10-Q

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, 2018

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)

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.  (Check one)

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-Accelerated Filer	☒	Smaller Reporting Company	☐
Emerging Growth Company	☒

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial standards provided pursuant to Section 7(a)(2)(B) of the Securities 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 13, 2018, there were 11,887,503 shares of the registrant’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, 2018 and December 31, 2017 (unaudited)	4
	Condensed Consolidated Statements of Income for the Three and Nine Months ended September 30, 2018 and 2017 (unaudited)	5
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2018 and 2017 (unaudited)	6
	Condensed Consolidated Statement of Changes in Shareholders’ Equity for the Nine Months ended September 30, 2018 and 2017 (unaudited)	7
	Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2018 and 2017 (unaudited)	8
	Notes to Condensed Consolidated Financial Statements (unaudited)	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	45
Item 4.	Controls and Procedures	47
Part II.   Other Information
Item 1.	Legal Proceedings	47
Item 1A.	Risk Factors	47
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	47
Item 3.	Defaults Upon Senior Securities	47
Item 4.	Mine Safety Disclosures	48
Item 5.	Other Information	48
Item 6.	Exhibits	48

2

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

This report may contain forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our management’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. With respect to any such forward-looking statements, we claim the protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995, as amended. Any or all of the forward-looking statements in this report may turn out to be inaccurate. 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 the Company’s prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on July 18, 2018. Some of the risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the overall health of the local and national real estate market; the credit risk associated with our loan portfolio, and specifically with our commercial real estate 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; 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; the effectiveness of our risk management framework; 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; fluctuations in the value of the securities held in our securities portfolio; governmental monetary and fiscal policies; material weaknesses in our internal control over financial reporting; and our success at managing the risks involved in the foregoing items.

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

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PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(dollars in thousands)

ASSETS
	September 30,			December 31,
	2018			2017 (audited)
Cash and due from banks	$	16,837		$	13,787
Interest earning deposits with other banks (restricted cash of $22,630 and $17,332    at September 30, 2018 and December 31, 2017, respectively)		98,671			75,964
Investment securities, available for sale, at fair value		35,749			36,927
Investment securities, held to maturity, at amortized cost		1,290			1,409
Other investments		3,766			3,680
Loans receivable		744,320			656,788
Allowance for loan losses		(9,111	)		(8,017	)
Total loans receivable, net		735,209			648,771
Premises and equipment, net		12,845			13,121
Accrued interest receivable		2,299			2,274
Bank-owned life insurance, net		6,640			6,500
Deferred tax asset, net		2,309			2,092
Other assets		1,414			1,228
Total assets	$	917,029		$	805,753
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits	$	774,722		$	703,295
Federal Home Loan Bank (FHLB) advances		20,000			20,000
Subordinated debt
Principal amount $10,000 (less unamortized debt issuance costs of $39    and $50 at September 30, 2018 and December 31, 2017, respectively)		9,961			9,950
Junior subordinated debentures
Principal amount $3,609 (less unamortized debt issuance costs of $28    and $30 at September 30, 2018 and December 31, 2017, respectively)		3,581			3,579
Deferred compensation		1,102			1,175
Accrued interest payable		257			228
Other liabilities		2,130			1,815
Total liabilities		811,753			740,042
SHAREHOLDERS’ EQUITY
Preferred stock, no par value:
Authorized: 25,000,000 shares at September 30, 2018 and December 31, 2017;     issued and outstanding: zero shares at September 30, 2018 and     December 31, 2017		-			-
Common stock, no par value:
Authorized: 300,000,000 shares at September 30, 2018 and December 31,     2017; 11,886,473 voting shares at September 30, 2018 issued and     outstanding and 8,887,457 voting and 361,444 nonvoting shares     at December 31, 2017 issued and outstanding		86,334			52,521
Retained earnings		20,966			14,134
Accumulated other comprehensive loss, net of tax		(2,024	)		(944	)
Total shareholders’ equity		105,276			65,711
Total liabilities and shareholders’ equity	$	917,029		$	805,753

See accompanying Notes to Condensed Consolidated Financial Statements.

4

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except for per share data)

	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	9,262	$	7,908	$	26,229	$	22,741
Interest on investment securities		156		135		463		385
Interest on interest earning deposits with other banks		458		171		949		458
Dividends on other investments		18		3		91		77
Total interest income		9,894		8,217		27,732		23,661
INTEREST EXPENSE
Interest on deposits		851		540		2,209		1,526
Interest on borrowed funds		195		192		594		551
Total interest expense		1,046		732		2,803		2,077
Net interest income		8,848		7,485		24,929		21,584
PROVISION FOR LOAN LOSSES		508		65		1,401		504
Net interest income after provision for loan losses		8,340		7,420		23,528		21,080
NONINTEREST INCOME
Deposit service charges and fees		800		725		2,258		1,924
Wholesale banking service fees		328		-		370		-
Loan referral fees		209		234		453		276
Mortgage broker fees		52		80		158		195
Sublease and lease income		10		56		71		167
Gain on sales of loans, net		-		18		142		102
Other income		147		137		414		437
Total noninterest income		1,546		1,250		3,866		3,101
NONINTEREST EXPENSE
Salaries and employee benefits		4,027		3,491		11,672		9,947
Occupancy		798		784		2,425		2,253
Data processing		501		463		1,472		1,311
Director and staff expenses		213		172		493		450
Excise taxes		146		119		404		344
Marketing		110		148		253		298
Legal and professional fees		142		87		352		281
Federal Deposit Insurance Corporation (FDIC) assessments		83		90		247		271
Business development		81		68		241		195
Other expense		509		387		1,472		1,298
Total noninterest expense		6,610		5,809		19,031		16,648
Income before provision for income taxes		3,276		2,861		8,363		7,533
PROVISION FOR INCOME TAXES		674		957		1,717		2,440
NET INCOME	$	2,602	$	1,904	$	6,646	$	5,093
Basic earnings per common share	$	0.23	$	0.21	$	0.67	$	0.55
Diluted earnings per common share	$	0.22	$	0.21	$	0.66	$	0.55
Weighted average number of common shares outstanding:
Basic		11,338,320		9,235,344		9,956,449		9,233,421
Diluted		11,609,978		9,238,808		10,051,415		9,236,175

See accompanying Notes to Condensed Consolidated Financial Statements.

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COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands)

	Three months ended September 30,						Nine months ended September 30,
	2018			2017			2018			2017
NET INCOME	$	2,602		$	1,904		$	6,646		$	5,093
OTHER COMPREHENSIVE INCOME (LOSS), before tax
Securities available-for-sale
Unrealized holding gain (loss) gain during the quarter		(259	)		(63	)		(1,131	)		504
Income tax benefit (provision) related to unrealized holding    gain (loss)		54			21			237			(171	)
OTHER COMPREHENSIVE (LOSS) INCOME, net of tax		(205	)		(42	)		(894	)		333
COMPREHENSIVE INCOME	$	2,397		$	1,862		$	5,752		$	5,426

See accompanying Notes to Condensed Consolidated Financial Statements.

6

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

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

(dollars in thousands)

	Shares of Common Stock			Common Stock			Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
BALANCE, January 1, 2017		9,238,788		$	52,215		$	8,698	$	(1,016	)	$	59,897
Net income		-			-			5,093		-			5,093
Issuance of vested stock awards		600			-			-		-			-
Issuance of restricted stock awards		6,208			-			-		-			-
Exercise of stock options		3,620			24			-		-			24
Stock repurchase		(211	)		(2	)		-		-			(2	)
Stock-based compensation		-			213			-		-			213
Other comprehensive income		-			-			-		333			333
BALANCE, September 30, 2017		9,249,005		$	52,450		$	13,791	$	(683	)	$	65,558
BALANCE, January 1, 2018		9,248,901		$	52,521		$	14,134	$	(944	)	$	65,711
Net income		-			-			6,646		-			6,646
Reclassification of stranded tax effect due to federal tax   rate change		-			-			186		(186	)		-
Issuance of restricted stock awards		4,402						-		-			-
Exercise of stock options		55,670			339			-		-			339
Stock-based compensation		-			231			-		-			231
Stock issuance and net proceeds from initial public    offering		2,577,500			33,243			-		-			33,243
Other comprehensive loss		-			-			-		(894	)		(894	)
BALANCE, September 30, 2018		11,886,473		$	86,334		$	20,966	$	(2,024	)	$	105,276

See accompanying Notes to Condensed Consolidated Financial Statements.

7

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

	Nine months ended September 30,
	2018			2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	6,646		$	5,093
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses		1,401			504
Depreciation and amortization		786			721
Loss on disposition of fixed assets		-			21
Gain on sales of loans		(142	)		(102	)
Gain on sale of other real estate owned		-			(32	)
Net discount accretion on investment securities		(17	)		(6	)
Stock-based compensation		231			213
Bank-owned life insurance earnings		(140	)		(138	)
Net change in other assets and liabilities		92			(688	)
Total adjustments		2,211			493
Net cash provided by operating activities		8,857			5,586
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest earning deposits with other banks		(22,707	)		1,400
Purchase of other investments, net		(86	)		(381	)
Principal paydowns of investment securities available-for-sale		70			79
Principal paydowns of investment securities held-to-maturity		114			234
Purchase of participation loans		(32,653	)		-
Purchase of loans		(8,575	)		(9,917	)
Increase in loans receivable, net		(46,469	)		(24,396	)
Proceeds from sale of other real estate owned		-			1,329
Purchases of premises and equipment, net		(510	)		(526	)
Net cash used by investing activities		(110,816	)		(32,178	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and money market, and savings		63,693			26,620
Net increase in time deposits		7,734			5,917
Net proceeds from initial public offering		33,243			-
Proceeds from exercise of stock options		339			24
Repurchase of common stock		-			(2	)
Net cash provided by financing activities		105,009			32,559
NET INCREASE IN CASH AND DUE FROM BANKS		3,050			5,967
CASH AND DUE FROM BANKS, beginning of year		13,787			11,084
CASH AND DUE FROM BANKS, end of quarter	$	16,837		$	17,051
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest paid	$	2,774		$	2,054
Income taxes paid		1,670			2,895
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Fair value adjustment of securities available-for-sale, gross	$	(1,131	)	$	505

See accompanying Notes to Condensed Consolidated Financial Statements.

8

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

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

The Company provides a full range of banking 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 branch and the headquarters of the Bank and Company are located in Everett, Washington. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (FDIC). The Bank’s loans and deposits are primarily within the greater Puget Sound area, and the Bank’s primary funding source is deposits from customers. The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

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 elsewhere in this report. Operating results for the three and nine months ended September 30, 2018, 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 and the Bank. All significant intercompany accounts have been eliminated in consolidation.

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

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

Subsequent Events - The Company has evaluated events and transactions subsequent to September 30, 2018 for potential recognition or disclosure. On October 9^th 2018, the Bank opened a full service branch in Edmonds, Washington.

9

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

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

Note 2 - Recent accounting standards

Accounting Standards Adopted in 2018

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

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

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

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

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

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

Wholesale Banking Service Fees: The Company earns fees, governed by contract arrangements, for providing banking services to customers of a third party company. Fees are recognized on a monthly basis, as earned.

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

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

As of January 1, 2018, the Company adopted FASB ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendments in this ASU require an entity to disclose the fair value of financial instruments using the exit price notion. Exit price is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methods of determining the fair value of assets and liabilities are consistent

10

with our methodologies disclosed in Note 8—Fair Value Measurements, except for the valuation of loans held-for-investment which was impacted by the adoption of ASU 2016-01. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of September 30, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments, a consensus of the FASB’s Emerging Issues Task Force. The ASU is intended to reduce diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This standard did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

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

In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This ASU updates outdated guidance related to the Office of Comptroller of the Currency’s (OCC) Banking Circular 202, Accounting for Net Deferred Tax Charges, as the guidance has been rescinded by OCC and is no longer relevant. The amendments in this ASU are effective immediately. The adoption of ASU No. 2018-06 is not expected to have a material impact on the Company's consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. The ASU is effective in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is in the process of its implementation, which includes identifying the population of the Company’s leases that are within the scope of the new guidance and gathering all key lease data that will facilitate application of the new accounting requirements. Upon adoption of this guidance, the Company will recognize a liability for the remaining obligations under its operating lease agreements, and a corresponding right of use asset for its right to use the

11

underlying assets for the lease term. Thus there will be an increase to the Company’s assets and liabilities upon adoption. The increase in assets and liabilities is estimated to be less than 1% of total assets when adopted on January 1, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are actively assessing our data and the model needs and are evaluating the impact of adopting the amendment. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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

Note 3 - Investment Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
September 30, 2018
Available-for-sale
U.S. Treasury securities	$	34,821	$	-	$	(2,492	)	$	32,329
U.S. Government agencies		3,000		-		(59	)		2,941
U.S. Agency collateralized mortgage obligations		188		-		(6	)		182
U.S. Agency residential mortgage-backed securities		43		-		-			43
Municipals		259		-		(5	)		254
Total available-for-sale securities		38,311		-		(2,562	)		35,749
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,290		-		(84	)		1,206
Total investment securities	$	39,601	$	-	$	(2,646	)	$	36,955

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
December 31, 2017
Available-for-sale
U.S. Treasury securities	$	34,794	$	-	$	(1,398	)	$	33,396
U.S. Government agencies		3,000		-		(30	)		2,970
U.S. Agency collateralized mortgage obligations		224		-		(3	)		221
U.S. Agency residential mortgage-backed securities		79		1		-			80
Municipals		261		-		(1	)		260
Total available-for-sale securities		38,358		1		(1,432	)		36,927
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,409		-		(35	)		1,374
Total investment securities	$	39,767	$	1	$	(1,467	)	$	38,301

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

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
Amounts maturing in
One year or less	$	-	$	-	$	-	$	-
After one year through five years		27,838		26,141		-		-
After five years through ten years		10,242		9,383		-		-
		38,080		35,524		-		-
U.S. Agency residential mortgage-backed securities and    collateralized mortgage obligations		231		225		1,290		1,206
	$	38,311	$	35,749	$	1,290	$	1,206

Investment securities with carrying values of $19,722,000 and $14,526,000 at September 30, 2018 and December 31, 2017 respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

There were no sales of investment securities during the three and nine months ended September 30, 2018 and September 30, 2017.

Information pertaining to securities with gross unrealized losses at the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	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, 2018
Available-for-sale
U.S. Treasury securities	$	-	$	-		$	32,329	$	(2,492	)	$	32,329	$	(2,492	)
U.S. Government agencies		-		-			2,941		(59	)		2,941		(59	)
U.S. Agency collateralized mortgage obligations		-		-			182		(6	)		182		(6	)
Municipals		254		(5	)		-		-			254		(5	)
Total available-for-sale securities		254		(5	)		35,452		(2,557	)		35,706		(2,562	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		-		-			1,206		(84	)		1,206		(84	)
Total investment securities	$	254	$	(5	)	$	36,658	$	(2,641	)	$	36,912	$	(2,646	)
December 31, 2017
Available-for-sale
U.S. Treasury securities	$	4,934	$	(77	)	$	28,463	$	(1,321	)	$	33,397	$	(1,398	)
U.S. Government agencies		-		-			2,970		(30	)		2,970		(30	)
U.S. Agency collateralized mortgage obligations		220		(3	)		-		-			220		(3	)
Municipals		260		(1	)		-		-			260		(1	)
Total available-for-sale securities		5,414		(81	)		31,433		(1,351	)		36,847		(1,432	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		-		-			1,374		(35	)		1,374		(35	)
Total investment securities	$	5,414	$	(81	)	$	32,807	$	(1,386	)	$	38,221	$	(1,467	)

At September 30, 2018 and December 31, 2017, there were 11 securities in an unrealized loss position. Unrealized losses have not been recognized into income because management does not intend to sell and does not expect it will be required to sell the

13

investments. The decline is largely due to changes in market conditions and interest rates, rather than credit quality. The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve. The Company does not consider these securities to be other than temporarily impaired at September 30, 2018 and December 31, 2017.

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,
	2018			2017
	(dollars in thousands)
Commercial and industrial loans	$	85,554		$	88,688
Real estate loans:
Construction, land, and land development		62,222			41,641
Residential real estate		91,995			87,031
Commercial real estate		502,782			437,717
Consumer and other loans		2,583			2,058
Gross loans receivable		745,136			657,135
Net deferred origination fees and premiums		(816	)		(347	)
Loans receivable	$	744,320		$	656,788

Included in consumer and other loans are overdrafts of $27,000 and $76,000 at September 30, 2018 and December 31, 2017, respectively. The Company has pledged loans totaling $157,100,000 and $147,008,000 at September 30, 2018 and December 31, 2017, respectively, for borrowing lines at the FHLB and FRB.

The balance of SBA loans and participations serviced for others totaled $28,679,000 and $29,910,000 at September 30, 2018 and December 31, 2017, respectively.

The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans with remaining balances totaled $42,662,000 and $43,213,000 as of September 30, 2018 and December 31, 2017, respectively. Unamortized premiums totaled $676,000 and $718,000 as of September 30, 2018 and December 31, 2017, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $40,500,000 and $8,124,000 as of September 30, 2018 and December 31, 2017, 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 our 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. We also issue letters of credit on behalf of our 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.

Construction, land and land development loans - We originate loans for the construction of 1-4 family, multifamily, and CRE properties in our 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. We occasionally originate 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.

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Residential real estate - Residential real estate includes various typesof loans for which the Company holds real property as collateral. Included in this segment are multi-family loans, first lien single family loans, which we occasionally purchase to diversify our 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.

Commercial real estate (includes owner occupied and nonowner occupied) - Commercial real estate includes various types of loans for which the Company holds real property as collateral. 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 - We originate 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.

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, 2018
Commercial and industrial loans	$	695	$	703	$	1,398	$	84,156	$	85,554		$	-
Real estate loans:
Construction, land and land development		-		-		-		62,222		62,222			-
Residential real estate		-		74		74		91,921		91,995			-
Commercial real estate		-		-		-		502,782		502,782			-
Consumer and other loans		-		-		-		2,583		2,583			-
	$	695	$	777	$	1,472	$	743,664	$	745,136		$	-
Less net deferred origination fees										(816	)
Loans receivable									$	744,320

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
December 31, 2017
Commercial and industrial loans	$	791	$	372	$	1,163	$	87,525	$	88,688		$	-
Real estate loans:
Construction, land and land development		218		-		218		41,423		41,641			-
Residential real estate		76		-		76		86,955		87,031			-
Commercial real estate		333		345		678		437,039		437,717			-
Consumer and other loans		-		-		-		2,058		2,058			-
	$	1,418	$	717	$	2,135	$	655,000		657,135		$	-
Less net deferred origination fees										(347	)
Loans receivable									$	656,788

15

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, 2018
Commercial and industrial loans	$	1,447	$	703	$	467	$	1,170	$	117
Real estate loans:
Residential real estate		75		74		-		74		-
Commercial real estate		1,495		1,277		-		1,277		-
Total	$	3,017	$	2,054	$	467	$	2,521	$	117
December 31, 2017
Commercial and industrial loans	$	1,123	$	1,065	$	-	$	1,065	$	-
Real estate loans:
Residential real estate		94		89		-		89		-
Commercial real estate		2,249		1,660		-		1,660		-
Total	$	3,466	$	2,814	$	-	$	2,814	$	-

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

	Three Months Ended
	September 30, 2018				September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	995	$	3	$	219	$	-
Real estate loans:
Residential real estate		74		-		-		-
Commercial real estate		1,284		-		-		-
Total	$	2,353	$	3	$	219	$	-
	Nine Months Ended
	September 30, 2018				September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	1,371	$	28	$	247	$	-
Real estate loans:
Construction, land and land development		-		-		1,281		17
Residential real estate		306		5		97		-
Commercial real estate		1,296		-		5,388		27
Total	$	2,973	$	33	$	7,013	$	44

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.

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The following table presents troubled debt restructurings by accrual versus nonaccrual status and by loan class as of the period indicated:

	Accrual Status		Nonaccrual Status		Total Restructured Loans
	(dollars in thousands)
September 30, 2018
Commercial real estate	$	-	$	1,277	$	1,277
December 31, 2017
Commercial real estate	$	-	$	1,315	$	1,315

No loans were restructured in the nine months ended September 30, 2018 and September 30, 2017 that qualified as troubled debt restructurings. The Company has no commitments to loan additional funds to borrowers whose loans were classified as troubled debt restructurings at September 30, 2018.

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,
	2018		2017
	(dollars in thousands)
Commercial and industrial loans	$	1,170	$	372
Real estate loans:
Residential real estate		74		88
Commercial real estate		1,277		1,660
Total nonaccrual loans	$	2,521	$	2,120

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 Pass 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.

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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, 2018
Commercial and industrial loans	$	81,751	$	2,248	$	1,555	$	-	$	85,554
Real estate loans:
Construction, land, and land development		59,707		2,515		-		-		62,222
Residential real estate		91,796		125		74		-		91,995
Commercial real estate		499,223		2,282		1,277		-		502,782
Consumer and other loans		2,583		-		-		-		2,583
	$	735,060	$	7,170	$	2,906	$	-		745,136
Less net deferred origination fees										(816	)
Loans receivable									$	744,320
December 31, 2017
Commercial and industrial loans	$	87,247	$	376	$	902	$	163	$	88,688
Real estate loans:
Construction, land, and land development		39,081		2,560		-		-		41,641
Residential real estate		86,464		479		88		-		87,031
Commercial real estate		434,421		1,636		1,315		345		437,717
Consumer and other loans		2,058		-		-		-		2,058
	$	649,271	$	5,051	$	2,305	$	508		657,135
Less net deferred origination fees										(347	)
Loans receivable									$	656,788

Allowance for Loan Losses

The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit review process together with data from peer institutions and economic information gathered from published sources.

The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based 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 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.

