Coastal Financial Corporation (CCB) — Q2 2019 Form 10-Q
Business context and reporting period. This unaudited quarterly report covers the three and six months ended June 30, 2019, with comparisons to the same 2018 periods. Coastal Financial is a Washington bank holding company operating Coastal Community Bank, a community bank with 14 branches in the Puget Sound region. Amounts below are in millions of dollars unless noted.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Interest income | $11.8 | $9.2 | $23.2 | $17.8 |
| Net interest income | $10.2 | $8.3 | $20.0 | $16.1 |
| Provision for loan losses | $0.5 | $0.4 | $1.1 | $0.9 |
| Noninterest income | $2.1 | $1.2 | $4.1 | $2.3 |
| Noninterest expense | $7.6 | $6.4 | $15.3 | $12.4 |
| Income before taxes | $4.1 | $2.8 | $7.7 | $5.1 |
| Net income | $3.3 | $2.2 | $6.1 | $4.0 |
| Diluted earnings per share | $0.27 | $0.24 | $0.50 | $0.44 |
- Q2 net interest income increased 22.7% year over year; first-half net interest income increased 24.1%. Management attributed the growth mainly to loan growth and higher loan yields.
- Q2 net interest margin was 4.24%, versus 4.26% a year earlier; first-half margin was 4.19%, unchanged year over year. The reported Q2 margin would have been 4.38% excluding the temporary wholesale-brokered deposit impact, a company-presented non-GAAP adjustment.
- Noninterest income growth included wholesale banking fees of $0.5 million in Q2 and $0.9 million for the first half, and higher loan referral fees of $0.5 million and $1.1 million, respectively. The wholesale banking service line began in 2018; loan referral fees can fluctuate with market conditions and loan closings.
- Expense growth reflected staffing for growth, the new Edmonds branch, wholesale banking operations, and public-company costs. The efficiency ratio improved to 62.05% in Q2 from 66.77% a year earlier.
Financial position, cash flow and liquidity
- At June 30, total assets were $1.031 billion, up 8.3% from December 31, 2018. Loans receivable were $845.4 million, up 10.1%; deposits were $868.1 million, up 8.0%. The loan-to-deposit ratio was 97.4%, compared with 95.6% at year-end.
- Commercial real estate represented 65.8% of gross loans ($557.7 million). Commercial and industrial loans were $101.1 million; construction, land and development loans were $84.7 million.
- Cash, due from banks and restricted cash totaled $54.9 million at quarter-end, versus $40.3 million at year-end. For the first half, operating cash flow was $4.7 million, investing cash outflow was $54.7 million, and financing cash inflow was $64.6 million. Loan growth was the principal investing cash use; deposit growth was the principal financing source.
- Total liabilities were $914.4 million and shareholders’ equity was $116.6 million. Borrowings included $20.0 million of FHLB advances, $10.0 million principal amount of subordinated debt, and $3.6 million principal amount of junior subordinated debentures.
- Management reported the Bank was “well capitalized” and in compliance with applicable requirements. At June 30, Bank ratios included common equity tier 1 of 12.27%, Tier 1 risk-based capital of 12.27%, total risk-based capital of 13.48%, and leverage capital of 11.00%.
- Available borrowing capacity was reported at $79.4 million under the FHLB line and $21.7 million under the Federal Reserve line; no Federal Reserve advances were outstanding. Management stated it believed liquidity was ample and maintained a Bank minimum on-balance-sheet liquidity target of 10% of assets.
Material changes, commentary and risks
- Temporary wholesale-brokered deposits: An atypically large balance from a wholesale banking client affected Q1 and Q2 results, including cash, assets, deposits, funding costs and margins. Management said most of the unusual balance was transferred out during Q2 and was not expected to recur; it also cautioned that its effects remained in year-to-date results. Average wholesale-brokered deposits were $20.3 million in Q2 and $47.0 million for the first half. Company-adjusted metrics excluding these deposits are non-GAAP and should be considered alongside reported results.
- Loan growth and credit: The allowance for loan losses was $10.4 million, or 1.24% of loans, versus $9.4 million at year-end. First-half net charge-offs were $51,000. Nonperforming assets were $1.6 million, or 0.16% of assets, compared with $1.8 million at year-end; there were no loans 90 days past due and still accruing. However, nonaccrual commercial and industrial loans increased to $1.6 million from $0.5 million at year-end.
- Unfunded commitments to extend credit totaled $162.1 million, including $87.4 million for construction and development projects; total commitments increased from $136.5 million at year-end. Management cited real estate and commercial lending concentrations, borrower repayment capacity, collateral values, economic conditions and the adequacy of the loan-loss allowance as key credit risks.
- Core deposits grew, but deposit costs rose: Q2 cost of deposits was 0.66%, compared with 0.40% a year earlier; excluding temporary wholesale-brokered deposits, management reported 0.63%. Management noted that further market-rate increases could raise deposit costs.
- The Company adopted lease accounting on January 1, 2019, recognizing operating lease right-of-use assets of $9.4 million and liabilities of $9.6 million at adoption, with no income statement impact from the adoption. The filing reported no material change in risk factors from the 2018 Form 10-K and no pending legal proceedings expected to have a material adverse effect.
- There is no formal earnings or financial guidance in the provided filing text. Management described continued efforts to grow loans and customer deposits, noted expectations for construction and development loans to continue paying off relatively quickly, and said it was rebuilding its government-guaranteed loan pipeline while focusing on higher-quality credits.
- Forward-looking risks include local and national real estate and economic conditions, commercial real estate credit concentrations, liquidity management, interest-rate movements, competition, regulatory requirements, cybersecurity and technology disruptions, and the effectiveness of risk management. Interest-rate simulations show asset sensitivity, but management cautioned that model assumptions are uncertain and actual outcomes may differ.
Most important facts for investors to verify
- Whether wholesale-brokered balances and related fee revenue normalize as management expects, and how reported results compare with the company’s non-GAAP adjusted measures.
- Whether loan growth remains supported by customer deposits, and whether the high loan-to-deposit ratio and large commercial real estate concentration remain manageable.
- Whether nonaccrual commercial and industrial loans, criticized loan ratings, construction commitments and the allowance for loan losses develop as expected.
- Whether deposit pricing and funding costs pressure net interest margin as market rates and competition change.
- Whether expense growth, including staffing, branch and public-company costs, is matched by sustainable revenue growth and operating efficiency.
- Whether capital and liquidity remain adequate as loans grow and credit conditions or deposit flows change.