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 (“Bank”) and Arlington Olympic LLC. We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. Our business is conducted through two reportable segments: The community bank and CCBX. The primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 28 partners as of March 31, 2022, compared to 21 as of March 31, 2021. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company. As of March 31, 2022, we had total assets of $2.83 billion, total loans receivable of $1.96 billion, total deposits of $2.58 billion and total shareholders’ equity of $207.9 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. We generate most of our community bank revenue from interest on loans and investments and CCBX revenue from interest on loans and BaaS fee income. Our primary source of funding for our loans is commercial and retail deposits from our customer relationships and from our partner deposit relationships. We place secondary reliance on wholesale funding, primarily borrowings from the Federal Home Loan Bank (“FHLB”). Less commonly used sources of funding include borrowings from the Federal Reserve System (Federal Reserve) discount window, draws on established federal funds lines from unaffiliated commercial banks, brokered funds, which allows us to obtain deposits from sources that do not have a relationship with the Bank and can be obtained through certificate of deposit listing services, via the internet or through other advertising methods, or a one-way buy through an insured cash sweep (“ICS”) account, which allows us to obtain funds from other institutions that have deposited funds through ICS. Our largest expenses are salaries and 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 consumer loans. Coronavirus Aid, Relief, and Economic Security (“CARES”) Act Our financial results for the three months ended March 31, 2022 and 2021 were also impacted by the coronavirus, and variants thereof, including the Delta and Omicron variants (“COVID-19”) pandemic. On March 27, 2020, the Coronavirus Aid, Relief and Economic Security Act (“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 was a stimulus response to the potential economic impacts of the COVID-19 pandemic. The purpose of the PPP was to provide forgivable loans to smaller businesses, sole proprietorships, independent contractors, and self-employed individuals that used the proceeds of the loans for payroll and certain other qualifying expenses. 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 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. In total, we funded $763.9 million in PPP loans, since the first round of PPP loans opened in March 2020 through the close of round three. Total net deferred fees on these loans were $26.3 million. As of March 31, 2022, $47.5 million in PPP loans remained with 28 $ 1.4 million in net deferred fees, which will be recognized in interest income in future periods. 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 has been a popular approach for customers with PPP loans that are not eligible for forgiveness. There were $ 2.9 million of these loans remaining as of March 31, 2022 . PPP loans originated in 2021 are five-year loans, and $ 44.6 million of these loans remained as of March 31, 2022 . 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 continue to accept applications from customers for loan forgiveness. To obtain loan forgiveness, a PPP borrower must submit a forgiveness application. We expect PPP forgiveness payments to continue through the second quarter of 2022. The table below summarizes information about total PPP loans originated in 2020 and 2021. Total PPP Loan Origination Round 1 & 2 2020 Round 3 2021 Total Loans Originated $ 452,846 $ 311,012 $ 763,858 Deferred fees, net 12,933 13,334 $ 26,267 Outstanding loans and deferred fees as of March 31, 2022 Loans outstanding $ 2,927 $ 44,540 $ 47,467 Deferred fees, net 7 1,358 $ 1,365 As of March 31, 2022 there was $47.5 million in PPP loans, including $2.9 million from rounds 1 and 2 and $44.6 million from round 3. The table below summarizes key information about the remaining PPP loans originated in 2020 and 2021 as of the period indicated: Outstanding PPP Loans Original Loan Size As of and for the Three Months Ended September 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: Round 1 & 2 $ 134 $ 367 $ 84 $ 1,578 $ 764 $ 2,927 Round 3 2,133 2,963 13,492 25,952 - 44,540 Total principal outstanding 2,267 3,330 13,576 27,530 764 47,467 Net deferred fees outstanding Round 1 & 2 $ - $ 1 $ 1 $ 4 $ 1 $ 7 Round 3 185 98 493 582 - 1,358 Total net deferred fees outstanding $ 185 $ 99 $ 494 $ 586 $ 1 $ 1,365 Number of loans: Round 1 & 2 7 7 3 6 1 24 Round 3 122 31 55 31 - 239 Total loan count 129 38 58 37 1 263 Percent of total 49.0 % 14.5 % 22.0 % 14.1 % 0.4 % 100.0 % Forgiveness/Payoffs/Paydowns in Three Months Ended March 31, 2022 Dollars $ 4,960 $ 7,880 $ 18,827 $ 31,741 $ 938 $ 64,346 Deferred fee recognized 394 286 768 811 9 2,268 PPP Overview The PPP loans originated in the first and second rounds during 2020 and in the third round in 2021 have had a significant impact on our financial statements. As the remaining $47.5 million in PPP loans continue to paydown they will have less impact our results in the future. Throughout this discussion, we will address the impact of these loans, on the balance sheet and income statement. Any estimated adjusted ratios that exclude the impact of this activity are non-U.S. generally accepted accounting principles (“GAAP”) 29 measures. For more information about non-GAAP financial measures, see the non-GAAP disclosure “ GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures ”. The Company's Preparations, Responses and Re-Opening to the COVID-19 Pandemic As part of its ongoing risk preparation and mitigation efforts, we 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 first quarter of 2022. 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. London Interbank Offered Rate (“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 ended December 31, 2021). 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 but no later than December 31, 2021. The Federal Reserve and other federal banking agencies have continued to encourage banks to transition away from LIBOR as soon as practicable. On March 15, 2022, President Biden signed into law the Adjustable Interest Rate (LIBOR) Act (the “LIBOR Act”), which was included as part of a larger Consolidated Appropriations Act, 2022. The LIBOR Act provides a nationwide process for replacing LIBOR in financial contracts that mature after the cessation of the overnight, one-, three-, six- and 12-month USD LIBOR tenors on June 30, 2023 and that do not provide for an effective means to replace LIBOR upon its cessation. For contracts in which a party has the discretion to identify a replacement rate, the LIBOR Act also provides a safe harbor to parties if they choose the SOFR-based benchmark replacement rate to be identified by the Federal Reserve. 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, 2021. As of March 31, 2022, we had $227.0 million in loans that are tied to LIBOR, and $185.4 million of those are SWAPs. We have $3.6 million in floating rate junior subordinated debentures to Coastal (WA) Statutory Trust I, which was formed for the issuance of trust preferred securities. These debentures are also tied to LIBOR. The move to an alternate index may impact the rates we receive on loans and rates we pay on our junior subordinated debentures. We have identified the loans and debt instruments impacted, are reviewing LIBOR replacement options and are preparing for and evaluating the impact of the transition from LIBOR. We are no longer issuing any loans or debt tied to LIBOR. 30 Comparison of Operating Results for the Three Months Ended March 31, 2022 and March 31, 2021 Results of Operations Net Income Net income for the three months ended March 31, 2022, was $6.2 million, or $0.46 per diluted share, compared to $6.0 million, or $0.49 per diluted share, for the three months ended March 31, 2021. The increase in net income over the comparable period in the prior year was primarily attributable to a $11.8 million increase in interest income and $19.0 million increase in noninterest income. These were partially offset by an increase in the provision for loan losses of $12.6 million, related to CCBX loan growth, and $18.1 million more in noninterest expense. The increase in noninterest income and noninterest expense are largely related to CCBX. In accordance with GAAP, we recognize the reimbursement of non-credit fraud losses on partner’s customer loans and credit enhancements related to the allowance for loan losses and reserve for unfunded commitments provided by the partner as revenue. Partner customer credit losses are recognized in the allowance for loan loss and non-credit fraud loss is recognized in BaaS noninterest expense . For more information on the accounting for BaaS allowance for loan losses, reserve for unfunded commitments, credit enhancements and fraud recovery see the section titled “CCBX – BaaS Reporting Information.” Net Interest Income Net interest income for the three months ended March 31, 2022, was $29.3 million, compared to $17.3 million for the three months ended March 31, 2021, an increase of $12.0 million, or 69.0%. Yield on loans receivable was 6.80% for the three months ended March 31, 2022, compared 4.51% for the three months ended March 31, 2021. The increase in net interest income compared to March 31, 2021 was largely related to increased yield on loans from growth in higher yielding loans. Average loans receivable for the three months ended March 31, 2022 was $1.77 billion, compared to $1.64 billion for the three months ended March 31, 2021. Interest and fees on loans totaled $29.6 million for the three months ended March 31, 2022 compared to $18.2 million for the three months ended March 31, 2021. The $11.8 million increase in interest and fees on loans for the quarter ended March 31, 2022, compared to March 31, 2021, was largely due to increased yield on loans from growth in higher yielding loans. Net non-PPP loan growth of $682.3 million, or 55.0%, for the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021, partially offset a decrease of $496.4 million in PPP loans that were forgiven or repaid. CCBX average loans receivable was $382.2 million for the quarter ended March 31, 2022, compared to $66.9 million for the quarter ended March 31, 2021, an increase of $315.3 million, or 471.7%. Average CCBX gross yield of 12.73% was earned on CCBX loans for the quarter ended March 31, 2022, compared to 2.5% for the quarter ended March 31, 2021. CCBX gross yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. As a result of the FOMC raising rates in mid-March 2022, interest rates were increased on $473.6 million in variable rate loans, the impact of this increase in interest rates will be fully seen in future quarters. As of March 31, 2022 there were $47.5 million in PPP loans, compared $543.8 million as of March 31, 2021. In the three months ended March 31, 2022 a total of $64.3 million in PPP loans were forgiven or repaid. Net deferred fees recognized on PPP loans contributed $2.3 million for the three months ended March 31, 2022, compared to $3.2 million for the three months ended March 31, 2021. As of March 31, 2022 $1.4 million in net deferred fees on PPP loans remains to be recognized in interest income in future periods along with interest earned 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. PPP loans in rounds 1 and 2 were originated in 2020, and were predominately two year loans, and only $2.9 million of these loans remained at March 31, 2022. PPP loans in round 3 were originated in 2021 and are all five-year loans, and $44.6 million of these loans remained at March 31, 2022. Interest income from interest earning deposits with other banks was $402,000 at March 31, 2022, an increase of $332,000 due to higher balances, compared to March 31, 2021. The average balance of interest earning deposits with other banks for the three months ended March 31, 2022 was $843.9 million, compared to $195.3 million for the three months ended March 31, 2021. Additionally, the yield on these interest earning deposits with other banks increased four basis points, compared to March 31, 2021. Interest expense was $874,000 for the quarter ended March 31, 2022, a $169,000 decrease from the quarter ended March 31, 2021. Interest expense on borrowed funds was $321,000 for the quarter ended March 31, 2022, compared to $383,000 for the quarter ended 31 March 31, 2021. The $62,000 decrease in interest expense on borrowed funds from the quarter ended March 31, 2021 is the result of a decrease in average PPPLF borrowings, which were paid off in full as of June 30, 2021, partially offset by a $ 15.0 million increase in subordinated debt, which increased during the quarter ended September 30, 2021 . Additionally, we paid off $25.0 million in FHLB borrowings late in the quarter ended March 31, 2022. The borrowings were no longer needed, and there was no prepayment penalty for early repayment. Interest expense on interest bearing deposits decreased $107,000 compared to March 31, 2021, because of management lowering interest rates in 2021 on interest bearing deposits resulting in lower interest rates on interest bearing deposits compared to March 31, 2021 . However, interest expense is expected to increase as a result of the FOMC increasing rates 0.25% in mid-March 2022. In addition, as a result of the FOMC rate increase, $690.4 million in CCBX deposits that were not earning interest were reclassed to interest bearing deposits from noninterest bearing deposits. This reclassification occurred mid-March 2022, therefore the impact of this change will not be fully realized until next quarter. We anticipate additional rate increases in 2022, which we expect will result in higher interest expense on interest bearing deposits. Net interest margin was 4.45% for the three months ended March 31, 2022, compared to 3.76% for the three months ended March 31, 2021. The increase in net interest margin compared to the three months ended March 31, 2021 was largely a result of an increase in higher rate, non-PPP loans. Non-PPP loans increased $682.3 million compared to March 31, 2021. Also contributing to the increase in net interest margin compared to the three months ended March 31, 2021 was $648.6 million increase in average interest earning deposits. These interest earning deposits earned an average rate of 19 basis points for the quarter ended March 31, 2022. Cost of funds was 0.14% for the quarter ended March 31, 2022, which is a decrease of 10 basis points from the quarter ended March 31, 2021. Cost of deposits for the quarter ended March 31, 2022 was 0.09%, which was an 8 basis point decrease, from 0.17% for the quarter ended March 31, 2021, largely due to an increase in noninterest bearing deposits and a lower rate environment. Deposit growth from CCBX in noninterest bearing and low interest bearing accounts contributed to the reduced cost of funds in conjunction with rate reductions on our community bank deposits. The recent 25 basis point increase in rates by the FOMC did not have a significant impact on the first quarter interest expense, but the impact of that change and the change on loan rates will likely be seen in future quarters. Noninterest bearing deposits increased $69.4 million, or 9.0%, compared to the quarter ended March 31, 2021 due to an increase of $759.8 million in noninterest bearing deposits, partially offset by the aforementioned reclassification of $690.4 million of CCBX noninterest bearing deposits to interest bearing deposits. Total yield on loans receivable for the quarter ended March 31, 2022 was 6.80%, compared to 4.51% for the quarter ended March 31, 2021. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX consumer loans. As of the quarter ended March 31, 2022 average CCBX loans increased $315.3 million, or 471.7%, with an average CCBX gross yield of 12.73%, compared to 2.50% at March 31, 2021. CCBX gross yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. Average community bank loans increased $209.0 million, or 19.0%, excluding PPP loans, and PPP loans decreased $396.1 million, or 83.2%, compared to March 31, 2021. Average yield on community bank loans for the three months ended March 31, 2022 was 5.16%. compared to 4.59% for the three months ended March 31, 2021. 32 For the Three Months Ended March 31, 2022 March 31, 2021 Yield on Cost of Yield on Cost of Loans Deposits Loans Deposits Community Bank 5.16% 0.11% 4.59% 0.18% CCBX - gross yield (1) 12.73% 0.06% 2.50% 0.09% (1) CCBX - gross yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. To determine net revenue (Net BaaS loan income) earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at Net BaaS loan income which can be compared to interest income on the Company’s community bank loans. For the Three Months Ended March 31, 2022 March 31, 2021 (Dollars in thousands) Interest / Expense Interest / expense divided by average CCBX loans Interest / Expense Interest / expense divided by average CCBX loans BaaS loan interest income $ 11,992 12.73 % $ 412 2.50 % Less: BaaS loan expense 8,290 8.80 % 90 0.55 % Net BaaS loan income * 3,702 3.93 % 322 1.95 % Average BaaS Loans 382,153 66,850 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 March 31, 2022, 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 4.45% and 4.28%, respectively, compared to 3.76% and 3.59%, respectively, for the three months ended March 31, 2021. 33 The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan fees included in interest income totaled $ 2.7 million and $ 4.0 million for the three months ended March 31, 2022 and 202 1 , respectively. For the three months ended March 31, 2022 and 202 1 , the amount of interest income not recognized on nonaccrual loans was not material. Average Balance Sheets For the Three Months Ended March 31, 2022 2021 Average Interest & Yield / Average Interest & Yield / (Dollars in thousands) Balance Dividends Cost (4) Balance Dividends Cost (4) Assets Interest earning assets: Interest earning deposits $ 843,931 $ 402 0.19 % $ 195,308 $ 70 0.15 % Investment securities, available for sale (1) 44,470 61 0.56 21,575 19 0.36 Investment securities, held to maturity (1) 1,292 10 3.14 2,610 9 1.40 Other investments 9,227 37 1.63 6,080 30 2.00 Loans receivable (2) 1,768,283 29,632 6.80 1,640,108 18,230 4.51 Total interest earning assets 2,667,203 30,142 4.58 1,865,681 18,358 3.99 Noninterest earning assets: Allowance for loan losses (30,668 ) (19,391 ) Other noninterest earning assets 92,401 65,912 Total assets $ 2,728,936 $ 1,912,202 Liabilities and Shareholders’ Equity Interest bearing liabilities: Interest bearing deposits $ 1,131,984 $ 553 0.20 % $ 856,111 $ 660 0.31 % PPPLF borrowings - - 0.00 170,376 147 0.35 FHLB advances and other borrowings 24,443 69 1.14 24,999 70 1.14 Subordinated debt 24,295 230 3.84 9,994 145 5.88 Junior subordinated debentures 3,586 22 2.49 3,585 21 2.38 Total interest bearing liabilities 1,184,308 874 0.30 1,065,065 1,043 0.40 Noninterest bearing deposits 1,320,144 690,465 Other liabilities 16,009 11,778 Total shareholders' equity 208,475 144,894 Total liabilities and shareholders' equity $ 2,728,936 $ 1,912,202 Net interest income $ 29,268 $ 17,315 Interest rate spread 4.28 % 3.59 % Net interest margin (3) 4.45 % 3.76 % (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. 34 The following table presents an analysis of certain average balances, interest income and interest expense by segment: March 31, 2022 March 31, 2021 Average Interest & Yield / Average Interest & Yield / Balance Dividends Cost (2) Balance Dividends Cost (2) Community Bank Assets Loans receivable (1) $ 1,386,130 $ 17,640 5.16 % $ 1,573,258 $ 17,818 4.59 % Liabilities Interest bearing deposits 935,784 435 0.19 826,471 638 0.31 Noninterest bearing deposits 718,760 625,876 CCBX Assets Loans receivable (1) $ 382,153 $ 11,992 12.73 % $ 66,850 $ 412 2.50 % Liabilities Interest bearing deposits 196,200 118 0.24 29,640 22 0.30 Noninterest bearing deposits 601,384 64,589 (1) Includes nonaccrual loans. (2) Yields and costs are annualized. 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 $9.3 million increase in loan interest income that is attributed to an increase in loan rates and $2.1 million increase in loan interest income that is attributed to an increase in loan volume. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume. Three Months Ended March 31, 2022 Compared to Three Months Ended March 31, 2021 Increase (Decrease) Due to Total Increase (Dollars in thousands) Volume Rate (Decrease) Interest income: Interest earning deposits $ 309 $ 23 $ 332 Investment securities, available for sale 31 11 42 Investment securities, held to maturity (10 ) 11 1 Other Investments 13 (6 ) 7 Loans receivable 2,148 9,254 11,402 Total increase in interest income 2,491 9,293 11,784 Interest expense: Interest bearing deposits 135 (242 ) (107 ) PPPLF borrowings (147 ) - (147 ) FHLB advances and other borrowings (1 ) - (1 ) Subordinated debt 135 (50 ) 85 Junior subordinated debentures - 1 1 Total increase in interest expense 122 (291 ) (169 ) Increase in net interest income $ 2,369 $ 9,584 $ 11,953 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 March 31, 2022, was $12.9 million, compared to $357,000 for the three months ended March 31, 2021. The increase in the Company’s provision for loan losses during the quarter ended March 31, 2022, is 35 largely related to the provision for CCBX partner loans. During th e quarter ended March 31, 202 2 , a $ 12.6 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank loan losses indicated that a provision for loan loss of $ 344,00 0 was needed for the quarter ended March 31, 202 2 . The economic environment is continuously changing and has shown some signs of improvement, with ongoing vaccination of its population and increased re-opening of economic activities, tempered by increased inflation, global unrest, the war in U k raine and a rise in new COVID-19 variants that have resulted in some economic uncertainty. The Company is not required to implement the provisions of the Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model. Gross loans totaled $1.96 billion at March 31, 2022 and i ncluded $ 47.5 million in PPP loans, which are 100% guaranteed, and are excluded from the provision for loan losses calculation. The allowance for loan losses as a percentage of loans was 1. 97 % at March 31, 2022 , compared to 1. 11 % at March 31, 2021 . Excluding PPP loans, which are 100% guaranteed by the SBA, the adjusted allowance for loan losses as a percentage of loans was approximately 2.02 % at March 31, 2022 . A reconciliation of this non-GAAP measure is set forth in the section titled “ GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures. ” Net charge-offs for the quarter ended March 31, 2022 totaled $2.8 million, or 0.64% of total average loans, as compared to net charge-offs of $9,000, or <0.01% of total average loans, for the quarter ended March 31, 2021. Net charge-offs were up in 2022 compared to 2021 due to CCBX partner loans. For the three months ended March 31, 2022, $2.8 million of net charge-offs were for CCBX, and for the three months ended March 31, 2021, $9,000 of net charge-offs were for the community bank. The following table shows the total charge-off activity by segment for the periods indicated: Three Months Ended March 31, 2022 March 31, 2021 (Dollars in thousands) Community Bank CCBX Total Community Bank CCBX Total Gross charge-offs $ 4 $ 2,804 $ 2,808 $ 18 $ - $ 18 Gross recoveries (4 ) - (4 ) (9 ) - (9 ) Net charge-offs $ - $ 2,804 $ 2,804 $ 9 $ - $ 9 Net charge-offs to average loans 0.00 % 2.98 % 0.64 % 0.00 % 0.00 % 0.00 % The following table shows the provision expense by segment for the periods indicated: Three Months Ended (Dollars in thousands) March 31, 2022 March 31, 2021 Community bank $ 344 $ 320 CCBX 12,598 37 Total provision expense $ 12,942 $ 357 Noninterest Income Our primary sources of recurring noninterest income are BaaS fees, deposit service charges and fees, loan referral fees, gain on sales of loans and mortgage broker fees . Noninterest income does not include loan origination fees, which are generally recognized over the life of the related loan as an adjustment to yield using the interest or similar method. For the three months ended March 31, 2022, noninterest income totaled $22.0 million, an increase of $19.0 million, or 636.8%, compared to $3.0 million for the three months ended March 31, 2021. 36 The following table presents, for the periods indicated, the major categories of noninterest income: Three Months Ended March 31, Increase Percent (Dollars in thousands) 2022 2021 (Decrease) Change BaaS fees $ 20,112 $ 948 $ 19,164 2021.5 % Deposit service charges and fees 884 863 21 2.4 Loan referral fees 602 597 5 0.8 Gain on sales of loans, net - 130 (130 ) (100.0 ) Mortgage broker fees 123 262 (139 ) (53.1 ) Other 265 184 81 44.0 Total noninterest income $ 21,986 $ 2,984 $ 19,002 636.8 % BaaS Fees. Our CCBX segment provides BaaS offerings that enable our broker dealer and digital financial service providers to offer their customers banking services. In exchange for providing these services, we earn fixed fees, volume-based fees and reimbursement of costs depending on the contract. In accordance with GAAP, we recognize the reimbursement of non-credit fraud losses on partner’s customer loans and credit enhancements related to the allowance for loan losses and reserve for unfunded commitments provided by the partner as revenue. Partner customer credit losses are recognized in the allowance for loan loss and non-credit fraud loss is recognized in BaaS noninterest expense . For more information on the accounting for BaaS allowance for loan losses, reserve for unfunded commitments, credit enhancements and fraud recovery see the section titled “CCBX – BaaS Reporting Information.” BaaS fee income for the three months ended March 31, 2022 was $20.1 million compared to $948,000 for the three months ended March 31, 2021, an increase of $19.2 million, or 2,021.5%. The increase over the quarter ended March 31, 2021 was primarily due to an increase of $1.3 million increase in total BaaS fee program income, which was the result of increased relationships with broker dealers and digital financial service providers, $13.1 million in BaaS fees – credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, $4.6 million in BaaS fees – fraud recovery, and $189,000 increase in reimbursement of expenses. The following table presents the BaaS fee income for the periods indicated: Three Months Ended March 31, March 31, Increase (Dollars in thousands) 2022 2021 (Decrease) Program income: Servicing and other BaaS fees $ 1,662 $ 730 $ 932 Interchange 432 35 397 Total program income 2,094 765 1,329 Reimbursements and indemnifications: Credit enhancement recovery 13,075 - 13,075 Fraud recovery 4,571 - 4,571 Reimbursement of expenses 372 183 189 Total reimbursements and indemnifications 18,018 183 17,835 Total BaaS fees $ 20,112 $ 948 $ 19,164 37 As of March 31, 2022, there were 20 active CCBX relationships, one in friends and family trials, five in onboarding/implementation, two signed letters of intent and a solid pipeline of potential new relationships, compared to ten active CCBX relationships, five in onboarding/implementation and six signed letters of intent at March 31, 2021. We have gradually become more selective in vetting new CCBX relationships by selecting only the relationships which are well-capitalized, are already established, and have experienced management teams. As more CCBX customers move to active status, we expect that BaaS service and interchange fees will increase. The following table illustrates the activity and growth in CCBX relationships for the periods presented and includes the addition of a large, established strategic partner and the exit of a small partner during the quarter ended March 31, 2022. As of March 31, 2022 March 31, 2021 Active 20 10 Friends and family / testing 1 - Implementation / onboarding 5 5 Signed letters of intent 2 6 Total CCBX relationships 28 21 Deposit Service Charges and Fees. Deposit service charges and fees include service charges on accounts, point-of-sale fees, merchant services fees and overdraft fees. Together they constitute the largest component of our noninterest income, outside of BaaS fee income. Deposit service charges were $884,000 for the three months ended March 31, 2022, an increase of $21,000, or 2.4%, from $863,000 over the same period in the prior year. The increase in deposit service charges and fees was primarily the result of a $38,000 increase in point of sale fees and $10,000 increase in service charges on business accounts partially offset by a decrease of $14,000 in merchant services fee income and $13,000 decrease in non-sufficient funds (“NSF”) and overdraft fees in the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021. The decrease in NSF and overdraft fees is the result of the Bank reducing NSF and overdraft fees from $35 per item to $15 per item (with a maximum daily fee of $175) in December 2021. NSF and overdraft fees are not a significant source of revenue for us and therefore this change will not have a material impact on noninterest income. 