8-K
Coastal Financial Corp (CCB)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 8-K
CURRENT REPORT
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 27, 2020
COASTAL FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
| Washington | 001-38589 | 56-2392007 |
|---|---|---|
| (State or other jurisdiction<br><br><br>of incorporation) | (Commission File Number) | (IRS Employer<br><br><br>Identification No.) |
5415 Evergreen Way, Everett, Washington 98203
(Address of principal executive offices, including zip code)
Registrant’s telephone number, including area code: (425) 257-9000
Not Applicable
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
[ ] Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425)
[ ] Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12)
[ ] Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b))
[ ] Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c))
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading<br><br><br>Symbol(s) | Name of each exchange on which registered |
|---|---|---|
| Common stock, no par value per share | CCB | The Nasdaq Stock Market LLC |
Indicate by check mark whether the registrant is an emerging growth company as defined in Rule 405 of the Securities Act of 1933 (§230.405 of this chapter) or Rule 12b-2 of the Securities Exchange Act of 1934 (§240.12b-2 of this chapter).
Emerging growth company ☒
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☒
| Item 2.02 | Results of Operations and Financial Condition |
|---|
On April 27, 2020, Coastal Financial Corporation (the “Company”) issued a press release announcing its results of operations and financial condition for the quarter ended March 31, 2020 (the “Press Release”). The Press Release is “furnished” as Exhibit 99.1 to this Current Report on Form 8-K pursuant to General Instruction B.2 of Form 8-K and the information provided in Item 2.02 of this report, including Exhibit 99.1, shall not be deemed “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), or otherwise subject to the liabilities under that Section. The information provided in Item 2.02 of this report, including Exhibit 99.1, shall not be deemed incorporated by reference into any filings the Company has made or may make under the Securities Act of 1933, as amended, or the Exchange Act, except as otherwise expressly stated in such filing.
Item 9.01 Financial Statements and Exhibits
Exhibits
NumberDescription
99.1Press Release, dated April 27, 2020
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
| COASTAL FINANCIAL CORPORATION | ||
|---|---|---|
| Date: April 28, 2020 | By: | /s/ Joel G. Edwards |
| Joel G. Edwards | ||
| Executive Vice President and Chief Financial Officer |
ck0001437958-ex991_6.htm
Exhibit 99.1
COASTAL FINANCIAL CORPORATION ANNOUNCES FIRST QUARTER 2020 RESULTS
Company Release: April 27, 2020
Quarter One 2020 Highlights:
| • | Net income totaled $2.7 million for the quarter ended March 31, 2020, or $0.22 per diluted common share, a decrease of 3.0% from $2.8 million or $0.23 per diluted common share for the quarter ended March 31, 2019. |
|---|---|
| • | Total assets were $1.18 billion and grew at an annualized rate of 19.8% during the quarter ended March 31, 2020, compared to total assets of $1.13 billion at December 31, 2019. |
| --- | --- |
| • | Total loans receivable grew at an annualized rate of 28.3% during the quarter ended March 31, 2020 to $1.01 billion compared to $939.1 million at December 31, 2019. |
| --- | --- |
| • | A provision for credit losses of $1.6 million was recorded during the quarter ended March 31, 2020, due to loan growth and in response to the economic uncertainties of the COVID-19 pandemic. |
| --- | --- |
| • | Total deposits increased at an annualized rate of 15.4% during the quarter ended March 31, 2019 to $1.01 billion, compared to $968.0 million at December 31, 2019. |
| --- | --- |
| • | Total core deposits increased at an annualized rate of 13.9% during the quarter ended March 31, 2020 and were 88.8% of total deposits. |
| --- | --- |
Everett, WA – Coastal Financial Corporation (Nasdaq: CCB) (the “Company”), the holding company for Coastal Community Bank (the “Bank”), today reported unaudited financial results for the quarter ended March 31, 2020. Net income for the first quarter of 2020 was $2.7 million, or $0.22 per diluted common share, compared with net income of $3.6 million, or $0.30 per diluted common share, for the fourth quarter of 2019, and $2.8 million or $0.23 per diluted common share for the quarter ended March 31, 2019.
“As we close the first quarter of 2020, we are in the midst of an unprecedented global COVID-19 pandemic that is impacting the physical and economic health of our community and nation. We started the year off strong and despite the pandemic related disruptions that occurred late in the period, we finished the first quarter of 2020 with net income of $2.7 million, which includes $1.6 million in loan loss provision expense due to loan growth and in response to the economic uncertainties of the pandemic, annualized loan growth of 28.3% and annualized deposit growth of 15.4%. We also continue to build out and expand on our CCBX division, which provides Banking as a Service (“BaaS”) enabling broker dealers and digital financial service providers to offer their clients banking services, while providing additional sources of fee income for the Bank,” stated Eric Sprink, the President and CEO of the Company and the Bank.
“As a preferred Small Business Administration (“SBA”) lender, we are working diligently with the SBA to offer assistance to small businesses as provided in the recently passed Coronavirus Aid, Relief and Economic Security Act (“CARES Act”). We have accepted in excess of 1,135 Paycheck Protection Program (“PPP”) applications expected to provide approximately $280.7 million in resources to businesses, impacting over 25,175 employees in our communities as of April 24, 2020. We are taking a proactive approach on restructuring payments for our loan customers during this uncertain time to help alleviate financial hardships by deferring or modifying payments on $159.3 million, that represents 180 loans to provide community financial relief, pursuant to federal guidance, since the end of March 2020.
We are committed to following the guidelines set forth by our federal, state and local government and public health officials to keep us all healthy and safe while remaining open and serving our communities through our drive throughs, call center, mobile banking, online banking and ATMs. The Company has taken measures to protect the health and safety of its employees by implementing remote work arrangements to the fullest extent possible.
The Company’s credit administration is closely analyzing the Company’s higher risk segments within the loan portfolio, monitoring and tracking loan payment deferrals, customer liquidity, and providing timely reporting. The management team continues to analyze economic conditions in our geographic markets. Based on the Company’s current capital levels, conservative underwriting policies, and industry diversification within our concentrations, management expects to be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic.
As we navigate through this historic time, we remain focused on managing and innovating our way to an enhanced future for the Company, our customers and our communities, combining the stability of our Bank and the additional sources of income from our CCBX division to emerge from this trying time united and stronger than ever.”
Results of Operations
Net interest income was $11.4 million for the quarter ended March 31, 2020, an increase of 0.3% from $11.3 million for the quarter ended December 31, 2019 and an increase of 16.4% from $9.8 million for the quarter ended March 31, 2019. The increase compared to the prior quarter and prior year’s fourth quarter is largely related to increased interest income resulting from our loan growth, partially offset by increased interest expense due to growth in interest bearing deposits and a decrease in rates on existing loans that are tied to indexes, including, among others, Wall Street Journal Prime, FHLB term advance rates and LIBOR.
Net interest margin for the quarter ended March 31, 2020 decreased 11 basis points to 4.15% as compared to 4.26% for the quarter ended December 31, 2019 and was 4.13% for the quarter ended March 31, 2019. The decrease over the prior quarter was due to lower interest rates on loans combined with reduced balances on investment securities. The increase in net interest margin compared to the first quarter in the prior year is primarily due to a decrease in cost of funds, which decreased six basis points to 0.70% for the quarter ended March 31, 2020, compared to 0.76% for the quarter ended March 31, 2019.
