Coastal Financial Corporation Announces Third Quarter 2022 Results

Everett, Washington, UNITED STATES


Third Quarter 2022 Highlights:

  • Second consecutive quarter of record net income. Quarterly net income of $11.1 million, or $0.82 per diluted common share, for the three months ended September 30, 2022, compared to $10.2 million, or $0.76 per diluted common share for the three months ended June 30, 2022.
  • Total assets increased $164.0 million, or 5.5%, to $3.13 billion for the quarter ended September 30, 2022, compared to $2.97 billion at June 30, 2022.
  • Loan growth of $173.5 million, or 7.4%, to $2.51 billion for the three months ended September 30, 2022.
    • CCBX loans increased $111.6 million, or 13.9%, to $915.6 million.
    • Community bank loans increased $61.9 million, or 4.0%, to $1.59 billion.
      • PPP loans decreased $10.6 million, or 64.7%, to $5.8 million.
  • CCBX loans held for sale decreased $16.7 million as of September 30, 2022, to $43.3 million
  • Deposit growth of $139.8 million, or 5.2%, to $2.84 billion for the three months ended September 30, 2022.
    • CCBX deposit growth of $136.2 million, or 12.8%, to $1.20 billion.
      • Additional $266.7 million in CCBX deposits transferred off balance sheet
    • Community bank deposits increased $3.6 million, or 0.2%, to $1.63 billion and community bank cost of deposits was 0.16%.
  • Total revenue increased $18.2 million, or 27.8% for the three months ended September 30, 2022, compared to June 30, 2022.
  • Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements(1) increased $9.2 million, or 20.7%, to $53.9 million for the three months ended September 30, 2022.

EVERETT, Wash., Oct. 27, 2022 (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 September 30, 2022.  Record quarterly net income for the third quarter of 2022 was $11.1 million, or $0.82 per diluted common share, compared with net income of $10.2 million, or $0.76 per diluted common share, for the second quarter of 2022, and $6.7 million, or $0.54 per diluted common share, for the quarter ended September 30, 2021. 

Total assets increased $164.0 million, or 5.5%, during the third quarter of 2022 to $3.13 billion, from $2.97 billion at June 30, 2022. Loan growth of $173.5 million, or 7.4%, for the three months ended September 30, 2022 to $2.51 billion. Loan growth included CCBX loan growth of $111.6 million, or 13.9%, and an increase of $61.9 million, or 4.0% in community bank loans, which is net of $10.6 million in PPP loan forgiveness/repayments. Deposits grew $139.8 million, or 5.2%, during the three months ended September 30, 2022 and included CCBX deposit growth of $136.2 million, or 12.8%, and an increase of $3.6 million, or 0.2%, in community bank deposits.

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

“Loans increased $173.5 million, or 7.4%, in the three months ended September 30, 2022, with $111.6 million of that growth in our CCBX segment, which provides Banking as a Service (“BaaS”). Our CCBX segment has grown to $915.6 million in loans, or 36.5% of total loans receivable, excluding $43.3 million in loans held for sale and our community bank loans have grown to $1.6 billion in loans receivable, as of September 30, 2022.  Additionally, deposits grew $139.8 million, or 5.2%, during the three months ended September 30, 2022.

“We achieved record net income for the second consecutive quarter. For the quarter ended September 30, 2022 we had net income of $11.1 million, an increase of $925,000, or 9.1%, over the quarter ended June 30, 2022.  Additionally, the Bank was recently named to the Piper Sandler Bank & Thrift Sm-All Stars Class of 2022 and was one of just two banks to receive the award for the fourth consecutive year. The recognition as a top performing bank is a huge honor and accomplishment and is reflective of the strong commitment our team has to our customers, communities and shareholders”, 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 $49.2 million for the quarter ended September 30, 2022, an increase of $9.3 million, or 23.3%, from $39.9 million for the quarter ended June 30, 2022, and an increase of $30.4 million, or 161.5%, from $18.8 million for the quarter ended September 30, 2021.  Yield on loans receivable was 8.46% for the three months ended September 30, 2022, compared to 7.34% for the three months ended June 30, 2022 and 4.57% for the three months ended September 30, 2021.  The increase in net interest income compared to June 30, 2022 and September 30, 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 September 30, 2022 was $2.45 billion, compared to $2.19 billion for the three months ended June 30, 2022, and $1.68 billion for the three months ended September 30, 2021.

Interest and fees on loans totaled $52.3 million for the three months ended September 30, 2022 compared to $40.2 million and $19.4 million for the three months ended June 30, 2022 and September 30, 2021, respectively.  Loan growth of $173.5 million, or 7.4%, during the quarter ended September 30, 2022 included $111.6 million increase in CCBX loans; this includes capital call lines, which decreased $50.6 million, or 22.5%, during 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 September 30, 2022, compared to June 30, 2022 and September 30, 2021, was largely due to growth in higher yielding loans.  As a result of the Federal Open Market Committee (“FOMC”) raising rates 3.0% 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 rates 0.75% on September 21, 2022.

Interest income from interest earning deposits with other banks was $2.3 million at September 30, 2022, an increase of $1.3 million compared to June 30, 2022, and an increase of $2.1 million compared to September 30, 2021 due to an increase in interest rates.  The average balance of interest earning deposits with other banks for the three months ended September 30, 2022 was $397.6 million, compared to $499.9 million and $419.7 million for the three months ended June 30, 2022 and September 30, 2021, respectively.  Interest earning deposits with other banks decreased as a result of increased loan demand.  Those deposits were used to fund higher yielding loans receivable.  Additionally, the average yield on these interest earning deposits with other banks increased to 2.27% for the quarter ended September 30, 2022, compared to 0.77% and 0.16% for the quarters ended June 30, 2022 and September 30, 2021, respectively.

Interest expense was $6.0 million for the quarter ended September 30, 2022, a $4.0 million increase from the quarter ended June 30, 2022 and a $5.2 million increase from the quarter ended September 30, 2021. Interest expense on borrowed funds was $273,000 for the quarter ended September 30, 2022, compared to $260,000 and $278,000 for the quarters ended June 30, 2022 and September 30, 2021, respectively. Interest expense on borrowed funds increased $13,000 compared to the three months ended June 30, 2022, as a result of the increase in interest rates. The $5,000 decrease in interest expense on borrowed funds from the quarter ended September 30, 2021 is the result of 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 $4.0 million for the quarter ended September 30, 2022, compared to the quarter ended June 30, 2022, and $5.2 million compared to the quarter ended September 30, 2021 as a result an increase in CCBX deposits that are tied to and reprice when the FOMC raises 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 September 30, 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 0.82% for the three months ended September 30, 2022, 0.25% for the three months ended June 30, 2022, and 0.10%, for the three months ended September 30, 2021. Community bank and CCBX cost of deposits were 0.16% and 1.79% respectively, for the three months ended September 30, 2022, compared to 0.08% and 0.56%, for the three months ended June 30, 2022, and 0.13% and 0.02% for the three months ended September 30, 2021. The increase in cost of deposits for the three months ended September 30, 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 6.58% for the three months ended September 30, 2022, compared to 5.66% and 3.48% for the three months ended June 30, 2022 and September 30, 2021, respectively.  The increase in net interest margin compared to the three months ended June 30, 2022 and September 30, 2021, was largely a result of an increase in higher rate loans.  Loans receivable increased $173.5 million and $802.2 million, compared to June 30, 2022 and September 30, 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 $12.2 million, or 30.3%, to $52.3 million for the three months ended September 30, 2022, compared to $40.2 million for the three months ended June 30, 2022, and $19.4 million for the three months ended September 30, 2021.  Also contributing to the increase in net interest margin compared to the three months ended June 30, 2022 and September 30, 2021, was $1.3 million and $2.1 million increase in interest on interest earning deposits, respectively.  These interest earning deposits earned an average rate of 2.27% for the quarter ended September 30, 2022, compared to 0.77% and 0.16% for the quarters ended June 30, 2022 and September 30, 2021, respectively.  Average investment securities decreased $17.6 million to $103.7 million for the three months ended September 30, 2022 compared to the three months ended June 30, 2022, and increased $69.9 million compared to the three months ended September 30, 2021. Interest on investment securities decreased $9,000 for the three months ended September 30, 2022 compared to the three months ended June 30, 2022 due to lower average outstanding balance on investments and increased $530,000 compared to September 30, 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 0.85% for the quarter ended September 30, 2022, an increase of 56 basis points from the quarter ended June 30, 2022 and an increase of 69 basis points from the quarter ended September 30, 2021. Cost of deposits for the quarter ended September 30, 2022 was 0.82%, compared to 0.25% for the quarter ended June 30, 2022, and 0.10% for the quarter ended September 30, 2021. The increased cost of funds and deposits compared to June 30, 2022 and September 30, 2021 was largely due to the increase in interest rates compared to the previous periods. Noninterest bearing deposits of $813.2 million for the quarter ended September 30, 2022 decreased $4.8 million, or 0.59%, compared to the quarter ended June 30, 2022, and decreased $483.2 million, or 37.3%, compared to the quarter ended September 30, 2021 due to the aforementioned reclassification of CCBX noninterest bearing deposits to interest bearing deposits.

