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CST: 14/11/2019 21:05:50   

Coastal Financial Corporation Announces Third Quarter 2019 Results

17 Days ago

Quarter Three 2019 Highlights:

  • Net income totaled $3.5 million for the quarter ended September 30, 2019, or $0.29 per diluted common share, up from $2.6 million, or $0.22 per diluted common share, for the quarter ended September 30, 2018. 
  • Total assets were $1.1 billion at September 30, 2019, up 14.5% from $952.1 million at December 31, 2018.
  • Total loans receivable grew at an annualized rate of 18.4% for the nine months ended September 30, 2019 and increased 13.8% from December 31, 2018.
  • Total core deposits grew at an annualized rate of 23.3% for the nine months ended September 30, 2019 and increased 17.5% since December 31, 2018. 

EVERETT, Wash., Oct. 28, 2019 (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, 2019.  Net income for the third quarter of 2019 was $3.5 million, or $0.29 per diluted common share, compared with net income of $3.3 million, or $0.27 per diluted common share, for the second quarter of 2019. 

The Company had net income of $9.6 million for the nine months ended September 30, 2019, or $0.79 per diluted common share, compared to $6.6 million, or $0.66 per diluted common share for the nine months ended September 30, 2018.

Eric Sprink, President and CEO, commented, “We had a strong quarter with earnings of $3.5 million, and loan growth of $28.9 million funded by $62.8 million in core deposit growth. We were extremely pleased to find that we moved into 4th place in deposit market share in Snohomish County at June 30, 2019, up from 5th place as compared to one year ago. Additionally, Sandler O’Neill + Partners recognized the Company as a Sm-All Star Class of 2019. Those that make the list have superior performance metrics in growth, profitability, credit quality, and capital strength.  After going public last year, this recognizes the hard work and dedication of our board and staff at all levels.”

Results of Operations

Net interest income was $10.7 million for the quarter ended September 30, 2019, an increase of 5.3% from $10.2 million for the quarter ended June 30, 2019 and an increase of 21.2% from $8.8 million from the quarter ended September 30, 2018.   The increase compared to prior quarter and prior year’s third quarter is related to increased interest income resulting from our continued loan growth and higher loan balances.

Net interest income for the nine months ended September 30, 2019 totaled $30.7 million, an increase of 23.1% compared to $24.9 million for the same period last year. The $5.8 million increase in net interest income over the same period last year was primarily related to loan growth. During the nine months ended September 30, 2019, the average balance of total loans receivable increased by $129.8 million, compared to the same period last year. Increased interest income was partially offset by increased deposit costs from the growth in the balance of our interest bearing deposits of $86.9 million and an increase in the cost of deposits of 26 basis points, compared to the same period last year.

Net interest margin for the quarter ended September 30, 2019 increased five basis points to 4.29% as compared to 4.24% for the quarter ended June 30, 2019 and was 4.13% for the quarter ended September 30, 2018. The increase over the prior quarter was due to growth in interest earning assets.  The increase in net interest margin compared to the prior year is primarily a result of an increase in loans receivable and higher yielding loan balances.  

Net interest margin for the nine months ended September 30, 2019 was 4.22% compared to 4.17% for the comparable period last year.  Higher loans receivable, increased average loan yields and increased interest earning deposits in the period ended September 30, 2019 were partially offset by an increase in balances and costs, resulting in a five basis point net increase over the nine-month period ended September 30, 2018. 

During the quarter ended September 30, 2019 the average balance of total loans receivable increased by $53.0 million, compared to the quarter ended June 30, 2019, and increased by $148.4 million, compared to the same quarter one year ago. Total loan yield for the quarter ended September 30, 2019 was 5.36%, a decrease of three basis points from 5.39% for the quarter ended June 30, 2019, and a 24 basis point increase from 5.12% for the quarter ended September 30, 2018.

Contractual loan yields approximated 5.24% for the three months ended September 30, 2019, compared to 5.23% for the three months ended June 30, 2019, and 5.02% for the three months ended September 30, 2018. The increase in contractual loan yields, as compared to last year, was from pricing new loans at higher rates.

Deposit costs for the quarter ended September 30, 2019 were 0.64%, a decrease of two basis points from 0.66% for the quarter ended June 30, 2019, and a 20 basis point increase from the quarter ended September 30, 2018.  Market conditions on deposit rates have changed since the Federal Reserve Open Market Committee lowered rates twice in third quarter. 

The following table shows the Company’s key performance ratios for the periods indicated.  The table also includes ratios that were adjusted by removing the impact of the previously disclosed atypical wholesale-brokered deposits for the quarters ended June 30, 2019 and March 31, 2019.  The wholesale-brokered deposits normalized in the third quarter, therefore no adjustments were made to the performance ratios for the quarter or nine months ended September 30, 2019.  The adjusted ratios are non-GAAP measures.  For more information about non-GAAP financial measures, see the end of this earnings release.

