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Coastal Financial Corporation Announces First Quarter 2023 Results
Press Releases

Coastal Financial Corporation Announces First Quarter 2023 Results






First Quarter 2023 Highlights:

  • Quarterly net income of $12.4 million, or $0.91 per diluted common share, for the three months ended March 31, 2023, compared to $13.1 million, or $0.96 per diluted common share for the three months ended December 31, 2022.
  • Total assets increased $306.6 million, or 9.7%, to $3.45 billion for the quarter ended March 31, 2023, compared to $3.14 billion at December 31, 2022.
  • Loan growth of $209.9 million, or 8.0%, to $2.84 billion for the three months ended March 31, 2023.
    • CCBX loans increased $153.7 million, or 15.2%, to $1.17 billion.
    • Community bank loans increased $56.3 million, or 3.5%, to $1.67 billion.
      • PPP loans decreased $0.9 million, or 19.3%, to $3.8 million.
  • Deposits increased $277.7 million, or 9.9%, to $3.10 billion as of March 31, 2023.
    • CCBX deposit growth of $284.5 million, or 22.2%, to $1.56 billion.
      • Additional $36.9 million in CCBX deposits transferred off balance sheet.
    • Community bank deposits decreased $6.8 million, or 0.4%, to $1.53 billion and community bank cost of deposits was 0.66%.
  • Total revenue increased $7.6 million, or 7.8%, for the three months ended March 31, 2023, compared to the three months ended December 31, 2022
  • Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements increased $1.2 million, or 2.0%, to $59.4 million for the three months ended March 31, 2023, compared to the three months ended December 31, 2022. (A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.)

EVERETT, Wash., April 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 March 31, 2023. 

Quarterly net income for the first quarter of 2023 was $12.4 million, or $0.91 per diluted common share, compared with net income of $13.1 million, or $0.96 per diluted common share, for the fourth quarter of 2022, and $6.2 million, or $0.46 per diluted common share, for the quarter ended March 31, 2022. 

Total assets increased $306.6 million, or 9.7%, during the first quarter of 2023 to $3.45 billion, from $3.14 billion at December 31, 2022. Loan growth of $209.9 million, or 8.0%, during the three months ended March 31, 2023 to $2.84 billion, compared to $2.63 billion at December 31, 2022. Loan growth included CCBX loan growth of $153.7 million, or 15.2%, and an increase of $56.3 million, or 3.5% in community bank loans, which is net of $908,000 in PPP loan forgiveness/repayments. Deposits increased $277.7 million, or 9.9%, during the three months ended March 31, 2023 and included CCBX deposit growth of $284.5 million, or 22.2%, and a decrease in community bank deposits of $6.8 million, or 0.4%. The slight decrease in community bank deposits was a result of pricing disciplines as some customers sought higher rate products. Our cost of deposits for the community bank was 0.66% for the three months ended March 31, 2023, compared to 0.37% for the three months ended December 31, 2022.

“The disruption from the bank failures in the first quarter of 2023 was unsettling to the broader financial services industry, but Coastal remains on solid footing with a diversified, stable deposit base. Deposits increased $277.7 million, or 9.9%, during the three months ended March 31, 2023. Fully insured IntraFi network sweep deposits increased to $94.3 million as of March 31, 2023, compared to $12.5 million as of December 31, 2022. These fully insured sweep deposits allow our larger deposit customers to fully insure their deposits through a sweep to other banks. Our liquidity position is supported by careful management of our liquid assets and liabilities as well as access to alternative sources of funds. As of March 31, 2023 we had $393.9 million in cash on the balance sheet and the capacity to borrow up to $575.1 million from Federal Home Loan Bank and the Federal Reserve Bank discount window, which we did not draw down at any point in the first quarter of 2023. Cash on the balance sheet and borrowing capacity totaled $969.0 million, which represented 31.3% of total deposits and exceeded our $768.3 million in uninsured deposits as of March 31, 2023. Our AFS securities portfolio has a weighted average remaining duration of just 11 months and U.S. Treasury securities represent 99.7% of that portfolio. Unrealized losses on the AFS securities portfolio were just $2.3 million, or 0.88%, of shareholders’ equity as of March 31, 2023, which we expect to accrete back into equity at approximately $500,000 a quarter for the next three quarters.

As we move forward in the year, we are well equipped to handle the challenges that may come from this uncertain economic environment. In addition to our well-established community bank base, which includes our 14 branch network and strong local economy, we also have three rings of defense to mitigate credit and counterparty risk with our CCBX partners: (1) well-funded partner cash reserve accounts, (2) partners we believe have the underlying financial strength to replenish and maintain cash reserve balances, and (3) if cash reserves are not replenished then we receive full economic benefit and retention of all interest and fee revenue from the loans. As we continue to evolve and explore new opportunities for growth, our commitment to the safety and soundness of the Company and the Bank continues to be our top priority,” stated Eric Sprink, the CEO of the Company and the Bank.

Highlights in Light of Recent Banking Events:

  • Deposits:
    • Deposits increased $277.7 million, or 9.9%, to $3.10 billion during the three months ended March 31, 2023
      • Includes $94.3 million in fully insured IntraFi network negotiable orders of withdrawal (“NOW”) and money market sweep deposits as of March 31, 2023, compared to $12.5 million as of December 31, 2022.
    • Deposits increased $258.0 million, or 9.09%, from March 10, 2023, the date Silicon Valley Bank was put into receivership, to March 31, 2023.
  • Reduction in Uninsured Deposits:
    • Uninsured deposits of $768.3 million, or 24.8% of total deposits as of March 31, 2023, compared to $835.8 million, or 29.7% of total deposits as of December 31, 2022.
    • Coastal has a lower percent of uninsured deposits than every bank over $10.0 billion in assets as of December 31, 20221.
  • Liquidity/Borrowings:
    • Cash and interest bearing deposits of $393.9 million, of which 89.3% is held at the Federal Reserve Bank, at March 31, 2023 compared to $342.1 million as of December 31, 2022.
    • As of March 31, 2023 we had the capacity to borrow up to $575.1 million from Federal Home Loan Bank and the Federal Reserve Bank discount window.
      • We had no outstanding borrowings under these facilities as of March 31, 2023.
      • We had no outstanding borrowings under these facilities during the quarter ended March 31, 2023.
  • Net Interest Margin:
    • Net interest margin of 7.15% for the quarter ended March 31, 2023 compared to 6.91% for the month ended March 31, 2023.
  • Cost of Deposits:
    • Cost of deposits of 2.13% for the quarter ended March 31, 2023,
    • Cost of deposits of 2.36% for the month ended March 31, 2023.
  • Investment Portfolio:
    • Available for sale (“AFS”) investments of $98.0 million, compared to $97.3 million as of December 31, 2022, of which 99.7% are U.S. Treasuries, with a weighted average remaining duration of 11 months as of March 31, 2023.
    • Held to maturity (“HTM”) investments of $3.7 million, of which 100% are U.S. Agency mortgage backed securities held for CRA purposes, with a fair value of $108,000 less than the carrying value as of March 31, 2023.

1 Source: S&P Global Market Intelligence as of December 31, 2022

Results of Operations Overview

Beginning in 2023, the Company changed the structure for how it reports segment activity. The Company has one main subsidiary, the Bank which consists of three segments: CCBX, the community bank and treasury & administration. The CCBX segment includes our BaaS activities, the community bank segment includes all community banking activities and treasury & administration includes treasury management, overall administration and all other aspects of the Company. Net interest income was $54.5 million for the quarter ended March 31, 2023, an increase of $1.1 million, or 2.0%, from $53.4 million for the quarter ended December 31, 2022, and an increase of $25.2 million, or 86.2%, from $29.3 million for the quarter ended March 31, 2022. Yield on loans receivable was 9.95% for the three months ended March 31, 2023, compared to 9.33% for the three months ended December 31, 2022 and 6.80% for the three months ended March 31, 2022. The increase in net interest income compared to December 31, 2022 and March 31, 2022, was largely related to increased yield on loans resulting from higher interest rates and growth in higher yielding loans, primarily from CCBX. Total average loans receivable for the three months ended March 31, 2023 was $2.71 billion, compared to $2.60 billion for the three months ended December 31, 2022, and $1.77 billion for the three months ended March 31, 2022.