During the quarter ended September 30, 2022, total loans receivable increased by $173.5 million, or 7.4%, to $2.51 billion, compared to $2.33 billion for the quarter ended June 30, 2022.  The increase consists of $111.6 million in CCBX loan growth and $61.9 million in community bank loan growth. Community bank loan growth includes a decrease of $10.6 million in PPP loans from forgiveness and repayments.  Total loans receivable grew $802.2 million as of September 30, 2022, compared to the quarter ended September 30, 2021.  This increase includes CCBX loan growth of $725.4 million and community bank loan growth of $76.9 million. Community bank loan growth is net of $261.5 million in PPP loan forgiveness/repayments, as of September 30, 2022, compared September 30, 2021.  During the quarter ended September 30, 2022, $48.1 million in CCBX loans were transferred into loans held for sale, with $64.8 million in loans sold during the quarter and $43.3 million remaining in loans held for sale as of September 30, 2022; compared to $60.0 million held for sale as of June 30, 2022. 

Total yield on loans receivable for the quarter ended September 30, 2022 was 8.46%, compared 7.34% for the quarter ended June 30, 2022, and 4.57% for the quarter ended September 30, 2021. This increase in yield on loans receivable is a combination of an overall increase in interest rates as well as additional volume in higher rate consumer loans from CCBX partners.  During the quarter ended September 30, 2022, CCBX loans outstanding increased 13.9%, or $111.6 million, with an average CCBX yield of 13.96% and community bank loans increased 4.0%, or $61.9 million, with an average yield of 5.31%.   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 7.05% for the quarter ended September 30, 2022 and was impacted by the $50.6 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 Nine Months Ended
 September 30, 2022 June 30, 2022 September 30, 2021 September 30, 2022 September 30, 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 Bank5.31% 0.16% 5.04% 0.08% 4.67% 0.13% 5.17% 0.11% 4.60% 0.15%
CCBX (1)13.96% 1.79% 12.35% 0.56% 3.65% 0.02% 13.16% 0.91% 3.26% 0.04%
Consolidated8.46% 0.82% 7.34% 0.25% 4.57% 0.10% 7.63% 0.41% 4.51% 0.14%

(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
  September 30, 2022 June 30, 2022 September 30, 2021
(dollars in thousands, unaudited) Income / Expense Income / expense divided by
average CCBX loans
 Income / Expense Income / expense divided by
average CCBX loans
 Income / Expense Income / expense divided by
average CCBX loans
BaaS loan interest income $31,449 13.96% $21,281 12.35% $1,471 3.65%
Less: BaaS loan expense  15,560 6.91%  12,229 7.10%  419 1.04%
Net BaaS loan income (1) $15,889 7.05% $9,052 5.25% $1,052 2.61%
Average BaaS Loans $893,655   $691,294   $160,022  


  For the Nine Months Ended
  September 30, 2022 September 30, 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 $64,721 13.16% $2,761 3.26%
Less: BaaS loan expense  36,079 7.34%  609 0.72%
Net BaaS loan income (1) $28,642 5.82% $2,152 2.54%
Average BaaS Loans $657,574   $113,369  

(1) A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.
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Key Performance Ratios

Return on average assets (“ROA”) was 1.45% for the quarter ended September 30, 2022 compared to 1.41% and 1.21% for the quarters ended June 30, 2022 and September 30, 2021, respectively.  ROA for the quarter ended September 30, 2022, was impacted by an increase in loan volume and overall higher interest rates on interest earning assets, compared to the quarters ended June 30, 2022 and September 30, 2021.

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

  Three Months Ended Nine Months Ended
(unaudited) September 30,
2022
 June 30,
2022
 March 31,
2022
 December 31,
2021
 September 30,
2021
 September 30,
2022
 September 30,
2021
               
Return on average assets (1) 1.45% 1.41% 0.93% 1.14% 1.21% 1.18% 1.28%
Return on average equity (1) 19.36% 18.86% 12.12% 16.80% 16.77% 16.90% 17.40%
Yield on earnings assets (1) 7.38% 5.94% 4.58% 4.09% 3.63% 6.03% 3.83%
Yield on loans receivable (1) 8.46% 7.34% 6.80% 5.92% 4.57% 7.63% 4.51%
Cost of funds (1) 0.85% 0.29% 0.14% 0.14% 0.16% 0.44% 0.20%
Cost of deposits (1) 0.82% 0.25% 0.09% 0.09% 0.10% 0.41% 0.14%
Net interest margin (1) 6.58% 5.66% 4.45% 3.95% 3.48% 5.61% 3.64%
Noninterest expense to average assets (1) 6.66% 5.29% 4.52% 3.29% 2.91% 5.54% 2.74%
Noninterest income to average assets (1) 4.48% 3.53% 3.27% 2.22% 1.11% 3.79% 0.90%
Efficiency ratio 61.12% 58.38% 59.34% 54.08% 64.68% 59.77% 61.51%
Loans receivable to deposits (2) 89.92% 86.54% 76.24% 73.73% 76.71% 89.92% 76.71%

(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
 September 30, June 30, September 30,
(dollars in thousands; unaudited) 2022   2022   2021
Deposit service charges and fees$986  $988  $956 
Mortgage broker fees 24   85   187 
Loan referral fees    208   723 
Unrealized (loss) gain on equity securities, net (133)  (2)  1,472 
Gain on sales of loans, net       206 
Other 236   313   302 
Noninterest income, excluding BaaS program income and BaaS indemnification income 1,113   1,592   3,846 
Servicing and other BaaS fees 1,079   1,159   1,313 
Transaction fees 940   814   146 
Interchange fees 738   628   188 
Reimbursement of expenses 885   618   333 
BaaS program income 3,642   3,219   1,980 
BaaS credit enhancements 17,928   14,207   10 
Baas fraud enhancements 11,708   6,474   296 
BaaS indemnification income 29,636   20,681   306 
Total noninterest income$34,391  $25,492  $6,132 

Noninterest income was $34.4 million for the three months ended September 30, 2022, an increase of $8.9 million from $25.5 million for the three months ended June 30, 2022, and an increase of $28.3 million from $6.1 million for the three months ended September 30, 2021.  The increase in noninterest income over the quarter ended June 30, 2022 was primarily due to an increase of $9.4 million in BaaS income partially offset by a $208,000 decrease in loan referral fees.  The $9.4 million increase in BaaS income included a $3.7 million increase in BaaS credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, $5.2 million increase in BaaS fraud enhancements, and an increase of $423,000 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 $28.3 million increase in noninterest income over the quarter ended September 30, 2021 was primarily due to a $31.0 million increase in BaaS income partially offset by a decrease of $1.6 million in unrealized gain on equity securities and a decrease of $723,000 in loan referral fees. The $31.0 million increase in BaaS income included a $17.9 million increase in BaaS credit enhancements, $11.4 million increase in BaaS fraud enhancements and $1.7 million increase in other BaaS program income. BaaS program income is steadily growing, with an increase of 13.1% compared to the quarter ended June 30, 2022, and an increase of 83.9% compared to the quarter ended September 30, 2021.

Our CCBX segment continues to evolve, and we now have 29 relationships, at varying stages, as of September 30, 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.

