Coastal Financial Corporation

CCB

US19046P2092

Banks

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24/05	Coastal Financial Insider Sold Shares Worth $539,967, According to a Recent SEC Filing	MT
29/04	Coastal Financial Corporation Reports Unaudited Net Charge-Offs Results for the First Quarter Ended March 31, 2024	CI

COASTAL FINANCIAL CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

March 16, 2023 at 03:45 pm IST

Overview



We are a bank holding company that operates through our wholly owned
subsidiaries, Coastal Community Bank ("Bank") and Arlington Olympic LLC . We are
headquartered in Everett, Washington, which by population is the largest city
in, and the county seat of, Snohomish County. Our business is conducted through
two reportable segments: The community bank and CCBX. The primary focus of the
community bank is on providing a wide range of banking products and services to
consumers and small to medium sized businesses in the broader Puget Sound region
in the state of Washington and through the Internet and our mobile banking
application. We currently operate 14 full-service banking locations, 12 of which
are located in Snohomish County, where we are the largest community bank by
deposit market share, and two of which are located in neighboring counties (one
in King County and one in Island County). The CCBX segment provides banking as a
service ("BaaS") that allows our broker-dealer and digital financial service
partners to offer their customers banking services. The CCBX segment had 27
partners as of December 31, 2022. The Bank's deposits are insured in whole or in
part by the Federal Deposit Insurance Corporation ("FDIC"). The Bank is subject
to regulation by the Federal Reserve and the Washington State Department of
Financial Institutions Division of Banks. The Federal Reserve also has
supervisory authority over the Company.

As of December 31, 2022, we had total assets of $3.14 billion, total loans receivable of $2.63 billion, total deposits of $2.82 billion and total shareholders' equity of $243.5 million.



The following discussion and analysis presents our financial condition and
results of operations on a consolidated basis. However, because we conduct all
of our material business operations through the Bank, the discussion and
analysis relate to activities primarily conducted by the Bank. This discussion
and analysis should be read in conjunction with the audited consolidated
financial statements and the accompanying notes presented elsewhere in this
Annual Report on Form 10-K.

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

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



Our financial results for the years ended December 31, 2022 and 2021 were
impacted by the coronavirus, and variants thereof, including the Delta and
Omicron variants ("COVID-19") pandemic. On March 27, 2020, the CARES Act was
enacted, providing wide ranging economic relief for individuals and businesses
impacted by the COVID-19 pandemic. Among other things, the statute created the
Paycheck Protection Program ("PPP"), which was a stimulus response to the
potential economic impacts of the COVID-19 pandemic. The purpose of the PPP was
to provide forgivable loans to smaller businesses, sole proprietorships,
independent contractors, and self-employed individuals that used the proceeds of
the loans for payroll and certain other qualifying expenses.
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In total, we funded $763.9 million in PPP loans, since the first round of PPP
loans opened in March 2020 through the close of round three. Total net deferred
fees on these loans were $26.3 million. As of December 31, 2022, there were $4.7
million in PPP loans outstanding, compared to $111.8 million as of December 31,
2021.

London Interbank Offered Rate ("LIBOR") Transition



On December 16, 2022, the Federal Reserve Board adopted a final rule that
implements the LIBOR Act by identifying benchmark rates based on SOFR (Secured
Overnight Financing Rate) that will replace LIBOR formerly known as the London
Interbank Offered Rate, in certain financial contracts after June 30, 2023.
Congress enacted the LIBOR Act, which was signed into law in March 2022, to
provide a uniform, nationwide solution for so-called tough legacy contracts that
do not have clear and practicable provisions for replacing LIBOR after June 30,
2023. The LIBOR Act also establishes a litigation safe harbor for lenders that
select a LIBOR replacement under certain situations, including the use of a
replacement rate selected by the Federal Reserve. As required by the law, the
final rule identifies replacement benchmark rates based on SOFR to replace
overnight, one-month, three-month, six-month, and 12-month LIBOR in contracts
subject to the Act. These contracts include U.S. contracts that do not mature
before LIBOR ends and that lack adequate "fallback" provisions that would
replace LIBOR with a practicable replacement benchmark rate.

As of December 31, 2022, we had 51 loans totaling $206.6 million that are tied
to LIBOR. We have $3.6 million in floating rate junior subordinated debentures
to Coastal (WA) Statutory Trust I, which was formed for the issuance of trust
preferred securities. These debentures are also tied to LIBOR. The move to an
alternate index may impact the rates we receive on loans and rates we pay on our
junior subordinated debentures. We have identified the loans and debt
instruments impacted, and we believe we will be able to use other benchmark
replacements and transition protections provided by the LIBOR Act, Federal
Reserve rule and relevant accounting guidance to manage through the transition
away from LIBOR. We no longer issue any loans or debt tied to LIBOR.

Key Factors Affecting our Business

Average Balances and Interest Rates



Our operating results depend primarily on our net interest income, which is the
largest contributor to our net income and is the difference between the interest
and fees earned on interest-earning assets (such as loans and securities) and
the interest expense incurred in connection with interest-bearing liabilities
(such as deposits and borrowings). Net interest income is primarily a function
of the average balances of interest-earning assets and interest-bearing
liabilities and the yields and costs with respect to these assets and
liabilities. Average balances are influenced by internal considerations such as
the types of products we offer and the amount of risk that we are willing to
assume as well as external influences such as economic conditions, competition
for loans and deposits, and interest rates. The yields generated by our loans
and securities are typically affected by short-term and long-term interest rates
and, in the case of loans, competition for similar products in our market area.
Interest rates are often impacted by the actions of the Federal Reserve. Since
March 2022, in response to inflation, the FOMC of the Federal Reserve has
increased the target range for the federal funds rate by 425 basis points,
including 125 basis points during the fourth calendar quarter of 2022, to a
range of 4.25% to 4.50% as of December 31, 2022. As it seeks to control
inflation without creating a recession, the FOMC has indicated there may be
further increases in the federal funds rate during calendar year 2023. The cost
of our deposits and short-term borrowings is primarily based on short-term
interest rates, which are largely driven by competition and by the actions of
the Federal Reserve. The level of net interest income is influenced by movements
in interest rates and the pace at which such movements occur, as well as the
relationship between short- and long-term interest rates.

Credit Quality



We have well established loan policies and underwriting practices that have
resulted in low levels of charge-offs and nonperforming assets for the community
bank. Through our thorough underwriting process, we strive to originate quality
loans that will maintain and enhance the overall credit quality of our loan
portfolio, and through our careful monitoring of our loan portfolio and prompt
attention to delinquencies, we seek to minimize the impact of problem loans.
However, credit trends in the markets in which we operate are largely impacted
by economic conditions beyond our control and can adversely impact our financial
condition. We originate loans through our CCBX partners and while these loans
will have higher levels of charge-offs and nonperforming assets, agreements with
our CCBX partners provide for a credit enhancement which protects the Bank by
absorbing incurred losses. If our partners are unable to fulfill their
contracted obligations then the Bank would be exposed to additional loan losses
as a result of this counterparty risk.
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Operating Efficiency



The largest component of noninterest expense is salaries and employee benefits.
Other significant operating expenses include BaaS expense, occupancy expense,
legal and professional expenses, data processing expense, director and staff
expense and marketing expense. Our operating efficiency, as measured by our
efficiency ratio, has gradually improved primarily because the growth of our
deposits and loans has enabled our net interest income and noninterest income to
outpace the growth of our expenses. When we make substantial investments in the
infrastructure of new divisions, open new branches or make investments to
increase our operating capacity, our operating efficiency decreases until we
generate enough revenue growth to offset the increased costs however, prior to
making such investments, we focus on how best and most expediently we can
achieve the revenue growth necessary to offset the costs of these investments or
new branches. Our efficiency ratio has been impacted by the increase in CCBX
income and CCBX expense. Our efficiency ratio was 56.26% at December 31, 2022,
compared to 58.82% at December 31, 2021.

Economic Conditions



Our business and financial performance are affected by economic conditions
generally in the United States and more directly in the markets in the Puget
Sound region where we operate. The significant economic factors that are most
relevant to our business and our financial performance include, but are not
limited to, real estate values, interest rates and unemployment rates. In recent
years, the Puget Sound region has experienced significant population gain,
fueled in large part by the region's technology industry, low unemployment and
rising real estate values, all of which positively impacted our business. The
economic environment is continuously changing, due to increased inflation,
global unrest, the war in Ukraine, the political environment, and trade issues
all contribute to economic uncertainty which has caused increased market
volatility and may lead to an economic recession and/or a significant decrease
in consumer confidence and business generally.

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 to our
consolidated financial statements included elsewhere in this Report on Form
10-K. Certain accounting policies involve significant judgments and assumptions
by us that have a material impact on the carrying value of certain assets and
liabilities. We consider these accounting policies, which are discussed below,
to be critical accounting policies. These assumptions, estimates and judgments
we use can be influenced by a number of factors, including the general economic
environment. Actual results could differ from these judgments and estimates
under different conditions, resulting in a change that could have a material
impact on the carrying values of our assets and liabilities and our results of
operations. We believe that of our accounting policies, the following accounting
policies may involve a higher degree of judgment and complexity:

Securities



Securities are classified as available for sale when they might be sold before
maturity. Securities available for sale are carried at fair value. Unrealized
gains and losses are excluded from earnings and reported in other comprehensive
income. Securities within the available for sale portfolio may be used as part
of our asset/liability strategy and may be pledged or sold in response to
changes in interest rate risk, prepayment risk or other similar economic
factors. Securities held to maturity are carried at cost, adjusted for the
amortization of premiums and the accretion of discounts and may be pledged.

Interest earned on these assets is included in interest income. Interest income
includes amortization of any purchase premium or discount. Premiums and
discounts on securities are amortized using the level-yield method, except for
mortgage backed securities where prepayments are anticipated. Gains and losses
on sales are recorded on the trade date and determined using the specific
identification method.

Management evaluates debt securities for other-than-temporary impairment
("OTTI"), on at least a quarterly basis, and more frequently when economic or
market conditions warrant such an evaluation. For securities in an unrealized
loss position, management considers the extent and duration of the unrealized
loss, and the financial condition and near-term prospects of the issuer.
Management also assesses whether it intends to sell, or it is more likely than
not that it will be required to sell, a security in an unrealized loss position
before recovery of its amortized cost basis. If either of the criteria regarding
intent or requirement to sell is met, the entire difference between amortized
cost and fair value is recognized as impairment through earnings. For debt
securities that do not meet the aforementioned criteria, the amount of
impairment is
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split into two components as follows: (1) OTTI related to credit loss, which
must be recognized in the income statement, and (2) OTTI related to other
factors, which is recognized in other comprehensive income, net of applicable
taxes. The credit loss is defined as the difference between the present value of
the cash flows expected to be collected and the amortized cost basis. The
previous amortized cost basis less the OTTI recognized in earnings becomes the
new amortized cost basis of the security. For more information and discussion
related to securities, see "Note 3 - Investment Securities" in the Consolidated
Financial Statements.

Loans Held for Investment

Loans held for investment are those that management has the intent and ability
to hold for the foreseeable future or until maturity or payoff at the principal
and interest balance outstanding, net of deferred loan fees and costs. Loans are
typically secured by specific items of collateral including business assets,
consumer assets, and commercial and residential real estate. Commercial loans
are expected to be repaid from cash flow from operations of businesses. Interest
income is accrued on the unpaid principal balance. Loan origination fees and
certain direct origination costs are deferred and recognized as adjustments to
interest income using a level yield methodology or a method approximating the
level yield methodology.

As of December 31, 2022, loans receivable totaled $2.63 billion, an increase of
$884.5 million, or 50.8%, compared to $1.74 billion as of December 31, 2021.
Total loans receivable is net of $6.1 million in net deferred origination fees,
$82,000 of which is attributed to PPP loans. The increase is largely attributed
to growth in our CCBX segment as a result of adding new partners, combined with
loan growth in the community bank segment, partially offset by forgiveness or
principal paydowns on PPP loans. For more information and discussion related to
the loans held for investment, see "Note 4 - Loans and Allowance for Loan
Losses" in the Consolidated Financial Statements.

Loans Held for Sale



CCBX loans held for sale consist of the portion of CCBX originated loans that
the Company intends to sell back to the originating CCBX partner or its
affiliate generally at par. The Company sells loans to manage credit positions
with partners and across loan categories. During the twelve months ended
December 31, 2022, the Company transferred $152.5 million in CCBX loans
receivable to loans held for sale and subsequently sold these loans. As of
December 31, 2022 and 2021 there were no CCBX loans held for sale.

Community bank loans held-for-sale consist of the guaranteed portion of SBA
loans and United States Department of Agriculture ("USDA") loans the Company
intends to sell after origination and are reflected at the lower of aggregate
cost or fair value. Loans are generally sold with servicing of the sold portion
retained by the Company when the sale of the loan occurs, the premium received
is combined with the estimated present value of future cash flows on the related
servicing asset and recorded as a gain on sale of loans in noninterest income.
There were no community bank loans held for sale at December 31, 2022 and 2021.

Equity Investments



Equity investments include amounts invested in stock, venture capital funds,
partnerships, and other business ventures. Some of these equity investments are
in vendors/suppliers, private companies, government agencies, or government
sponsored enterprises. The Company directly holds stock in organizations such as
the Federal Reserve Bank, Federal Home Loan Bank of Des Moines, private
companies, and venture capital funds. Equity investments are subject to the risk
of loss if these organizations experience financial difficulties or fall on hard
times. The Company carries these investments at market value or cost if market
value is not readily determinable. During 2022, net contributions to private
company equity investments totaled $699,000 and decreased in value by $153,000
in response to a decline in value in the stock based financial performance and
growth rates. In 2021, net contributions to private company equity investments
totaled $163,000 and increased in value by $1.5 million (unrealized gain) mostly
in response to one company's issuance of common equity awards, identical to the
Company's holdings, at a higher value.

The assumptions underlying these valuations represent management's best
estimates, which involve inherent uncertainties and the application of
management's judgment. While we believe the assumptions and estimates we have
made are reasonable and appropriate, different assumptions or estimates could
have resulted in materially different fair values for these equity investments.
For more information and discussion related to securities, see Note 3 -
Investment Securities" in the Consolidated Financial Statements.
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Allowance for Loan Losses



The allowance for loan losses represents management's estimate of probable and
reasonably estimable credit losses inherent in the loan portfolio. In
determining the allowance, the Company estimates losses on individual impaired
loans, or groups of loans which are not impaired, where the probable loss can be
identified and reasonably estimated. On a quarterly basis, the Company assesses
the risk inherent in the Company's loan portfolio based on qualitative and
quantitative trends in the portfolio, including the internal risk classification
of loans, historical loss rates, changes in the nature and volume of the loan
portfolio, industry or borrower concentrations, delinquency trends, detailed
reviews of significant loans with identified weaknesses and the impacts of
local, regional and national economic factors on the quality of the loan
portfolio. Community bank loans are assessed at the individual loan level and
CCBX loans are pooled and evaluated at both the partner and product level. Based
on this analysis, the Company records a provision for loan losses to maintain
the allowance at appropriate levels.

Determining the amount of the allowance is considered a critical accounting
estimate, as it requires significant judgment and the use of subjective
measurements, including management's assessment of overall portfolio quality.
The Company maintains the allowance at an amount the Company believes is
sufficient to provide for estimated losses inherent in the Company's loan
portfolio at each balance sheet date, and fluctuations in the provision for loan
losses may result from management's assessment of the adequacy of the allowance.
Changes in these estimates and assumptions are possible and may have a material
impact on the Company's allowance, and therefore the Company's financial
position, liquidity or results of operations.

