10-Q

No

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark one)

☒ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2019

or

☐ 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: 001-38589

COASTAL FINANCIAL CORPORATION

(Exact name of registrant as specified in its charter)

Washington	56-2392007
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
5415 Evergreen Way, Everett, Washington	98203
(Address of principal executive offices)	(Zip Code)

(425) 257-9000

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:

Title of each class	Trading symbol(s)	Name of each exchange on which registered
Common Stock, no par value per share	CCB	The Nasdaq Stock Market LLC

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.    Yes  ☒    No  ☐

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).    Yes  ☒    No  ☐

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 definition of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large Accelerated Filer	☐	Accelerated Filer	☐
Non-Accelerated Filer	☒	Smaller Reporting Company	☒
		Emerging Growth Company	☒

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  ☐    No  ☒As of November 8, 2019 there were 11,913,555 shares of the registrant’s common stock outstanding.  

COASTAL FINANCIAL CORPORATION

Table of Contents

		Page No.
Part I.   Financial Information
Item 1.	Condensed Consolidated Financial Statements (unaudited)	5
	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018 (unaudited)	5
	Condensed Consolidated Statements of Income for the Three and Nine Months ended September 30, 2019 and 2018 (unaudited)	6
	Condensed Consolidated Statements of Comprehensive Income for the Three and Nine Months ended September 30, 2019 and 2018 (unaudited)	7
	Condensed Consolidated Statements of Changes in Shareholders’ Equity for the Nine Months ended September 30, 2019 and 2018 (unaudited)	8
	Condensed Consolidated Statements of Cash Flows for the Nine Months ended September 30, 2019 and 2018 (unaudited)	9
	Notes to Condensed Consolidated Financial Statements (unaudited)	11
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	29
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	53
Item 4.	Controls and Procedures	54
Part II.   Other Information
Item 1.	Legal Proceedings	55
Item 1A.	Risk Factors	55
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55
Item 3.	Defaults Upon Senior Securities	55
Item 4.	Mine Safety Disclosures	55
Item 5.	Other Information	55
Item 6.	Exhibits	55

3

Safe Harbor Statement under the Private Securities Litigation Reform Act of 1995

This report may contain forward-looking statementswithin the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. 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. With respect to any such forward-looking statements, we claim the protection of the safe harbor provided for in the Private Securities Litigation Reform Act of 1995, as amended. Any or all of the forward-looking statements in this report may turn out to be inaccurate. 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 the Company’s Form 10-K for the year ended December 31, 2018, including the Risk Factors section of that report, and in its other SEC reports.  Some of the risks and uncertainties that may cause the Company’s actual results, performance or achievements to differ materially from those expressed include, but are not limited to, the following: the overall health of the local and national real estate market; the credit risk associated with our loan portfolio, and specifically with our commercial real estate loans; business and economic conditions generally and in the financial services industry, nationally and within our market area; 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; 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; the effectiveness of our risk management framework; 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; 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.

4

PART I.   FINANCIAL INFORMATION

Item 1. Financial Statements

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(dollars in thousands)

ASSETS
	September 30,			December 31,
	2019			2018
Cash and due from banks	$	22,060		$	16,315
Interest earning deposits with other banks (restricted cash of $24,817 and $24,004    at September 30, 2019 and December 31, 2018, respectively)		131,287			109,467
Investment securities, available for sale, at fair value		28,319			36,660
Investment securities, held to maturity, at amortized cost		4,377			1,262
Other investments		4,405			3,766
Loans receivable		874,112			767,899
Allowance for loan losses		(10,888	)		(9,407	)
Total loans receivable, net		863,224			758,492
Premises and equipment, net		13,167			13,167
Operating lease right-of-use assets		8,666			-
Accrued interest receivable		2,629			2,526
Bank-owned life insurance, net		6,832			6,688
Deferred tax asset, net		2,206			2,518
Other assets		2,888			1,249
Total assets	$	1,090,060		$	952,110
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits	$	922,249		$	803,614
Federal Home Loan Bank (FHLB) advances		20,000			20,000
Subordinated debt
Principal amount $10,000 (less unamortized debt issuance costs of $25    and $35 at September 30, 2019 and December 31, 2018, respectively)		9,975			9,965
Junior subordinated debentures
Principal amount $3,609 (less unamortized debt issuance costs of $27 and $28    at September 30, 2019 and December 31, 2018, respectively)		3,582			3,581
Deferred compensation		1,000			1,078
Accrued interest payable		303			279
Operating lease liabilities		8,847			-
Other liabilities		3,682			4,437
Total liabilities		969,638			842,954
SHAREHOLDERS’ EQUITY
Preferred stock, no par value:
Authorized: 25,000,000 shares at September 30, 2019 and December 31, 2018;     issued and outstanding: zero shares at September 30, 2019 and December 31, 2018		-			-
Common stock, no par value:
Authorized: 300,000,000 shares at September 30, 2019 and December 31, 2018;     11,912,115 voting shares at September 30, 2019 issued and outstanding     and 11,893,203 voting shares at December 31, 2018 issued and outstanding		86,866			86,431
Retained earnings		33,614			24,021
Accumulated other comprehensive loss, net of tax		(58	)		(1,296	)
Total shareholders’ equity		120,422			109,156
Total liabilities and shareholders’ equity	$	1,090,060		$	952,110

See accompanying Notes to Condensed Consolidated Financial Statements.

5

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

(dollars in thousands, except for per share data)

	Three months ended September 30,					Nine months ended September 30,
	2019			2018		2019		2018
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	11,691		$	9,262	$	33,027	$	26,229
Interest on interest earning deposits with other banks		486			458		1,946		949
Interest on investment securities		168			156		481		463
Dividends on other investments		10			18		99		91
Total interest income		12,355			9,894		35,553		27,732
INTEREST EXPENSE
Interest on deposits		1,435			851		4,291		2,209
Interest on borrowed funds		193			195		582		594
Total interest expense		1,628			1,046		4,873		2,803
Net interest income		10,727			8,848		30,680		24,929
PROVISION FOR LOAN LOSSES		637			508		1,724		1,401
Net interest income after provision for loan losses		10,090			8,340		28,956		23,528
NONINTEREST INCOME
Deposit service charges and fees		795			800		2,302		2,258
Wholesale banking service fees		456			328		1,404		370
Loan referral fees		-			209		1,106		453
Mortgage broker fees		140			52		336		158
Sublease and lease income		16			10		36		71
Gain on sales of loans, net		369			-		490		142
Gain on sales of securities, net		171			-		171		-
Other income		141			147		359		414
Total noninterest income		2,088			1,546		6,204		3,866
NONINTEREST EXPENSE
Salaries and employee benefits		4,971			4,027		14,058		11,672
Occupancy		884			798		2,808		2,425
Data processing		509			501		1,537		1,472
Director and staff expenses		241			213		698		493
Excise taxes		184			146		529		404
Marketing		98			110		300		253
Legal and professional fees		170			142		872		352
Federal Deposit Insurance Corporation (FDIC) assessments		(4	)		83		205		247
Business development		122			81		320		241
Other expense		573			509		1,726		1,472
Total noninterest expense		7,748			6,610		23,053		19,031
Income before provision for income taxes		4,430			3,276		12,107		8,363
PROVISION FOR INCOME TAXES		919			674		2,514		1,717
NET INCOME	$	3,511		$	2,602	$	9,593	$	6,646
Basic earnings per common share	$	0.30		$	0.23	$	0.81	$	0.67
Diluted earnings per common share	$	0.29		$	0.22	$	0.79	$	0.66
Weighted average number of common shares outstanding:
Basic		11,901,873			11,338,320		11,893,734		9,956,449
Diluted		12,188,507			11,609,978		12,193,071		10,051,415

See accompanying Notes to Condensed Consolidated Financial Statements.

6

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED)

(dollars in thousands)

	Three months ended September 30,						Nine months ended September 30,
	2019			2018			2019			2018
NET INCOME	$	3,511		$	2,602		$	9,593		$	6,646
OTHER COMPREHENSIVE INCOME (LOSS), before tax
Securities available-for-sale
Unrealized holding gain (loss) during the period		61			(259	)		1,396			(1,131	)
Income tax benefit (provision) related to unrealized holding    gain (loss)		(12	)		55			(293	)		237
Reclassification adjustment for net gain from sale of investment    securities available for sale included in income		171			-			171			-
Income tax provision related to net gain from sale of    investment securities available for sale included in income		(36	)		-			(36	)		-
OTHER COMPREHENSIVE INCOME (LOSS), net of tax		184			(204	)		1,238			(894	)
COMPREHENSIVE INCOME	$	3,695		$	2,398		$	10,831		$	5,752

See accompanying Notes to Condensed Consolidated Financial Statements.

7

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (UNAUDITED)

(dollars in thousands)

	Shares of Common Stock			Common Stock		Retained Earnings		Accumulated Other Comprehensive Income (Loss)			Total
BALANCE, June 30, 2018		9,298,553		$	52,946	$	18,364	$	(1,820	)	$	69,490
Net income		-			-		2,602		-			2,602
Exercise of stock options		10,420			66		-		-			66
Stock-based compensation		-			79		-		-			79
Stock issuance and net proceeds from initial public offering		2,577,500			33,243		-		-			33,243
Other comprehensive loss		-			-		-		(204	)		(204	)
BALANCE, September 30, 2018		11,886,473		$	86,334	$	20,966	$	(2,024	)	$	105,276
BALANCE, June 30, 2019		11,908,185		$	86,730	$	30,103	$	(242	)	$	116,591
Net income		-			-		3,511		-			3,511
Exercise of stock options		3,930			25		-		-			25
Stock-based compensation		-			111		-		-			111
Other comprehensive income		-			-		-		184			184
BALANCE, September 30, 2019		11,912,115		$	86,866	$	33,614	$	(58	)	$	120,422
BALANCE, December 31, 2017		9,248,898		$	52,521	$	14,134	$	(944	)	$	65,711
Net income		-			-		6,646		-			6,646
Reclassification of stranded tax effect due to federal tax   rate change		-			-		186		(186	)		-
Issuance of restricted stock awards		4,405			-		-		-			-
Exercise of stock options		55,670			339		-		-			339
Stock-based compensation		-			231		-		-			231
Stock issuance and net proceeds from initial public    offering		2,577,500			33,243		-		-			33,243
Other comprehensive loss		-			-		-		(894	)		(894	)
BALANCE, September 30, 2018		11,886,473		$	86,334	$	20,966	$	(2,024	)	$	105,276
BALANCE, December 31, 2018		11,893,203		$	86,431	$	24,021	$	(1,296	)	$	109,156
Net income		-			-		9,593		-			9,593
Issuance of restricted stock awards		2,352			-		-		-			-
Forfeiture of restricted stock awards		(1,200	)		-		-		-			-
Exercise of stock options		17,760			110		-		-			110
Stock-based compensation		-			325		-		-			325
Other comprehensive income		-			-		-		1,238			1,238
BALANCE, September 30, 2019		11,912,115		$	86,866	$	33,614	$	(58	)	$	120,422

See accompanying Notes to Condensed Consolidated Financial Statements.

8

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(dollars in thousands)

	Nine months ended September 30,
	2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	9,593		$	6,646
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses		1,724			1,401
Depreciation and amortization		907			786
Loss on disposition of fixed assets		5			-
Decrease in operating lease right-of-use assets		756			-
Decrease in operating lease liabilities		(702	)		-
Gain on sales of loans		(490	)		(142	)
Gain on sale of securities, net		(171	)		-
Net discount accretion on investment securities		(36	)		(17	)
Stock-based compensation		325			231
Bank-owned life insurance earnings		(144	)		(140	)
Deferred tax (benefit) expense		(18	)		26
Net change in other assets and liabilities		(2,413	)		66
Total adjustments		(257	)		2,211
Net cash provided by operating activities		9,336			8,857
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase (decrease) in interest earning deposits with other banks		(21,007	)		(17,409	)
Purchase of investment securities available for sale		(19,948	)		-
Purchase of investment securities held-to-maturity		(3,182	)		-
Proceeds from sale of available for sale securities		30,026			-
Purchase of other investments, net		(639	)		(86	)
Principal paydowns of investment securities available-for-sale		41			70
Principal paydowns of investment securities held-to-maturity		64			114
Purchase of participation loans		(7,238	)		(32,653	)
Proceeds from sale of loans		1,581			-
Purchase of loans		-			(8,575	)
Increase in loans receivable, net		(100,309	)		(46,469	)
Purchases of premises and equipment, net		(912	)		(510	)
Net cash used by investing activities		(121,523	)		(105,518	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and money market, and savings		124,363			63,693
Net increase in time deposits		(5,728	)		7,734
Net repayments from short term FHLB borrowing		-			33,243
Proceeds from exercise of stock options		110			339
Net cash provided by financing activities		118,745			105,009
NET INCREASE IN CASH, DUE FROM BANKS AND RESTRICTED CASH		6,558			8,348
CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year		40,319			31,119
CASH, DUE FROM BANKS AND RESTRICTED  CASH, end of quarter	$	46,877		$	39,467

9

SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest paid	$	4,849	$	2,774
Income taxes paid		2,940		1,670
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Fair value adjustment of securities available-for-sale, gross	$	1,568	$	(1,131	)
In conjunction with the adoption of ASU 2016-02 as detailed in Note 6 to    the Unaudited Condensed Consolidated Financial Statements, the    following assets and liabilities were recognized:
Operating lease right-of-use assets	$	9,421	$	-
Operating lease liabilities	$	9,591	$	-

See accompanying Notes to Condensed Consolidated Financial Statements. 

10

COASTAL FINANCIAL CORPORATION AND SUBSIDIARY

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 subsidiary is Coastal Community Bank (Bank). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank and Federal Reserve System (Federal Reserve) state member bank.

The Company provides a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound area through its 14 branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application. The Bank’s main branch and the headquarters of the Bank and Company are located in Everett, Washington. The Bank’s deposits are insured in whole or in part by the FDIC. The Bank’s loans and deposits are primarily within the greater Puget Sound area, and the Bank’s primary funding source is deposits from customers. The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has 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 28, 2019. Operating results for the three and nine months ended September 30, 2019 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 and the Bank. All significant intercompany accounts have been eliminated in consolidation.

Business Segments - The Company is managed by legal entity and not by lines of business. The entity’s primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its market areas. The Bank offers a wide variety of deposit products to its customers. Lending activities include the origination of real estate, commercial and industrial, and consumer loans. Interest income on loans is the Company’s primary source of revenue, and is supplemented by interest income on deposits with other banks, interest income from investment securities, deposit service charges, and other service provided activities. The Company has determined that its current business and operations consist of a single reporting segment and, therefore, segment disclosures are not required.

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 fair value of the Company’s investment securities, deferred tax assets, and financial instruments. Actual results could differ significantly from those estimates.

Subsequent Events - The Company has evaluated events and transactions subsequent to September 30, 2019 for potential recognition or disclosure.

11

Accounting policies – Our complete accounting policies are described in Note 1, summary of significant accounting policies of the Company’s audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017 included in the Company’s Annual Report Form 10-K filed with the SEC on March 28, 2019.

Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements have been reclassified to conform to the current presentation with no effect on stockholders’ equity or net income.

Note 2 - Recent accounting standards

Accounting Standards Adopted in 2019

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was effective for us on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. We have elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods. 

Our operating leases relate primarily to office space and bank branches. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use ("ROU") asset of $9.4 million and an operating lease liability of $9.6 million on January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded on the face on the consolidated balance sheets. See Note 6 - Leases for additional information.

In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This ASU updates outdated guidance related to the Office of Comptroller of the Currency’s (OCC) Banking Circular 202, Accounting for Net Deferred Tax Charges, as the guidance has been rescinded by OCC and is no longer relevant. The amendments in this ASU are effective immediately. The adoption of ASU No. 2018-06 did not have a material impact on the Company's consolidated financial statements.

In September 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.  This ASU was issued to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.  Previously, these awards were recorded at the fair value of consideration received or the fair value of the equity instruments issued and was measured as of the earlier of the commitment date or the date performance was completed. The amendments in this ASU require the awards to be measured at the grant-date fair value of the equity instrument.  ASU No. 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption was permitted, but no earlier than an entity's adoption of Topic 606.  The adoption of ASU No. 2018-07 did not have a material impact on the Company's consolidated financial statements.

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. As a smaller reporting company, once the FASB issues the approved update, our implementation will be effective January 1, 2023.  We are actively assessing our data and the model needs and are evaluating the impact of adopting the amendment. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period 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.

12

Note 3 - Investment Securities

The amortized cost and fair values of investment securities at the date indicated are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
September 30, 2019
Available-for-sale
U.S. Treasury securities	$	24,967	$	-	$	(68	)	$	24,899
U.S. Government agencies		3,000		-		(8	)		2,992
U.S. Agency collateralized mortgage obligations		138		-		-			138
U.S. Agency residential mortgage-backed securities		30		-		-			30
Municipals		257		3		-			260
Total available-for-sale securities		28,392		3		(76	)		28,319
Held-to-maturity
U.S. Agency residential mortgage-backed securities		4,377		-		(35	)		4,342
Total investment securities	$	32,769	$	3	$	(111	)	$	32,661

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
December 31, 2018
Available-for-sale
U.S. Treasury securities	$	34,831	$	-	$	(1,590	)	$	33,241
U.S. Government agencies		3,000		-		(43	)		2,957
U.S. Agency collateralized mortgage obligations		172		-		(3	)		169
U.S. Agency residential mortgage-backed securities		39		-		(1	)		38
Municipals		259		-		(4	)		255
Total available-for-sale securities		38,301		-		(1,641	)		36,660
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,262		-		(57	)		1,205
Total investment securities	$	39,563	$	-	$	(1,698	)	$	37,865

The amortized cost and fair value of debt securities at September 30, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers or the underlying borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
September 30, 2019
Amounts maturing in
One year or less	$	22,970	$	22,953	$	-	$	-
After one year through five years		5,254		5,198		-		-
After five years through ten years		-		-		-		-
		28,224		28,151		-		-
U.S. Agency residential mortgage-backed securities and    collateralized mortgage obligations		168		168		4,377		4,342
	$	28,392	$	28,319	$	4,377	$	4,342

Investment securities with carrying values of $16,837,000 and $19,678,000 at September 30, 2019 and December 31, 2018 respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

13

There were fiveinvestment securities sold totaling $30.0 million during the three and nine months ended September 30, 2019 resulting in gross gains of $242,000 and gross losses of $71,000, respectively.  There wereno sales during the three or nine months ended September 30, 2018.

Information pertaining to securities with gross unrealized losses at the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(dollars in thousands)
September 30, 2019
Available-for-sale
U.S. Treasury securities	$	19,959	$	(10	)	$	4,939	$	(58	)	$	24,898	$	(68	)
U.S. Government agencies		-		-			2,993		(8	)		2,993		(8	)
U.S. Agency collateralized mortgage obligations		-		-			-		-			-		-
Municipals		-		-			-		-			-		-
U.S. Agency residential mortgage-backed    securities		-		-			-		-			-		-
Total available-for-sale securities		19,959		(10	)		7,932		(66	)		27,891		(76	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		3,144		(24	)		1,198		(11	)		4,342		(35	)
Total investment securities	$	23,103	$	(34	)	$	9,130	$	(77	)	$	32,233	$	(111	)
December 31, 2018
Available-for-sale
U.S. Treasury securities	$	-	$	-		$	33,241	$	(1,590	)	$	33,241	$	(1,590	)
U.S. Government agencies		-		-			2,957		(43	)		2,957		(43	)
U.S. Agency collateralized mortgage obligations		-		-			169		(3	)		169		(3	)
Municipals		-		-			255		(4	)		255		(4	)
U.S. Agency residential mortgage-backed    securities		38		(1	)		-		-			38		(1	)
Total available-for-sale securities		38		(1	)		36,622		(1,640	)		36,660		(1,641	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		-		-			1,205		(57	)		1,205		(57	)
Total investment securities	$	38	$	(1	)	$	37,827	$	(1,697	)	$	37,865	$	(1,698	)

At September 30, 2019 and December 31, 2018, there were seven and 12 securities in an unrealized loss position, respectively. Unrealized losses have not been recognized into income because management does not intend to sell and does not expect that it will be required to sell the investments. The decline is largely due to changes in market conditions and interest rates, rather than credit quality. The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve. The Company does not consider these securities to be other than temporarily impaired at September 30, 2019 and December 31, 2018.

14

Note 4 - Loans and Allowance for Loan Losses

The composition of the loan portfolio is as follows as of the periods indicated:

	September 30,				December 31,
	2019				2018
				(dollars in thousands)
Commercial and industrial loans	$	105,634			$	90,390
Real estate loans:
Construction, land, and land development		86,919				64,045
Residential real estate		100,818				94,745
Commercial real estate		578,607				515,959
Consumer and other loans		3,720				3,584
Gross loans receivable		875,698				768,723
Net deferred origination fees and premiums		(1,586	)			(824	)
Loans receivable	$	874,112			$	767,899

Included in consumer and other loans are overdrafts of $24,000 and $36,000 at September 30, 2019 and December 31, 2018, respectively. The Company has pledged loans totaling $168,175,000 and $155,029,000 at September 30, 2019 and December 31, 2018, respectively, for borrowing lines at the FHLB and Federal Reserve Bank (FRB).

The balance of Small Business Administration (SBA) and United States Department of Agriculture (USDA) loans and participations serviced for others totaled $22,446,000 and $24,878,000 at September 30, 2019 and December 31, 2018, respectively.

The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans with remaining balances totaled $33,696,000 and $45,368,000 as of September 30, 2019 and December 31, 2018, respectively. Unamortized premiums totaled $533,000 and $701,000 as of September 30, 2019 and December 31, 2018, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $36,151,000 and $36,561,000 as of September 30, 2019 and December 31, 2018, respectively.

The following is a summary of the Company’s loan portfolio segments:

Commercial and industrial loans - Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment of businesses located generally in our primary market area. Loan types include revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. We also issue letters of credit on behalf of our customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers.

Construction, land and land development loans - We originate loans for the construction of 1-4 family, multifamily, and Commercial Real Estate (CRE) properties in our market area. Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. We occasionally originate land loans for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower’s ability to pay and the inability of the Company to recover its investment due to a material decline in the fair value of the underlying collateral.

Residential real estate loans - Residential real estate loans include various types of loans for which the Company holds real property as collateral. Included in this segment are first lien single family loans, which we occasionally purchase to diversify our loan portfolio, and rental portfolios secured by one-to-four family homes. The primary risks of residential real estate loans include the borrower’s inability to pay, material decreases in the value of the collateral, and significant increases in interest rates which may make the loan unprofitable.

15

Commercial real estate (includes owner occupied and nonowner occupied) loans - Commercial real estate loans include various types of loans for which the Company holds real property as collateral. The primary risks of commercial real estate loans include the borrower’s inability to pay, material decreases in the value of the collateralized real estate and significant increases in interest rates, which may make the real estate loan unprofitable. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Consumer and other loans - We originate a limited number of consumer loans, generally for banking customers only, which consist primarily of home equity lines of credit, saving account secured loans, and auto loans. This loan category also includes overdrafts. Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying collateral.

The following table illustrates an age analysis of past due loans as of the dates indicated:

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
September 30, 2019
Commercial and industrial loans	$	-	$	1,233	$	1,233	$	104,401	$	105,634		$	-
Real estate loans:
Construction, land and land development		-		-		-		86,919		86,919			-
Residential real estate		-		67		67		100,751		100,818			-
Commercial real estate		420		-		420		578,187		578,607			-
Consumer and other loans		6		-		6		3,714		3,720			-
	$	426	$	1,300	$	1,726	$	873,972	$	875,698		$	-
Less net deferred origination fees and premiums										(1,586	)
Loans receivable									$	874,112

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
December 31, 2018
Commercial and industrial loans	$	171	$	494	$	665	$	89,725	$	90,390		$	-
Real estate loans:
Construction, land and land development		823		-		823		63,222		64,045			-
Residential real estate		-		72		72		94,673		94,745			-
Commercial real estate		-		-		-		515,959		515,959			-
Consumer and other loans		2		-		2		3,582		3,584			-
	$	996	$	566	$	1,562	$	767,161		768,723		$	-
Less net deferred origination fees and premiums										(824	)
Loans receivable									$	767,899

16

A summary of information pertaining to impaired loans as of the period indicated:

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
	(dollars in thousands)
September 30, 2019
Commercial and industrial loans	$	1,463	$	407	$	826	$	1,233	$	230
Real estate loans:
Residential real estate		73		67		-		67		-
Total	$	1,536	$	474	$	826	$	1,300	$	230
December 31, 2018
Commercial and industrial loans	$	766	$	493	$	-	$	493	$	-
Real estate loans:
Residential real estate		74		72		-		72		-
Commercial real estate		1,491		1,261		-		1,261		-
Total	$	2,331	$	1,826	$	-	$	1,826	$	-

The following tables summarize our average recorded investment and interest income recognized on impaired loans by loan class for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended
	September 30, 2019				September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	1,406	$	-	$	995	$	3
Real estate loans:
Residential real estate		68		-		74		-
Commercial real estate		-		-		1,284		-
Total	$	1,474	$	-	$	2,353	$	3
	Nine Months Ended
	September 30, 2019				September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	933	$	-	$	1,371	$	28
Real estate loans:
Construction, land and land development		-		-		-		-
Residential real estate		71		-		306		5
Commercial real estate		315		-		1,296		-
Total	$	1,319	$	-	$	2,973	$	33

The Company grants restructurings in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.

17

The following table presents troubled debt restructurings by accrual versus nonaccrual status and by loan class as of December 31, 2018.  The troubled debt restructuring outstanding as of December 31, 2018 was paid off in the first quarter of 2019.

	Accrual Status		Nonaccrual Status		Total Restructured Loans
	(dollars in thousands)
December 31, 2018
Commercial real estate	$	-	$	1,261	$	1,261

No loans were restructured in the nine months ended September 30, 2019 and September 30, 2018 that qualified as troubled debt restructurings. The Company has no commitments to loan additional funds to borrowers whose loans were classified as troubled debt restructurings at September 30, 2019, as there were no outstanding troubled debt restructurings at September 30, 2019.

When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is removed, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual.

An analysis of nonaccrual loans by category consisted of the following at the periods indicated:

	September 30,		December 31,
	2019		2018
			(dollars in thousands)
Commercial and industrial loans	$	1,233	$	493
Real estate loans:
Residential real estate		67		72
Commercial real estate		-		1,261
Total nonaccrual loans	$	1,300	$	1,826

Credit Quality and Credit Risk

Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Company’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve. The Company also classifies some loans as Watch or Other Loans Especially Mentioned (OLEM). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans and are reported in the Pass column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring.

18

Loans by credit quality risk rating are as follows as of the periods indicated:

	Pass		Other Loans Especially Mentioned		Sub- Standard		Doubtful		Total
	(dollars in thousands)
September 30, 2019
Commercial and industrial loans	$	97,923	$	2,579	$	5,132	$	-	$	105,634
Real estate loans:
Construction, land, and land development		86,919		-		-		-		86,919
Residential real estate		100,333		418		67		-		100,818
Commercial real estate		575,895		2,712		-		-		578,607
Consumer and other loans		3,720		-		-		-		3,720
	$	864,790	$	5,709	$	5,199	$	-		875,698
Less net deferred origination fees										(1,586	)
Loans receivable									$	874,112
December 31, 2018
Commercial and industrial loans	$	84,859	$	3,908	$	1,623	$	-	$	90,390
Real estate loans:
Construction, land, and land development		55,666		8,379		-		-		64,045
Residential real estate		94,548		125		72		-		94,745
Commercial real estate		512,151		2,547		1,261		-		515,959
Consumer and other loans		3,584		-		-				3,584
	$	750,808	$	14,959	$	2,956	$	-		768,723
Less net deferred origination fees										(824	)
Loans receivable									$	767,899

Allowance for Loan Losses

The Company’s allowance for loan losses (ALLL) covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit review process together with data from peer institutions and economic information gathered from published sources.

The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

19

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLLattributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30, 2019:

	Commercial and Industrial			Construction, Land, and Land Development			Residential Real Estate		Commercial Real Estate			Consumer and Other			Unallocated			Total
	(dollars in thousands)
Three months ended September 30, 2019
Balance, June 30, 2019	$	2,482		$	2,386		$	1,814	$	2,845		$	67		$	849		$	10,443
Provision for loan losses or (recapture)		195			136			140		107			22			37			637
		2,677			2,522			1,954		2,952			89			886			11,080
Loans charged-off		(118	)		(75	)		-		-			(3	)		-			(196	)
Recoveries of loans previously charged-off		2			-			-		-			2			-			4
Net (charge-offs) recoveries		(116	)		(75	)		-		-			(1	)		-			(192	)
Balance, September 30, 2019	$	2,561		$	2,447		$	1,954	$	2,952		$	88		$	886		$	10,888
Nine months ended September 30, 2019
Balance, December 31, 2018	$	2,039		$	1,806		$	1,647	$	2,648		$	77		$	1,190		$	9,407
Provision for loan losses or (recapture)		643			716			307		333			29			(304	)		1,724
		2,682			2,522			1,954		2,981			106			886			11,131
Loans charged-off		(125	)		(75	)		-		(29	)		(23	)		-			(252	)
Recoveries of loans previously charged-off		4			-			-		-			5			-			9
Net (charge-offs) recoveries		(121	)		(75	)		-		(29	)		(18	)		-			(243	)
Balance, September 30, 2019	$	2,561		$	2,447		$	1,954	$	2,952		$	88		$	886		$	10,888
As of September 30, 2019
ALLL amounts allocated to
Individually evaluated for impairment	$	230		$	-		$	-	$	-		$	-		$	-		$	230
Collectively evaluated for impairment		2,331			2,447			1,954		2,952			88			886			10,658
ALLL balance, September 30, 2019	$	2,561		$	2,447		$	1,954	$	2,952		$	88		$	886		$	10,888
Loans individually evaluated for impairment	$	1,233		$	-		$	67	$	-		$	-					$	1,300
Loans collectively evaluated for impairment		104,401			86,919			100,751		578,607			3,720						874,398
Loan balance, September 30, 2019	$	105,634		$	86,919		$	100,818	$	578,607		$	3,720					$	875,698

20

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the threeand ninemonths ended September 30, 2018:

	Commercial and Industrial			Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate			Consumer and Other			Unallocated			Total
	(dollars in thousands)
Three Months Ended September 30, 2018
ALLL balance, June 30, 2018	$	1,821		$	1,238	$	1,395	$	2,303		$	52		$	1,731		$	8,540
Provision for loan losses or (recapture)		(10	)		423		7		164			39			(115	)		508
		1,811			1,661		1,402		2,467			91			1,616			9,048
Loans charged-off		-			-		-		-			(6	)		-			(6	)
Recoveries of loans previously charged-off		1			-		65		-			3			-			69
Net (charge-offs) recoveries		1			-		65		-			(3	)		-			63
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
Nine Months Ended September 30, 2018
ALLL balance, December 31, 2017	$	1,864		$	1,063	$	1,343	$	2,014		$	43		$	1,690		$	8,017
Provision for loan losses or (recapture)		226			598		59		537			55			(74	)		1,401
		2,090			1,661		1,402		2,551			98			1,616			9,418
Loans charged-off		(281	)		-		-		(84	)		(20	)		-			(385	)
Recoveries of loans previously charged-off		3			-		65		-			10			-			78
Net (charge-offs) recoveries		(278	)		-		65		(84	)		(10	)		-			(307	)
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111

	Commercial and Industrial		Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate		Consumer and Other		Unallocated		Total
	(dollars in thousands)
As of December 31, 2018
ALLL amounts allocated to
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		2,039		1,806		1,647		2,648		77		1,190		9,407
ALLL balance, December 31, 2018	$	2,039	$	1,806	$	1,647	$	2,648	$	77	$	1,190	$	9,407
Loans individually evaluated for impairment	$	493	$	-	$	72	$	1,261	$	-			$	1,826
Loans collectively evaluated for impairment		89,897		64,045		94,673		514,698		3,584				766,897
Loan balance, December 31, 2018	$	90,390	$	64,045	$	94,745	$	515,959	$	3,584			$	768,723

Note 5 - Deposits

The composition of consolidated deposits consisted of the following at the periods indicated:

	September 30,		December 31,
	2019		2018
	(dollars in thousands)
Demand, noninterest bearing	$	349,087	$	293,525
Now and money market		416,315		349,952
Savings		52,191		52,572
Wholesale brokered deposits		13,340		10,521
Time deposits less than $250,000		58,369		62,272
Time deposits $250,000 and over		32,947		34,772
Total deposits	$	922,249	$	803,614

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The following table presents the maturity distribution of time deposits as of September 30, 2019 (dollars in thousands):

Twelve months	$	69,662
One to two years		15,875
Two to three years		3,065
Three to four years		1,648
Four to five years		1,066
	$	91,316

Note 6 - Leases

The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.

