Coastal Financial Corporation Announces Second Quarter 2020 Results

Everett, Washington, UNITED STATES


Quarter Two 2020 Highlights:

  • Net income totaled $3.7 million for the quarter ended June 30, 2020, or $0.30 per diluted common share, an increase of 12.2% from $3.3 million, or $0.27 per diluted common share, for the quarter ended June 30, 2019. 
  • A $1.9 million provision for loan losses was recorded during the quarter ended June 30, 2020, due to economic uncertainties from the COVID-19 pandemic, up from $1.6 million during the quarter ended March 31, 2020.
  • Asset growth of $494.9 million, or 41.8%, to $1.68 billion for the quarter ended June 30, 2020, compared to $1.18 billion at March 31, 2020. 
  • Total loans receivable, net of deferred loan fees, grew 44.0% during the quarter ended June 30, 2020 to $1.45 billion compared to $1.01 billion at March 31, 2020.  Includes $427.4 million in Paycheck Protection Program (“PPP”) loans originated in the second quarter of 2020.  Loans receivable, net of PPP loans, grew at an annualized rate of 5.8%, or $14.5 million, during the quarter ended June 30, 2020.
  • Total deposits increased 30.0% during the quarter ended June 30, 2020 to $1.31 billion, compared to $1.01 billion at March 31, 2020. 
  • Utilized the Paycheck Protection Program Liquidity Facility (“PPPLF”) to fund PPP loans.  $190.2 million loans pledged and borrowed at June 30, 2020.
  • Opened 15th branch in Arlington, Washington.

EVERETT, Wash., July 27, 2020 (GLOBE NEWSWIRE) -- 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 June 30, 2020.  Net income for the second quarter of 2020 was $3.7 million, or $0.30 per diluted common share, compared with net income of $2.7 million, or $0.22 per diluted common share, for the first quarter of 2020, and $3.3 million, or $0.27 per diluted common share, for the quarter ended June 30, 2019. 

“During a period in which businesses and individuals had to contend with the impact of a global COVID-19 pandemic on the economy and on their personal lives, I am proud of the accomplishments and achievements of our team who have remained positive, flexible, and relentlessly focused on serving our communities and continued growth of our Company. Despite the pandemic related disruptions that continued through the quarter, we finished the second quarter of 2020 with net income of $3.7 million, which includes $1.9 million in loan loss provision expense primarily in response to the economic uncertainties of the pandemic.  As a preferred Small Business Administration (“SBA”) lender, we have funded $438.1 million gross funds in financial assistance to existing and new small business customers via the PPP as provided in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which represents 2,526 loans, impacting nearly 40,000 employees in our communities as of June 30, 2020.  We placed special emphasis on small companies, with 98% of the loans funded going to companies with fewer than 100 employees.  In addition, we continue to develop our CCBX division and added three new customers for the quarter, 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.

“During this uncertain time, we remain committed to our customers and, pursuant to federal guidance, have deferred or modified payments for $207.2 million in loans for our customers, representing 215 loans, remaining as of June 30, 2020.  This proactive approach to restructuring payments helped provide financial relief within our communities.

“We remain 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.  As new guidance emerges, the Company is enhancing measures already in place to protect the health and safety of its employees and continues to successfully employ remote work arrangements to the fullest extent possible. 

“We remain focused on closely analyzing higher risk segments within the loan portfolio, monitoring economic conditions, and are working diligently to proactively manage the risks and uncertainties associated with these unprecedented times.  The Coastal team is dedicated to our customers and to working within our communities to provide assistance through traditional banking services and are also committed to growing and developing our CCBX division, which provides an alternative means of income for the Company.”

Results of Operations

During the quarter ended June 30, 2020, significant focus was placed on helping the small businesses in our communities through the PPP.  These loans have had a significant impact on our financial statements for the quarter ended June 30, 2020 and will continue to impact our results in the future.  Throughout this earnings release, we will address the impact of these loans including borrowings received through PPPLF to help fund these loans and to aid in liquidity, increased customer deposit accounts from unused disbursements, and earnings and expenses related to these activities.  Any estimated adjusted ratios that exclude the impact of this activity are non-GAAP measures.  For more information about non-GAAP financial measures, see the end of this earnings release.

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

  Loan Size 
  As of June 30, 2020 
  $0.00 -
$150,000.00
 $150,000.01 -
$350,000.00
 $350,000.01 -
$2,000,000.00
 > 2,000,000.01 Totals 
(Dollars in thousands; unaudited)             
Principal outstanding:                
Existing customer $37,674 $29,561 $86,232 $52,299 $205,766 
New customer  48,914  42,205  82,940  58,252  232,311 
Total principal outstanding  86,588  71,766  169,172  110,551  438,077 
Deferred fees outstanding  (3,729) (3,057) (4,247) (940) (11,973)
Deferred costs outstanding  940  215  161  18  1,334 
Net deferred fees $(2,789)$(2,842)$(4,086)$(922)$(10,639)
Total principal, net of deferred fees $83,799 $68,924 $165,086 $109,629 $427,438 
Weighted average maturity (years)  1.91  1.83  1.83  1.81  1.83 
Number of loans:                
Existing customer  768  128  108  13  1,017 
New customer  1,185  190  116  18  1,509 
Total loan count  1,953  318  224  31  2,526 
Percent of total  77.3% 12.6% 8.9% 1.2% 100.0%
                 

Net interest income was $14.0 million for the quarter ended June 30, 2020, an increase of 23.1% from $11.4 million for the quarter ended March 31, 2020, and an increase of 37.4% from $10.2 million for the quarter ended June 30, 2019.   The increase compared to the prior quarter and prior year’s second quarter is largely related to increased interest income resulting from our loan growth.  This loan growth includes $438.1 million in PPP loans and $2.8 million in related interest income for the quarter ended June 30, 2020, combined with lower interest expense resulting from a decrease in interest rates paid on interest bearing deposits and an increase in noninterest bearing deposits from cash advanced on PPP loans being placed in noninterest bearing demand accounts.  Interest expense was $1.4 million as of June 30, 2020, a $323,000 decrease from the period ended March 31, 2020 and a $185,000 decrease from the period ended June 30, 2019.  Partially offsetting this decrease is a $228,000 decrease in interest earned on deposits with other banks compared to March 31, 2020, and a $522,000 decrease compared to June 30, 2019, largely as a result of lower rates.  Deposits held with other banks increased $32.6 million as of June 30, 2020, compared to March 31, 2020, as a result of the PPPLF borrowings, which were obtained to provide liquidity as PPP funds in deposit accounts are withdrawn.  Net deferred fees on PPP loans will be earned over the life of the loan, as a yield adjustment.  Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods. 

