Executive Summary / Key Takeaways

• BaaS Transformation at Scale: Coastal Financial's CCBX segment has evolved from a niche experiment into the dominant growth driver, generating $157.9 million in net interest income and $21.1 million in program fees through 29 partners, while selling $3.66 billion in loans to optimize capital. This shift transforms CCB from a traditional community bank into a fintech infrastructure provider, but creates new dependencies that alter the risk profile.

• Capital Raise Enables Growth, Dilutes Near-Term Returns: The December 2024 $98 million equity raise (at $71/share) provided crucial capital to support BaaX expansion, with $50 million injected into the bank. While necessary for scaling, the 1.38 million new shares explain why net income per diluted share declined despite 7.8% higher net income, creating a temporary disconnect between business performance and shareholder returns.

• Partner Concentration Presents Systemic Risk: Two CCBX partners account for 44% of total deposits, representing a critical vulnerability. If either relationship terminates, liquidity and funding costs could deteriorate rapidly. This concentration risk, combined with the bank's responsibility for 5% of credit losses on a $297 million portfolio from one partner, means CCB's fate increasingly rests in the hands of a few fintech counterparties.

• Credit Quality Improving But Still Elevated: While CCBX net charge-offs declined from 15.17% to 11.58% year-over-year, they remain extraordinarily high compared to the Community Bank segment's 0% charge-offs. The 97.7% credit enhancement coverage mitigates immediate losses, but the underlying credit performance suggests CCBX serves subprime markets that could deteriorate in a recession.

• Valuation Premium Reflects Growth, Not Efficiency: At $113.32, CCB trades at 35.6x earnings and 3.6x book value—significant premiums to regional peers averaging 12-14x earnings. The market rewards 25.6% revenue growth and 13.9% net margins, but this multiple assumes flawless execution on partner management and credit quality, leaving little margin for error.

Setting the Scene: The Community Bank That Became a Fintech Enabler

Coastal Financial Corporation began in 1997 as Coastal Community Bank, a Washington state-chartered commercial bank serving the Puget Sound region. For two decades, it operated as a traditional community lender, building a footprint of 14 branches concentrated in Snohomish County, where it remains the largest community bank by deposit market share. In 2003, the holding company structure was established, and for years the story followed a predictable script: gather core deposits, originate commercial and real estate loans, and earn spread income.

That script changed dramatically with the 2019 launch of CCBX, the Banking-as-a-Service segment that enables digital financial service providers to offer banking products to their customers. This wasn't a simple product extension—it represented a fundamental reimagining of what a bank could be. Instead of lending directly to consumers and businesses, CCB could now lend through fintech partners, earning fee income while selling loans back to the originators to manage balance sheet risk. As of September 30, 2025, this segment served 29 partners, including one broker-dealer, and had become the primary engine of growth.

The company operates through three segments that reveal its hybrid nature. The Community Bank segment represents the traditional business: $1.90 billion in loans and $1.60 billion in deposits serving Puget Sound businesses and consumers. The CCBX segment houses the BaaS platform: $1.80 billion in loans and $2.37 billion in deposits from fintech partners. The Treasury Administration segment manages investments, debt, and corporate-level functions. This structure matters because it shows CCB isn't abandoning its community banking roots—it's layering a high-growth, high-risk fintech business on top of a stable deposit franchise.

In the Pacific Northwest banking landscape, CCB occupies a unique position. Traditional competitors like Banner Corporation (BANR), Columbia Banking System (COLB), WaFd Inc. (WAFD), and Heritage Financial Corporation (HFWA) compete for the same commercial real estate and small business loans. These peers operate on a simple model: gather deposits at low cost, lend at higher rates, and manage credit risk. CCB's model is fundamentally different. While peers focus on geographic expansion and branch optimization, CCB has built a technology platform that transcends geography, serving partners and customers nationwide through digital channels.

Technology, Products, and Strategic Differentiation: The BaaS Platform Moat

CCBX's core technology enables digital financial service providers to launch banking products without obtaining their own bank charters. This isn't merely white-label banking—it's a full-stack solution that includes loan origination, deposit gathering, compliance, and risk management. The economic impact is profound: CCBX generated $21.1 million in program income (up 45.5% year-over-year) and $147.3 million in indemnification income, while selling $3.66 billion in loans back to partners during the nine months ended September 30, 2025.

Why does this matter? Because it transforms CCB's revenue model from spread-dependent to fee-driven, reducing interest rate risk while creating recurring income streams. The bank retains a portion of transaction processing fees on sold credit card receivables, generating ongoing revenue without balance sheet risk or capital requirements. This is the holy grail of banking: earning fees on volume without tying up capital.

