8-K/A: Coastal Financial Corporation Announces Fourth Quarter 2024 Results, Corrects Prior Release

Coastal Financial Corporation reports net income of $13.4 million for Q4 2024, while amending a prior release to correct accounting errors related to fintech partners.

Summary

• Coastal Financial Corporation reported a net income of $13.4 million, or $0.94 per diluted common share, for the fourth quarter of 2024.
• This compares to $13.5 million, or $0.97 per diluted common share, for the previous quarter and $9.0 million, or $0.66 per diluted common share, for the same quarter in the previous year.
• For the full year 2024, net income was $45.2 million, or $3.26 per diluted common share, compared to $44.6 million, or $3.27 per diluted common share, for the year 2023.
• The company completed a $98.0 million capital raise during the fourth quarter, priced at $71.00 per share.
• BaaS program fee income increased by 51.6% for the full year 2024, reaching $20.1 million.
• The company sold $845.5 million in loans during the fourth quarter and swept $273.2 million of deposits off balance-sheet.
• The company remains heavily indemnified against fraud and credit risk with its CCBX partners, at 98.7% as of year-end 2024.
• An amended 8-K was filed to correct errors in the original filing related to accounting for certain fintech partners; these corrections did not impact net income or earnings per share.

Sentiment

Score: 7

Explanation: The sentiment is moderately positive due to the completion of a capital raise, strong growth in BaaS program fees, and active management of the loan portfolio. However, the amended 8-K filing and increased noninterest expenses temper the overall sentiment.

Positives

• The company completed a $98.0 million capital raise, strengthening its capital position.
• BaaS program fee income saw strong annual growth, increasing by 51.6%.
• The company continues to expand its CCBX program, with three letters of intent signed for 2025.
• The company is actively managing its loan portfolio and credit quality by selling loans and implementing enhanced credit standards.
• The company retains a portion of fee income on sold credit card loans, providing an additional revenue stream without on-balance-sheet risk.
• The company remains well-capitalized, with Tier 1 leverage capital at 10.78% and total risk-based capital at 14.67%.

Negatives

• An amended 8-K was filed to correct errors in the original filing related to accounting for certain fintech partners.
• Noninterest expenses increased due to higher salaries, employee benefits, and legal and professional expenses.
• Yield on earning assets and yield on loans receivable decreased for the quarter ended December 31, 2024, compared to the previous quarter.
• Net charge-offs increased to 6.56% for the quarter ended December 31, 2024, compared to 5.60% for the quarter ended September 30, 2024.

Risks

• The company's reliance on CCBX partners for credit enhancements exposes it to counterparty risk.
• Fluctuations in interest rates could impact the company's net interest income.
• Investments in CCBX may result in front-loaded expenses before significant revenues are realized.
• The company is subject to various state taxes that are assessed as CCBX activities and employees expand into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods.

Future Outlook

The company plans to selectively expand its CCBX partner base, invest in technology and risk management infrastructure, and grow noninterest income through increased transaction activity and new product offerings.

Management Comments

• 2024 was highlighted by the completion of our $98.0 million capital raise during the fourth quarter, which we will utilize to support growth of the Bank including in our CCBX segment, said CEO Eric Sprink.
• We saw high quality net loan growth of $72.7 million despite selling $845.5 million in loans during the fourth quarter, and our CCBX program fee income continued to increase which was up 51.6% for full-year 2024 relative to the prior year.
• We continue to invest heavily in CCBX to support future growth, and we are pleased to have three letters of intent ('LOI') signed going into 2025 with an active pipeline.
• We believe that by increasing noninterest income, we can mitigate the uncertainties associated with fluctuating interest rates and provide a more stable income stream in the future, said CEO Eric Sprink.

Industry Context

The company's focus on BaaS reflects a broader trend in the banking industry towards leveraging technology to offer specialized services and expand reach through partnerships.

Comparison to Industry Standards

• Coastal Financial's CCBX segment competes with other banks offering BaaS solutions, such as Green Dot Corporation and LendingClub.
• The company's growth in BaaS program fees of 51.6% indicates a strong performance in this segment compared to industry averages.
• The company's capital ratios are above the minimum requirements for being considered well-capitalized under the Prompt Corrective Action framework.
• The company's efficiency ratio of 42.38% for the year ended December 31, 2024, indicates a strong performance compared to industry averages.

Stakeholder Impact

• Shareholders will benefit from the increased capital and potential for future growth.
• Employees may see increased opportunities as the company expands its CCBX program.
• Customers of CCBX partners will have access to a wider range of financial services.
• Suppliers and creditors may see increased business opportunities as the company grows.

Next Steps

• The company plans to selectively expand its CCBX partner base.
• The company plans to continue to invest in and enhance its technology and risk management infrastructure.
• The company plans to continue selling credit card loans while retaining a portion of the fee income for its role in processing transactions.

Key Dates