Coastal Financial Corporation — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; comparisons are primarily with FY2021. This is an annual filing, not a standalone fourth-quarter report. Coastal Financial operates a Puget Sound community bank and CCBX, its nationwide banking-as-a-service (BaaS) business.
Financial and operating highlights
| Metric | FY2022 / year-end | Prior comparable period |
|---|---|---|
| Net income | $40.6 million; diluted EPS $3.01 | $27.0 million; diluted EPS $2.16 |
| Net interest income | $171.8 million; net interest margin 5.97% | $79.4 million; 3.73% |
| Interest income / expense | $192.2 million / $20.4 million | $83.1 million / $3.6 million |
| Provision for loan losses | $79.1 million | $9.9 million |
| Noninterest income / expense | $124.7 million / $166.8 million | $28.1 million / $63.3 million |
| Total assets | $3.14 billion | $2.64 billion |
| Loans / deposits | $2.63 billion / $2.82 billion | $1.74 billion / $2.36 billion |
| Allowance for loan losses | $74.0 million, or 2.82% of loans | $28.6 million, or 1.64% |
| Operating cash flow | $67.1 million | $29.8 million |
Material changes and business drivers
- Loans grew 50.8% year over year, driven mainly by CCBX: CCBX loans reached $1.01 billion, up 192.1%; community-bank loans were $1.61 billion, up 15.7%.
- CCBX contributed $86.7 million of net interest income and $119.0 million of noninterest income, versus $6.4 million and $17.4 million, respectively, in 2021. Community-bank net interest income was $85.1 million.
- BaaS income included $76.4 million of credit-enhancement income and $29.6 million of fraud-enhancement recoveries. Corresponding BaaS loan and fraud expenses totaled $82.9 million. These items reflect partner arrangements and accounting presentation; BaaS income is not equivalent to recurring fee revenue.
- Net charge-offs rose to $33.7 million, or 1.49% of average loans, from $0.5 million, or 0.03%. CCBX accounted for $33.3 million of 2022 net charge-offs; the company reports that partner credit-enhancement recoveries covered these CCBX charge-offs.
- Nonperforming loans increased to $33.2 million, or 1.26% of loans, from $1.7 million, or 0.10%. Most of the increase was CCBX consumer loans at least 90 days past due that were still accruing under the company’s policies. Community-bank nonaccrual loans included a $6.9 million commercial real estate loan; management anticipated resolution in the first half of 2023.
- Deposits rose 19.2%, but the mix shifted: noninterest-bearing deposits fell to 27.5% of deposits from 57.4%, while total deposit cost increased to 0.71% from 0.12%. CCBX deposits were $1.28 billion, or 45.4% of total deposits.
Liquidity, debt and capital
- Year-end cash, due from banks and restricted cash was $342.1 million. Cash flow from investing was negative $987.9 million, largely reflecting loan growth; financing cash flow was positive $449.8 million. The cash-flow statement reports a $471.0 million net decrease in cash, due from banks and restricted cash.
- The loan-to-deposit ratio was 93.2%, versus 73.7% a year earlier. Management stated it believed liquidity was adequate; available sources include deposits, securities, FHLB capacity, Federal Reserve borrowing capacity and $225 million of CCBX customer deposits transferred off the balance sheet daily that could potentially be retained.
- There were no FHLB advances outstanding at year-end. Debt included $45.0 million principal of subordinated notes and $3.6 million of junior subordinated debentures. The company issued $20.0 million of subordinated debt in November 2022.
- The Bank was classified as well-capitalized. At year-end, Bank common equity Tier 1 capital was 9.73%, total capital was 11.00%, and leverage capital was 8.56%. Estimated uninsured deposits were $835.8 million. One CCBX partner’s deposits represented 25% of total deposits.
Outlook, risks and unusual items
- Management expected further 2023 interest-rate increases to raise deposit costs, partly offset by repricing of CCBX loans and interest-earning cash. The company described itself as asset-sensitive, while noting that modeled outcomes depend on uncertain assumptions.
- CECL became effective January 1, 2023. Management estimated a 3%–10% combined increase in the allowance for credit losses and reserve for unfunded commitments, which would reduce opening retained earnings; the estimate was not final at filing time.
- Key risks include CCBX partner concentration and counterparty performance, compliance and operational oversight of fintech relationships, cybersecurity and third-party technology dependence, rising credit losses, commercial real estate and Puget Sound concentration, deposit outflows, and interest-rate and economic volatility.
- Commercial real estate exposure was elevated relative to regulatory concentration guidance, although reported portfolio growth was below the cited supervisory growth indicator. The company also had $2.20 billion of loan commitments, including $1.57 billion that was unconditionally cancelable.
- Available-for-sale securities had a $3.0 million net unrealized loss at year-end, primarily attributed to interest-rate movements; management did not consider the securities other-than-temporarily impaired.
- The company had no pending legal proceedings it believed would have a material adverse effect. It reported no common-stock dividends historically and did not expect near-term dividends.
Most important facts for investors to verify
- Whether CCBX credit and fraud enhancements remain collectible and are supported by partner liquidity, particularly given the 25% deposit concentration and rapid loan growth.
- How CCBX delinquency, charge-off and loss trends develop, and whether partner recoveries continue to cover losses.
- The final CECL adoption adjustment and its effect on retained earnings, capital ratios and future provisions.
- Deposit stability, uninsured-deposit behavior, funding costs and the company’s ability to replace deposits if a major partner relationship changes.
- Whether reported earnings growth is sustained by core spread and fee income, apart from the significant BaaS enhancement and recovery entries and related expenses.
Audit and controls: Moss Adams LLP issued an unqualified opinion on the consolidated financial statements. Management concluded disclosure controls and internal control over financial reporting were effective; the company, as an emerging growth company, did not include an auditor attestation on internal control effectiveness.