Coastal Financial Corporation Announces Second Quarter 2023 Results


Second Quarter 2023 Highlights:

  • Net income of $12.9 million, or $0.95 per diluted common share, for the three months ended June 30, 2023, compared to $12.4 million, or $0.91 per diluted common share for the three months ended March 31, 2023.
    • Return on average assets ("ROA") of 1.52% for the three months ended June 30, 2023.
    • Return on average equity ("ROE") of 19.53% for the three months ended June 30, 2023.
  • Total assets increased $84.3 million, or 2.4%, to $3.54 billion for the quarter ended June 30, 2023, compared to $3.45 billion at March 31, 2023.
  • Loan growth, net of deferred fees of $170.3 million, or 6.0%, to $3.01 billion for the quarter ended June 30, 2023.
    • CCBX loans increased $128.3 million, or 11.0%, to $1.29 billion.
    • Community bank loans increased $42.0 million, or 2.5%, to $1.71 billion.
  • Deposits increased $67.3 million, or 2.2%, to $3.16 billion for the quarter ended June 30, 2023.
    • CCBX deposit growth of $89.3 million, or 5.7%, to $1.65 billion.
      • Additional $9.9 million in CCBX deposits transferred off balance sheet.
    • Community bank deposits decreased $21.9 million, or 1.4%, to $1.51 billion.
      • Includes noninterest bearing deposits of $621.0 million or 41.1% of total community bank deposits
      • Community bank cost of deposits was 0.98%.
    • Uninsured deposits of $632.1 million, or 20.0% of total deposits as of June 30, 2023, compared to $768.3 million, or 24.8% of total deposits as of March 31, 2023.
  • Total revenue increased $17.1 million, or 16.5%, for the three months ended June 30, 2023, compared to the three months ended March 31, 2023
  • Total revenue excluding Banking as a Service ("BaaS") credit enhancements and BaaS fraud enhancements increased $8.9 million, or 15.0%, to $68.4 million for the three months ended June 30, 2023, compared to the three months ended March 31, 2023. (A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.)
  • Liquidity/Borrowings as of June 30, 2023:
    • Capacity to borrow up to $559.8 million from Federal Home Loan Bank and the Federal Reserve Bank discount window with no borrowings taken under these facilities since the first quarter of 2022.
  • Investment Portfolio as of June 30, 2023 :
    • Available for sale ("AFS") investments of $98.2 million, compared to $98.0 million as of March 31, 2023, of which 99.7% are U.S. Treasuries, with a weighted average remaining duration of 8 months as of June 30, 2023.
    • Held to maturity ("HTM") investments of $12.6 million, of which 100% are U.S. Agency mortgage backed securities held for CRA purposes, with a fair value of $404,000 less than the carrying value and a weighted average remaining duration of 6.7 years as of June 30, 2023.

EVERETT, Wash., July 27, 2023 (GLOBE NEWSWIRE) -- Coastal Financial Corporation (Nasdaq: CCB) (the “Company”, "Coastal", "we", "our", or "us"), the holding company for Coastal Community Bank (the “Bank”), today reported unaudited financial results for the quarter ended June 30, 2023. 

Quarterly net income for the second quarter of 2023 was $12.9 million, or $0.95 per diluted common share, compared with net income of $12.4 million, or $0.91 per diluted common share, for the first quarter of 2023, and $10.2 million, or $0.76 per diluted common share, for the quarter ended June 30, 2022. 

Total assets increased $84.3 million, or 2.4%, during the second quarter of 2023 to $3.54 billion, from $3.45 billion at March 31, 2023. Loan growth of $170.3 million, or 6.0%, during the three months ended June 30, 2023 to $3.01 billion, compared to $2.84 billion at March 31, 2023. Loan growth included CCBX loan growth of $128.3 million, or 11.0%, and an increase of $42.0 million, or 2.5% in community bank loans, which is net of $196,000 in PPP loan forgiveness/repayments. Deposits increased $67.3 million, or 2.2%, during the three months ended June 30, 2023 and included CCBX deposit growth of $89.3 million, or 5.7%, and a decrease in community bank deposits of $21.9 million, or 1.4%. The slight decrease in community bank deposits was a result of pricing disciplines as some customers sought higher rate products. Our cost of deposits for the community bank was 0.98% for the three months ended June 30, 2023, compared to 0.66% for the three months ended March 31, 2023.

“We saw solid deposit growth in the second quarter, with deposits increasing $67.3 million, or 2.2%, compared to March 31, 2023. Fully insured IntraFi network sweep deposits increased $146.0 million to $240.3 million as of June 30, 2023, compared to $94.3 million as of March 31, 2023. These fully insured sweep deposits allow our larger deposit customers to fully insure their deposits through a sweep to other banks. Loans receivable increased $170.3 million, or 6.0%, during the three months ended June 30, 2023.   We continue to monitor our liquidity position through diligent management of our liquid assets and liabilities as well as maintaining access to alternative sources of funds. As of June 30, 2023 we had $275.1 million in cash on the balance sheet and the capacity to borrow up to $559.8 million from Federal Home Loan Bank and the Federal Reserve Bank discount window, which we did not draw down at any point in the second quarter of 2023. Cash on the balance sheet and borrowing capacity totaled $834.8 million, which represented 26.4% of total deposits and exceeded our $632.1 million in uninsured deposits as of June 30, 2023.

We understand that there continues to be uncertainty and concern surrounding the current economic environment; and as such we work hard to ensure that we are serving our customers and shareholders in the best way possible. Building a company that we believe can withstand the challenges of our time, growing in strength and size, through thoughtful and strategic management of growth, resources and opportunities. Net income for the quarter ended June 30, 2023 was adversely impacted by elevated legal & professional fees which increased $1.6 million compared to the quarter ended March 31, 2023. Nearly all of the increase in professional fees is related to enhancing or expanding our CCBX business, which we view as a strategic priority, by further developing our risk management system to support growth of the CCBX business as well as evaluating new Fintech partnerships and acquisitions of technology platforms and related assets. We anticipate that our legal and professional fees will remain elevated through the third quarter of 2023 then start to decline as projects are completed and initiatives are achieved, with legal and professional fees leveling off to approximate first quarter 2023 levels by first quarter 2024. We continue to remain true to our "un-Bankey" roots by looking for and finding new opportunities to survive and thrive in the changing banking world, while still maintaining the community bank mentality and feel," stated Eric Sprink, the CEO of the Company and the Bank.

Results of Operations Overview

The Company has one main subsidiary, the Bank which consists of three segments: CCBX, the community bank and treasury & administration.  The CCBX segment includes our BaaS activities, the community bank segment includes all community banking activities, and the treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.  Net interest income was $62.4 million for the quarter ended June 30, 2023, an increase of $7.9 million, or 14.4%, from $54.5 million for the quarter ended March 31, 2023, and an increase of $22.5 million, or 56.3%, from $39.9 million for the quarter ended June 30, 2022.  Yield on loans receivable was 10.85% for the three months ended June 30, 2023, compared to 9.95% for the three months ended March 31, 2023 and 7.34% for the three months ended June 30, 2022.  The increase in net interest income compared to March 31, 2023 and June 30, 2022, was largely related to increased yield on loans resulting from higher interest rates and growth in higher yielding loans, primarily from CCBX.  Total average loans receivable for the three months ended June 30, 2023 was $2.97 billion, compared to $2.71 billion for the three months ended March 31, 2023, and $2.19 billion for the three months ended June 30, 2022.

Interest and fees on loans totaled $80.2 million for the three months ended June 30, 2023 compared to $66.4 million and $40.2 million for the three months ended March 31, 2023 and June 30, 2022, respectively.  Loan growth of $170.3 million, or 6.0%, during the quarter ended June 30, 2023 included a $128.3 million increase in CCBX loans. The increase in CCBX loans includes an increase of $95.3 million, or 12.7%, in consumer and other loans and an increase of $19.6 million, or 16.5%, in capital call lines as a result of normal balance fluctuations and business activities.  Capital call lines bear a lower rate of interest, but have less credit risk due to the way the loans are structured compared to other commercial loans.  The increase in interest and fees on loans for the quarter ended June 30, 2023, compared to March 31, 2023 and June 30, 2022, was largely due to growth in higher yielding loans and increased interest rates.  As a result of the Federal Open Market Committee (“FOMC”) raising the target Federal Funds rate 0.25% during the quarter, interest rates on our existing variable rate loans were affected, as are the rates on new loans. The FOMC last raised the target Federal Funds rate 0.25% on May 3, 2023. We continue to monitor the impact of these increases in interest rates.

Interest income from interest earning deposits with other banks was $2.7 million for the quarter ended June 30, 2023 a decrease of $419,000 compared to March 31, 2023 as a result of lower average balances, and an increase of $1.7 million compared to June 30, 2022 due to an increase in interest rates.  The average balance of interest earning deposits with other banks for the three months ended June 30, 2023 was $211.4 million, compared to $271.7 million and $499.9 million for the three months ended March 31, 2023 and June 30, 2022, respectively.  Interest earning deposits with other banks decreased as a result of increased loan demand compared to the three months ended March 31, 2023 and June 30, 2022.  Additionally, the average yield on these interest earning deposits with other banks increased to 5.08% for the quarter ended June 30, 2023, compared to 4.62% and 0.77% for the quarters ended March 31, 2023 and June 30, 2022, respectively.

Total interest expense was $21.3 million for the quarter ended June 30, 2023, a $5.7 million increase from the quarter ended March 31, 2023 and a $19.4 million increase from the quarter ended June 30, 2022. Interest expense on deposits was $20.7 million for the quarter ended June 30, 2023, compared to $1.7 million for the quarter ended June 30, 2022. Interest expense on interest bearing deposits increased $5.7 million for the quarter ended June 30, 2023, compared to the quarter ended March 31, 2023, and $19.0 million compared to the quarter ended June 30, 2022 as a result an increase in CCBX deposits that are tied to, and reprice when the FOMC raises rates just like our most of our CCBX loans which also reprice when the FOMC raises interest rates. Interest expense on borrowed funds was $661,000 for the quarter ended June 30, 2023, compared to $662,000 and $260,000 for the quarters ended March 31, 2023 and June 30, 2022, respectively. The $401,000 increase in interest expense on borrowed funds from the quarter ended June 30, 2022 is the result of an increase of $19.7 million in subordinated debt and an increase in interest rates.

Total cost of deposits was 2.72% for the three months ended June 30, 2023, compared to 2.13% for the three months ended March 31, 2023, and 0.25%, for the three months ended June 30, 2022. Community bank and CCBX cost of deposits were 0.98% and 4.42% respectively, for the three months ended June 30, 2023, compared to 0.66% and 3.89%, for the three months ended March 31, 2023, and 0.08% and 0.56% for the three months ended June 30, 2022. The increase in cost of deposits for the three months ended June 30, 2023 compared to the prior periods for both segments is a result of increased interest rates and increased interest bearing deposits at higher rates. Any additional FOMC interest rate increases will increase our cost of deposits and result in higher interest expense on interest bearing deposits.