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

	Commercial and Industrial			Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate			Consumer and Other			Unallocated			Total
	(dollars in thousands)
Three Months Ended September 30, 2018
ALLL balance, June 30, 2018	$	1,821		$	1,238	$	1,395	$	2,303		$	52		$	1,731		$	8,540
Provision for loan losses or (recapture)		(10	)		423		7		164			39			(115	)		508
		1,811			1,661		1,402		2,467			91			1,616			9,048
Loans charged-off		-			-		-		-			(6	)		-			(6	)
Recoveries of loans previously charged-off		1			-		65		-			3			-			69
Net (charge-offs) recoveries		1			-		65		-			(3	)		-			63
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
Nine Months Ended September 30, 2018
ALLL balance, December 31, 2017	$	1,864		$	1,063	$	1,343	$	2,014		$	43		$	1,690		$	8,017
Provision for loan losses or (recapture)		226			598		59		537			55			(74	)		1,401
		2,090			1,661		1,402		2,551			98			1,616			9,418
Loans charged-off		(281	)		-		-		(84	)		(20	)		-			(385	)
Recoveries of loans previously charged-off		3			-		65		-			10			-			78
Net (charge-offs) recoveries		(278	)		-		65		(84	)		(10	)		-			(307	)
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
As of September 30, 2018
ALLL amounts allocated to
Individually evaluated for impairment	$	117		$	-	$	-	$	-		$	-		$	-		$	117
Collectively evaluated for impairment		1,695			1,661		1,467		2,467			88			1,616			8,994
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
Loans individually evaluated for impairment	$	1,170		$	-	$	74	$	1,277		$	-					$	2,521
Loans collectively evaluated for impairment		84,384			62,222		91,921		501,505			2,583						742,615
Loan balance, September 30, 2018	$	85,554		$	62,222	$	91,995	$	502,782		$	2,583					$	745,136

19

The following tables summarize the allocation of the allowance for loan loss, as well as the activity in the allowance for loan loss attributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30, 2017:

	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, 2017
ALLL balance, June 30, 2017	$	1,881		$	1,167		$	1,181		$	1,968		$	37		$	1,655	$	7,889
Provision for loan losses or (recapture)		26			(114	)		(62	)		42			3			170		65
		1,907			1,053			1,119			2,010			40			1,825		7,954
Loans charged-off		(6	)		-			-			-			(3	)		-		(9	)
Recoveries of loans previously charged-off		1			-			-			-			1			-		2
Net (charge-offs) recoveries		(5	)		-			-			-			(2	)		-		(7	)
ALLL balance, September 30, 2017	$	1,902		$	1,053		$	1,119		$	2,010		$	38		$	1,825	$	7,947
Nine Months Ended September 30, 2017
ALLL balance, December 31, 2016	$	1,606		$	1,398		$	1,495		$	1,474		$	26		$	1,545	$	7,544
Provision for loan losses or (recapture)		314			(440	)		(376	)		709			17			280		504
		1,920			958			1,119			2,183			43			1,825		8,048
Loans charged-off		(20	)		-			-			(173	)		(7	)		-		(200	)
Recoveries of loans previously charged-off		2			95			-			-			2			-		99
Net (charge-offs) recoveries		(18	)		95			-			(173	)		(5	)		-		(101	)
ALLL balance, September 30, 2017	$	1,902		$	1,053		$	1,119		$	2,010		$	38		$	1,825	$	7,947
As of September 30, 2017
ALLL amounts allocated to
Individually evaluated for impairment	$	60		$	-		$	-		$	-		$	-		$	-	$	60
Collectively evaluated for impairment		1,842			1,053			1,119			2,010			38			1,825		7,887
ALLL balance, September 30, 2017	$	1,902		$	1,053		$	1,119		$	2,010		$	38		$	1,825	$	7,947
Loans individually evaluated for impairment	$	217		$	-		$	-		$	-		$	-				$	217
Loans collectively evaluated for impairment		87,201			41,098			66,962			433,707			1,870					630,838
Loan balance, September 30, 2017	$	87,418		$	41,098		$	66,962		$	433,707		$	1,870				$	631,055

The following tables summarizes the allocation of the allowance for loan loss attributed to various segments in the loan portfolio as of December 31, 2017:

	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, 2017
ALLL amounts allocated to
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		1,864		1,063		1,343		2,014		43		1,690		8,017
ALLL balance, December 31, 2017	$	1,864	$	1,063	$	1,343	$	2,014	$	43	$	1,690	$	8,017
Loans individually evaluated for impairment	$	1,065	$	-	$	89	$	1,660	$	-			$	2,814
Loans collectively evaluated for impairment		87,623		41,641		86,942		436,057		2,058				654,321
Loan balance, December 31, 2017	$	88,688	$	41,641	$	87,031	$	437,717	$	2,058			$	657,135

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Note 5 - Deposits

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

	September 30,		December 31,
	2018		2017
	(dollars in thousands)
Demand, noninterest bearing	$	285,979	$	242,358
Now and money market		340,930		326,412
Savings		49,430		43,876
Time deposits less than $250,000		63,715		60,445
Time deposits $250,000 and over		34,668		30,204
Total deposits	$	774,722	$	703,295

The following table presents the maturity distribution of time deposits as of September 30, 2018 (dollars in thousands):

Twelve months	$	57,755
One to two years		28,412
Two to three years		8,652
Three to four years		1,560
Four to five years		2,004
	$	98,383

Note 6 - 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 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. The 2018 Plan replaces both the 2006 Plan and our Directors’ Stock Bonus Plan (2006 Plan). Existing awards will vest under the terms granted and no further awards will be made under these previous plans. Shares available to be granted under the 2018 plan were 500,000 at September 30, 2018.

Stock Option Awards

In January 2018, the Company granted 28,546 nonqualified stock options under the 2006 Plan to an employee, which vest ratably over 10 years. The Company also granted 87,500 qualified stock options under the 2006 Plan to employees, which vest ratably over 10 years.

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

The following assumptions were used to estimate the value of options granted under the 2006 Plan prior to the 2006 Plan being replaced by the 2018 Plan in the periods indicated:

	Nine months ended September 30, 2018			Nine months ended September 30, 2017
Expected term	10.0 years			10.0 years
Expected stock price volatility		41.89	%		43.41	%
Risk-free interest rate		2.66	%		2.51	%
Expected dividends	Zero			Zero
Weighted average grant date fair value	$	3.95		$	3.70

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A summary of stock option activity under the Company’s Plan during the nine months ended September 30, 2018:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)
Outstanding at December 31, 2017		668,934		$	6.12		6.36
Granted		116,046			7.10
Exercised		(55,670	)		6.09
Forfeited or expired		(47,120	)		6.54
Outstanding at September 30, 2018		682,190		$	6.26		6.58
Exercisable at September 30, 2018		207,035		$	5.97		5.19

The total 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, 2018 was $106,000 and $173,000, respectively. The intrinsic value of options exercised during the three and nine months ended September 30, 2017 was negligible.

As of September 30, 2018, there was $1,621,000 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. Total unrecognized compensation costs is adjusted for unvested forfeitures. The Company expects to recognize that cost over a weighted-average period of approximately 7.0 years.

Restricted Stock Awards

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

The Company’s nonvested shares at September 30, 2018 and December 31, 2017 totaled 1,200 and 1,400 shares, respectively, and were issued with weighted average grant date fair value of $6.25.

Director’s Stock Bonus

The Company adopted and subsequently amended the Director’s Stock Bonus Plan (Bonus Plan). The Bonus Plan was replaced on April 30, 2018, when the shareholders approved the 2018 Omnibus Incentive Plan.

Under the Bonus Plan, the Company could grant up to 50,000 shares. Stock was granted to directors who have attended at least 75% of the scheduled board meetings during the prior year. Grants cliff vest over 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. Grants also immediately vest when a director has attained the retirement age of 72 and retires from the Board.

The Bonus Plan granted shares with a total market value of $5,000 per director, per year, with the exception of the board chairman receiving $7,500 per year, and committee chairmen receiving $6,250 per year. Directors unable to receive stock will receive cash in lieu upon completion of the vesting period. Cash awards are recognized over the vesting period and recorded in other liabilities until paid. The amended Bonus Plan would have expired on May 31, 2018 if it was not replaced on April 30, 2018. Awards previously granted under the Bonus Plan will vest under the term granted.

In January 2018, there were 4,405 shares granted to five directors at an estimated fair value of $7.10 per share. During 2017, there were 4,808 shares granted to five directors at an estimated fair value of $6.50 per share. Compensation expense recorded related to the Plan totaled $8,000 for the three months ended September 30, 2018 and 2017 and $23,000 for the nine months ended September 30, 2018 and 2017.

Note 7 - Shareholders’ Equity

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

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

During 2017, the Articles of Incorporation of the Company were amended to increase total authorized common shares to 300,000,000 shares, an increase of 200,000,000 from the 100,000,000 common shares previously authorized. At September 30, 2018 and December 31, 2017, there were 11,886,473 and 8,887,457 common shares issued and outstanding.

During 2017, the Articles of Incorporation of the Company were amended to provide that 1,000,000 shares of common stock, out of the 300,000,000 shares authorized, be designated as Class B nonvoting common shares. On September 26, 2018 all 100,000 shares of Class B nonvoting common stock were exchanged for voting common stock on terms and conditions approved by the Company’s board of directors. At December 31, 2017, there were 100,000 shares of Class B nonvoting common stock issued and outstanding.

During 2017, the Articles of Incorporation of the Company were amended to provide that up to 100,000,000 shares of common stock, out of the 300,000,000 shares authorized, may be designated as Class C nonvoting common shares. On September 26, 2018, 261,444 Class C shares were exchanged for common stock on terms and conditions approved by the Company’s board of directors. At December 31, 2017, there were 261,444 shares of Class C nonvoting common stock issued and outstanding.

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, 2018				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	$	16,837	$	16,837	$	16,837	$	-	$	-
Interest earning deposits with other banks		98,671		98,671		98,671		-		-
Investment securities		37,039		36,955		32,329		4,626		-
Other investments		3,766		3,766		-		3,766		-
Loans receivable, net (1)		735,209		711,772		-		-		711,772
Accrued interest receivable		2,299		2,299		-		2,299		-
Financial liabilities
Deposits (1)	$	774,722		773,497	$	-	$	773,497	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,961		9,570		-		9,570		-
Junior subordinated debentures		3,581		3,112		-		3,112		-
Capital lease		88		86		-		86		-
Accrued interest payable		257		257		-		257		-

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

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	December 31, 2017				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	13,787	$	13,787	$	13,787	$	-	$	-
Interest earning deposits with other banks		75,964		75,891		75,891		-		-
Investment securities		38,336		38,301		33,396		4,905		-
Other investments		3,680		3,680		-		3,680		-
Loans receivable, net		648,771		636,334		-		-		636,334
Accrued interest receivable		2,274		-		-		2,274		-
Financial liabilities
Deposits	$	703,295	$	702,525	$	-	$	702,525	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,950		9,601		-		9,601		-
Junior subordinated debentures		3,579		2,978		-		2,978		-
Capital lease		137		134		-		134		-
Accrued interest payable		228		-		-		228		-

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 non-binding single dealer quotes not corroborated by observable market data.

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

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

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands)
September 30, 2018
Available-for-sale
U.S. Treasury securities	$	32,329	$	-	$	-	$	32,329
U.S. Government agencies		-		2,941		-		2,941
U.S. Agency collateralized mortgage obligations		-		182		-		182
U.S. Agency residential mortgage-backed securities		-		43		-		43
Municipals		-		254		-		254
	$	32,329	$	3,420	$	-	$	35,749
December 31, 2017
Available-for-sale
U.S. Treasury securities	$	33,396	$	-	$	-	$	33,396
U.S. Government agencies		-		2,970		-		2,970
U.S. Agency collateralized mortgage obligations		-		260		-		260
U.S. Agency residential mortgage-backed securities		-		81		-		81
Municipals		-		220		-		220
	$	33,396	$	3,531	$	-	$	36,927

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

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

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

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

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

	Valuation Technique	Unobservable Inputs	September 30, 2018 Weighted Average Rate			December 31, 2017 Weighted Average Rate
Impaired loans	Collateral valuations	Discount to appraised value		9	%		13	%

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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, 2018
Impaired loans	$	-	$	-	$	493	$	493
Total	$	-	$	-	$	493	$	493
December 31, 2017
Impaired loans	$	-	$	-	$	508	$	508
Total	$	-	$	-	$	508	$	508

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

Impaired 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.

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, 2018		September 30, 2017		September 30, 2018		September 30, 2017
	(dollars in thousands, except share data)				(dollars in thousands, except share data)
Net Income	$	2,602	$	1,904	$	6,646	$	5,093
Basic weighted average number common shares outstanding		11,338,320		9,235,344		9,956,449		9,233,421
Dilutive effect of share-based compensation		271,658		3,464		94,966		2,754
Diluted weighted average number common shares outstanding		11,609,978		9,238,808		10,051,415		9,236,175
Basic earnings per share	$	0.23	$	0.21	$	0.67	$	0.55
Diluted earnings per share	$	0.22	$	0.21	$	0.66	$	0.55

For the three and nine month periods ended September 30, 2018 and 2017, the difference in earnings per share under the two-class method was not significant. There were no antidilutive shares that impacted the diluted earnings per share calculation for the three months ended September 30, 2018. Options to purchase an additional 599,026 share of common stock, for the three months ended September 30, 2017 were not included in the computation of diluted earnings per common share because their effect resulted in them being antidilutive. For the nine months ended September 30, 2018 and 2017 options to purchase an additional 261,051 and 649,396 shares of common stock, respectively, were not included in the computation of diluted earnings per common share because their effect resulted in them being antidilutive.

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

Overview

Coastal Financial Corporation (the “Company”) is a bank holding company thatoperatesthrough its wholly ownedsubsidiary,CoastalCommunity Bank (the “Bank”).We are headquarteredin Everett,Washington,which by populationis the largestcityin, and the county seatof, Snohomish County. We focus on providinga wide range of banking productsand servicesto consumers and smallto mediumsizedbusinessesin the broaderPuget Soundregionin the stateof Washington.We currentlyoperate14 full-servicebanking locations,11 of which are locatedin Snohomish County, where weare the largestcommunitybank by depositmarketshare,and threeof which are locatedin neighboringcounties(one in King County and two in IslandCounty).  Included in the locations above is a new, full service branch, which opened on October 9, 2018, and is located in Edmonds, Washington.

The followingdiscussionand analysispresentsour financialconditionand resultsof operationson a consolidatedbasis.However, becauseweconduct allof our materialbusinessoperationsthrough the Bank,the discussionand analysisrelateto activitiesprimarilyconductedby the Bank.

Asa bank holding company thatoperatesthrough one segment,communitybanking, wegeneratemostof our revenuefromintereston loans and investments.Our primarysourceof funding for our loans is commercialand retaildeposits.We placesecondaryrelianceon wholesalefunding, primarilyborrowingsfromthe FederalHome Loan Bank,or FHLB.Our largestexpensesare salariesand relatedemployeebenefits,occupancy, intereston depositsand borrowings,data processing,and provisionfor loan losses.Our principallendingproductsare commercialrealestateloans, commercialand industrialloans, and to a lesserextentresidentialrealestateloans and consumerloans.

The Company successfully closed its initial public offering on July 20, 2018, raising net proceeds of $33.2 million and issuing 2,577,500 shares of common stock in exchange. We are using, and intend to continue to use, the net proceeds to support or growth, organically or through mergers and acquisitions, and for general corporate purposes, which may include the repayment or refinancing of debt and maintenance of our required regulatory capital levels.

Comparison of Operating Results for the Three Months Ended September 30, 2018 and September 30, 2017

Net Income

Net incomefor the threemonthsended September 30, 2018, was $2.6 million,or $0.22 per dilutedshare,comparedto $1.9 million,or $0.21 per dilutedshare,for the threemonthsended September 30, 2017. The increasein net incomeover the comparableperiodin the prioryear was attributableto a $1.3 million increasein net interestincome,primarily arisingfromincreasedinterest earningassetsfromour loan growth initiatives,as well as $328,000 in wholesale banking service fees, a new line of business in which we are banking customers of other financial service companies,and $283,000 in lower taxesresultingfromthe decreasein the corporatetax rateunder the Tax Cuts and Jobs Act. These positive factorswere partiallyoffsetby an $801,000 increasein noninterestexpense.

Net InterestIncome

Net interestincome for the threemonthsended September 30, 2018, was $8.8 million,comparedto $7.5 millionfor the threemonths ended September 30, 2017, an increaseof $1.3 million, or 17.3%. The increasein net interestincomeconsistedof a $1.7 million,or 20.7%, increasein interestincome partially offsetby a $314,000, or 42.9%, increasein interestexpense.

The growth in interestincomewas primarilyattributableto a $92.8 million,or 14.9%, increasein averageloans outstandingfor the threemonthsended September 30, 2018, comparedto the prioryear, combinedwith a 10 basis point increasein the yieldon totalloans. We have continuedto focus on our loan growth initiatives,includingthe deepeningof relationshipswith existingcustomersand developingnewloan and depositrelationships.We focuson organicallygrowing loans through our existinglendersand by acquiring newlenders or teamsto assist to grow our loan portfolio.

The increasein interestexpense for the threemonthsended September 30, 2018, was primarilyrelatedto a 19 basis point increasein the cost of interest bearingdepositscombinedwith a $60.1 million,or 14.0%, increasein average interest bearingdeposits compared to the sameperiodin the prioryear. The increasein the cost of depositswas primarily due to an increasein the ratepaid on NOWand money marketaccountsand on timedeposits,as marketinterest ratesincreased in response to the Federal Reserve raising rates 100 basis points since September 30, 2017. The increasein averageinterest bearingdepositsfor the threemonthsended September 30, 2018, comparedto the sameperiodin 2017 was attributableto growth in alldepositcategories.The averagebalanceof NOWand money marketaccountsgrew $32.4 million,or 10.6%, the averagebalanceof savingsaccountsgrew $6.4 million,or 14.9%, and the averagebalanceof customertimedepositsgrew$21.4 million,or 27.2% to $100.0 million. We do not regularlyadvertisetimedepositratesor money marketrates,althoughwe occasionallyadvertisepromotionalratesin targetedportionsof our marketarea.Our branch managers,

27

business developmentofficers,and lenderscollaborateto provideconsistentand coordinatedcustomerserviceand to seek depositsfromnewand existingcustomers.

For the threemonthsended September 30, 2018, net interestmargin(annualizednet interestincomedividedby averagetotalinterest earningassets) and net interestspread(averageyieldon totalinterest earningassetsminusaveragecost of totalinterest bearingliabilities)were 4.13% and 3.79%, respectively,comparedto 4.14% and 3.89% for the threemonthsended September 30, 2017.

The followingtablepresentsan analysisof net interestincome,net interestspreadand net interestmarginfor the periodsindicated.Loan feesincludedin interestincometotaled$193,000 and $179,000 for the threemonths ended September 30, 2018 and 2017, respectively.For the threemonthsended September 30, 2018 and 2017, the amount of interestincomenot recognizedon nonaccrualloans was not material.

	Average balance sheets
	For the Three Months Ended September 30,
	2018								2017
	Average			Interest &		Yield /			Average			Interest &		Yield /
(Dollars in thousands)	Balance			Dividends		Cost (4)			Balance			Dividends		Cost (4)
Assets
Interest earning assets:
Interest earning deposits	$	90,301		$	458		2.01	%	$	53,959		$	171		1.26	%
Investment securities, available for sale (1)		38,314			148		1.53			34,809			124		1.41
Investment securities, held to maturity (1)		1,299			8		2.44			1,649			11		2.65
Other Investments		3,000			18		2.38			3,043			3		0.39
Loans receivable (2)		717,260			9,262		5.12			624,463			7,908		5.02
Total interest earning assets		850,174			9,894		4.62	%		717,923			8,217		4.54	%
Noninterest earning assets:
Allowance for loan losses		(8,782	)							(7,890	)
Other noninterest earning assets		37,000								37,293
Total assets	$	878,392							$	747,326
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	488,183		$	851		0.69	%	$	428,036		$	540		0.50	%
FHLB advances and other borrowings		964			6		2.47			3,294			13		1.57
Subordinated debt		9,959			148		5.90			9,945			148		5.90
Junior subordinated debentures		3,580			41		4.54			3,579			31		3.44
Total interest bearing liabilities		502,686			1,046		0.83	%		444,854			732		0.65	%
Noninterest bearing deposits		274,549								233,896
Other liabilities		3,650								3,557
Total shareholders' equity		97,507								65,019
Total liabilities and shareholders' equity	$	878,392							$	747,326
Net interest income				$	8,848							$	7,485
Interest rate spread							3.79	%							3.89	%
Net interest margin (3)							4.13	%							4.14	%

(1) For presentationin thistable,averagebalancesand the correspondingaverageratesfor investmentsecurities are based upon historicalcost, adjustedfor amortizationof premiumsand accretionof discounts.

(2) Includesnonaccrualloans.

(3) Net interestmarginrepresentsannualizednet interestincomedividedby averagetotalinterest earning assets.

(4) Yields and ratesare annualized.

The followingtablepresentsinformationregardingthe dollaramountof changes in interestincomeand interestexpense for the periodsindicatedfor each majorcomponentof interest earningassetsand interest bearingliabilitiesand distinguishesbetween the changes

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attributableto changes in volumeand changes attributableto changes in interestrates.For purposesof thistable,changes attributableto both rateand volume thatcannot be segregatedhave been allocatedto volume.

	Three Months Ended September 30, 2018
	Compared to
	Three Months Ended September 30, 2017
	Increase (Decrease)
	Due to						Total Increase
(Dollars in thousands)	Volume			Rate			(Decrease)
Interest income:
Interest earning deposits	$	115		$	172		$	287
Investment securities, available for sale		12			12			24
Investment securities, held to maturity		(2	)		(1	)		(3	)
Other Investments		-			15			15
Loans receivable		1,176			178			1,354
Total increase in interest income		1,301			376			1,677
Interest expense:
Interest bearing deposits		76			235			311
FHLB advances		(9	)		2			(7	)
Subordinated debt		-			-			-
Junior subordinated debentures		-			10			10
Total increase in interest expense		67			247			314
Increase in net interest income	$	1,234		$	129		$	1,363

Provisionfor LoanLosses

The provisionfor loan lossesis an expense weincurto maintainan allowancefor loan lossesat a levelthatis deemedappropriateby managementto absorb inherentlosseson existingloans. For a descriptionof the factors taken into accountby our managementin determiningthe allowancefor loan lossessee “—Financial Condition—Allowance for Loan Losses.”

The provisionfor loan lossesfor the threemonthsended September 30, 2018, was $508,000, comparedto $65,000 for the three monthsended September 30, 2017. The allowancefor loan lossesas a percentageof loans was 1.22% at September 30, 2018, comparedto 1.26% at September 30, 2017. Strongcreditqualityreducedthe amount/percentageof overall allowanceneeded for 2018, while the provision for loan losses was increased due to loan growth.

Net recoveries for the threemonthsended September 30, 2018, totaled$63,000, or (0.03)% (annualized) of total averageloans, as comparedto net charge-offs of $7,000, or 0.004% (annualized) of totalaverageloans, for the threemonthsended September 30, 2017. Net charge-offs for both periodswere low and demonstrate the strong creditqualityof our loan portfolio and a healthyeconomicenvironment in our marketarea.

NoninterestIncome

Our primarysourcesof recurringnoninterestincomeare depositaccountservicecharges, wholesale banking service fees, loan referralfees, mortgagebrokerfees,and subleaseand leaseincome.Noninterestincomedoes not includeloan originationfees to the extentthey exceed the directloan originationcosts,which are generallyrecognizedover the lifeof the relatedloan as an adjustmentto yieldusing the interestmethod.

For the threemonthsended September 30, 2018, noninterestincometotaled$1.5 million,an increaseof $296,000, or 23.7%, comparedto $1.3 million for the threemonthsended September 30, 2017.

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

	Three Months
	Ended September 30,				Increase			Percent
(Dollars in thousands)	2018		2017		(Decrease)			Change
Deposit service charges and fees	$	800	$	725	$	75			10.3	%
Wholesale banking service fees		328		-		328		N/A
Loan referral fees		209		234		(25	)		(10.7	)
Mortgage broker fees		52		80		(28	)		(35.0	)
Sublease and lease income		10		56		(46	)		(82.1	)
Gain on sales of loans, net		-		18		(18	)		(100.0	)
Other		147		137		10			7.3
Total noninterest income	$	1,546	$	1,250	$	296			23.7	%

Deposit ServiceCharges and Fees. Deposit fees,which are feesfromour customersfor deposit-related services,constitutethe largestcomponentof our noninterestincome. Servicechargeson depositaccountswere$800,000 for the threemonthsended September 30, 2018, an increaseof $75,000, or 10.3%, over the sameperiodin the prioryear. The increasein depositaccountservicecharges was primarilythe resultof a fee incomeinitiativeto adjustthe pricingof fees,types of fees,and features of our depositaccounts,as well as growth in deposit accounts and balances.We were able to increasefeeswithout losing customers.

Wholesale Banking Service Fees. We provide banking services to customers of a third party investment platform company. In exchange for providing these services, we earn fixed fees and reimbursement of costs incurred for providing these services.  

LoanReferralFees. We earn loan referralfeeswhenweoriginatea variablerateloan and the borrowerenters into an interestrateswap agreementwith a thirdpartyto fix the interestratefor an extendedperiod,usually20 or 25 years.We recognizethe loan referralfee for arrangingthe interestrateswap. Byfacilitatinginterestrate swaps to our clients,weare able to providethemwith a long-term,fixedinterestratewithout assumingthe interestraterisk.Loan referralfeeswere $209,000 for the threemonthsended September 30, 2018, comparedto $234,000in the sameperiodin the prioryear. Interestratevolatility,swap rates,and the timingof loan closings allimpactthe demand for long-termfixedrateswaps. The recognitionof loan referralfeesfluctuatein response to thesemarketconditionsand as a resultwemay not recognizeany loan referralfeesin some periods.

