Coastal Financial Corporation Announces Fourth Quarter and Fiscal Year 2023 Results

| Source: Coastal Financial Corporation Coastal Financial Corporation

Fourth Quarter 2023 Highlights:

  • Net income of $9.0 million, or $0.66 per diluted common share, for the three months ended December 31, 2023, compared to $10.3 million, or $0.75 per diluted common share for the three months ended September 30, 2023.
    • Return on average assets ("ROA") of 0.97% for the three months ended December 31, 2023.
    • Return on average equity ("ROE") of 12.35% for the three months ended December 31, 2023.
  • Total assets increased $75.1 million, or 2.0%, to $3.75 billion for the quarter ended December 31, 2023, compared to $3.68 billion at September 30, 2023.
  • Total loans, net of deferred fees increased $59.1 million, or 2.0%, to $3.03 billion for the quarter ended December 31, 2023.
    • Community bank loans increased $45.5 million, or 2.5%, to $1.83 billion.
    • CCBX loans increased $13.6 million, or 1.1%, to $1.20 billion.
      • $125.1 million in CCBX loans were sold as management continued to sell loans as part of our strategy to reduce risk, optimize the CCBX loan portfolio and strengthen our balance sheet through enhanced credit standards.
  • Deposits increased $70.7 million, or 2.1%, to $3.36 billion for the quarter ended December 31, 2023.
    • CCBX deposit growth of $110.5 million, or 6.3%, to $1.86 billion.
      • CCBX deposit growth is net of an additional $69.4 million in CCBX deposits that were transferred off balance sheet for increased FDIC insurance coverage purposes.
    • Community bank deposits decreased $39.9 million, or 2.6%, to $1.50 billion as a result of our decision to not increase our deposit rates during the quarter and let higher rate deposits run-off.
      • Includes noninterest bearing deposits of $561.6 million or 37.5% of total community bank deposits.
      • Community bank cost of deposits was 1.57% compared to 1.31% for the quarter ended September 30, 2023.
      • Average deposits increased by $5.5 million compared to the quarter ended September 30, 2023.
    • Uninsured deposits of $558.6 million, or 16.6% of total deposits as of December 31, 2023, compared to $599.0 million, or 18.2% of total deposits as of September 30, 2023.
  • Liquidity/Borrowings as of December 31, 2023:
    • Capacity to borrow up to $640.1 million from Federal Home Loan Bank and the Federal Reserve Bank discount window with only minimal borrowings, taken once to test the lines, under these facilities since the first quarter of 2022.
  • Investment Portfolio as of December 31, 2023:
    • Available for sale ("AFS") investments of $99.5 million, compared to $98.9 million as of September 30, 2023, of which 99.9% are U.S. Treasuries, with a weighted average remaining life of 2 months as of December 31, 2023.
    • Held to maturity ("HTM") investments of $50.9 million, of which 100% are U.S. Agency mortgage backed securities held for CRA purposes. The market value of the HTM investments is $180,000 more than the carrying value, the weighted average remaining life is 17.7 years as of December 31, 2023 and the weighted average yield is 5.45% for the quarter ended December 31, 2023.

2023 Highlights:

  • Net income of $44.6 million, or $3.27 per diluted common share, for the year ended December 31, 2023, compared to $40.6 million, or $3.01 per diluted common share for the year ended December 31, 2022.
  • Total assets increased $608.9 million, or 19.4%, to $3.75 billion for the year ended December 31, 2023, compared to $3.14 billion at December 31, 2022.
  • Total loans, net of deferred fees increased $398.8 million, or 15.2%, to $3.03 billion for the year ended December 31, 2023, compared to $2.63 billion as of December 31, 2022.
    • Community bank loans increased $215.4 million, or 13.3%, during the year ended December 31, 2023.
    • CCBX loans increased $183.4 million, or 18.1%, during the year ended December 31, 2023.
  • Deposits:
    • Deposits increased $542.8 million, or 19.3%, to $3.36 billion during the year ended December 31, 2023, compared to $2.82 billion at December 31, 2022.
      • Includes $340.1 million in fully insured IntraFi network negotiable orders of withdrawal ("NOW") and money market reciprocal deposits as of December 31, 2023 to provide FDIC deposit insurance coverage and peace of mind to larger deposit customers.
      • Community bank deposits decreased $40.6 million, or 2.6%, during the year ended December 31, 2023 as a result of not increasing our deposit rates this quarter and letting higher rate deposits run-off.
      • CCBX deposits increased $583.5 million, or 45.6%, during the year ended December 31, 2023.

EVERETT, Wash., Jan. 30, 2024 (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 and fiscal year ended December 31, 2023. 

Quarterly net income for the fourth quarter of 2023 was $9.0 million, or $0.66 per diluted common share, compared with net income of $10.3 million, or $0.75 per diluted common share, for the third quarter of 2023, and $13.1 million, or $0.96 per diluted common share, for the quarter ended December 31, 2022. 

Total assets increased $75.1 million, or 2.0%, during the fourth quarter of 2023 to $3.75 billion, from $3.68 billion at September 30, 2023. Total loans, net of deferred fees increased $59.1 million, or 2.0%, during the three months ended December 31, 2023 to $3.03 billion, compared to $2.97 billion at September 30, 2023. Community bank loans increased $45.5 million, or 2.5%, and CCBX loans increased $13.6 million, or 1.1%. We continue to monitor and manage the CCBX loan portfolio, and sold $125.1 million in CCBX loans during the quarter ended December 31, 2023. During the quarter ended September 30, 2023 we intentionally reduced the CCBX loan portfolio to strengthen our balance sheet and reduce risk by selling loans or letting such loans mature. We currently expect to sell additional loans in the coming months as we continue working to optimize our CCBX portfolio through new partners, products and building on our existing relationships. Deposits increased $70.7 million, or 2.1%, during the three months ended December 31, 2023. CCBX deposits grew $110.5 million, or 6.3%. Community bank deposits decreased $39.9 million, or 2.6%, as a result of not increasing our deposit rates during the quarter and letting higher rate deposits run-off. Our cost of deposits for the community bank was 1.57% for the three months ended December 31, 2023, compared to 1.31% for the three months ended September 30, 2023.

We saw solid deposit growth in the fourth quarter, with deposits increasing $70.7 million, or 2.1%, compared to September 30, 2023. Fully insured IntraFi network reciprocal deposits increased $43.8 million to $340.1 million as of December 31, 2023, compared to $296.4 million as of September 30, 2023. These fully insured reciprocal deposits allow our larger deposit customers to fully insure their deposits through a reciprocal agreement with other banks. Loans receivable increased $59.1 million, or 2.0%, during the three months ended December 31, 2023. The increase is net of $125.1 million in CCBX loans that were sold during the quarter ended December 31, 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 December 31, 2023, we had $483.1 million in cash on the balance sheet and the capacity to borrow up to $640.1 million from Federal Home Loan Bank and the Federal Reserve Bank discount window, with no borrowings, except minimal amounts required to test the lines, taken under these facilities since the first quarter of 2022. Cash on the balance sheet and borrowing capacity totaled $1.12 billion, which represented 33.4% of total deposits and exceeded our $558.6 million in uninsured deposits as of December 31, 2023.

"We saw a lot of changes is 2023, with increases in interest rates, bank failures, and other economic challenges. We were able to meet those challenges by being flexible and adjusting our strategy to meet the changing environment. During this turbulent time we were able to reduce uninsured deposits by providing additional FDIC deposit insurance coverage through reciprocal deposits, bringing peace of mind to customers, maintain adequate liquidity and borrowing capacity and still grow both loans and deposits.

"Credit quality was a top priority, and during the quarter ended September 30, 2023 we started the process of optimizing our CCBX loan portfolio by selling higher yielding loans that have a higher potential for credit deterioration or letting such loans mature. As a result of this strategy we are seeing pressure on our margin, but we are on track with repositioning our portfolio and results are in line with our expectations.

"As we look forward to 2024, our focus will be on reducing costs through automation and by leveraging the gains in efficiencies afforded to us in the systems and technology that we continue investing in. We have made progress on reducing expenses in the three months ended December 31, 2023 and will keep working to manage expenses going forward. We will continue our strategy of focusing on larger partners and companies, selecting partnerships that align with our long term profitability and growth objectives. Additionally, we will continue working to optimize our CCBX loan portfolio and manage credit risk. We will work to achieve this by continuing to sell higher yielding loans that have a higher potential for credit deterioration or letting such loans mature, while simultaneously working to strengthen the CCBX portfolio with new loans that meet enhanced credit standards.

"We expect that this strategy will result in lower earnings in the short term with lower loan yields and compressed margins, but will provide for long term stability and profitability," 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 $59.7 million for the quarter ended December 31, 2023, a decrease of $2.6 million, or 4.1%, from $62.2 million for the quarter ended September 30, 2023, and an increase of $6.2 million, or 11.7%, from $53.4 million for the quarter ended December 31, 2022.  Yield on loans receivable was 10.71% for the three months ended December 31, 2023, compared to 10.84% for the three months ended September 30, 2023 and 9.33% for the three months ended December 31, 2022.  Cost of deposits was 3.36% for the three months ended December 31, 2023, compared to 3.14% for the three months ended September 30, 2023 and 1.56% for the three months ended December 31, 2022. The decrease in net interest income compared to September 30, 2023, was a result of increased interest expense due to an increase in average interest bearing deposits and an increase in cost of deposits as a result of higher interest rates. Additionally, interest and fees on loans decreased as a result of selling higher yielding CCBX loans that have a higher potential for credit deterioration. The increase in net interest income compared to December 31, 2022 was largely related to increased yield on loans resulting from higher interest rates and growth in higher yielding loans.  Total average loans receivable for the three months ended December 31, 2023 was $3.01 billion, compared to $3.06 billion for the three months ended September 30, 2023, and $2.60 billion for the three months ended December 31, 2022.

