GlobeNewswire Inc | Jul 27, 2020 09:25AM EDT

July 27, 2020

Quarter Two 2020 Highlights:

-- Net income totaled $3.7 million for the quarter ended June 30, 2020, or $0.30 per diluted common share, an increase of 12.2% from $3.3 million, or $0.27 per diluted common share, for the quarter ended June 30, 2019. -- A $1.9 million provision for loan losses was recorded during the quarter ended June 30, 2020, due to economic uncertainties from the COVID-19 pandemic, up from $1.6 million during the quarter ended March 31, 2020. -- Asset growth of $494.9 million, or 41.8%, to $1.68 billion for the quarter ended June 30, 2020, compared to $1.18 billion at March 31, 2020. -- Total loans receivable, net of deferred loan fees, grew 44.0% during the quarter ended June 30, 2020 to $1.45 billion compared to $1.01 billion at March 31, 2020. Includes $427.4 million in Paycheck Protection Program (PPP) loans originated in the second quarter of 2020. Loans receivable, net of PPP loans, grew at an annualized rate of 5.8%, or $14.5 million, during the quarter ended June 30, 2020. -- Total deposits increased 30.0% during the quarter ended June 30, 2020 to $1.31 billion, compared to $1.01 billion at March 31, 2020. -- Utilized the Paycheck Protection Program Liquidity Facility (PPPLF) to fund PPP loans. $190.2 million loans pledged and borrowed at June 30, 2020. -- Opened 15th branch in Arlington, Washington.

EVERETT, Wash., July 27, 2020 (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 June 30, 2020. Net income for the second quarter of 2020 was $3.7 million, or $0.30 per diluted common share, compared with net income of $2.7 million, or $0.22 per diluted common share, for the first quarter of 2020, and $3.3 million, or $0.27 per diluted common share, for the quarter ended June 30, 2019.

During a period in which businesses and individuals had to contend with the impact of a global COVID-19 pandemic on the economy and on their personal lives, I am proud of the accomplishments and achievements of our team who have remained positive, flexible, and relentlessly focused on serving our communities and continued growth of our Company. Despite the pandemic related disruptions that continued through the quarter, we finished the second quarter of 2020 with net income of $3.7 million, which includes $1.9 million in loan loss provision expense primarily in response to the economic uncertainties of the pandemic. As a preferred Small Business Administration (SBA) lender, we have funded $438.1 million gross funds in financial assistance to existing and new small business customers via the PPP as provided in the Coronavirus Aid, Relief and Economic Security Act (CARES Act), which represents 2,526 loans, impacting nearly 40,000 employees in our communities as of June 30, 2020. We placed special emphasis on small companies, with 98% of the loans funded going to companies with fewer than 100 employees. In addition, we continue to develop our CCBX division and added three new customers for the quarter, which provides Banking as a Service (BaaS) enabling broker dealers and digital financial service providers to offer their clients banking services, while providing additional sources of fee income for the Bank, stated Eric Sprink, the President and CEO of the Company and the Bank.

During this uncertain time, we remain committed to our customers and, pursuant to federal guidance, have deferred or modified payments for $207.2 million in loans for our customers, representing 215 loans, remaining as of June 30, 2020. This proactive approach to restructuring payments helped provide financial relief within our communities.

We remain committed to following the guidelines set forth by our federal, state and local government and public health officials to keep us all healthy and safe while remaining open and serving our communities through our drive throughs, call center, mobile banking, online banking and ATMs. As new guidance emerges, the Company is enhancing measures already in place to protect the health and safety of its employees and continues to successfully employ remote work arrangements to the fullest extent possible.

We remain focused on closely analyzing higher risk segments within the loan portfolio, monitoring economic conditions, and are working diligently to proactively manage the risks and uncertainties associated with these unprecedented times. The Coastal team is dedicated to our customers and to working within our communities to provide assistance through traditional banking services and are also committed to growing and developing our CCBX division, which provides an alternative means of income for the Company.

Results of Operations

During the quarter ended June 30, 2020, significant focus was placed on helping the small businesses in our communities through the PPP. These loans have had a significant impact on our financial statements for the quarter ended June 30, 2020 and will continue to impact our results in the future. Throughout this earnings release, we will address the impact of these loans including borrowings received through PPPLF to help fund these loans and to aid in liquidity, increased customer deposit accounts from unused disbursements, and earnings and expenses related to these activities. Any estimated adjusted ratios that exclude the impact of this activity are non-GAAP measures. For more information about non-GAAP financial measures, see the end of this earnings release.

The table below summarizes key information regarding the PPP loans as of the period indicated:

Loan Size As of June 30, 2020 $0.00 - $150,000.01 $350,000.01 - > $150,000.00 - $2,000,000.00 2,000,000.01 Totals $350,000.00(Dollars in thousands; unaudited)Principal outstanding:Existing $ 37,674 $ 29,561 $ 86,232 $ 52,299 $ 205,766 customerNew customer 48,914 42,205 82,940 58,252 232,311 Totalprincipal 86,588 71,766 169,172 110,551 438,077 outstandingDeferredfees (3,729 ) (3,057 ) (4,247 ) (940 ) (11,973 )outstandingDeferredcosts 940 215 161 18 1,334 outstandingNet deferred $ (2,789 ) $ (2,842 ) $ (4,086 ) $ (922 ) $ (10,639 )feesTotalprincipal,net of $ 83,799 $ 68,924 $ 165,086 $ 109,629 $ 427,438 deferredfeesWeightedaverage 1.91 1.83 1.83 1.81 1.83 maturity(years)Number of loans:Existing 768 128 108 13 1,017 customerNew customer 1,185 190 116 18 1,509 Total loan 1,953 318 224 31 2,526 countPercent of 77.3 % 12.6 % 8.9 % 1.2 % 100.0 %total

Net interest income was $14.0 million for the quarter ended June 30, 2020, an increase of 23.1% from $11.4 million for the quarter ended March 31, 2020, and an increase of 37.4% from $10.2 million for the quarter ended June 30, 2019. The increase compared to the prior quarter and prior years second quarter is largely related to increased interest income resulting from our loan growth. This loan growth includes $438.1 million in PPP loans and $2.8 million in related interest income for the quarter ended June 30, 2020, combined with lower interest expense resulting from a decrease in interest rates paid on interest bearing deposits and an increase in noninterest bearing deposits from cash advanced on PPP loans being placed in noninterest bearing demand accounts. Interest expense was $1.4 million as of June 30, 2020, a $323,000 decrease from the period ended March 31, 2020 and a $185,000 decrease from the period ended June 30, 2019. Partially offsetting this decrease is a $228,000 decrease in interest earned on deposits with other banks compared to March 31, 2020, and a $522,000 decrease compared to June 30, 2019, largely as a result of lower rates. Deposits held with other banks increased $32.6 million as of June 30, 2020, compared to March 31, 2020, as a result of the PPPLF borrowings, which were obtained to provide liquidity as PPP funds in deposit accounts are withdrawn. Net deferred fees on PPP loans will be earned over the life of the loan, as a yield adjustment. Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods.

