Coastal Financial Corporation — FY 2018 Form 10-K
Business context and reporting period
Annual report for the fiscal year ended December 31, 2018, filed March 27, 2019. Coastal Financial is a Washington bank holding company operating Coastal Community Bank, a community bank serving consumers and small and medium-sized businesses in the Puget Sound region through 14 branches. The company completed its IPO in July 2018.
Key financial metrics
| Metric | FY 2018 / Dec. 31, 2018 | FY 2017 / Dec. 31, 2017 |
|---|---|---|
| Total interest income | $38.7 million | $32.1 million |
| Net interest income | $34.8 million | $29.2 million |
| Net income | $9.7 million; diluted EPS $0.91 | $5.4 million; diluted EPS $0.59 |
| Net interest margin | 4.24% | 4.08% |
| Net interest income after provision | $33.0 million | $28.4 million |
| Operating cash flow | $14.4 million | $7.6 million |
| Total assets | $952.1 million | $805.8 million |
| Loans / deposits | $767.9 million / $803.6 million | $656.8 million / $703.3 million |
| Shareholders’ equity | $109.2 million | $65.7 million |
| Borrowings | $33.5 million | $33.5 million |
FY 2018 investing cash flow was negative $139.1 million, primarily reflecting loan growth and loan purchases; financing cash flow was positive $133.9 million, including $33.2 million of net IPO proceeds and deposit growth. Cash, due from banks and restricted cash increased $9.2 million to $40.3 million; the balance sheet separately reports $125.8 million in cash and interest-earning bank deposits, including restricted cash.
Material changes versus the prior year
- Net income increased 78.5%, supported by higher net interest income and noninterest income, and lower income tax expense. FY 2017 included a $1.3 million tax charge from remeasurement of deferred tax assets following the federal tax-rate change.
- Net interest income rose 19.2%, primarily from loan growth and a 20-basis-point increase in loan yield. Interest expense increased 36.6% as deposit costs rose.
- Loans grew 16.9%; deposits rose 14.3%. CRE loans were $516.0 million, or 67.1% of loans. Construction, land and development loans increased 53.8% to $64.0 million.
- Noninterest income increased 31.6% to $5.5 million, including $709,000 in new wholesale banking service fees and higher loan-sale gains and deposit fees. Noninterest expense rose 16.9% to $26.2 million, driven chiefly by staffing, branch and public-company costs.
- The allowance for loan losses increased to $9.4 million, or 1.23% of loans, from $8.0 million, or 1.22%. Net charge-offs were $436,000, or 0.06% of average loans. Nonperforming assets declined to $1.8 million, or 0.19% of assets, from $2.1 million.
Outlook, risks and unusual items
- No quantified earnings or growth guidance is provided. Management describes a strategy of organic growth, supported by customer relationships, lending teams, branch expansion and selective acquisitions.
- The bank was classified as well-capitalized at year-end: Bank common equity Tier 1 ratio 12.84%, Tier 1 leverage ratio 11.35%, and total risk-based capital ratio 14.05%.
- Commercial real estate concentration is a key risk: non-owner-occupied CRE exposure, including multifamily and construction/land loans, was 333.0% of Bank risk-based capital, above the 300% supervisory indicator. The ratio declined from 354.7% in 2017. CRE lending was 67.1% of total loans.
- Construction and development commitments rose, with approximately $63.4 million unfunded at year-end. Total commitments to extend credit were $136.5 million, versus $87.8 million in 2017. Draws could increase funding needs and credit exposure.
- Other principal risks include Puget Sound economic and property-market concentration; borrower credit deterioration; rising deposit costs and interest-rate sensitivity; liquidity and funding risk; cybersecurity and third-party service-provider dependence; regulatory requirements; and execution risks associated with growth. Management describes the balance sheet as asset-sensitive, but interest-rate simulation results depend on uncertain assumptions.
- Available-for-sale securities had a $1.6 million net unrealized loss at year-end; management attributed the decline mainly to interest rates and market conditions and reported no other-than-temporary impairment. Uninsured deposits were $36.1 million, compared with $6.7 million in 2017.
- The IPO generated approximately $33.2 million in net proceeds. The company did not historically pay dividends and said it did not intend to do so in the near term. Management expected CECL adoption, effective for the company in 2020, to require a one-time allowance adjustment, but had not determined its size. Operating lease adoption in January 2019 increased assets and liabilities by about 1.0% of total assets.
- Management reported effective disclosure controls. The auditor issued an unqualified opinion on the financial statements; the company was not required to obtain, and the auditor did not provide, an audit opinion on internal control over financial reporting.
Important facts for investors to verify
- Whether loan growth—particularly CRE, construction and purchased participations—remains within underwriting, concentration and capital-risk limits.
- Whether the allowance remains adequate as loan balances and unfunded construction commitments grow, and how CECL affects reserves, capital and earnings.
- Deposit retention, funding costs, uninsured deposit levels and the availability of liquidity if committed lines are drawn or deposits leave.
- Whether rising operating costs and new revenue streams, including wholesale banking and the Aspiration program, produce sustainable returns.
- The effect of interest-rate changes and securities valuation movements on net interest income, funding costs and equity.