The Company adopted the provisions of ASU 2016-02 (Topic 842) on January 1, 2019. Operating lease right-of-use (“ROU”) assets represent a right to use an underlying asset for the contractual lease term. Operating lease liabilities represent an obligation to make lease payments arising from the lease. Upon adoption, operating lease ROU assets totaling $9.4 million and operating lease liabilities totaling $9.6 million were recognized in our Unaudited Consolidated Balance Sheets for leases that existed at the adoption date, based on the present value of lease payments over the remaining lease term.  ROU assets are further adjusted for lease incentives.  Operating leases entered into after the adoption date will be recognized as an operating lease ROU asset and operating lease liability at the commencement date of the new lease.

The Company’s leases do not provide an implicit interest rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities. The weighted average discount rate used to discount operating lease liabilities at September 30, 2019 was 3.5%.

The Company’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Company’s lease agreements do not contain any residual value guarantees.

Operating leases with terms of 12 months or less are not included in ROU assets and operating lease liabilities recorded in our consolidated balance sheets. Operating lease terms include options to extend when it is reasonably certain that the Company will exercise such options, determined on a lease-by-lease basis. During the third quarter of 2019 the Bank entered into a new lease in Arlington, WA, that will serve as a new branch location.  The Arlington property was purchased through a LLC owned by the Company, and the Bank will lease that property from the LLC.  We do not expect this lease to have a financial statement impact on a consolidated basis.  As of September 30, 2019, the Company does not have any leases that have not yet commenced. At September 30, 2019, lease expiration dates ranged from two to 26 years, with additional renewal options on certain leases typically ranging from 5 to 10 years. At September 30, 2019, the weighted average remaining lease term for the Company’s operating leases was 9.7 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $1.1 million and $853,000, respectively, for the nine months ended September 30, 2019 and 2018. Variable lease components, such as fair market value adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at September 30, 2019:

	September 30,
(dollars in thousands)	2019
October 1, 2019 to December 31, 2019	$	325
2020		1,304
2021		1,291
2022		1,296
2023		1,306
2024 and thereafter		4,936
Total lease payments		10,458
Less:  amounts representing interest		1,611
Present value of lease liabilities	$	8,847

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The following table presents the components of total lease expense and operating cash flows for the nine months ended September 30, 2019:

	September 30,
(dollars in thousands)	2019
Lease expense:
Operating lease expense	$	991
Variable lease expense		98
Total lease expense (1)	$	1,089
Cash paid:
Cash paid reducing operating lease liabilities	$	1,074
(1) Included in net occupancy expense in the Condensed Consolidated Statements of Income (Unaudited).

Note 7 - Stock-Based Compensation

Stock Options and Restricted Stock

On April 30, 2018, the Company’s shareholders approved the Coastal Financial Corporation 2018 Omnibus Incentive Plan (2018 Plan). The 2018 Plan authorizes the Company to grant awards, including but not limited to, stock options and restricted stock awards, to eligible employees, directors or individuals that provide service to the Company, up to an aggregate of 500,000 shares of common stock. The 2018 Plan replaces both the Company’s 2006 Stock Option and Equity Compensation Plan (2006 Plan) and its Directors’ Stock Bonus Plan.  Existing awards will vest under the terms granted and no further awards will be made under the previous plans. Shares available to be granted under the 2018 Plan totaled 361,311 at September 30, 2019.

Stock Option Awards

In January 2019, the Company granted 26,737 nonqualified stock options under the 2018 Plan to an employee, which vest ratably over 10 years. In January 2019, the Company also granted 99,100 qualified stock options under the 2018 Plan to employees, which vest ratably over 10 years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock and other factors. The Company uses the vesting term and contractual life to determine the expected life. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense related to unvested stock option awards is reversed at date of forfeiture.

The following assumptions were used to estimate the value of options granted under the 2006 Plan and the 2018 Plan as applicable in the periods indicated:

	Nine months ended September 30, 2019			Nine months ended September 30, 2018
Expected term	10.0 years			10.0 years
Expected stock price volatility		48.79	%		41.89	%
Risk-free interest rate		2.74	%		2.66	%
Expected dividends	Zero			Zero
Weighted average grant date fair value	$	9.22		$	3.95

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A summary of stock option activity under the 2018 Plan and 2006 Plan during the nine months ended September 30, 2019:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
(dollars in thousands, except per share amounts)
Outstanding at December 31, 2018		688,310		$	6.39		6.38
Granted		125,837			14.91
Exercised		(17,760	)		6.15
Forfeited or expired		(10,130	)		8.78
Outstanding at September 30, 2019		786,257		$	7.72		6.20	$	5,815
Vested or expected to vest at September 30, 2019		786,257		$	7.72		6.20	$	5,815
Exercisable at September 30, 2019		261,232		$	6.01		4.49	$	2,376

The total intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three and nine months ended September 30, 2019 was $35,000 and $170,000, respectively and was $106,000 and $173,000 for the three and nine months ended September 30, 2018.

As of September 30, 2019, there was $2,422,000 of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan. Total unrecognized compensation costs are adjusted for unvested forfeitures. The Company expects to recognize that cost over a weighted-average period of approximately 7.7 years.   Compensation expense recorded related to stock options was $101,000 and $295,000 for the three and nine months ended September 30, 2019, respectively, and $71,000 and $207,000 for the three and nine months ended September 30, 2018, respectively.

Restricted Stock Awards

The fair value of restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities.

As of September 30, 2019 there was $54,000 of total unrecognized compensation cost related to nonvested restricted stock awards.  The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 7.3 years.  Compensation expense recorded related to restricted stock awards was $2,000 and $5,000 for the three and nine months ended September 30, 2019 and was nominal for the three and nine months ended September 30, 2018.

A summary of the Company’s nonvested shares at September 30, 2019 and changes during the nine-month period is presented below:

Nonvested shares	Shares			Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value
(all amounts in dollars except per share amounts)
Nonvested shares at December 31, 2018		5,200		$	12.32
Granted		-			-
Forfeited		(1,200	)		6.25
Vested		-			-
Nonvested shares at September 30, 2019		4,000		$	15.35	$	-

Director’s Stock Bonus

The Company adopted and subsequently amended the Director’s Stock Bonus Plan (Bonus Plan). The Bonus Plan would have expired on May 31, 2018 but was replaced on April 30, 2018, when the shareholders approved the 2018 Plan.

Under the Bonus Plan, the Company could grant up to 50,000 shares. Stock was granted to directors who attended at least 75% of the scheduled board meetings during the prior year. Grants cliff vest over two years from date awarded, contingent on the director still

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being a director of the Company. During the vesting period, the grants are considered participating securities. Grants also immediately vest when a director has attained the retirement age of 72 and retires from the Board.

The Bonus Plan granted shares with a total market value of $5,000 per director, per year, with the exception of the board chairman receiving $7,500 per year, and committee chairmen receiving $6,250 per year. The amended Bonus Plan would have expired on May 31, 2018 and it was replaced on April 30, 2018 by the 2018 Plan. Awards previously granted under the Bonus Plan will vest under the term granted.  Under the 2018 Plan, eligible directors are granted stock with a total market value of $5,000. Directors unable to receive stock will receive cash in lieu upon completion of the vesting period. Cash awards are recognized over the vesting period and recorded in other liabilities until paid.

In January 2019, there were 2,352 shares granted to seven directors at an estimated fair value of $14.91 per share. In January 2018, there were 4,405 shares granted to five directors at an estimated fair value of $7.10 per share. Compensation expense recorded related to the Bonus Plan totaled $8,000 and $25,000 for the three and nine months ended September 30, 2019, respectively, and $8,000 and $23,000 for the three and nine months ended September 30, 2018, respectively.

Note 8 - Shareholders’ Equity

On May 4, 2018 the Company effected a 1-for-5 reverse stock split, decreasing the number of issued shares from 46,268,359 to 9,254,073, including 401 additional shares issued to shareholders with fractional shares. Authorized shares were not impacted by the reverse stock split. Share and per share amounts included in the consolidated financial statements and accompanying notes reflect the effect of the split for all periods presented.

The total authorized preferred stock is 25,000,000 shares.  There were no shares of preferred stock issued and outstanding at September 30, 2019 and December 31, 2018.

The total authorized common shares is 300,000,000 shares.At September 30, 2019 and December 31, 2018, there were 11,912,115 and 11,893,203 common shares issued and outstanding.

On September 26, 2018, all 100,000 shares of Class B nonvoting common stock outstanding were exchanged for voting common stock on terms and conditions approved by the Company’s board of directors. At September 30, 2019 and December 31, 2018 there were no shares of Class B nonvoting common stock issued and outstanding.  

On September 26, 2018, 261,444 Class C shares were exchanged for common stock on terms and conditions approved by the Company’s board of directors. There were no shares of Class C nonvoting common stock issued and outstanding, at September 30, 2019 and December 31, 2018.

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Note 9 - Fair Value Measurements

The following tables present estimated fair values of the Company’s financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:

	September 30, 2019				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	22,060	$	22,060	$	22,060	$	-	$	-
Interest earning deposits with other banks		131,287		131,287		131,287		-		-
Investment securities		32,696		32,661		24,899		7,762		-
Other investments		4,405		4,405		-		4,405		-
Loans receivable, net		863,224		858,731		-		-		858,731
Accrued interest receivable		2,629		2,629		-		2,629		-
Financial liabilities
Deposits	$	922,249		922,110	$	-	$	922,110	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,975		10,035		-		10,035		-
Junior subordinated debentures		3,582		3,407		-		3,407		-
Accrued interest payable		303		303		-		303		-

	December 31, 2018				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	16,315	$	16,315	$	16,315	$	-	$	-
Interest earning deposits with other banks		109,467		109,467		109,467		-		-
Investment securities		37,922		37,865		33,241		4,624		-
Other investments		3,766		3,766		-		3,766		-
Loans receivable, net		758,492		743,354		-		-		743,354
Accrued interest receivable		2,526		2,526		-		2,526		-
Financial liabilities
Deposits	$	803,614	$	802,645	$	-	$	802,645	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,965		9,804		-		9,804		-
Junior subordinated debentures		3,581		3,265		-		3,265		-
Accrued interest payable		279		279		-		279		-

The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the accounting standard requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy:

• Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

• Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.

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• Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from nonbinding single dealer quotes not corroborated by observable market data.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for certain financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Items measured at fair value on a recurring basis – The following fair value hierarchy table presents information about the Company’s assets that are measured at fair value on a recurring basis at the dates indicated:

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands)
September 30, 2019
Available-for-sale
U.S. Treasury securities	$	24,899	$	-	$	-	$	24,899
U.S. Government agencies		-		2,992		-		2,992
U.S. Agency collateralized mortgage obligations		-		138		-		138
U.S. Agency residential mortgage-backed securities		-		30		-		30
Municipals		-		260		-		260
	$	24,899	$	3,420	$	-	$	28,319
December 31, 2018
Available-for-sale
U.S. Treasury securities	$	33,241	$	-	$	-	$	33,241
U.S. Government agencies		-		2,957		-		2,957
U.S. Agency collateralized mortgage obligations		-		169		-		169
U.S. Agency residential mortgage-backed securities		-		38		-		38
Municipals		-		255		-		255
	$	33,241	$	3,419	$	-	$	36,660

The following methods were used to estimate the fair value of the class of financial instruments above:

Investment securities - The fair value of securities is based on quoted market prices, pricing models, quoted prices of similar securities, independent pricing sources, and discounted cash flows.

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2019 and December 31, 2018. The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Assets measured at fair value using significant unobservable inputs (Level 3)

The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated:

	Valuation Technique	Unobservable Inputs	September 30, 2019 Weighted Average Rate			December 31, 2018 Weighted Average Rate
Impaired loans	Collateral valuations	Discount to appraised value		10	%		9	%

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Items measured at fair value on a nonrecurring basis – The following table presents financial assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at the dates indicated:

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands)
September 30, 2019
Impaired loans	$	-	$	-	$	1,073	$	1,073
Total	$	-	$	-	$	1,073	$	1,073
December 31, 2018
Impaired loans	$	-	$	-	$	493	$	493
Total	$	-	$	-	$	493	$	493

The amounts disclosed above represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported on.

Impaired loans - A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted cash expected future cash flows. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are evaluated quarterly to determine if valuation adjustments should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impairment amount. These valuation adjustments are considered nonrecurring fair value adjustments.

Note 10 - Earnings Per Common Share

The following is a computation of basic and diluted earnings per common share at the periods indicated:

	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	(dollars in thousands, except share data)				(dollars in thousands, except share data)
Net Income	$	3,511	$	2,602	$	9,593	$	6,646
Basic weighted average number common shares outstanding		11,901,873		11,338,320		11,893,734		9,956,449
Dilutive effect of share-based compensation		286,634		271,658		299,337		94,966
Diluted weighted average number common shares outstanding		12,188,507		11,609,978		12,193,071		10,051,415
Basic earnings per share	$	0.30	$	0.23	$	0.81	$	0.67
Diluted earnings per share	$	0.29	$	0.22	$	0.79	$	0.66

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Item 2.  Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview

Coastal Financial Corporation (the “Company”) is a bank holding company thatoperatesthrough its wholly ownedsubsidiary,CoastalCommunity Bank (the “Bank”).We are headquarteredin Everett,Washington,which by populationis the largestcityin, and the county seatof, Snohomish County. We focus on providinga wide range of banking productsand servicesto consumers and smallto mediumsizedbusinessesin the broaderPuget Soundregionin the stateof Washington.We currentlyoperate14 full-servicebanking locations,11 of which are locatedin Snohomish County, and threeof which are locatedin neighboringcounties(one in King County and two in IslandCounty).  We are the largest community bank by market share in Snohomish County and fourth in market share overall in Snohomish County.

The followingdiscussionand analysispresentsour financialconditionand resultsof operationson a consolidatedbasis.However, becauseweconduct allof our materialbusinessoperationsthrough the Bank,the discussionand analysisrelateto activitiesprimarilyconductedby the Bank.

Asa bank holding company thatoperatesthrough one segment,communitybanking, wegeneratemostof our revenuefromintereston loans and investments.Our primarysourceof funding for our loans is commercialand retaildeposits.We placesecondaryrelianceon wholesalefunding, primarilyborrowingsfromthe FederalHome Loan Bank,or FHLB.Our largestexpensesare salariesand relatedemployeebenefits,occupancy, intereston depositsand borrowings,data processing,and provisionfor loan losses.Our principallendingproductsare commercialrealestateloans, commercialand industrialloans, and to a lesserextentresidentialrealestateloans and consumerloans.

The Company successfully closed its initial public offering on July 20, 2018, raising net proceeds of $33.2 million and issuing 2,577,500 shares of common stock in exchange. We are using, and intend to continue to use, the net proceeds to support our growth, organically or through mergers and acquisitions, and for general corporate purposes, which may include the repayment or refinancing of debt and maintenance of our required regulatory capital levels.

Comparison of Operating Results for the Three Months Ended September 30, 2019 and September 30, 2018

The Company’s first and second quarter 2019 results were impacted by a temporary, atypically large balance held in a deposit account by a wholesale banking services client, which is not expected to occur again.  The deposits came through a wholesale banking relationship and not from the end customer so they are classified as brokered deposits in accordance with regulatory guidance.  Throughout the remainder of this earnings release, these deposits are referred to as wholesale-brokered deposits.  

The increase of wholesale-brokered deposits during the quarters ended June 30, 2019 and March 31, 2019 most significantly affected the following balance sheet items: cash and cash equivalents, total assets, deposits, and total liabilities.  Cost of deposits, cost of funds, net interest margin, and net income were the most significantly impacted income statement items due to the temporary increase in wholesale-brokered deposits.  These wholesale-brokered deposits stabalized in the third quarter 2019 to a more normalized balance.

Net Income

Net incomefor the threemonthsended September 30, 2019, was $3.5 million,or $0.29 per dilutedshare,comparedto $2.6 million,or $0.22 per dilutedshare,for the threemonthsended September 30, 2018. The increasein net incomeover the comparableperiodin the prioryear was attributableto a $1.9 million increasein net interestincome,primarily arisingfromincreasedinterest earningassetsfromour loan growth initiatives,as well as increases of $369,000 in gain on sale of loans, $171,000 in net gains on sale of securities and $128,000 in wholesale banking service fees, which is a line of business in which we provide banking services to wholesale banking service clients that provide financial service to their customers.  These positive factorswere partiallyoffsetby a $1.1 million increasein noninterestexpense, which includes $944,000 more in salaries and employee benefits.

Net InterestIncome

Net interestincome for the threemonthsended September 30, 2019, was $10.7 million,comparedto $8.8 millionfor the threemonths ended September 30, 2018, an increaseof $1.9 million, or 21.2%. The increasein net interestincomeconsistedof a $2.5 million,or 24.9%, increasein interestincome partially offsetby a $582,000, or 55.6%, increasein interestexpense.  The increase from prior quarter one year ago is a result of higher yielding and increased interest earning asset balances.

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The growth in interestincomewas primarilyattributableto a $148.4 million,or 20.7%, increasein averageloans outstandingfor the threemonthsended September 30, 2019, comparedto the prioryear period, combinedwith a 24 basis point increasein the yieldon totalloans, which totaled 5.36% for the three months ended September 30, 2019 compared to 5.12% for the three months ended September 30, 2018. The increase of loan yields, as compared to the prior year period, was from pricing new loans at higher rates, and changes in the composition in the loan portfolio.  Contractual loan yields approximated 5.24% for the quarter ended September 30, 2019 compared to 5.02% for the quarter ended September 30, 2018.  We have continuedto focus on our loan growth initiatives,includingthe deepeningof relationshipswith existingcustomersand developingnewloan and depositrelationships.We focuson organicallygrowing loans through our existinglendersand by acquiring newlenders or teamsto assistto grow our loan portfolio.

The increasein interestexpense for the threemonthsended September 30, 2019 was primarilyrelatedto a 20 basis point increasein the cost of depositscombinedwith a $67.5 million,or 13.8%, increasein average interest bearingdeposits compared to the sameperiodin the prioryear. Also contributing to the increase in interest expense is an increase in the ratepaid on NOWand money marketaccounts,asinterest ratesincreased in response to continued pressure for higher rates in the market. The increasein averageinterest bearingdepositsfor the threemonthsended September 30, 2019, comparedto the sameperiodin 2018, was attributableto both rate increases and growth in nearly alldepositcategories.The averagebalanceof NOWand money marketaccountsgrew $56.2 million,or 16.6%.  The average balance of wholesale brokered deposits was $12.8 million for the three months ended September 30, 2019, which was a new deposit category at the end of 2018 and therefore there was no balance for the same period in 2018.  The averagebalanceof savingsaccountsgrew $3.1 million,or 6.3%, and the averagebalanceof timedepositsdeclined$4.6 million or 4.6% to $95.4 million, in an intentional effort to focus on more on core deposit growth. We do not regularlyadvertisetimedepositratesor money marketrates,althoughwe occasionallyadvertisepromotionalratesin targetedportionsof our marketarea.Our branch managers,business developmentofficers,and lenderscollaborateto provideconsistentand coordinatedcustomerserviceand to seek depositsfromnewand existingcustomers.

For the threemonthsended September 30, 2019, net interestmargin(annualizednet interestincomedividedby averagetotalinterest earningassets) and net interestspread(averageyieldon totalinterest earningassetsminusaveragecost of totalinterest bearingliabilities)were 4.29% and 3.81%, respectively,comparedto 4.13% and 3.79%, respectively, for the threemonthsended September 30, 2018.  

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The followingtablepresentsan analysisof net interestincome,net interestspreadand net interestmarginfor the periodsindicated.Loan feesincludedin interestincometotaled$255,000 and $193,000 for the threemonths ended September 30, 2019 and 2018, respectively.For the threemonthsended September 30, 2019 and 2018, the amount of interestincomenot recognizedon nonaccrualloans was not material.

	Average balance sheets
	For the Three Months Ended September 30,
	2019								2018
	Average			Interest &		Yield /			Average			Interest &		Yield /
(Dollars in thousands)	Balance			Dividends		Cost (4)			Balance			Dividends		Cost (4)
Assets
Interest earning assets:
Interest earning deposits	$	85,406		$	486		2.26	%	$	90,301		$	458		2.01	%
Investment securities, available for sale (1)		32,581			134		1.63			38,314			148		1.53
Investment securities, held to maturity (1)		4,393			34		3.07			1,299			8		2.44
Other investments		3,621			10		1.10			3,000			18		2.38
Loans receivable (2)		865,674			11,691		5.36			717,260			9,262		5.12
Total interest earning assets		991,675			12,355		4.94			850,174			9,894		4.62
Noninterest earning assets:
Allowance for loan losses		(10,548	)							(8,782	)
Other noninterest earning assets		50,842								37,000
Total assets	$	1,031,969							$	878,392
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	555,665		$	1,435		1.02	%	$	488,183		$	851		0.69	%
FHLB advances and other borrowings		539			3		2.21			964			6		2.47
Subordinated debt		9,973			148		5.89			9,959			148		5.90
Junior subordinated debentures		3,582			42		4.65			3,580			41		4.54
Total interest bearing liabilities		569,759			1,628		1.13			502,686			1,046		0.83
Noninterest bearing deposits		330,553								274,549
Other liabilities		12,756								3,650
Total shareholders' equity		118,901								97,507
Total liabilities and shareholders' equity	$	1,031,969							$	878,392
Net interest income				$	10,727							$	8,848
Interest rate spread							3.81	%							3.79	%
Net interest margin (3)							4.29	%							4.13	%

(1) For presentationin thistable,averagebalancesand the correspondingaverageratesfor investmentsecurities are based upon historicalcost, adjustedfor amortizationof premiumsand accretionof discounts.

(2) Includesnonaccrualloans.

(3) Net interestmarginrepresentsannualizednet interestincomedividedby averagetotalinterest earning assets.

(4) Yields and costsare annualized.

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The followingtablepresentsinformationregardingthe dollaramountof changes in interestincomeand interestexpense for the periodsindicatedfor each majorcomponentof interest earningassetsand interest bearingliabilitiesand distinguishesbetween the changes attributableto changes in volumeand changes attributableto changes in interestrates.For purposesof thistable,changes attributableto both rateand volume thatcannot be segregatedhave been allocatedto volume.

	Three Months Ended September 30, 2019
	Compared to
	Three Months Ended September 30, 2018
	Increase (Decrease)
	Due to						Total Increase
(Dollars in thousands)	Volume			Rate			(Decrease)
Interest income:
Interest earning deposits	$	(28	)	$	56		$	28
Investment securities, available for sale		(24	)		10			(14	)
Investment securities, held to maturity		24			2			26
Other Investments		2			(10	)		(8	)
Loans receivable		2,004			425			2,429
Total increase in interest income		1,978			483			2,461
Interest expense:
Interest bearing deposits		175			410			585
FHLB advances and other borrowings		(3	)		(1	)		(4	)
Subordinated debt		-			-			-
Junior subordinated debentures		-			1			1
Total increase in interest expense		172			410			582
Increase in net interest income	$	1,806		$	73		$	1,879

Provisionfor LoanLosses

The provisionfor loan lossesis an expense weincurto maintainan allowancefor loan lossesat a levelthatis deemedappropriateby managementto absorb inherentlosseson existingloans. For a descriptionof the factors taken into accountby our managementin determiningthe allowancefor loan lossessee “—Financial Condition—Allowance for Loan Losses.”

The provisionfor loan lossesfor the threemonthsended September 30, 2019 was $637,000, comparedto $508,000 for the three monthsended September 30, 2018. The allowancefor loan lossesas a percentageof loans was 1.25% at September 30, 2019, comparedto 1.22% at September 30, 2018. The provision for loan losses was increased due to loan growth.  Strong credit quality indicators including nonperforming assets to total assets which was 0.12% at September 30, 2019 compared to 0.27% at September 30, 2018 support our consistent asset quality throughout the period.

Net charge-offs for the threemonthsended September 30, 2019 totaled$192,000, or 0.09% (annualized) of total averageloans, as comparedto net recoveries of $63,000, or (0.03)% (annualized) of totalaverageloans, for the threemonthsended September 30, 2018. Net charge-offs for the current periodremain low and reflect the strong creditqualityof our loan portfolio and a healthyeconomicenvironment in our marketarea.

NoninterestIncome

Our primarysourcesof recurringnoninterestincomeare depositaccountservicecharges, wholesale banking service fees, income from the sale of loans, loan referral fees and mortgagebrokerfees.Noninterestincomedoes not includeloan originationfees to the extentthey exceed the directloan originationcosts,which are generallyrecognizedover the lifeof the relatedloan as an adjustmentto yieldusing the interestmethod.

For the threemonthsended September 30, 2019, noninterestincometotaled$2.1 million,an increaseof $542,000, or 35.1%, comparedto $1.5 million for the threemonthsended September 30, 2018.

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The following table presents, for the periods indicated, the major categories of noninterest income:

	Three Months
	Ended September30,				Increase			Percent
(Dollars in thousands)	2019		2018		(Decrease)			Change
Deposit service charges and fees	$	795	$	800	$	(5	)		(0.6	)%
Wholesale banking service fees		456		328		128			39.0
Gain on sales of loans, net		369		-		369		n/a
Gain on sale of securities, net		171		-		171		n/a
Mortgage broker fees		140		52		88			169.2
Sublease and lease income		16		10		6			60.0
Loan referral fees		-		209		(209	)		(100.0	)
Other		141		147		(6	)		(4.1	)
Total noninterest income	$	2,088	$	1,546	$	542			35.1	%

Deposit ServiceCharges and Fees. Deposit fees,which are feesfor customer related services,constitutethe largestcomponentof our noninterestincome. Servicechargeson depositaccountswere$795,000 for the threemonthsended September 30, 2019, a decreaseof $5,000, or 0.6%, over the sameperiodin the prioryear. The decreasein depositaccountservicecharges was primarilythe resultof less overdraft fee income as well as a change in accounting for point-of-sale fees which reduced income by $57,000 for the three months ended September 30, 2019.

Wholesale Banking Service Fees. We provide banking services to wholesale banking service clients that provide financial services to their customers. In exchange for providing these services, we earn fixed and variable fees and reimbursement of certain costs incurred for providing these services.  This line of business was launched mid-year in 2018 and wholesale banking service fee income for the three months ended September 30, 2019 was $456,000 compared to $328,000 for the three months ended September 30, 2018.    

Gain on Sale of Loans. We typicallysellin the secondarymarketthe guaranteedportion(generally75% of the principalbalance)of the Small Business Administration (SBA)and United States Department of Agriculture (USDA)loans thatweoriginate. Gain on sale of loans for the three months ended September 30, 2019 was $369,000 as compared to no recognized gain in the sameperiodin 2018.  We continue to rebuild our government guaranteed loan pipeline as we focus on higher quality loans in what we believe is the latter half of the credit cycle.

Gain on Sale of Securities. In the third quarter 2019 we restructured our investment portfolio to improve the rate of return, interest rate and pricing risk on the portfolio.  As a result of this restructuring we were able to recognize $171,000 in net gains on the securities sold during the three months ended September 30, 2019 while decreasing the overall weighted average maturity of the investment portfolio.  

MortgageBroker Fees. We earn mortgagebrokerfeesfor residentialmortgageloans thatwebrokerthrough mortgage lenders. Mortgagebrokerfeesincreased$88,000 in the threemonthsended September 30, 2019, comparedto the sameperiodin 2018 as a resultof increased demand from lower interest rates on mortgages.

LoanReferralFees. We earn loan referralfeeswhenweoriginatea variablerateloan and the borrowerenters into an interestrateswap agreementwith a thirdpartyto fix the interestratefor an extendedperiod,usually20 or 25 years.We recognizethe loan referralfee for arrangingthe interestrateswap. Byfacilitatinginterestrate swaps to our clients,weare able to providethemwith a long-term,fixedinterestratewithout assumingthe interestraterisk. We had no income from loan referralfeesfor the threemonthsended September 30, 2019, comparedto $209,000in the sameperiodin the prioryear. Interestratevolatility,swap rates,and the timingof loan closings allimpactthe demand for long-termfixedrateswaps. The recognitionof loan referralfeesfluctuatesin response to thesemarketconditionsand as a resultwemay not recognizeany loan referralfeesin some periods.

Other. This categoryincludesa varietyof otherincome-producingactivities,annuitybrokerfees,and SBA servicingfees.Other noninterestincomedecreased $6,000 in the threemonthsended September 30, 2019, compared to the sameperiodin 2018 primarily as a result of lower annuity broker fees.

