Coastal Financial Corporation — Q1 2022 Form 10-Q
Business context and reporting period. Unaudited quarter ended March 31, 2022; comparisons are primarily with Q1 2021. Coastal operates a Washington community bank and CCBX, its nationwide banking-as-a-service (BaaS) business. CCBX had 28 partners at quarter-end, up from 21 a year earlier.
Key financial results
| Metric | Q1 2022 | Prior comparison |
|---|---|---|
| Total interest income | $30.1 million | $18.4 million |
| Net interest income | $29.3 million | $17.3 million |
| Net interest margin | 4.45% | 3.76% |
| Provision for loan losses | $12.9 million | $0.4 million |
| Noninterest income | $22.0 million | $3.0 million |
| Noninterest expense | $30.4 million | $12.4 million |
| Income before taxes | $7.9 million | $7.6 million |
| Net income | $6.2 million | $6.0 million |
| Diluted earnings per share | $0.46 | $0.49 |
| Operating cash flow | $8.0 million | $8.4 million |
Net income rose about 4%, while diluted EPS declined about 6%, reflecting higher weighted-average shares. Net interest income increased 69%, principally on loan growth and higher loan yields. The efficiency ratio was 59.34%, versus 60.85% in Q1 2021.
Financial position and material changes
- Assets were $2.83 billion at March 31, up 7.5% from year-end 2021. Gross loans were $1.971 billion; loans net of the $38.8 million allowance were $1.925 billion.
- Deposits were $2.576 billion, up 9.0% from year-end. Core deposits were 95.5% of deposits. Estimated uninsured deposits were $850.1 million.
- Cash and due from banks were $32.7 million and interest-earning deposits at other banks were $649.4 million. Cash flow was $8.0 million provided by operations, $177.7 million used in investing, and $187.9 million provided by financing.
- The company repaid $25.0 million of FHLB advances during the quarter; none remained at March 31. Subordinated debt was $24.3 million and junior subordinated debentures were $3.6 million.
- Shareholders’ equity was $207.9 million. The Bank reported regulatory capital ratios above required well-capitalized thresholds.
- Loans grew 12.5% from year-end, including $168.7 million of CCBX growth and $115.1 million of non-PPP community-bank growth, partly offset by $64.3 million of PPP paydowns and forgiveness. The loan-to-deposit ratio increased to 76.2% from 73.7%.
Management commentary, outlook and risks
- CCBX results and unusual items: BaaS fees were $20.1 million, including $13.1 million of credit-enhancement recoveries and $4.6 million of fraud recoveries. BaaS expenses were $12.9 million, including $8.3 million of partner loan expense and $4.6 million of fraud expense. Management says partner agreements provide protection for covered credit and fraud losses, but partner inability to meet obligations could expose the Bank to losses.
- Credit: The $12.9 million provision was largely CCBX-related; $12.6 million was attributed to CCBX partner loans. Net charge-offs were $2.8 million, versus $9,000 a year earlier, and were attributed to CCBX. The allowance was 1.97% of loans, or approximately 2.02% excluding SBA-guaranteed PPP loans. Nonperforming assets were $2.3 million, 0.08% of assets.
- Growth and expenses: Management described continued CCBX and loan growth, but reported higher staffing, technology, FDIC assessment and partner-related expenses. CCBX’s gross loan yield was 12.73%; after BaaS loan expense, reported net BaaS loan income yield was 3.93%.
- Interest rates: Management expects additional rate increases to raise deposit costs; the March 2022 rate increase had limited Q1 impact and is expected to be more evident in subsequent quarters. The Bank’s model indicates asset sensitivity, but results depend on uncertain assumptions about deposit repricing and other factors.
- Liquidity and concentration: Two CCBX partners accounted for 26% of total deposits. An additional $276.4 million in CCBX customer deposits was being transferred off the Bank’s balance sheet daily. Commitments to extend credit totaled $1.535 billion, including $553.5 million for capital call lines; some commitments may expire undrawn.
- Other risks and outlook: Management cited inflation, global unrest and the war in Ukraine, COVID-19 variants, real-estate and economic conditions, credit quality, CCBX partner and fraud risks, liquidity, cybersecurity and regulatory risks. PPP forgiveness payments were expected to continue through Q2 2022, with PPP loans expected to pay down substantially. The filing provides no formal numerical earnings guidance. CECL adoption is scheduled for January 1, 2023; the impact was not yet determinable.
- Contingencies and controls: The company stated pending legal proceedings were not expected to have a material adverse effect, and reported no material change in risk factors. Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting.
Important facts for investors to verify
- How much of CCBX’s reported fee income and credit protection is recurring, and whether partners can fund contractual credit-enhancement and fraud obligations.
- Whether CCBX loan growth, charge-offs and allowance needs develop in line with management’s assumptions, especially as partner-originated consumer lending expands.
- The stability and cost of CCBX deposits, including concentrations with two partners and the $276.4 million transferred off balance sheet.
- How rising rates affect deposit costs, loan yields, net interest margin and securities values; available-for-sale securities had $350,000 of gross unrealized losses at quarter-end.
- Whether the $1.535 billion of lending commitments—particularly capital call and consumer commitments—are drawn and how resulting growth is funded.
- The eventual allowance and financial-statement effects of CECL adoption in 2023.