Interest and fees on loans totaled $81.2 million for the three months ended December 31, 2023 compared to $83.7 million and $61.2 million for the three months ended September 30, 2023 and December 31, 2022, respectively.  Total loans, net of deferred fees increased $59.1 million, or 2.0%, during the quarter ended December 31, 2023, which included a $13.6 million increase in CCBX loans and an increase of $45.5 million in community bank loans. The increase in CCBX loans includes an increase of $58.4 million, or 7.7%, in consumer and other loans and a decrease of $26.7 million, or 23.4%, in capital call lines as a result of normal balance fluctuations and business activities.  We continue to monitor and manage the CCBX loan portfolio, and sold $125.1 million in CCBX loans during the quarter ended December 31, 2023 to reduce credit exposure in certain loan categories and manage credit risk. We continue to reposition ourselves by reducing our CCBX loans in an effort to optimize our loan portfolio and we will work to continue growing the CCBX portfolio in future quarters with loans that have lower potential risk of credit deterioration and are more aligned with our long term objectives. The decrease in interest and fees on loans for the quarter ended December 31, 2023, compared to September 30, 2023 was largely due to the sale of higher yielding CCBX loans. The increase in interest and fees on loans compared to the quarter ended December 31, 2022, was largely due to growth in higher yielding loans and increased interest rates.  The FOMC has increased rates 1.00% since December 31, 2022 and last raised the target Federal Funds rate 0.25% on July 26, 2023.

Interest income from interest earning deposits with other banks was $5.7 million for the quarter ended December 31, 2023 an increase of $1.8 million compared to September 30, 2023 and an increase of $2.6 million compared to December 31, 2022 due to an increase in interest rates and average deposit balance.  The average balance of interest earning deposits with other banks for the three months ended December 31, 2023 was $413.1 million, compared to $285.6 million and $329.4 million for the three months ended September 30, 2023 and December 31, 2022, respectively.  The average yield on these interest earning deposits with other banks increased to 5.46% for the quarter ended December 31, 2023, compared to 5.40% and 3.73% for the quarters ended September 30, 2023 and December 31, 2022, respectively.

Total interest expense was $28.6 million for the quarter ended December 31, 2023, a $2.5 million increase from the quarter ended September 30, 2023 and a $17.0 million increase from the quarter ended December 31, 2022. Interest expense on deposits was $27.9 million for the quarter ended December 31, 2023, compared to $25.5 million for the quarter ended September 30, 2023 and $11.1 million for the quarter ended December 31, 2022. Interest expense on interest bearing deposits increased $2.5 million for the quarter ended December 31, 2023, compared to the quarter ended September 30, 2023, and $16.9 million compared to the quarter ended December 31, 2022 as a result of an increase in CCBX deposits that are tied to, and reprice when the FOMC raises rates. Similarly, most of our CCBX loans also reprice when the FOMC raises interest rates. Interest expense on borrowed funds was $670,000 for the quarter ended December 31, 2023, compared to $651,000 and $537,000 for the quarters ended September 30, 2023 and December 31, 2022, respectively. The $133,000 increase in interest expense on borrowed funds from the quarter ended December 31, 2022 is the result of an increase in interest rates.

Total cost of deposits was 3.36% for the three months ended December 31, 2023, compared to 3.14% for the three months ended September 30, 2023, and 1.56%, for the three months ended December 31, 2022. Community bank and CCBX cost of deposits were 1.57% and 4.90% respectively, for the three months ended December 31, 2023, compared to 1.31% and 4.80%, for the three months ended September 30, 2023, and 0.37% and 3.13% for the three months ended December 31, 2022. The increase in cost of deposits for the three months ended December 31, 2023 compared to the prior periods for both segments is a result of increased interest rates. While we continue working to hold down deposit costs, the 1.00% increase in FOMC interest rates in 2023 has impacted our cost of deposits and resulted in higher interest expense on interest bearing deposits.

Net Interest Margin

Net interest margin was 6.61% for the three months ended December 31, 2023, compared to 7.10% and 6.96% for the three months ended September 30, 2023 and December 31, 2022, respectively.  The decrease in net interest margin compared to the three months ended September 30, 2023 and December 31, 2022 was largely due to an increase in cost of deposits and selling higher yielding consumer loans. Higher interest rates on interest bearing deposits compressed net interest margin as a result of our competitors promoting higher deposit rates and growth in primarily higher cost CCBX deposits. Additionally, the actions we took in an effort to strengthen our balance sheet by selling higher risk and higher yielding loans or letting such loans mature during the quarters ended September 30, 2023 and December 31, 2023 will continue to impact net interest margin in future quarters. Interest and fees on loans receivable decreased $2.5 million, or 3.0%, to $81.2 million for the three months ended December 31, 2023, compared to $83.7 million for the three months ended September 30, 2023, as a result of selling higher risk and higher yielding loans or letting such loans mature and increased $19.9 million, or 32.6%, compared to $61.2 million for the three months ended December 31, 2022, due to an increase in outstanding balances and higher interest rates.  Also contributing to the increase in net interest margin compared to the three months ended December 31, 2022, was a $2.6 million increase in interest on interest earning deposits.  These interest earning deposits earned an average rate of 5.46% for the quarter ended December 31, 2023, compared to 5.40% and 3.73% for the quarters ended September 30, 2023 and December 31, 2022, respectively.  Average investment securities increased $31.7 million to $149.7 million compared to the three months ended September 30, 2023 and increased $48.2 million compared to the three months ended December 31, 2022 due to the purchase of $50.2 million in securities in 2023 with $8.6 million of the purchases occurring during the three months ended December 31, 2023. Interest on investment securities increased $459,000 for the three months ended December 31, 2023 compared to the three months ended September 30, 2023 as a result of the increase in average outstanding balance coupled with increased yield, which positively impacted net interest margin. Interest on investment securities increased $668,000 compared to December 31, 2022, as a result of increased yield and outstanding balance.  These increases in interest income were partially offset by increases in interest expense on interest bearing deposits, as previously discussed.

Cost of funds was 3.39% for the quarter ended December 31, 2023, an increase of 21 basis points from the quarter ended September 30, 2023 and an increase of 178 basis points from the quarter ended December 31, 2022. Cost of deposits for the quarter ended December 31, 2023 was 3.36%, compared to 3.14% for the quarter ended September 30, 2023, and 1.56% for the quarter ended December 31, 2022. The increased cost of funds and deposits compared to September 30, 2023 and December 31, 2022 was due to the increase in interest rates compared to the previous periods and growth in higher rate CCBX deposits.

During the quarter ended December 31, 2023, total loans receivable increased by $59.1 million, or 2.0%, to $3.03 billion, compared to $2.97 billion for the quarter ended September 30, 2023.  This increase consists of a $13.6 million increase in CCBX loans and $45.5 million in community bank loan growth. Total loans receivable as of December 31, 2023 increased $398.8 million compared to December 31, 2022.  This increase includes community bank loan growth of $215.4 million and an increase in CCBX loans of $183.4 million. During the quarter ended December 31, 2023, $125.1 million in loans were sold and no loans were held for sale as of December 31, 2023, September 30, 2023 or December 31, 2022. 

Total yield on loans receivable for the quarter ended December 31, 2023 was 10.71%, compared to 10.84% for the quarter ended September 30, 2023, and 9.33% for the quarter ended December 31, 2022. This decrease in yield on loans receivable compared to the quarter ended September 30, 2023 is largely the result of selling higher risk and higher yielding CCBX loans or letting such loans mature and increasing lower risk and therefore lower yielding loans as we work to optimize our credit risk profile and loan portfolio. During the quarter ended December 31, 2023, community bank loans increased 2.5%, or $45.5 million, compared to the quarter ended September 30, 2023, with an average yield of 6.32% and CCBX loans outstanding increased 1.1%, or $13.6 million, compared to September 30, 2023, with an average CCBX yield of 17.36%. 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 Twelve Months Ended
 December 31, 2023 September 30, 2023 December 31, 2022 December 31, 2023 December 31, 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 Bank6.32% 1.57% 6.20% 1.31% 5.70% 0.37% 6.20% 1.14% 5.32% 0.18%
CCBX (1)17.36% 4.90% 17.05% 4.80% 15.20% 3.13% 16.89% 4.55% 13.85% 1.57%
Consolidated10.71% 3.36% 10.84% 3.14% 9.33% 1.56% 10.60% 2.87% 8.12% 0.71%

(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 expense resulting in net BaaS loan income and the associated yield:

  For the Three Months Ended
  December 31, 2023 September 30, 2023 December 31, 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 $52,327 17.36% $56,279 17.05% $38,086 15.20%
Less: BaaS loan expense  24,310 8.06%  23,003 6.97%  17,215 6.87%
Net BaaS loan income (1) $28,017 9.30% $33,276 10.08% $20,871 8.33%
Average BaaS Loans(3) $1,196,137   $1,309,380   $994,080  


  For the Twelve Months Ended
  December 31, 2023 December 31, 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 $204,458 16.89% $102,808 13.85%
Less: BaaS loan expense  86,900 7.18%  53,294 7.18%
Net BaaS loan income (1) $117,558 9.71% $49,514 6.67%
Average BaaS Loans(3) $1,210,413   $742,392  

(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 0.97% for the quarter ended December 31, 2023 compared to 1.13% and 1.66% for the quarters ended September 30, 2023 and December 31, 2022, respectively.  ROA for the quarter ended December 31, 2023, was down 0.16% and 0.69%, respectively, as a result of lower margin compared to September 30, 2023 and December 31, 2022. Noninterest expenses were lower for the quarter ended December 31, 2023 compared to the quarter ended September 30, 2023, but higher compared to the quarter ended December 31, 2022.