Net Interest Margin

Net interest margin was 7.58% for the three months ended June 30, 2023, compared to 7.15% and 5.66% for the three months ended March 31, 2023 and June 30, 2022, respectively.  The increase in net interest margin compared to the three months ended March 31, 2023 and June 30, 2022, was largely a result of increased volume and an increase in higher interest rates on new loans and on existing variable rate loans as they reprice.  Loans receivable increased $170.3 million and $673.2 million, compared to March 31, 2023 and June 30, 2022, respectively.  Additionally, the Fed Funds interest rate increases has resulted in existing, variable rate loans repricing to higher interest rates.  Interest and fees on loans receivable increased $13.8 million, or 20.7%, to $80.2 million for the three months ended June 30, 2023, compared to $66.4 million for the three months ended March 31, 2023, and $40.2 million for the three months ended June 30, 2022.  Also contributing to the increase in net interest margin compared to the three months ended June 30, 2022, was a $1.7 million increase in interest on interest earning deposits.  These interest earning deposits earned an average rate of 5.08% for the quarter ended June 30, 2023, compared to 4.62% and 0.77% for the quarters ended March 31, 2023 and June 30, 2022, respectively.  Average investment securities increased $8.1 million to $110.3 million due to the purchase of $8.9 million in securities during the three months ended June 30, 2023 compared to the three months ended March 31, 2023, and decreased $10.9 million compared to the three months ended June 30, 2022. Interest on investment securities increased $100,000 for the three months ended June 30, 2023 compared to the three months ended March 31, 2023 as a result of the increase in average outstanding balance coupled with increased yield, which also positively impacted net interest margin. Interest on investment securities increased $90,000 compared to June 30, 2022, as a result of increased yield.  These increases in interest income were partially offset by increases in interest expense on interest bearing deposits, as previously discussed.

Cost of funds was 2.77% for the quarter ended June 30, 2023, an increase of 58 basis points from the quarter ended March 31, 2023 and an increase of 248 basis points from the quarter ended June 30, 2022. Cost of deposits for the quarter ended June 30, 2023 was 2.72%, compared to 2.13% for the quarter ended March 31, 2023, and 0.25% for the quarter ended June 30, 2022. The increased cost of funds and deposits compared to March 31, 2023 and June 30, 2022 was largely due to the increase in interest rates compared to the previous periods and growth in higher cost CCBX deposits compared to June 30, 2022.

During the quarter ended June 30, 2023, total loans receivable increased by $170.3 million, or 6.0%, to $3.01 billion, compared to $2.84 billion for the quarter ended March 31, 2023.  This increase consists of $128.3 million in CCBX loan growth and $42.0 million in community bank loan growth. Community bank loan growth is net of $196,000 in PPP loan forgiveness/repayments since March 31, 2023.  Total loans receivable as of June 30, 2023 increased $673.2 million compared to June 30, 2022.  This increase includes CCBX loan growth of $490.6 million and community bank loan growth of $182.6 million. Community bank loan growth is net of $12.8 million in PPP loan forgiveness/repayments since June 30, 2022.  During the quarter ended June 30, 2023, $88.6 million in CCBX loans were transferred into loans held for sale, with $80.0 million in loans sold during the quarter and $35.9 million remaining in loans held for sale as of June 30, 2023; compared to $27.3 million in loans held for sale as of March 31, 2023. 

Total yield on loans receivable for the quarter ended June 30, 2023 was 10.85%, compared to 9.95% for the quarter ended March 31, 2023, and 7.34% for the quarter ended June 30, 2022. This increase in yield on loans receivable is a combination of an overall increase in interest rates, repricing of variable rate loans as well as additional volume in higher rate consumer loans from CCBX partners.  During the quarter ended June 30, 2023, CCBX loans outstanding increased 11.0%, or $128.3 million, compared to March 31, 2023, with an average CCBX yield of 16.95% and community bank loans increased 2.5%, or $42.0 million, compared to the quarter ended March 31, 2023, with an average yield of 6.28%.   The yield on CCBX loans does not include the impact of BaaS loan expense.  BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans.  

The following table summarizes the average yield on loans receivable and cost of deposits for our community bank and CCBX segments for the periods indicated:

 For the Three Months Ended For the Six Months Ended
 June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022
 Yield on
Loans(2)
 Cost of
Deposits(2)
 Yield on
Loans(2)
 Cost of
Deposits(2)
 Yield on
Loans(2)
 Cost of
Deposits(2)
 Yield on
Loans(2)
 Cost of
Deposits(2)
 Yield on
Loans(2)
 Cost of
Deposits(2)
Community Bank6.28% 0.98% 5.97% 0.66% 5.04% 0.08% 6.13% 0.82% 5.10% 0.09%
CCBX(1)16.95% 4.42% 16.09% 3.89% 12.35% 0.56% 16.56% 4.18% 12.48% 0.34%
Consolidated10.85% 2.72% 9.95% 2.13% 7.34% 0.25% 10.42% 2.44% 7.10% 0.18%


(1) CCBX yield on loans does not include the impact of BaaS loan expense.  BaaS loan expense represents the amount paid or payable to partners for credit and fraud enhancements and originating & servicing CCBX loans.  To determine Net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at Net BaaS loan income which can be compared to interest income on the Company’s community bank loans. See reconciliation of the non-GAAP measures at the end of this earnings release for the impact of BaaS loan expense on CCBX loan yield.
(2) Annualized calculations for periods shown.
   

The following tables illustrates how BaaS loan interest income is affected by BaaS loan interest expense resulting in net BaaS loan income and the associated yield:

  For the Three Months Ended
  June 30, 2023 March 31, 2023 June 30, 2022
(dollars in thousands, unaudited) Income /
Expense
 Income / expense divided by average CCBX loans(2) Income /
Expense
 Income / expense divided by
average CCBX loans(2)
 Income /
Expense
 Income / expense divided by average CCBX loans(2)
BaaS loan interest income $53,632 16.95% $42,220 16.09% $21,281 12.35%
Less: BaaS loan expense  22,033 6.96%  17,554 6.69%  12,229 7.10%
Net BaaS loan income(1) $31,599 9.98% $24,666 9.40% $9,052 5.25%
Average BaaS Loans(3) $1,269,406   $1,064,192   $691,294  


  For the Six Months Ended
  June 30, 2023 June 30, 2022
(dollars in thousands; unaudited) Income /
Expense
 Income / expense divided by average CCBX loans(2) Income /
Expense
 Income / expense divided by average CCBX loans(2)
BaaS loan interest income $95,851 16.56% $33,273 12.48%
Less: BaaS loan expense  39,587 6.84%  20,519 7.70%
Net BaaS loan income(1) $56,264 9.72% $12,754 4.78%
Average BaaS Loans(3) $1,167,366   $537,577  


(1) A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.
(2) Annualized calculations shown for quarterly periods presented.
(3) Includes loans held for sale.
   

Key Performance Ratios

ROA was 1.52% for the quarter ended June 30, 2023 compared to 1.58% and 1.41% for the quarters ended March 31, 2023 and June 30, 2022, respectively.  ROA for the quarter ended June 30, 2023, was down 0.06% as a result of higher expenses compared to March 31, 2023 and was up 0.11% due to increases in deposits, loans and overall higher interest rates on interest earning assets, compared to the quarter ended June 30, 2022.

The following table shows the Company’s key performance ratios for the periods indicated.  

  Three Months Ended Six Months Ended
(unaudited) June 30,
2023
 March 31,
2023
 December 31,
2022
 September 30,
2022
 June 30,
2022
 June 30,
2023
 June 30,
2022
               
Return on average assets(1) 1.52% 1.58% 1.66% 1.45% 1.41% 1.55% 1.18%
Return on average equity(1) 19.53% 19.89% 21.86% 19.36% 18.86% 19.70% 15.57%
Yield on earnings assets(1) 10.18% 9.19% 8.47% 7.38% 5.94% 9.70% 5.28%
Yield on loans receivable(1) 10.85% 9.95% 9.33% 8.46% 7.34% 10.42% 7.10%
Cost of funds(1) 2.77% 2.19% 1.61% 0.85% 0.29% 2.49% 0.22%
Cost of deposits(1) 2.72% 2.13% 1.56% 0.82% 0.25% 2.44% 0.18%
Net interest margin(1) 7.58% 7.15% 6.96% 6.58% 5.66% 7.37% 5.08%
Noninterest expense to average assets(1) 6.11% 5.69% 5.97% 6.66% 5.29% 5.91% 4.92%
Noninterest income to average assets(1) 6.90% 6.28% 5.43% 4.48% 3.53% 6.60% 3.40%
Efficiency ratio 42.92% 43.03% 48.94% 61.12% 58.38% 42.97% 58.80%
Loans receivable to deposits(2) 96.23% 92.55% 93.25% 89.92% 88.77% 96.23% 88.77%


(1) Annualized calculations shown for quarterly periods presented.
(2) Includes loans held for sale.
   

Noninterest Income

The following table details noninterest income for the periods indicated:

 Three Months Ended
 June 30, March 31, June 30,
(dollars in thousands; unaudited)2023 2023 2022
Deposit service charges and fees$989 $910 $988
Loan referral fees 682    208
Unrealized gain on equity securities, net 155  39  
Gain on sales of loans, net 23  123  
Other 234  299  396
Noninterest income, excluding BaaS program income and BaaS indemnification income 2,083  1,371  1,592
Servicing and other BaaS fees 895  948  1,159
Transaction fees 1,052  917  814
Interchange fees 975  789  628
Reimbursement of expenses 1,026  921  618
BaaS program income 3,948  3,575  3,219
BaaS credit enhancements 51,027  42,362  14,207
Baas fraud enhancements 1,537  1,999  6,474
BaaS indemnification income 52,564  44,361  20,681
Total BaaS income 56,512  47,936  23,900
Total noninterest income$58,595 $49,307 $25,492
         

Noninterest income was $58.6 million for the three months ended June 30, 2023, an increase of $9.3 million from $49.3 million for the three months ended March 31, 2023, and an increase of $33.1 million from $25.5 million for the three months ended June 30, 2022.  The increase in noninterest income over the quarter ended March 31, 2023 was primarily due to an increase of $8.6 million in total BaaS income.  The $8.6 million increase in total BaaS income included a $8.7 million increase in BaaS credit enhancements related to the allowance for credit losses, a $462,000 decrease in BaaS fraud enhancements, and an increase of $373,000 in BaaS program income. The increase in BaaS program income is largely the result of higher transaction and interchange fees (see “Appendix B” for more information on the accounting for BaaS allowance for credit losses and credit and fraud enhancements). The $33.1 million increase in noninterest income over the quarter ended June 30, 2022 was primarily due to a $32.6 million increase in BaaS income. The $32.6 million increase in BaaS income included a $36.8 million increase in BaaS credit enhancements, a $4.9 million decrease in BaaS fraud enhancements and a $729,000 increase in BaaS program income.

Our CCBX segment continues to evolve, and we now have 22 relationships, at varying stages, as of June 30, 2023.  We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense and are focusing more on selecting larger and more established partners, with experienced management teams, existing customer bases and strong financial positions.

The following table illustrates the activity and evolution in CCBX relationships for the periods presented.