Net interest margin for the quarter ended June 30, 2020 was 3.78%, a 37 basis point decrease from 4.15% for the quarter ended March 31, 2020 and a 46 basis point decrease from 4.24% for the quarter ended June 30, 2019. The decrease over the prior quarter and second quarter in the previous year was largely due to the originating and holding of PPP loans and lower interest rates on all other loans. Contributing to the decrease in net interest margin were PPP loans, which account for an average of $335.2 million in gross loans for the quarter ended June 30, 2020, and bear a contractual interest rate of 1.0%, and yield 3.31% after considering the amortization of loan fees, for the quarter ended June 30, 2020. Cost of funds decreased 29 basis points in the quarter ended June 30, 2020 compared to the quarter ended March 31, 2020 and decreased 33 basis points from the quarter ended June 30, 2019. Proceeds from the PPP loans were largely deposited into noninterest bearing accounts, which helped reduce our cost of funds. In addition, the Federal Open Market Committee (FOMC) lowered the Fed Funds rates five times for a total decrease of 2.25% since June 2019, which has impacted the rates paid on deposits. Interest rates may decline further, or may persist at current low levels, and may continue to impact the Company's net interest margin.

During the quarter ended June 30, 2020, the average balance of total loans receivable increased by $368.4 million, to $1.33 billion, compared to $966.6 million for the quarter ended March 31, 2020, largely as a result of PPP loans. PPP loans bear a contractual interest rate of 1.0%, yielding approximately 3.31%, after considering the amortization of loan fees. The average balance of total loans receivable increased by $522.3 million, compared to $812.7 million for the same quarter one year ago, due to overall growth in the loan portfolio, combined with the aforementioned growth in PPP loans. Total loan yield for the quarter ended June 30, 2020 was 4.57%, compared to 5.25% for the quarter ended March 31, 2020, and 5.39% for the quarter ended June 30, 2019. The reduction in loan yield is a result of the lower yielding PPP loans combined with the reduction in FOMC rates. PPP loans reduced the loan yield* by 37 basis points for the quarter ended June 30, 2020.

Contractual loan yields approximated 3.91% for the quarter ended June 30, 2020, compared to 5.08% for the quarter ended March 30, 2020, and 5.23% for the quarter ended June 30, 2019. During the quarter ended June 30, 2020, the average balance of PPP loans was $335.2 million. These loans bear a contractual rate of 1.0%, which negatively impacted the average contractual yield on loans. Excluding PPP loans and their related earned loan fees, the contractual yield on loans approximated 4.841%. Also contributing to the reduction in contractual yield was the reduction in rates by the FOMC which has resulted in lower rates on new and renewing loans as well as loans tied to indexes. Although we have rate floors in place for $349.1 million, or 23.9%, in existing loans, the rate reductions by FOMC have a corresponding impact on loan yields and subsequently the net interest margin in future periods.

Deposit costs for the quarter ended June 30, 2020 were 0.35%, a decrease of 29 basis points from 0.64% for the quarter ended March 31, 2020, and a 31 basis point decrease from the quarter ended June 30, 2019. Deposit costs and balances were favorably impacted from PPP loan proceeds being deposited into noninterest or low interest-bearing accounts. During the quarter ended June 30, 2020, PPP proceeds directly transferred into new or existing customer deposit accounts approximated $327.6 million. These deposits have been, and continue to be, gradually withdrawn as customers use the funds. Market conditions for deposits continued to be competitive during the quarter ended June 30, 2020; however we lowered many rates, with most changes to our interest-bearing demand deposit and certificate of deposit rates effective at the start of second quarter of 2020, which helped decrease deposit costs in the current quarter.

_______________* A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.

Return on average assets (ROA) was 0.96% for the quarter ended June 30, 2020 compared to 0.96% and 1.31% for the quarters ended March 31, 2020 and June 30, 2019, respectively. ROA was impacted in the current and prior quarter by increased provision for loan losses due to loan growth and in response to the economic uncertainties of the COVID-19 pandemic. Pre-tax, pre-provision ROA* was 1.72% for the quarter ended June 30, 2020 and 1.77% for the quarter ended March 31, 2020, compared to 1.87% for the quarter ended June 30, 2019.

The following table shows the Companys key performance ratios for the periods indicated. The table also includes ratios that were adjusted by removing the impact of the PPP loans. 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 Six months ended (unaudited) June 30, March 31, December31, September30, June 30, June 30, June 30, 2020 2020 2019 2019 2019 2020 2019 Return on average 0.96 % 0.96 % 1.31 % 1.35 % 1.31 % 0.96 % 1.23 %assets (1)Return on average 11.37 % 8.66 % 11.66 % 11.72 % 11.45 % 10.03 % 10.86 %equity (1)Pre-tax,pre-provision 1.72 % 1.77 % 1.95 % 1.95 % 1.87 % 1.74 % 1.77 %returnon averageassets (1)(2)Yield on earnings 4.16 % 4.79 % 4.90 % 4.94 % 4.92 % 4.43 % 4.87 %assets (1)Yield on loans 4.57 % 5.25 % 5.36 % 5.36 % 5.39 % 4.85 % 5.39 %receivable (1)Yield on loansreceivable,as 4.94 % n/a n/a n/a n/a 5.10 % n/a adjusted (1)(2)Contractual yieldonloansreceivable, 3.91 % 5.08 % 5.15 % 5.24 % 5.23 % 4.40 % 5.23 %excludingearnedfees (1)Contractual yieldon loansreceivable, 4.84 % n/a n/a n/a n/a 4.96 % n/a excludingearnedfees, asadjusted (1)(2)Cost of funds (1) 0.41 % 0.70 % 0.70 % 0.72 % 0.74 % 0.54 % 0.75 %Cost of deposits 0.35 % 0.64 % 0.63 % 0.64 % 0.66 % 0.48 % 0.67 %(1)Net interest 3.78 % 4.15 % 4.26 % 4.29 % 4.24 % 3.93 % 4.19 %margin (1)Noninterestexpense to 2.34 % 3.18 % 2.90 % 2.98 % 3.06 % 2.71 % 3.09 %averageassets(1)Efficiency ratio 57.66 % 64.26 % 59.86 % 60.46 % 62.05 % 60.80 % 63.59 %Loans receivable 110.77 % 100.01 % 97.02 % 94.78 % 97.39 % 110.77 % 97.39 %to deposits (1) Annualized calculations shown for quarterly and six month periods presented.(2) A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.