  Three months ended     Nine months ended  
  September 30,
2019
  June 30,
2019
  March 31,
2019
  December   31,
2018
  September   30,
2018
    September 30,
2019
  September 30,
2018
 
                                           
Return on average assets (1)   1.35 %   1.31 %   1.14 %   1.33 %   1.18 %   1.27 %   1.07 %
Return on average assets, as adjusted (1,2) N/A     1.34 %   1.20 % N/A   N/A     N/A   N/A  
Return on average equity (1)   11.72 %   11.45 %   10.25 %   11.31 %   10.59 %   11.16 %   11.37 %
Pre-tax, pre-provision return on average assets (1,3)   1.95 %   1.87 %   1.66 %   1.87 %   1.71 %   1.83 %   1.58 %
Yield on earnings assets (1)   4.94 %   4.92 %   4.82 %   4.93 %   4.62 %   4.89 %   4.64 %
Yield on loans receivable (1)   5.36 %   5.39 %   5.40 %   5.39 %   5.12 %   5.38 %   5.10 %
Loan yield excluding fees (1)   5.24 %   5.23 %   5.22 %   5.15 %   5.02 %   4.94 %      
Cost of funds (1)   0.72 %   0.74 %   0.76 %   0.56 %   0.53 %   0.74 %   0.50 %
Cost of funds, as adjusted (1,4) N/A     0.71 %   0.61 % N/A   N/A     N/A   N/A  
Cost of deposits (1)   0.64 %   0.66 %   0.68 %   0.47 %   0.44 %   0.66 %   0.40 %
Cost of deposits, as adjusted (1,5) N/A     0.63 %   0.52 % N/A   N/A     N/A   N/A  
Net interest margin (1)   4.29 %   4.24 %   4.13 %   4.43 %   4.13 %   4.22 %   4.17 %
Net interest margin, as adjusted (1,6) N/A     4.38 %   4.48 % N/A   N/A     N/A   N/A  
Noninterest expense to average assets (1)   2.98 %   3.06 %   3.12 %   3.12 %   2.99 %   3.05 %   3.07 %
Noninterest expense to average assets, as adjusted (1,7) N/A     3.12 %   3.37 % N/A   N/A     N/A   N/A  
Efficiency ratio   60.46 %   62.05 %   65.20 %   62.54 %   63.59 %   62.50 %   66.09 %
Loans receivable to deposits   94.78 %   97.39 %   81.01 %   95.56 %   96.08 %   94.78 %   96.08 %
Loans receivable to deposits, as adjusted (8) N/A   N/A     97.44 % N/A   N/A     N/A   N/A  
                                           
(1) Annualized calculations shown for quarterly periods presented.              
(2) For quarters ended June 30, 2019 and March 31, 2019, adjusted return on average assets is a non-GAAP measure that excludes the temporary impact of holding high rate wholesale deposits on balance sheet. The most directly comparable GAAP measure is return on average assets.  
(3) Pre-tax, pre-provision return on average assets is a non-GAAP measure that excludes the impact provision and income tax expense from return on average assets.  The most directly comparable GAAP measure is return on average assets.  
(4) For quarters ended June 30, 2019 and March 31, 2019, adjusted cost of funds is a non-GAAP measure that excludes the temporary impact of holding high rate wholesale deposits on balance sheet. The most directly comparable GAAP measure is cost of funds.  
(5) For quarters ended June 30, 2019 and March 31, 2019, adjusted cost of deposits is a non-GAAP measure that excludes the temporary impact of holding high rate wholesale deposits on balance sheet. The most directly comparable GAAP measure is cost of deposits.  
(6) For quarters ended June 30, 2019 and March 31, 2019, adjusted net interest margin is a non-GAAP measure that excludes the temporary impact of holding high rate wholesale deposits on balance sheet. The most directly comparable GAAP measure is net interest margin.  
(7) For quarters ended June 30, 2019 and March 31, 2019, adjusted noninterest expense to average assets is a non-GAAP measure that excludes the temporary impact of holding high rate wholesale deposits on balance sheet. The most directly comparable GAAP measure is noninterest expense to average assets.  
(8) For quarter ended March 31, 2019, adjusted loans receivable to deposits is a non-GAAP measure that excludes wholesale-brokered deposits on balance sheet. The most directly comparable GAAP measure is loans receivable to deposits.  
                                           

Noninterest income was $2.1 million for the third quarter of 2019, a decrease of $44,000 from the second quarter of 2019, and an increase of $542,000 from $1.5 million for the comparable period one year ago.  A $237,000 increase in gain on sale of loans and a realized net gain on sale of securities of $171,000 were offset by $473,000 less in loan referral fees for the quarter ended September 30, 2019 when compared to the quarter ended June 30, 2019, resulting in a $44,000 decrease in noninterest income.  The $542,000 increase over the quarter ended September 30, 2018 was largely due to a $369,000 increase on gain on sale of loans, a $171,000 net gain on sale of securities, a $128,000 increase in fees earned from wholesale banking services and a decrease of $209,000 in loan referral fees.

