COASTAL FINANCIAL CORP 10-Q

Item 1. Financial Statements COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands) ASSETS March 31, December 31, 2022 2021 Cash and due from banks $ 32,705 $ 14,496 Interest earning deposits with other banks (restricted cash of $ 0 at March 31, 2022 and December 31, 2021) 649,404 798,665 Investment securities, available for sale, at fair value 134,891 35,327 Investment securities, held to maturity, at amortized cost 1,286 1,296 Other investments 9,931 8,478 Loans receivable 1,964,209 1,742,735 Allowance for loan losses ( 38,770 ) ( 28,632 ) Total loans receivable, net 1,925,439 1,714,103 Premises and equipment, net 18,135 17,219 Operating lease right-of-use assets 5,836 6,105 Accrued interest receivable 8,824 8,105 Bank-owned life insurance, net 12,342 12,254 Deferred tax asset, net 6,892 6,818 Other assets 28,065 12,651 Total assets $ 2,833,750 $ 2,635,517 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Deposits $ 2,576,470 $ 2,363,787 Federal Home Loan Bank ("FHLB") advances - 24,999 Subordinated debt Principal amount $ 25,000 (less unamortized debt issuance costs of $ 694 and $ 712 ) at March 31, 2022 and December 31, 2021, respectively 24,306 24,288 Junior subordinated debentures Principal amount $ 3,609 (less unamortized debt issuance costs of $ 22 and $ 23 at March 31, 2022 and December 31, 2021, respectively) 3,587 3,586 Deferred compensation 712 744 Accrued interest payable 149 357 Operating lease liabilities 6,054 6,320 Other liabilities 14,552 10,214 Total liabilities 2,625,830 2,434,295 SHAREHOLDERS’ EQUITY Preferred stock, no par value: Authorized: 25,000,000 shares at March 31, 2022 and December 31, 2021; issued and outstanding: zero shares at March 31, 2022 and December 31, 2021 - - Common stock, no par value: Authorized: 300,000,000 shares at March 31, 2022 and December 31, 2021; 12,928,548 shares at March 31, 2022 issued and outstanding and 12,875,315 shares at December 31, 2021 issued and outstanding 122,592 121,845 Retained earnings 85,603 79,373 Accumulated other comprehensive (loss) income, net of tax ( 275 ) 4 Total shareholders’ equity 207,920 201,222 Total liabilities and shareholders’ equity $ 2,833,750 $ 2,635,517 See accompanying Notes to Condensed Consolidated Financial Statements. 4 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except for per share data) Three Months Ended March 31, 2022 2021 INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 29,632 $ 18,230 Interest on interest earning deposits with other banks 402 70 Interest on investment securities 71 28 Dividends on other investments 37 30 Total interest income 30,142 18,358 INTEREST EXPENSE Interest on deposits 553 660 Interest on borrowed funds 321 383 Total interest expense 874 1,043 Net interest income 29,268 17,315 PROVISION FOR LOAN LOSSES 12,942 357 Net interest income after provision for loan losses 16,326 16,958 NONINTEREST INCOME BaaS fees 20,112 948 Deposit service charges and fees 884 863 Loan referral fees 602 597 Gain on sales of loans, net - 130 Mortgage broker fees 123 262 Other income 265 184 Total noninterest income 21,986 2,984 NONINTEREST EXPENSE Salaries and employee benefits 11,085 7,686 Occupancy 1,136 1,058 Software licenses, maintenance and subscriptions 1,052 484 Legal and professional fees 708 760 Data processing 809 697 BaaS expense 12,861 90 Excise taxes 349 359 Federal Deposit Insurance Corporation ("FDIC") assessments 604 195 Director and staff expenses 344 220 Marketing 99 82 Other expense 1,368 721 Total noninterest expense 30,415 12,352 Income before provision for income taxes 7,897 7,590 PROVISION FOR INCOME TAXES 1,667 1,572 NET INCOME $ 6,230 $ 6,018 Basic earnings per common share $ 0.48 $ 0.50 Diluted earnings per common share $ 0.46 $ 0.49 Weighted average number of common shares outstanding: Basic 12,898,746 11,960,772 Diluted 13,475,337 12,393,493 See accompanying Notes to Condensed Consolidated Financial Statements. 5 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (dollars in thousands) Three Months Ended March 31, 2022 2021 NET INCOME $ 6,230 $ 6,018 OTHER COMPREHENSIVE LOSS, before tax Securities available-for-sale Unrealized holding loss during the period ( 349 ) ( 13 ) Income tax benefit related to unrealized holding loss 70 3 OTHER COMPREHENSIVE LOSS, net of tax ( 279 ) ( 10 ) COMPREHENSIVE INCOME $ 5,951 $ 6,008 See accompanying Notes to Condensed Consolidated Financial Statements. 6 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) (dollars in thousands) Shares of Common Stock Amount of Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total BALANCE, December 31, 2020 11,954,327 $ 87,815 $ 52,368 $ 34 $ 140,217 Net income - - 6,018 - 6,018 Issuance of restricted stock awards 5,978 - - - - Vesting of restricted stock units 7,426 - - - - Exercise of stock options 20,905 151 - - 151 Stock-based compensation - 363 - - 363 Other comprehensive loss - - - ( 10 ) ( 10 ) BALANCE, March 31, 2021 11,988,636 $ 88,329 $ 58,386 $ 24 $ 146,739 BALANCE, December 31, 2021 12,875,315 $ 121,845 $ 79,373 $ 4 $ 201,222 Net income - - 6,230 - 6,230 Vesting of restricted stock units 26,288 - - - - Exercise of stock options 26,945 208 - - 208 Stock-based compensation - 539 - - 539 Other comprehensive loss - - - ( 279 ) ( 279 ) BALANCE, March 31, 2022 12,928,548 $ 122,592 $ 85,603 $ ( 275 ) $ 207,920 S ee accompanying Notes to Condensed Consolidated Financial Statements. 7 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) Three months ended March 31, 2022 2021 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,230 $ 6,018 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 12,942 357 Depreciation and amortization 419 416 (Gain) loss on disposition of fixed assets ( 35 ) - Decrease in operating lease right-of-use assets 269 261 Decrease in operating lease liabilities ( 266 ) ( 259 ) Gain on sales of loans - ( 130 ) Proceeds from sale of loans - 2,201 Net (discount accretion) premium amortization on investment securities ( 12 ) 10 Stock-based compensation 539 363 Increase in bank-owned life insurance value ( 88 ) ( 51 ) Deferred tax benefit 1 - Net change in CCBX receivable ( 15,181 ) - Net change in other assets and liabilities 3,164 ( 745 ) Net cash provided by operating activities 7,982 8,441 CASH FLOWS FROM INVESTING ACTIVITIES Net change in interest earning deposits with other banks 149,261 ( 43,320 ) Purchase of investment securities available for sale ( 134,912 ) ( 14,998 ) Change in other investments, net ( 1,453 ) ( 770 ) Principal paydowns of investment securities available-for-sale 7 8 Principal paydowns of investment securities held-to-maturity 10 321 Maturities and calls of investment securities available-for-sale 35,000 