COASTAL FINANCIAL CORP Annual Report - A Year in Review

Considering an investment in COASTAL FINANCIAL CORP? This summary offers a clear, concise look at the company's performance for the fiscal year ending December 31, 2025, helping you understand its operations and financial health.

What COASTAL FINANCIAL CORP Does and How It Performed This Year (Business Overview)

COASTAL FINANCIAL CORP operates as a bank with two distinct business lines: a traditional Community Bank serving local businesses and individuals, and a growing Banking-as-a-Service (BaaS) segment. Through its BaaS segment, the company partners with financial technology (fintech) companies to offer essential banking services.

In the fiscal year ending December 31, 2025, COASTAL FINANCIAL CORP delivered strong financial results. The company achieved notable growth in key areas and effectively managed associated risks, driven by strategic expansion in its BaaS segment and consistent growth in its Community Bank operations.

Financial Performance: Revenue, Profit, and Growth (Financial Performance & MD&A Highlights)

COASTAL FINANCIAL CORP reported total revenue of $150 million for 2025, a 10% increase from $136 million in 2024. Net Interest Income (NII), the primary measure of a bank's earnings from loans and investments, grew 8% to $110 million.

The company's Net Income rose 15% to $35 million, up from $30.4 million in the prior year. This translated to Diluted Earnings Per Share (EPS) of $2.50, compared to $2.15 in 2024. Profitability metrics remained robust:

• Return on Average Assets (ROAA): 1.25%
• Return on Average Equity (ROAE): 15.0%
• The Efficiency Ratio (cost to generate a dollar of revenue) improved slightly to 58% from 59%.

BaaS Segment Growth: BaaS program fees, a crucial revenue stream from fintech partnerships, showed significant expansion:

• Total BaaS Program Fees reached $28 million in 2025, a 16.7% increase from $24 million in 2024, and a 40% increase from $20 million in 2023.
• "Servicing and Other BaaS Fees" grew 16.7% to $14 million.
• "Transaction Fees" increased 12.5% to $9 million.
• "Reimbursement of Expenses" climbed 25% to $5 million. This consistent growth demonstrates the increasing success of the company's BaaS strategy.

Loan Portfolio Expansion: The company also expanded its loan portfolio across both segments:

• Community Bank loans grew 6.7% to $1.2 billion in 2025, up from $1.125 billion in 2024, including growth in commercial, real estate, and consumer loans.
• CCBX (BaaS) loans showed even stronger growth, increasing 11.4% to $390 million in 2025, from $350 million in 2024, reflecting successful expansion in its fintech partnerships.

Managing BaaS Costs: While BaaS revenue increased, associated costs also rose:

• "BaaS Loan Expense" jumped 33.3% to $2 million in 2025 (from $1.5 million in 2024).
• "BaaS Fraud Expense" rose 25% to $1 million (from $0.8 million in 2024).
• Total "Indemnifications" (costs related to credit and fraud risks in BaaS) increased 21.6% to $4.5 million in 2025. These costs reflect the necessary investment and risk management for a rapidly expanding BaaS platform. Their faster growth rate compared to BaaS revenue growth emphasizes the importance of efficient risk management and operational scaling to maintain profitability.

Major Wins and Challenges This Year (MD&A Highlights)

Major Wins:

• Strategic BaaS Expansion: Double-digit growth in BaaS program fees and the CCBX loan portfolio validates the company's strategy to diversify revenue streams through fintech services.
• Strong Overall Profitability: Despite a challenging interest rate environment, the company achieved a 15% increase in net income and maintained strong ROAA and ROAE, showcasing effective financial management.
• Deposit Growth: The company successfully grew its deposit base by 7.5% to $2.5 billion, securing a stable and cost-effective funding source.

Challenges:

• Managing BaaS Expenses and Risk: The faster growth of BaaS Loan and Fraud Expenses relative to overall BaaS revenue presents a key challenge, highlighting the need for robust risk management and efficient scaling to ensure long-term profitability in this segment.
• Competitive Landscape: The banking sector remains highly competitive, requiring continuous innovation and efficient operations to attract and retain customers in both community banking and the rapidly evolving fintech space.
• Interest Rate Sensitivity: Like all banks, COASTAL FINANCIAL CORP faces sensitivity to interest rate fluctuations, which can impact Net Interest Margin and overall profitability.

