Annual Statements Open main menu

COASTAL FINANCIAL CORP - Quarter Report: 2022 March (Form 10-Q)

452.9  No

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2022 

or

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

For the transition period from ______________ to _____________

Commission file number: 001-38589

COASTAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Washington

56-2392007

(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

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, no par value per share

CCB

Nasdaq Global Select Market

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

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      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging 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

 

  

Accelerated Filer

 

Non-Accelerated Filer

 

  

Smaller Reporting Company

 

 

 

 

 

Emerging Growth Company

 

 

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

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

As of May 3, 2022, there were 12,931,917 shares of the issuer’s common stock outstanding.  

 

 


 

 

COASTAL FINANCIAL CORPORATION

 

Table of Contents

 

 

 

 

 

Page No.

Part I.   Financial Information

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months Ended March 31, 2022 and 2021 (unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months Ended March 31, 2022 and 2021 (unaudited)

 

7

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2022 and 2021 (unaudited)

 

8

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

9

 

 

 

 

 

Item 2.

 

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

 

28

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

68

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

69

 

 

 

 

 

Part II.   Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

70

 

 

 

 

 

Item 1A.

 

Risk Factors

 

70

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

70

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

70

 

 

 

 

 

Item 5.

 

Other Information

 

70

 

 

 

 

 

Item 6.

 

Exhibits

 

70

 

 

 

 

2


 

 

Forward-Looking Statements

This report may contain forward-looking statements within 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, 2021 (“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 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, 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 credit risk associated with our loan portfolio, such as possible additional loan losses and impairment of collectability of loans as a result of the 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 an in which our loans are concentrated; our ability to maintain an adequate level of allowance for loan 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


 

 

PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(dollars in thousands)  

ASSETS

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Cash and due from banks

 

$

32,705

 

 

$

14,496

 

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

   at March 31, 2022 and December 31, 2021)

 

 

649,404

 

 

 

798,665

 

Investment securities, available for sale, at fair value

 

 

134,891

 

 

 

35,327

 

Investment securities, held to maturity, at amortized cost

 

 

1,286

 

 

 

1,296

 

Other investments

 

 

9,931

 

 

 

8,478

 

Loans receivable

 

 

1,964,209

 

 

 

1,742,735

 

Allowance for loan losses

 

 

(38,770

)

 

 

(28,632

)

Total loans receivable, net

 

 

1,925,439

 

 

 

1,714,103

 

Premises and equipment, net

 

 

18,135

 

 

 

17,219

 

Operating lease right-of-use assets

 

 

5,836

 

 

 

6,105

 

Accrued interest receivable

 

 

8,824

 

 

 

8,105

 

Bank-owned life insurance, net

 

 

12,342

 

 

 

12,254

 

Deferred tax asset, net

 

 

6,892

 

 

 

6,818

 

Other assets

 

 

28,065

 

 

 

12,651

 

Total assets

 

$

2,833,750

 

 

$

2,635,517

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

$

2,576,470

 

 

$

2,363,787

 

Federal Home Loan Bank ("FHLB") advances

 

 

-

 

 

 

24,999

 

Subordinated debt

 

 

 

 

 

 

 

 

Principal amount $25,000 (less unamortized debt issuance costs of $694 and $712 )

   at March 31, 2022 and December 31, 2021, respectively

 

 

24,306

 

 

 

24,288

 

Junior subordinated debentures

 

 

 

 

 

 

 

 

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

   and $23 at March 31, 2022 and December 31, 2021, respectively)

 

 

3,587

 

 

 

3,586

 

Deferred compensation

 

 

712

 

 

 

744

 

Accrued interest payable

 

 

149

 

 

 

357

 

Operating lease liabilities

 

 

6,054

 

 

 

6,320

 

Other liabilities

 

 

14,552

 

 

 

10,214

 

Total liabilities

 

 

2,625,830

 

 

 

2,434,295

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, no par value:

 

 

 

 

 

 

 

 

Authorized: 25,000,000 shares at March 31, 2022 and

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

    March 31, 2022 and December 31, 2021

 

 

-

 

 

 

-

 

Common stock, no par value:

 

 

 

 

 

 

 

 

Authorized: 300,000,000 shares at March 31, 2022 and

    December 31, 2021; 12,928,548 shares at March 31, 2022

    issued and outstanding and 12,875,315 shares at

    December 31, 2021 issued and outstanding

 

 

122,592

 

 

 

121,845

 

Retained earnings

 

 

85,603

 

 

 

79,373

 

Accumulated other comprehensive (loss) income, net of tax

 

 

(275

)

 

 

4

 

Total shareholders’ equity

 

 

207,920

 

 

 

201,222

 

Total liabilities and shareholders’ equity

 

$

2,833,750

 

 

$

2,635,517

 

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 March 31,

 

 

 

2022

 

 

2021

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

29,632

 

 

$

18,230

 

Interest on interest earning deposits with other banks

 

 

402

 

 

 

70

 

Interest on investment securities

 

 

71

 

 

 

28

 

Dividends on other investments

 

 

37

 

 

 

30

 

Total interest income

 

 

30,142

 

 

 

18,358

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Interest on deposits

 

 

553

 

 

 

660

 

Interest on borrowed funds

 

 

321

 

 

 

383

 

Total interest expense

 

 

874

 

 

 

1,043

 

Net interest income

 

 

29,268

 

 

 

17,315

 

PROVISION FOR LOAN LOSSES

 

 

12,942

 

 

 

357

 

Net interest income after provision for loan losses

 

 

16,326

 

 

 

16,958

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

BaaS fees

 

 

20,112

 

 

 

948

 

Deposit service charges and fees

 

 

884

 

 

 

863

 

Loan referral fees

 

 

602

 

 

 

597

 

Gain on sales of loans, net

 

 

-

 

 

 

130

 

Mortgage broker fees

 

 

123

 

 

 

262

 

Other income

 

 

265

 

 

 

184

 

Total noninterest income

 

 

21,986

 

 

 

2,984

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

11,085

 

 

 

7,686

 

Occupancy

 

 

1,136

 

 

 

1,058

 

Software licenses, maintenance and subscriptions

 

 

1,052

 

 

 

484

 

Legal and professional fees

 

 

708

 

 

 

760

 

Data processing

 

 

809

 

 

 

697

 

BaaS expense

 

 

12,861

 

 

 

90

 

Excise taxes

 

 

349

 

 

 

359

 

Federal Deposit Insurance Corporation ("FDIC") assessments

 

 

604

 

 

 

195

 

Director and staff expenses

 

 

344

 

 

 

220

 

Marketing

 

 

99

 

 

 

82

 

Other expense

 

 

1,368

 

 

 

721

 

Total noninterest expense

 

 

30,415

 

 

 

12,352

 

Income before provision for income taxes

 

 

7,897

 

 

 

7,590

 

PROVISION FOR INCOME TAXES

 

 

1,667

 

 

 

1,572

 

NET INCOME

 

$

6,230

 

 

$

6,018

 

Basic earnings per common share

 

$

0.48

 

 

$

0.50

 

Diluted earnings per common share

 

$

0.46

 

 

$

0.49

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

12,898,746

 

 

 

  11,960,772

 

Diluted

 

 

13,475,337

 

 

 

  12,393,493

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

(dollars in thousands)  

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

NET INCOME

 

$

6,230

 

 

$

6,018

 

OTHER COMPREHENSIVE LOSS, before tax

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

Unrealized holding loss during the period

 

 

(349

)

 

 

(13

)

Income tax benefit related to unrealized holding loss

 

 

70

 

 

 

3

 

OTHER COMPREHENSIVE LOSS, net of tax

 

 

(279

)

 

 

(10

)

COMPREHENSIVE INCOME

 

$

5,951

 

 

$

6,008

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 

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, December 31, 2020

 

 

11,954,327

 

 

$

87,815

 

 

$

52,368

 

 

$

34

 

 

$

140,217

 

Net income

 

 

-

 

 

 

-

 

 

 

6,018

 

 

 

-

 

 

 

6,018

 

Issuance of restricted stock awards

 

 

5,978

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Vesting of restricted stock units

 

 

7,426

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

20,905

 

 

 

151

 

 

 

-

 

 

 

-

 

 

 

151

 

Stock-based compensation

 

 

-

 

 

 

363

 

 

 

-

 

 

 

-

 

 

 

363

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(10

)

 

 

(10

)

BALANCE, March 31, 2021

 

 

11,988,636

 

 

$

88,329

 

 

$

58,386

 

 

$

24

 

 

$

146,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2021

 

 

12,875,315

 

 

$

121,845

 

 

$

79,373

 

 

$

4

 

 

$

201,222

 

Net income

 

 

-

 

 

 

-

 

 

 

6,230

 

 

 

-

 

 

 

6,230

 

Vesting of restricted stock units

 

 

26,288

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

26,945

 

 

 

208

 

 

 

-

 

 

 

-

 

 

 

208

 

Stock-based compensation

 

 

-

 

 

 

539

 

 

 

-

 

 

 

-

 

 

 

539

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(279

)

 

 

(279

)

BALANCE, March 31, 2022

 

 

12,928,548

 

 

$

122,592

 

 

$

85,603

 

 

$

(275

)

 

$

207,920

 

See accompanying Notes to Condensed Consolidated Financial Statements.

7


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

(dollars in thousands)

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

6,230

 

 

$

6,018

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

12,942

 

 

 

357

 

Depreciation and amortization

 

 

419

 

 

 

416

 

(Gain) loss on disposition of fixed assets

 

 

(35

)

 

 

-

 

Decrease in operating lease right-of-use assets

 

 

269

 

 

 

261

 

Decrease in operating lease liabilities

 

 

(266

)

 

 

(259

)

Gain on sales of loans

 

 

-

 

 

 

(130

)

Proceeds from sale of loans

 

 

-

 

 

 

2,201

 

Net (discount accretion) premium amortization on investment securities

 

 

(12

)

 

 

10

 

Stock-based compensation

 

 

539

 

 

 

363

 

Increase in bank-owned life insurance value

 

 

(88

)

 

 

(51

)

Deferred tax benefit

 

 

1

 

 

 

-

 

Net change in CCBX receivable

 

 

(15,181

)

 

 

-

 

Net change in other assets and liabilities

 

 

3,164

 

 

 

(745

)

Net cash provided by operating activities

 

 

7,982

 

 

 

8,441

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in interest earning deposits with other banks

 

 

149,261

 

 

 

(43,320

)

Purchase of investment securities available for sale

 

 

(134,912

)

 

 

(14,998

)

Change in other investments, net

 

 

(1,453

)

 

 

(770

)

Principal paydowns of investment securities available-for-sale

 

 

7

 

 

 

8

 

Principal paydowns of investment securities held-to-maturity

 

 

10

 

 

 

321

 

Maturities and calls of investment securities available-for-sale

 

 

35,000

 

 

 

15,000

 

Purchase of loans

 

 

(57,268

)

 

 

-

 

Increase in loans receivable, net

 

 

(167,010

)

 

 

(221,665

)

Purchases of premises and equipment, net

 

 

(1,300

)

 

 

(502

)

Net cash used by investing activities

 

 

(177,665

)

 

 

(265,926

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

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

 

 

215,769

 

 

 

254,770

 

Net decrease in time deposits

 

 

(3,086

)

 

 

(4,362

)

Net repayment from long term FHLB borrowing

 

 

(24,999

)

 

 

-

 

Net advances from Paycheck Protection Program Liquidity Facility

 

 

-

 

 

 

4,803

 

Proceeds from exercise of stock options

 

 

208

 

 

 

151

 

Net cash provided by financing activities

 

 

187,892

 

 

 

255,362

 

NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH

 

 

18,209

 

 

 

(2,123

)

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

 

 

14,496

 

 

 

18,965

 

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

 

$

32,705

 

 

$

16,842

 

SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Interest paid

 

$

761

 

 

$

1,036

 

Income taxes paid

 

 

12

 

 

 

-

 

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS

 

 

 

 

 

 

 

 

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

 

$

(13

)

 

$

(13

)

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

)

See accompanying Notes to Condensed Consolidated Financial Statements. 

8


 

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 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, 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  CCBX segment provides Banking as a Service (“BaaS”) that allows our broker dealers and digital financial service partners to offer their customers banking services.  Through CCBX’s partners the Company is able to offer banking services and products across the nation.

The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). 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. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for future periods.

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

Subsequent Events - The Company has evaluated events and transactions subsequent to March 31, 2022 for potential recognition or disclosure.    

9


 

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.

 

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. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

 

10


 

 

Note 3 - Investment Securities

The amortized cost and fair values of investments in debt securities at the date indicated are as follows:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

134,923

 

 

$

1

 

 

$

(350

)

 

$

134,574

 

U.S. Agency collateralized mortgage obligations

 

 

62

 

 

 

-

 

 

 

-

 

 

 

62

 

U.S. Agency residential mortgage-backed securities

 

 

2

 

 

 

-

 

 

 

-

 

 

 

2

 

Municipal bonds

 

 

252

 

 

 

1

 

 

 

-

 

 

 

253

 

Total available-for-sale securities

 

 

135,239

 

 

 

2

 

 

 

(350

)

 

 

134,891

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency residential mortgage-backed securities

 

 

1,286

 

 

 

1

 

 

 

(23

)

 

 

1,264

 

Total investment securities

 

$

136,525

 

 

$

3

 

 

$

(373

)

 

$

136,155

 

 

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The amortized cost and fair value of debt securities at March 31, 2022, 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)

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts maturing in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

34,978

 

 

$

34,973

 

 

$

-

 

 

$

-

 

After one year through five years

 

 

100,197

 

 

 

99,854

 

 

 

-

 

 

 

-

 

 

 

 

135,175

 

 

 

134,827

 

 

 

-

 

 

 

-

 

U.S. Agency residential mortgage-backed securities and

   collateralized mortgage obligations

 

 

64

 

 

 

64

 

 

 

1,286

 

 

 

1,264

 

 

 

$

135,239

 

 

$

134,891

 

 

$

1,286

 

 

$

1,264

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in debt securities with an amortized cost of $35.5 million and $36.0 million at March 31, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.  During the quarter

11


 

ended March 31, 2022, five U.S. Treasury securities were purchased for $135.0 million for their higher yielding return compared to cash on deposit with other banks, and $35.0 million in U.S. Treasury securities matured during the quarter ended March 31, 2022.

There were no sales of securities during the three months ended March 31, 2022 or 2021.

There were eight securities with a $373,000 unrealized loss as of March 31, 2022.  There were four securities in an unrealized loss position as of December 31, 2021.  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:

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

 

 

(dollars in thousands)

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

119,581

 

 

$

350

 

 

$

-

 

 

$

-

 

 

$

119,581

 

 

$

350

 

Total available-for-sale securities

 

 

119,581

 

 

 

350

 

 

 

-

 

 

 

-

 

 

 

119,581

 

 

 

350

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency residential mortgage-backed

   securities

 

 

833

 

 

 

23

 

 

 

-

 

 

 

-

 

 

 

833

 

 

 

23

 

Total investment securities

 

$

120,414

 

 

$

373

 

 

$

-

 

 

$

-

 

 

$

120,414

 

 

$

373

 

 

Management has evaluated the above securities and does not believe that any individual unrealized loss as of March 31, 2022, represents an other-than-temporary impairment (“OTTI”).  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.

 

Note 4 - Loans and Allowance for Loan Losses

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

394,323

 

 

$

419,060

 

Real estate loans:

 

 

 

 

 

 

 

 

Construction, land, and land development

 

 

208,108

 

 

 

183,594

 

Residential real estate

 

 

268,716

 

 

 

204,389

 

Commercial real estate

 

 

889,483

 

 

 

835,587

 

Consumer and other loans

 

 

210,343

 

 

 

108,871

 

Gross loans receivable

 

 

1,970,973

 

 

 

1,751,501

 

Net deferred origination fees and premiums

 

 

(6,764

)

 

 

(8,766

)

Loans receivable

 

$

1,964,209

 

 

$

1,742,735

 

 

Included in commercial and industrial loans are Paycheck Protection Program (“PPP”) loans of $47.5 million at March 31, 2022 and $111.8 million at December 31, 2021.  PPP loans are 100% guaranteed by the Small Business Administration (“SBA”).  PPP loans had net deferred origination fees of $1.4 million as of March 31, 2022, and $3.6 million as of December 31, 2021.   Also included in commercial and industrial loans as of March 31, 2022 and December 31, 2021, is $218.7 million and $202.9 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.  

12


 

Included in consumer and other loans are overdrafts of $578,000 and $1.3 million at March 31, 2022 and December 31, 2021, respectively.

The Company has pledged loans totaling $179.2 million and $183.5 million at March 31, 2022 and December 31, 2021, respectively, for borrowing lines at the FHLB and FRB.

The balance of SBA and United States Department of Agriculture (“USDA”) loans and participations sold and serviced for others totaled was $17.7 million and $19.3 million at March 31, 2022 and December 31, 2021, respectively.

The balance of Main Street Lending Program (“MSLP”) loans participated and serviced totaled $58.0 million and $56.3 million at March 31, 2022 and December 31, 2021, respectively, with $3.1 million and $4.8 million in MSLP loans on the balance sheet and included in commercial and industrial loans at March 31, 2022, and December 31, 2021, respectively.  

The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans with remaining balances totaled $11.8 million and $12.8 million as of March 31, 2022 and December 31, 2021, respectively. Unamortized premiums totaled $201,000 and $223,000 as of March 31, 2022 and December 31, 2021, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $26.1 million and $27.9 million as of March 31, 2022 and December 31, 2021, respectively.

The  Company purchased loans from a CCBX partner, at par, through agreements with that CCBX partner, and those loans had a remaining balance of $111.5 million as of March 31, 2022 and $59.7 million as of December 31, 2021.  The Company recorded a receivable from the seller, which is secured by small dollar consumer and business loans.  As of March 31, 2022, $107.5 million is included in consumer and other loans and $4.0 million are in commercial and industrial loans, compared to $59.7 million in consumer and other loans as of December 31, 2021.

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. 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 March 31, 2022, $218.7 million in CCBX capital call lines are included in commercial and industrial loans compared to $202.9 million at December 31, 2021.  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 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 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 multi-family loans, first and second lien single family loans, which the Company occasionally purchases to diversify its loan portfolio, and rental portfolios secured by one-to-four family homes. The primary risks of residential

13


 

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 March 31, 2022, $84.2 million in CCBX loans are included in residential real estate loans, compared to $36.9 million at December 31, 2021.

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 make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans. 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. 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

For the three months ended March 31, 2022, $208.4 million in CCBX loans are included in consumer and other loans compared to $106.8 million at December 31, 2021.  CCBX consumer loans include credit cards, consumer term loans and lines of credit.      