The platform's strategic value extends beyond immediate revenue. During the nine months ended September 30, 2025, CCB transferred $3.68 billion in loans to held-for-sale and sold $3.66 billion, including $2.88 billion in new activity on previously sold receivables. This demonstrates a scalable, capital-light model where the bank can originate loans, earn fees, and offload risk simultaneously. As of September 30, 2025, 396,812 off-balance-sheet credit cards remained active with fee-earning potential, up 315,386 from the prior year—an asset that generates income without regulatory capital implications.

Management is actively refining partner criteria to focus on larger, established players with strong management, customer bases, and financial resources. This strategic shift matters because it reduces partner failure risk while concentrating resources on higher-quality relationships. The pipeline includes two partners in testing, four in implementation, and two signed letters of intent, positioning for continued growth into 2026. The T-Mobile (TMUS) deposit program launched April 1, 2025, and Robinhood (HOOD)'s deposit program is expected to ramp in Q4 2025, with six existing partners expanding into new products like lines of credit and credit cards.

The technology investment required to support this growth is substantial. Noninterest expenses in CCBX rose $25.4 million (20%) due to higher BaaS loan expenses, salaries, data processing, and legal costs—all related to growth and risk management investments. This spending isn't discretionary; it's the cost of building a scalable platform that can handle partner volume without proportional increases in operational risk. The company is automating processes to reduce future expense growth, but the current investment phase pressures near-term profitability.

Financial Performance & Segment Dynamics: Growth at What Cost?

CCB's financial results reveal a company in transition. For the nine months ended September 30, 2025, consolidated net income rose to $34.4 million ($2.24 per diluted share) from $31.9 million ($2.32 per diluted share) in 2024. The $2.5 million increase in earnings coincided with an 8.6% decline in per-share results due to the December 2024 capital raise that added 1.38 million shares. This divergence between absolute and per-share performance is the central tension in the story: the bank is growing, but shareholders aren't fully participating yet.

The Community Bank segment remains stable but stagnant. Net interest income grew 7.8% to $60.4 million, driven by higher average loans and lower intrabank funding costs, but noninterest income declined 6.9% and expenses surged 24.5% to $33.9 million. The 0% net charge-off ratio demonstrates pristine credit quality, but the segment's contribution to overall growth is modest. This is a mature franchise that provides stable funding and earnings, but not excitement.

CCBX tells a different story. Net interest income jumped 16.9% to $157.9 million, while program income soared 45.5% to $21.1 million. The segment's loan portfolio grew 12.5% to $1.80 billion, and deposits surged 15.1% to $2.37 billion. However, the 11.58% net charge-off ratio—while improved from 15.17%—remains alarmingly high. The 97.7% credit enhancement coverage means actual losses are minimal, but the underlying credit quality suggests CCBX serves riskier borrowers than the Community Bank segment.

The margin story is concerning. Consolidated net interest margin fell to 7.00% from 7.42% year-over-year, driven by a shift in loan mix toward lower-yielding capital call lines (which increased $73.6 million) and a decline in CCBX loan yields from 17.37% to 15.65%. Management attributes this to lower rates and mix changes, but it reveals a fundamental trade-off: scaling BaaS requires accepting lower yields and higher credit losses than traditional banking.

Expense growth across all segments reflects strategic investment. Salaries, benefits, data processing, and legal costs rose significantly as the bank built infrastructure to support partner growth. This spending is necessary but creates a timing mismatch—costs are incurred upfront while revenue ramps gradually. The Treasury Administration segment's 30.8% increase in net interest income demonstrates the value of holding excess liquidity, but its $28.9 million in noninterest expenses shows corporate overhead is growing faster than revenue.

Outlook, Management Guidance, and Execution Risk

Management's commentary reveals both confidence and caution. CEO Eric Sprink states, "We remain confident in our ability to manage expenses and maintain credit quality, even in a changing economic and interest rate environment." This confidence is tested by the bank's own guidance, which anticipates ongoing expense fluctuations as new partners launch, with most costs front-loaded before revenue materializes.

The Robinhood deposit program represents a critical near-term catalyst. Expected to ramp in Q4 2025, this relationship could significantly boost deposit growth and fee income. However, the concentration risk is stark: adding a major partner like Robinhood increases CCB's dependence on a few key relationships. If Robinhood's program underperforms or the partnership sours, the impact would be material.

Management expects servicing and other BaaS fees to decrease while transaction and interchange fees increase as partner activity grows. This shift matters because it moves revenue from fixed, predictable fees to variable, volume-dependent income. In a downturn, transaction volumes could fall sharply, creating earnings volatility. The anticipated increase in occupancy, marketing, and data processing expenses further pressures margins, even as the company expands its hybrid workforce and uses cost-effective advertising.

The strategic focus on larger, established partners is prudent but limiting. While it reduces individual partner risk, it concentrates the bank's fate in the hands of fewer, more powerful counterparties who can negotiate better terms. The company will continue exiting relationships that no longer align with its strategy, which could create revenue volatility as partners are jettisoned.

