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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 September 30, 2021

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

The Nasdaq Stock Market LLC

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 definition 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 November 2, 2021, there were 12,012,107 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 September 30, 2021 and December 31, 2020 (unaudited)

 

4

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Nine Months Ended September 30, 2021 and 2020 (unaudited)

 

7

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2021 and 2020 (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

 

70

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

71

 

 

 

 

 

Part II.   Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

73

 

 

 

 

 

Item 1A.

 

Risk Factors

 

73

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

73

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

73

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

73

 

 

 

 

 

Item 5.

 

Other Information

 

73

 

 

 

 

 

Item 6.

 

Exhibits

 

73

 

 

 

 

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, 2020 (“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; 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, 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. Furthermore, many of these risks and uncertainties are currently amplified by and may continue to be amplified by or may, in the future, be amplified by, the COVID-19 pandemic, including the emergence of variant strains of the virus, the pace at which the COVID-19 vaccine can be distributed and administered to residents of the markets Coastal Financial Corporation (the “the Company”) serves and the United States generally, and the impact of varying governmental responses that affect our customers and the economies where they operate. 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

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

Cash and due from banks

 

$

31,722

 

 

$

18,965

 

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

   at September 30, 2021 and December 31, 2020)

 

 

638,003

 

 

 

144,152

 

Investment securities, available for sale, at fair value

 

 

32,838

 

 

 

20,399

 

Investment securities, held to maturity, at amortized cost

 

 

2,086

 

 

 

2,848

 

Other investments

 

 

8,349

 

 

 

6,059

 

Loans receivable

 

 

1,705,682

 

 

 

1,547,138

 

Allowance for loan losses

 

 

(20,222

)

 

 

(19,262

)

Total loans receivable, net

 

 

1,685,460

 

 

 

1,527,876

 

Premises and equipment, net

 

 

17,231

 

 

 

17,108

 

Operating lease right-of-use assets

 

 

6,372

 

 

 

7,120

 

Accrued interest receivable

 

 

7,549

 

 

 

8,616

 

Bank-owned life insurance, net

 

 

12,166

 

 

 

7,082

 

Deferred tax asset, net

 

 

3,807

 

 

 

3,799

 

Other assets

 

 

5,985

 

 

 

2,098

 

Total assets

 

$

2,451,568

 

 

$

1,766,122

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

$

2,223,540

 

 

$

1,421,307

 

Federal Home Loan Bank ("FHLB") advances

 

 

24,999

 

 

 

24,999

 

Paycheck Protection Program Liquidity Facility

 

 

-

 

 

 

153,716

 

Subordinated debt

 

 

 

 

 

 

 

 

Principal amount $25,000 (less unamortized debt issuance costs of $731)

   and $10,000 (less unamortized debt issuance costs of $7) at

   September 30, 2021 and December 31, 2020, respectively

 

 

24,269

 

 

 

9,993

 

Junior subordinated debentures

 

 

 

 

 

 

 

 

Principal amount $3,609 (less unamortized debt issuance costs of $23

   and $25 at September 30, 2021 and December 31, 2020, respectively)

 

 

3,586

 

 

 

3,584

 

Deferred compensation

 

 

774

 

 

 

863

 

Accrued interest payable

 

 

147

 

 

 

531

 

Operating lease liabilities

 

 

6,583

 

 

 

7,323

 

Other liabilities

 

 

6,584

 

 

 

3,589

 

Total liabilities

 

 

2,290,482

 

 

 

1,625,905

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, no par value:

 

 

 

 

 

 

 

 

Authorized: 25,000,000 shares at September 30, 2021 and

    December 31, 2020; issued and outstanding: zero shares at

    September 30, 2021 and December 31, 2020

 

 

-

 

 

 

-

 

Common stock, no par value:

 

 

 

 

 

 

 

 

Authorized: 300,000,000 shares at September 30, 2021 and

    December 31, 2020; 12,012,107 shares at September 30, 2021

    issued and outstanding and 11,954,327 shares at

    December 31, 2020 issued and outstanding

 

 

88,997

 

 

 

87,815

 

Retained earnings

 

 

72,083

 

 

 

52,368

 

Accumulated other comprehensive income, net of tax

 

 

6

 

 

 

34

 

Total shareholders’ equity

 

 

161,086

 

 

 

140,217

 

Total liabilities and shareholders’ equity

 

$

2,451,568

 

 

$

1,766,122

 

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

19,383

 

 

$

16,244

 

 

$

56,978

 

 

$

44,025

 

Interest on interest earning deposits with other banks

 

 

170

 

 

 

99

 

 

 

314

 

 

 

587

 

Interest on investment securities

 

 

24

 

 

 

27

 

 

 

76

 

 

 

199

 

Dividends on other investments

 

 

31

 

 

 

24

 

 

 

169

 

 

 

129

 

Total interest income

 

 

19,608

 

 

 

16,394

 

 

 

57,537

 

 

 

44,940

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest on deposits

 

 

523

 

 

 

880

 

 

 

1,811

 

 

 

3,530

 

Interest on borrowed funds

 

 

278

 

 

 

418

 

 

 

992

 

 

 

957

 

Total interest expense

 

 

801

 

 

 

1,298

 

 

 

2,803

 

 

 

4,487

 

Net interest income

 

 

18,807

 

 

 

15,096

 

 

 

54,734

 

 

 

40,453

 

PROVISION FOR LOAN LOSSES

 

 

255

 

 

 

2,200

 

 

 

973

 

 

 

5,708

 

Net interest income after provision for loan losses

 

 

18,552

 

 

 

12,896

 

 

 

53,761

 

 

 

34,745

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BaaS fees

 

 

2,286

 

 

 

576

 

 

 

4,658

 

 

 

1,630

 

Unrealized holding gain on equity securities, net

 

 

1,472

 

 

 

-

 

 

 

1,472

 

 

 

-

 

Deposit service charges and fees

 

 

956

 

 

 

824

 

 

 

2,768

 

 

 

2,224

 

Loan referral fees

 

 

723

 

 

 

180

 

 

 

2,126

 

 

 

1,303

 

Gain on sales of loans, net

 

 

206

 

 

 

47

 

 

 

367

 

 

 

47

 

Mortgage broker fees

 

 

187

 

 

 

125

 

 

 

702

 

 

 

439

 

Gain on sale of branch, net

 

 

-

 

 

 

-

 

 

 

1,263

 

 

 

-

 

Other income

 

 

302

 

 

 

190

 

 

 

542

 

 

 

490

 

Total noninterest income

 

 

6,132

 

 

 

1,942

 

 

 

13,898

 

 

 

6,133

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

9,961

 

 

 

5,971

 

 

 

26,560

 

 

 

16,869

 

Occupancy

 

 

1,037

 

 

 

1,091

 

 

 

3,085

 

 

 

2,951

 

Software licenses, maintenance and subscriptions

 

 

817

 

 

 

337

 

 

 

1,844

 

 

 

919

 

Legal and professional fees

 

 

796

 

 

 

381

 

 

 

2,182

 

 

 

1,178

 

Data processing

 

 

761

 

 

 

577

 

 

 

2,192

 

 

 

1,749

 

BaaS expense

 

 

715

 

 

 

100

 

 

 

905

 

 

 

191

 

Excise taxes

 

 

407

 

 

 

291

 

 

 

1,154

 

 

 

756

 

Federal Deposit Insurance Corporation ("FDIC") assessments

 

 

400

 

 

 

148

 

 

 

820

 

 

 

292

 

Director and staff expenses

 

 

274

 

 

 

156

 

 

 

812

 

 

 

613

 

Marketing

 

 

130

 

 

 

52

 

 

 

344

 

 

 

280

 

Business development

 

 

123

 

 

 

72

 

 

 

322

 

 

 

245

 

Other expense

 

 

709

 

 

 

490

 

 

 

1,993

 

 

 

1,587

 

Total noninterest expense

 

 

16,130

 

 

 

9,666

 

 

 

42,213

 

 

 

27,630

 

Income before provision for income taxes

 

 

8,554

 

 

 

5,172

 

 

 

25,446

 

 

 

13,248

 

PROVISION FOR INCOME TAXES

 

 

1,870

 

 

 

1,082

 

 

 

5,731

 

 

 

2,763

 

NET INCOME

 

$

6,684

 

 

$

4,090

 

 

$

19,715

 

 

$

10,485

 

Basic earnings per common share

 

$

0.56

 

 

$

0.34

 

 

$

1.65

 

 

$

0.88

 

Diluted earnings per common share

 

$

0.54

 

 

$

0.34

 

 

$

1.58

 

 

$

0.86

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

11,999,899

 

 

 

11,919,850

 

 

 

11,982,009

 

 

 

11,915,513

 

Diluted

 

 

12,456,674

 

 

 

12,181,272

 

 

 

12,465,346

 

 

 

12,183,845

 

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

September 30,

 

 

Nine Months Ended

September 30,

 

 

 

2021

 

 

2020

 

 

2021

 

 

2020

 

NET INCOME

 

$

6,684

 

 

$

4,090

 

 

$

19,715

 

 

$

10,485

 

OTHER COMPREHENSIVE INCOME, before tax

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Unrealized holding (loss) gain during the period

 

 

5

 

 

 

(6

)

 

 

(35

)

 

 

99

 

Income tax (expense) benefit related to unrealized holding

gain (loss)

 

 

(1

)

 

 

1

 

 

 

7

 

 

 

(21

)

OTHER COMPREHENSIVE (LOSS) INCOME, net of tax

 

 

4

 

 

 

(5

)

 

 

(28

)

 

 

78

 

COMPREHENSIVE INCOME

 

$

6,688

 

 

$

4,085

 

 

$

19,687

 

 

$

10,563

 

 

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, June 30, 2021

 

 

12,007,669

 

 

$

88,699

 

 

$

65,399

 

 

$

2

 

 

$

154,100

 

Net income

 

 

-

 

 

 

-

 

 

 

6,684

 

 

 

-

 

 

 

6,684

 

Exercise of stock options

 

 

4,438

 

 

 

30

 

 

 

-

 

 

 

-

 

 

 

30

 

Stock-based compensation

 

 

-

 

 

 

268

 

 

 

-

 

 

 

-

 

 

 

268

 

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

4

 

 

 

4

 

BALANCE, September 30, 2021

 

 

12,012,107

 

 

$

88,997

 

 

$

72,083

 

 

$

6

 

 

$

161,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, June 30, 2020

 

 

11,926,263

 

 

$

87,309

 

 

$

43,617

 

 

$

51

 

 

$

130,977

 

Net income

 

 

-

 

 

 

-

 

 

 

4,090

 

 

 

-

 

 

 

4,090

 

Exercise of stock options

 

 

3,980

 

 

 

26

 

 

 

-

 

 

 

-

 

 

 

26

 

Stock-based compensation

 

 

-

 

 

 

144

 

 

 

-

 

 

 

-

 

 

 

144

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(5

)

 

 

(5

)

BALANCE, September 30, 2020

 

 

11,930,243

 

 

$

87,479

 

 

$

47,707

 

 

$

46

 

 

$

135,232

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2020

 

 

11,954,327

 

 

$

87,815

 

 

$

52,368

 

 

$

34

 

 

$

140,217

 

Net income

 

 

-

 

 

 

-

 

 

 

19,715

 

 

 

-

 

 

 

19,715

 

Issuance of restricted stock awards

 

 

10,714

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Vesting of restricted stock units

 

 

7,851

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

39,215

 

 

 

280

 

 

 

-

 

 

 

-

 

 

 

280

 

Stock-based compensation

 

 

-

 

 

 

902

 

 

 

-

 

 

 

-

 

 

 

902

 

Other comprehensive loss, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(28

)

 

 

(28

)

BALANCE, September 30, 2021

 

 

12,012,107

 

 

$

88,997

 

 

$

72,083

 

 

$

6

 

 

$

161,086

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2019

 

 

11,913,885

 

 

$

86,983

 

 

$

37,222

 

 

$

(32

)

 

$

124,173

 

Net income

 

 

-

 

 

 

-

 

 

 

10,485

 

 

 

-

 

 

 

10,485

 

Issuance of restricted stock awards

 

 

6,248

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Forfeiture of restricted stock awards

 

 

(3,500

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

13,610

 

 

 

82

 

 

 

-

 

 

 

-

 

 

 

82

 

Stock-based compensation

 

 

-

 

 

 

414

 

 

 

-

 

 

 

-

 

 

 

414

 

Other comprehensive income, net of tax

 

 

-

 

 

 

-

 

 

 

-

 

 

 

78

 

 

 

78

 

BALANCE, September 30, 2020

 

 

11,930,243

 

 

$

87,479

 

 

$

47,707

 

 

$

46

 

 

$

135,232

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

7

 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

(dollars in thousands)

 

 

Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

19,715

 

 

$

10,485

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

973

 

 

 

5,708

 

Depreciation and amortization

 

 

1,170

 

 

 

965

 

(Gain) loss on disposition of fixed assets

 

 

-

 

 

 

12

 

Decrease in operating lease right-of-use assets

 

 

789

 

 

 

1,129

 

Decrease in operating lease liabilities

 

 

(781

)

 

 

(1,115

)

Gain on sales of loans

 

 

(367

)

 

 

(47

)

Proceeds from sale of loans

 

 

4,092

 

 

 

694

 

Gain on sale of securities, net

 

 

-

 

 

 

-

 

Net premium amortization (discount accretion) on investment securities

 

 

21

 

 

 

36

 

Unrealized holding gain on equity investment

 

 

(1,472

)

 

 

-

 

Stock-based compensation

 

 

902

 

 

 

414

 

Gain on sale of branch

 

 

(1,263

)

 

 

-

 

Increase in bank-owned life insurance value

 

 

(5,084

)

 

 

(149

)

Deferred tax benefit

 

 

(1

)

 

 

-

 

Net change in other assets and liabilities

 

 

(283

)

 

 

(5,234

)

Net cash provided by operating activities

 

 

18,411

 

 

 

12,898

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Net increase in interest earning deposits with other banks

 

 

(493,851

)

 

 

(84,130

)

Purchase of investment securities available for sale

 

 

(57,495

)

 

 

(14,989

)

Change in other investments, net

 

 

(818

)

 

 

(1,446

)

Principal paydowns of investment securities available-for-sale

 

 

25

 

 

 

35

 

Principal paydowns of investment securities held-to-maturity

 

 

737

 

 

 

945

 

Maturities and calls of investment securities available-for-sale

 

 

45,000

 

 

 

23,000

 

Increase in loans receivable, net

 

 

(164,207

)

 

 

(571,065

)

Net cash transfer for branch sale

 

 

(19,980

)

 

 

-

 

Purchases of premises and equipment, net

 

 

(2,188

)

 

 

(4,750

)

Net cash used by investing activities

 

 

(692,777

)

 

 

(652,400

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

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

 

 

837,277

 

 

 

409,017

 

Net decrease in time deposits

 

 

(10,981

)

 

 

(16,965

)

Net repayments from short term FHLB borrowing

 

 

-

 

 

 

(10,000

)

Net advances from long term FHLB borrowing

 

 

-

 

 

 

24,999

 

Increase from subordinated debt proceeds

 

 

24,263

 

 

 

-

 

Decrease from subordinated debt repayment

 

 

(10,000

)

 

 

-

 

Net (repayments) advances from Paycheck Protection Program Liquidity Facility

 

 

(153,716

)

 

 

202,595

 

Proceeds from exercise of stock options

 

 

280

 

 

 

82

 

Net cash provided by financing activities

 

 

687,123

 

 

 

609,728

 

NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH

 

 

12,757

 

 

 

(29,774

)

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

 

 

18,965

 

 

 

43,910

 

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

 

$

31,722

 

 

$

14,136

 

SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Interest paid

 

$

3,187

 

 

$

4,314

 

Income taxes paid

 

 

6,809

 

 

 

4,985

 

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS

 

 

 

 

 

 

 

 

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

 

$

(35

)

 

$

99

 

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.

The Company provides a full range of banking products and services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound area through its 14 branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application.  The Bank’s main office and the headquarters of the Bank and Company are located in Everett, Washington. The Bank’s deposits are insured to applicable legal limits by the Federal Deposit Insurance Corporation (the “FDIC”). The Bank’s loans and deposits are largely within the greater Puget Sound area, with loans and deposits in our CCBX division expanding beyond the Puget Sound area, and the Bank’s primary funding source is deposits from customers. The CCBX division provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services.  The Bank’s CCDB division previously announced intent to collaborate with Google on a digital bank offering.  However Google recently announced its intent to exit the digital bank space, so CCDB has shifted focus and will continue to explore other opportunities for growth in that market. The Bank is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (“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 12, 2021. Operating results for the three and nine months ended September 30, 2021 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 September 30, 2021 for potential recognition or disclosure.  To the extent any events and conditions exist, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions. On October 4, 2021, the Company granted 100,000 share of performance-based restricted stock units to an employee pursuant to the Coastal Financial Corporation 2018 Omnibus Incentive plan.  A maximum of 100,000 shares vest on October 4, 2027, the quantity of which is dependent upon achievement of specified performance goals.  The Company is not aware of any other subsequent events which would require recognition or disclosure in the consolidated financial statements.  

9

 

Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements 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

Under Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors, a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The CARES Act, as amended by the Consolidated Appropriations Act, 2021, specified that, to be eligible not to be considered a TDR, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the federal national emergency or (B) January 1, 2022. Additionally, under guidance from the federal bank regulatory agencies, including the Federal Reserve and the FDIC, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs under ASC Subtopic 310-40. These modifications include short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. The federal banking agencies confirmed with the staff of the Financial Accounting Standards Board (“FASB”) that such short-term modifications not to be considered TDRs.  See Note 4 of the Condensed Consolidated Financial Statements of this Report for disclosure of the impact to date.

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.

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)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

32,499

 

 

$

-

 

 

$

(1

)

 

$

32,498

 

U.S. Agency collateralized mortgage obligations

 

 

74

 

 

 

3

 

 

 

-

 

 

 

77

 

U.S. Agency residential mortgage-backed securities

 

 

5

 

 

 

-

 

 

 

-

 

 

 

5

 

Municipal bonds

 

 

253

 

 

 

5

 

 

 

-

 

 

 

258

 

Total available-for-sale securities

 

 

32,831

 

 

 

8

 

 

 

(1

)

 

 

32,838

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency residential mortgage-backed securities

 

 

2,086

 

 

 

96

 

 

 

-

 

 

 

2,182

 

Total investment securities

 

$

34,917

 

 

$

104

 

 

$

(1

)

 

$

35,020

 

 

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

19,997

 

 

$

31

 

 

$

-

 

 

$

20,028

 

U.S. Agency collateralized mortgage obligations

 

 

96

 

 

 

4

 

 

 

-

 

 

 

100

 

U.S. Agency residential mortgage-backed securities

 

 

10

 

 

 

-

 

 

 

-

 

 

 

10

 

Municipal bonds

 

 

254

 

 

 

7

 

 

 

-

 

 

 

261

 

Total available-for-sale securities

 

 

20,357

 

 

 

42

 

 

 

-

 

 

 

20,399

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency residential mortgage-backed securities

 

 

2,848

 

 

 

109

 

 

 

-

 

 

 

2,957

 

Total investment securities

 

$

23,205

 

 

$

151

 

 

$

-

 

 

$

23,356

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The amortized cost and fair value of debt securities at September 30, 2021, 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)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts maturing in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

32,499

 

 

$

32,498

 

 

$

-

 

 

$

-

 

After one year through five years

 

 

253

 

 

 

258

 

 

 

-

 

 

 

-

 

 

 

 

32,752

 

 

 

32,756

 

 

 

-

 

 

 

-

 

U.S. Agency residential mortgage-backed securities and

   collateralized mortgage obligations

 

 

79

 

 

 

82

 

 

 

2,086

 

 

 

2,182

 

 

 

$

32,831

 

 

$

32,838

 

 

$

2,086

 

 

$

2,182

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Investments in debt securities with an amortized cost of $32.8 million and $22.0 million at September 30, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.  During the quarter

11

 

ended September 30, 2021, six U.S. Treasury Bills were purchased for $37.5 million, to replace maturing securities and to pledge as security for public funds.  During the nine months ended September 30, 2021, a total of  ten U.S. Treasury Bills were purchased for a total of $57.5 million, to replace maturing securities and to pledge as security for public funds.

There were no sales of securities during the three or nine months ended September 30, 2021 or 2020.