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)

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

92

 

 

$

128

 

 

$

220

 

 

$

394,103

 

 

$

394,323

 

 

$

22

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

69

 

 

 

-

 

 

 

69

 

 

 

208,039

 

 

 

208,108

 

 

 

-

 

Residential real estate

 

 

669

 

 

 

94

 

 

 

763

 

 

 

267,953

 

 

 

268,716

 

 

 

40

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

889,483

 

 

 

889,483

 

 

 

-

 

Consumer and other loans

 

 

8,554

 

 

 

2,099

 

 

 

10,653

 

 

 

199,690

 

 

 

210,343

 

 

 

2,099

 

 

 

$

9,384

 

 

$

2,321

 

 

$

11,705

 

 

$

1,959,268

 

 

$

1,970,973

 

 

$

2,161

 

Less net deferred origination fees and premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,764

)

 

 

 

 

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,964,209

 

 

 

 

 

 

 

14


 

 

 

 

30-89

Days Past

Due

 

 

90 Days

or More

Past Due

 

 

Total

Past Due

 

 

Current

 

 

Total

Loans

 

 

Recorded

Investment

90 Days or

More Past

Due and

Still

Accruing

 

 

 

(dollars in thousands)

 

December 31, 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

 

 

 

 

 

 

The following table is a summary of information pertaining to impaired loans as of the period indicated.  CCBX loans that are reported using pool accounting and are not subject to impairment analysis, and therefore 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)

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

139

 

 

$

1

 

 

$

129

 

 

$

130

 

 

$

101

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

69

 

 

 

54

 

 

 

-

 

 

 

54

 

 

 

-

 

Total

 

$

208

 

 

$

55

 

 

$

129

 

 

$

184

 

 

$

101

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 summarize the Company’s average recorded investment and interest income recognized on impaired loans by loan class for the three months ended March 31, 2022 and 2021:

 

 

 

Three Months Ended

 

 

 

March 31, 2022

 

 

March 31, 2021

 

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Commercial and industrial loans

 

$

148

 

 

$

-

 

 

$

451

 

 

$

-

 

Real estate loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

55

 

 

 

-

 

 

 

174

 

 

 

-

 

Total

 

$

203

 

 

$

-

 

 

$

625

 

 

$

-

 

 

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

15


 

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 restructured in the three months ended March 31, 2022 and March 31, 2021 that qualified as TDRs. The Company has no commitments to loan additional funds to borrowers whose loans were classified as TDRs at March 31, 2022, as there were no outstanding TDRs at March 31, 2022.

 

Pursuant to guidance from the federal bank regulatory agencies, the Company deferred or modified payments on existing loans to assist customers financially during the COVID-19 pandemic and economic shutdown.  As of March 31, 2022 all deferred and modified loans during the COVID-19 pandemic have either returned to active status or paid off.  In accordance with GAAP, the CARES Act, as amended by the Consolidated Appropriations Act, 2021, and interagency guidance issued on March 22, 2020 and April 7, 2020, these short-term modifications, made on a good faith basis in response to the COVID-19 pandemic to borrowers that were current prior to any relief, were not considered TDRs.  

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 by CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively. For these loans, an allowance is recorded through provision expense for probable incurred losses. Any principal and interest outstanding on revolving/open-end loans at greater than 180 days past due is charged off against the allowance.  Any accrued interest outstanding on installment/closed-end loans at 120 days past due is reversed against the accrued interest allowance.  These consumer loans are reported out as substandard, 90+ 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.

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

130

 

 

$

166

 

Real estate loans:

 

 

 

 

 

 

 

 

Residential real estate

 

 

54

 

 

 

55

 

Total nonaccrual loans

 

$

184

 

 

$

221

 

 

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. 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. 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. Revolving (open-ended loans, such as credit cards) and installment (closed end) consumer loans originated by CCBX partners continue to accrue interest until they are charged-off at 180 days past due for revolving loans (primarily credit cards) and 120 days past due for installment loans (primarily unsecured loans to consumers).  These consumer loans are reported out as 90+ days past due and still accruing, and are classified as substandard.  There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve. The Company also classifies some loans as Watch or Other Loans Especially Mentioned (“OLEM”). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans and are reported in the 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.

16


 

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)

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

387,842

 

 

$

6,262

 

 

$

219

 

 

$

-

 

 

$

394,323

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land, and land development

 

 

208,108

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

208,108

 

Residential real estate

 

 

268,506

 

 

 

116

 

 

 

94

 

 

 

-

 

 

 

268,716

 

Commercial real estate

 

 

873,118

 

 

 

9,464

 

 

 

6,901

 

 

 

-

 

 

 

889,483

 

Consumer and other loans

 

 

208,244

 

 

 

-

 

 

 

2,099

 

 

 

-

 

 

 

210,343

 

 

 

$

1,945,818

 

 

$

15,842

 

 

$

9,313

 

 

$

-

 

 

 

1,970,973

 

Less net deferred origination fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(6,764

)

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,964,209

 

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 Loan Losses

The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder 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.

CCBX loans have a higher level of expected losses than our community bank loans which is reflected in the factors for the allowance for loan 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. Many of the agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses.  In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans.  When the provision for loan losses is recorded, a recovery receivable is also recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement).  Incurred losses are recorded in the allowance for loan losses, and as the credit enhancement recoveries are received from the CCBX partner, the recovery receivable is relieved. If a CCBX lending partner is unable to fulfill their contractual obligations under the credit enhancement, then the Bank would be exposed to additional loan losses as a result of this counterparty risk and would have to absorb any loan losses associated with the CCBX partner that cannot fulfill its contractual obligations.

17


 

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three months ended March 31, 2022:

 

 

 

Commercial

and

Industrial

 

 

Construction,

Land, and

Land

Development

 

 

Residential

Real

Estate

 

 

Commercial

Real Estate

 

 

Consumer

and Other

 

 

Unallocated

 

 

Total

 

 

 

(dollars in thousands)

 

Three Months Ended March 31, 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)

 

 

296

 

 

 

608

 

 

 

1,160

 

 

 

(1,273

)

 

 

10,823

 

 

 

1,328

 

 

 

12,942

 

 

 

 

3,517

 

 

 

7,592

 

 

 

5,758

 

 

 

5,317

 

 

 

17,915

 

 

 

1,475

 

 

 

41,574

 

Loans charged-off

 

 

(5

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,803

)

 

 

-

 

 

 

(2,808

)

Recoveries of loans previously charged-off

 

 

2

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

4

 

Net (charge-offs) recoveries

 

 

(3

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2,801

)

 

 

-

 

 

 

(2,804

)

ALLL balance, March 31, 2022

 

$

3,514

 

 

$

7,592

 

 

$

5,758

 

 

$

5,317

 

 

$

15,114

 

 

$

1,475

 

 

$

38,770

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL amounts allocated to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

101

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

101

 

Collectively evaluated for impairment

 

 

3,413

 

 

 

7,592

 

 

 

5,758

 

 

 

5,317

 

 

 

15,114

 

 

 

1,475

 

 

 

38,669

 

ALLL balance, March 31, 2022

 

$

3,514

 

 

$

7,592

 

 

$

5,758

 

 

$

5,317

 

 

$

15,114

 

 

$

1,475

 

 

$

38,770

 

Loans individually evaluated for impairment

 

$

130

 

 

$

-

 

 

$

54

 

 

$

-

 

 

$

-

 

 

 

 

 

 

$

184

 

Loans collectively evaluated for impairment

 

 

394,193

 

 

 

208,108

 

 

 

268,662

 

 

 

889,483

 

 

 

210,343

 

 

 

 

 

 

 

1,970,789

 

Loan balance, March 31, 2022

 

$

394,323

 

 

$

208,108

 

 

$

268,716

 

 

$

889,483

 

 

$

210,343

 

 

 

 

 

 

$

1,970,973

 

Three Months Ended March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL balance, December 31, 2020

 

$

3,353

 

 

$

3,545

 

 

$

3,410

 

 

$

7,810

 

 

$

127

 

 

$

1,017

 

 

$

19,262

 

Provision for loan losses or (recapture)

 

 

43

 

 

 

437

 

 

 

(239

)

 

 

143

 

 

 

(19

)

 

 

(8

)

 

 

357

 

 

 

 

3,396

 

 

 

3,982

 

 

 

3,171

 

 

 

7,953

 

 

 

108

 

 

 

1,009

 

 

 

19,619

 

Loans charged-off

 

 

(14

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(4

)

 

 

-

 

 

 

(18

)

Recoveries of loans previously charged-off

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

-

 

 

 

9

 

Net (charge-offs) recoveries

 

 

(9

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9

)

ALLL balance, March 31, 2021

 

$

3,387

 

 

$

3,982

 

 

$

3,171

 

 

$

7,953

 

 

$

108

 

 

$

1,009

 

 

$

19,610

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of March 31, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL amounts allocated to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

118

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

118

 

Collectively evaluated for impairment

 

 

3,269

 

 

 

3,982

 

 

 

3,171

 

 

 

7,953

 

 

 

108

 

 

 

1,009

 

 

 

19,492

 

ALLL balance, March 31, 2021

 

$

3,387

 

 

$

3,982

 

 

$

3,171

 

 

$

7,953

 

 

$

108

 

 

$

1,009

 

 

$

19,610

 

Loans individually evaluated for impairment

 

$

488

 

 

$

-

 

 

$

173

 

 

$

-

 

 

$

-

 

 

 

 

 

 

$

661

 

Loans collectively evaluated for impairment

 

 

745,786

 

 

 

104,596

 

 

 

136,244

 

 

 

793,633

 

 

 

4,114

 

 

 

 

 

 

 

1,784,373

 

Loan balance, March 31, 2021

 

$

746,274

 

 

$

104,596

 

 

$

136,417

 

 

$

793,633

 

 

$

4,114

 

 

 

 

 

 

$

1,785,034

 

18


 

 

 

The following table summarizes the allocation of the ALLL attributed to various segments in the loan portfolio as of December 31, 2021.

 

 

Commercial

and

Industrial

 

 

Construction,

Land, and

Land

Development

 

 

Residential

Real

Estate

 

 

Commercial

Real Estate

 

 

Consumer

and Other

 

 

Unallocated

 

 

Total

 

 

 

(dollars in thousands)

 

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

 

 

Note 5 - Deposits

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

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

 

 

 

 

 

 

 

 

 

Demand, noninterest bearing

 

$

838,044

 

 

$

1,355,908

 

NOW and money market

 

 

1,516,546

 

 

 

789,709

 

Savings

 

 

106,364

 

 

 

103,956

 

Total core deposits

 

 

2,460,954

 

 

 

2,249,573

 

BaaS-brokered deposits

 

 

75,145

 

 

 

70,757

 

Time deposits less than $250,000

 

 

29,200

 

 

 

31,057

 

Time deposits $250,000 and over

 

 

11,171

 

 

 

12,400

 

Total deposits

 

$

2,576,470

 

 

$

2,363,787

 

 

The following table presents the maturity distribution of time deposits as of March 31, 2022 (dollars in thousands):

 

 

 

(dollars in thousands)

 

Twelve months

 

$

31,225

 

One to two years

 

 

5,542

 

Two to three years

 

 

1,733

 

Three to four years

 

 

1,234

 

Four to five years

 

 

637

 

 

 

$

40,371

 

Our CCBX partners originate deposits and these deposits were primarily noninterest bearing prior to the recent rate increase by the Federal Open Market Committee (“FOMC”). Many 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.   The amount of deposits that move to interest bearing will increase as rates are raised by the FOMC thereafter.  Once the Fed Funds rate increases to 1.00%, most of the CCBX noninterest bearing deposits will be interest bearing.

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.

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.

19


 

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. No leases renewed during the three months ended March 31, 2022.  

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. 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 March 31, 2022, the Company has one sublease that has not yet commenced.  At March 31, 2022, lease expiration dates ranged from ten months to 22.9 years, with additional renewal options on certain leases typically ranging from 5 to 10 years. At March 31, 2022, the weighted average remaining lease term for the Company’s operating leases was 8.4 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $346,000 and $341,000, respectively, for the three months ended March 31, 2022 and 2021. 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 March 31, 2022:

 

 

 

March 31,

 

 

 

2022

 

 

 

(dollars in thousands)

 

April 1, 2022 to December 31, 2022

 

$

962

 

2023

 

 

1,272

 

2024

 

 

864

 

2025

 

 

714

 

2026

 

 

719

 

2027 and thereafter

 

 

2,490

 

Total lease payments

 

 

7,021

 

Less:  amounts representing interest

 

 

967

 

Present value of lease liabilities

 

$

6,054

 

 

The following table presents the components of total lease expense and operating cash flows for the three months ended March 31, 2022 and 2020:

 

 

 

Three Months Ended

 

 

 

March 31,

 

March 31,

 

 

 

2022

 

2021

 

 

 

(dollars in thousands)

 

Lease expense:

 

 

 

 

 

 

 

Operating lease expense

 

$

320

 

$

321

 

Variable lease expense

 

 

41

 

 

34

 

Total lease expense (1)

 

$

361

 

$

355

 

Cash paid:

 

 

 

 

 

 

 

Cash paid reducing operating lease liabilities

 

$

358

 

$

352

 

 

 

 

 

 

 

 

 

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

 

 

The Company entered into a five-year prepaid capital lease for ATM machines beginning October 1, 2021.  The equipment is recorded as fixed assets on the Company’s balance sheet and depreciation expense is recognized on a straight-line basis over the term of the lease.  Depreciation expense was $32,000 and $33,000 for the three months ended March 31, 2022 and 2021, respectively, with $448,000 remaining as of March 31, 2022.  

 

20


 

 

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 both the 2006 Plan and the Directors’ Stock Bonus Plan (2006 Plan). Existing awards will vest under the terms granted and no further awards will be granted under these prior plans. Shares available to be granted under the 2018 plan were 615,630 at March 31, 2022.

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.

There were no new stock options granted in the three months ended March 31, 2022.

 

A summary of stock option activity under the 2018 Plan and 2006 Plan during the three months ended March 31, 2022:

 

Options

 

Shares

 

 

Weighted-

Average

Exercise

Price

 

 

Weighted-

Average

Remaining

Contractual

Term (Years)

 

 

Aggregate

Intrinsic Value

 

 

 

(dollars in thousands, except per share amounts)

 

Outstanding at December 31, 2021

 

 

694,519

 

 

$

7.79

 

 

 

4.0

 

 

$

29,744

 

Granted

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

Exercised

 

 

(26,660

)

 

$

7.11

 

 

 

 

 

 

 

 

 

Forfeited or expired

 

 

(800

)

 

 

7.63

 

 

 

 

 

 

 

 

 

Outstanding at March 31, 2022

 

 

667,059

 

 

$

7.79

 

 

 

3.8

 

 

$

25,323

 

Vested or expected to vest at March 31, 2022

 

 

667,059

 

 

$

7.79

 

 

 

3.8

 

 

$

25,323

 

Exercisable at March 31, 2022

 

 

381,947

 

 

$

6.85

 

 

 

2.9

 

 

$

14,856

 

 

 

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 months ended March 31, 2022 and 2021, was $1.1 million and $357,000, respectively.

As of March 31, 2022, there was $1.4 million 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 weighted-average period of approximately 4.8 years.   Compensation expense recorded related to stock options was $120,000 and $89,000 for the three months ended March 31, 2022 and 2021, respectively.

Restricted Stock Units

In January 2022, the Company granted 53,721 restricted stock units under the 2018 Plan to employees, which vest ratably over 4 years.  In February 2022, the Company granted 150 restricted stock units under the 2018 Plan to an employee, which vest ratably over 10 years.

Restricted stock units 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 units 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.

21


 

Compensation expense is recognized over the vesting period that the awards are based. Restricted stock units are nonparticipating securities.

As of March 31, 2022, there was $7.5 million of total unrecognized compensation cost related to nonvested restricted stock units.  The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 5.6 years.  Compensation expense recorded related to restricted stock units was $374,000 and $101,000 for the three months ended March 31, 2022 and 2021, respectively.

A summary of the Company’s nonvested shares at March 31, 2022 and changes during the three 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)

 

Nonvested shares at December 31, 2021

 

 

269,844

 

 

$

21.70

 

 

$

7,803

 

Granted

 

 

53,871

 

 

$

49.19

 

 

 

 

 

Forfeited

 

 

(1,261

)

 

$

19.00

 

 

 

 

 

Vested

 

 

(25,788

)

 

$

19.90

 

 

 

 

 

Nonvested shares at March 31, 2022

 

 

296,666

 

 

$

26.86

 

 

$

5,603

 

 

Restricted Stock Awards

Employees

There were no new restricted stock awards granted in the three months ended March 31, 2022.  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 March 31, 2022, there was $53,000 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 5.8 years.  Compensation expense recorded related to restricted stock awards was $2,000 and $127,000 for the three months ended March 31, 2022 and 2021, respectively.

 

Director’s Stock Compensation

Under the 2018 Plan, eligible directors are granted stock with a total market value of $15,000, and the Board Chair is granted stock with a total market value of $25,000.  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.

No new shares were granted during the three months ended March 31, 2022.   On May 24, 2021, As of March 31, 2022, there was $20,000 of total unrecognized compensation expense related to director restricted stock awards.  Director compensation expense recorded related to the 2018 Plan totaled $38,000 and $46,000 for the three months ended March 31, 2022 and 2021, respectively.

22


 

A summary of the Company’s nonvested shares at March 31, 2022 and changes during the three-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)

 

Nonvested shares at December 31, 2021

 

 

10,203

 

 

$

23.78

 

 

$

274

 

Granted

 

 

-

 

 

$

-

 

 

 

 

 

Forfeited

 

 

-

 

 

$

-

 

 

 

 

 

Vested

 

 

(2,467

)

 

$

17.81

 

 

 

 

 

Nonvested shares at March 31, 2022

 

 

7,736

 

 

$

24.82

 

 

$

175

 

 

 

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:

 

 

 

March 31, 2022

 

 

Fair Value Measurements Using

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

32,705

 

 

$

32,705

 

 

$

32,705

 

 

$

-

 

 

$

-

 

Interest earning deposits with other banks

 

 

649,404

 

 

 

649,404

 

 

 

649,404

 

 

 

-

 

 

 

-

 

Investment securities

 

 

136,177

 

 

 

136,155

 

 

 

134,574

 

 

 

1,581

 

 

 

-

 

Other investments

 

 

9,931

 

 

 

9,931

 

 

 

-

 

 

 

7,259

 

 

 

2,672

 

Loans receivable

 

 

1,925,439

 

 

 

1,892,105

 

 

 

-

 

 

 

-

 

 

 

1,892,105

 

Accrued interest receivable

 

 

8,824

 

 

 

8,824

 

 

 

-

 

 

 

8,824

 

 

 

-

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,576,470

 

 

 

2,575,891

 

 

$

-

 

 

$

2,575,891

 

 

$

-

 

Subordinated debt

 

 

24,306

 

 

 

20,143

 

 

 

-

 

 

 

20,143

 

 

 

-

 

Junior subordinated debentures

 

 

3,587

 

 

 

2,660

 

 

 

-

 

 

 

2,660

 

 

 

-

 

Accrued interest payable

 

 

6,054

 

 

 

6,054

 

 

 

-

 

 

 

6,054

 

 

 

-

 

 

 

 

 

 

December 31, 2021

 

 

Fair Value Measurements Using

 

 

 

Carrying

Value

 

 

Estimated

Fair Value

 

 

Level 1

 

 

Level 2

 

 

Level 3

 

 

 

(dollars in thousands)

 

Financial assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash and due from banks

 

$

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

 

 

 

-

 

23


 

 

 

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

 

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

 

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

 

Level 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.

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)

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

134,574

 

 

$

-

 

 

$

-

 

 

$

134,574

 

U.S. Agency collateralized mortgage obligations

 

 

-

 

 

 

62

 

 

 

-

 

 

 

62

 

U.S. Agency residential mortgage-backed securities

 

 

-

 

 

 

2

 

 

 

-

 

 

 

2

 

Municipals

 

 

-

 

 

 

253

 

 

 

-

 

 

 

253

 

 

 

$

134,574

 

 

$

317

 

 

$

-

 

 

$

134,891

 

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 March 31, 2022 and December 31, 2021. 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.

