Coastal Financial Corporation Announces Fourth Quarter and Year End 2020 Results

George T. Taft

Status of All Loans Deferred or Modified in the COVID-19 Program

Status of All Loans Deferred or Modified in the COVID-19 Program
Status of All Loans Deferred or Modified in the COVID-19 Program

Current Deferrals Compared to December 31, 2020 Total Loans

Current Deferrals Compared to December 31, 2020 Total Loans
Current Deferrals Compared to December 31, 2020 Total Loans
Current Deferrals Compared to December 31, 2020 Total Loans

Total Loan Deferrals by Ending Date

Total Loan Deferrals by Ending Date
Total Loan Deferrals by Ending Date
Total Loan Deferrals by Ending Date

2020 Highlights:

  • Net income totaled $15.1 million for the year ended December 31, 2020, or $1.24 per diluted common share, an increase of 14.0% from $13.2 million, or $1.08 per diluted common share, for the year ended December 31, 2019.

  • Basic earnings per share increased 30.0%, and diluted earnings per share increased 26.7%, for the quarter ended December 31, 2020, compared to the quarter ended December 31, 2019.

  • An $8.3 million provision for loan losses was recorded during the year ended December 31, 2020, largely due to continued economic uncertainties from the COVID-19 pandemic.

  • Total assets grew $637.6 million, or 56.5%, to $1.77 billion for the year ended December 31, 2020, compared to $1.13 billion at December 31, 2019.

  • Total loans receivable, net, including $365.8 million in PPP loans, grew $608.0 million, or 64.7%, to $1.55 billion for the year ended December 31, 2020, compared to $939.1 million at December 31, 2019.

  • Total deposits increased $453.3 million, or 46.8%, to $1.42 billion for the year ended December 31, 2020, compared to $968.0 million at December 31, 2019.

EVERETT, Wash., Jan. 27, 2021 (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 and year ended December 31, 2020. Net income for the fourth quarter of 2020 was $4.7 million, or $0.38 per diluted common share, compared with net income of $4.1 million, or $0.34 per diluted common share, for the third quarter of 2020, and $3.6 million, or $0.30 per diluted common share, for the quarter ended December 31, 2019.

“If there is one thing 2020 has taught us, it’s how resilient we are. Those words ring true time and time again as we continue to navigate our way through these unprecedented times. Despite the disruptions and economic uncertainty resulting from the COVID-19 pandemic, we are pleased to announce that we finished the year with $15.1 million in net income, which includes $8.3 million in provision for loan losses, primarily in response to the economic uncertainties of the COVID-19 pandemic. To date we have not seen a significant shift in our credit quality metrics, yet there are still economic uncertainties that exist. Deposit growth was strong, increasing $453.3 million, or 46.8%, in 2020, with core deposits totaling $1.3 billion, or 93.4% of total deposits, at December 31, 2020.

“As a preferred Small Business Administration (“SBA”) lender, we are committed to working with the SBA to provide financial assistance to existing and new small business customers via the third round of PPP loans as provided in the Coronavirus Aid, Relief and Economic Security Act (“CARES Act”), which opened for applications on January 19, 2021. I am proud to report that as of January 25, 2021, we have accepted applications for $233.6 million, representing 1,385 new and existing customers, in this latest round of PPP loans, consisting of $14.7 million in new PPP applications for first draws and $218.9 million in a second draw for small businesses that previously received PPP funds. Our growing CCBX division continues to develop and provide an additional source of fee income for the Company. CCBX provides Banking as a Service (“BaaS”) enabling broker dealers and digital financial service providers to offer their clients banking services. We are hard at work on CCDB, our digital banking division, and look forward to introducing our digital bank accounts later this year in connection with our previously announced collaboration with Google Pay. We recently went live with our new mobile wallet product which provides our customers with more ways to pay,” stated Eric Sprink, the President and CEO of the Company and the Bank.

“The health and safety of our employees and customers is of utmost importance, and as such we continue to enhance and modify measures already in place to keep us all heal
thy and safe while remaining open and serving our customers at our drive-throughs, by appointment, call center, mobile banking, online banking and ATMs. In addition, the Company continues to successfully employ remote work arrangements to the fullest extent possible. We remain committed to our customers, communities and employees as we move into this new year. The road ahead may be uncertain, but we are dedicated to strengthening existing relationships and embracing new opportunities for growth by continuing to focus on our three prong strategy of growing our core community bank, growing CCBX, our BaaS division, and building CCDB, our digital banking division.”

Results of Operations

Net interest income was $16.9 million for the quarter ended December 31, 2020, an increase of 12.2% from $15.1 million for the quarter ended September 30, 2020, and an increase of 49.4% from $11.3 million for the quarter ended December 31, 2019. The increase compared to the prior quarter and prior year’s fourth quarter is largely related to increased interest income resulting from loan growth. This loan growth included $365.8 million in PPP loans as of December 31, 2020, which contributed $2.8 million in net deferred PPP fees recognized, which is an increase of $347,000, or 14.2%, when compared to the quarter ended September 30, 2020, and $1.0 million in interest from the 1.0% contractual interest rate, for a total of $3.8 million in interest income for the quarter ended December 31, 2020.

As of December 31, 2020, $7.1 million, or 55.2%, of the total $12.9 million in PPP net deferred fees on PPP loans have been fully earned, with $5.8 million remaining to be recognized in interest income along with interest on loans. Net deferred fees on PPP loans are earned over the life of the loan, as a yield adjustment in interest income. Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods from the recognition of PPP deferred fees.

Also contributing to the increase in interest income is fee income recognized on loans made through the Main Street Lending Program (“MSLP”). During the quarter ended December 31, 2020, we recognized $383,000 in earned fees through MSLP loans, and there was no fee income on MSLP loans in previous quarters.

Our yield on loans receivable was 4.64% for the three months ended December 31, 2020, compared to 4.33% for the three months ended September 30, 2020, and 5.36% for the three months ended December 31, 2019. In the first three quarters of 2020 we generally saw a decrease in loan yield resulting from the lower interest rate that PPP loans earn and downward repricing of our variable rate loans in the low interest rate environment. The increase in yield on loans receivable for the quarter ended December 31, 2020 was due to the addition of higher rate, non-PPP loans that were added during the quarter along with the recognition of deferred fees on PPP loans that were forgiven and paid off during the quarter ended December 31, 2020, as well as fee income recognized on MSLP loans. MSLP loans were established by the Federal Reserve to support lending to small- and medium-sized businesses that were in sound financial condition prior to the COVID-19 pandemic. The Federal Reserve purchases participations on these loans, with the Bank retaining approximately 5% of the outstanding balance. Management concluded that the sold portion of the MSLP loans qualified for sale accounting. The MSLP loans have a five year maturity with deferral of principal payments for two years and deferral of interest payments for one year. The program stopped purchasing participations on January 8, 2021.

Non-PPP loan growth was $122.0 million, or 11.5%, for the quarter ended December 31, 2020, compared to the quarter ended September 30, 2020, and this included CCBX loan growth of $21.8 million for the quarter ended December 31, 2020. The average rate on new loans was approximately 4.26%, compared to an average rate of approximately 3.44% for the quarter ended September 30, 2020. Interest and fees on loans was $1.6 million higher compared to the three months ended September 30, 2020 and $5.6 million higher than the three months ended December 31, 2019 due to increased loan balances, increased average interest rate, recognition of PPP deferred fees on PPP loans that were forgiven and paid off and recognition of fee income on MSLP loans. Interest income from interest earning deposits with other banks decreased $23,000, and $401,000 from September 30, 2020 and December 31, 2019, respectively, to $76,000 for the three months ended December 31, 2020, compared to $99,000 and $477,000 the three months ended September 30, 2020 and December 31, 2019, respectively, as a result of lower interest rates.