NoninterestExpense

Generally,noninterestexpense is composedof allemployeeexpensesand costsassociatedwith operatingour facilities,obtainingand retainingcustomerrelationshipsand providingbank services.The largestcomponentof noninterestexpense is salariesand employee

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benefits.Noninterestexpense also includesoperationalexpenses, such as occupancy expense, data processingexpense, directorand staffexpense, marketingexpense, and legal and professionalfees.

For the threemonthsended September 30, 2019, noninterestexpense totaled$7.7 million,an increaseof $1.1 million, or 17.2%, comparedto $6.6 millionfor the threemonthsended September 30, 2018.

The followingtablepresents,for the periodsindicated,the majorcategoriesof noninterestexpense:

	Three Months
	Ended September 30,					Increase			Percent
(Dollars in thousands)	2019			2018		(Decrease)			Change
Salaries and employee benefits	$	4,971		$	4,027	$	944			23.4	%
Occupancy		884			798		86			10.8
Data processing		509			501		8			1.6
Director and staff expenses		241			213		28			13.1
Excise taxes		184			146		38			26.0
Legal and professional fees		170			142		28			19.7
Business development		122			81		41			50.6
Marketing		98			110		(12	)		(10.9	)
FDIC assessments		(4	)		83		(87	)		(104.8	)
Other		573			509		64			12.6
Total noninterest expense	$	7,748		$	6,610	$	1,138			17.2	%

Salariesand Employee Benefits.Salariesand employeebenefitsare the largestcomponentof noninterest expense and includepayrollexpense, incentivecompensationcosts,benefitplans, healthinsuranceand payroll taxes.Salariesand employeebenefitswere $5.0 millionfor the threemonthsended September 30, 2019, an increase of $944,000, or 23.4%, comparedto $4.0 millionfor the threemonthsended September 30, 2018. The increasewas due to hiringstafffor our Edmonds branch (which opened late in 2018), hiring new lenders and lending teams, new back office staff to support growth and to become a public company, and staff for our wholesale banking activities.  As our wholesale banking activities grow, we expect to continue to add employees to support this line of business.  New hires are primarily in support of our growth initiatives and deploying capital.  Asof September 30, 2019, wehad 192 full-timeequivalentemployees,comparedto 176 at September 30, 2018, an 9.1% increase.

Occupancy Expenses. Occupancy expenseswere $884,000 for the threemonthsended September 30, 2019, comparedto $798,000 for the threemonthsended September 30, 2018. This categoryincludesbuilding,leasehold,furniture,fixturesand equipmentdepreciationtotaling$301,000 and$269,000 for the threemonthsended September 30, 2019 and 2018, respectively.The increaseof 10.8% in occupancy expensesfor the threemonthsended September 30, 2019, comparedto the sameperiodin the prioryear, was largelydue to opening our Edmonds location late October 2018, increased lease expense and depreciation costs.

Data Processing.Data processingcostswere $509,000 for the threemonthsended September 30, 2019, compared to $501,000 for the threemonthsended September 30, 2018. Data processing costsincludeallof our customertransaction processing and data storage,computerprocessing,and network costs.  Data processing costs grow as we add new products, customers and branches.  A change in accounting to net direct expenses related to point-of-sale transactions, which reduced expenses by $57,000 in the current period, has resulted in only slightly higher expense for this category for the three months ended September 30, 2019 compared to the same period last year.

Director and Staff Expenses. Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses.   Director and staff expenses were $241,000 for the three months ended September 30, 2019 compared to $213,000 for the three months ended September 30, 2018, an increase of $28,000 or 13.1%.  A change in the structure of director compensation as a result of increased responsibilities of becoming a publicly traded company contributed to the increase in the quarter ended September 30, 2019 compared to quarter ended September 30, 2018.  

Legal and Professional Fees. Legal and professional costs were $170,000 for the quarter ended September 30, 2019 compared to $142,000 for the quarter ended September 30, 2018.  The increase over the prior year is largely the result of additional legal and consulting fees that we incurred from negotiating wholesale services banking agreements and increased legal and accounting expenses associated with being a public company.

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Business Development. Business development costs were $122,000 for the three months ended September 30, 2019 compared to $81,000 for the three months ended September 30, 2018.  Business development costs include sponsorships and other activities to cultivate business and community development.  

Other. This category includes dues and subscriptions, office supplies, mail services, telephone, examination fees, internal loan expenses, services charges from banks, operational losses, directors and officer’s insurance, donations, provision for unfunded commitments, and miscellaneous other expenses.Other noninterest expense was $573,000 for the three months ended September 30, 2019, compared to$509,000 for the three months ended September 30, 2018. The increase was largely due to overall growth for the three months ended September 30, 2019 as compared to the same period last year.

Income TaxExpense

The amountof incometax expense weincuris impactedby the amountsof our pre-taxincome,tax-exempt incomeand othernondeductibleexpenses.Deferredtax assetsand liabilitiesare reflectedat currentincometax ratesin effectfor the periodin which the deferredtax assetsand liabilitiesare expectedto be realizedor settled. Aschanges in tax laws or ratesare enacted,deferredtax assetsand liabilitiesare adjustedthrough the provision for incometaxes.Valuationallowancesare establishedwhennecessaryto reduceour deferredtax assetsto the amountexpectedto be realized. For the three monthsended September 30, 2019, incometax expense totaled$919,000, comparedto $674,000 for the threemonths ended September 30, 2018. Our effectivetax ratesfor the threemonthsended September 30, 2019 and 2018, were 20.7% and 20.6%, respectively.

Comparison of Operating Results for the Nine Months Ended September 30, 2019 and September 30, 2018

Net Income

Net incomefor the nine monthsended September 30, 2019, was $9.6 million,or $0.79 per dilutedshare,comparedto $6.6 million,or $0.66 per dilutedshare,for the nine monthsended September 30, 2018. The increasein net incomeover the comparableperiodin the prioryear was attributableto a $5.8 million increasein net interestincome,primarily arisingfromincreasedinterest-earningassetsfromour loan growth initiatives,as well as $1.0 million in increased wholesale banking fees under a program that was launched mid-year 2018, and $653,000 in increased feesand revenuefromloan referralfees. These positive factorswere offsetby a $4.0 million increasein noninterestexpense.  The most significant increase in noninterest expense are salaries and employee benefits, which was $2.4 million more for the nine months ended September 30, 2019 compared to the same period last year.

Net InterestIncome

Net interestincome for the nine monthsended September 30, 2019, was $30.7 millioncomparedto $24.9 millionfor the nine months ended September 30, 2018, an increaseof $5.8 million, or 23.1%. The increasein net interestincomeconsistedof a $7.8 million,or 28.2%, increasein interestincomeoffsetby a $2.1 million, or 73.8%, increasein interestexpense.

The growth in interestincomewas primarilyattributableto a $133.4 million,or 19.4%, increasein averageloans outstandingfor the nine monthsended September 30, 2019, comparedto the prioryear period, combinedwith a 28 basis point increasein the yieldon totalloans.

The increasein interestexpense for the nine monthsended September 30, 2019 was primarilyrelatedto a 40 basis point increasein the cost of interest-bearingdepositscombinedwith a $86.9 million,or 18.4%, increasein average interest-bearingdepositsover the sameperiodin the prioryear. Cost of deposits were 26 basis points higher for the nine months ended September 30, 2019 compared to the nine months ended September 30, 2018.  The increasein the cost of depositswas due in part to the temporary increase in wholesale-brokered deposits that were on the balance sheet earlier in the year, coupled with an increasein the ratepaid on NOWand money marketaccountsand on timedeposits,as marketinterest ratesincreasedover the prioryear period. The increasein averageinterest-bearingdepositsfor the nine monthsended September 30, 2019, comparedto the sameperiodin 2018 is attributableto growth in alldepositcategories.The averagebalanceof NOWand money marketaccountsgrew $43.9 million,or 13.3%, the averagebalanceof savingsaccountsgrew $4.9 million,or 10.3%, the averagebalanceof timedepositsgrew$2.5 million,or 2.7%, and wholesale-brokered deposits averaged $35.5 million with the addition of wholesale banking services.

For the nine monthsended September 30, 2019, net interestmargin(annualizednet interestincomedividedby averagetotalinterest-earningassets) and net interestspread(averageyieldon totalinterest-earningassetsminusaveragecost of totalinterest-bearingliabilities)were 4.22% and 3.76%, respectively,comparedto 4.17% and 3.87%, respectively for the nine monthsended September 30, 2018.

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The followingtablepresentsan analysisof net interestincome,net interestspreadand net interestmarginfor the periodsindicated.Loan feesincludedin interestincometotaled$921,000 and $825,000 for the nine months ended September 30, 2019 and 2018, respectively.For the nine monthsended September 30, 2019 and 2018, the amount of interestincomenot recognizedon nonaccrualloans was not material.

	Average balance sheets
	For the Nine Months Ended September 30,
	2019								2018
	Average			Interest &		Yield /			Average			Interest &		Yield /
(Dollars in thousands)	Balance			Dividends		Cost (4)			Balance			Dividends		Cost (4)
Assets
Interest earning assets:
Interest earning deposits	$	108,230		$	1,946		2.40	%	$	69,818		$	949		1.82	%
Investment securities, available for sale (1)		36,367			425		1.56			38,327			439		1.53
Investment securities, held to maturity (1)		2,516			56		2.98			1,330			24		2.41
Other Investments		3,479			99		3.80			3,038			91		4.00
Loans receivable (2)		820,560			33,027		5.38			687,165			26,229		5.10
Total interest earning assets		971,152			35,553		4.89			799,678			27,732		4.64
Noninterest earning assets:
Allowance for loan losses		(10,068	)							(8,478	)
Other noninterest earning assets		49,536								36,960
Total assets	$	1,010,620							$	828,160
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	559,119		$	4,291		1.03	%	$	472,266		$	2,209		0.63	%
FHLB advances and other borrowings		794			14		2.36			2,577			39		2.02
Subordinated debt		9,970			439		5.89			9,955			439		5.90
Junior subordinated debentures		3,582			129		4.81			3,580			116		4.33
Total interest bearing liabilities		573,465			4,873		1.14			488,378			2,803		0.77
Noninterest bearing deposits		309,270								258,586
Other liabilities		12,971								3,038
Total shareholders' equity		114,914								78,158
Total liabilities and shareholders' equity	$	1,010,620							$	828,160
Net interest income				$	30,680							$	24,929
Interest rate spread							3.76	%							3.87	%
Net interest margin (3)							4.22	%							4.17	%

(1) For presentationin thistable,averagebalancesand the correspondingaverageratesfor investmentsecurities are based upon historicalcost, adjustedfor amortizationof premiumsand accretionof discounts.

(2) Includesnonaccrualloans.

(3) Net interestmarginrepresentsannualizednet interestincomedividedby averagetotalinterest-earning assets.

(4) Yields and ratesare annualized.

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The followingtablepresentsinformationregardingthe dollaramountof changes in interestincomeand interestexpense for the periodsindicatedfor each majorcomponentof interest-earningassetsand interest- bearingliabilitiesand distinguishesbetween the changes attributableto changes in volumeand changes attributableto changes in interestrates.For purposesof thistable,changes attributableto both rateand volume thatcannot be segregatedhave been allocatedto volume.

	Nine Months Ended September 30, 2019
	Compared to
	Nine Months Ended September 30, 2018
	Increase (Decrease)
	Due to						Total Increase
(Dollars in thousands)	Volume			Rate			(Decrease)
Interest income:
Interest earning deposits	$	691		$	306		$	997
Investment securities, available for sale		(23	)		9			(14	)
Investment securities, held to maturity		26			6			32
Other Investments		13			(5	)		8
Loans receivable		5,369			1,429			6,798
Total increase in interest income		6,076			1,745			7,821
Interest expense:
Interest bearing deposits		666			1,415			2,081
FHLB advances		(31	)		6			(25	)
Subordinated debt		1			(1	)		-
Junior subordinated debentures		-			14			14
Total increase in interest expense		636			1,434			2,070
Increase in net interest income	$	5,440		$	311		$	5,751

Provisionfor LoanLosses

The provisionfor loan lossesfor the nine monthsended September 30, 2019, was $1.7 million, comparedto $1.4 million for the nine monthsended September 30, 2018. The increaseof $323,000 was primarilydue to loan growth. The allowancefor loan lossesas a percentageof loans was 1.25% at September 30, 2019, comparedto 1.22% at September 30, 2018. While the increased provision was needed for loan growth, strong credit quality contributed to lower charge-offs and decreased nonperforming assets which lead to an increase in the allowance for loan losses to total loans receivable ratio as well.  

Net charge-offsfor the nine monthsended September 30, 2019 totaled $243,000 or 0.04% (annualized) of total average loans, as compared to $307,000, or 0.06% (annualized)of total averageloans, for the nine monthsended September 30, 2018. Net charge-offsfor both periodswere low, and demonstratethe strong creditqualityof our loan portfolioand a healthyeconomicenvironmentin our marketarea.

NoninterestIncome

For the nine monthsended September 30, 2019, noninterestincometotaled$6.2 million,an increaseof $2.3 million, or 60.5%, comparedto $3.9 million for the nine monthsended September 30, 2018.

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The following table presents, for the periods indicated, the major categories of noninterest income:

	Nine Months
	Ended September 30,				Increase			Percent
(Dollars in thousands)	2018		2018		(Decrease)			Change
Deposit service charges and fees	$	2,302	$	2,258	$	44			1.9	%
Wholesale banking service fees		1,404		370		1,034			279.5
Loan referral fees		1,106		453		653			144.2
Gain on sales of loans, net		490		142		348			245.1
Mortgage broker fees		336		158		178			112.7
Gain on sales of securities, net		171		-		171		n/a
Sublease and lease income		36		71		(35	)		(49.3	)
Other		359		414		(55	)		(13.3	)
Total noninterest income	$	6,204	$	3,866	$	2,338			60.5	%

Deposit ServiceCharges and Fees. Servicechargeson depositaccountswere$2.3 million for the nine monthsended September 30, 2019, an increaseof $44,000, or 1.9%, over the sameperiodin the prioryear. Despite increases in most accounts within this category, income remained fairly flat for the nine months ended September 30, 2019 as compared to September 30, 2018 in part due to a change in the accounting for certain point-of-sale fees which reduced fee income by $146,000 for that product in the current period.  

Wholesale Banking Service Fees. We provide banking services to wholesale banking service clients that provide financial services to their customers. In exchange for providing these services, we earn fixed and variable fees and reimbursement of certain costs incurred for providing these services.  This line of business was launched mid-year in 2018, therefore income for the nine months ended September 30, 2018 was $370,000 compared to $1.4 million for the nine months ended September 30, 2019.  

LoanReferralFees. Loan referralfeeswere $1.1 million for the nine monthsended September 30, 2019, comparedto $453,000 for the sameperiodin the prioryear. The recognitionof loan referralfeesfluctuatesin response tomarketconditions resulting in periods of higher and lower fees, and wemay not recognizeany loan referralfeesin some periods.

Gain on Sale of Loans. We typicallysellin the secondarymarketthe guaranteedportion(generally75% of the principalbalance)of the Small Business Administration (SBA)and United States Department of Agriculture (USDA)loans thatweoriginate.Gain on sale of loans increased$348,000 to $490,000 in the nine monthsended September 30, 2019, comparedto the sameperiodin 2018.  We are in the process of rebuilding our SBA pipeline on continue to focus on higher quality loans in what we believe is the latter half of the credit cycle.

MortgageBroker Fees. Mortgagebrokerfeesincreased$178,000 in the nine monthsended September 30, 2019, comparedto the sameperiodin 2018 as a resultof higher demand and lower mortgageinterestratesin our key markets,which increasedthe demand for new and refinanced mortgages.

Gain on Sale of Securities, net. In the third quarter 2019 we restructured our investment portfolio to improve the rate of return and reduce the weighted average maturity, interest rate risk and price risk on the portfolio.  As a result of this restructuring we were able to recognize $171,000 in net gains on the securities sold during the nine months ended September 30, 2019.  

Other. Other noninterestincomedecreased$55,000 in the nine monthsended September 30, 2019, compared to the sameperiodin 2018. The most significant variances were lower SBA servicing fees and lower annuity fees for the nine months ended September 30, 2019, as compared to the same period last year.

NoninterestExpense

For the nine monthsended September 30, 2019, noninterestexpense totaled$23.1 million,an increaseof $4.1 million, or 21.1%, comparedto $19.0 millionfor the nine monthsended September 30, 2018.

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The followingtablepresents,for the periodsindicated,the majorcategoriesof noninterestexpense:

	Nine Months
	Ended September 30,				Increase			Percent
(Dollars in thousands)	2019		2018		(Decrease)			Change
Salaries and employee benefits	$	14,058	$	11,672	$	2,386			20.4	%
Occupancy		2,808		2,425		383			15.8
Data processing		1,537		1,472		65			4.4
Legal and professional fees		872		352		520			147.7
Director and staff expenses		698		493		205			41.6
Excise taxes		529		404		125			30.9
Business development		320		241		79			32.8
Marketing		300		253		47			18.6
FDIC assessments		205		247		(42	)		(17.0	)
Other		1,726		1,472		254			17.3
Total noninterest expense	$	23,053	$	19,031	$	4,022			21.1	%

Salariesand Employee Benefits.Salariesand employeebenefitswere $14.1 millionfor the nine monthsended September 30, 2019, an increase of $2.4 million, or 20.4%, comparedto $11.7 millionfor the nine monthsended September 30, 2018. As noted previously, the increasewas primarilydue to hiringadditionalstafffor our Edmondsbranch, which opened in October 2018, and hiring additional staff for our ongoing growth initiatives, doing business as a public company and staffing for our wholesale banking services team. Asof September 30, 2019, wehad 192 full-time equivalent employees, compared to 176 at September 30, 2018, an 9.1% increase.

Occupancy Expenses. Occupancy expenseswere $2.8 million for the nine monthsended September 30, 2019, comparedto $2.4 million for the nine monthsended September 30, 2018. This categoryincludes depreciation on building,leasehold,furniture,fixturesand equipmenttotaling $907,000 and $786,000 for the nine monthsended September 30, 2019 and 2018, respectively.The increaseof 15.8% in occupancy expensesfor the nine monthsended September 30, 2019, comparedto the sameperiodin the prioryear, was primarilydue to the addition of our Edmondsbranch in October 2018 and includes increases in rent expense, depreciation, property taxes and utilities as well as higher maintenance and repair costs overall.

Data Processing.Data processingcostswere $1.5 million for the nine monthsended September 30, 2019, and September 30, 2018. Data processing costsincludeallof our customer transaction processing and data storage,computerprocessing,and network costs.  In general, data processing costs increase as the Company grows.  The increase for the nine months ended September 30, 2019 as compared to the nine months ended September 30, 2018 was offset due to a change in accounting related to certain point-of-sale transactions that reduced expenses by $146,000 for that account in the current period.

Legal and Professional Fees. Legal and professional costs were $872,000 for the nine months ended September 30, 2019 compared to $352,000 for the nine months ended September 30, 2018.  The increase over the prior year is largely the result of additional legal and consulting fees from negotiating wholesale services banking agreements and increased legal and accounting expenses associated with being a public company.

Director and Staff Expenses. Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses.   Director and staff expenses were $698,000 for the nine months ended September 30, 2019 compared to $493,000 for the nine months ended September 30, 2018, an increase of $205,000 or 41.6%.  A change in the structure of director compensation as a result of increased responsibilities of becoming a publicly traded company contributed to the increase year over year.  

Other. Other noninterestexpenses were $1.7 million for the nine monthsended September 30, 2019, comparedto$1.5 million for the nine monthsended September 30, 2018. The increasewas primarilydue to an increase in the unfunded commitment provision combined with standard increases in many categories.  

Income TaxExpense

For the nine monthsended September 30, 2019, incometax expense totaled$2.5 million, comparedto $1.7 million for the nine months ended September 30, 2018. Our effectivetax ratesfor the nine monthsended September 30, 2019 and 2018, were 20.8% and 20.5%, respectively.

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Financial Condition

The Company’s total assets increased $138.0 million, or 14.5%, to $1.1 billion at September 30, 2019 from $952.1 million at December 31, 2018.  The increase is primarily the result of $106.2 million in loan growth during the nine months ended September 30, 2019.  Additionally, the Company implemented the new lease accounting standard, which brought operating leases onto the balance sheet on January 1, 2019, and increased assets by $8.7 million as of September 30, 2019.  Also contributing to the increase is $27.6 million more in cash and cash equivalents for the nine months ended September 30, 2019, compared to December 31, 2018 resulting from an increase in total deposits.

LoanPortfolio

Our primarysourceof incomeis derivedthrough interestearnedon loans. Asubstantialportionof our loan portfolioconsistsof commercialand industrialloans and realestateloans securedby commercialrealestate propertieslocatedin the Puget Soundregion.Our loan portfoliorepresentsthe highestyieldingcomponentof our earningassets.

Asof September 30, 2019, loans totaled$874.1 million,an increaseof $106.2 million,or 13.8%, comparedto December 31, 2018. The increasewas primarilydue to our efforts to increaseincomeby buildinga diversifiedloan portfoliowhile maintainingstrongcreditquality.

Loans as a percentageof depositswere 94.8% as of September 30, 2019, compared to 95.6% as of December 31, 2018.  We are focusedon servingour communitiesand marketsby growing loans and funding those loans with customerdeposits.

The followingtablesummarizesour loan portfolioby type of loan as of the datesindicated:

	As of September 30, 2019						As of December 31, 2018
(Dollars in thousands)	Amount			Percent			Amount			Percent
Commercial and industrial loans	$	105,634			12.1	%	$	90,390			11.8	%
Real estate:
Construction, land and land development		86,919			9.9			64,045			8.3
Residential real estate		100,818			11.5			94,745			12.3
Commercial real estate		578,607			66.1			515,959			67.1
Consumer and other loans		3,720			0.4			3,584			0.5
Gross loans receivable		875,698			100.0	%		768,723			100.0	%
Net deferred origination fees		(1,586	)					(824	)
Loans receivable	$	874,112					$	767,899

Commercial and IndustrialLoans.Commercialand industrialloans increased$15.2 million,or 16.9%, to $105.6 millionas of September 30, 2019, from $90.4 millionas of December 31, 2018.

Construction,Landand LandDevelopment Loans.Construction,land and land developmentloans increased$22.9 million,or 35.7%, to $86.9 millionas of September 30, 2019, from$64.0 millionas of December 31, 2018. We continue to have favorable economicconditionsfor buildingin our marketarea.We have a number of construction loans that have been approved, primarily for commercial projects, where the contractor/developer has not requested the funds, resulting in our unfunded construction and development commitments increasing to $70.2 millionat September 30, 2019, from$63.4 millionat December 31, 2018. Because of the strong commercial and residentialrealestatemarketin the Puget Soundregion,weexpect to see constructionand developmentloans continueto pay off morequicklythan wehave experienced historically even though the balances have continued to grow.

ResidentialReal EstateLoans.Our residentialloans increased $6.1 million, or 6.4%, from $94.7 millionat December 31, 2018. A fairly significant portion of our residential real estate loans are purchased and totaled $28.7 million as of September 30, 2019.  Most of the one-to-fourfamilyloans thatwepurchased are fromotherlendersin the Puget Soundregionor in California.  We also make one-to-fourfamilyloans to investors to financetheirrentalpropertiesand to businessowners to securetheirbusinessloans. Asof September 30, 2019, residentialrealestateloans made to investorsand businessowners totaled$44.3 million.In addition,we originatehome equitylinesof creditand home equitytermloans for our portfolio.

Commercial Real EstateLoans.Commercialrealestateloans increased$62.6 million,or 12.1%, to $578.6 millionas of September 30, 2019, from $516.0 millionas of December 31, 2018. The increaseoccurredbecause we activelyseek commercialrealestateloans in our marketsand our lendersare experiencedin competingfor theseloans.  Our credit administration team has substantial experience in underwriting, managing and monitoring commercial real estate loans.  We funded $215.9 million of new commercial

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real estate loans over the nine months ended September 30, 2019.  There was $7.0 million in purchased loan participations during the nine months ended September 30, 2019.  We occasionally purchase participations from other community banks we know under terms and credit conditions acceptable to us.  All participations are individually underwritten to our credit standards and are from our market or the other community bank’s market.

Consumerand Other Loans.Consumer and otherloans totaled $3.7 million as of September 30, 2019, increasing $136,000 from December 31, 2018. We continue to see strongconsumer confidenceand economicstrengthin the Puget Soundregion.

Nonperforming Assets

Loans are consideredpast due if the requiredprincipaland interestpaymentshave not been receivedas of the date such paymentswere due. Loans are placedon nonaccrualstatuswhen,in management’sopinion, the borrowermay be unable to meetpaymentobligationsas they becomedue, as well as whenrequiredby applicable regulations.Loans may be placedon nonaccrualstatusregardlessof whether or not such loans are considered past due. In general,weplaceloans on nonaccrualstatuswhenthey become90 days past due. We also place loans on nonaccrualstatusif they are lessthan 90 days past due if the collectionof principalor interestis in doubt. When loans are placedon nonaccrualstatus,allunpaid accruedinterestis reversedfromincomeand all interestaccrualsare stopped. Interestincomeis subsequentlyrecognizedonly to the extentcash paymentsare receivedin excessof principalbalance.Loans are returnedto accrualstatusif webelievethatallremaining principaland interestis fullycollectibleand therehas been at leastsix monthsof sustainedrepayment performancesincethe loan was placedon nonaccrualstatus.  We define nonperforming loans as loans on nonaccrual status and accruing loans 90 days or more past due.  Also included in nonperforming assets is other real estate owned and repossessed assets.  

We believeour lendingpracticesand activeapproachto managingnonperformingassetshas resultedin sound assetqualityand timelyresolutionof problemassets.We haveproceduresin placeto assistus in maintainingthe overallcreditqualityof our loan portfolio.We have establishedunderwriting guidelines, concentration limitsand wealso monitorour delinquencylevelsfor any negativeor adversetrends.We activelymanage problemassetsto reduceour riskfor loss.

We had $1.3 millionin nonperformingassets,as of September 30, 2019, comparedto $1.8 millionas of December 31, 2018. There were no loans more than 90 days past due and still accruing interest as of September 30, 2019 and December 31, 2018.  

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The followingtablepresentsinformationregardingnonperformingassetsat the datesindicated:

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

Allowance for LoanLosses

We maintainan allowancefor loan lossesthatrepresentsmanagement’sbest estimateof the loan lossesand risksinherentin our loan portfolio.The amountof the allowancefor loan lossesshould not be interpretedas an indicationthatcharge-offsin futureperiodswill necessarilyoccur in those amounts.In determiningthe allowancefor loan losses,weestimatelosseson specificloans, or groups of loans, where the probableloss can be identifiedand reasonablydetermined.The balanceof the allowancefor loan lossesis based on internally assignedriskclassificationsof loans, historicalloan loss rates,changes in the natureof our loan portfolio,overall portfolioquality,industryconcentrations,delinquencytrends,and currenteconomicfactors.

In connectionwith the review of our loan portfolio,weconsiderriskelementsapplicableto particularloan types or categoriesin assessingthe qualityof individualloans. Some of the riskelementsweconsiderinclude:

• for commercialand industrialloans, the debt servicecoverageratio(incomefromthe businessin excessof operatingexpensescomparedto loan repaymentrequirements),the operatingresultsof the commercial, professionalor agriculturalenterprise,the borrower’sbusiness,professionaland financialabilityand expertise,the specificrisksand volatilityof incomeand operatingresultstypicalfor businessesin that categoryand the value, natureand marketabilityof collateral;

• for commercialrealestateloans, the debt servicecoverageratio,operatingresultsof the owner in the case of owner-occupiedproperties,the loan-to-valueratio,the age and conditionof the collateraland the volatility of income,propertyvalue and futureoperatingresultstypicalof propertiesof thattype;

• for residentialmortgageloans, the borrower’sabilityto repay the loan, includinga considerationof the debt-to-incomeratioand employmentand incomestability,the loan-to-valueratio,and the age, condition and marketabilityof the collateral;and

• for construction,land and land developmentloans, the perceivedfeasibilityof the projectincludingthe abilityto selldevelopedlotsor improvementsconstructedfor resaleor the abilityto leaseproperty constructedfor lease,the qualityand natureof contractsfor presaleor prelease,if any, experienceand abilityof the developerand loan-to-valueratio.

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Asof September 30, 2019, the allowancefor loan lossestotaled$10.9 million,or 1.25% of totalloans. Our allowancefor loan lossesas of September 30, 2019, increasedby $1.5 million, or 15.7%, comparedto December 31, 2018, primarilydue to growth in our loan portfolio.Asof December 31, 2018, the allowancefor loan losses totaled$9.4 million,or 1.23% of totalloans.

The followingtablepresents,as of and for the periodsindicated,an analysisof the allowancefor loan losses and otherrelateddata:

	As of or for the Three						As of or for the Nine
	Months Ended						Months Ended
	September 30,						September 30,
(Dollars in thousands)	2019			2018			2019			2018
Allowance at beginning of period	$	10,443		$	8,540		$	9,407		$	8,017
Provision for loan losses		637			508			1,724			1,401
Charge-offs:
Commercial and industrial loans		118			-			125			281
Real estate:
Construction, land and land development		-			-			-			-
Residential		75			-			75			-
Commercial real estate		-			-			29			84
Consumer and other		3			6			23			20
Total charge-offs	$	196		$	6		$	252		$	385
Recoveries:
Commercial and industrial loans	$	2		$	1		$	4		$	3
Real estate:
Construction, land and land development		-			-			-			-
Residential		-			65			-			65
Commercial real estate		-			-			-			-
Consumer and other		2			3			5			10
Total recoveries	$	4		$	69		$	9		$	78
Net charge-offs (recoveries)		192			(63	)		243			307
Allowance at end of period	$	10,888		$	9,111		$	10,888		$	9,111
Allowance to nonperforming loans		837.54	%		361.40	%		837.54	%		361.40	%
Allowance to loans receivable		1.25	%		1.22	%		1.25	%		1.22	%
Net charge-offs (recoveries) to average loans (1)		0.09	%		(0.03	)%		0.04	%		0.06	%

(1)Ratios for the three and ninemonthsended September 30, 2019 and 2018, are annualized.

Although webelievethatwehave establishedour allowancefor loan lossesin accordancewith GAAPand that the allowancefor loan losseswas adequateto providefor knownand inherentlossesin the portfolioat alltimes shownabove, futureprovisionsfor loan losseswill be subjectto ongoing evaluationsof the risksin our loan portfolio.If the Puget Soundregionexperiencesan economicdownturn, our assetqualitycould deteriorateor if weare successfulin continuingto grow our loan portfolio,our allowancemay becomeinadequateand material additionalprovisionsfor loan lossescould be necessary.