There were four securities with a $1,000 unrealized loss as of September 30, 2021.  There were no gross unrealized losses or securities in an unrealized loss position as of December 31, 2020.  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)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

17,499

 

 

$

1

 

 

$

-

 

 

$

-

 

 

$

17,499

 

 

$

1

 

Total investment securities

 

$

17,499

 

 

$

1

 

 

$

-

 

 

$

-

 

 

$

17,499

 

 

$

1

 

 

Management has evaluated the above securities and does not believe that any individual unrealized loss as of September 30, 2021, represents an other-than-temporary impairment (“OTTI”).  The decline in fair market value of these securities was generally due to changes in market interest rates since purchase and was not related to any known decline in the credit worthiness of the issuer.  Management does not intend to sell any impaired securities nor does evidence suggest that it is more likely than not that management will be required to sell any impaired securities.  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:

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

536,855

 

 

$

539,200

 

Real estate loans:

 

 

 

 

 

 

 

 

Construction, land, and land development

 

 

158,710

 

 

 

94,423

 

Residential real estate

 

 

170,167

 

 

 

143,869

 

Commercial real estate

 

 

837,342

 

 

 

774,925

 

Consumer and other loans

 

 

17,140

 

 

 

3,916

 

Gross loans receivable

 

 

1,720,214

 

 

 

1,556,333

 

Net deferred origination fees and premiums

 

 

(14,532

)

 

 

(9,195

)

Loans receivable

 

$

1,705,682

 

 

$

1,547,138

 

 

Included in commercial and industrial loans are Paycheck Protection Program (“PPP”) loans of $267.3 million at September 30, 2021 and $365.8 million at December 31, 2020.  PPP loans are 100% guaranteed by the Small Business Administration (“SBA”).  PPP loans had net deferred origination fees and premiums of $9.4 million as of September 30, 2021, largely contributing to the increase in net deferred origination fees and premiums, compared to December 31, 2020.   Also included in commercial and industrial loans as of September 30, 2021 and December 31, 2020, is $161.5 million and $65.6 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 loan.  

12

 

Included in consumer and other loans are overdrafts of $23,000 and $31,000 at September 30, 2021 and December 31, 2020, respectively. The Company has pledged loans totaling $210.8 million and $326.8 million at September 30, 2021 and December 31, 2020, respectively, for borrowing lines at the FHLB and Federal Reserve Bank.  Paycheck Protection Program Liquidity Facility (“PPPLF”) borrowings require that an equal amount of PPP loans be pledged for any outstanding balance.  All PPPLF borrowings were paid in June 2021, and there were no outstanding PPPLF borrowings as of September 30, 2021, compared to a balance of $153.7 million at December 31, 2020.  As a result the amount of pledged loans as of September 30, 2021 decreased.  The last day to take new advances on the PPPLF was July 31, 2021.

The balance of SBA and United States Department of Agriculture (“USDA”) loans and participations sold and serviced for others totaled was $20.4 million and $20.6 million at September 30, 2021 and December 31, 2020, respectively.

The balance of Main Street Lending Program (“MSLP”) loans participated and serviced totaled $56.3 million, with $3.0 million in MSLP loans on the balance sheet and included in commercial and industrial loans at September 30, 2021 and December 31, 2020.  The MSLP ceased funding new loans on January 8, 2021.

The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans with remaining balances totaled $14.8 million and $19.3 million as of September 30, 2021 and December 31, 2020, respectively. Unamortized premiums totaled $242,000 and $306,000 as of September 30, 2021 and December 31, 2020, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $35.9 million and $44.9 million as of September 30, 2021 and December 31, 2020, respectively.

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. Loan types include revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. The Company also 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.   The Company also originates capital call lines, which are provided to venture capital firms through one of our BaaS clients.  Also included in this category are SBA 7(a) loans, which includes PPP loans.  PPP loans have a contractual rate of 1.0%, with maturity terms of two to five years, are unsecured, and 100% guaranteed by the SBA.  PPP loans may be forgiven by the SBA if loan proceeds are used for certain purposes.  To bolster the effectiveness of the SBA’s PPP loan program, the Federal Reserve PPPLF supplied liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPPLF, which expired on July 31, 2021, 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 PPPLF borrowing line also had to be paid down.  

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

13

 

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 Company 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.

     Also included in consumer and other loans is $14.7 million in consumer loans originated through CCBX or BaaS clients as of September 30, 2021, compared to $67,000 as of December 31, 2020. The increase is the result of growth in the CCBX or BaaS division.

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)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

307

 

 

$

407

 

 

$

714

 

 

$

536,141

 

 

$

536,855

 

 

$

-

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

-

 

 

 

-

 

 

 

-

 

 

 

158,710

 

 

 

158,710

 

 

 

-

 

Residential real estate

 

 

197

 

 

 

57

 

 

 

254

 

 

 

169,913

 

 

 

170,167

 

 

 

1

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

837,342

 

 

 

837,342

 

 

 

-

 

Consumer and other loans

 

 

416

 

 

 

122

 

 

 

538

 

 

 

16,602

 

 

 

17,140

 

 

 

122

 

 

 

$

920

 

 

$

586

 

 

$

1,506

 

 

$

1,718,708

 

 

$

1,720,214

 

 

$

123

 

Less net deferred origination fees and premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,532

)

 

 

 

 

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,705,682

 

 

 

 

 

 

 

 

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, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

133

 

 

$

537

 

 

$

670

 

 

$

538,530

 

 

$

539,200

 

 

$

-

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

1

 

 

 

-

 

 

 

1

 

 

 

94,422

 

 

 

94,423

 

 

 

-

 

Residential real estate

 

 

1,108

 

 

 

60

 

 

 

1,168

 

 

 

142,701

 

 

 

143,869

 

 

 

-

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

-

 

 

 

774,925

 

 

 

774,925

 

 

 

-

 

Consumer and other loans

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,916

 

 

 

3,916

 

 

 

-

 

 

 

$

1,242

 

 

$

597

 

 

$

1,839

 

 

$

1,554,494

 

 

 

1,556,333

 

 

$

-

 

Less net deferred origination fees and premiums

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,195

)

 

 

 

 

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,547,138

 

 

 

 

 

 

14

 

 

A summary of information pertaining to impaired loans as of the period indicated:

 

 

 

Unpaid

Contractual

Principal

Balance

 

 

Recorded

Investment

With No

Allowance

 

 

Recorded

Investment

With

Allowance

 

 

Total

Recorded

Investment

 

 

Related

Allowance

 

 

 

(dollars in thousands)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

561

 

 

$

355

 

 

$

206

 

 

$

561

 

 

$

166

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

56

 

 

 

56

 

 

 

-

 

 

 

56

 

 

 

-

 

Total

 

$

617

 

 

$

411

 

 

$

206

 

 

$

617

 

 

$

166

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

834

 

 

$

537

 

 

$

-

 

 

$

537

 

 

$

-

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate

 

 

188

 

 

 

175

 

 

 

-

 

 

 

175

 

 

 

-

 

Total

 

$

1,022

 

 

$

712

 

 

$

-

 

 

$

712

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

The following tables summarize the Company’s average recorded investment and interest income recognized on impaired loans by loan class for the three and nine months ended September 30, 2021 and 2020:

 

 

Three Months Ended

 

 

 

September 30, 2021

 

 

September 30, 2020

 

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Commercial and industrial loans

 

$

489

 

 

$

-

 

 

$

657

 

 

$

-

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

-

 

 

 

-

 

 

 

3,270

 

 

 

-

 

Residential real estate

 

 

111

 

 

 

-

 

 

 

151

 

 

 

-

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

409

 

 

 

-

 

Total

 

$

600

 

 

$

-

 

 

$

4,487

 

 

$

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended

 

 

 

September 30, 2021

 

 

September 30, 2020

 

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized

 

 

Average

Recorded

Investment

 

 

Interest Income

Recognized

 

 

 

 

 

 

 

 

 

 

 

(dollars in thousands)

 

Commercial and industrial loans

 

$

498

 

 

$

-

 

 

$

748

 

 

$

-

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

-

 

 

 

-

 

 

 

1,666

 

 

 

-

 

Residential real estate

 

 

143

 

 

 

-

 

 

 

153

 

 

 

-

 

Commercial real estate

 

 

-

 

 

 

-

 

 

 

204

 

 

 

-

 

Consumer and other loans

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

641

 

 

$

-

 

 

$

2,771

 

 

$

-

 

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

 

No loans were restructured in the three or nine months ended September 30, 2021 and September 30, 2020 that qualified as TDRs. The Company has no commitments to loan additional funds to borrowers whose loans were classified as TDRs at September 30, 2021, as there were no outstanding TDRs at September 30, 2021.

 

15

 

 

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 September 30, 2021 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.  

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:

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

561

 

 

$

537

 

Real estate loans:

 

 

 

 

 

 

 

 

Residential real estate

 

 

56

 

 

 

175

 

Total nonaccrual loans

 

$

617

 

 

$

712

 

 

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. 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)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

535,327

 

 

$

891

 

 

$

637

 

 

$

-

 

 

$

536,855

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land, and land development

 

 

158,710

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

158,710

 

Residential real estate

 

 

169,982

 

 

 

129

 

 

 

56

 

 

 

-

 

 

 

170,167

 

Commercial real estate

 

 

833,305

 

 

 

4,037

 

 

 

-

 

 

 

-

 

 

 

837,342

 

Consumer and other loans

 

 

17,017

 

 

 

-

 

 

 

123

 

 

 

-

 

 

 

17,140

 

 

 

$

1,714,341

 

 

$

5,057

 

 

$

816

 

 

$

-

 

 

 

1,720,214

 

Less net deferred origination fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(14,532

)

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,705,682

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

538,149

 

 

$

397

 

 

$

654

 

 

$

-

 

 

$

539,200

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land, and land development

 

 

94,423

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

94,423

 

Residential real estate

 

 

143,540

 

 

 

154

 

 

 

175

 

 

 

-

 

 

 

143,869

 

Commercial real estate

 

 

763,647

 

 

 

11,278

 

 

 

-

 

 

 

-

 

 

 

774,925

 

Consumer and other loans

 

 

3,916

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,916

 

 

 

$

1,543,675

 

 

$

11,829

 

 

$

829

 

 

$

-

 

 

 

1,556,333

 

Less net deferred origination fees

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(9,195

)

Loans receivable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

1,547,138

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for Loan Losses

The Company’s allowance for loan losses (“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 is prepared using the information provided by the Company’s credit review process together with economic information gathered from published sources.  Qualitative factors that are included in the analysis include industry data and data from peer institutions.

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 Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.  The $267.3 million in PPP loans as of September 30, 2021 are 100% guaranteed by the SBA and were not subject to the allowance analysis or assigned an allowance.  

The Company’s provision for credit losses of $255,000 and $973,000 for the three and nine months ended September 30, 2021, is primarily the result of growth in the loan portfolio.  The $2.2 million and $5.7 million provision for credit losses during the three and nine months ended September 30, 2020, is related to the uncertainties in the economic outlook from the COVID-19 pandemic and growth in the loan portfolio. The Company is not required to implement the provisions of the Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023 and is continuing to account for the allowance for loan losses under the incurred loss model.

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 and nine months ended September 30, 2021:

 

 

 

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 September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, June 30, 2021

 

$

3,317

 

 

$

4,520

 

 

$

3,302

 

 

$

8,057

 

 

$

84

 

 

$

686

 

 

$

19,966

 

Provision for loan losses or (recapture)

 

 

8

 

 

 

1,410

 

 

 

(49

)

 

 

(1,420

)

 

 

11

 

 

 

295

 

 

 

255

 

 

 

 

3,325

 

 

 

5,930

 

 

 

3,253

 

 

 

6,637

 

 

 

95

 

 

 

981

 

 

 

20,221

 

Loans charged-off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(31

)

 

 

-

 

 

 

(31

)

Recoveries of loans previously charged-off

 

 

16

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

16

 

 

 

-

 

 

 

32

 

Net (charge-offs) recoveries

 

 

16

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(15

)

 

 

-

 

 

 

1

 

Balance, September 30, 2021

 

$

3,341

 

 

$

5,930

 

 

$

3,253

 

 

$

6,637

 

 

$

80

 

 

$

981

 

 

$

20,222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Nine Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2020

 

$

3,353

 

 

$

3,545

 

 

$

3,410

 

 

$

7,810

 

 

$

127

 

 

$

1,017

 

 

$

19,262

 

Provision for loan losses or (recapture)

 

 

(17

)

 

 

2,385

 

 

 

(157

)

 

 

(1,173

)

 

 

(29

)

 

 

(36

)

 

 

973

 

 

 

 

3,336

 

 

 

5,930

 

 

 

3,253

 

 

 

6,637

 

 

 

98

 

 

 

981

 

 

 

20,235

 

Loans charged-off

 

 

(16

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(45

)

 

 

-

 

 

 

(61

)

Recoveries of loans previously charged-off

 

 

21

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

27

 

 

 

-

 

 

 

48

 

Net (charge-offs) recoveries

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(18

)

 

 

-

 

 

 

(13

)

Balance, September 30, 2021

 

$

3,341

 

 

$

5,930

 

 

$

3,253

 

 

$

6,637

 

 

$

80

 

 

$

981

 

 

$

20,222

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL amounts allocated to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

166

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

166

 

Collectively evaluated for impairment

 

 

3,175

 

 

 

5,930

 

 

 

3,253

 

 

 

6,637

 

 

 

80

 

 

 

981

 

 

 

20,056

 

ALLL balance, September 30, 2021

 

$

3,341

 

 

$

5,930

 

 

$

3,253

 

 

$

6,637

 

 

$

80

 

 

$

981

 

 

$

20,222

 

Loans individually evaluated for impairment

 

$

561

 

 

$

-

 

 

$

56

 

 

$

-

 

 

$

-

 

 

 

 

 

 

$

616

 

Loans collectively evaluated for impairment

 

 

536,294

 

 

 

158,710

 

 

 

170,111

 

 

 

837,342

 

 

 

17,140

 

 

 

 

 

 

 

1,719,598

 

Loan balance, September 30, 2021

 

$

536,855

 

 

$

158,710

 

 

$

170,167

 

 

$

837,342

 

 

$

17,140

 

 

 

 

 

 

$

1,720,214

 

18

 

 

 

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 and nine months ended September 30, 2020:

 

 

 

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 September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL balance, June 30, 2020

 

$

2,853

 

 

$

3,378

 

 

$

2,669

 

 

$

5,235

 

 

$

140

 

 

$

572

 

 

$

14,847

 

Provision for loan losses or (recapture)

 

 

27

 

 

 

234

 

 

 

222

 

 

 

1,929

 

 

 

(9

)

 

 

(203

)

 

 

2,200

 

 

 

 

2,880

 

 

 

3,612

 

 

 

2,891

 

 

 

7,164

 

 

 

131

 

 

 

369

 

 

 

17,047

 

Loans charged-off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(2

)

 

 

-

 

 

 

(2

)

Recoveries of loans previously charged-off

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

1

 

 

 

-

 

 

 

1

 

Net (charge-offs) recoveries

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(1

)

 

 

-

 

 

 

(1

)

ALLL balance, September 30, 2020

 

$

2,880

 

 

$

3,612

 

 

$

2,891

 

 

$

7,164

 

 

$

130

 

 

$

369

 

 

$

17,046

 

Nine Months Ended September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL balance, December 31, 2019

 

$

2,366

 

 

$

2,745

 

 

$

2,069

 

 

$

3,126

 

 

$

104

 

 

$

1,060

 

 

$

11,470

 

Provision for loan losses or (recapture)

 

 

639

 

 

 

867

 

 

 

822

 

 

 

4,038

 

 

 

33

 

 

 

(691

)

 

 

5,708

 

 

 

 

3,005

 

 

 

3,612

 

 

 

2,891

 

 

 

7,164

 

 

 

137

 

 

 

369

 

 

 

17,178

 

Loans charged-off

 

 

(130

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(9

)

 

 

-

 

 

 

(139

)

Recoveries of loans previously charged-off

 

 

5

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

2

 

 

 

-

 

 

 

7

 

Net (charge-offs) recoveries

 

 

(125

)

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(7

)

 

 

-

 

 

 

(132

)

ALLL balance, September 30, 2020

 

$

2,880

 

 

$

3,612

 

 

$

2,891

 

 

$

7,164

 

 

$

130

 

 

$

369

 

 

$

17,046

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

As of September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL amounts allocated to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Collectively evaluated for impairment

 

 

2,880

 

 

 

3,612

 

 

 

2,891

 

 

 

7,164

 

 

 

130

 

 

 

369

 

 

 

17,046

 

ALLL balance, September 30, 2020

 

$

2,880

 

 

$

3,612

 

 

$

2,891

 

 

$

7,164

 

 

$

130

 

 

$

369

 

 

$

17,046

 

Loans individually evaluated for impairment

 

$

625

 

 

$

3,269

 

 

$

178

 

 

$

405

 

 

$

-

 

 

 

 

 

 

$

4,477

 

Loans collectively evaluated for impairment

 

 

588,579

 

 

 

97,686

 

 

 

120,969

 

 

 

704,781

 

 

 

3,927

 

 

 

 

 

 

 

1,515,942

 

Loan balance, September 30, 2020

 

$

589,204

 

 

$

100,955

 

 

$

121,147

 

 

$

705,186

 

 

$

3,927

 

 

 

 

 

 

$

1,520,419

 

 

The following table summarizes the allocation of the ALLL attributed to various segments in the loan portfolio as of December 31, 2020.

 

 

 

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, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

ALLL amounts allocated to

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Individually evaluated for impairment

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Collectively evaluated for impairment

 

 

3,353

 

 

 

3,545

 

 

 

3,410

 

 

 

7,810

 

 

 

127

 

 

 

1,017

 

 

 

19,262

 

ALLL balance, December 31, 2020

 

$

3,353

 

 

$

3,545

 

 

$

3,410

 

 

$

7,810

 

 

$

127

 

 

$

1,017

 

 

$

19,262

 

Loans individually evaluated for impairment

 

$

537

 

 

$

-

 

 

$

175

 

 

$

-

 

 

$

-

 

 

 

 

 

 

$

712

 

Loans collectively evaluated for impairment

 

 

538,663

 

 

 

94,423

 

 

 

143,694

 

 

 

774,925

 

 

 

3,916

 

 

 

 

 

 

 

1,555,621

 

Loan balance, December 31, 2020

 

$

539,200

 

 

$

94,423

 

 

$

143,869

 

 

$

774,925

 

 

$

3,916

 

 

 

 

 

 

$

1,556,333

 

 

19

 

 

Note 5 - Deposits

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

 

 

 

September 30,

 

 

December 31,

 

 

 

2021

 

 

2020

 

 

 

(dollars in thousands)

 

Demand, noninterest bearing

 

$

1,296,443

 

 

$

592,261

 

NOW and money market

 

 

755,810

 

 

 

658,323

 

Savings

 

 

96,192

 

 

 

77,611

 

Total core deposits

 

 

2,148,445

 

 

 

1,328,195

 

BaaS-brokered deposits

 

 

28,396

 

 

 

33,482

 

Time deposits less than $250,000

 

 

32,687

 

 

 

41,145

 

Time deposits $250,000 and over

 

 

14,012

 

 

 

18,485

 

Total deposits

 

$

2,223,540

 

 

$

1,421,307

 

 

The following table presents the maturity distribution of time deposits as of September 30, 2021 (dollars in thousands):

 

 

 

(dollars in thousands)

 

Twelve months

 

$

35,905

 

One to two years

 

 

5,977

 

Two to three years

 

 

2,744

 

Three to four years

 

 

1,010

 

Four to five years

 

 

1,063

 

 

 

$

46,699

 

 

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.

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 September 30, 2021 and one lease renewed during the nine months ended September 30, 2021.  

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 September 30, 2021, the Company does not have any leases that have not yet commenced.  At September 30, 2021, lease expiration dates ranged from three months to 23.4 years, with additional renewal options on certain leases typically ranging from 5 to 10 years. At September 30, 2021, the weighted average remaining lease term for the Company’s operating leases was 8.6 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $343,000 and $461,000, respectively, for the three months ended September 30, 2021 and 2020 and $1.0 million and $1.1 million for the nine months ended September 30, 2021 and 2020, respectively. Variable lease components, such as inflation adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

20

 

The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at September 30, 2021:

 

 

 

September 30,

 

 

 

2021

 

 

 

(dollars in thousands)

 

October 1, 2021 to December 31, 2021

 

$

318

 

2022

 

 

1,279

 

2023

 

 

1,272

 

2024

 

 

864

 

2025

 

 

713

 

2026 and thereafter

 

 

3,209

 

Total lease payments

 

 

7,655

 

Less:  amounts representing interest

 

 

1,072

 

Present value of lease liabilities

 

$

6,583

 

 

The following table presents the components of total lease expense and operating cash flows for the three and nine months ended September 30, 2021 and 2020:

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

 

 

September 30,

 

September 30,

 

 

September 30,

 

September 30,

 

 

 

2021

 

2020

 

 

2021

 

2020

 

 

 

(dollars in thousands)

 

Lease expense:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating lease expense

 

$

321

 

$

321

 

 

$

962

 

$

983

 

Variable lease expense

 

 

37

 

 

167

 

 

 

108

 

 

239

 

Total lease expense (1)

 

$

358

 

$

488

 

 

$

1,070

 

$

1,222

 

Cash paid:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid reducing operating lease liabilities

 

$

356

 

$

484

 

 

$

1,061

 

$

1,206

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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, 2020.  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 $34,000 and $100,000 for the three and nine months ended September 30, 2021, with $532,000 remaining as of September 30, 2021.  This capital lease began in October 2020, therefore there was no depreciation expense for the ATM capital lease as of September 30, 2020.

