stal Financial (CCB) - 2025 Q2 - Quarterly Results

Executive Summary Coastal Financial Corporation reported Q2 2025 net income of $11.0 million ($0.71 diluted EPS), up QoQ but down YoY Second Quarter 2025 Financial Performance Q2 2025 net income reached $11.0 million ($0.71 diluted EPS), showing QoQ growth but a YoY decline Net Income and Diluted EPS (USD millions) | Metric | Q2 2025 (USD millions) | Q1 2025 (USD millions) | Q2 2024 (USD millions) | | :-------------------------- | :--------------------- | :--------------------- | :--------------------- | | Net Income | $11.0 | $9.7 | $11.6 | | Diluted EPS | $0.71 | $0.63 | $0.84 | Management Discussion and Strategic Outlook Management highlighted lower credit loss provisions, stable noninterest expenses, and CCBX fee income growth, driven by strategic investments and partnership expansion - Lower provision for credit losses in Q2 2025 due to improved CCBX portfolio performance and focus on originating higher quality CCBX loans, leading to lower historical loss factors[2] - Noninterest expenses were relatively flat QoQ, driven by continued onboarding and implementation costs for CCBX partnerships and technology investments, deemed crucial for long-term success and scalability[2] - Achieved $122.3 million in quality deposit growth during Q2 2025[2] - CCBX program fee income, excluding nonrecurring revenue, increased 8.2% compared to the prior quarter[2] - As of June 30, 2025, CCBX had two partners in testing, two in implementation/onboarding, and five signed letters of intent, with an active pipeline for new partners and products[3] - Total noninterest expense increased 1.2% QoQ to $72.8 million, mainly due to higher data processing and software costs, partially offset by lower legal and professional expenses; expense growth is expected to moderate in H2 2025 as new programs generate revenue[3] - Average deposits increased $221.6 million (6.0%) QoQ to $3.93 billion, primarily from CCBX partner programs and a new deposit partner[3] - Sold $1.30 billion of loans, mostly credit card receivables, during Q2 2025, while retaining a portion of fee income; off-balance sheet credit cards with fee earning potential increased by 76,803 QoQ and 286,146 YoY[3] Financial Highlights Key financial metrics show QoQ improvements in net income and assets, alongside shifts in credit quality and capital ratios Key Operating Metrics Key operating metrics show QoQ increases in net income, EPS, assets, and deposits, with a slight rise in nonperforming assets Income Statement Data (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :------------------------------ | :------------ | :------------- | :------------ | | Net interest income | $76,737 | $76,062 | $66,172 | | Provision for credit losses | $32,211 | $55,781 | $62,325 | | Noninterest income | $42,693 | $63,477 | $69,138 | | Noninterest expense | $72,832 | $71,989 | $57,964 | | Net income | $11,028 | $9,730 | $11,596 | Balance Sheet Data (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :------------------------------ | :------------ | :------------- | :------------ | | Total assets | $4,480,559 | $4,339,282 | $3,959,549 | | Total deposits | $3,913,571 | $3,791,229 | $3,543,432 | | Total shareholders' equity | $461,709 | $449,917 | $316,693 | Share and Per Share Data (USD) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :------------------------------ | :------------ | :------------- | :------------ | | Earnings per share – diluted | $0.71 | $0.63 | $0.84 | | Book value per share | $30.59 | $29.98 | $23.54 | Credit Quality Data | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :-------------------------------------- | :------------ | :------------- | :------------ | | Nonperforming assets to total assets | 1.36 % | 1.30 % | 1.34 % | | Allowance for credit losses to nonperforming loans | 270.7 % | 325.0 % | 279.9 % | | Net charge-offs to average loans | 5.54 % | 5.57 % | 6.54 % | Capital Ratios (Company) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :------------------------------ | :------------ | :------------- | :------------ | | Tier 1 leverage capital | 10.39 % | 10.67 % | 8.31 % | | Common equity Tier 1 risk-based capital | 12.32 % | 12.13 % | 9.03 % | | Total risk-based capital | 14.90 % | 14.73 % | 11.70 % | Key Performance Ratios ROA increased QoQ but decreased YoY due to higher expenses, while yields declined and the efficiency ratio rose significantly - Return on average assets (ROA) increased to 0.99% in Q2 2025 from 0.93% in Q1 2025, but decreased from 1.21% in Q2 2024[8] - Noninterest expenses were slightly higher QoQ due to continued investments in growth, technology, and risk management, partially offset by lower legal and professional expenses; YoY, expenses were higher due to increases in salaries, data processing, software, and legal/professional fees[8] - Yield on earning assets decreased 0.40% QoQ to 9.92%, and yield on loans receivable decreased 0.22% QoQ to 11.11%, mainly due to a decrease in CCBX loan yield and a 49.6% increase in lower-rate capital call lines[9][12] - Average loans receivable increased $56.1 million QoQ, despite selling $1.30 billion in CCBX loans[9] - Efficiency ratio increased to 60.98% in Q2 2025 from 51.59% in Q1 2025, and noninterest income to average assets decreased to 3.82% from 6.06%; this volatility was driven by a higher-quality CCBX loan mix, which reduced credit enhancement requirements and provision expense, impacting noninterest income[10][12] - Q2 2025 results included a net $439,000 loss on equity securities due to the re-valuation of a privately held equity stake[10] Key Performance Ratios | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :------------------------------ | :------------ | :------------- | :------------ | | Return on average assets | 0.99 % | 0.93 % | 1.21 % | | Return on average equity | 9.72 % | 8.91 % | 15.22 % | | Yield on earnings assets | 9.92 % | 10.32 % | 10.49 % | | Yield on loans receivable | 11.11 % | 11.33 % | 11.22 % | | Cost of funds | 3.13 % | 3.11 % | 3.60 % | | Net interest margin | 7.06 % | 7.48 % | 7.12 % | | Efficiency ratio | 60.98 % | 51.59 % | 42.84 % | Segment Performance Update The CCBX segment expanded partnerships and managed its