During the quarter ended March 31, 2020, the average balance of total loans receivable increased by $55.2 million, to $966.6 million, compared to $911.4 million for the quarter ended December 31, 2019, and increased by $184.2 million, compared to $782.4 million for the same quarter one year ago. Total loan yield for the quarter ended March 31, 2020 was 5.25%, compared to 5.36% for the quarter ended December 31, 2019, and 5.40% for the quarter ended March 31, 2019.
Contractual loan yields approximated 5.08% for the quarter ended March 31, 2020, compared to 5.15% for the quarter ended December 31, 2019, and 5.22% for the quarter ended March 31, 2019. The Federal Open Market Committee (“FOMC”) lowered rates five times for a total decrease of 2.25% since July 2019, resulting in lower rates on new and renewing loans as well as loans tied to indexes. Although we have rate floors in place for $347.7 million, or 34.5%, in existing loans, the rate reductions by FOMC have a corresponding impact on loan yields and subsequently the net interest margin in future periods.
Deposit costs for the quarter ended March 31, 2020 were 0.64%, an increase of one basis point from 0.63% for the quarter ended December 31, 2019, and a four-basis point decrease from the quarter ended March 31, 2019. Market conditions for deposits continued to be competitive during the quarter, despite this, we lowered many rates, with most changes to our interest bearing demand deposit and certificate of deposit rates effective in March and April 2020. Historically, there tends to be a lag in customer deposit rates being adjusted up or down in response to rate changes by the FOMC, therefore additional changes may be made in the future as the market responds to the most recent FOMC rate reductions.
Return on average assets (“ROA”) was 0.96% for the quarter ended March 31, 2020 compared to 1.31% and 1.14% for the quarters ended December 31, 2019 and March 31, 2019, respectively. ROA was impacted in the current quarter by increased provision for loan losses due to loan growth and in response to the economic uncertainties of the COVID-19 pandemic. Pre-provision, pre-tax ROA was 1.77% for the quarter ended March 31, 2020, compared to 1.95% and 1.66% for the quarters ended December 31, 2019 and March 31, 2019, respectively.
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 previously disclosed atypical BaaS-brokered deposits for the quarters ended June 30, 2019 and March 31, 2019. The BaaS-brokered deposits normalized at the end of the second quarter of 2019, therefore no adjustment was made to the loans receivable to deposits ratio as of June 30, 2019 and no adjustments were made to the performance ratios that are calculated using an average balance since the quarter ended June 30, 2019. The adjusted ratios are non-GAAP measures. For more information about non-GAAP financial measures, see the end of this earnings release.
| Three months ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31,<br><br><br>2020 | December 31,<br><br><br>2019 | September 30,<br><br><br>2019 | June 30,<br><br><br>2019 | March 31,<br><br><br>2019 | |||||||||||
| Return on average assets (1) | 0.96 | % | 1.31 | % | 1.35 | % | 1.31 | % | 1.14 | % | |||||
| Return on average assets, as adjusted (1,2) | N/A | N/A | N/A | 1.34 | % | 1.20 | % | ||||||||
| Return on average equity (1) | 8.66 | % | 11.66 | % | 11.72 | % | 11.45 | % | 10.25 | % | |||||
| Pre-tax, pre-provision return on average assets (1,3) | 1.77 | % | 1.95 | % | 1.95 | % | 1.87 | % | 1.66 | % | |||||
| Yield on earnings assets (1) | 4.79 | % | 4.90 | % | 4.94 | % | 4.92 | % | 4.82 | % | |||||
| Yield on loans receivable (1) | 5.25 | % | 5.36 | % | 5.36 | % | 5.39 | % | 5.40 | % | |||||
| Loan yield excluding fees (1) | 5.08 | % | 5.15 | % | 5.24 | % | 5.23 | % | 5.22 | % | |||||
| Cost of funds (1) | 0.70 | % | 0.70 | % | 0.72 | % | 0.74 | % | 0.76 | % | |||||
| Cost of funds, as adjusted (1,4) | N/A | N/A | N/A | 0.71 | % | 0.61 | % | ||||||||
| Cost of deposits (1) | 0.64 | % | 0.63 | % | 0.64 | % | 0.66 | % | 0.68 | % | |||||
| Cost of deposits, as adjusted (1,5) | N/A | N/A | N/A | 0.63 | % | 0.52 | % | ||||||||
| Net interest margin (1) | 4.15 | % | 4.26 | % | 4.29 | % | 4.24 | % | 4.13 | % | |||||
| Net interest margin, as adjusted (1,6) | N/A | N/A | N/A | 4.38 | % | 4.48 | % | ||||||||
| Noninterest expense to average assets (1) | 3.18 | % | 2.90 | % | 2.98 | % | 3.06 | % | 3.12 | % | |||||
| Noninterest expense to average assets, as adjusted (1,7) | N/A | N/A | N/A | 3.12 | % | 3.37 | % | ||||||||
| Efficiency ratio | 64.26 | % | 59.86 | % | 60.46 | % | 62.05 | % | 65.20 | % | |||||
| Loans receivable to deposits | 100.01 | % | 97.02 | % | 94.78 | % | 97.39 | % | 81.01 | % | |||||
| Loans receivable to deposits, as adjusted (8) | N/A | N/A | N/A | N/A | 97.44 | % | |||||||||
| (1) Annualized calculations shown for quarterly periods presented. | |||||||||||||||
| (2) For quarters ended June 30, 2019 and March 31, 2019, adjusted return on average assets is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is return on average assets. See the end of the earnings release for more information. | |||||||||||||||
| (3) Pre-tax, pre-provision return on average assets is a non-GAAP measure that excludes the impact of provision for loan losses and income tax expense from return on average assets. The most directly comparable GAAP measure is return on average assets. See the end of the earnings release for more information. | |||||||||||||||
| (4) For quarters ended June 30, 2019 and March 31, 2019, adjusted cost of funds is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is cost of funds. See the end of the earnings release for more information. | |||||||||||||||
| (5) For quarters ended June 30, 2019 and March 31, 2019, adjusted cost of deposits is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is cost of deposits. See the end of the earnings release for more information. | |||||||||||||||
| (6) For quarters ended June 30, 2019 and March 31, 2019, adjusted net interest margin is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is net interest margin. See the end of the earnings release for more information. | |||||||||||||||
| (7) For quarters ended June 30, 2019 and March 31, 2019, adjusted noninterest expense to average assets is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is noninterest expense to average assets. See the end of the earnings release for more information. | |||||||||||||||
| (8) For quarter ended March 31, 2019, adjusted loans receivable to deposits is a non-GAAP measure that excludes BaaS-brokered deposits on balance sheet. The most directly comparable GAAP measure is loans receivable to deposits. See the end of the earnings release for more information. |
Noninterest income was $2.7 million for the first quarter of 2020, an increase of $612,000 from $2.1 million at the fourth quarter of 2019, and an increase of $687,000 from $2.0 million for the comparable period one year ago. A $721,000 increase in loan referral fees, which is earned when we originate a variable rate loan and arrange for the borrower to enter into an interest rate swap agreement with a third party to fix the interest rate for an extended period, and $51,000 increase in mortgage broker fees was partially offset by a $82,000 decrease in deposit service charges and fees and $77,000 decrease in BaaS fees when compared to the quarter ended December 31, 2019. The $687,000 increase over the quarter ended March 31, 2019 was largely due to a $420,000 increase loan referral fees combined with $133,000 increase in BaaS fees, and $77,000 increase in mortgage broker fees.
