452.9 No
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM
(Mark one)
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QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ______________ to _____________
Commission file number:
(Exact name of registrant as specified in its charter)
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(I.R.S. Employer Identification No.) |
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(Former name, former address and former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and emerging growth company in Rule 12b-2 of the Exchange Act.
Large Accelerated Filer |
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Accelerated Filer |
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Smaller Reporting Company |
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Emerging Growth Company |
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
As of May 3, 2022, there were
COASTAL FINANCIAL CORPORATION
Table of Contents
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Page No. |
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Item 1. |
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4 |
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Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021 (unaudited) |
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Notes to Condensed Consolidated Financial Statements (unaudited) |
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Item 2. |
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Management’s Discussion and Analysis of Financial Condition and Results of Operations |
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Item 3. |
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68 |
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Item 4. |
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Item 1. |
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70 |
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Item 1A. |
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70 |
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Item 2. |
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70 |
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Item 3. |
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70 |
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Item 4. |
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70 |
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Item 5. |
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70 |
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Item 6. |
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70 |
2
Forward-Looking Statements
This report may contain 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. All forward-looking statements, expressed or implied, included herewith are expressly qualified in their entirety by the cautionary statements contained or referred to herein. The inclusion of forward-looking information in this report 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.
Factors that may affect our results are disclosed in “Item 1A. Risk Factors” in Part II of this report and in the section titled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2021 (“Form 10-K”). Some of the risks and uncertainties that may cause our actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the difficult market conditions and unfavorable economic conditions and uncertainties associated with the COVID-19 pandemic, including the emergence of variant strains of the virus, particularly in the markets in which we operate and in which our loans are concentrated, including declines in housing markets, an increase in unemployment levels and slowdowns in economic growth; our expected future financial results; the overall health of the local and national real estate market; the credit risk associated with our loan portfolio, such as possible additional loan losses and impairment of collectability of loans as a result of the COVID-19 pandemic and policies and programs implemented by the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”), including its automatic loan forbearance provisions and the effects on our loan portfolio from our Paycheck Protection Program (“PPP”) lending activities, specifically with our commercial real estate loans; our level of nonperforming assets and the costs associated with resolving problem loans; business and economic conditions generally and in the financial services industry, nationally and within our market area, including as a result of the COVID-19 pandemic, particularly in the markets in which we operate an in which our loans are concentrated; our ability to maintain an adequate level of allowance for loan losses; our ability to successfully manage liquidity risk; our ability to implement our growth strategy and manage costs effectively; the composition of our senior leadership team and our ability to attract and retain key personnel; our ability to raise additional capital to implement our business plan; changes in market interest rates and impacts of such changes on our profits and business; the occurrence of fraudulent activity, breaches or failures of our information security controls or cybersecurity-related incidents; interruptions involving our information technology and telecommunications systems or third-party servicers; our ability to maintain our reputation; increased competition in the financial services industry; regulatory guidance on commercial lending concentrations; our relationship with broker-dealers and digital financial service providers; the effectiveness of our risk management framework; the costs and obligations associated with being a publicly traded company; the commencement and outcome of litigation and other legal proceedings and regulatory actions against us or to which we may become subject; the extensive regulatory framework that applies to us; the impact of recent and future legislative and regulatory changes and economic stimulus programs; and other changes in banking, securities and tax laws and regulations, and their application by our regulators; the impact on our operations due to epidemic illnesses, natural or man-made disasters, such as wildfires, the effects of regional or national civil unrest, and political developments that may disrupt or increase volatility in securities or otherwise affect economic conditions; the impact of benchmark interest rate reform in the U.S. and implementation of alternative reference rates, such as the Secured Overnight Financing Rate (“SOFR”), to the London Interbank Offered Rate (“LIBOR”); fluctuations in the value of the securities held in our securities portfolio; governmental monetary and fiscal policies; material weaknesses in our internal control over financial reporting; and our success at managing the risks involved in the foregoing items.
The foregoing factors should not be construed as exhaustive and should be read together with the other cautionary statements included in this report. 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.