Noninterest income was $6.2 million for the nine months ended September 30, 2019, compared to $3.9 million for the nine months ended September 30, 2018. The increase is primarily related to increased wholesale banking service fees of $1.0 million and loan referral fee income, which totaled $1.1 million for the nine months ended September 30, 2019, an increase of $653,000 from the same period last year, and is earned when a borrower enters into an interest rate swap agreement with a third party.  Gain on sale of loans also contributed to the increase with $348,000 more in income for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.

Total noninterest expense for the current quarter was $7.7 million compared to $7.6 million for the preceding quarter and increased 17.2% from $6.6 million from the comparable period one year ago. Noninterest expense variances for the quarter ended September 30, 2019 as compared to the quarter ended June 30, 2019 include a $442,000 increase in salaries and employee benefits in the current quarter as a result of increases in staffing to support our growth and build our wholesale banking pipeline.  Offsetting this increase was a decrease of $138,000 in Federal Deposit Insurance Corporation (FDIC) assessments, as the FDIC issued a credit to qualifying banks beginning in September 2019 as a result of the FDIC fund ratio being in excess of the required ratio. Legal and professional fees were $123,000 lower than the quarter ended June 30, 2019 largely due to expenses from additional reporting and annual meeting expenses that were incurred in the quarter ended June 30, 2019.  The increased expenses for the current quarter compared to the comparable quarter one year ago were largely due to increases in salary expenses. Full time equivalent employees at September 30, 2019 totaled 192, which was up 2.7% from the prior quarter and increased 9.1% from the quarter ended September 30, 2018. Staffing increases compared to the prior year are due to continued organic growth initiatives, and include increases in sales staff, including hiring new banking teams, staff for the Edmonds location opened in October 2018, and additional back office staffing to support the incremental increases in banking teams, wholesale banking activities and for operation as a public company.  Occupancy expense increased $86,000 over the third quarter of 2019.  Occupancy expense for the quarter ended September 30, 2019 was higher than the quarter ended September 30, 2018 largely as a result of expenses related to the opening of the Edmonds branch as well as increases in rent, implementation of the new lease accounting standard, and increases in depreciation from improvements.

Total noninterest expense for the nine months ended September 30, 2019 was $23.1 million, an increase of $4.0 million or 21.1% compared to the same period last year.  The increase is primarily attributable to $2.4 million in increased salary expense, as discussed above, an increase of $520,000 in legal and professional fees, largely due to expenses related to being a public company, and our wholesale banking activities, and an increase of $383,000 in occupancy expenses related to the addition of our Edmonds branch in October 2018, higher rent expense, implementation of the new lease accounting standard and increases in depreciation.

The provision for income taxes was $65,000 more this quarter compared to the second quarter of 2019, and $245,000 more than the third quarter of 2018, as a result of increased taxable income.  The provision for income taxes was $797,000 more for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018 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.

Balance Sheet

The Company’s total assets increased $138.0 million, or 14.5%, to $1.1 billion at September 30, 2019 from $952.1 million at December 31, 2018.  The primary cause of the increase was a $104.7 million in increased net loans receivable. Additionally, the Company implemented the new lease accounting standard, which brought operating leases onto the balance sheet on January 1, 2019, and increased assets and liabilities $9.2 million and $9.4 million, respectively, as of September 30, 2019.  Total assets increased 5.7% or $59.0 million from June 30, 2019 due to a $28.2 million increase in loans receivable and $36.6 million increase in interest earning deposits.     

Total loans receivable, net of allowance for loan losses, increased $104.7 million, or 13.8%, to $863.2 million at September 30, 2019, from $758.5 million at December 31, 2018 and $128.0 million or 17.4% from $735.2 million at September 30, 2018.  The growth in net loans receivable was due primarily to increases in commercial real estate loans of $62.6 million and $22.9 million in construction, land and land development loans over the quarter ended December 31, 2018 and an increase of $75.8 million in commercial real estate loans, $24.7 million in construction, land and land development loans and $20.1 million in commercial and industrial loans over the quarter ended September 30, 2018.  

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

  As of  
  September 30, 2019     December 31, 2018     September 30, 2018  
(Dollars in thousands) Balance   % to
Total
    Balance   % to
Total
    Balance   % to
Total
 
                                         
Commercial and industrial loans $ 105,634     12.1 %   $ 90,390     11.8 %   $ 85,554     11.5 %
Real estate:                                        
  Construction, land and                                        
  land development   86,919     9.9       64,045     8.3       62,222     8.4  
  Residential   100,818     11.5       94,745     12.3       91,995     12.3  
  Commercial real estate   578,607     66.1       515,959     67.1       502,782     67.5  
Consumer and other   3,720     0.4       3,584     0.5       2,583     0.3  
  Gross loans receivable   875,698     100.0 %     768,723     100.0 %     745,136     100.0 %
Net deferred origination fees   (1,586 )           (824 )           (816 )      
  Loans receivable $ 874,112           $ 767,899           $ 744,320        

Total deposits increased $118.6 million, or 14.8%, to $922.2 million at September 30, 2019 from $803.6 million at December 31, 2018.  The increase is largely due to a $121.5 million increase in core deposits.  Included in this increase is approximately $16.0 million in temporary deposits that were brought into the Bank primarily during the third quarter which we believe will exit the Bank during the fourth quarter of 2019.  During the nine months ended September 30, 2019 noninterest bearing deposits increased $55.6 million, NOW and money market accounts increased $66.4 million, savings accounts were static, wholesale-brokered deposits increased $2.8 million and time deposits decreased $5.7 million.  Total deposits increased $147.5 million or 19.0% compared to September 30, 2018. 