MortgageBroker Fees. We earn mortgagebrokerfeesfor residentialmortgageloans thatwebrokerthrough Quicken Loans. Mortgagebrokerfeesdecreased$28,000 in the threemonthsended September 30, 2018, comparedto the sameperiodin 2017 as a resultof highermortgageinterestratesand lower inventoryof housing in our key markets,which decreasedthe demand for new and refinancedmortgages.

Gain on Sale of Loans. We typicallysellin the secondarymarketthe guaranteedportion(generally75% of the principalbalance)of the SBAand United StatesDepartmentof Agricultureloans thatweoriginate. There was no gain on sale of loans for the three months ended September 30, 2018 as compared to $18,000 in the sameperiodin 2017 as a resultof restructuringour SBAloan programin 2017.  We are in the process of refocusing and rebuilding our SBA pipeline as we focus on higher quality loans in what we believe is the latter half of the credit cycle.

Other. This categoryincludesa varietyof otherincome-producingactivities,annuitybrokerfees,and SBA servicingfees.Other noninterestincomeincreased$10,000 in the threemonthsended September 30, 2018, compared to the sameperiodin 2017 as a result of higher SBA servicing fees, partially offset by lower annuity fees.

NoninterestExpense

Generally,noninterestexpense is composedof allemployeeexpensesand costsassociatedwith operatingour facilities,obtainingand retainingcustomerrelationshipsand providingbank services.The largestcomponentof noninterestexpense is salariesand employeebenefits.Noninterestexpense also includesoperationalexpenses, such as occupancy expense, data processingexpense, directorand staffexpense, marketingexpense, and legal and professionalfees.

For the threemonthsended September 30, 2018, noninterestexpense totaled$6.6 million,an increaseof $801,000, or 13.8%, comparedto $5.8 millionfor the threemonthsended September 30, 2017.

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The followingtablepresents,for the periodsindicated,the majorcategoriesof noninterestexpense:

	Three Months
	Ended September 30,				Increase			Percent
(Dollars in thousands)	2018		2017		(Decrease)			Change
Salaries and employee benefits	$	4,027	$	3,491	$	536			15.4	%
Occupancy		798		784		14			1.8
Data processing		501		463		38			8.2
Director and staff expenses		213		172		41			23.8
Excise taxes		146		119		27			22.7
Marketing		110		148		(38	)		(25.7	)
Legal and professional fees		142		87		55			63.2
FDIC assessments		83		90		(7	)		(7.8	)
Business development		81		68		13			19.1
Other		509		387		122			31.5
Total noninterest expense	$	6,610	$	5,809	$	801			13.8	%

Salariesand Employee Benefits.Salariesand employeebenefitsare the largestcomponentof noninterest expense and includepayrollexpense, incentivecompensationcosts,benefitplans, healthinsuranceand payroll taxes.Salariesand employeebenefitswere $4.0 millionfor the threemonthsended September 30, 2018, an increase of $536,000, or 15.4%, comparedto $3.5 millionfor the threemonthsended September 30, 2017. The increasewas due to hiringstafffor our Woodinville branch (which opened in October 2017); hiring new lenders and lending teams in the first half of 2018; new back office staff to support growth and becoming a public company; new staff for our new Edmonds branch, and staff for our wholesale banking activities.  New hires were primarily in support of our growth initiatives and deploying capital.  Asof September 30, 2018, wehad 176 full-timeequivalentemployees,comparedto 161 at September 30, 2017, a 9% increase.

Occupancy Expenses. Occupancy expenseswere $798,000 for the threemonthsended September 30, 2018, comparedto $784,000 for the threemonthsended September 30, 2017. This categoryincludesbuilding,leasehold,furniture,fixturesand equipmentdepreciationtotaling$269,000 and$261,000 for the threemonthsended September 30, 2018 and 2017, respectively.The increaseof 1.8% in occupancy expensesfor the threemonthsended September 30, 2018, comparedto the sameperiodin the prioryear, was primarilydue to opening our Woodinvillebranch in October 2017, increasing our lease, depreciation and utility costs in late 2017 and all of 2018, and higher overall maintenancecosts.  Edmonds, our 14^th branch was opened in October 2018.  

Data Processing.Data processingcostswere $501,000 for the threemonthsended September 30, 2018, compared to $463,000 for the threemonthsended September 30, 2017. Data processing costsincludeallof our customerprocessing,computerprocessing,and network costs.  Data processing costs grow as we add new products, customers and branches.

Other. This category includes dues and subscriptions, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and officers insurance, donations, provision for unfunded commitments, and miscellaneous other expenses.Other noninterest expense was $509,000 for the three months ended September 30, 2018, compared to$387,000 for the three months ended September 30, 2017. The increase was primarily due to cost associated with unfunded commitments expense from strong loan growth for the three months ended September 30, 2018 as compared to the same period last year.

Income TaxExpense

The amountof incometax expense weincuris impactedby the amountsof our pre-taxincome,tax-exempt incomeand othernondeductibleexpenses.Deferredtax assetsand liabilitiesare reflectedat currentincometax ratesin effectfor the periodin which the deferredtax assetsand liabilitiesare expectedto be realizedor settled. Aschanges in tax laws or ratesare enacted,deferredtax assetsand liabilitiesare adjustedthrough the provision for incometaxes.Valuationallowancesare establishedwhennecessaryto reduceour deferredtax assetsto the amountexpectedto be realized. For the three monthsended September 30, 2018, incometax expense totaled$674,000, comparedto $957,000 for the threemonths ended September 30, 2017. Our effectivetax ratesfor the threemonthsended September 30, 2018 and 2017, were 20.6% and 33.4%, respectively.The lower tax ratein 2018 was the resultof the reductionin the corporateincometax rateunder the Tax Cuts and Jobs Act.

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Comparison of Operating Results for the Nine Months Ended September 30, 2018 and September 30, 2017

Net Income

Net incomefor the nine monthsended September 30, 2018, was $6.6 million,or $0.66 per dilutedshare,comparedto $5.1 million,or $0.55 per dilutedshare,for the nine monthsended September 30, 2017. The increasein net incomeover the comparableperiodin the prioryear was attributableto a $3.3 million increasein net interestincome,primarily arisingfromincreasedinterest earningassetsfromour loan growth initiatives,as well as $370,000 in fee income from a new line of business from wholesale banking services provided, a $511,000 increaseinfee incomefrom both raisingour depositservicechargesand feesand additional revenuefromloan referralfeesand $723,000 in lower taxesresultingfromthe decreasein the corporatetax rateunder the Tax Cuts and Jobs Act. These positive factorswere offsetby a $2.4 million increasein noninterestexpense.

Net InterestIncome

Net interestincome for the nine monthsended September 30, 2018, was $24.9 millioncomparedto $21.6 millionfor the nine months ended September 30, 2017, an increaseof $3.3 million, or 15.3%. The increasein net interestincomeconsistedof a $4.1 million,or 17.3%, increasein interestincomeoffsetby a $726,000, or 35.0%, increasein interestexpense.

The growth in interestincomewas primarilyattributableto a $77.2 million,or 12.7%, increasein averageloans outstandingfor the nine monthsended September 30, 2018, comparedto the prioryear, combinedwith a 12 basis point increasein the yieldon totalloans and a 16 basis point increase on earning assets.

The increasein interestexpense for the nine monthsended September 30, 2018, was primarilyrelatedto a 15 basis point increasein the cost of interest bearingdepositscombinedwith a $47.2 million,or 11.1%, increasein average interest bearingdepositsover the sameperiodin the prioryear. The Federal Reserve increased rates 1.0% since September 30, 2017 and market rates increased in response. The increasein averageinterest bearingdepositsfor the nine monthsended September 30, 2018, comparedto the sameperiodin 2017 is attributableto growth in alldepositcategories.The averagebalanceof NOWand money marketaccountsgrew $21.0 million,or 6.8%, the averagebalanceof savingsaccountsgrew $6.5 million,or 15.9%, and the averagebalanceof customertimedepositsgrew$19.8 million,or 26.9%.

For the nine monthsended September 30, 2018, net interestmargin(annualizednet interestincomedividedby averagetotalinterest earningassets) and net interestspread(averageyieldon totalinterest earningassetsminusaveragecost of totalinterest bearingliabilities)were 4.17% and 3.87%, respectively,comparedto 4.09% and 3.85% for the nine monthsended September 30, 2017.

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The followingtablepresentsan analysisof net interestincome,net interestspreadand net interestmarginfor the periodsindicated.Loan feesincludedin interestincometotaled$825,000 and $450,000 for the nine months ended September 30, 2018 and 2017, respectively.For the nine monthsended September 30, 2018 and 2017, the amount of interestincomenot recognizedon nonaccrualloans was not material.

	Average balance sheets
	For the Nine Months Ended September 30,
	2018								2017
	Average			Interest &		Yield /			Average			Interest &		Yield /
(Dollars in thousands)	Balance			Dividends		Cost (4)			Balance			Dividends		Cost (4)
Assets
Interest earning assets:
Interest earning deposits	$	69,818		$	949		1.82	%	$	56,284		$	458		1.09	%
Investment securities, available for sale (1)		38,327			439		1.53			34,683			363		1.40
Investment securities, held to maturity (1)		1,330			24		2.41			1,694			22		1.74
Other Investments		3,038			91		4.00			2,875			77		3.58
Loans receivable (2)		687,165			26,229		5.10			609,981			22,741		4.98
Total interest earning assets		799,678			27,732		4.64	%		705,517			23,661		4.48	%
Noninterest earning assets:
Allowance for loan losses		(8,478	)							(7,811	)
Other noninterest earning assets		36,960								39,990
Total assets	$	828,160							$	737,696
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	472,266		$	2,209		0.63	%	$	425,030		$	1,526		0.48	%
FHLB advances and other borrowings		2,577			39		2.02			2,179			22		1.35
Subordinated debt		9,955			439		5.90			9,941			439		5.90
Junior subordinated debentures		3,580			116		4.33			3,578			90		3.36
Total interest bearing liabilities		488,378			2,803		0.77	%		440,728			2,077		0.63	%
Noninterest bearing deposits		258,586								228,507
Other liabilities		3,038								3,069
Total shareholders' equity		78,158								65,392
Total liabilities and shareholders' equity	$	828,160							$	737,696
Net interest income				$	24,929							$	21,584
Interest rate spread							3.87	%							3.85	%
Net interest margin (3)							4.17	%							4.09	%

(1) For presentationin thistable,averagebalancesand the correspondingaverageratesfor investmentsecurities are based upon historicalcost, adjustedfor amortizationof premiumsand accretionof discounts.

(2) Includesnonaccrualloans.

(3) Net interestmarginrepresentsannualizednet interestincomedividedby averagetotalinterest earning assets.

(4) Yields and ratesare annualized.

The followingtablepresentsinformationregardingthe dollaramountof changes in interestincomeand interestexpense for the periodsindicatedfor each majorcomponentof interest earningassetsand interest bearingliabilitiesand distinguishesbetween the changes

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attributableto changes in volumeand changes attributableto changes in interestrates.For purposesof thistable,changes attributableto both rateand volume thatcannot be segregatedhave been allocatedto volume.

	Nine Months Ended September 30, 2018
	Compared to
	Nine Months Ended September 30, 2017
	Increase (Decrease)
	Due to						Total Increase
(Dollars in thousands)	Volume			Rate			(Decrease)
Interest income:
Interest earning deposits	$	110		$	381		$	491
Investment securities, available for sale		38			38			76
Investment securities, held to maturity		(5	)		7			2
Other Investments		4			10			14
Loans receivable		2,879			609			3,488
Total increase in interest income		3,026			1,045			4,071
Interest expense:
Interest bearing deposits		170			513			683
FHLB advances		4			13			17
Subordinated debt		1			(1	)		-
Junior subordinated debentures		-			26			26
Total increase in interest expense		175			551			726
Increase in net interest income	$	2,851		$	494		$	3,345

Provisionfor LoanLosses

The provisionfor loan lossesfor the nine monthsended September 30, 2018, was $1.4 million, comparedto $504,000 for the nine monthsended September 30, 2017. The increaseof $897,000 was primarilydue to loan growth. The allowancefor loan lossesas a percentageof loans was 1.22% at September 30, 2018, comparedto 1.26% at September 30, 2017.  Strongercreditqualityreducedthe amountof allowanceneeded for 2018 while loan growth increased the amount of provision needed.

Net charge-offsfor the nine monthsended September 30, 2018, totaled$307,000, or 0.06% (annualized)of total averageloans, as comparedto net charge-offsof $101,000, or 0.02% (annualized)of totalaverageloans, for the nine monthsended September 30, 2017. Net charge-offsfor both periodswere low, and demonstratethe strong creditqualityof our loan portfolioand healthyeconomicenvironmentin our marketarea.

NoninterestIncome

For the nine monthsended September 30, 2018, noninterestincometotaled$3.9 million,an increaseof $765,000, or 24.7%, comparedto $3.1 million for the nine monthsended September 30, 2017.

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

	Nine Months
	Ended September 30,				Increase			Percent
(Dollars in thousands)	2018		2017		(Decrease)			Change
Deposit service charges and fees	$	2,258	$	1,924	$	334			17.4	%
Wholesale banking service fees		370		-		370		N/A
Loan referral fees		453		276		177			64.1
Mortgage broker fees		158		195		(37	)		(19.0	)
Sublease and lease income		71		167		(96	)		(57.5	)
Gain on sales of loans, net		142		102		40			39.2
Other		414		437		(23	)		(5.3	)
Total noninterest income	$	3,866	$	3,101	$	765			24.7	%

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Deposit ServiceCharges and Fees. Servicechargeson depositaccountswere$2.3 million for the nine monthsended September 30, 2018, an increaseof $334,000, or 17.4%, over the sameperiodin the prioryear. The increasein depositaccountservicecharges was primarilythe resultof a fee incomeinitiativeto adjustthe pricingof fees,types of fees,and features of our depositaccounts,as well as growth in deposit accounts andbalances.

Wholesale Banking Service Fees. We provide banking services to customers of a third party investment-platform company. In exchange for providing these services, we earn fixed fees and reimbursement of costs incurred for providing these services.  We started receiving cost reimbursements in May 2018 and fixed fees in July 2018.  Wholesale banking service fees are received based on contractual relationships.

LoanReferralFees. Loan referralfeeswere $453,000 for the nine monthsended September 30, 2018, comparedto $276,000in the sameperiodin the prioryear. The recognitionof loan referralfees are rate sensitive and fluctuatein response to marketconditionsand as a resultwemay not recognizeany loan referralfeesin some periods.

MortgageBroker Fees. Mortgagebrokerfeesdecreased$37,000 in the nine monthsended September 30, 2018, comparedto the sameperiodin 2017 as a resultof highermortgageinterestratesand lower inventoryof housing in our key markets,which has decreasedthe demand for new and refinanced mortgages.

Gain on Sale of Loans. Gain on sale of loans increased$40,000 to $142,000 in the nine monthsended September 30, 2018, comparedto the sameperiodin 2017 as a resultof refocusing and restructuringour SBAloan programin 2017.  We are in the process of rebuilding our SBA pipeline as we focus on higher quality loans in the latter half of the credit cycle.

Other. Other noninterestincomedecreased$23,000 in the nine monthsended September 30, 2018, compared to the sameperiodin 2017. We experienced lower annuity fees and SBA servicing fees for the nine months ended September 30, 2018, as compared to the same period last year. Additionally, during the nine months ended September 30, 2017, the Company incurred a loss on fixed asset disposal of $21,000.

NoninterestExpense

For the nine monthsended September 30, 2018, noninterestexpense totaled$19.0 million,an increaseof $2.4 million, or 14.3%, comparedto $16.6 millionfor the nine monthsended September 30, 2017.

The followingtablepresents,for the periodsindicated,the majorcategoriesof noninterestexpense:

	Nine Months
	Ended September 30,				Increase			Percent
(Dollars in thousands)	2018		2017		(Decrease)			Change
Salaries and employee benefits	$	11,672	$	9,947	$	1,725			17.3	%
Occupancy		2,425		2,253		172			7.6
Data processing		1,472		1,311		161			12.3
Director and staff expenses		493		450		43			9.6
Excise taxes		404		344		60			17.4
Marketing		253		298		(45	)		(15.1	)
Legal and professional fees		352		281		71			25.3
FDIC assessments		247		271		(24	)		(8.9	)
Business development		241		195		46			23.6
Other		1,472		1,298		174			13.4
Total noninterest expense	$	19,031	$	16,648	$	2,383			14.3	%

Salariesand Employee Benefits.Salariesand employeebenefitswere $11.7 millionfor the nine monthsended September 30, 2018, an increase of $1.7 million, or 17.3%, comparedto $9.9 millionfor the nine monthsended September 30, 2017. As noted previously, the increasewas primarilydue to hiringstafffor our Woodinvillebranch (which opened in October 2017) hiring staff for the Edmonds branch which opened in October 2018, hiring additional higher-earning staff (primarily lenders and credit staff) for our ongoing growth initiatives, and to a lesser extent hiring additional staff related to the Company’s operation as a newly public company.Asof September 30, 2018, wehad 176 full-timeequivalentemployees,comparedto 161 at September 30, 2017, a 9% increase.

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Occupancy Expenses. Occupancy expenseswere $2.4 million for the nine monthsended September 30, 2018, comparedto $2.3 million for the nine monthsended September 30, 2017. This categoryincludesbuilding,leasehold,furniture,fixturesand equipmentdepreciationtotaling$786,000 and$721,000 for the nine monthsended September 30, 2018 and 2017, respectively.The increaseof 7.6% in occupancy expensesfor the nine monthsended September 30, 2018, comparedto the sameperiodin the prioryear was primarilydue to opening our Woodinvillebranch in October 2017.

Data Processing.Data processingcostswere $1.5 million for the nine monthsended September 30, 2018, compared to $1.3 million for the nine monthsended September 30, 2017. Data processing costsincludeallof our customerprocessing,computerprocessing,and network costs. Data processing costs increased due to our growth in new accounts, balances, new products, and new branches.

Other. Other noninterestexpense was $1.5 million for the nine monthsended September 30, 2018, comparedto$1.3 million for the nine monthsended September 30, 2017. The increasewas primarilydue to costs associated with unfunded commitments expense due to strong growth in loan commitmentsand costs associated with supportingthe communitiesweservethrough membershipsand sponsorships.

Income TaxExpense

For the nine monthsended September 30, 2018, incometax expense totaled$1.7 million, comparedto $2.4 million for the nine months ended September 30, 2017. Our effectivetax ratesfor the nine monthsended September 30, 2018 and 2017, were 20.5% and 32.4%, respectively.The lower tax ratein 2018 was the resultof the reductionin the corporateincometax rateunder the Tax Cuts and Jobs Act.

Financial Condition

Our totalassetsincreased$111.2 million,or 13.8%, to $917.0 millionas of September 30, 2018, from$805.8 million as of December31, 2017. Our assetgrowth in the first nine months of 2018 was primarilydue to $87.5 millionin loan growth and a $25.8 millionincreasein cash and cash equivalents, offsetby a decreaseof $1.3 millionininvestmentsecurities. Our growth was primarilyfunded by $71.4 millionin depositgrowth during the first nine months of 2018 and $33.2 million in new capital raised.

LoanPortfolio

Our primarysourceof incomeis derivedthrough interestearnedon loans. Asubstantialportionof our loan portfolioconsistsof commercialand industrialloans and realestateloans securedby commercialrealestate propertieslocatedin the Puget Soundregion.Our loan portfoliorepresentsthe highestyieldingcomponentof our earningassets.

Asof September 30, 2018, loans totaled$744.3 million,an increaseof $87.5 million,or 13.3%, comparedto December31, 2017. The increasewas primarilydue to our efforts to increaseincomeby buildinga diversifiedloan portfoliowhile maintainingstrongcreditquality.

Loans as a percentageof depositswere 96.1% as of September 30, 2018, compared to 93.4% as of December31, 2017. We are focusedon servingour communitiesand marketsby growing loans and funding those loans with customerdeposits.

The followingtablesummarizesour loan portfolioby type of loan as of the datesindicated:

	As of September 30, 2018						As of December 31, 2017
(Dollars in thousands)	Amount			Percent			Amount			Percent
Commercial and industrial loans	$	85,554			11.5	%	$	88,688			13.5	%
Real estate:
Construction, land and land development		62,222			8.4			41,641			6.3
Residential real estate		91,995			12.3			87,031			13.3
Commercial real estate		502,782			67.5			437,717			66.6
Consumer and other loans		2,583			0.3			2,058			0.3
Gross loans receivable		745,136			100.0	%		657,135			100.0	%
Net deferred origination fees		(816	)					(347	)
Loans receivable	$	744,320					$	656,788

36

Commercial and IndustrialLoans.Commercialand industrialloans decreased$3.1 million,or 3.5%, to $85.6 millionas of September 30, 2018, from $88.7 millionas of December31, 2017.

Construction,Landand LandDevelopment Loans.Construction,land and land developmentloans increased$20.6 million,or 49.5%, to $62.2 millionas of September 30, 2018, from$41.6 millionas of December31, 2017. The increasewas primarilydue to favorable economicconditionsfor buildingin our marketarea.Unfunded loan commitmentsfor construction,land and land developmentloans increasedto $58.4 millionat September 30, 2018, from$30.8 millionat December31, 2017. Because of the strong commercial and residentialrealestatemarketin the Puget Soundregion,weexpect to see constructionand developmentloans continueto pay off morequicklythan wehave experienced historically even though the balances have continued to grow.

ResidentialReal EstateLoans.Our residentialloans increased$5.0 million,or 5.7%, to $92.0 millionas of September 30, 2018, from$87.0 millionas of December31, 2017. The increaseswere primarilya resultof our diversificationstrategyto supplementexistingloan growth with purchasedloans from a local community bank that were individuallyunderwrittento our creditstandards in the Puget Sound region. Purchased residential loans totaled $35.5 million as of September 30, 2018.  Most of the one-to-fourfamilyloans thatwepurchased are fromotherlendersin the Puget Soundregionor in California.  We also make one-to-fourfamilyloans to investors to financetheirrentalpropertiesand to businessowners to securetheirbusinessloans. Asof September 30, 2018, residentialrealestateloans made to investorsand businessowners totaled$33.5 million.In addition,we originatehome equitylinesof creditand home equitytermloans for our portfolio.

Commercial Real EstateLoans.Commercialrealestateloans increased$65.1 million,or 14.9%, to $502.8 millionas of September 30, 2018, from $437.7 millionas of December31, 2017. The increaseoccurredbecause we activelyseek commercialrealestateloans in our marketsand our lendersare experiencedin competingfor theseloans.  We funded $114.7 million of new commercial real estate loans over the nine months ended September 30, 2018, of which $32.7 million were purchased participations with other community banks.  We also occasionally consider purchasing participations from other community banks we know under terms acceptable to us.  All participations are individually underwritten to our credit standards and are from our market or the other community bank’s market.

Consumerand Other Loans.Consumer and otherloans increased $500,000, or 23.8%, to $2.6 millionas of September 30, 2018, from$2.1 millionas of December31, 2017. The increasein theseloans was primarilya resultof strongconsumer confidenceand economicstrengthin the Puget Soundregion.

