| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| For the Three Months Ended |
| March 31, 2023 | | March 31, 2022 |
| (dollars in thousands, unaudited) | Average
Balance | | Interest &
Dividends | | Yield / Cost (1) | | Average
Balance | | Interest &
Dividends | | Yield / Cost (1) |
| Treasury & Administration | | | | | | | | | | | |
| Assets | | | | | | | | | | | |
| Interest earning assets: | | | | | | | | | | | |
| Interest earning deposits with other banks | $ | 271,700 | | | $ | 3,097 | | | 4.62 | % | | $ | 843,931 | | | $ | 402 | | | 0.19 | % |
Investment securities, available for sale (6) | 100,273 | | | 535 | | | 2.16 | | | 44,470 | | | 61 | | | 0.56 | |
Investment securities, held to maturity (6) | 1,955 | | | 18 | | | 3.73 | | | 1,292 | | | 10 | | | 3.14 | |
| Other investments | 10,633 | | | 30 | | | 1.14 | | | 9,227 | | | 37 | | | 1.63 | |
| Intrabank asset | (232,647) | | | (2,652) | | | (4.62) | | | (683,845) | | | (326) | | | (0.19) | |
| Total interest earning assets | 151,914 | | | 1,028 | | | 2.74 | | | 215,075 | | | 184 | | | 0.35 | % |
| Liabilities | | | | | | | | | | | |
| Interest bearing liabilities: | | | | | | | | | | | |
| FHLB advances and borrowings | $ | — | | | $ | — | | | — | % | | 24,443 | | | 69 | | | 1.14 | % |
| Subordinated debt | 44,010 | | | 599 | | | 5.52 | | | 24,295 | | | 230 | | | 3.84 | |
| Junior subordinated debentures | 3,588 | | | 63 | | | 7.12 | | | 3,586 | | | 22 | | | 2.49 | |
| Intrabank liability | (94,668) | | | (1,079) | | | (4.62) | | | — | | | — | | | — | |
| Total interest bearing liabilities | (47,070) | | | (417) | | | 3.59 | | | 52,324 | | | 321 | | | 2.49 | |
| Net interest income | | | $ | 1,445 | | | | | | | $ | (137) | | | |
| | | | | | | | | | | |
Net interest margin(3) | | | | | 3.86 | % | | | | | | (0.26) | % |
(1)Yields and costs are annualized.
(2)Includes loans held for sale and nonaccrual loans.
(3)Net interest margin represents net interest income divided by the average total interest earning assets.
(4)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, fraud enhancements and servicing CCBX loans.
(5)Net interest margin, net of BaaS loan expense includes the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans.
(6)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.
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 $13.7 million increase in loan interest income that is attributed to an increase in loan rates and $23.1 million increase in loan interest income that is attributed to an increase in loan volume. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.
| | | | | | | | | | | | | | | | | | | | |
| | Three months ended March 31, 2023
Compared to Three months ended March 31, 2022 |
| | Increase (Decrease)
Due to | | Total Increase
(Decrease) |
| (dollars in thousands; unaudited) | | Volume | | Rate | |
| Interest income: | | | | | | |
| Interest earning deposits | | $ | (6,523) | | | $ | 9,218 | | | $ | 2,695 | |
| Investment securities, available for sale | | 298 | | | 176 | | | 474 | |
| Investment securities, held to maturity | | 6 | | | 2 | | | 8 | |
| Other Investments | | 4 | | | (11) | | | (7) | |
| Loans receivable | | 23,055 | | | 13,744 | | | 36,799 | |
| Total increase in interest income | | 16,840 | | | 23,129 | | | 39,969 | |
| | | | | | |
| Interest expense: | | | | | | |
| Interest bearing deposits | | 6,779 | | | 7,626 | | | 14,405 | |
| | | | | | |
| FHLB advances and other borrowings | | (69) | | | — | | | (69) | |
| Subordinated debt | | 268 | | | 101 | | | 369 | |
| Junior subordinated debentures | | — | | | 41 | | | 41 | |
| Total increase in interest expense | | 6,978 | | | 7,768 | | | 14,746 | |
| Increase in net interest income | | $ | 9,862 | | | $ | 15,361 | | | $ | 25,223 | |
Noninterest Income
Our primary sources of recurring noninterest income are BaaS indemnification income, Baas program income and deposit service charges and 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 March 31, 2023 to the comparable quarter in the prior year
For the three months ended March 31, 2023, noninterest income totaled $49.3 million, an increase of $27.3 million, or 124.3%, compared to $22.0 million for the three months ended March 31, 2022.
The following table presents, for the periods indicated, the major categories of noninterest income:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase
(Decrease) | | Percent
Change |
| (dollars in thousands; unaudited) | | 2023 | | 2022 | | |
| Deposit service charges and fees | | $ | 910 | | | $ | 884 | | | $ | 26 | | | 2.9 | % |
| Loan referral fees | | — | | | 602 | | | (602) | | | (100.0) | |
| Mortgage broker fees | | 19 | | | 123 | | | (104) | | | (84.6) | |
| | | | | | | | |
| Unrealized gain on equity securities, net | | 39 | | | — | | | 39 | | | 100.0 | |
| Gain on sales of loans, net | | 123 | | | — | | | 123 | | | 100.0 | |
| Other | | 280 | | | 265 | | | 15 | | | 5.7 | |
Noninterest income, excluding BaaS program income and BaaS indemnification income | | 1,371 | | | 1,874 | | | (503) | | | (26.8) | |
| Servicing and other BaaS fees | | 948 | | | 1,169 | | | (221) | | | (18.9) | |
| Transaction fees | | 917 | | | 493 | | | 424 | | | 86.0 | |
| Interchange fees | | 789 | | | 432 | | | 357 | | | 82.6 | |
| Reimbursement of expenses | | 921 | | | 372 | | | 549 | | | 147.6 | |
| BaaS program income | | 3,575 | | | 2,466 | | | 1,109 | | | 45.0 | |
| BaaS credit enhancements | | 42,362 | | | 13,075 | | | 29,287 | | | 224.0 | |
| Baas fraud enhancements | | 1,999 | | | 4,571 | | | (2,572) | | | (56.3) | |
| BaaS indemnification income | | 44,361 | | | 17,646 | | | 26,715 | | | 151.4 | |
| Total BaaS income | | 47,936 | | | 20,112 | | | 24,143 | | | 120.0 | |
| Total noninterest income | | $ | 49,307 | | | $ | 21,986 | | | $ | 27,321 | | | 124.3 | % |
Summary of significant noninterest income for the three months ended March 31, 2023 compared to the three months ended March 31, 2022
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 through partners and credit enhancements related to the allowance for credit 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 asset for expected future credit losses through the recognition of BaaS credit enhancement revenue at the same time we establish an allowance for those loans though a provision for credit losses - loans. For more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”
Our CCBX segment continues to evolve, and now has 25 relationships, at varying stages, as of March 31, 2023. We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense for both parties and are focusing more on selecting larger and more established partners, with experienced management teams, existing customer bases and strong financial positions.
The following table illustrates the activity and evolution in CCBX relationships for the periods presented. | | | | | | | | | | | | | | |
| | As of |
| (unaudited) | | March 31, 2023 | | March 31, 2022 |
| Active | | 18 | | 20 |
| Friends and family / testing | | 1 | | 1 |
| Implementation / onboarding | | 1 | | 5 |
| Signed letters of intent | | 4 | | 2 |
| Wind down - preparing to exit relationship | | 1 | | 0 |
| Total CCBX relationships | | 25 | | 28 |
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. Current market conditions are making interest rate swap agreements less attractive in the higher rate environment.
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. The mortgage market has slowed down as a result of higher interest rates on mortgages.
Gain on Sales of Loans, net. Gain on sales of loans occurs when we sell certain CCBX loans to the originating partner, in accordance with partner agreements. Gain on sale of loans may also occur 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.
Unrealized (loss)/gain on equity securities, net. During the three months ended March 31, 2023, we recognized an unrealized gain on equity securities of $39,000, compared to March 31, 2022, when there was no unrealized holding gain or loss.
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 legal and professional expenses, data processing and software licenses, occupancy, FDIC assessment, points of sale expense, excise taxes, director and staff expenses, marketing and other expenses.
Comparison of the quarter ended March 31, 2023 to the comparable quarter in the prior year
For the three months ended March 31, 2023, noninterest expense totaled $44.7 million, an increase of $14.2 million, or 46.8%, compared to $30.4 million for the three months ended March 31, 2022.
The following table presents, for the periods indicated, the major categories of noninterest expense:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended March 31, | | Increase
(Decrease) | | Percent
Change |
| (dollars in thousands; unaudited) | | 2023 | | 2022 | | |
| Salaries and employee benefits | | $ | 15,575 | | | $ | 11,085 | | | $ | 4,490 | | | 40.5 | % |
| Legal and professional expenses | | 3,062 | | | 708 | | | 2,354 | | | 332.5 | |
| Data processing and software licenses | | 1,840 | | | 1,861 | | | (21) | | | (1.1) | |
| Occupancy | | 1,219 | | | 1,136 | | | 83 | | | 7.3 | |
| FDIC assessments | | 595 | | | 604 | | | (9) | | | (1.5) | |
| Point of sale expense | | 753 | | | 248 | | | 505 | | | 203.6 | |
| Excise taxes | | 455 | | | 349 | | | 106 | | | 30.4 | |
| Director and staff expenses | | 626 | | | 344 | | | 282 | | | 82.0 | |
| Marketing | | 95 | | | 99 | | | (4) | | | (4.0) | |
| Other | | 890 | | | 1,120 | | | (230) | | | (20.5) | |
Noninterest expense, excluding BaaS loan and BaaS fraud expense | | 25,110 | | | 17,554 | | | 7,556 | | | 43.0 | |
| BaaS loan expense | | 17,554 | | | 8,290 | | | 9,264 | | | 111.7 | |
| BaaS fraud expense | | 1,999 | | | 4,571 | | | (2,572) | | | (56.3) | |
| BaaS loan and fraud expense | | 19,553 | | | 12,861 | | | 6,692 | | | 52.0 | |
| Total noninterest expense | | $ | 44,663 | | | $ | 30,415 | | | $ | 14,248 | | | 46.8 | % |
Comparison of the three months ended March 31, 2023 to the comparable period in the prior year
For the three months ended March 31, 2023, noninterest expense totaled $44.7 million, an increase of $14.2 million, or 46.8%, compared to $30.4 million for the three months ended March 31, 2022.
Summary of significant noninterest expense for the three months ended March 31, 2023 compared to the three months ended March 31, 2022
A description of our largest noninterest expense categories are below:
Salaries and Employee Benefits. Salaries and employee benefits are one of the largest components of noninterest expense and include payroll expense, incentive compensation costs, equity compensation, 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 March 31, 2023, we had 461 full-time equivalent employees, compared to 401 at March 31, 2022, a 15.0% increase.
Data Processing and Software Licenses. Data processing and software licenses includes expenses related to obtaining and maintaining software required for our various functions. 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 and 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.