Net interest margin for the quarter ended June 30, 2020 was 3.78%, a 37 basis point decrease from 4.15% for the quarter ended March 31, 2020 and a 46 basis point decrease from 4.24% for the quarter ended June 30, 2019. The decrease over the prior quarter and second quarter in the previous year was largely due to the originating and holding of PPP loans and lower interest rates on all other loans.  Contributing to the decrease in net interest margin were PPP loans, which account for an average of $335.2 million in gross loans for the quarter ended June 30, 2020, and bear a contractual interest rate of 1.0%, and yield 3.31% after considering the amortization of loan fees, for the quarter ended June 30, 2020.   Cost of funds decreased 29 basis points in the quarter ended June 30, 2020 compared to the quarter ended March 31, 2020 and decreased 33 basis points from the quarter ended June 30, 2019.  Proceeds from the PPP loans were largely deposited into noninterest bearing accounts, which helped reduce our cost of funds.  In addition, the Federal Open Market Committee (“FOMC”) lowered the Fed Funds rates five times for a total decrease of 2.25% since June 2019, which has impacted the rates paid on deposits.  Interest rates may decline further, or may persist at current low levels, and may continue to impact the Company's net interest margin.

During the quarter ended June 30, 2020, the average balance of total loans receivable increased by $368.4 million, to $1.33 billion, compared to $966.6 million for the quarter ended March 31, 2020, largely as a result of PPP loans.  PPP loans bear a contractual interest rate of 1.0%, yielding approximately 3.31%, after considering the amortization of loan fees.  The average balance of total loans receivable increased by $522.3 million, compared to $812.7 million for the same quarter one year ago, due to overall growth in the loan portfolio, combined with the aforementioned growth in PPP loans. Total loan yield for the quarter ended June 30, 2020 was 4.57%, compared to 5.25% for the quarter ended March 31, 2020, and 5.39% for the quarter ended June 30, 2019. The reduction in loan yield is a result of the lower yielding PPP loans combined with the reduction in FOMC rates.  PPP loans reduced the loan yield* by 37 basis points for the quarter ended June 30, 2020.

Contractual loan yields approximated 3.91% for the quarter ended June 30, 2020, compared to 5.08% for the quarter ended March 30, 2020, and 5.23% for the quarter ended June 30, 2019. During the quarter ended June 30, 2020, the average balance of PPP loans was $335.2 million.  These loans bear a contractual rate of 1.0%, which negatively impacted the average contractual yield on loans.  Excluding PPP loans and their related earned loan fees, the contractual yield on loans approximated 4.841%.  Also contributing to the reduction in contractual yield was the reduction in rates by the FOMC which has resulted in lower rates on new and renewing loans as well as loans tied to indexes.  Although we have rate floors in place for $349.1 million, or 23.9%, 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 June 30, 2020 were 0.35%, a decrease of 29 basis points from 0.64% for the quarter ended March 31, 2020, and a 31 basis point decrease from the quarter ended June 30, 2019.  Deposit costs and balances were favorably impacted from PPP loan proceeds being deposited into noninterest or low interest-bearing accounts.  During the quarter ended June 30, 2020, PPP proceeds directly transferred into new or existing customer deposit accounts approximated $327.6 million.  These deposits have been, and continue to be, gradually withdrawn as customers use the funds.  Market conditions for deposits continued to be competitive during the quarter ended June 30, 2020; however we lowered many rates, with most changes to our interest-bearing demand deposit and certificate of deposit rates effective at the start of second quarter of 2020, which helped decrease deposit costs in the current quarter.

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* A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.

Return on average assets (“ROA”) was 0.96% for the quarter ended June 30, 2020 compared to 0.96% and 1.31% for the quarters ended March 31, 2020 and June 30, 2019, respectively.  ROA was impacted in the current and prior quarter by increased provision for loan losses due to loan growth and in response to the economic uncertainties of the COVID-19 pandemic. Pre-tax, pre-provision ROA* was 1.72% for the quarter ended June 30, 2020 and 1.77% for the quarter ended March 31, 2020, compared to 1.87% for the quarter ended June 30, 2019.

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.  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  Six months ended 
(unaudited) June 30,
2020
 March 31,
2020
 December 31, 2019 September 30, 2019 June 30,
2019
  June 30,
2020
 June 30,
2019
 
                        
Return on average assets (1)  0.96% 0.96% 1.31% 1.35% 1.31%  0.96% 1.23%
Return on average equity (1)  11.37% 8.66% 11.66% 11.72% 11.45%  10.03% 10.86%
Pre-tax, pre-provision return on average assets (1)(2)  1.72% 1.77% 1.95% 1.95% 1.87%  1.74% 1.77%
Yield on earnings assets (1)  4.16% 4.79% 4.90% 4.94% 4.92%  4.43% 4.87%
Yield on loans receivable (1)  4.57% 5.25% 5.36% 5.36% 5.39%  4.85% 5.39%
Yield on loans receivable, as adjusted (1)(2)  4.94%n/a n/a n/a n/a   5.10%n/a 
Contractual yield on loans receivable, excluding earned fees (1)  3.91% 5.08% 5.15% 5.24% 5.23%  4.40% 5.23%
Contractual yield on loans receivable, excluding earned fees, as adjusted (1)(2)  4.84%n/a n/a n/a n/a   4.96%n/a 
Cost of funds (1)  0.41% 0.70% 0.70% 0.72% 0.74%  0.54% 0.75%
Cost of deposits (1)  0.35% 0.64% 0.63% 0.64% 0.66%  0.48% 0.67%
Net interest margin (1)  3.78% 4.15% 4.26% 4.29% 4.24%  3.93% 4.19%
Noninterest expense to average assets (1)  2.34% 3.18% 2.90% 2.98% 3.06%  2.71% 3.09%
Efficiency ratio  57.66% 64.26% 59.86% 60.46% 62.05%  60.80% 63.59%
Loans receivable to deposits  110.77% 100.01% 97.02% 94.78% 97.39%  110.77% 97.39%
                        
(1) Annualized calculations shown for quarterly and six month periods presented.        
(2) A reconciliation of the non-GAAP measures are set forth at the end of this earnings release. 
  

