Coastal Financial Corporation Announces First Quarter 2020 Results

Everett, Washington, UNITED STATES


Quarter One 2020 Highlights:

  • Net income totaled $2.7 million for the quarter ended March 31, 2020, or $0.22 per diluted common share, a decrease of 3.0% from $2.8 million or $0.23 per diluted common share for the quarter ended March 31, 2019. 
  • Total assets were $1.18 billion and grew at an annualized rate of 19.8% during the quarter ended March 31, 2020, compared to total assets of $1.13 billion at December 31, 2019.
  • Total loans receivable grew at an annualized rate of 28.3% during the quarter ended March 31, 2020 to $1.01 billion compared to $939.1 million at December 31, 2019.
  • A provision for credit losses of $1.6 million was recorded during the quarter ended March 31, 2020, due to loan growth and in response to the economic uncertainties of the COVID-19 pandemic.
  • Total deposits increased at an annualized rate of 15.4% during the quarter ended March 31, 2019 to $1.01 billion, compared to $968.0 million at December 31, 2019.
  • Total core deposits increased at an annualized rate of 13.9% during the quarter ended March 31, 2020 and were 88.8% of total deposits. 

EVERETT, Wash., April 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 March 31, 2020.  Net income for the first quarter of 2020 was $2.7 million, or $0.22 per diluted common share, compared with net income of $3.6 million, or $0.30 per diluted common share, for the fourth quarter of 2019, and $2.8 million or $0.23 per diluted common share for the quarter ended March 31, 2019. 

“As we close the first quarter of 2020, we are in the midst of an unprecedented global COVID-19 pandemic that is impacting the physical and economic health of our community and nation.  We started the year off strong and despite the pandemic related disruptions that occurred late in the period, we finished the first quarter of 2020 with net income of $2.7 million, which includes $1.6 million in loan loss provision expense due to loan growth and in response to the economic uncertainties of the pandemic, annualized loan growth of 28.3% and annualized deposit growth of 15.4%.  We also continue to build out and expand on our CCBX division, which provides Banking as a Service (“BaaS”) enabling broker dealers and digital financial service providers to offer their clients banking services, while providing additional sources of fee income for the Bank,” stated Eric Sprink, the President and CEO of the Company and the Bank.

“As a preferred Small Business Administration (“SBA”) lender, we are working diligently with the SBA to offer assistance to small businesses as provided in the recently passed Coronavirus Aid, Relief and Economic Security Act (“CARES Act”).  We have accepted in excess of 1,135 Paycheck Protection Program (“PPP”) applications expected to provide approximately $280.7 million in resources to businesses, impacting over 25,175 employees in our communities as of April 24, 2020.  We are taking a proactive approach on restructuring payments for our loan customers during this uncertain time to help alleviate financial hardships by deferring or modifying payments on $159.3 million, that represents 180 loans to provide community financial relief, pursuant to federal guidance, since the end of March 2020.

We are committed to following the guidelines set forth by our federal, state and local government and public health officials to keep us all healthy and safe while remaining open and serving our communities through our drive throughs, call center, mobile banking, online banking and ATMs.  The Company has taken measures to protect the health and safety of its employees by implementing remote work arrangements to the fullest extent possible. 

The Company’s credit administration is closely analyzing the Company’s higher risk segments within the loan portfolio, monitoring and tracking loan payment deferrals, customer liquidity, and providing timely reporting. The management team continues to analyze economic conditions in our geographic markets. Based on the Company’s current capital levels, conservative underwriting policies, and industry diversification within our concentrations, management expects to be able to manage the economic risks and uncertainties associated with the COVID-19 pandemic.

As we navigate through this historic time, we remain focused on managing and innovating our way to an enhanced future for the Company, our customers and our communities, combining the stability of our Bank and the additional sources of income from our CCBX division to emerge from this trying time united and stronger than ever.” 

Results of Operations

Net interest income was $11.4 million for the quarter ended March 31, 2020, an increase of 0.3% from $11.3 million for the quarter ended December 31, 2019 and an increase of 16.4% from $9.8 million for the quarter ended March 31, 2019.   The increase compared to the prior quarter and prior year’s fourth quarter is largely related to increased interest income resulting from our loan growth, partially offset by increased interest expense due to growth in interest bearing deposits and a decrease in rates on existing loans that are tied to indexes, including, among others, Wall Street Journal Prime, FHLB term advance rates and LIBOR.

Net interest margin for the quarter ended March 31, 2020 decreased 11 basis points to 4.15% as compared to 4.26% for the quarter ended December 31, 2019 and was 4.13% for the quarter ended March 31, 2019. The decrease over the prior quarter was due to lower interest rates on loans combined with reduced balances on investment securities.  The increase in net interest margin compared to the first quarter in the prior year is primarily due to a decrease in cost of funds, which decreased six basis points to 0.70% for the quarter ended March 31, 2020, compared to 0.76% for the quarter ended March 31, 2019.

During the quarter ended March 31, 2020, the average balance of total loans receivable increased by $55.2 million, to $966.6 million, compared to $911.4 million for the quarter ended December 31, 2019, and increased by $184.2 million, compared to $782.4 million for the same quarter one year ago. Total loan yield for the quarter ended March 31, 2020 was 5.25%, compared to 5.36% for the quarter ended December 31, 2019, and 5.40% for the quarter ended March 31, 2019.