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

  As of  
  September 30, 2019     December 31, 2018     September 30, 2018  
(Dollars in thousands) Balance   % to
Total
    Balance   % to
Total
    Balance   % to
Total
 
                                         
Demand, noninterest bearing $ 349,087     37.9 %   $ 293,525     36.5 %   $ 285,979     36.9 %
NOW and money market   416,315     45.1       349,952     43.6       340,930     44.0  
Savings   52,191     5.7       52,572     6.5       49,430     6.4  
  Total core deposits   817,593     88.7       696,049     86.6       676,339     87.3  
Wholesale brokered deposits   13,340     1.4       10,521     1.3       -     0.0  
Time deposits less than $250,000   58,369     6.3       62,272     7.8       63,715     8.2  
Time deposits $250,000 and over   32,947     3.6       34,772     4.3       34,668     4.5  
  Total deposits $ 922,249     100.0 %   $ 803,614     100.0 %   $ 774,722     100.0 %

Total shareholders’ equity increased $11.3 million since December 31, 2018.  The increase in shareholders’ equity was primarily due to $9.6 million in net earnings in the last nine months and a $1.2 million increase in additional other comprehensive income as a result of an increase in the value of our available for sale investment portfolio.  During the third quarter of 2019, we sold $30.0 million of longer-term Treasuries (6-year average life) and replaced them with shorter-term Treasuries (less than 1-year average life) and certificates of deposit with one year maturities.  As a result, our exposure to declines in the value of our available for sale investment portfolio has significantly decreased.

Capital Ratios

The Company and the Bank remain well capitalized at September 30, 2019, as summarized in the following table.

Capital Ratios: Coastal
Community
Bank
    Coastal
Financial
Corporation
    Financial
Institution
Basel III
Regulatory
Guidelines
 
                       
Tier 1 leverage capital   11.54 %     12.00 %     5.00 %
Tier 1 risk-based capital   12.89 %     13.40 %     8.00 %
Common Equity Tier 1 risk-based capital   12.89 %     13.02 %     6.50 %
Total risk-based capital   14.11 %     15.70 %     10.00 %

Asset Quality

The allowance for loan losses was 1.25% of loans receivable at September 30, 2019 compared to 1.23% at December 31, 2018.  Provision for loan losses totaled $637,000 for the current quarter, $547,000 for the preceding quarter, and $508,000 for the same quarter in the prior year. Net charge-offs totaled $192,000 for the quarter ended September 30, 2019, compared to net charge-offs of $19,000 for the quarter ended June 30, 2019 and $63,000 net recoveries for the quarter ended September 30, 2018.  Net charge-offs totaled $243,000 for the nine months ended September 30, 2019, compared to $307,000 in net charge-offs for the nine months ended September 30, 2018.

At September 30, 2019 our nonperforming assets were $1.3 million, or 0.12% of total assets, compared to $1.8 million or 0.19% of total assets at December 31, 2018, and $2.5 million, or 0.27% of total assets at September 30, 2018.  There were no repossessed assets or other real estate owned at September 30, 2019.

Our nonperforming loans to loans receivable ratio was 0.15% at September 30, 2019, compared to 0.24% at December 31, 2018.  Commercial and industrial nonaccrual loans totaled $1.2 million at quarter end, and consisted of five lending relationships.  During the third quarter charge-offs totaling $110,000 were recorded on these relationships.  Principal reductions along with the aforementioned charge-offs resulted in an overall decrease in our ratios of nonperforming loans and nonperforming assets to total assets compared to December 31, 2018.

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

  As of  
  September 30,   December 31,     September 30,  
(Dollars in thousands) 2019   2018     2018  
                     
Nonaccrual loans:                    
Commercial and industrial loans $ 1,233   $ 493     $ 1,170  
Real estate:                    
Construction, land and land development   -     -       -  
Residential   67     72       74  
Commercial real estate   -     -       -  
Commercial real estate - troubled debt restructure   -     1,261       1,277  
Consumer and other loans   -     -       -  
Total nonaccrual loans   1,300     1,826       2,521  
Total accruing loans past due 90 days or more   -     -       -  
Total nonperforming loans   1,300     1,826       2,521  
Other real estate owned   -     -       -  
Repossessed assets   -     -       -  
Total nonperforming assets $ 1,300   $ 1,826     $ 2,521  
Troubled debt restructurings, accruing   -     -       -  
Total nonperforming loans to loans receivable   0.15 %   0.24 %     0.34 %
Total nonperforming assets to total assets   0.12 %   0.19 %     0.27 %

Credit quality has remained stable throughout 2019 as demonstrated by the low level of charge-offs and declining nonperforming loan balance.

