COASTAL FINANCIAL CORP 10-Q

Item 1. Financial Statements COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (dollars in thousands) ASSETS March 31, December 31, 2021 2020 Cash and due from banks $ 16,842 $ 18,965 Interest earning deposits with other banks (restricted cash of $ 0 at March 31, 2021 and December 31, 2020) 187,472 144,152 Investment securities, available for sale, at fair value 20,378 20,399 Investment securities, held to maturity, at amortized cost 2,515 2,848 Other investments 6,829 6,059 Loans receivable 1,766,723 1,547,138 Allowance for loan losses ( 19,610 ) ( 19,262 ) Total loans receivable, net 1,747,113 1,527,876 Premises and equipment, net 17,194 17,108 Operating lease right-of-use assets 6,900 7,120 Accrued interest receivable 8,597 8,616 Bank-owned life insurance, net 7,133 7,082 Deferred tax asset, net 3,802 3,799 Other assets 4,584 2,098 Total assets $ 2,029,359 $ 1,766,122 LIABILITIES AND SHAREHOLDERS’ EQUITY LIABILITIES Deposits $ 1,671,715 $ 1,421,307 Federal Home Loan Bank ("FHLB") advances 24,999 24,999 Paycheck Protection Program Liquidity Facility 158,519 153,716 Subordinated debt Principal amount $ 10,000 (less unamortized debt issuance costs of $ 4 and $ 7 at March 31, 2021 and December 31, 2020, respectively) 9,996 9,993 Junior subordinated debentures Principal amount $ 3,609 (less unamortized debt issuance costs of $ 24 and $ 25 at March 31, 2021 and December 31, 2020, respectively) 3,585 3,584 Deferred compensation 833 863 Accrued interest payable 538 531 Operating lease liabilities 7,105 7,323 Other liabilities 5,330 3,589 Total liabilities 1,882,620 1,625,905 SHAREHOLDERS’ EQUITY Preferred stock, no par value: Authorized: 25,000,000 shares at March 31, 2021 and December 31, 2020; issued and outstanding: zero shares at March 31, 2021 and December 31, 2020 - - Common stock, no par value: Authorized: 300,000,000 shares at March 31, 2021 and December 31, 2020; 11,988,636 shares at March 31, 2021 issued and outstanding and 11,954,327 shares at December 31, 2020 issued and outstanding 88,329 87,815 Retained earnings 58,386 52,368 Accumulated other comprehensive income (loss), net of tax 24 34 Total shareholders’ equity 146,739 140,217 Total liabilities and shareholders’ equity $ 2,029,359 $ 1,766,122 See accompanying Notes to Condensed Consolidated Financial Statements. 4 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) (dollars in thousands, except for per share data) Three Months Ended March 31, 2021 2020 INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 18,230 $ 12,627 Interest on interest earning deposits with other banks 70 358 Interest on investment securities 28 119 Dividends on other investments 30 16 Total interest income 18,358 13,120 INTEREST EXPENSE Interest on deposits 660 1,554 Interest on borrowed funds 383 202 Total interest expense 1,043 1,756 Net interest income 17,315 11,364 PROVISION FOR LOAN LOSSES 357 1,578 Net interest income after provision for loan losses 16,958 9,786 NONINTEREST INCOME Deposit service charges and fees 863 723 BaaS fees 948 579 Loan referral fees 597 1,053 Mortgage broker fees 262 162 Sublease and lease income 32 30 Gain on sales of loans, net 130 - Other income 152 124 Total noninterest income 2,984 2,671 NONINTEREST EXPENSE Salaries and employee benefits 7,686 5,683 Occupancy 1,058 927 Data processing 697 551 Software licenses, maintenance and subscriptions 484 271 Director and staff expenses 220 270 Excise taxes 359 203 Marketing 82 112 Legal and professional fees 760 323 Federal Deposit Insurance Corporation ("FDIC") assessments 195 70 Business development 99 125 Other expense 712 484 Total noninterest expense 12,352 9,019 Income before provision for income taxes 7,590 3,438 PROVISION FOR INCOME TAXES 1,572 714 NET INCOME $ 6,018 $ 2,724 Basic earnings per common share $ 0.50 $ 0.23 Diluted earnings per common share $ 0.48 $ 0.22 Weighted average number of common shares outstanding: Basic 11,980,092 11,909,248 Diluted 12,412,813 12,208,175 See accompanying Notes to Condensed Consolidated Financial Statements. 5 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) (dollars in thousands) Three Months Ended March 31, 2021 2020 NET INCOME $ 6,018 $ 2,724 OTHER COMPREHENSIVE INCOME, before tax Securities available-for-sale Unrealized holding (loss) gain during the period ( 13 ) 109 Income tax benefit (expense) related to unrealized holding (loss) gain 3 ( 23 ) OTHER COMPREHENSIVE (LOSS) INCOME, net of tax ( 10 ) 86 COMPREHENSIVE INCOME $ 6,008 $ 2,810 See accompanying Notes to Condensed Consolidated Financial Statements. 6 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED) (dollars in thousands) Shares of Common Stock Amount of Common Stock Retained Earnings Accumulated Other Comprehensive Income (Loss) Total BALANCE, December 31, 2019 11,913,885 $ 86,983 $ 37,222 $ ( 32 ) $ 124,173 Net income - - 2,724 - 2,724 Issuance of restricted stock awards 6,248 - - - - Forfeiture of restricted stock awards - - - - - Exercise of stock options 9,280 54 - - 54 Stock-based compensation - 129 - - 129 Other comprehensive income - - - 86 86 BALANCE, March 31, 2020 11,929,413 $ 87,166 $ 39,946 $ 54 $ 127,166 BALANCE, December 31, 2020 11,954,327 $ 87,815 $ 52,368 $ 34 $ 140,217 Net income - - 6,018 - 6,018 Issuance of restricted stock awards 5,978 - - - - Vesting of restricted stock units 7,426 - - - - Exercise of stock options 20,905 151 - - 151 Stock-based compensation - 363 - - 363 Other comprehensive loss - - - ( 10 ) ( 10 ) BALANCE, March 31, 2021 11,988,636 $ 88,329 $ 58,386 $ 24 $ 146,739 S ee accompanying Notes to Condensed Consolidated Financial Statements. 