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452.9  No

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

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

For the quarterly period ended March 31, 2022 

or

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

For the transition period from ______________ to _____________

Commission file number: 001-38589

COASTAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Washington

56-2392007

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

5415 Evergreen Way, Everett, Washington

98203

(Address of principal executive offices)

(Zip Code)

 

(425) 257-9000

(Registrant’s telephone number, including area code)

Not Applicable

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

 

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

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, no par value per share

CCB

Nasdaq Global Select Market

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

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

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

 

Large Accelerated Filer

 

  

Accelerated Filer

 

Non-Accelerated Filer

 

  

Smaller Reporting Company

 

 

 

 

 

Emerging Growth Company

 

 

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

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

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

 

 


 

 

COASTAL FINANCIAL CORPORATION

 

Table of Contents

 

 

 

 

 

Page No.

Part I.   Financial Information

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

 

4

 

 

 

 

 

 

 

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

 

4

 

 

 

 

 

 

 

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

 

5

 

 

 

 

 

 

 

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

 

6

 

 

 

 

 

 

 

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

 

7

 

 

 

 

 

 

 

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

 

8

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

9

 

 

 

 

 

Item 2.

 

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

 

28

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

68

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

69

 

 

 

 

 

Part II.   Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

70

 

 

 

 

 

Item 1A.

 

Risk Factors

 

70

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

70

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

70

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

70

 

 

 

 

 

Item 5.

 

Other Information

 

70

 

 

 

 

 

Item 6.

 

Exhibits

 

70

 

 

 

 

2


 

 

Forward-Looking Statements

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

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

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

 

 

 

 

3


 

 

PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(dollars in thousands)  

ASSETS

 

 

 

March 31,

 

 

December 31,

 

 

 

2022

 

 

2021

 

Cash and due from banks

 

$

32,705

 

 

$

14,496

 

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

   at March 31, 2022 and December 31, 2021)

 

 

649,404

 

 

 

798,665

 

Investment securities, available for sale, at fair value

 

 

134,891

 

 

 

35,327

 

Investment securities, held to maturity, at amortized cost

 

 

1,286

 

 

 

1,296

 

Other investments

 

 

9,931

 

 

 

8,478

 

Loans receivable

 

 

1,964,209

 

 

 

1,742,735

 

Allowance for loan losses

 

 

(38,770

)

 

 

(28,632

)

Total loans receivable, net

 

 

1,925,439

 

 

 

1,714,103

 

Premises and equipment, net

 

 

18,135

 

 

 

17,219

 

Operating lease right-of-use assets

 

 

5,836

 

 

 

6,105

 

Accrued interest receivable

 

 

8,824

 

 

 

8,105

 

Bank-owned life insurance, net

 

 

12,342

 

 

 

12,254

 

Deferred tax asset, net

 

 

6,892

 

 

 

6,818

 

Other assets

 

 

28,065

 

 

 

12,651

 

Total assets

 

$

2,833,750

 

 

$

2,635,517

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

 

LIABILITIES

 

 

 

 

 

 

 

 

Deposits

 

$

2,576,470

 

 

$

2,363,787

 

Federal Home Loan Bank ("FHLB") advances

 

 

-

 

 

 

24,999

 

Subordinated debt

 

 

 

 

 

 

 

 

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

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

 

 

24,306

 

 

 

24,288

 

Junior subordinated debentures

 

 

 

 

 

 

 

 

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

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

 

 

3,587

 

 

 

3,586

 

Deferred compensation

 

 

712

 

 

 

744

 

Accrued interest payable

 

 

149

 

 

 

357

 

Operating lease liabilities

 

 

6,054

 

 

 

6,320

 

Other liabilities

 

 

14,552

 

 

 

10,214

 

Total liabilities

 

 

2,625,830

 

 

 

2,434,295

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

Preferred stock, no par value:

 

 

 

 

 

 

 

 

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

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

    March 31, 2022 and December 31, 2021

 

 

-

 

 

 

-

 

Common stock, no par value:

 

 

 

 

 

 

 

 

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

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

    issued and outstanding and 12,875,315 shares at

    December 31, 2021 issued and outstanding

 

 

122,592

 

 

 

121,845

 

Retained earnings

 

 

85,603

 

 

 

79,373

 

Accumulated other comprehensive (loss) income, net of tax

 

 

(275

)

 

 

4

 

Total shareholders’ equity

 

 

207,920

 

 

 

201,222

 

Total liabilities and shareholders’ equity

 

$

2,833,750

 

 

$

2,635,517

 

See accompanying Notes to Condensed Consolidated Financial Statements.