Contractual loan yields approximated 5.08% for the quarter ended March 31, 2020, compared to 5.15% for the quarter ended December 31, 2019, and 5.22% for the quarter ended March 31, 2019. The Federal Open Market Committee (“FOMC”) lowered rates five times for a total decrease of 2.25% since July 2019, resulting in lower rates on new and renewing loans as well as loans tied to indexes.  Although we have rate floors in place for $347.7 million, or 34.5%, in existing loans, the rate reductions by FOMC have a corresponding impact on loan yields and subsequently the net interest margin in future periods.

Deposit costs for the quarter ended March 31, 2020 were 0.64%, an increase of one basis point from 0.63% for the quarter ended December 31, 2019, and a four-basis point decrease from the quarter ended March 31, 2019.  Market conditions for deposits continued to be competitive during the quarter, despite this, we lowered many rates, with most changes to our interest bearing demand deposit and certificate of deposit rates effective in March and April 2020.  Historically, there tends to be a lag in customer deposit rates being adjusted up or down in response to rate changes by the FOMC, therefore additional changes may be made in the future as the market responds to the most recent FOMC rate reductions.      

Return on average assets (“ROA”) was 0.96% for the quarter ended March 31, 2020 compared to 1.31% and 1.14% for the quarters ended December 31, 2019 and March 31, 2019, respectively.  ROA was impacted in the current quarter by increased provision for loan losses due to loan growth and in response to the economic uncertainties of the COVID-19 pandemic. Pre-provision, pre-tax ROA was 1.77% for the quarter ended March 31, 2020, compared to 1.95% and 1.66% for the quarters ended December 31, 2019 and March 31, 2019, respectively.

The following table shows the Company’s key performance ratios for the periods indicated.  The table also includes ratios that were adjusted by removing the impact of the previously disclosed atypical BaaS-brokered deposits for the quarters ended June 30, 2019 and March 31, 2019.  The BaaS-brokered deposits normalized at the end of the second quarter of 2019, therefore no adjustment was made to the loans receivable to deposits ratio as of June 30, 2019 and  no adjustments were made to the performance ratios that are calculated using an average balance since the quarter ended June 30, 2019.  The adjusted ratios are non-GAAP measures.  For more information about non-GAAP financial measures, see the end of this earnings release.

  Three months ended 
  March 31,
2020
 December 31,
2019
 September 30,
2019
 June 30,
2019
 March 31,
2019
 
                 
Return on average assets (1)  0.96% 1.31% 1.35% 1.31% 1.14%
Return on average assets, as adjusted (1,2) N/A N/A N/A  1.34% 1.20%
Return on average equity (1)  8.66% 11.66% 11.72% 11.45% 10.25%
Pre-tax, pre-provision return on average assets (1,3)  1.77% 1.95% 1.95% 1.87% 1.66%
Yield on earnings assets (1)  4.79% 4.90% 4.94% 4.92% 4.82%
Yield on loans receivable (1)  5.25% 5.36% 5.36% 5.39% 5.40%
Loan yield excluding fees (1)  5.08% 5.15% 5.24% 5.23% 5.22%
Cost of funds (1)  0.70% 0.70% 0.72% 0.74% 0.76%
Cost of funds, as adjusted (1,4) N/A N/A N/A  0.71% 0.61%
Cost of deposits (1)  0.64% 0.63% 0.64% 0.66% 0.68%
Cost of deposits, as adjusted (1,5) N/A N/A N/A  0.63% 0.52%
Net interest margin (1)  4.15% 4.26% 4.29% 4.24% 4.13%
Net interest margin, as adjusted (1,6) N/A N/A N/A  4.38% 4.48%
Noninterest expense to average assets (1)  3.18% 2.90% 2.98% 3.06% 3.12%
Noninterest expense to average assets, as adjusted (1,7) N/A N/A N/A  3.12% 3.37%
Efficiency ratio  64.26% 59.86% 60.46% 62.05% 65.20%
Loans receivable to deposits  100.01% 97.02% 94.78% 97.39% 81.01%
Loans receivable to deposits, as adjusted (8) N/A N/A N/A N/A  97.44%
                 
(1) Annualized calculations shown for quarterly periods presented. 
(2) For quarters ended June 30, 2019 and March 31, 2019, adjusted return on average assets is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is return on average assets.  See the end of the earnings release for more information. 
(3) Pre-tax, pre-provision return on average assets is a non-GAAP measure that excludes the impact of provision for loan losses and income tax expense from return on average assets.  The most directly comparable GAAP measure is return on average assets. See the end of the earnings release for more information. 
(4) For quarters ended June 30, 2019 and March 31, 2019, adjusted cost of funds is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is cost of funds.  See the end of the earnings release for more information. 
(5) For quarters ended June 30, 2019 and March 31, 2019, adjusted cost of deposits is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is cost of deposits.  See the end of the earnings release for more information. 
(6) For quarters ended June 30, 2019 and March 31, 2019, adjusted net interest margin is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is net interest margin.  See the end of the earnings release for more information. 
(7) For quarters ended June 30, 2019 and March 31, 2019, adjusted noninterest expense to average assets is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is noninterest expense to average assets.  See the end of the earnings release for more information. 
(8) For quarter ended March 31, 2019, adjusted loans receivable to deposits is a non-GAAP measure that excludes BaaS-brokered deposits on balance sheet. The most directly comparable GAAP measure is loans receivable to deposits.  See the end of the earnings release for more information. 