About Coastal Financial

Coastal Financial Corporation (NASDAQ: CCB) (the “Company”), is an Everett, Washington based bank holding company with Coastal Community Bank (the “Bank”), a full-service commercial bank, as its sole wholly-owned banking subsidiary.  The Bank operates through its 14 branches in Snohomish, Island, and King Counties, the Internet and its mobile banking application.  To learn more about Coastal Community Bank 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. 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 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.

Accordingly, we caution you that any such forward-looking statements are not a guarantee of future performance and that actual results may prove to be materially different from the results expressed or implied by the forward-looking statements due to a number of factors. Such factors include, without limitation, those listed from time to time in reports that the Company files with the Securities and Exchange Commission.  These forward-looking statements are made as of the date of this communication, and the Company does not intend, and assumes no obligation, to update 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 or circumstances, except as required by law.

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

   
ASSETS  
  September 30,     June 30,     December 31,  
  2019     2019     2018  
Cash and due from banks $ 22,060     $ 18,735     $ 16,315  
Interest earning deposits with other banks   131,287       94,735       109,467  
Investment securities, available for sale, at fair value   28,319       37,978       36,660  
Investment securities, held to maturity, at amortized cost   4,377       4,403       1,262  
Other investments   4,405       4,400       3,766  
Loans receivable   874,112       845,443       767,899  
Allowance for loan losses   (10,888 )     (10,443 )     (9,407 )
Total loans receivable, net   863,224       835,000       758,492  
Premises and equipment, net   13,167       12,933       13,167  
Operating lease right-of-use assets   9,205       8,922       -  
Accrued interest receivable   2,629       2,884       2,526  
Bank-owned life insurance, net   6,832       6,783       6,688  
Deferred tax asset, net   2,206       2,255       2,518  
Other assets   2,349       1,996       1,249  
Total assets $ 1,090,060     $ 1,031,024     $ 952,110  
                       
LIABILITIES AND SHAREHOLDERS EQUITY  
LIABILITIES                      
Deposits $ 922,249     $ 868,144     $ 803,614  
Federal Home Loan Bank (FHLB) advances   20,000       20,000       20,000  
Subordinated debt, net   9,975       9,972       9,965  
Junior subordinated debentures, net   3,582       3,582       3,581  
Deferred compensation   1,000       1,026       1,078  
Accrued interest payable   303       298       279  
Operating lease liabilities   9,386       9,098       -  
Other liabilities   3,143       2,313       4,437  
Total liabilities   969,638       914,433       842,954  
                       
SHAREHOLDERS’ EQUITY                      
Common stock   86,866       86,730       86,431  
Retained earnings   33,614       30,103       24,021  
Accumulated other comprehensive loss, net of tax   (58 )     (242 )     (1,296 )
Total shareholders’ equity   120,422       116,591       109,156  
Total liabilities and shareholders’ equity $ 1,090,060     $ 1,031,024     $ 952,110  
                       

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,  
  2019   2019   2018  
INTEREST AND DIVIDEND INCOME                  
Interest and fees on loans $ 11,691   $ 10,917   $ 9,262  
Interest on interest earning deposits with other banks   486     652     458  
Interest on investment securities   168     160     156  
Dividends on other investments   10     75     18  
Total interest and dividend income   12,355     11,804     9,894  
INTEREST EXPENSE                  
Interest on deposits   1,435     1,420     851  
Interest on borrowed funds   193     198     195  
Total interest expense   1,628     1,618     1,046  
Net interest income   10,727     10,186     8,848  
PROVISION FOR LOAN LOSSES   637     547     508  
Net interest income after provision for loan losses   10,090     9,639     8,340  
NONINTEREST INCOME                  
Deposit service charges and fees   795     781     800  
Wholesale banking service fees   456     502     328  
Loan referral fees   -     473     209  
Mortgage broker fees   140     111     52  
Sublease and lease income   16     10     10  
Gain on sales of loans, net   369     132     -  
Gain on sales of securities, net   171     -     -  
Other   141     123     147  
Total noninterest income   2,088     2,132     1,546  
NONINTEREST EXPENSE                  
Salaries and employee benefits   4,971     4,529     4,027  
Occupancy   884     930     798  
Data processing   509     499     501  
Director and staff expenses   241     217     213  
Excise taxes   184     180     146  
Marketing   98     108     110  
Legal and professional fees   170     293     142  
Federal Deposit Insurance Corporation (FDIC) assessments   (4 )   134     83  
Business development   122     96     81  
Other   573     657     509  
Total noninterest expense   7,748     7,643     6,610  
Income before provision for income taxes   4,430     4,128     3,276  
PROVISION FOR INCOME TAXES   919     854     674  
NET INCOME $ 3,511   $ 3,274   $ 2,602  
                   