Interest and fees on loans totaled $66.4 million for the three months ended March 31, 2023 compared to $61.2 million and $29.6 million for the three months ended December 31, 2022 and March 31, 2022, respectively. Loan growth of $209.9 million, or 8.0%, during the quarter ended March 31, 2023 included a $153.7 million increase in CCBX loans of which capital call lines form a part. Capital call lines decreased $27.2 million, or 18.6%, during the quarter ended March 31, 2023, compared to the quarter ended December 31, 2022 as a result of normal balance fluctuations and business activities. Capital call lines bear a lower rate of interest, but have less credit risk due to the way the loans are structured compared to other commercial loans. The increase in interest and fees on loans for the quarter ended March 31, 2023, compared to December 31, 2022 and March 31, 2022, was largely due to growth in higher yielding loans and increased interest rates. As a result of the Federal Open Market Committee (“FOMC”) raising the target Federal Funds rate two times during the quarter for a total increase of 0.50%, interest rates on our existing variable rate loans were 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 0.25% on March 23, 2023.

Interest income from interest earning deposits with other banks was $3.1 million at March 31, 2023 and December 31, 2022, and an increase of $2.7 million compared to March 31, 2022 due to an increase in interest rates. The average balance of interest earning deposits with other banks for the three months ended March 31, 2023 was $271.7 million, compared to $329.4 million and $843.9 million for the three months ended December 31, 2022 and March 31, 2022, respectively. Interest earning deposits with other banks decreased as a result of increased loan demand compared to the three months ended December 31, 2022 and March 31, 2022. Additionally, the average yield on these interest earning deposits with other banks increased to 4.62% for the quarter ended March 31, 2023, compared to 3.73% and 0.19% for the quarters ended December 31, 2022 and March 31, 2022, respectively.

Interest expense was $15.6 million for the quarter ended March 31, 2023, a $3.9 million increase from the quarter ended December 31, 2022 and a $14.7 million increase from the quarter ended March 31, 2022. Interest expense on deposits was $15.0 million for the quarter ended March 31, 2023, compared to $553,000 for the quarter ended March 31, 2022. Interest expense on borrowed funds was $662,000 for the quarter ended March 31, 2023, compared to $537,000 and $321,000 for the quarters ended December 31, 2022 and March 31, 2022, respectively. Interest expense on borrowed funds increased $125,000 compared to the three months ended December 31, 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 $341,000 increase in interest expense on borrowed funds from the quarter ended March 31, 2022 is the result of an increase in subordinated debt and 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 $3.9 million for the quarter ended March 31, 2023, compared to the quarter ended December 31, 2022, and $14.4 million compared to the quarter ended March 31, 2022 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, in the first and second quarter of 2022 a significant portion of CCBX deposits that were not earning interest were reclassified to interest bearing deposits from noninterest bearing deposits, which also contributed to the increase in interest expense compared to March 31, 2022. 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 2.13% for the three months ended March 31, 2023, compared to 1.56% for the three months ended December 31, 2022, and 0.09%, for the three months ended March 31, 2022. Community bank and CCBX cost of deposits were 0.66% and 3.89% respectively, for the three months ended March 31, 2023, compared to 0.37% and 3.13%, for the three months ended December 31, 2022, and 0.11% and 0.06% for the three months ended March 31, 2022. The increase in cost of deposits for the three months ended March 31, 2023 compared to the prior periods for both segments is a result of increased interest rates and increased CCBX deposits. 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 FOMC interest rate increases will increase our cost of deposits and result in higher interest expense on interest bearing deposits.

Net Interest Margin

Net interest margin was 7.15% for the three months ended March 31, 2023, compared to 6.96% and 4.45% for the three months ended December 31, 2022 and March 31, 2022, respectively. The increase in net interest margin compared to the three months ended December 31, 2022 and March 31, 2022, was largely a result of increased volume and an increase in higher interest rates on new loans and on existing variable rate loans as they reprice. Loans receivable increased $209.9 million and $873.0 million, compared to December 31, 2022 and March 31, 2022, 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 $5.2 million, or 8.5%, to $66.4 million for the three months ended March 31, 2023, compared to $61.2 million for the three months ended December 31, 2022, and $29.6 million for the three months ended March 31, 2022. Also contributing to the increase in net interest margin compared to the three months ended March 31, 2022, was a $2.7 million increase in interest on interest earning deposits. These interest earning deposits earned an average rate of 4.62% for the quarter ended March 31, 2023, compared to 3.73% and 0.19% for the quarters ended December 31, 2022 and March 31, 2022, respectively. Average investment securities increased $724,000 to $102.2 million for the three months ended March 31, 2023 compared to the three months ended December 31, 2022, and increased $56.5 million compared to the three months ended March 31, 2022. Interest on investment securities decreased $4,000 for the three months ended March 31, 2023 compared to the three months ended December 31, 2022. Interest on investment securities increased $482,000 compared to March 31, 2022, 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 2.19% for the quarter ended March 31, 2023, an increase of 58 basis points from the quarter ended December 31, 2022 and an increase of 205 basis points from the quarter ended March 31, 2022. Cost of deposits for the quarter ended March 31, 2023 was 2.13%, compared to 1.56% for the quarter ended December 31, 2022, and 0.09% for the quarter ended March 31, 2022. The increased cost of funds and deposits compared to December 31, 2022 and March 31, 2022 was largely due to the increase in interest rates compared to the previous periods and growth in higher cost CCBX deposits compared to March 31, 2022.

During the quarter ended March 31, 2023, total loans receivable increased by $209.9 million, or 8.0%, to $2.84 billion, compared to $2.63 billion for the quarter ended December 31, 2022. The increase consists of $153.7 million in CCBX loan growth and $56.3 million in community bank loan growth. Community bank loan growth is net of $0.9 million in PPP loan forgiveness/repayments. Total loans receivable grew $873.0 million as of March 31, 2023, compared to the quarter ended March 31, 2022. This increase includes CCBX loan growth of $650.8 million and community bank loan growth of $222.2 million. Community bank loan growth is net of $43.7 million in PPP loan forgiveness/repayments as of March 31, 2023 compared to March 31, 2022. During the quarter ended March 31, 2023, $101.2 million in CCBX loans were transferred into loans held for sale, with $73.9 million in loans sold during the quarter and $27.3 million remaining in loans held for sale as of March 31, 2023; compared to zero held for sale as of December 31, 2022. 

Total yield on loans receivable for the quarter ended March 31, 2023 was 9.95%, compared to 9.33% for the quarter ended December 31, 2022, and 6.80% for the quarter ended March 31, 2022. This increase in yield on loans receivable is a combination of an overall increase in interest rates, repricing of variable rate loans as well as additional volume in higher rate consumer loans from CCBX partners. During the quarter ended March 31, 2023, CCBX loans outstanding increased 15.2%, or $153.7 million, compared to December 31, 2022, with an average CCBX yield of 16.09% and community bank loans increased 3.5%, or $56.3 million, December 31, 2022, with an average yield of 5.97%. 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.

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

  For the Three Months Ended
  March 31, 2023   December 31, 2022   March 31, 2022
  Yield on
Loans (2)
  Cost of
Deposits (2)
  Yield on
Loans (2)
  Cost of
Deposits (2)
  Yield on
Loans (2)
  Cost of
Deposits (2)
Community Bank 5.97%   0.66%   5.70%   0.37%   5.16%   0.11%
CCBX (1) 16.09%   3.89%   15.20%   3.13%   12.73%   0.06%
Consolidated 9.95%   2.13%   9.33%   1.56%   6.80%   0.09%
                       

(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.
(2)  Annualized calculations for periods shown.

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

    For the Three Months Ended
    March 31, 2023   December 31, 2022   March 31, 2022
(dollars in thousands, unaudited)   Income /
Expense
  Income /
expense divided
by average
CCBX loans
(2)
  Income /
Expense
  Income /
expense divided
by 
average
CCBX loans
(2)
  Income /
Expense
  Income /
expense divided
by average
CCBX loans
(2)
BaaS loan interest income   $ 42,220   16.09 %   $ 38,086   15.20 %   $ 11,992   12.73 %
Less: BaaS loan expense     17,554   6.69 %     17,215   6.87 %     8,290   8.80 %
Net BaaS loan income (1)   $ 24,666   9.40 %   $ 20,871   8.33 %   $ 3,702   3.93 %
Average BaaS Loans   $ 1,064,192       $ 994,080       $ 382,153    

(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 1.58% for the quarter ended March 31, 2023 compared to 1.66% and 0.93% for the quarters ended December 31, 2022 and March 31, 2022, respectively.  ROA for the quarter ended March 31, 2023, was impacted by an increase in deposits, loans and overall higher interest rates on interest earning assets, compared to the quarters ended December 31, 2022 and March 31, 2022.