Noninterest income was $2.7 million for the first quarter of 2020, an increase of $612,000 from $2.1 million at the fourth quarter of 2019, and an increase of $687,000 from $2.0 million for the comparable period one year ago.  A $721,000 increase in loan referral fees, which is earned when we originate a variable rate loan and arrange for the borrower to enter into an interest rate swap agreement with a third party to fix the interest rate for an extended period, and $51,000 increase in mortgage broker fees was partially offset by a $82,000 decrease in deposit service charges and fees and $77,000 decrease in BaaS fees when compared to the quarter ended December 31, 2019.  The $687,000 increase over the quarter ended March 31, 2019 was largely due to a $420,000 increase loan referral fees combined with $133,000 increase in BaaS fees, and $77,000 increase in mortgage broker fees.  

Total noninterest expense for the current quarter was $9.0 million compared to $8.0 million for the preceding quarter and increased 17.7% from $7.7 million from the comparable period one year ago. Noninterest expense variances for the quarter ended March 31, 2020 as compared to the quarter ended December 31, 2019 include a $782,000 increase in salaries and employee benefits, largely the result of hiring staff for our BaaS CCBX division and additional staff for our ongoing banking related growth initiatives, coupled with $92,000 increase in legal and professional fees related to BaaS activities through CCBX operations and regular costs related to legal and accounting work related to year-end reporting.   The increased expenses for the current quarter compared to the comparable quarter one year ago were largely due to increases in salary expenses. Full time equivalent employees at March 31, 2020 totaled 208, which was up 6.7% from the prior quarter and increased 16.2% from the quarter ended March 31, 2019. Staffing increases compared to the prior year are due to organic growth initiatives and include increases in back office staffing to support the incremental increases in banking teams and to grow our BaaS CCBX division.   Other expenses increased $259,000 as a result of $124,000 more in dues and memberships and subscription and software license expense and $49,000 more in bank examination fees.    

The provision for income taxes was $714,000 at March 31, 2020, a $233,000 decrease compared to $947,000 for the fourth quarter of 2019 as a result of decreased taxable income and $27,000 less than $741,000 for the first quarter of 2019, also as a result of decreased taxable income.  The Company uses a federal statutory tax rate of 21% as a basis for calculating provision for income taxes.

Balance Sheet

The Company’s total assets increased $55.5 million, or 4.9%, to $1.18 billion at March 31, 2020 from $1.13 billion at December 31, 2019.  The primary cause of the increase was a $64.6 million in increased net loans receivable, partially offset by a $13.0 million decrease in investment securities resulting from maturities and principal paydowns.  In the quarter ended March 31, 2020 total assets increased $68.0 million, or 6.1%, from $1.12 billion at March 31, 2019.  This increase is largely the result of $211.1 million increase in net loans receivable, partially offset by $121.4 million decrease in interest earning deposits with other banks.  The Company previously disclosed that at March 31, 2019 there were $164.6 million in temporary, high rate BaaS deposits on balance sheet which temporarily increased total assets as of that date.

Total loans receivable, net of allowance for loan losses, increased $64.6 million, or 7.0%, to $992.3 million at March 31, 2020, from $927.6 million at December 31, 2019 and $211.1 million, or 27.0%, from $781.2 million at March 31, 2019.  The growth in net loans receivable over the previous quarter end was due primarily to increases in commercial real estate loans of $30.1 million and $22.6 million in construction, land and land development loans, and $11.3 million in commercial and industrial loans.  As a percent of total loans, all categories remained consistent with those of December 31, 2019, and we have been able to maintain this allocation by growing all areas of our portfolio.  The Company anticipates an increase in commercial and industrial SBA 7(a) loans during the second quarter 2020, as small business owners apply for relief via the PPP as prescribed in the CARES Act.  The increase over the quarter ended March 31, 2019 was due to increases in commercial real estate of $107.6 million, $54.0 million in construction, land and land development loans, $30.4 million in commercial and industrial loans and $23.1 million in residential real estate loans.

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

  As of 
  March 31, 2020  December 31, 2019  March 31, 2019 
(Dollars in thousands) Balance % to Total  Balance % to Total  Balance % to
Total
 
                      
Commercial and industrial loans $122,667  12.2% $111,401  11.8% $92,248  11.6%
Real estate:                     
  Construction, land and                     
  land development  119,668  11.9   97,034  10.3   65,686  8.3 
  Residential  117,821  11.7   115,011  12.2   94,743  12.0 
  Commercial real estate  643,488  63.9   613,398  65.2   535,896  67.6 
Consumer and other  3,695  0.3   4,214  0.5   3,583  0.5 
  Gross loans receivable  1,007,339  100.0%  941,058  100.0%  792,156  100.0%
Net deferred origination fees  (2,159)     (1,955)     (1,084)   
  Loans receivable $1,005,180     $939,103     $791,072    

Please see Appendix A for additional loan portfolio detail regarding industry concentrations in response to the volatile economic environment due to the COVID-19 pandemic.