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

  Three Months Ended Twelve Months Ended
(unaudited) December 31,
2023		 September 30,
2023		 June 30,
2023		 March 31,
2023		 December 31,
2022		 December 31,
2023		 December 31,
2022
               
Return on average assets (1) 0.97% 1.13% 1.52% 1.58% 1.66% 1.28% 1.38%
Return on average equity (1) 12.35% 14.60% 19.53% 19.89% 21.86% 16.41% 18.24%
Yield on earnings assets (1) 9.77% 10.08% 10.18% 9.19% 8.47% 9.82% 6.68%
Yield on loans receivable (1) 10.71% 10.84% 10.85% 9.95% 9.33% 10.60% 8.12%
Cost of funds (1) 3.39% 3.18% 2.77% 2.19% 1.61% 2.91% 0.75%
Cost of deposits (1) 3.36% 3.14% 2.72% 2.13% 1.56% 2.87% 0.71%
Net interest margin (1) 6.61% 7.10% 7.58% 7.15% 6.96% 7.10% 5.97%
Noninterest expense to average assets (1) 5.56% 6.23% 6.11% 5.69% 5.97% 5.90% 5.65%
Noninterest income to average assets (1) 6.95% 3.81% 6.90% 6.28% 5.43% 5.97% 4.23%
Efficiency ratio 41.58% 58.36% 42.92% 43.03% 48.94% 45.92% 56.26%
Loans receivable to deposits (2) 90.05% 90.19% 96.23% 92.55% 93.25% 90.05% 93.25%

(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
 December 31, September 30, December 31,
(dollars in thousands; unaudited) 2023   2023   2022 
Deposit service charges and fees$957  $998  $946 
Loan referral fees —   1   — 
Unrealized gain (loss) on equity securities, net 80   5   (18)
Gain on sales of loans, net —   107   — 
Other 60   291   298 
Noninterest income, excluding BaaS program income and BaaS indemnification income 1,097   1,402   1,226 
Servicing and other BaaS fees 1,015   997   1,001 
Transaction fees 1,006   1,036   964 
Interchange fees 1,272   1,216   785 
Reimbursement of expenses 1,076   1,152   857 
BaaS program income 4,369   4,401   3,607 
BaaS credit enhancements 58,449   25,926   31,164 
Baas fraud enhancements 779   2,850   6,818 
BaaS indemnification income 59,228   28,776   37,982 
Total BaaS income 63,597   33,177   41,589 
Total noninterest income$64,694  $34,579  $42,815 


Noninterest income was $64.7 million for the three months ended December 31, 2023, an increase of $30.1 million from $34.6 million for the three months ended September 30, 2023, and an increase of $21.9 million from $42.8 million for the three months ended December 31, 2022.  The increase in noninterest income over the quarter ended September 30, 2023 was primarily due to an increase of $30.4 million in total BaaS income.  The $30.4 million increase in total BaaS income included a $32.5 million increase in BaaS credit enhancements related to the allowance for credit losses, offset by a $2.1 million decrease in BaaS fraud enhancements, and a decrease of $32,000 in BaaS program income. The decrease in BaaS program income is largely the result of lower reimbursement for expenses (see “Appendix B” for more information on the accounting for BaaS allowance for credit losses and credit and fraud enhancements). Additionally, other income decreased $231,000 primarily due to the one-time cost of converting an existing BOLI policy to one that will yield higher returns in the future, which reduced BOLI earnings by $212,000 in the quarter ended December 31, 2023. The $21.9 million increase in noninterest income over the quarter ended December 31, 2022 was primarily due to a $21.2 million increase in BaaS credit and fraud enhancements, an increase of $762,000 in BaaS program income, a decrease of $238,000 in other income due to the aforementioned $212,000 one-time cost of converting a BOLI policy to one that will yield higher returns in the future, a $98,000 increase in unrealized gain on sale of equity securities and other minor changes.

Our CCBX segment continues to evolve, and we now have 21 relationships, at varying stages, as of December 31, 2023.  We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense and are focusing on larger more established partners, with experienced management teams, existing customer bases and strong financial positions. The sale of $125.1 million in CCBX loans during the quarter ended December 31, 2023 and $320.9 million sold during the quarter ended September 30, 2023 is part of our strategy to strengthen the balance sheet, reduce credit exposure in certain loan categories and lower the overall potential credit risk in our loan portfolio. We expect net interest margin will tighten as higher quality loans yield less than higher risk loans and we also expect the size of our CCBX loan portfolio will be about the same as the previous quarter while we work to grow the portfolio with loans that are subject to increased underwriting standards. We expect this process to take two quarters. At the same time we will be focused on increasing our efficiency and using technology to reduce future expense growth.

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

 As of
(unaudited)December 31,
2023		 September 30,
2023		 December 31,
2022
Active19 18 19
Friends and family / testing1 1 1
Implementation / onboarding1 1 0
Signed letters of intent0 1 5
Wind down - preparing to exit relationship0 1 2
Total CCBX relationships21 22 27


The following table details noninterest expense for the periods indicated:

Noninterest Expense

  Three Months Ended
  December 31, September 30, December 31,
(dollars in thousands; unaudited)  2023   2023   2022 
Salaries and employee benefits $16,490  $18,087  $14,399 
Legal and professional expenses  2,649   4,447   2,799 
Data processing and software licenses  2,417   2,366   1,768 
Occupancy  1,340   1,224   1,182 
Point of sale expense  899   1,068   710 
Director and staff expenses  478   529   515 
FDIC assessments  665   694   550 
Excise taxes  449   541   702 
Marketing  138   169   109 
Other  1,089   1,523   335 
Noninterest expense, excluding BaaS loan and BaaS fraud expense  26,614   30,648   23,069 
BaaS loan expense  24,310   23,003   17,215 
BaaS fraud expense  779   2,850   6,819 
BaaS loan and fraud expense  25,089   25,853   24,034 
Total noninterest expense $51,703  $56,501  $47,103 


Total noninterest expense decreased $4.8 million to $51.7 million for the three months ended December 31, 2023, compared to $56.5 million for the three months ended September 30, 2023, and increased $4.6 million from $47.1 million for the three months ended December 31, 2022. The decrease in noninterest expense for the quarter ended December 31, 2023, as compared to the quarter ended September 30, 2023, was primarily due to a $764,000 decrease in BaaS expense (including a $2.1 million decrease in BaaS fraud expense offset by a $1.3 million increase in BaaS loan expense), a $1.8 million decrease in legal and professional expenses and a $1.6 million decrease in salaries and employee benefits. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, and originating & servicing CCBX loans. BaaS 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 were higher in recent periods due to increased fees related to data and risk management, building out our infrastructure and increased consulting expenses for projects and enhanced monitoring. The $1.8 million decrease in this category was a result of projects being completed and initiatives achieved. Included in legal and professional fees are consulting fees related to services for BSA and money laundering monitoring. Expenses related to these contracted services were $1.7 million for the quarter ended December 31, 2023, however we have entered into a new agreement for these services and expect these costs to be $1.4 million a quarter going forward, which will further reduce expenses in this category. The $1.6 million decrease in salaries and employee benefits was related to our expense reduction efforts and lower bonus expense. Salaries and benefits included one time expenses of $494,000 during the quarter ended September 30, 2023 as part of our initiative to manage costs going forward which increased expenses in that period.

The increase in noninterest expenses for the quarter ended December 31, 2023 compared to the quarter ended December 31, 2022 were largely due to an increase of $1.1 million in BaaS partner expense (including a $7.1 million increase in BaaS loan expense offset by a decrease of $6.0 million in BaaS fraud expense), $2.1 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives. Additionally, there was a $754,000 increase in other expenses primarily due to the $1.1 million recapture of the unfunded commitment reserve in the quarter ended December 31, 2022, for which there was no similar activity in the current quarter, and a $649,000 increase in data processing and software licenses due to enhancements in technology and a $189,000 increase in point of sale expenses which is attributed to increased CCBX activity.

Provision for Income Taxes

The provision for income taxes was $2.8 million for the three months ended December 31, 2023, $2.8 million for the three months ended September 30, 2023 and $2.4 million for the fourth quarter of 2022.  The provision for income tax was higher, relative to net income, as a result of less deductible items, lower net income, and slightly higher provision for CCBX loans without credit enhancement for the three months ended December 31, 2023 compared to September 30, 2023. 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 $75.1 million, or 2.0%, to $3.75 billion at December 31, 2023 compared to $3.68 billion at September 30, 2023.  The increase is primarily due to a $59.1 million increase in loans receivable combined with a $16.1 million increase in the credit enhancement asset, an $8.3 million increase in held to maturity investments as a result of purchases, and a $6.8 million increase in interest earning deposits with other banks. During the quarter ended December 31, 2023, we sold $125.1 million in CCBX loans as part of our strategy to optimize our CCBX portfolio, reduce credit exposure in certain loan categories and strengthen the balance sheet through enhanced credit standards, compared to $320.9 million sold during the quarter ended September 30, 2023. There were no loans held for sale at December 31, 2023 and September 30, 2023.  

Total assets increased $608.9 million, or 19.4%, to $3.75 billion at December 31, 2023, compared to $3.14 billion at December 31, 2022.  The increase is primarily due to loans receivable increasing $398.8 million, an increase of $54.5 million in the credit enhancement asset and an increase of $52.0 million in investment securities and a $142.4 million increase in interest earning deposits with other banks compared to December 31, 2022.

Loans Receivable

Total loans receivable increased $59.1 million to $3.03 billion at December 31, 2023, from $2.97 billion at September 30, 2023, and increased $398.8 million from $2.63 billion at December 31, 2022.  The increase in loans receivable over the quarter ended September 30, 2023 was the result of an increase of $13.6 million in CCBX loans and a $45.5 million increase in community bank loans. We continue to monitor and manage the CCBX loan portfolio, and sold $125.1 million in CCBX loans during the quarter ended December 31, 2023 as part of our plan to optimize and strengthen the balance sheet and reduce and manage credit risk. The change in loans receivable over the quarter ended December 31, 2022 includes CCBX loan growth of $183.4 million and community bank loan growth of $215.4 million as of December 31, 2023.  