 

21

 

 

Note 7 - Stock-Based Compensation

Stock Options and Restricted Stock

On April 30, 2018, the Company’s shareholders approved the Coastal Financial Corporation 2018 Omnibus Incentive Plan (“2018 Plan”). The 2018 Plan authorizes the Company to grant awards, including but not limited to, stock options, restricted stock units, and restricted stock awards, to eligible employees, directors or individuals that provide service to the Company, up to an aggregate of 500,000 shares of common stock. On May 24, 2021, the Company’s shareholders approved the First Amendment to the 2018 Plan, which increased the authorized plan shares by 600,000.  The 2018 Plan replaced both the Company’s 2006 Stock Option and Equity Compensation Plan (“2006 Plan”) and its Directors’ Stock Bonus Plan.  Existing awards under the previous plans will vest under the terms granted and no further awards will be made under those plans. Shares available to be granted under the 2018 Plan totaled 769,928 at September 30, 2021.

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 and nine months ended September 30, 2021 and 2020.

 

A summary of stock option activity under the 2018 Plan and 2006 Plan during the nine months ended September 30, 2021:

 

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, 2020

 

 

749,397

 

 

$

7.75

 

 

 

5.04

 

 

$

9,933

 

Granted

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

Exercised

 

 

(39,215

)

 

$

7.15

 

 

 

-

 

 

 

 

 

Forfeited or expired

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

Outstanding at September 30, 2021

 

 

710,182

 

 

$

7.78

 

 

 

4.28

 

 

$

17,103

 

Vested or expected to vest at September 30, 2021

 

 

710,182

 

 

$

7.78

 

 

 

4.28

 

 

$

17,103

 

Exercisable at September 30, 2021

 

 

364,500

 

 

$

6.63

 

 

 

3.19

 

 

$

9,198

 

 

The total or aggregate intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three and nine months ended September 30, 2021 was $101,000 and $775,000, respectively, and was $28,000 and $121,000 for the three and nine months ended September 30, 2020, respectively.

As of September 30, 2021, there was $1.6 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 6.1 years.   Compensation expense recorded related to stock options was $92,000 and $273,000 for the three and nine months ended September 30, 2021, respectively and $94,000  and $281,000 for the three and nine months ended September 30, 2020, respectively.

Restricted Stock Units

In January 2021, the Company granted 84,258 restricted stock units under the 2018 Plan to employees, which vest ratably over 5 years.  In April 2021, the Company granted 1,000 restricted stock units under the 2018 Plan to an employee, which vest ratably over 5 years.

The fair value of restricted stock units 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 units are nonparticipating securities.

22

 

As of September 30, 2021, there was $2.8 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 5.9 years.  Compensation expense recorded related to restricted stock units was $133,000 and $367,000 for the three and nine months ended September 30, 2021, respectively and $39,000 and $96,000 for the three and nine months ended September 30, 2020, respectively.

A summary of the Company’s nonvested shares at September 30, 2021 and changes during the nine 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, 2020

 

 

90,249

 

 

$

17.25

 

 

$

352

 

Granted

 

 

85,258

 

 

$

20.99

 

 

 

 

 

Forfeited

 

 

(360

)

 

$

20.47

 

 

 

 

 

Vested

 

 

(7,851

)

 

$

17.73

 

 

 

 

 

Nonvested shares at September 30, 2021

 

 

167,296

 

 

$

19.12

 

 

$

2,246

 

Restricted Stock Awards

Employees

In January 2021, there were 5,978 shares granted to an employee at an estimated fair value of $20.91 per share, vesting  immediately.

The fair value of restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities.

As of September 30, 2021, there was $56,000 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 6.3 years.  Compensation expense recorded related to restricted stock awards was $3,000 and $132,000 for the three and nine months ended September 30, 2021, respectively and $2,000 and $5,000 for the three and nine months ended September 30, 2020, respectively.

 

Director’s Stock Compensation

Stock was previously granted to directors who attended at least 75% of the scheduled board meetings during the prior year. Grants cliff vest over one or two years from date awarded, contingent on the director still being a director of the Company. During the vesting period, the grants are considered participating securities.

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 will be granted as of each annual meeting date and will cliff vest one day prior to the next annual meeting date.  For stock granted in 2020, $5,000 was subject to a two-year cliff vesting period, and the remaining stock cliff vested one day prior to this year’s annual meeting date.  

On May 24, 2021, 4,736 new shares were granted to nine directors at an estimated fair value of $30.67 per share, and will cliff vest one day prior to the 2022 annual shareholder meeting date.  As of September 30, 2021, there was $91,000 of total unrecognized compensation expense related to director restricted stock awards.  Director compensation expense recorded related to the 2018 Plan totaled $43,000 and $133,000 for the three and nine months ended September 30, 2021, respectively and $8,000 and $26,000 for the three and nine months ended September 30, 2020, respectively.

23

 

A summary of the Company’s nonvested shares at September 30, 2021 and changes during the nine-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, 2020

 

 

14,377

 

 

$

16.15

 

 

$

70

 

Granted

 

 

10,714

 

 

$

25.22

 

 

 

 

 

Forfeited

 

 

-

 

 

$

-

 

 

 

 

 

Vested

 

 

(14,888

)

 

$

17.46

 

 

 

 

 

Nonvested shares at September 30, 2021

 

 

10,203

 

 

$

23.78

 

 

$

82

 

 

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:

 

 

 

September 30, 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

 

$

31,722

 

 

$

31,722

 

 

$

31,722

 

 

$

-

 

 

$

-

 

Interest earning deposits with other banks

 

 

638,003

 

 

 

638,003

 

 

 

638,003

 

 

 

-

 

 

 

-

 

Investment securities

 

 

34,924

 

 

 

35,020

 

 

 

32,498

 

 

 

2,522

 

 

 

-

 

Other investments

 

 

8,349

 

 

 

8,349

 

 

 

-

 

 

 

6,027

 

 

 

2,322

 

Loans receivable

 

 

1,685,460

 

 

 

1,682,602

 

 

 

-

 

 

 

-

 

 

 

1,682,602

 

Accrued interest receivable

 

 

7,549

 

 

 

7,549

 

 

 

-

 

 

 

7,549

 

 

 

-

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

2,223,540

 

 

 

2,223,498

 

 

$

-

 

 

$

2,223,498

 

 

$

-

 

FHLB advances

 

 

24,999

 

 

 

24,619

 

 

 

-

 

 

 

24,619

 

 

 

-

 

Subordinated debt

 

 

24,269

 

 

 

22,021

 

 

 

-

 

 

 

22,021

 

 

 

-

 

Junior subordinated debentures

 

 

3,586

 

 

 

2,745

 

 

 

-

 

 

 

2,745

 

 

 

-

 

Accrued interest payable

 

 

147

 

 

 

147

 

 

 

-

 

 

 

147

 

 

 

-

 

 

 

 

 

December 31, 2020

 

 

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

 

$

18,965

 

 

$

18,965

 

 

$

18,965

 

 

$

-

 

 

$

-

 

Interest earning deposits with other banks

 

 

144,152

 

 

 

144,152

 

 

 

144,152

 

 

 

-

 

 

 

-

 

Investment securities

 

 

23,247

 

 

 

23,356

 

 

 

20,028

 

 

 

3,328

 

 

 

-

 

Other investments

 

 

6,059

 

 

 

6,059

 

 

 

-

 

 

 

5,209

 

 

 

850

 

Loans receivable, net

 

 

1,527,876

 

 

 

1,535,541

 

 

 

-

 

 

 

-

 

 

 

1,535,541

 

Accrued interest receivable

 

 

8,616

 

 

 

8,616

 

 

 

-

 

 

 

8,616

 

 

 

-

 

Financial liabilities

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Deposits

 

$

1,421,307

 

 

$

1,421,534

 

 

$

-

 

 

$

1,421,534

 

 

$

-

 

Paycheck Protection Program Liquidity Facility

 

 

153,716

 

 

 

153,716

 

 

 

-

 

 

 

153,716

 

 

 

-

 

FHLB advances

 

 

24,999

 

 

 

24,787

 

 

 

-

 

 

 

24,787

 

 

 

-

 

Subordinated debt

 

 

9,993

 

 

 

9,913

 

 

 

-

 

 

 

9,913

 

 

 

-

 

Junior subordinated debentures

 

 

3,584

 

 

 

2,707

 

 

 

-

 

 

 

2,707

 

 

 

-

 

Accrued interest payable

 

 

531

 

 

 

531

 

 

 

-

 

 

 

531

 

 

 

-

 

 

24

 

 

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)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

32,498

 

 

$

-

 

 

$

-

 

 

$

32,498

 

U.S. Agency collateralized mortgage obligations

 

 

-

 

 

 

77

 

 

 

-

 

 

 

77

 

U.S. Agency residential mortgage-backed securities

 

 

-

 

 

 

5

 

 

 

-

 

 

 

5

 

Municipals

 

 

-

 

 

 

258

 

 

 

-

 

 

 

258

 

 

 

$

32,498

 

 

$

340

 

 

$

-

 

 

$

32,838

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

20,028

 

 

$

-

 

 

$

-

 

 

$

20,028

 

U.S. Agency collateralized mortgage obligations

 

 

-

 

 

 

100

 

 

 

-

 

 

 

100

 

U.S. Agency residential mortgage-backed securities

 

 

-

 

 

 

10

 

 

 

-

 

 

 

10

 

Municipals

 

 

-

 

 

 

261

 

 

 

-

 

 

 

261

 

 

 

$

20,028

 

 

$

371

 

 

$

-

 

 

$

20,399

 

 

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 September 30, 2021 and December 31, 2020. 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.

25

 

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

The following table presents the carrying value of equity securities without readily determinable fair values, as of September 30, 2021, with adjustments recorded during the periods presented for those securities with observable price changes.

 

 

For the Three Months Ended

 

 

For the Nine Months Ended

 

 

 

September 30,

 

 

September 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Carrying value, beginning of period

 

$

850

 

 

$

750

 

 

$

850

 

 

$

500

 

Addition of equity securities

 

 

-

 

 

 

-

 

 

 

-

 

 

 

250

 

Upward carrying value changes

 

 

1,472

 

 

 

-

 

 

 

1,472

 

 

 

-

 

Carrying value, end of period

 

$

2,322

 

 

$

750

 

 

$

2,322

 

 

$

750

 

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

 

September 30, 2021

Weighted

Average Rate

 

 

December 31, 2020

Weighted

Average Rate

 

Impaired loans

 

Collateral valuations

 

Discount to appraised value

 

9%

 

 

9%

 

 

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)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

-

 

 

$

-

 

 

$

451

 

 

$

451

 

Equity securities

 

 

 

 

 

 

 

 

 

 

2,322

 

 

 

2,322

 

Total

 

$

-

 

 

$

-

 

 

$

2,773

 

 

$

2,773

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Impaired loans

 

$

-

 

 

$

-

 

 

$

712

 

 

$

712

 

Equity securities

 

 

 

 

 

 

 

 

 

 

850

 

 

 

850

 

Total

 

$

-

 

 

$

-

 

 

$

1,562

 

 

$

1,562

 

 

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.

26

 

     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.

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

 

 

Nine months ended

 

 

 

September 30, 2021

 

 

September 30, 2020

 

 

September 30, 2021

 

 

September 30, 2020

 

 

 

(dollars in thousands, except share data)

 

Net Income

 

$

6,684

 

 

$

4,090

 

 

$

19,715

 

 

$

10,485

 

Basic weighted average number common shares outstanding

 

 

11,999,899

 

 

 

11,919,850

 

 

 

11,982,009

 

 

 

11,915,513

 

Dilutive effect of share-based compensation

 

 

456,775

 

 

 

261,422

 

 

 

483,337

 

 

 

268,332

 

Diluted weighted average number common shares outstanding

 

 

12,456,674

 

 

 

12,181,272

 

 

 

12,465,346

 

 

 

12,183,845

 

Basic earnings per share

 

$

0.56

 

 

$

0.34

 

 

$

1.65

 

 

$

0.88

 

Diluted earnings per share

 

$

0.54

 

 

$

0.34

 

 

$

1.58

 

 

$

0.86

 

Antidilutive stock options and restricted stock outstanding

 

 

160,668

 

 

 

224,177

 

 

 

160,668

 

 

 

224,177

 

 

 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.

 

 

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 (the “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. The primary focus of the Bank is on providing a full range of banking products and services to small and medium sized businesses, professionals, and individuals throughout the greater Puget Sound region in the state of Washington. 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 Bank through its CCBX division provides banking as a service (“BaaS”) that allows broker-dealer and digital financial service partners to offer their customers banking services.  CCDB, our digital banking division, is exploring additional opportunities in the digital sector of banking.  As of September 30, 2021, we had total assets of $2.45 billion, total gross loans of $1.71 billion, total deposits of $2.22 billion and total shareholders’ equity of $161.1 million.

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

As a bank holding company that operates through one segment,  we generate most of our revenue from interest on loans. Our primary source of funding for our loans is commercial and retail deposits from our customer relationships and from our CCBX division. We place secondary reliance on wholesale funding, primarily borrowings from the Federal Home Loan Bank (“FHLB”).  We utilized the Paycheck Protection Program Liquidity Facility (“PPPLF”), which provided an additional source of low cost funding for the Paycheck Protection Program (“PPP”) loans, with a contractual interest rate of 0.35% and collateralized by PPP loans.  All our PPPLF borrowings were paid in full as of June 30, 2021, and the PPPLF expired on July 31, 2021.  Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, brokered deposits, certificate of deposit listing services, and a one-way buy through an insured cash sweep (“ICS”) account, which allow us to obtain funds from other institutions that have deposited funds through ICS. Our largest expenses are salaries and related employee benefits, software licenses, maintenance and subscription expenses, legal and professional fees, 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 to a lesser extent consumer loans.

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

On March 27, 2020, the 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 is a stimulus response to the potential economic impacts of the COVID-19 pandemic.  The purpose of the PPP is 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 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.

PPP lending resumed on January 19, 2021 (known as “round three” or the “third round” of the PPP), and we accepted and processed applications for the duration of the round three, which closed for applications on May 31, 2021.  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 September 30, 2021, $267.3 million in PPP loans remained with $9.4 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 $16.2 million of these loans remaining as of September 30, 2021.  PPP loans originated in 2021 are five-year loans, and $251.1 million

28

 

remains of these loans as of September 30, 2021. 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 are accepting applications from customers for loan forgiveness and we received $130.8 million in forgiveness or principal paydowns in the three months ended September 30, 2021. 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 September 30, 2021

 

Loans outstanding

 

$

16,228

 

$

251,050

 

$

267,278

 

Deferred fees, net

 

 

148

 

 

9,269

 

$

9,417

 

As of September 30, 2021 there was $267.3 million in PPP loans, including $16.2 million from rounds 1 and 2 and $251.1 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

 

$

1,084

 

$

952

 

$

1,179

 

$

4,221

 

$

8,792

 

$

16,228

 

Round 3

 

 

23,692

 

 

40,604

 

 

60,700

 

 

123,098

 

 

2,956

 

 

251,050

 

Total principal outstanding

 

 

24,776

 

 

41,556

 

 

61,879

 

 

127,319

 

 

11,748

 

 

267,278

 

Net deferred fees outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Round 1 & 2

 

$

15

 

$

22

 

$

36

 

$

42

 

$

33

 

$

148

 

Round 3

 

 

2,083

 

 

1,532

 

 

2,506

 

 

3,123

 

 

25

 

 

9,269

 

Total net deferred fees

     outstanding

 

$

2,098

 

$

1,554

 

$

2,542

 

$

3,165

 

$

58

 

$

9,417

 

Number of loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Round 1 & 2

 

 

73

 

 

14

 

 

9

 

 

10

 

 

5

 

 

111

 

Round 3

 

 

1,294

 

 

445

 

 

262

 

 

160

 

 

1

 

 

2,162

 

Total loan count

 

 

1,367

 

 

459

 

 

271

 

 

170

 

 

6

 

 

2,273

 

Percent of total

 

 

60.1

%

 

20.2

%

 

11.9

%

 

7.5

%

 

0.3

%

 

100.0

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Forgiveness/Payoffs/Paydowns in Three Months Ended September 30, 2021

 

 

 

 

 

 

 

 

 

 

Dollars

 

$

12,199

 

$

17,408

 

$

21,557

 

$

44,995

 

$

34,601

 

$

130,760

 

Deferred fee recognized

 

 

671

 

 

579

 

 

638

 

 

946

 

 

112

 

 

2,946

 

29

 

 

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 third quarter of 2021. 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. As of September 30, 2021 our re-opening plan includes the following elements:

 

•

We are serving customers through drive throughs, call center, mobile banking, online banking and ATMs, and have opened branches for customers.

 

•

We continued participation in the SBA PPP with forgiveness or principal paydowns of $130.8 million during the three months ended September 30, 2021, and PPP loans outstanding were $267.3 million, as of September 30, 2021.

 

•

We actively engaged borrowers and other businesses in discussion to identify short-term cash flow and other financial needs, and restructured payments on existing loans to alleviate financial hardship consistent with regulatory guidance. As of September 30, 2021, all loans that were on deferred or modified payment status have successfully returned to active status or paid off.

 

•

We enhanced credit monitoring on loan segments that have been most impacted by the COVID-19 pandemic, monitoring and tracking loan payment deferrals and customer liquidity.

 

•

As of September 30, 2021, Washington state reopened under the Washington Ready plan. All industry sectors previously covered by the Roadmap to Recovery or the Safe Start plan, with the limited exceptions, were permitted to return to usual capacity and operations.

 

•

We updated and analyzed the Company's liquidity, funding and capital stress forecasts and risk assumptions.

 

•

On July 19, 2021, the Company started its re-opening process, which included some non-remote and hybrid workers returning to the office and in-person gatherings/trainings resuming.  Management recognizes this is an evolving situation and continues to monitor federal, state and local recommendations regarding the  COVID-19 pandemic and the variant strains of the virus.  Management will adjust its re-opening plans and implement precautions to safeguard our employees, customers and vendors based on the information available.  

PPP Overview

These loans have had a significant impact on our communities and financial statements for the quarter ended September 30, 2021 and will continue to 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”) measures.  For more information about non-GAAP financial measures, see the non-GAAP disclosure “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures”.

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 will end on December 31, 2021).  Additionally, 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.  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, 2020.

 

30

 

 

Comparison of Operating Results for the Three Months Ended September 30, 2021 and September 30, 2020

Results of Operations

Net Income

Net income for the three months ended September 30, 2021, was $6.7 million, or $0.54 per diluted share, compared to $4.1 million, or $0.34 per diluted share, for the three months ended September 30, 2020. The increase in net income over the comparable period in the prior year was attributable to a $3.2 million increase in interest income.  Interest income on non-PPP loans increased $3.0 million, or 23.4%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.  Additionally, a reduction in the provision for loan losses of $1.9 million for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, also contributed to the increase in net income. The provision for loan losses was increased in 2020 due the change in economic outlook caused by the COVID-19 pandemic, however those losses have not materialized as anticipated, and therefore we recorded a lower provision for loan losses of $255,000 for the three months ended September 30, 2021, compared to $2.2 million for the three months ended September 30, 2020.

 

Noninterest income increased $4.2 million for the three months ended September 30, 2021, compared to the same period last year. The $4.2 million increase in noninterest income over the quarter ended September 30, 2020 was primarily due to a $1.7 million increase in BaaS fees largely due to increased activity, which included $188,000 in interchange income from BaaS partners, compared to $4,000 as of September 30, 2020, a $1.5 million increase in unrealized holding gain on an equity investment, recognized due to an observable price change in an equity security held, a $543,000 increase in loan referral fees, a $159,000 increase in gain on sale of loans, and $132,000 increase in deposit service charges and fees, primarily in point of sale and ATM fees, which had decreased in 2020 because of stay-at-home orders related to the COVID-19 pandemic.

 

The increased loan interest income and noninterest income was partially offset by a $4.0 million increase in salary expenses related to hiring staff for CCBX, CCDB and additional staff for our ongoing banking growth initiatives, an increase of $615,000 in BaaS partner expense and a $480,000 increase in software license, maintenance and subscription expenses.  In addition, legal and professional fees increased $415,000 and Federal Deposit Insurance Corporation (“FDIC”) assessments increased $252,000. The increase in legal and professional expenses is associated with CCBX division expenses and higher costs associated with legal and accounting work related to financial reporting.  The increase in FDIC assessments is largely the result of an increase in deposits combined with other factors that impact the FDIC assessment calculation compared to the quarter ended September 30, 2020.

Net Interest Income

Net interest income for the three months ended September 30, 2021, was $18.8 million, compared to $15.1 million for the three months ended September 30, 2020, an increase of $3.7 million, or 24.6%. The increase in net interest income consisted of a $3.2 million, or 19.6%, increase in interest income coupled with a $497,000, or 38.3%, decrease in interest expense.  The increase in interest income was primarily attributable to a $188.0 million, or 12.6%, increase in average loans outstanding for the three months ended September 30, 2021, compared to the prior year period, and contributed $3.1 million increase in interest income for the quarter ended September 30, 2021, compared to September 30, 2020.  Capital call lines increased $62.3 million, or 63.2%, during the quarter ended September 30, 2021, compared to the prior year period.  These loans bear a lower rate of interest, but have less credit risk due to the way the loans are structured compared to other commercial loans.  