Total deposits increased $37.1 million, or 3.8%, to $1.01 billion at March 31, 2020 from $968.0 million at December 31, 2019.  The increase is largely due to a $29.9 million increase in core deposits.  During the quarter ended March 31, 2020, noninterest bearing deposits decreased $25.7 million, or 6.9%, to $345.5 million from $371.2 million at December 31, 2019.  The $25.7 million decrease in noninterest bearing deposits was impacted by the loss of $10.2 million in deposits from the distribution of deposits from an estate and the reclassification of $8.5 million in noninterest bearing to interest bearing from a CCBX customer that is expected to eventually return to noninterest bearing.  NOW and money market accounts increased $54.1 million, savings accounts increased $1.5 million, BaaS-brokered deposits were relatively static and time deposits increased $6.9 million.  Total deposits increased $28.6 million, or 2.9%, compared to March 31, 2019.  As previously reported, that includes $164.6 million in temporary BaaS-brokered deposits as of March 31, 2019.  Noninterest bearing deposits increased $49.3 million, or 16.6%, from $296.2 million at March 31, 2019.  NOW and money market accounts increased $123.9 million, savings accounts increased $2.6 million, BaaS-brokered deposits decreased $140.7 million and time deposits decreased $6.5 million.  Efforts to retain and grow core deposits is evidenced by the high ratios in these categories when compared to total deposits. 

The following table summarizes the deposit portfolio at the periods indicated and breaks out BaaS-brokered deposits.

  As of 
  March 31, 2020  December 31, 2019  March 31, 2019 
(Dollars in thousands) Balance % to
Total
  Balance % to
Total
  Balance % to
Total
 
                      
Demand, noninterest bearing $345,503  34.4% $371,243  38.4% $296,247  30.3%
NOW and money market  492,054  49.0   437,908  45.2   368,130  37.7 
Savings  54,851  5.4   53,365  5.5   52,246  5.4 
  Total core deposits  892,408  88.8   862,516  89.1   716,623  73.4 
BaaS-brokered deposits  23,904  2.4   23,586  2.4   164,604  16.9 
Time deposits less than $250,000  58,366  5.8   51,644  5.4   60,728  6.2 
Time deposits $250,000 and over  30,384  3.0   30,213  3.1   34,541  3.5 
  Total deposits $1,005,062  100.0% $967,959  100.0% $976,496  100.0%

The Federal Home Loan Bank (“FHLB”) allows us to borrow against our line of credit, which is collateralized by certain loans. As of March 31, 2020, total borrowing capacity of $88.1 million was available under this arrangement. On March 4, 2020, we borrowed a total of $25.0 million in FHLB long term advances.  This includes $10.0 million for a three-year term and $15.0 million for a five-year term.  These advances provide an alternative source of funding to meet loan demand.  We were able to lock in favorable, long-term rates, that supplements deposits, which is our primary source of funding.

Total shareholders’ equity increased $3.0 million since December 31, 2019.  The increase in shareholders’ equity was primarily due to $2.7 million in net earnings during the quarter ended March 31, 2020. 

Capital Ratios

The Company and the Bank remain well capitalized at March 31, 2020, as summarized in the following table.

Capital Ratios:Coastal
Community
Bank
  Coastal Financial
Corporation
  Financial
Institution Basel
III Regulatory
Guidelines
 
            
Tier 1 leverage capital 11.70%  11.43%  5.00%
Common Equity Tier 1 risk-based capital 12.58%  12.10%  6.50%
Tier 1 risk-based capital 12.58%  12.43%  8.00%
Total risk-based capital 13.83%  14.65%  10.00%

During the quarter ended March 31, 2020, the Company contributed $7.5 million in capital to the Bank due to the volatile economic environment.  After the downstream of capital, the Company had $6.1 million in cash at March 31, 2020 and could make additional contributions to the Bank in the future, if necessary.

Asset Quality

The allowance for loan losses was 1.29% of loans receivable at March 31, 2020 compared to 1.22% at December 31, 2019 and 1.25% at March 31, 2019.  Provision for loan losses totaled $1.6 million for the current quarter, $820,000 for the preceding quarter, and $540,000 for the same quarter in the prior year. Net charge-offs totaled $123,000 for the quarter ended March 31, 2020, compared to net charge-offs of $238,000 for the quarter ended December 31, 2019 and $32,000 net charge-offs for the quarter ended March 31, 2019.  

The Company’s provision for credit losses of $1.6 million during the quarter ended March 31, 2020 is related to the growth in the loan portfolio along with an increase in qualitative factors related to the economic uncertainties caused by the COVID-19 pandemic. The Company is not required to implement the provisions of the Current Expected Credit Loss accounting standard until January 1, 2023, and will continue to account for the allowance for credit losses under the incurred loss model. 

At March 31, 2020, our nonperforming assets were $763,000, or 0.06% of total assets, compared to $1.0 million or 0.09% of total assets at December 31, 2019, and $1.3 million, or 0.12% of total assets at March 31, 2019.  There were no repossessed assets or other real estate owned at March 31, 2020.

Our nonperforming loans to loans receivable ratio was 0.08% at March 31, 2020, compared to 0.11% at December 31, 2019.  Commercial and industrial nonaccrual loans totaled $699,000 at March 31, 2020, and consisted of four lending relationships.  During the first quarter of 2020, charge-offs totaled $121,000 on nonperforming loans.  Principal reductions along with the aforementioned charge-offs resulted in an overall decrease in our ratios of nonperforming loans and nonperforming assets to total assets compared to December 31, 2019.  One loan was moved to nonperforming status in the first quarter of 2020, and was subsequently charged off.

Credit quality has remained stable in 2020 thus far, as demonstrated by the low level of charge-offs and declining nonperforming loan balance.  The immediate and long-term economic impact of the global pandemic, trade issues, and decline in oil prices is unknown, however the Company remains diligent in its efforts to communicate and work with borrowers to help mitigate potential credit deterioration.

