Coastal Financial Corporation — Q1 2019 10-Q
Business and reporting period: Three months ended March 31, 2019. Coastal Financial is a Washington bank holding company operating Coastal Community Bank, a community bank serving consumers and small and midsize businesses in the Puget Sound region through 14 branches and digital channels.
Financial results and position
| Metric | Q1 2019 / March 31, 2019 | Comparable period / prior year-end |
|---|---|---|
| Net income | $2.81 million; diluted EPS $0.23 | $1.84 million; diluted EPS $0.20 in Q1 2018 |
| Interest income / expense | $11.39 million / $1.63 million | $8.61 million / $0.83 million in Q1 2018 |
| Net interest income | $9.77 million | $7.78 million in Q1 2018 |
| Provision for loan losses | $0.54 million | $0.50 million in Q1 2018 |
| Noninterest income / expense | $1.98 million / $7.66 million | $1.11 million / $6.07 million in Q1 2018 |
| Net interest margin | 4.13%; 4.48% excluding temporary wholesale-brokered deposits (non-GAAP) | 4.12% in Q1 2018; 4.43% in Q4 2018 |
| Total assets | $1.12 billion | $952.1 million at Dec. 31, 2018 |
| Loans, net of allowance | $781.2 million; gross loans $792.2 million | $758.5 million net at Dec. 31, 2018 |
| Deposits | $976.5 million | $803.6 million at Dec. 31, 2018 |
| Shareholders’ equity | $112.4 million | $109.2 million at Dec. 31, 2018 |
| Cash flows | Operating +$2.1 million; investing −$150.5 million; financing +$152.9 million | Q1 2018: operating +$2.7 million; investing −$27.4 million; financing +$24.0 million |
Q1 2019 pre-tax income was $3.55 million and income tax expense was $0.74 million (20.9% effective tax rate). The efficiency ratio was 65.20%, compared with 68.28% in Q1 2018. The allowance for loan losses was $9.92 million, or 1.25% of loans. Total debt included $10.0 million principal of subordinated debt and $3.6 million of junior subordinated debentures; FHLB advances were zero at quarter-end, down from $20.0 million at Dec. 31, 2018.
Material changes and management commentary
- Net income rose 52% year over year, supported by higher net interest income, loan-referral fees and new wholesale banking service fees. Noninterest expense also increased 26%, including higher staffing, occupancy and legal/professional costs.
- Loans increased 3.0% from year-end, led by commercial real estate (CRE), which represented 67.6% of gross loans. Deposits rose 21.5%, substantially reflecting temporary wholesale-brokered deposits.
- Wholesale-brokered deposits were $164.6 million at March 31, 2019, and averaged $74.1 million during the quarter. The company said the customer transferred $157.1 million on April 9, leaving less than $6 million. Management reported Q1 net interest margin of 4.48% excluding the temporary balances; this is a company-defined non-GAAP measure.
- Cash and cash equivalents were reported by management at $257.6 million at March 31, versus $125.8 million at year-end, largely due to the temporary deposits. Separately, the cash flow statement reports $44.9 million of cash, due from banks and restricted cash at quarter-end; these measures have different definitions.
- Nonperforming assets declined to $1.31 million, or 0.12% of assets, from $1.83 million at year-end. A $748,000 C&I loan was over 90 days past due but accruing at quarter-end; management said it was brought current in April. Net charge-offs were $32,000.
- The Bank reported “well-capitalized” status. At March 31, its common equity Tier 1 ratio was 12.62%, Tier 1 risk-based capital 12.62%, total risk-based capital 13.84%, and leverage ratio 10.70%.
Outlook, risks and unusual items
- No numerical earnings or operating guidance was provided. Management said it intends to continue growing loans and customer deposits, targets a loan-to-deposit ratio of 90%–100%, and believes liquidity resources are ample. The reported ratio was 81.0% at quarter-end, or 97.4% excluding wholesale-brokered deposits.
- Key risks include CRE and broader real-estate concentration, local and national economic conditions, credit losses and adequacy of the loan-loss allowance, liquidity, deposit pricing and interest-rate movements, competition, regulatory requirements, cybersecurity and operational disruptions. The filing says risk factors were not materially changed from the 2018 Form 10-K.
- The bank described itself as asset-sensitive: its model projected higher net interest income under rising-rate scenarios and potential declines under larger falling-rate scenarios. Results depend on assumptions about deposit repricing, loan prepayments and other factors and may differ from projections.
- Adoption of lease accounting on January 1, 2019 added approximately $9.5 million of right-of-use assets and $9.7 million of lease liabilities, without a reported income-statement impact. The company was assessing the expected-credit-loss standard (CECL); the amount of its expected one-time allowance adjustment was not yet determinable.
- The company reported no material pending legal proceedings and no material change in internal control over financial reporting. It cautioned that forward-looking statements are subject to risks and are not guaranteed.
Important facts for investors to verify
- Whether the temporary wholesale deposit runoff occurred as described and how it affected subsequent-period deposits, liquidity, funding costs and margins.
- How much of reported earnings and fee income is recurring, particularly loan-referral and wholesale banking fees, and whether expense growth moderates.
- CRE portfolio concentration, construction commitments, credit quality trends and the adequacy of the allowance as loans grow and CECL is implemented.
- Deposit costs and sensitivity to interest rates, including the impact of competition and any further rate changes.
- Regulatory capital and liquidity after the temporary deposits left; the filing states the Bank was well capitalized at quarter-end.