Noninterest income was $1.5 million in the second quarter of 2020, a decrease of $1.2 million from $2.7 million at the first quarter of 2020, and a decrease of $612,000 from $2.1 million in the second quarter of 2019.  The decrease was primarily due to a $983,000 decrease 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 $104,000 decrease in BaaS fees contributed to the decrease when compared to the quarter ended March 31, 2020.  The $612,000 decrease over the quarter ended June 30, 2019 was largely due to a $403,000 decrease in loan referral fees, a $132,000 decline in gain on sale of loans and a $104,000 decrease in deposit service changes and fees.  Amendments to partner agreements and longer implementation periods negatively impacted BaaS fees in the current quarter.  As of June 30, 2020, there were three active CCBX partners, two in the friends and family trials, two in onboarding/implementation, three signed letters of intent and a solid pipeline that may lead us to onboarding up to two new partners per quarter.  Some amendments were made for CCBX partners that were beneficial to the long-term relationship, resulting in a slight shift of revenue from the quarter ended June 30, 2020, to a future period. As partnerships move to active status and develop their customer base, it is expected that BaaS fees will increase.  The decline in deposit service fees over June 30, 2019 is largely due to a reduction in nonsufficient funds and overdraft charges on personal and business accounts as consumer activity decreased due to the COVID-19 pandemic and economic shut-down.

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* A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.

Total noninterest expense for the second quarter of 2020 was $8.9 million compared to $9.0 million for the preceding quarter and increased 17.0% from $7.6 million from the second quarter of 2019. Noninterest expense variances for the quarter ended June 30, 2020 as compared to the quarter ended March 31, 2020 include a $468,000 decrease in salaries and employee benefits, which is largely related to the deferred loan costs recorded as salary offsets from originating PPP loans.  The increased expenses for the current quarter compared to the comparable quarter one year ago were largely due to increases in salary expenses related to hiring staff for our BaaS CCBX division and additional staff for our ongoing banking growth initiatives, along with temporary additions to help with operations to originate PPP loans.  Legal and professional fees increased $151,000 and $181,000 in the current quarter over the quarters ended March 31, 2020 and June 30, 2019, respectively.  The increase is associated with BaaS activities through CCBX operations and regular costs related to legal and accounting work related to reporting.  In the quarter ended June 30, 2020, other expenses increased $260,000 and $358,000 over the quarters ended March 31, 2020 and June 30, 2019, respectively, largely as a result of increased dues and memberships, subscription and software license expense of $40,000 and $138,000 at March 31, 2020 and June 20, 2019, respectively. Also contributing to the increase in other expenses over March 31, 2020 and June 30, 2019 is a $103,000 and $39,000 increase, respectively, in the provision for off balance sheet commitments.

The provision for income taxes was $967,000 at June 30, 2020, a $253,000 increase compared to $714,000 for the first quarter of 2020 and a $113,000 increase compared to $854,000 for the second quarter of 2019, both as a result of increased 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 $494.9 million, or 41.8%, to $1.68 billion at June 30, 2020 compared to $1.18 billion at March 31, 2020.  The primary cause of the increase was $440.0 million in increased loans receivable (net of allowance for loan losses), largely from PPP loans, combined with a $44.9 million increase in cash and due from banks and interest earning deposits with other banks.  In the quarter ended June 30, 2020, total assets increased $550.0 million, or 48.8%, compared to $1.13 billion at December 31, 2019.  This increase is largely the result of $504.7 million increase in net loans receivable, combined with a $46.4 million increase in cash and due from banks and interest earning deposits with other banks.

Total loans receivable increased $508.0 million from $939.1 million at December 31, 2019 to $1.45 billion at June 30, 2020, and $601.7 million from $845.4 million at June 30, 2019.  The growth in loans receivable over the quarter ended December 31, 2019 was due primarily to an increase of $440.1 million in commercial and industrial loans, which includes $438.1 million in PPP loans for small business owners as prescribed in the CARES Act, combined with $64.9 million increase in commercial real estate loans.  Partially offsetting that increase is $10.9 million in additional net deferred loan origination fees, which includes $10.6 million in unearned fees on PPP loans, which are earned over the life of those loans, and have a maturity term of two to five years.  The increase over the quarter ended June 30, 2019 was due to a $450.4 million increase in commercial and industrial loans, $120.6 million in commercial real estate loans, $22.5 million in residential real estate loans, and $17.8 million in construction, land and land development loans.  Partially offsetting the increase in net loans receivable is an additional $11.5 million in net deferred loan origination fees, including $10.6 million in net unearned fees on PPP loans.

The PPP has been extended to August 8, 2020, and we will continue to accept and process requests for existing and new customers for the duration of the program; however, the volume of loans has significantly declined since the program began.  Guidance is being issued and we have begun accepting applications from customers for loan forgiveness.  It is still uncertain what the final forgiveness criteria will be, but we anticipate that the third quarter of 2020 will be busy as we migrate to the forgiveness stage of the PPP.  Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods.   Customers with two-year loans are also able to request that their PPP loan be extended to a five year maturity, which we anticipate may be a good option for customers not eligible for forgiveness.

The following table shows the number of PPP loans originated through July 22, 2020:

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The following table summarizes the loan portfolio at the periods indicated.

  As of 
  June 30, 2020  December 31, 2019  June 30, 2019 
(Dollars in thousands; unaudited) Balance % to Total  Balance % to Total  Balance % to Total 
                      
Commercial and industrial loans:                     
PPP loans $438,077  30.0% $-  0.0% $-  0.0%
All other commercial & industrial loans  113,473  7.8   111,401  11.8   101,110  11.9 
Real estate loans:                     
Construction, land and land development loans  102,422  7.0   97,034  10.3   84,666  10.0 
Residential real estate loans  122,949  8.4   115,011  12.2   100,446  11.9 
Commercial real estate loans  678,335  46.5   613,398  65.2   557,692  65.8 
Consumer and other loans  4,735  0.3   4,214  0.5   2,893  0.4 
Gross loans receivable  1,459,991  100.0%  941,058  100.0%  846,807  100.0%
Net deferred origination fees - PPP loans  (10,639)     -      -    
Net deferred origination fees - Other loans  (2,208)     (1,955)     (1,364)   
Loans receivable $1,447,144     $939,103     $845,443    
                      

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 $338.5 million, or 35.0%, to $1.31 billion at June 30, 2020 from $968.0 million at December 31, 2019.  The increase is largely due to a $349.7 million increase in core deposits.  A portion of the funds from PPP loans were deposited directly into existing or new deposit accounts, thus increasing deposit account balances.  These deposits have been, and continue to be, gradually withdrawn as the customers use the funds.  During the quarter ended June 30, 2020, noninterest bearing deposits increased $192.6 million, or 51.9%, to $563.8 million from $371.2 million at December 31, 2019.  NOW and money market accounts increased $138.5 million, savings accounts increased $18.7 million, BaaS-brokered deposits increased $2.9 million and time deposits decreased $14.2 million.  Total deposits increased $438.3 million, or 50.5%, compared to $868.1 million at June 30, 2019.  The increase is primarily in core deposits and is the result of expanding and growing banking relationships, combined with the PPP related deposits remaining in accounts at June 30, 2020. Noninterest bearing deposits increased $247.9 million, or 78.5%, from $315.9 million at June 30, 2019.  NOW and money market accounts increased $188.6 million, savings accounts increased $20.9 million, BaaS-brokered deposits increased $12.4 million and time deposits decreased $31.5 million.  Efforts to retain and grow core deposits are evidenced by the high ratios in these categories when compared to total deposits. 