Noninterest income was $1.5 million in the second quarter of 2020, a decrease of $1.2 million from $2.7 million at the first quarter of 2020, and a decrease of $612,000 from $2.1 million in the second quarter of 2019. The decrease was primarily due to a $983,000 decrease in loan referral fees, which is earned when we originate a variable rate loan and arrange for the borrower to enter into an interest rate swap agreement with a third party to fix the interest rate for an extended period, and $104,000 decrease in BaaS fees contributed to the decrease when compared to the quarter ended March 31, 2020. The $612,000 decrease over the quarter ended June 30, 2019 was largely due to a $403,000 decrease in loan referral fees, a $132,000 decline in gain on sale of loans and a $104,000 decrease in deposit service changes and fees. Amendments to partner agreements and longer implementation periods negatively impacted BaaS fees in the current quarter. As of June 30, 2020, there were three active CCBX partners, two in the friends and family trials, two in onboarding/implementation, three signed letters of intent and a solid pipeline that may lead us to onboarding up to two new partners per quarter. Some amendments were made for CCBX partners that were beneficial to the long-term relationship, resulting in a slight shift of revenue from the quarter ended June 30, 2020, to a future period. As partnerships move to active status and develop their customer base, it is expected that BaaS fees will increase. The decline in deposit service fees over June 30, 2019 is largely due to a reduction in nonsufficient funds and overdraft charges on personal and business accounts as consumer activity decreased due to the COVID-19 pandemic and economic shut-down.

_______________* A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.

Total noninterest expense for the second quarter of 2020 was $8.9 million compared to $9.0 million for the preceding quarter and increased 17.0% from $7.6 million from the second quarter of 2019. Noninterest expense variances for the quarter ended June 30, 2020 as compared to the quarter ended March 31, 2020 include a $468,000 decrease in salaries and employee benefits, which is largely related to the deferred loan costs recorded as salary offsets from originating PPP loans. The increased expenses for the current quarter compared to the comparable quarter one year ago were largely due to increases in salary expenses related to hiring staff for our BaaS CCBX division and additional staff for our ongoing banking growth initiatives, along with temporary additions to help with operations to originate PPP loans. Legal and professional fees increased $151,000 and $181,000 in the current quarter over the quarters ended March 31, 2020 and June 30, 2019, respectively. The increase is associated with BaaS activities through CCBX operations and regular costs related to legal and accounting work related to reporting. In the quarter ended June 30, 2020, other expenses increased $260,000 and $358,000 over the quarters ended March 31, 2020 and June 30, 2019, respectively, largely as a result of increased dues and memberships, subscription and software license expense of $40,000 and $138,000 at March 31, 2020 and June 20, 2019, respectively. Also contributing to the increase in other expenses over March 31, 2020 and June 30, 2019 is a $103,000 and $39,000 increase, respectively, in the provision for off balance sheet commitments.

The provision for income taxes was $967,000 at June 30, 2020, a $253,000 increase compared to $714,000 for the first quarter of 2020 and a $113,000 increase compared to $854,000 for the second quarter of 2019, both 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 Companys total assets increased $494.9 million, or 41.8%, to $1.68 billion at June 30, 2020 compared to $1.18 billion at March 31, 2020. The primary cause of the increase was $440.0 million in increased loans receivable (net of allowance for loan losses), largely from PPP loans, combined with a $44.9 million increase in cash and due from banks and interest earning deposits with other banks. In the quarter ended June 30, 2020, total assets increased $550.0 million, or 48.8%, compared to $1.13 billion at December 31, 2019. This increase is largely the result of $504.7 million increase in net loans receivable, combined with a $46.4 million increase in cash and due from banks and interest earning deposits with other banks.

Total loans receivable increased $508.0 million from $939.1 million at December 31, 2019 to $1.45 billion at June 30, 2020, and $601.7 million from $845.4 million at June 30, 2019. The growth in loans receivable over the quarter ended December 31, 2019 was due primarily to an increase of $440.1 million in commercial and industrial loans, which includes $438.1 million in PPP loans for small business owners as prescribed in the CARES Act, combined with $64.9 million increase in commercial real estate loans. Partially offsetting that increase is $10.9 million in additional net deferred loan origination fees, which includes $10.6 million in unearned fees on PPP loans, which are earned over the life of those loans, and have a maturity term of two to five years. The increase over the quarter ended June 30, 2019 was due to a $450.4 million increase in commercial and industrial loans, $120.6 million in commercial real estate loans, $22.5 million in residential real estate loans, and $17.8 million in construction, land and land development loans. Partially offsetting the increase in net loans receivable is an additional $11.5 million in net deferred loan origination fees, including $10.6 million in net unearned fees on PPP loans.

The PPP has been extended to August 8, 2020, and we will continue to accept and process requests for existing and new customers for the duration of the program; however, the volume of loans has significantly declined since the program began. Guidance is being issued and we have begun accepting applications from customers for loan forgiveness. It is still uncertain what the final forgiveness criteria will be, but we anticipate that the third quarter of 2020 will be busy as we migrate to the forgiveness stage of the PPP. Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods. Customers with two-year loans are also able to request that their PPP loan be extended to a five year maturity, which we anticipate may be a good option for customers not eligible for forgiveness.

The following table shows the number of PPP loans originated through July 22, 2020:

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

As of June 30, 2020 December 31, 2019 June 30, 2019 (Dollars in % to % to % tothousands; Balance Total Balance Total Balance Total unaudited) Commercial andindustrial loans:PPP loans $ 438,077 30.0 % $ - 0.0 % $ - 0.0 %All othercommercial & 113,473 7.8 111,401 11.8 101,110 11.9 industrialloansReal estate loans:Construction,land andland 102,422 7.0 97,034 10.3 84,666 10.0 developmentloansResidentialreal estate 122,949 8.4 115,011 12.2 100,446 11.9 loansCommercial real 678,335 46.5 613,398 65.2 557,692 65.8 estate loansConsumer and 4,735 0.3 4,214 0.5 2,893 0.4 other loansGross loans 1,459,991 100.0 % 941,058 100.0 % 846,807 100.0 %receivableNet deferredorigination (10,639 ) - - fees -PPPloansNet deferredorigination (2,208 ) (1,955 ) (1,364 ) fees -OtherloansLoans $ 1,447,144 $ 939,103 $ 845,443 receivable

Please see Appendix A for additional loan portfolio detail regarding industry concentrations in response to the volatile economic environment due to the COVID-19 pandemic.

Total deposits increased $338.5 million, or 35.0%, to $1.31 billion at June 30, 2020 from $968.0 million at December 31, 2019. The increase is largely due to a $349.7 million increase in core deposits. A portion of the funds from PPP loans were deposited directly into existing or new deposit accounts, thus increasing deposit account balances. These deposits have been, and continue to be, gradually withdrawn as the customers use the funds. During the quarter ended June 30, 2020, noninterest bearing deposits increased $192.6 million, or 51.9%, to $563.8 million from $371.2 million at December 31, 2019. NOW and money market accounts increased $138.5 million, savings accounts increased $18.7 million, BaaS-brokered deposits increased $2.9 million and time deposits decreased $14.2 million. Total deposits increased $438.3 million, or 50.5%, compared to $868.1 million at June 30, 2019. The increase is primarily in core deposits and is the result of expanding and growing banking relationships, combined with the PPP related deposits remaining in accounts at June 30, 2020. Noninterest bearing deposits increased $247.9 million, or 78.5%, from $315.9 million at June 30, 2019. NOW and money market accounts increased $188.6 million, savings accounts increased $20.9 million, BaaS-brokered deposits increased $12.4 million and time deposits decreased $31.5 million. Efforts to retain and grow core deposits are evidenced by the high ratios in these categories when compared to total deposits.

