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Section 1: 10-Q (10-Q)

ck0001437958-10q_20190331.htm

 

No

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2019

or

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______________ to _____________

Commission file number: 001-38589

COASTAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

 

Washington

56-2392007

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer Identification No.)

5415 Evergreen Way, Everett, Washington

98203

(Address of principal executive offices)

(Zip Code)

 

(425) 257-9000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes      No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an “emerging growth company.”  See the definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large Accelerated Filer

 

  

Accelerated Filer

 

Non-Accelerated Filer

 

  

Smaller Reporting Company

 

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 standards provided pursuant to Section 7(a)(2)(B) of the Securities Act  

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes      No  

 

 

 


 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class

Trading symbol(s)

Name of each exchange on which registered

Common Stock, no par value per share

CCB

The Nasdaq Stock Market LLC

As of May 13, 2019, there were 11,906,335 shares of the registrant’s common stock outstanding.  

 

 

 

 

 

 


 

COASTAL FINANCIAL CORPORATION

 

Table of Contents

 

 

 

 

 

Page No.

Part I.   Financial Information

 

 

 

 

 

Item 1.

 

Condensed Consolidated Financial Statements (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Balance Sheets as of March 31, 2019 and December 31, 2018 (unaudited)

 

5

 

 

 

 

 

 

 

Condensed Consolidated Statements of Income for the Three Months ended March 31, 2019 and 2018 (unaudited)

 

6

 

 

 

 

 

 

 

Condensed Consolidated Statements of Comprehensive Income for the Three Months ended March 31, 2019 and 2018 (unaudited)

 

7

 

 

 

 

 

 

 

Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Three Months ended March 31, 2019 and 2018 (unaudited)

 

8

 

 

 

 

 

 

 

Condensed Consolidated Statements of Cash Flows for the Three Months ended March 31, 2019 and 2018 (unaudited)

 

9

 

 

 

 

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

 

10

 

 

 

 

 

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

28

 

 

 

 

 

Item 3.

 

Quantitative and Qualitative Disclosures About Market Risk

 

47

 

 

 

 

 

Item 4.

 

Controls and Procedures

 

48

 

 

 

 

 

Part II.   Other Information

 

 

 

 

 

Item 1.

 

Legal Proceedings

 

49

 

 

 

 

 

Item 1A.

 

Risk Factors

 

49

 

 

 

 

 

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

 

49

 

 

 

 

 

Item 3.

 

Defaults Upon Senior Securities

 

49

 

 

 

 

 

Item 4.

 

Mine Safety Disclosures

 

49

 

 

 

 

 

Item 5.

 

Other Information

 

49

 

 

 

 

 

Item 6.

 

Exhibits

 

49

 

 

 

 

 

 

 

 

 

3


 

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This report may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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. With respect to any such forward-looking statements, we claim the protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995, as amended. Any or all of the forward-looking statements in this report may turn out to be inaccurate. The inclusion of forward-looking information in this report 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.

Factors that may affect our results are disclosed in “Item 1A. Risk Factors” in Part II of this report and in the section titled “Risk Factors” in the Company’s Form 10-K for the year ended December 31, 2018, including the Risk Factors section of that report, and in its other SEC reports.  Some of the risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the overall health of the local and national real estate market; the credit risk associated with our loan portfolio, and specifically with our commercial real estate loans; business and economic conditions generally and in the financial services industry, nationally and within our market area; our ability to maintain an adequate level of allowance for loan losses; our ability to successfully manage liquidity risk; our ability to implement our growth strategy and manage costs effectively; the composition of our senior leadership team and our ability to attract and retain key personnel; changes in market interest rates and impacts of such changes on our profits and business; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; our ability to maintain our reputation; increased competition in the financial services industry; regulatory guidance on commercial lending concentrations; the effectiveness of our risk management framework; the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; the extensive regulatory framework that applies to us; the impact of recent and future legislative and regulatory changes; fluctuations in the value of the securities held in our securities portfolio; governmental monetary and fiscal policies; material weaknesses in our internal control over financial reporting; and our success at managing the risks involved in the foregoing items.

The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. 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.

 

 

 

4


 

PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

 

(dollars in thousands)

 

ASSETS

 

 

March 31,

 

 

December 31,

 

 

 

 

2019

 

 

2018

 

 

Cash and due from banks

 

$

21,176

 

 

$

16,315

 

 

Interest earning deposits with other banks (restricted cash of $23,728 and $24,004

   at March 31, 2019 and December 31, 2018, respectively)

 

 

236,483

 

 

 

109,467

 

 

Investment securities, available for sale, at fair value

 

 

36,970

 

 

 

36,660

 

 

Investment securities, held to maturity, at amortized cost

 

 

1,247

 

 

 

1,262

 

 

Other investments

 

 

3,600

 

 

 

3,766

 

 

Loans receivable

 

 

791,072

 

 

 

767,899

 

 

Allowance for loan losses

 

 

(9,915

)

 

 

(9,407

)

 

Total loans receivable, net

 

 

781,157

 

 

 

758,492

 

 

Premises and equipment, net

 

 

13,017

 

 

 

13,167

 

 

Operating lease right-of-use assets

 

 

9,305

 

 

 

-

 

 

Accrued interest receivable

 

 

2,505

 

 

 

2,526

 

 

Bank-owned life insurance, net

 

 

6,735

 

 

 

6,688

 

 

Deferred tax asset, net

 

 

2,496

 

 

 

2,518

 

 

Other assets

 

 

1,399

 

 

 

1,249

 

 

Total assets

 

$

1,116,090

 

 

$

952,110

 

 

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES

 

 

 

 

 

 

 

 

 

Deposits

 

$

976,496

 

 

$

803,614

 

 

Federal Home Loan Bank (FHLB) advances

 

 

-

 

 

 

20,000

 

 

Subordinated debt

 

 

 

 

 

 

 

 

 

Principal amount $10,000 (less unamortized debt issuance costs of $32

   and $35 at March 31, 2019 and December 31, 2018, respectively)

 

 

9,968

 

 

 

9,965

 

 

Junior subordinated debentures

 

 

 

 

 

 

 

 

 

Principal amount $3,609 (less unamortized debt issuance costs of $28

   at March 31, 2019 and December 31, 2018)

 

 

3,581

 

 

 

3,581

 

 

Deferred compensation

 

 

1,052

 

 

 

1,078

 

 

Accrued interest payable

 

 

343

 

 

 

279

 

 

Operating lease liabilities

 

 

9,471

 

 

 

-

 

 

Other liabilities

 

 

2,814

 

 

 

4,437

 

 

Total liabilities

 

 

1,003,725

 

 

 

842,954

 

 

SHAREHOLDERS’ EQUITY

 

 

 

 

 

 

 

 

 

Preferred stock, no par value:

 

 

 

 

 

 

 

 

 

Authorized: 25,000,000 shares at March 31, 2019 and December 31, 2018;

    issued and outstanding: zero shares at March 31, 2019 and December 31, 2018

 

 

-

 

 

 

-

 

 

Common stock, no par value:

 

 

 

 

 

 

 

 

 

Authorized: 300,000,000 shares at March 31, 2019 and December 31, 2018;

    11,902,715 voting shares at March 31, 2019 issued and outstanding

    and 11,893,203 voting shares at December 31, 2018 issued and outstanding

 

 

86,579

 

 

 

86,431

 

 

Retained earnings

 

 

26,829

 

 

 

24,021

 

 

Accumulated other comprehensive loss, net of tax

 

 

(1,043

)

 

 

(1,296

)

 

Total shareholders’ equity

 

 

112,365

 

 

 

109,156

 

 

Total liabilities and shareholders’ equity

 

$

1,116,090

 

 

$

952,110

 

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

5


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

 

(dollars in thousands, except for per share data)

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

INTEREST AND DIVIDEND INCOME

 

 

 

 

 

 

 

 

Interest and fees on loans

 

$

10,419

 

 

$

8,189

 

Interest on interest earning deposits with other banks

 

 

808

 

 

 

255

 

Interest on investment securities

 

 

153

 

 

 

152

 

Dividends on other investments

 

 

14

 

 

 

11

 

Total interest income

 

 

11,394

 

 

 

8,607

 

INTEREST EXPENSE

 

 

 

 

 

 

 

 

Interest on deposits

 

 

1,436

 

 

 

646

 

Interest on borrowed funds

 

 

191

 

 

 

183

 

Total interest expense

 

 

1,627

 

 

 

829

 

Net interest income

 

 

9,767

 

 

 

7,778

 

PROVISION FOR LOAN LOSSES

 

 

540

 

 

 

501

 

Net interest income after provision for loan losses

 

 

9,227

 

 

 

7,277

 

NONINTEREST INCOME

 

 

 

 

 

 

 

 

Deposit service charges and fees

 

 

726

 

 

 

687

 

Wholesale banking service fees

 

 

446

 

 

 

-

 

Loan referral fees

 

 

633

 

 

 

130

 

Mortgage broker fees

 

 

85

 

 

 

37

 

Sublease and lease income

 

 

10

 

 

 

57

 

(Loss) gain on sales of loans, net

 

 

(11

)

 

 

64

 

Other income

 

 

95

 

 

 

132

 

Total noninterest income

 

 

1,984

 

 

 

1,107

 

NONINTEREST EXPENSE

 

 

 

 

 

 

 

 

Salaries and employee benefits

 

 

4,558

 

 

 

3,735

 

Occupancy

 

 

994

 

 

 

823

 

Data processing

 

 

529

 

 

 

479

 

Director and staff expenses

 

 

240

 

 

 

144

 

Excise taxes

 

 

165

 

 

 

124

 

Marketing

 

 

94

 

 

 

57

 

Legal and professional fees

 

 

409

 

 

 

80

 

Federal Deposit Insurance Corporation (FDIC) assessments

 

 

75

 

 

 

85

 

Business development

 

 

102

 

 

 

88

 

Other expense

 

 

496

 

 

 

452

 

Total noninterest expense

 

 

7,662

 

 

 

6,067

 

Income before provision for income taxes

 

 

3,549

 

 

 

2,317

 

PROVISION FOR INCOME TAXES

 

 

741

 

 

 

474

 

NET INCOME

 

$

2,808

 

 

$

1,843

 

Basic earnings per common share

 

$

0.24

 

 

$

0.20

 

Diluted earnings per common share

 

$

0.23

 

 

$

0.20

 

Weighted average number of common shares outstanding:

 

 

 

 

 

 

 

 

Basic

 

 

11,884,107

 

 

 

9,241,620

 

Diluted

 

 

12,183,234

 

 

 

9,247,209

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

6


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

 

(dollars in thousands)

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

NET INCOME

 

$

2,808

 

 

$

1,843

 

OTHER COMPREHENSIVE INCOME (LOSS), before tax

 

 

 

 

 

 

 

 

Securities available-for-sale

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) during the quarter

 

 

321

 

 

 

(883

)

Income tax benefit (provision) related to unrealized holding

   gain (loss)

 

 

(68

)

 

 

185

 

OTHER COMPREHENSIVE INCOME (LOSS), net of tax

 

 

253

 

 

 

(698

)

COMPREHENSIVE INCOME

 

$

3,061

 

 

$

1,145

 

 

See accompanying Notes to Condensed Consolidated Financial Statements.

7


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

 

(dollars in thousands)

 

 

 

Shares of

Common

Stock

 

 

Common

Stock

 

 

Retained

Earnings

 

 

Accumulated

Other

Comprehensive

Income (Loss)

 

 

Total

 

BALANCE, December 31, 2017

 

 

9,248,898

 

 

$

52,521

 

 

$

14,134

 

 

$

(944

)

 

$

65,711

 

Net income

 

 

-

 

 

 

-

 

 

 

1,843

 

 

 

-

 

 

 

1,843

 

Reclassification of stranded tax effect due to federal tax

   rate change

 

 

-

 

 

 

-

 

 

 

186

 

 

 

(186

)

 

 

-

 

Issuance of restricted stock awards

 

 

4,405

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Stock-based compensation

 

 

-

 

 

 

71

 

 

 

-

 

 

 

-

 

 

 

71

 

Other comprehensive loss

 

 

-

 

 

 

-

 

 

 

-

 

 

 

(698

)

 

 

(698

)

BALANCE, March 31, 2018

 

 

9,253,303

 

 

$

52,592

 

 

$

16,163

 

 

$

(1,828

)

 

$

66,927

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

BALANCE, December 31, 2018

 

 

11,893,203

 

 

$

86,431

 

 

$

24,021

 

 

$

(1,296

)

 

$

109,156

 

Net income

 

 

-

 

 

 

-

 

 

 

2,808

 

 

 

-

 

 

 

2,808

 

Issuance of restricted stock awards

 

 

2,352

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Exercise of stock options

 

 

7,160

 

 

 

42

 

 

 

-

 

 

 

-

 

 

 

42

 

Stock-based compensation

 

 

-

 

 

 

106

 

 

 

-

 

 

 

-

 

 

 

106

 

Other comprehensive income

 

 

-

 

 

 

-

 

 

 

-

 

 

 

253

 

 

 

253

 

BALANCE, March 31, 2019

 

 

11,902,715

 

 

$

86,579

 

 

$

26,829

 

 

$

(1,043

)

 

$

112,365

 

See accompanying Notes to Condensed Consolidated Financial Statements.

8


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

 

(dollars in thousands)

 

 

 

Three months ended March 31,

 

 

 

2019

 

 

2018

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

 

 

 

Net income

 

$

2,808

 

 

$

1,843

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

 

Provision for loan losses

 

 

540

 

 

 

501

 

Depreciation and amortization

 

 

304

 

 

 

254

 

Decrease in operating lease right-of-use assets

 

 

244

 

 

 

-

 

Decrease in operating lease liabilities

 

 

(205

)

 

 

-

 

Loss (gain) on sales of loans

 

 

11

 

 

 

(64

)

Net discount accretion on investment securities

 

 

(7

)

 

 

(3

)

Stock-based compensation

 

 

106

 

 

 

71

 

Bank-owned life insurance earnings

 

 

(47

)

 

 

(46

)

Deferred tax expense

 

 

(45

)

 

 

(40

)

Net change in other assets and liabilities

 

 

(1,584

)

 

 

188

 

Total adjustments

 

 

(683

)

 

 

861

 

Net cash provided by operating activities

 

 

2,125

 

 

 

2,704

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Net increase in interest earning deposits with other banks

 

 

(127,292

)

 

 

(5,523

)

Purchase of other investments, net

 

 

166

 

 

 

(86

)

Principal paydowns of investment securities available-for-sale

 

 

18

 

 

 

36

 

Principal paydowns of investment securities held-to-maturity

 

 

14

 

 

 

82

 

Purchase of participation loans

 

 

(7,000

)

 

 

-

 

Purchase of loans

 

 

-

 

 

 

(5,469

)

Increase in loans receivable, net

 

 

(16,216

)

 

 

(16,289

)

Purchases of premises and equipment, net

 

 

(154

)

 

 

(133

)

Net cash used by investing activities

 

 

(150,464

)

 

 

(27,382

)

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

 

 

 

Net increase in demand deposits, NOW and money market, and savings

 

 

174,657

 

 

 

25,122

 

Net decrease in time deposits

 

 

(1,775

)

 

 

(1,149

)

Net repayments from short term FHLB borrowing

 

 

(20,000

)

 

 

-

 

Proceeds from exercise of stock options

 

 

42

 

 

 

-

 

Net cash provided by financing activities

 

 

152,924

 

 

 

23,973

 

NET INCREASE IN CASH, DUE FROM BANKS AND RESTRICTED CASH

 

 

4,585

 

 

 

(705

)

CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year

 

 

40,319

 

 

 

31,119

 

CASH, DUE FROM BANKS AND RESTRICTED  CASH, end of quarter

 

$

44,904

 

 

$

30,414

 

SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES

 

 

 

 

 

 

 

 

Interest paid

 

$

1,563

 

 

$

828

 

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS

 

 

 

 

 

 

 

 

Fair value adjustment of securities available-for-sale, gross

 

$

321

 

 

$

(883

)

In conjunction with the adoption of ASU 2016-02 as detailed in Note 6 to the Unaudited Condensed Consolidated Financial Statements, the following assets and liabilities were recognized:

 

 

 

 

 

 

 

 

Operating lease right-of-use assets

 

$

9,549

 

 

$

-

 

Operating lease liabilities

 

$

9,714

 

 

$

-

 

See accompanying Notes to Condensed Consolidated Financial Statements. 

9


 

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)

 

Note 1 - Description of Business and Summary of Significant Accounting Policies

Nature of operations - Coastal Financial Corporation (Corporation or Company) is a registered bank holding company whose wholly owned subsidiary is Coastal Community Bank (Bank). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank and Federal Reserve System (Federal Reserve) state member bank.

The Company provides a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound area through its 14 branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application. The Bank’s main branch and the headquarters of the Bank and Company are located in Everett, Washington. The Bank’s deposits are insured in whole or in part by the FDIC. The Bank’s loans and deposits are primarily within the greater Puget Sound area, and the Bank’s primary funding source is deposits from customers. The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

Financial statement presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (GAAP) for interim reporting requirements and with instructions to Form 10-Q and Article 10 of Regulation S-X, and therefore do not include all the information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual report on Form 10-K as filed with the U.S. Securities and Exchange Commission (SEC) on March 28, 2019. Operating results for the three months ended March 31, 2019, are not necessarily indicative of the results that may be expected for future periods.

Amounts presented in the consolidated financial statements and footnote tables are rounded and presented in thousands of dollars except per-share amounts, which are presented in dollars. In the narrative footnote discussion, amounts are rounded to thousands and presented in dollars.

In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying consolidated financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation.

Principles of consolidation - The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts have been eliminated in consolidation.

Business Segments - The Company is managed by legal entity and not by lines of business. The entity’s primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its market areas. The Bank offers a wide variety of deposit products to its customers. Lending activities include the origination of real estate, commercial and industrial, and consumer loans. Interest income on loans is the Company’s primary source of revenue, and is supplemented by interest income on deposits with other banks, interest income from investment securities, deposit service charges, and other service provided activities. The Company has determined that its current business and operations consist of a single reporting segment and, therefore, segment disclosures are not required.

Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that its critical accounting policies include determining the allowance for loan losses, the fair value of the Company’s investment securities, deferred tax assets, and financial instruments. Actual results could differ significantly from those estimates.

Subsequent Events - The Company has evaluated events and transactions subsequent to March 31, 2019 for potential recognition or disclosure.  

10


 

Accounting policies – Our complete accounting policies are described in Note 1, summary of significant accounting policies of the Company’s audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017 included in the Company’s Annual Report Form 10-K filed with the SEC on March 28, 2019.

Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements have been reclassified to conform to the current presentation with no effect on stockholders’ equity or net income.

Note 2 - Recent accounting standards

Accounting Standards Adopted in 2019

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was effective for us on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. We have elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods. 

Our operating leases relate primarily to office space and bank branches. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use ("ROU") asset of $9.5 million and an operating lease liability of $9.7 million on January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded on the face on the consolidated balance sheets. See Note 6 - Leases for additional information.

  In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This ASU updates outdated guidance related to the Office of Comptroller of the Currency’s (OCC) Banking Circular 202, Accounting for Net Deferred Tax Charges, as the guidance has been rescinded by OCC and is no longer relevant. The amendments in this ASU are effective immediately. The adoption of ASU No. 2018-06 did not have a material impact on the Company's consolidated financial statements.

In June 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.  This ASU was issued to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.  Previously, these awards were recorded at the fair value of consideration received or the fair value of the equity instruments issued and was measured as of the earlier of the commitment date or the date performance was completed. The amendments in this ASU require the awards to be measured at the grant-date fair value of the equity instrument.  ASU No. 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption was permitted, but no earlier than an entity's adoption of Topic 606.  The adoption of ASU No. 2018-07 did not have a material impact on the Company's consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. Early application will be permitted for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. We are actively assessing our data and the model needs and are evaluating the impact of adopting the amendment. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements. 

 

11


 

Note 3 - Investment Securities

The amortized cost and fair values of investment securities at the date indicated are as follows:

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

34,840

 

 

$

-

 

 

$

(1,285

)

 

$

33,555

 

U.S. Government agencies

 

 

3,000

 

 

 

-

 

 

 

(32

)

 

 

2,968

 

U.S. Agency collateralized mortgage obligations

 

 

156

 

 

 

-

 

 

 

(2

)

 

 

154

 

U.S. Agency residential mortgage-backed securities

 

 

36

 

 

 

-

 

 

 

-

 

 

 

36

 

Municipals

 

 

258

 

 

 

-

 

 

 

(1

)

 

 

257

 

Total available-for-sale securities

 

 

38,290

 

 

 

-

 

 

 

(1,320

)

 

 

36,970

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency residential mortgage-backed securities

 

 

1,247

 

 

 

-

 

 

 

(37

)

 

 

1,210

 

Total investment securities

 

$

39,537

 

 

$

-

 

 

$

(1,357

)

 

$

38,180

 

 

 

 

Amortized

Cost

 

 

Gross

Unrealized

Gains

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

December 31, 2018

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

34,831

 

 

$

-

 

 

$

(1,590

)

 

$

33,241

 

U.S. Government agencies

 

 

3,000

 

 

 

-

 

 

 

(43

)

 

 

2,957

 

U.S. Agency collateralized mortgage obligations

 

 

172

 

 

 

-

 

 

 

(3

)

 

 

169

 

U.S. Agency residential mortgage-backed securities

 

 

39

 

 

 

-

 

 

 

(1

)

 

 

38

 

Municipals

 

 

259

 

 

 

-

 

 

 

(4

)

 

 

255

 

Total available-for-sale securities

 

 

38,301

 

 

 

-

 

 

 

(1,641

)

 

 

36,660

 

Held-to-maturity

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Agency residential mortgage-backed securities

 

 

1,262

 

 

 

-

 

 

 

(57

)

 

 

1,205

 

Total investment securities

 

$

39,563

 

 

$

-

 

 

$

(1,698

)

 

$

37,865

 

 

The amortized cost and fair value of debt securities at March 31, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers or the underlying borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.

 

 

 

Available-for-Sale

 

 

Held-to-Maturity

 

 

 

Amortized

Cost

 

 

Fair

Value

 

 

Amortized

Cost

 

 

Fair

Value

 

 

 

(dollars in thousands)

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Amounts maturing in

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

One year or less

 

$

3,000

 

 

$

2,968

 

 

$

-

 

 

$

-

 

After one year through five years

 

 

25,115

 

 

 

24,217

 

 

 

-

 

 

 

-

 

After five years through ten years

 

 

9,983

 

 

 

9,595

 

 

 

-

 

 

 

-

 

 

 

 

38,098

 

 

 

36,780

 

 

 

-

 

 

 

-

 

U.S. Agency residential mortgage-backed securities and

   collateralized mortgage obligations

 

 

192

 

 

 

190

 

 

 

1,247

 

 

 

1,210

 

 

 

$

38,290

 

 

$

36,970

 

 

$

1,247

 

 

$

1,210

 

 

Investment securities with carrying values of $19,646,000 and $19,678,000 at March 31, 2019 and December 31, 2018 respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

12


 

There were no sales of investment securities during the three months ended March 31, 2019 and March 31, 2018.

Information pertaining to securities with gross unrealized losses at the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

 

 

 

Less Than 12 Months

 

 

12 Months or Greater

 

 

Total

 

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

 

Fair

Value

 

 

Gross

Unrealized

Losses

 

 

 

(dollars in thousands)

 

March 31, 2019

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Available-for-sale

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

U.S. Treasury securities

 

$

-

 

 

$

-

 

 

$

33,555

 

 

$

(1,285

)

 

$

33,555

 

 

$

(1,285

)

U.S. Government agencies

 

 

-

 

 

 

-

 

 

 

2,968

 

 

 

(32

)

 

 

2,968

 

 

 

(32

)

U.S. Agency collateralized mortgage obligations

 

 

-

 

 

 

-

 

 

 

154

 

 

 

(2

)

 

 

154

 

 

 

(2

)

Municipals

 

 

-

 

 

 

-

 

 

 

257

 

 

 

(1

)

 

 

257

 

 

 

(1

)

Total available-for-sale securities

 

 

-

 

 

 

-

 

 

 

36,934

 

 

 

(1,320

)

 

 

36,934

 

 

 

(1,320

)

Held-to-maturity