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

  As of 
  March 31, December 31, March 31, 
(Dollars in thousands) 2020 2019 2019 
           
Nonaccrual loans:          
Commercial and industrial loans $699 $965 $493 
Real estate:          
  Residential  64  65  71 
Consumer and other loans  -  -  2 
  Total nonaccrual loans  763  1,030  566 
  Total accruing loans past due 90 days or more  -  -  748 
  Total nonperforming loans  763  1,030  1,314 
Other real estate owned  -  -  - 
Repossessed assets  -  -  - 
Total nonperforming assets $763 $1,030 $1,314 
Troubled debt restructurings, accruing  -  -  - 
Total nonperforming loans to loans receivable  0.08% 0.11% 0.17%
Total nonperforming assets to total assets  0.06% 0.09% 0.12%

About Coastal Financial

Coastal Financial Corporation (Nasdaq: CCB) (the “Company”), is an Everett, Washington based bank holding company with Coastal Community Bank (the “Bank”), a full-service commercial bank, as its sole wholly-owned banking subsidiary.  The $1 billion community bank that the Bank operates provides service through 14 branches in Snohomish, Island, and King Counties, the Internet and its mobile banking application.  The Bank will be opening its 15th branch in Arlington, Washington in second quarter 2020.  The Bank provides select partners with BaaS through its CCBX Division.  To learn more about Coastal visit www.coastalbank.com.

Contact

Eric Sprink, President & Chief Executive Officer, (425) 357-3659
Joel Edwards, Executive Vice President & Chief Financial Officer, (425) 357-3687

Forward-Looking Statements

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our management’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Any or all of the forward-looking statements in this earnings release may turn out to be inaccurate. The inclusion of or reference to forward-looking information in this earnings release should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, the risks and uncertainties discussed under “Risk Factors” in our Annual Report on Form 10-K for the most recent period filed, and in any of our subsequent filings with the Securities and Exchange Commission.

If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. You are cautioned not to place undue reliance on forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as required by law.

COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands; unaudited)

ASSETS 
  March 31,  December 31,  March 31, 
  2020  2019  2019 
Cash and due from banks $14,124  $16,555  $21,176 
Interest earning deposits with other banks  115,112   111,259   236,483 
Investment securities, available for sale, at fair value  15,469   28,360   36,970 
Investment securities, held to maturity, at amortized cost  4,290   4,350   1,247 
Other investments  5,723   4,505   3,600 
Loans receivable  1,005,180   939,103   791,072 
Allowance for loan losses  (12,925)  (11,470)  (9,915)
  Total loans receivable, net  992,255   927,633   781,157 
Premises and equipment, net  14,195   13,108   13,017 
Operating lease right-of-use assets  8,228   8,493   9,305 
Accrued interest receivable  3,014   2,980   2,505 
Bank-owned life insurance, net  6,931   6,882   6,735 
Deferred tax asset, net  2,735   2,743   2,496 
Other assets  1,995   1,658   1,399 
  Total assets $1,184,071  $1,128,526  $1,116,090 
             
LIABILITIES AND SHAREHOLDERS EQUITY 
LIABILITIES            
Deposits $1,005,062  $967,959  $976,496 
Federal Home Loan Bank (FHLB) advances  24,999   10,000   - 
Subordinated debt, net  9,982   9,979   9,968 
Junior subordinated debentures, net  3,583   3,583   3,581 
Deferred compensation  947   974   1,052 
Accrued interest payable  310   308   343 
Operating lease liabilities  8,419   8,679   9,471 
Other liabilities  3,603   2,871   2,814 
  Total liabilities  1,056,905   1,004,353   1,003,725 
             
SHAREHOLDERS’ EQUITY            
Common stock  87,166   86,983   86,579 
Retained earnings  39,946   37,222   26,829 
Accumulated other comprehensive income (loss), net of tax  54   (32)  (1,043)
  Total shareholders’ equity  127,166   124,173   112,365 
  Total liabilities and shareholders’ equity $1,184,071  $1,128,526  $1,116,090 
 

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

 Three months ended 
 March 31, December 31, March 31, 
 2020 2019 2019 
INTEREST AND DIVIDEND INCOME         
Interest and fees on loans$12,627 $12,323 $10,419 
Interest on interest earning deposits with other banks 358  477  808 
Interest on investment securities 119  154  153 
Dividends on other investments 16  80  14 
Total interest and dividend income 13,120  13,034  11,394 
INTEREST EXPENSE         
Interest on deposits 1,554  1,511  1,436 
Interest on borrowed funds 202  192  191 
Total interest expense 1,756  1,703  1,627 
Net interest income 11,364  11,331  9,767 
PROVISION FOR LOAN LOSSES 1,578  820  540 
Net interest income after provision for loan losses 9,786  10,511  9,227 
NONINTEREST INCOME         
Deposit service charges and fees 723  805  726 
BaaS fees 579  656  446 
Loan referral fees 1,053  332  633 
Mortgage broker fees 162  111  85 
Sublease and lease income 30  27  10 
Gain on sales of loans, net -  -  (11)
Other 124  128  95 
Total noninterest income 2,671  2,059  1,984 
NONINTEREST EXPENSE         
Salaries and employee benefits 5,683  4,901  4,558 
Occupancy 927  972  994 
Data processing 551  544  529 
Director and staff expenses 270  302  240 
Excise taxes 203  190  165 
Marketing 112  93  94 
Legal and professional fees 323  231  409 
Federal Deposit Insurance Corporation (FDIC) assessments 70  (21) 75 
Business development 125  111  102 
Other 755  692  496 
Total noninterest expense 9,019  8,015  7,662 
Income before provision for income taxes 3,438  4,555  3,549 
PROVISION FOR INCOME TAXES 714  947  741 
NET INCOME$2,724 $3,608 $2,808 
          
