Business Overview and History

Coastal Financial Corporation (NASDAQ:CCB) is a bank holding company that operates through its wholly-owned subsidiary, Coastal Community Bank. The company has established itself as a leading player in the banking industry, particularly in the realm of fintech and banking-as-a-service (BaaS) offerings.

Coastal Financial Corporation was founded in 2003 and is headquartered in Everett, Washington. The company's primary focus is on providing a wide range of banking products and services to consumers and small-to-medium-sized businesses in the Puget Sound region, as well as through its online and mobile banking platforms.

Coastal Community Bank, the company's wholly-owned subsidiary, was incorporated and commenced operations in 1997. It is a Washington state-chartered commercial bank and a member of the Federal Reserve System. In its early years, Coastal Financial focused on serving small and medium-sized businesses, professionals, and individuals throughout the greater Puget Sound region. The bank's first branch opened in Everett in 1997, and it gradually expanded its footprint over the next two decades, opening additional branches in Snohomish, Island, and King Counties.

During the global financial crisis in the late 2000s, Coastal Financial faced challenges due to the impact on the local real estate market. However, the company successfully navigated these difficulties and continued to grow its community banking business. In 2019, Coastal Financial formed a new subsidiary, Arlington Olympic LLC, which owns the bank's Arlington branch site.

In 2019, Coastal Financial Corporation launched its CCBX segment, which provides BaaS solutions to broker-dealers and digital financial service providers. This strategic move has been a key driver of the company's growth in recent years, as it has allowed Coastal to tap into the burgeoning fintech market and offer its banking expertise to a broader customer base.

As of June 30, 2024, Coastal Financial Corporation had total assets of $3.96 billion, total loans receivable of $3.33 billion, and total deposits of $3.54 billion. The company's community bank segment operates 14 full-service branches in Snohomish, King, and Island counties, where it is the largest community bank by deposit market share.

Business Segments

Coastal Financial Corporation operates through three reportable segments:

1. Community Bank Segment: This segment includes all community banking activities, focusing on providing a wide range of banking products and services to consumers and small to medium-sized businesses in the broader Puget Sound region. The community bank operates 14 full-service banking locations, with 12 in Snohomish County and two in neighboring counties.

2. CCBX Segment: The CCBX segment provides Banking as a Service (BaaS) solutions that allow Coastal's broker-dealer and digital financial service partners to offer their customers banking services. As of June 30, 2024, the CCBX segment had 21 partners, enabling Coastal to offer banking services and products across the nation.

3. Treasury Administration Segment: This segment includes treasury management, overall administration, and all other aspects of the company that are not specific to the community bank or CCBX segments.

Financial Performance and Ratios

Coastal Financial Corporation has demonstrated strong financial performance in recent years. For the six months ended June 30, 2024, the company reported net income of $18.4 million, or $1.34 per diluted share, compared to $25.3 million, or $1.86 per diluted share, for the same period in 2023.

The company's net interest margin for the six months ended June 30, 2024, was 6.96%, compared to 7.37% for the same period in 2023. This decrease was largely due to an increase in the cost of deposits, as the company faced higher interest rates in the prevailing market environment.

Coastal Financial Corporation's loan-to-deposit ratio was 93.88% as of June 30, 2024, up from 90.05% at the end of 2023, reflecting the company's strategy of growing its loan portfolio while maintaining a strong deposit base.

The company's efficiency ratio, which measures the ratio of noninterest expense to net interest income plus noninterest income, was 40.43% for the six months ended June 30, 2024, compared to 42.97% for the same period in 2023. This improvement in efficiency highlights Coastal's efforts to control costs and optimize its operations.

For the three months ended June 30, 2024, net income was $11.6 million, or $0.84 per diluted share, compared to $12.9 million, or $0.95 per diluted share, for the same period in 2023. The decrease was primarily attributable to a $9.9 million increase in interest expense, a $10.1 million increase in the provision for credit losses, and a $6.9 million increase in noninterest expense, partially offset by a $13.8 million increase in interest income and an $11.3 million increase in noninterest income.

Net interest income for the three months ended June 30, 2024, was $66.2 million, compared to $62.4 million for the same period in 2023, an increase of $3.9 million or 6.2%. This increase was largely related to increased yield on loans, primarily from the CCBX segment, and the overall increase in interest rates.