7 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (dollars in thousands) Three months ended March 31, 2021 2020 CASH FLOWS FROM OPERATING ACTIVITIES Net income $ 6,018 $ 2,724 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 357 1,578 Depreciation and amortization 416 309 Loss on disposition of fixed assets - 3 Decrease in operating lease right-of-use assets 261 265 Decrease in operating lease liabilities ( 259 ) ( 260 ) Gain on sales of loans ( 130 ) - Proceeds from sale of loans 2,201 - Net premium amortization (discount accretion) on investment securities 10 ( 4 ) Stock-based compensation 363 129 Increase in bank-owned life insurance value ( 51 ) ( 49 ) Deferred tax benefit - ( 15 ) Net change in other assets and liabilities ( 745 ) 339 Net cash provided by operating activities 8,441 5,019 CASH FLOWS FROM INVESTING ACTIVITIES Net increase in interest earning deposits with other banks ( 43,320 ) ( 31,208 ) Purchase of investment securities available for sale ( 14,998 ) - Change in other investments, net ( 770 ) ( 1,218 ) Principal paydowns of investment securities available-for-sale 8 8 Principal paydowns of investment securities held-to-maturity 321 56 Maturities and calls of investment securities available-for-sale 15,000 13,000 Increase in loans receivable, net ( 221,665 ) ( 66,200 ) Purchases of premises and equipment, net ( 502 ) ( 1,399 ) Net cash used by investing activities ( 265,926 ) ( 86,961 ) CASH FLOWS FROM FINANCING ACTIVITIES Net increase in demand deposits, NOW and money market, and savings 254,770 30,210 Net (decrease) increase in time deposits ( 4,362 ) 6,893 Net repayments from short term FHLB borrowing - ( 10,000 ) Net advances from long term FHLB borrowing - 24,999 Net advances from Paycheck Protection Program Liquidity Facility 4,803 - Proceeds from exercise of stock options 151 54 Net cash provided by financing activities 255,362 52,156 NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH ( 2,123 ) ( 29,786 ) CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year 18,965 43,910 CASH, DUE FROM BANKS AND RESTRICTED CASH, end of quarter $ 16,842 $ 14,124 SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES Interest paid $ 1,036 $ 1,754 SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS Fair value adjustment of securities available-for-sale, gross $ ( 13 ) $ 109 In conjunction with ASU 2016-02 as detailed in Note 6 to the Unaudited Consolidated Financial Statements, the following assets and liabilities were recognized: Operating lease right-of-use assets $ 41 $ - Operating lease liabilities $ ( 41 ) $ - See accompanying Notes to Condensed Consolidated Financial Statements. 8 COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) Note 1 - Description of Business and Summary of Significant Accounting Policies Nature of operations - Coastal Financial Corporation (“Corporation” or “Company”) is a registered bank holding company whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC (“LLC”). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank that is a Federal Reserve member bank. Arlington Olympic LLC was formed in 2019 and owns the Company’s Arlington branch, which the Bank leases from the LLC. The Company provides a full range of banking products and services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound area through its branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application. The Company previously announced the sale of its Freeland Branch, which was effective April 30, 2021, which brought the total branch locations to 14 . The Bank’s main branch and the headquarters of the Bank and Company are located in Everett, Washington. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (the “FDIC”). The Bank’s loans and deposits are primarily within the greater Puget Sound area, and the Bank’s primary funding source is deposits from customers. 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, the Bank expects to introduce a digital bank offering in collaboration with Google. The Bank is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (“Federal Reserve”) and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has regulatory and supervisory authority over the Company. Financial statement presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim reporting requirements and with instructions to Form 10-Q and Article 10 of Regulation S-X, and therefore do not include all the information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 12, 2021. Operating results for the three months ended March 31, 2021 are not necessarily indicative of the results that may be expected for future periods. Amounts presented in the consolidated financial statements and footnote tables are rounded and presented in thousands of dollars except per-share amounts, which are presented in dollars. In the narrative footnote discussion, amounts are rounded to thousands and presented in dollars. In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying consolidated financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation. Principles of consolidation - The consolidated financial statements include the accounts of the Company, the Bank and the LLC. All significant intercompany accounts have been eliminated in consolidation. Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of the Company’s deferred tax assets, and fair value of financial instruments. Actual results could differ significantly from those estimates. Subsequent Events - The Company has evaluated events and transactions subsequent to March 31, 2021 for potential recognition or disclosure. To the extent any events and conditions exist, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions. As referenced above, the sale of the Freeland branch was effective April 30, 2021, which included approximately $ 1.9 million in loans and $ 24.1 million in deposits. Other than the sale of the Freeland branch, the Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements. 