 As of
(unaudited)June 30, 2023March 31, 2023June 30, 2022
Active181823
Friends and family / testing112
Implementation / onboarding110
Signed letters of intent144
Wind down - preparing to exit relationship110
Total CCBX relationships222529
    

The following table details noninterest expense for the periods indicated:

Noninterest Expense

  Three Months Ended
  June 30, March 31, June 30,
(dollars in thousands; unaudited) 2023 2023 2022
Salaries and employee benefits $16,309 $15,575 $12,238
Legal and professional expenses  4,645  3,062  1,002
Data processing and software licenses  1,972  1,840  1,546
Occupancy  1,143  1,219  1,083
Point of sale expense  814  753  409
Director and staff expenses  519  626  377
FDIC assessments  570  595  855
Excise taxes  531  455  564
Marketing  115  95  74
Other  1,722  890  1,318
Noninterest expense, excluding BaaS loan and BaaS fraud expense  28,340  25,110  19,466
BaaS loan expense  22,033  17,554  12,229
BaaS fraud expense  1,537  1,999  6,474
BaaS loan and fraud expense  23,570  19,553  18,703
Total noninterest expense $51,910 $44,663 $38,169
          

Total noninterest expense increased $7.2 million to $51.9 million for the three months ended June 30, 2023, compared to $44.7 million for the three months ended March 31, 2023 and increased $13.7 million from $38.2 million for the three months ended June 30, 2022. The increase in noninterest expense for the quarter ended June 30, 2023, as compared to the quarter ended March 31, 2023, was primarily due to a $4.0 million increase in BaaS expense (of which $4.5 million is related to an increase in partner loan expense partially offset by a decrease of $462,000 in partner fraud expense).  Partner loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, and originating & servicing CCBX loans. Partner fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts. A portion of this expense is realized during the quarter during which the loss occurs, and a portion is estimated based on historical or other information from our partners.  Legal and professional fees increased $1.6 million for the quarter ended June 30, 2023, as compared to the quarter ended March 31, 2023 due to increased fees related to data and risk management, building out our infrastructure and increased consulting expenses for projects and enhanced monitoring. Additionally, there was a $734,000 increase in salaries and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives. We anticipate that our legal and professional fees will remain elevated through the third quarter of 2023 then start to decline as projects are completed and initiatives are achieved, with legal and professional fees leveling off to approximate first quarter 2023 levels by first quarter 2024.

The increase in noninterest expenses for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 were largely due to an increase of $4.9 million in BaaS partner expense (of which $9.8 million is related to an increase in partner loan expense partially offset by a decrease of $4.9 million in partner fraud expense), $4.1 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives and $3.6 million increase in legal and professional fees due to increased fees related to data and risk management, building out our infrastructure and increased consulting expenses for projects and enhanced monitoring. Additionally, there was a $405,000 increase in point of sale expenses which is attributed to increased CCBX activity, and $404,000 increase in other operational losses.

Provision for Income Taxes

The provision for income taxes was $3.9 million for the three months ended June 30, 2023, $3.0 million for the three months ended March 31, 2023 and $2.9 million for the second quarter of 2022.  The provision for income taxes was higher for the three months ended June 30, 2023 compared to March 31, 2023 as a result of higher stock equity award deductions in the quarter ended March 31, 2023, which lowered the effective tax rate as well. 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. The Company uses a federal statutory tax rate of 21.0% as a basis for calculating provision for federal income taxes and 2.62% for calculating the provision for state taxes.

Financial Condition Overview

Total assets increased $84.3 million, or 2.4%, to $3.54 billion at June 30, 2023 compared to $3.45 billion at March 31, 2023.  The increase is primarily due to loans receivable increasing $170.3 million during the quarter ended June 30, 2023 partially offset by a $111.0 million decrease in interest earning deposits with other banks during the quarter ended June 30, 2023.  Additionally, there were $35.9 million in loans held for sale at June 30, 2023, compared to $27.3 million at March 31, 2023.  

Total assets increased $565.6 million, or 19.0%, at June 30, 2023, compared to $2.97 billion at June 30, 2022.  The increase is primarily due to loans receivable increasing $673.2 million, and an increase of $909,000 in investment securities and a $119.7 million decrease in interest earning deposits with other banks, resulting from increased loan demand and funds being shifted from interest earning deposits with other banks to loans, compared to June 30, 2022.

Loans Receivable

Total loans receivable increased $170.3 million to $3.01 billion at June 30, 2023, from $2.84 billion at March 31, 2023, and increased $673.2 million from $2.33 billion at June 30, 2022.  The increase in loans receivable over the quarter ended March 31, 2023 was the result of $128.3 million in CCBX loan growth and $42.0 million in community bank loan growth. Community bank loan growth is net of $196,000 in PPP loan forgiveness/repayments since March 31, 2023.  The change in loans receivable over the quarter ended June 30, 2022 includes CCBX loan growth of $490.6 million and $182.6 million in community bank loan growth as of June 30, 2023.  Community bank loan growth is net of $12.8 million in PPP loan forgiveness/repayments since June 30, 2022.

The following table summarizes the loan portfolio at the period indicated:

 As of June 30, 2023 As of March 31, 2023 As of June 30, 2022
(dollars in thousands; unaudited)Amount Percent Amount Percent Amount Percent
Commercial and industrial loans:           
PPP loans$3,595  0.1% $3,791  0.1% $16,398  0.7%
Capital call lines 138,428  4.6   118,796  4.2   224,930  9.6 
All other commercial & industrial loans 211,806  7.0   203,751  7.2   160,636  6.9 
Total commercial and industrial loans: 353,829  11.7   326,338  11.5   401,964  17.2 
Real estate loans:           
Construction, land and land development 186,706  6.2   206,635  7.3   225,512  9.6 
Residential real estate 463,179  15.4   455,507  16.0   326,661  14.0 
Commercial real estate 1,164,088  38.6   1,102,771  38.8   956,320  40.8 
Consumer and other loans 846,459  28.1   752,528  26.4   430,083  18.4 
Gross loans receivable 3,014,261  100.0%  2,843,779  100.0%  2,340,540  100.0%
Net deferred origination fees - PPP loans (60)    (63)    (396)  
Net deferred origination fees - all other loans (6,648)    (6,512)    (5,790)  
Loans receivable$3,007,553    $2,837,204    $2,334,354   
Loan Yield(1) 10.85%    9.95%    7.34%  


(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.
   

Please see Appendix A for additional loan portfolio detail regarding industry concentrations.

The following tables detail the community bank and CCBX loans which are included in the total loan portfolio table above.

Community Bank As of
  June 30, 2023 March 31, 2023 June 30, 2022
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Commercial and industrial loans:            
PPP loans $3,595  0.2% $3,791  0.2% $16,398  1.1%
All other commercial & industrial loans  151,483  8.8   155,082  9.3   142,569  9.3 
Real estate loans:            
Construction, land and land development loans  186,706  10.9   206,635  12.3   225,512  14.7 
Residential real estate loans  211,966  12.3   206,140  12.3   193,518  12.6 
Commercial real estate loans  1,164,088  67.7   1,102,771  65.7   956,320  62.1 
Consumer and other loans:            
Other consumer and other loans  1,457  0.1   2,860  0.2   2,325  0.2 
Gross Community Bank loans receivable  1,719,295  100.0%  1,677,279  100.0%  1,536,642  100.0%
Net deferred origination fees  (6,261)    (6,265)    (6,240)  
Loans receivable $1,713,034    $1,671,014    $1,530,402   
Loan Yield(1)  6.28%    5.97%    5.04%  


(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.

 

CCBX As of
  June 30, 2023 March 31, 2023 June 30, 2022
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Commercial and industrial loans:            
Capital call lines $138,428  10.7% $118,796  10.2% $224,930  28.0%
All other commercial & industrial loans  60,323  4.7   48,669  4.1   18,067  2.2 
Real estate loans:            
Residential real estate loans  251,213  19.4   249,367  21.4   133,143  16.5 
Consumer and other loans:            
Credit cards  379,642  29.3   318,187  27.3   139,501  17.4 
Other consumer and other loans  465,360  35.9   431,481  37.0   288,257  35.9 
Gross CCBX loans receivable  1,294,966  100.0%  1,166,500  100.0%  803,898  100.0%
Net deferred origination (fees) costs  (447)    (310)    54   
Loans receivable $1,294,519    $1,166,190    $803,952   
Loan Yield - CCBX(1)(2)  16.95%    16.09%    12.35%  


(1) CCBX yield does not include the impact of BaaS loan expense.  BaaS loan expense represents the amount paid or payable to partners for credit enhancements and originating & servicing CCBX loans. See reconciliation of the non-GAAP measures at the end of this earnings release for the impact of BaaS loan expense on CCBX loan yield.
(2) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.
   

Deposits

Total deposits increased $67.3 million, or 2.2%, to $3.16 billion at June 30, 2023 from $3.10 billion at March 31, 2023. The increase was due to a $69.6 million increase in core deposits, partially offset by a $2.2 million decrease in time deposits. BaaS-brokered deposits are now classified as NOW accounts due to a change in the relationship agreement with one of our partners. Deposits in our CCBX segment increased $89.3 million, from $1.56 billion at March 31, 2023, to $1.65 billion at June 30, 2023 and community bank deposits decreased $21.9 million from $1.53 billion at March 31, 2023, to $1.51 billion at June 30, 2023. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts. During the quarter ended June 30, 2023, noninterest bearing deposits decreased $36.2 million, or 4.8%, to $725.6 million from $761.8 million at March 31, 2023. Community bank noninterest bearing deposits totaled $621.0 million or 41.1% of total community bank deposits and CCBX noninterest bearing deposits totaled $104.6 million, or 6.3% of total CCBX deposits. In the quarter ended June 30, 2023 compared to the quarter ended March 31, 2023, NOW and money market accounts increased $116.0 million, savings deposits decreased $10.3 million, and time deposits decreased $2.2 million. Included in total deposits is $240.3 million in IntraFi network NOW and money market sweep accounts as of June 30, 2023, which provides our larger deposit customers with fully insured deposits through a sweep to other banks. Uninsured deposits decreased to $632.1 million as of June 30, 2023, compared to $768.3 million as of March 31, 2023.

Total deposits increased $465.3 million, or 17.2%, to $3.16 billion at June 30, 2023 compared to $2.70 billion at June 30, 2022. The increase is largely the result of growth in CCBX deposits. Noninterest bearing deposits decreased $92.5 million, or 11.3%, to $725.6 million at June 30, 2023 from $818.1 million at June 30, 2022. NOW and money market accounts increased $662.8 million, or 39.9%, to $2.32 billion at June 30, 2023, and savings deposits decreased $17.5 million, or 16.4%, and time deposits decreased   $11.6 million, or 31.9%, in the second quarter of 2023 compared to the second quarter of 2022 and includes BaaS-brokered deposits that are now classified as NOW accounts included in core deposits due to a change in the relationship agreement with one of our partners and these deposits increased to $275.2 million as of June 30, 2023, compared to $76.0 million as of June 30, 2022. These deposits increased as a result of sweeping them back on the balance sheet. Deposits in our CCBX segment increased $587.0 million, from $1.07 billion at June 30, 2022, to $1.65 billion at June 30, 2023 and community bank deposits decreased $121.7 million, from $1.63 billion at June 30, 2022, to $1.51 billion at June 30, 2023. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts. Uninsured deposits decreased to $632.1 million as of June 30, 2023, compared to $812.1 million as of June 30, 2022.

Additionally, as of June 30, 2023 we have access to $9.9 million in CCBX customer deposits that are currently being transferred off the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. If a portion of these deposits are retained, they would be classified as NOW accounts. Efforts to retain and grow core deposits are evidenced by the high ratios in these categories when compared to total deposits.

The following table summarizes the deposit portfolio for the periods indicated.