Basic earnings per common share$0.23 $0.30 $0.24 
Diluted earnings per common share$0.22 $0.30 $0.23 
Weighted average number of common shares outstanding:         
Basic 11,909,248  11,903,750  11,884,107 
Diluted 12,208,175  12,213,512  12,183,234 
          

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

  For the Three Months Ended 
 March 31, 2020  December 31, 2019  March 31, 2019 
 Average Interest & Yield /  Average Interest & Yield /  Average Interest & Yield / 
 Balance Dividends Cost (4)  Balance Dividends Cost (4)  Balance Dividends Cost (4) 
Assets                             
Interest earning assets:                             
Interest earning deposits$103,372 $358  1.39% $106,985 $477  1.77% $133,458 $808  2.46%
Investment securities (1) 27,041  119  1.77   32,871  154  1.86   39,552  153  1.57 
Other Investments 4,507  16  1.43   3,743  80  8.48   3,150  14  1.80 
Loans receivable (2) 966,602  12,627  5.25   911,373  12,323  5.36   782,387  10,419  5.40 
Total interest earning assets 1,101,522  13,120  4.79   1,054,972  13,034  4.90  $958,547 $11,394  4.82 
Noninterest earning assets:                             
Allowance for loan losses (11,665)        (11,002)        (9,623)      
Other noninterest earning assets 51,596         51,373         48,145       
Total assets$1,141,453        $1,095,343        $997,069       
                              
Liabilities and Shareholders Equity 
Interest bearing liabilities:                             
Interest bearing deposits$628,037 $1,554  1.00% $585,277 $1,511  1.02% $571,086 $1,436  1.02%
Subordinated debt, net 9,980  146  5.88   9,977  148  5.89   9,966  145  5.90 
Junior subordinated debentures, net 3,583  35  3.93   3,583  39  4.32   3,581  44  4.98 
FHLB advances and other borrowings 7,851  21  1.08   893  5  2.22   297  2  2.73 
Total interest bearing liabilities 649,451  1,756  1.09   599,730  1,703  1.13  $584,930 $1,627  1.13 
Noninterest bearing deposits 352,930         360,030         288,049       
Other liabilities 12,542         12,869         13,029       
Total shareholders' equity 126,530         122,714         111,061       
Total liabilities and                             
  shareholders' equity$1,141,453        $1,095,343        $997,069       
Net interest income   $11,364        $11,331        $9,767    
Interest rate spread       3.70%        3.77%        3.69%
Net interest margin (3)       4.15%        4.26%        4.13%
                              
(1) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts. 
(2) Includes nonaccrual loans. 
(3) Net interest margin represents net interest income divided by the average total interest earning assets. 
(4) Yields and costs are annualized. 
  

COASTAL FINANCIAL CORPORATION
QUARTERLY STATISTICS
(Dollars in thousands, except share and per share data; unaudited)

 Three Months Ended 
 March 31, December 31, September 30, June 30, March 31, 
 2020 2019 2019 2019 2019 
Income Statement Data:               
Interest and dividend income$13,120 $13,034 $12,355 $11,804 $11,394 
Interest expense 1,756  1,703  1,628  1,618  1,627 
Net interest income 11,364  11,331  10,727  10,186  9,767 
Provision for loan losses 1,578  820  637  547  540 
Net interest income after               
provision for loan losses 9,786  10,511  10,090  9,639  9,227 
Noninterest income 2,671  2,059  2,088  2,132  1,984 
Noninterest expense 9,019  8,015  7,748  7,643  7,662 
Net income - pre-tax, pre-provision 5,016  5,375  5,067  4,675  4,089 
Provision for income tax 714  947  919  854  741 
Net income 2,724  3,608  3,511  3,274  2,808 
                
 As of Period End or for the Three Month Period 
 March 31, December 31, September 30, June 30, March 31, 
 2020 2019 2019 2019 2019 
Balance Sheet Data:               
Cash and cash equivalents$129,236 $127,814 $153,347 $113,470 $257,659 
Investment securities 19,759  32,710  32,696  42,381  38,217 
Loans receivable 1,005,180  939,103  874,112  845,443  791,072 
Allowance for loan losses (12,925) (11,470) (10,888) (10,443) (9,915)
Total assets 1,184,071  1,128,526  1,090,060  1,031,024  1,116,090 
Interest bearing deposits 659,559  596,716  573,162  552,254  680,249 
Noninterest bearing deposits 345,503  371,243  349,087  315,890  296,247 
Core deposits (1) 892,408  862,516  817,593  754,768  716,623 
Total deposits 1,005,062  967,959  922,249  868,144  976,496 
Total borrowings 38,564  23,562  33,557  33,554  13,549 
Total shareholders’ equity 127,166  124,173  120,422  116,591  112,365 
                
Share and Per Share Data (2):               
Earnings per share – basic$0.23 $0.30 $0.30 $0.28 $0.24 
Earnings per share – diluted$0.22 $0.30 $0.29 $0.27 $0.23 
Dividends per share -  -  -  -  - 
Book value per share (3)$10.66 $10.42 $10.11 $9.79 $9.44 
Tangible book value per share (4)$10.66 $10.42 $10.11 $9.79 $9.44 
Weighted avg outstanding shares – basic 11,909,248  11,903,750  11,901,873  11,895,026  11,884,107 
Weighted avg outstanding shares – diluted 12,208,175  12,213,512  12,188,507  12,202,197  12,183,234 
Shares outstanding at end of period 11,929,413  11,913,885  11,912,115  11,908,185  11,902,715 
Stock options outstanding at end of period 774,937  784,217  786,257  791,267  804,117 
                