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

 As of December 31, 2023 As of September 30, 2023 As of December 31, 2022
(dollars in thousands; unaudited)Amount Percent Amount Percent Amount Percent
Commercial and industrial loans:           
PPP loans$3,033  0.1% $3,310  0.1% $4,699  0.2%
Capital call lines 87,494  2.9   114,174  3.8   146,029  5.5 
All other commercial & industrial loans 200,767  6.6   213,791  7.2   161,900  6.1 
Total commercial and industrial loans: 291,294  9.6   331,275  11.1   312,628  11.8 
Real estate loans:           
Construction, land and land development 157,100  5.2   167,686  5.6   214,055  8.1 
Residential real estate 463,426  15.3   477,147  16.1   449,157  17.1 
Commercial real estate 1,303,533  43.0   1,237,849  41.6   1,048,752  39.8 
Consumer and other loans 818,039  26.9   760,463  25.6   608,771  23.2 
Gross loans receivable 3,033,392  100.0%  2,974,420  100.0%  2,633,363  100.0%
Net deferred origination fees - PPP loans (47)    (52)    (82)  
Net deferred origination fees - all other loans (7,253)    (7,333)    (6,025)  
Loans receivable$3,026,092    $2,967,035    $2,627,256   
Loan Yield (1) 10.71%    10.84%    9.33%  

(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
  December 31, 2023 September 30, 2023 December 31, 2022
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Commercial and industrial loans:            
PPP loans $3,033  0.2% $3,310  0.2% $4,699  0.3%
All other commercial & industrial loans  146,469  8.0   154,922  8.6   146,982  9.1 
Real estate loans:            
Construction, land and land development loans  157,100  8.5   167,686  9.4   214,055  13.2 
Residential real estate loans  225,391  12.3   225,372  12.6   204,581  12.6 
Commercial real estate loans  1,303,533  70.9   1,237,849  69.1   1,048,752  64.7 
Consumer and other loans:            
Other consumer and other loans  1,628  0.1   2,483  0.1   1,725  0.1 
Gross Community Bank loans receivable  1,837,154  100.0%  1,791,622  100.0%  1,620,794  100.0%
Net deferred origination fees  (7,000)    (6,961)    (6,042)  
Loans receivable $1,830,154    $1,784,661    $1,614,752   
Loan Yield(1)  6.32%    6.20%    5.70%  

(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
  December 31, 2023 September 30, 2023 December 31, 2022
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Commercial and industrial loans:            
Capital call lines $87,494  7.3% $114,174  9.6% $146,029  14.4%
All other commercial & industrial loans  54,298  4.5   58,869  5.0   14,918  1.5 
Real estate loans:            
Residential real estate loans  238,035  19.9   251,775  21.3   244,576  24.2 
Consumer and other loans:            
Credit cards  505,837  42.3   440,993  37.3   279,644  27.6 
Other consumer and other loans  310,574  26.0   316,987  26.8   327,402  32.3 
Gross CCBX loans receivable  1,196,238  100.0%  1,182,798  100.0%  1,012,569  100.0%
Net deferred origination (fees) costs  (300)    (424)    (65)  
Loans receivable $1,195,938    $1,182,374    $1,012,504   
Loan Yield - CCBX (1)(2)  17.36%    17.05%    15.20%  

(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 $70.7 million, or 2.1%, to $3.36 billion at December 31, 2023 from $3.29 billion at September 30, 2023. The increase was due to a $72.9 million increase in core deposits, partially offset by a $2.3 million decrease in time deposits. Deposits in our CCBX segment increased $110.5 million, from $1.75 billion at September 30, 2023, to $1.86 billion at December 31, 2023 and community bank deposits decreased $39.9 million from $1.54 billion at September 30, 2023, to $1.50 billion at December 31, 2023. The decrease in community bank deposits is a result of not increasing our deposit rates during the quarter and letting higher interest rate deposits run-off. We are comfortable with our pricing discipline and letting the higher rate community bank deposits run-off because we have adequate funding access through our CCBX deposits, and despite the generally higher cost of deposits, these CCBX deposits are less costly than raising our rates to meet competitors' rates, brokered funds or borrowing rates. We intend to build our community bank deposits back up when rates are lower and customers are less rate sensitive. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts. During the quarter ended December 31, 2023, noninterest bearing deposits decreased $26.6 million, or 4.1%, to $625.2 million from $651.8 million at September 30, 2023. Community bank noninterest bearing deposits totaled $561.6 million or 37.5% of total community bank deposits and CCBX noninterest bearing deposits totaled $63.6 million, or 3.4% of total CCBX deposits. In the quarter ended December 31, 2023 compared to the quarter ended September 30, 2023, NOW and money market accounts increased $107.6 million, savings deposits decreased $8.1 million, and time deposits decreased $2.3 million. Included in total deposits is $340.1 million in IntraFi network reciprocal NOW and money market accounts as of December 31, 2023, which provides our larger deposit customers with fully insured deposits through a reciprocal agreement with other banks. Uninsured deposits decreased to $558.6 million as of December 31, 2023, compared to $599.0 million as of September 30, 2023.

Total deposits increased $542.8 million, or 19.3%, to $3.36 billion at December 31, 2023 compared to $2.82 billion at December 31, 2022. The increase is largely the result of growth in CCBX deposits. Noninterest bearing deposits decreased $149.8 million, or 19.3%, to $625.2 million at December 31, 2023 from $775.0 million at December 31, 2022 as a result of customer movement from noninterest to interest bearing accounts. NOW and money market accounts increased $835.8 million, or 46.3%, to $2.64 billion at December 31, 2023, and savings deposits decreased $30.6 million, or 28.5%, and time deposits decreased $11.1 million, or 37.7%, in the fourth quarter of 2023 compared to the fourth 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 $254.7 million as of December 31, 2023, compared to $101.5 million as of December 31, 2022. Deposits in our CCBX segment increased $583.5 million, from $1.28 billion at December 31, 2022, to $1.86 billion at December 31, 2023 and community bank deposits decreased $40.6 million, from $1.54 billion at December 31, 2022, to $1.50 billion at December 31, 2023. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts. Uninsured deposits decreased to $558.6 million as of December 31, 2023, compared to $835.8 million as of December 31, 2022.

Additionally, as of December 31, 2023, $69.4 million in CCBX customer deposits were transferred off the Bank’s balance sheet to other financial institutions on a daily basis for additional FDIC insurance coverage. 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 December 31, 2023 As of September 30, 2023 As of December 31, 2022
(dollars in thousands; unaudited)Amount Percent of
Total
Deposits		 Balance Percent of
Total
Deposits		 Balance Percent of
Total
Deposits
Demand, noninterest bearing$625,202  18.6% $651,786  19.8% $775,012  27.5%
NOW and money market 2,640,240  78.6   2,532,668  77.0   1,804,399  64.0 
Savings 76,562  2.3   84,628  2.6   107,117  3.8 
Total core deposits 3,342,004  99.5   3,269,082  99.4   2,686,528  95.3 
Brokered deposits 1  0.0   1  0.0   101,546  3.6 
Time deposits less than $100,000 8,109  0.2   8,635  0.2   12,596  0.5 
Time deposits $100,000 and over 10,249  0.3   11,982  0.4   16,851  0.6 
Total$3,360,363  100.0% $3,289,700  100.0% $2,817,521  100.0%
Cost of deposits (1) 3.36%    3.14%    1.56%  

(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
  December 31, 2023 September 30, 2023 December 31, 2022
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Demand, noninterest bearing $561,572  37.5% $584,004  38.0% $694,179  45.2%
NOW and money market  846,072  56.5   852,747  55.5   709,490  46.1 
Savings  71,598  4.8   80,099  5.2   105,101  6.8 
Total core deposits  1,479,242  98.8   1,516,850  98.7   1,508,770  98.1 
Brokered deposits  1  0.0   1  0.0   1  0.0 
Time deposits less than $100,000  8,109  0.5   8,635  0.5   12,596  0.8 
Time deposits $100,000 and over  10,249  0.7   11,982  0.8   16,851  1.1 
Total Community Bank deposits $1,497,601  100.0% $1,537,468  100.0% $1,538,218  100.0%
Cost of deposits(1)  1.57%    1.31%    0.37%  

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

CCBX As of
  December 31, 2023 September 30, 2023 December 31, 2022
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Demand, noninterest bearing $63,630  3.4% $67,782  3.9% $80,833  6.3%
NOW and money market  1,794,168  96.3   1,679,921  95.9   1,094,909  85.6 
Savings  4,964  0.3   4,529  0.2   2,016  0.2 
Total core deposits  1,862,762  100.0   1,752,232  100.0   1,177,758  92.1 
BaaS-brokered deposits  —  0.0   —  0.0   101,545  7.9 
Total CCBX deposits $1,862,762  100.0% $1,752,232  100.0% $1,279,303  100.0%
Cost of deposits (1)  4.90%    4.80%    3.13%  

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

Borrowings

As of December 31, 2023, the Company had the capacity to borrow up to a total of $640.1 million from the Federal Reserve Bank discount window and Federal Home Loan Bank, with no borrowings outstanding on these lines as of December 31, 2023.

Shareholders’ Equity

During the twelve months ended December 31, 2023, the Company contributed $15.0 million in capital to the Bank.  The Company had a cash balance of $5.5 million as of December 31, 2023, which is retained for general operating purposes, including debt repayment, and for funding $653,000 in commitments to bank technology funds.  

Total shareholders’ equity increased $10.5 million since September 30, 2023.  The increase in shareholders’ equity was primarily due to $9.0 million in net earnings, an $874,000 increase from the amortization of equity awards, combined with a decrease in the unrealized loss on available-for-sale securities of $624,000 during the three months ended December 31, 2023.

Capital Ratios

The Company and the Bank remained well capitalized at December 31, 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) 9.06% 8.10% 5.00%
Common Equity Tier 1 Capital (to risk-weighted assets) 10.30% 9.10% 6.50%
Tier 1 Capital (to risk-weighted assets) 10.30% 9.20% 8.00%
Total Capital (to risk-weighted assets) 11.58% 11.87% 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 $117.0 million and 3.86% of loans receivable at December 31, 2023 compared to $101.1 million and 3.41% at September 30, 2023 and $74.0 million and 2.82% at December 31, 2022. The allowance for credit loss allocated to the CCBX portfolio was $95.4 million and 7.97% of CCBX loans receivable at December 31, 2023, with $21.6 million of allowance for credit loss allocated to the community bank or 1.18% 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 December 31, 2023 As of September 30, 2023 As of December 31, 2022
(dollars in thousands; unaudited) Community Bank CCBX Total Community Bank CCBX Total Community Bank CCBX Total
Loans receivable $1,830,154  $1,195,938  $3,026,092  $1,784,661  $1,182,374  $2,967,035  $1,614,752  $1,012,504  $2,627,256 
Allowance for credit losses  (21,595)  (95,363)  (116,958)  (21,316)  (79,769)  (101,085)  (20,636)  (53,393)  (74,029)
Allowance for credit losses to total loans receivable  1.18%  7.97%  3.86%  1.19%  6.75%  3.41%  1.28%  5.27%  2.82%


Provision for credit losses - loans totaled $60.7 million for the three months ended December 31, 2023, $27.2 million for the three months ended September 30, 2023, and $33.6 million for the three months ended December 31, 2022. Net charge-offs totaled $44.9 million for the quarter ended December 31, 2023, compared to $36.8 million for the quarter ended September 30, 2023 and $18.9 million for the quarter ended December 31, 2022. Net charge-offs increased due to CCBX 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 $288.1 million loan portfolio. At December 31, 2023, our portion of this portfolio represented $29.1 million in loans. The provision on this $29.1 million in loans was $2.1 million for the three months ended December 31, 2023 compared to $664,000 for the three months ended September 30, 2023 and $783,000 for the three months ended December 31, 2022. This $29.1 million portfolio of partner loans with full loss responsibility remains profitable but the provision has increased both from growth in the portfolio and a higher loss rate. In response, and working with the partner, we have increased our underwriting standards.