15,000 Purchase of loans ( 57,268 ) - Increase in loans receivable, net ( 167,010 ) ( 221,665 ) Purchases of premises and equipment, net ( 1,300 ) ( 502 ) Net cash used by investing activities ( 177,665 ) ( 265,926 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, NOW and money market, and savings 215,769 254,770 Net decrease in time deposits ( 3,086 ) ( 4,362 ) Net repayment from long term FHLB borrowing ( 24,999 ) - Net advances from Paycheck Protection Program Liquidity Facility - 4,803 Proceeds from exercise of stock options 208 151 Net cash provided by financing activities 187,892 255,362 NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH 18,209 ( 2,123 ) CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year 14,496 18,965 CASH, DUE FROM BANKS AND RESTRICTED CASH, end of quarter $ 32,705 $ 16,842 SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES Interest paid $ 761 $ 1,036 Income taxes paid 12 - SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS Fair value adjustment of securities available-for-sale, gross $ ( 13 ) $ ( 13 ) In conjunction with ASU 2016-02 as detailed in Note 6 to the Unaudited Consolidated Financial Statements, the following assets and liabilities were recognized: Operating lease right-of-use assets $ - $ 41 Operating lease liabilities $ - $ ( 41 ) See accompanying Notes to Condensed Consolidated Financial Statements. 8 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Description of Business and Summary of Significant Accounting Policies Nature of operations - Coastal Financial Corporation (“Corporation” or “Company”) is a registered bank holding company whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC (“LLC”). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank that is a member bank of the Federal Reserve system. Arlington Olympic LLC was formed in 2019 and owns the Company’s Arlington branch site, which the Bank leases from the LLC. We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. The Company’s business is conducted through two reportable segments: The community bank and CCBX. The primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium-sized businesses, professionals, and individuals in the broader Puget Sound region in the state of Washington through its 14 branches in Snohomish, Island and King Counties, and through the Internet and its mobile banking application. The CCBX segment provides Banking as a Service (“BaaS”) that allows our broker dealers and digital financial service partners to offer their customers banking services. Through CCBX’s partners the Company is able to offer banking services and products across the nation. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The community bank’s loans and deposits are primarily within the greater Puget Sound area, while CCBX loans and deposits are dependent upon the partner’s market. The Bank’s primary funding source is deposits from customers. The Bank is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has regulatory and supervisory authority over the Company. Financial statement presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim reporting requirements and with instructions to Form 10-Q and Article 10 of Regulation S-X, and therefore do not include all the information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 14, 2022. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for future periods. Amounts presented in the consolidated financial statements and footnote tables are rounded and presented in thousands of dollars except per-share amounts, which are presented in dollars. In the narrative footnote discussion, amounts are rounded to thousands and presented in dollars. In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying consolidated financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation. Principles of consolidation - The consolidated financial statements include the accounts of the Company, the Bank and the LLC. All significant intercompany accounts have been eliminated in consolidation. Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of the Company’s deferred tax assets, and fair value of financial instruments. Actual results could differ significantly from those estimates. Subsequent Events - The Company has evaluated events and transactions subsequent to March 31, 2022 for potential recognition or disclosure. 9 Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements may have been reclassified to conform to the current presentation with no effect on stockholders’ equity or net income. Note 2 - Recent accounting standards Recent Accounting Guidance Not Yet Effective In September 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. The Company’s implementation of ASU 2016-13 will be effective January 1, 2023. The Company is actively assessing the data and the model needs and is evaluating the impact of adopting the amendment. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period, January 2023, in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting , to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations. 10 Note 3 - Investment Securities The amortized cost and fair values of investments in debt securities at the date indicated are as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in thousands) March 31, 2022 Available-for-sale U.S. Treasury securities $ 134,923 $ 1 $ ( 350 ) $ 134,574 U.S. Agency collateralized mortgage obligations 62 - - 62 U.S. Agency residential mortgage-backed securities 2 - - 2 Municipal bonds 252 1 - 253 Total available-for-sale securities 135,239 2 ( 350 ) 134,891 Held-to-maturity U.S. Agency residential mortgage-backed securities 1,286 1 ( 23 ) 1,264 Total investment securities $ 136,525 $ 3 $ ( 373 ) $ 136,155 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in thousands) December 31, 2021 Available-for-sale U.S. Treasury securities $ 34,999 $ - $ ( 1 ) $ 34,998 U.S. Agency collateralized mortgage obligations 68 2 - 70 U.S. Agency residential mortgage-backed securities 3 - - 3 Municipal bonds 252 4 - 256 Total available-for-sale securities 35,322 6 ( 1 ) 35,327 Held-to-maturity U.S. Agency residential mortgage-backed securities 1,296 52 - 1,348 Total investment securities $ 36,618 $ 58 $ ( 1 ) $ 36,675 The amortized cost and fair value of debt securities at March 31, 2022, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers or the underlying borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date. Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value (dollars in thousands) March 31, 2022 Amounts maturing in One year or less $ 34,978 $ 34,973 $ - $ - After one year through five years 100,197 99,854 - - 135,175 134,827 - - U.S. Agency residential mortgage-backed securities and collateralized mortgage obligations 64 64 1,286 1,264 $ 135,239 $ 134,891 $ 1,286 $ 1,264 Investments in debt securities with an amortized cost of $ 35.5 million and $ 36.0 million at March 31, 2022 and December 31, 2021, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. During the quarter 11 ended March 31, 2022 , five U.S. Treasury securities w ere purchased for $ 135.0 millio n for their higher yielding return compared to cash on deposit with other banks , and $ 35.0 million in U.S. Treasury securities matured during the quarter ended March 31, 2022. There were no sales of securities during the three months ended March 31, 2022 or 2021. There were eight securities with a $ 373,000 unrealized loss as of March 31, 2022. There were four securities in an unrealized loss position as of December 31, 2021. The following table shows the investments’ gross unrealized losses and fair values, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position: Less Than 12 Months 12 Months or Greater Total Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses Fair Value Gross Unrealized Losses (dollars in thousands) March 31, 2022 Available-for-sale U.S. Treasury securities $ 119,581 $ 350 $ - $ - $ 119,581 $ 350 Total available-for-sale securities 119,581 350 - - 119,581 350 Held-to-maturity U.S. Agency residential mortgage-backed securities 833 23 - - 833 23 Total investment securities $ 120,414 $ 373 $ - $ - $ 120,414 $ 373 Management has evaluated the above securities and does not believe that any individual unrealized loss as of March 31, 2022, represents an other-than-temporary impairment (“OTTI”). Unrealized losses have not been recognized into income because management does not intend to sell and does not expect it will be required to sell the investments. The decline is largely due to changes in market conditions and interest rates, rather than credit quality. The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve. Management believes there is a high probability of collecting all contractual amounts due, because the majority of the securities in the portfolio are backed by government agencies or government sponsored enterprises. However, a recovery in value may not occur for some time, if at all, and may be delayed for greater than the one year time horizon or perhaps even until maturity. Note 4 - Loans and Allowance for Loan Losses The composition of the loan portfolio is as follows as of the periods indicated: March 31, December 31, 2022 2021 Commercial and industrial loans $ 394,323 $ 419,060 Real estate loans: Construction, land, and land development 208,108 183,594 Residential real estate 268,716 204,389 Commercial real estate 889,483 835,587 Consumer and other loans 210,343 108,871 Gross loans receivable 1,970,973 1,751,501 Net deferred origination fees and premiums ( 6,764 ) ( 8,766 ) Loans receivable $ 1,964,209 $ 1,742,735 Included in commercial and industrial loans are Paycheck Protection Program (“PPP”) loans of $ 47.5 million at March 31, 2022 and $ 111.8 million at December 31, 2021. PPP loans are 100 % guaranteed by the Small Business Administration (“SBA”). PPP loans had net deferred origination fees of $ 1.4 million as of March 31, 2022, and $ 3.6 million as of December 31, 2021. Also included in commercial and industrial loans as of March 31, 2022 and December 31, 2021, is $ 218.7 million and $ 202.9 million, respectively in capital call lines, provided to venture capital firms through one of our BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards by our BaaS client and the underwriting is reviewed and approved by the Bank on every line. 12 Included in consumer and other loans are overdrafts of $ 578,000 and $ 1.3 million at March 31, 2022 and December 31 , 2021 , respectively. The Company has pledged loans totaling $ 179.2 million and $ 183.5 million at March 31, 2022 and December 31, 2021, respectively, for borrowing lines at the FHLB and FRB. The balance of SBA and United States Department of Agriculture (“USDA”) loans and participations sold and serviced for others totaled was $ 17.7 million and $ 19.3 million at March 31, 2022 and December 31, 2021, respectively. The balance of Main Street Lending Program (“MSLP”) loans participated and serviced totaled $ 58.0 million and $ 56.3 million at March 31, 2022 and December 31, 2021, respectively, with $ 3.1 million and $ 4.8 million in MSLP loans on the balance sheet and included in commercial and industrial loans at March 31, 2022, and December 31, 2021, respectively. The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans with remaining balances totaled $ 11.8 million and $ 12.8 million as of March 31, 2022 and December 31, 2021, respectively. Unamortized premiums totaled $ 201,000 and $ 223,000 as of March 31, 2022 and December 31, 2021, respectively, and are amortized into interest income over the life of the loans. The Company has purchased participation loans with remaining balances totaling $ 26.1 million and $ 27.9 million as of March 31, 2022 and December 31, 2021, respectively. The Company purchased loans from a CCBX partner, at par, through agreements with that CCBX partner, and those loans had a remaining balance of $ 111.5 million as of March 31, 2022 and $ 59.7 million as of December 31, 2021. The Company recorded a receivable from the seller, which is secured by small dollar consumer and business loans. As of March 31, 2022, $ 107.5 million is included in consumer and other loans and $ 4.0 million are in commercial and industrial loans, compared to $ 59.7 million in consumer and other loans as of December 31, 2021. The following is a summary of the Company’s loan portfolio segments: Commercial and industrial loans – Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment of businesses located generally in the Company’s primary market area and capital calls on venture and investment funds. Loan types include PPP loans, revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. Also included in commercial and industrial loans are loans to other financial institutions. Additionally, the Company issues letters of credit on behalf of its customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers. For the three months ended March 31, 2022, $ 218.7 million in CCBX capital call lines are included in commercial and industrial loans compared to $ 202.9 million at December 31, 2021. Capital call lines are provided to venture capital firms. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line/loan. Construction, land and land development loans – The Company originates loans for the construction of 1-4 family, multifamily, and Commercial Real Estate (“CRE”) properties in the Company’s market area. Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. The Company occasionally originates land loans for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower’s ability to pay and the inability of the Company to recover its investment due to a material decline in the fair value of the underlying collateral. Residential real estate loans – Residential real estate includes various types of loans for which the Company holds real property as collateral. Included in this segment are multi-family loans, first and second lien single family loans, which the Company occasionally purchases to diversify its loan portfolio, and rental portfolios secured by one-to-four family homes. The primary risks of residential 13 real estate loans include the borrower’s inability to pay, material decreases in the value of the collateral, and significant increases in interest rates which may make the loan unprofitable. For the three months ended March 31, 2022, $ 84.2 million in CCBX loans are included in residential real estate loans, compared to $ 36.9 million at December 31, 2021. Commercial real estate (includes owner occupied and nonowner occupied) loans – Commercial real estate loans include various types of loans for which the Company holds real property as collateral. We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans. The primary risks of commercial real estate loans include the borrower’s inability to pay, material decreases in the value of the collateralized real estate and significant increases in interest rates, which may make the real estate loan unprofitable. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Consumer and other loans – The community bank originates a limited number of consumer loans, generally for banking customers only, which consist primarily of home equity lines of credit, saving account secured loans, and auto loans. This loan category also includes overdrafts. Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying collateral For the three months ended March 31, 2022, $ 208.4 million in CCBX loans are included in consumer and other loans compared to $ 106.8 million at December 31, 2021. CCBX consumer loans include credit cards, consumer term loans and lines of credit. The following table illustrates an age analysis of past due loans as of the dates indicated: 30-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Recorded Investment 90 Days or More Past Due and Still Accruing (dollars in thousands) March 31, 2022 Commercial and industrial loans $ 92 $ 128 $ 220 $ 394,103 $ 394,323 $ 22 Real estate loans: Construction, land and land development 69 - 69 208,039 208,108 - Residential real estate 669 94 763 267,953 268,716 40 Commercial real estate - - - 889,483 889,483 - Consumer and other loans 8,554 2,099 10,653 199,690 210,343 2,099 $ 9,384 $ 2,321 $ 11,705 $ 1,959,268 $ 1,970,973 $ 2,161 Less net deferred origination fees and premiums ( 6,764 ) Loans receivable $ 1,964,209 14 30-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Recorded Investment 90 Days or More Past Due and Still Accruing (dollars in thousands) December 31, 2021 Commercial and industrial loans $ 259 $ 38 $ 297 $ 418,763 $ 419,060 $ - Real estate loans: Construction, land and land development - - - 183,594 183,594 - Residential real estate 809 94 903 203,486 204,389 39 Commercial real estate - - - 835,587 835,587 - Consumer and other loans 3,901 1,467 5,368 103,503 108,871 1,467 $ 4,969 $ 1,599 $ 6,568 $ 1,744,933 1,751,501 $ 1,506 Less net deferred origination fees and premiums ( 8,766 ) Loans receivable $ 1,742,735 The following table is a summary of information pertaining to impaired loans as of the period indicated. CCBX loans that are reported using pool accounting and are not subject to impairment analysis, and therefore not included in this table. Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Total Recorded Investment Related Allowance (dollars in thousands) March 31, 2022 Commercial and industrial loans $ 139 $ 1 $ 129 $ 130 $ 101 Real estate loans: Residential real estate 69 54 - 54 - Total $ 208 $ 55 $ 129 $ 184 $ 101 December 31, 2021 Commercial and industrial loans $ 173 - $ 166 $ 166 $ 132 Real estate loans: Residential real estate 69 55 - 55 - Total $ 242 $ 55 $ 166 $ 221 $ 132 The following tables summarize the Company’s average recorded investment and interest income recognized on impaired loans by loan class for the three months ended March 31, 2022 and 2021: Three Months Ended March 31, 2022 March 31, 2021 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (dollars in thousands) Commercial and industrial loans $ 148 $ - $ 451 $ - Real estate loans Residential real estate 55 - 174 - Total $ 203 $ - $ 625 $ - The Company grants restructurings in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 15 100 % of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration. No loans were restructured in the three months ended March 31, 2022 and March 31, 2021 that qualified as TDRs. The Company has no commitments to loan additional funds to borrowers whose loans were classified as TDRs at March 31, 2022, as there were no outstanding TDRs at March 31, 2022. Pursuant to guidance from the federal bank regulatory agencies, the Company deferred or modified payments on existing loans to assist customers financially during the COVID-19 pandemic and economic shutdown. As of March 31, 2022 all deferred and modified loans during the COVID-19 pandemic have either returned to active status or paid off. In accordance with GAAP, the CARES Act, as amended by the Consolidated Appropriations Act, 2021, and interagency guidance issued on March 22, 2020 and April 7, 2020, these short-term modifications, made on a good faith basis in response to the COVID-19 pandemic to borrowers that were current prior to any relief, were not considered TDRs. Generally, the accrual of interest on community bank loans is discontinued when, in management’s opinion, the borrower may be unable to meet payments as they become due or when they are 90 days past due as to either principal or interest, unless they are well secured and in the process of collection. Installment/closed-end, and revolving/open-end consumer loans originated by CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively. For these loans, an allowance is recorded through provision expense for probable incurred losses. Any principal and interest outstanding on revolving/open-end loans at greater than 180 days past due is charged off against the allowance. Any accrued interest outstanding on installment/closed-end loans at 120 days past due is reversed against the accrued interest allowance. These consumer loans are reported out as substandard, 90+ days past due and still accruing. When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is removed, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual. An analysis of nonaccrual loans by category consisted of the following at the periods indicated: March 31, December 31, 2022 2021 Commercial and industrial loans $ 130 $ 166 Real estate loans: Residential real estate 54 55 Total nonaccrual loans $ 184 $ 221 Credit Quality and Credit Risk Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Company’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. Revolving (open-ended loans, such as credit cards) and installment (closed end) consumer loans originated by CCBX partners continue to accrue interest until they are charged-off at 180 days past due for revolving loans (primarily credit cards) and 120 days past due for installment loans (primarily unsecured loans to consumers). These consumer loans are reported out as 90+ days past due and still accruing, and are classified as substandard. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve. The Company also classifies some loans as Watch or Other Loans Especially Mentioned (“OLEM”). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans and are reported in the OLEM column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring. 16 Loans by credit quality risk rating are as follows as of the periods indicated: Pass Other Loans Especially Mentioned Sub- Standard Doubtful Total (dollars in thousands) March 31, 2022 Commercial and industrial loans $ 387,842 $ 6,262 $ 219 $ - $ 394,323 Real estate loans: Construction, land, and land development 208,108 - - - 208,108 Residential real estate 268,506 116 94 - 268,716 Commercial real estate 873,118 9,464 6,901 - 889,483 Consumer and other loans 208,244 - 2,099 - 210,343 $ 1,945,818 $ 15,842 $ 9,313 $ - 1,970,973 Less net deferred origination fees ( 6,764 ) Loans receivable $ 1,964,209 December 31, 2021 Commercial and industrial loans $ 416,642 $ 2,180 $ 238 $ - $ 419,060 Real estate loans: Construction, land, and land development 183,594 - - - 183,594 Residential real estate 204,173 122 94 - 204,389 Commercial real estate 824,676 10,911 - - 835,587 Consumer and other loans 107,404 - 1,467 - 108,871 $ 1,736,489 $ 13,213 $ 1,799 $ - 1,751,501 Less net deferred origination fees ( 8,766 ) Loans receivable $ 1,742,735 Allowance for Loan Losses The Company’s ALLL covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder of the loan portfolio. The ALLL for the community bank is prepared using the information provided by the Company’s credit review process and our historical loss data, together with data from peer institutions and economic information gathered from published sources. The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated from the community bank’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances. CCBX loans have a higher level of expected losses than our community bank loans which is reflected in the factors for the allowance for loan losses. Estimated loss rates for CCBX loans vary by partner, and might be based on actual partner experience, realized losses or losses for comparable products or industry averages. Many of the agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans. When the provision for loan losses is recorded, a recovery receivable is also recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement). Incurred losses are recorded in the allowance for loan losses, and as the credit enhancement recoveries are received from the CCBX partner, the recovery receivable is relieved. If a CCBX lending partner is unable to fulfill their contractual obligations under the credit enhancement, then the Bank would be exposed to additional loan losses as a result of this counterparty risk and would have to absorb any loan losses associated with the CCBX partner that cannot fulfill its contractual obligations. 17 The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three months ended March 31, 2022: Commercial and Industrial Construction, Land, and Land Development Residential Real Estate Commercial Real Estate Consumer and Other Unallocated Total (dollars in thousands) Three Months Ended March 31, 2022 ALLL balance, December 31, 2021 $ 3,221 $ 6,984 $ 4,598 $ 6,590 $ 7,092 $ 147 $ 28,632 Provision for loan losses or (recapture) 296 608 1,160 ( 1,273 ) 10,823 1,328 12,942 3,517 7,592 5,758 5,317 17,915 1,475 41,574 Loans charged-off ( 5 ) - - - ( 2,803 ) - ( 2,808 ) Recoveries of loans previously charged-off 2 - - - 2 - 4 Net (charge-offs) recoveries ( 3 ) - - - ( 2,801 ) - ( 2,804 ) ALLL balance, March 31, 2022 $ 3,514 $ 7,592 $ 5,758 $ 5,317 $ 15,114 $ 1,475 $ 38,770 As of March 31, 2022 ALLL amounts allocated to Individually evaluated for impairment $ 101 $ - $ - $ - $ - $ - $ 101 Collectively evaluated for impairment 3,413 7,592 5,758 5,317 15,114 1,475 38,669 ALLL balance, March 31, 2022 $ 3,514 $ 7,592 $ 5,758 $ 5,317 $ 15,114 $ 1,475 $ 38,770 Loans individually evaluated for impairment $ 130 $ - $ 54 $ - $ - $ 184 Loans collectively evaluated for impairment 394,193 208,108 268,662 889,483 210,343 1,970,789 Loan balance, March 31, 2022 $ 394,323 $ 208,108 $ 268,716 $ 889,483 $ 210,343 $ 1,970,973 Three Months Ended March 31, 2021 ALLL balance, December 31, 2020 $ 3,353 $ 3,545 $ 3,410 $ 7,810 $ 127 $ 1,017 $ 19,262 Provision for loan losses or (recapture) 43 437 ( 239 ) 143 ( 19 ) ( 8 ) 357 3,396 3,982 3,171 7,953 108 1,009 19,619 Loans charged-off ( 14 ) - - - ( 4 ) - ( 18 ) Recoveries of loans previously charged-off 5 - - - 4 - 9 Net (charge-offs) recoveries ( 9 ) - - - - - ( 9 ) ALLL balance, March 31, 2021 $ 3,387 $ 3,982 $ 3,171 $ 7,953 $ 108 $ 1,009 $ 19,610 As of March 31, 2021 ALLL amounts allocated to Individually evaluated for impairment $ 118 $ - $ - $ - $ - $ - $ 118 Collectively evaluated for impairment 3,269 3,982 3,171 7,953 108 1,009 19,492 ALLL balance, March 31, 2021 $ 3,387 $ 3,982 $ 3,171 $ 7,953 $ 108 $ 1,009 $ 19,610 Loans individually evaluated for impairment $ 488 $ - $ 173 $ - $ - $ 661 Loans collectively evaluated for impairment 745,786 104,596 136,244 793,633 4,114 1,784,373 Loan balance, March 31, 2021 $ 746,274 $ 104,596 $ 136,417 $ 793,633 $ 4,114 $ 1,785,034 18 The following table summarizes the allocation of the ALLL attributed to various segments in the loan portfolio as of December 31, 2021. Commercial and Industrial Construction, Land, and Land Development Residential Real Estate Commercial Real Estate Consumer and Other Unallocated Total (dollars in thousands) As of December 31, 2021 ALLL amounts allocated to Individually evaluated for impairment $ 132 $ - $ - $ - $ - $ - $ 132 Collectively evaluated for impairment 3,089 6,984 4,598 6,590 7,092 147 28,500 ALLL