Coastal Financial Corporation — Q1 2024 Form 10-Q
Business context and reporting period. Unaudited results cover the three months ended March 31, 2024; balance-sheet comparisons are with December 31, 2023. Coastal operates a Washington community bank, the nationwide CCBX Banking-as-a-Service (BaaS) business, and treasury and administration. CCBX had 21 partners, 19 active. Unless noted, financial amounts below are in U.S. dollars.
Key financial results and condition
- Profit: Net income was $6.8 million, down 45% from $12.4 million; diluted EPS was $0.50 versus $0.91. Return on average assets was 0.73% and return on average equity 9.21%.
- Interest income and margins: Net interest income rose 11.8% to $60.9 million. Net interest margin declined to 6.78% from 7.15%; deposit cost rose to 3.49% from 2.13%. Loan yield increased to 10.85% from 9.95%.
- Credit costs and BaaS: Provision for credit losses was $83.2 million, versus $43.7 million. The allowance for credit losses reached $139.3 million, or 4.35% of loans, compared with $117.0 million, or 3.86%, at year-end. Net charge-offs were $57.2 million, including $57.2 million in CCBX; the annualized consolidated net charge-off ratio was 7.34%. CCBX partner agreements generally provide reimbursement, but introduce partner-counterparty risk.
- Revenue and expenses: Noninterest income increased to $87.0 million from $49.3 million, largely because BaaS indemnification income rose to $80.7 million from $44.4 million. Total noninterest expense rose 25% to $56.0 million, including $24.8 million of BaaS loan expense. The filing’s non-GAAP reconciliation excludes $3.0 million of identified unanticipated pretax expenses—$1.9 million of noninterest expense and $1.1 million of provision—and shows adjusted net income of $9.1 million, versus reported GAAP net income of $6.8 million.
- Loans, deposits, and assets: Total assets were $3.87 billion, up 3.0% from year-end. Loans, net of deferred fees, were $3.20 billion, up 5.7%; deposits were $3.46 billion, up 3.1%. Loans equaled 92.4% of deposits. Community-bank deposits fell $63.6 million, while CCBX deposits increased $166.2 million.
- Liquidity and funding: Cash and due from banks plus interest-earning bank deposits totaled $515.1 million. The company reported $659.5 million of available borrowing capacity at the Federal Reserve and FHLB and no draws on those facilities during the quarter. Cash and stated borrowing capacity totaled $1.17 billion. Estimated uninsured deposits were $495.6 million, or 14.3% of deposits.
- Debt, capital, and cash flow: Debt carrying value was $47.8 million, comprising $44.2 million of subordinated debt and $3.6 million of junior subordinated debentures. Shareholders’ equity was $303.7 million. The Bank remained classified as well capitalized; its CET1 ratio was 10.14% and total capital ratio 11.43%. Operating cash flow was $61.9 million; investing cash flow was negative $132.8 million and financing cash flow was positive $102.9 million. Cash increased $32.0 million during the quarter.
Material changes versus comparable periods
- Year over year, net income fell $5.6 million despite higher net interest income and noninterest income. Management attributed the decline primarily to increased deposit interest expense, higher credit-loss provision, higher operating expenses, and identified unanticipated costs.
- Interest expense increased $13.9 million, mainly from growth in interest-bearing deposits and higher deposit rates. Net interest margin narrowed as funding costs rose.
- CCBX loans increased 10.1% from year-end to $1.32 billion. The company sold $100.5 million of CCBX loans during the quarter as part of its portfolio-management strategy. The allowance increased substantially, and CCBX net charge-offs were higher than in the prior-year quarter.
- The $100.0 million of available-for-sale U.S. Agency securities matured, reducing the available-for-sale portfolio from $99.5 million at year-end to $41,000. Held-to-maturity securities were $50.0 million.
Outlook, commentary, and risks
- Management intends to rebuild and grow CCBX with enhanced underwriting standards, focus on larger and more established partners, and continue selling selected loans. It expects lower yields and compressed margins in the near term as higher-risk, higher-yielding loans are replaced; no quantified earnings guidance is provided.
- Management plans to manage deposit costs, use technology to improve efficiency, and pursue long-term growth. It added exception pricing tactics late in the quarter to help retain and compete for community-bank deposits.
- Two CCBX partners represented 44% of total deposits. Loss or movement of a significant partner relationship could pressure liquidity. CCBX credit-enhancement assets depend on partners meeting contractual reimbursement and reserve-funding obligations.
- One partner agreement covering a $317.8 million loan portfolio was amended effective April 1, 2024: Coastal’s share of credit losses decreased from approximately 10% to 5%. The quarter-end allowance used the revised 5% share.
- Credit, real-estate, interest-rate, liquidity, partner concentration, operational, cybersecurity, regulatory, and macroeconomic risks remain relevant. Commercial real estate was 41.9% of loans; management noted economic uncertainty, elevated rates, and potential deterioration in asset quality. The filing reports no material change in risk factors from the 2023 Form 10-K and no pending legal proceeding believed likely to have a material adverse effect.
Important facts for investors to verify
- How much of reported BaaS indemnification income and provision reflects credit-enhancement accounting, and how those balances convert to collected partner reimbursements and cash.
- Whether CCBX partners maintain adequate cash reserves and honor credit-enhancement obligations, especially given partner deposit concentration and the quarter’s elevated CCBX charge-offs.
- Subsequent credit performance, allowance adequacy, and delinquency trends, including CCBX loans reported as 90 days or more past due but still accruing under the company’s policies.
- Whether deposit growth, retention, and funding costs support margins as community-bank deposits declined and deposit pricing competition continues.
- Progress on CCBX portfolio quality, loan sales, partner strategy, and management’s expectation of near-term margin pressure; the filing provides no numerical forecast.
- Reconcile the $3.0 million of “unanticipated” pretax expenses in the non-GAAP discussion with the separate management narrative describing approximately $3.0 million of such costs, and assess the adjusted measure alongside GAAP results.