Investment Securities

We use our securitiesportfolioprimarilyas a sourceof liquidityand collateralthatcan be readilysold or pledged for publicdepositsor otherbusinesspurposes.At September 30, 2019, 76.2% of our investmentportfolio consistedof U.S.Treasurysecurities.The remainderof our securitiesportfoliowas investedin U.S.Governmentagency securities,agency collateralizedmortgageobligationsand mortgage-backedsecurities,and municipal bonds. Because wetargeta loan-to-depositratioin the range of 90% to 100%, weprioritizeliquidityover the earningsof our securitiesportfolio.At September 30, 2019, our loan-to-depositratiowas 94.8%.   Our securities portfoliorepresentedlessthan 5% of assets.Tothe extentour securitiesrepresentmorethan 5% of assets,absent an immediateneed for liquidity,weanticipateinvestingexcessfunds to providea higherreturn.

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Asof September 30, 2019, the carryingamountof our investmentsecuritiestotaled$32.7million,a decreaseof$5.2 million,or 13.8%, comparedto $37.9 millionas of December 31, 2018. The decreasein the securities portfoliowas due tothe restructuring of the investment portfolio to increase our overall rate of return, reduce weighted average maturity, and improve interest rate risk and pricing risk, which involved the sale of $30.0 million (par value) of existing available for sale securities and the purchase of $20.0 million (par value) of available for sale securities as well as an additional $10.0 million of one year certificates of deposits.  Also contributing to the decrease was pay-downs on mortgage-backed securities.  Additionally, we purchased$3.2 million of a community reinvestment act qualified mortgage-backed security and the fair value of available for sale securities improved during the nine months ended September 30, 2019.

Our investmentportfolioconsistsof securitiesclassifiedas availablefor saleand, to a lesseramount,held to maturity.The carryingvaluesof our investmentsecuritiesclassifiedas availablefor saleare adjustedfor unrealizedgain or loss, and any gain or loss is reportedon an after-taxbasisas a componentof other comprehensiveincomein shareholders’equity.

The followingtablesummarizesthe amortizedcost and estimatedfairvalue of our investmentsecuritiesas of the datesshown:

	As of				As of
	September 30, 2019				December 31, 2018
	Amortized		Fair		Amortized		Fair
(Dollars in thousands)	Cost		Value		Cost		Value
Securities available-for-sale:
U.S. Treasury securities	$	24,967	$	24,899	$	34,831	$	33,241
U.S. Government securities		3,000		2,992		3,000		2,957
U.S. Agency collateralized mortgage obligations		138		138		172		169
U.S. Agency residential mortgage-backed    securities		30		30		39		38
Municipal bonds		257		260		259		255
Total available-for-sale securities		28,392		28,319		38,301		36,660
Securities held-to-maturity:
U.S. Agency residential mortgage-backed    securities		4,377		4,342		1,262		1,205
Total held-to-maturity securities		4,377		4,342		1,262		1,205
Total investment securities	$	32,769	$	32,661	$	39,563	$	37,865

Deposits

We offera varietyof depositproductsthathave a wide range of interestratesand terms,includingdemand, savings,money marketand timeaccounts as well as wholesale-brokered deposits. In addition, we recently added reciprocal deposits to our product offering. This enables us to extend FDIC insurance to customers that have balances in excess of the FDIC insurance limit.  This service trades our customer’s funds as CDs in increments under the FDIC insured amount to other participating financial institutions and in exchange we receive CD investments from participating financial institutions in a reciprocal agreement.  We relyprimarilyon competitivepricingpolicies,convenient locations,electronicdeliverychannels (Internet and mobile),and personalizedserviceto attractand retainourdeposits.

Total depositsas of September 30, 2019 were $922.2 million,an increaseof $118.6 million,or 14.8%, comparedto$803.6 millionas of December 31, 2018. The increasewas largely in core deposits, which increased $121.6 million to $817.6 million from $696.0 million at December 31, 2018.  Included in this increase is approximately $16.0 million in temporary deposits that were brought into the Bank primarily during the third quarter which we believe will exit the bank during the fourth quarter of 2019.  We define core deposits as all deposits except time deposits and wholesale-brokered deposits.

Noninterest bearingdepositsas of September 30, 2019 were $349.1 million,an increaseof $55.6 million,or 18.9%, comparedto $293.5 millionas of December 31, 2018. The increasewas due to the collaborationof our branch managers,businessdevelopmentofficersand lendersto grow core deposits.Asa team,weactivelypursue new business and retail customers.

Total interest bearingaccountbalances, excluding time deposits,as of September 30, 2019 were $481.8 million,an increaseof $68.8 million,or 16.7% from$413.0 millionas of December 31, 2018. Included in interest bearing account balances is $13.3 million in wholesale-brokered deposits from wholesale banking services, an increase of $2.8 million from December 31, 2018.

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Total timedepositbalancesas of September 30, 2019 were $91.3 million,a decreaseof $5.7 million,or 5.9%, from$97.0 millionas of December 31, 2018. The decrease is due to the strong increase in core deposits, making it not necessary to replace time deposits as they mature.  Included in time deposits is $4.5 million in reciprocal deposits, which is a new product for the Bank this year.We have seen competitors increase rates on time deposits, and we have not globally matched their rates in response as we have been able to grow and retain less costly core deposits.

The followingtablesetsforthdepositbalancesat the datesindicated.

	As of					As of
	September 30, 2019					December 31, 2018
			Percent of					Percent of
(Dollars in thousands)	Amount		Total Deposits			Amount		Total Deposits
Demand, noninterest bearing	$	349,087		37.9	%	$	293,525		36.5	%
NOW and money market		416,315		45.1			349,952		43.6
Savings		52,191		5.7			52,572		6.5
Total core deposits		817,593		88.7			696,049		86.6
Wholesale brokered deposits		13,340		1.4			10,521		1.3
Time deposits less than $100,000		23,287		2.5			25,851		3.2
Time deposits $100,000 and over		68,029		7.4			71,193		8.9
Total	$	922,249		100.0	%	$	803,614		100.0	%

The following table sets forth the Company’s time deposits of $100,000 or more by time remaining until maturity as of the dates indicated:

(Dollars in thousands)	As of September 30, 2019		As of December 31, 2018
Maturity Period:
Three months or less	$	22,252	$	8,228
Over three through six months		9,943		13,166
Over six through twelve months		21,029		28,196
Over twelve months		14,805		21,603
Total	$	68,029	$	71,193
Weighted average maturity (in years)		0.66		0.97

Average depositsfor the three and nine monthsended September 30, 2019 were $886.2 million and $868.4 million, respectively, an increaseof 16.2% and 18.8%, respectively, comparedto the three and nine monthsended September 30, 2018. The increasein averagedepositswas primarily due to an increase in core deposits, both in noninterest bearing deposits and in interest bearing deposits.  Continuedgrowth in our primarymarketareasand the increasein commerciallendingrelationshipsfor which wealso seek deposit balancesand the resultsof businessdevelopmenteffortsby our businessdevelopmentofficers,branch managers and lenders continue to contribute to deposit growth.

The averageratepaid on totaldepositswas 0.64% and 0.66%, respectively, for the three and nine monthsended September 30, 2019, comparedto 0.44% and 0.40%, respectively, for the three and nine monthsended September 30, 2018.  Increased pressure in market pricing continues to impact our total cost of deposits.  We will continue to actively manage our interest rates on deposits while pursuing our growth goals.  Changes to the fed funds rate along with competition will impact future cost of deposits.

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The followingtablepresentsthe averagebalancesand averageratespaid on depositsfor the periodsindicated:

	For the Three Months Ended September 30,										For the Nine Months Ended September 30,
	2019					2018					2019					2018
(Dollars in thousands)	Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate			Average Balance		Average Rate
Demand, noninterest bearing	$	330,553		0.00	%	$	274,549		0.00	%	$	309,270		0.00	%	$	258,586		0.00	%
NOW and money market		394,939		0.96			338,770		0.55			375,267		0.87			331,328		0.50
Savings		52,511		0.05			49,417		0.02			52,401		0.06			47,487		0.03
Wholesale brokered deposits		12,787		1.99			-		0.00			35,494		2.32			-		0.00
Time deposits less than $100,000		24,126		1.30			27,864		1.25			25,221		1.31			26,974		1.12
Time deposits $100,000 and over		71,302		1.84			72,132		1.61			70,736		1.81			66,477		1.49
Total deposits	$	886,218		0.64	%	$	762,732		0.44	%	$	868,389		0.66	%	$	730,852		0.40	%

The ratioof averagenoninterest bearingdepositsto averagetotaldepositsfor the three and ninemonthsendedSeptember 30, 2019 was 37.3% and 35.6%, respectively, compared to 36.0% and 35.4%, respectively, for the three and nine months ended September 30, 2018.

Borrowings

We have the abilityto utilizeshort-termto long-termborrowingsto supplementdepositsto fund our lending and investmentactivities,each of which is discussedbelow.

Federal Reserve Bank Line of Credit. The FRBallows us to borrow againstour lineof credit,which is collateralizedby certainloans. Asof September 30, 2019, and December 31, 2018, totalborrowing capacityof $20.9 million and$20.8 million,respectively,was availableunder thisarrangement.  Asof September 30, 2019 and December 31, 2018, FRB advances totaled zero.

Federal HomeLoanBankAdvances. The FHLBallows us to borrow againstour lineof credit,which is collateralizedby certainloans. Asof September 30, 2019, and December 31, 2018, totalborrowing capacityof $88.2 million and$79.3 million,respectively,was availableunder thisarrangement. FHLB advances totaled $20.0 million as of September 30, 2019 and December 31, 2018.

	As of and For the Nine
	Months Ended
	September 30,
(Dollars in thousands)	2019			2018
Maximum amount outstanding at any month-end    during period:
FHLB Advances	$	20,000		$	20,000
Average outstanding balance during period:
FHLB Advances	$	740		$	2,467
Weighted average interest rate during period:
FHLB Advances		2.46	%		2.05	%
Balance outstanding at end of period:
FHLB Advances	$	20,000		$	20,000
Weighted average interest rate at end of period:
FHLB Advances		2.09	%		2.39	%

Junior SubordinatedDebentures. In 2004, weissued$3.6 millionin juniorsubordinateddebenturesto Coastal (WA) StatutoryTrust I, or the Trust, of which weownallof the outstandingcommonsecurities.The Trust used the proceedsfromthe issuanceof itsunderlyingcommonsecuritiesand preferredsecuritiesto purchasethe debenturesissuedby the Company. These debenturesare the Trust’sonly assetsand the interestpaymentsfrom the debenturesfinancethe distributionspaid on the preferredsecurities.The debenturesbear interestat a rateper annum equal to the 3-monthLIBORplus 2.10%. The effectiverateas of September 30, 2019, and December 31, 2018, was 4.22% and 4.88%, respectively.We generallyhave the rightto deferpaymentof intereston the debenturesat any timeor fromtimeto timefor a periodnot exceedingfiveyearsprovidedthatno extensionperiodmay extend beyond the statedmaturityof the debentures.During any such extensionperiod, distributionson the Trust’spreferredsecuritieswill also be deferred,and our abilityto pay dividendson our commonstock will be restricted.The Trust’spreferredsecuritiesare mandatorilyredeemableupon maturityof the debentures,or upon earlierredemptionas providedin the indenture.If the debenturesare redeemedpriorto maturity,the redemptionpricewill be the principalamountand any accruedbut unpaid interest.Weunconditionallyguarantee

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paymentof accruedand unpaid distributionsrequiredto be paid on the Trust securitiessubjectto certainexceptions,the redemptionpricewith respectto any Trust securitiescalledfor redemptionand amountsdue if the Trust is liquidatedor terminated.

SubordinatedDebt. In 2016, the Company issueda subordinatednote to a commercialbank in the amountof$10.0 million.The note matureson August 1, 2026, and bearsinterestat the rateof 5.65% per year for fiveyears and, thereafter,at a rateequal to The WallStreetJournal primerateplus 2.50%. Principalpaymentsof $500,000 per quartercommenceNovember 1, 2021. We may redeemthe subordinatednote, in whole or in part,without premiumor penaltyafterJuly 29, 2021, subjectto any requiredregulatoryapprovals.

Liquidity andCapital Resources

LiquidityManagement

Liquidityrefersto our capacityto meetour cash obligationsat a reasonablecost. Our cash obligationsrequire us to have cash flow thatis adequateto fund loan growth and maintainon-balancesheetliquiditywhile meeting presentand futureobligationsof depositwithdrawals,borrowing maturitiesand othercontractualcash obligations.In managingour cash flows, managementregularlyconfrontssituationsthatcan give riseto increasedliquidityrisk.These includefunding mismatches,marketconstraintsin accessingsourcesof funds and the abilityto convertassetsinto cash. Changes in economicconditionsor exposureto credit,market,and operational,legaland reputationalrisksalso could affectthe Bank’s liquidityriskprofileand are consideredin the assessmentof liquiditymanagement.

We continuallymonitorour liquiditypositionto ensurethatour assetsand liabilitiesare managedin a manner to meetallreasonablyforeseeableshort-term,long-termand strategicliquiditydemands.Managementhas establisheda comprehensiveprocessfor identifying,measuring,monitoringand controllingliquidityrisk. Because of itscriticalimportanceto the viabilityof the Bank,liquidityriskmanagementis fullyintegratedinto our riskmanagementprocesses.Criticalelementsof our liquidityriskmanagementinclude:effectivecorporate governanceconsistingof oversightby the board of directorsand activeinvolvementby management;appropriate strategies,policies,procedures,and limitsused to manageand mitigateliquidityrisk;comprehensiveliquidity riskmeasurementand monitoringsystemsthatare commensuratewith the complexityof our businessactivities; activemanagementof intradayliquidityand collateral;an appropriatelydiversemix of existingand potential futurefunding sources;adequatelevelsof highly liquidmarketablesecuritiesfreeof legal,regulatory,or operationalimpediments,thatcan be used to meetliquidityneeds in stressfulsituations;contingencyfunding policiesand plans thatsufficientlyaddresspotentialadverseliquidityeventsand emergencycash flow requirements;and internalcontrolsand internalauditprocessessufficientto determinethe adequacy of the Bank’s liquidityriskmanagementprocess.

Our liquiditypositionis supportedby managementof our liquidassetsand liabilitiesand accessto alternative sourcesof funds. Our liquidityrequirementsare metprimarilythrough our deposits,FHLBadvancesand the principaland interestpaymentswereceiveon loans and investmentsecurities.Cash on hand, cash at third-party banks, investmentsavailable-for-saleand maturingor prepayingbalancesin our investmentand loan portfolios are our mostliquidassets.Other sourcesof liquiditythatare routinelyavailableto us includefunds fromretail, commercial,and wholesaledeposits,advancesfromthe FHLBand proceedsfromthe saleof loans. Less commonlyused sourcesof funding includeborrowingsfromthe FederalReserve discountwindow,draws on establishedfederalfunds linesfromunaffiliatedcommercialbanks and the issuanceof debt or equitysecurities. We believewehave ampleliquidityresourcesto fund futuregrowth and meetothercash needs as necessary.

The Company is a corporationseparateand apartfromour Bankand, therefore,mustprovidefor itsown liquidity,includingliquidityrequiredto meetitsdebt servicerequirementson itssubordinatednote and junior subordinateddebentures.The Company’s mainsourceof cash flow has been through equityand debt offerings. The Company has consistentlyretaineda portionof the funds fromequityand debt offeringsso thatis has sufficientfunds for itsoperatingand debt costsfor the next two or threeyears. The Company down-streamed $5.0 million in capital to the Bank during the third quarter of 2019, bringing the Company’s cash holding to $14.3 million at September 30, 2019.  The Company uses approximately $1.1 million for debt servicing and operating purposes each year, leaving about $11.0 million for other purposes after deducting $3.3 million to cover operating purposes for the next three years.  In addition,the Bankcan declare and pay dividendsto the Company to meetthe Company’s debt and operatingexpenses.There are statutoryand regulatorylimitationsthataffectthe abilityof the Bankto pay dividendsto the Company. We believethatthese limitationswill not impactthe abilityof the Bankto pay dividendsto the Company to meetongoing operating needs. For contingencypurposes,the Company maintainsa minimumlevelof cash to fund one year’sprojected operatingcash flow needs and the Bankmanagesto a minimumliquidityratioof 10% of assets.Both of these minimumliquiditylevelsare on-balancesheetsources.Per policyand the Bank’s liquiditycontingencyplan, in event of a liquidityemergencythe Bankcan utilizewholesalefunds in an amountup to 30% of assets.Since the Bankuses only a smallportionof itsborrowing capacity,the Bankhas accessto funds if needed in a liquidity emergency.

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Capital Adequacy

Capitalmanagementconsistsof providingequityand otherinstrumentsthatqualifyas regulatorycapitalto supportcurrentand futureoperations.Banking regulatorsview capitallevelsas importantindicatorsof an institution’sfinancialsoundness. Asa generalmatter,FDIC-insureddepositoryinstitutionsand theirholding companiesare requiredto maintainminimumcapitallevelsrelativeto the amountand types of assetsthey hold. We are subjectto regulatorycapitalrequirementsat the bank level.The Company will becomesubjectto regulatorycapitalrequirementsonce itsconsolidatedassetsexceed $3.0 billion.

Asof September 30, 2019, and December 31, 2018, the Bankwas in compliancewith all applicableregulatorycapitalrequirements,and the Bankwas classifiedas “well capitalized”for purposesof the FederalReserve’spromptcorrectiveactionregulations.Aswedeploy our capitaland continueto grow our operations,our regulatorycapitallevelsmay decreasedepending on our levelof earnings.However, weexpectto monitorand controlour growth in orderto remainin compliancewith allregulatorycapitalstandardsapplicable to us.

The followingtablepresentsthe Company’s and the Bank’s regulatorycapitalratiosas of the datespresented,as well as the regulatorycapitalratiosthatare requiredby FederalReserve regulationsto maintain“well-capitalized”status:

	Actual					Minimum Required for Capital Adequacy Purposes					Required to be Well Capitalized Under the Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(dollars in thousands)
September 30, 2019
Common Equity Tier I risk-based capital ratio (to    risk-weighted assets)
Company	$	120,283		13.02	%	$	41,575		4.50	%	$	60,052		6.50	%
Bank Only		118,995		12.89	%		41,546		4.50	%		60,011		6.50	%
Leverage Capital (to average assets)
Company		123,783		12.00	%		41,271		4.00	%		51,589		5.00	%
Bank Only		118,995		11.54	%		41,255		4.00	%		51,568		5.00	%
Tier I Capital (to risk-weighted assets)
Company		123,783		13.40	%		55,433		6.00	%		73,910		8.00	%
Bank Only		118,995		12.89	%		55,395		6.00	%		73,860		8.00	%
Total Capital (to risk-weighted assets)
Company		145,093		15.70	%		73,910		8.00	%		92,388		10.00	%
Bank Only		130,305		14.11	%		73,860		8.00	%		92,325		10.00	%
December 31, 2018
Common Equity Tier I risk-based capital ratio (to    risk-weighted assets)
Company	$	110,307		13.70	%	$	36,238		4.50	%	$	52,343		6.50	%
Bank Only		103,597		12.84	%		36,294		4.50	%		52,425		6.50	%
Leverage Capital (to average assets)
Company		113,807		12.46	%		36,529		4.00	%		45,661		5.00	%
Bank Only		103,597		11.35	%		36,524		4.00	%		45,655		5.00	%
Tier I Capital (to risk-weighted assets)
Company		113,807		14.13	%		48,317		6.00	%		64,423		8.00	%
Bank Only		103,597		12.84	%		48,392		6.00	%		64,253		8.00	%
Total Capital (to risk-weighted assets)
Company		133,518		16.58	%		64,423		8.00	%		80,528		10.00	%
Bank Only		113,308		14.05	%		64,523		8.00	%		80,653		10.00	%

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ContractualObligations

The followingtablesummarizescontractualobligationsand othercommitmentsto make futurepayments (otherthan non-timedepositobligations),which consistof futurecash paymentsassociatedwith our contractual obligations,as of September 30, 2019.

			Payments Due by Period
			Less than		1 to 2		2 to 5		More than
(Dollars in thousands)	Total		1 Year		Years		Years		5 Years
Time Deposits	$	91,316	$	69,662	$	15,876	$	5,778	$	-
FHLB advances		20,000		20,000		-		-		-
Subordinated note		10,000		-		-		6,000		4,000
Junior subordinated debentures		3,609		-		-		-		3,609
Deferred compensation plans		1,505		175		175		526		629
Operating leases		8,284		1,350		1,306		3,325		2,303

For a discussionof our borrowings,see “—FinancialCondition—Borrowings.”

We believethatwill webe able to meetour contractualobligationsas they come due. Adequate cash levelsare expectedthrough profitability,repaymentsfromloans and securities,depositgatheringactivity,accessto borrowing sourcesand periodicloan sales.

Off-BalanceSheet Items

In the normalcourseof business,weenterinto varioustransactions,which, in accordancewith GAAP,are not includedin our consolidatedbalancesheets.We enterinto thesetransactionsto meetthe financingneeds of our customers.These transactionsincludecommitmentsto extend creditand standby and commerciallettersof credit,which involve,to varyingdegrees,elementsof creditriskand interestrateriskin excessof the amounts recognizedin our consolidatedbalancesheets.

Our commitmentsassociatedwith outstandingcommitmentsto extend creditand standby and commercial lettersof creditare summarizedbelow. Since commitmentsassociatedwith commitmentsto extend creditand lettersof creditmay expireunused, the amountsshowndo not necessarilyreflectthe actualfuturecash funding requirements.

	As of		As of
	September 30,		December 31,
(Dollars in thousands)	2019		2018
Commitments to extend credit:
Commercial and industrial loans	$	54,671	$	47,033
Construction – commercial real estate		44,155		33,128
Construction – residential real estate		26,015		30,269
Residential real estate		14,008		12,543
Commercial real estate		12,569		12,871
Other		1,351		656
Total commitments to extend credit	$	152,769	$	136,500
Standby letters of credit	$	2,200	$	2,331

Commitmentsto extend creditare agreementsto lend to a customeras long as thereis no violationof any conditionestablishedin the contract.Commitmentsgenerallyhave fixedexpirationdatesor othertermination clausesand may requirepaymentof a fee. Since many of the commitmentsare expectedto expirewithout being fullydrawn upon, the totalcommitmentamountsdisclosedabove do not necessarilyrepresentfuturecash requirements.We evaluateeach customer’screditworthinesson a case-by-casebasis.The amountof collateral obtained,if considerednecessaryby us, upon extensionof credit,is based on management’screditevaluationof the customer.

Standby and commerciallettersof creditare conditionalcommitmentsissuedby us to guaranteethe performanceof a customerto a thirdparty.In the event of nonperformanceby the customer,wehave rightsto theunderlyingcollateral,which can includecommercialrealestate,physicalplantand property,inventory, receivables,cash and/ormarketablesecurities.Our creditriskassociatedwith issuinglettersof creditis essentiallythe sameas the riskinvolvedin extendingloan facilitiesto our customers.

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Selected Financial Data

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

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

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Non-GAAP Financial Measures

Some of the financial measures included in this report are not measures of financial performance recognized by GAAP. Our management uses the non-GAAP financial measures set forth below in its analysis of our performance.

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

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

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

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

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

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

The Company also presented comparable earnings and financial information using GAAP financial measures.  Reconciliations of the GAAP and non-GAAP measures are presented in the following table:

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	As of and for the Three Months Ended
(Dollars in thousands)	June 30, 2019			March 31, 2019
Adjusted return on average assets:
Total average assets	$	1,002,436		$	997,069
Less: average wholesale-brokered deposits		20,252			74,116
Adjusted total average deposits and borrowings	$	982,184		$	922,953
Total net income	$	3,274		$	2,808
Less: fees earned on servicing wholesale-brokered deposits		36			78
Adjusted net income	$	3,238		$	2,730
Adjusted return on average assets:		1.34	%		1.20	%
Adjusted cost of funds:
Total average deposits and borrowings	$	874,610		$	872,979
Less: average wholesale-brokered deposits		20,252			74,116
Adjusted total average deposits and borrowings	$	854,358		$	798,863
Total interest expense	$	1,618		$	1,627
Less: interest expense on wholesale-brokered deposits		116			435
Adjusted interest expense	$	1,502		$	1,192
Adjusted cost of funds:		0.71	%		0.61	%
Adjusted cost on deposits:
Total average deposits	$	859,516		$	859,135
Less: average wholesale-brokered deposits		20,252			74,116
Adjusted total average deposits	$	839,264		$	785,019
Interest expense on deposits	$	1,420		$	1,436
Less: interest expense on wholesale-brokered deposits		116			435
Adjusted interest expense on interest bearing deposits	$	1,304		$	1,001
Adjusted cost of deposits:		0.63	%		0.52	%
Adjusted net interest margin:
Total average interest earning assets	$	962,867		$	958,547
Less: average wholesale-brokered deposits held in cash		20,252			74,116
Adjusted total average interest earning assets	$	942,615		$	884,431
Total net interest income	$	10,186		$	9,767
Less: interest income earned wholesale-brokered deposits held in cash		116			435
Plus: interest expense on wholesale-brokered deposits		116			435
Adjusted net interest income		10,186			9,767
Adjusted net interest margin:		4.38	%		4.48	%
Adjusted noninterest expense to average assets:
Total average assets	$	1,002,436		$	997,069
Less: average wholesale-brokered deposits		20,252			74,116
Adjusted total average assets	$	982,184		$	922,953
Total noninterest expense	$	7,643		$	7,662
Adjusted noninterest expense to average assets:		3.12	%		3.37	%
	As of and for the Three Months Ended
(Dollars in thousands)	June 30, 2019			March 31, 2019
Adjusted loans receivable to deposits (1):
Total loans receivable	n/a			$	791,072
Total deposits	n/a				976,496
Less: wholesale-brokered deposits	n/a				164,604
Total deposits, less wholesale-brokered deposits	n/a			$	811,892
Adjusted loans receivable to deposits:	n/a				97.44	%
(1) Adjusted loans receivable to deposits is only presented for periods that include atypically large wholesale-brokered deposits as of the end of the period presented.

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Item 3.  Quantitative and Qualitative Disclosure about Market Risk

QuantitativeandQualitativeDisclosuresabout Market Risk

Asa financialinstitution,our primarycomponentof marketriskis interestratevolatility.Our assetliability and funds managementpolicyprovidesmanagementwith the guidelinesfor effectivefunds management,and we have establisheda measurementsystemfor monitoringour net interestratesensitivityposition.We have historicallymanagedour sensitivitypositionwithin our establishedguidelines.

Fluctuationsin interestrateswill ultimatelyimpactboth the levelof incomeand expense recordedon mostof our assetsand liabilities,and the marketvalue of allinterest earningassetsand interest bearingliabilities,other than those which have a shorttermto maturity.Interestrateriskis the potentialfor economiclossesdue to future interestratechanges. These economiclossescan be reflectedas a loss of futurenet interestincomeand/ora decreasein currentfairmarketvalues.Our objectiveis to measurethe effecton net interestincomeand to adjust the balancesheetto minimizethe inherentriskwhile at the sametimemaximizingincome.

We manageour exposureto interestratesby structuringour balancesheetin the ordinarycourseof business. We do not enterinto instrumentssuch as leveragedderivatives,financialoptions,financialfuturecontractsor forwarddeliverycontractsfor the purpose of reducinginterestraterisk.Based upon the natureof our operations, weare not subjectto foreignexchange or commoditypricerisk.We do not ownany tradingassets.

Our exposureto interestrateriskis managedby the Asset LiabilityCommittee(ALCO),of the Bankand reviewedby the Asset Liabilityand InvestmentCommitteeof our board of directorsin accordancewith policies approved by our board of directors.ALCOformulatesstrategiesbased on appropriatelevelsof interestraterisk. In determiningthe appropriatelevelof interestraterisk,ALCOconsidersthe impacton earningsand capitalon the currentoutlook on interestrates,potentialchanges in interestrates,regionaleconomies,liquidity,business strategiesand otherfactors.ALCOmeetsregularlyto review, among otherthings,the sensitivityof assetsand liabilitiesto interestratechanges, the book and marketvaluesof assetsand liabilities,unrealizedgains and losses,purchaseand saleactivities,commitmentsto originateloans and the maturitiesof investmentsand borrowings.Additionally,ALCOreviewsliquidity,cash flows, maturitiesof depositsand consumerand commercialdepositactivity.Managementemploysvariousmethodologiesto manageinterestrateriskincluding an analysisof relationshipsbetween interest earningassetsand interest bearingliabilitiesand interestrate simulationsusing a model.The Asset Liabilityand InvestmentCommitteeof our board of directorsmeets quarterlyto review the Bank’s interestrateriskprofile,liquidityposition,includingcontingentliquidity,and investmentportfolio.

We use interestraterisksimulationmodelsto testinterestratesensitivityof net interestincomeand fairvalue of equity,and the impactof changes in interestrateson otherfinancialmetrics.Contractualmaturitiesandre-pricingopportunitiesof loans are incorporatedin the model,as are prepaymentassumptions,maturitydata and calloptionswithin the investmentportfolio.Average lifeof non-maturitydepositaccountsare based on historical decay ratesand assumptionsand are incorporatedinto the model.The assumptionsused are inherentlyuncertain and, as a result,the modelcannot preciselymeasurefuturenet interestincomeor preciselypredictthe impactof fluctuationsin marketinterestrateson net interestincome.Actual resultswill differfromthe model’ssimulated resultsdue to timing,magnitudeand frequencyof interestratechanges as well as changes in marketconditions and the applicationand timingof variousmanagementstrategies.

Ona quarterlybasis,werun multiplesimulationsunder two differentpremisesof which one is a staticbalance sheetand the otheris a dynamicgrowth balancesheet.The staticbalancesheetapproachproduces results that showthe interestriskcurrentlyinherentin our balancesheetat thatpoint in time.The dynamicbalancesheet includesour projectedgrowth levelsgoing forwardand producesresultsthatshows hownet income,net interest income,and interestriskchange based on our projectedgrowth. These simulationstestthe impacton net interest incomeand fairvalue of equityfromchanges in marketinterestratesunder variousscenarios.Under the static and dynamicapproaches,ratesare shocked instantaneouslyand rampedover a 12-monthhorizonassuming parallelyieldcurve shifts.Parallelshock scenariosassumeinstantaneousparallelmovementsin the yieldcurve comparedto a flatyieldcurve scenario.Non-parallelsimulationsare also conductedand involveanalysisof interestincomeand expense under variouschanges in the shape of the yieldcurve includinga forwardcurve, flat curve, steepeningcurve, and an invertedcurve. Our internalpolicyregardinginternalraterisksimulations currentlyspecifiesthatfor instantaneousparallelshiftsof the yieldcurve, estimatednet incomeat riskfor the subsequentone- and two-yearperiodshould not declineby morethan 10% for a 100 basispoint shift,15% for a 200 basispoint shift,20% for a 300 basispoint shift,and 25% for a 400 basispoint shift.