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

As of June 30, 2020 December 31, 2019 June 30, 2019 (Dollars in % to % to % tothousands, Balance Total Balance Total Balance Total unaudited) Demand,noninterest $ 563,794 43.2 % $ 371,243 38.4 % $ 315,890 36.4 %bearingNOW and money 576,376 44.1 437,908 45.2 387,758 44.7 marketSavings 72,045 5.5 53,365 5.5 51,120 5.9 Total core 1,212,215 92.8 862,516 89.1 754,768 87.0 depositsBaaS-brokered 26,529 2.0 23,586 2.4 14,166 1.6 depositsTime depositsless than 43,900 3.4 51,644 5.4 62,303 7.2 $250,000Time deposits$250,000 and 23,783 1.8 30,213 3.1 36,907 4.2 overTotal deposits $ 1,306,427 100.0 % $ 967,959 100.0 % $ 868,144 100.0 %

Funds from PPP loans were frequently deposited directly into existing or new customer accounts during the quarter ended June 30, 2020. This includes approximately 842 new customer deposit relationships that were established as a result of funding PPP loans for business owners in the communities we serve. The time and effort spent working with these new customers throughout the PPP process has resulted in new relationships that the Company will work to retain into the future.

Distributions from PPP loans were largely directly deposited into new or existing deposit accounts as illustrated below:

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To bolster the effectiveness of the SBA PPP loan program, the Federal Reserve is supplying liquidity to participating financial institutions through non-recourse term financing secured by PPP loans to small businesses. The PPP provides loans to small businesses so that they can keep their employees on the payroll and pay other allowed business expenses. The PPPLF extends low cost borrowing lines, 0.35% interest rate, to eligible financial institutions that originate PPP loans, taking the loans as collateral at face value. Borrowings are required to be paid down as the pledged PPP loans are paid down. As of June 30, 2020, there was $190.2 million outstanding in PPPLF advances and pledged PPP loans.

The Federal Home Loan Bank (FHLB) allows us to borrow against our line of credit, which is collateralized by certain loans. As of June 30, 2020, we borrowed a total of $25.0 million in FHLB long term advances. This includes a $10.0 million advance with a remaining term of 2.75 years and $15.0 million advance with a 4.75 years remaining term. These advances provide an alternative and stable source of funding for loan demand. Although there are no immediate plans to borrow additional funds, additional FHLB borrowing capacity of $63.7 million was available under this arrangement as of June 30, 2020.

Total shareholders equity increased $6.8 million since December 31, 2019. The increase in shareholders equity was primarily due to $6.4 million in net earnings for the six months ended June 30, 2020.

Capital Ratios

The Company and the Bank remain well capitalized at June 30, 2020, as summarized in the following table.

Capital Coastal Coastal Financial InstitutionRatios: Community Financial Basel III Regulatory Bank Corporation Guidelines(unaudited) Tier 1leverage 9.61 % 9.38 % 5.00 %capitalCommon EquityTier 1 12.86 % 12.34 % 6.50 %risk-basedcapitalTier 1risk-based 12.86 % 12.67 % 8.00 %capitalTotalrisk-based 14.11 % 14.88 % 10.00 %capital

As previously disclosed, during the quarter ended March 31, 2020, the Company contributed $7.5 million in capital to the Bank due to the volatile economic environment. No additional contributions have been made; however, the Company could downstream additional funds to the Bank in the future, if necessary.

Asset Quality

The allowance for loan losses was $14.8 million and 1.03% of loans receivable at June 30, 2020 compared to $11.5 million and 1.22% at December 31, 2019 and $10.4 million and 1.24% at June 30, 2019. At June 30, 2020, there was $427.4 million in PPP loans, net of deferred fees, which are 100% guaranteed by the SBA. Excluding PPP loans, the allowance for loan losses to loans receivable* would be 1.46% for the quarter ended June 30, 2020. Provision for loan losses totaled $1.9 million for the current quarter, $1.6 million for the preceding quarter, and $547,000 for the same quarter in the prior year. Net charge-offs totaled $8,000 for the quarter ended June 30, 2020, compared to $123,000 for the quarter ended March 31, 2020 and $19,000 net charge-offs for the quarter ended June 30, 2019.

The Companys provision for loan losses of $1.9 million and $1.6 million during the quarters ended June 30, 2020 and March 31, 2020, respectively, is related to the growth in the loan portfolio along with an increase in qualitative factors related to the economic uncertainties caused by the COVID-19 pandemic. The Company is not required to implement the provisions of the Current Expected Credit Loss accounting standard until January 1, 2023 and will continue to account for the allowance for credit losses under the incurred loss model.

At June 30, 2020, our nonperforming assets were $4.4 million, or 0.26% of total assets, compared to $1.0 million, or 0.09%, of total assets at December 31, 2019, and $1.6 million, or 0.16%, of total assets at June 30, 2019. Nonperforming assets increased $3.4 million during the quarter ended June 30, 2020, with the addition of two loans.

Management is actively monitoring the loan portfolio to identify borrowers experiencing difficulties with repayment and are proactively working with them to reduce potential losses through the prudent use of PPP loans, deferrals, and modifications in accordance with regulatory guidelines. There were no repossessed assets or other real estate owned at June 30, 2020. Our nonperforming loans to loans receivable ratio was 0.31% at June 30, 2020, compared to 0.11% at December 31, 2019. Commercial and industrial nonaccrual loans totaled $689,000 at June 30, 2020 and consisted of three lending relationships. During the second quarter of 2020, there was $11,000 in charge-offs on one nonperforming loan and $3,000 in recoveries. Two loans moved to nonperforming status, both non-COVID-19 pandemic related, during the second quarter, which includes $3.3 million in construction, land and land development loans and $413,000 in commercial real estate loans. The addition of these loans to nonperforming status in the second quarter was a result of our proactive monitoring program and review activities and was partially offset by principal reductions and the aforementioned charge-off and resulted in an overall increase in our ratios of nonperforming loans and nonperforming assets to total assets compared to December 31, 2019.

Credit quality has remained stable as of June 30, 2020, as demonstrated by the low level of charge-offs and nonperforming loans. The short and long-term economic impact of the COVID-19 pandemic, trade issues, political gridlock, and decline in oil prices is unknown; however, the Company remains diligent in its efforts to communicate and proactively work with borrowers to help mitigate potential credit deterioration.

_______________* A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.

Pursuant to federal guidance, the Company deferred and/or modified payments on loans to assist customers financially during the COVID-19 pandemic and economic shutdown. At June 30, 2020, the Company had 215 loans, or $207.2 million, outstanding with deferred or modified payments. Additional information on these loans can be found in Appendix A.

The following table details the Companys nonperforming assets for the periods indicated.