 As of Period End or for the Three Month Period 
 March 31, December 31, September 30, June 30, March 31, 
 2020 2019 2019 2019 2019 
Credit Quality Data:               
Nonperforming assets to total assets 0.06% 0.09% 0.12% 0.16% 0.12%
Nonperforming assets to loans receivable and OREO 0.08% 0.11% 0.15% 0.19% 0.17%
Nonperforming loans to total loans receivable 0.08% 0.11% 0.15% 0.19% 0.17%
Allowance for loan losses to nonperforming loans 1694.0% 1113.6% 837.5% 633.7% 754.6%
Allowance for loan losses to total loans receivable 1.29% 1.22% 1.25% 1.24% 1.25%
Gross charge-offs$124 $242 $196 $22 $34 
Gross recoveries$1 $4 $4 $3 $2 
Net charge-offs to average loans (5) 0.05% 0.10% 0.09% 0.01% 0.02%
                
Capital Ratios (6):               
Tier 1 leverage capital 11.43% 11.64% 12.00% 11.99% 11.57%
Common equity Tier 1 risk-based capital 12.10% 12.74% 13.02% 12.99% 13.24%
Tier 1 risk-based capital 12.43% 13.10% 13.40% 13.37% 13.66%
Total risk-based capital 14.65% 15.35% 15.70% 15.70% 16.06%
                
(1) Core deposits are defined as all deposits excluding BaaS-brokered and time deposits. 
(2) Share and per share amounts are based on total common shares outstanding. 
(3) We calculate book value per share as total shareholders’ equity at the end of the relevant period divided by the outstanding number of our common shares at the end of each period. 
(4) Tangible book value per share is a non-GAAP financial measure. We calculate tangible book value per share as total shareholders’ equity at the end of the relevant period, less goodwill and other intangible assets, divided by the outstanding number of our common shares at the end of each period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets as of any of the dates indicated. As a result, tangible book value per share is the same as book value per share as of each of the dates indicated. 
(5) Annualized calculations.               
(6) Capital ratios are for the Company, Coastal Financial Corporation. 

Non-GAAP Financial Measures

This earnings release contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP.

The following non-GAAP measures are presented to illustrate the impact of provision for loan losses and provision for income taxes on net income and return on average assets.

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

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

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

  As of and for the Three Months Ended 
(Dollars in thousands) March 31,
2020
  December 31,
2019
  September 30,
2019
  June 30,
2019
  March 31,
2019
 
Pre-provision, pre-tax return on average assets:                    
Total average assets $1,141,461  $1,095,343  $1,031,969  $1,002,436  $997,069 
Total net income  2,724   3,608   3,511   3,274   2,808 
Plus:  provision for loan losses  1,578   820   637   547   540 
Plus:  provision for income taxes  714   947   919   854   741 
Total pre-provision, pre-tax net income $5,016  $5,375  $5,067  $4,675  $4,089 
Pre-provision, pre-tax return on average assets:  1.77%  1.95%  1.95%  1.87%  1.66%

The following non-GAAP financial measures are presented to illustrate and identify the impact of temporary high rate BaaS deposits on the balance sheet.  By removing these temporary deposits to show what the results would have been without them we are providing the investors with the information to better compare results with periods that did not have these temporary deposits.  These measures include the following:

“Adjusted return on average assets” is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is return on average assets.

“Adjusted cost of funds” is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is cost of funds.

“Adjusted cost of deposits” is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is cost of deposits.

“Adjusted net interest margin” is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is net interest margin.

“Adjusted noninterest expense to average assets” is a non-GAAP measure that excludes the temporary impact of holding high rate BaaS deposits on balance sheet. The most directly comparable GAAP measure is noninterest expense to average assets.

“Adjusted loans receivable to deposits” is a non-GAAP measure that excludes BaaS-brokered deposits on balance sheet. The most directly comparable GAAP measure is loans receivable to deposits.

The Company also presented comparable earnings information using GAAP financial measures. Reconciliations of the GAAP and non-GAAP measures are presented below.  