The following table summarizes the deposit portfolio at the periods indicated.

  As of 
  June 30, 2020  December 31, 2019  June 30, 2019 
(Dollars in thousands, unaudited) Balance % to Total  Balance % to Total  Balance % to Total 
                      
Demand, noninterest bearing $563,794  43.2% $371,243  38.4% $315,890  36.4%
NOW and money market  576,376  44.1   437,908  45.2   387,758  44.7 
Savings  72,045  5.5   53,365  5.5   51,120  5.9 
Total core deposits  1,212,215  92.8   862,516  89.1   754,768  87.0 
BaaS-brokered deposits  26,529  2.0   23,586  2.4   14,166  1.6 
Time deposits less than $250,000  43,900  3.4   51,644  5.4   62,303  7.2 
Time deposits $250,000 and over  23,783  1.8   30,213  3.1   36,907  4.2 
Total deposits $1,306,427  100.0% $967,959  100.0% $868,144  100.0%
                      

Funds from PPP loans were frequently deposited directly into existing or new customer accounts during the quarter ended June 30, 2020.  This includes approximately 842 new customer deposit relationships that were established as a result of funding PPP loans for business owners in the communities we serve.  The time and effort spent working with these new customers throughout the PPP process has resulted in new relationships that the Company will work to retain into the future. 

Distributions from PPP loans were largely directly deposited into new or existing deposit accounts as illustrated below:

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To bolster the effectiveness of the SBA PPP loan program, the Federal Reserve is supplying liquidity to participating financial institutions through non-recourse term financing secured by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their employees on the payroll and pay other allowed business expenses. The PPPLF extends low cost borrowing lines, 0.35% interest rate, to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. Borrowings are required to be paid down as the pledged PPP loans are paid down.  As of June 30, 2020, there was $190.2 million outstanding in PPPLF advances and pledged PPP loans.

The Federal Home Loan Bank (“FHLB”) allows us to borrow against our line of credit, which is collateralized by certain loans. As of June 30, 2020, we borrowed a total of $25.0 million in FHLB long term advances.  This includes a $10.0 million advance with a remaining term of 2.75 years and $15.0 million advance with a 4.75 years remaining term.  These advances provide an alternative and stable source of funding for loan demand.  Although there are no immediate plans to borrow additional funds, additional FHLB borrowing capacity of $63.7 million was available under this arrangement as of June 30, 2020.

Total shareholders’ equity increased $6.8 million since December 31, 2019.  The increase in shareholders’ equity was primarily due to $6.4 million in net earnings for the six months ended June 30, 2020. 

Capital Ratios

The Company and the Bank remain well capitalized at June 30, 2020, as summarized in the following table. 

Capital Ratios:Coastal Community Bank  Coastal Financial Corporation  Financial Institution Basel III Regulatory Guidelines 
(unaudited)           
Tier 1 leverage capital 9.61%  9.38%  5.00%
Common Equity Tier 1 risk-based capital 12.86%  12.34%  6.50%
Tier 1 risk-based capital 12.86%  12.67%  8.00%
Total risk-based capital 14.11%  14.88%  10.00%
            

As previously disclosed, during the quarter ended March 31, 2020, the Company contributed $7.5 million in capital to the Bank due to the volatile economic environment.  No additional contributions have been made; however, the Company could downstream additional funds to the Bank in the future, if necessary. 

Asset Quality

The allowance for loan losses was $14.8 million and 1.03% of loans receivable at June 30, 2020 compared to $11.5 million and 1.22% at December 31, 2019 and $10.4 million and 1.24% at June 30, 2019.  At June 30, 2020, there was $427.4 million in PPP loans, net of deferred fees, which are 100% guaranteed by the SBA.  Excluding PPP loans, the allowance for loan losses to loans receivable* would be 1.46% for the quarter ended June 30, 2020.  Provision for loan losses totaled $1.9 million for the current quarter, $1.6 million for the preceding quarter, and $547,000 for the same quarter in the prior year. Net charge-offs totaled $8,000 for the quarter ended June 30, 2020, compared to $123,000 for the quarter ended March 31, 2020 and $19,000 net charge-offs for the quarter ended June 30, 2019.  

The Company’s provision for loan losses of $1.9 million and $1.6 million during the quarters ended June 30, 2020 and March 31, 2020, respectively, 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 June 30, 2020, our nonperforming assets were $4.4 million, or 0.26% of total assets, compared to $1.0 million, or 0.09%, of total assets at December 31, 2019, and $1.6 million, or 0.16%, of total assets at June 30, 2019.  Nonperforming assets increased $3.4 million during the quarter ended June 30, 2020, with the addition of two loans. 

Management is actively monitoring the loan portfolio to identify borrowers experiencing difficulties with repayment and are proactively working with them to reduce potential losses through the prudent use of PPP loans, deferrals, and modifications in accordance with regulatory guidelines.  There were no repossessed assets or other real estate owned at June 30, 2020.  Our nonperforming loans to loans receivable ratio was 0.31% at June 30, 2020, compared to 0.11% at December 31, 2019.  Commercial and industrial nonaccrual loans totaled $689,000 at June 30, 2020 and consisted of three lending relationships.  During the second quarter of 2020, there was $11,000 in charge-offs on one nonperforming loan and $3,000 in recoveries.  Two loans moved to nonperforming status, both non-COVID-19 pandemic related, during the second quarter, which includes $3.3 million in construction, land and land development loans and $413,000 in commercial real estate loans.  The addition of these loans to nonperforming status in the second quarter was a result of our proactive monitoring program and review activities and was partially offset by principal reductions and the aforementioned charge-off and resulted in an overall increase in our ratios of nonperforming loans and nonperforming assets to total assets compared to December 31, 2019.