Nonperforming Assets

Loans are consideredpast due if the requiredprincipaland interestpaymentshave not been receivedas of the date such paymentswere due. Loans are placedon nonaccrualstatuswhen,in management’sopinion, the borrowermay be unable to meetpaymentobligationsas they becomedue, as well as whenrequiredby applicable regulations.Loans may be placedon nonaccrualstatusregardlessof whether or not such loans are considered past due. In general,weplaceloans on nonaccrualstatuswhenthey become90 days past due. We also place loans on nonaccrualstatusif they are lessthan 90 days past due if the collectionof principalor interestis in doubt. When loans are placedon nonaccrualstatus,allunpaid accruedinterestis reversedfromincomeand all interestaccrualsare stopped. Interestincomeis subsequentlyrecognizedonly to the extentcash paymentsare receivedin excessof principalbalance.Loans are returnedto accrualstatusif webelievethatallremaining principaland interestis fullycollectibleand therehas been at leastsix monthsof sustainedrepayment performancesincethe loan was placedon nonaccrualstatus.

We believeour lendingpracticesand activeapproachto managingnonperformingassetshas resultedin sound assetqualityand timelyresolutionof problemassets.We have severalproceduresin placeto assistus in maintainingthe overallcreditqualityof our loan portfolio.We have establishedunderwriting guidelines,and wealso monitorour delinquencylevelsfor any negativeor adversetrends.We activelymanage problemassetsto reduceour riskfor loss.

We had $2.5 millionin nonperformingassets,includingperformingtroubleddebt restructurings,or TDRs,as of September 30, 2018, comparedto $2.1 millionas of December31, 2017.

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The followingtablepresentsinformationregardingnonperformingassetsat the datesindicated:

	As of			As of
	September 30,			December 31,
(Dollars in thousands)	2018			2017
Nonaccrual loans:
Commercial and industrial loans	$	1,170		$	372
Real estate:
Construction, land and land development		-			-
Residential		74			88
Commercial real estate		1,277			1,660
Consumer and other loans		-			-
Total nonaccrual loans	$	2,521		$	2,120
Accruing loans past due 90 days or more:
Commercial and industrial loans	$	-		$	-
Real estate:
Construction, land and land development		-			-
Residential		-			-
Commercial real estate		-			-
Consumer and other		-			-
Total accruing loans past due 90 days or more	$	-		$	-
Total nonperforming loans	$	2,521		$	2,120
Real estate owned		-			-
Repossessed assets		-			-
Troubled debt restructurings, accruing		-			-
Total nonperforming assets	$	2,521		$	2,120
Total nonperforming loans to loans receivable		0.34	%		0.32	%
Total nonperforming assets to total assets		0.27	%		0.26	%

Allowance for LoanLosses

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

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

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

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

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

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

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Asof September 30, 2018, the allowancefor loan lossestotaled$9.1 million,or 1.22% of totalloans. Our allowancefor loan lossesas of September 30, 2018, increasedby $1.1 million, or 13.9%, comparedto December31, 2017, primarilydue to growth in our loan portfolio.Asof December31, 2017, the allowancefor loan losses totaled$8.0 million,or 1.22% of totalloans.

The followingtablepresents,as of and for the periodsindicated,an analysisof the allowancefor loan losses and otherrelateddata:

	As of or for the Three						As of or for the Nine
	Months Ended						Months Ended
	September 30,						September 30,
(Dollars in thousands)	2018			2017			2018			2017
Allowance at beginning of period	$	8,540		$	7,889		$	8,017		$	7,544
Provision for loan losses		508			65			1,401			504
Charge-offs:
Commercial and industrial loans		-			6			281			20
Real estate:
Construction, land and land development		-			-			-			-
Residential		-			-			-			-
Commercial real estate		-			-			84			173
Consumer and other		6			3			20			7
Total charge-offs	$	6		$	9		$	385		$	200
Recoveries:
Commercial and industrial loans	$	1		$	1		$	3		$	2
Real estate:
Construction, land and land development		-			-			-			95
Residential		65			-			65			-
Commercial real estate		-			-			-			-
Consumer and other		3			1			10			2
Total recoveries	$	69		$	2		$	78		$	99
Net (charge-offs ) recoveries		63			(7	)		(307	)		(101	)
Allowance at end of period	$	9,111		$	7,947		$	9,111		$	7,947
Allowance to nonperforming loans		361.40	%		316.36	%		361.40	%		316.36	%
Allowance to loans receivable		1.22	%		1.26	%		1.22	%		1.26	%
Net charge-offs (recoveries) to average loans (1)		(0.03	)%		0.00	%		0.06	%		0.02	%

(1) Ratios for the three and ninemonthsended September 30, 2018 and 2017, are annualized.

Although webelievethatwehave establishedour allowancefor loan lossesin accordancewith GAAPand that the allowancefor loan losseswas adequateto providefor knownand inherentlossesin the portfolioat alltimes shownabove, futureprovisionsfor loan losseswill be subjectto ongoing evaluationsof the risksin our loan portfolio.If the Puget Soundregionexperiencesan economicdownturn, our assetqualitycould deteriorateor if weare successfulin continuingto grow our loan portfolio,our allowancemay becomeinadequateand material additionalprovisionsfor loan lossescould be necessary.

Investment Securities

We use our securitiesportfolioprimarilyas a sourceof liquidityand collateralthatcan be readilysold or pledged for publicdepositsor otherbusinesspurposes.At September 30, 2018, 87.9% of our investmentportfolio consistedof U.S.Treasurysecurities.The remainderof our securitiesportfoliowas investedin U.S.Governmentagency securities,agency collateralizedmortgageobligationsand mortgage-backedsecurities,and municipal bonds. Because wetargeta loan-to-depositratioin the range of 90% to 100%, weprioritizeliquidityover the earningsof our securitiesportfolio.At September 30, 2018, our loan-to-depositratiowas 96.1% and our securities portfoliorepresentedlessthan 5% of assets.Tothe extentour securitiesrepresentmorethan 5% of assets,absent an immediateneed for liquidity,weanticipateinvestingexcessfunds to providea higherreturn.

Asof September 30, 2018, the carryingamountof our investmentsecuritiestotaled$37.0 million,a decreaseof$1.3 million,or 3.4%, comparedto $38.3 millionas of December31, 2017. The decreasein the securities portfoliowas primarilythe resultof the declinein fairvalue and pay-downs on mortgage-backedsecurities.

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Our investmentportfolioconsistsof securitiesclassifiedas availablefor saleand, to a lesseramount,held to maturity.The carryingvaluesof our investmentsecuritiesclassifiedas availablefor saleare adjustedfor unrealizedgain or loss, and any gain or loss is reportedon an after-taxbasisas a componentof other comprehensiveincomein shareholders’equity.

The followingtablesummarizesthe amortizedcost and estimatedfairvalue of our investmentsecuritiesas of the datesshown:

	As of				As of
	September 30, 2018				December 31, 2017
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Securities available-for-sale:
U.S. Treasury securities	$	34,821	$	32,329	$	34,794	$	33,396
U.S. Government securities		3,000		2,941		3,000		2,970
U.S. Agency collateralized mortgage obligations		188		182		224		221
U.S. Agency residential mortgage-backed    securities		43		43		79		80
Municipal bonds		259		254		261		260
Total available-for-sale securities		38,311		35,749		38,358		36,927
Securities held-to-maturity:
U.S. Agency residential mortgage-backed    securities		1,290		1,206		1,409		1,374
Total held-to-maturity securities		1,290		1,206		1,409		1,374
Total investment securities	$	39,601	$	36,955	$	39,767	$	38,301

Deposits

We offera varietyof depositproductsthathave a wide range of interestratesand terms,includingdemand, savings,money marketand timeaccounts.We relyprimarilyon competitivepricingpolicies,convenient locations,electronicdeliverychannels (Internet and mobile),and personalizedserviceto attractand retainthesedeposits.

Total depositsas of September 30, 2018, were $774.7 million,an increaseof $71.4 million,or 10.2%, comparedto$703.3 millionas of December31, 2017. The increasewas primarilyrelatedto our successfulexecutionof our organic growth strategyof deepeningrelationshipswith existingcustomers and activelyseekingnewcustomers.

Noninterest bearingdepositsas of September 30, 2018, were $286.0 million,an increaseof $43.6 million,or 18.0%, comparedto $242.4 millionas of December31, 2017. The increasewas due to the collaborationof our branch managers,businessdevelopmentofficesand lendersto grow core deposits.Asa team,weactivelypursue new business and retail customers.

Total interest bearingaccountbalancesas of September 30, 2018, were $390.4 million,an increaseof $20.1 million,or 5.4% from$370.3 millionas of December31, 2017. The increasewas also due to our teamfocusingon growing core deposits.

Total timedepositbalancesas of September 30, 2018, were $98.4 million,an increaseof $7.7 million,or 8.5%, from$90.6 millionas of December31, 2017. The increasein totaldepositsduring the periodwas primarilya resultof several short-term growth initiatives during the second quarter of 2018.  Total time deposits represented 12.7% of deposits at September 30, 2018 as compared to 12.8% at December 31, 2017.

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The followingtablesetsforthdepositbalancesat the datesindicated.

	As of					As of
	September 30, 2018					December 31, 2017
			Percent of					Percent of
(Dollars in thousands)	Amount		Total Deposits			Amount		Total Deposits
Demand, noninterest bearing	$	285,979		36.9	%	$	242,358		34.5	%
NOW and money market		340,930		44.0			326,412		46.4
Savings		49,430		6.4			43,876		6.2
Time deposits less than $100,000		27,383		3.5			27,059		3.8
Time deposits $100,000 and over		71,000		9.2			63,590		9.0
Total	$	774,722		100.0	%	$	703,295		100.0	%

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, 2018		As of December 31, 2017
Maturity Period:
Three months or less	$	8,105	$	6,510
Over three through six months		7,710		8,324
Over six through twelve months		24,422		14,185
Over twelve months		30,763		34,571
Total	$	71,000	$	63,590

Average depositsfor the three and ninemonthsended September 30, 2018, were $762.7 million and $730.9 million, respectively,an increaseof 15.2% and 11.8%, respectively, comparedto the three and nine monthsended September 30, 2017. The increasein averagedepositswas primarilydue to our continuedgrowth in our primarymarketareasand the increasein commerciallendingrelationshipsfor which wealso seek deposit balancesand the resultsof businessdevelopmenteffortsby our businessdevelopmentofficers,branch managers and lenders.

The averageratepaid on totalinterest bearingdepositswas 0.69% and 0.63% for the three and nine monthsended September 30, 2018, comparedto 0.50% and 0.48% for the three and nine monthsended September 30, 2017.  Since September 30, 2017, the Federal Reserve has raised the Fed Funds rate 100 basis points which has resulted in higher deposit rates throughout the market.  We will continue to actively manage our interest rates on deposits while pursuing our growth goals but additional Fed Funds increases will continue to raise our deposit costs.

The followingtablepresentsthe averagebalancesand averageratespaid on depositsfor the periodsindicated:

	For the Three Months Ended September 30,										For the Nine Months Ended September 30,
	2018					2017					2018					2017
(Dollars in thousands)	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
Demand, noninterest bearing	$	274,549		0.00	%	$	233,896		0.00	%	$	258,586		0.00	%	$	228,507		0.00	%
NOW and money market		338,770		0.55			306,347		0.41			331,328		0.50			310,359		0.39
Savings		49,417		0.02			43,047		0.03			47,487		0.03			40,977		0.03
Time deposits less than $100,000		27,864		1.25			25,980		0.82			26,974		1.12			26,816		0.81
Time deposits $100,000 and over		72,132		1.61			52,662		1.29			66,477		1.49			46,878		1.25
Total deposits	$	762,732		0.44	%	$	661,932		0.33	%	$	730,852		0.40	%	$	653,537		0.31	%

The ratioof averagenoninterest bearingdepositsto averagetotaldepositsfor the threemonthsendedSeptember 30, 2018 and 2017, was 36.0% and 35.3%, respectively.The ratioof averagenoninterest bearingdeposits to averagetotaldepositsfor the nine months ended September 30, 2018 and 2017, was 35.4% and 35.0%, respectively.

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Borrowings

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

Federal HomeLoanBank (FHLB)Advances. The FHLBallows us to borrow againstour lineof credit,which is collateralizedby certainloans. Asof September 30, 2018, and December31, 2017, totalborrowing capacityof $68.2 million and$59.3 million,respectively,was availableunder thisarrangement. FHLB advances totaled $20.0 million as of September 30, 2018 and December31, 2017.

	As of and For the Three						As of and For the Nine
	Months Ended						Months Ended
	September 30,						September 30,
(Dollars in thousands)	2018			2017			2018			2017
Maximum amount outstanding at any month-end    during  period:
FHLB Advances	$	20,000		$	15,000		$	20,000		$	17,000
Average outstanding balance during period:
FHLB Advances	$	870		$	3,136		$	2,467		$	2,013
Weighted average interest rate during period:
FHLB Advances		2.35	%		1.43	%		2.05	%		1.31	%
Balance outstanding at end of period:
FHLB Advances	$	20,000		$	15,000		$	20,000		$	15,000
Weighted average interest rate at end of period:
FHLB Advances		2.39	%		1.33	%		2.39	%		1.33	%

Junior SubordinatedDebentures. In 2004, weissued$3.6 millionin juniorsubordinateddebenturesto Coastal (WA) StatutoryTrust I, or the Trust, of which weownallof the outstandingcommonsecurities.The Trust used the proceedsfromthe issuanceof itsunderlyingcommonsecuritiesand preferredsecuritiesto purchasethe debenturesissuedby the Company. These debenturesare the Trust’sonly assetsand the interestpaymentsfrom the debenturesfinancethe distributionspaid on the preferredsecurities.The debenturesbear interestat a rateper annum equal to the 3-monthLIBORplus 2.10%. The effectiverateas of September 30, 2018, and December31, 2017, was 4.43% and 3.69%, respectively.We generallyhave the rightto deferpaymentof intereston the debenturesat any timeor fromtimeto timefor a periodnot exceedingfiveyearsprovidedthatno extensionperiodmay extend beyond the statedmaturityof the debentures.During any such extensionperiod, distributionson the Trust’spreferredsecuritieswill also be deferred,and our abilityto pay dividendson our commonstock will be restricted.The Trust’spreferredsecuritiesare mandatorilyredeemableupon maturityof the debentures,or upon earlierredemptionas providedin the indenture.If the debenturesare redeemedpriorto maturity,the redemptionpricewill be the principalamountand any accruedbut unpaid interest.Weunconditionallyguaranteepaymentof accruedand unpaid distributionsrequiredto be paid on the Trust securitiessubjectto certainexceptions,the redemptionpricewith respectto any Trust securitiescalledfor redemptionand amountsdue if the Trust is liquidatedor terminated.

SubordinatedDebt. In 2016, the Company issueda subordinatednote to a commercialbank in the amountof$10.0 million.The note matureson August 1, 2026, and bearsinterestat the rateof 5.65% per year for fiveyears and, thereafter,at a rateequal to The WallStreetJournal primerateplus 2.50%. Principalpaymentsof $500,000 per quartercommenceNovember 1, 2021. We may redeemthe subordinatednote, in whole or in part,without premiumor penaltyafterJuly 29, 2021, subjectto any requiredregulatoryapprovals.

Liquidity andCapital Resources

LiquidityManagement

Liquidityrefersto our capacityto meetour cash obligationsat a reasonablecost. Our cash obligationsrequire us to have cash flow thatis adequateto fund loan growth and maintainon-balancesheetliquiditywhile meeting presentand futureobligationsof depositwithdrawals,borrowing maturitiesand othercontractualcash obligations.In managingour cash flows, managementregularlyconfrontssituationsthatcan give riseto increasedliquidityrisk.These includefunding mismatches,marketconstraintsin accessingsourcesof funds and the abilityto convertassetsinto cash. Changes in economicconditionsor exposureto credit,market,and operational,legaland reputationalrisksalso could affectthe Bank’s liquidityriskprofileand are consideredin the assessmentof liquiditymanagement.

42

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

Our liquiditypositionis supportedby managementof our liquidassetsand liabilitiesand accessto alternative sourcesof funds. Our liquidityrequirementsare metprimarilythrough our deposits,FHLBadvancesand the principaland interestpaymentswereceiveon loans and investmentsecurities.Cash on hand, cash at third-party banks, investmentsavailable-for-saleand maturingor prepayingbalancesin our investmentand loan portfolios are our mostliquidassets.Other sourcesof liquiditythatare routinelyavailableto us includefunds fromretail, commercial,and wholesaledeposits,advancesfromthe FHLBand proceedsfromthe saleof loans. Less commonlyused sourcesof funding includeborrowingsfromthe FederalReserve discountwindow,draws on establishedfederalfunds linesfromunaffiliatedcommercialbanks and the issuanceof debt or equitysecurities. We believewehave ampleliquidityresourcesto fund futuregrowth and meetothercash needs as necessary.

The Company is a corporationseparateand apartfromour Bankand, therefore,mustprovidefor itsown liquidity,includingliquidityrequiredto meetitsdebt servicerequirementson itssubordinatednote and junior subordinateddebentures.The Company’s mainsourceof cash flow has been through equityand debt offerings. The Company has consistentlyretaineda portionof the funds fromequityand debt offeringsso thatis has sufficientfunds for itsoperatingand debt costsfor the next two or threeyears.In addition,the Bankcan declare and pay dividendsto the Company to meetthe Company’s debt and operatingexpenses.There are statutoryand regulatorylimitationsthataffectthe abilityof the Bankto pay dividendsto the Company. We believethatthese limitationswill not impactthe abilityof the Bankto pay dividendsto the Company to meetongoing operating needs. For contingencypurposes,the Company maintainsa minimumlevelof cash to fund one year’sprojected operatingcash flow needs and the Bankmanagesto a minimumliquidityratioof 10% of assets.Both of these minimumliquiditylevelsare on-balancesheetsources.Per policyand the Bank’s liquiditycontingencyplan, in event of a liquidityemergencythe Bankcan utilizewholesalefunds in an amountup to 30% of assets.Since the Bankuses only a smallportionof itsborrowing capacity,the Bankhas accessto funds if needed in a liquidity emergency.

Capital Adequacy

Capitalmanagementconsistsof providingequityand otherinstrumentsthatqualifyas regulatorycapitalto supportcurrentand futureoperations.Banking regulatorsview capitallevelsas importantindicatorsof an institution’sfinancialsoundness. Asa generalmatter,FDIC-insureddepositoryinstitutionsand theirholding companiesare requiredto maintainminimumcapitallevelsrelativeto the amountand types of assetsthey hold. We are subjectto regulatorycapitalrequirementsat the bank level.The Company will becomesubjectto regulatorycapitalrequirementsonce itsconsolidatedassetsexceed $3.0 billion.

Asof September 30, 2018, and December31, 2017, the Bankwas in compliancewith all applicableregulatorycapitalrequirements,and the Bankwas classifiedas “well capitalized”for purposesof the FederalReserve’spromptcorrectiveactionregulations.Aswedeploy our capitaland continueto grow our operations,our regulatorycapitallevelsmay decreasedepending on our levelof earnings.However, weexpectto monitorand controlour growth in orderto remainin compliancewith allregulatorycapitalstandardsapplicable to us.

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

	Actual					Minimum Required for Capital Adequacy Purposes					Required to be Well Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
September 30, 2018
Common Equity Tier I risk-based capital ratio (to    risk-weighted assets)
Company	$	107,145		13.72	%	$	35,140		4.50	%	$	50,758		6.50	%
Bank Only		100,297	12.82				35,198		4.50			50,842		6.50
Leverage Capital (to average assets)
Company		110,645	12.60				35,129		4.00			43,912		5.00
Bank Only		100,297	11.42				35,120		4.00			43,900		5.00
Tier I Capital (to risk-weighted assets)
Company		110,645	14.17				46,853		6.00			62,471		8.00
Bank Only		100,297	12.82				46,931		6.00			62,575		8.00
Total Capital (to risk-weighted assets)
Company		130,054	16.65				62,471		8.00			78,089		10.00
Bank Only		109,706	14.03				62,575		8.00			78,218		10.00
December 31, 2017
Common Equity Tier I risk-based capital ratio (to    risk-weighted assets)
Company	$	66,494		9.98	%	$	29,990		4.50	%	$	43,319		6.50	%
Bank Only		77,756	11.67				29,984		4.50			43,311		6.50
Leverage Capital (to average assets)
Company		69,994	8.95				31,286		4.00			39,107		5.00
Bank Only		77,756	9.94				31,280		4.00			39,099		5.00
Tier I Capital (to risk-weighted assets)
Company		69,994		10.50			39,987		6.00			53,316		8.00
Bank Only		77,756	11.67				39,979		6.00			53,306		8.00
Total Capital (to risk-weighted assets)
Company		88,222	13.24				53,316		8.00			66,645		10.00
Bank Only		85,983		12.90			53,306		8.00			66,632		10.00

ContractualObligations

The followingtablesummarizescontractualobligationsand othercommitmentsto make futurepayments (otherthan non-timedepositobligations),which consistof futurecash paymentsassociatedwith our contractual obligations,as of September 30, 2018.

			Payments Due by Period
			Less than		1 to 2		2 to 5		More than
(Dollars in thousands)	Total		1 Year		Years		Years		5 Years
Contractual Cash Obligations
Time Deposits	$	98,383	$	57,755	$	28,412	$	12,216	$	-
FHLB advances		20,000		20,000		-		-		-
Subordinated note		10,000		-		-		4,000		6,000
Junior subordinated debentures		3,609		-		-		-		3,609
Deferred compensation plans		1,680		175		175		526		804
Operating leases		9,569		1,330		1,339		3,703		3,197
Capital Leases		88		66		22		-		-

44

For a discussionof our borrowings,see “—FinancialCondition—Borrowings.”

We believethatwill webe able to meetour contractualobligationsas they come due. Adequate cash levelsare expectedthrough profitability,repaymentsfromloans and securities,depositgatheringactivity,accessto borrowing sourcesand periodicloan sales.

Off-BalanceSheet Items

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

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

	As of		As of
	September 30,		December 31,
(Dollars in thousands)	2018		2017
Commitments to extend credit:
Residential real estate	$	12,742	$	12,488
Construction – residential real estate		32,497		27,447
Construction – commercial real estate		25,932		3,343
Commercial and industrial loans		48,652		38,958
Other		11,588		5,603
Total commitments to extend credit	$	131,411	$	87,839
Standby letters of credit	$	2,031	$	2,004

Commitmentsto extend creditare agreementsto lend to a customeras long as thereis no violationof any conditionestablishedin the contract.Commitmentsgenerallyhave fixedexpirationdatesor othertermination clausesand may requirepaymentof a fee. Since many of the commitmentsare expectedto expirewithout being fullydrawn upon, the totalcommitmentamountsdisclosedabove do not necessarilyrepresentfuturecash requirements.We evaluateeach customer’screditworthinesson a case-by-casebasis.The amountof collateral obtained,if considerednecessaryby us, upon extensionof credit,is based on management’screditevaluationof the customer.

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

Item 3.  Quantitative and Qualitative Disclosure about Market Risk

QuantitativeandQualitativeDisclosuresabout Market Risk

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

Fluctuationsin interestrateswill ultimatelyimpactboth the levelof incomeand expense recordedon mostof our assetsand liabilities,and the marketvalue of allinterest earningassetsand interest bearingliabilities,other than those which have a shorttermto maturity.Interestrateriskis the potentialfor economiclossesdue to future interestratechanges. These economiclossescan be reflectedas a loss of futurenet interestincomeand/ora decreasein currentfairmarketvalues.Our objectiveis to measurethe effecton net interestincomeand to adjust the balancesheetto minimizethe inherentriskwhile at the sametimemaximizingincome.

