ck1437958-10q_20220630.htm

0001564590-22-028122.txt : 20220805 0001564590-22-028122.hdr.sgml : 20220805 20220805092620 ACCESSION NUMBER: 0001564590-22-028122 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 75 CONFORMED PERIOD OF REPORT: 20220630 FILED AS OF DATE: 20220805 DATE AS OF CHANGE: 20220805 FILER: COMPANY DATA: COMPANY CONFORMED NAME: COASTAL FINANCIAL CORP CENTRAL INDEX KEY: 0001437958 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 000000000 STATE OF INCORPORATION: WA FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-38589 FILM NUMBER: 221138885 BUSINESS ADDRESS: STREET 1: 2817 COLBY AVENUE CITY: EVERETT STATE: WA ZIP: 98201 BUSINESS PHONE: 425-257-1652 MAIL ADDRESS: STREET 1: 2817 COLBY AVENUE CITY: EVERETT STATE: WA ZIP: 98201 10-Q 1 ck1437958-10q_20220630.htm 10-Q ck1437958-10q_20220630.htm

level452.9 No

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended June 30, 2022

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

For the transition period from ______________ to _____________

Commission file number: 001-38589

COASTAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Washington	56-2392007
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5415 Evergreen Way, Everett, Washington	98203
(Address of principal executive offices)	(Zip Code)

(425) 257-9000

(Registrant’s telephone number, including area code)

Not Applicable

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

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


Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, no par value per share	CCB	Nasdaq Global Select Market

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and emerging growth company in Rule 12b-2 of the Exchange Act.

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

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

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

As of August 2, 2022, there were 12,950,853 shares of the issuer’s common stock outstanding.

COASTAL FINANCIAL CORPORATION

Table of Contents

		Page No.
Part I. Financial Information

Item 1.	Condensed Consolidated Financial Statements (unaudited)	4

	Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021 (unaudited)	4

	Condensed Consolidated Statements of Income for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	5

	Condensed Consolidated Statements of Comprehensive Income for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	6

	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three and Six Months Ended June 30, 2022 and 2021 (unaudited)	7

	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2022 and 2021 (unaudited)	8

	Notes to Condensed Consolidated Financial Statements (unaudited)	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	30

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	80

Item 4.	Controls and Procedures	81

Part II. Other Information

Item 1.	Legal Proceedings	82

Item 1A.	Risk Factors	82

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	82

Item 3.	Defaults Upon Senior Securities	82

Item 4.	Mine Safety Disclosures	82

Item 5.	Other Information	82

Item 6.	Exhibits	82

Forward-Looking Statements

This report may contain forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our management’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. All forward-looking statements, expressed or implied, included herewith are expressly qualified in their entirety by the cautionary statements contained or referred to herein. The inclusion of forward-looking information in this report should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs.

Factors that may affect our results are disclosed in “Item 1A. Risk Factors” in Part II of this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (“Form 10-K”). Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the difficult market conditions and unfavorable economic conditions and uncertainties associated with the coronavirus, and variants thereof (“COVID-19”) pandemic, including the emergence of variant strains of the virus, particularly in the markets in which we operate and in which our loans are concentrated, including declines in housing markets, an increase in unemployment levels and slowdowns in economic growth; our expected future financial results; the overall health of the local and national real estate market; the credit risk associated with our loan portfolio, such as possible additional loan losses and impairment of collectability of loans as a result of the COVID-19 pandemic and policies and programs implemented by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), including its automatic loan forbearance provisions and the effects on our loan portfolio from our Paycheck Protection Program (“PPP”) lending activities, specifically with our commercial real estate loans; our level of nonperforming assets and the costs associated with resolving problem loans; business and economic conditions generally and in the financial services industry, nationally and within our market area, including as a result of the COVID-19 pandemic, particularly in the markets in which we operate and in which our loans are concentrated; our ability to maintain an adequate level of allowance for loan losses; our ability to successfully manage liquidity risk; our ability to implement our growth strategy and manage costs effectively; the composition of our senior leadership team and our ability to attract and retain key personnel; our ability to raise additional capital to implement our business plan; changes in market interest rates and impacts of such changes on our profits and business; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; our ability to maintain our reputation; increased competition in the financial services industry; regulatory guidance on commercial lending concentrations; our relationship with broker-dealers and digital financial service providers; the effectiveness of our risk management framework; the costs and obligations associated with being a publicly traded company; the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; the extensive regulatory framework that applies to us; the impact of recent and future legislative and regulatory changes and economic stimulus programs; and other changes in banking, securities and tax laws and regulations, and their application by our regulators; the impact on our operations due to epidemic illnesses, natural or man-made disasters, such as wildfires, the effects of regional or national civil unrest, and political developments that may disrupt or increase volatility in securities or otherwise affect economic conditions; the impact of benchmark interest rate reform in the U.S. and implementation of alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”), to the London Interbank Offered Rate (“LIBOR”); fluctuations in the value of the securities held in our securities portfolio; governmental monetary and fiscal policies; material weaknesses in our internal control over financial reporting; and our success at managing the risks involved in the foregoing items.

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

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(dollars in thousands)

ASSETS
	June 30,			December 31,
	2022			2021
Cash and due from banks	$	40,750		$	14,496
Interest earning deposits with other banks (restricted cash of $0 at June 30, 2022 and December 31, 2021)		364,939			798,665
Investment securities, available for sale, at fair value		108,560			35,327
Investment securities, held to maturity, at amortized cost		1,261			1,296
Other investments		10,379			8,478
Loans held for sale, at par		60,000			-
Loans receivable		2,334,354			1,742,735
Allowance for loan losses		(49,358	)		(28,632	)
Total loans receivable, net		2,284,996			1,714,103
Premises and equipment, net		18,670			17,219
Operating lease right-of-use assets		5,565			6,105
Accrued interest receivable		12,430			8,105
Bank-owned life insurance, net		12,485			12,254
Deferred tax asset, net		11,709			6,818
Other assets		37,978			12,651
Total assets	$	2,969,722		$	2,635,517

LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits	$	2,697,305		$	2,363,787
Federal Home Loan Bank ("FHLB") advances		-			24,999
Subordinated debt
Principal amount $25,000 (less unamortized debt issuance costs of $676 and $712 ) at June 30, 2022 and December 31, 2021, respectively		24,324			24,288
Junior subordinated debentures
Principal amount $3,609 (less unamortized debt issuance costs of $22 and $23 at June 30, 2022 and December 31, 2021, respectively)		3,587			3,586
Deferred compensation		680			744
Accrued interest payable		330			357
Operating lease liabilities		5,786			6,320
Other liabilities		20,049			10,214
Total liabilities		2,752,061			2,434,295
SHAREHOLDERS’ EQUITY
Preferred stock, no par value:
Authorized: 25,000,000 shares at June 30, 2022 and December 31, 2021; issued and outstanding: zero shares at June 30, 2022 and December 31, 2021		-			-
Common stock, no par value:
Authorized: 300,000,000 shares at June 30, 2022 and December 31, 2021; 12,948,623 shares at June 30, 2022 issued and outstanding and 12,875,315 shares at December 31, 2021 issued and outstanding		123,226			121,845
Retained earnings		95,779			79,373
Accumulated other comprehensive (loss) income, net of tax		(1,344	)		4
Total shareholders’ equity		217,661			201,222
Total liabilities and shareholders’ equity	$	2,969,722		$	2,635,517

See accompanying Notes to Condensed Consolidated Financial Statements.

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except for per share data)

	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	40,166	$	19,365	$	69,798	$	37,595
Interest on interest earning deposits with other banks		956		74		1,358		144
Interest on investment securities		563		24		634		52
Dividends on other investments		134		108		171		138
Total interest income		41,819		19,571		71,961		37,929
INTEREST EXPENSE
Interest on deposits		1,673		628		2,226		1,288
Interest on borrowed funds		260		331		581		714
Total interest expense		1,933		959		2,807		2,002
Net interest income		39,886		18,612		69,154		35,927
PROVISION FOR LOAN LOSSES		14,094		361		27,036		718
Net interest income after provision for loan losses		25,792		18,251		42,118		35,209
NONINTEREST INCOME
Deposit service charges and fees		988		949		1,872		1,812
Loan referral fees		208		806		810		1,403
Gain on sales of loans, net		-		31		-		161
Mortgage broker fees		85		253		208		515
Gain on sale of bank branch including deposits and loans, net		-		1,263		-		1,263
Other income		311		56		576		240
Noninterest income, excluding BaaS program income and BaaS indemnification income		1,592		3,358		3,466		5,394
Servicing and other BaaS fees		1,159		1,029		2,328		1,613
Transaction fees		814		93		1,307		239
Interchange fees		628		110		1,060		145
Reimbursement of expenses		618		192		990		375
BaaS program income		3,219		1,424		5,685		2,372
BaaS credit enhancements		14,207		-		27,282		-
BaaS fraud enhancements		6,474		-		11,045		-
BaaS indemnification income		20,681		-		38,327		-
Total noninterest income		25,492		4,782		47,478		7,766
NONINTEREST EXPENSE
Salaries and employee benefits		12,238		8,913		23,323		16,599
Occupancy		1,083		990		2,219		2,048
Software licenses, maintenance and subscriptions		1,108		543		2,160		1,027
Legal and professional fees		1,002		626		1,710		1,386
Data processing		1,010		734		1,819		1,431
Excise taxes		564		388		913		747
Federal Deposit Insurance Corporation ("FDIC") assessments		855		225		1,459		420
Director and staff expenses		377		318		721		538
Marketing		74		132		173		214
Other expense		1,155		763		2,523		1,484
Noninterest expense, excluding BaaS loan and BaaS fraud expense		19,466		13,632		37,020		25,894
BaaS loan expense		12,229		99		20,519		189
BaaS fraud expense		6,474		-		11,045		-
BaaS loan and fraud expense		18,703		99		31,564		189
Total noninterest expense		38,169		13,731		68,584		26,083
Income before provision for income taxes		13,115		9,302		21,012		16,892
PROVISION FOR INCOME TAXES		2,939		2,289		4,606		3,861
NET INCOME	$	10,176	$	7,013	$	16,406	$	13,031
Basic earnings per common share	$	0.79	$	0.59	$	1.27	$	1.09
Diluted earnings per common share	$	0.76	$	0.56	$	1.22	$	1.05
Weighted average number of common shares outstanding:
Basic		12,928,061		11,984,927		12,913,485		11,972,916
Diluted		13,442,013		12,459,467		13,458,706		12,423,659

See accompanying Notes to Condensed Consolidated Financial Statements.

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands)

	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
NET INCOME	$	10,176		$	7,013		$	16,406		$	13,031
OTHER COMPREHENSIVE LOSS, before tax
Securities available-for-sale
Unrealized holding loss during the period		(1,351	)		(28	)		(1,701	)		(41	)
Income tax benefit related to unrealized holding loss		282			6			353			9
OTHER COMPREHENSIVE LOSS, net of tax		(1,069	)		(22	)		(1,348	)		(32	)
COMPREHENSIVE INCOME	$	9,107		$	6,991		$	15,058		$	12,999

See accompanying Notes to Condensed Consolidated Financial Statements.

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

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

(dollars in thousands)

	Shares of Common Stock		Amount of Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
BALANCE, March 31, 2021		11,988,636	$	88,329	$	58,386	$	24		$	146,739
Net income		-		-		7,013		-			7,013
Issuance of restricted stock awards		4,736		-		-		-			-
Vesting of restricted stock units		425		-		-		-			-
Forfeiture of restricted stock awards		-		-		-		-			-
Exercise of stock options		13,872		99		-		-			99
Stock-based compensation		-		271		-		-			271
Other comprehensive loss, net of tax		-		-		-		(22	)		(22	)
BALANCE, June 30, 2021		12,007,669	$	88,699	$	65,399	$	2		$	154,100

BALANCE, December 31, 2020		11,954,327	$	87,815	$	52,368	$	34		$	140,217
Net income		-		-		13,031		-			13,031
Issuance of restricted stock awards		10,714		-		-		-			-
Vesting of restricted stock units		7,851		-		-		-			-
Exercise of stock options		34,777		250		-		-			250
Stock-based compensation		-		634		-		-			634
Other comprehensive loss, net of tax		-		-		-		(32	)		(32	)
BALANCE, June 30, 2021		12,007,669	$	88,699	$	65,399	$	2		$	154,100

BALANCE, March 31, 2022		12,928,548	$	122,592	$	85,603	$	(275	)	$	207,920
Net income		-		-		10,176		-			10,176
Issuance of restricted stock awards		10,396		-		-		-			-
Vesting of restricted stock units		349		-		-		-			-
Exercise of stock options		9,330		69		-		-			69
Stock-based compensation		-		565		-		-			565
Other comprehensive loss		-		-		-		(1,069	)		(1,069	)
BALANCE, June 30, 2022		12,948,623	$	123,226	$	95,779	$	(1,344	)	$	217,661

BALANCE, December 31, 2021		12,875,315	$	121,845	$	79,373	$	4		$	201,222
Net income		-		-		16,406		-			16,406
Issuance of restricted stock awards		10,396		-		-		-			-
Vesting of restricted stock units		26,637		-		-		-			-
Exercise of stock options		36,275		277		-		-			277
Stock-based compensation		-		1,104		-		-			1,104
Other comprehensive loss		-		-		-		(1,348	)		(1,348	)
BALANCE, June 30, 2022		12,948,623	$	123,226	$	95,779	$	(1,344	)	$	217,661

See accompanying Notes to Condensed Consolidated Financial Statements.

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

	Six months ended June 30,
	2022			2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	16,406		$	13,031
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		27,036			718
Depreciation and amortization		845			802
Loss on disposition of fixed assets		35			-
Decrease in operating lease right-of-use assets		540			524
Decrease in operating lease liabilities		(534	)		(519	)
Gain on sales of loans		-			(161	)
Proceeds from sale of loans related to sale of bank branch		-			2,415
Net (discount accretion) premium amortization on investment securities		(37	)		19
Stock-based compensation		1,104			634
Gain on sale of bank branch, including deposits and loans		-			(1,263	)
Increase in bank-owned life insurance value		(178	)		(4,974	)
Deferred tax benefit		(4,533	)		-
Net change in CCBX receivable		(24,851	)		-
Net change in other assets and liabilities		4,979			(407	)
Total adjustments		4,406			(2,212	)
Net cash provided by operating activities		20,812			10,819
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest earning deposits with other banks		433,726			(107,264	)
Purchase of investment securities available for sale		(134,912	)		(19,998	)
Change in other investments, net		(1,901	)		(780	)
Principal paydowns of investment securities available-for-sale		12			18
Principal paydowns of investment securities held-to-maturity		34			725
Maturities and calls of investment securities available-for-sale		60,000			15,000
Purchase of bank owned life insurance		(53	)		-
Proceeds from sales of loans held for sale		20,059			-
Purchase of loans		(165,456	)		-
Increase in loans receivable, net		(512,532	)		(115,204	)
Net cash transfer for branch sale		-			(19,980	)
Purchases of premises and equipment, net		(2,331	)		(1,796	)
Net cash used by investing activities		(303,354	)		(249,279	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and money market, and savings		340,502			411,958
Net decrease in time deposits		(6,984	)		(7,524	)
Net repayment from long term FHLB borrowing		(24,999	)		-
Net advances from Paycheck Protection Program Liquidity Facility		-			(153,716	)
Proceeds from exercise of stock options		277			250
Net cash provided by financing activities		308,796			250,968
NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH		26,254			12,508
CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year		14,496			18,965
CASH, DUE FROM BANKS AND RESTRICTED CASH, end of quarter	$	40,750		$	31,473
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest paid	$	2,834		$	2,354
Income taxes paid		5,247			4,269
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Fair value adjustment of securities available-for-sale, gross	$	(1,705	)	$	(41	)
In conjunction with ASU 2016-02 as detailed in Note 6 to the Unaudited Consolidated Financial Statements, the following assets and liabilities were recognized:
Operating lease right-of-use assets	$	-		$	41
Operating lease liabilities	$	-		$	(41	)
Non-cash investing and financing activities:
Transfer from loans to loans held for sale	$	80,058		$	-

See accompanying Notes to Condensed Consolidated Financial Statements.

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

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

Nature of operations - Coastal Financial Corporation (“Corporation” or “Company”) is a registered bank holding company whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC (“LLC”). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank that is a member bank of the Federal Reserve system. Arlington Olympic LLC was formed in 2019 and owns the Company’s Arlington branch site, which the Bank leases from the LLC.

We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. The Company’s business is conducted through two reportable segments: The community bank and CCBX. The primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium-sized businesses, professionals, and individuals in the broader Puget Sound region in the state of Washington through its 14 branches in Snohomish, Island and King Counties, and through the Internet and its mobile banking application. The CCBX segment provides Banking as a Service (“BaaS”) that allows our broker dealers and digital financial service partners to offer their customers banking services. Through CCBX’s partners the Company is able to offer banking services and products across the nation.

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

Financial statement presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim reporting requirements and with instructions to Form 10-Q and Article 10 of Regulation S-X, and therefore do not include all the information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 14, 2022. Operating results for the three months and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for future periods.

Amounts presented in the consolidated financial statements and footnote tables are rounded and presented in thousands of dollars except per-share amounts, which are presented in dollars. In the narrative footnote discussion, amounts are rounded to thousands and presented in dollars.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying consolidated financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation.

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

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

Accounting policy update– During the quarter ended June 30, 2022, the Company transferred $80.1 million in CCBX loans receivable to loans held for sale. These CCBX loans held for sale consist of the portion of CCBX partner loans that the Company intends to sell back to the originating CCBX partner at par. As of June 30, 2022 there were $60.0 million in CCBX partner loans held for sale recorded at par, compared to zero at December 31, 2021.

Community bank loans held-for-sale consist of the guaranteed portion of SBA loans and United States Department of Agriculture (“USDA”) loans the Company intends to sell after origination and are reflected at the lower of aggregate cost or fair value. Loans are

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

Subsequent Events - The Company has evaluated events and transactions subsequent to June 30, 2022 for potential recognition or disclosure.

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

Note 2 - Recent accounting standards

Recent Accounting Guidance Not Yet Effective

In September 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. The Company’s implementation of ASU 2016-13 will be effective January 1, 2023. The Company is actively assessing the data and the model needs and is evaluating the impact of adopting the amendment. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period, January 2023, in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. The actual magnitude of the change will be impacted by the growth, composition and performance of the loan portfolio and economic conditions at January 1, 2023.

In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.

Note 3 - Investment Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands; unaudited)
June 30, 2022
Available-for-sale
U.S. Treasury securities	$	109,950	$	-	$	(1,699	)	$	108,251
U.S. Agency collateralized mortgage obligations		59		-		(2	)		57
U.S. Agency residential mortgage-backed securities		1		-		-			1
Municipal bonds		251		-		-			251
Total available-for-sale securities		110,261		-		(1,701	)		108,560
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,261		-		(97	)		1,164
Total investment securities	$	111,522	$	-	$	(1,798	)	$	109,724

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands; unaudited)
December 31, 2021
Available-for-sale
U.S. Treasury securities	$	34,999	$	-	$	(1	)	$	34,998
U.S. Agency collateralized mortgage obligations		68		2		-			70
U.S. Agency residential mortgage-backed securities		3		-		-			3
Municipal bonds		252		4		-			256
Total available-for-sale securities		35,322		6		(1	)		35,327
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,296		52		-			1,348
Total investment securities	$	36,618	$	58	$	(1	)	$	36,675

The amortized cost and fair value of debt securities at June 30, 2022, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers or the underlying borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands; unaudited)
June 30, 2022
Amounts maturing in
One year or less	$	9,997	$	9,993	$	-	$	-
After one year through five years		100,204		98,509		-		-
		110,201		108,502		-		-
U.S. Agency residential mortgage-backed securities and collateralized mortgage obligations		60		58		1,261		1,164
	$	110,261	$	108,560	$	1,261	$	1,164

Investments in debt securities with an amortized cost of $38.0 million and $36.0 million at June 30, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. During the quarter ended June 30, 2022, $25.0 million in U.S. Treasury securities matured. During the six months ended June 30, 2022, five U.S. Treasury securities were purchased for $135.0 million for their higher yielding return compared to cash on deposit with other banks, and $60.0 million in U.S. Treasury securities matured during the six months ended June 30, 2022.

There were no sales of securities during the three months ended June 30, 2022 or 2021.

There were eight securities with a $1.8 million unrealized loss as of June 30, 2022. There were four securities in an unrealized loss position as of December 31, 2021. The following table shows the investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position:

	Less Than 12 Months				12 Months or Greater				Total
	Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses		Fair Value		Gross Unrealized Losses
	(dollars in thousands; unaudited)
June 30, 2022
Available-for-sale
U.S. Treasury securities	$	108,251	$	1,699	$	-	$	-	$	108,251	$	1,699
U.S. Agency collateralized mortgage obligations		57		2		-		-		57		2
Total available-for-sale securities		108,308		1,701		-		-		108,308		1,701
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,164		97		-		-		1,164		97
Total investment securities	$	109,472	$	1,798	$	-	$	-	$	109,472	$	1,798

Management has evaluated the above securities and does not believe that any individual unrealized loss as of June 30, 2022, represents an other-than-temporary impairment (“OTTI”). Unrealized losses have not been recognized into income because management does not intend to sell and does not expect it will be required to sell the investments. The decline is largely due to changes in market conditions and interest rates, rather than credit quality. The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve. Management believes there is a high probability of collecting all contractual amounts due, because the majority of the securities in the portfolio are backed by government agencies or government sponsored enterprises. However, a recovery in value may not occur for some time, if at all, and may be delayed for greater than the one year time horizon or perhaps even until maturity.

Note 4 - Loans and Allowance for Loan Losses

During the quarter ended June 30, 2022 $80.1 million in CCBX loans were transferred to loans held for sale, with $20.1 million in loans sold, at par, during the quarter ended June 30, 2022; $60.0 million remains in loans held for sale as of June 30, 2022. Previously there were no loans held for sale. The loans held for sale are residential real estate secured lines of credit.

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

	June 30,			December 31,
	2022			2021
	(dollars in thousands; unaudited)
Commercial and industrial loans	$	401,964		$	419,060
Real estate loans:
Construction, land, and land development		225,512			183,594
Residential real estate		326,661			204,389
Commercial real estate		956,320			835,587
Consumer and other loans		430,083			108,871
Gross loans receivable		2,340,540			1,751,501
Net deferred origination fees and premiums		(6,186	)		(8,766	)
Loans receivable	$	2,334,354		$	1,742,735

Included in commercial and industrial loans are PPP loans of $16.4 million at June 30, 2022 and $111.8 million at December 31, 2021. PPP loans are 100% guaranteed by the Small Business Administration (“SBA”). PPP loans had net deferred origination fees of $396,000 as of June 30, 2022, and $3.6 million as of December 31, 2021. Also included in commercial and industrial loans as of June 30, 2022 and December 31, 2021, is $224.9 million and $202.9 million, respectively in capital call lines, provided to venture capital firms through one of our BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards by our BaaS client and the underwriting is reviewed and approved by the Bank on every line.

Included in consumer and other loans are overdrafts of $2.7 million and $1.3 million at June 30, 2022 and December 31, 2021, respectively.

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

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

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

The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans with remaining balances totaled $10.5 million and $12.8 million as of June 30, 2022 and December 31, 2021, respectively. Unamortized premiums totaled $181,000 and $223,000 as of June 30, 2022 and December 31, 2021, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $24.2 million and $27.9 million as of June 30, 2022 and December 31, 2021, respectively.

The Company purchased loans from a CCBX partner, at par, through agreements with that CCBX partner, and those loans had a remaining balance of $204.8 million as of June 30, 2022 and $59.7 million as of December 31, 2021. The Company recorded the small dollar consumer and business loans. As of June 30, 2022, $186.7 million is included in consumer and other loans and $18.1 million is included in commercial and industrial loans, compared to $59.4 million in consumer and other loans and $281,000 in commercial and industrial loans as of December 31, 2021.

The following is a summary of the Company’s loan portfolio segments:

Commercial and industrial loans – Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment of businesses located generally in the Company’s primary market area and capital calls on venture and investment funds. Also included in commercial and industrial loans are $18.1 million in unsecured CCBX partner loans. Loan types include PPP loans, revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. Also included in commercial and industrial loans are loans to other financial institutions. Additionally, the Company issues letters of credit on behalf of its customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers.

For the three months ended June 30, 2022, $224.9 million in CCBX capital call lines are included in commercial and industrial loans compared to $202.9 million at December 31, 2021. Capital call lines are provided to venture capital firms. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line/loan.

Construction, land and land development loans – The Company originates loans for the construction of 1-4 family, multifamily, and Commercial Real Estate (“CRE”) properties in the Company’s market area. Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. The Company occasionally originates land loans for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower’s ability to pay and the inability of the Company to recover its investment due to a material decline in the fair value of the underlying collateral.

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

For the three months ended June 30, 2022, $133.1 million in CCBX loans are included in residential real estate loans, compared to $36.9 million at December 31, 2021.

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

Consumer and other loans – The community bank originates a limited number of consumer loans, generally for banking customers only, which consist primarily of home equity lines of credit, saving account secured loans, and auto loans. CCBX originates consumer loans including credit cards, consumer term loans and secured and unsecured lines of credit. This loan category also includes overdrafts. Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying collateral

For the three months ended June 30, 2022, $428.2 million in CCBX loans are included in consumer and other loans compared to $106.8 million at December 31, 2021.

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

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands; unaudited)
June 30, 2022
Commercial and industrial loans	$	1,196	$	108	$	1,304	$	400,660	$	401,964		$	10
Real estate loans:
Construction, land and land development		-		67		67		225,445		225,512			-
Residential real estate		431		176		607		326,054		326,661			123
Commercial real estate		-		-		-		956,320		956,320			-
Consumer and other loans		18,863		5,447		24,310		405,773		430,083			5,447
	$	20,490	$	5,798	$	26,288	$	2,314,252	$	2,340,540		$	5,580
Less net deferred origination fees and premiums										(6,186	)
Loans receivable									$	2,334,354

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands; unaudited)
December 31, 2021
Commercial and industrial loans	$	259	$	38	$	297	$	418,763	$	419,060		$	-
Real estate loans:
Construction, land and land development		-		-		-		183,594		183,594			-
Residential real estate		809		94		903		203,486		204,389			39
Commercial real estate		-		-		-		835,587		835,587			-
Consumer and other loans		3,901		1,467		5,368		103,503		108,871			1,467
	$	4,969	$	1,599	$	6,568	$	1,744,933		1,751,501		$	1,506
Less net deferred origination fees and premiums										(8,766	)
Loans receivable									$	1,742,735

There were $5.8 million in loans past due 90 days or more and still accruing interest as of June 30, 2022, and $1.5 million as of December 31, 2021. The increase is attributed to installment/closed-end, and revolving/open-end consumer loans originated by CCBX lending partners which continue to accrue interest until 120 and 180 days past due, respectively.

The following table is a summary of information pertaining to impaired loans as of the period indicated. Loans originated by CCBX partners are reported using pool accounting and are not subject to impairment analysis, therefore CCBX loans are not included in this table.

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
	(dollars in thousands; unaudited)
June 30, 2022
Commercial and industrial loans	$	121	$	-	$	111	$	111	$	84
Real estate loans:
Construction, land and land development		68		67		-		67		-
Residential real estate		68		53		-		53		-
Total	$	257	$	120	$	111	$	231	$	84

December 31, 2021
Commercial and industrial loans	$	173	$	-	$	166	$	166	$	132
Real estate loans:
Residential real estate		69		55		-		55		-
Total	$	242	$	55	$	166	$	221	$	132

The following tables summarize the Company’s average recorded investment and interest income recognized on impaired loans by loan class for the three and six months ended June 30, 2022 and 2021:

	Three Months Ended
	June 30, 2022				June 30, 2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands; unaudited)
Commercial and industrial loans	$	120	$	-	$	485	$	-
Real estate loans:
Construction, land and land development		13		-		-		-
Residential real estate		54		-		170		-
Total	$	187	$	-	$	655	$	-

	Six Months Ended
	June 30, 2022				June 30, 2021
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands; unaudited)
Commercial and industrial loans	$	136	$	-	$	503	$	-
Real estate loans:
Construction, land and land development		9		-		-		-
Residential real estate		54		-		171		-
Total	$	199	$	-	$	674	$	-

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

No loans were restructured in the three and six months ended June 30, 2022 and 2021 that qualified as TDRs. The Company has no commitments to loan additional funds to borrowers whose loans were classified as TDRs at June 30, 2022, as there were no outstanding TDRs at June 30, 2022.

Generally, the accrual of interest on community bank loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due or when they are 90 days past due as to either principal or interest, unless they are well secured and in the process of collection. Installment/closed-end, and revolving/open-end consumer loans originated by CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively and an allowance is recorded through provision expense for these probable incurred losses. Any principal and interest outstanding on revolving/open-end loans at greater than 180 days past due is charged off against the allowance. Any accrued interest outstanding on installment/closed-end loans at 120 days past due is reversed against interest income. These consumer loans are reported as substandard, 90 day or more days past due and still accruing.

When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is removed, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual.

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

	June 30,		December 31,
	2022		2021
	(dollars in thousands; unaudited)
Commercial and industrial loans	$	111	$	166
Real estate loans:
Construction, land and land development		67		-
Residential real estate		53		55
Total nonaccrual loans	$	231	$	221

Credit Quality and Credit Risk

Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Company’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. The Company classifies some loans as Watch or Other Loans Especially Mentioned (“OLEM”). Loans classified as Watch are performing assets but have elements of risk that require more monitoring than other performing loans and are reported in the OLEM column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Revolving (open-ended loans, such as credit cards) and installment (closed end) consumer loans originated by CCBX partners continue to accrue interest until they are charged-off at 120 days past due for installment loans (primarily unsecured loans to consumers) and 180 days past due for revolving loans (primarily credit cards) and are classified as substandard. Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve.

Loans by credit quality risk rating are as follows as of the periods indicated:

	Pass		Other Loans Especially Mentioned		Sub- Standard		Doubtful		Total
	(dollars in thousands; unaudited)
June 30, 2022
Commercial and industrial loans	$	391,345	$	10,437	$	182	$	-	$	401,964
Real estate loans:
Construction, land, and land development		225,445		-		67		-		225,512
Residential real estate		326,376		109		176		-		326,661
Commercial real estate		939,988		9,431		6,901		-		956,320
Consumer and other loans		424,636		-		5,447		-		430,083
	$	2,307,790	$	19,977	$	12,773	$	-		2,340,540
Less net deferred origination fees										(6,186	)
Loans receivable									$	2,334,354
December 31, 2021
Commercial and industrial loans	$	416,642	$	2,180	$	238	$	-	$	419,060
Real estate loans:
Construction, land, and land development		183,594		-		-		-		183,594
Residential real estate		204,173		122		94		-		204,389
Commercial real estate		824,676		10,911		-		-		835,587
Consumer and other loans		107,404		-		1,467		-		108,871
	$	1,736,489	$	13,213	$	1,799	$	-		1,751,501
Less net deferred origination fees										(8,766	)
Loans receivable									$	1,742,735

Allowance for Loan Losses

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

The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated from the community bank’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

CCBX loans have a higher level of expected losses than our community bank loans which is reflected in the factors for the allowance for loan losses. Estimated loss rates for CCBX loans vary by partner, and might be based on actual partner experience, realized losses or losses for comparable products or industry averages. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans and deposit overdrafts. When the provision for loan losses is recorded, a receivable is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). Incurred losses are recorded in the allowance for loan losses, and as the credit enhancement recoveries are received from the CCBX partner, the receivable is relieved. If a CCBX lending partner is unable to fulfill their contractual obligations under the credit enhancement, then the Bank would be exposed to additional loan losses as a result of this counterparty risk and would have to absorb any loan losses associated with the CCBX partner that cannot fulfill its contractual obligations.

