Coastal Financial Corporation — Q2 2021 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2021; results are unaudited. Comparisons below are against Q2 and first-half 2020 unless noted. Coastal Financial operates Coastal Community Bank and Arlington Olympic LLC, serving the Puget Sound region and providing banking-as-a-service (BaaS) through CCBX. The Freeland branch sale closed April 30, 2021.
Financial performance and condition
| Metric | Q2 2021 | Six months 2021 | Comparable 2020 |
|---|---|---|---|
| Net interest income | $18.6 million | $35.9 million | $14.0 million Q2; $25.4 million six months |
| Provision for loan losses | $0.4 million | $0.7 million | $1.9 million Q2; $3.5 million six months |
| Noninterest income | $4.8 million | $7.8 million | $1.5 million Q2; $4.2 million six months |
| Noninterest expense | $13.7 million | $26.1 million | $8.9 million Q2; $18.0 million six months |
| Net income | $7.0 million | $13.0 million | $3.7 million Q2; $6.4 million six months |
| Diluted earnings per share | $0.56 | $1.05 | $0.30 Q2; $0.52 six months |
| Net interest margin | 3.70% | 3.73% | 3.78% Q2; 3.93% six months |
- Balance sheet at June 30: Total assets were $2.01 billion, up 13.6% from year-end 2020. Gross loans were $1.67 billion, deposits $1.80 billion, and shareholders’ equity $154.1 million.
- Liquidity and funding: Cash and due from banks were $31.5 million, with another $251.4 million in interest-earning deposits at other banks. Core deposits were $1.72 billion, or 95.7% of deposits. The loan-to-deposit ratio was 92.0%, down from 108.9% at year-end 2020.
- Debt: FHLB advances were $25.0 million; subordinated debt was $10.0 million and junior subordinated debentures were $3.6 million. PPPLF borrowings, $153.7 million at year-end, were fully repaid by June 30. The PPPLF expired July 31, 2021.
- Cash flow, six months: Operating activities provided $8.4 million; investing activities used $246.9 million; financing activities provided $251.0 million. Cash and due from banks rose $12.5 million to $31.5 million. The investing outflow primarily reflected loan growth and higher deposits at other banks.
- Credit and capital: Allowance for loan losses was $20.0 million, or 1.20% of loans (1.57% excluding PPP loans, a company-reported non-GAAP measure). Nonperforming loans were $0.65 million, or 0.04% of loans. The Bank remained “well capitalized”; its total risk-based capital ratio was 12.70% and common equity Tier 1 ratio 11.45%.
Material changes versus prior periods
- Q2 net income rose to $7.0 million from $3.7 million, supported by higher loan interest income, lower loan-loss provision, increased BaaS and referral fees, and the Freeland branch sale gain. First-half net income approximately doubled to $13.0 million from $6.4 million.
- Loan growth and PPP activity lifted net interest income, but margins narrowed: Q2 NIM was 3.70% versus 3.78%; first-half NIM was 3.73% versus 3.93%. Management attributed lower loan yields partly to PPP loans and the low-rate environment.
- Noninterest expense increased 53.5% in Q2 and 45.2% in the first half, principally from hiring and compensation for CCBX, the planned digital bank (CCDB), and other growth initiatives. Full-time equivalent employees rose 45.9% year over year to 321.
- Deposits increased $380.4 million from December 31, while loans increased $111.0 million. Commercial real estate remained the largest loan category; PPP loans were $398.0 million outstanding at quarter-end.
Outlook, commentary, and risks
- No formal earnings or financial targets are provided. Management expects BaaS fees to grow as partners become active and expects to introduce a digital bank with Google. It also anticipates continued hiring and higher operating costs as these businesses expand.
- Management expected PPP forgiveness to remain robust in Q3 2021 and slow later in the year. PPP loans had $12.4 million of net deferred fees remaining to be recognized; forgiveness and paydowns can accelerate fee income.
- Management said it expected interest rates to remain low in the near term. The Bank is asset-sensitive in its interest-rate simulations, though management cautions that model assumptions are uncertain. Lower rates may pressure loan yields and NIM.
- COVID-19 and emerging variants, local economic and real estate conditions, borrower credit quality, and the impact of stimulus and loan deferrals remain risks. Two loans totaling $11.7 million remained on COVID-related deferral or modified payment status; management expected them to return to active status in Q3.
- Credit concentration warrants attention: commercial real estate represented 48.2% of gross loans; excluding PPP loans, CRE was about 63.3% of the loan portfolio. Capital call lines had $98.9 million outstanding and $286.8 million in unused commitments. Total commitments to extend credit were $544.1 million.
- The Freeland branch sale generated a one-time $1.3 million gain. CECL adoption is scheduled for January 1, 2023; management expects a one-time allowance adjustment but cannot yet estimate its amount. The company reported effective disclosure controls, no material change in risk factors, and no pending litigation expected to have a material adverse effect.
Important facts for investors to verify
- How much future earnings depend on PPP deferred-fee recognition and the pace of forgiveness, versus recurring loan and BaaS revenues.
- Whether BaaS and the planned digital bank can scale profitably given rising staffing, technology, compliance, and other expenses.
- Credit quality and collateral performance in CRE, construction, and capital call lending, including utilization of the substantial unused commitments.
- Deposit retention and funding costs as pandemic-related balances and market rates change; confirm available liquidity after PPPLF repayment.
- The future trajectory of NIM and loan yields, and the potential effect of interest-rate changes and the 2023 CECL transition.