Interest expense was $1.2 million for the quarter ended December 31, 2020, a $133,000 decrease from the quarter ended September 30, 2020 and a $538,000 decrease from the quarter ended December 31, 2019. The interest expense decrease occurred despite an increase in average interest bearing deposits for the quarter ended December 31, 2020 of $29.2 million and $59.8 million, over the quarter ended September 30, 2020 and December 31, 2019, respectively, as a result of lower interest rates. Interest expense on borrowed funds was $407,000 for the quarter ended December 31, 2020, compared to $418,000 and $192,000 for the quarters ended September 30, 2020 and December 31, 2019, respectively. This increase from the quarter ended December 31, 2019 was primarily the result of the PPPLF borrowings, which were obtained to provide liquidity to fund the PPP loans; the decrease from the quarter ended September 30, 2020 is the result of a decrease in average PPPLF borrowings due to paydowns on PPP loans.

Net interest income increased $15.4 million, or 36.6%, to $57.4 million for the year ended December 31, 2020, compared to $42.0 million for the year ended December 31, 2019. These increases are largely related to increased interest income resulting from loan growth, the recognition of deferred fees on PPP loans that have been forgiven and paid off, and the additional fee income recognized on MSLP loans. Interest and fees on loans increased $16.6 million, or 36.5%, over the prior year period, despite a decrease in yield on loans receivable of 0.74% for the year ended December 31, 2020, compared to the year ended December 31, 2019. Non-PPP loan growth of $248.0 million, which includes CCBX loan growth of $65.3 million, for the year ended December 31, 2020, compared to the year ended December 31, 2019, contributed to this increase. Also contributing to the increase in loans is $365.8 million in PPP loans as of December 31, 2020. An average balance of $302.7 million in PPP loans contributed $3.0 million from the 1% interest rate and $7.2 million in fees recognized, for a total of $10.2 million in interest income on PPP loans for the year ended December 31, 2020, compared to the year ended December 31, 2019. Interest and fee income on MSLP loans also contributed to the increase, and was $398,000 for the year ended December 31, 2020, compared to no income on MSLP loans for the year ended December 31, 2019. Net deferred fees on PPP loans are earned over the life of the loan, as a yield adjustment in interest income. Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods from the recognition of PPP net deferred fees. Interest income from interest earning deposits with other banks decreased $1.8 million, or 72.6%, to $663,000 for the year ended December 31, 2020, compared to $2.4 million for the year ended December 31, 2019, as a result of lower interest rates. Interest expense decreased $924,000, or 14.1%, to $5.7 million for the year ended December 31, 2020 compared to $6.6 million for the year ended December 31, 2019. Lower interest rates resulted in a decrease in interest expense despite a $158.6 million increase in average interest bearing deposits and $144.0 million increase in average borrowings for
the year ended December 31, 2020, compared to the prior year period. Borrowings included $124.1 million in average PPPLF borrowings, which were obtained to partially fund the PPP loans.

Net interest margin widened in the quarter ending December 31, 2020 and will likely fluctuate over the near term as round one and round two PPP loans are forgiven and round three PPP loans are on-boarded. Accelerated deferred fee recognition related to the forgiven PPP loans supplemented interest income resulting in a net interest margin for the quarter ended December 31, 2020 of 3.89%, a 28 basis point increase from 3.62% for the quarter ended September 30, 2020 and a 37 basis point decrease from 4.26% for the quarter ended December 31, 2019. The increase over the prior quarter is due to the increase of higher rate, non-PPP loans coupled with the recognition of PPP deferred fees on PPP loans that paid down or paid off during the quarter ended December 31, 2020. The decrease in net interest margin from the quarter ended December 31, 2019 was largely a result of the low interest rate on PPP loans and lower interest rates on all other loans, especially our variable rate loans. PPP loans accounted for an average of $424.3 million in gross loans for the quarter ended December 31, 2020, and bear a contractual interest rate of 1.0%, and yield approximately 3.61% after considering the amortization of deferred PPP loan fees, for the quarter ended December 31, 2020. Cost of funds decreased four basis points in the quarter ended December 31, 2020 to 0.29%, compared to the quarter ended September 30, 2020 and decreased 41 basis points from the quarter ended December 31, 2019. Deposits into noninterest bearing and low interest bearing accounts by new and existing customers contributed to the reduced cost of funds. In addition, the Federal Open Market Committee (“FOMC”) lowered the Fed Funds rates five times for a total decrease of 2.25% since June 2019, which has impacted market rates paid on deposits. The lower interest rate environment will continue to impact the Company’s net interest margin. Net interest margin for the year ended December 31, 2020 decreased 40 basis points compared to the year ended December 31, 2019 as a result of the low rate on PPP loans and lower rates on all other loans, especially our variable rate loans. Cost of funds decreased 33 basis points to 0.40% for the year ended December 31, 2020 compared to 0.73% for the year ended December 31, 2019. Growth in new and existing noninterest bearing deposit accounts and the lowered Fed Funds rates contributed to the reduced cost of funds.

During the quarter ended December 31, 2020, the average balance of total loans receivable increased by $40.5 million, to $1.53 billion, compared to $1.49 billion for the quarter ended September 30, 2020, as a result of loan growth. New loans in the fourth quarter of 2020 had an average interest rate of approximately 4.26%, compared to approximately 3.44% for the quarter ended September 30, 2020. Non-PPP loans grew by $122.0 million, or 11.5%, during the quarter ended December 31, 2020. PPP loans totaled $365.8 million as of December 31, 2020, which is a decrease of $87.0 million compared to the quarter ended September 31, 2020. PPP loans bear a contractual interest rate of 1.0%, yielding approximately 3.61%, after considering the amortization of deferred PPP loan fees. The average balance of total loans receivable at December 31, 2020 increased by $622.2 million to $1.53 billion, compared to $911.4 million for the fourth quarter of 2019, due to overall growth in the loan portfolio, combined with the aforementioned growth in PPP loans. Non-PPP loans grew by $248.0 million, or 26.4%, to $1.19 billion for the year ended December 31, 2020. Total yield on loans receivable for the quarter ended December 31, 2020 was 4.64%, compared to 4.33% for the quarter ended September 30, 2020, and 5.36% for the quarter ended December 31, 2019. The increase in yield on loans receivable over the quarter ended September 30, 2020 was a result of new higher rate, non-PPP loans added during the fourth quarter, combined with the recognition of PPP deferred fee income on PPP loans that paid down or paid off as well as fee income recognized on MSLP loans. The reduction in yield on loans receivable compared to the quarter ended December 31, 2019 was a result of the lower rate that PPP loans bear and the downward repricing of our variable rate loans in the low rate environment. PPP loans reduced the yield on loans receivable* by 36 basis points for the quarter ended December 31, 2020.

Contractual yield on loans receivable, excluding earned fees approximated 3.66% for the quarter ended December 31, 2020, compared to 3.61% for the quarter ended September 30, 2020, and 5.15% for the quarter ended December 31, 2019. During the quarter ended December 31, 2020, the average balance of PPP loans was $424.3 million. These loans bear a contractual rate of 1.0%, which negatively impacted the average contractual yield on loans. Excluding PPP loans and their related earned fees and interest, the contractual yield on loans receivable approximated 4.65%*. Also contributing to the reduction in contractual yield was the reduction in rates by the FOMC, which has resulted in lower rates on our variable rate loans and on new and renewing loans. Although we have rate floors in place for $398.6 million, or 25.6%, in existing loans, the rate reductions by FOMC has a corresponding impact on yield on loans receivables and the net interest margin in future periods.

Cost of deposits for the quarter ended December 31, 2020 was 0.22%, a decrease of five basis points from 0.27% for the quarter ended September 30, 2020, and a 41 basis point decrease from the quarter ended December 31, 2019. Deposit growth in new and existing noninterest bearing and low interest bearing accounts contributed to the reduced cost of funds in conjunction with rate reductions on deposits. We gained new customer relationships by making PPP loans to noncustomers that continue to move their deposit relationships to the Bank. Market conditions for deposits continued to be competitive during the quarter ended December 31, 2020; however, we continued lowering deposit rates, with the largest changes to our interest-bearing demand deposit and certificate of deposit rates being effective in second quarter of 2020. We expect to continue repricing high-rate certificates of deposits and letting those high cost deposits run-off when appropriate; such as when we are able to replace them with lower cost, core deposits.

