What changed in this filing

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Item 2. Management’s Discussion and Analysis

2021-05-07 compared with 2020-11-06 · 420 added, 630 removed, 638 unchanged (62% of the section changed)

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We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County.

We focus 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.

We currently operate 15 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and three of which are located in neighboring counties (one in King County and two in Island County).

The Bank also provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service providers to offer their customers banking services and expects to introduce a digital bank offering in collaboration with Google in 2021.

As of September 30, 2020, we had total assets of $1.75 billion, total gross loans of $1.51 billion, total deposits of $1.36 billion and total shareholders’ equity of $135.2 million.

The primary focus of the Bank is on providing a full range of banking products and services to small and medium sized businesses, professionals, and individuals throughout the greater Puget Sound region in the state of Washington.

We currently operate 14 full-service banking locations as of May 7, 2021, 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 Bank announced the sale of its Freeland Branch (Island County) in February 2021, and the sale closed on April 30, 2021.

The CCBX division provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services.

In addition, we expect to introduce a digital bank offering, through our CCDB division, in collaboration with Google.

As of March 31, 2021, we had total assets of $2.03 billion, total gross loans of $1.77 billion, total deposits of $1.67 billion and total shareholders’ equity of $146.7 million.

The following discussion and analysis presents our financial condition and results of operations on a consolidated basis.

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We place secondary reliance on wholesale funding, primarily borrowings from the Federal Home Loan Bank (“FHLB”).

We are utilizing the Paycheck Protection Program Liquidity Facility (“PPPLF”), which provides an additional source of low cost funding for the PPP loans, with a contractual interest rate of 0.35%.

The PPPLF borrowings are collateralized by Paycheck Protection Program (“PPP”) loans and must be paid down as the PPP loans are forgiven or paid down by customers.

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.

We are utilizing the Paycheck Protection Program Liquidity Facility (“PPPLF”), which provides an additional source of low cost funding for the Paycheck Protection Program (“PPP”) loans, with a contractual interest rate of 0.35%.

The PPPLF borrowings are collateralized by PPP loans and must be paid down as PPP loans are forgiven or paid down by customers.

Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, brokered deposits, which allows us to obtain deposits from sources that do not have a relationship with the Bank and can be obtained through certificate of deposit listing services, via the internet or through other advertising methods, or a one-way buy through an insured cash sweep (“ICS”) account, which allows us to obtain funds from other institutions that have deposited funds through ICS.

Our largest expenses are salaries and related employee benefits, provision for loan losses, interest on deposits and borrowings, occupancy and data processing.

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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 PPP, which is a stimulus response to the potential economic impacts of COVID-19, and its purpose is to provide forgivable loans to smaller businesses that use the proceeds of the loans for payroll and certain other qualifying expenses.

The Small Business Administration ("SBA") manages and backs the PPP.

Among other things, the statute created the PPP, which is a stimulus response to the potential economic impacts of the COVID-19 pandemic.

The purpose of the PPP is to provide forgivable loans to smaller businesses, sole proprietorships, independent contractors, and self-employed individuals that use the proceeds of the loans for payroll and certain other qualifying expenses.

The Small Business Administration (SBA) manages the PPP.

If a loan is fully forgiven, the SBA will repay the lending bank in full.

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If the borrower defaults, the loan is guaranteed by the SBA.

The PPP program closed to new loan applicants on August 8, 2020.

We accepted and processed requests for existing and new customers for the duration of the program.

Deferral on PPP payments was extended as we await final guidance on these loans;

however, we have begun accepting applications from customers for loan forgiveness.

We accepted and processed applications for the duration of the initial PPP loan program, which closed for new applicants on August 8, 2020.

The Consolidated Appropriations Act, 2021, enacted on December 27, 2020, appropriated additional funding to the PPP and permitted certain PPP borrowers to make “second draw” loans.

The American Rescue Plan Act of 2021, enacted on March 11, 2021, expanded the eligibility criteria for both first and second draw PPP loans and revised the exclusions from payroll costs for purposes of loan forgiveness.

The PPP Extension Act of 2021, enacted on March 25, 2021, extended the PPP through May 31, 2021.

The PPP resumed on January 19, 2021 (known as “round three” of the PPP), and we have been accepting and processing applications since that time.

As of March 31, 2021, we have funded $283.6 million, representing 2,368 customers, in this latest round of PPP loans, consisting of $23.6 million in new PPP applications for first draw loans and $260.0 million in second draw loans for small businesses that previously received PPP funds.

Net deferred fees on these loans total $11.4 million as of March 31, 2021, and will be recognized in interest income in future periods.

PPP loans originated in 2021 are five-year loans.

Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower's loan forgiveness amount to the lender.

If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness (either 8 weeks or 24 weeks).

We are accepting applications from customers for loan forgiveness and during the three months ended March 31, 2021 we have received $105.6 million in forgiveness or principal paydowns.

To obtain loan forgiveness, a PPP borrower must submit a forgiveness application to us, which we review and submit to the SBA.

We expect that the pace of forgiveness of PPP loans will be robust in the second quarter 2021 through the third quarter of 2021 and then start to slow in the fourth quarter of 2021.

Legislation extended the initial payment deferral period on PPP loans originated in 2020, and PPP borrowers with two-year loans can work with their lender to extend their loan to a five year maturity, which we anticipate could be a popular approach for customers with PPP loans that are not eligible for forgiveness.

The Company's Preparations and Responses to COVID-19 Pandemic

As part of its ongoing risk preparation and mitigation efforts, the Company had developed a detailed plan and action measures related to a possible pandemic scenario.

This pandemic plan was implemented on March 12, 2020 and continued through the third quarter and into fourth quarter of 2020.

This pandemic plan was implemented on March 12, 2020 and continued through the first quarter of 2021.

The Company carefully executed the plan with limited operational disruptions, with attention to ensure continued customer support, and with the utmost care to safeguard employees, customers and vendors.

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Dispersed workforce throughout facilities in order to maximize social distancing protocols, including successful employment of remote work solutions for many employees.

Continued participation in the SBA PPP with funded loans outstanding of $452.8 million, as of September 30, 2020.

Continued participation in the SBA PPP with funded loans outstanding of $543.8 million, as of March 31, 2021.

Actively engaged borrowers and other businesses in discussion to identify short-term cash flow and other financial needs, and restructured payments on existing loans to alleviate financial hardship per regulatory guidance.

As of October 31, 2020, $9.2 million, or 10 loans, remain on deferred or modified payment status.

Pledged 820 PPP loans, or $202.6 million as of September 30, 2020, which provides an additional source of funding for the PPP loans, through the PPPLF.

As of March 31, 2021, $13.3 million, or three loans, were on deferred or modified payment status.

Pledged 448 PPP loans, or $158.5 million as of March 31, 2021, through the PPPLF, which provides an additional source of funding for the PPP loans.

The borrowings must be paid down as PPP loan amounts are forgiven or when the customers pay their loans down.

PPPLF is a low cost source of funding and liquidity for PPP loans, with an interest rate of 0.35%, and favorable capital treatment.

Enhanced credit monitoring on loan segments that have been most impacted by COVID-19, monitoring and tracking loan payment deferrals and customer liquidity.

Majority of Washington State, including Snohomish County, migrated to Phase 2 in early June, after spending most of the second quarter of 2020 in Phase 1 of Washington State’s 4 phase approach to re-opening businesses.

We anticipate remaining in Phase 2 for the foreseeable future.

Phase 2 provides:

Gatherings of no more than 5 people outside one’s household per week

Travel to counties that are in other phases of reopening to participate in non-essential activities is not allowed

The PPPLF is a low cost source of funding and liquidity for PPP loans, with an interest rate of 0.35%, and favorable regulatory capital treatment.

Enhanced credit monitoring on loan segments that have been most impacted by the COVID-19 pandemic, monitoring and tracking loan payment deferrals and customer liquidity.

As of March 31, 2021, all of Washington State was in Phase 3 of Washington State’s Healthy Washington – Roadmap to Recovery.

Phase 3 is subject to the following guidance:

Social and at home indoor gatherings of no more than 10 people outside one’s household

Social and at home outdoor gatherings of no more than 50 people

Opens certain businesses with social distancing and capacity restrictions

Professional services -remote work strongly encouraged, 50% capacity otherwise

Indoor and outdoor entertainment establishments with capacity restrictions

Refreshed and analyzed the Company's liquidity, funding and capital stress forecasts and risk assumptions.

During the second and third quarters of 2020, focus was placed on helping the small businesses in our communities through the PPP.

These loans have had a significant impact on our financial statements for the quarter ended September 30, 2020 and will continue to impact our results in the future.

Throughout this discussion, we will address the impact of these loans, including borrowings received through PPPLF to help fund these loans and to aid in liquidity, increased customer deposit accounts from unused disbursements, and earnings and expenses related to these activities.

During the quarter ended March 31, 2021, focus was placed on helping the small businesses in our communities through the PPP.

These loans have had a significant impact on our communities and financial statements for the quarter ended March 31, 2021 and will continue to impact our results in the future.

Throughout this discussion, we will address the impact of these loans, which include borrowings received through PPPLF to help fund these loans and to provide liquidity, increased customer deposit accounts from unused disbursements, and earnings and expenses related to these activities.

Any estimated adjusted ratios that exclude the impact of this activity are non-U.S.

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

The table below summarizes key information regarding the PPP loans as of the period indicated:

As of September 30, 2020

LIBOR Transition

On March 5, 2021, the United Kingdom’s Financial Conduct Authority, which regulates LIBOR, confirmed that the publication of most LIBOR term rates will end on June 30, 2023 (excluding 1-week U.S.

LIBOR and 2-month U.S.

LIBOR, the publication of which will end on December 31, 2021).

Additionally, on April 6, 2021, New York Governor Cuomo signed into law legislation that provides for the substitution of an alternative reference rate, the Secured Overnight Financing Rate, in any LIBOR-based contract governed by New York state law that does not include clear fallback language, once LIBOR is discontinued.

The Federal Reserve and other federal banking agencies have continued to encourage banks to transition away from LIBOR as soon as practicable.

For more information on the Company’s approach to LIBOR transition planning, please see the risk factors discussed in the Company’s annual report on Form 10-K for the year ended December 31, 2020.

The table below summarizes the total PPP loans originated and total net deferred fees on all PPP loans originated in rounds in 2020 and 2021:

Total PPP Loan Origination

(Dollars in thousands;

Loans Originated

Net deferred fees

The table below summarizes key information regarding the current position of PPP loans originated in 2020 as of the period indicated:

Round 1 and 2 - Originated in 2020

Original Loan Size

As of March 31, 2021

$50,0000.01 -

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Total principal, net of deferred

Weighted average maturity

Number of loans:

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Percent of total

Comparison of Operating Results for the Three Months Ended September 30, 2020 and September 30, 2019

Forgiveness/Payoffs/Paydowns in Quarter Ended March 31, 2021, net

Deferred fee recognized

The table below summarizes key information regarding the current position of PPP loans originated in 2021 as of the period indicated:

Round 3 - Originated in 2021

Original Loan Size

As of March 31, 2021

$50,0000.01 -

$150,000.01 -

$350,000.01 -

$2,000,000.00

> 2,000,000.01

(Dollars in thousands;

Principal outstanding:

Existing customer

Total principal outstanding

Deferred fees outstanding

Deferred costs outstanding

Net deferred fees

Number of loans:

Existing customer

Total loan count

Percent of total

First or Second Draw

Comparison of Operating Results for the Three Months Ended March 31, 2021 and March 31, 2020

Results of Operations

Net income for the three months ended September 30, 2020, was $4.1 million, or $0.34 per diluted share, compared to $3.5 million, or $0.29 per diluted share, for the three months ended September 30, 2019.

Net income for the three months ended March 31, 2021, was $6.0 million, or $0.48 per diluted share, compared to $2.7 million, or $0.22 per diluted share, for the three months ended March 31, 2020.

The increase in net income over the comparable period in the prior year was attributable to a $6.0 million increase in net interest income, largely related to increased interest earning assets, including PPP loans.

Interest and fee income related to PPP loans totaled $3.6 million for the three months ended September 30, 2020.

Interest and fee income related to PPP loans totaled $4.4 million for the three months ended March 31, 2021.

Net deferred fees on PPP loans will be earned over the life of the loan, as a yield adjustment.

Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods.

The increase in net interest income was partially offset by a $1.6 million increase in the provision for loan losses, related to an increase in qualitative factors related to the change in the economic outlook caused by the COVID-19 pandemic along with the growth in the loan portfolio, and $1.9 million increase in noninterest expense, which includes $1.0 million more in salaries and employee benefits, $211,000 more in legal and professional fees, and $207,000 more in occupancy expenses.

Salaries and employee benefits were increased largely as a result of hiring staff for our BaaS CCBX division, legal and professional expenses increased due to development of contracts for CCBX customers and because of reporting related legal and professional services.

The increase in occupancy expense is related to a one-time $119,000 building operating expense and higher rent and depreciation expenses resulting from the opening of our Arlington branch in the second quarter of 2020 and our overall growth as a Company.

Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods from the recognition of PPP deferred fees.

The increase in net interest income was partially offset by a $3.3 million increase in noninterest expense, which includes $2.0 million increase in salaries and employee benefits, $437,000 increase in legal and professional fees, and $441,000 increase in other expense.

Salaries and employee benefits were increased largely as a result of hiring staff for our BaaS CCBX and CCDB divisions, and bonus and incentive expense was $1.4 million higher than the three months ended March 31, 2020, due to incentives paid to employees that have been involved in the production and support of PPP loans during the three months ended March 31, 2021.

The increase in salary expense was offset by an increase in deferred loan costs recorded as salary offsets, largely from originating PPP loans, which was $1.2 million higher and lowered expense by that same amount, for the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020.

Legal and professional expenses increased due to development of contracts for CCBX customers and because of reporting related legal and professional services.

The increase in other expense is largely related to a $213,000 increase in software, licenses, maintenance and subscriptions, which expected to continue to increase as we grow products lines and expand our CCBX and CCDB divisions .

