COASTAL FINANCIAL CORP 10-Q

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, which are incorporated by reference herein. As of September 30, 2020, the risk factors of the Company have not changed materially from those disclosed in the Form 10-K, other than those noted below. The effects of COVID-19, and the impact of actions to mitigate it, has had and may continue to adversely affect our business, financial condition and results of operations, and the extent and duration of these effects remain uncertain. A second wave of COVID-19 may have a similar or worse impact on us. Federal, state and local governments have enacted various restrictions in an attempt to limit the spread of COVID-19. Such measures have disrupted economic activity and contributed to job losses and reductions in consumer and business spending. In response to the economic and financial effects of COVID-19, the Federal Reserve has sharply reduced interest rates and instituted quantitative easing measures as well as domestic and global capital market support programs. In addition, the Trump Administration, Congress, various federal agencies and state governments have taken measures to address the economic and social consequences of the COVID-19 pandemic, including the passage of the CARES Act. The CARES Act, among other things, provides certain measures to support individuals and businesses in maintaining solvency through monetary relief, including in the form of financing, loan forgiveness and automatic forbearance. Beginning at the end of March 2020, we began processing loan applications under the PPP created under the CARES Act, and we continued to accept and process requests through the program end date of August 8, 2020. The Federal Reserve's Main Street Lending Program will provide liquidity to small and mid-sized businesses by purchasing 95% participations in 5-year loans with certain terms, including certain deferrals of payment of principal and interest. The Bank is a registered lender under the Main Street Lending Program, and we have accepted one application as of September 30, 2020. Other banking regulatory agencies have encouraged lenders to extend additional loans, and the federal government is considering additional stimulus and support legislation focused on providing aid to various sectors, including small businesses. Further, we expect to continue to restructure certain payments and/or defer payments for our loan customers during this uncertain time to help alleviate financial hardships. The full impact on our business activities as a result of new government and regulatory policies, programs and guidelines, as well as regulators’ reactions to such activities, remains uncertain. The economic effects of the COVID-19 pandemic have had a destabilizing effect on financial markets, key market indices and overall economic activity. The uncertainty regarding the duration of the pandemic and the resulting economic disruption has caused increased market volatility and led to an economic recession and a significant decrease in consumer confidence and business generally. The continuation of these conditions (including whether due to a resurgence or a second wave of COVID-19 infections, particularly as our home county of Snohomish begins to re-open) as well as the impacts of the CARES Act and other federal and state measures, specifically with respect to loan forbearances, have had and can be expected to adversely impact our businesses and results of operations and the operations of our borrowers, customers and business partners. In particular, these events have had and/or can be expected to continue to have the following effects, among other things: • impair the ability of borrowers to repay outstanding loans or other obligations, resulting in increases in delinquencies; • impair the value of collateral securing loans (particularly with respect to real estate); • adversely affect our level of charge-offs and require an additional increase in our allowance for loan losses; • adversely affect the stability of our deposit base, or otherwise impair our liquidity; • create stress on our operations and systems associated with our participation in the PPP as a result of high demand and volume of applications; • result in increased compliance risk as we become subject to new regulatory and other requirements, including new and changing guidance, associated with the PPP and its loan forgiveness program, the Main Street Lending Program, and other new programs in which we participate; • impair the ability of loan guarantors to honor commitments; • negatively impact our regulatory capital ratios; 69 • negatively impact the productivity and availability of key personnel and other employees necessary to conduct our business, and of third-party service providers who perform critical services for us, or otherwise cause operational failures due to changes in our normal business practices necessitated by the COVID-19 pandemic and related governmental actions; • increase cyber and payment fraud risk, and other operational risks given increased online and remote activity; and • broadly result in lost revenue and income. Our results of operations have been adversely affected by the factors described above. For example, in the quarter ended September 30, 2020, these factors caused a substantial increase in our provision for loan losses. Prolonged measures by health or other governmental authorities encouraging or requiring significant restrictions on travel, assembly or other core business practices could further harm our business and those of our customers, in particular our small to medium sized business customers. Although we have business continuity plans and other safeguards in place, there is no assurance that they will be effective. Our loan portfolio includes loans that are in forbearance, but which are not classified as TDRs because they were current at the time forbearance began. When the forbearance periods end, we may be required to classify a portion of these loans as TDRs, if the borrowers are unable to resume repayment. The ultimate impact of these factors is highly uncertain at this time and we do not yet know the full extent of the impacts on our business, our operations or the global economy as a whole, as well as the pace of economic recovery when the COVID-19 pandemic subsides. However, the decline in economic conditions generally and a prolonged negative impact on small to medium sized businesses, in particular, due to COVID-19 may result in an adverse effect on our business, financial condition and results of operations and may heighten many of our known risks described in the “Risk Factors” section of our Form 10-K.