Additionally, yield on loans receivable increased 24 basis points to 4.57% for the three months ended September 30, 2021 from 4.33% for the three months ended September 30, 2020.  The increase in yield on loans receivable compared to September 30, 2020, was largely related to increased yield on loans receivable resulting from loan growth and a decrease in lower yielding PPP loans.  In the three months ended September 30, 2021, a total of $130.8 million in PPP loans were forgiven or repaid.  PPP loans have a 1.0% interest rate and $267.3 million in PPP loans remained as of September 30, 2021, compared to $452.8 million as of September 30, 2020.  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.  As of September 30, 2021, $9.4 million in net deferred fees on PPP loans remains to be recognized in interest income along with interest on loans.

Yield on loans receivable, excluding earned fees, approximated 3.74% for the quarter ended September 30, 2021 compared to 3.61% for the quarter ended September 30, 2020. A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.” Even though there are rate floors in place for

31

 

$460.8 million, or 27.2%, in existing loans, the lower rates have a corresponding impact on yield on loans receivable and subsequently the net interest margin in future periods.  We expect rates to remain at this level for the short term.  

The decrease in interest expense for the three months ended September 30, 2021 was the result of a 17 basis point, or 51.5%, decrease in cost of funds, bringing it to 0.16% as of September 30, 2021, compared to 0.33% at September 30, 2020.  The decrease is largely due to an increase in noninterest bearing deposits and a lower rate environment for the quarter ended September 30, 2021, as compared to the prior year period.  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.  Currently, the majority of CCBX deposits are noninterest bearing, however, as the Federal Reserve Open Market Committee raises interest rates, a majority of these accounts will bear interest and be reclassified to interest bearing deposits once rates exceed the minimum interest rate set in their respective program agreements and begin to earn interest.  As of September 30, 2021, there was $607.2 million in CCBX deposits compared to $51.6 million at September 30, 2020.

The average balance of interest-bearing deposits increased $169.0 million, or 22.5%, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020, but the average rate paid on interest bearing deposits was 24 basis points less for the three months ended September 30, 2021, compared to the quarter ended September 30, 2020.  The increased balance compared to the three months ended September 30, 2020 is primarily attributable to growth in core deposit accounts, which we define as deposits excluding all brokered and time deposits. Average noninterest bearing deposits (such as demand or checking accounts) grew $491.7 million, or 86.3%.  Average NOW (otherwise known as a negotiable order of withdrawal account or interest bearing checking accounts) and money market accounts grew $163.7 million, or 27.8%, and savings accounts increased $20.2 million, or 27.3% compared to September 30, 2020.  Average non-core deposits decreased $14.9 million with time deposits decreasing $17.4 million, or 26.4%, partially offset by an increase of BaaS-brokered deposits of $2.5 million, or 11.5%, compared to September 30, 2020.  As previously mentioned, the current low interest rate environment has impacted the rates that are paid on interest bearing accounts.  The average rate paid on NOW and money market accounts decreased 22 basis points for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.  The average rate paid on time deposits also decreased during this period.  For time deposits less than $100,000, the rate decreased 56 basis points and for time deposits over $100,000, the average rate decreased 66 basis points, for the three months ended September 30, 2021 as compared to the prior year period.  

We do not regularly advertise time deposit rates or money market rates, although we occasionally advertise promotional rates in targeted portions of our market area. Our branch managers, business development officers, and lenders collaborate to provide consistent and coordinated customer service and to seek deposits from new and existing customers.  

 

Interest expense on borrowed funds was $278,000 for the quarter ended September 30, 2021, compared to $418,000 for the quarter ended September 30, 2020.  The decrease in interest expense on borrowed funds from the quarter ended September 30, 2020 is the result of a decrease in average PPPLF borrowings, which were paid off in full as of June 30, 2021.  During the quarter ended September 30, 2021, the Company entered into a $25.0 million subordinated note purchase agreement with a current rate of 3.375%, some of the proceeds of which were used to repay an existing $10.0 million in subordinated debt at a higher 5.65% interest rate.  This increased interest expense on the subordinated debt due to the increased principal balance.

For the three months ended September 30, 2021, 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 3.48% and 3.30%, respectively, compared to 3.62% and 3.41%, respectively, for the three months ended September 30, 2020.  

32

 

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 $3.5 million and $2.7 million for the three months ended September 30, 2021 and 2020, respectively. A total of $2.9 million in PPP loan net fees were recognized in the quarter ended September 30, 2021, compared to $2.4 million for the quarter ended September 30, 2020.  Yield on loans receivable was 4.57% for the three months ended September 30, 2021, compared to 4.33% for the three months ended September 30, 2020.  For the three months ended September 30, 2021 and 2020, the amount of interest income not recognized on nonaccrual loans was not material.

 

 

 

Average Balance Sheets

 

 

 

For the Three Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

Average

 

 

Interest &

 

 

Yield /

 

 

Average

 

 

Interest &

 

 

Yield /

 

(Dollars in thousands)

 

Balance

 

 

Dividends

 

 

Cost (4)

 

 

Balance

 

 

Dividends

 

 

Cost (4)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits

 

$

419,715

 

 

$

170

 

 

 

0.16

%

 

$

137,568

 

 

$

99

 

 

 

0.29

%

Investment securities, available for sale (1)

 

 

31,693

 

 

 

9

 

 

 

0.11

 

 

 

20,373

 

 

 

22

 

 

 

0.43

 

Investment securities, held to maturity (1)

 

 

2,095

 

 

 

15

 

 

 

2.84

 

 

 

3,509

 

 

 

5

 

 

 

0.57

 

Other investments

 

 

6,859

 

 

 

31

 

 

 

1.79

 

 

 

5,951

 

 

 

24

 

 

 

1.60

 

Loans receivable (2)

 

 

1,681,069

 

 

 

19,383

 

 

 

4.57

 

 

 

1,493,024

 

 

 

16,244

 

 

 

4.33

 

Total interest earning assets

 

 

2,141,431

 

 

 

19,608

 

 

 

3.63

 

 

 

1,660,425

 

 

 

16,394

 

 

 

3.93

 

Noninterest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(20,102

)

 

 

 

 

 

 

 

 

 

 

(15,711

)

 

 

 

 

 

 

 

 

Other noninterest earning assets

 

 

77,221

 

 

 

 

 

 

 

 

 

 

 

60,160

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,198,550

 

 

 

 

 

 

 

 

 

 

$

1,704,874

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

$

919,792

 

 

$

523

 

 

 

0.23

%

 

$

750,790

 

 

$

880

 

 

 

0.47

%

PPPLF borrowings

 

 

-

 

 

 

-

 

 

 

0.00

 

 

 

199,076

 

 

 

176

 

 

 

0.35

 

FHLB advances and other borrowings

 

 

24,999

 

 

 

72

 

 

 

1.14

 

 

 

24,999

 

 

 

71

 

 

 

1.13

 

Subordinated debt

 

 

17,073

 

 

 

185

 

 

 

4.30

 

 

 

9,987

 

 

 

148

 

 

 

5.90

 

Junior subordinated debentures

 

 

3,586

 

 

 

21

 

 

 

2.32

 

 

 

3,584

 

 

 

23

 

 

 

2.55

 

Total interest bearing liabilities

 

 

965,450

 

 

 

801

 

 

 

0.33

 

 

 

988,436

 

 

 

1,298

 

 

 

0.52

 

Noninterest bearing deposits

 

 

1,061,311

 

 

 

 

 

 

 

 

 

 

 

569,615

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

13,705

 

 

 

 

 

 

 

 

 

 

 

12,781

 

 

 

 

 

 

 

 

 

Total shareholders' equity

 

 

158,084

 

 

 

 

 

 

 

 

 

 

 

134,042

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

2,198,550

 

 

 

 

 

 

 

 

 

 

$

1,704,874

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

18,807

 

 

 

 

 

 

 

 

 

 

$

15,096

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

3.30

%

 

 

 

 

 

 

 

 

 

 

3.41

%

Net interest margin (3)

 

 

 

 

 

 

 

 

 

 

3.48

%

 

 

 

 

 

 

 

 

 

 

3.62

%

(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.

33

 

 

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 $2.2 million increase in loan interest income that is attributed to an increase in loan volume.  This increase is supplemented by a $926,000 increase in interest income from loans receivable due to higher interest rates; this increase is largely related to a reduction in the outstanding balance of 1.0% interest rate PPP loans as of September 30, 2021, compared to the three months ended September 30, 2020. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.  

 

 

 

Three Months Ended September 30, 2021

 

 

 

Compared to

 

 

 

Three Months Ended September 30, 2020

 

 

 

Increase (Decrease)

 

 

 

 

 

 

 

Due to

 

 

Total Increase

 

(Dollars in thousands)

 

Volume

 

 

Rate

 

 

(Decrease)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits

 

$

115

 

 

$

(44

)

 

$

71

 

Investment securities, available for sale

 

 

3

 

 

 

(16

)

 

 

(13

)

Investment securities, held to maturity

 

 

(10

)

 

 

20

 

 

 

10

 

Other Investments

 

 

4

 

 

 

3

 

 

 

7

 

Loans receivable

 

 

2,213

 

 

 

926

 

 

 

3,139

 

Total increase in interest income

 

 

2,325

 

 

 

889

 

 

 

3,214

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

 

99

 

 

 

(456

)

 

 

(357

)

PPPLF borrowings

 

 

(176

)

 

 

-

 

 

 

(176

)

FHLB advances and other borrowings

 

 

-

 

 

 

1

 

 

 

1

 

Subordinated debt

 

 

77

 

 

 

(40

)

 

 

37

 

Junior subordinated debentures

 

 

-

 

 

 

(2

)

 

 

(2

)

Total increase in interest expense

 

 

-

 

 

 

(497

)

 

 

(497

)

Increase in net interest income

 

$

2,325

 

 

$

1,386

 

 

$

3,711

 

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 September 30, 2021 was $255,000, compared to $2.2 million for the three months ended September 30, 2020. The allowance for loan losses as a percentage of loans was 1.19% at September 30, 2021, compared to 1.13% at September 30, 2020. As of September 30, 2021, there was $267.3 million in PPP loans included in our portfolio.  These loans are 100% guaranteed by the SBA, and therefore we have not allocated any portion of our allowance to these 100% guaranteed loans.  The allowance for loan losses to loans receivable, excluding the guaranteed PPP loans, is 1.40%.  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 provision for loan losses was increased in 2020 due to the change in economic outlook caused by the COVID-19 pandemic along with loan growth.  The factors used in management’s analysis of the allowance for loan losses resulted in a provision of $255,000 was needed for quarter ended September 30, 2021. The expected COVID-19 pandemic related loan losses have not materialized as originally anticipated in 2020, as evidenced by the low level of charge-offs and nonperforming loans.  The economic environment is continuously changing and has shown signs of improvement, with United States implementing stimulus packages, ongoing vaccination of its population and increased re-opening of business activities. We are not required to implement the provisions of the Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023, and therefore we are continuing to account for the allowance for loan losses under the incurred loss model.  Credit quality has remained stable through September 30, 2021, as demonstrated by the low level of charge-offs and nonperforming loan balance.  Nonperforming loans decreased $3.7 million, to $740,000, as of September 30, 2021, compared to $4.5 million as of September 30, 2020.  Included in nonperforming loans for the three months ended September 30, 2021 is $123,000 in CCBX partner loans that were past due 90 days or more and still accruing.  Nonperforming assets to total assets was 0.03% at September 30, 2021 compared to 0.26% at September 30, 2020.  For a description of the Company’s nonperforming assets see “—Financial Condition—Nonperforming Assets.”

34

 

Pursuant to guidance from the federal bank regulatory agencies, the Company deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic and economic shutdown There was a total of $246.4 million, or 250 loans, which were deferred and/or for which payments were modified under this guidance. As of September 30, 2021, all of these  loans have successfully returned to active status or paid off.  The purpose of this deferral and modification program was to provide cash flow relief for small business customers as they navigate through the uncertainties of the COVID-19 pandemic.  The Company’s deferral program has been successful as evidenced by customers’ ability to migrate from deferral to active status and resume making payments as planned.

Net recoveries for the three months ended September 30, 2021 totaled $1,000, as compared to net charge-offs of $1,000 for the three months ended September 30, 2020.  Net charge-offs for both quarterly periods represented a non-material percentage of the value of total average loans.

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. Additionally, the unrealized holding gain on equity securities was a contributing source of noninterest income for the three months ended September 30, 2021.  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 September 30, 2021, noninterest income totaled $6.1 million, an increase of $4.2 million, or 215.8%, compared to $1.9 million for the three months ended September 30, 2020.

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

 

 

 

Three Months

 

 

 

 

 

 

 

 

 

 

 

Ended September30,

 

 

Increase

 

 

Percent

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

(Decrease)

 

 

Change

 

BaaS fees

 

$

2,286

 

 

$

576

 

 

$

1,710

 

 

 

296.9

%

Unrealized holding gain on equity securities, net

 

 

1,472

 

 

 

-

 

 

 

1,472

 

 

 

100.0

 

Deposit service charges and fees

 

 

956

 

 

 

824

 

 

 

132

 

 

 

16.0

 

Loan referral fees

 

 

723

 

 

 

180

 

 

 

543

 

 

 

301.7

 

Gain on sales of loans, net

 

 

206

 

 

 

47

 

 

 

159

 

 

 

338.3

 

Mortgage broker fees

 

 

187

 

 

 

125

 

 

 

62

 

 

 

49.6

 

Other

 

 

302

 

 

 

190

 

 

 

112

 

 

 

58.9

 

Total noninterest income

 

$

6,132

 

 

$

1,942

 

 

$

4,190

 

 

 

215.8

%

 

BaaS Fees. Our CCBX division 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 enhancement 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. BaaS fee income for the three months ended September 30, 2021 was $2.3 million compared to $576,000 for the three months ended September 30, 2020.  The increase is the largely the result of providing services to additional CCBX customers during the period.  

 

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

 

 

 

Three Months

 

 

 

 

 

 

 

 

 

 

 

Ended September30,

 

 

Increase

 

 

Percent

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

(Decrease)

 

 

Change

 

Servicing and other BaaS fees

 

$

1,792

 

 

$

572

 

 

$

1,220

 

 

 

213.3

%

Fraud recovery

 

 

296

 

 

 

-

 

 

 

296

 

 

 

100.0

 

Credit enhancement recovery

 

 

10

 

 

 

-

 

 

 

10

 

 

 

100.0

 

Interchange

 

 

188

 

 

 

4

 

 

 

184

 

 

 

4,600.0

 

Total BaaS fees

 

$

2,286

 

 

$

576

 

 

$

1,710

 

 

 

296.9

%

35

 

 

 

As of September 30, 2021, there were sixteen active CCBX relationships, seven in onboarding/implementation, three signed letters of intent and a solid pipeline of potential new relationships.  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 for the periods presented:

 

 

As of

 

September 30, 2021

September 30, 2020

Active

16

4

Friends and family / testing

0

1

Implementation / onboarding

7

4

Signed letters of intent

3

2

      Total CCBX relationships

26

11

 

Unrealized holding gain on sale of equity securities, net. During the quarter ended September 30, 2021, we recognized a $1.5 million unrealized holding gain on an equity security as a result of an observable price change.  There was no similar income in the three months ended September 30, 2020.  

 

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. Deposit service charges were $956,000 for the three months ended September 30, 2021, an increase of $132,000, or 16.0%, from $824,000 over the same period in the prior year. The increase in deposit service charges and fees was primarily the result of a $93,000 increase in point of sale fees and $17,000 increase in merchant services fee income in the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020, during which the economy was impacted by initial the spread of COVID-19 pandemic.

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 $723,000 in income from loan referral fees for the three months ended September 30, 2021, compared to $180,000 for the three months ended September 30, 2020. 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.  Gain on sale of loans totaled $206,000 for the three months ended September 30, 2021, compared to $47,000 for the three months ended September 30, 2020 as a result of more SBA and USDA loans 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 increased $62,000 in the three months ended September 30, 2021 to $187,000, compared to $125,000 for the three months ended September 30, 2020 as a result of higher demand.

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 $112,000 in the three months ended September 30, 2021, compared to the three months ended September 30, 2020 primarily due to an increase in earnings on BOLI and increased credit card fee income.

36

 

Noninterest Expense

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

For the three months ended September 30, 2021, noninterest expense totaled $16.1 million, an increase of $6.5 million, or 66.9%, compared to $9.7 million for the three months ended September 30, 2020.

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

 

 

 

Three Months

 

 

 

 

 

 

 

 

 

 

 

Ended September 30,

 

 

Increase

 

 

Percent

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

(Decrease)

 

 

Change

 

Salaries and employee benefits

 

$

9,961

 

 

$

5,971

 

 

$

3,990

 

 

 

66.8

%

Occupancy

 

 

1,037

 

 

 

1,091

 

 

 

(54

)

 

 

(4.9

)

Software licenses, maintenance and subscriptions

 

 

817

 

 

 

337

 

 

 

480

 

 

 

142.4

 

Legal and professional fees

 

 

796

 

 

 

381

 

 

 

415

 

 

 

108.9

 

Data processing

 

 

761

 

 

 

577

 

 

 

184

 

 

 

31.9

 

BaaS expense

 

 

715

 

 

 

100

 

 

 

615

 

 

 

615.0

 

Excise taxes

 

 

407

 

 

 

291

 

 

 

116

 

 

 

39.9

 

FDIC assessments

 

 

400

 

 

 

148

 

 

 

252

 

 

 

170.3

 

Director and staff expenses

 

 

274

 

 

 

156

 

 

 

118

 

 

 

75.6

 

Marketing

 

 

130

 

 

 

52

 

 

 

78

 

 

 

150.0

 

Business development

 

 

123

 

 

 

72

 

 

 

51

 

 

 

70.8

 

Other

 

 

709

 

 

 

490

 

 

 

219

 

 

 

44.7

 

Total noninterest expense

 

$

16,130

 

 

$

9,666

 

 

$

6,464

 

 

 

66.9

%

 

Salaries and Employee Benefits. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, incentive compensation costs, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $10.0 million for the three months ended September 30, 2021, an increase of $4.0 million, or 66.8%, compared to $6.0 million for the three months ended September 30, 2020. The increase was primarily due to continued hiring staff for our CCBX division 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 September 30, 2021, we had 342.7 full-time equivalent employees, compared to 234.2 at September 30, 2020, a 46.3% increase.

Occupancy. Occupancy expenses were $1.0 million for the three months ended September 30, 2021, compared to $1.1 million for the three months ended September 30, 2020. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $369,000 and $345,000 for the three months ended September 30, 2021 and 2020, 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 $817,000 for the quarter ended September 30, 2021, compared to $337,000 for the prior year period.  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 and CCDB divisions.

Legal and Professional Fees. Legal and professional costs were $796,000 for the quarter ended September 30, 2021, compared to $381,000 for the quarter ended September 30, 2020.  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.  The increase in legal and professional expenses includes consulting expenses related to monitoring for Bank Secrecy Act/Anti-Money Laundering, CCBX operations and higher costs related to legal and accounting work related to financial reporting.

37

 

Data Processing. Data processing costs were $761,000 for the three months ended September 30, 2021, compared to $577,000 for the three months ended September 30, 2020. 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 and CCDB data processing expenses are included in this category and are expected to increase incrementally as these divisions grow.

BaaS expense. Our CCBX division 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.  BaaS loan expense represents the amount paid to partners for originating and servicing loans.  BaaS fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts.  Any credit enhancement provided by the partner is reimbursed and included in noninterest income.   For the quarter ended September 30, 2021, BaaS expense was $715,000 compared to $100,000 for the three months ended September 30, 2020 as a result of increased partner customer activity.  

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

 

 

Three Months

 

 

 

 

 

 

 

 

 

 

 

Ended September 30,

 

 

Increase

 

 

Percent

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

(Decrease)

 

 

Change

 

BaaS loan expense

 

$

419

 

 

$

100

 

 

$

319

 

 

 

319.0

%

BaaS fraud expense

 

 

296

 

 

 

-

 

 

 

296

 

 

 

100.0

 

Total BaaS expense

 

$

715

 

 

$

100

 

 

$

615

 

 

 

615.0

%

Excise Taxes. Excise taxes were $407,000 for the three months ended September 30, 2021, compared to $291,000 for the three months ended September 30, 2020.  Excise taxes are based on gross income of $25.7 million and $18.3 million for the three months ended September 30, 2021 and 2020, respectively.  Gross income is reduced by certain allowed deductions to arrive at the taxable base; however, as gross income increases, so does the excise tax expense.  

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 $400,000 for the three months ended September 30, 2021, compared to $148,000 for the three months ended September 30, 2020, an increase of $252,000.  As deposits increase, the FDIC assessment expense will generally increase.  

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 $274,000 for the three months ended September 30, 2021, compared to $156,000 for the three months ended September 30, 2020.  Changes to director compensation approved in October 2020 and increased expenses related to employee travel, and continuing education contributed to the increase in the quarter ended September 30, 2021 compared to quarter ended September 30, 2020.  

Marketing. Marketing costs were $130,000 for the three months ended September 30, 2021, compared to $52,000 for the three months ended September 30, 2020.  Marketing costs were lower in the three months ended September 30, 2020 as a result of reduced marketing during the COVID-19 pandemic, however, as we continue to expand our CCBX and CCDB divisions, offer new products and services and grow our brand, we expect marketing costs to increase.

Business Development. Business development costs were $123,000 for the three months ended September 30, 2021, compared to $72,000 for the three months ended September 30, 2020.  Business development costs include sponsorships and other activities to cultivate business and community development.  Business development expenses were reduced in the three months ended September 30, 2020 as a result of restrictions on in person meetings and business related activities due to the COVID-19 pandemic.