Legal and Professional Expenses. 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 consulting costs related to risk management, development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services.
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.
FDIC Assessments. FDIC assessments are assessed to fund the 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 October 18, 2022 the FDIC finalized an increase of 2 basis points in the initial base deposit insurance assessment rates schedules. The rise is intended to increase the reserve ratio of the Deposit Insurance Fund to 1.35%, the statutory requirement. The increase in the base rates will remain in place until the reserve ratio reaches or exceeds 2.0%. The increase takes effect in the first quarterly assessment period of 2023 and will increase the FDIC assessment expense for the Bank.
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.
Point of Sale Expenses. Point of sale expenses are incurred as part of the process that allows businesses to accept payment for goods or services. Generally, point of sale expense increases as point of sale activity increases, as does point of sale income which is recognized in other income.
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 conferences and other professional events have resumed we have seen increased expenses related to employee travel, and continuing education.
Marketing. Marketing and promotion costs were flat because we are using more cost-effective advertising options; however, we expect to see advertising expenses increase as we deploy more branding and targeted advertising for the community bank and CCBX.
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 and miscellaneous other expenses. Provision for unfunded commitments is only included in this category for three months ended March 31, 2022 as the expense for the three months ended March 31, 2023 is included in the provision for unfunded commitments.
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, fraud enhancements and servicing CCBX loans. Partner fraud expense represents noncredit fraud losses on loans and deposits originated through 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 | | |
| (dollars in thousands; unaudited) | | March 31,
2023 | | March 31,
2022 | | | | |
| BaaS loan expense | | $ | 17,554 | | | $ | 8,290 | | | | | |
| BaaS fraud expense | | 1,999 | | | 4,571 | | | | | |
| Total BaaS loan and fraud expense | | $ | 19,553 | | | $ | 12,861 | | | | | |
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. On August 16, 2022, President Biden signed into law the Inflation Reduction Act of 2022, which, among other things, implements a new 15% corporate alternative minimum tax for certain large corporations, a 1% excise tax on stock buybacks, and several tax incentives to promote clean energy and climate initiatives. These provisions were effective beginning January 1, 2023. Based on its current analysis of the provisions, we do not expect this legislation to have a material impact on our consolidated financial statements.
Comparison of the quarter ended March 31, 2023 to the comparable quarter in the prior year
For the three months ended March 31, 2023, income tax expense totaled $3.0 million, compared to $1.7 million for the three months ended March 31, 2022. The $1.4 million 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. The effective tax rate was 19.7% for the three months ended March 31, 2023, compared to 21.1% for the three months ended March 31, 2022. The effective tax rate was lower for the three months ended March 31, 2023 due to tax benefits that resulted from the exercise and deductibility of equity awards.
Segment Information
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 three segments: the community bank, CCBX and treasury & administration. 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 25 partners as of March 31, 2023. The treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.
The management accounting policies and processes utilized in compiling segment financial information are highly subjective and, unlike financial accounting, are not based on authoritative guidance similar to GAAP. As a result, 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 Company continues to evaluate its methodology on allocating items to the Company’s various segments to support strategic business decisions by the Company’s executive leadership. Income and expenses that are specific to a segment are directly posted to each segment. Additionally, certain indirect expenses are allocated to each segment utilizing various metrics, such as number of employees, utilization of space, and allocations based on loan and deposit balances. We have implemented a transfer pricing process that credits or charges the community bank and CCBX segments with intrabank interest income or expense for the difference in average loans and average deposits, with the treasury & administration segment as the offset for those entries. 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.
The following table presents summary financial information for each segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | March 31, 2023 | | December 31, 2022 |
| (dollars in thousands; unaudited) | | Community Bank | | CCBX | | Treasury & Administration | | Total | | Community Bank | | CCBX | | Treasury & Administration | | Total |
| Assets | | | | | | | | | | |
| Cash and Due from Banks | | $ | 4,485 | | | $ | 12,223 | | | $ | 377,208 | | | $ | 393,916 | | | $ | 4,603 | | | $ | 12,899 | | | $ | 324,637 | | | $ | 342,139 | |
| Intrabank asset | | — | | | 356,905 | | | (356,905) | | | — | | | — | | | 254,096 | | | (254,096) | | | — | |
| Securities | | — | | | — | | | 101,704 | | | 101,704 | | | — | | | — | | | 98,353 | | | 98,353 | |
| Loans held for sale | | — | | | 27,292 | | | — | | | 27,292 | | | — | | | — | | | — | | | — | |
| Total loans receivable | | 1,671,014 | | | 1,166,190 | | | — | | | 2,837,204 | | | 1,614,752 | | | 1,012,504 | | | — | | | 2,627,256 | |
Allowance for credit losses | | (20,708) | | | (68,415) | | | — | | | (89,123) | | | (20,636) | | | (53,393) | | | — | | | (74,029) | |
| All other assets | | 25,652 | | | 103,403 | | | 50,985 | | | 180,040 | | | 25,508 | | | 76,111 | | | 49,129 | | | 150,748 | |
| Total assets | | $ | 1,680,443 | | | $ | 1,597,598 | | | $ | 172,992 | | | $ | 3,451,033 | | | $ | 1,624,227 | | | $ | 1,302,217 | | | $ | 218,023 | | | $ | 3,144,467 | |
| Liabilities | | | | | | | | | | | | | | | | |
| Total deposits | | $ | 1,531,391 | | | $ | 1,563,832 | | | $ | — | | | $ | 3,095,223 | | | $ | 1,538,218 | | | $ | 1,279,303 | | | $ | — | | | $ | 2,817,521 | |
| Total borrowings | | — | | | — | | | 47,619 | | | 47,619 | | | — | | | — | | | 47,587 | | | 47,587 | |
| Intrabank liability | | 143,279 | | | — | | | (143,279) | | | — | | | 80,392 | | | — | | | (80,392) | | | — | |
| All other liabilities | | 5,773 | | | 33,766 | | | 9,889 | | | 49,428 | | | 5,617 | | | 22,914 | | | 7,334 | | | 35,865 | |
| Total liabilities | | $ | 1,680,443 | | | $ | 1,597,598 | | | $ | (85,771) | | | $ | 3,192,270 | | | $ | 1,624,227 | | | $ | 1,302,217 | | | $ | (25,471) | | | $ | 2,900,973 | |
Community bank total assets as of March 31, 2023 increased $56.2 million, or 3.5%, to $1.68 billion, compared to $1.62 billion as of December 31, 2022. Loans receivable net of deferred fees for the community bank segment increased $56.3 million, or 3.5%, to $1.67 billion as of March 31, 2023, compared to $1.61 billion as of December 31, 2022. The increase in community bank loans receivable is the result of gross loan growth of $56.5 million, which includes $908,000 in PPP loan forgiveness and paydowns during the three months ended March 31, 2023. Total community bank deposits decreased $6.8 million, or 0.4%, to $1.53 billion, as of March 31, 2023, compared to $1.54 billion as of December 31, 2022. The slight decrease in community bank deposits was a result of pricing disciplines as some customer sought higher rate products elsewhere. Our cost of deposits for the community bank was 0.66% for the three months ended March 31, 2023.
CCBX total assets as of March 31, 2023 increased $295.4 million, or 22.7%, to $1.60 billion, compared to $1.30 billion as of December 31, 2022. During the three months ended March 31, 2023, $101.2 million in CCBX loans were transferred to loans held for sale, with $73.9 million in loans sold and $27.3 million remaining in loans held for sale as of March 31, 2023; we had no loans held for sale as of December 31, 2022. Total CCBX loans receivable increased $153.7 million, or 15.2%, to $1.17 billion as of March 31, 2023, compared to $1.01 billion as of December 31, 2022. The increase in loans receivable is the result of increased activity with CCBX partners. CCBX allowance for credit losses increased to $68.4 million as of March 31, 2023, compared to $53.4 million as of December 31, 2022 as a result of CCBX loan growth and portfolio mix. Total CCBX deposits increased $284.5 million, or 22.2%, to $1.56 billion, compared to $1.28 billion as of December 31, 2022 as a result of growth within the CCBX relationships. This does not include an additional $36.9 million in CCBX deposits that are transferred off the balance sheet as of March 31, 2023.
Treasury & administration total assets as of March 31, 2023 decreased $45.0 million, or 20.7%, to $173.0 million, compared to $218.0 million as of December 31, 2022. Total securities increased $3.4 million, or 3.4%, to $101.7 million as of March 31, 2023, compared to $98.4 million as of December 31, 2022. Total borrowings were $47.6 million as of March 31, 2023 and December 31, 2022.