Net Interest Income

Net interest income for the three months ended September 30, 2020, was $15.1 million, compared to $10.7 million for the three months ended September 30, 2019, an increase of $4.4 million, or 40.7%.

Net interest income for the three months ended March 31, 2021, was $17.3 million, compared to $11.4 million for the three months ended March 31, 2020, an increase of $6.0 million, or 52.4%.

The increase in net interest income consisted of a $5.2 million, or 39.9%, increase in interest income coupled with a $713,000, or 40.6%, decrease in interest expense.

The increase in interest income was primarily attributable to a $627.4 million, or 72.5%, increase in average loans outstanding for the three months ended September 30, 2020, compared to the prior year period, partially offset by a 1.03% decrease in yield on loans.

The decrease in loan yields, as compared to the prior year period, was the result of the Federal Open Market Committee (“FOMC”) lowering the Fed funds rate five times since June 2019, totaling 2.25%, resulting in lower rates on our variable rate, new and renewing loans.

In addition, for the quarter ended September 30, 2020 there was an average of $448.3 million in PPP loans, which have a 1.0% interest rate and an approximate yield of 3.16% after including the amortization of deferred fees and costs, which contributed to the decline in loan yield.

Contractual loan yields approximated 3.61% for the quarter ended September 30, 2020 compared to 5.24% for the quarter ended September 30, 2019.

Excluding PPP loans, the contractual loan yield approximated 4.69% for the three months ended September 30, 2020.

The increase in interest income was primarily attributable to a $673.5 million, or 69.7%, increase in average loans outstanding for the three months ended March 31, 2021, compared to the prior year period, partially offset by a 0.74% decrease in yield on loans receivable from 5.25% for the three months March 31, 2020 to 4.51% for the three months ended March 31, 2021.

The decrease in yield on loans receivable, as compared to the three months ended March 31, 2020, was largely due to an average of $475.9 million in PPP loans.

Excluding PPP loans, the yield on loans receivable approximated 4.78% for the three months ended March 31, 2021.

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

” Although there are rate floors in place for $361.8 million, or 23.8%, in existing loans, the rate reductions by the FOMC have had a corresponding impact on loan yields and subsequently the net interest margin in future periods.

We expect that the FOMC will maintain the Fed funds rate low for some time.

We have continued to focus on our loan growth initiatives, including the deepening of relationships with existing customers and developing new loan and deposit relationships with new customers and non-Bank PPP customers.

During the quarter ended September 30, 2020, our focus continued to be on working with small businesses within our communities as business owners navigate through the uncertainty and change resulting from the COVID-19 pandemic.

We experienced a significant increase in commercial and industrial SBA 7(a) loans during the second and into the third quarter of 2020, as small business owners applied for relief via the PPP as prescribed in the CARES Act.

The PPP program closed to new loan applicants on August 8, 2020, and the Bank is no longer originating any PPP loans.

The decrease in interest expense for the three months ended September 30, 2020 was the result of a 39 basis point decrease in cost of funds, bringing it to 0.33% as of September 30, 2020, compared to 0.72% at September 30, 2019.

In addition to the aforementioned rate reductions by the FOMC, which ultimately resulted in a lowering of the interest rate paid on interest-bearing deposit accounts, we gained new customer relationships by making PPP loans to noncustomers and they continued to move their banking/deposit relationships to the Bank.

These increases in noninterest bearing and low rate interest bearing deposits helped contribute to the improved cost of funds for the quarter ended September 30, 2020, as compared to the prior year period.

” PPP loans have a 1.0% interest rate and an approximate yield of 3.69% for the three months ended March 31, 2021, after including the amortization of deferred fees and costs.

As of March 31, 2021, $14.3 million in net deferred fees on PPP loans remains to be recognized in interest income along with interest on loans.

Net deferred fees on PPP loans are earned over the life of the loan, as a yield adjustment in interest income.

Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods from the recognition of PPP deferred fees.

Also contributing to the decline in loan yield is the current low interest rate environment which results in lower rates on our variable rate, new and renewing loans.

Contractual yield on loans receivable, excluding earned fees, approximated 3.53% for the quarter ended March 31, 2021 compared to 5.08% for the quarter ended March 31, 2020.

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

” Although there are rate floors in place for $410.4 million, or 23.0%, in existing loans, the lower rates have a corresponding impact on yield on loans and subsequently the net interest margin in future periods.

We expect rates to remain at this level for the short term.

The decrease in interest expense for the three months ended March 31, 2021 was the result of a 46 basis point decrease in cost of funds, bringing it to 0.24% as of March 31, 2021, compared to 0.70% at March 31, 2020.

In addition to the aforementioned low interest rate environment, which resulted in a lower interest rate paid on interest-bearing deposit accounts, we gained new customer relationships by making PPP loans to noncustomers and they continued to move their banking/deposit relationships to the Bank.

These increases in noninterest bearing and low interest rate interest bearing deposits helped contribute to the improved cost of funds for the quarter ended March 31, 2021, as compared to the prior year period.

The increase in borrowed funds is largely the result of utilizing the PPPLF to help fund PPP loans.

The PPPLF extends low cost borrowing lines, 0.35% interest rate, to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.

Borrowings are required to be paid down as the pledged PPP loans are paid down or forgiven.

The average balance for the three months ended September 30, 2020 was $199.1 million, resulting in $176,000 in interest expense.

The average balance of interest-bearing deposits increased $1 95.1 million, or 35.1 %, compared to the prior year period, but the average rate paid on interest bearing deposits was 5 5 basis points less for the quarter ended September 30, 2020, compared to the quarter ended September 30, 2019.

A s previously mentioned, the Fed funds rate reductions by the FOMC have impacted the rates that are paid on interest bearing accounts and management lowered deposit rates in response to these rate reductions .

The average rate paid on BaaS-brokered deposits decreased 1 64 basis points and NOW and money market accounts de creased 51 basis points for the three months ended September 30, 2020 .

The average rate paid on BaaS-brokered deposits was higher in the three months ended September 30, 2019 as a result of a temporary negotiated rate for that period.

The average rate paid on time deposits also decreased.

For time deposits less than $100,000 , the rate decreased 31 basis points and for time deposits over $100,000 , the average rate decreased 66 basis points, as compared to the prior year period.

The average rate paid on NOW , money market , and time deposit accounts in the quarter ended September 30, 2020 is the result of the recent decreased Fed funds rates and management lowering rates on these accounts in response .

We continue to evaluate rates and anticipate that additional rates reductions may occur in the fourth quarter .

Many deposit rates were either lowered late in the first quarter or at the start of the second quarter, and some rates were further lowered at the start of the third quarter of 2020, so the impact of these reductions were largely seen in the quarter ended September 30, 2020 and the full impact will continue to be seen in future periods.

The average balance of BaaS-brokered deposits was $ 21.7 million for the three mont hs ended September 30, 2020 , which was up $8.9 million from the prior year period.

T he average balance of savings accounts grew $ 21.4 million, or 40.8 %, and the average balance of time deposits declined $ 29.

6 million , or 30.8 % , to $ 66 .0 million in the three months ended September 30, 2020 , compared to the three months ended September 30, 2019, in an intentional effort to focus more on core deposit growth .

Borrowings are required to be paid down as the

pledged PPP loans are paid down or forgiven.

The average balance for the three months ended March 31, 2021 was $170.4 million, resulting in $147,000 in interest expense.

The average balance of interest-bearing deposits increased $228.1 million, or 36.3%, for the three months ended March 31, 2021 compared to the three months ended March 31, 2020, but the average rate paid on interest bearing deposits was 69 basis points less for the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020.

The increase compared to the three months ended March 31, 2020 is primarily attributable to growth in core deposit accounts, which we define as deposits excluding all brokered and time deposits.

Noninterest bearing deposits (such as demand or checking accounts) grew $337.5 million, or 95.6%.

NOW (which are interest bearing checking accounts) and money market accounts grew $223.1 million, or 47.7%, and savings accounts increased $32.0 million, or 58.9% compared to the three months ended March 31, 2020.

Included in the noninterest bearing deposit growth compared to the three months ended March 31, 2020, is $109.7 million in CCBX deposits, which increased $79.6 million, from $30.1 million during the quarter ended March 31, 2021.

Non-core deposits decreased $27.0 million with time deposits decreasing $28.0 million, or 33.1%, partially offset by an increase in BaaS-brokered deposits of $1.0 million, or 4.7% compared to the three months ended March 31, 2020.

As previously mentioned, the current low interest rate environment has impacted the rates that are paid on interest bearing accounts.

The average rate paid on BaaS-brokered deposits decreased 73 basis points and NOW and money market accounts decreased 69 basis points for the three months ended March 31, 2021, compared to the three months ended March 31, 2020.

The average rate paid on time deposits also decreased during this period.

For time deposits less than $100,000, the rate decreased 47 basis points and for time deposits over $100,000, the average rate decreased 81 basis points, for the quarter ended March 31, 2021 as compared to the prior year period.

We do not regularly advertise time deposit rates or money market rates, although we occasionally advertise promotional rates in targeted portions of our market area.

Our branch managers, business development officers, and lenders collaborate to provide consistent and coordinated customer service and to seek deposits from new and existing customers.

For the three months ended September 30, 2020, net interest margin (annualized net interest income divided by average total interest earning assets) and net interest spread (average yield on total interest earning assets minus average cost of total interest bearing liabilities) were 3.62% and 3.41%, respectively, compared to 4.29% and 3.81%, respectively, for the three months ended September 30, 2019.

For the three months ended March 31, 2021, net interest margin (annualized net interest income divided by average total interest earning assets) and net interest spread (average yield on total interest earning assets minus average cost of total interest bearing liabilities) were 3.76% and 3.59%, respectively, compared to 4.15% and 3.70%, respectively, for the three months ended March 31, 2020.

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 $ 2.

7 million and $ 25 5 ,000 for the three months ended September 30, 2020 and 2019 , respectively.

A total of $2.4 million in PPP loan fees were recognized in the quarter ended September 30, 2020.

Yield on loans receivable was 4.33% for the three months ended September 30, 2020, compared to 5.36% for the three months ended September 30, 2019.

Excluding PPP loans, the yield on loans receivable was 4.78% for the three months ended September 30, 2020.

Loan fees included in interest income totaled $ 4.0 million and $ 42 8 ,000 for the three months ended March 31, 2021 and 2020 , respectively.

A total of $ 3.2 million in PPP loan net fees were recognized in the quarter ended March 31, 2021 .

Yield on loans receivable was 4.

51 % for the three months ended March 31, 2021 , compared to 5.

25 % for the three months ended March 31, 2020 .

Excluding PPP loans, the yield on loans receivable was 4.78% for the three months ended March 31, 2021 .

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

” For the three months ended September 30, 2020 and 2019 , the amount of interest income not recognized on nonaccrual loans was not material.

” For the three months ended March 31, 2021 and 2020 , the amount of interest income not recognized on nonaccrual loans was not material.

Average Balance Sheets

For the Three Months Ended September 30,

For the Three Months Ended March 31,

(Dollars in thousands)

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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 illustra tes the $6.8 million increase in loan interest income is attributed to an increase in loan volume.

This increase is partially offset by a $2.2 million decrease in loan interest income due to lower interest rates, however that decrease is largely due to low rate PPP loans, which yielded approximately 3.16%, after including the amortization of the deferred fees and costs, for the three months ended September 30, 2020.

The table illustrates the $7.4 million increase in loan interest income that is attributed to an increase in loan volume.

This increase is partially offset by a $1.8 million decrease in interest income from loans receivable due to lower interest rates;

however, this decrease is largely due to low interest rate PPP loans, which has a yield of approximately 3.69%, after including the amortization of the deferred fees and costs, for the three months ended March 31, 2021.

For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.

Three Months Ended September 30, 2020

Three Months Ended September 30, 2019

Three Months Ended March 31, 2021

Three Months Ended March 31, 2020

Increase (Decrease)

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For a description of the factors taken into account by our management in determining the allowance for loan losses see “—Financial Condition—Allowance for Loan Losses.”

The provision for loan losses for the three months ended September 30, 2020 was $2.2 million, compared to $637,000 for the three months ended September 30, 2019.

The allowance for loan losses as a percentage of loans was 1.13% at September 30, 2020, compared to 1.25% at September 30, 2019.

For the three months ended September 30, 2020, there were $452.8 million in PPP loans included in our portfolio.

The provision for loan losses for the three months ended March 31, 2021 was $357,000, compared to $1.6 million for the three months ended March 31, 2020.

The allowance for loan losses as a percentage of loans was 1.11% at March 31, 2021, compared to 1.29% at March 31, 2020.

For the three months ended March 31, 2021, there were $543.8 million in PPP loans included in our portfolio.

These loans are 100% guaranteed by the SBA, therefore we have not allocated any portion of our allowance to these 100% guaranteed loans.

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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 provision for loan losses was increased due to an increase in qualitative factors related to the change in economic outlook caused by the COVID-19 pandemic along with loan growth.

” The provision for loan losses was increased in 2020 due to an increase in qualitative factors related to the change in economic outlook caused by the COVID-19 pandemic along with loan growth.

The qualitative and economic factors used in management’s analysis of the provision for loan losses indicated an increased provision was not required for the quarter ended March 31, 2021.

The expected loan losses have not materialized as originally anticipated in 2020, as evidenced by the low level of charge-offs and nonperforming loans.

The economic environment is continuously changing and has shown signs of improvement, with United States implementing $1.9 trillion in stimulus package, ongoing vaccination of its population and increased re-opening of business activities.

We are not required to implement the provisions of the Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023, therefore we are continuing to account for the allowance for loan losses under the incurred loss model.

Credit quality has remained stable through September 30, 2020, as demonstrated by the low level of charge-offs and nonperforming loan balance.

Nonperforming loans increased $42,000 in the three months ended September 30, 2020, as compared to $4.4 million in the three months ended June 30, 2020.

N onperforming assets to total assets was 0.26% at September 30, 2020 compared to 0.12% at September 30, 2019.