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 $709,000 for the three months ended September 30, 2021, compared to $490,000 for the three months ended September 30, 2020. The increase was largely due to $75,000 increase in provision for unfunded commitments for the three months ended September 30, 2021, as compared to the same period last year, combined with $55,000 more in office supply costs, and $53,000 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

38

 

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. For the three months ended September 30, 2021, income tax expense totaled $1.9 million, compared to $1.1 million for the three months ended September 30, 2020.  The $788,000 increase in income tax expense is the result of higher net income.   Additionally, we are now subject to various state taxes that are being assessed as a result of hiring staff in multiple states, remote employees and CCBX activities 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 September 30, 2021 and 2020 were 21.9% and 20.9%, respectively.

39

 

Comparison of Operating Results for the Nine months ended September 30, 2021 and September 30, 2020

Results of Operations

Net Income

Net income for the nine months ended September 30, 2021, was $19.7 million, or $1.58 per diluted share, compared to $10.5 million, or $0.86 per diluted share, for the nine months ended September 30, 2020. The increase in net income over the comparable period in the prior year was attributable to a $14.3 million increase in net interest income, largely related to PPP and non-PPP loan growth.  A reduction in the provision for loan losses of $4.7 million for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, also contributed to the increase in net income.  The provision for loan losses increased in 2020 due to the change in economic outlook caused by the COVID-19 pandemic, however losses have not materialized as anticipated, and therefore a provision of $973,000 was recorded, for the nine months ended September 30, 2021.  For the nine months ended September 30, 2021 there was $7.8 million increase in noninterest income, including $3.0 million increase in BaaS fees as a result of growth in CCBX, $1.5 million on an unrealized holding gain on equity securities as a result of an observable price change, and $1.3 million gain on sale of the Freeland branch  compared to the nine months ended September 30, 2020.  Noninterest expense for the nine months ended September 30, 2021 was $14.6 million higher compared to the nine months ended September 30, 2020, primarily due to $9.7 million higher salaries and employee benefits as a result of growth in CCBX and growth initiatives, an increase of $1.0 million in legal, accounting and professional fees related to CCBX, financial reporting, and compliance consulting, $925,000 more in software licenses, maintenance and subscriptions, and $714,000 increase in BaaS expense.  

Net Interest Income

Net interest income for the nine months ended September 30, 2021, was $54.7 million, compared to $40.5 million for the nine months ended September 30, 2020, an increase of $14.3 million, or 35.3%. The increase in net interest income consisted of a $12.6 million, or 28.0%, increase in interest income coupled with a $1.7 million, or 37.5%, decrease in interest expense.  

The increase in interest income was primarily attributable to a $425.1 million, or 33.6%, increase in average loans outstanding for the nine months ended September 30, 2021, compared to the prior year period, partially offset by a 14 basis point decrease in yield on loans receivable from 4.65% for the nine months September 30, 2020 to 4.51% for the nine months ended September 30, 2021.  The decrease in yield on loans receivable, as compared to the nine months ended September 30, 2020, was largely due to an average balance of $435.4 million in PPP loans for the nine months ended September 30, 2021.  PPP loans have a 1.0% interest rate and an approximate yield of 3.97% for the nine months ended September 30, 2021, after including the amortization of deferred fees and costs.  Capital call lines increased $117.7 million, or 268.8%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.  These loans bear a lower rate of interest, which contributed to the lower yield on loans receivable, but have less credit risk due to the way the loans are structured compared to other commercial loans.  Also contributing to the decline in yield on loans receivable is the current low interest rate environment which results in lower rates on our variable rate, new and renewing loans.  

Yield on loans receivable, excluding earned fees, approximated 3.57% for the nine months ended September 30, 2021 compared to 4.09% for the nine months ended September 30, 2020. A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.” Although there are rate floors in place for $460.8 million, or 27.2%, in existing loans, the lower rates have a corresponding impact on yield on loans receivable and subsequently the net interest margin in future periods.  We expect rates to remain at this level in the near future.  

The decrease in interest expense for the nine months ended September 30, 2021 was the result of a 25 basis point, or 55.6%, decrease in cost of funds, bringing it to 0.20% for the nine months ended September 30, 2021, compared to 0.45% for the nine months ended September 30, 2020.  In addition to the aforementioned low interest rate environment, which resulted in a lower interest rate paid on interest-bearing deposit accounts, we gained new customer relationships by originating PPP loans to noncustomers and they continue to move their banking/deposit relationships over to the Bank.  Additionally, as of September 30, 2021, there were a total of $607.2 million in CCBX deposits compared to $51.6 million at September 30, 2020. These increases in noninterest bearing and low interest rate interest bearing deposits helped contribute to the improved cost of funds for the nine months ended September 30, 2021, as compared to the prior year period.   Currently, the majority of CCBX deposits are noninterest bearing; however, if the Federal Reserve Open Market Committee raises interest rates, a majority of these accounts will bear interest and be reclassified to interest bearing deposits once rates exceed their minimum interest rate set in their respective program agreements and begin to earn interest, which will increase interest expense and cost of funds.  

40

 

The average balance of interest-bearing deposits increased $196.5 million, or 28.2%, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020, but the average rate paid on interest bearing deposits was 26 basis points less for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.  The increased balance compared to the nine months ended September 30, 2020 is primarily attributable to growth in core deposit accounts, which we define as deposits excluding all brokered and time deposits. Noninterest bearing deposits (such as demand or checking accounts) grew $385.0 million, or 78.8%.  Average NOW (which are interest bearing checking accounts) and money market accounts grew $195.4 million, or 36.8%, and savings accounts increased $25.3 million, or 38.8% compared to September 30, 2020.  Average non-core deposits decreased $24.2 million with time deposits decreasing $25.5 million, or 32.6%, partially offset by $1.3 million increase in average BaaS-brokered deposits, compared to September 30, 2020.  As previously mentioned, the current low interest rate environment has impacted the rates that are paid on interest bearing accounts.  The average rate paid on BaaS-brokered deposits decreased 24 basis points to 0.35%, and NOW and money market accounts decreased 39 basis points to 0.27% for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.  The average rate paid on time deposits also decreased during this period.  For time deposits less than $100,000, the rate decreased 52 basis points to 0.61% and for time deposits over $100,000, the average rate decreased 73 basis points to 0.72%, for the quarter ended September 30, 2021 as compared to the prior year period.  

For the nine months ended September 30, 2021, 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 3.64% and 3.46%, respectively, compared to 3.81% and 3.51%, respectively, for the nine months ended September 30, 2020.  

41

 

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 $11.8 million and $5.3 million for the nine months ended September 30, 2021 and 2020, respectively. A total of $9.7 million in PPP loan net fees were recognized in the nine months ended September 30, 2021, compared to $4.4 million for the nine months ended September 30, 2020.  Yield on loans receivable was 4.51% for the nine months ended September 30, 2021, compared to 4.65% for the nine months ended September 30, 2020.  For the nine months ended September 30, 2021 and 2020, the amount of interest income not recognized on nonaccrual loans was not material.

 

 

Average balance sheets

 

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

2020

 

 

 

Average

 

 

Interest &

 

 

Yield /

 

 

Average

 

 

Interest &

 

 

Yield /

 

(Dollars in thousands)

 

Balance

 

 

Dividends

 

 

Cost (4)

 

 

Balance

 

 

Dividends

 

 

Cost (4)

 

Assets

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits

 

$

284,225

 

 

$

314

 

 

 

0.15

%

 

$

122,941

 

 

$

587

 

 

 

0.64

%

Investment securities, available for sale (1)

 

 

25,344

 

 

 

45

 

 

 

0.24

 

 

 

20,302

 

 

 

155

 

 

 

1.02

 

Investment securities, held to maturity (1)

 

 

2,349

 

 

 

31

 

 

 

1.76

 

 

 

3,950

 

 

 

44

 

 

 

1.49

 

Other Investments

 

 

6,594

 

 

 

169

 

 

 

3.43

 

 

 

5,435

 

 

 

129

 

 

 

3.17

 

Loans receivable (2)

 

 

1,690,817

 

 

 

56,978

 

 

 

4.51

 

 

 

1,265,705

 

 

 

44,025

 

 

 

4.65

 

Total interest earning assets

 

 

2,009,329

 

 

 

57,537

 

 

 

3.83

 

 

 

1,418,333

 

 

 

44,940

 

 

 

4.23

 

Noninterest earning assets:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Allowance for loan losses

 

 

(19,744

)

 

 

 

 

 

 

 

 

 

 

(13,651

)

 

 

 

 

 

 

 

 

Other noninterest earning assets

 

 

73,328

 

 

 

 

 

 

 

 

 

 

 

57,830

 

 

 

 

 

 

 

 

 

Total assets

 

$

2,062,913

 

 

 

 

 

 

 

 

 

 

$

1,462,512

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Liabilities and Shareholders’ Equity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing liabilities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

$

892,574

 

 

$

1,811

 

 

 

0.27

%

 

$

696,051

 

 

$

3,530

 

 

 

0.68

%

PPPLF borrowings

 

 

91,850

 

 

 

240

 

 

 

0.35

 

 

 

102,527

 

 

 

269

 

 

 

0.35

 

FHLB advances and other borrowings

 

 

24,999

 

 

 

212

 

 

 

1.13

 

 

 

19,304

 

 

 

164

 

 

 

1.13

 

Subordinated debt

 

 

12,381

 

 

 

477

 

 

 

5.15

 

 

 

9,984

 

 

 

441

 

 

 

5.90

 

Junior subordinated debentures

 

 

3,585

 

 

 

63

 

 

 

2.35

 

 

 

3,583

 

 

 

83

 

 

 

3.09

 

Total interest bearing liabilities

 

 

1,025,389

 

 

 

2,803

 

 

 

0.37

 

 

 

831,449

 

 

 

4,487

 

 

 

0.72

 

Noninterest bearing deposits

 

 

873,271

 

 

 

 

 

 

 

 

 

 

 

488,296

 

 

 

 

 

 

 

 

 

Other liabilities

 

 

12,798

 

 

 

 

 

 

 

 

 

 

 

12,607

 

 

 

 

 

 

 

 

 

Total shareholders' equity

 

 

151,455

 

 

 

 

 

 

 

 

 

 

 

130,160

 

 

 

 

 

 

 

 

 

Total liabilities and shareholders' equity

 

$

2,062,913

 

 

 

 

 

 

 

 

 

 

$

1,462,512

 

 

 

 

 

 

 

 

 

Net interest income

 

 

 

 

 

$

54,734

 

 

 

 

 

 

 

 

 

 

$

40,453

 

 

 

 

 

Interest rate spread

 

 

 

 

 

 

 

 

 

 

3.46

%

 

 

 

 

 

 

 

 

 

 

3.51

%

Net interest margin (3)

 

 

 

 

 

 

 

 

 

 

3.64

%

 

 

 

 

 

 

 

 

 

 

3.81

%

 

(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.

42

 

 

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. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.  

 

 

 

Nine Months Ended September 30, 2021

 

 

 

Compared to

 

 

 

Nine Months Ended September 30, 2020

 

 

 

Increase (Decrease)

 

 

 

 

 

 

 

Due to

 

 

Total Increase

 

(Dollars in thousands)

 

Volume

 

 

Rate

 

 

(Decrease)

 

Interest income:

 

 

 

 

 

 

 

 

 

 

 

 

Interest earning deposits

 

$

178

 

 

$

(451

)

 

$

(273

)

Investment securities, available for sale

 

 

9

 

 

 

(119

)

 

 

(110

)

Investment securities, held to maturity

 

 

(21

)

 

 

8

 

 

 

(13

)

Other Investments

 

 

30

 

 

 

10

 

 

 

40

 

Loans receivable

 

 

14,285

 

 

 

(1,332

)

 

 

12,953

 

Total increase in interest income

 

 

14,481

 

 

 

(1,884

)

 

 

12,597

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest expense:

 

 

 

 

 

 

 

 

 

 

 

 

Interest bearing deposits

 

 

395

 

 

 

(2,114

)

 

 

(1,719

)

PPPLF borrowings

 

 

(29

)

 

 

-

 

 

 

(29

)

FHLB advances

 

 

48

 

 

 

-

 

 

 

48

 

Subordinated debt

 

 

92

 

 

 

(56

)

 

 

36

 

Junior subordinated debentures

 

 

-

 

 

 

(20

)

 

 

(20

)

Total increase in interest expense

 

 

506

 

 

 

(2,190

)

 

 

(1,684

)

Increase in net interest income

 

$

13,975

 

 

$

306

 

 

$

14,281

 

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 nine months ended September 30, 2021 was $973,000, compared to $5.7 million for the nine months ended September 30, 2020. The allowance for loan losses as a percentage of loans was 1.19% at September 30, 2021, compared to 1.13% at September 30, 2020. As of September 30, 2021, there was $267.3 million in PPP loans included in our portfolio.  These loans are 100% guaranteed by the SBA, and therefore we have not allocated any portion of our allowance to these 100% guaranteed loans.  The allowance for loan losses to loans receivable, excluding the guaranteed PPP loans, is 1.40%.  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 provision for loan losses was increased in 2020 due to the change in economic outlook caused by the COVID-19 pandemic along with loan growth.  The factors used in management’s analysis of the provision for loan losses resulted in a provision of $973,000 for the nine months ended September 30, 2021.  The expected loan losses have not materialized as originally anticipated in 2020, as evidenced by the low level of charge-offs and nonperforming loans.  The economic environment is continuously changing and has shown signs of improvement, with United States implementing substantial economic stimulus legislation, ongoing vaccination of its population and increased re-opening of business activities. We are not required to implement the provisions of CECL accounting standard until January 1, 2023, and therefore we are continuing to account for the allowance for loan losses under the incurred loss model.  Credit quality has remained stable through September 30, 2021, as demonstrated by the low level of charge-offs and nonperforming loan balance.  Nonperforming loans decreased $3.7 million, to $740,000, as of September 30, 2021, compared to $4.5 million as of September 30, 2020.  Included in nonperforming loans for the three months ended September 30, 2021 is $123,000 in CCBX partner loans that were past due 90 days or more and still accruing.  Nonperforming assets to total assets was 0.03% at September 30, 2021 compared to 0.26% at September 30, 2020.  For a description of the Company’s nonperforming assets see “—Financial Condition—Nonperforming Assets.”

Pursuant to guidance from the federal bank regulatory agencies, the Company deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic and economic shutdown.  There was a total of $246.4 million, or 250 loans,

43

 

granted deferred and/or modified payments under this guidance. As of September 30, 2021, all of these loans have successfully returned to active status or paid off.  The purpose of this deferral and modification program was to provide cash flow relief for small business customers as they navigate through the uncertainties of the COVID-19 pandemic.  The Company’s deferral program has been successful, as evidenced by customers’ ability to migrate from deferral to active status and resume making payments as planned.

Net charge-offs for the nine months ended September 30, 2021 totaled $13,000, a non-material percentage of the value of total average loans, as compared to $131,000, or 0.01% (annualized) of total average loans, for the nine months ended September 30, 2020.

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. Additionally, the unrealized holding gain on equity securities and the gain on the sale of the Freeland branch was a contributing source of noninterest income for the nine months ended September 30, 2021.  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 nine months ended September 30, 2021, noninterest income totaled $13.9 million, an increase of $7.8 million, or 126.6%, compared to $6.1 million for the nine months ended September 30, 2020.

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

 

 

Nine Months

 

 

 

 

 

 

 

 

 

 

 

Ended September 30,

 

 

Increase

 

 

Percent

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

(Decrease)

 

 

Change

 

BaaS fees

 

$

4,658

 

 

$

1,630

 

 

$

3,028

 

 

 

185.8

%

Deposit service charges and fees

 

 

2,768

 

 

 

2,224

 

 

 

544

 

 

 

24.5

 

Loan referral fees

 

 

2,126

 

 

 

1,303

 

 

 

823

 

 

 

63.2

 

Unrealized holding gain on equity securities, net

 

 

1,472

 

 

 

-

 

 

 

1,472

 

 

 

100.0

 

Gain on sale of branch, net

 

 

1,263

 

 

 

-

 

 

 

1,263

 

 

 

100.0

 

Mortgage broker fees

 

 

702

 

 

 

439

 

 

 

263

 

 

 

59.9

 

Gain on sales of loans, net

 

 

367

 

 

 

47

 

 

 

320

 

 

 

680.9

 

Other

 

 

542

 

 

 

490

 

 

 

52

 

 

 

10.6

 

Total noninterest income

 

$

13,898

 

 

$

6,133

 

 

$

7,765

 

 

 

126.6

%

 

BaaS Fees. Our CCBX division provides BaaS offerings that enable broker dealers 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 enhancement 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. BaaS fee income for the nine months ended September 30, 2021 was $4.7 million compared to $1.6 million for the nine months ended September 30, 2020.  The increase is the result of new CCBX customers actively offering services to their customers.  

 

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

 

 

 

Nine Months

 

 

 

 

 

 

 

 

 

 

 

Ended September30,

 

 

Increase

 

 

Percent

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

(Decrease)

 

 

Change

 

Servicing and other BaaS fees

 

$

4,019

 

 

$

1,626

 

 

$

2,393

 

 

 

147.2

%

Fraud recovery

 

 

296

 

 

 

-

 

 

 

296

 

 

 

100.0

 

Credit enhancement recovery

 

 

10

 

 

 

-

 

 

 

10

 

 

 

100.0

 

Interchange

 

 

333

 

 

 

4

 

 

 

329

 

 

 

8,225.0

 

Total BaaS fees

 

$

4,658

 

 

$

1,630

 

 

$

3,028

 

 

 

185.8

%

44

 

 

 

As of September 30, 2021, there were sixteen active CCBX relationships, seven in onboarding/implementation, three signed letters of intent and a solid pipeline of potential new relationships.  As more CCBX customers move to active status, we expect that BaaS fees will increase.  The following table illustrates the activity and growth in CCBX for the periods presented:

 

 

As of

 

September 30, 2021

September 30, 2020

Active

16

4

Friends and family / testing

0

1

Implementation / onboarding

7

4

Signed letters of intent

3

2

      Total CCBX relationships

26

11

 

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 one of the largest components of our noninterest income. Deposit service charges were $2.8 million for the nine months ended September 30, 2021, an increase of $544,000, or 24.5%, from $2.2 million over the same period in the prior year. The increase in deposit service charges and fees was primarily the result of $413,000 increase in point of sale fees, $84,000 increase in merchant services fee income, and $27,000 increase in ATM fees in the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020, during which the economy was impacted by the spread of COVID-19 pandemic.

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 $2.1 million in income from loan referral fees for the nine months ended September 30, 2021, compared to $1.3 million for the nine months ended September 30, 2020.  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, less or not recognize any, loan referral fees in some periods.

Unrealized holding gain on sale of equity securities, net. During the nine months ended September 30, 2021, we recognized a $1.5 million unrealized holding gain on an equity security as a result of an observable price change.  There was no similar income in the nine months ended September 30, 2020.  

Gain on Sale of Branch, net. The sale of our Freeland branch closed on April 30, 2021.  Noninterest income included a $1.3 million gain from sale of the branch during the nine months ended September 30, 2021. There was no similar income in the nine months ended September 30, 2020.  

Mortgage Broker Fees. We earn mortgage broker fees for residential real estate loans that we broker through mortgage lenders. Mortgage broker fees increased $263,000 in the nine months ended September 30, 2021 to $702,000, compared to $439,000 in the same period in 2020 as a result of increased demand from lower interest rates on mortgages.

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 USDA loans that we originate. This activity fluctuates based on SBA and USDA loan activity.  Gain on sale of loans was $367,000 for the nine months ended September 30, 2021 and $47,000 for the nine months ended September 30, 2020.

Other. This category includes a variety of other income-producing activities, annuity broker fees, earnings on BOLI and SBA and USDA servicing fees. Other noninterest income increased $52,000 in the nine months ended September 30, 2021, compared to the same period in 2020 which is largely due to an increase in credit card fee income and operational recoveries partially offset by a market adjustment on a new BOLI policy purchased during the nine months ended September 30, 2021.  We anticipate that the new BOLI policy will produce market gains in future periods.

Noninterest Expense

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest component of noninterest expense is salaries and employee

45

 

benefits. Noninterest expense also includes operational expenses, such as occupancy expense, data processing expense, legal and professional fees, software licenses, maintenance, and subscriptions, director and staff expense, FDIC assessments, marketing and business development expenses.

For the nine months ended September 30, 2021, noninterest expense totaled $42.2 million, an increase of $14.6 million, or 52.8%, compared to $27.6 million for the nine months ended September 30, 2020.