balance, December 31, 2021 $ 3,221 $ 6,984 $ 4,598 $ 6,590 $ 7,092 $ 147 $ 28,632 Loans individually evaluated for impairment $ 166 $ - $ 55 $ - $ - $ 221 Loans collectively evaluated for impairment 418,894 183,594 204,334 835,587 108,871 1,751,280 Loan balance, December 31, 2021 $ 419,060 $ 183,594 $ 204,389 $ 835,587 $ 108,871 $ 1,751,501 Note 5 - Deposits The composition of consolidated deposits consisted of the following at the periods indicated: March 31, December 31, 2022 2021 Demand, noninterest bearing $ 838,044 $ 1,355,908 NOW and money market 1,516,546 789,709 Savings 106,364 103,956 Total core deposits 2,460,954 2,249,573 BaaS-brokered deposits 75,145 70,757 Time deposits less than $250,000 29,200 31,057 Time deposits $250,000 and over 11,171 12,400 Total deposits $ 2,576,470 $ 2,363,787 The following table presents the maturity distribution of time deposits as of March 31, 2022 (dollars in thousands): (dollars in thousands) Twelve months $ 31,225 One to two years 5,542 Two to three years 1,733 Three to four years 1,234 Four to five years 637 $ 40,371 Our CCBX partners originate deposits and these deposits were primarily noninterest bearing prior to the recent rate increase by the Federal Open Market Committee (“FOMC”). Many of these CCBX deposits became interest bearing during the quarter ended March 31, 2022, and were reclassified to interest bearing deposits from noninterest bearing deposits, when the FOMC raised rates 0.25 % in mid-March 2022. The amount of deposits that move to interest bearing will increase as rates are raised by the FOMC thereafter. Once the Fed Funds rate increases to 1.00 %, most of the CCBX noninterest bearing deposits will be interest bearing. Note 6 - Leases The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception. Operating lease right-of-use (“ROU”) assets represent a right to use an underlying asset for the contractual lease term. Operating lease liabilities represent an obligation to make lease payments arising from the lease. An operating lease ROU asset and operating lease liability will be recognized for any new operating leases at the commencement of the new lease. 19 The Company’s leases do not provide an implicit interest rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities. No leases renewed during the three months ended March 31, 2022. The Company’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Company’s lease agreements do not contain any residual value guarantees. Operating leases with terms of 12 months or less are not included in ROU assets and operating lease liabilities recorded in the Company’s consolidated balance sheets. Operating lease terms include options to extend when it is reasonably certain that the Company will exercise such options, determined on a lease-by-lease basis . As of March 31, 2022, the Company has one sublease that has not yet commenced. At March 31, 2022, lease expiration dates ranged from ten months to 22.9 years, with additional renewal options on certain leases typically ranging from 5 to 10 years . At March 31, 2022, the weighted average remaining lease term for the Company’s operating leases was 8.4 years. Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $ 346,000 and $ 341,000 , respectively, for the three months ended March 31, 2022 and 2021. Variable lease components, such as inflation adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities. The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at March 31, 2022: March 31, 2022 (dollars in thousands) April 1, 2022 to December 31, 2022 $ 962 2023 1,272 2024 864 2025 714 2026 719 2027 and thereafter 2,490 Total lease payments 7,021 Less: amounts representing interest 967 Present value of lease liabilities $ 6,054 The following table presents the components of total lease expense and operating cash flows for the three months ended March 31, 2022 and 2020: Three Months Ended March 31, March 31, 2022 2021 (dollars in thousands) Lease expense: Operating lease expense $ 320 $ 321 Variable lease expense 41 34 Total lease expense (1) $ 361 $ 355 Cash paid: Cash paid reducing operating lease liabilities $ 358 $ 352 (1) Included in net occupancy expense in the Condensed Consolidated Statements of Income (Unaudited). The Company entered into a five-year prepaid capital lease for ATM machines beginning October 1, 2021. The equipment is recorded as fixed assets on the Company’s balance sheet and depreciation expense is recognized on a straight-line basis over the term of the lease. Depreciation expense was $ 32,000 and $ 33,000 for the three months ended March 31, 2022 and 2021, respectively, with $ 448,000 remaining as of March 31, 2022. 20 Note 7 - Stock-Based Compensation - Stock Options and Restricted Stock The 2018 Coastal Financial Corporation Omnibus Plan (2018 Plan) authorizes the Company to grant awards, including but not limited to, stock options, restricted stock units, and restricted stock awards, to eligible employees, directors or individuals that provide service to the Company, up to an aggregate of 500,000 shares of common stock. On May 24, 2021, the Company’s shareholders approved the First Amendment to the 2018 Plan, which increased the authorized plan shares by 600,000 . The 2018 Plan replaces both the 2006 Plan and the Directors’ Stock Bonus Plan (2006 Plan). Existing awards will vest under the terms granted and no further awards will be granted under these prior plans. Shares available to be granted under the 2018 plan were 615,630 at March 31, 2022. Stock Option Awards The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model. Expected volatilities are based on historical volatility of the Company’s stock and other factors. The Company uses the vesting term and contractual life to determine the expected life. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense related to unvested stock option awards is reversed at date of forfeiture. There were no new stock options granted in the three months ended March 31, 2022. A summary of stock option activity under the 2018 Plan and 2006 Plan during the three months ended March 31, 2022: Options Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (dollars in thousands, except per share amounts) Outstanding at December 31, 2021 694,519 $ 7.79 4.0 $ 29,744 Granted - - Exercised ( 26,660 ) $ 7.11 Forfeited or expired ( 800 ) 7.63 Outstanding at March 31, 2022 667,059 $ 7.79 3.8 $ 25,323 Vested or expected to vest at March 31, 2022 667,059 $ 7.79 3.8 $ 25,323 Exercisable at March 31, 2022 381,947 $ 6.85 2.9 $ 14,856 The total or aggregate intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three months ended March 31, 2022 and 2021, was $ 1.1 million and $ 357,000 , respectively. As of March 31, 2022, there was $ 1.4 million of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan. Total unrecognized compensation costs are adjusted for unvested forfeitures. The Company expects to recognize that cost over a weighted-average period of approximately 4.8 years. Compensation expense recorded related to stock options was $ 120,000 and $ 89,000 for the three months ended March 31, 2022 and 2021, respectively. Restricted Stock Units In January 2022, the Company granted 53,721 restricted stock units under the 2018 Plan to employees, which vest ratably over 4 years. In February 2022, the Company granted 150 restricted stock units under the 2018 Plan to an employee, which vest ratably over 10 years. Restricted stock units provide for an interest in Company common stock to the recipient, the underlying stock is not issued until certain conditions are met. Vesting requirements include time-based, performance-based, or market-based conditions. Recipients of restricted stock units do not pay any cash consideration to the Company for the units and the holders of the restricted units do not have voting rights. The fair value of time-based and performance-based units is equal to the fair market value of the Company’s common stock on the grant date. The fair value of market-based units is estimated on the grant date using the Monte Carlo simulation model. 21 Compensation expense is recognized over the vesting period that the awards are based. Restricted stock units are nonparticipating securities. As of March 31, 2022, there was $ 7.5 million of total unrecognized compensation cost related to nonvested restricted stock units. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 5.6 years. Compensation expense recorded related to restricted stock units was $ 374,000 and $ 101,000 for the three months ended March 31, 2022 and 2021, respectively. A summary of the Company’s nonvested shares at March 31, 2022 and changes during the three month period is presented below: Nonvested shares Shares Weighted- Average Grant Date Fair Value Total or Aggregate Intrinsic Value (dollars in thousands, except per share amounts) Nonvested shares at December 31, 2021 269,844 $ 21.70 $ 7,803 Granted 53,871 $ 49.19 Forfeited ( 1,261 ) $ 19.00 Vested ( 25,788 ) $ 19.90 Nonvested shares at March 31, 2022 296,666 $ 26.86 $ 5,603 Restricted Stock Awards Employees There were no new restricted stock awards granted in the three months ended March 31, 2022. The fair value of restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities. As of March 31, 2022, there was $ 53,000 of total unrecognized compensation cost related to nonvested restricted stock awards. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 5.8 years. Compensation expense recorded related to restricted stock awards was $ 2,000 and $ 127,000 for the three months ended March 31, 2022 and 2021, respectively. Director’s Stock Compensation Under the 2018 Plan, eligible directors are granted stock with a total market value of $ 15,000 , and the Board Chair is granted stock with a total market value of $ 25,000 . Stock is granted as of each annual meeting date and will cliff vest one day prior to the next annual meeting date. During the vesting period, the grants are considered participating securities. No new shares were granted during the three months ended March 31, 2022. On May 24, 2021, As of March 31, 2022, there was $ 20,000 of total unrecognized compensation expense related to director restricted stock awards. Director compensation expense recorded related to the 2018 Plan totaled $ 38,000 and $ 46,000 for the three months ended March 31, 2022 and 2021, respectively. 22 A summary of the Company’s nonvested shares at March 31, 2022 and changes during the three-month period is presented below: Nonvested shares Shares Weighted- Average Grant Date Fair Value Total or Aggregate Intrinsic Value (dollars in thousands, except per share amounts) Nonvested shares at December 31, 2021 10,203 $ 23.78 $ 274 Granted - $ - Forfeited - $ - Vested ( 2,467 ) $ 17.81 Nonvested shares at March 31, 2022 7,736 $ 24.82 $ 175 Note 8 - Fair Value Measurements The following tables present estimated fair values of the Company’s financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated: March 31, 2022 Fair Value Measurements Using Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 (dollars in thousands) Financial assets Cash and due from banks $ 32,705 $ 32,705 $ 32,705 $ - $ - Interest earning deposits with other banks 649,404 649,404 649,404 - - Investment securities 136,177 136,155 134,574 1,581 - Other investments 9,931 9,931 - 7,259 2,672 Loans receivable 1,925,439 1,892,105 - - 1,892,105 Accrued interest receivable 8,824 8,824 - 8,824 - Financial liabilities Deposits $ 2,576,470 2,575,891 $ - $ 2,575,891 $ - Subordinated debt 24,306 20,143 - 20,143 - Junior subordinated debentures 3,587 2,660 - 2,660 - Accrued interest payable 6,054 6,054 - 6,054 - December 31, 2021 Fair Value Measurements Using Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 (dollars in thousands) Financial assets Cash and due from banks $ 14,496 $ 14,496 $ 14,496 $ - $ - Interest earning deposits with other banks 798,665 798,665 798,665 - - Investment securities 36,623 36,675 34,998 1,677 - Other investments 8,478 8,478 - 6,156 2,322 Loans receivable, net 1,714,103 1,686,124 - - 1,686,124 Accrued interest receivable 8,105 8,105 - 8,105 - Financial liabilities Deposits $ 2,363,787 $ 2,363,624 $ - $ 2,363,624 $ - FHLB advances 24,999 24,447 - 24,447 - Subordinated debt 24,288 21,891 - 21,891 - Junior subordinated debentures 3,586 2,771 - 2,771 - Accrued interest payable 357 357 - 357 - 23 The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the accounting standard requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy: • Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. • Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data. • Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from nonbinding single dealer quotes not corroborated by observable market data. The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for certain financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Items measured at fair value on a recurring basis – The following fair value hierarchy table presents information about the Company’s assets that are measured at fair value on a recurring basis at the dates indicated: Level 1 Level 2 Level 3 Total Fair Value (dollars in thousands) March 31, 2022 Available-for-sale U.S. Treasury securities $ 134,574 $ - $ - $ 134,574 U.S. Agency collateralized mortgage obligations - 62 - 62 U.S. Agency residential mortgage-backed securities - 2 - 2 Municipals - 253 - 253 $ 134,574 $ 317 $ - $ 