Coastal Financial Corporation — Q2 2018 Form 10-Q
Business context and reporting period
Unaudited results cover the three and six months ended June 30, 2018; balance-sheet comparisons are with December 31, 2017. Coastal Financial is a Washington bank holding company operating Coastal Community Bank, with 13 branches serving the Puget Sound region. It focuses on small and midsize businesses, individuals, and commercial real estate lending.
Financial performance and condition
| Metric | Q2 2018 | Q2 2017 | Six months 2018 | Six months 2017 |
|---|---|---|---|---|
| Interest income | $9.23m | $7.90m | $17.84m | $15.44m |
| Net interest income | $8.30m | $7.22m | $16.08m | $14.10m |
| Provision for loan losses | $0.39m | — | $0.89m | $0.44m |
| Noninterest income | $1.21m | $1.02m | $2.32m | $1.85m |
| Noninterest expense | $6.35m | $5.46m | $12.42m | $10.84m |
| Net income | $2.20m | $1.88m | $4.04m | $3.19m |
| Diluted earnings per share | $0.24 | $0.20 | $0.44 | $0.35 |
- Q2 net interest margin was 4.26%, compared with 4.12%; six-month margin was 4.19%, compared with 4.07%. Net interest spread was 3.96% and 3.91%, respectively, versus 3.89% and 3.84%.
- At June 30, assets were $850.9m, up 5.6% from year-end; loans were $700.7m, up 6.7%; deposits were $744.5m, up 5.9%. Commercial real estate represented 67.7% of gross loans.
- The allowance for loan losses was $8.54m, or 1.22% of loans. Nonperforming loans were $2.07m, or 0.30% of loans, versus $2.12m and 0.32% at year-end. Six-month net charge-offs were $0.37m.
- Cash and due from banks totaled $14.2m, with a further $77.2m in interest-bearing deposits at other banks. Six-month operating cash flow was $4.68m; investing activities used $45.69m, largely reflecting loan growth and $32.65m of purchased participation loans; financing activities provided $41.45m, mainly from deposit growth.
- Debt included $20.0m of FHLB advances, $10.0m principal of subordinated debt, and $3.61m principal of junior subordinated debentures. The Bank was reported well-capitalized; its June 30 total risk-based capital ratio was 12.50% and leverage ratio 10.18%.
Changes versus comparable periods
- Q2 net income increased 17%; six-month net income increased 27%. Management attributed earnings growth chiefly to loan-driven interest income, higher deposit service and loan referral fees, and lower taxes following the federal corporate tax-rate reduction.
- Net interest income increased 15.3% in Q2 and 14.2% for the first half, supported by loan growth and improved loan yields. Deposit and borrowing costs also rose as interest rates increased.
- Noninterest expense rose 16.3% in Q2 and 14.6% for the first half, driven chiefly by salaries and benefits, additional staff, and costs associated with the Woodinville branch opened in 2017. Headcount rose 16% year over year to 170.
- Q2 provision expense rose to $392,000 from zero; the first-half provision rose to $893,000 from $439,000, primarily due to loan growth. The allowance ratio was below the 1.27% reported at June 30, 2017.
Outlook, risks, and unusual items
- No specific earnings or growth guidance was provided. Management described continued loan and deposit growth efforts, targeting a loan-to-deposit ratio of 90%–100%; the June 30 ratio was 94.1%. It expected construction and development loans to continue paying off faster than historically despite growth in balances.
- On July 20, 2018, after quarter-end, the company completed an IPO of 2,577,500 shares, including the underwriters’ over-allotment. Proceeds are intended to support organic growth or acquisitions and general corporate purposes, potentially including debt repayment or refinancing and regulatory capital.
- The filing gives inconsistent IPO net-proceeds figures: approximately $33.24m in the financial-statement subsequent-events note and capitalization presentation, versus $35.2m in Part II. Verify the final net proceeds and reconciliation of offering costs.
- Key disclosed risks include local and national real estate conditions, commercial real estate concentration and credit quality, loan-loss reserve adequacy, liquidity, interest-rate changes, growth and cost management, cybersecurity and technology disruptions, regulatory requirements, and competition. Management reported no material change in risk factors from the July 2018 IPO prospectus.
- Management stated disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. The company said pending litigation was not expected to have a material adverse effect.
- Available-for-sale securities had $2.30m of gross unrealized losses at quarter-end, versus $1.43m at year-end. Management attributed these mainly to market conditions and interest rates, said it did not intend or expect to be required to sell, and did not consider them other-than-temporarily impaired.
- The company early adopted guidance permitting reclassification of certain stranded tax effects, moving $186,000 from accumulated other comprehensive loss to retained earnings. The reverse stock split and the IPO occurred in 2018.
Important facts for investors to verify
- Reconcile the IPO net-proceeds discrepancy and confirm how the proceeds affect post-offering capital and share counts.
- Assess whether loan growth, particularly commercial real estate and participation lending, can be sustained without higher credit losses or increased reserve needs.
- Track deposit pricing and funding costs against loan yields, NIM, and the company’s sensitivity to rising or falling rates.
- Review the growth in operating costs and staffing against revenue growth, including the ongoing costs of the Woodinville branch.
- Review the July 2018 IPO prospectus for the full risk-factor disclosures and planned use of proceeds.