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

    Three Months Ended
(unaudited)   March 31,
2023
  December 31,
2022
  September 30,
2022
  June 30,
2022
  March 31,
2022
                     
Return on average assets (1)   1.58 %   1.66 %   1.45 %   1.41 %   0.93 %
Return on average equity (1)   19.89 %   21.86 %   19.36 %   18.86 %   12.12 %
Yield on earnings assets (1)   9.19 %   8.47 %   7.38 %   5.94 %   4.58 %
Yield on loans receivable (1)   9.95 %   9.33 %   8.46 %   7.34 %   6.80 %
Cost of funds (1)   2.19 %   1.61 %   0.85 %   0.29 %   0.14 %
Cost of deposits (1)   2.13 %   1.56 %   0.82 %   0.25 %   0.09 %
Net interest margin (1)   7.15 %   6.96 %   6.58 %   5.66 %   4.45 %
Noninterest expense to average assets (1)   5.69 %   5.97 %   6.66 %   5.29 %   4.52 %
Noninterest income to average assets (1)   6.28 %   5.43 %   4.48 %   3.53 %   3.27 %
Efficiency ratio   43.03 %   48.94 %   61.12 %   58.38 %   59.34 %
Loans receivable to deposits (2)   92.55 %   93.25 %   89.92 %   86.54 %   76.24 %

(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
  March 31,   December 31,   March 31,
(dollars in thousands; unaudited) 2023   2022
  2022
Deposit service charges and fees $ 910   $ 946     $ 884
Gain on sales of loans, net   123          
Loan referral fees             602
Unrealized gain on equity securities, net   39     (18 )    
Mortgage broker fees   19     25       123
Other   280     273       265
Noninterest income, excluding BaaS program income and BaaS indemnification income   1,371     1,226       1,874
Servicing and other BaaS fees   948     1,001       1,169
Transaction fees   917     964       493
Interchange fees   789     785       432
Reimbursement of expenses   921     857       372
BaaS program income   3,575     3,607       2,466
BaaS credit enhancements   42,362     31,164       13,075
Baas fraud enhancements   1,999     6,818       4,571
BaaS indemnification income   44,361     37,982       17,646
Total BaaS income   47,936     41,589       20,112
Total noninterest income $ 49,307   $ 42,815     $ 21,986
                   

Noninterest income was $49.3 million for the three months ended March 31, 2023, an increase of $6.5 million from $42.8 million for the three months ended December 31, 2022, and an increase of $27.3 million from $22.0 million for the three months ended March 31, 2022. The increase in noninterest income over the quarter ended December 31, 2022 was primarily due to an increase of $6.3 million in total BaaS income. The $6.3 million increase in total BaaS income included a $11.2 million increase in BaaS credit enhancements related to the allowance for credit losses and reserve for unfunded commitments, a $4.8 million decrease in BaaS fraud enhancements, and a decrease of $32,000 in BaaS program income. The decrease in BaaS program income is a result of seasonality and lower implementation fees (see “Appendix B” for more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments and credit and fraud enhancements). The $27.3 million increase in noninterest income over the quarter ended March 31, 2022 was primarily due to a $27.8 million increase in BaaS income. The $27.8 million increase in BaaS income included a $29.3 million increase in BaaS credit enhancements, a $2.6 million decrease in BaaS fraud enhancements and a $1.1 million increase in BaaS program income.

Our CCBX segment continues to evolve, and we now have 25 relationships, at varying stages, as of March 31, 2023. 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 March 31, 2023, two partners wound down their CCBX programs; these programs were not material in terms of income and sources of funds or loans.

  As of
(unaudited) March 31, 2023 December 31, 2022 March 31, 2022
Active 18 19 20
Friends and family / testing 1 1 1
Implementation / onboarding 1 0 5
Signed letters of intent 4 5 2
Wind down – preparing to exit relationship 1 2 0
Total CCBX relationships 25 27 28
       

The following table details noninterest expense for the periods indicated:

Noninterest Expense

    Three Months Ended
    March 31,   December 31,   March 31,
(dollars in thousands; unaudited)   2023   2022   2022
Salaries and employee benefits   $ 15,575   $ 14,399   $ 11,085
Legal and professional expenses     3,062     2,799     708
Data processing and software licenses     1,840     1,768     1,861
Occupancy     1,219     1,182     1,136
Point of sale expense     753     710     248
Director and staff expenses     626     515     344
FDIC assessments     595     550     604
Excise taxes     455     702     349
Marketing     95     109     99
Other     890     335     1,120
Noninterest expense, excluding BaaS loan and BaaS fraud expense     25,110     23,069     17,554
BaaS loan expense     17,554     17,215     8,290
BaaS fraud expense     1,999     6,819     4,571
BaaS loan and fraud expense     19,553     24,034     12,861
Total noninterest expense   $ 44,663   $ 47,103   $ 30,415
                   

Total noninterest expense decreased $2.4 million to $44.7 million for the three months ended March 31, 2023, compared to $47.1 million for the three months ended December 31, 2022 and increased $14.3 million from $30.4 million for the three months ended March 31, 2022. The decrease in noninterest expense for the quarter ended March 31, 2023, as compared to the quarter ended December 31, 2022, was primarily due to a $4.5 million decrease in BaaS expense (of which $4.8 million is related to a decrease in partner fraud expense partially offset by an increase of $339,000 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 during which the loss occurs, and a portion is estimated based on historical or other information from our partners.  

The increase in noninterest expenses for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 were largely due to an increase of $6.7 million in BaaS partner expense (increase of $9.3 million of which is related to partner loan expense and a decrease of $2.6 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 $2.4 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 $505,000 increase in point of sale expenses which is attributed to increased CCBX activity.

Provision for Income Taxes

The provision for income taxes was $3.0 million for the three months ended March 31, 2023, $2.4 million for the three months ended December 31, 2022 and $1.7 million for the first quarter of 2023. The provision for income taxes was higher for the three months ended March 31, 2023 due to fewer favorable tax deductions related to the exercise of equity awards compared to December 31, 2022. The Company is subject to various state taxes that are assessed as CCBX activities and employees expand into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods. The Company uses a federal statutory tax rate of 21.0% as a basis for calculating provision for federal income taxes and 2.62% for calculating the provision for state taxes. The effective tax rate was lower for the three months ended March 31, 2023 due to tax benefits that resulted from the exercise and deductibility of equity awards.

Financial Condition Overview

Total assets increased $306.6 million, or 9.7%, to $3.45 billion at March 31, 2023 compared to $3.14 billion at December 31, 2022. The increase is primarily due to loans receivable increasing $209.9 million during the quarter ended March 31, 2023 coupled with a $46.8 million increase in interest earning deposits with other banks. Additionally, there were $27.3 million in loans held for sale at March 31, 2023, compared to zero at December 31, 2022.  

Total assets increased $617.3 million, or 21.8%, at March 31, 2023, compared to $2.83 billion at March 31, 2022. The increase is primarily due to loans receivable increasing $873.0 million, and a decrease of $34.5 million in investment securities and a $293.2 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 March 31, 2022.

Loans Receivable

Total loans receivable increased $209.9 million to $2.84 billion at March 31, 2023, from $2.63 billion at December 31, 2022, and increased $873.0 million from $1.96 billion at March 31, 2022.  The increase in loans receivable over the quarter ended December 31, 2022 was the result of $153.7 million in CCBX loan growth and $56.3 million in community bank loan growth. Community bank loan growth is net of $908,000 in PPP loan forgiveness/repayments compared to the quarter ended December 31, 2022. The change in loans receivable over the quarter ended March 31, 2022 includes CCBX loan growth of $650.8 million and $222.2 million in community bank loan growth as of March 31, 2023.  Community bank loan growth is net of $43.7 million in PPP loan forgiveness and paydowns since March 31, 2022.