The following tables present summary financial information for each segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Three months ended March 31, 2023 | | Three months ended March 31, 2022 |
| Community Bank | | CCBX | | Treasury & Administration | | Total | | Community Bank | | CCBX | | Treasury & Administration | | Total |
| (dollars in thousands; unaudited) |
Net interest income, before
intrabank transfer | $ | 21,677 | | | $ | 29,796 | | | $ | 3,018 | | | $ | 54,491 | | | $ | 17,205 | | | $ | 11,874 | | | $ | 189 | | | $ | 29,268 | |
Interest income (expense)
intrabank transfer | (1,079) | | | 2,652 | | | (1,573) | | | — | | | 128 | | | 198 | | | (326) | | | — | |
Provision for credit
losses - loans | 428 | | | 43,116 | | | — | | | 43,544 | | | 344 | | | 12,598 | | | — | | | 12,942 | |
Provision for unfunded
commitments | 137 | | | 16 | | | — | | | 153 | | | — | | | — | | | — | | | — | |
Noninterest income (1) | 1,090 | | | 48,080 | | | 137 | | | 49,307 | | | 1,556 | | | 20,343 | | | 87 | | | 21,986 | |
| Noninterest expense | 9,092 | | | 28,439 | | | 7,132 | | | 44,663 | | | 7,646 | | | 18,407 | | | 4,362 | | | 30,415 | |
Net income before income
taxes | 12,031 | | | 8,957 | | | (5,550) | | | 15,438 | | | 10,899 | | | 1,410 | | | (4,412) | | | 7,897 | |
| Income taxes | 2,375 | | | 1,768 | | | (1,096) | | | 3,047 | | | 2,301 | | | 297 | | | (931) | | | 1,667 | |
| Net Income | $ | 9,656 | | | $ | 7,189 | | | $ | (4,454) | | | $ | 12,391 | | | $ | 8,598 | | | $ | 1,113 | | | $ | (3,481) | | | $ | 6,230 | |
Comparison of the quarter ended March 31, 2023 to the comparable quarter in the prior year
Net interest income before intrabank interest expense for the community bank was $21.7 million for the quarter ended March 31, 2023, an increase of $4.5 million, or 26.0%, compared to $17.2 million for the quarter ended March 31, 2022. The increase in net interest income is largely due to increased yield on loans resulting from loan growth and higher interest rates. As a result of the community bank having higher average loans than deposits for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022, intrabank interest expense for the community bank was $1.1 million for the quarter ended March 31, 2023, compared to intrabank interest income of $128,000 for the quarter ended March 31, 2022. Provision for credit losses - loans for the community bank was $428,000 for the quarter ended March 31, 2023, compared to a provision of $344,000 for the quarter ended March 31, 2022. Net charge-offs to average loans for the community bank segment have remained consistently low and was 0.01% for the quarter ended March 31, 2023 and 0.00% for the quarter ended March 31, 2022. Noninterest income for the community bank was $1.1 million, for the quarter ended March 31, 2023, a decrease of $466,000, or 29.9%, compared to $1.6 million for the quarter ended March 31, 2022 and primarily due to a $602,000 decrease in loan referral fees. Noninterest expenses for the community bank increased $1.4 million, or 18.9%, to $9.1 million as of March 31, 2023, compared to $7.6 million as of March 31, 2022. 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 before intrabank interest income for CCBX was $29.8 million for the quarter ended March 31, 2023, an increase of $17.9 million, or 150.9%, compared to $11.9 million for the quarter ended March 31, 2022. The increase in net interest income is due to loan growth and higher interest rates from active CCBX relationships. As a result of having higher average deposits than loans for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 intrabank interest income for CCBX was $2.7 million for the quarter ended March 31, 2023, compared to $198,000 for the quarter ended March 31, 2022. Provision for credit losses - loans was $43.1 million as a result of loan origination growth and charge-offs from CCBX loans for the quarter ended March 31, 2023, compared to $12.6 million for the quarter ended March 31, 2022. The $43.1 million provision on CCBX loans includes $42.3 million for partner loans with credit enhancement on them and $770,000 on CCBX loans that the Company is responsible for. In accordance with the program agreement and for true lender purposes for that CCBX partner only, the Company is responsible for credit losses on approximately 10% of a $137.4 million loan portfolio, or $13.9 million in partner loans at March 31, 2023. Noninterest income for CCBX was $48.1 million for the quarter ended March 31, 2023, an increase of $27.7 million, or 136.3%, compared to $20.3 million for the quarter ended March 31, 2022, due to an increase of $29.3 million in BaaS credit enhancements to establish a credit enhancement asset for future credit losses due from our CCBX partners, $2.6 million decrease in BaaS fraud enhancements and $1.1 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 $10.0 million, or 54.5%, to $28.4 million as of March 31, 2023, compared to $18.4 million as of March 31, 2022. 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 March 31, 2023, compared to the quarter ended March 31, 2022. For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”
Net interest income before intrabank interest expense for treasury & administration was $3.0 million for the quarter ended March 31, 2023, an increase of $2.8 million, or 1496.9%, compared to $189,000 for the quarter ended March 31, 2022, as a result of increased interest rates. Noninterest income increased $50,000, or 57.5%, to $137,000 for the quarter ended March 31, 2023, compared to $87,000 for the quarter ended March 31, 2022. Noninterest expense increased $2.8 million, or 63.5%, to $7.1 million for the quarter ended March 31, 2023, compared to $4.4 million for the quarter ended March 31, 2022, largely as a result of increased salaries and employee benefits as a result of growth.
Financial Condition
Our total assets increased $306.6 million, or 9.7%, to $3.45 billion at March 31, 2023 from $3.14 billion at December 31, 2022. The increase is primarily the result of $209.9 million increase in loans receivable during the three months ended March 31, 2023.
Loans Held For Sale
During the quarter ended March 31, 2023, $101.2 million in CCBX loans were transferred to loans held for sale, with $73.9 million in loans sold. A portion of these loans were sold at par and a portion were sold with a gain on sale of $123,000. As
of March 31, 2023 $27.3 million in residential real estate secured lines of credit loans remain in loans held for sale. At December 31, 2022, there were no loans held for sale.
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 March 31, 2023, loans receivable totaled $2.84 billion, an increase of $209.9 million, or 8.0%, compared to December 31, 2022. Total loans receivable is net of $6.6 million in net deferred origination fees, $63,000 of which is attributed to PPP loans. The increase includes CCBX loan growth of $153.7 million, or 15.2%, and community bank loan growth of $56.5 million, or 3.5%, which includes a $0.9 million, or 19.3%, reduction in PPP loans due to forgiveness and principal paydowns.
Loans as a percentage of deposits were 92.5% as of March 31, 2023, compared to 93.2% as of December 31, 2022. We remain focused on serving our communities and markets by growing loans and funding those loans with customer deposits.
The following table summarizes our loan portfolio by type of loan as of the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2023 | | As of December 31, 2022 |
| (dollars in thousands; unaudited) | | Amount | | Percent | | Amount | | Percent |
| Commercial and industrial loans: | | | | | | | | |
| PPP loans | | $ | 3,791 | | | 0.1 | % | | $ | 4,699 | | | 0.2 | % |
| Capital call lines | | 118,796 | | | 4.2 | | | 146,029 | | | 5.5 | |
| All other commercial & industrial loans | | 203,751 | | | 7.2 | | | 161,900 | | | 6.1 | |
| Total commercial and industrial loans: | | 326,338 | | | 11.5 | | | 312,628 | | | 11.8 | |
| Real estate loans: | | | | | | | | |
| Construction, land and land development | | 206,635 | | | 7.3 | | | 214,055 | | | 8.1 | |
| Residential real estate | | 455,507 | | | 16.0 | | | 449,157 | | | 17.1 | |
| Commercial real estate | | 1,102,771 | | | 38.8 | | | 1,048,752 | | | 39.8 | |
| Consumer and other loans | | 752,528 | | | 26.4 | | | 608,771 | | | 23.2 | |
| Gross loans receivable | | 2,843,779 | | | 100.0 | % | | 2,633,363 | | | 100.0 | % |
| Net deferred origination fees - PPP loans | | (63) | | | | | (82) | | | |
| Net deferred origination fees - all other loans | | (6,512) | | | | | (6,025) | | | |
| Loans receivable | | $ | 2,837,204 | | | | | $ | 2,627,256 | | | |
Loan Yield (1) | | 9.95 | % | | | | 9.33 | % | | |
(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 |
| | March 31, 2023 | | December 31, 2022 |
| (dollars in thousands; unaudited) | | Balance | | % to Total | | Balance | | % to Total |
| Commercial and industrial loans: | | | | | | | | |
| PPP loans | | $ | 3,791 | | | 0.2 | % | | $ | 4,699 | | | 0.3 | % |
| All other commercial & industrial loans | | 155,082 | | | 9.3 | | | 146,982 | | | 9.1 | |
| Real estate loans: | | | | | | | | |
| Construction, land and land development loans | | 206,635 | | | 12.3 | | | 214,055 | | | 13.2 | |
| Residential real estate loans | | 206,140 | | | 12.3 | | | 204,581 | | | 12.6 | |
| Commercial real estate loans | | 1,102,771 | | | 65.7 | | | 1,048,752 | | | 64.7 | |
| Consumer and other loans: | | | | | | | | |
| Other consumer and other loans | | 2,860 | | | 0.2 | | | 1,725 | | | 0.1 | |
| Gross Community Bank loans receivable | | 1,677,279 | | | 100.0 | % | | 1,620,794 | | | 100.0 | % |
| Net deferred origination fees | | (6,265) | | | | | (6,042) | | | |
| Loans receivable | | $ | 1,671,014 | | | | | $ | 1,614,752 | | | |
Loan Yield(1) | | 5.97 | % | | | | 5.70 | % | | |
(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 |
| | March 31, 2023 | | December 31, 2022 |
| (dollars in thousands; unaudited) | | Balance | | % to Total | | Balance | | % to Total |
| Commercial and industrial loans: | | | | | | | | |
| Capital call lines | | $ | 118,796 | | | 10.2 | % | | $ | 146,029 | | | 14.4 | % |
All other commercial & industrial loans | | 48,669 | | | 4.1 | | | 14,918 | | | 1.5 | |
| Real estate loans: | | | | | | | | |
| Residential real estate loans | | 249,367 | | | 21.4 | | | 244,576 | | | 24.2 | |
| Consumer and other loans: | | | | | | | | |
| Credit cards | | 318,187 | | | 27.3 | | | 279,644 | | | 27.6 | |
| Other consumer and other loans | | 431,481 | | | 37.0 | | | 327,402 | | | 32.3 | |
| Gross CCBX loans receivable | | 1,166,500 | | | 100.0 | % | | 1,012,569 | | | 100.0 | % |
| Net deferred origination fees | | (310) | | | | | (65) | | | |
| Loans receivable | | $ | 1,166,190 | | | | | $ | 1,012,504 | | | |
Loan Yield - CCBX (1)(2) | | 16.09 | % | | | | 15.20 | % | | |
(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, fraud 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. Net BaaS loan income is a non-GAAP measure. See the reconciliation of non-GAAP measures set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures” for the impact of BaaS loan expense on CCBX yield.
(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 increased $13.7 million, or 4.4%, to $326.3 million as of March 31, 2023, from $312.6 million as of December 31, 2022. The increase in commercial and industrial loans receivable over December 31, 2022 was due to a $41.9 million increase in other commercial and industrial loans partially offset by $908,000 in forgiven and repaid PPP loans and a decrease of $27.2 million in capital call lines. Included in the commercial and industrial loan balance is $118.8 million and $146.0 million in capital call lines resulting from relationships with our CCBX partners as of March 31, 2023 and December 31, 2022, respectively. As of March 31, 2023, there were $48.7 million in CCBX other commercial loans, compared to $14.9 million at December 31, 2022.
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 $48.6 million and $45.1 million in loans to financial institutions as of March 31, 2023 and December 31, 2022, respectively.
Also included in commercial and industrial loans is $3.8 million and $4.7 million in PPP loans as of March 31, 2023, and December 31, 2022, respectively. The impact of PPP loans on the Company’s financial statements has significantly lessened as nearly all of the PPP loans have been paid off and/or forgiven.
Construction, Land and Land Development Loans. Construction, land and land development loans decreased $7.4 million, or 3.5%, to $206.6 million as of March 31, 2023, from $214.1 million as of December 31, 2022. The decrease is attributed to the completion of a few construction and development projects.
Unfunded loan commitments for construction, land and land development loans were $180.5 million at March 31, 2023, compared to $142.5 million at December 31, 2022. Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2023, the economic environment is continuously changing with the recent bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, mid-term elections and trade issues that have resulted in some economic uncertainty and slowing in construction lending.
Construction, land and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing these loans are primarily located in the Puget Sound region and are comprised of both residential and commercial properties, including owner occupied properties and investor properties. As of March 31, 2023, construction, land and land development loans included $98.0 million in commercial construction loans, $42.0 million in undeveloped land loans, $32.3 million in residential construction loans and $34.4 million in other construction, land and land development loans, compared to $100.7 million in commercial construction loans, $44.6 million in undeveloped land loans, $32.9 million in residential construction loans and $35.9 million in other construction, land and land development loans as of December 31, 2022.
Residential Real Estate Loans. Our one-to-four family residential real estate loans increased $6.4 million, or 1.4%, to $455.5 million as of March 31, 2023, from $449.2 million as of December 31, 2022 largely due to an increase of $4.8 million in CCBX loans.
