Coastal Financial Corporation — FY2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed March 11, 2022. This is an annual filing, not a standalone fourth-quarter report. Coastal operates a Puget Sound community bank and CCBX, its nationwide banking-as-a-service (BaaS) business.
Financial performance and position
| Metric | FY2021 / Dec. 31, 2021 | Comparable period |
|---|---|---|
| Net income | $27.0 million; diluted EPS $2.16 | FY2020: $15.1 million; diluted EPS $1.24 |
| Net interest income | $79.4 million; net interest margin 3.73% | FY2020: $57.4 million; 3.83% margin |
| Noninterest income | $28.1 million | FY2020: $8.2 million |
| Provision for loan losses | $9.9 million | FY2020: $8.3 million |
| Noninterest expense | $63.3 million; efficiency ratio 58.82% | FY2020: $38.1 million; 58.14% |
| Total assets | $2.64 billion | Dec. 31, 2020: $1.77 billion |
| Loans receivable, net of deferred fees | $1.74 billion | Dec. 31, 2020: $1.55 billion |
| Deposits | $2.36 billion | Dec. 31, 2020: $1.42 billion |
| Shareholders’ equity | $201.2 million | Dec. 31, 2020: $140.2 million |
Net interest income rose 38.4%, driven by loan growth, PPP fee recognition and lower funding costs; margin eased 10 basis points. Operating cash flow was $29.8 million, compared with $19.3 million in FY2020. Investing cash outflow was $894.2 million, principally reflecting a $654.5 million increase in interest-bearing deposits at other banks and loan growth; financing cash inflow was $859.8 million, largely from deposit growth, debt issuance and the equity offering.
At year-end, cash and due from banks was $14.5 million and interest-bearing deposits with other banks were $798.7 million. Total deposits included $823.5 million of estimated uninsured deposits. Loans were 73.7% of deposits, down from 108.9% a year earlier. The filing reports $25.0 million of FHLB advances, $24.3 million carrying value of subordinated debt and $3.6 million of junior subordinated debentures; PPPLF borrowings were fully repaid in 2021. The Bank was classified as well capitalized: its CET1 ratio was 11.12%, total risk-based capital ratio 12.38%, and leverage ratio 7.96%.
Material changes and notable items
- CCBX expanded to 28 relationships from 15, including 19 active relationships. CCBX loans grew to $346.7 million from $65.7 million, and CCBX deposits to $716.3 million from $68.7 million.
- BaaS fees increased to $17.3 million from $2.4 million. This total included $9.1 million of credit-enhancement recoveries and $1.5 million of fraud recoveries; related BaaS expenses were $4.5 million, including $1.5 million of fraud expense. Credit-enhancement and fraud amounts warrant separate consideration when assessing recurring fee economics.
- Noninterest expense increased 66.0%, led by salaries and benefits, which rose 59.2% to $37.1 million, alongside BaaS, technology, software and compliance-related costs. Management said it expects to continue adding staff and investing in CCBX infrastructure.
- Loan growth was partly offset by PPP forgiveness and repayments: PPP loans declined to $111.8 million from $365.8 million. The Company originated $763.9 million of PPP loans cumulatively; it expected forgiveness payments to continue through Q2 2022.
- Other nonrecurring or less routine FY2021 income included a $1.3 million gain on sale of the Freeland branch and a $1.5 million unrealized gain on an equity investment. The prior-year period included a $0.4 million unrealized equity investment loss.
- The Company issued $25.0 million of 3.375% fixed-to-floating subordinated notes, used part of the proceeds to repay $10.0 million of higher-rate debt, and completed a public offering of 851,853 shares for $34.5 million gross proceeds. It did not historically pay common dividends and said it did not intend to do so in the near term.
Outlook, risks and contingencies
No formal earnings or revenue guidance is provided. Management described continued CCBX and community-bank growth as a strategy, while noting investments in staffing and infrastructure may increase expenses. It anticipated CCBX deposits becoming interest-bearing as rates rise, potentially increasing deposit costs; the filing’s year-end rate-sensitivity model estimated higher net interest income under rising-rate scenarios, but results depend on model assumptions and deposit repricing.
- Credit and concentration: Commercial real estate was $835.6 million, or 47.7% of loans. Non-owner-occupied CRE, including multifamily and construction/land loans, equaled 305.1% of Bank risk-based capital, above the cited 300% supervisory indicator; management reported enhanced monitoring. Capital call lines were $202.9 million, with $416.0 million of unused commitments.
- CCBX execution and counterparty exposure: Partner relationships account for substantial deposit and loan growth. Credit and fraud enhancements depend on partners meeting contractual obligations; partner failure or termination could affect losses, funding, income and liquidity. Estimated CCBX customer deposits of $252.4 million were being transferred off the balance sheet daily but could be retained if needed, potentially as brokered deposits.
- Liquidity and funding: High cash balances support liquidity, but deposits are largely withdrawable on demand and include significant uninsured balances. The filing states the Bank had $76.3 million of additional FHLB capacity and $21.9 million available through its Federal Reserve line, subject to collateral and terms.
- Interest-rate and benchmark risk: The Company was asset-sensitive by its model, but rising rates may also raise deposit costs and borrower stress. $216.9 million of loans were tied to LIBOR, including $180.3 million in serviced swaps, and $3.6 million of junior subordinated debentures also referenced LIBOR; transition and fallback arrangements remained under review.
- COVID-19 and accounting: Management reported no loans remaining on COVID-related deferral status at year-end and no TDRs. It cautioned that economic effects remained uncertain. CECL adoption was scheduled for January 1, 2023; the eventual allowance impact was not yet quantifiable.
- Other risks and contingencies: The filing highlights cybersecurity, third-party systems, regulatory/compliance, local economic and real-estate conditions, and natural-disaster risks. Management said pending litigation was not expected to have a material adverse effect. Disclosure controls and internal control over financial reporting were assessed as effective; the auditor issued an unmodified opinion on the financial statements and did not attest to internal controls.
Investor verification checklist
- Reconcile BaaS revenue, credit-enhancement recoveries and related provisions/expenses; assess what portion is recurring and dependent on partner performance.
- Review CCBX loan and deposit concentrations, partner credit quality, contractual protections, unused commitments and potential balance-sheet deposit retention.
- Track CRE concentration, capital call line utilization and credit quality, allowance adequacy, charge-offs and nonperforming assets (reported at $1.7 million, or 0.10% of loans).
- Assess deposit stability, uninsured and partner-generated balances, funding alternatives, and the effect of rising rates on deposit costs and net interest margin.
- Verify LIBOR transition progress, CECL implementation readiness, and the sustainability of earnings excluding branch-sale and equity-valuation gains and PPP-related fee recognition.