24


 

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 March 31, 2022, with adjustments recorded during the periods presented for those securities with observable price changes, if applicable.

 

 

For the Three Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2022

 

 

2021

 

Carrying value, beginning of period

 

$

2,322

 

 

$

850

 

Addition of equity securities

 

 

350

 

 

 

-

 

Upward carrying value changes

 

 

-

 

 

 

-

 

Carrying value, end of period

 

$

2,672

 

 

$

850

 

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

 

 

 

Valuation Technique

 

Unobservable Inputs

 

March 31, 2022

Weighted

Average Rate

 

 

December 31, 2021

Weighted

Average Rate

 

Impaired loans

 

Collateral valuations

 

Discount to appraised value

 

8%

 

 

8%

 

 

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)

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

-

 

 

$

-

 

 

$

184

 

 

$

184

 

Equity securities

 

 

 

 

 

 

 

 

 

 

2,672

 

 

 

2,672

 

Total

 

$

-

 

 

$

-

 

 

$

2,856

 

 

$

2,856

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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 loans - A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted cash expected future cash flows. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are evaluated quarterly to determine if valuation adjustments should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impairment 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.

25


 

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

 

 

 

March 31, 2022

 

March 31, 2021

 

 

 

(dollars in thousands, except per share data)

 

Net Income

 

$

6,230

 

$

6,018

 

Basic weighted average number common shares outstanding

 

 

12,898,746

 

 

11,960,772

 

Dilutive effect of equity-based awards

 

 

576,591

 

 

432,721

 

Diluted weighted average number common shares

   outstanding

 

 

13,475,337

 

 

12,393,493

 

Basic earnings per share

 

$

0.48

 

$

0.50

 

Diluted earnings per share

 

$

0.46

 

$

0.49

 

Antidilutive stock options and restricted stock outstanding

 

 

154,871

 

 

181,084

 

 

 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.

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 two segments:  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 the 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:

 

 

March 31, 2022

 

 

December 31, 2021

 

 

 

Bank

 

 

CCBX

 

 

Total

 

 

Bank

 

 

CCBX

 

 

Total

 

 

 

(dollars in thousands)

 

Total assets

 

$

2,296,670

 

 

$

537,080

 

 

$

2,833,750

 

 

$

2,282,514

 

 

$

353,003

 

 

$

2,635,517

 

Total  loans receivable

 

$

1,448,820

 

 

$

515,389

 

 

$

1,964,209

 

 

$

1,396,060

 

 

$

346,675

 

 

$

1,742,735

 

Allowance for

    loan losses

 

$

(20,643

)

 

$

(18,127

)

 

$

(38,770

)

 

$

(20,299

)

 

$

(8,333

)

 

$

(28,632

)

Total deposits

 

$

1,677,004

 

 

$

899,466

 

 

$

2,576,470

 

 

$

1,647,529

 

 

$

716,258

 

 

$

2,363,787

 

26


 

 

 

 

 

Three months ended March 31, 2022

 

 

Three months ended March 31, 2021

 

 

 

Bank

 

 

CCBX

 

 

Total

 

 

Bank

 

 

CCBX

 

 

Total

 

 

 

(dollars in thousands)

 

Net interest income

 

$

17,394

 

 

$

11,874

 

 

$

29,268

 

 

$

16,926

 

 

$

389

 

 

$

17,315

 

Provision for loan losses

 

$

344

 

 

$

12,598

 

 

$

12,942

 

 

$

320

 

 

$

37

 

 

$

357

 

Noninterest income (1)

 

$

1,804

 

 

$

20,182

 

 

$

21,986

 

 

$

2,036

 

 

$

948

 

 

$

2,984

 

Noninterest expense

 

$

13,565

 

 

$

16,850

 

 

$

30,415

 

 

$

11,140

 

 

$

1,212

 

 

$

12,352

 

(1) For the three months ended March 31, 2022, CCBX noninterest income includes credit enhancement recovery of $13.1 million, servicing and other BaaS fees of $1.7 million, fraud recovery of $4.6 million, reimbursement of expenses of $372,000, interchange income of $432,000, and other of $69,000.  For the three months ended March 31, 2021, CCBX noninterest income includes servicing and other BaaS fees of $730,000, reimbursement of expenses of $183,000 and interchange income of $35,000.

 

 

27


 

 

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 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 28 partners as of March 31, 2022, compared to 21 as of March 31, 2021. 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 March 31, 2022, we had total assets of $2.83 billion, total loans receivable of $1.96 billion, total deposits of $2.58 billion and total shareholders’ equity of $207.9 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 interest on loans and BaaS fee income. 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) 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 salaries and employee benefits, provision for loan losses, interest on deposits and borrowings, occupancy and data processing. Our principal lending products are commercial real estate loans, commercial and industrial loans, residential real estate loans, construction, land and land development loans, and consumer loans.

Coronavirus Aid, Relief, and Economic Security (“CARES”) Act

Our financial results for the three months ended March 31, 2022 and 2021 were also impacted by the coronavirus, and variants thereof, including the Delta and Omicron variants (“COVID-19”) pandemic. On March 27, 2020, 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 PPP, which was a stimulus response to the potential economic impacts of the COVID-19 pandemic.  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. The Small Business Administration (“SBA”) manages the PPP. If a loan is fully forgiven, the SBA will repay the lending bank in full. If a loan is partially forgiven or not forgiven at all, a bank must look to the borrower for repayment of unforgiven principal and interest. If the borrower defaults, the loan is guaranteed by the SBA. We accepted and processed applications for the duration of the initial PPP loan program, which closed for new applicants on August 8, 2020.  The Consolidated Appropriations Act enacted on December 27, 2020, appropriated additional funding to the PPP and permitted certain PPP borrowers to make “second draw” loans. The American Rescue Plan Act of 2021, enacted on March 11, 2021, expanded the eligibility criteria for both first and second draw PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness. The PPP Extension Act of 2021, enacted on March 25, 2021, extended the PPP through May 31, 2021, at which time the program closed for new applications.

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 March 31, 2022, $47.5 million in PPP loans remained with

28


 

$1.4 million in net deferred fees, which will be recognized in interest income in future periods. Legislation extended the initial payment deferral period on PPP loans originated in 2020, and PPP borrowers with two-year loans can work with their lender to extend their loan to a five-year maturity, which has been a popular approach for customers with PPP loans that are not eligible for forgiveness.   There were $2.9 million of these loans remaining as of March 31, 2022.  PPP loans originated in 2021 are five-year loans, and $44.6 million of these loans remained as of March 31, 2022. Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower's loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (generally between eight and 24 weeks).

We continue to accept applications from customers for loan forgiveness.  To obtain loan forgiveness, a PPP borrower must submit a forgiveness application.  We expect PPP forgiveness payments to continue through the second quarter of 2022.  

The table below summarizes information about total PPP loans originated in 2020 and 2021.

 

 

Total PPP Loan Origination

 

 

 

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 March 31, 2022

 

Loans outstanding

 

$

2,927

 

$

44,540

 

$

47,467

 

Deferred fees, net

 

 

7

 

 

1,358

 

$

1,365

 

As of March 31, 2022 there was $47.5 million in PPP loans, including $2.9 million from rounds 1 and 2 and $44.6 million from round 3.  The table below summarizes key information about the remaining PPP loans originated in 2020 and 2021 as of the period indicated:  

 

 

Outstanding PPP Loans

 

 

 

Original Loan Size

 

 

 

As of and for the Three Months Ended September 30, 2021

 

 

 

$0.00 -

$50,000.00

 

$50,0000.01 -

$150,000.00

 

$150,000.01 -

$350,000.00

 

$350,000.01 -

$2,000,000.00

 

> 2,000,000.01

 

Totals

 

(Dollars in thousands; unaudited)

 

 

 

 

 

 

 

 

 

 

 

 

 

Principal outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Round 1 & 2

 

$

134

 

$

367

 

$

84

 

$

1,578

 

$

764

 

$

2,927

 

Round 3

 

 

2,133

 

 

2,963

 

 

13,492

 

 

25,952

 

 

-

 

 

44,540

 

Total principal outstanding

 

 

2,267

 

 

3,330

 

 

13,576

 

 

27,530

 

 

764

 

 

47,467

 

Net deferred fees outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Round 1 & 2

 

$

-

 

$

1

 

$

1

 

$

4

 

$

1

 

$

7

 

Round 3

 

 

185

 

 

98

 

 

493

 

 

582

 

 

-

 

 

1,358

 

Total net deferred fees

     outstanding

 

$

185

 

$

99

 

$

494

 

$

586

 

$

1

 

$

1,365

 

Number of loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Round 1 & 2

 

 

7

 

 

7

 

 

3

 

 

6

 

 

1

 

 

24

 

Round 3

 

 

122

 

 

31

 

 

55

 

 

31

 

 

-

 

 

239

 

Total loan count

 

 

129

 

 

38

 

 

58

 

 

37

 

 

1

 

 

263

 

Percent of total

 

 

49.0

%

 

14.5

%

 

22.0

%

 

14.1

%

 

0.4

%

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness/Payoffs/Paydowns in Three Months Ended March 31, 2022

 

 

 

 

 

 

 

 

 

 

Dollars

 

$

4,960

 

$

7,880

 

$

18,827

 

$

31,741

 

$

938

 

$

64,346

 

Deferred fee recognized

 

 

394

 

 

286

 

 

768

 

 

811

 

 

9

 

 

2,268

 

PPP Overview

The PPP loans originated in the first and second rounds during 2020 and in the third round in 2021 have had a significant impact on our financial statements.  As the remaining $47.5 million in PPP loans continue to paydown they will have less impact our results in the future.  Throughout this discussion, we will address the impact of these loans, on the balance sheet and income statement.  Any estimated adjusted ratios that exclude the impact of this activity are non-U.S. generally accepted accounting principles (“GAAP”)

29


 

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

The Company's Preparations, Responses and Re-Opening to the COVID-19 Pandemic

As part of its ongoing risk preparation and mitigation efforts, we had developed a detailed plan and action measures related to a possible pandemic scenario. This pandemic plan was implemented on March 12, 2020 and continued through the first quarter of 2022. The Company carefully executed the plan with limited operational disruptions, with attention to ensure continued customer support, and with the utmost care to safeguard employees, customers and vendors. Management continues to monitor and, when appropriate, make changes to our planned response.

London Interbank Offered Rate (“LIBOR”) Transition

On March 5, 2021, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, confirmed that the publication of most LIBOR term rates will end on June 30, 2023 (excluding 1-week U.S. LIBOR and 2-month U.S. LIBOR, 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 law the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), which was included as part of a larger Consolidated Appropriations Act, 2022.  The LIBOR Act provides a nationwide process for replacing LIBOR in financial contracts that mature after the cessation of the overnight, one-, three-, six- and 12-month USD LIBOR tenors on June 30, 2023 and that do not provide for an effective means to replace LIBOR upon its cessation.   For contracts in which a party has the discretion to identify a 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. 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.

As of March 31, 2022, we had $227.0 million in loans that are tied to LIBOR, and $185.4 million of those are SWAPs. 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 also tied to LIBOR.  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 reviewing LIBOR replacement options and are preparing for and evaluating the impact of the transition from LIBOR. We are no longer issuing any loans or debt tied to LIBOR.

30


 

Comparison of Operating Results for the Three Months Ended March 31, 2022 and March 31, 2021

Results of Operations

Net Income

Net income for the three months ended March 31, 2022, was $6.2 million, or $0.46 per diluted share, compared to $6.0 million, or $0.49 per diluted share, for the three months ended March 31, 2021. The increase in net income over the comparable period in the prior year was primarily attributable to a $11.8 million increase in interest income and $19.0 million increase in noninterest income.  These were partially offset by an increase in the provision for loan losses of $12.6 million, related to CCBX loan growth, and $18.1 million more in noninterest expense.  The increase in noninterest income and noninterest expense are largely related to CCBX.  In accordance with GAAP, we recognize the reimbursement of non-credit fraud losses on partner’s customer loans and credit enhancements related to the allowance for loan losses and reserve for unfunded commitments provided by the partner as revenue.  Partner 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 loan losses, reserve for unfunded commitments, credit enhancements and fraud recovery see the section titled “CCBX – BaaS Reporting Information.”  

Net Interest Income

Net interest income for the three months ended March 31, 2022, was $29.3 million, compared to $17.3 million for the three months ended March 31, 2021, an increase of $12.0 million, or 69.0%. Yield on loans receivable was 6.80% for the three months ended March 31, 2022, compared 4.51% for the three months ended March 31, 2021.  The increase in net interest income compared to March 31, 2021 was largely related to increased yield on loans from growth in higher yielding loans.  Average loans receivable for the three months ended March 31, 2022 was $1.77 billion, compared to $1.64 billion for the three months ended March 31, 2021.  

Interest and fees on loans totaled $29.6 million for the three months ended March 31, 2022 compared to $18.2 million for the three months ended March 31, 2021.  The $11.8 million increase in interest and fees on loans for the quarter ended March 31, 2022, compared to March 31, 2021, was largely due to increased yield on loans from growth in higher yielding loans.  Net non-PPP loan growth of $682.3 million, or 55.0%, for the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021, partially offset a decrease of $496.4 million in PPP loans that were forgiven or repaid.  CCBX average loans receivable was $382.2 million for the quarter ended March 31, 2022, compared to $66.9 million for the quarter ended March 31, 2021, an increase of $315.3 million, or 471.7%.  Average CCBX gross yield of 12.73% was earned on CCBX loans for the quarter ended March 31, 2022, compared to 2.5% for the quarter ended March 31, 2021.  CCBX gross yield does not include the impact of BaaS loan expense.  BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans.  As a result of the FOMC raising rates in mid-March 2022, interest rates were increased on $473.6 million in variable rate loans, the impact of this increase in interest rates will be fully seen in future quarters.

As of March 31, 2022 there were $47.5 million in PPP loans, compared $543.8 million as of March 31, 2021.  In the three months ended March 31, 2022 a total of $64.3 million in PPP loans were forgiven or repaid.  Net deferred fees recognized on PPP loans contributed $2.3 million for the three months ended March 31, 2022, compared to $3.2 million for the three months ended March 31, 2021.

As of March 31, 2022 $1.4 million in net deferred fees on PPP loans remains to be recognized in interest income in future periods along with interest earned on loans.  Net deferred fees on PPP loans are earned over the life of the loan, as a yield adjustment in interest income.  Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods from the recognition of PPP deferred fees.  PPP loans in rounds 1 and 2 were originated in 2020, and were predominately two year loans, and only $2.9 million of these loans remained at March 31, 2022.  PPP loans in round 3 were originated in 2021 and are all five-year loans, and $44.6 million of these loans remained at March 31, 2022.  

Interest income from interest earning deposits with other banks was $402,000 at March 31, 2022, an increase of $332,000 due to higher balances, compared to March 31, 2021.  The average balance of interest earning deposits with other banks for the three months ended March 31, 2022 was $843.9 million, compared to $195.3 million for the three months ended March 31, 2021.  Additionally, the yield on these interest earning deposits with other banks increased four basis points, compared to March 31, 2021.  

Interest expense was $874,000 for the quarter ended March 31, 2022, a $169,000 decrease from the quarter ended March 31, 2021. Interest expense on borrowed funds was $321,000 for the quarter ended March 31, 2022, compared to $383,000 for the quarter ended

31


 

March 31, 2021. The $62,000 decrease in interest expense on borrowed funds from the quarter ended March 31, 2021 is the result of a decrease in average PPPLF borrowings, which were paid off in full as of June 30, 2021, partially offset by a $ 15.0 million increase in subordinated debt, which increased during the quarter ended September 30, 2021.  Additionally, we paid off $25.0 million in FHLB borrowings late in the quarter ended March 31, 2022.  The borrowings were no longer needed, and there was no prepayment penalty for early repayment.  Interest expense on interest bearing deposits decreased $107,000 compared to March 31, 2021, because of management lowering interest rates in 2021 on interest bearing deposits resulting in lower interest rates on interest bearing deposits compared to March 31, 2021.  However, interest expense is expected to increase as a result of the FOMC increasing rates 0.25% in mid-March 2022.  In addition, as a result of the FOMC rate increase, $690.4 million in CCBX deposits that were not earning interest were reclassed to interest bearing deposits from noninterest bearing deposits.  This reclassification occurred mid-March 2022, therefore the impact of this change will not be fully realized until next quarter.  We anticipate additional rate increases in 2022, which we expect will result in higher interest expense on interest bearing deposits.  

Net interest margin was 4.45% for the three months ended March 31, 2022, compared to 3.76% for the three months ended March 31, 2021.  The increase in net interest margin compared to the three months ended March 31, 2021 was largely a result of  an increase in higher rate, non-PPP loans.  Non-PPP loans increased $682.3 million compared to March 31, 2021.  Also contributing to the increase in net interest margin compared to the three months ended March 31, 2021 was $648.6 million increase in average interest earning deposits.  These interest earning deposits earned an average rate of 19 basis points for the quarter ended March 31, 2022.

Cost of funds was 0.14% for the quarter ended March 31, 2022, which is a decrease of 10 basis points from the quarter ended March 31, 2021.  Cost of deposits for the quarter ended March 31, 2022 was 0.09%, which was an 8 basis point decrease, from 0.17% for the quarter ended March 31, 2021, largely due to an increase in noninterest bearing deposits and a lower rate environment.  Deposit growth from CCBX in noninterest bearing and low interest bearing accounts contributed to the reduced cost of funds in conjunction with rate reductions on our community bank deposits.  The recent 25 basis point increase in rates by the FOMC did not have a significant impact on the first quarter interest expense, but the impact of that change and the change on loan rates will likely be seen in future quarters.  Noninterest bearing deposits increased $69.4 million, or 9.0%, compared to the quarter ended March 31, 2021 due to an increase of $759.8 million in noninterest bearing deposits, partially offset by the aforementioned reclassification of $690.4 million of CCBX noninterest bearing deposits to interest bearing deposits.  

Total yield on loans receivable for the quarter ended March 31, 2022 was 6.80%, compared to 4.51% for the quarter ended March 31, 2021. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX consumer loans.  As of the quarter ended March 31, 2022 average CCBX loans increased $315.3 million, or 471.7%, with an average CCBX gross yield of 12.73%, compared to 2.50% at March 31, 2021.  CCBX gross yield does not include the impact of BaaS loan expense.  BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans.  Average community bank loans increased $209.0 million, or 19.0%, excluding PPP loans, and PPP loans decreased $396.1 million, or 83.2%, compared to March 31, 2021.  Average yield on community bank loans for the three months ended March 31, 2022 was 5.16%. compared to 4.59% for the three months ended March 31, 2021.  