Key Risk Factors

Investing in COASTAL FINANCIAL CORP involves various risks inherent to the financial services industry and its specific business model. Key risks include:

• Credit Risk: The risk that borrowers may not repay loans or meet contractual obligations, affecting both Community Bank and BaaS loan portfolios, especially during economic downturns or rapid growth.
• Interest Rate Risk: The risk that changes in market interest rates could negatively impact the company's net interest income, asset values, or funding costs.
• Liquidity Risk: The risk that the company may struggle to meet its financial obligations as they become due without incurring significant losses, or may be unable to fund its operations and growth.
• Operational and Technology Risk: Risks from potential failures in internal processes, people, and systems, or from external events. This includes cybersecurity threats, data breaches, fraud, system outages, and the complexities of managing technology platforms for both traditional banking and BaaS operations, particularly with third-party fintech partners.
• Regulatory and Compliance Risk: The risk of failing to comply with extensive and evolving banking laws, regulations, and supervisory requirements, including those for consumer protection, anti-money laundering (AML), and the emerging regulatory landscape for BaaS activities.
• Competition Risk: Intense competition from traditional banks, credit unions, and non-bank financial institutions, including fintech companies, which could affect market share, pricing power, and profitability.
• Economic Conditions: Adverse changes in local, regional, or national economic conditions (e.g., recessions, unemployment, inflation) could negatively impact loan demand, credit quality, deposit levels, and overall financial performance.
• Strategic Risk: Risks associated with successfully executing strategic initiatives, especially the rapid expansion and integration of the BaaS segment, including managing growth, partner relationships, and maintaining profitability in a dynamic market.

Financial Health: Cash, Debt, and Capital (Financial Health)

COASTAL FINANCIAL CORP maintained a strong liquidity position, holding cash and cash equivalents totaling $250 million at year-end 2025. Total deposits grew 7.5% to $2.5 billion, providing a stable and diversified funding base for loan growth and operations.

The company strategically rebalanced its debt profile:

• "Subordinated Debt" increased 11.1% to $50 million in 2025 (from $45 million in 2024).
• "Junior Subordinated Debt" decreased 20% to $20 million (from $25 million in 2024). This rebalancing aims to optimize funding costs and enhance regulatory capital.

COASTAL FINANCIAL CORP remains well-capitalized, exceeding all regulatory requirements. Its Common Equity Tier 1 (CET1) ratio stood at 11.5% and its Total Capital Ratio was 14.0% at year-end 2025, providing a strong buffer against potential losses and supporting future growth. Asset quality remained sound, with non-performing assets representing only 0.75% of total assets, a slight improvement from 0.80% in 2024. The allowance for credit losses covered non-performing loans by 150%, demonstrating a prudent approach to credit risk management.

Overall, COASTAL FINANCIAL CORP exhibits robust financial health, characterized by strong liquidity, a solid capital base, and sound asset quality, positioning it well for continued growth.

Future Outlook and Strategic Priorities

Looking ahead, COASTAL FINANCIAL CORP plans to:

• Continue strategic growth in its BaaS segment, leveraging its established platform to onboard new fintech partners and expand service offerings.
• Sustain steady growth in its traditional Community Bank operations by deepening customer relationships, enhancing digital offerings, and expanding its local market presence where strategic opportunities arise.
• Invest in technology and infrastructure to support scalability and security for both segments, enhance operational efficiency, and strengthen cybersecurity defenses.
• Prioritize prudent risk management practices, especially in its rapidly expanding BaaS portfolio, to effectively mitigate credit, fraud, and operational risks.
• Optimize its capital structure and maintain strong liquidity to support future growth initiatives and deliver shareholder returns.

The company expects to navigate the evolving economic and regulatory landscape by adapting its strategies to capitalize on opportunities and mitigate challenges.

Competitive Position

COASTAL FINANCIAL CORP operates in a highly competitive financial services industry.

Community Bank Segment: In its traditional Community Bank segment, the company competes with a wide array of financial institutions, including larger regional and national banks, as well as smaller community banks and credit unions. Competition in this segment primarily revolves around customer service, local market knowledge, product offerings, convenience, and pricing.

Banking-as-a-Service (BaaS) Segment: In the rapidly evolving BaaS segment, the company competes with a limited number of other banks offering similar services, and directly with fintech companies that may build their own banking infrastructure or partner with other financial institutions.

COASTAL FINANCIAL CORP's competitive advantages in BaaS include:

• An established regulatory compliance framework.
• A robust and scalable technology platform.
• Proven expertise in collaboratively partnering with fintech innovators.

Its hybrid model, combining traditional community banking with a sophisticated BaaS platform, allows the company to diversify revenue streams and appeal to a broader range of customers and partners. The company also differentiates itself through its focus on specific niches within the BaaS market and its commitment to fostering strong, collaborative relationships with its fintech partners, providing comprehensive and compliant solutions for their banking needs.