Return on average assets (“ROA”) was 1.04% for the quarter ended December 31, 2020 compared to 0.95% and 1.31% for the quarters ended September 30, 2020 and December 31, 2019, respectively. ROA was impacted in the fourth quarter of 2020 and prior quarter in 2020 by increased provision for loan losses due to the economic uncertainties of the COVID-19 pandemic and loan growth. Pre-tax, pre-provision ROA* was 1.90% for the quarter ended December 31, 2020, compared to 1.72% for the quarter ended September 30, 2020, and 1.95% for the quarter ended December 31, 2019.

During the second and third quarters of 2020, significant focus was placed on helping the small businesses in our communities through the PPP. We are currently accepting applications for the third round of PPP loans which will begin funding in the first quarter of 2021. The PPP loans from the first and second rounds in 2020 have had a significant impact on our financial statements for the year ended December 31, 2020. These PPP loans along with those loans that fund in round three will continue to impact our results in the future. During the quarter ended December 31, 2020 we began receiving forgiveness payments from the SBA. Throughout this earnings release, we will address the impact, to the extent possible, of these loans including borrowings received through PPPLF to help fund these loans and to aid in liquidity, in addition to earnings and expenses related to these activities. Any estimated adjusted ratios that exclude the impact of this a
ctivity are non-GAAP measures. For more information about non-GAAP financial measures, please see the end of this earnings release.

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

Original Loan Size

As of December 31, 2020

$0.00 –
$50,000.00

$50,0000.01 –
$150,000.00

$150,000.01 –
$350,000.00

$350,000.01 –
$2,000,000.00

> 2,000,000.01

Totals

(Dollars in thousands; unaudited)

Principal outstanding:

Existing customer

$

9,399

$

22,614

$

17,211

$

55,821

$

52,299

$

157,344

New customer

18,324

30,325

34,206

64,591

61,052

208,498

Total principal outstanding

27,723

52,939

51,417

120,412

113,351

365,842

Deferred fees outstanding

(906

)

(1,580

)

(1,538

)

(2,060

)

(631

)

(6,715

)

Deferred costs outstanding

487

208

114

86

17

912

Net deferred fees

$

(419

)

$

(1,372

)

$

(1,424

)

$

(1,974

)

$

(614

)

$

(5,803

)

Total principal, net of deferred
fees

$

27,304

$

51,567

$

49,993

$

118,438

$

112,737

$

360,039

Number of loans:

Existing customer

434

263

81

77

13

868

New customer

1,006

344

161

90

19

1,620

Total loan count

1,440

607

242

167

32

2,488

Percent of total

57.9

%

24.4

%

9.7

%

6.7

%

1.3

%

100.0

%

Forgiveness/Payoffs/Paydowns in Quarter Ended December 31, 2020, net

Dollars

$

4,139

$

9,330

$

20,948

$

52,587

$

$

87,004

Deferred fee recognized

114

470

826

1,254

119

2,783

The following table shows the Company’s key performance ratios for the periods indicated. The table also includes ratios that were adjusted by removing the impact of the PPP loans as described above. 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

Year ended

(unaudited)

December 31,
2020

September 30,
2020

June 30,
2020

March 31,
2020

December 31,
2019

December 31,
2020

December 31,
2019

Return on average assets (1)

1.04

%

0.95

%

0.96

%

0.96

%

1.31

%

0.98

%

1.28

%

Return on average equity (1)

13.36

%

12.14

%

11.37

%

8.66

%

11.66

%

11.44

%

11.29

%

Pre-tax, pre-provision return
on average assets (1)(2)

1.90

%

1.72

%

1.72

%

1.77

%

1.95

%

1.78

%

1.86

%

Yield on earnings assets (1)

4.16

%

3.93

%

4.16

%

4.79

%

4.90

%

4.21

%

4.90

%

Yield on loans receivable (1)

4.64

%

4.33

%

4.57

%

5.25

%

5.36

%

4.64

%

5.38

%

Yield on loans receivable,
as adjusted (1)(2)

5.00

%

4.78

%

4.94

%

n/a

n/a

4.99

%

n/a

Contractual yield on loans
receivable, excluding earned
fees (1)

3.66

%

3.61

%

3.91

%

5.08

%

5.15

%

3.96

%

4.75

%

Contractual yield on loans
receivable, excluding earned
fees and interest on PPP loans,
as adjusted (1)(2)

4.65

%

4.69

%

4.84

%

n/a

n/a

4.80

%

n/a

Cost of funds (1)

0.29

%

0.33

%

0.41

%

0.70

%

0.70

%

0.40

%

0.73

%

Cost of deposits (1)

0.22

%

0.27

%

0.35

%

0.64

%

0.63

%

0.35

%

0.65

%

Net interest margin (1)

3.89

%

3.62

%

3.78

%

4.15

%

4.26

%

3.83

%

4.23

%

Noninterest expense to average
assets (1)

2.35

%

2.26

%

2.34

%

3.18

%

2.90

%

2.47

%

3.01

%

Efficiency ratio

55.26

%

56.73

%

57.66

%

64.26

%

59.86

%

58.14

%

61.79

%

Loans receivable to deposits

108.85

%

110.98

%

110.77

%

100.01

%

97.02

%

108.85

%

97.02

%

(1) Annualized calculations shown for quarterly periods presented.

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

Noninterest income was $2.0 million in the fourth quarter of 2020, an increase of $107,000 from $1.9 million at the third quarter of 2020, and a decrease of $10,000 from $2.1 million in the fourth quarter of 2019. The increase over the prior quarter was primarily due to a $243,000 increase in loan referral fees that are 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, a $159,000 increase in BaaS fees as a result of adding new relationships, and a $91,000 increase in mortgage broker fees, which are a result of increased producti
on from the attractive low rate environment, partially offset by a decrease in other income due to the revaluation and write-down of an equity interest of $400,000. The $10,000 decrease over the quarter ended December 31, 2019 was primarily due to the revaluation and write-down of an equity interest of $400,000 recorded in other income, partially offset by $105,000 increase in mortgage broker fees, a $91,000 increase in loan referral fees, and a $79,000 increase in BaaS fees.

As of December 31, 2020, there were six active CCBX relationships, two CCBX relationships in the friends and family trials, three CCBX relationships in onboarding/implementation, four signed letters of intent for a CCBX relationship and a solid pipeline of potential new CCBX relationships. The following table illustrates the activity and growth in CCBX for the periods presented:

As of

December 31, 2020

September 30, 2020

December 31, 2019

Active

6

4

2

Friends and family trials

2

1

0

Implementation / onboarding

3

4

3

Signed letters of intent

4

2

0

Total CCBX relationships

15

11

5

Total noninterest expense for the fourth quarter of 2020 increased to $10.5 million compared to $9.7 million for the preceding quarter and compared to $8.0 million for the fourth quarter of 2019. Noninterest expense variances for the quarter ended December 31, 2020, as compared to the quarter ended September 30, 2020, include a $66,000 increase in other expenses due to $65,000 increase in software license, maintenance and subscription expenses, which is expected to increase as we invest more in automated processing and as we grow product lines and our CCBX division. Salaries and employee benefits increased $462,000 for the quarter ended December 31, 2020 compared to $6.0 million for the quarter ended September 30, 2020, which is related to the hiring in our CCBX and CCDB divisions and additional staff for our ongoing banking growth initiatives. Legal and professional fees increased $203,000 due to CCBX division expenses and higher costs associated with legal and accounting work related to financial reporting. The increased expenses for the quarter ended December 31, 2020 compared to the fourth quarter in 2019 were largely due to a $1.5 million increase in salary expenses related to hiring staff for our CCBX division and additional staff for our ongoing banking growth initiatives. Other expenses increased $301,000 in the fourth quarter of 2020 compared to $692,000 for the quarter ended December 31, 2019, which is largely due to a $159,000 increase in software license, maintenance and subscription expenses, and a $74,000 increase in the provision for unfunded commitments. In addition, in the fourth quarter of 2020 compared to the fourth quarter of 2019, legal and professional fees increased $353,000 and Federal Deposit Insurance Corporation (“FDIC”) assessments increased $251,000. The increase in legal and professional expenses is associated with CCBX division expenses and higher costs associated with legal and accounting work related to financial reporting. The increase in FDIC assessments is primarily the result of a credit issued to the Bank for assessments in the quarter ended December 31, 2019, combined with an increase in deposits compared to the quarter ended December 31, 2019.