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three and six months ended June 30, 2022 and 2021:

	Commercial and Industrial			Construction, Land, and Land Development		Residential Real Estate			Commercial Real Estate			Consumer and Other			Unallocated			Total
	(dollars in thousands; unaudited)
Three Months Ended June 30, 2022
ALLL balance, March 31, 2022	$	3,514		$	7,592	$	5,758		$	5,317		$	15,114		$	1,475		$	38,770
Provision for loan losses or (recapture)		550			407		1,413			(577	)		12,204			97			14,094
		4,064			7,999		7,171			4,740			27,318			1,572			52,864
Loans charged-off		(33	)		-		-			-			(3,509	)		-			(3,542	)
Recoveries of loans previously charged-off		35			-		-			-			1			-			36
Net (charge-offs) recoveries		2			-		-			-			(3,508	)		-			(3,506	)
ALLL balance, June 30, 2022	$	4,066		$	7,999	$	7,171		$	4,740		$	23,810		$	1,572		$	49,358

Six Months Ended June 30, 2022
ALLL balance, December 31, 2021	$	3,221		$	6,984	$	4,598		$	6,590		$	7,092		$	147		$	28,632
Provision for loan losses or (recapture)		846			1,015		2,573			(1,850	)		23,027			1,425			27,036
		4,067			7,999		7,171			4,740			30,119			1,572			55,668
Loans charged-off		(38	)		-		-			-			(6,312	)		-			(6,350	)
Recoveries of loans previously charged-off		37			-		-			-			3			-			40
Net (charge-offs) recoveries		(1	)		-		-			-			(6,309	)		-			(6,310	)
ALLL balance, June 30, 2022	$	4,066		$	7,999	$	7,171		$	4,740		$	23,810		$	1,572		$	49,358

As of June 30, 2022
ALLL amounts allocated to
Individually evaluated for impairment	$	84		$	-	$	-		$	-		$	-		$	-		$	84
Collectively evaluated for impairment		3,982			7,999		7,171			4,740			23,810			1,572			49,274
ALLL balance, June 30, 2022	$	4,066		$	7,999	$	7,171		$	4,740		$	23,810		$	1,572		$	49,358
Loans individually evaluated for impairment	$	111		$	67	$	53		$	-		$	-					$	231
Loans collectively evaluated for impairment		401,853			225,445		326,608			956,320			430,083						2,340,309
Loan balance, June 30, 2022	$	401,964		$	225,512	$	326,661		$	956,320		$	430,083					$	2,340,540

Three Months Ended June 30, 2021
Balance, March 31, 2021	$	3,387		$	3,982	$	3,171		$	7,953		$	108		$	1,009		$	19,610
Provision for loan losses or (recapture)		(68	)		538		131			104			(21	)		(323	)		361
		3,319			4,520		3,302			8,057			87			686			19,971
Loans charged-off		(2	)		-		-			-			(10	)		-			(12	)
Recoveries of loans previously charged-off		-			-		-			-			7			-			7
Net (charge-offs) recoveries		(2	)		-		-			-			(3	)		-			(5	)
Balance, June 30, 2021	$	3,317		$	4,520	$	3,302		$	8,057		$	84		$	686		$	19,966

Six Months Ended June 30, 2021
Balance, December 31, 2020	$	3,353		$	3,545	$	3,410		$	7,810		$	127		$	1,017		$	19,262
Provision for loan losses or (recapture)		(25	)		975		(108	)		247			(40	)		(331	)		718
		3,328			4,520		3,302			8,057			87			686			19,980
Loans charged-off		(16	)		-		-			-			(14	)		-			(30	)
Recoveries of loans previously charged-off		5			-		-			-			11			-			16
Net (charge-offs) recoveries		(11	)		-		-			-			(3	)		-			(14	)
Balance, June 30, 2021	$	3,317		$	4,520	$	3,302		$	8,057		$	84		$	686		$	19,966

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

	Commercial and Industrial		Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate		Consumer and Other		Unallocated		Total
	(dollars in thousands; unaudited)
As of December 31, 2021
ALLL amounts allocated to
Individually evaluated for impairment	$	132	$	-	$	-	$	-	$	-	$	-	$	132
Collectively evaluated for impairment		3,089		6,984		4,598		6,590		7,092		147		28,500
ALLL balance, December 31, 2021	$	3,221	$	6,984	$	4,598	$	6,590	$	7,092	$	147	$	28,632
Loans individually evaluated for impairment	$	166	$	-	$	55	$	-	$	-			$	221
Loans collectively evaluated for impairment		418,894		183,594		204,334		835,587		108,871				1,751,280
Loan balance, December 31, 2021	$	419,060	$	183,594	$	204,389	$	835,587	$	108,871			$	1,751,501

Note 5 - Deposits

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

	June 30,		December 31,
	2022		2021
	(dollars in thousands; unaudited)
Demand, noninterest bearing	$	818,052	$	1,355,908
NOW and money market		1,660,315		789,709
Savings		106,464		103,956
Total core deposits		2,584,831		2,249,573
BaaS-brokered deposits		76,001		70,757
Time deposits less than $250,000		26,676		31,057
Time deposits $250,000 and over		9,797		12,400
Total deposits	$	2,697,305	$	2,363,787

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

(dollars in thousands; unaudited)
Twelve months	$	27,857
One to two years		5,795
Two to three years		1,306
Three to four years		1,322
Four to five years		193
	$	36,473

Our CCBX partners originate deposits and these deposits were primarily noninterest bearing prior to the recent rate increases by the Federal Open Market Committee (“FOMC”). Many of these CCBX deposits became interest bearing during the quarter ended March 31, 2022, and were reclassified to interest bearing deposits from noninterest bearing deposits, when the FOMC raised rates 0.25% in mid-March 2022. With the additional interest rate increases in the second quarter of 2022 the remaining CCBX deposits that were subject to reclassification were moved from noninterest bearing to interest bearing deposits. This reclassification is because the current rate exceeds the minimum interest rate set in their respective program agreements, as a result of the first and second quarter 2022 Fed Funds rate increases. We do not currently expect to have any additional CCBX deposits that will be reclassified as a result of any future Fed Funds rate increases that may be implemented.

Note 6 - Leases

The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.

Operating lease right-of-use (“ROU”) assets represent a right to use an underlying asset for the contractual lease term. Operating lease liabilities represent an obligation to make lease payments arising from the lease. An operating lease ROU asset and operating lease liability will be recognized for any new operating leases at the commencement of the new lease.

The Company’s leases do not provide an implicit interest rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities. During the period the Company extended one lease for an additional five year term and added two additional five year options.

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

Operating leases with terms of 12 months or less are not included in ROU assets and operating lease liabilities recorded in the Company’s consolidated balance sheets. Operating lease terms include options to extend when it is reasonably certain that the Company will exercise such options, determined on a lease-by-lease basis. As of June 30, 2022, the Company had one sublease commence during the period. At June 30, 2022, lease expiration dates ranged from seven months to 22.7 years, with additional renewal options on certain leases typically ranging from 5 to 10 years. At June 30, 2022, the weighted average remaining lease term inclusive of renewal options that the Company is reasonably certain to renew for the Company’s operating leases was 8.3 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $347,000 and $693,000, respectively, for the three and six months ended June 30, 2022, and $341,000 and $682,000 respectively, for the three and six months ended June 30, 2021. Variable lease components, such as inflation adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

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

	June 30,
(dollars in thousands; unaudited)	2022

July 1, 2022 to December 31, 2022	$	645
2023		1,272
2024		864
2025		713
2026		719
2027 and thereafter		2,490
Total lease payments		6,703
Less: amounts representing interest		917
Present value of lease liabilities	$	5,786

The following table presents the components of total lease expense and operating cash flows for the three and six months ended June 30, 2022 and 2021:

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
	2022		2021		2022		2021
	(dollars in thousands; unaudited)
Lease expense:
Operating lease expense	$	320	$	321	$	675	$	642
Variable lease expense		45		36		87		70
Total lease expense (1)	$	365	$	357	$	762	$	712
Cash paid:
Cash paid reducing operating lease liabilities	$	362	$	353	$	756	$	706

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

The Company entered into a five-year prepaid capital lease for ATM machines beginning October 1, 2021. The equipment is recorded as fixed assets on the Company’s balance sheet and depreciation expense is recognized on a straight-line basis over the term of the lease. Depreciation expense was $32,000 and $64,000, respectively, for the three and six months ended June 30, 2022 and $33,000 and $66,000, respectively, for the three and six months ended June 30, 2021, with $416,000 remaining as of June 30, 2022.

Note 7 - Stock-Based Compensation -

Stock Options and Restricted Stock

The 2018 Coastal Financial Corporation Omnibus Plan (2018 Plan) authorizes the Company to grant awards, including but not limited to, stock options, restricted stock units, and restricted stock awards, to eligible employees, directors or individuals that provide service to the Company, up to an aggregate of 500,000 shares of common stock. On May 24, 2021, the Company’s shareholders approved the First Amendment to the 2018 Plan, which increased the authorized plan shares by 600,000. The 2018 Plan replaces both the 2006 Plan and the Directors’ Stock Bonus Plan (2006 Plan). Existing awards will vest under the terms granted and no further awards will be granted under these prior plans. Shares available to be granted under the 2018 plan were 537,328 at June 30, 2022.

Stock Option Awards

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

There were no new stock options granted in the three and six months ended June 30, 2022 and 2021.

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

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
	(dollars in thousands, except per share amounts; unaudited)
Outstanding at December 31, 2021		694,519		$	7.79		4.0	$	29,744
Granted		-			-
Exercised		(36,275	)	$	7.63
Forfeited or expired		(2,400	)		11.91
Outstanding at June 30, 2022		655,844		$	7.79		3.5	$	19,894
Vested or expected to vest at June 30, 2022		655,844		$	7.79		3.5	$	19,894
Exercisable at June 30, 2022		393,444		$	6.77		2.5	$	12,336

The total or aggregate intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three and six months ended June 30, 2022 was $302,000 and $1.4 million, respectively. The total or aggregate intrinsic value of options exercised during the three and six months ended June 30, 2021 was $317,000 and $674,000, respectively.

As of June 30, 2022, there was $1.3 million of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan. Total unrecognized compensation costs are adjusted for unvested forfeitures. The Company expects to recognize that cost over a remaining weighted-average period of approximately 4.9 years. Compensation expense recorded related to stock options was $68,000 and $188,000 for the three and six months ended June 30, 2022, respectively and $92,000 and $181,000 for the three and six months ended June 30, 2021, respectively.

Restricted Stock Units

In the first quarter of 2022, the Company granted 53,721 restricted stock units under the 2018 Plan to employees, which vest ratably over 4 years and 150 restricted stock units which vest ratably over 10 years. In the second quarter of 2022, the Company granted 9,831 restricted stock units under the 2018 Plan to employees, which vest ratably over 5 years and 7,000 restricted stock units that vest ratably over 3 years. Additionally, the Company granted 53,000 performance-based restricted stock units under the 2018 Plan to an employee, that vest on June 1, 2028, the quantity of which is dependent upon achievement of specified performance goals.

Restricted stock units provide for an interest in Company common stock to the recipient, the underlying stock is not issued until certain conditions are met. Vesting requirements include time-based, performance-based, or market-based conditions. Recipients of restricted stock units do not pay any cash consideration to the Company for the units and the holders of the restricted units do not have voting rights. The fair value of time-based and performance-based units is equal to the fair market value of the Company’s common stock on the grant date. The fair value of market-based units is estimated on the grant date using the Monte Carlo simulation model. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock units are nonparticipating securities.

As of June 30, 2022, there was $9.3 million of total unrecognized compensation cost related to nonvested restricted stock units. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 4.0 years. Compensation expense recorded related to restricted stock units was $453,000 and $827,000 for the three and six months ended June 30, 2022, respectively and $133,000 and $234,000 for the three and six months ended June 30, 2021, respectively.

A summary of the Company’s nonvested RSUs at June 30, 2022 and changes during the three month period is presented below:

Nonvested shares	Shares			Weighted- Average Grant Date Fair Value		Total or Aggregate Intrinsic Value
	(dollars in thousands, except per share amounts; unaudited)
Nonvested shares at December 31, 2021		269,844		$	21.70	$	7,803
Granted		123,702		$	39.66
Forfeited		(2,486	)	$	22.00
Vested		(26,137	)	$	19.93
Nonvested shares at June 30, 2022		364,923		$	27.92	$	3,723

Restricted Stock Awards

Employees

There were no new restricted stock awards granted in the three or six months ended June 30, 2022. The fair value of restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities.

As of June 30, 2022, there was $50,000 of total unrecognized compensation cost related to nonvested restricted stock awards. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 5.6 years. Compensation expense recorded related to restricted stock awards was $2,000 and $4,000 for the three and six months ended June 30, 2022, respectively and $2,000 and $129,000 for the three and six months ended June 30, 2021, respectively.

Director’s Stock Compensation

Under the 2018 Plan, eligible directors are granted stock with a total market value of $35,000, and the Board Chair is granted stock with a total market value of $55,000. Committee chairs will receive additional stock with a market value of $2,500 for each committee chaired. Stock is granted as of each annual meeting date and will cliff vest one day prior to the next annual meeting date. During the vesting period, the grants are considered participating securities.

There were 10,396 new shares were granted during the three and six months ended June 30, 2022. As of June 30, 2022, there was $347,000 of total unrecognized compensation expense related to director restricted stock awards which the Company expects to recognize over the remaining average vesting period of approximately 0.9 years. Director compensation expense recorded related to the 2018 Plan totaled $60,000 and $98,000 for the three and six months ended June 30, 2022, respectively, and $44,000 and $90,000 for the three and six months ended June 30, 2021, respectively.

A summary of the Company’s nonvested shares at June 30, 2022 and changes during the three-month period is presented below:

Nonvested shares	Shares			Weighted- Average Grant Date Fair Value		Total or Aggregate Intrinsic Value
	(dollars in thousands, except per share amounts; unaudited)
Nonvested shares at December 31, 2021		10,203		$	23.78	$	274
Granted		10,396		$	37.30
Forfeited		-		$	-
Vested		(7,203	)	$	26.27
Nonvested shares at June 30, 2022		13,396		$	32.94	$	69

Note 8 - Fair Value Measurements

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

	June 30, 2022				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands; unaudited)
Financial assets
Cash and due from banks	$	40,750	$	40,750	$	40,750	$	-	$	-
Interest earning deposits with other banks		364,939		364,939		364,939		-		-
Investment securities		109,821		109,724		108,251		1,473		-
Other investments		10,379		10,379		-		7,707		2,672
Loans held for sale		60,000		60,000		-		60,000
Loans receivable		2,334,354		2,287,734		-		-		2,287,734
Accrued interest receivable		12,430		12,430		-		12,430		-
Financial liabilities
Deposits	$	2,697,305		2,696,607	$	-	$	2,696,607	$	-
Subordinated debt		24,324		22,421		-		22,421		-
Junior subordinated debentures		3,587		3,332		-		3,332		-
Accrued interest payable		330		330		-		330		-

	December 31, 2021				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands; unaudited)
Financial assets
Cash and due from banks	$	14,496	$	14,496	$	14,496	$	-	$	-
Interest earning deposits with other banks		798,665		798,665		798,665		-		-
Investment securities		36,623		36,675		34,998		1,677		-
Other investments		8,478		8,478		-		6,156		2,322
Loans receivable, net		1,714,103		1,686,124		-		-		1,686,124
Accrued interest receivable		8,105		8,105		-		8,105		-
Financial liabilities
Deposits	$	2,363,787	$	2,363,624	$	-	$	2,363,624	$	-
FHLB advances		24,999		24,447		-		24,447		-
Subordinated debt		24,288		21,891		-		21,891		-
Junior subordinated debentures		3,586		2,771		-		2,771		-
Accrued interest payable		357		357		-		357		-

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

•

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

•

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

•

Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from nonbinding single dealer quotes not corroborated by observable market data.

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

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

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands; unaudited)
June 30, 2022
Available-for-sale
U.S. Treasury securities	$	108,251	$	-	$	-	$	108,251
U.S. Agency collateralized mortgage obligations		-		57		-		57
U.S. Agency residential mortgage-backed securities		-		1		-		1
Municipals		-		251		-		251
	$	108,251	$	309	$	-	$	108,560
December 31, 2021
Available-for-sale
U.S. Treasury securities	$	34,998	$	-	$	-	$	34,998
U.S. Agency collateralized mortgage obligations		-		70		-		70
U.S. Agency residential mortgage-backed securities		-		3		-		3
Municipals		-		256		-		256
	$	34,998	$	329	$	-	$	35,327

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

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

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2022 and December 31, 2021. The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

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

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands; unaudited)
June 30, 2022
Impaired loans	$	-	$	-	$	231	$	231
Equity securities						2,672		2,672
Total	$	-	$	-	$	2,903	$	2,903

December 31, 2021
Impaired loans	$	-	$	-	$	221	$	221
Equity securities						2,322		2,322
Total	$	-	$	-	$	2,543	$	2,543

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

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

Equity securities – The Company measures equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer, with price changes recognized in earnings.

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

The following table presents the carrying value of equity securities without readily determinable fair values, as of June 30, 2022, with adjustments recorded during the periods presented for those securities with observable price changes, if applicable. These equity securities are included in other investments on the balance sheet.

	For the Three Months Ended				For the Six Months Ended
	June 30,				June 30,
(dollars in thousands; unaudited)	2022		2021		2022		2021
Carrying value, beginning of period	$	2,672	$	850	$	2,322	$	850
Addition of equity securities		-		-		350		-
Carrying value, end of period	$	2,672	$	850	$	2,672	$	850

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

(unaudited)

Valuation Technique

Unobservable Inputs

June 30, 2022

Weighted

Average Rate

December 31, 2021

Weighted

Average Rate

Impaired loans

Collateral valuations

Discount to appraised value

8.5%

8.0%

Note 9 - Earnings Per Common Share

The following is a computation of basic and diluted earnings per common share at the periods indicated:

	Three Months Ended				Six Months Ended
	June 30, 2022		June 30, 2021		June 30, 2022		June 30, 2021
	(dollars in thousands, except share data; unaudited)
Net Income	$	10,176	$	7,013	$	16,406	$	13,031
Basic weighted average number common shares outstanding		12,928,061		11,984,927		12,913,485		11,972,916
Dilutive effect of equity-based awards		513,952		474,540		545,221		450,743
Diluted weighted average number common shares outstanding		13,442,013		12,459,467		13,458,706		12,423,659
Basic earnings per share	$	0.79	$	0.59	$	1.27	$	1.09
Diluted earnings per share	$	0.76	$	0.56	$	1.22	$	1.05
Antidilutive stock options and restricted stock outstanding		299,743		159,668		234,649		173,472

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

Note 10 – Segment Reporting

As defined in ASC 280, Segment Reporting, an operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluate performance based on an internal performance measurement accounting system, which provides line of business results. This system uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income and expense. A primary objective of this measurement system and related internal financial reporting practices are to produce consistent results that reflect the underlying financial impact of the segments on the Company and to provide a basis of support for strategic decision making. The accounting policies applicable to our segments are those that apply to our preparation of the accompanying Consolidated Financial Statements. Based on these criteria, we have identified two segments: The community bank and CCBX.

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

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

	June 30, 2022									December 31, 2021
	Bank			CCBX			Total			Bank			CCBX			Total
	(dollars in thousands; unaudited)
Total assets	$	2,079,317		$	890,405		$	2,969,722		$	2,282,514		$	353,003		$	2,635,517
Loans held for sale		-			60,000			60,000			-			-			-
Total loans receivable		1,530,402			803,952			2,334,354			1,396,060			346,675			1,742,735
Allowance for loan losses		(20,785	)		(28,573	)		(49,358	)		(20,299	)		(8,333	)		(28,632	)
Total deposits		1,631,190			1,066,115			2,697,305			1,647,529			716,258			2,363,787

	Three months ended June 30, 2022						Three months ended June 30, 2021
	Bank		CCBX		Total		Bank		CCBX			Total
	(dollars in thousands; unaudited)
Net interest income	$	19,960	$	19,926	$	39,886	$	17,753	$	859		$	18,612
Provision for loan losses		108		13,986		14,094		364		(3	)		361
Noninterest income (1)		1,510		23,982		25,492		3,356		1,426			4,782
Noninterest expense		15,143		23,026		38,169		12,208		1,523			13,731
(1) For the three months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $14.2 million, fraud enhancements of $6.5 million, and BaaS program income of $3.2 million. For the three months ended June 30, 2021, CCBX noninterest income includes BaaS program income of $1.4 million.

	Six months ended June 30, 2022						Six months ended June 30, 2021
	Bank		CCBX		Total		Bank		CCBX			Total
	(dollars in thousands; unaudited)
Net interest income	$	37,355	$	31,799	$	69,154	$	34,679	$	1,248		$	35,927
Provision for loan losses		452		26,584		27,036		685		33			718
Noninterest income (1)		3,314		44,164		47,478		5,392		2,374			7,766
Noninterest expense		28,708		39,876		68,584		23,348		2,735			26,083
(1) For the six months ended June 30, 2022, CCBX noninterest income includes credit enhancements of $27.3 million, fraud enhancements of $11.0 million and BaaS program income of $5.7 million. For the six months ended June 30, 2021, CCBX noninterest income includes BaaS program income of $2.4 million.

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

Overview

We are a bank holding company that operates through our wholly owned subsidiaries, Coastal Community Bank (“Bank”) and Arlington Olympic LLC. We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. Our business is conducted through two reportable segments: The community bank and CCBX. The primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 29 partners as of June 30, 2022, compared to 24 as of June 30, 2021. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

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

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

We generate most of our community bank revenue from interest on loans and investments and CCBX revenue from interest on loans and BaaS income. Our primary source of funding for our loans is commercial and retail deposits from our customer relationships and from our partner deposit relationships. We place secondary reliance on wholesale funding, primarily borrowings from the Federal Home Loan Bank (“FHLB”). Less commonly used sources of funding include borrowings from the Federal Reserve System (Federal Reserve) discount window, draws on established federal funds lines from unaffiliated commercial banks, brokered funds, which allows us to obtain deposits from sources that do not have a relationship with the Bank and can be obtained through certificate of deposit listing services, via the internet or through other advertising methods, or a one-way buy through an insured cash sweep (“ICS”) account, which allows us to obtain funds from other institutions that have deposited funds through ICS. Our largest expenses are salaries and employee benefits, provision for loan losses, interest on deposits and borrowings, occupancy and data processing. Our principal lending products are commercial real estate loans, commercial and industrial loans, consumer loans, residential real estate loans, and construction, land and land development loans.

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

Our financial results for the three and six months ended June 30, 2022 and 2021 were impacted by the coronavirus, and variants thereof (“COVID-19”) pandemic. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”) was enacted, providing wide ranging economic relief for individuals and businesses impacted by the COVID-19 pandemic. Among other things, the statute created the Paycheck Protection Program (“PPP”), which was a stimulus response to the potential economic impacts of the COVID-19 pandemic. The purpose of the PPP was to provide forgivable loans to smaller businesses, sole proprietorships, independent contractors, and self-employed individuals that used the proceeds of the loans for payroll and certain other qualifying expenses.

In total, we funded $763.9 million in PPP loans, since the first round of PPP loans opened in March 2020 through the close of round three. Total net deferred fees on these loans were $26.3 million. As of June 30, 2022, there were $16.4 million in PPP loans outstanding, compared to $47.5 million as of March 31, 2022, and $398.0 million as of June 30, 2021. In the three months ended June 30, 2022, a total of $31.1 million in PPP loans were forgiven or repaid. Net deferred fees recognized on PPP loans contributed $969,000 for the three months ended June 30, 2022, compared to $2.3 million for the three months ended March 31, 2022, and $3.6 million for the three months ended June 30, 2021. The impact of PPP loans on the Company’s financial statements has significantly lessened as 97.9% of PPP loans have been paid off and forgiven. The future impact is expected to be minimal with just $16.4 million, or 2.1%, in PPP loans and $396,000 in net deferred fees remaining to be recognized as of June 30, 2022. Throughout this discussion, we will address the impact of these loans, on the balance sheet and income statement. Any estimated adjusted ratios that exclude the impact of this activity are non-U.S. generally accepted accounting principles (“GAAP”) measures. For more information about non-

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

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

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

	Total PPP Loan Origination
(dollars in thousands, unaudited)	Round 1 & 2 2020		Round 3 2021		Total
Loans Originated	$	452,846	$	311,012	$	763,858
Deferred fees, net	$	12,933	$	13,334	$	26,267
Outstanding loans and deferred fees as of June 30, 2022
Loans outstanding	$	2,199	$	14,199	$	16,398
Deferred fees, net	$	-	$	396	$	396

London Interbank Offered Rate (“LIBOR”) Transition

On March 5, 2021, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, confirmed that the publication of most LIBOR term rates will end on June 30, 2023 (excluding 1-week U.S. LIBOR and 2-month U.S. LIBOR, the publication of which ended December 31, 2021). On April 6, 2021, New York Governor Cuomo signed into law legislation that provides for the substitution of an alternative reference rate, the Secured Overnight Financing Rate, in any LIBOR-based contract governed by New York state law that does not include clear fallback language, once LIBOR is discontinued but no later than December 31, 2021. The Federal Reserve and other federal banking agencies have continued to encourage banks to transition away from LIBOR as soon as practicable. On March 15, 2022, President Biden signed into law the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), which was included as part of a larger Consolidated Appropriations Act, 2022. The LIBOR Act provides a nationwide process for replacing LIBOR in financial contracts that mature after the cessation of the overnight, one-, three-, six- and 12-month USD LIBOR tenors on June 30, 2023 and that do not provide for an effective means to replace LIBOR upon its cessation. For contracts in which a party has the discretion to identify a replacement rate, the LIBOR Act also provides a safe harbor to parties if they choose the SOFR-based benchmark replacement rate to be identified by the Federal Reserve. For more information on the Company’s approach to LIBOR transition planning, please see the risk factors discussed in the Company’s annual report on Form 10-K for the year ended December 31, 2021.

As of June 30, 2022, we had 55 loans totaling $215.7 million that are tied to LIBOR. Included in that total are 33 loans, totaling $182.1 million that are commercial loans, and 13 loans, totaling $9.8 million that are jumbo mortgages. We have $3.6 million in floating rate junior subordinated debentures to Coastal (WA) Statutory Trust I, which was formed for the issuance of trust preferred securities. These debentures are also tied to LIBOR. The move to an alternate index may impact the rates we receive on loans and rates we pay on our junior subordinated debentures. We have identified the loans and debt instruments impacted, are reviewing LIBOR replacement options and are preparing for and evaluating the impact of the transition from LIBOR. We are no longer issuing any loans or debt tied to LIBOR.

Results of Operations

Net Income

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

Net income for the three months ended June 30, 2022, was $10.2 million, or $0.76 per diluted share, compared to $7.0 million, or $0.56 per diluted share, for the three months ended June 30, 2021. The increase in net income over the comparable period in the prior year was primarily attributable to a $22.2 million increase in interest income and $20.7 million increase in noninterest income. These were partially offset by an increase in the provision for loan losses of $13.7 million, related to CCBX loan growth, and $24.4 million more in noninterest expense, also largely related to loan growth. The increase in noninterest income, provision expense and noninterest expense are all largely related to CCBX growth. In accordance with GAAP, we recognize as revenue (1) the reimbursement of non-credit fraud losses on partner’s customer loans and deposits and (2) the indemnification obligation, also known as credit enhancements, that our partners provide for expected loan losses related to loans they originate and unfunded commitments from such loans. Partner customer credit losses are recognized in the allowance for loan loss and non-credit fraud loss is recognized in BaaS noninterest expense. For more information on the accounting for BaaS allowance for loan losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

Comparison of the six months ended June 30, 2022 to the comparable period in the prior year

Net income for the six months ended June 30, 2022, was $16.4 million, or $1.22 per diluted share, compared to $13.0 million, or $1.05 per diluted share, for the six months ended June 30, 2021. The increase in net income over the comparable period in the prior year was primarily attributable to a $34.0 million increase in interest income and $39.7 million increase in noninterest income. These were partially offset by an increase in the provision for loan losses of $26.3 million, related primarily to CCBX loan growth, and $42.5 million more in noninterest expense. The increase in noninterest income and noninterest expense are largely related to CCBX growth.

Net Interest Income

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

Net interest income for the three months ended June 30, 2022, was $39.9 million, compared to $18.6 million for the three months ended June 30, 2021, an increase of $21.3 million, or 114.3%. Yield on loans receivable was 7.34% for the three months ended June 30, 2022, compared 4.44% for the three months ended June 30, 2021. The increase in net interest income compared to June 30, 2021 was largely related to increased yield on loans from growth in higher yielding CCBX loans. Average loans receivable for the three months ended June 30, 2022 was $2.19 billion, compared to $1.75 billion for the three months ended June 30, 2021.

Interest and fees on loans totaled $40.2 million for the three months ended June 30, 2022 compared to $19.4 million for the three months ended June 30, 2021. The $20.8 million increase in interest and fees on loans for the quarter ended June 30, 2022, compared to June 30, 2021, was largely due to increased yield on loans from growth in higher yielding CCBX loans. Loan growth of $401.2 million, or 20.9%, for the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021, partially offset a decrease of $31.1 million in PPP loans that were forgiven or repaid. CCBX loan growth was strong during the quarter with average loans receivable of $691.3 million for the quarter ended June 30, 2022, compared to $112.2 million for the quarter ended June 30, 2021, an increase of $579.1 million, or 516.1%. Average CCBX yield of 12.35% was earned on CCBX loans for the quarter ended June 30, 2022, compared to 3.14% for the quarter ended June 30, 2021. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Also impacting the increase in loan interest is the increase in interest rates on variable rate loans resulting from the FOMC raising rates 0.25% in mid-March 2022 and an additional 1.25% in the second quarter of 2022. Interest rates were increased on $460.9 million in variable rate loans, the impact of this increase in interest rates will be fully seen in future quarters.

Interest income from interest earning deposits with other banks was $956,000 at June 30, 2022, an increase of $882,000, or 1191.9%, due to an increase in balances and higher interest rates, compared to June 30, 2021. The average balance of interest earning deposits invested with other banks for the three months ended June 30, 2022 was $499.9 million, compared to $235.2 million for the three months ended June 30, 2021. Additionally, the yield on these interest earning deposits with other banks increased 0.64%, to 0.77% compared to 0.13% at June 30, 2021. Interest income on investment securities increased $539,000 to $563,000 at June 30, 2022, compared to $24,000 at June 30, 2021. Average investment securities increased $96.3 million from $25.0 million for the three months ended June 30, 2021 to $121.3 million for the three months ended June 30, 2022, and average yield increased to 1.86% for the three months ended June 30, 2022, compared to 0.39% for the three months ended June 30, 2021.