Total noninterest expense for the current quarter was $9.0 million compared to $8.0 million for the preceding quarter and increased 17.7% from $7.7 million from the comparable period one year ago. Noninterest expense variances for the quarter ended March 31, 2020 as compared to the quarter ended December 31, 2019 include a $782,000 increase in salaries and employee benefits, largely the result of hiring staff for our BaaS CCBX division and additional staff for our ongoing banking related growth initiatives, coupled with $92,000 increase in legal and professional fees related to BaaS activities through CCBX operations and regular costs related to legal and accounting work related to year-end reporting. The increased expenses for the current quarter compared to the comparable quarter one year ago were largely due to increases in salary expenses. Full time equivalent employees at March 31, 2020 totaled 208, which was up 6.7% from the prior quarter and increased 16.2% from the quarter ended March 31, 2019. Staffing increases compared to the prior year are due to organic growth initiatives and include increases in back office staffing to support the incremental increases in banking teams and to grow our BaaS CCBX division. Other expenses increased $259,000 as a result of $124,000 more in dues and memberships and subscription and software license expense and $49,000 more in bank examination fees.
The provision for income taxes was $714,000 at March 31, 2020, a $233,000 decrease compared to $947,000 for the fourth quarter of 2019 as a result of decreased taxable income and $27,000 less than $741,000 for the first quarter of 2019, also as a result of decreased taxable income. The Company uses a federal statutory tax rate of 21% as a basis for calculating provision for income taxes.
Balance Sheet
The Company’s total assets increased $55.5 million, or 4.9%, to $1.18 billion at March 31, 2020 from $1.13 billion at December 31, 2019. The primary cause of the increase was a $64.6 million in increased net loans receivable, partially offset by a $13.0 million decrease in investment securities resulting from maturities and principal paydowns. In the quarter ended March 31, 2020 total assets increased $68.0 million, or 6.1%, from $1.12 billion at March 31, 2019. This increase is largely the result of $211.1 million increase in net loans receivable, partially offset by $121.4 million decrease in interest earning deposits with other banks. The Company previously disclosed that at March 31, 2019 there were $164.6 million in temporary, high rate BaaS deposits on balance sheet which temporarily increased total assets as of that date.
Total loans receivable, net of allowance for loan losses, increased $64.6 million, or 7.0%, to $992.3 million at March 31, 2020, from $927.6 million at December 31, 2019 and $211.1 million, or 27.0%, from $781.2 million at March 31, 2019. The growth in net loans receivable over the previous quarter end was due primarily to increases in commercial real estate loans of $30.1 million and $22.6 million in construction, land and land development loans, and $11.3 million in commercial and industrial loans. As a percent of total loans, all categories remained consistent with those of December 31, 2019, and we have been able to maintain this allocation by growing all areas of our portfolio. The Company anticipates an increase in commercial and industrial SBA 7(a) loans during the second quarter 2020, as small business owners apply for relief via the PPP as prescribed in the CARES Act. The increase over the quarter ended March 31, 2019 was due to increases in commercial real estate of $107.6 million, $54.0 million in construction, land and land development loans, $30.4 million in commercial and industrial loans and $23.1 million in residential real estate loans.
The following table summarizes the loan portfolio at the periods indicated.
| As of | ||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||||||||||||
| (Dollars in thousands) | Balance | % to Total | Balance | % to Total | Balance | % to Total | ||||||||||||
| Commercial and industrial loans | $ | 122,667 | 12.2 | % | $ | 111,401 | 11.8 | % | $ | 92,248 | 11.6 | % | ||||||
| Real estate: | ||||||||||||||||||
| Construction, land and | ||||||||||||||||||
| land development | 119,668 | 11.9 | 97,034 | 10.3 | 65,686 | 8.3 | ||||||||||||
| Residential | 117,821 | 11.7 | 115,011 | 12.2 | 94,743 | 12.0 | ||||||||||||
| Commercial real estate | 643,488 | 63.9 | 613,398 | 65.2 | 535,896 | 67.6 | ||||||||||||
| Consumer and other | 3,695 | 0.3 | 4,214 | 0.5 | 3,583 | 0.5 | ||||||||||||
| Gross loans receivable | 1,007,339 | 100.0 | % | 941,058 | 100.0 | % | 792,156 | 100.0 | % | |||||||||
| Net deferred origination fees | (2,159 | ) | (1,955 | ) | (1,084 | ) | ||||||||||||
| Loans receivable | $ | 1,005,180 | $ | 939,103 | $ | 791,072 |
Please see Appendix A for additional loan portfolio detail regarding industry concentrations in response to the volatile economic environment due to the COVID-19 pandemic.
Total deposits increased $37.1 million, or 3.8%, to $1.01 billion at March 31, 2020 from $968.0 million at December 31, 2019. The increase is largely due to a $29.9 million increase in core deposits. During the quarter ended March 31, 2020, noninterest bearing deposits decreased $25.7 million, or 6.9%, to $345.5 million from $371.2 million at December 31, 2019. The $25.7 million decrease in noninterest bearing deposits was impacted by the loss of $10.2 million in deposits from the distribution of deposits from an estate and the reclassification of $8.5 million in noninterest bearing to interest bearing from a CCBX customer that is expected to eventually return to noninterest bearing. NOW and money market accounts increased $54.1 million, savings accounts increased $1.5 million, BaaS-brokered deposits were relatively static and time deposits increased $6.9 million. Total deposits increased $28.6 million, or 2.9%, compared to March 31, 2019. As previously reported, that includes $164.6 million in temporary BaaS-brokered deposits as of March 31, 2019. Noninterest bearing deposits increased $49.3 million, or 16.6%, from $296.2 million at March 31, 2019. NOW and money market accounts increased $123.9 million, savings accounts increased $2.6 million, BaaS-brokered deposits decreased $140.7 million and time deposits decreased $6.5 million. Efforts to retain and grow core deposits is evidenced by the high ratios in these categories when compared to total deposits.