9 Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements have been reclassified to conform to the current presentation with no effect on stockholders’ equity or net income. Note 2 - Recent accounting standards Recent Accounting Guidance Under Accounting Standards Codification (“ASC”) Subtopic 310-40, Receivables – Troubled Debt Restructurings by Creditors , a restructuring of debt constitutes a troubled debt restructuring (“TDR”) if the creditor, for economic or legal reasons related to the debtor’s financial difficulties, grants a concession to the debtor that it would not otherwise consider. The CARES Act specified that, to be eligible not to be considered a TDR, a loan modification must be (1) related to the COVID-19 pandemic; (2) executed on a loan that was not more than 30 days past due as of December 31, 2019; and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the federal national emergency or (B) December 31, 2020 (which has since been extended to January 1, 2022 by the Consolidated Appropriations Act, 2021, as discussed below). Additionally, under guidance from the federal bank regulatory agencies, including the Federal Reserve and the Federal Deposit Insurance Corporation, other short-term modifications made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief are not TDRs under ASC Subtopic 310-40. These modifications include short-term modifications such as payment deferrals, fee waivers, extensions of repayment terms, or delays in payment that are insignificant. The federal banking agencies confirmed with the staff of the Financial Accounting Standards Board (“FASB”) that such short-term modifications not to be considered TDRs. See Note 4 of the Condensed Consolidated Financial Statements of this Report for disclosure of the impact to date . Consolidated Appropriations Act, 2021. In response to the COVID-19 pandemic, Congress, through the enactment of the Consolidated Appropriations Act, 2021 on December 27, 2020, took a series of actions to provide national emergency economic relief measures. Such action included extending the relief offered under the CARES Act related to TDRs as a result of COVID-19 through January 1, 2022 or 60 days after the end of the national emergency declared by the President, whichever is earlier. The suspension of GAAP is applicable for the entire term of the modification. The Bank is applying this guidance to qualifying COVID-19 Modifications. Recent Accounting Guidance Not Yet Effective In September 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments . The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. The Company’s implementation of ASU 2016-13 will be effective January 1, 2023. The Company is actively assessing the data and the model needs and is evaluating the impact of adopting the amendment. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period, January 2023, in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. 10 Note 3 - Investment Securities The amortized cost and fair values of investment securities at the date indicated are as follows: Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in thousands) March 31, 2021 Available-for-sale U.S. Treasury securities $ 19,998 $ 20 $ - $ 20,018 U.S. Agency collateralized mortgage obligations 88 4 - 92 U.S. Agency residential mortgage-backed securities 8 - - 8 Municipal bonds 254 6 - 260 Total available-for-sale securities 20,348 30 - 20,378 Held-to-maturity U.S. Agency residential mortgage-backed securities 2,515 98 - 2,613 Total investment securities $ 22,863 $ 128 $ - $ 22,991 Amortized Cost Gross Unrealized Gains Gross Unrealized Losses Fair Value (dollars in thousands) December 31, 2020 Available-for-sale U.S. Treasury securities $ 19,997 $ 31 $ - $ 20,028 U.S. Agency collateralized mortgage obligations 96 4 - 100 U.S. Agency residential mortgage-backed securities 10 - - 10 Municipal bonds 254 7 - 261 Total available-for-sale securities 20,357 42 - 20,399 Held-to-maturity U.S. Agency residential mortgage-backed securities 2,848 109 - 2,957 Total investment securities $ 23,205 $ 151 $ - $ 23,356 The amortized cost and fair value of debt securities at March 31, 2021, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers or the underlying borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date. Available-for-Sale Held-to-Maturity Amortized Cost Fair Value Amortized Cost Fair Value (dollars in thousands) March 31, 2021 Amounts maturing in One year or less $ 19,998 $ 20,018 $ - $ - After one year through five years 254 260 - - 20,252 20,278 - - U.S. Agency residential mortgage-backed securities and collateralized mortgage obligations 96 100 2,515 2,613 $ 20,348 $ 20,378 $ 2,515 $ 2,613 11 Investment securities with carrying values of $ 21.5 million and $ 22.0 million at March 31, 2021 and December 31, 2020, respectively, were pledged to secure public deposits and for other purposes as required or permitted by law. During the quarter ended March 31, 2021 three U.S. Treasury Bills were purchased for a total of $ 15.0 million, to replace maturing securities. There were no sales of securities during the three months ended March 31, 2021 or 2020. There were no gross unrealized losses or securities in an unrealized loss position as of the quarter ended March 31, 2021, or December 31, 2020. Note 4 - Loans and Allowance for Loan Losses The composition of the loan portfolio is as follows as of the periods indicated: March 31, December 31, 2021 2020 Commercial and industrial loans $ 746,274 $ 539,200 Real estate loans: Construction, land, and land development 104,596 94,423 Residential real estate 136,417 143,869 Commercial real estate 793,633 774,925 Consumer and other loans 4,114 3,916 Gross loans receivable 1,785,034 1,556,333 Net deferred origination fees and premiums ( 18,311 ) ( 9,195 ) Loans receivable $ 1,766,723 $ 1,547,138 Included in commercial and industrial loans are Paycheck Protection Program (“PPP”) loans of $ 543.8 million at March 31, 2021 and $ 365.8 million at December 31, 2020. PPP loans are 100 % guaranteed by the Small Business Administration (“SBA”). Also included in commercial and industrial loans as of March 31, 2021 and December 31, 2020, is $ 102.2 million and $ 65.6 million, respectively in capital call lines, provided