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

  As of March 31, 2023   December 31, 2022   As of March 31, 2022
(dollars in thousands; unaudited) Amount   Percent   Amount   Percent   Amount   Percent
Commercial and industrial loans:                      
PPP loans $ 3,791     0.1 %   $ 4,699     0.2 %   $ 47,467     2.4 %
Capital call lines   118,796     4.2       146,029     5.5       218,675     11.1  
All other commercial & industrial loans   203,751     7.2       161,900     6.1       128,181     6.5  
Total commercial and industrial loans:   326,338     11.5       312,628     11.8       394,323     20.0  
Real estate loans:                      
Construction, land and land development   206,635     7.3       214,055     8.1       208,108     10.6  
Residential real estate   455,507     16.0       449,157     17.1       268,716     13.6  
Commercial real estate   1,102,771     38.8       1,048,752     39.8       889,483     45.1  
Consumer and other loans   752,528     26.4       608,771     23.2       210,343     10.7  
Gross loans receivable   2,843,779     100.0 %     2,633,363     100.0 %     1,970,973     100.0 %
Net deferred origination fees – PPP loans   (63 )         (82 )         (1,365 )    
Net deferred origination fees – all other loans   (6,512 )         (6,025 )         (5,399 )    
Loans receivable $ 2,837,204         $ 2,627,256         $ 1,964,209      
Loan Yield (1)   9.95 %         9.33 %         6.80 %    

(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
    March 31, 2023   December 31, 2022   March 31, 2022
(dollars in thousands; unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total
Commercial and industrial loans:                        
PPP loans   $ 3,791     0.2 %   $ 4,699     0.3 %   $ 47,467     3.3 %
All other commercial & industrial loans     155,082     9.3       146,982     9.1       124,160     8.5  
Real estate loans:                        
Construction, land and land development loans     206,635     12.3       214,055     13.2       208,108     14.3  
Residential real estate loans     206,140     12.3       204,581     12.6       184,485     12.7  
Commercial real estate loans     1,102,771     65.7       1,048,752     64.7       889,483     61.1  
Consumer and other loans:                        
Other consumer and other loans     2,860     0.2       1,725     0.1       1,959     0.1  
Gross Community Bank loans receivable     1,677,279     100.0 %     1,620,794     100.0 %     1,455,662     100.0 %
Net deferred origination fees     (6,265 )         (6,042 )         (6,842 )    
Loans receivable   $ 1,671,014         $ 1,614,752         $ 1,448,820      
Loan Yield(1)     5.97 %         5.70 %         5.16 %    

(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
    March 31, 2023   December 31, 2022   March 31, 2022
(dollars in thousands; unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total
Commercial and industrial loans:                        
Capital call lines   $ 118,796     10.2 %   $ 146,029     14.4 %   $ 218,675     42.5 %
All other commercial & industrial loans     48,669     4.1       14,918     1.5       4,021     0.8  
Real estate loans:                        
Residential real estate loans     249,367     21.4       244,576     24.2       84,231     16.3  
Consumer and other loans:                        
Credit cards     318,187     27.3       279,644     27.6       55,090     10.7  
Other consumer and other loans     431,481     37.0       327,402     32.3       153,294     29.7  
Gross CCBX loans receivable     1,166,500     100.0 %     1,012,569     100.0 %     515,311     100.0 %
Net deferred origination fees     (310 )         (65 )         78      
Loans receivable   $ 1,166,190         $ 1,012,504         $ 515,389      
Loan Yield – CCBX (1)(2)     16.09 %         15.20 %         12.73 %    
                         

(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 $277.7 million, or 9.9%, to $3.10 billion at March 31, 2023 from $2.82 billion at December 31, 2022. The increase was due to a $381.6 million increase in core deposits, combined with a $2.4 million decrease in time deposits and includes BaaS-brokered deposits that are now classified as NOW accounts due to a change in the relationship agreement with one of our partners; these deposits increased to $275.4 million as of March 31, 2023 compared to $101.5 million as of December 31, 2022. Deposits in our CCBX segment increased $284.5 million, from $1.28 billion at December 31, 2022, to $1.56 billion at March 31, 2023 and community bank deposits decreased $6.8 million to $1.53 billion at March 31, 2023. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts. During the quarter ended March 31, 2023, noninterest bearing deposits decreased $13.2 million, or 1.7%, to $761.8 million from $775.0 million at December 31, 2022. In the quarter ended March 31, 2023 compared to the quarter ended December 31, 2022, NOW and money market accounts increased $402.7 million, savings deposits decreased $7.9 million, and time deposits decreased $2.4 million. Included in total deposits is $94.3 million in IntraFi network NOW and money market sweep accounts as of March 31, 2023, which provides our customers with fully insured deposits through a sweep to other banks. Uninsured deposits decreased to $768.3 million as of March 31, 2023, compared to $835.8 million as of December 31, 2022.

Total deposits increased $518.8 million, or 20.1%, to $3.10 billion at March 31, 2023 compared to $2.58 billion at March 31, 2022. The increase is largely the result of growth in CCBX deposits. Noninterest bearing deposits decreased $76.2 million, or 9.1%, to $761.8 million at March 31, 2023 from $838.0 million at March 31, 2022. NOW and money market accounts increased $690.6 million, or 45.5%, to $2.21 billion at March 31, 2023, and savings accounts decreased $7.1 million, or 6.7%, and time deposits decreased $13.3 million, or 33.0%, in the first quarter of 2023 compared to the first quarter of 2022 and includes BaaS-brokered deposits that are now classified as NOW accounts due to a change in the relationship agreement with one of our partners; these deposits increased to $275.4 million as of March 31, 2023, compared to $75.1 million as of March 31, 2022. These deposits increased as a result of sweeping them back on the balance sheet. Additionally, as of March 31, 2023 we have access to $36.9 million in CCBX customer deposits that are currently being transferred off the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. If a portion of these deposits are retained, they would be classified as NOW accounts. Efforts to retain and grow core deposits are evidenced by the high ratios in these categories when compared to total deposits.

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

  As of March 31, 2023   As of December 31, 2022   As of March 31, 2022
(dollars in thousands; unaudited) Amount   Percent of
Total
Deposits
  Balance   Percent of
Total
Deposits
  Balance   Percent of
Total
Deposits
Demand, noninterest bearing $ 761,800     24.6 %   $ 775,012     27.5 %   $ 838,044     32.5 %
NOW and money market   2,207,121     71.3       1,804,399     64.0       1,516,546     58.9  
Savings   99,241     3.2       107,117     3.8       106,364     4.1  
Total core deposits   3,068,162     99.1       2,686,528     95.3       2,460,954     95.5  
Brokered deposits   1           101,546     3.6       75,145     2.9  
Time deposits less than $100,000   11,343     0.4       12,596     0.5       14,856     0.6  
Time deposits $100,000 and over   15,717     0.5       16,851     0.6       25,515     1.0  
Total $ 3,095,223     100.0 %   $ 2,817,521     100.0 %   $ 2,576,470     100.0 %
Cost of deposits (1)   2.13 %         1.56 %         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
    March 31, 2023   December 31, 2022   March 31, 2022
(dollars in thousands; unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total
Demand, noninterest bearing   $ 664,452     43.4 %   $ 694,179     45.2 %   $ 724,723     43.2 %
NOW and money market     743,548     48.6       709,490     46.1       805,858     48.1  
Savings     96,330     6.3       105,101     6.8       106,050     6.3  
Total core deposits     1,504,330     98.3       1,508,770     98.1       1,636,631     97.6  
Brokered deposits     1     0.0       1     0.0       2     0.0  
Time deposits less than $100,000     11,343     0.7       12,596     0.8       14,856     0.9  
Time deposits $100,000 and over     15,717     1.0       16,851     1.1       25,515     1.5  
Total Community Bank deposits   $ 1,531,391     100.0 %   $ 1,538,218     100.0 %   $ 1,677,004     100.0 %
Cost of deposits(1)     0.66 %         0.37 %         0.11 %    

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

CCBX   As of
    March 31, 2023   December 31, 2022   March 31, 2022
(dollars in thousands; unaudited)   Balance   % to Total   Balance   % to Total   Balance   % to Total
Demand, noninterest bearing   $ 97,348     6.2 %   $ 80,833     6.3 %   $ 113,321     12.6 %
NOW and money market     1,463,573     93.6       1,094,909     85.6       710,688     79.0  
Savings     2,911     0.2       2,016     0.2       314      
Total core deposits     1,563,832     100.0       1,177,758     92.1       824,323     91.6  
BaaS-brokered deposits               101,545     7.9       75,143     8.4  
Total CCBX deposits   $ 1,563,832     100.0 %   $ 1,279,303     100.0 %   $ 899,466     100.0 %
Cost of deposits (1)     3.89 %         3.13 %         0.06 %    

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

Borrowings

As of March 31, 2023 the Company has the capacity to borrow up to a total of $575.1 million from the Federal Reserve Bank discount window and Federal Home Loan Bank, with no borrowings outstanding as of March 31, 2023.

Shareholders’ Equity

During the three months ended March 31, 2023, the Company contributed $15.0 million in capital to the Bank.  The Company had a cash balance of $7.7 million as of March 31, 2023, which is retained for general operating purposes, including debt repayment, and for funding $820,000 in commitments to bank technology funds.  

Total shareholders’ equity increased $15.3 million since December 31, 2022.  The increase in shareholders’ equity was primarily due to $12.4 million in net earnings, $954,000 net credit adjustment to retained earnings from implementing CECL on January 1, 2023 and $567,000 increase from stock options being exercised during the three months ended March 31, 2023.

