Business Context and Reporting Period
Company: Coastal Financial Corporation (CCB)
Filing Type: Form 10-Q (Unaudited)
Reporting Period: Quarter ended March 31, 2026
Business Overview: A Washington state-chartered bank holding company operating through three segments: Community Bank (traditional banking in Puget Sound), CCBX (Banking-as-a-Service for digital partners), and Treasury & Administration. As of March 31, 2026, the company had 15,248,808 shares of common stock outstanding.
Key Financial Metrics
| Metric (in thousands, except per share) | Q1 2026 | Q1 2025 |
|---|---|---|
| Net Income | $12,019 | $9,730 |
| Diluted EPS | $0.78 | $0.63 |
| Total Assets | $5,663,829 | $4,741,437 (Dec 31, 2025) |
| Total Loans Receivable | $3,859,379 | $3,749,531 (Dec 31, 2025) |
| Total Deposits | $5,041,164 | $4,144,199 (Dec 31, 2025) |
| Net Interest Income | $83,357 | $76,062 |
| Provision for Credit Losses | $51,398 | $55,781 |
| Noninterest Income | $66,077 | $63,477 |
| Noninterest Expense | $83,452 | $71,989 |
| Net Cash Provided by Operating Activities | $75,974 | $71,684 |
| Allowance for Credit Losses (ACL) | $172,427 | $169,530 (Dec 31, 2025) |
Key Ratios:
- Net Interest Margin: 7.00% (vs. 7.48% in Q1 2025)
- Return on Average Assets: 0.98%
- Return on Average Equity: 9.80%
- Efficiency Ratio: 55.85%
Material Changes vs. Prior Period
- Profitability: Net income increased 23.5% year-over-year to $12.0 million, driven by a $7.3 million increase in net interest income and a $2.6 million increase in noninterest income, partially offset by a $11.5 million increase in noninterest expenses.
- Balance Sheet Growth: Total assets grew 19.5% quarter-over-quarter to $5.66 billion, primarily due to a $740 million increase in interest-earning deposits with other banks and a $110 million increase in loans receivable.
- Deposit Surge: Total deposits increased 21.6% to $5.04 billion, largely driven by a $910 million increase in CCBX deposits from new partner relationships. Management expects these balances to moderate in Q2 2026.
- Provision Reduction: The provision for credit losses decreased 7.9% to $51.4 million, attributed to improved performance in the CCBX portfolio and a shift toward higher-quality loan originations.
- Expense Growth: Noninterest expenses rose 15.9%, primarily due to a $4.4 million increase in BaaS loan expense, a $3.4 million increase in data processing/software licenses, and higher salaries.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects CCBX deposit balances to decline and normalize in the second quarter of 2026. The company anticipates continued growth in technology investments and CCBX activities, which may drive further expense increases.
- Interest Rate Environment: The company is asset-sensitive. The Federal Reserve lowered rates in late 2025, and further cuts are anticipated. The company's static balance sheet shows a 1.3% decrease in net interest income for a 100 basis point rate drop.
- CCBX Credit Enhancements: A significant portion of CCBX credit losses is indemnified by partners. In Q1 2026, 97.9% of CCBX net charge-offs were covered by credit enhancements. However, the company retains risk on approximately 5% of one partner's $324 million portfolio ($22 million).
- Subsequent Event: Post-quarter, the Bank entered a non-binding term sheet with Evolve Bank & Trust to explore acquiring certain BaaS programs.
- Risks: Key risks include concentration in CCBX partners (three partners represent 48.2% of deposits), counterparty risk if partners fail to reimburse losses, and macroeconomic volatility affecting the Puget Sound real estate market.
Investor Verification Checklist
- Deposit Stability: Verify the sustainability of the $910 million CCBX deposit growth and the timeline for the expected normalization in Q2 2026.
- CCBX Partner Concentration: Assess the risk exposure to the top three partners holding 48.2% of total deposits and the specific terms of the credit enhancement agreements.
- Expense Trajectory: Monitor the trend in data processing and software license expenses, which increased 80.6% year-over-year, to ensure they align with revenue growth.
- Asset Quality: Review the $67.6 million in nonperforming assets (1.75% of loans), noting that $35.2 million are accruing loans 90+ days past due, primarily within the CCBX segment.
- Capital Adequacy: Confirm the company remains "well-capitalized" under Prompt Corrective Action regulations (Tier 1 Leverage Ratio: 10.10% for the Bank).