to venture capital firms through one of our BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards by our BaaS client and the underwriting is reviewed and approved by the Bank on every loan. Included in consumer and other loans are overdrafts of $ 11,000 and $ 31,000 at March 31, 2021 and December 31, 2020, respectively. The Company has pledged loans totaling $ 346.1 million and $ 326.8 million at March 31, 2021 and December 31, 2020, respectively, for borrowing lines at the FHLB and Federal Reserve Bank (“FRB”). The balance of SBA and United States Department of Agriculture (“USDA”) loans and participations sold and serviced for others totaled was $ 21.6 million and $ 20.6 million at March 31, 2021 and December 31, 2020, respectively. The balance of Main Street Lending Program (“MSLP”) loans participated and serviced totaled $ 56.3 million at March 31, 2021 and December 31, 2020. The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans with remaining balances totaled $ 18.6 million and $ 19.3 million as of March 31, 2021 and December 31, 2020, respectively. Unamortized premiums totaled $ 302,000 and $ 306,000 as of March 31, 2021 and December 31, 2020, respectively, and are amortized into interest income over the life of the loans. The Company has purchased participation loans with remaining balances totaling $ 46.7 million and $ 44.9 million as of March 31, 2021 and December 31, 2020, respectively. 12 The following is a summary of the Company’s loan portfolio segments: Commercial and industrial loans – Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment of businesses located generally in the Company’s primary market area. Loan types include revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. The Company also issues letters of credit on behalf of its customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers. The Company also has capital call lines which are provided to venture capital firms through one of our BaaS clients. Also included in this category are SBA 7(a) loans, which allow small business owners to apply for financial assistance via the PPP as prescribed in the CARES Act. These loans have a contractual rate of 1.0 %, with maturity terms of two to five years , are unsecured, 100 % guaranteed and loan proceeds may be forgiven by the U.S. Government / SBA if used for certain purposes. To bolster the effectiveness of the SBA’s PPP loan program, the Federal Reserve is supplying liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The Paycheck Protection Program Liquidity Facility (“PPPLF”) extends credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. The interest rate is 0.35 % and as PPP loans are paid down, the PPPLF borrowing line must also be paid down. Construction, land and land development loans – The Company originates loans for the construction of 1-4 family, multifamily, and Commercial Real Estate (“CRE”) properties in the Company’s market area. Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. The Company occasionally originates land loans for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower’s ability to pay and the inability of the Company to recover its investment due to a material decline in the fair value of the underlying collateral. Residential real estate loans – Residential real estate loans include various types of loans for which the Company holds real property as collateral. Included in this segment are first lien single family loans, which are occasionally purchased to diversify the Company’s loan portfolio, and rental portfolios secured by one-to-four family homes. The primary risks of residential real estate loans include the borrower’s inability to pay, material decreases in the value of the collateral, and significant increases in interest rates which may make the loan unprofitable. Commercial real estate (includes owner occupied and nonowner occupied) loans – Commercial real estate loans include various types of loans for which the Company holds real property as collateral. The primary risks of commercial real estate loans include the borrower’s inability to pay, material decreases in the value of the collateralized real estate and significant increases in interest rates, which may make the real estate loan unprofitable. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy. Consumer and other loans – The Company originates a limited number of consumer loans, generally for banking customers only, which consist primarily of home equity lines of credit, saving account secured loans, and auto loans. This loan category also includes overdrafts. Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying collateral. 13 The following table illustrates an age analysis of past due loans as of the dates indicated: 30-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Recorded Investment 90 Days or More Past Due and Still Accruing (dollars in thousands) March 31, 2021 Commercial and industrial loans $ 138 $ 488 $ 626 $ 745,648 $ 746,274 $ - Real estate loans: Construction, land and land development - - - 104,596 104,596 - Residential real estate 1,708 59 1,767 134,650 136,417 - Commercial real estate 396 - 396 793,237 793,633 - Consumer and other loans - - - 4,114 4,114 - $ 2,242 $ 547 $ 2,789 $ 1,782,245 $ 1,785,034 $ - Less net deferred origination fees and premiums ( 18,311 ) Loans receivable $ 1,766,723 30-89 Days Past Due 90 Days or More Past Due Total Past Due Current Total Loans Recorded Investment 90 Days or More Past Due and Still Accruing (dollars in thousands) December 31, 2020 Commercial and industrial loans $ 133 $ 537 $ 670 $ 538,530 $ 539,200 $ - Real estate loans: Construction, land and land development 1 - 1 94,422 94,423 - Residential real estate 1,108 60 1,168 142,701 143,869 - Commercial real estate - - - 774,925 774,925 - Consumer and other loans - - - 3,916 3,916 - $ 1,242 $ 597 $ 1,839 $ 1,554,494 1,556,333 $ - Less net deferred origination fees and premiums ( 9,195 ) Loans