COASTAL FINANCIAL CORP 10-Q

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations Overview We are a bank holding company that operates through our wholly owned subsidiaries, Coastal Community Bank (the “Bank”) and Arlington Olympic LLC. We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. 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, 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 Bank through its CCBX division provides banking as a service (“BaaS”) that allows broker-dealer and digital financial service partners to offer their customers banking services. In addition, the Bank expects to introduce a digital bank offering, through its CCDB division, in collaboration with Google. As of June 30, 2021, we had total assets of $2.01 billion, total gross loans of $1.66 billion, total deposits of $1.80 billion and total shareholders’ equity of $154.1 million. The following discussion and analysis presents our financial condition and results of operations on a consolidated basis. However, because we conduct all of our material business operations through the Bank, the discussion and analysis relate to activities primarily conducted by the Bank. As a bank holding company that operates through one segment, we generate most of our revenue from interest on loans. Our primary source of funding for our loans is commercial and retail deposits from our customer relationships. We place secondary reliance on wholesale funding, primarily borrowings from the Federal Home Loan Bank (“FHLB”). We utilized the Paycheck Protection Program Liquidity Facility (“PPPLF”), which provided an additional source of low cost funding for the Paycheck Protection Program (“PPP”) loans, with a contractual interest rate of 0.35% and collateralized by PPP loans. All our PPPLF borrowings were paid in full as of June 30, 2021, and the PPPLF expired on July 31, 2021. 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, certificate of deposit listing services, and a one-way buy through an insured cash sweep (“ICS”) account, which allow 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. Our principal lending products are commercial real estate loans, commercial and industrial loans, residential real estate loans, construction, land and land development loans, and to a lesser extent consumer loans. 28 Coronavirus Aid, Relief, and Economic Security (“CARES”) Act 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 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. If a loan is partially forgiven or not forgiven at all, a bank must look to the borrower for repayment of unforgiven principal and interest. If the borrower defaults, the loan is guaranteed by the SBA. 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, at which time the program closed for new applications. The PPP lending resumed on January 19, 2021 (known as “round three” or the “third round” of the PPP), and we accepted and processed applications for the duration of the round three, which closed for applications on May 31, 2021. As of June 30, 2021, we funded $763.9 million in PPP loans, since the first round of PPP loans opened in March 2020 through the close of round three. Net deferred fees on these loans total $12.4 million as of June 30, 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 (generally between eight and 24 weeks). We are accepting applications from customers for loan forgiveness and we have received $173.2 million in forgiveness or principal paydowns in the three months ended June 30, 2021. 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 continue to be robust in the third quarter 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, Responses and Re-Opening to the 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 second 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. Management continues to monitor and, when appropriate, make changes to our planned response. As of June 30, 2021 our re-opening plan includes: • Serving customers through drive throughs, call center, mobile banking, online banking and ATMs, and have opened branches for customers. • Continued participation in the SBA PPP with funded loans outstanding of $398.0 million, as of June 30, 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 consistent with regulatory guidance. As of June 30, 2021, $11.7 million, or two loans, were on deferred or modified payment status. • Paid-off in full the borrowing through the PPPLF, which provided an additional source of funding for the PPP loans. The PPPLF was a low cost source of funding and liquidity for PPP loans, with an interest rate of 0.35%, with 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 June 30, 2021, Washington state reopened under the Washington Ready plan. All industry sectors previously covered by the Roadmap to Recovery or the Safe Start plan, with the limited exceptions, were permitted to return to usual capacity and operations. 29 • Updated and analyzed the Company's liquidity, funding and capital stress forecasts and risk assumptions. • Effective July 19, 2021, the Company started its re-opening process, which includes some non-remote and hybrid workers returning to the office and in-person gatherings/trainings resuming. Management recognizes this is an evolving situation and continues to monitor federal, state and local recommendations regarding the COVID-19 pandemic and the Delta variant. Management will adjust its re-opening plans and implement precautions to safeguard our employees, customers and vendors based on the information available. PPP Overview Beginning in January 2021, when the third round of PPP loans opened for applications, and continuing through the quarter ended June 30, 2021, focus was placed on helping the small businesses in our communities through the third round of PPP, which closed for applications on May 31, 2021. Additionally, we continued to gather and process applications for forgiveness for all rounds of the PPP. These loans have had a significant impact on our communities and financial statements for the quarter ended June 30, 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. generally accepted accounting principles (“GAAP”) measures. For more information about non-GAAP financial measures, see the non-GAAP disclosure “ GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures ”. 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. 30 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 Round 1 & 2 2020 Round 3 2021 Total (Dollars in thousands; unaudited) Loans Originated $ 452,846 $ 311,012 $ 763,858 Deferred fees, net 12,933 13,334 $ 26,267 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 and for the Three Months Ended June 30, 2021 $0.00 - $50,000.00 $50,0000.01 - $150,000.00 $150,000.01 - $350,000.00 $350,000.01 - $2,000,000.00 > 2,000,000.01 Totals (Dollars in thousands; unaudited) Principal outstanding: Existing customer $ 6,333 $ 6,496 $ 12,864 $ 17,256 $ 27,852 $ 70,801 New customer 2,076 3,649 4,550 13,878 15,540 39,693 Total principal outstanding 8,409 10,145 17,414 31,134 43,392 110,494 Deferred fees outstanding (227 ) (214 ) (333 ) (351 ) (145 ) (1,270 ) Deferred costs outstanding 128 30 27 15 2 202 Net deferred fees $ (99 ) $ (184 ) $ (306 ) $ (336 ) $ (143 ) $ (1,068 ) Number of loans: Existing customer 107 41 21 19 5 193 New customer 379 77 60 27 9 552 Total loan count 486 118 81 46 14 745 Percent of total 65.2 % 15.8 % 10.9 % 6.2 % 1.9 % 100.0 % Forgiveness/Payoffs/Paydowns in Three Months Ended June 30, 2021 Dollars $ 7,227 $ 15,346 $ 15,788 $ 41,375 $ 69,959 $ 149,695 Deferred fee recognized 104 370 425 613 358 1,870 31 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 and for the Three Months Ended June 30, 2021 $0.00 - $50,000.00 $50,0000.01 - $150,000.00 $150,000.01 - $350,000.00 $350,000.01 - $2,000,000.00 > 2,000,000.01 Totals (Dollars in thousands; unaudited) Principal outstanding: Existing customer $ 14,830 $ 33,279 $ 43,218 $ 106,856 $ 2,956 $ 201,139 New customer 13,735 15,541 22,804 34,325 - 86,405 Total principal outstanding 28,565 48,820 66,022 141,181 2,956 287,544 Deferred fees outstanding (3,524 ) (2,272 ) (3,045 ) (3,895 ) (27 ) (12,763 ) Deferred costs outstanding 854 323 172 118 1 1,468 Net deferred fees $ (2,670 ) $ (1,949 ) $ (2,873 ) $ (3,777 ) $ (26 ) $ (11,295 ) Number of loans: Existing customer 724 362 187 133 1 1,407 New customer 838 181 100 51 - 1,170 Total loan count 1,562 543 287 184 1 2,577 Percent of total 60.6 % 21.1 % 11.1 % 7.1 % 0.1 % 100.0 % First or Second Draw First Draw $ 9,881 $ 6,265 $ 2,728 $ 6,024 $ 2,956 $ 27,854 Second Draw 18,684 42,555 63,294 135,157 - 259,690 Forgiveness/Payoffs/Paydowns in Three Months Ended June 30, 2021 Dollars $ 5,047 $ 8,402 $ 2,585 $ 7,433 $ - $ 23,467 Deferred fee recognized 586 433 259 407 2 1,687 32 Comparison of Operating Results for the Three Months Ended June 30, 2021 and June 30, 2020 Results of Operations Net Income Net income for the three months ended June 30, 2021, was $7.0 million, or $0.56 per diluted share, compared to $3.7 million, or $0.30 per diluted share, for the three months ended June 30, 2020. The increase in net income over the comparable period in the prior year was attributable to a $4.2 million increase in interest and fee income on loans. Interest and fee income related to PPP loans totaled $4.8 million for the three months ended June 30, 2021, compared to $2.8 million for the three months ended June 30, 2020. Net deferred fees on PPP loans are 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 from the recognition of PPP deferred fees. Additionally, a reduction in the provision for loan losses of $1.6 million for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, also contributed to the increase in net income. The provision for loan losses was increased in 2020 due the change in economic outlook caused by the COVID-19 pandemic, however those losses have not materialized as anticipated, and therefore we recorded a lower provision for loan losses of $361,000 for the three months ended June 30, 2021. Interest and fee income on non-PPP loans increased $2.1 million, or 14.8%, for the three months ended June 30, 2021, compared to the three months ended June 30, 2020. Noninterest income increased $3.3 million for the three months ended June 30, 2021, compared to the same period last year, due to $1.3 million gain on sale of the Freeland branch, on April 30, 2021, combined with $949,000 increase in BaaS fees and $736,000 more in loan referral fees. The increased loan interest income and noninterest income was partially offset by at $4.8 million increase in noninterest expense, largely due to a $3.7 million increase in salaries and employee benefits. Salaries and employee benefits increased largely as a result of hiring staff for our CCBX and CCDB divisions. Net Interest Income Net interest income for the three months ended June 30, 2021, was $18.6 million, compared to $14.0 million for the three months ended June 30, 2020, an increase of $4.6 million, or 33.0%. The increase in net interest income consisted of a $4.1 million, or 26.9%, increase in interest income coupled with a $474,000, or 33.1%, decrease in interest expense. The increase in interest income was primarily attributable to a $415.8 million, or 31.2%, increase in average loans outstanding for the three months ended June 30, 2021, compared to the prior year period, partially offset by a 0.13% decrease in yield on loans receivable from 4.57% for the three months June 30, 2020 to 4.44% for the three months ended June 30, 2021. The decrease in yield on loans receivable, as compared to the three months ended June 30, 2020, was largely due to an average of $509.3 million in PPP loans. Excluding PPP loans, the yield on loans receivable approximated 4.65% for the three months ended June 30, 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. ” PPP loans have a 1.0% interest rate and an approximate yield of 3.80% for the three months ended June 30, 2021, when the amortization of deferred fees and costs are included. As of June 30, 2021, $12.4 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. Yield on loans receivable, excluding earned fees, approximated 3.46% for the quarter ended June 30, 2021 compared to 3.91% for the quarter ended June 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. ” Even though there are rate floors in place for $429.8 million, or 25.7%, 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 June 30, 2021 was the result of a 21 basis point, or 51.2%, decrease in cost of funds, bringing it to 0.20% as of June 30, 2021, compared to 0.41% at June 30, 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, who moved their banking/deposit relationships to the Bank. As of June 30, 2021, there was $267.4 million in CCBX deposits compared to $47.7 million at June 30, 2020. These increases in noninterest bearing and low interest rate interest bearing deposits helped contribute to the improved cost of funds for the quarter ended June 30, 2021, as compared to the prior year period. The average balance of interest-bearing deposits increased $192.4 million, or 27.2%, for the three months ended June 30, 2021, compared to the three months ended June 30, 2020, but the average rate paid on interest bearing deposits was 34 basis points less for 33 the three months ended June 30, 2021, compared to the quarter ended June 30, 2020. The increased balance compared to the three months ended June 30, 2020 is primarily attributable to growth in core deposit accounts, which we define as deposits excluding all brokered and time deposits. Average noninterest bearing deposits (such as demand or checking accounts) grew $322.5 million, or 59.6%. Average NOW (otherwise known as a negotiable order of withdrawal account or interest bearing checking accounts) and money market accounts grew $199.5 million, or 37.3%, and savings accounts increased $23.8 million, or 35.3% compared to June 30, 2020. Average non-core deposits decreased $30.8 million with time deposits decreasing $31.2 million, or 37.1%, and BaaS-brokered deposits increased $327,000, or 1.5%, compared to June 30, 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 NOW and money market accounts decreased 31 basis points for the three months ended June 30, 2021, compared to the three months ended June 30, 2020. The average rate paid on time deposits also decreased during this period. For time deposits less than $100,000, the rate decreased 52 basis points and for time deposits over $100,000, the average rate decreased 69 basis points, for the three months ended June 30, 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 June 30, 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 3.70% and 3.52%, respectively, compared to 3.78% and 3.49%, respectively, for the three months ended June 30, 2020. 