Business context and reporting period
Coastal Financial Corporation filed this Form 10-K for the fiscal year ended December 31, 2023; it is an annual report, not a standalone fourth-quarter report. The Washington-based bank holding company operates through its community bank, CCBX banking-as-a-service (BaaS), and treasury and administration segments. At year-end, it reported 14 branches and 21 CCBX partner relationships, including 19 active partners.
Key financial metrics
| Metric | 2023 | 2022 |
|---|---|---|
| Total assets | $3.75 billion | $3.14 billion |
| Loans receivable, net | $3.03 billion | $2.63 billion |
| Deposits | $3.36 billion | $2.82 billion |
| Shareholders’ equity | $295.0 million | $243.5 million |
| Net interest income | $238.7 million | $171.8 million |
| Noninterest income | $207.2 million | $124.7 million |
| Net income | $44.6 million | $40.6 million |
| Diluted earnings per share | $3.27 | $3.01 |
| Net interest margin | 7.10% | 5.97% |
| Efficiency ratio | 45.92% | 56.26% |
Net interest income rose 39.0%, supported by loan growth and higher loan yields. Average loan yield was 10.60%, versus 8.12%; average deposit cost increased to 2.87% from 0.71%. Return on average assets was 1.28% (1.38% in 2022), and return on average equity was 16.41% (18.24%).
Credit and cash flow: Provision for credit losses was approximately $184.0 million, up from $79.1 million. Net charge-offs were $145.0 million, or 4.94% of average loans, versus $33.7 million, or 1.49%. The allowance for credit losses was $117.0 million, equal to 3.86% of loans, compared with $74.0 million and 2.82%. Operating cash flow was $196.5 million; investing activities used $599.0 million and financing activities provided $543.5 million. Cash, due from banks and restricted cash ended at $483.1 million.
Funding, debt and capital: Deposits grew 19.3%; loans were 90.1% of deposits, down from 93.2%. Estimated uninsured deposits were $558.6 million, or 16.6% of deposits, versus $835.8 million, or 29.7%. The company had $47.7 million of borrowings, principally $45.0 million of subordinated notes and $3.6 million of junior subordinated debentures; no FHLB or Federal Reserve borrowings were outstanding. The Bank was classified as well-capitalized, with a 9.06% leverage ratio and 11.58% total risk-based capital ratio. Available same-day borrowing capacity from the FHLB and Federal Reserve was reported at $640.1 million.
Material changes versus the prior comparable period
- CCBX loans increased 18.1% to $1.20 billion, and CCBX deposits rose 45.6% to $1.86 billion. CCBX accounted for 39.4% of loans and 55.4% of deposits at year-end.
- Noninterest income growth was heavily influenced by BaaS indemnification income, which reached $184.9 million, including $177.8 million of credit-enhancement income. The filing describes this as recognition of partner reimbursement commitments alongside provisions for expected credit losses, rather than solely fee-based operating revenue.
- The allowance increased substantially, largely reflecting CCBX loan growth and expected losses. CCBX charge-offs were $144.9 million; partner agreements provide reimbursement for most covered losses, but reimbursement depends on partners meeting their obligations.
- The company sold $599.9 million of CCBX loans during the year as part of portfolio and credit-risk management. The year-end portfolio still grew, while management said it was deliberately reducing higher-risk exposures.
- Interest expense on deposits rose to $89.0 million from $19.0 million as average interest-bearing deposits and deposit rates increased. Noninterest expense rose 22.8% to $204.8 million, including higher staffing, legal and professional, technology, and BaaS loan costs.
- The company adopted CECL on January 1, 2023. The transition increased retained earnings by $734,000, net of tax.
Outlook, commentary, risks and unusual items
Management provided no numeric earnings or revenue guidance. It expects deposit costs to remain under pressure and net interest margin to compress. Management also anticipated lower near-term CCBX loan balances and yields as it sells higher-risk loans and tightens underwriting, with the portfolio transition expected to take another quarter or two. It expects lower short-term income while seeking longer-term portfolio stability and profitability, and plans to improve efficiency through technology.
Important risks include CCBX partner concentration and counterparty performance, consumer-loan credit losses, the large commercial real estate exposure, deposit competition and liquidity sensitivity, interest-rate changes, and regulatory scrutiny of BaaS oversight. Two CCBX partners each represented more than 10% of deposits and together represented 40%. Nonperforming assets rose to $53.8 million from $33.2 million; $46.5 million was CCBX loans at least 90 days past due that were still accruing interest. Of that CCBX past-due balance, $44.3 million was covered by partner credit enhancements. One partner arrangement leaves the Bank responsible for credit losses on approximately 10% of a $288.1 million portfolio.
The securities portfolio had a $537,000 unrealized loss in available-for-sale securities; management attributed the decline mainly to interest rates and did not record a credit-loss allowance. The company reported no material cybersecurity incident as of the report date, no material pending legal proceeding, and effective internal control over financial reporting; the auditor gave unqualified opinions on the financial statements and internal controls. The company said it does not intend to pay common-stock dividends in the near term.
Important facts for investors to verify
- Review CCBX credit performance, charge-offs, allowance assumptions, and the collectability and funding of partner credit-enhancement obligations.
- Track deposit concentration, uninsured and off-balance-sheet CCBX deposits, deposit pricing, and available liquidity under stress scenarios.
- Assess the effects of CCBX loan sales and tighter underwriting on loan growth, yields, net interest margin, and near-term earnings.
- Examine commercial real estate concentrations, borrower performance, collateral values, and the $113.5 million of construction, land and development commitments.
- Confirm capital ratios and borrowing capacity as the company transitions from small bank holding company reporting and addresses evolving regulatory requirements.