Net charge-offs for this $29.1 million in loans were $1.5 million for the three months ended December 31, 2023, compared to $579,000 for the three months ended September 30, 2023 and $216,000 for the three months ended December 31, 2022.

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

  Three Months Ended
  December 31, 2023 September 30, 2023 December 31, 2022
(dollars in thousands; unaudited) Community Bank CCBX Total Community Bank CCBX Total Community Bank CCBX Total
Gross charge-offs $2  $47,650  $47,652  $3  $37,876  $37,879  $10  $18,876  $18,886 
Gross recoveries  (4)  (2,777)  (2,781)  (3)  (1,042)  (1,045)  (3)  (30)  (33)
Net charge-offs $(2) $44,873  $44,871  $—  $36,834  $36,834  $7  $18,846  $18,853 
Net charge-offs to average loans (1)  0.00%  14.88%  5.92%  0.00%  11.16%  4.77%  0.00%  7.52%  2.87%

(1) Annualized calculations shown for periods presented.

The increase in the Company’s provision for credit losses - loans during the quarter ended December 31, 2023, is a result of an increase in loans receivable. During the quarter ended December 31, 2023, a $60.5 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis, compared to the $26.5 million provision for credit losses - loans that was recorded for CCBX for the quarter ended September 30, 2023, as a result of an increase in CCBX loans receivable. 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 $288.1 million CCBX loan portfolio. At December 31, 2023, 10% of this portfolio represented $29.1 million in loans.

The factors used in management’s analysis for community bank credit losses indicated that a provision of $277,000 and was needed for the quarter ended December 31, 2023 and a provision of $664,000 and $504,000 was needed for the quarters ended September 30, 2023 and December 31, 2022, respectively.

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

  Three Months Ended Twelve Months Ended
(dollars in thousands; unaudited) December 31, 2023 September 30, 2023 December 31, 2022 December 31, 2023 December 31, 2022
Community bank $277  $664  $504  $1,322  $719 
CCBX  60,467   26,493   33,096   182,721   78,345 
Total provision expense $60,744  $27,157  $33,600  $184,043  $79,064 


At December 31, 2023, our nonperforming assets were $53.8 million, or 1.43% of total assets, compared to $43.5 million, or 1.18%, of total assets, at September 30, 2023, and $33.2 million, or 1.06% of total assets, at December 31, 2022. These ratios are impacted by CCBX loans over 90 days delinquent that are covered by CCBX partner credit enhancements. As of December 31, 2023, $44.3 million of the $46.5 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 $10.3 million during the quarter ended December 31, 2023, compared to the quarter ended September 30, 2023, due to a $10.3 million increase in CCBX loans that are past due 90 days or more and still accruing combined with a $8,000 decrease 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 decreased due to principal reductions. There were no repossessed assets or other real estate owned at December 31, 2023. Our nonperforming loans to loans receivable ratio was 1.78% at December 31, 2023, compared to 1.47% at September 30, 2023, and 1.26% at December 31, 2022.

For the quarter ended December 31, 2023, there were $2,000 community bank net recoveries and $7.3 million nonperforming community bank loans, including a multifamily loan for $6.9 million which we believe is currently well secured. For the quarter ended December 31, 2023 $44.9 million in net charge-offs were recorded on CCBX loans. These 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. The Company is responsible for credit losses on approximately 10% of a $288.1 million loan portfolio. At December 31, 2023, our portion of this portfolio represented $29.1 million in loans.

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

(dollars in thousands; unaudited)As of December 31, 2023 As of September 30, 2023 As of December 31, 2022
Nonaccrual loans:     
Commercial and industrial loans$—  $2  $113 
Real estate loans:     
Construction, land and land development —   —   66 
Residential real estate 170   176   — 
Commercial real estate 7,145   7,145   6,901 
Total nonaccrual loans 7,315   7,323   7,080 
Accruing loans past due 90 days or more:     
Commercial & industrial loans 2,086   1,387   404 
Real estate loans:     
Residential real estate loans 1,115   1,462   876 
Consumer and other loans:     
Credit cards 34,835   24,807   10,570 
Other consumer and other loans 8,488   8,561   14,245 
Total accruing loans past due 90 days or more 46,524   36,217   26,095 
Total nonperforming loans 53,839   43,540   33,175 
Real estate owned —   —   — 
Repossessed assets —   —   — 
Modified loans for borrowers experiencing financial difficulty —   —   — 
Total nonperforming assets$53,839  $43,540  $33,175 
Total nonaccrual loans to loans receivable 0.24%  0.25%  0.27%
Total nonperforming loans to loans receivable 1.78%  1.47%  1.26%
Total nonperforming assets to total assets 1.43%  1.18%  1.06%


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)December 31,
2023		 September 30,
2023		 December 31,
2022
Nonaccrual loans:     
Commercial and industrial loans$—  $2  $113 
Real estate:     
Construction, land and land development —   —   66 
Residential real estate 170   176   — 
Commercial real estate 7,145   7,145   6,901 
Total nonaccrual loans 7,315   7,323   7,080 
Accruing loans past due 90 days or more:     
Total accruing loans past due 90 days or more —   —   — 
Total nonperforming loans 7,315   7,323   7,080 
Other real estate owned —   —   — 
Repossessed assets —   —   — 
Total nonperforming assets$7,315  $7,323  $7,080 


CCBXAs of
(dollars in thousands; unaudited)December 31,
2023		 September 30,
2023		 December 31,
2022
Nonaccrual loans$—  $—  $— 
Accruing loans past due 90 days or more:     
Commercial & industrial loans 2,086   1,387   404 
Real estate loans:     
Residential real estate loans 1,115   1,462   876 
Consumer and other loans:     
Credit cards 34,835   24,807   10,570 
Other consumer and other loans 8,488   8,561   14,245 
Total accruing loans past due 90 days or more 46,524   36,217   26,095 
Total nonperforming loans 46,524   36,217   26,095 
Other real estate owned —   —   — 
Repossessed assets —   —   — 
Total nonperforming assets$46,524  $36,217  $26,095 


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 $3.75 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
 December 31,
2023		 September 30,
2023		 December 31,
2022
Cash and due from banks$31,345  $29,984  $32,722 
Interest earning deposits with other banks 451,783   444,962   309,417 
Investment securities, available for sale, at fair value 99,504   98,939   97,317 
Investment securities, held to maturity, at amortized cost 50,860   42,550   1,036 
Other investments 10,227   11,898   10,555 
Loans receivable 3,026,092   2,967,035   2,627,256 
Allowance for credit losses (116,958)  (101,085)  (74,029)
Total loans receivable, net 2,909,134   2,865,950   2,553,227 
CCBX credit enhancement asset 107,921   91,867   53,377 
CCBX receivable 9,088   10,623   10,416 
Premises and equipment, net 22,090   20,543   18,213 
Operating lease right-of-use assets 5,932   6,126   5,018 
Accrued interest receivable 26,819   23,428   17,815 
Bank-owned life insurance, net 12,870   12,970   12,667 
Deferred tax asset, net 3,806   4,404   18,458 
Other assets 11,987   14,021   4,229 
Total assets$3,753,366  $3,678,265  $3,144,467 
      
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES     
Deposits$3,360,363  $3,289,700  $2,817,521 
Subordinated debt, net 44,144   44,106   43,999 
Junior subordinated debentures, net 3,590   3,589   3,588 
Deferred compensation 479   513   616 
Accrued interest payable 892   1,056   684 
Operating lease liabilities 6,124   6,321   5,234 
CCBX payable 33,651   38,229   20,419 
Other liabilities 9,145   10,301   8,912 
Total liabilities 3,458,388   3,393,815   2,900,973 
      
SHAREHOLDERS’ EQUITY     
Common stock 130,137   129,244   125,830 
Retained earnings 165,310   156,299   119,998 
Accumulated other comprehensive loss, net of tax (469)  (1,093)  (2,334)
Total shareholders’ equity 294,978   284,450   243,494 
Total liabilities and shareholders’ equity$3,753,366  $3,678,265  $3,144,467 


COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts; unaudited)

 Three Months Ended
 December 31,
2023		 September 30,
2023		 December 31,
2022
INTEREST AND DIVIDEND INCOME     
Interest and fees on loans$81,159  $83,652  $61,226 
Interest on interest earning deposits with other banks 5,687   3,884   3,097 
Interest on investment securities 1,225   766   557 
Dividends on other investments 172   29   150 
Total interest income 88,243   88,331   65,030 
INTEREST EXPENSE     
Interest on deposits 27,916   25,451   11,061 
Interest on borrowed funds 670   651   537 
Total interest expense 28,586   26,102   11,598 
Net interest income 59,657   62,229   53,432 
PROVISION FOR CREDIT LOSSES - LOANS 60,744   27,157   33,600 
PROVISION (RECAPTURE) FOR UNFUNDED COMMITMENTS 45   96   — 
Net interest income after provision for credit losses - loans and unfunded commitments (1,132)  34,976   19,832 
NONINTEREST INCOME     
Deposit service charges and fees 957   998   946 
Loan referral fees —   1   — 
Gain on sales of loans, net —   107   — 
Unrealized (loss) gain on equity securities, net 80   5   (18)
Other income 60   291   298 
Noninterest income, excluding BaaS program income and BaaS indemnification income 1,097   1,402   1,226 
Servicing and other BaaS fees 1,015   997   1,001 
Transaction fees 1,006   1,036   964 
Interchange fees 1,272   1,216   785 
Reimbursement of expenses 1,076   1,152   857 
BaaS program income 4,369   4,401   3,607 
BaaS credit enhancements 58,449   25,926   31,164 
BaaS fraud enhancements 779   2,850   6,818 
BaaS indemnification income 59,228   28,776   37,982 
Total noninterest income 64,694   34,579   42,815 
NONINTEREST EXPENSE     
Salaries and employee benefits 16,490   18,087   14,399 
Occupancy 1,340   1,224   1,182 
Data processing and software licenses 2,417   2,366   1,768 
Legal and professional expenses 2,649   4,447   2,799 
Point of sale expense 899   1,068   710 
Excise taxes 449   541   702 
Federal Deposit Insurance Corporation ("FDIC") assessments 665   694   550 
Director and staff expenses 478   529   515 
Marketing 138   169   109 
Other expense 1,089   1,523   335 
Noninterest expense, excluding BaaS loan and BaaS fraud expense 26,614   30,648   23,069 
BaaS loan expense 24,310   23,003   17,215 
BaaS fraud expense 779   2,850   6,819 
BaaS loan and fraud expense 25,089   25,853   24,034 
Total noninterest expense 51,703   56,501   47,103 
Income before provision for income taxes 11,859   13,054   15,544 
PROVISION FOR INCOME TAXES 2,847   2,784   2,426 
NET INCOME$9,012  $10,270  $13,118 
Basic earnings per common share$0.68  $0.77  $1.01 
Diluted earnings per common share$0.66  $0.75  $0.96 
Weighted average number of common shares outstanding:     
Basic 13,286,828   13,285,974   13,030,726 
Diluted 13,676,513   13,675,833   13,603,978 


COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts; unaudited)

 Twelve Months Ended
 December 31,
2023		 December 31,
2022
INTEREST AND DIVIDEND INCOME   
Interest and fees on loans$311,441  $183,352 
Interest on interest earning deposits with other banks 15,346   6,728 
Interest on investment securities 3,197   1,745 
Dividends on other investments 387   345 
Total interest income 330,371   192,170 
INTEREST EXPENSE   
Interest on deposits 89,000   19,004 
Interest on borrowed funds 2,644   1,391 
Total interest expense 91,644   20,395 
Net interest income 238,727   171,775 
PROVISION FOR CREDIT LOSSES - LOANS 184,043   79,064 
PROVISION (RECAPTURE) FOR UNFUNDED COMMITMENTS (51)  — 
Net interest income after provision for credit losses - loans and unfunded commitments 54,735   92,711 
NONINTEREST INCOME   
Deposit service charges and fees 3,854   3,804 
Loan referral fees 683   810 
Gain on sales of loans, net 253   — 
Unrealized (loss) gain on equity securities, net 279   (153)
Other income 884   1,344 
Noninterest income, excluding BaaS program income and BaaS indemnification income 5,953   5,805 
Servicing and other BaaS fees 3,855   4,408 
Transaction fees 4,011   3,211 
Interchange fees 4,252   2,583 
Reimbursement of expenses 4,175   2,732 
BaaS program income 16,293   12,934 
BaaS credit enhancements 177,764   76,374 
BaaS fraud enhancements 7,165   29,571 
BaaS indemnification income 184,929   105,945 
Total noninterest income 207,175   124,684 
NONINTEREST EXPENSE   
Salaries and employee benefits 66,461   52,228 
Occupancy 4,926   4,548 
Data processing and software licenses 8,595   6,487 
Legal and professional expenses 14,803   6,760 
Point of sale expense 3,534   2,109 
Excise taxes 1,976   2,204 
Federal Deposit Insurance Corporation ("FDIC") assessments 2,524   2,859 
Director and staff expenses 2,152   1,711 
Marketing 517   351 
Other expense 5,224   4,652 
Noninterest expense, excluding BaaS loan and BaaS fraud expense 110,712   83,909 
BaaS loan expense 86,900   53,294 
BaaS fraud expense 7,165   29,571 
BaaS loan and fraud expense 94,065   82,865 
Total noninterest expense 204,777   166,774 
Income before provision for income taxes 57,133   50,621 
PROVISION FOR INCOME TAXES 12,554   9,996 
NET INCOME$44,579  $40,625 
Basic earnings per common share$3.36  $3.14 
Diluted earnings per common share$3.27  $3.01 
Weighted average number of common shares outstanding:   
Basic 13,261,664   12,949,266 
Diluted 13,640,182   13,514,952 


COASTAL FINANCIAL CORPORATION
AVERAGE BALANCES, YIELDS, AND RATES – QUARTERLY
(Dollars in thousands; unaudited)

 For the Three Months Ended
 December 31, 2023 September 30, 2023 December 31, 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$413,127  $5,687 5.46% $285,596  $3,884 5.40% $329,354  $3,097 3.73%
Investment securities, available for sale (2) 100,204   546 2.16   100,283   543 2.15   100,269   550 2.18 
Investment securities, held to maturity (2) 49,469   679 5.45   17,703   223 5.00   1,235   7 2.25 
Other investments 11,683   172 5.84   11,943   29 0.96   10,592   150 5.62 
Loans receivable (3) 3,007,289   81,159 10.71   3,062,214   83,652 10.84   2,603,962   61,226 9.33 
Total interest earning assets 3,581,772   88,243 9.77   3,477,739   88,331 10.08   3,045,412   65,030 8.47 
Noninterest earning assets:                 
Allowance for credit losses (95,391)      (100,329)      (58,440)    
Other noninterest earning assets 204,052       220,750       141,624     
Total assets$3,690,433      $3,598,160      $3,128,596     
                  
Liabilities and Shareholders’ Equity                 
Interest bearing liabilities:                 
Interest bearing deposits$2,660,235  $27,916 4.16% $2,515,093  $25,451 4.01% $2,006,679  $11,061 2.19%
FHLB advances and borrowings 1   — —   —   — —   5   — — 
Subordinated debt 44,121   598 5.38   44,084   580 5.22   37,455   484 5.13 
Junior subordinated debentures 3,590   72 7.96   3,589   71 7.85   3,588   53 5.86 
Total interest bearing liabilities 2,707,947   28,586 4.19   2,562,766   26,102 4.04   2,047,727   11,598 2.25 
Noninterest bearing deposits 640,424       698,532       807,794     
Other liabilities 52,450       57,865       34,944     
Total shareholders' equity 289,612       278,997       238,131     
Total liabilities and shareholders' equity$3,690,433      $3,598,160      $3,128,596     
Net interest income  $59,657     $62,229     $53,432  
Interest rate spread    5.59%     6.04%     6.22%
Net interest margin (4)    6.61%     7.10%     6.96%

(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
 December 31, 2023 September 30, 2023 December 31, 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)$1,811,152 $28,832 6.32% $1,752,834 $27,373 6.20% $1,609,882 $23,140 5.70%
Total interest earning assets 1,811,152  28,832 6.32   1,752,834  27,373 6.20   1,609,882  23,140 5.70 
Liabilities                 
Interest bearing liabilities:                
Interest bearing deposits 951,148  6,090 2.54%  920,707  5,067 2.18%  864,001  1,502 0.69%
Intrabank liability 275,995  3,799 5.46   223,221  3,036 5.40   8,069  76 3.74 
Total interest bearing liabilities 1,227,143  9,889 3.20   1,143,928  8,103 2.81   872,070  1,578 0.72 
Noninterest bearing deposits 584,009      608,906      737,812    
Net interest income  $18,943     $19,270     $21,562  
Net interest margin(3)    4.15%     4.36%     5.31%
                  
CCBX                 
Assets                 
Interest earning assets:                 
Loans receivable (2)(4)$1,196,137 $52,327 17.36% $1,309,380 $56,279 17.05% $994,080 $38,086 15.20%
Intrabank asset 569,365  7,837 5.46   374,632  5,095 5.40   218,581  2,055 3.73 
Total interest earning assets 1,765,502  60,164 13.52   1,684,012  61,374 14.46   1,212,661  40,141 13.13 
Liabilities                 
Interest bearing liabilities:              
Interest bearing deposits 1,709,087  21,826 5.07%  1,594,386  20,384 5.07%  1,142,678  9,559 3.32%
Total interest bearing liabilities 1,709,087  21,826 5.07   1,594,386  20,384 5.07   1,142,678  9,559 3.32 
Noninterest bearing deposits 56,415      89,626      69,982    
Net interest income  $38,338     $40,990     $30,582  
Net interest margin(3)    8.62%     9.66%     10.01%
Net interest margin, net of Baas loan expense (5)    3.15%     4.24%     4.37%


 For the Three Months Ended
 December 31, 2023 September 30, 2023 December 31, 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$413,127 $5,687 5.46% $285,596 $3,884 5.40% $329,354 $3,097 3.73%
Investment securities, available for sale (6) 100,204  546 2.16   100,283  543 2.15   100,269  550 2.18 
Investment securities, held to maturity (6) 49,469  679 5.45   17,703  223 5.00   1,235  7 2.25 
Other investments 11,683  172 5.84   11,943  29 0.96   10,592  150 5.62 
Total interest earning assets 574,483  7,084 4.89%  415,525  4,679 4.47%  441,450  3,804 3.42%
Liabilities                 
Interest bearing liabilities:                 
FHLB advances and borrowings$3 $— —%  —  — —%  5  — —%
Subordinated debt 44,121  598 5.38%  44,084  580 5.22%  37,455  484 5.13%
Junior subordinated debentures 3,590  72 7.96   3,589  71 7.85   3,588  53 5.86 
Intrabank liability, net (7) 293,370  4,038 5.46   151,411  2,059 5.40   210,511  1,979 3.73 
Total interest bearing liabilities 341,084  4,708 5.48   199,084  2,710 5.40   251,559  2,516 3.97 
Net interest income  $2,376     $1,969     $1,288  
Net interest margin(3)    1.64%     1.88%     1.16%

(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 Twelve Months Ended
 December 31, 2023 December 31, 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$295,808  $15,346 5.19% $515,967  $6,728 1.30%
Investment securities, available for sale (2) 100,260   2,158 2.15   91,970   1,710 1.86 
Investment securities, held to maturity (2) 19,918   1,039 5.22   1,266   35 2.76 
Other investments 11,512   387 3.36   10,146   345 3.40 
Loans receivable (3) 2,936,908   311,441 10.60   2,257,787   183,352 8.12 
Total interest earning assets 3,364,406   330,371 9.82   2,877,136   192,170 6.68 
Noninterest earning assets:           
Allowance for credit losses (91,194)      (46,769)    
Other noninterest earning assets 198,071       119,817     
Total assets$3,471,283      $2,950,184     
            