Credit quality has remained stable through March 31, 2021, as demonstrated by the low level of charge-offs and nonperforming loan balance.

Nonperforming loans decreased $102,000 in the three months ended March 31, 2021 compared to $763,000 for the quarter ended March 31, 2020.

Nonperforming assets to total assets was 0.03% at March 31, 2021 compared to 0.06% at March 31, 2020.

For a description of the Company’s nonperforming assets see “—Financial Condition—Nonperforming Assets.”

Pursuant to federal guidance, the Company deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic and economic shutdown.

The majority of those loans have successfully returned to active status.

At September 30, 2020, the Company had 44 loans, or $52.5 million, that remained outstanding with deferred or modified payments, compared to $207.2 million, or 215 loans, as of June 30, 2020.

All of the loans that have migrated to active status are current, with 128 loans or $93.1 million, successfully resuming payments and 65 loans or $76.0 million back on active status with an initial

payment due in the fourth quarter of 2020.

In addition, $3.0 million of deferred and/or modified loans paid-in-full or closed as of September 30, 2020 .

The purpose of this program was to provide cash flow relief for small businesses as they navigated through the uncertainty of the COVID-19 pandemic.

We believe that the Company’s deferral program was successful as evidenced by customers’ ability to migrate from deferral to active status and resume making payments as planned.

However, a s additional loans migrate to active status, we anticipate that there will be borrowers that are unable to resume making payments as planned.

There is uncertainty surrounding the economy, the continuation of unemployment benefits, stimulus payments, political uncertainty, and the continued restrictions on businesses, all of which lead to uncertainty with our customers and their ability to remain current on their financial obligations.

These factors all contributed to the additional reserve to loan losses that was made in the three months ended September 30, 2020.

Net charge-offs for the three months ended September 30, 2020 totaled $1,000, or 0.00% (annualized), of total average loans, as compared to $192,000, or 0.09% (annualized) of total average loans, for the three months ended September 30, 2019.

The full extent of the short-term and long-term economic impact of the COVID-19 pandemic is unknown;

There was a total of $241.6 million, or 249 loans, granted deferred and/or modified payments under this guidance.

As of March 31, 2021, $211.4 million, or 217 loans, have successfully resumed payments as scheduled, a total of $3.7 million, or two loans, moved to active status with a payment due in the second quarter of 2021, $13.3 million, or 27 loans, have closed and paid-in-full, leaving $13.3 million, or three loans, on deferral.

The purpose of this program is to provide cash flow relief for small business customers as they navigate through the uncertainties of the COVID-19 pandemic.

The Company’s deferral program has been successful as evidenced by customers’ ability to migrate from deferral to active status and resume making payments as planned.

The full extent of the long-term economic impact of the COVID-19 pandemic is unknown;

however, we remain diligent in our efforts to communicate and proactively work with borrowers to help mitigate potential credit deterioration and loan losses.

Noninterest Income

Our primary sources of recurring noninterest income are deposit service charges and fees, BaaS fees, mortgage broker fees and loan referral fees.

Our primary sources of recurring noninterest income are deposit service charges and fees, BaaS fees, loan referral fees, and mortgage broker fees .

Noninterest income does not include loan origination fees including PPP loans fees, which to the extent they exceed the direct loan origination costs, are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method and recognized in interest and fees on loans as part of interest income.

For the three months ended September 30, 2020, noninterest income totaled $1.9 million, a decrease of $146,000, or 7.0%, compared to $2.1 million for the three months ended September 30, 2019.

For the three months ended March 31, 2021, noninterest income totaled $3.0 million, an increase of $313,000, or 11.7%, compared to $2.7 million for the three months ended March 31, 2020.

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

Ended September30,

Ended March 31,

(Dollars in thousands)

3 unchanged sentences

Gain on sales of loans, net

Gain on sale of securities, net

Sublease and lease income

Total noninterest income

2 unchanged sentences

Together they constitute one of the largest components of our noninterest income.

Deposit service charges were $824,000 for the three months ended September 30, 2020, an increase of $29,000, or 3.6%, from $795,000 over the same period in the prior year.

The increase in deposit service charges and fees was primarily the result of $61,000 increase in point of sale fees partially offset by $32,000 less overdraft fee income in the quarter ended September 30, 2020 compared to the prior year period.

Deposit service charges were $863,000 for the three months ended March 31, 2021, an increase of $140,000, or 19.4%, from $723,000 over the same period in the prior year.

The increase in deposit service charges and fees was primarily the result of $142,000 increase in point of sale fees, partially offset by $29,000 less overdraft fee income in the quarter ended March 31, 2021 compared to the three months ended March 31, 2020 during which the economy was impacted by the spread of COVID-19 pandemic.

Our CCBX division 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 contract.

BaaS fee income for the three months ended September 30, 2020 was $576,000 compared to $456,000 for the three months ended September 30, 2019.

BaaS fee income for the three months ended March 31, 2021 was $948,000 compared to $579,000 for the three months ended March 31, 2020.

The increase is the result of adding additional CCBX customers to active and implementation status.

As of September 30, 2020, there were four active CCBX relationships, one in friends and family trials, four in onboarding/implementation, two signed letters of intent and a solid pipeline of potential new relationships.

As of March 31, 2021, there were 10 active CCBX relationships, five in onboarding/implementation, six signed letters of intent and a solid pipeline of potential new relationships.

As more CCBX customers move to active status, we expect that BaaS fees will increase.

The following table illustrates the activity and growth in CCBX for the periods presented:

March 31, 2021

March 31, 2020

Implementation / onboarding

Signed letters of intent

Total CCBX relationships

Loan Referral Fees .

2 unchanged sentences

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.

We had $180,000 in income from l oan referral fees for the three months

ended September 30, 2020 , compared to zero in the same period in the prior year.

We had $597,000 in income from loan referral fees for the three months ended March 31, 2021, compared to $1.1 million for the three months ended March 31, 2020.

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 not recognize any , or recognize more or fewer, loan referral fees in some periods.

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.

Mortgage Broker Fees .

We earn mortgage broker fees for residential real estate loans that we broker through mortgage lenders.

Mortgage broker fees decreased $15,000 in the three months ended September 30, 2020 to $125,000, compared to $140,000 in the same period in 2019 as a result of lower demand;

however, low mortgage rates continue to make homes more affordable and mortgage refinancing an attractive option.

Mortgage broker fees increased $100,000 in the three months ended March 31, 2021 to $262,000, compared to $162,000 for the three months ended March 31, 2020 as a result of higher demand.

Gain on Sales of Loans, net .

2 unchanged sentences

This activity fluctuates based on SBA and USDA loan activity.

Gain on sale of loans decreased $322,000, or 87.3%, to $47,000 for the three months ended September 30, 2020, compared to $369,000 for the same period in 2019 as a result of fewer SBA and USDA loans being originated and sold to the secondary market.

Our focus on loans in the second and third quarter of 2020 was on PPP loans administered by the SBA.

Gain on Sale of Securities, net .

In the third quarter of 2019, we restructured our investment portfolio to improve the rate of return, interest rate and pricing risk on the portfolio.

As a result of this restructuring we were able to recognize $171,000 in net gains on the securities sold during the three months ended September 30, 2019 while decreasing the overall weighted average maturity of the investment portfolio.

No securities were sold in the three months ended September 30, 2020.

This category includes a variety of other income-producing activities, lease and sublease income, annuity broker fees, and SBA and USDA servicing fees.

Other noninterest income increased $33,000 in the three months ended September 30, 2020, compared to the same period in 2019 primarily from higher SBA and USDA servicing fee income.

Gain on sale of loans increased to $130,000 for the three months ended March 31, 2021, compared to none for the three months ended March 31, 2020 as a result of more SBA and USDA loans being originated and sold to the secondary market.

This category includes a variety of other income-producing activities, wire transfer fees, annuity broker fees, and SBA and USDA servicing fees.

Other noninterest income increased $28,000 in the three months ended March 31, 2021, compared to the three months ended March 31, 2020 primarily from higher SBA servicing fee income and increased wire transfer fees.

Noninterest Expense

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The largest component of noninterest expense is salaries and employee benefits.

Noninterest expense also includes operational expenses, such as occupancy expense, data processing expense, legal and professional fees, director and staff expense and software licenses, maintenance and subscriptions.

For the three months ended September 30, 2020, noninterest expense totaled $9.7 million, an increase of $1.9 million, or 24.8%, compared to $7.7 million for the three months ended September 30, 2019.

Noninterest expense also includes operational expenses, such as occupancy expense, legal and professional fees, data processing expense, software license, maintenance and subscriptions, excise taxes and director and staff expenses.

For the three months ended March 31, 2021, noninterest expense totaled $12.4 million, an increase of $3.3 million, or 37.0%, compared to $9.0 million for the three months ended March 31, 2020.

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

Ended September 30,

Ended March 31,

(Dollars in thousands)

Salaries and employee benefits

Data processing

Legal and professional fees

Data processing

Software licenses, maintenance and subscriptions

Director and staff expenses

Federal Deposit Insurance Corporation (“FDIC”) assessments

FDIC assessments

Business development

2 unchanged sentences

Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, incentive compensation costs, benefit plans, health insurance and payroll taxes.

Salaries and employee benefits were $ 6.0 million for the three months ended September 30, 2020 , an increase of $ 1.0 million , or 20.1 %, compared to $ 5.0 million for the three months ended September 30, 2019 .

The increase was primarily due to continued hiring staff for our BaaS CCBX division and additional staff for our ongoing banking related growth initiatives , including hiring staff for opening our Arlington branch in J une 20 20, as well as employing temporary help to assist with operations related to the PPP loans .

A s our BaaS activities and customers grow , we expect to continue to add employees to support this line of business.

As of September 30, 2020 , we had 2 34 full-time equivalent employees, compared to 1 92 at September 30, 2019 , a 2 2.0 % increase .

Occupancy expenses were $1.1 million for the three months ended September 30, 2020, compared to $884,000 for the three months ended September 30, 2019.

This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $345,000 and $301,000 for the three months ended September 30, 2020 and 2019, respectively.

Occupancy expenses increased as a result of $119,000 in a one-time building operating expense, with the opening of our 15 th branch late in the second quarter of 2020 and as a result of the growth in CCBX.

Salaries and employee benefits were $7.7 million for the three months ended March 31, 2021, an increase of $2.0 million, or 35.2%, compared to $5.7 million for the three months ended March 31, 2020.

The increase was primarily due to continued hiring staff for our CCBX and CCDB divisions and additional staff for our ongoing banking related growth initiatives, including staff for our Arlington branch which opened in June 2020.

In addition, bonus and incentive expense was $1.4 million higher than the three months ended March 31, 2020, due to incentive accrued for employees that have been involved in the production and support of PPP loans during the three months ended March 31, 2021.

The increase in expense was reduced as a result of an increase in deferred loan costs recorded as salary offsets, largely from originating PPP loans, which was $1.2 million higher and lowered expense by that same amount, for the quarter ended March 31, 2021, compared to the quarter ended March 31, 2020.

As our CCBX and CCDB activities grow, we expect to continue to add employees to support this line of business.

As of March 31, 2021, we had 277 full-time equivalent employees, compared to 208 at March 31, 2020, a 33.2% increase.

Occupancy expenses were $1.1 million for the three months ended March 31, 2021, compared to $927,000 for the three months ended March 31, 2020.

This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $416,000 and $309,000 for the three months ended March 31, 2021 and 2020, respectively.

Occupancy expenses increased primarily as a result of $107,000 more in depreciation expense resulting from growth in our CCBX and CCDB divisions, increased equipment expenses related to employees working from home because of the COVID-19 pandemic, combined with the opening of our Arlington branch in June of 2020.

As we continue to grow, we expect occupancy expenses to increase.

Legal and Professional Fees.

Legal and professional costs were $760,000 for the quarter ended March 31, 2021, compared to $323,000 for the quarter ended March 31, 2020.

Legal and professional costs fluctuate with the development of contracts for CCBX customers and are also impacted by our reporting cycle and timing of legal and professional services.

The increase in legal and professional expenses is associated with consulting expenses related to monitoring for Bank Secrecy Act/Anti-Money Laundering, CCBX operations and higher costs related to legal and accounting work related to financial reporting.

Data Processing.

Data processing costs were $577,000 for the three months ended September 30, 2020, compared to $509,000 for the three months ended September 30, 2019.

Data processing costs were $697,000 for the three months ended March 31, 2021, compared to $551,000 for the three months ended March 31, 2020.

Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs.

Data processing costs grow as we grow and add new products, customers and branches.

Additionally, CCBX data processing expenses are included in this category and are expected to increase incrementally as the CCBX division grows.

Legal and Professional Fees.

Legal and professional costs were $381,000 for the quarter ended September 30, 2020, compared to $170,000 for the quarter ended September 30, 2019.

Legal and professional costs fluctuate with the development of contracts for CCBX customers and are also impacted by our reporting cycle and timing of legal and professional services.

The increase in legal and professional expenses is associated with BaaS activities through CCBX operations and higher costs related to legal and accounting work related to reporting.

Additionally, CCBX and CCDB data processing expenses are included in this category and are expected to increase incrementally as these divisions grow.

Software Licenses, Maintenance and Subscriptions.

Software licenses, maintenance and subscriptions includes expenses related to obtaining and maintaining software required for various functions throughout the Company.

Software licenses, maintenance and subscriptions were $337,000 for the quarter ended September 30, 2020, compared to $181,000 for the prior year period.

Late in 2019, we changed how we were expensing these costs, consolidating all related expenses to one category, which contributed to the increase over the prior year period.

Additionally, software related expenses are expected to continue to increase as we grow product lines and our CCBX division.

Software licenses, maintenance and subscriptions were $484,000 for the quarter ended March 31, 2021, compared to $271,000 for the prior year period.

These expenses are expected to increase as we invest more in automated processing and as we grow product lines and our CCBX and CCDB divisions.

Excise Taxes.

Excise taxes were $291,000 for the three months ended September 30, 2020, compared to $184,000 for the three months ended September 30, 2019.

