Community banks have had a tough year as the collapse of Silicon Valley Bank, First Republic Bank and Signature Bank sent shockwaves through the domestic banking industry.
One standout that has weathered the storm is Coastal Financial Corp. (CCB, Financial), which is a bank holding company for Coastal Community Bank, a large community bank that provides banking products and services to businesses, professionals and individuals in the Puget Sound region os Washington, including the cities of Seattle and Tacoma. Products include checking and savings offerings, commercial and industrial loans, residential real estate loans and many other offering and banking products.
Additionally, Coastal Financial provides banking-as-a-service to digital financial services companies and broker dealers through its CCBX segment. With assets totaling over $3.5 billion, the company operates 14 branches throughout the greater Seattle-MSA region, making these services readily available. The company proudly touts its credentials as the largest community bank based on deposit market share.
Coastal Financial Corporation was founded in 1997 and is headquartered in Everett, Washington. It currently has a market capitalization of $583 million.
CCBX segment
The company recently created CCBX, which is a fintech company that provides a full suite of banking-as-a-service (BaaS) offerings that enable customers to create digital financial services. Key services offered include debit and credit card BIN sponsorship, compliance oversight, financial transactions clearing, deposit services, lending solutions, and overall banking industry consulting. CCBX currently has 18 clients and 3 more in testing or implementation phase. Fee income in this division grew over 30% in the 2nd quarter. Net loan income was $31.6 million in the 2nd quarter. The company continues to refine the criteria for CCBX clients and are exiting relationships where it makes sense for both parties and are now focusing on selecting larger and more established partners with experienced management teams.
Financial review
The company recently reported second-quarter financial results, which showed solid deposit growth and as well as earnings per share growth. Total revenue increased 16.5% during the quarter while deposits rose $67.3 million to $3.16 billion. Net income was $12.9 million, or 95 cents per share, which compares to $12.4 million, or 91 cents, for the prior-year period.
Return on average assets was 1.52% for the quarter and return on average equity was 19.53%, which were both improvements over the prior-year period. Total assets increased 2.4% to $3.54 billion for the quarter, which compares to $3.45 billion as of March 31. Net loan growth increased 6% to $3.01 billion during the quarter.
Cash balances were $6.8 million as of June 30, which is retained for general operating purposes, including debt repayment and for funding $763,000 in commitments to bank technology funds. Total shareholders’ equity increased $13.9 million to $272.7 million. The company remains well capitalized with all relevant capital ratios exceeding the minimum requirements by regulators.
In a statement, CEO Eric Sprink said, “We understand that there continues to be uncertainty and concern surrounding the current economic environment; and as such we work hard to ensure that we are serving our customers and shareholders in the best way possible. Building a company that we believe can withstand the challenges of our time, growing in strength and size, through thoughtful and strategic management of growth, resources and opportunities. Net income for the quarter ended June 30, 2023 was adversely impacted by elevated legal & professional fees which increased $1.6 million compared to the quarter ended March 31, 2023. Nearly all of the increase in professional fees is related to enhancing or expanding our CCBX business, which we view as a strategic priority, by further developing our risk management system to support growth of the CCBX business as well as evaluating new Fintech partnerships and acquisitions of technology platforms and related assets. We continue to remain true to our 'un-Bankey' roots by looking for and finding new opportunities to survive and thrive in the changing banking world, while still maintaining the community bank mentality and feel."
Valuation
A discounted cash flow calculation does not work for banks due to the inherent lumpiness and cyclicality of the industry. Historical and relative price-book ratios are common measures of valuation. The company is currently selling at a price-book ratio of approximately 1.95 based on consensus estimates of shareholders equity. The price-book ratio of the industry is currently about 1.00 times due to the doldrums affecting regional banks. The ratio for Coastal Financial stock in recent years has ranged from 1 times to 2.34 times.
Banks are also measure on important metrics such as return on equity and return on assets. Return on average assets in the second quarter for the company was 1.52% compared to a sector average of approximately 1.15%. Return on common equity was 19.53%, which is substantially about their cost of equity. Average ROE for the sector is approximately 11.0%.
There are two Wall Street analysts that cover the company with an average price target of $58.50 , a target of $60 and a low target of $57.
Unlike many bank holding companies, the company has not historically paid a dividend and has no immediate plans to pay a dividend.
Guru trades
The top three institutional owners of the company with stakes above 5% include T. Rowe Price Investment Management, BlackRock Inc. and Endeavour Capital Advisors Inc. with each holding 6.18%, 5.65% and 5.48% of total outstanding shares respectively. The latest guru trade was from Jim Simons (Trades, Portfolio)' Renaissance Technologies, which reduced his position by 7.38%.
Summary
For those looking for small-cap bank exposure, or community bank exposure, Coastal Financial may be a good long-term bet. The “un-banky” roots may pay off over the long term as the company diversifies into other areas besides traditional banking services.