Capital Ratios

The Company and the Bank remained well capitalized at March 31, 2023, as summarized in the following table.

(unaudited)   Coastal Community Bank   Coastal Financial Corporation   Minimum Well Capitalized Ratios under Prompt Corrective Action (1)
Tier 1 leverage capital   9.35 %   8.29 %   5.00 %
Common Equity Tier 1 risk-based capital   9.76 %   8.61 %   6.50 %
Tier 1 risk-based capital   9.76 %   8.73 %   8.00 %
Total risk-based capital   11.03 %   11.49 %   10.00 %

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

Asset Quality

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

The total allowance for credit losses was $89.1 million and 3.14% of loans receivable at March 31, 2023 compared to $74.0 million and 2.82% at December 31, 2022 and $38.8 million and 1.97% at March 31, 2022. The allowance for credit loss allocated to the CCBX portfolio was $68.4 million and 5.87% of CCBX loans receivable at March 31, 2023, with $20.7 million of allowance for credit loss allocated to the community bank or 1.24% of total community bank loans receivable.

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

    As of March 31, 2023   As of December 31, 2022   As of March 31, 2022
(dollars in thousands; unaudited)   Community Bank   CCBX   Total   Community Bank   CCBX   Total   Community Bank   CCBX   Total
Loans receivable   $ 1,671,014     $ 1,166,190     $ 2,837,204     $ 1,614,751     $ 1,012,505     $ 2,627,256     $ 1,448,820     $ 515,389     $ 1,964,209  
Allowance for credit losses     (20,708 )     (68,415 )     (89,123 )     (20,636 )     (53,393 )     (74,029 )     (20,643 )     (18,127 )     (38,770 )
Allowance for credit losses to
total loan receivable
    1.24 %     5.87 %     3.14 %     1.28 %     5.27 %     2.82 %     1.42 %     3.52 %     1.97 %
                                                                         

Provision for credit losses – loans totaled $43.5 million for the three months ended March 31, 2023, $33.6 million for the three months ended December 31, 2022, and $12.9 million for the three months ended March 31, 2022. Net charge-offs totaled $32.3 million for the quarter ended March 31, 2023, compared to $18.9 million for the quarter ended December 31, 2022 and $2.8 million for the quarter ended March 31, 2022. 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 $137.4 million loan portfolio. At March 31, 2023, our 10% of this portfolio represented $13.9 million in loans.

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

    Three Months Ended
    March 31, 2023   December 31, 2022   March 31, 2022
(dollars in thousands; unaudited)   Community Bank   CCBX   Total   Community Bank   CCBX   Total   Community Bank   CCBX   Total
Gross charge-offs   $ 50     $ 34,117     $ 34,167     $ 10     $ 18,876     $ 18,886     $ 4     $ 2,804     $ 2,808  
Gross recoveries     (5 )     (1,860 )     (1,865 )     (3 )     (30 )     (33 )     (4 )           (4 )
Net charge-offs   $ 45     $ 32,257     $ 32,302     $ 7     $ 18,846     $ 18,853     $     $ 2,804     $ 2,804  
Net charge-offs to average loans (1)     0.01 %     12.29 %     4.84 %     0.00 %     7.52 %     2.87 %     0.00 %     2.98 %     0.64 %
                                                                         

The increase in the Company’s provision for credit losses – loans during the quarter ended March 31, 2023, is largely related to the provision for loan growth in CCBX partner loans. During the quarter ended March 31, 2023, a $43.1 million provision for credit losses – loans was recorded for CCBX partner loans based on management’s analysis, compared to the $33.1 million provision for credit losses – loans that was recorded for CCBX for the quarter ended December 31, 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 credit 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 expected losses for these CCBX loans and reclassified negative deposit accounts. When the provision for CCBX credit losses and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). Expected losses are recorded in the allowance for credit losses. The credit enhancement asset is relieved when credit enhancement recoveries are received from the CCBX partner. CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by absorbing incurred credit and fraud losses. If our partner is unable to fulfill their contracted obligations then the bank could be exposed to additional credit losses. Management regularly evaluates and manages this counterparty risk. The Company is responsible for credit losses on approximately 10% of a $137.4 million CCBX loan portfolio. At March 31, 2023, 10% of this portfolio represented $13.9 million in loans. The factors used in management’s analysis for community bank credit losses indicated that a provision of $428,000 and $504,000 was needed for the quarters ended March 31, 2023 and December 31, 2022, respectively.

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

    Three Months Ended
(dollars in thousands; unaudited)   March 31, 2023   December 31, 2022   March 31, 2022
Community bank   $ 428   $ 504   $ 344
CCBX     43,116     33,096     12,598
Total provision expense   $ 43,544   $ 33,600   $ 12,942
                   

At March 31, 2023, our nonperforming assets were $31.5 million, or 0.91% of total assets, compared to $33.2 million, or 1.06%, of total assets, at December 31, 2022, and $2.3 million, or 0.08% of total assets, at March 31, 2022. These ratios are impacted by 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 decreased $1.6 million during the quarter ended March 31, 2023, compared to the quarter ended December 31, 2022, due to $1.5 million less in CCBX loans that are past due 90 days or more and still accruing combined with $98,000 less 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 decreased as a result of nonaccrual principal reductions/charge-offs. There were no repossessed assets or other real estate owned at March 31, 2023. Our nonperforming loans to loans receivable ratio was 1.11% at March 31, 2023, compared to 1.26% at December 31, 2022, and 0.12% at March 31, 2022.

For the quarter ended March 31, 2023, there were $45,000 of community bank net charge-offs and $7.0 million of nonperforming community bank loans. The $6.9 million nonaccrual balance in commercial real estate loans shown below consists of one loan that 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 March 31, 2023, $32.3 million in net charge-offs were recorded on CCBX loans. These loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. The Company is responsible for credit losses on approximately 10% of a $137.4 million loan portfolio. At March 31, 2023, 10% of this portfolio represented $13.9 million in loans.

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

(dollars in thousands; unaudited) As of March 31, 2023   As of December 31, 2022   As of March 31, 2022
Nonaccrual loans:          
Commercial and industrial loans $ 15     $ 113     $ 130  
Real estate loans:          
Construction, land and land development   66       66        
Residential real estate               54  
Commercial real estate   6,901       6,901        
Total nonaccrual loans   6,982       7,080       184  
Accruing loans past due 90 days or more:          
Commercial & industrial loans   187       404       22  
Real estate loans:          
Residential real estate loans   946       876       40  
Consumer and other loans:          
Credit cards   17,772       10,570       708  
Other consumer and other loans   5,657       14,245       1,391  
Total accruing loans past due 90 days or more   24,562       26,095       2,161  
Total nonperforming loans   31,544       33,175       2,345  
Real estate owned                
Repossessed assets                
Modified loans for borrowers experiencing financial difficulty, accruing                
Total nonperforming assets $ 31,544     $ 33,175     $ 2,345  
Total nonaccrual loans to loans receivable   0.25 %     0.27 %     0.01 %
Total nonperforming loans to loans receivable   1.11 %     1.26 %     0.12 %
Total nonperforming assets to total assets   0.91 %     1.06 %     0.08 %

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) March 31,
2023
  December 31,
2022
  March 31,
2022
Nonaccrual loans:          
Commercial and industrial loans $ 15   $ 113   $ 130
Real estate:          
Construction, land and land development   66     66    
Residential real estate           54
Commercial real estate   6,901     6,901    
Total nonaccrual loans   6,982     7,080     184
           
Accruing loans past due 90 days or more:          
Total accruing loans past due 90 days or more          
Total nonperforming loans   6,982     7,080     184
Other real estate owned          
Repossessed assets          
Total nonperforming assets $ 6,982   $ 7,080   $ 184

CCBX As of
(dollars in thousands; unaudited) March 31,
2023
  December 31,
2022
  March 31,
2022
Nonaccrual loans $   $   $
Accruing loans past due 90 days or more:          
Commercial & industrial loans   187     404     22
Real estate loans:          
Residential real estate loans   946     876     40
Consumer and other loans:          
Credit cards   17,772     10,570     708
Other consumer and other loans   5,657     14,245     1,391
Total accruing loans past due 90 days or more   24,562     26,095     2,161
Total nonperforming loans   24,562     26,095     2,161
Other real estate owned          
Repossessed assets          
Total nonperforming assets $ 24,562   $ 26,095   $ 2,161
                 