34 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 $4.3 million and $2.2 million for the three months ended June 30, 2021 and 2020, respectively. A total of $3.6 million in PPP loan net fees were recognized in the quarter ended June 30, 2021, compared to $1.9 million for the quarter ended June 30, 2020. Yield on loans receivable was 4.44% for the three months ended June 30, 2021, compared to 4.57% for the three months ended June 30, 2020. Excluding PPP loans, the yield on loans receivable was 4.65% and 4.94% for the three months ended June 30, 2021, and June 30, 2020, respectively. 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 June 30, 2021 and 2020, the amount of interest income not recognized on nonaccrual loans was not material. Average Balance Sheets For the Three Months Ended June 30, 2021 2020 Average Interest & Yield / Average Interest & Yield / (Dollars in thousands) Balance Dividends Cost (4) Balance Dividends Cost (4) Assets Interest earning assets: Interest earning deposits $ 235,187 $ 74 0.13 % $ 127,721 $ 130 0.41 % Investment securities, available for sale (1) 22,653 17 0.30 17,811 45 1.02 Investment securities, held to maturity (1) 2,347 7 1.20 4,024 8 0.80 Other investments 6,835 108 6.34 5,841 89 6.13 Loans receivable (2) 1,750,825 19,365 4.44 1,334,991 15,154 4.57 Total interest earning assets 2,017,847 19,571 3.89 1,490,388 15,426 4.16 Noninterest earning assets: Allowance for loan losses (19,733 ) (13,555 ) Other noninterest earning assets 76,727 61,713 Total assets $ 2,074,841 $ 1,538,546 Liabilities and Shareholders’ Equity Interest bearing liabilities: Interest bearing deposits $ 901,120 $ 628 0.28 % $ 708,724 $ 1,096 0.62 % PPPLF borrowings 107,047 94 0.35 107,443 94 0.35 FHLB advances and other borrowings 24,999 70 1.12 24,999 70 1.13 Subordinated debt 9,998 146 5.86 9,984 147 5.92 Junior subordinated debentures 3,585 21 2.35 3,583 26 2.92 Total interest bearing liabilities 1,046,749 959 0.37 854,733 1,433 0.67 Noninterest bearing deposits 863,962 541,448 Other liabilities 12,887 12,498 Total shareholders' equity 151,243 129,867 Total liabilities and shareholders' equity $ 2,074,841 $ 1,538,546 Net interest income $ 18,612 $ 13,993 Interest rate spread 3.52 % 3.49 % Net interest margin (3) 3.70 % 3.78 % (1) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. (2) Includes nonaccrual loans. (3) Net interest margin represents annualized net interest income divided by average total interest earning assets. (4) Yields and costs are annualized. 35 The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. The table illustrates the $4.6 million increase in loan interest income that is attributed to an increase in loan volume. This increase is partially offset by a $430,000 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 3.80%, after including the amortization of the deferred fees and costs, for the three months ended June 30, 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 June 30, 2021 Compared to Three Months Ended June 30, 2020 Increase (Decrease) Due to Total Increase (Dollars in thousands) Volume Rate (Decrease) Interest income: Interest earning deposits $ 34 $ (90 ) $ (56 ) Investment securities, available for sale 4 (32 ) (28 ) Investment securities, held to maturity (5 ) 4 (1 ) Other Investments 16 3 19 Loans receivable 4,641 (430 ) 4,211 Total increase in interest income 4,690 (545 ) 4,145 Interest expense: Interest bearing deposits 137 (605 ) (468 ) PPPLF borrowings - - - FHLB advances and other borrowings - - - Subordinated debt 1 (2 ) (1 ) Junior subordinated debentures - (5 ) (5 ) Total increase in interest expense 138 (612 ) (474 ) Increase in net interest income $ 4,552 $ 67 $ 4,619 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 three months ended June 30, 2021 was $361,000, compared to $1.9 million for the three months ended June 30, 2020. The allowance for loan losses as a percentage of loans was 1.20% at June 30, 2021, compared to 1.03% at June 30, 2020. As of June 30, 2021, there was $398.0 million in PPP loans included in our portfolio. These loans are 100% guaranteed by the SBA, and therefore 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 1.57%. 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 in 2020 due to the change in economic outlook caused by the COVID-19 pandemic along with loan growth. The factors used in management’s analysis of the provision for loan losses resulted in a provision of $361,000 was needed for quarter ended June 30, 2021. The expected COVID-19 pandemic related 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, and therefore we are continuing to account for the allowance for loan losses under the incurred loss model. Credit quality has remained stable through June 30, 2021, as demonstrated by the low level of charge-offs and nonperforming loan balance. Nonperforming loans decreased $3.8 million, to $648,000, in the three months ended June 30, 2021, compared to $4.4 million for the quarter ended June 30, 2020. Nonperforming assets to total assets was 0.03% at June 30, 2021 compared to 0.26% at June 30, 2020. For a description of the Company’s nonperforming assets see “—Financial Condition—Nonperforming Assets.” 36 Pursuant to guidance from the federal bank regulatory agencies, the Company deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic and economic shutdown. There was a total of $246.4 million, or 250 loans, which were deferred and/or modified payments under this guidance. As of June 30, 2021, $216.0 million, or 204 loans, have successfully resumed payments as scheduled, a total, $18.6 million, or 44 loans, have closed and paid-in-full, leaving $11.7 million, or two loans, on deferral. The purpose of this deferral and modification 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. Net charge-offs for the three months ended June 30, 2021 totaled $5,000, as compared to $8,000 for the three months ended June 30, 2020. Net charge-offs for both quarterly periods represented a non-material percentage of the value of total average loans. Noninterest Income Our primary sources of recurring noninterest income are deposit service charges and fees, BaaS fees, loan referral fees, and mortgage broker fees . Additionally, the gain on the sale of our Freeland branch was a contributing source of noninterest income for the three months ended June 30, 2021. Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method. For the three months ended June 30, 2021, noninterest income totaled $4.8 million, an increase of $3.3 million, or 214.6%, compared to $1.5 million for the three months ended June 30, 2020. The following table presents, for the periods indicated, the major categories of noninterest income: Three Months Ended June 30, Increase Percent (Dollars in thousands) 2021 2020 (Decrease) Change Deposit service charges and fees $ 949 $ 677 $ 272 40.2 % BaaS fees 1,424 475 949 199.8 Gain on sale of branch, net 1,263 - 1,263 100.0 Loan referral fees 806 70 736 1,051.4 Mortgage broker fees 253 152 101 66.4 Gain on sales of loans, net 31 - 31 100.0 Sublease and lease income 31 31 - - Other 25 115 (90 ) (78.3 ) Total noninterest income $ 4,782 $ 1,520 $ 3,262 214.6 % 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. Deposit service charges were $949,000 for the three months ended June 30, 2021, an increase of $272,000, or 40.2%, from $677,000 over the same period in the prior year. The increase in deposit service charges and fees was primarily the result of a $178,000 increase in point of sale fees, $51,000 increase in merchant services fee income, $18,000 increase in ATM fees, and $16,000 increase in overdraft fee income in the quarter ended June 30, 2021 compared to the quarter ended June 30, 2020, during which the economy was impacted by initial the spread of COVID-19 pandemic. 37 BaaS Fees. 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 June 30, 2021 was $1.4 million compared to $475,000 for the three months ended June 30, 2020. The increase is the result of adding additional CCBX customers to active and implementation status. As of June 30, 2021, there were twelve active CCBX relationships, three in friends and family/testing, seven in onboarding/implementation, two signed letters of intent and a solid pipeline of potential new relationships. Included in BaaS fees is interchange income of $110,000 for the three months ended June 30, 2021, compared to zero interchange income for the three months ended June 30, 2020. 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: As of June 30, 2021 June 30, 2020 Active 12 3 Friends and family / testing 3 2 Implementation / onboarding 7 2 Signed letters of intent 2 3 Total CCBX relationships 24 10 Gain on Sale of Branch, net . The previously announced sale of our Freeland branch closed on April 30, 2021. Noninterest income included $1.3 million gain from sale of the branch during the three months ended June 30, 2021. There was no similar income in the three months ended June 30, 2020. 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. We had $806,000 in income from loan referral fees for the three months ended June 30, 2021, compared to $70,000 for the three months ended June 30, 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 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 increased $101,000 in the three months ended June 30, 2021 to $253,000, compared to $152,000 for the three months ended June 30, 2020 as a result of higher demand. 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 U.S. Department of Agriculture (“USDA”) loans that we originate. This activity fluctuates based on SBA and USDA loan activity. Gain on sale of loans totaled $31,000 for the three months ended June 30, 2021, compared to none for the three months ended June 30, 2020 as a result of more SBA and USDA loans being originated and sold to the secondary market. Other. This category includes a variety of other income-producing activities, wire transfer fees, interest earned on bank owned life insurance (“BOLI”), annuity broker fees, and SBA and USDA servicing fees. Other noninterest income decreased $90,000 in the three months ended June 30, 2021, compared to the three months ended June 30, 2020 primarily due to market value charge on a new BOLI purchased in the three months ended June 30, 2021, partially offset by an increase in recoveries on operational losses. 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. Noninterest expense also includes operational expenses, such as occupancy expense, data processing expense, legal and professional fees, software license, maintenance and subscriptions, excise taxes and director and staff expenses. For the three months ended June 30, 2021, noninterest expense totaled $13.7 million, an increase of $4.8 million, or 53.5%, compared to $8.9 million for the three months ended June 30, 2020. 38 The following table presents, for the periods indicated, the major categories of noninterest expense: Three Months Ended June 30, Increase Percent (Dollars in thousands) 2021 2020 (Decrease) Change Salaries and employee benefits $ 8,913 $ 5,215 $ 3,698 70.9 % Occupancy 990 933 57 6.1 Data processing 734 621 113 18.2 Legal and professional fees 626 474 152 32.1 Software licenses, maintenance and subscriptions 543 311 232 74.6 Excise taxes 388 262 126 48.1 Director and staff expenses 318 187 131 70.1 FDIC assessments 225 74 151 204.1 Marketing 132 116 16 13.8 Business development 100 48 52 108.3 Other 762 704 58 8.2 Total noninterest expense $ 13,731 $ 8,945 $ 4,786 53.5 % 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 $8.9 million for the three months ended June 30, 2021, an increase of $3.7 million, or 70.9%, compared to $5.2 million for the three months ended June 30, 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. The increase in salary expense was a result of a decrease in deferred loan costs recorded as salary offsets, primarily from the slow-down of originating PPP loans, which was $861,000 lower for the quarter ended June 30, 2021, compared to the quarter ended June 30, 2020. As our CCBX and CCDB activities grow, we expect to continue to add employees to support these lines of business. As of June 30, 2021, we had 321 full-time equivalent employees, compared to 220 at June 30, 2020, a 45.9% increase. Occupancy. Occupancy expenses were $990,000 for the three months ended June 30, 2021, compared to $933,000 for the three months ended June 30, 2020. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $386,000 and $311,000 for the three months ended June 30, 2021 and 2020, respectively. Occupancy expenses increased primarily as a result of higher depreciation expense resulting from growth in our CCBX and CCDB divisions. As we continue to grow, we expect occupancy expenses to increase. Data Processing. Data processing costs were $734,000 for the three months ended June 30, 2021, compared to $621,000 for the three months ended June 30, 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 and CCDB data processing expenses are included in this category and are expected to increase incrementally as these divisions grow. Legal and Professional Fees. Legal and professional costs were $626,000 for the quarter ended June 30, 2021, compared to $474,000 for the quarter ended June 30, 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. 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 $543,000 for the quarter ended June 30, 2021, compared to $311,000 for the prior year period. Software that aids in the reporting of CCBX and helps to automate and create other efficiencies in reporting contributed to the increase. 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 $388,000 for the three months ended June 30, 2021, compared to $262,000 for the three months ended June 30, 2020. Excise taxes are based on gross income of $24.4 million and $16.9 million for the three months ended June 30, 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. 39 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 $318,000 for the three months ended June 30, 2021, compared to $187,000 for the three months ended June 30, 2020, an increase of $131,000 or 70.1%. Increased expenses related to employee travel, continuing education and staff appreciation expenses contributed to the increase in the quarter ended June 30, 2021 compared to quarter ended June 30, 2020. FDIC Assessments. FDIC assessments are assessed to fund the Deposit Insurance Fund (“DIF”) to insure and protect the depositors of insured banks and to resolve failed banks. The assessment rate is based on a number of factors and recalculated each quarter. FDIC assessments were $225,000 for the three months ended June 30, 2021, compared to $74,000 for the three months ended June 30, 2020, an increase of $151,000. As deposits increase, the FDIC assessment expense generally will also increase. Marketing. Marketing costs were $132,000 for the three months ended June 30, 2021, compared to $116,000 for the three months ended June 30, 2020. Marketing costs increased year over year due to a conscious effort to reduce general advertising costs last year during the COVID-19 pandemic. We expect to see advertising expenses increase as we deploy more branding and targeted advertising for the Bank, CCBX and CCDB. Business Development. Business development costs were $100,000 for the three months ended June 30, 2021, compared to $48,000 for the three months ended June 30, 2020. Business development costs include sponsorships and other activities to cultivate business and community development. Business development expenses were reduced in the three months ended June 30, 2020 as a result of restrictions on in person meetings and business related activities due to the COVID-19 pandemic. Other. This category includes dues and memberships, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and officer’s insurance, donations, provision for unfunded commitments, and miscellaneous other expenses. Other noninterest expense was $762,000 for the three months ended June 30, 2021, compared to $704,000 for the three months ended June 30, 2020. The increase was largely due to $100,000 more in BaaS expenses for the three months ended June 30, 2021, as compared to the same period last year, partially offset by $63,000 less in the provision for unfunded commitments. 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 June 30, 2021, income tax expense totaled $2.3 million, compared to $967,000 for the three months ended June 30, 2020. The $1.3 million increase in income tax expense is the result of higher net income. Additionally, we are now subject to various state taxes that are being assessed as a result of operations expanding into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods. Our effective tax rates for the three months ended June 30, 2021 and 2020 were 24.6% and 20.8%, respectively. 40 Comparison of Operating Results for the Six Months Ended June 30, 2021 and June 30, 2020 Results of Operations Net Income Net income for the six months ended June 30, 2021, was $13.0 million, or $1.05 per diluted share, compared to $6.4 million, or $0.52 per diluted share, for the six months ended June 30, 2020. The increase in net income over the comparable period in the prior year was attributable to a $10.6 million increase in net interest income, largely related to PPP and non-PPP loan growth. A reduction in the provision for loan losses of $2.8 million for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, also contributed to the increase in net income. The provision for loan losses increased in 2020 due to the change in economic outlook caused by the COVID-19 pandemic, however losses have not materialized as anticipated, and therefore a provision of $718,000 was recorded, for the six months ended June 30, 2021. For the six months ended June 30, 2021 there was $3.6 million increase in noninterest income, including $1.3 million gain on sale of the Freeland branch and $1.3 million more in BaaS fees as a result of growth in CCBX compared to the six months ended June 30, 2020. Noninterest expense for the six months ended June 30, 2021 was $8.1 million higher compared to the six months ended June 30, 2020, resulting from $5.7 million higher salaries and employee benefits as a result of growth in CCBX, CCDB and growth initiatives and increased legal, accounting and professional fees of $589,000 related to CCBX, financial reporting, and compliance consulting. Net Interest Income Net interest income for the six months ended June 30, 2021, was $35.9 million, compared to $25.4 million for the six months ended June 30, 2020, an increase of $10.6 million, or 41.7%. The increase in net interest income consisted of a $9.8 million, or 35.3%, in increased loan interest income as a result of higher volume and $1.4 million, or 51.4%, less in interest expense on deposits. The increase in net interest income consisted of a $9.4 million, or 32.9%, increase in interest income coupled with a $1.2 million, or 37.2%, decrease in interest expense. The increase in interest income was primarily attributable to a $545.0 million, or 47.4%, increase in average loans outstanding for the six months ended June 30, 2021, compared to the prior year period, partially offset by a 0.38% decrease in yield on loans receivable from 4.85% for the six months June 30, 2020 to 4.47% for the six months ended June 30, 2021. The decrease in yield on loans receivable, as compared to the six months ended June 30, 2020, was largely due to an average balance of $492.7 million in PPP loans. Excluding PPP loans, the yield on loans receivable approximated 4.71% for the six months ended June 30, 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. ” PPP loans have a 1.0% interest rate and an approximate yield of 3.77% for the six months ended June 30, 2021, after including the amortization of deferred fees and costs. For the six months ended June 30, 2021 $6.8 million of deferred fees were recognized. As of June 30, 2021, $12.4 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. Yield on loans receivable, excluding earned fees, approximated 3.49% for the six months ended June 30, 2021 compared to 4.40% for the six months ended June 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. ” Although there are rate floors in place for $429.8 million, or 25.7%, 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 in the near future. The decrease in interest expense for the six months ended June 30, 2021 was the result of a 32 basis point, or 59.1%, decrease in cost of funds, bringing it to 0.22% for the six months ended June 30, 2021, compared to 0.54% for the six months ended June 30, 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 originating PPP loans to noncustomers and they continue to move their banking/deposit relationships over to the Bank. As of June 30, 2021, there were a total of $267.4 million in CCBX deposits compared to $47.7 million at June 30, 2020. These increases in noninterest bearing and low interest rate interest bearing deposits helped contribute to the improved cost of funds for the six months ended June 30, 2021, as compared to the prior year period. The average balance of interest-bearing deposits increased $210.4 million, or 31.5%, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020, but the average rate paid on interest bearing deposits was 50 basis points less for the quarter ended June 30, 2021, compared to the quarter ended June 30, 2020. The increased balance compared to the six months ended 41 June 30, 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 $330.5 million, or 73.9%. Average NOW (which are interest bearing checking accounts) and money market accounts grew $211.4 million, or 42.2%, and savings accounts increased $27.9 million, or 45.8% compared to June 30, 2020. Average non-core deposits decreased $28.9 million with time deposits decreasing $29.6 million, or 35.1%, partially offset by $677,000 increase in BaaS-brokered deposits, compared to June 30, 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 36 basis points to 0.35%, and NOW and money market accounts decreased 49 basis points to 0.29% for the six months ended June 30, 2021, compared to the six months ended June 30, 2020. The average rate paid on time deposits also decreased during this period. For time deposits less than $100,000, the rate decreased 50 basis points to 0.69% and for time deposits over $100,000, the average rate decreased 74 basis points to 0.82%, for the quarter ended June 30, 2021 as compared to the prior year period. For the six months ended June 30, 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 3.73% and 3.56%, respectively, compared to 3.93% and 3.58%, respectively, for the six months ended June 30, 2020. 42 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 $8.2 million and $2.6 million for the six months ended June 30, 2021 and 2020, respectively. A total of $6.8 million in PPP loan net fees were recognized in the six months ended June 30, 2021, compared to $1.9 million for the six months ended June 30, 2020. Yield on loans receivable was 4.47% for the six months ended June 30, 2021, compared to 4.85% for the six months ended June 30, 2020. Excluding PPP loans, the yield on loans receivable was 4.71% and 5.10% for the six months ended June 30, 2021, and June 30, 2020, respectively. 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 six months ended June 30, 2021 and 2020, the amount of interest income not recognized on nonaccrual loans was not material. Average Balance Sheets For the Six Months Ended June 30, 2021 2020 Average Interest & Yield / Average Interest & Yield / (Dollars in thousands) Balance Dividends Cost (4) Balance Dividends Cost (4) Assets Interest earning assets: Interest earning deposits $ 215,358 $ 144 0.13 % $ 115,547 $ 488 0.85 % Investment securities, available for sale (1) 22,117 36 0.33 20,265 133 1.32 Investment securities, held to maturity (1) 2,478 16 1.30 4,173 39 1.88 Other Investments 6,460 138 4.31 5,174 105 4.08 Loans receivable (2) 1,695,772 37,595 4.47 1,150,797 27,781 4.85 Total interest earning assets 1,942,185 37,929 3.94 1,295,956 28,546 4.43 Noninterest earning assets: Allowance for loan losses (19,563 ) (12,610 ) Other noninterest earning assets 71,349 56,654 Total assets $ 1,993,971 $ 1,340,000 Liabilities and Shareholders’ Equity Interest bearing liabilities: Interest bearing deposits $ 878,740 $ 1,288 0.30 % $ 668,381 $ 2,650 0.80 % PPPLF borrowings 138,536 240 0.35 53,722 94 0.35 FHLB advances and other borrowings 24,999 141 1.14 16,425 91 1.11 Subordinated debt 9,996 291 5.87 9,982 293 5.90 Junior subordinated debentures 3,585 42 2.36 3,583 61 3.42 Total interest bearing liabilities 1,055,856 2,002 0.38 752,093 3,189 0.85 Noninterest bearing deposits 777,693 447,189 Other liabilities 12,336 12,520 Total shareholders' equity 148,086 128,198 Total liabilities and shareholders' equity $ 1,993,971 $ 1,340,000 Net interest income $ 35,927 $ 25,357 Interest rate spread 3.56 % 3.58 % Net interest margin (3) 3.73 % 3.93 % (1) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. (2) Includes nonaccrual loans. (3) Net interest margin represents annualized net interest income divided by average total interest earning assets. (4) Yields and costs are annualized. 