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Coastal Financial Corporation Announces Third Quarter 2021 Results

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·42 min read
GlobeNewswire Inc.
In this article:
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Third Quarter 2021 Highlights:

  • Total assets increased $444.4 million, or 22.1%, to $2.45 billion for the quarter ended September 30, 2021, compared to $2.01 billion at June 30, 2021.

  • Total deposits increased $421.9 million, or 23.4%, to $2.22 billion for the quarter ended September 30, 2021, compared to $1.8 billion at June 30, 2021.

  • Loan growth of $47.5 million during the quarter ended September 30, 2021. This growth is net of $130.8 million in forgiven or paid down Paycheck Protection Program (“PPP”) loans during the quarter ended September 30, 2021.

  • CCBX loans increased $86.7 million, and community bank loans increased $89.4 million, excluding PPP loans during the quarter ended September 30, 2021.

  • CCBX deposits increased $339.8 million during the quarter ended September 30, 2021.

  • Net income totaled $6.7 million for the quarter ended September 30, 2021, or $0.54 per diluted common share, compared to $7.0 million, or $0.56 per diluted common share, for the quarter ended June 30, 2021.

EVERETT, Wash., Oct. 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 ended September 30, 2021. Net income for the third quarter of 2021 was $6.7 million, or $0.54 per diluted common share, compared with net income of $7.0 million, or $0.56 per diluted common share, for the second quarter of 2021, and $4.1 million, or $0.34 per diluted common share, for the quarter ended September 30, 2020.

“The third quarter of 2021 ended with total assets of $2.45 billion, an increase of $444.4 million from June 30, 2021. Deposit growth was strong, increasing $421.9 million during the three months ended September 30, 2021. Loans receivable increased $47.5 million, which included non-PPP loan growth of $176.1 million partially offset by $130.8 million in forgiven or repaid PPP loans. Core deposits increased $424.3 million and represented 96.6% of total deposits as of September 30, 2021.

“Our three-prong strategy for success and growth continues to be the guide and focus of our efforts. Our CCBX division, which provides Banking as a Service (“BaaS”), has a total of 26 relationships as of September 30, 2021, an increase of 15 relationships compared to September 30, 2020. CCBX generates additional fee and interest income, as well as related expenses, for the Company by providing BaaS to broker dealers and digital financial service providers who offer their clients these banking services. During the quarter ended September 30, 2021, CCBX deposits increased $339.8 million to $607.2 million. Additionally, we have access to $331.1 million in CCBX brokered deposits that are swept off the balance sheet as of September 30, 2021. CCBX loans increased $86.7 million to $190.1 million as of September 30, 2021, compared to $103.5 million as of June 30, 2021. CCDB our digital banking division, has shifted from the Google banking collaboration to exploring other opportunities in this sector of banking,” stated Eric Sprink, the President and CEO of the Company and the Bank.

Results of Operations

Net interest income was $18.8 million for the quarter ended September 30, 2021, an increase of $195,000, or 1.0%, from $18.6 million for the quarter ended June 30, 2021, and an increase of $3.7 million, or 24.6%, from $15.1 million for the quarter ended September 30, 2020. Yield on loans receivable was 4.57% for the three months ended September 30, 2021, compared to 4.44% for the three months ended June 30, 2021 and 4.33% for the three months ended September 30, 2020. The increase in net interest income compared to June 30, 2021 and September 30, 2020, was largely related to increased yield on loans resulting from loan growth and a decrease in lower yielding PPP loans. Average loans receivable for the three months ended September 30, 2021, was $1.68 billion, compared to $1.75 billion and $1.49 billion for the three months ended June 30, 2021 and September 30, 2020, respectively.

Interest and fees on loans totaled $19.4 million for the three months ended September 30, 2021 and June 30, 2021, compared to $16.2 million for the three months ended September 30, 2020. Net non-PPP loan growth of $176.1 million during the quarter ended September 30, 2021, offset a decrease of $130.8 million in PPP loans that were forgiven or repaid, which resulted in the recognition of $2.9 million in net deferred fees on PPP loans. Capital call lines increased $62.6 million, or 63.2%, during the quarter ended September 30, 2021. These loans bear a lower rate of interest, but have less credit risk due to the way the loans are structured compared to other commercial loans. The increase in interest and fees on loans for the quarter ended September 30, 2021, compared to September 30, 2020, was largely due to $3.1 million in increased interest income as a result of loan volume, combined with an increase in net deferred fees recognized on forgiven or repaid PPP loans.

As of September 30, 2021, there were $267.3 million in PPP loans, compared to $398.0 million as of June 30, 2021, and $452.8 million as of September 30, 2020. In the three months ended September 30, 2021, a total of $130.8 million in PPP loans were forgiven or repaid. Net deferred fees recognized on PPP loans contributed $2.9 million for the three months ended September 30, 2021, compared to $3.6 million for the three months ended June 30, 2021, and $2.4 million for the three months ended September 30, 2020.