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 $3.45 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
  March 31,
2023
  December 31,
2022
  March 31,
2022
Cash and due from banks $ 37,676     $ 32,722     $ 32,705  
Interest earning deposits with other banks   356,240       309,417       649,404  
Investment securities, available for sale, at fair value   97,999       97,317       134,891  
Investment securities, held to maturity, at amortized cost   3,705       1,036       1,286  
Other investments   11,346       10,555       9,931  
Loans held for sale   27,292              
Loans receivable   2,837,204       2,627,256       1,964,209  
Allowance for credit losses   (89,123 )     (74,029 )     (38,770 )
Total loans receivable, net   2,748,081       2,553,227       1,925,439  
CCBX credit enhancement asset   76,395       53,377       20,283  
CCBX receivable   13,681       10,416       4,875  
Premises and equipment, net   18,030       18,213       18,135  
Operating lease right-of-use assets   4,812       5,018       5,836  
Accrued interest receivable   19,321       17,815       8,824  
Bank-owned life insurance, net   12,761       12,667       12,342  
Deferred tax asset, net   20,527       18,458       6,892  
Other assets   3,167       4,229       2,907  
Total assets $ 3,451,033     $ 3,144,467     $ 2,833,750  
           
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES          
Deposits $ 3,095,223     $ 2,817,521     $ 2,576,470  
Subordinated debt, net   44,031       43,999       24,306  
Junior subordinated debentures, net   3,588       3,588       3,587  
Deferred compensation   582       616       712  
Accrued interest payable   874       684       149  
Operating lease liabilities   5,022       5,234       6,054  
CCBX payable   30,794       20,419       5,284  
Other liabilities   12,156       8,912       9,268  
Total liabilities   3,192,270       2,900,973       2,625,830  
           
SHAREHOLDERS’ EQUITY          
Common stock   127,447       125,830       122,592  
Retained earnings   133,123       119,998       85,603  
Accumulated other comprehensive (loss) income, net of tax   (1,807 )     (2,334 )     (275 )
Total shareholders’ equity   258,763       243,494       207,920  
Total liabilities and shareholders’ equity $ 3,451,033     $ 3,144,467     $ 2,833,750  

COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts; unaudited)
  Three Months Ended
  March 31,
2023
  December 31,
2022
  March 31,
2022
INTEREST AND DIVIDEND INCOME          
Interest and fees on loans $ 66,431   $ 61,226     $ 29,632
Interest on interest earning deposits with other banks   3,097     3,097       402
Interest on investment securities   553     557       71
Dividends on other investments   30     150       37
Total interest income   70,111     65,030       30,142
INTEREST EXPENSE          
Interest on deposits   14,958     11,061       553
Interest on borrowed funds   662     537       321
Total interest expense   15,620     11,598       874
Net interest income   54,491     53,432       29,268
PROVISION FOR CREDIT LOSSES – LOANS   43,544     33,600       12,942
PROVISION FOR UNFUNDED COMMITMENTS   153          
Net interest income after provision for credit losses – loans and unfunded commitments   10,794     19,832       16,326
NONINTEREST INCOME          
Deposit service charges and fees   910     946       884
Loan referral fees             602
Gain on sales of loans, net   123          
Mortgage broker fees   19     25       123
Unrealized (loss) gain on equity securities, net   39     (18 )    
Other income   280     273       265
Noninterest income, excluding BaaS program income and BaaS indemnification income   1,371     1,226       1,874
Servicing and other BaaS fees   948     1,001       1,169
Transaction fees   917     964       493
Interchange fees   789     785       432
Reimbursement of expenses   921     857       372
BaaS program income   3,575     3,607       2,466
BaaS credit enhancements   42,362     31,164       13,075
BaaS fraud enhancements   1,999     6,818       4,571
BaaS indemnification income   44,361     37,982       17,646
Total noninterest income   49,307     42,815       21,986
NONINTEREST EXPENSE          
Salaries and employee benefits   15,575     14,399       11,085
Occupancy   1,219     1,182       1,136
Data processing and software licenses   1,840     1,768       1,861
Legal and professional expenses   3,062     2,799       708
Point of sale expense   753     710       248
Excise taxes   455     702       349
Federal Deposit Insurance Corporation ("FDIC") assessments   595     550       604
Director and staff expenses   626     515       344
Marketing   95     109       99
Other expense   890     335       1,120
Noninterest expense, excluding BaaS loan and BaaS fraud expense   25,110     23,069       17,554
BaaS loan expense   17,554     17,215       8,290
BaaS fraud expense   1,999     6,819       4,571
BaaS loan and fraud expense   19,553     24,034       12,861
Total noninterest expense   44,663     47,103       30,415
Income before provision for income taxes   15,438     15,544       7,897
PROVISION FOR INCOME TAXES   3,047     2,426       1,667
NET INCOME $ 12,391   $ 13,118     $ 6,230
Basic earnings per common share $ 0.94   $ 1.01     $ 0.48
Diluted earnings per common share $ 0.91   $ 0.96     $ 0.46
Weighted average number of common shares outstanding:          
Basic   13,196,960     13,030,726       12,898,746
Diluted   13,609,491     13,603,978       13,475,337

COASTAL FINANCIAL CORPORATION
AVERAGE BALANCES, YIELDS, AND RATES – QUARTERLY
(Dollars in thousands; unaudited)
  For the Three Months Ended
  March 31, 2023   December 31, 2022   March 31, 2022
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
Assets                                  
Interest earning assets:                                  
Interest earning deposits with other banks $ 271,700     $ 3,097   4.62 %   $ 329,354     $ 3,097   3.73 %   $ 843,931     $ 402   0.19 %
Investment securities, available for sale (2)   100,273       535   2.16       100,269       550   2.18       44,470       61   0.56  
Investment securities, held to maturity (2)   1,955       18   3.73       1,235       7   2.25       1,292       10   3.14  
Other investments   10,633       30   1.14       10,592       150   5.62       9,227       37   1.63  
Loans receivable (3)   2,708,177       66,431   9.95       2,603,962       61,226   9.33       1,768,283       29,632   6.80  
Total interest earning assets   3,092,738       70,111   9.19       3,045,412       65,030   8.47       2,667,203       30,142   4.58  
Noninterest earning assets:                                  
Allowance for credit losses   (81,086 )             (58,440 )             (30,668 )        
Other noninterest earning assets   172,161               141,624               92,401          
Total assets $ 3,183,813             $ 3,128,596             $ 2,728,936          
                                   
Liabilities and Shareholders’ Equity                                  
Interest bearing liabilities:                                  
Interest bearing deposits $ 2,070,217     $ 14,958   2.93 %   $ 2,006,679     $ 11,061   2.19 %   $ 1,131,984     $ 553   0.20 %
FHLB advances and borrowings                 5               24,443       69   1.14  
Subordinated debt   44,010       599   5.52       37,455       484   5.13       24,295       230   3.84  
Junior subordinated debentures   3,588       63   7.12       3,588       53   5.86       3,586       22   2.49  
Total interest bearing liabilities   2,117,815       15,620   2.99       2,047,727       11,598   2.25       1,184,308       874   0.30  
Noninterest bearing deposits   775,940               807,794               1,320,144          
Other liabilities   37,448               34,944               16,009          
Total shareholders’ equity   252,610               238,131               208,475          
Total liabilities and shareholders’ equity $ 3,183,813             $ 3,128,596             $ 2,728,936          
Net interest income     $ 54,491           $ 53,432           $ 29,268    
Interest rate spread         6.20 %           6.22 %           4.28 %
Net interest margin (4)         7.15 %           6.96 %           4.45 %

(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
  March 31, 2023   December 31, 2022   March 31, 2022
(dollars in thousands, unaudited) Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
Community Bank                                  
Assets                                  
Interest earning assets:                                  
Loans receivable (2) $ 1,643,985   $ 24,211   5.97 %   $ 1,609,882   $ 23,140   5.70 %   $ 1,386,130   $ 17,640   5.16 %
Intrabank asset                           268,414     128   0.19  
Total interest earning assets   1,643,985     24,211   5.97       1,609,882     23,140   5.70       1,654,544     17,768   4.36  
Liabilities                                  
Interest bearing liabilities:                                
Interest bearing deposits   853,152     2,534   1.20 %     864,001     1,502   0.69 %     935,784     435   0.19 %
Intrabank liability   94,668     1,079   4.62       8,069     76   3.73              
Total interest bearing liabilities   947,820     3,613   1.55       872,070     1,578   0.72       935,784     435   0.19  
Noninterest bearing deposits   696,166             737,812             718,760        
Net interest income     $ 20,598           $ 21,562           $ 17,333    
Net interest margin(4)         5.08 %           5.31 %           4.25 %
                                   