4


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

(dollars in thousands, except for per share data)

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

29,632

 

 

$

18,230

 

Interest on interest earning deposits with other banks

 

 

402

 

 

 

70

 

Interest on investment securities

 

 

71

 

 

 

28

 

Dividends on other investments

 

 

37

 

 

 

30

 

Total interest income

 

 

30,142

 

 

 

18,358

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Interest on deposits

 

 

553

 

 

 

660

 

Interest on borrowed funds

 

 

321

 

 

 

383

 

Total interest expense

 

 

874

 

 

 

1,043

 

Net interest income

 

 

29,268

 

 

 

17,315

 

PROVISION FOR LOAN LOSSES

 

 

12,942

 

 

 

357

 

Net interest income after provision for loan losses

 

 

16,326

 

 

 

16,958

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

BaaS fees

 

 

20,112

 

 

 

948

 

Deposit service charges and fees

 

 

884

 

 

 

863

 

Loan referral fees

 

 

602

 

 

 

597

 

Gain on sales of loans, net

 

 

-

 

 

 

130

 

Mortgage broker fees

 

 

123

 

 

 

262

 

Other income

 

 

265

 

 

 

184

 

Total noninterest income

 

 

21,986

 

 

 

2,984

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

11,085

 

 

 

7,686

 

Occupancy

 

 

1,136

 

 

 

1,058

 

Software licenses, maintenance and subscriptions

 

 

1,052

 

 

 

484

 

Legal and professional fees

 

 

708

 

 

 

760

 

Data processing

 

 

809

 

 

 

697

 

BaaS expense

 

 

12,861

 

 

 

90

 

Excise taxes

 

 

349

 

 

 

359

 

Federal Deposit Insurance Corporation ("FDIC") assessments

 

 

604

 

 

 

195

 

Director and staff expenses

 

 

344

 

 

 

220

 

Marketing

 

 

99

 

 

 

82

 

Other expense

 

 

1,368

 

 

 

721

 

Total noninterest expense

 

 

30,415

 

 

 

12,352

 

Income before provision for income taxes

 

 

7,897

 

 

 

7,590

 

PROVISION FOR INCOME TAXES

 

 

1,667

 

 

 

1,572

 

NET INCOME

 

$

6,230

 

 

$

6,018

 

Basic earnings per common share

 

$

0.48

 

 

$

0.50

 

Diluted earnings per common share

 

$

0.46

 

 

$

0.49

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

12,898,746

 

 

 

  11,960,772

 

Diluted

 

 

13,475,337

 

 

 

  12,393,493

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

(dollars in thousands)  

 

 

 

Three Months Ended March 31,

 

 

 

2022

 

 

2021

 

NET INCOME

 

$

6,230

 

 

$

6,018

 

OTHER COMPREHENSIVE LOSS, before tax

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

Unrealized holding loss during the period

 

 

(349

)

 

 

(13

)

Income tax benefit related to unrealized holding loss

 

 

70

 

 

 

3

 

OTHER COMPREHENSIVE LOSS, net of tax

 

 

(279

)

 

 

(10

)

COMPREHENSIVE INCOME

 

$

5,951

 

 

$

6,008

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

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

 

(dollars in thousands)

 

 

Shares of

Common

Stock

 

 

Amount of Common

Stock

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

BALANCE, December 31, 2020

 

 

11,954,327

 

 

$

87,815

 

 

$

52,368

 

 

$

34

 

 

$

140,217

 

Net income

 

 

-

 

 

 

-

 

 

 

6,018

 

 

 

-

 

 

 

6,018

 

Issuance of restricted stock awards

 

 

5,978

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Vesting of restricted stock units

 

 

7,426

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

20,905

 

 

 

151

 

 

 

-

 

 

 

-

 

 

 

151

 

Stock-based compensation

 

 

-

 

 

 

363

 

 

 

-

 

 

 

-

 

 

 

363

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(10

)

 

 

(10

)

BALANCE, March 31, 2021

 

 

11,988,636

 

 

$

88,329

 

 

$

58,386

 

 

$

24

 

 

$

146,739

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2021

 

 

12,875,315

 

 

$

121,845

 

 

$

79,373

 

 

$

4

 

 

$

201,222

 

Net income

 

 

-

 

 

 

-

 

 

 

6,230

 

 

 

-

 

 

 

6,230

 

Vesting of restricted stock units

 

 

26,288

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

26,945

 

 

 

208

 

 

 

-

 

 

 

-

 

 

 

208

 

Stock-based compensation

 

 

-

 

 

 

539

 

 

 

-

 

 

 

-

 

 

 

539

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(279

)

 

 

(279

)

BALANCE, March 31, 2022

 

 

12,928,548

 

 

$

122,592

 

 

$

85,603

 

 

$

(275

)

 

$

207,920

 

See accompanying Notes to Condensed Consolidated Financial Statements.