Basic earnings per share $ 0.30   $ 0.28   $ 0.23  
Diluted earnings per share $ 0.29   $ 0.27   $ 0.22  
Weighted average number of common shares outstanding:                  
Basic   11,901,873     11,895,026     11,338,320  
Diluted   12,188,507     12,202,197     11,609,978  
                   

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

             
  Nine months ended  
  September 30,   September 30,  
  2019   2018  
INTEREST AND DIVIDEND INCOME            
Interest and fees on loans $ 33,027   $ 26,229  
Interest on interest earning deposits with other banks   1,946     949  
Interest on investment securities   481     463  
Dividends on other investments   99     91  
Total interest and dividend income   35,553     27,732  
INTEREST EXPENSE            
Interest on deposits   4,291     2,209  
Interest on borrowed funds   582     594  
Total interest expense   4,873     2,803  
Net interest income   30,680     24,929  
PROVISION FOR LOAN LOSSES   1,724     1,401  
Net interest income after provision for loan losses   28,956     23,528  
NONINTEREST INCOME            
Deposit service charges and fees   2,302     2,258  
Wholesale banking service fees   1,404     370  
Loan referral fees   1,106     453  
Mortgage broker fees   336     158  
Sublease and lease income   36     71  
Gain on sales of loans, net   490     142  
Gain on sales of securities, net   171     -  
Other   359     414  
Total noninterest income   6,204     3,866  
NONINTEREST EXPENSE            
Salaries and employee benefits   14,058     11,672  
Occupancy   2,808     2,425  
Data processing   1,537     1,472  
Director and staff expenses   698     493  
Excise taxes   529     404  
Marketing   300     253  
Legal and professional fees   872     352  
Federal Deposit Insurance Corporation (FDIC) assessments   205     247  
Business development   320     241  
Other   1,726     1,472  
Total noninterest expense   23,053     19,031  
Income before provision for income taxes   12,107     8,363  
PROVISION FOR INCOME TAXES   2,514     1,717  
NET INCOME $ 9,593   $ 6,646  
             
Basic earnings per share $ 0.81   $ 0.67  
Diluted earnings per share $ 0.79   $ 0.66  
Weighted average number of common shares outstanding:            
Basic   11,893,734     9,956,449  
Diluted   12,193,071     10,051,415  
             

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

     
  For the Three Months Ended  
  September 30, 2019     June 30, 2019     September 30, 2018  
  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 $ 85,406   $ 486     2.26 %   $ 106,353   $ 652     2.46 %   $ 90,301   $ 458     2.01 %
Investment securities (1)   36,974     168     1.80       40,151     160     1.60       39,613     156     1.56  
Other Investments   3,621     10     1.10       3,659     75     8.22       3,000     18     2.38  
Loans receivable (2)   865,674     11,691     5.36       812,704     10,917     5.39       717,260     9,262     5.12  
Total interest earning assets   991,675     12,355     4.94       962,867     11,804     4.92       850,174     9,894     4.62  
Noninterest earning assets:                                                          
Allowance for loan losses   (10,548 )                 (10,025 )                 (8,782 )            
Other noninterest earning assets   50,842                   49,594                   37,000              
Total assets $ 1,031,969                 $ 1,002,436                 $ 878,392              
                                                           
Liabilities and Shareholders Equity  
Interest bearing liabilities:                                                          
Interest bearing deposits $ 555,665   $ 1,435     1.02 %   $ 550,777   $ 1,420     1.03 %   $ 488,183   $ 851     0.69 %
Subordinated debt, net   9,973     148     5.89       9,970     146     5.87       9,959     148     5.90  
Junior subordinated debentures, net   3,582     42     4.65       3,582     43     4.81       3,580     41     4.54  
FHLB advances and other borrowings   539     3     2.21       1,542     9     2.34       964     6     2.47  
Total interest bearing liabilities   569,759     1,628     1.13       565,871     1,618     1.15       502,686     1,046     0.83  
Noninterest bearing deposits   330,553                   308,739                   274,549              
Other liabilities   12,756                   13,132                   3,650              
Total shareholders' equity   118,901                   114,694                   97,507              
Total liabilities and                                                          
shareholders' equity $ 1,031,969                 $ 1,002,436                 $ 878,392              
Net interest income       $ 10,727                 $ 10,186                 $ 8,848        
Interest rate spread               3.81 %                 3.77 %                 3.79 %
Net interest margin (3)               4.29 %                 4.24 %                 4.13 %
                                                           
(1) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.  
(2) Includes nonaccrual loans.  
(3) Net interest margin represents net interest income divided by the average total interest earning assets.  
(4) Yields and costs are annualized.  
   