The Company increased the allowance from $28.6 million at December 31, 2021 to
$74.0 million at December 31, 2022. The allowance was significantly increased in
response to growth in CCBX loans. The Company uses CCBX partner data, industry
data and its own loan loss data to develop an appropriate allowance for the risk
inherent in the CCBX new loan volume. The Company increased the allowance from
$19.3 million to $28.6 million in 2021 largely due to an increase in CCBX
consumer loans. For more information and discussion related to the allowance for
loan losses, see "Note 4 - Loans and Allowance for Loan Losses" in the
Consolidated Financial Statements.

Stock-based Compensation



We grant stock options and restricted stock to our employees and directors. We
record the related compensation expense based on the grant date fair value
calculated in accordance with the authoritative guidance issued by FASB. We
recognize these compensation costs on a straight-line basis over the requisite
service period of the award. We estimate the grant date fair value of stock
options using the Black-Scholes valuation model. Stock-based compensation
expense related to awards of restricted stock and restricted stock units is
based on the fair value at the grant date.

The determination of fair value using the Black-Scholes model is affected by the
price of our common stock, as well as the input of other subjective assumptions.
These assumptions include, but are not limited to, the expected term of stock
options and our stock price volatility. The factors considered by our board of
directors included the prices of known transactions in our common stock, the
book value per share of our common stock, and our board of directors'
understanding of pricing multiples for comparable financial institutions that
were not publicly traded.

The assumptions underlying these valuations represented management's best estimate, which involved inherent uncertainties and the application of management's judgment. As a result, if we had used different assumptions or estimates, the fair value of our common stock and our stock-based compensation expense could have been materially different. For more information and discussion related to stock-based compensation, see "Note 15 - Stock-based Compensation" in the Consolidated Financial Statements.

Revenue Recognition



We record revenue from contracts with customers in accordance with ASU 2014-09,
Revenue from Contracts with Customers ("Topic 606"). Under Topic 606, the
Company must identify the contract with a customer, identify the performance
obligations in the contract, determine the transaction price, allocate the
transaction price to the performance obligations in the contract and recognize
revenue when (or as) the Company satisfies a performance obligation. Significant
revenue has not been recognized in the current reporting period that results
from performance obligations satisfied in previous periods. A large portion of
the Company's revenue are derived from interest and fees earned on loans,
investment securities and other financial instruments that are not within the
scope of Topic 606. The Company generally fully satisfies its performance
obligations on its contracts with customers as services are rendered and the
transaction prices are typically
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fixed, charged either on a periodic basis or based on activity. Because performance obligations are satisfied as services are rendered and the transaction prices are fixed, there is little judgment involved in applying Topic 606 that significantly affects the determination of the amount and timing of revenue from contracts with customers.



The recording of BaaS income and expense is dependent upon the contractual
agreement with each partner, however in accordance with accounting guidance the
recording of certain components of BaaS income are as follows: Agreements with
many of our CCBX partners provide for a credit enhancement which protects the
Bank by absorbing incurred losses. In accordance with accounting guidance, we
estimate and record a provision for probable losses for these CCBX loans. When
the provision for loan losses and provision for unfunded commitments is
recorded, a credit enhancement asset is also recorded on the balance sheet
through noninterest income (BaaS fees -credit enhancement). Incurred losses are
recorded in the allowance for loan losses, the credit enhancement asset is
relieved when credit enhancement recoveries are received from the CCBX partner.
Many agreements with our CCBX partners also provide protection to the Bank from
fraud by absorbing incurred fraud losses. Fraud losses are recorded when
incurred 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. Enhancements that provide protection to the Bank from credit
and fraud losses, are not within the scope of Topic 606.

For the year ended December 31, 2022, noninterest income subject to Topic 606
increased $4.3 million to $18.2 million, compared to $13.9 million for the year
ended December 31, 2021. The increase was largely due to an increase in BaaS fee
income resulting from growth with active CCBX partners. For more information and
discussion related to revenue recognition, see "Note 19 - Revenue Recognition"
in the Consolidated Financial Statements.

Emerging Growth Company



The Jumpstart Our Business Startups Act of 2012, (the "JOBS Act") permits an
"emerging growth company" to take advantage of an extended transition period to
comply with new or revised accounting standards applicable to public companies.
However, we have decided not to take advantage of this provision. As a result,
we will comply with new or revised accounting standards to the same extent that
compliance is required for non-emerging growth companies. Our decision to opt
out of the extended transition period under the JOBS Act is irrevocable.

Recent Pronouncements



For a discussion of the expected impact of accounting pronouncements recently
adopted and accounting pronouncements recently issued but not yet adopted by us
as of December 31, 2022, see "Note 2 - Recent Accounting Standards" in the
accompanying notes to our audited consolidated financial statements included
elsewhere in this Report on Form 10-K.

Results of Operations

Net Income



Year Ended December 31, 2022, Compared to Year Ended December 31, 2021. Net
income for the year ended December 31, 2022 was $40.6 million, or $3.01 per
diluted share, compared to $27.0 million, or $2.16 per diluted share, for the
year ended December 31, 2021. The increase in net income over the prior year was
attributable to a $92.3 million increase in net interest income, $96.6 million
increase in noninterest income partially offset by a $103.5 million increase in
noninterest expense and a $69.1 million increase in the provision for loan
losses.

Net Interest Income



Year Ended December 31, 2022, Compared to Year Ended December 31, 2021. Net
interest income for the year ended December 31, 2022, was $171.8 million,
compared to $79.4 million for the year ended December 31, 2021, an increase of
$92.3 million, or 116.2%. Yield on loans receivable was 8.12% for the year ended
December 31, 2022, compared to 4.86% for the year ended December 31, 2021. The
increase in net interest income compared to the year ended December 31, 2021 was
largely related to increased yield on loans from growth in higher yielding CCBX
and community bank loans and interest rate increases on variable rate and new
loans. Average loans receivable for the year ended December 31, 2022 was $2.26
billion, compared to $1.69 billion for the year ended December 31, 2021.
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Interest and fees on loans totaled $183.4 million for the year ended
December 31, 2022 compared to $82.1 million for the year ended December 31,
2021. The $101.2 million increase in interest and fees on loans for the year
ended December 31, 2022, compared to the year ended December 31, 2021, was
largely due to increased yield on loans from growth in higher yielding CCBX
loans and an overall increase in interest rates. Loan growth of $884.5 million,
or 50.8%, for the year ended December 31, 2022, compared to December 31, 2021,
includes a decrease of $107.1 million in PPP loans that were forgiven or repaid.
CCBX average loans receivable grew to $742.4 million for the year ended
December 31, 2022, compared to $146.3 million for the year ended December 31,
2021, an increase of $596.1 million, or 407.4%. Average CCBX yield of 13.85% was
earned on CCBX loans for the year ended December 31, 2022, compared to 4.46% for
the year ended December 31, 2021. CCBX yield does not include the impact of BaaS
loan expense. BaaS loan expense represents the amount paid or payable to
partners for credit enhancements, fraud enhancements and servicing CCBX loans.
The tables later in this section illustrate the impact of BaaS loan expense on
CCBX loan yield. Also impacting the increase in loan interest is the increase in
interest rates on variable rate loans resulting from the FOMC raising rates
4.25% during the year ended December 31, 2022. We continue to monitor the impact
of these increases in interest rates.

Interest income from interest earning deposits with other banks was $6.7 million
at December 31, 2022, an increase of $6.1 million due to an increase in balances
and higher interest rates, compared to December 31, 2021. The average balance of
interest earning deposits invested with other banks for the year ended
December 31, 2022 was $516.0 million, compared to $402.1 million for the year
ended December 31, 2021. Additionally, the yield on these interest earning
deposits with other banks increased 1.15%, compared to the year ended
December 31, 2021. Interest income on investment securities increased to $1.7
million at December 31, 2022, compared to $79,000 at December 31, 2021. Average
investment securities increased $63.2 million from $30.0 million for the year
ended December 31, 2022 to $93.2 million for the year ended December 31, 2022,
and average yield increased to 1.87% for the year ended December 31, 2022,
compared to 0.26% for the year ended December 31, 2021.

Interest expense was $20.4 million for the year ended December 31, 2022, a $16.7
million increase from the year ended December 31, 2021. Interest expense on
deposits was $19.0 million for the year ended December 31, 2022, compared to
$2.3 million for the year ended December 31, 2021. The $16.7 million increase in
interest expense on deposits was primarily due to an increase in average
interest bearing deposits of $813.9 million. Interest on borrowed funds was $1.4
million for the year ended December 31, 2022, compared to $1.3 million for the
year ended December 31, 2021. The $72,000 increase in interest expense on
borrowed funds from the year ended December 31, 2021 is the result of a decrease
in average PPPLF and FHLB borrowings, which were paid off in full during the
quarter ended June 30, 2021 and March 31, 2022, respectively, partially offset
by a $12.2 million average balance increase in subordinated debt, which
increased during the year ended December 31, 2022. Interest expense is expected
to increase as a result of the FOMC increasing the Fed Funds rate 4.25% during
the year ended December 31, 2022. In addition, as a result of the FOMC rate
increase, CCBX deposits that were below their floor to earn interest due to the
low interest rate environment and were not earning interest were reclassified to
interest bearing deposits from noninterest bearing deposits during the first and
second quarters of 2022. We anticipate additional rate increases in 2023, which
we expect will result in higher interest expense on interest bearing deposits
which will be offset by higher interest rates on CCBX loans and excess cash
invested in the Federal Reserve Bank or other banks.

Net interest margin was 5.97% for the year ended December 31, 2022, compared to
3.73% for the year ended December 31, 2021. Interest rate spread was 5.52%, and
3.54% for the years ended December 31, 2022 and 2021, respectively. The increase
in net interest margin and spread compared to the year ended December 31, 2021
was largely a result of an increase in higher rate loans. Average loans
increased $568.9 million, compared to the year ended December 31, 2021; the
increase includes an average decrease in PPP loans of $340.3 million. Also
contributing to the increase in net interest margin and spread compared to the
year ended December 31, 2021 was a $113.9 million increase in average interest
earning deposits invested in other banks. These interest earning deposits earned
an average rate of 130 basis points for the year ended December 31, 2022,
compared to an average rate of 15 basis points for the year ended December 31,
2021.

Cost of funds was 0.75% for the year ended December 31, 2022, compared to 0.18%
for the year ended December 31, 2021. Cost of deposits for the year ended
December 31, 2022 was 0.71%, which was a 59 basis point increase, from 0.12% for
the year ended December 31, 2021. These increases were largely due to an
increase in interest bearing deposits from CCBX and an increase in interest
rates. CCBX deposit growth and the aforementioned reclassification of CCBX
noninterest bearing deposits to interest bearing deposits significantly
contributed to the increase in interest expense.
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Total yield on loans receivable for the year ended December 31, 2022 was 8.12%,
compared to 4.86% for the year ended December 31, 2021. This increase in yield
on loans receivable is primarily attributed to an increase in higher rate CCBX
loans. As of the year ended December 31, 2022, average CCBX loans increased
$596.1 million, or 407.4%, with an average CCBX yield of 13.85%, compared to
4.46% at December 31, 2021. CCBX yield does not include the impact of BaaS loan
expense. BaaS loan expense represents the amount paid or payable to partners for
credit enhancements, fraud enhancements and servicing CCBX loans. The tables
later in this section illustrate the impact of BaaS loan expense on CCBX loan
yield. There was a decrease in average community bank loans of $27.2 million, or
1.8%, which is attributed to an average $340.3 million decrease in PPP loans as
a result of loan forgiveness and repayments, compared to the year ended
December 31, 2021. Average yield on community bank loans for the year ended
December 31, 2022 was 5.32%. compared to 4.90% for the year ended December 31,
2021.

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

                                                For the Year Ended
                           December 31, 2022                        December 31, 2021
                     Yield on              Cost of          Yield on                 Cost of
(unaudited)          Loans (2)            Deposits          Loans (2)               Deposits
Community Bank         5.32%                0.18%             4.90%                   0.14%
CCBX (1)              13.85%                1.57%             4.46%                   0.03%
Consolidated           8.12%                0.71%             4.86%                   0.12%


(1)CCBX yield on loans does not include the impact of BaaS loan expense. BaaS
loan expense represents the amount paid or payable to partners for credit
enhancements, 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.

                                                                              For the Year Ended
                                                         December 31, 2022                           December 31, 2021
                                                                   Income / expense                            Income / expense
                                                                      divided by                                  divided by
                                                 Income /            average CCBX            Income /            average CCBX
(dollars in thousands; unaudited)                 Expense                loans                Expense                loans
BaaS loan interest income                      $  102,808                   13.85  %       $    6,532                    4.46  %
Less: BaaS loan expense                            53,294                    7.18  %            2,976                    2.03  %
Net BaaS loan income (1)                       $   49,514                    6.67  %       $    3,556                    2.43  %
Average BaaS Loans                             $  742,392                                  $  146,304

(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."



The following table presents an analysis of the average balances of net interest
income, net interest spread and net interest margin for the periods indicated.
Loan fees included in interest income totaled $3.2 million and $18.4 million for
the years ended December 31, 2022 and 2021, respectively. Of the $18.4 million
in fees recognized in 2021, $15.5 million were from PPP loans. For the years
ended December 31, 2022 and 2021, the amount of interest income not recognized
on nonaccrual loans was not material.
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                                                                                         Average Balance Sheets
                                                                                    For the Year Ended December 31,
                                                                  2022                                                           2021
                                           Average            Interest &             Yield /              Average             Interest &             Yield /
(dollars in thousands)                     Balance             Dividends            Cost (1)              Balance             Dividends             Cost (1)
Assets
Interest earning assets:
Interest earning deposits with          $   515,967          $    6,728                  1.30  %       $   402,081          $       608

0.15 %


   other banks
Investment securities, available             91,970               1,710                  1.86               27,908                   49

0.18


for sale (2)
Investment securities, held to                1,266                  35                  2.76                2,137                   30                  1.40
maturity (2)
Other investments                            10,146                 345                  3.40                7,052                  284                  4.03
Loans receivable (3)                      2,257,787             183,352                  8.12            1,688,925               82,112                  4.86
Total interest earning assets             2,877,136             192,170                  6.68            2,128,103               83,083                  3.90
Noninterest earning assets:
Allowance for loan losses                   (46,769)                                                       (19,870)
Other noninterest earning assets            119,817                                                         74,088
Total assets                            $ 2,950,184                                                    $ 2,182,321

Liabilities and Shareholders'
Equity
Interest bearing liabilities:
Interest bearing deposits               $ 1,724,020          $   19,004                  1.10  %       $   910,106          $     2,327                  0.26  %
PPPLF borrowings                                  -                   -                     -               68,699                  240                  0.35
FHLB advances and borrowings                  6,029                  69                  1.14               24,999                  284                  1.14
Subordinated debt                            27,626               1,179                  4.27               15,379                  711                  4.62
Junior subordinated debentures                3,587                 143                  3.99                3,585                   84                  2.34
Total interest bearing                    1,761,262              20,395                  1.16            1,022,768                3,646                  0.36
liabilities
Noninterest bearing deposits                942,087                                                        989,945
Other liabilities                            24,097                                                         12,926
Total shareholders' equity                  222,738                                                        156,682
Total liabilities and                   $ 2,950,184                                                    $ 2,182,321
shareholders' equity
Net interest income                                          $  171,775                                                     $    79,437
Interest rate spread                                                                     5.52  %                                                         3.54  %
Net interest margin (4)                                                                  5.97  %                                                         3.73  %


(1) For presentation in this table, average balances and the corresponding
average rates for investment securities are based upon historical cost, adjusted
for amortization of premiums and accretion of discounts.
(2) Includes nonaccrual loans.
(3) Net interest margin represents net interest income divided by the average
total interest earning assets.
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The following table presents an analysis of certain average balances, interest
income and interest expense that are specific to each segment. Items are that
not directly attributed to the segment are not listed:

                                                                                       For the Year Ended
                                                       December 31, 2022                                               December 31, 2021
(dollars in thousands;                 Average            Interest &             Yield /              Average             Interest &             Yield /
unaudited)                             Balance             Dividends              Cost                Balance             Dividends               Cost
Community Bank
Assets
Loans receivable (1)                $ 1,515,395          $   80,544                  5.32  %       $ 1,542,621          $    75,580                  4.90  %
Liabilities
Interest bearing deposits               905,447               2,896                  0.32              877,389                2,228

0.25


Noninterest bearing deposits            733,104                                                        674,509
Total deposits                      $ 1,638,551          $    2,896                  0.18          $ 1,551,898          $     2,228                  0.14
Interest rate spread                                                                 5.14  %                                                         4.76  %

CCBX
Assets
Loans receivable (1)(2)             $   742,392          $  102,808                 13.85  %       $   146,304          $     6,532                  4.46  %
Liabilities
Interest bearing deposits               818,573              16,108                  1.97               32,717                   99                  0.30
Noninterest bearing deposits            208,983                                                        315,436
Total deposits                      $ 1,027,556          $   16,108                  1.57          $   348,153          $        99                  0.03
Interest rate spread                                                                12.28  %                                                         4.43  %
Net BaaS loan income interest                                                        5.10  %                                                         2.40  %
   rate spread (3)


(1)Includes loans held for sale and nonaccrual loans.
(2)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.
(3)A reconciliation of the non-GAAP measures are is set forth in the section
titled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial
Measures."
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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 $55.0
million increase in loan interest income that is attributable to an increase in
loan rates and $46.2 million increase in loan interest income that is
attributable 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.