loan portfolio, while the Community Bank segment saw stable loan and deposit trends CCBX Segment CCBX expanded relationships and product offerings, focusing on strategic partnerships, loan sales, and deposit growth - The CCBX segment has 29 relationships at varying stages as of June 30, 2025, including two partners in testing, two in implementation/onboarding, and five signed Letters of Intent (LOI)[15] - Strategy involves refining criteria for CCBX partnerships, exploring relationships with larger and more established partners, and exiting relationships that no longer align with the company's approach[15] - Expanding product offerings with existing CCBX partners and cultivating new relationships to grow the customer base with modest regulatory risk[16] - Continued strategy of selling loans to balance partner and lending limits, manage the loan portfolio, and generate off-balance sheet fee income from sold credit card loans[16] - Deposit sweep capability allows for better liquidity and deposit program management; $478.7 million in deposits were swept off-balance sheet for FDIC insurance and liquidity purposes at June 30, 2025[17][28] - Robinhood entered production testing for deposit products, and Dave finalized production testing in Q2, poised for beta launch, expected to diversify and grow deposits[17] CCBX Relationships and Strategy CCBX is expanding its partner ecosystem, focusing on larger partners and diversified product offerings to manage risk and grow revenue CCBX Relationships Evolution | Category | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :-------------------------- | :------------ | :------------- | :------------ | | Active | 20 | 19 | 19 | | Friends and family / testing| 2 | 2 | 1 | | Implementation / onboarding | 2 | 3 | 1 | | Signed letters of intent | 5 | 1 | 0 | | Total CCBX relationships | 29 | 25 | 21 | CCBX Loan Portfolio CCBX loans grew 1.8% to $1.68 billion despite $1.30 billion in sales, driven by capital call lines, though loan yield decreased - CCBX loans increased $29.5 million (1.8%) to $1.68 billion, despite selling $1.30 billion in loans during Q2 2025[19] CCBX Loan Portfolio (USD thousands) | Loan Type | June 30, 2025 Balance | % to Total | March 31, 2025 Balance | % to Total | June 30, 2024 Balance | % to Total | | :------------------------------ | :-------------------- | :--------- | :--------------------- | :--------- | :-------------------- | :--------- | | Commercial and industrial loans: Capital call lines | $199,675 | 11.9 % | $133,466 | 8.1 % | $109,133 | 7.7 % | | Residential real estate loans | $234,786 | 14.0 | $285,355 | 17.3 | $287,950 | 20.4 | | Credit cards | $533,925 | 31.8 | $532,775 | 32.2 | $549,241 | 39.0 | | Other consumer and other loans | $686,321 | 40.7 | $670,026 | 40.6 | $422,136 | 29.9 | | Gross CCBX loans receivable | $1,680,849 | 100.0 % | $1,651,324 | 100.0 % | $1,410,217 | 100.0 % | | Loan Yield - CCBX | 16.22 % | | 16.88 % | | 17.75 % | | - Capital call lines increased $66.2 million (49.6%) QoQ, while residential real estate loans decreased $50.6 million (17.7%)[21] - CCBX loan yield decreased 0.67% QoQ due to the increase in lower-rate capital call lines and overall loan mix[21] - The company sold $1.30 billion in CCBX loans in Q2 2025, up from $744.6 million in Q1 2025, as part of a strategy to optimize loan portfolio earnings and generate off-balance sheet fee income[21] CCBX Deposit Portfolio CCBX deposits increased 4.1% to $2.36 billion, excluding off-balance sheet sweeps, with a slight QoQ decrease in deposit cost CCBX Deposit Portfolio (USD thousands) | Deposit Type | June 30, 2025 Balance | % to Total | March 31, 2025 Balance | % to Total | June 30, 2024 Balance | % to Total | | :------------------------------ | :-------------------- | :--------- | :--------------------- | :--------- | :-------------------- | :--------- | | Demand, noninterest bearing | $60,448 | 2.6 % | $58,416 | 2.6 % | $62,234 | 3.0 % | | Interest bearing demand and money market | $2,231,159 | 94.5 | $2,145,608 | 94.6 | $1,989,105 | 96.7 | | Savings | $51,523 | 2.2 | $16,625 | 0.7 | $5,150 | 0.3 | | Total CCBX deposits | $2,360,143 | 100.0 % | $2,267,008 | 100.0 % | $2,056,489 | 100.0 % | | Cost of deposits | 3.96 % | | 4.01 % | | 4.92 % | | - CCBX deposits increased $93.1 million (4.1%) to $2.36 billion in Q2 2025[28] - The cost of CCBX deposits decreased to 3.96% in Q2 2025 from 4.01% in Q1 2025[28] Community Bank Segment The community bank segment saw a slight decrease in net loans, driven by commercial real estate, with modest deposit growth and stable costs Community Bank Loan Portfolio Community bank net loans decreased 0.3% to $1.86 billion, primarily due to commercial real estate, partially offset by construction loan growth - Community bank net loans decreased $6.5 million (0.3%) to $1.86 billion in Q2 2025[29] Community Bank Loan Portfolio (USD thousands) | Loan Type | June 30, 2025 Balance | % to Total | March 31, 2025 Balance | % to Total | June 30, 2024 Balance | % to Total | | :------------------------------ | :-------------------- | :--------- | :--------------------- | :--------- | :-------------------- | :--------- | | Commercial and industrial loans | $149,926 | 8.0 % | $149,104 | 8.0 % | $144,436 | 7.5 % | | Construction, land and land development loans | $194,150 | 10.4 | $166,551 | 8.9 | $173,064 | 9.0 | | Residential real estate loans | $198,844 | 10.7 | $202,920 | 10.8 | $229,639 | 12.0 | | Commercial real estate loans | $1,310,882 | 70.2 | $1,340,647 | 71.6 | $1,357,979 | 70.8 | | Gross Community Bank loans receivable | $1,866,032 | 100.0 % | $1,872,548 | 100.0 % | $1,919,338 | 100.0 % | | Loan Yield | 6.53 % | | 6.53 % | | 6.52 % | | - Commercial real estate loans decreased $29.8 million, partially offset by a $27.6 million increase in construction, land, and land development loans[30] Community Bank Deposit Portfolio Community bank deposits grew 1.9% to $1.55 billion, maintaining a stable 1.77% cost, with noninterest-bearing deposits as a key component Community Bank Deposit Portfolio (USD thousands) | Deposit Type | June 30, 2025 Balance | % to Total | March 31, 2025 Balance | % to Total | June 30, 2024 Balance | % to Total | | :------------------------------ | :-------------------- | :--------- | :--------------------- | :--------- | :-------------------- | :--------- | | Demand, noninterest bearing | $494,907 | 31.9 % | $481,214 | 31.5 % | $531,555 | 35.7 % | | Interest bearing demand and money market | $545,655 | 35.1 | $560,416 | 36.8 | $876,668 | 59.0 | | Savings | $57,933 | 3.7 | $59,493 | 3.9 | $63,627 | 4.3 | | Total Community Bank deposits | $1,553,428 | 100.0 % | $1,524,221 | 100.0 % | $1,486,943 | 100.0 % | | Cost of deposits | 1.77 % | | 1.76 % | | 1.77 % | | - Community bank deposits increased $29.2 million (1.9%) to $1.55 billion in Q2 2025[31] - Noninterest bearing deposits accounted for $494.9 million (31.9%) of total community bank deposits, contributing to a stable cost of deposits at 1.77%[31] Detailed Financial Discussion This section details net interest income, noninterest income, expenses, and tax provisions, highlighting key drivers and quarterly changes Net Interest Income and Margin Net interest income increased QoQ and YoY, but net interest margin decreased QoQ due to lower loan yields from capital call lines - Net interest income was $76.7 million in Q2 2025, an increase of $675,000 (0.9%) QoQ and $10.6 million (16.0%) YoY[32] - Net interest margin was 7.06% in Q2 2025, down from 7.48% in Q1 2025, primarily due to a decrease in loan yield; net interest margin, net of BaaS loan expense, was 4.07% in Q2 2025, down from 4.28% in Q1 2025[33][35] - The $66.2 million (49.6%) growth in lower-rate capital call lines, which have less credit risk, contributed to the decrease in net interest margin[33] - Interest and fees on loans receivable increased $720,000 (0.7%) QoQ to $98.9 million due to loan growth, and $8.0 million (8.8%) YoY due to increased outstanding balances[34] Consolidated Net Interest Margin and Loan Yield (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :---------------------------------------------- | :------------ | :------------- | :------------ | | Net interest margin (GAAP) | 7.06 % | 7.48 % | 7.12 % | | Net interest income (GAAP) | $76,737 | $76,062 | $66,172 | | Less: BaaS loan expense | ($32,483) | ($32,507) | ($29,011) | | Net interest income, net of BaaS loan expense | $44,254 | $43,555 | $37,161 | | Net interest margin, net of BaaS loan expense | 4.07 % | 4.28 % | 4.00 % | | Loan yield (GAAP) | 11.11 % | 11.33 % | 11.22 % | | Interest and earned fee income on loans (GAAP) | $98,867 | $98,147 | $90,879 | | BaaS loan expense | ($32,483) | ($32,507) | ($29,011) | | Net loan income | $66,384 | $65,640 | $61,868 | | Loan income, net of BaaS loan expense, divided by average loans | 7.46 % | 7.58 % | 7.64 % | - Cost of funds was 3.13% in Q2 2025, up 2 basis points QoQ but down 47 basis points YoY; cost of deposits was 3.10%, up from 3.08% QoQ but down from 3.58% YoY, largely due to reductions in the Fed funds rate in 2024[36] Average Yield on Loans and Cost of Deposits by Segment | Segment | June 30, 2025 Yield on Loans | June 30, 2025 Cost of Deposits | March 31, 2025 Yield on Loans | March 31, 2025 Cost of Deposits | June 30, 2024 Yield on Loans | June 30, 2024 Cost of Deposits | | :-------------- | :--------------------------- | :----------------------------- | :---------------------------- | :------------------------------ | :--------------------------- | :----------------------------- | | Community Bank | 6.53% | 1.77% | 6.53% | 1.76% | 6.52% | 1.77% | | CCBX | 16.22% | 3.96% | 16.88% | 4.01% | 17.75% | 4.92% | | Consolidated | 11.11% | 3.10% | 11.33% | 3.08% | 11.22% | 3.58% | Noninterest Income Noninterest income significantly decreased QoQ and YoY, mainly due to reduced BaaS credit enhancements reflecting improved CCBX portfolio quality - Noninterest income was $42.7 million in Q2 2025, a decrease of $20.8 million QoQ and $26.4 million YoY[38][39] - The QoQ decrease was primarily due to a $20.6 million decrease in total BaaS income, which included a $22.4 million decrease in BaaS credit enhancements; this decrease in credit enhancements is linked to improved CCBX portfolio performance and a focus on higher quality loans, leading to lower historical loss factors and a favorable impact on provision for credit losses[38] - Partially offsetting the decrease was a $1.0 million increase in BaaS program income (including $504,000 in nonrecurring revenue) and an $811,000 increase in BaaS fraud enhancements[38] - The YoY decrease was mainly due to a $28.5 million decrease in BaaS credit and fraud enhancements, again reflecting improved CCBX loan portfolio performance, partially offset by a $2.0 million increase in BaaS program income[39] - Q2 2025 noninterest income also included a net $439,000 loss on equity securities from the re-valuation of a privately held equity stake[38] Noninterest Expense Total noninterest expense increased QoQ and YoY, driven by technology, risk management, and CCBX growth investments, with some expenses reimbursed - Total noninterest expense increased $843,000 to $72.8 million in Q2 2025, compared to $72.0 million in Q1 2025, and increased $14.9 million from $58.0 million in Q2 2024[40][41] - QoQ increase was primarily due to a $659,000 increase in data processing and software licenses, an $811,000 increase in BaaS fraud expense, and a $74,000 increase in legal and professional fees, partially offset by decreases in other expenses, occupancy, salaries, and BaaS loan expense[41] - YoY increase was largely due to a $4.4 million increase in salary and employee benefits, a $1.6 million increase in data processing and software licenses, a $2.7 million increase in legal and professional expenses, a $3.5 million increase in BaaS loan expense, and a $1.0 million increase in BaaS fraud expense, all related to company growth and technology/risk management investments[42] - BaaS loan expense represents amounts paid to partners for credit/fraud enhancements and originating/servicing CCBX loans; BaaS fraud expense covers non-credit fraud losses on partner customer accounts[41] Noninterest Expense, Net of BaaS Related Items (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :---------------------------------------------- | :------------ | :------------- | :------------ | | Total noninterest expense (GAAP) | $72,832 | $71,989 | $57,964 | | Less: BaaS loan expense | ($32,483) | ($32,507) | ($29,011) | | Less: BaaS fraud expense | ($2,804) | ($1,993) | ($1,784) | | Less: Reimbursement of expenses (BaaS) | ($646) | ($1,026) | ($857) | | Noninterest expense, net of BaaS loan expense, BaaS fraud expense and reimbursement of expenses (BaaS) | $36,899 | $36,463 | $26,312 | Provision for Income Taxes Provision for income taxes increased QoQ to $3.4 million due to higher net income and increased state tax rates, remaining flat YoY in dollar terms - Provision for income taxes was $3.4 million in Q2 2025, up from $2.0 million in Q1 2025, and comparable to $3.4 million in Q2 2024[44] - The QoQ increase was due to higher net income and an increase in state income tax rates, partially offset by the deductibility of certain equity awards[44] - The overall tax rate increased due to the expansion of CCBX activities and employees into other states, with a specific increase in California's tax laws impacting the state rate[45] Financial Condition and Asset Quality This section reviews the company's financial condition, capital adequacy, asset quality, and allowance for credit losses Financial Condition Overview Total assets increased 3.3% QoQ to $4.48 billion, driven by cash and loans, with strong liquidity and increased shareholders' equity - Total assets increased $141.3 million (3.3%) to $4.48 billion at June 30, 2025, compared to $4.34 billion at March 31, 2025[46] - The increase in assets was primarily comprised of a $95.5 million increase in cash and interest-bearing deposits, a $23.0 million increase in loans receivable, and an $18.3 million increase in loans held for sale[46] - Total loans receivable increased to $3.54 billion at June 30, 2025, from $3.52 billion at March 31, 2025[46] - As of June 30, 2025, the company had $719.8 million in cash and an additional borrowing capacity of $642.7 million from the Federal Reserve Bank discount window and Federal Home Loan Bank, plus $50.0 million from a correspondent bank, with no outstanding borrowings on these lines[47] - Uninsured deposits were $579.9 million as of June 30, 2025, up from $558.8 million at March 31, 2025[48] - Total shareholders' equity increased $11.8 million QoQ, primarily due to $11.0 million in net earnings and a $764,000 increase in common stock outstanding from equity awards[49] Capital Ratios Both Coastal Financial Corporation and Coastal Community Bank remained well-capitalized, exceeding all minimum regulatory capital requirements Capital Ratios (June 30, 2025) | Metric | Coastal Community Bank | Coastal Financial Corporation | Minimum Well Capitalized Ratios | | :-------------------------------------- | :--------------------- | :---------------------------- | :------------------------------ | | Tier 1 Leverage Capital (to average assets) | 10.33 % | 10.39 % | 5.00 % | | Common Equity Tier 1 Capital (to risk-weighted assets) | 12.36 % | 12.32 % | 6.50 % | | Tier 1 Capital (to risk-weighted assets) | 12.36 % | 12.41 % | 8.00 % | | Total Capital (to risk-weighted assets) | 13.65 % | 14.90 % | 10.00 % | Asset Quality and Allowance for Credit Losses Allowance for credit losses decreased QoQ but increased YoY, with CCBX provision significantly down due to improved portfolio quality - Allowance for credit losses was $164.8 million (4.65% of loans receivable) at June 30, 2025, down from $183.2 million (5.21%) at March 31, 2025, but up from $148.9 million (4.48%) at June 30, 2024[51] - The allowance for credit loss allocated to the CCBX portfolio was $145.9 million (8.68% of CCBX loans receivable), while $18.9 million (1.02% of total community bank loans receivable) was allocated to the community bank[51][52] - Net charge-offs totaled $49.3 million in Q2 2025, compared to $48.2 million in Q1 2025 and $53.0 million in Q2 2024; net charge-offs as a percent of average loans decreased to 5.54% QoQ[52] - CCBX partner agreements provide credit enhancements covering net charge-offs on CCBX loans and negative deposit accounts, except for a 5% responsibility on a $296.3 million portfolio ($19.8 million at June 30, 2025)[52] Net Charge-offs by Segment (USD thousands) | Segment | June 30, 2025 Net Charge-offs | March 31, 2025 Net Charge-offs | June 30, 2024 Net Charge-offs | | :-------------- | :---------------------------- | :----------------------------- | :---------------------------- | | Community Bank | $9 | ($3) | ($2) | | CCBX | $49,304 | $48,203 | $52,955 | | Total | $49,313 | $48,200 | $52,953 | | Net charge-offs to average loans (CCBX) | 11.71 % | 11.99 % | 15.63 % | - Provision for credit losses for CCBX partner loans was $31.0 million in Q2 2025, significantly down from $54.3 million in Q1 2025, due to improved CCBX portfolio performance and a focus on higher quality originations[54] - The community bank recorded a provision recapture of $47,000 in Q2 2025, compared to a provision of $65,000 in Q1 2025, due to a lower outstanding balance in its loan portfolio[56] Provision Expense/(Recapture) by Segment (USD thousands) | Segment | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :-------------- | :------------ | :------------- | :------------ | | Community bank | ($47) | $65 | ($341) | | CCBX | $30,976 | $54,319 | $62,231 | | Total provision expense | $30,929 | $54,384 | $61,890 | Nonperforming Assets Nonperforming assets increased QoQ and YoY to $60.9 million (1.36% of total assets), driven by both segments, with CCBX loans largely covered - Nonperforming assets were $60.9 million (1.36% of total assets) at June 30, 2025, up from $56.4 million (1.30%) at March 31, 2025, and $53.2 million (1.34%) at June 30, 2024[58] - Of the $57.0 million in nonperforming CCBX loans, $55.3 million were covered by CCBX partner credit enhancements[58] - Community bank nonperforming loans increased $3.7 million to $3.8 million, and CCBX nonperforming loans increased $847,000 to $57.0 million QoQ[60] - The increase in CCBX nonperforming loans was due to a $4.2 million increase in nonaccrual loans, partially offset by a $3.4 million decrease in CCBX loans past due 90 days or more and still accruing interest[60] - The nonperforming loans to loans receivable ratio was 1.72% at June 30, 2025, compared to 1.60% at March 31, 2025, and 