The following table illustrates the activity and evolution in CCBX relationships for the periods presented. During the quarter ended September 30, 2022 a few partners wound down their CCBX programs; these programs were not material in terms of income and sources of funds.

 As of
(unaudited)September 30, 2022June 30, 2022September 30, 2021
Active192316
Friends and family / testing220
Implementation / onboarding007
Signed letters of intent543
Wind down - preparing to exit relationship300
Total CCBX relationships292926

Noninterest Expense

The following table details noninterest expense for the periods indicated:

  Three Months Ended
  September 30, June 30, September 30,
(dollars in thousands; unaudited)  2022  2022  2021
Salaries and employee benefits $14,506 $12,238 $9,961
Legal and professional fees  2,251  1,002  796
Data processing and software licenses  1,670  1,546  1,333
Occupancy  1,147  1,083  1,037
FDIC assessments  850  855  400
Point of sale expense  742  409  212
Excise taxes  588  564  407
Director and staff expenses  475  377  274
Marketing  69  74  130
Other  1,522  1,318  865
Noninterest expense, excluding BaaS loan and BaaS fraud expense  23,820  19,466  15,415
BaaS loan expense  15,560  12,229  419
BaaS fraud expense  11,707  6,474  296
BaaS loan and fraud expense  27,267  18,703  715
Total noninterest expense $51,087 $38,169 $16,130

Total noninterest expense increased to $51.1 million for the three months ended September 30, 2022, compared to $38.2 million for the three months ended June 30, 2022 and $16.1 million for the three months ended September 30, 2021. The increase in noninterest expense for the quarter ended September 30, 2022, as compared to the quarter ended June 30, 2022, was primarily due to a $8.6 million increase in BaaS expense ($3.3 million of which is related to partner loan expense and $5.2 million of which is related to partner fraud 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 partner.  Also contributing to the increase in noninterest expense compared to June 30, 2022 is a $2.3 million increase in salaries and employee benefits which is related to hiring in CCBX and additional staff for our ongoing growth initiatives.  In the quarter ended September 30, 2022 compared to the quarter ended June 30, 2022, legal and professional fees increased $1.2 million, point of sale expenses increased   $333,000 and data processing and software license expense increased $124,000  The increase in legal and professional expenses is due to increased fees related to building our regulatory compliance infrastructure, our data management capabilities, and risk management, and increased consulting expenses. The increase in point of sale expenses is primarily a result of increased activity in CCBX; CCBX BaaS program income in noninterest income also increased as a result of this activity. Data processing and software license fees are expected to increase as we invest in software related to CCBX, information technology and risk management.

The increased noninterest expenses for the quarter ended September 30, 2022 compared to the quarter ended September 30, 2021 were largely due to an increase of $26.6 million in BaaS partner expense ($15.1 million of which is related to partner loan expense and $11.4 million of which is related to partner fraud expense), $4.5 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives and $1.5 million increase in legal and professional fees due to increased fees related to data and risk management, and increased regulatory consulting expenses. Additionally, there was a $530,000 increase in point of sale expenses, $450,000 increase in FDIC assessments and $337,000 increase in data processing and software licenses.  The increase in point of sale expenses is attributed to increased CCBX activity; CCBX BaaS program income in noninterest income also increased as a result of this activity. The increase in FDIC assessments is largely the result of an increase in assets combined with other factors that impact the FDIC assessment calculation compared to the quarter ended September 30, 2021.  The increase in data processing and software licenses expenses was a result of implementing software to monitor and assist in the reporting of CCBX activities and monitoring of transactions to automate and improve efficiency.

The provision for income taxes was $3.0 million for the three months ended September 30, 2022, $2.9 million for the three months ended June 30, 2022 and $1.9 million for the third 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 Company uses a federal statutory tax rate of 21.0% as a basis for calculating provision for federal income taxes and 1.0% for calculating the provision for state taxes.

Financial Condition Overview

Total assets increased $164.0 million, or 5.5%, to $3.13 billion at September 30, 2022 compared to $2.97 billion at June 30, 2022.  The increase is primarily due to loans receivable increasing $173.5 million during the quarter ended September 30, 2022.  Loans held for sale decreased $16.7 million, to $43.3 million during the quarter ended September 30, 2022.  Also contributing to the increase in assets for the quarter ended September 30, 2022 was a $8.3 million increase in interest earning deposits with other banks, as a result of higher deposit totals.  Total assets increased $682.2 million, or 27.8%, at September 30, 2022, compared to $2.45 billion at September 30, 2021.  The increase is primarily due to loans receivable increasing $802.2 million, and an increase of $64.8 million in investment securities.  Partially offsetting the increase is a $264.8 million decrease in interest earning deposits with other banks, resulting from increased loan demand, compared to September 30, 2021.

Loans Receivable

Total loans receivable increased $173.5 million to $2.51 billion at September 30, 2022, from $2.33 billion at June 30, 2022, and increased $802.2 million from $1.71 billion at September 30, 2021.  The increase in loans receivable over the quarter ended June 30, 2022 was the result of $111.6 million in CCBX loan growth and $61.9 million in community bank loan growth. Community bank loan growth includes $10.6 million in PPP loan forgiveness and paydowns for the quarter ended September 30, 2022.  The change in loans receivable over the quarter ended September 30, 2021 includes CCBX loan growth of $725.4 million and $76.9 million in community bank loan growth as of September 30, 2022.  Community bank loan growth is net of $261.5 million in PPP loan forgiveness and paydowns since September 30, 2021.

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

 As of September 30, 2022 As of June 30, 2022 As of September 30, 2021
(dollars in thousands; unaudited)Amount Percent Amount Percent Amount Percent
Commercial and industrial loans:           
PPP loans$5,794  0.2% $16,398  0.7% $267,278  15.5%
Capital call lines 174,311  6.9   224,930  9.6   161,457  9.4 
All other commercial & industrial loans 159,823  6.4   160,636  6.9   108,120  6.3 
Total commercial and industrial loans: 339,928  13.5   401,964  17.2   536,855  31.2 
Real estate loans:           
Construction, land and land development 224,188  8.9   225,512  9.6   158,710  9.2 
Residential real estate 402,781  16.0   326,661  14.0   170,167  9.9 
Commercial real estate 1,024,067  40.7   956,320  40.8   837,342  48.7 
Consumer and other loans 523,536  20.9   430,083  18.4   17,140  1.0 
Gross loans receivable 2,514,500  100.0%  2,340,540  100.0%  1,720,214  100.0%
Net deferred origination fees - PPP loans (111)    (396)    (9,417)  
Net deferred origination fees - all other loans (6,500)    (5,790)    (5,115)  
Loans receivable$2,507,889    $2,334,354    $1,705,682   
Loan Yield (1) 8.46%    7.34%    4.57%  

(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
  September 30, 2022 June 30, 2022 September 30, 2021
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Commercial and industrial loans:            
PPP loans $5,794  0.4% $16,398  1.1% $267,278  17.5%
All other commercial & industrial loans  143,808  9.0   142,569  9.3   108,120  7.1 
Real estate loans:            
Construction, land and land development loans  224,188  14.0   225,512  14.7   158,710  10.4 
Residential real estate loans  198,871  12.5   193,518  12.6   156,128  10.2 
Commercial real estate loans  1,024,067  64.0   956,320  62.2   837,342  54.7 
Consumer and other loans:            
Other consumer and other loans  2,220  0.1   2,325  0.1   2,492  0.1 
Gross Community Bank loans receivable  1,598,948  100.0%  1,536,642  100.0%  1,530,070  100.0%
Net deferred origination fees  (6,628)    (6,240)    (14,602)  
Loans receivable $1,592,320    $1,530,402    $1,515,468   
Loan Yield(1)  5.31%    5.04%    4.67%  

(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
  September 30, 2022 June 30, 2022 September 30, 2021
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Commercial and industrial loans:            
Capital call lines $174,311  19.0% $224,930  28.0% $161,457  84.9%
All other commercial & industrial loans  16,015  1.8   18,067  2.2     0.0 
Real estate loans:            
Residential real estate loans  203,910  22.3   133,143  16.5   14,039  7.4 
Consumer and other loans:            
Credit cards  216,995  23.7   139,501  17.4   1,711  0.9 
Other consumer and other loans  304,321  33.2   288,257  35.9   12,937  6.8 
Gross CCBX loans receivable  915,552  100.0%  803,898  100.0%  190,144  100.0%
Net deferred origination costs  17     54     70   
Loans receivable $915,569    $803,952    $190,214   
Loan Yield - CCBX(1)(2)  13.96%    12.35%    3.65%  
             

(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 increased $139.8 million, or 5.2%, to $2.84 billion at September 30, 2022 from $2.70 billion at June 30, 2022. The increase was due to a $143.0 million increase in core deposits, partially offset by a $2.6 million decrease in time deposits. Our increase in deposits is primarily the result of growth in CCBX. Deposits in our CCBX segment increased $136.2 million, from $1.07 billion at June 30, 2022, to $1.20 billion at September 30, 2022 and community bank deposits increased $3.6 million to $1.63 billion at September 30, 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 September 30, 2022, noninterest bearing deposits decreased $4.8 million, or 0.6%, to $813.2 million from $818.1 million at June 30, 2022. In the quarter ended September 30, 2022 compared to the quarter ended June 30, 2022, NOW and money market accounts increased $146.8 million and savings deposits increased $1.0 million. Partially offsetting those increases is a decrease of $638,000 in BaaS-brokered deposits and a decrease of $2.6 million in time deposits.