Risks and Asymmetries: Where the Thesis Can Break

Partner concentration is the most material risk. With two partners representing 44% of deposits, a termination would create an immediate liquidity crisis. The bank would need to replace billions in deposits quickly, likely at higher cost, compressing margins. Management's disclosure that it manages loan concentration through portfolio limits—capping capital call line commitments at $350 million despite $488.8 million in total commitments—suggests they're aware of the risk, but the deposit concentration remains unaddressed.

Credit risk in CCBX is asymmetrically skewed. While 97.7% of charge-offs are covered by credit enhancements, the bank still bears 2.3% of losses plus the operational risk of managing high-default portfolios. If macroeconomic conditions deteriorate, historical loss factors could prove inadequate. Management warns that "if economic conditions worsen then Washington state and Puget Sound region may experience a more severe economic downturn, and our asset quality could deteriorate, which may require material additional provisions for credit losses." This is particularly concerning for CCBX's subprime exposure.

Partner failure risk extends beyond credit. Management notes, "If the partner is unable to fulfill its contracted obligations then the Bank could be exposed to the loss of the reimbursement and credit enhancement income." If a major partner cannot replenish its cash reserve account, CCB must either adjust funding terms or declare default and take over servicing. This operational burden could divert management attention and increase costs during a crisis.

Interest rate risk is manageable but not absent. The static balance sheet remains liability-sensitive, while the dynamic balance sheet is more neutral. The shift toward variable-rate CCBX loans mitigates some risk, but the 3.90% cost of CCBX deposits versus 1.77% for Community Bank deposits shows the bank is paying premium rates for fintech funding. If rates fall further, asset yields could compress faster than funding costs.

Regulatory risk for BaaS providers is rising. While not explicitly mentioned in the guidance, the broader trend of increased scrutiny on fintech-bank partnerships could impose stricter capital requirements or limit CCB's ability to serve certain partners. The material weaknesses in internal controls identified in 2023-2024, while being remediated, suggest the bank's risk management infrastructure is still catching up to its growth.

Valuation Context: Paying for Growth in a Low-Multiple Industry

At $113.32 per share, Coastal Financial trades at 35.6x trailing earnings and 3.6x book value—substantial premiums to regional peers. Banner Corporation trades at 11.8x earnings and 1.2x book, Columbia at 12.8x and 1.1x, WaFd at 12.2x and 0.9x, and Heritage at 14.6x and 0.9x. This valuation gap reflects CCB's 25.6% revenue growth versus peer averages of 1-20%, but it also assumes the BaaS model will deliver superior returns long-term.

The price-to-free-cash-flow ratio of 6.9x and price-to-operating-cash-flow of 6.6x appear more reasonable, but these metrics benefit from the bank's capital-light loan sales model. The 13.9% profit margin and 11.8% ROE lag peers like WaFd (31.5% margin) and Banner (29.8% margin), suggesting CCB's growth comes with lower profitability. The 0.90 beta indicates lower volatility than the market, but this may understate the binary risk of partner concentration.

The $98 million capital raise strengthened the balance sheet, with $50 million contributed to the bank and the remainder held at the holding company level. This provides a capital cushion but also explains the ROE dilution. For valuation, the key question is whether the market is paying for sustainable competitive advantage or temporary growth momentum. The 4.2x price-to-sales ratio versus peers at 3.5-4.1x suggests a modest premium, but the earnings multiple implies expectations of significant margin expansion.

Conclusion: A Compelling Transformation with Concentrated Risk

Coastal Financial has executed a remarkable strategic pivot, building a BaaS platform that generates capital-light growth and diversifies revenue beyond traditional banking. The CCBX segment's 29 partners, $3.66 billion in loan sales, and pipeline of new relationships demonstrate a scalable model that positions CCB at the center of fintech infrastructure. This transformation justifies a valuation premium to traditional peers.

However, the investment thesis hinges on two critical variables: partner concentration and credit quality management. The 44% deposit concentration in two partners creates a single-point-of-failure risk that no amount of credit enhancement can fully mitigate. While the 97.7% coverage of charge-offs protects near-term earnings, the 11.58% loss rate in CCBX suggests the bank is playing in riskier pools than its community banking heritage prepared it for.

For investors, the question is whether CCB can scale its BaaS platform while diversifying partner risk and maintaining underwriting discipline. The December 2024 capital raise provided necessary ammunition, but the per-share dilution shows capital comes at a cost. If management successfully ramps the Robinhood program, expands existing partnerships, and maintains credit enhancements, the stock's premium valuation could compress as earnings growth catches up. If a major partner stumbles or credit losses exceed enhancement levels, the downside could be severe. The story is compelling, but the concentration risk demands constant monitoring.