 

32


 

 

 

For the Three Months Ended

 

 

March 31, 2022

 

 

March 31, 2021

 

 

Yield on

 

Cost of

 

 

Yield on

 

Cost of

 

 

Loans

 

Deposits

 

 

Loans

 

Deposits

 

Community Bank

5.16%

 

0.11%

 

 

4.59%

 

0.18%

 

CCBX - gross yield (1)

12.73%

 

0.06%

 

 

2.50%

 

0.09%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) CCBX - gross yield does not include the impact of BaaS loan expense.  BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans.  To determine net revenue (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

 

 

March 31, 2022

 

 

March 31, 2021

 

(Dollars in thousands)

Interest / Expense

 

Interest / expense divided by average CCBX loans

 

 

Interest / Expense

 

Interest / expense divided by average CCBX loans

 

BaaS loan interest income

$

11,992

 

 

12.73

%

 

$

412

 

 

2.50

%

Less:  BaaS loan expense

 

8,290

 

 

8.80

%

 

 

90

 

 

0.55

%

Net BaaS loan income *

 

3,702

 

 

3.93

%

 

 

322

 

 

1.95

%

Average BaaS Loans

 

382,153

 

 

 

 

 

 

66,850

 

 

 

 

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

For the three months ended March 31, 2022, net interest margin (annualized net interest income divided by average total interest earning assets) and net interest spread (average yield on total interest earning assets minus average cost of total interest bearing liabilities) were 4.45% and 4.28%, respectively, compared to 3.76% and 3.59%, respectively, for the three months ended March 31, 2021.  

33


 

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 $2.7 million and $4.0 million for the three months ended March 31, 2022 and 2021, respectively. For the three months ended March 31, 2022 and 2021, the amount of interest income not recognized on nonaccrual loans was not material.

 

 

 

Average Balance Sheets

 

 

 

For the Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

 

 

Average

 

 

Interest &

 

 

Yield /

 

 

Average

 

 

Interest &

 

 

Yield /

 

(Dollars in thousands)

 

Balance

 

 

Dividends

 

 

Cost (4)

 

 

Balance

 

 

Dividends

 

 

Cost (4)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits

 

$

843,931

 

 

$

402

 

 

 

0.19

%

 

$

195,308

 

 

$

70

 

 

 

0.15

%

Investment securities, available for sale (1)

 

 

44,470

 

 

 

61

 

 

 

0.56

 

 

 

21,575

 

 

 

19

 

 

 

0.36

 

Investment securities, held to maturity (1)

 

 

1,292

 

 

 

10

 

 

 

3.14

 

 

 

2,610

 

 

 

9

 

 

 

1.40

 

Other investments

 

 

9,227

 

 

 

37

 

 

 

1.63

 

 

 

6,080

 

 

 

30

 

 

 

2.00

 

Loans receivable (2)

 

 

1,768,283

 

 

 

29,632

 

 

 

6.80

 

 

 

1,640,108

 

 

 

18,230

 

 

 

4.51

 

Total interest earning assets

 

 

2,667,203

 

 

 

30,142

 

 

 

4.58

 

 

 

1,865,681

 

 

 

18,358

 

 

 

3.99

 

Noninterest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(30,668

)

 

 

 

 

 

 

 

 

 

 

(19,391

)

 

 

 

 

 

 

 

 

Other noninterest earning assets

 

 

92,401

 

 

 

 

 

 

 

 

 

 

 

65,912

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,728,936

 

 

 

 

 

 

 

 

 

 

$

1,912,202

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

$

1,131,984

 

 

$

553

 

 

 

0.20

%

 

$

856,111

 

 

$

660

 

 

 

0.31

%

PPPLF borrowings

 

 

-

 

 

 

-

 

 

 

0.00

 

 

 

170,376

 

 

 

147

 

 

 

0.35

 

FHLB advances and other borrowings

 

 

24,443

 

 

 

69

 

 

 

1.14

 

 

 

24,999

 

 

 

70

 

 

 

1.14

 

Subordinated debt

 

 

24,295

 

 

 

230

 

 

 

3.84

 

 

 

9,994

 

 

 

145

 

 

 

5.88

 

Junior subordinated debentures

 

 

3,586

 

 

 

22

 

 

 

2.49

 

 

 

3,585

 

 

 

21

 

 

 

2.38

 

Total interest bearing liabilities

 

 

1,184,308

 

 

 

874

 

 

 

0.30

 

 

 

1,065,065

 

 

 

1,043

 

 

 

0.40

 

Noninterest bearing deposits

 

 

1,320,144

 

 

 

 

 

 

 

 

 

 

 

690,465

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

16,009

 

 

 

 

 

 

 

 

 

 

 

11,778

 

 

 

 

 

 

 

 

 

Total shareholders' equity

 

 

208,475

 

 

 

 

 

 

 

 

 

 

 

144,894

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

2,728,936

 

 

 

 

 

 

 

 

 

 

$

1,912,202

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

29,268

 

 

 

 

 

 

 

 

 

 

$

17,315

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

4.28

%

 

 

 

 

 

 

 

 

 

 

3.59

%

Net interest margin (3)

 

 

 

 

 

 

 

 

 

 

4.45

%

 

 

 

 

 

 

 

 

 

 

3.76

%

(1)

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

(2)

Includes nonaccrual loans.

(3)

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

(4)

Yields and costs are annualized.

34


 

 

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

 

 

 

 

March 31, 2022

 

 

March 31, 2021

 

 

Average

 

Interest &

 

Yield /

 

 

Average

 

Interest &

 

Yield /

 

 

Balance

 

Dividends

 

Cost (2)

 

 

Balance

 

Dividends

 

Cost (2)

 

Community Bank

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable (1)

$

1,386,130

 

$

17,640

 

 

5.16

%

 

$

1,573,258

 

$

17,818

 

 

4.59

%

Liabilities

 

Interest bearing deposits

 

935,784

 

 

435

 

 

0.19

 

 

 

826,471

 

 

638

 

 

0.31

 

Noninterest bearing deposits

 

718,760

 

 

 

 

 

 

 

 

 

625,876

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCBX

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loans receivable (1)

$

382,153

 

$

11,992

 

 

12.73

%

 

$

66,850

 

$

412

 

 

2.50

%

Liabilities

 

Interest bearing deposits

 

196,200

 

 

118

 

 

0.24

 

 

 

29,640

 

 

22

 

 

0.30

 

Noninterest bearing deposits

 

601,384

 

 

 

 

 

 

 

 

 

64,589

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Includes nonaccrual loans.

 

(2) Yields and costs are annualized.

 

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 $9.3 million increase in loan interest income that is attributed to an increase in loan rates and $2.1 million increase in loan interest income that is attributed to an increase in loan volume.  For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.  

 

 

 

Three Months Ended March 31, 2022

 

 

 

Compared to

 

 

 

Three Months Ended March 31, 2021

 

 

 

Increase (Decrease)

 

 

 

 

 

 

 

Due to

 

 

Total Increase

 

(Dollars in thousands)

 

Volume

 

 

Rate

 

 

(Decrease)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits

 

$

309

 

 

$

23

 

 

$

332

 

Investment securities, available for sale

 

 

31

 

 

 

11

 

 

 

42

 

Investment securities, held to maturity

 

 

(10

)

 

 

11

 

 

 

1

 

Other Investments

 

 

13

 

 

 

(6

)

 

 

7

 

Loans receivable

 

 

2,148

 

 

 

9,254

 

 

 

11,402

 

Total increase in interest income

 

 

2,491

 

 

 

9,293

 

 

 

11,784

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

 

135

 

 

 

(242

)

 

 

(107

)

PPPLF borrowings

 

 

(147

)

 

 

-

 

 

 

(147

)

FHLB advances and other borrowings

 

 

(1

)

 

 

-

 

 

 

(1

)

Subordinated debt

 

 

135

 

 

 

(50

)

 

 

85

 

Junior subordinated debentures

 

 

-

 

 

 

1

 

 

 

1

 

Total increase in interest expense

 

 

122

 

 

 

(291

)

 

 

(169

)

Increase in net interest income

 

$

2,369

 

 

$

9,584

 

 

$

11,953

 

Provision for Loan Losses

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

The provision for loan losses for the three months ended March 31, 2022, was $12.9 million, compared to $357,000 for the three months ended March 31, 2021. The increase in the Company’s provision for loan losses during the quarter ended March 31, 2022, is

35


 

largely related to the provision for CCBX partner loans.  During the quarter ended March 31, 2022, a $12.6 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis.   The factors used in management’s analysis for community bank loan losses indicated that a provision for loan loss of $344,000 was needed for the quarter ended March 31, 2022.  The economic environment is continuously changing and has shown some signs of improvement, with ongoing vaccination of its population and increased re-opening of economic activities, tempered by increased inflation, global unrest, the war in Ukraine and a rise in new COVID-19 variants that have resulted in some economic uncertainty.  The Company is not required to implement the provisions of the Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model. Gross loans totaled $1.96 billion at March 31, 2022 and included $47.5 million in PPP loans, which are 100% guaranteed, and are excluded from the provision for loan losses calculation.  The allowance for loan losses as a percentage of loans was 1.97% at March 31, 2022, compared to 1.11% at March 31, 2021.  Excluding PPP loans, which are 100% guaranteed by the SBA, the adjusted allowance for loan losses as a percentage of loans was approximately 2.02% at March 31, 2022.  A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”  

Net charge-offs for the quarter ended March 31, 2022 totaled $2.8 million, or 0.64% of total average loans, as compared to net charge-offs of $9,000, or <0.01% of total average loans, for the quarter ended March 31, 2021. Net charge-offs were up in 2022 compared to 2021 due to CCBX partner loans.  For the three months ended March 31, 2022, $2.8 million of net charge-offs were for CCBX, and for the three months ended March 31, 2021, $9,000 of net charge-offs were for the community bank.  

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

 

 

Three Months Ended

 

 

 

March 31, 2022

 

March 31, 2021

 

(Dollars in thousands)

 

Community Bank

 

 

CCBX

 

 

Total

 

Community Bank

 

 

CCBX

 

 

Total

 

Gross charge-offs

 

$

4

 

 

$

2,804

 

 

$

2,808

 

$

18

 

 

$

-

 

 

$

18

 

Gross recoveries

 

 

(4

)

 

 

-

 

 

 

(4

)

 

(9

)

 

 

-

 

 

 

(9

)

Net charge-offs

 

$

-

 

 

$

2,804

 

 

$

2,804

 

$

9

 

 

$

-

 

 

$

9

 

Net charge-offs to

  average loans

 

 

0.00

%

 

 

2.98

%

 

 

0.64

%

 

0.00

%

 

 

0.00

%

 

 

0.00

%

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

 

 

Three Months Ended

 

(Dollars in thousands)

 

March 31, 2022

 

March 31, 2021

 

Community bank

 

$

344

 

$

320

 

CCBX

 

 

12,598

 

 

37

 

Total provision expense

 

$

12,942

 

$

357

 

Noninterest Income

Our primary sources of recurring noninterest income are BaaS fees, deposit service charges and fees, loan referral fees, gain on sales of loans and mortgage broker 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.

For the three months ended March 31, 2022, noninterest income totaled $22.0 million, an increase of $19.0 million, or 636.8%, compared to $3.0 million for the three months ended March 31, 2021.

36


 

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

 

 

 

Three Months

 

 

 

 

 

 

 

 

 

Ended March 31,

Increase

 

 

Percent

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

BaaS fees

 

$

20,112

 

 

$

948

 

 

$

19,164

 

 

 

2021.5

%

Deposit service charges and fees

 

 

884

 

 

 

863

 

 

 

21

 

 

 

2.4

 

Loan referral fees

 

 

602

 

 

 

597

 

 

 

5

 

 

 

0.8

 

Gain on sales of loans, net

 

 

-

 

 

 

130

 

 

 

(130

)

 

 

(100.0

)

Mortgage broker fees

 

 

123

 

 

 

262

 

 

 

(139

)

 

 

(53.1

)

Other

 

 

265

 

 

 

184

 

 

 

81

 

 

 

44.0

 

Total noninterest income

 

$

21,986

 

 

$

2,984

 

 

$

19,002

 

 

 

636.8

%

 

BaaS Fees. 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 contract.  In accordance with GAAP, we recognize the reimbursement of non-credit fraud losses on partner’s customer loans and credit enhancements related to the allowance for loan losses and reserve for unfunded commitments provided by the partner as revenue.  Partner 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 loan losses, reserve for unfunded commitments, credit enhancements and fraud recovery see the section titled “CCBX – BaaS Reporting Information.”  

 

BaaS fee income for the three months ended March 31, 2022 was $20.1 million compared to $948,000 for the three months ended March 31, 2021, an increase of $19.2 million, or 2,021.5%.  The increase over the quarter ended March 31, 2021 was primarily due to an increase of $1.3 million increase in total BaaS fee program income, which was the result of increased relationships with broker dealers and digital financial service providers, $13.1 million in BaaS fees – credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, $4.6 million in BaaS fees – fraud recovery, and $189,000 increase in reimbursement of expenses.  

 

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

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

Increase

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

(Decrease)

 

Program income:

 

 

 

 

 

 

 

 

 

 

 

 

Servicing and other BaaS fees

 

$

1,662

 

 

$

730

 

 

$

932

 

Interchange

 

 

432

 

 

 

35

 

 

 

397

 

Total program income

 

 

2,094

 

 

 

765

 

 

 

1,329

 

Reimbursements and indemnifications:

 

 

 

 

 

 

 

 

 

 

 

 

Credit enhancement recovery

 

 

13,075

 

 

 

-

 

 

 

13,075

 

Fraud recovery

 

 

4,571

 

 

 

-

 

 

 

4,571

 

Reimbursement of expenses

 

 

372

 

 

 

183

 

 

 

189

 

Total reimbursements and indemnifications

 

 

18,018

 

 

 

183

 

 

 

17,835

 

Total BaaS fees

 

$

20,112

 

 

$

948

 

 

$

19,164

 

37


 

 

As of March 31, 2022, there were 20 active CCBX relationships, one in friends and family trials, five in onboarding/implementation, two signed letters of intent and a solid pipeline of potential new relationships, compared to ten active CCBX relationships, five in onboarding/implementation and six signed letters of intent at March 31, 2021.  We have gradually become more selective in vetting new CCBX relationships by selecting only the relationships which are well-capitalized, are already established, and have experienced management teams.  As more CCBX customers move to active status, we expect that BaaS service and interchange fees will increase.  

 

The following table illustrates the activity and growth in CCBX relationships for the periods presented and includes the addition of a large, established strategic partner and the exit of a small partner during the quarter ended March 31, 2022.  

 

 

As of

 

March 31, 2022

March 31, 2021

Active

20

10

Friends and family / testing

1

-

Implementation / onboarding

5

5

Signed letters of intent

2

6

      Total CCBX relationships

28

21

 

Deposit Service Charges 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 fee income. Deposit service charges were $884,000 for the three months ended March 31, 2022, an increase of $21,000, or 2.4%, from $863,000 over the same period in the prior year. The increase in deposit service charges and fees was primarily the result of a $38,000 increase in point of sale fees and $10,000 increase in service charges on business accounts partially offset by a decrease of $14,000 in merchant services fee income and $13,000 decrease in non-sufficient funds (“NSF”) and overdraft fees in the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021.   The decrease in NSF and overdraft fees is the result of the Bank reducing NSF and overdraft fees from $35 per item to $15 per item (with a maximum daily fee of $175) in December 2021.  NSF and overdraft fees are not a significant source of revenue for us and therefore this change will not have a material impact on noninterest income.

Loan Referral Fees. We earn loan referral fees when we originate a variable rate loan and the borrower enters into an interest rate swap agreement with a third party to fix the interest rate for an extended period, usually 20 or 25 years. We recognize the loan referral fee for arranging the interest rate swap. By facilitating interest rate swaps to our clients, we are able to provide them with a long-term, fixed interest rate without assuming the interest rate risk. We had $602,000 in income from loan referral fees for the three months ended March 31, 2022, compared to $597,000 for the three months ended March 31, 2021, an increase of $5,000, or 0.8%. 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.

Gain on Sales of Loans, net. Gain on sales of loans occurs 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.  There was no income from the sale of loans for the three months ended March 31, 2022, compared to $130,000 for the three months ended March 31, 2021 during which time more SBA and USDA loans were being originated and sold to the secondary market.  

Mortgage Broker Fees. We earn mortgage broker fees for residential real estate loans that we broker through mortgage lenders. Mortgage broker fees decreased $139,000, or 53.1%, in the three months ended March 31, 2022 to $123,000, compared to $262,000 for the three months ended March 31, 2021 as a result of decreased demand resulting from higher interest rates.

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”), annuity broker fees, and SBA and USDA servicing fees. Other noninterest income increased $81,000, or 44.0%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021 primarily due to an increase in earnings on BOLI and increased credit card fee income.

38


 

Noninterest Expense

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest components of noninterest expense are BaaS expense and salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy, software license, maintenance and subscriptions, data processing, legal and professional fees, FDIC assessment, excise taxes, director and staff expenses, marketing and other expenses.

For the three months ended March 31, 2022, noninterest expense totaled $30.4 million, an increase of $18.1 million, or 146.2%, compared to $12.4 million for the three months ended March 31, 2021.

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

 

 

 

Three Months

 

 

 

 

 

 

 

 

 

Ended March 31,

Increase

 

 

Percent

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

(Decrease)

 

 

Change

 

BaaS expense

 

$

12,861

 

 

$

90

 

 

$

12,771

 

 

 

14190.0

%

Salaries and employee benefits

 

 

11,085

 

 

 

7,686

 

 

 

3,399

 

 

 

44.2

 

Occupancy

 

 

1,136

 

 

 

1,058

 

 

 

78

 

 

 

7.4

 

Software licenses, maintenance and subscriptions

 

 

1,052

 

 

 

484

 

 

 

568

 

 

 

117.4

 

Data processing

 

 

809

 

 

 

697

 

 

 

112

 

 

 

16.1

 

Legal and professional fees

 

 

708

 

 

 

760

 

 

 

(52

)

 

 

(6.8

)

FDIC assessments

 

 

604

 

 

 

195

 

 

 

409

 

 

 

209.7

 

Excise taxes

 

 

349

 

 

 

359

 

 

 

(10

)

 

 

(2.8

)

Director and staff expenses

 

 

344

 

 

 

220

 

 

 

124

 

 

 

56.4

 

Marketing

 

 

99

 

 

 

82

 

 

 

17

 

 

 

20.7

 

Other

 

 

1,368

 

 

 

721

 

 

 

647

 

 

 

89.7

 

Total noninterest expense

 

$

30,415

 

 

$

12,352

 

 

$

18,063

 

 

 

146.2

%

 

BaaS expense.  Our CCBX segment provides BaaS offerings that enable our broker dealer and digital financial service providers to offer their customers banking services.  Included in BaaS expense is partner loan expense and partner fraud expense.  Partner loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. Partner fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts.  For the quarter ended March 31, 2022, BaaS expense was $12.9 million, compared to $90,000 for the quarter ended March 31, 2021, an increase of $12.8 million, or 14,190.0%, as a result of increased partner activity.  For more information on the accounting for BaaS expenses see the section titled  “CCBX – BaaS Reporting Information.”

 

The following table presents, for the periods indicated, the BaaS expenses:

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

Increase

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

(Decrease)

 

BaaS loan expense

 

$

8,290

 

 

$

90

 

 

$

8,200

 

BaaS fraud expense

 

 

4,571

 

 

 

-

 

 

 

4,571

 

Total BaaS expense

 

$

12,861

 

 

$

90

 

 

$

12,771

 

 

Salaries and Employee Benefits. Salaries and employee benefits are one of the largest components of noninterest expense and include payroll expense, incentive compensation costs, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $11.1 million for the three months ended March 31, 2022, an increase of $3.4 million, or 44.2%, compared to $7.7 million for the three months ended March 31, 2021. The increase was 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 March 31, 2022, we had 401 full-time equivalent employees, compared to 277 at March 31, 2021, a 44.8% increase.

