Coastal Financial Corporation Announces Third Quarter 2019 Results

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 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 4^th place in deposit market share in Snohomish County at June 30, 2019, up from 5^th 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.

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.

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.

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.

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.

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 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
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COASTAL FINANCIAL CORPORATION
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COASTAL FINANCIAL CORPORATION
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COASTAL FINANCIAL CORPORATION
AVERAGE BALANCES, YIELDS, AND RATES – QUARTERLY
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AVERAGE BALANCES, YIELDS, AND RATES – YEAR-TO-DATE
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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.