The provision for income taxes was $1.2 million at December 31, 2020, a $150,000 increase compared to $1.1 million for the third quarter of 2020 and a $285,000 increase compared to $947,000 for the fourth quarter of 2019, both as a result of increased taxable income. The Company uses a federal statutory tax rate of 21% as a basis for calculating provision for income taxes.

Financial Condition

Total assets increased $16.5 million, or 0.9%, to $1.77 billion at December 31, 2020 compared to $1.75 billion at September 30, 2020. The primary cause of the increase was $37.7 million in increased loans receivable, as a result of overall growth in the loan portfolio, partially offset by a $23.9 million decrease in interest earning deposits with other banks. Total assets increased $637.6 million, or 56.5% at December 31, 2020, compared to $1.13 billion at December 31, 2019. This increase was largely the result of a $608.0 million increase in loans receivable, which includes $365.8 million in PPP loans as of December 31, 2020, combined with a $32.9 million increase in interest earning deposits with other banks.

Total loans receivable increased $37.7 million to $1.55 billion at December 31, 2020, from $1.51 billion at September 30, 2020, and increased $608.0 million from $939.1 million at December 31, 2019. The growth in loans receivable over the quarter ended September 30, 2020 was due primarily to growth in non-PPP loans of $122.0 million consisting of an increase of $69.7 million in commercial real estate loans, $37.0 million in other commercial and industrial loans, and $22.7 million in residential real estate loans, partially offset by a decrease of $87.0 million in PPP loans. Total loans receivable is net of $9.2 million in net deferred origination fees, $5.8 million of which is attributed to PPP loans. Deferred fees on PPP loans are earned over the life of the loan, with a maximum maturity of five years. As of December 31, 2020,
55.2% of the total $12.9 million in net deferred fees on the first and second rounds of PPP loans was fully earned. The increase in loans receivable over the quarter ended December 31, 2019 was due to a $365.8 million increase in PPP loans, and $248.0 million increase in non-PPP loans consisting of $161.5 million increase in commercial real estate loans, $62.0 million in other commercial and industrial loans and $28.9 million in residential real estate loans.

The second round of the PPP program closed to new loan applicants on August 8, 2020, and since that time we have been accepting applications from customers for loan forgiveness. As of December 31, 2020, we have received $87.0 million in forgiveness payments or principal paydowns, on 472 loans. We expect that the pace of forgiveness will increase in the first half of 2021. Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods from the recognition of deferred PPP loan fees. Customers with two-year loans are also able to request that their PPP loan be extended to a five year maturity, which we anticipate may be a good option for customers not eligible for forgiveness.

The third round of PPP loans opened to applicants on January 19, 2021. We expect to again accept and process applications for both existing and new customers, to help small businesses in our communities. As of January 25, 2021, we have accepted applications for $233.6 million, representing 1,385 new and existing customers, in the third round of the PPP program.

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

As of

December 31, 2020

September 30, 2020

December 31, 2019

(Dollars in thousands; unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Commercial and industrial loans:

PPP loans

$

365,842

23.5

%

$

452,846

29.8

%

$

0.0

%

All other commercial &
industrial loans

173,358

11.0

136,358

8.9

111,401

11.8

Real estate loans:

Construction, land and
land development loans

94,423

6.1

100,955

6.6

97,034

10.3

Residential real estate loans

143,869

9.3

121,147

8.0

115,011

12.2

Commercial real estate loans

774,925

49.8

705,186

46.4

613,398

65.2

Consumer and other loans

3,916

0.3

3,927

0.3

4,214

0.5

Gross loans receivable

1,556,333

100.0

%

1,520,419

100.0

%

941,058

100.0

%

Net deferred origination fees –
PPP loans

(5,803

)

(8,586

)

Net deferred origination fees –
Other loans

(3,392

)

(2,444

)

(1,955

)

Loans receivable

$

1,547,138

$

1,509,389

$

939,103

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 $61.3 million, or 4.5%, to $1.42 billion at December 31, 2020 from $1.36 billion at September 30, 2020. The increase is largely due to a $57.9 million increase in core deposits, which is primarily the result of expanding and growing banking relationships with new customers, including deposit relationships from PPP loans made to noncustomers, who moved their banking relationship to the Bank. During the quarter ended December 31, 2020, noninterest bearing deposits increased $21.6 million, or 3.8%, to $592.3 million from $570.7 million at September 30, 2020. Included in the increase in noninterest bearing deposits is an increase in CCBX deposits of $11.9 million for the quarter ended December 31, 2020. In the fourth quarter of 2020 compared to the quarter ended September 30, 2020, NOW and money market accounts increased $33.4 million, and savings accounts increased $2.9 million. BaaS-brokered deposits increased $8.6 million, and time deposits decreased $5.3 million. Total deposits increased $453.3 million, or 46.8%, to $1.42 billion at December 31, 2020 compared to $968.0 million at December 31, 2019. Noninterest bearing deposits increased $221.0 million, or 59.5%, to $592.3 million at December 31, 2020 from $371.2 million at December 31, 2019. NOW and money market accounts increased $220.4 million, or 50.3%, to $658.3 million at December 31, 2020, and savings accounts increased $24.3 million and BaaS-brokered deposits increased $9.9 million while time deposits decreased $22.2 million. Efforts to retain and grow core deposits are evidenced by the high ratios in these categories when compared to total deposits.

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

As of

December 31, 2020

September 30, 2020

December 31, 2019

(Dollars in thousands, unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Demand, noninterest bearing

$

592,261

41.7

%

$

570,664

42.0

%

$

371,243

38.4

%

NOW and money market

658,323

46.3

624,891

45.9

437,908

45.2

Savings

77,611

5.4

74,694

5.5

53,365

5.5

Total core deposits

1,328,195

93.4

1,270,249

93.4

862,516

89.1

BaaS-brokered deposits

33,482

2.4

24,870

1.8

23,586

2.4

Time deposits less than $250,000

41,145

2.9

41,676

3.1

51,644

5.4

Time deposits $250,000 and over

18,485

1.3

23,216

1.7

30,213

3.1

Total deposits

$

1,421,307

100.0

%

$

1,360,011

100.0

%

$

967,959

100.0

%

To support and promote the effectiveness of the SBA PPP loan program, the Federal Reserve is supplying liquidity to participating financial institutions through non-recourse term financing secured by PPP loans to small businesses. The PPPLF extends low cost borrowing lines, 0.35% interest rate, to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. Borrowings are required to be paid down as the pledged PPP loans are paid down. As of December 31, 2020, there was $153.7 million in outstanding PPPLF advances and pledged PPP loans, compared to $202.6 million at September 30, 2020. The PPPLF program is currently available for new borrowings until March 31, 2021.

The Federal Home Loan Bank (“FHLB”) allows us to borrow against our line of credit, which is collateralized by certain loans. As of December 31, 2020, we borrowed a total of $25.0 million in FHLB medium term advances. This includes a $10.0 million advance with a remaining term of 2.25 years and $15.0 million advance with a remaining term of 4.25 years. These advances provide an alte
rnative and stable source of funding for loan demand. Although there are no immediate plans to borrow additional funds, additional FHLB borrowing capacity of $65.7 million was available under this arrangement as of December 31, 2020.