receivable $ 1,547,138 14 A summary of information pertaining to impaired loans as of the period indicated: Unpaid Contractual Principal Balance Recorded Investment With No Allowance Recorded Investment With Allowance Total Recorded Investment Related Allowance (dollars in thousands) March 31, 2021 Commercial and industrial loans $ 756 $ 355 $ 133 $ 488 $ 118 Real estate loans: Residential real estate 188 173 - 173 - Total $ 944 $ 528 $ 133 $ 661 $ 118 December 31, 2020 Commercial and industrial loans $ 834 $ 537 $ - $ 537 $ - Real estate loans: Residential real estate 188 175 - 175 - Total $ 1,022 $ 712 $ - $ 712 $ - The following tables summarize the Company’s average recorded investment and interest income recognized on impaired loans by loan class for the three months ended March 31, 2021 and 2020: Three Months Ended March 31, 2021 March 31, 2020 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized (dollars in thousands) Commercial and industrial loans $ 451 $ - $ 840 $ - Real estate loans Residential real estate 174 - 64 - Consumer loans 1 - Total $ 625 $ - $ 905 $ - The Company grants restructurings in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100 % of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration. No loans were restructured in the three months ended March 31, 2021 and March 31, 2020 that qualified as TDRs. The Company has no commitments to loan additional funds to borrowers whose loans were classified as TDRs at March 31, 2021, as there were no outstanding TDRs at March 31, 2021. Pursuant to federal guidance, the Company deferred or modified payments on existing loans to assist customers financially during the COVID-19 pandemic and economic shutdown. There are three loans, representing $ 13.3 million in outstanding loans, that remain on deferred or modified payment status as of March 31, 2021. In accordance with GAAP and interagency guidance issued on March 22, 2020, these short-term modifications, made on a good faith basis in response to the COVID-19 pandemic to borrowers that were current prior to any relief, are not considered troubled debt restructurings. When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is removed, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual. 15 An analysis of nonaccrual loans by category consisted of the following at the periods indicated: March 31, December 31, 2021 2020 Commercial and industrial loans $ 488 $ 537 Real estate loans: Residential real estate 173 175 Total nonaccrual loans $ 661 $ 712 Credit Quality and Credit Risk Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Company’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve. The Company also classifies some loans as Watch or Other Loans Especially Mentioned (“OLEM”). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans and are reported in the OLEM column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring. 16 Loans by credit quality risk rating are as follows as of the periods indicated: Pass Other Loans Especially Mentioned Sub- Standard Doubtful Total (dollars in thousands) March 31, 2021 Commercial and industrial loans $ 745,281 $ 394 $ 599 $ - $ 746,274 Real estate loans: Construction, land, and land development 104,596 - - - 104,596 Residential real estate 136,184 60 173 - 136,417 Commercial real estate 782,720 10,913 - - 793,633 Consumer and other loans 4,114 - - - 4,114 $ 1,772,895 $ 11,367 $ 772 $ - 1,785,034 Less net deferred origination fees ( 18,311 ) Loans receivable $ 1,766,723 December 31, 2020 Commercial and industrial loans $ 538,149 $ 397 $ 654 $ - $ 539,200 Real estate loans: Construction, land, and land development 94,423 - - - 94,423 Residential real estate 143,540 154 175 - 143,869 Commercial real estate 763,647 11,278 - - 774,925 Consumer and other loans 3,916 - - - 3,916 $ 1,543,675 $ 11,829 $ 829 $ - 1,556,333 Less net deferred origination fees ( 9,195 ) Loans receivable $ 1,547,138 Allowance for Loan Losses The Company’s allowance for loan losses (“ALLL”) covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit review process together with economic information gathered from published sources. Qualitative factors that are included in the analysis include industry data and data from peer institutions. The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated from the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances. The $ 543.8 million in PPP loans as of March 31, 2021 are 100% guaranteed and were not subject to the allowance analysis or assigned an allowance. The Company’s provision for credit losses of $ 357,000 for the three months ended March 31, 2021, is primarily the result of growth in the loan portfolio. The $ 1.6 million provision for credit losses during the three months ended March 31, 2020, is related to an increase in qualitative factors primarily related to the uncertainties in the economic outlook from the COVID-19 pandemic and growth in the loan portfolio. The Company is not required to implement the provisions of the Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023 and is continuing to account for the allowance for loan losses under the incurred loss model. 