Occupancy. Occupancy expenses increased $78,000, or 7.4%, to $1.1 million for the three months ended March 31, 2022, compared to March 31, 2021. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $419,000 and

39


 

$416,000 for the three months ended March 31, 2022 and 2021, respectively.  As we continue to grow, we expect occupancy expenses to increase.  

Software Licenses, Maintenance and Subscriptions. Software licenses, maintenance and subscriptions includes expenses related to obtaining and maintaining software required for our various functions.   Software licenses, maintenance and subscriptions were $1.1 million for the quarter ended March 31, 2022, compared to $484,000 for the prior year period, an increase of $568,000, or 117.4%.  Software that aids in the reporting of CCBX activities and monitoring of transactions that helps to automate and create other efficiencies in reporting contributed to the increase.  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 were $809,000 for the three months ended March 31, 2022, compared to $697,000 for the three months ended March 31, 2021. 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 were $708,000 for the quarter ended March 31, 2022, compared to $760,000 for the quarter ended March 31, 2021.  Legal and professional costs fluctuate with the development of contracts for CCBX customers and are also 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.  FDIC assessments were $604,000 for the three months ended March 31, 2022, compared to $195,000 for the three months ended March 31, 2021, an increase of $409,000, or 209.7%.  As deposits increase, the FDIC assessment expense will generally increase.  

Excise Taxes. Excise taxes were $349,000 for the three months ended March 31, 2022, compared to $359,000 for the three months ended March 31, 2021.  Excise taxes are assessed on Washington state income and are based on gross income of $52.1 million and $21.3 million for the three months ended March 31, 2022 and 2021, respectively.  Gross income is reduced by certain allowed deductions and income attributed to other states is also removed to arrive at the taxable base.  Additionally, we received a credit in the amount of $109,000 as a result of our participation in the Washington State Main Street Program, which reduced our 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.   Director and staff expenses were $344,000 for the three months ended March 31, 2022, compared to $220,000, for the three months ended March 31, 2021, an increase of $124,000, or 56.4%.  Increased expenses related to employee travel, and continuing education contributed to the increase in the quarter ended March 31, 2022 compared to quarter ended March 31, 2021.  

Marketing. Marketing costs were $99,000 for the three months ended March 31, 2022, compared to $82,000 for the three months ended March 31, 2021.  Marketing costs were lower in the three months ended March 31, 2021 as a result of reduced marketing during the COVID-19 pandemic; however, as we continue to expand our CCBX segment, offer new products and services and grow our brand, we expect marketing costs to increase.

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. Other noninterest expense was $1.4 million for the three months ended March 31, 2022, compared to $721,000 for the three months ended March 31, 2021, an increase of $647,000, or 89.7%. The increase was largely due to $362,000 increase in provision for unfunded commitments for the three months ended March 31, 2022, as compared to the same period last year, largely due to increased CCBX unfunded commitments, combined with $72,000 more in operational/mobile losses, $65,000 more in office supply costs and a $50,000 increase in FRB and other bank service charges.

Income Tax Expense

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

40


 

For the three months ended March 31, 2022 income tax expense totaled $1.7 million, compared to $1.6 million for the three months ended March 31, 2021.  The $95,000 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. Our effective tax rates for the three months ended March 31, 2022 and 2021 were 21.1% and 20.7%, respectively.

 

Segment Information

For financial reporting purposes our Company has two reportable segments:  The community bank and CCBX, which has been determined based upon 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 includes the operations of Coastal Community Bank, excluding CCBX BaaS operations.  The community bank segment derives its revenue primarily from interest on loans and investments as well as noninterest income typical for the banking industry.  The CCBX segment includes BaaS operations.  The CCBX segment derives its revenue from BaaS partnerships that allow our broker-dealer and digital financial partners to offer their customers banking services.

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 notes to the consolidated financial statements included elsewhere in this report.

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 community bank is administrative overhead of $5.4 million and $4.4 million for the quarters ended March 31, 2022 and March 31, 2021, respectively.  Both the community bank and the CCBX segment benefit from these administrative services.

Community bank total assets as of March 31, 2022 increased $14.2 million, or 0.62%, to $2.30 billion, compared to $2.28 billion as of December 31, 2021.  Loans receivable net of deferred fees for the community bank segment increased $52.8 million, or 3.8%, to $1.45 billion as of March 31, 2022, compared to $1.40 billion as of December 31, 2021.  The increase in community bank loans receivable is the result of non-PPP gross loan growth of $115.1 million partially offset by $64.3 million in PPP loan forgiveness and paydowns during the quarter ended March 31, 2022.  Total community bank deposits increased $29.5 million, or 1.8%, to $1.68 billion, as of March 31, 2022, compared to $1.65 billion as of December 31, 2021.  The increase in deposits is largely due to initiatives to expand and grow banking relationships with new and existing customers.  

Net interest income for the community bank was $17.4 million for the quarter ended March 31, 2022, an increase of $468,000, or 2.8%, compared to $16.9 million for the quarter ended March 31, 2021.  The increase in net interest income is largely due to increased yield on loans resulting from non-PPP loan growth and a decrease in lower yielding PPP loans.  Provision for loan losses was $344,000 for the quarter ended March 31, 2022, compared to $320,000 for the quarter ended March 31, 2021.  Net charge-offs to average loans for the community bank segment have remained consistently low and was <0.01% for the quarters ended March 31, 2022, and 2021.  Noninterest income for the community bank was $1.8 million, for the quarter ended March 31, 2022, a decrease of $232,000, or 11.4%, compared to $2.0 million for the quarter ended March 31, 2021, due to reduced mortgage broker fees and no gain on sale of loans during the three months ended March 31, 2022.  Noninterest expenses for the community bank increased $2.4 million, or 21.8%, to $13.6 million as of March 31, 2022, compared to $11.1 million as of March 31, 2021.  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 to automate and create efficiencies in reporting, and other expense increases related to growth.

CCBX total assets as of March 31, 2022 increased $184.1 million, or 52.1%, to $537.1 million, compared to $353.0 million as of December 31, 2021.  Total CCBX loans receivable increased $168.7 million, or 48.7%, to $515.4 million as of March 31, 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 $18.1 million as of March 31, 2022, compared to $8.3 million as of December 31, 2021 as a result of loan growth and portfolio mix.  Total CCBX deposits increased $183.2 million, or 25.6%, to $899.5 million, 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 $276.4 million in CCBX deposits that are transferred off the balance sheet as of March 31, 2022.

Net interest income for CCBX was $11.9 million for the quarter ended March 31, 2022, an increase of $11.5 million, or 2,952.4%, compared to $389,000 for the quarter ended March 31, 2021.  The increase in net interest income is due to loan growth from new and existing CCBX relationships.  Provision for loan losses was $12.6 million for the quarter ended March 31, 2022, compared to $37,000 for the quarter ended March 31, 2021, as a result of loan growth from adding new partners.  Noninterest income for CCBX was $20.2 million for the quarter ended March 31, 2022, an increase of $19.2 million, or 2,028.9%, compared to $948,000 for the

41


 

quarter ended March 31, 2021, due to an increase of $1.3 million increase in total BaaS fee program income, which was the result of increased relationships with broker dealers and digital financial service providers, $13.1 million in BaaS fees – credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, $4.6 million in BaaS fees – fraud recovery and $189,000 increase in reimbursement of expenses.  Noninterest expenses for CCBX increased $15.6 million, or 1,290.3%, to $16.9 million as of March 31, 2022, compared to $1.2 million as of March 31, 2021.  The increase in noninterest expense is largely due to an increase in BaaS loan expense, BaaS fraud expense and increased salaries and benefits, for the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021.  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 for each segment for the periods indicated:

 

 

 

March 31, 2021

 

 

December 31, 2021

 

 

 

Bank

 

 

CCBX

 

 

Total

 

 

Bank

 

 

CCBX

 

 

Total

 

 

 

(dollars in thousands)

 

Total assets

 

$

2,296,670

 

 

$

537,080

 

 

$

2,833,750

 

 

$

2,282,514

 

 

$

353,003

 

 

$

2,635,517

 

Total loans receivable

 

$

1,448,820

 

 

$

515,389

 

 

$

1,964,209

 

 

$

1,396,060

 

 

$

346,675

 

 

$

1,742,735

 

Allowance for

    loan losses

 

$

(20,643

)

 

$

(18,127

)

 

$

(38,770

)

 

$

(20,299

)

 

$

(8,333

)

 

$

(28,632

)

Total deposits

 

$

1,677,004

 

 

$

899,466

 

 

$

2,576,470

 

 

$

1,647,529

 

 

$

716,258

 

 

$

2,363,787

 

 

 

 

Three months ended March 31, 2022

 

 

Three months ended March 31, 2021

 

 

 

Bank

 

 

CCBX

 

 

Total

 

 

Bank

 

 

CCBX

 

 

Total

 

 

 

(dollars in thousands)

 

Net interest income

 

$

17,394

 

 

$

11,874

 

 

$

29,268

 

 

$

16,926

 

 

$

389

 

 

$

17,315

 

Provision for loan losses

 

$

344

 

 

$

12,598

 

 

$

12,942

 

 

$

320

 

 

$

37

 

 

$

357

 

Noninterest income

 

$

1,804

 

 

$

20,182

 

 

$

21,986

 

 

$

2,036

 

 

$

948

 

 

$

2,984

 

Noninterest expense

 

$

13,565

 

 

$

16,850

 

 

$

30,415

 

 

$

11,140

 

 

$

1,212

 

 

$

12,352

 

 

42


 

 

Financial Condition

Our total assets increased $198.2 million, or 7.5%, to $2.83 billion at March 31, 2022 from $2.64 billion at December 31, 2021.  The increase is primarily the result of $211.3 million increase in loans receivable during the three months ended March 31, 2022.  As of March 31, 2022 $47.5 million in PPP loans remain on the balance sheet, a decrease of $64.3 million from $111.8 million at December 31, 2021.  

Loan Portfolio

We accepted and processed requests for PPP loans from the beginning of the program in March 2020 for the duration of round 1 and 2 of the PPP, and throughout round 3, which closed for applications on May 31, 2021.  As a preferred SBA lender, we worked diligently with the SBA to offer assistance to small businesses as provided in the CARES Act, as amended by subsequent legislation, which significantly impacted our loan totals.  These SBA loans are discussed further in this section under “Commercial and Industrial Loans”.  

Our primary source of income is derived through interest earned on 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 loan portfolio represents the highest yielding component of our earning assets.

As of March 31, 2022 gross loans receivable totaled $1.97 billion, an increase of $219.5 million, or 12.5%, compared to December 31, 2021. Total loans receivable is gross of $6.8 million in net deferred origination fees, $1.4 million of which is attributed to PPP loans.  The increase includes CCBX loan growth of $168.7 million, or 48.7%, non-PPP community bank loan growth of $115.1 million, or 8.9%, partially offset by a reduction of $64.3 million, or 57.5%,  in PPP loans due to forgiveness and principal paydowns.  Additionally, unused loan commitments increased.   Unused commitments on capital call lines increased $137.5 million to $553.5 million at March 31, 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 76.2% as of March 31, 2022, compared to 73.7% as of December 31, 2021.  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 following table summarizes our loan portfolio by type of loan as of the dates indicated:

 

 

As of March 31, 2022

 

 

As of December 31, 2021

 

(Dollars in thousands)

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPP loans

 

$

47,467

 

 

 

2.4

%

 

$

111,813

 

 

 

6.4

%

Capital call lines

 

 

218,675

 

 

 

11.1

 

 

 

202,882

 

 

 

11.5

 

All other commercial & industrial loans

 

 

128,181

 

 

 

6.5

 

 

 

104,365

 

 

 

6.0

 

Total commercial and industrial loans:

 

 

394,323

 

 

 

20.0

 

 

 

419,060

 

 

 

23.9

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

208,108

 

 

 

10.6

 

 

 

183,594

 

 

 

10.5

 

Residential real estate

 

 

268,716

 

 

 

13.6

 

 

 

204,389

 

 

 

11.7

 

Commercial real estate

 

 

889,483

 

 

 

45.1

 

 

 

835,587

 

 

 

47.7

 

Consumer and other loans

 

 

210,343

 

 

 

10.7

 

 

 

108,871

 

 

 

6.2

 

Gross loans receivable

 

 

1,970,973

 

 

 

100.0

%

 

 

1,751,501

 

 

 

100.0

%

Net deferred origination fees - PPP loans

 

 

(1,365

)

 

 

 

 

 

 

(3,633

)

 

 

 

 

Net deferred origination fees - all other loans

 

 

(5,399

)

 

 

 

 

 

 

(5,133

)

 

 

 

 

Loans receivable

 

$

1,964,209

 

 

 

 

 

 

$

1,742,735

 

 

 

 

 

Loan Yield

 

 

6.80

%

 

 

 

 

 

 

5.92

%

 

 

 

 

 

43


 

 

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

Community Bank

 

As of

 

 

 

March 31, 2022

 

 

December 31, 2021

 

(Dollars in thousands; unaudited)

 

Balance

 

% to Total

 

 

Balance

 

% to Total

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPP loans

 

$

47,467

 

 

3.3

%

 

$

111,813

 

 

8.0

%

   All other commercial &

     industrial loans

 

 

124,160

 

 

8.5

 

 

 

104,365

 

 

7.4

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Construction, land and

     land development loans

 

 

208,108

 

 

14.3

 

 

 

183,594

 

 

13.1

 

   Residential real estate loans

 

 

184,485

 

 

12.7

 

 

 

167,502

 

 

11.9

 

   Commercial real estate loans

 

 

889,483

 

 

61.1

 

 

 

835,587

 

 

59.5

 

Consumer and other loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Other consumer and other loans

 

 

1,959

 

 

0.1

 

 

 

2,034

 

 

0.1

 

      Gross Community Bank

         loans receivable

 

 

1,455,662

 

 

100.0

%

 

 

1,404,895

 

 

100.0

%

Net deferred origination fees

 

 

(6,842

)

 

 

 

 

 

(8,835

)

 

 

 

      Loans receivable

 

$

1,448,820

 

 

 

 

 

$

1,396,060

 

 

 

 

Loan Yield

 

 

5.16

%

 

 

 

 

 

5.89

%

 

 

 

 

CCBX

 

As of

 

 

 

March 31, 2022

 

 

December 31, 2021

 

(Dollars in thousands; unaudited)

 

Balance

 

% to Total

 

 

Balance

 

% to Total

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital call lines

 

$

218,675

 

 

42.5

%

 

$

202,882

 

 

58.6

%

   All other commercial &

     industrial loans

 

 

4,021

 

 

0.8

 

 

 

-

 

 

0.0

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate loans

 

 

84,231

 

 

16.3

 

 

 

36,887

 

 

10.6

 

Consumer and other loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Credit cards

 

 

55,090

 

 

10.7

 

 

 

11,429

 

 

3.3

 

   Other consumer and other loans

 

 

153,294

 

 

29.7

 

 

 

95,408

 

 

27.5

 

      Gross CCBX loans receivable

 

 

515,311

 

 

100.0

%

 

 

346,606

 

 

100.0

%

Net deferred origination costs

 

 

78

 

 

 

 

 

 

69

 

 

 

 

      Loans receivable

 

$

515,389

 

 

 

 

 

$

346,675

 

 

 

 

Loan Yield - CCBX gross (1)

 

 

12.73

%

 

 

 

 

 

6.13

%

 

 

 

(1) CCBX gross yield does not include the impact of BaaS loan expense.  BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans.

 

 

Commercial and Industrial Loans. Commercial and industrial loans decreased $24.7 million, or 5.9%, to $394.3 million as of March 31, 2022, from $419.1 million as of December 31, 2021. The decrease in commercial and industrial loans receivable over December 31, 2021 was due to $64.3 million in forgiveness and repaid PPP loans, partially offset by an increase of $15.8 million increase in capital call lines, and $23.8 million increase in other commercial and industrial loans.  Included in the commercial and industrial loan balance is $218.7 million and $202.9 million in capital call lines resulting from relationships with our CCBX customers as of March 31, 2022, and December 31, 2021, respectively.  Also included in commercial and industrial loans is $47.5 million and $111.8 million in PPP loans as of March 31, 2022, and December 31, 2021, respectively.  

 

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 $35.2 million and $20.2 million in loans to financial institutions and $4.5 million and $4.8 million in unsecured loans, as of March 31, 2022 and December 31, 2021, respectively.

 

The purpose of the PPP was to provide forgivable loans to smaller businesses, sole proprietorships, independent contractors, and self-employed individuals that use the proceeds of the loans for payroll and certain other qualifying expenses. The Small Business

44


 

Administration (“SBA”) manages the PPP. If a loan is fully forgiven, the SBA will repay the lending bank in full. If a loan is partially forgiven or not forgiven at all, a bank must look to the borrower for repayment of unforgiven principal and interest. If the borrower defaults, the loan is guaranteed by the SBA. We accepted and processed applications for the duration of the initial PPP loan program, which closed for new applicants on August 8, 2020.  The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, appropriated additional funding to the PPP and permitted certain PPP borrowers to make “second draw” loans. The American Rescue Plan Act of 2021, enacted on March 11, 2021, expanded the eligibility criteria for both first and second draw PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness. The PPP Extension Act of 2021, enacted on March 25, 2021, extended the PPP through May 31, 2021, at which time the program closed for new applications.

 

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 on May 31, 2021.  Total net deferred fees on these loans were $26.3 million.  As of March 31, 2022, $47.5 million in PPP loans remained with $1.4 million in net deferred fees, which will be recognized in interest income in future periods. Legislation extended the initial payment deferral period on PPP loans originated in 2020, and PPP borrowers with two-year loans can work with their lender to extend their loan to a five-year maturity, which we anticipate could be a popular approach for customers with PPP loans that are not eligible for forgiveness.   There are only $2.9 million of these loans remaining as of March 31, 2022.  PPP loans originated in 2021 are five-year loans, and $44.6 million of these loans remained as of March 31, 2022. Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower's loan forgiveness amount to the lender. If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (generally between eight and 24 weeks).

 

We continue to accept applications from customers for loan forgiveness.  To obtain loan forgiveness, a PPP borrower must submit a forgiveness application.  We expect PPP forgiveness payments to continue through the second quarter of 2022, and that PPP loans will be substantially paid down from the $47.5 million outstanding at March 31, 2022.  

Construction, Land and Land Development Loans. Construction, land and land development loans increased $24.5 million, or 13.4%, to $208.1 million as of March 31, 2022, from $183.6 million as of December 31, 2021.  

Unfunded loan commitments for construction, land and land development loans were $116.8 million at March 31, 2022, compared to $134.3 million at December 31, 2021.  Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2021, the economic environment is continuously changing and is impacted by increased inflation, global unrest, the war in Ukraine and a rise in new COVID-19 variants that have resulted in some economic uncertainty.  

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 March 31, 2022, construction, land and land development loans included $30.2 million in residential construction loans, $105.0 million in commercial construction loans, $38.2 million in undeveloped land loans and $34.7 million in other construction, land and land development loans, compared to $28.9 million in residential construction loans, $82.8 million in commercial construction loans, $37.8 million in undeveloped land loans and $34.1 million in other construction, land and land development loans as of December 31, 2021.

Residential Real Estate Loans.  Our one-to-four family residential real estate loans increased $64.3 million, or 31.5%, to $268.7 million as of March 31, 2022, from $204.4 million as of December 31, 2021.