Total shareholders’ equity increased $5.0 million since September 30, 2020. The increase in shareholders’ equity was primarily due to $4.7 million in net earnings for the three months ended December 31, 2020.

Capital Ratios

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

Capital Ratios:

Coastal
Community
Bank

Coastal
Financial
Corporation

Financial
Institution Basel
III Regulatory
Guidelines

(unaudited)

Tier 1 leverage capital

9.29

%

9.05

%

5.00

%

Adjusted Tier 1 leverage capital ratio, excluding PPP loans (1)

10.91

%

10.63

%

5.00

%

Common Equity Tier 1 risk-based capital

11.86

%

11.27

%

6.50

%

Tier 1 risk-based capital

11.86

%

11.55

%

8.00

%

Total risk-based capital

13.11

%

13.61

%

10.00

%

(1) A reconciliation of the non-GAAP measure is set forth at the end of this earnings release.

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

Asset Quality

The allowance for loan losses was $19.3 million and 1.25% of loans receivable at December 31, 2020 compared to $17.0 million and 1.13% at September 30, 2020 and $11.5 million and 1.22% at December 31, 2019. At December 31, 2020, there was $365.8 million in PPP loans, which are 100% guaranteed by the SBA. Excluding PPP loans, the allowance for loan losses to loans receivable* would be 1.62% for the quarter ended December 31, 2020. Provision for loan losses totaled $2.6 milli
on for the three months ended December 31, 2020, $2.2 million for the three months ended September 30, 2020, and $820,000 for the three months ended December 31, 2019. Net charge-offs totaled $384,000 for the quarter ended December 31, 2020, compared to $1,000 for the quarter ended September 30, 2020 and $238,000 for the quarter ended December 31, 2019. Net charge-offs for the quarter ended December 31, 2020 primarily included a charge-off for $368,000 to secure a payoff of a $3.3 million longer-term nonperforming loan from the portfolio.

The Company’s provision for loan losses during the quarters ended December 31, 2020, September 30, 2020, June 30, 2020 and March 31, 2020, is related to an increase in qualitative factors related to the economic uncertainties caused by the COVID-19 pandemic and loan growth. 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 December 31, 2020, our nonperforming assets were $712,000, or 0.04% of total assets, compared to $4.5 million, or 0.26%, of total assets at September 30, 2020, and $1.0 million, or 0.09%, of total assets at December 31, 2019. Nonperforming assets decreased $3.8 million during the quarter ended December 31, 2020, compared to the quarter ended September 30, 2020, with the pay-off and partial charge-off of one loan ($3.3 million) and principal pay-downs and pay-offs on other loans.

Management is continuing to actively monitor the loan portfolio to identify borrowers experiencing difficulties with repayment and are proactively working with them to reduce potential losses through the prudent use of PPP loans, deferrals, and modifications in accordance with regulatory guidelines. There were no repossessed assets or other real estate owned at December 31, 2020. Our nonperforming loans to loans receivable ratio was 0.05% at December 31, 2020, compared to 0.30% at September 30, 2020, and 0.11% at December 31, 2019. Nonperforming loans totaled $712,000 at December 31, 2020, compared to $4.5 million at September 30, 2020. The decrease of $3.8 million in the quarter ended December 31, 2020, compared to the quarter ended September 30, 2020 was largely due to one nonperforming construction, land and land development loan for $3.3 million that was paid-off and included a partial charge-off of $368,000. These changes, combined with other pay-offs and principal reductions, resulted an overall decrease in our ratio of nonperforming loans to loans receivable and nonperforming loans to total assets compared to September 30, 2020.

To date we have not seen a significant change in our credit quality metrics, as demonstrated by the low level of charge-offs and nonperforming loans for the year ended December 31, 2020. The long-term economic impact of the COVID-19 pandemic, political gridlock, trade issues, and decline in oil prices is unknown; however, the Company remains diligent in its efforts to communicate and proactively work with borrowers to help mitigate potential credit deterioration.

Pursuant to federal guidance, the Company deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic and economic shutdown. A total of $233.9 million in loans were deferred and/or modified under this guidance during the second, third and fourth quarters of 2020. All of the loans that were on deferred and/or modified status as of the quarter ended September 30, 2020 have either successfully returned to active status or have closed. All of these loans are current, with no loans more than 30 days past due as of December 31, 2020. For the quarter ended December 31, 2020, three loans, or $9.3 million remained on deferred and/or modified status. The purpose of this program is to provide cash flow relief for small business customers as they navigate through the uncertainties of the COVID-19 pandemic. The Company’s deferral program has been successful as evidenced by customers’ ability to migrate from deferral to active status and resume making payments as planned.

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

As of

December 31,

September 30,

December 31,

(Dollars in thousands, unaudited)

2020

2020

2019

Nonaccrual loans:

Commercial and industrial loans

$

537

$

625

$

965

Real estate:

Construction, land and land development

3,269

Residential real estate

175

178

65

Commercial real estate

405

Total nonaccrual loans

712

4,477

1,030

Accruing loans past due 90 days or more:

Total accruing loans past due 90 days or more

Total nonperforming loans

712

4,477

1,030

Other real estate owned

Repossessed assets

Total nonperforming assets

$

712

$

4,477

$

1,030

Troubled debt restructurings, accruing

Total nonperforming loans to loans receivable

0.05

%

0.30

%

0.11

%

Total nonperforming assets to total assets

0.04

%

0.26

%

0.09

%

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

About Coastal Financial

Coastal Financial Corporation (Nasdaq: CCB) (the “Company”), is an Everett, Washington based bank holding company whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC. The $1.8 billion community bank that the Bank operates provides service through 15 branches in Snohomish, Island, and King Counties, the Internet and its mobile banking application. The Bank provides banking as a service to broker dealers and digital financial service providers through its CCBX Division. In 2021, the Bank expects to introduce CCDB, its digital bank division in collaboration with Google. 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, our Quarterly Report on Form 10-Q for the most recent quarter, and in any of our subsequent filings with the Securities and Exchange Commission.

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

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

ASSETS

December 31,

September 30,

December 31,

2020

2020

2019

Cash and due from banks

$

18,965

$

14,136

$

16,555

Interest earning deposits with other banks

144,152

168,034

111,259

Investment securities, available for sale, at fair value

20,399

20,428

28,360

Investment securities, held to maturity, at amortized cost

2,848

3,354

4,350

Other investments

6,059

5,951

4,505

Loans receivable

1,547,138

1,509,389

939,103

Allowance for loan losses

(19,262

)

(17,046

)

(11,470

)

Total loans receivable, net

1,527,876

1,492,343

927,633

Premises and equipment, net

17,108

16,881

13,108

Operating lease right-of-use assets

7,120

7,379

8,493

Accrued interest receivable

8,616

8,216

2,980

Bank-owned life insurance, net

7,082

7,031

6,882

Deferred tax asset, net

3,799

2,722

2,743

Other assets

2,098

3,144

1,658

Total assets

$

1,766,122

$

1,749,619

$

1,128,526

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES

Deposits

$

1,421,307

$

1,360,011

$

967,959

Federal Home Loan Bank advances

24,999

24,999

10,000

Paycheck Protection Program Liquidity Facility

153,716

202,595

Subordinated debt, net

9,993

9,989

9,979

Junior subordinated debentures, net

3,584

3,584

3,583

Deferred compensation

863

891

974

Accrued interest payable

531

481

308

Operating lease liabilities

7,323

7,579

8,679

Other liabilities

3,589

4,258

2,871

Total liabilities

1,625,905

1,614,387

1,004,353

SHAREHOLDERS’ EQUITY

Common stock

87,815

87,479

86,983

Retained earnings

52,368

47,707

37,222

Accumulated other comprehensive income (loss), net of tax

34

46

(32

)