17 The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three months ended March 31, 2021: Commercial and Industrial Construction, Land, and Land Development Residential Real Estate Commercial Real Estate Consumer and Other Unallocated Total (dollars in thousands) Three Months Ended March 31, 2021 ALLL balance, December 31, 2020 $ 3,353 $ 3,545 $ 3,410 $ 7,810 $ 127 $ 1,017 $ 19,262 Provision for loan losses or (recapture) 43 437 ( 239 ) 143 ( 19 ) ( 8 ) 357 3,396 3,982 3,171 7,953 108 1,009 19,619 Loans charged-off ( 14 ) - - - ( 4 ) - ( 18 ) Recoveries of loans previously charged-off 5 - - - 4 - 9 Net (charge-offs) recoveries ( 9 ) - - - - - ( 9 ) ALLL balance, March 31, 2021 $ 3,387 $ 3,982 $ 3,171 $ 7,953 $ 108 $ 1,009 $ 19,610 As of March 31, 2021 ALLL amounts allocated to Individually evaluated for impairment $ 118 $ - $ - $ - $ - $ - $ 118 Collectively evaluated for impairment 3,269 3,982 3,171 7,953 108 1,009 19,492 ALLL balance, March 31, 2021 $ 3,387 $ 3,982 $ 3,171 $ 7,953 $ 108 $ 1,009 $ 19,610 Loans individually evaluated for impairment $ 488 $ - $ 173 $ - $ - $ 661 Loans collectively evaluated for impairment 745,786 104,596 136,244 793,633 4,114 1,784,373 Loan balance, March 31, 2021 $ 746,274 $ 104,596 $ 136,417 $ 793,633 $ 4,114 $ 1,785,034 The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three months ended March 31, 2020: Commercial and Industrial Construction, Land, and Land Development Residential Real Estate Commercial Real Estate Consumer and Other Unallocated Total (dollars in thousands) Three Months Ended March 31, 2020 ALLL balance, December 31, 2019 $ 2,366 $ 2,745 $ 2,069 $ 3,126 $ 104 $ 1,060 $ 11,470 Provision for loan losses or (recapture) 589 902 163 763 ( 3 ) ( 836 ) 1,578 2,955 3,647 2,232 3,889 101 224 13,048 Loans charged-off ( 119 ) - - - ( 5 ) - ( 124 ) Recoveries of loans previously charged-off 1 - - - - - 1 Net (charge-offs) recoveries ( 118 ) - - - ( 5 ) - ( 123 ) ALLL balance, March 31, 2020 $ 2,837 $ 3,647 $ 2,232 $ 3,889 $ 96 $ 224 $ 12,925 As of March 31, 2020 ALLL amounts allocated to Individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - Collectively evaluated for impairment 2,837 3,647 2,232 3,889 96 224 12,925 ALLL balance, March 31, 2020 $ 2,837 $ 3,647 $ 2,232 $ 3,889 $ 96 $ 224 $ 12,925 Loans individually evaluated for impairment $ 699 $ - $ 64 $ - $ - $ 763 Loans collectively evaluated for impairment 121,968 119,668 117,757 643,488 3,695 1,006,576 Loan balance, March 31, 2020 $ 122,667 $ 119,668 $ 117,821 $ 643,488 $ 3,695 $ 1,007,339 The following table summarizes the allocation of the ALLL attributed to various segments in the loan portfolio as of December 31, 2020. 18 Commercial and Industrial Construction, Land, and Land Development Residential Real Estate Commercial Real Estate Consumer and Other Unallocated Total (dollars in thousands) As of December 31, 2020 ALLL amounts allocated to Individually evaluated for impairment $ - $ - $ - $ - $ - $ - $ - Collectively evaluated for impairment 3,353 3,545 3,410 7,810 127 1,017 19,262 ALLL balance, December 31, 2020 $ 3,353 $ 3,545 $ 3,410 $ 7,810 $ 127 $ 1,017 $ 19,262 Loans individually evaluated for impairment $ 537 $ - $ 175 $ - $ - $ 712 Loans collectively evaluated for impairment 538,663 94,423 143,694 774,925 3,916 1,555,621 Loan balance, December 31, 2020 $ 539,200 $ 94,423 $ 143,869 $ 774,925 $ 3,916 $ 1,556,333 Note 5 - Deposits The composition of consolidated deposits consisted of the following at the periods indicated: March 31 December 31, 2021 2020 (dollars in thousands) Demand, noninterest bearing $ 768,690 $ 592,261 NOW and money market 728,243 658,323 Savings 93,917 77,611 Total core deposits 1,590,850 1,328,195 BaaS-brokered deposits 25,597 33,482 Time deposits less than $250,000 38,986 41,145 Time deposits $250,000 and over 16,282 18,485 Total deposits $ 1,671,715 $ 1,421,307 The following table presents the maturity distribution of time deposits as of March 31, 2021 (dollars in thousands): (dollars in thousands) Twelve months $ 41,954 One to two years 8,284 Two to three years 2,625 Three to four years 1,151 Four to five years 1,254 $ 55,268 Note 6 - Leases The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception. Operating lease right-of-use (“ROU”) assets represent a right to use an underlying asset for the contractual lease term. Operating lease liabilities represent an obligation to make lease payments arising from the lease. An operating lease ROU asset and operating lease liability will be recognized for any new operating leases at the commencement of the new lease. The Company’s leases do not provide an implicit interest rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities. There was one lease that renewed during the quarter ended March 31, 2021. The Company’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Company’s lease agreements do not contain any residual value guarantees. 19 Operating leases with terms of 12 months or less are not included in ROU assets and operating lease liabilities recorded in the Company’s consolidated balance sheets. Operating lease terms include options to extend when it is reasonably certain that the Company will exercise such options, determined on a lease-by-lease basis . As of March 31, 2021, the Company does no t have any leases that have not yet commenced. At March 31, 2021, lease expiration dates ranged from nine months to 24 years , with additional renewal options on certain leases typically ranging from 5 to 10 years . At March 31, 2021, the weighted average remaining lease term for the Company’s operating leases was 8.8 years. Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $ 341,000 and $ 343,000 , respectively, for the three months ended March 31, 2021 and 2020. Variable lease components, such as inflation adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities. The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at March 31, 2021: March 31, 2021 (dollars in thousands) April 1, 2021 to December 31, 2021 $ 953 2022 1,279 2023 1,272 2024 864 2025 713 2026 and thereafter 3,209 Total lease payments 8,290 Less: amounts representing interest 1,185 Present value of lease liabilities $ 7,105 The following table presents the components of total lease expense and operating cash flows for the three months ended March 31, 2021: March 31, 2021 (dollars in thousands) Lease expense: Operating lease expense $ 321 Variable lease expense 34 Total lease expense (1) $ 355 Cash paid: Cash paid reducing operating lease liabilities $ 352 (1) Included in net occupancy expense in the Condensed Consolidated Statements of Income (Unaudited). The Company entered into a five-year prepaid capital lease for ATM machines beginning October 1, 2020. The equipment is recorded as fixed assets on the Company’s balance sheet and depreciation expense is recognized on a straight-line basis over the term of the lease. Depreciation expense was $ 33,000 for the three months ended March 31, 2021, with $ 599,000 remaining as of March 31, 2021. This capital lease began in October 2020, therefore there was no depreciation expense for the ATM capital lease as of March 31, 2020. 