 As of June 30, 2023 As of March 31, 2023 As of June 30, 2022
(dollars in thousands; unaudited)Amount Percent of
Total
Deposits
 Balance Percent of
Total
Deposits
 Balance Percent of
Total
Deposits
Demand, noninterest bearing$725,592  22.9% $761,800  24.6% $818,052  30.3%
NOW and money market 2,323,164  73.5   2,207,121  71.3   1,660,315  61.6 
Savings 88,991  2.8   99,241  3.2   106,464  3.9 
Total core deposits 3,137,747  99.2   3,068,162  99.1   2,584,831  95.8 
Brokered deposits 1  0.0   1  0.0   76,001  2.8 
Time deposits less than $100,000 9,741  0.3   11,343  0.4   14,009  0.5 
Time deposits $100,000 and over 15,083  0.5   15,717  0.5   22,464  0.8 
Total$3,162,572  100.0% $3,095,223  100.0% $2,697,305  100.0%
Cost of deposits(1) 2.72%    2.13%    0.25%  


(1) Cost of deposits is annualized for the three months ended for each period presented.
   

The following tables detail the community bank and CCBX deposits which are included in the total deposit portfolio table above.

Community Bank As of
  June 30, 2023 March 31, 2023 June 30, 2022
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Demand, noninterest bearing $621,012  41.1% $664,452  43.4% $729,436  44.7%
NOW and money market  778,475  51.6   743,548  48.6   759,704  46.6 
Savings  85,146  5.7   96,330  6.3   105,576  6.5 
Total core deposits  1,484,633  98.4   1,504,330  98.3   1,594,716  97.8 
Brokered deposits  1  0.0   1  0.0   1  0.0 
Time deposits less than $100,000  9,741  0.6   11,343  0.7   14,009  0.9 
Time deposits $100,000 and over  15,083  1.0   15,717  1.0   22,464  1.4 
Total Community Bank deposits $1,509,458  100.0% $1,531,391  100.0% $1,631,190  100.0%
Cost of deposits(1)  0.98%    0.66%    0.08%  


(1) Cost of deposits is annualized for the three months ended for each period presented.

  

CCBX As of
  June 30, 2023 March 31, 2023 June 30, 2022
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Demand, noninterest bearing $104,580  6.3% $97,348  6.2% $88,616  8.3%
NOW and money market  1,544,689  93.5   1,463,573  93.6   900,611  84.5 
Savings  3,845  0.2   2,911  0.2   888  0.1 
Total core deposits  1,653,114  100.0   1,563,832  100.0   990,115  92.9 
BaaS-brokered deposits    0.0     0.0   76,000  7.1 
Total CCBX deposits $1,653,114  100.0% $1,563,832  100.0% $1,066,115  100.0%
Cost of deposits(1)  4.42%    3.89%    0.56%  


(1) Cost of deposits is annualized for the three months ended for each period presented.
   

Borrowings

As of June 30, 2023 the Company has the capacity to borrow up to a total of $559.8 million from the Federal Reserve Bank discount window and Federal Home Loan Bank, with no borrowings outstanding on these lines as of June 30, 2023.

Shareholders’ Equity

During the six months ended June 30, 2023, the Company contributed $15.0 million in capital to the Bank.  The Company had a cash balance of $6.8 million as of June 30, 2023, which is retained for general operating purposes, including debt repayment, and for funding $763,000 in commitments to bank technology funds.  

Total shareholders’ equity increased $13.9 million since March 31, 2023.  The increase in shareholders’ equity was primarily due to $12.9 million in net earnings, a $846,000 increase from the amortization of equity awards, combined with a decrease in the unrealized loss on available-for-sale securities of $125,000 and $22,000 increase from stock options being exercised during the three months ended June 30, 2023.

Capital Ratios

The Company and the Bank remained well capitalized at June 30, 2023, as summarized in the following table.

(unaudited) Coastal Community Bank Coastal Financial Corporation Minimum Well Capitalized Ratios under Prompt Corrective Action(1)
Tier 1 Leverage Capital (to average assets) 9.16% 8.16% 5.00%
Common Equity Tier 1 Capital (to risk-weighted assets) 9.52% 8.36% 6.50%
Tier 1 Capital (to risk-weighted assets) 9.52% 8.47% 8.00%
Total Capital (to risk-weighted assets) 10.80% 11.12% 10.00%


(1) Presents the minimum capital ratios for an insured depository institution, such as the Bank, to be considered well capitalized under the Prompt Corrective Action framework. The minimum requirements for the Company to be considered well capitalized under Regulation Y include to maintain, on a consolidated basis, a total risk-based capital ratio of 10.0 percent or greater and a tier 1 risk-based capital ratio of 6.0 percent or greater.
   

Asset Quality

Effective January 1, 2023 the Company implemented the CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the incurred loss model, which is what we were previously using. As a result of implementing CECL, there was a one-time adjustment to the 2023 opening allowance balance of $3.9 million. The day 1 CECL adjustment for community bank loans included a reduction of $310,000 to the community bank allowance driven by the reversal of the unallocated balance and a reduction of $340,000 related to the community bank unfunded commitment reserve also driven by the reversal of the unallocated balance. This was offset by an increase to the CCBX allowance for $4.2 million. With the mirror image approach accounting related to the contingent receivable for CCBX partner loans, there was a CECL day 1 increase to the indemnification asset in the amount of $4.5 million. Net, the day 1 impact to retained earnings for the Bank’s transition to CECL was an increase of $954,000, excluding the impact of income taxes.

The total allowance for credit losses was $110.8 million and 3.68% of loans receivable at June 30, 2023 compared to $89.1 million and 3.14% at March 31, 2023 and $49.4 million and 2.11% at June 30, 2022. The allowance for credit loss allocated to the CCBX portfolio was $90.1 million and 6.96% of CCBX loans receivable at June 30, 2023, with $20.7 million of allowance for credit loss allocated to the community bank or 1.21% of total community bank loans receivable.

The following table details the allocation of the allowance for credit loss as of the period indicated:

  As of June 30, 2023 As of March 31, 2023 As of June 30, 2022
(dollars in thousands; unaudited) Community Bank CCBX Total Community Bank CCBX Total Community Bank CCBX Total
Loans receivable $1,713,034  $1,294,519  $3,007,553  $1,671,014  $1,166,190  $2,837,204  $1,530,402  $803,952  $2,334,354 
Allowance for credit losses  (20,653)  (90,109)  (110,762)  (20,708)  (68,415)  (89,123)  (20,785)  (28,573)  (49,358)
Allowance for credit losses to total loans receivable  1.21%  6.96%  3.68%  1.24%  5.87%  3.14%  1.36%  3.55%  2.11%
                                     

Provision for credit losses - loans totaled $52.6 million for the three months ended June 30, 2023, $43.5 million for the three months ended March 31, 2023, and $14.1 million for the three months ended June 30, 2022. Net charge-offs totaled $31.0 million for the quarter ended June 30, 2023, compared to $32.3 million for the quarter ended March 31, 2023 and $3.5 million for the quarter ended June 30, 2022. Net charge-offs increased primarily due to CCBX partner loans. CCBX partner agreements provide for a credit enhancement that covers the net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company is responsible for credit losses on approximately 10% of a $180.5 million loan portfolio. At June 30, 2023, our portion of this portfolio represented $18.0 million in loans.

The following table details net charge-offs for the core bank and CCBX for the period indicated:

  Three Months Ended
  June 30, 2023 March 31, 2023 June 30, 2022
(dollars in thousands; unaudited) Community
Bank
 CCBX Total Community
Bank
 CCBX Total Community Bank CCBX Total
Gross charge-offs $9  $32,290  $32,299  $50  $34,117  $34,167  $3  $3,539  $3,542 
Gross recoveries     (1,340)  (1,340)  (5)  (1,860)  (1,865)  (36)     (36)
Net charge-offs $9  $30,950  $30,959  $45  $32,257  $32,302  $(33) $3,539  $3,506 
Net charge-offs to average loans(1)  %  9.78%  4.19%  0.01%  12.29%  4.84%  (0.01)%  2.05%  0.64%


(1) Annualized calculations shown for periods presented.
   

The increase in the Company’s provision for credit losses - loans during the quarter ended June 30, 2023, is a result of loan growth in CCBX partner loans and to replenish reserves as a result of loan charge-off activity, which has resulted in increased charge-off rates impacting the allowance calculation. During the quarter ended June 30, 2023, a $52.6 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis, compared to the $43.1 million provision for credit losses - loans that was recorded for CCBX for the quarter ended March 31, 2023. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and reclassified negative deposit accounts. When the provision for CCBX credit losses and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). Expected losses are recorded in the allowance for credit losses. The credit enhancement asset is relieved when credit enhancement recoveries are received from the CCBX partner. CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses. If our partner is unable to fulfill their contracted obligations then the bank could be exposed to additional credit losses. Management regularly evaluates and manages this counterparty risk. The Company is responsible for credit losses on approximately 10% of a $180.5 million CCBX loan portfolio. At June 30, 2023, 10% of this portfolio represented $18.0 million in loans. The factors used in management’s analysis for community bank credit losses indicated that a small adjustment (recapture) of $47,000 and provision of $428,000 was needed for the quarters ended June 30, 2023 and March 31, 2023, respectively.

The following table details the provision expense for the community bank and CCBX for the period indicated:

  Three Months Ended Six Months Ended
(dollars in thousands; unaudited) June 30, 2023 March 31, 2023 June 30, 2022 June 30, 2023 June 30, 2022
Community bank $(47) $428 $109 $381 $452
CCBX  52,645   43,116  13,985  95,761  26,584
Total provision expense $52,598  $43,544 $14,094 $96,142 $27,036
                 

At June 30, 2023, our nonperforming assets were $33.7 million, or 0.95% of total assets, compared to $31.5 million, or 0.91%, of total assets, at March 31, 2023, and $5.8 million, or 0.20% of total assets, at June 30, 2022. These ratios are impacted by CCBX loans over 90 days delinquent that are covered by CCBX partner credit enhancements. As of June 30, 2023, $25.2 million of the $26.3 million in nonperforming CCBX loans were covered by CCBX partner credit enhancements. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses. Under the agreement, CCBX partners will indemnify or reimburse the Bank for its loss/charge-off on these loans. Nonperforming assets increased $2.2 million during the quarter ended June 30, 2023, compared to the quarter ended March 31, 2023, due to a $1.8 million increase in CCBX loans that are past due 90 days or more and still accruing combined with a $417,000 increase in community bank nonaccrual loans. As a result of the type of loans (primarily consumer loans) originated through our CCBX partners we anticipate that balances 90 days past due or more and still accruing will increase as those loan portfolios grow. Installment/closed-end and revolving/open-end consumer loans originated through CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively and are reported as substandard, 90 days or more days past due and still accruing. Community bank nonaccrual loans increased due to the addition of three loans partially offset by principal reductions. There were no repossessed assets or other real estate owned at June 30, 2023. Our nonperforming loans to loans receivable ratio was 1.12% at June 30, 2023, compared to 1.11% at March 31, 2023, and 0.25% at June 30, 2022.

For the quarter ended June 30, 2023, there were $9,000 of community bank net charge-offs and $7.4 million of nonperforming community bank loans. For the quarter ended June 30, 2023, $31.0 million in net charge-offs were recorded on CCBX loans. These loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. The Company is responsible for credit losses on approximately 10% of a $180.5 million loan portfolio. At June 30, 2023, our portion of this portfolio represented $18.0 million in loans.