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The followingtablessummarizethe simulatedchange in net interestincomeover a 12-monthhorizonas of the datesindicated:

		Estimated Increase (Decrease) in Net Interest Income
Change in Market Interest Rates	Twelve Month Projection September 30, 2019	Twelve Month Projection December 31, 2018
Static Balance Sheet and Rate Shifts
+400 basis points	14.5%	15.2%
+300 basis points	10.8	11.2
+200 basis points	7.1	7.4
+100 basis points	3.4	3.7
-100 basis points	0.8	(1.5)
-200 basis points	(4.6)	(8.7)
-300 basis points	(6.0)	(14.0)
Dynamic Balance Sheet and Rate Shifts
+400 basis points	18.6	17.9
+300 basis points	13.8	13.2
+200 basis points	9.1	8.8
+100 basis points	4.5	4.4
-100 basis points	(0.3)	(2.3)
-200 basis points	(6.6)	(10.1)
-300 basis points	(8.3)	(16.2)

TheresultsillustratethattheBankisassetsensitiveandgenerallyperformsbetterinanincreasinginterestrateenvironment.Theresultsareprimarilyduetobehaviorofdemand,moneymarketandsavingsdepositsduringsuchratefluctuations.Wehavefoundthat,historically,interestratesonthesedepositschangemoreslowlythanchangesinthediscountandfederalfundsrates.Thisassumptionisincorporatedintothesimulationmodel.Theassumptionsincorporatedintothemodelareinherentlyuncertainand,asaresult,themodelcannotpreciselymeasurefuturenetinterestincomeorpreciselypredicttheimpactoffluctuationsinmarketinterestratesonnetinterestincome.Actual results willdifferfromthemodel’ssimulatedresultsduetotiming,magnitudeandfrequencyofinterestrate changesaswellaschangesinmarketconditions, the shape of the interest yield curve,andtheapplicationandtimingofvariousstrategies.

Impactof Inflation

Our consolidatedfinancialstatementsand relatednotes to those financialstatementsincludedelsewherein this report have been preparedin accordancewith GAAP.GAAPrequiresthe measurementof financialposition and operatingresultsin termsof historicaldollars,without consideringchanges in the relativevalue of money over timedue to inflationor recession.

Unlike many industrialcompanies,substantiallyallof our assetsand liabilitiesare monetaryin nature.Asa result,interestrateshave a moresignificantimpacton our performancethan the effectsof generallevelsof inflation.Interestratesmay not necessarilymove in the samedirectionor in the samemagnitudeas the pricesof goods and services.However, otheroperatingexpensesdo reflectgenerallevelsof inflation.

Item 4.  Controls and Procedures

The Company’s management, including the Company’s principal executive officer and principal financial officer, have evaluated the effectiveness of the Company’s “disclosure controls and procedures,” as such term is defined in Rule 13a-15(f) promulgated under the Securities Exchange Act of 1934, as amended, (the “Exchange Act”).  Based upon their evaluation, the principal executive officer and principal financial officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective for the purpose of ensuring that the information required to be disclosed in the reports that the Company files or submits under the Exchange Act with the Securities and Exchange Commission (the “SEC”) (1) is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and (2) is accumulated and communicated to the Company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure.  In addition, based on that evaluation, no change in the Company’s internal control over financial reporting occurred during the nine months ended September 30, 2019, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

54

PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings

From time to time we are a party to various litigation matters incidental to the conduct of our business. We do not believe that any currently pending legal proceedings will have a material adverse effect on our business, financial condition or earnings.

Item 1A.  Risk Factors

For information regarding the Company’s risk factors, see “Risk Factors” in the Company’s Annual Report on Form 10-K, filed with the Securities and Exchange Commission on March 28, 2019. As of September 30, 2019, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K.

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds

There were no unregistered sales of the Company’s stock during the quarter.

The Company did not repurchase any of its shares during the quarter and does not have any authorized share repurchase programs.

Item 3.  Defaults Upon Senior Securities

Not applicable.

Item 4.  Mine Safety Disclosures

Not applicable.

Item 5.  Other Information

Not applicable.

Item 6.  Exhibits

31.1	Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32	Section 1350 Certification of Chief Executive Officer and Chief Financial Officer
101.0	The following materials from the Company’s Quarterly Report on Form 10-Q for the quarter months ended September 30, 2019, formatted in XBRL (Extensible Business Reporting Language): (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statement of Changes in Shareholders’ Equity, (v) the Consolidated Statements of Cash Flows and (vi) the Notes to the Consolidated Financial Statements.

55

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

			COASTAL FINANCIAL CORPORATION
Dated:	November 12, 2019	By:	/s/ Eric M. Sprink
			Eric M. Sprink
			President and Chief Executive Officer
			(principal executive officer)
Dated:	November 12, 2019	By:	/s/ Joel G. Edwards
			Joel G. Edwards
			Executive Vice President and
			Chief Financial Officer
			(principal financial officer)

56

EX-31.1

Exhibit 31.1

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Eric M. Sprink, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Coastal Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 12, 2019	By:	/s/ Eric M. Sprink
		Eric M. Sprink
		President and Chief Executive Officer

EX-31.2

Exhibit 31.2

CERTIFICATION PURSUANT TO

RULES 13a-14(a) AND 15d-14(a) UNDER THE SECURITIES EXCHANGE ACT OF 1934,

AS ADOPTED PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002

I, Joel G. Edwards, certify that:

1. I have reviewed this Quarterly Report on Form 10-Q of Coastal Financial Corporation;

2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

(a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

(b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

(c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

(d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

(a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

(b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 12, 2019	By:	/s/ Joel G. Edwards
		Joel G. Edwards
		Executive Vice President and Chief Financial Officer

EX-32

Exhibit 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO

SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the Quarterly Report of Coastal Financial Corporation (the “Company”) on Form 10-Q for the period ending September 30, 2019, as filed with the Securities and Exchange Commission on the date hereof (the “Report”), I certify, pursuant to 18 U.S.C. § 1350, as adopted pursuant to § 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and result of operations of the Company.

Date: November 12, 2019	By:	/s/ Eric M. Sprink
		Eric M. Sprink
		President and Chief Executive Officer

Date: November 12, 2019	By:	/s/ Joel G. Edwards
		Joel G. Edwards
		Executive Vice President and Financial Officer

XML

Fair Value Measurements - Summary of Estimated Fair Values of Financial Instruments (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financial assets
Other investments	$ 4,405	$ 3,766
Financial liabilities
FHLB advances	20,000	20,000
Carrying Value
Financial assets
Cash and due from banks	22,060	16,315
Interest earning deposits with other banks	131,287	109,467
Investment securities	32,696	37,922
Other investments	4,405	3,766
Loans receivable, net	863,224	758,492
Accrued interest receivable	2,629	2,526
Financial liabilities
Deposits	922,249	803,614
FHLB advances	20,000	20,000
Subordinated debt	9,975	9,965
Junior subordinated debentures	3,582	3,581
Accrued interest payable	303	279
Estimated Fair Value
Financial assets
Cash and due from banks	22,060	16,315
Interest earning deposits with other banks	131,287	109,467
Investment securities	32,661	37,865
Other investments	4,405	3,766
Loans receivable, net	858,731	743,354
Accrued interest receivable	2,629	2,526
Financial liabilities
Deposits	922,110	802,645
FHLB advances	20,000	20,000
Subordinated debt	10,035	9,804
Junior subordinated debentures	3,407	3,265
Accrued interest payable	303	279
Estimated Fair Value | Level 1
Financial assets
Cash and due from banks	22,060	16,315
Interest earning deposits with other banks	131,287	109,467
Investment securities	24,899	33,241
Estimated Fair Value | Level 2
Financial assets
Investment securities	7,762	4,624
Other investments	4,405	3,766
Accrued interest receivable	2,629	2,526
Financial liabilities
Deposits	922,110	802,645
FHLB advances	20,000	20,000
Subordinated debt	10,035	9,804
Junior subordinated debentures	3,407	3,265
Accrued interest payable	303	279
Estimated Fair Value | Level 3
Financial assets
Loans receivable, net	$ 858,731	$ 743,354

XML

Earnings Per Common Share - Schedule of Computation of Basic and Diluted Earnings Per Common Share (Details) - USD ($) $ / shares in Units, $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Earnings Per Share [Abstract]
Net income	$ 3,511	$ 2,602	$ 9,593	$ 6,646
Basic weighted average number common shares outstanding	11,901,873	11,338,320	11,893,734	9,956,449
Dilutive effect of share-based compensation	286,634	271,658	299,337	94,966
Diluted weighted average number common shares outstanding	12,188,507	11,609,978	12,193,071	10,051,415
Basic earnings per share	$ 0.30	$ 0.23	$ 0.81	$ 0.67
Diluted earnings per share	$ 0.29	$ 0.22	$ 0.79	$ 0.66

XML

Loans and Allowance for Loan Losses - Summary of an Age Analysis of Past Due Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	$ 1,726	$ 1,562
Current	873,972	767,161
Total Loans	875,698	768,723
Net deferred origination fees and premiums	(1,586)	(824)
Loans receivable	874,112	767,899
30-89 Days Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	426	996
90 Days or More Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	1,300	566
Commercial and Industrial Loans
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	1,233	665
Current	104,401	89,725
Total Loans	105,634	90,390
Commercial and Industrial Loans | 30-89 Days Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due		171
Commercial and Industrial Loans | 90 Days or More Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	1,233	494
Construction, Land and Land Development
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due		823
Current	86,919	63,222
Total Loans	86,919	64,045
Construction, Land and Land Development | 30-89 Days Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due		823
Residential Real Estate
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	67	72
Current	100,751	94,673
Total Loans	100,818	94,745
Residential Real Estate | 90 Days or More Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	67	72
Commercial Real Estate
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	420
Current	578,187	515,959
Total Loans	578,607	515,959
Commercial Real Estate | 30-89 Days Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	420
Consumer and Other Loans
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	6	2
Current	3,714	3,582
Total Loans	3,720	3,584
Consumer and Other Loans | 30-89 Days Past Due
Financing Receivable Recorded Investment Past Due [Line Items]
Total Past Due	$ 6	$ 2

XML

Investments Securities - Additional Information (Details)	3 Months Ended		9 Months Ended		12 Months Ended
	Sep. 30, 2019 USD ($) InvestmentSecurity Security	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) InvestmentSecurity Security	Sep. 30, 2018 USD ($)	Dec. 31, 2018 USD ($) Security
Investments [Abstract]
Investment securities with carrying value pledged to secure public deposits	$ 16,837,000		$ 16,837,000		$ 19,678,000
Number of investment securities sold | InvestmentSecurity	5		5
Gross gains (losses) on investment securities	$ 242,000		$ (71,000)
Sales of investment securities	$ 30,000,000	$ 0	$ 30,026,000	$ 0
Number of securities in unrealized loss position | Security	7		7		12
Securities other than temporarily impaired			$ 0		$ 0

XML

Loans and Allowance for Loan Losses - Analysis of Nonaccrual Loans by Category (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financing Receivable Recorded Investment Past Due [Line Items]
Total nonaccrual loans	$ 1,300	$ 1,826
Commercial and Industrial Loans
Financing Receivable Recorded Investment Past Due [Line Items]
Total nonaccrual loans	1,233	493
Residential Real Estate
Financing Receivable Recorded Investment Past Due [Line Items]
Total nonaccrual loans	$ 67	72
Commercial Real Estate
Financing Receivable Recorded Investment Past Due [Line Items]
Total nonaccrual loans		$ 1,261

XML

Leases

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Leases

Note 6 - Leases

The Company has committed to rent premises used in business operations under non-cancelable operating leases and determines if an arrangement meets the definition of a lease upon inception.

The Company adopted the provisions of ASU 2016-02 (Topic 842) on January 1, 2019. Operating lease right-of-use (“ROU”) assets represent a right to use an underlying asset for the contractual lease term. Operating lease liabilities represent an obligation to make lease payments arising from the lease. Upon adoption, operating lease ROU assets totaling $9.4 million and operating lease liabilities totaling $9.6 million were recognized in our Unaudited Consolidated Balance Sheets for leases that existed at the adoption date, based on the present value of lease payments over the remaining lease term.  ROU assets are further adjusted for lease incentives.  Operating leases entered into after the adoption date will be recognized as an operating lease ROU asset and operating lease liability at the commencement date of the new lease.

The Company’s leases do not provide an implicit interest rate, therefore the Company used its incremental collateralized borrowing rates commensurate with the underlying lease terms to determine the present value of operating lease liabilities. The weighted average discount rate used to discount operating lease liabilities at September 30, 2019 was 3.5%.

The Company’s operating lease agreements contain both lease and non-lease components, which are generally accounted for separately. The Company’s lease agreements do not contain any residual value guarantees.

Operating leases with terms of 12 months or less are not included in ROU assets and operating lease liabilities recorded in our consolidated balance sheets. Operating lease terms include options to extend when it is reasonably certain that the Company will exercise such options, determined on a lease-by-lease basis. During the third quarter of 2019 the Bank entered into a new lease in Arlington, WA, that will serve as a new branch location.  The Arlington property was purchased through a LLC owned by the Company, and the Bank will lease that property from the LLC.  We do not expect this lease to have a financial statement impact on a consolidated basis.  As of September 30, 2019, the Company does not have any leases that have not yet commenced. At September 30, 2019, lease expiration dates ranged from two to 26 years, with additional renewal options on certain leases typically ranging from 5 to 10 years. At September 30, 2019, the weighted average remaining lease term for the Company’s operating leases was 9.7 years.

Rental expense for operating leases is recognized on a straight-line basis over the lease term and amounted to $1.1 million and $853,000, respectively, for the nine months ended September 30, 2019 and 2018. Variable lease components, such as fair market value adjustments, are expensed as incurred and not included in ROU assets and operating lease liabilities.

The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at September 30, 2019:

	September 30,
(dollars in thousands)	2019
October 1, 2019 to December 31, 2019	$	325
2020		1,304
2021		1,291
2022		1,296
2023		1,306
2024 and thereafter		4,936
Total lease payments		10,458
Less:  amounts representing interest		1,611
Present value of lease liabilities	$	8,847

The following table presents the components of total lease expense and operating cash flows for the nine months ended September 30, 2019:

	September 30,
(dollars in thousands)	2019
Lease expense:
Operating lease expense	$	991
Variable lease expense		98
Total lease expense (1)	$	1,089
Cash paid:
Cash paid reducing operating lease liabilities	$	1,074
(1) Included in net occupancy expense in the Condensed Consolidated Statements of Income (Unaudited).

XML

Earnings Per Common Share

9 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

Earnings Per Common Share

Note 10 - Earnings Per Common Share

The following is a computation of basic and diluted earnings per common share at the periods indicated:

	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	(dollars in thousands, except share data)				(dollars in thousands, except share data)
Net Income	$	3,511	$	2,602	$	9,593	$	6,646
Basic weighted average number common shares outstanding		11,901,873		11,338,320		11,893,734		9,956,449
Dilutive effect of share-based compensation		286,634		271,658		299,337		94,966
Diluted weighted average number common shares outstanding		12,188,507		11,609,978		12,193,071		10,051,415
Basic earnings per share	$	0.30	$	0.23	$	0.81	$	0.67
Diluted earnings per share	$	0.29	$	0.22	$	0.79	$	0.66

XML

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Statement Of Income And Comprehensive Income [Abstract]
NET INCOME	$ 3,511	$ 2,602	$ 9,593	$ 6,646
Securities available-for-sale
Unrealized holding gain (loss) during the period	61	(259)	1,396	(1,131)
Income tax benefit (provision) related to unrealized holding gain (loss)	(12)	55	(293)	237
Reclassification adjustment for net gain from sale of investment securities available for sale included in income	171		171
Income tax provision related to net gain from sale of investment securities available for sale included in income	(36)		(36)
OTHER COMPREHENSIVE INCOME (LOSS), net of tax	184	(204)	1,238	(894)
COMPREHENSIVE INCOME	$ 3,695	$ 2,398	$ 10,831	$ 5,752

XML

Investments Securities - Amortized Cost and Fair Value of Debt Securities by Contractual Maturity (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-Sale, Amortized Cost, Amounts maturing in One year or less	$ 22,970
Available-for-Sale, Amortized Cost, Amounts maturing in After one year through five years	5,254
Available-for-Sale, Amortized Cost. Amounts maturity with single maturity	28,224
Available-for-sale, Amortized Cost	28,392	$ 38,301
Available-for-Sale, Fair Value, Amounts maturing in One year or less	22,953
Available-for-Sale, Fair Value, Amounts maturing in After one year through five years	5,198
Available-for-Sale, Fair Value, Amounts maturing with single maturity	28,151
Available-for-Sale, Fair Value	28,319	36,660
Held-to-maturity, Amortized Cost	4,377	$ 1,262
Held-to-Maturity, Fair Value	4,342
U.S. Agency Residential Mortgage-backed Securities and Collateralized Mortgage Obligations
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-Sale, Amortized Cost, Amounts maturity without single maturity	168
Available-for-Sale, Fair Value, Amounts maturing without single maturity	168
Held-to-Maturity, Amortized Cost, Amounts maturity without single maturity	4,377
Held-to-Maturity, Fair Value, Amounts maturing without single maturity	$ 4,342

XML

Document And Entity Information - shares	9 Months Ended
	Sep. 30, 2019	Nov. 08, 2019
Cover [Abstract]
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2019
Document Fiscal Year Focus	2019
Document Fiscal Period Focus	Q3
Entity Registrant Name	COASTAL FINANCIAL CORP
Entity Central Index Key	0001437958
Entity Current Reporting Status	Yes
Current Fiscal Year End Date	--12-31
Entity Filer Category	Non-accelerated Filer
Entity Common Stock, Shares Outstanding		11,913,555
Entity Shell Company	false
Entity Small Business	true
Entity Emerging Growth Company	true
Entity Ex Transition Period	true
Trading Symbol	CCB
Entity File Number	001-38589
Entity Tax Identification Number	56-2392007
Entity Address, Address Line One	5415 Evergreen Way
Entity Address, City or Town	Everett
Entity Address, State or Province	WA
Entity Address, Country	US
Entity Address, Postal Zip Code	98203
City Area Code	425
Local Phone Number	257-9000
Entity Incorporation, State or Country Code	WA
Document Quarterly Report	true
Document Transition Report	false
Entity Interactive Data Current	Yes
Title of 12(b) Security	Common Stock, no par value per share
Security Exchange Name	NASDAQ

XML

Deposits (Tables)

9 Months Ended

Sep. 30, 2019

Deposits [Abstract]

Composition of Consolidated Deposits

The composition of consolidated deposits consisted of the following at the periods indicated:

	September 30,		December 31,
	2019		2018
	(dollars in thousands)
Demand, noninterest bearing	$	349,087	$	293,525
Now and money market		416,315		349,952
Savings		52,191		52,572
Wholesale brokered deposits		13,340		10,521
Time deposits less than $250,000		58,369		62,272
Time deposits $250,000 and over		32,947		34,772
Total deposits	$	922,249	$	803,614

Schedule of Maturity Distribution of Time Deposits

The following table presents the maturity distribution of time deposits as of September 30, 2019 (dollars in thousands):

Twelve months	$	69,662
One to two years		15,875
Two to three years		3,065
Three to four years		1,648
Four to five years		1,066
	$	91,316

XML

Recent Accounting Standards

9 Months Ended

Sep. 30, 2019

New Accounting Pronouncements And Changes In Accounting Principles [Abstract]

Recent Accounting Standards

Note 2 - Recent accounting standards

Accounting Standards Adopted in 2019

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was effective for us on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. We have elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods. 

Our operating leases relate primarily to office space and bank branches. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use ("ROU") asset of $9.4 million and an operating lease liability of $9.6 million on January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded on the face on the consolidated balance sheets. See Note 6 - Leases for additional information.

In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This ASU updates outdated guidance related to the Office of Comptroller of the Currency’s (OCC) Banking Circular 202, Accounting for Net Deferred Tax Charges, as the guidance has been rescinded by OCC and is no longer relevant. The amendments in this ASU are effective immediately. The adoption of ASU No. 2018-06 did not have a material impact on the Company's consolidated financial statements.

In September 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.  This ASU was issued to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.  Previously, these awards were recorded at the fair value of consideration received or the fair value of the equity instruments issued and was measured as of the earlier of the commitment date or the date performance was completed. The amendments in this ASU require the awards to be measured at the grant-date fair value of the equity instrument.  ASU No. 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption was permitted, but no earlier than an entity's adoption of Topic 606.  The adoption of ASU No. 2018-07 did not have a material impact on the Company's consolidated financial statements.

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. As a smaller reporting company, once the FASB issues the approved update, our implementation will be effective January 1, 2023.  We are actively assessing our data and the model needs and are evaluating the impact of adopting the amendment. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period 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.

XML

Earnings Per Common Share (Tables)

9 Months Ended

Sep. 30, 2019

Earnings Per Share [Abstract]

Schedule of Computation of Basic and Diluted Earnings Per Common Share

The following is a computation of basic and diluted earnings per common share at the periods indicated:

	Three months ended				Nine months ended
	September 30, 2019		September 30, 2018		September 30, 2019		September 30, 2018
	(dollars in thousands, except share data)				(dollars in thousands, except share data)
Net Income	$	3,511	$	2,602	$	9,593	$	6,646
Basic weighted average number common shares outstanding		11,901,873		11,338,320		11,893,734		9,956,449
Dilutive effect of share-based compensation		286,634		271,658		299,337		94,966
Diluted weighted average number common shares outstanding		12,188,507		11,609,978		12,193,071		10,051,415
Basic earnings per share	$	0.30	$	0.23	$	0.81	$	0.67
Diluted earnings per share	$	0.29	$	0.22	$	0.79	$	0.66

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Leases - Summary of Minimum Annual Lease Payments under Lease Terms (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019
Leases [Abstract]
October 1, 2019 to December 31, 2019	$ 325
2020	1,304
2021	1,291
2022	1,296
2023	1,306
2024 and thereafter	4,936
Total lease payments	10,458
Less: amounts representing interest	1,611
Present value of lease liabilities	$ 8,847	$ 9,600

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Loans and Allowance for Loan Losses - Summary of Allocation of Allowance for Loan Loss as well as Activity in Allowance for Loan Loss Attributed to Various Segments in Loan (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018	Jun. 30, 2019	Dec. 31, 2018	Jun. 30, 2018	Dec. 31, 2017
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	$ 10,443	$ 8,540	$ 9,407	$ 8,017
Provision for loan losses or (recapture)					$ 637	$ 1,724	$ 508	$ 1,401
Loans receivable allowance including provision losses or (recapture)					11,080	11,131	9,048	9,418
Loans charged-off	(196)	(6)	(252)	(385)
Recoveries of loans previously charged-off	4	69	9	78
Net (charge-offs) recoveries	(192)	63	(243)	(307)
ALLL Balance	10,888	9,111	10,888	9,111
Allowances
Amounts allocated to Individually evaluated for impairment	230		230
Amounts allocated to Collectively evaluated for impairment	10,658		10,658			9,407
ALLL Balance	10,888	9,111	10,888	9,111
Loans
Loans individually evaluated for impairment	1,300		1,300			1,826
Loans collectively evaluated for impairment	874,398		874,398			766,897
Total Loans	875,698		875,698			768,723
Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	2,482	1,821	2,039	1,864
Provision for loan losses or (recapture)					195	643	(10)	226
Loans receivable allowance including provision losses or (recapture)					2,677	2,682	1,811	2,090
Loans charged-off	(118)		(125)	(281)
Recoveries of loans previously charged-off	2	1	4	3
Net (charge-offs) recoveries	(116)	1	(121)	(278)
ALLL Balance	2,561	1,812	2,561	1,812
Allowances
Amounts allocated to Individually evaluated for impairment	230		230
Amounts allocated to Collectively evaluated for impairment	2,331		2,331			2,039
ALLL Balance	2,561	1,812	2,561	1,812
Loans
Loans individually evaluated for impairment	1,233		1,233			493
Loans collectively evaluated for impairment	104,401		104,401			89,897
Total Loans	105,634		105,634			90,390
Construction, Land and Land Development
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	2,386	1,238	1,806	1,063
Provision for loan losses or (recapture)					136	716	423	598
Loans receivable allowance including provision losses or (recapture)					2,522	2,522	1,661	1,661
Loans charged-off	(75)		(75)
Net (charge-offs) recoveries	(75)		(75)
ALLL Balance	2,447	1,661	2,447	1,661
Allowances
Amounts allocated to Collectively evaluated for impairment	2,447		2,447			1,806
ALLL Balance	2,447	1,661	2,447	1,661
Loans
Loans collectively evaluated for impairment	86,919		86,919			64,045
Total Loans	86,919		86,919			64,045
Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	1,814	1,395	1,647	1,343
Provision for loan losses or (recapture)					140	307	7	59
Loans receivable allowance including provision losses or (recapture)					1,954	1,954	1,402	1,402
Recoveries of loans previously charged-off		65		65
Net (charge-offs) recoveries		65		65
ALLL Balance	1,954	1,467	1,954	1,467
Allowances
Amounts allocated to Collectively evaluated for impairment	1,954		1,954			1,647
ALLL Balance	1,954	1,467	1,954	1,467
Loans
Loans individually evaluated for impairment	67		67			72
Loans collectively evaluated for impairment	100,751		100,751			94,673
Total Loans	100,818		100,818			94,745
Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	2,845	2,303	2,648	2,014
Provision for loan losses or (recapture)					107	333	164	537
Loans receivable allowance including provision losses or (recapture)					2,952	2,981	2,467	2,551
Loans charged-off			(29)	(84)
Net (charge-offs) recoveries			(29)	(84)
ALLL Balance	2,952	2,467	2,952	2,467
Allowances
Amounts allocated to Collectively evaluated for impairment	2,952		2,952			2,648
ALLL Balance	2,952	2,467	2,952	2,467
Loans
Loans individually evaluated for impairment						1,261
Loans collectively evaluated for impairment	578,607		578,607			514,698
Total Loans	578,607		578,607			515,959
Consumer and Other Loans
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	67	52	77	43
Provision for loan losses or (recapture)					22	29	39	55
Loans receivable allowance including provision losses or (recapture)					89	106	91	98
Loans charged-off	(3)	(6)	(23)	(20)
Recoveries of loans previously charged-off	2	3	5	10
Net (charge-offs) recoveries	(1)	(3)	(18)	(10)
ALLL Balance	88	88	88	88
Allowances
Amounts allocated to Collectively evaluated for impairment	88		88			77
ALLL Balance	88	88	88	88
Loans
Loans collectively evaluated for impairment	3,720		3,720			3,584
Total Loans	3,720		3,720			3,584
Unallocated
Loans And Leases Receivable Disclosure [Line Items]
ALLL Balance	849	1,731	1,190	1,690
Provision for loan losses or (recapture)					37	(304)	(115)	(74)
Loans receivable allowance including provision losses or (recapture)					$ 886	886	$ 1,616	$ 1,616
ALLL Balance	886	1,616	886	1,616
Allowances
Amounts allocated to Collectively evaluated for impairment	886		886			$ 1,190
ALLL Balance	$ 886	$ 1,616	$ 886	$ 1,616

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Stock-Based Compensation - Summary of Stock Option Activity (Details) - 2018 Omnibus Incentive Plan $ / shares in Units, $ in Thousands	9 Months Ended	12 Months Ended
	Sep. 30, 2019 USD ($) $ / shares shares	Dec. 31, 2018 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Outstanding, Shares, Beginning balance | shares	688,310
Granted, Shares | shares	125,837
Exercised, Shares | shares	(17,760)
Forfeited or expired, Shares | shares	(10,130)
Outstanding, Shares, Ending balance | shares	786,257	688,310
Vested or expected to vest, Shares | shares	786,257
Exercisable, Shares | shares	261,232
Outstanding, Weighted Average Exercise Price, Beginning balance | $ / shares	$ 6.39
Granted, Weighted Average Exercise Price | $ / shares	14.91
Exercised, Weighted Average Exercise Price | $ / shares	6.15
Forfeited or expired, Weighted Average Exercise price | $ / shares	8.78
Outstanding, Weighted Average Exercise Price, Ending balance | $ / shares	7.72	$ 6.39
Vested or expected to vest, Weighted Average Exercise Price | $ / shares	7.72
Exercisable, Weighted Average Exercise Price | $ / shares	$ 6.01
Outstanding, Weighted Average Remaining Contractual Term	6 years 2 months 12 days	6 years 4 months 17 days
Vested or expected to vest, Weighted Average Remaining Contractual Term	6 years 2 months 12 days
Exercisable, Weighted Average Remaining Contractual Term	4 years 5 months 26 days
Outstanding, Aggregate Intrinsic Value | $	$ 5,815
Vested or expected to vest, Aggregate Intrinsic Value | $	5,815
Exercisable, Aggregate Intrinsic Value | $	$ 2,376

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Loans and Allowance for Loan Losses (Tables)

9 Months Ended

Sep. 30, 2019

Receivables [Abstract]

Composition of Loan Portfolio

The composition of the loan portfolio is as follows as of the periods indicated:

	September 30,				December 31,
	2019				2018
				(dollars in thousands)
Commercial and industrial loans	$	105,634			$	90,390
Real estate loans:
Construction, land, and land development		86,919				64,045
Residential real estate		100,818				94,745
Commercial real estate		578,607				515,959
Consumer and other loans		3,720				3,584
Gross loans receivable		875,698				768,723
Net deferred origination fees and premiums		(1,586	)			(824	)
Loans receivable	$	874,112			$	767,899

Summary of an Age Analysis of Past Due Loans

The following table illustrates an age analysis of past due loans as of the dates indicated:

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
September 30, 2019
Commercial and industrial loans	$	-	$	1,233	$	1,233	$	104,401	$	105,634		$	-
Real estate loans:
Construction, land and land development		-		-		-		86,919		86,919			-
Residential real estate		-		67		67		100,751		100,818			-
Commercial real estate		420		-		420		578,187		578,607			-
Consumer and other loans		6		-		6		3,714		3,720			-
	$	426	$	1,300	$	1,726	$	873,972	$	875,698		$	-
Less net deferred origination fees and premiums										(1,586	)
Loans receivable									$	874,112

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
December 31, 2018
Commercial and industrial loans	$	171	$	494	$	665	$	89,725	$	90,390		$	-
Real estate loans:
Construction, land and land development		823		-		823		63,222		64,045			-
Residential real estate		-		72		72		94,673		94,745			-
Commercial real estate		-		-		-		515,959		515,959			-
Consumer and other loans		2		-		2		3,582		3,584			-
	$	996	$	566	$	1,562	$	767,161		768,723		$	-
Less net deferred origination fees and premiums										(824	)
Loans receivable									$	767,899

Summary of Information Pertaining to Impaired Loans

A summary of information pertaining to impaired loans as of the period indicated:

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
	(dollars in thousands)
September 30, 2019
Commercial and industrial loans	$	1,463	$	407	$	826	$	1,233	$	230
Real estate loans:
Residential real estate		73		67		-		67		-
Total	$	1,536	$	474	$	826	$	1,300	$	230
December 31, 2018
Commercial and industrial loans	$	766	$	493	$	-	$	493	$	-
Real estate loans:
Residential real estate		74		72		-		72		-
Commercial real estate		1,491		1,261		-		1,261		-
Total	$	2,331	$	1,826	$	-	$	1,826	$	-

Summary of Our Average Recorded Investment and Interest Income Recognized on Impaired Loans

The following tables summarize our average recorded investment and interest income recognized on impaired loans by loan class for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended
	September 30, 2019				September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	1,406	$	-	$	995	$	3
Real estate loans:
Residential real estate		68		-		74		-
Commercial real estate		-		-		1,284		-
Total	$	1,474	$	-	$	2,353	$	3
	Nine Months Ended
	September 30, 2019				September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	933	$	-	$	1,371	$	28
Real estate loans:
Construction, land and land development		-		-		-		-
Residential real estate		71		-		306		5
Commercial real estate		315		-		1,296		-
Total	$	1,319	$	-	$	2,973	$	33

Summary of Troubled Debt Restructurings by Accrual Versus Nonaccrual Status and by Loan Class

The following table presents troubled debt restructurings by accrual versus nonaccrual status and by loan class as of December 31, 2018.  The troubled debt restructuring outstanding as of December 31, 2018 was paid off in the first quarter of 2019.   