1.60% at June 30, 2024[60] Consolidated Nonperforming Assets (USD thousands) | Category | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :-------------------------------------- | :------------ | :------------- | :------------ | | Total nonaccrual loans | $28,233 | $20,359 | $7,944 | | Total accruing loans past due 90 days or more | $32,634 | $36,008 | $45,244 | | Total nonperforming loans | $60,867 | $56,367 | $53,188 | | Total nonperforming assets | $60,867 | $56,367 | $53,188 | | Total nonperforming assets to total assets | 1.36 % | 1.30 % | 1.34 % | CCBX Nonperforming Assets (USD thousands) | Category | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :-------------------------------------- | :------------ | :------------- | :------------ | | Total nonaccrual loans | $24,391 | $20,170 | $0 | | Total accruing loans past due 90 days or more | $32,634 | $36,008 | $45,244 | | Total nonperforming loans | $57,025 | $56,178 | $45,244 | | Total CCBX nonperforming assets to total consolidated assets | 1.27 % | 1.29 % | 1.14 % | Community Bank Nonperforming Assets (USD thousands) | Category | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :-------------------------------------- | :------------ | :------------- | :------------ | | Total nonaccrual loans | $3,842 | $189 | $7,944 | | Total accruing loans past due 90 days or more | $0 | $0 | $0 | | Total nonperforming loans | $3,842 | $189 | $7,944 | | Total community bank nonperforming assets to total consolidated assets | 0.09 % | 0.00 % | 0.20 % | Company Information This section provides an overview of Coastal Financial Corporation and its cautionary statements regarding forward-looking information About Coastal Financial Corporation Coastal Financial Corporation, an Everett, WA-based bank holding company, operates Coastal Community Bank ($4.48 billion assets) and its CCBX BaaS segment - Coastal Financial Corporation (Nasdaq: CCB) is an Everett, Washington-based bank holding company[65] - Its wholly-owned subsidiaries are Coastal Community Bank and Arlington Olympic LLC[65] - The Bank has $4.48 billion in assets and operates through 14 branches in Snohomish, Island, and King Counties, as well as via the Internet and mobile banking[65] - The CCBX segment provides banking as a service (BaaS) to digital financial service providers, companies, and brands[65] Forward-Looking Statements This section contains cautionary statements about forward-looking information, noting that actual results may differ due to risks and uncertainties - The earnings release contains forward-looking statements reflecting current views on future events and financial performance[67] - Actual results could differ materially from anticipated outcomes due to difficult-to-predict risks, uncertainties, and assumptions[67] - Readers are cautioned not to place undue reliance on forward-looking statements, and the company undertakes no obligation to update them, except as required by law[68] Condensed Consolidated Financial Statements This section presents the condensed consolidated statements of financial condition and income for the reported periods Condensed Consolidated Statements of Financial Condition The consolidated balance sheet shows increased total assets, driven by cash and loans, with higher liabilities from deposits and modest equity growth Condensed Consolidated Statements of Financial Condition (USD thousands) | ASSETS | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :-------------------------------------- | :------------ | :------------- | :------------ | | Cash and due from banks | $29,546 | $43,467 | $59,995 | | Interest earning deposits with other banks | $690,213 | $580,835 | $427,250 | | Loans held for sale | $60,474 | $42,132 | $0 | | Loans receivable | $3,540,330 | $3,517,359 | $3,321,813 | | Allowance for credit losses | ($164,794) | ($183,178) | ($148,878) | | Total assets | $4,480,559 | $4,339,282 | $3,959,549 | | LIABILITIES AND SHAREHOLDERS' EQUITY | | | | | Deposits | $3,913,571 | $3,791,229 | $3,543,432 | | Total liabilities | $4,018,850 | $3,889,365 | $3,642,856 | | Total shareholders' equity | $461,709 | $449,917 | $316,693 | Condensed Consolidated Statements of Income The consolidated income statement shows increased net interest income, decreased noninterest income, and a substantial QoQ reduction in credit loss provision Condensed Consolidated Statements of Income (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :-------------------------------------- | :------------ | :------------- | :------------ | | Total interest income | $107,797 | $104,907 | $97,422 | | Total interest expense | $31,060 | $28,845 | $31,250 | | Net interest income | $76,737 | $76,062 | $66,172 | | Provision for credit losses | $32,211 | $55,781 | $62,325 | | Total noninterest income | $42,693 | $63,477 | $69,138 | | Total noninterest expense | $72,832 | $71,989 | $57,964 | | Provision for income taxes | $3,359 | $2,039 | $3,425 | | NET INCOME | $11,028 | $9,730 | $11,596 | | Diluted earnings per common share | $0.71 | $0.63 | $0.84 | Average Balances, Yields, and Rates This section details consolidated and segment-specific average balances, yields, and rates for assets and liabilities Consolidated Average Balances, Yields, and Rates Consolidated average interest-earning assets increased QoQ, but yield decreased, while cost of interest-bearing liabilities slightly rose, leading to a lower net interest margin Consolidated Average Balances, Yields, and Rates (USD thousands) | Metric | June 30, 2025 Average Balance | June 30, 2025 Yield/Cost | March 31, 2025 Average Balance | March 31, 2025 Yield/Cost | June 30, 2024 Average Balance | June 30, 2024 Yield/Cost | | :-------------------------------------- | :---------------------------- | :----------------------- | :----------------------------- | :------------------------ | :---------------------------- | :----------------------- | | Total interest earning assets | $4,356,591 | 9.92 % | $4,124,065 | 10.32 % | $3,736,579 | 10.49 % | | Loans receivable | $3,567,823 | 11.11 % | $3,511,724 | 11.33 % | $3,258,042 | 11.22 % | | Total interest bearing liabilities | $3,417,514 | 3.65 % | $3,214,285 | 3.64 % | $2,904,010 | 4.33 % | | Interest bearing deposits | $3,369,574 | 3.62 % | $3,166,384 | 3.61 % | $2,854,575 | 4.31 % | | Net interest income | | | | | | | | Net interest margin | | 7.06 % | | 7.48 % | | 7.12 % | Segment-Specific Average Balances, Yields, and Rates Community Bank maintained stable yields and costs, while CCBX saw decreased loan yield and net interest margin due to loan mix changes Community Bank Average Balances, Yields, and Rates (USD thousands) | Metric | June 30, 2025 Average Balance | June 30, 2025 Yield/Cost | March 31, 2025 Average Balance | March 31, 2025 Yield/Cost | June 30, 2024 Average Balance | June 30, 2024 Yield/Cost | | :-------------------------------------- | :---------------------------- | :----------------------- | :----------------------------- | :------------------------ | :---------------------------- | :----------------------- | | Loans receivable | $1,879,331 | 6.53 % | $1,881,636 | 6.53 % | $1,895,699 | 6.52 % | | Interest bearing deposits | $1,048,506 | 2.59 % | $1,045,971 | 2.56 % | $938,033 | 2.77 % | | Net interest income | | $20,028 | | $19,779 | | $18,446 | | Net interest margin | | 4.27 % | | 4.26 % | | 3.91 % | CCBX Average Balances, Yields, and Rates (USD thousands) | Metric | June 30, 2025 Average Balance | June 30, 2025 Yield/Cost | March 31, 2025 Average Balance | March 31, 2025 Yield/Cost | June 30, 2024 Average Balance | June 30, 2024 Yield/Cost | | :-------------------------------------- | :---------------------------- | :----------------------- | :----------------------------- | :------------------------ | :---------------------------- | :----------------------- | | Loans receivable | $1,688,492 | 16.22 % | $1,630,088 | 16.88 % | $1,362,343 | 17.75 % | | Interest bearing deposits | $2,321,068 | 4.08 % | $2,120,413 | 4.13 % | $1,916,542 | 5.06 % | | Net interest income | | $52,472 | | $52,359 | | $44,318 | | Net interest margin | | 8.79 % | | 9.72 % | | 9.03 % | | Net interest margin, net of BaaS loan expense | | 3.35 % | | 3.68 % | | 3.12 % | Treasury & Administration Average Balances, Yields, and Rates (USD thousands) | Metric | June 30, 2025 Average Balance | June 30, 2025 Yield/Cost | March 31, 2025 Average Balance | March 31, 2025 Yield/Cost | June 30, 2024 Average Balance | June 30, 2024 Yield/Cost | | :-------------------------------------- | :---------------------------- | :----------------------- | :----------------------------- | :------------------------ | :---------------------------- | :----------------------- | | Total interest earning assets | $788,768 | 4.54 % | $612,341 | 4.48 % | $478,537 | 5.50 % | | Total interest bearing liabilities | $411,865 | 4.57 % | $246,345 | 4.67 % | $230,629 | 5.47 % | | Net interest income | | $4,237 | | $3,924 | | $3,408 | | Net interest margin | | 2.15 % | | 2.60 % | | 2.86 % | Non-GAAP Financial Measures This section defines and reconciles non-GAAP financial measures, providing supplementary insights into operational performance Introduction and Definitions Non-GAAP measures are defined to provide supplementary insights into operational performance, particularly regarding BaaS loan and fraud expense impacts - Non-GAAP financial measures are used to provide supplemental information on operational performance and enhance investor understanding, but are not substitutes for GAAP measures[78][79] - Non-GAAP measures presented illustrate the impact of BaaS loan expense on net loan income and yield on loans (including CCBX loans), and on net interest income and net interest margin (including CCBX net interest margin)[80][83][84] - Another non-GAAP measure shows noninterest expense, net of BaaS loan expense, BaaS fraud expense, and reimbursement of expenses (BaaS), to clarify the impact of CCBX partner-reimbursed expenses[87] Reconciliations Reconciliations detail adjustments for BaaS loan and fraud expenses and reimbursements to derive adjusted net loan income, net interest income, and noninterest expense CCBX Non-GAAP Reconciliations (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :---------------------------------------------- | :------------ | :------------- | :------------ | | CCBX loan yield (GAAP) | 16.22 % | 16.88 % | 17.75 % | | Net BaaS loan income | $35,781 | $35,348 | $31,127 | | Net BaaS loan income divided by average CCBX loans | 8.50 % | 8.79 % | 9.19 % | | CCBX net interest margin (GAAP) | 8.79 % | 9.72 % | 9.03 % | | Net interest income, net of BaaS loan expense | $19,989 | $19,852 | $15,307 | | CCBX net interest margin, net of BaaS loan expense | 3.35 % | 3.68 % | 3.12 % | Consolidated Non-GAAP Reconciliations (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :---------------------------------------------- | :------------ | :------------- | :------------ | | Net interest margin (GAAP) | 7.06 % | 7.48 % | 7.12 % | | Net interest income, net of BaaS loan expense | $44,254 | $43,555 | $37,161 | | Net interest margin, net of BaaS loan expense | 4.07 % | 4.28 % | 4.00 % | | Loan yield (GAAP) | 11.11 % | 11.33 % | 11.22 % | | Net loan income | $66,384 | $65,640 | $61,868 | | Loan income, net of BaaS loan expense, divided by average loans | 7.46 % | 7.58 % | 7.64 % | Noninterest Expense, Net of BaaS Related Items Reconciliation (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :---------------------------------------------- | :------------ | :------------- | :------------ | | Noninterest expense (GAAP) | $72,832 | $71,989 | $57,964 | | Less: BaaS loan expense | ($32,483) | ($32,507) | ($29,011) | | Less: BaaS fraud expense | ($2,804) | ($1,993) | ($1,784) | | Less: Reimbursement of expenses | ($646) | ($1,026) | ($857) | | Noninterest expense, net of BaaS loan expense, BaaS fraud expense and reimbursement of expenses | $36,899 | $36,463 | $26,312 | Appendix A - Industry Concentration This appendix details the company's loan portfolio by industry, including outstanding balances and unused commitments Overview of Loan Portfolio The company maintains a diversified $3.55 billion loan portfolio with $1.93 billion in unused commitments, led by commercial real estate - The company has a diversified loan portfolio totaling $3.55 billion in outstanding balances across commercial real estate, consumer and other loans, residential real estate, commercial and industrial, and