As of March 31, 2023, there were $249.4 million in CCBX home equity loans included in residential real estate, compared to $244.6 million at December 31, 2022, as a result of increased activity. These home equity lines of credit are secured by residential real estate and are accessed by using a credit card.
We have purchased residential mortgages originated through other financial institutions to hold for investment with the intent to diversify our residential mortgage loan portfolio, meet certain regulatory requirements and increase our interest income. We last purchased residential mortgage loans in 2018. As of March 31, 2023 and December 31, 2022, we held $9.4 million in purchased residential real estate mortgage loans. 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.
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 $54.0 million, or 5.2%, to $1.10 billion as of March 31, 2023, from $1.05 billion as of December 31, 2022.
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, low rise office buildings, mixed-use residential and commercial, and other properties. We originate both fixed- and adjustable-rate loans with terms up to 20 years. Fixed-rate loans typically amortize over a 10 to 25 year period with balloon payments due at the end of five to ten years. Adjustable-rate loans are generally based on the prime rate and adjust with the prime rate or are based on term equivalent FHLB rates. At March 31, 2023, approximately 31.7% of the commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans represented 38.8% of our loan portfolio at March 31, 2023 and are historically our largest source of revenue. As of March 31, 2023, we held $42.2 million in purchased commercial real estate loans, compared to $42.4 million at December 31, 2022. 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 $143.8 million, or 23.6%, to $752.5 million, from $608.8 million as of December 31, 2022, as a result of growth in CCBX loans originated through our partners.
CCBX consumer loans totaled $749.7 million as of March 31, 2023, compared to $607.0 million at December 31, 2022. CCBX consumer loans include installment loans, credit cards, lines of credit and other loans. Our community bank consumer and other loans totaled $2.9 million as of March 31, 2023, compared to $1.7 million at December 31, 2022 and 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. Our major categories of loans are commercial real estate, consumer and other loans, residential real estate, commercial and industrial, and construction, land and land development loans. Together they represent $2.84 billion in outstanding loan balances. When combined with $2.36 billion in unused commitments the total of these categories is $5.20 billion. However, total exposure on CCBX loans is subject to portfolio and partner maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.
The following table summarizes our community bank loan commitments by industry for our commercial real estate portfolio as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands; unaudited) | | Outstanding Balance | | Available Loan Commitments | | Total Outstanding Balance & Available Commitment | | % of Total Loans (Outstanding Balance & Available Commitment) | | Average Loan Balance | | Number of Loans |
| Community bank commercial real estate loans |
| Apartments | | $ | 264,439 | | | $ | 6,231 | | | $ | 270,670 | | | 5.2 | % | | $ | 3,040 | | | 87 |
| Hotel/Motel | | 148,869 | | | 2,931 | | | 151,800 | | | 2.9 | | | 6,203 | | | 24 |
| Office | | 99,407 | | | 3,258 | | | 102,665 | | | 2.0 | | | 1,058 | | | 94 |
| Convenience Store | | 95,885 | | | 2,586 | | | 98,471 | | | 1.9 | | | 1,844 | | | 52 |
| Retail | | 85,679 | | | 1,162 | | | 86,841 | | | 1.7 | | | 921 | | | 93 |
| Mixed use | | 85,624 | | | 3,670 | | | 89,294 | | | 1.7 | | | 1,007 | | | 85 |
| Warehouse | | 83,366 | | | 1,290 | | | 84,656 | | | 1.6 | | | 1,516 | | | 55 |
| Mini Storage | | 50,643 | | | 917 | | | 51,560 | | | 1.0 | | | 2,814 | | | 18 |
| Strip Mall | | 45,801 | | | — | | | 45,801 | | | 0.9 | | | 5,725 | | | 8 |
| Manufacturing | | 37,558 | | | 800 | | | 38,358 | | | 0.7 | | | 1,138 | | | 33 |
| Groups < 0.70% of total | | 105,500 | | | 3,947 | | | 109,447 | | | 2.1 | | | 1,256 | | | 84 |
| Total | | $ | 1,102,771 | | | $ | 26,792 | | | $ | 1,129,563 | | | 21.7 | % | | $ | 1,742 | | | 633 |
As illustrated in the table below, our CCBX partners originate a large number of mostly smaller dollar loans, resulting in an average consumer loan of just $1,600.
The following table summarizes our loan commitments by category for our consumer and other loan portfolio as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands; unaudited) | | Outstanding Balance | | Available Loan Commitments | | Total Outstanding Balance & Available Commitment (1) | | % of Total Loans (Outstanding Balance & Available Commitment) | | Average Loan Balance | | Number of Loans |
| CCBX consumer loans |
| Installment loans | | $ | 425,280 | | | $ | — | | | $ | 425,280 | | | 8.2 | % | | $ | 1.9 | | | 225,180 |
| Credit cards | | 318,187 | | | 944,758 | | | 1,262,945 | | | 24.3 | | | 1.5 | | | 219,417 |
| Lines of credit | | 3,605 | | | 361 | | | 3,966 | | | 0.1 | | | 0.3 | | | 12,553 |
| Other loans | | 2,596 | | | — | | | 2,596 | | | 0.1 | | | 0.2 | | | 16,389 |
| Community bank consumer loans |
| Other loans | | 1,408 | | | — | | | 1,408 | | | 0.0 | | | 5.8 | | | 241 |
| Installment loans | | 1,294 | | | — | | | 1,294 | | | 0.0 | | | 51.8 | | | 25 |
| Lines of credit | | 158 | | | 619 | | | 777 | | | 0.0 | | | 3.4 | | | 47 |
| Total | | $ | 752,528 | | | $ | 945,738 | | | $ | 1,698,266 | | | 32.7 | % | | $ | 1.6 | | | 473,852 |
(1)Total exposure on CCBX capital call lines is subject to a portfolio maximum limit of $350.0 million. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.
The following table summarizes our loan commitments by category for our residential real estate portfolio as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands; unaudited) | | Outstanding Balance | | Available Loan Commitments | | Total Exposure (1) | | % of Total Loans
(Outstanding Balance &
Available Commitment) | | Average Loan Balance | | Number of Loans |
| CCBX residential real estate loans |
| Home equity line of credit | | $ | 249,367 | | | $ | 359,215 | | | $ | 608,582 | | | 11.7 | % | | $ | 26 | | | 9,495 |
| Community bank residential real estate loans |
| Closed end, secured by first liens | | 178,206 | | | 4,748 | | | 182,954 | | | 3.5 | | | 600 | | | 297 |
| Home equity line of credit | | 19,318 | | | 43,565 | | | 62,883 | | | 1.2 | | | 91 | | | 213 |
| Closed end, second liens | | 8,616 | | | 1,016 | | | 9,632 | | | 0.2 | | | 331 | | | 26 |
| Total | | $ | 455,507 | | | $ | 408,544 | | | $ | 864,051 | | | 16.6 | % | | $ | 45 | | | 10,031 |
(1)Total exposure on CCBX loans is subject to portfolio maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.
The following table summarizes our loan commitments by industry for our commercial and industrial loan portfolio as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands; unaudited) | | Outstanding Balance | | Available Loan Commitments | | Total Outstanding Balance & Available Commitment (1) | | % of Total Loans (Outstanding Balance & Available Commitment) | | Average Loan Balance | | Number of Loans |
| Capital Call Lines | | $ | 118,796 | | | $ | 716,609 | | | $ | 835,405 | | | 16.1 | % | | $ | 707 | | | 168 |
| Retail | | 49,329 | | | 6,174 | | | 55,503 | | | 1.1 | | | 24 | | | 2,026 |
| Financial Institutions | | 48,649 | | | — | | | 48,649 | | | 0.9 | | | 4,054 | | | 12 |
| Construction/Contractor Services | | 22,019 | | | 30,785 | | | 52,804 | | | 1.0 | | | 120 | | | 183 |
| Medical / Dental / Other Care | | 20,758 | | | 5,848 | | | 26,606 | | | 0.5 | | | 769 | | | 27 |
| Manufacturing | | 11,622 | | | 5,416 | | | 17,038 | | | 0.3 | | | 208 | | | 56 |
| Groups < 0.30% of total | | 55,165 | | | 30,251 | | | 85,416 | | | 1.6 | | | 175 | | | 315 |
| Total | | $ | 326,338 | | | $ | 795,083 | | | $ | 1,121,421 | | | 21.5 | % | | $ | 117 | | | 2,787 |
(1)Total exposure on CCBX loans is subject to portfolio maximum limits. See "Material Cash Requirements and Capital Resources" for maximum limits on CCBX loans by category.
The following table details our community bank loan commitments by category for our construction, land and land development loan portfolio as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| (dollars in thousands; unaudited) | | Outstanding Balance | | Available Loan Commitments | | Total Outstanding Balance & Available Commitment | | % of Total Loans (Outstanding Balance & Available Commitment) | | Average Loan Balance | | Number of Loans |
| Community bank construction, land and land development loans |
| Commercial construction | | $ | 97,987 | | | $ | 141,667 | | | $ | 239,654 | | | 4.6 | % | | $ | 4,260 | | | 23 |
| Residential construction | | 32,268 | | | 21,988 | | | 54,256 | | | 1.0 | | | 978 | | | 33 |
| Undeveloped land loans | | 41,951 | | | 9,718 | | | 51,669 | | | 1.0 | | | 2,997 | | | 14 |
| Developed land loans | | 19,130 | | | 3,732 | | | 22,862 | | | 0.4 | | | 660 | | | 29 |
| Land development | | 15,299 | | | 3,392 | | | 18,691 | | | 0.4 | | | 805 | | | 19 |
| Total | | $ | 206,635 | | | $ | 180,497 | | | $ | 387,132 | | | 7.4 | % | | $ | 1,751 | | | 118 |
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 through 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 nonperforming/substandard loans, 90+ days past due and still accruing. As a result of the type of loans (primarily consumer loans) originated through our CCBX partners, we anticipate that balances 90 days past due or more and still accruing will increase as those loans grow. 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 $31.5 million in nonperforming assets as of March 31, 2023, compared to $33.2 million as of December 31, 2022. This includes $24.6 million in CCBX loans more than 90 days past due and still accruing interest as of March 31, 2023, compared to $26.1 million at December 31, 2022. All of our nonperforming assets were nonperforming loans as of March 31, 2023 and December 31, 2022. Our nonperforming loans to loans receivable ratio was 1.11% at March 31, 2023, compared to 1.26% at December 31, 2022. The decrease in nonperforming assets was due to a $1.5 million decrease in CCBX partner loans that are 90 days or more past due and still accruing interest. Community bank nonaccrual loans decreased $98,000 during the three months ended March 31, 2023 due to principal reductions/charge-offs.