Year Ended December 31, 2022

Compared to

Year Ended December 31, 2021


                                                                  Increase (Decrease)
                                                                         Due to                        Total Increase
(dollars in thousands)                                         Volume                 Rate               (Decrease)
Interest income:
Interest earning deposits                                 $     1,485             $   4,635          $         6,120
Investment securities, available for sale                       1,191                   470                    1,661
Investment securities, held to maturity                           (24)                   29                        5
Other Investments                                                 105                   (44)                      61
Loans receivable                                               46,197                55,043                  101,240
Total increase in interest income                              48,954                60,133                  109,087

Interest expense:
Interest bearing deposits                                       8,972                 7,705                   16,677
PPPLF borrowings                                                 (240)                    -                     (240)
FHLB advances                                                    (217)                    2                     (215)
Subordinated debt                                                 523                   (55)                     468
Junior subordinated debentures                                      -                    59                       59
Total increase in interest expense                              9,038                 7,711                   16,749
Increase in net interest income                           $    39,916             $  52,422          $        92,338


Provision for Loan Losses

The provision for loan losses is an expense we incur to maintain an allowance
for loan losses at a level that is deemed appropriate by management to absorb
inherent losses on existing loans. For a description of the factors taken into
account by our management in determining the allowance for loan losses see "Item
7. Management's Discussion and Analysis of Financial Condition and
Operations-Financial Condition-Allowance for Loan Losses."

The economic environment is continuously changing, due to increased inflation,
higher interest rates, global unrest, the war in Ukraine, the political
environment and trade issues that may impact the provision and therefore the
allowance. Gross loans, excluding loans held for sale, totaled $2.63 billion at
December 31, 2022 and included $4.7 million in PPP loans, which are 100%
guaranteed, and are excluded from the provision for loan losses calculation. The
allowance for loan losses as a percentage of loans was 2.82% at December 31,
2022, compared to 1.64% at December 31, 2021.

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

The Company adopted the Current Expected Credit Loss ("CECL") accounting standard effective January 1, 2023. The CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio

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characteristics, economic outlook, and other key methodology assumptions versus
the current accounting practice that utilizes the incurred loss model. The
adoption of this ASU will result in a one-time cumulative-effect adjustment to
the allowance for loan losses as of the day of adoption. The Company currently
estimates a combined increase to our allowance for credit losses and reserve for
unfunded loan commitments of 3% to 10%. This change will decrease the opening
retained earnings balance as of January 1, 2023. The above range is disclosed
due to the fact that the Company is still in the process of finalizing the CECL
allowance model, including the review of assumptions related to qualitative
adjustments and economic forecasts; finalizing the execution of internal
controls; and evaluating the impact to our financial statement disclosures.

Year Ended December 31, 2022, Compared to Year Ended December 31, 2021. The
provision for loan losses for the year ended December 31, 2022, was $79.1
million compared to $9.9 million for the year ended December 31, 2021. The
increase in the Company's provision for loan losses during the year ended
December 31, 2022, is largely related to the provision for CCBX partner loans.
During the year ended December 31, 2022, a $78.3 million provision for loan
losses was recorded for loans originated through CCBX partners based on
management's analysis. The factors used in management's analysis for community
bank loan losses indicated that a provision for loan loss of $719,000 was needed
for the year ended December 31, 2022.

The $78.3 million provision on CCBX loans includes $76.9 million for partner
loans with credit enhancement on them and $1.4 million is attributed to loans
originated through one CCBX partner for which the Company is responsible for
credit losses. In accordance with the program agreement and for one CCBX partner
only, the Company is responsible for credit losses on approximately 10% of a
$114.5 million loan portfolio, or $11.5 million of that loan portfolio at
December 31, 2022.

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



                                                        Year Ended
(dollars in thousands; unaudited)       December 31, 2022       December 31, 2021
Community bank                         $              719      $            1,275
CCBX                                               78,345                   8,640
Total provision expense                $           79,064      $            9,915


Net charge-offs for the year ended December 31, 2022 totaled $33.7 million, or
1.49% of total average loans, as compared to net charge-offs of $545,000, or
0.03% of total average loans, for the year ended December 31, 2021. Net
charge-offs were up significantly in 2022 compared to 2021 due to CCBX partner
loans. In 2022, $382,000 in net charge-offs were for the community bank and
$33.3 million were for CCBX. In 2021, $172,000 were for the community bank and
$373,000 of the charge-offs were for the CCBX.

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

                                                     Year Ended                                                 Year Ended
                                                 December 31, 2022                                          December 31, 2021
(dollars in thousands)           Community Bank           CCBX              Total           Community Bank           CCBX              Total
Gross charge-offs               $         428          $ 33,321          $ 33,749          $         255          $    385          $    640
Gross recoveries                          (46)              (36)              (82)                   (83)              (12)              (95)
Net charge-offs                 $         382          $ 33,285          $ 33,667          $         172          $    373          $    545
Net charge-offs to
average loans                            0.03  %           4.48  %           1.49  %                0.01  %           0.25  %           0.03  %


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.
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For the year ended December 31, 2022, noninterest income totaled $124.7 million,
an increase of $96.6 million, or 343.4%, compared to $28.1 million for the year
ended December 31, 2021. The following table presents, for the periods
indicated, the major categories of noninterest income:

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

                                                           Year Ended
                                                          December 31,                    Increase                Percent
(dollars in thousands)                               2022               2021             (Decrease)               Change
Deposit service charges and fees                 $   3,804          $   3,698          $       106                       2.9  %
Loan referral fees                                     810              2,126               (1,316)                    (61.9)
Mortgage broker fees                                   257                920                 (663)                    (72.1)
Gain on sale of bank branch including                    -              1,263               (1,263)                   (100.0)
deposits and loans, net
Gain on sales of loans, net                              -                396                 (396)                   (100.0)
Unrealized (loss) gain on equity                      (153)             1,469               (1,622)                   (110.4)
securities, net
Other                                                1,087                939                  148                      15.8
Noninterest income, excluding BaaS program           5,805             10,811               (5,006)                    (46.3)
income and BaaS indemnification income
Servicing and other BaaS fees                        4,408              4,467                  (59)                     (1.3)
Transaction fees                                     3,211                544                2,667                     490.3
Interchange fees                                     2,583                701                1,882                     268.5
Reimbursement of expenses                            2,732              1,004                1,728                     172.1
BaaS program income                                 12,934              6,716                6,218                      92.6
BaaS credit enhancements                            76,374              9,086               67,288                     740.6
BaaS fraud enhancements                             29,571              1,505               28,066                   1,864.9
BaaS indemnification income                        105,945             10,591               95,354                     900.3
Total noninterest income                         $ 124,684          $  28,118          $    96,566                     343.4  %

A description of our largest noninterest income categories are below:



BaaS Fees. 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 loan losses and reserve for unfunded commitments
provided by the partner as revenue in BaaS income. CCBX credit losses are
recognized in the allowance for loan loss and noncredit fraud losses are
expensed in noninterest expense under BaaS fraud expense. Also in accordance
with GAAP, we establish a credit enhancement asset for expected future loan
losses through the recognition of BaaS credit enhancement revenue at the same
time we establish an allowance for those loans though a provision for loan
losses. For more information on the accounting for BaaS allowance for loan
losses, reserve for unfunded commitments, credit enhancements and fraud
enhancements see the section titled "CCBX - BaaS Reporting Information."

For the year ended December 31, 2022, we earned $118.9 million in BaaS fees,
which was an increase of $101.6 million, or 586.9%, over the year ended
December 31, 2021, where we earned $17.3 million in BaaS fees. The increase over
the year ended December 31, 2021 was primarily due to an increase of $6.2
million in total BaaS fee program income, which was the result of increased
relationships with broker dealers and digital financial service providers, $67.3
million in BaaS fees - credit enhancements related to the allowance for loan
losses and reserve for unfunded commitments, $28.1 million in BaaS fees - fraud
recovery, and $1.7 million increase in reimbursement of expenses.
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The following table presents the BaaS fee income for the periods indicated:



                                           Year Ended
                                          December 31,              Increase
(dollars in thousands)                 2022           2021         (Decrease)
Program income:
Servicing and other BaaS fees       $   4,408      $  4,467           (59)
Transaction fees                        3,211           544         2,667
Interchange fees                        2,583           701         1,882
Reimbursement of expenses               2,732         1,004         1,728
Program income                         12,934         6,716         6,218
Indemnification income:
Credit enhancements                    76,374         9,086        67,288
Fraud enhancements                     29,571         1,505        28,066
Indemnification income                105,945        10,591        95,354
Total BaaS income                   $ 118,879      $ 17,307       101,572


Our CCBX segment continues to evolve, and now has 27 relationships, at varying
stages, as of December 31, 2022. As of December 31, 2022, we had 19 active
relationships. We continue to refine the criteria for CCBX partnerships and are
exiting relationships where it makes sense for both parties and are focusing on
selecting larger and more established partners, with experienced management
teams. We are winding down two partner relationships; these programs are not
material in terms of income, deposits or loans.

The following table illustrates the activity in CCBX for the periods indicated:

                                                                                          As of
(unaudited)                                                          December 31, 2022             December 31, 2021
Active                                                                      19                            19
Friends and family / testing                                                 1                             1
Implementation / onboarding                                                  0                             5
Signed letters of intent                                                     5                             3
Wind down - preparing to exit relationship                                   2                             0
Total CCBX relationships                                                    27                            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 fee income. Deposit service charges and fees
were $3.8 million for the year ended December 31, 2022, an increase of $106,000,
or 2.9%, over the prior year primarily due to increases in point-of-sale fees of
$96,000 and service charges on deposit accounts of $58,000, partially offset by
decreases in merchant services revenue of $60,000, ATM fees of $9,000, and
overdraft fees of $6,000. NSF and overdraft fees were $310,000 for the year
ended December 31, 2022, compared to $316,000 for the year ended December 31,
2021. During 2022 consumer overdraft fees were eliminated. Consumer overdraft
fees are not a significant source of income, and the elimination of these fees
will not have a significant impact on income.
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The following table presents deposit service charges and fees for the periods
indicated:

                                       Year Ended
                                      December 31,           Increase       Percent
(dollars in thousands)             2022         2021        (Decrease)      Change
Point of sale fees               $ 2,055      $ 1,959              96         4.9  %
Service charges on accounts          468          410              58        14.1
Merchant services                    508          568             (60)      (10.6)
Overdraft and NSF fees               310          316              (6)       (1.9)
ATM fees                             218          227              (9)       (4.0)
Cash management fees                 118          113               5         4.4
Other                                127          105              22        21.0
                                 $ 3,804      $ 3,698      $      106         2.9  %


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. Loan referral fees were $810,000 for
the year ended December 31, 2022, a decrease of $1.3 million, or 61.9%, over the
year ended December 31, 2021. Interest rate volatility, swap rates, and the
timing of loan closings all impact the demand for long-term fixed rate swaps.

Mortgage Broker Fees. We earn mortgage broker fees for residential mortgage
loans that we broker through mortgage lenders. Mortgage broker fees decreased
$663,000, or 72.1%, for the year ended December 31, 2022 compared to the year
ended December 31, 2021. The mortgage market is slowing down as a result of
higher interest rates on mortgages.

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

Gain on Sale of Loans, net. Gain on sales of loans occurs when we sell in the
secondary market the guaranteed portion (generally 75% of the principal balance)
of the SBA and USDA loans that we originate. This activity fluctuates based on
SBA and USDA loan activity. Gain on sale of loans decreased $396,000, or 100.0%,
to zero for the year ended December 31, 2022 compared to the prior year, due to
decreased activity.

Unrealized gain (loss) on equity securities, net. During the year ended
December 31, 2022, we recognized an unrealized loss on equity securities of
$153,000, compared to the year ended December 31, 2021, when we recognized a
$1.5 million unrealized holding gain on an equity security as a result of an
observable price change.

Other. This category includes a variety of other income-producing activities,
annuity broker fees, and SBA and USDA servicing fees. Other noninterest income
increased $148,000, or 15.8%, for the year ended December 31, 2022 compared to
the year ended December 31, 2021.

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.

For the year ended December 31, 2022, noninterest expense totaled $166.8
million, an increase of $103.5 million, or 163.6%, compared to $63.3 million for
the year ended December 31, 2021. Noninterest expense, excluding BaaS loan and
BaaS fraud expense totaled $83.9 million and increased $25.1 million or 42.7%.
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The following table presents, for the periods indicated, the major categories of
noninterest expense:

                                                         Year Ended
                                                        December 31,                   Increase                Percent
(dollars in thousands)                             2022               2021            (Decrease)               Change
Salaries and employee benefits                 $  52,228          $  37,101          $   15,127                      40.8  %
Occupancy                                          4,548              4,128                 420                      10.2
Data processing and software licenses              6,487              4,951               1,536                      31.0
Point of sale expense                              2,109                671               1,438                     214.3
Legal and professional expenses                    6,760              3,133               3,627                     115.8
FDIC assessments                                   2,859              1,632               1,227                      75.2
Excise taxes                                       2,204              1,589                 615                      38.7
Director and staff expenses                        1,711              1,205                 506                      42.0
Marketing                                            351                451                (100)                    (22.2)
Other                                              4,652              3,921                 731                      18.6
Noninterest expense, excluding BaaS loan                                                                             42.7
and BaaS fraud expense                            83,909             58,782              25,127
BaaS loan expense                                 53,294              2,976              50,318                   1,690.8
BaaS fraud expense                                29,571              1,505              28,066                   1,864.9
BaaS loan and fraud expense                       82,865              4,481              78,384                   1,749.3
Total noninterest expense                      $ 166,774          $  63,263          $  103,511                     163.6  %


Salaries and Employee Benefits. Salaries and employee benefits are the largest
component of noninterest expense excluding BaaS loan expense and include payroll
expense, incentive compensation costs, benefit plans, health insurance and
payroll taxes. Salaries and employee benefits were $52.2 million for the year
ended December 31, 2022, an increase of $15.1 million, or 40.8%, compared to
$37.1 million for the year ended December 31, 2021. The increase was primarily
due to hiring staff for our CCBX segment and additional staff for our ongoing
community bank related growth initiatives. As our CCBX segment grows, we expect
to continue to add employees to support this line of business. As of
December 31, 2022, we had 448 full-time equivalent employees, compared to 377 at
December 31, 2021.