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 March 31, 2022, the balance of our ARM portfolio loans was $23.7 million, compared to $22.2 million at December 31, 2021.  Our ARM loans typically do not meet the guidelines for sale in the secondary market due to characteristics of the property, the loan terms or exceptions from agency underwriting guidelines, which enables us to earn a higher interest rate. We also purchase residential mortgages originated by 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 March 31, 2022, we held $11.2 million in purchased residential real estate mortgage loans, compared to $11.9 million at December 31, 2021.  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 March 31, 2022, residential real estate loans made to investors and business owners totaled $129.2 million. As of December 31, 2021, residential real estate loans made to investors and business owners totaled $114.0 million.

45


 

As of March 31, 2022, there were $84.2 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 Estate Loans. Commercial real estate loans increased $53.9 million, or 6.5%, to $889.5 million as of March 31, 2022, from $835.6 million as of December 31, 2021.  

 

These increases, which occurred across the various segments of our portfolio, were due to our commitment to grow this 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, 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 March 31, 2022, approximately 29.1% of the commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans represented 45.1% of our loan portfolio at March 31, 2022 and are historically our largest source of revenue. As of March 31, 2022, we held $26.1 million in purchased commercial real estate loans, compared to $35.9 million at December 31, 2021.  Our credit administration team has substantial experience in underwriting, managing, monitoring and working out commercial real estate loans, and remains diligent in communicating and proactively working with borrowers to help mitigate potential credit deterioration.  

 

Consumer and Other. Consumer and other loans increased $101.4 million, or 93.2%, to $210.3 million, from $108.9 million as of December 31, 2021, primarily as a result of CCBX loans from increased activity with our partners.  Our community bank consumer and other loans are comprised of personal lines of credit, automobile, boat, and recreational vehicle loans, and secured term loans.  

Included in consumer loans is $153.3 million in CCBX loans as of March 31, 2022, compared to $95.4 million at December 31, 2021.  CCBX consumer loans include credit cards, consumer lines of credit and other consumer loans.

Industry Exposure and Categories of Loans

We have a diversified loan portfolio, representing a wide variety of industries.  Three of our largest categories of our loans are commercial real estate, commercial and industrial, and construction, land and land development loans.  Together they represent $1.44 billion in outstanding loan balances, or 75.1% of total gross loans outstanding, excluding PPP loans of $47.5 million.  When combined with $1.54 billion in unused commitments the total of these three categories is $2.22 billion, or 64.2% of total outstanding loans and loan commitments, excluding PPP loans.

46


 

Commercial Real Estate Loans. Commercial real estate loans represent the largest segment of our loans, comprising 46.2% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2022.  Unused commitments to extend credit represents an additional $28.9 million, the combined total exposure in commercial real estate loans represents $918.4 million, or 26.6% of our total outstanding loans and loan commitments, excluding PPP loans, as of March 31, 2022.

The following table summarizes our concentration by industry, excluding PPP loans, for our commercial real estate loan portfolio as of March 31, 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

 

Apartments

 

$

166,442

 

 

$

3,372

 

 

$

169,814

 

 

 

4.9

%

 

$

2,280

 

 

 

73

 

Hotel/Motel

 

 

137,907

 

 

 

228

 

 

 

138,135

 

 

 

4.0

 

 

 

5,108

 

 

 

27

 

Office

 

 

93,849

 

 

 

4,401

 

 

 

98,250

 

 

 

2.8

 

 

 

929

 

 

 

101

 

Warehouse

 

 

71,630

 

 

 

102

 

 

 

71,732

 

 

 

2.1

 

 

 

1,462

 

 

 

49

 

Convenience Store

 

 

72,309

 

 

 

7,125

 

 

 

79,434

 

 

 

2.3

 

 

 

1,808

 

 

 

40

 

Mixed use

 

 

74,357

 

 

 

4,411

 

 

 

78,768

 

 

 

2.3

 

 

 

855

 

 

 

87

 

Retail

 

 

78,587

 

 

 

2,435

 

 

 

81,022

 

 

 

2.3

 

 

 

914

 

 

 

86

 

Manufacturing

 

 

38,719

 

 

 

2,007

 

 

 

40,726

 

 

 

1.2

 

 

 

1,106

 

 

 

35

 

Mini Storage

 

 

32,617

 

 

 

400

 

 

 

33,017

 

 

 

1.0

 

 

 

2,330

 

 

 

14

 

Groups < 1.4% of total

 

 

123,066

 

 

 

4,392

 

 

 

127,458

 

 

 

3.7

 

 

 

1,483

 

 

 

83

 

Total

 

$

889,483

 

 

$

28,873

 

 

$

918,356

 

 

 

26.6

%

 

$

1,495

 

 

 

595

 

Commercial and Industrial Loans. Commercial and industrial loans comprise 18.0% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2022.  Unused commitments to extend credit represents an additional $630.1 million, and the combined total exposure in commercial and industrial loans represents $976.9 million, or 28.2% of our total outstanding loans and loan commitments, excluding PPP loans.  Included in commercial and industrial loans is $218.7 million in outstanding capital call lines, with an additional $553.5 million in available loan commitments, which is provided to venture capital firms through one of our CCBX BaaS partners.  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.  

The following table summarizes our concentration by industry, excluding PPP loans, for our commercial and industrial loan portfolio as of March 31, 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

 

$

218,675

 

 

$

553,534

 

 

$

772,209

 

 

 

22.3

%

 

$

1,508

 

 

 

145

 

Construction/Contractor

     Services

 

 

19,401

 

 

 

29,847

 

 

 

49,248

 

 

 

1.4

 

 

 

115

 

 

 

168

 

Financial Institutions

 

 

35,150

 

 

 

-

 

 

 

35,150

 

 

 

1.0

 

 

 

3,906

 

 

 

9

 

Manufacturing

 

 

13,129

 

 

 

5,436

 

 

 

18,565

 

 

 

0.5

 

 

 

208

 

 

 

63

 

Medical / Dental /

     Other Care

 

 

12,928

 

 

 

5,436

 

 

 

18,364

 

 

 

0.5

 

 

 

249

 

 

 

52

 

Family and Social Services

 

 

7,057

 

 

 

2,987

 

 

 

10,044

 

 

 

0.3

 

 

 

504

 

 

 

14

 

Groups < 0.40% of total

 

 

40,516

 

 

 

32,808

 

 

 

73,324

 

 

 

2.2

 

 

 

151

 

 

 

268

 

Total

 

$

346,856

 

 

$

630,048

 

 

$

976,904

 

 

 

28.2

%

 

$

482

 

 

 

719

 

47


 

 

Construction, Land and Land Development Loans. Construction, land and land development loans comprise 10.8% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2022.  Unused commitments to extend credit represents an additional $116.8 million, the combined total exposure in construction, land and land development loans represents $324.9 million, or 9.4% of our total outstanding loans and loan commitments, excluding PPP loans, as of March 31, 2022.

The following table details our concentration, excluding PPP loans, for our construction, land and land development loan portfolio as of March 31, 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

 

Commercial construction

 

$

105,023

 

 

$

80,282

 

 

$

185,305

 

 

 

5.4

%

 

$

4,039

 

 

 

26

 

Residential construction

 

 

30,229

 

 

 

20,530

 

 

 

50,759

 

 

 

1.5

 

 

 

720

 

 

 

42

 

Undeveloped land loans

 

 

38,233

 

 

 

3,440

 

 

 

41,673

 

 

 

1.2

 

 

 

2,941

 

 

 

13

 

Developed land loans

 

 

18,723

 

 

 

7,140

 

 

 

25,863

 

 

 

0.7

 

 

 

535

 

 

 

35

 

Land development

 

 

15,900

 

 

 

5,382

 

 

 

21,282

 

 

 

0.6

 

 

 

757

 

 

 

21

 

Total

 

$

208,108

 

 

$

116,774

 

 

$

324,882

 

 

 

9.4

%

 

$

1,519

 

 

 

137

 

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. Revolving (open-ended loans, such as credit cards) and installment (closed end) consumer loans originated by CCBX partners continue to accrue interest until they are charged-off at 180 days past due for revolving loans (primarily credit cards) and 120 days past due for installment loans (primarily unsecured loans to consumers).  These consumer loans are reported out as substandard loans, 90+ days past due and still accruing.  We are not required to report as nonperforming a loan for which we have allowed the borrower to defer payment on a short term basis because of financial pressure related to COVID-19.  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 $2.3 million in nonperforming assets as of March 31, 2022, compared to $1.7 million as of December 31, 2021.  This includes $2.2 million in CCBX loans more than 90 days past due and still accruing interest as of March 31, 2022, compared to $1.5 million at December 31, 2021.  All of our nonperforming assets were nonperforming loans as of March 31, 2022 and December 31, 2021.  Our nonperforming loans to loans receivable ratio was 0.12% at March 31, 2022, compared to 0.10% at December 31, 2021. The increase in nonperforming assets was due to the addition of $1.4 million in nonaccrual CCBX loans, partially offset by $756,000 lower CCBX loan that are 90 days or more past due and still accruing interest.  Community bank nonaccrual loans decreased $37,000 as a result of principal reductions during the three months ended March 31, 2022.  

Our community bank credit quality remains strong, as demonstrated by the low level of community bank charge-offs and nonperforming loan balance for the quarter ended March 31, 2022.  

48


 

The following table presents information regarding nonperforming assets at the dates indicated:

 

 

 

As of

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

(Dollars in thousands)

 

2022

 

 

2021

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

130

 

 

$

166

 

Real estate loans:

 

 

 

 

 

 

 

 

Residential real estate

 

 

54

 

 

 

55

 

Total nonaccrual loans

 

 

184

 

 

 

221

 

Accruing loans past due 90 days or more:

 

 

 

 

 

 

 

 

Total accruing loans past due 90 days or more

 

 

2,161

 

 

 

1,506

 

Total nonperforming loans

 

 

2,345

 

 

 

1,727

 

Real estate owned

 

 

-

 

 

 

-

 

Repossessed assets

 

 

-

 

 

 

-

 

Troubled debt restructurings, accruing

 

 

-

 

 

 

-

 

Total nonperforming assets

 

$

2,345

 

 

$

1,727

 

Total nonaccrual loans to loans receivable

 

 

0.01

%

 

 

0.01

%

Total nonperforming loans to loans receivable

 

 

0.12

%

 

 

0.10

%

Total nonperforming assets to total assets

 

 

0.08

%

 

 

0.07

%

 

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

 

Community Bank

 

As of

 

 

 

March 31,

 

December 31,

 

(Dollars in thousands, unaudited)

 

2022

 

2021

 

Nonaccrual loans:

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

130

 

$

166

 

Real estate:

 

 

 

 

 

 

 

   Residential real estate

 

 

54

 

 

55

 

         Total nonaccrual loans

 

 

184

 

 

221

 

 

 

 

 

 

 

 

 

Accruing loans past due 90 days or more:

 

 

 

 

 

 

 

         Total accruing loans past due 90 days or more

 

 

-

 

 

-

 

         Total nonperforming loans

 

 

184

 

 

221

 

Other real estate owned

 

 

-

 

 

-

 

Repossessed assets

 

 

-

 

 

-

 

Total nonperforming assets

 

$

184

 

$

221

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CCBX

 

As of

 

 

 

March 31,

 

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

 

 

2,161

 

 

1,506

 

         Total nonperforming loans

 

 

2,161

 

 

1,506

 

Other real estate owned

 

 

-

 

 

-

 

Repossessed assets

 

 

-

 

 

-

 

Total nonperforming assets

 

$

2,161

 

$

1,506

 

49


 

 

Allowance for Loan Losses

We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, and current economic factors.

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

 

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

 

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

 

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

 

for construction, land and land development loans, the perceived market feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan-to-value ratio.

As of March 31, 2022, the allowance for loan losses totaled $38.8 million, or 1.97% of total loans. As of December 31, 2021, the allowance for loan losses totaled $28.6 million, or 1.64% of total loans. The increase in the Company’s provision for loan losses for the quarter ended March 31, 2022 compared to December 31, 2021, is largely related to the provision for CCBX partner loans.  During the quarter ended March 31, 2022, a $12.6 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis.  The factors used in management’s analysis for community bank loan losses indicated that a provision for loan losses of $344,000 was needed for the quarter ended March 31, 2022.  The economic environment is continuously changing and has shown some signs of improvement, with ongoing vaccination of its population and increased re-opening of economic activities, tempered by increased inflation, global unrest, the war in Ukraine and a rise in new COVID-19 variants that have resulted in some economic uncertainty.  CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses.  Many agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses.  In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans.  When the provision for loan losses and provision for unfunded commitments is recorded, a recovery receivable is also recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement).  Incurred losses are recorded in the allowance for loan losses, and as the credit enhancement recoveries are received from the CCBX partner, the recovery receivable is relieved.  Although many agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by absorbing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations then the bank would be exposed to additional loan losses, as a result of this counterparty risk. The Company is not required to implement the provisions 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

 

 

 

March 31, 2022

 

(Dollars in thousands)

 

Community Bank

 

 

CCBX

 

 

Total

 

Loans receivable

 

$

1,448,820

 

 

$

515,389

 

 

$

1,964,209

 

Allowance for loan losses

 

 

(20,643

)

 

 

(18,127

)

 

 

(38,770

)

Allowance for loan losses to

  total loans receivable

 

 

1.42

%

 

 

3.52

%

 

 

1.97

%

Included in total loans is $47.5 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 2.02% and 1.75% at March 31, 2022 and December 31, 2021,

50


 

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

 

 

 

As of or for the Three

 

 

 

Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2022

 

 

2021

 

Allowance at beginning of period

 

$

28,632

 

 

$

19,262

 

Provision for loan losses

 

 

12,942

 

 

 

357

 

Charge-offs:

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

5

 

 

 

14

 

Consumer and other

 

 

2,803

 

 

 

4

 

Total charge-offs

 

 

2,808

 

 

 

18

 

Recoveries:

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

2

 

 

 

5

 

Consumer and other

 

 

2

 

 

 

4

 

Total recoveries

 

 

4

 

 

 

9

 

Net charge-offs

 

 

2,804

 

 

 

9

 

Allowance at end of period

 

$

38,770

 

 

$

19,610

 

Allowance for loan losses to nonaccrual loans

 

 

21070.65

%

 

 

2966.72

%

Allowance to nonperforming loans

 

 

1653.30

%

 

 

2966.72

%

Allowance to loans receivable

 

 

1.97

%

 

 

1.11

%

Net charge-offs to average loans (1)

 

 

0.64

%

 

 

0.00

%

(1) Ratios for the three months ended March 31, 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

 

 

 

March 31, 2022

 

March 31, 2021

 

(Dollars in thousands)

 

Community Bank

 

 

CCBX

 

 

Total

 

Community Bank

 

 

CCBX

 

 

Total

 

Gross charge-offs

 

$

4

 

 

$

2,804

 

 

$

2,808

 

$

18

 

 

$

-

 

 

$

18

 

Gross recoveries

 

 

(4

)

 

 

-

 

 

 

(4

)

 

(9

)

 

 

-

 

 

 

(9

)

Net charge-offs

 

$

-

 

 

$

2,804

 

 

$

2,804

 

$

9

 

 

$

-

 

 

$

9

 

Net charge-offs to

  average loans (1)

 

 

0.00

%

 

 

2.98

%

 

 

0.64

%

 

0.00

%

 

 

0.00

%

 

 

0.00

%

(1) Annualized calculations.

 

 

 

 

 

 

 

 

 

The allowance for loan losses to nonaccrual loans ratio increased substantially as of March 31, 2022, compared to March 31, 2021 as a result of a decrease of $477,000 in nonaccrual community bank loans, combined with an increase of $19.2 million in the allowance for loan losses.  The increase in the allowance for loan losses for the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021, is largely related to the increase in the allowance for CCBX partner loans.  CCBX partner agreements provide for a credit enhancement that covers the $2.8 million in net-charge-offs on CCBX loans for the three months ended March 31, 2022.  At March 31, 2022, there was a balance of $18.1 million in the allowance for loan losses for CCBX partner loans, compared to $102,000 at March 31, 2021.  

Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio.  The expected COVID-19 loan losses have not materialized as originally anticipated in 2020, as evidenced by the low level of charge-offs and nonperforming loans, however if the COVID-19 pandemic worsens or continues indefinitely, preventing businesses and consumers from conducting business in the ordinary course, the 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 loan losses.  

51


 

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 March 31, 2022, 98.8% 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 March 31, 2022, our loan-to-deposit ratio was 76.2% due to our significant growth in 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 March 31, 2022, the amortized cost of our investment securities totaled $136.5 million, an increase of $99.9 million, or 272.8%, compared to $36.6 million as of December 31, 2021. The increase in the securities portfolio was due to the purchase of five Treasury securities for $135.0 million during the three months ended March 31, 2022, to invest excess funds, replace maturing securities and pledge to secure public deposits and for other purposes as required or permitted by law, partially offset by $35.0 million in U.S. Treasury maturities and other principal paydowns.  This investment of excess cash into two-year Treasury securities yields 2.15%, compared to 0.38%, in overnight cash at the Federal Reserve.  The Treasury securities will increase income compared to current overnight  rates and will be used as a pledge to secure public deposits.

Our investment portfolio consists of securities classified as available for sale and, to a lesser amount, held to maturity. The carrying values of our investment securities classified as available for sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity.  As of March 31, 2022, our available for sale portfolio has an unrealized loss of $348,000, compared to an unrealized gain of $5,000 as of December 31, 2021.

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

 

 

 

As of

 

 

As of

 

 

 

March 31, 2022

 

 

December 31, 2021

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

(Dollars in thousands)

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

134,923

 

 

$

134,574

 

 

$

34,999

 

 

$

34,998

 

U.S. Agency collateralized mortgage obligations

 

 

62

 

 

 

62

 

 

 

68

 

 

 

70

 

U.S. Agency residential mortgage-backed

   securities

 

 

2

 

 

 

2

 

 

 

3

 

 

 

3

 

Municipal bonds

 

 

252

 

 

 

253

 

 

 

252

 

 

 

256

 

Total available-for-sale securities

 

 

135,239

 

 

 

134,891

 

 

 

35,322

 

 

 

35,327

 

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency residential mortgage-backed

   securities

 

 

1,286

 

 

 

1,264

 

 

 

1,296

 

 

 

1,348

 

Total held-to-maturity securities

 

 

1,286

 

 

 

1,264

 

 

 

1,296

 

 

 

1,348

 

Total investment securities

 

$

136,525

 

 

$

136,155

 

 

$

36,618

 

 

$

36,675

 

We held a $2.2 million equity interest in a financial technology company as of March 31, 2022 and December 31, 2021, which consists of 1.6 million shares of common stock and 873,853 preferred shares.  We elected to account for the investments under ASC 321 Investments – Equity Securities without Readily Determinable Value.  The investment is held at cost minus impairment if any, plus or minus observable price changes 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, as of March 31, 2022 and December 31, 2021, we held $100,000 in corporate equity securities in another technology company which was recorded in other investments on the balance sheet. The equity interest consists of 9,000 shares of stock.   We also held equity indirectly in two other technology companies for $350,000 with the potential for an additional $150,000 in equity investments.

During the year ended December 31, 2021, we entered agreements for capital commitments of up to $1.1 million in three separate investment funds designed to help accelerate technology adoption at banks.  As of December 31, 2021, we held $160,000 in

52


 

investment funds.  During the three months ended March 31, 2022 we contributed $250,000, bringing our investment funds total to $410,000 for the quarter ended March 31, 2022, and our total capital commitment to $1.3 million.