3
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)
(dollars in thousands)
ASSETS |
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March 31, |
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December 31, |
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2022 |
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2021 |
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Cash and due from banks |
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$ |
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$ |
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Interest earning deposits with other banks (restricted cash of $ at March 31, 2022 and December 31, 2021) |
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Investment securities, available for sale, at fair value |
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Investment securities, held to maturity, at amortized cost |
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Other investments |
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Loans receivable |
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Allowance for loan losses |
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Total loans receivable, net |
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Premises and equipment, net |
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Operating lease right-of-use assets |
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Accrued interest receivable |
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Bank-owned life insurance, net |
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Deferred tax asset, net |
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Other assets |
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Total assets |
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$ |
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$ |
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LIABILITIES AND SHAREHOLDERS’ EQUITY |
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LIABILITIES |
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Deposits |
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$ |
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$ |
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Federal Home Loan Bank ("FHLB") advances |
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- |
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Subordinated debt |
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Principal amount $ at March 31, 2022 and December 31, 2021, respectively |
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Junior subordinated debentures |
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Principal amount $ and $ |
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Deferred compensation |
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Accrued interest payable |
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Operating lease liabilities |
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Other liabilities |
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Total liabilities |
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SHAREHOLDERS’ EQUITY |
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Preferred stock, par value: |
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Authorized: December 31, 2021; issued and outstanding: March 31, 2022 and December 31, 2021 |
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Common stock, par value: |
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Authorized: December 31, 2021; issued and outstanding and December 31, 2021 issued and outstanding |
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Retained earnings |
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Accumulated other comprehensive (loss) income, net of tax |
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Total shareholders’ equity |
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Total liabilities and shareholders’ equity |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
4
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
(dollars in thousands, except for per share data)
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Three Months Ended March 31, |
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2022 |
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2021 |
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INTEREST AND DIVIDEND INCOME |
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Interest and fees on loans |
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$ |
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$ |
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Interest on interest earning deposits with other banks |
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Interest on investment securities |
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Dividends on other investments |
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Total interest income |
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INTEREST EXPENSE |
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Interest on deposits |
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Interest on borrowed funds |
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Total interest expense |
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Net interest income |
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PROVISION FOR LOAN LOSSES |
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Net interest income after provision for loan losses |
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NONINTEREST INCOME |
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BaaS fees |
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Deposit service charges and fees |
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Loan referral fees |
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Gain on sales of loans, net |
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- |
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Mortgage broker fees |
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Other income |
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Total noninterest income |
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NONINTEREST EXPENSE |
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Salaries and employee benefits |
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Occupancy |
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Software licenses, maintenance and subscriptions |
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Legal and professional fees |
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Data processing |
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BaaS expense |
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Excise taxes |
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Federal Deposit Insurance Corporation ("FDIC") assessments |
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Director and staff expenses |
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Marketing |
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Other expense |
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Total noninterest expense |
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Income before provision for income taxes |
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PROVISION FOR INCOME TAXES |
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NET INCOME |
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$ |
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$ |
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Basic earnings per common share |
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$ |
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$ |
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Diluted earnings per common share |
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$ |
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$ |
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Weighted average number of common shares outstanding: |
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Basic |
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Diluted |
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See accompanying Notes to Condensed Consolidated Financial Statements.
5
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)
(dollars in thousands)
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Three Months Ended March 31, |
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2022 |
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2021 |
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NET INCOME |
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$ |
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$ |
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OTHER COMPREHENSIVE LOSS, before tax |
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Securities available-for-sale |
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Unrealized holding loss during the period |
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Income tax benefit related to unrealized holding loss |
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OTHER COMPREHENSIVE LOSS, net of tax |
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( |
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COMPREHENSIVE INCOME |
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$ |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
6
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)
(dollars in thousands)
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Shares of Common Stock |
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Amount of Common Stock |
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Retained Earnings |
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Accumulated Other Comprehensive Income (Loss) |
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Total |
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BALANCE, December 31, 2020 |
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$ |
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$ |
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$ |
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$ |
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Net income |
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- |
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- |
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- |
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Issuance of restricted stock awards |
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- |
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- |
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- |
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- |
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Vesting of restricted stock units |
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- |
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- |
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- |
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- |
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Exercise of stock options |
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- |
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- |
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Stock-based compensation |
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- |
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- |
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- |
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Other comprehensive loss |
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- |
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- |
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- |
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( |
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( |
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BALANCE, March 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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BALANCE, December 31, 2021 |
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$ |
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$ |
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$ |
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$ |
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Net income |
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- |
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- |
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- |
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Vesting of restricted stock units |
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- |
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- |
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- |
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- |
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Exercise of stock options |
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- |
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- |
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Stock-based compensation |
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- |
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- |
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- |
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Other comprehensive loss |
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- |
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- |
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- |
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( |
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( |
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BALANCE, March 31, 2022 |
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$ |
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$ |
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$ |
( |
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$ |
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See accompanying Notes to Condensed Consolidated Financial Statements.