Occupancy Expenses. Occupancy expenses were $4.5 million for the year ended
December 31, 2022, compared to $4.1 million for the year ended December 31,
2021, an increase of $420,000, or 10.2%. This category includes building,
leasehold, furniture, fixtures and equipment depreciation totaling $1.8 million
and $1.6 million for years ended December 31, 2022 and 2021, respectively. The
increase of $420,000 in occupancy expenses for 2022 compared to 2021, was
primarily the result of $222,000 increase in depreciation expense, resulting
from increased costs associated with the increase in FTE and growth in CCBX and
$138,000 increase in maintenance and repairs expense. 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 has increased, which
helps keep some occupancy expenses down, we do expect occupancy expenses to
increase as we continue to grow.

Legal and Professional Expenses. Legal and professional expenses include legal,
audit and accounting expenses, consulting fees, fees for recruiting and hiring
employees, and IT related security expenses. These expenses fluctuate with the
development of contracts for CCBX customers, audit and accounting needs, and are
impacted by our reporting cycle and timing of legal and professional services.
Legal and professional expenses were $6.8 million for the year ended
December 31, 2022 compared to $3.1 million for the year ended December 31, 2021,
an increase of $3.6 million, or 115.8%. The increase in legal and professional
expenses were primarily focused on building infrastructure for future growth.

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
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automated processing and as we grow product lines and our CCBX segment. Data
processing costs were $6.5 million for the year ended December 31, 2022,
compared to $5.0 million for the year ended December 31, 2021, an increase of
$1.5 million, or 31.0%.

FDIC Assessments. FDIC assessments are assessed to fund the Deposit Insurance
Fund ("DIF") to insure and protect the depositors of insured banks and to
resolve failed banks. The assessment rate is based on a number of factors and
recalculated each quarter. As deposits increase, the FDIC assessment expense
will generally increase. FDIC assessments were $2.8 million for the year ended
December 31, 2022, compared to $1.6 million for the year ended December 31,
2021, an increase of $1.2 million, or 75.2%. Deposit growth in the community
bank and CCBX contributed to this 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, which was at 1.26% as of September 30, 2022, 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 will take
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 were $2.2 million for the year ended December 31, 2022, compared to
$1.6 million for the year ended December 31, 2021, an increase of $615,000, or
38.7%. Excise taxes increased as a result of increased income subject to excise
taxes. Partially offsetting that increase is a credit we received in 2022
against excise taxes owed in the amount of $109,000 as a result of our
participation in the Washington State Main Street Program, which reduced our
calculated 2022 expense. Excise taxes are based on gross income of $316.9
million and $111.2 million for the years ended December 31, 2022 and 2021,
respectively. Gross income is reduced by certain allowed deductions to arrive at
the taxable base; however, as gross income increases, so does the excise tax
expense.

Director and Staff Expenses. Director and staff expenses includes compensation
for director service, continuing education for employees and other director and
staff related expenses. Director and staff expenses were $1.7 million for the
year ended December 31, 2022 compared to $1.2 million for the year ended
December 31, 2021, an increase of $506,000, or 42.0%. In 2022 we saw an increase
in employee travel and training return to a more typical level after a year of
reduced activity in 2021 as a result of restrictions related to the COVID-19
pandemic.

Marketing and promotion. Marketing and promotion costs were $351,000 for the
year ended December 31, 2022, compared to $451,000 for the year ended
December 31, 2021, a decrease of $100,000, or 22.2%. Marketing and promotion
costs decreased 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,
provision for unfunded commitments, and miscellaneous other expenses. The
provision for unfunded commitments has increased with the addition of CCBX loan
partners. Other noninterest expense increased to $4.7 million for the year ended
December 31, 2022, compared to $3.9 million for the year ended December 31,
2021, an increase of $731,000, or 18.6%. The increase was largely due to a
$551,000 increase in dues and memberships and $91,000 increase in business
development and overall increases resulting from growth for the year ended
December 31, 2022, as compared to the same period last year.

BaaS loan and fraud expense. Our CCBX segment provides BaaS offerings that
enable our broker dealer and digital financial service providers to offer their
customers banking services. 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 the year
ended December 31, 2022, BaaS loan and fraud expense was $82.9 million, compared
to $4.5 million for the year ended December 31, 2021 as a result of increased
partner activity. For more information on the accounting for BaaS loan and fraud
expenses see the section titled "CCBX - BaaS Reporting Information."
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The following table presents, for the periods indicated, the BaaS loan and fraud
expenses:

                                             Year Ended
                                            December 31,            Increase
(dollars in thousands)                    2022         2021        (Decrease)
BaaS loan expense                      $ 53,294      $ 2,976      $    50,318
BaaS fraud expense                       29,571        1,505           28,066

Total BaaS loan and fraud expense $ 82,865 $ 4,481 $ 78,384




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 are 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.

Year Ended December 31, 2022, Compared to Year Ended December 31, 2021. For the
year ended December 31, 2022, income tax expense totaled $10.0 million, compared
to $7.4 million for the year ended December 31, 2021. Our effective tax rates
for the years ended December 31, 2022, and 2021, was 19.7% and 21.4%,
respectively. The effective tax rate was lower for 2022 due to an update in the
state apportionment of the revenues in the states in which we operate combined
with tax benefits that resulted from stock based compensation activity.

Segment Information



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

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

Community bank total assets as of December 31, 2022 decreased $184.6 million, or
8.1%, to $2.10 billion, compared to $2.28 billion as of December 31, 2021. Total
community bank loans receivable increased $218.7 million, or 15.7%, to $1.61
billion as of December 31, 2022, compared to $1.40 billion as of December 31,
2021. The increase in loans receivable is the result of strong loans growth net
of $107.1 million in PPP loan forgiveness and paydowns during the year ended
December 31, 2022. Non-PPP community bank loan growth was $325.8 million, or
25.4%, as a result of increased loan activity. Total community bank deposits
decreased $109.3 million, or 6.6%, to $1.54 billion, as of December 31, 2022,
compared to $1.65 billion as of December 31, 2021. The decrease in deposits is
largely due our decision to let some deposits runoff instead of retaining them
based on price. The overall increase in deposits was achieved
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despite a decrease of $25.6 million in total deposits due to the sale of our
Freeland branch, which were included in the total deposits as of December 31,
2021.

Net interest income for the community bank was $85.1 million for the year ended
December 31, 2022, an increase of $12.1 million, or 16.5%, compared to $73.0
million for the year ended December 31, 2021. The increase in net interest
income is largely due to loan growth and increased interest rates on new and
variable rate loans. Provision for loan losses was $719,000 for the year ended
December 31, 2022, compared to $1.3 million for the year ended December 31,
2021. The provision for loan losses was increased in 2021 as a result of
economic uncertainties of the COVID-19 pandemic and loan growth, however losses
have not realized as anticipated. Noninterest income for the community bank was
$5.7 million, for the year ended December 31, 2022, a decrease of $5.1 million,
or 47.2%, compared to $10.7 million for the year ended December 31, 2021 In
2021, there was a $1.5 million unrealized holding gain on an equity investment
and $1.3 million gain on sale of a branch, compared to $153,000 unrealized loss
on equity securities, no gain on sale of branch and $1.3 million less in loan
referral fees in 2022. Noninterest expenses for the community bank increased
$12.6 million, or 24.4%, to $64.1 million as of December 31, 2022, compared to
$51.5 million as of December 31, 2021. The increase in noninterest expense is
largely due to increased salaries and employee benefits as a result of growth,
higher software licenses maintenance and subscription costs related to new
reporting software that helps to automate and create efficiencies in reporting,
and other expense increases related to growth.

CCBX total assets as of December 31, 2022 increased $693.6 million, or 196.5%,
to $1.05 billion, compared to $353.0 million as of December 31, 2021. Total CCBX
loans receivable increased $665.8 million, or 192.1%, to $1.01 billion as of
December 31, 2022, compared to $346.7 million as of December 31, 2021. The
increase in loans receivable is the result of growth in CCBX relationships. CCBX
allowance for loan losses increased to $53.4 million as of December 31, 2022,
compared to $8.3 million as of December 31, 2021 as a result of loan growth and
portfolio mix. Total CCBX deposits increased $563.0 million, or 78.6%, to $1.28
billion, compared to $716.3 million as of December 31, 2021 as a result of
growth in CCBX.

Included in noninterest expense for the community bank is administrative
overhead of $27.2 million and $19.0 million for the year ended December 31, 2022
and December 31, 2021, respectively. Both the community bank and the CCBX
segment benefit from this administrative overhead and services, which includes
shared operational activities such as data management, compliance monitoring and
other administration functions.

Net interest income for CCBX was $86.7 million for the year ended December 31,
2022, an increase of $80.3 million, or 1,247.7%, compared to $6.4 million for
the year ended December 31, 2021. The increase in net interest income is due to
loan growth from CCBX relationships. Provision for loan losses was $78.3 million
for the year ended December 31, 2022, compared to $8.6 million for the year
ended December 31, 2021, as a result of loan growth from CCBX partners.
Noninterest income for CCBX was $119.0 million, for the year ended December 31,
2022, an increase of $101.6 million, or 583.9%, compared to $17.4 million for
the year ended December 31, 2021, due to an increase of $6.2 million in BaaS fee
program income, which was the result of increased activity with broker dealers
and digital financial service providers, $67.3 million in BaaS fees - credit
enhancements related to the allowance for loan losses and reserve for unfunded
commitments, and $28.1 million in BaaS fees - fraud enhancements. Noninterest
expenses for CCBX increased $90.9 million, or 776.2%, to $102.7 million as of
December 31, 2022, compared to $11.7 million as of December 31, 2021. The
increase in noninterest expense is largely due to an increase in BaaS loan
expense, BaaS fraud expense and increased salaries and benefits, for the year
ended December 31, 2022, compared to the year ended December 31, 2021. For more
information on the accounting for BaaS income and expenses see the section
titled "CCBX - BaaS Reporting Information.".

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

                                                       December 31, 2022                                             December 31, 2021
(dollars in thousands)                   Bank                 CCBX                Total                 Bank                CCBX               Total

Total assets                        $ 2,097,885          $ 1,046,582          $ 3,144,467          $ 2,282,514          $ 353,003          $ 2,635,517

Total loans receivable                1,614,751            1,012,505            2,627,256            1,396,060            346,675            1,742,735
Allowance for loan losses               (20,636)             (53,393)             (74,029)             (20,299)            (8,333)             (28,632)
Total deposits                        1,538,218            1,279,303            2,817,521            1,647,529            716,258            2,363,787


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                                                                   Year Ended
                                          December 31, 2022                          December 31, 2021
(dollars in thousands)            Bank          CCBX           Total          Bank          CCBX         Total

Net interest income            $ 85,075      $  86,700      $ 171,775      $ 73,004      $  6,433      $ 79,437
Provision for loan losses      $    719      $  78,345         79,064      $  1,275      $  8,640         9,915
Noninterest income             $  5,652      $ 119,032        124,684      $ 10,713      $ 17,405        28,118
Noninterest expense            $ 64,114      $ 102,660        166,774      $ 51,547      $ 11,716        63,263


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Financial Condition



Our total assets increased $509.0 million to $3.14 billion, or 19.3% at
December 31, 2022, compared to $2.64 billion at December 31, 2021. This increase
was largely the result of a $884.5 million increase in loans receivable,
combined with a decrease of $489.2 million in interest earning deposits with
other banks.

Loans Held For Sale

During the year ended December 31, 2022, $152.5 million in CCBX loans were
transferred to loans held for sale, with $152.5 million in loans sold, at par,
during the year ended December 31, 2022 and zero remaining in loans held for
sale as of December 31, 2022.

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 primarily 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 December 31, 2022, loans receivable totaled $2.63 billion, an increase of
$884.5 million, or 50.8%, compared to December 31, 2021. Total loans receivable
is net of $6.1 million in net deferred origination fees, $82,000 of which is
attributed to PPP loans. The increase includes CCBX loan growth of $665.8
million, or 192.1%, and community bank loan growth of $215.9 million, or 15.4%,
which includes a $107.1 million, or 95.8%, reduction in PPP loans due to
forgiveness and principal paydowns. Additionally, unused loan commitments
increased including unused commitments on capital call lines which increased
$356.8 million to $772.7 million at December 31, 2022, compared to $416.0
million at December 31, 2021, which may translate into loan growth as the
commitments are utilized.

Loans as a percentage of deposits were 93.2% as of December 31, 2022, compared
to 73.7% as of December 31, 2021. We remain focused on serving our communities
and markets by growing loans and funding those loans with customer deposits. The
increase in the loan to deposit ratio was due to loan growth.

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

                                                                                As of December 31,
                                                                 2022                                         2021
(dollars in thousands)                              Amount                Percent                Amount                Percent
Commercial and industrial loans:
PPP loans                                       $     4,699                     0.2  %       $   111,813                     6.4  %
Capital call lines                                  146,029                     5.5              202,882                    11.5
All other commercial & industrial loans             161,900                     6.1              104,365                     6.0
Total commercial and industrial loans:              312,628                    11.8              419,060                    23.9
Real estate loans:
Construction, land and land development             214,055                     8.1              183,594                    10.5
Residential real estate                             449,157                    17.1              204,389                    11.7
Commercial real estate                            1,048,752                    39.8              835,587                    47.7
Consumer and other loans                            608,771                    23.2              108,871                     6.2
Gross loans receivable                            2,633,363                   100.0  %         1,751,501                   100.0  %
Net deferred origination fees - PPP loans               (82)                                      (3,633)
Net deferred origination fees - all other
loans                                                (6,025)                                      (5,133)
Loans receivable                                $ 2,627,256                                  $ 1,742,735
Loan Yield                                             8.12  %                                      4.86  %


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

Community Bank                                                                                 As of
                                                              December 31, 2022                                    December 31, 2021
(dollars in thousands; unaudited)                     Balance                  % to Total                  Balance                  % to Total
Commercial and industrial loans:
PPP loans                                       $          4,699                        0.3  %       $        111,813                        8.0  %
All other commercial & industrial loans                  146,982                        9.1                   104,365                        7.4
Real estate loans:
Construction, land and land development
loans                                                    214,055                       13.2                   183,594                       13.1
Residential real estate loans                            204,581                       12.6                   167,502                       11.9
Commercial real estate loans                           1,048,752                       64.7                   835,587                       59.5
Consumer and other loans:
Other consumer and other loans                             1,725                        0.1                     2,034                        0.1
Gross Community Bank loans receivable                  1,620,794                      100.0  %              1,404,895                      100.0  %
Net deferred origination fees                             (6,042)                                              (8,835)
Loans receivable                                $      1,614,752                                     $      1,396,060
Loan Yield                                                  5.32  %                                              4.90  %



CCBX                                                                                        As of
                                                            December 31, 2022                                    December 31, 2021
(dollars in thousands; unaudited)                   Balance                  % to Total                 Balance                  % to Total
Commercial and industrial loans:
Capital call lines                            $        146,029                       14.4  %       $       202,882                       58.6  %
All other commercial & industrial loans                 14,918                        1.5                        -                        0.0
Real estate loans:
Residential real estate loans                          244,576                       24.2                   36,887                       10.6
Consumer and other loans:
Credit cards                                           279,644                       27.6                   11,429                        3.3
Other consumer and other loans                         327,402                       32.3                   95,408                       27.5
Gross CCBX loans receivable                          1,012,569                      100.0  %               346,606                      100.0  %
Net deferred origination (fees) costs                      (65)                                                 69
Loans receivable                              $      1,012,504                                     $       346,675
Loan Yield (1)                                           13.85  %                                             4.46  %


(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.