Excise taxes are based on gross income of $18.4 million and $14.4 million for the three months ended September 30, 2020 and 2019, respectively.

Excise taxes were $359,000 for the three months ended March 31, 2021, compared to $203,000 for the three months ended March 31, 2020.

Excise taxes are based on gross income of $21.3 million and $15.8 million for the three months ended March 31, 2021 and 2020, 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.

In addition, the tax rate that is applied to our industry increased 25 basis points effective April 1, 2020, which contributed to the increase in excise tax.

gross income increases, so does the excise tax expense.

In addition, the tax rate that is applied to our industry increased 25 basis points effective April 1, 2020 , which contributed to the increase in excise tax in the current period compared to the prior year period , when the increase in tax rate had not yet been applied .

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 $156,000 for the three months ended September 30, 2020, compared to $241,000 for the three months ended September 30, 2019, a decrease of 85,000 or 35.3%.

Decreased expenses related to employee travel as a result of restrictions related to the COVID-19 pandemic contributed to the decrease in the quarter ended September 30, 2020 compared to quarter ended September 30, 2019.

Director and staff expenses were $220,000 for the three months ended March 31, 2021, compared to $270,000 for the three months ended March 31, 2020, a decrease of $50,000 or 18.5%.

Decreased expenses related to employee travel as a result of restrictions related to the COVID-19 pandemic contributed to the decrease in the quarter ended March 31, 2021 compared to quarter ended March 31, 2020.

FDIC Assessments.

1 unchanged sentence

The assessment rate is based on a number of factors and recalculated each quarter.

FDIC assessments were $148,000 for the three months ended September 30, 2020, compared to $4,000 credit for the three months ended September 30, 2019, an increase of $152,000.

The DIF’s reserve was in excess of the required ratio in 2019, resulting in a credit for the three months ended September 30, 2019 based on past activity and payments.

The DIF reserve ratio is currently below the required ratio.

FDIC assessments were $195,000 for the three months ended March 31, 2021, compared to $70,000 for the three months ended March 31, 2020, an increase of $125,000.

As deposits increase, the FDIC assessment expense will also increase.

Business Development.

Business development costs were $72,000 for the three months ended September 30, 2020, compared to $122,000 for the three months ended September 30, 2019.

Business development costs were $99,000 for the three months ended March 31, 2021, compared to $125,000 for the three months ended March 31, 2020.

Business development costs include sponsorships and other activities to cultivate business and community development.

As expected, these expenses were reduced as a result of restrictions on in person meetings and business related activities due to the COVID-19 pandemic.

Marketing costs were $52,000 for the three months ended September 30, 2020, compared to $98,000 for the three months ended September 30, 2019.

Marketing costs decreased year over year due to a conscious effort to reduce general advertising costs

during the COVID-19 pandemic.

The bank is using more cost-effective advertising options ;

however, we expect to see advertising expenses increase as we deploy more branding and targeted advertising.

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.

Other noninterest expense was $590,000 for the three months ended September 30, 2020, compared to $392,000 for the three months ended September 30, 2019.

The increase was largely due to a $191,000 increase in BaaS expenses and overall growth for the three months ended September 30, 2020, as compared to the same period last year.

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.

For the three months ended September 30, 2020, income tax expense totaled $1.1 million, compared to $919,000 for the three months ended September 30, 2019.

Our effective tax rates for the three months ended September 30, 2020 and 2019 were 20.9% and 20.7%, respectively.

Comparison of Operating Results for the Nine months ended September 30, 2020 and September 30, 2019

Results of Operations

Net income for the nine months ended September 30, 2020, was $10.5 million, or $0.86 per diluted share, compared to $9.6 million, or $0.79 per diluted share, for the nine months ended September 30, 2019.

The increase in net income over the comparable period in the prior year was attributable to a $9.8 million increase in net interest income, largely related to organic loan growth combined with growth from PPP loans, partially offset by a $4.0 million increase in the provision for loan losses, related to an increase in qualitative factors related to the change in the economic outlook caused by the COVID-19 pandemic along with the growth in the loan portfolio, and $4.6 million increase in noninterest expense, which includes $2.8 million more in salaries and employee benefits and $306,000 more in legal and professional fees.

Salaries and employee benefits were increased largely as a result of hiring staff for our BaaS CCBX division.

Legal and professional fees increased due to BaaS activities through our CCBX division and as a result of higher costs related to legal and accounting work related to reporting.

Net Interest Income

Net interest income for the nine months ended September 30, 2020, was $40.5 million, compared to $30.7 million for the nine months ended September 30, 2019, an increase of $9.8 million, or 31.9%.

The increase in net interest income consisted of $11.0 million, or 33.3%, in increased loan interest income.

An increase in loan volume drove income up, despite a decrease in interest rates.

Additionally, interest expense on deposits decreased $761,000, or 17.7%, and was partially offset by $375,000, or 64.4%, increase in interest on borrowed funds.

The increase in interest income was primarily attributable to a $445.1 million, or 54.2%, increase in average loans outstanding for the nine months ended September 30, 2020, compared to the prior year period, partially offset by a 73 basis point decrease in yield on loans.

The decrease in loan yields, as compared to the prior year period, was the result of the FOMC lowering rates five times since June 2019, totaling 2.25%, which resulted in lower rates on new and renewing loans as well as loans tied to indexes.

In addition, for the nine months ended September 30, 2020 there was an average of $261.9 million in PPP loans, which have a 1.0% interest rate and an approximate yield of 3.23% after including the amortization of deferred fees and costs.

Contractual loan yields approximated 4.08% for the nine months ended September 30, 2020 compared to 5.23% for the nine months ended September 30, 2019.

Excluding PPP loans, the contractual loan yield approximated 4.86%.

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

” Although we have rate floors in place for $361.8 million, or 23.8%, in existing loans, the rate reductions by the FOMC have had a corresponding impact on loan yields and subsequently the net interest margin in future periods.

We expect that the FOMC will maintain the Fed funds rate low for some time.

We have continued to focus on our loan growth initiatives, but most recently much of our focus has been on working with small businesses within our communities, providing assistance as business owners navigate through the uncertainty and change resulting from the COVID-19 pandemic.

We experienced a significant increase in commercial and industrial loans during the second and third quarters of 2020, as small business owners applied for financial assistance via the PPP through the SBA as prescribed in the CARES Act.

The decrease in interest expense for the nine months ended September 30, 2020 was the result of a $761,000 decrease in interest expense on deposit accounts partially offset by a $375,000 increase in interest on borrowed funds.

Cost of funds decreased 29 basis points to 0.45% as of September 30, 2020, compared to 0.74% at September 30, 2019.

The increases in noninterest bearing and low rate interest bearing deposits helped contribute to the improved cost of funds for the nine months ended September 30, 2020, as compared to the prior year period.

We gained new customer relationships by making PPP loans to noncustomers and they continued to move their banking/deposit relationships to the Bank.

The increase in borrowed funds is largely the result of utilizing the PPPLF to help fund PPP loans as disbursements are withdrawn from deposit accounts.

The PPPLF extends low cost borrowing lines, 0.35% interest rate, to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value.

Borrowings are required to be paid down as the pledged PPP loans are paid down or forgiven.

The average balance for the nine months ended September 30, 2020 was $102.5 million, resulting in $269,000 in interest expense.

The average balance of interest-bearing deposits increased $136.9 million, or 24.5%, compared to the prior year period, but the average rate paid on interest bearing deposits was 35 basis points less for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

As previously discussed, the Fed funds rate reductions by the FOMC have impacted the rates that are paid on interest bearing accounts and management lowered deposit rates in response to these rate reductions.

The average rate

paid on BaaS-brokered deposits decreased 1.72% and NOW and money market accounts decreased 21 basis points for the nine months ended September 30, 2020.

The average rate paid on BaaS-brokered deposits was higher in the nine months ended September 30, 2019 as a result of the temporary rate negotiated for BaaS-brokered deposits for that period.

The average rate paid on time deposits also decreased.

For time deposits less than $100,000 the rate decreased 1 9 basis points and for time deposits over $100,000 the average rate decreased 36 basis points, as compared to the prior year period .

The average rate paid on NOW, money market, and time deposit accounts in the nine months ended September 30, 2020 is the result of the recent decreased Fed funds rate and management lowering rates in response.

We continue to evaluate rates and anticipate that additional rates reductions may occur in the fourth quarter.

Many deposit rates were either lowered late in the first quarter or at the start of the second quarter of 2020, and some were further decreased at the start of the third quarter, so the impact of these reductions will continue to be seen in future periods.

The average balance of NOW and money market accounts grew $ 1 55.5 million, or 41.4 %, in the nine months ended September 30, 2020 , compared to the nine months ended September 30, 2019 .

The average balance of BaaS-brokered deposits was $2 1.

8 million for the nine months ended September 30, 2020, which was down $ 13.6 million , or 38.4 %, from the prior year period.

The higher balance in the prior year period was the result of a temporary increase in BaaS deposits for that period , and a subsequent planned exit of balances .

T he average balance of savings accounts grew $ 12.8 million, or 24.5 %, and the average balance of time deposits declined $ 17.8 million, or 18.5 % , to $ 78.2 million in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019, in an intentional effort to focus on more on core deposit growth .

We do not regularly advertise time deposit rates or money market rates, although we occasionally advertise promotional rates in targeted portions of our market area.

Our branch managers, business development officers, and lenders collaborate to provide consistent and coordinated customer service and to seek deposits from new and existing customers.

For the nine months ended September 30, 2020, net interest margin and net interest spread were 3.81% and 3.51%, respectively, compared to 4.22% and 3.76%, respectively, for the nine months ended September 30, 2019.

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 $5.3 million and $920,000 for the nine months ended September 30, 2020 and 2019, respectively.

The increase in loan fees for the nine months ended September 30, 2020 is due to the PPP loans.

Yield on loans receivable was 4.65% for the nine months ended September 30, 2020, compared to 5.38% for the nine months ended September 30, 2019.

Excluding PPP loans, the yield on loans receivable was 4.99% for the nine months ended September 30, 2020.

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

” For the nine months ended September 30, 2020 and 2019, the amount of interest income not recognized on nonaccrual loans was not material.

Average balance sheets

For the Nine Months Ended September 30,

(Dollars in thousands)

Interest earning assets:

Interest earning deposits

Investment securities, available for sale (1)

Investment securities, held to maturity (1)

Other Investments

Loans receivable (2)

Total interest earning assets

Noninterest earning assets:

Allowance for loan losses

Other noninterest earning assets

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest bearing deposits

PPPLF borrowings

FHLB advances and other borrowings

Subordinated debt

Junior subordinated debentures

Total interest bearing liabilities

Noninterest bearing deposits

Other liabilities

Total shareholders' equity

Total liabilities and shareholders' equity

Net interest income

Interest rate spread

Net interest margin (3)

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.

Includes nonaccrual loans.

Net interest margin represents annualized net interest income divided by average total interest earning assets.

Yields and costs are annualized.

This table illustrates the $15.5 million increase in loan interest income as a result of increased loan volume was significantly more than the $4.5 million decrease in interest income due to lower interest rates on loans , resulting in an overall increase in loan interest income for the nine months ended September 30, 2020, compared to the n i ne months ended September 30, 2019.

Similarly, the volume of interest bearing deposits has increased by $702,000 , but the reduced interest rate paid on interest bearing deposits resulted in an overall decrease in interest expense on interest bearing deposits for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.

Nine Months Ended September 30, 2020

Nine Months Ended September 30, 2019

Increase (Decrease)

Total Increase

(Dollars in thousands)

Interest income:

Interest earning deposits

Investment securities, available for sale

Investment securities, held to maturity

Other Investments

Loans receivable

Total increase in interest income

Interest expense:

Interest bearing deposits

PPPLF borrowings

FHLB advances

Subordinated debt

Junior subordinated debentures

Total increase in interest expense

Increase in net interest income

Provision for Loan Losses

The provision for loan losses is an expense we incur to maintain an allowance for loan losses at a level that management deems appropriate to absorb inherent losses on existing loans.

For a description of the factors taken into account by our management in determining the allowance for loan losses see “—Financial Condition—Allowance for Loan Losses.”

The provision for loan losses for the nine months ended September 30, 2020 was $5.7 million, compared to $1.7 million for the nine months ended September 30, 2019.

The allowance for loan losses as a percentage of loans was 1.13% at September 30, 2020, compared to 1.25% at September 30, 2019.

As of September 30, 2020, there were $452.8 million in PPP loans in our portfolio.

These loans are 100% guaranteed by the SBA and we have not allocated any portion of our allowance to these 100% guaranteed loans.

The allowance for loan losses to loans receivable, excluding the guaranteed PPP loans, is 1.60%.

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 provision for loan losses was increased due to an increase in qualitative factors related to the change in economic outlook caused by the COVID-19 pandemic along with loan growth.

We are not required to implement the provisions of the CECL accounting standard until January 1, 2023, therefore we are continuing to account for the allowance for loan losses under the incurred loss model.

We are working with customers impacted by COVID-19 and have deferred or modified payments in accordance with federal guidance on $52.5 million as of September 30, 2020, compared to $207.2 million as of June 30, 2020.

Credit quality has remained stable through September 30, 2020, as demonstrated by the low level of charge-offs and nonperforming loan balance.

N onperforming assets to total assets was 0.26% at September 30, 2020 compared to 0.12% at September 30, 2019.

For a description of the Company's nonperforming assets, see "—Financial Condition—Nonperforming Assets."

Pursuant to federal guidance, the Company deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic and economic shutdown.

The majority of those loans have successfully returned to active status.

At September 30, 2020, the Company had 44 loans, or $52.5 million, that remained outstanding with deferred or modified payments, compared to $207.2 million, or 215 loans, as of June 30, 2020.

All of the loans that have migrated to active status are current, with

128 loans or $93.1 million, successfully resuming payments and 65 loans or $76.0 million back on active status with an initial payment due in the fourth quarter of 2020.

In addition, $3.0 million of deferred and/or modified loans paid-in-full or closed as of September 30, 2020 .