Total deposits increased $613.5 million, or 27.6%, to $2.84 billion at September 30, 2022 compared to $2.22 billion at September 30, 2021. The increase in deposits is largely the result of growth in CCBX and is also due to expanding and growing banking relationships with community bank customers. Noninterest bearing deposits decreased $483.2 million, or 37.3%, to $813.2 million at September 30, 2022 from $1.3 billion at September 30, 2021. NOW and money market accounts increased $1.05 billion, or 139.1%, to $1.81 billion at September 30, 2022, and savings accounts increased $11.3 million, or 11.8%, and BaaS-brokered deposits increased $47.0 million, or 165.4% while time deposits decreased   $12.8 million, or 27.5%, in the third quarter of 2022 compared to the third quarter of 2021. Additionally, as of September 30, 2022 we have access to $266.7 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 September 30, 2022 As of June 30, 2022 As of September 30, 2021
(dollars in thousands; unaudited)Amount Percent of
Total
Deposits
 Balance Percent of
Total
Deposits
 Balance Percent of
Total
Deposits
Demand, noninterest bearing$813,217  28.7% $818,052  30.3% $1,296,443  58.3%
NOW and money market 1,807,105  63.7   1,660,315  61.6   755,810  34.0 
Savings 107,508  3.8   106,464  3.9   96,192  4.3 
Total core deposits 2,727,830  96.2   2,584,831  95.8   2,148,445  96.6 
BaaS-brokered deposits 75,363  2.6   76,001  2.8   28,396  1.3 
Time deposits less than $100,000 13,296  0.5   14,009  0.5   15,701  0.7 
Time deposits $100,000 and over 20,577  0.7   22,464  0.8   30,998  1.4 
Total$2,837,066  100.0% $2,697,305  100.0% $2,223,540  100.0%
Cost of Deposits(1) 0.82%    0.25%    0.10%  

(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
  September 30, 2022 June 30, 2022 September 30, 2021
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Demand, noninterest bearing $746,516  45.7% $729,436  44.7% $722,458  44.7%
NOW and money market  748,347  45.8   759,704  46.6   750,973  46.5 
Savings  106,059  6.5   105,576  6.5   96,192  6.0 
Total core deposits  1,600,922  97.9   1,594,716  97.8   1,569,623  97.1 
Brokered deposits  1  0.0   1  0.0   1  0.0 
Time deposits less than $100,000  13,296  0.8   14,009  0.9   15,701  1.0 
Time deposits $100,000 and over  20,577  1.3   22,464  1.4   30,998  1.9 
Total Community Bank deposits $1,634,796  100.0% $1,631,190  100.0% $1,616,323  100.0%
Cost of deposits(1)  0.16%    0.08%    0.13%  

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

CCBX As of
  September 30, 2022 June 30, 2022 September 30, 2021
(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to Total
Demand, noninterest bearing $66,701  5.5% $88,616  8.3% $573,985  94.5%
NOW and money market  1,058,758  88.1   900,611  84.5   4,837  0.8 
Savings  1,449  0.1   888  0.1      
Total core deposits  1,126,908  93.7   990,115  92.9   578,822  95.3 
BaaS-brokered deposits  75,362  6.3   76,000  7.1   28,395  4.7 
Total CCBX deposits $1,202,270  100.0% $1,066,115  100.0% $607,217  100.0%
Cost of deposits(1)  1.79%    0.56%    0.02%  

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

Shareholders’ Equity

During the nine months ended September 30, 2022, the Company contributed $21.0 million in capital to the Bank.  The Company has a cash balance of $2.0 million as of September 30, 2022, which is retained for general operating purposes, including debt repayment, and for funding $1.0 million in commitments to bank technology funds.  

Total shareholders’ equity increased $11.1 million since June 30, 2022.  The increase in shareholders’ equity was primarily due to $11.1 million in net earnings for the three months ended September 30, 2022. The accrual of equity awards and exercises equally offset the $747,000 decrease in accumulated other comprehensive income, related to the market adjustment on available for sale securities.

Capital Ratios

The Company and the Bank remain well capitalized at September 30, 2022, as summarized in the following table.

(unaudited) Coastal Community Bank Coastal Financial Corporation Financial Institution Basel III
Regulatory Guidelines
Tier 1 leverage capital 8.34% 7.70% 5.00%
Common Equity Tier 1 risk-based capital 9.34% 8.49% 6.50%
Tier 1 risk-based capital 9.34% 8.62% 8.00%
Total risk-based capital 10.60% 10.80% 10.00%

Asset Quality

The total allowance for loan losses was $59.3 million and 2.36% of loans receivable at September 30, 2022 compared to $49.4 million and 2.11% at June 30, 2022 and $20.2 million and 1.19% at September 30, 2021. The allowance for loan loss allocated to the CCBX portfolio was $39.1 million and 4.28% of CCBX loans receivable at September 30, 2022, with $20.1 million of allowance for loan loss allocated to the community bank or 1.26% 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 September 30, 2022 As of June 30, 2022 As of September 30, 2021
(dollars in thousands; unaudited) Community Bank CCBX Total Community Bank CCBX Total Community Bank CCBX Total
Loans receivable $1,592,320  $915,569  $2,507,889  $1,530,402  $803,952  $2,334,354  $1,515,468  $190,214  $1,705,682 
Allowance for loan losses  (20,139)  (39,143)  (59,282)  (20,785)  (28,573)  (49,358)  (20,070)  (152)  (20,222)
Allowance for loan losses to total loans receivable  1.26%  4.28%  2.36%  1.36%  3.55%  2.11%  1.32%  0.08%  1.19%

Provision for loan losses totaled $18.4 million for the three months ended September 30, 2022, $14.1 million for the three months ended June 30, 2022, and $255,000 for the three months ended September 30, 2021. Net charge-offs totaled $8.5 million for the quarter ended September 30, 2022, compared to $3.5 million for the quarter ended June 30, 2022 and $(1,000) for the quarter ended September 30, 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.

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

  Three Months Ended
  September 30, 2022 June 30, 2022 September 30, 2021
(dollars in thousands; unaudited) Community Bank CCBX Total Community Bank CCBX Total Community Bank CCBX Total
Gross charge-offs $411  $8,102  $8,513  $3  $3,539  $3,542  $14  $17  $31 
Gross recoveries  (3)  (6)  (9)  (36)     (36)  (24)  (8)  (32)
Net charge-offs $408  $8,096  $8,504  $(33) $3,539  $3,506  $(10) $9  $(1)
Net charge-offs to average loans  0.10%  3.59%  1.38% (0.01)%  2.05%  0.64%  0.00%  0.02%  0.00%

The increase in the Company’s provision for loan losses during the quarter ended September 30, 2022, is largely related to the provision for CCBX partner loans. During the quarter ended September 30, 2022, a $18.7 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis, compared to the $14.0 million provision for loan losses that was recorded for CCBX for the quarter ended June 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 recapture/adjustment for loan losses of $238,000 and provision of $109,000 was needed for the quarters ended September 30, 2022 and June 30, 2022, respectively. The community bank recapture/adjustment was the result of transferring a portion of the allowance from the community bank segment to the CCBX segment. In accordance with the program agreement, in the quarter ended September 30, 2022, the Company was responsible for losses on $7.8 million from one CCBX partner for which there is no credit enhancement . CCBX partners indemnify the Bank for loan losses/charge-offs on loans they originate, other than the aforementioned $7.8 million. The economic environment is continuously changing, due to increased inflation, global unrest, the war in Ukraine, upcoming midterm elections, trade issues that have may impact the provision and therefore the allowance. The Company is not required to implement the provisions of the Current Expected Credit Loss accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model.