43 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. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume. Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020 Increase (Decrease) Due to Total Increase (Dollars in thousands) Volume Rate (Decrease) Interest income: Interest earning deposits $ 65 $ (409 ) $ (344 ) Investment securities, available for sale 3 (100 ) (97 ) Investment securities, held to maturity (11 ) (12 ) (23 ) Other Investments 27 6 33 Loans receivable 12,005 (2,191 ) 9,814 Total increase in interest income 12,089 (2,706 ) 9,383 Interest expense: Interest bearing deposits 301 (1,663 ) (1,362 ) PPPLF borrowings 146 - 146 FHLB advances 48 2 50 Subordinated debt - (2 ) (2 ) Junior subordinated debentures - (19 ) (19 ) Total increase in interest expense 495 (1,682 ) (1,187 ) Increase in net interest income $ 11,594 $ (1,024 ) $ 10,570 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 six months ended June 30, 2021 was $718,000, compared to $3.5 million for the six months ended June 30, 2020. The allowance for loan losses as a percentage of loans was 1.20% at June 30, 2021, compared to 1.03% at June 30, 2020. As of June 30, 2021, there was $398.0 million in PPP loans included in our portfolio. These loans are 100% guaranteed by the SBA, and therefore 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 1.57%. 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 in 2020 due to the change in economic outlook caused by the COVID-19 pandemic along with loan growth. The factors used in management’s analysis of the provision for loan losses resulted in a provision of $718,000 for the six months ended June 30, 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 substantial economic stimulus legislation, ongoing vaccination of its population and increased re-opening of business activities. We are not required to implement the provisions of CECL accounting standard until January 1, 2023, and therefore we are continuing to account for the allowance for loan losses under the incurred loss model. Credit quality has remained stable through June 30, 2021, as demonstrated by the low level of charge-offs and nonperforming loan balance. Nonperforming loans decreased $3.8 million, to $648,000, at June 30, 2021, compared to $4.4 million at June 30, 2020. Nonperforming assets to total assets was 0.03% at June 30, 2021 compared to 0.26% at June 30, 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. There was a total of $246.4 million, or 250 loans, granted deferred and/or modified payments under this guidance. As of June 30, 2021, $216.0 million, or 204 loans, have successfully resumed payments as scheduled, a total, $18.6 million, or 44 loans, have closed and paid-in-full, leaving $11.7 million, or two loans, that are expected to come off 44 deferral in the third quarter of 2021, 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. Net charge-offs for the six months ended June 30, 2021 totaled $14,000, or 0.00% (annualized) of total average loans, as compared to $131,000, or 0.02% (annualized) of total average loans, for the six months ended June 30, 2020. Noninterest Income Our primary sources of recurring noninterest income are deposit service charges and fees , BaaS fees, loan referral fees and mortgage broker fees. Also contributing to noninterest income in the six months ended June 30, 2021, was the gain on the sale of the Freeland branch. Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method. For the six months ended June 30, 2021, noninterest income totaled $7.8 million, an increase of $3.6 million, or 85.3%, compared to $4.2 million for the six months ended June 30, 2020. The following table presents, for the periods indicated, the major categories of noninterest income: Six Months Ended June 30, Increase Percent (Dollars in thousands) 2020 2019 (Decrease) Change Deposit service charges and fees $ 1,812 $ 1,400 $ 412 29.4 % BaaS fees 2,372 1,054 1,318 125.0 Loan referral fees 1,403 1,123 280 24.9 Gain on sales of branch, net 1,263 - 1,263 100.0 Mortgage broker fees 515 314 201 64.0 Gain on sales of loans, net 161 - 161 100.0 Sublease and lease income 63 61 2 3.3 Other 177 239 (62 ) (25.9 ) Total noninterest income $ 7,766 $ 4,191 $ 3,575 85.3 % 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 $1.8 million for the six months ended June 30, 2021, an increase of $412,000, or 29.4%, from $1.4 million over the same period in the prior year. The increase in deposit service charges and fees was primarily the result of $320,000 increase in point of sale fees, $67,000 increase in merchant services fee income, and $24,000 increase in ATM fees in the six months ended June 30, 2021 compared to the six months ended June 30, 2020, during which the economy was impacted by the spread of COVID-19 pandemic. 45 BaaS Fees. Our CCBX division provides BaaS offerings that enable broker dealers and digital financial service providers to offer their customers banking services. Included in BaaS fees is interchange income of $145,000 for the six months ended June 30, 2021, compared to zero interchange income for the three months ended June 30, 2020. 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 six months ended June 30, 2021 was $2.4 million compared to $1.1 million for the six months ended June 30, 2020. The increase is the result of new CCBX customers actively offering services to their customers. As of June 30, 2021, there were twelve active CCBX relationships, three in friends and family/testing, seven 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. The following table illustrates the activity and growth in CCBX for the periods presented: As of June 30, 2021 June 30, 2020 Active 12 3 Friends and family / testing 3 2 Implementation / onboarding 7 2 Signed letters of intent 2 3 Total CCBX relationships 24 10 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. We had $1.4 million in income from l oan referral fees for the six months ended June 30, 2021, compared to $1.1 million for the six months ended June 30, 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 recognize more, less or not recognize any, loan referral fees in some periods. Gain on Sale of Branch, net . The previously announced sale of our Freeland branch closed on April 30, 2021. Noninterest income included $1.3 million gain from sale of the branch during the six months ended June 30, 2021. There was no similar income in the six months ended June 30, 2020. Mortgage Broker Fees . We earn mortgage broker fees for residential real estate loans that we broker through mortgage lenders. Mortgage broker fees increased $201,000 in the six months ended June 30, 2021 to $515,000, compared to $314,000 in the same period in 2020 as a result of increased demand from lower interest rates on mortgages. 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. Gain on sale of loans was $161,000 for the six months ended June 30, 2021 and we did not sell the guaranteed portion of any SBA or USDA loans in the six months ended June 30, 2020, therefore we had no income for that period. Other. This category includes a variety of other income-producing activities, annuity broker fees, earnings on BOLI and SBA and USDA servicing fees. Other noninterest income decreased $62,000 in the six months ended June 30, 2021, compared to the same period in 2020 which is related to the market value adjustment on a new BOLI policy purchased during the six months ended June 30, 2021. We anticipate that the new BOLI policy will produce market gains in future periods. 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. Noninterest expense also includes operational expenses, such as occupancy expense, data processing expense, legal and professional fees, software licenses, maintenance and subscriptions and director and staff expense. For the six months ended June 30, 2021, noninterest expense totaled $26.1 million, an increase of $8.1 million, or 45.2%, compared to $18.0 million for the six months ended June 30, 2020. 46 The following table presents, for the periods indicated, the major categories of noninterest expense: Six Months Ended June 30, Increase Percent (Dollars in thousands) 2021 2020 (Decrease) Change Salaries and employee benefits $ 16,599 $ 10,898 $ 5,701 52.3 % Occupancy 2,048 1,860 188 10.1 Data processing 1,431 1,172 259 22.1 Legal and professional fees 1,386 797 589 73.9 Software licenses, maintenance and subscriptions 1,027 582 445 76.5 Excise taxes 747 465 282 60.6 Director and staff expenses 538 457 81 17.7 FDIC assessments 420 144 276 191.7 Marketing 214 228 (14 ) (6.1 ) Business development 199 173 26 15.0 Other 1,474 1,188 286 24.1 Total noninterest expense $ 26,083 $ 17,964 $ 8,119 45.2 % 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 $16.6 million for the six months ended June 30, 2021, an increase of $5.7 million, or 52.3%, compared to $10.9 million for the six months ended June 30, 2020. The increase was primarily due to hiring staff for our CCBX and CCDB divisions and additional staff for our ongoing banking related growth initiatives. Bonus and incentive expense was $1.3 million higher for the six months ended June 30, 2021 due to incentives paid to employees that have been involved in the production and support of 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 $318,000 higher and lowered expense by that same amount, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020. As our CCBX and CCDB activities grow, we expect to continue to add employees to support these lines of business. As of June 30, 2021, we had 321 full-time equivalent employees, compared to 220 at June 30, 2020, a 45.9% increase. Occupancy Expenses. Occupancy expenses were $2.0 million for the six months ended June 30, 2021, compared to $1.9 million for the six months ended June 30, 2020. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $801,000 and $620,000 for the six months ended June 30, 2021 and 2020, respectively, an increase of $182,000. Occupancy expenses increased primarily as a result of higher depreciation expense resulting from growth in our CCBX division. As we continue to grow, we expect occupancy expenses to increase in future periods. Data Processing. Data processing costs were $1.4 million for the six months ended June 30, 2021, compared to $1.2 million for the six months ended June 30, 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 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 transactions increase. Legal and Professional Fees. Legal and professional costs were $1.4 million for the six months ended June 30, 2021 compared to $797,000 for the six months ended June 30, 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. Contributing to the increase in legal and professional expenses is 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. 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 $1.0 million for the six months ended June 30, 2021, compared to $582,000 for the prior year period. Software that aids in the reporting of CCBX and helps to automate and create other efficiencies in reporting contributed to the increase. 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 $747,000 for the six months ended June 30, 2021, compared to $465,000 for the six months ended June 30, 2020. Excise taxes are based on gross income of $45.7 million and $32.7 million for the six months ended June 30, 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. 47 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 $538,000 for the six months ended June 30, 2021 and $457,000 for the six months ended June 30, 2020. Changes to director compensation in October 2020 combined with increased employee appreciation expenses contributed to the increase in expense year over year. Marketing. Marketing costs were $214,000 for the six months ended June 30, 2021, compared to $228,000 for the six months ended June 30, 2020. Marketing costs were relatively flat year over year as a result of reduced marketing during the COVID-19 pandemic, however, as we continue to expand our CCBX and CCDB divisions, offer new products and services and grow our brand, we expect marketing costs to increase. Business Development. Business development costs were $199,000 for the six months ended June 30, 2021, compared to $173,000 for the six months ended June 30, 2020. Business development costs include sponsorships and other activities to cultivate business and community development. These expenses are increasing to a more typical level as business activities resume, but were reduced as a result of restrictions on in person meetings and business related activities in 2020 due to the COVID-19 pandemic. Other. This category includes dues and memberships, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and officer’s insurance, donations, provision for unfunded commitments, and miscellaneous other expenses. Other noninterest expenses were $1.5 million for the six months ended June 30, 2021, compared to $1.2 million for the six months ended June 30, 2020. The increase was largely due to a $189,000 increase in BaaS expenses, $52,000 increase in provision for unfunded commitments and overall growth for the six months ended June 30, 2021, 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 six months ended June 30, 2021, income tax expense totaled $3.9 million, compared to $1.7 million for the six months ended June 30, 2020. Additionally, we are now subject to various state taxes that are being assessed as a result of operations expanding into other states, which has increased the overall rate used in calculating the provision for income taxes in the current and future periods. Our effective tax rates for the six months ended June 30, 2021 was 22.9% compared to 20.8% for the six months ended June 30, 2020. 