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

 

 

 

Nine Months

 

 

 

 

 

 

 

 

 

 

 

Ended September 30,

 

 

Increase

 

 

Percent

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

(Decrease)

 

 

Change

 

Salaries and employee benefits

 

$

26,560

 

 

$

16,869

 

 

$

9,691

 

 

 

57.4

%

Occupancy

 

 

3,085

 

 

 

2,951

 

 

 

134

 

 

 

4.5

 

Data processing

 

 

2,192

 

 

 

1,749

 

 

 

443

 

 

 

25.3

 

Legal and professional fees

 

 

2,182

 

 

 

1,178

 

 

 

1,004

 

 

 

85.2

 

Software licenses, maintenance and subscriptions

 

 

1,844

 

 

 

919

 

 

 

925

 

 

 

100.7

 

Excise taxes

 

 

1,154

 

 

 

756

 

 

 

398

 

 

 

52.6

 

BaaS Expense

 

 

905

 

 

 

191

 

 

 

714

 

 

 

373.8

 

Director and staff expenses

 

 

812

 

 

 

613

 

 

 

199

 

 

 

32.5

 

FDIC assessments

 

 

820

 

 

 

292

 

 

 

528

 

 

 

180.8

 

Marketing

 

 

344

 

 

 

280

 

 

 

64

 

 

 

22.9

 

Business development

 

 

322

 

 

 

245

 

 

 

77

 

 

 

31.4

 

Other

 

 

1,993

 

 

 

1,587

 

 

 

406

 

 

 

25.6

 

Total noninterest expense

 

$

42,213

 

 

$

27,630

 

 

$

14,583

 

 

 

52.8

%

 

Salaries and Employee Benefits. Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, incentive compensation costs, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $26.6 million for the nine months ended September 30, 2021, an increase of $9.7 million, or 57.4%, compared to $16.9 million for the nine months ended September 30, 2020. The increase was primarily due to hiring staff for our CCBX  and CCDB divisions and additional staff for our ongoing banking related growth initiatives. Bonus and incentive expense was $1.9 million higher for the nine months ended September 30, 2021 due in part to incentives paid to employees that have been involved in the production and support of PPP loans.  The increase in expense would have been greater if not for an increase in deferred loan costs recorded as salary offsets, largely from originating PPP loans, which was $354,000 higher and lowered expense by that same amount, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020. As our CCBX activities grow, we expect to continue to add employees to support these lines of business.  As of September 30, 2021, we had 342.7 full-time equivalent employees, compared to 234.2 at September 30, 2020, a 46.3% increase.

Occupancy Expenses. Occupancy expenses were $3.1 million for the nine months ended September 30, 2021, compared to $3.0 million for the nine months ended September 30, 2020. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $1.2 million and $965,000 for the nine months ended September 30, 2021 and 2020, respectively, an increase of $206,000.  As we continue to grow, we expect occupancy expenses to increase in future periods.  

Data Processing. Data processing costs were $2.2 million for the nine months ended September 30, 2021, compared to $1.7 million for the nine months ended September 30, 2020. Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs.  Data processing costs grow as we add new products, customers and branches.  Additionally, CCBX data processing expenses are included in this category and are expected to increase incrementally as the CCBX transactions increase.

Legal and Professional Fees. Legal and professional costs were $2.2 million for the nine months ended September 30, 2021 compared to $1.2 million for the nine months ended September 30, 2020.  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. Contributing to the increase in legal and professional expenses is consulting expenses related to monitoring for Bank Secrecy Act/Anti-Money Laundering, CCBX operations and higher costs related to legal and accounting work related to financial reporting.

Software Licenses, Maintenance and Subscriptions. Software licenses, maintenance and subscriptions includes expenses related to obtaining and maintaining software required for various functions throughout the Company.   Software licenses, maintenance and subscriptions were $1.8 million for the nine months ended September 30, 2021, compared to $919,000 for the prior year period.  

46

 

Software that aids in the reporting of CCBX and 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 and CCDB divisions.     

Excise Taxes. Excise taxes were $1.2 million for the nine months ended September 30, 2021, compared to $756,000 for the nine months ended September 30, 2020.  Excise taxes are based on gross income of $71.4 million and $51.1 million for the nine months ended September 30, 2021 and 2020, respectively.  Gross income is reduced by certain allowed deductions to arrive at the taxable base; however, as gross income increases, so does the excise tax expense.  

BaaS expense. Our CCBX division 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.  BaaS loan expense represents the amount paid to partners for originating and servicing loans.  BaaS fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts.  Any credit enhancement provided by the partner is reimbursed and included in noninterest income.  For the nine months ended September 30, 2021, BaaS expense was $905,000 compared to $191,000 for the nine months ended September 30, 2020.  

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

 

 

Nine Months

 

 

 

 

 

 

 

 

 

 

 

Ended September30,

 

 

Increase

 

 

Percent

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

(Decrease)

 

 

Change

 

BaaS loan expense

 

$

609

 

 

$

191

 

 

$

418

 

 

 

218.8

%

BaaS fraud expense

 

 

296

 

 

 

-

 

 

 

296

 

 

 

100.0

 

Total BaaS Expense

 

$

905

 

 

$

191

 

 

$

714

 

 

 

373.8

%

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 $812,000 for the nine months ended September 30, 2021 and $613,000 for the nine months ended September 30, 2020.  Changes to director compensation approved in October 2020 combined with increased employee expenses related to travel and continuing education contributed to the increase in expense year over year.

Marketing. Marketing costs were $344,000 for the nine months ended September 30, 2021, compared to $280,000 for the nine months ended September 30, 2020.  Marketing costs were lower in the nine months ended September 30, 2020 as a result of reduced marketing during the COVID-19 pandemic, however, as we continue to expand our CCBX and CCDB divisions, offer new products and services and grow our brand, we expect marketing costs to increase.

Business Development. Business development costs were $322,000 for the nine months ended September 30, 2021, compared to $245,000 for the nine months ended September 30, 2020.  Business development costs include sponsorships and other activities to cultivate business and community development.  These expenses are increasing to a more typical level as business activities resume, but were reduced as a result of restrictions on in person meetings and business related activities in 2020 due to the COVID-19 pandemic.

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 expenses were $2.0 million for the nine months ended September 30, 2021, compared to $1.6 million for the nine months ended September 30, 2020. The increase was largely due to a $127,000 increase in provision for unfunded commitments, $85,000 increase in FRB and other bank service charges and overall growth for the nine months ended September 30, 2021, as compared to the same period last year.

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. For the nine months ended September 30, 2021, income tax expense totaled $5.7 million, compared to $2.8 million for the nine months ended September 30, 2020. Additionally, we are now subject to various state taxes that are being assessed as a result of hiring staff in multiple states, remote employees and CCBX activities expanding into other states, which has increased the overall rate used in calculating the provision for income taxes in the current and future periods.

47

 

Our effective tax rates for the nine months ended September 30, 2021 was 22.5% compared to 20.9% for the nine months ended September 30, 2020.

48

 

Financial Condition

The Company’s total assets increased $685.4 million, or 38.8%, to $2.45 billion at September 30, 2021 from $1.77 billion at December 31, 2020.  The increase is primarily the result of $493.9 million increase in interest earning deposits with other banks including the Federal Reserve, combined with $158.5 million growth in loans receivable during the nine months ended September 30, 2021.  As of September 30, 2021, $267.3 million in PPP loans remain on the balance sheet, a decrease of $98.5 million from $365.8 million at December 31, 2020.  These PPP loans are 100% guaranteed by the SBA and have a rate of 1.0%, and an approximate yield of 3.97% for the nine months ended September 30, 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 one and two of the PPP, and throughout round three, 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 September 30, 2021, gross loans receivable totaled $1.72 billion, an increase of $163.9 million, or 10.5%, compared to December 31, 2020. The increase was the result of  $137.9 million in non-PPP loan growth, $124.5 million in CCBX loan growth, partially offset by a reduction of $98.5 million in PPP loans due to forgiveness and principal paydowns.  Additionally, unused loan commitments increased, with unused commitments on capital call lines increasing $219.2 million to $347.4 million at September 30, 2021 compared to $128.2 million at December 31, 2020, which will likely translate to loan growth as the commitments are utilized in future periods.

Loans as a percentage of deposits were 76.7% as of September 30, 2021, compared to 108.9% as of December 31, 2020.  We remain focused on serving our communities and markets by growing loans and funding those loans with customer deposits.  The decrease in the loan to deposit ratio was largely due to the increase in interest earning deposits with other banks, primarily due to the increase in CCBX deposits.  

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

 

 

 

As of September 30, 2021

 

 

As of December 31, 2020

 

(Dollars in thousands)

 

Amount

 

 

Percent

 

 

Amount

 

 

Percent

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPP loans

 

$

267,278

 

 

 

15.5

%

 

$

365,842

 

 

 

23.5

%

Capital call lines

 

 

161,457

 

 

 

9.4

 

 

 

65,559

 

 

 

4.2

 

All other commercial & industrial loans

 

 

108,120

 

 

 

6.3

 

 

 

107,799

 

 

 

6.9

 

Total commercial and industrial loans:

 

 

536,855

 

 

 

31.2

 

 

 

539,200

 

 

 

34.6

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

 

158,710

 

 

 

9.2

 

 

 

94,423

 

 

 

6.1

 

Residential real estate

 

 

170,167

 

 

 

9.9

 

 

 

143,869

 

 

 

9.2

 

Commercial real estate

 

 

837,342

 

 

 

48.7

 

 

 

774,925

 

 

 

49.8

 

Consumer and other loans

 

 

17,140

 

 

 

1.0

 

 

 

3,916

 

 

 

0.3

 

Gross loans receivable

 

 

1,720,214

 

 

 

100.0

%

 

 

1,556,333

 

 

 

100.0

%

Net deferred origination fees - PPP loans

 

 

(9,417

)

 

 

 

 

 

 

(5,803

)

 

 

 

 

Net deferred origination fees - all other loans

 

 

(5,115

)

 

 

 

 

 

 

(3,392

)

 

 

 

 

Loans receivable

 

$

1,705,682

 

 

 

 

 

 

$

1,547,138

 

 

 

 

 

 

49

 

 

The following table details the CCBX loans which are included in the total loan portfolio table above:

 

 

As of

 

 

 

September 30, 2021

 

 

December 31, 2020

 

(Dollars in thousands; unaudited)

 

Balance

 

% to Total

 

 

Balance

 

% to Total

 

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Capital call lines

 

$

161,457

 

 

84.9

%

 

$

65,559

 

 

99.9

%

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate loans

 

 

14,039

 

 

7.4

 

 

 

-

 

 

0.0

 

Consumer and other loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

   Credit cards

 

 

1,711

 

 

0.9

 

 

 

9

 

 

0.0

 

   Other consumer loans

 

 

12,937

 

 

6.8

 

 

 

58

 

 

0.1

 

      Gross CCBX loans receivable

 

 

190,144

 

 

100.0

%

 

 

65,626

 

 

100.0

%

Commercial and Industrial Loans. Commercial and industrial loans decreased $2.3 million, or 0.4%, to $536.9 million as of September 30, 2021, from $539.2 million as of December 31, 2020. 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. Commercial and industrial loans are typically 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.

Included in this balance is $161.5 million in capital call lines resulting from relationships with our CCBX customers as of September 30, 2021.   Capital call lines bear a lower rate of interest, but have less credit risk due to the way the loans are structured compared to other commercial loans.

In the first two rounds of the PPP loan program in 2020, our work with the SBA to help small businesses as provided in the CARES Act and subsequent legislation resulted in a total of $452.8 million in PPP loans, with a total of $12.9 million in net deferred fees.  PPP loans have a maximum maturity of five years, bear a 1.0% interest rate and may be forgiven by the SBA if certain criteria are met.  The deferred fees are or will be recognized in interest income over the life of the loans; however, if loans are forgiven or paid off, remaining deferred fees will be recognized in the period the forgiveness or payoff occurs.  As of September 30, 2021, $16.2 million of these loans remain.

The third round of the PPP loan program opened for applications on January 19, 2021 and closed on May 31, 2021.  In this latest round of PPP loans, we funded $311.0 million in PPP loans, and net deferred fees on these loans totaled $13.3 million.  Round three PPP loans have a maturity of five years. 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. As of September 30, 2021, $251.1 million in these loans remain.

We are accepting applications from customers for loan forgiveness.  During the nine months ended September 30, 2021, we received $409.6 million in forgiveness payments or principal paydowns.  In order to obtain loan forgiveness, a PPP borrower must submit a forgiveness application.  We expect that the pace of forgiveness of PPP loans will remain fairly steady throughout 2021, and start declining in 2022 as the covered periods will have passed and payments will start up gradually for loans originated earlier in the program.  Legislation extended the initial payment deferral period on PPP loans, and PPP borrowers with two-year loans can work with their lender to extend to a five year maturity, which we anticipate could be a popular approach for customers whose PPP loans are not eligible for forgiveness or who have only received partial forgiveness. Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods from the recognition of deferred PPP loan fees.  

As of September 30, 2021, we have a total of $267.3 million in PPP loans.  This includes all rounds of the PPP loan program and is net of forgiveness or principal paydowns received on PPP loans.  Net deferred fees of $9.4 million remains on these loans, and will be recognized in interest income in future periods.  We were able to provide loans to our existing customers and also provide assistance to new customers, by taking a proactive approach and reaching out to the communities we serve to offer assistance through the PPP.  

Commercial Real Estate Loans. Commercial real estate loans increased $62.4 million, or 8.1%, to $837.3 million as of September 30, 2021, from $774.9 million as of December 31, 2020.  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 September 30, 2021, approximately 30.8% of the commercial real estate loan portfolio

50

 

consisted of fixed rate loans. Commercial real estate loans represented 48.7% of our loan portfolio at September 30, 2021 and are historically our largest source of revenue. As of September 30, 2021, we held $35.9 million in purchased commercial real estate loans, compared to $29.6 million at December 31, 2020.  The addition of the $267.3 million in PPP loans, and $161.5 million in capital call lines as commercial and industrial loans has significantly impacted the composition of our loan portfolio; without the PPP and capital call line loans, commercial real estate loans would represent approximately 64.8% of the loan portfolio, which is more in line with what it has been historically.  The Bank actively seeks commercial real estate loans in our markets and our lenders are experienced in originating and competing for these loans.  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.  

Residential Real Estate Loans.  Our residential real estate loans increased $26.3 million, or 18.3%, from $143.9 million at December 31, 2020 to $170.2 million at September 30, 2021. We originate one-to-four 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 September 30, 2021, the balance of our ARM portfolio loans was $22.1 million, compared to $20.5 million at December 31, 2020.  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.  As of September 30, 2021, we held $13.5 million in purchased residential real estate mortgage loans, compared to $16.8 million at December 31, 2020.  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 September 30, 2021, residential real estate loans made to investors and business owners totaled $102.0 million, compared to $84.3 million as of December 31, 2020. Residential real estate loans also includes $14.0 million in CCBX loans at September 30, 2021, compared to none at December 31, 2020.

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.

Construction, Land and Land Development Loans. Construction, land and land development loans increased $64.3 million, or 68.1%, to $158.7 million as of September 30, 2021, from $94.4 million as of December 31, 2020. We have a number of construction loans that have been approved, primarily for commercial projects, where the borrower has not requested the funds, resulting in our unfunded construction and development commitments increasing to $152.5 million at September 30, 2021, from $88.4 million at December 31, 2020.  As of September 30, 2021, we had no purchased construction, land and land development loans, compared to $15.3 million at December 31, 2020.

Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2021, the full extent of the long-term effects of the COVID-19 pandemic remain to be seen.  We anticipate that as projects continue we will see drawdowns on the available commitments.  

Consumer and Other. Consumer and other loans totaled $17.1 million as of September 30, 2021, increasing $13.2 million from $3.9 million at December 31, 2020. Our 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 $14.6 million in CCBX loans as of September 30, 2021, compared to $67,000 at December 31, 2020.  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 $1.27 billion in outstanding loan balances, or 87.1% of total gross loans outstanding, excluding PPP loans of $267.3 million.  When combined with $589.3 million in unused commitments the total of these three categories is $1.85 billion, or 87.1% of total outstanding loans and loan commitments.

51

 

Commercial Real Estate Loans. Commercial real estate loans represents the largest segment of our loans, comprising 57.6% of our total balance of outstanding loans, excluding PPP loans, as of September 30, 2021.  Unused commitments to extend credit represents an additional $20.9 million, the combined total exposure in commercial real estate loans represents $858.2 million, or 40.3% of our total outstanding loans and loan commitments, excluding PPP loans, as of September 30, 2021.

The following table summarizes our concentration by industry for our commercial real estate loan portfolio as of September 30, 2021:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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

 

$

140,616

 

 

$

2,595

 

 

$

143,211

 

 

 

6.7

%

 

$

1,926

 

 

 

73

 

Hotel/Motel

 

 

117,924

 

 

 

228

 

 

 

118,152

 

 

 

5.5

 

 

 

4,368

 

 

 

27

 

Office

 

 

92,199

 

 

 

4,513

 

 

 

96,712

 

 

 

4.5

 

 

 

951

 

 

 

97

 

Retail

 

 

84,940

 

 

 

2,672

 

 

 

87,612

 

 

 

4.1

 

 

 

988

 

 

 

86

 

Convenience Store

 

 

78,361

 

 

 

1,093

 

 

 

79,454

 

 

 

3.7

 

 

 

1,822

 

 

 

43

 

Mixed use

 

 

74,521

 

 

 

3,929

 

 

 

78,450

 

 

 

3.7

 

 

 

877

 

 

 

85

 

Warehouse

 

 

76,372

 

 

 

892

 

 

 

77,264

 

 

 

3.6

 

 

 

1,497

 

 

 

51

 

Mini Storage

 

 

39,880

 

 

 

137

 

 

 

40,017

 

 

 

1.9

 

 

 

2,849

 

 

 

14

 

Manufacturing

 

 

37,128

 

 

 

600

 

 

 

37,728

 

 

 

1.8

 

 

 

1,160

 

 

 

32

 

Groups < 2.0% of total

 

 

95,401

 

 

 

4,247

 

 

 

99,648

 

 

 

4.7

 

 

 

1,239

 

 

 

77

 

Total

 

$

837,342

 

 

$

20,906

 

 

$

858,248

 

 

 

40.3

%

 

$

1,431

 

 

 

585

 

Commercial and Industrial Loans. Commercial and industrial loans comprise 18.6% of our total balance of outstanding loans, excluding PPP loans, as of September 30, 2021.  Unused commitments to extend credit represents an additional $415.9 million, the combined total exposure in commercial and industrial loans represents $685.5 million, or 32.2% of our total outstanding loans and loan commitments, excluding PPP loans, as of September 30, 2021.

The following table summarizes our concentration by industry for our commercial and industrial loan portfolio as of September 30, 2021:

 

(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

 

$

161,457

 

 

$

347,386

 

 

$

508,843

 

 

 

23.9

%

 

$

1,509

 

 

 

107

 

Construction/Contractor

     Services

 

 

15,027

 

 

 

29,913

 

 

 

44,940

 

 

 

2.1

 

 

 

98

 

 

 

153

 

Financial Institutions

 

 

20,150

 

 

 

-

 

 

 

20,150

 

 

 

0.9

 

 

 

3,358

 

 

 

6

 

Medical / Dental /

     Other Care

 

 

12,412

 

 

 

7,155

 

 

 

19,567

 

 

 

0.9

 

 

 

210

 

 

 

59

 

Manufacturing

 

 

12,180

 

 

 

5,041

 

 

 

17,221

 

 

 

0.8

 

 

 

210

 

 

 

58

 

Retail

 

 

9,576

 

 

 

4,348

 

 

 

13,924

 

 

 

0.7

 

 

 

399

 

 

 

24

 

Groups < 0.70% of total

 

 

38,775

 

 

 

22,033

 

 

 

60,808

 

 

 

2.9

 

 

 

137

 

 

 

284

 

Total

 

$

269,577

 

 

$

415,876

 

 

$

685,453

 

 

 

32.2

%

 

$

390

 

 

 

691

 

52

 

 

Construction, Land and Land Development Loans. Construction, land and land development loans comprise 10.9% of our total balance of outstanding loans, excluding PPP loans, as of September 30, 2021.  Unused commitments to extend credit represents an additional $152.5 million, the combined total exposure in construction, land and land development loans represents $311.3 million, or 14.6% of our total outstanding loans and loan commitments, excluding PPP loans, as of September 30, 2021.

The following table details our concentration for our construction, land and land development loan portfolio as of September 30, 2021:

 

(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

 

$

63,763

 

 

$

123,937

 

 

$

187,700

 

 

 

8.8

%

 

$

1,993

 

 

 

32

 

Residential construction

 

 

25,370

 

 

 

19,019

 

 

 

44,389

 

 

 

2.1

 

 

 

793

 

 

 

32

 

Undeveloped land loans

 

 

37,704

 

 

 

3,440

 

 

 

41,144

 

 

 

1.9

 

 

 

2,900

 

 

 

13

 

Developed land loans

 

 

17,934

 

 

 

2,240

 

 

 

20,174

 

 

 

0.9

 

 

 

498

 

 

 

36

 

Land development

 

 

13,939

 

 

 

3,912

 

 

 

17,851

 

 

 

0.8

 

 

 

871

 

 

 

16

 

Total

 

$

158,710

 

 

$

152,548

 

 

$

311,258

 

 

 

14.6

%

 

$

1,230

 

 

 

129

 

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. 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 the COVID-19 pandemic.  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. For CCBX loan relationships, we contractually obtain credit enhancements to limit losses.