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

45

Our exposureto interestrateriskis managedby the Asset LiabilityCommittee,or ALCO,of the Bankand reviewedby the Asset Liabilityand InvestmentCommitteeof our board of directorsin accordancewith policies approved by our board of directors.ALCOformulatesstrategiesbased on appropriatelevelsof interestraterisk. In determiningthe appropriatelevelof interestraterisk,ALCOconsidersthe impacton earningsand capitalon the currentoutlook on interestrates,potentialchanges in interestrates,regionaleconomies,liquidity,business strategiesand otherfactors.ALCOmeetsregularlyto review, among otherthings,the sensitivityof assetsand liabilitiesto interestratechanges, the book and marketvaluesof assetsand liabilities,unrealizedgains and losses,purchaseand saleactivities,commitmentsto originateloans and the maturitiesof investmentsand borrowings.Additionally,ALCOreviewsliquidity,cash flows, maturitiesof depositsand consumerand commercialdepositactivity.Managementemploysvariousmethodologiesto manageinterestrateriskincluding an analysisof relationshipsbetween interest earningassetsand interest bearingliabilitiesand interestrate simulationsusing a model.The Asset Liabilityand InvestmentCommitteeof our board of directorsmeets quarterlyto review the Bank’s interestrateriskprofile,liquidityposition,includingcontingentliquidity,and investmentportfolio.

We use interestraterisksimulationmodelsto testinterestratesensitivityof net interestincomeand fairvalue of equity,and the impactof changes in interestrateson otherfinancialmetrics.Contractualmaturitiesandre-pricingopportunitiesof loans are incorporatedin the model,as are prepaymentassumptions,maturitydata and calloptionswithin the investmentportfolio.Average lifeof non-maturitydepositaccountsare based on historical decay ratesand assumptionsand are incorporatedinto the model.The assumptionsused are inherentlyuncertain and, as a result,the modelcannot preciselymeasurefuturenet interestincomeor preciselypredictthe impactof fluctuationsin marketinterestrateson net interestincome.Actual resultswill differfromthe model’ssimulated resultsdue to timing,magnitudeand frequencyof interestratechanges as well as changes in marketconditions and the applicationand timingof variousmanagementstrategies.

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

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

	Estimated Increase (Decrease) in Net Interest Income
Change in Market Interest Rates	Twelve Month Projection September 30, 2018	Twelve Month Projection December 31, 2017
Static Balance Sheet and Rate Shifts
+400 basis points	14.2%	13.2%
+300 basis points	10.4	9.7
+200 basis points	6.9	6.4
+100 basis points	3.5	3.2
-100 basis points	(2.1)	(2.8)
-200 basis points	(8.9)	(8.1)
-300 basis points	(13.1)	(10.4)
Dynamic Balance Sheet and Rate Shifts
+400 basis points	17.1	16.1
+300 basis points	12.6	11.9
+200 basis points	8.3	7.8
+100 basis points	4.2	3.9
-100 basis points	(2.9)	(3.6)
-200 basis points	(10.4)	(9.8)
-300 basis points	(15.4)	(12.5)

46

TheresultsillustratethattheBankisassetsensitiveandgenerallyperformsbetterinanincreasinginterestrateenvironment.Theresultsareprimarilyduetobehaviorofdemand,moneymarketandsavingsdepositsduringsuchratefluctuations.Wehavefoundthat,historically,interestratesonthesedepositschangemoreslowlythanchangesinthediscountandfederalfundsrates.Thisassumptionisincorporatedintothesimulationmodel.Theassumptionsincorporatedintothemodelareinherentlyuncertainand,asaresult,themodelcannotpreciselymeasurefuturenetinterestincomeorpreciselypredicttheimpactoffluctuationsinmarketinterestratesonnetinterestincome.Actualresultswilldifferfromthemodel’ssimulatedresultsduetotiming,magnitudeandfrequencyofinterestratechangesaswellaschangesinmarketconditionsandtheapplicationandtimingofvariousstrategies.

Impactof Inflation

Our consolidatedfinancialstatementsand relatednotes to those financialstatementsincludedelsewherein this report have been preparedin accordancewith GAAP.GAAPrequiresthe measurementof financialposition and operatingresultsin termsof historicaldollars,without consideringchanges in the relativevalue of money over timedue to inflationor recession.

Unlike many industrialcompanies,substantiallyallof our assetsand liabilitiesare monetaryin nature.Asa result,interestrateshave a moresignificantimpacton our performancethan the effectsof generallevelsof inflation.Interestratesmay not necessarilymove in the samedirectionor in the samemagnitudeas the pricesof goods and services.However, otheroperatingexpensesdo reflectgenerallevelsof inflation.

Item 4.  Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal 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 Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the three months ended September 30, 2018, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

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

Item 1A.  Risk Factors

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s prospectus, filed with the Securities and Exchange Commission pursuant to Rule 424(b)(4) on July 18, 2018. As of September 30, 2018, the risk factors of the Company have not changed materially from those disclosed in the prospectus.

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

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

The Company did not repurchase any of its shares during the quarter and does not have any authorized share repurchase programs.

Item 3.  Defaults Upon Senior Securities

Not applicable.

47

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the three and nine months ended September 30, 2018, formatted in 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.

48

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 13, 2018	By:	/s/ Eric M. Sprink
			Eric M. Sprink
			President and Chief Executive Officer
			(principal executive officer)
Dated:	November 13, 2018	By:	/s/ Joel G. Edwards
			Joel G. Edwards
			Executive Vice President and
			Chief Financial Officer
			(principal financial officer)

49

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Eric M. Sprink, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Coastal Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 13, 2018	By:	/s/ Eric M. Sprink
		Eric M. Sprink
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joel G. Edwards, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Coastal Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 13, 2018	By:	/s/ Joel G. Edwards
		Joel G. Edwards
		Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Coastal Financial Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2018, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: November 13, 2018	By:	/s/ Eric M. Sprink
		Eric M. Sprink
		President and Chief Executive Officer

By:	/s/ Joel G. Edwards
	Joel G. Edwards
	Executive Vice President and Financial Officer

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2018	Nov. 13, 2018
Document And Entity Information [Abstract]
Entity Registrant Name	COASTAL FINANCIAL CORP
Entity Central Index Key	0001437958
Amendment Flag	false
Document Type	10-Q
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Small Business	false
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Document Period End Date	Sep. 30, 2018
Document Fiscal Year Focus	2018
Document Fiscal Period Focus	Q3
Entity Common Stock, Shares Outstanding		11,887,503

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
ASSETS
Cash and due from banks	$ 16,837	$ 13,787
Interest earning deposits with other banks (restricted cash of $22,630 and $17,332 at September 30, 2018 and December 31, 2017, respectively)	98,671	75,964
Investment securities, available for sale, at fair value	35,749	36,927
Investment securities, held to maturity, at amortized cost	1,290	1,409
Other investments	3,766	3,680
Loans receivable	744,320	656,788
Allowance for loan losses	(9,111)	(8,017)
Total loans receivable, net	735,209	648,771
Premises and equipment, net	12,845	13,121
Accrued interest receivable	2,299	2,274
Bank-owned life insurance, net	6,640	6,500
Deferred tax asset, net	2,309	2,092
Other assets	1,414	1,228
Total assets	917,029	805,753
LIABILITIES
Deposits	774,722	703,295
Federal Home Loan Bank (FHLB) advances	20,000	20,000
Principal amount $10,000 (less unamortized debt issuance costs of $39 and $50 at September 30, 2018 and December 31, 2017, respectively)	9,961	9,950
Principal amount $3,609 (less unamortized debt issuance costs of $28 and $30 at September 30, 2018 and December 31, 2017, respectively)	3,581	3,579
Deferred compensation	1,102	1,175
Accrued interest payable	257	228
Other liabilities	2,130	1,815
Total liabilities	811,753	740,042
SHAREHOLDERS’ EQUITY
Authorized: 25,000,000 shares at September 30, 2018 and December 31, 2017; issued and outstanding: zero shares at September 30, 2018 and December 31, 2017
Authorized: 300,000,000 shares at September 30, 2018 and December 31, 2017; 11,886,473 voting shares at September 30, 2018 issued and outstanding and 8,887,457 voting and 361,444 nonvoting shares at December 31, 2017 issued and outstanding	86,334	52,521
Retained earnings	20,966	14,134
Accumulated other comprehensive loss, net of tax	(2,024)	(944)
Total shareholders’ equity	105,276	65,711
Total liabilities and shareholders’ equity	$ 917,029	$ 805,753

XML

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Restricted cash	$ 22,630	$ 17,332
Preferred stock, no par value
Preferred stock, shares authorized	25,000,000	25,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, no par value
Common stock, shares authorized	300,000,000	300,000,000
Common stock, shares, issued	11,886,473	8,887,457
Common stock, shares, outstanding	11,886,473	8,887,457
Voting Common Stock
Common stock, shares, issued	11,886,473	8,887,457
Common stock, shares, outstanding	11,886,473	8,887,457
Non-voting Common Stock
Common stock, shares, issued		361,444
Common stock, shares, outstanding		361,444
Subordinated Debt
Principal amount	$ 10,000	$ 10,000
Unamortized debt issuance cost	39	50
Junior Subordinated Debentures
Principal amount	3,609	3,609
Unamortized debt issuance cost	$ 28	$ 30

XML

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$ 9,262	$ 7,908	$ 26,229	$ 22,741
Interest on investment securities	156	135	463	385
Interest on interest earning deposits with other banks	458	171	949	458
Dividends on other investments	18	3	91	77
Total interest income	9,894	8,217	27,732	23,661
INTEREST EXPENSE
Interest on deposits	851	540	2,209	1,526
Interest on borrowed funds	195	192	594	551
Total interest expense	1,046	732	2,803	2,077
Net interest income	8,848	7,485	24,929	21,584
PROVISION FOR LOAN LOSSES	508	65	1,401	504
Net interest income after provision for loan losses	8,340	7,420	23,528	21,080
NONINTEREST INCOME
Sublease and lease income	10	56	71	167
Gain on sales of loans, net		18	142	102
Other income	147	137	414	437
Total noninterest income	1,546	1,250	3,866	3,101
NONINTEREST EXPENSE
Salaries and employee benefits	4,027	3,491	11,672	9,947
Occupancy	798	784	2,425	2,253
Data processing	501	463	1,472	1,311
Director and staff expenses	213	172	493	450
Excise taxes	146	119	404	344
Marketing	110	148	253	298
Legal and professional fees	142	87	352	281
Federal Deposit Insurance Corporation (FDIC) assessments	83	90	247	271
Business development	81	68	241	195
Other expense	509	387	1,472	1,298
Total noninterest expense	6,610	5,809	19,031	16,648
Income before provision for income taxes	3,276	2,861	8,363	7,533
PROVISION FOR INCOME TAXES	674	957	1,717	2,440
NET INCOME	$ 2,602	$ 1,904	$ 6,646	$ 5,093
Basic earnings per common share	$ 0.23	$ 0.21	$ 0.67	$ 0.55
Diluted earnings per common share	$ 0.22	$ 0.21	$ 0.66	$ 0.55
Weighted average number of common shares outstanding:
Basic	11,338,320	9,235,344	9,956,449	9,233,421
Diluted	11,609,978	9,238,808	10,051,415	9,236,175
Deposit Service Charges and Fees
NONINTEREST INCOME
Noninterest income	$ 800	$ 725	$ 2,258	$ 1,924
Loan Referral Fees
NONINTEREST INCOME
Noninterest income	209	234	453	276
Wholesale Banking Service Fees
NONINTEREST INCOME
Noninterest income	328		370
Mortgage Broker Fees
NONINTEREST INCOME
Noninterest income	$ 52	$ 80	$ 158	$ 195

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Statement Of Income And Comprehensive Income [Abstract]
NET INCOME	$ 2,602	$ 1,904	$ 6,646	$ 5,093
Securities available-for-sale
Unrealized holding gain (loss) gain during the quarter	(259)	(63)	(1,131)	504
Income tax benefit (provision) related to unrealized holding gain (loss)	54	21	237	(171)
OTHER COMPREHENSIVE (LOSS) INCOME, net of tax	(205)	(42)	(894)	333
COMPREHENSIVE INCOME	$ 2,397	$ 1,862	$ 5,752	$ 5,426

XML

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) - USD ($) $ in Thousands	Total	Common Stock	Retained Earnings	Accumulated Other Comprehensive Income (Loss)
Beginning balance at Dec. 31, 2016	$ 59,897	$ 52,215	$ 8,698	$ (1,016)
Beginning balance, Shares at Dec. 31, 2016		9,238,788
Net income	5,093		5,093
Issuance of vested stock awards, Shares		600
Issuance of restricted stock awards, Shares		6,208
Exercise of stock options	24	$ 24
Exercise of stock options, Shares		3,620
Stock repurchase	(2)	$ (2)
Stock repurchase, Shares		(211)
Stock-based compensation	213	$ 213
Other comprehensive income (loss)	333			333
Ending balance at Sep. 30, 2017	65,558	$ 52,450	13,791	(683)
Ending balance, Shares at Sep. 30, 2017		9,249,005
Beginning balance at Dec. 31, 2017	65,711	$ 52,521	14,134	(944)
Beginning balance, Shares at Dec. 31, 2017		9,248,901
Net income	6,646		6,646
Reclassification of stranded tax effect due to federal tax rate change			186	(186)
Issuance of restricted stock awards, Shares		4,402
Exercise of stock options	$ 339	$ 339
Exercise of stock options, Shares	55,670	55,670
Stock-based compensation	$ 231	$ 231
Stock issuance and net proceeds from initial public offering	33,243	$ 33,243
Stock issuance and net proceeds from initial public offering, Shares		2,577,500
Other comprehensive income (loss)	(894)			(894)
Ending balance at Sep. 30, 2018	$ 105,276	$ 86,334	$ 20,966	$ (2,024)
Ending balance, Shares at Sep. 30, 2018		11,886,473

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($) $ in Thousands	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 6,646	$ 5,093
Adjustments to reconcile net income to net cash provided by operating activities
Provision for loan losses	1,401	504
Depreciation and amortization	786	721
Loss on disposition of fixed assets		21
Gain on sales of loans	(142)	(102)
Gain on sale of other real estate owned		(32)
Net discount accretion on investment securities	(17)	(6)
Stock-based compensation	231	213
Bank-owned life insurance earnings	(140)	(138)
Net change in other assets and liabilities	92	(688)
Total adjustments	2,211	493
Net cash provided by operating activities	8,857	5,586
CASH FLOWS FROM INVESTING ACTIVITIES
Net (increase) decrease in interest earning deposits with other banks	(22,707)	1,400
Purchase of other investments, net	(86)	(381)
Principal paydowns of investment securities available-for-sale	70	79
Principal paydowns of investment securities held-to-maturity	114	234
Purchase of participation loans	(32,653)
Purchase of loans	(8,575)	(9,917)
Increase in loans receivable, net	(46,469)	(24,396)
Proceeds from sale of other real estate owned		1,329
Purchases of premises and equipment, net	(510)	(526)
Net cash used by investing activities	(110,816)	(32,178)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and money market, and savings	63,693	26,620
Net increase in time deposits	7,734	5,917
Net proceeds from initial public offering	33,243
Proceeds from exercise of stock options	339	24
Repurchase of common stock		(2)
Net cash provided by financing activities	105,009	32,559
NET INCREASE IN CASH AND DUE FROM BANKS	3,050	5,967
CASH AND DUE FROM BANKS, beginning of year	13,787	11,084
CASH AND DUE FROM BANKS, end of quarter	16,837	17,051
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest paid	2,774	2,054
Income taxes paid	1,670	2,895
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Fair value adjustment of securities available-for-sale, gross	$ (1,131)	$ 505

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Description of Business and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Description of Business and Summary of Significant Accounting Policies

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 subsidiary is Coastal Community Bank (Bank). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank and Federal Reserve System (Federal Reserve) state member bank.

The Company provides a full range of banking 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 branch and the headquarters of the Bank and Company are located in Everett, Washington. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (FDIC). The Bank’s loans and deposits are primarily within the greater Puget Sound area, and the Bank’s primary funding source is deposits from customers. The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

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 elsewhere in this report. Operating results for the three and nine months ended September 30, 2018, 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 and the Bank. All significant intercompany accounts have been eliminated in consolidation.

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

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

Subsequent Events - The Company has evaluated events and transactions subsequent to September 30, 2018 for potential recognition or disclosure. On October 9^th 2018, the Bank opened a full service branch in Edmonds, Washington.

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

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

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Recent Accounting Standards

9 Months Ended

Sep. 30, 2018

New Accounting Pronouncements And Changes In Accounting Principles [Abstract]

Recent Accounting Standards

Note 2 - Recent accounting standards

Accounting Standards Adopted in 2018

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

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

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

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

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

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

Wholesale Banking Service Fees: The Company earns fees, governed by contract arrangements, for providing banking services to customers of a third party company. Fees are recognized on a monthly basis, as earned.

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

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

As of January 1, 2018, the Company adopted FASB ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendments in this ASU require an entity to disclose the fair value of financial instruments using the exit price notion. Exit price is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methods of determining the fair value of assets and liabilities are consistent with our methodologies disclosed in Note 8—Fair Value Measurements, except for the valuation of loans held-for-investment which was impacted by the adoption of ASU 2016-01. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of September 30, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments, a consensus of the FASB’s Emerging Issues Task Force. The ASU is intended to reduce diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This standard did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

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

In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This ASU updates outdated guidance related to the Office of Comptroller of the Currency’s (OCC) Banking Circular 202, Accounting for Net Deferred Tax Charges, as the guidance has been rescinded by OCC and is no longer relevant. The amendments in this ASU are effective immediately. The adoption of ASU No. 2018-06 is not expected to have a material impact on the Company's consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. The ASU is effective in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is in the process of its implementation, which includes identifying the population of the Company’s leases that are within the scope of the new guidance and gathering all key lease data that will facilitate application of the new accounting requirements. Upon adoption of this guidance, the Company will recognize a liability for the remaining obligations under its operating lease agreements, and a corresponding right of use asset for its right to use the underlying assets for the lease term. Thus there will be an increase to the Company’s assets and liabilities upon adoption. The increase in assets and liabilities is estimated to be less than 1% of total assets when adopted on January 1, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are actively assessing our data and the model needs and are evaluating the impact of adopting the amendment. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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

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Investment Securities

9 Months Ended

Sep. 30, 2018

Investments Debt And Equity Securities [Abstract]

Investment Securities

Note 3 - Investment Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
September 30, 2018
Available-for-sale
U.S. Treasury securities	$	34,821	$	-	$	(2,492	)	$	32,329
U.S. Government agencies		3,000		-		(59	)		2,941
U.S. Agency collateralized mortgage obligations		188		-		(6	)		182
U.S. Agency residential mortgage-backed securities		43		-		-			43
Municipals		259		-		(5	)		254
Total available-for-sale securities		38,311		-		(2,562	)		35,749
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,290		-		(84	)		1,206
Total investment securities	$	39,601	$	-	$	(2,646	)	$	36,955

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
December 31, 2017
Available-for-sale
U.S. Treasury securities	$	34,794	$	-	$	(1,398	)	$	33,396
U.S. Government agencies		3,000		-		(30	)		2,970
U.S. Agency collateralized mortgage obligations		224		-		(3	)		221
U.S. Agency residential mortgage-backed securities		79		1		-			80
Municipals		261		-		(1	)		260
Total available-for-sale securities		38,358		1		(1,432	)		36,927
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,409		-		(35	)		1,374
Total investment securities	$	39,767	$	1	$	(1,467	)	$	38,301

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

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
Amounts maturing in
One year or less	$	-	$	-	$	-	$	-
After one year through five years		27,838		26,141		-		-
After five years through ten years		10,242		9,383		-		-
		38,080		35,524		-		-
U.S. Agency residential mortgage-backed securities and    collateralized mortgage obligations		231		225		1,290		1,206
	$	38,311	$	35,749	$	1,290	$	1,206

Investment securities with carrying values of $19,722,000 and $14,526,000 at September 30, 2018 and December 31, 2017 respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

There were no sales of investment securities during the three and nine months ended September 30, 2018 and September 30, 2017.

Information pertaining to securities with gross unrealized losses at the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	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, 2018
Available-for-sale
U.S. Treasury securities	$	-	$	-		$	32,329	$	(2,492	)	$	32,329	$	(2,492	)
U.S. Government agencies		-		-			2,941		(59	)		2,941		(59	)
U.S. Agency collateralized mortgage obligations		-		-			182		(6	)		182		(6	)
Municipals		254		(5	)		-		-			254		(5	)
Total available-for-sale securities		254		(5	)		35,452		(2,557	)		35,706		(2,562	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		-		-			1,206		(84	)		1,206		(84	)
Total investment securities	$	254	$	(5	)	$	36,658	$	(2,641	)	$	36,912	$	(2,646	)
December 31, 2017
Available-for-sale
U.S. Treasury securities	$	4,934	$	(77	)	$	28,463	$	(1,321	)	$	33,397	$	(1,398	)
U.S. Government agencies		-		-			2,970		(30	)		2,970		(30	)
U.S. Agency collateralized mortgage obligations		220		(3	)		-		-			220		(3	)
Municipals		260		(1	)		-		-			260		(1	)
Total available-for-sale securities		5,414		(81	)		31,433		(1,351	)		36,847		(1,432	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		-		-			1,374		(35	)		1,374		(35	)
Total investment securities	$	5,414	$	(81	)	$	32,807	$	(1,386	)	$	38,221	$	(1,467	)

At September 30, 2018 and December 31, 2017, there were 11 securities in an unrealized loss position. Unrealized losses have not been recognized into income because management does not intend to sell and does not expect it will be required to sell the investments. The decline is largely due to changes in market conditions and interest rates, rather than credit quality. The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve. The Company does not consider these securities to be other than temporarily impaired at September 30, 2018 and December 31, 2017.

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Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2018

Receivables [Abstract]

Loans and Allowance for Loan Losses

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,
	2018			2017
	(dollars in thousands)
Commercial and industrial loans	$	85,554		$	88,688
Real estate loans:
Construction, land, and land development		62,222			41,641
Residential real estate		91,995			87,031
Commercial real estate		502,782			437,717
Consumer and other loans		2,583			2,058
Gross loans receivable		745,136			657,135
Net deferred origination fees and premiums		(816	)		(347	)
Loans receivable	$	744,320		$	656,788

Included in consumer and other loans are overdrafts of $27,000 and $76,000 at September 30, 2018 and December 31, 2017, respectively. The Company has pledged loans totaling $157,100,000 and $147,008,000 at September 30, 2018 and December 31, 2017, respectively, for borrowing lines at the FHLB and FRB.

The balance of SBA loans and participations serviced for others totaled $28,679,000 and $29,910,000 at September 30, 2018 and December 31, 2017, respectively.

The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans with remaining balances totaled $42,662,000 and $43,213,000 as of September 30, 2018 and December 31, 2017, respectively. Unamortized premiums totaled $676,000 and $718,000 as of September 30, 2018 and December 31, 2017, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $40,500,000 and $8,124,000 as of September 30, 2018 and December 31, 2017, 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 our 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. We also issue letters of credit on behalf of our 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.

Construction, land and land development loans - We originate loans for the construction of 1-4 family, multifamily, and CRE properties in our 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. We occasionally originate 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 - Residential real estate includes various types of loans for which the Company holds real property as collateral. Included in this segment are multi-family loans, first lien single family loans, which we occasionally purchase to diversify our 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.

Commercial real estate (includes owner occupied and nonowner occupied) - Commercial real estate includes various types of loans for which the Company holds real property as collateral. 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 - We originate 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.

