Coastal Financial Corporation Announces Fourth Quarter and Year End 2018 Results

2018 Highlights:

• Net income totaled $9.7 million for the year ended December 31, 2018, or $0.91 per diluted common share, up 79.6% from $5.4 million, or $0.59 per diluted common share, for the year ended December 31, 2017. 
• Total assets were $952.1 million at December 31, 2018, up 3.8% from $917.0 million at September 30, 2018 and 18.2% from $805.8 million at December 31, 2017.
• Total loans receivable grew at a rate of 16.9% for the twelve months ended December 31, 2018.
• Total deposits grew at a rate of 14.3% for the twelve months ended December 31, 2018.
• Noninterest bearing deposits at December 31, 2018 were 36.5% of total deposits.
• Cost of deposits were 0.42% for the year ending December 31, 2018, up 0.03% from the third quarter of 2018 and 0.10% from the year ending December 31, 2017.
• Initial public offering of 2,577,500 shares of common stock completed, on July 18, 2018, for net proceeds of $33.2 million.

EVERETT, Wash., Jan. 25, 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 and year ended December 31, 2018.  Net income for the fourth quarter of 2018 was $3.1 million, or $0.25 per diluted common share, compared with net income of $2.6 million, or $0.22 per diluted common share, for the third quarter of 2018.  For the year ending December 31, 2018 net income was $9.7 million or $0.91 per diluted common share, compared with net income of $5.4 million or $0.59 per diluted common share for the year ending December 31, 2017.  On December 22, 2017 the Tax Cuts and Jobs Act was signed into law and, among other things, reduced the federal corporate tax rate to 21% from the previous maximum of 35% for tax years effective January 1, 2018.  In compliance with generally accepted accounting principles (“GAAP”), the Company revalued its net deferred tax assets at the new, lower rate which resulted in additional incremental tax expense of $1.3 million in 2017.  Without that additional tax expense (non-GAAP), net income would have been $1.6 million or $0.18 per common diluted share and $6.7 million or $0.73 per diluted common share, respectively, for the quarter and year ended December 31, 2017. 

On July 18, 2018, the Company completed its initial public offering of 2,577,500 shares of common stock, including the exercise of the over-allotment of 427,500 shares, for net proceeds of $33.2 million after deducting underwriting discounts, commissions, and estimated offering expenses.

Eric Sprink, President and CEO, commented, “We had a strong fourth quarter with earnings of $3.1 million, loan growth of $23.6 million, and core deposit growth of $19.7 million.  The solid organic growth in core deposits and loans helped leverage our capital and put us in a good position for future growth and earnings.  Overall, 2018 was a defining year with strong deposit, loan and earnings growth plus a successful initial public offering, a new full service branch and the Company’s continued work on developing robust wholesale banking services.”

Results of Operations

Net interest income was $9.9 million for the three months ended December 31, 2018, an increase of 12.5% from $8.8 million for the third quarter of 2018, and an increase of 28.6% from $7.7 million for the fourth quarter of 2017. Increases over the prior quarter and prior year period were the result of growth in interest earning assets, primarily loans, and improvements in net interest margin. Net interest income for the year ended December 31, 2018 totaled $34.8 million, an increase of 19.2% compared to 2017. The $5.6 million increase in net interest income over the same period last year was primarily related to growth in loan balances. During the year ended December 31, 2018, the average balance of total loans receivable increased by $86.8 million, compared to 2017. The $5.8 million increase in loan interest income was partially offset by increased deposit costs of $1.0 million.  The growth in the average balance of our interest bearing deposits grew $46.6 million and cost of deposit funds increased 10 basis points, compared to 2017.

Net interest margin for the quarter ended December 31, 2018 increased 30 basis points to 4.43% from 4.13% for the third quarter of 2018 and increased 39 basis points from 4.04% for the fourth quarter of 2017. The net interest margin for the quarter ended December 31, 2018 is higher than the comparative quarters, largely as a result of atypical prepayment penalties and deferred fees recognized on loans paid off.  These atypical penalties and fees increased the net interest margin for the quarter ended December 31, 2018. 

