Business Context and Reporting Period
Company: Coastal Financial Corporation (CCB)
Reporting Period: Fiscal Year Ended December 31, 2025
Business Model: A Washington-based bank holding company operating through three segments: Community Bank (traditional banking in Puget Sound), CCBX (Banking-as-a-Service/BaaS with 28 partners), and Treasury & Administration.
Key Operational Update: Management concluded that previously identified material weaknesses in internal controls over financial reporting (related to BaaS partner accounting) were fully remediated as of December 31, 2025.
Key Financial Metrics
| Metric | 2025 | 2024 |
|---|---|---|
| Total Assets | $4.74 billion | $4.12 billion |
| Total Loans Receivable | $3.75 billion | $3.49 billion |
| Total Deposits | $4.14 billion | $3.59 billion |
| Net Income | $47.0 million | $45.2 million |
| Diluted EPS | $3.06 | $3.26 |
| Net Interest Income | $310.1 million | $273.0 million |
| Net Interest Margin | 7.14% | 7.18% |
| Provision for Credit Losses | $192.6 million | $277.6 million |
| Allowance for Credit Losses (ACL) | $169.5 million (4.52% of loans) | $177.0 million (5.08% of loans) |
| Nonperforming Assets | $64.1 million (1.35% of assets) | $62.7 million (1.52% of assets) |
| Shareholders' Equity | $491.0 million | $438.7 million |
Material Changes vs. Prior Period
- Revenue Growth: Net interest income increased $37.0 million (13.6%) driven by loan growth, particularly in the CCBX segment, and lower interest expense due to declining rates. However, total noninterest income decreased $76.6 million (24.9%) primarily due to a $85.2 million reduction in BaaS credit enhancement income, which correlates with the lower provision for credit losses.
- Expense Increases: Total noninterest expense rose $41.5 million (16.8%). Significant increases included BaaS loan expense ($10.6 million), salaries and benefits ($15.8 million), and data processing/software licenses ($8.0 million), reflecting technology investments and growth.
- Loan Portfolio Shift: Total loans grew 7.5%. The CCBX segment grew 12.7% to $1.81 billion, while the Community Bank segment grew 3.2% to $1.94 billion. Commercial Real Estate (CRE) loans decreased 6.5% to $1.29 billion.
- Capital Raise: The company completed a public offering in December 2024 raising $98.0 million, which increased shares outstanding and contributed to the decrease in diluted EPS despite higher net income.
Guidance, Outlook, and Risks
- Outlook: Management expects continued growth in the CCBX segment and community bank deposits. The company is actively selling CCBX loans to manage portfolio size and credit concentrations while retaining fee income.
- Interest Rate Risk: The balance sheet has become slightly asset-sensitive. Management notes that the Federal Open Market Committee (FOMC) lowered rates in late 2025, and future rate cuts could impact net interest income.
- Credit Risk: While the provision for credit losses decreased significantly due to improved CCBX portfolio performance, the company maintains a high allowance for CCBX loans (8.37% of CCBX loans) compared to the Community Bank (0.94%). Approximately 97.7% of CCBX net charge-offs are covered by partner credit enhancements.
- Regulatory & Operational Risks: Key risks include the soundness of BaaS partners (counterparty risk), cybersecurity threats, and the potential for increased regulatory scrutiny on BaaS activities. The company confirmed remediation of prior internal control weaknesses.
Investor Verification Checklist
- BaaS Partner Concentration: Verify the financial health of the top two CCBX partners, which collectively represent 45% of total deposits.
- Credit Enhancement Coverage: Confirm the status of partner cash reserve accounts and the enforceability of credit enhancement agreements, particularly for the 5% of the CCBX portfolio not fully covered by enhancements.
- Internal Control Remediation: Review the specific controls implemented to address the previously identified material weaknesses regarding BaaS partner accounting and data integrity.
- Commercial Real Estate Exposure: Assess the concentration of non-owner-occupied CRE loans (170.9% of capital) and the impact of potential regional economic downturns in the Puget Sound area.
- Efficiency Ratio: Monitor the efficiency ratio, which increased to 53.13% in 2025 from 42.38% in 2024, to ensure technology and growth investments yield expected returns.