	Accrual Status		Nonaccrual Status		Total Restructured Loans
	(dollars in thousands)
December 31, 2018
Commercial real estate	$	-	$	1,261	$	1,261

Analysis of Nonaccrual Loans by Category

An analysis of nonaccrual loans by category consisted of the following at the periods indicated:

	September 30,		December 31,
	2019		2018
			(dollars in thousands)
Commercial and industrial loans	$	1,233	$	493
Real estate loans:
Residential real estate		67		72
Commercial real estate		-		1,261
Total nonaccrual loans	$	1,300	$	1,826

Summary of Loans by Credit Quality Risk Rating

Loans by credit quality risk rating are as follows as of the periods indicated:

	Pass		Other Loans Especially Mentioned		Sub- Standard		Doubtful		Total
	(dollars in thousands)
September 30, 2019
Commercial and industrial loans	$	97,923	$	2,579	$	5,132	$	-	$	105,634
Real estate loans:
Construction, land, and land development		86,919		-		-		-		86,919
Residential real estate		100,333		418		67		-		100,818
Commercial real estate		575,895		2,712		-		-		578,607
Consumer and other loans		3,720		-		-		-		3,720
	$	864,790	$	5,709	$	5,199	$	-		875,698
Less net deferred origination fees										(1,586	)
Loans receivable									$	874,112
December 31, 2018
Commercial and industrial loans	$	84,859	$	3,908	$	1,623	$	-	$	90,390
Real estate loans:
Construction, land, and land development		55,666		8,379		-		-		64,045
Residential real estate		94,548		125		72		-		94,745
Commercial real estate		512,151		2,547		1,261		-		515,959
Consumer and other loans		3,584		-		-				3,584
	$	750,808	$	14,959	$	2,956	$	-		768,723
Less net deferred origination fees										(824	)
Loans receivable									$	767,899

Summary of Allocation of Allowance for Loan Loss as well as Activity in Allowance for Loan Loss Attributed to Various Segments in Loan

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30, 2019:

	Commercial and Industrial			Construction, Land, and Land Development			Residential Real Estate		Commercial Real Estate			Consumer and Other			Unallocated			Total
	(dollars in thousands)
Three months ended September 30, 2019
Balance, June 30, 2019	$	2,482		$	2,386		$	1,814	$	2,845		$	67		$	849		$	10,443
Provision for loan losses or (recapture)		195			136			140		107			22			37			637
		2,677			2,522			1,954		2,952			89			886			11,080
Loans charged-off		(118	)		(75	)		-		-			(3	)		-			(196	)
Recoveries of loans previously charged-off		2			-			-		-			2			-			4
Net (charge-offs) recoveries		(116	)		(75	)		-		-			(1	)		-			(192	)
Balance, September 30, 2019	$	2,561		$	2,447		$	1,954	$	2,952		$	88		$	886		$	10,888
Nine months ended September 30, 2019
Balance, December 31, 2018	$	2,039		$	1,806		$	1,647	$	2,648		$	77		$	1,190		$	9,407
Provision for loan losses or (recapture)		643			716			307		333			29			(304	)		1,724
		2,682			2,522			1,954		2,981			106			886			11,131
Loans charged-off		(125	)		(75	)		-		(29	)		(23	)		-			(252	)
Recoveries of loans previously charged-off		4			-			-		-			5			-			9
Net (charge-offs) recoveries		(121	)		(75	)		-		(29	)		(18	)		-			(243	)
Balance, September 30, 2019	$	2,561		$	2,447		$	1,954	$	2,952		$	88		$	886		$	10,888
As of September 30, 2019
ALLL amounts allocated to
Individually evaluated for impairment	$	230		$	-		$	-	$	-		$	-		$	-		$	230
Collectively evaluated for impairment		2,331			2,447			1,954		2,952			88			886			10,658
ALLL balance, September 30, 2019	$	2,561		$	2,447		$	1,954	$	2,952		$	88		$	886		$	10,888
Loans individually evaluated for impairment	$	1,233		$	-		$	67	$	-		$	-					$	1,300
Loans collectively evaluated for impairment		104,401			86,919			100,751		578,607			3,720						874,398
Loan balance, September 30, 2019	$	105,634		$	86,919		$	100,818	$	578,607		$	3,720					$	875,698

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30, 2018:

	Commercial and Industrial			Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate			Consumer and Other			Unallocated			Total
	(dollars in thousands)
Three Months Ended September 30, 2018
ALLL balance, June 30, 2018	$	1,821		$	1,238	$	1,395	$	2,303		$	52		$	1,731		$	8,540
Provision for loan losses or (recapture)		(10	)		423		7		164			39			(115	)		508
		1,811			1,661		1,402		2,467			91			1,616			9,048
Loans charged-off		-			-		-		-			(6	)		-			(6	)
Recoveries of loans previously charged-off		1			-		65		-			3			-			69
Net (charge-offs) recoveries		1			-		65		-			(3	)		-			63
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
Nine Months Ended September 30, 2018
ALLL balance, December 31, 2017	$	1,864		$	1,063	$	1,343	$	2,014		$	43		$	1,690		$	8,017
Provision for loan losses or (recapture)		226			598		59		537			55			(74	)		1,401
		2,090			1,661		1,402		2,551			98			1,616			9,418
Loans charged-off		(281	)		-		-		(84	)		(20	)		-			(385	)
Recoveries of loans previously charged-off		3			-		65		-			10			-			78
Net (charge-offs) recoveries		(278	)		-		65		(84	)		(10	)		-			(307	)
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111

	Commercial and Industrial		Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate		Consumer and Other		Unallocated		Total
	(dollars in thousands)
As of December 31, 2018
ALLL amounts allocated to
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		2,039		1,806		1,647		2,648		77		1,190		9,407
ALLL balance, December 31, 2018	$	2,039	$	1,806	$	1,647	$	2,648	$	77	$	1,190	$	9,407
Loans individually evaluated for impairment	$	493	$	-	$	72	$	1,261	$	-			$	1,826
Loans collectively evaluated for impairment		89,897		64,045		94,673		514,698		3,584				766,897
Loan balance, December 31, 2018	$	90,390	$	64,045	$	94,745	$	515,959	$	3,584			$	768,723

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Description of Business and Summary of Significant Accounting Policies

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Description of Business and Summary of Significant Accounting Policies

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 subsidiary is Coastal Community Bank (Bank). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank and Federal Reserve System (Federal Reserve) state member bank.

The Company provides a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound area through its 14 branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application. The Bank’s main branch and the headquarters of the Bank and Company are located in Everett, Washington. The Bank’s deposits are insured in whole or in part by the FDIC. The Bank’s loans and deposits are primarily within the greater Puget Sound area, and the Bank’s primary funding source is deposits from customers. The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has 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 28, 2019. Operating results for the three and nine months ended September 30, 2019 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 and the Bank. All significant intercompany accounts have been eliminated in consolidation.

Business Segments - The Company is managed by legal entity and not by lines of business. The entity’s primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its market areas. The Bank offers a wide variety of deposit products to its customers. Lending activities include the origination of real estate, commercial and industrial, and consumer loans. Interest income on loans is the Company’s primary source of revenue, and is supplemented by interest income on deposits with other banks, interest income from investment securities, deposit service charges, and other service provided activities. The Company has determined that its current business and operations consist of a single reporting segment and, therefore, segment disclosures are not required.

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 fair value of the Company’s investment securities, deferred tax assets, and financial instruments. Actual results could differ significantly from those estimates.

Subsequent Events - The Company has evaluated events and transactions subsequent to September 30, 2019 for potential recognition or disclosure.

Accounting policies – Our complete accounting policies are described in Note 1, summary of significant accounting policies of the Company’s audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017 included in the Company’s Annual Report Form 10-K filed with the SEC on March 28, 2019.

Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements have been reclassified to conform to the current presentation with no effect on stockholders’ equity or net income.

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Fair Value Measurements (Tables)

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Summary of Estimated Fair Values of Financial Instruments

The following tables present estimated fair values of the Company’s financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:

	September 30, 2019				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	22,060	$	22,060	$	22,060	$	-	$	-
Interest earning deposits with other banks		131,287		131,287		131,287		-		-
Investment securities		32,696		32,661		24,899		7,762		-
Other investments		4,405		4,405		-		4,405		-
Loans receivable, net		863,224		858,731		-		-		858,731
Accrued interest receivable		2,629		2,629		-		2,629		-
Financial liabilities
Deposits	$	922,249		922,110	$	-	$	922,110	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,975		10,035		-		10,035		-
Junior subordinated debentures		3,582		3,407		-		3,407		-
Accrued interest payable		303		303		-		303		-

	December 31, 2018				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	16,315	$	16,315	$	16,315	$	-	$	-
Interest earning deposits with other banks		109,467		109,467		109,467		-		-
Investment securities		37,922		37,865		33,241		4,624		-
Other investments		3,766		3,766		-		3,766		-
Loans receivable, net		758,492		743,354		-		-		743,354
Accrued interest receivable		2,526		2,526		-		2,526		-
Financial liabilities
Deposits	$	803,614	$	802,645	$	-	$	802,645	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,965		9,804		-		9,804		-
Junior subordinated debentures		3,581		3,265		-		3,265		-
Accrued interest payable		279		279		-		279		-

Summary of Assets Measured at Fair Value on Recurring Basis

Items measured at fair value on a recurring basis – The following fair value hierarchy table presents information about the Company’s assets that are measured at fair value on a recurring basis at the dates indicated:

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands)
September 30, 2019
Available-for-sale
U.S. Treasury securities	$	24,899	$	-	$	-	$	24,899
U.S. Government agencies		-		2,992		-		2,992
U.S. Agency collateralized mortgage obligations		-		138		-		138
U.S. Agency residential mortgage-backed securities		-		30		-		30
Municipals		-		260		-		260
	$	24,899	$	3,420	$	-	$	28,319
December 31, 2018
Available-for-sale
U.S. Treasury securities	$	33,241	$	-	$	-	$	33,241
U.S. Government agencies		-		2,957		-		2,957
U.S. Agency collateralized mortgage obligations		-		169		-		169
U.S. Agency residential mortgage-backed securities		-		38		-		38
Municipals		-		255		-		255
	$	33,241	$	3,419	$	-	$	36,660

Summary of Assets and Liabilities Classified as Level 3 and Measured at Fair Value on Nonrecurring Basis

The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated:

	Valuation Technique	Unobservable Inputs	September 30, 2019 Weighted Average Rate			December 31, 2018 Weighted Average Rate
Impaired loans	Collateral valuations	Discount to appraised value		10	%		9	%

Summary of Financial Assets and Liabilities Measured at Fair Value on Nonrecurring Basis

Items measured at fair value on a nonrecurring basis – The following table presents financial assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at the dates indicated:

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands)
September 30, 2019
Impaired loans	$	-	$	-	$	1,073	$	1,073
Total	$	-	$	-	$	1,073	$	1,073
December 31, 2018
Impaired loans	$	-	$	-	$	493	$	493
Total	$	-	$	-	$	493	$	493

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CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$ 11,691	$ 9,262	$ 33,027	$ 26,229
Interest on interest earning deposits with other banks	486	458	1,946	949
Interest on investment securities	168	156	481	463
Dividends on other investments	10	18	99	91
Total interest income	12,355	9,894	35,553	27,732
INTEREST EXPENSE
Interest on deposits	1,435	851	4,291	2,209
Interest on borrowed funds	193	195	582	594
Total interest expense	1,628	1,046	4,873	2,803
Net interest income	10,727	8,848	30,680	24,929
PROVISION FOR LOAN LOSSES	637	508	1,724	1,401
Net interest income after provision for loan losses	10,090	8,340	28,956	23,528
NONINTEREST INCOME
Sublease and lease income	16	10	36	71
Gain on sales of loans, net	369		490	142
Gain on sales of securities, net	171		171
Other income	141	147	359	414
Total noninterest income	2,088	1,546	6,204	3,866
NONINTEREST EXPENSE
Salaries and employee benefits	4,971	4,027	14,058	11,672
Occupancy	884	798	2,808	2,425
Data processing	509	501	1,537	1,472
Director and staff expenses	241	213	698	493
Excise taxes	184	146	529	404
Marketing	98	110	300	253
Legal and professional fees	170	142	872	352
Federal Deposit Insurance Corporation (FDIC) assessments	(4)	83	205	247
Business development	122	81	320	241
Other expense	573	509	1,726	1,472
Total noninterest expense	7,748	6,610	23,053	19,031
Income before provision for income taxes	4,430	3,276	12,107	8,363
PROVISION FOR INCOME TAXES	919	674	2,514	1,717
NET INCOME	$ 3,511	$ 2,602	$ 9,593	$ 6,646
Basic earnings per common share	$ 0.30	$ 0.23	$ 0.81	$ 0.67
Diluted earnings per common share	$ 0.29	$ 0.22	$ 0.79	$ 0.66
Weighted average number of common shares outstanding:
Basic	11,901,873	11,338,320	11,893,734	9,956,449
Diluted	12,188,507	11,609,978	12,193,071	10,051,415
Deposit Service Charges and Fees
NONINTEREST INCOME
Noninterest income	$ 795	$ 800	$ 2,302	$ 2,258
Loan Referral Fees
NONINTEREST INCOME
Noninterest income		209	1,106	453
Wholesale Banking Service Fees
NONINTEREST INCOME
Noninterest income	456	328	1,404	370
Mortgage Broker Fees
NONINTEREST INCOME
Noninterest income	$ 140	$ 52	$ 336	$ 158

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Investments Securities - Amortized Cost and Fair Values of Investment Securities (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	$ 28,392	$ 38,301
Available-for-sale, Gross Unrealized Gains	3
Available-for-sale, Gross Unrealized Losses	(76)	(1,641)
Available-for-sale, Fair Value	28,319	36,660
Held-to-maturity, Amortized Cost	4,377	1,262
Held-to-maturity, Fair Value	4,342
Total investment securities, Amortized Cost	32,769	39,563
Total investment securities, Gross Unrealized Gains	3
Total investment securities, Gross Unrealized Losses	(111)	(1,698)
Total investment securities, Fair Value	32,661	37,865
U.S. Treasury Securities
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	24,967	34,831
Available-for-sale, Gross Unrealized Losses	(68)	(1,590)
Available-for-sale, Fair Value	24,899	33,241
U.S. Government Agencies
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	3,000	3,000
Available-for-sale, Gross Unrealized Losses	(8)	(43)
Available-for-sale, Fair Value	2,992	2,957
U.S. Agency Collateralized Mortgage Obligations
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	138	172
Available-for-sale, Gross Unrealized Losses		(3)
Available-for-sale, Fair Value	138	169
U.S. Agency Residential Mortgage-Backed Securities
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	30	39
Available-for-sale, Gross Unrealized Losses		(1)
Available-for-sale, Fair Value	30	38
Held-to-maturity, Amortized Cost	4,377	1,262
Held-to-maturity, Gross Unrealized Losses	(35)	(57)
Held-to-maturity, Fair Value	4,342	1,205
Municipals
Available-for-Sale and Held-to-Maturity Securities [Line Items]
Available-for-sale, Amortized Cost	257	259
Available-for-sale, Gross Unrealized Gains	3
Available-for-sale, Gross Unrealized Losses		(4)
Available-for-sale, Fair Value	$ 260	$ 255

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Stock-Based Compensation - Summary of Nonvested Shares (Details) - Restricted Stock Awards	9 Months Ended
	Sep. 30, 2019 $ / shares shares
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Nonvested shares, Beginning balance | shares	5,200
Granted, Shares | shares	0
Forfeited, Shares | shares	(1,200)
Vested, Shares | shares	0
Nonvested shares, Ending balance | shares	4,000
Nonvested, Weighted-Average Grant Date Fair Value, Beginning balance | $ / shares	$ 12.32
Granted, Weighted-Average Grant Date Fair Value | $ / shares	0
Forfeited, Weighted-Average Grant Date Fair Value | $ / shares	6.25
Vested, Weighted-Average Grant Date Fair Value | $ / shares	0
Nonvested, Weighted-Average Grant Date Fair Value, Ending balance | $ / shares	$ 15.35

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Leases - Summary of Components of Total Lease Expense and Operating Cash Flows (Details) $ in Thousands	9 Months Ended
	Sep. 30, 2019 USD ($)
Lease expense:
Operating lease expense	$ 991
Variable lease expense	98
Total lease expense	1,089
Cash paid:
Cash paid reducing operating lease liabilities	$ 1,074

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Deposits - Composition of Consolidated Deposits (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Time Deposits By Maturity [Abstract]
Demand, noninterest bearing	$ 349,087	$ 293,525
Now and money market	416,315	349,952
Savings	52,191	52,572
Wholesale brokered deposits	13,340	10,521
Time deposits less than $250,000	58,369	62,272
Time deposits $250,000 and over	32,947	34,772
Total deposits	$ 922,249	$ 803,614

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Shareholders' Equity - Additional Information (Details)	Sep. 26, 2018 shares	May 04, 2018 shares	Sep. 30, 2019 shares	Dec. 31, 2018 shares
Class Of Stock [Line Items]
Reverse stock split, description		1-for-5 reverse stock split
Reverse stock split, conversion ratio		0.2
Number of issued shares before reverse stock split		46,268,359
Number of issued shares after reverse stock split		9,254,073
Number of additional shares issued to shareholders with fractional shares		401
Preferred stock, shares authorized			25,000,000	25,000,000
Preferred stock, shares issued			0	0
Preferred stock, shares outstanding			0	0
Common stock, shares authorized			300,000,000	300,000,000
Common stock, shares issued			11,912,115	11,893,203
Common stock, shares outstanding			11,912,115	11,893,203
Class B Nonvoting Common Stock Exchanged for Voting Common Stock
Class Of Stock [Line Items]
Shares converted to common stock	100,000
Class C Nonvoting Common Stock Exchanged for Voting Common Stock
Class Of Stock [Line Items]
Shares converted to common stock	261,444
Class B Nonvoting Common Stock
Class Of Stock [Line Items]
Common stock, shares issued			0	0
Common stock, shares outstanding			0	0
Class C Nonvoting Common Stock
Class Of Stock [Line Items]
Common stock, shares issued			0	0
Common stock, shares outstanding			0	0

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Fair Value Measurements - Summary of Financial Assets and Liabilities Measured at Fair Value on Nonrecurring Basis (Details) - Nonrecurring - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	$ 1,073	$ 493
Impaired Loans
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	1,073	493
Level 3
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	1,073	493
Level 3 | Impaired Loans
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	$ 1,073	$ 493

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Loans and Allowance for Loan Losses - Summary of Loans by Credit Quality Risk Rating (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	$ 875,698	$ 768,723
Less net deferred origination fees	(1,586)	(824)
Loans receivable	874,112	767,899
Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	105,634	90,390
Construction, Land and Land Development
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	86,919	64,045
Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	100,818	94,745
Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	578,607	515,959
Consumer and Other Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	3,720	3,584
Pass
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	864,790	750,808
Pass | Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	97,923	84,859
Pass | Construction, Land and Land Development
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	86,919	55,666
Pass | Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	100,333	94,548
Pass | Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	575,895	512,151
Pass | Consumer and Other Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	3,720	3,584
Other Loans Especially Mentioned
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	5,709	14,959
Other Loans Especially Mentioned | Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	2,579	3,908
Other Loans Especially Mentioned | Construction, Land and Land Development
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross		8,379
Other Loans Especially Mentioned | Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	418	125
Other Loans Especially Mentioned | Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	2,712	2,547
Sub-Standard
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	5,199	2,956
Sub-Standard | Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	5,132	1,623
Sub-Standard | Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross	$ 67	72
Sub-Standard | Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Loans, gross		$ 1,261

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Loans and Allowance for Loan Losses - Summary of Information Pertaining to Impaired Loans (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Financing Receivable Impaired [Line Items]
Unpaid Contractual Principal Balance	$ 1,536	$ 2,331
Recorded Investment With No Allowance	474	1,826
Recorded Investment With Allowance	826
Total Recorded Investment	1,300	1,826
Related Allowance	230
Commercial and Industrial Loans
Financing Receivable Impaired [Line Items]
Unpaid Contractual Principal Balance	1,463	766
Recorded Investment With No Allowance	407	493
Recorded Investment With Allowance	826
Total Recorded Investment	1,233	493
Related Allowance	230
Residential Real Estate
Financing Receivable Impaired [Line Items]
Unpaid Contractual Principal Balance	73	74
Recorded Investment With No Allowance	67	72
Total Recorded Investment	$ 67	72
Commercial Real Estate
Financing Receivable Impaired [Line Items]
Unpaid Contractual Principal Balance		1,491
Recorded Investment With No Allowance		1,261
Total Recorded Investment		$ 1,261

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Investments Securities - Summary of Investment Securities Continuous Unrealized Loss Position (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, Less Than 12 Months	$ 19,959	$ 38
Available-for-sale, Gross Unrealized Losses, Less Than 12 Months	(10)	(1)
Available-for-sale, Fair Value, 12 Months or Greater	7,932	36,622
Available-for-sale, Gross Unrealized Losses, 12 Months or Greater	(66)	(1,640)
Available-for-sale, Total Fair Value	27,891	36,660
Available-for-sale, Total Gross Unrealized Losses	(76)	(1,641)
Held-to-maturity, Fair Value, Less Than 12 Months	23,103	38
Held-to-maturity, Gross Unrealized Losses, Less Than 12 Months	(34)	(1)
Held-to-maturity, Fair Value, 12 Months or Greater	9,130	37,827
Held-to-maturity, Gross Unrealized Losses, Less Than 12 Months	(77)	(1,697)
Held-to-maturity, Total, Fair Value	32,233	37,865
Held-to-maturity, Total, Gross Unrealized Losses	(111)	(1,698)
U.S. Treasury Securities
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, Less Than 12 Months	19,959
Available-for-sale, Gross Unrealized Losses, Less Than 12 Months	(10)
Available-for-sale, Fair Value, 12 Months or Greater	4,939	33,241
Available-for-sale, Gross Unrealized Losses, 12 Months or Greater	(58)	(1,590)
Available-for-sale, Total Fair Value	24,898	33,241
Available-for-sale, Total Gross Unrealized Losses	(68)	(1,590)
U.S. Government Agencies
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, 12 Months or Greater	2,993	2,957
Available-for-sale, Gross Unrealized Losses, 12 Months or Greater	(8)	(43)
Available-for-sale, Total Fair Value	2,993	2,957
Available-for-sale, Total Gross Unrealized Losses	(8)	(43)
U.S. Agency Collateralized Mortgage Obligations
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, 12 Months or Greater		169
Available-for-sale, Gross Unrealized Losses, 12 Months or Greater		(3)
Available-for-sale, Total Fair Value		169
Available-for-sale, Total Gross Unrealized Losses		(3)
Municipals
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, 12 Months or Greater		255
Available-for-sale, Gross Unrealized Losses, 12 Months or Greater		(4)
Available-for-sale, Total Fair Value		255
Available-for-sale, Total Gross Unrealized Losses		(4)
U.S. Agency Residential Mortgage-Backed Securities
Schedule Of Available For Sale Securities [Line Items]
Available-for-sale, Fair Value, Less Than 12 Months		38
Available-for-sale, Gross Unrealized Losses, Less Than 12 Months		(1)
Available-for-sale, Total Fair Value		38
Available-for-sale, Total Gross Unrealized Losses		(1)
Held-to-maturity, Fair Value, Less Than 12 Months	3,144
Held-to-maturity, Gross Unrealized Losses, Less Than 12 Months	(24)
Held-to-maturity, Fair Value, 12 Months or Greater	1,198	1,205
Held-to-maturity, Gross Unrealized Losses, Less Than 12 Months	(11)	(57)
Held-to-maturity, Total, Fair Value	4,342	1,205
Held-to-maturity, Total, Gross Unrealized Losses	$ (35)	$ (57)

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Deposits

9 Months Ended

Sep. 30, 2019

Deposits [Abstract]

Deposits

Note 5 - Deposits

The composition of consolidated deposits consisted of the following at the periods indicated:

	September 30,		December 31,
	2019		2018
	(dollars in thousands)
Demand, noninterest bearing	$	349,087	$	293,525
Now and money market		416,315		349,952
Savings		52,191		52,572
Wholesale brokered deposits		13,340		10,521
Time deposits less than $250,000		58,369		62,272
Time deposits $250,000 and over		32,947		34,772
Total deposits	$	922,249	$	803,614

The following table presents the maturity distribution of time deposits as of September 30, 2019 (dollars in thousands):

Twelve months	$	69,662
One to two years		15,875
Two to three years		3,065
Three to four years		1,648
Four to five years		1,066
	$	91,316

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Fair Value Measurements

9 Months Ended

Sep. 30, 2019

Fair Value Disclosures [Abstract]

Fair Value Measurements

Note 9 - Fair Value Measurements

The following tables present estimated fair values of the Company’s financial instruments as of the period indicated, whether or not recognized or recorded in the consolidated balance sheets at the period indicated:

	September 30, 2019				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	22,060	$	22,060	$	22,060	$	-	$	-
Interest earning deposits with other banks		131,287		131,287		131,287		-		-
Investment securities		32,696		32,661		24,899		7,762		-
Other investments		4,405		4,405		-		4,405		-
Loans receivable, net		863,224		858,731		-		-		858,731
Accrued interest receivable		2,629		2,629		-		2,629		-
Financial liabilities
Deposits	$	922,249		922,110	$	-	$	922,110	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,975		10,035		-		10,035		-
Junior subordinated debentures		3,582		3,407		-		3,407		-
Accrued interest payable		303		303		-		303		-

	December 31, 2018				Fair Value Measurements Using
	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
	(dollars in thousands)
Financial assets
Cash and due from banks	$	16,315	$	16,315	$	16,315	$	-	$	-
Interest earning deposits with other banks		109,467		109,467		109,467		-		-
Investment securities		37,922		37,865		33,241		4,624		-
Other investments		3,766		3,766		-		3,766		-
Loans receivable, net		758,492		743,354		-		-		743,354
Accrued interest receivable		2,526		2,526		-		2,526		-
Financial liabilities
Deposits	$	803,614	$	802,645	$	-	$	802,645	$	-
FHLB advances		20,000		20,000		-		20,000		-
Subordinated debt		9,965		9,804		-		9,804		-
Junior subordinated debentures		3,581		3,265		-		3,265		-
Accrued interest payable		279		279		-		279		-

The Company measures and discloses certain assets and liabilities at fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (that is, not a forced liquidation or distressed sale). GAAP establishes a consistent framework for measuring fair value and disclosure requirements about fair value measurements. Among other things, the accounting standard requires the reporting entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s estimates for market assumptions. These two types of inputs create the following fair value hierarchy:

• Level 1 – Quoted prices in active markets for identical instruments. An active market is a market in which transactions occur with sufficient frequency and volume to provide pricing information on an ongoing basis. A quoted price in an active market provides the most reliable evidence of fair value and shall be used to measure fair value whenever available.

• Level 2 – Observable inputs other than Level 1 including quoted prices in active markets for similar instruments, quoted prices in less active markets for identical or similar instruments, or other observable inputs that can be corroborated by observable market data.

• Level 3 – Unobservable inputs supported by little or no market activity for financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation; also includes observable inputs from nonbinding single dealer quotes not corroborated by observable market data.

The estimated fair value amounts of financial instruments have been determined by the Company using available market information and appropriate valuation methodologies. However, considerable judgment is required to interpret data to develop the estimates of fair value. Accordingly, the estimates presented herein are not necessarily indicative of the amounts the Company could realize at a future date. The use of different market assumptions and/or estimation methodologies may have a material effect on the estimated fair value amounts. In addition, reasonable comparability between financial institutions may not be likely due to the wide range of permitted valuation techniques and numerous estimates that must be made given the absence of active secondary markets for certain financial instruments. This lack of uniform valuation methodologies also introduces a greater degree of subjectivity to these estimated fair values.

Items measured at fair value on a recurring basis – The following fair value hierarchy table presents information about the Company’s assets that are measured at fair value on a recurring basis at the dates indicated:

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands)
September 30, 2019
Available-for-sale
U.S. Treasury securities	$	24,899	$	-	$	-	$	24,899
U.S. Government agencies		-		2,992		-		2,992
U.S. Agency collateralized mortgage obligations		-		138		-		138
U.S. Agency residential mortgage-backed securities		-		30		-		30
Municipals		-		260		-		260
	$	24,899	$	3,420	$	-	$	28,319
December 31, 2018
Available-for-sale
U.S. Treasury securities	$	33,241	$	-	$	-	$	33,241
U.S. Government agencies		-		2,957		-		2,957
U.S. Agency collateralized mortgage obligations		-		169		-		169
U.S. Agency residential mortgage-backed securities		-		38		-		38
Municipals		-		255		-		255
	$	33,241	$	3,419	$	-	$	36,660

The following methods were used to estimate the fair value of the class of financial instruments above:

Investment securities - The fair value of securities is based on quoted market prices, pricing models, quoted prices of similar securities, independent pricing sources, and discounted cash flows.