Commercial and Industrial Loans. Commercial and industrial loans decreased
$106.4 million, or 25.4%, to $312.6 million as of December 31, 2022, from $419.1
million as of December 31, 2021. The decrease in commercial and industrial loans
receivable over December 31, 2021 was due to $107.1 million in forgiven and
repaid PPP loans and a decrease of $56.9 million in capital call lines,
partially offset by a $57.5 million increase in other commercial and industrial
loans. Included in the commercial and industrial loan balance is $146.0 million
and $202.9 million in capital call lines resulting from relationships with our
CCBX partners as of December 31, 2022, and December 31, 2021, respectively. As
of December 31, 2022, there were $14.9 million in CCBX other commercial loans,
compared to zero at December 31, 2021.

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

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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 $45.1 million and $20.2 million in
loans to financial institutions as of December 31, 2022, and December 31, 2021,
respectively.

Also included in commercial and industrial loans is $4.7 million and $111.8
million in PPP loans as of December 31, 2022, and December 31, 2021,
respectively. As of December 31, 2022, $4.7 million in PPP loans remained with
$82,000 in net deferred fees, which will be recognized in interest income in
future periods. The impact of PPP loans on the Company's financial statements
has significantly decreased 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 increased $30.5 million, or 16.6%, to $214.1 million as of
December 31, 2022, from $183.6 million as of December 31, 2021. The increase is
attributed to growth in community bank primarily for commercial construction and
some land and land development loans.

Unfunded loan commitments for construction, land and land development loans were
$142.5 million at December 31, 2022, compared to $134.3 million at December 31,
2021. Although we have seen a strong commercial and residential real estate
market in the Puget Sound region thus far in 2022, the economic environment is
continuously changing and is impacted by increased inflation, higher interest
rates, global unrest, the war in Ukraine, the political environment 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 December 31, 2022,
construction, land and land development loans included $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, compared to $82.8 million in
commercial construction loans, $37.8 million in undeveloped land loans, $28.9
million in residential construction loans and $34.1 million in other
construction, land and land development loans as of December 31, 2021.

Residential Real Estate Loans. Our one-to-four family residential real estate
loans increased $244.8 million, or 119.8%, to $449.2 million as of December 31,
2022, from $204.4 million as of December 31, 2021 largely due to an increase of
$207.7 million in CCBX loans. CCBX home equity lines of credit are secured by
residential real estate and are accessed by using a credit card.

We originate one-to-four family residential real estate adjustable-rate mortgage
("ARM"), loans for our portfolio and operate as a mortgage broker for mortgage
lenders we have agreements with for customers who want a 15-year to 30-year,
fixed-rate mortgage loan. As of December 31, 2022, the balance of our ARM
portfolio loans was $28.0 million, compared to $22.2 million at December 31,
2021. Our ARM loans typically do not meet the guidelines for sale in the
secondary market due to characteristics of the property, the loan terms or
exceptions from agency underwriting guidelines, which enables us to earn a
higher interest rate. We also purchase residential mortgages originated 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 December 31, 2022, we held $9.4 million in purchased residential
real estate mortgage loans, compared to $11.9 million at December 31, 2021.
These purchased loans typically are variable rate and are collateralized by
one-to-four family residential real estate. We have a defined set of credit
guidelines that we use when evaluating these loans. Although purchased loans
were originated and underwritten by another institution, our mortgage, credit,
and compliance departments conduct an independent review of each underlying loan
that includes re-underwriting each of these loans to our credit and compliance
standards. We also make one-to-four family loans to investors to finance their
rental properties and to business owners to secure their business loans. As of
December 31, 2022, residential real estate loans made to investors and business
owners totaled $140.7 million. As of December 31, 2021, residential real estate
loans made to investors and business owners totaled $114.0 million.

As of December 31, 2022, there were $244.6 million in CCBX home equity loans
included in residential real estate, compared to $36.9 million at December 31,
2021, as a result of increased activity. These home equity lines of credit are
secured by residential real estate and are accessed by using a credit card.

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
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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 $213.2 million, or 25.5%, to $1.05 billion as of December 31, 2022, from $835.6 million as of December 31, 2021.



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

We make commercial mortgage loans collateralized by owner-occupied and
non-owner-occupied real estate, as well as multi-family residential loans. The
real estate securing our existing commercial real estate loans includes a wide
variety of property types, such as manufacturing and processing facilities,
business parks, warehouses, retail centers, convenience stores, hotels and
motels, office buildings, mixed-use residential and commercial, and other
properties. We originate both fixed- and adjustable-rate loans with terms up to
20 years. Fixed-rate loans typically amortize over a 10 to 25 year period with
balloon payments due at the end of five to ten years. Adjustable-rate loans are
generally based on the prime rate and adjust with the prime rate or are based on
term equivalent FHLB rates. At December 31, 2022, approximately 30.5% of the
commercial real estate loan portfolio consisted of fixed rate loans. Commercial
real estate loans represented 39.8% of our loan portfolio at December 31, 2022
and are historically our largest source of revenue. As of December 31, 2022, we
held $42.4 million in purchased commercial real estate loans, compared to $35.9
million at December 31, 2021. Our credit administration team has substantial
experience in underwriting, managing, monitoring and working out commercial real
estate loans, and remains diligent in communicating and proactively working with
borrowers to help mitigate potential credit deterioration.

Consumer and Other Loans. Consumer and other loans increased $499.9 million, or
459.2%, to $608.8 million, from $108.9 million as of December 31, 2021, as a
result of growth in CCBX loans originated through our partners.

CCBX consumer loans totaled $607.0 million as of December 31, 2022, compared to
$106.8 million at December 31, 2021. CCBX consumer loans include installment
loans, credit cards, lines of credit and other loans. Our community bank
consumer and other loans totaled $1.7 million as of December 31, 2022, compared
to $2.0 million at December 31, 2021 and are comprised of personal lines of
credit, automobile, boat, and recreational vehicle loans, and secured term
loans.

Contractual Maturity Ranges. The contractual maturity ranges of loans in our
loan portfolio and the amount of such loans with fixed and floating interest
rates in each maturity range as of date indicated are summarized in the
following tables:

                                                                               As of December 31, 2022
                                                             Due after One           Due after Five
                                       Due in One            Year Through            Years Through              Due After               Gross
(dollars in thousands)                Year or Less            Five Years             Fifteen Years            Fifteen Years             Loans
Commercial and industrial
loans:
PPP loans                           $           -          $        4,699          $             -          $            -          $     4,699
All other commercial and
industrial loans                          180,872                  53,895                   73,162                       -              307,929
Real estate loans:
Construction, land and land
development loans                         148,912                  36,921                   11,114                  17,108              214,055
Residential real estate loans              24,700                 276,526                  106,163                  41,768              449,157
Commercial real estate loans               71,517                 221,532                  618,269                 137,434            1,048,752
Consumer and other loans                   30,377                 519,167                   59,227                       -              608,771
Total                               $     456,378          $    1,112,740          $       867,935          $      196,310          $ 2,633,363


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The following table sets forth all loans at December 31, 2022, that are due
after December 31, 2023, and have either fixed interest rates or floating or
adjustable interest rates:

                                                                      Floating or
                                                                      Adjustable
(dollars in thousands)                              Fixed Rates          Rates            Total
Commercial and industrial loans:
PPP loans                                                 4,699      $         -      $     4,699
All other commercial and industrial loans                72,829          235,100          307,929
Real estate loans:
Construction, land and land development loans            69,209          144,846          214,055
Residential real estate loans                            61,636          387,521          449,157
Commercial real estate loans                            320,049          728,703        1,048,752
Consumer and other loans                                324,991          283,780          608,771
Total                                              $    853,413      $ 1,779,950      $ 2,633,363

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 $2.63 billion in
outstanding loan balances. When combined with $2.20 billion in unused
commitments the total of these categories is $4.83 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 exposure by industry for our commercial real estate portfolio as of December 31, 2022:



                                                                                                       % of Total Loans
                                                                                                     (Outstanding Balance
(dollars in thousands;          Outstanding          Available Loan                                            &                 Average Loan
unaudited)                        Balance              Commitments            Total Exposure         Available Commitment)          Balance            Number of Loans
Apartments                    $    215,371          $        5,912          $       221,283                         4.6  %       $    2,564                           84
Hotel/Motel                        160,938                   4,101                  165,039                         3.4               5,961                           27
Retail                              82,257                   4,116                   86,373                         1.8                 904                           91
Office                             101,205                   3,744                  104,949                         2.2               1,043                           97
Mixed use                           83,640                   4,632                   88,272                         1.8                 950                           88
Convenience Store                   91,075                   3,586                   94,661                         2.0               1,822                           50
Warehouse                           77,716                   1,862                   79,578                         1.6               1,439                           54
Mini Storage                        47,380                   1,287                   48,667                         1.0               2,961                           16
Strip Mall                          45,873                       -                   45,873                         0.9               5,734                            8
Manufacturing                       38,694                   1,780                   40,474                         0.8               1,138                           34
Groups < 0.70% of total            104,603                   4,004                  108,607                         2.2               1,260                           83
Total                         $  1,048,752          $       35,024          $     1,083,776                        22.3  %       $    1,659                          632


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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 $1,400.

The following table summarizes our exposure by category for our consumer and other loan portfolio as of December 31, 2022:



                                                                                                  % of Total Loans
                                                                                                (Outstanding Balance
(dollars in                   Outstanding           Available Loan        Total Exposure                  &                  Average Loan
thousands; unaudited)           Balance              Commitments                (1)             Available Commitment)          Balance             Number of Loans
CCBX consumer loans
Installment loans           $     320,017          $           -          $    320,017                         6.6  %       $       1.5                      211,547
Credit cards                      279,644                791,758             1,071,402                        22.1                  1.5                      189,642
Lines of credit                     4,822                    689                 5,511                         0.1                  0.3                       14,349
Other loans                         2,563                      -                 2,563                         0.1                  0.1                       17,987
Community bank consumer loans
Lines of credit                       162                  1,116                 1,278                         0.0                  3.4                           47
Installment loans                   1,351                      -                 1,351                         0.1                 42.2                           32
Other loans                           212                      -                   212                         0.0                  0.6                          332
Total                       $     608,771          $     793,563          $  1,402,334                        29.0  %       $       1.4                      433,936

(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 exposure by category for our residential real estate portfolio as of December 31, 2022:



                                                                                                % of Total Loans
                                                                                              (Outstanding Balance
(dollars in                   Outstanding           Available Loan            Total                     &                  Average Loan
thousands; unaudited)           Balance              Commitments          Exposure (1)        Available Commitment)           Balance             Number of Loans
CCBX residential real estate loans
Home equity line of
credit                      $     244,576          $     329,193          $  573,769                        11.9  %       $         28

8,607


Community bank residential real estate loans
Closed end, secured
by first liens                    178,901                  4,625             183,526                         3.8                   604                          296
Home equity line of
credit                             15,853                 39,005              54,858                         1.1                    79                          200
Closed end, second
liens                               9,827                  1,912              11,739                         0.2                   351                           28
Total                       $     449,157          $     374,735          $  823,892                        17.0  %       $         49                        9,131

(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.

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The following table summarizes our concentration by industry for our commercial and industrial loan portfolio as of December 31, 2022:



                                                                                                                    % of Total Loans
                                            Outstanding           Available Loan                                 (Outstanding Balance &        Average Loan
(dollars in thousands; unaudited)             Balance              Commitments            Total Exposure         Available Commitment)            Balance             Number of Loans
Capital Call Lines (1)                    $     146,029          $     772,732          $       918,761                         19.0  %       $        859                           170
Construction/Contractor Services                 20,714                 32,137                   52,851                          1.1                   116                           179
Financial Institutions                           45,149                      -                   45,149                          0.9                 4,104                            11
Manufacturing                                    13,341                  4,793                   18,134                          0.4                   226                            59
Medical / Dental / Other Care                    21,790                  2,464                   24,254                          0.5                   726                            30
Retail                                           15,991                  6,245                   22,236                          0.5                    26                           623
Groups < 0.30% of total                          49,614                 35,929                   85,543                          1.8                   168                           296
Total                                     $     312,628          $     854,300          $     1,166,928                         24.2  %       $        229                         1,368

(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 concentration by category for our construction, land and land development loan portfolio as of December 31, 2022:



                                                                                                     % of Total Loans
                                                                                                   (Outstanding Balance
(dollars in                   Outstanding           Available Loan                                           &                 Average Loan
thousands; unaudited)           Balance              Commitments            Total Exposure         Available Commitment)          Balance            Number of Loans
Commercial
construction                $     100,714          $     100,647          $       201,361                         4.2  %       $    4,196                           24
Residential
construction                       32,879                 26,708                   59,587                         1.2                 865                           38
Undeveloped land
loans                              44,578                  7,653                   52,231                         1.1               2,972                           15
Developed land loans               20,167                  4,315                   24,482                         0.5                 672                           30
Land development                   15,717                  3,219                   18,936                         0.4                 827                           19
Total                       $     214,055          $     142,542          $       356,597                         7.4  %       $    1,699                          126


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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 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 $33.2 million in nonperforming assets as of December 31, 2022, compared
to $1.7 million as of December 31, 2021. This includes $26.1 million in CCBX
loans more than 90 days past due and still accruing interest as of December 31,
2022, compared to $1.5 million at December 31, 2021. All of our nonperforming
assets were nonperforming loans as of December 31, 2022 and December 31, 2021.
Our nonperforming loans to loans receivable ratio was 1.26% at December 31,
2022, compared to 0.10% at December 31, 2021. The increase in nonperforming
assets was due to a $24.6 million increase in CCBX partner loans that are 90
days or more past due and still accruing interest. Community bank nonaccrual
loans increased $6.9 million during the year ended December 31, 2022 primarily
due to the addition of one new nonaccrual loan partially offset by other
nonaccrual principal reductions/charge-offs. The $6.9 million nonaccrual balance
in commercial real estate loans shown below consists of one loan, is well
secured with an original loan to value ratio of 62%, and an updated loan to
value ratio of 75% as of January 2023. Management anticipates this loan being
resolved in the first half of 2023.

Our community bank credit quality remains strong, as demonstrated by the low
level of community bank charge-offs and nonperforming loan balance for the year
ended December 31, 2022. CCBX loans have a higher level of expected losses than
our community bank loans, which is reflected in the factors for the allowance
for loan losses. Agreements with our CCBX partners provide for a credit
enhancement which protects the Bank by absorbing incurred losses. 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).
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The following table presents information regarding nonperforming assets at the
dates indicated:

                                                                        As of December         As of December
(dollars in thousands)                                                     31, 2022               31, 2021
Nonaccrual loans:
Commercial and industrial loans                                        $       113            $       166
Real estate loans:
Construction, land and land development                                         66                      -
Residential real estate                                                          -                     55
Commercial real estate                                                       6,901                      -
Total nonaccrual loans                                                       7,080                    221
Accruing loans past due 90 days or more:
Commercial & industrial loans                                                  404                      -
Real estate loans:
Residential real estate loans                                                  876                     39
Consumer and other loans:
Credit cards                                                                10,570                    155
Other consumer and other loans                                              14,245                  1,312
Total accruing loans past due 90 days or more                               26,095                  1,506
Total nonperforming loans                                                   33,175                  1,727
Real estate owned                                                                -                      -
Repossessed assets                                                               -                      -
Troubled debt restructurings, accruing                                           -                      -
Total nonperforming assets                                             $    33,175            $     1,727
Total nonaccrual loans to loans receivable                                    0.27    %              0.01    %
Total nonperforming loans to loans receivable                                 1.26    %              0.10    %
Total nonperforming assets to total assets                                    1.06    %              0.07    %

The following tables detail the community bank and CCBX nonperforming assets which are included in the total nonperforming assets table above.