Our community bank credit quality remains strong, as demonstrated by the low level of community bank charge-offs and nonperforming loan balance for the three months ended March 31, 2023. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses, when accruing
consumer loans originated through 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:
| | | | | | | | | | | | | | |
| (dollars in thousands; unaudited) | | As of March 31, 2023 | | As of December 31, 2022 |
| Nonaccrual loans: | | | | |
| Commercial and industrial loans | | $ | 15 | | | $ | 113 | |
| Real estate loans: | | | | |
| Construction, land and land development | | 66 | | | 66 | |
| | | | |
| Commercial real estate | | 6,901 | | | 6,901 | |
| Total nonaccrual loans | | 6,982 | | | 7,080 | |
| Accruing loans past due 90 days or more: | | | | |
Commercial & industrial loans | | 187 | | | 404 | |
| Real estate loans: | | | | |
| Residential real estate loans | | 946 | | | 876 | |
| Consumer and other loans: | | | | |
| Credit cards | | 17,772 | | | 10,570 | |
| Other consumer and other loans | | 5,657 | | | 14,245 | |
| Total accruing loans past due 90 days or more | | 24,562 | | | 26,095 | |
| Total nonperforming loans | | 31,544 | | | 33,175 | |
| Real estate owned | | — | | | — | |
| Repossessed assets | | — | | | — | |
| Modified loans for borrowers experiencing financial difficulty, accruing | | — | | | — | |
| Total nonperforming assets | | $ | 31,544 | | | $ | 33,175 | |
| Total nonaccrual loans to loans receivable | | 0.25 | % | | 0.27 | % |
| Total nonperforming loans to loans receivable | | 1.11 | % | | 1.26 | % |
| Total nonperforming assets to total assets | | 0.91 | % | | 1.06 | % |
The following tables detail nonperforming assets by segment which are included in the total nonperforming assets table above:
| | | | | | | | | | | | | | |
| Community Bank | | As of |
| (dollars in thousands; unaudited) | | March 31,
2023 | | December 31,
2022 |
| Nonaccrual loans: | | | | |
| Commercial and industrial loans | | $ | 15 | | | $ | 113 | |
| Real estate: | | | | |
| Construction, land and land development | | 66 | | | 66 | |
| | | | |
| Commercial real estate | | 6,901 | | | 6,901 | |
| Total nonaccrual loans | | 6,982 | | | 7,080 | |
| | | | |
| Accruing loans past due 90 days or more: | | | | |
| Total accruing loans past due 90 days or more | | — | | | — | |
| Total nonperforming loans | | 6,982 | | | 7,080 | |
| Other real estate owned | | — | | | — | |
| Repossessed assets | | — | | | — | |
| Total nonperforming assets | | $ | 6,982 | | | $ | 7,080 | |
| | | | | | | | | | | | | | |
| CCBX | | As of |
| (dollars in thousands; unaudited) | | March 31,
2023 | | December 31,
2022 |
| Nonaccrual loans | | $ | — | | | $ | — | |
| Accruing loans past due 90 days or more: | | | | |
Commercial & industrial loans | | 187 | | | 404 | |
| Real estate loans: | | | | |
| Residential real estate loans | | 946 | | | 876 | |
| Consumer and other loans: | | | | |
| Credit cards | | 17,772 | | | 10,570 | |
| Other consumer and other loans | | 5,657 | | | 14,245 | |
| Total accruing loans past due 90 days or more | | 24,562 | | | 26,095 | |
| Total nonperforming loans | | 24,562 | | | 26,095 | |
| Other real estate owned | | — | | | — | |
| Repossessed assets | | — | | | — | |
| Total nonperforming assets | | $ | 24,562 | | | $ | 26,095 | |
Allowance for credit losses
The ACL is an estimate of the expected credit losses on financial assets measured at amortized cost. The ACL is evaluated and calculated on a collective basis for those loans which share similar risk characteristics. At each reporting period, the Company evaluates whether the loans in a pool continue to exhibit similar risk characteristics as the other loans in the pool and whether it needs to evaluate the allowance on an individual basis. The Bank must estimate expected credit losses over the loans’ contractual terms, adjusted for expected prepayments. In estimating the life of the loan, the Bank cannot extend the contractual term of the loan for expected extensions, renewals, and modifications, unless the extension or renewal options are included in the contract at the reporting date and are not unconditionally cancellable by the Bank. Because expected credit losses are estimated over the contractual life adjusted for estimated prepayments, determination of the life of the loan may significantly affect the ACL. The Company has chosen to segment its portfolio consistent with the manner in which it manages the risk of the type of credit.
•Community Bank Portfolio: The ACL calculation is derived for loan segments utilizing loan level information and relevant information from internal and external sources related to past events and current conditions. In addition, the Company incorporates a reasonable and supportable forecast.
•CCBX Portfolio: The Bank calculates the ACL on loans on an aggregate basis based on each partner and product level, segmenting the risk inherent in the CCBX portfolio based on qualitative and quantitative trends in the portfolio.
Also included in the ACL are qualitative reserves to cover losses that are expected, but in the Company’s assessment may not be adequately represented in the quantitative method. For example, factors that the Company considers include environmental business conditions, borrower’s financial condition, credit rating and the volume and severity of past due loans and non-accrual loans. Based on this analysis, the Company records a provision for loan losses to maintain the allowance at appropriate levels.
As of March 31, 2023, the allowance for credit losses totaled $89.1 million, or 3.14% of total loans. As of December 31, 2022, the allowance for loan losses totaled $74.0 million, or 2.82% of total loans. Effective January 1, 2023 the Company implemented the CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the incurred loss model, which is what we were previously using. As a result of implementing CECL, there was a one-time adjustment to the 2023 opening allowance balance of $3.9 million. The day one CECL adjustment for community bank loans included a reduction of $310,000 to the community bank allowance driven by the reversal of the unallocated balance and a reduction of $340,000 related to the community bank unfunded commitment reserve also driven by the reversal of the unallocated balance. This was offset by an increase to the CCBX allowance for $4.2 million. With the mirror image approach accounting related to the contingent credit enhancement asset for CCBX partner loans, there was a CECL day one increase to the indemnification asset in the amount of $4.5 million. Net, the day one impact to retained earnings for the Bank’s transition to CECL was an increase of $954,000, excluding the impact of income taxes.
The increase in the Company’s allowance for credit losses for the quarter ended March 31, 2023 compared to December 31, 2022, is largely related to the provision for CCBX partner loans. During the three months ended March 31, 2023, a $43.1 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a provision for credit losses - loans of $428,000 was needed for the three months ended March 31, 2023. The economic environment is continuously changing with the recent bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, mid-term elections and trade issues 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 credit losses.
Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and negative deposit accounts. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner's legal commitment to cover losses. The credit enhancement asset is relieved as credit enhancement payments and recoveries are received from the CCBX partner. 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 enhancement 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 a cash reserve account at the Bank which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Although 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 to replenish their cash reserve account then the Bank would be exposed to additional loan and deposit losses, as a result of this counterparty risk. If a CCBX partner does not replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would write-off any remaining credit enhancement asset from the CCBX partner but would retain the full yield on the loan portfolio going forward, and BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.
The following table presents, as of and for the periods indicated, net charge-off information by segment:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended |
| | March 31, 2023 | | March 31, 2022 |
| (dollars in thousands; unaudited) | | Community Bank | | CCBX | | Total | | Community Bank | | CCBX | | Total |
| Gross charge-offs | | $ | 50 | | | $ | 34,117 | | | $ | 34,167 | | | $ | 4 | | | $ | 2,804 | | | $ | 2,808 | |
| Gross recoveries | | (5) | | | (1,860) | | | (1,865) | | | (4) | | | — | | | (4) | |
| Net charge-offs | | $ | 45 | | | $ | 32,257 | | | $ | 32,302 | | | $ | — | | | $ | 2,804 | | | $ | 2,804 | |
Net charge-offs to average loans (1) | | 0.01 | % | | 12.29 | % | | 4.84 | % | | 0.00 | % | | 2.98 | % | | 0.64 | % |
(1)Annualized calculations shown for periods presented.
The following table presents, as of and for the periods indicated, an analysis of the allowance for credit losses and other related data:
| | | | | | | | | | | | | | | | | | | | |
| | As of or for the Three Months Ended March 31, | | |
| (dollars in thousands; unaudited) | | 2023 | | 2022 | | | | |
| Allowance at beginning of period | | $ | 74,029 | | | $ | 28,632 | | | | | |
| Impact of adopting CECL (ASC 326) | | 3,852 | | | — | | | | | |
| Provision for credit losses | | 43,544 | | | 12,942 | | | | | |
| Charge-offs: | | | | | | | | |
| Commercial and industrial loans | | 776 | | | 5 | | | | | |
| Residential real estate | | 737 | | | — | | | | | |
| Consumer and other | | 32,654 | | | 2,803 | | | | | |
| Total charge-offs | | 34,167 | | | 2,808 | | | | | |
| Recoveries: | | | | | | | | |
| Commercial and industrial loans | | 3 | | | 2 | | | | | |
| Consumer and other | | 1,862 | | | 2 | | | | | |
| Total recoveries | | 1,865 | | | 4 | | | | | |
| Net charge-offs | | 32,302 | | | 2,804 | | | | | |
| Allowance at end of period | | $ | 89,123 | | | $ | 38,770 | | | | | |
| Allowance for credit losses to nonaccrual loans | | 1276.47 | % | | 21070.65 | % | | | | |
| Allowance to nonperforming loans | | 282.54 | % | | 1653.30 | % | | | | |
| Allowance to loans receivable | | 3.14 | % | | 1.97 | % | | | | |
| | | | | | | | |
(1)Annualized calculations shown for periods presented.
The allowance for credit losses to nonaccrual loans ratio decreased as of March 31, 2023, compared to March 31, 2022 as a result of an increase of $6.8 million in nonaccrual community bank loans, combined with an increase of $50.4 million in the allowance for credit losses. The increase in the allowance for credit losses for the three March 31, 2023 compared to the three March 31, 2022, is largely related to the increase in the allowance for loans originated through our CCBX partners. CCBX partner agreements provide for, and the Company has collected in full, credit enhancements that cover the $32.3 million in net charge-offs on CCBX loans for the three March 31, 2023. At March 31, 2023, the allowance for credit losses for CCBX partner loans totaled $68.4 million, compared to $18.1 million at March 31, 2022.
The following table presents the loans receivable and allowance for credit losses by segment for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2023 | | As of December 31, 2022 |
| (dollars in thousands; unaudited) | | Community Bank | | CCBX | | Total | | Community Bank | | CCBX | | Total |
| Loans receivable | | $ | 1,671,014 | | | $ | 1,166,190 | | | $ | 2,837,204 | | | $ | 1,614,752 | | | $ | 1,012,504 | | | $ | 2,627,256 | |
| Allowance for credit losses | | (20,708) | | | (68,415) | | | (89,123) | | | (20,636) | | | (53,393) | | | (74,029) | |
Allowance for credit losses to
total loans receivable | | 1.24 | % | | 5.87 | % | | 3.14 | % | | 1.28 | % | | 5.27 | % | | 2.82 | % |
Although we believe that we have established our allowance for credit losses in accordance with GAAP and that the allowance for credit losses was adequate to provide for expected losses in the portfolio at all times shown above, future provisions for credit losses will be subject to ongoing evaluations of the risks in our loan portfolio. We have not seen an increase in community bank credit 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 the recent bank failures, inflation, higher interest rates, global unrest, the war in Ukraine, mid-term elections and trade issues that have resulted in some economic uncertainty. If economic conditions worsen then 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 credit 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 March 31, 2023, 96.1% of our investment portfolio consisted of U.S. Treasury securities. The remainder of our securities portfolio was invested in municipal bonds, U.S. Agency collateralized mortgage obligations and U.S. Agency residential mortgage-backed securities. Because we target a loan-to-deposit ratio in the range of 90% to 100%, we prioritize liquidity over the earnings of our securities portfolio. At March 31, 2023, our loan-to-deposit ratio was 92.5% due to our significant growth in both loans and deposits. Our securities portfolio represented less than 5% of assets. To the extent our securities represent more than 5% of assets, absent an immediate need for liquidity, we anticipate investing excess funds to provide a higher return.