Limitations: The fair value estimates presented herein are based on pertinent information available to management as of September 30, 2019 and December 31, 2018. The factors used in the fair values estimates are subject to change subsequent to the dates the fair value estimates are completed, therefore, current estimates of fair value may differ significantly from the amounts presented herein.

Assets measured at fair value using significant unobservable inputs (Level 3)

The following table provides a description of the valuation technique, unobservable inputs, and qualitative information about the unobservable inputs for the Company’s assets and liabilities classified as Level 3 and measured at fair value on a nonrecurring basis at the dates indicated:

	Valuation Technique	Unobservable Inputs	September 30, 2019 Weighted Average Rate			December 31, 2018 Weighted Average Rate
Impaired loans	Collateral valuations	Discount to appraised value		10	%		9	%

Items measured at fair value on a nonrecurring basis – The following table presents financial assets and liabilities measured at fair value on a nonrecurring basis and the level within the fair value hierarchy of the fair value measurements for those assets at the dates indicated:

	Level 1		Level 2		Level 3		Total Fair Value
	(dollars in thousands)
September 30, 2019
Impaired loans	$	-	$	-	$	1,073	$	1,073
Total	$	-	$	-	$	1,073	$	1,073
December 31, 2018
Impaired loans	$	-	$	-	$	493	$	493
Total	$	-	$	-	$	493	$	493

The amounts disclosed above represent the fair values at the time the nonrecurring fair value measurements were made, and not necessarily the fair value as of the dates reported on.

Impaired loans - A loan is considered impaired when it is probable that payment of interest and principal will not be made in accordance with the contractual terms of the loan agreement. Impairment is measured based on the fair value of the underlying collateral or the discounted cash expected future cash flows. Subsequent changes in the value of impaired loans are included within the provision for loan losses in the same manner in which impairment initially was recognized or as a reduction in the provision that would otherwise be reported. Impaired loans are evaluated quarterly to determine if valuation adjustments should be recorded. The need for valuation adjustments arises when observable market prices or current appraised values of collateral indicate a shortfall in collateral value compared to current carrying values of the related loan. If the Company determines that the value of the impaired loan is less than the carrying value of the loan, the Company either establishes an impairment reserve as a specific component of the allowance for loan losses or charges off the impairment amount. These valuation adjustments are considered nonrecurring fair value adjustments.

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Leases (Tables)

9 Months Ended

Sep. 30, 2019

Leases [Abstract]

Summary of Minimum Annual Lease Payments under Lease Terms

The following table presents the minimum annual lease payments under the terms of these leases, inclusive of renewal options that the Company is reasonably certain to renew, at September 30, 2019:

	September 30,
(dollars in thousands)	2019
October 1, 2019 to December 31, 2019	$	325
2020		1,304
2021		1,291
2022		1,296
2023		1,306
2024 and thereafter		4,936
Total lease payments		10,458
Less:  amounts representing interest		1,611
Present value of lease liabilities	$	8,847

Summary of Components of Total Lease Expense and Operating Cash Flows

The following table presents the components of total lease expense and operating cash flows for the nine months ended September 30, 2019:

	September 30,
(dollars in thousands)	2019
Lease expense:
Operating lease expense	$	991
Variable lease expense		98
Total lease expense (1)	$	1,089
Cash paid:
Cash paid reducing operating lease liabilities	$	1,074
(1) Included in net occupancy expense in the Condensed Consolidated Statements of Income (Unaudited).

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Description of Business and Summary of Significant Accounting Policies - Additional Information (Details)	9 Months Ended
	Sep. 30, 2019 Branch
Accounting Policies [Abstract]
Entity incorporation, state name	WA
Number of branches	14

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CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) - USD ($) $ in Thousands	Total	Common Stock	Retained Earnings	Accumulated Other Comprehensive Income (Loss)
Beginning balance at Dec. 31, 2017	$ 65,711	$ 52,521	$ 14,134	$ (944)
Beginning balance, Shares at Dec. 31, 2017		9,248,898
Net income	6,646		6,646
Reclassification of stranded tax effect due to federal tax rate change			186	(186)
Issuance of restricted stock awards, Shares		4,405
Exercise of stock options	339	$ 339
Exercise of stock options, Shares		55,670
Stock-based compensation	231	$ 231
Stock issuance and net proceeds from initial public offering	33,243	$ 33,243
Stock issuance and net proceeds from initial public offering, Shares		2,577,500
Other comprehensive income (loss)	(894)			(894)
Ending balance at Sep. 30, 2018	105,276	$ 86,334	20,966	(2,024)
Ending balance, Shares at Sep. 30, 2018		11,886,473
Beginning balance at Jun. 30, 2018	69,490	$ 52,946	18,364	(1,820)
Beginning balance, Shares at Jun. 30, 2018		9,298,553
Net income	2,602		2,602
Exercise of stock options	66	$ 66
Exercise of stock options, Shares		10,420
Stock-based compensation	79	$ 79
Stock issuance and net proceeds from initial public offering	33,243	$ 33,243
Stock issuance and net proceeds from initial public offering, Shares		2,577,500
Other comprehensive income (loss)	(204)			(204)
Ending balance at Sep. 30, 2018	105,276	$ 86,334	20,966	(2,024)
Ending balance, Shares at Sep. 30, 2018		11,886,473
Beginning balance at Dec. 31, 2018	109,156	$ 86,431	24,021	(1,296)
Beginning balance, Shares at Dec. 31, 2018		11,893,203
Net income	9,593		9,593
Issuance of restricted stock awards, Shares		2,352
Forfeiture of restricted stock awards, Shares		(1,200)
Exercise of stock options	110	$ 110
Exercise of stock options, Shares		17,760
Stock-based compensation	325	$ 325
Other comprehensive income (loss)	1,238			1,238
Ending balance at Sep. 30, 2019	120,422	$ 86,866	33,614	(58)
Ending balance, Shares at Sep. 30, 2019		11,912,115
Beginning balance at Jun. 30, 2019	116,591	$ 86,730	30,103	(242)
Beginning balance, Shares at Jun. 30, 2019		11,908,185
Net income	3,511		3,511
Exercise of stock options	25	$ 25
Exercise of stock options, Shares		3,930
Stock-based compensation	111	$ 111
Other comprehensive income (loss)	184			184
Ending balance at Sep. 30, 2019	$ 120,422	$ 86,866	$ 33,614	$ (58)
Ending balance, Shares at Sep. 30, 2019		11,912,115

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
ASSETS
Cash and due from banks	$ 22,060	$ 16,315
Interest earning deposits with other banks (restricted cash of $24,817 and $24,004 at September 30, 2019 and December 31, 2018, respectively)	131,287	109,467
Investment securities, available for sale, at fair value	28,319	36,660
Investment securities, held to maturity, at amortized cost	4,377	1,262
Other investments	4,405	3,766
Loans receivable	874,112	767,899
Allowance for loan losses	(10,888)	(9,407)
Total loans receivable, net	863,224	758,492
Premises and equipment, net	13,167	13,167
Operating lease right-of-use assets	8,666
Accrued interest receivable	2,629	2,526
Bank-owned life insurance, net	6,832	6,688
Deferred tax asset, net	2,206	2,518
Other assets	2,888	1,249
Total assets	1,090,060	952,110
LIABILITIES
Deposits	922,249	803,614
Federal Home Loan Bank (FHLB) advances	20,000	20,000
Principal amount $10,000 (less unamortized debt issuance costs of $25 and $35 at September 30, 2019 and December 31, 2018, respectively)	9,975	9,965
Principal amount $3,609 (less unamortized debt issuance costs of $27 and $28 at September 30, 2019 and December 31, 2018, respectively)	3,582	3,581
Deferred compensation	1,000	1,078
Accrued interest payable	303	279
Operating lease liabilities	8,847
Other liabilities	3,682	4,437
Total liabilities	969,638	842,954
SHAREHOLDERS’ EQUITY
Authorized: 25,000,000 shares at September 30, 2019 and December 31, 2018; issued and outstanding: zero shares at September 30, 2019 and December 31, 2018
Authorized: 300,000,000 shares at September 30, 2019 and December 31, 2018; 11,912,115 voting shares at September 30, 2019 issued and outstanding and 11,893,203 voting shares at December 31, 2018 issued and outstanding	86,866	86,431
Retained earnings	33,614	24,021
Accumulated other comprehensive loss, net of tax	(58)	(1,296)
Total shareholders’ equity	120,422	109,156
Total liabilities and shareholders’ equity	$ 1,090,060	$ 952,110

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Stock-Based Compensation - Summary of Assumptions used to Estimate the Value of Options Granted (Details) - 2018 Omnibus Incentive Plan - $ / shares	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Expected term	10 years	10 years
Expected stock price volatility	48.79%	41.89%
Risk-free interest rate	2.74%	2.66%
Expected dividends	0.00%	0.00%
Weighted average grant date fair value	$ 9.22	$ 3.95

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Leases - Additional Information (Details) - USD ($)	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Jan. 01, 2019
Lessee Lease Description [Line Items]
Operating lease ROU assets	$ 8,666,000		$ 9,400,000
Operating lease liabilities	$ 8,847,000		$ 9,600,000
Weighted average discount rate used to discount operating lease liabilities	3.50%
Operating lease not yet commenced	$ 0
Operating lease, option to extend description	Operating lease terms include options to extend when it is reasonably certain that the Company will exercise such options, determined on a lease-by-lease basis.
Operating lease, existence of option to extend	true
Operating leases weighted-average remaining lease term	9 years 8 months 12 days
Operating lease rental expense	$ 1,100,000	$ 853,000
Minimum
Lessee Lease Description [Line Items]
Operating leases lease term	2 years
Operating lease, option to renewal period	5 years
Maximum
Lessee Lease Description [Line Items]
Operating leases lease term	26 years
Operating lease, option to renewal period	10 years

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Fair Value Measurements - Summary of Assets Measured at Fair Value on Recurring Basis (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	$ 28,319	$ 36,660
Estimated Fair Value | Recurring
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	28,319	36,660
Estimated Fair Value | Recurring | U.S. Treasury Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	24,899	33,241
Estimated Fair Value | Recurring | U.S. Government Agencies
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	2,992	2,957
Estimated Fair Value | Recurring | U.S. Agency Collateralized Mortgage Obligations
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	138	169
Estimated Fair Value | Recurring | U.S. Agency Residential Mortgage-Backed Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	30	38
Estimated Fair Value | Recurring | Municipals
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	260	255
Estimated Fair Value | Recurring | Level 1
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	24,899	33,241
Estimated Fair Value | Recurring | Level 1 | U.S. Treasury Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	24,899	33,241
Estimated Fair Value | Recurring | Level 2
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	3,420	3,419
Estimated Fair Value | Recurring | Level 2 | U.S. Government Agencies
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	2,992	2,957
Estimated Fair Value | Recurring | Level 2 | U.S. Agency Collateralized Mortgage Obligations
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	138	169
Estimated Fair Value | Recurring | Level 2 | U.S. Agency Residential Mortgage-Backed Securities
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	30	38
Estimated Fair Value | Recurring | Level 2 | Municipals
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Total Fair Value	$ 260	$ 255

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Description of Business and Summary of Significant Accounting Policies (Policies)

9 Months Ended

Sep. 30, 2019

Accounting Policies [Abstract]

Nature of Operations

Nature of operations - Coastal Financial Corporation (Corporation or Company) is a registered bank holding company whose wholly owned subsidiary is Coastal Community Bank (Bank). The Company is a Washington state corporation that was organized in 2003. The Bank was incorporated and commenced operations in 1997 and is a Washington state-chartered commercial bank and Federal Reserve System (Federal Reserve) state member bank.

The Company provides a full range of banking services to small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound area through its 14 branches in Snohomish, Island, and King Counties, the Internet, and its mobile banking application. The Bank’s main branch and the headquarters of the Bank and Company are located in Everett, Washington. The Bank’s deposits are insured in whole or in part by the FDIC. The Bank’s loans and deposits are primarily within the greater Puget Sound area, and the Bank’s primary funding source is deposits from customers. The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

Financial Statement Preparation

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 28, 2019. Operating results for the three and nine months ended September 30, 2019 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

Principles of consolidation - The consolidated financial statements include the accounts of the Company and the Bank. All significant intercompany accounts have been eliminated in consolidation.

Business Segments

Business Segments - The Company is managed by legal entity and not by lines of business. The entity’s primary business is that of a traditional banking institution, gathering deposits and originating loans for portfolio in its market areas. The Bank offers a wide variety of deposit products to its customers. Lending activities include the origination of real estate, commercial and industrial, and consumer loans. Interest income on loans is the Company’s primary source of revenue, and is supplemented by interest income on deposits with other banks, interest income from investment securities, deposit service charges, and other service provided activities. The Company has determined that its current business and operations consist of a single reporting segment and, therefore, segment disclosures are not required.

Estimates

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 fair value of the Company’s investment securities, deferred tax assets, and financial instruments. Actual results could differ significantly from those estimates.

Subsequent Events

Subsequent Events - The Company has evaluated events and transactions subsequent to September 30, 2019 for potential recognition or disclosure.

Accounting Policies

Accounting policies – Our complete accounting policies are described in Note 1, summary of significant accounting policies of the Company’s audited consolidated financial statements as of and for the years ended December 31, 2018 and 2017 included in the Company’s Annual Report Form 10-K filed with the SEC on March 28, 2019.

Reclassifications

Reclassifications - Certain amounts reported in prior quarters' consolidated financial statements have been reclassified to conform to the current presentation with no effect on stockholders’ equity or net income.

Accounting Standards Adopted in 2019

Accounting Standards Adopted in 2019

In February 2016, FASB issued ASU 2016-02, Leases (Topic 842). The new standard requires that lessees and lessors recognize lease assets and lease liabilities on the balance sheet and disclose key information about leasing arrangements. ASU 2016-02 was effective for us on January 1, 2019. ASU 2016-02 provides for a modified retrospective transition approach requiring lessees to recognize and measure leases on the balance sheet at the beginning of either the earliest period presented or as of the beginning of the period of adoption with the option to elect certain practical expedients. We have elected to apply ASU 2016-02 as of the beginning of the period of adoption (January 1, 2019) and have not restated comparative periods. 

Our operating leases relate primarily to office space and bank branches. As a result of implementing ASU 2016-02, we recognized an operating lease right-of-use ("ROU") asset of $9.4 million and an operating lease liability of $9.6 million on January 1, 2019, with no impact on our consolidated statement of income or consolidated statement of cash flows compared to the prior lease accounting model. The ROU asset and operating lease liability are recorded on the face on the consolidated balance sheets. See Note 6 - Leases for additional information.

In May 2018, the FASB issued ASU No. 2018-06, Codification Improvements to Topic 942, Financial Services - Depository and Lending. This ASU updates outdated guidance related to the Office of Comptroller of the Currency’s (OCC) Banking Circular 202, Accounting for Net Deferred Tax Charges, as the guidance has been rescinded by OCC and is no longer relevant. The amendments in this ASU are effective immediately. The adoption of ASU No. 2018-06 did not have a material impact on the Company's consolidated financial statements.

In September 2018, the FASB issued ASU No. 2018-07, Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting.  This ASU was issued to expand the scope of Topic 718 to include share-based payment transactions for acquiring goods and services from nonemployees.  Previously, these awards were recorded at the fair value of consideration received or the fair value of the equity instruments issued and was measured as of the earlier of the commitment date or the date performance was completed. The amendments in this ASU require the awards to be measured at the grant-date fair value of the equity instrument.  ASU No. 2018-07 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018.  Early adoption was permitted, but no earlier than an entity's adoption of Topic 606.  The adoption of ASU No. 2018-07 did not have a material impact on the Company's consolidated financial statements.

Recent Accounting Guidance Not Yet Effective

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. As a smaller reporting company, once the FASB issues the approved update, our implementation will be effective January 1, 2023.  We are actively assessing our data and the model needs and are evaluating the impact of adopting the amendment. We expect to recognize a one-time cumulative effect adjustment to the allowance for loan losses as of the beginning of the first reporting period 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.

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Investment Securities

9 Months Ended

Sep. 30, 2019

Investments Debt And Equity Securities [Abstract]

Investment Securities

Note 3 - Investment Securities

The amortized cost and fair values of investment securities at the date indicated are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
September 30, 2019
Available-for-sale
U.S. Treasury securities	$	24,967	$	-	$	(68	)	$	24,899
U.S. Government agencies		3,000		-		(8	)		2,992
U.S. Agency collateralized mortgage obligations		138		-		-			138
U.S. Agency residential mortgage-backed securities		30		-		-			30
Municipals		257		3		-			260
Total available-for-sale securities		28,392		3		(76	)		28,319
Held-to-maturity
U.S. Agency residential mortgage-backed securities		4,377		-		(35	)		4,342
Total investment securities	$	32,769	$	3	$	(111	)	$	32,661

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
December 31, 2018
Available-for-sale
U.S. Treasury securities	$	34,831	$	-	$	(1,590	)	$	33,241
U.S. Government agencies		3,000		-		(43	)		2,957
U.S. Agency collateralized mortgage obligations		172		-		(3	)		169
U.S. Agency residential mortgage-backed securities		39		-		(1	)		38
Municipals		259		-		(4	)		255
Total available-for-sale securities		38,301		-		(1,641	)		36,660
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,262		-		(57	)		1,205
Total investment securities	$	39,563	$	-	$	(1,698	)	$	37,865

The amortized cost and fair value of debt securities at September 30, 2019, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers or the underlying borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
September 30, 2019
Amounts maturing in
One year or less	$	22,970	$	22,953	$	-	$	-
After one year through five years		5,254		5,198		-		-
After five years through ten years		-		-		-		-
		28,224		28,151		-		-
U.S. Agency residential mortgage-backed securities and    collateralized mortgage obligations		168		168		4,377		4,342
	$	28,392	$	28,319	$	4,377	$	4,342

Investment securities with carrying values of $16,837,000 and $19,678,000 at September 30, 2019 and December 31, 2018 respectively, were pledged to secure public deposits and for other purposes as required or permitted by law.

There were five investment securities sold totaling $30.0 million during the three and nine months ended September 30, 2019 resulting in gross gains of $242,000 and gross losses of $71,000, respectively.  There were no sales during the three or nine months ended September 30, 2018.

Information pertaining to securities with gross unrealized losses at the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(dollars in thousands)
September 30, 2019
Available-for-sale
U.S. Treasury securities	$	19,959	$	(10	)	$	4,939	$	(58	)	$	24,898	$	(68	)
U.S. Government agencies		-		-			2,993		(8	)		2,993		(8	)
U.S. Agency collateralized mortgage obligations		-		-			-		-			-		-
Municipals		-		-			-		-			-		-
U.S. Agency residential mortgage-backed    securities		-		-			-		-			-		-
Total available-for-sale securities		19,959		(10	)		7,932		(66	)		27,891		(76	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		3,144		(24	)		1,198		(11	)		4,342		(35	)
Total investment securities	$	23,103	$	(34	)	$	9,130	$	(77	)	$	32,233	$	(111	)
December 31, 2018
Available-for-sale
U.S. Treasury securities	$	-	$	-		$	33,241	$	(1,590	)	$	33,241	$	(1,590	)
U.S. Government agencies		-		-			2,957		(43	)		2,957		(43	)
U.S. Agency collateralized mortgage obligations		-		-			169		(3	)		169		(3	)
Municipals		-		-			255		(4	)		255		(4	)
U.S. Agency residential mortgage-backed    securities		38		(1	)		-		-			38		(1	)
Total available-for-sale securities		38		(1	)		36,622		(1,640	)		36,660		(1,641	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		-		-			1,205		(57	)		1,205		(57	)
Total investment securities	$	38	$	(1	)	$	37,827	$	(1,697	)	$	37,865	$	(1,698	)

At September 30, 2019 and December 31, 2018, there were seven and 12 securities in an unrealized loss position, respectively. Unrealized losses have not been recognized into income because management does not intend to sell and does not expect that it will be required to sell the investments. The decline is largely due to changes in market conditions and interest rates, rather than credit quality. The fair value is expected to recover as the underlying securities in the portfolio approach maturity date and market conditions improve. The Company does not consider these securities to be other than temporarily impaired at September 30, 2019 and December 31, 2018.

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Stock-Based Compensation

9 Months Ended

Sep. 30, 2019

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Stock-Based Compensation

Note 7 - Stock-Based Compensation

Stock Options and Restricted Stock

On April 30, 2018, the Company’s shareholders approved the Coastal Financial Corporation 2018 Omnibus Incentive Plan (2018 Plan). The 2018 Plan authorizes the Company to grant awards, including but not limited to, stock options and restricted stock awards, to eligible employees, directors or individuals that provide service to the Company, up to an aggregate of 500,000 shares of common stock. The 2018 Plan replaces both the Company’s 2006 Stock Option and Equity Compensation Plan (2006 Plan) and its Directors’ Stock Bonus Plan.  Existing awards will vest under the terms granted and no further awards will be made under the previous plans. Shares available to be granted under the 2018 Plan totaled 361,311 at September 30, 2019.

Stock Option Awards

In January 2019, the Company granted 26,737 nonqualified stock options under the 2018 Plan to an employee, which vest ratably over 10 years. In January 2019, the Company also granted 99,100 qualified stock options under the 2018 Plan to employees, which vest ratably over 10 years.

The fair value of each option award is estimated on the date of grant using the Black-Scholes option pricing model that uses the assumptions noted in the following table. Expected volatilities are based on historical volatility of the Company’s stock and other factors. The Company uses the vesting term and contractual life to determine the expected life. The risk-free interest rate for periods within the contractual life of the option is based on the U.S. Treasury yield curve in effect at the time of grant. Compensation expense related to unvested stock option awards is reversed at date of forfeiture.

The following assumptions were used to estimate the value of options granted under the 2006 Plan and the 2018 Plan as applicable in the periods indicated:

	Nine months ended September 30, 2019			Nine months ended September 30, 2018
Expected term	10.0 years			10.0 years
Expected stock price volatility		48.79	%		41.89	%
Risk-free interest rate		2.74	%		2.66	%
Expected dividends	Zero			Zero
Weighted average grant date fair value	$	9.22		$	3.95

A summary of stock option activity under the 2018 Plan and 2006 Plan during the nine months ended September 30, 2019:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
(dollars in thousands, except per share amounts)
Outstanding at December 31, 2018		688,310		$	6.39		6.38
Granted		125,837			14.91
Exercised		(17,760	)		6.15
Forfeited or expired		(10,130	)		8.78
Outstanding at September 30, 2019		786,257		$	7.72		6.20	$	5,815
Vested or expected to vest at September 30, 2019		786,257		$	7.72		6.20	$	5,815
Exercisable at September 30, 2019		261,232		$	6.01		4.49	$	2,376

The total intrinsic value (which is the amount by which the stock price exceeds the exercise price) of options exercised during the three and nine months ended September 30, 2019 was $35,000 and $170,000, respectively and was $106,000 and $173,000 for the three and nine months ended September 30, 2018.

As of September 30, 2019, there was $2,422,000 of total unrecognized compensation cost related to nonvested stock options granted under the 2018 Plan and 2006 Plan. Total unrecognized compensation costs are adjusted for unvested forfeitures. The Company expects to recognize that cost over a weighted-average period of approximately 7.7 years.   Compensation expense recorded related to stock options was $101,000 and $295,000 for the three and nine months ended September 30, 2019, respectively, and $71,000 and $207,000 for the three and nine months ended September 30, 2018, respectively.

Restricted Stock Awards

The fair value of restricted stock awards is equal to the fair value of the Company’s stock at the date of grant. Compensation expense is recognized over the vesting period that the awards are based. Restricted stock awards are participating securities.

As of September 30, 2019 there was $54,000 of total unrecognized compensation cost related to nonvested restricted stock awards.  The Company expects to recognize that cost over the remaining weighted-average vesting period of approximately 7.3 years.  Compensation expense recorded related to restricted stock awards was $2,000 and $5,000 for the three and nine months ended September 30, 2019 and was nominal for the three and nine months ended September 30, 2018.

A summary of the Company’s nonvested shares at September 30, 2019 and changes during the nine-month period is presented below:

Nonvested shares	Shares			Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value
(all amounts in dollars except per share amounts)
Nonvested shares at December 31, 2018		5,200		$	12.32
Granted		-			-
Forfeited		(1,200	)		6.25
Vested		-			-
Nonvested shares at September 30, 2019		4,000		$	15.35	$	-

Director’s Stock Bonus

The Company adopted and subsequently amended the Director’s Stock Bonus Plan (Bonus Plan). The Bonus Plan would have expired on May 31, 2018 but was replaced on April 30, 2018, when the shareholders approved the 2018 Plan.

Under the Bonus Plan, the Company could grant up to 50,000 shares. Stock was granted to directors who attended at least 75% of the scheduled board meetings during the prior year. Grants cliff vest over two years from date awarded, contingent on the director still being a director of the Company. During the vesting period, the grants are considered participating securities. Grants also immediately vest when a director has attained the retirement age of 72 and retires from the Board.

The Bonus Plan granted shares with a total market value of $5,000 per director, per year, with the exception of the board chairman receiving $7,500 per year, and committee chairmen receiving $6,250 per year. The amended Bonus Plan would have expired on May 31, 2018 and it was replaced on April 30, 2018 by the 2018 Plan. Awards previously granted under the Bonus Plan will vest under the term granted.  Under the 2018 Plan, eligible directors are granted stock with a total market value of $5,000. Directors unable to receive stock will receive cash in lieu upon completion of the vesting period. Cash awards are recognized over the vesting period and recorded in other liabilities until paid.

In January 2019, there were 2,352 shares granted to seven directors at an estimated fair value of $14.91 per share. In January 2018, there were 4,405 shares granted to five directors at an estimated fair value of $7.10 per share. Compensation expense recorded related to the Bonus Plan totaled $8,000 and $25,000 for the three and nine months ended September 30, 2019, respectively, and $8,000 and $23,000 for the three and nine months ended September 30, 2018, respectively.

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Loans and Allowance for Loan Losses - Summary of Troubled Debt Restructurings by Accrual Versus Nonaccrual Status and by Loan Class (Details) - USD ($)	Sep. 30, 2019	Dec. 31, 2018
Financing Receivable Modifications [Line Items]
Total Restructured Loans	$ 0
Commercial Real Estate
Financing Receivable Modifications [Line Items]
Total Restructured Loans		$ 1,261,000
Commercial Real Estate | Nonaccrual Status
Financing Receivable Modifications [Line Items]
Total Restructured Loans		$ 1,261,000

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Loans and Allowance for Loan Losses - Additional Information (Details)	9 Months Ended
	Sep. 30, 2019 USD ($) Loan	Sep. 30, 2018 Loan	Dec. 31, 2018 USD ($)
Loans And Leases Receivable Disclosure [Line Items]
Overdrafts included in loans	$ 24,000		$ 36,000
Pledged loans for borrowing lines at FHLB and FRB	168,175,000		155,029,000
Balance of SBA and USDA loans and participations serviced	22,446,000		24,878,000
Purchased loans	33,696,000		45,368,000
Unamortized premiums	533,000		701,000
Purchased participation loans	$ 36,151,000		$ 36,561,000
Number of loans restructured as troubled debt restructurings | Loan	0	0
Additional funds to borrowers with troubled debt restructurings	$ 0
Troubled debt restructuring	$ 0
Minimum
Loans And Leases Receivable Disclosure [Line Items]
Percentage of collateral coverage to loan balance	100.00%
Loan repayment extended period of time	6 months
Sustained repayment performance period of loan placed on nonaccrual	6 months

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Fair Value Measurements - Summary of Assets and Liabilities Classified as Level 3 and Measured at Fair Value on Nonrecurring Basis (Details) - Level 3	9 Months Ended	12 Months Ended
	Sep. 30, 2019	Dec. 31, 2018
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Valuation Technique	Collateral valuations
Unobservable Inputs	Discount to appraised value
Measurement Input, Discount Rate
Fair Value Assets And Liabilities Measured On Recurring And Nonrecurring Basis [Line Items]
Weighted Average Rate	10.00%	9.00%

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Loans and Allowance for Loan Losses

9 Months Ended

Sep. 30, 2019

Receivables [Abstract]

Loans and Allowance for Loan Losses

Note 4 - Loans and Allowance for Loan Losses

The composition of the loan portfolio is as follows as of the periods indicated:

	September 30,				December 31,
	2019				2018
				(dollars in thousands)
Commercial and industrial loans	$	105,634			$	90,390
Real estate loans:
Construction, land, and land development		86,919				64,045
Residential real estate		100,818				94,745
Commercial real estate		578,607				515,959
Consumer and other loans		3,720				3,584
Gross loans receivable		875,698				768,723
Net deferred origination fees and premiums		(1,586	)			(824	)
Loans receivable	$	874,112			$	767,899

Included in consumer and other loans are overdrafts of $24,000 and $36,000 at September 30, 2019 and December 31, 2018, respectively. The Company has pledged loans totaling $168,175,000 and $155,029,000 at September 30, 2019 and December 31, 2018, respectively, for borrowing lines at the FHLB and Federal Reserve Bank (FRB).

The balance of Small Business Administration (SBA) and United States Department of Agriculture (USDA) loans and participations serviced for others totaled $22,446,000 and $24,878,000 at September 30, 2019 and December 31, 2018, respectively.

The Company, at times, purchases individual loans at fair value as of the acquisition date. Purchased loans with remaining balances totaled $33,696,000 and $45,368,000 as of September 30, 2019 and December 31, 2018, respectively. Unamortized premiums totaled $533,000 and $701,000 as of September 30, 2019 and December 31, 2018, respectively, and are amortized into interest income over the life of the loans.

The Company has purchased participation loans with remaining balances totaling $36,151,000 and $36,561,000 as of September 30, 2019 and December 31, 2018, respectively.

The following is a summary of the Company’s loan portfolio segments:

Commercial and industrial loans - Commercial and industrial loans are secured by business assets including inventory, receivables and machinery and equipment of businesses located generally in our primary market area. Loan types include revolving lines of credit, term loans, and loans secured by liquid collateral such as cash deposits or marketable securities. We also issue letters of credit on behalf of our customers. Risk arises primarily due to the difference between expected and actual cash flows of the borrowers. In addition, the recoverability of the Company’s investment in these loans is also dependent on other factors primarily dictated by the type of collateral securing these loans. The fair value of the collateral securing these loans may fluctuate as market conditions change. In the case of loans secured by accounts receivable, the recovery of the Company’s investment is dependent upon the borrower’s ability to collect amounts due from its customers.