The following table details the Company’s nonperforming assets for the periods indicated.

(dollars in thousands; unaudited)As of June 30,
2023
 As of March 31,
2023
 As of June 30,
2022
Nonaccrual loans:     
Commercial and industrial loans$5  $15  $111 
Real estate loans:     
Construction, land and land development 66   66   67 
Residential real estate 186      53 
Commercial real estate 7,142   6,901    
Total nonaccrual loans 7,399   6,982   231 
Accruing loans past due 90 days or more:     
Commercial & industrial loans 808   187   10 
Real estate loans:     
Residential real estate loans 1,722   946   123 
Consumer and other loans:     
Credit cards 18,306   17,772   1,283 
Other consumer and other loans 5,492   5,657   4,164 
Total accruing loans past due 90 days or more 26,328   24,562   5,580 
Total nonperforming loans 33,727   31,544   5,811 
Real estate owned        
Repossessed assets        
Modified loans for borrowers experiencing financial difficulty        
Total nonperforming assets$33,727  $31,544  $5,811 
Total nonaccrual loans to loans receivable 0.25%  0.25%  0.01%
Total nonperforming loans to loans receivable 1.12%  1.11%  0.25%
Total nonperforming assets to total assets 0.95%  0.91%  0.20%
            

The following tables detail the community bank and CCBX nonperforming assets which are included in the total nonperforming assets table above.

Community BankAs of
(dollars in thousands; unaudited)June 30,
2023
 March 31,
2023
 June 30,
2022
Nonaccrual loans:     
Commercial and industrial loans$5 $15 $111
Real estate:     
Construction, land and land development 66  66  67
Residential real estate 186    53
Commercial real estate 7,142  6,901  
Total nonaccrual loans 7,399  6,982  231
Accruing loans past due 90 days or more:     
Total accruing loans past due 90 days or more     
Total nonperforming loans 7,399  6,982  231
Other real estate owned     
Repossessed assets     
Total nonperforming assets$7,399 $6,982 $231


CCBXAs of
(dollars in thousands; unaudited)June 30,
2023
 March 31,
2023
 June 30,
2022
Nonaccrual loans$ $ $
Accruing loans past due 90 days or more:     
Commercial & industrial loans 808  187  10
Real estate loans:     
Residential real estate loans 1,722  946  123
Consumer and other loans:     
Credit cards 18,306  17,772  1,283
Other consumer and other loans 5,492  5,657  4,164
Total accruing loans past due 90 days or more 26,328  24,562  5,580
Total nonperforming loans 26,328  24,562  5,580
Other real estate owned     
Repossessed assets     
Total nonperforming assets$26,328 $24,562 $5,580
         

About Coastal Financial

Coastal Financial Corporation (Nasdaq: CCB) (the “Company”), is an Everett, Washington based bank holding company whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC.  The $3.54 billion Bank provides service through 14 branches in Snohomish, Island, and King Counties, the Internet and its mobile banking application.  The Bank provides banking as a service to broker-dealers, digital financial service providers, companies and brands that want to provide financial services to their customers through the Bank's CCBX segment.  To learn more about the Company visit www.coastalbank.com.

CCB-ER

Contact

Eric Sprink, Chief Executive Officer, (425) 357-3659
Joel Edwards, Executive Vice President & Chief Financial Officer, (425) 357-3687

Forward-Looking Statements

This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our management’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Any or all of the forward-looking statements in this earnings release may turn out to be inaccurate. The inclusion of or reference to forward-looking information in this earnings release should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, the risks and uncertainties discussed under “Risk Factors” in our Annual Report on Form 10-K for the most recent period filed, our Quarterly Report on Form 10-Q for the most recent quarter, and in any of our subsequent filings with the Securities and Exchange Commission.

If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. You are cautioned not to place undue reliance on forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as required by law.


COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands; unaudited)
 
ASSETS
 June 30,
2023
 March 31,
2023
 June 30,
2022
Cash and due from banks$29,783  $37,676  $40,750 
Interest earning deposits with other banks 245,277   356,240   364,939 
Investment securities, available for sale, at fair value 98,167   97,999   108,560 
Investment securities, held to maturity, at amortized cost 12,563   3,705   1,261 
Other investments 12,037   11,346   10,379 
Loans held for sale 35,923   27,292   60,000 
Loans receivable 3,007,553   2,837,204   2,334,354 
Allowance for credit losses (110,762)  (89,123)  (49,358)
Total loans receivable, net 2,896,791   2,748,081   2,284,996 
CCBX credit enhancement asset 96,928   76,395   30,715 
CCBX receivable 19,113   13,681   4,114 
Premises and equipment, net 18,903   18,030   18,670 
Operating lease right-of-use assets 6,216   4,812   5,565 
Accrued interest receivable 21,581   19,321   12,430 
Bank-owned life insurance, net 12,873   12,761   12,485 
Deferred tax asset, net 25,764   20,527   11,709 
Other assets 3,364   3,167   3,149 
Total assets$3,535,283  $3,451,033  $2,969,722 
      
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES     
Deposits$3,162,572  $3,095,223  $2,697,305 
Subordinated debt, net 44,069   44,031   24,324 
Junior subordinated debentures, net 3,589   3,588   3,587 
Deferred compensation 547   582   680 
Accrued interest payable 766   874   330 
Operating lease liabilities 6,413   5,022   5,786 
CCBX payable 27,714   30,794   12,058 
Other liabilities 16,951   12,156   7,991 
Total liabilities 3,262,621   3,192,270   2,752,061 
      
SHAREHOLDERS’ EQUITY     
Common stock 128,315   127,447   123,226 
Retained earnings 146,029   133,123   95,779 
Accumulated other comprehensive loss, net of tax (1,682)  (1,807)  (1,344)
Total shareholders’ equity 272,662   258,763   217,661 
Total liabilities and shareholders’ equity$3,535,283  $3,451,033  $2,969,722 


COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts; unaudited)
 
 Three Months Ended
 June 30,
2023
 March 31,
2023
 June 30,
2022
INTEREST AND DIVIDEND INCOME     
Interest and fees on loans$80,199  $66,431 $40,166
Interest on interest earning deposits with other banks 2,678   3,097  956
Interest on investment securities 653   553  563
Dividends on other investments 156   30  134
Total interest income 83,686   70,111  41,819
INTEREST EXPENSE     
Interest on deposits 20,675   14,958  1,673
Interest on borrowed funds 661   662  260
Total interest expense 21,336   15,620  1,933
Net interest income 62,350   54,491  39,886
PROVISION FOR CREDIT LOSSES - LOANS 52,598   43,544  14,094
(RECAPTURE) PROVISION FOR UNFUNDED COMMITMENTS (345)  153  
Net interest income after provision for credit losses - loans and unfunded commitments 10,097   10,794  25,792
NONINTEREST INCOME     
Deposit service charges and fees 989   910  988
Loan referral fees 682     208
Gain on sales of loans, net 23   123  
Unrealized (loss) gain on equity securities, net 155   39  
Other income 234   299  396
Noninterest income, excluding BaaS program income and BaaS indemnification income 2,083   1,371  1,592
Servicing and other BaaS fees 895   948  1,159
Transaction fees 1,052   917  814
Interchange fees 975   789  628
Reimbursement of expenses 1,026   921  618
BaaS program income 3,948   3,575  3,219
BaaS credit enhancements 51,027   42,362  14,207
BaaS fraud enhancements 1,537   1,999  6,474
BaaS indemnification income 52,564   44,361  20,681
Total noninterest income 58,595   49,307  25,492
NONINTEREST EXPENSE     
Salaries and employee benefits 16,309   15,575  12,238
Occupancy 1,143   1,219  1,083
Data processing and software licenses 1,972   1,840  1,546
Legal and professional expenses 4,645   3,062  1,002
Point of sale expense 814   753  409
Excise taxes 531   455  564
Federal Deposit Insurance Corporation ("FDIC") assessments 570   595  855
Director and staff expenses 519   626  377
Marketing 115   95  74
Other expense 1,722   890  1,318
Noninterest expense, excluding BaaS loan and BaaS fraud expense 28,340   25,110  19,466
BaaS loan expense 22,033   17,554  12,229
BaaS fraud expense 1,537   1,999  6,474
BaaS loan and fraud expense 23,570   19,553  18,703
Total noninterest expense 51,910   44,663  38,169
Income before provision for income taxes 16,782   15,438  13,115
PROVISION FOR INCOME TAXES 3,876   3,047  2,939
NET INCOME$12,906  $12,391 $10,176
Basic earnings per common share$0.97  $0.94 $0.79
Diluted earnings per common share$0.95  $0.91 $0.76
Weighted average number of common shares outstanding:     
Basic 13,275,640   13,196,960  12,928,061
Diluted 13,597,763   13,609,491  13,442,013


COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts; unaudited)
 
 Six Months Ended
 June 30,
2023
 June 30,
2022
INTEREST AND DIVIDEND INCOME   
Interest and fees on loans$146,630  $69,798
Interest on interest earning deposits with other banks 5,775   1,358
Interest on investment securities 1,206   634
Dividends on other investments 186   171
Total interest income 153,797   71,961
INTEREST EXPENSE   
Interest on deposits 35,633   2,226
Interest on borrowed funds 1,323   581
Total interest expense 36,956   2,807
Net interest income 116,841   69,154
PROVISION FOR CREDIT LOSSES - LOANS 96,142   27,036
RECAPTURE FOR UNFUNDED COMMITMENTS (192)  
Net interest income after provision for credit losses - loans and unfunded commitments 20,891   42,118
NONINTEREST INCOME   
Deposit service charges and fees 1,899   1,872
Loan referral fees 682   810
Gain on sales of loans, net 146   
Unrealized (loss) gain on equity securities, net 194   
Other income 533   784
Noninterest income, excluding BaaS program income and BaaS indemnification income 3,454   3,466
Servicing and other BaaS fees 1,843   2,328
Transaction fees 1,969   1,307
Interchange fees 1,764   1,060
Reimbursement of expenses 1,947   990
BaaS program income 7,523   5,685
BaaS credit enhancements 93,389   27,282
BaaS fraud enhancements 3,536   11,045
BaaS indemnification income 96,925   38,327
Total noninterest income 107,902   47,478
NONINTEREST EXPENSE   
Salaries and employee benefits 31,884   23,323
Occupancy 2,362   2,219
Data processing and software licenses 3,812   3,050
Legal and professional expenses 7,707   1,710
Point of sale expense 1,567   657
Excise taxes 986   913
Federal Deposit Insurance Corporation ("FDIC") assessments 1,165   1,459
Director and staff expenses 1,145   721
Marketing 210   173
Other expense 2,612   2,795
Noninterest expense, excluding BaaS loan and BaaS fraud expense 53,450   37,020
BaaS loan expense 39,587   20,519
BaaS fraud expense 3,536   11,045
BaaS loan and fraud expense 43,123   31,564
Total noninterest expense 96,573   68,584
Income before provision for income taxes 32,220   21,012
PROVISION FOR INCOME TAXES 6,923   4,606
NET INCOME$25,297  $16,406
Basic earnings per common share$1.91  $1.27
Diluted earnings per common share$1.86  $1.22
Weighted average number of common shares outstanding:   
Basic 13,236,517   12,913,485
Diluted 13,603,594   13,458,706