We had $740,000 in nonperforming assets, as of September 30, 2021, compared to $712,000 as of December 31, 2020.  This includes $123,000 in CCBX loans more than 90 days past due and still accruing interest as of September 30, 2021, compared to none at December 31, 2020.  Our nonperforming loans to loans receivable ratio was 0.04% at September 30, 2021, compared to 0.05% at December 31, 2020. Commercial and industrial nonaccrual loans totaled $561,000 at September 30, 2021 and consisted of five lending relationships.  Residential real estate nonaccrual loans totaled $56,000 and consisted of one lending relationships. Principal reductions resulted in an overall decrease in our ratios of nonperforming loans and nonperforming assets to total assets as of September 30, 2021 compared to December 31, 2020.

To date we have not seen a significant change in our credit quality metrics, as demonstrated by the low level of charge-offs and nonperforming loan balance for the quarter ended September 30, 2021.  The full extent of the long-term economic impact of the COVID-19 pandemic still remains unknown; however, we remain diligent in our efforts to communicate and proactively work with borrowers to help mitigate potential credit deterioration. Credit administration is closely analyzing higher risk segments within the loan portfolio, monitoring and tracking loan payment deferrals and customer liquidity, and providing timely reporting to management and the board of directors.  Additional stimulus, increased vaccinations, full reopening of the economy and overcoming supply line challenges are expected to help the economic recovery and borrower performance.

Pursuant to guidance from the federal bank regulatory agencies, we deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic.  In total, we have deferred or modified payments on 250 loans, or $246.4 million, per the

53

 

federal guidance.  As of September 30, 2021, all loans on deferred and/or modified status have 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, 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, are not classified as TDRs.    

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

 

 

 

As of

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

Nonaccrual loans:

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

561

 

 

$

537

 

Real estate loans:

 

 

 

 

 

 

 

 

Residential real estate

 

 

56

 

 

 

175

 

Total nonaccrual loans

 

 

617

 

 

 

712

 

Accruing loans past due 90 days or more:

 

 

 

 

 

 

 

 

Total accruing loans past due 90 days or more

 

 

123

 

 

 

-

 

Total nonperforming loans

 

 

740

 

 

 

712

 

Real estate owned

 

 

-

 

 

 

-

 

Repossessed assets

 

 

-

 

 

 

-

 

Troubled debt restructurings, accruing

 

 

-

 

 

 

-

 

Total nonperforming assets

 

$

740

 

 

$

712

 

Total nonperforming loans to loans receivable

 

 

0.04

%

 

 

0.05

%

Total nonperforming assets to total assets

 

 

0.03

%

 

 

0.04

%

 

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 September 30, 2021, the allowance for loan losses totaled $20.2 million, or 1.19% of total loans. As of December 31, 2020, the allowance for loan losses totaled $19.3 million, or 1.25% of total loans. Included in total loans is $267.3 million in PPP loans which are 100% guaranteed by the SBA.  Our allowance for loan losses as of September 30, 2021 increased by $960,000, or 5.0%, compared to December 31, 2020, primarily due to non-PPP loan growth. The allowance for loan losses to loans receivable, excluding the guaranteed PPP loans, is approximately 1.40% at September 30, 2021.  A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”  

54

 

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 and for the Three

 

 

As of and for the Nine

 

 

 

Months Ended

 

 

Months Ended

 

 

 

September 30,

 

 

September 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Allowance at beginning of period

 

$

19,966

 

 

$

14,847

 

 

$

19,262

 

 

$

11,470

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

255

 

 

 

2,200

 

 

 

973

 

 

 

5,708

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Charge-offs:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

-

 

 

 

-

 

 

 

16

 

 

 

130

 

Consumer and other

 

 

31

 

 

 

2

 

 

 

45

 

 

 

9

 

Total charge-offs

 

 

31

 

 

 

2

 

 

 

61

 

 

 

139

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Recoveries:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

 

16

 

 

 

-

 

 

 

21

 

 

 

5

 

Consumer and other

 

 

16

 

 

 

1

 

 

 

27

 

 

 

2

 

Total recoveries

 

 

32

 

 

 

1

 

 

 

48

 

 

 

7

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net (recoveries) charge-offs

 

 

(1

)

 

 

1

 

 

 

13

 

 

 

132

 

Allowance at end of period

 

$

20,222

 

 

$

17,046

 

 

$

20,222

 

 

$

17,046

 

Allowance to nonperforming loans

 

 

2732.70

%

 

 

380.75

%

 

 

2732.70

%

 

 

380.75

%

Allowance to loans receivable

 

 

1.19

%

 

 

1.13

%

 

 

1.19

%

 

 

1.13

%

Net charge-offs to average loans (1)

 

 

0.00

%

 

 

0.00

%

 

 

0.00

%

 

 

0.01

%

 

(1)Ratios for the three and nine months ended September 30, 2021 and 2020 are annualized.

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.  As a result of the COVID-19 pandemic and the subsequent impact to the economy, we increased our provision during the year ended December 31, 2020.  The provision for the three and nine months ended September 30, 2021, was based primarily on non-PPP loan growth during the quarter.   The economic outlook has improved with additional substantial economic stimulus legislation, increased vaccine adoption, and the re-opening of activities previously restricted.  However, if the COVID-19 pandemic, including the emergence of variant strains of the virus, worsens, preventing businesses and consumers from conducting business in the ordinary course, Washington state and the Puget Sound region may experience a continued economic downturn, and our asset quality could deteriorate, which may require material additional provisions for loan losses.  We remain focused on working with our borrowers and the communities we serve to help them through the COVID-19 pandemic.

55

 

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 September 30, 2021, 92.8% 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 September 30, 2021, our loan-to-deposit ratio was 76.7% due to our significant growth in deposits.  Our securities portfolio represented less than 2% 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 September 30, 2021, the amortized cost of our investment securities totaled $34.9 million, an increase of $11.7 million, or 50.5%, compared to $23.2 million as of December 31, 2020. The increase in the securities portfolio was due to the purchase of ten Treasury securities for $57.5 million during the nine months ended September 30, 2021, which was needed to replace maturing securities and pledged to secure public deposits and for other purposes as required or permitted by law, partially offset by maturities and principal paydowns.  

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.

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

 

 

 

As of

 

 

As of

 

 

 

September 30, 2021

 

 

December 31, 2020

 

 

 

Amortized

 

 

Fair

 

 

Amortized

 

 

Fair

 

(Dollars in thousands)

 

Cost

 

 

Value

 

 

Cost

 

 

Value

 

Securities available-for-sale:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

32,499

 

 

$

32,498

 

 

$

19,997

 

 

$

20,028

 

U.S. Agency collateralized mortgage obligations

 

 

74

 

 

 

77

 

 

 

96

 

 

 

100

 

U.S. Agency residential mortgage-backed

   securities

 

 

5

 

 

 

5

 

 

 

10

 

 

 

10

 

Municipal bonds

 

 

253

 

 

 

258

 

 

 

254

 

 

 

261

 

Total available-for-sale securities

 

 

32,831

 

 

 

32,838

 

 

 

20,357

 

 

 

20,399

 

Securities held-to-maturity:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency residential mortgage-backed

   securities

 

 

2,086

 

 

 

2,182

 

 

 

2,848

 

 

 

2,957

 

Total held-to-maturity securities

 

 

2,086

 

 

 

2,182

 

 

 

2,848

 

 

 

2,957

 

Total investment securities

 

$

34,917

 

 

$

35,020

 

 

$

23,205

 

 

$

23,356

 

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.

Total deposits as of September 30, 2021 were $2.22 billion, an increase of $802.2 million, or 56.4%, compared to $1.42 billion as of December 31, 2020.  The overall increase in total deposits was achieved despite a decrease of $25.4 million in total deposits compared to December 31, 2020, due to the sale of our Freeland branch. The increase in deposits was largely in core deposits, which increased $820.3 million to $2.15 billion from $1.33 billion at December 31, 2020.   The $820.3 million increase in core deposits is also largely from growth in the CCBX division, which accounted for $543.6 million of the increase, combined with the initiatives to expand and grow banking relationships with new customers, which accounted for $276.7 million of the increase.  We define core deposits as all deposits except time deposits and brokered deposits. Additionally, as of September 30, 2021 we have access to $331.1 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily

56

 

basis.  The Bank could retain these deposits for liquidity and funding purposes if needed.  If a portion of these deposits are retained, they would be classified as brokered deposits, however if the entire available balance is retained, they would be non-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 $607.2 million in deposits derived from CCBX deposit relationships, an increase of $538.5 million, or 784.0%, compared to $68.7 million as of December 31, 2020.  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 relevant relationship agreement.  Currently, the majority of CCBX deposits are noninterest bearing, however, as the Federal Reserve Open Market Committee raises interest rates, a majority of these accounts will bear interest and be reclassified to interest bearing deposits once rates exceed the minimum interest rate set in the program agreement and begin to earn interest.  

Total noninterest bearing deposits as of September 30, 2021 were $1.30 billion, an increase of $704.2 million, or 118.9%, compared to $592.3 million as of December 31, 2020. The $704.2 million increase is primarily the result of growth in the CCBX division, which accounted for $543.8 million of the increase, and expanding and growing banking relationships with new customers, which accounted for $160.4 million of the increase, including deposit relationships from PPP loans made to noncustomers, who moved their banking relationship to the Bank.  Noninterest bearing deposits represent 58.3% and 41.7% of total deposits for September 30, 2021 and December 31, 2020, respectively.

Total interest bearing account balances, excluding time deposits, as of September 30, 2021 were $880.4 million, an increase of $111.0 million, or 14.4%, from $769.4 million as of December 31, 2020.  Included in interest bearing account balances is $28.4 million in BaaS-brokered deposits, an decrease of $5.1 million from December 31, 2020. Also included in interest bearing deposits is $5.7 million in reciprocal deposits.  

Total time deposit balances as of September 30, 2021 were $46.7 million, a decrease of $12.9 million, or 21.7%, from $59.6 million as of December 31, 2020. 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

 

 

 

September 30, 2021

 

 

December 31, 2020

 

 

 

 

 

 

 

Percent of

 

 

 

 

 

 

Percent of

 

(Dollars in thousands)

 

Amount

 

 

Total

Deposits

 

 

Amount

 

 

Total

Deposits

 

Demand, noninterest bearing

 

$

1,296,443

 

 

 

58.3

%

 

$

592,261

 

 

 

41.7

%

NOW and money market

 

 

755,810

 

 

 

34.0

 

 

 

658,323

 

 

 

46.3

 

Savings

 

 

96,192

 

 

 

4.3

 

 

 

77,611

 

 

 

5.4

 

Total core deposits

 

 

2,148,445

 

 

 

96.6

 

 

 

1,328,195

 

 

 

93.4

 

BaaS-brokered deposits

 

 

28,396

 

 

 

1.3

 

 

 

33,482

 

 

 

2.4

 

Time deposits less than $100,000

 

 

15,701

 

 

 

0.7

 

 

 

19,315

 

 

 

1.4

 

Time deposits $100,000 and over

 

 

30,998

 

 

 

1.4

 

 

 

40,315

 

 

 

2.8

 

Total

 

$

2,223,540

 

 

 

100.0

%

 

$

1,421,307

 

 

 

100.0

%

 

The following table details the CCBX deposits which are included in the total deposit portfolio table above:

 

 

 

As of

 

 

 

September 30, 2021

 

 

December 31, 2020

 

(Dollars in thousands, unaudited)

 

Balance

 

% to Total

 

 

Balance

 

% to Total

 

Demand, noninterest bearing

 

$

573,985

 

 

94.5

%

 

$

30,144

 

 

43.9

%

Interest bearing

 

 

4,837

 

 

0.8

 

 

 

5,062

 

 

7.4

 

      Total core deposits

 

 

578,822

 

 

95.3

 

 

 

35,206

 

 

51.3

 

BaaS-brokered deposits

 

 

28,395

 

 

4.7

 

 

 

33,481

 

 

48.7

 

      Total CCBX deposits

 

$

607,217

 

 

100.0

%

 

$

68,687

 

 

100.0

%

57

 

 

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

September 30,

2021

 

 

As of

December 31,

2020

 

Maturity Period:

 

 

 

 

 

 

 

 

Three months or less

 

$

7,106

 

 

$

11,050

 

Over three through six months

 

 

6,432

 

 

 

7,799

 

Over six through twelve months

 

 

11,164

 

 

 

13,006

 

Over twelve months

 

 

6,296

 

 

 

8,460

 

Total

 

$

30,998

 

 

$

40,315

 

Weighted average maturity (in years)

 

 

0.81

 

 

 

0.70

 

Average deposits for the three months ended September 30, 2021 were $1.98 billion, an increase of 50.0% compared to $1.32 billion for the three months ended September 30, 2020. Average deposits for the nine months ended September 30, 2021 were $1.77 billion, an increase of 49.1% compared to $1.18 billion for the nine months ended September 30, 2020. The increase in average deposits for both these periods was primarily due to an increase in core deposits, both in noninterest bearing deposits and in low interest rate interest bearing deposits.  Included in this increase is deposit relationships gained from PPP loans made to noncustomers that moved their banking/deposit relationship to the Bank.  Also included in this increase is growth in CCBX 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 0.10% for the three months ended September 30, 2021, compared to 0.27% for the three months ended September 30, 2020.  The average rate paid on NOW and money market accounts decreased 22 basis points for the three months ended September 30, 2021.  The average rate paid on time deposits of less than $100,000 and more than $100,000 decreased 56 basis points and 66 basis points, respectively, for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.  The average rate paid on savings and BaaS brokered deposits was fairly flat for the three months ended September 30, 2021, compared to the three months ended September 30, 2020.  The overall lower average rate paid on interest bearing  accounts in the three months ended September 30, 2021 is due to the current low interest rate environment resulting from the decreased Fed Funds rate.  Any further changes to the Fed Funds rate along with competition are expected to continue to impact future cost of deposits and our pricing strategies.

The average rate paid on total deposits was 0.14% for the nine months ended September 30, 2021, compared to 0.40% for the nine months ended September 30, 2020.  The average rate paid on BaaS-brokered deposits decreased 24 basis points for the nine months ended September 30, 2021, compared to the prior year period, and NOW and money market accounts decreased 39 basis points for the nine months ended September 30, 2021, compared to the prior year period.  The average rate paid on time deposits of less than $100,000 and more than $100,000 decreased 52 basis points and 73 basis points, respectively, for the nine months ended September 30, 2021, compared to the nine months ended September 30, 2020.  The lower average rate paid on interest bearing  accounts in the nine months ended September 30, 2021 is due to the current low interest rate environment resulting from the decreased Fed Funds rate. Any further changes to the Fed Funds rate 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 September 30,

 

 

For the Nine Months Ended September 30,

 

 

 

2021

 

 

 

 

 

 

2020

 

 

 

 

 

 

2021

 

 

 

 

 

 

2020

 

 

 

 

 

(Dollars in thousands)

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

 

Average

Balance

 

 

Average

Rate

 

Demand, noninterest bearing

 

$

1,061,311

 

 

 

0.00

%

 

$

569,615

 

 

 

0.00

%

 

$

873,271

 

 

 

0.00

%

 

$

488,296

 

 

 

0.00

%

NOW and money market

 

 

752,889

 

 

 

0.23

 

 

 

589,209

 

 

 

0.45

 

 

 

726,174

 

 

 

0.27

 

 

 

530,761

 

 

 

0.66

 

Savings

 

 

94,143

 

 

 

0.03

 

 

 

73,928

 

 

 

0.05

 

 

 

90,574

 

 

 

0.03

 

 

 

65,247

 

 

 

0.05

 

BaaS-brokered deposits

 

 

24,152

 

 

 

0.34

 

 

 

21,653

 

 

 

0.35

 

 

 

23,139

 

 

 

0.35

 

 

 

21,849

 

 

 

0.59

 

Time deposits less than $100,000

 

 

15,825

 

 

 

0.43

 

 

 

19,274

 

 

 

0.99

 

 

 

17,353

 

 

 

0.61

 

 

 

20,181

 

 

 

1.13

 

Time deposits $100,000 and over

 

 

32,783

 

 

 

0.51

 

 

 

46,726

 

 

 

1.17

 

 

 

35,334

 

 

 

0.72

 

 

 

58,013

 

 

 

1.45

 

Total deposits

 

$

1,981,103

 

 

 

0.10

%

 

$

1,320,405

 

 

 

0.27

%

 

$

1,765,845

 

 

 

0.14

%

 

$

1,184,347

 

 

 

0.40

%

 

The ratio of average noninterest bearing deposits to average total deposits for the three and nine months ended September 30, 2021 was 53.6% and 49.5% compared to 43.1% and 41.2%, respectively, for the three and nine months ended September 30, 2020.

58

 

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 September 30, 2021, and December 31, 2020, total borrowing capacity of $21.7 million  and $21.3 million, respectively, was available under this arrangement.  As of September 30, 2021 and December 31, 2020, 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 September 30, 2021, no PPPLF advances were outstanding, compared to $153.7 million as of December 31, 2020.  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

 

 

As of and For the Nine

 

 

 

Months Ended

 

 

Months Ended

 

 

 

September 30,

 

 

September 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Maximum amount outstanding at any month-end

   during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPPLF Advances

 

$

-

 

 

$

202,595

 

 

$

185,894

 

 

$

202,595

 

Average outstanding balance during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPPLF Advances

 

$

-

 

 

$

199,076

 

 

$

91,850

 

 

$

102,527

 

Weighted average interest rate during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPPLF Advances

 

n/a

 

 

 

0.35

%

 

 

0.35

%

 

 

0.35

%

Balance outstanding at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPPLF Advances

 

$

-

 

 

$

202,595

 

 

$

-

 

 

$

202,595

 

Weighted average interest rate at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

PPPLF Advances

 

n/a

 

 

 

0.35

%

 

 

0.00

%

 

 

0.35

%

59

 

 

 

Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of September 30, 2021, and December 31, 2020, we had borrowing capacity of $120.4 million and $90.7 million, respectively, with the FHLB. As of September 30, 2021, we have $25.0 million in FHLB medium term advances.  This includes $10.0 million that matures March 6, 2023 and $15.0 million that matures March 4, 2025.  FHLB advances totaled $25.0 million as of September 30, 2021 and December 31, 2020.  Although there are no immediate plans to borrow additional funds, additional borrowing capacity of $95.4 million was available under this arrangement as of September 30, 2021.

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

 

 

 

As of and For the Three

 

 

As of and For the Nine

 

 

 

Months Ended

 

 

Months Ended

 

 

 

September 30,

 

 

September 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Maximum amount outstanding at any month-end

   during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Average outstanding balance during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

$

-

 

 

$

-

 

 

$

-

 

 

$

89

 

Weighted average interest rate during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

n/a

 

 

n/a

 

 

n/a

 

 

 

1.84

%

Balance outstanding at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

$

-

 

 

$

-

 

 

$

-

 

 

$

-

 

Weighted average interest rate at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

n/a

 

 

n/a

 

 

 

0.00

%

 

 

0.00

%

 

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

 

 

 

As of and For the Three

 

 

As of and For the Nine

 

 

 

Months Ended

 

 

Months Ended

 

 

 

September 30,

 

 

September 30,

 

(Dollars in thousands)

 

2021

 

 

2020

 

 

2021

 

 

2020

 

Maximum amount outstanding at any month-end

   during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

$

24,999

 

 

$

24,999

 

 

$

24,999

 

 

$

24,999

 

Average outstanding balance during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

$

24,999

 

 

$

24,999

 

 

$

24,999

 

 

$

19,160

 

Weighted average interest rate during period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

 

1.13

%

 

 

1.13

%

 

 

1.13

%

 

 

1.13

%

Balance outstanding at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

$

24,999

 

 

$

24,999

 

 

$

24,999

 

 

$

24,999

 

Weighted average interest rate at end of period:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

FHLB Advances

 

 

1.13

%

 

 

1.13

%

 

 

1.13

%

 

 

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 September 30, 2021, and December 31, 2020, was 2.22% and 2.32%, 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.

60

 

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.

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 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.

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, 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.  Under the terms of the facility, the borrowings are paid down as the loans are forgiven or paid down by the customer.  In June 2021, we repaid all borrowings under the PPPLF in full, resulting in a zero balance as of September 30, 2021.  The last day to take advances on the PPPLF was July 31, 2021.  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 $7.1 million in cash, and uses approximately $1.3 million for debt servicing and operating purposes each year, leaving about $4.5 million for other purposes after deducting $2.6 million to cover operating purposes for the next two years.  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 September 30, 2021, has access to $331.1 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

61

 

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.  

 

As of September 30, 2021, and December 31, 2020, 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 $150 million. The Company currently has no immediate plans for raising additional capital under the registration statement.