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

Net interest margin was 5.66% for the three months ended June 30, 2022, compared to 3.70% for the three months ended June 30, 2021. The increase in net interest margin compared to the three months ended June 30, 2021 was largely a result of an increase in higher rate loans. Average loans excluding PPP loans increased $919.6 million compared to the three months ended June 30, 2021, the increase was partially offset by an average decrease of $475.6 million in forgiven or repaid PPP loans. Also contributing to the increase in net interest margin compared to the three months ended June 30, 2021 was $264.7 million increase in average interest earning deposits invested in other banks. These interest earning deposits earned an average rate of 77 basis points for the quarter ended June 30, 2022, compared to an average rate of 39 basis points for the quarter ended June 30, 2021.

Cost of funds was 0.29% for the quarter ended June 30, 2022, which is an increase of nine basis points from the quarter ended June 30, 2021. Cost of deposits for the quarter ended June 30, 2022 was 0.25%, which was an 11 basis point increase, from 0.14% for the quarter ended June 30, 2021, largely due to an increase in interest bearing deposits and a higher interest rate environment. CCBX deposit growth and the aforementioned reclassification of $690.4 million of CCBX noninterest bearing deposits to interest bearing deposits in the first quarter of 2022 and $86.4 million in the second quarter 2022, that resulted from the Fed Funds rate increases, contributed to the increase in interest expense.

Total yield on loans receivable for the quarter ended June 30, 2022 was 7.34%, compared to 4.44% for the quarter ended June 30, 2021. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. For the quarter ended June 30, 2022 average CCBX loans increased $579.1 million, or 516.1%, with an average CCBX yield of 12.35%, compared to 3.14% at the quarter ended June 30, 2021. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Average community bank loans increased $340.5 million, or 30.1%, excluding average PPP loan forgiveness and repayments of $475.6 million, or 93.4%, compared to the quarter ended June 30, 2021. Average yield on community bank loans for the three months ended June 30, 2022 was 5.04%. compared to 4.52% for the three months ended June 30, 2021.

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

	For the Three Months Ended
	June 30, 2022					June 30, 2021
	Yield on		Cost of			Yield on		Cost of
(unaudited)	Loans		Deposits			Loans		Deposits
Community Bank	5.04%		0.08%			4.52%		0.16%
CCBX⁽¹⁾	12.35%		0.56%			3.14%		0.03%
Consolidated	7.34%		0.25%			4.44%		0.14%
(1) CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans.

	For the Three Months Ended
	June 30, 2022					June 30, 2021
(dollars in thousands, unaudited)	Income / Expense		Income / expense divided by average CCBX loans			Income / Expense		Income / expense divided by average CCBX loans
BaaS loan interest income	$	21,281		12.35	%	$	879		3.14	%
Less: BaaS loan expense		12,229		7.10	%		99		0.35	%
Net BaaS loan income*	$	9,052		5.25	%	$	780		2.79	%
Average BaaS Loans	$	691,294				$	112,210

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

For the three months ended June 30, 2022, net interest margin (net interest income divided by the average total interest earning assets) and net interest spread (average yield on total interest earning assets minus average cost of total interest bearing liabilities) were 5.66% and 5.51%, respectively, compared to 3.70% and 3.52%, respectively, for the three months ended June 30, 2021.

The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan fees included in interest income totaled $1.2 million and $4.3 million for the three months ended June 30, 2022 and 2021, respectively. For the three months ended June 30, 2022 and 2021, the amount of interest income not recognized on nonaccrual loans was not material.

	Average Balance Sheets
	For the Three Months Ended June 30,
	2022								2021
	Average			Interest &		Yield /			Average			Interest &		Yield /
(dollars in thousands; unaudited)	Balance			Dividends		Cost (1)			Balance			Dividends		Cost (1)
Assets
Interest earning assets:
Interest earning deposits	$	499,918		$	956		0.77	%	$	235,187		$	74		0.13	%
Investment securities, available for sale (2)		119,975			554		1.85			22,653			17		0.30
Investment securities, held to maturity (2)		1,280			9		2.82			2,347			7		1.20
Other investments		10,225			134		5.26			6,835			108		6.34
Loans receivable (3)		2,194,761			40,166		7.34			1,750,825			19,365		4.44
Total interest earning assets		2,826,159			41,819		5.94			2,017,847			19,571		3.89
Noninterest earning assets:
Allowance for loan losses		(46,354	)							(19,733	)
Other noninterest earning assets		115,788								76,727
Total assets	$	2,895,593							$	2,074,841

Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	1,792,119		$	1,673		0.37	%	$	901,120		$	628		0.28	%
PPPLF borrowings		-			-		0.00			107,047			94		0.35
FHLB advances and borrowings		-			-		0.00			24,999			70		1.12
Subordinated debt		24,313			231		3.81			9,998			146		5.86
Junior subordinated debentures		3,587			29		3.24			3,585			21		2.35
Total interest bearing liabilities		1,820,019			1,933		0.43			1,046,749			959		0.37
Noninterest bearing deposits		839,562								863,962
Other liabilities		19,550								12,887
Total shareholders' equity		216,462								151,243
Total liabilities and shareholders' equity	$	2,895,593							$	2,074,841
Net interest income				$	39,886							$	18,612
Interest rate spread							5.51	%							3.52	%
Net interest margin (4)							5.66	%							3.70	%

(1) Yields and costs are annualized.
(2) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(3) Includes loans held for sale and nonaccrual loans.
(4) Net interest margin represents net interest income divided by the average total interest earning assets.

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


	For the Three Months Ended
	June 30, 2022							June 30, 2021
	Average		Interest &		Yield /			Average		Interest &		Yield /
(dollars in thousands, unaudited)	Balance		Dividends		Cost (1)			Balance		Dividends		Cost (1)
Community Bank
Assets
Loans receivable (2)	$	1,503,467	$	18,885		5.04	%	$	1,638,615	$	18,486		4.52	%
Liabilities
Interest bearing deposits		921,499		317		0.14			873,320		608		0.28
Noninterest bearing deposits		740,575							658,757

CCBX
Assets
Loans receivable (2)(3)	$	691,294	$	21,281		12.35	%	$	112,210	$	879		3.14	%
Liabilities
Interest bearing deposits		870,620		1,356		0.62			27,800		20		0.29
Noninterest bearing deposits		98,987							205,205

(1) Yields and costs are annualized.
(2) Includes loans held for sale and nonaccrual loans.
(3) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans.

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. The table illustrates the $12.7 million increase in loan interest income that is attributed to an increase in loan rates and $8.1 million increase in loan interest income that is attributed to an increase in loan volume. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.

	Three Months Ended June 30, 2022
	Compared to
	Three Months Ended June 30, 2021
	Increase (Decrease)
	Due to						Total Increase
(dollars in thousands; unaudited)	Volume			Rate			(Decrease)
Interest income:
Interest earning deposits	$	506		$	376		$	882
Investment securities, available for sale		449			88			537
Investment securities, held to maturity		(8	)		10			2
Other Investments		44			(18	)		26
Loans receivable		8,124			12,677			20,801
Total increase in interest income		9,115			13,133			22,248

Interest expense:
Interest bearing deposits		832			213			1,045
PPPLF borrowings		(94	)		-			(94	)
FHLB advances and other borrowings		(70	)		-			(70	)
Subordinated debt		136			(51	)		85
Junior subordinated debentures		-			8			8
Total increase in interest expense		804			170			974
Increase in net interest income	$	8,311		$	12,963		$	21,274

Comparison of the six months ended June 30, 2022 to the comparable period in the prior year

Net interest income for the six months ended June 30, 2022, was $69.2 million, compared to $35.9 million for the six months ended June 30, 2021, an increase of $33.2 million, or 92.5%. Yield on loans receivable was 7.10% for the six months ended June 30, 2022, compared 4.47% for the six months ended June 30, 2021. The increase in net interest income compared to the six months ended June 30, 2021 was largely related to increased yield on loans from growth in higher yielding CCBX loans. Average loans receivable for the six months ended June 30, 2022 was $1.98 billion, compared to $1.70 billion for the six months ended June 30, 2021.

Interest and fees on loans totaled $69.8 million for the six months ended June 30, 2022 compared to $37.6 million for the six months ended June 30, 2021. The $32.2 million increase in interest and fees on loans for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was largely due to increased yield on loans from growth in higher yielding CCBX loans. Loan growth of $1.0 billion, or 82.0%, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021, was partially offset a decrease of $381.6 million in PPP loans that were forgiven or repaid. CCBX average loans receivable grew to $537.6 million for the six months ended June 30, 2022, compared to $89.7 million for the six months ended June 30, 2021, an increase of $447.9 million, or 499.6%. Average CCBX yield of 12.48% was earned on CCBX loans for the six months ended June 30, 2022, compared to 2.90% for the six months ended June 30, 2021. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Also impacting the increase in loan interest is the increase in interest rates on variable rate loans resulting from the FOMC raising rates 0.25% in mid-March 2022 and an additional 1.25% in the second quarter of 2022. Interest rates were increased on $460.9 million in variable rate loans during the six months ended June 30, 2022, the impact of this increase in interest rates will be fully seen in future quarters.

Interest income from interest earning deposits with other banks was $1.4 million at June 30, 2022, an increase of $1.2 million due to an increase in balances and higher interest rates, compared to June 30, 2021. The average balance of interest earning deposits invested with other banks for the six months ended June 30, 2022 was $671.0 million, compared to $215.4 million for the six months ended June 30, 2021. Additionally, the yield on these interest earning deposits with other banks increased 0.28%, compared to the six months ended June 30, 2021. Interest income on investment securities increased $582,000, to $634,000, or 1.53%, at June 30, 2022, compared to $52,000, or 0.43%, at June 30, 2021. Average investment securities increased $59.1 million from $24.6 million for the six months ended June 30, 2021 to $83.7 million for the six months ended June 30, 2022, and average yield increased to 1.53% for the six months ended June 30, 2022, compared to 0.43% for the six months ended June 30, 2021.

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

Net interest margin was 5.08% for the six months ended June 30, 2022, compared to 3.73% for the six months ended June 30, 2021. The increase in net interest margin compared to the six months ended June 30, 2021 was largely a result of an increase in higher rate, loans. Average loans excluding PPP loans increased $723.0 million compared to the six months ended June 30, 2021, the increase was partially offset by an average $436.1 million decrease in forgiven or repaid PPP loans. Also contributing to the increase in net interest margin compared to the six months ended June 30, 2021 was $455.6 million increase in average interest earning deposits invested in other banks. These interest earning deposits earned an average rate of 41 basis points for the six months ended June 30, 2022, compared to an average rate of 13 basis points for the six months ended June 30, 2021.

Cost of funds was 0.22% for the six months ended June 30, 2022, which is unchanged from the six months ended June 30, 2021. Cost of deposits for the six months ended June 30, 2022 was 0.18%, which was a two basis point increase, from 0.16% for the six months ended June 30, 2021, largely due to an increase in interest bearing deposits. CCBX deposit growth and the aforementioned reclassification of CCBX noninterest bearing deposits to interest bearing deposits contributed to the increase in interest expense.

Total yield on loans receivable for the six months ended June 30, 2022 was 7.10%, compared to 4.47% for the six months ended June 30, 2021. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. As of the six months ended June 30, 2022 average CCBX loans increased $447.9 million, or 499.6%, with an average CCBX yield of 12.48%, compared to 2.90% at June 30, 2021. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Average community bank loans increased $220.6 million, or 18.3%, excluding average PPP loan forgiveness and repayments of $381.6 million, or 95.9%, compared to the six months ended June 30, 2021. Average yield on community bank loans for the six months ended June 30, 2022 was 5.10%. compared to 4.56% for the six months ended June 30, 2021.

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

	For the Six Months Ended
	June 30, 2022					June 30, 2021
	Yield on		Cost of			Yield on		Cost of
(unaudited)	Loans		Deposits			Loans		Deposits
Community Bank	5.10%		0.09%			4.56%		0.17%
CCBX ⁽¹⁾	12.48%		0.34%			2.90%		0.05%
Consolidated	7.10%		0.18%			4.47%		0.16%
(1) CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. To determine net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at net BaaS loan income which can be compared to interest income on the Company’s community bank loans.

	For the Six Months Ended
	June 30, 2022					June 30, 2021
(dollars in thousands; unaudited)	Income / Expense		Income / expense divided by average CCBX loans			Income / Expense		Income / expense divided by average CCBX loans
BaaS loan interest income	$	33,273		12.48	%	$	1,290		2.90	%
Less: BaaS loan expense		20,519		7.70	%		189		0.43	%
Net BaaS loan income*	$	12,754		4.78	%	$	1,101		2.48	%
Average BaaS Loans	$	537,577				$	89,656

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

For the six months ended June 30, 2022, net interest margin (net interest income divided by the average total interest earning assets) and net interest spread (average yield on total interest earning assets minus average cost of total interest bearing liabilities) were 5.08% and 4.90%, respectively, compared to 3.76% and 3.56%, respectively, for the six months ended June 30, 2021.

The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan fees included in interest income totaled $4.0 million and $8.2 million for the six months ended June 30, 2022 and 2021, respectively. For the six months ended June 30, 2022 and 2021, the amount of interest income not recognized on nonaccrual loans was not material.

	Average Balance Sheets
	For the Six Months Ended June 30,
	2022								2021
	Average			Interest &		Yield /			Average			Interest &		Yield /
(dollars in thousands; unaudited)	Balance			Dividends		Cost (1)			Balance			Dividends		Cost (1)
Assets
Interest earning assets:
Interest earning deposits	$	670,974		$	1,358		0.41	%	$	215,358		$	144		0.13	%
Investment securities, available for sale (2)		82,431			615		1.50			22,117			36		0.33
Investment securities, held to maturity (2)		1,286			19		2.98			2,478			16		1.30
Other Investments		9,729			171		3.54			6,460			138		4.31
Loans receivable (3)		1,982,700			69,798		7.10			1,695,772			37,595		4.47
Total interest earning assets		2,747,120			71,961		5.28			1,942,185			37,929		3.94
Noninterest earning assets:
Allowance for loan losses		(38,554	)							(19,563	)
Other noninterest earning assets		104,159								71,349
Total assets	$	2,812,725							$	1,993,971

Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	1,463,875		$	2,226		0.31	%	$	878,740		$	1,288		0.30	%
PPPLF borrowings		-			-		0.00			138,536			240		0.35
FHLB advances and borrowings		12,154			69		1.14			24,999			141		1.14
Subordinated debt		24,304			461		3.83			9,996			291		5.87
Junior subordinated debentures		3,587			51		2.87			3,585			42		2.36
Total interest bearing liabilities		1,503,920			2,807		0.38			1,055,856			2,002		0.38
Noninterest bearing deposits		1,078,525								777,693
Other liabilities		17,790								12,336
Total shareholders' equity		212,490								148,086
Total liabilities and shareholders' equity	$	2,812,725							$	1,993,971
Net interest income				$	69,154							$	35,927
Interest rate spread							4.90	%							3.56	%
Net interest margin (4)							5.08	%							3.73	%

(1) Yields and costs are annualized.
(2) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(3) Includes loans held for sale and nonaccrual loans.
(4) Net interest margin represents net interest income divided by the average total interest earning assets.

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


	For the Six Months Ended
	June 30, 2022							June 30, 2021
	Average		Interest &		Yield /			Average		Interest &		Yield /
(dollars in thousands; unaudited)	Balance		Dividends		Cost (1)			Balance		Dividends		Cost (1)
Community Bank
Assets
Loans receivable (2)	$	1,445,123	$	36,525		5.10	%	$	1,606,116	$	36,305		4.56	%
Liabilities
Interest bearing deposits		928,602		752		0.16			850,026		1,246		0.30
Noninterest bearing deposits		729,728							642,407

CCBX
Assets
Loans receivable (2)(3)	$	537,577	$	33,273		12.48	%	$	89,656	$	1,290		2.90	%
Liabilities
Interest bearing deposits		535,273		1,474		0.56			28,714		42		0.29
Noninterest bearing deposits		348,797							135,286

(1) Yields and costs are annualized.
(2) Includes loans held for sale and nonaccrual loans.
(3) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans.

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. The table illustrates the $22.1 million increase in loan interest income that is attributed to an increase in loan rates and $10.1 million increase in loan interest income that is attributed to an increase in loan volume. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.

	Six Months Ended June 30, 2022
	Compared to
	Six Months Ended June 30, 2021
	Increase (Decrease)
	Due to						Total Increase
(dollars in thousands; unaudited)	Volume			Rate			(Decrease)
Interest income:
Interest earning deposits	$	922		$	292		$	1,214
Investment securities, available for sale		450			129			579
Investment securities, held to maturity		(18	)		21			3
Other Investments		57			(24	)		33
Loans receivable		10,101			22,102			32,203
Total increase in interest income		11,512			22,520			34,032

Interest expense:
Interest bearing deposits		890			48			938
PPPLF borrowings		(240	)		-			(240	)
FHLB advances		(72	)		-			(72	)
Subordinated debt		271			(101	)		170
Junior subordinated debentures		-			9			9
Total increase in interest expense		849			(44	)		805
Increase in net interest income	$	10,663		$	22,564		$	33,227

Provision for Loan Losses

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

The economic environment is continuously changing with increased inflation, global unrest, the war in Ukraine and a rise in new COVID-19 variants that have resulted in some economic uncertainty. The Company is not required to implement the provisions of the Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model. Gross loans, excluding loans held for sale, totaled $2.33 billion at June 30, 2022 and included $16.4 million in PPP loans, which are 100% guaranteed, and are excluded from the provision for loan losses calculation. The allowance for loan losses as a percentage of loans was 2.11% at June 30, 2022, compared to 1.20% at June 30, 2021.

Agreements with our CCBX partners provide for an indemnification of loan losses and is also known as a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for CCBX loans and deposit overdrafts. When the provision for loan losses and provision for unfunded commitments is recorded, a credit enhancement receivable is also recorded in other assets on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner legal commitment to cover the Bank’s loan losses related to loans they originate. Incurred loan losses are recorded in the allowance for loan losses, and as the credit enhancement obligations are received from the CCBX partner, the credit enhancement receivable is relieved.

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

The provision for loan losses for the three months ended June 30, 2022, was $14.1 million, compared to $361,000 for the three months ended June 30, 2021. The increase in the Company’s provision for loan losses during the quarter ended June 30, 2022, is largely related to the provision for CCBX partner loans. During the quarter ended June 30, 2022, a $14.0 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank loan losses indicated that a provision for loan loss of $109,000 was needed for the quarter ended June 30, 2022.

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

	Three Months Ended
(dollars in thousands; unaudited)	June 30, 2022		June 30, 2021
Community bank	$	109	$	364
CCBX		13,985		(3	)
Total provision expense	$	14,094	$	361

Net charge-offs for the quarter ended June 30, 2022 totaled $3.5 million, or 0.64% of total average loans, as compared to net charge-offs of $5,000, or <0.01% of total average loans, for the quarter ended June 30, 2021. Net charge-offs were up in 2022 compared to 2021 due to loans originated by CCBX partners. In accordance with GAAP, CCBX loan losses are recorded as charge-offs. Agreements with CCBX partners provide for a credit enhancement that protects the Bank from incurred losses. The credit enhancement is recognized as noninterest income in the BaaS credit enhancements category and as a credit enhancement receivable on the balance sheet. When loan losses are recognized on CCBX loans, the Bank charges off the loan and the partner reimburses the Bank and the credit enhancement receivable is reduced. For the three months ended June 30, 2022, $3.5 million of net charge-offs were recognized for CCBX loans and $33,000 in net recoveries were recognized for community bank loans. For the three months ended June 30, 2021, $5,000 of net charge-offs were recognized for the community bank.

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

	Three Months Ended
	June 30, 2022									June 30, 2021
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	3		$	3,539		$	3,542		$	8		$	4		$	12
Gross recoveries		(36	)		-			(36	)		(3	)		(4	)		(7	)
Net charge-offs	$	(33	)	$	3,539		$	3,506		$	5		$	-		$	5
Net charge-offs to average loans		-0.01	%		2.05	%		0.64	%		0.00	%		0.00	%		0.00	%

Comparison of the six months ended June 30, 2022 to the comparable period in the prior year

The provision for loan losses for the six months ended June 30, 2022, was $27.0 million, compared to $718,000 for the six months ended June 30, 2021. The increase in the Company’s provision for loan losses during the quarter ended June 30, 2022, is largely related to the provision for CCBX partner loans. During the six months ended June 30, 2022, a $26.6 million provision for loan losses was recorded for loans originated by CCBX partners based on management’s analysis. The factors used in management’s analysis for community bank loan losses indicated that a provision for loan loss of $452,000 was needed for the six months ended June 30, 2022.

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

	Six Months Ended
(dollars in thousands; unaudited)	June 30, 2022		June 30, 2021
Community bank	$	452	$	685
CCBX		26,584		33
Total provision expense	$	27,036	$	718

Net charge-offs for the six months ended June 30, 2022 totaled $6.3 million, or 0.64% of total average loans, as compared to net charge-offs of $15,000, or <0.01% of total average loans, for the quarter ended June 30, 2021. Net charge-offs were up in 2022 compared to 2021 due to loans originated by CCBX partners. In accordance with GAAP, CCBX losses are recorded as charge-offs, but agreements with CCBX partners provide for an indemnification of credit losses, or credit enhancement that protects the Bank from incurred losses, which is recorded as noninterest income. For the six months ended June 30, 2022, $6.3 million of net charge-offs were recognized for CCBX loans, with $33,000 in net recoveries recognized for community bank loans. For the six months ended June 30, 2021, $15,000 of net charge-offs were recognized for community bank loans.

	Six Months Ended
	June 30, 2022									June 30, 2021
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	7		$	6,343		$	6,350		$	27		$	4		$	30
Gross recoveries		(40	)		-			(40	)		(12	)		(4	)		(16	)
Net charge-offs	$	(33	)	$	6,343		$	6,310		$	15		$	-		$	14
Net charge-offs to average loans		0.00	%		2.38	%		0.64	%		0.00	%		0.00	%		0.00	%

Noninterest Income

Our primary sources of recurring noninterest income are BaaS income, deposit service charges and fees, loan referral fees and mortgage broker fees. Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method.

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

For the three months ended June 30, 2022, noninterest income totaled $25.5 million, an increase of $20.7 million, or 433.1%, compared to $4.8 million for the three months ended June 30, 2021.

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

	Three Months
	Ended June 30,				Increase			Percent
(dollars in thousands; unaudited)	2022		2021		(Decrease)			Change
Deposit service charges and fees	$	988	$	949	$	39			4.1	%
Loan referral fees		208		806		(598	)		(74.2	)
Mortgage broker fees		85		253		(168	)		(66.4	)
Gain on sale of bank branch including deposits and loans, net		-		1,263		(1,263	)		(100.0	)
Gain on sales of loans, net		-		31		(31	)		(100.0	)
Other		311		56		255			455.4
Noninterest income, excluding BaaS program income and BaaS indemnification income		1,592		3,358		(1,766	)		(52.6	)
Servicing and other BaaS fees		1,159		1,029		130			12.6
Transaction fees		814		93		721			775.3
Interchange fees		628		110		518			470.9
Reimbursement of expenses		618		192		426			221.9
BaaS program income		3,219		1,424		1,795			126.1
BaaS credit enhancements		14,207		-		14,207			100.0
Baas fraud enhancements		6,474		-		6,474			100.0
BaaS indemnification income		20,681		-		20,681			100.0
Total noninterest income	$	25,492	$	4,782	$	20,710			433.1	%

Comparison of the six months ended June 30, 2022 to the comparable period in the prior year

For the six months ended June 30, 2022, noninterest income totaled $47.5 million, an increase of $39.7 million, or 511.4%, compared to $7.8 million for the six months ended June 30, 2021.

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

	Six Months
	Ended June 30,				Increase			Percent
(dollars in thousands; unaudited)	2022		2021		(Decrease)			Change
Deposit service charges and fees	$	1,872	$	1,812	$	60			3.3	%
Loan referral fees		810		1,403		(593	)		(42.3	)
Mortgage broker fees		208		515		(307	)		(59.6	)
Gain on sale of bank branch including deposits and loans, net		-		1,263		(1,263	)		(100.0	)
Gain on sales of loans, net		-		161		(161	)		(100.0	)
Other		576		240		336			140.0
Noninterest income, excluding BaaS program income and BaaS indemnification income		3,466		5,394		(1,928	)		(35.7	)
Servicing and other BaaS fees		2,328		1,613		715			44.3
Transaction fees		1,307		239		1,068			446.9
Interchange fees		1,060		145		915			631.0
Reimbursement of expenses		990		375		615			164.0
BaaS program income		5,685		2,372		3,313			139.7
BaaS credit enhancements		27,282		-		27,282			100.0
BaaS fraud enhancements		11,045		-		11,045			100.0
BaaS indemnification income		38,327		-		38,327			100.0
Total noninterest income	$	47,478	$	7,766	$	39,712			511.4	%

Summary of significant noninterest income for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021

A description of our largest noninterest income categories are below:

BaaS Income. Our CCBX segment provides BaaS offerings that enable our broker dealer and digital financial service providers to offer their customers banking services. In exchange for providing these services, we earn fixed fees, volume-based fees and reimbursement of costs depending on the program agreement. In accordance with GAAP, we recognize the reimbursement of noncredit fraud losses on loans and deposits originated by partners and credit enhancements related to the allowance for loan losses and reserve for unfunded commitments provided by the partner as revenue in BaaS income. CCBX credit losses are recognized in the allowance for loan loss and noncredit fraud losses are expensed in noninterest expense under BaaS fraud expense. Also in accordance with GAAP, we establish a credit enhancement receivable for expected future loan losses through the recognition of BaaS credit enhancement revenue at the same time we establish an allowance for those loans though a provision for loan losses. For more information on the accounting for BaaS allowance for loan losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

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

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(dollars in thousands; unaudited)	2022		2021		2022		2021
Program income:
Servicing and other BaaS fees	$	1,159	$	1,029	$	2,328	$	1,613
Transaction fees		814		93		1,307		239
Interchange fees		628		110		1,060		145
Reimbursement of expenses		618		192		990		375
Program income		3,219		1,424		5,685		2,372
Indemnification income:
Credit enhancements		14,207		-		27,282		-
Fraud enhancements		6,474		-		11,045		-
Indemnification income		20,681		-		38,327		-
Total BaaS income	$	23,900	$	1,424	$	44,012	$	2,372

Our CCBX segment continues to grow, and now has 29 relationships, at varying stages, as of June 30, 2022. As of June 30, 2022, we increased our active relationships to 23, compared to 12 as of June 30, 2021. As we continue to grow in the BaaS space, we are choosing to work with larger, more established fintech partners, so the number of new partnerships is not increasing as quickly as in the past, but these newer, larger partners are expected to have a significant impact on our financial growth. As more CCBX customers move to active status, we expect that BaaS program income will increase.

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

	As of
(unaudited)	June 30, 2022	June 30, 2021
Active	23	12
Friends and family / testing	2	3
Implementation / onboarding	0	7
Signed letters of intent	4	2
Total CCBX relationships	29	24

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

Loan Referral Fees. We earn loan referral fees when we originate a variable rate loan and the borrower enters into an interest rate swap agreement with a third party to fix the interest rate for an extended period, usually 20 or 25 years. We recognize the loan referral fee for arranging the interest rate swap. By facilitating interest rate swaps to our clients, we are able to provide them with a long-term, fixed interest rate without assuming the interest rate risk. Interest rate volatility, swap rates, and the timing of loan closings all impact the demand for long-term fixed rate swaps. The recognition of loan referral fees fluctuates in response to these market conditions and as a result we may recognize more or less, or may not recognize any, loan referral fees in some periods.

Gain on Sales of Loans, net. Gain on sales of loans occurs when we sell in the secondary market the guaranteed portion (generally 75% of the principal balance) of the SBA and U.S. Department of Agriculture (“USDA”) loans that we originate. This activity fluctuates based on SBA and USDA loan activity.

Mortgage Broker Fees. We earn mortgage broker fees for residential real estate loans that we broker through mortgage lenders. Mortgage broker fees fluctuate based on demand and changes in interest rates.

Gain on Sale of Bank Branch Including Deposits and Loans, net. The sale of our Freeland branch closed on April 30, 2021. Noninterest income included $1.3 million gain from sale of the branch in 2021, there was no similar income in 2022.

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

Noninterest Expense

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

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

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

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

	Three Months
	Ended June 30,				Increase			Percent
(dollars in thousands; unaudited)	2022		2021		(Decrease)			Change
Salaries and employee benefits	$	12,238	$	8,913	$	3,325			37.3	%
Software licenses, maintenance and subscriptions		1,108		543		565			104.1
Occupancy		1,083		990		93			9.4
Data processing		1,010		734		276			37.6
Legal and professional fees		1,002		626		376			60.1
FDIC assessments		855		225		630			280.0
Excise taxes		564		388		176			45.4
Director and staff expenses		377		318		59			18.6
Marketing		74		132		(58	)		(43.9	)
Other		1,155		763		392			51.4
Noninterest expense, excluding BaaS loan and BaaS fraud expense		19,466		13,632		5,834			42.8
BaaS loan expense		12,229		99		12,130			12,252.5
BaaS fraud expense		6,474		-		6,474			100.0
BaaS loan and fraud expense		18,703		99		18,604			18,791.9
Total noninterest expense	$	38,169	$	13,731	$	24,438			178.0	%

Comparison of the six months ended June 30, 2022 to the comparable period in the prior year

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

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

	Six Months
	Ended June 30,				Increase			Percent
(dollars in thousands; unaudited)	2022		2021		(Decrease)			Change
Salaries and employee benefits	$	23,323	$	16,599	$	6,724			40.5	%
Occupancy		2,219		2,048		171			8.3
Software licenses, maintenance and subscriptions		2,160		1,027		1,133			110.3
Data processing		1,819		1,431		388			27.1
Legal and professional fees		1,710		1,386		324			23.4
FDIC assessments		1,459		420		1,039			247.4
Excise taxes		913		747		166			22.2
Director and staff expenses		721		538		183			34.0
Marketing		173		214		(41	)		(19.2	)
Other		2,524		1,484		1,040			70.1
Noninterest expense, excluding BaaS loan and BaaS fraud expense		37,021		25,894		11,127			43.0
BaaS loan expense		20,519		189		20,330			107.6
BaaS fraud expense		11,045		-		11,045			100.0
BaaS loan and fraud expense		31,564		189		31,375			16600.5
Total noninterest expense	$	68,585	$	26,083	$	42,502			162.9	%

Summary of significant noninterest expense for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021

A description of our largest noninterest expense categories are below:

BaaS loan and fraud expense. Included in BaaS loan and fraud expense is partner loan expense including overdraft balances and partner fraud expense. Partner loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. Partner fraud expense represents noncredit fraud losses on loans and deposits originated by partners. Fraud losses are recorded when incurred as losses in noninterest expense, and the reimbursement from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. For more information on the accounting for BaaS loan and fraud expenses see the section titled “CCBX – BaaS Reporting Information.”

