Business Context and Reporting Period
Company: Coastal Financial Corp (CCB)
Filing Type: Form 10-Q (Unaudited)
Period Ended: September 30, 2024
Business Overview: Coastal Financial operates as a bank holding company with three segments: Community Bank (traditional banking in the Puget Sound region), CCBX (Banking-as-a-Service or BaaS for digital partners), and Treasury & Administration. The company is headquartered in Everett, Washington.
Key Financial Metrics
| Metric | Q3 2024 (Three Months) | Q3 2023 (Three Months) | YTD 2024 (Nine Months) | YTD 2023 (Nine Months) |
|---|---|---|---|---|
| Net Income | $13.5 million | $10.3 million | $31.9 million | $35.6 million |
| Diluted EPS | $0.97 | $0.75 | $2.32 | $2.61 |
| Total Assets | $4.07 billion | $3.75 billion (Dec 31, 2023) | N/A | N/A |
| Total Loans Receivable | $3.42 billion | $2.97 billion | N/A | N/A |
| Total Deposits | $3.63 billion | $3.36 billion (Dec 31, 2023) | N/A | N/A |
| Net Interest Income | $72.2 million | $62.2 million | $199.4 million | $179.1 million |
| Provision for Credit Losses | $71.6 million | $27.3 million | $213.0 million | $123.3 million |
| Noninterest Income | $80.1 million | $34.6 million | $236.9 million | $142.5 million |
| Noninterest Expense | $65.6 million | $56.5 million | $180.4 million | $153.1 million |
| Net Interest Margin | 7.41% | 7.10% | 7.12% | 7.27% |
| Return on Average Assets | 1.34% | 1.13% | 1.10% | 1.40% |
| Return on Average Equity | 16.67% | 14.60% | 13.80% | 17.90% |
Material Changes vs. Prior Period
- Profitability: Q3 2024 net income increased 31% year-over-year to $13.5 million, driven by higher interest income and BaaS program income. However, YTD 2024 net income decreased 10% to $31.9 million compared to $35.6 million in 2023, primarily due to a significant increase in BaaS loan expenses.
- Provision for Credit Losses: The provision surged to $71.6 million in Q3 2024 (up from $27.3 million in Q3 2023) and $213.0 million YTD. This increase is almost entirely attributable to the CCBX segment's loan growth and higher expected loss rates, which are largely offset by credit enhancement income from partners.
- Balance Sheet Growth: Total loans increased 13% year-over-year to $3.42 billion, with CCBX loans growing 27% to $1.52 billion. Deposits grew 7.9% to $3.63 billion, with CCBX deposits increasing 13%.
- Asset Quality: Nonperforming assets increased to $66.4 million (1.94% of loans) from $53.8 million at year-end 2023. This increase is driven by CCBX loans, specifically a new collection practice placing certain loans on nonaccrual status to improve collectibility. Community bank nonperforming loans decreased significantly.
- Noninterest Income: Total noninterest income jumped 132% in Q3 2024 to $80.1 million, largely due to a $70.1 million increase in BaaS credit enhancement income, which offsets the provision for credit losses.
Guidance, Outlook, and Risks
- CCBX Strategy: Management is actively optimizing the CCBX portfolio by selling loans back to originating partners to manage credit quality and portfolio limits. They are retaining fee income on sold credit card balances to create passive revenue streams.
- Interest Rate Environment: The Federal Reserve lowered rates by 0.50% in September 2024. Management expects this to positively impact deposit costs in future periods. The company's balance sheet is currently liability-sensitive in static models but neutral in dynamic growth models due to the variable-rate nature of CCBX assets and liabilities.
- Regulatory Risks: The company is monitoring proposed FDIC rules regarding brokered deposits and third-party deposit arrangements, which could increase compliance costs or require reclassification of CCBX deposits.
- Counterparty Risk: While CCBX partners provide credit enhancements covering ~97% of charge-offs, the company faces counterparty risk if a partner fails to fulfill reimbursement obligations. The company retains exposure on approximately 5% of one partner's portfolio ($19.8 million).
- Capital: The company remains "well-capitalized" under regulatory standards. It maintains an effective S-3 registration statement to raise up to $200 million in additional capital if needed.
Investor Verification Checklist
- CCBX Credit Enhancement Reliability: Verify the financial health of key CCBX partners and the enforceability of credit enhancement agreements, as the company's net income is heavily dependent on these reimbursements offsetting high provisions.
- Net Charge-Off Trends: Monitor the trend of net charge-offs in the CCBX segment (15.26% annualized YTD 2024) to ensure they remain within the modeled expectations covered by partner enhancements.
- Deposit Cost Stability: Assess the impact of the recent Fed rate cut on the cost of CCBX deposits, which are primarily variable-rate and currently drive the company's cost of funds.
- Loan Sales Execution: Confirm the company's ability to continue selling CCBX loans to partners as planned to manage balance sheet size and risk concentrations.
- Regulatory Impact: Evaluate the potential financial impact of finalized FDIC rules on brokered deposits and third-party arrangements on the CCBX business model.