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

  Three Months Ended Nine Months Ended
(dollars in thousands; unaudited) September 30, 2022 June 30, 2022 September 30, 2021 September 30, 2022 September 30, 2021
Community bank $(238) $109 $192 $214 $877
CCBX  18,666   13,985  63  45,250  96
Total provision expense $18,428  $14,094 $255 $45,464 $973

At September 30, 2022, our nonperforming assets were $22.9 million, or 0.73% of total assets, compared to $5.8 million, or 0.20%, of total assets, at June 30, 2022, and $740,000, or 0.03% of total assets, at September 30, 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 $17.1 million during the quarter ended September 30, 2022, compared to the quarter ended June 30, 2022, due to the addition of $10.2 million in CCBX loans that are past due 90 days or more and still accruing combined with $6.8 million more in community bank nonaccrual loans. 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 September 30, 2022. Our nonperforming loans to loans receivable ratio was 0.91% at September 30, 2022, compared to 0.25% at June 30, 2022, and 0.04% at September 30, 2021.

For the quarter ended September 30, 2022, we have seen a slight change in our community bank credit quality metrics, as demonstrated by the $408,000 of community bank net charge-offs and $7.1 million of nonperforming community bank loans. For the quarter ended September 30, 2022, $8.1 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. Agreements with our CCBX loan and deposit partners provide for a credit enhancement against loan and fraud losses.

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

(dollars in thousands; unaudited)As of September 30, 2022 As of June 30, 2022 As of September 30, 2021
Nonaccrual loans:     
Commercial and industrial loans$94  $111  $561 
Real estate loans:     
Construction, land and land development 66   67    
Residential real estate    53   56 
Commercial real estate 6,901       
Total nonaccrual loans 7,061   231   617 
Accruing loans past due 90 days or more:     
Commercial & industrial loans 138   10    
Real estate loans:     
Residential real estate loans 638   123   1 
Consumer and other loans:     
Credit cards 4,777   1,283   94 
Other consumer and other loans 10,268   4,164   28 
Total accruing loans past due 90 days or more 15,821   5,580   123 
Total nonperforming loans 22,882   5,811   740 
Real estate owned        
Repossessed assets        
Troubled debt restructurings, accruing        
Total nonperforming assets$22,882  $5,811  $740 
Total nonaccrual loans to loans receivable 0.28%  0.01%  0.04%
Total nonperforming loans to loans receivable 0.91%  0.25%  0.04%
Total nonperforming assets to total assets 0.73%  0.20%  0.03%

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)September 30,
2022
 June 30, 2022 September 30,
2021
Nonaccrual loans:     
Commercial and industrial loans$94 $111 $561
Real estate:     
Construction, land and land development 66  67  
Residential real estate   53  56
Commercial real estate 6,901    
Total nonaccrual loans 7,061  231  617
      
Accruing loans past due 90 days or more:     
Total accruing loans past due 90 days or more     
Total nonperforming loans 7,061  231  617
Other real estate owned     
Repossessed assets     
Total nonperforming assets$7,061 $231 $617


CCBXAs of
(dollars in thousands; unaudited)September 30,
2022
 June 30, 2022 September 30,
2021
Nonaccrual loans$ $ $
Accruing loans past due 90 days or more:     
Commercial & industrial loans 138  10  
Real estate loans:     
Residential real estate loans 638  123  1
Consumer and other loans:     
Credit cards 4,777  1,283  94
Other consumer and other loans 10,268  4,164  28
Total accruing loans past due 90 days or more 15,821  5,580  123
Total nonperforming loans 15,821  5,580  123
Other real estate owned     
Repossessed assets     
Total nonperforming assets$15,821 $5,580 $123

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 $3.13 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 and digital financial service providers through its 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
 September 30,
2022
 June 30,
2022
 September 30,
2021
Cash and due from banks$37,482  $40,750  $31,722 
Interest earning deposits with other banks 373,246   364,939   638,003 
Investment securities, available for sale, at fair value 97,621   108,560   32,838 
Investment securities, held to maturity, at amortized cost 1,250   1,261   2,086 
Other investments 10,581   10,379   8,349 
Loans held for sale, at par 43,314   60,000    
Loans receivable 2,507,889   2,334,354   1,705,682 
Allowance for loan losses (59,282)  (49,358)  (20,222)
Total loans receivable, net 2,448,607   2,284,996   1,685,460 
Premises and equipment, net 18,467   18,670   17,231 
Operating lease right-of-use assets 5,293   5,565   6,372 
Accrued interest receivable 13,114   12,430   7,549 
Bank-owned life insurance, net 12,576   12,485   12,166 
Deferred tax asset, net 13,997   11,709   3,807 
Other assets 58,193   37,978   5,985 
Total assets$3,133,741  $2,969,722  $2,451,568 
      
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES     
Deposits$2,837,066  $2,697,305  $2,223,540 
Federal Home Loan Bank ("FHLB") advances       24,999 
Subordinated debt 24,343   24,324   24,269 
Junior subordinated debentures 3,588   3,587   3,586 
Deferred compensation 648   680   774 
Accrued interest payable 153   330   147 
Operating lease liabilities 5,514   5,786   6,583 
Other liabilities 33,696   20,049   6,584 
Total liabilities 2,905,008   2,752,061   2,290,482 
      
SHAREHOLDERS’ EQUITY     
Common stock 123,944   123,226   88,997 
Retained earnings 106,880   95,779   72,083 
Accumulated other comprehensive (loss) income, net of tax (2,091)  (1,344)  6 
Total shareholders’ equity 228,733   217,661   161,086 
Total liabilities and shareholders’ equity$3,133,741  $2,969,722  $2,451,568 



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

 Three Months Ended
 September 30,
2022
 June 30,
2022
 September 30,
2021
INTEREST AND DIVIDEND INCOME     
Interest and fees on loans$52,328  $40,166  $19,383
Interest on interest earning deposits with other banks 2,273   956   170
Interest on investment securities 554   563   24
Dividends on other investments 24   134   31
Total interest income 55,179   41,819   19,608
INTEREST EXPENSE     
Interest on deposits 5,717   1,673   523
Interest on borrowed funds 273   260   278
Total interest expense 5,990   1,933   801
Net interest income 49,189   39,886   18,807
PROVISION FOR LOAN LOSSES 18,428   14,094   255
Net interest income after provision for loan losses 30,761   25,792   18,552
NONINTEREST INCOME     
Deposit service charges and fees 986   988   956
Loan referral fees    208   723
Gain on sales of loans, net       206
Mortgage broker fees 24   85   187
Unrealized (loss) gain on equity securities, net (133)  (2)  1,472
Other income 236   313   302
Noninterest income, excluding BaaS program income and BaaS indemnification income 1,113   1,592   3,846
Servicing and other BaaS fees 1,079   1,159   1,313
Transaction fees 940   814   146
Interchange fees 738   628   188
Reimbursement of expenses 885   618   333
BaaS program income 3,642   3,219   1,980
BaaS credit enhancements 17,928   14,207   10
BaaS fraud enhancements 11,708   6,474   296
BaaS indemnification income 29,636   20,681   306
Total noninterest income 34,391   25,492   6,132
NONINTEREST EXPENSE     
Salaries and employee benefits 14,506   12,238   9,961
Occupancy 1,147   1,083   1,037
Data processing and software licenses 1,670   1,546   1,333
Legal and professional fees 2,251   1,002   796
Point of sale expense 742   409   212
Excise taxes 588   564   407
Federal Deposit Insurance Corporation ("FDIC") assessments 850   855   400
Director and staff expenses 475   377   274
Marketing 69   74   130
Other expense 1,522   1,318   865
Noninterest expense, excluding BaaS loan and BaaS fraud expense 23,820   19,466   15,415
BaaS loan expense 15,560   12,229   419
BaaS fraud expense 11,707   6,474   296
BaaS loan and fraud expense 27,267   18,703   715
Total noninterest expense 51,087   38,169   16,130
Income before provision for income taxes 14,065   13,115   8,554
PROVISION FOR INCOME TAXES 2,964   2,939   1,870
NET INCOME$11,101  $10,176  $6,684
Basic earnings per common share$0.86  $0.79  $0.56
Diluted earnings per common share$0.82  $0.76  $0.54
Weighted average number of common shares outstanding:     
Basic 12,938,200   12,928,061   11,999,899
Diluted 13,536,823   13,442,013   12,456,674