The purpose of this program was to provide cash flow relief for small businesses as they navigated through the uncertainty of the COVID-19 pandemic.

We believe that the Company’s deferral program was successful as evidenced by customers ’ ability to migrate from deferral to active status and resume making payments as planned.

However, a s additional loans migrate to active status, we anticipate that there will be borrowers that are unable to resume making payments as planned.

There is uncertainty surrounding the economy, the continuation of unemployment benefits, stimulus payments , political uncertainty, and the continued restrictions on businesses, all of which lead to uncertainty with our customers and their ability to remain current on their financial obligations.

These factors all contributed to the additional reserve to loan losses that was made in the nine months ended September 30, 2020.

Net charge-offs for the nine months ended September 30, 2020 totaled $132,000, or 0.01% (annualized) of total average loans, as compared to $243,000, or 0.04% (annualized) of total average loans, for the nine months ended September 30, 2019.

The full extent of the short-term and long-term economic impact of the COVID-19 pandemic is unknown;

however, we remain diligent in our efforts to communicate and proactively work with borrowers to help mitigate potential credit deterioration and future losses.

Noninterest Income

Our primary sources of recurring noninterest income are deposit service charges and fees, loan referral fees, BaaS fees, and mortgage broker fees.

Noninterest income does not include loan origination fees, including PPP loan fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method and recognized in interest and fees on loans as part of interest income.

For the nine months ended September 30, 2020, noninterest income totaled $6.1 million, a decrease of $71,000, or 1.1%, compared to $6.2 million for the nine months ended September 30, 2019.

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

Ended September 30,

(Dollars in thousands)

Deposit service charges and fees

Loan referral fees

Mortgage broker fees

Gain on sales of loans, net

Gain on sales of securities, net

Total noninterest income

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 one of the largest components of our noninterest income.

Deposit service charges were $2.2 million for the nine months ended September 30, 2020, a decrease of $78,000, or 3.5%, from $2.3 million over the same period in the prior year.

The decrease in deposit service charges and fees was primarily the result of $118,000 less overdraft fee income in the nine months ended September 30, 2020 compared to the prior year period which may be attributed to the stay-at-home order in place for Washington State during part of the first half of 2020, and overall reduced activity as a result of COVID-19 restrictions.

An increase in point-of-sale fees of $49,000 partially offset some of these reductions.

Our CCBX division 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 contract.

BaaS fee income for the nine months ended September 30, 2020 was $1.6 million compared to $1.4 million for the nine months ended September 30, 2019.

The increase is the result of increased relationships with broker dealers and digital financial service providers.

At September 30, 2020 there were four active CCBX relationships, one in friends and family trials, four in onboarding/implementation, two signed letters of intent and a solid pipeline of potential new relationships.

As more CCBX customers move to active status, we expect that BaaS fees will increase.

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.

3 million in income from l oan referral fees for the nine months ended September 30, 2020 compared to $1.1 million for the nine months ended September 30, 2019.

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 not recognize any , or recognize more or fewer, loan referral fees in some periods.

Mortgage Broker Fees .

We earn mortgage broker fees for residential real estate loans that we broker through mortgage lenders.

Mortgage broker fees increased $103,000 in the nine months ended September 30, 2020 to $439,000, compared to $336,000 in the same period in 2019 as a result of increased demand from lower interest rates on mortgages which continue to make homes more affordable and mortgage refinancing an attractive option.

Gain on Sales of Loans, net .

Gain on sales of loans occurs when we sell in the secondary market the guaranteed portion (generally 75% of the principal balance) of the SBA and USDA loans that we originate.

This activity fluctuates based on SBA and USDA loan activity.

Income from the sale of loans was $47,000 for the nine months ended September 30, 2020, compared to $490,000 for the nine months ended September 30, 2019, a decrease of $443,000 or 90.4%, as a result of fewer SBA and USDA loans being originated and sold to the secondary market.

Gain on Sale of Securities, net.

In the third quarter of 2019, we restructured our investment portfolio to improve the rate of return, interest rate and pricing risk on the portfolio.

As a result of this restructuring we were able to recognize $171,000 in net gains on the securities sold during the nine months ended September 30, 2019 while decreasing the overall weighted average maturity of the investment portfolio.

No securities were sold in the nine months ended September 30, 2020 .

This category includes a variety of other income-producing activities, annuity broker fees, and SBA and USDA servicing fees.

Other noninterest income increased $95,000 in the nine months ended September 30, 2020, compared to the same period in 2019 primarily as a result of higher SBA and USDA servicing fees and higher lease and sublease income.

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 component of noninterest expense is salaries and employee benefits.

For the nine months ended September 30, 2020, noninterest expense totaled $27.6 million, an increase of $4.6 million, or 19.9%, compared to $23.1 million for the nine months ended September 30, 2019.

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

Ended September 30,

(Dollars in thousands)

Salaries and employee benefits

Data processing

Legal and professional fees

Software licenses, maintenance and subscriptions

Director and staff expenses

FDIC assessments

Business development

Total noninterest expense

Salaries and Employee Benefits.

Salaries and employee benefits are the largest component of noninterest expense and include payroll expense, incentive compensation costs, benefit plans, health insurance and payroll taxes.

Salaries and employee benefits were $ 1 6.9 million for the nine months ended September 30, 2020 , an increase of $ 2 .8 million , or 2 0.0 %, compared to $ 14.1 million for the nine months ended September 30, 2019 .

The increase was primarily due to continued hiring staff for our BaaS CCBX division and additional staff for our ongoing banking related growth initiatives , as well as employing temporary help to assist with operations related to the PPP loans.

The increase in expense would have been greater if not for an increase in deferred loan costs recorded as salary offsets, largely from originating PPP loans, which was $1.

4 million higher and lowered expense by that same amount, for the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

As our BaaS banking activities grow, we expect to continue to add employees to support this line of business.

As of September 30, 2020 , we had 2 34 full-time equivalent employees, compared to 1 92 at September 30, 2019, a 22.0 % increase.

Occupancy expenses were $3.0 million for the nine months ended September 30, 2020 compared to $2.8 million for the nine months ended September 30, 2019, an increase of $143,000 or 5.1%.

This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $965,000 and $907,000 for the nine months ended September 30, 2020 and 2019, respectively.

Occupancy expenses increased $143,000 year over year largely as the result of the opening of our 15 th branch late in the second quarter of 2020.

As we continue to grow, we expect occupancy expenses to increase.

Data Processing.

Data processing costs were $1.7 million for the nine months ended September 30, 2020, compared to $1.5 million for the nine months ended September 30, 2019.

Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs.

Data processing costs grow as we add new products, customers and branches.

Additionally, CCBX data processing expenses are included in this category and are expected to increase incrementally as the CCBX division expands.

Legal and Professional Fees.

Legal and professional costs were $1.2 million for the nine months ended September 30, 2020 compared to $872,000 for the nine months ended September 30, 2019.

Legal and professional costs fluctuate with the development of contracts for CCBX customers and are also impacted by our reporting cycle and timing of legal services.

Software Licenses, Maintenance and Subscriptions.

Software licenses, maintenance and subscriptions includes expenses related to obtaining and maintaining software required for various functions throughout the Company.

Software licenses, maintenance and subscriptions were $919,000 for the quarter ended September 30, 2020, compared to $501,000 for the prior year period.

Late in 2019, we changed how we were expensing these costs, consolidating all related expenses to one category, which contributed to the increase over the prior year period.

Software related expenses is expected to continue to increase as we grow product lines and expand our CCBX division.

Excise Taxes.

Excise taxes were $756,000 for the nine months ended September 30, 2020, compared to $529,000 for the nine months ended September 30, 2019.

Excise taxes are based on gross income of $51.1 million and $41.8 million for the nine months ended September 30, 2020 and 2019, 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.

In addition, the tax rate that is applied to our industry increased 25 basis points effective April 1, 2020, which contributed to the increase in excise taxes.

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 $613,000 for the nine months ended September 30, 2020 and $698,000 for the nine months ended September 30, 2019, a decrease of $85,000.

The decrease is the result of decreased expenses related to employee travel expenses as a result of restrictions related to COVID-19 partially offset by increased training expenses in the nine months ended September 30, 2020, compared to the nine months ended September 30, 2019.

FDIC Assessments.

FDIC assessments are assessed to fund the DIF to insure and protect the depositors of insured banks and to resolve failed banks.

The assessment rate is based on a number of factors and is recalculated each quarter.

FDIC assessments were $292,000 for the nine months ended September 30, 2020, compared to $205,000 for the nine months ended September 30, 2019, an increase of $87,000.

The DIF’s reserve was in excess of the required ratio in 2019, resulting in a credit for the third quarter of 2019, reducing the amount assessed.

Marketing costs were $280,000 for the nine months ended September 30, 2020, compared to $300,000 for the nine months ended September 30, 2019.

Business development expenses were reduced as a result of restrictions on in person meetings and business related activities due to the COVID-19 pandemic.

Marketing costs were $82,000 for the three months ended March 31, 2021, compared to $112,000 for the three months ended March 31, 2020.

Marketing costs decreased year over year due to a conscious effort to reduce general advertising costs during the COVID-19 pandemic.

The bank is using more cost-effective advertising options;

however, we expect to see advertising expenses increase as we deploy more branding and targeted advertising.

Business Development.

Business development costs were $245,000 for the nine months ended September 30, 2020, compared to $320,000 for the nine months ended September 30, 2019.

Business development costs include sponsorships and other activities to

cultivate business and community development.

As expected, these expenses were reduced as a result of restrictions on in person meetings and business related activities due to the COVID-19 pandemic .

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 Bank, CCBX and CCDB.

Other noninterest expenses were $1.8 million for the nine months ended September 30, 2020, compared to $1.2 million for the nine months ended September 30, 2019.

The increase was largely due to a $108,000 increase in bank examination fees, $56,000 increase in telephone costs, $47,000 increase in service charges from banks, $42,000 increase in operational losses, $32,000 increase in donations and overall increases resulting from growth for the nine months ended September 30, 2020, as compared to the same period last year.

Other noninterest expense was $712,000 for the three months ended March 31, 2021, compared to $484,000 for the three months ended March 31, 2020.

The increase was largely due to a $115,000 in increase in the unfunded commitment provision, $90,000 more in BaaS expenses and overall growth for the three months ended March 31, 2021, as compared to the same period last year.

Income Tax Expense

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Valuation allowances are established when necessary to reduce our deferred tax assets to the amount expected to be realized.

For the nine months ended September 30, 2020, income tax expense totaled $2.8 million, compared to $2.5 million for the nine months ended September 30, 2019.

Our effective tax rates for the nine months ended September 30, 2020 and 2019, was 20.9% and 20.8%, respectively.

For the three months ended March 31, 2021, income tax expense totaled $1.6 million, compared to $714,000 for the three months ended March 31, 2020.

The $858,000 increase in income tax expense is the result of higher net income.

Our effective tax rates for the three months ended March 31, 2021 and 2020 were 20.7% and 20.8%, respectively.

Financial Condition

The Company’s total assets increased $621.1 million, or 55.0%, to $1.75 billion at September 30, 2020 from $1.13 billion at December 31, 2019.

The increase is primarily the result of $570.3 million in gross loan growth during the nine months ended September 30, 2020.

Included in the loan growth is $452.8 million in PPP loans.

The Company’s total assets increased $263.2 million, or 14.9%, to $2.03 billion at March 31, 2021 from $1.77 billion at December 31, 2020.

The increase is primarily the result of $219.6 million growth in loans receivable during the three months ended March 31, 2021.

Included in the loan growth is $178.0 million in new PPP loans, net of forgiveness and principal paydowns.

These PPP loans are 100% guaranteed by the SBA and have a rate of 1.0%, an approximate yield of 3.69%.

Interest earning deposits with other banks also increased $56.8 million, compared to September 30, 2019.

Loan Portfolio

The quarter ended September 30, 2020 closed with the global COVID-19 pandemic continuing to impact the economic health of our community and nation.

The provision for loan losses allowances was $5.7 million during the nine months ended September 30, 2020, as a result of an increase in qualitative factors related to uncertainties in the economic outlook from the COVID-19 pandemic and loan growth.

As a preferred SBA lender, we worked diligently with the SBA in the second quarter and third quarters of 2020 to offer assistance to small businesses as provided in the CARES Act, which significantly increased our loan totals.

We accepted and processed requests through the duration of round one and two of the PPP, and began accepting and processing applications for round three, which opened for applications on January 19, 2021.

As a preferred SBA lender, we worked diligently with the SBA to offer assistance to small businesses as provided in the CARES Act, which significantly increased our loan totals.

These SBA loans are discussed further in this section under “Commercial and Industrial Loans”.

As part of our ongoing commitment to our customers we have been proactive in contacting customers impacted by the stay-at-home order in Washington State, temporary business closures, or that have otherwise been impacted by the COVID-19 pandemic and responses thereto.

In addition to the PPP loans we made to assist customers, as of September 30, 2020, we have $52.5 million in deferred or modified payments, pursuant to federal guidance, representing 44 loans.

During the quarter ended September 30, 2020, there were an additional 7 loans, or $10.2 million, that were granted deferred or modified payments and 169 loans, representing $161.9 million, that moved back to active status from deferral status.

In total, we have deferred or modified payments on 245 loans, or $224.6 million.

As of September 30, 2020, $93.1 million, or 128 loans, have successfully resumed payments as scheduled, $76.0 million, or 65 loans, have moved to active status and have a payment due in the fourth quarter of 2020, $3.0 million, or 8 loans, have closed and paid-in-full, leaving $52.5 million, or 44 loans, on deferral.

All of the loans on deferred or modified status as of September 30, 2020 are scheduled to return to active status in the fourth quarter of 2020.

The graph below illustrates the status of all the loans that were part of the COVID-19 deferral program:

The graph below indicates the percentage of loans that remain on a COVID-19 deferral.

This illustration is based on total loans outstanding as of as of September 30, 2020.