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 $602,000 in income from loan referral fees for the three months ended March 31, 2022, compared to $597,000 for the three months ended March 31, 2021, an increase of $5,000, or 0.8%. 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. 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. There was no income from the sale of loans for the three months ended March 31, 2022, compared to $130,000 for the three months ended March 31, 2021 during which time more SBA and USDA loans were being originated and sold to the secondary market. Mortgage Broker Fees . We earn mortgage broker fees for residential real estate loans that we broker through mortgage lenders. Mortgage broker fees decreased $139,000, or 53.1%, in the three months ended March 31, 2022 to $123,000, compared to $262,000 for the three months ended March 31, 2021 as a result of decreased demand resulting from higher interest rates. Other. This category includes a variety of other income-producing activities, credit card fee income, wire transfer fees, interest earned on bank owned life insurance (“BOLI”), annuity broker fees, and SBA and USDA servicing fees. Other noninterest income increased $81,000, or 44.0%, in the three months ended March 31, 2022, compared to the three months ended March 31, 2021 primarily due to an increase in earnings on BOLI and increased credit card fee income. 38 Noninterest Expense Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest components of noninterest expense are BaaS expense and salaries and employee benefits. Noninterest expense also includes operational expenses, such as occupancy, software license, maintenance and subscriptions, data processing, legal and professional fees, FDIC assessment, excise taxes, director and staff expenses, marketing and other expenses. For the three months ended March 31, 2022, noninterest expense totaled $30.4 million, an increase of $18.1 million, or 146.2%, compared to $12.4 million for the three months ended March 31, 2021. The following table presents, for the periods indicated, the major categories of noninterest expense: Three Months Ended March 31, Increase Percent (Dollars in thousands) 2022 2021 (Decrease) Change BaaS expense $ 12,861 $ 90 $ 12,771 14190.0 % Salaries and employee benefits 11,085 7,686 3,399 44.2 Occupancy 1,136 1,058 78 7.4 Software licenses, maintenance and subscriptions 1,052 484 568 117.4 Data processing 809 697 112 16.1 Legal and professional fees 708 760 (52 ) (6.8 ) FDIC assessments 604 195 409 209.7 Excise taxes 349 359 (10 ) (2.8 ) Director and staff expenses 344 220 124 56.4 Marketing 99 82 17 20.7 Other 1,368 721 647 89.7 Total noninterest expense $ 30,415 $ 12,352 $ 18,063 146.2 % BaaS expense. Our CCBX segment provides BaaS offerings that enable our broker dealer and digital financial service providers to offer their customers banking services. Included in BaaS expense is partner loan expense and partner fraud expense. Partner loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. Partner fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts. For the quarter ended March 31, 2022, BaaS expense was $12.9 million, compared to $90,000 for the quarter ended March 31, 2021, an increase of $12.8 million, or 14,190.0%, as a result of increased partner activity. For more information on the accounting for BaaS expenses see the section titled “CCBX – BaaS Reporting Information.” The following table presents, for the periods indicated, the BaaS expenses: Three Months Ended March 31, March 31, Increase (Dollars in thousands) 2022 2021 (Decrease) BaaS loan expense $ 8,290 $ 90 $ 8,200 BaaS fraud expense 4,571 - 4,571 Total BaaS expense $ 12,861 $ 90 $ 12,771 Salaries and Employee Benefits. Salaries and employee benefits are one of the largest components of noninterest expense and include payroll expense, incentive compensation costs, benefit plans, health insurance and payroll taxes. Salaries and employee benefits were $11.1 million for the three months ended March 31, 2022, an increase of $3.4 million, or 44.2%, compared to $7.7 million for the three months ended March 31, 2021. The increase was primarily due to continued hiring staff for our CCBX segment and additional staff for our ongoing banking related growth initiatives. As our CCBX activities grow, we expect to continue to add employees to support these lines of business. As of March 31, 2022, we had 401 full-time equivalent employees, compared to 277 at March 31, 2021, a 44.8% increase. Occupancy. Occupancy expenses increased $78,000, or 7.4%, to $1.1 million for the three months ended March 31, 2022, compared to March 31, 2021. This category includes building, leasehold, furniture, fixtures and equipment depreciation totaling $419,000 and 39 $ 416 ,000 for the three months ended March 31, 2022 and 202 1 , respectively. As we continue to grow, we expect occupancy expenses to increase. Software Licenses, Maintenance and Subscriptions. Software licenses, maintenance and subscriptions includes expenses related to obtaining and maintaining software required for our various functions. Software licenses, maintenance and subscriptions were $1.1 million for the quarter ended March 31, 2022, compared to $484,000 for the prior year period, an increase of $568,000, or 117.4%. Software that aids in the reporting of CCBX activities and monitoring of transactions that 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 segment. Data Processing. Data processing costs were $809,000 for the three months ended March 31, 2022, compared to $697,000 for the three months ended March 31, 2021. Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs. Data processing costs grow as we grow and add new products, customers and branches. Additionally, CCBX data processing expenses are included in this category and are expected to increase incrementally as this segment grows. Legal and Professional Fees. Legal and professional costs were $708,000 for the quarter ended March 31, 2022, compared to $760,000 for the quarter ended March 31, 2021. 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. 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 $604,000 for the three months ended March 31, 2022, compared to $195,000 for the three months ended March 31, 2021, an increase of $409,000, or 209.7%. As deposits increase, the FDIC assessment expense will generally increase. Excise Taxes. Excise taxes were $349,000 for the three months ended March 31, 2022, compared to $359,000 for the three months ended March 31, 2021. Excise taxes are assessed on Washington state income and are based on gross income of $52.1 million and $21.3 million for the three months ended March 31, 2022 and 2021, respectively. Gross income is reduced by certain allowed deductions and income attributed to other states is also removed to arrive at the taxable base. Additionally, we received a credit in the amount of $109,000 as a result of our participation in the Washington State Main Street Program, which reduced our 2022 expense. Director and Staff Expenses. Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses. Director and staff expenses were $344,000 for the three months ended March 31, 2022, compared to $220,000, for the three months ended March 31, 2021, an increase of $124,000, or 56.4%. Increased expenses related to employee travel, and continuing education contributed to the increase in the quarter ended March 31, 2022 compared to quarter ended March 31, 2021. Marketing. Marketing costs were $99,000 for the three months ended March 31, 2022, compared to $82,000 for the three months ended March 31, 2021. Marketing costs were lower in the three months ended March 31, 2021 as a result of reduced marketing during the COVID-19 pandemic; however, as we continue to expand our CCBX segment, offer new products and services and grow our brand, we expect marketing costs to increase. 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 $1.4 million for the three months ended March 31, 2022, compared to $721,000 for the three months ended March 31, 2021, an increase of $647,000, or 89.7%. The increase was largely due to $362,000 increase in provision for unfunded commitments for the three months ended March 31, 2022, as compared to the same period last year, largely due to increased CCBX unfunded commitments, combined with $72,000 more in operational/mobile losses, $65,000 more in office supply costs and a $50,000 increase in FRB and other bank service charges. Income Tax Expense The amount of income tax expense we incur is impacted by the amounts of our pre-tax income, tax-exempt income and other nondeductible expenses. Deferred tax assets and liabilities are reflected at current income tax rates in effect for the period in which the deferred tax assets and liabilities are expected to be realized or settled. As changes in tax laws or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. Valuation allowances are established when necessary to reduce our deferred tax assets to the amount expected to be realized. The Company is subject to various state taxes that are assessed as CCBX activities and employees expand into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods. 40 For the three months ended March 31, 2022 income tax expense totaled $ 1. 7 million, compared to $ 1. 6 million for the three months ended March 31, 2021 . The $ 95 ,000 increase in income tax expense is the result of higher net income , combined with the addition of various state taxes that are being assessed as CCBX activities and employees 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 March 31, 2022 and 202 1 were 21. 1 % and 20. 7 %, respectively. Segment Information For financial reporting purposes our Company has two reportable segments: The community bank and CCBX, which has been determined based upon the Company's relationship with the end customer. This determination also gave consideration to the structure and management of our various products. The community bank segment includes the operations of Coastal Community Bank, excluding CCBX BaaS operations. The community bank segment derives its revenue primarily from interest on loans and investments as well as noninterest income typical for the banking industry. The CCBX segment includes BaaS operations. The CCBX segment derives its revenue from BaaS partnerships that allow our broker-dealer and digital financial partners to offer their customers banking services. Reported segments and the financial information of the reported segments are not necessarily comparable with similar information reported by other financial institutions. Additionally, because of the interrelationships of the various segments, the information presented is not indicative of how the segments would perform if they operated as independent entities. Changes in management structure or allocation methodologies and procedures may result in future changes to previously reported segment financial data. The accounting policies of the segments are the same as those described in “ Note 1 – Description of Business and Summary of Significant Accounting Policies ” in the accompanying notes to the consolidated financial statements included elsewhere in this report. Income and expenses that are specific to CCBX are recorded to the CCBX segment. Additionally, certain indirect expenses are allocated to CCBX utilizing various metrics, such as number of employees, utilization of space, and allocations based on loan and deposit balances. Included in noninterest expense for the community bank is administrative overhead of $5.4 million and $4.4 million for the quarters ended March 31, 2022 and March 31, 2021, respectively. Both the community bank and the CCBX segment benefit from these administrative services. Community bank total assets as of March 31, 2022 increased $14.2 million, or 0.62%, to $2.30 billion, compared to $2.28 billion as of December 31, 2021. Loans receivable net of deferred fees for the community bank segment increased $52.8 million, or 3.8%, to $1.45 billion as of March 31, 2022, compared to $1.40 billion as of December 31, 2021. The increase in community bank loans receivable is the result of non-PPP gross loan growth of $115.1 million partially offset by $64.3 million in PPP loan forgiveness and paydowns during the quarter ended March 31, 2022. Total community bank deposits increased $29.5 million, or 1.8%, to $1.68 billion, as of March 31, 2022, compared to $1.65 billion as of December 31, 2021. The increase in deposits is largely due to initiatives to expand and grow banking relationships with new and existing customers. Net interest income for the community bank was $17.4 million for the quarter ended March 31, 2022, an increase of $468,000, or 2.8%, compared to $16.9 million for the quarter ended March 31, 2021. The increase in net interest income is largely due to increased yield on loans resulting from non-PPP loan growth and a decrease in lower yielding PPP loans. Provision for loan losses was $344,000 for the quarter ended March 31, 2022, compared to $320,000 for the quarter ended March 31, 2021. Net charge-offs to average loans for the community bank segment have remained consistently low and was <0.01% for the quarters ended March 31, 2022, and 2021. Noninterest income for the community bank was $1.8 million, for the quarter ended March 31, 2022, a decrease of $232,000, or 11.4%, compared to $2.0 million for the quarter ended March 31, 2021, due to reduced mortgage broker fees and no gain on sale of loans during the three months ended March 31, 2022. Noninterest