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

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(dollars in thousands; unaudited)	2022		2021		2022		2021
BaaS loan expense	$	12,229	$	99	$	20,519	$	189
BaaS fraud expense		6,474		-		11,045		-
Total BaaS loan and fraud expense	$	18,703	$	99	$	31,564	$	189

Salaries and Employee Benefits. Salaries and employee benefits are one of the largest components of noninterest expense and include payroll expense, incentive compensation costs, benefit plans, health insurance and payroll taxes. Salaries and employee benefits continue to increase primarily due to continued hiring staff for our CCBX segment and additional staff for our ongoing banking related growth initiatives. As our CCBX activities grow, we expect to continue to add employees to support these lines of business. As of June 30, 2022, we had 433 full-time equivalent employees, compared to 321 at June 30, 2021, a 34.9% increase.

Occupancy. Occupancy expenses rent, utilities, janitorial and other maintenance expenses, property insurances and taxes. Also included is depreciation on building, leasehold, furniture, fixtures and equipment. Although our hybrid and remote workforce is increasing, which helps keep some occupancy expenses down, we do expect occupancy expenses to increase as we continue to grow.

Software Licenses, Maintenance and Subscriptions. Software licenses, maintenance and subscriptions includes expenses related to obtaining and maintaining software required for our various functions. Software that aids in the reporting of CCBX activities and monitoring of transactions that helps to automate and create other efficiencies in reporting have resulted in increased expenses in the category. These expenses are expected to increase as we invest more in automated processing and as we grow product lines and our CCBX segment.

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

Legal and Professional Fees. Legal and professional costs include legal, audit and accounting expenses, consulting fees, fees for recruiting and hiring employees, and IT related security expenses. These expenses fluctuate with the development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services.

FDIC Assessments. FDIC assessments are assessed to fund the Deposit Insurance Fund (“DIF”) to insure and protect the depositors of insured banks and to resolve failed banks. The assessment rate is based on a number of factors and recalculated each quarter. As deposits increase, the FDIC assessment expense will generally increase. On June 21, 2022 the FDIC proposed an increase of 2 basis points in the initial base deposit insurance assessment rates. The rise is intended to increase the reserve ratio of the Deposit Insurance Fund from 1.23% (as of March 31, 2022) to 1.35%, the statutory requirement. However, the increase in the base rates would remain in place until the reserve ratio reaches 2.0%. If adopted, the increase would take effect in the first quarterly assessment period of 2023, and would increase FDIC assessment expense.

Excise Taxes. Excise taxes are assessed on Washington state income and are based on gross income. Gross income is reduced by certain allowed deductions and income attributed to other states is also removed to arrive at the taxable base. Excise taxes increased as a result of increased income subject to excise taxes. Partially offsetting that increase is a credit we received in 2022 against excise taxes owed in the amount of $109,000 as a result of our participation in the Washington State Main Street Program, which reduced our calculated 2022 expense.

Director and Staff Expenses. Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses. As COVID-19 restrictions have lessened, we have seen increased expenses related to employee travel, and continuing education.

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

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

Income Tax Expense

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

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

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

Comparison of the six months ended June 30, 2022 to the comparable period in the prior year

For the six months ended June 30, 2022 income tax expense totaled $4.6 million, compared to $3.9 million for the six months ended June 30, 2021. The $745,000 increase in income tax expense is the result of higher net income. Our effective tax rates for the six months ended June 30, 2022 and 2021 were 21.9% and 22.9%, respectively as a result of lower taxable income for the six months ended June 30, 2022 compared to the six months ended June 30, 2021.

Segment Information

For financial reporting purposes our Company has two reportable segments: The community bank and CCBX, which has been determined based upon the Company's relationship with the end customer. This determination also gave consideration to the structure and management of our various products. The community bank segment includes the operations of Coastal Community Bank, excluding CCBX BaaS operations. The community bank segment derives its revenue primarily from interest on loans and investments as well as noninterest income typical for the banking industry. The CCBX segment includes BaaS operations. The CCBX segment derives its revenue from fees and interest income from loans though our BaaS partnerships that allow our broker-dealer and digital financial partners to offer their customers banking services.

Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The accounting policies of the segments are the same as those described in “Note 1 – Description of Business and Summary of Significant Accounting Policies” in the accompanying notes to the consolidated financial statements included elsewhere in this report.

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

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

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

	June 30, 2022									December 31, 2021
(dollars in thousands; unaudited)	Bank			CCBX			Total			Bank			CCBX			Total

Total assets	$	2,079,317		$	890,405		$	2,969,722		$	2,282,514		$	353,003		$	2,635,517
Loans held for sale		-			60,000			60,000			-			-			-
Total loans receivable		1,530,402			803,952			2,334,354			1,396,060			346,675			1,742,735
Allowance for loan losses		(20,785	)		(28,573	)		(49,358	)		(20,299	)		(8,333	)		(28,632	)
Total deposits		1,631,190			1,066,115			2,697,305			1,647,529			716,258			2,363,787

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

Income and expenses that are specific to CCBX are recorded to the CCBX segment. Additionally, certain indirect expenses are allocated to CCBX utilizing various metrics, such as number of employees, utilization of space, and allocations based on loan and deposit balances. Included in noninterest expense for the community bank is administrative overhead of $6.5 million and $4.3 million for the quarters ended June 30, 2022 and June 30, 2021, respectively. Both the community bank and the CCBX segment benefit from these administrative services.

Net interest income for the community bank was $20.0 million for the quarter ended June 30, 2022, an increase of $2.2 million, or 12.4%, compared to $17.8 million for the quarter ended June 30, 2021. The increase in net interest income is largely due to increased yield on loans resulting from loan growth excluding PPP loans. Provision for loan losses for the community bank was $108,000 for the quarter ended June 30, 2022, compared to $364,000 for the quarter ended June 30, 2021. Net charge-offs to average loans for the community bank segment have remained consistently low and was (0.01%) for the quarter ended June 30, 2022 and <0.01% for the quarter ended June 30, 2021. Noninterest income for the community bank was $1.5 million, for the quarter ended June 30, 2022, a decrease of $1.8 million, or 55.0%, compared to $3.4 million for the quarter ended June 30, 2021, largely due to the sale of a bank branch including deposits and loans during the quarter ended June 30, 2021 which resulted in a nonrecurring net gain of $1.3 million. Noninterest expenses for the community bank increased $2.9 million, or 24.0%, to $15.1 million as of June 30, 2022, compared to $23.0 million as of June 30, 2021. The increase in noninterest expense is largely due to increased salaries and employee benefits as a result of growth, higher software licenses maintenance and subscription costs related to new reporting software that helps monitor and assess risk and to automate and create efficiencies in reporting, and other expense increases related to growth.

Net interest income for CCBX was $19.9 million for the quarter ended June 30, 2022, an increase of $19.1 million, or 2,219.7%, compared to $859,000 for the quarter ended June 30, 2021. The increase in net interest income is due to loan growth from new and existing CCBX relationships. Provision for loan losses was $14.0 million as a result of loan origination growth from CCBX partners for the quarter ended June 30, 2022, compared to a recapture of $3,000 for the quarter ended June 30, 2021. Noninterest income for CCBX was $24.0 million for the quarter ended June 30, 2022, an increase of $22.6 million, or 1,581.8%, compared to $1.4 million for the quarter ended June 30, 2021, due to an increase of $14.2 million in BaaS credit enhancements to establish a credit enhancement receivable for future loan losses due from our strategic partners, $6.5 million increase in BaaS fraud enhancements and $1.8 million in BaaS program income, which was the result of increased relationships with broker dealers and digital financial service providers. Noninterest expenses for CCBX increased $21.5 million, or 1,411.9%, to $23.0 million as of June 30, 2022, compared to $1.5 million as of June 30, 2021. The increase in noninterest expense is largely due to an increase in BaaS loan expense, BaaS fraud expense from increased CCBX loan originations and increased salaries and benefits, for the quarter ended June 30, 2022, compared to the quarter ended June 30, 2021. For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”.

The following tables present summary financial information for each segment for the periods indicated:

	Three Months Ended June 30, 2022						Three Months Ended June 30, 2021
(dollars in thousands; unaudited)	Bank		CCBX		Total		Bank		CCBX			Total

Net interest income	$	19,960	$	19,926	$	39,886	$	17,753	$	859		$	18,612
Provision for loan losses		108		13,986		14,094		364		(3	)		361
Noninterest income		1,510		23,982		25,492		3,356		1,426			4,782
Noninterest expense		15,143		23,026		38,169		12,208		1,523			13,731

Comparison of the six months ended June 30, 2022 to the comparable period in the prior year

Included in noninterest expense for the community bank is administrative overhead of $11.8 million and $8.7 million for the quarters ended June 30, 2022 and June 30, 2021, respectively. Both the community bank and the CCBX segment benefit from these administrative services.

Net interest income for the community bank was $37.4 million for the six months ended June 30, 2022, an increase of $2.7 million, or 7.7%, compared to $34.7 million for the six months ended June 30, 2021. The increase in net interest income is largely due to increased yield on loans resulting from loan growth, excluding PPP loan forgiveness and repayments, and a decrease in lower yielding PPP loans. Provision for loan losses for the community bank was $452,000 for the six months ended June 30, 2022, compared to $685,000 for the six months ended June 30, 2021. Net charge-offs to average loans for the community bank segment have remained consistently low and was <0.01% for the six months ended June 30, 2022, and 2021. Noninterest income for the community bank was $3.3 million, for the six months ended June 30, 2022, a decrease of $2.1 million, or 38.5%, compared to $5.4 million for the six months ended June 30, 2021, largely due to the sale of a bank branch including deposits and loans during the

quarter ended June 30, 2021 which resulted in a nonrecurring net gain of $1.3 million for the six months ended June 30, 2021. Additionally, loan referral fees decreased $593,000 compared to the six months ended June 30, 2021. The recognition of loan referral fees fluctuates in response to market conditions and as a result we may recognize more or less, or may not recognize any, loan referral fees in some periods. Noninterest expenses for the community bank increased $5.4 million, or 23.0%, to $28.7 million as of June 30, 2022, compared to $23.3 million as of June 30, 2021. The increase in noninterest expense is largely due to increased salaries and employee benefits as a result of growth, higher software licenses maintenance and subscription costs related to new reporting software that helps monitor and assess risk and to automate and create efficiencies in reporting, and other expense increases related to growth.

Net interest income for CCBX was $31.8 million for the six months ended June 30, 2022, an increase of $30.6 million, or 2,448.0%, compared to $1.2 million for the six months ended June 30, 2021. The increase in net interest income is due to loan growth from new and existing CCBX relationships. Provision for loan losses was $26.6 million for the six months ended June 30, 2022, compared to $33,000 for the six months ended June 30, 2021, as a result of loan growth from our partners. Noninterest income for CCBX was $44.2 million for the six months ended June 30, 2022, an increase of $41.8 million, or 1,760.3%, compared to $2.4 million for the six months ended June 30, 2021, due to an increase of $27.3 million in BaaS credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, $11.0 million increase in BaaS fraud enhancements and $3.3 million in total BaaS program income, which was the result of increased relationships with broker dealers and digital financial service providers. Noninterest expenses for CCBX increased $37.1 million, or 1,358.0%, to $39.9 million as of June 30, 2022, compared to $2.7 million as of June 30, 2021. The increase in noninterest expense is largely due to growth from new and existing CCBX relationships resulting in an increase in BaaS loan expense, BaaS fraud expense and increased salaries and benefits, for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”.

The following tables present summary financial information for each segment for the periods indicated:

	Six Months Ended June 30, 2022						Six Months Ended June 30, 2021
(dollars in thousands; unaudited)	Bank		CCBX		Total		Bank		CCBX		Total

Net interest income	$	37,355	$	31,799	$	69,154	$	34,679	$	1,248	$	35,927
Provision for loan losses		452		26,584		27,036		685		33		718
Noninterest income		3,314		44,164		47,478		5,392		2,374		7,766
Noninterest expense		28,708		39,876		68,584		23,348		2,735		26,083

Financial Condition

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

Loans Held For Sale

During the quarter ended June 30, 2022 $80.1 million in CCBX loans were transferred to loans held for sale, with $20.1 million in loans sold, at par, during the quarter and $60.0 million remaining in loans held for sale as of June 30, 2022; previously we did not have any loans held for sale. All of the loans held for sale are from one CCBX partner and are credit card home equity secured lines of credit.

Loan Portfolio

Our primary source of income is derived through interest earned on loans. A substantial portion of our loan portfolio consists of commercial real estate loans and commercial and industrial loans in the Puget Sound region. Our consumer and other loans also represent a significant portion of our loan portfolio with the growth of our CCBX segment. Our loan portfolio represents the highest yielding component of our earning assets.

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

Loans as a percentage of deposits were 86.5% as of June 30, 2022, compared to 73.7% as of December 31, 2021. We remain focused on serving our communities and markets by growing loans and funding those loans with customer deposits. The increase in the loan to deposit ratio was due to loan growth.

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

	As of June 30, 2022						As of December 31, 2021
(dollars in thousands; unaudited)	Amount			Percent			Amount			Percent
Commercial and industrial loans:
PPP loans	$	16,398			0.7	%	$	111,813			6.4	%
Capital call lines		224,930			9.6			202,882			11.5
All other commercial & industrial loans		160,636			6.9			104,365			6.0
Total commercial and industrial loans:		401,964			17.2			419,060			23.9
Real estate loans:
Construction, land and land development		225,512			9.6			183,594			10.5
Residential real estate		326,661			14.0			204,389			11.7
Commercial real estate		956,320			40.8			835,587			47.7
Consumer and other loans		430,083			18.4			108,871			6.2
Gross loans receivable		2,340,540			100.0	%		1,751,501			100.0	%
Net deferred origination fees - PPP loans		(396	)					(3,633	)
Net deferred origination fees - all other loans		(5,790	)					(5,133	)
Loans receivable	$	2,334,354					$	1,742,735
Loan Yield ⁽¹⁾		7.34	%					5.92	%
(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.

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

Community Bank	As of
	June 30, 2022						December 31, 2021
(dollars in thousands; unaudited)	Balance			% to Total			Balance			% to Total
Commercial and industrial loans:
PPP loans	$	16,398			1.1	%	$	111,813			8.0	%
All other commercial & industrial loans		142,569			9.3			104,365			7.4
Real estate loans:
Construction, land and land development loans		225,512			14.7			183,594			13.1
Residential real estate loans		193,518			12.6			167,502			11.9
Commercial real estate loans		956,320			62.2			835,587			59.5
Consumer and other loans:
Other consumer and other loans		2,325			0.2			2,034			0.1
Gross Community Bank loans receivable		1,536,642			100.0	%		1,404,895			100.0	%
Net deferred origination fees		(6,240	)					(8,835	)
Loans receivable	$	1,530,402					$	1,396,060
Loan Yield⁽¹⁾		5.04	%					5.89	%
(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.

CCBX	As of
	June 30, 2022						December 31, 2021
(dollars in thousands; unaudited)	Balance			% to Total			Balance			% to Total
Commercial and industrial loans:
Capital call lines	$	224,930			28.0	%	$	202,882			58.6	%
All other commercial & industrial loans		18,067			2.2			-			0.0
Real estate loans:
Residential real estate loans		133,143			16.5			36,887			10.6
Consumer and other loans:
Credit cards		139,501			17.4			11,429			3.3
Other consumer and other loans		288,257			35.9			95,408			27.5
Gross CCBX loans receivable		803,898			100.0	%		346,606			100.0	%
Net deferred origination costs		54						69
Loans receivable	$	803,952					$	346,675
Loan Yield - CCBX ⁽¹⁾⁽²⁾		12.35	%					6.13	%
(1) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans.
(2) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.

Commercial and Industrial Loans. Commercial and industrial loans decreased $17.1 million, or 4.1%, to $402.0 million as of June 30, 2022, from $419.1 million as of December 31, 2021. The decrease in commercial and industrial loans receivable over December 31, 2021 was due to $95.4 million in forgiven and repaid PPP loans, partially offset by an increase of $22.0 million increase in capital call lines, and $56.3 million increase in other commercial and industrial loans. Included in the commercial and industrial loan balance is $224.9 million and $202.9 million in capital call lines resulting from relationships with our CCBX customers as of June 30, 2022, and December 31, 2021, respectively. As of June 30, 2022, there were $18.1 million in CCBX other commercial loans, compared to zero at December 31, 2021.

Also included in commercial and industrial loans is $16.4 million and $111.8 million in PPP loans as of June 30, 2022, and December 31, 2021, respectively.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively. These loans are primarily made based on the borrower’s ability to service the debt from income. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable, inventory or equipment,

and we generally obtain personal guarantees on these loans. Commercial and industrial loans includes $40.1 million and $20.2 million in loans to financial institutions.

In total, we funded $763.9 million in PPP loans, since the first round of PPP loans opened in March 2020 through the close of round three on May 31, 2021. Total net deferred fees on these loans were $26.3 million. As of June 30, 2022, $16.4 million in PPP loans remained with $396,000 in net deferred fees, which will be recognized in interest income in future periods. The impact of PPP loans on the Company’s financial statements has significantly lessened as 97.9% of PPP loans have been paid off and forgiven.

Construction, Land and Land Development Loans. Construction, land and land development loans increased $41.9 million, or 22.8%, to $225.5 million as of June 30, 2022, from $183.6 million as of December 31, 2021. The increase is attributed to growth in community bank construction, land and land development loans.

Unfunded loan commitments for construction, land and land development loans were $126.9 million at June 30, 2022, compared to $134.3 million at December 31, 2021. Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2022, the economic environment is continuously changing and is impacted by increased inflation, global unrest, the war in Ukraine and a rise in new COVID-19 variants that have resulted in some economic uncertainty.

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

Residential Real Estate Loans. Our one-to-four family residential real estate loans increased $122.3 million, or 59.8%, to $326.7 million as of June 30, 2022, from $204.4 million as of December 31, 2021 largely due to an increase of $96.3 million in CCBX loans.

We originate one-to-four family residential real estate adjustable-rate mortgage (“ARM”), loans for our portfolio and operate as a mortgage broker for mortgage lenders we have agreements with for customers who want a 15-year to 30-year, fixed-rate mortgage loan. As of June 30, 2022, the balance of our ARM portfolio loans was $26.6 million, compared to $22.2 million at December 31, 2021. Our ARM loans typically do not meet the guidelines for sale in the secondary market due to characteristics of the property, the loan terms or exceptions from agency underwriting guidelines, which enables us to earn a higher interest rate. We also purchase residential mortgages originated by other financial institutions to hold for investment with the intent to diversify our residential mortgage loan portfolio, meet certain regulatory requirements and increase our interest income. We last purchased residential mortgage loans in 2018. As of June 30, 2022, we held $10.1 million in purchased residential real estate mortgage loans, compared to $11.9 million at December 31, 2021. These loans purchased typically have a fixed rate with a term of 15 to 30 years and are collateralized by one-to-four family residential real estate. We have a defined set of credit guidelines that we use when evaluating these loans. Although purchased loans were originated and underwritten by another institution, our mortgage, credit, and compliance departments conduct an independent review of each underlying loan that includes re-underwriting each of these loans to our credit and compliance standards. We also make one-to-four family loans to investors to finance their rental properties and to business owners to secure their business loans. As of June 30, 2022, residential real estate loans made to investors and business owners totaled $133.0 million. As of December 31, 2021, residential real estate loans made to investors and business owners totaled $114.0 million.

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

Like our commercial real estate loans, our residential real estate loans are secured by real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in the area in which the real estate is located. Adverse developments affecting real estate values in our market areas could therefore increase the credit risk associated with these loans, impair the value of property pledged as collateral on loans, and affect our ability to sell the collateral upon foreclosure without a loss or additional losses.

Commercial Real Estate Loans. Commercial real estate loans increased $120.7 million, or 14.4%, to $956.3 million as of June 30, 2022, from $835.6 million as of December 31, 2021.

These increases, which occurred across the various segments of our portfolio, were due to our commitment to grow the portfolio in the Puget Sound region. We actively seek commercial real estate loans in our markets and our lenders are experienced in competing for these loans and managing these relationships.

We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores, hotels and motels, office buildings, mixed-use residential and commercial, and other properties. We originate both fixed- and adjustable-rate loans with terms up to 20 years. Fixed-rate loans typically amortize over a 10 to 25 year period with balloon payments due at the end of five to ten years. Adjustable-rate loans are generally based on the prime rate and adjust with the prime rate or are based on term equivalent FHLB rates. At June 30, 2022, approximately 29.6% of the commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans represented 40.8% of our loan portfolio at June 30, 2022 and are historically our largest source of revenue. As of June 30, 2022, we held $26.1 million in purchased commercial real estate loans, compared to $35.9 million at December 31, 2021. Our credit administration team has substantial experience in underwriting, managing, monitoring and working out commercial real estate loans, and remains diligent in communicating and proactively working with borrowers to help mitigate potential credit deterioration.

Consumer and Other. Consumer and other loans increased $321.2 million, or 295.0%, to $430.1 million, from $108.9 million as of December 31, 2021, as a result of growth in CCBX loans originated by our partners.

CCBX consumer loans totaled $427.8 million as of June 30, 2022, compared to $106.8 million at December 31, 2021. CCBX consumer loans include installment loans, credit cards, lines of credit and other loans. Our community bank consumer and other loans are comprised of personal lines of credit, automobile, boat, and recreational vehicle loans, and secured term loans.

Industry Exposure and Categories of Loans

We have a diversified loan portfolio, representing a wide variety of industries. Four of our largest categories of loans are commercial real estate, consumer and other loans, commercial and industrial, and construction, land and land development loans. Together they represent $2.0 billion in outstanding loan balances, or 85.9% of total gross loans outstanding, excluding PPP loans of $16.4 million. When combined with $1.62 billion in unused commitments the total of these three categories is $3.62 billion, or 82.5% of total outstanding loans and loan commitments, excluding PPP loans.

The following table summarizes our exposure by industry, excluding PPP loans, for our commercial real estate portfolio as of June 30, 2022:

(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure		% of Total Loans (Outstanding Balance & Available Commitment)			Average Loan Balance		Number of Loans
Apartments	$	188,436	$	5,390	$	193,826		4.4	%	$	2,416		78
Hotel/Motel		156,667		2,479		159,146		3.6			5,802		27
Office		100,615		3,930		104,545		2.4			1,027		98
Retail		81,327		2,978		84,305		1.9			904		90
Convenience Store		76,730		6,386		83,116		1.9			1,871		41
Mixed use		78,008		4,332		82,340		1.9			886		88
Warehouse		72,335		102		72,437		1.7			1,418		51
Manufacturing		42,454		1,907		44,361		1.1			1,213		35
Mini Storage		38,872		984		39,856		0.9			2,777		14
Groups < 0.70% of total		120,876		4,806		125,682		2.9			1,389		87
Total	$	956,320	$	33,294	$	989,614		22.6	%	$	1,570		609

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

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

(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure		% of Total Loans (Outstanding Balance & Available Commitment)			Average Loan Balance		Number of Loans
CCBX consumer loans
Installment loans	$	279,015	$	-	$	279,015		6.4	%	$	1.5		181,602
Credit cards		139,456		680,342		819,798		18.7			1.2		117,870
Lines of credit		6,831		258		7,089		0.2			0.2		34,492
Other loans		2,456		-		2,456		0.1			0.2		12,853
Community bank consumer loans
Lines of credit		1,463		1,501		2,964		0.1			20.9		70
Installment loans		423		-		423		0.0			28.2		15
Other loans		439		-		439		0.0			1.2		373
Total	$	430,083	$	682,101	$	1,112,184		25.4	%	$	1.2		347,275

The following table summarizes our concentration by industry, excluding PPP loans, for our commercial and industrial loan portfolio as of June 30, 2022:

(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure		% of Total Loans (Outstanding Balance & Available Commitment)			Average Loan Balance		Number of Loans
Capital Call Lines	$	224,930	$	704,523	$	929,453		21.2	%	$	1,372		164
Construction/Contractor Services		19,170		30,891		50,061		1.1			116		165
Financial Institutions		40,149		-		40,149		0.9			4,015		10
Manufacturing		17,269		5,064		22,333		0.5			270		64
Medical / Dental / Other Care		11,960		4,926		16,886		0.4			260		46
Groups < 0.30% of total		72,088		32,010		104,098		2.5			68		1,058
Total	$	385,566	$	777,414	$	1,162,980		26.5	%	$	256		1,507

The following table details our concentration, excluding PPP loans, for our construction, land and land development loan portfolio as of June 30, 2022:

(dollars in thousands; unaudited)	Outstanding Balance		Available Loan Commitments		Total Exposure		% of Total Loans (Outstanding Balance & Available Commitment)			Average Loan Balance		Number of Loans
Commercial construction	$	115,452	$	76,448	$	191,900		4.4	%	$	4,276		27
Residential construction		36,192		35,699		71,891		1.6			823		44
Undeveloped land loans		39,684		3,440		43,124		1.0			2,835		14
Developed land loans		20,173		6,664		26,837		0.6			593		34
Land development		14,011		4,629		18,640		0.4			737		19
Total	$	225,512	$	126,880	$	352,392		8.0	%	$	1,634		138

Nonperforming Assets

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

We believe our lending practices and active approach to managing nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have procedures in place to assist us in maintaining the overall credit quality of our loan portfolio. We have established underwriting guidelines, concentration limits and we also monitor our delinquency levels for any negative or adverse trends. We actively manage problem assets to reduce our risk for loss.

We had $5.8 million in nonperforming assets as of June 30, 2022, compared to $1.7 million as of December 31, 2021. This includes $5.6 million in CCBX loans more than 90 days past due and still accruing interest as of June 30, 2022, compared to $1.5 million at December 31, 2021. All of our nonperforming assets were nonperforming loans as of June 30, 2022 and December 31, 2021. Our nonperforming loans to loans receivable ratio was 0.25% at June 30, 2022, compared to 0.10% at December 31, 2021. The increase in nonperforming assets was due to an $4.1 million increase in CCBX partner loans that are 90 days or more past due and still accruing interest. Community bank nonaccrual loans increased $10,000 as a result of adding a new loan to nonaccrual status, partially offset by principal reductions during the six months ended June 30, 2022.

Our community bank credit quality remains strong, as demonstrated by the low level of community bank charge-offs and nonperforming loan balance for the six month ended June 30, 2022. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses, when accruing consumer loans originated by CCBX partners are charged-off at 120 days past due for installment loans (primarily unsecured loans to consumers) and 180 days past due for revolving loans (primarily credit cards).

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

	As of			As of
	June 30,			December 31,
(dollars in thousands; unaudited)	2022			2021
Nonaccrual loans:
Commercial and industrial loans	$	111		$	166
Real estate loans:
Construction, land and land development		67			-
Residential real estate		53			55
Total nonaccrual loans		231			221
Accruing loans past due 90 days or more:
Total accruing loans past due 90 days or more		5,580			1,506
Total nonperforming loans		5,811			1,727
Real estate owned		-			-
Repossessed assets		-			-
Troubled debt restructurings, accruing		-			-
Total nonperforming assets	$	5,811		$	1,727
Total nonaccrual loans to loans receivable		0.01	%		0.01	%
Total nonperforming loans to loans receivable		0.25	%		0.10	%
Total nonperforming assets to total assets		0.20	%		0.07	%

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

Community Bank	As of
	June 30,		December 31,
(dollars in thousands; unaudited)	2022		2021
Nonaccrual loans:
Commercial and industrial loans	$	111	$	166
Real estate:
Construction, land and land development		67		-
Residential real estate		53		55
Total nonaccrual loans		231		221

Accruing loans past due 90 days or more:
Total accruing loans past due 90 days or more		-		-
Total nonperforming loans		231		221
Other real estate owned		-		-
Repossessed assets		-		-
Total nonperforming assets	$	231	$	221


CCBX	As of
	June 30,		December 31,
(dollars in thousands; unaudited)	2022		2021
Nonaccrual loans	$	-	$	-

Accruing loans past due 90 days or more:
Total accruing loans past due 90 days or more		5,580		1,506
Total nonperforming loans		5,580		1,506
Other real estate owned		-		-
Repossessed assets		-		-
Total nonperforming assets	$	5,580	$	1,506

Allowance for Loan Losses

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

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

•

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

•

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

•

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

•

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

As of June 30, 2022, the allowance for loan losses totaled $49.4 million, or 2.11% of total loans. As of December 31, 2021, the allowance for loan losses totaled $28.6 million, or 1.64% of total loans. The increase in the Company’s allowance for loan losses for the quarter ended June 30, 2022 compared to December 31, 2021, is largely related to the provision for CCBX partner loans. During the six months ended June 30, 2022, a $26.6 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank loan losses indicated that a provision for loan losses of $452,000 was needed for the six months ended June 30, 2022. The economic environment is continuously changing with increased inflation, global unrest, the war in Ukraine and a rise in new COVID-19 variants that have resulted in some economic uncertainty. As described above, CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans. When the provision for loan losses and provision for unfunded commitments is recorded, a receivable is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). Incurred losses are recorded in the allowance for loan losses, and as the credit enhancement recoveries are received from the CCBX partner, the receivable is relieved. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by absorbing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations then the bank would be exposed to additional losses, as a result of this counterparty risk. The Company is not required to implement the provisions of the CECL accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model.

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

	As of									As of
	June 30, 2022									December 31, 2021
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Loans receivable	$	1,530,402		$	803,952		$	2,334,354		$	1,396,061		$	346,674		$	1,742,735
Allowance for loan losses		(20,785	)		(28,573	)		(49,358	)		(20,299	)		(8,333	)		(28,632	)
Allowance for loan losses to total loans receivable		1.36	%		3.55	%		2.11	%		1.45	%		2.40	%		1.64	%

Included in total loans is $16.4 million in PPP loans which are 100% guaranteed by the SBA. The allowance for loan losses to loans receivable, excluding the guaranteed PPP loans, is approximately 2.13% and 1.75% at June 30, 2022 and December 31, 2021, respectively. A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

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

	As of or for the Three						As of or for the Six
	Months Ended						Months Ended
	June 30,						June 30,
(dollars in thousands; unaudited)	2022			2021			2022			2021
Allowance at beginning of period	$	38,770		$	19,610		$	28,632		$	19,262
Provision for loan losses		14,094			361			27,036			718
Charge-offs:
Commercial and industrial loans		33			2			38			16
Consumer and other		3,509			10			6,312			14
Total charge-offs		3,542			12			6,350			30
Recoveries:
Commercial and industrial loans		35			-			37			5
Consumer and other		1			7			3			11
Total recoveries		36			7			40			16
Net charge-offs		3,506			5			6,310			14
Allowance at end of period	$	49,358		$	19,966		$	49,358		$	19,966
Allowance for loan losses to nonaccrual loans		21367.10	%		3081.17	%		21367.10	%		3081.17	%
Allowance to nonperforming loans		849.39	%		3081.17	%		849.39	%		3081.17	%
Allowance to loans receivable		2.11	%		1.20	%		2.11	%		1.20	%
Net charge-offs to average loans (1)		0.64	%		0.00	%		0.64	%		0.00	%

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

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

	Three Months Ended
	June 30, 2022									June 30, 2021
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	3		$	3,539		$	3,542		$	8		$	4		$	12
Gross recoveries		(36	)		-			(36	)		(3	)		(4	)		(7	)
Net charge-offs	$	(33	)	$	3,539		$	3,506		$	5		$	-		$	5
Net charge-offs to average loans		-0.01	%		2.05	%		0.64	%		0.00	%		0.00	%		0.00	%

	Six Months Ended
	June 30, 2022									June 30, 2021
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	7		$	6,343		$	6,350		$	27		$	4		$	30
Gross recoveries		(40	)		-			(40	)		(12	)		(4	)		(16	)
Net charge-offs	$	(33	)	$	6,343		$	6,310		$	15		$	-		$	14
Net charge-offs to average loans		0.00	%		2.38	%		0.64	%		0.00	%		0.00	%		0.00	%

The allowance for loan losses to nonaccrual loans ratio increased substantially as of June 30, 2022, compared to June 30, 2021 as a result of a decrease of $417,000 in nonaccrual community bank loans, combined with an increase of $29.4 million in the allowance for loan losses. The increase in the allowance for loan losses for the three and six months ended June 30, 2022 compared to the three and six months ended June 30, 2021, is largely related to the increase in the allowance for loans originated by our CCBX partners. CCBX partner agreements provide for, and the Company has collected in full, credit enhancements that cover the $3.5 million and $6.3 million in net-charge-offs on CCBX loans for the three and six months ended June 30, 2022, respectively. At June 30, 2022, the allowance for loan losses for CCBX partner loans totaled $28.6 million, compared to $99,000 at June 30, 2021.

Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio. We have not seen an increase in community bank loan losses due to COVID-19 as originally anticipated, as evidenced by the low level of charge-offs and nonperforming loans, however, the

economic environment is continuously changing with increased inflation, global unrest, the war in Ukraine and a rise in new COVID-19 variants that have resulted in some economic uncertainty. If economic conditions worsen the Washington state and Puget Sound region may experience a more severe economic downturn, and our asset quality could deteriorate, which may require material additional provisions for loan losses.

Securities

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

As of June 30, 2022, the amortized cost of our investment securities totaled $111.5 million, an increase of $74.9 million, or 204.6%, compared to $36.6 million as of December 31, 2021. The increase in the securities portfolio was due to the purchase of five Treasury securities for $135.0 million during the six months ended June 30, 2022, to invest excess funds, replace maturing securities and pledge to secure public deposits and for other purposes as required or permitted by law, partially offset by $60.0 million in U.S. Treasury maturities and other principal paydowns.

Our investment portfolio consists of securities classified as available for sale and, to a lesser amount, held to maturity. The carrying values of our investment securities classified as available for sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. As of June 30, 2022, our available for sale portfolio has an unrealized loss of $1.7 million, compared to an unrealized gain of $5,000 as of December 31, 2021.

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

	As of				As of
	June 30, 2022				December 31, 2021
	Amortized		Fair		Amortized		Fair
(dollars in thousands; unaudited)	Cost		Value		Cost		Value
Securities available-for-sale:
U.S. Treasury securities	$	109,950	$	108,251	$	34,999	$	34,998
U.S. Agency collateralized mortgage obligations		59		57		68		70
U.S. Agency residential mortgage-backed securities		1		1		3		3
Municipal bonds		251		251		252		256
Total available-for-sale securities		110,261		108,560		35,322		35,327
Securities held-to-maturity:
U.S. Agency residential mortgage-backed securities		1,261		1,164		1,296		1,348
Total held-to-maturity securities		1,261		1,164		1,296		1,348
Total investment securities	$	111,522	$	109,724	$	36,618	$	36,675

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

During the year ended December 31, 2021, we entered agreements for capital commitments of up to $1.1 million in three separate investment funds designed to help accelerate technology adoption at banks. As of December 31, 2021, we held $160,000 in investment funds. During the six months ended June 30, 2022 we contributed $325,000 and recognized a market loss of $2,000 bringing our investment funds total to $483,000 as of June 30, 2022, and our total capital commitment to $1.3 million.

Deposits

We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, money market, savings, BaaS-brokered deposits and time accounts as well as reciprocal deposits. Reciprocal deposits enable us to provide an FDIC insured deposit option to customers that have balances in excess of the FDIC insurance limit. This service trades our customers’ funds as certificates of deposit or interest bearing demand deposits in increments under the FDIC insured amount to other participating financial institutions and in exchange we receive time deposit or interest bearing demand investments from participating financial institutions in a reciprocal agreement. We rely primarily on competitive pricing policies, convenient locations, electronic delivery channels (internet and mobile), and personalized service to attract new deposits and retain existing deposits. Additionally, we offer deposit products through our CCBX segment. Although the CCBX products are similar to the community bank offerings, the CCBX deposit products allow us to offer a broader range of partner specific products, which include products designed to reach specific under-served or under-banked populations served by our CCBX partners.

Total deposits as of June 30, 2022 were $2.70 billion, an increase of $333.5 million, or 14.1%, compared to $2.36 billion as of December 31, 2021. The increase in deposits was largely in core deposits, which increased $335.3 million to $2.58 billion from $2.25 billion at December 31, 2021. We define core deposits as all deposits except time deposits and brokered deposits. The $335.3 million increase in core deposits is also largely from growth in the CCBX segment, which accounted for $344.6 million of the increase, partially offset by a decrease of $9.4 million in community bank deposits. Additionally, as of June 30, 2022 we have access to $269.5 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis. Depending on the circumstances of how the Bank would retain these deposits and its relationship with the customer, these retained deposits could be classified as brokered deposits.

Included in total deposits is $1.07 billion in CCBX deposits, an increase of $349.9 million, or 48.8%, compared to $716.3 million as of December 31, 2021. CCBX customer deposit relationships include deposits with CCBX end customers, operating and non-operating deposit accounts. The deposits from our CCBX division are generally classified as interest bearing NOW and money market accounts, and a portion of such CCBX deposits may be classified as brokered deposits as a result of the relationship agreement. During the six months ended June 30, 2022, the majority of CCBX deposits were reclassified from noninterest bearing to interest bearing. This is because the current rate exceeds the minimum interest rate set in their respective program agreements, as a result of the recent increases in interest rates by the FOMC.

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

Total interest bearing account balances, excluding time deposits, as of June 30, 2022 were $1.84 billion, an increase of $878.4 million, or 91.1%, compared to $964.4 million as of December 31, 2021. The $878.4 million increase is the result of reclassifying $776.8 million in CCBX noninterest bearing deposits to interest bearing as a result of the recent increases in interest rates by the FOMC, combined with CCBX growth in interest bearing deposits of $121.1 million partially offset by community bank decrease in interest bearing deposits of $19.5 million. Included in interest bearing account balances is $76.0 million in BaaS-brokered deposits, an increase of $5.2 million from December 31, 2021. Also included in interest bearing deposits is $17.2 million in reciprocal deposits.

Total time deposit balances as of June 30, 2022 were $36.5 million, a decrease of $7.0 million, or 16.1%, from $43.5 million as of December 31, 2021. The decrease is due to the strong increase in core deposits, and our focus on core deposits and letting higher rate deposits run off as they mature. We have seen competitors increase rates on time deposits, and we have not globally matched their rates in response as we have been able to grow and retain less costly core deposits.

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

	As of						As of
	June 30, 2022						December 31, 2021
				Percent of						Percent of
(dollars in thousands; unaudited)	Amount			Total Deposits			Amount			Total Deposits
Demand, noninterest bearing	$	818,052			30.3	%	$	1,355,908			57.4	%
NOW and money market		1,660,315			61.6			789,709			33.4
Savings		106,464			3.9			103,956			4.4
Total core deposits		2,584,831			95.8			2,249,573			95.2
BaaS-brokered deposits		76,001			2.8			70,757			3.0
Time deposits less than $100,000		14,009			0.5			14,961			0.6
Time deposits $100,000 and over		22,464			0.8			28,496			1.2
Total	$	2,697,305			100.0	%	$	2,363,787			100.0	%
Cost of Deposits ⁽¹⁾		0.25	%					0.09	%
(1) Cost of deposits is for the three months ended for each period presented.

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

Community Bank	As of
	June 30, 2022						December 31, 2021
(dollars in thousands; unaudited)	Balance			% to Total			Balance			% to Total
Demand, noninterest bearing	$	729,436			44.7	%	$	719,233			43.7	%
NOW and money market		759,704			46.6			780,884			47.4
Savings		105,576			6.5			103,954			6.3
Total core deposits		1,594,716			97.8			1,604,071			97.4
Brokered deposits		1			0.0			1			0.0
Time deposits less than $100,000		14,009			1.3			31,057			1.8
Time deposits $100,000 and over		22,464			0.9			12,400			0.8
Total Community Bank deposits	$	1,631,190			100.0	%	$	1,647,529			100.0	%
Cost of deposits⁽¹⁾		0.08	%					0.12	%
(1) Cost of deposits is for the three months ended for each period presented.

CCBX	As of
	June 30, 2022						December 31, 2021
(dollars in thousands; unaudited)	Balance			% to Total			Balance			% to Total
Demand, noninterest bearing	$	88,616			8.3	%	$	636,675			88.9	%
NOW and money market		900,611			84.5			8,825			1.2
Savings		888			0.1			2			0.0
Total core deposits		990,115			92.9			645,502			90.1
BaaS-brokered deposits		76,000			7.1			70,756			9.9
Total CCBX deposits	$	1,066,115			100.0	%	$	716,258			100.0	%
Cost of deposits ⁽¹⁾		0.56	%					0.02	%
(1) Cost of deposits is for the three months ended for each period presented.

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

(dollars in thousands; unaudited)	As of June 30, 2022		As of December 31, 2021
Maturity Period:
Three months or less	$	7,425	$	8,106
Over three through six months		5,558		6,520
Over six through twelve months		4,952		8,925
Over twelve months		4,529		4,945
Total	$	22,464	$	28,496
Weighted average maturity (in years)		0.80		0.73

Average deposits for the three months ended June 30, 2022 were $2.63 billion, an increase of 49.1% compared to $1.77 billion for the three months ended June 30, 2021. The increase in average deposits for was primarily due to an increase in core deposits, primarily in interest rate bearing deposits. We expect deposits to increase with continued growth in our primary market areas, the increase in commercial lending relationships for which we also seek deposit balances and the results of business development efforts by branch managers, treasury service personnel and lenders. Additionally, as our CCBX relationships grow, so too will our deposits.

The average rate paid on total deposits was 0.25% for the three months ended June 30, 2022, compared to 0.14% for the three months ended June 30, 2021. The average rate paid on NOW and money market accounts increased 11 basis points for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. The average rate paid on time deposits of less than $100,000 decreased 37 basis points for the three months ended June 30, 2022, compared to the three months ended June 30, 2021. The average rate paid on time deposits greater than $100,000 decreased 0.41% for the three months ended June 30, 2022 compared to the three months ended . The average rate paid on savings was fairly flat for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The average rate paid on BaaS brokered deposits increased 0.14% for the three months ended June 30, 2022 compared to the three months ended June 30, 2021. The overall higher average rate paid on interest bearing accounts in the three months ended June 30, 2022 compared to the three months ended June 30, 2021 is due to the recent interest rate increases by the FOMC. The impact of the interest rate increases by the FOMC in the second quarter of 2022 will not be fully realized in our interest expense until future periods. Increased Fed Funds rates along with competition are expected to continue to impact future cost of deposits and our pricing strategies.

The average rate paid on total deposits was 0.18% for the six months ended June 30, 2022, compared to 0.16% for the six months ended June 30, 2021. The average rate paid on NOW and money market accounts increased one basis points for the six months ended June 30, 2022 compared to the six months ended June 30, 2021. The average rate paid on time deposits of less than $100,000 decreased 39 basis points for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The average rate paid on time deposits greater than $100,000 increased 0.54% for the six months ended June 30, 2022 compared to the six months ended June 30, 2021, due to the recognition of additional interest expense of $130,000 during the six months ended June 30, 2022 to correct interest on CDs from a previous period. The average rate paid on savings was fairly flat for the six months ended June 30, 2022, compared to the six months ended June 30, 2021. The average rate paid on BaaS brokered deposits increased seven basis points compared to the six months ended June 30, 2021. The overall higher average rate paid on interest bearing accounts in the six months ended June 30, 2022 compared to the six months ended June 30, 2021 is due to the recent interest rate increases by the FOMC.

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

	For the Three Months Ended June 30,										For the Six Months Ended June 30,
	2022					2021					2022					2021
(dollars in thousands; unaudited)	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
Demand, noninterest bearing	$	839,562		0.00	%	$	863,962		0.00	%	$	1,078,525		0.00	%	$	777,693		0.00	%
NOW and money market		1,579,970		0.39			734,677		0.28			1,250,353		0.30			712,595		0.29
Savings		104,356		0.03			91,181		0.03			104,283		0.03			88,759		0.03
BaaS-brokered deposits		68,876		0.50			22,435		0.36			68,848		0.42			22,625		0.35
Time deposits less than $100,000		14,462		0.25			17,392		0.62			14,652		0.30			18,130		0.69
Time deposits $100,000 and over		24,455		0.31			35,435		0.72			25,739		1.36			36,631		0.82
Total deposits	$	2,631,681		0.25	%	$	1,765,082		0.14	%	$	2,542,400		0.18	%	$	1,656,433		0.16	%

The ratio of average noninterest bearing deposits to average total deposits for the three months ended June 30, 2022 was 31.9% and compared to 48.9% for the three months ended June 30, 2021 and 42.4% for the six months ended June 30, 2022 compared to 46.9% for the six months ended June 30, 2021.

Uninsured Deposits

The FDIC insures our deposits up to $250,000 per depositor, per insured bank for each account ownership category. Deposits that exceed insurance limits are uninsured. At June 30, 2022, deposits totaled $2.70 billion, of which total estimated uninsured deposits were $812.1 million. At June 30, 2021, deposits totaled $2.36 billion, of which total estimated uninsured deposits were $780.6 million.

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

(dollars in thousands; unaudited)	As of June 30, 2022
Maturity Period:
Three months or less	$	1,561
Over three through six months		1,013
Over six through twelve months		289
Over twelve months		184
Total	$	3,047

Borrowings

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

Federal Reserve Bank Line of Credit. The Federal Reserve allows us to borrow against our line of credit through a borrower in custody agreement utilizing the discount window, which is collateralized by certain loans. As of June 30, 2022 and June 30, 2021, total borrowing capacity of $28.9 million and $20.8 million, respectively, was available under this arrangement. As of June 30, 2022 and 2021, Federal Reserve advances totaled zero.

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

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

	As of and For the Three						As of and For the Six
	Months Ended						Months Ended
	June 30,						June 30,
(dollars in thousands; unaudited)	2022			2021			2022			2021
Maximum amount outstanding at any month-end during period:
PPPLF Advances	$	-		$	128,826		$	-		$	185,894
Average outstanding balance during period:
PPPLF Advances	$	-		$	107,047		$	-		$	138,536
Weighted average interest rate during period:
PPPLF Advances		0.00	%		0.35	%		0.00	%		0.35	%
Balance outstanding at end of period:
PPPLF Advances	$	-		$	-		$	-		$	-
Weighted average interest rate at end of period:
PPPLF Advances		0.00	%		0.35	%		0.00	%		0.35	%

Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of June 30, 2022 and June 30, 2021, we had borrowing capacity of $109.0 million and $101.0 million, respectively, with the FHLB. During the six months ended June 30, 2022, we repaid a total of $25.0 million in FHLB term advances. This included a $10.0 million advance that would have matured in March of 2023 and $15.0 million advance that would have matured in March 2025. We have sufficient liquidity for our current loan demand, and with no prepayment penalty for early repayment, management opted to repay these term advances and save the unnecessary interest expense.

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

	As of and For the Three						As of and For the Six
	Months Ended						Months Ended
	June 30,						June 30,
(dollars in thousands; unaudited)	2022			2021			2022			2021
Maximum amount outstanding at any month-end during period:
FHLB Advances	$	-		$	24,999		$	24,999		$	24,999
Average outstanding balance during period:
FHLB Advances	$	-		$	24,999		$	12,154		$	24,999
Weighted average interest rate during period:
FHLB Advances		0.00	%		1.13	%		1.13	%		1.13	%
Balance outstanding at end of period:
FHLB Advances	$	-		$	24,999		$	-		$	24,999
Weighted average interest rate at end of period:
FHLB Advances		0.00	%		1.13	%		0.00	%		1.13	%

Junior Subordinated Debentures. In 2004, we issued $3.6 million in junior subordinated debentures to Coastal (WA) Statutory Trust I (the “Trust”), of which we own all of the outstanding common securities. The Trust used the proceeds from the issuance of its underlying common securities and preferred securities to purchase the debentures issued by the Company. These debentures are the Trust’s only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. The debentures bear interest at a rate per annum equal to the 3-month LIBOR plus 2.10%. The effective rate as of June 30, 2022 and December 31, 2021 was 3.93% and 2.30%, respectively. We generally have the right to defer payment of interest on the debentures at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the debentures. During any such extension period, distributions on the Trust’s preferred securities will also be deferred, and our ability to pay dividends on our common stock will be restricted. The Trust’s preferred securities are mandatorily redeemable upon maturity of the debentures, or upon earlier redemption as provided in the indenture, subject to Federal Reserve approval. If the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. We unconditionally guarantee payment of accrued and unpaid distributions required to be paid on the Trust securities subject to certain exceptions, the redemption price with respect to any Trust securities called for redemption and amounts due if the Trust is liquidated or terminated.

Subordinated Debt. In August 2021, the Company issued a subordinated note in the amount of $25.0 million. The note matures on September 1, 2031, and bears interest at the rate of 3.375% per year for five years and, thereafter, reprices quarterly beginning September 1, 2026, at a rate equal to the three-month SOFR plus 2.76%. The five-year 3.375% interest period ends on September 1, 2026. We may redeem the subordinated note, in whole or in part, without premium or penalty, in principal redemption multiples of $1,000, after August 18, 2026, subject to any required regulatory approvals. Proceeds were used to repay $10.0 million in existing 5.65% interest subordinated debt on August 9, 2021 and $11.5 million was contributed to the Bank as capital during the quarter ended September 30, 2021.

Liquidity and Capital Resources

Liquidity Management

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

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

We continually monitor our liquidity position to ensure that our assets and liabilities are managed in a manner to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. Management has established a comprehensive process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of readily available cash, deposits and highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; contingency funding policies and plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity risk management process. Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation.

Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash on hand, cash at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and BaaS deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, funds from online rate services, brokered deposits, a one-way buy through an ICS account, and the issuance of debt or equity securities. We also participated in the PPPLF, which provided an additional source of low cost funding, at a 0.35% interest rate, and favorable capital treatment for the PPP loans. In June 2021, we repaid all borrowings under the PPPLF in full, resulting in a zero balance as of June 30, 2022. We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary and are closely monitoring liquidity in this uncertain economic environment.

The Company is a corporation separate and apart from our Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its subordinated note and junior subordinated debentures. The Company’s main source of cash flow has been through equity and debt offerings. The Company has consistently retained a portion of the funds from equity and debt offerings so that is has sufficient funds for its operating and debt costs. During the six months ended June 30, 2022, the Company contributed $21.0 million to the Bank. The Company currently holds $2.5 million in cash, and uses approximately $1.6 million for debt servicing and operating purposes each year. In addition, the Bank can declare and pay dividends to the Company to meet the Company’s debt and operating expenses. There are statutory and regulatory limitations that affect the ability of the Bank to pay dividends to the Company. We believe that these limitations will not impact the ability of the Bank to pay dividends to the Company to meet ongoing operating needs.

Additionally, the Bank, as of June 30, 2022, has access to $269.5 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. We believe that these limitations will not impact the ability of the Bank to pay dividends to the Company to meet ongoing operating needs. For contingency purposes, the Company maintains a minimum level of cash to fund one year’s projected operating cash flow needs and the Bank established a minimum liquidity ratio of 5% of assets. Both of these minimum liquidity levels are on-balance sheet sources. Per policy and the Bank’s liquidity contingency plan, in event of a liquidity emergency the Bank can utilize wholesale funds in an amount up to 30% of assets. Since the Bank uses only a small portion of its borrowing or wholesale funding capacity, the Bank has access to funds if needed in a liquidity emergency.

Capital Adequacy

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

As of June 30, 2022, and December 31, 2021, the Bank was in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the Federal Reserve’s prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us. In addition, the Company maintains an effective registration statement on Form S-3 with the Securities and Exchange Commission that would allow the Company to raise additional capital in an amount up to $115.5 million. The Company raised $34.5 million in December 2021.

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

	Actual					Minimum Required for Capital Adequacy Purposes (1)					Required to be Well Capitalized Under the Prompt Corrective Action Provisions
(dollars in thousands; unaudited)	Amount		Ratio			Amount		Ratio			Amount		Ratio
June 30, 2022
Leverage Capital (to average assets)
Company	$	222,399		7.68	%	$	115,819		4.00	%	$	144,774		5.00	%
Bank Only		240,870		8.33	%		115,687		4.00	%		144,609		5.00	%
Common Equity Tier I Capital (to risk-weighted assets)
Company		218,899		8.51	%		115,716		4.50	%		167,146		6.50	%
Bank Only		240,870		9.39	%		115,480		4.50	%		166,805		6.50	%
Tier I Capital (to risk-weighted assets)
Company		222,399		8.65	%		154,289		6.00	%		205,718		8.00	%
Bank Only		240,870		9.39	%		153,974		6.00	%		205,298		8.00	%
Total Capital (to risk-weighted assets)
Company		279,779		10.88	%		205,718		8.00	%		257,148		10.00	%
Bank Only		273,186		10.65	%		205,298		8.00	%		256,623		10.00	%
December 31, 2021
Leverage Capital (to average assets)
Company	$	204,585		8.07	%	$	101,460		4.00	%	$	126,826		5.00	%
Bank Only		201,783		7.96	%		101,350		4.00	%		126,687		5.00	%
Common Equity Tier I Capital (to risk-weighted assets)
Company		201,085		11.06	%		81,834		4.50	%		118,205		6.50	%
Bank Only		201,783		11.12	%		81,623		4.50	%		117,900		6.50	%
Tier I Capital (to risk-weighted assets)
Company		204,585		11.25	%		109,112		6.00	%		145,483		8.00	%
Bank Only		201,783		11.12	%		108,830		6.00	%		145,107		8.00	%
Total Capital (to risk-weighted assets)
Company		252,405		13.88	%		145,483		8.00	%		181,854		10.00	%
Bank Only		224,545		12.38	%		145,107		8.00	%		181,384		10.00	%
(1) Presents the minimum capital adequacy requirements that apply to the Bank (excluding the capital conservation buffer) and that would apply to the Company if it were not eligible to operate under the Small Bank Holding Company Policy Statement.

Material Cash Requirements and Capital Resources

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

			Payments Due by Period
			Less than		Over
(dollars in thousands; unaudited)	Total		1 Year		1 year		Other (1)
Cash requirements
Time Deposits	$	36,473	$	27,857	$	8,616	$	-
Subordinated note		25,000		-		25,000		-
Junior subordinated debentures		3,609		-		3,609		-
Deferred compensation plans		1,023		175		848		-
Operating leases		6,703		1,283		5,420		-
Non-maturity deposits		2,660,832		-		-		2,660,832
Equity investment commitment		1,262		1,262		-		-

(1) Represents the undefined maturity of non-maturing deposits, including noninterest bearing demand deposits, interest bearing demand deposits, money market accounts, savings accounts and brokered deposits, which can generally be withdrawn on demand.

We maintain sufficient cash and cash equivalents and investment securities to meet short-term cash requirements and the levels of these assets are dependent on our operating, investing and financing activities during any given period. Cash on hand, cash at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and BaaS deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, funds from online rate services, brokered funds, a one-way buy through an ICS account, and the issuance of debt or equity securities.

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

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

As of June 30, 2022 we held $224.9 million in capital call lines, included in commercial and industrial loans, provided to venture capital firms through one of our BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line.

As of June 30, 2022 we had $2.06 billion in commitments to extend credit, compared to $909.6 million as of December 31, 2021. The $1.15 billion increase is largely attributed to an increase of $518.6 million in consumer and other loan commitments, related to CCBX consumer loans, $288.6 million increase in commercial and industrial capital call line commitments, and $340.0 million increase in residential real estate commitments, related to CCBX loans.

	As of		As of
	June 30,		December 31,
(dollars in thousands; unaudited)	2022		2021
Commitments to extend credit:
Commercial and industrial loans	$	72,980	$	70,848
Commercial and industrial loans - capital call lines		704,523		415,956
Construction – commercial real estate loans		89,213		90,946
Construction – residential real estate loans		37,667		43,339
Residential real estate loans		441,725		101,715
Commercial real estate loans		33,294		23,248
Consumer and other loans		682,101		163,510
Total commitments to extend credit	$	2,061,503	$	909,562
Standby letters of credit	$	2,790	$	2,729
Equity investment commitment	$	1,262	$	1,090

Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer. As of June 30, 2022, $1.21 billion in commitments to extend credit are unconditionally cancelable, compared to $162.3 million at December 31, 2021. The increase in unconditionally cancelable commitments is attributed to growth in CCBX loans.

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

Critical Accounting Policies

Our accounting policies are integral to understanding our results of operations. Our accounting policies are described in greater detail in “Note 1 - Description of Business and Summary of Significant Accounting Policies” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” of our Form 10-K. We have procedures and processes in place to facilitate making these judgments. Actual results in these areas could differ from management’s estimates. There have been no significant changes concerning our critical accounting policies as described in our Form 10-K.

Selected Financial Data

The following table shows the Company’s key performance ratios for the periods indicated. The table also includes ratios that were adjusted by removing the impact of the PPP loans on loans receivable related measures. The adjusted ratios are non-GAAP measures. For more information about non-GAAP financial measures, see “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” section that follows.

	Three Months Ended															Six Months Ended
(unaudited)	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021			June 30, 2022			June 30, 2021

Return on average assets (1)		1.41	%		0.93	%		1.14	%		1.21	%		1.36	%		1.18	%		1.32	%
Return on average equity (1)		18.86	%		12.12	%		16.80	%		16.77	%		18.60	%		15.57	%		17.75	%
Yield on earnings assets (1)		5.94	%		4.58	%		4.09	%		3.63	%		3.89	%		5.28	%		3.94	%
Yield on loans receivable (1)		7.34	%		6.80	%		5.92	%		4.57	%		4.44	%		7.10	%		4.47	%
Yield on loans receivable, excluding PPP loans (1)(2)		7.26	%		6.52	%		4.98	%		4.53	%		4.65	%		6.93	%		4.71	%
Yield on loans receivable, excluding earned fees (1)(2)		7.12	%		6.17	%		4.37	%		3.74	%		3.46	%		6.70	%		3.49	%
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans, as adjusted (1)(2)		7.21	%		6.41	%		4.78	%		4.36	%		4.42	%		6.86	%		4.47	%
Cost of funds (1)		0.29	%		0.14	%		0.14	%		0.16	%		0.20	%		0.22	%		0.22	%
Cost of deposits (1)		0.25	%		0.09	%		0.09	%		0.10	%		0.14	%		0.18	%		0.16	%
Net interest margin (1)		5.66	%		4.45	%		3.95	%		3.48	%		3.70	%		5.08	%		3.73	%
Noninterest expense to average assets (1)		5.29	%		4.52	%		3.29	%		2.91	%		2.65	%		4.92	%		2.64	%
Noninterest income to average assets (1)		3.53	%		3.27	%		2.22	%		1.11	%		0.92	%		3.40	%		0.79	%
Efficiency ratio		58.38	%		59.34	%		54.08	%		64.68	%		58.69	%		58.80	%		59.70	%
Loans receivable to deposits (3)		86.54	%		76.24	%		73.73	%		76.71	%		92.03	%		86.54	%		92.03	%

(1) Annualized calculations shown for quarterly periods presented.
(2) A reconciliation of the non-GAAP measures are set forth at the end of this report in the section GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
(3) Excluding loans held for sale.

CCBX – BaaS Reporting Information

During the three and six months ended June 30, 2022, $14.2 million and $27.3 million, respectively was recognized in noninterest income BaaS credit enhancements related to the establishment of a credit enhancement receivable for future loan losses indemnified by our strategic partners and reserve for unfunded commitments for CCBX partner loans and deposits. Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by absorbing incurred losses on accounts they originate. In accordance with accounting guidance, we estimate and record a provision for probable losses on these CCBX loans and deposit overdrafts. When the provision for loan losses and provision for unfunded commitments is recorded, a receivable is also recorded on the balance sheet through the recognition of noninterest income (BaaS credit enhancements) in recognition of the CCBX partner’s indemnification obligation and legal commitment to cover losses. Incurred credit losses are recorded in the allowance for

loan losses, and as the credit enhancement payments are received from the CCBX partner, the credit enhancement receivable is relieved. Agreements with our CCBX partners also provide protection to the Bank from fraud by absorbing incurred fraud losses. Fraud losses are recorded when incurred as losses in noninterest expense, and the recovery received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. CCBX partners also pledge cash reserves in a restricted deposit account at the Bank which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by absorbing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations beyond their cash reserve account then the bank would be exposed to additional loan and deposit losses, as a result of this counterparty risk.

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

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

Loan income and related loan expense	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
(dollars in thousands; unaudited)	2022			2021			2022			2021
BaaS loan interest income	$	21,281		$	879		$	33,273		$	1,290
Less: BaaS loan expense		12,229			99			20,519			189
Net BaaS loan income*		9,052			780			12,754			1,101
Net BaaS loan income divided by average BaaS loans*		5.25	%		2.79	%		4.78	%		2.48	%

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

The addition of new CCBX partners has resulted in increases in direct fees, expenses and interest for the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021. The following tables are a summary of the direct fees, expenses and interest components of BaaS for the periods indicated and are not inclusive of all income and expense related to BaaS.

Interest income	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(dollars in thousands; unaudited)	2022		2021		2022		2021
Loan interest income	$	21,281	$	879	$	33,273	$	1,290
Total BaaS interest income	$	21,281	$	879	$	33,273	$	1,290

Interest expense	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(dollars in thousands; unaudited)	2022		2021		2022		2021
BaaS interest expense	$	1,356	$	20	$	1,474	$	42
Total BaaS interest expense	$	1,356	$	20	$	1,474	$	42

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(dollars in thousands; unaudited)	2022		2021		2022		2021
Program income:
Servicing and other BaaS fees	$	1,159	$	1,029	$	2,328	$	1,613
Transaction fees		814		93		1,307		239
Interchange fees		628		110		1,060		145
Reimbursement of expenses		618		192		990		375
Program income		3,219		1,424		5,685		2,372
Indemnification income:
Credit enhancements		14,207		-		27,282		-
Fraud enhancements		6,474		-		11,045		-
Indemnification income		20,681		-		38,327		-
Total BaaS income	$	23,900	$	1,424	$	44,012	$	2,372

	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
(dollars in thousands; unaudited)	2022		2021		2022		2021
BaaS loan expense	$	12,229	$	99	$	20,519	$	189
BaaS fraud expense		6,474		-		11,045		-
Total BaaS loan and fraud expense	$	18,703	$	99	$	31,564	$	189

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

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

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

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

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

	As of and for the Three Months Ended												As of and for the Six Months Ended
(dollars in thousands; unaudited)	June 30, 2022			March 31, 2022			December 31, 2021			June 30, 2021			June 30, 2022			June 30, 2021
Net BaaS loan income and net BaaS loan income divided by average CCBX loans:
Total average CCBX loans receivable	$	691,294		$	382,153		$	244,038		$	112,210		$	537,577		$	89,656
Interest and earned fee income on CCBX loans		21,281			11,992			3,771			879			33,273			1,291
Less: loan expense on CCBX loans		(12,229	)		(8,290	)		(2,368	)		(99	)		(20,519	)		(189	)
Net BaaS loan income	$	9,052		$	3,702		$	1,403		$	780		$	12,754		$	1,102
Net BaaS loan income divided by average CCBX loans		5.25	%		3.93	%		2.28	%		2.79	%		4.78	%		2.48	%
CCBX loan yield		12.35	%		12.73	%		6.13	%		3.14	%		12.48	%		2.90	%

The following non-GAAP measure is presented to illustrate the impact of loan fees on yield on loans receivable.