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

     
  For the Nine Months Ended  
  September 30, 2019     September 30, 2018  
  Average   Interest &   Yield /     Average   Interest &   Yield /  
  Balance   Dividends   Cost (4)     Balance   Dividends   Cost (4)  
Assets                                      
Interest earning assets:                                      
Interest earning deposits $ 108,230   $ 1,946     2.40 %   $ 69,818   $ 949     1.82 %
Investment securities (1)   38,883     481     1.65       39,657     463     1.56  
Other Investments   3,479     99     3.80       3,038     91     4.00  
Loans receivable (2)   820,560     33,027     5.38       687,165     26,229     5.10  
Total interest earning assets   971,152     35,553     4.89       799,678     27,732     4.64  
Noninterest earning assets:                                      
Allowance for loan losses   (10,068 )                 (8,478 )            
Other noninterest earning assets   49,536                   36,960              
Total assets $ 1,010,620                 $ 828,160              
                                       
Liabilities and Shareholders Equity                                      
Interest bearing liabilities:                                      
Interest bearing deposits $ 559,119   $ 4,291     1.03 %   $ 472,266   $ 2,209     0.63 %
Subordinated debt, net   9,970     439     5.89       9,955     439     5.90  
Junior subordinated debentures, net   3,582     129     4.81       3,580     116     4.33  
FHLB advances and other borrowings   794     14     2.36       2,577     39     2.02  
Total interest bearing liabilities   573,465     4,873     1.14       488,378     2,803     0.77  
Noninterest bearing deposits   309,270                   258,586              
Other liabilities   12,971                   3,038              
Total shareholders' equity   114,914                   78,158              
Total liabilities and                                      
shareholders' equity $ 1,010,620                 $ 828,160              
Net interest income       $ 30,680                 $ 24,929        
Interest rate spread               3.76 %                 3.87 %
Net interest margin (3)               4.22 %                 4.17 %
                                       
(1) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.  
(2) Includes nonaccrual loans.  
(3) Net interest margin represents net interest income divided by the average total interest earning assets.  
(4) Yields and costs are annualized.  
   

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

     
  Three Months Ended  
  September 30,   June 30,   March 31,   December 31,   September 30,  
  2019   2019   2019   2018   2018  
Income Statement Data:                              
Interest and dividend income $ 12,355   $ 11,804   $ 11,394   $ 11,011   $ 9,894  
Interest expense   1,628     1,618     1,627     1,123     1,046  
Net interest income   10,727     10,186     9,767     9,888     8,848  
Provision for loan losses   637     547     540     425     508  
Net interest income after                              
provision for loan losses   10,090     9,639     9,227     9,463     8,340  
Noninterest income   2,088     2,132     1,984     1,601     1,546  
Noninterest expense   7,748     7,643     7,662     7,185     6,610  
Net income - pre-tax, pre-provision   5,067     4,675     4,089     4,304     3,784  
Provision for income tax   919     854     741     824     674  
Net income   3,511     3,274     2,808     3,055     2,602  
                               
  As of Period End or for the Three Month Period  
  September 30,   June 30,   March 31,   December 31,   September 30,  
  2019   2019   2019   2018   2018  
Balance Sheet Data:                              
Cash and cash equivalents $ 153,347   $ 113,470   $ 257,659   $ 125,782   $ 115,508  
Investment securities   32,696     42,381     38,217     37,922     37,039  
Loans receivable   874,112     845,443     791,072     767,899     744,320  
Allowance for loan losses   (10,888 )   (10,443 )   (9,915 )   (9,407 )   (9,111 )
Total assets   1,090,060     1,031,024     1,116,090     952,110     917,029  
Interest bearing deposits   573,162     552,254     680,249     510,089     488,743  
Noninterest bearing deposits   349,087     315,890     296,247     293,525     285,979  
Core deposits (1)   817,593     754,768     716,623     696,049     676,339  
Total deposits   922,249     868,144     976,496     803,614     774,722  
Total borrowings   33,557     33,554     13,549     33,546     33,542  
Total shareholders’ equity   120,422     116,592     112,365     109,156     105,276  
                               
Share and Per Share Data (2):                              
Earnings per share – basic $ 0.30   $ 0.28   $ 0.24   $ 0.26   $ 0.23  
Earnings per share – diluted $ 0.29   $ 0.27   $ 0.23   $ 0.25   $ 0.22  
Dividends per share   -     -     -     -     -  
Book value per share (3) $ 10.11   $ 9.79   $ 9.44   $ 9.18   $ 8.86  
Tangible book value per share (4) $ 10.11   $ 9.79   $ 9.44   $ 9.18   $ 8.86  
Weighted avg outstanding shares – basic   11,901,873     11,895,026     11,884,107     11,877,261     11,338,320  
Weighted avg outstanding shares – diluted   12,188,507     12,202,197     12,183,234     12,166,250     11,609,978  
Shares outstanding at end of period   11,912,115     11,908,185     11,902,715     11,893,203     11,886,473  
Stock options outstanding at end of period   786,257     791,267     804,117     688,312     682,190  
                               