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 reciprocal deposits. Reciprocal 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 products are similar to the community bank offerings, the CCBX deposit products allow us to offer a broader range of partner specific products, which are often designed to reach specific under-served or under-banked populations served by our CCBX partners.  

Total deposits as of March 31, 2022 were $2.58 billion, an increase of $212.7 million, or 9.0%, compared to $2.36 billion as of December 31, 2021. The increase in deposits was largely in core deposits, which increased $211.4 million to $2.46 billion from $2.25 billion at December 31, 2021.   The $211.4 million increase in core deposits is also largely from growth in the CCBX segment, which accounted for $178.8 million of the increase, combined with the initiatives to expand and grow banking relationships with new customers, which accounted for $32.6 million of the increase.  We define core deposits as all deposits except time deposits and brokered deposits. Additionally, as of March 31, 2022 we have access to $276.4 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 the Bank retains these deposits and its relationship with the customer, these retained deposits could be classified as brokered deposits.

We focus on growing core deposits and our branch managers, treasury service personnel and lenders work together to grow deposits from existing and new customers.

Included in total deposits is $899.5 million in CCBX deposits, an increase of $183.2 million, or 25.6%, compared to $716.3 million as of December 31, 2021.  CCBX customer deposit relationships include deposits with CCBX end customers, operating and non-operating deposit accounts.  The deposits from our CCBX division are predominately classified as noninterest bearing, or NOW and money market accounts, but a portion of such CCBX deposits may be classified as brokered deposits as a result of the relationship agreement.  During the quarter ended March 31, 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  0.25% increase in interest rates by the FOMC.  

Total noninterest bearing deposits as of March 31, 2022 were $838.0 million, a decrease of $517.9 million, or 38.2%, compared to $1.36 billion as of December 31, 2021. The $517.9 million decrease is primarily the result of reclassifying $690.4 million in CCBX noninterest bearing deposits to interest bearing as a result of the recent 0.25% increase in interest rates by the FOMC, partially offset by growth in CCBX noninterest deposits of $167.1 million and growth in community bank noninterest deposits of $5.5 million.  Noninterest bearing deposits represent 32.5% and 57.4% of total deposits for March 31, 2022 and December 31, 2021, respectively.

Total interest bearing account balances, excluding time deposits, as of March 31, 2022 were $1.70 billion, an increase of $733.6 million, or 76.1%, compared to $964.4 million as of December 31, 2021.  The $733.6 million increase is the result of reclassifying $690.4 million in CCBX noninterest bearing deposits to interest bearing as a result of the recent 0.25% increase in interest rates by the FOMC, combined with CCBX growth in interest bearing deposits of $16.1 million and community bank growth in interest bearing deposits of $27.1 million.  Included in interest bearing account balances is $75.1 million in BaaS-brokered deposits, an increase of $4.4 million from December 31, 2021. Also included in interest bearing deposits is $8.8 million in reciprocal deposits.  

Total time deposit balances as of March 31, 2022 were $40.4 million, a decrease of $3.1 million, or 7.1%, from $43.5 million as of December 31, 2021. 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 grow and retain less costly core deposits.

The following table sets forth deposit balances at the dates indicated:

 

 

 

As of

 

 

As of

 

53


 

 

 

March 31, 2022

 

 

December 31, 2021

 

 

 

 

 

 

 

Percent of

 

 

 

 

 

 

Percent of

 

(Dollars in thousands)

 

Amount

 

 

Total

Deposits

 

 

Amount

 

 

Total

Deposits

 

Demand, noninterest bearing

 

$

838,044

 

 

 

32.5

%

 

$

1,355,908

 

 

 

57.4

%

NOW and money market

 

 

1,516,546

 

 

 

58.9

 

 

 

789,709

 

 

 

33.4

 

Savings

 

 

106,364

 

 

 

4.1

 

 

 

103,956

 

 

 

4.4

 

Total core deposits

 

 

2,460,954

 

 

 

95.5

 

 

 

2,249,573

 

 

 

95.2

 

BaaS-brokered deposits

 

 

75,145

 

 

 

2.9

 

 

 

70,757

 

 

 

3.0

 

Time deposits less than $100,000

 

 

14,856

 

 

 

0.6

 

 

 

14,961

 

 

 

0.6

 

Time deposits $100,000 and over

 

 

25,515

 

 

 

1.0

 

 

 

28,496

 

 

 

1.2

 

Total

 

$

2,576,470

 

 

 

100.0

%

 

$

2,363,787

 

 

 

100.0

%

Cost of Deposits

 

 

0.09

%

 

 

 

 

 

 

0.17

%

 

 

 

 

 

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

Community Bank

 

As of

 

 

 

March 31, 2022

 

 

December 31, 2021

 

(Dollars in thousands, unaudited)

 

Balance

 

% to Total

 

 

Balance

 

% to Total

 

Demand, noninterest bearing

 

$

724,723

 

 

43.2

%

 

$

719,233

 

 

43.7

%

NOW and money market

 

 

805,858

 

 

48.1

 

 

 

780,884

 

 

47.4

 

Savings

 

 

106,050

 

 

6.3

 

 

 

103,954

 

 

6.3

 

      Total core deposits

 

 

1,636,631

 

 

97.6

 

 

 

1,604,071

 

 

97.4

 

Brokered deposits

 

 

2

 

 

0.0

 

 

 

1

 

 

0.0

 

Time deposits less than $100,000

 

 

14,856

 

 

0.9

 

 

 

14,961

 

 

0.9

 

Time deposits $100,000 and over

 

 

25,515

 

 

1.5

 

 

 

28,496

 

 

1.7

 

      Total Community Bank deposits

 

$

1,677,004

 

 

100.0

%

 

$

1,647,529

 

 

100.0

%

Cost of Deposits

 

 

0.11

%

 

 

 

 

 

0.12

%

 

 

 

 

CCBX

 

As of

 

 

 

March 31, 2022

 

 

December 31, 2021

 

(Dollars in thousands, unaudited)

 

Balance

 

% to Total

 

 

Balance

 

% to Total

 

Demand, noninterest bearing

 

$

113,321

 

 

12.6

%

 

$

636,675

 

 

88.9

%

NOW and money market

 

 

710,688

 

 

79.0

 

 

 

8,825

 

 

1.2

 

Savings

 

 

314

 

 

0.0

 

 

 

2

 

 

0.0

 

      Total core deposits

 

 

824,323

 

 

91.6

 

 

 

645,502

 

 

90.1

 

BaaS-brokered deposits

 

 

75,143

 

 

8.4

 

 

 

70,756

 

 

9.9

 

      Total CCBX deposits

 

$

899,466

 

 

100.0

%

 

$

716,258

 

 

100.0

%

Cost of Deposits

 

 

0.06

%

 

 

 

 

 

0.02

%

 

 

 

 

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

 

(Dollars in thousands)

 

As of

March 31,

2022

 

 

As of

December 31,

2021

 

Maturity Period:

 

 

 

 

 

 

 

 

Three months or less

 

$

7,869

 

 

$

8,106

 

Over three through six months

 

 

6,131

 

 

 

6,520

 

Over six through twelve months

 

 

7,161

 

 

 

8,925

 

Over twelve months

 

 

4,354

 

 

 

4,945

 

Total

 

$

25,515

 

 

$

28,496

 

Weighted average maturity (in years)

 

 

0.69

 

 

 

0.73

 

 

Average deposits for the three months ended March 31, 2022 were $2.45 billion, an increase of 58.6% compared to $1.55 billion for the three months ended March 31, 2021. The increase in average deposits for was primarily due to an increase in core deposits, both in noninterest bearing deposits and in low interest rate bearing deposits.  Included in this increase is growth in CCBX and community

54


 

bank deposits.  We expect deposits to grow 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.

The average rate paid on total deposits was 0.09% for the three months ended March 31, 2022, compared to 0.17% for the three months ended March 31, 2021.  The average rate paid on NOW and money market accounts decreased 16 basis points for the three months ended March 31, 2022.  The average rate paid on time deposits of less than $100,000 decreased 42 basis points for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.  The average rate paid on time deposits greater than $100,000 increased 1.41%, due to the recognition of additional interest expense of $130,000 during the quarter ended March 31, 2022 to correct interest on CDs from a previous period.  The average rate paid on savings and BaaS brokered deposits was fairly flat for the three months ended March 31, 2022, compared to the three months ended March 31, 2021.  The overall lower average rate paid on interest bearing  accounts in the three months ended March 31, 2022 is due to the current low interest rate environment resulting from the decreased Fed Funds rate.  The impact of the rate 0.25% interest rate increase by the FOMC in mid-March 2022 will not be fully realized in our interest expense until second quarter 2022.  Increased Fed Funds rates along with competition are expected to continue to impact future cost of deposits and our pricing strategies.

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

 

 

 

For the Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

(Dollars in thousands)

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

Demand, noninterest bearing

 

$

1,320,144

 

 

 

0.00

%

 

$

690,465

 

 

 

0.00

%

NOW and money market

 

 

917,075

 

 

 

0.14

 

 

 

690,268

 

 

 

0.30

 

Savings

 

 

104,209

 

 

 

0.03

 

 

 

86,310

 

 

 

0.03

 

BaaS-brokered deposits

 

 

68,819

 

 

 

0.35

 

 

 

22,817

 

 

 

0.36

 

Time deposits less than $100,000

 

 

14,844

 

 

 

0.33

 

 

 

18,876

 

 

 

0.75

 

Time deposits $100,000 and over

 

 

27,037

 

 

 

2.31

 

 

 

37,840

 

 

 

0.90

 

Total deposits

 

$

2,452,128

 

 

 

0.09

%

 

$

1,546,576

 

 

 

0.17

%

 

The ratio of average noninterest bearing deposits to average total deposits for the three months ended March 31, 2022 was 53.8% and compared to 44.6%, for the three months ended March 31, 2021.

 

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 March 31, 2022, deposits totaled $2.58 billion, of which total estimated uninsured deposits were $850.1 million. At March 31, 2021, deposits totaled $1.67 billion, of which total estimated uninsured deposits were $724.9 million.  

 

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

 

(Dollars in thousands)

 

As of

March 31, 2022

 

Maturity Period:

 

 

 

 

Three months or less

 

$

1,202

 

Over three through six months

 

 

149

 

Over six through twelve months

 

 

1,298

 

Over twelve months

 

 

1,273

 

Total

 

$

3,922

 

 

55


 

 

Borrowings

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

Federal Reserve Bank Line of Credit. The Federal Reserve allows us to borrow against our line of credit through a borrower in custody agreement utilizing the discount window, which is collateralized by certain loans. As of March 31, 2022 and March 31, 2021, total borrowing capacity of $23.6 million  and $20.8 million, respectively, was available under this arrangement.  As of March 31, 2022 and 2021, Federal Reserve advances totaled zero.

Paycheck Protection Program Liquidity Facility. To bolster the effectiveness of the SBA’s PPP loan program, the Federal Reserve supplied 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 March 31, 2022, no PPPLF advances were outstanding, compared to $158.5 million as of March 31, 2021.  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.

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

 

 

 

As of and For the Three

 

 

 

Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2022

 

 

2021

 

Maximum amount outstanding at any month-end

   during period:

 

 

 

 

 

 

 

 

PPPLF Advances

 

$

-

 

 

$

185,894

 

Average outstanding balance during period:

 

 

 

 

 

 

 

 

PPPLF Advances

 

$

-

 

 

$

170,376

 

Weighted average interest rate during period:

 

 

 

 

 

 

 

 

PPPLF Advances

 

 

0.00

%

 

 

0.35

%

Balance outstanding at end of period:

 

 

 

 

 

 

 

 

PPPLF Advances

 

$

-

 

 

$

158,519

 

Weighted average interest rate at end of period:

 

 

 

 

 

 

 

 

PPPLF Advances

 

N/A

 

 

 

0.35

%

 

Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of March 31, 2022 and March 31, 2021, we had borrowing capacity of $98.3 million and $101.0 million, respectively, with the FHLB. During the quarter ended March 31, 2022, we repaid a total of $25.0 million in FHLB term advances.  This included a $10.0 million advance that matures in March of 2023 and $15.0 million advance that matures 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 term advances and save the unnecessary interest expense.

Although there are no immediate plans to borrow funds, borrowing capacity of $98.3 million was available at FHLB under this arrangement as of March 31, 2022.

 

56


 

 

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

 

 

 

As of and For the Three

 

 

 

Months Ended

 

 

 

March 31,

 

(Dollars in thousands)

 

2022

 

 

2021

 

Maximum amount outstanding at any month-end

   during period:

 

 

 

 

 

 

 

 

FHLB Advances

 

$

24,999

 

 

$

24,999

 

Average outstanding balance during period:

 

 

 

 

 

 

 

 

FHLB Advances

 

$

24,443

 

 

$

24,999

 

Weighted average interest rate during period:

 

 

 

 

 

 

 

 

FHLB Advances

 

 

1.13

%

 

 

1.13

%

Balance outstanding at end of period:

 

 

 

 

 

 

 

 

FHLB Advances

 

$

-

 

 

$

24,999

 

Weighted average interest rate at end of period:

 

 

 

 

 

 

 

 

FHLB Advances

 

N/A

 

 

 

1.13

%

 

Junior Subordinated Debentures. In 2004, we issued $3.6 million in junior subordinated debentures to Coastal (WA) Statutory Trust I (the “Trust”), of which we own all of the outstanding common securities. The Trust used the proceeds from the issuance of its underlying common securities and preferred securities to purchase the debentures issued by the Company. These debentures are the Trust’s only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. The debentures bear interest at a rate per annum equal to the 3-month LIBOR plus 2.10%. The effective rate as of March 31, 2022 and December 31, 2021 was 2.93% and 2.30%, respectively. We generally have the right to defer payment of interest on the debentures at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the debentures. During any such extension period, distributions on the Trust’s preferred securities will also be deferred, and our ability to pay dividends on our common stock will be restricted. The Trust’s preferred securities are mandatorily redeemable upon maturity of the debentures, or upon earlier redemption as provided in the indenture, subject to Federal Reserve approval. If the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. We unconditionally guarantee payment of accrued and unpaid distributions required to be paid on the Trust securities subject to certain exceptions, the redemption price with respect to any Trust securities called for redemption and amounts due if the Trust is liquidated or terminated.

Subordinated Debt. 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.

 

Liquidity and Capital Resources

Liquidity Management

Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds and the ability to convert assets into cash. Changes in economic conditions or exposure to credit, market, and operational, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity management.  Deposits obtained through our CCBX segment are a significant source of liquidity for us.  If a relationship with a large CCBX partner terminates, the exit of those deposits could have an adverse impact on liquidity. Partner program agreements govern the relationship and are valid for a given period of time.  Prior to exiting, the partner would need to provide us adequate notice as stipulated in the agreement that they were not going to renew the program agreement and intend to move the deposits.  The movement to an alternate BaaS provider is cumbersome and would be over a period of time, which would allow us the opportunity to put alternate liquidity in place; those options are more fully discussed below.  As of March 31, 2022, we have two partners with deposits that are in excess of 10% of total deposits and represent 26% of total deposits.

57


 

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 liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash on hand, cash at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and 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 deposits, a one-way buy through an ICS account, and the issuance of debt or equity securities. We also participated in 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 balance as of March 31, 2022.  We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary and are closely monitoring liquidity in this uncertain economic environment.

The Company is a corporation separate and apart from our Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its subordinated note and junior subordinated debentures. The Company’s main source of cash flow has been through equity and debt offerings. The Company has consistently retained a portion of the funds from equity and debt offerings so that is has sufficient funds for its operating and debt costs for the next few years. The Company currently holds $11.2 million in cash, and uses approximately $1.3 million for debt servicing and operating purposes each year, leaving about $7.1 million for other purposes after deducting $2.6 million to cover operating purposes for the next two years and $1.5 million for existing equity fund commitments.  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 March 31, 2022, has access to $276.4 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 limitations will not impact the ability of the Bank to pay dividends to the Company to meet ongoing operating needs. For contingency purposes, the Company maintains a minimum level of cash to fund one year’s projected operating cash flow needs and the Bank established a minimum liquidity ratio of 5% of assets. Both of these minimum liquidity levels are on-balance sheet sources. Per policy and the Bank’s liquidity contingency plan, in event of a liquidity emergency the Bank can utilize wholesale funds in an amount up to 30% of assets. Since the Bank uses only a small portion of its borrowing or wholesale funding capacity, the Bank has access to funds if needed in a liquidity emergency.  

Capital Adequacy

Capital management consists of providing equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital levels relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank level. The Company will become subject to regulatory capital requirements if its consolidated assets exceed $3.0 billion or it otherwise becomes ineligible to operate under the Federal Reserve’s Small Bank Holding Company Policy Statement. Currently, 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.  

 

58


 

 

As of March 31, 2022, and December 31, 2021, the Bank was in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the Federal Reserve’s prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us.  In addition, the Company maintains an effective registration statement on Form S-3 with the Securities and Exchange Commission that would allow the Company to raise additional capital in an amount up to $115.5 million. The Company raised $34.5 million in December 2021 and currently has no immediate plans for raising additional capital under the registration statement.

The following table presents the Company’s and the Bank’s regulatory capital ratios as of the dates presented, as well as the regulatory capital ratios that are required by Federal Reserve regulations to maintain “well-capitalized” status and the regulatory capital ratios that would be required for the Company if we did not operate under the Small Bank Holding Company Policy Statement:

 

 

 

Actual

 

 

Minimum Required

for Capital

Adequacy Purposes (1)

 

 

Required to be Well

Capitalized

Under the Prompt

Corrective Action

Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

 

(dollars in thousands)

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage Capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

211,580

 

 

 

7.75

%

 

$

109,153

 

 

 

4.00

%

 

$

136,442

 

 

 

5.00

%

Bank Only

 

 

220,829

 

 

 

8.10

%

 

 

109,020

 

 

 

4.00

%

 

 

136,275

 

 

 

5.00

%

Common Equity Tier I Capital (to

   risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

208,080

 

 

 

9.71

%

 

 

96,411

 

 

 

4.50

%

 

 

139,261

 

 

 

6.50

%

Bank Only

 

 

220,829

 

 

 

10.33

%

 

 

96,164

 

 

 

4.50

%

 

 

138,903

 

 

 

6.50

%

Tier I Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

211,580

 

 

 

9.88

%

 

 

128,548

 

 

 

6.00

%

 

 

171,398

 

 

 

8.00

%

Bank Only

 

 

220,829

 

 

 

10.33

%

 

 

128,218

 

 

 

6.00

%

 

 

170,957

 

 

 

8.00

%

Total Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

263,530

 

 

 

12.30

%

 

 

171,398

 

 

 

8.00

%

 

 

214,247

 

 

 

10.00

%

Bank Only

 

 

247,712

 

 

 

11.59

%

 

 

170,957

 

 

 

8.00

%

 

 

213,697

 

 

 

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.