As of June 30, December June 30, 31,(Dollars in thousands, unaudited) 2020 2019 2019 Nonaccrual loans: Commercial and industrial loans $ 689 $ 965 $ 1,579 Real estate: Construction, land and land development 3,270 - - Residential 63 65 69 Commercial real estate 413 - - Total nonaccrual loans 4,435 1,030 1,648 Accruing loans past due 90 days or more:Total accruing loans past due 90 days - - - or moreTotal nonperforming loans 4,435 1,030 1,648 Other real estate owned - - - Repossessed assets - - - Total nonperforming assets $ 4,435 $ 1,030 $ 1,648 Troubled debt restructurings, accruing - - - Total nonperforming loans to loans 0.31 % 0.11 % 0.19 %receivableTotal nonperforming assets to total 0.26 % 0.09 % 0.16 %assets

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 $1.6 billion community bank that the Bank operates provides service through 15 branches in Snohomish, Island, and King Counties, the Internet and its mobile banking application. The Bank provides select partners with BaaS through its CCBX Division. To learn more about Coastal visit www.coastalbank.com.

Forward-Looking Statements

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our managements expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as anticipate, believes, can, could, may, predicts, potential, should, will, estimate, plans, projects, continuing, ongoing, expects, intends and similar words or phrases. Any or all of the forward-looking statements in this earnings release may turn out to be inaccurate. The inclusion of or reference to forward-looking information in this earnings release should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, the risks and uncertainties discussed under Risk Factors in our Annual Report on Form 10-K for the most recent period filed, our Quarterly Report on Form 10-Q for the most recent quarter, and in any of our subsequent filings with the Securities and Exchange Commission.

If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. You are cautioned not to place undue reliance on forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as required by law.

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

ASSETS June 30, March 31, December 31, 2020 2020 2019 Cash and due from banks $ 26,510 $ 14,124 $ 16,555 Interest earning deposits with 147,666 115,112 111,259 other banksInvestment securities,available for sale, at fair 20,448 15,469 28,360 valueInvestment securities, held to 3,870 4,290 4,350 maturity, at amortized costOther investments 5,951 5,723 4,505 Loans receivable 1,447,144 1,005,180 939,103 Allowance for loan losses (14,847 ) (12,925 ) (11,470 )Total loans receivable, net 1,432,297 992,255 927,633 Premises and equipment, net 16,668 14,195 13,108 Operating lease right-of-use 7,635 8,228 8,493 assetsAccrued interest receivable 5,944 3,014 2,980 Bank-owned life insurance, net 6,981 6,931 6,882 Deferred tax asset, net 2,721 2,735 2,743 Other assets 2,265 1,995 1,658 Total assets $ 1,678,956 $ 1,184,071 $ 1,128,526 LIABILITIES AND SHAREHOLDERS? EQUITYLIABILITIES Deposits $ 1,306,427 $ 1,005,062 $ 967,959 Federal Home Loan Bank advances 24,999 24,999 10,000 Paycheck Protection Program 190,156 - - Liquidity FacilitySubordinated debt, net 9,986 9,982 9,979 Junior subordinated debentures, 3,584 3,583 3,583 netDeferred compensation 919 947 974 Accrued interest payable 312 310 308 Operating lease liabilities 7,831 8,419 8,679 Other liabilities 3,765 3,603 2,871 Total liabilities 1,547,979 1,056,905 1,004,353 SHAREHOLDERS? EQUITY Common stock 87,309 87,166 86,983 Retained earnings 43,617 39,946 37,222 Accumulated other comprehensive 51 54 (32 )income (loss), net of taxTotal shareholders? equity 130,977 127,166 124,173 Total liabilities and $ 1,678,956 $ 1,184,071 $ 1,128,526 shareholders? equity

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

Three months ended June 30, March 31, June 30, 2020 2020 2019 INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 15,154 $ 12,627 $ 10,917 Interest on interest earning 130 358 652 deposits with other banksInterest on investment 53 119 160 securitiesDividends on other 89 16 75 investmentsTotal interest and dividend 15,426 13,120 11,804 incomeINTEREST EXPENSE Interest on deposits 1,096 1,554 1,420 Interest on borrowed funds 337 202 198 Total interest expense 1,433 1,756 1,618 Net interest income 13,993 11,364 10,186 PROVISION FOR LOAN LOSSES 1,930 1,578 547 Net interest income after 12,063 9,786 9,639 provision for loan lossesNONINTEREST INCOME Deposit service charges and 677 723 781 feesBaaS fees 475 579 502 Loan referral fees 70 1,053 473 Mortgage broker fees 152 162 111 Sublease and lease income 31 30 10 Gain on sales of loans, net - - 132 Other 115 124 123 Total noninterest income 1,520 2,671 2,132 NONINTEREST EXPENSE Salaries and employee 5,215 5,683 4,529 benefitsOccupancy 933 927 930 Data processing 621 551 499 Director and staff expenses 187 270 217 Excise taxes 262 203 180 Marketing 116 112 108 Legal and professional fees 474 323 293 Federal Deposit Insurance 74 70 134 Corporation assessmentsBusiness development 48 125 96 Other 1,015 755 657 Total noninterest expense 8,945 9,019 7,643 Income before provision for 4,638 3,438 4,128 income taxesPROVISION FOR INCOME TAXES 967 714 854 NET INCOME $ 3,671 $ 2,724 $ 3,274 Basic earnings per common $ 0.31 $ 0.23 $ 0.28 shareDiluted earnings per common $ 0.30 $ 0.22 $ 0.27 shareWeighted average number of common shares outstanding:Basic 11,917,394 11,909,248 11,895,026 Diluted 12,190,284 12,208,175 12,202,197

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

Six months ended June 30, 2020 June 30, 2019 INTEREST AND DIVIDEND INCOME Interest and fees on loans $ 27,781 $ 21,336 Interest on interest earning deposits with 488 1,460 other banksInterest on investment securities 172 313 Dividends on other investments 105 89 Total interest and dividend income 28,546 23,198 INTEREST EXPENSE Interest on deposits 2,650 2,856 Interest on borrowed funds 539 389 Total interest expense 3,189 3,245 Net interest income 25,357 19,953 PROVISION FOR LOAN LOSSES 3,508 1,087 Net interest income after provision for loan 21,849 18,866 lossesNONINTEREST INCOME Deposit service charges and fees 1,400 1,507 BaaS fees 1,054 948 Loan referral fees 1,123 1,106 Mortgage broker fees 314 196 Sublease and lease income 61 20 Gain on sales of loans, net - 121 Other 239 218 Total noninterest income 4,191 4,116 NONINTEREST EXPENSE Salaries and employee benefits 10,898 9,087 Occupancy 1,860 1,924 Data processing 1,172 1,028 Director and staff expenses 457 457 Excise taxes 465 345 Marketing 228 202 Legal and professional fees 797 702 Federal Deposit Insurance Corporation 144 209 assessmentsBusiness development 173 198 Other 1,770 1,153 Total noninterest expense 17,964 15,305 Income before provision for income taxes 8,076 7,677 PROVISION FOR INCOME TAXES 1,681 1,595 NET INCOME $ 6,395 $ 6,082 Basic earnings per common share $ 0.54 $ 0.51 Diluted earnings per common share $ 0.52 $ 0.50 Weighted average number of common shares outstanding:Basic 11,913,321 11,889,597 Diluted 12,185,154 12,192,647