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

 Nine Months Ended
 September 30,
2022
 September 30,
2021
INTEREST AND DIVIDEND INCOME   
Interest and fees on loans$122,126  $56,978
Interest on interest earning deposits with other banks 3,631   314
Interest on investment securities 1,188   76
Dividends on other investments 195   169
Total interest income 127,140   57,537
INTEREST EXPENSE   
Interest on deposits 7,943   1,811
Interest on borrowed funds 854   992
Total interest expense 8,797   2,803
Net interest income 118,343   54,734
PROVISION FOR LOAN LOSSES 45,464   973
Net interest income after provision for loan losses 72,879   53,761
NONINTEREST INCOME   
Deposit service charges and fees 2,858   2,768
Loan referral fees 810   2,126
Gain on sales of loans, net    367
Mortgage broker fees 232   702
Unrealized (loss) gain on equity securities, net (135)  1,472
Gain on sale of bank branch including deposits and loans, net    1,263
Other income 814   542
Noninterest income, excluding BaaS program income and BaaS indemnification income 4,579   9,240
Servicing and other BaaS fees 3,407   3,046
Transaction fees 2,247   264
Interchange fees 1,798   333
Reimbursement of expenses 1,875   709
BaaS program income 9,327   4,352
BaaS credit enhancements 45,210   10
BaaS fraud enhancements 22,753   296
BaaS indemnification income 67,963   306
Total noninterest income 81,869   13,898
NONINTEREST EXPENSE   
Salaries and employee benefits 37,829   26,560
Occupancy 3,366   3,085
Data processing and software licenses 4,719   3,457
Legal and professional fees 3,961   2,182
Point of sale expense 1,399   475
Excise taxes 1,501   1,154
Federal Deposit Insurance Corporation ("FDIC") assessments 2,309   820
Director and staff expenses 1,196   812
Marketing 242   344
Other expense 4,318   2,419
Noninterest expense, excluding BaaS loan and BaaS fraud expense 60,840   41,308
BaaS loan expense 36,079   609
BaaS fraud expense 22,752   296
BaaS loan and fraud expense 58,831   905
Total noninterest expense 119,671   42,213
Income before provision for income taxes 35,077   25,446
PROVISION FOR INCOME TAXES 7,570   5,731
NET INCOME$27,507  $19,715
Basic earnings per common share$2.13  $1.65
Diluted earnings per common share$2.04  $1.58
Weighted average number of common shares outstanding:   
Basic 12,921,814   11,982,009
Diluted 13,484,950   12,465,346



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

 September 30, 2022 June 30, 2022 September 30, 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$397,621  $2,273 2.27% $499,918  $956 0.77% $419,715  $170 0.16%
Investment securities, available for sale(2) 102,438   545 2.11   119,975   554 1.85   31,693   9 0.11 
Investment securities, held to maturity(2) 1,257   9 2.84   1,280   9 2.82   2,095   15 2.84 
Other investments 10,520   24 0.91   10,225   134 5.26   6,859   31 1.79 
Loans receivable(3) 2,452,815   52,328 8.46   2,194,761   40,166 7.34   1,681,069   19,383 4.57 
Total interest earning assets 2,964,651   55,179 7.38   2,826,159   41,819 5.94   2,141,431   19,608 3.63 
Noninterest earning assets:                 
Allowance for loan losses (51,259)      (46,354)      (20,102)    
Other noninterest earning assets 128,816       115,788       77,221     
Total assets$3,042,208      $2,895,593      $2,198,550     
                  
Liabilities and Shareholders’ Equity                 
Interest bearing liabilities:                 
Interest bearing deposits$1,953,170  $5,717 1.16% $1,792,119  $1,673 0.37% $919,792  $523 0.23%
FHLB advances and borrowings               24,999   72 1.14 
Subordinated debt 24,331   234 3.82   24,313   231 3.81   17,073   185 4.30 
Junior subordinated debentures 3,587   39 4.31   3,587   29 3.24   3,586   21 2.32 
Total interest bearing liabilities 1,981,088   5,990 1.20   1,820,019   1,933 0.43   965,450   801 0.33 
Noninterest bearing deposits 807,952       839,562       1,061,311     
Other liabilities 25,662       19,550       13,705     
Total shareholders' equity 227,506       216,462       158,084     
Total liabilities and shareholders' equity$3,042,208      $2,895,593      $2,198,550     
Net interest income  $49,189     $39,886     $18,807  
Interest rate spread    6.18%     5.51%     3.30%
Net interest margin(4)    6.58%     5.66%     3.48%

(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
 September 30, 2022 June 30, 2022 September 30, 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)$1,559,160 $20,879 5.31% $1,503,467 $18,885 5.04% $1,521,047 $17,912 4.67%
Liabilities                 
Interest bearing deposits 901,339  642 0.28   921,499  317 0.14   888,485  500 0.22 
Noninterest bearing deposits 735,038      740,575      696,906    
Total deposits 1,636,377  642 0.16   1,662,074  317 0.08   1,585,391  500 0.13 
                  
CCBX                 
Assets                 
Loans receivable(2)(3)$893,655 $31,449 13.96% $691,294 $21,281 12.35% $160,022 $1,471 3.65%
Liabilities                 
Interest bearing deposits 1,051,831  5,075 1.91   870,620  1,356 0.62   31,307  23 0.29 
Noninterest bearing deposits 72,914      98,987      364,405    
Total deposits 1,124,745  5,075 1.79 1.79 969,607  1,356 0.56   395,712  23 0.02 

(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.



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

 For the Nine Months Ended
 September 30, 2022 September 30, 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$578,855  $3,631 0.84% $284,225  $314 0.15%
Investment securities, available for sale(2) 89,173   1,160 1.74   25,344   45 0.24 
Investment securities, held to maturity(2) 1,276   28 2.93   2,349   31 1.76 
Other investments 9,996   195 2.61   6,594   169 3.43 
Loans receivable(3) 2,141,127   122,126 7.63   1,690,817   56,978 4.51 
Total interest earning assets 2,820,427   127,140 6.03   2,009,329   57,537 3.83 
Noninterest earning assets:           
Allowance for loan losses (42,836)      (19,744)    
Other noninterest earning assets 112,468       73,328     
Total assets$2,890,059      $2,062,913     
            
Liabilities and Shareholders’ Equity           
Interest bearing liabilities:           
Interest bearing deposits$1,628,765  $7,943 0.65% $892,574  $1,811 0.27%
PPPLF borrowings     0.00   91,850   240 0.35 
FHLB advances and borrowings 8,058   69 1.14   24,999   212 1.13 
Subordinated debt 24,313   695 3.82   12,381   477 5.15 
Junior subordinated debentures 3,587   90 3.35   3,585   63 2.35 
Total interest bearing liabilities 1,664,723   8,797 0.71   1,025,389   2,803 0.37 
Noninterest bearing deposits 987,343       873,271     
Other liabilities 20,442       12,798     
Total shareholders' equity 217,551       151,455     
Total liabilities and shareholders' equity$2,890,059      $2,062,913     
Net interest income  $118,343     $54,734  
Interest rate spread    5.32%     3.46%
Net interest margin(4)    5.61%     3.64%

(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 Nine Months Ended
  September 30, 2022 September 30, 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) $1,483,553 $57,405 5.17% $1,577,448 $54,217 4.60%
Liabilities            
Interest bearing deposits  919,415  1,394 0.20   862,986  1,746 0.27 
Noninterest bearing deposits  731,517      660,773    
Total deposits $1,650,932 $1,394 0.11  $1,523,759 $1,746 0.15 
             
CCBX            
Assets            
Loans receivable(2)(3) $657,574 $64,721 13.16% $113,369 $2,761 3.26%
Liabilities            
Interest bearing deposits  709,350  6,549 1.23   29,588  65 0.29 
Noninterest bearing deposits  255,826      212,498    
Total deposits $965,176 $6,549 0.91  $242,086 $65 0.04 

(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.