The following table summarizes the deposit portfolio at the periods indicated and breaks out BaaS-brokered deposits.
| December 31, 2019 | March 31, 2019 | |||||||||||||
| (Dollars in thousands) | % to Total | Balance | % to Total | Balance | % to Total | |||||||||
| Demand, noninterest bearing | 345,503 | 34.4 | % | $ | 371,243 | 38.4 | % | $ | 296,247 | 30.3 | % | |||
| NOW and money market | 492,054 | 49.0 | 437,908 | 45.2 | 368,130 | 37.7 | ||||||||
| Savings | 54,851 | 5.4 | 53,365 | 5.5 | 52,246 | 5.4 | ||||||||
| Total core deposits | 892,408 | 88.8 | 862,516 | 89.1 | 716,623 | 73.4 | ||||||||
| BaaS-brokered deposits | 23,904 | 2.4 | 23,586 | 2.4 | 164,604 | 16.9 | ||||||||
| Time deposits less than 250,000 | 58,366 | 5.8 | 51,644 | 5.4 | 60,728 | 6.2 | ||||||||
| Time deposits 250,000 and over | 30,384 | 3.0 | 30,213 | 3.1 | 34,541 | 3.5 | ||||||||
| Total deposits | 1,005,062 | 100.0 | % | $ | 967,959 | 100.0 | % | $ | 976,496 | 100.0 | % |
All values are in US Dollars.
The Federal Home Loan Bank (“FHLB”) allows us to borrow against our line of credit, which is collateralized by certain loans. As of March 31, 2020, total borrowing capacity of $88.1 million was available under this arrangement. On March 4, 2020, we borrowed a total of $25.0 million in FHLB long term advances. This includes $10.0 million for a three-year term and $15.0 million for a five-year term. These advances provide an alternative source of funding to meet loan demand. We were able to lock in favorable, long-term rates, that supplements deposits, which is our primary source of funding.
Total shareholders’ equity increased $3.0 million since December 31, 2019. The increase in shareholders’ equity was primarily due to $2.7 million in net earnings during the quarter ended March 31, 2020.
Capital Ratios
The Company and the Bank remain well capitalized at March 31, 2020, as summarized in the following table.
| Capital Ratios: | Coastal Community Bank | Coastal Financial Corporation | Financial Institution Basel III Regulatory Guidelines | ||||||
|---|---|---|---|---|---|---|---|---|---|
| Tier 1 leverage capital | 11.70 | % | 11.43 | % | 5.00 | % | |||
| Common Equity Tier 1 risk-based capital | 12.58 | % | 12.10 | % | 6.50 | % | |||
| Tier 1 risk-based capital | 12.58 | % | 12.43 | % | 8.00 | % | |||
| Total risk-based capital | 13.83 | % | 14.65 | % | 10.00 | % |
During the quarter ended March 31, 2020, the Company contributed $7.5 million in capital to the Bank due to the volatile economic environment. After the downstream of capital, the Company had $6.1 million in cash at March 31, 2020 and could make additional contributions to the Bank in the future, if necessary.
Asset Quality
The allowance for loan losses was 1.29% of loans receivable at March 31, 2020 compared to 1.22% at December 31, 2019 and 1.25% at March 31, 2019. Provision for loan losses totaled $1.6 million for the current quarter, $820,000 for the preceding quarter, and $540,000 for the same quarter in the prior year. Net charge-offs totaled $123,000 for the quarter ended March 31, 2020, compared to net charge-offs of $238,000 for the quarter ended December 31, 2019 and $32,000 net charge-offs for the quarter ended March 31, 2019.
The Company’s provision for credit losses of $1.6 million during the quarter ended March 31, 2020 is related to the growth in the loan portfolio along with an increase in qualitative factors related to the economic uncertainties caused by the COVID-19 pandemic. The Company is not required to implement the provisions of the Current Expected Credit Loss accounting standard until January 1, 2023, and will continue to account for the allowance for credit losses under the incurred loss model.
At March 31, 2020, our nonperforming assets were $763,000, or 0.06% of total assets, compared to $1.0 million or 0.09% of total assets at December 31, 2019, and $1.3 million, or 0.12% of total assets at March 31, 2019. There were no repossessed assets or other real estate owned at March 31, 2020.
Our nonperforming loans to loans receivable ratio was 0.08% at March 31, 2020, compared to 0.11% at December 31, 2019. Commercial and industrial nonaccrual loans totaled $699,000 at March 31, 2020, and consisted of four lending relationships. During the first quarter of 2020, charge-offs totaled $121,000 on nonperforming loans. Principal reductions along with the aforementioned charge-offs resulted in an overall decrease in our ratios of nonperforming loans and nonperforming assets to total assets compared to December 31, 2019. One loan was moved to nonperforming status in the first quarter of 2020, and was subsequently charged off.
Credit quality has remained stable in 2020 thus far, as demonstrated by the low level of charge-offs and declining nonperforming loan balance. The immediate and long-term economic impact of the global pandemic, trade issues, and decline in oil prices is unknown, however the Company remains diligent in its efforts to communicate and work with borrowers to help mitigate potential credit deterioration.
The following table details the Company’s nonperforming assets for the periods indicated.
| As of | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| March 31, | December 31, | March 31, | |||||||
| (Dollars in thousands) | 2020 | 2019 | 2019 | ||||||
| Nonaccrual loans: | |||||||||
| Commercial and industrial loans | $ | 699 | $ | 965 | $ | 493 | |||
| Real estate: | |||||||||
| Residential | 64 | 65 | 71 | ||||||
| Consumer and other loans | - | - | 2 | ||||||
| Total nonaccrual loans | 763 | 1,030 | 566 | ||||||
| Total accruing loans past due 90 days or more | - | - | 748 | ||||||
| Total nonperforming loans | 763 | 1,030 | 1,314 | ||||||
| Other real estate owned | - | - | - | ||||||
| Repossessed assets | - | - | - | ||||||
| Total nonperforming assets | $ | 763 | $ | 1,030 | $ | 1,314 | |||
| Troubled debt restructurings, accruing | - | - | - | ||||||
| Total nonperforming loans to loans receivable | 0.08 | % | 0.11 | % | 0.17 | % | |||
| Total nonperforming assets to total assets | 0.06 | % | 0.09 | % | 0.12 | % |
About Coastal Financial
Coastal Financial Corporation (Nasdaq: CCB) (the “Company”), is an Everett, Washington based bank holding company with Coastal Community Bank (the “Bank”), a full-service commercial bank, as its sole wholly-owned banking subsidiary. The $1 billion community bank that the Bank operates provides service through 14 branches in Snohomish, Island, and King Counties, the Internet and its mobile banking application. The Bank will be opening its 15^th^ branch in Arlington, Washington in second quarter 2020. The Bank provides select partners with BaaS through its CCBX Division. To learn more about Coastal visit www.coastalbank.com.
Contact
Eric Sprink, President & Chief Executive Officer, (425) 357-3659
Joel Edwards, Executive Vice President & Chief Financial Officer, (425) 357-3687
Forward-Looking Statements
This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our management’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Any or all of the forward-looking statements in this earnings release may turn out to be inaccurate. The inclusion of or reference to forward-looking information in this earnings release should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, the risks and uncertainties discussed under “Risk Factors” in our Annual Report on Form 10-K for the most recent period filed, and in any of our subsequent filings with the Securities and Exchange Commission.
If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. You are cautioned not to place undue reliance on forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as required by law.
COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands; unaudited)
| ASSETS | |||||||||
|---|---|---|---|---|---|---|---|---|---|
| March 31, | December 31, | March 31, | |||||||
| 2020 | 2019 | 2019 | |||||||
| Cash and due from banks | $ | 14,124 | $ | 16,555 | $ | 21,176 | |||
| Interest earning deposits with other banks | 115,112 | 111,259 | 236,483 | ||||||
| Investment securities, available for sale, at fair value | 15,469 | 28,360 | 36,970 | ||||||
| Investment securities, held to maturity, at amortized cost | 4,290 | 4,350 | 1,247 | ||||||
| Other investments | 5,723 | 4,505 | 3,600 | ||||||
| Loans receivable | 1,005,180 | 939,103 | 791,072 | ||||||
| Allowance for loan losses | (12,925 | ) | (11,470 | ) | (9,915 | ) | |||
| Total loans receivable, net | 992,255 | 927,633 | 781,157 | ||||||
| Premises and equipment, net | 14,195 | 13,108 | 13,017 | ||||||
| Operating lease right-of-use assets | 8,228 | 8,493 | 9,305 | ||||||
| Accrued interest receivable | 3,014 | 2,980 | 2,505 | ||||||
| Bank-owned life insurance, net | 6,931 | 6,882 | 6,735 | ||||||
| Deferred tax asset, net | 2,735 | 2,743 | 2,496 | ||||||
| Other assets | 1,995 | 1,658 | 1,399 | ||||||
| Total assets | $ | 1,184,071 | $ | 1,128,526 | $ | 1,116,090 | |||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||
| LIABILITIES | |||||||||
| Deposits | $ | 1,005,062 | $ | 967,959 | $ | 976,496 | |||
| Federal Home Loan Bank (FHLB) advances | 24,999 | 10,000 | - | ||||||
| Subordinated debt, net | 9,982 | 9,979 | 9,968 | ||||||
| Junior subordinated debentures, net | 3,583 | 3,583 | 3,581 | ||||||
| Deferred compensation | 947 | 974 | 1,052 | ||||||
| Accrued interest payable | 310 | 308 | 343 | ||||||
| Operating lease liabilities | 8,419 | 8,679 | 9,471 | ||||||
| Other liabilities | 3,603 | 2,871 | 2,814 | ||||||
| Total liabilities | 1,056,905 | 1,004,353 | 1,003,725 | ||||||
| SHAREHOLDERS’ EQUITY | |||||||||
| Common stock | 87,166 | 86,983 | 86,579 | ||||||
| Retained earnings | 39,946 | 37,222 | 26,829 | ||||||
| Accumulated other comprehensive income (loss), net of tax | 54 | (32 | ) | (1,043 | ) | ||||
| Total shareholders’ equity | 127,166 | 124,173 | 112,365 | ||||||
| Total liabilities and shareholders’ equity | $ | 1,184,071 | $ | 1,128,526 | $ | 1,116,090 |
COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts; unaudited)
| Three months ended | ||||||||
|---|---|---|---|---|---|---|---|---|
| March 31, | December 31, | March 31, | ||||||
| 2020 | 2019 | 2019 | ||||||
| INTEREST AND DIVIDEND INCOME | ||||||||
| Interest and fees on loans | $ | 12,627 | $ | 12,323 | $ | 10,419 | ||
| Interest on interest earning deposits with other banks | 358 | 477 | 808 | |||||
| Interest on investment securities | 119 | 154 | 153 | |||||
| Dividends on other investments | 16 | 80 | 14 | |||||
| Total interest and dividend income | 13,120 | 13,034 | 11,394 | |||||
| INTEREST EXPENSE | ||||||||
| Interest on deposits | 1,554 | 1,511 | 1,436 | |||||
| Interest on borrowed funds | 202 | 192 | 191 | |||||
| Total interest expense | 1,756 | 1,703 | 1,627 | |||||
| Net interest income | 11,364 | 11,331 | 9,767 | |||||
| PROVISION FOR LOAN LOSSES | 1,578 | 820 | 540 | |||||
| Net interest income after provision for loan losses | 9,786 | 10,511 | 9,227 | |||||
| NONINTEREST INCOME | ||||||||
| Deposit service charges and fees | 723 | 805 | 726 | |||||
| BaaS fees | 579 | 656 | 446 | |||||
| Loan referral fees | 1,053 | 332 | 633 | |||||
| Mortgage broker fees | 162 | 111 | 85 | |||||
| Sublease and lease income | 30 | 27 | 10 | |||||
| Gain on sales of loans, net | - | - | (11 | ) | ||||
| Other | 124 | 128 | 95 | |||||
| Total noninterest income | 2,671 | 2,059 | 1,984 | |||||
| NONINTEREST EXPENSE | ||||||||
| Salaries and employee benefits | 5,683 | 4,901 | 4,558 | |||||
| Occupancy | 927 | 972 | 994 | |||||
| Data processing | 551 | 544 | 529 | |||||
| Director and staff expenses | 270 | 302 | 240 | |||||
| Excise taxes | 203 | 190 | 165 | |||||
| Marketing | 112 | 93 | 94 | |||||
| Legal and professional fees | 323 | 231 | 409 | |||||
| Federal Deposit Insurance Corporation (FDIC) assessments | 70 | (21 | ) | 75 | ||||
| Business development | 125 | 111 | 102 | |||||
| Other | 755 | 692 | 496 | |||||
| Total noninterest expense | 9,019 | 8,015 | 7,662 | |||||
| Income before provision for income taxes | 3,438 | 4,555 | 3,549 | |||||
| PROVISION FOR INCOME TAXES | 714 | 947 | 741 | |||||
| NET INCOME | $ | 2,724 | $ | 3,608 | $ | 2,808 | ||
| Basic earnings per common share | $ | 0.23 | $ | 0.30 | $ | 0.24 | ||
| Diluted earnings per common share | $ | 0.22 | $ | 0.30 | $ | 0.23 | ||
| Weighted average number of common shares outstanding: | ||||||||
| Basic | 11,909,248 | 11,903,750 | 11,884,107 | |||||
| Diluted | 12,208,175 | 12,213,512 | 12,183,234 |
COASTAL FINANCIAL CORPORATION
AVERAGE BALANCES, YIELDS, AND RATES – QUARTERLY
(Dollars in thousands; unaudited)
| For the Three Months Ended | ||||||||||||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, 2020 | December 31, 2019 | March 31, 2019 | ||||||||||||||||||||||
| Average | Interest & | Yield / | Average | Interest & | Yield / | Average | Interest & | Yield / | ||||||||||||||||
| Balance | Dividends | Cost (4) | Balance | Dividends | Cost (4) | Balance | Dividends | Cost (4) | ||||||||||||||||
| Assets | ||||||||||||||||||||||||
| Interest earning assets: | ||||||||||||||||||||||||
| Interest earning deposits | $ | 103,372 | $ | 358 | 1.39 | % | $ | 106,985 | $ | 477 | 1.77 | % | $ | 133,458 | $ | 808 | 2.46 | % | ||||||