7
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
(dollars in thousands)
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Three months ended March 31, |
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2022 |
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2021 |
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CASH FLOWS FROM OPERATING ACTIVITIES |
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Net income |
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$ |
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$ |
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Adjustments to reconcile net income to net cash provided by operating activities: |
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Provision for loan losses |
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Depreciation and amortization |
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(Gain) loss on disposition of fixed assets |
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( |
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- |
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Decrease in operating lease right-of-use assets |
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Decrease in operating lease liabilities |
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( |
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Gain on sales of loans |
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- |
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Proceeds from sale of loans |
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- |
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Net (discount accretion) premium amortization on investment securities |
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( |
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Stock-based compensation |
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Increase in bank-owned life insurance value |
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( |
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Deferred tax benefit |
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- |
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Net change in CCBX receivable |
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( |
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- |
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Net change in other assets and liabilities |
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Net cash provided by operating activities |
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CASH FLOWS FROM INVESTING ACTIVITIES |
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Net change in interest earning deposits with other banks |
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Purchase of investment securities available for sale |
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( |
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( |
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Change in other investments, net |
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( |
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( |
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Principal paydowns of investment securities available-for-sale |
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Principal paydowns of investment securities held-to-maturity |
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Maturities and calls of investment securities available-for-sale |
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Purchase of loans |
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( |
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- |
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Increase in loans receivable, net |
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( |
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( |
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Purchases of premises and equipment, net |
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( |
) |
|
|
( |
) |
Net cash used by investing activities |
|
|
( |
) |
|
|
( |
) |
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
|
|
|
|
Net increase in demand deposits, NOW and money market, and savings |
|
|
|
|
|
|
|
|
Net decrease in time deposits |
|
|
( |
) |
|
|
( |
) |
Net repayment from long term FHLB borrowing |
|
|
( |
) |
|
|
- |
|
Net advances from Paycheck Protection Program Liquidity Facility |
|
|
- |
|
|
|
|
|
Proceeds from exercise of stock options |
|
|
|
|
|
|
|
|
Net cash provided by financing activities |
|
|
|
|
|
|
|
|
NET CHANGE IN CASH, DUE FROM BANKS AND RESTRICTED CASH |
|
|
|
|
|
|
( |
) |
CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year |
|
|
|
|
|
|
|
|
CASH, DUE FROM BANKS AND RESTRICTED CASH, end of quarter |
|
$ |
|
|
|
$ |
|
|
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES |
|
|
|
|
|
|
|
|
Interest paid |
|
$ |
|
|
|
$ |
|
|
Income taxes paid |
|
|
|
|
|
|
- |
|
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS |
|
|
|
|
|
|
|
|
Fair value adjustment of securities available-for-sale, gross |
|
$ |
( |
) |
|
$ |
( |
) |
In conjunction with ASU 2016-02 as detailed in Note 6 to the Unaudited Consolidated Financial Statements, the following assets and liabilities were recognized: |
|
|
|
|
|
|
|
|
Operating lease right-of-use assets |
|
$ |
- |
|
|
$ |
|
|
Operating lease liabilities |
|
$ |
- |
|
|
$ |
( |
) |
See accompanying Notes to Condensed Consolidated Financial Statements.