48 Financial Condition The Company’s total assets increased $241.0 million, or 13.6%, to $2.01 billion at June 30, 2021 from $1.77 billion at December 31, 2020. The increase is primarily the result of $111.0 million growth in loans receivable during the six months ended June 30, 2021. As of June 30, 2021 $398.0 million in PPP loans remain on the balance sheet. These PPP loans are 100% guaranteed by the SBA and have a rate of 1.0%, and an approximate yield of 3.77% for the six months ended June 30, 2021. Loan Portfolio We accepted and processed requests for PPP loans from the beginning of the program in March 2020 for the duration of round one and two of the PPP, and throughout round three, which closed for applications on May 31, 2021. As a preferred SBA lender, we worked diligently with the SBA to offer assistance to small businesses as provided in the CARES Act, as amended by subsequent legislation, which significantly impacted our loan totals. These SBA loans are discussed further in this section under “Commercial and Industrial Loans”. Our primary source of income is derived through interest earned on loans. A substantial portion of our loan portfolio consists of commercial real estate loans and commercial and industrial loans in the Puget Sound region. Our loan portfolio represents the highest yielding component of our earning assets. As of June 30, 2021, loans receivable totaled $1.66 billion, an increase of $111.0 million, or 7.2%, compared to December 31, 2020. The increase was largely due to $86.4 million in non-PPP loan growth and $32.2 million in PPP loan growth. Our efforts to provide community assistance through the PPP loans, which resulted in $311.0 million in new PPP loans during the six months ended June 30, 2021, partially offset by $278.8 million in forgiveness payments or principal paydowns, resulted in the $32.2 million net increase in PPP loans as of June 30, 2021, compared to December 31, 2020. Additionally, unused loan commitments increased, with capital call lines increasing $158.6 million to $286.8 million at June 30, 2021 compared to $128.2 million at December 31, 2020, which may translate to loan growth in future periods as the commitments are utilized. Loans as a percentage of deposits were 92.0% as of June 30, 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. The loan to deposit ratio was over 100.0% at December 31, 2020 largely due to the high volume of PPP loans, but as these loans have been forgiven or paid off, the loan to deposit ratio has decreased. The following table summarizes our loan portfolio by type of loan as of the dates indicated: As of June 30, 2021 As of December 31, 2020 (Dollars in thousands) Amount Percent Amount Percent Commercial and industrial loans: PPP loans $ 398,038 23.8 % $ 365,842 23.5 % All other commercial & industrial loans 201,680 12.0 173,358 11.1 Total commercial and industrial loans: 599,718 35.8 539,200 34.6 Real estate loans: Construction, land and land development 116,733 7.0 94,423 6.1 Residential real estate 143,574 8.6 143,869 9.2 Commercial real estate 807,711 48.2 774,925 49.8 Consumer and other loans 7,161 0.4 3,916 0.3 Gross loans receivable 1,674,897 100.0 % 1,556,333 100.0 % Net deferred origination fees - PPP loans (12,363 ) (5,803 ) Net deferred origination fees - all other loans (4,385 ) (3,392 ) Loans receivable $ 1,658,149 $ 1,547,138 Commercial and Industrial Loans. Commercial and industrial loans increased $60.5 million, or 11.2%, to $599.7 million as of June 30, 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. These loans are primarily made based on the borrower’s ability to service the debt from income. Commercial and industrial loans are typically 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. 49 Included in this balance is $98.9 million in capital call lines resulting from relationships with our CCBX customers as of June 30, 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 and subsequent legislation 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. The third round of the PPP loan program opened for applications on January 19, 2021 and closed on May 31, 2021. In this latest round of PPP loans, we funded $311.0 million in PPP loans, and net deferred fees on these loans totaled $13.3 million. 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 six months ended June 30, 2021, we received $278.8 million in forgiveness payments or principal paydowns. In order to obtain loan forgiveness, a PPP borrower must submit a forgiveness application. 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 June 30, 2021, we have a total of $398.0 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 $12.4 million remains on these loans, and will be recognized in interest income in future periods. 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 assistance through the PPP. Commercial Real Estate Loans. Commercial real estate loans increased $32.8 million, or 4.2%, to $807.7 million as of June 30, 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. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores, hotels and motels, office buildings, mixed-use residential and commercial, and other properties. We originate both fixed- and adjustable-rate loans with terms up to 20 years. Fixed-rate loans typically amortize over a 10-to-25 year period with balloon payments due at the end of five to ten years. Adjustable-rate loans are generally based on the prime rate and adjust with the prime rate or are based on term equivalent FHLB rates. At June 30, 2021, approximately 31.0% of the commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans represented 48.2% of our loan portfolio at June 30, 2021 and are historically our largest source of revenue. As of June 30, 2021, we held $29.5 million in purchased commercial real estate loans, compared to $29.6 million at December 31, 2020. The addition of the $398.0 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 63.3% 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. Residential Real Estate Loans. Our residential real estate loans decreased $295,000, or 0.2%, from $143.9 million at December 31, 2020 to $143.6 million at June 30, 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 loan. As of June 30, 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 June 30, 2021, we held $14.1 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. We have a defined set of credit guidelines that we use when evaluating these loans. Although purchased loans were originated and underwritten by another institution, our mortgage, credit, and compliance departments conduct an independent review of each 50 underlying loan that includes re-underwriting each of these loans to our credit and compliance standards. We also make one-to-four family loans to investors to finance their rental properties and to business owners to secure their business loans. As of June 30, 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. Adverse developments affecting real estate values in our market areas could therefore increase the credit risk associated with these loans, impair the value of property pledged as collateral on loans, and affect our ability to sell the collateral upon foreclosure without a loss or additional losses. Construction, Land and Land Development Loans. Construction, land and land development loans increased $22.3 million, or 23.6%, to $116.7 million as of June 30, 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 $125.8 million at June 30, 2021, from $88.4 million at December 31, 2020. As of June 30, 2021, we held $17.3 million in purchased construction, land and land development loans, compared to $15.3 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. Consumer and Other. Consumer and other loans totaled $7.2 million as of June 30, 2021, increasing $3.2 million 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. Industry Exposure and Categories of Loans We have a diversified loan portfolio, representing a wide variety of industries. 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 $1.13 billion in outstanding loan balances, or 88.2% of total gross loans outstanding, excluding PPP loans of $398.0 million as of June 30, 2021. When combined with $544.1 million in unused commitments, the total of these three categories is $1.62 billion, or 88.8%, of total outstanding loans and loan commitments. Commercial Real Estate Loans. Commercial real estate loans represents the largest segment of our loans, comprising 63.3% of our total balance of outstanding loans, excluding PPP loans, as of June 30, 2021. Unused commitments to extend credit represents an additional $18.2 million, the combined total exposure in commercial real estate loans represents $825.9 million, or 45.4%, of our total outstanding loans and loan commitments, excluding PPP loans, as of June 30, 2021. The following table summarizes our concentration by industry for our commercial real estate loan portfolio as of June 30, 2021: (Dollars in thousands, unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans (Outstanding Balance & Available Commitment) Average Loan Balance Number of Loans Apartments $ 124,057 $ 2,466 $ 126,523 6.9 % $ 1,676 74 Hotel/Motel 111,831 228 112,059 6.2 4,301 26 Office 91,200 3,218 94,418 5.2 970 94 Retail 83,957 2,630 86,587 4.8 1,012 83 Warehouse 74,164 1,480 75,644 4.2 1,514 49 Convenience Store 73,584 1,093 74,677 4.1 1,795 41 Mixed use 69,092 1,717 70,809 3.9 823 84 Mini Storage 44,085 174 44,259 2.4 2,755 16 Manufacturing 38,165 600 38,765 2.1 1,123 34 Groups < 2.0% of total 97,576 4,577 102,153 5.6 1,267 77 Total $ 807,711 $ 18,183 $ 825,894 45.4 % $ 1,397 578 51 Commercial and Industrial Loans. Commercial and industrial loans comprise 15.8% of our total balance of outstanding loans, excluding PPP loans, as of June 30, 2021. Unused commitments to extend credit represents an additional $347.1 million, the combined total exposure in commercial and industrial loans represents $548.8 million, or 30.1%, of our total outstanding loans and loan commitments, excluding PPP loans, as of June 30, 2021. The following table summarizes our concentration by industry for our commercial and industrial loan portfolio as of June 30, 2021: (Dollars in thousands, unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans (Outstanding Balance & Available Commitment) Average Loan Balance Number of Loans Capital Call Lines $ 98,905 $ 286,775 $ 385,680 21.2 % $ 1,124 88 Construction/Contractor Services 13,930 25,222 39,152 2.2 92 152 Financial Institutions 20,150 - 20,150 1.1 3,358 6 Manufacturing 10,939 6,699 17,638 1.0 185 59 Medical / Dental / Other Care 10,386 4,153 14,539 0.8 185 56 Retail 7,793 4,710 12,503 0.7 312 25 Groups < 0.70% of total 39,577 19,549 59,126 3.2 141 281 Total $ 201,680 $ 347,108 $ 548,788 30.1 % $ 302 667 Construction, Land and Land Development Loans. Construction, land and land development loans comprise 9.1% of our total balance of outstanding loans, excluding PPP loans, as of June 30, 2021. Unused commitments to extend credit represents an additional $125.8 million, the combined total exposure in construction, land and land development loans represents $242.6 million, or 13.3%, of our total outstanding loans and loan commitments, excluding PPP loans, as of June 30, 2021. The following table details our concentration for our construction, land and land development loan portfolio as of June 30, 2021: (Dollars in thousands, unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans (Outstanding Balance & Available Commitment) Average Loan Balance Number of Loans Commercial construction $ 65,895 $ 106,626 $ 172,521 9.5 % $ 2,126 31 Residential construction 17,685 15,640 33,325 1.8 680 26 Land development 13,626 1,963 15,589 0.9 852 16 Developed land loans 14,221 1,598 15,819 0.9 474 30 Undeveloped land loans 5,306 - 5,306 0.3 379 14 Total $ 116,733 $ 125,827 $ 242,560 13.3 % $ 998 117 Nonperforming Assets Loans are considered past due if the required principal and interest payments have not been received as of the date such payments were due. Loans are placed on nonaccrual status when, in management’s opinion, the borrower may be unable to meet payment obligations as they become due, as well as when required by applicable regulations. Loans may be placed on nonaccrual status regardless of whether or not such loans are considered past due. In general, we place loans on nonaccrual status when they become 90 days past due. We also place loans on nonaccrual status if they are less than 90 days past due if the collection of principal or interest is in doubt. 