Credit quality has remained stable as of June 30, 2020, as demonstrated by the low level of charge-offs and nonperforming loans.  The short and long-term economic impact of the COVID-19 pandemic, trade issues, political gridlock, and decline in oil prices is unknown; however, the Company remains diligent in its efforts to communicate and proactively work with borrowers to help mitigate potential credit deterioration.

_______________
* A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.

Pursuant to federal guidance, the Company deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic and economic shutdown.  At June 30, 2020, the Company had 215 loans, or $207.2 million, outstanding with deferred or modified payments.   Additional information on these loans can be found in Appendix A.

The following table details the Company’s nonperforming assets for the periods indicated.

  As of 
  June 30, December 31, June 30, 
(Dollars in thousands, unaudited) 2020 2019 2019 
           
Nonaccrual loans:          
Commercial and industrial loans $689 $965 $1,579 
Real estate:          
Construction, land and land development  3,270  -  - 
Residential  63  65  69 
Commercial real estate  413  -  - 
Total nonaccrual loans  4,435  1,030  1,648 
           
Accruing loans past due 90 days or more:          
Total accruing loans past due 90 days or more  -  -  - 
Total nonperforming loans  4,435  1,030  1,648 
Other real estate owned  -  -  - 
Repossessed assets  -  -  - 
Total nonperforming assets $4,435 $1,030 $1,648 
Troubled debt restructurings, accruing  -  -  - 
Total nonperforming loans to loans receivable  0.31% 0.11% 0.19%
Total nonperforming assets to total assets  0.26% 0.09% 0.16%
           

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 $1.6 billion community bank that the Bank operates provides service through 15 branches in Snohomish, Island, and King Counties, the Internet and its mobile banking application.  The Bank provides select partners with BaaS through its CCBX Division.  To learn more about Coastal visit www.coastalbank.com.

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, our Quarterly Report on Form 10-Q for the most recent quarter, 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
  June 30,  March 31,  December 31, 
  2020  2020  2019 
Cash and due from banks $26,510  $14,124  $16,555 
Interest earning deposits with other banks  147,666   115,112   111,259 
Investment securities, available for sale, at fair value  20,448   15,469   28,360 
Investment securities, held to maturity, at amortized cost  3,870   4,290   4,350 
Other investments  5,951   5,723   4,505 
Loans receivable  1,447,144   1,005,180   939,103 
Allowance for loan losses  (14,847)  (12,925)  (11,470)
Total loans receivable, net  1,432,297   992,255   927,633 
Premises and equipment, net  16,668   14,195   13,108 
Operating lease right-of-use assets  7,635   8,228   8,493 
Accrued interest receivable  5,944   3,014   2,980 
Bank-owned life insurance, net  6,981   6,931   6,882 
Deferred tax asset, net  2,721   2,735   2,743 
Other assets  2,265   1,995   1,658 
Total assets $1,678,956  $1,184,071  $1,128,526 
             
LIABILITIES AND SHAREHOLDERS EQUITY
LIABILITIES            
Deposits $1,306,427  $1,005,062  $967,959 
Federal Home Loan Bank advances  24,999   24,999   10,000 
Paycheck Protection Program Liquidity Facility  190,156   -   - 
Subordinated debt, net  9,986   9,982   9,979 
Junior subordinated debentures, net  3,584   3,583   3,583 
Deferred compensation  919   947   974 
Accrued interest payable  312   310   308 
Operating lease liabilities  7,831   8,419   8,679 
Other liabilities  3,765   3,603   2,871 
Total liabilities  1,547,979   1,056,905   1,004,353 
             
SHAREHOLDERS’ EQUITY            
Common stock  87,309   87,166   86,983 
Retained earnings  43,617   39,946   37,222 
Accumulated other comprehensive income (loss), net of tax  51   54   (32)
Total shareholders’ equity  130,977   127,166   124,173 
Total liabilities and shareholders’ equity $1,678,956  $1,184,071  $1,128,526 
             

COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts; unaudited)

 Three months ended 
 June 30, March 31, June 30, 
 2020 2020 2019 
INTEREST AND DIVIDEND INCOME         
Interest and fees on loans$15,154 $12,627 $10,917 
Interest on interest earning deposits with other banks 130  358  652 
Interest on investment securities 53  119  160 
Dividends on other investments 89  16  75 
Total interest and dividend income 15,426  13,120  11,804 
INTEREST EXPENSE         
Interest on deposits 1,096  1,554  1,420 
Interest on borrowed funds 337  202  198 
Total interest expense 1,433  1,756  1,618 
Net interest income 13,993  11,364  10,186 
PROVISION FOR LOAN LOSSES 1,930  1,578  547 
Net interest income after provision for loan losses 12,063  9,786  9,639 
NONINTEREST INCOME         
Deposit service charges and fees 677  723  781 
BaaS fees 475  579  502 
Loan referral fees 70  1,053  473 
Mortgage broker fees 152  162  111 
Sublease and lease income 31  30  10 
Gain on sales of loans, net -  -  132 
Other 115  124  123 
Total noninterest income 1,520  2,671  2,132 
NONINTEREST EXPENSE         
Salaries and employee benefits 5,215  5,683  4,529 
Occupancy 933  927  930 
Data processing 621  551  499 
Director and staff expenses 187  270  217 
Excise taxes 262  203  180 
Marketing 116  112  108 
Legal and professional fees 474  323  293 
Federal Deposit Insurance Corporation assessments 74  70  134 
Business development 48  125  96 
Other 1,015  755  657 
Total noninterest expense 8,945  9,019  7,643 
Income before provision for income taxes 4,638  3,438  4,128 
PROVISION FOR INCOME TAXES 967  714  854 
NET INCOME$3,671 $2,724 $3,274 
          
Basic earnings per common share$0.31 $0.23 $0.28 
Diluted earnings per common share$0.30 $0.22 $0.27 
Weighted average number of common shares outstanding:         
Basic 11,917,394  11,909,248  11,895,026 
Diluted 12,190,284  12,208,175  12,202,197 
          

COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts; unaudited)

 Six months ended 
       
 June 30, 2020 June 30, 2019 
INTEREST AND DIVIDEND INCOME      
Interest and fees on loans$27,781 $21,336 
Interest on interest earning deposits with other banks 488  1,460 
Interest on investment securities 172  313 
Dividends on other investments 105  89 
Total interest and dividend income 28,546  23,198 
INTEREST EXPENSE      
Interest on deposits 2,650  2,856 
Interest on borrowed funds 539  389 
Total interest expense 3,189  3,245 
Net interest income 25,357  19,953 
PROVISION FOR LOAN LOSSES 3,508  1,087 
Net interest income after provision for loan losses 21,849  18,866 
NONINTEREST INCOME      
Deposit service charges and fees 1,400  1,507 
BaaS fees 1,054  948 
Loan referral fees 1,123  1,106 
Mortgage broker fees 314  196 
Sublease and lease income 61  20 
Gain on sales of loans, net -  121 
Other 239  218 
Total noninterest income 4,191  4,116 
NONINTEREST EXPENSE      
Salaries and employee benefits 10,898  9,087 
Occupancy 1,860  1,924 
Data processing 1,172  1,028 
Director and staff expenses 457  457 
Excise taxes 465  345 
Marketing 228  202 
Legal and professional fees 797  702 
Federal Deposit Insurance Corporation assessments 144  209 
Business development 173  198 
Other 1,770  1,153 
Total noninterest expense 17,964  15,305 
Income before provision for income taxes 8,076  7,677 
PROVISION FOR INCOME TAXES 1,681  1,595 
NET INCOME$6,395 $6,082 
       
Basic earnings per common share$0.54 $0.51 
Diluted earnings per common share$0.52 $0.50 
Weighted average number of common shares outstanding:      
Basic 11,913,321  11,889,597 
Diluted 12,185,154  12,192,647 
       

COASTAL FINANCIAL CORPORATION
AVERAGE BALANCES, YIELDS, AND RATES – QUARTERLY
(Dollars in thousands; unaudited)

 For the Three Months Ended 
 June 30, 2020  March 31, 2020   June 30, 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$127,721 $130  0.41% $103,372 $358  1.39%  $106,353 $652  2.46%
Investment securities (1) 21,835  53  0.98   27,041  119  1.77    40,151  160  1.60 
Other Investments 5,841  89  6.13   4,507  16  1.43    3,659  75  8.22 
Loans receivable (2) 1,334,991  15,154  4.57   966,602  12,627  5.25    812,704  10,917  5.39 
Total interest earning assets 1,490,388  15,426  4.16   1,101,522  13,120  4.79    962,867  11,804  4.92 
Noninterest earning assets:                              
Allowance for loan losses (13,555)        (11,665)         (10,025)      
Other noninterest earning assets 61,713         51,596          49,594       
Total assets$1,538,546        $1,141,453         $1,002,436       
                               
Liabilities and Shareholders Equity 
Interest bearing liabilities:                              
Interest bearing deposits$708,724 $1,096  0.62% $628,037 $1,554  1.00%  $550,777 $1,420  1.03%
Subordinated debt, net 9,984  147  5.92   9,980  146  5.88    9,970  146  5.87 
Junior subordinated debentures, net 3,583  26  2.92   3,583  35  3.93    3,582  43  4.81 
PPPFL borrowings 107,443  94  0.35   -  -  0.00    -  -  0.00 
FHLB advances and other borrowings 24,999  70  1.13   7,851  21  1.08    1,542  9  2.34 
Total interest bearing liabilities 854,733  1,433  0.67   649,451  1,756  1.09    565,871  1,618  1.15 
Noninterest bearing deposits 541,448         352,930          308,739       
Other liabilities 12,498         12,542          13,132       
Total shareholders' equity 129,867         126,530          114,694       
Total liabilities and shareholders' equity$1,538,546        $1,141,453         $1,002,436       
Net interest income   $13,993        $11,364         $10,186    
Interest rate spread       3.49%        3.70%         3.77%
Net interest margin (3)       3.78%        4.15%         4.24%
                               
(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
AVERAGE BALANCES, YIELDS, AND RATES – YEAR-TO-DATE
(Dollars in thousands; unaudited)

 For the Six Months Ended 
 June 30, 2020  June 30, 2019 
 Average Interest & Yield /  Average Interest & Yield / 
 Balance Dividends Cost (4)  Balance Dividends Cost (4) 
Assets                   
Interest earning assets:                   
Interest earning deposits$115,547 $488  0.85% $119,830 $1,460  2.46%
Investment securities (1) 24,438  172  1.42   39,853  313  1.58 
Other Investments 5,174  105  4.08   3,406  89  5.27 
Loans receivable (2) 1,150,797  27,781  4.85   797,629  21,336  5.39 
Total interest earning assets$1,295,956 $28,546  4.43  $960,718 $23,198  4.87 
Noninterest earning assets:                   
Allowance for loan losses (12,610)        (9,825)      
Other noninterest earning assets 56,654         48,873       
Total assets$1,340,000        $999,766       
                    
Liabilities and Shareholders Equity                   
Interest bearing liabilities:                   
Interest bearing deposits$668,381 $2,650  0.80% $560,875 $2,856  1.03%
Subordinated debt, net 9,982  293  5.90   9,968  291  5.89 
Junior subordinated debentures, net 3,583  61  3.42   3,581  87  4.90 
PPPLF borrowings 53,722  94  0.35   -  -  0.00 
FHLB advances and other borrowings 16,425  91  1.11   923  11  2.40 
Total interest bearing liabilities$752,093 $3,189  0.85  $575,347 $3,245  1.14 
Noninterest bearing deposits 447,189         298,451       
Other liabilities 12,520         13,080       
Total shareholders' equity 128,198         112,888       
Total liabilities and shareholders' equity$1,340,000        $999,766       
Net interest income   $25,357        $19,953    
Interest rate spread       3.58%        3.73%
Net interest margin (3)       3.93%        4.19%
                    
(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 
 June 30, March 31, December 31, September 30, June 30, 
 2020 2020 2019 2019 2019 
Income Statement Data:               
Interest and dividend income$15,426 $13,120 $13,034 $12,355 $11,804 
Interest expense 1,433  1,756  1,703  1,628  1,618 
Net interest income 13,993  11,364  11,331  10,727  10,186 
Provision for loan losses 1,930  1,578  820  637  547 
Net interest income after provision for loan losses 12,063  9,786  10,511  10,090  9,639 
Noninterest income 1,520  2,671  2,059  2,088  2,132 
Noninterest expense 8,945  9,019  8,015  7,748  7,643 
Net income - pre-tax, pre-provision (1) 6,568  5,016  5,375  5,067  4,675 
Provision for income tax 967  714  947  919  854 
Net income 3,671  2,724  3,608  3,511  3,274 
                
 As of and for the Three Month Period 
 June 30, March 31, December 31, September 30, June 30, 
 2020 2020 2019 2019 2019 
Balance Sheet Data:               
Cash and cash equivalents$174,176 $129,236 $127,814 $153,347 $113,470 
Investment securities 24,318  19,759  32,710  32,696  42,381 
Loans receivable 1,447,144  1,005,180  939,103  874,112  845,443 
Allowance for loan losses (14,847) (12,925) (11,470) (10,888) (10,443)
Total assets 1,678,956  1,184,071  1,128,526  1,090,060  1,031,024 
Interest bearing deposits 742,633  659,559  596,716  573,162  552,254 
Noninterest bearing deposits 563,794  345,503  371,243  349,087  315,890 
Core deposits (2) 1,212,215  892,408  862,516  817,593  754,768 
Total deposits 1,306,427  1,005,062  967,959  922,249  868,144 
Total borrowings 228,725  38,564  23,562  33,557  33,554 
Total shareholders’ equity 130,977  127,166  124,173  120,422  116,591 
                
Share and Per Share Data (3):               
Earnings per share – basic$0.31 $0.23 $0.30 $0.30 $0.28 
Earnings per share – diluted$0.30 $0.22 $0.30 $0.29 $0.27 
Dividends per share -  -  -  -  - 
Book value per share (4)$10.98 $10.66 $10.42 $10.11 $9.79 
Tangible book value per share (5)$10.98 $10.66 $10.42 $10.11 $9.79 
Weighted avg outstanding shares – basic 11,917,394  11,909,248  11,903,750  11,901,873  11,895,026 
Weighted avg outstanding shares – diluted 12,190,284  12,208,175  12,213,512  12,188,507  12,202,197 
Shares outstanding at end of period 11,926,263  11,929,413  11,913,885  11,912,115  11,908,185 
Stock options outstanding at end of period 774,587  774,937  784,217  786,257  791,267 
                
See footnotes on following page               
                
                
 As of and for the Three Month Period 
 June 30, March 31, December 31, September 30, June 30, 
 2020 2020 2019 2019 2019 
Credit Quality Data:               
Nonperforming assets to total assets 0.26% 0.06% 0.09% 0.12% 0.16%
Nonperforming assets to loans receivable and OREO 0.31% 0.08% 0.11% 0.15% 0.19%
Nonperforming loans to total loans receivable 0.31% 0.08% 0.11% 0.15% 0.19%
Allowance for loan losses to nonperforming loans 334.8% 1694.0% 1113.6% 837.5% 633.7%
Allowance for loan losses to total loans receivable 1.03% 1.29% 1.22% 1.25% 1.24%
Allowance for loan losses to loans receivable, as adjusted (1) 1.46%n/a n/a n/a n/a 
Gross charge-offs$13 $124 $242 $196 $22 
Gross recoveries$5 $1 $4 $4 $3 
Net charge-offs to average loans (6) 0.00% 0.05% 0.10% 0.09% 0.01%
                
Capital Ratios (7):               
Tier 1 leverage capital 9.38% 11.43% 11.64% 12.00% 11.99%
Common equity Tier 1 risk-based capital 12.34% 12.10% 12.74% 13.02% 12.99%
Tier 1 risk-based capital 12.67% 12.43% 13.10% 13.40% 13.37%
Total risk-based capital 14.88% 14.65% 15.35% 15.70% 15.70%
                
(1) A reconciliation of the non-GAAP measures are set forth at the end of this earnings release. 
(2) Core deposits are defined as all deposits excluding BaaS-brokered and time deposits. 
(3) Share and per share amounts are based on total common shares outstanding. 
(4) 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. 
(5) 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. 
(6) Annualized calculations.               
(7) Capital ratios are for the Company, Coastal Financial Corporation. 

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 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-tax, pre-provision 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-tax, pre-provision return on average assets is a non-GAAP measure that excludes the impact of provision for loan losses and provision for income taxes from return on average assets.  The most directly comparable GAAP measure is return on average assets.

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

  As of and for the
Three Months Ended
  As of and for the
Six Months Ended
 
(Dollars in thousands, unaudited) June 30,
2020
  March 31,
2020
  December 31,
2019
  September 30,
2019
  June 30,
2019
  June 30,
2020
  June 30,
2019
 
Pre-tax, pre-provision net income and pre-tax, pre-provision return on average assets:         
Total average assets $1,538,546  $1,141,453  $1,095,343  $1,031,969  $1,002,436  $1,340,000  $999,766 
Total net income  3,671   2,724   3,608   3,511   3,274   6,395   6,082 
Plus:  provision for loan losses  1,930   1,578   820   637   547   3,508   1,087 
Plus:  provision for income taxes  967   714   947   919   854   1,681   1,595 
Pre-tax, pre-provision net income $6,568  $5,016  $5,375  $5,067  $4,675  $11,584  $8,764 
Return on average assets  0.96%  0.96%  1.31%  1.35%  1.31%  0.96%  1.23%
Pre-tax, pre-provision return on average assets:  1.72%  1.77%  1.95%  1.95%  1.87%  1.74%  1.77%
                             

The following non-GAAP financial measures are presented to illustrate and identify the impact of PPP loans on loans receivable related measures.  By removing these significant items and showing what the results would have been without them, we are providing investors with the information to better compare results with periods that did not have these significant items.  These measures include the following:

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

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

Adjusted contractual yield on loans receivable, excluding earned fees is a non-GAAP measure that excludes the impact of PPP loans on balance sheet. The most directly comparable GAAP measure is contractual yield on loans, excluding fees.

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

  As of and for the
Three Months Ended
  As of and for the
Six Months Ended
 
(Dollars in thousands, unaudited) June 30, 2020  June 30, 2020 
Adjusted allowance for loan losses to loans receivable:        
Total loans, net of deferred fees $1,447,144  $1,447,144 
Less: PPP loans  (438,077)  (438,077)
Less: net deferred fees on PPP loans  10,639   10,639 
Adjusted loans, net of deferred fees $1,019,707  $1,019,707 
Allowance for loan losses $(14,847) $(14,847)
Allowance for loan losses to loans receivable  1.03%  1.03%
Adjusted allowance for loan losses to loans receivable  1.46%  1.46%
Adjusted yield on loans receivable:        
Total average loans receivable $1,334,991  $1,150,797 
Less: average PPP loans  (335,200)  (167,600)
Plus: average deferred fees on PPP loans  8,700   4,350 
Adjusted total average loans receivable $1,008,491  $987,547 
Interest income on loans $15,154  $27,781 
Less: interest and fee income on PPP loans  (2,759)  (2,759)
Adjusted interest income on loans $12,395  $25,022 
Yield on loans receivable  4.57%  4.85%
Adjusted yield on loans receivable:  4.94%  5.10%
Adjusted contractual yield on loans receivable, excluding earned fees:     
Total average loans receivable $1,334,991  $1,150,797 
Less: average PPP loans  (335,200)  (167,600)
Plus: average deferred fees on PPP loans $8,700  $4,350 
Adjusted total average loans receivable, excluding earned fees $1,008,491  $987,547 
Interest and earned fee income on loans $15,154  $27,781 
Less: earned fee income on loans $(2,182) $(2,610)
Less: interest income on PPP loans  (837)  (837)
Adjusted interest income on loans $12,135  $24,334 
Contractual yield on loans receivable, excluding earned fees  3.91%  4.40%
Adjusted contractual yield on loans receivable, excluding earned fees:  4.84%  4.96%
         

APPENDIX A

As of June 30, 2020

Industry Concentration

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 $894.2 million in outstanding loan balances, or 87.5% of total gross loans outstanding, excluding PPP loans of $438.1 million.  When combined with $189.9 million in unused commitments the total of these three categories is $1.08 billion, or 87.9% of total outstanding loans and loan commitments.

Commercial real estate loans represent the largest segment of our loans, comprising 66.4% of our total balance of outstanding loans, excluding PPP loans, as of June 30, 2020.  Unused commitments to extend credit represents an additional $13.5 million, the combined total exposure in commercial real estate loans represents $691.9 million, or 56.1% of our total outstanding loans and loan commitments, excluding PPP loans.

The following table summarizes our exposure by industry for our commercial real estate portfolio as of June 30, 2020:

(Dollars in thousands, unaudited) Outstanding Balance  Available Loan Commitments  Total Exposure  % of Total Loans
(Outstanding Balance & Available Commitment)
  Average Loan Balance  Number of Loans 
Hotel/Motel $99,389  $632  $100,021   8.1% $3,823   26 
Apartments  92,453   2,596   95,049   7.7   1,360   68 
Retail  79,436   55   79,491   6.4   993   80 
Office  75,833   2,976   78,809   6.4   824   92 
Mixed use  71,636   3,365   75,001   6.1   823   87 
Convenience Store  65,086   700   65,786   5.3   1,713   38 
Warehouse  56,586   50   56,636   4.6   1,179   48 
Manufacturing  36,094   453   36,547   3.0   1,003   36 
Mini Storage  28,382   137   28,519   2.3   3,154   9 
Groups < 2.0% of total  73,440   2,587   76,027   6.2   1,049   70 
Total $678,335  $13,551  $691,886   56.1% $1,224   554 
                         

Commercial and industrial loans comprise 11.1% of our total balance of outstanding loans, excluding PPP loans, as of June 30, 2020. Unused commitments to extend credit represents an additional $98.8 million, the combined total exposure in commercial and industrial loans represents $212.7 million, or 17.2% of our total outstanding loans and loan commitments, excluding PPP loans.

The following table summarizes our exposure by industry, excluding PPP loans, for our commercial and industrial loan portfolio as of June 30, 2020:

(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 $11,971  $40,093  $52,064   4.2% $570   21 
Construction/Contractor Services  13,625   21,305   34,930   2.8   99   138 
Manufacturing  12,603   7,854   20,457   1.7   221   57 
Medical / Dental / Other Care  14,766   2,230   16,996   1.4   208   71 
Family and Social Services  11,007   4,599   15,606   1.3   847   13 
Financial Institutions  15,400   -   15,400   1.2   5,133   3 
Groups < 1.0% of total  34,101   23,138   57,239   4.6   109   312 
Total $113,473  $99,219  $212,692   17.2% $185   615 
                         

Construction, land and land development loans comprise 10.0% of our total balance of outstanding loans, excluding PPP loans, as of June 30, 2020.  Unused commitments to extend credit represents an additional $77.5 million, the combined total exposure in construction, land and land development loans represents $180.0 million, or 14.6% of our total outstanding loans and loan commitments.

The following table details our exposure for our construction, land and land development portfolio as of June 30, 2020:

(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 $48,256  $56,597  $104,853   8.5% $2,540   19 
Residential construction  26,344   15,274   41,618   3.4   753   35 
Developed land loans  14,200   2,804   17,004   1.4   418   34 
Undeveloped land loans  8,976   492   9,468   0.8   472   19 
Land development  4,646   2,378   7,024   0.6   581   8 
Total $102,422  $77,545  $179,967   14.6% $891   115 
                         

Payment Modifications and Deferrals

As part of our ongoing commitment to our customers we have been proactive in contacting customers impacted by the stay-at-home order in Washington State, temporary business closures, or that have otherwise been impacted by the COVID-19 pandemic and responses thereto.  In addition to the PPP loans we made to assist customers, as of June 30, 2020, we have $207.2 million in deferred or restructured payments, pursuant to federal guidance, representing 215 loans.  Of the 215 loans that remain on deferral, 92 loans, or $77.1 million, were subject to a loan extension as part of the deferral and restructuring process.  During the quarter ended June 30, 2020, there were 24 loans, representing $7.2 million, that moved back to active status from deferral status, with all of them successfully resuming payments. 

We offered various options depending upon the needs of the customer, with the 93% of the current loan deferrals being principal and interest, and 7% interest only deferrals.  The number of deferral days also varied among 90, 120 and 180 days.  The charts below show more detail regarding the payment modifications and deferrals.

The graphs below indicate the percentage of loans that were granted a COVID-19 deferral.  This illustration is based on total loans outstanding as of March 31, 2020 to approximate the impact to our portfolio, pre-COVID-19; also presented is deferred loans compared to total loans outstanding as of June 30, 2020. 

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/24d49fec-cac7-4e49-b314-f323ad0e9ad5

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/e4cf8860-1ac1-4a7d-858d-d78dbf3cd3d1

Deferrals remaining as of June 30, 2020: 

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/2f3dc86e-3c59-469a-bc35-08b07f089ee9

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/495a50b7-fe58-4c48-9dba-9ff14b7a3730

Remaining deferrals by industry as of June 30, 2020:

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/980bfd50-6349-43b8-98c0-cde11c3b6589

As a result of our proactive approach with customers, we did not see material downgrades in credit during quarter ended June 30, 2020 related to the COVID-19 pandemic.  We will continue to be diligent in monitoring credit and changes in the economy, keeping the lines of communication open with our customers, but the full impact of these challenging economic times on our financial condition and liquidity remains to be seen at this time.

 
Total Number of PPP Loans PPP Funding Distribution Current Deferrals Compared to March 31, 2020 Total Loans Current Deferrals Compared to June 30, 2020 Total Loans Total Loan Deferrals by Ending Date Total Loan Deferrals by Deferral Type Total Loan Deferrals by Industry

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