Community Bank                                                 As of
                                                  December 31,       December 31,
(dollars in thousands; unaudited)                     2022

2021


Nonaccrual loans:
Commercial and industrial loans                  $         113      $

166


Real estate:
Construction, land and land development                     66                  -
Residential real estate                                      -                 55
Commercial real estate                                   6,901                  -
Total nonaccrual loans                                   7,080                221

Accruing loans past due 90 days or more:
Total accruing loans past due 90 days or more                -                  -
Total nonperforming loans                                7,080                221
Other real estate owned                                      -                  -
Repossessed assets                                           -                  -
Total nonperforming assets                       $       7,080      $         221


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CCBX                                                           As of
                                                  December 31,       December 31,
(dollars in thousands; unaudited)                     2022

2021


Nonaccrual loans                                 $           -      $


Accruing loans past due 90 days or more:
Commercial & industrial loans                              404


Real estate loans:
Residential real estate loans                              876


Consumer and other loans:
Credit cards                                            10,570

155


Other consumer and other loans                          14,245

1,312


Total accruing loans past due 90 days or more           26,095              1,506
Total nonperforming loans                               26,095              1,506
Other real estate owned                                      -                  -
Repossessed assets                                           -                  -
Total nonperforming assets                       $      26,095      $       1,506


Potential Problem Loans

From a credit risk standpoint, we classify most categories of our loans in one
of five categories: pass, other loans especially mentioned, substandard,
doubtful or loss. Within the pass category, we classify loans into one of the
following five subcategories based on perceived credit risk, including repayment
capacity and collateral security: minimal risk, low risk, modest risk, average
risk and acceptable risk. For consumer loans we follow the uniform retail credit
classification approach, where we classify loans into three categories: pass,
substandard (over 90 days and still accruing) and loss (installment/closed-end,
and revolving/open-end consumer loans originated through CCBX lending partners
more than 120 and 180 days past due, respectively). The classifications of loans
reflect a judgment about the risks of default and loss given default. We review
the risk ratings of our credits on an annual basis, or more frequently if
circumstances warrant. Risk ratings are adjusted to reflect the degree of risk
and loss that is believed to be inherent in each credit as of each monthly
reporting period. Our methodology is structured so that specific reserve
allocations are increased in accordance with deterioration in credit quality
(and a corresponding increase in risk and loss) or decreased in accordance with
improvement in credit quality (and a corresponding decrease in risk and loss).

•Credits rated as other loans especially mentioned show clear signs of financial
weaknesses or deterioration in creditworthiness; however, such concerns are not
so pronounced that we generally expect to experience significant loss within the
short-term. Such credits typically maintain the ability to perform within
standard credit terms and credit exposure is not as prominent as credits with a
lower rating.

•Credits rated as substandard are those in which the normal repayment of
principal and interest may be, or has been, jeopardized by reason of adverse
trends or developments of a financial, managerial, economic or political nature,
or important weaknesses in the collateral for the loan. A protracted workout on
these credits is a distinct possibility. Prompt corrective action is therefore
required to reduce exposure and to assure that adequate remedial measures are
taken by the borrower. Credit exposure becomes more likely in such credits and a
serious evaluation of the secondary support to the credit is performed.

•Credits rated as doubtful have weaknesses of substandard assets that are sufficient to make collection or liquidation in full questionable and there is a high probability of loss based on currently existing facts, conditions and values.



•Credits rated as loss are charged-off. We have no expectation of the recovery
of any payments in respect of credits rated as loss.
•CCBX credits are rated following the uniform retail credit classification
approach, where we classify loans into three categories: pass, substandard (over
90 days and still accruing) and loss (installment/closed-end, and
revolving/open-end consumer loans originated through CCBX lending partners more
than 120 and 180 days past due, respectively). Installment/closed-end, and
revolving/open-end consumer loans originated through CCBX lending partners will
continue to accrue interest until 120 and 180 days past due, respectively and an
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allowance is recorded through provision expense for these probable incurred
losses. For installment/closed-end and revolving/open-end consumer loans
originated through CCBX lending partners with balances outstanding beyond 120
days and 180 days, respectively, principal and capitalized interest outstanding
is charged off against the allowance and accrued interest outstanding is
reversed against interest income.

The following table summarizes the internal ratings of our loans as of the dates
indicated:

                                                                     As of December 31, 2022
                                                          Other
                                                          Loans
                                                        Especially             Sub-
                                      Pass              Mentioned            Standard            Doubtful              Total
                                                                      (dollars in thousands)
Commercial and industrial loans  $   304,840          $     7,219          $     569          $         -          $   312,628
Real estate loans:
Construction, land, and land
development                          206,304                7,685                 66                    -              214,055
Residential real estate              448,185                   96                876                    -              449,157
Commercial real estate             1,030,650               11,201              6,901                    -            1,048,752
Consumer and other loans             583,956                    -             24,815                    -              608,771
                                 $ 2,573,935          $    26,201          $  33,227          $         -            2,633,363
Less net deferred origination
fees                                                                                                                    (6,107)
Loans receivable                                                                                                   $ 2,627,256


                                                                      As of December 31, 2021
                                                          Other
                                                          Loans
                                                        Especially             Sub-
                                      Pass              Mentioned            Standard             Doubtful              Total
                                                                      (dollars in thousands)
Commercial and industrial loans  $   416,642          $     2,180          $      238          $         -          $   419,060
Real estate loans:
Construction, land, and land
development loans                    183,594                    -                   -                    -              183,594
Residential real estate loans        204,173                  122                  94                    -              204,389
Commercial real estate loans         824,676               10,911                   -                    -              835,587
Consumer and other loans             107,404                    -               1,467                    -              108,871
                                 $ 1,736,489          $    13,213          $    1,799          $         -            1,751,501
Less net deferred origination
fees                                                                                                                     (8,766)
Loans receivable                                                                                                    $ 1,742,735


Allowance for Loan Losses

We maintain an allowance for loan losses that represents management's best
estimate of the loan losses and risks inherent in our loan portfolio. The amount
of the allowance for loan losses should not be interpreted as an indication that
charge-offs in future periods will necessarily occur in those amounts. In
determining the allowance for loan losses, we estimate losses on specific loans,
or groups of loans, where the probable loss can be identified and reasonably
determined. The balance of the allowance for loan losses is based on internally
assigned risk classifications of loans, historical loan loss rates, changes in
the nature of our loan portfolio, overall portfolio quality, industry
concentrations, delinquency trends, and current economic factors. See "-Critical
Accounting Policies-Allowance for Loan Losses."
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In connection with our allowance for loan loss review, we consider risk elements
applicable to particular loan types or categories in assessing the quality of
individual loans. Some of the risk elements we consider include:

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

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

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

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

•for consumer and other loans, the borrower's ability to repay the loan, including a consideration of delinquency status, consumer credit scores, debt-to-income ratio and employment and income stability, and loan-to-value ratios, as applicable.



As of December 31, 2022, the allowance for loan losses totaled $74.0 million, or
2.82% of total loans. As of December 31, 2021, the allowance for loan losses
totaled $28.6 million, or 1.64% of total loans. The increase in the Company's
allowance for loan losses for the year ended December 31, 2022 compared to
December 31, 2021, is largely related to the provision for CCBX partner loans.
During the year ended December 31, 2022, a $78.3 million provision for loan
losses was recorded for CCBX partner loans based on management's analysis. The
factors used in management's analysis for community bank loan losses indicated
that a provision for loan losses of $719,000 was needed for the year ended
December 31, 2022. The economic environment is continuously changing with
increased inflation, higher interest rates, global unrest, the war in Ukraine,
the political environment 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 loan 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 probable losses
for these CCBX loans and negative deposit accounts. When the provision for loan
losses 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
recoveries are received from the CCBX partner. 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 losses by absorbing incurred credit losses,
if our partner is unable to fulfill its contracted obligations to replenish 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 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
receivable 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. The Company adopted the CECL
accounting standard effective January 1, 2023 and accounted for the allowance
for credit losses under the incurred loss model at December 31, 2022 and for
prior periods.
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The following table presents the loans receivable and allowance for loan losses by segment for the period indicated:



                                                    As of December 31, 2022                                          As of December 31, 2021
(dollars in thousands)             Community Bank              CCBX                Total             Community Bank             CCBX               Total
Loans receivable                  $    1,614,751          $ 1,012,505          $ 2,627,256          $    1,396,060          $ 346,675          $ 1,742,735
Allowance for loan losses                (20,636)             (53,393)             (74,029)                (20,299)            (8,333)             (28,632)
Allowance for loan losses
to total loans receivable                   1.28  %              5.27  %              2.82  %                 1.45  %            2.40  %              1.64  %

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



                                                                   As of or for the Year Ended December
                                                                                   31,
(dollars in thousands)                                                  2022                   2021
Allowance at beginning of period                                  $     28,632            $    19,262
Provision for loan losses                                               79,064                  9,915

Charge-offs:


Commercial and industrial loans                                            555                    222
Residential real estate                                                    452                     79
Consumer and other                                                      32,742                    339
Total charge-offs                                                       33,749                    640
Recoveries:
Commercial and industrial loans                                             40                     67
Consumer and other                                                          42                     28
Total recoveries                                                            82                     95
Net charge-offs                                                         33,667                    545
Allowance at end of period                                        $     74,029            $    28,632
Allowance for loan losses to nonaccrual loans                          1045.61    %          12955.66  %
Allowance to nonperforming loans                                        223.15    %           1657.90  %
Allowance to loans receivable                                             2.82    %              1.64  %
Net charge-offs to average loans                                          1.49    %              0.03  %


The allowance for loan losses to nonaccrual loans ratio decreased as of
December 31, 2022, compared to December 31, 2021 as a result of an increase of
$6.9 million in nonaccrual community bank loans, combined with an increase of
$45.4 million in the allowance for loan losses. The decrease in the allowance to
nonperforming loans ratio is due to an increase in CCBX loans 90+ days past due
and accruing as a result of growth in the CCBX loan portfolio. The increase in
the allowance for loan losses for the year ended December 31, 2022 compared to
the year ended December 31, 2021, 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 $33.3 million in net-charge-offs on CCBX loans for
the year ended December 31, 2022. At December 31, 2022, the allowance for loan
losses for CCBX partner loans totaled $53.4 million, compared to $8.3 million at
December 31, 2021.
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The following table presents, as of and for the periods indicated, net charge-off information by segment:



                                                                              Year Ended
                                             December 31, 2022                                          December 31, 2021
(dollars in
thousands; unaudited)        Community Bank           CCBX              Total           Community Bank           CCBX              Total
Gross charge-offs           $         428          $ 33,321          $ 33,749          $         255          $    385          $    640
Gross recoveries                      (46)              (36)              (82)                   (83)              (12)              (95)
Net charge-offs             $         382          $ 33,285          $ 33,667          $         172          $    373          $    545
Net charge-offs to
average loans                        0.03  %           4.48  %           1.49  %                0.01  %           0.25  %           0.03  %


Although we believe that we have established our allowance for loan losses in
accordance with GAAP and that the allowance for loan losses was adequate to
provide for known and inherent losses in the portfolio at all times shown above,
future provisions for loan losses will be subject to ongoing evaluations of the
risks in our loan portfolio. We have not seen an increase in community bank loan
losses due to COVID-19 as originally anticipated, as evidenced by the low level
of charge-offs and nonperforming loans, however, the economic environment is
continuously changing with increased inflation, higher interest rates, global
unrest, the war in Ukraine, the political environment and trade issues that have
resulted in some economic uncertainty. If economic conditions worsen then the
U.S., Washington state and Puget Sound region may experience a more severe
economic downturn, and our asset quality could deteriorate, which may require
material additional provisions for loan losses.

The following table shows the allocation of the allowance for loan losses among
loan categories and certain other information as of the dates indicated. The
allocation of the allowance for loan losses as shown in the table should neither
be interpreted as an indication of future charge-offs, nor as an indication that
charge-offs in future periods will necessarily occur in these amounts or in the
indicated proportions. The total allowance is available to absorb losses from
any loan category.

                                                                                   At December 31,
                                                                 2022                                          2021
                                                                           Loan                                          Loan
                                                  Allowance              Category               Allowance              Category
                                                  Allocated              as a % of              Allocated              as a % of
                                                   to Loan                 Total                 to Loan                 Total
(dollars in thousands)                            Portfolio                Loans                Portfolio                Loans
Commercial and industrial loans                 $    4,831                      11.8  %       $    3,221                      23.9  %
Real estate loans:
Construction, land and land development
loans                                                7,425                       8.1               6,984                      10.5
Residential real estate loans                        4,142                      17.1               4,598                      11.7
Commercial real estate loans                         5,470                      39.8               6,590                      47.7
Consumer and other loans                            50,996                      23.2               7,092                       6.2
Total allocated                                     72,864                                        28,485

Unallocated                                          1,165                                           147
Total allowance for loan losses                 $   74,029                                    $   28,632


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 December 31, 2022, 98.7% of our investment portfolio
consisted primarily of U.S. Treasury securities. The remainder of our securities
portfolio was invested in municipal bonds, U.S. Agency collateralized mortgage
obligations and U.S. Agency residential mortgage-backed securities. Because we
target a loan-to-deposit ratio in the range of 90% to 100%, we prioritize
liquidity over the earnings of our securities portfolio. At December 31, 2022,
our loan-to-deposit ratio was 93.2% 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.
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As of December 31, 2022, the amortized cost of our investment securities totaled
$101.3 million, an increase of $64.7 million, or 176.7%, compared to $36.6
million as of December 31, 2021. The increase in the securities portfolio was
due to the purchase of five Treasury securities for $135.0 million during the
year ended December 31, 2022, to invest excess funds, replace maturing
securities and pledge to secure public deposits and for other purposes as
required or permitted by law, partially offset by $70.0 million in U.S. Treasury
maturities and other principal paydowns.

Our investment portfolio consists of securities classified as available for sale
and, to a lesser amount, held to maturity. The carrying values of our investment
securities classified as available for sale are adjusted for unrealized gain or
loss, and any gain or loss is reported on an after-tax basis as a component of
other comprehensive income in shareholders' equity. As of December 31, 2022, our
available for sale portfolio has an unrealized loss of $3.0 million, compared to
an unrealized loss of $38,000 as of December 31, 2021.

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



                                                                               As of December 31,
                                                                  2022                                   2021
                                                      Amortized             Fair             Amortized             Fair
(dollars in thousands)                                   Cost              Value               Cost               Value
Securities available-for-sale:
U.S. Treasury securities                             $  99,967          $

97,015 $ 34,999 $ 34,998



U.S. Agency collateralized mortgage                         54                 51                  68                 70

obligations

U.S. Agency residential mortgage-backed
securities 1 1 3 3
Municipal bonds 250 250 252 256
Total available-for-sale securities 100,272 97,317 35,322 35,327
Securities held-to-maturity:
U.S. Agency residential mortgage-backed
securities 1,036 916 1,296 1,348
Total held-to-maturity securities 1,036 916 1,296 1,348
Total investment securities $ 101,308 $ 98,233 $ 36,618 $ 36,675

All of our U.S. Agency residential mortgage-backed securities and U.S. Agency
collateralized mortgage obligations are U.S. Government agency securities. As of
December 31, 2022, we did not hold any Fannie Mae or Freddie Mac preferred
stock, collateralized debt obligations, collateralized loan obligations,
structured investment vehicles, private label collateralized mortgage
obligations, subprime, or second lien elements in our investment portfolio.