COASTAL FINANCIAL CORPORATION
AVERAGE BALANCES, YIELDS, AND RATES – QUARTERLY
(Dollars in thousands; unaudited)
 
 For the Three Months Ended
 June 30, 2023 March 31, 2023 June 30, 2022
 Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
 Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
 Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
Assets                 
Interest earning assets:                 
Interest earning deposits with other banks$211,369  $2,678 5.08% $271,700  $3,097 4.62% $499,918  $956 0.77%
Investment securities, available for sale(2) 100,278   534 2.14   100,273   535 2.16   119,975   554 1.85 
Investment securities, held to maturity(2) 10,047   119 4.75   1,955   18 3.73   1,280   9 2.82 
Other investments 11,773   156 5.31   10,633   30 1.14   10,225   134 5.26 
Loans receivable(3) 2,965,287   80,199 10.85   2,708,177   66,431 9.95   2,194,761   40,166 7.34 
Total interest earning assets 3,298,754   83,686 10.18   3,092,738   70,111 9.19   2,826,159   41,819 5.94 
Noninterest earning assets:                 
Allowance for credit losses (87,713)      (81,086)      (46,354)    
Other noninterest earning assets 194,747       172,161       115,788     
Total assets$3,405,788      $3,183,813      $2,895,593     
                  
Liabilities and Shareholders’ Equity                 
Interest bearing liabilities:                 
Interest bearing deposits$2,326,702  $20,675 3.56% $2,070,217  $14,958 2.93% $1,792,119  $1,673 0.37%
Subordinated debt 44,047   596 5.43   44,010   599 5.52   24,313   231 3.81 
Junior subordinated debentures 3,589   65 7.26   3,588   63 7.12   3,587   29 3.24 
Total interest bearing liabilities 2,374,338   21,336 3.60   2,117,815   15,620 2.99   1,820,019   1,933 0.43 
Noninterest bearing deposits 717,256       775,940       839,562     
Other liabilities 49,085       37,448       19,550     
Total shareholders' equity 265,109       252,610       216,462     
Total liabilities and shareholders' equity$3,405,788      $3,183,813      $2,895,593     
Net interest income  $62,350     $54,491     $39,886  
Interest rate spread    6.57%     6.20%     5.51%
Net interest margin(4)    7.58%     7.15%     5.66%


(1) Yields and costs are annualized.
(2) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(3) Includes loans held for sale and nonaccrual loans.
(4) Net interest margin represents net interest income divided by the average total interest earning assets.


COASTAL FINANCIAL CORPORATION
SELECTED AVERAGE BALANCES, YIELDS, AND RATES – BY SEGMENT - QUARTERLY
(Dollars in thousands; unaudited)
 
 For the Three Months Ended
 June 30, 2023 March 31, 2023 June 30, 2022
(dollars in thousands, unaudited)Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
 Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
 Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
Community Bank                 
Assets                 
Interest earning assets:                 
Loans receivable(2)$1,695,881 $26,567 6.28% $1,643,985 $24,211 5.97% $1,503,467 $18,885 5.04%
Intrabank asset             158,607  303 0.77 
Total interest earning assets 1,695,881  26,567 6.28   1,643,985  24,211 5.97   1,662,074  19,188 4.63 
Liabilities                 
Interest bearing liabilities:                
Interest bearing deposits 875,760  3,663 1.68%  853,152  2,534 1.20%  921,499  317 0.14%
Intrabank liability 196,552  2,490 5.08   94,668  1,079 4.62       
Total interest bearing liabilities 1,072,312  6,153 2.30   947,820  3,613 1.55   921,499  317 0.14 
Noninterest bearing deposits 623,570      696,166      740,575    
Net interest income  $20,414     $20,598     $18,871  
Net interest margin(4)    4.83%%    5.08%     4.55%
                  
CCBX                 
Assets                 
Interest earning assets:                 
Loans receivable(2)(4)$1,269,406 $53,632 16.95% $1,064,192 $42,220 16.09% $691,294 $21,281 12.35%
Intrabank asset 275,222  3,487 5.08   232,647  2,652 4.62   278,312  532 0.77 
Total interest earning assets 1,544,628  57,119 14.83   1,296,839  44,872 14.03   969,606  21,813 9.02 
Liabilities                 
Interest bearing liabilities:              
Interest bearing deposits 1,450,942  17,012 4.70%  1,217,065  12,424 4.14%  870,620  1,356 0.62%
Total interest bearing liabilities 1,450,942  17,012 4.70   1,217,065  12,424 4.14   870,620  1,356 0.62 
Noninterest bearing deposits 93,686      79,774      98,987    
Net interest income  $40,107     $32,448     $20,457  
Net interest margin(3)    10.41%     10.15%     8.46%
Net interest margin, net of BaaS loan expense(5)    4.69%     4.66%     3.40%


 For the Three Months Ended
 June 30, 2023 March 31, 2023 June 30, 2022
(dollars in thousands, unaudited)Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
 Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
 Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
Treasury & Administration                   
Assets                 
Interest earning assets:                 
Interest earning deposits with other banks$211,369 $2,678 5.08% $271,700 $3,097 4.62% $499,918 $956 0.77%
Investment securities, available for sale(6) 100,278  534 2.14   100,273  535 2.16   119,975  554 1.85 
Investment securities, held to maturity(6) 10,047  119 4.75   1,955  18 3.73   1,280  9 2.82 
Other investments 11,773  156 5.31   10,633  30 1.14   10,225  134 5.26 
Total interest earning assets 333,467  3,487 4.19%  384,561  3,680 3.88%  631,398  1,653 1.05%
Liabilities                 
Interest bearing liabilities:                 
Subordinated debt 44,047  596 5.43%  44,010  599 5.52%  24,313  231 3.81%
Junior subordinated debentures 3,589  65 7.26   3,588  63 7.12   3,587  29 3.24 
Intrabank liability, net(7) 78,670  997 5.08   137,979  1,573 4.62   436,919  835 0.77 
Total interest bearing liabilities 126,306  1,658 5.27   185,576  2,235 4.89   464,819  1,095 0.94 
Net interest income  $1,829     $1,445     $558  
Net interest margin(3)    2.20%     1.52%     0.35%


(1) Yields and costs are annualized.
(2) Includes loans held for sale and nonaccrual loans.
(3) Net interest margin represents net interest income divided by the average total interest earning assets.
(4) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. See reconciliation of the non-GAAP measures at the end of this earnings release for the impact of BaaS loan expense on CCBX loan yield.
(5) Net interest margin, net of BaaS loan expense includes the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, originating & servicing CCBX loans. See reconciliation of the non-GAAP measures at the end of this earnings release.
(6) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(7) Intrabank assets and liabilities are consolidated for period calculations and presented as intrabank asset, net or intrabank liability, net in the table above.
   


COASTAL FINANCIAL CORPORATION
AVERAGE BALANCES, YIELDS, AND RATES – YEAR-TO-DATE
(Dollars in thousands; unaudited)
 
 For the Six Months Ended
 June 30, 2023 June 30, 2022
(dollars in thousands; unaudited)Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
 Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
Assets           
Interest earning assets:           
Interest earning deposits with other banks$241,368  $5,775 4.82% $670,974  $1,358 0.41%
Investment securities, available for sale(2) 100,276   1,069 2.15   82,431   615 1.50 
Investment securities, held to maturity(2) 6,023   137 4.59   1,286   19 2.98 
Other investments 11,206   186 3.35   9,729   171 3.54 
Loans receivable(3) 2,837,442   146,630 10.42   1,982,700   69,798 7.10 
Total interest earning assets 3,196,315   153,797 9.70   2,747,120   71,961 5.28 
Noninterest earning assets:           
Allowance for credit losses (84,417)      (38,554)    
Other noninterest earning assets 183,516       104,159     
Total assets$3,295,414      $2,812,725     
            
Liabilities and Shareholders’ Equity           
Interest bearing liabilities:           
Interest bearing deposits$2,199,168  $35,633 3.27% $1,463,875  $2,226 0.31%
FHLB advances and borrowings        12,154   69 1.14 
Subordinated debt 44,028   1,195 5.47   24,304   461 3.83 
Junior subordinated debentures 3,588   128 7.19   3,587   51 2.87 
Total interest bearing liabilities 2,246,784   36,956 3.32   1,503,920   2,807 0.38 
Noninterest bearing deposits 746,436       1,078,525     
Other liabilities 43,299       17,790     
Total shareholders' equity 258,895       212,490     
Total liabilities and shareholders' equity$3,295,414      $2,812,725     
Net interest income  $116,841     $69,154  
Interest rate spread    6.39%     4.90%
Net interest margin(4)    7.37%     5.08%


(1) Yields and costs are annualized.
(2) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(3) Includes loans held for sale and nonaccrual loans.
(4) Net interest margin represents net interest income divided by the average total interest earning assets.


COASTAL FINANCIAL CORPORATION
SELECTED AVERAGE BALANCES, YIELDS, AND RATES – BY SEGMENT – YEAR-TO-DATE
(Dollars in thousands; unaudited)
 
  For the Six Months Ended
  June 30, 2023 June 30, 2022
(dollars in thousands; unaudited) Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
 Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
Community Bank            
Assets            
Interest earning assets:            
Loans receivable(2) $1,670,076 $50,779 6.13% $1,445,123 $36,525 5.10%
Intrabank asset        213,207  431 0.41 
Total interest earning assets  1,670,076  50,779 6.13   1,658,330  36,956 4.49 
Liabilities            
Interest bearing liabilities:            
Interest bearing deposits  864,518  6,197 1.45%  928,602  752 0.16%
Intrabank liability  145,890  3,569 4.93       
Total interest bearing liabilities  1,010,408  9,766 1.95   928,602  752 0.16 
Noninterest bearing deposits  659,668      729,728    
Net interest income   $41,013     $36,204  
Interest rate spread     4.18%     4.33%
Net interest margin(3)     4.95%     4.40%
             
CCBX            
Assets            
Interest earning assets:            
Loans receivable(2)(4) $1,167,366 $95,851 16.56% $537,577 $33,273 12.48%
Intrabank asset  254,052  6,139 4.87   346,493  730 0.42 
Total interest earning assets  1,421,418  101,990 14.47   884,070  34,003 7.76 
Liabilities            
Interest bearing liabilities:            
Interest bearing deposits  1,334,650  29,436 4.45%  535,273  1,474 0.56%
Total interest bearing liabilities  1,334,650  29,436 4.45   535,273  1,474 0.56 
Noninterest bearing deposits  86,768      348,797    
Net interest income   $72,554     $32,529  
Interest rate spread     10.02%     7.20%
Interest rate spread, net of BaaS loan expense     3.18%     (0.50)%
Net interest margin(3)     10.29%     7.42%
Net interest margin, net of Baas loan expense(5)     4.68%     2.74%


  For the Six Months Ended
  June 30, 2023 June 30, 2022
(dollars in thousands; unaudited) Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
 Average
Balance
 Interest &
Dividends
 Yield /
Cost(1)
Treasury & Administration            
Assets            
Interest earning assets:            
Interest earning deposits with other banks $241,368 $5,775 4.82% $670,974 $1,358 0.41%
Investment securities, available for sale(6)  100,276  1,069 2.15   82,431  615 1.50 
Investment securities, held to maturity(6)  6,023  137 4.59   1,286  19 2.98 
Other investments  11,206  186 3.35   9,729  171 3.54 
Total interest earning assets  358,873  7,167 4.03   764,420  2,163 0.57 
Liabilities            
Interest bearing liabilities:            
FHLB advances and borrowings     %  12,154  69 1.14%
Subordinated debt  44,028  1,195 5.47   24,304  461 3.83 
Junior subordinated debentures  3,588  128 7.19   3,587  51 2.87 
Intrabank liability, net(7)  108,162  2,570 4.79   559,700  1,161 0.42 
Total interest bearing liabilities  155,778  3,893 5.04   599,745  1,742 0.59 
Net interest income   $3,274     $421  
Interest rate spread     (1.01)%     (0.02)%
Net interest margin(3)     1.84%     0.11%


(1) Yields and costs are annualized.
(2) Includes loans held for sale and nonaccrual loans.
(3) Net interest margin represents net interest income divided by the average total interest earning assets.
(4) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans. See reconciliation of the non-GAAP measures at the end of this earnings release for the impact of BaaS loan expense on CCBX loan yield.
(5) Net interest margin, net of BaaS loan expense includes the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, originating & servicing CCBX loans. See reconciliation of the non-GAAP measures at the end of this earnings release.
(6) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(7) Intrabank assets and liabilities are consolidated for period calculations and presented as intrabank asset, net or intrabank liability, net in the table above.  
   