As of March 31, 2023, the amortized cost of our investment securities totaled $104.0 million, an increase of $2.7 million, or 2.6%, compared to $101.3 million as of December 31, 2022. The increase in the securities portfolio was due to the purchase of one security for $2.7 million during the three months ended March 31, 2023. This security was purchased for CRA purposes and placed in our held-to-maturity portfolio. The existing securities in our held-to-maturity portfolio were purchased for and are being held for CRA purposes.
Our investment portfolio consists of securities classified as available-for-sale and, to a lesser amount, held-to-maturity. The carrying values of our investment securities classified as available-for-sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. As of March 31, 2023, our available-for-sale portfolio has an unrealized loss of $2.3 million, compared to an unrealized loss of $3.0 million as of December 31, 2022.
The following table summarizes the amortized cost and estimated fair value of our investment securities as of the dates shown:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2023 | | As of December 31, 2022 |
| (dollars in thousands; unaudited) | | Amortized
Cost | | Fair
Value | | Amortized
Cost | | Fair
Value |
| Securities available-for-sale: | | | | | | | | |
| U.S. Treasury securities | | $ | 99,974 | | | $ | 97,699 | | | $ | 99,967 | | | $ | 97,015 | |
| U.S. Agency collateralized mortgage obligations | | 52 | | | 50 | | | 54 | | | 51 | |
U.S. Agency residential mortgage-backed securities | | — | | | — | | | 1 | | | 1 | |
| Municipal bonds | | 250 | | | 250 | | | 250 | | | 250 | |
| Total available-for-sale securities | | 100,276 | | | 97,999 | | | 100,272 | | | 97,317 | |
| Securities held-to-maturity: | | | | | | | | |
U.S. Agency residential mortgage-backed securities | | 3,705 | | | 3,597 | | | 1,036 | | | 916 | |
| Total held-to-maturity securities | | 3,705 | | | 3,597 | | | 1,036 | | | 916 | |
| Total investment securities | | $ | 103,981 | | | $ | 101,596 | | | $ | 101,308 | | | $ | 98,233 | |
We held a $2.2 million equity interest in a financial technology company as of March 31, 2023 and December 31, 2022, which consists of common stock and preferred shares.
Additionally, we held a $350,000 equity interest in a technology company of March 31, 2023 and December 31, 2022.
We invest in investment funds that are designed to help accelerate technology adoption at banks and have invested in three separate funds. These funds are carried at fair value as reported by the funds. During the three months ended March 31, 2023, we contributed $123,000 with investment funds designed to help accelerate technology adoption at banks, and recognized gains of $39,000, resulting in an equity interest of $617,000 at March 31, 2023. The Company has committed up to $820,000 in capital for these investment funds, however, the Company is not obligated to fund these commitments prior to a capital call.
Deposits
We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, money market, savings, and time accounts as well as IntraFi network sweep deposits. Sweep 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. CCBX deposits are generally classified as interest bearing negotiable order of withdrawal (“NOW”) and money market accounts. 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 March 31, 2023 were $3.10 billion, an increase of $277.7 million, or 9.9%, compared to $2.82 billion as of December 31, 2022. The increase in deposits was largely in core deposits, which increased $381.6 million to $3.07 billion from $2.69 billion at December 31, 2022. We define core deposits as all deposits except time deposits and brokered deposits. The $381.6 million increase in core deposits is also largely from growth in the CCBX segment, which accounted for $386.1 million of the increase, partially offset by a decrease of $4.4 million in community bank deposits. The slight decrease in community bank deposits was a result of pricing disciplines as some customer sought higher rate products elsewhere. Our cost of deposits for the community bank was 0.66% for the three months ended March 31, 2023. BaaS-brokered deposits are now classified as NOW accounts due to a change in the relationship agreement with one of our partners; these deposits increased $173.9 million to $275.4 million as of March 31, 2023. These deposits increased as a result of sweeping them back on the balance sheet. Additionally, as of March 31, 2023 we have access to $36.9 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. If a portion of these deposits are retained, they would be classified as NOW accounts.
Included in total deposits is $1.56 billion in CCBX deposits, an increase of $284.5 million, or 22.2%, compared to $1.28 billion as of December 31, 2022. CCBX customer deposit relationships include deposits with CCBX end customers, operating and non-operating deposit accounts. The deposits from our CCBX segment are generally classified as interest bearing NOW and money market accounts.
Total noninterest bearing deposits as of March 31, 2023 were $761.8 million, a decrease of $13.2 million, or 1.7%, compared to $775.0 million as of December 31, 2022. Noninterest bearing deposits represent 24.6% and 27.5% of total deposits for March 31, 2023 and December 31, 2022, respectively.
Total interest bearing account balances, excluding time deposits, as of March 31, 2023 were $2.31 billion, an increase of $293.3 million, or 14.6%, compared to $2.01 billion as of December 31, 2022. The $293.3 million increase is the due in part to former BaaS-brokered deposits now being classified as NOW accounts in the first quarter of 2023 due to a change in the relationship agreement with one of our partners, combined with CCBX growth in interest bearing deposits and a community bank increase in interest bearing deposits of $25.3 million. Included in total deposits is $94.3 million in IntraFi network NOW and money market sweep accounts as of March 31, 2023, which provides our customers with fully insured deposits through a sweep to other financial institutions.
Total time deposit balances as of March 31, 2023 were $27.1 million, a decrease of $2.4 million, or 8.1%, from $29.4 million as of December 31, 2022. 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 focus on growing and retaining less costly core deposits.
The following table sets forth deposit balances at the dates indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | As of March 31, 2023 | | As of December 31, 2022 |
| (dollars in thousands; unaudited) | | Amount | | Percent of Total Deposits | | Amount | | Percent of Total Deposits |
| Demand, noninterest bearing | | $ | 761,800 | | | 24.6 | % | | $ | 775,012 | | | 27.5 | % |
| NOW and money market | | 2,207,121 | | | 71.3 | | | 1,804,399 | | | 64.0 | |
| Savings | | 99,241 | | | 3.2 | | | 107,117 | | | 3.8 | |
| Total core deposits | | 3,068,162 | | | 99.1 | | | 2,686,528 | | | 95.3 | |
| Brokered deposits | | 1 | | | — | | | 101,546 | | | 3.6 | |
| Time deposits less than $100,000 | | 11,343 | | | 0.4 | | | 12,596 | | | 0.5 | |
| Time deposits $100,000 and over | | 15,717 | | | 0.5 | | | 16,851 | | | 0.6 | |
| Total | | $ | 3,095,223 | | | 100.0 | % | | $ | 2,817,521 | | | 100.0 | % |
Cost of deposits (1) | | 2.13 | % | | | | 1.56 | % | | |
(1)Cost of deposits is annualized 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 |
| | March 31, 2023 | | December 31, 2022 |
| (dollars in thousands; unaudited) | | Balance | | % to Total | | Balance | | % to Total |
| Demand, noninterest bearing | | $ | 664,452 | | | 43.4 | % | | $ | 694,179 | | | 45.2 | % |
| NOW and money market | | 743,548 | | | 48.6 | | | 709,490 | | | 46.1 | |
| Savings | | 96,330 | | | 6.3 | | | 105,101 | | | 6.8 | |
| Total core deposits | | 1,504,330 | | | 98.3 | | | 1,508,770 | | | 98.1 | |
| Brokered deposits | | 1 | | | 0.0 | | | 1 | | | 0.0 | |
| Time deposits less than $100,000 | | 11,343 | | | 0.7 | | | 12,596 | | | 0.8 | |
| Time deposits $100,000 and over | | 15,717 | | | 1.0 | | | 16,851 | | | 1.1 | |
| Total Community Bank deposits | | $ | 1,531,391 | | | 100.0 | % | | $ | 1,538,218 | | | 100.0 | % |
Cost of deposits(1) | | 0.66 | % | | | | 0.37 | % | | |
(1)Cost of deposits is annualized for the three months ended for each period presented.
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| CCBX | | As of |
| | March 31, 2023 | | December 31, 2022 |
| (dollars in thousands; unaudited) | | Balance | | % to Total | | Balance | | % to Total |
| Demand, noninterest bearing | | $ | 97,348 | | | 6.2 | % | | $ | 80,833 | | | 6.3 | % |
| NOW and money market | | 1,463,573 | | | 93.6 | | | 1,094,909 | | | 85.6 | |
| Savings | | 2,911 | | | 0.2 | | | 2,016 | | | 0.2 | |
| Total core deposits | | 1,563,832 | | | 100.0 | | | 1,177,758 | | | 92.1 | |
| BaaS-brokered deposits | | — | | | — | | | 101,545 | | | 7.9 | |
| Total CCBX deposits | | $ | 1,563,832 | | | 100.0 | % | | $ | 1,279,303 | | | 100.0 | % |
Cost of deposits (1) | | 3.89 | % | | | | 3.13 | % | | |
(1)Cost of deposits is annualized 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 March 31, 2023 | | As of December 31, 2022 |
| Maturity Period: | | | | |
| Three months or less | | $ | 3,657 | | | $ | 4,067 | |
| Over three through six months | | 2,708 | | | 2,957 | |
| Over six through twelve months | | 6,827 | | | 5,892 | |
| Over twelve months | | 2,525 | | | 3,935 | |
| Total | | $ | 15,717 | | | $ | 16,851 | |
| Weighted average maturity (in years) | | 0.83 | | 0.76 |
Average deposits for the three months ended March 31, 2023 were $2.85 billion, an increase of 16.1% compared to $2.45 billion for the three months ended March 31, 2022. The increase in average deposits 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.
The average rate paid on total deposits was 2.13% for the three months ended March 31, 2023, compared to 0.09% for the three months ended March 31, 2022. The average rate paid on NOW and money market accounts increased 2.92% for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. The average rate paid on time deposits of less than $100,000 decreased 0.12% for the three months ended March 31, 2023, compared to the three months ended March 31, 2022. The average rate paid on time deposits greater than $100,000 decreased 2.06% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The average rate paid on time deposits greater than $100,000 was higher in the quarter ended March 31, 2022 due to the recognition of additional interest expense of $130,000 during the quarter to correct interest on CDs from a previous period; there was no such adjustment in the quarter ended March 31, 2023. The average rate paid on savings increased 0.11% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The average rate paid on BaaS brokered deposits increased 3.73% for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. The overall higher average rate paid on interest bearing accounts in the three months ended March 31, 2023 compared to the three months ended March 31, 2022 is due to the recent interest rate increases by the FOMC. Increased Fed Funds rates along with competition are expected to continue to impact future cost of deposits and our pricing strategies.