construction, land and land development loans[90] - Total outstanding loans and unused commitments combined amount to $5.48 billion[90] Commercial Real Estate Loans Commercial real estate loans are the largest segment at 37.0% of outstanding loans, totaling $1.34 billion with commitments, led by apartments - Commercial real estate loans represent 37.0% of total outstanding loans, with a combined total of $1.34 billion including $30.1 million in unused commitments[91] Commercial Real Estate Loan Commitment by Industry (June 30, 2025, USD thousands) | Industry | Outstanding Balance | Available Loan Commitments | Total Outstanding Balance & Available Commitment | % of Total Loans (Combined) | | :---------------- | :------------------ | :------------------------- | :----------------------------------------------- | :-------------------------- | | Apartments | $362,315 | $2,889 | $365,204 | 6.7 % | | Hotel/Motel | $154,877 | $1,073 | $155,950 | 2.8 | | Convenience Store | $135,118 | $546 | $135,664 | 2.5 | | Office | $119,622 | $6,666 | $126,288 | 2.3 | | Warehouse | $102,688 | $0 | $102,688 | 1.9 | | Total | $1,310,882 | $30,077 | $1,340,959 | 24.5 % | Consumer and Other Loans Consumer loans represent 34.7% of outstanding loans, totaling $1.98 billion with commitments, primarily CCBX credit cards and installment loans - Consumer loans comprise 34.7% of total outstanding loans, with a combined total of $1.98 billion including $746.8 million in unused commitments[91] - CCBX partners contribute a large number of mostly smaller dollar consumer loans, resulting in an average consumer loan balance of $900[91] Consumer and Other Loan Commitment by Industry (June 30, 2025, USD thousands) | Loan Type | Outstanding Balance | Available Loan Commitments | Total Outstanding Balance & Available Commitment | % of Total Loans (Combined) | | :------------------------ | :------------------ | :------------------------- | :----------------------------------------------- | :-------------------------- | | CCBX consumer loans: Credit cards | $533,925 | $702,611 | $1,236,536 | 22.6 % | | CCBX consumer loans: Installment loans | $671,089 | $30,817 | $701,906 | 12.8 | | Community bank consumer loans: Other loans | $11,314 | $13,000 | $24,314 | 0.4 | | Total | $1,232,476 | $746,783 | $1,979,259 | 36.1 % | Residential Real Estate Loans Residential real estate loans are 12.2% of outstanding loans, totaling $991.3 million with commitments, largely driven by CCBX home equity lines - Residential real estate loans comprise 12.2% of total outstanding loans, with a combined total of $991.3 million including $557.7 million in unused commitments[92] Residential Real Estate Loan Commitment by Industry (June 30, 2025, USD thousands) | Loan Type | Outstanding Balance | Available Loan Commitments | Total Outstanding Balance & Available Commitment | % of Total Loans (Combined) | | :------------------------ | :------------------ | :------------------------- | :----------------------------------------------- | :-------------------------- | | CCBX residential real estate loans: Home equity line of credit | $234,786 | $509,297 | $744,083 | 13.6 % | | Community bank residential real estate loans: Closed end, secured by first liens | $162,205 | $1,064 | $163,269 | 3.0 | | Total | $433,630 | $557,704 | $991,334 | 18.1 % | Commercial and Industrial Loans C&I loans are 10.6% of outstanding loans, totaling $903.6 million with commitments, significantly comprising CCBX capital call lines - Commercial and industrial loans comprise 10.6% of total outstanding loans, with a combined total of $903.6 million including $527.8 million in unused commitments[93] - Included are $199.7 million in outstanding capital call lines (with $438.4 million in available commitments, limited to a $350.0 million portfolio maximum), provided to venture capital firms through a CCBX BaaS client[93] Commercial and Industrial Loan Commitment by Industry (June 30, 2025, USD thousands) | Loan Type | Outstanding Balance | Available Loan Commitments | Total Outstanding Balance & Available Commitment | % of Total Loans (Combined) | | :------------------------ | :------------------ | :------------------------- | :----------------------------------------------- | :-------------------------- | | CCBX C&I loans: Capital call lines | $199,675 | $438,391 | $638,066 | 11.6 % | | CCBX C&I loans: Retail and other loans | $26,142 | $23,001 | $49,143 | 0.9 | | Community bank C&I loans: Construction/Contractor services | $30,449 | $32,173 | $62,622 | 1.1 | | Community bank C&I loans: Financial institutions | $51,768 | $0 | $51,768 | 0.9 | | Total | $375,743 | $527,817 | $903,560 | 16.5 % | Construction, Land and Land Development Loans Construction, land, and land development loans are 5.5% of outstanding loans, totaling $264.2 million with commitments, with increased commercial construction exposure - Construction, land and land development loans comprise 5.5% of total outstanding loans, with a combined total of $264.2 million including $70.0 million in unused commitments[94] Construction, Land and Land Development Loan Commitment (June 30, 2025, USD thousands) | Loan Type | Outstanding Balance | Available Loan Commitments | Total Outstanding Balance & Available Commitment | % of Total Loans (Combined) | | :------------------------ | :------------------ | :------------------------- | :----------------------------------------------- | :-------------------------- | | Commercial construction | $104,078 | $48,309 | $152,387 | 2.8 % | | Residential construction | $39,831 | $17,340 | $57,171 | 1.0 | | Developed land loans | $22,875 | $604 | $23,479 | 0.4 | | Undeveloped land loans | $20,067 | $748 | $20,815 | 0.4 | | Land development | $7,299 | $3,048 | $10,347 | 0.2 | | Total | $194,150 | $70,049 | $264,199 | 4.8 % | Outstanding Balance of Construction, Land and Land Development Portfolio (USD thousands) | Category | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :------------------------ | :------------ | :------------- | :------------ | | Commercial construction | $104,078 | $96,716 | $110,372 | | Residential construction | $39,831 | $39,375 | $34,652 | | Undeveloped land loans | $20,067 | $16,684 | $8,372 | | Developed land loans | $22,875 | $7,788 | $13,954 | | Land development | $7,299 | $5,988 | $5,714 | | Total | $194,150 | $166,551 | $173,064 | Commitments to Extend Credit and CCBX Portfolio Limits Total commitments to extend credit reached $1.93 billion, managed by CCBX partner and portfolio limits to control concentration and counter-party risk - Total commitments to extend credit were $1.93 billion at June 30, 2025, but actual customer usage is not anticipated to reach this amount due to CCBX partner and portfolio limits[96][97] - The company manages loan concentration, liquidity, and counter-party risk through individual CCBX partner portfolio limits, with penalties for breaches[97] Consolidated Commitments to Extend Credit (June 30, 2025, USD thousands) | Category | As of June 30, 2025 | | :-------------------------------------- | :------------------ | | Commercial and industrial loans | $89,426 | | Commercial and industrial loans - capital call lines | $438,391 | | Construction – commercial real estate loans | $52,709 | | Construction – residential real estate loans | $17,340 | | Residential real estate loans | $557,704 | | Commercial real estate loans | $30,077 | | Credit cards | $702,611 | | Consumer and other loans | $44,172 | | Total commitments to extend credit | $1,932,430 | CCBX Portfolio Maximums and Related Available Commitments (June 30, 2025, USD thousands) | Loan Type | Balance | Maximum Portfolio Size | Available Commitments | | :-------------------------------------- | :---------- | :--------------------- | :-------------------- | | Capital call lines | $199,675 | $350,000 | $438,391 | | Home equity lines of credit | $234,786 | $375,000 | $509,297 | | Credit cards - total | $533,925 | $850,000 | $702,611 | | Installment loans - total | $671,089 | $1,818,619 | $30,817 | | Gross CCBX loans receivable | $1,680,849 | $3,870,000 | $1,704,131 | Appendix B - CCBX – BaaS Reporting Information This appendix details the accounting treatment for CCBX BaaS credit and fraud enhancements, loan income, and related expenses Credit and Fraud Enhancements Accounting BaaS credit enhancements are noninterest income, fraud losses and reimbursements net to zero, with counterparty risk managed via partner agreements - BaaS credit enhancements of $31.3 million were recorded in Q2 2025, related to the provision for credit losses and unfunded commitments for CCBX partner loans and negative deposit accounts[102] - Credit enhancement assets are recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of partner legal commitments to indemnify or reimburse losses[102] - BaaS fraud losses are recorded as noninterest expense, and partner reimbursements are recorded in noninterest income, resulting in a net zero impact on the income statement[102] - Counterparty risk is managed through partner agreements and cash reserve accounts, which partners replenish regularly; failure to replenish could expose the Bank to additional losses[102] CCBX Loan Income and Expense Accounting CCBX loan interest income is adjusted for origination costs and BaaS loan expense to derive net income, with a focus on higher quality loan originations - Contractual interest earned from borrowers on CCBX partner loans is recorded in interest income, adjusted for origination costs[103] - BaaS loan expense represents amounts paid or payable to partners for credit and fraud enhancements and originating & servicing CCBX loans[103] - Net BaaS loan income is calculated by deducting BaaS loan expense from BaaS loan interest income, providing a comparable metric to community bank loan interest income[103] CCBX Partner Loan Income and Expenses (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :---------------------------------------------- | :------------ | :------------- | :------------ | | Yield on loans | 16.22 % | 16.88 % | 17.75 % | | BaaS loan interest income | $68,264 | $67,855 | $60,138 | | Less: BaaS loan expense | ($32,483) | ($32,507) | ($29,011) | | Net BaaS loan income | $35,781 | $35,348 | $31,127 | | Net BaaS loan income divided by average BaaS loans | 8.50 % | 8.79 % | 9.19 % | - The strategy is to optimize the CCBX loan portfolio and strengthen the balance sheet by originating higher quality new loans with enhanced credit standards, which tend to have lower stated rates and expected losses[106] Summary of BaaS Interest Components, Fees, and Expenses BaaS interest income and program fees increased, while indemnification income decreased due to improved portfolio performance, with substantial loan and fraud expenses BaaS Interest Income (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :------------------ | :------------ | :------------- | :------------ | | Loan interest income| $68,264 | $67,855 | $60,138 | | Total BaaS interest income | $68,264 | $67,855 | $60,138 | BaaS Interest Expense (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :------------------ | :------------ | :------------- | :------------ | | BaaS interest expense | $23,617 | $21,581 | $24,119 | | Total BaaS interest expense | $23,617 | $21,581 | $24,119 | Total Noninterest BaaS Income (USD thousands) | Category | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :------------------------ | :------------ | :------------- | :------------ | | Servicing and other BaaS fees | $1,539 | $1,419 | $1,525 | | Transaction and interchange fees | $5,109 | $3,833 | $2,934 | | Reimbursement of expenses | $646 | $1,026 | $857 | | Total BaaS program income | $7,294 | $6,278 | $5,316 | | BaaS credit enhancements | $31,268 | $53,648 | $60,826 | | BaaS fraud enhancements | $2,804 | $1,993 | $1,784 | | BaaS indemnification income | $34,072 | $55,641 | $62,610 | | Total noninterest BaaS income | $41,366 | $61,919 | $67,926 | - Servicing and other BaaS fees increased $120,000 QoQ, and transaction and interchange fees increased $1.3 million QoQ, including $504,000 in nonrecurring revenue[109] Total BaaS Loan and Fraud Expense (USD thousands) | Metric | June 30, 2025 | March 31, 2025 | June 30, 2024 | | :------------------------ | :------------ | :------------- | :------------ | | BaaS loan expense | $32,483 | $32,507 | $29,011 | | BaaS fraud expense | $2,804 | $1,993 | $1,784 | | Total BaaS loan and fraud expense | $35,287 | $34,500 | $30,795 |