| Investment securities (1) | 27,041 | 119 | 1.77 | 32,871 | 154 | 1.86 | 39,552 | 153 | 1.57 | |||||||||||||||
| Other Investments | 4,507 | 16 | 1.43 | 3,743 | 80 | 8.48 | 3,150 | 14 | 1.80 | |||||||||||||||
| Loans receivable (2) | 966,602 | 12,627 | 5.25 | 911,373 | 12,323 | 5.36 | 782,387 | 10,419 | 5.40 | |||||||||||||||
| Total interest earning assets | 1,101,522 | 13,120 | 4.79 | 1,054,972 | 13,034 | 4.90 | $ | 958,547 | $ | 11,394 | 4.82 | |||||||||||||
| Noninterest earning assets: | ||||||||||||||||||||||||
| Allowance for loan losses | (11,657 | ) | (11,002 | ) | (9,623 | ) | ||||||||||||||||||
| Other noninterest earning assets | 51,596 | 51,373 | 48,145 | |||||||||||||||||||||
| Total assets | $ | 1,141,461 | $ | 1,095,343 | $ | 997,069 | ||||||||||||||||||
| Liabilities and Shareholders’ Equity | ||||||||||||||||||||||||
| Interest bearing liabilities: | ||||||||||||||||||||||||
| Interest bearing deposits | $ | 628,037 | $ | 1,554 | 1.00 | % | $ | 585,277 | $ | 1,511 | 1.02 | % | $ | 571,086 | $ | 1,436 | 1.02 | % | ||||||
| Subordinated debt, net | 9,980 | 146 | 5.88 | 9,977 | 148 | 5.89 | 9,966 | 145 | 5.90 | |||||||||||||||
| Junior subordinated debentures, net | 3,583 | 35 | 3.93 | 3,583 | 39 | 4.32 | 3,581 | 44 | 4.98 | |||||||||||||||
| FHLB advances and other borrowings | 7,851 | 21 | 1.08 | 893 | 5 | 2.22 | 297 | 2 | 2.73 | |||||||||||||||
| Total interest bearing liabilities | 649,451 | 1,756 | 1.09 | 599,730 | 1,703 | 1.13 | $ | 584,930 | $ | 1,627 | 1.13 | |||||||||||||
| Noninterest bearing deposits | 352,930 | 360,030 | 288,049 | |||||||||||||||||||||
| Other liabilities | 12,544 | 12,869 | 13,029 | |||||||||||||||||||||
| Total shareholders' equity | 126,536 | 122,714 | 111,061 | |||||||||||||||||||||
| Total liabilities and | ||||||||||||||||||||||||
| shareholders' equity | $ | 1,141,461 | $ | 1,095,343 | $ | 997,069 | ||||||||||||||||||
| Net interest income | $ | 11,364 | $ | 11,331 | $ | 9,767 | ||||||||||||||||||
| Interest rate spread | 3.70 | % | 3.77 | % | 3.69 | % | ||||||||||||||||||
| Net interest margin (3) | 4.15 | % | 4.26 | % | 4.13 | % | ||||||||||||||||||
| (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 net interest income divided by the average total interest earning assets. | ||||||||||||||||||||||||
| (4) Yields and costs are annualized. |
COASTAL FINANCIAL CORPORATION
QUARTERLY STATISTICS
(Dollars in thousands, except share and per share data; unaudited)
| Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||
| 2020 | 2019 | 2019 | 2019 | 2019 | |||||||||||
| Income Statement Data: | |||||||||||||||
| Interest and dividend income | $ | 13,120 | $ | 13,034 | $ | 12,355 | $ | 11,804 | $ | 11,394 | |||||
| Interest expense | 1,756 | 1,703 | 1,628 | 1,618 | 1,627 | ||||||||||
| Net interest income | 11,364 | 11,331 | 10,727 | 10,186 | 9,767 | ||||||||||
| Provision for loan losses | 1,578 | 820 | 637 | 547 | 540 | ||||||||||
| Net interest income after | |||||||||||||||
| provision for loan losses | 9,786 | 10,511 | 10,090 | 9,639 | 9,227 | ||||||||||
| Noninterest income | 2,671 | 2,059 | 2,088 | 2,132 | 1,984 | ||||||||||
| Noninterest expense | 9,019 | 8,015 | 7,748 | 7,643 | 7,662 | ||||||||||
| Net income - pre-tax, pre-provision | 5,016 | 5,375 | 5,067 | 4,675 | 4,089 | ||||||||||
| Provision for income tax | 714 | 947 | 919 | 854 | 741 | ||||||||||
| Net income | 2,724 | 3,608 | 3,511 | 3,274 | 2,808 | ||||||||||
| As of Period End or for the Three Month Period | |||||||||||||||
| March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||
| 2020 | 2019 | 2019 | 2019 | 2019 | |||||||||||
| Balance Sheet Data: | |||||||||||||||
| Cash and cash equivalents | $ | 129,236 | $ | 127,814 | $ | 153,347 | $ | 113,470 | $ | 257,659 | |||||
| Investment securities | 19,759 | 32,710 | 32,696 | 42,381 | 38,217 | ||||||||||
| Loans receivable | 1,005,180 | 939,103 | 874,112 | 845,443 | 791,072 | ||||||||||
| Allowance for loan losses | (12,925 | ) | (11,470 | ) | (10,888 | ) | (10,443 | ) | (9,915 | ) | |||||
| Total assets | 1,184,071 | 1,128,526 | 1,090,060 | 1,031,024 | 1,116,090 | ||||||||||
| Interest bearing deposits | 659,559 | 596,716 | 573,162 | 552,254 | 680,249 | ||||||||||
| Noninterest bearing deposits | 345,503 | 371,243 | 349,087 | 315,890 | 296,247 | ||||||||||
| Core deposits (1) | 892,408 | 862,516 | 817,593 | 754,768 | 716,623 | ||||||||||
| Total deposits | 1,005,062 | 967,959 | 922,249 | 868,144 | 976,496 | ||||||||||
| Total borrowings | 38,564 | 23,562 | 33,557 | 33,554 | 13,549 | ||||||||||
| Total shareholders’ equity | 127,166 | 124,173 | 120,422 | 116,591 | 112,365 | ||||||||||
| Share and Per Share Data (2): | |||||||||||||||
| Earnings per share – basic | $ | 0.23 | $ | 0.30 | $ | 0.30 | $ | 0.28 | $ | 0.24 | |||||
| Earnings per share – diluted | $ | 0.22 | $ | 0.30 | $ | 0.29 | $ | 0.27 | $ | 0.23 | |||||
| Dividends per share | - | - | - | - | - | ||||||||||
| Book value per share (3) | $ | 10.66 | $ | 10.42 | $ | 10.11 | $ | 9.79 | $ | 9.44 | |||||
| Tangible book value per share (4) | $ | 10.66 | $ | 10.42 | $ | 10.11 | $ | 9.79 | $ | 9.44 | |||||
| Weighted avg outstanding shares – basic | 11,909,248 | 11,903,750 | 11,901,873 | 11,895,026 | 11,884,107 | ||||||||||
| Weighted avg outstanding shares – diluted | 12,208,175 | 12,213,512 | 12,188,507 | 12,202,197 | 12,183,234 | ||||||||||
| Shares outstanding at end of period | 11,929,413 | 11,913,885 | 11,912,115 | 11,908,185 | 11,902,715 | ||||||||||
| Stock options outstanding at end of period | 774,937 | 784,217 | 786,257 | 791,267 | 804,117 | ||||||||||
| As of Period End or for the Three Month Period | |||||||||||||||