Our management evaluates securities for other-than-temporary impairment on at
least a quarterly basis, and more frequently when economic or market conditions
warrant such an evaluation.

As of December 31, 2022 and 2021, we did not own securities of any one issuer,
other than the U.S. Government and its agencies, for which aggregate adjusted
cost exceeded 10.0% of consolidated shareholders' equity.

Restricted equity securities totaled $7.5 million as of December 31, 2022 and
$6.0 million as of December 31, 2021 The increase was attributable to net
additions of Federal Reserve and FHLB stock. Federal Reserve and FHLB stock are
carried at par and do not have a readily determinable fair value. Ownership of
FHLB stock is restricted to the FHLB and member institutions, and can only be
purchased and redeemed at par.

The Company has the following equity investments which do not have a readily
determinable fair value and are held at cost minus impairment if any, plus or
minus observable price changes in orderly transactions for an identical or
similar investment of the same issuer. This method will be applied until the
investments do not qualify for the measurement election (e.g., if the investment
has a readily determinable fair value). The Company will reassess at each
reporting period whether the equity investments without a readily determinable
fair value qualifies to be measured at cost minus impairment.

As of December 31, 2022 and December 31, 2021 the Company held a $2.2 million
equity interest in a specialized bank technology company which consists of
1.6 million shares of common stock and 873,853 preferred shares. During the year
ended December 31, 2021, the Company reassessed the value and recognized a $1.5
million unrealized holding gain as a
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result of an observable price change. During the year ended 2022, the Company reviewed the carrying value of $2.2 million and determined it was still the appropriate carrying value.



During the year ended December 31, 2022, the Company re-evaluated the value on a
$500,000 equity investment in a technology company and recorded an impairment of
$100,000. This equity investment consists of 9,000 shares of stock and is
carried at cost less impairment, which approximates its fair value.

Additionally, the Company contributed $350,000 in a technology company during
the year ended December 31, 2022. There was no equity ownership in this company
as of December 31, 2021.

The Company invests in investment funds that are designed to help accelerate
technology adoption at banks and has invested in three separate funds. These
funds are carried at fair value as reported by the funds During the year ended
December 31, 2022, the Company contributed $349,000 with investment funds
designed to help accelerate technology adoption at banks, and recognized losses
of $53,000, resulting in an equity interest of $456,000 at December 31, 2022.
The Company has committed up to $988,000 in capital for these investment funds,
however, the Company is not obligated to fund these commitments prior to a
capital call.

The following table sets forth the amortized cost of held to maturity securities
and the fair value of available for sale securities, maturities and approximated
weighted average yield based on estimated annual income divided by the average
amortized cost of our securities portfolio as of the dates indicated. The
contractual maturity of a mortgage-backed security is the date at which the last
underlying mortgage matures.

                                                                                                                                As of December 31, 2022
                                                                                           More than One                              More than Five
                                              One Year or Less                           Year to Five Years                         Years to Ten Years                          More than Ten Years                              Total
                                                              Weighted                                 Weighted                                      Weighted                                   Weighted                                 Weighted
                                      Carrying                Average              Carrying             Average               Carrying                Average              Carrying              Average            Carrying             Average
(dollars in thousands)                  Value                  Yield                Value                Yield                  Value                  Yield                Value                 Yield               Value               Yield
Securities
available-for-sale:
U.S. Treasury securities          $            -                  0.000  %       $  97,015                 2.153  %       $            -                 0.000  %       $         -                 0.000  %       $ 97,015                  2.153  %
U.S. Agency collateralized
mortgage obligations                           -                  0.000  %               -                 0.000  %                    -                 0.000  %                51                 3.190  %             51                  3.190  %
U.S. Agency residential
mortgage-backed securities                     1                  2.751  %               -                 0.000  %                    -                 0.000  %                 -                 0.000  %              1                  2.751  %
Municipals                                   250                  3.750  %               -                 0.000  %                    -                 0.000  %                 -                 0.000  %            250                  3.750  %
Total available-for-sale                     251                  3.746  %          97,015                 2.153  %                    -                 0.000  %                51                 3.190  %         97,317                  2.157  %

Securities held to
maturity:
U.S. Agency residential
mortgage-backed securities                     -                  0.000  %               -                 0.000  %                    -                 0.000  %               916                 2.657  %            916                  2.657  %
Total held to maturity                         -                  0.000  %               -                 0.000  %                    -                 0.000  %               916                 2.657  %            916                  2.657  %

Total                             $          251                  3.746  %       $  97,015                 2.153  %       $            -                 0.000  %       $       967                 2.527  %       $ 98,233                  2.162  %


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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
reciprocal deposits. Reciprocal deposits enable us to provide an FDIC insured
deposit option to customers that have balances in excess of the FDIC insurance
limit. This service trades our customers' funds as certificates of deposit or
interest bearing demand deposits in increments under the FDIC insured amount to
other participating financial institutions and in exchange we receive time
deposit or interest bearing demand investments from participating financial
institutions in a reciprocal agreement. We rely primarily on competitive pricing
policies, convenient locations, electronic delivery channels (internet and
mobile), and personalized service to attract new deposits and retain existing
deposits. Additionally, we offer deposit products through our CCBX segment. CCBX
deposits are generally classified as interest bearing negotiable order of
withdrawal ("NOW") and money market accounts, and a portion of such CCBX
deposits may be classified as brokered deposits as a result of the relationship
agreement. 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 December 31, 2022 were $2.82 billion, an increase of $453.7
million, or 19.2%, compared to $2.36 billion as of December 31, 2021. The
increase in deposits was largely in core deposits, which increased $437.0
million to $2.69 billion from $2.25 billion at December 31, 2021. We define core
deposits as all deposits except time deposits and brokered deposits. The $437.0
million increase in core deposits is also largely from growth in the CCBX
segment, which accounted for $532.3 million of the increase, partially offset by
a decrease of $95.3 million in community bank deposits. Additionally, as of
December 31, 2022 we have access to $225.0 million in CCBX customer deposits
that are currently being transferred from the Bank's balance sheet to other
financial institutions on a daily basis. Depending on the circumstances of how
the Bank would retain these deposits and its relationship with the customer,
these retained deposits could be classified as brokered deposits.

Included in total deposits is $1.28 billion in CCBX deposits, an increase of
$563.0 million, or 78.6%, compared to $716.3 million as of December 31, 2021.
CCBX customer deposit relationships include deposits with CCBX end customers,
operating and non-operating deposit accounts. The deposits from our CCBX segment
are generally classified as interest bearing NOW and money market accounts, and
a portion of such CCBX deposits may be classified as brokered deposits as a
result of the relationship agreement. During the first and second quarter of
2022, the majority of CCBX deposits were reclassified from noninterest bearing
to interest bearing. This is because the current rate exceeds the minimum
interest rate set in their respective program agreements, as a result of the
increases in interest rates by the FOMC.

Total noninterest bearing deposits as of December 31, 2022 were $775.0 million,
a decrease of $580.9 million, or 42.8%, compared to $1.36 billion as of
December 31, 2021. The $580.9 million decrease is primarily the result of
reclassifying CCBX noninterest bearing deposits to interest bearing as a result
of the increase in interest rates by the FOMC, partially offset by growth in
CCBX noninterest deposits and growth in community bank noninterest deposits.
Noninterest bearing deposits represent 27.5% and 57.4% of total deposits for
December 31, 2022 and December 31, 2021, respectively.

Total interest bearing account balances, excluding time deposits, as of
December 31, 2022 were $2.01 billion, an increase of $1.05 billion, or 108.7%,
compared to $964.4 million as of December 31, 2021. The $1.05 billion increase
is the result of reclassifying CCBX noninterest bearing deposits to interest
bearing as a result of the increases in interest rates by the FOMC, combined
with CCBX growth in interest bearing deposits partially offset by community bank
decrease in interest bearing deposits of $70.2 million. Included in interest
bearing account balances is $101.5 million in BaaS-brokered deposits, an
increase of $30.8 million from December 31, 2021. Also included in interest
bearing deposits is $12.5 million in reciprocal deposits.

Total time deposit balances as of December 31, 2022 were $29.4 million, a
decrease of $14.0 million, or 32.2%, from $43.5 million as of December 31, 2021.
The decrease is due to the strong increase in core deposits, and our focus on
core deposits and letting higher rate deposits run off as they mature. We have
seen competitors increase rates on time deposits, and we have not globally
matched their rates in response as we focus on growing and retaining less costly
core deposits.
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The following table sets forth deposit balances at the dates indicated.



                                                              As of December 31,
                                                    2022                              2021
                                                          Percent of                        Percent of
                                                            Total                             Total
(dollars in thousands)                     Amount          Deposits          Amount          Deposits
Demand, noninterest bearing            $   775,012            27.5  %    $ 1,355,908            57.4  %
NOW and money market                     1,804,399            64.0           789,709            33.4
Savings                                    107,117             3.8           103,956             4.4
Total core deposits                      2,686,528            95.3         2,249,573            95.2
BaaS-brokered deposits                     101,546             3.6            70,757             3.0
Time deposits less than $100,000            12,596             0.5            14,961             0.6
Time deposits $100,000 and over             16,851             0.6            28,496             1.2
Total                                  $ 2,817,521           100.0  %    $ 2,363,787           100.0  %
Cost of deposits                              1.56  %                           0.09  %

The following table presents the community bank deposits which are included in the total deposit portfolio table above:



Community Bank                                                                           As of
                                                        December 31, 2022                                    December 31, 2021
(dollars in thousands)                          Balance                  % to Total                  Balance                  % to Total
Demand, noninterest bearing               $        694,179                       45.2  %       $        719,233                       43.7  %
NOW and money market                               709,490                       46.1                   780,884                       47.4
Savings                                            105,101                        6.8                   103,954                        6.3
Total core deposits                              1,508,770                       98.1                 1,604,071                       97.4
Brokered deposits                                        1                        0.0                         1                        0.0
Time deposits less than $100,000                    12,596                        0.8                    14,961                        0.9
Time deposits $100,000 and over                     16,851                        1.1                    28,496                        1.7
Total Community Bank deposits             $      1,538,218                      100.0  %       $      1,647,529                      100.0  %
Cost of deposits                                      0.37  %                                              0.12  %

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



CCBX                                                                                     As of
                                                         December 31, 2022                                    December 31, 2021
(dollars in thousands)                           Balance                  % to Total                 Balance                  % to Total
Demand, noninterest bearing                $         80,833                        6.3  %       $       636,675                       88.9  %
NOW and money market                              1,094,909                       85.6                    8,825                        1.2
Savings                                               2,016                        0.2                        2                        0.0
Total core deposits                               1,177,758                       92.1                  645,502                       90.1
BaaS-brokered deposits                              101,545                        7.9                   70,756                        9.9
Total CCBX deposits                        $      1,279,303                      100.0  %       $       716,258                      100.0  %
Cost of deposits                                       3.13  %                                             0.02  %


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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:



                                              As of December 31,
(dollars in thousands)                        2022           2021
Maturity Period:
Three months or less                      $    4,067      $  8,106
Over three through six months                  2,957         6,520
Over six through twelve months                 5,892         8,925
Over twelve months                             3,935         4,945
Total                                     $   16,851      $ 28,496
Weighted average maturity (in years)              0.76          0.73


Average deposits for the year ended December 31, 2022, were $2.67 billion, an
increase of $766.1 million, or 40.3%, compared $1.90 billion for the year ended
December 31, 2021. The increase in average deposits was primarily due to an
increase in core deposits, both in noninterest bearing deposits and in interest
bearing deposits. Included in this increase is growth in CCBX deposits. We
expect deposits to increase with continued growth in CCBX as well as in the
community bank through 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 interest-bearing deposits was 0.71% for the year
ended December 31, 2022, compared to 0.12% for the year ended December 31, 2021.
The average rate paid on total interest-bearing deposits was 1.10% for the year
ended December 31, 2022, compared to 0.26% for the year ended December 31, 2021.
The average rate paid on BaaS-brokered deposits increased 1.11% for the year
ended December 31, 2022, compared to December 31, 2021, and NOW and money market
accounts increased 0.93%, for the year ended December 31, 2022. The increase in
average rate paid on deposit accounts for the year ended December 31, 2022, is
the result of the increased Fed funds rates throughout 2022. Any further changes
to the Fed funds rate and rate pressure from market competition is 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 Year Ended December 31,


                                                                   2022                                           2021
                                                     Average                  Average               Average                Average
(dollars in thousands)                               Balance                   Rate                 Balance                 Rate
Demand, noninterest bearing                     $       942,087                    0.00  %       $   989,945                    0.00  %
NOW and money market                                  1,509,492                    1.17              740,045                    0.24
Savings                                                 106,061                    0.05               93,409                    0.03
BaaS-brokered deposits                                   71,532                    1.46               26,020                    0.35
Time deposits less than $100,000                         13,980                    0.28               16,838                    1.06
Time deposits $100,000 and over                          22,955                    0.85               33,794                    0.71
Total deposits                                  $     2,666,107                    0.71  %       $ 1,900,051                    0.12  %

The ratio of average noninterest-bearing deposits to average total deposits for the years ended December 31, 2022 and 2021, was 35.3% and 52.1%, respectively.



Factors affecting the cost of funding interest-bearing assets include the volume
of noninterest- and interest-bearing deposits, changes in market interest rates
and economic conditions in the Puget Sound region and their impact on interest
paid on deposits, competition from other financial institutions, as well as the
ongoing execution of our growth strategies. Cost of total interest-bearing
liabilities is calculated as total interest expense divided by average total
interest-bearing deposits plus average total borrowings. Our cost of total
interest-bearing liabilities was 1.16% and 0.36% for the years ended
December 31, 2022 and 2021, respectively. The increase in our cost of deposits
in 2022 was primarily due to rate increases from the Federal Reserve. We
actively manage our interest rates on deposits, however, rate changes from the
Federal Reserve and competition can and do impact our deposit costs.
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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 December 31, 2022, deposits totaled $2.82 billion, of which total
estimated uninsured deposits were $835.8 million. At December 31, 2021, deposits
totaled $2.36 billion, of which total estimated uninsured deposits were $823.5
million.

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

(dollars in thousands)               As of December 31, 2022
Maturity Period:
Three months or less                $                    744
Over three through six months                             30
Over six through twelve months                           947
Over twelve months                                       284
Total                               $                  2,005


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 December 31,
2022, and December 31, 2021, total borrowing capacity of $26.7 million and $21.9
million, respectively, was available under this arrangement. As of December 31,
2022, and December 31, 2021, Federal Reserve borrowings against our line of
credit totaled zero. We are able to pledge additional loans to increase out
borrowing capacity, should we decide to do so.

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

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

As of and For the Year Ended
December 31,
(dollars in thousands) 2021
Maximum amount outstanding at any month-end during period: $ 185,894
Average outstanding balance during period: $ 68,699
Weighted average interest rate during period: 0.35 %
Balance outstanding at end of period: $ -
Weighted average interest rate at end of period: 0.00 %

Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line
of credit, which is collateralized by certain loans. As of December 31, 2022 and
December 31, 2021, we had borrowing capacity of $120.8 million and $120.4
million, respectively, with the FHLB. During the year ended December 31, 2022,
we repaid a total of $25.0 million in FHLB term advances. This included a $10.0
million advance that would have matured in March of 2023 and $15.0 million
advance that would have matured in March 2025. We have sufficient liquidity for
our current loan demand, and
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with no prepayment penalty for early repayment, management opted to repay these term advances and save the unnecessary interest expense.