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

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

	As of and for the Three Months Ended															As of and for the Six Months Ended
(dollars in thousands; unaudited)	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021			June 30, 2022			June 30, 2021
Yield on loans receivable, excluding earned fees :
Total average loans receivable	$	2,194,761		$	1,768,283		$	1,683,310		$	1,681,069		$	1,750,825		$	1,982,700		$	1,695,772
Interest and earned fee income on loans		40,166			29,632			25,134			19,383			19,365			69,798			37,595
Less: earned fee income on all loans		(1,227	)		(2,729	)		(6,572	)		(3,533	)		(4,274	)		(3,956	)		(8,248	)
Adjusted interest income on loans	$	38,939		$	26,903		$	18,562		$	15,850		$	15,091		$	65,842		$	29,347
Yield on loans receivable		7.34	%		6.80	%		5.92	%		4.57	%		4.44	%		7.10	%		4.47	%
Yield on loans receivable, excluding earned fees:		7.12	%		6.17	%		4.37	%		3.74	%		3.46	%		6.70	%		3.49	%
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans (1):		7.21	%		6.41	%		4.78	%		4.36	%		4.42	%		6.86	%		4.47	%
(1) Non-GAAP measure - see next table of "Non-GAAP Financial Measures" for more information.

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

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

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

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

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

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

																As of and for the
	As of and for the Three Months Ended															Six Months Ended
(dollars in thousands; unaudited)	June 30, 2022			March 31, 2022			December 31, 2021			September 30, 2021			June 30, 2021			June 30, 2022			June 30, 2021
Adjusted allowance for loan losses to loans receivable, excluding PPP loans:
Total loans, net of deferred fees	$	2,334,354		$	1,964,209		$	1,742,735		$	1,705,682		$	1,658,149		$	2,334,354		$	1,658,149
Less: PPP loans		(16,398	)		(47,467	)		(111,813	)		(267,278	)		(398,038	)		(16,398	)		(398,038	)
Less: net deferred fees on PPP loans		396			1,365			3,633			9,417			12,363			396			12,363
Adjusted loans, net of deferred fees	$	2,318,351		$	1,918,107		$	1,634,555		$	1,447,821		$	1,272,474		$	2,318,351		$	1,272,474
Allowance for loan losses	$	(49,358	)	$	(38,770	)	$	(28,632	)	$	(20,222	)	$	(19,966	)	$	(49,358	)	$	(19,966	)
Allowance for loan losses to loans receivable		2.11	%		1.97	%		1.64	%		1.19	%		1.20	%		2.11	%		1.20	%
Adjusted allowance for loan losses to loans receivable, excluding PPP loans		2.13	%		2.02	%		1.75	%		1.40	%		1.57	%		2.13	%		1.57	%
Yield on loans receivable, excluding PPP loans:
Total average loans receivable	$	2,194,761		$	1,768,283		$	1,683,310		$	1,681,069		$	1,750,825		$	1,982,700		$	1,695,772
Less: average PPP loans		(33,653	)		(79,828	)		(186,267	)		(322,595	)		(509,265	)		(56,613	)		(492,695	)
Plus: average deferred fees on PPP loans		894			2,453			6,370			11,639			14,213			1,669			12,510
Adjusted total average loans receivable	$	2,162,002		$	1,690,908		$	1,503,413		$	1,370,113		$	1,255,773		$	1,927,756		$	1,215,587
Interest income on loans	$	40,166		$	29,632		$	25,134		$	19,383		$	19,365		$	69,798		$	37,595
Less: interest and deferred fee income recognized on PPP loans		(1,050	)		(2,460	)		(6,245	)		(3,744	)		(4,821	)		(3,510	)		(9,199	)
Adjusted interest income on loans	$	39,116		$	27,172		$	18,889		$	15,639		$	14,544		$	66,288		$	28,396
Yield on loans receivable		7.34	%		6.80	%		5.92	%		4.57	%		4.44	%		7.10	%		4.47	%
Yield on loans receivable, excluding PPP loans:		7.26	%		6.52	%		4.98	%		4.53	%		4.65	%		6.93	%		4.71	%
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans:
Total average loans receivable	$	2,194,761		$	1,768,283		$	1,683,310		$	1,681,069		$	1,750,825		$	1,982,700		$	1,695,772
Less: average PPP loans		(33,653	)		(79,828	)		(186,267	)		(322,595	)		(509,265	)		(56,613	)		(492,695	)
Plus: average deferred fees on PPP loans	$	894		$	2,453		$	6,370		$	11,639		$	14,213		$	1,669		$	12,510
Adjusted total average loans receivable	$	2,162,002		$	1,690,908		$	1,503,413		$	1,370,113		$	1,255,773		$	1,927,756		$	1,215,587
Interest and earned fee income on loans	$	40,166		$	29,632		$	25,134		$	19,383		$	19,365		$	69,798		$	37,595
Less: earned fee income on all loans	$	(1,227	)	$	(2,729	)	$	(6,572	)	$	(3,533	)	$	(4,274	)	$	(3,956	)	$	(8,248	)
Less: interest income on PPP loans		(81	)		(192	)		(461	)		(796	)		(1,257	)		(273	)		(2,426	)
Adjusted interest income on loans	$	38,858		$	26,711		$	18,101		$	15,054		$	13,834		$	65,569		$	26,921
Yield on loans receivable		7.34	%		6.80	%		5.92	%		4.57	%		4.44	%		7.10	%		4.47	%
Yield on loans receivable, excluding earned fees on all loans (1):		7.12	%		6.17	%		4.37	%		3.74	%		3.46	%		6.70	%		3.49	%
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans:		7.21	%		6.41	%		4.78	%		4.36	%		4.42	%		6.86	%		4.47	%
(1) Non-GAAP measure - see previous table of "Non-GAAP Financial Measures" for more information.

(dollars in thousands; unaudited)	As of June 30, 2022			As of June 30, 2021
Adjusted Tier 1 leverage capital ratio, excluding PPP loans:
Company:
Tier 1 capital	$	222,399		$	157,450
Average assets for the leverage capital ratio	$	2,895,487		$	1,967,646
Less: Average PPP loans		(33,653	)		(509,265	)
Plus: Average PPPLF borrowings		-			107,047
Adjusted average assets for the leverage capital ratio	$	2,861,833		$	1,565,428
Tier 1 leverage capital ratio		7.68	%		8.00	%
Adjusted Tier 1 leverage capital ratio, excluding PPP loans		7.77	%		10.06	%
Bank:
Tier 1 capital	$	240,870		$	161,368
Average assets for the leverage capital ratio	$	2,892,173		$	1,966,528
Less: Average PPP loans		(33,653	)		(509,265	)
Plus: Average PPPLF borrowings		-			107,047
Adjusted average assets for the leverage capital ratio	$	2,858,519		$	1,564,310
Tier 1 leverage capital ratio		8.33	%		8.21	%
Adjusted Tier 1 leverage capital ratio, excluding PPP loans		8.43	%		10.32	%

Item 3. Quantitative and Qualitative Disclosure about Market Risk

Quantitative and Qualitative Disclosures about Market Risk

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

Fluctuations in interest rates will ultimately impact both the level of income and expense recorded on most of our assets and liabilities, and the market value of all interest earning assets and interest bearing liabilities, other than those which have a short term to maturity. Interest rate risk is the potential for economic losses due to future interest rate changes. These economic losses can be reflected as a loss of future net interest income and/or a decrease in current fair market values. Our objective is to measure the effect on net interest income and to adjust the balance sheet to minimize the inherent risk while at the same time maximizing income. The Federal Open Market Committee raised interest rates 0.25% in mid-March 2022 and 1.25% in the second quarter of 2022 with additional increases expected in the future. The impact of this and any future increases will impact financial results.

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

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

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

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

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

(unaudited)
Change in Market Interest Rates	Twelve Month Projection June 30, 2022	Twelve Month Projection December 31, 2021
Static Balance Sheet and Rate Shifts
+400 basis points	20.9%	36.7%
+300 basis points	15.7%	27.2%
+200 basis points	10.6%	17.9%
+100 basis points	5.3%	8.5%
-100 basis points	(6.5)%	(9.7)%
-200 basis points	(10.9)%	(15.4)%
-300 basis points	(15.5)%	(19.9)%

Dynamic Balance Sheet and Rate Shifts
+400 basis points	23.1%	38.5%
+300 basis points	17.3%	28.7%
+200 basis points	11.6%	18.8%
+100 basis points	5.9%	9.1%
-100 basis points	(6.9)%	(11.8)%
-200 basis points	(11.4)%	(19.4)%
-300 basis points	(16.2)%	(23.0)%

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

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

Item 4. Controls and Procedures

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

Change in Internal Control over Financial Reporting. There were no changes in the Company’s internal control over financial reporting occurred during the three months ended June 30, 2022, 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 Annual Report on Form 10-K for the fiscal year ended December 31, 2021, which are incorporated by reference herein. As of June 30, 2022, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

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

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

The Company did not repurchase any of its equity securities during the three and six months ended June 30, 2022 and does not have any authorized share repurchase programs.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

Item 6. Exhibits



10.1+	Employment agreement by and among Coastal Financial Corporation, Coastal Community Bank and Curt Queyrouze dated May 18, 2022.

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

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

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

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

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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			COASTAL FINANCIAL CORPORATION

Dated:	August 4, 2022	By:	/s/ Eric M. Sprink
			Eric M. Sprink
			Chief Executive Officer
			(Principal Executive Officer)

Dated:	August 4, 2022	By:	/s/ Joel G. Edwards
			Joel G. Edwards
			Executive Vice President and
			Chief Financial Officer
			(Principal Financial Officer)

EX-10.1 2 ck1437958-ex101_222.htm EX-10.1 ck1437958-ex101_222.htm

EXHIBIT 10.1

EMPLOYMENT AGREEMENT

THIS EMPLOYMENT AGREEMENT (the “Agreement”) dated as of May 18, 2022 (the “Effective Date”), is made by and among Coastal Financial Corporation (the “Holding Company”), Everett, Washington, Coastal Community Bank (the “Bank”), Everett, Washington, and Curt Queyrouze, an individual (the “Executive”).

RECITALS

WHEREAS, the Holding Company and the Bank desire to hire the Executive to serve as President of the Holding Company and the Bank, and the Executive desires to accept an offer of employment to serve as President of the Holding Company and the Bank; and

WHEREAS, the parties desire to enter into an employment relationship on the terms and conditions set forth herein.

NOW, THEREFORE, in consideration of the mutual covenants herein contained, the receipt and sufficiency of which are acknowledged, the parties hereby agree as follows.

POSITION.

During the period of the Executive’s employment hereunder, the Executive agrees to serve as President of the Holding Company and the Bank.

2.	TERM AND DUTIES.

(a)The term of this Agreement shall commence as of the Effective Date and shall continue until the sixth (6th) anniversary of the Effective Date (the “Initial Term”). The Agreement will renew automatically for additional, successive twelve (12) month periods (each, a “Renewal Term”, and collectively with the Initial Term, the “Term”) unless the Executive, on the one hand, or the Bank and the Holding Company, on the other hand, delivers notice of intent not to renew at least ninety (90) days prior to the applicable renewal date. The Term may be terminated in accordance with Sections 4 and 5.

(b)During the period of the Executive’s employment hereunder, except for periods of absence occasioned by illness, vacation periods, and approved leaves of absence, the Executive shall devote all of the Executive’s business time, attention, skill,

and efforts to the faithful performance of the Executive’s duties hereunder, including the operation and management of the Holding Company and the Bank. The duties of the Executive shall be as directed by the Boards of Directors of the Holding Company and the Bank including, but not limited to, the direction of activities of all other officers and employees of the Holding Company and the Bank.

3.	COMPENSATION AND REIMBURSEMENT.

(a)The compensation specified under this Agreement shall constitute the salary and benefits paid for the duties as President described in Sections 1 and 2. The Bank shall pay the Executive as compensation a base salary of Four Hundred Thousand & No/100 Dollars ($400,000.00) per year (“Base Salary”), less deductions and withholdings. Such Base Salary shall be payable in accordance with the customary payroll practices of the Bank, and shall commence on the Effective Date. The Compensation Committee of the Board of Directors of the Holding Company (the “Committee”) shall review the Executive’s Base Salary at least annually and may increase, but not decrease, the Executive’s Base Salary based on such review. Any increase in salary after the Effective Date shall constitute the Base Salary for purposes of this Agreement. For purposes of this Agreement, any decisions, duties, and actions specified for the Committee may be taken or fulfilled by the Board of Directors of the Holding Company and/or the Bank or such other committee that may be established by the Board of Directors of the Holding Company or the Bank, as applicable.

(b)During the Term, the Executive shall be eligible to participate in the Bank’s annual cash incentive plan similar to that offered to other senior executives, with award opportunities based upon the achievement of performance goals in relationship to objective defined targets as established from year to year by the Committee (the “Annual Bonus”). Determinations regarding the Executive’s performance against established objectives shall be in the sole discretion of the Committee.

(c)During the Term, the Executive shall be eligible to receive equity incentive awards under the Holding Company’s 2018 Omnibus Incentive Plan, as amended, or any successor plan (the “2018 Incentive Plan”), with award opportunities based upon his continued service and/or the achievement of performance goals in relationship to objective defined targets as established by the Committee. Determinations regarding the Executive’s performance against established objectives shall be in the sole discretion of the Committee. The parties agree and intend that all payments or awards under this Section 3(c) shall be pursuant to a “bona fide deferred compensation plan or arrangement,” as that term is defined under 12 C.F.R. § 359.1(d), and (f)(2)(iii).

(d)In addition to the incentive compensation opportunities provided under Section 3(b) and Section 3(c), the Executive shall also be eligible to participate in or receive benefits under any employee benefit plan including, but not limited to, retirement plans, supplemental retirement plans, pension plans, profit-sharing plans, life insurance, health insurance, or any other employee benefit plan or arrangement made available by the Bank currently or in the future to its senior executives and key management employees, subject to, and on a basis consistent with, the terms, conditions and overall administration of such plans and arrangements. The Bank reserves the right to amend or terminate its plans and programs at any time, or to change the portion of the cost of coverage that the Bank pays. The parties agree and intend that all payments or awards under this Section 3(d) shall be pursuant to a “benefit plan,” as that term is defined under 12 C.F.R. § 359.1(c), and (f)(2)(ii).

(e)The Bank will reimburse the Executive for reasonable, business-related travel and entertainment expenses upon the presentation of appropriate receipts, in accordance with the Bank’s reimbursement policies and procedures. The Bank shall reimburse the Executive for reasonable expenses for the Executive and the Executive’s spouse to attend industry-related meetings, including registration fees and travel expenses, in accordance with budgetary constraints.

(f)The Bank will provide the Executive with a cellular telephone and laptop computer and mobile and home data connections in accordance with the Bank’s internal IT policy (this amount is estimated to be approximately $200 per month of reimbursement to the Executive at the time of executive of this Agreement).

(g)The Executive will be entitled to five (5) weeks’ paid vacation annually.

(h)The Bank shall provide the Executive with a taxable monthly auto allowance of $850 (or such other amount as may be approved by the Committee from time to time), unless the Bank elects to provide the Executive with a Bank owned or leased vehicle, in which case the Bank will pay or reimburse the Executive for all expenses of insurance, registration, operation and maintenance of such Bank owned or leased vehicle.

(i)The Bank shall reimburse the Executive up to $400.00 per month (or such other amount as may be approved by the Committee from time to time) toward the premium for a life insurance policy on the life of the Executive payable to the Executive’s designated beneficiary.

(j)The Bank shall furnish payments for reasonable annual dues for industry certifications (including payment for continuing education requirements associated with such certifications), associations, and memberships.

4.	TERMINATION OF EMPLOYMENT.

(a)Death or Disability. The Executive’s employment shall terminate automatically upon the Executive’s death. If the Holding Company or the Bank determine in good faith that a Disability (as defined in Section 5(i)(iii) below) of the Executive has occurred during the Term, the Holding Company and the Bank may give to the Executive written notice of intention to terminate the Executive’s employment. In such event, the Executive’s employment with the Holding Company and the Bank shall terminate effective on the thirtieth (30^th) day after receipt by the Executive of such written notice, provided that, within the thirty (30) days after such receipt, the Executive shall not have returned to full-time performance of the Executive’s duties.

(b)Termination by Holding Company and Bank. The Holding Company and the Bank may terminate the Executive’s employment during the Term, with or without Cause (as defined in Section 5(i)(i) below), immediately on written notice to the Executive if with Cause or after thirty (30) days’ written notice if without Cause.

(c)Termination by the Executive.

(i)Termination Without Good Reason. The Executive’s employment may be terminated by the Executive for any reason or no reason by delivering a Notice of Termination (as defined in Section 4(d) below) to the Holding Company and the Bank at least ninety (90) days prior to the desired termination date. During such notice period, and at the sole discretion of the Holding Company and the Bank, the Executive may be relieved of all duties or prohibited from physically working at the Bank’s offices so long as the Executive continues to be paid the Executive’s Base Salary and receive any other amounts owed under this Agreement during such notice period.

(ii)Termination With Good Reason. If an event constituting Good Reason (as defined in Section 5(i)(iv) below) occurs during the Term, the Executive may, at any time within the sixty (60) day period following the initial occurrence of such event, provide a Notice of Termination specifying the event of Good Reason and notifying the Holding Company and the Bank of the Executive’s intention to terminate the Executive’s employment with the Holding Company

and the Bank if the Holding Company and the Bank fail to correct the event of Good Reason within thirty (30) days following receipt of the Executive’s Notice of Termination (the “Cure Period”). If the Holding Company and the Bank fail to correct the event of Good Reason and provide the Executive with notice of such correction within the Cure Period, the Executive may terminate employment with the Holding Company and the Bank for Good Reason within fifteen (15) days after the end of the Cure Period. If (i) the Holding Company and the Bank correct the event of Good Reason and provide the Executive with notice of such correction within the Cure Period, or (ii) the Executive does not comply with the 60-day notice requirement, 30-day cure period requirement or 15-day termination requirement described in this paragraph, Good Reason shall be deemed not to have occurred.

(d)Notice of Termination. Any purported termination shall be communicated by a Notice of Termination by the Executive to the Holding Company and the Bank, or by the Holding Company and the Bank to the Executive, as applicable. For purposes of this Agreement, a “Notice of Termination” shall mean a written notice which shall indicate the specific termination provision in this Agreement relied upon and, if applicable, shall set forth in reasonable detail the facts and circumstances claimed to provide a basis for termination of the Executive’s employment under the provision so indicated.

5.	OBLIGATIONS OF THE HOLDING COMPANY AND THE BANK UPON TERMINATION.

(a)Termination for Cause; Resignation Other Than for Good Reason or Disability; Expiration. If during the Term, (i) the Holding Company and the Bank terminate the Executive’s employment for Cause, (ii) the Executive terminates the Executive’s employment for any reason other than Good Reason or Disability, or (iii) if the Executive’s employment terminates because the Term is not renewed and expires, the Holding Company and Bank shall have no further obligations to the Executive or the Executive’s legal representatives, other than to pay the Executive or the Executive’s legal representatives (1) the unpaid Base Salary earned by the Executive through the effective date of the Executive’s termination of employment with the Holding Company and the Bank (the “Termination Date”) and any vacation pay, expense reimbursements and cash entitlements accrued by the Executive that are payable pursuant to the Holding Company and Bank’s policies as of such date, which payment shall be made within ten (10) days of termination (subject to receipt of required substantiation, as applicable) or earlier if required by law, and (2) any other amounts or benefits required to be paid or provided

or which the Executive is eligible to receive under any plan, program, policy, contract or agreement of the Bank and its affiliated companies and in accordance with the terms thereof, including, but not limited to, any amounts payable under any deferred compensation arrangements or agreements between the Executive and the Holding Company or the Bank, or other benefit plans, in accordance with the terms of such plans, programs, policies, contract, or agreement (clauses (1) and (2), collectively, the “Accrued Benefits”). In the event of the Executive’s death prior to payment of the Accrued Benefits, such payments and benefits shall be provided to the Executive’s estate or beneficiary.

(b)Without Cause or for Good Reason. If, during the Term and prior to a Change in Control (as defined in Section 5(i)(ii) below) or more than one year after a Change in Control, the Holding Company and the Bank terminate the Executive’s employment without Cause or the Executive terminates the Executive’s employment for Good Reason, the Executive shall be entitled to receive the payments and benefits set forth in this Section 5(b), which shall be paid to the Executive or, after the Executive’s death, to the Executive’s estate or beneficiary, as applicable, as follows:

(i)The Bank shall pay the Executive the Accrued Benefits as described in Section 5(a) above.

(ii)The Bank shall pay the Executive an amount in cash equal to one (1) year of the Executive’s Base Salary as then in effect (the “Severance Amount”). Such Severance Amount shall be payable in substantially equal monthly installments over one (1) year following the Termination Date, except that the first payment shall be made on the sixtieth (60th) day following the Termination Date and shall include all installments that would have been paid earlier had the installment stream commenced immediately following the Termination Date.

(iii)The Bank shall pay the Executive an amount equal to the product of (A) the Annual Bonus, if any, that the Executive would have earned for the calendar year in which the Termination Date occurs based on achievement of the applicable performance goals for such year at target and (B) a fraction, the numerator of which is the number of days the Executive was employed by the Holding Company and the Bank during the year of termination and the denominator of which is the number of days in such year, in a lump sum in cash on the sixtieth (60th) day following the Termination Date.

(iv)If the Executive timely and properly elects continued Bank-provided group health plan coverage pursuant to the Consolidated Omnibus Reconciliation

Act of 1985, as amended (“COBRA”), the Bank shall reimburse the Executive in an amount equal to the monthly COBRA premium paid by the Executive for such coverage less the active employee premium for such coverage. The Executive shall be eligible to receive such reimbursement until the earliest of: (A) one (1) year following the Termination Date; (B) the date the Executive is no longer eligible to receive COBRA continuation coverage; or (C) the date on which the Executive either receives or becomes eligible to receive substantially similar coverage from another employer. If the Bank is unable to provide such reimbursement of health benefits as a result of applicable non-discrimination requirements, the Bank shall pay the Executive a monthly taxable amount equal to the reimbursement the Bank would have paid.

(v)Any unvested and outstanding stock options, restricted stock units, and/or other outstanding equity incentive compensation awards granted to the Executive on or after the Effective Date (other than as explicitly provided for in an award agreement) shall vest to the extent that such award would have vested within one year following the Termination Date based solely on the continued employment of the Executive, effective as of the time the Release Agreement set forth in Section 5(g) below becomes effective and irrevocable.

(c)Disability. If during the Term, the Executive’s employment terminates due to the Executive’s Disability, the Executive shall be entitled to receive the payments and benefits set forth in this Section 5(c), which shall be paid to the Executive or, after the Executive’s death, to the Executive’s estate or beneficiary, as applicable, as follows:

(i)The Bank shall pay the Executive Accrued Benefits as described in Section 5(a) above.

(ii)The Bank shall pay the Executive an amount equal to one (1) year of the Executive’s Base Salary in effect on the Termination Date less the amount paid under the Bank’s long-term disability plan for the one (1) year period following the Termination Date, with such net amount paid as salary continuation in substantially equal installments over the one (1) year period following the Termination Date in accordance with the Bank’s customary payroll practices regarding the payment of base salary to executives but no less frequently than monthly (i.e., as if the Executive were still employed and receiving Base Salary pursuant to Section 3(a) of this Agreement), except that the first payment shall be made on the sixtieth (60th) day following the Termination Date and shall include

all installments that would have been paid earlier had the installment stream commenced immediately following the Termination Date.

(iii)If the Executive timely and properly elects continued Bank-provided group health plan coverage pursuant to COBRA, the Bank shall reimburse the Executive in an amount equal to the monthly COBRA premium paid by the Executive for such coverage less the active employee premium for such coverage. The Executive shall be eligible to receive such reimbursement until the earliest of: (A) one (1) year following the Termination Date; or (B) the date the Executive is no longer eligible to receive COBRA continuation coverage. If the Bank is unable to provide such reimbursement of health benefits as a result of applicable non-discrimination requirements, the Bank shall pay the Executive a monthly taxable amount equal to the reimbursement the Bank would have paid.

(iv)Any unvested and outstanding stock options, restricted stock units, and/or other outstanding equity incentive compensation awards granted to the Executive on or after the Effective Date (other than as explicitly provided for in an award agreement) shall vest to the extent that such award would have vested within one year following the Termination Date based solely on the continued employment of the Executive.

(d)Death. If during the Term, the Executive’s employment terminates due to the Executive’s death, the Executive’s estate or beneficiary shall be entitled to receive the payments and benefits set forth in this Section 5(d) as follows:

(i)The Bank shall pay the Executive’s estate or beneficiary the Accrued Benefits as described in Section 5(a) above.

(ii)If the Executive’s surviving spouse timely and properly elects continued Bank-provided group health plan coverage pursuant to COBRA, the Bank shall reimburse the Executive’s surviving spouse and covered dependents in an amount equal to the monthly COBRA premium paid by the Executive’s surviving spouse for such coverage less the active employee premium for such coverage. The Executive’s surviving spouse shall be eligible to receive such reimbursement until the earliest of: (A) twelve (12) months following the Executive’s death; or (B) the date the spouse is no longer eligible to receive COBRA continuation coverage. If the Bank is unable to provide such reimbursement of health benefits as a result of applicable non-discrimination requirements, the Bank

shall pay a monthly taxable amount equal to the reimbursement the Bank would have paid.

(iii)Any unvested and outstanding stock options, restricted stock units, and/or other outstanding equity incentive compensation awards granted to the Executive on or after the Effective date (other than as explicitly provided for in an award agreement) shall vest to the extent that such award would have vested within one year following the Termination Date based solely on the continued employment of the Executive.

(e)Without Cause or for Good Reason Following a Change in Control. If during the Term and within one (1) year following a Change in Control, the Holding Company and Bank terminate the Executive’s employment without Cause or the Executive terminates the Executive’s employment for Good Reason, the Executive shall be entitled to receive the payments and benefits set forth in this Section 5(e) in lieu of the payments and benefits set forth in Section 5(b), which shall be paid to the Executive or, after the Executive’s death, to the Executive’s estate or beneficiary, as applicable, as follows:

(i)The Bank shall pay the Executive the Accrued Benefits as described in Section 5(a) above.

(ii)The Bank shall pay the Executive an amount (the “CIC Severance Amount”) in cash equal to two (2) times the sum of (A) the Executive’s Base Salary as then in effect, and (B) the cash Annual Bonus earned by the Executive for the year prior to the year in which the Change in Control occurs in a lump sum on the sixtieth (60th) day following the Termination Date.

(iii)Within sixty (60) days following the Termination Date, the Bank shall pay to the Executive a single lump sum payment in an amount equal to twenty-four (24) times the Bank’s monthly COBRA charge in effect on the Termination Date for the type of Bank-provided group health plan coverage in effect for the Executive (e.g., family coverage) on the Termination Date less the active employee charge for such coverage in effect on the Termination Date.

(iv)The Executive will be vested in full with respect to all of the Executive’s unvested stock options, restricted stock units, and/or other equity incentive compensation awards previously granted to the Executive (other than as explicitly provided for in an award agreement) that would have vested based

solely on the continued employment of the Executive, effective as of the time the Release Agreement set forth in Section 5(g) below becomes effective and irrevocable.

(f)Entitlement to Benefits. Except as otherwise provided in this Agreement, upon termination of the Executive’s employment, the Executive shall be entitled to all vested benefits, vested stock-based awards in accordance with their terms, accrued and unused vacation, return of personal effects, COBRA rights and other rights that may not be waived or released as a matter of law, in addition to any other sums, benefits, or rights which are provided for in this Agreement.

(g)Release of Claims. Notwithstanding anything herein to the contrary, the Bank and the Holding Company shall be obligated to provide the payments and benefits described in Sections 5(b)(ii) through 5(b)(v) and Sections 5(e)(ii) through 5(e)(iv) only if within forty-five (45) days after the Termination Date the Executive shall have executed a full release of claims covering all claims relating to the Executive’s employment and termination of employment (the “Release Agreement”) and such Release Agreement shall not have been revoked within the revocation period specified in the Release Agreement (a copy of the agreed form of the Release Agreement is attached hereto as Exhibit A); provided, however, that if the maximum period in which the Executive has to execute and revoke the Release Agreement would extend into the calendar year following the year of termination (the “Following Year”), then any termination payment which is subject to Section 409A of the Internal Revenue Code of 1986, as amended (the “Code”), will be paid beginning no later than fourteen (14) days after the later of (i) the first day of the Following Year or (ii) the date on which the Executive has executed and not revoked the Release Agreement. The Release Agreement shall contain exceptions to the release for (a) any existing right to indemnification, contribution, and a defense, (b) any directors and officers and general liability insurance coverage of the Executive, (c) the Executive’s rights as a shareholder, (d) all vested rights of the Executive, (e) the Executive’s right to enforce this Agreement, and (f) any rights which cannot be waived or released as a matter of law.

(h)The Executive’s Obligations. Payment of the Severance Amount and the other benefits described in Sections 5(b)(ii) through 5(b)(v), payment of the CIC Severance Amount and the other benefits described in and Sections 5(e)(ii) through 5(e)(iv), as applicable, shall be conditioned upon the Executive’s ongoing compliance with the obligations set forth in Section 6.

(i)Definitions of Terms.

(i)Cause. “Cause” shall exist if there is (a) a material neglect by the Executive of the Executive’s assigned duties, which includes but is not limited to any failure to follow the written direction of the Boards of Directors of the Holding Company and/or the Bank, as applicable or to comply with the Holding Company and Bank’s code of ethics or written policies, or repeated refusal by the Executive to perform the Executive’s assigned duties, in each case other than by reason of Disability, provided that Cause shall not exist if such failure or refusal, if curable, is cured by the Executive within 30 days following receipt of written notice of such failure or refusal from the Boards of Directors of the Holding Company and/or the Bank, as applicable; (b) the commission by the Executive of any act of fraud or embezzlement against the Holding Company, the Bank or any of their affiliates or the commission of any felony or act involving dishonesty; (c) the commission by the Executive of any breach of fiduciary duty or act of moral turpitude which causes harm to the Holding Company, the Bank or any of their affiliates; (d) a material breach by the Executive of the terms of this Agreement or any other confidentiality, non-disclosure, or restrictive covenant agreement of the Executive with the Holding Company and/or the Bank; (e) the Executive’s commencement of employment with another company that is a competitor of the Holding Company or the Bank while the Executive is an employee of the Holding Company and the Bank without the prior consent of the Boards of Directors of the Holding Company and the Bank; or (f) a final cease and desist order issued against the Executive directly.