| March 31, | December 31, | September 30, | June 30, | March 31, | |||||||||||
| 2020 | 2019 | 2019 | 2019 | 2019 | |||||||||||
| Credit Quality Data: | |||||||||||||||
| Nonperforming assets to total assets | 0.06 | % | 0.09 | % | 0.12 | % | 0.16 | % | 0.12 | % | |||||
| Nonperforming assets to loans receivable and OREO | 0.08 | % | 0.11 | % | 0.15 | % | 0.19 | % | 0.17 | % | |||||
| Nonperforming loans to total loans receivable | 0.08 | % | 0.11 | % | 0.15 | % | 0.19 | % | 0.17 | % | |||||
| Allowance for loan losses to nonperforming loans | 1694.0 | % | 1113.6 | % | 837.5 | % | 633.7 | % | 754.6 | % | |||||
| Allowance for loan losses to total loans receivable | 1.29 | % | 1.22 | % | 1.25 | % | 1.24 | % | 1.25 | % | |||||
| Gross charge-offs | $ | 124 | $ | 242 | $ | 196 | $ | 22 | $ | 34 | |||||
| Gross recoveries | $ | 1 | $ | 4 | $ | 4 | $ | 3 | $ | 2 | |||||
| Net charge-offs to average loans (5) | 0.05 | % | 0.10 | % | 0.09 | % | 0.01 | % | 0.02 | % | |||||
| Capital Ratios (6): | |||||||||||||||
| Tier 1 leverage capital | 11.43 | % | 11.64 | % | 12.00 | % | 11.99 | % | 11.57 | % | |||||
| Common equity Tier 1 risk-based capital | 12.10 | % | 12.74 | % | 13.02 | % | 12.99 | % | 13.24 | % | |||||
| Tier 1 risk-based capital | 12.43 | % | 13.10 | % | 13.40 | % | 13.37 | % | 13.66 | % | |||||
| Total risk-based capital | 14.65 | % | 15.35 | % | 15.70 | % | 15.70 | % | 16.06 | % | |||||
| (1) Core deposits are defined as all deposits excluding BaaS-brokered and time deposits. | |||||||||||||||
| (2) Share and per share amounts are based on total common shares outstanding. | |||||||||||||||
| (3) We calculate book value per share as total shareholders’ equity at the end of the relevant period divided by the outstanding number of our common shares at the end of each period. | |||||||||||||||
| (4) Tangible book value per share is a non-GAAP financial measure. We calculate tangible book value per share as total shareholders’ equity at the end of the relevant period, less goodwill and other intangible assets, divided by the outstanding number of our common shares at the end of each period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets as of any of the dates indicated. As a result, tangible book value per share is the same as book value per share as of each of the dates indicated. | |||||||||||||||
| (5) Annualized calculations. | |||||||||||||||
| (6) Capital ratios are for the Company, Coastal Financial Corporation. |
Non-GAAP Financial Measures
This earnings release contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP.
The following non-GAAP measures are presented to illustrate the impact of provision for loan losses and provision for income taxes on net income and return on average assets.
“Pre-provision, pre-tax return net income” is a non-GAAP measure that excludes the impact of provision for loan losses and provision for income taxes from net income. The most directly comparable GAAP measure is net income.
“Pre-provision, pre-tax return on average assets” is a non-GAAP measure that excludes the impact of provision for loan losses and provision for income taxes from return on average assets. The most directly comparable GAAP measure is return on average assets.
Reconciliations of the GAAP and non-GAAP measures are presented below.
| As of and for the Three Months Ended | |||||||||||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| (Dollars in thousands) | March 31,<br><br><br>2020 | December 31,<br><br><br>2019 | September 30,<br><br><br>2019 | June 30,<br><br><br>2019 | March 31,<br><br><br>2019 | ||||||||||
| Pre-provision, pre-tax return on average assets: | |||||||||||||||
| Total average assets | $ | 1,141,461 | $ | 1,095,343 | $ | 1,031,969 | $ | 1,002,436 | $ | 997,069 | |||||
| Total net income | 2,724 | 3,608 | 3,511 | 3,274 | 2,808 | ||||||||||
| Plus: provision for loan losses | 1,578 | 820 | 637 | 547 | 540 | ||||||||||
| Plus: provision for income taxes | 714 | 947 | 919 | 854 | 741 | ||||||||||
| Total pre-provision, pre-tax net income | $ | 5,016 | $ | 5,375 | $ | 5,067 | $ | 4,675 | $ | 4,089 | |||||
| Pre-provision, pre-tax return on average assets: | 1.77 | % | 1.95 | % | 1.95 | % | 1.87 | % | 1.66 | % |
The following non-GAAP financial measures are presented to illustrate and identify the impact of temporary high rate BaaS deposits on the balance sheet. By removing these temporary deposits to show what the results would have been without them we are providing the investors with the information to better compare results with periods that did not have these temporary deposits. These measures include the following:
“Adjusted return on average assets” is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is return on average assets.
“Adjusted cost of funds” is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is cost of funds.
“Adjusted cost of deposits” is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is cost of deposits.
“Adjusted net interest margin” is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is net interest margin.
“Adjusted noninterest expense to average assets” is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is noninterest expense to average assets.
“Adjusted loans receivable to deposits” is a non-GAAP measure that excludes BaaS-brokered deposits on balance sheet. The most directly comparable GAAP measure is loans receivable to deposits.
The Company also presented comparable earnings information using GAAP financial measures. Reconciliations of the GAAP and non-GAAP measures are presented below.