expenses for the community bank increased $2.4 million, or 21.8%, to $13.6 million as of March 31, 2022, compared to $11.1 million as of March 31, 2021. The increase in noninterest expense is largely due to increased salaries and employee benefits as a result of growth, higher software licenses maintenance and subscription costs related to new reporting software that helps to automate and create efficiencies in reporting, and other expense increases related to growth. CCBX total assets as of March 31, 2022 increased $184.1 million, or 52.1%, to $537.1 million, compared to $353.0 million as of December 31, 2021. Total CCBX loans receivable increased $168.7 million, or 48.7%, to $515.4 million as of March 31, 2022, compared to $346.7 million as of December 31, 2021. The increase in loans receivable is the result of increased activity with CCBX partners. CCBX allowance for loan losses increased to $18.1 million as of March 31, 2022, compared to $8.3 million as of December 31, 2021 as a result of loan growth and portfolio mix. Total CCBX deposits increased $183.2 million, or 25.6%, to $899.5 million, compared to $716.3 million as of December 31, 2021 as a result of growth within the CCBX relationships. This does not include an additional $276.4 million in CCBX deposits that are transferred off the balance sheet as of March 31, 2022. Net interest income for CCBX was $11.9 million for the quarter ended March 31, 2022, an increase of $11.5 million, or 2,952.4%, compared to $389,000 for the quarter ended March 31, 2021. The increase in net interest income is due to loan growth from new and existing CCBX relationships. Provision for loan losses was $12.6 million for the quarter ended March 31, 2022, compared to $37,000 for the quarter ended March 31, 2021, as a result of loan growth from adding new partners. Noninterest income for CCBX was $20.2 million for the quarter ended March 31, 2022, an increase of $19.2 million, or 2,028.9%, compared to $948,000 for the 41 quarter ended March 31, 2021 , due to an increase of $ 1.3 million increase in total BaaS fee program income, which was the result of increased relationships with broker dealers and digital financial service providers, $ 13.1 million in BaaS fees – credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, $ 4.6 million in BaaS fees – fraud recovery and $189,000 increase in reimbursement of expenses. Noninterest expenses for CCBX increased $ 15.6 million, or 1,290.3 %, to $ 16. 9 million as of March 31, 2022, compared to $ 1.2 million as of March 31, 2021. The increase in noninterest expense is largely due to an increase in BaaS loan expense, BaaS fraud expense and increased salaries and benefits, for the quarter ended March 31, 2022 , compared to the quarter ended March 31, 2021 . For more information on the accounting for BaaS income and expenses see the section titled “CCBX – BaaS Reporting Information.”. The following tables present summary financial information for each segment for the periods indicated: March 31, 2021 December 31, 2021 Bank CCBX Total Bank CCBX Total (dollars in thousands) Total assets $ 2,296,670 $ 537,080 $ 2,833,750 $ 2,282,514 $ 353,003 $ 2,635,517 Total loans receivable $ 1,448,820 $ 515,389 $ 1,964,209 $ 1,396,060 $ 346,675 $ 1,742,735 Allowance for loan losses $ (20,643 ) $ (18,127 ) $ (38,770 ) $ (20,299 ) $ (8,333 ) $ (28,632 ) Total deposits $ 1,677,004 $ 899,466 $ 2,576,470 $ 1,647,529 $ 716,258 $ 2,363,787 Three months ended March 31, 2022 Three months ended March 31, 2021 Bank CCBX Total Bank CCBX Total (dollars in thousands) Net interest income $ 17,394 $ 11,874 $ 29,268 $ 16,926 $ 389 $ 17,315 Provision for loan losses $ 344 $ 12,598 $ 12,942 $ 320 $ 37 $ 357 Noninterest income $ 1,804 $ 20,182 $ 21,986 $ 2,036 $ 948 $ 2,984 Noninterest expense $ 13,565 $ 16,850 $ 30,415 $ 11,140 $ 1,212 $ 12,352 42 Financial Condition Our total assets increased $198.2 million, or 7.5%, to $2.83 billion at March 31, 2022 from $2.64 billion at December 31, 2021. The increase is primarily the result of $211.3 million increase in loans receivable during the three months ended March 31, 2022. As of March 31, 2022 $47.5 million in PPP loans remain on the balance sheet, a decrease of $64.3 million from $111.8 million at December 31, 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 1 and 2 of the PPP, and throughout round 3, 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 March 31, 2022 gross loans receivable totaled $1.97 billion, an increase of $219.5 million, or 12.5%, compared to December 31, 2021. Total loans receivable is gross of $6.8 million in net deferred origination fees, $1.4 million of which is attributed to PPP loans. The increase includes CCBX loan growth of $168.7 million, or 48.7%, non-PPP community bank loan growth of $115.1 million, or 8.9%, partially offset by a reduction of $64.3 million, or 57.5%, in PPP loans due to forgiveness and principal paydowns. Additionally, unused loan commitments increased. Unused commitments on capital call lines increased $137.5 million to $553.5 million at March 31, 2022 compared to $416.0 million at December 31, 2021, which will likely translate into loan growth as the commitments are utilized. Loans as a percentage of deposits were 76.2% as of March 31, 2022, compared to 73.7% as of December 31, 2021. We remain focused on serving our communities and markets by growing loans and funding those loans with customer deposits. The increase in the loan to deposit ratio was due to loan growth. The following table summarizes our loan portfolio by type of loan as of the dates indicated: As of March 31, 2022 As of December 31, 2021 (Dollars in thousands) Amount Percent Amount Percent Commercial and industrial loans: PPP loans $ 47,467 2.4 % $ 111,813 6.4 % Capital call lines 218,675 11.1 202,882 11.5 All other commercial & industrial loans 128,181 6.5 104,365 6.0 Total commercial and industrial loans: 394,323 20.0 419,060 23.9 Real estate loans: Construction, land and land development 208,108 10.6 183,594 10.5 Residential real estate 268,716 13.6 204,389 11.7 Commercial real estate 889,483 45.1 835,587 47.7 Consumer and other loans 210,343 10.7 108,871 6.2 Gross loans receivable 1,970,973 100.0 % 1,751,501 100.0 % Net deferred origination fees - PPP loans (1,365 ) (3,633 ) Net deferred origination fees - all other loans (5,399 ) (5,133 ) Loans receivable $ 1,964,209 $ 1,742,735 Loan Yield 6.80 % 5.92 % 43 The following tables detail the loans by segment which are included in the total loan portfolio table above: Community Bank As of March 31, 2022 December 31, 2021 (Dollars in thousands; unaudited) Balance % to Total Balance % to Total Commercial and industrial loans: PPP loans $ 47,467 3.3 % $ 111,813 8.0 % All other commercial & industrial loans 124,160 8.5 104,365 7.4 Real estate loans: Construction, land and land development loans 208,108 14.3 183,594 13.1 Residential real estate loans 184,485 12.7 167,502 11.9 Commercial real estate loans 889,483 61.1 835,587 59.5 Consumer and other loans: Other consumer and other loans 1,959 0.1 2,034 0.1 Gross Community Bank loans receivable 1,455,662 100.0 % 1,404,895 100.0 % Net deferred origination fees (6,842 ) (8,835 ) Loans receivable $ 1,448,820 $ 1,396,060 Loan Yield 5.16 % 5.89 % CCBX As of March 31, 2022 December 31, 2021 (Dollars in thousands; unaudited) Balance % to Total Balance % to Total Commercial and industrial loans: Capital call lines $ 218,675 42.5 % $ 202,882 58.6 % All other commercial & industrial loans 4,021 0.8 - 0.0 Real estate loans: Residential real estate loans 84,231 16.3 36,887 10.6 Consumer and other loans: Credit cards 55,090 10.7 11,429 3.3 Other consumer and other loans 153,294 29.7 95,408 27.5 Gross CCBX loans receivable 515,311 100.0 % 346,606 100.0 % Net deferred origination costs 78 69 Loans receivable $ 515,389 $ 346,675 Loan Yield - CCBX gross (1) 12.73 % 6.13 % (1) CCBX gross yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. Commercial and Industrial Loans. Commercial and industrial loans decreased $24.7 million, or 5.9%, to $394.3 million as of March 31, 2022, from $419.1 million as of December 31, 2021. The decrease in commercial and industrial loans receivable over December 31, 2021 was due to $64.3 million in forgiveness and repaid PPP loans, partially offset by an increase of $15.8 million increase in capital call lines, and $23.8 million increase in other commercial and industrial loans. Included in the commercial and industrial loan balance is $218.7 million and $202.9 million in capital call lines resulting from relationships with our CCBX customers as of March 31, 2022, and December 31, 2021, respectively. Also included in commercial and industrial loans is $47.5 million and $111.8 million in PPP loans as of March 31, 2022, and December 31, 2021, respectively. 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. Most commercial and industrial loans are secured by the assets being financed or other business assets, such as accounts receivable, inventory or equipment, and we generally obtain personal guarantees on these loans. Commercial and industrial loans includes $35.2 million and $20.2 million in loans to financial institutions and $4.5 million and $4.8 million in unsecured loans, as of March 31, 2022 and December 31, 2021, respectively. The purpose of the PPP was 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 44 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. In total, we funded $763.9 million in PPP loans, since the first round of PPP loans opened in March 2020 through the close of round three on May 31, 2021. Total net deferred fees on these loans were $26.3 million. As of March 31, 2022, $47.5 million in PPP loans remained with $1.4 million in net deferred fees, which will be recognized in interest income in future periods. 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. There are only $2.9 million of these loans remaining as of March 31, 2022. PPP loans originated in 2021 are five-year loans, and $44.6 million of these loans remained as of March 31, 2022. 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 continue to accept applications from customers for loan forgiveness. To obtain loan forgiveness, a PPP borrower must submit a forgiveness application. We expect PPP forgiveness payments to continue through the second quarter of 2022, and that PPP loans will be substantially paid down from the $47.5 million outstanding at March 31, 2022. Construction, Land and Land Development Loans. Construction, land and land development loans increased $24.5 million, or 13.4%, to $208.1 million as of March 31, 2022, from $183.6 million as of December 31, 2021. Unfunded loan commitments for construction, land and land development loans were $116.8 million at March 31, 2022, compared to $134.3 million at December 31, 2021. Although we have seen a strong commercial and residential real estate market in the Puget Sound region thus far in 2021, the economic environment is continuously changing and is impacted by increased inflation, global unrest, the war in Ukraine and a rise in new COVID-19 variants that have resulted in some economic uncertainty. Construction, land and land development loans are comprised of loans to fund construction, land acquisition and land development construction. The properties securing these loans are primarily located in the Puget Sound region and are comprised of both residential and commercial properties, including owner occupied properties and investor properties. As of March 31, 2022, construction, land and land development loans included $30.2 million in residential construction loans, $105.0 million in commercial construction loans, $38.2 million in undeveloped land loans and $34.7 million in other construction, land and land development loans, compared to $28.9 million in residential construction loans, $82.8 million in commercial construction loans, $37.8 million in undeveloped land loans and $34.1 million in other construction, land and land development loans as of December 31, 2021. Residential Real Estate Loans. Our one-to-four family residential real estate loans increased $64.3 million, or 31.5%, to $268.7 million as of March 31, 2022, from $204.4 million as of December 31, 2021. We originate one-to-four family residential real estate adjustable-rate mortgage (“ARM”), loans for our portfolio and operate as a mortgage broker for mortgage lenders we have agreements with for customers who want a 15-year to 30-year, fixed-rate mortgage loan. As of March 31, 2022, the balance of our ARM portfolio loans was $23.7 million, compared to $22.2 million at December 31, 2021. Our ARM loans typically do not meet the guidelines for sale in the secondary market due to characteristics of the property, the loan terms or exceptions from agency underwriting guidelines, which enables us to earn a higher interest rate. We also purchase residential mortgages originated 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. We last purchased residential mortgage loans in 2018. As of March 31, 2022, we held $11.2 million in purchased residential real estate mortgage loans, compared to $11.9 million at December 31, 2021. 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 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 March 31, 2022, residential real estate loans made to investors and business owners totaled $129.2 million. As of December 31, 2021, residential real estate loans made to investors and business owners totaled $114.0 million. 45 As of March 31, 2022, there were $ 84.2 million in CCBX home equity loans included in residential real estate, compared to $ 36.9 million at December 31, 202 1 , as a result of increased activity . 