The following table presents details on FHLB advance borrowings for the periods
indicated:

As of and For the Years
Ended December 31,
(dollars in thousands) 2022 2021
Maximum amount outstanding at any month-end during period: $ 24,999 $ 24,999
Average outstanding balance during period: $ 6,029 $ 24,999
Weighted average interest rate during period: 1.13 % 1.13 %
Balance outstanding at end of period: $ - $ 24,999
Weighted average interest rate at end of period: n/a 1.13 %

Junior Subordinated Debentures. In 2004, we issued $3.6 million in junior
subordinated debentures to Coastal (WA) Statutory Trust (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
December 31, 2022 and 2021, was 6.87% and 2.30%, respectively. We generally have
the right to defer payment of interest on the debentures at any time or from
time to time for a period not exceeding five years provided that no extension
period may extend beyond the stated maturity of the debentures. During any such
extension period, distributions on the Trust's preferred securities will also be
deferred, and our ability to pay dividends on our common stock will be
restricted. The Trust's preferred securities are mandatorily redeemable upon
maturity of the debentures, or upon earlier redemption as provided in the
indenture. 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.

In November 2022, the Company issued a subordinated note in the amount of $20.0
million. The note matures on November 1, 2032, and bears 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 2.90%. The
five-year 7.00% interest period ends on November 1, 2027. We may redeem the
subordinated note, 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.
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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. The Company considers various deposit
run-off scenarios in its liquidity management process including that all
community bank uninsured deposits exit the Bank in an economic downturn.
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 December 31, 2022, we have 1 partner with deposits
that are in excess of 10% of total deposits and represent 25% of total deposits.
The Company also considers the immediate loss of a significant deposit partner
as a liquidity scenario in its liquidity management process.

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
December 31, 2022, has access to $225.0 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 notes 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 it has sufficient funds for its operating
and debt costs. During the year ended December 31, 2022, the Company contributed
$21.0 million in capital to the Bank. The Company currently holds $22.9 million
in cash for debt servicing and operating purposes. In addition, the Bank can
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declare and pay dividends to the Company if needed, 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 if needed, 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, and usually maintains a liquidity ratio
in excess of 10%. Both of these minimum liquidity levels are on-balance sheet
sources. Per the Bank's policies and its 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 required to meet
the generally applicable regulatory capital requirements of the Federal Reserve
and the FDIC at the company and bank level. Historically, the Company had been
operating under the Small Bank Holding Company Policy Statement, which exempts
bank holding companies that have total consolidated assets of less than $3.0
billion and meet other criteria from the Federal Reserve's risk-based- and
leverage capital rules.

Because the Company's total consolidated assets exceeded $3.0 billion as of
September 30, 2022, the Company is no longer subject to 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.
A bank holding company that crosses the $3.0 billion total consolidated assets
threshold as of June 30 of a particular year is no longer permitted to file
reports as a small holding company beginning the following March. 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. If the Company's total
consolidated assets remain in excess of $3.0 billion as of June 30, 2023,
starting in March 2024 the Company will cease filing financial reports with the
Federal Reserve as though it were a small bank holding company.

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

                                                                                                                                Required to be Well
                                                                                                                                    Capitalized
                                                                                    Minimum Required                             Under the Prompt
                                                                                       for Capital                               Corrective Action
                                                Actual                            Adequacy Purposes (1)                             Provisions
(dollars in thousands)               Amount               Ratio                Amount               Ratio                  Amount                   Ratio
December 31, 2022
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 I 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 I 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  %
December 31, 2021
Leverage Capital (to average
assets)
Company                           $ 204,585                  8.07  %       $   101,460                 4.00  %                       N/A                   N/A
Bank Only                           201,783                  7.96  %           101,350                 4.00  %                126,687                  5.00  %
Common Equity Tier I Capital (to
risk-weighted assets)
Company                             201,085                 11.06  %            81,834                 4.50  %                       N/A                   N/A
Bank Only                           201,783                 11.12  %            81,623                 4.50  %                117,900                  6.50  %
Tier I Capital (to risk-weighted
assets)
Company                             204,585                 11.25  %           109,112                 6.00  %                       N/A                   N/A
Bank Only                           201,783                 11.12  %           108,830                 6.00  %                145,107                  8.00  %
Total Capital (to risk-weighted
assets)
Company                             252,405                 13.88  %           145,483                 8.00  %                       N/A                   N/A
Bank Only                           224,545                 12.38  %           145,107                 8.00  %                181,384                 10.00  %


(1) This table presents the minimum capital adequacy requirements that apply to
the Bank (excluding the capital conservation buffer) and the Company. Prior to
September 30, 2022, the Company operated under the Small Bank Holding Company
Policy Statement and therefore was not subject to Basel III capital adequacy
requirements.

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Material Cash Requirements and Capital Resources

The following table provides the material cash requirements from known contractual and other obligations as of December 31, 2022:



                                                                 Payments Due by Period
                                                         Less than          Over
(dollars in thousands)                  Total             1 Year           1 year       Other (1)
Cash requirements
Time Deposits                       $    29,447      $    22,219          $ 7,228      $        -
Subordinated notes                       45,000                -           45,000               -
Junior subordinated debentures            3,609                -            3,609               -
Deferred compensation plans                 935              175              760               -
Operating leases                          6,058            1,272            4,786               -
Non-maturity deposits                 2,788,074                -                -       2,788,074
Equity investment commitment                988              988                -               -


(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 below. Since commitments
associated with commitments to extend credit and letters of credit may expire
unused, the amounts shown do not necessarily reflect the actual future cash
funding requirements.

As of December 31, 2022, we had $2.20 billion in commitments to extend credit,
compared to $909.6 million as of December 31, 2021. The $1.29 billion increase
is largely attributed to growth in our CCBX segment, due to the addition of new
partners, resulting in an increase of $1.25 billion in commitments to extend
credit on CCBX loans. The following
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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:



                                                                      As of December        As of December
(dollars in thousands)                                                   31, 2022              31, 2021
Commitments to extend credit:
Commercial and industrial loans                                      $      81,568          $    70,848
Commercial and industrial loans - capital call lines                       772,732              415,956
Construction - commercial real estate loans                                109,715               90,946
Construction - residential real estate loans                                32,827               43,339
Residential real estate loans                                              374,735              101,715
Commercial real estate loans                                                35,024               23,248
Consumer and other loans                                                   793,563              163,510
Total commitments to extend credit                                   $   2,200,164          $   909,562
Standby letters of credit                                            $       3,064          $     3,040
Equity investment commitment                                         $

988 $ 1,090

Commitments to extend credit on CCBX loans are included in the table above and are summarized below:



                                                                  As of December        As of December
(dollars in thousands)                                               31, 2022              31, 2021
Commitments to extend credit:
Commercial and industrial loans                                  $     773,684          $    415,956

Residential real estate loans                                          329,193                71,453
Consumer and other loans                                               792,447               162,266
Total commitments to extend credit                               $

1,895,324 $ 649,675




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 December 31, 2022, capital call lines outstanding balance totaled $146.0
million, and while commitments totaled $772.7 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 December 31, 2022.

                                                                                 Maximum Portfolio
(dollars in thousands; unaudited)                 Type of Lending                      Size
Commercial and industrial loans:
Capital call lines                  Business - Venture Capital                  $        350,000
All other commercial & industrial
loans                               Business - Small Business                             65,856
Real estate loans:
Home equity lines of credit         Home Equity - Secured Credit Cards                   250,000
Consumer and other loans:
Credit cards                        Credit Cards - Primarily Consumer                    600,770
Installment loans                   Consumer                                           1,048,134

Other consumer and other loans Consumer - Secured Credit Builder &


                                    Unsecured consumer                                   190,240
                                                                                $      2,505,000


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
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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 December 31, 2022, $1.57 billion in commitments to extend
credit are unconditionally cancelable, compared to $162.3 million at
December 31, 2021. The increase in unconditionally cancelable commitments is
attributed to growth in CCBX loans. 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.

CCBX - BaaS Reporting Information



During the year ended December 31, 2022, $76.4 million was recognized in
noninterest income BaaS credit enhancements related to the establishment of a
credit enhancement asset for future loan losses indemnified by our strategic
partners and reserve for unfunded commitments for CCBX partner loans and
deposits. Agreements with our CCBX partners provide for a credit enhancement
provided by the partner which protects the Bank by absorbing incurred losses on
accounts originated through the partner. In accordance with accounting guidance,
we estimate and record a provision for probable losses on these CCBX loans and
deposit overdrafts. When the provision for loan losses and provision for
unfunded commitments is recorded, a 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 loan 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 receivable 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.
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The following table illustrates how CCBX partner loan income and expenses are recorded in the financial statements:



Loan income and related loan expense

Year. Ended


                                                             December 31,       December 31,
(dollars in thousands; unaudited)                                2022               2021
BaaS loan interest income                                   $    102,808       $     6,532
Less: BaaS loan expense                                           53,294             2,976
Net BaaS loan income (1)                                          49,514             3,556
Net BaaS loan income divided by average BaaS loans (1)              6.67  %           2.43  %
Yield on loans                                                     13.85  %           4.46  %

(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."



The addition of new CCBX partners has resulted in increases in direct fees,
expenses and interest for the year ended December 31, 2022 compared to the year
ended December 31, 2021. The following tables are a summary of the direct fees,
expenses and interest components of BaaS for the periods indicated and are not
inclusive of all income and expense related to BaaS.

Interest income                                    Year Ended
                                        December 31,       December 31,
(dollars in thousands; unaudited)           2022               2021
Loan interest income                   $     102,808      $       6,532
Total BaaS interest income             $     102,808      $       6,532


Interest expense                                  Year Ended
                                        December 31,       December 31,
(dollars in thousands; unaudited)           2022               2021
BaaS interest expense                  $      16,108      $         99
Total BaaS interest expense            $      16,108      $         99


                                                   Year Ended
                                        December 31,       December 31,
(dollars in thousands; unaudited)           2022               2021
Program income:
Servicing and other BaaS fees          $       4,408      $       4,467
Transaction fees                               3,211                544
Interchange fees                               2,583                701
Reimbursement of expenses                      2,732              1,004
Program income                                12,934              6,716
Indemnification income:
Credit enhancements                           76,374              9,086
Fraud enhancements                            29,571              1,505
Indemnification income                       105,945             10,591
Total BaaS income                      $     118,879      $      17,307


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                                                   Year Ended
                                        December 31,       December 31,
(dollars in thousands; unaudited)           2022               2021
BaaS loan expense                      $      53,294      $       2,976
BaaS fraud expense                            29,571              1,505

Total BaaS loan and fraud expense $ 82,865 $ 4,481

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 financial measures are presented to illustrate the impact
of BaaS loan expense on net loan income, yield on CCBX loans and interest rate
spread.

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.

Net BaaS loan interest income interest rate spread is a non-GAAP measure that includes the impact of BaaS loan expense on interest rate spread. The most directly comparable GAAP measure is interest rate spread.



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

                                                                            As of and for the Year Ended
                                                                       December 31,              December 31,
(dollars in thousands; unaudited)                                          2022                      2021

Net BaaS loan income divided by average CCBX loans: CCBX loan yield (GAAP)

                                                         13.85  %                   4.46  %
Total average CCBX loans receivable                                 $           742,392       $           146,304
Interest and earned fee income on CCBX loans (GAAP)                             102,808                     6,532
Less: loan expense on CCBX loans                                               (53,294)                   (2,976)
Net BaaS loan income                                                $            49,514       $             3,556
Net BaaS loan income divided by average CCBX loans                              6.67  %                   2.43  %
Net BaaS loan income interest rate spread:
CCBX interest rate spread (GAAP)                                               12.28  %                   4.43  %
Net BaaS loan income divided by average CCBX loans                              6.67  %                   2.43  %
CCBX cost of funds                                                              1.57  %                   0.03  %

Net BaaS loan income interest


  rate spread                                                                   5.10  %                   2.40  %

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Coastal Financial Corporation Reports Unaudited Net Charge-Offs for the Quarter Ended September 30, 2023	28/23/28	CI
Earnings Flash (CCB) COASTAL FINANCIAL CORPORATION Posts Q3 EPS $0.75	27/23/27	MT
Earnings Flash (CCB) COASTAL FINANCIAL CORPORATION Reports Q3 Revenue $96.8M	27/23/27	MT
Coastal Financial Corporation Reports Earnings Results for the Third Quarter and Nine Months Ended September 30, 2023	27/23/27	CI
Coastal Financial Corporation Announces Management Appointments	01/23/01	CI
Earnings Flash (CCB) COASTAL FINANCIAL CORPORATION Posts Q2 Revenue $120.95M	27/23/27	MT
Earnings Flash (CCB) COASTAL FINANCIAL CORPORATION Posts Q2 EPS $0.95	27/23/27	MT
Coastal Financial Corporation Reports Unaudited Net Charge-Offs Results for the Second Quarter Ended June 30, 2023	27/23/27	CI
Coastal Financial Corporation Reports Earnings Results for the Second Quarter and Six Months Ended June 30, 2023	27/23/27	CI
North American Morning Briefing : Stock Futures -2-	26/23/26	DJ
Stephens Adjusts Coastal Financial Price Target to $53 From $51, Maintains Overweight Rating	02/23/02	MT
Earnings Flash (CCB) COASTAL FINANCIAL CORPORATION Posts Q1 EPS $0.91	27/23/27	MT
Coastal Financial Corporation Reports Earnings Results for the First Quarter Ended March 31, 2023	27/23/27	CI
Coastal Financial Corporation Reports Net Charge Offs for the First Quarter Ended March 31, 2023	27/23/27	CI
Keefe, Bruyette & Woods Adjusts Price Target on Coastal Financial to $66 From $70, Maintains Outperform Rating	06/23/06	MT
Sector Update: Financial Stocks Steady Late Afternoon	04/23/04	MT

Chart Coastal Financial Corporation

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Company Profile

Coastal Financial Corporation is the bank holding company that operates through its subsidiaries, including Coastal Community Bank (Bank) and Arlington Olympic LLC. The Company operates through three segments: CCBX, the Community Bank and treasury & administration. The CCBX segment provides banking as a service (BaaS) activities that allows its broker-dealer and digital financial service partners to offer their customers banking services. It offers a variety of loans to business owners, including commercial and industrial loans and commercial real estate loans secured by owner-occupied commercial properties. The Community Bank segment provides a 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 its mobile banking application. The treasury and administration segment includes treasury management, overall administration and all other aspects of the Company.

Sector

Banks

Calendar

25/07/2024 - Q2 2024 Earnings Release (Projected)

Related indices

Russell 2000

More about the company

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Ratings for Coastal Financial Corporation

Trading Rating

Investor Rating

ESG Refinitiv

D+

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Analysts' Consensus

Sell

Buy

Mean consensus

BUY

Number of Analysts

Last Close Price

44.36 USD

Average target price

54.5 USD

Spread / Average Target

+22.86%

Consensus

EPS Revisions

Estimates Revisions

Quarterly earnings - Rate of surprise

Company calendar

Sector Other Banks

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COASTAL FINANCIAL CORPORATION	-0.11%	595M
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CHINA CONSTRUCTION BANK CORPORATION	+25.38%	188B
BANK OF CHINA LIMITED	+31.21%	172B
HSBC HOLDINGS PLC	+9.11%	163B
ROYAL BANK OF CANADA	+7.40%	149B
HDFC BANK LIMITED	-10.78%	139B
COMMONWEALTH BANK OF AUSTRALIA	+7.52%	132B

Other Banks

Coastal Financial Corporation

Equities

CCB

US19046P2092

Banks

COASTAL FINANCIAL CORP Management's Discussion and Analysis of Financial Condition and Results of Operations (form 10-K)

EPS Revisions