Total shareholders’ equity

140,217

135,232

124,173

Total liabilities and shareholders’ equity

$

1,766,122

$

1,749,619

$

1,128,526

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

Three Months Ended

December 31,

September 30,

December 31,

2020

2020

2019

INTEREST AND DIVIDEND INCOME

Interest and fees on loans

$

17,885

$

16,244

$

12,323

Interest on interest earning deposits with other banks

76

99

477

Interest on investment securities

31

27

154

Dividends on other investments

106

24

80

Total interest and dividend income

18,098

16,394

13,034

INTEREST EXPENSE

Interest on deposits

758

880

1,511

Interest on borrowed funds

407

418

192

Total interest expense

1,165

1,298

1,703

Net interest income

16,933

15,096

11,331

PROVISION FOR LOAN LOSSES

2,600

2,200

820

Net interest income after provision for loan losses

14,333

12,896

10,511

NONINTEREST INCOME

Deposit service charges and fees

867

824

805

BaaS fees

735

576

656

Loan referral fees

423

180

332

Mortgage broker fees

216

125

111

Sublease and lease income

31

30

27

Gain on sales of loans, net

35

47

Other

(258

)

160

128

Total noninterest income

2,049

1,942

2,059

NONINTEREST EXPENSE

Salaries and employee benefits

6,433

5,971

4,901

Occupancy

1,026

1,091

972

Data processing

599

577

544

Director and staff expenses

187

156

302

Excise taxes

301

291

190

Marketing

37

52

93

Legal and professional fees

584

381

231

Federal Deposit Insurance Corporation assessments

230

148

(21

)

Business development

99

72

111

Other

993

927

692

Total noninterest expense

10,489

9,666

8,015

Income before provision for income taxes

5,893

5,172

4,555

PROVISION FOR INCOME TAXES

1,232

1,082

947

NET INCOME

$

4,661

$

4,090

$

3,608

Basic earnings per common share

$

0.39

$

0.34

$

0.30

Diluted earnings per common share

$

0.38

$

0.34

$

0.30

Weighted average number of common shares outstanding:

Basic

11,936,289

11,919,850

11,903,750

Diluted

12,280,191

12,181,272

12,213,512

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

Year ended

December 31,

December 31,

2020

2019

INTEREST AND DIVIDEND INCOME

Interest and fees on loans

$

61,910

$

45,350

Interest on interest earning deposits with other banks

663

2,423

Interest on investment securities

230

635

Dividends on other investments

235

179

Total interest and dividend income

63,038

48,587

INTEREST EXPENSE

Interest on deposits

4,288

5,802

Interest on borrowed funds

1,364

774

Total interest expense

5,652

6,576

Net interest income

57,386

42,011

PROVISION FOR LOAN LOSSES

8,308

2,544

Net interest income after provision for loan losses

49,078

39,467

NONINTEREST INCOME

Deposit service charges and fees

3,091

3,107

BaaS fees

2,365

2,060

Loan referral fees

1,726

1,438

Mortgage broker fees

655

447

Sublease and lease income

122

58

Gain on sales of loans, net

82

490

Gain on sales of securities, net

171

Other

141

487

Total noninterest income

8,182

8,258

NONINTEREST EXPENSE

Salaries and employee benefits

23,302

18,959

Occupancy

3,977

3,775

Data processing

2,348

2,081

Director and staff expenses

800

1,000

Excise taxes

1,057

719

Marketing

317

393

Legal and professional fees

1,762

1,103

Federal Deposit Insurance Corporation assessments

522

184

Business development

344

431

Other

3,690

2,418

Total noninterest expense

38,119

31,063

Income before provision for income taxes

19,141

16,662

PROVISION FOR INCOME TAXES

3,995

3,461

NET INCOME

$

15,146

$

13,201

Basic earnings per common share

$

1.27

$

1.11

Diluted earnings per common share

$

1.24

$

1.08

Weighted average number of common shares outstanding:

Basic

11,920,735

11,896,258

Diluted

12,209,371

12,196,120

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

For the Three Months Ended

December 31, 2020

September 30, 2020

December 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

$

166,744

$

76

0.18

%

$

137,568

$

99

0.29

%

$

106,985

$

477

1.77

%

Investment securities (1)

23,730

31

0.52

23,882

27

0.45

32,871

154

1.86

Other Investments

6,124

106

6.89

5,951

24

1.60

3,743

80

8.48

Loans receivable (2)

1,533,533

17,885

4.64

1,493,024

16,244

4.33

911,373

12,323

5.36

Total interest earning assets

1,730,131

18,098

4.16

1,660,425

16,394

3.93

1,054,972

13,034

4.90

Noninterest earning assets:

Allowance for loan losses

(17,767

)

(15,711

)

(11,002

)

Other noninterest earning assets

62,359

60,160

51,373

Total assets

$

1,774,723

$

1,704,874

$

1,095,343

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest bearing deposits

$

808,351

$

758

0.37

%

$

750,790

$

880

0.47

%

$

585,277

$

1,511

1.02

%

Subordinated debt, net

9,991

148

5.89

9,987

148

5.90

9,977

148

5.89

Junior subordinated debentures, net

3,584

22

2.44

3,584

23

2.55

3,583

39

4.32

PPPLF borrowings

188,222

166

0.35

199,076

176

0.35

0.00

FHLB advances and other borrowings

25,001

71

1.13

24,999

71

1.13

893

5

2.22

Total interest bearing liabilities

1,035,149

1,165

0.45

988,436

1,298

0.52

599,730

1,703

1.13

Noninterest bearing deposits

588,764

569,615

360,030

Other liabilities

11,968

12,781

12,869

Total shareholders’ equity

138,842

134,042

122,714

Total liabilities and

shareholders’ equity

$

1,774,723

$

1,704,874

$

1,095,343

Net interest income

$

16,933

$

15,096

$

11,331

Interest rate spread

3.71

%

3.41

%

3.77

%

Net interest margin (3)

3.89

%

3.62

%

4.26

%

(1) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted
for amortization of premiums and accretion of discounts.

(2) Includes nonaccrual loans.

(3) Net interest margin represents net interest income divided by the average total interest earning assets.

(4) Yields and costs are annualized.

COASTAL FINANCIAL CORPORATION
AVERAGE BALANCES, YIELDS, AND RATES – YEAR-TO-DATE
(Dollars in thousands; unaudited)

For the Year Ended

December 31, 2020

December 31, 2019

Average

Interest &

Yield /

Average

Interest &

Yield /

Balance

Dividends

Cost

Balance

Dividends

Cost

Assets

Interest earning assets:

Interest earning deposits

$

133,951

$

663

0.
49

%

$

107,916

$

2,423

2.25

%

Investment securities (1)

24,120

230

0.95

37,368

635

1.70

Other Investments

5,608

235

4.19

3,545

179

5.05

Loans receivable (2)

1,333,028

61,910

4.64

843,450

45,350

5.38

Total interest earning assets

$

1,496,707

$

63,038

4.21

$

992,279

$

48,587

4.90

Noninterest earning assets:

Allowance for loan losses

(14,686

)

(10,304

)

Other noninterest earning assets

58,970

49,998

Total assets

$

1,540,991

$

1,031,973

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest bearing deposits

$

724,279

$

4,288

0.59

%

$

565,713

$

5,802

1.03

%

Subordinated debt, net

9,986

589

5.90

9,971

587

5.89

Junior subordinated debentures, net

3,584

105

2.93

3,582

168

4.69

PPPLF borrowings

124,068

435

0.35

0.00

FHLB advances and other borrowings

20,736

235

1.13

819

19

2.32

Total interest bearing liabilities

$

882,653

$

5,652

0.64

$

580,085

$

6,576

1.13

Noninterest bearing deposits

513,550

322,064

Other liabilities

12,445

12,944

Total shareholders’ equity

132,343

116,880

Total liabilities and

shareholders’ equity

$

1,540,991

$

1,031,973

Net interest income

$

57,386

$

42,011

Interest rate spread

3.57

%

3.76

%

Net interest margin (3)

3.83

%

4.23

%

(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.