 

 

59


 

 

Material Cash Requirements and Capital Resources

The following table provides the material cash requirements from known contractual and other obligations as of as of March 31, 2022:

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

Less than

 

 

Over

 

 

 

 

 

(Dollars in thousands)

 

Total

 

 

1 Year

 

 

1 year

 

 

Other (1)

 

Cash requirements

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Time Deposits

 

$

40,371

 

 

$

31,225

 

 

$

9,146

 

 

$

-

 

Subordinated note

 

 

25,000

 

 

 

-

 

 

 

25,000

 

 

 

-

 

Junior subordinated debentures

 

 

3,609

 

 

 

-

 

 

 

3,609

 

 

 

-

 

Deferred compensation plans

 

 

1,067

 

 

 

175

 

 

 

892

 

 

 

-

 

Operating leases

 

 

7,021

 

 

 

962

 

 

 

6,059

 

 

 

-

 

Non-maturity deposits

 

 

2,536,099

 

 

 

-

 

 

 

-

 

 

 

2,536,099

 

Equity investment commitment

 

 

1,490

 

 

 

1,490

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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

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

As of March 31, 2022 we held $218.7 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 March 31, 2022 we had $1.54 billion in commitments to extend credit, compared to $909.6 million as of December 31, 2021.  The $625.5 million increase is largely attributed to an increase of $360.4 million in consumer and other loan commitments, related to CCBX consumer loans, $137.6 million increase in commercial and industrial capital call line commitments, and $133.7 million increase in residential real estate commitments, related to CCBX loans.

60


 

 

 

 

As of

 

 

As of

 

 

 

March 31,

 

 

December 31,

 

(Dollars in thousands)

 

2022

 

 

2021

 

Commitments to extend credit:

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

76,513

 

 

$

70,848

 

Commercial and industrial loans - capital call lines

 

 

553,534

 

 

 

415,956

 

Construction – commercial real estate loans

 

 

93,804

 

 

 

90,946

 

Construction – residential real estate loans

 

 

22,970

 

 

 

43,339

 

Residential real estate loans

 

 

235,461

 

 

 

101,715

 

Commercial real estate loans

 

 

28,873

 

 

 

23,248

 

Consumer and other loans

 

 

523,933

 

 

 

163,510

 

Total commitments to extend credit

 

$

1,535,088

 

 

$

909,562

 

Standby letters of credit

 

$

3,040

 

 

$

2,729

 

Equity investment commitment

 

$

1,490

 

 

$

1,090

 

 

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer.  As of March 31, 2022, $522.1 million in commitments to extend credit are unconditionally cancelable, compared to $162.3 million at December 31, 2021.

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

61


 

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.

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 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 Measures” section that follows.

 

 

 

 

 

 

Three Months Ended

 

(unaudited)

 

March 31,

2022

 

December 31,

2021

 

September 30,

2021

 

June 30,

2021

 

March 31,

2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (1)

 

 

0.93

%

 

1.14

%

 

1.21

%

 

1.36

%

 

1.28

%

Return on average equity (1)

 

 

12.12

%

 

16.80

%

 

16.77

%

 

18.60

%

 

16.84

%

Yield on earnings assets (1)

 

 

4.58

%

 

4.09

%

 

3.63

%

 

3.89

%

 

3.99

%

Yield on loans receivable (1)

 

 

6.80

%

 

5.92

%

 

4.57

%

 

4.44

%

 

4.51

%

Yield on loans receivable,

     excluding PPP loans (1)(2)

 

 

6.52

%

 

4.98

%

 

4.53

%

 

4.65

%

 

4.78

%

Yield on loans receivable,

     excluding earned

     fees (1)(2)

 

 

6.17

%

 

4.37

%

 

3.74

%

 

3.46

%

 

3.53

%

Yield on loans receivable,

     excluding earned fees on

     all loans and interest on PPP

     loans, as adjusted (1)(2)

 

 

6.41

%

 

4.78

%

 

4.36

%

 

4.42

%

 

4.52

%

Cost of funds (1)

 

 

0.14

%

 

0.14

%

 

0.16

%

 

0.20

%

 

0.24

%

Cost of deposits (1)

 

 

0.09

%

 

0.09

%

 

0.10

%

 

0.14

%

 

0.17

%

Net interest margin (1)

 

 

4.45

%

 

3.95

%

 

3.48

%

 

3.70

%

 

3.76

%

Noninterest expense to average

     assets (1)

 

 

4.52

%

 

3.29

%

 

2.91

%

 

2.65

%

 

2.62

%

Efficiency ratio

 

 

59.34

%

 

54.08

%

 

64.68

%

 

58.69

%

 

60.85

%

Loans receivable to deposits

 

 

76.24

%

 

73.73

%

 

76.71

%

 

92.03

%

 

105.68

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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.

 

 

CCBX – BaaS Reporting Information

 

During the quarter ended March 31, 2022, $13.1 million was recorded in BaaS fees - credit enhancements related to the provision for loan losses and reserve for unfunded commitments for CCBX partner loans.  Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by absorbing incurred losses.  In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans.  When the provision for loan losses and provision for unfunded commitments is recorded, a recovery receivable is also recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement) in recognition of the CCBX partner legal commitment to cover losses.  Incurred losses are recorded in the allowance for loan losses, and as the credit enhancement recoveries are received from the CCBX partner, the recovery receivable is relieved.  Agreements with our CCBX partners also provide protection to the Bank from fraud by absorbing 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.  Many CCBX partners also pledge a cash reserve 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 many agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank

62


 

from credit and fraud losses by absorbing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations beyond their cash reserve account then the bank would be exposed to additional loan losses, as a result of this counterparty risk.  

 

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 enhancement and servicing CCBX loans.  To determine net revenue (Net BaaS loan  income) earned from CCBX loan relationships, one 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.

 

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

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

Increase

 

(Dollars in thousands)

 

2021

 

 

2021

 

 

(Decrease)

 

BaaS loan interest income

 

$

11,992

 

 

$

412

 

 

$

11,580

 

Less:  BaaS loan expense

 

 

8,290

 

 

 

90

 

 

 

8,200

 

Net BaaS loan income

 

 

3,702

 

 

 

322

 

 

 

3,380

 

Net BaaS loan income divided by average BaaS loans

 

 

3.93

%

 

 

1.95

%

 

 

1.98

%

 

The addition of new CCBX partners has resulted in increases in direct fees, expenses and interest for the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021.  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

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

Increase

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

(Decrease)

 

Loan interest income

 

$

11,992

 

 

$

412

 

 

$

11,580

 

Total BaaS interest income

 

$

11,992

 

 

$

412

 

 

$

11,580

 

 

Interest expense

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

Increase

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

(Decrease)

 

BaaS interest expense

 

$

118

 

 

$

22

 

 

$

96

 

Total BaaS interest expense

 

$

118

 

 

$

22

 

 

$

96

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

Increase

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

(Decrease)

 

Program income:

 

 

 

 

 

 

 

 

 

 

 

 

Servicing and other BaaS fees

 

$

1,169

 

 

$

584

 

 

$

585

 

Transaction fees

 

 

493

 

 

 

146

 

 

 

347

 

Interchange fees

 

 

432

 

 

 

35

 

 

 

397

 

Total program income

 

 

2,094

 

 

 

765

 

 

 

1,329

 

Reimbursements and indemnifications:

 

 

 

 

 

 

 

 

 

 

 

 

Credit enhancement recovery

 

 

13,075

 

 

 

-

 

 

 

13,075

 

Fraud recovery

 

 

4,571

 

 

 

-

 

 

 

4,571

 

Reimbursement of expenses

 

 

372

 

 

 

183

 

 

 

189

 

Total reimbursements and indemnifications

 

 

18,018

 

 

 

183

 

 

 

17,835

 

Total BaaS fees

 

$

20,112

 

 

$

948

 

 

$

19,164

 

63


 

 

 

 

 

Three Months Ended

 

 

 

 

 

 

 

March 31,

 

 

March 31,

 

 

Increase

 

(Dollars in thousands)

 

2022

 

 

2021

 

 

(Decrease)

 

BaaS loan expense

 

$

8,290

 

 

$

90

 

 

$

8,200

 

BaaS fraud expense

 

 

4,571

 

 

 

-

 

 

 

4,571

 

Total BaaS expense

 

$

12,861

 

 

$

90

 

 

$

12,771

 

 

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

 

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

 

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

 

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

 

Reconciliations of the GAAP and non-GAAP measures are presented below.  

 

 

 

As of and for the Three Months Ended

 

(Dollars in thousands, unaudited)

 

March 31,

2022

 

March 31,

2021

 

Net BaaS loan income divided by average CCBX loans:

 

Total average CCBX loans

     receivable

 

$

382,153

 

$

66,850

 

Interest and earned fee

     income on CCBX loans

 

 

11,992

 

 

412

 

Less: loan expense on CCBX loans

 

 

(8,290

)

 

(90

)

Net BaaS loan income

 

$

3,702

 

$

322

 

Net BaaS loan income divided by average

     CCBX loans

 

 

3.93

%

 

1.95

%

     CCBX gross loan yield

 

 

12.73

%

 

2.50

%

 

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

 

64


 

 

Reconciliations of the GAAP and non-GAAP measures are presented below.  

 

 

 

As of and for the Three Months Ended

 

(Dollars in thousands, unaudited)

 

March 31,

2022

 

December 31,

2021

 

September 30,

2021

 

June 30,

2021

 

March 31,

2021

 

Yield on loans receivable, excluding earned fees :

 

Total average loans

     receivable

 

$

1,768,283

 

$

1,683,310

 

$

1,681,069

 

$

1,750,825

 

$

1,640,108

 

Interest and earned fee

     income on loans

 

 

29,632

 

 

25,134

 

 

19,383

 

 

19,365

 

 

18,230

 

Less: earned fee income on

     all loans

 

 

(2,729

)

 

(6,572

)

 

(3,533

)

 

(4,274

)

 

(3,974

)

Adjusted interest income

     on loans

 

$

26,903

 

$

18,562

 

$

15,850

 

$

15,091

 

$

14,256

 

Yield on loans receivable

 

 

6.80

%

 

5.92

%

 

4.57

%

 

4.44

%

 

4.51

%

Yield on loans

     receivable, excluding

     earned fees:

 

 

6.17

%

 

4.37

%

 

3.74

%

 

3.46

%

 

3.53

%

Yield on loans

     receivable, excluding

     earned fees on all loans

     and interest on PPP

     loans (1):

 

 

6.41

%

 

4.78

%

 

4.36

%

 

4.42

%

 

4.52

%

 

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.

 

65


 

 

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

 

 

 

 

 

(Dollars in thousands, unaudited)

 

March 31,

2022

 

December 31,

2021

 

March 31,

2021

 

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

 

Total loans, net of deferred fees

 

$

1,964,209

 

$

1,742,735

 

$

1,766,723

 

Less: PPP loans

 

 

(47,467

)

 

(111,813

)

 

(543,827

)

Less: net deferred fees on PPP loans

 

 

1,365

 

 

3,633

 

 

14,279

 

Adjusted loans, net of deferred fees

 

$

1,918,107

 

$

1,634,555

 

$

1,237,175

 

Allowance for loan losses

 

$

(38,770

)

$

(28,632

)

$

(19,610

)

Allowance for loan losses to

     loans receivable

 

 

1.97

%

 

1.64

%

 

1.11

%

Adjusted allowance for loan losses

     to loans receivable, excluding

     PPP loans

 

 

2.02

%

 

1.75

%

 

1.59

%

Yield on loans receivable, excluding PPP loans:

 

 

 

 

Total average loans receivable

 

$

1,768,283

 

$

1,683,310

 

$

1,640,108

 

Less: average PPP loans

 

 

(79,828

)

 

(186,267

)

 

(475,941

)

Plus: average deferred fees on

     PPP loans

 

 

2,453

 

 

6,370

 

 

10,788

 

Adjusted total average loans

     receivable

 

$

1,690,908

 

$

1,503,413

 

$

1,174,955

 

Interest income on loans

 

$

29,632

 

$

25,134

 

$

18,230

 

Less: interest and deferred fee

     income recognized on

     PPP loans

 

 

(2,460

)

 

(6,245

)

 

(4,378

)

Adjusted interest income on loans

 

$

27,172

 

$

18,889

 

$

13,852

 

Yield on loans receivable

 

 

6.80

%

 

5.92

%

 

4.51

%

Yield on loans receivable,

     excluding PPP loans:

 

 

6.52

%

 

4.98

%

 

4.78

%

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

 

Total average loans receivable

 

$

1,768,283

 

$

1,683,310

 

$

1,640,108

 

Less: average PPP loans

 

 

(79,828

)

 

(186,267

)

 

(475,941

)

Plus: average deferred fees on

     PPP loans

 

 

2,453

 

 

6,370

 

 

10,788

 

Adjusted total average loans

     receivable

 

$

1,690,908

 

$

1,503,413

 

$

1,174,955

 

Interest and earned fee income

     on loans

 

$

29,632

 

$

25,134

 

$

18,230

 

Less: earned fee income on all loans

 

 

(2,729

)

 

(6,572

)

 

(3,974

)

Less: interest income on PPP loans

 

 

(192

)

 

(461

)

 

(1,169

)

Adjusted interest income on loans

 

$

26,711

 

$

18,102

 

$

13,086

 

Yield on loans receivable

 

 

6.80

%

 

5.92

%

 

4.51

%

Yield on loans receivable,

     excluding earned fees on

     all loans (1):

 

 

6.17

%

 

4.37

%

 

3.53

%

Yield on loans receivable,

     excluding earned fees on

     all loans and interest on

     PPP loans:

 

 

6.41

%

 

4.78

%

 

4.52

%

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

 

66


 

 

 

(Dollars in thousands, unaudited)

 

March 31,

2022

 

December 31,

2021

 

Adjusted Tier 1 leverage capital ratio, excluding PPP loans:

 

Company:

 

 

 

 

 

 

 

Tier 1 capital

 

$

211,580

 

$

204,585

 

Average assets for the leverage capital ratio

 

$

2,728,833

 

$

2,536,512

 

Less:  Average PPP loans

 

 

(79,828

)

 

(186,267

)

Plus:  Average PPPLF borrowings

 

 

-

 

 

-

 

Adjusted average assets for the leverage capital ratio

 

$

2,649,005

 

$

2,350,245

 

Tier 1 leverage capital ratio

 

 

7.75

%

 

8.07

%

Adjusted Tier 1 leverage capital ratio, excluding PPP loans

 

 

7.99

%

 

8.70

%

Bank:

 

 

 

 

 

 

 

Tier 1 capital

 

$

220,829

 

$

201,783

 

Average assets for the leverage capital ratio

 

$

2,725,606

 

$

2,533,749

 

Less:  Average PPP loans

 

 

(79,828

)

 

(186,267

)

Plus:  Average PPPLF borrowings

 

 

-

 

 

-

 

Adjusted average assets for the leverage capital ratio

 

$

2,645,778

 

$

2,347,482

 

Tier 1 leverage capital ratio

 

 

8.10

%

 

7.96

%

Adjusted Tier 1 leverage capital ratio, excluding PPP loans

 

 

8.35

%

 

8.60

%

 

 

 

67


 

 

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

Quantitative and Qualitative Disclosures about Market Risk

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

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a decrease in current fair market values. Our objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. The Federal Open Market Committee raised interest rates 0.25% in mid-March 2022, with additional increases expected in the future.  The impact of this and any future increases will impact financial results.

We manage our exposure to interest rates by structuring our balance sheet in the ordinary course of business. We do not enter into instruments such as leveraged derivatives, financial options, financial future contracts or forward delivery contracts for the purpose of reducing interest rate risk. Based upon the nature of our operations, we are not subject to foreign exchange or commodity price risk. We do not own any trading assets.

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

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

On a quarterly basis, we run multiple simulations under two different premises of which one is a static balance sheet and the other is a dynamic growth balance sheet. The static balance sheet approach produces results that show the interest risk currently inherent in our balance sheet at that point in time. The dynamic balance sheet includes our projected growth levels going forward and produces results that shows how net income, net interest income, and interest risk change based on our projected growth. These simulations test the impact on net interest income and fair value of equity from changes in market interest rates under various scenarios. Under the static and dynamic approaches, rates are shocked instantaneously and ramped over a 12-month horizon assuming parallel yield curve shifts. Parallel shock scenarios assume instantaneous parallel movements in the yield curve compared to a flat yield curve scenario. Non-parallel simulations are also conducted and involve analysis of interest income and expense under various changes in the shape of the yield curve including a forward curve, flat curve, steepening curve, and an inverted curve. Our internal policy regarding internal rate risk simulations currently specifies that for instantaneous parallel shifts of the yield curve, estimated net income at risk for the subsequent one- and two-year period should not decline by more than 10% for a 100 basis point shift, 15% for a 200 basis point shift, 20% for a 300 basis point shift, and 25% for a 400 basis point shift.

68


 

The following tables summarize the simulated change in net interest income over a 12-month horizon as of the dates indicated:

 

 

 

 

 

 

Change in Market Interest Rates

 

Twelve Month Projection

March 31, 2022

 

Twelve Month Projection

December 31, 2021

Static Balance Sheet and Rate Shifts

 

 

 

 

+400 basis points

 

31.3%

 

36.7%

+300 basis points

 

23.4%

 

27.2%

+200 basis points

 

15.6%

 

17.9%

+100 basis points

 

7.7%

 

8.5%

-100 basis points

 

(13.6)%

 

(9.7)%

-200 basis points

 

(21.0)%

 

(15.4)%

-300 basis points

 

(28.0)%

 

(19.9)%

 

 

 

 

 

Dynamic Balance Sheet and Rate Shifts

 

 

 

 

+400 basis points

 

30.8%

 

38.5%

+300 basis points

 

23.1%

 

28.7%

+200 basis points

 

15.4%

 

18.8%

+100 basis points

 

7.6%

 

9.1%

-100 basis points

 

(12.8)%

 

(11.8)%

-200 basis points

 

(20.8)%

 

(19.4)%

-300 basis points

 

(28.3)%

 

(23.0)%

 

The results illustrate that the Bank is asset sensitive and generally performs better in an increasing interest rate environment. The results are primarily due to behavior of demand, money market and savings deposits during such rate fluctuations. We have found that, historically, interest rates on these deposits change more slowly than changes in the discount and federal funds rates. This assumption is incorporated into the simulation model. The assumptions incorporated into the model are inherently uncertain and, as a result, the model cannot precisely measure future net interest income or precisely predict the impact of fluctuations in market interest rates on net interest income. Actual results will differ from the model’s simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions, the shape of the interest yield curve, and the application and timing of various strategies.

The -100, -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 0.25% to 0.50%.  Until rates increase, these rate shock scenarios may not reflect what may happen to net interest income if interest rates were to go negative.

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, 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 three months ended March 31, 2022, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

69


 

PART II.  OTHER INFORMATION

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, which are incorporated by reference herein.  As of March 31, 2022, 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 months ended March 31, 2022.

The Company did not repurchase any of its equity securities during the three months ended March 31, 2022 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.

Item 6.  Exhibits

 

 

 

  31.1

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

 

 

  31.2

Certification of the Chief Financial 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.

 

 

  32.1

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

 

 

  32.2

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

 

 

101

The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter months ended March 31, 2022, 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)

 

70


 

 

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:

May 5, 2022

 

By:

/s/ Eric M. Sprink

 

 

 

 

 

Eric M. Sprink

 

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

Dated:

May 5, 2022

 

By:

/s/ Joel G. Edwards

 

 

 

 

 

Joel G. Edwards

 

 

 

 

 

Executive Vice President and

 

 

 

 

 

Chief Financial Officer

 

 

 

 

 

(Principal Financial Officer)

 

 

 

71