The following table presents the average balances and average rates paid on deposits for the periods indicated:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | For the Three Months Ended March 31, | | |
| | 2023 | | 2022 | | | | |
| (dollars in thousands; unaudited) | | Average Balance | | Average Rate(1) | | Average Balance | | Average Rate(1) | | | | | | | | |
| Demand, noninterest bearing | | $ | 775,940 | | | 0.00 | % | | $ | 1,320,144 | | | 0.00 | % | | | | | | | | |
| NOW and money market | | 1,833,035 | | | 3.06 | | | 917,075 | | | 0.14 | | | | | | | | | |
| Savings | | 103,893 | | | 0.14 | | | 104,209 | | | 0.03 | | | | | | | | | |
| BaaS-brokered deposits | | 105,315 | | | 4.08 | | | 68,819 | | | 0.35 | | | | | | | | | |
| Time deposits less than $100,000 | | 11,838 | | | 0.21 | | | 14,844 | | | 0.33 | | | | | | | | | |
| Time deposits $100,000 and over | | 16,136 | | | 0.25 | | | 27,037 | | | 2.31 | | | | | | | | | |
| Total deposits | | $ | 2,846,157 | | | 2.13 | % | | $ | 2,452,128 | | | 0.09 | % | | | | | | | | |
(1)Annualized calculations shown for periods presented.
The ratio of average noninterest bearing deposits to average total deposits for the three months ended March 31, 2023 was 27.3% and compared to 53.8% for the three months ended March 31, 2022.
Uninsured Deposits
The FDIC insures our deposits up to $250,000 per depositor, per insured bank for each account ownership category. Deposits that exceed insurance limits are uninsured. At March 31, 2023, deposits totaled $3.10 billion, of which total estimated uninsured deposits were $768.3 million, or 24.8% of total deposits, compared to $835.8 million, or 29.7% of total deposits as of December 31, 2022. At March 31, 2022, deposits totaled $2.58 billion, of which total estimated uninsured deposits were $850.1 million, or 33.0% of total deposits. The Bank is using sweep deposits to provide our customers with fully insured deposits.
Uninsured time deposits totaled $2.7 million as of March 31, 2023. The table below shows the estimated uninsured time deposits, by account, for the maturity periods indicated:
| | | | | | | | |
| (dollars in thousands; unaudited) | | As of March 31, 2023 |
| Maturity Period: | | |
| Three months or less | | $ | 314 | |
| Over three through six months | | 691 | |
| Over six through twelve months | | 1,491 | |
| Over twelve months | | 178 | |
| Total | | $ | 2,674 | |
Borrowings
We have the ability to utilize short-term to long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below.
Federal Reserve Bank Line of Credit. The Federal Reserve allows us to borrow against our line of credit through a borrower in custody agreement utilizing the discount window, which is collateralized by certain loans. As of March 31, 2023 and March 31, 2022, total borrowing capacity of $465.3 million and $23.6 million, respectively, was available under this arrangement. As of March 31, 2023 and 2022, Federal Reserve advances totaled zero.
Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of March 31, 2023 and March 31, 2022, we had borrowing capacity of $109.8 million and $98.3 million, respectively, with the FHLB. As of March 31, 2023 and 2022, FHLB advances totaled zero.
The table below provides details on the FHLB advance borrowings for the periods indicated:
| | | | | | | | | | | | | | | | | | |
| | As of and For the Three Months Ended March 31, | | |
| (dollars in thousands; unaudited) | | 2023 | | 2022 | | | | |
Maximum amount outstanding at any month-end during period: | | $ | — | | | $ | 24,999 | | | | | |
| Average outstanding balance during period: | | $ | — | | | $ | 24,443 | | | | | |
| Weighted average interest rate during period: | | 0.00 | % | | 1.13 | % | | | | |
| Balance outstanding at end of period: | | $ | — | | | $ | — | | | | | |
| Weighted average interest rate at end of period: | | 0.00 | % | | N/A | | | | |
Junior Subordinated Debentures. In 2004, we issued $3.6 million in junior subordinated debentures to Coastal (WA) Statutory Trust I (the “Trust”), of which we own all of the outstanding common securities. The Trust used the proceeds from the issuance of its underlying common securities and preferred securities to purchase the debentures issued by the Company. These debentures are the Trust’s only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. The debentures bear interest at a rate per annum equal to the 3-month LIBOR plus 2.10%. The effective rate as of March 31, 2023 and December 31, 2022 was 6.97% and 6.87%, 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.
In November 2022, the Company issued subordinated notes in the aggregate amount of $20.0 million. The notes mature on November 1, 2032, and bear interest at the rate of 7.00% per year for five years and, thereafter, reprices quarterly beginning November 1, 2027, at a rate equal to the three-month SOFR plus 2.9%. The five-year 7.00% interest period ends on November 1, 2027. We may redeem the subordinated notes, in whole or in part, without premium or penalty, in principal redemption multiples of $1,000, after November 1, 2027, subject to any required regulatory approvals.
Liquidity and Capital Resources
Liquidity Management
Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds and the ability to convert assets into cash. Changes in economic conditions or exposure to credit, market, and operational, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity management. Deposits obtained through our CCBX segment are a significant source of liquidity for us. If a relationship with a large CCBX partner terminates, the exit of those deposits could have an adverse impact on liquidity. Partner program agreements govern the relationship and are valid for a given period of time. Prior to exiting, the partner would need to provide us adequate notice as stipulated in the agreement that they were not going to renew the program agreement and intend to move the deposits. The movement to an alternate BaaS provider is cumbersome and would be over a period of time, which would allow us the opportunity to put alternate liquidity in place; those options are more fully discussed below. As of March 31, 2023, we have 1 partner with deposits that are in excess of 10% of total deposits and represent 26% 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. Additionally, the Bank, as of March 31, 2023, has access to $36.9 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 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 three months ended March 31, 2023, the Company contributed $15.0 million to the Bank. The Company currently holds $7.7 million in cash for debt servicing and operating purposes. 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.
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. Because the Company’s consolidated assets exceeded $3.0 billion as of September 30, 2022, the Company is no longer eligible for the Federal Reserve’s Small Bank Holding Company Policy Statement and will be evaluated relative to the capital adequacy standards established by the Federal Reserve going forward. The Company was not in excess of $3.0 billion as of June 30, 2022, and accordingly prepared and filed financial reports with the Federal Reserve as a small bank holding company. Currently, the Federal Reserve assesses the capital position of the Company based on these reports by reviewing its debt-to-equity ratio and its capacity to serve as a source of strength to the Bank.
As of March 31, 2023, and December 31, 2022, the Company and the Bank were 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 Company, through a private placement, raised $25.0 million in subordinated debt in 2021 and repaid $10.0 million of subordinated debt with the proceeds and used the remainder for general corporate purposes. On November 1, 2022 the Company, through a private placement, raised $20.0 million of subordinated debt with the proceeds to be used for general corporate purposes.
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:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Actual | | Minimum Required
for Capital
Adequacy Purposes | | Required to be Well
Capitalized
Under the Prompt
Corrective Action
Provisions |
| (dollars in thousands; unaudited) | | Amount | | Ratio | | Amount | | Ratio | | Amount | | Ratio |
| March 31, 2023 | | | | | | | | | | | | |
| Tier 1 Leverage Capital (to average assets) | | | | | | | | | | | | |
| Company | | $ | 264,000 | | | 8.29 | % | | $ | 127,350 | | | 4.00 | % | | N/A | | N/A |
| Bank Only | | 297,477 | | | 9.35 | % | | 127,233 | | | 4.00 | % | | 159,041 | | | 5.00 | % |
| Common Equity Tier 1 Capital (to risk-weighted assets) | | | | | | | | | | | | |
| Company | | 260,500 | | | 8.61 | % | | 136,084 | | | 4.50 | % | | N/A | | N/A |
| Bank Only | | 297,477 | | | 9.76 | % | | 137,110 | | | 4.50 | % | | 198,047 | | | 6.50 | % |
| Tier 1 Capital (to risk-weighted assets) | | | | | | | | | | | | |
| Company | | 264,000 | | | 8.73 | % | | 181,445 | | | 6.00 | % | | N/A | | N/A |
| Bank Only | | 297,477 | | | 9.76 | % | | 182,813 | | | 6.00 | % | | 243,751 | | | 8.00 | % |
| Total Capital (to risk-weighted assets) | | | | | | | | | | | | |
| Company | | 347,444 | | | 11.49 | % | | 241,926 | | | 8.00 | % | | N/A | | N/A |
| Bank Only | | 336,201 | | | 11.03 | % | | 243,751 | | | 8.00 | % | | 304,688 | | | 10.00 | % |
| December 31, 2022 | | | | | | | | | | | | |
| Tier 1 Leverage Capital (to average assets) | | | | | | | | | | | | |
| Company | | $ | 249,250 | | | 7.97 | % | | $ | 125,141 | | | 4.00 | % | | N/A | | N/A |
| Bank Only | | 267,699 | | | 8.56 | % | | 125,025 | | | 4.00 | % | | 156,281 | | | 5.00 | % |
| Common Equity Tier 1 Capital (to risk-weighted assets) | | | | | | | | | | | | |
| Company | | 245,750 | | | 8.92 | % | | 124,027 | | | 4.50 | % | | N/A | | N/A |
| Bank Only | | 267,699 | | | 9.73 | % | | 123,822 | | | 4.50 | % | | 178,854 | | | 6.50 | % |
| Tier 1 Capital (to risk-weighted assets) | | | | | | | | | | | | |
| Company | | 249,250 | | | 9.04 | % | | 165,370 | | | 6.00 | % | | N/A | | N/A |
| Bank Only | | 267,699 | | | 9.73 | % | | 165,096 | | | 6.00 | % | | 220,128 | | | 8.00 | % |
| Total Capital (to risk-weighted assets) | | | | | | | | | | | | |
| Company | | 329,203 | | | 11.94 | % | | 220,493 | | | 8.00 | % | | N/A | | N/A |
| Bank Only | | 302,595 | | | 11.00 | % | | 220,128 | | | 8.00 | % | | 275,160 | | | 10.00 | % |
(1)Presents the minimum capital adequacy requirements that apply to the Bank (excluding the capital conservation buffer) and the Company.