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. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal balance. Loans are returned to accrual status if we believe that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual status. We define nonperforming loans as loans on nonaccrual status and accruing loans 90 days or more past due. Nonperforming assets also include other real estate owned and repossessed assets. 52 We believe our lending practices and active approach to managing nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have procedures in place to assist us in maintaining the overall credit quality of our loan portfolio. We have established underwriting guidelines, concentration limits and we also monitor our delinquency levels for any negative or adverse trends. We actively manage problem assets to reduce our risk for loss. We had $648,000 in nonperforming assets, as of June 30, 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 June 30, 2021 and December 31, 2020. Our nonperforming loans to loans receivable ratio was 0.04% at June 30, 2021, compared to 0.05% at December 31, 2020. Commercial and industrial nonaccrual loans totaled $482,000 at June 30, 2021 and consisted of three lending relationships. Residential real estate nonaccrual loans totaled $166,000 and consisted of two lending relationships. Principal reductions resulted in an overall decrease in our ratios of nonperforming loans and nonperforming assets to total assets as of June 30, 2021 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 June 30, 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 guidance from the federal bank regulatory agencies, the Company deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic. In addition to the PPP loans we made to assist customers, as of June 30, 2021, we have $11.7 million in deferred and/or modified payments, pursuant to federal guidance, representing two loans. In total, we have deferred or modified payments on 250 loans, or $241.6 million, per the federal guidance. As of June 30, 2021, $216.0 million, or 204 loans, have successfully resumed payments as scheduled, $18.6 million, or 44 loans, have closed and paid-in-full, leaving $11.7 million, or two loans, on deferral. All of the loans on deferred or modified status as of June 30, 2021 are scheduled to return to active status in the third quarter of 2021. In accordance with GAAP, the CARES Act, as amended by the Consolidated Appropriations Act, 2021, and interagency guidance issued on March 22, 2020 and April 7, 2020, 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 TDRs. The following table presents information regarding nonperforming assets at the dates indicated: As of As of June 30, December 31, (Dollars in thousands) 2021 2020 Nonaccrual loans: Commercial and industrial loans $ 482 $ 537 Real estate loans: Residential real estate 166 175 Total nonaccrual loans 648 712 Accruing loans past due 90 days or more: Total accruing loans past due 90 days or more - - Total nonperforming loans 648 712 Real estate owned - - Repossessed assets - - Troubled debt restructurings, accruing - - Total nonperforming assets $ 648 $ 712 Total nonperforming loans to loans receivable 0.04 % 0.05 % Total nonperforming assets to total assets 0.03 % 0.04 % Allowance for Loan Losses We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on 53 internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, and current economic factors. In connection with our allowance for loan loss review, we consider risk elements applicable to particular loan types or categories in assessing the quality of individual loans. Some of the risk elements we consider include: • for commercial and industrial loans, the debt service coverage ratio (income from the business in excess of operating expenses compared to loan repayment requirements), the operating results of the commercial, professional or agricultural enterprise, the borrower’s business, professional and financial ability and expertise, the specific risks and volatility of income and operating results typical for businesses in that category and the value, nature and marketability of collateral; • for commercial real estate loans, the debt service coverage ratio, operating results of the owner in the case of owner-occupied properties, the loan-to-value ratio, the age and condition of the collateral and the volatility of income, property value and future operating results typical of properties of that type; • for residential real estate loans, the borrower’s ability to repay the loan, including a consideration of the debt-to-income ratio and employment and income stability, the loan-to-value ratio, and the age, condition and marketability of the collateral; and • for construction, land and land development loans, the perceived market feasibility of the project including the ability to sell developed lots or improvements constructed for resale or the ability to lease property constructed for lease, the quality and nature of contracts for presale or prelease, if any, experience and ability of the developer and loan-to-value ratio. As of June 30, 2021, the allowance for loan losses totaled $20.0 million, or 1.20% 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 $398.0 million in PPP loans which are 100% guaranteed by the SBA. Our allowance for loan losses as of June 30, 2021 increased by $704,000, or 3.7%, 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 1.57% at June 30, 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. ” 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 As of or for the Six Months Ended Months Ended June 30, June 30, (Dollars in thousands) 2021 2020 2021 2020 Allowance at beginning of period $ 19,610 $ 12,925 $ 19,262 $ 11,470 Provision for loan losses 361 1,930 718 3,508 Charge-offs: Commercial and industrial loans 2 11 16 130 Consumer and other 10 2 14 7 Total charge-offs 12 13 30 137 Recoveries: Commercial and industrial loans - 4 5 5 Consumer and other 7 1 11 1 Total recoveries 7 5 16 6 Net charge-offs 5 8 14 131 Allowance at end of period $ 19,966 $ 14,847 $ 19,966 $ 14,847 Allowance to nonperforming loans 3081.17 % 334.77 % 3081.17 % 334.77 % Allowance to loans receivable 1.20 % 1.03 % 1.20 % 1.03 % Net charge-offs to average loans (1) 0.00 % 0.00 % 0.00 % 0.02 % (1) Ratios for the three and six months ended June 30, 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 54 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 year ended December 31, 2020. The provision for the three and six months ended June 30, 2021, was based primarily on non-PPP loan growth during the quarter. The economic outlook has improved with additional substantial economic stimulus legislation, increased vaccination leading to herd immunity, and the re-opening of activities previously restricted. However, if the COVID-19 pandemic, including the emergence of variant strains of the virus, worsens, 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. Securities We use our securities portfolio primarily as a source of liquidity and collateral that can be readily sold or pledged for public deposits or other business purposes. At June 30, 2021, 87.5% of our investment portfolio consisted primarily of U.S. Treasury securities. The remainder of our securities portfolio was invested in U.S. Agency residential mortgage-backed securities, municipal bonds and U.S. Agency collateralized mortgage obligations. 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 June 30, 2021, our loan-to-deposit ratio was 92.0%. 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 June 30, 2021, the carrying amount of our investment securities totaled $27.4 million, an increase of $4.2 million, or 18.0%, compared to $23.2 million as of December 31, 2020. The increase in the securities portfolio was due to the purchase of a $5.0 million Treasury securities during the quarter ended June 30, 2021, which was needed to pledge as collateral for Washington public funds as required in the depository pledge agreement with the Washington Public Funds Commission, partially offset by maturities and principal paydowns. Our investment portfolio consists of securities classified as available for sale and, to a lesser amount, held to maturity. The carrying values of our investment securities classified as available for sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. The following table summarizes the amortized cost and estimated fair value of our investment securities as of the dates shown: As of As of June 30, 2021 December 31, 2020 Amortized Fair Amortized Fair (Dollars in thousands) Cost Value Cost Value Securities available-for-sale: U.S. Treasury securities $ 24,999 $ 24,992 $ 19,997 $ 20,028 U.S. Agency collateralized mortgage obligations 80 83 96 100 U.S. Agency residential mortgage-backed securities 7 7 10 10 Municipal bonds 253 259 254 261 Total available-for-sale securities 25,339 25,341 20,357 20,399 Securities held-to-maturity: U.S. Agency residential mortgage-backed securities 2,101 2,179 2,848 2,957 Total held-to-maturity securities 2,101 2,179 2,848 2,957 Total investment securities $ 27,440 $ 27,520 $ 23,205 $ 23,356 Deposits We offer a variety of deposit products that have a wide range of interest rates and terms, including demand, money market, savings, BaaS-brokered deposits and time accounts as well as r eciprocal deposits. Reciprocal deposits enable us to provide an FDIC insured deposit option to customers that have balances in excess of the FDIC insurance limit. This service trades our customers’ funds as certificates of deposit or interest bearing demand deposits in increments under the FDIC insured amount to other participating financial institutions and in exchange we receive time deposit or interest bearing demand investments from participating financial 55 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 June 30, 2021 were $1.80 billion, an increase of $380.4 million, or 26.8%, compared to $1.42 million as of December 31, 2020. The overall increase in total deposits was achieved despite a decrease of $25.4 million in total deposits compared to December 31, 2020, due to the sale of our Freeland branch. Included in total deposits is $267.4 million in deposits derived from CCBX deposit relationships, an increase of $198.7 million, or 289.3%, compared to $68.7 million as of December 31, 2020. The deposits from our CCBX division are predominately classified as noninterest bearing, or NOW and money market accounts, but a portion of such CCBX deposits may be classified as brokered deposits as a result of the relevant relationship agreement. The increase was largely in core deposits, which increased $395.9 million to $1.72 billion from $1.33 billion at December 31, 2020. The increase in core deposits is primarily the result of expanding and growing banking relationships with new customers and growth in our CCBX division. We define core deposits as all deposits except time deposits and 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 June 30, 2021 were $887.9 million, an increase of $295.6 million, or 49.9%, compared to $592.3 million as of December 31, 2020. 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, and growth in our CCBX division. Noninterest bearing deposits represent 49.3% and 41.7% of total deposits for June 30, 2021 and December 31, 2020, respectively. Total interest bearing account balances, excluding time deposits, as of June 30, 2021 were $863.6 million, an increase of $94.2 million, or 12.2%, from $769.4 million as of December 31, 2020. Included in interest bearing account balances is $27.4 million in BaaS-brokered deposits, an decrease of $6.1 million from December 31, 2020. Also included in interest bearing deposits is $8.2 million in reciprocal deposits. Total time deposit balances as of June 30, 2021 were $50.2 million, a decrease of $9.5 million, or 15.9%, 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. As of As of June 30, 2021 December 31, 2020 Percent of Percent of (Dollars in thousands) Amount Total Deposits Amount Total Deposits Demand, noninterest bearing $ 887,896 49.3 % $ 592,261 41.7 % NOW and money market 743,014 41.2 658,323 46.3 Savings 93,224 5.2 77,611 5.4 Total core deposits 1,724,134 95.7 1,328,195 93.4 BaaS-brokered deposits 27,388 1.5 33,482 2.4 Time deposits less than $100,000 16,302 0.9 19,315 1.4 Time deposits $100,000 and over 33,854 1.9 40,315 2.8 Total $ 1,801,678 100.0 % $ 1,421,307 100.0 % 56 The following table sets forth the Company’s time deposits of $100,000 or more by time remaining until maturity as of the dates indicated: (Dollars in thousands) As of June 30, 2021 As of December 31, 2020 Maturity Period: Three months or less $ 9,842 $ 11,050 Over three through six months 5,520 7,799 Over six through twelve months 11,281 13,006 Over twelve months 7,211 8,460 Total $ 33,854 $ 40,315 Weighted average maturity (in years) 0.85 0.70 Average deposits for the three months ended June 30, 2021 were $1.77 billion, an increase of 41.2% compared to $1.25 billion for the three months ended June 30, 2020. Average deposits for the six months ended June 30, 2021 were $1.66 