Remaining deferrals by industry as of September 30, 2020:

As a result of proactively reaching out to customers to offer deferment to help reduce cash flow pressure we did not see material downgrades in credit during the nine months ended September 30, 2020.

We will continue to be diligent in monitoring credit and changes in the economy, keeping the lines of communication open with our customers, but the full impact of these challenging economic times on our financial condition and liquidity remains to be seen at this time.

In accordance with GAAP and interagency guidance issued on March 22, 2020, 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, are not classified as troubled debt restructurings.

Our primary source of income is derived through interest earned on loans.

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Our loan portfolio represents the highest yielding component of our earning assets.

As of September 30, 2020, gross loans totaled $1.51 billion, an increase of $570.3 million, or 60.7%, compared to December 31, 2019.

The increase was largely due to our efforts to provide community assistance through the PPP loans, which resulted in $452.8 million in PPP loans as of September 30, 2020, coupled with an additional $117.5 million in loan growth.

Loans as a percentage of deposits were 1 1 1.0 % as of September 30, 2020 , compared to 9 7.0 % as of December 31, 2019 .

We are 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 is largely due to the large volume of PPP loans.

As of March 31, 2021, loans receivable totaled $1.77 billion, an increase of $219.6 million, or 14.2%, compared to December 31, 2020.

The increase was largely due to our efforts to provide community assistance through the PPP loans, which resulted in $178.0 million increase in PPP loans as of March 31, 2021, and $41.6 million in other loan growth .

PPP loan growth includes $283.6 million in new PPP loans less $105.6 in forgiveness payments or principal paydowns during the three months ended March 31, 2021.

Loans as a percentage of deposits were 105.7% as of March 31, 2021, compared to 108.9% as of December 31, 2020.

We remain focused on serving our communities and markets by growing loans and funding those loans with customer deposits.

Loan to deposit ratio is over 100.0% largely due to the volume of PPP loans.

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

As of September 30, 2020

As of March 31, 2021

As of December 31, 2020

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Commercial and Industrial Loans.

Commercial and industrial loans increased $477.8 million, or 428.9%, to $589.2 million as of September 30, 2020, from $111.4 million as of December 31, 2019.

Commercial and industrial loans increased $207.1 million, or 38.4%, to $746.3 million as of March 31, 2021, from $539.2 million as of December 31, 2020.

Commercial and industrial loans are underwritten after evaluating and understanding the borrower’s ability to operate profitably and effectively.

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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.

Included in this balance is $ 43.8 million in capital call lines resulting from relationships with our BaaS customers as of September 30, 2020.

Our work with the SBA to help small businesses as provided in the CARES Act resulted in $452.8 million in PPP loans, with $8.6 million in net unearned deferred fees, which are included in commercial and industrial loans.

This includes 2,879 loans, helping over 40,600 employees in our communities.

We were able to provide loans to our existing customers and also provide assistance to new customers, by taking a proactive approach and reaching out to the communities we serve to offer aid through the PPP.

We have received approximately $14.5 million in loan fees from the SBA for originating and servicing the PPP loans, net of fees paid to agents.

These SBA 7(a) loans allowed small business owners to apply for financial relief under the PPP.

This program allowed business owners that are impacted by the COVID-19 pandemic to apply for and receive financial relief to help pay for employee wages and certain other expenses.

PPP loans have a maximum maturity of five years;

however, the majority of our PPP loans are two years, bear a 1.0% interest rate and may be forgiven by the government if certain criteria are met.

These fees are or will be recognized in interest income over the life of the loans;

Included in this balance is $ 102.2 million in capital call lines resulting from relationships with our CCBX customers as of March 31, 2021.

In the first two rounds of the PPP loan program in 2020, our work with the SBA to help small businesses as provided in the CARES Act resulted in a total of $452.8 million in PPP loans, with a total of $12.9 million in net deferred fees.

This includes over 2,800

loans, helping over 40,600 employees in our communities.

PPP loans have a maximum maturity of five years, bear a 1.0% interest rate and may be forgiven by the SBA if certain criteria are met.

The deferred fees are or will be recognized in interest income over the life of the loans;

however, if loans are forgiven or paid off remaining deferred fees will be recognized in the period the forgiveness or payoff occurs.

These fees are recognized as interest income and will provide a source of income to the Company as we navigate through these changes in our business and economy, so we may continue to provide financial services to our customers and communities.

We accepted and processed requests through the duration of the program, which ended on August 8, 2020.

We have begun accepting applications from customers for loan forgiveness;

however, we are awaiting further guidance and cannot approve an application or submit it to the SBA until the specific criteria have been disclosed.

In order to obtain loan forgiveness, a PPP borrower must submit a forgiveness application to us, which we must review and forward to the SBA.

In October 2020, we started to receive some forgiveness payments from the SBA.

It is still uncertain how quickly the SBA will be processing forgiveness requests, but we anticipate that forgiveness of PPP loans will begin in fourth quarter 2020, and the pace of forgiveness will increase in the first half of 2021.

The initial payment deferral period on PPP loans was extended and customers with two-year loans can work with their lender to extend to a five year maturity, which we anticipate could be a good option for customers that are not eligible for forgiveness.

The third round of the PPP loan program opened for applications on January 19, 2021.

Net deferred fees on these loans total $11.4 million as of March 31, 2021, and will be recognized in interest income in future periods.

Round three PPP loans have a maturity of five years.

Loan payments will be deferred for borrowers who apply for loan forgiveness until SBA remits the borrower's loan forgiveness amount to the lender.

If a borrower does not apply for loan forgiveness, payments are deferred 10 months after the end of the covered period for the borrower’s loan forgiveness.

We are accepting applications from customers for loan forgiveness.

During the quarter ended March 31, 2021, we received $105.6 million in forgiveness payments or principal paydowns.

In order to obtain loan forgiveness, a PPP borrower must submit a forgiveness application to us, which we review and submit to the SBA.

We expect that the pace of forgiveness of PPP loans will remain fairly steady throughout 2021, and start declining in the fourth quarter of 2021 as the covered periods will have passed and payments will start up gradually for loans originated earlier in the year.

Legislation extended the initial payment deferral period on PPP loans, and PPP borrowers with two-year loans can work with their lender to extend to a five year maturity, which we anticipate could be a popular approach for customers whose PPP loans are not eligible for forgiveness or who have only received partial forgiveness.

Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods from the recognition of deferred PPP loan fees.

As of March 31, 2021, we have a total of $543.8 million in PPP loans.

This includes all the rounds of the PPP loan program and is net of forgiveness or principal paydowns received on PPP loans.

Net deferred fees of $14.3 million remains on these loans, and will be recognized in interest income in future periods.

As of March 31, 2021, we have a total of $543.8 million in PPP loans.

This includes all the rounds of the PPP loan program and is net of forgiveness or principal paydowns received on PPP loans.

Net deferred fees of $14.3 million remains on these loans, and will be recognized in interest income in future periods.

Commercial Real Estate Loans.

Commercial real estate loans increased $91.8 million, or 15.0%, to $705.2 million as of September 30, 2020, from $613.4 million as of December 31, 2019.

Commercial real estate loans increased $18.7 million, or 2.4%, to $793.6 million as of March 31, 2021, from $774.9 million as of December 31, 2020.

We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans.

convenience stores, hotels and motels, office buildings, mixed-use residential and commercial, and other properties.

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 at the end of five to ten 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 September 30, 2020 , approximately 39.3 % of the commercial real estate loan portfolio consisted of fixed rate loans.

Commercial real estate loans represented 46.

4 % of our loan portfolio at September 30, 2020 and are historically our largest source of revenue.

At March 31, 2021, approximately 31.0% of the commercial real estate loan portfolio consisted of fixed rate loans.

Commercial real estate loans represented 44.5% of our loan portfolio at March 31, 2021 and are historically our largest source of revenue.

The addition of the $543.8 million in PPP loans as commercial and industrial loans has significantly impacted the composition of our loan portfolio;

without the PPP loans, commercial real estate loans would represent approximately 66.

1 % of the loan portfolio, which is more in line with what it has been historically.

The Bank actively seek s commercial real estate loans in our markets and our lenders are experienced in originating and competing for these loans.

Our credit administration team has substantial experience in underwriting, managing , monitoring and working out commercial real estate loans , and remains diligent in communicat ing and proactively work ing with borrowers to help mitigate potential credit deterioration .

without the PPP loans, commercial real estate loans would represent approximately 63.9% of the loan portfolio, which is more in line with what it has been historically.

The Bank actively seeks commercial real estate loans in our markets and our lenders are experienced in originating and competing for these loans.

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.

Construction, Land and Land Development Loans.

Construction, land and land development loans increased $3.9 million, or 4.0%, to $101.0 million as of September 30, 2020, from $97.0 million as of December 31, 2019.

We have a number of construction loans that have been approved, primarily for commercial projects, where the borrower has not requested the funds, resulting in our unfunded construction and development commitments increasing to $76.3 million at September 30, 2020, from $63.7 million at December 31, 2019.

Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2020, the full extent of the short-term and long-term effects of the COVID-19 pandemic remain to be seen.

Construction, land and land development loans increased $10.2 million, or 10.8%, to $104.6 million as of March 31, 2021, from $94.4 million as of December 31, 2020.

We have a number of construction loans that have been approved, primarily for commercial projects, where the borrower has not requested the funds, resulting in our unfunded construction and development commitments increasing to $107.4 million at March 31, 2021, from $69.9 million at December 31, 2020.

Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2021, the full extent of the long-term effects of the COVID-19 pandemic remain to be seen.

We anticipate that as projects continue we will see drawdowns on the available commitments.

Residential Real Estate Loans.

Our residential loans increased $6.1 million, or 5.3%, from $115.0 million at December 31, 2019 to $121.1 million at September 30, 2020.

We originate one-to-four 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 September 30, 2020, the balance of our ARM portfolio loans was $14.0 million, compared to $11.7 million at December 31, 2019.

Our residential real estate loans de creased $ 7.5 million , or 5.

2 %, from $ 143.9 million at December 31, 2020 to $ 136.4 million at March 31, 2021 .

We originate one-to-four 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 lo an.

As of March 31, 2021 , the balance of our ARM portfolio loans was $ 20.3 million, compared to $ 20.5 million at December 31, 2020 .

Our ARM loans typically do not meet the guidelines for sale in the secondary market due to characteristics of the property, the loan terms or exceptions from agency underwriting guidelines, which enables us to earn a higher interest rate.

We also purchase residential mortgages originated by other financial institutions to hold for investment with the intent to diversify our residential mortgage loan portfolio, meet certain regulatory requirements and increase our interest income .

As of September 30, 2020, we held $17.9 million in purchased residential real estate mortgage loans, compared to $28.6 million at December 31, 2019.

As of March 31, 2021 , we held $ 16.5 million in purchased residential real estate mortgage loans , compared to $ 16.8 million at December 31, 2020 .

These loans purchased typically have a fixed rate with a term of 15 to 30 years and are collateralized by one-to-four family residential real estate.

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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 September 30, 2020, residential real estate loans made to investors and business owners totaled $75.6 million .

As of March 31, 2021 , residential real estate loans made to investors and business owners totaled $ 82.4 million , compared to $84.3 million as of December 31, 2020 .

Like our commercial real estate loans, our residential real estate loans are secured by real estate, the value of which may fluctuate significantly over a short period of time as a result of market conditions in the area in which the real estate is located.

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Consumer and Other.

Consumer and other loans totaled $3.9 million as of September 30, 2020, decreasing $287,000 from $4.2 million at December 31, 2019.

Consumer and other loans totaled $4.1 million as of March 31, 2021, increasing $198,000 from $3.9 million at December 31, 2020.

Our consumer and other loans are comprised of personal lines of credit, automobile, boat, and recreational vehicle loans, and secured term loans.

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Three of our largest categories of our loans are commercial real estate, commercial and industrial, and construction, land and land development loans.

Together they represent $942.5 million in outstanding loan balances, or 88.3% of total gross loans outstanding, excluding PPP loans of $452.8 million.

Together they represent $1.10 billion in outstanding loan balances, or 88.7% of total gross loans outstanding, excluding PPP loans of $543.8 million as of March 31, 2021.

When combined with $393.5 million in unused commitments, the total of these three categories is $1.49 billion, or 90.2%, of total outstanding loans and loan commitments.

Commercial Real Estate Loans.

Commercial real estate represents the largest segment of our loans, comprising 66.1% of our total balance of outstanding loans, excluding PPP loans, as of September 30, 2020.

Unused commitments to extend credit represents an

additional $15.6 million, the combined total exposure in commercial real estate loans represents $720.8 million, or 54.6 % of our total outstanding loans and loan commitments, excluding PPP loans.

The following table summarizes our concentration by industry for our commercial real estate loan portfolio as of September 30, 2020:

Commercial real estate loans represents the largest segment of our loans, comprising 63.9% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2021.

Unused commitments to extend credit represents an additional $23.2 million, the combined total exposure in commercial real estate loans represents $816.9 million, or 49.3%, of our total outstanding loans and loan commitments, excluding PPP loans.

The following table summarizes our concentration by industry for our commercial real estate loan portfolio as of March 31, 2021:

(Dollars in thousands, unaudited)

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Commercial and Industrial Loans.

Commercial and industrial loans comprise 12.8% of our total balance of outstanding loans, excluding PPP loans, as of September 30, 2020.

Commercial and industrial loans comprise 16.3% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2021.

Unused commitments to extend credit represents an additional $239.7 million, the combined total exposure in commercial and industrial loans represents $442.1 million, or 26.7%, of our total outstanding loans and loan commitments, excluding PPP loans.

The following table summarizes our concentration by industry for our commercial and industrial loan portfolio as of September 30, 2020:

The following table summarizes our concentration by industry for our commercial and industrial loan portfolio as of March 31, 2021:

(Dollars in thousands, unaudited)

9 unchanged sentences

Financial Institutions

Family and Social Services

Manufacturing

Medical / Dental /

Family and Social Services

Groups < 0.80% of total

Construction, Land and Land Development Loans.

Construction, land and land development loans comprise 9.5% of our total balance of outstanding loans, excluding PPP loans, as of September 30, 2020.