20 Note 7 - Stock-Based Compensation Stock Options and Restricted Stock On April 30, 2018, the Company’s shareholders approved the Coastal Financial Corporation 2018 Omnibus Incentive Plan (“2018 Plan”). The 2018 Plan authorizes the Company to grant awards, including but not limited to, stock options, restricted stock units, and restricted stock awards, to eligible employees, directors or individuals that provide service to the Company, up to an aggregate of 500,000 shares of common stock. The 2018 Plan replaces both the Company’s 2006 Stock Option and Equity Compensation Plan (“2006 Plan”) and its Directors’ Stock Bonus Plan. Existing awards under the previous plans will vest under the terms granted and no further awards will be made under these plans. Shares available to be granted under the 2018 Plan totaled 175,304 at March 31, 2021. Stock Option Awards The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock and other factors. The Company uses the vesting term and contractual life to determine the expected life. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense related to unvested stock option awards is reversed at date of forfeiture. There were no new stock options granted in the three months ended March 31, 2021 and 2020. A summary of stock option activity under the 2018 Plan and 2006 Plan during the three months ended March 31, 2021: Options Shares Weighted- Average Exercise Price Weighted- Average Remaining Contractual Term (Years) Aggregate Intrinsic Value (dollars in thousands, except per share amounts) Outstanding at December 31, 2020 749,397 $ 7.75 5.04 $ 9,933 Granted - - - Exercised ( 20,905 ) 7.21 - Forfeited or expired - 14.91 - Outstanding at March 31, 2021 728,492 $ 7.76 4.78 $ 13,447 Vested or expected to vest at March 31, 2021 728,492 $ 7.76 4.78 $ 13,447 Exercisable at March 31, 2021 352,410 $ 6.70 3.82 $ 6,881 The total or aggregate intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three months ended March 31, 2021 and 2020, was $ 357,000 and $ 91,000 , respectively. As of March 31, 2021, there was $ 1.8 million of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan. Total unrecognized compensation costs are adjusted for unvested forfeitures. The Company expects to recognize that cost over a weighted-average period of approximately 6.5 years. Compensation expense recorded related to stock options was $ 89,000 and $ 94,000 for the three months ended March 31, 2021 and 2020, respectively. Restricted Stock Units In January 2021, the Company granted 84,258 restricted stock units under the 2018 Plan to employees, which vest ratably over 5 years. The fair value of restricted stock units is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock units are nonparticipating securities. 21 As of March 31, 2021, there was $ 3.1 million of total unrecognized compensation cost related to nonvested restricted stock units. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 6.4 years. Compensation expense recorded related to restricted stock units was $ 101,000 and $ 23,000 for the three months ended March 31, 2021 and 2020, respectively. A summary of the Company’s nonvested shares at March 31, 2021 and changes during the three-month period is presented below: Nonvested shares Shares Weighted- Average Grant Date Fair Value Total or Aggregate Intrinsic Value (dollars in thousands, except per share amounts) Nonvested shares at December 31, 2020 90,249 $ 17.25 $ 352 Granted 84,258 20.91 Forfeited - - Vested ( 7,426 ) 17.81 Nonvested shares at March 31, 2021 167,081 $ 19.01 $ 1,064 Restricted Stock Awards Employees In January 2021, there were 5,978 shares granted to an employee at an estimated fair value of $ 20.91 per share, vesting immediately. The fair value of restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities. As of March 31, 2021, there was $ 61,000 of total unrecognized compensation cost related to nonvested restricted stock awards. The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 6.8 years. Compensation expense recorded related to restricted stock awards was $ 127,000 and $ 3,000 for the three months ended March 31, 2021 and 2020, respectively. Director’s Stock Bonus Stock was previously granted to directors who attended at least 75 % of the scheduled board meetings during the prior year. Grants cliff vest over one or two years from date awarded, contingent on the director still being a director of the Company. During the vesting period, the grants are considered participating securities. Under the 2018 Plan, eligible directors are granted stock with a total market value of $ 15,000 , and the Board Chair is granted stock with a total market value of $ 25,000 . Stock will be granted as of each annual meeting date and will cliff vest one day prior to the next annual meeting date. For stock granted in 2020, $ 5,000 is subject to a two-year cliff vesting period, and the remaining stock will cliff vest one day prior to the next annual meeting date. Directors unable to receive stock will receive cash in lieu upon completion of the vesting period. Cash awards are recognized over the vesting period and recorded in other liabilities until paid. No new shares have been granted for the three months ended March 31, 2021. Compensation expense recorded related to the 2018 Plan totaled $ 46,000 and $ 9,000 for the three months ended March 31, 2021 and 2020, respectively. 