Coastal Financial Corporation — Q3 2021 Form 10-Q
Business context and reporting period. This unaudited filing covers the quarter and nine months ended September 30, 2021; balance-sheet comparisons are to December 31, 2020. Coastal Financial is a Washington-based bank holding company operating Coastal Community Bank, with 14 branches and a growing Banking-as-a-Service (BaaS) business through its CCBX division. Amounts below are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise.
Key financial results
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Net interest income | $18.8 | $15.1 | $54.7 | $40.5 |
| Provision for loan losses | $0.3 | $2.2 | $1.0 | $5.7 |
| Noninterest income | $6.1 | $1.9 | $13.9 | $6.1 |
| Noninterest expense | $16.1 | $9.7 | $42.2 | $27.6 |
| Net income | $6.7 | $4.1 | $19.7 | $10.5 |
| Diluted earnings per share | $0.54 | $0.34 | $1.58 | $0.86 |
| Net interest margin | 3.48% | 3.62% | 3.64% | 3.81% |
| Efficiency ratio | 64.68% | 56.73% | 61.51% | 59.31% |
Q3 net income rose about 63% year over year; nine-month net income rose about 88%. Net interest income growth reflected loan growth and lower funding costs, while lower loan-loss provisions also supported earnings. Noninterest expense grew faster than net interest income, reflecting staffing and investment in CCBX and other growth initiatives.
Financial position, liquidity and capital
- Total assets were $2.45 billion, up 38.8% from year-end 2020. Gross loans were $1.72 billion, up 10.5%; deposits were $2.22 billion, up 56.4%; shareholders’ equity was $161.1 million.
- Interest-earning deposits at other banks rose to $638.0 million from $144.2 million. The loan-to-deposit ratio fell to 76.7% from 108.9%, principally as deposits, especially CCBX balances, grew faster than loans.
- Core deposits totaled $2.15 billion, or 96.6% of deposits. Noninterest-bearing deposits were $1.30 billion, or 58.3% of deposits. CCBX deposits reached $607.2 million, including $574.0 million in noninterest-bearing accounts.
- Cash flows for the nine months: operating activities provided $18.4 million; investing activities used $692.8 million; financing activities provided $687.1 million. Cash and due from banks ended at $31.7 million. The cash-flow statement’s cash measure is distinct from the $638.0 million of interest-earning bank deposits on the balance sheet.
- Borrowings included $25.0 million of FHLB advances, $24.3 million carrying value of subordinated debt, and $3.6 million of junior subordinated debentures. PPPLF borrowings were fully repaid by June 2021. The Bank reported regulatory capital ratios above applicable “well capitalized” thresholds.
- The allowance for loan losses was $20.2 million, or 1.19% of loans (1.40% excluding SBA-guaranteed PPP loans). Nonperforming assets were $0.74 million, or 0.03% of assets; nine-month net charge-offs were $13,000.
Material changes and unusual items
- Q3 noninterest income included a $1.47 million unrealized gain on an equity investment following an observable price change. Nine-month noninterest income also included a $1.26 million gain on the Freeland branch sale, completed April 30, 2021. These items are not necessarily recurring.
- BaaS fees were $2.29 million in Q3, versus $0.58 million a year earlier; nine-month fees were $4.66 million, versus $1.63 million. CCBX had 16 active relationships, seven onboarding or in implementation, and three signed letters of intent.
- Noninterest expense increased 66.9% in Q3. Salaries and benefits rose $4.0 million year over year; software costs, BaaS partner expense, legal and professional fees, and FDIC assessments also increased. Full-time-equivalent employees rose 46.3% year over year to 342.7.
- The company issued $25 million of subordinated notes in August at a 3.375% fixed rate for five years, then floating at three-month SOFR plus 2.76%; proceeds partly repaid $10 million of higher-cost debt and included a $11.5 million capital contribution to the Bank.
- PPP loans outstanding were $267.3 million at quarter-end, with $9.4 million of net deferred fees remaining to be recognized in future interest income. The company received $130.8 million in PPP forgiveness or principal paydowns during Q3.
Outlook, commentary and risks
Management reported that all pandemic-related payment deferrals or modifications had returned to active status or been paid off by September 30, 2021. It expected PPP forgiveness payments to continue through the second quarter of 2022 and anticipated ongoing growth-related hiring and technology costs. The filing provides no formal earnings guidance. Management said low interest rates were expected to persist in the near term, while noting that CCBX deposits could begin bearing interest as rates rise, increasing funding costs. Interest-rate simulations indicate asset sensitivity, but depend on assumptions and are not forecasts.
Key risks include COVID-19 and economic uncertainty; credit deterioration or real-estate market weakness; concentration in commercial real estate and growth in construction and capital-call lending; execution, partner, fraud, compliance and technology risks in BaaS; liquidity and deposit-retention risks; and interest-rate changes. The filing reports $677.6 million in commitments to extend credit, including $347.4 million for capital-call lines. The company also disclosed that Google intends to exit digital banking; its CCDB division is exploring other growth opportunities. Management said pending litigation was not expected to have a material adverse effect, risk factors had not materially changed from the 2020 Form 10-K, and disclosure controls were effective.
Important facts for investors to verify
- Whether BaaS relationship growth and fee income can sustain returns as staffing, technology, partner and fraud-related costs rise.
- The stability and pricing sensitivity of CCBX deposits, including the potential effect of higher rates on funding costs and liquidity.
- Credit quality and concentration trends in commercial real estate, construction, capital-call lines and CCBX-originated consumer loans, including utilization of large undrawn commitments.
- The pace of PPP forgiveness and recognition of the remaining $9.4 million in deferred fees, and the effect of the one-time equity valuation gain and branch-sale gain on reported earnings.
- Management’s progress in replacing the planned Google digital-bank collaboration and the future direction and costs of CCDB.