Construction, land and land development loans comprise 8.4% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2021.

Unused commitments to extend credit represents an additional $130.6 million, the combined total exposure in construction, land and land development loans represents $235.2 million, or 14.2%, of our total outstanding loans and loan commitments, excluding PPP loans.

The following table details our concentration for our construction, land and land development loan portfolio as of September 30, 2020:

The following table details our concentration for our construction, land and land development loan portfolio as of March 31, 2021:

(Dollars in thousands, unaudited)

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Residential construction

Land development

Developed land loans

Undeveloped land loans

Land development

Nonperforming Assets

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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.

We are not required to report as nonperforming a loan for which we have allowed the borrower to defer payment on a short term basis because of financial pressure related to COVID-19.

We are not required to report as nonperforming a loan for which we have allowed the borrower to defer payment on a short term basis because of financial pressure related to the COVID-19 pandemic.

When loans are placed on nonaccrual status, all unpaid accrued interest is reversed from income and all interest accruals are stopped.

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We actively manage problem assets to reduce our risk for loss.

We had $4.5 million in nonperforming assets, as of September 30, 2020, compared to $1.0 million as of December 31, 2019.

There were no loans more than 90 days past due and still accruing interest as of September 30, 2020 and December 31, 2019.

Our nonperforming loans to loans receivable ratio was 0.30% at September 30, 2020, compared to 0.11% at December 31, 2019.

Construction, land and land development loans totaled $3.3 million, representing one loan that was added in the second quarter of 2020.

Commercial and industrial nonaccrual loans totaled $625,000 at September 30, 2020 and consisted of three lending relationships.

Commercial real estate loans totaled $405,000, representing one loan, which was added during the second quarter of 2020.

During the third quarter of 2020, one loan for $117,000 in residential real estate moved to nonperforming status.

The addition of this loan to nonperforming status in the third quarter was partially offset by principal reductions and resulted in an overall increase in our ratios of nonperforming loans and nonperforming assets to total assets compared to December 31, 2019.

Credit quality has remained stable in 2020 thus far as demonstrated by the low level of charge-offs and nonperforming loan balance.

The full extent of the short-term and long-term economic impact of the COVID-19 pandemic is unknown;

We had $661,000 in nonperforming assets, as of March 31, 2021, compared to $712,000 as of December 31, 2020.

There were no loans more than 90 days past due and still accruing interest as of March 31, 2021 and December 31, 2020.

Our nonperforming loans to loans receivable ratio was 0.04% at March 31, 2021, compared to 0.05% at December 31, 2020.

Commercial and industrial nonaccrual loans totaled $488,000 at March 31, 2021 and consisted of three lending relationships.

Residential real estate nonaccrual loans totaled $173,000 and consisted of two lending relationships.

The addition of one loan for $133,000, the payoff of two loans totaling $182,000 and principal reductions in the first quarter of 2021 resulted in an overall decrease in our ratios of nonperforming loans and nonperforming assets to total assets compared to December 31, 2020.

To date we have not seen a significant change in our credit quality metrics, as demonstrated by the low level of charge-offs and nonperforming loan balance for the quarter ended March 31, 2021.

The full extent of the long-term economic impact of the COVID-19 pandemic still remains unknown;

however, we remain diligent in our efforts to communicate and proactively work with borrowers to help mitigate potential credit deterioration.

Credit administration is closely analyzing higher risk segments within the loan portfolio, monitoring and tracking loan payment deferrals and customer liquidity, and providing timely reporting to management and the board of directors.

Increased stimulus, ongoing vaccinations, and reopening of the economy are expected to help the economic recovery and borrower performance.

Pursuant to federal guidance, the Company deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic and economic shutdown.

In addition to the PPP loans we made to assist customers, as of March 31, 2021, we have $13.3 million in deferred and/or modified payments, pursuant to federal guidance, representing three loans.

During the quarter ended March 31, 2021, there were an additional two loans, or $7.7 million, that were granted deferred or modified payments and two loans, representing $3.7 million, that moved back to active status from deferral status.

In total, we have deferred or modified payments on 249 loans, or $241.6 million.

As of March 31, 2021, $211.4 million, or 217 loans, have successfully resumed payments as scheduled, $3.7 million, or two loans, have moved to active status and have a payment due in the second quarter of 2021, $13.3 million, or 27 loans, have closed and paid-in-full, leaving $13.3 million, or three loans, on deferral.

All of the loans on deferred or modified status as of March 31, 2021 are scheduled to return to active status in the second quarter of 2021.

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

September 30,

(Dollars in thousands)

2 unchanged sentences

Real estate loans:

Construction, land and land development

Residential real estate

Commercial real estate

Total nonaccrual loans

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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.

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.

6 unchanged sentences

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

As of September 30, 2020, the allowance for loan losses totaled $17.0 million, or 1.13% of total loans.

As of March 31, 2021, the allowance for loan losses totaled $19.6 million, or 1.11% of total loans.

As of December 31, 2020, the allowance for loan losses totaled $19.3 million, or 1.25% of total loans.

Included in total loans is $543.8 million in PPP loans which are 100% guaranteed by the SBA.

The allowance for loan losses to loans receivable, excluding the guaranteed PPP loans, is approximately 1.60%.

Our allowance for loan losses as of March 31, 2021 increased by $348,000, or 1.8%, compared to December 31, 2020, primarily due to non-PPP loan growth.

The allowance for loan losses to loans receivable, excluding the guaranteed PPP loans, is approximately 1.59% at March 31, 2021.

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

” Our allowance for loan losses as of September 30, 2020 increased by $5.6 million, or 48.6%, compared to December 31, 2019, due to an increase in our qualitative factors primarily related to the current economic environment from the COVID-19 pandemic on our loan portfolio and loan growth.

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

As of and for the Three

As of and for the Nine

September 30,

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

As of or for the Three

(Dollars in thousands)

2 unchanged sentences

Commercial and industrial loans

Real estate loans:

Residential real estate loans

Commercial real estate

Consumer and other

8 unchanged sentences

Net charge-offs to average loans (1)

(1) Ratios for the three and nine months ended September 30, 2020 and 2019 are annualized.

(1) Ratios for the three months ended March 31, 2021 and 2020 are annualized.

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.

As a result of the COVID-19 pandemic and the subsequent impact to the economy, we increased our provision during the nine months ended September 30, 2020.

If the COVID-19 pandemic worsens or continues indefinitely, preventing businesses and consumers from conducting business, the state and Puget Sound region may experience a continued economic downturn, and our asset quality could deteriorate, which may require material additional provisions for loan losses.

As a result of the COVID-19 pandemic and the subsequent impact to the economy, we increased our provision during the year ended December 31, 2020.

The provision for the three months ended March 31, 2021, was based primarily on non-PPP loan growth during the quarter.

The economic outlook has improved with additional economic stimulus of $1.9 trillion, increased vaccination leading to herd immunity, and the re-opening of activities previously restricted.

However, if the COVID-19 pandemic worsens or continues indefinitely, preventing businesses and consumers from conducting business in the ordinary course, Washington state and the Puget Sound region may experience a continued economic downturn, and our asset quality could deteriorate, which may require material additional provisions for loan losses.

We remain focused on working with the communities we serve, offering payment deferrals and other resources available under the CARES Act to provide financial assistance to businesses and consumers until they are able recover from this uncertain and trying time.

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 September 30, 2020, 83.9% of our investment portfolio consisted of U.S.

At March 31, 2021, 87.1% of our investment portfolio consisted of U.S.

Treasury securities.

The remainder of our securities portfolio was invested in U.S.

Government agency securities, U.S.

A gency collateralized mortgage obligations and U.S.

A gency collateralized mortgage obligations, U.S.

Agency residential mortgage-backed securities, and municipal bonds.

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 September 30, 2020, our loan-to-deposit ratio was 111.0%, which is elevated as a result of the PPP loans.

At March 31, 2021, our loan-to-deposit ratio was 105.7%, which is elevated as a result of the PPP loans.

Our securities portfolio represented less than 2% of assets.

To the extent our securities represent more than 5% of assets, absent an immediate need for liquidity, we anticipate investing excess funds to provide a higher return.

As of September 30, 2020 , the carrying amount of our investment securities totaled $ 2 3.8 million, a de crease of $ 8.

9 million , or 2 7 .

3 %, compared to $ 3 2 .

7 million as of December 31, 2019 .

As of March 31, 2021, the carrying amount of our investment securities totaled $22.9 million, a decrease of $354,000, or 1.5%, compared to $23.2 million as of December 31, 2020.

The decrease in the securities portfolio was due to maturities and principal paydowns.

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

September 30, 2020

March 31, 2021

December 31, 2020

2 unchanged sentences

Treasury securities

Government securities

Agency collateralized mortgage obligations

6 unchanged sentences

Total investment securities

We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, savings, money market and time accounts as well as BaaS-brokered deposits.

In addition, we recently added reciprocal deposits to our product offering.

This enables us to extend FDIC insurance to customers that have balances in excess of the FDIC insurance limit.

This service trades our customers’ funds as CDs or interest bearing demand deposits in increments under the FDIC insured amount to other participating financial institutions and in exchange we receive CD or interest bearing demand investments from participating financial institutions in a reciprocal agreement.

We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, savings, money market, time accounts, BaaS-brokered deposits as well as r eciprocal deposits.

Reciprocal deposits enable us to extend FDIC insurance to customers that have balances in excess of the FDIC insurance limit.

This service trades our customers’ funds as CDs 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.

Total deposits as of September 30, 2020 were $1.36 billion, an increase of $392.1 million, or 40.5%, compared to $968.0 million as of December 31, 2019.

The increase was largely in core deposits, which increased $407.7 million to $1.27 billion from $862.5 million at December 31, 2019.

The increase in core deposits is primarily the result of expanding and growing banking relationships with new customers, including deposit relationships from PPP loans made to noncustomers moving their banking relationship to the Bank.

We define core deposits as all deposits except time deposits and BaaS-brokered deposits.

We focus on growing core deposits and our branch managers, business development officers, treasury service personnel and lenders work together to grow deposits from existing and new customers.

Noninterest bearing deposits as of September 30, 2020 were $570.7 million, an increase of $199.4 million, or 53.7%, compared to $371.2 million as of December 31, 2019.

The increase is primarily the result of expanding and growing banking relationships with new customers, including deposit relationships from PPP loans made to noncustomers, who moved their banking relationship to the Bank.

Noninterest bearing deposits represent 42.0% and 38.4% of total deposits for September 30, 2020 and December 31, 2019, respectively.

Total interest bearing account balances, excluding time deposits, as of September 30, 2020 were $724.5 million, an increase of $209.6 million, or 40.7%, from $514.9 million as of December 31, 2019.

Included in interest bearing account balances is $24.9 million in BaaS-brokered deposits, an increase of $1.3 million from December 31, 2019.

Total deposits as of March 31, 2021 were $ 1.67 billion , an increase of $ 250.4 million, or 17.6 %, compared to $ 1.42 million as of December 31, 2020 .

Included in total deposits is $ 139.1 million in deposits derived from CCBX deposit relationships, an increase of $ 70.4 million, or 102.5 %, compared to $ 68.7 million as of December 31, 20 20 .

CCBX customer deposit relationships include deposits with CCBX end customers, operating and non-operating deposit accounts.

The increase was largely in core deposits, which increased $ 262.7 million to $ 1.59 billion from $ 1.33 b illion at December 31, 2020 .

We define core deposits as all deposits except time deposits an d brokered deposits.

We focus on growing core deposits and our branch managers, treasury service personnel and lenders work together to grow deposits from existing and new customers.

Noninterest bearing deposits as of March 31, 2021 were $768.7 million, an increase of $176.4 million, or 29.8%, compared to $592.3 million as of December 31, 2020.

Noninterest bearing deposits represent 46.0% and 41.7% of total deposits for March 31, 2021 and December 31, 2020, respectively.

Total interest bearing account balances, excluding time deposits, as of March 31, 2021 were $847.8 million, an increase of $78.3 million, or 10.2%, from $769.4 million as of December 31, 2020.

Included in interest bearing account balances is $25.6 million in BaaS-brokered deposits, an decrease of $7.9 million from December 31, 2020.

Also included in interest bearing deposits is $8.2 million in reciprocal deposits.

In 2019 we introduced reciprocal deposits as a product available for time deposit customers and beginning in 2020 we added an interest bearing demand reciprocal deposit product.

Total time deposit balances as of September 30, 2020 were $ 64.9 million, a de crease of $ 17.0 million, or 20.7 % , from $ 81.9 million as of December 31, 2019 .

The de crease is a conscious effort to not replace maturing time deposits, but rather to grow and retain less expensive core deposits .

We have s een competitors continue to offer higher rates on time deposits , and we have not globally matched their rates in response as we have been able to grow and retain less costly core deposits.

Total time deposit balances as of March 31, 2021 were $55.3 million, a decrease of $4.3 million, or 7.3%, from $59.6 million as of December 31, 2020.

The decrease is due to the strong increase in core deposits, and thus not requiring the replacement of time deposits as they mature.

We have seen competitors increase rates on time deposits, and we have not globally matched their rates in response as we have been able to grow and retain less costly core deposits.

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

September 30, 2020

March 31, 2021

December 31, 2020

8 unchanged sentences

(Dollars in thousands)

September 30,

Maturity Period:

4 unchanged sentences

Weighted average maturity (in years)

Average deposits for the three and nine months ended September 30, 2020 were $1.32 billion and $1.18 billion, respectively, an increase of 49.0% and 36.4%, respectively , compared to the three and nine months ended September 30, 2019.

The increase in average deposits was primarily due to an increase in core deposits, both in noninterest bearing deposits and in low rate interest bearing deposits.

Average deposits for the three months ended March 31, 2021 were $1.55 billion, an increase of 57.7% compared to $981.0 million for the three months ended March 31, 2020.

The increase in average deposits was primarily due to an increase in core deposits, both in

noninterest bearing deposits and in low interest rate interest bearing deposits.