Liabilities and Shareholders’ Equity           
Interest bearing liabilities:           
Interest bearing deposits$2,395,012  $89,000 3.72% $1,724,020  $19,004 1.10%
FHLB advances and borrowings —   — —   6,029   69 1.14 
Subordinated debt 44,066   2,373 5.39   27,626   1,179 4.27 
Junior subordinated debentures 3,589   271 7.55   3,587   143 3.99 
Total interest bearing liabilities 2,442,667   91,644 3.75   1,761,262   20,395 1.16 
Noninterest bearing deposits 707,641       942,087     
Other liabilities 49,271       24,097     
Total shareholders' equity 271,704       222,738     
Total liabilities and shareholders' equity$3,471,283      $2,950,184     
Net interest income  $238,727     $171,775  
Interest rate spread    6.07%     5.52%
Net interest margin (4)    7.10%     5.97%

(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 Twelve Months Ended
  December 31, 2023 December 31, 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) $1,726,495 $106,983 6.20% $1,515,395 $80,544 5.32%
Intrabank asset  —  — —   123,156  796 0.65 
Total interest earning assets  1,726,495  106,983 6.20   1,638,551  81,340 4.96 
Liabilities            
Interest bearing liabilities:            
Interest bearing deposits  900,516  17,354 1.93%  905,447  2,896 0.32%
Intrabank liability  198,176  10,404 5.25   —  — — 
Total interest bearing liabilities  1,098,692  27,758 2.53   905,447  2,896 0.32 
Noninterest bearing deposits  627,803      733,104    
Net interest income   $79,225     $78,444  
Net interest margin(3)     4.59%     4.79%
             
CCBX            
Assets            
Interest earning assets:            
Loans receivable (2)(4) $1,210,413 $204,458 16.89% $742,392 $102,808 13.85%
Intrabank asset  363,921  19,071 5.24   285,164  4,106 1.44 
Total interest earning assets  1,574,334  223,529 14.20   1,027,556  106,914 10.40 
Liabilities            
Interest bearing liabilities:            
Interest bearing deposits  1,494,496  71,646 4.79%  818,573  16,108 1.97%
Total interest bearing liabilities  1,494,496  71,646 4.79   818,573  16,108 1.97 
Noninterest bearing deposits  79,838      208,983    
Net interest income   $151,883     $90,806  
Net interest margin(3)     9.65%     8.84%
Net interest margin, net of Baas loan expense (5)     4.13%     3.65%


  For the Twelve Months Ended
  December 31, 2023 December 31, 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 $295,808 $15,346 5.19% $515,967 $6,728 1.30%
Investment securities, available for sale (6)  100,260  2,158 2.15   91,970  1,710 1.86 
Investment securities, held to maturity (6)  19,918  1,039 5.22   1,266  35 2.76 
Other investments  11,512  387 3.36   10,146  345 3.40 
Total interest earning assets  427,498  18,930 4.43   619,349  8,818 1.42 
Liabilities            
Interest bearing liabilities:            
FHLB advances and borrowings  —  — —%  6,029  69 1.14%
Subordinated debt  44,066  2,373 5.39   27,626  1,179 4.27 
Junior subordinated debentures  3,589  271 7.55   3,587  143 3.99 
Intrabank liability, net (7)  165,745  8,667 5.23   408,320  4,902 1.20 
Total interest bearing liabilities  213,400  11,311 5.30   445,562  6,293 1.41 
Net interest income   $7,619     $2,525  
Net interest margin(3)     1.78%     0.41%

(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
 December 31,
2023		 September 30,
2023		 June 30,
2023		 March 31,
2023		 December 31,
2022
Income Statement Data:         
Interest and dividend income$88,243  $88,331  $83,686  $70,111  $65,030 
Interest expense 28,586   26,102   21,336   15,620   11,598 
Net interest income 59,657   62,229   62,350   54,491   53,432 
Provision for credit losses - loans 60,744   27,157   52,598   43,544   33,600 
Provision (recovery) for unfunded commitments 45   96   (345)  153   — 
Net interest income after provision for credit losses - loans and unfunded commitments (1,132)  34,976   10,097   10,794   19,832 
Noninterest income 64,694   34,579   58,595   49,307   42,815 
Noninterest expense 51,703   56,501   51,910   44,663   47,103 
Provision for income tax 2,847   2,784   3,876   3,047   2,426 
Net income 9,012   10,270   12,906   12,391   13,118 
          
 As of and for the Three Month Period
 December 31,
2023		 September 30,
2023		 June 30,
2023		 March 31,
2023		 December 31,
2022
Balance Sheet Data:         
Cash and cash equivalents$483,128  $474,946  $275,060  $393,916  $342,139 
Investment securities 150,364   141,489   110,730   101,704   98,353 
Loans held for sale —   —   35,923   27,292   — 
Loans receivable 3,026,092   2,967,035   3,007,553   2,837,204   2,627,256 
Allowance for credit losses (116,958)  (101,085)  (110,762)  (89,123)  (74,029)
Total assets 3,753,366   3,678,265   3,535,283   3,451,033   3,144,467 
Interest bearing deposits 2,735,161   2,637,914   2,436,980   2,333,423   2,042,509 
Noninterest bearing deposits 625,202   651,786   725,592   761,800   775,012 
Core deposits (1) 3,342,004   3,269,082   3,137,747   3,068,162   2,686,528 
Total deposits 3,360,363   3,289,700   3,162,572   3,095,223   2,817,521 
Total borrowings 47,734   47,695   47,658   47,619   47,587 
Total shareholders’ equity 294,978   284,450   272,662   258,763   243,494 
          
Share and Per Share Data (2):         
Earnings per share – basic$0.68  $0.77  $0.97  $0.94  $1.01 
Earnings per share – diluted$0.66  $0.75  $0.95  $0.91  $0.96 
Dividends per share —   —   —   —   — 
Book value per share (3)$22.17  $21.38  $20.50  $19.48  $18.50 
Tangible book value per share (4)$22.17  $21.38  $20.50  $19.48  $18.50 
Weighted avg outstanding shares – basic 13,286,828   13,285,974   13,275,640   13,196,960   13,030,726 
Weighted avg outstanding shares – diluted 13,676,513   13,675,833   13,597,763   13,609,491   13,603,978 
Shares outstanding at end of period 13,304,339   13,302,449   13,300,809   13,281,533   13,161,147 
Stock options outstanding at end of period 354,969   356,359   357,999   360,119   438,103 

See footnotes on following page

 As of and for the Three Month Period
 December 31,
2023		 September 30,
2023		 June 30,
2023		 March 31,
2023		 December 31,
2022
Credit Quality Data:         
Nonperforming assets (5) to total assets 1.43%  1.18%  0.95%  0.91%  1.06%
Nonperforming assets (5) to loans receivable and OREO 1.78%  1.47%  1.12%  1.11%  1.26%
Nonperforming loans (5) to total loans receivable 1.78%  1.47%  1.12%  1.11%  1.26%
Allowance for credit losses to nonperforming loans 217.2%  232.2%  328.4%  282.5%  224.4%
Allowance for credit losses to total loans receivable 3.86%  3.41%  3.68%  3.14%  2.82%
Gross charge-offs$47,652  $37,879  $32,299  $34,167  $18,886 
Gross recoveries$2,781  $1,045  $1,340  $1,865  $33 
Net charge-offs to average loans (6) 5.92%  4.77%  4.19%  4.84%  2.87%
          
Capital Ratios (7):         
Tier 1 leverage capital 8.10%  8.03%  8.16%  8.29%  7.97%
Common equity Tier 1 risk-based capital 9.10%  9.00%  8.36%  8.61%  8.92%
Tier 1 risk-based capital 9.20%  9.11%  8.47%  8.73%  9.04%
Total risk-based capital 11.87%  11.80%  11.12%  11.49%  11.94%

(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 measures are presented to illustrate the impact of BaaS loan expense on net loan income and yield on CCBX loans and the impact of BaaS loan expense on net interest income and net interest margin.

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.

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 Twelve Months Ended
(dollars in thousands; unaudited) December 31,
2023		 September 30,
2023		 December 31,
2022		 December 31,
2023		 December 31,
2022
Net BaaS loan income divided by average CCBX loans:    
CCBX loan yield (GAAP)(1)  17.36%  17.05%  15.20%  16.89%  13.85%
Total average CCBX loans receivable $1,196,137  $1,309,380  $994,080  $1,210,413  $742,392 
Interest and earned fee income on CCBX loans (GAAP)  52,327   56,279   38,086   204,458   102,808 
BaaS loan expense  (24,310)  (23,003)  (17,215)  (86,900)  (53,294)
Net BaaS loan income $28,017  $33,276  $20,871  $117,558  $49,514 
Net BaaS loan income divided by average CCBX loans (1)  9.30%  10.08%  8.33%  9.71%  6.67%
Net interest margin, net of BaaS loan expense:        
CCBX interest margin (1)  8.62%  9.66%  10.01%  9.65%  8.84%
CCBX earning assets  1,765,502   1,684,012   1,212,661   1,574,334   1,027,556 
Net interest income  38,338   40,990   30,582   151,883   90,806 
Less: BaaS loan expense  (24,310)  (23,003)  (17,215)  (86,900)  (53,294)
Net interest income, net of BaaS loan expense $14,028  $17,987  $13,367  $64,983  $37,512 
Net interest margin, net of BaaS loan expense (1)  3.15%  4.24%  4.37%  4.13%  3.65%

(1) Annualized calculations for periods presented.

APPENDIX A -
As of December 31, 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 $3.03 billion in outstanding loan balances. When combined with $2.34 billion in unused commitments the total of these categories is $5.38 billion.

