Coastal Financial Corporation — Q1 2020 Form 10-Q
Business context and reporting period
For the three months ended March 31, 2020. Coastal Financial is a Washington bank holding company operating Coastal Community Bank, a community bank serving the Puget Sound region through 14 branches and digital channels. Figures below are in U.S. dollars; financial statement amounts are in millions unless stated otherwise. The filing was signed May 8, 2020.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior year-end |
|---|---|---|
| Net interest income | $11.4 million | $9.8 million, Q1 2019 |
| Provision for loan losses | $1.6 million | $0.5 million, Q1 2019 |
| Net income; diluted EPS | $2.7 million; $0.22 | $2.8 million; $0.23, Q1 2019 |
| Net interest margin | 4.15% | 4.13%, Q1 2019; 4.26%, Q4 2019 |
| Noninterest income / expense | $2.7 million / $9.0 million | $2.0 million / $7.7 million, Q1 2019 |
| Total assets | $1,184.1 million | $1,128.5 million, Dec. 31, 2019 |
| Loans receivable, net; deposits | $992.3 million; $1,005.1 million | $927.6 million; $968.0 million, Dec. 31, 2019 |
| Allowance for loan losses | $12.9 million; 1.29% of loans | $11.5 million; 1.22%, Dec. 31, 2019 |
| Shareholders’ equity | $127.2 million | $124.2 million, Dec. 31, 2019 |
Operating cash flow was $5.0 million in Q1 2020, versus $2.1 million in Q1 2019. Investing activities used $87.0 million, principally reflecting $66.2 million of net loan growth; financing activities provided $52.2 million. Cash, due from banks and restricted cash decreased $29.8 million to $14.1 million at quarter-end. Separately, interest-earning deposits with other banks were $115.1 million.
Deposits funded most assets; loans equaled 100.0% of deposits. FHLB advances were $25.0 million, up from $10.0 million at year-end; subordinated and junior subordinated debt totaled approximately $13.6 million. The Bank was reported well capitalized: common equity Tier 1 ratio 12.58%, Tier 1 risk-based ratio 12.58%, total capital ratio 13.83%, and leverage ratio 11.70%.
Material changes versus comparable periods
- Net interest income increased 16.4% year over year, primarily as average loans grew 23.6%; loan yield declined to 5.25% from 5.40%.
- Net income fell by $84,000 year over year as higher loan-loss provision and operating expenses outweighed revenue growth. Noninterest expense rose 17.7%, including a 24.7% increase in salaries and benefits.
- Noninterest income rose 34.6%, led by loan referral fees, which increased $420,000, and BaaS fees, up $133,000.
- Gross loans increased $66.3 million, or 7.0%, from year-end. Commercial real estate was $643.5 million, 63.9% of gross loans; construction, land and development loans rose to $119.7 million.
- Deposits increased $37.1 million from year-end, with core deposits up $29.9 million. Available-for-sale and held-to-maturity securities together declined to $19.8 million from $32.7 million.
Outlook, commentary, risks and unusual items
- COVID-19 and credit: Management increased the Q1 provision in response to loan growth and heightened economic uncertainty. As of May 6, 2020, the Bank reported 215-plus loan payment deferrals totaling $196.1 million, and had funded 1,874 PPP loans totaling $393.4 million. Those PPP loans were funded after quarter-end. The company noted that the pandemic’s economic impact and potential credit losses were uncertain.
- Concentration and rate risk: CRE represented nearly two-thirds of gross loans, and the portfolio is concentrated in the Puget Sound area. Hotel/motel exposure was $99.2 million outstanding. Rate cuts and market changes may affect loan yields and margins; management noted that effects of lower deposit rates were expected to emerge from Q2. Approximately 34.5% of loans had rate floors.
- Liquidity and operations: Management said it believed liquidity resources were ample and was monitoring funding and capital stress forecasts. Additional borrowing capacity included $63.1 million at the FHLB and $21.4 million through the Federal Reserve discount window. COVID-related risks include borrower repayment capacity, collateral values, deposit stability, PPP execution and compliance, cybersecurity, and business continuity.
- Plans and guidance: The company planned to open a 15th branch in Arlington in Q2 2020. No numerical earnings or margin guidance was provided. Management expected continued loan growth, including PPP lending, and further customer payment accommodations.
- Other items: On May 1, 2020, the company agreed to buy its existing Freeland branch property for $875,000, with closing expected in Q2. The filing reported no material pending legal proceedings and no significant change in other risk factors beyond COVID-19.
Important facts for investors to verify
- How the $196.1 million of reported loan deferrals and subsequent PPP lending developed, including borrower performance and any recognized fees or funding costs.
- Whether COVID-19 drives additional loan-loss provisions, charge-offs, or deterioration in CRE, hospitality, construction and small-business credits.
- Whether deposit growth and available borrowing capacity remain sufficient as loans equaled deposits at quarter-end.
- How lower interest rates, loan floors, deposit repricing and loan growth affect net interest margin after Q1.
- Whether rising personnel and technology costs are matched by recurring revenue growth; assess reliance on variable loan referral fees and BaaS income.