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, 2018
Commercial and industrial loans	$	695	$	703	$	1,398	$	84,156	$	85,554		$	-
Real estate loans:
Construction, land and land development		-		-		-		62,222		62,222			-
Residential real estate		-		74		74		91,921		91,995			-
Commercial real estate		-		-		-		502,782		502,782			-
Consumer and other loans		-		-		-		2,583		2,583			-
	$	695	$	777	$	1,472	$	743,664	$	745,136		$	-
Less net deferred origination fees										(816	)
Loans receivable									$	744,320

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
December 31, 2017
Commercial and industrial loans	$	791	$	372	$	1,163	$	87,525	$	88,688		$	-
Real estate loans:
Construction, land and land development		218		-		218		41,423		41,641			-
Residential real estate		76		-		76		86,955		87,031			-
Commercial real estate		333		345		678		437,039		437,717			-
Consumer and other loans		-		-		-		2,058		2,058			-
	$	1,418	$	717	$	2,135	$	655,000		657,135		$	-
Less net deferred origination fees										(347	)
Loans receivable									$	656,788

A summary 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, 2018
Commercial and industrial loans	$	1,447	$	703	$	467	$	1,170	$	117
Real estate loans:
Residential real estate		75		74		-		74		-
Commercial real estate		1,495		1,277		-		1,277		-
Total	$	3,017	$	2,054	$	467	$	2,521	$	117
December 31, 2017
Commercial and industrial loans	$	1,123	$	1,065	$	-	$	1,065	$	-
Real estate loans:
Residential real estate		94		89		-		89		-
Commercial real estate		2,249		1,660		-		1,660		-
Total	$	3,466	$	2,814	$	-	$	2,814	$	-

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

	Three Months Ended
	September 30, 2018				September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	995	$	3	$	219	$	-
Real estate loans:
Residential real estate		74		-		-		-
Commercial real estate		1,284		-		-		-
Total	$	2,353	$	3	$	219	$	-
	Nine Months Ended
	September 30, 2018				September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	1,371	$	28	$	247	$	-
Real estate loans:
Construction, land and land development		-		-		1,281		17
Residential real estate		306		5		97		-
Commercial real estate		1,296		-		5,388		27
Total	$	2,973	$	33	$	7,013	$	44

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.

The following table presents troubled debt restructurings by accrual versus nonaccrual status and by loan class as of the period indicated:

	Accrual Status		Nonaccrual Status		Total Restructured Loans
	(dollars in thousands)
September 30, 2018
Commercial real estate	$	-	$	1,277	$	1,277
December 31, 2017
Commercial real estate	$	-	$	1,315	$	1,315

No loans were restructured in the nine months ended September 30, 2018 and September 30, 2017 that qualified as troubled debt restructurings. The Company has no commitments to loan additional funds to borrowers whose loans were classified as troubled debt restructurings at September 30, 2018.

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,
	2018		2017
	(dollars in thousands)
Commercial and industrial loans	$	1,170	$	372
Real estate loans:
Residential real estate		74		88
Commercial real estate		1,277		1,660
Total nonaccrual loans	$	2,521	$	2,120

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 Pass 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.

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, 2018
Commercial and industrial loans	$	81,751	$	2,248	$	1,555	$	-	$	85,554
Real estate loans:
Construction, land, and land development		59,707		2,515		-		-		62,222
Residential real estate		91,796		125		74		-		91,995
Commercial real estate		499,223		2,282		1,277		-		502,782
Consumer and other loans		2,583		-		-		-		2,583
	$	735,060	$	7,170	$	2,906	$	-		745,136
Less net deferred origination fees										(816	)
Loans receivable									$	744,320
December 31, 2017
Commercial and industrial loans	$	87,247	$	376	$	902	$	163	$	88,688
Real estate loans:
Construction, land, and land development		39,081		2,560		-		-		41,641
Residential real estate		86,464		479		88		-		87,031
Commercial real estate		434,421		1,636		1,315		345		437,717
Consumer and other loans		2,058		-		-		-		2,058
	$	649,271	$	5,051	$	2,305	$	508		657,135
Less net deferred origination fees										(347	)
Loans receivable									$	656,788

Allowance for Loan Losses

The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit review process together with data from peer institutions and economic information gathered from published sources.

The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based 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 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 following tables summarize the allocation of the allowance for loan loss, as well as the activity in the allowance for loan loss attributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30, 2018:

	Commercial and Industrial			Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate			Consumer and Other			Unallocated			Total
	(dollars in thousands)
Three Months Ended September 30, 2018
ALLL balance, June 30, 2018	$	1,821		$	1,238	$	1,395	$	2,303		$	52		$	1,731		$	8,540
Provision for loan losses or (recapture)		(10	)		423		7		164			39			(115	)		508
		1,811			1,661		1,402		2,467			91			1,616			9,048
Loans charged-off		-			-		-		-			(6	)		-			(6	)
Recoveries of loans previously charged-off		1			-		65		-			3			-			69
Net (charge-offs) recoveries		1			-		65		-			(3	)		-			63
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
Nine Months Ended September 30, 2018
ALLL balance, December 31, 2017	$	1,864		$	1,063	$	1,343	$	2,014		$	43		$	1,690		$	8,017
Provision for loan losses or (recapture)		226			598		59		537			55			(74	)		1,401
		2,090			1,661		1,402		2,551			98			1,616			9,418
Loans charged-off		(281	)		-		-		(84	)		(20	)		-			(385	)
Recoveries of loans previously charged-off		3			-		65		-			10			-			78
Net (charge-offs) recoveries		(278	)		-		65		(84	)		(10	)		-			(307	)
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
As of September 30, 2018
ALLL amounts allocated to
Individually evaluated for impairment	$	117		$	-	$	-	$	-		$	-		$	-		$	117
Collectively evaluated for impairment		1,695			1,661		1,467		2,467			88			1,616			8,994
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
Loans individually evaluated for impairment	$	1,170		$	-	$	74	$	1,277		$	-					$	2,521
Loans collectively evaluated for impairment		84,384			62,222		91,921		501,505			2,583						742,615
Loan balance, September 30, 2018	$	85,554		$	62,222	$	91,995	$	502,782		$	2,583					$	745,136

The following tables summarize the allocation of the allowance for loan loss, as well as the activity in the allowance for loan loss attributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30, 2017:

	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, 2017
ALLL balance, June 30, 2017	$	1,881		$	1,167		$	1,181		$	1,968		$	37		$	1,655	$	7,889
Provision for loan losses or (recapture)		26			(114	)		(62	)		42			3			170		65
		1,907			1,053			1,119			2,010			40			1,825		7,954
Loans charged-off		(6	)		-			-			-			(3	)		-		(9	)
Recoveries of loans previously charged-off		1			-			-			-			1			-		2
Net (charge-offs) recoveries		(5	)		-			-			-			(2	)		-		(7	)
ALLL balance, September 30, 2017	$	1,902		$	1,053		$	1,119		$	2,010		$	38		$	1,825	$	7,947
Nine Months Ended September 30, 2017
ALLL balance, December 31, 2016	$	1,606		$	1,398		$	1,495		$	1,474		$	26		$	1,545	$	7,544
Provision for loan losses or (recapture)		314			(440	)		(376	)		709			17			280		504
		1,920			958			1,119			2,183			43			1,825		8,048
Loans charged-off		(20	)		-			-			(173	)		(7	)		-		(200	)
Recoveries of loans previously charged-off		2			95			-			-			2			-		99
Net (charge-offs) recoveries		(18	)		95			-			(173	)		(5	)		-		(101	)
ALLL balance, September 30, 2017	$	1,902		$	1,053		$	1,119		$	2,010		$	38		$	1,825	$	7,947
As of September 30, 2017
ALLL amounts allocated to
Individually evaluated for impairment	$	60		$	-		$	-		$	-		$	-		$	-	$	60
Collectively evaluated for impairment		1,842			1,053			1,119			2,010			38			1,825		7,887
ALLL balance, September 30, 2017	$	1,902		$	1,053		$	1,119		$	2,010		$	38		$	1,825	$	7,947
Loans individually evaluated for impairment	$	217		$	-		$	-		$	-		$	-				$	217
Loans collectively evaluated for impairment		87,201			41,098			66,962			433,707			1,870					630,838
Loan balance, September 30, 2017	$	87,418		$	41,098		$	66,962		$	433,707		$	1,870				$	631,055

The following tables summarizes the allocation of the allowance for loan loss attributed to various segments in the loan portfolio as of December 31, 2017:

	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, 2017
ALLL amounts allocated to
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		1,864		1,063		1,343		2,014		43		1,690		8,017
ALLL balance, December 31, 2017	$	1,864	$	1,063	$	1,343	$	2,014	$	43	$	1,690	$	8,017
Loans individually evaluated for impairment	$	1,065	$	-	$	89	$	1,660	$	-			$	2,814
Loans collectively evaluated for impairment		87,623		41,641		86,942		436,057		2,058				654,321
Loan balance, December 31, 2017	$	88,688	$	41,641	$	87,031	$	437,717	$	2,058			$	657,135

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Deposits

9 Months Ended

Sep. 30, 2018

Deposits [Abstract]

Deposits

Note 5 - Deposits

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

	September 30,		December 31,
	2018		2017
	(dollars in thousands)
Demand, noninterest bearing	$	285,979	$	242,358
Now and money market		340,930		326,412
Savings		49,430		43,876
Time deposits less than $250,000		63,715		60,445
Time deposits $250,000 and over		34,668		30,204
Total deposits	$	774,722	$	703,295

The following table presents the maturity distribution of time deposits as of September 30, 2018 (dollars in thousands):

Twelve months	$	57,755
One to two years		28,412
Two to three years		8,652
Three to four years		1,560
Four to five years		2,004
	$	98,383

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2018

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock-Based Compensation

Note 6 - 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 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. The 2018 Plan replaces both the 2006 Plan and our Directors’ Stock Bonus Plan (2006 Plan). Existing awards will vest under the terms granted and no further awards will be made under these previous plans. Shares available to be granted under the 2018 plan were 500,000 at September 30, 2018.

Stock Option Awards

In January 2018, the Company granted 28,546 nonqualified stock options under the 2006 Plan to an employee, which vest ratably over 10 years. The Company also granted 87,500 qualified stock options under the 2006 Plan to employees, which vest ratably over 10 years.

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

The following assumptions were used to estimate the value of options granted under the 2006 Plan prior to the 2006 Plan being replaced by the 2018 Plan in the periods indicated:

	Nine months ended September 30, 2018			Nine months ended September 30, 2017
Expected term	10.0 years			10.0 years
Expected stock price volatility		41.89	%		43.41	%
Risk-free interest rate		2.66	%		2.51	%
Expected dividends	Zero			Zero
Weighted average grant date fair value	$	3.95		$	3.70

A summary of stock option activity under the Company’s Plan during the nine months ended September 30, 2018:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)
Outstanding at December 31, 2017		668,934		$	6.12		6.36
Granted		116,046			7.10
Exercised		(55,670	)		6.09
Forfeited or expired		(47,120	)		6.54
Outstanding at September 30, 2018		682,190		$	6.26		6.58
Exercisable at September 30, 2018		207,035		$	5.97		5.19

The total 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, 2018 was $106,000 and $173,000, respectively. The intrinsic value of options exercised during the three and nine months ended September 30, 2017 was negligible.

As of September 30, 2018, there was $1,621,000 of total unrecognized compensation cost related to nonvested stock options granted under the Plan. Total unrecognized compensation costs is adjusted for unvested forfeitures. The Company expects to recognize that cost over a weighted-average period of approximately 7.0 years.

Restricted Stock Awards

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

The Company’s nonvested shares at September 30, 2018 and December 31, 2017 totaled 1,200 and 1,400 shares, respectively, and were issued with weighted average grant date fair value of $6.25.

Director’s Stock Bonus

The Company adopted and subsequently amended the Director’s Stock Bonus Plan (Bonus Plan). The Bonus Plan was replaced on April 30, 2018, when the shareholders approved the 2018 Omnibus Incentive Plan.

Under the Bonus Plan, the Company could grant up to 50,000 shares. Stock was granted to directors who have attended at least 75% of the scheduled board meetings during the prior year. Grants cliff vest over 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. Grants also immediately vest when a director has attained the retirement age of 72 and retires from the Board.

The Bonus Plan granted shares with a total market value of $5,000 per director, per year, with the exception of the board chairman receiving $7,500 per year, and committee chairmen receiving $6,250 per year. Directors unable to receive stock will receive cash in lieu upon completion of the vesting period. Cash awards are recognized over the vesting period and recorded in other liabilities until paid. The amended Bonus Plan would have expired on May 31, 2018 if it was not replaced on April 30, 2018. Awards previously granted under the Bonus Plan will vest under the term granted.

In January 2018, there were 4,405 shares granted to five directors at an estimated fair value of $7.10 per share. During 2017, there were 4,808 shares granted to five directors at an estimated fair value of $6.50 per share. Compensation expense recorded related to the Plan totaled $8,000 for the three months ended September 30, 2018 and 2017 and $23,000 for the nine months ended September 30, 2018 and 2017.

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Shareholders' Equity

9 Months Ended

Sep. 30, 2018

Equity [Abstract]

Shareholders Equity

Note 7 - Shareholders’ Equity

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

During 2017, the Articles of Incorporation of the Company were amended to increase the total authorized preferred stock from 500,000 shares to 25,000,000 shares. There were no shares of preferred stock issued and outstanding at September 30, 2018 and December 31, 2017.

During 2017, the Articles of Incorporation of the Company were amended to increase total authorized common shares to 300,000,000 shares, an increase of 200,000,000 from the 100,000,000 common shares previously authorized. At September 30, 2018 and December 31, 2017, there were 11,886,473 and 8,887,457 common shares issued and outstanding.

During 2017, the Articles of Incorporation of the Company were amended to provide that 1,000,000 shares of common stock, out of the 300,000,000 shares authorized, be designated as Class B nonvoting common shares. On September 26, 2018 all 100,000 shares of Class B nonvoting common stock were exchanged for voting common stock on terms and conditions approved by the Company’s board of directors. At December 31, 2017, there were 100,000 shares of Class B nonvoting common stock issued and outstanding.

During 2017, the Articles of Incorporation of the Company were amended to provide that up to 100,000,000 shares of common stock, out of the 300,000,000 shares authorized, may be designated as Class C nonvoting common shares. On September 26, 2018, 261,444 Class C shares were exchanged for common stock on terms and conditions approved by the Company’s board of directors. At December 31, 2017, there were 261,444 shares of Class C nonvoting common stock issued and outstanding.

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Fair Value Measurements

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Fair Value Measurements

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, 2018				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	$	16,837	$	16,837	$	16,837	$	-	$	-
Interest earning deposits with other banks		98,671		98,671		98,671		-		-
Investment securities		37,039		36,955		32,329		4,626		-
Other investments		3,766		3,766		-		3,766		-
Loans receivable, net (1)		735,209		711,772		-		-		711,772
Accrued interest receivable		2,299		2,299		-		2,299		-
Financial liabilities
Deposits (1)	$	774,722		773,497	$	-	$	773,497	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,961		9,570		-		9,570		-
Junior subordinated debentures		3,581		3,112		-		3,112		-
Capital lease		88		86		-		86		-
Accrued interest payable		257		257		-		257		-

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

	December 31, 2017				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	13,787	$	13,787	$	13,787	$	-	$	-
Interest earning deposits with other banks		75,964		75,891		75,891		-		-
Investment securities		38,336		38,301		33,396		4,905		-
Other investments		3,680		3,680		-		3,680		-
Loans receivable, net		648,771		636,334		-		-		636,334
Accrued interest receivable		2,274		-		-		2,274		-
Financial liabilities
Deposits	$	703,295	$	702,525	$	-	$	702,525	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,950		9,601		-		9,601		-
Junior subordinated debentures		3,579		2,978		-		2,978		-
Capital lease		137		134		-		134		-
Accrued interest payable		228		-		-		228		-

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 non-binding 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, 2018
Available-for-sale
U.S. Treasury securities	$	32,329	$	-	$	-	$	32,329
U.S. Government agencies		-		2,941		-		2,941
U.S. Agency collateralized mortgage obligations		-		182		-		182
U.S. Agency residential mortgage-backed securities		-		43		-		43
Municipals		-		254		-		254
	$	32,329	$	3,420	$	-	$	35,749
December 31, 2017
Available-for-sale
U.S. Treasury securities	$	33,396	$	-	$	-	$	33,396
U.S. Government agencies		-		2,970		-		2,970
U.S. Agency collateralized mortgage obligations		-		260		-		260
U.S. Agency residential mortgage-backed securities		-		81		-		81
Municipals		-		220		-		220
	$	33,396	$	3,531	$	-	$	36,927

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

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

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

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

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

	Valuation Technique	Unobservable Inputs	September 30, 2018 Weighted Average Rate			December 31, 2017 Weighted Average Rate
Impaired loans	Collateral valuations	Discount to appraised value		9	%		13	%

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

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands)
September 30, 2018
Impaired loans	$	-	$	-	$	493	$	493
Total	$	-	$	-	$	493	$	493
December 31, 2017
Impaired loans	$	-	$	-	$	508	$	508
Total	$	-	$	-	$	508	$	508

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

Impaired 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.

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Earnings Per Common Share

9 Months Ended

Sep. 30, 2018

Earnings Per Share [Abstract]

Earnings Per Common Share

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, 2018		September 30, 2017		September 30, 2018		September 30, 2017
	(dollars in thousands, except share data)				(dollars in thousands, except share data)
Net Income	$	2,602	$	1,904	$	6,646	$	5,093
Basic weighted average number common shares outstanding		11,338,320		9,235,344		9,956,449		9,233,421
Dilutive effect of share-based compensation		271,658		3,464		94,966		2,754
Diluted weighted average number common shares outstanding		11,609,978		9,238,808		10,051,415		9,236,175
Basic earnings per share	$	0.23	$	0.21	$	0.67	$	0.55
Diluted earnings per share	$	0.22	$	0.21	$	0.66	$	0.55

For the three and nine month periods ended September 30, 2018 and 2017, the difference in earnings per share under the two-class method was not significant. There were no antidilutive shares that impacted the diluted earnings per share calculation for the three months ended September 30, 2018. Options to purchase an additional 599,026 share of common stock, for the three months ended September 30, 2017 were not included in the computation of diluted earnings per common share because their effect resulted in them being antidilutive. For the nine months ended September 30, 2018 and 2017 options to purchase an additional 261,051 and 649,396 shares of common stock, respectively, were not included in the computation of diluted earnings per common share because their effect resulted in them being antidilutive.

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Description of Business and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2018

Accounting Policies [Abstract]

Nature of Operations

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

The Company provides a full range of banking 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 branch and the headquarters of the Bank and Company are located in Everett, Washington. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (FDIC). The Bank’s loans and deposits are primarily within the greater Puget Sound area, and the Bank’s primary funding source is deposits from customers. The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

Financial Statement Preparation

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 elsewhere in this report. Operating results for the three and nine months ended September 30, 2018, 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

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

Business Segments

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

Estimates

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

Subsequent Events

Subsequent Events - The Company has evaluated events and transactions subsequent to September 30, 2018 for potential recognition or disclosure. On October 9^th 2018, the Bank opened a full service branch in Edmonds, Washington.

Accounting Policies

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

Reclassifications

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.

Accounting Standards Adopted in 2018

Accounting Standards Adopted in 2018

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

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

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

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

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

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

Wholesale Banking Service Fees: The Company earns fees, governed by contract arrangements, for providing banking services to customers of a third party company. Fees are recognized on a monthly basis, as earned.

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

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

As of January 1, 2018, the Company adopted FASB ASU No. 2016-01, Financial Instruments—Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities. ASU 2016-01 requires equity investments (except those accounted for under the equity method of accounting) to be measured at fair value with changes in fair value recognized in net income. In addition, the amendments in this ASU require an entity to disclose the fair value of financial instruments using the exit price notion. Exit price is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The methods of determining the fair value of assets and liabilities are consistent with our methodologies disclosed in Note 8—Fair Value Measurements, except for the valuation of loans held-for-investment which was impacted by the adoption of ASU 2016-01. Prior to adopting the amendments included in the standard, the Company was allowed to measure fair value under an entry price notion. The entry price notion previously applied by the Company used a discounted cash flows technique to calculate the present value of expected future cash flows for a financial instrument. The exit price notion uses the same approach, but also incorporates other factors, such as enhanced credit risk, illiquidity risk and market factors that sometimes exist in exit prices in dislocated markets. As of September 30, 2018, the technique used by the Company to estimate the exit price of the loan portfolio consists of similar procedures to those used as of December 31, 2017, but with added emphasis on both illiquidity risk and credit risk not captured by the previously applied entry price notion. This credit risk assumption is intended to approximate the fair value that a market participant would realize in a hypothetical orderly transaction. This ASU also eliminates the requirement to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost on the balance sheet. The amendments in this ASU were effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. The adoption of ASU 2016-01 did not have a material impact on the Company’s consolidated financial statements.

In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Receipts and Cash Payments, a consensus of the FASB’s Emerging Issues Task Force. The ASU is intended to reduce diversity in practice in how certain transactions are presented and classified in the statement of cash flows. The standard will take effect for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. This standard did not have a material impact on the Company’s consolidated financial statements.

In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. The amendments in this update provide a more robust framework to use in determining when a set of assets and activities is a business. Because the current definition of a business is interpreted broadly and can be difficult to apply, stakeholders indicated that analyzing transactions is inefficient and costly and that the definition does not permit the use of reasonable judgment. The amendments provide more consistency in applying the guidance, reduce the costs of application, and make the definition of a business more operable. The amendments in this update become effective for annual periods and interim periods within those fiscal years, beginning after December 15, 2017. The adoption of this standard did not have a material effect on the Company’s operating results or financial condition.

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

In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This ASU updates outdated guidance related to the Office of Comptroller of the Currency’s (OCC) Banking Circular 202, Accounting for Net Deferred Tax Charges, as the guidance has been rescinded by OCC and is no longer relevant. The amendments in this ASU are effective immediately. The adoption of ASU No. 2018-06 is not expected to have a material impact on the Company's consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

Recent Accounting Guidance Not Yet Effective

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard is being issued to increase the transparency and comparability around lease obligations. Previously unrecorded off-balance sheet obligations will now be brought more prominently to light by presenting lease liabilities on the face of the balance sheet, accompanied by enhanced qualitative and quantitative disclosures in the notes to the financial statements. The ASU is effective in fiscal years beginning after December 15, 2018, and interim periods within those fiscal years. The Company is in the process of its implementation, which includes identifying the population of the Company’s leases that are within the scope of the new guidance and gathering all key lease data that will facilitate application of the new accounting requirements. Upon adoption of this guidance, the Company will recognize a liability for the remaining obligations under its operating lease agreements, and a corresponding right of use asset for its right to use the underlying assets for the lease term. Thus there will be an increase to the Company’s assets and liabilities upon adoption. The increase in assets and liabilities is estimated to be less than 1% of total assets when adopted on January 1, 2019.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are actively assessing our data and the model needs and are evaluating the impact of adopting the amendment. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.