134,891 December 31, 2021 Available-for-sale U.S. Treasury securities $ 34,998 $ - $ - $ 34,998 U.S. Agency collateralized mortgage obligations - 70 - 70 U.S. Agency residential mortgage-backed securities - 3 - 3 Municipals - 256 - 256 $ 34,998 $ 329 $ - $ 35,327 The following methods were used to estimate the fair value of the class of financial instruments above: Investment securities - The fair value of securities is based on quoted market prices, pricing models, quoted prices of similar securities, independent pricing sources, and discounted cash flows. Limitations: The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2022 and December 31, 2021. The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein. 24 Assets measured at fair value using significant unobservable inputs (Level 3) The following table presents the carrying value of equity securities without readily determinable fair values, as of March 31, 2022, with adjustments recorded during the periods presented for those securities with observable price changes, if applicable. For the Three Months Ended March 31, (Dollars in thousands) 2022 2021 Carrying value, beginning of period $ 2,322 $ 850 Addition of equity securities 350 - Upward carrying value changes - - Carrying value, end of period $ 2,672 $ 850 The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated: Valuation Technique Unobservable Inputs March 31, 2022 Weighted Average Rate December 31, 2021 Weighted Average Rate Impaired loans Collateral valuations Discount to appraised value 8 % 8 % Items measured at fair value on a nonrecurring basis – The following table presents financial assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at the dates indicated: Level 1 Level 2 Level 3 Total Fair Value (dollars in thousands) March 31, 2022 Impaired loans $ - $ - $ 184 $ 184 Equity securities 2,672 2,672 Total $ - $ - $ 2,856 $ 2,856 December 31, 2021 Impaired loans $ - $ - $ 221 $ 221 Equity securities 2,322 2,322 Total $ - $ - $ 2,543 $ 2,543 The amounts disclosed above represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported on. Impaired loans - A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted cash expected future cash flows. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are evaluated quarterly to determine if valuation adjustments should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impairment amount. These valuation adjustments are considered nonrecurring fair value adjustments. Equity securities – The Company measures equity securities without readily determinable fair values at cost less impairment (if any), plus or minus observable price changes from an identical or similar investment of the same issuer, with price changes recognized in earnings. 25 Note 9 - Earnings Per Common Share The following is a computation of basic and diluted earnings per common share at the periods indicated: Three Months Ended March 31, 2022 March 31, 2021 (dollars in thousands, except per share data) Net Income $ 6,230 $ 6,018 Basic weighted average number common shares outstanding 12,898,746 11,960,772 Dilutive effect of equity-based awards 576,591 432,721 Diluted weighted average number common shares outstanding 13,475,337 12,393,493 Basic earnings per share $ 0.48 $ 0.50 Diluted earnings per share $ 0.46 $ 0.49 Antidilutive stock options and restricted stock outstanding 154,871 181,084 Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings, however the difference in the two-class method was not significant. Note 10 – Segment Reporting As defined in ASC 280, Segment Reporting , an operating segment is a component of an enterprise that engages in business activities from which it may earn revenues and incur expenses, whose operating results are regularly reviewed by the enterprise’s chief operating decision makers to make decisions about resources to be allocated to the segment and assess its performance, and for which discrete financial information is available. We evaluate performance based on an internal performance measurement accounting system, which provides line of business results. This system uses various techniques to assign balance sheet and income statement amounts to the business segments, including allocations of income and expense. A primary objective of this measurement system and related internal financial reporting practices are to produce consistent results that reflect the underlying financial impact of the segments on the Company and to provide a basis of support for strategic decision making. The accounting policies applicable to our segments are those that apply to our preparation of the accompanying Consolidated Financial Statements. Based on these criteria, we have identified two segments: The community bank and CCBX. Income and expenses that are specific to CCBX are recorded to the CCBX segment. Additionally, certain indirect expenses are allocated to CCBX utilizing various metrics, such as number of employees, utilization of space, and allocations based on loan and deposit balances. Included in noninterest expense for the bank is administrative overhead/expenses from which both the community bank and CCBX benefit. Summarized financial information concerning the Company's reportable segments and the reconciliation to the consolidated financial results is shown in the following tables for the periods indicated: March 31, 2022 December 31, 2021 Bank CCBX Total Bank CCBX Total (dollars in thousands) Total assets $ 2,296,670 $ 537,080 $ 2,833,750 $ 2,282,514 $ 353,003 $ 2,635,517 Total loans receivable $ 1,448,820 $ 515,389 $ 1,964,209 $ 1,396,060 $ 346,675 $ 1,742,735 Allowance for loan losses $ ( 20,643 ) $ ( 18,127 ) $ ( 38,770 ) $ ( 20,299 ) $ ( 8,333 ) $ ( 28,632 ) Total deposits $ 1,677,004 $ 899,466 $ 2,576,470 $ 1,647,529 $ 716,258 $ 2,363,787 26 Three months ended March 31, 2022 Three months ended March 31, 2021 Bank CCBX Total Bank CCBX Total (dollars in thousands) Net interest income $ 17,394 $ 11,874 $ 29,268 $ 16,926 $ 389 $ 17,315 Provision for loan losses $ 344 $ 12,598 $ 12,942 $ 320 $ 37 $ 357 Noninterest income (1) $ 1,804 $ 20,182 $ 21,986 $ 2,036 $ 948 $ 2,984 Noninterest expense $ 13,565 $ 16,850 $ 30,415 $ 11,140 $ 1,212 $ 12,352 (1) For the three months ended March 31, 2022, CCBX noninterest income includes credit enhancement recovery of $ 13.1 million, servicing and other BaaS fees of $ 1.7 million, fraud recovery of $ 4.6 million, reimbursement of expenses of $ 372,000 , interchange income of $ 432,000 , and other of $ 69,000 . For the three months ended March 31, 2021, CCBX noninterest income includes servicing and other BaaS fees of $ 730,000 , reimbursement of expenses of $ 183,000 and interchange income of $ 35,000 . 27