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. Commercial Real Estate Loans. Commercial real estate loans increased $53.9 million, or 6.5%, to $889.5 million as of March 31, 2022, from $835.6 million as of December 31, 2021. These increases, which occurred across the various segments of our portfolio, were due to our commitment to grow this portfolio in the Puget Sound region. We actively seek commercial real estate loans in our markets and our lenders are experienced in competing for these loans and managing these relationships. We make commercial mortgage loans collateralized by owner-occupied and non-owner-occupied real estate, as well as multi-family residential loans. The real estate securing our existing commercial real estate loans includes a wide variety of property types, such as manufacturing and processing facilities, business parks, warehouses, retail centers, convenience stores, hotels and motels, office buildings, mixed-use residential and commercial, and other properties. We originate both fixed- and adjustable-rate loans with terms up to 20 years. Fixed-rate loans typically amortize over a 10 to 25 year period with balloon payments due at the end of five to ten years. Adjustable-rate loans are generally based on the prime rate and adjust with the prime rate or are based on term equivalent FHLB rates. At March 31, 2022, approximately 29.1% of the commercial real estate loan portfolio consisted of fixed rate loans. Commercial real estate loans represented 45.1% of our loan portfolio at March 31, 2022 and are historically our largest source of revenue. As of March 31, 2022, we held $26.1 million in purchased commercial real estate loans, compared to $35.9 million at December 31, 2021. Our credit administration team has substantial experience in underwriting, managing, monitoring and working out commercial real estate loans, and remains diligent in communicating and proactively working with borrowers to help mitigate potential credit deterioration. Consumer and Other. Consumer and other loans increased $101.4 million, or 93.2%, to $210.3 million, from $108.9 million as of December 31, 2021, primarily as a result of CCBX loans from increased activity with our partners. Our community bank consumer and other loans are comprised of personal lines of credit, automobile, boat, and recreational vehicle loans, and secured term loans. Included in consumer loans is $153.3 million in CCBX loans as of March 31, 2022, compared to $95.4 million at December 31, 2021. CCBX consumer loans include credit cards, consumer lines of credit and other consumer 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 $1.44 billion in outstanding loan balances, or 75.1% of total gross loans outstanding, excluding PPP loans of $47.5 million. When combined with $1.54 billion in unused commitments the total of these three categories is $2.22 billion, or 64.2% of total outstanding loans and loan commitments, excluding PPP loans. 46 Commercial Real Estate Loans. Commercial real estate loans represent the largest segment of our loans, comprising 46.2% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2022. Unused commitments to extend credit represents an additional $28.9 million, the combined total exposure in commercial real estate loans represents $918.4 million, or 26.6 % of our total outstanding loans and loan commitments, excluding PPP loans , as of March 31, 2022 . The following table summarizes our concentration by industry, excluding PPP loans, for our commercial real estate loan portfolio as of March 31, 2022: (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 $ 166,442 $ 3,372 $ 169,814 4.9 % $ 2,280 73 Hotel/Motel 137,907 228 138,135 4.0 5,108 27 Office 93,849 4,401 98,250 2.8 929 101 Warehouse 71,630 102 71,732 2.1 1,462 49 Convenience Store 72,309 7,125 79,434 2.3 1,808 40 Mixed use 74,357 4,411 78,768 2.3 855 87 Retail 78,587 2,435 81,022 2.3 914 86 Manufacturing 38,719 2,007 40,726 1.2 1,106 35 Mini Storage 32,617 400 33,017 1.0 2,330 14 Groups < 1.4% of total 123,066 4,392 127,458 3.7 1,483 83 Total $ 889,483 $ 28,873 $ 918,356 26.6 % $ 1,495 595 Commercial and Industrial Loans. Commercial and industrial loans comprise 18.0% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2022. Unused commitments to extend credit represents an additional $630.1 million, and the combined total exposure in commercial and industrial loans represents $976.9 million, or 28.2% of our total outstanding loans and loan commitments, excluding PPP loans. Included in commercial and industrial loans is $218.7 million in outstanding capital call lines, with an additional $553.5 million in available loan commitments, which is provided to venture capital firms through one of our CCBX BaaS partners. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line. The following table summarizes our concentration by industry, excluding PPP loans, for our commercial and industrial loan portfolio as of March 31, 2022: (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 $ 218,675 $ 553,534 $ 772,209 22.3 % $ 1,508 145 Construction/Contractor Services 19,401 29,847 49,248 1.4 115 168 Financial Institutions 35,150 - 35,150 1.0 3,906 9 Manufacturing 13,129 5,436 18,565 0.5 208 63 Medical / Dental / Other Care 12,928 5,436 18,364 0.5 249 52 Family and Social Services 7,057 2,987 10,044 0.3 504 14 Groups < 0.40% of total 40,516 32,808 73,324 2.2 151 268 Total $ 346,856 $ 630,048 $ 976,904 28.2 % $ 482 719 47 Construction, Land and Land Development Loans. Construction, land and land development loans comprise 10.8% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2022. Unused commitments to extend credit represents an additional $116.8 million, the combined total exposure in construction, land and land development loans represents $324.9 million, or 9.4% of our total outstanding loans and loan commitments, excluding PPP loans, as of March 31, 2022. The following table details our concentration, excluding PPP loans, for our construction, land and land development loan portfolio as of March 31, 2022: (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 $ 105,023 $ 80,282 $ 185,305 5.4 % $ 4,039 26 Residential construction 30,229 20,530 50,759 1.5 720 42 Undeveloped land loans 38,233 3,440 41,673 1.2 2,941 13 Developed land loans 18,723 7,140 25,863 0.7 535 35 Land development 15,900 5,382 21,282 0.6 757 21 Total $ 208,108 $ 116,774 $ 324,882 9.4 % $ 1,519 137 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. Revolving (open-ended loans, such as credit cards) and installment (closed end) consumer loans originated by CCBX partners continue to accrue interest until they are charged-off at 180 days past due for revolving loans (primarily credit cards) and 120 days past due for installment loans (primarily unsecured loans to consumers). These consumer loans are reported out as substandard loans, 90+ days past due and still accruing. We are not required to report as nonperforming a loan for which we have allowed the borrower to defer payment on a short term basis because of financial pressure related to COVID-19. When loans are placed on nonaccrual status, all unpaid accrued interest is reversed from income and all interest accruals are stopped. Interest income is subsequently recognized only to the extent cash payments are received in excess of principal balance. Loans are returned to accrual status if we believe that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual status. We define nonperforming loans as loans on nonaccrual status and accruing loans 90 days or more past due. Nonperforming assets also include other real estate owned and repossessed assets. We believe our lending practices and active approach to managing nonperforming assets has resulted in sound asset quality and timely resolution of problem assets. We have procedures in place to assist us in maintaining the overall credit quality of our loan portfolio. We have established underwriting guidelines, concentration limits and we also monitor our delinquency levels for any negative or adverse trends. We actively manage problem assets to reduce our risk for loss. We had $2.3 million in nonperforming assets as of March 31, 2022, compared to $1.7 million as of December 31, 2021. This includes $2.2 million in CCBX loans more than 90 days past due and still accruing interest as of March 31, 2022, compared to $1.5 million at December 31, 2021. All of our nonperforming assets were nonperforming loans as of March 31, 2022 and December 31, 2021. Our nonperforming loans to loans receivable ratio was 0.12% at March 31, 2022, compared to 0.10% at December 31, 2021. The increase in nonperforming assets was due to the addition of $1.4 million in nonaccrual CCBX loans, partially offset by $756,000 lower CCBX loan that are 90 days or more past due and still accruing interest. Community bank nonaccrual loans decreased $37,000 as a result of principal reductions during the three months ended March 31, 2022. Our community bank credit quality remains strong, as demonstrated by the low level of community bank charge-offs and nonperforming loan balance for the quarter ended March 31, 2022. 48 The following table presents information regarding nonperforming assets at the dates indicated: As of As of March 31, December 31, (Dollars in thousands) 2022 2021 Nonaccrual loans: Commercial and industrial loans $ 130 $ 166 Real estate loans: Residential real estate 54 55 Total nonaccrual loans 184 221 Accruing loans past due 90 days or more: Total accruing loans past due 90 days or more 2,161 1,506 Total nonperforming loans 2,345 1,727 Real estate owned - - Repossessed assets - - Troubled debt restructurings, accruing - - Total nonperforming assets $ 2,345 $ 1,727 Total nonaccrual loans to loans receivable 0.01 % 0.01 % Total nonperforming loans to loans receivable 0.12 % 0.10 % Total nonperforming assets to total assets 0.08 % 0.07 % The following tables detail nonperforming assets by segment which are included in the total nonperforming assets table above: Community Bank As of March 31, December 31, (Dollars in thousands, unaudited) 2022 2021 Nonaccrual loans: Commercial and industrial loans $ 130 $ 166 Real estate: Residential real estate 54 55 Total nonaccrual loans 184 221 Accruing loans past due 90 days or more: Total accruing loans past due 90 days or more - - Total nonperforming loans 184 221 Other real estate owned - - Repossessed assets - - Total nonperforming assets $ 184 $ 221 CCBX As of March 31, December 31, (Dollars in thousands, unaudited) 2022 2021 Nonaccrual loans $ - $ - Accruing loans past due 90 days or more: Total accruing loans past due 90 days or more 2,161 1,506 Total nonperforming loans 2,161 1,506 Other real estate owned - - Repossessed assets - - Total nonperforming assets $ 2,161 $ 1,506 49 Allowance for Loan Losses We maintain an allowance for loan losses that represents management’s best estimate of the loan losses and risks inherent in our loan portfolio. The amount of the allowance for loan losses should not be interpreted as an indication that charge-offs in future periods will necessarily occur in those amounts. In determining the allowance for loan losses, we estimate losses on specific loans, or groups of loans, where the probable loss can be identified and reasonably determined. The balance of the allowance for loan losses is based on internally assigned risk classifications of loans, historical loan loss rates, changes in the nature of our loan portfolio, overall portfolio quality, industry concentrations, delinquency trends, and current economic factors. 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 March 31, 2022, the allowance for loan losses totaled $38.8 million, or 1.97% of total loans. As of December 31, 2021, the allowance for loan losses totaled $28.6 million, or 1.64% of total loans. The increase in the Company’s provision for loan losses for the quarter ended March 31, 2022 compared to December 31, 2021, is largely related to the provision for CCBX partner loans. During the quarter ended March 31, 2022, a $12.6 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank loan losses indicated that a provision for loan losses of $344,000 was needed for the quarter ended March 31, 2022. The economic environment is continuously changing and has shown some signs of improvement, with ongoing vaccination of its population and increased re-opening of economic activities, tempered by increased inflation, global unrest, the war in Ukraine and a rise in new COVID-19 variants that have resulted in some economic uncertainty. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses. Many agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans. When the provision for loan losses and provision for unfunded commitments is recorded, a recovery receivable is also recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement). Incurred losses are recorded in the allowance for loan losses, and as the credit enhancement recoveries are received from the CCBX partner, the recovery receivable is relieved. Although many agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by absorbing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations then the bank would be exposed to additional loan losses, as a result of this counterparty risk. The Company is not required to implement the provisions of the CECL accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model. The following table presents the loans receivable and allowance for loan losses by segment for the periods indicated: As of March 31, 2022 (Dollars in thousands) Community Bank CCBX Total Loans receivable $ 1,448,820 $ 515,389 $ 1,964,209 Allowance for loan losses (20,643 ) (18,127 ) (38,770 ) Allowance for loan losses to total loans receivable 1.42 % 3.52 % 1.97 % Included in total loans is $47.5 million in PPP loans which are 100% guaranteed by the SBA. The allowance for loan losses to loans receivable, excluding the guaranteed PPP loans, is approximately 2.02% and 1.75% at March 31, 2022 and December 31, 2021, 50 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.” 