Coastal Financial Corporation (NASDAQ:CCB) is a diversified financial institution that has established itself as a leading community bank in the Pacific Northwest region. With a strong focus on serving small and medium-sized businesses, professionals, and individuals, Coastal Financial has consistently delivered impressive financial results, showcasing its ability to navigate the ever-evolving banking landscape.

Financials

In the fiscal year 2023, Coastal Financial reported an annual net income of $44,579,000, a testament to the company's robust financial performance. The bank's annual revenue reached $330,371,000, while its annual operating cash flow and free cash flow stood at $196,513,000 and $190,038,000, respectively.

Quarterly Performance

The company's quarterly performance has also been noteworthy. For the first quarter of 2024, Coastal Financial reported net income of $6,800,000, a decrease from the $12,391,000 reported in the same period of the previous year. This decline was primarily attributable to a $13.9 million increase in interest expense due to higher interest rates, a $39.5 million increase in the provision for credit losses related to CCBX loan growth, and $11.4 million in additional noninterest expenses, including unanticipated costs incurred during the quarter.

Despite these challenges, Coastal Financial's revenue for the first quarter of 2024 increased by $20.4 million, or 29.2%, to $90,472,000, compared to $70,111,000 in the same period of the previous year. This growth was driven by a $18.2 million, or 27.4%, increase in interest and fees on loans, as well as a $1.7 million, or 54.3%, increase in interest income from interest-earning deposits with other banks.

Business Overview

CCBX Segment

The company's CCBX segment, which provides Banking as a Service (BaaS) offerings to broker-dealers and digital financial service providers, has been a significant contributor to Coastal Financial's growth. In the first quarter of 2024, the CCBX segment's net interest income before intrabank interest expense increased by $12.3 million, or 29.2%, to $54,569,000, compared to $42,220,000 in the same period of the previous year.

Community Bank Segment

Coastal Financial's community bank segment, which focuses on providing banking services to the Puget Sound region, also performed well, with net interest income before intrabank interest expense increasing by $5.8 million, or 24.1%, to $30,052,000 in the first quarter of 2024, compared to $24,211,000 in the same period of the previous year.

Liquidity

The company's strong financial performance is further reflected in its robust liquidity position. As of March 31, 2024, Coastal Financial had $515.1 million in cash on the balance sheet and the capacity to borrow up to $659.5 million from the Federal Home Loan Bank and the Federal Reserve Bank discount window, with no borrowings taken under these facilities during the quarter or three months ended March 31, 2024.

Asset Quality

Coastal Financial's asset quality remains strong, with a nonperforming loans to total loans ratio of 1.71% as of March 31, 2024, compared to 1.78% as of December 31, 2023. The company's allowance for credit losses as a percentage of total loans was 4.35% as of March 31, 2024, up from 3.86% as of December 31, 2023, reflecting the company's proactive approach to managing credit risk.

Geographic Footprint

The company's geographic footprint is primarily concentrated in the Puget Sound region of Washington, with 14 full-service banking locations, 12 of which are located in Snohomish County, where Coastal Financial is the largest community bank by deposit market share. The company's CCBX segment, on the other hand, has a national reach, with 21 active partners as of March 31, 2024.

Revenue Breakdown

In terms of revenue breakdown, Coastal Financial's net interest income, which accounted for 67.3% of total revenue in the first quarter of 2024, has been a significant driver of the company's financial performance. The bank's noninterest income, which includes BaaS program income and BaaS indemnification income, has also been a crucial component, contributing 32.7% of total revenue during the same period.

Outlook

Looking ahead, Coastal Financial's management has provided guidance for the remainder of 2024. The company expects to continue its focus on growing the CCBX segment, while also optimizing and strengthening its CCBX balance sheet. The bank plans to sell additional CCBX loans in the coming months as part of its strategy to reduce risk and improve the overall quality of its loan portfolio.

Furthermore, Coastal Financial is committed to investing in technology to enhance its BaaS infrastructure, increase automation, and improve operational efficiency and productivity. These initiatives, while requiring significant upfront expenses, are expected to contribute to the company's long-term success.

Risks and Challenges

The company's risk profile is well-managed, with a diversified loan portfolio and a strong focus on credit quality. Coastal Financial's commercial real estate loans, which accounted for 41.9% of the total loan portfolio as of March 31, 2024, are primarily secured by owner-occupied and non-owner-occupied real estate, as well as multi-family residential properties.

The company's CCBX segment, while a significant contributor to its growth, also presents certain risks. Coastal Financial's CCBX partners provide credit enhancements that protect the bank from credit and fraud losses, but the company is exposed to counterparty risk if a partner is unable to fulfill its contractual obligations. The company actively monitors and manages this risk to mitigate potential losses.

Conclusion

In conclusion, Coastal Financial Corporation is a well-positioned community bank that has demonstrated its ability to navigate the challenges of the banking industry. The company's strong financial performance, robust liquidity position, and strategic focus on the CCBX segment position it for continued growth and success. As Coastal Financial continues to optimize its operations and invest in technology, investors can expect the company to remain a prominent player in the Pacific Northwest banking landscape.