(ii)Change in Control. “Change in Control” means a change in control as defined in Section 409A of the Code and the rules, regulations and guidance promulgated thereunder and issued by the Department of the Treasury, including the occurrence of any one or more of the following events:

(A)Merger. The Holding Company merges into or consolidates with another entity, or merges another entity into the Holding Company and, as a result, less than a majority of the combined voting power of the resulting entity or, if applicable, the ultimate parent thereof, immediately after the merger or consolidation is held by persons who were stockholders of the Holding Company immediately before the merger or consolidation;

(B)Acquisition of Significant Share Ownership. The acquisition by any person (within the meaning of Section 13(d) of the Securities Exchange Act, as amended), other than any employee benefit plan or trust maintained

by the Holding Company, of fifty percent (50%) or more of the combined voting power entitled to vote generally in the election of directors of the Holding Company’s then outstanding voting securities;

(C)Change in Board Composition. During any period of two consecutive years, individuals who constitute the Holding Company’s Board of Directors at the beginning of the two-year period cease for any reason to constitute at least a majority of the Holding Company’s Board of Directors; provided, however, that for purposes of this clause (C), each director who is first elected by the Board of Directors (or first nominated by the Board of Directors for election by the stockholders) by a vote of at least two-thirds (2/3) of the directors who were directors at the beginning of the two-year period shall be deemed to have also been a director at the beginning of such period, including for purposes of this proviso; or

(D)Sale of Assets. A sale, transfer, or other disposition of all or substantially all of the assets of the Holding Company which is consummated and immediately following which the persons who were the owners of the Holding Company immediately prior to such sale, transfer, or disposition, do not own, directly or indirectly and in substantially the same proportions as their ownership immediately prior to the sale, transfer, or disposition, more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of (i) the entity or entities to which such assets or ownership interest are sold or transferred or (ii) an entity that, directly or indirectly, owns more than fifty percent (50%) of the combined voting power entitled to vote generally in the election of directors of the entities described in clause (i).

(iii)Disability. “Disability” means a determination by the Social Security Administration of the Executive’s inability to engage in any substantial gainful activity by reason of any medically-determinable physical or mental impairment which can be expected to result in death or which has lasted or can be expected to last for a continuous period of not less than 12 months.

(iv)Good Reason. “Good Reason” means the occurrence of any of the following during the Term without the express prior written consent of the Executive: (a) there is a material change in the geographic location at which the Executive must perform the Executive’s services hereunder; i.e., relocation of the principal executive offices to a location outside Snohomish and Skagit Counties;

(b) there is a material reduction by the Holding Company and Bank in the Executive’s responsibilities, duties, authority, title or reporting relationship; or (c) there is a material reduction in the Executive’s Base Salary (as defined or subsequently increased pursuant to Section 3(a)) or a failure by the Holding Company or Bank to pay or provide to the Executive any material compensation or benefits due under the terms of this Agreement or any other agreement with the Holding Company or Bank. The Executive shall not have Good Reason on account of being relieved of his duties during a notice period as permitted under this Agreement or if the Executive is placed on a paid leave not to exceed sixty (60) days, during which compensation and benefits are provided, so that the Board may investigate, in good faith, whether a Cause event has occurred.

(v)To the extent any definition herein differs in a material way from the definitions of the same term in other agreements relating to the Executive’s employment or benefits, the definitions herein shall control.

6.	CONFIDENTIALITY AND RESTRICTIVE COVENANTS.

(a)Return of Holding Company and Bank Assets. Upon cessation of the Executive’s employment, or as otherwise reasonably requested by Bank or the Holding Company, the Executive shall return to the Bank or the Holding Company all documents, information and other property of the Bank or of any Affiliate that is in the Executive’s possession or control, including but not limited to documents and files (whether paper or electronic); keys, passes and key cards; and computers, portable hard drives, and other office equipment. Upon cessation of the Executive’s employment, the Executive shall cooperate with the Bank to transfer possession of an automobile owned or leased by the Bank and used by the Executive during the Term.

(b)Confidentiality. The Executive agrees that, during the Term and at all times thereafter, the Executive will not disclose, nor will the Executive use for the benefit of the Executive or any other person, any of the non-public information regarding the business of the Holding Company, Bank or any Affiliate to which the Executive was entrusted with access during the Executive’s employment (the “Confidential Information”), including but not limited to: (a) customer information, including customer lists and other nonpublic information regarding customers, such as customer contact information; contract terms; customer files; information regarding customer history, needs and preferences; and information designated by customers to be kept confidential; (b) financial information, such as financial plans and earnings and other performance figures; cost and profitability information; and pricing; (c) strategies, marketing and other

strategic plans; and (d) personnel files and information. Confidential Information does not include any information that is, or becomes, in the public domain through no disclosure or other action (whether direct or indirect) by the Executive. The obligations in this Section 6(b) with respect to a particular piece of Confidential Information shall remain in effect until that piece of information enters the public domain through no breach of contract, duty, or other obligation. The Executive will not, during the Term and at all times thereafter, disclose any knowledge of the past, present, planned, or considered business activities of the Holding Company, the Bank, or Affiliates to any person, firm, corporation or other entity for any reason or purpose whatsoever. Notwithstanding the foregoing, the Executive may disclose any knowledge of banking, financial and/or economic principles, concepts or ideas which are not solely and exclusively derived from the business plans and activities of the Holding Company and the Bank. Nothing in this Agreement prohibits the Executive from (1) making any disclosure or communication required or protected by law or (2) reporting possible violations of law to a governmental agency or entity. The Executive is not required to notify, or seek authorization from, the Holding Company or the Bank if the Executive makes such reports. In addition, the Executive understands that the Executive may be entitled to immunity from liability under the Defend Trade Secrets Act, 18 U.S.C. § 1833(b) for certain disclosures of trade secrets, provided that such disclosure (A) is made (i) in confidence to a federal, state, or local government official, either directly or indirectly, or to an attorney, and (ii) solely for the purpose of reporting or investigating a suspected violation of law; or (B) is made in a complaint or other document filed in a lawsuit or other proceeding, if such filing is made under seal and the Executive does not disclose the trade secret except pursuant to court order.

(c)Non-Competition. During the Term and, subject to the final paragraph of this Section 6(c), for a period of twelve (12) months following the Termination Date, the Executive covenants not to directly or indirectly engage in any of the following activities within the Restricted Area (as defined in Section 6(f)(ii) below):

(i)compete with the Holding Company, the Bank, or any Affiliate;

(ii)Work for a sponsor bank, issuing bank or bank of record that competes with the Holding Company, the Bank, or any Affiliate within the “banking as a service” (“BaaS”) field;

(iii)work for or advise, consult, or otherwise provide services to, any entity whose business materially competes, or who is planning or preparing to

compete, with the depository, lending, BaaS, or other business activities of the Holding Company, the Bank or any Affiliate;

(iv)provide services, in either a paid or unpaid capacity, to any individual, entity or group proposing, planning, or preparing to establish a new bank or other financial institution; or

(v)provide, or assist in the provision of, Restricted Services to any Restricted Customer (as defined respectively in Sections 6(f)(v) and 6(f)(iii) below).

The restrictions in this Section 6(c) will apply following the Term if the Executive’s employment is not terminated for any reason prior to December 1, 2023, and (1) the Executive becomes eligible for the severance payments and benefits described in Sections 5(b)(ii) through 5(b)(v) or Sections 5(e)(ii) through 5(e)(iv) or (2) the Holding Company and the Bank elect within sixty (60) days after the Termination Date that the restrictions will apply and the Executive will receive salary continuation for twelve (12) months following the end of the Term (the first payment of which shall be made on the sixtieth (60th) day following the Termination Date and shall include all installments that would have been paid earlier had the installment stream commenced immediately following the Termination Date), the bonus described in Section 5(b)(iii), and the health benefits described in Section 5(b)(iv); provided, however, that if the Termination Date occurs within one (1) year following a Change in Control, any amounts payable under this clause shall be paid in lump sum on the sixtieth (60th) day following the Termination Date. Payments of the amounts described in this paragraph shall be conditioned upon the Executive’s ongoing compliance with the obligations set forth in Section 6, and, for the avoidance of doubt, in the event that the Executive fails to comply with such obligations and payments cease, the restrictions in this Section 6(c) shall remain effective.

(d)Non-Solicitation. During the Term and for a period of eighteen (18) months following the Termination Date, the Executive will not, directly or indirectly, do the following, nor shall the Executive assist, encourage or advise any other person or entity to do the following:

(i)solicit, or induce, any Restricted Customer to cease doing business with the Holding Company, the Bank or any Affiliate, or otherwise interfere with the relationship between a Restricted Customer and the Holding Company, the Bank, or any Affiliate;

(ii)recruit, hire, or employ any Restricted Person;

(iii)recommend, suggest, or interview for employment any Restricted Person; or

(iv)solicit, advise, encourage, or induce any Restricted Person to terminate such Restricted Person’s engagement with the Holding Company, the Bank, or any Affiliate.

(e)Non-Disparagement. During the Term and at all times thereafter, the Executive shall not, and will not encourage or assist others to, in verbal, written or any other form in any medium (including, but not limited to, television or radio, newspapers, magazines, computer networks, social media, or bulletin boards, statements to the media, or any other form of communication), make false statements about, disparage, defame, impugn, or otherwise damage or assail the reputation, integrity, or professionalism of the Holding Company, the Bank, or any Affiliate, or any of their respective directors, officers, employees, representatives, businesses, products, services, or activities. During the Term and at all times thereafter, the Holding Company and the Bank shall instruct their respective executive officers and directors to not, and to not encourage or assist others to, in verbal, written or any other form in any medium (including, but not limited to, television or radio, newspapers, magazines, computer networks, social media, or bulletin boards, statements to the media, or any other form of communication), make false statements about, disparage, defame, impugn, or otherwise damage or assail the reputation, integrity or professionalism of the Executive. However, nothing in this Section 6(e) shall be deemed to preclude any person or entity subject to this Section 6(e) from providing truthful testimony or information pursuant to a validly issued subpoena or court order. Additionally, nothing in this Section 6(e) shall prohibit the Holding Company, the Bank, or any of their respective officers, directors, or employees from: (i) defending any legal or arbitral action brought against the Holding Company, the Bank, or any of their Affiliates, or any of their respective officers, directors, or employees; (ii) accurately completing and delivering performance reviews of the Executive; or (iii) making such disclosures to shareholders as are required by law and consistent with applicable fiduciary responsibilities.

(f)Definitions. The following terms have the meanings assigned below:

(i)“Affiliate” as used in this Section 6 means any subsidiary or parent company of the Holding Company or the Bank.

(ii)“Restricted Area” means each county in which the Holding Company, the Bank, or any Affiliate provides banking, depositary, lending and other services, which, as of the Effective Date, includes (1) Snohomish County, Washington, (2) Skagit County, Washington, (3) Island County, Washington, and (4) King County, Washington, and in each case all geographic territory within; for purposes of the application of this Section 6 following the Termination Date, the Restricted Area shall be determined as of the Termination Date. Notwithstanding the foregoing, with respect to the BaaS business, the Restricted Area shall be the United States.

(iii)“Restricted Customer” means any and all persons or entities who were customers of the Bank or who contracted with the Bank at any time during the last twelve (12) months of the Executive’s employment.

(iv)“Restricted Person” means any person who provided services to the Holding Company, the Bank, or an Affiliate (whether as an employee, agent, independent contractor, or otherwise) within the last six (6) months of the Executive’s employment.

(v)“Restricted Services” means banking, financial and BaaS services of the type provided by the Holding Company, the Bank, and any Affiliate during the Executive’s employment.

(g)Acknowledgements. The Executive recognizes and acknowledges that the knowledge of the business activities and plans for business activities of the Holding Company, the Bank, and their Affiliates, as they may exist from time to time, is a valuable, special, and unique asset of the business of the Holding Company and the Bank. The Executive agrees that the Holding Company and the Bank have provided new and independent consideration for the covenants contained in this Section 6, to which the Executive would not otherwise be entitled and the sufficiency of which the Executive recognizes and acknowledges. The Executive agrees that the length and scope of the covenants in Section 6 are necessary to protect the Holding Company’s and the Bank’s business and goodwill. In particular, the Executive agrees that the BaaS business of the Holding Company, the Bank and its Affiliates has a nationwide geographic scope and that such business would be irreparably harmed if the Executive were to compete within that field anywhere in the United States. The Executive represents that the Executive’s experience and capabilities are such that the Executive can obtain employment in a business, engaged in other lines and/or of a different nature than the Bank, and that the

enforcement of the covenants herein will not prevent the Executive from earning a sufficient livelihood.

(h)Remedies. The parties hereto, recognizing that irreparable injury will result to the Holding Company and the Bank, their business and property in the event of the Executive’s breach of this Section 6, agree that in the event of any such breach by the Executive, the Holding Company and the Bank will be entitled, in addition to any other remedies and damages available, to temporary, preliminary, and post-trial injunctive relief to restrain the violation or threatened violation hereof by the Executive, the Executive’s partners, agents, servants, employers, employees and all persons acting for or with the Executive, which may include (but is not limited to) restraining the Executive from rendering any services to any person, firm, corporation, other entity to whom knowledge of the past, present, planned, or considered business activities of the Holding Company, the Bank, or Affiliates, in whole or in part, has been disclosed or is threatened to be disclosed. Nothing herein will be construed as prohibiting the Holding Company and the Bank from pursuing any other remedies available to them for such breach or threatened breach, including the recovery of damages from the Executive.

(i)Tolling. In the event that the Executive is found to have breached any covenant in this Agreement, the time period provided for in that covenant shall be tolled (i.e., it will not run) for so long as the Executive is in violation of that covenant.

7.	EFFECT ON PRIOR AGREEMENTS.

This Agreement contains the entire understanding between the parties hereto and supersedes all prior discussions and agreements relating to the subject matter herein. No provision of this Agreement shall be interpreted to mean that the Executive is subject to receiving fewer benefits than those available to the Executive without reference to this Agreement.

8.TAXES.

All compensation and benefits provided under this Agreement or otherwise by the Bank or the Holding Company will be subject to applicable tax withholding.

9.	MANDATORY REDUCTION OF PAYMENTS IN CERTAIN EVENTS.

(a)Notwithstanding anything in this Agreement to the contrary, in the event it shall be determined that any payment or distribution by the Holding Company or the

Bank to or for the benefit of the Executive (whether paid or payable or distributed or distributable pursuant to the terms of this Agreement or otherwise) (such benefits, payments or distributions are hereinafter referred to as “Payments”) would, if paid, be subject to the excise tax imposed by Section 4999 of the Code, (the “Excise Tax”), then, prior to the making of any Payments to the Executive, a calculation shall be made comparing (i) the net after-tax benefit to the Executive of the Payments after payment by the Executive of the Excise Tax, to (ii) the net after-tax benefit to the Executive if the Payments had been limited to the extent necessary to avoid being subject to the Excise Tax. If the amount calculated under (i) above is less than the amount calculated under (ii) above, then the Payments shall be limited to the extent necessary to avoid being subject to the Excise Tax (the “Reduced Amount”). The reduction of the Payments due hereunder, if applicable, shall be made by first reducing cash Payments against the latest amounts to be paid and then, to the extent necessary, reducing those Payments having the next highest ratio of Parachute Value to actual present value of such Payments as of the date of the Change in Control, reducing the latest amounts to be paid first, as determined by a nationally recognized accounting firm or compensation consulting firm mutually acceptable to the Holding Company, the Bank, and the Executive (the “Determination Firm”). For purposes of this Section 9, present value shall be determined in good faith in accordance with Section 280G(d)(4) of the Code. For purposes of this Section 9, the “Parachute Value” of a Payment means the present value as of the date of the Change in Control of the portion of such Payment that constitutes a “parachute payment” under Section 280G(b)(2) of the Code, as determined by the Determination Firm for purposes of determining whether and to what extent the Excise Tax will apply to such Payment.

(b)All determinations required to be made under this Section 9, including whether an Excise Tax would otherwise be imposed, whether the Payments shall be reduced, the amount of the Reduced Amount, and the assumptions to be utilized in arriving at such determinations, shall be made in writing in good faith by the Determination Firm which shall provide detailed supporting calculations to the Holding Company, the Bank and the Executive within fifteen (15) business days after the receipt of notice from the Executive that a Payment is due to be made, or such earlier time as is requested by the Holding Company or the Bank. All fees and expenses of the Determination Firm shall be borne solely by the Holding Company or the Bank. Any determination by the Determination Firm shall be binding upon the Holding Company, the Bank, and the Executive. As a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Determination Firm hereunder, it is possible that Payments which the Executive was entitled to, but did not receive pursuant to Section 9(a), could have been made without the imposition of the

Excise Tax (“Underpayment”), consistent with the calculations required to be made hereunder. In such event, the Determination Firm shall determine the amount of the Underpayment that has occurred and any such Underpayment shall be promptly paid by the Holding Company or the Bank to or for the benefit of the Executive but no later than March 15 of the year after the year in which the Underpayment is determined to exist, which is when the legally binding right to such Underpayment arises.

10.	COMPLIANCE WITH SECTION 409A OF THE INTERNAL REVENUE CODE.

(a)It is the intent of the Holding Company and the Bank that the payments and benefits provided under this Agreement shall be exempt from the application of, or otherwise comply with, the requirements of Section 409A of the Code (“Section 409A”). Specifically, any taxable benefits or payments provided under this Agreement are intended to be separate payments that qualify for the “short-term deferral” exception to Section 409A to the maximum extent possible, and to the extent they do not so qualify, are intended to qualify for the involuntary separation pay exceptions to maximum extent possible. This Agreement shall be construed, administered, and governed in a manner that effects such intent, and the Holding Company and the Bank shall not take any action that would be inconsistent with such intent; provided that in no event shall the Holding Company or the Bank be responsible for any 409A penalties that arise in connection with any amounts payable under this Agreement. Without limiting the foregoing, the payments and benefits provided under this Agreement may not be deferred, accelerated, extended, paid out or modified in a manner that would result in the imposition of an additional tax under Section 409A upon the Executive.

(b)If neither the “short-term deferral” nor the involuntary separation pay exceptions to Section 409A described above applies to a benefit, payment, or reimbursement under this Agreement, and such benefit, payment or reimbursement is not otherwise exempt from Section 409A, then notwithstanding any provision in this Agreement to the contrary, the remaining provisions of this Section 10 shall apply.

(i)If the Executive is a “specified employee,” within the meaning of Section 409A as determined under the Bank’s or Holding Company’s policy for identifying specified employees on the Termination Date, then to the extent required in order to comply with Section 409A of the Code, all payments, benefits or reimbursements paid or provided under this Agreement that constitute a “deferral of compensation” within the meaning of Section 409A of the Code, that are provided as a result of a “separation from service” within the meaning of Section 409A and that would otherwise be paid or provided during the first six

months following such Termination Date shall be accumulated through and paid or provided (together with interest on the delayed amount at the applicable federal rate under Section 7872(f)(2)(A) of the Code in effect on the Termination Date) within 30 days after the first business day following the six (6) month anniversary of such Termination Date (or, if the Executive dies during such six month period, within thirty (30) days after the Executive’s death).

(ii)To the extent required to comply with Section 409A Code, any reimbursement of expenses pursuant to this Agreement, that will not be excluded from the Executive’s income when received is subject to the following requirements: (1) the amount of expenses eligible for reimbursement during a calendar year may not affect the expenses eligible for reimbursement, or in-kind benefits to be provided in any other calendar year; (2) the reimbursement of the eligible expense must be made on or before the last day of the calendar year following the calendar year in which the expense was incurred; and (3) the right to reimbursement is not subject to liquidation or exchange for another benefit.

11.

JOINDER.

The Holding Company joins in this Agreement, not as the primary employer of the Executive, but as secondary obligor of the Bank’s obligations hereunder. In the event the Bank is unable to fulfill its obligations hereunder, the Holding Company shall be obligated to fulfill those obligations.

12.	NO ATTACHMENT; SUCCESSORS AND ASSIGNS.

(a)Except as required by law, no right to receive payments under this Agreement shall be subject to anticipation, commutation, alienation, sale, assignment, encumbrance, charge, pledge, or hypothecation, or to execution, attachment, levy, or similar process or assignment by operation of law, and any attempt, voluntary or involuntary, to effect any such action shall be null, void, and of no effect.

(b)This Agreement shall be binding upon, and inure to the benefit of, the Executive and the Holding Company and the Bank and their respective successors and assigns. Holding Company and the Bank, or either of them, may assign this Agreement to any purchaser of all or substantially all of its assets without notice to or consent from the Executive. The Executive may not assign this Agreement.

13.	MODIFICATION AND WAIVER.

(a)Except for the judicial or arbitral modification allowed by Section 14, this Agreement may not be modified or amended except by an instrument in writing signed by the parties hereto.

(b)No term or condition of this Agreement shall be deemed to have been waived, nor there any estoppel against the enforcement of any provision of this Agreement, except by written instrument of the party charged with such waiver or estoppel. No such written waiver shall be deemed a continuing waiver unless specifically stated therein, and each such waiver shall operate only as to the specific term or condition waived and shall not constitute a waiver of such term or condition for the future as to any act other than that specifically waived.

14.	SEVERABILITY.

If, for any reason, any provision of this Agreement, or any part of any provision, is held invalid, such invalidity shall not affect any other provision of this Agreement or any part of such provision not held so invalid, and each such other provision and part shall to the full extent consistent with law continue in full force and effect. If any one or more of the provisions contained in this Agreement shall for any reason be held by a court of competent jurisdiction or arbitrator to be excessively broad (for example as to temporal or geographic scope), that court or arbitrator shall construe, modify, limit, and enforce such provision to the extent allowed by applicable law as it then shall appear in such jurisdiction, without affecting the enforceability of any part of this Agreement in any jurisdiction or proceeding.

15.	HEADINGS FOR REFERENCE ONLY.

The headings of sections and paragraphs herein are included solely for convenience of reference and shall not control the meaning or interpretation of any of the provisions of this Agreement.

16.	GOVERNING LAW; VENUE AND JURISDICTION.

(a)This Agreement shall be governed by the substantive laws and procedural provisions of the State of Washington, including, without limitation, its statutory and case law of privilege, unless otherwise specified herein; provided, however, that in the

event of a conflict between the terms of this Agreement and any applicable federal or state law or regulation, the provisions of such law or regulation shall prevail.

(b)If requested by the Holding Company and Bank, or the Executive, any unresolved controversy or claim arising from or related to this Agreement or breach hereof shall be resolved by use of mediation initially, and if that fails to resolve the matter, by arbitration. Mediation shall be in Seattle, Washington, before a mediator qualified in mediation of employment matters agreed upon by the parties. If the parties cannot agree on a single mediator, each party must select one mediator and those two mediators will select a third mediator. This third mediator will hear the dispute. There shall be only one mediator. The parties will use best efforts to obtain a mediator and complete the mediation within 30 days from the date of request for mediation. If the mediation has not been completed within 45 days from the date of request for mediation, any party may, by notice to all other parties and the American Arbitration Association (the “AAA”), forego mediation and move directly to arbitration under the AAA National Rules for the Resolution of Employment Disputes (or under any other form of arbitration mutually acceptable to the parties); provided, however, that such arbitration shall be before one arbitrator, and shall be in Seattle, Washington. Also, by written agreement signed by the Holding Company and Bank and the Executive, the parties hereto may agree to forego mediation, may make any agreement regarding scheduling of the mediation or the arbitration process, discovery or hearing, which agreement shall be binding on the mediator or arbitrator, despite any AAA rule to the contrary. In any arbitration, if the Executive is the prevailing party, the Holding Company and Bank shall pay all reasonable attorney’s fees of the Executive, as well as the expenses and administrative fees related to the arbitration. If the Holding Company and/or Bank are the prevailing parties at the arbitration, each party shall pay its own attorney’s fees and expenses and its share of the administrative fees and expenses related to the arbitration. Notwithstanding the foregoing provisions of this Section 16(b), (i) the parties are not required to arbitrate any issue for which injunctive relief is sought by any party hereto, (ii) all parties may seek injunctive relief in any federal or state court having jurisdiction located in Seattle, Washington, and (iii) claims of worker’s compensation and unemployment compensation shall not be subject to arbitration under this Agreement. In rendering any decision as to any state law claims, Washington State law shall apply.

(c)The parties irrevocably and unconditionally waive, to the fullest extent permitted by law, all rights to trial by jury in any action, suit or proceeding arising out of or relating to this Agreement or the transactions contemplated hereby, including without limitation, any counteraction or counterclaim, whether in contract, statute, tort

(including, without limitation, negligence) or otherwise. This provision is a material inducement for the parties to enter into this Agreement.

17.	INDEMNIFICATION.

The Bank shall provide the Executive with coverage under a standard directors’ and officers’ liability insurance policy as is provided for the other directors and officers of the Holding Company and the Bank, at its expense, and hereby indemnifies the Executive to the fullest extent permitted under applicable Washington and federal law and the Articles of Incorporation and Bylaws of the Holding Company and the Bank against all expenses and liabilities reasonably incurred by the Executive in connection with or arising out of any action, suit or proceeding in which the Executive may be involved by reason of the Executive having been a director or officer of the Holding Company or the Bank (whether or not the Executive continues to be a director or officer at the time of incurring such expenses or liabilities), such expenses and liabilities to include, but not be limited to, judgment, court costs and attorneys’ fees and the cost of reasonable settlements.

18.	SUCCESSOR TO THE HOLDING COMPANY AND THE BANK.

The Holding Company and the Bank shall require any successor or assignee, whether direct or indirect, by purchase, merger, consolidation or otherwise, to all or substantially all the business or assets of the Holding Company and the Bank, expressly and unconditionally, to assume and agree to perform the Holding Company’s and the Bank’s obligations under this Agreement, in the same manner and to the same extent that the Holding Company and the Bank would be required to perform if no such succession or assignment had taken place.

19.	REGULATORY REQUIREMENTS.

The parties agree that any payments contemplated pursuant to this Agreement are subject to and conditioned upon their compliance (if required) with the provisions of 12 U.S.C. § 1828(k) and implementing rules thereunder (including 12 C.F.R. Part 359) restricting certain “golden parachute and indemnification payments” as such laws and regulations may hereafter be amended from time to time (the “FDIC Compensation Restrictions”), and that notwithstanding any other provisions of the Agreement, the Bank and the Holding Company shall in no case be obligated to make any payment to the Executive that would be impermissible under the FDIC Compensation Restrictions.

20.	CLAW BACK.

(a)The Bank or its successors retain the legal right to demand the return of any “golden parachute” payments from the Executive in the event that it shall be determined, by legal process or by order of the Bank’s or the Holding Company’s federal regulator(s) that the Executive:

(i)has committed any fraudulent act or omission, breach of trust or fiduciary duty, or insider abuse with regard to the Bank or the Holding Company that has had or is likely to have a material adverse effect on the Bank or the Holding Company; or

(ii)is substantially responsible for the insolvency of, the appointment of a conservator or receiver for, or the troubled condition, as defined by applicable regulations of the appropriate federal banking agency, of the Bank, the Holding Company, or any FDIC insured depository institution subsidiary of the Holding Company; or

(iii)has materially violated any applicable federal or state banking law or regulation that has had or is likely to have a material effect on the Bank or the Holding Company; or

(iv)has violated or conspired to violate section 215, 656, 657, 1005, 1006, 1007, 1014, 1032, or 1344 of title 18 of the United States Code, or section 1341 or 1343 of such title affecting a federally insured financial institution as defined in title 18 of the United States Code.

(b)The Bank and its successors-in-interest further retain the legal right to demand the return by the Executive of incentive compensation paid to the Executive within the fifteen (15) months prior to such demand (or any longer period of time required by applicable law) pursuant to the terms of any compensation “clawback” or recoupment policy of the Holding Company and/or the Bank applicable to similarly-situated employees of the Holding Company or the Bank (as may be amended from time to time and as may hereafter be adopted) or required to comply with applicable law.

(c)No reduction, modification, limitation or clawback of payments or compensation pursuant to Section 19 or this Section 20 shall be a breach of this Agreement or the basis for Good Reason.

Signatures on following page

IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed by a duly authorized officer or director, and the Executive has signed this Agreement, effective on the date first written above. This Agreement may be executed in multiple counterparts, each of which, when assembled to include an original signature for each party, will constitute a complete and fully executed original. All such fully executed original counterparts will collectively constitute a single agreement between the parties.

Coastal Financial Corporation

Title

Coastal Community Bank

Title

The Executive

Curt Queyrouze

RELEASE AGREEMENT

This Release Agreement (the “Agreement”) is entered into by and between __________________ (“Employee”) and ________________________ (the “Company”).

A. Employee’s employment with the Company will or has been terminated on ______________(the “Separation Date”);

B. Employee and the Company wish to resolve any disputed issues surrounding Employee’s employment and separation from employment with the Company;

Therefore, for good and sufficient consideration, Employee and the Company agree as follows:

1.Effective Date. The “Effective Date” of this Agreement shall be the date on which both of the following conditions are met: (a) Employee has returned to the Company an executed copy of this Agreement on or before twenty-one (21) days after Employee receives this Agreement; and (b) seven (7) days have passed after Employee signed this Agreement, and Employee has not revoked this Agreement in accordance with Section 16 during the seven (7) day Revocation Period (as defined below). In the event that both of these conditions are not met, this Agreement shall not become effective.

2.Separation Benefits. In consideration for the promises made by Employee, the Company agrees to provide the benefits described in the Employee’s Employment Agreement and the following which the Employee is not otherwise entitled (the “Separation Benefits”):

TBD

Employee understands and agrees that the Company is neither providing tax or legal advice, nor making representations regarding tax obligations or consequences, if any, related to this Agreement. Employee further agrees that the Employee is solely responsible for and will fully assume any and all tax obligations or consequences that may arise in connection with the Separation Benefits. Employee further agrees to fully indemnify and hold the Company harmless from any claims, demands, deficiencies, levies, assessments, executions, judgments, or recoveries made by any governmental entity against the Company for any failure by Employee to pay taxes or by the Company to make withholdings on the Separation Benefits. Employee further agrees that the Company shall not have any obligation to oppose or defend any claims or actions filed by any entity or person arising from amounts claimed due on account of this Agreement.

Employee acknowledges that the Separation Benefits exceed the amount to which Employee otherwise would be entitled and fully discharges and satisfies all of the Company’s obligations related to Employee’s employment and separation from employment, and that but for this Agreement, Employee would not be entitled to any such payment. Employee acknowledges that Employee has previously been paid all wages due, including all or any regular compensation, overtime compensation, bonuses, commissions, and all amounts owed for accrued, but unused vacation pay, that the Company does not owe Employee any payments for business expenses related to Employee’s employment, and that Employee is not presently aware of any injury for which Employee may be entitled to file a claim for workers’ compensation benefits.