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 Months Ended March 31, (Dollars in thousands) 2022 2021 Allowance at beginning of period $ 28,632 $ 19,262 Provision for loan losses 12,942 357 Charge-offs: Commercial and industrial loans 5 14 Consumer and other 2,803 4 Total charge-offs 2,808 18 Recoveries: Commercial and industrial loans 2 5 Consumer and other 2 4 Total recoveries 4 9 Net charge-offs 2,804 9 Allowance at end of period $ 38,770 $ 19,610 Allowance for loan losses to nonaccrual loans 21070.65 % 2966.72 % Allowance to nonperforming loans 1653.30 % 2966.72 % Allowance to loans receivable 1.97 % 1.11 % Net charge-offs to average loans (1) 0.64 % 0.00 % (1) Ratios for the three months ended March 31, 2022 and 2021 are annualized. The following table presents, as of and for the periods indicated, net charge-off information by segment: Three Months Ended March 31, 2022 March 31, 2021 (Dollars in thousands) Community Bank CCBX Total Community Bank CCBX Total Gross charge-offs $ 4 $ 2,804 $ 2,808 $ 18 $ - $ 18 Gross recoveries (4 ) - (4 ) (9 ) - (9 ) Net charge-offs $ - $ 2,804 $ 2,804 $ 9 $ - $ 9 Net charge-offs to average loans (1) 0.00 % 2.98 % 0.64 % 0.00 % 0.00 % 0.00 % (1) Annualized calculations. The allowance for loan losses to nonaccrual loans ratio increased substantially as of March 31, 2022, compared to March 31, 2021 as a result of a decrease of $477,000 in nonaccrual community bank loans, combined with an increase of $19.2 million in the allowance for loan losses. The increase in the allowance for loan losses for the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021, is largely related to the increase in the allowance for CCBX partner loans. CCBX partner agreements provide for a credit enhancement that covers the $2.8 million in net-charge-offs on CCBX loans for the three months ended March 31, 2022. At March 31, 2022, there was a balance of $18.1 million in the allowance for loan losses for CCBX partner loans, compared to $102,000 at March 31, 2021. Although we believe that we have established our allowance for loan losses in accordance with GAAP and that the allowance for loan losses was adequate to provide for known and inherent losses in the portfolio at all times shown above, future provisions for loan losses will be subject to ongoing evaluations of the risks in our loan portfolio. The expected COVID-19 loan losses have not materialized as originally anticipated in 2020, as evidenced by the low level of charge-offs and nonperforming loans, however if the COVID-19 pandemic worsens or continues indefinitely, preventing businesses and consumers from conducting business in the ordinary course, the Washington state and Puget Sound region may experience a more severe economic downturn, and our asset quality could deteriorate, which may require material additional provisions for loan losses. 51 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 March 31, 2022, 98.8% of our investment portfolio consisted primarily of U.S. Treasury securities. The remainder of our securities portfolio was invested in municipal bonds, U.S. Agency collateralized mortgage obligations and U.S. Agency residential mortgage-backed securities. Because we target a loan-to-deposit ratio in the range of 90% to 100%, we prioritize liquidity over the earnings of our securities portfolio. At March 31, 2022, our loan-to-deposit ratio was 76.2% due to our significant growth in deposits. Our securities portfolio represented less than 5% of assets. To the extent our securities represent more than 5% of assets, absent an immediate need for liquidity, we anticipate investing excess funds to provide a higher return. As of March 31, 2022, the amortized cost of our investment securities totaled $136.5 million, an increase of $99.9 million, or 272.8%, compared to $36.6 million as of December 31, 2021. The increase in the securities portfolio was due to the purchase of five Treasury securities for $135.0 million during the three months ended March 31, 2022, to invest excess funds, replace maturing securities and pledge to secure public deposits and for other purposes as required or permitted by law, partially offset by $35.0 million in U.S. Treasury maturities and other principal paydowns. This investment of excess cash into two-year Treasury securities yields 2.15%, compared to 0.38%, in overnight cash at the Federal Reserve. The Treasury securities will increase income compared to current overnight rates and will be used as a pledge to secure public deposits. Our investment portfolio consists of securities classified as available for sale and, to a lesser amount, held to maturity. The carrying values of our investment securities classified as available for sale are adjusted for unrealized gain or loss, and any gain or loss is reported on an after-tax basis as a component of other comprehensive income in shareholders’ equity. As of March 31, 2022, our available for sale portfolio has an unrealized loss of $348,000, compared to an unrealized gain of $5,000 as of December 31, 2021. The following table summarizes the amortized cost and estimated fair value of our investment securities as of the dates shown: As of As of March 31, 2022 December 31, 2021 Amortized Fair Amortized Fair (Dollars in thousands) Cost Value Cost Value Securities available-for-sale: U.S. Treasury securities $ 134,923 $ 134,574 $ 34,999 $ 34,998 U.S. Agency collateralized mortgage obligations 62 62 68 70 U.S. Agency residential mortgage-backed securities 2 2 3 3 Municipal bonds 252 253 252 256 Total available-for-sale securities 135,239 134,891 35,322 35,327 Securities held-to-maturity: U.S. Agency residential mortgage-backed securities 1,286 1,264 1,296 1,348 Total held-to-maturity securities 1,286 1,264 1,296 1,348 Total investment securities $ 136,525 $ 136,155 $ 36,618 $ 36,675 We held a $2.2 million equity interest in a financial technology company as of March 31, 2022 and December 31, 2021, which consists of 1.6 million shares of common stock and 873,853 preferred shares. We elected to account for the investments under ASC 321 Investments – Equity Securities without Readily Determinable Value. The investment is held at cost minus impairment if any, plus or minus observable price changes in orderly transactions for an identical or similar investment of the same issue. This method should be applied until the investment does not qualify for the measurement election (e.g., if the investment has a readily determinable fair value). We will reassess at each reporting period whether the equity investment without a readily determinable fair value qualifies to be measured at cost minus impairment; there was no change to the value or valuation technique this quarter. Additionally, as of March 31, 2022 and December 31, 2021, we held $100,000 in corporate equity securities in another technology company which was recorded in other investments on the balance sheet. The equity interest consists of 9,000 shares of stock. We also held equity indirectly in two other technology companies for $350,000 with the potential for an additional $150,000 in equity investments. During the year ended December 31, 2021, we entered agreements for capital commitments of up to $1.1 million in three separate investment funds designed to help accelerate technology adoption at banks. As of December 31, 2021, we held $160,000 in 52 investment funds . During the three months ended March 31, 2022 we contributed $ 250 ,000, bringing our investment funds total to $ 410 ,000 for the quarter ended March 31, 2022 , and our total capital commitment to $1.3 million. 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 reciprocal deposits. Reciprocal deposits enable us to provide an FDIC insured deposit option to customers that have balances in excess of the FDIC insurance limit. This service trades our customers’ funds as certificates of deposit or interest bearing demand deposits in increments under the FDIC insured amount to other participating financial institutions and in exchange we receive time deposit or interest bearing demand investments from participating financial institutions in a reciprocal agreement. We rely primarily on competitive pricing policies, convenient locations, electronic delivery channels (internet and mobile), and personalized service to attract new deposits and retain existing deposits. Additionally, we offer deposit products through our CCBX segment. Although the CCBX products are similar to the community bank offerings, the CCBX deposit products allow us to offer a broader range of partner specific products, which are often designed to reach specific under-served or under-banked populations served by our CCBX partners. Total deposits as of March 31, 2022 were $2.58 billion, an increase of $212.7 million, or 9.0%, compared to $2.36 billion as of December 31, 2021. The increase in deposits was largely in core deposits, which increased $211.4 million to $2.46 billion from $2.25 billion at December 31, 2021. The $211.4 million increase in core deposits is also largely from growth in the CCBX segment, which accounted for $178.8 million of the increase, combined with the initiatives to expand and grow banking relationships with new customers, which accounted for $32.6 million of the increase. We define core deposits as all deposits except time deposits and brokered deposits. Additionally, as of March 31, 2022 we have access to $276.4 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis. Depending on the circumstances of how the Bank retains these deposits and its relationship with the customer, these retained deposits could be classified as 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. Included in total deposits is $899.5 million in CCBX deposits, an increase of $183.2 million, or 25.6%, compared to $716.3 million as of December 31, 2021. CCBX customer deposit relationships include deposits with CCBX end customers, operating and non-operating deposit accounts. The deposits from our CCBX 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 relationship agreement. During the quarter ended March 31, 2022, the majority of CCBX deposits were reclassified from noninterest bearing to interest bearing. This is because the current rate exceeds the minimum interest rate set in their respective program agreements, as a result of the recent 0.25% increase in interest rates by the FOMC. Total noninterest bearing deposits as of March 31, 2022 were $838.0 million, a decrease of $517.9 million, or 38.2%, compared to $1.36 billion as of December 31, 2021. The $517.9 million decrease is primarily the result of reclassifying $690.4 million in CCBX noninterest bearing deposits to interest bearing as a result of the recent 0.25% increase in interest rates by the FOMC, partially offset by growth in CCBX noninterest deposits of $167.1 million and growth in community bank noninterest deposits of $5.5 million. Noninterest bearing deposits represent 32.5% and 57.4% of total deposits for March 31, 2022 and December 31, 2021, respectively. Total interest bearing account balances, excluding time deposits, as of March 31, 2022 were $1.70 billion, an increase of $733.6 million, or 76.1%, compared to $964.4 million as of December 31, 2021. The $733.6 million increase is the result of reclassifying $690.4 million in CCBX noninterest bearing deposits to interest bearing as a result of the recent 0.25% increase in interest rates by the FOMC, combined with CCBX growth in interest bearing deposits of $16.1 million and community bank growth in interest bearing deposits of $27.1 million. Included in interest bearing account balances is $75.1 million in BaaS-brokered deposits, an increase of $4.4 million from December 31, 2021. Also included in interest bearing deposits is $8.8 million in reciprocal deposits. Total time deposit balances as of March 31, 2022 were $40.4 million, a decrease of $3.1 million, or 7.1%, from $43.5 million as of December 31, 2021. The decrease is due to the strong increase in core deposits, and our focus on core deposits and letting higher rate deposits run off as they mature. We have seen competitors increase rates on time deposits, and we have not globally matched their rates in response as we 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 53 March 31, 2022 December 31, 2021 Percent of Percent of (Dollars in thousands) Amount Total Deposits Amount Total Deposits Demand, noninterest bearing $ 838,044 32.5 % $ 1,355,908 57.4 % NOW and money market 1,516,546 58.9 789,709 33.4 Savings 106,364 4.1 103,956 4.4 Total core deposits 2,460,954 95.5 2,249,573 95.2 BaaS-brokered deposits 75,145 2.9 70,757 3.0 Time deposits less than $100,000 14,856 0.6 14,961 0.6 Time deposits $100,000 and over 25,515 1.0 28,496 1.2 Total $ 2,576,470 100.0 % $ 2,363,787 100.0 % Cost of Deposits 0.09 % 0.17 % The following tables detail the deposits for the segments which are included in the total deposit portfolio table above: Community Bank As of March 31, 2022 December 31, 2021 (Dollars in thousands, unaudited) Balance % to Total Balance % to Total Demand, noninterest bearing $ 724,723 43.2 % $ 719,233 43.7 % NOW and money market 805,858 48.1 780,884 47.4 Savings 106,050 6.3 103,954 6.3 Total core deposits 1,636,631 97.6 1,604,071 97.4 Brokered deposits 2 0.0 1 0.0 Time deposits less than $100,000 14,856 0.9 14,961 0.9 Time deposits $100,000 and over 25,515 1.5 28,496 1.7 Total Community Bank deposits $ 1,677,004 100.0 % $ 1,647,529 100.0 % Cost of Deposits 0.11 % 0.12 % CCBX As of March 31, 2022 December 31, 2021 (Dollars in thousands, unaudited) Balance % to Total Balance % to Total Demand, noninterest bearing $ 113,321 12.6 % $ 636,675 88.9 % NOW and money market 710,688 79.0 8,825 1.2 Savings 314 0.0 2 0.0 Total core deposits 824,323 91.6 645,502 90.1 BaaS-brokered deposits 75,143 8.4 70,756 9.9 Total CCBX deposits $ 899,466 100.0 % $ 716,258 100.0 % Cost of Deposits 0.06 % 0.02 % 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 March 31, 2022 As of December 31, 2021 Maturity Period: Three months or less $ 7,869 $ 8,106 Over three through six months 6,131 6,520 Over six through twelve months 7,161 8,925 Over twelve months 4,354 4,945 Total $ 25,515 $ 28,496 Weighted average maturity (in years) 0.69 0.73 Average deposits for the three months ended March 31, 2022 were $2.45 billion, an increase of 58.6% compared to $1.55 billion for the three months ended March 31, 2021. The increase in average deposits for was primarily due to an increase in core deposits, both in noninterest bearing deposits and in low interest rate bearing deposits. Included in this increase is growth in CCBX and community 54 bank 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 branch managers , treasury service personnel and lenders. The average rate paid on total deposits was 0.09% for the three months ended March 31, 2022, compared to 0.17% for the three months ended March 31, 2021. The average rate paid on NOW and money market accounts decreased 16 basis points for the three months ended March 31, 2022. The average rate paid on time deposits of less than $100,000 decreased 42 basis points for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The average rate paid on time deposits greater than $100,000 increased 1.41%, due to the recognition of additional interest expense of $130,000 during