22 A summary of the Company’s nonvested shares at March 31, 2021 and changes during the three-month period is presented below: Nonvested shares Shares Weighted- Average Grant Date Fair Value Total or Aggregate Intrinsic Value (dollars in thousands, except per share amounts) Nonvested shares at December 31, 2020 14,377 $ 16.15 $ 70 Granted 5,978 20.91 Forfeited - - Vested ( 8,494 ) 19.30 Nonvested shares at March 31, 2021 11,861 $ 16.30 $ 118 Note 8 - Fair Value Measurements The following tables present estimated fair values of the Company’s financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated: March 31, 2021 Fair Value Measurements Using Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 (dollars in thousands) Financial assets Cash and due from banks $ 16,842 $ 16,842 $ 16,842 $ - $ - Interest earning deposits with other banks 187,472 187,472 187,472 - - Investment securities 22,893 22,991 20,018 2,973 - Other investments 6,829 6,829 - 5,979 850 Loans receivable 1,766,723 1,747,905 - - 1,747,905 Accrued interest receivable 8,597 8,597 - 8,597 - Financial liabilities Deposits $ 1,671,715 1,671,802 $ - $ 1,671,802 $ - FHLB advances 24,999 24,552 - 24,552 - Paycheck Protection Program Liquidity Facility 158,519 158,519 158,519 Subordinated debt 9,996 9,819 - 9,819 - Junior subordinated debentures 3,585 2,785 - 2,785 - Accrued interest payable 538 538 - 538 - December 31, 2020 Fair Value Measurements Using Carrying Value Estimated Fair Value Level 1 Level 2 Level 3 (dollars in thousands) Financial assets Cash and due from banks $ 18,965 $ 18,965 $ 18,965 $ - $ - Interest earning deposits with other banks 144,152 144,152 144,152 - - Investment securities 23,247 23,356 20,028 3,328 - Other investments 6,059 6,059 - 5,209 850 Loans receivable, net 1,527,876 1,535,541 - - 1,535,541 Accrued interest receivable 8,616 8,616 - 8,616 - Financial liabilities Deposits $ 1,421,307 $ 1,421,534 $ - $ 1,421,534 $ - Paycheck Protection Program Liquidity Facility $ 153,716 $ 153,716 $ 153,716 FHLB advances 24,999 24,787 - 24,787 - Subordinated debt 9,993 9,913 - 9,913 - Junior subordinated debentures 3,584 2,707 - 2,707 - Accrued interest payable 531 531 - 531 - 23 The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the accounting standard requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy: • Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available. • Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data. • Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from nonbinding single dealer quotes not corroborated by observable market data. The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for certain financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values. Items measured at fair value on a recurring basis – The following fair value hierarchy table presents information about the Company’s assets that are measured at fair value on a recurring basis at the dates indicated: Level 1 Level 2 Level 3 Total Fair Value (dollars in thousands) March 31, 2021 Available-for-sale U.S. Treasury securities $ 20,018 $ - $ - $ 20,018 U.S. Agency collateralized mortgage obligations - 92 - 92 U.S. Agency residential mortgage-backed securities - 8 - 8 Municipals - 260 - 260 $ 20,018 $ 360 $ - $ 20,378 December 31, 2020 Available-for-sale U.S. Treasury securities $ 20,028 $ - $ - $ 20,028 U.S. Agency collateralized mortgage obligations - 100 - 100 U.S. Agency residential mortgage-backed securities - 10 - 10 Municipals - 261 - 261 $ 20,028 $ 371 $ - $ 20,399 The following methods were used to estimate the fair value of the class of financial instruments above: Investment securities - The fair value of securities is based on quoted market prices, pricing models, quoted prices of similar securities, independent pricing sources, and discounted cash flows. Limitations: The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2021 and December 31, 2020. The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein. 24 Assets measured at fair value using significant unobservable inputs (Level 3) The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated: Valuation Technique Unobservable Inputs March 31, 2021 Weighted Average Rate December 31, 2020 Weighted Average Rate Impaired loans Collateral valuations Discount to appraised value 7 % 9 % Items measured at fair value on a nonrecurring basis – The following table presents financial assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at the dates indicated: Level 1 Level 2 Level 3 Total Fair Value (dollars in thousands) March 31, 2021 Impaired loans $ - $ - $ 543 $ 543 Total $ - $ - $ 543 $ 543 December 31, 2020 Impaired loans $ - $ - $ 712 $ 712 Total $ - $ - $ 712 $ 712 The amounts disclosed above represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported on. Impaired loans - A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted cash expected future cash flows. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are evaluated quarterly to determine if valuation adjustments should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impairment amount. These valuation adjustments are considered nonrecurring fair value adjustments. 25 Note 9 - Earnings Per Common Share The following is a computation of basic and diluted earnings per common share at the periods indicated: Three months ended March 31, 2021 March 31, 2020 (dollars in thousands, except share data) Net Income $ 6,018 $ 2,724 Basic weighted average number common shares outstanding 11,980,092 11,909,248 Dilutive effect of share-based compensation 432,721 298,927 Diluted weighted average number common shares outstanding 12,412,813 12,208,175 Basic earnings per share $ 0.50 $ 0.23 Diluted earnings per share $ 0.48 $ 0.22 Antidilutive stock options and restricted stock outstanding 181,084 223,093 Under the two-class method, earnings available to common shareholders for the period are allocated between common shareholders and participating securities according to dividends declared (or accumulated) and participation rights in undistributed earnings, however the difference in the two-class method was not significant. 26