10-K: Coastal Financial Corporation Restates Prior Financials Amidst CCBX Accounting Errors, Reports Strong Loan Growth in 2024

Coastal Financial Corporation restates prior financial statements due to accounting errors in its CCBX segment, while still reporting significant loan growth and improved financial performance for the year ended December 31, 2024.

Summary

• Coastal Financial Corporation restated its prior financial statements due to errors in the recognition of interest income and BaaS expense for certain BaaS partner loans in its CCBX segment, as well as the accounting for reimbursement of expenses associated with certain BaaS partners.
• The errors had no impact on consolidated pre-tax income or net income but resulted in an overstatement of assets and liabilities in the Consolidated Balance Sheet and impacted net change in operating activities and investing activities in the Consolidated Statement of Cash flows.
• Despite the restatement, Coastal Financial Corporation reported a net income of $45.2 million, or $3.26 per diluted share, for the year ended December 31, 2024, compared to $44.6 million, or $3.27 per diluted share, for the year ended December 31, 2023.
• The increase in net income was attributed to a $41.5 million increase in net interest income and a $104.1 million increase in noninterest income, partially offset by a $93.6 million increase in the provision for credit losses loans and a $51.7 million increase in noninterest expense.
• Total assets increased to $4.12 billion as of December 31, 2024, a 9.9% increase from $3.75 billion in the previous year, primarily driven by a $465.0 million increase in loans receivable.
• The company's loan portfolio reached $3.49 billion, with significant growth in both the community bank and CCBX segments.
• The allowance for credit losses increased to $177.0 million, representing 5.08% of total loans, reflecting the growth and composition of the CCBX partner loan portfolio.
• Net interest margin improved to 7.18% for the year ended December 31, 2024, compared to 6.88% for the year ended December 31, 2023.
• The company continues to focus on organic growth in its community bank and expansion of its CCBX segment, while also refining criteria for CCBX partnerships to focus on larger, more established partners.

Sentiment

Score: 6

Explanation: The sentiment is neutral to slightly positive. While there's a restatement of financials (negative), the company shows strong growth and profitability (positive). The material weaknesses in internal controls are a concern, but the company is taking steps to remediate them.

Positives

• Significant loan growth in both the community bank and CCBX segments.
• Improvement in net interest margin.
• Increase in noninterest income.
• Strong capital position, with the Bank classified as well-capitalized.
• Continued focus on organic growth and strategic partnerships.
• Implementation of enhanced internal controls to remediate material weaknesses.

Negatives

• Restatement of prior financial statements due to accounting errors in the CCBX segment.
• Identification of material weaknesses in internal control over financial reporting.
• Increase in provision for credit losses loans.
• Increase in noninterest expense.
• High concentration of loans secured by real estate in the Puget Sound region.

Risks

• Concentration of business and operations in the Puget Sound region, making the company sensitive to adverse changes in the local economy.
• Potential for insufficient allowance for credit losses to absorb actual credit losses.
• Intense competition from traditional and new financial services providers.
• Risks associated with the banking business and operations, including credit, market, liquidity, interest rate, and compliance risks.
• Challenges in effectively managing growth.
• Risks associated with managing relationships with broker dealers, digital financial service providers, and other partners to provide BaaS.
• Potential for adverse effects from changes in laws and regulations.
• Risks related to privacy, information security, and cybersecurity breaches.
• Potential for economic disruptions from changes to the size, structure, powers and operations of the federal government.
• Potential business risk from actions by regulators related to CCBX relationships.

Future Outlook

The company aims to continuously enhance its customer base, increase loans and deposits, and expand its overall market share in Snohomish County, while also refining the criteria for CCBX partnerships and exploring relationships with larger, more established partners.

Management Comments

• We continue to refine the criteria for CCBX partnerships, exploring relationships with larger and more established partners, with experienced management teams, existing customer bases and strong financial positions and will continue to exit partnerships where it makes sense for us to do so.

Industry Context

The company operates in a highly competitive industry and market, facing competition from large banking institutions, mid-sized regional banks, credit unions, mortgage companies, and fintech companies. The company's CCBX segment competes against companies across the retail banking, financial services, transaction processing, consumer technology, and financial technology services industries.

Comparison to Industry Standards

• The document does not provide enough information to make a detailed comparison to industry standards.
• However, it mentions that the company competes with larger institutions that have advantages such as extensive advertising campaigns, branch networks, and technology investments.
• The document also notes that some competitors have advantages such as tax exemption (credit unions) and lesser regulation (mortgage companies and finance companies).

Management Changes

Legal Proceedings

• The company is a party to various litigation matters incidental to the conduct of its business, but it does not believe that any currently pending legal proceedings will have a material adverse effect on its business, financial condition, or operations.

Related Party Transactions

• The company had transactions made in the ordinary course of business with certain of its executive officers and directors, with loans made on substantially the same terms as those prevailing at the time for comparable transactions with other persons.
• The company held deposits from directors, principal shareholders, and executive officers.
• The company obtains legal services from a law firm in which one of the company's directors is a partner.
• The company leased one facility from a group of investors, one of which was a director until he retired from the board in May 2023.

Stakeholder Impact

• Shareholders: The restatement of prior financials may negatively impact investor confidence, but strong growth and profitability may offset this.
• Employees: The company seeks to attract, retain and develop the most talented employees possible by promoting a strong, positive culture, maintaining a safe and healthy workplace, emphasizing open communication with management and investing in training and education.
• Customers: The company is committed to supporting the communities it serves through donations, sponsorships and employee volunteerism.
• The company recognizes the need to connect our marginalized communities to financial education and safe, affordable, and functional financial services.

Next Steps

• Implement enhanced internal controls to remediate the identified material weaknesses.
• Continue to refine the criteria for CCBX partnerships.
• Explore relationships with larger and more established CCBX partners.
• Continue to monitor and manage liquidity in an uncertain economic environment.

Key Dates