COASTAL FINANCIAL CORPORATIONAVERAGE BALANCES, YIELDS, AND RATES QUARTERLY(Dollars in thousands; unaudited)

For the Three Months Ended June 30, 2020 March 31, 2020 June 30, 2019 Average Interest Yield Average Interest Yield Average Interest Yield & / & / & / Balance Dividends Cost Balance Dividends Cost Balance Dividends Cost (4) (4) (4)Assets Interest earning assets:Interest earning $ 127,721 $ 130 0.41 % $ 103,372 $ 358 1.39 % $ 106,353 $ 652 2.46 %depositsInvestment 21,835 53 0.98 27,041 119 1.77 40,151 160 1.60 securities (1)Other Investments 5,841 89 6.13 4,507 16 1.43 3,659 75 8.22 Loans receivable 1,334,991 15,154 4.57 966,602 12,627 5.25 812,704 10,917 5.39 (2)Total interest 1,490,388 15,426 4.16 1,101,522 13,120 4.79 962,867 11,804 4.92 earning assetsNoninterest earning assets:Allowance for (13,555 ) (11,665 ) (10,025 ) loan lossesOther noninterest 61,713 51,596 49,594 earning assetsTotal assets $ 1,538,546 $ 1,141,453 $ 1,002,436 Liabilities and Shareholders? Equity Interest bearing liabilities:Interest bearing $ 708,724 $ 1,096 0.62 % $ 628,037 $ 1,554 1.00 % $ 550,777 $ 1,420 1.03 %depositsSubordinated 9,984 147 5.92 9,980 146 5.88 9,970 146 5.87 debt, netJuniorsubordinated 3,583 26 2.92 3,583 35 3.93 3,582 43 4.81 debentures, netPPPFL borrowings 107,443 94 0.35 - - 0.00 - - 0.00 FHLB advances and 24,999 70 1.13 7,851 21 1.08 1,542 9 2.34 other borrowingsTotal interestbearing 854,733 1,433 0.67 649,451 1,756 1.09 565,871 1,618 1.15 liabilitiesNoninterest 541,448 352,930 308,739 bearing depositsOther liabilities 12,498 12,542 13,132 Totalshareholders' 129,867 126,530 114,694 equityTotal liabilitiesand shareholders' $ 1,538,546 $ 1,141,453 $ 1,002,436 equityNet interest $ 13,993 $ 11,364 $ 10,186 incomeInterest rate 3.49 % 3.70 % 3.77 %spreadNet interest 3.78 % 4.15 % 4.24 %margin (3) (1) For presentation in this table, average balances and the correspondingaverage rates for investment securities are based upon historical cost, adjustedfor 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 CORPORATIONAVERAGE BALANCES, YIELDS, AND RATES YEAR-TO-DATE(Dollars in thousands; unaudited)

For the Six Months Ended June 30, 2020 June 30, 2019 Average Interest Yield Average Interest Yield & / & / Balance Dividends Cost Balance Dividends Cost (4) (4)Assets Interestearning assets:Interestearning $ 115,547 $ 488 0.85 % $ 119,830 $ 1,460 2.46 %depositsInvestmentsecurities 24,438 172 1.42 39,853 313 1.58 (1)Other 5,174 105 4.08 3,406 89 5.27 InvestmentsLoansreceivable 1,150,797 27,781 4.85 797,629 21,336 5.39 (2)Totalinterest $ 1,295,956 $ 28,546 4.43 $ 960,718 $ 23,198 4.87 earningassetsNoninterestearning assets:Allowance for (12,610 ) (9,825 ) loan lossesOthernoninterest 56,654 48,873 earningassetsTotal assets $ 1,340,000 $ 999,766 Liabilitiesand Shareholders?EquityInterestbearing liabilities:Interestbearing $ 668,381 $ 2,650 0.80 % $ 560,875 $ 2,856 1.03 %depositsSubordinated 9,982 293 5.90 9,968 291 5.89 debt, netJuniorsubordinated 3,583 61 3.42 3,581 87 4.90 debentures,netPPPLF 53,722 94 0.35 - - 0.00 borrowingsFHLB advancesand other 16,425 91 1.11 923 11 2.40 borrowingsTotalinterest $ 752,093 $ 3,189 0.85 $ 575,347 $ 3,245 1.14 bearingliabilitiesNoninterestbearing 447,189 298,451 depositsOther 12,520 13,080 liabilitiesTotalshareholders' 128,198 112,888 equityTotalliabilitiesand $ 1,340,000 $ 999,766 shareholders'equityNet interest $ 25,357 $ 19,953 incomeInterest rate 3.58 % 3.73 %spreadNet interest 3.93 % 4.19 %margin (3) (1) For presentation in this table, average balances and the correspondingaverage rates for investment securitiesare 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 CORPORATIONQUARTERLY STATISTICS(Dollars in thousands, except share and per share data; unaudited)