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

 Three Months Ended
 September 30,
2022
 June 30,
2022
 March 31,
2022
 December 31,
2021
 September 30,
2021
Income Statement Data:         
Interest and dividend income$55,179  $41,819  $30,142  $25,546  $19,608 
Interest expense 5,990   1,933   874   843   801 
Net interest income 49,189   39,886   29,268   24,703   18,807 
Provision for loan losses 18,428   14,094   12,942   8,942   255 
Net interest income after
provision for loan losses
 30,761   25,792   16,326   15,761   18,552 
Noninterest income 34,391   25,492   21,986   14,220   6,132 
Noninterest expense 51,087   38,169   30,415   21,050   16,130 
Provision for income tax 2,964   2,939   1,667   1,641   1,870 
Net income 11,101   10,176   6,230   7,290   6,684 
          
 As of and for the Three Month Period
 September 30,
2022
 June 30,
2022
 March 31,
2022
 December 31,
2021
 September 30,
2021
Balance Sheet Data:         
Cash and cash equivalents$410,728  $405,689  $682,109  $813,161  $669,725 
Investment securities 98,871   109,821   136,177   36,623   34,924 
Loans held for sale 43,314   60,000          
Loans receivable 2,507,889   2,334,354   1,964,209   1,742,735   1,705,682 
Allowance for loan losses (59,282)  (49,358)  (38,770)  (28,632)  (20,222)
Total assets 3,133,741   2,969,722   2,833,750   2,635,517   2,451,568 
Interest bearing deposits 2,023,849   1,879,253   1,738,426   1,007,879   927,097 
Noninterest bearing deposits 813,217   818,052   838,044   1,355,908   1,296,443 
Core deposits (1) 2,727,830   2,584,831   2,460,954   2,249,573   2,148,445 
Total deposits 2,837,066   2,697,305   2,576,470   2,363,787   2,223,540 
Total borrowings 27,931   27,911   27,893   52,873   52,854 
Total shareholders’ equity 228,733   217,661   207,920   201,222   161,086 
          
Share and Per Share Data (2):         
Earnings per share – basic$0.86  $0.79  $0.48  $0.60  $0.56 
Earnings per share – diluted$0.82  $0.76  $0.46  $0.57  $0.54 
Dividends per share              
Book value per share (3)$17.66  $16.81  $16.08  $15.63  $13.41 
Tangible book value per share (4)$17.66  $16.81  $16.08  $15.63  $13.41 
Weighted avg outstanding shares – basic 12,938,200   12,928,061   12,898,746   12,144,452   11,999,899 
Weighted avg outstanding shares – diluted 13,536,823   13,442,013   13,475,337   12,701,464   12,456,674 
Shares outstanding at end of period 12,954,573   12,948,623   12,928,548   12,875,315   12,012,107 
Stock options outstanding at end of period 644,334   655,844   666,774   694,519   710,182 

See footnotes on following page

 As of and for the Three Month Period
 September 30,
2022
 June 30,
2022
 March 31,
2022
 December 31,
2021
 September 30,
2021
Credit Quality Data:         
Nonperforming assets (5) to total assets 0.73%  0.09%  0.08%  0.07%  0.03%
Nonperforming assets (5) to loans receivable and OREO 0.91%  0.11%  0.12%  0.10%  0.04%
Nonperforming loans (5) to total loans receivable 0.91%  0.11%  0.12%  0.10%  0.04%
Allowance for loan losses to nonperforming loans 259.1%  849.4%  1653.3%  1657.9%  2732.7%
Allowance for loan losses to total loans receivable 2.36%  2.11%  1.97%  1.64%  1.19%
Gross charge-offs$8,513  $3,542  $2808  $579  $31 
Gross recoveries$9  $36  $4  $47  $32 
Net charge-offs to average loans (6) 1.38%  0.64%  0.64%  0.13%  0.00%
Credit enhancement income (7)$8,102  $3,539  $2804  $363  $18 
          
Capital Ratios (8):         
Tier 1 leverage capital 7.70%  7.68%  7.75%  8.07%  7.48%
Common equity Tier 1 risk-based capital 8.49%  8.51%  9.71%  11.06%  9.94%
Tier 1 risk-based capital 8.62%  8.65%  9.88%  11.26%  10.15%
Total risk-based capital 10.80%  10.88%  12.30%  13.89%  12.95%

(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)  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. When the provision for loan losses and provision for unfunded commitments is recorded, a receivable is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). This is the amount of CCBX incurred losses that were recorded and are covered by the partner’s credit enhancements.
(8)  Capital ratios are for the Company, Coastal Financial Corporation.

Non-GAAP Financial Measures

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

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

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

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

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

  As of and for the Three Months Ended As of and for the Nine Months Ended
(Dollars in thousands, unaudited) September 30,
2022
 June 30, 2022 September 30,
2021
 September 30,
2022
 September 30,
2021
Revenue excluding BaaS credit enhancements and BaaS fraud enhancements:
Total net interest income $49,189  $39,886  $18,807  $118,343  $54,734 
Total noninterest income  34,391   25,492   6,132   81,869   13,898 
Total Revenue $83,580  $65,378  $24,939  $200,212  $68,632 
Less: BaaS credit enhancements  (17,928)  (14,207)  (10)  (45,210)  (10)
Less: BaaS fraud enhancements  (11,708)  (6,474)  (296)  (22,753)  (296)
Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements $53,944  $44,697  $24,633  $132,249  $68,326 

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

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

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

  As of and for the Three Months Ended As of and for the Nine Months Ended
(dollars in thousands; unaudited) September 30,
2022
 June 30, 2022 September 30,
2021
 September 30,
2022
 September 30,
2021
Net BaaS loan income divided by average CCBX loans:    
Total average CCBX loans receivable $893,655  $691,294  $160,022  $657,574  $113,369 
Interest and earned fee income on CCBX loans  31,449   21,281   1,471   64,721   2,761 
Less: loan expense on CCBX loans  (15,560)  (12,229)  (419)  (36,079)  (609)
Net BaaS loan income $15,889  $9,052  $1,052  $28,642  $2,152 
Net BaaS loan income divided by average CCBX loans  7.05%  5.25%  2.61%  5.82%  2.54%
CCBX loan yield  13.96%  12.35%  3.65%  13.16%  3.26%

APPENDIX A -
As of September 30, 2022

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 $2.51 billion in outstanding loan balances. When combined with $2.32 billion in unused commitments the total of these categories is $4.83 billion.

Commercial real estate loans represent the largest segment of our loans, comprising 40.7% of our total balance of outstanding loans as of September 30, 2022. Unused commitments to extend credit represents an additional $37.2 million, and the combined total exposure in commercial real estate loans represents $1.06 billion, or 22.0% of our total outstanding loans and loan commitments.

The following table summarizes our exposure by industry for our commercial real estate portfolio as of September 30, 2022:

(dollars in thousands; unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans
(Outstanding Balance &
Available Commitment)
 Average Loan Balance Number of Loans
Apartments $208,509 $5,658 $214,167 4.4% $2,644 81
Hotel/Motel  165,233  4,880  170,113 3.5   6,075 28
Office  100,224  3,522  103,746 2.1   1,048 99
Retail  116,648  3,631  120,279 2.5   1,215 99
Convenience Store  81,286  4,336  85,622 1.8   2,088 41
Mixed use  84,255  4,681  88,936 1.8   988 90
Warehouse  74,382  1,766  76,148 1.6   1,410 54
Manufacturing  40,634  1,765  42,399 0.9   1,211 35
Mini Storage  46,989  1,810  48,799 1.0   3,050 16
Groups < 0.70% of total  105,907  5,148  111,055 2.3   1,354 82
Total $1,024,067 $37,197 $1,061,264 22.0% $1,698 625

Consumer loans comprise 20.9% of our total balance of outstanding loans as of September 30, 2022. Unused commitments to extend credit represents an additional $802.6 million, and the combined total exposure in consumer and other loans represents $1.3 billion, or 27.4% 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 of just $1,200. CCBX consumer loans are underwritten to CCBX credit standards and underwriting of these loans is regularly tested.