Construction, land and land development loans - We originate loans for the construction of 1-4 family, multifamily, and Commercial Real Estate (CRE) properties in our market area. Construction loans are considered to have higher risks due to construction completion and timing risk, the ultimate repayment being sensitive to interest rate changes, government regulation of real property and the availability of long-term financing. Additionally, economic conditions may impact the Company’s ability to recover its investment in construction loans, as adverse economic conditions may negatively impact the real estate market, which could affect the borrower’s ability to complete and sell the project. Additionally, the fair value of the underlying collateral may fluctuate as market conditions change. We occasionally originate land loans for the purpose of facilitating the ultimate construction of a home or commercial building. The primary risks include the borrower’s ability to pay and the inability of the Company to recover its investment due to a material decline in the fair value of the underlying collateral.

Residential real estate loans - Residential real estate loans include various types of loans for which the Company holds real property as collateral. Included in this segment are first lien single family loans, which we occasionally purchase to diversify our loan portfolio, and rental portfolios secured by one-to-four family homes. The primary risks of residential real estate loans include the borrower’s inability to pay, material decreases in the value of the collateral, and significant increases in interest rates which may make the loan unprofitable.

Commercial real estate (includes owner occupied and nonowner occupied) loans - Commercial real estate loans include various types of loans for which the Company holds real property as collateral. The primary risks of commercial real estate loans include the borrower’s inability to pay, material decreases in the value of the collateralized real estate and significant increases in interest rates, which may make the real estate loan unprofitable. Commercial real estate loans may be more adversely affected by conditions in the real estate markets or in the general economy.

Consumer and other loans - We originate a limited number of consumer loans, generally for banking customers only, which consist primarily of home equity lines of credit, saving account secured loans, and auto loans. This loan category also includes overdrafts. Repayment of these loans is dependent on the borrower’s ability to pay and the fair value of the underlying collateral.

The following table illustrates an age analysis of past due loans as of the dates indicated:

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
September 30, 2019
Commercial and industrial loans	$	-	$	1,233	$	1,233	$	104,401	$	105,634		$	-
Real estate loans:
Construction, land and land development		-		-		-		86,919		86,919			-
Residential real estate		-		67		67		100,751		100,818			-
Commercial real estate		420		-		420		578,187		578,607			-
Consumer and other loans		6		-		6		3,714		3,720			-
	$	426	$	1,300	$	1,726	$	873,972	$	875,698		$	-
Less net deferred origination fees and premiums										(1,586	)
Loans receivable									$	874,112

	30-89 Days Past Due		90 Days or More Past Due		Total Past Due		Current		Total Loans			Recorded Investment 90 Days or More Past Due and Still Accruing
	(dollars in thousands)
December 31, 2018
Commercial and industrial loans	$	171	$	494	$	665	$	89,725	$	90,390		$	-
Real estate loans:
Construction, land and land development		823		-		823		63,222		64,045			-
Residential real estate		-		72		72		94,673		94,745			-
Commercial real estate		-		-		-		515,959		515,959			-
Consumer and other loans		2		-		2		3,582		3,584			-
	$	996	$	566	$	1,562	$	767,161		768,723		$	-
Less net deferred origination fees and premiums										(824	)
Loans receivable									$	767,899

A summary of information pertaining to impaired loans as of the period indicated:

	Unpaid Contractual Principal Balance		Recorded Investment With No Allowance		Recorded Investment With Allowance		Total Recorded Investment		Related Allowance
	(dollars in thousands)
September 30, 2019
Commercial and industrial loans	$	1,463	$	407	$	826	$	1,233	$	230
Real estate loans:
Residential real estate		73		67		-		67		-
Total	$	1,536	$	474	$	826	$	1,300	$	230
December 31, 2018
Commercial and industrial loans	$	766	$	493	$	-	$	493	$	-
Real estate loans:
Residential real estate		74		72		-		72		-
Commercial real estate		1,491		1,261		-		1,261		-
Total	$	2,331	$	1,826	$	-	$	1,826	$	-

The following tables summarize our average recorded investment and interest income recognized on impaired loans by loan class for the three and nine months ended September 30, 2019 and 2018:

	Three Months Ended
	September 30, 2019				September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	1,406	$	-	$	995	$	3
Real estate loans:
Residential real estate		68		-		74		-
Commercial real estate		-		-		1,284		-
Total	$	1,474	$	-	$	2,353	$	3
	Nine Months Ended
	September 30, 2019				September 30, 2018
	Average Recorded Investment		Interest Income Recognized		Average Recorded Investment		Interest Income Recognized
	(dollars in thousands)
Commercial and industrial loans	$	933	$	-	$	1,371	$	28
Real estate loans:
Construction, land and land development		-		-		-		-
Residential real estate		71		-		306		5
Commercial real estate		315		-		1,296		-
Total	$	1,319	$	-	$	2,973	$	33

The Company grants restructurings in response to borrower financial difficulty, and generally provides for a temporary modification of loan repayment terms. The restructured loans on accrual status represent the only impaired loans accruing interest. In order for a restructured loan to be considered for accrual status, the loan’s collateral coverage generally will be greater than or equal to 100% of the loan balance, the loan is current on payments, and the borrower must either prefund an interest reserve or demonstrate the ability to make payments from a verified source of cash flow for an extended period of time, usually at least six months in duration.

The following table presents troubled debt restructurings by accrual versus nonaccrual status and by loan class as of December 31, 2018.  The troubled debt restructuring outstanding as of December 31, 2018 was paid off in the first quarter of 2019.   

	Accrual Status		Nonaccrual Status		Total Restructured Loans
	(dollars in thousands)
December 31, 2018
Commercial real estate	$	-	$	1,261	$	1,261

No loans were restructured in the nine months ended September 30, 2019 and September 30, 2018 that qualified as troubled debt restructurings. The Company has no commitments to loan additional funds to borrowers whose loans were classified as troubled debt restructurings at September 30, 2019, as there were no outstanding troubled debt restructurings at September 30, 2019.

When loans are placed on nonaccrual status, all accrued interest is reversed from current period earnings. Payments received on nonaccrual loans are generally applied as a reduction to the loan principal balance. If the likelihood of further loss is removed, the Company will recognize interest on a cash basis only. Loans may be returned to accruing status if the Company believes that all remaining principal and interest is fully collectible and there has been at least six months of sustained repayment performance since the loan was placed on nonaccrual.

An analysis of nonaccrual loans by category consisted of the following at the periods indicated:

	September 30,		December 31,
	2019		2018
			(dollars in thousands)
Commercial and industrial loans	$	1,233	$	493
Real estate loans:
Residential real estate		67		72
Commercial real estate		-		1,261
Total nonaccrual loans	$	1,300	$	1,826

Credit Quality and Credit Risk

Federal regulations require that the Company periodically evaluate the risks inherent in its loan portfolio. In addition, the Company’s regulatory agencies have authority to identify problem loans and, if appropriate, require them to be reclassified. There are three classifications for problem loans: Substandard, Doubtful, and Loss. Substandard loans have one or more defined weaknesses and are characterized by the distinct possibility that the Company will sustain some loss if the deficiencies are not corrected. Doubtful loans have the weaknesses of loans classified as Substandard, with additional characteristics that suggest the weaknesses make collection or recovery in full after liquidation of collateral questionable on the basis of currently existing facts, conditions, and values. There is a high possibility of loss in loans classified as Doubtful. A loan classified as Loss is considered uncollectible and of such little value that continued classification of the credit as a loan is not warranted. If a loan or a portion thereof is classified as Loss, it must be charged-off, meaning the amount of the loss is charged against the allowance for loan losses, thereby reducing that reserve. The Company also classifies some loans as Watch or Other Loans Especially Mentioned (OLEM). Loans classified as Watch are performing assets and classified as pass credits but have elements of risk that require more monitoring than other performing loans and are reported in the Pass column in the following table. Loans classified as OLEM are assets that continue to perform but have shown deterioration in credit quality and require close monitoring.

Loans by credit quality risk rating are as follows as of the periods indicated:

	Pass		Other Loans Especially Mentioned		Sub- Standard		Doubtful		Total
	(dollars in thousands)
September 30, 2019
Commercial and industrial loans	$	97,923	$	2,579	$	5,132	$	-	$	105,634
Real estate loans:
Construction, land, and land development		86,919		-		-		-		86,919
Residential real estate		100,333		418		67		-		100,818
Commercial real estate		575,895		2,712		-		-		578,607
Consumer and other loans		3,720		-		-		-		3,720
	$	864,790	$	5,709	$	5,199	$	-		875,698
Less net deferred origination fees										(1,586	)
Loans receivable									$	874,112
December 31, 2018
Commercial and industrial loans	$	84,859	$	3,908	$	1,623	$	-	$	90,390
Real estate loans:
Construction, land, and land development		55,666		8,379		-		-		64,045
Residential real estate		94,548		125		72		-		94,745
Commercial real estate		512,151		2,547		1,261		-		515,959
Consumer and other loans		3,584		-		-				3,584
	$	750,808	$	14,959	$	2,956	$	-		768,723
Less net deferred origination fees										(824	)
Loans receivable									$	767,899

Allowance for Loan Losses

The Company’s allowance for loan losses (ALLL) covers estimated credit losses on individually evaluated loans that are determined to be impaired as well as estimated probable losses inherent in the remainder of the loan portfolio. The ALLL is prepared using the information provided by the Company’s credit review process together with data from peer institutions and economic information gathered from published sources.

The loan portfolio is segmented into groups of loans with similar risk profiles. Each segment possesses varying degrees of risk based on the type of loan, the type of collateral, and the sensitivity of the borrower or industry to changes in external factors such as economic conditions. An estimated loss rate calculated the Company’s actual historical loss rates adjusted for current portfolio trends, economic conditions, and other relevant internal and external factors, is applied to each group’s aggregate loan balances.

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30, 2019:

	Commercial and Industrial			Construction, Land, and Land Development			Residential Real Estate		Commercial Real Estate			Consumer and Other			Unallocated			Total
	(dollars in thousands)
Three months ended September 30, 2019
Balance, June 30, 2019	$	2,482		$	2,386		$	1,814	$	2,845		$	67		$	849		$	10,443
Provision for loan losses or (recapture)		195			136			140		107			22			37			637
		2,677			2,522			1,954		2,952			89			886			11,080
Loans charged-off		(118	)		(75	)		-		-			(3	)		-			(196	)
Recoveries of loans previously charged-off		2			-			-		-			2			-			4
Net (charge-offs) recoveries		(116	)		(75	)		-		-			(1	)		-			(192	)
Balance, September 30, 2019	$	2,561		$	2,447		$	1,954	$	2,952		$	88		$	886		$	10,888
Nine months ended September 30, 2019
Balance, December 31, 2018	$	2,039		$	1,806		$	1,647	$	2,648		$	77		$	1,190		$	9,407
Provision for loan losses or (recapture)		643			716			307		333			29			(304	)		1,724
		2,682			2,522			1,954		2,981			106			886			11,131
Loans charged-off		(125	)		(75	)		-		(29	)		(23	)		-			(252	)
Recoveries of loans previously charged-off		4			-			-		-			5			-			9
Net (charge-offs) recoveries		(121	)		(75	)		-		(29	)		(18	)		-			(243	)
Balance, September 30, 2019	$	2,561		$	2,447		$	1,954	$	2,952		$	88		$	886		$	10,888
As of September 30, 2019
ALLL amounts allocated to
Individually evaluated for impairment	$	230		$	-		$	-	$	-		$	-		$	-		$	230
Collectively evaluated for impairment		2,331			2,447			1,954		2,952			88			886			10,658
ALLL balance, September 30, 2019	$	2,561		$	2,447		$	1,954	$	2,952		$	88		$	886		$	10,888
Loans individually evaluated for impairment	$	1,233		$	-		$	67	$	-		$	-					$	1,300
Loans collectively evaluated for impairment		104,401			86,919			100,751		578,607			3,720						874,398
Loan balance, September 30, 2019	$	105,634		$	86,919		$	100,818	$	578,607		$	3,720					$	875,698

The following tables summarize the allocation of the ALLL, as well as the activity in the ALLL attributed to various segments in the loan portfolio, as of and for the three and nine months ended September 30, 2018:

	Commercial and Industrial			Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate			Consumer and Other			Unallocated			Total
	(dollars in thousands)
Three Months Ended September 30, 2018
ALLL balance, June 30, 2018	$	1,821		$	1,238	$	1,395	$	2,303		$	52		$	1,731		$	8,540
Provision for loan losses or (recapture)		(10	)		423		7		164			39			(115	)		508
		1,811			1,661		1,402		2,467			91			1,616			9,048
Loans charged-off		-			-		-		-			(6	)		-			(6	)
Recoveries of loans previously charged-off		1			-		65		-			3			-			69
Net (charge-offs) recoveries		1			-		65		-			(3	)		-			63
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111
Nine Months Ended September 30, 2018
ALLL balance, December 31, 2017	$	1,864		$	1,063	$	1,343	$	2,014		$	43		$	1,690		$	8,017
Provision for loan losses or (recapture)		226			598		59		537			55			(74	)		1,401
		2,090			1,661		1,402		2,551			98			1,616			9,418
Loans charged-off		(281	)		-		-		(84	)		(20	)		-			(385	)
Recoveries of loans previously charged-off		3			-		65		-			10			-			78
Net (charge-offs) recoveries		(278	)		-		65		(84	)		(10	)		-			(307	)
ALLL balance, September 30, 2018	$	1,812		$	1,661	$	1,467	$	2,467		$	88		$	1,616		$	9,111

	Commercial and Industrial		Construction, Land, and Land Development		Residential Real Estate		Commercial Real Estate		Consumer and Other		Unallocated		Total
	(dollars in thousands)
As of December 31, 2018
ALLL amounts allocated to
Individually evaluated for impairment	$	-	$	-	$	-	$	-	$	-	$	-	$	-
Collectively evaluated for impairment		2,039		1,806		1,647		2,648		77		1,190		9,407
ALLL balance, December 31, 2018	$	2,039	$	1,806	$	1,647	$	2,648	$	77	$	1,190	$	9,407
Loans individually evaluated for impairment	$	493	$	-	$	72	$	1,261	$	-			$	1,826
Loans collectively evaluated for impairment		89,897		64,045		94,673		514,698		3,584				766,897
Loan balance, December 31, 2018	$	90,390	$	64,045	$	94,745	$	515,959	$	3,584			$	768,723

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Shareholders' Equity

9 Months Ended

Sep. 30, 2019

Equity [Abstract]

Shareholders Equity

Note 8 - Shareholders’ Equity

On May 4, 2018 the Company effected a 1-for-5 reverse stock split, decreasing the number of issued shares from 46,268,359 to 9,254,073, including 401 additional shares issued to shareholders with fractional shares. Authorized shares were not impacted by the reverse stock split. Share and per share amounts included in the consolidated financial statements and accompanying notes reflect the effect of the split for all periods presented.

The total authorized preferred stock is 25,000,000 shares.  There were no shares of preferred stock issued and outstanding at September 30, 2019 and December 31, 2018.

The total authorized common shares is 300,000,000 shares.At September 30, 2019 and December 31, 2018, there were 11,912,115 and 11,893,203 common shares issued and outstanding.

On September 26, 2018, all 100,000 shares of Class B nonvoting common stock outstanding were exchanged for voting common stock on terms and conditions approved by the Company’s board of directors. At September 30, 2019 and December 31, 2018 there were no shares of Class B nonvoting common stock issued and outstanding.  

On September 26, 2018, 261,444 Class C shares were exchanged for common stock on terms and conditions approved by the Company’s board of directors. There were no shares of Class C nonvoting common stock issued and outstanding, at September 30, 2019 and December 31, 2018.

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Investment Securities (Tables)

9 Months Ended

Sep. 30, 2019

Investments Debt And Equity Securities [Abstract]

Amortized Cost and Fair Values of Investment Securities

The amortized cost and fair values of investment securities at the date indicated are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
September 30, 2019
Available-for-sale
U.S. Treasury securities	$	24,967	$	-	$	(68	)	$	24,899
U.S. Government agencies		3,000		-		(8	)		2,992
U.S. Agency collateralized mortgage obligations		138		-		-			138
U.S. Agency residential mortgage-backed securities		30		-		-			30
Municipals		257		3		-			260
Total available-for-sale securities		28,392		3		(76	)		28,319
Held-to-maturity
U.S. Agency residential mortgage-backed securities		4,377		-		(35	)		4,342
Total investment securities	$	32,769	$	3	$	(111	)	$	32,661

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses			Fair Value
	(dollars in thousands)
December 31, 2018
Available-for-sale
U.S. Treasury securities	$	34,831	$	-	$	(1,590	)	$	33,241
U.S. Government agencies		3,000		-		(43	)		2,957
U.S. Agency collateralized mortgage obligations		172		-		(3	)		169
U.S. Agency residential mortgage-backed securities		39		-		(1	)		38
Municipals		259		-		(4	)		255
Total available-for-sale securities		38,301		-		(1,641	)		36,660
Held-to-maturity
U.S. Agency residential mortgage-backed securities		1,262		-		(57	)		1,205
Total investment securities	$	39,563	$	-	$	(1,698	)	$	37,865

Amortized Cost and Fair Value of Debt Securities by Contractual Maturity

Mortgage-backed securities and collateralized mortgage obligations are shown separately, since they are not due at a single maturity date.

	Available-for-Sale				Held-to-Maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(dollars in thousands)
September 30, 2019
Amounts maturing in
One year or less	$	22,970	$	22,953	$	-	$	-
After one year through five years		5,254		5,198		-		-
After five years through ten years		-		-		-		-
		28,224		28,151		-		-
U.S. Agency residential mortgage-backed securities and    collateralized mortgage obligations		168		168		4,377		4,342
	$	28,392	$	28,319	$	4,377	$	4,342

Summary of Investment Securities Continuous Unrealized Loss Position

Information pertaining to securities with gross unrealized losses at the dates indicated, aggregated by investment category and length of time that individual securities have been in a continuous loss position, follows:

	Less Than 12 Months					12 Months or Greater					Total
	Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses			Fair Value		Gross Unrealized Losses
	(dollars in thousands)
September 30, 2019
Available-for-sale
U.S. Treasury securities	$	19,959	$	(10	)	$	4,939	$	(58	)	$	24,898	$	(68	)
U.S. Government agencies		-		-			2,993		(8	)		2,993		(8	)
U.S. Agency collateralized mortgage obligations		-		-			-		-			-		-
Municipals		-		-			-		-			-		-
U.S. Agency residential mortgage-backed    securities		-		-			-		-			-		-
Total available-for-sale securities		19,959		(10	)		7,932		(66	)		27,891		(76	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		3,144		(24	)		1,198		(11	)		4,342		(35	)
Total investment securities	$	23,103	$	(34	)	$	9,130	$	(77	)	$	32,233	$	(111	)
December 31, 2018
Available-for-sale
U.S. Treasury securities	$	-	$	-		$	33,241	$	(1,590	)	$	33,241	$	(1,590	)
U.S. Government agencies		-		-			2,957		(43	)		2,957		(43	)
U.S. Agency collateralized mortgage obligations		-		-			169		(3	)		169		(3	)
Municipals		-		-			255		(4	)		255		(4	)
U.S. Agency residential mortgage-backed    securities		38		(1	)		-		-			38		(1	)
Total available-for-sale securities		38		(1	)		36,622		(1,640	)		36,660		(1,641	)
Held-to-maturity
U.S. Agency residential mortgage-backed    securities		-		-			1,205		(57	)		1,205		(57	)
Total investment securities	$	38	$	(1	)	$	37,827	$	(1,697	)	$	37,865	$	(1,698	)

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Loans and Allowance for Loan Losses - Summary of Our Average Recorded Investment and Interest Income Recognized on Impaired Loans (Details) - USD ($) $ in Thousands	3 Months Ended		9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018	Sep. 30, 2019	Sep. 30, 2018
Financing Receivable Impaired [Line Items]
Average Recorded Investment	$ 1,474	$ 2,353	$ 1,319	$ 2,973
Interest Income Recognized		3		33
Commercial and Industrial Loans
Financing Receivable Impaired [Line Items]
Average Recorded Investment	1,406	995	933	1,371
Interest Income Recognized		3		28
Residential Real Estate
Financing Receivable Impaired [Line Items]
Average Recorded Investment	$ 68	74	71	306
Interest Income Recognized				5
Commercial Real Estate
Financing Receivable Impaired [Line Items]
Average Recorded Investment		$ 1,284	$ 315	$ 1,296

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Loans and Allowance for Loan Losses - Composition of Loan Portfolio (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	$ 875,698	$ 768,723
Net deferred origination fees and premiums	(1,586)	(824)
Loans receivable	874,112	767,899
Commercial and Industrial Loans
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	105,634	90,390
Construction, Land and Land Development
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	86,919	64,045
Residential Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	100,818	94,745
Commercial Real Estate
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	578,607	515,959
Consumer and Other Loans
Loans And Leases Receivable Disclosure [Line Items]
Gross loans receivable	$ 3,720	$ 3,584

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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - USD ($)	9 Months Ended
	Sep. 30, 2019	Sep. 30, 2018
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$ 9,593,000	$ 6,646,000
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan losses	1,724,000	1,401,000
Depreciation and amortization	907,000	786,000
Loss on disposition of fixed assets	5,000
Decrease in operating lease right-of-use assets	756,000
Decrease in operating lease liabilities	(702,000)
Gain on sales of loans	(490,000)	(142,000)
Gain on sale of securities, net	(171,000)
Net discount accretion on investment securities	(36,000)	(17,000)
Stock-based compensation	325,000	231,000
Bank-owned life insurance earnings	(144,000)	(140,000)
Deferred tax (benefit) expense	(18,000)	26,000
Net change in other assets and liabilities	(2,413,000)	66,000
Total adjustments	(257,000)	2,211,000
Net cash provided by operating activities	9,336,000	8,857,000
CASH FLOWS FROM INVESTING ACTIVITIES
Net increase (decrease) in interest earning deposits with other banks	(21,007,000)	(17,409,000)
Purchase of investment securities available for sale	(19,948,000)
Purchase of investment securities held-to-maturity	(3,182,000)
Proceeds from sale of available for sale securities	30,026,000	0
Purchase of other investments, net	(639,000)	(86,000)
Principal paydowns of investment securities available-for-sale	41,000	70,000
Principal paydowns of investment securities held-to-maturity	64,000	114,000
Purchase of participation loans	(7,238,000)	(32,653,000)
Proceeds from sale of loans	1,581,000
Purchase of loans		(8,575,000)
Increase in loans receivable, net	(100,309,000)	(46,469,000)
Purchases of premises and equipment, net	(912,000)	(510,000)
Net cash used by investing activities	(121,523,000)	(105,518,000)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in demand deposits, NOW and money market, and savings	124,363,000	63,693,000
Net increase in time deposits	(5,728,000)	7,734,000
Net repayments from short term FHLB borrowing		33,243,000
Proceeds from exercise of stock options	110,000	339,000
Net cash provided by financing activities	118,745,000	105,009,000
NET INCREASE IN CASH, DUE FROM BANKS AND RESTRICTED CASH	6,558,000	8,348,000
CASH, DUE FROM BANKS AND RESTRICTED CASH, beginning of year	40,319,000	31,119,000
CASH, DUE FROM BANKS AND RESTRICTED CASH, end of quarter	46,877,000	39,467,000
SUPPLEMENTAL SCHEDULE OF OPERATING AND INVESTING ACTIVITIES
Interest paid	4,849,000	2,774,000
Income taxes paid	2,940,000	1,670,000
SUPPLEMENTAL SCHEDULE OF NONCASH TRANSACTIONS
Fair value adjustment of securities available-for-sale, gross	1,568,000	$ (1,131,000)
In conjunction with the adoption of ASU 2016-02 as detailed in Note 6 to the Unaudited Condensed Consolidated Financial Statements, the following assets and liabilities were recognized:
Operating lease right-of-use assets	9,421,000
Operating lease liabilities	$ 9,591,000

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CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED) (Parenthetical) - USD ($) $ in Thousands	Sep. 30, 2019	Dec. 31, 2018
Restricted cash	$ 24,817	$ 24,004
Preferred stock, no par value
Preferred stock, shares authorized	25,000,000	25,000,000
Preferred stock, shares issued	0	0
Preferred stock, shares outstanding	0	0
Common stock, no par value
Common stock, shares authorized	300,000,000	300,000,000
Common stock, shares, issued	11,912,115	11,893,203
Common stock, shares, outstanding	11,912,115	11,893,203
Voting Common Stock
Common stock, shares, issued	11,912,115	11,893,203
Common stock, shares, outstanding	11,912,115	11,893,203
Subordinated Debt
Principal amount	$ 10,000	$ 10,000
Unamortized debt issuance cost	25	35
Junior Subordinated Debentures
Principal amount	3,609	3,609
Unamortized debt issuance cost	$ 27	$ 28

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Stock-Based Compensation (Tables)

9 Months Ended

Sep. 30, 2019

Disclosure Of Compensation Related Costs Sharebased Payments [Abstract]

Summary of Assumptions Used to Estimate the Value of Options Granted

The following assumptions were used to estimate the value of options granted under the 2006 Plan and the 2018 Plan as applicable in the periods indicated:

	Nine months ended September 30, 2019			Nine months ended September 30, 2018
Expected term	10.0 years			10.0 years
Expected stock price volatility		48.79	%		41.89	%
Risk-free interest rate		2.74	%		2.66	%
Expected dividends	Zero			Zero
Weighted average grant date fair value	$	9.22		$	3.95

Summary of Stock Option Activity

A summary of stock option activity under the 2018 Plan and 2006 Plan during the nine months ended September 30, 2019:

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (Years)		Aggregate Intrinsic Value
(dollars in thousands, except per share amounts)
Outstanding at December 31, 2018		688,310		$	6.39		6.38
Granted		125,837			14.91
Exercised		(17,760	)		6.15
Forfeited or expired		(10,130	)		8.78
Outstanding at September 30, 2019		786,257		$	7.72		6.20	$	5,815
Vested or expected to vest at September 30, 2019		786,257		$	7.72		6.20	$	5,815
Exercisable at September 30, 2019		261,232		$	6.01		4.49	$	2,376

Summary of Nonvested Shares

A summary of the Company’s nonvested shares at September 30, 2019 and changes during the nine-month period is presented below:

Nonvested shares	Shares			Weighted- Average Grant Date Fair Value		Aggregate Intrinsic Value
(all amounts in dollars except per share amounts)
Nonvested shares at December 31, 2018		5,200		$	12.32
Granted		-			-
Forfeited		(1,200	)		6.25
Vested		-			-
Nonvested shares at September 30, 2019		4,000		$	15.35	$	-

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Recent Accounting Standards - Additional Information (Details) - USD ($) $ in Thousands	Sep. 30, 2019	Jan. 01, 2019
New Accounting Pronouncements Or Change In Accounting Principle [Line Items]
Operating lease right-of-use asset	$ 8,666	$ 9,400
Operating lease liability	$ 8,847	9,600
ASU 2016-02
New Accounting Pronouncements Or Change In Accounting Principle [Line Items]
Operating lease right-of-use asset		9,400
Operating lease liability		$ 9,600

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Stock-Based Compensation - Additional Information (Details)		1 Months Ended		3 Months Ended		9 Months Ended
	Apr. 30, 2018 shares	Jan. 31, 2019 Director $ / shares shares	Jan. 31, 2018 Director $ / shares shares	Sep. 30, 2019 USD ($) shares	Sep. 30, 2018 USD ($)	Sep. 30, 2019 USD ($) shares	Sep. 30, 2018 USD ($)
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Total intrinsic value of options exercise price				$ 35,000	$ 106,000	$ 170,000	$ 173,000
Total unrecognized compensation cost related to nonvested stock options granted				2,422,000		2,422,000
Compensation expense						$ 325,000	231,000
Stock Option Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation cost related to nonvested stock options/ RSA granted, weighted-average period						7 years 8 months 12 days
Compensation expense				101,000	71,000	$ 295,000	207,000
Restricted Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Unrecognized compensation cost related to nonvested stock options/ RSA granted, weighted-average period						7 years 3 months 18 days
Compensation expense				2,000		$ 5,000
Total unrecognized compensation cost related to nonvested restricted stock awards				$ 54,000		$ 54,000
Number of shares granted | shares						0
2018 Omnibus Incentive Plan
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Common stock, additional shares authorized | shares	0
Shares available to be granted | shares				361,311		361,311
Stock options granted to employees | shares						125,837
2018 Omnibus Incentive Plan | Nonqualified Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options granted to employees | shares		26,737
Stock options vesting period		10 years
2018 Omnibus Incentive Plan | Qualified Stock Options
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options granted to employees | shares		99,100
Stock options vesting period		10 years
2018 Omnibus Incentive Plan | Restricted Stock Awards | Director
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Market value of shares grants per year						$ 5,000
2018 Omnibus Incentive Plan | Maximum
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Aggregate of common stock, shares authorized | shares	500,000
Director's Stock Bonus Plan | Restricted Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Stock options vesting period						2 years
Compensation expense				$ 8,000	$ 8,000	$ 25,000	$ 23,000
Attainment of retirement age of directors						72 years
Amended bonus plan expiration date						May 31, 2018
Director's Stock Bonus Plan | Restricted Stock Awards | Director
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Market value of shares grants per year						$ 5,000
Number of shares granted | shares		2,352	4,405
Number of directors | Director		7	5
Estimated fair value per share | $ / shares		$ 14.91	$ 7.10
Director's Stock Bonus Plan | Restricted Stock Awards | Board Chairman
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Market value of shares grants per year						7,500
Director's Stock Bonus Plan | Restricted Stock Awards | Committee Chairmen
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Market value of shares grants per year						$ 6,250
Director's Stock Bonus Plan | Maximum | Restricted Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Shares available to be granted | shares				50,000		50,000
Director's Stock Bonus Plan | Minimum | Restricted Stock Awards
Share-based Compensation Arrangement by Share-based Payment Award [Line Items]
Percentage of scheduled board meetings attended by directors during prior year				75.00%		75.00%

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Deposits - Schedule of Maturity Distribution of Time Deposits (Details) $ in Thousands	Sep. 30, 2019 USD ($)
Deposits [Abstract]
Twelve months	$ 69,662
One to two years	15,875
Two to three years	3,065
Three to four years	1,648
Four to five years	1,066
Total time deposits	$ 91,316