Net interest margin for the twelve months ended December 31, 2018 increased 16 basis points to 4.24% from 4.08% for the year ended December 31, 2017. The increase in net interest margin over the prior year was largely due to higher prepayment penalties and deferred fees recognized on loans paid off. Additionally, the composition of the loan portfolio changed slightly to loans that earn higher fees at a quicker rate, and there were increases in average loan yields overall. The increase in loan yields were off-set in part by higher deposit costs resulting from the growth in deposits and increase in cost of funds.  Higher, atypical prepayment penalties and deferred fees recognized on loans paid off increased the net interest margin by approximately five basis points for the year ended December 31, 2018.

Loan yields for the quarter ended December 31, 2018 were 5.39%, an increase of 27 basis points from 5.12% for the quarter ended September 31, 2018, and a 44 basis point increase from 4.95% for the quarter ended December 31, 2017. Loan yields for the year ended December 31, 2018 were 5.18%, an increase of 20 basis points from 4.98% for the year ended December 31, 2017.  Atypical deferred fees and higher prepayment penalties on loans paid off increased loan yields by approximately 12 basis points and five basis points for the quarter and year ended December 31, 2018, respectively.  Without those atypical fees, loan yields are estimated to be 5.27% for the quarter ended December 31, 2018 and 5.13% for the year ended December 31, 2018.

Contractual loan yields approximated 5.15% for the three months ended December 31, 2018, 5.02% for the three months ended September 31, 2018, and 4.90% for the three months ended December 31, 2017.  The 13 basis point increase in contractual loan yields, as compared to prior quarter, was from pricing new loans at higher rates and variable loans repricing with the increase in the prime rate.

Deposit costs for the quarter ended December 31, 2018 were 0.47%, an increase of three basis points from 0.44% for the quarter ended September 30, 2018 and a 12 basis point increase from the quarter ended December 31, 2017.  Deposit costs for the year ended December 31, 2018 were 0.42%, an increase of ten basis points from 0.32% for the year ended December 31, 2017.  Market conditions in 2019 may result in pressure to increase rates on deposit accounts, which would impact the cost of deposits going forward.

The following table shows the Company’s key performance ratios for the periods indicated.

Noninterest income was $1.6 million for the fourth quarter of 2018, an increase of $55,000 from $1.5 million for the third quarter of 2018 and an increase of $548,000 from $1.1 million for the comparable period one year ago. The increase compared to the prior quarter was primarily the result of $122,000 related to the gain on sale of the guaranteed portion of SBA loans.  The increase over the quarter ended December 31, 2017 was largely due to fees earned from wholesale banking services which provided an additional $339,000 of income combined with the aforementioned $122,000 from the gain on sale of loans. Additional noninterest income in the current quarter as compared to the same quarter one year ago were related to increases in existing deposit fees and the introduction of certain new deposit fees. Sublease and lease income decreased in the fourth quarter 2018, as compared to the fourth quarter 2017, as a result of a long-term tenant not renewing their lease.

Noninterest income was $5.5 million for the year ended December 31, 2018, compared to $4.2 million for the year ended December 31, 2017. The increase was primarily related to $709,000 in wholesale banking services, $444,000 from increases in deposit fees and $162,000 in higher gain on sale of loans. Loan referral fee income, which is earned when a borrower enters into an interest rate swap agreement with a third party, totaled $618,000 for the twelve months ended December 31, 2018, an increase of $179,000 from the same period last year.  Sublease and lease income decreased $141,000 for the twelve months ended December 31, 2018.

Total noninterest expense for the current quarter increased 9.1% to $7.2 million from $6.6 million for the preceding quarter and increased 24.1% from $5.8 million from the comparable period one year ago. The increased expenses for the current quarter compared to the prior quarter and previous quarter one year ago were primarily due to increases in salary expenses. Full time equivalent employees increased 4% during the current quarter and increased 17% from the year ended December 31, 2017. Staffing increases are due to the continued organic growth initiatives, and include increases in sales staff, including hiring new banking teams, staff for the newly opened Edmonds location, and additional back office staffing to support the incremental increases in banking teams, wholesale banking activities and for operation as a public company.  During the quarter our legal and professional fees increased by $183,000 as a result of growth initiatives, credit actions, and operating as a public company.  Occupancy expense increased $91,000, largely as a result of the new Edmonds branch.  Partially offsetting these higher expenses was a reduction in our FDIC assessment, which was $35,000 less than the previous quarter as a result of the FDIC lowering assessment rates.