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

Three Months Ended

December 31,

September 30,

June 30,

March 31,

December 31,

2020

2020

2020

2020

2019

Income Statement Data:

Interest and dividend income

$

18,098

$

16,394

$

15,426

$

13,120

$

13,034

Interest expense

1,165

1,298

1,433

1,756

1,703

Net interest income

16,933

15,096

13,993

11,364

11,331

Provision for loan losses

2,600

2,200

1,930

1,578

820

Net interest income after

provision for loan losses

14,333

12,896

12,063

9,786

10,511

Noninterest income

2,049

1,942

1,520

2,671

2,059

Noninterest expense

10,489

9,666

8,945

9,019

8,015

Net income – pre-tax, pre-provision (1)

8,493

7,372

6,568

5,016

5,375

Provision for income tax

1,232

1,082

967

714

947

Net income

4,661

4,090

3,671

2,724

3,608

As of and for the Three Month Period

December 31,

September 30,

June 30,

March 31,

December 31,

2020

2020

2020

2020

2019

Balance Sheet Data:

Cash and cash equivalents

$

163,117

$

182,170

$

174,176

$

129,236

$

127,814

Investment securities

23,247

23,782

24,318

19,759

32,710

Loans receivable

1,547,138

1,509,389

1,447,144

1,005,180

939,103

Allowance for loan losses

(19,262

)

(17,046

)

(14,847

)

(12,925

)

(11,470

)

Total assets

1,766,122

1,749,619

1,678,956

1,184,071

1,128,526

Interest bearing deposits

829,046

789,347

742,633

659,559

596,716

Noninterest bearing deposits

592,261

570,664

563,794

345,503

371,243

Core deposits (2)

1,328,195

1,270,249

1,212,215

892,408

862,516

Total deposits

1,421,307

1,360,011

1,306,427

1,005,062

967,959

Total borrowings

192,292

241,167

228,725

38,564

23,562

Total shareholders’ equity

140,217

135,232

130,977

127,166

124,173

Share and Per Share Data (3):

Earnings per share – basic

$

0.39

$

0.34

$

0.31

$

0.23

$

0.30

Earnings per share – diluted

$

0.38

$

0.34

$

0.30

$

0.22

$

0.30

Dividends per share

Book value per share (4)

$

11.73

$

11.34

$

10.98

$

10.66

$

10.42

Tangible book value per share (5)

$

11.73

$

11.34

$

10.98

$

10.66

$

10.42

Weighted avg outstanding shares – basic

11,936,289

11,919,850

11,917,394

11,909,248

11,903,750

Weighted avg outstanding shares – diluted

12,280,191

12,181,272

12,190,284

12,208,175

12,213,512

Shares outstanding at end of period

11,954,327

11,930,243

11,926,263

11,929,413

11,913,885

Stock options outstanding at end of period

749,397

769,607

774,587

774,937

784,217

As of and for the Three Month Period

December 31,

September 30,

June 30,

March 31,

December 31,

2020

2020

2020

2020

2019

Credit Quality Data:

Nonperforming assets to total assets

0.04

%

0.26

%

0.26

%

0.06

%

0.09

%

Nonperforming assets to loans receivable and OREO

0.05

%

0.30

%

0.31

%

0.08

%

0.11

%

Nonperforming loans to total loans receivable

0.05

%

0.30

%

0.31

%

0.08

%

0.11

%

Allowance for loan losses to nonperforming loans

2705.3

%

380.7

%

334.8

%

1694.0

%

1113.6

%

Allowance for loan losses to total loans receivable

1.25

%

1.13

%

1.03

%

1.29

%

1.22

%

Allowance for loan losses to loans receivable, as adjusted (1)

1.62

%

1.60

%

1.46

%

n/a

n/a

Gross charge-offs

$

386

$

2

$

13

$

124

$

242

Gross recoveries

$

2

$

1

$

5

$

1

$

4

Net charge-offs to average loans (6)

0.10

%

0.00

%

0.00

%

0.05

%

0.10

%

Capital Ratios (7):

Tier 1 leverage capital

9.05

%

9.20

%

9.38

%

11.43

%

11.64

%

Common equity Tier 1 risk-based capital

11.27

%

12.14

%

12.34

%

12.10

%

12.74

%

Tier 1 risk-based capital

11.55

%

12.45

%

12.67

%

12.43

%

13.10

%

Total risk-based capital

13.61

%

14.61

%

14.88

%

14.65

%

15.35

%

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

(2) Core deposits are defined as all deposits excluding BaaS-brokered and all time deposits.

(3) Share and per share amounts are based on total common shares outstanding.

(4) We calculate book value per share as total shareholders’ equity at the end of the relevant period divided by the outstanding number of our common shares at the end of each period.

(5) Tangible book value per share is a non-GAAP financial measure. We calculate tangible book value per share as total shareholders’ equity at the end of the relevant period, less goodwill and other intangible assets, divided by the outstanding number of our common shares at the end of each period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets as of any of the dates indicated. As a result, tangible book value per share is the same as book value per share as of each of the dates indicated.

(6) Annualized calculations.

(7) Capital ratios are for the Company, Coastal Financial Corporation.

Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies.

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

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

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

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

As of and for the
Three Months Ended

As of and for the
Years Ended

(Dollars in thousands, unaudited)

December 31,
2020

September 30,
2020

June 30,
2020

March 31,
2020

December 31,
2019

December 31,
2020

December 31,
2019

Pre-tax, pre-provision net income and pre-tax, pre-provision return on average assets:

Total average assets

$

1,774,723

$

1,704,874

$

1,538,546

$

1,141,453

$

1,095,343

$

1,540,991

$

1,031,973

Total net income

4,661

4,090

3,671

2,724

3,608

15,146

13,201

Plus: provision for loan
losses

2,600

2,200

1,930

1,578

820

8,308

2,544

Plus: provision for
income taxes

1,232

1,082

967

714

947

3,995

3,461

Pre-tax, pre-provision net
income

$

8,493

$

7,372

$

6,568

$

5,016

$

5,375

$

27,449

$

19,206

Return on average assets

1.04

%

0.95

%

0.96

%

0.96

%

1.31

%

0.98

%

1.28

%

Pre-tax, pre-provision
return on average
assets:

1.90

%

1.72

%

1.72

%

1.77

%

1.95

%

1.78

%

1.86

%

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

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

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

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

Adjusted Tier 1 leverage capital ratio, excluding PPP loans is a non-GAAP measure that excludes the impact of PPP loans on balance sheet. The most directly comparable GAAP measure is Tier 1 leverage capital ratio.

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

Three Months Ended

Year Ended

(Dollars in thousands, unaudited)

December 31, 2020

September 30, 2020

December 31, 2020

Adjusted allowance for loan losses to loans receivable:

Total loans, net of deferred fees

$

1,547,138

$

1,509,389

$

1,547,138

Less: PPP loans

(365,842

)

(452,846

)

(365,842

)

Less: net deferred fees on PPP loans

5,803

8,586

5,803

Adjusted loans, net of deferred fees

$

1,187,099

$

1,065,129

$

1,187,099

Allowance for loan losses

$

(19,262

)

$

(17,046

)

$

(19,262

)

Allowance for loan losses to loans receivable

1.25

%

1.13

%

1.25

%

Adjusted allowance for loan losses to loans receivable

1.62

%

1.60

%

1.62

%

Adjusted yield on loans receivable:

Total average loans receivable

$

1,533,533

$

1,493,024

$

1,333,028

Less: average PPP loans

(424,290

)

(448,313

)

(302,685

)

Plus: average deferred fees on PPP loans

7,385

9,599

6,432

Adjusted total average loans receivable

$

1,116,628

$

1,054,310

$

1,036,775

Interest income on loans

$

17,885

$

16,244

$

61,910

Less: interest and deferred fee income
recognized on PPP loans

(3,847

)

(3,566

)

(10,172

)

Adjusted interest income on loans

$

14,038

$

12,678

$

51,738

Yield on loans receivable

4.64

%

4.33

%

4.64

%

Adjusted yield on loans receivable:

5.00

%

4.78

%

4.99

%

Adjusted contractual yield on loans receivable, excluding earned fees and interest on PPP loans:

Total average loans receivable

$

1,533,533

$

1,493,024

$

1,333,028

Less: average PPP loans

(424,290

)

(448,313

)

(302,685

)

Plus: average deferred fees on PPP loans

$

7,385

$

9,599

$

6,432

Adjusted total average loans receivable,
excluding earned fees

$

1,116,628

$

1,054,310

$

1,036,775

Interest and earned fee income on loans

$

17,885

$

16,244

$

61,910

Less: earned fee income on all loans

$

(3,762

)

$

(2,693

)

$

(9,065

)

Less: interest income on PPP loans

(1,064

)

(1,129

)

(3,030

)

Adjusted interest income on loans

$

13,059

$

12,422

$

49,815

Contractual yield on loans receivable,
excluding earned fees

3.66

%

3.61

%

3.96

%

Adjusted contractual yield on loans receivable,
excluding earned fees and interest on PPP loans:

4.65

%

4.69

%

4.80

%

(Dollars in thousands, unaudited)

As of
December 31, 2020

Adjusted Tier 1 leverage capital ratio, excluding PPP loans:

Company:

Tier 1 capital

$

143,532

Average assets for the leverage capital ratio

$

1,586,350

Less: Average PPP loans

(424,290

)

Plus: Average PPPLF borrowings

188,222

Adjusted average assets for the leverage capital ratio

$

1,350,282

Tier 1 leverage capital ratio

9.05

%

Adjusted Tier 1 leverage capital ratio, excluding PPP loans

10.63

%

Bank:

Tier 1 capital

$

147,262

Average assets for the leverage capital ratio

$

1,585,514

Less: Average PPP loans

(424,290

)

Plus: Average PPPLF borrowings

188,222

Adjusted average assets for the leverage capital ratio

$

1,349,446

Tier 1 leverage capital ratio

9.29

%

Adjusted Tier 1 leverage capital ratio, excluding PPP loans

10.91

%

APPENDIX A
As of December 31, 2020

Industry Concentration

We have a diversified loan portfolio, representing a wide variety of industries. Three of our largest categories of our loans are commercial real estate, commercial and industrial, and construction, land and land development loans. Together they represent $1.04 billion in outstanding loan balances, or 87.6% of total gross loans outstanding, excluding PPP loans of $365.8 million. When combined with $298.7 million in unused commitments the total of these three categories is $1.34 billion, or 88.9% of total outstanding loans and loan commitments.

Commercial real estate loans represent the largest segment of our loans, comprising 65.1% of our total balance of outstanding loans, excluding PPP loans, as of December 31, 2020. Unused commitments to extend credit represents an additional $20.5 million, the combined total exposure in commercial real estate loans represents $795.4 million, or 52.7% of our total outstanding loans and loan commitments, excluding PPP loans.

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

(Dollars in thousands, unaudited)

Outstanding Balance

Available Loan Commitments

Total Exposure

% of Total
Loans

(Outstanding
Balance &
Available
Commitment)

Average Loan Balance

Number of Loans

Hotel/Motel

$

120,018

$

228

$

120,246

8.0

%

$

4,445

27

Apartments

107,094

2,956

110,050

7.3

1,467

73

Office

79,712

3,008

82,720

5.5

876

91

Warehouse

78,732

1,900

80,632

5.3

1,575

50

Convenience Store

75,699

817

76,516

5.1

1,846

41

Retail

71,914

2,723

74,637

4.9

910

79

Mixed use

70,196

2,555

72,751

4.8

789

89

Mini Storage

38,923

528

39,451

2.6

2,780

14

Manufacturing

32,381

500

32,881

2.2

952

34

Groups < 2.0% of total

100,256

5,267

105,523

7.0

1,253

80

Total

$

774,925

$

20,482

$

795,407

52.7

%

$

1,341

578

Commercial and industrial loans comprise 14.6% of our total balance of outstanding loans, excluding PPP loans, as of December 31, 2020. Unused commitments to extend credit represents an additional $189.9 million, the combined total exposure in commercial and industrial loans represents $363.2 million, or 24.1% of our total outstanding loans and loan commitments, excluding PPP loans.

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

(Dollars in thousands, unaudited)

Outstanding Balance

Available Loan Commitments

Total Exposure

% of Total
Loans

(Outstanding
Balance &
Available
Commitment)

Average Loan Balance

Number of Loans

Capital Call Lines

$

65,559

$

128,208

$

193,767

12.8

%

$

1,192

55

Construction/Contractor
Services

14,089

26,046

40,135

2.7

99

143

Manufacturing

11,787

5,607

17,394

1.2

210

56

Family and Social Services

9,894

5,466

15,360

1.0

707

14

Medical / Dental /
Other Care

12,300

2,376

14,676

1.0

192

64

Financial Institutions

13,400

13,400

0.9

3,350

4

Groups < 0.85% of total

46,329

22,181

68,510

4.5

150

309

Total

$

173,358

$

189,884

$

363,242

24.1

%

$

269

645

Construction, land and land development loans comprise 7.9% of our total balance of outstanding loans, excluding PPP loans, as of December 31, 2020. Unused commitments to extend credit represents an additional $88.4 million, the combined total exposure in construction, land and land development loans represents $182.8 million, or 12.1% of our total outstanding loans and loan commitments, excluding PPP loans.

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

(Dollars in thousands, unaudited)

Outstanding Balance

Available Loan Commitments

Total Exposure

% of Total
Loans

(Outstanding
Balance &
Available
Commitment)

Average Loan Balance

Number of Loans

Commercial construction

$

43,511

$

66,944

$

110,455

7.3

%

$

1,813

24

Residential construction

21,632

16,245

37,877

2.5

1,082

20

Land development

10,405

4,505

14,910

1.0

946

11

Developed land loans

12,624

468

13,092

0.9

395

32

Undeveloped land loans

6,251

193

6,444

0.4

391

16

Total

$

94,423

$

88,355

$

182,778

12.1

%

$

917

103

Payment Modifications and Deferrals

As part of our ongoing commitment to our customers we have been continuously proactive in contacting customers impacted by the stay-at-home order in Washington State, temporary business closures, or that have otherwise been impacted by the COVID-19 pandemic and responses thereto. As of December 31, 2020, $9.3 million in deferred or modified payments, pursuant to federal guidance, representing three loans, remained on deferred or modified status.

There was a total of $233.9 million, or 247 loans, granted deferred or modified payments in the quarters ended June 30, 2020 September 30, 2020 and December 31, 2020. As of December 31, 2020, $209.8 million, or 220 loans, have successfully resumed payments as scheduled, $7.9 million, or 7 loans, have moved to active status and have a payment due in the first quarter of 2021, $6.9 million, or 17 loans, have closed and paid-in-full, leaving $9.3 million, or 3 loans, on deferral.

The graph below illustrates the status of all the loans that were part of the COVID-19 deferral program:

View graph here: https://www.globenewswire.com/NewsRoom/AttachmentNg/eac49836-c27f-46a0-9a59-a54084ec55f1

The graph below indicates the percentage of loans that remain on a COVID-19 deferral. This illustration is based on total loans outstanding as of as of December 31, 2020.

View graph here: https://www.globenewswire.com/NewsRoom/AttachmentNg/c403935e-5443-44e0-ae4c-c3a529d56ff1

Remaining deferrals by deferral end date as of December 31, 2020:

View graph here: https://www.globenewswire.com/NewsRoom/AttachmentNg/78a0c167-4705-43a0-8739-58ce2faf0ed5

As a result of our proactive approach with customers, we did not see material downgrades in credit during quarter ended December 31, 2020 related to the COVID-19 pandemic. We will continue to be diligent in monitoring credit and changes in the economy, keeping the lines of communication open with our customers, but the full impact of these challenging economic times on our financial condition and liquidity remains to be seen at this time.

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