62

 

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

 

 

Required to be Well

Capitalized

Under the Prompt

Corrective Action

Provisions

 

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

Amount

 

 

Ratio

 

 

 

(dollars in thousands)

 

September 30, 2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage Capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

164,437

 

 

 

7.48

%

 

$

87,936

 

 

 

4.00

%

 

$

109,920

 

 

 

5.00

%

Bank Only

 

 

178,857

 

 

 

8.14

%

 

 

87,891

 

 

 

4.00

%

 

 

109,864

 

 

 

5.00

%

Common Equity Tier I Capital (to

   risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

160,937

 

 

 

9.94

%

 

 

72,883

 

 

 

4.50

%

 

 

105,276

 

 

 

6.50

%

Bank Only

 

 

178,857

 

 

 

11.07

%

 

 

72,724

 

 

 

4.50

%

 

 

105,046

 

 

 

6.50

%

Tier I Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

164,437

 

 

 

10.15

%

 

 

97,178

 

 

 

6.00

%

 

 

129,571

 

 

 

8.00

%

Bank Only

 

 

178,857

 

 

 

11.07

%

 

 

96,966

 

 

 

6.00

%

 

 

129,288

 

 

 

8.00

%

Total Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

209,693

 

 

 

12.95

%

 

 

129,571

 

 

 

8.00

%

 

 

161,963

 

 

 

10.00

%

Bank Only

 

 

199,069

 

 

 

12.32

%

 

 

129,288

 

 

 

8.00

%

 

 

161,610

 

 

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

December 31, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Leverage Capital (to average assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

$

143,532

 

 

 

9.05

%

 

$

63,454

 

 

 

4.00

%

 

$

79,318

 

 

 

5.00

%

Bank Only

 

 

147,262

 

 

 

9.29

%

 

 

63,421

 

 

 

4.00

%

 

 

79,276

 

 

 

5.00

%

Common Equity Tier I Capital (to

   risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

140,032

 

 

 

11.27

%

 

 

55,935

 

 

 

4.50

%

 

 

80,795

 

 

 

6.50

%

Bank Only

 

 

147,262

 

 

 

11.86

%

 

 

55,879

 

 

 

4.50

%

 

 

80,713

 

 

 

6.50

%

Tier I Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

143,532

 

 

 

11.55

%

 

 

74,580

 

 

 

6.00

%

 

 

99,440

 

 

 

8.00

%

Bank Only

 

 

147,262

 

 

 

11.86

%

 

 

74,505

 

 

 

6.00

%

 

 

99,340

 

 

 

8.00

%

Total Capital (to risk-weighted assets)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Company

 

 

169,123

 

 

 

13.61

%

 

 

99,440

 

 

 

8.00

%

 

 

124,300

 

 

 

10.00

%

Bank Only

 

 

162,837

 

 

 

13.11

%

 

 

99,340

 

 

 

8.00

%

 

 

124,175

 

 

 

10.00

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Contractual Obligations

The following table summarizes contractual obligations and other commitments to make future payments (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations, as of September 30, 2021:

 

 

 

 

 

 

 

Payments Due by Period

 

 

 

 

 

 

 

Less than

 

 

1 to 3

 

 

3 to 5

 

 

More than

 

(Dollars in thousands)

 

Total

 

 

1 Year

 

 

Years

 

 

Years

 

 

5 Years

 

Time Deposits

 

$

46,699

 

 

$

35,905

 

 

$

8,721

 

 

$

2,073

 

 

$

-

 

FHLB advances

 

 

24,999

 

 

 

-

 

 

 

10,000

 

 

 

14,999

 

 

 

-

 

Subordinated note

 

 

25,000

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

25,000

 

Junior subordinated debentures

 

 

3,609

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

3,609

 

Deferred compensation plans

 

 

1,154

 

 

 

175

 

 

 

350

 

 

 

351

 

 

 

278

 

Operating leases

 

 

7,655

 

 

 

318

 

 

 

2,551

 

 

 

1,577

 

 

 

3,209

 

 

For a discussion of our borrowings, see “—Financial Condition—Borrowings” in this section.

63

 

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

Off-Balance Sheet Items

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

 

 

As of

 

 

 

September 30,

 

 

December 31,

 

(Dollars in thousands)

 

2021

 

 

2020

 

Commitments to extend credit:

 

 

 

 

 

 

 

 

Commercial and industrial loans

 

$

68,490

 

 

$

61,676

 

Commercial and industrial loans - capital call lines

 

 

347,386

 

 

 

128,208

 

Construction – commercial real estate loans

 

 

105,547

 

 

 

69,866

 

Construction – residential real estate loans

 

 

47,001

 

 

 

18,489

 

Residential real estate loans

 

 

48,908

 

 

 

20,482

 

Commercial real estate loans

 

 

20,906

 

 

 

18,128

 

Other

 

 

39,396

 

 

 

1,101

 

Total commitments to extend credit

 

$

677,634

 

 

$

317,950

 

Standby letters of credit

 

$

2,729

 

 

$

2,754

 

 

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.

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.

64

 

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

 

 

Nine Months Ended

 

(unaudited)

 

September 30,

2021

 

June 30,

2021

 

March 31,

2021

 

December 31,

2020

 

September 30,

2020

 

 

September 30, 2021

 

September 30, 2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (1)

 

 

1.21

%

 

1.36

%

 

1.28

%

 

1.04

%

 

0.95

%

 

 

1.28

%

 

0.96

%

Return on average equity (1)

 

 

16.77

%

 

18.60

%

 

16.84

%

 

13.36

%

 

12.14

%

 

 

17.40

%

 

10.73

%

Pre-tax, pre-provision return

     on average assets (1)(2)

 

 

1.59

%

 

1.87

%

 

1.69

%

 

1.90

%

 

1.72

%

 

 

1.71

%

 

1.73

%

Yield on earnings assets (1)

 

 

3.63

%

 

3.89

%

 

3.99

%

 

4.16

%

 

3.93

%

 

 

3.83

%

 

4.23

%

Yield on loans receivable (1)

 

 

4.57

%

 

4.44

%

 

4.51

%

 

4.64

%

 

4.33

%

 

 

4.51

%

 

4.65

%

Yield on loans receivable,

     excluding PPP loans (1)(2)

 

 

4.53

%

 

4.65

%

 

4.78

%

 

5.00

%

 

4.78

%

 

 

4.64

%

 

4.99

%

Yield on loans receivable,

     excluding all earned

     fees (1)(2)

 

 

3.74

%

 

3.46

%

 

3.53

%

 

3.66

%

 

3.61

%

 

 

3.57

%

 

4.09

%

Yield on loans

     receivable, excluding

     earned fees on all loans

     and interest on PPP

     loans (1)(2)

 

 

4.36

%

 

4.42

%

 

4.52

%

 

4.65

%

 

4.69

%

 

 

4.43

%

 

4.86

%

Cost of funds (1)

 

 

0.16

%

 

0.20

%

 

0.24

%

 

0.29

%

 

0.33

%

 

 

0.20

%

 

0.45

%

Cost of deposits (1)

 

 

0.10

%

 

0.14

%

 

0.17

%

 

0.22

%

 

0.27

%

 

 

0.14

%

 

0.40

%

Net interest margin (1)

 

 

3.48

%

 

3.70

%

 

3.76

%

 

3.89

%

 

3.62

%

 

 

3.64

%

 

3.81

%

Noninterest expense to average

     assets (1)

 

 

2.91

%

 

2.65

%

 

2.62

%

 

2.35

%

 

2.26

%

 

 

2.74

%

 

2.52

%

Efficiency ratio

 

 

64.68

%

 

58.69

%

 

60.85

%

 

55.26

%

 

56.73

%

 

 

61.51

%

 

59.31

%

Loans receivable to deposits

 

 

76.71

%

 

92.03

%

 

105.68

%

 

108.85

%

 

110.98

%

 

 

76.71

%

 

110.98

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1) Annualized calculations shown for quarterly periods presented.

 

 

 

 

 

 

 

 

(2) A reconciliation of the non-GAAP measures are set forth in the next section under "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures".

 

 

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.  We believe these non-GAAP measures are useful to investors in evaluating our performance and in demonstrating resources available with and without provision for loan losses and income taxes.

 

65

 

 

The following non-GAAP measures are presented to illustrate the impact of provision for loan losses and provision for income taxes on net income and return on average assets.

 

Pre-tax, pre-provision net income is a non-GAAP measure that excludes the impact of provision for loan losses and provision for income taxes from net income.  The most directly comparable GAAP measure is net income.  

 

Pre-tax, pre-provision return on average assets is a non-GAAP measure that excludes the impact of provision for loan losses and provision for income taxes from return on average assets.  The most directly comparable GAAP measure is return on average assets.

 

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

 

 

 

As of and for the Three Months Ended

 

 

As of and for the

Nine Months Ended

 

(Dollars in thousands, unaudited)

 

September 30,

2021

 

June 30,

2021

 

March 31,

2021

 

December 31,

2020

 

September 30,

2020

 

 

September 30,

2021

 

September 30,

2020

 

Pre-tax, pre-provision net income and pre-tax, pre-provision return on average assets:

 

 

 

 

 

 

 

 

Total average assets

 

$

2,198,550

 

$

2,074,841

 

$

1,912,202

 

$

1,774,723

 

$

1,704,874

 

 

$

2,062,913

 

$

1,462,512

 

Total net income

 

 

6,684

 

 

7,013

 

 

6,018

 

 

4,661

 

 

4,090

 

 

 

19,715

 

 

10,485

 

Plus:  provision for loan

     losses

 

 

255

 

 

361

 

 

357

 

 

2,600

 

 

2,200

 

 

 

973

 

 

5,708

 

Plus:  provision for

     income taxes

 

 

1,870

 

 

2,289

 

 

1,572

 

 

1,232

 

 

1,082

 

 

 

5,731

 

 

2,763

 

Pre-tax, pre-provision

     net income

 

$

8,809

 

$

9,663

 

$

7,947

 

$

8,493

 

$

7,372

 

 

$

26,419

 

$

18,956

 

Return on average assets

 

 

1.21

%

 

1.36

%

 

1.28

%

 

1.04

%

 

0.95

%

 

 

1.28

%

 

0.96

%

Pre-tax, pre-provision

     return on average assets:

 

 

1.59

%

 

1.87

%

 

1.69

%

 

1.90

%

 

1.72

%

 

 

1.71

%

 

1.73

%

 

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.

 

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

 

 

 

As of and for the Three Months Ended

 

 

As of and for the

Nine Months Ended

 

(Dollars in thousands, unaudited)

 

September 30,

2021

 

June 30,

2021

 

March 31,

2021

 

December 31,

2020

 

September 30,

2020

 

 

September 30,

2021

 

September 30,

2020

 

Yield on loans receivable, excluding earned fees :

 

 

 

 

 

 

 

 

Total average loans

     receivable

 

$

1,681,069

 

$

1,750,825

 

$

1,640,108

 

$

1,533,533

 

$

1,493,024

 

 

$

1,690,817

 

$

1,265,705

 

Interest and earned fee

     income on loans

 

 

19,383

 

 

19,365

 

 

18,230

 

 

17,885

 

 

16,244

 

 

 

56,978

 

 

44,025

 

Less: earned fee income on

     all loans

 

 

(3,533

)

 

(4,274

)

 

(3,974

)

 

(3,765

)

 

(2,692

)

 

 

(11,782

)

 

(5,303

)

Adjusted interest income

     on loans

 

$

15,850

 

$

15,091

 

$

14,256

 

$

14,120

 

$

13,552

 

 

$

45,196

 

$

38,722

 

Yield on loans receivable

 

 

4.57

%

 

4.44

%

 

4.51

%

 

4.64

%

 

4.33

%

 

 

4.51

%

 

4.65

%

Yield on loans

     receivable, excluding

     earned fees:

 

 

3.74

%

 

3.46

%

 

3.53

%

 

3.66

%

 

3.61

%

 

 

3.57

%

 

4.09

%

Yield on loans

     receivable, excluding

     earned fees on all loans

     and interest on PPP

     loans (1):

 

 

4.36

%

 

4.42

%

 

4.52

%

 

4.65

%

 

4.69

%

 

 

4.43

%

 

4.86

%

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

 

 

66

 

 

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.  These measures include the following:

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.

 

67

 

 

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

 

 

 

As of and for the

 

 

As of and for the

 

 

 

Three Months Ended

 

 

Nine Months Ended

 

(Dollars in thousands, unaudited)

 

September

30,

2021

 

June

30,

2021

 

March

31,

2021

 

December

31,

2020

 

September

30,

2020

 

 

September

30,

2021

 

September

30,

2020

 

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

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total loans, net of deferred fees

 

$

1,705,682

 

$

1,658,149

 

$

1,766,723

 

$

1,547,138

 

$

1,509,389

 

 

$

1,705,682

 

$

1,509,389

 

Less: PPP loans

 

 

(267,278

)

 

(398,038

)

 

(543,827

)

 

(365,842

)

 

(452,846

)

 

 

(267,278

)

 

(452,846

)

Less: net deferred fees on PPP loans

 

 

9,417

 

 

12,363

 

 

14,279

 

 

5,803

 

 

8,586

 

 

 

9,417

 

 

8,586

 

Adjusted loans, net of deferred fees

 

$

1,447,821

 

$

1,272,474

 

$

1,237,175

 

$

1,187,099

 

$

1,065,129

 

 

$

1,447,821

 

$

1,065,129

 

Allowance for loan losses

 

$

(20,222

)

$

(19,966

)

$

(19,610

)

$

(19,262

)

$

(17,046

)

 

$

(20,222

)

$

(17,046

)

Allowance for loan losses to

     loans receivable

 

 

1.19

%

 

1.20

%

 

1.11

%

 

1.25

%

 

1.13

%

 

 

1.19

%

 

1.13

%

Adjusted allowance for loan losses

     to loans receivable, excluding

     PPP loans

 

 

1.40

%

 

1.57

%

 

1.59

%

 

1.62

%

 

1.60

%

 

 

1.40

%

 

1.60

%

Yield on loans receivable, excluding PPP loans:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total average loans receivable

 

$

1,681,069

 

$

1,750,825

 

$

1,640,108

 

$

1,533,533

 

$

1,493,024

 

 

$

1,690,817

 

$

1,265,705

 

Less: average PPP loans

 

 

(322,595

)

 

(509,265

)

 

(475,941

)

 

(424,290

)

 

(448,313

)

 

 

(435,372

)

 

(261,854

)

Plus: average deferred fees on

     PPP loans

 

 

11,639

 

 

14,213

 

 

10,788

 

 

7,385

 

 

9,599

 

 

 

12,216

 

 

6,112

 

Adjusted total average loans

     receivable

 

$

1,370,113

 

$

1,255,773

 

$

1,174,955

 

$

1,116,628

 

$

1,054,310

 

 

$

1,267,661

 

$

1,009,963

 

Interest income on loans

 

$

19,383

 

$

19,365

 

$

18,230

 

$

17,885

 

$

16,244

 

 

$

56,978

 

$

44,025

 

Less: interest and deferred fee

     income recognized on

     PPP loans

 

 

(3,744

)

 

(4,821

)

 

(4,378

)

 

(3,847

)

 

(3,566

)

 

 

(12,943

)

 

(6,325

)

Adjusted interest income on loans

 

$

15,639

 

$

14,544

 

$

13,852

 

$

14,038

 

$

12,678

 

 

$

44,035

 

$

37,700

 

Yield on loans receivable

 

 

4.57

%

 

4.44

%

 

4.51

%

 

4.64

%

 

4.33

%

 

 

4.51

%

 

4.65

%

Yield on loans receivable,

     excluding PPP loans:

 

 

4.53

%

 

4.65

%

 

4.78

%

 

5.00

%

 

4.78

%

 

 

4.64

%

 

4.99

%

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

 

 

 

 

 

 

 

 

Total average loans receivable

 

$

1,681,069

 

$

1,750,825

 

$

1,640,108

 

$

1,533,533

 

$

1,493,024

 

 

$

1,690,817

 

$

1,265,705

 

Less: average PPP loans

 

 

(322,595

)

 

(509,265

)

 

(475,941

)

 

(424,290

)

 

(448,313

)

 

 

(435,372

)

 

(261,854

)

Plus: average deferred fees on

     PPP loans

 

 

11,639

 

 

14,213

 

 

10,788

 

 

7,385

 

 

9,599

 

 

 

12,216

 

 

6,112

 

Adjusted total average loans

     receivable

 

$

1,370,113

 

$

1,255,773

 

$

1,174,955

 

$

1,116,628

 

$

1,054,310

 

 

$

1,267,661

 

$

1,009,963

 

Interest and earned fee income

     on loans

 

$

19,383

 

$

19,365

 

$

18,230

 

$

17,885

 

$

16,244

 

 

$

56,978

 

$

44,025

 

Less: earned fee income on all loans

 

 

(3,533

)

 

(4,274

)

 

(3,974

)

 

(3,762

)

 

(2,693

)

 

 

(11,782

)

 

(5,303

)

Less: interest income on PPP loans

 

 

(796

)

 

(1,257

)

 

(1,169

)

 

(1,064

)

 

(1,129

)

 

 

(3,222

)

 

(1,966

)

Adjusted interest income on loans

 

$

15,054

 

$

13,834

 

$

13,087

 

$

13,059

 

$

12,422

 

 

$

41,974

 

$

36,756

 

Yield on loans receivable

 

 

4.57

%

 

4.44

%

 

4.51

%

 

4.64

%

 

4.33

%

 

 

4.51

%

 

4.65

%

Yield on loans receivable,

     excluding earned fees (1):

 

 

3.74

%

 

3.46

%

 

3.53

%

 

4.65

%

 

3.61

%

 

 

3.57

%

 

4.09

%

Yield on loans receivable,

     excluding earned fees on

     all loans and interest on

     PPP loans:

 

 

4.36

%

 

4.42

%

 

4.52

%

 

4.65

%

 

4.69

%

 

 

4.43

%

 

4.86

%

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

 

68

 

 

 

(Dollars in thousands, unaudited)

 

As of

September 30, 2021

 

As of

June 30, 2021

 

Adjusted Tier 1 leverage capital ratio, excluding PPP loans:

 

Company:

 

 

 

 

 

 

 

Tier 1 capital

 

$

164,437

 

$

157,450

 

Average assets for the leverage capital ratio

 

$

2,198,406

 

$

1,967,646

 

Less:  Average PPP loans

 

 

(322,595

)

 

(509,265

)

Plus:  Average PPPLF borrowings

 

 

-

 

 

107,047

 

Adjusted average assets for the leverage capital ratio

 

$

1,875,811

 

$

1,565,428

 

Tier 1 leverage capital ratio

 

 

7.48

%

 

8.00

%

Adjusted Tier 1 leverage capital ratio, excluding PPP loans

 

 

8.77

%

 

10.06

%

Bank:

 

 

 

 

 

 

 

Tier 1 capital

 

$

178,857

 

$

161,368

 

Average assets for the leverage capital ratio

 

$

2,197,276

 

$

1,966,528

 

Less:  Average PPP loans

 

 

(322,595

)

 

(509,265

)

Plus:  Average PPPLF borrowings

 

 

-

 

 

107,047

 

Adjusted average assets for the leverage capital ratio

 

$

1,874,681

 

$

1,564,310

 

Tier 1 leverage capital ratio

 

 

8.14

%

 

8.21

%

Adjusted Tier 1 leverage capital ratio, excluding PPP loans

 

 

9.54

%

 

10.32

%

 

 

 

 

69

 

 

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.

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.

70

 

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

 

 

 

Estimated Increase (Decrease) in

Net Interest Income

Change in Market Interest Rates

 

Twelve Month Projection

September 30, 2021

 

Twelve Month Projection

December 31, 2020

Static Balance Sheet and Rate Shifts

 

 

 

 

+400 basis points

 

52%

 

18%

+300 basis points

 

39%

 

14%

+200 basis points

 

26%

 

9%

+100 basis points

 

13%

 

5%

-100 basis points

 

(8)%

 

(4)%

-200 basis points

 

(12)%

 

(7)%

-300 basis points

 

(16)%

 

(10)%

 

 

 

 

 

Dynamic Balance Sheet and Rate Shifts

 

 

 

 

+400 basis points

 

63%

 

23%

+300 basis points

 

47%

 

17%

+200 basis points

 

31%

 

11%

+100 basis points

 

16%

 

6%

-100 basis points

 

(10)%

 

(4)%

-200 basis points

 

(15)%

 

(7)%

-300 basis points

 

(19)%

 

(11)%

 

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 0.00% to 0.25%.  Until rates increase, these rate shock scenarios may not reflect what may happen to net interest income if interest rates were to go negative.

Impact of Inflation

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

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

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

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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 September 30, 2021, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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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, 2020, which are incorporated by reference herein.  As of September 30, 2021, 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 September 30, 2021.

The Company did not repurchase any of its equity securities during the three months ended September 30, 2021 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

 

 

 

4.1

Form of 3.375% Fixed-to-Floating Rate Subordinated Note due September 1, 2031 (incorporated herein by reference to Exhibit 4.1 of the Company’s Form 8-K, filed with the Securities and Exchange Commission on August 18, 2021).

 

 

10.1

Form of Subordinated Note Purchase Agreement, dated as of August 18, 2021 (incorporated herein by reference to Exhibit 10.1 of the Company’s Form 8-K, filed with the Securities and Exchange Commission on August 18, 2021).

 

 

  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 and 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 September 30, 2021, 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)

 

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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:

November 5, 2021

 

By:

/s/ Eric M. Sprink

 

 

 

 

 

Eric M. Sprink

 

 

 

 

 

President and Chief Executive Officer

 

 

 

 

 

(Principal Executive Officer)

 

 

 

 

 

 

 

Dated:

November 5, 2021

 

By:

/s/ Joel G. Edwards

 

 

 

 

 

Joel G. Edwards

 

 

 

 

 

Executive Vice President and

 

 

 

 

 

Chief Financial Officer

 

 

 

 

 

(Principal Financial Officer)

 

 

 

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