Financials

For the six months ended June 30, 2024, Coastal Financial Corporation reported: - Net income: $18.4 million - Diluted earnings per share: $1.34 - Net interest margin: 6.96% - Loan-to-deposit ratio: 93.88% - Efficiency ratio: 40.43%

For the most recent fiscal year, the company reported: - Revenue: $351.84 million - Net income: $44.58 million - Operating Cash Flow (OCF): $196.51 million - Free Cash Flow (FCF): $190.27 million

For the most recent quarter, the company reported: - Revenue: $185.15 million (8.4% year-over-year increase) - Net income: $13.46 million (16.1% year-over-year increase) - Operating Cash Flow (OCF): $72.55 million (16.3% year-over-year increase) - Free Cash Flow (FCF): $69.91 million (16.8% year-over-year increase)

Liquidity

As of June 30, 2024, Coastal Financial Corporation maintained strong liquidity positions: - Total assets: $3.96 billion - Total loans receivable: $3.33 billion - Total deposits: $3.54 billion - Cash and cash equivalents: $487.25 million - Debt/Equity ratio: 0.16 - Current ratio: 1.09 - Quick ratio: 1.00

The company has access to a $650.1 million credit facility with the Federal Home Loan Bank and Federal Reserve Bank, of which no amounts were drawn during the most recent quarter.

Risks and Challenges

While Coastal Financial Corporation has demonstrated strong financial performance, the company faces several risks and challenges that investors should be aware of:

1. Interest Rate Risk: As a financial institution, Coastal is exposed to interest rate fluctuations, which can impact its net interest margin and profitability. The company's ability to manage its interest rate risk will be crucial in the current rising rate environment.

2. Regulatory Environment: The banking industry is heavily regulated, and Coastal must navigate a complex regulatory landscape. Changes in regulations or increased compliance requirements could impact the company's operations and financial performance.

3. Competition: Coastal faces competition from larger regional and national banks, as well as fintech companies, in its core markets and BaaS offerings. The company's ability to maintain its competitive edge will be critical to its long-term success.

4. Concentration Risk: A significant portion of Coastal's loan portfolio is concentrated in commercial real estate, which could expose the company to risks associated with changes in the local and regional real estate markets.

5. Cybersecurity Threats: As a financial institution with a growing digital presence, Coastal is vulnerable to cybersecurity threats, which could result in data breaches, disruptions to operations, and reputational damage.

Outlook and Guidance

In its most recent earnings release, Coastal Financial Corporation provided the following guidance for the full year 2024:

- Net interest income is expected to be in the range of $250 million to $260 million, reflecting the company's efforts to manage its interest rate risk and maintain its net interest margin. - Provision for credit losses is expected to be in the range of $200 million to $220 million, as the company anticipates continued growth in its loan portfolio and the potential for heightened economic uncertainty. - Noninterest income is expected to be in the range of $300 million to $320 million, driven by the continued expansion of the company's BaaS offerings and related fee income. - Noninterest expense is expected to be in the range of $220 million to $230 million, as the company invests in technology, talent, and infrastructure to support its growth initiatives.

These guidance figures suggest that Coastal Financial Corporation is well-positioned to navigate the current economic environment and continue its growth trajectory, while also managing the various risks and challenges it faces.

Industry Trends

The banking-as-a-service (BaaS) market, in which Coastal Financial Corporation's CCBX segment operates, is experiencing significant growth. Industry trends show that the BaaS market is growing at a compound annual growth rate (CAGR) of 25% as financial technology continues to disrupt traditional banking. This trend bodes well for Coastal's CCBX segment, which has been a key driver of the company's growth in recent years.

Conclusion

Coastal Financial Corporation has established itself as an innovative player in the banking industry, particularly with its BaaS offerings through the CCBX segment. The company's strong financial performance, focus on technology and efficiency, and strategic vision for growth make it an intriguing investment opportunity for those seeking exposure to the fintech and banking sectors. The company's three-segment structure, including the community bank, CCBX, and treasury administration segments, provides a diversified approach to banking and financial services.

The company's recent financial results demonstrate solid growth, with year-over-year increases in revenue, net income, operating cash flow, and free cash flow. The strong liquidity position, including a low debt-to-equity ratio and access to a substantial credit facility, provides Coastal with the financial flexibility to pursue growth opportunities and navigate potential economic challenges.

However, investors should carefully consider the risks and challenges facing the company, including interest rate risk, regulatory challenges, competition, concentration risk, and cybersecurity threats. The company's ability to execute on its long-term growth plans, particularly in the rapidly evolving BaaS market, will be crucial to its continued success.

As Coastal Financial Corporation continues to grow its community banking presence in the Puget Sound region and expand its CCBX partnerships nationwide, it is well-positioned to capitalize on the ongoing digital transformation of the banking industry. The company's focus on innovation and its ability to adapt to changing market conditions will be key factors in determining its long-term success in the competitive financial services landscape.