CCBX                                  
Assets                                  
Interest earning assets:                                  
Loans receivable (2)(4) $ 1,064,192   $ 42,220   16.09 %   $ 994,080   $ 38,086   15.20 %   $ 382,153   $ 11,992   12.73 %
Intrabank asset   232,647     2,652   4.62       218,580     2,056   3.73       415,431     198   0.19  
Total interest earning assets   1,296,839     44,872   14.03       1,212,660     40,142   13.13       797,584     12,190   6.20  
Liabilities                                  
Interest bearing liabilities:                            
Interest bearing deposits   1,217,065     12,424   4.14 %     1,142,678     9,559   3.32 %     196,200     118   0.24 %
Total interest bearing liabilities   1,217,065     12,424   4.14       1,142,678     9,559   3.32       196,200     118   0.24  
Noninterest bearing deposits   79,774             69,982             601,384        
Net interest income     $ 32,448           $ 30,583           $ 12,072    
Net interest margin(3)         10.15 %           10.01 %           6.14 %
Net interest margin, net of Baas loan expense (5)         4.66 %           4.37 %           1.92 %

  For the Three Months Ended
  March 31, 2023   December 31, 2022   March 31, 2022
(dollars in thousands, unaudited) Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
Treasury & Administration                            
Assets                                  
Interest earning assets:                                  
Interest earning deposits with other banks $ 271,700     $ 3,097     4.62 %   $ 329,354     $ 3,097     3.73 %   $ 843,931     $ 402     0.19 %
Investment securities, available for sale (6)   100,273       535     2.16       100,269       550     2.18       44,470       61     0.56  
Investment securities, held to maturity (6)   1,955       18     3.73       1,235       7     2.25       1,292       10     3.14  
Other investments   10,633       30     1.14       10,592       150     5.62       9,227       37     1.63  
Intrabank asset   (232,647 )     (2,652 )   (4.62 )     (218,580 )     (2,056 )   (3.73 )     (683,845 )     (326 )   (0.19 )
Total interest earning assets   151,914       1,028     2.74       222,870     1,748     3.11 %     215,075       184     0.35 %
Liabilities                                  
Interest bearing liabilities:                                  
FHLB advances and borrowings $     $     %     5           %     24,443       69     1.14 %
Subordinated debt   44,010       599     5.52       37,455       484     5.13       24,295       230     3.84  
Junior subordinated debentures   3,588       63     7.12       3,588       53     5.86       3,586       22     2.49  
Intrabank liability   (94,668 )     (1,079 )   (4.62 )     (8,069 )     (76 )   (3.73 )                
Total interest bearing liabilities   (47,070 )     (417 )   3.59       32,979       461     5.55       52,324       321     2.49  
Net interest income     $ 1,445             $ 1,287             $ (137 )    
Net interest margin(3)         3.86 %           2.29 %           (0.26)        %

(1)   Yields and costs are annualized.
(2)   Includes loans held for sale and nonaccrual loans.
(3)   Net interest margin represents net interest income divided by the average total interest earning assets.
(4)   CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans.
(5)   Net interest margin, net of BaaS loan expense includes the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans.
(6)   For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.

COASTAL FINANCIAL CORPORATION
QUARTERLY STATISTICS
(Dollars in thousands, except share and per share data; unaudited)
  Three Months Ended
  March 31,
2023
  December 31,
2022
  September 30,
2022
  June 30,
2022
  March 31,
2022
Income Statement Data:                  
Interest and dividend income $ 70,111     $ 65,030     $ 55,179     $ 41,819     $ 30,142  
Interest expense   15,620       11,598       5,990       1,933       874  
Net interest income   54,491       53,432       49,189       39,886       29,268  
Provision for credit losses – loans   43,544       33,600       18,428       14,094       12,942  
Provision for unfunded commitments   153                          
Net interest income after provision for credit losses – loans and unfunded commitments   10,794       19,832       30,761       25,792       16,326  
Noninterest income   49,307       42,815       34,391       25,492       21,986  
Noninterest expense   44,663       47,103       51,087       38,169       30,415  
Provision for income tax   3,047       2,426       2,964       2,939       1,667  
Net income   12,391       13,118       11,101       10,176       6,230  
                   
  As of and for the Three Month Period
  March 31,
2023
  December 31,
2022
  September 30,
2022
  June 30,
2022
  March 31,
2022
Balance Sheet Data:                  
Cash and cash equivalents $ 393,916     $ 342,139     $ 410,728     $ 405,689     $ 682,109  
Investment securities   101,704       98,353       98,871       109,821       136,177  
Loans held for sale   27,292             43,314       60,000        
Loans receivable   2,837,204       2,627,256       2,507,889       2,334,354       1,964,209  
Allowance for credit losses   (89,123 )     (74,029 )     (59,282 )     (49,358 )     (38,770 )
Total assets   3,451,033       3,144,467       3,133,741       2,969,722       2,833,750  
Interest bearing deposits   2,333,423       2,042,509       2,023,849       1,879,253       1,738,426  
Noninterest bearing deposits   761,800       775,012       813,217       818,052       838,044  
Core deposits (1)   3,068,162       2,686,528       2,727,830       2,584,831       2,460,954  
Total deposits   3,095,223       2,817,521       2,837,066       2,697,305       2,576,470  
Total borrowings   47,619       47,587       27,931       27,911       27,893  
Total shareholders’ equity   258,763       243,494       228,733       217,661       207,920  
                   
Share and Per Share Data (2):                  
Earnings per share – basic $ 0.94     $ 1.01     $ 0.86     $ 0.79     $ 0.48  
Earnings per share – diluted $ 0.91     $ 0.96     $ 0.82     $ 0.76     $ 0.46  
Dividends per share                            
Book value per share (3) $ 19.48     $ 18.50     $ 17.66     $ 16.81     $ 16.08  
Tangible book value per share (4) $ 19.48     $ 18.50     $ 17.66     $ 16.81     $ 16.08  
Weighted avg outstanding shares – basic   13,196,960       13,030,726       12,938,200       12,928,061       12,898,746  
Weighted avg outstanding shares – diluted   13,609,491       13,603,978       13,536,823       13,442,013       13,475,337  
Shares outstanding at end of period   13,281,533       13,161,147       12,954,573       12,948,623       12,928,548  
Stock options outstanding at end of period   360,119       438,103       644,334       655,844       666,774  

See footnotes on following page

  As of and for the Three Month Period
  March 31,
2023
  December 31,
2022
  September 30,
2022
  June 30,
2022
  March 31,
2022
Credit Quality Data:                  
Nonperforming assets (5) to total assets   0.91 %     1.06 %     0.73 %     0.09 %     0.08 %
Nonperforming assets (5) to loans receivable and OREO   1.11 %     1.26 %     0.91 %     0.11 %     0.12 %
Nonperforming loans (5) to total loans receivable   1.11 %     1.26 %     0.91 %     0.11 %     0.12 %
Allowance for credit losses to nonperforming loans   282.5 %     224.4 %     259.1 %     849.4 %     1,653.3 %
Allowance for credit losses to total loans receivable   3.14 %     2.82 %     2.36 %     2.11 %     1.97 %
Gross charge-offs $ 34,167     $ 18,886     $ 8,513     $ 3,542     $ 2,808  
Gross recoveries $ 1,865     $ 33     $ 9     $ 36     $ 4  
Net charge-offs to average loans (6)   4.84 %     2.87 %     1.38 %     0.64 %     0.64 %
                   
Capital Ratios (7):                  
Tier 1 leverage capital   8.29 %     7.97 %     7.70 %     7.68 %     7.75 %
Common equity Tier 1 risk-based capital   8.61 %     8.92 %     8.49 %     8.51 %     9.71 %
Tier 1 risk-based capital   8.73 %     9.04 %     8.62 %     8.65 %     9.88 %
Total risk-based capital   11.49 %     11.94 %     10.80 %     10.88 %     12.30 %

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

Non-GAAP Financial Measures

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

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

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

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

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

    As of and for the Three Months Ended
(dollars in thousands, unaudited)   March 31,
2023
  December 31,
2022
  March 31,
2022
Revenue excluding BaaS credit enhancements and BaaS fraud enhancements:
Total net interest income   $ 54,491     $ 53,432     $ 29,268  
Total noninterest income     49,307       42,815       21,986  
Total Revenue   $ 103,798     $ 96,247     $ 51,254  
Less: BaaS credit enhancements     (42,362 )     (31,164 )     (13,075 )
Less: BaaS fraud enhancements     (1,999 )     (6,818 )     (4,571 )
Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements   $ 59,437     $ 58,265     $ 33,608  
                         

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

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

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

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

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

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

    As of and for the Three Months Ended
(dollars in thousands; unaudited)   March 31,
2023
  December 31,
2022
  March 31,
2022
Net BaaS loan income divided by average CCBX loans:
CCBX loan yield (GAAP)(1)     16.09 %     15.20 %     12.73 %
Total average CCBX loans receivable   $ 1,064,192     $ 994,080     $ 382,153  
Interest and earned fee income on CCBX loans (GAAP)     42,220       38,086       11,992  
Less: BaaS loan expense     (17,554 )     (17,215 )     (8,290 )
Net BaaS loan income   $ 24,666     $ 20,871     $ 3,702  
Net BaaS loan income divided by average CCBX loans (1)     9.40 %     8.33 %     3.93 %
Net interest margin, net of BaaS loan expense:        
CCBX interest margin (1)     10.15 %     10.01 %     6.14 %
CCBX earning assets     1,296,839       1,212,660       797,584  
Net interest income     32,448       30,583       12,072  
Less: BaaS loan expense     (17,554 )     (17,215 )     (8,290 )
Net interest income, net of BaaS loan expense   $ 14,894     $ 13,368     $ 3,782  
Net interest margin, net of BaaS loan expense (1)     4.66 %     4.37 %     1.92 %

(1) Annualized calculations for periods presented.

