,499 $275,060 $4,603 $12,899 $324,637 $342,139 
Intrabank assets— 304,408 (304,408)— — 254,096 (254,096)— 
Securities— — 110,730 110,730 — — 98,353 98,353 
Loans held for sale— 35,923 — 35,923 — — — — 
Total loans receivable1,713,034 1,294,519 — 3,007,553 1,614,752 1,012,504 — 2,627,256 
Allowance for credit losses(20,653)(90,109)— (110,762)(20,636)(53,393)— (74,029)
All other assets27,164 131,260 58,355 216,779 25,508 76,111 49,129 150,748 
Total assets$1,723,927 $1,683,180 $128,176 $3,535,283 $1,624,227 $1,302,217 $218,023 $3,144,467 
Liabilities
Total deposits$1,509,458 $1,653,114 $— $3,162,572 $1,538,218 $1,279,303 $— $2,817,521 
Total borrowings— — 47,658 47,658 — — 47,587 47,587 
Intrabank liabilities207,651 — (207,651)— 80,392 — (80,392)— 
All other liabilities6,818 30,066 15,507 52,391 5,617 22,914 7,334 35,865 
Total liabilities$1,723,927 $1,683,180 $(144,486)$3,262,621 $1,624,227 $1,302,217 $(25,471)$2,900,973 
42
Table of Contents,
Three months ended June 30, 2023Three months ended June 30, 2022
Community BankCCBXTreasury & AdministrationTotalCommunity BankCCBXTreasury & AdministrationTotal
(dollars in thousands; unaudited)
Net interest income, before
   intrabank transfer		$22,904 $36,620 $2,826 $62,350 $18,568 $19,926 $1,392 $39,886 
Interest income (expense)
   intrabank transfer		(2,490)3,487 (997)— 303 532 (835)— 
(Recapture)/Provision for
   credit losses - loans		(47)52,645 — 52,598 108 13,986 — 14,094 
(Recapture)/Provision for
   unfunded commitments		(340)(5)— (345)— — — — 
Noninterest income (1)
1,613 56,718 264 58,595 1,355 24,048 89 25,492 
Noninterest expense9,592 35,196 7,122 51,910 7,721 24,527 5,921 38,169 
Net income before income taxes12,822 8,989 (5,029)16,782 12,397 5,993 (5,275)13,115 
Income taxes2,949 2,089 (1,162)3,876 2,777 1,344 (1,182)2,939 
Net Income$9,873 $6,900 $(3,867)$12,906 $9,620 $4,649 $(4,093)$10,176 
(1)For the three months ended June 30, 2023, CCBX noninterest income includes credit enhancements of $51.0 million, fraud enhancements of $1.5 million, and BaaS program income of $3.9 million. For the three months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $14.2 million, fraud enhancements of $6.5 million and BaaS program income of $3.2 million.
43
Table of Contents,
Six Months Ended June 30, 2023Six Months Ended June 30, 2022
Community BankCCBXTreasury & AdministrationTotalCommunity BankCCBXTreasury & AdministrationTotal
(dollars in thousands; unaudited)
Net interest income, before
   intrabank transfer		$44,582 $66,415 $5,844 $116,841 $35,773 $31,799 $1,582 $69,154 
Interest income (expense)
   intrabank transfer		(3,569)6,139 (2,570)— 431 730 (1,161)— 
Provision for credit
   losses - loans		381 95,761 — 96,142 452 26,584 — 27,036 
(Recapture)/Provision for
   unfunded commitments		(203)11 — (192)— — — — 
Noninterest income(1)
2,704 104,798 400 107,902 2,912 44,389 177 47,478 
Noninterest expense18,685 63,634 14,254 96,573 15,367 42,934 10,283 68,584 
Net income before income
   taxes		$24,854 $17,946 $(10,580)$32,220 $23,297 $7,400 $(9,685)$21,012 
Income taxes5,340 3,856 (2,273)6,923 5,103 1,626 (2,123)4,606 
Net Income19,514 14,090 (8,307)25,297 18,194 5,774 (7,562)16,406 
(1)For the six months ended June 30, 2023, CCBX noninterest income includes credit enhancements of $93.4 million, fraud enhancements of $3.5 million and BaaS program income of $7.5 million. For the six months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $27.3 million, fraud enhancements of $11.0 million and BaaS program income of $5.7 million.
44
Table of Contents,
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are a bank holding company that operates through our wholly owned subsidiaries, Coastal Community Bank (“Bank”) and Arlington Olympic LLC . We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. Our 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 and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 22 partners as of June 30, 2021.2023. The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

As of June 30, 2022,2023, we had total assets of $2.97$3.54 billion, total loans receivable of $2.33$3.01 billion, total deposits of $2.70$3.16 billion and total shareholders’ equity of $217.7$272.7 million.

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

We generate most of our community bank revenue from interest on loans and investments and CCBX revenue from BaaS fee income and interest on loans and BaaS income.loans. Our primary source of funding for our loans is commercial and retail 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)(“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 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 employee benefits, provision for loan losses, interest on deposits and borrowings, occupancylegal and professional expenses and data processing. Our principal lending products are commercial real estate loans, commercial and industrial loans, consumer loans, residential real estate, commercial and industrial loans and construction, land and land development loans.

Coronavirus Aid, Relief,

Potential Regulatory Reforms in Response to Bank Failures
The failures of Silicon Valley Bank, Santa Clara, California, Signature Bank, New York, New York, and Economic Security (“CARES”)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 PPP Overview

Our financial resultsthe 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 threeBoard of Governors of the Federal Reserve System, have called for changes to the manner in which banks’ capital, interest rate and six months ended June 30, 2022liquidity risks are supervised and 2021 were impactedregulated. The extent of final actions to be taken by the coronavirus,regulatory agencies in responses to these bank failures, including the potential changes discussed by the Vice Chair or highlighted in the Federal Reserve and variants thereof (“COVID-19”) pandemic. FDIC reports, remain unclear.

Small Business Lending Data Collection Rule
On March 27, 2020,30, 2023, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted, providing wide ranging economic relief for individuals and businesses impacted by the COVID-19 pandemic. Among other things, the statute created the Paycheck Protection Program (“PPP”), which wasCFPB finalized a stimulus response to the potential economic impactsrule under section 1071 of the COVID-19 pandemic.Dodd-Frank Act requiring lenders to collect and report data regarding small business lending activity. The purpose of the PPP was to provide forgivable loans to smaller businesses, sole proprietorships, independent contractors, and self-employed individuals that used the proceeds of the loans for payroll and certain other qualifying expenses.

In total, we funded $763.9 million in PPP loans, since the first round of PPP loans opened in March 2020 through the close of round three.  Total net deferred fees on these loans were $26.3 million.  As of June 30, 2022, there were $16.4 million in PPP loans outstanding, compared to $47.5 million as of March 31, 2022, and $398.0 million as of June 30, 2021.  In the three months ended June 30, 2022, a total of $31.1 million in PPP loans were forgiven or repaid.  Net deferred fees recognized on PPP loans contributed $969,000 for the three months ended June 30, 2022, compared to $2.3 million for the three months ended March 31, 2022, and $3.6 million for the three months ended June 30, 2021.  The impact of PPP loans on the Company’s financial statements has significantly lessened as 97.9% of PPP loans have been paid off and forgiven.  The future impactCompany is expected to be minimal with just $16.4 million, or 2.1%, in PPP loans and $396,000 in net deferred fees remaining to be recognized as of June 30, 2022.  Throughout this discussion, we will addressevaluating the impact of these loans,the new rule. The rule is

45
Table of Contents,
scheduled to take effect on August 29, 2023, and requires compliance by October 1, 2024, April 1, 2025, or January 1, 2026, depending on the balance sheet and income statement.  Any estimated adjusted ratiosnumber of covered small business loans that exclude the impact of this activity are non-U.S. generally accepted accounting principles (“GAAP”) measures.  For more information about non-


GAAP financial measures, see the non-GAAP disclosure “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures”.

We continue to accept applications from customers for loan forgiveness.  To obtain loan forgiveness, a PPP borrower must submit a forgiveness application.  With just $16.4 million in PPP loans remaining as of June 30, 2022, the majority of eligible customers have already submitted loan forgiveness requests, however we will continue to accept forgiveness applications for as long as loan forgiveness is an option for our customers.  

PPP loans in rounds 1 and 2 were originated in 2020, and were predominately two year loans, and only $2.2 million, or 0.50%, of these loans remain at June 30, 2022.  PPP loans in round 3 were originated in 2021 and were all five-year loans, and $14.2 million, or 4.6%, of these loans remain at June 30, 2022.  

covered lender originates.

 

 

Total PPP Loan Origination

 

(dollars in thousands, unaudited)

 

Round 1 & 2

2020

 

Round 3

2021

 

Total

 

Loans Originated

 

$

452,846

 

$

311,012

 

$

763,858

 

Deferred fees, net

 

$

12,933

 

$

13,334

 

$

26,267

 

Outstanding loans and deferred fees as of June 30, 2022

 

Loans outstanding

 

$

2,199

 

$

14,199

 

$

16,398

 

Deferred fees, net

 

$

-

 

$

396

 

$

396

 

London Interbank Offered Rate (“LIBOR”) Transition

On March 5, 2021,

LIBOR, a benchmark interest rate that was widely referenced in the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, confirmed that the publication of most LIBOR term rates will end onpast, is no longer published after June 30, 2023 (excluding 1-week U.S. LIBOR and 2-month U.S. LIBOR,2023. On December 16, 2022, the publication of which ended December 31, 2021).  On April 6, 2021, New York Governor Cuomo signed into law legislation that provides for the substitution of an alternative reference rate, the Secured Overnight Financing Rate, in any LIBOR-based contract governed by New York state law that does not include clear fallback language, once LIBOR is discontinued but no later than December 31, 2021.  The Federal Reserve and other federal banking agencies have continued to encourage banks to transition away from LIBOR as soon as practicable.  On March 15, 2022, President Biden signed into lawBoard adopted a final rule that implements the Adjustable Interest Rate (LIBOR)(“LIBOR”) Act (the “LIBOR Act”), by identifying benchmark rates based on SOFR (Secured Overnight Financing Rate) that will replace LIBOR formerly known as the London Interbank Offered Rate, in certain financial contracts after June 30, 2023. Congress enacted the LIBOR Act, which was included as part ofsigned into law in March 2022, to provide a larger Consolidated Appropriations Act, 2022.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 providesalso establishes a nationwide processlitigation safe harbor for replacinglenders 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 financial contracts that mature aftersubject to the cessation of the overnight, one-, three-, six- and 12-month USD LIBOR tenors on June 30, 2023 andAct. These contracts include U.S. contracts that do not provide for an effective means tomature before LIBOR ends and that lack adequate "fallback" provisions that would replace LIBOR upon its cessation.   For contracts in whichwith a party has the discretion to identify apracticable replacement rate, the LIBOR Act also provides a safe harbor to parties if they choose the SOFR-based benchmark replacement rate to be identified by the Federal Reserve.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, 2021.

2022.

As of June 30, 2022,2023, we had 5544 loans totaling $215.7$196.6 million that are tied to LIBOR. Included in that total are 33 loans, totaling $182.1 million that are commercial loans, and 13 loans, totaling $9.8 million that are jumbo mortgages. 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 are alsohave been tied to LIBOR.LIBOR, but beginning with rate adjustments that occur after June 30, 2023, the rate will be based off three-month CME Term SOFR plus 0.26%. The move to an alternate index may impact the rates we receive on loans and rates we pay on our junior subordinated debentures. We have identified the loans and debt instruments impacted, are reviewingand we believe we will be able to use other benchmark replacements and transition protections provided by the LIBOR replacement optionsAct, Federal Reserve rule and are preparing for and evaluatingrelevant accounting guidance to manage through the impact of the transition away from LIBOR. We are no longer issuingissue any loans or debt tied to LIBOR.

LIBOR.

Third Party Risk Management Guidance
On June 6, 2023, the FDIC, the Federal Reserve and the OCC issued final guidance providing sound principles that support a risk-based approach to third-party risk management. The Company is evaluating the impact of this guidance on its practices.
Financial Indicators
Below are a select number of financial highlights from our second quarter.
•Deposits increased $67.3 million, or 2.2%, to $3.16 billion as of June 30, 2023 compared to March 31, 2023.
◦CCBX deposit growth of $89.3 million, or 5.7%, to $1.65 billion.
▪Additional $9.9 million in CCBX deposits transferred off balance sheet.
◦Community bank deposits decreased $21.9 million, or 1.4%, to $1.51 billion
▪Includes noninterest bearing deposits of $621.0 million or 41.1% of total community bank deposits.
▪Community bank cost of deposits was 0.98%.
◦Uninsured deposits of $632.1 million, or 20.0% of total deposits as of June 30, 2023, compared to $768.3 million, or 24.8% of total deposits as of March 31, 2023.
•Total revenue increased $17.1 million, or 16.5%, for the three months ended June 30, 2023, compared to the three months ended March 31, 2023
•Total revenue excluding Banking as a Service ("BaaS") credit enhancements and BaaS fraud enhancements increased $8.9 million, or 15.0%, to $68.4 million for the three months ended June 30, 2023, compared to the three months ended March 31, 2023. (A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”)
•Liquidity/Borrowings as of June 30, 2023:
◦Capacity to borrow up to $559.8 million from Federal Home Loan Bank and the Federal Reserve Bank discount window with no borrowings taken under these facilities during the quarter ended June 30, 2023.
•Investment Portfolio as of June 30, 2023:
◦Available for sale ("AFS") investments of $98.2 million, compared to $98.0 million as of March 31, 2023, of which 99.7% are U.S. Treasuries, with a weighted average remaining duration of 8 months as of June 30, 2023.
46
Table of Contents,
◦Held to maturity ("HTM") investments of $12.6 million, of which 100% are U.S. Agency mortgage backed securities held for Community Reinvestment Act ("CRA") purposes, with a fair value of $404,000 less than the carrying value as of June 30, 2023 and a weighted average remaining duration of 6.7 years as of June 30, 2023.
•Net interest margin of 7.58% for the quarter ended June 30, 2023
•Cost of deposits of 2.72% for the quarter ended June 30, 2023.
Deposits increased $67.3 million, or 2.2%, during the three months ended June 30, 2023. Fully insured IntraFi network sweep deposits increased $146.0 million to $240.3 million as of June 30, 2023, compared to $94.3 million as of March 31, 2023. These fully insured sweep deposits allow our larger deposit customers to fully insure their deposits through a sweep and exchange of deposits with other financial institutions. Our liquidity position is supported by diligent management of our liquid assets and liabilities as well as maintaining access to alternative sources of funds. As of June 30, 2023 we had $275.1 million in cash on the balance sheet and the capacity to borrow up to $559.8 million from Federal Home Loan Bank and the Federal Reserve Bank discount window. We did not draw down on either facility at any point in the six months ending June 30, 2023.Cash on the balance sheet and borrowing capacity total $834.8 million and represented 26.4% of total deposits and exceeded our $632.1 million in uninsured deposits as of June 30, 2023. Our AFS securities portfolio has a weighted average remaining duration of just 8 months and U.S. Treasury securities represent 99.7% of that portfolio as of June 30, 2023. Unrealized losses on the AFS securities portfolio were just $2.1 million, or 0.78%, of shareholders' equity as of June 30, 2023.
Results of Operations

Net Income

Comparison of the quarter ended June 30, 20222023 to the comparable quarter in the prior year

Net income for the three months ended June 30, 2022,2023 was $10.2$12.9 million, or $0.76$0.95 per diluted share, compared to $7.0$10.2 million, or $0.56$0.76 per diluted share, for the three months ended June 30, 2021.2022. The increase in net income over the comparable period in the prior year was primarily attributable to a $22.2$41.9 million increase in interest income and $20.7$33.1 million increase in noninterest income. These were partially offset by an increase in the provision for loancredit losses - loans of $13.7$38.5 million, related to CCBX loan growth, and $24.4$13.7 million more in noninterest expense, also largely related to CCBX loan growth.growth, and increases in salary expense and professional fees. The increase in noninterest income, provision expense and noninterest expense are all largely related to increased CCBX growth.loan and deposit activity. In accordance with GAAP, we recognize as revenue (1) the reimbursement of non-creditright to be indemnified or reimbursed for fraud losses on partner’sCCBX customer loans and deposits and (2) the indemnification obligation, also known asright to be indemnified for credit enhancements, thatlosses by our partners provide for expected loancredit losses related to loans they originate and unfunded commitments from such loans. PartnerCCBX customer credit losses are recognized in the allowance for loan loss and non-credit fraud loss is recognized in BaaS noninterest expense. For more information on the accounting for BaaS allowance for loancredit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

Comparison of the six months ended June 30, 20222023 to the comparable period in the prior year

Net income for the six months ended June 30, 2022,2023 was $16.4$25.3 million, or $1.22$1.86 per diluted share, compared to $13.0$16.4 million, or $1.05$1.22 per diluted share, for the six months ended June 30, 2021.2022. The increase in net income over the comparable period in the prior year was primarily attributable to a $34.0$81.8 million increase in interest income and $39.7$60.4 million increase in noninterest income. These were partially offset by an increase in the provision for loancredit losses - loans of $26.3$69.1 million, related primarily to CCBX loan growth, and $42.5$28.0 million more in noninterest expense. The increase in noninterest income, provision expense and noninterest expense are largely related to CCBX loan and deposit growth.

Net InterestIncome

Comparison of the quarter ended June 30, 20222023 to the comparable quarter in the prior year

Net interest income for the three months ended June 30, 2022,2023 was $39.9$62.4 million, compared to $18.6$39.9 million for the three months ended June 30, 2021,2022, an increase of $21.3$22.5 million, or 114.3%56.3%. Yield on loans receivable was 10.85% for the three months ended June 30, 2023, compared to 7.34% for the three months ended June 30, 2022, compared 4.44% for the three months ended June 30, 2021.2022. The increase in net interest income compared to the quarter ended June 30, 20212022 was largely related to increased yield on loans from growth in higher yielding loans, primarily from CCBX, and the overall increase in interest rates resulting from the Federal Open Market Committee (“FOMC”) raising rates 3.50% since June 30, 2022 to 5.25%, with the last increase during such period on
May 3, 2023. As of June 30, 2022, the FOMC had set the interest rates at 1.75%. This increase in interest rates impacts our existing variable rate loans as well as rates on new loans. AverageWe continue to monitor the impact of these increases in interest rates. Total average loans receivable for the three months ended June 30, 20222023 was $2.19$2.97 billion, compared to $1.75$2.19 billion for the three months ended June 30, 2021.  

Interest2022.

Total interest and fees on loans totaled $80.2 million for the three months ended June 30, 2023 compared to $40.2 million for the three months ended June 30, 2022 compared to $19.4 million for the three months ended June 30, 2021.2022. The $20.8$40.0 million increase in interest and fees on loans for the quarter ended June 30, 2022,2023, compared to the quarter ended June 30, 2021,2022, was largely due to increased yield on loans from growth in higher yielding loans, primarily from CCBX, loans.  Loan growth of $401.2 million, or 20.9%, forcombined with the quarter endedoverall increase in interest rates. Total loans receivable was $3.01 billion at June 30, 2022,2023, compared to the quarter ended$2.33 billion at June 30, 2021, partially offset a decrease of $31.1 million in PPP loans that were forgiven or repaid.2022. CCBX loan growth was strong during the quarter with average loans receivable of $1.27 billion for the quarter ended June 30, 2023, compared to $691.3 million for the quarter ended June 30, 2022, compared to $112.2 million for the quarter ended June 30, 2021, an increase of $579.1$578.1 million, or 516.1%83.6%. Average CCBX yield of 12.35%16.95% was earned on CCBX loans for the quarter ended June 30, 2022,2023, compared to 3.14%12.35% for the quarter ended June 30, 2021.2022. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Also impacting the increase in loan interest is the increase in interest rates on variable rate loans resulting from the FOMC raising rates. The FOMC has increased interest rates 0.25% in mid-Marchfrom 1.75% as of June 30, 2022 and an additional 1.25% in the second quarterto 5.25% as of 2022.  Interest rates were increased on $460.9 million in variable rate loans,June 30, 2023. We continue to monitor the impact of this increasethese increases in interest rates will be fully seen in future quarters.

rates.

Interest income from interest earning deposits with other banks was $956,000 at$2.7 million for the quarter ended June 30, 2022,2023, an increase of $882,000,$1.7 million, or 1191.9%180.1%, due to an increase in balances and higher interest rates, compared to the quarter ended June 30, 2021.2022. The average balance of interest earning deposits invested with other banks for the three months ended June 30, 20222023 was $499.9$211.4 million, compared to $235.2$499.9 million for the three months ended June 30, 2021.  Additionally, the2022. This decrease was a result of increased loan demand. The yield on these interest earning deposits with other banks increased 0.64%4.31%, to 0.77%5.08% compared to 0.13%0.77% at June 30, 2021.2022. Interest income on investment securities increased $539,000$90,000 to $653,000 at June 30, 2023, compared to $563,000 at June 30, 2022, compared to $24,000 at June 30, 2021.2022. Average investment securities increased $96.3decreased $10.9 million from $25.0 million for the three months ended June 30, 2021 to $121.3 million for the three months ended June 30, 2022, to $110.3 million for the three months ended June 30, 2023, and, as a result of higher interest rates, average yield increased to 2.37% for the three months ended June 30, 2023, compared to 1.86% for the three months ended June 30, 2022, compared to 0.39% for the three months ended June 30, 2021.

2022.

Interest expense was $1.9$21.3 million for the quarter ended June 30, 2022,2023, a $974,000$19.4 million increase from the quarter ended June 30, 2021.2022. Interest expense on deposits was $20.7 million for the quarter ended June 30, 2023, compared to $1.7 million for the quarter ended June 30, 2022, compared to $628,000 for the quarter ended June 30, 2021.2022. The $1.0$19.0 million increase in interest expense on deposits was due to an increase of $891.0$534.6 million in interest bearing deposits as well as a nine basis point3.19% increase in interest rates on deposit accounts. Interest on borrowed funds was $661,000 for the quarter ended June 30, 2023, compared to $260,000 for the quarter ended June 30, 2022, compared to $331,000 for the quarter ended June 30, 2021.2022. The $71,000 decrease$401,000 increase in interest expense on borrowed funds from the quarter ended June 30, 20212022 is the result of a decrease inan average PPPLF and FHLB borrowings, which were paid off in the quarter ended June 30, 2021 and March 31, 2022, respectively partially offset by a $15.0balance increase of $19.7 million increase in subordinated debt, which increased during the quarter ended SeptemberDecember 31, 2022, and an increase in interest rates. Interest expense on interest bearing deposits increased compared to the quarter ended June 30, 2021.2022 as a result of an increase in CCBX deposits that are tied to, and reprice when, the FOMC raises rates, just like our CCBX loans which also reprice when the FOMC raises interest rates. Interest expense is expected to increase as a result of the FOMC increasing rates in mid-March 2022 and again in the second quarter of 2022.  In addition, as a result of the Fed Fundsrates. Any additional FOMC interest rate increases CCBX deposits that were below their floor to earn interest due to the low interest rate environment and not earning interest were reclassed to interest bearing deposits from noninterest bearing deposits.  Reclassification of $690.4 million, balances as of March 31, 2022,  in CCBX deposits from noninterest bearing to interest bearing deposits occurred mid-March 2022 with the 0.25% interest rate increase, and an additional $86.4 million, balances as of June 30, 2022, were reclassified in the second quarter 2022 as a result of the rate increases totaling 1.25% in the second quarter of 2022.  We anticipate additional rate increases in 2022, which we expect will result in higher interest expense on interest bearing deposits which we expect will be primarily offset by higher interest rates on CCBX loans and excess cash invested in the Federal Reserve Bank or other banks.

Net interest margin was 7.58% for the three months ended June 30, 2023, compared to 5.66% for the three months ended June 30, 2022, compared to 3.70% for the three months ended June 30, 2021.2022. The increase in net interest margin compared to the three months ended June 30, 20212022 was largely a result ofdue to an increase in total loans combined with higher interest rates on new and existing variable rate loans.loans as they reprice. Average loans excluding PPP loans increased $919.6$770.5 million compared to the three months ended June 30, 2021, the increase was partially offset by an average decrease of $475.6 million in forgiven or repaid PPP loans.2022. Also contributing to the increase in net interest margin compared to the three months ended June 30, 20212022 was $264.7 million increase in average interest earning deposits invested in other banks.  These interest earning depositsbanks, which earned an average rate of 77 basis points5.08% for the quarter ended June 30, 2022,2023, compared to an average rate of 39 basis points0.77% for the quarter ended June 30, 2021.

2022.

Cost of funds was 0.29%2.77% for the quarter ended June 30, 2022,2023, which is an increase of nine basis points2.48% from the quarter ended June 30, 2021.2022. Cost of deposits for the quarter ended June 30, 20222023 was 0.25%2.72%, which was an 11 basis point2.47% increase, from 0.14%0.25% for the quarter ended June 30, 2021,2022. These increases were largely due to an increase in interest bearinghigher cost CCBX deposits and a higher interest rate environment.environment compared to June 30, 2022. CCBX deposit growth and the aforementioned reclassification of $690.4 million of CCBX noninterest bearing deposits to interest bearing deposits in the first quarter of 2022 and $86.4 million in the second quarter 2022, that resulted from the Fed Funds rate increases,also contributed to the increase in interest expense.

Total yield on loans receivable for the quarter ended June 30, 20222023 was 7.34%10.85%, compared to 4.44%7.34% for the quarter ended June 30, 2021.2022. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. For the quarter ended June 30, 20222023, average CCBX loans increased $579.1$578.1 million, or 516.1%83.6%, with an average CCBX yield of 12.35%16.95%, compared to 3.14%12.35% at the quarter ended June 30, 2021.2022. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating &servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Average community bank loans increased $340.5$192.4 million, or 30.1%, excluding12.8%. This increase includes a decrease in average PPP loan forgiveness and repaymentsloans of $475.6$29.9 million, or 93.4%, compared to the quarter ended June 30, 2021.2022. Average yield on community bank loans for the three months ended June 30, 20222023 was 5.04%.6.28% compared to 4.52%5.04% for the three months ended June 30, 2021.  

2022.

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 Three Months Ended
June 30, 2023June 30, 2022
(unaudited)
Yield on
Loans (2)
Cost of
Deposits (2)
Yield on
Loans (2)
Cost of
Deposits (2)
Community Bank6.28%0.98%5.04%0.08%
CCBX(1)
16.95%4.42%12.35%0.56%
Consolidated10.85%2.72%7.34%0.25%
(1)

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

 

For the Three Months Ended

 

 

 

June 30, 2022

 

 

June 30, 2021

 

 

 

Yield on

 

Cost of

 

 

Yield on

 

Cost of

 

 

(unaudited)

Loans

 

Deposits

 

 

Loans

 

Deposits

 

 

Community Bank

5.04%

 

0.08%

 

 

4.52%

 

0.16%

 

 

CCBX (1)

12.35%

 

0.56%

 

 

3.14%

 

0.03%

 

 

Consolidated

7.34%

 

0.25%

 

 

4.44%

 

0.14%

 

 

(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 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

June 30, 2022

 

 

June 30, 2021

 

 

(dollars in thousands, unaudited)

Income / Expense

 

Income / expense divided by average CCBX loans

 

 

Income / Expense

 

Income / expense divided by average CCBX loans

 

 

BaaS loan interest income

$

21,281

 

 

12.35

%

 

$

879

 

 

3.14

%

 

Less:  BaaS loan expense

 

12,229

 

 

7.10

%

 

 

99

 

 

0.35

%

 

Net BaaS loan income*

$

9,052

 

 

5.25

%

 

$

780

 

 

2.79

%

 

Average BaaS Loans

$

691,294

 

 

 

 

 

$

112,210

 

 

 

 

 

(2)Annualized calculations shown for periods presented.

*

For the Three Months Ended
June 30, 2023June 30, 2022
(dollars in thousands, unaudited)Income / Expense
Income / expense divided by average CCBX loans (2)
Income / Expense
Income / expense divided by average CCBX loans (2)
BaaS loan interest income$53,632 16.95 %$21,281 12.35 %
Less: BaaS loan expense22,033 6.96 %12,229 7.10 %
Net BaaS loan income (1)
$31,599 9.98 %$9,052 5.25 %
Average BaaS Loans(3)
$1,269,406 $691,294 
(1)A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

(2)Annualized calculations shown for periods presented.
(3)Includes loans held for sale.
For the threemonthsended June 30, 2022,2023, net interestmargin(net (net interestincomedividedby the averagetotalinterest earningassets) and net interestspread(average (average yieldon totalinterest earningassetsminusaveragecost of totalinterest bearingliabilities)were 7.58% and 6.57%, respectively, compared to 5.66% and 5.51%, respectively,comparedto 3.70% and 3.52%, respectively, for the threemonthsended June 30, 2021.  

2022.


The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan costs included in interest income totaled $1.2 million and loan fees included in interest income totaled $1.2 million and $4.3 million for the three months ended June 30, 20222023 and 2021,2022, respectively. For the three months ended June 30, 20222023 and 2021,2022, the amount of interest income not recognized on nonaccrual loans was not material.
Average Balance Sheets
For the Three Months Ended June 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		$211,369 $2,678 5.08 %$499,918 $956 0.77 %
Investment securities, available for sale (2)
100,278 534 2.14 119,975 554 1.85 
Investment securities, held to maturity (2)
10,047 119 4.75 1,280 9 2.82 
Other investments11,773 156 5.31 10,225 134 5.26 
Loans receivable (3)
2,965,287 80,199 10.85 2,194,761 40,166 7.34 
Total interest earning assets3,298,754 83,686 10.18 2,826,159 41,819 5.94 
Noninterest earning assets:
Allowance for credit losses(87,713)(46,354)
Other noninterest earning assets194,747 115,788 
Total assets$3,405,788 $2,895,593 
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits$2,326,702 $20,675 3.56 %$1,792,119 $1,673 0.37 %
Subordinated debt44,047 596 5.43 24,313 231 3.81 
Junior subordinated debentures3,589 65 7.26 3,587 29 3.24 
Total interest bearing liabilities2,374,338 21,336 3.60 1,820,019 1,933 0.43 
Noninterest bearing deposits717,256 839,562 
Other liabilities49,085 19,550 
Total shareholders' equity265,109 216,462 
Total liabilities and shareholders' equity$3,405,788 $2,895,593 
Net interest income$62,350 $39,886 
Interest rate spread6.57 %5.51 %
Net interest margin (4)
7.58 %5.66 %
(1)

Yields and costs are annualized.

 

Average Balance Sheets

 

 

For the Three Months Ended June 30,

 

 

2022

 

 

2021

 

 

Average

 

 

Interest &

 

 

Yield /

 

 

Average

 

 

Interest &

 

 

Yield /

 

(dollars in thousands; unaudited)

Balance

 

 

Dividends

 

 

Cost (1)

 

 

Balance

 

 

Dividends

 

 

Cost (1)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits

$

499,918

 

 

$

956

 

 

 

0.77

%

 

$

235,187

 

 

$

74

 

 

 

0.13

%

Investment securities, available for sale (2)

 

119,975

 

 

 

554

 

 

 

1.85

 

 

 

22,653

 

 

 

17

 

 

 

0.30

 

Investment securities, held to maturity (2)

 

1,280

 

 

 

9

 

 

 

2.82

 

 

 

2,347

 

 

 

7

 

 

 

1.20

 

Other investments

 

10,225

 

 

 

134

 

 

 

5.26

 

 

 

6,835

 

 

 

108

 

 

 

6.34

 

Loans receivable (3)

 

2,194,761

 

 

 

40,166

 

 

 

7.34

 

 

 

1,750,825

 

 

 

19,365

 

 

 

4.44

 

Total interest earning assets

 

2,826,159

 

 

 

41,819

 

 

 

5.94

 

 

 

2,017,847

 

 

 

19,571

 

 

 

3.89

 

Noninterest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

(46,354

)

 

 

 

 

 

 

 

 

 

 

(19,733

)

 

 

 

 

 

 

 

 

Other noninterest earning assets

 

115,788

 

 

 

 

 

 

 

 

 

 

 

76,727

 

 

 

 

 

 

 

 

 

Total assets

$

2,895,593

 

 

 

 

 

 

 

 

 

 

$

2,074,841

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

$

1,792,119

 

 

$

1,673

 

 

 

0.37

%

 

$

901,120

 

 

$

628

 

 

 

0.28

%

PPPLF borrowings

 

-

 

 

 

-

 

 

 

0.00

 

 

 

107,047

 

 

 

94

 

 

 

0.35

 

FHLB advances and borrowings

 

-

 

 

 

-

 

 

 

0.00

 

 

 

24,999

 

 

 

70

 

 

 

1.12

 

Subordinated debt

 

24,313

 

 

 

231

 

 

 

3.81

 

 

 

9,998

 

 

 

146

 

 

 

5.86

 

Junior subordinated debentures

 

3,587

 

 

 

29

 

 

 

3.24

 

 

 

3,585

 

 

 

21

 

 

 

2.35

 

Total interest bearing liabilities

 

1,820,019

 

 

 

1,933

 

 

 

0.43

 

 

 

1,046,749

 

 

 

959

 

 

 

0.37

 

Noninterest bearing deposits

 

839,562

 

 

 

 

 

 

 

 

 

 

 

863,962

 

 

 

 

 

 

 

 

 

Other liabilities

 

19,550

 

 

 

 

 

 

 

 

 

 

 

12,887

 

 

 

 

 

 

 

 

 

Total shareholders' equity

 

216,462

 

 

 

 

 

 

 

 

 

 

 

151,243

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

$

2,895,593

 

 

 

 

 

 

 

 

 

 

$

2,074,841

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

$

39,886

 

 

 

 

 

 

 

 

 

 

$

18,612

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

5.51

%

 

 

 

 

 

 

 

 

 

 

3.52

%

Net interest margin (4)

 

 

 

 

 

 

 

 

 

5.66

%

 

 

 

 

 

 

 

 

 

 

3.70

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

 

 

 

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


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

(4)Net interest margin represents net interest income divided by the average total interest earning assets.
The following table presents an analysis of certain average balances, interest income and interest expense by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Three Months Ended

 

June 30, 2022

 

 

June 30, 2021

 

For the Three Months Ended

Average

 

Interest &

 

Yield /

 

 

Average

 

Interest &

 

Yield /

 

June 30, 2023June 30, 2022

(dollars in thousands, unaudited)

Balance

 

Dividends

 

Cost (1)

 

 

Balance

 

Dividends

 

Cost (1)

 

(dollars in thousands, unaudited)Average
Balance		Interest &
Dividends
Yield /
Cost (1)
Average
Balance		Interest &
Dividends
Yield /
Cost (1)

Community Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community Bank

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets
Interest earning assets:Interest earning assets:

Loans receivable (2)

$

1,503,467

 

$

18,885

 

5.04

%

 

$

1,638,615

 

$

18,486

 

4.52

%

Loans receivable (2)
$1,695,881 $26,567 6.28 %$1,503,467 $18,885 5.04 %
Intrabank assetIntrabank asset— — — 158,607 303 0.77 
Total interest earning assetsTotal interest earning assets1,695,881 26,567 6.28 1,662,074 19,188 4.63 

Liabilities

Liabilities

 

Liabilities
Interest bearing liabilities:Interest bearing liabilities:

Interest bearing deposits

 

921,499

 

317

 

0.14

 

 

 

873,320

 

608

 

0.28

 

Interest bearing deposits$875,760 $3,663 1.68 %$921,499 $317 0.14 %
Intrabank liabilityIntrabank liability196,552 2,490 5.08 — — — 
Total interest bearing liabilitiesTotal interest bearing liabilities1,072,312 6,153 2.30 921,499 317 0.14 

Noninterest bearing deposits

 

740,575

 

 

 

 

 

 

 

658,757

 

 

 

 

 

Noninterest bearing deposits623,570 740,575 
Net interest incomeNet interest income$20,414 $18,871 
Net interest margin(3)
Net interest margin(3)
4.83 %4.55 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCBX

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCBX

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

Loans receivable (2)(3)

$

691,294

 

$

21,281

 

12.35

%

 

$

112,210

 

$

879

 

3.14

%

Interest earning assets:Interest earning assets:
Loans receivable (2)(4)
Loans receivable (2)(4)
$1,269,406 $53,632 16.95 %$691,294 $21,281 12.35 %
Intrabank assetIntrabank asset275,222 3,487 5.08 278,312 532 0.77 
Total interest earning assetsTotal interest earning assets1,544,628 57,119 14.83 969,606 21,813 9.02 

Liabilities

Liabilities

 

Liabilities
Interest bearing liabilities:Interest bearing liabilities:

Interest bearing deposits

 

870,620

 

1,356

 

0.62

 

 

 

27,800

 

20

 

0.29

 

Interest bearing deposits$1,450,942 $17,012 4.70 %$870,620 $1,356 0.62 %
Total interest bearing liabilitiesTotal interest bearing liabilities1,450,942 17,012 4.70 870,620 1,356 0.62 

Noninterest bearing deposits

 

98,987

 

 

 

 

 

 

 

205,205

 

 

 

 

 

Noninterest bearing deposits93,686 98,987 
Net interest incomeNet interest income$40,107 $20,457 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Yields and costs are annualized.

 

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

 

(3) 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 and servicing CCBX loans.

 

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

For the Three Months Ended
June 30, 2023June 30, 2022
(dollars in thousands, unaudited)Average
Balance		Interest &
Dividends
Yield /
Cost (1)
Average
Balance		Interest &
Dividends
Yield /
Cost (1)
Treasury & Administration
Assets
Interest earning assets:
Interest earning deposits with
     other banks		$211,369 $2,678 5.08 %$499,918 $956 0.77 %
Investment securities, available for
     sale (6)
100,278 534 2.14 119,975 554 1.85 
Investment securities, held to
     maturity (6)
10,047 119 4.75 1,280 9 2.82 
Other investments11,773 156 5.31 10,225 134 5.26 
Total interest earning assets333,467 3,487 4.19 631,398 1,653 1.05 %
Liabilities
Interest bearing liabilities:
Subordinated debt44,047 596 5.43 24,313 231 3.81 
Junior subordinated debentures3,589 65 7.26 3,587 29 3.24 
Intrabank liability, net (7)
78,670 997 5.08 436,919 835 0.77 
Total interest bearing liabilities126,306 1,658 5.27 464,819 1,095 0.94 
Net interest income$1,829 $558 
Net interest margin(3)
2.20 %0.35 %
(1)Yields and costs are annualized.
(2)Includes loans held for sale and nonaccrual loans.
(3)Net interest margin represents net interest income divided by the average total interest earning assets.
(4)CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. See the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a reconciliation of the impact of BaaS loan expense on CCBX loan yield.
(5)Net interest margin, net of BaaS loan expense includes the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, originating & servicing CCBX loans. A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”
(6)For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(7)Intrabank assets and liabilities are consolidated for period calculations and presented as intrabank asset, net or intrabank liability, net in the table above.
The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. The table illustrates the $12.7$19.2 million increase in loan interest income that is attributed to an increase in loan rates and $8.1$20.8 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, 2022

 

 

Compared to

 

 

Three Months Ended June 30, 2021

 

 

Increase (Decrease)

 

 

 

 

 

Three months ended June 30, 2023
Compared to Three months ended June 30, 2022

 

Due to

 

 

Total Increase

 

Increase (Decrease)
Due to		Total Increase
(Decrease)

(dollars in thousands; unaudited)

 

Volume

 

 

Rate

 

 

(Decrease)

 

(dollars in thousands; unaudited)VolumeRate

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

Interest earning deposits

 

$

506

 

 

$

376

 

 

$

882

 

Interest earning deposits$(3,656)$5,378 $1,722 

Investment securities, available for sale

 

 

449

 

 

 

88

 

 

 

537

 

Investment securities, available for sale(105)85 (20)

Investment securities, held to maturity

 

 

(8

)

 

 

10

 

 

 

2

 

Investment securities, held to maturity104 6 110 

Other Investments

 

 

44

 

 

 

(18

)

 

 

26

 

Other Investments21 1 22 

Loans receivable

 

 

8,124

 

 

 

12,677

 

 

 

20,801

 

Loans receivable20,840 19,193 40,033 

Total increase in interest income

 

 

9,115

 

 

 

13,133

 

 

 

22,248

 

Total increase in interest income17,204 24,663 41,867 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

Interest bearing deposits

 

 

832

 

 

 

213

 

 

 

1,045

 

Interest bearing deposits4,750 14,252 19,002 

PPPLF borrowings

 

 

(94

)

 

 

-

 

 

 

(94

)

FHLB advances and other borrowings

 

 

(70

)

 

 

-

 

 

 

(70

)

Subordinated debt

 

 

136

 

 

 

(51

)

 

 

85

 

Subordinated debt267 98 365 

Junior subordinated debentures

 

 

-

 

 

 

8

 

 

 

8

 

Junior subordinated debentures— 36 36 

Total increase in interest expense

 

 

804

 

 

 

170

 

 

 

974

 

Total increase in interest expense5,017 14,386 19,403 

Increase in net interest income

 

$

8,311

 

 

$

12,963

 

 

$

21,274

 

Increase in net interest income$12,187 $10,277 $22,464 

Comparison of the six months ended June 30, 20222023 to the comparable period in the prior year

Net interest income for the six months ended June 30, 2022,2023, was $69.2$116.8 million, compared to $35.9$69.2 million for the six months ended June 30, 2021,2022, an increase of $33.2$47.7 million, or 92.5%69.0%. Yield on loans receivable was 10.42% for the six months ended June 30, 2023, compared 7.10% for the six months ended June 30, 2022, compared 4.47% for the six months ended June 30, 2021.2022. The increase in net interest income compared to the six months ended June 30, 20212022 was largely related to increased yield on loans from growth in higher yielding loans primarily from CCBX loans.  Averageand higher interest rates. Total average loans receivable for the six months ended June 30, 20222023 was $1.98$2.84 billion, compared to $1.70$1.98 billion for the six months ended June 30, 2021.  

2022.

Interest and fees on loans totaled $146.6 million for the six months ended June 30, 2023 compared to $69.8 million for the six months ended June 30, 2022 compared to $37.6 million for the six months ended June 30, 2021.2022. The $32.2$76.8 million increase in interest and fees on loans for the six months ended June 30, 2022,2023, compared to the six months ended June 30, 2021,2022, was largely due to increased yield on loans from growth in higher yielding CCBX loans.loans and an overall increase in interest rates. Loan growth of $1.0 billion,$673.2 million, or 82.0%28.8%, for the six months ended June 30, 2022,2023, compared to the six months ended June 30, 2021, was partially offset2022, includes a decrease of $381.6$12.8 million in PPP loans that were forgiven or repaid. CCBX average loans receivable grew to $1.17 billion for the six months ended June 30, 2023, compared to $537.6 million for the six months ended June 30, 2022, compared to $89.7 million for the six months ended June 30, 2021, an increase of $447.9$629.8 million, or 499.6%117.2%. Average CCBX yield of 12.48%16.56% was earned on CCBX loans for the six months ended June 30, 2022,2023, compared to 2.90%12.48% for the six months ended June 30, 2021.2022. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating &servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Also impacting the increase in loan interest is the increase in interest rates on variable rate loans resulting from the FOMC raising rates 0.25% in mid-March 2022 and an additional 1.25% in the second quarterfrom 1.75% as of 2022.  Interest rates were increased on $460.9 million in variable rate loans during the six months ended June 30, 2022 to 5.25% as of June 30, 2023, with the most recent increase during such period on May 3, 2023. We continue to monitor the impact of this increasethese increases in interest rates will be fully seen in future quarters.

rates.

47
Table of Contents,
Interest income from interest earning deposits with other banks was $1.4$5.8 million atfor the six months ended June 30, 2022,2023, an increase of $1.2$4.4 million due to an increase in balances and higher interest rates, despite a decrease in balances, compared to the six months ended June 30, 2021.2022. The average balance of interest earning deposits invested with other banks for the six months ended June 30, 20222023 was $671.0$241.4 million, compared to $215.4$671.0 million for the six months ended June 30, 2021.2022. This decrease was a result of increased loan demand. Additionally, the yield on these interest earning deposits with other banks increased 0.28%4.41%, compared to the six months ended June 30, 2021.2022. Interest income on investment securities increased $582,000,$572,000 to $1.2 million, and a yield 2.29% at June 30, 2023, compared to $634,000, orand a yield of 1.53%, at June 30, 2022, compared to $52,000, or 0.43%, at June 30, 2021.2022. Average investment securities increased $59.1$22.6 million from $24.6 million for the six months ended June 30, 2021 to $83.7 million for the six months ended June 30, 2022 to $106.3 million for the six months ended June 30, 2023 as a result of purchasing additional securities to hold for CRA purposes, and average yield increased to 2.29% for the six months ended June 30, 2023, compared to 1.53% for the six months ended June 30, 2022, compared to 0.43% for the six months ended June 30, 2021.

2022.

Interest expense was $2.8$37.0 million for the six months ended June 30, 2022,2023, a $805,000$34.1 million increase from the six months ended June 30, 2021.2022. Interest expense on deposits was $35.6 million for the six months ended June 30, 2023, compared to $2.2 million for the six months ended June 30, 2022, compared to $1.32022. The $33.4 million for the six months ended June 30, 2021.  The $938,000 increase in interest expense on deposits was primarily due to an increase in average interest bearing deposits of $585.1$735.3 million. Interest on borrowed funds was $1.3 million for the six months ended June 30, 2023, compared to $581,000 for the six months ended June 30, 2022, compared to $714,000 for the six months ended June 30, 2021.2022. The $133,000 decrease$742,000 increase in interest expense on borrowed funds from the six months ended June 30, 20212022 is the result of a decrease in average PPPLF and FHLB borrowings, or $312,000 less interest expense, which were paid off in full during the quarter ended June 30, 2021 and March 31, 2022, respectively, partially offset by a $14.3$19.7 million average balance increase in subordinated debt, which increased interest expense $170,000.during the quarter ended December 31, 2022. Interest expense is expected to increase as a result of the FOMC increasing the Fed Funds rate 1.50% in0.75% during the first half of 2022.  In addition,six months ended June 30, 2023, with the most recent increase during such period on May 3, 2023. Interest expense is expected to increase as a result of the FOMC rate increase CCBX deposits that were below their floor to earn interest due to the lowincreasing rates. Any additional FOMC interest rate environment and not earning interest were reclassed to interest bearing deposits from noninterest bearing deposits.  Reclassification of $690.4 million from noninterest bearing to interest bearing deposits occurred mid-March 2022 with the 0.25% interest rate increase, and an additional $86.4 million reclassified in the second quarter 2022 as a result of the add1.25% rate increases in the second quarter 2022.  We anticipate additional rate increases in 2022, which we expect will result in higher interest expense on interest bearing deposits which we expect will be primarily offset by higher interest rates on CCBX loans and excess cash invested in the Federal Reserve Bank or other banks.

Net interest margin was 7.37% for the six months ended June 30, 2023, compared to 5.08% for the six months ended June 30, 2022, compared to 3.73% for the six months ended June 30, 2021.2022. The increase in net interest margin compared to the six months ended June 30, 20212022 was largely a result of an increase in higher rate loans. Average loans excluding PPP loans increased $723.0$854.7 million, compared to the six months ended June 30, 2021,2022; the increase was partially offset byincludes an average $436.1 million decrease in forgiven or repaid PPP loans.loans of $52.6 million. Also contributing to the increase in net interest margin compared to the six months ended June 30, 20212022 was $455.6a $4.4 million increase in averageinterest earned on interest earning deposits invested in other banks. These interest earning deposits earned an average rate of 41 basis points4.82% for the six months ended June 30, 2022,2023, compared to an average rate of 13 basis points0.41% for the six months ended June 30, 2021.

2022.

Cost of funds was 2.49% for the six months ended June 30, 2023, compared to 0.22% for the six months ended June 30, 2022, which is unchanged from the six months ended June 30, 2021.2022. Cost of deposits for the six months ended June 30, 20222023 was 0.18%2.44%, which was a two basis point2.26% increase, from 0.16%0.18% for the six months ended June 30, 2021,2022. These increases were largely due to an increase in interest rates and an increase in interest bearing deposits. CCBX deposit growth and the aforementioned reclassification of CCBX noninterest bearing deposits to interest bearing depositsalso contributed to the increase in interest expense.


Total yield on loans receivable for the six months ended June 30, 20222023 was 7.10%10.42%, compared to 4.47%7.10% for the six months ended June 30, 2021.2022. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. As ofFor the six months ended June 30, 20222023, average CCBX loans increased $447.9$629.8 million, or 499.6%117.2%, with an average CCBX yield of 12.48%16.56%, compared to 2.90% at12.48% for the six months ended June 30, 2021.2022. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements andoriginating & servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. AverageThere was an increase in average community bank loans increased $220.6of $225.0 million, or 18.3%15.6%, excludingwhich includes an average $52.6 million decrease in PPP loans as a result of loan forgiveness andforgiveness/ repayments, of $381.6 million, or 95.9%, compared to the six months ended June 30, 2021.2022. Average yield on community bank loans for the six months ended June 30, 20222023 was 5.10%6.13%. compared to 4.56%5.10% for the six months ended June 30, 2021.  2022.

48
Table of Contents,
The following tables show the average yield on loans and cost of deposits by segment and also illustrates the impact of BaaS loan expense on CCBX yield on loans:

 

For the Six Months Ended

 

 

June 30, 2022

 

 

June 30, 2021

 

 

Yield on

 

Cost of

 

 

Yield on

 

Cost of

 

(unaudited)

Loans

 

Deposits

 

 

Loans

 

Deposits

 

Community Bank

5.10%

 

0.09%

 

 

4.56%

 

0.17%

 

CCBX (1)

12.48%

 

0.34%

 

 

2.90%

 

0.05%

 

Consolidated

7.10%

 

0.18%

 

 

4.47%

 

0.16%

 

(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 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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

 

June 30, 2022

 

 

June 30, 2021

 

(dollars in thousands; unaudited)

Income / Expense

 

Income / expense divided by average CCBX loans

 

 

Income / Expense

 

Income / expense divided by average CCBX loans

 

BaaS loan interest income

$

33,273

 

 

12.48

%

 

$

1,290

 

 

2.90

%

Less:  BaaS loan expense

 

20,519

 

 

7.70

%

 

 

189

 

 

0.43

%

Net BaaS loan income*

$

12,754

 

 

4.78

%

 

$

1,101

 

 

2.48

%

Average BaaS Loans

$

537,577

 

 

 

 

 

$

89,656

 

 

 

��

For the Six Months Ended
June 30, 2023June 30, 2022
(unaudited)
Yield on
Loans (2)
Cost of
Deposits (2)
Yield on
Loans (2)
Cost of
Deposits (2)
Community Bank6.13%0.82%5.10%0.09%
CCBX (1)
16.56%4.18%12.48%0.34%
Consolidated10.42%2.44%7.10%0.18%

*

(1)CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans. A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”
(2)Annualized calculations shown for periods presented.
For the Six Months Ended
June 30, 2023June 30, 2022
(dollars in thousands; unaudited)Income / Expense
Income / expense divided by average CCBX loans (2)
Income / Expense
Income / expense divided by average CCBX loans (2)
BaaS loan interest income$95,851 16.56 %$33,273 12.48 %
Less: BaaS loan expense39,587 6.84 %20,519 7.70 %
Net BaaS loan income (1)
$56,264 9.72 %$12,754 4.78 %
Average BaaS Loans(3)
$1,167,366 $537,577 
(1)A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

(2)Annualized calculations shown for periods presented.
(3)Includes loans held for sale.
For the sixmonthsended June 30, 2022,2023, net interestmargin(net (net interestincomedividedby the averagetotalinterest earningassets) and net interestspread(average (average yieldon totalinterest earningassetsminusaveragecost of totalinterest bearingliabilities)were 7.37% and 6.39%, respectively, compared to 5.08% and 4.90%, respectively,comparedto 3.76% and 3.56%, respectively, for the sixmonthsended June 30, 2021.  

2022.

49

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 $4.0$2.3 million and $8.2$4.0 million for the six months ended June 30, 20222023 and 2021,2022, respectively. For the six months ended June 30, 20222023 and 2021,2022, the amount of interest income not recognized on nonaccrual loans was not material.

 

Average Balance Sheets

 

 

For the Six Months Ended June 30,

 

 

2022

 

 

2021

 

Average Balance Sheets
For the Six Months Ended June 30,

 

Average

 

 

Interest &

 

 

Yield /

 

 

Average

 

 

Interest &

 

 

Yield /

 

20232022

(dollars in thousands; unaudited)

 

Balance

 

 

Dividends

 

 

Cost (1)

 

 

Balance

 

 

Dividends

 

 

Cost (1)

 

(dollars in thousands; unaudited)Average
Balance		Interest &
Dividends
Yield /
Cost (1)
Average
Balance		Interest &
Dividends
Yield /
Cost (1)

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

Interest earning deposits

 

$

670,974

 

 

$

1,358

 

 

 

0.41

%

 

$

215,358

 

 

$

144

 

 

 

0.13

%

Interest earning deposits with
other banks		Interest earning deposits with
other banks		$241,368 $5,775 4.82 %$670,974 $1,358 0.41 %

Investment securities, available for sale (2)

 

 

82,431

 

 

 

615

 

 

 

1.50

 

 

 

22,117

 

 

 

36

 

 

 

0.33

 

Investment securities, available for sale (2)
100,276 1,069 2.15 82,431 615 1.50 

Investment securities, held to maturity (2)

 

 

1,286

 

 

 

19

 

 

 

2.98

 

 

 

2,478

 

 

 

16

 

 

 

1.30

 

Investment securities, held to maturity (2)
6,023 137 4.59 1,286 19 2.98 

Other Investments

 

 

9,729

 

 

 

171

 

 

 

3.54

 

 

 

6,460

 

 

 

138

 

 

 

4.31

 

Other investmentsOther investments11,206 186 3.35 9,729 171 3.54 

Loans receivable (3)

 

 

1,982,700

 

 

 

69,798

 

 

 

7.10

 

 

 

1,695,772

 

 

 

37,595

 

 

 

4.47

 

Loans receivable (3)
2,837,442 146,630 10.42 1,982,700 69,798 7.10 

Total interest earning assets

 

 

2,747,120

 

 

 

71,961

 

 

 

5.28

 

 

 

1,942,185

 

 

 

37,929

 

 

 

3.94

 

Total interest earning assets3,196,315 153,797 9.70 2,747,120 71,961 5.28 

Noninterest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Noninterest earning assets:

Allowance for loan losses

 

 

(38,554

)

 

 

 

 

 

 

 

 

 

 

(19,563

)

 

 

 

 

 

 

 

 

Allowance for credit lossesAllowance for credit losses(84,417)(38,554)

Other noninterest earning assets

 

 

104,159

 

 

 

 

 

 

 

 

 

 

 

71,349

 

 

 

 

 

 

 

 

 

Other noninterest earning assets183,516 104,159 

Total assets

 

$

2,812,725

 

 

 

 

 

 

 

 

 

 

$

1,993,971

 

 

 

 

 

 

 

 

 

Total assets$3,295,414 $2,812,725 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

Interest bearing deposits

 

$

1,463,875

 

 

$

2,226

 

 

 

0.31

%

 

$

878,740

 

 

$

1,288

 

 

 

0.30

%

Interest bearing deposits$2,199,168 $35,633 3.27 %$1,463,875 $2,226 0.31 %

PPPLF borrowings

 

 

-

 

 

 

-

 

 

 

0.00

 

 

 

138,536

 

 

 

240

 

 

 

0.35

 

FHLB advances and borrowings

 

 

12,154

 

 

 

69

 

 

 

1.14

 

 

 

24,999

 

 

 

141

 

 

 

1.14

 

FHLB advances and borrowings— — 0.00 12,154 69 1.14 

Subordinated debt

 

 

24,304

 

 

 

461

 

 

 

3.83

 

 

 

9,996

 

 

 

291

 

 

 

5.87

 

Subordinated debt44,028 1,195 5.47 24,304 461 3.83 

Junior subordinated debentures

 

 

3,587

 

 

 

51

 

 

 

2.87

 

 

 

3,585

 

 

 

42

 

 

 

2.36

 

Junior subordinated debentures3,588 128 7.19 3,587 51 2.87 

Total interest bearing liabilities

 

 

1,503,920

 

 

 

2,807

 

 

 

0.38

 

 

 

1,055,856

 

 

 

2,002

 

 

 

0.38

 

Total interest bearing liabilities2,246,784 36,956 3.32 1,503,920 2,807 0.38 

Noninterest bearing deposits

 

 

1,078,525

 

 

 

 

 

 

 

 

 

 

 

777,693

 

 

 

 

 

 

 

 

 

Noninterest bearing deposits746,436 1,078,525 

Other liabilities

 

 

17,790

 

 

 

 

 

 

 

 

 

 

 

12,336

 

 

 

 

 

 

 

 

 

Other liabilities43,299 17,790 

Total shareholders' equity

 

 

212,490

 

 

 

 

 

 

 

 

 

 

 

148,086

 

 

 

 

 

 

 

 

 

Total shareholders' equity258,895 212,490 

Total liabilities and shareholders' equity

 

$

2,812,725

 

 

 

 

 

 

 

 

 

 

$

1,993,971

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity$3,295,414 $2,812,725 

Net interest income

 

 

 

 

 

$

69,154

 

 

 

 

 

 

 

 

 

 

$

35,927

 

 

 

 

 

Net interest income$116,841 $69,154 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

4.90

%

 

 

 

 

 

 

 

 

 

 

3.56

%

Interest rate spread6.39 %4.90 %

Net interest margin (4)

 

 

 

 

 

 

 

 

 

 

5.08

%

 

 

 

 

 

 

 

 

 

 

3.73

%

Net interest margin (4)
7.37 %5.08 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

 

(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.

50
Table of Contents,
The following table presents an analysis of certain average balances, interest income and interest expense by segment:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

For the Six Months Ended

 

June 30, 2022

 

 

June 30, 2021

 

For the Six Months Ended

Average

 

Interest &

 

Yield /

 

 

Average

 

Interest &

 

Yield /

 

June 30, 2023June 30, 2022

(dollars in thousands; unaudited)

Balance

 

Dividends

 

Cost (1)

 

 

Balance

 

Dividends

 

Cost (1)

 

(dollars in thousands; unaudited)Average
Balance		Interest &
Dividends
Yield /
Cost (1)
Average
Balance		Interest &
Dividends
Yield /
Cost (1)

Community Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Community Bank

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets
Interest earning assets:Interest earning assets:

Loans receivable (2)

$

1,445,123

 

$

36,525

 

5.10

%

 

$

1,606,116

 

$

36,305

 

4.56

%

Loans receivable (2)
$1,670,076 $50,779 6.13 %$1,445,123 $36,525 5.10 %
Intrabank assetIntrabank asset— — 0.00 213,207 431 0.41 
Total interest earning assetsTotal interest earning assets1,670,076 50,779 6.13 1,658,330 36,956 4.49 

Liabilities

Liabilities

 

Liabilities
Interest bearing liabilities:Interest bearing liabilities:

Interest bearing deposits

 

928,602

 

 

752

 

0.16

 

 

 

850,026

 

 

1,246

 

0.30

 

Interest bearing deposits$864,518 $6,197 1.45 %$928,602 $752 0.16 %
Intrabank liabilityIntrabank liability145,890 3,569 4.93 — — — 
Total interest bearing liabilitiesTotal interest bearing liabilities1,010,408 9,766 1.95 928,602 752 0.16 

Noninterest bearing deposits

 

729,728

 

 

 

 

 

 

 

 

642,407

 

 

 

 

 

 

Noninterest bearing deposits659,668 729,728 
Net interest incomeNet interest income$41,013 $36,204 
Net interest margin(3)
Net interest margin(3)
4.95 %4.40 %

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCBX

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCBX

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

Loans receivable (2)(3)

$

537,577

 

$

33,273

 

12.48

%

 

$

89,656

 

$

1,290

 

2.90

%

Interest earning assets:Interest earning assets:
Loans receivable (2)(4)
Loans receivable (2)(4)
$1,167,366 $95,851 16.56 %$537,577 $33,273 12.48 %
Intrabank assetIntrabank asset254,052 6,139 4.87 346,493 730 0.42 
Total interest earning assetsTotal interest earning assets1,421,418 101,990 14.47 884,070 34,003 7.76 

Liabilities

Liabilities

 

Liabilities
Interest bearing liabilities:Interest bearing liabilities:

Interest bearing deposits

 

535,273

 

 

1,474

 

0.56

 

 

 

28,714

 

 

42

 

0.29

 

Interest bearing deposits$1,334,650 $29,436 4.45 %$535,273 $1,474 0.56 %
Total interest bearing liabilitiesTotal interest bearing liabilities1,334,650 29,436 4.45 535,273 1,474 0.56 

Noninterest bearing deposits

 

348,797

 

 

 

 

 

 

 

 

135,286

 

 

 

 

 

 

Noninterest bearing deposits86,768 348,797 
Net interest incomeNet interest income$72,554 $32,529 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Yields and costs are annualized.

 

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

 

 

 

(3) 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 and servicing CCBX loans.

 

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

51
Table of Contents,
For the Six Months Ended
June 30, 2023June 30, 2022
Average
Balance		Interest &
Dividends
Yield /
Cost (1)
Average
Balance		Interest &
Dividends
Yield /
Cost (1)
Treasury & Administration
Assets
Interest earning assets:
Interest earning deposits with
     other banks		$241,368 $5,775 4.82 %$670,974 $1,358 0.41 %
Investment securities, available for
     sale (6)
100,276 1,069 2.15 82,431 615 1.50 
Investment securities, held to
     maturity (6)
6,023 137 4.59 1,286 19 2.98 
Other investments11,206 186 3.35 9,729 171 3.54 
Total interest earning assets358,873 7,167 4.03 %764,420 2,163 0.57 %
Liabilities
Interest bearing liabilities:
FHLB advances and borrowings$— $— 0.00 %$12,154 $69 1.14 %
Subordinated debt44,028 1,195 5.47 24,304 461 3.83 
Junior subordinated debentures3,588 128 7.19 3,587 51 2.87 
Intrabank liability, net (7)
108,162 2,570 4.79 559,700 1,161 0.42 
Total interest bearing liabilities155,778 3,893 5.04 599,745 1,742 0.59 
Net interest income$3,274 $421 
Net interest margin(3)
1.84 %0.11 %
(1)Yields and costs are annualized.
(2)Includes loans held for sale and nonaccrual loans.
(3)Net interest margin represents net interest income divided by the average total interest earning assets.
(4)CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. See the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for a reconciliation of the impact of BaaS loan expense on CCBX loan yield.
(5)Net interest margin, net of BaaS loan expense includes the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, originating & servicing CCBX loans. A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”
(6)For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(7)Intrabank assets and liabilities are consolidated for period calculations and presented as intrabank asset, net or intrabank liability, net in the table above.
52
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 $22.1$32.7 million increase in loan interest income that is attributed to an increase in loan rates and $10.1$44.2 million increase in loan interest income that is attributed to an increase in loan volume. For purposesof thistable,changes attributableto both rateand volume thatcannot be segregatedhave been allocatedto volume.

 

Six Months Ended June 30, 2022

 

 

Compared to

 

 

Six Months Ended June 30, 2021

 

 

Increase (Decrease)

 

 

 

 

 

Six Months Ended June 30, 2023
compared to Six Months Ended June 30, 2022

 

Due to

 

 

Total Increase

 

Increase (Decrease)
Due to		Total Increase
(Decrease)

(dollars in thousands; unaudited)

 

Volume

 

 

Rate

 

 

(Decrease)

 

(dollars in thousands; unaudited)VolumeRate

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest income:

Interest earning deposits

 

$

922

 

 

$

292

 

 

$

1,214

 

Interest earning deposits$(10,279)$14,696 $4,417 

Investment securities, available for sale

 

 

450

 

 

 

129

 

 

 

579

 

Investment securities, available for sale190 264 454 

Investment securities, held to maturity

 

 

(18

)

 

 

21

 

 

 

3

 

Investment securities, held to maturity108 10 118 

Other Investments

 

 

57

 

 

 

(24

)

 

 

33

 

Other Investments25 (10)15 

Loans receivable

 

 

10,101

 

 

 

22,102

 

 

 

32,203

 

Loans receivable44,170 32,662 76,832 

Total increase in interest income

 

 

11,512

 

 

 

22,520

 

 

 

34,032

 

Total increase in interest income34,214 47,622 81,836 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

Interest bearing deposits

 

 

890

 

 

 

48

 

 

 

938

 

Interest bearing deposits11,914 21,493 33,407 

PPPLF borrowings

 

 

(240

)

 

 

-

 

 

 

(240

)

FHLB advances

 

 

(72

)

 

 

-

 

 

 

(72

)

FHLB advances— (69)(69)

Subordinated debt

 

 

271

 

 

 

(101

)

 

 

170

 

Subordinated debt535 199 734 

Junior subordinated debentures

 

 

-

 

 

 

9

 

 

 

9

 

Junior subordinated debentures— 77 77 

Total increase in interest expense

 

 

849

 

 

 

(44

)

 

 

805

 

Total increase in interest expense12,449 21,700 34,149 

Increase in net interest income

 

$

10,663

 

 

$

22,564

 

 

$

33,227

 

Increase in net interest income$21,765 $25,922 $47,687 

Provisionfor LoanCredit Losses

The provisionfor loancredit losses - loans is an expense weincurto maintainan allowancefor loancredit lossesat a levelthatmanagement deems appropriate to absorb inherentlosseson existingloans. For a descriptionof the factors taken into accountby our managementin determiningthe allowancefor loancredit lossessee “—Financial Condition—Allowance for LoanCredit Losses.”

The economic environment is continuously changing with increasedthe bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, political uncertainty and a rise in new COVID-19 variantstrade issues that have resulted in some economic uncertainty.  The Company is not required to implementmay impact the provisions ofprovision and therefore the Current Expected Credit Loss (“CECL”) accounting standard untilallowance. Effective January 1, 2023 the Company implemented the CECL allowance model which calculates reserves over the life of the loan and continues to account for the allowance for credit losses underis largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the incurred loss model.model, which is what we were previously using. Gross loans, excluding loans held for sale, totaled $2.33$3.01 billion at June 30, 20222023 and included $16.4$3.6 million in PPP loans, which are 100% guaranteed, and are excluded from the provision for loancredit losses - loans calculation. The allowance for loancredit losses as a percentage of loans was 3.68% at June 30, 2023, compared to 2.11% at June 30, 2022, compared to 1.20% at June 30, 2021.  

2022.

Agreements with our CCBX partners provide for an indemnification of loan losses and is also known as a credit enhancement provided by the partner which protects the Bank by absorbingindemnifying or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probableexpected losses for these CCBX loans and reclassified negative deposit overdrafts.accounts. When the provision for loancredit losses - loans and provision for unfunded commitments is recorded, a credit enhancement receivableasset is also recorded in other assets on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partnerpartner's legal commitment to cover the Bank’s loan losses related to loans they originate.  Incurred loan losses are recorded in the allowance for loan losses, and as theindemnify or reimburse losses. The credit enhancement obligationsasset is relieved as credit enhancement payments are received from the CCBX partner or taken from the credit enhancement receivable is relieved.  

partner's cash reserve account.

53
Table of Contents,
Comparison of the quarter ended June 30, 20222023 to the comparable quarter in the prior year

The provision for loancredit losses - loans for the three months ended June 30, 2022,2023 was $14.1$52.6 million, compared to $361,000$14.1 million for the three months ended June 30, 2021.2022. The increase in the Company’s provision for loancredit losses - loans during the quarter ended June 30, 2022,2023, is largely related to the provision for CCBX partner loans. During the quarter ended June 30, 2022,2023, a $14.0$52.6 million provision for loancredit losses - loans was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank loancredit losses indicated that a provisionsmall adjustment (recapture) for loan loss of $109,000$47,000 was needed for the quarter ended June 30, 2022.  

2023.

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

 

Three Months Ended

 

Three Months Ended

(dollars in thousands; unaudited)

 

June 30, 2022

 

June 30, 2021

 

(dollars in thousands; unaudited)June 30, 2023June 30, 2022

Community bank

 

$

109

 

$

364

 

Community bank$(47)$109 

CCBX

 

 

13,985

 

(3

)

CCBX52,645 13,985 

Total provision expense

 

$

14,094

 

$

361

 

Total provision expense$52,598 $14,094 

Net charge-offs for the quarter ended June 30, 20222023 totaled $31.0 million, or 4.19% of total average loans, compared to $3.5 million, or 0.64% of total average loans, as compared to net charge-offs of $5,000, or <0.01% of total average loans, for the quarter ended June 30, 2021.2022. Net charge-offs were up in 20222023 compared to 20212022 due to loans originated bythrough CCBX partners. In accordance with GAAP, CCBX loan losses are recorded as charge-offs. Agreements withcharge-offs, but CCBX partnerspartner agreements provide for a credit enhancement that protectsindemnifies or reimburses the Bank from incurred losses.  The credit enhancement is recognized as noninterest income in the BaaS credit enhancements category and as a credit enhancement receivable on the balance sheet.  When loan losses are recognizedfor net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the Bank charges offprogram agreement for one partner where the Company is responsible for credit losses on approximately 10% of a $180.5 million loan portfolio. At June 30, 2023, our portion of this portfolio represented $18.0 million in loans. For the three months ended June 30, 2023, $31.0 million of net charge-offs were recognized for CCBX loans and the partner reimburses the Bank and the credit enhancement receivable is reduced.$9,000 of net charge-offs were recognized on community bank loans. For the three months ended June 30, 2022, $3.5 million of net charge-offs were recognized foron CCBX loans and $33,000 inof net recoveries were recognized for community bank loans.  For the three months ended June 30, 2021, $5,000 of net charge-offs were recognized for the community bank.  


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

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

Annualized calculations shown for periods presented.

 

 

Three Months Ended

 

 

 

June 30, 2022

 

 

June 30, 2021

 

(dollars in thousands; unaudited)

 

Community Bank

 

CCBX

 

Total

 

 

Community Bank

 

CCBX

 

Total

 

Gross charge-offs

 

$

3

 

$

3,539

 

$

3,542

 

 

$

8

 

$

4

 

$

12

 

Gross recoveries

 

 

(36

)

 

-

 

 

(36

)

 

 

(3

)

 

(4

)

 

(7

)

Net charge-offs

 

$

(33

)

$

3,539

 

$

3,506

 

 

$

5

 

$

-

 

$

5

 

Net charge-offs to average loans

 

 

-0.01

%

 

2.05

%

 

0.64

%

 

 

0.00

%

 

0.00

%

 

0.00

%

Comparison of the six months ended June 30, 20222023 to the comparable period in the prior year

The provision for loancredit losses - loans for the six months ended June 30, 2022,2023 was $27.0$96.1 million, compared to $718,000$27.0 million for the six months ended June 30, 2021.2022. The increase in the Company’s provision for loancredit losses - loans during the quarter ended June 30, 2022,2023, is largely related to the provision for CCBX partner loans. During the six months ended June 30, 2022,2023, a $26.6$95.8 million provision for loancredit losses - loans was recorded for loans originated bythrough CCBX partners based on management’s analysis. The factors used in management’s analysis for community bank loancredit losses indicated that a provision for loan loss of $452,000$381,000 was needed for the six months ended June 30, 2022.  

2023.

54
Table of Contents,
The following table shows the provision expense by segment for the periods indicated:

Six Months Ended

 

Six Months Ended

(dollars in thousands; unaudited)

June 30, 2022

 

June 30, 2021

 

(dollars in thousands; unaudited)June 30, 2023June 30, 2022

Community bank

$

452

 

$

685

 

Community bank$381 $452 

CCBX

 

26,584

 

33

 

CCBX95,761 26,584 

Total provision expense

$

27,036

 

$

718

 

Total provision expense$96,142 $27,036 

Net charge-offs for the six months ended June 30, 20222023 totaled $6.3$63.3 million, or 0.64%4.50% of total average loans, as compared to net charge-offs of $15,000,$6.3 million, or <0.01%0.64% of total average loans, for the quartersix months ended June 30, 2021.2022. Net charge-offs were upincreased in 2022the first six months of 2023 compared to 2021 due tothe same period of 2022 as a result of the growth in loans originated bythrough CCBX partners. In accordance with GAAP, CCBX losses are recorded as charge-offs, but agreements with CCBX partnerspartner agreements provide for an indemnification of credit losses, ora credit enhancement that protectsindemnifies or reimburses the Bank from incurredfor 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 which is recorded as noninterest income.on approximately 10% of a $180.5 million loan portfolio. At June 30, 2023, our portion of this portfolio represented $18.0 million in loans. For the six months ended June 30, 2023, $63.2 million of net charge-offs were recognized for CCBX loans and $54,000 of net charge-offs recognized for community bank loans. For the six months ended June 30, 2022, $6.3 million of net charge-offs were recognized for CCBX loans, withand $33,000 in net recoveries recognized for community bank loans.  For the six months ended June 30, 2021, $15,000 of net charge-offsrecoveries were recognized for community bank loans.

 

Six Months Ended

 

Six Months Ended

 

June 30, 2022

 

 

June 30, 2021

 

June 30, 2023June 30, 2022

(dollars in thousands; unaudited)

 

Community Bank

 

CCBX

 

Total

 

 

Community Bank

 

CCBX

 

Total

 

(dollars in thousands; unaudited)Community BankCCBXTotalCommunity BankCCBXTotal

Gross charge-offs

 

$

7

 

$

6,343

 

$

6,350

 

 

$

27

 

$

4

 

$

30

 

Gross charge-offs$59 $66,407 $66,466 $7 $6,343 $6,350 

Gross recoveries

 

 

(40

)

 

-

 

 

(40

)

 

 

(12

)

 

(4

)

 

(16

)

Gross recoveries(5)(3,200)(3,205)(40)— (40)

Net charge-offs

 

$

(33

)

$

6,343

 

$

6,310

 

 

$

15

 

$

-

 

$

14

 

Net charge-offs$54 $63,207 $63,261 $(33)$6,343 $6,310 

Net charge-offs to average loans

 

 

0.00

%

 

2.38

%

 

0.64

%

 

 

0.00

%

 

0.00

%

 

0.00

%

Net charge-offs to average loans(1)
Net charge-offs to average loans(1)
0.01 %10.92 %4.50 %0.00 %2.38 %0.64 %

(1) Annualized calculations shown for periods presented.
NoninterestIncome

Our primarysourcesof recurringnoninterestincomeare BaaS indemnification income, Baas program income and depositservicecharges and fees, loan referral fees and mortgage broker fees.fees. Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method.

Comparison of the quarter ended June 30, 20222023 to the comparable quarter in the prior year

For the threemonthsended June 30, 2022,2023, noninterestincometotaled$25.5 $58.6 million,an increaseof $20.7$33.1 million, or 433.1%129.9%, comparedto $4.8$25.5 million for the threemonthsended June 30, 2021.

2022.

55

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

 

Three Months

 

 

 

 

 

 

 

 

Ended June 30,

 

 

Increase

 

 

Percent

 

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

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

(dollars in thousands; unaudited)20232022

Deposit service charges and fees

 

$

988

 

 

$

949

 

 

$

39

 

 

 

4.1

%

Deposit service charges and fees$989 $988 $1 0.1 %

Loan referral fees

 

 

208

 

 

 

806

 

 

 

(598

)

 

 

(74.2

)

Loan referral fees682 208 474 227.9 

Mortgage broker fees

 

 

85

 

 

 

253

 

 

 

(168

)

 

 

(66.4

)

Gain on sale of bank branch including deposits and loans, net

 

 

-

 

 

 

1,263

 

 

 

(1,263

)

 

 

(100.0

)

Unrealized gain on equity securities, netUnrealized gain on equity securities, net155 — 155 100.0 

Gain on sales of loans, net

 

 

-

 

 

 

31

 

 

 

(31

)

 

 

(100.0

)

Gain on sales of loans, net23 — 23 100.0 

Other

 

 

311

 

 

 

56

 

 

 

255

 

 

 

455.4

 

Other234 396 (162)(40.9)

Noninterest income, excluding BaaS program income and

BaaS indemnification income

 

 

1,592

 

 

 

3,358

 

 

 

(1,766

)

 

 

(52.6

)

Noninterest income, excluding BaaS program income and BaaS indemnification income2,083 1,592 491 30.8 

Servicing and other BaaS fees

 

 

1,159

 

 

 

1,029

 

 

 

130

 

 

 

12.6

 

Servicing and other BaaS fees895 1,159 (264)(22.8)

Transaction fees

 

 

814

 

 

 

93

 

 

 

721

 

 

 

775.3

 

Transaction fees1,052 814 238 29.2 

Interchange fees

 

 

628

 

 

 

110

 

 

 

518

 

 

 

470.9

 

Interchange fees975 628 347 55.3 

Reimbursement of expenses

 

 

618

 

 

 

192

 

 

 

426

 

 

 

221.9

 

Reimbursement of expenses1,026 618 408 66.0 

BaaS program income

 

 

3,219

 

 

 

1,424

 

 

 

1,795

 

 

 

126.1

 

BaaS program income3,948 3,219 729 22.6 

BaaS credit enhancements

 

 

14,207

 

 

 

-

 

 

 

14,207

 

 

 

100.0

 

BaaS credit enhancements51,027 14,207 36,820 259.2 

Baas fraud enhancements

 

 

6,474

 

 

 

-

 

 

 

6,474

 

 

 

100.0

 

Baas fraud enhancements1,537 6,474 (4,937)(76.3)

BaaS indemnification income

 

 

20,681

 

 

 

-

 

 

 

20,681

 

 

 

100.0

 

BaaS indemnification income52,564 20,681 31,883 154.2 
Total BaaS incomeTotal BaaS income56,512 23,900 32,612 136.5 

Total noninterest income

 

$

25,492

 

 

$

4,782

 

 

$

20,710

 

 

 

433.1

%

Total noninterest income$58,595 $25,492 $33,103 129.9 %

Comparison of the six months ended June 30, 20222023 to the comparable period in the prior year

For the sixmonthsended June 30, 2022,2023, noninterestincometotaled$47.5 $107.9 million,an increaseof $39.7$60.4 million, or 511.4%127.3%, comparedto $7.8$47.5 million for the sixmonthsended June 30, 2021.

2022.

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

 

Six Months

 

 

 

 

 

 

 

 

 

 

Ended June 30,

 

 

Increase

 

 

Percent

 

Six Months Ended June 30,Increase
(Decrease)		Percent
Change

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

(dollars in thousands; unaudited)20232022

Deposit service charges and fees

 

$

1,872

 

 

$

1,812

 

 

$

60

 

 

 

3.3

%

Deposit service charges and fees$1,899 $1,872 $27 1.4 %

Loan referral fees

 

 

810

 

 

 

1,403

 

 

 

(593

)

 

 

(42.3

)

Loan referral fees682 810 (128)(15.8)

Mortgage broker fees

 

 

208

 

 

 

515

 

 

 

(307

)

 

 

(59.6

)

Gain on sale of bank branch including deposits and loans, net

 

 

-

 

 

 

1,263

 

 

 

(1,263

)

 

 

(100.0

)

Gain on sales of loans, net

 

 

-

 

 

 

161

 

 

 

(161

)

 

 

(100.0

)

Gain on sales of loans, net146 — 146 100.0 
Unrealized (loss) gain on equity securities, netUnrealized (loss) gain on equity securities, net194 — 194 100.0 

Other

 

 

576

 

 

 

240

 

 

 

336

 

 

 

140.0

 

Other533 784 (251)(32.0)

Noninterest income, excluding BaaS program income and

BaaS indemnification income

 

 

3,466

 

 

 

5,394

 

 

 

(1,928

)

 

 

(35.7

)

Noninterest income, excluding BaaS program income and BaaS indemnification income3,454 3,466 (12)(0.3)

Servicing and other BaaS fees

 

 

2,328

 

 

 

1,613

 

 

 

715

 

 

 

44.3

 

Servicing and other BaaS fees1,843 2,328 (485)(20.8)

Transaction fees

 

 

1,307

 

 

 

239

 

 

 

1,068

 

 

 

446.9

 

Transaction fees1,969 1,307 662 50.7 

Interchange fees

 

 

1,060

 

 

 

145

 

 

 

915

 

 

 

631.0

 

Interchange fees1,764 1,060 704 66.4 

Reimbursement of expenses

 

 

990

 

 

 

375

 

 

 

615

 

 

 

164.0

 

Reimbursement of expenses1,947 990 957 96.7 

BaaS program income

 

 

5,685

 

 

 

2,372

 

 

 

3,313

 

 

 

139.7

 

BaaS program income7,523 5,685 1,838 32.3 

BaaS credit enhancements

 

 

27,282

 

 

 

-

 

 

 

27,282

 

 

 

100.0

 

BaaS credit enhancements93,389 27,282 66,107 242.3 

BaaS fraud enhancements

 

 

11,045

 

 

 

-

 

 

 

11,045

 

 

 

100.0

 

BaaS fraud enhancements3,536 11,045 (7,509)(68.0)

BaaS indemnification income

 

 

38,327

 

 

 

-

 

 

 

38,327

 

 

 

100.0

 

BaaS indemnification income96,925 38,327 58,598 152.9 
Total BaaS incomeTotal BaaS income104,448 44,012 60,436 137.3 

Total noninterest income

 

$

47,478

 

 

$

7,766

 

 

$

39,712

 

 

 

511.4

%

Total noninterest income$107,902 $47,478 $60,424 127.3 %

56
Table of Contents,
Summary of significant noninterest income for the three and six months ended June 30, 20222023 compared to the three and six months ended June 30, 2021

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 bythrough partners and credit enhancements related to the allowance for loancredit 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 noncredit fraud losses are expensed in noninterest expense under BaaS fraud expense. Also in accordance with GAAP, we establish a credit enhancement receivableasset for expected future loancredit losses through the recognition of BaaS credit enhancement revenue at the same time we establish an allowance for those loans though a provision for loan losses.credit losses - loans. For more information on the accounting for BaaS allowance for loancredit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”


The following table presents the BaaS income for the periods indicated:

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Program income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing and other BaaS fees

 

$

1,159

 

 

$

1,029

 

 

$

2,328

 

 

$

1,613

 

Transaction fees

 

 

814

 

 

 

93

 

 

 

1,307

 

 

 

239

 

Interchange fees

 

 

628

 

 

 

110

 

 

 

1,060

 

 

 

145

 

Reimbursement of expenses

 

 

618

 

 

 

192

 

 

 

990

 

 

 

375

 

Program income

 

 

3,219

 

 

 

1,424

 

 

 

5,685

 

 

 

2,372

 

Indemnification income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit enhancements

 

 

14,207

 

 

 

-

 

 

 

27,282

 

 

 

-

 

Fraud enhancements

 

 

6,474

 

 

 

-

 

 

 

11,045

 

 

 

-

 

Indemnification income

 

 

20,681

 

 

 

-

 

 

 

38,327

 

 

 

-

 

Total BaaS income

 

$

23,900

 

 

$

1,424

 

 

$

44,012

 

 

$

2,372

 

Our CCBX segment continues to grow,evolve, and now has 2922 relationships, at varying stages, as of June 30, 2022.  As of June 30, 2022, we increased our active relationships to 23, compared to 12 as of June 30, 2021.   As we2023. We continue to grow inrefine the BaaS space, wecriteria for CCBX partnerships and are choosing to work withexiting relationships where it makes sense and are focusing more on selecting larger and more established fintech partners, so the number of new partnerships is not increasing as quickly as in the past, but these newer, larger partners are expected to have a significant impact on ourwith experienced management teams, existing customer bases and strong financial growth.  As more CCBX customers move to active status, we expect that BaaS program income will increase.  

positions.

The following table illustrates the activity and growthevolution in CCBX relationships for the periods presented and includes the exit of a small partner during the quarter and six months ended June 30, 2022.  

presented.
As of
(unaudited)June 30, 2023June 30, 2022
Active1823
Friends and family / testing12
Implementation / onboarding10
Signed letters of intent14
Wind down - preparing to exit relationship10
Total CCBX relationships2229

 

As of

(unaudited)

June 30, 2022

June 30, 2021

Active

23

12

Friends and family / testing

2

3

Implementation / onboarding

0

7

Signed letters of intent

4

2

      Total CCBX relationships

29

24

Deposit ServiceCharges and Fees. Deposit service charges and fees include service charges on accounts, point-of-sale fees, merchant services fees and overdraft fees. Together they constitute the largest component of our noninterest income, outside of BaaS income.

Loan Referral FeesReferralFees. We earn loan referralfeeswhenweoriginatea variablerateloan and the borrowerenters into an interestrateswap agreementwith a thirdpartyto fix the interestratefor an extendedperiod,usually20 or 25 years.We recognizethe loan referralfee for arrangingthe interestrateswap. Byfacilitatinginterestrate swaps to our clients,weare able to providethemwith a long-term,fixedinterestratewithout assumingthe interestraterisk. Interest rate volatility, swap rates, and the timing of loan closings all impact the demand for long-term fixed rate swaps. The recognition of loan referral fees fluctuates in response to these market conditions and as a result we may recognize more or less, or may not recognize any, loan referral fees in some periods. Current market conditions are making interest rate swap agreements less attractive in the higher rate environment.

Gain on Sales of Loans, net. Gain on sales of loans occurs when we sell certain CCBX loans to the originating partner, in accordance with partner agreements. Gain on sale of loans may also occur when we sell in the secondary market the guaranteed portion (generally 75% of the principal balance) of the SBA and U.S. Department of Agriculture (“USDA”) loans that we originate. This activity fluctuates based on SBA and USDA loan activity.

Mortgage Broker Fees

. We earn mortgage broker fees for residential real estate loans that we broker through mortgage lenders. Mortgage broker fees fluctuate basedUnrealized (loss)/gain on demand and changes in interest rates.  


Gain on Sale of Bank Branch Including Deposits and Loans,equity securities, net. The saleDuring the three and six months ended June 30, 2023, we recognized an unrealized gain on equity securities of our Freeland branch closed on April$155,000 and $194,000, respectively, compared to the same periods ended June 30, 2021.  Noninterest income included $1.3 million gain from sale of the branch in 2021,2022, when there was no similar income in 2022.unrealized holding gain or loss.

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

57
Table of Contents,
NoninterestExpense

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 components of noninterest expense are BaaS loan and fraud expense and salaries and employee benefits. Noninterest expense also includes operational expenses, such as software license, maintenance and subscriptions, occupancy, data processing, legal and professional fees,expenses, data processing and software licenses, occupancy, FDIC assessment, points of sale expense, excise taxes, director and staff expenses, marketing and other expenses.

Comparison of the quarter ended June 30, 20222023 to the comparable quarter in the prior year

For the three months ended June 30, 2022,2023, noninterest expense totaled $38.2$51.9 million, an increase of $24.4$13.7 million, or 178.0%36.0%, compared to $13.7$38.2 million for the three months ended June 30, 2021.

2022.

The followingtablepresents,for the periodsindicated,the majorcategoriesof noninterestexpense:

 

Three Months

 

 

 

 

 

 

 

 

 

 

Ended June 30,

 

 

Increase

 

 

Percent

 

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

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

(dollars in thousands; unaudited)20232022

Salaries and employee benefits

 

$

12,238

 

 

$

8,913

 

 

$

3,325

 

 

 

37.3

%

Salaries and employee benefits$16,309 $12,238 $4,071 33.3 %

Software licenses, maintenance and subscriptions

 

 

1,108

 

 

 

543

 

 

 

565

 

 

 

104.1

 

Legal and professional expensesLegal and professional expenses4,645 1,002 3,643 363.6 
Data processing and software licensesData processing and software licenses1,972 1,546 426 27.6 

Occupancy

 

 

1,083

 

 

 

990

 

 

 

93

 

 

 

9.4

 

Occupancy1,143 1,083 60 5.5 

Data processing

 

 

1,010

 

 

 

734

 

 

 

276

 

 

 

37.6

 

Legal and professional fees

 

 

1,002

 

 

 

626

 

 

 

376

 

 

 

60.1

 

FDIC assessments

 

 

855

 

 

 

225

 

 

 

630

 

 

 

280.0

 

FDIC assessments570 855 (285)(33.3)
Point of sale expensePoint of sale expense814 409 405 99.0 

Excise taxes

 

 

564

 

 

 

388

 

 

 

176

 

 

 

45.4

 

Excise taxes531 564 (33)(5.9)

Director and staff expenses

 

 

377

 

 

 

318

 

 

 

59

 

 

 

18.6

 

Director and staff expenses519 377 142 37.7 

Marketing

 

 

74

 

 

 

132

 

 

 

(58

)

 

 

(43.9

)

Marketing115 74 41 55.4 

Other

 

 

1,155

 

 

 

763

 

 

 

392

 

 

 

51.4

 

Other1,722 1,318 404 30.7 

Noninterest expense, excluding BaaS loan and

BaaS fraud expense

 

 

19,466

 

 

 

13,632

 

 

 

5,834

 

 

 

42.8

 

Noninterest expense, excluding BaaS loan and BaaS fraud expense28,340 19,466 8,874 45.6 

BaaS loan expense

 

 

12,229

 

 

 

99

 

 

 

12,130

 

 

 

12,252.5

 

BaaS loan expense22,033 12,229 9,804 80.2 

BaaS fraud expense

 

 

6,474

 

 

 

-

 

 

 

6,474

 

 

 

100.0

 

BaaS fraud expense1,537 6,474 (4,937)(76.3)

BaaS loan and fraud expense

 

 

18,703

 

 

 

99

 

 

 

18,604

 

 

 

18,791.9

 

BaaS loan and fraud expense23,570 18,703 4,867 26.0 

Total noninterest expense

 

$

38,169

 

 

$

13,731

 

 

$

24,438

 

 

 

178.0

%

Total noninterest expense$51,910 $38,169 $13,741 36.0 %


Comparison of the six months ended June 30, 20222023 to the comparable period in the prior year

For the six months ended June 30, 2022,2023, noninterest expense totaled $68.6$96.6 million, an increase of $42.5$28.0 million, or 162.9%40.8%, compared to $26.1$68.6 million for the six months ended June 30, 2021.

2022.

58
Table of Contents,
The followingtablepresents,for the periodsindicated,the majorcategoriesof noninterestexpense:

 

Six Months

 

 

 

 

 

 

 

 

 

 

Ended June 30,

 

 

Increase

 

 

Percent

 

Six Months Ended June 30,Increase
(Decrease)		Percent
Change

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

(dollars in thousands; unaudited)20232022

Salaries and employee benefits

 

$

23,323

 

 

$

16,599

 

 

$

6,724

 

 

 

40.5

%

Salaries and employee benefits$31,884 $23,323 $8,561 36.7 %
Data processing and software licensesData processing and software licenses3,812 3,050 762 25.0 
Legal and professional expensesLegal and professional expenses7,707 1,710 5,997 350.7 

Occupancy

 

 

2,219

 

 

 

2,048

 

 

 

171

 

 

 

8.3

 

Occupancy2,362 2,219 143 6.4 

Software licenses, maintenance and subscriptions

 

 

2,160

 

 

 

1,027

 

 

 

1,133

 

 

 

110.3

 

Data processing

 

 

1,819

 

 

 

1,431

 

 

 

388

 

 

 

27.1

 

Legal and professional fees

 

 

1,710

 

 

 

1,386

 

 

 

324

 

 

 

23.4

 

FDIC assessments

 

 

1,459

 

 

 

420

 

 

 

1,039

 

 

 

247.4

 

FDIC assessments1,165 1,459 (294)(20.2)

Excise taxes

 

 

913

 

 

 

747

 

 

 

166

 

 

 

22.2

 

Excise taxes986 913 73 8.0 
Point of sale expensePoint of sale expense1,567 657 910 138.5 

Director and staff expenses

 

 

721

 

 

 

538

 

 

 

183

 

 

 

34.0

 

Director and staff expenses1,145 721 424 58.8 

Marketing

 

 

173

 

 

 

214

 

 

 

(41

)

 

 

(19.2

)

Marketing210 173 37 21.4 

Other

 

 

2,524

 

 

 

1,484

 

 

 

1,040

 

 

 

70.1

 

Other2,612 2,795 (183)(6.5)

Noninterest expense, excluding BaaS loan and

BaaS fraud expense

 

 

37,021

 

 

 

25,894

 

 

 

11,127

 

 

 

43.0

 

Noninterest expense, excluding BaaS loan and BaaS fraud expense53,450 37,020 16,430 44.4 

BaaS loan expense

 

 

20,519

 

 

 

189

 

 

 

20,330

 

 

 

107.6

 

BaaS loan expense39,587 20,519 19,068 92.9 

BaaS fraud expense

 

 

11,045

 

 

 

-

 

 

 

11,045

 

 

 

100.0

 

BaaS fraud expense3,536 11,045 (7,509)(68.0)

BaaS loan and fraud expense

 

 

31,564

 

 

 

189

 

 

 

31,375

 

 

 

16600.5

 

BaaS loan and fraud expense43,123 31,564 11,559 36.6 

Total noninterest expense

 

$

68,585

 

 

$

26,083

 

 

$

42,502

 

 

 

162.9

%

Total noninterest expense$96,573 $68,584 $27,989 40.8 %

Summary of significant noninterest expense for the three and six months ended June 30, 20222023 compared to the three and six months ended June 30, 2021

2022

A description of our largest noninterest expense categories are below:

Salaries and Employee Benefits. Salaries and employee benefits are one of the largest components of noninterest expense and include payroll expense, incentive compensation costs, equity compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits 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. As of June 30, 2023, we had 482 full-time equivalent employees, compared to 433 at June 30, 2022, a 11.3% increase.
Data Processing and Software Licenses. Data processing and software licenses includes expenses related to obtaining and maintaining software required for our various functions. Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs. Data processing costs grow as we grow and add new products, customers and branches. Additionally, CCBX data processing expenses and software that aids in the reporting of CCBX activities and monitoring of transactions that helps to automate and create other efficiencies in reporting have resulted in increased expenses in the category. These expenses are expected to increase as we invest more in automated processing and as we grow product lines and our CCBX segment.
Legal and Professional Expenses. Legal and professional costs include legal, audit and accounting expenses, consulting fees, fees for recruiting and hiring employees, and IT related security expenses. These expenses fluctuate with the consulting costs related to risk management, development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services. The expenses also reflect the costs associated with our infrastructure enhancement projects to improve our processing, automate processes, reduce compliance costs and enhance our data management.
Occupancy. Occupancy expenses include rent, utilities, janitorial and other maintenance expenses, property insurances and taxes. Also included is depreciation on building, leasehold, furniture, fixtures and equipment. Although our hybrid and remote workforce is increasing, which helps keep some occupancy expenses down, we do expect occupancy expenses to increase as we continue to grow.
59
Table of Contents,
FDIC Assessments. FDIC assessments are assessed to fund the DIF to insure and protect the depositors of insured banks and to resolve failed banks. The assessment rate is based on a number of factors and recalculated each quarter. As deposits increase, the FDIC assessment expense will generally increase. However, our rate has decreased in 2023 as a result of improvement in the ratios that determine the rate at which insured deposits are assessed, compared to the comparable prior year period. On October 18, 2022 the FDIC finalized an increase of 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 exceeds 2.0%.
Excise Taxes. Excise taxes are assessed on Washington state income and are based on gross income. Gross income is reduced by certain allowed deductions and income attributed to other states is also removed to arrive at the taxable base. Excise taxes increased as a result of increased income subject to excise taxes.
Point of Sale Expenses. Point of sale expenses are incurred as part of the process that allows businesses to accept payment for goods or services. Generally, point of sale expense increases as point of sale activity increases, as does point of sale income which is recognized in other income.
Director and Staff Expenses. Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses. As conferences and other professional events have resumed we have seen increased expenses related to employee travel, and continuing education.
Marketing. Marketing and promotion costs were flat because we are using more cost-effective advertising options; however, we expect to see advertising expenses increase as we deploy more branding and targeted advertising for the community bank and CCBX.
Other. This category includes dues and memberships, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and officer’s insurance, donations and miscellaneous other expenses. Provision for unfunded commitments is only included in this category for three and six months ended June 30, 2022 as the expense/credit for the three and six months ended June 30, 2023 is included in the provision/recapture for unfunded commitments.
BaaS loan and fraud expense. Included in BaaS loan and fraud expense is partner loan expense including overdraft balances and partner fraud expense. Partner loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements andoriginating & servicing CCBX loans. Partner fraud expense represents noncredit fraud losses on loans and deposits originated bythrough 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 periods indicated, the BaaS loan and fraud expenses:

 

Three Months Ended

 

 

Six Months Ended

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

Three Months EndedSix Months Ended

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

(dollars in thousands; unaudited)June 30,
2023		June 30,
2022		June 30,
2023		June 30,
2022

BaaS loan expense

 

$

12,229

 

 

$

99

 

 

$

20,519

 

 

$

189

 

BaaS loan expense$22,033 $12,229 $39,587 $20,519 

BaaS fraud expense

 

 

6,474

 

 

 

-

 

 

 

11,045

 

 

 

-

 

BaaS fraud expense1,537 6,474 3,536 11,045 

Total BaaS loan and fraud expense

 

$

18,703

 

 

$

99

 

 

$

31,564

 

 

$

189

 

Total BaaS loan and fraud expense$23,570 $18,703 $43,123 $31,564 

Salariesand Employee Benefits.Salariesand employeebenefitsare one of the largestcomponentsof noninterest expense and includepayrollexpense, incentivecompensationcosts,benefitplans, healthinsuranceand payroll taxes.Salariesand employeebenefitscontinue 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.  Asof June 30, 2022, wehad 433 full-timeequivalentemployees,comparedto 321 at June 30, 2021, a 34.9% increase.


Occupancy. Occupancy expenses rent, utilities, janitorial and other maintenance expenses, property insurances and taxes.  Also included is depreciation on building,leasehold,furniture,fixturesand 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.  

Software Licenses, Maintenance and Subscriptions. Software licenses, maintenance and subscriptions includes expenses related to obtaining and maintaining software required for our various functions.   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.

Data Processing. Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs.  Data processing costs grow as we grow and add new products, customers and branches.  Additionally, CCBX data processing expenses are included in this category and are expected to increase incrementally as this segment grows.

Legal and Professional Fees.  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 development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services.  

FDIC Assessments. FDIC assessments are assessed to fund the Deposit Insurance Fund (“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.  On June 21, 2022 the FDIC proposed an increase of 2 basis points in the initial base deposit insurance assessment rates.  The rise is intended to increase the reserve ratio of the Deposit Insurance Fund from 1.23% (as of March 31, 2022) to 1.35%, the statutory requirement.  However, the increase in the base rates would remain in place until the reserve ratio reaches 2.0%.  If adopted, the increase would take effect in the first quarterly assessment period of 2023, and would increase FDIC assessment expense.

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.  Partially offsetting that increase is a credit we received in 2022 against excise taxes owed in the amount of $109,000 as a result of our participation in the Washington State Main Street Program, which reduced our calculated 2022 expense.

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 COVID-19 restrictions have lessened, we have seen increased expenses related to employee travel, and continuing education.  

Marketing. Marketing costs are down from 2021, however they are expected to increase as we continue to expand our CCBX segment, offer new products and services and grow our brand.

Other. This category includes dues and memberships, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and officer’s insurance, donations, provision for unfunded commitments, and miscellaneous other expenses.  The provision for unfunded commitments has increased with the addition of CCBX loan partners.

Income TaxExpense

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

On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which, among other things, implements a new 15%

60

Table of Contents,
corporate alternative minimum tax for certain large corporations, a 1% excise tax on stock buybacks, and several tax incentives to promote clean energy and climate initiatives. These provisions were effective beginning January 1, 2023. Based on its current analysis of the provisions, we do not expect this legislation to have a material impact on our consolidated financial statements.
Comparison of the quarter ended June 30, 20222023 to the comparable quarter in the prior year

For the three monthsended June 30, 2022 incometax expense totaled$2.9 million, comparedto $2.3 million for the threemonths ended June 30, 2021.2023, income tax expense totaled $3.9 million, compared to $2.9 million for the three months ended June 30, 2022. The $650,000$937,000 increase in income tax expense is the result of higher net income, combined with the addition of various state taxes that are being assessed as CCBX activities and employees expanding into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods, however our taxable income has decreased in 2022, which has lowered ourperiods. The effective tax rate was 23.1% for the three months ended June 30, 2023, compared to 22.4% for the three months ended June 30, 2022, compared to 24.6%2022. The effective tax rate was higher for the three months ended June 30, 2021.

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 six months ended June 30, 20222023 to the comparable period in the prior year

For the six monthsended June 30, 2022 incometax expense totaled$4.6 million, comparedto $3.9 million for the sixmonths ended June 30, 2021.2023 income tax expense totaled $6.9 million, compared to $4.6 million for the six months ended June 30, 2022. The $745,000$2.3 million increase in income tax expense is the result of higher net income. Our effectivetax ratesfor the sixmonthsended June 30, 2022 and 2021 were 21.9% and 22.9%, respectively as a result of lower taxable income for the six months ended June 30, 2023 and 2022 comparedwere 21.5% and 21.9%, respectively.
Segment Information
As defined in ASC 280, Segment Reporting, an operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the six months ended June 30, 2021.

Segment Information

Forsegment 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 purposespractices 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 Company has two reportablesegments are those that apply to our preparation of the accompanying Consolidated Financial Statements. Based on these criteria, we have identified three segments: Thethe community bank, CCBX and CCBX, which has been determined based upontreasury & administration. The primary focus of the Company's relationship with the end customer.  This determination also gave consideration to the structure and management of our various products.  The community bank segment includesis on providing a wide range of banking products and services to consumers and small to medium sized businesses in the operationsbroader Puget Sound region in the state of Coastal Community Bank, excluding CCBX BaaS operations.  TheWashington 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 segment derives its revenue primarily from interest on loansby deposit market share, and investments as well as noninterest income typical for the banking industry.two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment includes BaaS operations.  The CCBX segment derives its revenue from fees and interest income from loans though our BaaS partnershipsprovides banking as a service (“BaaS”) that allowallows our broker-dealer and digital financial service partners to offer their customers banking services.

Reported The CCBX segment has 22 partners as of June 30, 2023. The treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.

The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The 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 notesCompany continues to evaluate its methodology on allocating items to the consolidated financial statements included elsewhere in this report.

Community bank total assets as of June 30, 2022 decreased $203.2 million, or 8.9%,Company’s various segments to $2.08 billion, compared to $2.28 billion as of December 31, 2021.  Loans receivable net of deferred fees forsupport strategic business decisions by the community bank segment increased $134.3 million, or 9.6%, to $1.53 billion as of June 30, 2022, compared to $1.40 billion as of December 31, 2021.  The increase in community bank loans receivable is the result of gross loan growth of $229.8 million partially offset by $95.4 million in PPP loan forgiveness and paydowns during the six months ended June 30, 2022.  Total community bank deposits decreased $16.3 million, or 1.0%, to $1.63 billion, as of June 30, 2022, compared to $1.65 billion as of December 31, 2021.  

CCBX total assets as of June 30, 2022 increased $537.4 million, or 152.2%, to $890.4 million, compared to $353.0 million as of December 31, 2021.  During the six months ended June 30, 2022, $80.1 million in CCBX loans were transferred to loans held for sale, with $20.1 million in loans sold during the quarter and $60.0 million remaining in loans held for sale as of June 30, 2022; previously we did not have any loans held for sale.  Total CCBX loans receivable increased $457.3 million, or 131.9%, to $804.0 million as of June 30, 2022, compared to $346.7 million as of December 31, 2021.  The increase in loans receivable is the result of increased activity with CCBX partners.  CCBX allowance for loan losses increased to $28.6 million as of June 30, 2022, compared to $8.3 million as of December 31, 2021 as a result of CCBX loan growth and portfolio mix.  Total CCBX deposits increased $349.9 million, or 48.8%, to $1.07 billion, compared to $716.3 million as of December 31, 2021 as a result of growth within the CCBX relationships.  This does not include an additional $269.5 million in CCBX deposits that are transferred off the balance sheet as of June 30, 2022.

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

 

 

June 30, 2022

 

 

December 31, 2021

 

(dollars in thousands; unaudited)

Bank

 

 

CCBX

 

 

Total

 

 

Bank

 

 

CCBX

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,079,317

 

 

$

890,405

 

 

$

2,969,722

 

 

$

2,282,514

 

 

$

353,003

 

 

$

2,635,517

 

Loans held for sale

 

 

-

 

 

 

60,000

 

 

 

60,000

 

 

 

-

 

 

 

-

 

 

 

-

 

Total  loans receivable

 

 

1,530,402

 

 

 

803,952

 

 

 

2,334,354

 

 

 

1,396,060

 

 

 

346,675

 

 

 

1,742,735

 

Allowance for

    loan losses

 

 

(20,785

)

 

 

(28,573

)

 

 

(49,358

)

 

 

(20,299

)

 

 

(8,333

)

 

 

(28,632

)

Total deposits

 

 

1,631,190

 

 

 

1,066,115

 

 

 

2,697,305

 

 

 

1,647,529

 

 

 

716,258

 

 

 

2,363,787

 


Comparison of the quarter ended June 30, 2022 to the comparable quarter in the prior year

Company’s executive leadership. Income and expenses that are specific to CCBXa segment are recordeddirectly posted to the CCBXeach segment. Additionally, certain indirect expenses are allocated to CCBXeach segment utilizing various metrics, such as number of employees, utilization of space, and allocations based on loan and deposit balances. IncludedWe 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.

61
Table of Contents,
The following table presents summary financial information for each segment for the periods indicated:
June 30, 2023December 31, 2022
(dollars in thousands; unaudited)Community BankCCBXTreasury & AdministrationTotalCommunity BankCCBXTreasury & AdministrationTotal
Assets
Cash and Due from Banks$4,382 $7,179 $263,499 $275,060 $4,603 $12,899 $324,637 $342,139 
Intrabank asset— 304,408 (304,408)— — 254,096 (254,096)— 
Securities— — 110,730 110,730 — — 98,353 98,353 
Loans held for sale— 35,923 — 35,923 — — — — 
Total loans receivable1,713,034 1,294,519 — 3,007,553 1,614,752 1,012,504 — 2,627,256 
Allowance for credit losses(20,653)(90,109)— (110,762)(20,636)(53,393)— (74,029)
All other assets27,164 131,260 58,355 216,779 25,508 76,111 49,129 150,748 
Total assets$1,723,927 $1,683,180 $128,176 $3,535,283 $1,624,227 $1,302,217 $218,023 $3,144,467 
Liabilities
Total deposits$1,509,458 $1,653,114 $— $3,162,572 $1,538,218 $1,279,303 $— $2,817,521 
Total borrowings— — 47,658 47,658 — — 47,587 47,587 
Intrabank liability207,651 — (207,651)— 80,392 — (80,392)— 
All other liabilities6,818 30,066 15,507 52,391 5,617 22,914 7,334 35,865 
Total liabilities$1,723,927 $1,683,180 $(144,486)$3,262,621 $1,624,227 $1,302,217 $(25,471)$2,900,973 
62
Table of Contents,
Community bank total assets as of June 30, 2023 increased $99.7 million, or 6.1%, to $1.72 billion, compared to $1.62 billion as of December 31, 2022. Loans receivable net of deferred fees for the community bank segment increased $98.3 million, or 6.1%, to $1.71 billion as of June 30, 2023, compared to $1.61 billion as of December 31, 2022. The increase in community bank loans receivable is the result of gross loan growth of $98.5 million, which includes $1.1 million in PPP loan forgiveness and paydowns during the six months ended June 30, 2023. Total community bank deposits decreased $28.8 million, or 1.9%, to $1.51 billion, as of June 30, 2023, compared to $1.54 billion as of December 31, 2022. The decrease in community bank deposits was a result of pricing disciplines as some customer sought higher rate products elsewhere. Our cost of deposits for the community bank was 0.98% for the three months ended June 30, 2023.
CCBX total assets as of June 30, 2023 increased $381.0 million, or 29.3%, to $1.68 billion, compared to $1.30 billion as of December 31, 2022. During the six months ended June 30, 2023, $189.8 million in CCBX loans were transferred to loans held for sale, with $153.9 million in loans sold and $35.9 million remaining in loans held for sale as of June 30, 2023; we had no loans held for sale as of December 31, 2022. Total CCBX loans receivable increased $282.0 million, or 27.9%, to $1.29 billion as of June 30, 2023, compared to $1.01 billion as of December 31, 2022. The increase in loans receivable is the result of increased activity with CCBX partners. CCBX allowance for credit losses increased to $90.1 million as of June 30, 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 impacted the allowance calculation. CCBX partner agreements provide for, and the Company has collected in full, credit enhancements that cover the $31.0 million and $63.2 million in net charge-offs on CCBX loans for the three and six months ended June 30, 2023. Total CCBX deposits increased $373.8 million, or 29.2%, to $1.65 billion, compared to $1.28 billion as of December 31, 2022 as a result of growth within the CCBX relationships. This does not include an additional $9.9 million in CCBX deposits that are transferred off the balance sheet as of June 30, 2023.
Treasury & administration total assets as of June 30, 2023 decreased $89.8 million, or 41.2%, to $128.2 million, compared to $218.0 million as of December 31, 2022. Total securities increased $12.4 million, or 12.6%, to $110.7 million as of June 30, 2023, compared to $98.4 million as of December 31, 2022. Total borrowings were $47.7 million as of June 30, 2023 and $47.6 million as of December 31, 2022.
63
Table of Contents,
The following tables present summary financial information for each segment for the periods indicated:
Three months ended June 30, 2023Three months ended June 30, 2022
(dollars in thousands; unaudited)Community BankCCBXTreasury & AdministrationTotalCommunity BankCCBXTreasury & AdministrationTotal
Net interest income, before
   intrabank transfer		$22,904 $36,620 $2,826 $62,350 $18,568 $19,926 $1,392 $39,886 
Interest income (expense)
   intrabank transfer		(2,490)3,487 (997)— 303 532 (835)— 
(Recapture)/Provision for
   credit losses - loans		(47)52,645 — 52,598 108 13,986 — 14,094 
(Recapture)/Provision for
   unfunded commitments		(340)(5)— (345)— — — — 
Noninterest income (1)
1,613 56,718 264 58,595 1,355 24,048 89 25,492 
Noninterest expense9,592 35,196 7,122 51,910 7,721 24,527 5,921 38,169 
Net income before income taxes12,822 8,989 (5,029)16,782 12,397 5,993 (5,275)13,115 
Income taxes2,949 2,089 (1,162)3,876 2,777 1,344 (1,182)2,939 
Net Income$9,873 $6,900 $(3,867)$12,906 $9,620 $4,649 $(4,093)$10,176 
(1)For the three months ended June 30, 2023, CCBX noninterest income includes credit enhancements of $51.0 million, fraud enhancements of $1.5 million, and BaaS program income of $3.9 million. For the three months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $14.2 million, fraud enhancements of $6.5 million and BaaS program income of $3.2 million.
Six Months Ended June 30, 2023Six Months Ended June 30, 2022
(dollars in thousands; unaudited)Community BankCCBXTreasury & AdministrationTotalCommunity BankCCBXTreasury & AdministrationTotal
Net interest income, before
   intrabank transfer		$44,582 $66,415 $5,844 $116,841 $35,773 $31,799 $1,582 $69,154 
Interest income (expense)
   intrabank transfer		(3,569)6,139 (2,570)— 431 730 (1,161)— 
Provision for credit losses - loans381 95,761 — 96,142 452 26,584 — 27,036 
(Recapture)/Provision for unfunded
   commitments		(203)11 — (192)— — — — 
Noninterest income(1)
2,704 104,798 400 107,902 2,912 44,389 177 47,478 
Noninterest expense18,685 63,634 14,254 96,573 15,367 42,934 10,283 68,584 
Net income before income taxes24,854 17,946 (10,580)32,220 23,297 7,400 (9,685)21,012 
Income taxes5,340 3,856 (2,273)6,923 5,103 1,626 (2,123)4,606 
Net Income$19,514 $14,090 $(8,307)$25,297 $18,194 $5,774 $(7,562)$16,406 
(1)For the six months ended June 30, 2023, CCBX noninterest income includes credit enhancements of $93.4 million, fraud enhancements of $3.5 million and BaaS program income of $7.5 million. For the six months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $27.3 million, fraud enhancements of $11.0 million and BaaS program income of $5.7 million.
64
Table of Contents,
Comparison of the quarter ended June 30, 2023 to the comparable quarter in the prior year
Net interest income before intrabank interest expense for the community bank is administrative overhead of $6.5 million and $4.3 million for the quarters ended June 30, 2022 and June 30, 2021, respectively.  Both the community bank and the CCBX segment benefit from these administrative services.

Net interest income for the community bank was $20.0$22.9 million for the quarter ended June 30, 2022,2023, an increase of $2.2$4.3 million, or 12.4%23.4%, compared to $17.8$18.6 million for the quarter ended June 30, 2021.2022. The increase in net interest income is largely due to increased yield on loans resulting from loan growth excluding PPP loans.  Provisionand higher interest rates. As a result of the community bank having higher average loans than deposits for loan lossesthe quarter ended June 30, 2023 compared to the quarter ended June 30, 2022, intrabank interest expense for the community bank was $2.5 million for the quarter ended June 30, 2023, compared to intrabank interest income of $303,000 for the quarter ended June 30, 2022. There was a small recapture for credit losses - loans for the community bank of $47,000 for the quarter ended June 30, 2023, compared to a provision of $108,000 for the quarter ended June 30, 2022, compared to $364,000 for the quarter ended June 30, 2021.2022. Net charge-offs (recoveries) to average loans for the community bank segment have remained consistently low and were 0.00% for the quarter ended June 30, 2023 and (0.01)% for the quarter ended June 30, 2022. Noninterest income for the community bank was (0.01%)$1.6 million, for the quarter ended June 30, 2023, an increase of $258,000, or 19.0%, compared to $1.4 million for the quarter ended June 30, 2022 and <0.01% for the quarter ended June 30, 2021.  Noninterest income for the community bank was $1.5 million, for the quarter ended June 30, 2022, a decrease of $1.8 million, or 55.0%, compared to $3.4 million for the quarter ended June 30, 2021, largelyprimarily due to the sale of a bank branch including deposits and loans during the quarter ended June 30, 2021 which resulted$474,000 increase in a nonrecurring net gain of $1.3 million.loan referral fees. Noninterest expenses for the community bank increased $2.9$1.9 million, or 24.0%24.2%, to $15.1$9.6 million as of June 30, 2022,2023, compared to $23.0$7.7 million as of June 30, 2021.2022. The increase in noninterest expense is largely due to increased salaries and employee benefits as a result of growth, higher software licenses maintenance and subscription costs related to new reporting software that helps monitor and assess risk and to automate and create efficiencies in reporting, and other expense increases related to growth.

Net interest income for CCBX before intrabank interest income was $36.6 million for the quarter ended June 30, 2023, an increase of $16.7 million, or 83.8%, compared to $19.9 million for the quarter ended June 30, 2022, an increase of $19.1 million, or 2,219.7%, compared to $859,000 for the quarter ended June 30, 2021.2022. The increase in net interest income is due to loan growth and higher interest rates from new and existingactive CCBX relationships. As a result of having higher average deposits than loans for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 intrabank interest income for CCBX was $3.5 million for the quarter ended June 30, 2023, compared to $532,000 for the quarter ended June 30, 2022. Provision for loancredit losses - loans was $14.0$52.6 million as a result of loan origination growth fromand as a result of increased loss rates and balances on CCBX partnersloans which has impacted the allowance calculation for the quarter ended June 30, 2022,2023, compared to a recapture of $3,000$14.0 million for the quarter ended June 30, 2021.2022. CCBX partner agreements provide for, and the Company has collected in full, credit enhancements that cover the $31.0 million in net charge-offs on CCBX loans for the quarter ended June 30, 2023. The $52.6 million provision on CCBX loans includes $51.0 million for partner loans with credit enhancement on them and $1.6 million on CCBX loans that the Company is responsible for. In accordance with the program agreement, the Company is responsible for credit losses on approximately 10% of a $180.5 million loan portfolio, or $18.0 million in partner loans at June 30, 2023. Noninterest income for CCBX was $56.7 million for the quarter ended June 30, 2023, an increase of $32.7 million, or 135.9%, compared to $24.0 million for the quarter ended June 30, 2022, an increase of $22.6 million, or 1,581.8%, compared to $1.4 million for the quarter ended June 30, 2021, due to an increase of $14.2$36.8 million in BaaS credit enhancements to establish a credit enhancement receivableasset for future loancredit losses due from our strategicCCBX partners, $6.5$4.9 million increasedecrease in BaaS fraud enhancements and $1.8 million$729,000 in BaaS program income, which was the result of increased relationshipsactivity with broker dealers and digital financial service providers. Noninterest expenses for CCBX increased $21.5$10.7 million, or 1,411.9%43.5%, to $23.0$35.2 million as of June 30, 2022,2023, compared to $1.5$24.5 million as of June 30, 2021.2022. The increase in noninterest expense is largely due to growth from active CCBX relationships resulting in an increase in BaaS loan expense, BaaS fraud expense from increased CCBX loan originations and increased salaries and benefits, for the quarter ended June 30, 2022,2023, compared to the quarter ended June 30, 2021.2022. For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”.

The following tables present summary financial information

Net interest income before intrabank interest expense for each segmenttreasury & administration was $2.8 million for the periods indicated:

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

 

 

Three Months Ended June 30, 2022

 

 

Three Months Ended June 30, 2021

 

(dollars in thousands; unaudited)

 

Bank

 

 

CCBX

 

 

Total

 

 

Bank

 

 

CCBX

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

 

$

19,960

 

 

$

19,926

 

 

$

39,886

 

 

$

17,753

 

 

$

859

 

 

$

18,612

 

Provision for loan losses

 

 

108

 

 

 

13,986

 

 

 

14,094

 

 

 

364

 

 

 

(3

)

 

 

361

 

Noninterest income

 

 

1,510

 

 

 

23,982

 

 

 

25,492

 

 

 

3,356

 

 

 

1,426

 

 

 

4,782

 

Noninterest expense

 

 

15,143

 

 

 

23,026

 

 

 

38,169

 

 

 

12,208

 

 

 

1,523

 

 

 

13,731

 

Comparison of the six months ended June 30, 20222023 to the comparable period in the prior year

Included in noninterest

Net interest income before intrabank interest expense for the community bank is administrative overhead of $11.8 million and $8.7 million for the quarters ended June 30, 2022 and June 30, 2021, respectively.  Both the community bank and the CCBX segment benefit from these administrative services.

Net interest income for the community bank was $37.4$44.6 million for the six months ended June 30, 2022,2023, an increase of $2.7$8.8 million, or 7.7%24.6%, compared to $34.7$35.8 million for the six months ended June 30, 2021.2022. The increase in net interest income is largely due to increased yield on loans resulting from loan growth excluding PPP loan forgiveness and repayments, andhigher interest rates. As a decrease in lower yielding PPP loans.  Provisionresult of the community bank having higher average loans than deposits for loan lossesthe six months ended June 30, 2023

65
Table of Contents,
compared to the six months ended June 30, 2022, intrabank interest expense for the community bank was $3.6 million for the six months ended June 30, 2023, compared to intrabank interest income of $431,000 for the six months ended June 30, 2022. Provision for credit losses - loans for the community bank was $381,000 for the six months ended June 30, 2023, compared to $452,000 for the six months ended June 30, 2022, compared to $685,000 for the six months ended June 30, 2021.2022. Net charge-offs to average loans for the community bank segment have remained consistently low and was <0.01% and 0.00% for the six months ended June 30, 2023, and 2022, and 2021.respectively. Noninterest income for the community bank was $3.3$2.7 million for the six months ended June 30, 2022,2023, a decrease of $2.1 million,$208,000, or 38.5%7.1%, compared to $5.4$2.9 million for the six months ended June 30, 2021, largely due to the sale of a bank branch including deposits and loans during the


quarter ended June 30, 2021 which resulted in a nonrecurring net gain of $1.3 million2022. Loan referral fees decreased $128,000 for the six months ended June 30, 2021. Additionally, loan referral fees decreased $593,0002023 compared to the six months ended June 30, 2021.2022. The recognition of loan referral fees fluctuates in response to market conditions and as a result we may recognize more or less, or may not recognize any, loan referral fees in some periods. Additionally, in the six months ended June 30, 2022, there was a no net unrealized gain on equity securities recognized compared to an unrealized gain of $194,000 in the six months ended June 30, 2023. Noninterest expenses for the community bank increased $5.4$3.3 million, or 23.0%21.6%, to $28.7$18.7 million as of June 30, 2022,2023, compared to $23.3$15.4 million as of June 30, 2021.2022. The increase in noninterest expense is largely due to increased salaries and employee benefits as a result of growth, higher software licenses maintenance and subscription costs related to new reporting software that helps monitor and assess risk and to automate and create efficiencies in reporting, and other expense increases relatedincreased legal and professional fees associated with our infrastructure enhancement projects to growth.

improve processing, automate processes, reduce compliance costs, and enhance our data management.

Net interest income for CCBX before intrabank interest income was $66.4 million for the six months ended June 30, 2023, an increase of $34.6 million, or 108.9%, compared to $31.8 million for the six months ended June 30, 2022, an increase of $30.6 million, or 2,448.0%, compared to $1.2 million for the six months ended June 30, 2021.2022. The increase in net interest income is due to loan growth from new and existingactive CCBX relationships. As a result of having higher average deposits than loans for the six months ended June 30, 2023 compared to the six months ended June 30, 2022 intrabank interest income for CCBX was $6.1 million for the six months ended June 30, 2023, compared to $730,000 for the six months ended June 30, 2022. Provision for loancredit losses - loans was $95.8 million for the six months ended June 30, 2023, compared to $26.6 million for the six months ended June 30, 2022, compared to $33,000as a result of loan origination growth and as a result of increased loss rates and balances on CCBX loans which has impacted the allowance calculation. Noninterest income for CCBX was $104.8 million for the six months ended June 30, 2021, as a result2023, an increase of loan growth from our partners.  Noninterest income for CCBX was $44.2$60.4 million, or 136.1%, compared to $44.4 million for the six months ended June 30, 2022, an increase of $41.8 million, or 1,760.3%, compared to $2.4 million for the six months ended June 30, 2021, due to an increase of $27.3$66.1 million in BaaS credit enhancements related to the allowance for loancredit losses, and reserve for unfunded commitments, $11.0$7.5 million increasedecrease in BaaS fraud enhancements and $3.3$1.8 million increase in total BaaS program income, which was the result of increased relationshipsactivity with broker dealers and digital financial service providers. Noninterest expenses for CCBX increased $37.1$20.7 million, or 1,358.0%48.2%, to $39.9$63.6 million as of June 30, 2022,2023, compared to $2.7$42.9 million as of June 30, 2021.2022. The increase in noninterest expense is largely due to growth from new and existingactive CCBX relationships resulting in an increase in BaaS loan expense, BaaS fraud expense and increased salaries and benefits, for the six months ended June 30, 2022,2023, compared to the six months ended June 30, 2021.2022. Also contributing to the increase in noninterest expense is higher legal and professional fees associated with our infrastructure enhancement projects to improve processing, automate processes, reduce compliance costs, and enhance our data management. For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”.

The following tables present summary financial information

Net interest income before intrabank interest expense for each segmenttreasury & administration was $5.8 million for the periods indicated:

 

Six Months Ended June 30, 2022

 

Six Months Ended June 30, 2021

 

(dollars in thousands; unaudited)

Bank

 

 

CCBX

 

 

Total

 

Bank

 

 

CCBX

 

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net interest income

$

37,355

 

 

$

31,799

 

 

$

69,154

 

$

34,679

 

 

$

1,248

 

 

$

35,927

 

Provision for loan losses

 

452

 

 

 

26,584

 

 

 

27,036

 

 

685

 

 

 

33

 

 

 

718

 

Noninterest income

 

3,314

 

 

 

44,164

 

 

 

47,478

 

 

5,392

 

 

 

2,374

 

 

 

7,766

 

Noninterest expense

 

28,708

 

 

 

39,876

 

 

 

68,584

 

 

23,348

 

 

 

2,735

 

 

 

26,083

 

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

Financial Condition

Our total assets increased $334.2$390.8 million, or 12.7%12.4%, to $2.97$3.54 billion at June 30, 20222023 from $2.64$3.14 billion at December 31, 2021.2022. The increase is primarily the result of $591.6$380.3 million increase in loans receivable during the six months ended June 30, 2022.  As of June 30, 2022, $16.4 million in PPP loans remain on the balance sheet, a decrease of $95.4 million from $111.8 million at December 31, 2021.  

Loans2023.

Loans Held For Sale

During the quarter ended June 30, 2022 $80.12023, $88.6 million in CCBX loans were transferred to loans held for sale, with $20.1$80.0 million in loans sold. A portion of these loans were sold at par during the quarter and $60.0a portion were sold with a gain on sale of $23,000. As
66
Table of Contents,
of June 30, 2023 $35.9 million remainingin residential real estate secured lines of credit loans remain in loans held for sale as of June 30, 2022; previously we did not have anysale. At December 31, 2022, there were no loans held for sale.  All
Loan Portfolio
Our primary source of the loans held for sale are from one CCBX partner and are credit card home equity secured lines of credit.

LoanPortfolio

Our primarysourceof incomeis derivedthrough interestearnedon loans. A substantial portion of our loan portfolio consists of commercial real estate loans and commercial and industrial loans in the Puget Sound region. Our consumer and other loans also represent a significant portion of our loan portfolio with the growth of our CCBX segment. Our loan portfoliorepresentsthe highestyieldingcomponentof our earningassets.

As of June 30, 2022,2023, loans receivable totaled $2.33$3.01 billion, an increase of $591.6$380.3 million, or 33.9%14.5%, compared to December 31, 2021.2022. Total loans receivable is net of $6.2$6.7 million in net deferred origination fees, $396,000$60,000 of which is attributed to PPP loans. The increase includes CCBX loan growth of $457.3$282.0 million, or 131.9%27.9%, and community bank loan growth of $229.8$98.5 million, or 17.9%6.1%, partially offset by $95.4which includes a $1.1 million, or 85.3%23.5%, reduction in PPP loans due to forgiveness and principal paydowns.  Additionally, unused loan commitments increased including unused commitments on capital call lines which increased $288.6 million to $704.5 million at June 30, 2022 compared to $416.0 million at December 31, 2021, which will likely translate into loan growth as the commitments are utilized.

Loans as a percentage of deposits were 86.5%96.2% as of June 30, 2022,2023, compared to 73.7%93.2% as of December 31, 2021.2022. We remain focused on serving our communities and markets by growing loans and funding those loans with customer deposits.  The increase in the loan to deposit ratio was due to loan growth.

The followingtablesummarizesour loan portfolioby type of loan as of the dates indicated:
As of June 30, 2023As of December 31, 2022
(dollars in thousands; unaudited)AmountPercentAmountPercent
Commercial and industrial loans:
PPP loans$3,595 0.1 %$4,699 0.2 %
Capital call lines138,428 4.6 146,029 5.5 
All other commercial & industrial loans211,806 7.0 161,900 6.1 
Total commercial and industrial loans:353,829 11.7 312,628 11.8 
Real estate loans:
Construction, land and land development186,706 6.2 214,055 8.1 
Residential real estate463,179 15.4 449,157 17.1 
Commercial real estate1,164,088 38.6 1,048,752 39.8 
Consumer and other loans846,459 28.1 608,771 23.2 
Gross loans receivable3,014,261 100.0 %2,633,363 100.0 %
Net deferred origination fees - PPP loans(60)(82)
Net deferred origination fees - all other loans(6,648)(6,025)
Loans receivable$3,007,553 $2,627,256 
Loan Yield (1)
10.85 %8.12 %
(1)indicated:

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

 

 

As of June 30, 2022

 

 

As of December 31, 2021

 

(dollars in thousands; unaudited)

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPP loans

 

$

16,398

 

 

 

0.7

%

 

$

111,813

 

 

 

6.4

%

Capital call lines

 

 

224,930

 

 

 

9.6

 

 

 

202,882

 

 

 

11.5

 

All other commercial & industrial loans

 

 

160,636

 

 

 

6.9

 

 

 

104,365

 

 

 

6.0

 

Total commercial and industrial loans:

 

 

401,964

 

 

 

17.2

 

 

 

419,060

 

 

 

23.9

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

225,512

 

 

 

9.6

 

 

 

183,594

 

 

 

10.5

 

Residential real estate

 

 

326,661

 

 

 

14.0

 

 

 

204,389

 

 

 

11.7

 

Commercial real estate

 

 

956,320

 

 

 

40.8

 

 

 

835,587

 

 

 

47.7

 

Consumer and other loans

 

 

430,083

 

 

 

18.4

 

 

 

108,871

 

 

 

6.2

 

Gross loans receivable

 

 

2,340,540

 

 

 

100.0

%

 

 

1,751,501

 

 

 

100.0

%

Net deferred origination fees - PPP loans

 

 

(396

)

 

 

 

 

 

 

(3,633

)

 

 

 

 

Net deferred origination fees - all other loans

 

 

(5,790

)

 

 

 

 

 

 

(5,133

)

 

 

 

 

Loans receivable

 

$

2,334,354

 

 

 

 

 

 

$

1,742,735

 

 

 

 

 

Loan Yield (1)

 

 

7.34

%

 

 

 

 

 

 

5.92

%

 

 

 

 

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

 

67


Table of Contents,

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

Community Bank

 

As of

 

Community BankAs of

 

June 30, 2022

 

 

December 31, 2021

 

June 30, 2023December 31, 2022

(dollars in thousands; unaudited)

 

Balance

 

% to Total

 

 

Balance

 

% to Total

 

(dollars in thousands; unaudited)Balance% to TotalBalance% to Total

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans:

PPP loans

 

$

16,398

 

 

1.1

%

 

$

111,813

 

 

8.0

%

PPP loans$3,595 0.2 %$4,699 0.3 %

All other commercial &

industrial loans

 

 

142,569

 

9.3

 

 

 

104,365

 

7.4

 

All other commercial & industrial loans151,483 8.8 146,982 9.1 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Real estate loans:

Construction, land and

land development loans

 

 

225,512

 

14.7

 

 

 

183,594

 

13.1

 

Construction, land and land development loans186,706 10.9 214,055 13.2 

Residential real estate loans

 

 

193,518

 

12.6

 

 

 

167,502

 

11.9

 

Residential real estate loans211,966 12.3 204,581 12.6 

Commercial real estate loans

 

 

956,320

 

62.2

 

 

 

835,587

 

59.5

 

Commercial real estate loans1,164,088 67.7 1,048,752 64.7 

Consumer and other loans:

 

 

 

 

 

 

 

 

 

 

 

 

Consumer and other loans:

Other consumer and other loans

 

 

2,325

 

 

0.2

 

 

 

2,034

 

 

0.1

 

Other consumer and other loans1,457 0.1 1,725 0.1 

Gross Community Bank

loans receivable

 

 

1,536,642

 

 

100.0

%

 

 

1,404,895

 

 

100.0

%

Gross Community Bank loans receivable1,719,295 100.0 %1,620,794 100.0 %

Net deferred origination fees

 

 

(6,240

)

 

 

 

 

 

(8,835

)

 

 

 

Net deferred origination fees(6,261)(6,042)

Loans receivable

 

$

1,530,402

 

 

 

 

$

1,396,060

 

 

 

Loans receivable$1,713,034 $1,614,752 

Loan Yield (1)

 

 

5.04

%

 

 

 

 

 

5.89

%

 

 

 

Loan Yield(1)
6.28 %5.32 %

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

 

CCBX

 

As of

 

 

 

June 30, 2022

 

 

December 31, 2021

 

(dollars in thousands; unaudited)

 

Balance

 

% to Total

 

 

Balance

 

% to Total

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital call lines

 

$

224,930

 

 

28.0

%

 

$

202,882

 

 

58.6

%

   All other commercial &

     industrial loans

 

 

18,067

 

 

2.2

 

 

 

-

 

 

0.0

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate loans

 

 

133,143

 

 

16.5

 

 

 

36,887

 

 

10.6

 

Consumer and other loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Credit cards

 

 

139,501

 

 

17.4

 

 

 

11,429

 

 

3.3

 

   Other consumer and other loans

 

 

288,257

 

 

35.9

 

 

 

95,408

 

 

27.5

 

      Gross CCBX loans receivable

 

 

803,898

 

 

100.0

%

 

 

346,606

 

 

100.0

%

Net deferred origination costs

 

 

54

 

 

 

 

 

 

69

 

 

 

 

      Loans receivable

 

$

803,952

 

 

 

 

 

$

346,675

 

 

 

 

Loan Yield - CCBX (1)(2)

 

 

12.35

%

 

 

 

 

 

6.13

%

 

 

 

(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 and servicing CCBX loans.

 

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

 

(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
June 30, 2023December 31, 2022
(dollars in thousands; unaudited)Balance% to TotalBalance% to Total
Commercial and industrial loans:
Capital call lines$138,428 10.7 %$146,029 14.4 %
All other commercial & industrial loans60,323 4.7 14,918 1.5 
Real estate loans:
Residential real estate loans251,213 19.4 244,576 24.2 
Consumer and other loans:
Credit cards379,642 29.3 279,644 27.6 
Other consumer and other loans465,360 35.9 327,402 32.3 
Gross CCBX loans receivable1,294,966 100.0 %1,012,569 100.0 %
Net deferred origination (fees) costs(447)(65)
Loans receivable$1,294,519 $1,012,504 
Loan Yield - CCBX (1)(2)
16.95 %13.85 %
(1)CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans. Net BaaS loan income is a non-GAAP measure. See the reconciliation of non-GAAP measures set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for the impact of BaaS loan expense on CCBX yield.
(2)Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.
Commercial and IndustrialLoans. Commercial and industrial loans decreased $17.1increased $41.2 million, or 4.1%13.2%, to $402.0$353.8 million as of June 30, 2022,2023, from $419.1$312.6 million as of December 31, 2021.2022. The decreaseincrease in commercial and industrial loans receivable over December 31, 20212022 was due to $95.4a $49.9 million increase in other commercial and industrial loans partially offset by $1.1 million in forgiven and repaid PPP loans partially offset by an increaseand a decrease of $22.0$7.6 million increase in capital call lines, and $56.3 million increase in other commercial and industrial loans.lines. Included in the commercial and industrial loan balance is $224.9$138.4 million and $202.9$146.0 million in capital call lines resulting from relationships with our CCBX customerspartners as of June 30, 2022,2023 and December 31, 2021,2022, respectively. As of June 30, 2022,2023, there were $18.1$60.3 million in CCBX other commercial loans, compared to zero$14.9 million at December 31, 2021.2022.

Also included in commercial and industrial loans is $16.4 million and $111.8 million in PPP loans as

68
Table of June 30, 2022, and December 31, 2021, respectively.  

Contents,

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 $40.1$48.6 million and $20.2$45.1 million in loans to financial institutions.

In total, we funded $763.9institutions as of June 30, 2023 and December 31, 2022, respectively.

Also included in commercial and industrial loans is $3.6 million and $4.7 million in PPP loans since the first round of PPP loans opened in March 2020 through the close of round three on May 31, 2021.  Total net deferred fees on these loans were $26.3 million.  Asas of June 30, 2023, and December 31, 2022, $16.4 million in PPP loans remained with $396,000 in net deferred fees, which will be recognized in interest income in future periods.respectively. The impact of PPP loans on the Company’s financial statements has significantly lessened as 97.9%nearly all of the PPP loans have been paid off andand/or forgiven.

Construction, Land and Land Development Loans. Construction, land and land development loans increased $41.9decreased $27.3 million, or 22.8%12.8%, to $225.5$186.7 million as of June 30, 2022,2023, from $183.6$214.1 million as of December 31, 2021.2022. The increasedecrease is attributed to growth in community bankthe completion of a few construction land and land development loans.projects.

Unfunded loan commitments for construction, land and land development loans were $126.9$159.1 million at June 30, 2022,2023, compared to $134.3$142.5 million at December 31, 2021.2022. Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2022,2023, the economic environment is continuously changing and is impacted by increasedwith bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, political uncertainty and a rise in new COVID-19 variantstrade issues that have resulted in some economic uncertainty.  

uncertainty and slowing in construction lending.

Construction, land and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing these loans are primarily located in the Puget Sound region and are comprised of both residential and commercial properties, including owner occupied properties and investor properties. As of June 30, 2022,2023, construction, land and land development loans included $115.5$78.1 million in commercial construction loans, $39.7$42.5 million in undeveloped land loans, $36.2$35.0 million in residential construction loans and $34.2$31.1 million in other construction, land and land development loans, compared to $82.8$100.7 million in commercial construction loans, $37.8$44.6 million in undeveloped land loans, $28.9$32.9 million in residential construction loans and $34.1$35.9 million in other construction, land and land development loans as of December 31, 2021.

2022.

ResidentialReal Estate Loans. Loans.Our one-to-four family residential real estate loans increased $122.3$14.0 million, or 59.8%3.1%, to $326.7$463.2 million as of June 30, 2022,2023, from $204.4$449.2 million as of December 31, 2021 largely2022 due to an increase of $96.3$7.4 million in community bank loans combined with an increase of $6.6 million in CCBX loans.

We originate one-to-four family residential real estate adjustable-rate mortgage (“ARM”), loans for our portfolio and operate as a mortgage broker for mortgage lenders we have agreements with for customers who want a 15-year to 30-year, fixed-rate mortgage loan.

As of June 30, 2022, the balance of our ARM portfolio2023, there were $251.2 million in CCBX home equity loans was $26.6 million,included in residential real estate, compared to $22.2$244.6 million at December 31, 2021.  Our ARM loans typically do not meet the guidelines for sale in the secondary market due to characteristics2022, as a result of the property, the loan terms or exceptions from agency underwriting guidelines, which enables us to earnincreased activity. These home equity lines of credit are secured by residential real estate and are accessed by using a higher interest rate. credit card.
We also purchasehave purchased residential mortgages originated bythrough other financial institutions to hold for investment with the intent to diversify our residential mortgage loan portfolio, meet certain regulatory requirements and increase our interest income. We last purchased residential mortgage loans in 2018. As of June 30, 2023 and December 31, 2022, we held $10.1$9.3 million and $9.4 million, respectively, in purchased residential real estate mortgage loans, compared to $11.9 million at December 31, 2021.loans. These loans purchased typically have a fixed rate with a term of 15 to 30 years and are collateralized by one-to-four family residential real estate. We have a defined set of credit guidelines that we use when evaluating these loans. Although purchased loans were originated and underwritten by another institution, our mortgage, credit, and compliance departments conduct an independent review of each underlying loan that includes re-underwriting each of these loans to our credit and compliance standards. We also make one-to-four family loans to investors to finance their rental properties and to business owners to secure their business loans.  As of June 30, 2022, residential real estate loans made to investors and business owners totaled $133.0 million. As of December 31, 2021, residential real estate loans made to investors and business owners totaled $114.0 million.

As of June 30, 2022, there were $133.1 million in CCBX home equity loans included in residential real estate, compared to $36.9 million at December 31, 2021, as a result of increased activity.

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 EstateLoans. Commercial real estate loans increased $120.7$115.3 million, or 14.4%11.0%, to $956.3 million$1.16 billion as of June 30, 2022,2023, from $835.6 million$1.05 billion as of December 31, 2021.  2022.


69

Table of Contents,
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. We actively seek commercial real estate loans in our markets and our lenders are experienced in competing for these loans and managing these relationships.

We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores, hotels and motels, low rise office buildings, mixed-use residential and commercial, and other properties. We originate both fixed- and adjustable-rate loans with terms up to 20 years. Fixed-rate loans typically amortize over a 10 to 25 year period with balloon payments due at the end of five to ten years. Adjustable-rate loans are generally based on the prime rate and adjust with the prime rate or are based on term equivalent FHLB rates. At June 30, 2022,2023, approximately 29.6%33.2% of the commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans represented 40.8%38.6% of our loan portfolio at June 30, 20222023 and are historically our largest source of revenue. As of June 30, 2022,2023, we held $26.1$42.1 million in purchased commercial real estate loans, compared to $35.9$42.4 million at December 31, 2021.2022. 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.

Consumerand Other. Consumer and other loans increased $321.2$237.7 million, or 295.0%39.0%, to $430.1$846.5 million, from $108.9$608.8 million as of December 31, 2021,2022, as a result of growth in CCBX loans originated bythrough our partners.

CCBX consumer loans totaled $427.8$845.0 million as of June 30, 2022,2023, compared to $106.8$607.0 million at December 31, 2021.2022. CCBX consumer loans include installment loans, credit cards, lines of credit and other loans. Our community bank consumer and other loans totaled $1.5 million as of June 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. Four of our largestOur 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 $2.0$3.01 billion in outstanding loan balances, or 85.9% of total gross loans outstanding, excluding PPP loans of $16.4 million.balances. When combined with $1.62$2.34 billion in unused commitments the total of these three categories is $3.62 billion, or 82.5% of$5.36 billion. However, total outstandingexposure on CCBX loans is subject to portfolio and loan commitments, excluding PPP loans.

partner maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.

The following table summarizes our exposurecommunity bank loan commitments by industry excluding PPP loans, for our commercial real estate portfolio as of June 30, 2022:2023:

70
Table of Contents

,

(dollars in thousands; unaudited)

 

Outstanding Balance

 

 

Available Loan Commitments

 

 

Total Exposure

 

 

% of Total Loans

(Outstanding Balance & Available Commitment)

 

 

Average Loan Balance

 

 

Number of Loans

 

(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 loansCommunity bank commercial real estate loans

Apartments

 

$

188,436

 

 

$

5,390

 

 

$

193,826

 

 

 

4.4

%

 

$

2,416

 

 

 

78

 

Apartments$305,459 $11,819 $317,278 5.9 %$3,117 98

Hotel/Motel

 

 

156,667

 

 

 

2,479

 

 

 

159,146

 

 

 

3.6

 

 

 

5,802

 

 

 

27

 

Hotel/Motel164,098 2,577 166,675 3.1 6,311 26

Office

 

 

100,615

 

 

 

3,930

 

 

 

104,545

 

 

 

2.4

 

 

 

1,027

 

 

 

98

 

Retail

 

 

81,327

 

 

 

2,978

 

 

 

84,305

 

 

 

1.9

 

 

 

904

 

 

 

90

 

Convenience Store

 

 

76,730

 

 

 

6,386

 

 

 

83,116

 

 

 

1.9

 

 

 

1,871

 

 

 

41

 

Convenience Store107,568 2,585 110,153 2.1 1,992 54

Mixed use

 

 

78,008

 

 

 

4,332

 

 

 

82,340

 

 

 

1.9

 

 

 

886

 

 

 

88

 

Mixed use89,926 2,752 92,678 1.7 1,046 86

Warehouse

 

 

72,335

 

 

 

102

 

 

 

72,437

 

 

 

1.7

 

 

 

1,418

 

 

 

51

 

Warehouse89,222 2,122 91,344 1.7 1,652 54
OfficeOffice87,322 3,194 90,516 1.7 939 93
RetailRetail88,307 675 88,982 1.7 920 96
Mini StorageMini Storage55,774 1,792 57,566 1.1 2,935 19
Strip MallStrip Mall45,729 — 45,729 0.9 5,716 8

Manufacturing

 

 

42,454

 

 

 

1,907

 

 

 

44,361

 

 

 

1.1

 

 

 

1,213

 

 

 

35

 

Manufacturing37,297 1,800 39,097 0.7 1,130 33

Mini Storage

 

 

38,872

 

 

 

984

 

 

 

39,856

 

 

 

0.9

 

 

 

2,777

 

 

 

14

 

Groups < 0.70% of total

 

 

120,876

 

 

 

4,806

 

 

 

125,682

 

 

 

2.9

 

 

 

1,389

 

 

 

87

 

Groups < 0.70% of total93,386 4,923 98,309 1.8 1,139 82

Total

 

$

956,320

 

 

$

33,294

 

 

$

989,614

 

 

 

22.6

%

 

$

1,570

 

 

 

609

 

Total$1,164,088 $34,239 $1,198,327 22.4 %$1,794 649

As illustrated in the table below, our CCBX partners bring inoriginate a large number of mostly smaller dollar loans, resulting in an average consumer loan balance of just $1,200.  

$1,500.

The following table summarizes our exposureloan commitments by industry, excluding PPP loans,category for our consumer and other loan portfolio as of June 30, 2022:

2023:

(dollars in thousands; unaudited)

 

Outstanding Balance

 

 

Available Loan Commitments

 

 

Total Exposure

 

 

% of Total Loans

(Outstanding Balance & Available Commitment)

 

 

Average Loan Balance

 

 

Number of Loans

 

(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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCBX consumer loans
Credit cardsCredit cards$379,642 $990,447 $1,370,089 25.6 %$1.5 248,853

Installment loans

 

$

279,015

 

 

$

-

 

 

$

279,015

 

 

 

6.4

%

 

$

1.5

 

 

 

181,602

 

Installment loans459,391 — 459,391 8.6 1.7 269,592

Credit cards

 

 

139,456

 

 

 

680,342

 

 

 

819,798

 

 

 

18.7

 

 

 

1.2

 

 

 

117,870

 

Lines of credit

 

 

6,831

 

 

 

258

 

 

 

7,089

 

 

 

0.2

 

 

 

0.2

 

 

 

34,492

 

Lines of credit3,704 296 4,000 0.1 0.1 25,826

Other loans

 

 

2,456

 

 

 

-

 

 

 

2,456

 

 

 

0.1

 

 

 

0.2

 

 

 

12,853

 

Other loans2,265 — 2,265 0.0 0.1 17,261

Community bank consumer loans

Community bank consumer loans

 

Community bank consumer loans
Installment loansInstallment loans1,254 — 1,254 0.0 52.3 24

Lines of credit

 

 

1,463

 

 

 

1,501

 

 

 

2,964

 

 

 

0.1

 

 

 

20.9

 

 

 

70

 

Lines of credit149 585 734 0.0 3.5 43

Installment loans

 

 

423

 

 

 

-

 

 

 

423

 

 

 

0.0

 

 

 

28.2

 

 

 

15

 

Other loans

 

 

439

 

 

 

-

 

 

 

439

 

 

 

0.0

 

 

 

1.2

 

 

 

373

 

Other loans54 — 54 0.0 0.2 315

Total

 

$

430,083

 

 

$

682,101

 

 

$

1,112,184

 

 

 

25.4

%

 

$

1.2

 

 

 

347,275

 

Total$846,459 $991,328 $1,837,787 34.3 %$1.5 561,914

(1)Total exposure on CCBX capital call lines is subject to a portfolio maximum limit of $350.0 million. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.
71
Table of Contents,
The following table summarizes our concentrationloan commitments by category for our residential real estate portfolio as of June 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$251,213 $413,473 $664,686 12.4 %$23 10,976
Community bank residential real estate loans
Closed end, secured by first liens181,507 3,597 185,104 3.4 603 301
Home equity line of credit21,803 41,764 63,567 1.2 98 222
Closed end, second liens8,656 1,170 9,826 0.2 321 27
Total$463,179 $460,004 $923,183 17.2 %$40 11,526
(1)Total exposure on CCBX loans is subject to portfolio maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.
The following table summarizes our loan commitments by industry excluding PPP loans, for our commercial and industrial loan portfolio as of June 30, 2022:

(dollars in thousands; unaudited)

 

Outstanding Balance

 

 

Available Loan Commitments

 

 

Total Exposure

 

 

% of Total Loans

(Outstanding Balance & Available Commitment)

 

 

Average Loan Balance

 

 

Number of Loans

 

Capital Call Lines

 

$

224,930

 

 

$

704,523

 

 

$

929,453

 

 

 

21.2

%

 

$

1,372

 

 

 

164

 

Construction/Contractor

     Services

 

 

19,170

 

 

 

30,891

 

 

 

50,061

 

 

 

1.1

 

 

 

116

 

 

 

165

 

Financial Institutions

 

 

40,149

 

 

 

-

 

 

 

40,149

 

 

 

0.9

 

 

 

4,015

 

 

 

10

 

Manufacturing

 

 

17,269

 

 

 

5,064

 

 

 

22,333

 

 

 

0.5

 

 

 

270

 

 

 

64

 

Medical / Dental /

     Other Care

 

 

11,960

 

 

 

4,926

 

 

 

16,886

 

 

 

0.4

 

 

 

260

 

 

 

46

 

Groups < 0.30% of total

 

 

72,088

 

 

 

32,010

 

 

 

104,098

 

 

 

2.5

 

 

 

68

 

 

 

1,058

 

Total

 

$

385,566

 

 

$

777,414

 

 

$

1,162,980

 

 

 

26.5

%

 

$

256

 

 

 

1,507

 

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$138,428 $622,319 $760,747 14.2 %$876 158
Retail60,344 6,362 66,706 1.2 22 2,718
Construction/Contractor Services24,067 27,329 51,396 1.0 131 184
Financial Institutions48,648 — 48,648 0.9 4,054 12
Medical / Dental / Other Care19,046 8,610 27,656 0.5 705 27
Manufacturing9,286 3,905 13,191 0.3 202 46
Groups < 0.30% of total54,010 31,017 85,027 1.6 150 359
Total$353,829 $699,542 $1,053,371 19.7 %$101 3,504

(1)Total exposure on CCBX loans is subject to portfolio maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.
72
Table of Contents,
The following table details our concentration, excluding PPP loans,community bank loan commitments by category for our construction, land and land development loan portfolio as of June 30, 2022:

2023:

(dollars in thousands; unaudited)

 

Outstanding Balance

 

 

Available Loan Commitments

 

 

Total Exposure

 

 

% of Total Loans

(Outstanding Balance & Available Commitment)

 

 

Average Loan Balance

 

 

Number of Loans

 

(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 loansCommunity bank construction, land and land development loans

Commercial construction

 

$

115,452

 

 

$

76,448

 

 

$

191,900

 

 

 

4.4

%

 

$

4,276

 

 

 

27

 

Commercial construction$78,079 $127,352 $205,431 3.8 %$4,109 19
Undeveloped land loansUndeveloped land loans42,530 9,718 52,248 1.0 2,835 15

Residential construction

 

 

36,192

 

 

 

35,699

 

 

 

71,891

 

 

 

1.6

 

 

 

823

 

 

 

44

 

Residential construction35,032 16,833 51,865 1.0 1,208 29

Undeveloped land loans

 

 

39,684

 

 

 

3,440

 

 

 

43,124

 

 

 

1.0

 

 

 

2,835

 

 

 

14

 

Developed land loans

 

 

20,173

 

 

 

6,664

 

 

 

26,837

 

 

 

0.6

 

 

 

593

 

 

 

34

 

Developed land loans18,735 400 19,135 0.4 669 28

Land development

 

 

14,011

 

 

 

4,629

 

 

 

18,640

 

 

 

0.4

 

 

 

737

 

 

 

19

 

Land development12,330 4,774 17,104 0.3 822 15

Total

 

$

225,512

 

 

$

126,880

 

 

$

352,392

 

 

 

8.0

%

 

$

1,634

 

 

 

138

 

Total$186,706 $159,077 $345,783 6.5 %$1,761 106

Nonperforming Assets

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

We believe our lending practices and active approach to managing nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have 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 $5.8$33.7 millionin nonperformingassetsas of June 30, 2022,2023, comparedto $1.7$33.2 millionas of December 31, 2021.2022. This includes $5.6$26.3 million in CCBX loans more than 90 days past due and still accruing interest as of June 30, 2022,2023, compared to $1.5$26.1 million at December 31, 2021.2022. All of our nonperforming assets were nonperforming loans as of June 30, 20222023 and December 31, 2021.2022. Our nonperforming loans to loans receivable ratio was 0.25%1.12% at June 30, 2022,2023, compared to 0.10%1.26% at December 31, 2021.2022. The increase in nonperforming assets was due to an $4.1 milliona $233,000 increase in CCBX partner loans that are 90 days or more past due and still accruing interest. CommunityAdditionally, community bank nonaccrual loans increased $10,000 as a result of adding a new loan to nonaccrual status, partially offset by principal reductions$319,000 during the six months ended June 30, 2022.  

2023 due to the addition of three loans partially offset by principal reductions.

Our community bank credit quality remains strong, as demonstrated by the low level of community bank charge-offs and nonperforming loan balance for the six monthmonths ended June 30, 2022.2023. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loancredit losses. Agreements with our
73
Table of Contents,
CCBX partners provide for a credit enhancement which protects the Bank by absorbingindemnifying or reimbursing incurred losses, when accruing consumer loans originated bythrough 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 dates indicated:

(dollars in thousands; unaudited)As of June 30, 2023As of December 31, 2022
Nonaccrual loans:
Commercial and industrial loans$5 $113 
Real estate loans:
Construction, land and land development66 66 
Residential real estate186 — 
Commercial real estate7,142 6,901 
Total nonaccrual loans7,399 7,080 
Accruing loans past due 90 days or more:
Commercial & industrial loans808 404 
Real estate loans:
Residential real estate loans1,722 876 
Consumer and other loans:
Credit cards18,306 10,570 
Other consumer and other loans5,492 14,245 
Total accruing loans past due 90 days or more26,328 26,095 
Total nonperforming loans33,727 33,175 
Real estate owned— — 
Repossessed assets— — 
Modified loans for borrowers experiencing financial difficulty— — 
Total nonperforming assets$33,727 $33,175 
Total nonaccrual loans to loans receivable0.25 %0.27 %
Total nonperforming loans to loans receivable1.12 %1.26 %
Total nonperforming assets to total assets0.95 %1.06 %
74
Table of Contentsindicated:

,

 

 

As of

 

 

As of

 

 

 

June 30,

 

 

December 31,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

111

 

 

$

166

 

Real estate loans:

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

67

 

 

 

-

 

Residential real estate

 

 

53

 

 

 

55

 

Total nonaccrual loans

 

 

231

 

 

 

221

 

Accruing loans past due 90 days or more:

 

 

 

 

 

 

 

 

Total accruing loans past due 90 days or more

 

 

5,580

 

 

 

1,506

 

Total nonperforming loans

 

 

5,811

 

 

 

1,727

 

Real estate owned

 

 

-

 

 

 

-

 

Repossessed assets

 

 

-

 

 

 

-

 

Troubled debt restructurings, accruing

 

 

-

 

 

 

-

 

Total nonperforming assets

 

$

5,811

 

 

$

1,727

 

Total nonaccrual loans to loans receivable

 

 

0.01

%

 

 

0.01

%

Total nonperforming loans to loans receivable

 

 

0.25

%

 

 

0.10

%

Total nonperforming assets to total assets

 

 

0.20

%

 

 

0.07

%


The following tables detail nonperforming assets by segment which are included in the total nonperforming assets table above:

Community Bank

 

As of

 

 

 

June 30,

 

December 31,

 

(dollars in thousands; unaudited)

 

2022

 

2021

 

Nonaccrual loans:

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

111

 

$

166

 

Real estate:

 

 

 

 

 

 

 

   Construction, land and land development

 

 

67

 

 

-

 

   Residential real estate

 

 

53

 

 

55

 

         Total nonaccrual loans

 

 

231

 

 

221

 

 

 

 

 

 

 

 

 

Accruing loans past due 90 days or more:

 

 

 

 

 

 

 

         Total accruing loans past due 90 days or more

 

 

-

 

 

-

 

         Total nonperforming loans

 

 

231

 

 

221

 

Other real estate owned

 

 

-

 

 

-

 

Repossessed assets

 

 

-

 

 

-

 

Total nonperforming assets

 

$

231

 

$

221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCBX

 

As of

 

 

 

June 30,

 

December 31,

 

(dollars in thousands; unaudited)

 

2022

 

2021

 

Nonaccrual loans

 

$

-

 

$

-

 

 

 

 

 

 

 

 

 

Accruing loans past due 90 days or more:

 

 

 

 

 

 

 

         Total accruing loans past due 90 days or more

 

 

5,580

 

 

1,506

 

         Total nonperforming loans

 

 

5,580

 

 

1,506

 

Other real estate owned

 

 

-

 

 

-

 

Repossessed assets

 

 

-

 

 

-

 

Total nonperforming assets

 

$

5,580

 

$

1,506

 

Allowance for LoanLosses

We maintainan allowancefor loan lossesthatrepresentsmanagement’sbest estimateof the loan lossesand risksinherentin our loan portfolio.The amountof the allowancefor loan lossesshould not be interpretedas an indicationthatcharge-offsin futureperiodswill necessarilyoccur in those amounts.In determiningthe allowancefor loan losses,weestimatelosseson specificloans, or groups of loans, where the probableloss can be identifiedand reasonablydetermined.The balanceof the allowancefor loan lossesis based on internally assignedriskclassificationsof loans, historicalloan loss rates,changes in the natureof our loan portfolio,overall portfolioquality,industryconcentrations,delinquencytrends,and currenteconomicfactors.

In connectionwith our allowance for loan loss review,weconsiderriskelementsapplicableto particularloan types or categoriesin assessingthe qualityof individualloans. Some of the riskelementsweconsiderinclude:

•

for commercialand industrialloans, the debt servicecoverageratio(incomefromthe businessin excessof operatingexpensescomparedto loan repaymentrequirements),the operatingresultsof the commercial, professionalor agriculturalenterprise,the borrower’sbusiness,professionaland financialabilityand expertise,the specificrisksand volatilityof incomeand operatingresultstypicalfor businessesin that categoryand the value, natureand marketabilityof collateral;

•

for commercialrealestateloans, the debt servicecoverageratio,operatingresultsof the owner in the case of owner-occupiedproperties,the loan-to-valueratio,the age and conditionof the collateraland the volatility of income,propertyvalue and futureoperatingresultstypicalof propertiesof thattype;

Community BankAs of
(dollars in thousands; unaudited)June 30,
2023		December 31,
2022
Nonaccrual loans:
Commercial and industrial loans$5 $113 
Real estate:
Construction, land and land development66 66 
Residential real estate186 — 
Commercial real estate7,142 6,901 
Total nonaccrual loans7,399 7,080 
Accruing loans past due 90 days or more:
Total accruing loans past due 90 days or more— — 
Total nonperforming loans7,399 7,080 
Other real estate owned— — 
Repossessed assets— — 
Total nonperforming assets$7,399 $7,080 

•

for residentialreal estateloans, the borrower’sabilityto repay the loan, includinga considerationof the debt-to-incomeratioand employmentand incomestability,the loan-to-valueratio,and the age, condition and marketabilityof the collateral;and

CCBXAs of
(dollars in thousands; unaudited)June 30,
2023		December 31,
2022
Nonaccrual loans$— $— 
Accruing loans past due 90 days or more:
Commercial & industrial loans808 404 
Real estate loans:
Residential real estate loans1,722 876 
Consumer and other loans:
Credit cards18,306 10,570 
Other consumer and other loans5,492 14,245 
Total accruing loans past due 90 days or more26,328 26,095 
Total nonperforming loans26,328 26,095 
Other real estate owned— — 
Repossessed assets— — 
Total nonperforming assets$26,328 $26,095 

•

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

Allowance for credit losses
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and calculated on a collective basis for those loans which share similar risk characteristics. At each reporting period, the Company evaluates whether the loans in a pool continue to exhibit similar risk characteristics as the other loans in the pool and whether it needs to evaluate the allowance on an individual basis. The Bank must estimate expected credit losses over the loans’ contractual terms, adjusted for expected prepayments. In estimating the life of the loan, the Bank cannot extend the contractual term of the loan for expected extensions, renewals, and modifications, unless the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Bank. Because expected credit losses are estimated over the contractual life adjusted for estimated prepayments, determination of the life
75
Table of Contents,
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 to maintain the allowance at appropriate levels.
As of June 30, 2023, the allowance for credit losses totaled $110.8 million, or 3.68% of total loans. As of December 31, 2022, the allowance for loan losses totaled $49.4$74.0 million, or 2.11%2.82% of total loans. Effective January 1, 2023 the Company implemented the CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the incurred loss model, which is what we were previously using. As a result of December 31, 2021,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 losses totaled $28.6 million, or 1.64%$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 total loans. $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 loancredit losses for the quarter ended June 30, 20222023 compared to December 31, 2021,2022, is largely related to the provision for CCBX partner loans. During the six months ended June 30, 2022,2023, a $26.6$95.8 million provision for loancredit losses - loans was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank loancredit losses indicated that a provision for loancredit losses - loans of $452,000$381,000 was needed for the six months ended June 30, 2022.2023. The economic environment is continuously changing with increasedthe bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, political uncertainty and a rise in new COVID-19 variantstrade issues that have resulted in some economic uncertainty. As described above, CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loancredit losses.
Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by absorbingindemnifying or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probableexpected losses for these CCBX loans.loans and reclassified negative deposit accounts. When the provision for loancredit losses - loans and provision for unfunded commitments is recorded, a receivablecredit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements).  Incurred losses are recorded in recognition of the allowance for loan losses, and as theCCBX 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 receivablepartner's cash reserve account. Partner fraud includes noncredit fraud losses on loans and deposits originated through partners. Agreements with our CCBX partners also provide protection to the Bank from fraud by indemnifying or reimbursing incurred fraud losses. Fraud losses are recorded when incurred as losses in noninterest expense, and the enhancement received from the CCBX partner is relieved.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 absorbingindemnifying 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 bankBank 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 and providing credit enhancements. The Company is not requiredBank 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 implement the provisionsCCBX partner were stopped.
76
Table of the CECL accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model.  

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

 

 

As of

 

 

As of

 

 

 

June 30, 2022

 

 

December 31, 2021

 

(dollars in thousands; unaudited)

 

Community Bank

 

CCBX

 

Total

 

 

Community Bank

 

 

CCBX

 

 

Total

 

Loans receivable

 

$

1,530,402

 

$

803,952

 

$

2,334,354

 

 

$

1,396,061

 

 

$

346,674

 

 

$

1,742,735

 

Allowance for loan losses

 

 

(20,785

)

 

(28,573

)

 

(49,358

)

 

 

(20,299

)

 

 

(8,333

)

 

 

(28,632

)

Allowance for loan losses to total loans receivable

 

 

1.36

%

 

3.55

%

 

2.11

%

 

 

1.45

%

 

 

2.40

%

 

 

1.64

%

Included in total loans is $16.4 million in PPP loans which are 100% guaranteed by the SBA.  The allowance for loan losses to loans receivable, excluding the guaranteed PPP loans, is approximately 2.13% and 1.75% at June 30, 2022 and December 31, 2021, respectively.  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 followingContents,tablepresents,as of and for the periodsindicated,an analysisof the allowancefor loan losses and otherrelateddata:

 

 

As of or for the Three

 

 

As of or for the Six

 

 

 

Months Ended

 

 

Months Ended

 

 

 

June 30,

 

 

June 30,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Allowance at beginning of period

 

$

38,770

 

 

$

19,610

 

 

$

28,632

 

 

$

19,262

 

Provision for loan losses

 

 

14,094

 

 

 

361

 

 

 

27,036

 

 

 

718

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

33

 

 

 

2

 

 

 

38

 

 

 

16

 

Consumer and other

 

 

3,509

 

 

 

10

 

 

 

6,312

 

 

 

14

 

Total charge-offs

 

 

3,542

 

 

 

12

 

 

 

6,350

 

 

 

30

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

35

 

 

 

-

 

 

 

37

 

 

 

5

 

Consumer and other

 

 

1

 

 

 

7

 

 

 

3

 

 

 

11

 

Total recoveries

 

 

36

 

 

 

7

 

 

 

40

 

 

 

16

 

Net charge-offs

 

 

3,506

 

 

 

5

 

 

 

6,310

 

 

 

14

 

Allowance at end of period

 

$

49,358

 

 

$

19,966

 

 

$

49,358

 

 

$

19,966

 

Allowance for loan losses to nonaccrual loans

 

 

21367.10

%

 

 

3081.17

%

 

 

21367.10

%

 

 

3081.17

%

Allowance to nonperforming loans

 

 

849.39

%

 

 

3081.17

%

 

 

849.39

%

 

 

3081.17

%

Allowance to loans receivable

 

 

2.11

%

 

 

1.20

%

 

 

2.11

%

 

 

1.20

%

Net charge-offs to average loans (1)

 

 

0.64

%

 

 

0.00

%

 

 

0.64

%

 

 

0.00

%

(1) Ratios for the three and six months ended June 30, 2022 and 2021 are annualized.

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

 

 

Three Months Ended

 

 

 

June 30, 2022

 

 

June 30, 2021

 

(dollars in thousands; unaudited)

 

Community Bank

 

CCBX

 

Total

 

 

Community Bank

 

CCBX

 

Total

 

Gross charge-offs

 

$

3

 

$

3,539

 

$

3,542

 

 

$

8

 

$

4

 

$

12

 

Gross recoveries

 

 

(36

)

 

-

 

 

(36

)

 

 

(3

)

 

(4

)

 

(7

)

Net charge-offs

 

$

(33

)

$

3,539

 

$

3,506

 

 

$

5

 

$

-

 

$

5

 

Net charge-offs to average loans

 

 

-0.01

%

 

2.05

%

 

0.64

%

 

 

0.00

%

 

0.00

%

 

0.00

%

 

Six Months Ended

 

Three Months Ended

 

June 30, 2022

 

 

June 30, 2021

 

June 30, 2023June 30, 2022

(dollars in thousands; unaudited)

 

Community Bank

 

CCBX

 

Total

 

 

Community Bank

 

CCBX

 

Total

 

(dollars in thousands; unaudited)Community BankCCBXTotalCommunity BankCCBXTotal

Gross charge-offs

 

$

7

 

$

6,343

 

$

6,350

 

 

$

27

 

$

4

 

$

30

 

Gross charge-offs$9 $32,290 $32,299 $3 $3,539 $3,542 

Gross recoveries

 

 

(40

)

 

-

 

 

(40

)

 

 

(12

)

 

(4

)

 

(16

)

Gross recoveries— (1,340)(1,340)(36)— (36)

Net charge-offs

 

$

(33

)

$

6,343

 

$

6,310

 

 

$

15

 

$

-

 

$

14

 

Net charge-offs$9 $30,950 $30,959 $(33)$3,539 $3,506 

Net charge-offs to average loans

 

 

0.00

%

 

2.38

%

 

0.64

%

 

 

0.00

%

 

0.00

%

 

0.00

%

Net charge-offs to average loans (1)
Net charge-offs to average loans (1)
— %9.78 %4.19 %(0.01)%2.05 %0.64 %

(1)Annualized calculations shown for periods presented.
Six Months Ended
June 30, 2023June 30, 2022
(dollars in thousands; unaudited)Community BankCCBXTotalCommunity BankCCBXTotal
Gross charge-offs$59 $66,407 $66,466 $7 $6,343 $6,350 
Gross recoveries(5)(3,200)(3,205)(40)— (40)
Net charge-offs$54 $63,207 $63,261 $(33)$6,343 $6,310 
Net charge-offs to
    average loans (1)
0.01 %10.92 %4.50 %0.00 %2.38 %0.64 %
(1)Annualized calculations shown for periods presented.
The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data:
As of or for the Three Months Ended June 30,As of or for the Six Months Ended June 30,
(dollars in thousands; unaudited)2023202220232022
Allowance at beginning of period$89,123 $38,770 $74,029 $28,632 
Impact of adopting CECL (ASC 326)— — 3,852 — 
Provision for credit losses52,598 14,094 96,142 27,036 
Charge-offs:
Commercial and industrial loans411 33 1,187 38 
Residential real estate945 — 1,682 — 
Consumer and other30,943 3,509 63,597 6,312 
Total charge-offs32,299 3,542 66,466 6,350 
Recoveries:
Commercial and industrial loans— 35 3 37 
Consumer and other1,340 1 3,202 3 
Total recoveries1,340 36 3,205 40 
Net charge-offs30,959 3,506 63,261 6,310 
Allowance at end of period$110,762 $49,358 $110,762 $49,358 
Allowance for credit losses to nonaccrual loans1496.99 %21367.10 %1496.99 %21367.10 %
Allowance to nonperforming loans328.41 %849.39 %328.41 %849.39 %
Allowance to loans receivable3.68 %2.11 %3.68 %2.11 %
(1)Annualized calculations shown for periods presented.
77
Table of Contents,
The allowance for loancredit losses to nonaccrual loans ratio increased substantiallydecreased as of June 30, 2022,2023, compared to June 30, 20212022 as a result of a decreasean increase of $417,000$7.2 million in nonaccrual community bank loans, combined with an increase of $29.4$61.4 million in the allowance for loancredit losses. The increase in the allowance for loancredit losses for the three and six months ended June 30, 20222023 compared to the three and six months ended June 30, 2021,2022, is largely related to the increase in the allowance for loans originated bythrough our CCBX partners. CCBX partner agreements provide for, and the Company has collected in full, credit enhancements that cover the $3.5$31.0 million and $6.3$63.2 million in net-charge-offsnet charge-offs on CCBX loans for the three and six months ended June 30, 2022, respectively.2023. At June 30, 2022,2023, the allowance for loancredit losses for CCBX partner loans totaled $28.6$90.1 million, compared to $99,000$28.6 million at June 30, 2021.  

2022.

The following table presents the loans receivable and allowance for credit losses by segment for the periods indicated:
As of June 30, 2023As of December 31, 2022
(dollars in thousands; unaudited)Community BankCCBXTotalCommunity BankCCBXTotal
Loans receivable$1,713,034 $1,294,519 $3,007,553 $1,614,752 $1,012,504 $2,627,256 
Allowance for credit losses(20,653)(90,109)(110,762)(20,636)(53,393)(74,029)
Allowance for credit losses to
    total loans receivable		1.21 %6.96 %3.68 %1.28 %5.27 %2.82 %
Although we believe that we have established our allowance for 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 have not seen an increase in community bank loancredit losses due to COVID-19 as originally anticipated, as evidenced by the low level of charge-offs and nonperforming loans, however, the


economic environment is continuously changing with increasedthe bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, political uncertainty and a rise in new COVID-19 variantstrade issues that have resulted in some economic uncertainty. If economic conditions worsen thethen Washington state and Puget Sound region may experience a more severe economic downturn, and our asset quality could deteriorate, which may require material additional provisions for loancredit losses.

Securities

We use our securities portfolio primarily as a source of liquidity and collateral that can be readily sold or pledged for public deposits or other business purposes. At June 30, 2022, 98.6%2023, 88.6% of our investment portfolio consisted primarily of U.S. Treasury securities. The remainder of our securities portfolio was invested in municipal bonds, U.S. Agency collateralized mortgage obligations and U.S. Agency residential mortgage-backed securities. Because we target a loan-to-deposit ratio in the range of 90% to 100%, we prioritize liquidity over the earnings of our securities portfolio. At June 30, 2022,2023, our loan-to-deposit ratio was 86.5%96.2% due to our significant growth in both loans and deposits. Our securities portfolio represented less than 5% of assets. To the extent our securities represent more than 5% of assets, absent an immediate need for liquidity, we anticipate investing excess funds to provide a higher return.

As of June 30, 2022,2023, the amortized cost of our investment securities totaled $111.5$112.8 million, an increase of $74.9$11.5 million, or 204.6%11.4%, compared to $36.6$101.3 million as of December 31, 2021.2022. The increase in the securities portfolio was due to the purchase of five Treasurythree securities for $135.0$11.6 million during the six months ended June 30, 2022, to invest excess funds, replace maturing2023. These securities were purchased for CRA purposes and pledge to secure public depositsplaced in our held-to-maturity portfolio. The existing securities in our held-to-maturity portfolio were previously purchased for and are being held for other purposes as required or permitted by law, partially offset by $60.0 million in U.S. Treasury maturities and other principal paydowns.  

CRA purposes.

Our investmentportfolioconsistsof securitiesclassifiedas availablefor saleAFS and, to a lesseramount,held to maturity. held-to-maturity. The carryingvaluesof our investmentsecuritiesclassifiedas availablefor saleAFS are adjustedfor unrealizedgain or loss, and any gain or loss is reportedon an after-taxbasisas a componentof other comprehensiveincomein shareholders’equity. As of June 30, 2022,2023, our available for saleAFS portfolio has an unrealized loss of $1.7$2.1 million, compared to an unrealized gainloss of $5,000$3.0 million as of December 31, 2021.

2022.

78
Table of Contents,
The followingtablesummarizesthe amortizedcost and estimatedfairvalue of our investmentsecuritiesas of the datesshown:

 

As of

 

 

As of

 

 

June 30, 2022

 

 

December 31, 2021

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

As of June 30, 2023As of December 31, 2022

(dollars in thousands; unaudited)

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

(dollars in thousands; unaudited)Amortized
Cost		Fair
Value		Amortized
Cost		Fair
Value

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale:

U.S. Treasury securities

 

$

109,950

 

 

$

108,251

 

 

$

34,999

 

 

$

34,998

 

U.S. Treasury securities$99,981 $97,871 $99,967 $97,015 

U.S. Agency collateralized mortgage obligations

 

 

59

 

 

 

57

 

 

 

68

 

 

 

70

 

U.S. Agency collateralized mortgage obligations50 47 54 51 

U.S. Agency residential mortgage-backed

securities

 

 

1

 

 

 

1

 

 

 

3

 

 

 

3

 

U.S. Agency residential mortgage-backed securities— — 1 1 

Municipal bonds

 

 

251

 

 

 

251

 

 

 

252

 

 

 

256

 

Municipal bonds250 249 250 250 

Total available-for-sale securities

 

 

110,261

 

 

 

108,560

 

 

 

35,322

 

 

 

35,327

 

Total available-for-sale securities100,281 98,167 100,272 97,317 

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities held-to-maturity:

U.S. Agency residential mortgage-backed

securities

 

 

1,261

 

 

 

1,164

 

 

 

1,296

 

 

 

1,348

 

U.S. Agency residential mortgage-backed securities12,563 12,159 1,036 916 

Total held-to-maturity securities

 

 

1,261

 

 

 

1,164

 

 

 

1,296

 

 

 

1,348

 

Total held-to-maturity securities12,563 12,159 1,036 916 

Total investment securities

 

$

111,522

 

 

$

109,724

 

 

$

36,618

 

 

$

36,675

 

Total investment securities$112,844 $110,326 $101,308 $98,233 

We held a $2.2 million equity interest in a financial technology company as of June 30, 20222023 and December 31, 2021,2022, which consists of common stock and preferred shares.  We elected to account for the investments under ASC 321 Investments – Equity Securities without Readily Determinable Value.  The investment is
Additionally, we held at cost minus impairment if any, plus or minus observable price changesa $350,000 equity interest in orderly transactions for an identical or similar investment of the same issue.  This method should be applied until the investment does not qualify for the measurement election (e.g., if the investment has a readily determinable fair value). We will reassess at each reporting period whether the equity investment without a readily determinable fair value qualifies to be measured at cost minus impairment; there was no change to the value or valuation technique this quarter.  Additionally, astechnology company of June 30, 20222023 and December 31, 2021, we held $100,0002022.
We invest in corporate equity securities in anotherinvestment funds that are designed to help accelerate technology company which was recorded in other investments on the balance sheet. We also held equity indirectly in two other technology companies for $350,000.

During the year ended December 31, 2021, we entered agreements for capital commitments of up to $1.1 millionadoption at banks and have invested in three separate funds. These funds are carried at fair value as reported by the funds. During the six months ended June 30, 2023, we contributed $180,000 with investment funds designed to help accelerate technology adoption at banks.  Asbanks, and recognized net gains of December 31, 2021, we held $160,000$194,000, resulting in investment funds.  During the six months endedan equity interest of $830,000 at June 30, 2022 we contributed $325,000 and recognized a market loss of $2,000 bringing our2023. The Company has committed up to $763,000 in capital for these investment funds, totalhowever, the Company is not obligated to $483,000 as of June 30, 2022, and our totalfund these commitments prior to a capital commitment to $1.3 million.

call.

Deposits

We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, money market, savings, BaaS-brokered deposits and time accounts as well as reciprocalIntraFi network sweep deposits. ReciprocalSweep 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 existing deposits. Additionally, we offer deposit products through our CCBX segment. Although the CCBX productsdeposits are similar to the community bank offerings, thegenerally classified as interest bearing negotiable order of withdrawal (“NOW”) and money market accounts. CCBX deposit products allow us to offer a broader range of partner specific products, which include products designed to reach specific under-served or under-banked populations served by our CCBX partners.

Total deposits as of June 30, 20222023 were $2.70$3.16 billion, an increase of $333.5$345.1 million, or 14.1%12.2%, compared to $2.36$2.82 billion as of December 31, 2021.2022. The increase in deposits was largely in core deposits, which increased $335.3$451.2 million to $2.58$3.14 billion from $2.25$2.69 billion at December 31, 2021.2022. We define core deposits as all deposits except time deposits and brokered deposits. The $335.3$451.2 million increase in core deposits is also largely from growth in the CCBX segment, which accounted for $344.6$475.4 million of the increase, partially offset by a decrease of $9.4$24.1 million in community bank deposits. The slight decrease in community bank deposits was a result of pricing disciplines as some customer sought higher rate products elsewhere. Our cost of deposits for the community bank was 0.98% for the three months ended June 30, 2023. BaaS-brokered deposits are now classified as NOW accounts due to a change in the relationship agreement with one of our partners; these deposits increased $173.6 million to $275.2 million as of June 30, 2023. These deposits increased as a result of sweeping them back on the balance sheet. Additionally, as of June 30, 20222023 we have access to $269.5$9.9 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis. Depending on the circumstances of how theThe Bank wouldcould retain these deposits for liquidity and its relationship with the customer,funding purposes if needed. If a portion of these deposits are retained, deposits couldthey would be classified as brokered deposits.

NOW accounts.

79
Table of Contents,
Included in total deposits is $1.07$1.65 billion in CCBX deposits, an increase of $349.9$373.8 million, or 48.8%29.2%, compared to $716.3 million$1.28 billion as of December 31, 2021.2022. CCBX customer deposit relationships include deposits with CCBX end customers, operating and non-operating deposit accounts. The deposits from our CCBX divisionsegment are generally classified as interest bearing NOW and money market accounts, and a portion of such CCBX deposits may be classified as brokered deposits as a result of the relationship agreement.  During the six months ended June 30, 2022, the majority of CCBX deposits were reclassified from noninterest bearing to interest bearing.  This is because the current rate exceeds the minimum interest rate set in their respective program agreements, as a result of the recent increases in interest rates by the FOMC.  

accounts.

Total noninterest bearing deposits as of June 30, 20222023 were $818.1$725.6 million, a decrease of $537.9$49.4 million, or 39.7%6.4%, compared to $1.36 billion$775.0 million as of December 31, 2021. The $537.9 million decrease is primarily the result of reclassifying $776.8 million in CCBX noninterest bearing deposits to interest bearing as a result of the recent increase in interest rates by the FOMC, partially offset by growth in CCBX noninterest deposits of $228.7 million and growth in community bank noninterest deposits of $10.2 million.2022. Noninterest bearing deposits represent 30.3%22.9% and 57.4%27.5% of total deposits for June 30, 20222023 and December 31, 2021,2022, respectively.

Total interest bearing account balances, excluding time deposits, as of June 30, 20222023 were $1.84$2.41 billion, an increase of $878.4$399.1 million, or 91.1%19.8%, compared to $964.4 million$2.01 billion as of December 31, 2021.2022. The $878.4$399.1 million increase is the resultdue in part to former BaaS-brokered deposits now being classified as NOW accounts in the first quarter of reclassifying $776.8 million2023 due to a change in CCBX noninterest bearing deposits to interest bearing as a resultthe relationship agreement with one of the recent increases in interest rates by the FOMC,our partners, combined with CCBX growth in interest bearing deposits of $121.1 million partially offset byand a community bank decreaseincrease in interest bearing deposits of $19.5$49.0 million. Included in interest bearing account balancestotal deposits is $76.0$240.3 million in BaaS-brokeredIntraFi network NOW and money market sweep accounts as of June 30, 2023, which provides our customers with fully insured deposits an increasethrough a sweep and exchange of $5.2 million from December 31, 2021. Also included in interest bearing deposits is $17.2 million in reciprocal deposits.  

with other financial institutions.

Total time deposit balances as of June 30, 20222023 were $36.5$24.8 million, a decrease of $7.0$4.6 million, or 16.1%15.7%, from $43.5$29.4 million as of December 31, 2021.2022. The decrease is due to the strong increase in core deposits, and our focus on core deposits and letting higher rate deposits run off as they mature. We have seen competitors increase rates on time deposits, and we have not globally matched their rates in response as we have been able to growfocus on growing and retainretaining less costly core deposits.

The followingtablesetsforthdepositbalancesat the dates indicated:
As of June 30, 2023As of December 31, 2022
(dollars in thousands; unaudited)Amount
Percent of
Total
Deposits
Amount
Percent of
Total
Deposits
Demand, noninterest bearing$725,592 22.9 %$775,012 27.5 %
NOW and money market2,323,164 73.5 1,804,399 64.0 
Savings88,991 2.8 107,117 3.8 
Total core deposits3,137,747 99.2 2,686,528 95.3 
Brokered deposits1 — 101,546 3.6 
Time deposits less than $100,0009,741 0.3 12,596 0.5 
Time deposits $100,000 and over15,083 0.5 16,851 0.6 
Total$3,162,572 100.0 %$2,817,521 100.0 %
Cost of deposits (1)
2.72 %1.56 %
(1)indicated:

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

 

 

As of

 

 

As of

 

 

 

June 30, 2022

 

 

December 31, 2021

 

 

 

 

 

 

 

Percent of

 

 

 

 

 

 

Percent of

 

(dollars in thousands; unaudited)

 

Amount

 

 

Total

Deposits

 

 

Amount

 

 

Total

Deposits

 

Demand, noninterest bearing

 

$

818,052

 

 

 

30.3

%

 

$

1,355,908

 

 

 

57.4

%

NOW and money market

 

 

1,660,315

 

 

 

61.6

 

 

 

789,709

 

 

 

33.4

 

Savings

 

 

106,464

 

 

 

3.9

 

 

 

103,956

 

 

 

4.4

 

Total core deposits

 

 

2,584,831

 

 

 

95.8

 

 

 

2,249,573

 

 

 

95.2

 

BaaS-brokered deposits

 

 

76,001

 

 

 

2.8

 

 

 

70,757

 

 

 

3.0

 

Time deposits less than $100,000

 

 

14,009

 

 

 

0.5

 

 

 

14,961

 

 

 

0.6

 

Time deposits $100,000 and over

 

 

22,464

 

 

 

0.8

 

 

 

28,496

 

 

 

1.2

 

Total

 

$

2,697,305

 

 

 

100.0

%

 

$

2,363,787

 

 

 

100.0

%

Cost of Deposits (1)

 

 

0.25

%

 

 

 

 

 

 

0.09

%

 

 

 

 

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

 

80


Table of Contents,

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

Community Bank

 

As of

 

Community BankAs of

 

June 30, 2022

 

 

December 31, 2021

 

June 30, 2023December 31, 2022

(dollars in thousands; unaudited)

 

Balance

 

% to Total

 

 

Balance

 

% to Total

 

(dollars in thousands; unaudited)Balance% to TotalBalance% to Total

Demand, noninterest bearing

 

$

729,436

 

 

44.7

%

 

$

719,233

 

 

43.7

%

Demand, noninterest bearing$621,012 41.1 %$694,179 45.2 %

NOW and money market

 

 

759,704

 

 

46.6

 

 

 

780,884

 

 

47.4

 

NOW and money market778,475 51.6 709,490 46.1 

Savings

 

 

105,576

 

 

6.5

 

 

 

103,954

 

 

6.3

 

Savings85,146 5.7 105,101 6.8 

Total core deposits

 

 

1,594,716

 

 

97.8

 

 

 

1,604,071

 

 

97.4

 

Total core deposits1,484,633 98.4 1,508,770 98.1 

Brokered deposits

 

 

1

 

 

0.0

 

 

 

1

 

 

0.0

 

Brokered deposits1 0.0 1 0.0 

Time deposits less than $100,000

 

 

14,009

 

 

1.3

 

 

 

31,057

 

 

1.8

 

Time deposits less than $100,0009,741 0.6 12,596 0.8 

Time deposits $100,000 and over

 

 

22,464

 

 

0.9

 

 

 

12,400

 

 

0.8

 

Time deposits $100,000 and over15,083 1.0 16,851 1.1 

Total Community Bank deposits

 

$

1,631,190

 

 

100.0

%

 

$

1,647,529

 

 

100.0

%

Total Community Bank deposits$1,509,458 100.0 %$1,538,218 100.0 %

Cost of deposits (1)

 

 

0.08

%

 

 

 

 

 

0.12

%

 

 

 

Cost of deposits(1)
0.98 %0.37 %

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

 

CCBX

 

As of

 

 

 

June 30, 2022

 

 

December 31, 2021

 

(dollars in thousands; unaudited)

 

Balance

 

% to Total

 

 

Balance

 

% to Total

 

Demand, noninterest bearing

 

$

88,616

 

 

8.3

%

 

$

636,675

 

 

88.9

%

NOW and money market

 

 

900,611

 

 

84.5

 

 

 

8,825

 

 

1.2

 

Savings

 

 

888

 

 

0.1

 

 

 

2

 

 

0.0

 

      Total core deposits

 

 

990,115

 

 

92.9

 

 

 

645,502

 

 

90.1

 

BaaS-brokered deposits

 

 

76,000

 

 

7.1

 

 

 

70,756

 

 

9.9

 

      Total CCBX deposits

 

$

1,066,115

 

 

100.0

%

 

$

716,258

 

 

100.0

%

Cost of deposits (1)

 

 

0.56

%

 

 

 

 

 

0.02

%

 

 

 

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

 

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

CCBXAs of
June 30, 2023December 31, 2022
(dollars in thousands; unaudited)Balance% to TotalBalance% to Total
Demand, noninterest bearing$104,580 6.3 %$80,833 6.3 %
NOW and money market1,544,689 93.5 1,094,909 85.6 
Savings3,845 0.2 2,016 0.2 
Total core deposits1,653,114 100.0 1,177,758 92.1 
BaaS-brokered deposits— — 101,545 7.9 
Total CCBX deposits$1,653,114 100.0 %$1,279,303 100.0 %
Cost of deposits (1)
4.42 %3.13 %
(1)Cost of deposits is annualized for the three months ended for each period presented.
The following table sets forth the Company’s time deposits of $100,000 or more by time remaining until maturity as of the dates indicated:

(dollars in thousands; unaudited)

 

As of

June 30,

2022

 

 

As of

December 31,

2021

 

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

Maturity Period:

 

 

 

 

 

 

 

 

Maturity Period:

Three months or less

 

$

7,425

 

 

$

8,106

 

Three months or less$3,798 $4,067 

Over three through six months

 

 

5,558

 

 

 

6,520

 

Over three through six months3,619 2,957 

Over six through twelve months

 

 

4,952

 

 

 

8,925

 

Over six through twelve months5,374 5,892 

Over twelve months

 

 

4,529

 

 

 

4,945

 

Over twelve months2,292 3,935 

Total

 

$

22,464

 

 

$

28,496

 

Total$15,083 $16,851 

Weighted average maturity (in years)

 

 

0.80

 

 

 

0.73

 

Weighted average maturity (in years)0.800.76

Average depositsfor the three months ended June 30, 20222023 were $3.04 billion, an increase of 15.7% compared to $2.63 billion an increaseof 49.1% compared to $1.77 billion for the three months ended June 30, 2021.2022. The increasein averagedeposits for was primarily due to an increase in core deposits, primarily in interest rate bearing deposits. We expect deposits to increase with continued growth in our primary market areas, the increase in commercial lending relationships for which we also seek deposit balances and the results of business development efforts by branch managers, treasury service personnel and lenders.  Additionally, as our CCBX relationships grow, so too will our deposits.


The averageratepaid on totaldepositswas 2.72% for the three months ended June 30, 2023, compared to 0.25% for the three months ended June 30, 2022, compared to 0.14% for the three months ended June 30, 2021.2022. The average rate paid on NOW and money market accounts increased 11 basis points3.35% for the three months ended June 30, 2022,2023, compared to the three months ended June 30, 2021.2022. The average rate paid on time

81
Table of Contents,
deposits of less than $100,000 decreased 37 basis pointsincreased 0.09% for the three months ended June 30, 2022,2023, compared to the three months ended June 30, 2021.2022. The average rate paid on time deposits greater than $100,000 decreased 0.41%increased 0.05% for the three months ended June 30, 2022 compared to the three months ended .  The average rate paid on savings was fairly flat for the three months ended June 30, 20222023 compared to the three months ended June 30, 2021.2022. The average rate paid on savings increased 0.21% for the three months ended June 30, 2023 compared to the three months ended June 30, 2022. The average rate paid on BaaS brokered deposits increased 0.14%decreased 0.50% for the three months ended June 30, 20222023 compared to the three months ended June 30, 2021.2022. The overall higher average rate paid on interest bearing accounts in the three months ended June 30, 20222023 compared to the three months ended June 30, 20212022 is due to the recent interest rate increases by the FOMC. The impact of the interest rate increases by the FOMC in the second quarter of 2022 will not be fully realized in our interest expense until future periods. Increased Fed Funds rates along with competition are expected to continue to impact future cost of deposits and our pricing strategies.

The averageratepaid on totaldepositswas 2.44% for the six months ended June 30, 2023, compared to 0.18% for the six months ended June 30, 2022, compared to 0.16% for the six months ended June 30, 2021.2022. The average rate paid on NOW and money market accounts increased one basis points3.14% for the six months ended June 30, 20222023 compared to the six months ended June 30, 2021.2022. The average rate paid on time deposits of less than $100,000 decreased 39 basis points0.03% for the six months ended June 30, 2022,2023, compared to the six months ended June 30, 2021.2022. The average rate paid on time deposits greater than $100,000 increased 0.54%decreased 1.05% for the six months ended June 30, 20222023 compared to the six months ended June 30, 2021,2022, due to the recognition of additional interest expense of $130,000 during the six months ended June 30, 2022 to correct interest on CDs from a previous period. The average rate paid on savings was fairly flat0.19% for the six months ended June 30, 2022,2023, compared to 0.03% for the six months ended June 30, 2021.2022. The average rate paid on BaaS brokered deposits increased seven basis points3.66% compared to the six months ended June 30, 2021.2022. The overall higher average rate paid on interest bearing accounts in the six months ended June 30, 20222023 compared to the six months ended June 30, 20212022 is due to the recent interest rate increases by the FOMC.

The followingtablepresentsthe averagebalancesand averageratespaid on depositsfor the periods indicated:
For the Three Months Ended June 30,For the Six Months Ended June 30,
2023202220232022
(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$717,256 0.00 %$839,562 0.00 %$746,436 0.00 %$1,078,525 0.00 %
NOW and money market2,206,791 3.74 1,579,970 0.39 2,020,946 3.44 1,250,353 0.30 
Savings93,818 0.24 104,356 0.03 98,828 0.19 104,283 0.03 
BaaS-brokered deposits1 0.00 68,876 0.50 52,367 4.08 68,848 0.42 
Time deposits less than $100,00010,517 0.34 14,462 0.25 11,174 0.27 14,652 0.30 
Time deposits $100,000 and over15,575 0.36 24,455 0.31 15,853 0.31 25,739 1.36 
Total deposits$3,043,958 2.72 %$2,631,681 0.25 %$2,945,604 2.44 %$2,542,400 0.18 %
(1)indicated:

Annualized calculations shown for periods presented.

 

 

For the Three Months Ended June 30,

 

 

For the Six Months Ended June 30,

 

 

 

2022

 

 

2021

 

 

2022

 

 

2021

 

(dollars in thousands; unaudited)

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

Demand, noninterest bearing

 

$

839,562

 

 

 

0.00

%

 

$

863,962

 

 

 

0.00

%

 

$

1,078,525

 

 

 

0.00

%

 

$

777,693

 

 

 

0.00

%

NOW and money market

 

 

1,579,970

 

 

 

0.39

 

 

 

734,677

 

 

 

0.28

 

 

 

1,250,353

 

 

 

0.30

 

 

 

712,595

 

 

 

0.29

 

Savings

 

 

104,356

 

 

 

0.03

 

 

 

91,181

 

 

 

0.03

 

 

 

104,283

 

 

 

0.03

 

 

 

88,759

 

 

 

0.03

 

BaaS-brokered deposits

 

 

68,876

 

 

 

0.50

 

 

 

22,435

 

 

 

0.36

 

 

 

68,848

 

 

 

0.42

 

 

 

22,625

 

 

 

0.35

 

Time deposits less than $100,000

 

 

14,462

 

 

 

0.25

 

 

 

17,392

 

 

 

0.62

 

 

 

14,652

 

 

 

0.30

 

 

 

18,130

 

 

 

0.69

 

Time deposits $100,000 and over

 

 

24,455

 

 

 

0.31

 

 

 

35,435

 

 

 

0.72

 

 

 

25,739

 

 

 

1.36

 

 

 

36,631

 

 

 

0.82

 

Total deposits

 

$

2,631,681

 

 

 

0.25

%

 

$

1,765,082

 

 

 

0.14

%

 

$

2,542,400

 

 

 

0.18

%

 

$

1,656,433

 

 

 

0.16

%

The ratioof averagenoninterest bearingdepositsto averagetotaldepositsfor the three months ended June 30, 2022 was 31.9% and compared to 48.9% for the three months ended June 30, 2021 and 42.4% for the six months ended June 30, 20222023 was 23.6% and 25.3%, respectively, compared to 46.9%31.9% and 42.4%, respectively, for the three and six months ended June 30, 2021.

2022.

Uninsured Deposits

The FDIC insures our deposits up to $250,000 per depositor, per insured bank for each account ownership category. Deposits that exceed insurance limits are uninsured. At June 30, 2023, deposits totaled $3.16 billion, of which total estimated uninsured deposits were $632.1 million, or 20.0% of total deposits, compared to $835.8 million, or 29.7% of total deposits as of December 31, 2022. At June 30, 2022, deposits totaled $2.70 billion, of which total estimated uninsured deposits were $812.1 million. Atmillion, or 30.1% of total deposits. The Bank is using sweep deposits to provide our customers with fully insured deposits through a sweep and exchange of deposits with other financial institutions.
82
Table of Contents,
Estimated uninsured time deposits totaled $2.6 million as of June 30, 2021, deposits totaled $2.36 billion, of which total estimated uninsured deposits were $780.6 million.  

2023. The table below shows the estimated uninsured time deposits, by account, for the maturity periods indicated:


(dollars in thousands; unaudited)As of June 30, 2023
Maturity Period:
Three months or less$947 
Over three through six months257 
Over six through twelve months1,287 
Over twelve months146 
Total$2,637 

(dollars in thousands; unaudited)

 

As of

June 30, 2022

 

Maturity Period:

 

 

 

 

Three months or less

 

$

1,561

 

Over three through six months

 

 

1,013

 

Over six through twelve months

 

 

289

 

Over twelve months

 

 

184

 

Total

 

$

3,047

 

Borrowings

We have the abilityto utilizeshort-termto long-termborrowingsto supplementdepositsto fund our lending and investmentactivities,each of which is discussed below.
below.

Federal Reserve Bank Line of Credit. The Federal Reserveallows us to borrow againstour lineof credit through a borrower in custody agreement utilizing the discount window,which is collateralizedby certainloans. Asof June 30, 20222023 and June 30, 2021,2022, totalborrowing capacityof $28.9$433.8 million and $20.8$28.9 million, respectively, was availableunder thisarrangement. Asof June 30, 20222023 and 2021,2022, Federal Reserve advances totaled zero.

Paycheck Protection Program Liquidity Facility. To bolster Additional loans were pledged during the effectivenessfirst six months of 2023 to significantly increase the borrowing capacity of the SBA’s PPP loan program,Bank in the Federal Reserve suppliedevent of a liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provided loans to small businesses so that they can keep their employees on the payroll and pay for other allowed expenses. If the borrowers meet certain criteria, the loan may be forgiven.  The PPPLF extended credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. The interest rate was 0.35% and as PPP loans were paid down, the borrowing line also had to be paid down.  The borrowing was paid in full in June 2021 and as of June 30, 2022 and 2021, no PPPLF advances were outstanding.  PPPLF advances were a new borrowing arrangement beginning in 2020 that had favorable capital treatment and was specific to the PPP loan program.  The last day to take new advances on the PPPLF was July 31, 2021.crisis.

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

 

 

As of and For the Three

 

 

As of and For the Six

 

 

 

Months Ended

 

 

Months Ended

 

 

 

June 30,

 

 

June 30,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Maximum amount outstanding at any month-end

   during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPPLF Advances

 

$

-

 

 

$

128,826

 

 

$

-

 

 

$

185,894

 

Average outstanding balance during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPPLF Advances

 

$

-

 

 

$

107,047

 

 

$

-

 

 

$

138,536

 

Weighted average interest rate during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPPLF Advances

 

 

0.00

%

 

 

0.35

%

 

 

0.00

%

 

 

0.35

%

Balance outstanding at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPPLF Advances

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Weighted average interest rate at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPPLF Advances

 

 

0.00

%

 

 

0.35

%

 

 

0.00

%

 

 

0.35

%

Federal Home Loan Bank Advances. LoanBankAdvances. The FHLBallows us to borrow againstour lineof credit,which is collateralizedby certainloans. Asof June 30, 20222023 and June 30, 2021,2022, we had borrowing capacity of $109.0$126.0 millionand $101.0109.0 million,respectively,with the FHLB. During the six months endedAs of June 30, 2022, we repaid a total of $25.0 million in FHLB term advances.  This included a $10.0 million advance that would have matured in March of 2023 and $15.0 million advance that would have matured in March 2025.  We have sufficient liquidity for our current loan demand, and with no prepayment penalty for early repayment, management opted to repay these term2022, FHLB advances and save the unnecessary interest expense.totaled zero.


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

 

 

As of and For the Three

 

 

As of and For the Six

 

 

 

Months Ended

 

 

Months Ended

 

 

 

June 30,

 

 

June 30,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Maximum amount outstanding at any month-end

   during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

$

-

 

 

$

24,999

 

 

$

24,999

 

 

$

24,999

 

Average outstanding balance during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

$

-

 

 

$

24,999

 

 

$

12,154

 

 

$

24,999

 

Weighted average interest rate during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

 

0.00

%

 

 

1.13

%

 

 

1.13

%

 

 

1.13

%

Balance outstanding at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

$

-

 

 

$

24,999

 

 

$

-

 

 

$

24,999

 

Weighted average interest rate at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

 

0.00

%

 

 

1.13

%

 

 

0.00

%

 

 

1.13

%

As of and For the Three Months Ended June 30,As of and For the Six Months Ended June 30,
(dollars in thousands; unaudited)2023202220232022
Maximum amount outstanding at any month-end during period:$— $— $— $24,999 
Average outstanding balance during period:$— $— $— $12,154 
Weighted average interest rate during period:0.00 %0.00 %0.00 %1.13 %
Balance outstanding at end of period:$— $— $— $— 
Weighted average interest rate at end of period:0.00 %0.00 %0.00%0.00 %

Junior Subordinated Debentures. Debentures. In 2004, weissued$3.6 $3.6 millionin juniorsubordinateddebenturesto Coastal (WA) StatutoryTrust I (the “Trust”), of which weownallof the outstandingcommonsecurities.The Trust used the proceedsfromthe issuanceof itsunderlyingcommonsecuritiesand preferredsecuritiesto purchasethe debenturesissuedby the Company. These debenturesare the Trust’sonly assetsand the interestpaymentsfrom the debenturesfinancethe distributionspaid on the preferredsecurities.The debenturesbear interestat a rateper annum equal to the 3-monthLIBORplus 2.10%. The effectiverateas of June 30, 20222023 and December 31, 20212022 was 3.93%7.65% and 2.30%6.87%, respectively. Beginning with rate adjustments that occur after June 30, 2023, the rate will be based off three-month CME Term SOFR plus 0.26%. We generallyhave the rightto deferpaymentof intereston the debenturesat any timeor fromtimeto timefor a periodnot exceedingfiveyearsprovidedthatno extensionperiodmay extend beyond the statedmaturityof the debentures.During any such extensionperiod, distributionson the Trust’spreferredsecuritieswill 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, subject to Federal Reserve approval.If the debenturesare redeemedpriorto maturity,the redemptionpricewill be the principalamountand any accruedbut unpaid interest.We unconditionallyguaranteepaymentof accruedand unpaid distributionsrequiredto be paid on the Trust securitiessubjectto certain exceptions,the redemptionpricewith respectto any Trust securitiescalledfor redemptionand amountsdue if the Trust is liquidatedor terminated.

83
Table of Contents,
Subordinated DebtDebt. In August 2021, the Company issued a subordinated note in the amount of $25.0 million. The note matures on September 1, 2031, and bears interest at the rate of 3.375% per year for five years and, thereafter, reprices quarterly beginning September 1, 2026, at a rate equal to the three-month SOFR plus 2.76%. The five-year 3.375% interest period ends on September 1, 2026. We may redeem the subordinated note, in whole or in part, without premium or penalty, in principal redemption multiples of $1,000, after August 18, 2026, subject to any required regulatory approvals. 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.


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

LiquidityManagement

Liquidityrefersto our capacityto meetour cash obligationsat a reasonablecost. Our cash obligationsrequire us to have cash flow thatis adequateto fund loan growth and maintainon-balancesheetliquiditywhile meeting presentand futureobligationsof depositwithdrawals,borrowing maturitiesand othercontractualcash obligations.In managingour cash flows, managementregularlyconfrontssituationsthatcan give riseto increasedliquidityrisk.These includefunding mismatches,marketconstraintsin accessingsourcesof funds and the abilityto convertassetsinto cash. Changes in economicconditionsor exposureto credit,market,and operational,legaland reputationalrisksalso could affectthe Bank’s liquidityriskprofileand are consideredin the assessmentof liquiditymanagement. Deposits obtained through our CCBX segment are a significant source of liquidity for us. If a relationship with a large CCBX partner terminates, the exit of those deposits could have an adverse impact on liquidity. Partner program agreements govern the relationship and are valid for a given period of time. Prior to exiting, the partner would need to provide us adequate notice as stipulated in the agreement that they were not going to renew the program agreement and intend to move the deposits. The movement to an alternate BaaS provider is cumbersome and would be over a period of time, which would allow us the


opportunity to put alternate liquidity in place; those options are more fully discussed below. As of June 30, 2022,2023, we have 2 partners1 partner with deposits that are in excess of 10% of total deposits and represent 29%27% of total deposits.

We continually monitor our liquidity position to ensure that our assets and liabilities are managed in a manner to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. Management has established a comprehensive process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of readily available cash, deposits and highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; contingency funding policies and plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity risk management process. 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 liquiditypositionis supportedby managementof our liquidassetsand liabilitiesand accessto alternative sourcesof funds. Our liquidityrequirementsare metprimarilythrough our deposits,FHLBadvancesand the principaland interestpaymentswereceiveon loans and investmentsecurities.Cash on hand, cash at third-party banks, investmentsavailable-for-saleand maturingor prepayingbalancesin our investmentand loan portfolios are our mostliquidassets.Other sourcesof liquiditythatare routinelyavailableto us includefunds fromretail, commercial,and BaaSdeposits,advancesfromthe FHLBand proceedsfromthe saleof loans. Less commonlyused sourcesof funding includeborrowingsfromthe FederalReserve discountwindow,draws on establishedfederalfunds linesfromunaffiliatedcommercialbanks, funds from online
84
Table of Contents,
rate services, brokered deposits, a one-way buy through an ICS account, and the issuanceof debt or equitysecurities. We also participated inAdditionally, the PPPLF, which provided an additional source of low cost funding, at a 0.35% interest rate, and favorable capital treatment for the PPP loans.  In June 2021, we repaid all borrowings under the PPPLF in full, resulting in a zero balanceBank, as of June 30, 2022.2023, has access to $9.9 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. We believewehave ampleliquidityresourcesto fund futuregrowth and meetothercash needs as necessary and are closely monitoring liquidity in this uncertain economic environment.

The Company is a corporationseparateand apartfromour Bankand, therefore,mustprovidefor itsown liquidity,includingliquidityrequiredto meetitsdebt servicerequirementson itssubordinatednote and junior subordinateddebentures.The Company’s mainsourceof cash flow has been through equityand debt offerings. The Company has consistentlyretaineda portionof the funds fromequityand debt offeringsso thatis has sufficientfunds for itsoperatingand debt costs. During the six months ended June 30, 2022, 2023, the Company contributed $21.0$15.0 million to the Bank. The Company currently holds $2.5$6.8 million in cash and uses approximately $1.6 million for debt servicing and operating purposes each year.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.

Additionally, the Bank, as of June 30, 2022, has access to $269.5 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis.  The Bank could retain these deposits for liquidity and funding purposes if needed.   We believe that these limitationswill not impact the ability of the Bankto pay dividends to the Company to meet ongoing operating needs.

For contingency purposes, the Company maintainsa minimumlevel of cash to fund one year’s projected operating cash flow needs and the Bankestablishedtargets a minimumliquidityratio of 5% of assets.10%. Both of these minimumliquiditylevels are on-balance sheet sources. Per policy and the Bank’s liquiditycontingency plan, in event of a liquidityemergency the Bankcan utilizewholesale funds in an amount up to 30% of assets. Since the Bankuses only a small portion of its borrowing or wholesale funding capacity, the Bankhas access to borrow funds if needed in a liquidity emergency.

Capital Adequacy

Capitalmanagementconsistsof providingequityand otherinstrumentsthatqualifyas regulatorycapitalto supportcurrentand futureoperations.Banking regulatorsview capitallevelsas importantindicatorsof an institution’sfinancialsoundness. Asa generalmatter,FDIC-insureddepositoryinstitutionsand theirholding companiesare requiredto maintainminimumcapitallevelsrelativeto the amountand types of assetsthey hold. We are subjectto regulatorycapitalrequirementsat the bank level.The Company will becomesubjectto regulatorycapitalrequirementsif its Because the Company’s consolidatedassetsexceed exceeded $3.0 billion or it otherwise becomes ineligible to operate underas of September 30, 2022, the Company is no longer eligible for the Federal Reserve’s Small Bank Holding Company Policy Statement. Currently,Statement and will be evaluated relative to the capital adequacy standards established by the Federal Reserve. Additionally, as of June 30, 2023, the Company’s consolidated assets are in excess of $3.0 billion, and as a consequence, beginning in March 2024, the Company will no longer prepare and file financial reports with the Federal Reserve assesses the capital position of the Company by reviewing its debt-to-equity ratio and assessing the Company's capacity to serve as a source of strength to the Bank.  

small bank holding company.

Asof June 30, 2022,2023, and December 31, 2021,2022, the Company and the Bankwas were in compliancewith all applicableregulatorycapitalrequirements,and the Bankwas classifiedas “well capitalized”for purposesof the FederalReserve’spromptcorrectiveactionregulations.Aswedeploy our capitaland continueto grow our operations,our regulatorycapitallevelsmay decreasedepending on our levelof earnings.However, weexpectto monitorand controlour growth in orderto remainin compliancewith allregulatorycapitalstandardsapplicable to us. In addition, the Company maintains an effective registration statement on Form S-3 with the Securities and Exchange Commission that would allow the Company to raise additional capital in an amount up to $115.5 million. The Company raised $34.5 million in December 2021.

The Company, through a private placement, raised $25.0 million in subordinated debt in 2021 and repaid $10.0 million of subordinated debt with the proceeds and used the remainder for general corporate purposes. On November 1, 2022 the Company, through a private placement, raised $20.0 million of subordinated debt with the proceeds to be used for general corporate purposes. The Company contributed $15.0 million of the capital raised to the Bank in March 2023.

85
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”status and the regulatory capital ratios that would beare required forby Federal Reserve regulations to maintain “well-capitalized” status:
Actual
Minimum Required
for Capital
Adequacy Purposes(1)
Required to be Well
Capitalized
Under the Prompt
Corrective Action
Provisions
(dollars in thousands; unaudited)AmountRatioAmountRatioAmountRatio
June 30, 2023
Tier 1 Leverage Capital
   (to average assets)
Company$277,812 8.16 %$136,230 4.00 %N/AN/A
Bank Only311,723 9.16 %136,101 4.00 %170,126 5.00 %
Common Equity Tier 1 Capital (to risk-weighted assets)
Company274,312 8.36 %147,575 4.50 %N/AN/A
Bank Only311,723 9.52 %147,353 4.50 %212,843 6.50 %
Tier 1 Capital (to risk-weighted assets)
Company277,812 8.47 %196,767 6.00 %N/AN/A
Bank Only311,723 9.52 %196,471 6.00 %261,961 8.00 %
Total Capital (to risk-weighted assets)
Company364,672 11.12 %262,356 8.00 %N/AN/A
Bank Only353,522 10.80 %261,961 8.00 %327,451 10.00 %
December 31, 2022
Tier 1 Leverage Capital
   (to average assets)
Company$249,250 7.97 %$125,141 4.00 %N/AN/A
Bank Only267,699 8.56 %125,025 4.00 %156,281 5.00 %
Common Equity Tier 1 Capital (to risk-weighted assets)
Company245,750 8.92 %124,027 4.50 %N/AN/A
Bank Only267,699 9.73 %123,822 4.50 %178,854 6.50 %
Tier 1 Capital (to risk-weighted assets)
Company249,250 9.04 %165,370 6.00 %N/AN/A
Bank Only267,699 9.73 %165,096 6.00 %220,128 8.00 %
Total Capital (to risk-weighted assets)
Company329,203 11.94 %220,493 8.00 %N/AN/A
Bank Only302,595 11.00 %220,128 8.00 %275,160 10.00 %
(1)Presents the Company if we did not operate underminimum capital adequacy requirements (excluding the Smallcapital conservation buffer) that apply to the Bank Holding Company Policy Statement:

and the Company.

 

 

Actual

 

 

Minimum Required

for Capital

Adequacy Purposes (1)

 

 

Required to be Well

Capitalized

Under the Prompt

Corrective Action

Provisions

 

(dollars in thousands; unaudited)

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

June 30, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage Capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

222,399

 

 

 

7.68

%

 

$

115,819

 

 

 

4.00

%

 

$

144,774

 

 

 

5.00

%

Bank Only

 

 

240,870

 

 

 

8.33

%

 

 

115,687

 

 

 

4.00

%

 

 

144,609

 

 

 

5.00

%

Common Equity Tier I Capital (to

   risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

218,899

 

 

 

8.51

%

 

 

115,716

 

 

 

4.50

%

 

 

167,146

 

 

 

6.50

%

Bank Only

 

 

240,870

 

 

 

9.39

%

 

 

115,480

 

 

 

4.50

%

 

 

166,805

 

 

 

6.50

%

Tier I Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

222,399

 

 

 

8.65

%

 

 

154,289

 

 

 

6.00

%

 

 

205,718

 

 

 

8.00

%

Bank Only

 

 

240,870

 

 

 

9.39

%

 

 

153,974

 

 

 

6.00

%

 

 

205,298

 

 

 

8.00

%

Total Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

279,779

 

 

 

10.88

%

 

 

205,718

 

 

 

8.00

%

 

 

257,148

 

 

 

10.00

%

Bank Only

 

 

273,186

 

 

 

10.65

%

 

 

205,298

 

 

 

8.00

%

 

 

256,623

 

 

 

10.00

%

December 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage Capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

204,585

 

 

 

8.07

%

 

$

101,460

 

 

 

4.00

%

 

$

126,826

 

 

 

5.00

%

Bank Only

 

 

201,783

 

 

 

7.96

%

 

 

101,350

 

 

 

4.00

%

 

 

126,687

 

 

 

5.00

%

Common Equity Tier I Capital (to

   risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

201,085

 

 

 

11.06

%

 

 

81,834

 

 

 

4.50

%

 

 

118,205

 

 

 

6.50

%

Bank Only

 

 

201,783

 

 

 

11.12

%

 

 

81,623

 

 

 

4.50

%

 

 

117,900

 

 

 

6.50

%

Tier I Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

204,585

 

 

 

11.25

%

 

 

109,112

 

 

 

6.00

%

 

 

145,483

 

 

 

8.00

%

Bank Only

 

 

201,783

 

 

 

11.12

%

 

 

108,830

 

 

 

6.00

%

 

 

145,107

 

 

 

8.00

%

Total Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

252,405

 

 

 

13.88

%

 

 

145,483

 

 

 

8.00

%

 

 

181,854

 

 

 

10.00

%

Bank Only

 

 

224,545

 

 

 

12.38

%

 

 

145,107

 

 

 

8.00

%

 

 

181,384

 

 

 

10.00

%

(1) Presents the minimum capital adequacy requirements that apply to the Bank (excluding the capital conservation buffer) and that would apply to the Company if it were not eligible to operate under the Small Bank Holding Company Policy Statement.

 

86


Table of Contents,

Material Cash Requirements and Capital Resources

The following table provides the material cash requirements from known contractual and other obligations as of as of June 30, 2022:

2023:

 

 

 

 

 

Payments Due by Period

 

 

 

 

 

 

Less than

 

 

Over

 

 

 

 

 

Payments Due by Period

(dollars in thousands; unaudited)

 

Total

 

 

1 Year

 

 

1 year

 

 

Other (1)

 

(dollars in thousands; unaudited)TotalLess than
1 Year		Over
1 year		Other (1)

Cash requirements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash requirements

Time Deposits

 

$

36,473

 

 

$

27,857

 

 

$

8,616

 

 

$

-

 

Time Deposits$24,824 $20,182 $4,642 $— 

Subordinated note

 

 

25,000

 

 

 

-

 

 

 

25,000

 

 

 

-

 

Subordinated notesSubordinated notes45,000 — 45,000 — 

Junior subordinated debentures

 

 

3,609

 

 

 

-

 

 

 

3,609

 

 

 

-

 

Junior subordinated debentures3,609 — 3,609 — 

Deferred compensation plans

 

 

1,023

 

 

 

175

 

 

 

848

 

 

 

-

 

Deferred compensation plans848 175 673 — 

Operating leases

 

 

6,703

 

 

 

1,283

 

 

 

5,420

 

 

 

-

 

Operating leases7,726 995 6,731 — 

Non-maturity deposits

 

 

2,660,832

 

 

 

-

 

 

 

-

 

 

 

2,660,832

 

Non-maturity deposits3,137,748 — — 3,137,748 

Equity investment commitment

 

 

1,262

 

 

 

1,262

 

 

 

-

 

 

 

-

 

Equity investment commitment763 763 — — 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1)Represents the undefined maturity of 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 maintain sufficient cash and cash equivalents and investment securities to meet short-term cash requirements and the levels of these assets are dependent on our operating, investing and financing activities during any given period. 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 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 an ICS account, and the issuance of debt or equity securities.

In the normalcourseof business,weenterinto varioustransactions,which, in accordancewith GAAP,are not includedin our consolidatedbalancesheets.We enterinto thesetransactionsto meetthe financingneeds of our customers.These transactionsincludecommitmentsto extend creditand standby and commerciallettersof credit,which involve,to varyingdegrees,elementsof creditriskand interestrateriskin excessof the amounts recognizedin our consolidatedbalancesheets.

Our commitmentsassociatedwith outstandingcommitmentsto extend creditand standby and commercial lettersof 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 summarizedin the following table. Since commitmentsassociatedwith commitmentsto extend creditand lettersof creditmay expireunused, the amountsshowndo not necessarilyreflectthe actualfuturecash funding requirements.

As of June 30, 2022 we held $224.9 million in capital call lines, included in commercial and industrial loans, 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 and the underwriting is reviewed by the Bank on every line.  

As of June 30, 20222023 we had $2.06$2.34 billion in commitments to extend credit, compared to $909.6 million$2.20 billion as of December 31, 2021.2022. The $1.15 billion$144.0 million increase is largely attributed to an increase of $518.6$197.8 million in consumer and other loan commitments, related to CCBX consumer loans, $288.6$150.4 million increasedecrease in commercial and industrial capital call line commitments, $22.1 million increase in commercial construction loans and $340.0$85.3 million increase in residential real estate commitments, related to CCBX loans.


87

 

 

As of

 

 

As of

 

 

 

June 30,

 

 

December 31,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

Commitments to extend credit:

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

72,980

 

 

$

70,848

 

Commercial and industrial loans - capital call lines

 

 

704,523

 

 

 

415,956

 

Construction – commercial real estate loans

 

 

89,213

 

 

 

90,946

 

Construction – residential real estate loans

 

 

37,667

 

 

 

43,339

 

Residential real estate loans

 

 

441,725

 

 

 

101,715

 

Commercial real estate loans

 

 

33,294

 

 

 

23,248

 

Consumer and other loans

 

 

682,101

 

 

 

163,510

 

Total commitments to extend credit

 

$

2,061,503

 

 

$

909,562

 

Standby letters of credit

 

$

2,790

 

 

$

2,729

 

Equity investment commitment

 

$

1,262

 

 

$

1,090

 

Table of Contents,

Commitments

The following table presents commitments associated with outstanding commitments to extend credit, standby and commercial letters of credit and equity investment commitments as of the periods indicated:
(dollars in thousands; unaudited)As of June 30, 2023As of December 31, 2022
Commitments to extend credit:
Commercial and industrial loans$77,223 $81,568 
Commercial and industrial loans - capital call lines622,319 772,732 
Construction – commercial real estate loans131,820 109,715 
Construction – residential real estate loans27,257 32,827 
Residential real estate loans460,004 374,735 
Commercial real estate loans34,239 35,024 
Consumer and other loans991,328 793,563 
Total commitments to extend credit$2,344,190 $2,200,164 
Standby letters of credit$1,299 $3,064 
Equity investment commitment$763 $988 
We have portfolio limits with our each of our partners to manage loan concentration risk, liquidity risk, and counter-party partner risk. For example, as of June 30, 2023, capital call lines outstanding balance totaled $138.4 million, and while commitments totaled $622.3 million the commitments are cancelable, and are also limited to a maximum of $350.0 million by agreement with the partner.
The following table shows the CCBX maximum portfolio sizes by loan category as of June 30, 2023.
As of June 30, 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 Business309,573 65,856 243,717 
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 Consumer526,520 600,770 (74,250)
Installment loansConsumer1,160,868 1,048,134 112,734 
Other consumer and other loansConsumer - Secured Credit Builder & Unsecured consumer603,039 190,240 412,799 
$3,325,000 $2,505,000 $820,000 
Total Existing Portfolio Size$1,294,519 $1,012,504 $282,015 
Commitments to extend credit are agreementsto lend to a customeras long as thereis no violationof any conditionestablishedin the contract.Commitmentsgenerallyhave fixedexpirationdatesor othertermination clausesand may requirepaymentof a fee. Since many of the commitmentsare expectedto expirewithout being fullydrawn upon, the totalcommitmentamountsdisclosedabove do not necessarilyrepresentfuturecash requirements.We evaluateeach customer’screditworthinesson a case-by-casebasis.The amountof collateral obtained,if considerednecessaryby us, upon extensionof credit,is based on management’screditevaluationof the customer. As of June 30, 2022, $1.212023, $1.61 billion in commitments to extend credit are unconditionally cancelable, compared to $162.3 million$1.57 billion at December 31, 2021.2022. The increase in unconditionally cancelable commitments is attributed to growth in CCBX loans.

Commitments that are unconditionally cancelable allow us to better manage loan growth, credit concentrations and liquidity. We also limit CCBX partners to a maximum aggregate customer loan balance originated and held on our balance sheet, as shown in the table above.

88
Table of Contents,
Standby and commerciallettersof creditare conditionalcommitmentsissuedby us to guaranteethe performanceof a customerto a thirdparty.In the event of nonperformanceby the customer,wehave rightsto the underlyingcollateral,which can includecommercialrealestate,physicalplantand property,inventory, receivables,cash and/ormarketablesecurities.Our creditriskassociatedwith issuinglettersof creditis essentiallythe sameas the riskinvolvedin extendingloan facilitiesto our customers.


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 operations. Our accounting policies are described in greater detail in “Note 1 - Description of Business and Summary of Significant Accounting Policies” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” of our 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.

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 shows the Company’s key performance ratios for the periods indicated.  The table also includes ratios that were adjusted by removing the impact of the PPP
Three Months EndedSix Months Ended
(unaudited)June 30,
2023		March 31,
2023		December 31,
2022		September 30,
2022		June 30,
2022		June 30,
2023		June 30,
2022
Return on average assets (1)
1.52 %1.58 %1.66 %1.45 %1.41 %1.55 %1.18 %
Return on average equity (1)
19.53 %19.89 %21.86 %19.36 %18.86 %19.70 %15.57 %
Yield on earnings assets (1)
10.18 %9.19 %8.47 %7.38 %5.94 %9.70 %5.28 %
Yield on loans receivable (1)
10.85 %9.95 %9.33 %8.46 %7.34 %10.42 %7.10 %
Cost of funds (1)
2.77 %2.19 %1.61 %0.85 %0.29 %2.49 %0.22 %
Cost of deposits (1)
2.72 %2.13 %1.56 %0.82 %0.25 %2.44 %0.18 %
Net interest margin (1)
7.58 %7.15 %6.96 %6.58 %5.66 %7.37 %5.08 %
Noninterest expense to average assets (1)
6.11 %5.69 %5.97 %6.66 %5.29 %5.91 %4.92 %
Noninterest income to average assets (1)
6.90 %6.28 %5.43 %4.48 %3.53 %6.60 %3.40 %
Efficiency ratio42.92 %43.03 %48.94 %61.12 %58.38 %42.97 %58.80 %
Loans receivable to deposits (2)
96.23 %92.55 %93.25 %89.92 %88.77 %96.23 %88.77 %
(1)Annualized calculations shown for periods presented.
(2)Including loans on loans receivable related measures.  The adjusted ratios are non-GAAP measures.  For more information about non-GAAP financial measures, see “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measuresheld for sale.” section that follows.

 

 

Three Months Ended

 

 

Six Months Ended

 

(unaudited)

 

June 30,

2022

 

March 31,

2022

 

December 31,

2021

 

September 30,

2021

 

June 30,

2021

 

 

June 30,

2022

 

June 30,

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (1)

 

 

1.41

%

 

0.93

%

 

1.14

%

 

1.21

%

 

1.36

%

 

 

1.18

%

 

1.32

%

Return on average equity (1)

 

 

18.86

%

 

12.12

%

 

16.80

%

 

16.77

%

 

18.60

%

 

 

15.57

%

 

17.75

%

Yield on earnings assets (1)

 

 

5.94

%

 

4.58

%

 

4.09

%

 

3.63

%

 

3.89

%

 

 

5.28

%

 

3.94

%

Yield on loans receivable (1)

 

 

7.34

%

 

6.80

%

 

5.92

%

 

4.57

%

 

4.44

%

 

 

7.10

%

 

4.47

%

Yield on loans receivable,

     excluding PPP loans (1)(2)

 

 

7.26

%

 

6.52

%

 

4.98

%

 

4.53

%

 

4.65

%

 

 

6.93

%

 

4.71

%

Yield on loans receivable,

     excluding earned

     fees (1)(2)

 

 

7.12

%

 

6.17

%

 

4.37

%

 

3.74

%

 

3.46

%

 

 

6.70

%

 

3.49

%

Yield on loans receivable,

     excluding earned fees on

     all loans and interest on PPP

     loans, as adjusted (1)(2)

 

 

7.21

%

 

6.41

%

 

4.78

%

 

4.36

%

 

4.42

%

 

 

6.86

%

 

4.47

%

Cost of funds (1)

 

 

0.29

%

 

0.14

%

 

0.14

%

 

0.16

%

 

0.20

%

 

 

0.22

%

 

0.22

%

Cost of deposits (1)

 

 

0.25

%

 

0.09

%

 

0.09

%

 

0.10

%

 

0.14

%

 

 

0.18

%

 

0.16

%

Net interest margin (1)

 

 

5.66

%

 

4.45

%

 

3.95

%

 

3.48

%

 

3.70

%

 

 

5.08

%

 

3.73

%

Noninterest expense to average

     assets (1)

 

 

5.29

%

 

4.52

%

 

3.29

%

 

2.91

%

 

2.65

%

 

 

4.92

%

 

2.64

%

Noninterest income to average

     assets (1)

 

 

3.53

%

 

3.27

%

 

2.22

%

 

1.11

%

 

0.92

%

 

 

3.40

%

 

0.79

%

Efficiency ratio

 

 

58.38

%

 

59.34

%

 

54.08

%

 

64.68

%

 

58.69

%

 

 

58.80

%

 

59.70

%

Loans receivable to deposits (3)

 

 

86.54

%

 

76.24

%

 

73.73

%

 

76.71

%

 

92.03

%

 

 

86.54

%

 

92.03

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Annualized calculations shown for quarterly periods presented.

 

 

 

 

 

 

 

 

(2) A reconciliation of the non-GAAP measures are set forth at the end of this report in the section GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

 

(3) Excluding loans held for sale.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCBX – BaaS Reporting Information

During the three and six months ended June 30, 2022, $14.22023, $51.0 million and $27.3$93.4 million, respectively was recognized in noninterest income BaaS credit enhancements related to the establishment of a credit enhancement receivableasset for future loancredit losses indemnified by our strategic partners and reserve for unfunded commitments for CCBX partner loans and deposits. Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by absorbingindemnifying or reimbursing incurred losses on accounts they originate.originated through the partner. In accordance with accounting guidance, we estimate and record a provision for probableexpected losses on these CCBX loans and deposit overdrafts. When the provision for loancredit losses - loans and provision for unfunded commitments is recorded, a receivablecredit enhancement asset is also recorded on the balance sheet through the recognition of noninterest income (BaaS credit enhancements) in recognition of the CCBX partner’s indemnification obligation and legal commitment to coverindemnify or reimburse losses. Incurred credit losses are recorded in the allowance for


loan credit losses, and as the credit enhancement payments are received from the CCBX

89
Table of Contents,
partner or taken from the partner's cash reserve account, the credit enhancement receivableasset is relieved. Agreements with our CCBX partners also provide protection to the Bank from fraud by absorbingrequiring the CCBX partners to indemnify or reimburse the Bank for incurred fraud losses. Fraud losses are recorded when incurred as losses in noninterest expense, and the recovery received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. CCBX partners also pledge cash reserves in a restricted deposit account at the Bank which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by absorbingindemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill theirits contracted obligations beyond theirits cash reserve account then the bankBank would be exposed to additional loan and deposit losses, as a result of this counterparty risk.

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

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

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

Loan income and related loan expense

 

Three Months Ended

 

 

Six Months Ended

 

Loan income and related loan expenseThree Months EndedSix Months Ended

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

(dollars in thousands; unaudited)June 30,
2023		June 30,
2022		June 30,
2023		June 30,
2022

BaaS loan interest income

 

$

21,281

 

 

$

879

 

 

$

33,273

 

 

$

1,290

 

BaaS loan interest income$53,632 $21,281 $95,851 $33,273 

Less: BaaS loan expense

 

 

12,229

 

 

 

99

 

 

 

20,519

 

 

 

189

 

Less: BaaS loan expense22,033 12,229 39,587 20,519 

Net BaaS loan income*

 

 

9,052

 

 

 

780

 

 

 

12,754

 

 

 

1,101

 

Net BaaS loan income divided by average BaaS loans*

 

 

5.25

%

 

 

2.79

%

 

 

4.78

%

 

 

2.48

%

Net BaaS loan income (1)
Net BaaS loan income (1)
31,599 9,052 56,264 12,754 
Net BaaS loan income divided by average BaaS loans (1)
Net BaaS loan income divided by average BaaS loans (1)
9.98 %5.25 %9.72 %4.78 %
Yield on loans (2)
Yield on loans (2)
16.95 %12.35 %16.56 %12.48 %

*

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

(2)Annualized calculations shown for periods presented.
The additionincreased activity of new CCBX partners has resulted in increases in direct fees, expenses and interest for the quarterthree and six months ended June 30, 20222023 compared to the quarterthree and six months ended June 30, 2021.2022. The following tables are a summary of the direct fees, expenses and interest components of BaaS for the periods indicated and are not inclusive of all income and expense related to BaaS.

Interest income

 

Three Months Ended

 

 

Six Months Ended

 

Interest incomeThree Months EndedSix Months Ended

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

(dollars in thousands; unaudited)June 30,
2023		June 30,
2022		June 30,
2023		June 30,
2022

Loan interest income

 

$

21,281

 

 

$

879

 

 

$

33,273

 

 

$

1,290

 

Loan interest income$53,632 $21,281 $95,851 $33,273 

Total BaaS interest income

 

$

21,281

 

 

$

879

 

 

$

33,273

 

 

$

1,290

 

Total BaaS interest income$53,632 $21,281 $95,851 $33,273 

Interest expense

 

Three Months Ended

 

 

Six Months Ended

 

Interest expenseThree Months EndedSix Months Ended

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

(dollars in thousands; unaudited)June 30,
2023		June 30,
2022		June 30,
2023		June 30,
2022

BaaS interest expense

 

$

1,356

 

 

$

20

 

 

$

1,474

 

 

$

42

 

BaaS interest expense$17,012 $1,356 $29,436 $1,474 

Total BaaS interest expense

 

$

1,356

 

 

$

20

 

 

$

1,474

 

 

$

42

 

Total BaaS interest expense$17,012 $1,356 $29,436 $1,474 


90

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

Program income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Servicing and other BaaS fees

 

$

1,159

 

 

$

1,029

 

 

$

2,328

 

 

$

1,613

 

Transaction fees

 

 

814

 

 

 

93

 

 

 

1,307

 

 

 

239

 

Interchange fees

 

 

628

 

 

 

110

 

 

 

1,060

 

 

 

145

 

Reimbursement of expenses

 

 

618

 

 

 

192

 

 

 

990

 

 

 

375

 

Program income

 

 

3,219

 

 

 

1,424

 

 

 

5,685

 

 

 

2,372

 

Indemnification income:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Credit enhancements

 

 

14,207

 

 

 

-

 

 

 

27,282

 

 

 

-

 

Fraud enhancements

 

 

6,474

 

 

 

-

 

 

 

11,045

 

 

 

-

 

Indemnification income

 

 

20,681

 

 

 

-

 

 

 

38,327

 

 

 

-

 

Total BaaS income

 

$

23,900

 

 

$

1,424

 

 

$

44,012

 

 

$

2,372

 

Table of Contents,

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

 

June 30,

 

(dollars in thousands; unaudited)

 

2022

 

 

2021

 

 

2022

 

 

2021

 

BaaS loan expense

 

$

12,229

 

 

$

99

 

 

$

20,519

 

 

$

189

 

BaaS fraud expense

 

 

6,474

 

 

 

-

 

 

 

11,045

 

 

 

-

 

Total BaaS loan and fraud expense

 

$

18,703

 

 

$

99

 

 

$

31,564

 

 

$

189

 

Three Months EndedSix Months Ended
(dollars in thousands; unaudited)June 30,
2023		June 30,
2022		June 30,
2023		June 30,
2022
BaaS program income:
Servicing and other BaaS fees$895 $1,159 $1,843 $2,328 
Transaction fees1,052 814 1,969 1,307 
Interchange fees975 628 1,764 1,060 
Reimbursement of expenses1,026 618 1,947 990 
BaaS program income3,948 3,219 7,523 5,685 
BaaS indemnification income:
BaaS credit enhancements51,027 14,207 93,389 27,282 
BaaS fraud enhancements1,537 6,474 3,536 11,045 
BaaS indemnification income52,564 20,681 96,925 38,327 
Total BaaS income$56,512 $23,900 $104,448 $44,012 

Three Months EndedSix Months Ended
(dollars in thousands; unaudited)June 30,
2023		June 30,
2022		June 30,
2023		June 30,
2022
BaaS loan and fraud expense:
BaaS loan expense$22,033 $12,229 $39,587 $20,519 
BaaS fraud expense1,537 6,474 3,536 11,045 
Total BaaS loan and fraud expense$23,570 $18,703 $43,123 $31,564 
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

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

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

Net BaaS loan income and net BaaS loan income divided by average CCBX loans areis a non-GAAP measuresmeasure that includeincludes the impact BaaS loan expense on net BaaS loan income and the yield on CCBX loans. The most directly comparable GAAP measures are BaaS loan interest income andmeasure is yield on CCBX loans.


91
Table of Contents,
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 Six Months Ended
(dollars in thousands; unaudited)June 30,
2023		June 30,
2022		June 30,
2023		June 30,
2022
Net BaaS loan income divided by average CCBX loans:
CCBX loan yield (GAAP)(1)
16.95 %12.35 %16.56 %12.48 %
Total average CCBX loans receivable$1,269,406$691,294$1,167,366$537,577
Interest and earned fee income on CCBX loans (GAAP)53,63221,28195,85133,273
BaaS loan expense(22,033)(12,229)(39,587)(20,519)
Net BaaS loan income$31,599$9,052$56,264$12,754
Net BaaS loan income divided by average CCBX loans (1)
9.98 %5.25 %9.72 %4.78 %

 

 

As of and for the Three Months Ended

 

 

As of and for the Six Months Ended

 

(dollars in thousands; unaudited)

 

June 30,

2022

 

March 31,

2022

 

December 31,

2021

 

June 30,

2021

 

 

June 30,

2022

 

June 30,

2021

 

Net BaaS loan income and net BaaS loan income divided by average CCBX loans:

 

 

 

 

 

 

 

 

Total average CCBX loans

     receivable

 

$

691,294

 

$

382,153

 

$

244,038

 

$

112,210

 

 

$

537,577

 

$

89,656

 

Interest and earned fee

     income on CCBX loans

 

 

21,281

 

 

11,992

 

 

3,771

 

 

879

 

 

 

33,273

 

 

1,291

 

Less: loan expense on CCBX loans

 

 

(12,229

)

 

(8,290

)

 

(2,368

)

 

(99

)

 

 

(20,519

)

 

(189

)

Net BaaS loan income

 

$

9,052

 

$

3,702

 

$

1,403

 

$

780

 

 

$

12,754

 

$

1,102

 

Net BaaS loan income divided by average

     CCBX loans

 

 

5.25

%

 

3.93

%

 

2.28

%

 

2.79

%

 

 

4.78

%

 

2.48

%

     CCBX loan yield

 

 

12.35

%

 

12.73

%

 

6.13

%

 

3.14

%

 

 

12.48

%

 

2.90

%

(1) Annualized calculations for periods presented.

The following non-GAAP measure is presented to illustrate the impact






92
Table of loan fees on yield on loans receivable.  

Yield on loans receivable, excluding earned fees is a non-GAAP measure that excludes the impact of earned loan fees on the interest rate yield. The most directly comparable GAAP measure is yield on loans.

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

Contents,

 

 

As of and for the Three Months Ended

 

 

As of and for the

Six Months Ended

 

(dollars in thousands; unaudited)

 

June 30,

2022

 

March 31,

2022

 

December 31,

2021

 

September 30,

2021

 

June 30,

2021

 

 

June 30,

2022

 

June 30,

2021

 

Yield on loans receivable, excluding earned fees :

 

 

 

 

 

 

 

 

Total average loans

     receivable

 

$

2,194,761

 

$

1,768,283

 

$

1,683,310

 

$

1,681,069

 

$

1,750,825

 

 

$

1,982,700

 

$

1,695,772

 

Interest and earned fee

     income on loans

 

 

40,166

 

 

29,632

 

 

25,134

 

 

19,383

 

 

19,365

 

 

 

69,798

 

 

37,595

 

Less: earned fee income on

     all loans

 

 

(1,227

)

 

(2,729

)

 

(6,572

)

 

(3,533

)

 

(4,274

)

 

 

(3,956

)

 

(8,248

)

Adjusted interest income

     on loans

 

$

38,939

 

$

26,903

 

$

18,562

 

$

15,850

 

$

15,091

 

 

$

65,842

 

$

29,347

 

Yield on loans receivable

 

 

7.34

%

 

6.80

%

 

5.92

%

 

4.57

%

 

4.44

%

 

 

7.10

%

 

4.47

%

Yield on loans

     receivable, excluding

     earned fees:

 

 

7.12

%

 

6.17

%

 

4.37

%

 

3.74

%

 

3.46

%

 

 

6.70

%

 

3.49

%

Yield on loans

     receivable, excluding

     earned fees on all loans

     and interest on PPP

     loans (1):

 

 

7.21

%

 

6.41

%

 

4.78

%

 

4.36

%

 

4.42

%

 

 

6.86

%

 

4.47

%

(1) Non-GAAP measure - see next table of "Non-GAAP Financial Measures" for more information.

 

The following non-GAAP financial measures are presented to illustrate and identify the impact of PPP loans on loans receivable related measures.  By removing these significant items and showing what the results would have been without them, we are providing investors with the information to better compare results with periods that did not have these significant items.  We believe that these non-GAAP financial measures provide information that is important to investors and that is useful in understanding our results of operation. These measures include the following:

Adjusted allowance for loan losses to loans receivable, excluding PPP loans is a non-GAAP measure that excludes the impact of PPP loans on balance sheet. The most directly comparable GAAP measure is allowance for loan losses to loans receivable.

Yield on loans receivable, excluding PPP loans is a non-GAAP measure that excludes the impact of PPP loans on balance sheet and income statement. The most directly comparable GAAP measure is yield on loans.


Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans is a non-GAAP measure that excludes the impact of all earned fees and PPP loans on balance sheet and income statement. The most directly comparable GAAP measure is yield on loans.

Adjusted Tier 1 leverage capital ratio, excluding PPP loans is a non-GAAP measure that excludes the impact of PPP loans on balance sheet. The most directly comparable GAAP measure is Tier 1 leverage capital ratio.


Reconciliations of the GAAP and non-GAAP measures are presented in the following tables:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of and for the

 

 

 

As of and for the Three Months Ended

 

 

Six Months Ended

 

(dollars in thousands; unaudited)

 

June

30,

2022

 

March

31,

2022

 

December

31,

2021

 

September

30,

2021

 

June

30,

2021

 

 

June

30,

2022

 

June

30,

2021

 

Adjusted allowance for loan losses to loans receivable, excluding PPP loans:

 

 

 

 

 

 

 

 

Total loans, net of deferred fees

 

$

2,334,354

 

$

1,964,209

 

$

1,742,735

 

$

1,705,682

 

$

1,658,149

 

 

$

2,334,354

 

$

1,658,149

 

Less: PPP loans

 

 

(16,398

)

 

(47,467

)

 

(111,813

)

 

(267,278

)

 

(398,038

)

 

 

(16,398

)

 

(398,038

)

Less: net deferred fees on

     PPP loans

 

 

396

 

 

1,365

 

 

3,633

 

 

9,417

 

 

12,363

 

 

 

396

 

 

12,363

 

Adjusted loans, net of

     deferred fees

 

$

2,318,351

 

$

1,918,107

 

$

1,634,555

 

$

1,447,821

 

$

1,272,474

 

 

$

2,318,351

 

$

1,272,474

 

Allowance for loan losses

 

$

(49,358

)

$

(38,770

)

$

(28,632

)

$

(20,222

)

$

(19,966

)

 

$

(49,358

)

$

(19,966

)

Allowance for loan losses to

     loans receivable

 

 

2.11

%

 

1.97

%

 

1.64

%

 

1.19

%

 

1.20

%

 

 

2.11

%

 

1.20

%

Adjusted allowance for loan

     losses to loans receivable,

     excluding PPP loans

 

 

2.13

%

 

2.02

%

 

1.75

%

 

1.40

%

 

1.57

%

 

 

2.13

%

 

1.57

%

Yield on loans receivable, excluding PPP loans:

 

 

 

 

 

 

 

 

Total average loans receivable

 

$

2,194,761

 

$

1,768,283

 

$

1,683,310

 

$

1,681,069

 

$

1,750,825

 

 

$

1,982,700

 

$

1,695,772

 

Less: average PPP loans

 

 

(33,653

)

 

(79,828

)

 

(186,267

)

 

(322,595

)

 

(509,265

)

 

 

(56,613

)

 

(492,695

)

Plus: average deferred fees on

     PPP loans

 

 

894

 

 

2,453

 

 

6,370

 

 

11,639

 

 

14,213

 

 

 

1,669

 

 

12,510

 

Adjusted total average loans

     receivable

 

$

2,162,002

 

$

1,690,908

 

$

1,503,413

 

$

1,370,113

 

$

1,255,773

 

 

$

1,927,756

 

$

1,215,587

 

Interest income on loans

 

$

40,166

 

$

29,632

 

$

25,134

 

$

19,383

 

$

19,365

 

 

$

69,798

 

$

37,595

 

Less: interest and deferred fee

     income recognized on

     PPP loans

 

 

(1,050

)

 

(2,460

)

 

(6,245

)

 

(3,744

)

 

(4,821

)

 

 

(3,510

)

 

(9,199

)

Adjusted interest income on loans

 

$

39,116

 

$

27,172

 

$

18,889

 

$

15,639

 

$

14,544

 

 

$

66,288

 

$

28,396

 

Yield on loans receivable

 

 

7.34

%

 

6.80

%

 

5.92

%

 

4.57

%

 

4.44

%

 

 

7.10

%

 

4.47

%

Yield on loans receivable,

     excluding PPP loans:

 

 

7.26

%

 

6.52

%

 

4.98

%

 

4.53

%

 

4.65

%

 

 

6.93

%

 

4.71

%

Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans:

 

 

 

 

 

 

 

 

Total average loans receivable

 

$

2,194,761

 

$

1,768,283

 

$

1,683,310

 

$

1,681,069

 

$

1,750,825

 

 

$

1,982,700

 

$

1,695,772

 

Less: average PPP loans

 

 

(33,653

)

 

(79,828

)

 

(186,267

)

 

(322,595

)

 

(509,265

)

 

 

(56,613

)

 

(492,695

)

Plus: average deferred fees on

     PPP loans

 

$

894

 

$

2,453

 

$

6,370

 

$

11,639

 

$

14,213

 

 

$

1,669

 

$

12,510

 

Adjusted total average loans

     receivable

 

$

2,162,002

 

$

1,690,908

 

$

1,503,413

 

$

1,370,113

 

$

1,255,773

 

 

$

1,927,756

 

$

1,215,587

 

Interest and earned fee income

     on loans

 

$

40,166

 

$

29,632

 

$

25,134

 

$

19,383

 

$

19,365

 

 

$

69,798

 

$

37,595

 

Less: earned fee income on

     all loans

 

$

(1,227

)

$

(2,729

)

$

(6,572

)

$

(3,533

)

$

(4,274

)

 

$

(3,956

)

$

(8,248

)

Less: interest income on

     PPP loans

 

 

(81

)

 

(192

)

 

(461

)

 

(796

)

 

(1,257

)

 

 

(273

)

 

(2,426

)

Adjusted interest income on loans

 

$

38,858

 

$

26,711

 

$

18,101

 

$

15,054

 

$

13,834

 

 

$

65,569

 

$

26,921

 

Yield on loans receivable

 

 

7.34

%

 

6.80

%

 

5.92

%

 

4.57

%

 

4.44

%

 

 

7.10

%

 

4.47

%

Yield on loans receivable,

     excluding earned fees on

     all loans (1):

 

 

7.12

%

 

6.17

%

 

4.37

%

 

3.74

%

 

3.46

%

 

 

6.70

%

 

3.49

%

Yield on loans receivable,

     excluding earned fees on

     all loans and interest on

     PPP loans:

 

 

7.21

%

 

6.41

%

 

4.78

%

 

4.36

%

 

4.42

%

 

 

6.86

%

 

4.47

%

(1) Non-GAAP measure - see previous table of "Non-GAAP Financial Measures" for more information.

 


(dollars in thousands; unaudited)

 

As of

June 30, 2022

 

As of

June 30, 2021

 

Adjusted Tier 1 leverage capital ratio, excluding PPP loans:

 

Company:

 

 

 

 

 

 

 

Tier 1 capital

 

$

222,399

 

$

157,450

 

Average assets for the leverage capital ratio

 

$

2,895,487

 

$

1,967,646

 

Less:  Average PPP loans

 

 

(33,653

)

 

(509,265

)

Plus:  Average PPPLF borrowings

 

 

-

 

 

107,047

 

Adjusted average assets for the leverage capital ratio

 

$

2,861,833

 

$

1,565,428

 

Tier 1 leverage capital ratio

 

 

7.68

%

 

8.00

%

Adjusted Tier 1 leverage capital ratio, excluding PPP loans

 

 

7.77

%

 

10.06

%

Bank:

 

 

 

 

 

 

 

Tier 1 capital

 

$

240,870

 

$

161,368

 

Average assets for the leverage capital ratio

 

$

2,892,173

 

$

1,966,528

 

Less:  Average PPP loans

 

 

(33,653

)

 

(509,265

)

Plus:  Average PPPLF borrowings

 

 

-

 

 

107,047

 

Adjusted average assets for the leverage capital ratio

 

$

2,858,519

 

$

1,564,310

 

Tier 1 leverage capital ratio

 

 

8.33

%

 

8.21

%

Adjusted Tier 1 leverage capital ratio, excluding PPP loans

 

 

8.43

%

 

10.32

%


Item 3. Quantitative and Qualitative Disclosure about Market Risk

QuantitativeandQualitativeDisclosuresabout Market Risk

Asa financialinstitution,our primarycomponentof marketriskis interestratevolatility.Our assetliability and funds managementpolicyprovidesmanagementwith the guidelinesfor effectivefunds management,and we have establisheda measurementsystemfor monitoringour net interestratesensitivityposition.We have historicallymanagedour sensitivitypositionwithin our establishedguidelines.

Fluctuationsin interestrateswill ultimatelyimpactboth the levelof incomeand expense recordedon mostof our assetsand liabilities,and the marketvalue of allinterest earningassetsand interest bearingliabilities,other than those which have a shorttermto maturity.Interestrateriskis the potentialfor economiclossesdue to future interestratechanges. These economiclossescan be reflectedas a loss of futurenet interestincomeand/ora decreasein currentfairmarketvalues.Our objectiveis to measurethe effecton net interestincomeand to adjust the balancesheetto minimizethe inherentriskwhile at the sametimemaximizingincome. The Federal Open Market CommitteeFOMC raised interest rates 0.25% in mid-March 2022, and 1.25% in the second quarter of 2022, 1.50% in the third quarter of 2022, 1.25% in the fourth quarter of 2022, 0.50% in the first quarter 2023, and 0.25% in the second quarter 2023 and 0.25% so far in the third quarter of 2023, with additionala 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 exposureto interestrateriskis managedby the Asset LiabilityCommittee(“ALCO”),of the Bankand reviewedby the Asset Liabilityand InvestmentCommitteeof our board of directorsin accordancewith policies approved by our board of directors.ALCOformulatesstrategiesbased on appropriatelevelsof interestraterisk. In determiningthe appropriatelevelof interestraterisk,ALCOconsidersthe impacton earningsand capitalon the currentoutlook on interestrates,potentialchanges in interestrates,regionaleconomies,liquidity,business strategiesand otherfactors.ALCOmeetsregularlyto review, among otherthings,the sensitivityof assetsand liabilitiesto interestratechanges, the book and marketvaluesof assetsand liabilities,unrealizedgains and losses,purchaseand saleactivities,commitmentsto originateloans and the maturitiesof investmentsand borrowings.Additionally,ALCOreviewsliquidity,cash flows, maturitiesof depositsand consumerand commercialdepositactivity.Managementemploysvariousmethodologiesto manageinterestrateriskincluding an analysisof relationshipsbetween interest earningassetsand interest bearingliabilitiesand interestrate simulationsusing a model.The Asset Liabilityand InvestmentCommitteeof our board of directorsmeets regularlyto review the Bank’s interestrateriskprofile,liquidityposition,includingcontingentliquidity,and investment portfolio.
portfolio.

We use interestraterisksimulationmodelsto testinterestratesensitivityof net interestincomeand fairvalue of equity,and the impactof changes in interest rates on other financial metrics. Contractual maturities and rateson otherfinancialmetrics.Contractualmaturitiesandre-pricingopportunitiesof loans are incorporatedin the model,as are prepaymentassumptions,maturitydata and calloptionswithin the investmentportfolio.Average lifeof non-maturitydepositaccountsare based on historical decay ratesand assumptionsand are incorporatedinto the model.The assumptionsused are inherentlyuncertain and, as a result,the modelcannot preciselymeasurefuturenet interestincomeor preciselypredictthe impactof fluctuationsin marketinterestrateson net interestincome.Actual resultswill differfromthe model’ssimulated resultsdue to timing,magnitudeand frequencyof interestratechanges as well as changes in marketconditions and the applicationand timingof variousmanagementstrategies. To help ensure the accuracy of the model, we perform a quarterly back test against our actual results.

Ona quarterlybasis,werun multiplesimulationsunder two differentpremisesof which one is a staticbalance sheetand the otheris a dynamicgrowth balancesheet.The staticbalancesheetapproachproduces results that showthe interestriskcurrentlyinherentin our balancesheetat thatpoint in time.The dynamicbalancesheet includesour projectedgrowth levelsgoing forwardand producesresultsthatshows hownet income,net interest income,and interestriskchange based on our projectedgrowth. These simulationstestthe impacton net interest incomeand fairvalue of equityfromchanges in marketinterestratesunder variousscenarios.Under the static and dynamicapproaches,ratesare shocked instantaneouslyand rampedover a 12-monthhorizonassuming parallelyieldcurve shifts.Parallelshock scenariosassumeinstantaneousparallelmovementsin the yieldcurve comparedto a flatyieldcurve scenario.Non-parallelsimulationsare also conductedand involveanalysisof interestincomeand expense under variouschanges in the shape of the yieldcurve includinga forwardcurve, flat curve, steepeningcurve, and an invertedcurve. Our internalpolicyregardinginternalraterisksimulations currentlyspecifiesthatfor instantaneousparallelshiftsof the yieldcurve, estimatednet incomeat riskfor the
93
Table of Contents,
subsequentone- and two-yearperiodshould not declineby morethan 10% for a 100 basispoint shift,15% for a 200 basispoint shift,20% for a 300 basispoint shift,and 25% for a 400 basispoint shift.


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

(unaudited)

 

 

 

 

(unaudited)

Change in Market Interest Rates

 

Twelve Month Projection

June 30, 2022

 

Twelve Month Projection

December 31, 2021

Change in Market Interest RatesTwelve Month Projection
As of June 30, 2023		Twelve Month Projection
As of December 31, 2022

Static Balance Sheet and Rate Shifts

 

 

 

 

Static Balance Sheet and Rate Shifts

+400 basis points

 

20.9%

 

36.7%

+400 basis points10.6%15.2%

+300 basis points

 

15.7%

 

27.2%

+300 basis points8.0%11.4%

+200 basis points

 

10.6%

 

17.9%

+200 basis points5.3%7.6%

+100 basis points

 

5.3%

 

8.5%

+100 basis points2.7%3.8%

-100 basis points

 

(6.5)%

 

(9.7)%

-100 basis points(2.9)%(4.1)%

-200 basis points

 

(10.9)%

 

(15.4)%

-200 basis points(6.0)%(8.5)%

-300 basis points

 

(15.5)%

 

(19.9)%

-300 basis points(9.4)%(13.0)%
-400 basis points-400 basis points(13.0)%(18.8)%

 

 

 

 

Dynamic Balance Sheet and Rate Shifts

 

 

 

 

Dynamic Balance Sheet and Rate Shifts

+400 basis points

 

23.1%

 

38.5%

+400 basis points13.3%17.6%

+300 basis points

 

17.3%

 

28.7%

+300 basis points9.9%13.2%

+200 basis points

 

11.6%

 

18.8%

+200 basis points6.6%8.8%

+100 basis points

 

5.9%

 

9.1%

+100 basis points3.3%4.4%

-100 basis points

 

(6.9)%

 

(11.8)%

-100 basis points(3.5)%(4.6)%

-200 basis points

 

(11.4)%

 

(19.4)%

-200 basis points(7.2)%(9.5)%

-300 basis points

 

(16.2)%

 

(23.0)%

-300 basis points(10.9)%(14.5)%
-400 basis points-400 basis points(14.6)%(20.8)%

TheresultsillustratethattheBank Company isassetsensitiveandgenerallyperformsbetterinanincreasinginterestrateenvironment. As the Company’s composition has shifted overtime due to the growth of the CCBX segment to more variable/adjustable in nature, our interest rate risk profile has migrated, slightly reducing our exposure to interest rate risk from declining rates. For the community bank, the drivers are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, offering rates on our community bank deposits change more slowly than changes in short-term market rates. For the CCBX segment, the offering rates on the loan portfolio are modeled using partner contractual net yields which adjust with market shifts. For this CCBX portfolio, the offering rates on both the loans and the deposits nearly fully reprice with changes in market rates. Theresults assumptions incorporated into the simulation model areprimarilyduetobehaviorofdemand,money inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact that fluctuations in marketandsavingsdepositsduringsuchratefluctuations.We interest rates havefoundthat,historically, on net interestratesonthesedepositschangemoreslowlythanchangesinthediscountandfederalfundsrates.Thisassumptionisincorporatedintothesimulationmodel.Theassumptionsincorporatedintothemodelareinherentlyuncertainand,asaresult,themodelcannotpreciselymeasurefuturenetinterestincomeorpreciselypredicttheimpactoffluctuationsinmarketinterestratesonnetinterestincome.Actual results willdifferfromthemodel’ssimulatedresultsduetotiming,magnitude,andfrequencyofinterestrate changesaswellaschangesinmarketconditions, the shape of the interest yield curve,andtheapplicationandtimingofvariousstrategies.

The -200, and -300 basis point change in market interest rates no longer reflects viable interest rate changes as interest rates would have to go negative since the Fed Funds rate target range is set at 1.50% to 1.75%.  Until rates increase, these rate shock scenarios may not reflect what may happen to net interest income if interest rates were to go negative.

application and timing of various assumptions and strategies.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. An evaluation was performed under the supervision and with the participation of the Company's management, including the Chief Executive Officer and the Chief Financial Officer, of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based on that evaluation, the Company's Chief Executive Officer and the Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company's disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the SEC (1) is recorded,
94
Table of Contents,
processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate, to allow timely decisions regarding required disclosure.

Change in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting occurred during the threesix months ended June 30, 2022,2023, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.


95

Table of Contents,
PART II. OTHER 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2021,2022, which are incorporated by reference herein. As of June 30, 2022,2023, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

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

There were no unregistered sales of the Company’s equity securities during the three and six months ended June 30, 2022.

2023.

The Company did not repurchase any of its equity securities during the three and six months ended June 30, 20222023 and does not have any authorized share repurchase programs.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

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

  10.1+

31.1

  31.1

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

31.2

32.1

32.2

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter months ended June 30, 2022,2023, formatted in inline XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements. Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, or Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise are not subject to liability under those sections.

104

Cover Page Interactive Data (formatted as Inline XBRL and contained in Exhibit 101 filed herewith)


96

Table of Contents,
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 4, 2022

7, 2023

By:

By:

/s/ Eric M. Sprink

Eric M. Sprink

Chief Executive Officer

(Principal Executive Officer)

Dated:

August 4, 2022

7, 2023

By:

By:

/s/ Joel G. Edwards

Joel G. Edwards

Executive Vice President and

Chief Financial Officer

(Principal Financial Officer)

83

97