United States

Coastal Financial Corporation Announces Fourth Quarter 2022 Results

Fourth Quarter 2022 Highlights:

  • Quarterly net income of $13.1 million, or $0.96 per diluted common share, for the three months ended December 31, 2022, compared to $11.1 million, or $0.82 per diluted common share for the three months ended September 30, 2022.
  • Total assets increased $10.7 million, or 0.3%, to $3.14 billion for the quarter ended December 31, 2022, compared to $3.13 billion at September 30, 2022.
  • Loan growth of $119.4 million, or 4.8%, to $2.63 billion for the three months ended December 31, 2022.
    • CCBX loans increased $96.9 million, or 10.6%, to $1.0 billion.
    • Community bank loans increased $22.4 million, or 1.4%, to $1.61 billion.
      • PPP loans decreased $1.1 million, or 18.9%, to $4.7 million.
  • Deposits decreased $19.5 million, or 0.7%, to $2.82 billion for the three months ended December 31, 2022.
    • CCBX deposit growth of $77.0 million, or 6.4%, to $1.28 billion.
      • Additional $225.0 million in CCBX deposits transferred off balance sheet.
    • Community bank deposits decreased $96.6 million, or 5.9%, to $1.54 billion and community bank cost of deposits was 0.37%.
  • Total revenue increased $12.7 million, or 15.2%, for the three months ended December 31, 2022, compared to September 30, 2022.
  • Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements(*) increased $4.3 million, or 8.0%, to $58.3 million for the three months ended December 31, 2022.
  • On November 1, 2022 the Company completed its private placement of $20.0 million in fixed-to-floating rate subordinated notes due November 1, 2032; the intention is to use net proceeds from the offering for general corporate purposes.

2022 Highlights:

  • Total assets increased $509.0 million, or 19.3%, to $3.14 billion for the year ended December 31, 2022, compared to $2.64 billion at December 31, 2021.
  • Total deposits increased $453.7 million, or 19.2%, to $2.82 billion for the year ended December 31, 2022, compared to $2.36 billion at December 31, 2021.
    • CCBX deposits increased $563.0 million, or 78.6%, during the year ended December 31, 2022.
    • Community bank deposits decreased $109.3 million, or 6.6%, during the year ended December 31, 2022
  • Loan growth of $884.5 million, or 50.8%, to $2.63 billion for the year ended December 31, 2022, compared to $1.74 billion for the year ended December 31, 2021.
    • CCBX loans increased $665.8 million, or 192.1%.
    • Community bank loans increased $218.7 million, or 15.7%.
      • PPP loans decreased $107.1 million, or 95.8%, to $4.7 million.
  • Net income increased $13.6 million, or 50.4%, to $40.6 million for the year ended December 31, 2022, or $3.01 per diluted common share, compared to $27.0 million, or $2.16 per diluted common share, for the year ended December 31, 2021.
  • Total revenue increased $57.3 million, or 147.3% for the year ended December 31, 2022, compared to the year ended December 31, 2021.
  • Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements(*) increased $29.6 million, or 103.5%, to $190.5 million for the year ended December 31, 2022, compared to $97.0 million for the year ended December 31, 2021.
  • Loan losses (net charge-offs) for the year ended December 31, 2022:
    • Community bank: $32,000.
    • Holding Company: $350,000.
    • CCBX: $33.3 million; $33.1 million covered by credit enhancements.

EVERETT, Wash., Jan. 27, 2023 (GLOBE NEWSWIRE) — Coastal Financial Corporation (Nasdaq: CCB) (the “Company”), the holding company for Coastal Community Bank (the “Bank”), today reported unaudited financial results for the quarter ended December31, 2022. Quarterly net income for the fourth quarter of 2022 was $13.1 million, or $0.96 per diluted common share, compared with net income of $11.1 million, or $0.82 per diluted common share, for the third quarter of 2022, and $7.3 million, or $0.57 per diluted common share, for the quarter ended December 31, 2021. 

Total assets increased $10.7 million, or 0.3%, during the fourth quarter of 2022 to $3.14 billion, from $3.13 billion at September 30, 2022. Loan growth of $119.4 million, or 4.8%, during the three months ended December 31, 2022 to $2.63 billion, compared to $2.51 billion at September 30, 2022 . Loan growth included CCBX loan growth of $96.9 million, or 10.6%, and an increase of $22.4 million, or 1.4% in community bank loans, which is net of $1.1 million in PPP loan forgiveness/repayments. Deposits decreased $19.5 million, or 0.7%, during the three months ended December 31, 2022 and included CCBX deposit growth of $77.0 million, or 6.4%, and a decrease in community bank deposits of $96.6 million, or 5.9%.

“Loans increased $119.4 million, or 4.8%, in the three months ended December 31, 2022, with $96.9 million of that growth in our CCBX segment, which provides Banking as a Service (“BaaS”). Our CCBX segment has grown to $1.0 billion in loans receivable, or 38.5% of total loans receivable, and our community bank loans have grown to $1.6 billion in loans receivable, as of December 31, 2022. Additionally, we sold excess loans back to our partners to help partners manage credit and interest rate risk. During the quarter ended December 31, 2022 we allowed some community bank deposits to run off in order to manage our our deposit costs, resulting in deposits decreasing $19.5 million, or 0.7%, during the three months ended December 31, 2022. Community bank cost of deposits was 0.37% for the quarter ended December 31, 2022. For the quarter ended December 31, 2022 we had net income of $13.1 million, an increase of $2.0 million, or 18.2%, over the quarter ended September 30, 2022.

“We are so proud to have recently received the Everett Herald Readers Choice Best of Snohomish County in three categories; Best Place to Work, Best Mortgage, and Best Bank. This recognition reflects our strong commitment to our community bank roots. We are also pleased that Coastal World, www.coastalworld.com, an immersive 3D web platform that promotes, educates and informs visitors about digital banking solutions through our fintech partners is garnering recognition, and was awarded site of the day and site of the month from three major outlets and was nominated as site of the year as well,” 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 two segments: CCBX and the community bank. The CCBX segment includes our BaaS activities and the community bank segment includes all other banking activities. Net interest income was $53.4 million for the quarter ended December 31, 2022, an increase of $4.2 million, or 8.6%, from $49.2 million for the quarter ended September 30, 2022, and an increase of $28.7 million, or 116.3%, from $24.7 million for the quarter ended December 31, 2021. Yield on loans receivable was 9.33% for the three months ended December 31, 2022, compared to 8.46% for the three months ended September 30, 2022 and 5.92% for the three months ended December 31, 2021. The increase in net interest income compared to September 30, 2022 and December 31, 2021, was largely related to increased yield on loans resulting from higher interest rates and growth in higher yielding loans, primarily from CCBX. Total average loans receivable for the three months ended December 31, 2022 was $2.60 billion, compared to $2.45 billion for the three months ended September 30, 2022, and $1.68 billion for the three months ended December 31, 2021.

Interest and fees on loans totaled $61.2 million for the three months ended December 31, 2022 compared to $52.3 million and $25.1 million for the three months ended September 30, 2022 and December 31, 2021, respectively. Loan growth of $119.4 million, or 4.8%, during the quarter ended December 31, 2022 included $96.9 million increase in CCBX loans; this includes capital call lines, which decreased $28.3 million, or 16.2%, during the quarter ended December 31, 2022, compared to the quarter ended September 30, 2022. Capital call lines bear a lower rate of interest, but have less credit risk due to the way the loans are structured compared to other commercial loans. The increase in interest and fees on loans for the quarter ended December 31, 2022, compared to September 30, 2022 and December 31, 2021, was largely due to growth in higher yielding loans and increased interest rates. As a result of the Federal Open Market Committee (“FOMC”) raising the target Federal Funds rate 4.25% in 2022, interest rates on our existing variable rate loans are affected, as are the rates on new loans. We continue to monitor the impact of these increases in interest rates. The FOMC last raised the target Federal Funds rate 0.50% on December 14, 2022.

Interest income from interest earning deposits with other banks was $3.1 million at December 31, 2022, an increase of $824,000 compared to September 30, 2022, and an increase of $2.8 million compared to December 31, 2021 due to an increase in interest rates. The average balance of interest earning deposits with other banks for the three months ended December 31, 2022 was $329.4 million, compared to $397.6 million and $751.8 million for the three months ended September 30, 2022 and December 31, 2021, respectively. Interest earning deposits with other banks decreased as a result of increased loan demand and decreased deposits compared to the three months ended September 30, 2022. Interest earning deposits with other banks decreased as a result of increased loan demand compared to the three months ended December 31, 2021. Additionally, the average yield on these interest earning deposits with other banks increased to 3.73% for the quarter ended December 31, 2022, compared to 2.27% and 0.16% for the quarters ended September 30, 2022 and December 31, 2021, respectively.

Interest expense was $11.6 million for the quarter ended December 31, 2022, a $5.3 million increase from the quarter ended September 30, 2022 and a $10.8 million increase from the quarter ended December 31, 2021. Interest expense on borrowed funds was $537,000 for the quarter ended December 31, 2022, compared to $273,000 and $327,000 for the quarters ended September 30, 2022 and December 31, 2021, respectively. Interest expense on borrowed funds increased $264,000 compared to the three months ended September 30, 2022, as a result of an increase of $20.0 million in subordinated debt, which closed on November 1, 2022, combined with the increase in interest rates. The $210,000 increase in interest expense on borrowed funds from the quarter ended December 31, 2021 is the result of an increase in interest rates partially offset by a decrease in Federal Home Loan Bank borrowings, which were paid off in the first quarter of 2022. Interest expense on interest bearing deposits increased $5.3 million for the quarter ended December 31, 2022, compared to the quarter ended September 30, 2022, and $10.5 million compared to the quarter ended December 31, 2021 as a result an increase in CCBX deposits that are tied to and reprice when the FOMC raises rates, just like our CCBX loans which also reprice when the FOMC raises interest rates. Additionally, as a result of the interest rate increases, a significant portion of CCBX deposits that were not earning interest were reclassified to interest bearing deposits from noninterest bearing deposits during the first and second quarters of 2022, which also contributed to the increase in interest expense compared to December 31, 2021. These CCBX deposits were reclassified because the current interest rate exceeded the minimum interest rate set in their respective program agreements, as a result of the first and second quarter 2022 interest rate increases. We do not expect additional CCBX deposits will be reclassified as a result of future rate increases.

Total cost of deposits was 1.56% for the three months ended December 31, 2022, 0.82% for the three months ended September 30, 2022, and 0.09%, for the three months ended December 31, 2021. Community bank and CCBX cost of deposits were 0.37% and 3.13% respectively, for the three months ended December 31, 2022, compared to 0.16% and 1.79%, for the three months ended September 30, 2022, and 0.12% and 0.02% for the three months ended December 31, 2021. The increase in cost of deposits for the three months ended December 31, 2022 compared to the prior periods for both segments is a result of increased interest rates. Also impacting CCBX cost of deposits was the reclassification of deposits from noninterest bearing to interest bearing in the first two quarters of 2022. Any additional interest rate increases will increase our cost of deposits and result in higher interest expense on interest bearing deposits.

Net Interest Margin

Net interest margin was 6.96% for the three months ended December 31, 2022, compared to 6.58% and 3.95% for the three months ended September 30, 2022 and December 31, 2021, respectively. The increase in net interest margin compared to the three months ended September 30, 2022 and December 31, 2021, was largely a result of increased volume and an increase in higher interest rates on new loans and on existing variable rate loans as they reprice. Loans receivable increased $119.4 million and $884.5 million, compared to September 30, 2022 and December 31, 2021, respectively. Additionally, the Fed Funds interest rate increases have resulted in existing, variable rate loans repricing to higher interest rates. Interest on loans receivable increased $8.9 million, or 17.0%, to $61.2 million for the three months ended December 31, 2022, compared to $52.3 million for the three months ended September 30, 2022, and $25.1 million for the three months ended December 31, 2021. Also contributing to the increase in net interest margin compared to the three months ended September 30, 2022 and December 31, 2021, was $824,000 and $2.8 million increase in interest on interest earning deposits, respectively. These interest earning deposits earned an average rate of 3.73% for the quarter ended December 31, 2022, compared to 2.27% and 0.16% for the quarters ended September 30, 2022 and December 31, 2021, respectively. Average investment securities decreased $2.2 million to $101.5 million for the three months ended December 31, 2022 compared to the three months ended September 30, 2022, and increased $64.5 million compared to the three months ended December 31, 2021. Interest on investment securities increased $3,000 for the three months ended December 31, 2022 compared to the three months ended September 30, 2022. Investment securities increased $554,000 compared to December 31, 2021, as a result of the increase in average outstanding balance coupled with increased yield, which also positively impacted net interest margin. These increases in interest income were partially offset by increases in interest expense on interest bearing deposits, as previously discussed.

Cost of funds was 1.61% for the quarter ended December 31, 2022, an increase of 76 basis points from the quarter ended September 30, 2022 and an increase of 147 basis points from the quarter ended December 31, 2021. Cost of deposits for the quarter ended December 31, 2022 was 1.56%, compared to 0.82% for the quarter ended September 30, 2022, and 0.09% for the quarter ended December 31, 2021. The increased cost of funds and deposits compared to September 30, 2022 and December 31, 2021 was largely due to the increase in interest rates compared to the previous periods and growth in deposits compared to December 31, 2021.

During the quarter ended December 31, 2022, total loans receivable increased by $119.4 million, or 4.8%, to $2.63 billion, compared to $2.51 billion for the quarter ended September 30, 2022. The increase consists of $96.9 million in CCBX loan growth and $22.4 million in community bank loan growth. Community bank loan growth is net of $1.1 million in PPP loan forgiveness/repayments. Total loans receivable grew $884.5 million as of December 31, 2022, compared to the quarter ended December 31, 2021. This increase includes CCBX loan growth of $665.8 million and community bank loan growth of $218.7 million. Community bank loan growth is net of $107.1 million in PPP loan forgiveness/repayments as of December 31, 2022 compared to December 31, 2021. During the quarter ended December 31, 2022, $24.4 million in CCBX loans were transferred into loans held for sale, with $67.7 million in loans sold during the quarter and no loans remaining in loans held for sale as of December 31, 2022; compared to $43.3 million held for sale as of September 30, 2022. 

Total yield on loans receivable for the quarter ended December 31, 2022 was 9.33%, compared 8.46% for the quarter ended September 30, 2022, and 5.92% for the quarter ended December 31, 2021. This increase in yield on loans receivable is a combination of an overall increase in interest rates, repricing of variable rate loans as well as additional volume in higher rate consumer loans from CCBX partners. During the quarter ended December 31, 2022, CCBX loans outstanding increased 10.6%, or $96.9 million, compared to September 30, 2022, with an average CCBX yield of 15.20% and community bank loans increased 1.4%, or $22.4 million, September 30, 2022, with an average yield of 5.70%. 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 servicing CCBX loans. Net BaaS loan income(*) divided by average CCBX loans outstanding was 8.33% for the quarter ended December 31, 2022 and was impacted by the $28.3 million decline in capital call lines during the quarter that are priced at prime minus 0.50%.

The following table summarizes the average yield on loans receivable and cost of deposits for each segment for the periods indicated:

  For the Three Months Ended   For the Twelve Months Ended
  December 31, 2022   September 30, 2022   December 31, 2021   December 31, 2022   December 31, 2021
  Yield on
Loans
  Cost of
Deposits
  Yield on
Loans
  Cost of
Deposits
  Yield on
Loans
  Cost of
Deposits
  Yield on
Loans
  Cost of
Deposits
  Yield on
Loans
  Cost of
Deposits
Community Bank 5.70 %   0.37 %   5.31 %   0.16 %   5.89 %   0.12 %   5.32 %   0.18 %   4.90 %   0.14 %
CCBX (1) 15.20 %   3.13 %   13.96 %   1.79 %   6.13 %   0.02 %   13.85 %   1.57 %   4.46 %   0.03 %
Consolidated 9.33 %   1.56 %   8.46 %   0.82 %   5.92 %   0.09 %   8.12 %   0.71 %   4.86 %   0.12 %

(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 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.

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

    For the Three Months Ended
    December 31, 2022   September 30, 2022   December 31, 2021
(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   $ 38,086   15.20 %   $ 31,449   13.96 %   $ 3,771   6.13 %
Less: BaaS loan expense     17,215   6.87 %     15,560   6.91 %     2,368   3.85 %
Net BaaS loan income (1)   $ 20,871   8.33 %   $ 15,889   7.05 %   $ 1,403   2.28 %
Average BaaS Loans   $ 994,080       $ 893,655       $ 244,038    

    For the Twelve Months Ended
    December 31, 2022   December 31, 2021
(dollars in thousands; unaudited)   Income / Expense   Income / expense divided by average CCBX loans   Income / Expense   Income / expense divided by average CCBX loans
BaaS loan interest income   $ 102,808   13.85 %   $ 6,532   4.46 %
Less: BaaS loan expense     53,294   7.18 %     2,976   2.03 %
Net BaaS loan income (1)   $ 49,514   6.67 %   $ 3,556   2.43 %
Average BaaS Loans   $ 742,392       $ 146,304    

(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.

The following table illustrates the net BaaS loan income spread for the periods indicated:

    For the Three Months Ended
(unaudited)   December 31, 2022   September 30, 2022   December 31, 2021
Net BaaS loan income (1)(2)   8.33 %   7.05 %   2.28 %
CCBX cost of deposits(2)   3.13 %   1.79 %   0.02 %
Net BaaS loan income interest rate spread (1)   5.20 %   5.26 %   2.26 %

    For the Twelve Months Ended
(unaudited)   December 31, 2022   December 31, 2021
Net BaaS loan income (1)   6.67 %   2.43 %
CCBX cost of deposits   1.57 %   0.03 %
Net BaaS loan income interest rate spread (1)   5.10 %   2.40 %

(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.

Key Performance Ratios

Return on average assets (“ROA”) was 1.66% for the quarter ended December 31, 2022 compared to 1.45% and 1.14% for the quarters ended September 30, 2022 and December 31, 2021, respectively. ROA for the quarter ended December 31, 2022, was impacted by an increase in loan volume and overall higher interest rates on interest earning assets, compared to the quarters ended September 30, 2022 and December 31, 2021.

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

    Three Months Ended   Twelve Months Ended
(unaudited)   December 31,
2022
  September 30,
2022
  June 30,
2022
  March 31,
2022
  December 31,
2021
  December 31,
2022
  December 31,
2021
                             
Return on average assets (1)   1.66 %   1.45 %   1.41 %   0.93 %   1.14 %   1.38 %   1.24 %
Return on average equity (1)   21.86 %   19.36 %   18.86 %   12.12 %   16.80 %   18.24 %   17.24 %
Yield on earnings assets (1)   8.47 %   7.38 %   5.94 %   4.58 %   4.09 %   6.68 %   3.90 %
Yield on loans receivable (1)   9.33 %   8.46 %   7.34 %   6.80 %   5.92 %   8.12 %   4.86 %
Cost of funds (1)   1.61 %   0.85 %   0.29 %   0.14 %   0.14 %   0.75 %   0.18 %
Cost of deposits (1)   1.56 %   0.82 %   0.25 %   0.09 %   0.09 %   0.71 %   0.12 %
Net interest margin (1)   6.96 %   6.58 %   5.66 %   4.45 %   3.95 %   5.97 %   3.73 %
Noninterest expense to average assets (1)   5.97 %   6.66 %   5.29 %   4.52 %   3.29 %   5.65 %   2.90 %
Noninterest income to average assets (1)   5.43 %   4.48 %   3.53 %   3.27 %   2.22 %   4.23 %   1.29 %
Efficiency ratio   48.94 %   61.12 %   58.38 %   59.34 %   54.08 %   56.26 %   58.82 %
Loans receivable to deposits (2)   93.25 %   89.92 %   86.54 %   76.24 %   73.73 %   93.25 %   73.73 %

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

The following table details noninterest income for the periods indicated:

Noninterest Income

  Three Months Ended
  December 31,   September 30,   December 31,
(dollars in thousands; unaudited)   2022       2022       2021  
Deposit service charges and fees $ 946     $ 986     $ 930  
Mortgage broker fees   25       24       218  
Unrealized (loss) gain on equity securities, net   (18 )     (133 )     (3 )
Gain on sales of loans, net               29  
Other   273       236       397  
Noninterest income, excluding BaaS program income and BaaS indemnification income   1,226       1,113       1,571  
Servicing and other BaaS fees   1,001       1,079       1,421  
Transaction fees   964       940       280  
Interchange fees   785       738       368  
Reimbursement of expenses   857       885       295  
BaaS program income   3,607       3,642       2,364  
BaaS credit enhancements   31,164       17,928       9,076  
Baas fraud enhancements   6,818       11,708       1,209  
BaaS indemnification income   37,982       29,636       10,285  
Total noninterest income $ 42,815     $ 34,391     $ 14,220  

Noninterest income was $42.8 million for the three months ended December 31, 2022, an increase of $8.4 million from $34.4 million for the three months ended September 30, 2022, and an increase of $28.6 million from $14.2 million for the three months ended December 31, 2021. The increase in noninterest income over the quarter ended September 30, 2022 was primarily due to an increase of $8.3 million in BaaS income. The $8.3 million increase in BaaS income included a $13.2 million increase in BaaS credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, a $4.9 million decrease in BaaS fraud enhancements, and a decrease of $35,000 in BaaS program income (see “Appendix B” for more information on the accounting for BaaS allowance for loan losses, reserve for unfunded commitments and credit and fraud enhancements). The $28.6 million increase in noninterest income over the quarter ended December 31, 2021 was primarily due to a $28.9 million increase in BaaS income. The $28.9 million increase in BaaS income included a $22.1 million increase in BaaS credit enhancements, a $5.6 million increase in BaaS fraud enhancements and a $1.2 million increase in other BaaS program income.

Our CCBX segment continues to evolve, and we now have 27 relationships, at varying stages, as of December 31, 2022. We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense for both parties and are focusing more on selecting larger and more established partners, with experienced management teams, existing customer bases and strong financial positions.

The following table illustrates the activity and evolution in CCBX relationships for the periods presented. During the quarter ended December 31, 2022, a couple partners wound down their CCBX programs; these programs were not material in terms of income and sources of funds or loans.

  As of
(unaudited) December 31,
2022
September 30,
2022
December 31,
2021
Active 19 19 19
Friends and family / testing 1 2 1
Implementation / onboarding 0 0 5
Signed letters of intent 5 5 3
Wind down – preparing to exit relationship 2 3 0
Total CCBX relationships 27 29 28

Noninterest Expense

The following table details noninterest expense for the periods indicated:

    Three Months Ended
    December 31,   September 30,   December 31,
(dollars in thousands; unaudited)     2022     2022     2021
Salaries and employee benefits   $ 14,399   $ 14,506   $ 10,541
Legal and professional fees     2,799     2,251     951
Data processing and software licenses     1,768     1,670     1,494
Occupancy     1,182     1,147     1,043
Point of sale expense     710     742     195
FDIC assessments     550     850     812
Director and staff expenses     515     475     393
Marketing     109     69     107
Excise taxes     702     588     435
Other     335     1,522     1,502
Noninterest expense, excluding BaaS loan and BaaS fraud expense     23,069     23,820     17,473
BaaS loan expense     17,215     15,560     2,368
BaaS fraud expense     6,819     11,707     1,209
BaaS loan and fraud expense     24,034     27,267     3,577
Total noninterest expense   $ 47,103   $ 51,087   $ 21,050

Total noninterest expense decreased to $47.1 million for the three months ended December 31, 2022, compared to $51.1 million for the three months ended September 30, 2022 and increased from $21.1 million for the three months ended December 31, 2021. The decrease in noninterest expense for the quarter ended December 31, 2022, as compared to the quarter ended September 30, 2022, was primarily due to a $3.2 million decrease in BaaS expense (of which $4.9 million is related to a decrease in partner fraud expense partially offset by an increase of $1.7 million in partner loan expense). Partner loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, and servicing CCBX loans. Partner fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts, a portion of this expense is realized during the quarter, and a portion is estimated based on historical or other information from our partners. Also contributing to the decrease in noninterest expense compared to September 30, 2022 is a $1.2 million decrease in other expenses, which is related to reduction in the unfunded commitment reserve of $1.1 million.

The increase in noninterest expenses for the quarter ended December 31, 2022 compared to the quarter ended December 31, 2021 were largely due to an increase of $20.5 million in BaaS partner expense ($14.8 million of which is related to partner loan expense and $5.6 million of which is related to partner fraud expense), $3.9 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives and $1.8 million increase in legal and professional fees due to increased fees related to data and risk management, and increased consulting expenses for projects and enhanced monitoring. Additionally, there was a $515,000 increase in point of sale expenses which is attributed to increased CCBX activity. Partially offsetting the increase in noninterest expense compared to December 31, 2021 is a $1.2 million decrease in other expenses, which is related to reduction in the unfunded commitment reserve of $1.5 million.

The provision for income taxes was $2.4 million for the three months ended December 31, 2022, $3.0 million for the three months ended September 30, 2022 and $1.6 million for the fourth quarter of 2021. 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 effective tax rate was lower for the three months ended December 31, 2022 due to an update in the state apportionment of the revenues in the states in which we operate combined with tax benefits that resulted from the exercise of stock awards. 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 $10.7 million, or 0.3%, to $3.14 billion at December 31, 2022 compared to $3.13 billion at September 30, 2022. The increase is primarily due to loans receivable increasing $119.4 million during the quarter ended December 31, 2022. Partially offsetting the increase in loans for the quarter ended December 31, 2022 was a $63.8 million decrease in interest earning deposits with other banks, resulting from increased loan demand and decreased customer deposits. Additionally, there were no loans held for sale at December 31, 2022, a decrease of $43.3 million, compared to the quarter ended September 30, 2022.

Total assets increased $509.0 million, or 19.3%, at December 31, 2022, compared to $2.64 billion at December 31, 2021. The increase is primarily due to loans receivable increasing $884.5 million, and an increase of $61.7 million in investment securities. Partially offsetting the increase is a $489.2 million decrease in interest earning deposits with other banks, resulting from increased loan demand and funds being shifted from interest earning deposits with other banks to loans, compared to December 31, 2021.

Loans Receivable

Total loans receivable increased $119.4 million to $2.63 billion at December 31, 2022, from $2.51 billion at September 30, 2022, and increased $884.5 million from $1.74 billion at December 31, 2021. The increase in loans receivable over the quarter ended September 30, 2022 was the result of $96.9 million in CCBX loan growth and $22.4 million in community bank loan growth. Community bank loan growth is net of $1.1 million in PPP loan forgiveness/repayments compared to the quarter ended September 30, 2022. The change in loans receivable over the quarter ended December 31, 2021 includes CCBX loan growth of $665.8 million and $218.7 million in community bank loan growth as of December 31, 2022. Community bank loan growth is net of $107.1 million in PPP loan forgiveness and paydowns since December 31, 2021.

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

  As of December 31, 2022   As of September 30, 2022   As of December 31, 2021
(dollars in thousands; unaudited) Amount   Percent   Amount   Percent   Amount   Percent
Commercial and industrial loans:                      
PPP loans $ 4,699     0.2 %   $ 5,794     0.2 %   $ 111,813     6.4 %
Capital call lines   146,029     5.5       174,311     6.9       202,882     11.5  
All other commercial & industrial loans   161,900     6.1       159,823     6.4       104,365     6.0  
Total commercial and industrial loans:   312,628     11.8       339,928     13.5       419,060     23.9  
Real estate loans:                      
Construction, land and land development   214,055     8.1       224,188     8.9       183,594     10.5  
Residential real estate   449,157     17.1       402,781     16.0       204,389     11.7  
Commercial real estate   1,048,752     39.8       1,024,067     40.7       835,587     47.7  
Consumer and other loans   608,771     23.2       523,536     20.9       108,871     6.2  
    Gross loans receivable   2,633,363     100.0 %     2,514,500     100.0 %     1,751,501     100.0 %
Net deferred origination fees – PPP loans   (82 )         (111 )         (3,633 )    
Net deferred origination fees – all other loans   (6,025 )         (6,500 )         (5,133 )    
    Loans receivable $ 2,627,256         $ 2,507,889         $ 1,742,735      
Loan Yield (1)   9.33 %         8.46 %         5.92 %    

(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, 2022   September 30, 2022   December 31, 2021
(dollars in thousands; unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total
Commercial and industrial loans:                        
PPP loans   $ 4,699     0.3 %   $ 5,794     0.4 %   $ 111,813     8.0 %
All other commercial & industrial loans     146,982     9.1       143,808     9.0       104,365     7.4  
Real estate loans:                        
Construction, land and land development loans     214,055     13.2       224,188     14.0       183,594     13.1  
Residential real estate loans     204,581     12.6       198,871     12.5       167,502     11.9  
Commercial real estate loans     1,048,752     64.7       1,024,067     64.0       835,587     59.5  
Consumer and other loans:                        
Other consumer and other loans     1,725     0.1       2,220     0.1       2,034     0.1  
Gross Community Bank loans receivable     1,620,794     100.0 %     1,598,948     100.0 %     1,404,895     100.0 %
Net deferred origination fees     (6,042 )         (6,628 )         (8,835 )    
Loans receivable   $ 1,614,752         $ 1,592,320         $ 1,396,060      
Loan Yield(1)     5.70 %         5.31 %         5.89 %    

(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, 2022   September 30, 2022   December 31, 2021
(dollars in thousands; unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total
Commercial and industrial loans:                        
Capital call lines   $ 146,029     14.4 %   $ 174,311     19.0 %   $ 202,882     58.6 %
All other commercial & industrial loans     14,918     1.5       16,015     1.8           0.0  
Real estate loans:                        
Residential real estate loans     244,576     24.2       203,910     22.3       36,887     10.6  
Consumer and other loans:                        
Credit cards     279,644     27.6       216,995     23.7       11,429     3.3  
Other consumer and other loans     327,402     32.3       304,321     33.2       95,408     27.5  
Gross CCBX loans receivable     1,012,569     100.0 %     915,552     100.0 %     346,606     100.0 %
Net deferred origination (fees) costs     (65 )         17           69      
Loans receivable   $ 1,012,504         $ 915,569         $ 346,675      
Loan Yield – CCBX (1)(2)     15.20 %         13.96 %         6.13 %    

(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 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 decreased $19.5 million, or 0.7%, to $2.82 billion at December 31, 2022 from $2.84 billion at September 30, 2022. The decrease was due to a $41.3 million decrease in core deposits, combined with a $4.4 million decrease in time deposits, partially offset by a $26.2 million increase in BaaS-brokered deposits. We believe our decrease in deposits is primarily the result of significantly higher deposit rates being offered by competitors and depositors investing in the market. Deposits in our CCBX segment increased $77.0 million, from $1.20 billion at September 30, 2022, to $1.28 billion at December 31, 2022 and community bank deposits decreased $96.6 million to $1.54 billion at December 31, 2022. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts, but a portion of such CCBX deposits may be classified as brokered deposits as a result of the relationship agreement. During the quarter ended December 31, 2022, noninterest bearing deposits decreased $38.2 million, or 4.7%, to $775.0 million from $813.2 million at September 30, 2022. In the quarter ended December 31, 2022 compared to the quarter ended September 30, 2022, NOW and money market accounts decreased $2.7 million, savings deposits decreased $391,000, and time deposits decreased $4.4 million. Partially offsetting those decreases is an increase of $26.2 million in BaaS-brokered deposits.

Total deposits increased $453.7 million, or 19.2%, to $2.82 billion at December 31, 2022 compared to $2.36 billion at December 31, 2021. The increase is largely the result of growth in CCBX deposits. Noninterest bearing deposits decreased $580.9 million, or 42.8%, to $775.0 million at December 31, 2022 from $1.4 billion at December 31, 2021. NOW and money market accounts increased $1.01 billion, or 128.5%, to $1.80 billion at December 31, 2022, and savings accounts increased $3.2 million, or 3.0%, and BaaS-brokered deposits increased $30.8 million, or 43.5% while time deposits decreased $14.0 million, or 32.2%, in the fourth quarter of 2022 compared to the fourth quarter of 2021. Additionally, as of December 31, 2022 we have access to $225.0 million in CCBX customer deposits that are currently being transferred off the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. If a portion of these deposits are retained, they would be classified as brokered deposits, however if the entire available balance is retained, they would be non-brokered deposits. 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, 2022   As of September 30, 2022   As of December 31, 2021
(dollars in thousands; unaudited) Amount   Percent of
Total
Deposits
  Balance   Percent of
Total
Deposits
  Balance   Percent of
Total
Deposits
Demand, noninterest bearing $ 775,012     27.5 %   $ 813,217     28.7 %   $ 1,355,908     57.4 %
NOW and money market   1,804,399     64.0       1,807,105     63.7       789,709     33.4  
Savings   107,117     3.8       107,508     3.8       103,956     4.4  
Total core deposits   2,686,528     95.3       2,727,830     96.2       2,249,573     95.2  
BaaS-brokered deposits   101,546     3.6       75,363     2.6       70,757     3.0  
Time deposits less than $100,000   12,596     0.5       13,296     0.5       14,961     0.6  
Time deposits $100,000 and over   16,851     0.6       20,577     0.7       28,496     1.2  
Total $ 2,817,521     100.0 %   $ 2,837,066     100.0 %   $ 2,363,787     100.0 %
Cost of Deposits (1)   1.56 %         0.82 %         0.09 %    

(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, 2022   September 30, 2022   December 31, 2021
(dollars in thousands; unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total
Demand, noninterest bearing   $ 694,179     45.2 %   $ 746,516     45.7 %   $ 719,233     43.7 %
NOW and money market     709,490     46.1       748,347     45.8       780,884     47.4  
Savings     105,101     6.8       106,059     6.4       103,954     6.3  
Total core deposits     1,508,770     98.1       1,600,922     97.9       1,604,071     97.4  
Brokered deposits     1     0.0       1     0.0       1     0.0  
Time deposits less than $100,000     12,596     0.8       13,296     0.8       14,961     0.9  
Time deposits $100,000 and over     16,851     1.1       20,577     1.3       28,496     1.7  
Total Community Bank deposits   $ 1,538,218     100.0 %   $ 1,634,796     100.0 %   $ 1,647,529     100.0 %
Cost of deposits(1)     0.37 %         0.16 %         0.12 %    

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

CCBX   As of
    December 31, 2022   September 30, 2022   December 31, 2021
(dollars in thousands; unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total
Demand, noninterest bearing   $ 80,833     6.3 %   $ 66,701     5.5 %   $ 636,675     88.9 %
NOW and money market     1,094,909     85.6       1,058,758     88.1       8,825     1.2  
Savings     2,016     0.2       1,449     0.1       2      
Total core deposits     1,177,758     92.1       1,126,908     93.7       645,502     90.1  
BaaS-brokered deposits     101,545     7.9       75,362     6.3       70,756     9.9  
Total CCBX deposits   $ 1,279,303     100.0 %   $ 1,202,270     100.0 %   $ 716,258     100.0 %
Cost of deposits (1)     3.13 %         1.79 %         0.02 %    

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

Borrowings

On November 1, 2022, the Company completed its private placement of $20.0 million in fixed-to-floating rate subordinated notes due November 1, 2032 (the “Notes”). The Notes bear interest at a fixed annual rate of 7.00% for the first five years and will reset quarterly thereafter to the then-current three-month Secured Overnight Financing Rate (“SOFR”) plus 290 basis points. The Company may redeem the Notes, in whole or in part, on any interest payment date on or after November 1, 2027, or at any time, in whole but not in part, upon certain other specified events prior to the Notes’ maturity on November 1, 2032.

Shareholders’ Equity

During the twelve months ended December 31, 2022, the Company contributed $21.0 million in capital to the Bank. The Company has a cash balance of $22.9 million as of December 31, 2022, which is retained for general operating purposes, including debt repayment, and for funding $988,000 in commitments to bank technology funds.

Total shareholders’ equity increased $14.8 million since September 30, 2022. The increase in shareholders’ equity was primarily due to $13.1 million in net earnings and $1.2 million increase from stock options being exercised for the three months ended December 31, 2022.

Capital Ratios

The Company and the Bank remain well capitalized at December 31, 2022, as summarized in the following table.

(unaudited)   Coastal
Community
Bank
  Coastal
Financial
Corporation
  Financial
Institution
Basel III

Regulatory
Guidelines
Tier 1 leverage capital   8.56 %   7.97 %   5.00 %
Common Equity Tier 1 risk-based capital   9.77 %   8.95 %   6.50 %
Tier 1 risk-based capital   9.77 %   9.08 %   8.00 %
Total risk-based capital   11.04 %   11.99 %   10.00 %

Asset Quality

The total allowance for loan losses was $74.0 million and 2.82% of loans receivable at December 31, 2022 compared to $59.3 million and 2.36% at September 30, 2022 and $28.6 million and 1.64% at December 31, 2021. The allowance for loan loss allocated to the CCBX portfolio was $53.4 million and 5.27% of CCBX loans receivable at December 31, 2022, with $20.6 million of allowance for loan loss allocated to the community bank or 1.28% of total community bank loans receivable.

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

    As of December 31, 2022   As of September 30, 2022   As of December 31, 2021
(dollars in thousands; unaudited)   Community
Bank
  CCBX   Total   Community
Bank
  CCBX   Total   Community
Bank
  CCBX   Total
Loans receivable   $ 1,614,751     $ 1,012,505     $ 2,627,256     $ 1,592,320     $ 915,569     $ 2,507,889     $ 1,396,060     $ 346,675     $ 1,742,735  
Allowance for loan losses     (20,636 )     (53,393 )     (74,029 )     (20,139 )     (39,143 )     (59,282 )     (20,299 )     (8,333 )     (28,632 )
Allowance for loan losses to total loans receivable     1.28 %     5.27 %     2.82 %     1.26 %     4.28 %     2.36 %     1.45 %     2.40 %     1.64 %

Provision for loan losses totaled $33.6 million for the three months ended December 31, 2022, $18.4 million for the three months ended September 30, 2022, and $8.9 million for the three months ended December 31, 2021. Net charge-offs totaled $18.9 million for the quarter ended December 31, 2022, compared to $8.5 million for the quarter ended September 30, 2022 and $532,000 for the quarter ended December 31, 2021. Net charge-offs increased due to CCBX partner loans and the reclassification and charge-off of negative deposit accounts. 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 $114.5 million loan portfolio. At December 31, 2022, 10% of this portfolio represented $11.5 million in loans.

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

    Three Months Ended
    December 31, 2022   September 30, 2022   December 31, 2021
(dollars in thousands; unaudited)   Community
Bank
  CCBX   Total   Community
Bank
  CCBX   Total   Community
Bank
  CCBX   Total
Gross charge-offs   $ 10     $ 18,876     $ 18,886     $ 411     $ 8,102     $ 8,513     $ 215     $ 364     $ 579  
Gross recoveries     (3 )     (30 )     (33 )     (3 )     (6 )     (9 )     (47 )           (47 )
Net charge-offs   $ 7     $ 18,846     $ 18,853     $ 408     $ 8,096     $ 8,504     $ 168     $ 364     $ 532  
Net charge-offs to average loans (1)     %     7.52 %     2.87 %     0.10 %     3.59 %     1.38 %     0.05 %     0.59 %     0.13 %

The increase in the Company’s provision for loan losses during the quarter ended December 31, 2022, is largely related to the provision for loan growth in CCBX partner loans. During the quarter ended December 31, 2022, a $33.1 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis, compared to the $18.7 million provision for loan losses that was recorded for CCBX for the quarter ended September 30, 2022. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans and reclassified negative deposit accounts. When the provision for CCBX loan losses and provision for unfunded commitments is recorded, a receivable is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). Incurred losses are recorded in the allowance for loan losses. The receivable is relieved when credit enhancement recoveries are received from the CCBX partner. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by absorbing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations then the bank would be exposed to additional loan losses, as a result of this counterparty risk. The factors used in management’s analysis for community bank loan losses indicated that a provision of $504,000 and recapture/adjustment for loan losses of $238,000 was needed for the quarters ended December 31, 2022 and September 30, 2022, respectively. In accordance with the program agreement and for this CCBX partner only, the Company is responsible for credit losses on approximately 10% of a $114.5 million loan portfolio. At December 31, 2022, 10% of this portfolio represented $11.5 million in loans. The partner is responsible for credit losses on approximately 90% of this portfolio and for fraud losses on 100% of this portfolio. The Company earns 100% of the revenue on the aforementioned $11.5 million of loans. The economic environment is continuously changing, due to increased inflation, global unrest, the war in Ukraine, political environment, trade issues that may impact the provision and therefore the allowance. The Company is not required to implement the provisions of the Current Expected Credit Loss (“CECL”) accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model. The Company is on track with its migration and adoption plan for CECL.

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,
2022
  September 30,
2022
  December 31,
2021
  December 31,
2022
  December 31,
2021
Community bank   $ 504   $ (238 )   $ 243   $ 719   $ 1,275
CCBX     33,096     18,666       8,699     78,345     8,640
Total provision expense   $ 33,600   $ 18,428     $ 8,942   $ 79,064   $ 9,915

At December 31, 2022, our nonperforming assets were $33.2 million, or 1.06% of total assets, compared to $22.9 million, or 0.73%, of total assets, at September 30, 2022, and $1.7 million, or 0.07% of total assets, at December 31, 2021. These ratios are impacted by the increase in CCBX loans over 90 days delinquent that are covered by CCBX partner credit enhancements. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. Under the agreement, the CCBX partner will reimburse the Bank for its loss/charge-off on these loans. Nonperforming assets increased $10.3 million during the quarter ended December 31, 2022, compared to the quarter ended September 30, 2022, due to the addition of $10.3 million in CCBX loans that are past due 90 days or more and still accruing combined with $19,000 more 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 loans grow. Installment/closed-end and revolving/open-end consumer loans originated through CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively and are reported as substandard, 90 days or more days past due and still accruing. Community bank nonaccrual loans increased with the addition of one new nonaccrual loan partially offset by other nonaccrual principal reductions/charge-offs. There were no repossessed assets or other real estate owned at December 31, 2022. Our nonperforming loans to loans receivable ratio was 1.26% at December 31, 2022, compared to 0.91% at September 30, 2022, and 0.10% at December 31, 2021.

For the quarter ended December 31, 2022, there were $7,000 of community bank net charge-offs and $7.1 million of nonperforming community bank loans. The $6.9 million nonaccrual balance in commercial real estate loans shown below consists of one loan, is well secured with an original loan to value of 62%, and an updated loan to value of 75% as of January 2023. Management anticipates this loan being resolved in the first half of 2023. For the quarter ended December 31, 2022, $18.8 million in net charge-offs were recorded on CCBX loans. These loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses. In accordance with the program agreement and for this CCBX partner only, the Company is responsible for credit losses on approximately 10% of a $114.5 million loan portfolio. At December 31, 2022, 10% of this portfolio represented $11.5 million in loans. The partner is responsible for credit losses on approximately 90% of this portfolio and for fraud losses on 100% of this portfolio.

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

(dollars in thousands; unaudited) As of December
31, 2022
  As of September
30, 2022
  As of December
31, 2021
Nonaccrual loans:          
Commercial and industrial loans $ 113     $ 94     $ 166  
Real estate loans:          
Construction, land and land development   66       66        
Residential real estate               55  
Commercial real estate   6,901       6,901        
Total nonaccrual loans   7,080       7,061       221  
Accruing loans past due 90 days or more:          
Commercial & industrial loans   404       138        
Real estate loans:          
Residential real estate loans   876       638       39  
Consumer and other loans:          
Credit cards   10,570       4,777       155  
Other consumer and other loans   14,245       10,268       1,312  
    Total accruing loans past due 90 days or more   26,095       15,821       1,506  
Total nonperforming loans   33,175       22,882       1,727  
Real estate owned                
Repossessed assets                
Troubled debt restructurings, accruing                
Total nonperforming assets $ 33,175     $ 22,882     $ 1,727  
Total nonaccrual loans to loans receivable   0.27 %     0.28 %     0.01 %
Total nonperforming loans to loans receivable   1.26 %     0.91 %     0.10 %
Total nonperforming assets to total assets   1.06 %     0.73 %     0.07 %

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

Community Bank As of
(dollars in thousands; unaudited) December 31,
2022
  September 30,
2022
  December 31,
2021
Nonaccrual loans:          
Commercial and industrial loans $ 113   $ 94   $ 166
Real estate:          
Construction, land and land development   66     66    
Residential real estate           55
Commercial real estate   6,901     6,901    
Total nonaccrual loans   7,080     7,061     221
           
Accruing loans past due 90 days or more:          
Total accruing loans past due 90 days or more          
Total nonperforming loans   7,080     7,061     221
Other real estate owned          
Repossessed assets          
Total nonperforming assets $ 7,080   $ 7,061   $ 221

CCBX As of
(dollars in thousands; unaudited) December 31,
2022
  September 30,
2022
  December 31,
2021
Nonaccrual loans $   $   $
Accruing loans past due 90 days or more:          
Commercial & industrial loans   404     138    
Real estate loans:          
Residential real estate loans   876     638     39
Consumer and other loans:          
Credit cards   10,570     4,777     155
Other consumer and other loans   14,245     10,268     1,312
Total accruing loans past due 90 days or more   26,095     15,821     1,506
Total nonperforming loans   26,095     15,821     1,506
Other real estate owned          
Repossessed assets          
Total nonperforming assets $ 26,095   $ 15,821   $ 1,506

* A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.

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 $3.14 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,
2022
  September 30,
2022
  December 31,
2021
Cash and due from banks $ 32,722     $ 37,482     $ 14,496  
Interest earning deposits with other banks   309,417       373,246       798,665  
Investment securities, available for sale, at fair value   97,317       97,621       35,327  
Investment securities, held to maturity, at amortized cost   1,036       1,250       1,296  
Other investments   10,555       10,581       8,478  
Loans held for sale         43,314        
Loans receivable   2,627,256       2,507,889       1,742,735  
Allowance for loan losses   (74,029 )     (59,282 )     (28,632 )
Total loans receivable, net   2,553,227       2,448,607       1,714,103  
CCBX credit enhancement asset   53,377       48,228       8,712  
CCBX receivable   10,416       6,145       1,266  
Premises and equipment, net   18,213       18,467       17,219  
Operating lease right-of-use assets   5,018       5,293       6,105  
Accrued interest receivable   17,815       13,114       8,105  
Bank-owned life insurance, net   12,667       12,576       12,254  
Deferred tax asset, net   18,458       13,997       6,818  
Other assets   4,229       3,820       2,673  
Total assets $ 3,144,467     $ 3,133,741     $ 2,635,517  
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES          
Deposits $ 2,817,521     $ 2,837,066     $ 2,363,787  
Federal Home Loan Bank (“FHLB”) advances               24,999  
Subordinated debt, net   43,999       24,343       24,288  
Junior subordinated debentures, net   3,588       3,588       3,586  
Deferred compensation   616       648       744  
Accrued interest payable   684       153       357  
Operating lease liabilities   5,234       5,514       6,320  
Other liabilities   29,331       33,696       10,214  
Total liabilities   2,900,973       2,905,008       2,434,295  
           
SHAREHOLDERS’ EQUITY          
Common stock   125,830       123,944       121,845  
Retained earnings   119,998       106,880       79,373  
Accumulated other comprehensive (loss) income, net of tax   (2,334 )     (2,091 )     4  
Total shareholders’ equity   243,494       228,733       201,222  
Total liabilities and shareholders’ equity $ 3,144,467     $ 3,133,741     $ 2,635,517  

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

  Three Months Ended
  December 31,
2022
  September 30,
2022
  December 31,
2021
INTEREST AND DIVIDEND INCOME          
Interest and fees on loans $ 61,226     $ 52,328     $ 25,134  
Interest on interest earning deposits with other banks   3,097       2,273       294  
Interest on investment securities   557       554       3  
Dividends on other investments   150       24       115  
Total interest income   65,030       55,179       25,546  
INTEREST EXPENSE          
Interest on deposits   11,061       5,717       516  
Interest on borrowed funds   537       273       327  
Total interest expense   11,598       5,990       843  
Net interest income   53,432       49,189       24,703  
PROVISION FOR LOAN LOSSES   33,600       18,428       8,942  
Net interest income after provision for loan losses   19,832       30,761       15,761  
NONINTEREST INCOME          
Deposit service charges and fees   946       986       930  
Gain on sales of loans, net               29  
Mortgage broker fees   25       24       218  
Unrealized (loss) gain on equity securities, net   (18 )     (133 )     (3 )
Other income   273       236       397  
Noninterest income, excluding BaaS program income and BaaS indemnification income   1,226       1,113       1,571  
Servicing and other BaaS fees   1,001       1,079       1,421  
Transaction fees   964       940       280  
Interchange fees   785       738       368  
Reimbursement of expenses   857       885       295  
BaaS program income   3,607       3,642       2,364  
BaaS credit enhancements   31,164       17,928       9,076  
BaaS fraud enhancements   6,818       11,708       1,209  
BaaS indemnification income   37,982       29,636       10,285  
Total noninterest income   42,815       34,391       14,220  
NONINTEREST EXPENSE          
Salaries and employee benefits   14,399       14,506       10,541  
Occupancy   1,182       1,147       1,043  
Data processing and software licenses   1,768       1,670       1,494  
Legal and professional fees   2,799       2,251       951  
Point of sale expense   710       742       195  
Excise taxes   702       588       435  
Federal Deposit Insurance Corporation (“FDIC”) assessments   550       850       812  
Director and staff expenses   515       475       393  
Marketing   109       69       107  
Other expense   335       1,522       1,502  
Noninterest expense, excluding BaaS loan and BaaS fraud expense   23,069       23,820       17,473  
BaaS loan expense   17,215       15,560       2,368  
BaaS fraud expense   6,819       11,707       1,209  
BaaS loan and fraud expense   24,034       27,267       3,577  
Total noninterest expense   47,103       51,087       21,050  
Income before provision for income taxes   15,544       14,065       8,931  
PROVISION FOR INCOME TAXES   2,426       2,964       1,641  
NET INCOME $ 13,118     $ 11,101     $ 7,290  
Basic earnings per common share $ 1.01     $ 0.86     $ 0.60  
Diluted earnings per common share $ 0.96     $ 0.82     $ 0.57  
Weighted average number of common shares outstanding:          
Basic   13,030,726       12,938,200       12,144,452  
Diluted   13,603,978       13,536,823       12,701,464  

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

  Twelve Months Ended
  December 31,
2022
  December 31,
2021
INTEREST AND DIVIDEND INCOME      
Interest and fees on loans $ 183,352     $ 82,112
Interest on interest earning deposits with other banks   6,728       608
Interest on investment securities   1,745       79
Dividends on other investments   345       284
Total interest income   192,170       83,083
INTEREST EXPENSE      
Interest on deposits   19,004       2,327
Interest on borrowed funds   1,391       1,319
Total interest expense   20,395       3,646
Net interest income   171,775       79,437
PROVISION FOR LOAN LOSSES   79,064       9,915
Net interest income after provision for loan losses   92,711       69,522
NONINTEREST INCOME      
Deposit service charges and fees   3,804       3,698
Loan referral fees   810       2,126
Gain on sales of loans, net         396
Mortgage broker fees   257       920
Unrealized (loss) gain on equity securities, net   (153 )     1,469
Gain on sale of bank branch including deposits and loans, net         1,263
Other income   1,087       939
Noninterest income, excluding BaaS program income and BaaS indemnification income   5,805       10,811
Servicing and other BaaS fees   4,408       4,467
Transaction fees   3,211       544
Interchange fees   2,583       701
Reimbursement of expenses   2,732       1,004
BaaS program income   12,934       6,716
BaaS credit enhancements   76,374       9,086
BaaS fraud enhancements   29,571       1,505
BaaS indemnification income   105,945       10,591
Total noninterest income   124,684       28,118
NONINTEREST EXPENSE      
Salaries and employee benefits   52,228       37,101
Occupancy   4,548       4,128
Data processing and software licenses   6,487       4,951
Legal and professional fees   6,760       3,133
Point of sale expense   2,109       671
Excise taxes   2,204       1,589
Federal Deposit Insurance Corporation (“FDIC”) assessments   2,859       1,632
Director and staff expenses   1,711       1,205
Marketing   351       451
Other expense   4,652       3,921
Noninterest expense, excluding BaaS loan and BaaS fraud expense   83,909       58,782
BaaS loan expense   53,294       2,976
BaaS fraud expense   29,571       1,505
BaaS loan and fraud expense   82,865       4,481
Total noninterest expense   166,774       63,263
Income before provision for income taxes   50,621       34,377
PROVISION FOR INCOME TAXES   9,996       7,372
NET INCOME $ 40,625     $ 27,005
Basic earnings per common share $ 3.14     $ 2.25
Diluted earnings per common share $ 3.01     $ 2.16
Weighted average number of common shares outstanding:      
Basic   12,949,266       12,022,954
Diluted   13,514,952       12,521,426

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

  For the Three Months Ended
  December 31, 2022   September 30, 2022   December 31, 2021
  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 $ 329,354     $ 3,097   3.73 %   $ 397,621     $ 2,273   2.27 %   $ 751,805     $ 294     0.16 %
Investment securities, available for sale (2)   100,269       550   2.18       102,438       545   2.11       35,517       5     0.06  
Investment securities, held to maturity (2)   1,235       7   2.25       1,257       9   2.84       1,507       (2 )   (0.53 )
Other investments   10,592       150   5.62       10,520       24   0.91       8,411       115     5.42  
Loans receivable (3)   2,603,962       61,226   9.33       2,452,815       52,328   8.46       1,683,310       25,134     5.92  
Total interest earning assets   3,045,412       65,030   8.47       2,964,651       55,179   7.38       2,480,550       25,546     4.09  
Noninterest earning assets:                                  
Allowance for loan losses   (58,440 )             (51,259 )             (20,242 )        
Other noninterest earning assets   141,624               128,816               76,343          
Total assets $ 3,128,596             $ 3,042,208             $ 2,536,651          
                                   
Liabilities and Shareholders’ Equity                                  
Interest bearing liabilities:                                  
Interest bearing deposits $ 2,006,679     $ 11,061   2.19 %   $ 1,953,170     $ 5,717   1.16 %   $ 962,128     $ 516     0.21 %
FHLB advances and borrowings   5                             25,000       72     1.14  
Subordinated debt   37,455       484   5.13       24,331       234   3.82       24,276       234     3.82  
Junior subordinated debentures   3,588       53   5.86       3,587       39   4.31       3,586       21     2.32  
Total interest bearing liabilities   2,047,727       11,598   2.25       1,981,088       5,990   1.20       1,014,990       843     0.33  
Noninterest bearing deposits   807,794               807,952               1,336,161          
Other liabilities   34,944               25,662               13,308          
Total shareholders’ equity   238,131               227,506               172,192          
Total liabilities and shareholders’ equity $ 3,128,596             $ 3,042,208             $ 2,536,651          
Net interest income     $ 53,432           $ 49,189           $ 24,703      
Interest rate spread         6.22 %           6.18 %           3.76 %
Net interest margin (4)         6.96 %           6.58 %           3.95 %

(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, 2022   September 30, 2022   December 31, 2021
(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                                  
Loans receivable (2) $ 1,609,882   $ 23,140   5.70 %   $ 1,559,160   $ 20,879   5.31 %   $ 1,439,272   $ 21,363   5.89 %
Liabilities                                  
Interest bearing deposits   864,001     1,502   0.69       901,339     642   0.28       920,125     482   0.21  
Noninterest bearing deposits   737,812             735,038             715,267        
Total deposits   1,601,813     1,502   0.37       1,636,377     642   0.16       1,635,392     482   0.12  
Interest rate spread         5.33 %           5.16 %           5.77 %
                                   
CCBX                                  
Assets                                  
Loans receivable (2)(3) $ 994,080   $ 38,086   15.20 %   $ 893,655   $ 31,449   13.96 %   $ 244,038   $ 3,771   6.13 %
Liabilities                                  
Interest bearing deposits   1,142,678     9,559   3.32       1,051,831     5,075   1.91       42,003     34   0.32  
Noninterest bearing deposits   69,982             72,914             620,894        
Total deposits   1,212,660     9,559   3.13       1,124,745     5,075   1.79       662,897     34   0.02  
Interest rate spread         12.07 %           12.17 %           6.11 %
Net Baas loan income                                        
interest rate spread (4)         5.20 %           5.26 %           2.26 %

(1) Yields and costs are annualized.
(2) Includes loans held for sale and nonaccrual loans.
(3) 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 servicing CCBX loans.
(4) A reconciliation of non-GAAP measures are set forth at the end of this earnings release.

COASTAL FINANCIAL CORPORATION
AVERAGE BALANCES, YIELDS, AND RATES – YEAR-TO-DATE
(Dollars in thousands; unaudited)

  For the Twelve Months Ended
  December 31, 2022   December 31, 2021
(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 $ 515,967     $ 6,728   1.30 %   $ 402,081     $ 608   0.15 %
Investment securities, available for sale (2)   91,970       1,710   1.86       27,908       49   0.18  
Investment securities, held to maturity (2)   1,266       35   2.76       2,137       30   1.40  
Other investments   10,146       345   3.40       7,052       284   4.03  
Loans receivable (3)   2,257,787       183,352   8.12       1,688,925       82,112   4.86  
Total interest earning assets   2,877,136       192,170   6.68       2,128,103       83,083   3.90  
Noninterest earning assets:                      
Allowance for loan losses   (46,769 )             (19,870 )        
Other noninterest earning assets   119,817               74,088          
Total assets $ 2,950,184             $ 2,182,321          
                       
Liabilities and Shareholders’ Equity                      
Interest bearing liabilities:                      
Interest bearing deposits $ 1,724,020     $ 19,004   1.10 %   $ 910,106     $ 2,327   0.26 %
PPPLF borrowings           0.00       68,699       240   0.35  
FHLB advances and borrowings   6,029       69   1.14       24,999       284   1.14  
Subordinated debt   27,626       1,179   4.27       15,379       711   4.62  
Junior subordinated debentures   3,587       143   3.99       3,585       84   2.34  
Total interest bearing liabilities   1,761,262       20,395   1.16       1,022,768       3,646   0.36  
Noninterest bearing deposits   942,087               989,945          
Other liabilities   24,097               12,926          
Total shareholders’ equity   222,738               156,682          
Total liabilities and shareholders’ equity $ 2,950,184             $ 2,182,321          
Net interest income     $ 171,775           $ 79,437    
Interest rate spread         5.52 %           3.54 %
Net interest margin (4)         5.97 %           3.73 %

(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, 2022   December 31, 2021
(dollars in thousands; unaudited)   Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
Community Bank                        
Assets                        
Loans receivable (2)   $ 1,515,395   $ 80,544   5.32 %   $ 1,542,621   $ 75,580   4.90 %
Liabilities                        
Interest bearing deposits     905,447     2,896   0.32       877,389     2,228   0.25  
Noninterest bearing deposits     733,104             674,509        
Total deposits   $ 1,638,551   $ 2,896   0.18     $ 1,551,898   $ 2,228   0.14  
Interest rate spread           5.14 %           4.76 %
                         
CCBX                        
Assets                        
Loans receivable (2)(3)   $ 742,392   $ 102,808   13.85 %   $ 146,304   $ 6,532   4.46 %
Liabilities                        
Interest bearing deposits     818,573     16,108   1.97       32,717     99   0.30  
Noninterest bearing deposits     208,983             315,436        
Total deposits   $ 1,027,556   $ 16,108   1.57     $ 348,153   $ 99   0.03  
Interest rate spread           12.28 %           4.43 %
Net BaaS loan income interest rate spread (4)           5.10 %           2.40 %

 

(1) Yields and costs are annualized.
(2) Includes loans held for sale and nonaccrual loans.
(3) 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 servicing CCBX loans.
(4) A reconciliation of non-GAAP measures are set forth at the end of this earnings release.

COASTAL FINANCIAL CORPORATION
QUARTERLY STATISTICS
(Dollars in thousands, except share and per share data; unaudited)

  Three Months Ended
  December 31,
2022
  September 30,
2022
  June 30,
2022
  March 31,
2022
  December 31,
2021
Income Statement Data:                  
Interest and dividend income $ 65,030     $ 55,179     $ 41,819     $ 30,142     $ 25,546  
Interest expense   11,598       5,990       1,933       874       843  
Net interest income   53,432       49,189       39,886       29,268       24,703  
Provision for loan losses   33,600       18,428       14,094       12,942       8,942  
Net interest income after provision for loan losses   19,832       30,761       25,792       16,326       15,761  
Noninterest income   42,815       34,391       25,492       21,986       14,220  
Noninterest expense   47,103       51,087       38,169       30,415       21,050  
Provision for income tax   2,426       2,964       2,939       1,667       1,641  
Net income   13,118       11,101       10,176       6,230       7,290  
                   
  As of and for the Three Month Period
  December 31,
2022
  September 30,
2022
  June 30,
2022
  March 31,
2022
  December 31,
2021
Balance Sheet Data:                  
Cash and cash equivalents $ 342,139     $ 410,728     $ 405,689     $ 682,109     $ 813,161  
Investment securities   98,353       98,871       109,821       136,177       36,623  
Loans held for sale         43,314       60,000              
Loans receivable   2,627,256       2,507,889       2,334,354       1,964,209       1,742,735  
Allowance for loan losses   (74,029 )     (59,282 )     (49,358 )     (38,770 )     (28,632 )
Total assets   3,144,467       3,133,741       2,969,722       2,833,750       2,635,517  
Interest bearing deposits   2,042,509       2,023,849       1,879,253       1,738,426       1,007,879  
Noninterest bearing deposits   775,012       813,217       818,052       838,044       1,355,908  
Core deposits (1)   2,686,528       2,727,830       2,584,831       2,460,954       2,249,573  
Total deposits   2,817,521       2,837,066       2,697,305       2,576,470       2,363,787  
Total borrowings   47,587       27,931       27,911       27,893       52,873  
Total shareholders’ equity   243,494       228,733       217,661       207,920       201,222  
                   
Share and Per Share Data (2):                  
Earnings per share – basic $ 1.01     $ 0.86     $ 0.79     $ 0.48     $ 0.60  
Earnings per share – diluted $ 0.96     $ 0.82     $ 0.76     $ 0.46     $ 0.57  
Dividends per share                            
Book value per share (3) $ 18.50     $ 17.66     $ 16.81     $ 16.08     $ 15.63  
Tangible book value per share (4) $ 18.50     $ 17.66     $ 16.81     $ 16.08     $ 15.63  
Weighted avg outstanding shares – basic   13,030,726       12,938,200       12,928,061       12,898,746       12,144,452  
Weighted avg outstanding shares – diluted   13,603,978       13,536,823       13,442,013       13,475,337       12,701,464  
Shares outstanding at end of period   13,161,147       12,954,573       12,948,623       12,928,548       12,875,315  
Stock options outstanding at end of period   438,103       644,334       655,844       666,774       694,519  

See footnotes on following page

  As of and for the Three Month Period
  December 31,
2022
  September 30,
2022