Commercial real estate loans represent the largest segment of our loans, comprising 43.0% of our total balance of outstanding loans as of December 31, 2023. Unused commitments to extend credit represents an additional $54.3 million, and the combined total in commercial real estate loans represents $1.36 billion, or 25.2% 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 December 31, 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 $356,046 $10,783 $366,829 6.8% $3,359 106
Hotel/Motel  172,437  2,345  174,782 3.2   6,387 27
Convenience Store  132,007  1,086  133,093 2.5   2,164 61
Mixed use  93,850  3,475  97,325 1.8   1,079 87
Warehouse  114,572  2,166  116,738 2.2   1,975 58
Office  89,007  3,447  92,454 1.7   989 90
Retail  101,688  719  102,407 1.9   987 103
Mini Storage  65,731  23,979  89,710 1.7   3,130 21
Strip Mall  44,590  —  44,590 0.8   6,370 7
Manufacturing  37,946  1,514  39,460 0.7   1,186 32
Groups < 0.70% of total  95,659  4,775  100,434 1.9   1,139 84
Total $1,303,533 $54,289 $1,357,822 25.2% $1,928 676


Consumer loans comprise 26.9% of our total balance of outstanding loans as of December 31, 2023. Unused commitments to extend credit represents an additional $1.02 billion, and the combined total in consumer and other loans represents $1.83 billion, or 34.1% 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 $1,200. CCBX consumer loans are underwritten to CCBX credit standards and underwriting of these loans is regularly tested, including quarterly testing for partners with portfolio balances greater than $10.0 million.

The following table summarizes our loan commitment by industry for our consumer and other loan portfolio as of December 31, 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 $505,837 $1,014,959 $1,520,796 28.3% $1.6 308,955
Installment loans  302,241  134  302,375 5.6   1.1 266,203
Lines of credit  5,788  63  5,851 0.1   0.1 102,805
Other loans  2,545  —  2,545 0.1   0.2 10,993
Community bank consumer loans
Installment loans  1,151  —  1,151 0.0   57.6 20
Lines of credit  147  582  729 0.0   3.5 42
Other loans  330  —  330 0.0   1.1 314
Total $818,039 $1,015,738 $1,833,777 34.1% $1.2 689,332

(1) Total exposure on CCBX loans is subject to CCBX partner/portfolio maximum limits.

Residential real estate loans comprise 15.3% of our total balance of outstanding loans as of December 31, 2023. Unused commitments to extend credit represents an additional $465.9 million, and the combined total in residential real estate loans represents $929.3 million, or 17.3% 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 December 31, 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 $238,035 $418,761 $656,796 12.2% $24 9,792
Community bank residential real estate loans
Closed end, secured by first liens  192,805  3,268  196,073 3.7   610 316
Home equity line of credit  23,049  42,048  65,097 1.2   106 217
Closed end, second liens  9,537  1,810  11,347 0.2   281 34
Total $463,426 $465,887 $929,313 17.3% $45 10,359

(1) Total exposure on CCBX loans is subject to CCBX partner/portfolio maximum limits.

Commercial and industrial loans comprise 9.6% of our total balance of outstanding loans as of December 31, 2023. Unused commitments to extend credit represents an additional $695.0 million, and the combined total in commercial and industrial loans represents $986.3 million, or 18.3% of our total outstanding loans and loan commitments. Included in commercial and industrial loans is $87.5 million in outstanding capital call lines, with an additional $608.8 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 capital call line.

The following table summarizes our loan commitment by industry for our commercial and industrial loan portfolio as of December 31, 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 $87,494 $608,837 $696,331 12.9% $537 163
Retail  52,208  1,842  54,050 1.0   18 2,887
Construction/Contractor Services  24,360  31,020  55,380 1.0   129 189
Financial Institutions  48,648  —  48,648 0.9   4,054 12
Medical / Dental / Other Care  20,732  3,852  24,584 0.5   942 22
Manufacturing  8,022  3,967  11,989 0.2   187 43
Groups < 0.20% of total  49,830  45,453  95,283 1.8   67 744
Total $291,294 $694,971 $986,265 18.3% $72 4,060

(1)  Total exposure on CCBX loans is subject to CCBX partner/portfolio maximum limits.

We have individual CCBX partner portfolio limits with our each of our partners to manage loan concentration risk, liquidity risk, and counter-party partner risk. For example, as of December 31, 2023, capital call lines outstanding balance totaled $87.5 million, and while commitments totaled $608.8 million the commitments are limited to a maximum of $350.0 million by agreement with the partner. If a CCBX partner goes over their individual limit, it would be a breach of their contract and the Bank may impose penalties. See the table below for CCBX portfolio maximums and related available commitments:

(dollars in thousands; unaudited) Balance Percent of CCBX loans receivableAvailable Commitments (1) Maximum Portfolio SizeCash Reserve/Pledge Account Amount (2)
Commercial and industrial loans:      
Capital call lines $87,494  7.3%$608,837 $350,000$—
All other commercial & industrial loans  54,298  4.5  9,144  305,905 2,426
Real estate loans:        
Home equity lines of credit (3)  238,035  19.9  418,761  375,000 28,043
Consumer and other loans:      
Credit cards - cash secured  43    —   —
Credit cards - unsecured  505,794    1,014,959   27,704
Credit cards - total  505,837  42.3  1,014,959  756,614 27,704
Installment loans - cash secured  68,856    —   —
Installment loans - unsecured  233,385    134   8,960
Installment loans - total  302,241  25.3  134  933,374 8,960
Other consumer and other loans  8,333  0.7  63  709,108 820
Gross CCBX loans receivable  1,196,238  100.0% 2,051,898  3,430,001$67,953
Net deferred origination fees  (300)      
Loans receivable $1,195,938       

(1) Remaining commitment available, net of outstanding balance.
(2) Balances are as of January 9, 2024.
(3) These home equity lines of credit are secured by residential real estate and are accessed by using a credit card, but are classified as 1-4 family residential properties per regulatory guidelines.

Construction, land and land development loans comprise 5.2% of our total balance of outstanding loans as of December 31, 2023. Unused commitments to extend credit represents an additional $113.5 million, and the combined total in construction, land and land development loans represents $270.6 million, or 5.0% 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 December 31, 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 $81,489 $85,584 $167,073 3.1% $5,433 15
Undeveloped land loans  7,890  4,391  12,281 0.2   564 14
Residential construction  34,213  16,687  50,900 1.0   1,711 20
Developed land loans  20,515  2,734  23,249 0.4   789 26
Land development  12,993  4,138  17,131 0.3   866 15
Total $157,100 $113,534 $270,634 5.0% $1,746 90


Exposure and risk in our construction, land and land development portfolio is lower in the current period compared to previous periods as demonstrated by the declining outstanding balance for the periods indicated in the following table:

  Outstanding Balance as of
(dollars in thousands; unaudited) December 31,
2023		 September 30,
2023		 June 30,
2023		 March 31,
2023		 December 31,
2022
Commercial construction $81,489 $91,396 $78,079 $97,987 $100,714
Residential construction  34,213  33,971  35,032  32,268  32,879
Undeveloped land loans  7,890  8,310  42,530  41,951  44,578
Developed land loans  20,515  21,369  18,735  19,130  20,167
Land development  12,993  12,640  12,330  15,299  15,717
Total $157,100 $167,686 $186,706 $206,635 $214,055


APPENDIX B -
As of December 31, 2023

CCBX – BaaS Reporting Information

During the quarter ended December 31, 2023, $58.4 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, unfunded commitments 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. BaaS 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 if the cash flows on the loans were not sufficient to fund the reimbursement of loan 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 and fraud enhancements. The Bank would write-off any remaining credit enhancement asset from the CCBX partner not covered by the cash pledge account but would retain the full yield and any fee income on the loan going forward, and BaaS loan expense for that CCBX partner would cease 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 and fraud 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 Twelve Months Ended
(dollars in thousands; unaudited) December 31,
2023		 September 30,
2023		 December 31,
2022		 December 31,
2023		 December 31,
2022
Yield on loans (1)  17.36%  17.05%  15.20%  16.89%  13.85%
BaaS loan interest income $52,327  $56,279  $38,086  $204,458  $102,808 
Less: BaaS loan expense  24,310   23,003   17,215   86,900   53,294 
Net BaaS loan income (2)  28,017   33,276   20,871   117,558   49,514 
Net BaaS loan income divided by average BaaS loans (1)(2)  9.30%  10.08%  8.33%  9.71%  6.67%

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

A decrease in CCBX loans receivable resulted in decreased interest income on CCBX loans during the quarter ended December 31, 2023 compared to the quarter ended September 30, 2023. The decrease in CCBX loans receivable was primarily due to the sale of CCBX loans as part of our strategy to reduce risk, optimize the CCBX loan portfolio and strengthen our balance sheet through enhanced credit standards. Increased interest rates and growth in CCBX loans and deposits has resulted in increases in interest income and expense for the quarter ended December 31, 2023 compared to the quarter ended December 31, 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 Twelve Months Ended
(dollars in thousands; unaudited) December 31,
2023		 September 30,
2023		 December 31,
2022		 December 31,
2023		 December 31,
2022
Loan interest income $52,327 $56,279 $38,086 $204,458 $102,808
Total BaaS interest income $52,327 $56,279 $38,086 $204,458 $102,808


Interest expense Three Months Ended Twelve Months Ended
(dollars in thousands; unaudited) December 31,
2023		 September 30,
2023		 December 31,
2022		 December 31,
2023		 December 31,
2022
BaaS interest expense $21,826 $20,384 $9,559 $71,646 $16,108
Total BaaS interest expense $21,826 $20,384 $9,559 $71,646 $16,108


BaaS income Three Months Ended Twelve Months Ended
(dollars in thousands; unaudited) December 31,
2023		 September 30,
2023		 December 31,
2022		 December 31,
2023		 December 31,
2022
BaaS program income:          
Servicing and other BaaS fees $1,015 $997 $1,001 $3,855 $4,408
Transaction fees  1,006  1,036  964  4,011  3,211
Interchange fees  1,272  1,216  785  4,252  2,583
Reimbursement of expenses  1,076  1,152  857  4,175  2,732
BaaS program income  4,369  4,401  3,607  16,293  12,934
BaaS indemnification income:          
BaaS credit enhancements  58,449  25,926  31,164  177,764  76,374
BaaS fraud enhancements  779  2,850  6,818  7,165  29,571
BaaS indemnification income  59,228  28,776  37,982  184,929  105,945
Total BaaS income $63,597 $33,177 $41,589 $201,222 $118,879


BaaS loan and fraud expense: Three Months Ended Twelve Months Ended
(dollars in thousands; unaudited) December 31,
2023		 September 30,
2023		 December 31,
2022		 December 31,
2023		 December 31,
2022
BaaS loan expense $24,310 $23,003 $17,215 $86,900 $53,294
BaaS fraud expense  779  2,850  6,819  7,165  29,571
Total BaaS loan and fraud expense $25,089 $25,853 $24,034 $94,065 $82,865

 


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