7


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

(dollars in thousands)

 

 

Three months ended March 31,

 

 

 

2022

 

 

2021

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

6,230

 

 

$

6,018

 

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

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

12,942

 

 

 

357

 

Depreciation and amortization

 

 

419

 

 

 

416

 

(Gain) loss on disposition of fixed assets

 

 

(35

)

 

 

-

 

Decrease in operating lease right-of-use assets

 

 

269

 

 

 

261

 

Decrease in operating lease liabilities

 

 

(266

)

 

 

(259

)

Gain on sales of loans

 

 

-

 

 

 

(130

)

Proceeds from sale of loans

 

 

-

 

 

 

2,201

 

Net (discount accretion) premium amortization on investment securities

 

 

(12

)

 

 

10

 

Stock-based compensation

 

 

539

 

 

 

363

 

Increase in bank-owned life insurance value

 

 

(88

)

 

 

(51

)

Deferred tax benefit

 

 

1

 

 

 

-

 

Net change in CCBX receivable

 

 

(15,181

)

 

 

-

 

Net change in other assets and liabilities

 

 

3,164

 

 

 

(745

)

Net cash provided by operating activities

 

 

7,982

 

 

 

8,441

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Net change in interest earning deposits with other banks

 

 

149,261

 

 

 

(43,320

)

Purchase of investment securities available for sale

 

 

(134,912

)

 

 

(14,998

)

Change in other investments, net

 

 

(1,453

)

 

 

(770

)

Principal paydowns of investment securities available-for-sale

 

 

7

 

 

 

8

 

Principal paydowns of investment securities held-to-maturity

 

 

10

 

 

 

321

 

Maturities and calls of investment securities available-for-sale

 

 

35,000

 

 

 

15,000

 

Purchase of loans

 

 

(57,268

)

 

 

-

 

Increase in loans receivable, net

 

 

(167,010

)

 

 

(221,665

)

Purchases of premises and equipment, net

 

 

(1,300

)

 

 

(502

)

Net cash used by investing activities

 

 

(177,665

)

 

 

(265,926

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

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

 

 

215,769

 

 

 

254,770

 

Net decrease in time deposits

 

 

(3,086

)

 

 

(4,362

)

Net repayment from long term FHLB borrowing

 

 

(24,999

)

 

 

-

 

Net advances from Paycheck Protection Program Liquidity Facility

 

 

-

 

 

 

4,803

 

Proceeds from exercise of stock options

 

 

208

 

 

 

151

 

Net cash provided by financing activities

 

 

187,892

 

 

 

255,362

 

NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH

 

 

18,209

 

 

 

(2,123

)

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

 

 

14,496

 

 

 

18,965

 

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

 

$

32,705

 

 

$

16,842

 

SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Interest paid

 

$

761

 

 

$

1,036

 

Income taxes paid

 

 

12

 

 

 

-

 

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS

 

 

 

 

 

 

 

 

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

 

$

(13

)

 

$

(13

)

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

   Financial Statements, the following assets and liabilities were recognized:

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

-

 

 

$

41

 

Operating lease liabilities

 

$

-

 

 

$

(41

)

See accompanying Notes to Condensed Consolidated Financial Statements. 

8


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

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

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

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

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

Financial statement presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim reporting requirements and with instructions to Form 10-Q and Article 10 of Regulation S-X, and therefore do not include all the information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 14, 2022. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for future periods.

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

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

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

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

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

9


 

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

Note 2 - Recent accounting standards

Recent Accounting Guidance Not Yet Effective

 

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

 

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

 

10


 

 

Note 3 - Investment Securities

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

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

March 31, 2022

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

134,923

 

 

$

1

 

 

$

(350

)

 

$

134,574

 

U.S. Agency collateralized mortgage obligations

 

 

62

 

 

 

-

 

 

 

-

 

 

 

62

 

U.S. Agency residential mortgage-backed securities

 

 

2

 

 

 

-

 

 

 

-

 

 

 

2

 

Municipal bonds

 

 

252

 

 

 

1

 

 

 

-