APPENDIX A –
As of March 31, 2023

Industry Concentration

We have a diversified loan portfolio, representing a wide variety of industries. Our major categories of loans are commercial real estate, consumer and other loans, residential real estate, commercial and industrial, and construction, land and land development loans. Together they represent $2.84 billion in outstanding loan balances. When combined with $2.36 billion in unused commitments the total of these categories is $5.20 billion.

Commercial real estate loans represent the largest segment of our loans, comprising 38.8% of our total balance of outstanding loans as of March 31, 2023. Unused commitments to extend credit represents an additional $26.8 million, and the combined total in commercial real estate loans represents $1.13 billion, or 21.7% of our total outstanding loans and loan commitments.

The following table summarizes our loan commitment by industry for our commercial real estate portfolio as of March 31, 2023:

(dollars in thousands; unaudited)   Outstanding Balance   Available Loan Commitments   Total Outstanding Balance & Available Commitment   % of Total Loans
(Outstanding Balance &
Available Commitment)
  Average Loan Balance   Number of Loans
Apartments   $ 264,439   $ 6,231   $ 270,670   5.2 %   $ 3,040   87
Hotel/Motel     148,869     2,931     151,800   2.9       6,203   24
Office     99,407     3,258     102,665   2.0       1,058   94
Convenience Store     95,885     2,586     98,471   1.9       1,844   52
Retail     85,679     1,162     86,841   1.7       921   93
Mixed use     85,624     3,670     89,294   1.7       1,007   85
Warehouse     83,366     1,290     84,656   1.6       1,516   55
Mini Storage     50,643     917     51,560   1.0       2,814   18
Strip Mall     45,801         45,801   0.9       5,725   8
Manufacturing     37,558     800     38,358   0.7       1,138   33
Groups < 0.70% of total     105,500     3,947     109,447   2.1       1,256   84
Total   $ 1,102,771   $ 26,792   $ 1,129,563   21.7 %   $ 1,742   633
                                   

Consumer loans comprise 26.4% of our total balance of outstanding loans as of March 31, 2023. Unused commitments to extend credit represents an additional $945.7 million, and the combined total in consumer and other loans represents $1.70 billion, or 32.7% 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 $1,600. CCBX consumer loans are underwritten to CCBX credit standards and underwriting of these loans is regularly tested.

The following table summarizes our loan commitment by industry for our consumer and other loan portfolio as of March 31, 2023:

(dollars in thousands; unaudited)   Outstanding Balance   Available Loan Commitments   Total Outstanding Balance & Available Commitment (1)   % of Total Loans
(Outstanding Balance &
Available Commitment)
  Average Loan Balance   Number of Loans
CCBX consumer loans
Installment loans   $ 425,280   $   $ 425,280   8.2 %   $ 1.9   225,180
Credit cards     318,187     944,758     1,262,945   24.3       1.5   219,417
Lines of credit     3,605     361     3,966   0.1       0.3   12,553
Other loans     2,596         2,596   0.1       0.2   16,389
Community bank consumer loans
Other loans     1,408         1,408   0.0       5.8   241
Installment loans     1,294         1,294   0.0       51.8   25
Lines of credit     158     619     777   0.0       3.4   47
Total   $ 752,528   $ 945,738   $ 1,698,266   32.7 %   $ 1.6   473,852

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

Residential real estate loans comprise 16.0% of our total balance of outstanding loans as of March 31, 2023. Unused commitments to extend credit represents an additional $408.5 million, and the combined total in residential real estate loans represents $864.1 million, or 16.6% of our total outstanding loans and loan commitments.

The following table summarizes our loan commitment by industry for our residential real estate loan portfolio as of March 31, 2023:

(dollars in thousands; unaudited)   Outstanding Balance   Available Loan Commitments   Total Outstanding Balance & Available Commitment (1)   % of Total Loans
(Outstanding Balance &
Available Commitment)
  Average Loan Balance   Number of Loans
CCBX residential real estate loans
Home equity line of credit   $ 249,367   $ 359,215   $ 608,582   11.7 %   $ 26   9,495
Community bank residential real estate loans
Closed end, secured by first liens     178,206     4,748     182,954   3.5       600   297
Home equity line of credit     19,318     43,565     62,883   1.2       91   213
Closed end, second liens     8,616     1,016     9,632   0.2       331   26
Total   $ 455,507   $ 408,544   $ 864,051   16.6 %   $ 45   10,031

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

Commercial and industrial loans comprise 11.5% of our total balance of outstanding loans as of March 31, 2023. Unused commitments to extend credit represents an additional $795.1 million, and the combined total in commercial and industrial loans represents $1.12 billion, or 21.5% of our total outstanding loans and loan commitments. Included in commercial and industrial loans is $118.8 million in outstanding capital call lines, with an additional $716.6 million in available loan commitments which is limited to a $350.0 million portfolio maximum. Capital call lines are provided to venture capital firms through one of our CCBX BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line.

The following table summarizes our loan commitment by industry for our commercial and industrial loan portfolio as of March 31, 2023:

(dollars in thousands; unaudited)   Outstanding Balance   Available Loan Commitments   Total Outstanding Balance & Available Commitment (1)   % of Total Loans
(Outstanding Balance &
Available Commitment)
  Average Loan Balance   Number of Loans
Capital Call Lines   $ 118,796   $ 716,609   $ 835,405   16.1 %   $ 707   168
Retail     49,329     6,174     55,503   1.1       24   2,026
Financial Institutions     48,649         48,649   0.9       4,054   12
Construction/Contractor Services     22,019     30,785     52,804   1.0       120   183
Medical / Dental / Other Care     20,758     5,848     26,606   0.5       769   27
Manufacturing     11,622     5,416     17,038   0.3       208   56
Groups < 0.30% of total     55,165     30,251     85,416   1.6       175   315
Total   $ 326,338   $ 795,083   $ 1,121,421   21.5 %   $ 117   2,787

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

Construction, land and land development loans comprise 7.3% of our total balance of outstanding loans as of March 31, 2023. Unused commitments to extend credit represents an additional $180.5 million, and the combined total in construction, land and land development loans represents $387.1 million, or 7.4% of our total outstanding loans and loan commitments.

The following table details our loan commitment for our construction, land and land development portfolio as of March 31, 2023:

(dollars in thousands; unaudited)   Outstanding Balance   Available Loan Commitments   Total Outstanding Balance & Available Commitment   % of Total Loans
(Outstanding Balance &
Available Commitment)
  Average Loan Balance   Number of Loans
Commercial construction   $ 97,987   $ 141,667   $ 239,654   4.6 %   $ 4,260   23
Residential construction     32,268     21,988     54,256   1.0       978   33
Undeveloped land loans     41,951     9,718     51,669   1.0       2,997   14
Developed land loans     19,130     3,732     22,862   0.4       660   29
Land development     15,299     3,392     18,691   0.4       805   19
Total   $ 206,635   $ 180,497   $ 387,132   7.4 %   $ 1,751   118
                                   

We have portfolio limits with our each of our partners to manage loan concentration risk, liquidity risk, and counter-party partner risk. For example, as of March 31, 2023, capital call lines outstanding balance totaled $118.8 million, and while commitments totaled $716.6 million the commitments are limited to a maximum of $350.0 million by agreement with the partner.

The following table shows the CCBX maximum portfolio sizes by loan category as of March 31, 2023.

(dollars in thousands; unaudited) Type of Lending Maximum Portfolio Size
Commercial and industrial loans: