What changed in this filing

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Item 1. Financial Statements

2020-08-07 compared with 2020-05-08 · 199 added, 149 removed, 579 unchanged (38% of the section changed)

5 unchanged sentences

Interest earning deposits with other banks (restricted cash of $ 0 and $ 27,355

at March 31, 2020 and December 31, 2019, respectively)

at June 30, 2020 and December 31, 2019, respectively)

Investment securities, available for sale, at fair value

11 unchanged sentences

Federal Home Loan Bank (FHLB) advances

Paycheck Protection Program Liquidity Facility

Subordinated debt

Principal amount $ 10,000 (less unamortized debt issuance costs of $ 14

and $21 at March 31, 2020 and December 31, 2019, respectively)

and $ 21 at June 30, 2020 and December 31, 2019, respectively)

Junior subordinated debentures

Principal amount $ 3,609 (less unamortized debt issuance costs of $ 25

at March 31, 2020 and December 31, 2019)

and $26 at June 30, 2020 and December 31, 2019, respectively)

Deferred compensation

5 unchanged sentences

Preferred stock, no par value:

25,000,000 shares at March 31, 2020 and December 31, 2019;

25,000,000 shares at June 30, 2020 and December 31, 2019;

issued and outstanding:

zero shares at March 31, 2020 and December 31, 2019

zero shares at June 30, 2020 and December 31, 2019

Common stock, no par value:

300,000,000 shares at March 31, 2020 and December 31, 2019;

11,929,413 voting shares at March 31, 2020 issued and outstanding

300,000,000 shares at June 30, 2020 and December 31, 2019;

11,926,263 voting shares at June 30, 2020 issued and outstanding

and 11,913,885 voting shares at December 31, 2019 issued and outstanding

7 unchanged sentences

(dollars in thousands, except for per share data)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

INTEREST AND DIVIDEND INCOME

36 unchanged sentences

(dollars in thousands)

Three months ended March 31,

Three months ended June 30,

Six months ended June 30,

OTHER COMPREHENSIVE INCOME, before tax

Securities available-for-sale

Unrealized holding gain during the period

Income tax benefit related to unrealized holding

OTHER COMPREHENSIVE INCOME, net of tax

Unrealized holding (loss) gain during the period

Income tax benefit (expense) related to unrealized holding

OTHER COMPREHENSIVE (LOSS) INCOME, net of tax

COMPREHENSIVE INCOME

5 unchanged sentences

Income (Loss)

BALANCE, December 31, 2018

BALANCE, March 31, 2019

Issuance of restricted stock awards

Forfeiture of restricted stock awards

Exercise of stock options

1 unchanged sentence

Other comprehensive income

BALANCE, June 30, 2019

BALANCE, March 31, 2020

Forfeiture of restricted stock awards

Exercise of stock options

Stock-based compensation

Other comprehensive loss

BALANCE, June 30, 2020

BALANCE, December 31, 2018

Issuance of restricted stock awards

Forfeiture of restricted stock awards

Exercise of stock options

1 unchanged sentence

Other comprehensive income

BALANCE, March 31, 2020

BALANCE, June 30, 2019

BALANCE, December 31, 2019

Issuance of restricted stock awards

Forfeiture of restricted stock awards

Exercise of stock options

Stock-based compensation

Other comprehensive income

BALANCE, June 30, 2020

S ee accompanying Notes to Condensed Consolidated Financial Statements.

2 unchanged sentences

(dollars in thousands)

Three months ended March 31,

Six months ended June 30,

CASH FLOWS FROM OPERATING ACTIVITIES

6 unchanged sentences

Gain on sales of loans

Net discount accretion on investment securities

Net premium amortization (discount accretion) on investment securities

Stock-based compensation

Bank-owned life insurance earnings

Increase in bank-owned life insurance value

Deferred tax (benefit) expense

3 unchanged sentences

CASH FLOWS FROM INVESTING ACTIVITIES

Net decrease in interest earning deposits with other banks

Net (increase) decrease in interest earning deposits with other banks

Purchase of investment securities available for sale

Change in other investments, net

3 unchanged sentences

Purchase of participation loans

Proceeds from sale of loans

Increase in loans receivable, net

3 unchanged sentences

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

Net increase (decrease) in time deposits

Net (decrease) increase in time deposits

Net repayments from short term FHLB borrowing

Net advances from long term FHLB borrowing

Net advances from Paycheck Protection Program Liquidity Facility

Proceeds from exercise of stock options

5 unchanged sentences

Interest paid

Income taxes paid

SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS

8 unchanged sentences

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”).

Nature of operations - Coastal Financial Corporation (“Corporation” or “Company”) is a registered bank holding company whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC (“LLC”).

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.

Arlington Olympic LLC was formed in 2019 and owns the Company’s Arlington branch, which the Bank leases from the LLC.

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 15 branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application.

The Company plans to open its 15 th branch in Arlington, Washington in the second quarter 2020.

The Company opened its 15 th branch in Arlington, Washington during the second quarter 2020.

The Bank’s main branch and the headquarters of the Bank and Company are located in Everett, Washington.

1 unchanged sentence

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 also provides banking as a service (“BaaS”) that allow the Company’s broker dealers and digital financial service partners to offer their customers banking services.

The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks.

4 unchanged sentences

Securities and Exchange Commission (“SEC”) on March 12, 2020.

Operating results for the three months ended March 31, 2020 are not necessarily indicative of the results that may be expected for future periods.

Operating results for the three and six months ended June 30, 2020 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.

11 unchanged sentences

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.

Management believes that its critical accounting policies include determining the allowance for loan losses, the fair value of the Company’s 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, 2020 for potential recognition or disclosure.

To the extent any events and conditions exist, disclosures are made regarding the nature of events and the estimated financial effects for those events and conditions.

The Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements other than those listed below.

T h e quarter ended March 31, 2020 closed amid an unprecedented global COVID-19 pandemic that is impacting the economic health of our community and nation.

The Company is working with the Small Business Administration (“SBA”) to offer assistance to small busi nesses as provided in the recently passed Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).

As of May 6, 2020 , the Company has funded SBA Paycheck Protection Program (“PPP”) loan requests for 1,874 borrowers and $ 3 93.4 million, impacting ov er 3 5,325 employees in our communities.

As part of the Paycheck Protection Program Liquidity Facility, the Company pledged 327 of these loans, or $ 1 11.1 million as of May 6, 2020, which provides an additional source of funding for the PPP loans.

The Company is also in contact with borrowers with existing loans that have been impacted by COVID-19.

The Company expects to continue to restructure payments for existing loan customers during this uncertain time to help alleviate financial hardships and are deferring payments on over 215 loans representing $1 96.1 million in loans as of May 6, 2020.

In accordance with GAAP and interagency guidance issued on March 22, 2020, short-term modifications, made on a good faith basis in response to COVID-19 to borrow ers that were current prior to any relief, are not classified as troubled debt restructurings .

On May 1, 2020 the Company entered into a Purchase and Sale agreement to purchase property in Freeland, WA, for a cash consideration of $875,000.

The Company currently leases and occupies the property, which is the location of their Freeland Branch.

The purchase is expected to be completed during the second quarter of 2020 .

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, 2019 and 2018 included in the Company’s Annual Report Form 10-K filed with the SEC on March 12, 2020.

Subsequent Events - The Company has evaluated events and transactions subsequent to June 30, 2020 for potential recognition or disclosure.

To the extent any events and conditions exist, disclosures are made regarding the nature of events and the estimated

financial effects for those events and conditions.

The Company is not aware of any subsequent events which would require recognition or disclosure in the consolidated financial statements other than the ones presented below .

The Company recently became a registered lender in the Main Street Lending Program (“MSLP”), which was established by the Federal Reserve, to support lending to small- and medium-sized businesses and nonprofit organizations that were in sound financial condition before the onset of the COVID-19 pandemic.

The Company has not yet made any MSLP loans.

As a registered lender, the Company will be better positioned to provide financial assistance to customers as the COVID-19 pandemic evolves.

On July 4, the President signed legislation extending the PPP to August 8, 2020.

The PPP was originally set to expire on June 30, 2020.

The Company will continue to serve its customers and prospective new customers to originate loans in its markets through the latest extension date.

The Company funded $ 10.0 million in PPP loans from July 1, 2020 through August 5, 2020, helping over 1,015 additional people in its communities.

On August 3, 2020 the Bank announced it is working with Google to introduce digital bank accounts, which will be available to its customers through Google Pay in 2021.

Accounting policies – The Company’s 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, 2019 and 2018 included in the Company’s Annual Report Form 10-K filed with the SEC on March 12, 2020.

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.

7 unchanged sentences

Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented.

This interagency guidance is not expected to have a material impact on the Company’s financial statements;

however, this impact cannot be quantified at this time.

To be eligible a loan modification must be (1) related to COVID-19;

(2) executed on a loan that was not more than 30 days past due as of December 31, 2019;

and (3) executed between March 1, 2020, and the earlier of (A) 60 days after the date of termination of the federal National Emergency or (B) December 31, 2020.

See Note 4 of the Condensed Consolidated Financial Statements of this Report for disclosure of the impact to date .

4 unchanged sentences

The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods.

As a smaller reporting company our implementation will be effective January 1, 2023.

As a smaller reporting company, the Company’s implementation will be effective January 1, 2023.

The Company is actively assessing the data and the model needs and are evaluating the impact of adopting the amendment.

3 unchanged sentences

(dollars in thousands)

March 31, 2020

June 30, 2020

Available-for-sale

19 unchanged sentences

Total investment securities

The amortized cost and fair value of debt securities at March 31, 2020, by contractual maturity, are shown below.

The amortized cost and fair value of debt securities at June 30, 2020, 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.

3 unchanged sentences

(dollars in thousands)

March 31, 2020

June 30, 2020

Amounts maturing in

1 unchanged sentence

After one year through five years

After five years through ten years

Agency residential mortgage-backed securities and

collateralized mortgage obligations

Investment securities with carrying values of $13,809,000 and $16,843,000 at March 31, 2020 and December 31, 2019 respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

There were no sales during the three months ended March 31, 2020 and 2019 .

Investment securities with carrying values of $ 19,480,000 and $ 16,843,000 at June 30, 2020 and December 31, 2019 respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

There were no sales of securities available for sale during the three or six months ended June 30, 2020 and 2019.

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:

2 unchanged sentences

(dollars in thousands)

March 31, 2020

June 30, 2020

Available-for-sale

Municipal bonds

Total available-for-sale securities

Held-to-maturity

Agency residential mortgage-backed

Treasury securities

Total investment securities

7 unchanged sentences

Total investment securities

At March 31, 2020 and December 31, 2019, there were three and six securities in an unrealized loss position, respectively.

At June 30, 2020 and December 31, 2019, there were two and six securities in an unrealized loss position, respectively.

Unrealized losses have not been recognized into income because management does not intend to sell and does not expect that it will be required to sell the investments.

1 unchanged sentence

The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve.

The Company does not consider these securities to be other than temporarily impaired at March 31, 2020 and December 31, 2019.

The Company does no t consider these securities to be other than temporarily impaired at June 30, 2020 and December 31, 2019.

Note 4 - Loans and Allowance for Loan Losses

The composition of the loan portfolio is as follows as of the periods indicated:

(dollars in thousands)

Commercial and industrial loans

7 unchanged sentences

Loans receivable

Included in consumer and other loans are overdrafts of $19,000 and $26,000 at March 31, 2020 and December 31, 2019, respectively.

The Company has pledged loans totaling $168,864,000 and $163,522,000 at March 31, 2020 and December 31, 2019, respectively, for borrowing lines at the FHLB and Federal Reserve Bank (“FRB”).

The balance of SBA and United States Department of Agriculture ( “ USDA ” ) loans was $34,4 3 4,000 and $36,592,000 at March 31, 2020 and December 31, 2019, respectively.

Included in these totals is SBA and USDA loans serviced for others total ing $ 2 0,928 ,0 00 and $ 2 1,498 ,000 at March 31, 2020 and December 31, 2019 , respective ly.

Included in consumer and other loans are overdrafts of $ 13,000 and $ 26,000 at June 30, 2020 and December 31, 2019, respectively.

The Company has pledged loans totaling $ 359,278,000 and $ 163,522,000 at June 30, 2020 and December 31, 2019, respectively, for borrowing lines at the FHLB and Federal Reserve Bank (“FRB”).

The balance of Small Business Administration (“SBA”) and United States Department of Agriculture (“USDA”) loans was $ 470,700,000 and $ 36,592,000 at June 30, 2020 and December 31, 2019, respectively.

PPP loans of $ 438,077,000 at June 30, 2020 are included in the commercial and industrial loans balance.

Included in these totals are SBA and USDA loans serviced for others totaling $ 21,101,000 and $ 21,498,000 at June 30, 2020 and December 31, 2019, respectively.

Net deferred origination fees include $ 10,639,000 of net fees from PPP loans as of June 30, 2020.

The Company, at times, purchases individual loans at fair value as of the acquisition date.

Purchased loans with remaining balances totaled $30,418,000 and $32,937,000 as of March 31, 2020 and December 31, 2019, respectively.

Unamortized premiums totaled $484,000 and $527,000 as of March 31, 2020 and December 31, 2019, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $32,876,000 and $31,352,000 as of March 31, 2020 and December 31, 2019, respectively.

Purchased loans with remaining balances totaled $ 25,151,000 and $ 32,937,000 as of June 30, 2020 and December 31, 2019, respectively.

Unamortized premiums totaled $ 398,000 and $ 527,000 as of June 30, 2020 and December 31, 2019, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $ 35,456,000 and $ 31,352,000 as of June 30, 2020 and December 31, 2019, respectively.

The following is a summary of the Company’s loan portfolio segments:

Commercial and industrial loans - Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment of businesses located generally in our primary market area.

Loan types include revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities.

4 unchanged sentences

In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers.

Construction, land and land development loans – The Company originates loans for the construction of 1-4 family, multifamily, and Commercial Real Estate (“CRE”) properties in our market area.

Also included in this category are SBA 7(a) loans, which allow small business owners to apply for financial assistance via the PPP as prescribed in the CARES Act.

These loans have a contractual rate of 1.0 %, with maturity terms of two to five years , are unsecured, 100 % guaranteed and loan proceeds may be forgiven by the U.S.

Government / SBA if used for certain purposes.

Construction, land and land development loans – The Company originates loans for the construction of 1-4 family, multifamily, and Commercial Real Estate (“CRE”) properties in the Company’s market area.

Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing.

12 unchanged sentences

Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying collateral.

The following table illust rates an age analysis of past due loans as of the dates indicated:

The following table illustrates an age analysis of past due loans as of the dates indicated:

(dollars in thousands)

March 31, 2020

June 30, 2020

Commercial and industrial loans

18 unchanged sentences

(dollars in thousands)

March 31, 2020

June 30, 2020

Commercial and industrial loans

Real estate loans:

Construction, land and land development

Residential real estate

Commercial real estate

December 31, 2019

2 unchanged sentences

Residential real estate

The following tables summarize our average recorded investment and interest income recognized on impaired loans by loan class for the three months ended March 31, 2020 and 2019:

The following tables summarize the Company’s average recorded investment and interest income recognized on impaired loans by loan class for the three and six months ended June 30, 2020 and 2019:

Three Months Ended

March 31, 2020

March 31, 2019

June 30, 2020

June 30, 2019

Interest Income

(dollars in thousands)

Commercial and industrial loans

Real estate loans:

Construction, land and land development

Residential real estate

Commercial real estate

Consumer loans

Six Months Ended

June 30, 2020

June 30, 2019

Interest Income

(dollars in thousands)

Commercial and industrial loans

Real estate loans:

Construction, land and land development

Residential real estate

Commercial real estate

Consumer and other loans

The Company grants restructurings in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms.

The restructured loans on accrual status represent the only impaired loans accruing interest.

In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.

No loans were restructured in the three months ended March 31, 2020 and March 31, 2019 that qualified as TDRs.

The Company has no commitments to loan additional funds to borrowers whose loans were classified as troubled debt restructurings at March 31, 2020, as there were no outstanding troubled debt restructurings at March 31, 2020.

In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to

100 % of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.

No loans were restructured in the three or six months ended June 30, 2020 and June 30, 2019 that qualified as troubled debt restructurings (“TDRs”).

The Company has no commitments to loan additional funds to borrowers whose loans were classified as TDRs at June 30, 2020, as there were no outstanding TDRs at June 30, 2020.

The Company is in contact with borrowers with existing loans that have been impacted by COVID-19.

The Company is working on restructuring payments for loan customers during this uncertain time to help alleviate financial hardships, deferring payments on 52 loans, representing $37,862,000, as of March 31, 2020.

In accordance with GAAP and interagency guidance issued on March 22, 2020, these short-term modifications, made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief, are not considered troubled debt restructurings.

The Company has restructured payments for loan customers during this uncertain time to help alleviate financial hardships, deferring payments on 215 loans, representing $ 207.2 million in outstanding loans, and $ 5,611,000 in unused commitments, as of June 30, 2020.

In accordance with GAAP and interagency guidance issued on March 22, 2020, these short-term modifications, six months or less, made on a good faith basis in response to COVID-19 to borrowers that were current prior to any relief, are not considered troubled debt restructurings.

When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings.

6 unchanged sentences

Real estate loans:

Construction, land and land development

Residential real estate

Commercial real estate

Total nonaccrual loans

14 unchanged sentences

(dollars in thousands)

March 31, 2020

June 30, 2020

Commercial and industrial loans

21 unchanged sentences

Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions.

An estimated loss rate calculated the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

The Company’s provision for credit losses of $1.6 million during the quarter ended March 31, 2020 is related to the growth in the loan portfolio along with an increase in qualitative factors primarily related to the uncertainties in the economic outlook from the COVID-19 pandemic.

An estimated loss rate calculated from the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

The $ 438.1 million in PPP loans as of June 30, 2020 are 100% guaranteed and were not subject to the allowance analysis or assigned an allowance.

The Company’s provision for credit losses of $ 1.9 million and $ 3.5 million during the three and six months ended June 30, 2020, respectively, is related to the growth in the loan portfolio along with an increase in qualitative factors primarily related to the uncertainties in the economic outlook from the COVID-19 pandemic.

The Company is not required to implement the provisions of the Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023 and is continuing to account for the allowance for loan losses under the incurred loss model.

The following tables summarize the allocation of the ALLL , as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three months ended March 31, 2020 :

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three and six months ended June 30, 2020:

Construction,

(dollars in thousands)

Three Months Ended March 31, 2020

Three Months Ended June 30, 2020

ALLL balance, March 31, 2020

Provision for loan losses or (recapture)

Loans charged-off

Recoveries of loans previously charged-off

Net (charge-offs) recoveries

ALLL balance, June 30, 2020

Six Months Ended June 30, 2020

ALLL balance, December 31, 2019

3 unchanged sentences

Net (charge-offs) recoveries

ALLL balance, March 31, 2020

As of March 31, 2020

ALLL balance, June 30, 2020

As of June 30, 2020

ALLL amounts allocated to

1 unchanged sentence

Collectively evaluated for impairment

ALLL balance, March 31, 2020

ALLL balance, June 30, 2020

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Loan balance, March 31, 2020

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three months ended March 31, 2019:

Loan balance, June 30, 2020

The following tables summarize the allocation of the ALLL , as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three and six months ended June 30 , 2019 :

Construction,

(dollars in thousands)

Three Months Ended March 31, 2019

ALLL balance, December 31, 2019

Three months ended June 30, 2019

Balance, March 31, 2019

Provision for loan losses or (recapture)

2 unchanged sentences

Net (charge-offs) recoveries

ALLL balance, March 31, 2019

As of March 31, 2019

Balance, June 30, 2019

Six months ended June 30, 2019

Balance, December 31, 2018

Provision for loan losses or (recapture)

Loans charged-off

Recoveries of loans previously charged-off

Net (charge-offs) recoveries

Balance, June 30, 2019

As of June 30, 2019

ALLL amounts allocated to

1 unchanged sentence

Collectively evaluated for impairment

ALLL balance, March 31, 2019

ALLL balance, June 30, 2019

Loans individually evaluated for impairment

Loans collectively evaluated for impairment

Loan balance, March 31, 2019

Loan balance, June 30, 2019

The following table summarizes the allocation of the ALLL attributed to various segments in the loan portfolio as of December 31, 2019.

18 unchanged sentences

Total deposits

The following table presents the maturity distribution of time deposits as of March 31, 2020 (dollars in thousands):

The following table presents the maturity distribution of time deposits as of June 30, 2020 (dollars in thousands):

Twelve months

8 unchanged sentences

Operating lease liabilities represent an obligation to make lease payments arising from the lease.

Operating lease ROU assets and operating lease liabilities were recognized in our Unaudited Consolidated Balance Sheets for leases that existed at the adoption date, based on the present value of lease payments over the remaining lease term.

Operating lease ROU assets and operating lease liabilities were recognized in the Company’s Unaudited Consolidated Balance Sheets for leases that existed at the adoption date, based on the present value of lease payments over the remaining lease term.

ROU assets were further adjusted for lease incentives.

4 unchanged sentences

The Company’s lease agreements do not contain any residual value guarantees.

Operating leases with terms of 12 months or less are not included in ROU assets and operating lease liabilities recorded in our consolidated balance sheets.

Operating lease terms include options to extend when it is r easonably certain that the Company will exercise such options, determined on a lease-by-lease basis.

As of March 31, 2020, the Company does not have any leases that have not yet commenced.

At March 31, 2020, lease expiration dates ranged from two to 26 y ears , with additional renewal options on certain leases typically ranging from 5 to 10 years.

At March 31, 2020, the weighted average remaining lease term for the Company’s operating leases was 10.6 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $343,000 and $371,000, respectively, for the three months ended March 31, 2020 and 2019.

Operating leases with terms of 12 months or less are not included in ROU assets and operating lease liabilities recorded in the Company’s consolidated balance sheets.

Operating lease terms include options to extend when it is reasonably certain that the Company will exercise such options, determined on a lease-by-lease basis .

As of June 30, 2020, the Company does no t have any leases that have not yet commenced.

At June 30, 2020, lease expiration dates ranged from two to 26 years , with additional renewal options on certain leases typically ranging from 5 to 10 years .

At June 30, 2020, the weighted average remaining lease term for the Company’s operating leases was 10.6 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $ 334,000 and $ 348,000 , respectively, for the three months ended June 30, 2020 and 2019 and $ 678,000 and $ 711,000 , respectively for the six months ended June 30, 2020 and 2019.

Variable lease components, such as inflation adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at March 31, 2020:

The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at June 30, 2020:

(dollars in thousands)

April 1, 2020 to December 31, 2020

July 1, 2020 to December 31, 2020

2025 and thereafter

2 unchanged sentences

Present value of lease liabilities

The following table presents the components of total lease expense and operating cash flows for the three months ended March 31, 2020:

The following table presents the components of total lease expense and operating cash flows for the six months ended June 30, 2020:

(dollars in thousands)

11 unchanged sentences

Existing awards under the previous plans will vest under the terms granted and no further awards will be made under these plans.

Shares available to be granted under the 2018 Plan totaled 276,407 at March 31, 2020.

Shares available to be granted under the 2018 Plan totaled 281,225 at June 30, 2020.

Stock Option Awards

In January 2019, the Company granted 26,737 nonqualified stock options under the 2018 Plan to an employee, which vest ratably over 10 years.

In January 2019, the Company also granted 99,100 qualified stock options under the 2018 Plan to employees, which vest ratably over 10 years.

The Company has not granted any stock options in 2020.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table.

Expected volatilities are based on historical volatility of the Company’s stock and o ther factors.

Expected volatilities are based on historical volatility of the Company’s stock and other factors.

The Company uses the vesting term and contractual life to determine the expected life.

3 unchanged sentences

The following assumptions were used to estimate the value of options granted under the 2018 Plan as applicable in the period indicated:

Three months ended

March 31, 2019

Six months ended

June 30, 2019

Expected term

3 unchanged sentences

Weighted average grant date fair value

A summary of stock option activity under the 2018 Plan and 2006 Plan during the three months ended March 31, 2020:

Total or Aggregate

A summary of stock option activity under the 2018 Plan and 2006 Plan during the three months ended June 30, 2020:

Intrinsic Value

2 unchanged sentences

Forfeited or expired

Outstanding at March 31, 2020

Vested or expected to vest at March 31, 2020

Exercisable at March 31, 2020

The total or aggregate intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three months ended March 31, 2020 was $91,000 and was $69,000 for the three months ended March 31, 2019.

As of March 31, 2020, there was $2.2 million of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan.

Outstanding at June 30, 2020

Vested or expected to vest at June 30, 2020

Exercisable at June 30, 2020

The total or aggregate intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three and six months ended June 30, 2020 was $ 3,000 and $ 94,000 , respectively, and was $ 66,000 and $ 135,000 for the three and six months ended June 30, 2019, respectively.

As of June 30, 2020, there was $ 2.1 million of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan.

Total unrecognized compensation costs are adjusted for unvested forfeitures.

The Company expects to recognize that cost over a weighted-average period of approximately 7.0 years.

Compensation expense recorded related to stock options was $94,000 for the three months ended March 31, 2020, and $97,000 for the three months ended March 31, 2019.

Compensation expense recorded related to stock options was $ 92,000 and $ 187,000 for the three and six months ended June 30, 2020, respectively, and $ 101,000 and $ 198,000 for the three and six months ended June 30, 2019, respectively.

Restricted Stock Units

In February 2020, the Company granted 78,756 restricted stock units under the 2018 Plan to employees, which vest ratably over 10 years.

In April 2020, the Company granted 1,490 restricted stock units under the 2018 Plan to an employee, which vest ratably over 10 years.

The fair value of restricted stock units is equal to the fair value of the Company’s stock at the date of grant.

3 unchanged sentences

The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 9.8 years.

Compensation expense recorded related to restricted stock units was $23,000 for the three months ended March 31, 2020.

There were no restricted stock units and no compensation expense recorded related to restricted stock units for the three months ended March 31, 2019.

A summary of the Compan y’s nonv ested shares at March 31, 2020 and changes during the three -month period is presented below:

Compensation expense recorded related to restricted stock units was $ 34,000 and $ 57,000 for the three and six months ended June 30, 2020, respectively.

There were no restricted stock units and no compensation expense recorded related to restricted stock units for the three and six months ended June 30, 2019.

A summary of the Company’s nonvested shares at June 30, 2020 and changes during the six-month period is presented below:

Nonvested shares

1 unchanged sentence

Intrinsic Value

(all amounts in dollars except per share amounts)

(dollars in thousands, except per share amounts)

Nonvested shares at December 31, 2019

Nonvested shares at March 31, 2020

Nonvested shares at June 30, 2020

Restricted Stock Awards

3 unchanged sentences

Restricted stock awards are participating securities.

As of March 31, 2020, there was $120,000 of total unrecognized compensation cost related to nonvested restricted stock awards.

As of June 30, 2020, there was $ 70,000 of total unrecognized compensation cost related to nonvested restricted stock awards.

The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 7.6 years.

Compensation expense recorded related to restricted stock awards was $3,000 for the three months ended March 31, 2020 and was $2,000 for the three months ended March 31, 2019.

Compensation expense recorded related to restricted stock awards was $ 1,000 and $ 3,000 for the three and six months ended June 30, 2020, respectively, and was $ 2,000 and $ 4,000 for the three and six months ended June 30, 2019, respectively.

Director’s Stock Bonus

11 unchanged sentences

In January 2019, there were 2,352 shares granted to seven directors at an estimated fair value of $ 14.91 per share.

Compensation expense recorded related to the 2018 Plan totaled $9,000 for the three months ended March 31, 2020 and $8,000 for the three months ended March 31, 2019.

A summary of the Company’s nonvested shares at March 31, 2020 and changes during the three-month period is presented below:

Compensation expense recorded related to the 2018 Plan totaled $ 9,000 and $ 18,000 for the three and six months ended June 30, 2020, respectively, and $ 8,000 and $ 17,000 for the three and six months ended June 30, 2019, respectively.

A summary of the Company’s nonvested shares at June 30, 2020 and changes during the three-month period is presented below:

Nonvested shares

Total or Aggregate

Intrinsic Value

(all amounts in dollars except per share amounts)

(dollars in thousands, except per share amounts)

Nonvested shares at December 31, 2019

Nonvested shares at March 31, 2020

Note 8 - Shareholders’ Equity

The total authorized preferred stock is 25,000,000 shares.

There were no shares of preferred stock issued and outstanding at March 31, 2020 and December 31, 2019.

The total authorized common shares is 300,000,000 shares.

At March 31, 2020 and December 31, 2019, there were 11,929,413 and 11,913,885 common shares issued and outstanding.

At March 31, 2020 and December 31, 2019 there were no shares of Class B nonvoting common stock issued and outstanding.

There were no shares of Class C nonvoting common stock issued and outstanding, at March 31, 2020 and December 31, 2019.

Nonvested shares at June 30, 2020

Note 8 - Fair Value Measurements

The following tables present estimated fair values of the Company’s financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:

March 31, 2020

June 30, 2020

Fair Value Measurements Using

9 unchanged sentences

FHLB advances

Paycheck Protection Program Liquidity Facility

Subordinated debt

17 unchanged sentences

The Company measures and discloses certain assets and liabilities at fair value.

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale).

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date

(that is, not a forced liquidation or distressed sale).

GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements.

14 unchanged sentences

This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Items measured at fair value on a rec urring basis – The following fair value hierarchy table presents information about the Company’s assets that are measured at fair value on a recurring basis at the dates indicated:

Items measured at fair value on a recurring basis – The following fair value hierarchy table presents information about the Company’s assets that are measured at fair value on a recurring basis at the dates indicated:

(dollars in thousands)

March 31, 2020

June 30, 2020

Available-for-sale

Treasury securities

Government agencies

Agency collateralized mortgage obligations

8 unchanged sentences

Investment securities - The fair value of securities is based on quoted market prices, pricing models, quoted prices of similar securities, independent pricing sources, and discounted cash flows.

The fair value estimates presented herein are based on pertinent information available to management as of March 31, 2020 and December 31, 2019.

The fair value estimates presented herein are based on pertinent information available to management as of June 30, 2020 and December 31, 2019.

The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

3 unchanged sentences

Unobservable Inputs

March 31, 2020

Weighted Average Rate

June 30, 2020

December 31, 2019

Weighted Average Rate

Impaired loans

3 unchanged sentences

(dollars in thousands)

March 31, 2020

June 30, 2020

Impaired loans

12 unchanged sentences

Three months ended

March 31, 2020

March 31, 2019

Six months ended

June 30, 2020

June 30, 2019

June 30, 2020

June 30, 2019

(dollars in thousands, except share data)

Basic weighted average number common shares outstanding

Dilutive effect of share-based compensation

Diluted weighted average number common shares outstanding

Dilutive effect of equity-based awards

Diluted weighted average number common shares

Basic earnings per share

2 unchanged sentences

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-Q

Item 1. Financial Statements