COASTAL FINANCIAL CORPORATION
QUARTERLY STATISTICS
(Dollars in thousands, except share and per share data; unaudited)
 
 Three Months Ended
 June 30,
2023
 March 31,
2023
 December 31,
2022
 September 30,
2022
 June 30,
2022
Income Statement Data:         
Interest and dividend income$83,686  $70,111  $65,030  $55,179  $41,819 
Interest expense 21,336   15,620   11,598   5,990   1,933 
Net interest income 62,350   54,491   53,432   49,189   39,886 
Provision for credit losses - loans 52,598   43,544   33,600   18,428   14,094 
(Recovery)Provision for unfunded commitments (345)  153          
Net interest income after provision for credit losses - loans and unfunded commitments 10,097   10,794   19,832   30,761   25,792 
Noninterest income 58,595   49,307   42,815   34,391   25,492 
Noninterest expense 51,910   44,663   47,103   51,087   38,169 
Provision for income tax 3,876   3,047   2,426   2,964   2,939 
Net income 12,906   12,391   13,118   11,101   10,176 
          
 As of and for the Three Month Period
 June 30,
2023
 March 31,
2023
 December 31,
2022
 September 30,
2022
 June 30,
2022
Balance Sheet Data:         
Cash and cash equivalents$275,060  $393,916  $342,139  $410,728  $405,689 
Investment securities 110,730   101,704   98,353   98,871   109,821 
Loans held for sale 35,923   27,292      43,314   60,000 
Loans receivable 3,007,553   2,837,204   2,627,256   2,507,889   2,334,354 
Allowance for credit losses (110,762)  (89,123)  (74,029)  (59,282)  (49,358)
Total assets 3,535,283   3,451,033   3,144,467   3,133,741   2,969,722 
Interest bearing deposits 2,436,980   2,333,423   2,042,509   2,023,849   1,879,253 
Noninterest bearing deposits 725,592   761,800   775,012   813,217   818,052 
Core deposits(1) 3,137,747   3,068,162   2,686,528   2,727,830   2,584,831 
Total deposits 3,162,572   3,095,223   2,817,521   2,837,066   2,697,305 
Total borrowings 47,658   47,619   47,587   27,931   27,911 
Total shareholders’ equity 272,662   258,763   243,494   228,733   217,661 
          
Share and Per Share Data(2):         
Earnings per share – basic$0.97  $0.94  $1.01  $0.86  $0.79 
Earnings per share – diluted$0.95  $0.91  $0.96  $0.82  $0.76 
Dividends per share              
Book value per share(3)$20.50  $19.48  $18.50  $17.66  $16.81 
Tangible book value per share(4)$20.50  $19.48  $18.50  $17.66  $16.81 
Weighted avg outstanding shares – basic 13,275,640   13,196,960   13,030,726   12,938,200   12,928,061 
Weighted avg outstanding shares – diluted 13,597,763   13,609,491   13,603,978   13,536,823   13,442,013 
Shares outstanding at end of period 13,300,809   13,281,533   13,161,147   12,954,573   12,948,623 
Stock options outstanding at end of period 357,999   360,119   438,103   644,334   655,844 

See footnotes on following page

 As of and for the Three Month Period
 June 30,
2023
 March 31,
2023
 December 31,
2022
 September 30,
2022
 June 30,
2022
Credit Quality Data:         
Nonperforming assets(5)to total assets 0.95%  0.91%  1.06%  0.73%  0.09%
Nonperforming assets(5)to loans receivable and OREO 1.12%  1.11%  1.26%  0.91%  0.11%
Nonperforming loans(5)to total loans receivable 1.12%  1.11%  1.26%  0.91%  0.11%
Allowance for credit losses to nonperforming loans 328.4%  282.5%  224.4%  259.1%  849.4%
Allowance for credit losses to total loans receivable 3.68%  3.14%  2.82%  2.36%  2.11%
Gross charge-offs$32,299  $34,167  $18,886  $8,513  $3,542 
Gross recoveries$1,340  $1,865  $33  $9  $36 
Net charge-offs to average loans(6) 4.19%  4.84%  2.87%  1.38%  0.64%
          
Capital Ratios(7):         
Tier 1 leverage capital 8.16%  8.29%  7.97%  7.70%  7.68%
Common equity Tier 1 risk-based capital 8.36%  8.61%  8.92%  8.49%  8.51%
Tier 1 risk-based capital 8.47%  8.73%  9.04%  8.62%  8.65%
Total risk-based capital 11.12%  11.49%  11.94%  10.80%  10.88%


(1) Core deposits are defined as all deposits excluding brokered and all time deposits.
(2) Share and per share amounts are based on total actual or average common shares outstanding, as applicable.
(3) We calculate book value per share as total shareholders’ equity at the end of the relevant period divided by the outstanding number of our common shares at the end of each period.
(4) Tangible book value per share is a non-GAAP financial measure. We calculate tangible book value per share as total shareholders’ equity at the end of the relevant period, less goodwill and other intangible assets, divided by the outstanding number of our common shares at the end of each period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets as of any of the dates indicated. As a result, tangible book value per share is the same as book value per share as of each of the dates indicated.
(5) Nonperforming assets and nonperforming loans include loans 90+ days past due and accruing interest.
(6) Annualized calculations.
(7) Capital ratios are for the Company, Coastal Financial Corporation.
   

Non-GAAP Financial Measures

The Company uses certain non-GAAP financial measures to provide meaningful supplemental information regarding the Company’s operational performance and to enhance investors’ overall understanding of such financial performance.

However, these non-GAAP financial measures are supplemental and are not a substitute for an analysis based on GAAP measures. As other companies may use different calculations for these adjusted measures, this presentation may not be comparable to other similarly titled adjusted measures reported by other companies.

The following non-GAAP measure is presented to illustrate the impact of BaaS credit enhancements and BaaS fraud enhancements on total revenue.

Revenue excluding BaaS credit enhancements and BaaS fraud enhancements is a non-GAAP measure that excludes the impact of BaaS credit enhancements and BaaS fraud enhancements on revenue. The most directly comparable GAAP measure is revenue.

Reconciliations of the GAAP and non-GAAP measures are presented below.

  As of and for the Three Months Ended As of and for the Six Months Ended
(dollars in thousands, unaudited) June 30,
2023
 March 31,
2023
 June 30,
2022
 June 30,
2023
 June 30,
2022
Revenue excluding BaaS credit enhancements and BaaS fraud enhancements:    
Total net interest income $62,350  $54,491  $39,886  $116,841  $69,154 
Total noninterest income  58,595   49,307   25,492   107,902   47,478 
Total Revenue $120,945  $103,798  $65,378  $224,743  $116,632 
Less: BaaS credit enhancements  (51,027)  (42,362)  (14,207)  (93,389)  (27,282)
Less: BaaS fraud enhancements  (1,537)  (1,999)  (6,474)  (3,536)  (11,045)
Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements $68,381  $59,437  $44,697  $127,818  $78,305 
                     

The following non-GAAP measure is presented to illustrate the impact of BaaS loan expense on net loan income and yield on CCBX loans.

Net BaaS loan income divided by average CCBX loans is a non-GAAP measure that includes the impact BaaS loan expense on net BaaS loan income and the yield on CCBX loans. The most directly comparable GAAP measure is yield on CCBX loans.

The following non-GAAP measure is presented to illustrate the impact of BaaS loan expense on net interest income and net interest margin.

Net interest income net of BaaS loan expense is a non-GAAP measure that includes the impact BaaS loan expense on net interest income. The most directly comparable GAAP measure is net interest income.

Net interest margin, net of BaaS loan expense is a non-GAAP measure that includes the impact of BaaS loan expense on net interest rate margin. The most directly comparable GAAP measure is net interest margin.

Reconciliations of the GAAP and non-GAAP measures are presented below.

  As of and for the Three Months Ended As of and for the Six Months Ended
(dollars in thousands; unaudited) June 30,
2023
 March 31,
2023
 June 30,
2022
 June 30,
2023
 June 30,
2022
Net BaaS loan income divided by average CCBX loans:    
CCBX loan yield (GAAP)(1)  16.95%  16.09%  12.35%  16.56%  12.48%
Total average CCBX loans receivable $1,269,406  $1,064,192  $691,294  $1,167,366  $537,577 
Interest and earned fee income on CCBX loans (GAAP)  53,632   42,220   21,281   95,851   33,273 
BaaS loan expense  (22,033)  (17,554)  (12,229)  (39,587)  (20,519)
Net BaaS loan income $31,599  $24,666  $9,052  $56,264  $12,754 
Net BaaS loan income divided by average CCBX loans(1)  9.98%  9.40%  5.25%  9.72%  4.78%
Net interest margin, net of BaaS loan expense:        
CCBX interest margin(1)  10.41%  10.15%  8.46%  10.29%  7.42%
CCBX earning assets  1,544,628   1,296,839   969,606   1,421,418   884,070 
Net interest income  40,107   32,448   20,457   72,554   32,529 
Less: BaaS loan expense  (22,033)  (17,554)  (12,229)  (39,587)  (20,519)
Net interest income, net of BaaS loan expense $18,074  $14,894  $8,228  $32,967  $12,010 
Net interest margin, net of BaaS loan expense(1)  4.69%  4.66%  3.40%  4.68%  2.74%


(1) Annualized calculations for periods presented.

 

APPENDIX A -
As of June 30, 2023

Industry Concentration

We have a diversified loan portfolio, representing a wide variety of industries. Our major categories of loans are commercial real estate, consumer and other loans, residential real estate, commercial and industrial, and construction, land and land development loans. Together they represent $3.01 billion in outstanding loan balances. When combined with $2.34 billion in unused commitments the total of these categories is $5.36 billion.

Commercial real estate loans represent the largest segment of our loans, comprising 38.6% of our total balance of outstanding loans as of June 30, 2023. Unused commitments to extend credit represents an additional $34.2 million, and the combined total in commercial real estate loans represents $1.20 billion, or 22.4% of our total outstanding loans and loan commitments.