Included in this increase is deposit relationships gained from PPP loans made to noncustomers that moved their banking /deposit relationship to the Bank .

Also included in this increase is growth in CCBX deposits.

We expect deposit to grow with continued growth in our primary market areas, the increase in commercial lending relationships for which we also seek deposit balances and the results of business development efforts by our business development officers, branch managers and lenders.

The average rate paid on total deposits was 0.27% and 0.40%, respectively, for the three and nine months ended September 30, 2020, compared to 0.64% and 0.66%, for the three and nine months ended September 30, 2019, respectively.

The average rate paid on BaaS-brokered deposits decreased 1.64% and 1.72% for the three and nine months ended September 30, 2020, respectively, compared to the prior year periods, and NOW and money market accounts decreased 51 basis points and 21 basis points, for the three and nine months ended September 30, 2020, respectively.

The average rate paid on NOW and money market accounts in the three and nine months ended September 30, 2020 is the result of the decreased Fed funds rates since June 2019;

the impact of these rate decreases will continue to be reflected in future periods.

The average rate paid on total deposits was 0.17% for the three months ended March 31, 2021, compared to 0.64% for the three months ended March 31, 2020, respectively.

The average rate paid on BaaS-brokered deposits decreased 0.73% for the three months ended March 31, 2021, compared to the prior year period, and NOW and money market accounts decreased 69 basis points for the three months ended March 31, 2021.

The average rate paid on NOW and money market accounts in the three months ended March 31, 2021 is the result of the current low interest rate environment resulting from the decreased Fed Funds rate.

Any further changes to the Fed Funds rate along with competition are expected to continue to impact future cost of deposits and our pricing strategies.

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

For the Three Months Ended September 30,

For the Nine Months Ended September 30,

For the Three Months Ended March 31,

(Dollars in thousands)

5 unchanged sentences

Total deposits

The ratio of average noninterest bearing deposits to average total deposits for the three and nine months ended September 30, 2020 was 43.1% and 41.2%, respectively, compared to 37.3% and 35.6% for the three and nine months ended September 30, 2019, respectively.

The ratio of average noninterest bearing deposits to average total deposits for the three months ended March 31, 2021 was 44.6% compared to 36.0% for the three months ended March 31, 2020.

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.

1 unchanged sentence

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 September 30, 2020, and December 31, 2019, total borrowing capacity of $20.8 and $21.4 million, respectively, was available under this arrangement.

As of September 30, 2020 and December 31, 2019, Federal Reserve advances totaled zero.

As of March 31, 2021, and December 31, 2020, total borrowing capacity of $20.8 and $21.3 million, respectively, was available under this arrangement.

As of March 31, 2021 and December 31, 2020, Federal Reserve advances totaled zero.

Paycheck Protection Program Liquidity Facility.

4 unchanged sentences

The interest rate is 0.35% and as PPP loans are paid down, the borrowing line must also be paid down.

As of September 30, 2020, there was $202.6 million outstanding in PPPLF advances.

This is a new borrowing arrangement that has favorable capital treatment and is specific to the PPP loan program, and therefore there was no balance at December 31, 2019.

As of March 31, 2021, there was $158.5 million outstanding in PPPLF advances, compared to $153.7 million as of December 31, 2020.

PPPLF advances were a new borrowing arrangement in 2020 that has favorable capital treatment and is specific to the PPP loan program.

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

As of and For the Three

As of and For the Nine

September 30,

(Dollars in thousands)

12 unchanged sentences

The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans.

As of September 30, 2020, and December 31, 2019, we had borrowing capacity of $92.7 million and $84.9 million, respectively, under this arrangement.

As of September 30, 2020, we borrowed a total of $25.0 million in FHLB long term advances.

This includes $10.0 million for a 2.50-year remaining term and $15.0 million advance with a 4.50-year remaining term.

FHLB advances totaled $25.0 million as of September 30, 2020 and $10.0 million as of December 31, 2019.

There was $67.7 million and $74.9 million borrowing capacity remaining as of September 30, 2020, and December 31, 2019, respectively.

Although there are no immediate plans to borrow additional funds, additional borrowing capacity of $67.7 million was available under this arrangement as of September 30, 2020.

As of March 31, 2021, and December 31, 2020, we had borrowing capacity of $101.0 million and $90.7 million, respectively, with the FHLB.

As of March 31, 2021, we have $25.0 million in FHLB medium term advances.

This includes $10.0 million for a 2.0-year remaining term and $15.0 million for a 4.0-year remaining term.

FHLB advances totaled $25.0 million as of March 31, 2021 and December 31, 2020.

Although there are no immediate plans to borrow additional funds, additional borrowing capacity of $76.0 million was available under this arrangement as of March 31, 2021.

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

As of and For the Three

As of and For the Nine

September 30,

(Dollars in thousands)

10 unchanged sentences

FHLB Advances

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

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

As of and For the Three

As of and For the Nine

September 30,

(Dollars in thousands)

15 unchanged sentences

The debentures bear interest at a rate per annum equal to the 3-month LIBOR plus 2.10%.

The effective rate as of September 30, 2020, and December 31, 2019, was 2.35 % and 3.99%, respectively.

The effective rate as of March 31, 2021, and December 31, 2020, was 2.28 % and 2.32%, 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.

2 unchanged sentences

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

ex ceptions, the redemption price with respect to any Trust securities called for redemption and amounts due if the Trust is liquidated or terminated.

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 .

27 unchanged sentences

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.

We are also participating in the PPPLF, which provides an additional source of low cost funding, at a 0.35% interest rate, and favorable capital treatment for the PPP loans.

We have pledged 820 of these loans, or $202.6 million, as of September 30, 2020.

We have pledged 448 of these loans, or $158.5 million, as of March 31, 2021.

Under the terms of the agreement, the borrowings will be paid down as the loans are forgiven or paid down by the customer.

4 unchanged sentences

The Company has consistently retained a portion of the funds from equity and debt offerings so that is has sufficient funds for its operating and debt costs for the next few years.

The Company down-streamed $7.5 million in capital to the Bank during the first quarter of 2020, bringing the Company’s cash holding to $5.6 million at September 30, 2020.

The Company uses approximately $1.3 million for debt servicing and operating purposes each year, leaving about $3.0 million for other purposes after deducting $2.6 million to cover operating purposes for the next two years.

The Company currently holds $4.7 million in cash, and uses approximately $1.3 million for debt servicing and operating purposes each year, leaving about $2.1 million for other purposes after deducting $2.6 million to cover operating purposes for the next two years.

In addition, the Bank can declare and pay dividends to the Company to meet the Company’s debt and operating expenses.

3 unchanged sentences

Both of these minimum liquidity levels are on-balance sheet sources.

Per policy and the Bank’s liquidity contingency plan, in event of a liquidity emergency the Bank can utilize wholesale funds in an amount up to 30% of

Per policy and the Bank’s liquidity contingency plan, in event of a liquidity emergency the Bank can utilize wholesale funds in an amount up to 30% of assets.

Since the Bank uses only a small portion of its borrowing or wholesale funding capacity, the Bank has access to funds if needed in a liquidity emergency.

Any P PPLF borrowings are excluded from the 30% of assets wholesale ratio as these funds are for a specific purpose and have favorable regulatory treatment.

Any PPPLF borrowings are excluded from the 30% of assets wholesale ratio as these funds are for a specific purpose and have favorable regulatory treatment.

Capital Adequacy

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Currently, the Federal Reserve assesses the capital position of the Company by reviewing its debt-to-equity ratio and assessing the Company's capacity to serve as a source of strength to the Bank.

During the first quarter of 2020, the Company contributed $7.5 million in capital to the Bank due to the volatile economic environment.

No additional contributions have been made;

however, the Company could downstream additional funds to the Bank in the future, if necessary.

As of September 30, 2020, and December 31, 2019, 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 of March 31, 2021, and December 31, 2020, 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.

On April 13, 2021, the Company filed a registration statement on Form S-3 with the Securities and Exchange Commission (the “SEC”).

The Company currently has no immediate plans for raising additional capital;

however under the registration statement on Form S-3, the Company may offer and sell from time to time, separately or together, any combination of Company common stock, preferred stock, debt securities, depositary shares, warrants, purchase contracts, purchase units, subscription rights and units in one or more offerings at an aggregate offering price of up to $150,000,000.

The Company may utilize the proceeds from any of these potential security sales to support growth, for general corporate purposes as necessary, or to refinance debt.

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:

5 unchanged sentences

(dollars in thousands)

September 30, 2020

March 31, 2021

Leverage Capital (to average assets)

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Contractual Obligations

The following table summarizes contractual obligations and other commitments to make future payments (other than non-time deposit obligations), which consist of future cash payments associated with our contractual obligations, as of September 30, 2020.

Payments Due by Period

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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.

September 30,

(Dollars in thousands)

1 unchanged sentence

Commercial and industrial loans

Commercial and industrial loans - capital call lines

Construction – commercial real estate loans

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Three Months Ended

Nine Months Ended

September 30,

December 31, 2019

September 30, 2019

September 30, 2020

September 30, 2019

Return on average assets (1)

5 unchanged sentences

Yield on loans receivable,

as adjusted (1)(2)

excluding PPP loans (1)(2)

Contractual yield on loans

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receivable, excluding earned

fees, as adjusted (1)(2)

fees and interest on PPP loans

Cost of funds (1)

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Loans receivable to deposits

(1) Annualized calculations shown for quarterly and nine month periods presented.

(2) A reconciliation of the non-GAAP measures are set forth in “GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures”.

(1) Annualized calculations shown for quarterly periods presented.

(2) A reconciliation of the non-GAAP measures are set forth in the section titled "GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures.”

GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures

11 unchanged sentences

Three Months Ended

As of and for the

Nine Months Ended

(Dollars in thousands, unaudited)

September 30,

Pre-tax, pre-provision net income and pre-tax, pre-provision return on average assets:

7 unchanged sentences

return on average

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

Contractual yield on loans receivable, excluding earned fees is a non-GAAP measure that excludes the impact of earned loan fees on the contractual interest rate yield.

The most directly comparable GAAP measure is yield on loans.

Reconciliations of the GAAP and non-GAAP measures are presented below.

(Dollars in thousands, unaudited)

September 30,

Contractual yield on loans receivable, excluding earned fees :

Total average loans receivable

Interest and earned fee income on loans

earned fee income on all loans

Adjusted interest income on loans

Yield on loans receivable

Contractual yield on loans

receivable, excluding earned fees:

Contractual yield on loans

receivable, excluding earned fees

and interest on PPP loans (1):

(1) Non-GAAP measure - see next table of "Non-GAAP Financial Measures" for more information.

The following non-GAAP financial measures are presented to illustrate and identify the impact of PPP loans on loans receivable related measures.

By removing these significant items and showing what the results would have been without them, we are providing investors with the information to better compare results with periods that did not have these significant items.

We believe that these non-GAAP financial measures provide information that is important to investors and that is useful in understanding our results of operations.

These measures include the following:

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

Allowance for loan losses to loans receivable, excluding PPP loans is a non-GAAP measure that excludes the impact of PPP loans on balance sheet.

The most directly comparable GAAP measure is allowance for loan losses to loans receivable.

Adjusted yield on loans receivable is a non-GAAP measure that excludes the impact of PPP loans on balance sheet.

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

The most directly comparable GAAP measure is yield on loans.

Adjusted contractual yield on loans receivable, excluding earned fees is a non-GAAP measure that excludes the impact of PPP loans on balance sheet.

The most directly comparable GAAP measure is contractual yield on loans, excluding fees.

Contractual yield on loans receivable, excluding earned fees and interest on PPP loans is a non-GAAP measure that excludes the impact of PPP loans on balance sheet and income statement.

The most directly comparable GAAP measure is contractual yield on loans.

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

The most directly comparable GAAP measure is Tier 1 leverage capital ratio.

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

As of and for the

Three Months Ended

Nine Months Ended

(Dollars in thousands, unaudited)

September 30, 2020

Adjusted allowance for loan losses to loans receivable:

March 31, 2021

December 31, 2020

Allowance for loan losses to loans receivable, exlcuding PPP loans:

Total loans, net of deferred fees

3 unchanged sentences

Allowance for loan losses to loans receivable

Adjusted allowance for loan losses to loans receivable

Adjusted yield on loans receivable:

Allowance for loan losses to loans receivable,

excluding PPP loans

Yield on loans receivable, excluding PPP loans:

Total average loans receivable

3 unchanged sentences

Interest income on loans

interest and fee income on PPP loans

interest and deferred fee income

recognized on PPP loans

Adjusted interest income on loans

Yield on loans receivable

Adjusted yield on loans receivable:

Adjusted contractual yield on loans receivable, excluding earned fees and interest on PPP loans:

Yield on loans receivable, excluding PPP loans:

Contractual yield on loans receivable, excluding earned fees and interest on PPP loans:

Total average loans receivable

2 unchanged sentences

Adjusted total average loans receivable

excluding earned fees

Interest and earned fee income on loans

earned fee income on loans

earned fee income on all loans

interest income on PPP loans

Adjusted interest income on loans

Yield on loans receivable

Contractual yield on loans receivable,

excluding earned fees (1)

Adjusted contractual yield on loans receivable,

Contractual yield on loans receivable,

excluding earned fees and interest on PPP loans:

(1) Non-GAAP measure - see previous table of " Non-GAAP Financial Measures" for more information.

(Dollars in thousands, unaudited)

March 31, 2021

December 31, 2020

Tier 1 capital

Average assets for the leverage capital ratio

Average PPP loans

Average PPPLF borrowings

Adjusted average assets for the leverage capital ratio

Tier 1 leverage capital ratio

Adjusted Tier 1 leverage capital ratio, excluding PPP loans

Tier 1 capital

Average assets for the leverage capital ratio

Average PPP loans

Average PPPLF borrowings

Adjusted average assets for the leverage capital ratio

Tier 1 leverage capital ratio

Adjusted Tier 1 leverage capital ratio, excluding PPP loans

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 2. Management’s Discussion and Analysis