Coastal Financial Corporation — Q3 2019 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2019. Coastal Financial is a Washington bank holding company operating Coastal Community Bank, with 14 branches serving the Puget Sound region. Figures below are in U.S. dollars; financial statement amounts are in millions unless otherwise noted.
Financial performance and position
| Metric | Q3 2019 / September 30, 2019 | Comparable period / prior date |
|---|---|---|
| Net income | $3.51 million; diluted EPS $0.29 | Q3 2018: $2.60 million; diluted EPS $0.22 |
| Net interest income | $10.73 million | Q3 2018: $8.85 million |
| Net interest margin | 4.29% | Q3 2018: 4.13% |
| Noninterest income / expense | $2.09 million / $7.75 million | Q3 2018: $1.55 million / $6.61 million |
| Total assets | $1.09 billion | December 31, 2018: $952.1 million |
| Loans, net of allowance | $863.2 million; gross loans were $874.1 million | December 31, 2018: $758.5 million net |
| Deposits | $922.2 million | December 31, 2018: $803.6 million |
| Allowance for loan losses | $10.9 million, or 1.25% of loans | December 31, 2018: $9.4 million |
| Shareholders’ equity | $120.4 million | December 31, 2018: $109.2 million |
| Debt and borrowings | $20.0 million FHLB advances; $10.0 million subordinated note principal; $3.6 million junior subordinated debentures principal | FHLB advances were also $20.0 million at December 31, 2018 |
For the nine months ended September 30, 2019, net income was $9.59 million versus $6.65 million a year earlier; diluted EPS was $0.79 versus $0.66. Net interest income was $30.68 million versus $24.93 million, and net interest margin was 4.22% versus 4.17%. Operating cash flow was $9.34 million; investing cash outflow was $121.52 million, primarily reflecting loan growth; financing cash inflow was $118.75 million, mainly from deposit growth. Cash, due from banks and restricted cash ended the period at $46.88 million.
At September 30, the bank reported regulatory capital ratios above “well-capitalized” thresholds, including a 12.89% common equity Tier 1 ratio and 14.11% total capital ratio. Management said liquidity resources were ample; unused borrowing capacity included $88.2 million at the FHLB and $20.9 million at the Federal Reserve. Loans were 94.8% of deposits, within the company’s stated 90%–100% target range.
Changes and drivers versus comparable periods
- Q3 net income rose about 35% year over year. Net interest income increased 21%, principally from higher average loan balances and yields; average loans were up $148.4 million year over year.
- Q3 noninterest income rose 35%, including $369,000 in loan-sale gains, $171,000 in securities-sale gains, and higher wholesale banking fees. These items supported results but may not recur at the same level.
- Q3 noninterest expense increased 17%, led by $944,000 higher salaries and benefits. The company cited hiring for growth, its Edmonds branch, wholesale banking and public-company support.
- Year-to-date total assets increased 14.5%, deposits increased 14.8%, and loans increased 13.8%. Commercial real estate loans were $578.6 million, about 66% of gross loans.
- Deposit costs rose: Q3 average cost of deposits was 0.64% versus 0.44% a year earlier. The Q3 net interest spread was 3.81%, compared with 3.79%.
- Credit indicators remained low overall: nonperforming assets were $1.3 million, or 0.12% of assets, versus $1.8 million, or 0.19%, at year-end 2018. Q3 net charge-offs were $192,000; nine-month net charge-offs were $243,000.
Outlook, risks and unusual items
- No specific earnings or revenue guidance is provided. Management described continued loan and core-deposit growth efforts and a target loan-to-deposit range of 90%–100%. It expected approximately $16 million of temporary deposits brought in largely during Q3 to leave in Q4 2019.
- Management said unusually large wholesale-brokered deposits earlier in 2019 temporarily affected funding costs, net interest margin and related ratios; balances had normalized in Q3. The company presented non-GAAP adjusted metrics for Q1 and Q2 that remove this temporary impact.
- The bank restructured its securities portfolio in Q3 to improve returns and reduce maturity, interest-rate and pricing risk, recognizing a $171,000 net gain. Unrealized securities losses were $111,000 at quarter-end; management attributed these mainly to market rates and conditions and said it did not expect to need to sell the affected securities.
- Key risks include commercial real estate and construction lending concentration, regional economic and property-market conditions, credit-loss estimates, deposit competition and funding costs, interest-rate changes, liquidity, cybersecurity and operational disruptions, regulation, and the ability to manage growth and expenses. Management’s interest-rate model characterized the bank as asset-sensitive: a +100-basis-point shock projected a 3.4% increase in 12-month net interest income under the static-balance-sheet scenario; actual results may differ.
- Credit-loss standard CECL was not yet adopted; the company expected adoption in 2023 and could not yet estimate the size of any initial allowance adjustment. Operating lease accounting adoption added $8.7 million of right-of-use assets and $8.8 million of lease liabilities to the September 30 balance sheet.
- Management reported disclosure controls were effective and no material change in internal control over financial reporting during the nine-month period. The company said pending litigation was not expected to have a material adverse effect and risk factors had not materially changed from its 2018 Form 10-K.
Important facts for investors to verify
- Whether rapid loan growth—particularly in commercial real estate and construction—continues without material deterioration in credit quality or a larger loan-loss provision.
- Whether core deposit growth can fund lending while containing deposit costs, and whether the temporary deposits leave as management expected.
- How much of reported earnings growth is sustained by net interest income and recurring fees versus securities and loan-sale gains or variable loan-referral fees.
- Whether expense growth, including staffing and public-company costs, remains aligned with revenue growth and efficiency improvements.
- Future liquidity, capital and interest-rate sensitivity as the balance sheet grows; compare modeled rate scenarios with subsequent actual results.