  As of Period End or for the Three Month Period  
  September 30,   June 30,   March 31,   December 31,   September 30,  
  2019   2019   2019   2018   2018  
Credit Quality Data:                              
Nonperforming assets to total assets   0.12 %   0.16 %   0.12 %   0.19 %   0.27 %
Nonperforming assets to loans receivable and OREO   0.15 %   0.19 %   0.17 %   0.24 %   0.34 %
Nonperforming loans to total loans receivable   0.15 %   0.19 %   0.17 %   0.24 %   0.34 %
Allowance for loan losses to nonperforming loans   837.5 %   633.7 %   754.6 %   515.2 %   361.40 %
Allowance for loan losses to total loans receivable   1.25 %   1.24 %   1.25 %   1.23 %   1.22 %
Gross charge-offs $ 196   $ 22   $ 34   $ 134   $ 6  
Gross recoveries $ 4   $ 3   $ 2   $ 5   $ 69  
Net charge-offs (recoveries) to average loans (5)   0.09 %   0.01 %   0.02 %   0.07 %   (0.03 %)
                               
Capital Ratios (6):                              
Tier 1 leverage capital   12.00 %   11.99 %   11.57 %   12.46 %   12.60 %
Tier 1 risk-based capital   13.40 %   12.99 %   13.66 %   14.13 %   14.17 %
Common equity Tier 1 risk-based capital   13.02 %   13.37 %   13.24 %   13.70 %   13.72 %
Total risk-based capital   15.70 %   15.70 %   16.06 %   16.58 %   16.65 %
                               
(1) Core deposits are defined as all deposits excluding wholesale-brokered and time deposits.  
(2) Share and per share amounts are based on total common shares outstanding, which includes common stock and nonvoting common stock.  
(3) We calculate book value per share as total shareholders’ equity at the end of the relevant period divided by the outstanding number of our common shares, which includes common stock and nonvoting common stock, at the end of each period.  
(4) Tangible book value per share is a non-GAAP financial measure. We calculate tangible book value per share as total shareholders’ equity at the end of the relevant period, less goodwill and other intangible assets, divided by the outstanding number of our common shares, which includes common stock and nonvoting common stock, at the end of each period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets as of any of the dates indicated. As a result, tangible book value per share is the same as book value per share as of each of the dates indicated.  
(5) Annualized calculations.                              
(6) Capital ratios are for the Company, Coastal Financial Corporation.  
   

Non-GAAP Financial Measures

This earnings release contains certain non-GAAP financial measures in addition to results presented in accordance with GAAP. These measures include the following:

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

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

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

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

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

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

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

(Dollars in thousands)   June 30, 2019     March 31, 2019  
Adjusted return on average assets:                
Total average assets   $ 1,002,436     $ 997,069  
Less: average wholesale-brokered deposits     20,252       74,116  
Adjusted total average deposits and borrowings   $ 982,184     $ 922,953  
Total net income   $ 3,274     $ 2,808  
Less: fees earned on servicing wholesale-brokered deposits     36       78  
Adjusted net income   $ 3,238     $ 2,730  
Adjusted return on average assets:     1.34 %     1.20 %
Adjusted cost of funds:                
Total average deposits and borrowings   $ 874,610     $ 872,979  
Less: average wholesale-brokered deposits     20,252       74,116  
Adjusted total average deposits and borrowings   $ 854,358     $ 798,863  
Total interest expense   $ 1,618     $ 1,627  
Less: interest expense on wholesale-brokered deposits     116       435  
Adjusted interest expense   $ 1,502     $ 1,192  
Adjusted cost of funds:     0.71 %     0.61 %
Adjusted cost on deposits:                
Total average deposits   $ 859,516     $ 859,135  
Less: average wholesale-brokered deposits     20,252       74,116  
Adjusted total average deposits   $ 839,264     $ 785,019  
Interest expense on deposits   $ 1,420     $ 1,436  
Less: interest expense on wholesale-brokered deposits     116       435  
Adjusted interest expense on interest bearing deposits   $ 1,304     $ 1,001  
Adjusted cost of deposits:     0.63 %     0.52 %
Adjusted net interest margin:                
Total average interest earning assets   $ 962,867     $ 958,547  
Less: average wholesale-brokered deposits held in cash     20,252       74,116  
Adjusted total average interest earning assets   $ 942,615     $ 884,431  
Total net interest income   $ 10,186     $ 9,767  
Less: interest income earned wholesale-brokered deposits held in cash     116       435  
Plus: interest expense on wholesale-brokered deposits     116       435  
Adjusted net interest income     10,186       9,767  
Adjusted net interest margin:     4.38 %     4.48 %
Adjusted noninterest expense to average assets:                
Total average assets   $ 1,002,436     $ 997,069  
Less: average wholesale-brokered deposits     20,252       74,116  
Adjusted total average assets   $ 982,184     $ 922,953  
Total noninterest expense   $ 7,643     $ 7,662  
Adjusted noninterest expense to average assets:     3.12 %     3.37 %

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