Material Cash Requirements and Capital Resources
The following table provides the material cash requirements from known contractual and other obligations as of as of March 31, 2023:
| | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | Payments Due by Period |
| (dollars in thousands; unaudited) | | Total | | Less than
1 Year | | Over
1 year | | Other (1) |
| Cash requirements | | | | | | | | |
| Time Deposits | | $ | 27,060 | | | $ | 21,548 | | | $ | 5,512 | | | $ | — | |
| Subordinated notes | | 45,000 | | | — | | | 45,000 | | | — | |
| Junior subordinated debentures | | 3,609 | | | — | | | 3,609 | | | — | |
| Deferred compensation plans | | 891 | | | 175 | | | 716 | | | — | |
| Operating leases | | 5,805 | | | 987 | | | 4,818 | | | — | |
| Non-maturity deposits | | 3,068,163 | | | — | | | — | | | 3,068,163 | |
| Equity investment commitment | | 820 | | | 820 | | | — | | | — | |
(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 March 31, 2023 we had $2.4 billion in commitments to extend credit, compared to $2.2 billion as of December 31, 2022. The $156.5 million increase is largely attributed to an increase of $152.2 million in consumer and other loan commitments, related to CCBX consumer loans, $56.1 million decrease in commercial and industrial capital call line commitments, $40.2 million increase in commercial construction loans and $33.8 million increase in residential real estate commitments, related to CCBX loans.
The following table presents commitments associated with outstanding commitments to extend credit, standby and commercial letters of credit and equity investment commitments as of the periods indicated:
| | | | | | | | | | | | | | |
| (dollars in thousands; unaudited) | | As of March 31, 2023 | | As of December 31, 2022 |
| Commitments to extend credit: | | | | |
| Commercial and industrial loans | | $ | 78,473 | | | $ | 81,568 | |
| Commercial and industrial loans - capital call lines | | 716,610 | | | 772,732 | |
| Construction – commercial real estate loans | | 149,867 | | | 109,715 | |
| Construction – residential real estate loans | | 30,631 | | | 32,827 | |
| Residential real estate loans | | 408,544 | | | 374,735 | |
| Commercial real estate loans | | 26,792 | | | 35,024 | |
| Consumer and other loans | | 945,738 | | | 793,563 | |
| Total commitments to extend credit | | $ | 2,356,655 | | | $ | 2,200,164 | |
| Standby letters of credit | | $ | 2,374 | | | $ | 3,064 | |
| Equity investment commitment | | $ | 820 | | | $ | 988 | |
We have portfolio limits with our each of our partners to manage loan concentration risk, liquidity risk, and counter-party partner risk. For example, as of March 31, 2023, capital call lines outstanding balance totaled $118.8 million, and while commitments totaled $716.6 million the commitments are cancelable, and are also limited to a maximum of $350.0 million by agreement with the partner.
The following table shows the CCBX maximum portfolio sizes by loan category as of March 31, 2023.
| | | | | | | | |
| (dollars in thousands; unaudited) | Type of Lending | Maximum Portfolio Size |
| Commercial and industrial loans: | | |
| Capital call lines | Business - Venture Capital | $ | 350,000 | |
All other commercial & industrial loans | Business - Small Business | 102,209 | |
| Real estate loans: | | |
| Home equity lines of credit | Home Equity - Secured Credit Cards | 300,000 | |
| Consumer and other loans: | | |
| Credit cards | Credit Cards - Primarily Consumer | 500,762 | |
| Installment loans | Consumer | 1,166,761 | |
| Other consumer and other loans | Consumer - Secured Credit Builder & Unsecured consumer | 185,269 | |
| | $ | 2,605,001 | |
| Total Existing Portfolio Size | | $ | 1,166,190 | |
Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer. As of March 31, 2023, $1.66 billion in commitments to extend credit are unconditionally cancelable, compared to $1.57 billion at December 31, 2022. The increase in unconditionally cancelable commitments is attributed to growth in CCBX loans. Commitments that are unconditionally cancelable allow us to better manage loan growth, credit concentrations and liquidity. We also limit CCBX partners to a maximum aggregate customer loan balance originated and held on our balance sheet, as shown in the table above.
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.
We believe that we will be able to meet our long-term cash requirements as they come due. Adequate cash levels are generated through profitability, repayments from loans and securities, deposit gathering activity, access to borrowing sources and periodic loan sales.
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 except as indicated in Note 1 of the condensed consolidated financial statements included elsewhere in this report.
Selected Financial Data
The following table shows the Company’s key performance ratios for the periods indicated.
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| | Three Months Ended | | |
| (unaudited) | | March 31,
2023 | | December 31,
2022 | | September 30,
2022 | | June 30,
2022 | | March 31,
2022 | | | | |
| | | | | | | | | | | | | | |
Return on average assets (1) | | 1.58 | % | | 1.66 | % | | 1.45 | % | | 1.41 | % | | 0.93 | % | | | | |
Return on average equity (1) | | 19.89 | % | | 21.86 | % | | 19.36 | % | | 18.86 | % | | 12.12 | % | | | | |
Yield on earnings assets (1) | | 9.19 | % | | 8.47 | % | | 7.38 | % | | 5.94 | % | | 4.58 | % | | | | |
Yield on loans receivable (1) | | 9.95 | % | | 9.33 | % | | 8.46 | % | | 7.34 | % | | 6.80 | % | | | | |
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Cost of funds (1) | | 2.19 | % | | 1.61 | % | | 0.85 | % | | 0.29 | % | | 0.14 | % | | | | |
Cost of deposits (1) | | 2.13 | % | | 1.56 | % | | 0.82 | % | | 0.25 | % | | 0.09 | % | | | | |
Net interest margin (1) | | 7.15 | % | | 6.96 | % | | 6.58 | % | | 5.66 | % | | 4.45 | % | | | | |
Noninterest expense to average assets (1) | | 5.69 | % | | 5.97 | % | | 6.66 | % | | 5.29 | % | | 4.52 | % | | | | |
Noninterest income to average assets (1) | | 6.28 | % | | 5.43 | % | | 4.48 | % | | 3.53 | % | | 3.27 | % | | | | |
| Efficiency ratio | | 43.03 | % | | 48.94 | % | | 61.12 | % | | 58.38 | % | | 59.34 | % | | | | |
Loans receivable to deposits (2) | | 92.55 | % | | 93.25 | % | | 89.92 | % | | 86.54 | % | | 76.24 | % | | | | |
(1)Annualized calculations shown for periods presented.
(2)Including loans held for sale.
CCBX – BaaS Reporting Information
During the three months ended March 31, 2023, $42.4 million was recognized in noninterest income BaaS credit enhancements related to the establishment of a credit enhancement asset for future credit 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 originated through the partner. In accordance with accounting guidance, we estimate and record a provision for expected losses on these CCBX loans and deposit overdrafts. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset 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 credit losses, and as the credit enhancement payments are received from the CCBX partner, the credit enhancement asset 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 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 its contracted obligations beyond its cash reserve account then the Bank would be
exposed to additional loan and deposit losses, as a result of this counterparty risk. If a CCBX partner does not adequately replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would write-off any remaining credit and fraud enhancement asset from the CCBX partner but would retain the full yield on the loan going forward, and BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.
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, fraud 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 then 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:
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| Loan income and related loan expense | | Three Months Ended | | |
| (dollars in thousands; unaudited) | | March 31,
2023 | | March 31,
2022 | | | | |
| BaaS loan interest income | | $ | 42,220 | | | $ | 11,992 | | | | | |
| Less: BaaS loan expense | | 17,554 | | | 8,290 | | | | | |
Net BaaS loan income (1) | | 24,666 | | | 3,702 | | | | | |
Net BaaS loan income divided by average BaaS loans (1) | | 9.40 | % | | 3.93 | % | | | | |
Yield on loans (2) | | 16.09 | % | | 12.73 | % | | | | |
(1)A reconciliation of this non-GAAP measure is set forth in the section titled “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”
(2)Annualized calculations shown for periods presented.
The increased activity of CCBX partners has resulted in increases in direct fees, expenses and interest for the three months ended March 31, 2023 compared to the three months ended March 31, 2022. 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.
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| Interest income | | Three Months Ended | | |
| (dollars in thousands; unaudited) | | March 31,
2023 | | March 31,
2022 | | | | |
| Loan interest income | | $ | 42,220 | | | $ | 11,992 | | | | | |
| Total BaaS interest income | | $ | 42,220 | | | $ | 11,992 | | | | | |
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| Interest expense | | Three Months Ended | | |
| (dollars in thousands; unaudited) | | March 31,
2023 | | March 31,
2022 | | | | |
| BaaS interest expense | | $ | 12,424 | | | $ | 118 | | | | | |
| Total BaaS interest expense | | $ | 12,424 | | | $ | 118 | | | | | |
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| | Three Months Ended | | |
| (dollars in thousands; unaudited) | | March 31,
2023 | | March 31,
2022 | | | | |
| BaaS program income: | | | | | | | | |
| Servicing and other BaaS fees | | $ | 948 | | | $ | 1,169 | | | | | |
| Transaction fees | | 917 | | | 493 | | | | | |
| Interchange fees | | 789 | | | 432 | | | | | |
| Reimbursement of expenses | | 921 | | | 372 | | | | | |
| BaaS program income | | 3,575 | | | 2,466 | | | | | |
| BaaS indemnification income: | | | | | | | | |
| BaaS credit enhancements | | 42,362 | | | 13,075 | | | | | |
| BaaS fraud enhancements | | 1,999 | | | 4,571 | | | | | |
| BaaS indemnification income | | 44,361 | | | 17,646 | | | | | |
| Total BaaS income | | $ | 47,936 | | | $ | 20,112 | | | | | |
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| | Three Months Ended | | |
| (dollars in thousands; unaudited) | | March 31,
2023 | | March 31,
2022 | | | | |
| BaaS loan expense | | $ | 17,554 | | | $ | 8,290 | | | | | |
| BaaS fraud expense | | 1,999 | | | 4,571 | | | | | |
| Total BaaS loan and fraud expense | | $ | 19,553 | | | $ | 12,861 | | | | | |
GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures
The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies.
The following non-GAAP measure is presented to illustrate the impact of BaaS loan expense on net loan income and yield on CCBX loans.
Net BaaS loan income divided by average CCBX loans is a non-GAAP measure that includes the impact BaaS loan expense on net BaaS loan income and the yield on CCBX loans. The most directly comparable GAAP measure is yield on CCBX loans.
Reconciliations of the GAAP and non-GAAP measures are presented in the following table.
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| | As of and for the Three Months Ended | | |
| (dollars in thousands; unaudited) | | March 31,
2023 | | | | | | | | March 31,
2022 | | | | |
| Net BaaS loan income divided by average CCBX loans: | | | | | | | | |
CCBX loan yield (GAAP)(1) | | 16.09 | % | | | | | | | | 12.73 | % | | | | |
| Total average CCBX loans receivable | | $ | 1,064,192 | | | | | | | | $ | 382,153 | | | | |
| Interest and earned fee income on CCBX loans (GAAP) | | 42,220 | | | | | | | | 11,992 | | | | |
| Less: BaaS loan expense | | (17,554) | | | | | | | | (8,290) | | | | |
| Net BaaS loan income | | $ | 24,666 | | | | | | | | $ | 3,702 | | | | |
Net BaaS loan income divided by average CCBX loans (1) | | 9.40 | % | | | | | | | | 3.93 | % | | | | |
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(1) Annualized calculations for periods presented.