Three Months Ended June 30, March 31, December 31, September June 30, 30, 2020 2020 2019 2019 2019 IncomeStatement Data:Interest anddividend $ 15,426 $ 13,120 $ 13,034 $ 12,355 $ 11,804 incomeInterest 1,433 1,756 1,703 1,628 1,618 expenseNet interest 13,993 11,364 11,331 10,727 10,186 incomeProvision for 1,930 1,578 820 637 547 loan lossesNet interestincome after 12,063 9,786 10,511 10,090 9,639 provision forloan lossesNoninterest 1,520 2,671 2,059 2,088 2,132 incomeNoninterest 8,945 9,019 8,015 7,748 7,643 expenseNet income -pre-tax, 6,568 5,016 5,375 5,067 4,675 pre-provision(1)Provision for 967 714 947 919 854 income taxNet income 3,671 2,724 3,608 3,511 3,274 As of and for the Three Month Period June 30, March 31, December 31, September June 30, 30, 2020 2020 2019 2019 2019 Balance Sheet Data:Cash and cash $ 174,176 $ 129,236 $ 127,814 $ 153,347 $ 113,470 equivalentsInvestment 24,318 19,759 32,710 32,696 42,381 securitiesLoans 1,447,144 1,005,180 939,103 874,112 845,443 receivableAllowance for (14,847 ) (12,925 ) (11,470 ) (10,888 ) (10,443 )loan lossesTotal assets 1,678,956 1,184,071 1,128,526 1,090,060 1,031,024 Interestbearing 742,633 659,559 596,716 573,162 552,254 depositsNoninterestbearing 563,794 345,503 371,243 349,087 315,890 depositsCore deposits 1,212,215 892,408 862,516 817,593 754,768 (2)Total 1,306,427 1,005,062 967,959 922,249 868,144 depositsTotal 228,725 38,564 23,562 33,557 33,554 borrowingsTotalshareholders? 130,977 127,166 124,173 120,422 116,591 equity Share and PerShare Data (3):Earnings per $ 0.31 $ 0.23 $ 0.30 $ 0.30 $ 0.28 share ? basicEarnings pershare ? $ 0.30 $ 0.22 $ 0.30 $ 0.29 $ 0.27 dilutedDividends per - - - - - shareBook value $ 10.98 $ 10.66 $ 10.42 $ 10.11 $ 9.79 per share (4)Tangible bookvalue per $ 10.98 $ 10.66 $ 10.42 $ 10.11 $ 9.79 share (5)Weighted avgoutstanding 11,917,394 11,909,248 11,903,750 11,901,873 11,895,026 shares ?basicWeighted avgoutstanding 12,190,284 12,208,175 12,213,512 12,188,507 12,202,197 shares ?dilutedSharesoutstanding 11,926,263 11,929,413 11,913,885 11,912,115 11,908,185 at end ofperiodStock optionsoutstanding 774,587 774,937 784,217 786,257 791,267 at end ofperiod See footnoteson following page As of and for the Three Month Period June 30, March 31, December 31, September June 30, 30, 2020 2020 2019 2019 2019 Credit Quality Data:Nonperformingassets to 0.26 % 0.06 % 0.09 % 0.12 % 0.16 %total assetsNonperformingassets toloans 0.31 % 0.08 % 0.11 % 0.15 % 0.19 %receivableand OREONonperformingloans to 0.31 % 0.08 % 0.11 % 0.15 % 0.19 %total loansreceivableAllowance forloan lossesto 334.8 % 1694.0 % 1113.6 % 837.5 % 633.7 %nonperformingloansAllowance forloan lossesto total 1.03 % 1.29 % 1.22 % 1.25 % 1.24 %loansreceivableAllowance forloan lossesto loans 1.46 % n/a n/a n/a n/a receivable,as adjusted(1)Gross $ 13 $ 124 $ 242 $ 196 $ 22 charge-offsGross $ 5 $ 1 $ 4 $ 4 $ 3 recoveriesNetcharge-offs 0.00 % 0.05 % 0.10 % 0.09 % 0.01 %to averageloans (6) Capital Ratios (7):Tier 1leverage 9.38 % 11.43 % 11.64 % 12.00 % 11.99 %capitalCommon equityTier 1 12.34 % 12.10 % 12.74 % 13.02 % 12.99 %risk-basedcapitalTier 1risk-based 12.67 % 12.43 % 13.10 % 13.40 % 13.37 %capitalTotalrisk-based 14.88 % 14.65 % 15.35 % 15.70 % 15.70 %capital (1) A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.(2) Core deposits are defined as all deposits excluding BaaS-brokered and time deposits.(3) Share and per share amounts are based on total common shares outstanding. (4) We calculate book value per share as total shareholders? equity at the endof the relevant period divided by the outstanding number ofour common shares at the end of each period.(5) Tangible book value per share is a non-GAAP financial measure. We calculatetangible book value per share as total shareholders?equity at the end of therelevant period, less goodwill and other intangible assets, divided by theoutstanding number of ourcommon shares at the end of each period. The most directly comparable GAAP financial measure is book value per share. Wehad nogoodwill or other intangible assets as of any of the dates indicated. As aresult, tangible book value per share is thesame as book value per share as ofeach of the dates indicated.(6)Annualized calculations.(7) Capital ratios are for the Company, Coastal Financial Corporation.

Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Companys operational performance and to enhance investors overall understanding of such financial performance. However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies.

The following non-GAAP measures are presented to illustrate the impact of provision for loan losses and provision for income taxes on net income and return on average assets.

Pre-tax, pre-provision return net income is a non-GAAP measure that excludes the impact of provision for loan losses and provision for income taxes from net income. The most directly comparable GAAP measure is net income.

Pre-tax, pre-provision return on average assets is a non-GAAP measure that excludes the impact of provision for loan losses and provision for income taxes from return on average assets. The most directly comparable GAAP measure is return on average assets.

Reconciliations of the GAAP and non-GAAP measures are presented below.

As of and for the As of and for the Three Months Ended Six Months Ended(Dollars in June 30, March 31, December31, September30, June 30, June 30, June 30,thousands, 2020 2020 2019 2019 2019 2020 2019 unaudited)Pre-tax, pre-provision net income and pre-tax, pre-provision return on average assets:Total average $ 1,538,546 $ 1,141,453 $ 1,095,343 $ 1,031,969 $ 1,002,436 $ 1,340,000 $ 999,766 assetsTotal net 3,671 2,724 3,608 3,511 3,274 6,395 6,082 incomePlus:provision for 1,930 1,578 820 637 547 3,508 1,087 loan lossesPlus:provision for 967 714 947 919 854 1,681 1,595 incometaxesPre-tax,pre-provision $ 6,568 $ 5,016 $ 5,375 $ 5,067 $ 4,675 $ 11,584 $ 8,764 netincomeReturn on 0.96 % 0.96 % 1.31 % 1.35 % 1.31 % 0.96 % 1.23 %average assetsPre-tax,pre-provisionreturnon 1.72 % 1.77 % 1.95 % 1.95 % 1.87 % 1.74 % 1.77 %averageassets:

The following non-GAAP financial measures are presented to illustrate and identify the impact of PPP loans on loans receivable related measures. By removing these significant items and showing what the results would have been without them, we are providing investors with the information to better compare results with periods that did not have these significant items. These measures include the following:

Adjusted allowance for loan losses to loans receivable is a non-GAAP measure that excludes the impact of PPP loans on balance sheet. The most directly comparable GAAP measure is allowance for loan losses to loans receivable.

Adjusted yield on loans receivable is a non-GAAP measure that excludes the impact of PPP loans on balance sheet. The most directly comparable GAAP measure is yield on loans.

Adjusted contractual yield on loans receivable, excluding earned fees is a non-GAAP measure that excludes the impact of PPP loans on balance sheet. The most directly comparable GAAP measure is contractual yield on loans, excluding fees.

Reconciliations of the GAAP and non-GAAP measures are presented below.

As of and As of and for the for the Three Months Six Months Ended Ended(Dollars in thousands, unaudited) June 30, June 30, 2020 2020Adjusted allowance for loan losses to loans receivable:Total loans, net of deferred fees $ 1,447,144 $ 1,447,144 Less: PPP loans (438,077 ) (438,077 )Less: net deferred fees on PPP loans 10,639 10,639 Adjusted loans, net of deferred fees $ 1,019,707 $ 1,019,707 Allowance for loan losses $ (14,847 ) $ (14,847 )Allowance for loan losses to loans 1.03 % 1.03 %receivableAdjusted allowance for loan losses to 1.46 % 1.46 %loans receivableAdjusted yield on loans receivable: Total average loans receivable $ 1,334,991 $ 1,150,797 Less: average PPP loans (335,200 ) (167,600 )Plus: average deferred fees on PPP loans 8,700 4,350 Adjusted total average loans receivable $ 1,008,491 $ 987,547 Interest income on loans $ 15,154 $ 27,781 Less: interest and fee income on PPP (2,759 ) (2,759 )loansAdjusted interest income on loans $ 12,395 $ 25,022 Yield on loans receivable 4.57 % 4.85 %Adjusted yield on loans receivable: 4.94 % 5.10 %Adjusted contractual yield on loans receivable, excluding earned fees:Total average loans receivable $ 1,334,991 $ 1,150,797 Less: average PPP loans (335,200 ) (167,600 )Plus: average deferred fees on PPP loans $ 8,700 $ 4,350 Adjusted total average loans receivable, $ 1,008,491 $ 987,547 excluding earned feesInterest and earned fee income on loans $ 15,154 $ 27,781 Less: earned fee income on loans $ (2,182 ) $ (2,610 )Less: interest income on PPP loans (837 ) (837 )Adjusted interest income on loans $ 12,135 $ 24,334 Contractual yield on loans receivable, 3.91 % 4.40 %excluding earned feesAdjusted contractual yield on loans 4.84 % 4.96 %receivable, excluding earned fees:

APPENDIX A

As of June 30, 2020

Industry Concentration

We have a diversified loan portfolio, representing a wide variety of industries. Three of our largest categories of our loans are commercial real estate, commercial and industrial, and construction, land and land development loans. Together they represent $894.2 million in outstanding loan balances, or 87.5% of total gross loans outstanding, excluding PPP loans of $438.1 million. When combined with $189.9 million in unused commitments the total of these three categories is $1.08 billion, or 87.9% of total outstanding loans and loan commitments.

Commercial real estate loans represent the largest segment of our loans, comprising 66.4% of our total balance of outstanding loans, excluding PPP loans, as of June 30, 2020. Unused commitments to extend credit represents an additional $13.5 million, the combined total exposure in commercial real estate loans represents $691.9 million, or 56.1% of our total outstanding loans and loan commitments, excluding PPP loans.

The following table summarizes our exposure by industry for our commercial real estate portfolio as of June 30, 2020:

% of Total(Dollars in Available Loans Average Numberthousands, Outstanding Loan Total (Outstanding Loan of unaudited) Balance Commitments Exposure Balance & Balance Loans Available Commitment)Hotel/Motel $ 99,389 $ 632 $ 100,021 8.1 % $ 3,823 26 Apartments 92,453 2,596 95,049 7.7 1,360 68 Retail 79,436 55 79,491 6.4 993 80 Office 75,833 2,976 78,809 6.4 824 92 Mixed use 71,636 3,365 75,001 6.1 823 87 Convenience 65,086 700 65,786 5.3 1,713 38 StoreWarehouse 56,586 50 56,636 4.6 1,179 48 Manufacturing 36,094 453 36,547 3.0 1,003 36 Mini Storage 28,382 137 28,519 2.3 3,154 9 Groups < 2.0% 73,440 2,587 76,027 6.2 1,049 70 of totalTotal $ 678,335 $ 13,551 $ 691,886 56.1 % $ 1,224 554

Commercial and industrial loanscomprise 11.1% of our total balance of outstanding loans, excluding PPP loans, as of June 30, 2020. Unused commitments to extend credit represents an additional $98.8 million, the combined total exposure in commercial and industrial loans represents $212.7 million, or 17.2% of our total outstanding loans and loan commitments, excluding PPP loans.

The following table summarizes our exposure by industry, excluding PPP loans, for our commercial and industrial loan portfolio as of June 30, 2020:

% of Total(Dollars in Available Loans Average Numberthousands, Outstanding Loan Total (Outstanding Loan of unaudited) Balance Commitments Exposure Balance & Balance Loans Available Commitment)Capital Call Lines $ 11,971 $ 40,093 $ 52,064 4.2 % $ 570 21 Construction/ 13,625 21,305 34,930 2.8 99 138 ContractorServicesManufacturing 12,603 7,854 20,457 1.7 221 57 Medical / Dental / 14,766 2,230 16,996 1.4 208 71 Other CareFamily and Social 11,007 4,599 15,606 1.3 847 13 ServicesFinancial 15,400 - 15,400 1.2 5,133 3 InstitutionsGroups < 1.0% of 34,101 23,138 57,239 4.6 109 312 totalTotal $ 113,473 $ 99,219 $ 212,692 17.2 % $ 185 615

Construction, land and land development loans comprise 10.0% of our total balance of outstanding loans, excluding PPP loans, as of June 30, 2020. Unused commitments to extend credit represents an additional $77.5 million, the combined total exposure in construction, land and land development loans represents $180.0 million, or 14.6% of our total outstanding loans and loan commitments.

The following table details our exposure for our construction, land and land development portfolio as of June 30, 2020:

% of Total(Dollars in Available Loans Average Numberthousands, Outstanding Loan Total (Outstanding Loan of unaudited) Balance Commitments Exposure Balance & Balance Loans Available Commitment)Commercial $ 48,256 $ 56,597 $ 104,853 8.5 % $ 2,540 19 constructionResidential 26,344 15,274 41,618 3.4 753 35 constructionDeveloped 14,200 2,804 17,004 1.4 418 34 land loansUndeveloped 8,976 492 9,468 0.8 472 19 land loansLand 4,646 2,378 7,024 0.6 581 8 developmentTotal $ 102,422 $ 77,545 $ 179,967 14.6 % $ 891 115

Payment Modifications and Deferrals

As part of our ongoing commitment to our customers we have been proactive in contacting customers impacted by the stay-at-home order in Washington State, temporary business closures, or that have otherwise been impacted by the COVID-19 pandemic and responses thereto. In addition to the PPP loans we made to assist customers, as of June 30, 2020, we have $207.2 million in deferred or restructured payments, pursuant to federal guidance, representing 215 loans. Of the 215 loans that remain on deferral, 92 loans, or $77.1 million, were subject to a loan extension as part of the deferral and restructuring process. During the quarter ended June 30, 2020, there were 24 loans, representing $7.2 million, that moved back to active status from deferral status, with all of them successfully resuming payments.

We offered various options depending upon the needs of the customer, with the 93% of the current loan deferrals being principal and interest, and 7% interest only deferrals. The number of deferral days also varied among 90, 120 and 180 days. The charts below show more detail regarding the payment modifications and deferrals.

The graphs below indicate the percentage of loans that were granted a COVID-19 deferral. This illustration is based on total loans outstanding as of March 31, 2020 to approximate the impact to our portfolio, pre-COVID-19; also presented is deferred loans compared to total loans outstanding as of June 30, 2020.

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/24d49fec-cac7-4e49-b314-f323ad0e9ad5

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/e4cf8860-1ac1-4a7d-858d-d78dbf3cd3d1

Deferrals remaining as of June 30, 2020:

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/2f3dc86e-3c59-469a-bc35-08b07f089ee9

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/495a50b7-fe58-4c48-9dba-9ff14b7a3730

Remaining deferrals by industry as of June 30, 2020:

A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/980bfd50-6349-43b8-98c0-cde11c3b6589

As a result of our proactive approach with customers, we did not see material downgrades in credit during quarter ended June 30, 2020 related to the COVID-19 pandemic. We will continue to be diligent in monitoring credit and changes in the economy, keeping the lines of communication open with our customers, but the full impact of these challenging economic times on our financial condition and liquidity remains to be seen at this time.

Contact

Eric Sprink, President & Chief Executive Officer, (425) 357-3659Joel Edwards, Executive Vice President & Chief Financial Officer, (425) 357-3687