  As of and for the Three Months Ended 
(Dollars in thousands) June 30, 2019  March 31, 2019 
Adjusted return on average assets:        
Total average assets $1,002,436  $997,069 
Less: average BaaS-brokered deposits  20,252   74,116 
Adjusted total average deposits and borrowings $982,184  $922,953 
Total net income $3,274  $2,808 
Less: fees earned on servicing BaaS-brokered deposits  36   78 
Adjusted net income $3,238  $2,730 
Adjusted return on average assets:  1.34%  1.20%
Adjusted cost of funds:        
Total average deposits and borrowings $874,610  $872,979 
Less: average BaaS-brokered deposits  20,252   74,116 
Adjusted total average deposits and borrowings $854,358  $798,863 
Total interest expense $1,618  $1,627 
Less: interest expense on BaaS-brokered deposits  116   435 
Adjusted interest expense $1,502  $1,192 
Adjusted cost of funds:  0.71%  0.61%
Adjusted cost of deposits:        
Total average deposits $859,516  $859,135 
Less: average BaaS-brokered deposits  20,252   74,116 
Adjusted total average deposits $839,264  $785,019 
Interest expense on deposits $1,420  $1,436 
Less: interest expense on BaaS-brokered deposits  116   435 
Adjusted interest expense on interest bearing deposits $1,304  $1,001 
Adjusted cost of deposits:  0.63%  0.52%
Adjusted net interest margin:        
Total average interest earning assets $962,867  $958,547 
Less: average BaaS-brokered deposits held in cash  20,252   74,116 
Adjusted total average interest earning assets $942,615  $884,431 
Total net interest income $10,186  $9,767 
Less: interest income earned BaaS-brokered deposits held in cash  116   435 
Plus: interest expense on BaaS-brokered deposits  116   435 
Adjusted net interest income  10,186   9,767 
Adjusted net interest margin:  4.38%  4.48%
Adjusted noninterest expense to average assets:        
Total average assets $1,002,436  $997,069 
Less: average BaaS-brokered deposits  20,252   74,116 
Adjusted total average assets $982,184  $922,953 
Total noninterest expense $7,643  $7,662 
Adjusted noninterest expense to average assets:  3.12%  3.37%
Adjusted loans receivable to deposits (1):        
Total loans receivable n/a  $791,072 
Total deposits n/a   976,496 
Less: BaaS-brokered deposits n/a   164,604 
Total deposits, less BaaS-brokered deposits n/a  $811,892 
Adjusted loans receivable to deposits: n/a   97.44%
         
(1) Adjusted loans receivable to deposits is only presented for periods that include atypically large BaaS-brokered deposits as of the end of the period presented. 
  

APPENDIX A

As of March 31, 2020

We have a diversified loan portfolio, representing a wide variety of industries.  The three largest categories of our loans are commercial real estate, commercial and industrial, and construction, land and land development loans.  Together they represent $885.8 million in outstanding loan balances or 88.0% of total gross loans outstanding.  When combined with $159.1 million in unused commitments the total of these three categories is $1.044 billion or 88.1% of total outstanding loans and loan commitments.

Commercial real estate represents the largest segment of our loans, comprising 63.9% of our total balance of outstanding loans as of March 31, 2020.  Unused commitments to extend credit represents an additional $11.3 million, the combined total exposure in commercial real estate loans represents $654.7 million or 55.2% of our total outstanding loans and loan commitments.

The following table summarizes our exposure by industry for our commercial real estate portfolio as of March 31, 2020:

 (Dollars in thousands) Outstanding
Balance
  Available Loan
Commitments
  Total Exposure  % of Total
Loans

(Outstanding
Balance &
Available
Commitment)
  Average Loan
Balance
  Number
of Loans
 
Hotel/Motel $99,168  $1,092  $100,260   8.5% $3,673   27 
Apartments  76,536   2,000   78,536   6.6   1,215   63 
Mixed use  71,599   3,482   75,081   6.3   833   86 
Office  72,832   892   73,724   6.2   837   87 
Retail  69,133   55   69,188   5.8   922   75 
Convenience store  64,678   700   65,378   5.5   1,702   38 
Warehouse  58,767   50   58,817   5.0   1,130   52 
Manufacturing  36,344   593   36,937   3.1   1,010   36 
Groups < 2.0% of total  94,431   2,387   96,818   8.2   1,243   76 
Total $643,488  $11,251  $654,739   55.2% $1,192   540 

Commercial and industrial loans comprise 12.2% of our total balance of outstanding loans as of March 31, 2020.  Unused commitments to extend credit represents an additional $74.9 million, the combined total exposure in commercial and industrial loans represents $197.6 million or 16.7% of our total outstanding loans and loan commitments.

The following table summarizes our exposure by industry for our commercial and industrial loan portfolio as of March 31, 2020:

 (Dollars in thousands) Outstanding
Balance
  Available Loan
Commitments
  Total Exposure  % of Total
Loans

(Outstanding
Balance &
Available
Commitment)
  Average Loan
Balance
  Number
of Loans
 
Construction/Contractor Services $17,376  $22,432  $39,808   3.4% $124   140 
Capital Call Lines  11,506   20,744   32,250   2.7   1,151   10 
Manufacturing  12,955   7,310   20,265   1.7   216   60 
Medical / Dental / Other Care  16,185   1,656   17,841   1.5   225   72 
Financial Institutions  14,400   -   14,400   1.2   4,800   3 
Family and Social Services  11,746   1,764   13,510   1.1   839   14 
Groups < 1.0% of total  38,499   21,033   59,532   5.0   123   314 
Total $122,667  $74,939  $197,606   16.7% $200   613 

Construction, land and land development loans comprise 11.9% of our total balance of outstanding loans as of March 31, 2020.  Unused commitments to extend credit represents an additional $72.9 million, the combined total exposure in construction, land and land development loans represents $192.5 million or 16.2% of our total outstanding loans and loan commitments.

The following table details our exposure for our construction, land and land development portfolio as of March 31, 2020:

 (Dollars in thousands) Outstanding
Balance
  Available Loan
Commitments
  Total Exposure  % of Total
Loans

(Outstanding
Balance &
Available
Commitment)
  Average Loan
Balance
  Number
of Loans
 
Commercial construction $63,073  $53,921  $116,994   9.9% $2,523   25 
Residential construction  28,597   14,389   42,986   3.6   894   32 
Developed land loans  14,482   693   15,175   1.3   402   36 
Undeveloped land loans  9,540   822   10,362   0.9   502   19 
Land development  3,976   3,052   7,028   0.6   497   8 
Total $119,668  $72,877  $192,545   16.2% $997   120