8
COASTAL FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
Note 1 - Description of Business and Summary of Significant Accounting Policies
Nature of operations - Coastal Financial Corporation (“Corporation” or “Company”) is a registered bank holding company whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC (“LLC”). The Company is a
We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County. The Company’s business is conducted through
The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The community bank’s loans and deposits are primarily within the greater Puget Sound area, while CCBX loans and deposits are dependent upon the partner’s market. The Bank’s primary funding source is deposits from customers. The Bank is subject to regulation and supervision by the Board of Governors of the Federal Reserve System (the “Federal Reserve”) and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has regulatory and supervisory authority over the Company.
Financial statement presentation - The accompanying unaudited interim condensed consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) for interim reporting requirements and with instructions to Form 10-Q and Article 10 of Regulation S-X, and therefore do not include all the information and notes included in the annual consolidated financial statements in conformity with GAAP. These interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s audited consolidated financial statements and accompanying notes included in the Company’s Annual report on Form 10-K as filed with the U.S. Securities and Exchange Commission (“SEC”) on March 14, 2022. Operating results for the three months ended March 31, 2022 are not necessarily indicative of the results that may be expected for future periods.
Amounts presented in the consolidated financial statements and footnote tables are rounded and presented in thousands of dollars except per-share amounts, which are presented in dollars. In the narrative footnote discussion, amounts are rounded to thousands and presented in dollars.
In management’s opinion, all accounting adjustments necessary to accurately reflect the financial position and results of operations on the accompanying consolidated financial statements have been made. These adjustments include normal and recurring accruals considered necessary for a fair and accurate presentation.
Principles of consolidation - The consolidated financial statements include the accounts of the Company, the Bank and the LLC. All significant intercompany accounts have been eliminated in consolidation.
Estimates - The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Management believes that its critical accounting policies include determining the allowance for loan losses, the valuation of the Company’s deferred tax assets, and fair value of financial instruments. Actual results could differ significantly from those estimates.
Subsequent Events - The Company has evaluated events and transactions subsequent to March 31, 2022 for potential recognition or disclosure.
9
Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements may have been reclassified to conform to the current presentation with no effect on stockholders’ equity or net income.
Note 2 - Recent accounting standards
Recent Accounting Guidance Not Yet Effective
In September 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. The amendments replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendment is effective for annual periods beginning after December 15, 2019 and interim period within those annual periods. The Company’s implementation of ASU 2016-13 will be effective January 1, 2023. The Company is actively assessing the data and the model needs and is evaluating the impact of adopting the amendment. The Company expects to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period, January 2023, in which the new standard is effective, but cannot yet determine the magnitude of any such one-time adjustment or the overall impact of the new guidance on the consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting, to provide temporary optional expedients and exceptions to the U.S. GAAP guidance on contract modifications and hedge accounting to ease the financial reporting burdens of the expected market transition from LIBOR and other interbank offered rates to alternative reference rates, such as Secured Overnight Financing Rate. Entities can elect not to apply certain modification accounting requirements to contracts affected by what the guidance calls reference rate reform, if certain criteria are met. An entity that makes this election would not have to remeasure the contracts at the modification date or reassess a previous accounting determination. Also, entities can elect various optional expedients that would allow them to continue applying hedge accounting for hedging relationships affected by reference rate reform, if certain criteria are met, and can make a one-time election to sell and/or reclassify held-to-maturity debt securities that reference an interest rate affected by reference rate reform. The amendments in this ASU are effective for all entities upon issuance through December 31, 2022. The Company is currently evaluating the impact the adoption of the standard will have on the Company’s financial position or results of operations.
10
Note 3 - Investment Securities
The amortized cost and fair values of investments in debt securities at the date indicated are as follows:
|
|
Amortized Cost |
|
|
Gross Unrealized Gains |
|
|
Gross Unrealized Losses |
|
|
Fair Value |
|
||||
|
|
(dollars in thousands) |
|
|||||||||||||
March 31, 2022 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury securities |
|
$ |
|
|
|
$ |
|
|
|
$ |
( |
) |
|
$ |
|
|
U.S. Agency collateralized mortgage obligations |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
U.S. Agency residential mortgage-backed securities |
|
|
|
|
|
|
- |
|
|
|
- |
|
|
|
|
|
Municipal bonds |
|
|
|
|
|
|
|
|
|
|
- |
|
|
|
|