As of September 30, 2021, $9.4 million in net deferred fees on PPP loans remains 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. PPP loans in round one and two were originated in 2020, and were predominately two year loans, with $16.2 million of these loans remaining at September 30, 2021. PPP loans in round three were originated in 2021 and are all five year loans, with $251.1 million of these loans remaining at September 30, 2021.

Interest income from interest earning deposits with other banks was $170,000 at September 30, 2021, an increase of $96,000 and $71,000 due to higher balances compared to June 30, 2021, and September 30, 2020, respectively.

Interest expense was $801,000 for the quarter ended September 30, 2021, a $158,000 decrease from the quarter ended June 30, 2021 and a $497,000 decrease from the quarter ended September 30, 2020. Interest expense on interest bearing deposits decreased despite an increase of $18.7 million and $169.0 million in average interest bearing deposits for the quarter ended September 30, 2021 over the quarters ended June 30, 2021 and September 30, 2020, respectively, as a result of management lowering deposit interest rates and a low interest rate environment. This contributed to our improved cost of deposits which decreased 26.6% and 60.5% for the three months ended September 30, 2021 when compared to the three months ended June 30, 2021 and September 30, 2020, respectively. Interest expense on borrowed funds was $278,000 for the quarter ended September 30, 2021, compared to $331,000 and $418,000 for the quarters ended June 30, 2021 and September 30, 2020, respectively. The decrease in interest expense on borrowed funds from the quarters ended June 30, 2021 and September 30, 2020 is the result of a decrease in average PPPLF borrowings, which were paid off in full as of June 30, 2021. During the quarter ended September 30, 2021, the Company entered into a $25.0 million subordinated note purchase agreement with a current rate of 3.375%, and part of the proceeds were used to repay $10.0 million in subordinated debt at a higher interest rate of 5.65%. The increase in principal balance outstanding resulted in an increase in interest expense on subordinated debt.

Net interest margin decreased for the three months ended September 30, 2021 to 3.48%, compared to 3.70% and 3.62% for the three months ended June 30, 2021 and September 30, 2020, respectively. The net interest margin will likely fluctuate over the near term as PPP loans originated in 2020 and 2021 continue to be forgiven and paid off. The decrease in net interest margin was largely a result of $419.7 million in interest earning deposits as of September 30, 2021, a $184.5 million and $282.1 million increase compared to the quarters ended June 30, 2021 and September 30, 2020, respectively. These interest earning deposits earned an average rate of 16 basis points for the quarter ended September 30, 2021.

Cost of funds decreased four basis points in the quarter ended September 30, 2021 to 0.16%, compared to the quarter ended June 30, 2021 and decreased 17 basis points from the quarter ended September 30, 2020. Cost of deposits for the quarter ended September 30, 2021 was 0.10%, a decrease of four basis points, or a 26.6% decrease, from 0.14% for the quarter ended June 30, 2021, and a 17 basis point decrease, or a 60.5% decrease, from 0.27% for the quarter ended September 30, 2020, largely due to an increase in noninterest bearing deposits and a lower rate environment. Deposit growth from CCBX in noninterest bearing and low interest bearing accounts contributed to the reduced cost of funds in conjunction with rate reductions on our community bank deposits. Noninterest bearing deposits increased $408.5 million, or 46.0%, and $725.8 million, or 127.2%, compared to the quarters ended June 30, 2021, and September 30, 2020, respectively. Market conditions for deposits continued to be competitive during the quarter ended September 30, 2021; however, we have been able to keep our cost of deposits down by increasing low interest bearing and noninterest bearing deposits and allowing high cost deposits to run-off when appropriate, lowering deposit rates and replacing them with lower cost core deposits.

During the quarter ended September 30, 2021, total loans receivable increased by $47.5 million, to $1.71 billion, compared to $1.66 billion for the quarter ended June 30, 2021. Non-PPP loans increased $176.1 million, or 13.8%, for the quarter ended September 30, 2021, compared to the quarter ended June 30, 2021. PPP loans decreased $130.8 million as a result of forgiveness and repayments and totaled $267.3 million as of September 30, 2021 compared to June 30, 2021.

Total yield on loans receivable for the quarter ended September 30, 2021 was 4.57%, compared to 4.44% for the quarter ended June 30, 2021, and 4.33% for the quarter ended September 30, 2020. This increase in yield on loans receivable is attributed to a decrease in the outstanding balance of PPP loans that have a stated rate of 1.0% which is combined with the recognition of net deferred fees on PPP loans that are forgiven or repaid. Additionally, new non-PPP loans generally bear a higher average interest rate than the PPP loans they are replacing.

Yield on loans receivable, excluding earned fees* approximated 3.74% for the quarter ended September 30, 2021, compared to 3.46% for the quarter ended June 30, 2021, and 3.61% for the quarter ended September 30, 2020. Net deferred fees recognized on loans were $3.5 million (includes $2.9 million on PPP loans), $4.3 million (includes $3.6 million on PPP loans) and $2.7 million (includes $2.4 million on PPP loans) for the quarters ended September 30, 2021, June 30, 2021 and September 30, 2020, respectively.