The following table summarizes our exposure by industry for our consumer and other loan portfolio as of September 30, 2022:

(dollars in thousands; unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans
(Outstanding Balance &
Available Commitment)
 Average Loan Balance Number of Loans
CCBX consumer loans
Installment loans $294,907 $ $294,907 6.1% $1.5 196,058
Credit cards  216,995  800,914  1,017,909 21.1   1.3 162,170
Lines of credit  6,104  559  6,663 0.1   0.2 30,481
Other loans  3,310    3,310 0.1   0.2 16,854
Community bank consumer loans
Lines of credit  155  397  552 0.0   3.7 42
Installment loans  1,408  716  2,124 0.0   33.5 42
Other loans  657    657 0.0   1.9 339
Total $523,536 $802,586 $1,326,122 27.4% $1.2 405,986

Residential real estate loans comprise 16.0% of our total balance of outstanding loans as of September 30, 2022. Unused commitments to extend credit represents an additional $476.6 million, and the combined total exposure in residential real estate loans represents $879.4 million, or 18.2% of our total outstanding loans and loan commitments.

The following table summarizes our exposure by industry for our commercial and industrial loan portfolio as of September 30, 2022:

(dollars in thousands; unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans
(Outstanding Balance &
Available Commitment)
 Average Loan Balance Number of Loans
CCBX residential real estate loans
Home equity line of credit $203,910 $436,346 $640,256 13.2% $23 8,836
Community bank residential real estate loans
Closed end, secured by first liens  173,890  4,389  178,279 3.7   610 285
Home equity line of credit  15,750  33,945  49,695 1.0   85 186
Closed end, second liens  9,231  1,912  11,143 0.2   330 28
Total $402,781 $476,592 $879,373 18.2% $43 9,335

Commercial and industrial loans comprise 13.5% of our total balance of outstanding loans as of September 30, 2022. Unused commitments to extend credit represents an additional $839.7 million, and the combined total exposure in commercial and industrial loans represents $1.18 billion, or 24.4% of our total outstanding loans and loan commitments. Included in commercial and industrial loans is $174.3 million in outstanding capital call lines, with an additional $760.2 million in available loan commitments, which is provided to venture capital firms through one of our CCBX BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line.

The following table summarizes our exposure by industry for our commercial and industrial loan portfolio as of September 30, 2022:

(dollars in thousands; unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans
(Outstanding Balance &
Available Commitment)
 Average Loan Balance Number of Loans
Capital Call Lines $174,311 $760,192 $934,503 19.3% $1,019 171
Construction/Contractor Services  23,737  31,764  55,501 1.1   129 184
Financial Institutions  35,150    35,150 0.7   3,906 9
Manufacturing  14,530  5,477  20,007 0.4   382 38
Medical / Dental / Other Care  21,408  4,833  26,241 0.5   335 64
Retail  17,054  5,792  22,846 0.5   25 676
Groups < 0.30% of total  53,738  31,660  85,398 1.8   177 303
Total $339,928 $839,718 $1,179,646 24.4% $235 1,445

Construction, land and land development loans comprise 8.9% of our total balance of outstanding loans as of September 30, 2022. Unused commitments to extend credit represents an additional $163.0 million, and the combined total exposure in construction, land and land development loans represents $387.2 million, or 8.0% of our total outstanding loans and loan commitments.

The following table details our exposure for our construction, land and land development portfolio as of September 30, 2022:

(dollars in thousands; unaudited) Outstanding Balance Available Loan Commitments Total Exposure % of Total Loans
(Outstanding Balance &
Available Commitment)
 Average Loan Balance Number of Loans
Commercial construction $109,874 $116,147 $226,021 4.7% $3,789 29
Residential construction  38,795  31,170  69,965 1.4   970 40
Undeveloped land loans  41,373  4,068  45,441 0.9   3,183 13
Developed land loans  19,436  6,130  25,566 0.5   607 32
Land development  14,710  5,485  20,195 0.4   774 19
Total $224,188 $163,000 $387,188 8.0% $1,686 133

APPENDIX B -
As of September 30, 2022

CCBX – BaaS Reporting Information

During the quarter ended September 30, 2022, $17.9 million was recorded in BaaS credit enhancements related to the provision for loan losses 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 absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans and negative deposit accounts. When the provision for loan losses and provision for unfunded commitments is recorded, a receivable is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner legal commitment to cover losses. The receivable is relieved as credit enhancement recoveries are received from the CCBX partner. Agreements with our CCBX partners also provide protection to the Bank from fraud by absorbing incurred fraud losses. 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 absorbing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations to replenish their cash reserve account then the bank would be exposed to additional loan and deposit losses, as a result of this counterparty risk. If a CCBX partner does not replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would write-off any remaining receivable from the CCBX partner but would retain the full yield on the loan going forward, and BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.

For CCBX partner loans the Bank records contractual interest earned from the borrower on loans in interest income, adjusted for origination costs which are paid or payable to the CCBX partner. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. To determine net revenue (Net BaaS loan income) earned from CCBX loan relationships, one 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 table illustrates how CCBX partner loan income and expenses are recorded in the financial statements:

Loan income and related loan expense Three Months Ended Nine Months Ended
(dollars in thousands; unaudited) September 30,
2022
 June 30,
2022
 September 30,
2021
 September 30,
2022
 September 30,
2021
BaaS loan interest income $31,449  $21,281  $1,471  $64,721  $2,761 
Less: BaaS loan expense  15,560   12,229   419   36,079   609 
Net BaaS loan income(1)  15,889   9,052   1,052   28,642   2,152 
Net BaaS loan income divided by average BaaS loans(1)  7.05%  5.25%  2.61%  5.82%  2.54%
Yield on loans  13.96%  12.35%  3.65%  13.16%  3.26%

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

The addition of new CCBX partners and increased activity has resulted in increases in interest, direct fees and expenses for the quarter ended September 30, 2022 compared to the quarters ended June 30, 2022 and September 30, 2021. 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 Nine Months Ended
(dollars in thousands; unaudited) September 30,
2022
 June 30,
2022
 September 30,
2021
 September 30,
2022
 September 30,
2021
Loan interest income $31,449 $21,281 $1,471 $64,721 $2,761
Total BaaS interest income $31,449 $21,281 $1,471 $64,721 $2,761


Interest expense Three Months Ended Nine Months Ended
(dollars in thousands; unaudited) September 30,
2022
 June 30,
2022
 September 30,
2021
 September 30,
2022
 September 30,
2021
BaaS interest expense $5,075 $1,356 $23 $6,549 $65
Total BaaS interest expense $5,075 $1,356 $23 $6,549 $65


BaaS income Three Months Ended Nine Months Ended
(dollars in thousands; unaudited) September 30,
2022
 June 30,
2022
 September 30,
2021
 September 30,
2022
 September 30,
2021
Program income:          
Servicing and other BaaS fees $1,079 $1,159 $1,313 $3,407 $3,046
Transaction fees  940  814  146  2,247  264
Interchange fees  738  628  188  1,798  333
Reimbursement of expenses  885  618  333  1,875  709
Program income  3,642  3,219  1,980  9,327  4,352
Indemnification income:          
Credit enhancements  17,928  14,207  10  45,210  10
Fraud enhancements  11,708  6,474  296  22,753  296
Indemnification income  29,636  20,681  306  67,963  306
Total BaaS income $33,278 $23,900 $2,286 $77,290 $4,658


BaaS loan and fraud expense Three Months Ended Nine Months Ended
(dollars in thousands; unaudited) September 30,
2022
 June 30,
2022
 September 30,
2021
 September 30,
2022
 September 30,
2021
BaaS loan expense $15,560 $12,229 $419 $36,079 $609
BaaS fraud expense  11,707  6,474  296  22,752  296
Total BaaS loan and fraud expense $27,267 $18,703 $715 $58,831 $905