Coastal Financial Corporation — Q1 2021 Form 10-Q
Business context and reporting period. The unaudited quarter ended March 31, 2021. Coastal Financial is a Washington bank holding company operating Coastal Community Bank and Arlington Olympic LLC, serving small and midsize businesses, professionals, and individuals in the Puget Sound region. Its CCBX division provides banking-as-a-service (BaaS). The figures below are consolidated; dollar amounts are in millions unless otherwise stated.
Financial results and position
| Metric | Q1 2021 / March 31, 2021 | Comparable period / prior date |
|---|---|---|
| Total interest income | $18.4 | $13.1 in Q1 2020 |
| Net interest income | $17.3 | $11.4 in Q1 2020 |
| Provision for loan losses | $0.4 | $1.6 in Q1 2020 |
| Noninterest income | $3.0 | $2.7 in Q1 2020 |
| Noninterest expense | $12.4 | $9.0 in Q1 2020 |
| Income before taxes | $7.6 | $3.4 in Q1 2020 |
| Net income; diluted EPS | $6.0; $0.48 | $2.7; $0.22 in Q1 2020 |
| Net interest margin; efficiency ratio | 3.76%; 60.85% | 4.15%; 64.26% in Q1 2020 |
| Operating cash flow | $8.4 | $5.0 in Q1 2020 |
| Cash used in investing; cash from financing | $(265.9); $255.4 | $(87.0); $52.2 in Q1 2020 |
| Total assets | $2,029.4 | $1,766.1 at December 31, 2020 |
| Gross loans; deposits | $1,785.0; $1,671.7 | $1,556.3; $1,421.3 at December 31, 2020 |
| Shareholders’ equity | $146.7 | $140.2 at December 31, 2020 |
| Allowance for loan losses | $19.6; 1.11% of loans | $19.3; 1.25% at December 31, 2020 |
At quarter-end, cash and due from banks was $16.8 million and interest-earning deposits at other banks were $187.5 million. Borrowings included $158.5 million under the Paycheck Protection Program Liquidity Facility (PPPLF), $25.0 million of FHLB advances, $10.0 million of subordinated debt, and $3.6 million of junior subordinated debentures. The loan-to-deposit ratio was 105.7%.
Material changes and drivers
- Net income more than doubled year over year, primarily as net interest income rose $6.0 million, reflecting substantially higher earning assets and loan growth. PPP loans contributed $4.4 million of interest and fee income in the quarter.
- Gross loans increased $228.7 million from year-end, including $178.0 million of net PPP loan growth and $41.6 million of other loan growth. Quarter-end PPP loans were $543.8 million and are 100% SBA-guaranteed.
- Deposits increased $250.4 million from year-end, largely in core deposits. Core deposits were 95.2% of total deposits; noninterest-bearing deposits were $768.7 million.
- Net interest margin declined year over year despite higher net interest income: loan yields were lower, in part because of PPP loans and the low-rate environment. Deposit costs fell, helping offset the yield pressure.
- Noninterest expense rose 37% year over year to $12.4 million. Salaries and benefits increased $2.0 million, including hiring for BaaS/digital initiatives and PPP-related incentives; legal and professional fees rose $0.4 million.
- Credit measures remained low: nonperforming loans were $0.7 million, or 0.04% of loans, versus $0.7 million and 0.05% at year-end. Net charge-offs were $9,000 in the quarter.
Outlook, risks, and unusual items
- No specific earnings or financial guidance was provided. Management expected PPP forgiveness activity to remain robust through Q2–Q3 2021 and begin slowing in Q4; forgiveness and paydowns accelerate recognition of deferred PPP fees in interest income. Approximately $14.3 million of net deferred PPP fees remained to be recognized at quarter-end.
- Management said it expected interest rates to remain low in the short term and anticipated continued investment in staffing, technology, and operating costs as CCBX and its planned CCDB digital-bank offering grow. The company expected to launch the digital offering in collaboration with Google.
- Management described credit quality as stable and cited improving economic conditions, but cautioned that the pandemic’s longer-term effects remain uncertain and could lead to deterioration and additional loan-loss provisions. Three loans totaling $13.3 million remained on COVID-related payment deferral or modification at quarter-end.
- Credit and concentration risks include commercial real estate exposure, construction lending, and capital-call lines to venture capital firms. Excluding PPP loans, commercial real estate was 63.9% of the loan portfolio; capital-call loans totaled $102.2 million, with $174.8 million of available commitments.
- The bank reported it was “well capitalized.” At March 31, its total risk-based capital ratio was 12.70%; its leverage ratio was 8.84%. A Form S-3 filed April 13 permits potential offerings of up to $150 million, but the company said it had no immediate capital-raising plans.
- After quarter-end, the Freeland branch sale closed April 30, transferring approximately $1.9 million of loans and $24.1 million of deposits. The filing reported no other subsequent events requiring disclosure.
- Interest-rate simulations showed the bank as asset-sensitive; modeled 12-month net interest income increased 5.9% under a static +100-basis-point shock and declined 4.7% under a −100-basis-point shock. Management cautioned that model assumptions are uncertain.
Important facts for investors to verify
- How quickly PPP forgiveness proceeds and deferred-fee recognition normalize, and how earnings perform as that temporary contribution fades.
- Whether core deposit growth and BaaS relationships persist, and the related deposit concentration, funding, and operational risks.
- Credit trends in commercial real estate, construction, and capital-call lending, including the status of deferred loans and unfunded commitments.
- Whether margin pressure, rising expenses, or changing rates affect profitability; compare reported results with management’s interest-rate sensitivity disclosures.
- Capital, liquidity, and borrowing needs as loans grow; review the post-quarter Freeland sale’s effects and any use of the registered securities offering.