The following table summarizes our loan commitment by industry for our commercial real estate portfolio as of June 30, 2023:

(dollars in thousands; unaudited) Outstanding Balance Available Loan Commitments Total Outstanding Balance & Available Commitment % of Total Loans
(Outstanding Balance &
Available Commitment)
 Average Loan Balance Number of Loans
Apartments $305,459 $11,819 $317,278 5.9% $3,117 98
Hotel/Motel  164,098  2,577  166,675 3.1   6,311 26
Convenience Store  107,568  2,585  110,153 2.1   1,992 54
Mixed use  89,926  2,752  92,678 1.7   1,046 86
Warehouse  89,222  2,122  91,344 1.7   1,652 54
Office  87,322  3,194  90,516 1.7   939 93
Retail  88,307  675  88,982 1.7   920 96
Mini Storage  55,774  1,792  57,566 1.1   2,935 19
Strip Mall  45,729    45,729 0.9   5,716 8
Manufacturing  37,297  1,800  39,097 0.7   1,130 33
Groups < 0.70% of total  93,386  4,923  98,309 1.8   1,139 82
Total $1,164,088 $34,239 $1,198,327 22.4% $1,794 649
                  

Consumer loans comprise 28.1% of our total balance of outstanding loans as of June 30, 2023. Unused commitments to extend credit represents an additional $991.3 million, and the combined total in consumer and other loans represents $1.84 billion, or 34.3% of our total outstanding loans and loan commitments. As illustrated in the table below, our CCBX partners bring in a large number of mostly smaller dollar loans, resulting in an average consumer loan balance of just $1,500. CCBX consumer loans are underwritten to CCBX credit standards and underwriting of these loans is regularly tested.

The following table summarizes our loan commitment by industry for our consumer and other loan portfolio as of June 30, 2023:

(dollars in thousands; unaudited) Outstanding Balance Available Loan Commitments Total Outstanding Balance & Available Commitment(1) % of Total Loans
(Outstanding Balance &
Available Commitment)
 Average Loan Balance Number of Loans
CCBX consumer loans
Credit cards $379,642 $990,447 $1,370,089 25.6% $1.5 248,853
Installment loans  459,391    459,391 8.6   1.7 269,592
Lines of credit  3,704  296  4,000 0.1   0.1 25,826
Other loans  2,265    2,265 0.0   0.1 17,261
Community bank consumer loans
Installment loans  1,254    1,254 0.0   52.3 24
Lines of credit  149  585  734 0.0   3.5 43
Other loans  54    54 0.0   0.2 315
Total $846,459 $991,328 $1,837,787 34.3% $1.5 561,914


(1) Total exposure on CCBX loans is subject to portfolio maximum limits - see table below.
   

Residential real estate loans comprise 15.4% of our total balance of outstanding loans as of June 30, 2023. Unused commitments to extend credit represents an additional $460.0 million, and the combined total in residential real estate loans represents $923.2 million, or 17.2% of our total outstanding loans and loan commitments.

The following table summarizes our loan commitment by industry for our residential real estate loan portfolio as of June 30, 2023:

(dollars in thousands; unaudited) Outstanding Balance Available Loan Commitments Total Outstanding Balance & Available Commitment(1) % of Total Loans
(Outstanding Balance &
Available Commitment)
 Average Loan Balance Number of Loans
CCBX residential real estate loans
Home equity line of credit $251,213 $413,473 $664,686 12.4% $23 10,976
Community bank residential real estate loans
Closed end, secured by first liens  181,507  3,597  185,104 3.4   603 301
Home equity line of credit  21,803  41,764  63,567 1.2   98 222
Closed end, second liens  8,656  1,170  9,826 0.2   321 27
Total $463,179 $460,004 $923,183 17.2% $40 11,526


(1) Total exposure on CCBX loans is subject to portfolio maximum limits - see table below.
   

Commercial and industrial loans comprise 11.7% of our total balance of outstanding loans as of June 30, 2023. Unused commitments to extend credit represents an additional $699.5 million, and the combined total in commercial and industrial loans represents $1.05 billion, or 19.7% of our total outstanding loans and loan commitments. Included in commercial and industrial loans is $138.4 million in outstanding capital call lines, with an additional $622.3 million in available loan commitments which is limited to a $350.0 million portfolio maximum. Capital call lines are provided to venture capital firms through one of our CCBX BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line.

The following table summarizes our loan commitment by industry for our commercial and industrial loan portfolio as of June 30, 2023:

(dollars in thousands; unaudited) Outstanding Balance Available Loan Commitments Total Outstanding Balance & Available Commitment(1) % of Total Loans
(Outstanding Balance &
Available Commitment)
 Average Loan Balance Number of Loans
Capital Call Lines $138,428 $622,319 $760,747 14.2% $876 158
Retail  60,344  6,362  66,706 1.2   22 2,718
Construction/Contractor Services  24,067  27,329  51,396 1.0   131 184
Financial Institutions  48,648    48,648 0.9   4,054 12
Medical / Dental / Other Care  19,046  8,610  27,656 0.5   705 27
Manufacturing  9,286  3,905  13,191 0.3   202 46
Groups < 0.30% of total  54,010  31,017  85,027 1.6   150 359
Total $353,829 $699,542 $1,053,371 19.7% $101 3,504


(1) Total exposure on CCBX loans is subject to portfolio maximum limits -see table below.
   

Construction, land and land development loans comprise 6.2% of our total balance of outstanding loans as of June 30, 2023. Unused commitments to extend credit represents an additional $159.1 million, and the combined total in construction, land and land development loans represents $345.8 million, or 6.5% of our total outstanding loans and loan commitments.

The following table details our loan commitment for our construction, land and land development portfolio as of June 30, 2023:

(dollars in thousands; unaudited) Outstanding Balance Available Loan Commitments Total Outstanding Balance & Available Commitment % of Total Loans
(Outstanding Balance &
Available Commitment)
 Average Loan Balance Number of Loans
Commercial construction $78,079 $127,352 $205,431 3.8% $4,109 19
Undeveloped land loans  42,530  9,718  52,248 1.0   2,835 15
Residential construction  35,032  16,833  51,865 1.0   1,208 29
Developed land loans  18,735  400  19,135 0.4   669 28
Land development  12,330  4,774  17,104 0.3   822 15
Total $186,706 $159,077 $345,783 6.5% $1,761 106
                  

We have portfolio limits with our each of our partners to manage loan concentration risk, liquidity risk, and counter-party partner risk. For example, as of June 30, 2023, capital call lines outstanding balance totaled $138.4 million, and while commitments totaled $622.3 million the commitments are limited to a maximum of $350.0 million by agreement with the partner.

APPENDIX B -
As of June 30, 2023

CCBX – BaaS Reporting Information

During the quarter ended June 30, 2023, $51.0 million was recorded in BaaS credit enhancements related to the provision for credit losses - loans and reserve for unfunded commitments for CCBX partner loans and negative deposit accounts. Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and negative deposit accounts. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner legal commitment to indemnify or reimburse losses. The credit enhancement asset is relieved as credit enhancement payments and recoveries are received from the CCBX partner or taken from the partner's cash reserve account. Agreements with our CCBX partners also provide protection to the Bank from fraud by indemnifying or reimbursing incurred fraud losses. Partner fraud includes noncredit fraud losses on loans and deposits originated through partners. Fraud losses are recorded when incurred as losses in noninterest expense, and the enhancement received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. CCBX partners also pledge a cash reserve account at the Bank which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations to replenish their cash reserve account then the bank would be exposed to additional loan and deposit losses, as a result of this counterparty risk. If a CCBX partner does not replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would write-off any remaining credit enhancement asset from the CCBX partner but would retain the full yield and any fee income on the loan going forward, and BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.

For CCBX partner loans the Bank records contractual interest earned from the borrower on loans in interest income, adjusted for origination costs which are paid or payable to the CCBX partner. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and originating & servicing CCBX loans. To determine net revenue (Net BaaS loan income) earned from CCBX loan relationships, the Bank takes BaaS loan interest income and deducts BaaS loan expense to arrive at Net BaaS loan income (A reconciliation of the non-GAAP measures are set forth in the preceding section of this earnings release.) which can be compared to interest income on the Company’s community bank loans.

The following table illustrates how CCBX partner loan income and expenses are recorded in the financial statements:

Loan income and related loan expense Three Months Ended Six Months Ended
(dollars in thousands; unaudited) June 30,
2023
 March 31,
2023
 June 30,
2022
 June 30,
2023
 June 30,
2022
Yield on loans(2)  16.95%  16.09%  12.35%  16.56%  12.48%
BaaS loan interest income $53,632  $42,220  $21,281  $95,851  $33,273 
Less: BaaS loan expense  22,033   17,554   12,229   39,587   20,519 
Net BaaS loan income(1)  31,599   24,666   9,052   56,264   12,754 
Net BaaS loan income divided by average BaaS loans(1)  9.98%  9.40%  5.25%  9.72%  4.78%


(1) A reconciliation of the non-GAAP measures are set forth in the preceding section of this earnings release.
(2) Annualized calculation for quarterly periods shown.
   

Increased interest rates and growth in CCBX loans and deposits has resulted in increases in interest income and expense for the quarter ended June 30, 2023 compared to the quarters ended March 31, 2023 and June 30, 2022. The following tables are a summary of the interest components, direct fees, and expenses of BaaS for the periods indicated and are not inclusive of all income and expense related to BaaS.

Interest income Three Months Ended Six Months Ended
(dollars in thousands; unaudited) June 30,
2023
 March 31,
2023
 June 30,
2022
 June 30,
2023
 June 30,
2022
Loan interest income $53,632 $42,220 $21,281 $95,851 $33,273
Total BaaS interest income $53,632 $42,220 $21,281 $95,851 $33,273


Interest expense Three Months Ended Six Months Ended
(dollars in thousands; unaudited) June 30,
2023
 March 31,
2023
 June 30,
2022
 June 30,
2023
 June 30,
2022
BaaS interest expense $17,012 $12,424 $1,356 $29,436 $1,474
Total BaaS interest expense $17,012 $12,424 $1,356 $29,436 $1,474


BaaS income Three Months Ended Six Months Ended
(dollars in thousands; unaudited) June 30,
2023
 March 31,
2023
 June 30,
2022
 June 30,
2023
 June 30,
2022
BaaS program income:          
Servicing and other BaaS fees $895 $948 $1,159 $1,843 $2,328
Transaction fees  1,052  917  814  1,969  1,307
Interchange fees  975  789  628  1,764  1,060
Reimbursement of expenses  1,026  921  618  1,947  990
BaaS program income  3,948  3,575  3,219  7,523  5,685
BaaS indemnification income:          
BaaS credit enhancements  51,027  42,362  14,207  93,389  27,282
BaaS fraud enhancements  1,537  1,999  6,474  3,536  11,045
BaaS indemnification income  52,564  44,361  20,681  96,925  38,327
Total BaaS income $56,512 $47,936 $23,900 $104,448 $44,012


BaaS loan and fraud expense: Three Months Ended Six Months Ended
(dollars in thousands; unaudited) June 30,
2023
 March 31,
2023
 June 30,
2022
 June 30,
2023
 June 30,
2022
BaaS loan expense $22,033 $17,554 $12,229 $39,587 $20,519
BaaS fraud expense  1,537  1,999  6,474  3,536  11,045
Total BaaS loan and fraud expense $23,570 $19,553 $18,703 $43,123 $31,564