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

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2018

Investments Debt And Equity Securities [Abstract]

Amortized Cost and Fair Values of Investment Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
September 30, 2018
Available-for-sale
U.S. Treasury securities	$	34,821	$	-	$	(2,492	)	$	32,329
U.S. Government agencies		3,000		-		(59	)		2,941
U.S. Agency collateralized mortgage obligations		188		-		(6	)		182
U.S. Agency residential mortgage-backed securities		43		-		-			43
Municipals		259		-		(5	)		254
Total available-for-sale securities		38,311		-		(2,562	)		35,749
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,290		-		(84	)		1,206
Total investment securities	$	39,601	$	-	$	(2,646	)	$	36,955

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
December 31, 2017
Available-for-sale
U.S. Treasury securities	$	34,794	$	-	$	(1,398	)	$	33,396
U.S. Government agencies		3,000		-		(30	)		2,970
U.S. Agency collateralized mortgage obligations		224		-		(3	)		221
U.S. Agency residential mortgage-backed securities		79		1		-			80
Municipals		261		-		(1	)		260
Total available-for-sale securities		38,358		1		(1,432	)		36,927
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,409		-		(35	)		1,374
Total investment securities	$	39,767	$	1	$	(1,467	)	$	38,301

Amortized Cost and Fair Value of Debt Securities by Contractual Maturity

Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
Amounts maturing in
One year or less	$	-	$	-	$	-	$	-
After one year through five years		27,838		26,141		-		-
After five years through ten years		10,242		9,383		-		-
		38,080		35,524		-		-
U.S. Agency residential mortgage-backed securities and    collateralized mortgage obligations		231		225		1,290		1,206
	$	38,311	$	35,749	$	1,290	$	1,206

Summary of Investment Securities Continuous Unrealized Loss Position

Information pertaining to securities with gross unrealized losses at the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	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, 2018
Available-for-sale
U.S. Treasury securities	$	-	$	-		$	32,329	$	(2,492	)	$	32,329	$	(2,492	)
U.S. Government agencies		-		-			2,941		(59	)		2,941		(59	)
U.S. Agency collateralized mortgage obligations		-		-			182		(6	)		182		(6	)
Municipals		254		(5	)		-		-			254		(5	)
Total available-for-sale securities		254		(5	)		35,452		(2,557	)		35,706		(2,562	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		-		-			1,206		(84	)		1,206		(84	)
Total investment securities	$	254	$	(5	)	$	36,658	$	(2,641	)	$	36,912	$	(2,646	)
December 31, 2017
Available-for-sale
U.S. Treasury securities	$	4,934	$	(77	)	$	28,463	$	(1,321	)	$	33,397	$	(1,398	)
U.S. Government agencies		-		-			2,970		(30	)		2,970		(30	)
U.S. Agency collateralized mortgage obligations		220		(3	)		-		-			220		(3	)
Municipals		260		(1	)		-		-			260		(1	)
Total available-for-sale securities		5,414		(81	)		31,433		(1,351	)		36,847		(1,432	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		-		-			1,374		(35	)		1,374		(35	)
Total investment securities	$	5,414	$	(81	)	$	32,807	$	(1,386	)	$	38,221	$	(1,467	)

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Loans and Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 30, 2018

Receivables [Abstract]

Composition of Loan Portfolio

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

	September 30,			December 31,
	2018			2017
	(dollars in thousands)
Commercial and industrial loans	$	85,554		$	88,688
Real estate loans:
Construction, land, and land development		62,222			41,641
Residential real estate		91,995			87,031
Commercial real estate		502,782			437,717
Consumer and other loans		2,583			2,058
Gross loans receivable		745,136			657,135
Net deferred origination fees and premiums		(816	)		(347	)
Loans receivable	$	744,320		$	656,788

Summary of an Age Analysis of Past Due Loans

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

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
September 30, 2018
Commercial and industrial loans	$	695	$	703	$	1,398	$	84,156	$	85,554		$	-
Real estate loans:
Construction, land and land development		-		-		-		62,222		62,222			-
Residential real estate		-		74		74		91,921		91,995			-
Commercial real estate		-		-		-		502,782		502,782			-
Consumer and other loans		-		-		-		2,583		2,583			-
	$	695	$	777	$	1,472	$	743,664	$	745,136		$	-
Less net deferred origination fees										(816	)
Loans receivable									$	744,320

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
December 31, 2017
Commercial and industrial loans	$	791	$	372	$	1,163	$	87,525	$	88,688		$	-
Real estate loans:
Construction, land and land development		218		-		218		41,423		41,641			-
Residential real estate		76		-		76		86,955		87,031			-
Commercial real estate		333		345		678		437,039		437,717			-
Consumer and other loans		-		-		-		2,058		2,058			-
	$	1,418	$	717	$	2,135	$	655,000		657,135		$	-
Less net deferred origination fees										(347	)
Loans receivable									$	656,788

Summary of Information Pertaining to Impaired Loans

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, 2018
Commercial and industrial loans	$	1,447	$	703	$	467	$	1,170	$	117
Real estate loans:
Residential real estate		75		74		-		74		-
Commercial real estate		1,495		1,277		-		1,277		-
Total	$	3,017	$	2,054	$	467	$	2,521	$	117
December 31, 2017
Commercial and industrial loans	$	1,123	$	1,065	$	-	$	1,065	$	-
Real estate loans:
Residential real estate		94		89		-		89		-
Commercial real estate		2,249		1,660		-		1,660		-
Total	$	3,466	$	2,814	$	-	$	2,814	$	-

Summary of Our Average Recorded Investment and Interest Income Recognized on Impaired Loans

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

	Three Months Ended
	September 30, 2018				September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	995	$	3	$	219	$	-
Real estate loans:
Residential real estate		74		-		-		-
Commercial real estate		1,284		-		-		-
Total	$	2,353	$	3	$	219	$	-
	Nine Months Ended
	September 30, 2018				September 30, 2017
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	1,371	$	28	$	247	$	-
Real estate loans:
Construction, land and land development		-		-		1,281		17
Residential real estate		306		5		97		-
Commercial real estate		1,296		-		5,388		27
Total	$	2,973	$	33	$	7,013	$	44

Summary of Troubled Debt Restructurings by Accrual Versus Nonaccrual Status and by Loan Class

The following table presents troubled debt restructurings by accrual versus nonaccrual status and by loan class as of the period indicated:

	Accrual Status		Nonaccrual Status		Total Restructured Loans
	(dollars in thousands)
September 30, 2018
Commercial real estate	$	-	$	1,277	$	1,277
December 31, 2017
Commercial real estate	$	-	$	1,315	$	1,315

Analysis of Nonaccrual Loans by Category

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

	September 30,		December 31,
	2018		2017
	(dollars in thousands)
Commercial and industrial loans	$	1,170	$	372
Real estate loans:
Residential real estate		74		88
Commercial real estate		1,277		1,660
Total nonaccrual loans	$	2,521	$	2,120

Summary of Loans by Credit Quality Risk Rating

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, 2018
Commercial and industrial loans	$	81,751	$	2,248	$	1,555	$	-	$	85,554
Real estate loans:
Construction, land, and land development		59,707		2,515		-		-		62,222
Residential real estate		91,796		125		74		-		91,995
Commercial real estate		499,223		2,282		1,277		-		502,782
Consumer and other loans		2,583		-		-		-		2,583
	$	735,060	$	7,170	$	2,906	$	-		745,136
Less net deferred origination fees										(816	)
Loans receivable									$	744,320
December 31, 2017
Commercial and industrial loans	$	87,247	$	376	$	902	$	163	$	88,688
Real estate loans:
Construction, land, and land development		39,081		2,560		-		-		41,641
Residential real estate		86,464		479		88		-		87,031
Commercial real estate		434,421		1,636		1,315		345		437,717
Consumer and other loans		2,058		-		-		-		2,058
	$	649,271	$	5,051	$	2,305	$	508		657,135
Less net deferred origination fees										(347	)
Loans receivable									$	656,788

Summary of Allocation of Allowance for Loan Loss as well as Activity in Allowance for Loan Loss Attributed to Various Segments in Loan

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

	Commercial and Industrial			Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate			Consumer and Other			Unallocated			Total
	(dollars in thousands)
Three Months Ended September 30, 2018
ALLL balance, June 30, 2018	$	1,821		$	1,238	$	1,395	$	2,303		$	52		$	1,731		$	8,540
Provision for loan losses or (recapture)		(10	)		423		7		164			39			(115	)		508
		1,811			1,661		1,402		2,467			91			1,616			9,048
Loans charged-off		-			-		-		-			(6	)		-			(6	)
Recoveries of loans previously charged-off		1			-		65		-			3			-			69
Net (charge-offs) recoveries		1			-		65		-			(3	)		-			63
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
Nine Months Ended September 30, 2018
ALLL balance, December 31, 2017	$	1,864		$	1,063	$	1,343	$	2,014		$	43		$	1,690		$	8,017
Provision for loan losses or (recapture)		226			598		59		537			55			(74	)		1,401
		2,090			1,661		1,402		2,551			98			1,616			9,418
Loans charged-off		(281	)		-		-		(84	)		(20	)		-			(385	)
Recoveries of loans previously charged-off		3			-		65		-			10			-			78
Net (charge-offs) recoveries		(278	)		-		65		(84	)		(10	)		-			(307	)
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
As of September 30, 2018
ALLL amounts allocated to
Individually evaluated for impairment	$	117		$	-	$	-	$	-		$	-		$	-		$	117
Collectively evaluated for impairment		1,695			1,661		1,467		2,467			88			1,616			8,994
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
Loans individually evaluated for impairment	$	1,170		$	-	$	74	$	1,277		$	-					$	2,521
Loans collectively evaluated for impairment		84,384			62,222		91,921		501,505			2,583						742,615
Loan balance, September 30, 2018	$	85,554		$	62,222	$	91,995	$	502,782		$	2,583					$	745,136

The following tables summarize the allocation of the allowance for loan loss, as well as the activity in the allowance for loan loss attributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30, 2017:

	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, 2017
ALLL balance, June 30, 2017	$	1,881		$	1,167		$	1,181		$	1,968		$	37		$	1,655	$	7,889
Provision for loan losses or (recapture)		26			(114	)		(62	)		42			3			170		65
		1,907			1,053			1,119			2,010			40			1,825		7,954
Loans charged-off		(6	)		-			-			-			(3	)		-		(9	)
Recoveries of loans previously charged-off		1			-			-			-			1			-		2
Net (charge-offs) recoveries		(5	)		-			-			-			(2	)		-		(7	)
ALLL balance, September 30, 2017	$	1,902		$	1,053		$	1,119		$	2,010		$	38		$	1,825	$	7,947
Nine Months Ended September 30, 2017
ALLL balance, December 31, 2016	$	1,606		$	1,398		$	1,495		$	1,474		$	26		$	1,545	$	7,544
Provision for loan losses or (recapture)		314			(440	)		(376	)		709			17			280		504
		1,920			958			1,119			2,183			43			1,825		8,048
Loans charged-off		(20	)		-			-			(173	)		(7	)		-		(200	)
Recoveries of loans previously charged-off		2			95			-			-			2			-		99
Net (charge-offs) recoveries		(18	)		95			-			(173	)		(5	)		-		(101	)
ALLL balance, September 30, 2017	$	1,902		$	1,053		$	1,119		$	2,010		$	38		$	1,825	$	7,947
As of September 30, 2017
ALLL amounts allocated to
Individually evaluated for impairment	$	60		$	-		$	-		$	-		$	-		$	-	$	60
Collectively evaluated for impairment		1,842			1,053			1,119			2,010			38			1,825		7,887
ALLL balance, September 30, 2017	$	1,902		$	1,053		$	1,119		$	2,010		$	38		$	1,825	$	7,947
Loans individually evaluated for impairment	$	217		$	-		$	-		$	-		$	-				$	217
Loans collectively evaluated for impairment		87,201			41,098			66,962			433,707			1,870					630,838
Loan balance, September 30, 2017	$	87,418		$	41,098		$	66,962		$	433,707		$	1,870				$	631,055

The following tables summarizes the allocation of the allowance for loan loss attributed to various segments in the loan portfolio as of December 31, 2017:

	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, 2017
ALLL amounts allocated to
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		1,864		1,063		1,343		2,014		43		1,690		8,017
ALLL balance, December 31, 2017	$	1,864	$	1,063	$	1,343	$	2,014	$	43	$	1,690	$	8,017
Loans individually evaluated for impairment	$	1,065	$	-	$	89	$	1,660	$	-			$	2,814
Loans collectively evaluated for impairment		87,623		41,641		86,942		436,057		2,058				654,321
Loan balance, December 31, 2017	$	88,688	$	41,641	$	87,031	$	437,717	$	2,058			$	657,135

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Deposits (Tables)

9 Months Ended

Sep. 30, 2018

Deposits [Abstract]

Composition of Consolidated Deposits

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

	September 30,		December 31,
	2018		2017
	(dollars in thousands)
Demand, noninterest bearing	$	285,979	$	242,358
Now and money market		340,930		326,412
Savings		49,430		43,876
Time deposits less than $250,000		63,715		60,445
Time deposits $250,000 and over		34,668		30,204
Total deposits	$	774,722	$	703,295

Schedule of Maturity Distribution of Time Deposits

The following table presents the maturity distribution of time deposits as of September 30, 2018 (dollars in thousands):

Twelve months	$	57,755
One to two years		28,412
Two to three years		8,652
Three to four years		1,560
Four to five years		2,004
	$	98,383

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2018

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Summary of Assumptions Used to Estimate the Value of Options Granted

The following assumptions were used to estimate the value of options granted under the 2006 Plan prior to the 2006 Plan being replaced by the 2018 Plan in the periods indicated:

	Nine months ended September 30, 2018			Nine months ended September 30, 2017
Expected term	10.0 years			10.0 years
Expected stock price volatility		41.89	%		43.41	%
Risk-free interest rate		2.66	%		2.51	%
Expected dividends	Zero			Zero
Weighted average grant date fair value	$	3.95		$	3.70

Summary of Stock Option Activity

A summary of stock option activity under the Company’s Plan during the nine months ended September 30, 2018:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)
Outstanding at December 31, 2017		668,934		$	6.12		6.36
Granted		116,046			7.10
Exercised		(55,670	)		6.09
Forfeited or expired		(47,120	)		6.54
Outstanding at September 30, 2018		682,190		$	6.26		6.58
Exercisable at September 30, 2018		207,035		$	5.97		5.19

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Summary of Estimated Fair Values of Financial Instruments

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, 2018				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	$	16,837	$	16,837	$	16,837	$	-	$	-
Interest earning deposits with other banks		98,671		98,671		98,671		-		-
Investment securities		37,039		36,955		32,329		4,626		-
Other investments		3,766		3,766		-		3,766		-
Loans receivable, net (1)		735,209		711,772		-		-		711,772
Accrued interest receivable		2,299		2,299		-		2,299		-
Financial liabilities
Deposits (1)	$	774,722		773,497	$	-	$	773,497	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,961		9,570		-		9,570		-
Junior subordinated debentures		3,581		3,112		-		3,112		-
Capital lease		88		86		-		86		-
Accrued interest payable		257		257		-		257		-

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

	December 31, 2017				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	13,787	$	13,787	$	13,787	$	-	$	-
Interest earning deposits with other banks		75,964		75,891		75,891		-		-
Investment securities		38,336		38,301		33,396		4,905		-
Other investments		3,680		3,680		-		3,680		-
Loans receivable, net		648,771		636,334		-		-		636,334
Accrued interest receivable		2,274		-		-		2,274		-
Financial liabilities
Deposits	$	703,295	$	702,525	$	-	$	702,525	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,950		9,601		-		9,601		-
Junior subordinated debentures		3,579		2,978		-		2,978		-
Capital lease		137		134		-		134		-
Accrued interest payable		228		-		-		228		-

Summary of Assets Measured at Fair Value on Recurring Basis

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, 2018
Available-for-sale
U.S. Treasury securities	$	32,329	$	-	$	-	$	32,329
U.S. Government agencies		-		2,941		-		2,941
U.S. Agency collateralized mortgage obligations		-		182		-		182
U.S. Agency residential mortgage-backed securities		-		43		-		43
Municipals		-		254		-		254
	$	32,329	$	3,420	$	-	$	35,749
December 31, 2017
Available-for-sale
U.S. Treasury securities	$	33,396	$	-	$	-	$	33,396
U.S. Government agencies		-		2,970		-		2,970
U.S. Agency collateralized mortgage obligations		-		260		-		260
U.S. Agency residential mortgage-backed securities		-		81		-		81
Municipals		-		220		-		220
	$	33,396	$	3,531	$	-	$	36,927

Summary of Assets and Liabilities Classified as Level 3 and Measured at Fair Value on Nonrecurring Basis

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, 2018 Weighted Average Rate			December 31, 2017 Weighted Average Rate
Impaired loans	Collateral valuations	Discount to appraised value		9	%		13	%

Summary of Financial Assets and Liabilities Measured at Fair Value on Nonrecurring Basis

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, 2018
Impaired loans	$	-	$	-	$	493	$	493
Total	$	-	$	-	$	493	$	493
December 31, 2017
Impaired loans	$	-	$	-	$	508	$	508
Total	$	-	$	-	$	508	$	508

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Earnings Per Common Share (Tables)

9 Months Ended

Sep. 30, 2018

Earnings Per Share [Abstract]

Schedule of Computation of Basic and Diluted 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, 2018		September 30, 2017		September 30, 2018		September 30, 2017
	(dollars in thousands, except share data)				(dollars in thousands, except share data)
Net Income	$	2,602	$	1,904	$	6,646	$	5,093
Basic weighted average number common shares outstanding		11,338,320		9,235,344		9,956,449		9,233,421
Dilutive effect of share-based compensation		271,658		3,464		94,966		2,754
Diluted weighted average number common shares outstanding		11,609,978		9,238,808		10,051,415		9,236,175
Basic earnings per share	$	0.23	$	0.21	$	0.67	$	0.55
Diluted earnings per share	$	0.22	$	0.21	$	0.66	$	0.55

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Description of Business and Summary of Significant Accounting Policies - Additional Information (Details)	9 Months Ended
	Sep. 30, 2018 Branch
Accounting Policies [Abstract]
Entity incorporation, state name	The Company is a Washington state corporation that was organized in 2003.
Number of branches	14

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Recent Accounting Standards - Additional Information (Details) - USD ($)	3 Months Ended	9 Months Ended
	Mar. 31, 2018	Sep. 30, 2018
ASU No. 2018-02
New Accounting Pronouncements Or Change In Accounting Principle [Line Items]
Increase to retained earnings and a decrease to AOCI for stranded tax effects on investment available for sale securities	$ 186,000
ASU No. 2016-02 | Maximum
New Accounting Pronouncements Or Change In Accounting Principle [Line Items]
Estimated percentage of increase in assets and liabilities on adoption date		1.00%

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Investments Securities - Amortized Cost and Fair Values of Investment Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	$ 38,311	$ 38,358
Available-for-sale, Gross Unrealized Gains		1
Available-for-sale, Gross Unrealized Losses	(2,562)	(1,432)
Available-for-sale, Fair Value	35,749	36,927
Held-to-maturity, Amortized Cost	1,290	1,409
Held-to-maturity, Fair Value	1,206
Total investment securities, Amortized Cost	39,601	39,767
Total investment securities, Gross Unrealized Gains		1
Total investment securities, Gross Unrealized Losses	(2,646)	(1,467)
Total investment securities, Fair Value	36,955	38,301
U.S. Treasury Securities
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	34,821	34,794
Available-for-sale, Gross Unrealized Losses	(2,492)	(1,398)
Available-for-sale, Fair Value	32,329	33,396
U.S. Government Agencies
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	3,000	3,000
Available-for-sale, Gross Unrealized Losses	(59)	(30)
Available-for-sale, Fair Value	2,941	2,970
U.S. Agency Collateralized Mortgage Obligations
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	188	224
Available-for-sale, Gross Unrealized Losses	(6)	(3)
Available-for-sale, Fair Value	182	221
U.S. Agency Residential Mortgage-Backed Securities
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	43	79
Available-for-sale, Gross Unrealized Gains		1
Available-for-sale, Fair Value	43	80
Held-to-maturity, Amortized Cost	1,290	1,409
Held-to-maturity, Gross Unrealized Losses	(84)	(35)
Held-to-maturity, Fair Value	1,206	1,374
Municipals
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	259	261
Available-for-sale, Gross Unrealized Losses	(5)	(1)
Available-for-sale, Fair Value	$ 254	$ 260

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Investments Securities - Amortized Cost and Fair Value of Debt Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-Sale, Amortized Cost, Amounts maturing in After one year through five years	$ 27,838
Available-for-Sale, Amortized Cost, Amounts maturing in After five years through ten years	10,242
Available-for-Sale, Amortized Cost. Amounts maturity with single maturity	38,080
Available-for-sale, Amortized Cost	38,311	$ 38,358
Available-for-Sale, Fair Value, Amounts maturing in After one year through five years	26,141
Available-for-Sale, Fair Value, Amounts maturing in After five years through ten years	9,383
Available-for-Sale, Fair Value, Amounts maturing with single maturity	35,524
Available-for-Sale, Fair Value	35,749	36,927
Held-to-maturity, Amortized Cost	1,290	$ 1,409
Held-to-Maturity, Fair Value	1,206
U.S. Agency Residential Mortgage-backed Securities and Collateralized Mortgage Obligations
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-Sale, Amortized Cost, Amounts maturity without single maturity	231
Available-for-Sale, Fair Value, Amounts maturing without single maturity	225
Held-to-Maturity, Amortized Cost, Amounts maturity without single maturity	1,290
Held-to-Maturity, Fair Value, Amounts maturing without single maturity	$ 1,206

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Investments Securities - Additional Information (Details)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2018 USD ($) Security	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) Security	Sep. 30, 2017 USD ($)	Dec. 31, 2017 USD ($) Security
Investments [Abstract]
Investment securities with carrying value pledged to secure public deposits	$ 19,722,000		$ 19,722,000		$ 14,526,000
Sales of investment securities	$ 0	$ 0	$ 0	$ 0
Number of securities in unrealized loss position | Security	11		11		11
Securities other than temporarily impaired			$ 0		$ 0

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Investments Securities - Summary of Investment Securities Continuous Unrealized Loss Position (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, Less Than 12 Months	$ 254	$ 5,414
Available-for-sale, Gross Unrealized Losses, Less Than 12 Months	(5)	(81)
Available-for-sale, Fair Value, 12 Months or Greater	35,452	31,433
Available-for-sale, Gross Unrealized Losses, 12 Months or Greater	(2,557)	(1,351)
Available-for-sale, Total Fair Value	35,706	36,847
Available-for-sale, Total Gross Unrealized Losses	(2,562)	(1,432)
Held-to-maturity, Fair Value, Less Than 12 Months	254	5,414
Held-to-maturity, Gross Unrealized Losses, Less Than 12 Months	(5)	(81)
Held-to-maturity, Fair Value, 12 Months or Greater	36,658	32,807
Held-to-maturity, Gross Unrealized Losses, Less Than 12 Months	(2,641)	(1,386)
Held-to-maturity, Total, Fair Value	36,912	38,221
Held-to-maturity, Total, Gross Unrealized Losses	(2,646)	(1,467)
U.S. Treasury Securities
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, Less Than 12 Months		4,934
Available-for-sale, Gross Unrealized Losses, Less Than 12 Months		(77)
Available-for-sale, Fair Value, 12 Months or Greater	32,329	28,463
Available-for-sale, Gross Unrealized Losses, 12 Months or Greater	(2,492)	(1,321)
Available-for-sale, Total Fair Value	32,329	33,397
Available-for-sale, Total Gross Unrealized Losses	(2,492)	(1,398)
U.S. Government Agencies
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, 12 Months or Greater	2,941	2,970
Available-for-sale, Gross Unrealized Losses, 12 Months or Greater	(59)	(30)
Available-for-sale, Total Fair Value	2,941	2,970
Available-for-sale, Total Gross Unrealized Losses	(59)	(30)
U.S. Agency Collateralized Mortgage Obligations
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, Less Than 12 Months		220
Available-for-sale, Gross Unrealized Losses, Less Than 12 Months		(3)
Available-for-sale, Fair Value, 12 Months or Greater	182
Available-for-sale, Gross Unrealized Losses, 12 Months or Greater	(6)
Available-for-sale, Total Fair Value	182	220
Available-for-sale, Total Gross Unrealized Losses	(6)	(3)
Municipals
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, Less Than 12 Months	254	260
Available-for-sale, Gross Unrealized Losses, Less Than 12 Months	(5)	(1)
Available-for-sale, Total Fair Value	254	260
Available-for-sale, Total Gross Unrealized Losses	(5)	(1)
U.S. Agency Residential Mortgage-Backed Securities
Schedule Of Available For Sale Securities [Line Items]
Held-to-maturity, Fair Value, 12 Months or Greater	1,206	1,374
Held-to-maturity, Gross Unrealized Losses, Less Than 12 Months	(84)	(35)
Held-to-maturity, Total, Fair Value	1,206	1,374
Held-to-maturity, Total, Gross Unrealized Losses	$ (84)	$ (35)