3.General Release of Claims. In exchange for the Company’s payment of the Separation Benefits and the promises in this Agreement, Employee, for Employee’s heirs, legal representatives, successors and assigns, releases and forever discharges the Company, its parents, subsidiaries and affiliated entities, and each of their shareholders, members, officers, directors, representatives, employees,

former employees, volunteers, advisors, agents, attorneys, insurers, successors, predecessors, and assigns, (collectively the “Releasees”) from all claims, rights, demands, actions, and obligations of any kind or nature, whether known or unknown, that Employee has or ever had against them arising out of Employee’s employment or separation of employment from the Company. This release includes, without limitation, any and all claims for any other compensation and all claims arising from contract (express or implied), tort, public policy, and equity, and any and all claims of wrongful discharge, retaliation, harassment and/or employment discrimination arising under local, state, and/or federal law and statutes including, without limitation, Title VII of the Civil Rights Act of 1964, as amended, the Age Discrimination in Employment Act, the Older Workers Benefit Protection Act, the Americans with Disabilities Act, the Family Medical Leave Act, ERISA, Fair Labor Standards Act, Occupational Safety and Health Act (OSHA), the Washington Law Against Discrimination; the Washington Family Care Act; the Washington Family Leave Act; provided, however, that this release shall not apply to any claim for workers’ compensation insurance benefits or any unemployment benefits to which Employee may be entitled. Employee acknowledges and agrees that included in this General Release of claims are any and all claims that have been, or may be asserted by Employee or by any other person or entity on Employee’s behalf in any class or collective action relating to Employee’s employment and/or termination of employment with the Company. This section shall exclude all claims, rights, demands, actions, and obligations of the Company to the Employee for (a) any existing right to indemnification, contribution, and a defense, (b) any directors and officers and general liability insurance coverage of the Employee, (c) the Employee’s rights as a shareholder, (d) all vested rights of the Employee, (e) the Employee’s right to enforce this Agreement, and (f) any rights which cannot be waived or released as a matter of law.

4.Agreement Not to Sue. Employee affirms that Employee has not filed, caused to be filed, and presently is not a party to any claim, charge, complaint, causes of action, or action against the Company or any of the Releasees. Employee agrees not to file or maintain any other charge, claim or action against the Releasees arising out of the matters covered by this Agreement, and agrees not to participate in or encourage the pursuit of any claims against the Company, its employees or agents, unless compelled to testify pursuant to subpoena or order of a court of competent jurisdiction. However, this paragraph will not limit Employee from filing a claim with a governmental agency regarding the enforceability of this Agreement or from filing a claim that may be allowed by applicable law.

5.Confidentiality of Agreement. Employee agrees to keep the existence of this Agreement and all of its terms strictly confidential and not to disclose, discuss or reveal its terms to any persons or entities except immediate family members, attorneys, accountants, or if compelled to do so by subpoena or order of court of competent jurisdiction.

6.Non-Admission of Liability. By offering and entering into this Agreement, neither the Company nor Employee admits to any liability or wrongdoing with respect to each other and/or any third party.

7.Knowing and Voluntary. Employee represents that Employee has read and fully understands this Agreement, that the Separation Benefits by the Company as provided pursuant to this Agreement constitute valuable consideration for this Agreement, that Employee has been given a reasonable period of time to consider this Agreement and consult with legal counsel, Employee is not executing this Agreement in reliance on any promises or representations other than those contained in the Agreement, and that Employee is executing this Agreement voluntarily. Employee acknowledges that the Company has informed Employee that Employee should consult with an attorney before executing this Agreement.

8.Attorneys’ Fees. In the event of litigation arising out of this Agreement, the prevailing party shall be entitled to reimbursement from the other party for the prevailing party’s reasonable attorneys’

fees and costs and expenses incurred with respect to such litigation. Each party shall otherwise bear its own attorneys’ fees and costs fees related to the subject matter of or arising out of this Agreement.

9.Severability. If any term or provision of this Agreement is determined by a court of competent jurisdiction to be unenforceable or contrary to any applicable law or policy, such term or provision shall be effective to the maximum extent permitted by law and the same shall not affect any other term or provision of this Agreement, which shall otherwise remain in full force and effect.

10.Choice of Law. To the extent not governed by federal law or otherwise prohibited by state law, Employee agrees that this Agreement is governed by the laws of Washington, without regard to its principles on conflicts of law. To the extent that a federal court or agency does not have jurisdiction over any action involving the validity, interpretation or enforcement of this Agreement, or any of its terms, provisions or obligations, Employee agrees that jurisdiction and venue shall exist exclusively in a court or government agency located within Washington State, unless specifically prohibited by applicable state law.

11.Assignment. Employee represents and warrants that Employee has not assigned or transferred to any person or entity any of Employee’s rights which are or could be covered by this Agreement, including but not limited to any covenant not to sue and the waivers and releases contained in this Agreement.

12.Time to Consider and Revoke Agreement. Employee understands and acknowledges that Employee has been given at least twenty-one (21) days in which to consider signing this Agreement and that Employee may revoke this Agreement up to seven (7) days after signing it (the “Revocation Period”). Any revocation of this Agreement must be in writing and must be actually received by the Company within the Revocation Period. In the event that Employee fails to return an executed copy of this Agreement to the Company on or before the expiration of the twenty-one (21) day period or Employee revokes this Agreement within the Revocation Period, this Agreement shall not become effective and shall be null and void.

13.Code Section 409A. This Agreement is intended to comply with Section 409A of the Internal Revenue Code of 1986, as amended (“Section 409A”), including the exceptions thereto, and shall be construed and administered in accordance with such intent. Notwithstanding any other provision of this Agreement, payments provided under this Agreement may only be made upon an event and in a manner that complies with Section 409A or an applicable exemption. Any payments under this Agreement that may be excluded from Section 409A either as separation pay due to an involuntary separation from service, as a short-term deferral, or otherwise shall be excluded from Section 409A to the maximum extent possible. For purposes of Section 409A, any installment payments provided under this Agreement shall each be treated as a separate payment. To the extent required under Section 409A, any payments to be made under this Agreement in connection with a termination of employment shall only be made if such termination constitutes a “separation from service” under Section 409A. Notwithstanding the foregoing, the Company makes no representations that the payments and benefits provided under this Agreement comply with Section 409A and in no event shall Company have any liability to Employee or any other person relating to the failure or alleged failure of any payment or benefit under this Agreement to comply with, or be exempt from, the requirements of Section 409A.

[Signatures appear on the following page.]

IN WITNESS WHEREOF, the parties have duly executed this Separation Agreement as of the dates set forth below.


Date: _________________________

Date: _________________________	Name: _________________________________ Title: __________________________________ ________________________________________ By:

EX-31.1 3 ck1437958-ex311_8.htm EX-31.1 ck1437958-ex311_8.htm

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;

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 (the registrant’s fourth fiscal quarter in the case of an annual report) 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: August 4, 2022	By:	/s/ Eric M. Sprink
		Eric M. Sprink
		Chief Executive Officer

EX-31.2 4 ck1437958-ex312_7.htm EX-31.2 ck1437958-ex312_7.htm

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;

(a)

(b)

(c)

(d)

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)

(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: August 4, 2022	By:	/s/ Joel G. Edwards
		Joel G. Edwards
		Executive Vice President and Chief Financial Officer

EX-32.1 5 ck1437958-ex321_6.htm EX-32.1 ck1437958-ex321_6.htm

Exhibit 32.1

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 June 30, 2022, 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: August 4, 2022	By:	/s/ Eric M. Sprink
		Eric M. Sprink
		Chief Executive Officer

EX-32.2 6 ck1437958-ex322_9.htm EX-32.2 ck1437958-ex322_9.htm

Exhibit 32.2

CERTIFICATION PURSUANT TO

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

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

(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: August 4, 2022	By:	/s/ Joel G. Edwards
		Joel G. Edwards
		Executive Vice President and Financial Officer

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Voting Common Stock Voting Common Stock [Member] Statement [Line Items] Statement [Line Items] Restricted cash Restricted Cash Principal amount Debt Instrument Carrying Amount Unamortized debt issuance cost Unamortized Debt Issuance Expense Preferred stock, no par value Preferred Stock No Par Value Preferred stock, shares authorized Preferred Stock Shares Authorized Preferred stock, shares issued Preferred Stock Shares Issued Preferred stock, shares outstanding Preferred Stock Shares Outstanding Common stock, no par value Common Stock No Par Value Common stock, shares authorized Common Stock Shares Authorized Common stock, shares, issued Common Stock Shares Issued Common stock, shares, outstanding Common Stock Shares Outstanding Dividends on other investments. Deposit service charges and fees. Loan referral fees. Mortgage broker fees. Noninterest income, excluding BaaS program income and baas indemnification income. Software licenses, maintenance and subscriptions. Federal Deposit Insurance Corporation premium expense (benefit). Noninterest directors and staff expenses. Noninterest expense, excluding BaaS loan and BaaS fraud expense. Banking service expenses. Income Statement [Abstract] Product and Service Product Or Service [Axis] Product and Service Products And Services [Domain] Servicing and Other BaaS Fees. Servicing and Other BaaS Fees Servicing And Other Baa S Fees [Member] Transaction fees. Transaction Fees Transaction Fees [Member] Interchange fees. Interchange Fees Interchange Fees [Member] Reimbursement of expenses. Reimbursement of Expenses Reimbursement Of Expenses [Member] BaaS credit enhancements. BaaS Credit Enhancements Baa S Credit Enhancements [Member] BaaS fraud enhancements. BaaS Fraud Enhancements Baa S Fraud Enhancements [Member] BaaS loan expense. BaaS Loan Expense Baa S Loan Expense [Member] BaaS fraud expense. BaaS Fraud Expense Baa S Fraud Expense [Member] Segments Statement Business Segments [Axis] Segments Segment [Domain] BaaS program fees. BaaS Program Income Baa S Program Fees [Member] Indemnifications. BaaS Indemnification Income Indemnifications [Member] INTEREST AND DIVIDEND INCOME Interest And Dividend Income Operating [Abstract] Interest and fees on loans Interest And Fee Income Loans And Leases Interest on interest earning deposits with other banks Interest Income Deposits With Financial Institutions Interest on investment securities Investment Income Interest Dividends on other investments Dividends On Other Investments Total interest income Interest And Dividend Income Operating INTEREST EXPENSE Interest Expense [Abstract] Interest on deposits Interest Expense Deposits Interest on borrowed funds Interest Expense Borrowings Total interest expense Interest Expense Net interest income Interest Income Expense Net PROVISION FOR LOAN LOSSES Provision For Loan And Lease Losses Net interest income after provision for loan losses Interest Income Expense After Provision For Loan Loss NONINTEREST INCOME Noninterest Income [Abstract] Deposit service charges and fees Deposit Service Charges And Fees Loan referral fees Loan Referral Fees Gain on sales of loans, net Gain Loss On Sales Of Loans Net Mortgage broker fees Mortgage Broker Fees Gain on sale of bank branch including deposits and loans, net Gain Loss On Sale Of Business Other income Noninterest Income Other Noninterest income, excluding BaaS program income and BaaS indemnification income Noninterest Income Excluding Baa S Program Income And Baa S Indemnification Income Noninterest income Revenue From Contract With Customer Including Assessed Tax Total noninterest income Noninterest Income NONINTEREST EXPENSE Noninterest Expense [Abstract] Salaries and employee benefits Labor And Related Expense Occupancy Occupancy Net Software licenses, maintenance and subscriptions Software Licenses Maintenance And Subscriptions Legal and professional fees Professional Fees Data processing Information Technology And Data Processing Excise taxes Excise And Sales Taxes Federal Deposit Insurance Corporation ("FDIC") assessments Federal Deposit Insurance Corporation Premium Expense Benefit Director and staff expenses Noninterest Directors And Staff Expenses Marketing Marketing Expense Other expense Other Noninterest Expense Noninterest expense, excluding BaaS loan and BaaS fraud expense Noninterest Expense Excluding Baa S Loan And Baa S Fraud Expense BaaS loan and fraud expense Banking Service Expenses Total noninterest expense Noninterest Expense Income before provision for income taxes Income Loss From Continuing Operations Before Income Taxes Extraordinary Items Noncontrolling Interest PROVISION FOR INCOME TAXES Income Tax Expense Benefit NET INCOME Net Income Loss Basic earnings per common share Earnings Per Share Basic Diluted earnings per common share Earnings Per Share Diluted Weighted average number of common shares outstanding: Weighted Average Number Of Shares Outstanding [Abstract] Basic Weighted Average Number Of Shares Outstanding Basic Diluted Weighted Average Number Of Diluted Shares Outstanding Statement Of Income And Comprehensive Income [Abstract] NET INCOME OTHER COMPREHENSIVE LOSS, before tax Other Comprehensive Income Loss Before Tax Portion Attributable To Parent [Abstract] Securities available-for-sale Other Comprehensive Income Availableforsale Securities Tax Portion Attributable To Parent [Abstract] Unrealized holding loss during the period Other Comprehensive Income Unrealized Holding Gain Loss On Securities Arising During Period Before Tax Income tax benefit related to unrealized holding loss Other Comprehensive Income Unrealized Holding Gain Loss On Securities Arising During Period Tax OTHER COMPREHENSIVE LOSS, net of tax Other Comprehensive Income Loss Net Of Tax Portion Attributable To Parent COMPREHENSIVE INCOME Comprehensive Income Net Of Tax Stock issued during period shares vesting of restricted stock units Stock issued during period value vesting of restricted stock units. Statement Of Stockholders Equity [Abstract] Equity Components Statement Equity Components [Axis] Equity Component Equity Component [Domain] Common Stock Common Stock [Member] Retained Earnings Retained Earnings [Member] Accumulated Other Comprehensive Income (Loss) Accumulated Other Comprehensive Income [Member] Beginning balance Beginning balance, Shares Shares Outstanding Net income Issuance of restricted stock awards Stock Issued During Period Value Restricted Stock Award Gross Issuance of restricted stock awards, Shares Stock Issued During Period Shares Restricted Stock Award Gross Vesting of restricted stock units Stock Issued During Period Value Vesting Of Restricted Stock Units Vesting of restricted stock units, Shares Stock Issued During Period Shares Vesting Of Restricted Stock Units Forfeiture of restricted stock awards Stock Issued During Period Shares Restricted Stock Award Forfeited Exercise of stock options Stock Issued During Period Value Stock Options Exercised Exercise of stock options,shares Stock Issued During Period Shares Stock Options Exercised Stock-based compensation Stock Issued During Period Value Share Based Compensation Other comprehensive loss, net of tax Ending balance Ending balance,shares Increase decrease in operating lease right-of-use assets. Increase decrease in operating lease liabilities. Proceeds from sale of loans related to sale of bank branch. Payment for (Proceeds from) other investments, net. Principal paydowns of investment securities available-for-sale. Net cash transfer for branch sale. Net (repayments) advances from paycheck protection program liquidity facility. Noncash fair value adjustment of securities available-for-sale, gross. Non cash operating lease liabilities. Non cash assets and liabilities. 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Document And Entity Information - shares	6 Months Ended
Document And Entity Information - shares	Jun. 30, 2022	Aug. 02, 2022
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Jun. 30, 2022
Document Fiscal Year Focus	2022
Document Fiscal Period Focus	Q2
Entity Registrant Name	COASTAL FINANCIAL CORPORATION
Entity Central Index Key	0001437958
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		12,950,853
Entity Shell Company	false
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Trading Symbol	CCB
Entity File Number	001-38589
Entity Tax Identification Number	56-2392007
Entity Address, Address Line One	5415 Evergreen Way
Entity Address, City or Town	Everett
Entity Address, State or Province	WA
Entity Address, Postal Zip Code	98203
City Area Code	425
Local Phone Number	257-9000
Entity Incorporation, State or Country Code	WA
Document Quarterly Report	true
Document Transition Report	false
Entity Current Reporting Status	Yes
Entity Interactive Data Current	Yes
Title of 12(b) Security	Common Stock, no par value per share
Security Exchange Name	NASDAQ

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
ASSETS
Cash and due from banks	$ 40,750	$ 14,496
Interest earning deposits with other banks (restricted cash of $0 at June 30, 2022 and December 31, 2021)	364,939	798,665
Investment securities, available for sale, at fair value	108,560	35,327
Investment securities, held to maturity, at amortized cost	1,261	1,296
Other investments	10,379	8,478
Loans held for sale, at par	60,000
Loans receivable	2,334,354	1,742,735
Allowance for loan losses	(49,358)	(28,632)
Total loans receivable, net	2,284,996	1,714,103
Premises and equipment, net	18,670	17,219
Operating lease right-of-use assets	5,565	6,105
Accrued interest receivable	12,430	8,105
Bank-owned life insurance, net	12,485	12,254
Deferred tax asset, net	11,709	6,818
Other assets	37,978	12,651
Total assets	2,969,722	2,635,517
LIABILITIES
Deposits	2,697,305	2,363,787
Federal Home Loan Bank ("FHLB") advances		24,999
Principal amount $25,000 (less unamortized debt issuance costs of $676 and $712 ) at June 30, 2022 and December 31, 2021, respectively	24,324	24,288
Principal amount $3,609 (less unamortized debt issuance costs of $22 and $23 at June 30, 2022 and December 31, 2021, respectively)	3,587	3,586
Deferred compensation	680	744
Accrued interest payable	330	357
Operating lease liabilities	5,786	6,320
Other liabilities	20,049	10,214
Total liabilities	2,752,061	2,434,295
SHAREHOLDERS’ EQUITY
Authorized: 25,000,000 shares at June 30, 2022 and December 31, 2021; issued and outstanding: zero shares at June 30, 2022 and December 31, 2021
Authorized: 300,000,000 shares at June 30, 2022 and December 31, 2021; 12,948,623 shares at June 30, 2022 issued and outstanding and 12,875,315 shares at December 31, 2021 issued and outstanding	123,226	121,845
Retained earnings	95,779	79,373
Accumulated other comprehensive (loss) income, net of tax	(1,344)	4
Total shareholders’ equity	217,661	201,222
Total liabilities and shareholders’ equity	$ 2,969,722	$ 2,635,517

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - USD ($) $ in Thousands	Jun. 30, 2022	Dec. 31, 2021
Restricted cash	$ 0	$ 0
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
Voting Common Stock
Common stock, shares, issued	12,948,623	12,875,315
Common stock, shares, outstanding	12,948,623	12,875,315
Subordinated Debt
Principal amount	$ 25,000	$ 25,000
Unamortized debt issuance cost	676	712
Junior Subordinated Debentures
Principal amount	3,609	3,609
Unamortized debt issuance cost	$ 22	$ 23

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$ 40,166	$ 19,365	$ 69,798	$ 37,595
Interest on interest earning deposits with other banks	956	74	1,358	144
Interest on investment securities	563	24	634	52
Dividends on other investments	134	108	171	138
Total interest income	41,819	19,571	71,961	37,929
INTEREST EXPENSE
Interest on deposits	1,673	628	2,226	1,288
Interest on borrowed funds	260	331	581	714
Total interest expense	1,933	959	2,807	2,002
Net interest income	39,886	18,612	69,154	35,927
PROVISION FOR LOAN LOSSES	14,094	361	27,036	718
Net interest income after provision for loan losses	25,792	18,251	42,118	35,209
NONINTEREST INCOME
Deposit service charges and fees	988	949	1,872	1,812
Loan referral fees	208	806	810	1,403
Gain on sales of loans, net		31		161
Mortgage broker fees	85	253	208	515
Gain on sale of bank branch including deposits and loans, net		1,263		1,263
Other income	311	56	576	240
Noninterest income, excluding BaaS program income and BaaS indemnification income	1,592	3,358	3,466	5,394
Total noninterest income	25,492	4,782	47,478	7,766
NONINTEREST EXPENSE
Salaries and employee benefits	12,238	8,913	23,323	16,599
Occupancy	1,083	990	2,219	2,048
Software licenses, maintenance and subscriptions	1,108	543	2,160	1,027
Legal and professional fees	1,002	626	1,710	1,386
Data processing	1,010	734	1,819	1,431
Excise taxes	564	388	913	747
Federal Deposit Insurance Corporation ("FDIC") assessments	855	225	1,459	420
Director and staff expenses	377	318	721	538
Marketing	74	132	173	214
Other expense	1,155	763	2,523	1,484
Noninterest expense, excluding BaaS loan and BaaS fraud expense	19,466	13,632	37,020	25,894
BaaS loan and fraud expense	18,703	99	31,564	189
Total noninterest expense	38,169	13,731	68,584	26,083
Income before provision for income taxes	13,115	9,302	21,012	16,892
PROVISION FOR INCOME TAXES	2,939	2,289	4,606	3,861
NET INCOME	$ 10,176	$ 7,013	$ 16,406	$ 13,031
Basic earnings per common share	$ 0.79	$ 0.59	$ 1.27	$ 1.09
Diluted earnings per common share	$ 0.76	$ 0.56	$ 1.22	$ 1.05
Weighted average number of common shares outstanding:
Basic	12,928,061	11,984,927	12,913,485	11,972,916
Diluted	13,442,013	12,459,467	13,458,706	12,423,659
BaaS Program Income
NONINTEREST INCOME
Noninterest income	$ 3,219	$ 1,424	$ 5,685	$ 2,372
BaaS Indemnification Income
NONINTEREST INCOME
Noninterest income	20,681		38,327
Servicing and Other BaaS Fees \| BaaS Program Income
NONINTEREST INCOME
Noninterest income	1,159	1,029	2,328	1,613
Transaction Fees \| BaaS Program Income
NONINTEREST INCOME
Noninterest income	814	93	1,307	239
Interchange Fees \| BaaS Program Income
NONINTEREST INCOME
Noninterest income	628	110	1,060	145
Reimbursement of Expenses \| BaaS Program Income
NONINTEREST INCOME
Noninterest income	618	192	990	375
BaaS Credit Enhancements \| BaaS Indemnification Income
NONINTEREST INCOME
Noninterest income	14,207		27,282
BaaS Fraud Enhancements \| BaaS Indemnification Income
NONINTEREST INCOME
Noninterest income	6,474		11,045
BaaS Loan Expense
NONINTEREST EXPENSE
BaaS loan and fraud expense	12,229	$ 99	20,519	$ 189
BaaS Fraud Expense
NONINTEREST EXPENSE
BaaS loan and fraud expense	$ 6,474		$ 11,045

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended		6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021	Jun. 30, 2022	Jun. 30, 2021
Statement Of Income And Comprehensive Income [Abstract]
NET INCOME	$ 10,176	$ 7,013	$ 16,406	$ 13,031
Securities available-for-sale
Unrealized holding loss during the period	(1,351)	(28)	(1,701)	(41)
Income tax benefit related to unrealized holding loss	282	6	353	9
OTHER COMPREHENSIVE LOSS, net of tax	(1,069)	(22)	(1,348)	(32)
COMPREHENSIVE INCOME	$ 9,107	$ 6,991	$ 15,058	$ 12,999

- Definition

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

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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, 2020	$ 140,217	$ 87,815	$ 52,368	$ 34
Beginning balance, Shares at Dec. 31, 2020		11,954,327
Net income	13,031		13,031
Issuance of restricted stock awards, Shares		10,714
Vesting of restricted stock units, Shares		7,851
Exercise of stock options	250	$ 250
Exercise of stock options,shares		34,777
Stock-based compensation	634	$ 634
Other comprehensive loss, net of tax	(32)			(32)
Ending balance at Jun. 30, 2021	154,100	$ 88,699	65,399	2
Ending balance,shares at Jun. 30, 2021		12,007,669
Beginning balance at Mar. 31, 2021	146,739	$ 88,329	58,386	24
Beginning balance, Shares at Mar. 31, 2021		11,988,636
Net income	7,013		7,013
Issuance of restricted stock awards, Shares		4,736
Vesting of restricted stock units, Shares		425
Exercise of stock options	99	$ 99
Exercise of stock options,shares		13,872
Stock-based compensation	271	$ 271
Other comprehensive loss, net of tax	(22)			(22)
Ending balance at Jun. 30, 2021	154,100	$ 88,699	65,399	2
Ending balance,shares at Jun. 30, 2021		12,007,669
Beginning balance at Dec. 31, 2021	201,222	$ 121,845	79,373	4
Beginning balance, Shares at Dec. 31, 2021		12,875,315
Net income	16,406		16,406
Issuance of restricted stock awards, Shares		10,396
Vesting of restricted stock units, Shares		26,637
Exercise of stock options	277	$ 277
Exercise of stock options,shares		36,275
Stock-based compensation	1,104	$ 1,104
Other comprehensive loss, net of tax	(1,348)			(1,348)
Ending balance at Jun. 30, 2022	217,661	$ 123,226	95,779	(1,344)
Ending balance,shares at Jun. 30, 2022		12,948,623
Beginning balance at Mar. 31, 2022	207,920	$ 122,592	85,603	(275)
Beginning balance, Shares at Mar. 31, 2022		12,928,548
Net income	10,176		10,176
Issuance of restricted stock awards, Shares		10,396
Vesting of restricted stock units, Shares		349
Exercise of stock options	69	$ 69
Exercise of stock options,shares		9,330
Stock-based compensation	565	$ 565
Other comprehensive loss, net of tax	(1,069)			(1,069)
Ending balance at Jun. 30, 2022	$ 217,661	$ 123,226	$ 95,779	$ (1,344)
Ending balance,shares at Jun. 30, 2022		12,948,623

- Definition

The portion of profit or loss for the period, net of income taxes, which is attributable to the parent.

+ References

+ Details

- Definition

Total of all stockholders' equity (deficit) items, net of receivables from officers, directors, owners, and affiliates of the entity which are attributable to the parent. The amount of the economic entity's stockholders' equity attributable to the parent excludes the amount of stockholders' equity which is allocable to that ownership interest in subsidiary equity which is not attributable to the parent (noncontrolling interest, minority interest). This excludes temporary equity and is sometimes called permanent equity.

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($) $ in Thousands	6 Months Ended
	Jun. 30, 2022	Jun. 30, 2021
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 16,406	$ 13,031
Adjustments to reconcile net income to net cash provided by operating activities:
PROVISION FOR LOAN LOSSES	27,036	718
Depreciation and amortization	845	802
Loss on disposition of fixed assets	35
Decrease in operating lease right-of-use assets	540	524
Decrease in operating lease liabilities	(534)	(519)
Gain on sales of loans		(161)
Proceeds from sale of loans related to sale of bank branch		2,415
Net (discount accretion) premium amortization on investment securities	(37)	19
Stock-based compensation	1,104	634
Gain on sale of bank branch, including deposits and loans		(1,263)
Increase in bank-owned life insurance value	(178)	(4,974)
Deferred tax benefit	(4,533)
Net change in CCBX receivable	(24,851)
Net change in other assets and liabilities	4,979	(407)
Total adjustments	4,406	(2,212)
Net cash provided by operating activities	20,812	10,819
CASH FLOWS FROM INVESTING ACTIVITIES
Net change in interest earning deposits with other banks	433,726	(107,264)
Purchase of investment securities available for sale	(134,912)	(19,998)
Change in other investments, net	(1,901)	(780)
Principal paydowns of investment securities available-for-sale	12	18
Principal paydowns of investment securities held-to-maturity	34	725
Maturities and calls of investment securities available-for-sale	60,000	15,000
Purchase of bank owned life insurance	(53)
Proceeds from sales of loans held for sale	20,059
Purchase of loans	(165,456)
Increase in loans receivable, net	(512,532)	(115,204)
Net cash transfer for branch sale		(19,980)
Purchases of premises and equipment, net	(2,331)	(1,796)
Net cash used by investing activities	(303,354)	(249,279)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and money market, and savings	340,502	411,958
Net decrease in time deposits	(6,984)	(7,524)
Net repayment from long term FHLB borrowing	(24,999)
Net advances from Paycheck Protection Program Liquidity Facility		(153,716)
Proceeds from exercise of stock options	277	250
Net cash provided by financing activities	308,796	250,968
NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH	26,254	12,508
CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year	14,496	18,965
CASH, DUE FROM BANKS AND RESTRICTED CASH, end of quarter	40,750	31,473
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest paid	2,834	2,354
Income taxes paid	5,247	4,269
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Fair value adjustment of securities available-for-sale, gross	(1,705)	(41)
In conjunction with ASU 2016-02 as detailed in Note 6 to the Unaudited Consolidated Financial Statements, the following assets and liabilities were recognized:
Operating lease right-of-use assets		41
Operating lease liabilities		$ (41)
Transfer from loans to loans held for sale	$ 80,058

XML 19 R8.htm IDEA: XBRL DOCUMENT

Description of Business and Summary of Significant Accounting Policies

6 Months Ended

Jun. 30, 2022

Accounting Policies [Abstract]

Description of Business and Summary of Significant Accounting Policies

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

Subsequent Events - The Company has evaluated events and transactions subsequent to June 30, 2022 for potential recognition or disclosure.

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Recent Accounting Standards

6 Months Ended

Jun. 30, 2022

New Accounting Pronouncements And Changes In Accounting Principles [Abstract]

Recent Accounting Standards

Note 2 - Recent accounting standards

Recent Accounting Guidance Not Yet Effective

- Definition

The entire disclosure for change in accounting principle. Includes, but is not limited to, nature, reason, and method of adopting amendment to accounting standards or other change in accounting principle.

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Reference 29: http://www.xbrl.org/2003/role/disclosureRef
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+ Details

XML 21 R10.htm IDEA: XBRL DOCUMENT

Investment Securities

6 Months Ended

Jun. 30, 2022

Investments Debt And Equity Securities [Abstract]

Investment Securities

Note 3 - Investment Securities

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

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands; unaudited)
June 30, 2022
Available-for-sale
U.S. Treasury securities	$	109,950	$	-	$	(1,699	)	$	108,251
U.S. Agency collateralized mortgage obligations		59		-		(2	)		57
U.S. Agency residential mortgage-backed securities		1		-		-			1
Municipal bonds		251		-		-			251
Total available-for-sale securities		110,261		-		(1,701	)		108,560
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,261		-		(97	)		1,164
Total investment securities	$	111,522	$	-	$	(1,798	)	$	109,724

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands; unaudited)
December 31, 2021
Available-for-sale
U.S. Treasury securities	$	34,999	$	-	$	(1	)	$	34,998
U.S. Agency collateralized mortgage obligations		68		2		-			70
U.S. Agency residential mortgage-backed securities		3		-		-			3
Municipal bonds		252		4		-			256
Total available-for-sale securities		35,322		6		(1	)		35,327
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,296		52		-			1,348
Total investment securities	$	36,618	$	58	$	(1	)	$	36,675

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands; unaudited)
June 30, 2022
Amounts maturing in
One year or less	$	9,997	$	9,993	$	-	$	-
After one year through five years		100,204		98,509		-		-
		110,201		108,502		-		-
U.S. Agency residential mortgage-backed securities and collateralized mortgage obligations		60		58		1,261		1,164
	$	110,261	$	108,560	$	1,261	$	1,164

There were no sales of securities during the three months ended June 30, 2022 or 2021.

	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; unaudited)
June 30, 2022
Available-for-sale
U.S. Treasury securities	$	108,251	$	1,699	$	-	$	-	$	108,251	$	1,699
U.S. Agency collateralized mortgage obligations		57		2		-		-		57		2
Total available-for-sale securities		108,308		1,701		-		-		108,308		1,701
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,164		97		-		-		1,164		97
Total investment securities	$	109,472	$	1,798	$	-	$	-	$	109,472	$	1,798

XML 22 R11.htm IDEA: XBRL DOCUMENT

Loans and Allowance for Loan Losses

6 Months Ended

Jun. 30, 2022

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:

	June 30,			December 31,
	2022			2021
	(dollars in thousands; unaudited)
Commercial and industrial loans	$	401,964		$	419,060
Real estate loans:
Construction, land, and land development		225,512			183,594
Residential real estate		326,661			204,389
Commercial real estate		956,320			835,587
Consumer and other loans		430,083			108,871
Gross loans receivable		2,340,540			1,751,501
Net deferred origination fees and premiums		(6,186	)		(8,766	)
Loans receivable	$	2,334,354		$	1,742,735