Return on average assets (“ROA”) was 1.21% for the quarter ended September 30, 2021 compared to 1.36% and 0.95% for the quarters ended June 30, 2021 and September 30, 2020, respectively. ROA for the quarter ended September 30, 2021 was impacted by increased demand deposits and cash on the balance sheet, which has resulted in a lower loan to deposit ratio. ROA for the quarter ended September 30, 2020 was impacted 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 1.59% for the quarter ended September 30, 2021, compared to 1.87% for the quarter ended June 30, 2021, and 1.72% for the quarter ended September 30, 2020.

The PPP loans originated in the first and second rounds during 2020 and in the third round in 2021 have had a significant impact on our financial statements. These PPP loans will continue to impact our results in the future. We continued to receive forgiveness payments from the SBA. Any estimated adjusted ratios that exclude the impact of this activity are non-GAAP measures. For more information about non-GAAP financial measures, please see the end of this earnings release.

The table below summarizes information about total PPP loans originated in 2020 and 2021.

Total PPP Loan Origination

Round 1 & 2
2020

Round 3
2021

Total

(Dollars in thousands; unaudited)

Loans Originated

$

452,846

$

311,012

$

763,858

Deferred fees, net

12,933

13,334

$

26,267

Outstanding loans and deferred fees as of September 30, 2021

Loans outstanding

$

16,228

$

251,050

$

267,278

Deferred fees, net

148

9,269

$

9,417

As of September 30, 2021 there was $267.3 million in PPP loans, this includes $16.2 million from round 1 & 2 and $251.1 million from round 3. The table below summarizes key information about the remaining PPP loans originated in 2020 and 2021 as of the period indicated:

Outstanding PPP Loans

Original Loan Size

As of and for the Three Months Ended September 30, 2021

$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:

Round 1 & 2

$

1,084

$

952

$

1,179

$

4,221

$

8,792

$

16,228

Round 3

23,692

40,604

60,700

123,098

2,956

251,050

Total principal outstanding

24,776

41,556

61,879

127,319

11,748

267,278

Net deferred fees outstanding

Round 1 & 2

$

15

$

22

$

36

$

42

$

33

$

148

Round 3

2,083

1,532

2,506

3,123

25

9,269

Total net deferred fees
outstanding

$

2,098

$

1,554

$

2,542

$

3,165

$

58

$

9,417

Number of loans:

Round 1 & 2

73

14

9

10

5

111

Round 3

1,294

445

262

160

1

2,162

Total loan count

1,367

459

271

170

6

2,273

Percent of total

60.1

%

20.2

%

11.9

%

7.5

%

0.3

%

100.0

%

Forgiveness/Payoffs/Paydowns in Three Months Ended September 30, 2021

Dollars

$

12,199

$

17,408

$

21,557

$

44,995

$

34,601

$

130,760

Deferred fee recognized

671

579

638

946

112

2,946

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

Nine Months Ended

(unaudited)

September 30,
2021

June 30,
2021

March 31,
2021

December 31,
2020

September 30,
2020

September 30, 2021

September 30, 2020

Return on average assets (1)

1.21

%

1.36

%

1.28

%

1.04

%

0.95

%

1.28

%

0.96

%

Return on average equity (1)

16.77

%

18.60

%

16.84

%

13.36

%

12.14

%

17.40

%

10.73

%

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

1.59

%

1.87

%

1.69

%

1.90

%

1.72

%

1.71

%

1.73

%

Yield on earnings assets (1)

3.63

%

3.89

%

3.99

%

4.16

%

3.93

%

3.83

%

4.23

%

Yield on loans receivable (1)

4.57

%

4.44

%

4.51

%

4.64

%

4.33

%

4.51

%

4.65

%

Yield on loans receivable,
excluding PPP loans (1)(2)

4.53

%

4.65

%

4.78

%

5.00

%

4.78

%

4.64

%

4.99

%

Yield on loans receivable,
excluding earned
fees (1)(2)

3.74

%

3.46

%

3.53

%

3.66

%

3.61

%

3.57

%

4.09

%

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

4.36

%

4.42

%

4.52

%

4.65

%

4.69

%

4.43

%

4.86

%

Cost of funds (1)

0.16

%

0.20

%

0.24

%

0.29

%

0.33

%

0.20

%

0.45

%

Cost of deposits (1)

0.10

%

0.14

%

0.17

%

0.22

%

0.27

%

0.14

%

0.40

%

Net interest margin (1)

3.48

%

3.70

%

3.76

%

3.89

%

3.62

%

3.64

%

3.81

%

Noninterest expense to average
assets (1)

2.91

%

2.65

%

2.62

%

2.35

%

2.26

%

2.74

%

2.52

%

Efficiency ratio

64.68

%

58.69

%

60.85

%

55.26

%

56.73

%

61.51

%

59.31

%

Loans receivable to deposits

76.71

%

92.03

%

105.68

%

108.85

%

110.98

%

76.71

%

110.98

%

(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 $6.1 million as of September 30, 2021, an increase of $1.3 million from $4.8 million as of June 30, 2021, and an increase of $4.2 million from $1.9 million as of September 30, 2020. The increase in noninterest income over the quarter ended June 30, 2021 was due to a $1.5 million unrealized holding gain on an equity investment, a $862,000 increase in BaaS fees, a $175,000 increase in gain on sale of loans, partially offset by the absence of a $1.3 million gain from the sale of a branch that occurred the quarter ended June 30, 2021. The $4.2 million increase in noninterest income over the quarter ended September 30, 2020 was primarily due to a $1.7 million increase in BaaS fees, a $1.5 million unrealized holding gain on an equity investment, a $543,000 increase in loan referral fees, a $159,000 increase in gain on sale of loans, and $132,000 increase in deposit service charges and fees, primarily in point of sale and ATM fees, which were down in 2020 because of stay-at-home orders related to the COVID-19 pandemic. Interchange income from BaaS partners for the quarter ended September 30, 2021 was $188,000, compared to $110,000 and $4,000, as of June 30, 2021 and September 30, 2020, respectively.

Our CCBX division continues to grow, and now has 26 relationships, at varying stages, as of September 30, 2021, compared to 24 CCBX relationships at June 30, 2021 and 11 CCBX relationships as of September 30, 2020, respectively. As of September 30, 2021, we had 16 active CCBX relationships, seven relationships in onboarding/implementation, three signed letters of intent and we believe we have a strong pipeline of potential new CCBX relationships. The following table illustrates the activity and growth in CCBX for the periods presented:

As of

September 30, 2021

June 30, 2021

September 30, 2020

Active

16

12

4

Friends and family / testing

0

3

1

Implementation / onboarding

7

7

4

Signed letters of intent

3

2

2

Total CCBX relationships

26

24

11

Total noninterest expense increased to $16.1 million as of September 30, 2021, compared to $13.7 million as of June 30, 2021 and $9.7 million as of September 30, 2020. Increase in noninterest expense for the quarter ended September 30, 2021, as compared to the quarter ended June 30, 2021, was primarily due to a $1.0 million increase in salaries and employee benefits which is related to the hiring in CCBX, CCDB, and additional staff for our ongoing growth initiatives. BaaS expense increased $616,000 compared to June 30, 2021, which includes $319,000 increase in partner loan expense and $297,000 increase in partner fraud expense. Partner loan expense represents the amount paid to partners for originating and servicing loans. Partner fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts. Any credit enhancement provided by the partner is reimbursed and included in noninterest income. Also contributing to the increase in expenses compared to June 30, 2021 is a $274,000 increase in software license, maintenance and subscription expenses, which is expected to increase as we invest more in automated processing and as we grow our product lines for CCBX and CCDB. In the third quarter of 2021 compared to the second quarter of 2021, legal and professional fees increased $170,000 and Federal Deposit Insurance Corporation (“FDIC”) assessments increased $175,000. 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 largely the result of an increase in deposits combined with other factors that impact the FDIC assessment calculation compared to the quarter ended June 30, 2021.

The increased noninterest expenses for the quarter ended September 30, 2021 compared to the quarter ended September 30, 2020 were largely due to a $4.0 million increase in salary expenses related to hiring staff for CCBX, CCDB and additional staff for our ongoing banking growth initiatives, an increase of $524,000 in BaaS partner expense and a $480,000 increase in software license, maintenance and subscription expenses. In addition, in the third quarter of 2021 compared to the third quarter of 2020, legal and professional fees increased $415,000 and Federal Deposit Insurance Corporation (“FDIC”) assessments increased $252,000. 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 largely the result of an increase in deposits combined with other factors that impact the FDIC assessment calculation compared to the quarter ended September 30, 2020.

The provision for income taxes was $1.9 million at September 30, 2021, a $419,000 decrease compared to $2.3 million for the second quarter of 2021 as a result of decreased taxable income, and a $788,000 increase compared to $1.1 million for the third quarter of 2020, as a result of increased taxable income. Additionally, the Company is now subject to various state taxes that are being assessed as a result of hiring employees nationwide and CCBX activities expanding into other states, which has increased the overall rate used in calculating the provision for income taxes in the current and future periods. The Company uses a federal statutory tax rate of 21% as a basis for calculating provision for federal income taxes.

Financial Condition

Total assets increased $444.4 million, or 22.1%, to $2.45 billion at September 30, 2021 compared to $2.01 billion at June 30, 2021. The primary cause of the increase was a $386.6 million increase in interest earning deposits with other banks, primarily a result of increased CCBX deposits during the quarter ended September 30, 2021, combined with $47.5 million increase in loans receivable even after experiencing $130.8 million in PPP loan forgiveness and paydowns. Total assets increased $702.0 million, or 40.1%, at September 30, 2021, compared to $1.75 billion at September 30, 2020. This increase was largely the result of a $470.0 million increase in interest earning deposits with other banks including the Federal Reserve, combined with $196.5 million increase in loans receivable.

Total loans receivable increased $47.5 million to $1.71 billion at September 30, 2021, from $1.66 billion at June 30, 2021, and increased $196.3 million from $1.51 billion at September 30, 2020. The increase in loans receivable over the quarter ended June 30, 2021 was the result of $176.1 million in non-PPP loan growth partially offset by $130.8 million in forgiveness, payoffs or principal paydowns on PPP loans. The $176.1 million increase in non-PPP loans includes CCBX loan growth of $86.7 million, and core banking loan growth, which excludes PPP loans and CCBX loans, of $89.4 million during the three months ended September 30, 2021. CCBX loans totaled $190.1 million at September 30, 2021 compared to $103.5 million at June 30, 2021 and $43.8 million at September 30, 2020. Total loans receivable as of September 30, 2021 is net of $14.5 million in net deferred origination fees, $9.4 million of which is attributed to PPP loans. Deferred fees on PPP loans are earned over the life of the loan. Loans that were originated in 2020 are primarily two year loans with some being 5 year loans with $16.2 million of these loans remaining as of September 30, 2021, and all PPP loans originated in 2021 have five year maturities, with $251.1 million of these loans remaining as of September 30, 2021. Along with an increase in loans receivable as of September 30, 2021 compared to June 30, 2021, unused commitments also increased during the same period, with the unused commitments on capital call lines increasing $60.6 million to $347.4 million at September 30, 2021 compared to $286.8 million at June 30, 2021, which should translate into future loan growth as the commitments are utilized. The increase in loans receivable over the quarter ended September 30, 2020 includes growth of $385.4 million in non-PPP loans, partially offset by a $185.6 million decrease in PPP loans as of September 30, 2021. Non-PPP loan growth consists of $117.7 million in capital call lines, $132.2 million in commercial real estate loans, $57.8 million in construction, land and land development loans, $49.0 million in residential real estate loans, and $15.5 million in other commercial and industrial loans. Consumer loans increased $13.2 million, primarily due to growth in CCBX.

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

As of

September 30, 2021

June 30, 2021

September 30, 2020

(Dollars in thousands; unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Commercial and industrial loans:

PPP loans

$

267,278

15.5

%

$

398,038

23.8

%

$

452,846

29.8

%

Capital call lines

161,457

9.4

98,905

5.9

43,776

2.9

All other commercial &
industrial loans

108,120

6.3

102,775

6.1

92,582

6.0

Real estate loans:

Construction, land and
land development loans

158,710

9.2

116,733

7.0

100,955

6.6

Residential real estate loans

170,167

9.9

143,574

8.6

121,147

8.0

Commercial real estate loans

837,342

48.7

807,711

48.2

705,186

46.4

Consumer and other loans

17,140

1.0

7,161

0.4

3,927

0.3

Gross loans receivable

1,720,214

100.0

%

1,674,897

100.0

%

1,520,419

100.0

%

Net deferred origination fees -
PPP loans

(9,417

)

(12,363

)

(8,586

)

Net deferred origination fees -
Other loans

(5,115

)

(4,385

)

(2,444

)

Loans receivable

$

1,705,682

$

1,658,149

$

1,509,389

Please see Appendix A for additional loan portfolio detail regarding industry concentrations.

The following table details the CCBX loans which are included in the total loan portfolio table above.

As of

September 30, 2021

June 30, 2021

September 30, 2020

(Dollars in thousands; unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Commercial and industrial loans:

Capital call lines

$

161,457

84.9

%

$

98,905

95.6

%

$

43,776

99.9

%

Real estate loans:

Residential real estate loans

14,039

7.4

-

0.0

-

0.0

Consumer and other loans:

Credit cards

1,711

0.9

1,850

1.8

1

0.0

Other consumer loans

12,937

6.8

2,721

2.6

47

0.1

Gross CCBX loans receivable

190,144

100.0

%

103,476

100.0

%

43,824

100.0

%

Total deposits increased $421.9 million, or 23.4%, to $2.22 billion at September 30, 2021 from $1.8 billion at June 30, 2021. The increase was due primarily to a $424.3 million increase in core deposits, which is primarily the result of growth in CCBX partners and expanding and growing banking relationships with new customers. Deposits in our CCBX division increased $339.8 million, from $267.4 million at June 30, 2021, to $607.2 million at September 30, 2021. The deposits from our CCBX division are predominately classified as noninterest bearing, or NOW and money market accounts, but a portion of such CCBX deposits may be classified as brokered deposits as a result of the relevant relationship agreement. Currently, the majority of CCBX deposits are noninterest bearing, however, as the Federal Reserve Open Market Committee raises interest rates, a majority of these accounts will bear interest and be reclassified to interest bearing deposits once rates exceed the minimum interest rate set in their respective program agreements and begin to earn interest. During the quarter ended September 30, 2021, noninterest bearing deposits increased $408.5 million, or 46.0%, to $1.30 billion from $887.9 million at June 30, 2021. Included in the increase in noninterest bearing deposits is an increase in CCBX division deposits of $339.8 million for the quarter ended September 30, 2021. In the third quarter of 2021 compared to the second quarter of 2021, NOW and money market accounts increased $12.8 million, and savings accounts increased $3.0 million. BaaS-brokered deposits increased $1.0 million, or 3.7%, and time deposits decreased $3.5 million, or 6.9% in the third quarter of 2021 compared to the second quarter of 2021.

Total deposits increased $863.5 million, or 63.5%, to $2.22 billion at September 30, 2021 compared to $1.36 billion at September 30, 2020. Noninterest bearing deposits increased $725.8 million, or 127.2%, to $1.30 billion at September 30, 2021 from $570.7 million at September 30, 2020. NOW and money market accounts increased $130.9 million, or 21.0%, to $755.8 million at September 30, 2021, and savings accounts increased $21.5 million, or 28.8%, and BaaS-brokered deposits increased $3.5 million, or 14.2% while time deposits decreased $18.2 million, or 28.0%. The overall increase in deposits was achieved despite a decrease of $26.4 million in total deposits compared to September 30, 2020 due to the sale of our Freeland branch which included deposits. Additionally, as of September 30, 2021 we have access to $331.1 million in CCBX customer deposits that are currently being transferred or swept off the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. If a portion of these deposits are retained, they would be classified as brokered deposits, however if the entire available balance is retained, they would be non-brokered deposits. 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

September 30, 2021

June 30, 2021

September 30, 2020

(Dollars in thousands, unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Demand, noninterest bearing

$

1,296,443

58.3

%

$

887,896

49.3

%

$

570,664

42.0

%

NOW and money market

755,810

34.0

743,014

41.2

624,891

45.9

Savings

96,192

4.3

93,224

5.2

74,694

5.5

Total core deposits

2,148,445

96.6

1,724,134

95.7

1,270,249

93.4

BaaS-brokered deposits

28,396

1.3

27,388

1.5

24,870

1.8

Time deposits less than $250,000

32,937

1.5

34,809

1.9

41,676

3.1

Time deposits $250,000 and over

13,762

0.6

15,347

0.9

23,216

1.7

Total deposits

$

2,223,540

100.0

%

$

1,801,678

100.0

%

$

1,360,011

100.0

%

The following table details the CCBX deposits which are included in the total deposit portfolio table above.

As of

September 30, 2021

June 30, 2021

September 30, 2020

(Dollars in thousands, unaudited)

Balance

% to Total

Balance

% to Total

Balance

% to Total

Demand, noninterest bearing

$

573,985

94.5

%

$

230,185

86.1

%

$

18,215

35.3

%

Interest bearing

4,837

0.8

9,810

3.7

8,489

16.5

Total core deposits

578,822

95.3

239,995

89.8

26,704

51.8

BaaS-brokered deposits

28,395

4.7

27,387

10.2

24,869

48.2

Total CCBX deposits

$

607,217

100.0

%

$

267,382

100.0

%

$

51,573

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 September 30, 2021, we borrowed a total of $25.0 million in FHLB term advances. This includes a $10.0 million advance that matures in March of 2023 and $15.0 million advance that matures in March 2025. These advances provide an alternative and stable source of funding for loan demand. Although there are no immediate plans to borrow additional funds, additional FHLB borrowing capacity of $95.4 million was available under this arrangement as of September 30, 2021.

During the quarter ended September 30, 2021, the Company entered into a $25.0 million subordinated note purchase agreement with a current rate of 3.375%, some of the proceeds of which were used to repay an existing $10.0 million in subordinated debt at a higher 5.65% interest rate. A total of $11.5 million was contributed to the Bank, and the balance of the amount was retained in cash at the Company level.

Total shareholders’ equity increased $7.0 million since June 30, 2021. The increase in shareholders’ equity was primarily due to $6.7 million in net earnings for the three months ended September 30, 2021.

Capital Ratios

The Company and the Bank remain well capitalized at September 30, 2021, 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

8.14

%

7.48

%

5.00

%

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

9.54

%

8.77

%

5.00

%

Common Equity Tier 1 risk-based capital

11.07

%

9.94

%

6.50

%

Tier 1 risk-based capital

11.07

%

10.15

%

8.00

%

Total risk-based capital

12.32

%

12.95

%

10.00

%

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

Asset Quality

The allowance for loan losses was $20.2 million and 1.19% of loans receivable at September 30, 2021 compared to $20.0 million and 1.20% at June 30, 2021 and $17.0 million and 1.13% at September 30, 2020. At September 30, 2021, there was $267.3 million in PPP loans, which are 100% guaranteed by the SBA. Adjusted allowance for loan losses to loans receivable, excluding PPP loans* was 1.40% for the quarter ended September 30, 2021. Provision for loan losses totaled $255,000 for the three months ended September 30, 2021, $361,000 for the three months ended June 30, 2021, and $2.2 million for the three months ended September 30, 2020. Net recoveries totaled $1,000 for the quarter ended September 30, 2021, compared to net charge-offs of $5,000 for the quarter ended June 30, 2021 and $1,000 for the quarter ended September 30, 2020.

The Company’s provision for loan losses during the quarter ended September 30, 2021, is related to an increase in non-PPP loan growth. The factors used in management’s analysis of the provision for loan losses indicated that a provision of $255,000 and $361,000 was needed for the quarters ended September 30, 2021 and June 30, 2021, respectively. The expected loan losses did not materialize as originally anticipated in 2020 due to the COVID-19 pandemic and related economic slowdown, as evidenced by the low level of charge-offs and nonperforming loans. The economic environment is continuously changing and has shown signs of improvement, with the United States implementing stimulus packages, ongoing vaccination of its population and increased re-opening of economic activities. The Company is not required to implement the provisions of the Current Expected Credit Loss accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model.

At September 30, 2021, our nonperforming assets were $740,000, or 0.03% of total assets, compared to $648,000, or 0.03%, of total assets at June 30, 2021, and $4.5 million, or 0.26%, of total assets at September 30, 2020. Nonperforming assets increased $92,000 during the quarter ended September 30, 2021, compared to the quarter ended June 30, 2021, due to $123,000 in CCBX loans that are past due 90 days or more and still accruing interest. There were no repossessed assets or other real estate owned at September 30, 2021. Our nonperforming loans to loans receivable ratio was 0.04% at September 30, 2021 and June 30, 2021, compared to 0.30% at September 30, 2020.

For the quarter ended September 30, 2021, we have not seen a significant change in our credit quality metrics, as demonstrated by the low level of charge-offs and nonperforming loans. The long-term economic impact of the COVID-19 pandemic, political gridlock, and trade issues 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 $246.4 million in loans were deferred and/or modified under this guidance. As of the quarter ended September 30, 2021, all loans have either been paid off or returned to active status. The purpose of this program was 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.

September 30,

June 30,

September 30,

(Dollars in thousands, unaudited)

2021

2021

2020

Nonaccrual loans:

Commercial and industrial loans

$

561

$

482

$

625

Real estate:

Construction, land and land development

-

-

3,269

Residential real estate

56

166

178

Commercial real estate

-

-

405

Total nonaccrual loans

617

648

4,477

Accruing loans past due 90 days or more:

Total accruing loans past due 90 days or more

123

-

-

Total nonperforming loans

740

648

4,477

Other real estate owned

-

-

-

Repossessed assets

-

-

-

Total nonperforming assets

$

740

$

648

$

4,477

Troubled debt restructurings, accruing

-

-

-

Total nonperforming loans to loans receivable

0.04

%

0.04

%

0.30

%

Total nonperforming assets to total assets

0.03

%

0.03

%

0.26

%

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 $2.45 billion Bank provides service through 14 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. 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

September 30,

June 30,

September 30,

2021

2021

2020

Cash and due from banks

$

31,722

$

31,473

$

14,136

Interest earning deposits with other banks

638,003

251,416

168,034

Investment securities, available for sale, at fair value

32,838

25,341

20,428

Investment securities, held to maturity, at amortized cost

2,086

2,101

3,354

Other investments

8,349

6,839

5,951

Loans receivable

1,705,682

1,658,149

1,509,389

Allowance for loan losses

(20,222

)

(19,966

)

(17,046

)

Total loans receivable, net

1,685,460

1,638,183

1,492,343

Premises and equipment, net

17,231

17,207

16,881

Operating lease right-of-use assets

6,372

6,637

7,379

Accrued interest receivable

7,549

8,108

8,216

Bank-owned life insurance, net

12,166

12,056

7,031

Deferred tax asset, net

3,807

3,808

2,722

Other assets

5,985

3,969

3,144

Total assets

$

2,451,568

$

2,007,138

$

1,749,619

LIABILITIES AND SHAREHOLDERS’ EQUITY

LIABILITIES

Deposits

$

2,223,540

$

1,801,678

$

1,360,011

Federal Home Loan Bank advances

24,999

24,999

24,999

Paycheck Protection Program Liquidity Facility

-

-

202,595

Subordinated debt, net

24,269

10,000

9,989

Junior subordinated debentures, net

3,586

3,585

3,584

Deferred compensation

774

803

891

Accrued interest payable

147

179

481

Operating lease liabilities

6,583

6,845

7,579

Other liabilities

6,584

4,949

4,258

Total liabilities

2,290,482

1,853,038

1,614,387

SHAREHOLDERS’ EQUITY

Common stock

88,997

88,699

87,479

Retained earnings

72,083

65,399

47,707

Accumulated other comprehensive income, net of tax

6

2

46

Total shareholders’ equity

161,086

154,100

135,232

Total liabilities and shareholders’ equity

$

2,451,568

$

2,007,138

$

1,749,619

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

Three Months Ended

September 30,

June 30,

September 30,

2021

2021

2020

INTEREST AND DIVIDEND INCOME

Interest and fees on loans

$

19,383

$

19,365

$

16,244

Interest on interest earning deposits with other banks

170

74

99

Interest on investment securities

24

24

27

Dividends on other investments

31

108

24

Total interest and dividend income

19,608

19,571

16,394

INTEREST EXPENSE

Interest on deposits

523

628

880

Interest on borrowed funds

278

331

418

Total interest expense

801

959

1,298

Net interest income

18,807

18,612

15,096

PROVISION FOR LOAN LOSSES

255

361

2,200

Net interest income after provision for loan losses

18,552

18,251

12,896

NONINTEREST INCOME

-

BaaS fees

2,286

1,424

576

Unrealized holding gain on equity securities, net

1,472

-

-

Deposit service charges and fees

956

949

824

Loan referral fees

723

806

180

Gain on sales of loans, net

206

31

47

Mortgage broker fees

187

253

125

Gain on sale of branch

-

1,263

-

Other income

302

56

190

Total noninterest income

6,132

4,782

1,942

NONINTEREST EXPENSE

Salaries and employee benefits

9,961

8,913

5,971

Occupancy

1,037

990

1,091

Software licenses, maintenance and subscriptions

817

543

337

Legal and professional fees

796

626

381

Data processing

761

734

577

BaaS expense

715

99

100

Excise taxes

407

388

291

Federal Deposit Insurance Corporation assessments

400

225

148

Director and staff expenses

274

318

156

Marketing

130

132

52

Other expense

832

763

562

Total noninterest expense

16,130

13,731

9,666

Income before provision for income taxes

8,554

9,302

5,172

PROVISION FOR INCOME TAXES

1,870

2,289

1,082

NET INCOME

$

6,684

$

7,013

$

4,090

Basic earnings per common share

$

0.56

$

0.59

$

0.34

Diluted earnings per common share

$

0.54

$

0.56

$

0.34

Weighted average number of common shares outstanding:

Basic

11,999,899

11,984,927

11,919,850

Diluted

12,456,674

12,459,467

12,181,272

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

Nine Months Ended

September 30,

September 30,

2021

2020

INTEREST AND DIVIDEND INCOME

Interest and fees on loans

$

56,978

$

44,025

Interest on interest earning deposits with other banks

314

587

Interest on investment securities

76

199

Dividends on other investments

169

129

Total interest and dividend income

57,537

44,940

INTEREST EXPENSE

Interest on deposits

1,811

3,530

Interest on borrowed funds

992

957

Total interest expense

2,803

4,487

Net interest income

54,734

40,453

PROVISION FOR LOAN LOSSES

973

5,708

Net interest income after provision for loan losses

53,761

34,745

NONINTEREST INCOME

BaaS fees

4,658

1,630

Unrealized holding gain on equity securities, net

1,472

Deposit service charges and fees

2,768

2,224

Loan referral fees

2,126

1,303

Gain on sales of loans, net

367

47

Mortgage broker fees

702

439

Gain on sale of branch

1,263

-

Other

542

490

Total noninterest income

13,898

6,133

NONINTEREST EXPENSE

Salaries and employee benefits

26,560

16,869

Occupancy

3,085

2,951

Software licenses, maintenance and subscriptions

1,844

919

Legal and professional fees

2,182

1,178

Data processing

2,192

1,749

BaaS expense

905

191

Excise taxes

1,154

756

Federal Deposit Insurance Corporation assessments

820

292

Director and staff expenses

812

613

Marketing

344

280

Other

2,315

1,832

Total noninterest expense

42,213

27,630

Income before provision for income taxes

25,446

13,248

PROVISION FOR INCOME TAXES

5,731

2,763

NET INCOME

$

19,715

$

10,485

Basic earnings per common share

$

1.65

$

0.88

Diluted earnings per common share

$

1.58

$

0.86

Weighted average number of common shares outstanding:

Basic

11,982,009

11,915,513

Diluted

12,465,346

12,183,845

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

September 30, 2021

June 30, 2021

September 30, 2020

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

$

419,715

$

170

0.16

%

$

235,187

$

74

0.13

%

$

137,568

$

99

0.29

%

Investment securities (1)

33,788

24

0.28

25,000

24

0.39

23,882

27

0.45

Other investments

6,859

31

1.79

6,835

108

6.34

5,951

24

1.60

Loans receivable (2)

1,681,069

19,383

4.57

1,750,825

19,365

4.44

1,493,024

16,244

4.33

Total interest earning assets

2,141,431

19,608

3.63

2,017,847

19,571

3.89

1,660,425

16,394

3.93

Noninterest earning assets:

Allowance for loan losses

(20,102

)

(19,733

)

(15,711

)

Other noninterest earning assets

77,221

76,727

60,160

Total assets

$

2,198,550

$

2,074,841

$

1,704,874

Liabilities and Shareholders’ Equity

Interest bearing liabilities:

Interest bearing deposits

$

919,792

$

523

0.23

%

$

901,120

$

628

0.28

%

$

750,790

$

880

0.47

%

Subordinated debt, net

17,073

185

4.30

9,998

146

5.86

9,987

148

5.90

Junior subordinated debentures, net

3,586

21

2.32

3,585

21

2.35

3,584