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Loans and Allowance for Loan Losses - Composition of Loan Portfolio (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	$ 745,136	$ 657,135	$ 631,055
Net deferred origination fees and premiums	(816)	(347)
Loans receivable	744,320	656,788
Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	85,554	88,688	87,418
Construction, Land and Land Development
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	62,222	41,641	41,098
Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	91,995	87,031	66,962
Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	502,782	437,717	433,707
Consumer and Other Loans
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	$ 2,583	$ 2,058	$ 1,870

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Loans and Allowance for Loan Losses - Additional Information (Details)	9 Months Ended
	Sep. 30, 2018 USD ($) Loan	Sep. 30, 2017 Loan	Dec. 31, 2017 USD ($)
Loans And Leases Receivable Disclosure [Line Items]
Overdrafts included in loans	$ 27,000		$ 76,000
Pledged loans for borrowing lines at FHLB and FRB	157,100,000		147,008,000
Balance of SBA loans and participations serviced	28,679,000		29,910,000
Purchased loans	42,662,000		43,213,000
Unamortized premiums	676,000		718,000
Purchased participation loans	$ 40,500,000		$ 8,124,000
Number of loans restructured as troubled debt restructurings | Loan	0	0
Additional funds to borrowers with troubled debt restructurings	$ 0
Minimum
Loans And Leases Receivable Disclosure [Line Items]
Percentage of collateral coverage to loan balance	100.00%
Loan repayment extended period of time	6 months
Sustained repayment performance period of loan placed on nonaccrual	6 months

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Loans and Allowance for Loan Losses - Summary of an Age Analysis of Past Due Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	$ 1,472	$ 2,135
Current	743,664	655,000
Total Loans	745,136	657,135	$ 631,055
Less net deferred origination fees	(816)	(347)
Loans receivable	744,320	656,788
30-89 Days Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	695	1,418
90 Days or More Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	777	717
Commercial and Industrial Loans
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	1,398	1,163
Current	84,156	87,525
Total Loans	85,554	88,688	87,418
Commercial and Industrial Loans | 30-89 Days Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	695	791
Commercial and Industrial Loans | 90 Days or More Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	703	372
Construction, Land and Land Development
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due		218
Current	62,222	41,423
Total Loans	62,222	41,641	41,098
Construction, Land and Land Development | 30-89 Days Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due		218
Residential Real Estate
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	74	76
Current	91,921	86,955
Total Loans	91,995	87,031	66,962
Residential Real Estate | 30-89 Days Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due		76
Residential Real Estate | 90 Days or More Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	74
Commercial Real Estate
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due		678
Current	502,782	437,039
Total Loans	502,782	437,717	433,707
Commercial Real Estate | 30-89 Days Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due		333
Commercial Real Estate | 90 Days or More Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due		345
Consumer and Other Loans
Financing Receivable Recorded Investment Past Due [Line Items]
Current	2,583	2,058
Total Loans	$ 2,583	$ 2,058	$ 1,870

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Loans and Allowance for Loan Losses - Summary of Information Pertaining to Impaired Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Financing Receivable Impaired [Line Items]
Unpaid Contractual Principal Balance	$ 3,017	$ 3,466
Recorded Investment With No Allowance	2,054	2,814
Recorded Investment With Allowance	467
Total Recorded Investment	2,521	2,814
Related Allowance	117
Commercial and Industrial Loans
Financing Receivable Impaired [Line Items]
Unpaid Contractual Principal Balance	1,447	1,123
Recorded Investment With No Allowance	703	1,065
Recorded Investment With Allowance	467
Total Recorded Investment	1,170	1,065
Related Allowance	117
Residential Real Estate
Financing Receivable Impaired [Line Items]
Unpaid Contractual Principal Balance	75	94
Recorded Investment With No Allowance	74	89
Total Recorded Investment	74	89
Commercial Real Estate
Financing Receivable Impaired [Line Items]
Unpaid Contractual Principal Balance	1,495	2,249
Recorded Investment With No Allowance	1,277	1,660
Total Recorded Investment	$ 1,277	$ 1,660

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Loans and Allowance for Loan Losses - Summary of Our Average Recorded Investment and Interest Income Recognized on Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Financing Receivable Impaired [Line Items]
Average Recorded Investment	$ 2,353	$ 219	$ 2,973	$ 7,013
Interest Income Recognized	3		33	44
Commercial and Industrial Loans
Financing Receivable Impaired [Line Items]
Average Recorded Investment	995	$ 219	1,371	247
Interest Income Recognized	3		28
Construction, Land and Land Development
Financing Receivable Impaired [Line Items]
Average Recorded Investment				1,281
Interest Income Recognized				17
Residential Real Estate
Financing Receivable Impaired [Line Items]
Average Recorded Investment	74		306	97
Interest Income Recognized			5
Commercial Real Estate
Financing Receivable Impaired [Line Items]
Average Recorded Investment	$ 1,284		$ 1,296	5,388
Interest Income Recognized				$ 27

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Loans and Allowance for Loan Losses - Summary of Troubled Debt Restructurings by Accrual Versus Nonaccrual Status and by Loan Class (Details) - Commercial Real Estate - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Financing Receivable Modifications [Line Items]
Total Restructured Loans	$ 1,277	$ 1,315
Nonaccrual Status
Financing Receivable Modifications [Line Items]
Total Restructured Loans	$ 1,277	$ 1,315

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Loans and Allowance for Loan Losses - Analysis of Nonaccrual Loans by Category (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Financing Receivable Recorded Investment Past Due [Line Items]
Total nonaccrual loans	$ 2,521	$ 2,120
Commercial and Industrial Loans
Financing Receivable Recorded Investment Past Due [Line Items]
Total nonaccrual loans	1,170	372
Residential Real Estate
Financing Receivable Recorded Investment Past Due [Line Items]
Total nonaccrual loans	74	88
Commercial Real Estate
Financing Receivable Recorded Investment Past Due [Line Items]
Total nonaccrual loans	$ 1,277	$ 1,660

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Loans and Allowance for Loan Losses - Summary of Loans by Credit Quality Risk Rating (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017	Sep. 30, 2017
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	$ 745,136	$ 657,135	$ 631,055
Less net deferred origination fees	(816)	(347)
Loans receivable	744,320	656,788
Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	85,554	88,688	87,418
Construction, Land and Land Development
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	62,222	41,641	41,098
Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	91,995	87,031	66,962
Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	502,782	437,717	433,707
Consumer and Other Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	2,583	2,058	$ 1,870
Pass
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	735,060	649,271
Pass | Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	81,751	87,247
Pass | Construction, Land and Land Development
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	59,707	39,081
Pass | Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	91,796	86,464
Pass | Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	499,223	434,421
Pass | Consumer and Other Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	2,583	2,058
Other Loans Especially Mentioned
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	7,170	5,051
Other Loans Especially Mentioned | Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	2,248	376
Other Loans Especially Mentioned | Construction, Land and Land Development
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	2,515	2,560
Other Loans Especially Mentioned | Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	125	479
Other Loans Especially Mentioned | Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	2,282	1,636
Sub-Standard
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	2,906	2,305
Sub-Standard | Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	1,555	902
Sub-Standard | Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	74	88
Sub-Standard | Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	$ 1,277	1,315
Doubtful
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross		508
Doubtful | Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross		163
Doubtful | Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross		$ 345

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Loans and Allowance for Loan Losses - Summary of Allocation of Allowance for Loan Loss as well as Activity in Allowance for Loan Loss Attributed to Various Segments in Loan (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017	Dec. 31, 2017
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	$ 8,540	$ 7,889	$ 8,017	$ 7,544
Provision for loan losses or (recapture)	508	65	1,401	504
Loans receivable allowance including provision losses or (recapture)	9,048	7,954	9,418	8,048
Loans charged-off	(6)	(9)	(385)	(200)
Recoveries of loans previously charged-off	69	2	78	99
Net (charge-offs) recoveries	63	(7)	(307)	(101)
ALLL Balance	9,111	7,947	9,111	7,947
Allowances
Amounts allocated to Individually evaluated for impairment	117	60	117	60
Amounts allocated to Collectively evaluated for impairment	8,994	7,887	8,994	7,887	$ 8,017
ALLL Balance	9,111	7,947	9,111	7,947
Loans
Loans individually evaluated for impairment	2,521	217	2,521	217	2,814
Loans collectively evaluated for impairment	742,615	630,838	742,615	630,838	654,321
Total Loans	745,136	631,055	745,136	631,055	657,135
Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	1,821	1,881	1,864	1,606
Provision for loan losses or (recapture)	(10)	26	226	314
Loans receivable allowance including provision losses or (recapture)	1,811	1,907	2,090	1,920
Loans charged-off		(6)	(281)	(20)
Recoveries of loans previously charged-off	1	1	3	2
Net (charge-offs) recoveries	1	(5)	(278)	(18)
ALLL Balance	1,812	1,902	1,812	1,902
Allowances
Amounts allocated to Individually evaluated for impairment	117	60	117	60
Amounts allocated to Collectively evaluated for impairment	1,695	1,842	1,695	1,842	1,864
ALLL Balance	1,812	1,902	1,812	1,902
Loans
Loans individually evaluated for impairment	1,170	217	1,170	217	1,065
Loans collectively evaluated for impairment	84,384	87,201	84,384	87,201	87,623
Total Loans	85,554	87,418	85,554	87,418	88,688
Construction, Land and Land Development
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	1,238	1,167	1,063	1,398
Provision for loan losses or (recapture)	423	(114)	598	(440)
Loans receivable allowance including provision losses or (recapture)	1,661	1,053	1,661	958
Recoveries of loans previously charged-off				95
Net (charge-offs) recoveries				95
ALLL Balance	1,661	1,053	1,661	1,053
Allowances
Amounts allocated to Collectively evaluated for impairment	1,661	1,053	1,661	1,053	1,063
ALLL Balance	1,661	1,053	1,661	1,053
Loans
Loans collectively evaluated for impairment	62,222	41,098	62,222	41,098	41,641
Total Loans	62,222	41,098	62,222	41,098	41,641
Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	1,395	1,181	1,343	1,495
Provision for loan losses or (recapture)	7	(62)	59	(376)
Loans receivable allowance including provision losses or (recapture)	1,402	1,119	1,402	1,119
Recoveries of loans previously charged-off	65		65
Net (charge-offs) recoveries	65		65
ALLL Balance	1,467	1,119	1,467	1,119
Allowances
Amounts allocated to Collectively evaluated for impairment	1,467	1,119	1,467	1,119	1,343
ALLL Balance	1,467	1,119	1,467	1,119
Loans
Loans individually evaluated for impairment	74		74		89
Loans collectively evaluated for impairment	91,921	66,962	91,921	66,962	86,942
Total Loans	91,995	66,962	91,995	66,962	87,031
Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	2,303	1,968	2,014	1,474
Provision for loan losses or (recapture)	164	42	537	709
Loans receivable allowance including provision losses or (recapture)	2,467	2,010	2,551	2,183
Loans charged-off			(84)	(173)
Net (charge-offs) recoveries			(84)	(173)
ALLL Balance	2,467	2,010	2,467	2,010
Allowances
Amounts allocated to Collectively evaluated for impairment	2,467	2,010	2,467	2,010	2,014
ALLL Balance	2,467	2,010	2,467	2,010
Loans
Loans individually evaluated for impairment	1,277		1,277		1,660
Loans collectively evaluated for impairment	501,505	433,707	501,505	433,707	436,057
Total Loans	502,782	433,707	502,782	433,707	437,717
Consumer and Other Loans
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	52	37	43	26
Provision for loan losses or (recapture)	39	3	55	17
Loans receivable allowance including provision losses or (recapture)	91	40	98	43
Loans charged-off	(6)	(3)	(20)	(7)
Recoveries of loans previously charged-off	3	1	10	2
Net (charge-offs) recoveries	(3)	(2)	(10)	(5)
ALLL Balance	88	38	88	38
Allowances
Amounts allocated to Collectively evaluated for impairment	88	38	88	38	43
ALLL Balance	88	38	88	38
Loans
Loans collectively evaluated for impairment	2,583	1,870	2,583	1,870	2,058
Total Loans	2,583	1,870	2,583	1,870	2,058
Unallocated
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	1,731	1,655	1,690	1,545
Provision for loan losses or (recapture)	(115)	170	(74)	280
Loans receivable allowance including provision losses or (recapture)	1,616	1,825	1,616	1,825
ALLL Balance	1,616	1,825	1,616	1,825
Allowances
Amounts allocated to Collectively evaluated for impairment	1,616	1,825	1,616	1,825	$ 1,690
ALLL Balance	$ 1,616	$ 1,825	$ 1,616	$ 1,825

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Deposits - Composition of Consolidated Deposits (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Time Deposits By Maturity [Abstract]
Demand, noninterest bearing	$ 285,979	$ 242,358
Now and money market	340,930	326,412
Savings	49,430	43,876
Time deposits less than $250,000	63,715	60,445
Time deposits $250,000 and over	34,668	30,204
Total deposits	$ 774,722	$ 703,295

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Deposits - Schedule of Maturity Distribution of Time Deposits (Details) $ in Thousands	Sep. 30, 2018 USD ($)
Deposits [Abstract]
Twelve months	$ 57,755
One to two years	28,412
Two to three years	8,652
Three to four years	1,560
Four to five years	2,004
Total time deposits	$ 98,383

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Stock-Based Compensation - Additional Information (Details)		1 Months Ended	3 Months Ended		9 Months Ended		12 Months Ended
	Apr. 30, 2018 shares	Jan. 31, 2018 Director $ / shares shares	Sep. 30, 2018 USD ($) $ / shares shares	Sep. 30, 2017 USD ($)	Sep. 30, 2018 USD ($) $ / shares shares	Sep. 30, 2017 USD ($)	Dec. 31, 2017 Director $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options granted to employees					116,046
Total intrinsic value of options exercise price | $			$ 106,000		$ 173,000
Total unrecognized compensation cost related to nonvested stock options granted | $			$ 1,621,000		$ 1,621,000
Unrecognized compensation cost related to nonvested stock options granted, weighted-average period					7 years
Compensation expense | $					$ 231,000	$ 213,000
Restricted Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Number of nonvested shares			1,200		1,200		1,400
Weighted average grant date fair value | $ / shares			$ 6.25		$ 6.25		$ 6.25
2018 Omnibus Incentive Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock, additional shares authorized	0
Shares available to be granted			500,000		500,000
2018 Omnibus Incentive Plan | Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate of common stock, shares authorized	500,000
2006 Plan | Nonqualified Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options granted to employees		28,546
Stock options vesting period		10 years
2006 Plan | Qualified Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options granted to employees		87,500
Stock options vesting period		10 years
Director's Stock Bonus Plan | Restricted Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options vesting period					2 years
Attainment of retirement age of directors					72 years
Amended bonus plan expiration date					May 31, 2018
Compensation expense | $			$ 8,000	$ 8,000	$ 23,000	$ 23,000
Director's Stock Bonus Plan | Restricted Stock Awards | Director
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Market value of shares grants per year | $					5,000
Number of shares granted		4,405					4,808
Number of directors | Director		5					5
Estimated fair value per share | $ / shares		$ 7.10					$ 6.50
Director's Stock Bonus Plan | Restricted Stock Awards | Board Chairman
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Market value of shares grants per year | $					7,500
Director's Stock Bonus Plan | Restricted Stock Awards | Committee Chairmen
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Market value of shares grants per year | $					$ 6,250
Director's Stock Bonus Plan | Maximum | Restricted Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares available to be granted			50,000		50,000
Director's Stock Bonus Plan | Minimum | Restricted Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Percentage of scheduled board meetings attended by directors during prior year			75.00%		75.00%

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Stock-Based Compensation - Summary of Assumptions used to Estimate the Value of Options Granted (Details) - 2018 Omnibus Incentive Plan - $ / shares	9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term	10 years	10 years
Expected stock price volatility	41.89%	43.41%
Risk-free interest rate	2.66%	2.51%
Expected dividends	0.00%	0.00%
Weighted average grant date fair value	$ 3.95	$ 3.70

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Stock-Based Compensation - Summary of Stock Option Activity (Details) - $ / shares	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]
Outstanding, Shares, Beginning balance	668,934
Granted, Shares	116,046
Exercised, Shares	(55,670)
Forfeited or expired, Shares	(47,120)
Outstanding, Shares, Ending balance	682,190	668,934
Exercisable, Shares	207,035
Outstanding, Weighted Average Exercise Price, Beginning balance	$ 6.12
Granted, Weighted Average Exercise Price	7.10
Exercised, Weighted Average Exercise Price	6.09
Forfeited or expired, Weighted Average Exercise price	6.54
Outstanding, Weighted Average Exercise Price, Ending balance	6.26	$ 6.12
Exercisable, Weighted Average Exercise Price	$ 5.97
Outstanding, Weighted Average Remaining Contractual Term	6 years 6 months 29 days	6 years 4 months 9 days
Exercisable, Weighted Average Remaining Contractual Term	5 years 2 months 8 days

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Shareholders' Equity - Additional Information (Details)	Sep. 26, 2018 shares	May 04, 2018 shares	Sep. 30, 2018 shares	Dec. 31, 2017 shares	Dec. 31, 2016 shares
Class Of Stock [Line Items]
Reverse stock split, description		1-for-5 reverse stock split
Reverse stock split, conversion ratio		0.2
Number of issued shares before reverse stock split		46,268,359
Number of issued shares after reverse stock split		9,254,073
Number of additional shares issued to shareholders with fractional shares		401
Preferred stock, shares authorized			25,000,000	25,000,000	500,000
Preferred stock, shares issued			0	0
Preferred stock, shares outstanding			0	0
Common stock, shares authorized			300,000,000	300,000,000	100,000,000
Increase in authorized number of shares of common stock				200,000,000
Common stock, shares, issued			11,886,473	8,887,457
Common stock, shares, outstanding			11,886,473	8,887,457
Class B Nonvoting Common Stock Exchanged for Voting Common Stock
Class Of Stock [Line Items]
Shares converted to common stock	100,000
Class C Nonvoting Common Stock Exchanged for Voting Common Stock
Class Of Stock [Line Items]
Shares converted to common stock	261,444
Class B Nonvoting Common Stock
Class Of Stock [Line Items]
Common stock, shares authorized				1,000,000
Common stock, shares, issued				100,000
Common stock, shares, outstanding				100,000
Class C Nonvoting Common Stock
Class Of Stock [Line Items]
Common stock, shares authorized				100,000,000
Common stock, shares, issued				261,444
Common stock, shares, outstanding				261,444

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Fair Value Measurements - Summary of Estimated Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Financial assets
Other investments	$ 3,766	$ 3,680
Financial liabilities
FHLB advances	20,000	20,000
Carrying Value
Financial assets
Cash and due from banks	16,837	13,787
Interest earning deposits with other banks	98,671	75,964
Investment securities	37,039	38,336
Other investments	3,766	3,680
Loans receivable, net	735,209	648,771
Accrued interest receivable	2,299	2,274
Financial liabilities
Deposits	774,722	703,295
FHLB advances	20,000	20,000
Subordinated debt	9,961	9,950
Junior subordinated debentures	3,581	3,579
Capital lease	88	137
Accrued interest payable	257	228
Estimated Fair Value
Financial assets
Cash and due from banks	16,837	13,787
Interest earning deposits with other banks	98,671	75,891
Investment securities	36,955	38,301
Other investments	3,766	3,680
Loans receivable, net	711,772	636,334
Accrued interest receivable	2,299
Financial liabilities
Deposits	773,497	702,525
FHLB advances	20,000	20,000
Subordinated debt	9,570	9,601
Junior subordinated debentures	3,112	2,978
Capital lease	86	134
Accrued interest payable	257
Estimated Fair Value | Level 1
Financial assets
Cash and due from banks	16,837	13,787
Interest earning deposits with other banks	98,671	75,891
Investment securities	32,329	33,396
Estimated Fair Value | Level 2
Financial assets
Investment securities	4,626	4,905
Other investments	3,766	3,680
Accrued interest receivable	2,299	2,274
Financial liabilities
Deposits	773,497	702,525
FHLB advances	20,000	20,000
Subordinated debt	9,570	9,601
Junior subordinated debentures	3,112	2,978
Capital lease	86	134
Accrued interest payable	257	228
Estimated Fair Value | Level 3
Financial assets
Loans receivable, net	$ 711,772	$ 636,334

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Fair Value Measurements - Summary of Assets Measured at Fair Value on Recurring Basis (Details) - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	$ 35,749	$ 36,927
Estimated Fair Value | Recurring
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	35,749	36,927
Estimated Fair Value | Recurring | U.S. Treasury Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	32,329	33,396
Estimated Fair Value | Recurring | U.S. Government Agencies
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	2,941	2,970
Estimated Fair Value | Recurring | U.S. Agency Collateralized Mortgage Obligations
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	182	260
Estimated Fair Value | Recurring | U.S. Agency Residential Mortgage-Backed Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	43	81
Estimated Fair Value | Recurring | Municipals
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	254	220
Estimated Fair Value | Recurring | Level 1
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	32,329	33,396
Estimated Fair Value | Recurring | Level 1 | U.S. Treasury Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	32,329	33,396
Estimated Fair Value | Recurring | Level 2
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	3,420	3,531
Estimated Fair Value | Recurring | Level 2 | U.S. Government Agencies
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	2,941	2,970
Estimated Fair Value | Recurring | Level 2 | U.S. Agency Collateralized Mortgage Obligations
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	182	260
Estimated Fair Value | Recurring | Level 2 | U.S. Agency Residential Mortgage-Backed Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	43	81
Estimated Fair Value | Recurring | Level 2 | Municipals
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	$ 254	$ 220

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Fair Value Measurements - Summary of Assets and Liabilities Classified as Level 3 and Measured at Fair Value on Nonrecurring Basis (Details) - Level 3	9 Months Ended	12 Months Ended
	Sep. 30, 2018	Dec. 31, 2017
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Valuation Technique	Collateral valuations
Unobservable Inputs	Discount to appraised value
Measurement Input, Discount Rate
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Weighted Average Rate	9.00%	13.00%

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Fair Value Measurements - Summary of Financial Assets and Liabilities Measured at Fair Value on Nonrecurring Basis (Details) - Nonrecurring - USD ($) $ in Thousands	Sep. 30, 2018	Dec. 31, 2017
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	$ 493	$ 508
Impaired Loans
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	493	508
Level 3
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	493	508
Level 3 | Impaired Loans
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	$ 493	$ 508

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Earnings Per Common Share - Schedule of Computation of Basic and Diluted Earnings Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Earnings Per Share [Abstract]
Net Income	$ 2,602	$ 1,904	$ 6,646	$ 5,093
Basic weighted average number common shares outstanding	11,338,320	9,235,344	9,956,449	9,233,421
Dilutive effect of share-based compensation	271,658	3,464	94,966	2,754
Diluted weighted average number common shares outstanding	11,609,978	9,238,808	10,051,415	9,236,175
Basic earnings per share	$ 0.23	$ 0.21	$ 0.67	$ 0.55
Diluted earnings per share	$ 0.22	$ 0.21	$ 0.66	$ 0.55

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Earnings Per Common Share - Additional Information (Details) - shares	3 Months Ended		9 Months Ended
	Sep. 30, 2018	Sep. 30, 2017	Sep. 30, 2018	Sep. 30, 2017
Earnings Per Share [Abstract]
Antidilutive securities excluded from computation of earnings per share, amount	0	599,026	261,051	649,396