| As of and for the Three Months Ended | ||||||
|---|---|---|---|---|---|---|
| (Dollars in thousands) | June 30, 2019 | March 31, 2019 | ||||
| Adjusted return on average assets: | ||||||
| Total average assets | $ | 1,002,436 | $ | 997,069 | ||
| Less: average BaaS-brokered deposits | 20,252 | 74,116 | ||||
| Adjusted total average deposits and borrowings | $ | 982,184 | $ | 922,953 | ||
| Total net income | $ | 3,274 | $ | 2,808 | ||
| Less: fees earned on servicing BaaS-brokered deposits | 36 | 78 | ||||
| Adjusted net income | $ | 3,238 | $ | 2,730 | ||
| Adjusted return on average assets: | 1.34 | % | 1.20 | % | ||
| Adjusted cost of funds: | ||||||
| Total average deposits and borrowings | $ | 874,610 | $ | 872,979 | ||
| Less: average BaaS-brokered deposits | 20,252 | 74,116 | ||||
| Adjusted total average deposits and borrowings | $ | 854,358 | $ | 798,863 | ||
| Total interest expense | $ | 1,618 | $ | 1,627 | ||
| Less: interest expense on BaaS-brokered deposits | 116 | 435 | ||||
| Adjusted interest expense | $ | 1,502 | $ | 1,192 | ||
| Adjusted cost of funds: | 0.71 | % | 0.61 | % | ||
| Adjusted cost of deposits: | ||||||
| Total average deposits | $ | 859,516 | $ | 859,135 | ||
| Less: average BaaS-brokered deposits | 20,252 | 74,116 | ||||
| Adjusted total average deposits | $ | 839,264 | $ | 785,019 | ||
| Interest expense on deposits | $ | 1,420 | $ | 1,436 | ||
| Less: interest expense on BaaS-brokered deposits | 116 | 435 | ||||
| Adjusted interest expense on interest bearing deposits | $ | 1,304 | $ | 1,001 | ||
| Adjusted cost of deposits: | 0.63 | % | 0.52 | % | ||
| Adjusted net interest margin: | ||||||
| Total average interest earning assets | $ | 962,867 | $ | 958,547 | ||
| Less: average BaaS-brokered deposits held in cash | 20,252 | 74,116 | ||||
| Adjusted total average interest earning assets | $ | 942,615 | $ | 884,431 | ||
| Total net interest income | $ | 10,186 | $ | 9,767 | ||
| Less: interest income earned BaaS-brokered deposits held in cash | 116 | 435 | ||||
| Plus: interest expense on BaaS-brokered deposits | 116 | 435 | ||||
| Adjusted net interest income | 10,186 | 9,767 | ||||
| Adjusted net interest margin: | 4.38 | % | 4.48 | % | ||
| Adjusted noninterest expense to average assets: | ||||||
| Total average assets | $ | 1,002,436 | $ | 997,069 | ||
| Less: average BaaS-brokered deposits | 20,252 | 74,116 | ||||
| Adjusted total average assets | $ | 982,184 | $ | 922,953 | ||
| Total noninterest expense | $ | 7,643 | $ | 7,662 | ||
| Adjusted noninterest expense to average assets: | 3.12 | % | 3.37 | % | ||
| Adjusted loans receivable to deposits (1): | ||||||
| Total loans receivable | n/a | $ | 791,072 | |||
| Total deposits | n/a | 976,496 | ||||
| Less: BaaS-brokered deposits | n/a | 164,604 | ||||
| Total deposits, less BaaS-brokered deposits | n/a | $ | 811,892 | |||
| Adjusted loans receivable to deposits: | n/a | 97.44 | % | |||
| (1) Adjusted loans receivable to deposits is only presented for periods that include atypically large BaaS-brokered deposits as of the end of the period presented. |
APPENDIX A
As of March 31, 2020
We have a diversified loan portfolio, representing a wide variety of industries. The three largest categories of our loans are commercial real estate, commercial and industrial, and construction, land and land development loans. Together they represent $885.8 million in outstanding loan balances or 88.0% of total gross loans outstanding. When combined with $159.1 million in unused commitments the total of these three categories is $1.044 billion or 88.1% of total outstanding loans and loan commitments.
Commercial real estate represents the largest segment of our loans, comprising 63.9% of our total balance of outstanding loans as of March 31, 2020. Unused commitments to extend credit represents an additional $11.3 million, the combined total exposure in commercial real estate loans represents $654.7 million or 55.2% of our total outstanding loans and loan commitments.
The following table summarizes our exposure by industry for our commercial real estate portfolio as of March 31, 2020:
| (Dollars in thousands) | Outstanding Balance | Available Loan Commitments | Total Exposure | % of Total Loans<br><br><br>(Outstanding Balance & Available Commitment) | Average Loan Balance | Number of Loans | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Hotel/Motel | $ | 99,168 | $ | 1,092 | $ | 100,260 | 8.5 | % | $ | 3,673 | 27 | ||
| Apartments | 76,536 | 2,000 | 78,536 | 6.6 | 1,215 | 63 | |||||||
| Mixed use | 71,599 | 3,482 | 75,081 | 6.3 | 833 | 86 | |||||||
| Office | 72,832 | 892 | 73,724 | 6.2 | 837 | 87 | |||||||
| Retail | 69,133 | 55 | 69,188 | 5.8 | 922 | 75 | |||||||
| Convenience store | 64,678 | 700 | 65,378 | 5.5 | 1,702 | 38 | |||||||
| Warehouse | 58,767 | 50 | 58,817 | 5.0 | 1,130 | 52 | |||||||
| Manufacturing | 36,344 | 593 | 36,937 | 3.1 | 1,010 | 36 | |||||||
| Groups < 2.0% of total | 94,431 | 2,387 | 96,818 | 8.2 | 1,243 | 76 | |||||||
| Total | $ | 643,488 | $ | 11,251 | $ | 654,739 | 55.2 | % | $ | 1,192 | 540 |
Commercial and industrial loans comprise 12.2% of our total balance of outstanding loans as of March 31, 2020. Unused commitments to extend credit represents an additional $74.9 million, the combined total exposure in commercial and industrial loans represents $197.6 million or 16.7% of our total outstanding loans and loan commitments.
The following table summarizes our exposure by industry for our commercial and industrial loan portfolio as of March 31, 2020:
| (Dollars in thousands) | Outstanding Balance | Available Loan Commitments | Total Exposure | % of Total Loans<br><br><br>(Outstanding Balance & Available Commitment) | Average Loan Balance | Number of Loans | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Construction/Contractor Services | $ | 17,376 | $ | 22,432 | $ | 39,808 | 3.4 | % | $ | 124 | 140 | ||
| Capital Call Lines | 11,506 | 20,744 | 32,250 | 2.7 | 1,151 | 10 | |||||||
| Manufacturing | 12,955 | 7,310 | 20,265 | 1.7 | 216 | 60 | |||||||
| Medical / Dental / Other Care | 16,185 | 1,656 | 17,841 | 1.5 | 225 | 72 | |||||||
| Financial Institutions | 14,400 | - | 14,400 | 1.2 | 4,800 | 3 | |||||||
| Family and Social Services | 11,746 | 1,764 | 13,510 | 1.1 | 839 | 14 | |||||||
| Groups < 1.0% of total | 38,499 | 21,033 | 59,532 | 5.0 | 123 | 314 | |||||||
| Total | $ | 122,667 | $ | 74,939 | $ | 197,606 | 16.7 | % | $ | 200 | 613 |
Construction, land and land development loans comprise 11.9% of our total balance of outstanding loans as of March 31, 2020. Unused commitments to extend credit represents an additional $72.9 million, the combined total exposure in construction, land and land development loans represents $192.5 million or 16.2% of our total outstanding loans and loan commitments.
The following table details our exposure for our construction, land and land development portfolio as of March 31, 2020:
| (Dollars in thousands) | Outstanding Balance | Available Loan Commitments | Total Exposure | % of Total Loans<br><br><br>(Outstanding Balance & Available Commitment) | Average Loan Balance | Number of Loans | |||||||
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
| Commercial construction | $ | 63,073 | $ | 53,921 | $ | 116,994 | 9.9 | % | $ | 2,523 | 25 | ||
| Residential construction | 28,597 | 14,389 | 42,986 | 3.6 | 894 | 32 | |||||||
| Developed land loans | 14,482 | 693 | 15,175 | 1.3 | 402 | 36 | |||||||
| Undeveloped land loans | 9,540 | 822 | 10,362 | 0.9 | 502 | 19 | |||||||
| Land development | 3,976 | 3,052 | 7,028 | 0.6 | 497 | 8 | |||||||
| Total | $ | 119,668 | $ | 72,877 | $ | 192,545 | 16.2 | % | $ | 997 | 120 |