billion, an increase of 48.5% compared to $1.12 billion for the six months ended June 30, 2020. The increase in average deposits for both these periods 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 deposits 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 0.14% for the three months ended June 30, 2021, compared to 0.35% for the three months ended June 30, 2020. The average rate paid on NOW and money market accounts decreased 32 basis points for the three months ended June 30, 2021. The average rate paid on time deposits of less than $100,000 and more than $100,000 decreased 52 basis points and 69 basis points, respectively, for the three months ended June 30, 2021, compared to the three months ended June 30, 2020. The average rate paid on savings and BaaS brokered deposits was fairly flat for the three months ended June 30, 2021, compared to the three months ended June 30, 2020. The overall lower average rate paid on interest bearing accounts in the three months ended June 30, 2021 is due to 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 average rate paid on total deposits was 0.16% for the six months ended June 30, 2021, compared to 0.48% for the six months ended June 30, 2020, respectively. The average rate paid on BaaS-brokered deposits decreased 36 basis points for the six months ended June 30, 2021, compared to the prior year period, and NOW and money market accounts decreased 49 basis points for the six months ended June 30, 2021, compared to the prior year period. The average rate paid on time deposits of less than $100,000 and more than $100,000 decreased 50 basis points and 74 basis points, respectively, for the six months ended June 30, 2021, compared to the six months ended June 30, 2020. The lower average rate paid on interest bearing accounts in the six months ended June 30, 2021 is due to 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 June 30, For the Six Months Ended June 30, 2021 2020 2021 2020 (Dollars in thousands) Average Balance Average Rate Average Balance Average Rate Average Balance Average Rate Average Balance Average Rate Demand, noninterest bearing $ 863,962 0.00 % $ 541,448 0.00 % $ 777,693 0.00 % $ 447,189 0.00 % NOW and money market 734,677 0.28 535,222 0.59 712,595 0.29 501,216 0.78 Savings 91,181 0.03 67,407 0.04 88,759 0.03 60,858 0.04 BaaS-brokered deposits 22,435 0.36 22,108 0.35 22,625 0.35 21,948 0.71 Time deposits less than $100,000 17,392 0.62 20,160 1.14 18,130 0.69 20,640 1.19 Time deposits $100,000 and over 35,435 0.72 63,827 1.41 36,631 0.82 63,719 1.56 Total deposits $ 1,765,082 0.14 % $ 1,250,172 0.35 % $ 1,656,433 0.16 % $ 1,115,570 0.48 % The ratio of average noninterest bearing deposits to average total deposits for the three and six months ended June 30, 2021 was 48.9% and 46.9% compared to 43.3% and 40.1%, respectively, for the three and six months ended June 30, 2020. 57 Borrowings We have the ability to utilize short-term to long-term borrowings to supplement deposits to fund our lending and investment activities, each of which is discussed below. Federal Reserve Bank Line of Credit. The Federal Reserve allows us to borrow against our line of credit through a borrower in custody agreement utilizing the discount window, which is collateralized by certain loans. As of June 30, 2021, and December 31, 2020, total borrowing capacity of $21.3 million was available under this arrangement. As of June 30, 2021 and December 31, 2020, Federal Reserve advances totaled zero. Paycheck Protection Program Liquidity Facility. 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 PPP provided loans to small businesses so that they can keep their employees on the payroll and pay for other allowed expenses. If the borrowers meet certain criteria, the loan may be forgiven. The PPPLF 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 borrowing line must also be paid down. As of June 30, 2021, the borrowing was paid in full with zero outstanding 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 Six Months Ended Months Ended June 30, June 30, (Dollars in thousands) 2021 2020 2021 2020 Maximum amount outstanding at any month-end during period: PPPLF Advances $ 128,826 $ 190,156 $ 185,894 $ 190,156 Average outstanding balance during period: PPPLF Advances $ 107,047 $ 107,443 $ 138,536 $ 53,722 Weighted average interest rate during period: PPPLF Advances 0.35 % 0.35 % 0.35 % 0.35 % Balance outstanding at end of period: PPPLF Advances $ - $ 190,156 $ - $ 190,156 Weighted average interest rate at end of period: PPPLF Advances 0.35 % 0.35 % 0.35 % 0.35 % 58 Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of June 30, 2021, and December 31, 2020, we had borrowing capacity of $114.2 million and $90.7 million, respectively, with the FHLB. As of June 30, 2021, we have $25.0 million in FHLB medium term advances. This includes $10.0 million that matures March 6, 2023 and $15.0 million that matures March 4, 2025. FHLB advances totaled $25.0 million as of June 30, 2021 and December 31, 2020. Although there are no immediate plans to borrow additional funds, additional borrowing capacity of $89.2 million was available under this arrangement as of June 30, 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 Six Months Ended Months Ended June 30, June 30, (Dollars in thousands) 2021 2020 2021 2020 Maximum amount outstanding at any month-end during period: FHLB Advances $ - $ - $ - $ - Average outstanding balance during period: FHLB Advances $ - $ - $ - $ 134 Weighted average interest rate during period: FHLB Advances n/a n/a n/a 1.84 % Balance outstanding at end of period: FHLB Advances $ - $ - $ - $ - Weighted average interest rate at end of period: FHLB Advances n/a n/a n/a 0.00 % 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 Six Months Ended Months Ended June 30, June 30, (Dollars in thousands) 2021 2020 2021 2020 Maximum amount outstanding at any month-end during period: FHLB Advances $ 24,999 $ 24,999 $ 24,999 $ 24,999 Average outstanding balance during period: FHLB Advances $ 24,999 $ 24,999 $ 24,999 $ 16,208 Weighted average interest rate during period: FHLB Advances 1.13 % 1.13 % 1.13 % 1.13 % Balance outstanding at end of period: FHLB Advances $ 24,999 $ 24,999 $ 24,999 $ 24,999 Weighted average interest rate at end of period: FHLB Advances 1.13 % 1.13 % 1.13 % 1.13 % Junior Subordinated Debentures. In 2004, we issued $3.6 million in junior subordinated debentures to Coastal (WA) Statutory Trust I (the “Trust”), of which we own all of the outstanding common securities. The Trust used the proceeds from the issuance of its underlying common securities and preferred securities to purchase the debentures issued by the Company. These debentures are the Trust’s only assets and the interest payments from the debentures finance the distributions paid on the preferred securities. The debentures bear interest at a rate per annum equal to the 3-month LIBOR plus 2.10%. The effective rate as of June 30, 2021, and December 31, 2020, was 2.22% 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. During any such extension period, distributions on the Trust’s preferred securities will also be deferred, and our ability to pay dividends on our common stock will be restricted. The Trust’s preferred securities are mandatorily redeemable upon maturity of the debentures, or upon earlier redemption as provided in the indenture, subject to Federal Reserve approval. If the debentures are redeemed prior to maturity, the redemption price will be the principal amount and any accrued but unpaid interest. We unconditionally guarantee payment of accrued and unpaid distributions required to be paid on the Trust securities subject to certain exceptions, the redemption price with respect to any Trust securities called for redemption and amounts due if the Trust is liquidated or terminated. 59 Subordinated Debt . In 2016, the Company issued a subordinated note to a commercial bank in the amount of $10.0 million. The note matures on August 1, 2026, and bears interest at the rate of 5.65% per year for five years and, thereafter, at a rate equal to The Wall Street Journal prime rate plus 2.50%. The five-year 5.65% interest period ends on August 1, 2021. Principal payments of $500,000 per quarter commence November 1, 2021. We may redeem the subordinated note, in whole or in part, without premium or penalty after July 29, 2021, subject to any required regulatory approvals. Liquidity and Capital Resources Liquidity Management Liquidity refers to our capacity to meet our cash obligations at a reasonable cost. Our cash obligations require us to have cash flow that is adequate to fund loan growth and maintain on-balance sheet liquidity while meeting present and future obligations of deposit withdrawals, borrowing maturities and other contractual cash obligations. In managing our cash flows, management regularly confronts situations that can give rise to increased liquidity risk. These include funding mismatches, market constraints in accessing sources of funds and the ability to convert assets into cash. Changes in economic conditions or exposure to credit, market, and operational, legal and reputational risks also could affect the Bank’s liquidity risk profile and are considered in the assessment of liquidity management. We continually monitor our liquidity position to ensure that our assets and liabilities are managed in a manner to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. Management has established a comprehensive process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; contingency funding policies and plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity risk management process. Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash on hand, cash at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and BaaS deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, brokered deposits, a one-way buy through an ICS account, and the issuance of debt or equity securities. We also participated in the PPPLF, which provided an additional source of low cost funding, at a 0.35% interest rate, and favorable capital treatment for the PPP loans. Under the terms of the facility, the borrowings are paid down as the loans are forgiven or paid down by the customer. We have repaid this borrowing under the PPPLF in full, resulting in a zero balance as of June 30, 2021 and the PPPLF expired on July 31, 2021. We believe we have ample liquidity resources to fund future growth and meet other cash needs as necessary and are closely monitoring liquidity in this uncertain economic environment. The Company is a corporation separate and apart from our Bank and, therefore, must provide for its own liquidity, including liquidity required to meet its debt service requirements on its subordinated note and junior subordinated debentures. The Company’s main source of cash flow has been through equity and debt offerings. The Company has consistently retained a portion of the funds from equity and debt offerings so that is has sufficient funds for its operating and debt costs for the next few 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. There are statutory and regulatory limitations that affect the ability of the Bank to pay dividends to the Company. We believe that these limitations will not impact the ability of the Bank to pay dividends to the Company to meet ongoing operating needs. For contingency purposes, the Company maintains a minimum level of cash to fund one year’s projected operating cash flow needs and the Bank established a minimum liquidity ratio of 5% of assets. Both of these minimum liquidity levels are on-balance sheet sources. Per policy and the Bank’s liquidity contingency plan, in event of a liquidity emergency the Bank can utilize wholesale funds in an amount up to 30% of assets. Since the Bank uses only a small portion of its borrowing or wholesale funding capacity, the Bank has access to funds if needed in a liquidity emergency. 60 Capital Adequacy Capital management consists of providing equity and other instruments that qualify as regulatory capital to support current and future operations. Banking regulators view capital levels as important indicators of an institution’s financial soundness. As a general matter, FDIC-insured depository institutions and their holding companies are required to maintain minimum capital levels relative to the amount and types of assets they hold. We are subject to regulatory capital requirements at the bank level. The Company will become subject to regulatory capital requirements if its consolidated assets exceed $3.0 billion or it otherwise becomes ineligible to operate under the Federal Reserve’s Small Bank Holding Company Policy Statement. 