Total noninterest expense for the year ended December 31, 2018 totaled $26.2 million, an increase of 17.0% compared to the last year. The increase was primarily attributable to increased salary expense from our organic growth initiatives, new wholesale banking services, and early termination of a contract for $120,000.  Occupancy expense increased $277,000 over last year, largely due to the opening of the Edmonds branch and a full year of operations of the Woodinville branch.  Legal and professional expenses increased $322,000 as a result of growth initiatives, credit actions, and operating as a public company.

The provision for income taxes was $150,000 higher this quarter compared to the third quarter of 2018 as a result of increased taxable income.  Despite increased earnings, the provision was $1.4 million less in the current quarter over the same period last year primarily due to the Tax Cuts and Jobs Act, which was signed into law on December 22, 2017.  As a result of the reduction in the federal corporate tax rates in 2017, the Company had to revalue its net deferred tax assets at the new, lower tax rate, resulting in $1.3 million in additional tax expense in the fourth quarter of 2017.  The Company used federal statutory tax rates of 21% and 34% for the twelve months ended December 31, 2018, and 2017, respectively, as a basis for calculating provision for income taxes.

Balance Sheet

The Company’s total assets increased $146.3 million, or 18.2%, to $952.1 million at December 31, 2018 from $805.8 million at December 31, 2017 due to the Company’s successful initial public offering and organic growth initiatives, which included the opening of the Edmonds branch in the fourth quarter of 2018.

Total loans receivable, net of allowance for loan losses, increased $109.7 million, or 16.9%, to $758.5 million at December 31, 2018 from $648.8 million at December 31, 2017.  The growth in loans receivable was due primarily to increases in commercial real estate loans of $78.2 million.

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

Total deposits increased $100.3 million, or 14.3%, to $803.6 million at December 31, 2018 from $703.3 million at December 31, 2017.  The increase in deposits included increases in noninterest bearing deposit accounts of $51.2 million, or 21.1%, and increases in interest bearing NOW and money market accounts of $34.0 million or 10.4%. Savings deposits increased $8.7 million or 19.8% and time deposits increased $6.4 million or 7.1% in 2018.  Our NOW and money market accounts included $10.5 million of deposits from our wholesale banking services.  Deposits from wholesale banking services are primarily temporary in nature and the $10.5 million of these deposits will largely run-off within the next six months.

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

Total shareholders’ equity increased $43.4 million, or 66.1%, to $109.2 million at December 31, 2018 from $65.7 million at December 31, 2017.  The Company’s successful initial public offering in July of 2018 increased capital by $33.2 million. The remaining increase in shareholders’ equity was primarily due to net income earned during the year. The Company contributed $15.0 million of the $33.2 million raised in its initial public offering to the Bank during 2018.

Capital Ratios

The Company and the Bank remain well capitalized at December 31, 2018, as summarized in the following table.

Asset Quality

The allowance for loan losses was 1.23% of loans receivable at December 31, 2018. Provision for loan losses totaled $425,000 for the current quarter, $508,000 for the preceding quarter, and $366,000 for the same quarter in the prior year. Net charge-offs totaled $129,000 for the quarter ended December 31, 2018 compared to net charge-offs of $295,000 for quarter ended December 31, 2017.

Provision for loan losses totaled $1.8 million for the twelve months December 31, 2018 and $870,000 for the year ended December 31, 2017. Net charge-offs totaled $437,000 for the twelve months ended December 31, 2018 compared to net charge-offs of $397,000 for twelve months ended December 31, 2017.

Our nonperforming assets were $1.8 million, or 0.19% of total assets, at December 31, 2018, compared to $2.1 million, or 0.26% of total assets at December 31, 2017.  There were no repossessed assets or other real estate owned at December 31, 2018.

Nonperforming loans to loans receivable ratio was 0.24% at December 31, 2018, compared to 0.32% at December 31, 2017. 

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

About Coastal Financial

Coastal Financial Corporation is an Everett-based Washington State 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.  More information about the Bank can be found on its website at www.coastalbank.com and its investor relations page.

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.

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 net income” is a non-GAAP measure defined as net income increased by the additional income tax expense that resulted from the revaluation of deferred tax assets as a result of the reduction in the corporate income tax rate under the recently enacted Tax Cuts and Jobs Act. The most directly comparable GAAP measure is net income.

“Adjusted earnings per share” is a non-GAAP measure defined as net income, plus additional income tax expense, divided by weighted average outstanding shares (diluted). The most directly comparable GAAP measure is earnings per share.

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