the quarter ended March 31, 2022 to correct interest on CDs from a previous period. The average rate paid on savings and BaaS brokered deposits was fairly flat for the three months ended March 31, 2022, compared to the three months ended March 31, 2021. The overall lower average rate paid on interest bearing accounts in the three months ended March 31, 2022 is due to the current low interest rate environment resulting from the decreased Fed Funds rate. The impact of the rate 0.25% interest rate increase by the FOMC in mid-March 2022 will not be fully realized in our interest expense until second quarter 2022. Increased Fed Funds rates 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 March 31, 2022 2021 (Dollars in thousands) Average Balance Average Rate Average Balance Average Rate Demand, noninterest bearing $ 1,320,144 0.00 % $ 690,465 0.00 % NOW and money market 917,075 0.14 690,268 0.30 Savings 104,209 0.03 86,310 0.03 BaaS-brokered deposits 68,819 0.35 22,817 0.36 Time deposits less than $100,000 14,844 0.33 18,876 0.75 Time deposits $100,000 and over 27,037 2.31 37,840 0.90 Total deposits $ 2,452,128 0.09 % $ 1,546,576 0.17 % The ratio of average noninterest bearing deposits to average total deposits for the three months ended March 31, 2022 was 53.8% and compared to 44.6%, for the three months ended March 31, 2021. Uninsured Deposits The FDIC insures our deposits up to $250,000 per depositor, per insured bank for each account ownership category. Deposits that exceed insurance limits are uninsured. At March 31, 2022, deposits totaled $2.58 billion, of which total estimated uninsured deposits were $850.1 million. At March 31, 2021, deposits totaled $1.67 billion, of which total estimated uninsured deposits were $724.9 million. The table below shows the estimated uninsured time deposits, by account, for the maturity periods indicated: (Dollars in thousands) As of March 31, 2022 Maturity Period: Three months or less $ 1,202 Over three through six months 149 Over six through twelve months 1,298 Over twelve months 1,273 Total $ 3,922 55 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 March 31, 2022 and March 31, 2021, total borrowing capacity of $23.6 million and $20.8 million, respectively, was available under this arrangement. As of March 31, 2022 and 2021, Federal Reserve advances totaled zero. Paycheck Protection Program Liquidity Facility. To bolster the effectiveness of the SBA’s PPP loan program, the Federal Reserve supplied liquidity to participating financial institutions through term financing backed by PPP loans to small businesses. The PPP provided loans to small businesses so that they can keep their employees on the payroll and pay for other allowed expenses. If the borrowers meet certain criteria, the loan may be forgiven. The PPPLF extended credit to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. The interest rate was 0.35% and as PPP loans were paid down, the borrowing line also had to be paid down. The borrowing was paid in full in June 2021 and as of March 31, 2022, no PPPLF advances were outstanding, compared to $158.5 million as of March 31, 2021. PPPLF advances were a new borrowing arrangement beginning in 2020 that had favorable capital treatment and was specific to the PPP loan program. The last day to take new advances on the PPPLF was July 31, 2021. The table below provides details on PPPLF borrowings for the periods indicated: As of and For the Three Months Ended March 31, (Dollars in thousands) 2022 2021 Maximum amount outstanding at any month-end during period: PPPLF Advances $ - $ 185,894 Average outstanding balance during period: PPPLF Advances $ - $ 170,376 Weighted average interest rate during period: PPPLF Advances 0.00 % 0.35 % Balance outstanding at end of period: PPPLF Advances $ - $ 158,519 Weighted average interest rate at end of period: PPPLF Advances N/A 0.35 % Federal Home Loan Bank Advances. The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. As of March 31, 2022 and March 31, 2021, we had borrowing capacity of $98.3 million and $101.0 million, respectively, with the FHLB. During the quarter ended March 31, 2022, we repaid a total of $25.0 million in FHLB term advances. This included a $10.0 million advance that matures in March of 2023 and $15.0 million advance that matures in March 2025. We have sufficient liquidity for our current loan demand, and with no prepayment penalty for early repayment, management opted to repay these term advances and save the unnecessary interest expense. Although there are no immediate plans to borrow funds, borrowing capacity of $98.3 million was available at FHLB under this arrangement as of March 31, 2022. 56 The table below provides details on the FHLB borrowings for the periods indicated: As of and For the Three Months Ended March 31, (Dollars in thousands) 2022 2021 Maximum amount outstanding at any month-end during period: FHLB Advances $ 24,999 $ 24,999 Average outstanding balance during period: FHLB Advances $ 24,443 $ 24,999 Weighted average interest rate during period: FHLB Advances 1.13 % 1.13 % Balance outstanding at end of period: FHLB Advances $ - $ 24,999 Weighted average interest rate at end of period: FHLB Advances N/A 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 March 31, 2022 and December 31, 2021 was 2.93% and 2.30%, respectively. We generally have the right to defer payment of interest on the debentures at any time or from time to time for a period not exceeding five years provided that no extension period may extend beyond the stated maturity of the debentures. During any such extension period, distributions on the Trust’s preferred securities will also be deferred, and our ability to pay dividends on our common stock will be restricted. The Trust’s preferred securities are mandatorily redeemable upon maturity of the debentures, or upon earlier redemption as provided in the indenture, 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. Subordinated Debt . In August 2021, the Company issued a subordinated note in the amount of $25.0 million. The note matures on September 1, 2031, and bears interest at the rate of 3.375% per year for five years and, thereafter, reprices quarterly beginning September 1, 2026, at a rate equal to the three-month SOFR plus 2.76%. The five-year 3.375% interest period ends on September 1, 2026. We may redeem the subordinated note, in whole or in part, without premium or penalty, in principal redemption multiples of $1,000, after August 18, 2026, subject to any required regulatory approvals. Proceeds were used to repay $10.0 million in existing 5.65% interest subordinated debt on August 9, 2021 and $11.5 million was contributed to the Bank as capital during the quarter ended September 30, 2021. 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. Deposits obtained through our CCBX segment are a significant source of liquidity for us. If a relationship with a large CCBX partner terminates, the exit of those deposits could have an adverse impact on liquidity. Partner program agreements govern the relationship and are valid for a given period of time. Prior to exiting, the partner would need to provide us adequate notice as stipulated in the agreement that they were not going to renew the program agreement and intend to move the deposits. The movement to an alternate BaaS provider is cumbersome and would be over a period of time, which would allow us the opportunity to put alternate liquidity in place; those options are more fully discussed below. As of March 31, 2022, we have two partners with deposits that are in excess of 10% of total deposits and represent 26% of total deposits. 57 We continually monitor our liquidity position to ensure that our assets and liabilities are managed in a manner to meet all reasonably foreseeable short-term, long-term and strategic liquidity demands. Management has established a comprehensive process for identifying, measuring, monitoring and controlling liquidity risk. Because of its critical importance to the viability of the Bank, liquidity risk management is fully integrated into our risk management processes. Critical elements of our liquidity risk management include: effective corporate governance consisting of oversight by the board of directors and active involvement by management; appropriate strategies, policies, procedures, and limits used to manage and mitigate liquidity risk; comprehensive liquidity risk measurement and monitoring systems that are commensurate with the complexity of our business activities; active management of intraday liquidity and collateral; an appropriately diverse mix of existing and potential future funding sources; adequate levels of readily available cash, deposits and highly liquid marketable securities free of legal, regulatory, or operational impediments, that can be used to meet liquidity needs in stressful situations; contingency funding policies and plans that sufficiently address potential adverse liquidity events and emergency cash flow requirements; and internal controls and internal audit processes sufficient to determine the adequacy of the Bank’s liquidity risk management process. Unlike many industrial companies, substantially all of our assets and liabilities are monetary in nature. As a result, interest rates have a more significant impact on our performance than the effects of general levels of inflation. Interest rates may not necessarily move in the same direction or in the same magnitude as the prices of goods and services. However, other operating expenses do reflect general levels of inflation. Our liquidity position is supported by management of our liquid assets and liabilities and access to alternative sources of funds. Our liquidity requirements are met primarily through our deposits, FHLB advances and the principal and interest payments we receive on loans and investment securities. Cash on hand, cash at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and BaaS deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, funds from online rate services, brokered deposits, a one-way buy through an ICS account, and the issuance of debt or equity securities. 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. In June 2021, we repaid all borrowings under the PPPLF in full, resulting in a zero balance as of March 31, 2022. 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 $11.2 million in cash, and uses approximately $1.3 million for debt servicing and operating purposes each year, leaving about $7.1 million for other purposes after deducting $2.6 million to cover operating purposes for the next two years and $1.5 million for existing equity fund commitments. 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. Additionally, the Bank, as of March 31, 2022, has access to $276.4 million in CCBX customer deposits that are currently being transferred from the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. We believe 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. 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. 58 As of March 31, 2022, and December 31, 2021, the Bank was in compliance with all applicable regulatory capital requirements, and the Bank was classified as “well capitalized” for purposes of the Federal Reserve’s prompt corrective action regulations. As we deploy our capital and continue to grow our operations, our regulatory capital levels may decrease depending on our level of earnings. However, we expect to monitor and control our growth in order to remain in compliance with all regulatory capital standards applicable to us. In addition, the Company maintains an effective registration statement on Form S-3 with the Securities and Exchange Commission that would allow the Company to raise additional capital in an amount up to $115.5 million. The Company raised $34.5 million in December 2021 and currently has no immediate plans for raising additional capital under the registration statement. 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 (1) Required to be Well Capitalized Under the Prompt Corrective Action Provisions Amount Ratio Amount Ratio Amount Ratio (dollars in thousands) March 31, 2022 Leverage Capital (to average assets) Company $ 211,580 7.75 % $ 109,153 4.00 % $ 136,442 5.00 % Bank Only 220,829 8.10 % 109,020 4.00 % 136,275 5.00 % Common Equity Tier I Capital (to risk-weighted assets) Company 208,080 9.71 % 96,411 4.50 % 139,261 6.50 % Bank Only 220,829 10.33 % 96,164 4.50 % 138,903 6.50 % Tier I Capital (to risk-weighted assets) Company 211,580 9.88 % 128,548 6.00 % 171,398 8.00 % Bank Only 220,829 10.33 % 128,218 6.00 % 170,957 8.00 % Total Capital (to risk-weighted assets) Company 263,530 12.30 % 171,398 8.00 % 214,247 10.00 % Bank Only 247,712 11.59 % 170,957 8.00 % 213,697 10.00 % December 31, 2021 Leverage Capital (to average assets) Company $ 204,585 8.07 % $ 101,460 4.00 % $ 126,826 5.00 % Bank Only 201,783 7.96 % 101,350 4.00 % 126,687 5.00 % Common Equity Tier I Capital (to risk-weighted assets) Company 201,085 11.06 % 81,834 4.50 % 118,205 6.50 % Bank Only 201,783 11.12 % 81,623 4.50 % 117,900 6.50 % Tier I Capital (to risk-weighted assets) Company 204,585 11.25 % 109,112 6.00 % 145,483 8.00 % Bank Only 201,783 11.12 % 108,830 6.00 % 145,107 8.00 % Total Capital (to risk-weighted assets) Company 252,405 13.88 % 145,483 8.00 % 181,854 10.00 % Bank Only 224,545 12.38 % 145,107 8.00 % 181,384 10.00 % (1) Presents the minimum capital adequacy requirements that apply to the Bank (excluding the capital conservation buffer) and that would apply to the Company if it were not eligible to operate under the Small Bank Holding Company Policy Statement. 