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. As of June 30, 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 for general corporate purposes as necessary, including refinancing of debt. 61 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 and the regulatory capital ratios that would be required for the Company if we did not operate under the Small Bank Holding Company Policy Statement: Actual Minimum Required for Capital Adequacy Purposes Required to be Well Capitalized Under the Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) June 30, 2021 Leverage Capital (to average assets) Company $ 157,450 8.00 % $ 78,706 4.00 % $ 98,382 5.00 % Bank Only 161,368 8.21 % 78,661 4.00 % 98,326 5.00 % Common Equity Tier I risk-based capital ratio (to risk-weighted assets) Company 153,950 10.92 % 63,470 4.50 % 91,678 6.50 % Bank Only 161,368 11.45 % 63,416 4.50 % 91,600 6.50 % Tier I Capital (to risk-weighted assets) Company 157,450 11.16 % 84,626 6.00 % 112,835 8.00 % Bank Only 161,368 11.45 % 84,554 6.00 % 112,739 8.00 % Total Capital (to risk-weighted assets) Company 185,119 13.12 % 112,835 8.00 % 141,044 10.00 % Bank Only 179,022 12.70 % 112,739 8.00 % 140,924 10.00 % December 31, 2020 Leverage Capital (to average assets) Company $ 143,532 9.05 % $ 63,454 4.00 % $ 79,318 5.00 % Bank Only 147,262 9.29 % 63,421 4.00 % 79,276 5.00 % Common Equity Tier I risk-based capital ratio (to risk-weighted assets) Company 140,032 11.27 % 55,935 4.50 % 80,795 6.50 % Bank Only 147,262 11.86 % 55,879 4.50 % 80,713 6.50 % Tier I Capital (to risk-weighted assets) Company 143,532 11.55 % 74,580 6.00 % 99,440 8.00 % Bank Only 147,262 11.86 % 74,505 6.00 % 99,340 8.00 % Total Capital (to risk-weighted assets) Company 169,123 13.61 % 99,440 8.00 % 124,300 10.00 % Bank Only 162,837 13.11 % 99,340 8.00 % 124,175 10.00 % 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 June 30, 2021. Payments Due by Period Less than 1 to 3 3 to 5 More than (Dollars in thousands) Total 1 Year Years Years 5 Years Time Deposits $ 50,156 $ 38,445 $ 9,297 $ 2,414 $ - FHLB advances 24,999 - 10,000 14,999 - Subordinated note 10,000 1,500 4,000 4,000 500 Junior subordinated debentures 3,609 - - - 3,609 Deferred compensation plans 1,198 175 350 351 322 Operating leases 7,973 1,271 2,418 1,435 2,849 62 For a discussion of our borrowings, see “—Financial Condition—Borrowings” in this section. We believe that we will be able to meet our contractual obligations as they come due. Adequate cash levels are expected through profitability, repayments from loans and securities, deposit gathering activity, access to borrowing sources and periodic loan sales. Off-Balance Sheet Items In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets. Our commitments associated with outstanding commitments to extend credit and standby and commercial letters of credit are summarized below. Since commitments associated with commitments to extend credit and letters of credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. As of As of June 30, December 31, (Dollars in thousands) 2021 2020 Commitments to extend credit: Commercial and industrial loans $ 60,333 $ 61,676 Commercial and industrial loans - capital call lines 286,775 $ 128,208 Construction – commercial real estate loans 103,831 69,866 Construction – residential real estate loans 21,996 18,489 Residential real estate loans 31,935 20,482 Commercial real estate loans 18,183 18,128 Other 21,060 1,101 Total commitments to extend credit $ 544,113 $ 317,950 Standby letters of credit $ 2,669 $ 2,754 Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. Since many of the commitments are expected to expire without being fully drawn upon, the total commitment amounts disclosed above do not necessarily represent future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. The amount of collateral obtained, if considered necessary by us, upon extension of credit, is based on management’s credit evaluation of the customer. Standby and commercial letters of credit are conditional commitments issued by us to guarantee the performance of a customer to a third party. In the event of nonperformance by the customer, we have rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and/or marketable securities. Our credit risk associated with issuing letters of credit is essentially the same as the risk involved in extending loan facilities to our customers. 63 Critical Accounting Policies Our accounting policies are integral to understanding our results of operations. Our accounting policies are described in greater detail in “Note 1 - Description of Business and Summary of Significant Accounting Policies” and “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations - Critical Accounting Policies” of our Form 10-K. We have procedures and processes in place to facilitate making these judgments. Actual results in these areas could differ from management’s estimates. There have been no significant changes concerning our critical accounting policies as described in our Form 10-K. Selected Financial Data The following table shows the Company’s key performance ratios for the periods indicated. The table also includes ratios that were adjusted by removing the impact of the PPP loans on loans receivable related measures. The adjusted ratios are non-GAAP measures. For more information about non-GAAP financial measures, see “ GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures ” section that follows. Three Months Ended Six Months Ended (unaudited) June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 June 30, 2021 June 30, 2020 Return on average assets (1) 1.36 % 1.28 % 1.04 % 0.95 % 0.96 % 1.31 % 0.96 % Return on average equity (1) 18.60 % 16.84 % 13.36 % 12.14 % 11.37 % 17.65 % 10.03 % Pre-tax, pre-provision return on average assets (1)(2) 1.87 % 1.69 % 1.90 % 1.72 % 1.72 % 1.78 % 1.74 % Yield on earnings assets (1) 3.89 % 3.99 % 4.16 % 3.93 % 4.16 % 3.94 % 4.43 % Yield on loans receivable (1) 4.44 % 4.51 % 4.64 % 4.33 % 4.57 % 4.47 % 4.85 % Yield on loans receivable, excluding PPP loans (1)(2) 4.65 % 4.78 % 5.00 % 4.78 % 4.94 % 4.71 % 5.10 % Yield on loans receivable, excluding earned fees (1)(2) 3.46 % 3.53 % 3.66 % 3.61 % 3.91 % 3.49 % 4.40 % Yield on loans receivable, excluding earned fees and interest on PPP loans, as adjusted (1)(2) 4.42 % 4.52 % 4.65 % 4.69 % 4.84 % 4.47 % 4.96 % Cost of funds (1) 0.20 % 0.24 % 0.29 % 0.33 % 0.41 % 0.22 % 0.54 % Cost of deposits (1) 0.14 % 0.17 % 0.22 % 0.27 % 0.35 % 0.16 % 0.48 % Net interest margin (1) 3.70 % 3.76 % 3.89 % 3.62 % 3.78 % 3.73 % 3.93 % Noninterest expense to average assets (1) 2.65 % 2.62 % 2.35 % 2.26 % 2.34 % 2.64 % 2.71 % Efficiency ratio 58.69 % 60.85 % 55.26 % 56.73 % 57.66 % 59.70 % 60.80 % Loans receivable to deposits 92.03 % 105.68 % 108.85 % 110.98 % 110.77 % 92.03 % 110.77 % (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 The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies. We believe these non-GAAP measures are useful to investors in evaluating our performance and in demonstrating resources available with and without provision for loan losses and income taxes. The following non-GAAP measures are presented to illustrate the impact of provision for loan losses and provision for income taxes on net income and return on average assets. 64 Pre-tax, pre-provision net income is a non-GAAP measure that excludes the impact of provision for loan losses and provision for income taxes from net income. The most directly comparable GAAP measure is net income. Pre-tax, pre-provision return on average assets is a non-GAAP measure that excludes the impact of provision for loan losses and provision for income taxes from return on average assets. The most directly comparable GAAP measure is return on average assets. Reconciliations of the GAAP and non-GAAP measures are presented below. As of and for the Three Months Ended As of and for the Six Months Ended (Dollars in thousands, unaudited) June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 June 30, 2021 June 30, 2020 Pre-tax, pre-provision net income and pre-tax, pre-provision return on average assets: Total average assets $ 2,074,841 $ 1,912,202 $ 1,774,723 $ 1,704,874 $ 1,538,546 $ 1,993,971 $ 1,340,000 Total net income 7,013 6,018 4,661 4,090 3,671 13,031 6,395 Plus: provision for loan losses 361 357 2,600 2,200 1,930 718 3,508 Plus: provision for income taxes 2,289 1,572 1,232 1,082 967 3,861 1,681 Pre-tax, pre-provision net income $ 9,663 $ 7,947 $ 8,493 $ 7,372 $ 6,568 $ 17,610 $ 11,584 Return on average assets 1.36 % 1.28 % 1.04 % 0.95 % 0.96 % 1.31 % 0.96 % Pre-tax, pre-provision return on average assets: 1.87 % 1.69 % 1.90 % 1.72 % 1.72 % 1.78 % 1.74 % The following non-GAAP measure is presented to illustrate the impact of loan fees on loan yield. Yield on loans receivable, excluding earned fees is a non-GAAP measure that excludes the impact of earned loan fees on the interest rate yield. The most directly comparable GAAP measure is yield on loans. Reconciliations of the GAAP and non-GAAP measures are presented below. As of and for the Three Months Ended As of and for the Six Months Ended (Dollars in thousands, unaudited) June 30, 2021 March 31, 2021 December 31, 2020 September 30, 2020 June 30, 2020 June 30, 2021 June 30, 2020 Yield on loans receivable, excluding earned fees : Total average loans receivable $ 1,750,825 $ 1,640,108 $ 1,533,533 $ 1,493,024 $ 1,334,991 $ 1,695,772 $ 1,150,797 Interest and earned fee income on loans 19,365 18,230 17,885 16,244 15,154 37,595 27,781 Less: earned fee income on all loans (4,274 ) (3,974 ) (3,765 ) (2,692 ) (2,182 ) (8,248 ) (2,610 ) Adjusted interest income on loans $ 15,091 $ 14,256 $ 14,120 $ 13,552 $ 12,972 $ 29,347 $ 25,171 Yield on loans receivable 4.44 % 4.51 % 4.64 % 4.33 % 4.57 % 4.47 % 4.85 % Yield on loans receivable, excluding earned fees: 3.46 % 3.53 % 3.66 % 3.61 % 3.91 % 3.49 % 4.40 % Yield on loans receivable, excluding earned fees and interest on PPP loans (1): 4.42 % 4.52 % 4.65 % 4.69 % 4.84 % 4.47 % 4.96 % (1) Non-GAAP measure - see next table of "Non-GAAP Financial Measures" for more information. 65 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. These measures include the following: 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. 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. 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 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. 66 Reconciliations of the GAAP and non-GAAP measures are presented in the following table: As of and for the As of and for the Three Months Ended Six Months Ended (Dollars in thousands, unaudited) June 30, 2021 June 30, 2020 June 30, 2021 June 30, 2020 Allowance for loan losses to loans receivable, excluding PPP loans: Total loans, net of deferred fees $ 1,658,149 $ 1,447,144 $ 1,658,149 $ 1,447,144 Less: PPP loans (398,038 ) (438,077 ) (398,038 ) (438,077 ) Less: net deferred fees on PPP loans 12,363 10,639 12,363 10,639 Adjusted loans, net of deferred fees $ 1,272,474 $ 1,019,707 $ 1,272,474 $ 1,019,707 Allowance for loan losses $ (19,966 ) $ (14,847 ) $ (19,966 ) $ (14,847 ) Allowance for loan losses to loans receivable 1.20 % 1.03 % 1.20 % 1.03 % Adjusted allowance for loan losses to loans receivable, excluding PPP loans 1.57 % 1.46 % 1.57 % 1.46 % Yield on loans receivable, excluding PPP loans: Total average loans receivable $ 1,750,825 $ 1,334,991 $ 1,695,772 $ 1,150,797 Less: average PPP loans (509,265 ) (335,200 ) (492,695 ) (167,600 ) Plus: average deferred fees on PPP loans 14,213 8,700 12,510 4,350 Adjusted total average loans receivable $ 1,255,773 $ 1,008,491 $ 1,215,587 $ 987,547 Interest income on loans $ 19,365 $ 15,154 $ 37,595 $ 27,781 Less: interest and deferred fee income recognized on PPP loans (4,821 ) (2,759 ) (9,199 ) (2,759 ) Adjusted interest income on loans $ 14,544 $ 12,395 $ 28,396 $ 25,022 Yield on loans receivable 4.44 % 4.57 % 4.47 % 4.85 % Yield on loans receivable, excluding PPP loans: 4.65 % 4.94 % 4.71 % 5.10 % Yield on loans receivable, excluding earned fees and interest on PPP loans: Total average loans receivable $ 1,750,825 $ 1,334,991 $ 1,695,772 $ 1,150,797 Less: average PPP loans (509,265 ) (335,200 ) (492,695 ) (167,600 ) Plus: average deferred fees on PPP loans $ 14,213 $ 8,700 $ 12,510 $ 4,350 Adjusted total average loans receivable $ 1,255,773 $ 1,008,491 $ 1,215,587 $ 987,547 Interest and earned fee income on loans $ 19,365 $ 15,154 $ 37,595 $ 27,781 Less: earned fee income on all loans $ (4,274 ) $ (2,182 ) $ (8,248 ) $ (2,610 ) Less: interest income on PPP loans (1,257 ) (837 ) (2,426 ) (837 ) Adjusted interest income on loans $ 13,834 $ 12,135 $ 26,921 $ 24,334 Yield on loans receivable 4.44 % 4.57 % 4.47 % 4.85 % Yield on loans receivable, excluding earned fees (1): 3.46 % 3.91 % 3.49 % 4.40 % Yield on loans receivable, excluding earned fees and interest on PPP loans: 4.42 % 4.84 % 4.47 % 4.96 % (1) Non-GAAP measure - see previous table of " Non-GAAP Financial Measures" for more information. 67 (Dollars in thousands, unaudited) As of June 30, 2021 Adjusted Tier 1 leverage capital ratio, excluding PPP loans: Company: Tier 1 capital $ 157,450 Average assets for the leverage capital ratio $ 1,967,646 Less: Average PPP loans (509,265 ) Plus: Average PPPLF borrowings 107,047 Adjusted average assets for the leverage capital ratio $ 1,565,428 Tier 1 leverage capital ratio 8.00 % Adjusted Tier 1 leverage capital ratio, excluding PPP loans 10.06 % Bank: Tier 1 capital $ 161,368 Average assets for the leverage capital ratio $ 1,966,528 Less: Average PPP loans (509,265 ) Plus: Average PPPLF borrowings 107,047 Adjusted average assets for the leverage capital ratio $ 1,564,310 Tier 1 leverage capital ratio 8.21 % Adjusted Tier 1 leverage capital ratio, excluding PPP loans 10.32 % 68