59 Material Cash Requirements and Capital Resources The following table provides the material cash requirements from known contractual and other obligations as of as of March 31, 2022: Payments Due by Period Less than Over (Dollars in thousands) Total 1 Year 1 year Other (1) Cash requirements Time Deposits $ 40,371 $ 31,225 $ 9,146 $ - Subordinated note 25,000 - 25,000 - Junior subordinated debentures 3,609 - 3,609 - Deferred compensation plans 1,067 175 892 - Operating leases 7,021 962 6,059 - Non-maturity deposits 2,536,099 - - 2,536,099 Equity investment commitment 1,490 1,490 - - (1) Represents the undefined maturity of non-maturing deposits, including noninterest bearing demand deposits, interest bearing demand deposits, money market accounts, savings accounts and brokered deposits, which can generally be withdrawn on demand. We maintain sufficient cash and cash equivalents and investment securities to meet short-term cash requirements and the levels of these assets are dependent on our operating, investing and financing activities during any given period. Cash on hand, cash at third-party banks, investments available-for-sale and maturing or prepaying balances in our investment and loan portfolios are our most liquid assets. Other sources of liquidity that are routinely available to us include funds from retail, commercial, and BaaS deposits, advances from the FHLB and proceeds from the sale of loans. Less commonly used sources of funding include borrowings from the Federal Reserve discount window, draws on established federal funds lines from unaffiliated commercial banks, funds from online rate services, brokered funds, a one-way buy through an ICS account, and the issuance of debt or equity securities. In the normal course of business, we enter into various transactions, which, in accordance with GAAP, are not included in our consolidated balance sheets. We enter into these transactions to meet the financing needs of our customers. These transactions include commitments to extend credit and standby and commercial letters of credit, which involve, to varying degrees, elements of credit risk and interest rate risk in excess of the amounts recognized in our consolidated balance sheets. Our commitments associated with outstanding commitments to extend credit and standby and commercial letters of credit are summarized below. Since commitments associated with commitments to extend credit and letters of credit may expire unused, the amounts shown do not necessarily reflect the actual future cash funding requirements. As of March 31, 2022 we held $218.7 million in capital call lines, included in commercial and industrial loans, provided to venture capital firms through one of our BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line. As of March 31, 2022 we had $1.54 billion in commitments to extend credit, compared to $909.6 million as of December 31, 2021. The $625.5 million increase is largely attributed to an increase of $360.4 million in consumer and other loan commitments, related to CCBX consumer loans, $137.6 million increase in commercial and industrial capital call line commitments, and $133.7 million increase in residential real estate commitments, related to CCBX loans. 60 As of As of March 31, December 31, (Dollars in thousands) 2022 2021 Commitments to extend credit: Commercial and industrial loans $ 76,513 $ 70,848 Commercial and industrial loans - capital call lines 553,534 415,956 Construction – commercial real estate loans 93,804 90,946 Construction – residential real estate loans 22,970 43,339 Residential real estate loans 235,461 101,715 Commercial real estate loans 28,873 23,248 Consumer and other loans 523,933 163,510 Total commitments to extend credit $ 1,535,088 $ 909,562 Standby letters of credit $ 3,040 $ 2,729 Equity investment commitment $ 1,490 $ 1,090 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. As of March 31, 2022, $522.1 million in commitments to extend credit are unconditionally cancelable, compared to $162.3 million at December 31, 2021. 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. 61 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 (unaudited) March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Return on average assets (1) 0.93 % 1.14 % 1.21 % 1.36 % 1.28 % Return on average equity (1) 12.12 % 16.80 % 16.77 % 18.60 % 16.84 % Yield on earnings assets (1) 4.58 % 4.09 % 3.63 % 3.89 % 3.99 % Yield on loans receivable (1) 6.80 % 5.92 % 4.57 % 4.44 % 4.51 % Yield on loans receivable, excluding PPP loans (1)(2) 6.52 % 4.98 % 4.53 % 4.65 % 4.78 % Yield on loans receivable, excluding earned fees (1)(2) 6.17 % 4.37 % 3.74 % 3.46 % 3.53 % Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans, as adjusted (1)(2) 6.41 % 4.78 % 4.36 % 4.42 % 4.52 % Cost of funds (1) 0.14 % 0.14 % 0.16 % 0.20 % 0.24 % Cost of deposits (1) 0.09 % 0.09 % 0.10 % 0.14 % 0.17 % Net interest margin (1) 4.45 % 3.95 % 3.48 % 3.70 % 3.76 % Noninterest expense to average assets (1) 4.52 % 3.29 % 2.91 % 2.65 % 2.62 % Efficiency ratio 59.34 % 54.08 % 64.68 % 58.69 % 60.85 % Loans receivable to deposits 76.24 % 73.73 % 76.71 % 92.03 % 105.68 % (1) Annualized calculations shown for quarterly periods presented. (2) A reconciliation of the non-GAAP measures are set forth at the end of this report. CCBX – BaaS Reporting Information During the quarter ended March 31, 2022, $13.1 million was recorded in BaaS fees - credit enhancements related to the provision for loan losses and reserve for unfunded commitments for CCBX partner loans. Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans. When the provision for loan losses and provision for unfunded commitments is recorded, a recovery receivable is also recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement) in recognition of the CCBX partner legal commitment to cover losses. Incurred losses are recorded in the allowance for loan losses, and as the credit enhancement recoveries are received from the CCBX partner, the recovery receivable is relieved. Agreements with our CCBX partners also provide protection to the Bank from fraud by absorbing incurred fraud losses. Fraud losses are recorded when incurred as losses in noninterest expense, and the recovery received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. Many CCBX partners also pledge a cash reserve account at the Bank which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Although many agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank 62 from credit and fraud losses by absorbing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations beyond their cash reserve account then the bank would be exposed to additional loan losses, as a result of this counterparty risk. For CCBX partner loans the Bank records contractual interest earned from the borrower on loans in interest income, adjusted for origination costs which are paid or payable to the CCBX partner. BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. To determine net revenue (Net BaaS loan income) earned from CCBX loan relationships, one takes BaaS loan interest income and deducts BaaS loan expense to arrive at Net BaaS loan income which can be compared to interest income on the Company’s community bank loans. The following table illustrates how CCBX partner loan income and expenses are recorded in the financial statements: Loan income and related loan expense Three Months Ended March 31, March 31, Increase (Dollars in thousands) 2021 2021 (Decrease) BaaS loan interest income $ 11,992 $ 412 $ 11,580 Less: BaaS loan expense 8,290 90 8,200 Net BaaS loan income 3,702 322 3,380 Net BaaS loan income divided by average BaaS loans 3.93 % 1.95 % 1.98 % The addition of new CCBX partners has resulted in increases in direct fees, expenses and interest for the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021. The following tables are a summary of the direct fees, expenses and interest components of BaaS for the periods indicated and are not inclusive of all income and expense related to BaaS. Interest income Three Months Ended March 31, March 31, Increase (Dollars in thousands) 2022 2021 (Decrease) Loan interest income $ 11,992 $ 412 $ 11,580 Total BaaS interest income $ 11,992 $ 412 $ 11,580 Interest expense Three Months Ended March 31, March 31, Increase (Dollars in thousands) 2022 2021 (Decrease) BaaS interest expense $ 118 $ 22 $ 96 Total BaaS interest expense $ 118 $ 22 $ 96 Three Months Ended March 31, March 31, Increase (Dollars in thousands) 2022 2021 (Decrease) Program income: Servicing and other BaaS fees $ 1,169 $ 584 $ 585 Transaction fees 493 146 347 Interchange fees 432 35 397 Total program income 2,094 765 1,329 Reimbursements and indemnifications: Credit enhancement recovery 13,075 - 13,075 Fraud recovery 4,571 - 4,571 Reimbursement of expenses 372 183 189 Total reimbursements and indemnifications 18,018 183 17,835 Total BaaS fees $ 20,112 $ 948 $ 19,164 63 Three Months Ended March 31, March 31, Increase (Dollars in thousands) 2022 2021 (Decrease) BaaS loan expense $ 8,290 $ 90 $ 8,200 BaaS fraud expense 4,571 - 4,571 Total BaaS expense $ 12,861 $ 90 $ 12,771 GAAP Reconciliation and Management Explanation of Non-GAAP Financial Measures The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies. The following non-GAAP measure is presented to illustrate the impact of BaaS loan expense on net loan income and yield on CCBX loans. Net BaaS loan income divided by average CCBX loans is a non-GAAP measure that includes the impact BaaS loan expense on net BaaS loan income and the gross yield on CCBX loans. The most directly comparable GAAP measure is (gross) yield on CCBX loans. Reconciliations of the GAAP and non-GAAP measures are presented below. As of and for the Three Months Ended (Dollars in thousands, unaudited) March 31, 2022 March 31, 2021 Net BaaS loan income divided by average CCBX loans: Total average CCBX loans receivable $ 382,153 $ 66,850 Interest and earned fee income on CCBX loans 11,992 412 Less: loan expense on CCBX loans (8,290 ) (90 ) Net BaaS loan income $ 3,702 $ 322 Net BaaS loan income divided by average CCBX loans 3.93 % 1.95 % CCBX gross loan yield 12.73 % 2.50 % The following non-GAAP measure is presented to illustrate the impact of loan fees on yield on loans receivable. 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. 64 Reconciliations of the GAAP and non-GAAP measures are presented below. As of and for the Three Months Ended (Dollars in thousands, unaudited) March 31, 2022 December 31, 2021 September 30, 2021 June 30, 2021 March 31, 2021 Yield on loans receivable, excluding earned fees : Total average loans receivable $ 1,768,283 $ 1,683,310 $ 1,681,069 $ 1,750,825 $ 1,640,108 Interest and earned fee income on loans 29,632 25,134 19,383 19,365 18,230 Less: earned fee income on all loans (2,729 ) (6,572 ) (3,533 ) (4,274 ) (3,974 ) Adjusted interest income on loans $ 26,903 $ 18,562 $ 15,850 $ 15,091 $ 14,256 Yield on loans receivable 6.80 % 5.92 % 4.57 % 4.44 % 4.51 % Yield on loans receivable, excluding earned fees: 6.17 % 4.37 % 3.74 % 3.46 % 3.53 % Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans (1): 6.41 % 4.78 % 4.36 % 4.42 % 4.52 % The following non-GAAP financial measures are presented to illustrate and identify the impact of PPP loans on loans receivable related measures. By removing these significant items and showing what the results would have been without them, we are providing investors with the information to better compare results with periods that did not have these significant items. We believe that these non-GAAP financial measures provide information that is important to investors and that is useful in understanding our results of operation. These measures include the following: Adjusted 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 on all loans and interest on PPP loans is a non-GAAP measure that excludes the impact of all earned fees and 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. 65 Reconciliations of the GAAP and non-GAAP measures are presented in the following table: (Dollars in thousands, unaudited) March 31, 2022 December 31, 2021 March 31, 2021 Adjusted allowance for loan losses to loans receivable, excluding PPP loans: Total loans, net of deferred fees $ 1,964,209 $ 1,742,735 $ 1,766,723 Less: PPP loans (47,467 ) (111,813 ) (543,827 ) Less: net deferred fees on PPP loans 1,365 3,633 14,279 Adjusted loans, net of deferred fees $ 1,918,107 $ 1,634,555 $ 1,237,175 Allowance for loan losses $ (38,770 ) $ (28,632 ) $ (19,610 ) Allowance for loan losses to loans receivable 1.97 % 1.64 % 1.11 % Adjusted allowance for loan losses to loans receivable, excluding PPP loans 2.02 % 1.75 % 1.59 % Yield on loans receivable, excluding PPP loans: Total average loans receivable $ 1,768,283 $ 1,683,310 $ 1,640,108 Less: average PPP loans (79,828 ) (186,267 ) (475,941 ) Plus: average deferred fees on PPP loans 2,453 6,370 10,788 Adjusted total average loans receivable $ 1,690,908 $ 1,503,413 $ 1,174,955 Interest income on loans $ 29,632 $ 25,134 $ 18,230 Less: interest and deferred fee income recognized on PPP loans (2,460 ) (6,245 ) (4,378 ) Adjusted interest income on loans $ 27,172 $ 18,889 $ 13,852 Yield on loans receivable 6.80 % 5.92 % 4.51 % Yield on loans receivable, excluding PPP loans: 6.52 % 4.98 % 4.78 % Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans: Total average loans receivable $ 1,768,283 $ 1,683,310 $ 1,640,108 Less: average PPP loans (79,828 ) (186,267 ) (475,941 ) Plus: average deferred fees on PPP loans 2,453 6,370 10,788 Adjusted total average loans receivable $ 1,690,908 $ 1,503,413 $ 1,174,955 Interest and earned fee income on loans $ 29,632 $ 25,134 $ 18,230 Less: earned fee income on all loans (2,729 ) (6,572 ) (3,974 ) Less: interest income on PPP loans (192 ) (461 ) (1,169 ) Adjusted interest income on loans $ 26,711 $ 18,102 $ 13,086 Yield on loans receivable 6.80 % 5.92 % 4.51 % Yield on loans receivable, excluding earned fees on all loans (1): 6.17 % 4.37 % 3.53 % Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans: 6.41 % 4.78 % 4.52 % (1) Non-GAAP measure - see previous table of " Non-GAAP Financial Measures" for more information. 66 (Dollars in thousands, unaudited) March 31, 2022 December 31, 2021 Adjusted Tier 1 leverage capital ratio, excluding PPP loans: Company: Tier 1 capital $ 211,580 $ 204,585 Average assets for the leverage capital ratio $ 2,728,833 $ 2,536,512 Less: Average PPP loans (79,828 ) (186,267 ) Plus: Average PPPLF borrowings - - Adjusted average assets for the leverage capital ratio $ 2,649,005 $ 2,350,245 Tier 1 leverage capital ratio 7.75 % 8.07 % Adjusted Tier 1 leverage capital ratio, excluding PPP loans 7.99 % 8.70 % Bank: Tier 1 capital $ 220,829 $ 201,783 Average assets for the leverage capital ratio $ 2,725,606 $ 2,533,749 Less: Average PPP loans (79,828 ) (186,267 ) Plus: Average PPPLF borrowings - - Adjusted average assets for the leverage capital ratio $ 2,645,778 $ 2,347,482 Tier 1 leverage capital ratio 8.10 % 7.96 % Adjusted Tier 1 leverage capital ratio, excluding PPP loans 8.35 % 8.60 % 67