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Coastal Financial Corporation Announces Fourth Quarter and Fiscal Year 2023 Results
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Coastal Financial Corporation Announces Fourth Quarter and Fiscal Year 2023 Results

Fourth Quarter 2023 Highlights:

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

2023 Highlights:

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

EVERETT, Wash., Jan. 30, 2024 (GLOBE NEWSWIRE) — Coastal Financial Corporation (Nasdaq: CCB) (the “Company”, "Coastal", "we", "our", or "us"), the holding company for Coastal Community Bank (the “Bank”), today reported unaudited financial results for the quarter and fiscal year ended December 31, 2023. 

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

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

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

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

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

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

"We expect that this strategy will result in lower earnings in the short term with lower loan yields and compressed margins, but will provide for long term stability and profitability," stated Eric Sprink, the CEO of the Company and the Bank.

Results of Operations Overview

The Company has one main subsidiary, the Bank which consists of three segments: CCBX, the community bank and treasury & administration.  The CCBX segment includes our BaaS activities, the community bank segment includes all community banking activities, and the treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.  Net interest income was $59.7 million for the quarter ended December 31, 2023, a decrease of $2.6 million, or 4.1%, from $62.2 million for the quarter ended September 30, 2023, and an increase of $6.2 million, or 11.7%, from $53.4 million for the quarter ended December 31, 2022.  Yield on loans receivable was 10.71% for the three months ended December 31, 2023, compared to 10.84% for the three months ended September 30, 2023 and 9.33% for the three months ended December 31, 2022.  Cost of deposits was 3.36% for the three months ended December 31, 2023, compared to 3.14% for the three months ended September 30, 2023 and 1.56% for the three months ended December 31, 2022. The decrease in net interest income compared to September 30, 2023, was a result of increased interest expense due to an increase in average interest bearing deposits and an increase in cost of deposits as a result of higher interest rates. Additionally, interest and fees on loans decreased as a result of selling higher yielding CCBX loans that have a higher potential for credit deterioration. The increase in net interest income compared to December 31, 2022 was largely related to increased yield on loans resulting from higher interest rates and growth in higher yielding loans.  Total average loans receivable for the three months ended December 31, 2023 was $3.01 billion, compared to $3.06 billion for the three months ended September 30, 2023, and $2.60 billion for the three months ended December 31, 2022.

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

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

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

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

Net Interest Margin

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

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

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

Total yield on loans receivable for the quarter ended December 31, 2023 was 10.71%, compared to 10.84% for the quarter ended September 30, 2023, and 9.33% for the quarter ended December 31, 2022. This decrease in yield on loans receivable compared to the quarter ended September 30, 2023 is largely the result of selling higher risk and higher yielding CCBX loans or letting such loans mature and increasing lower risk and therefore lower yielding loans as we work to optimize our credit risk profile and loan portfolio. During the quarter ended December 31, 2023, community bank loans increased 2.5%, or $45.5 million, compared to the quarter ended September 30, 2023, with an average yield of 6.32% and CCBX loans outstanding increased 1.1%, or $13.6 million, compared to September 30, 2023, with an average CCBX yield of 17.36%. The yield on CCBX loans does not include the impact of BaaS loan expense.  BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans.  

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

  For the Three Months Ended   For the Twelve Months Ended
  December 31, 2023   September 30, 2023   December 31, 2022   December 31, 2023   December 31, 2022
  Yield on
Loans (2)
  Cost of
Deposits (2)
  Yield on
Loans (2)
  Cost of
Deposits (2)
  Yield on
Loans (2)
  Cost of
Deposits (2)
  Yield on
Loans (2)
  Cost of
Deposits (2)
  Yield on
Loans (2)
  Cost of
Deposits (2)
Community Bank 6.32%   1.57%   6.20%   1.31%   5.70%   0.37%   6.20%   1.14%   5.32%   0.18%
CCBX (1) 17.36%   4.90%   17.05%   4.80%   15.20%   3.13%   16.89%   4.55%   13.85%   1.57%
Consolidated 10.71%   3.36%   10.84%   3.14%   9.33%   1.56%   10.60%   2.87%   8.12%   0.71%

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

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

    For the Three Months Ended
    December 31, 2023   September 30, 2023   December 31, 2022
(dollars in thousands, unaudited)   Income / Expense   Income / expense divided by average CCBX loans (2)   Income / Expense   Income / expense divided by
average CCBX loans(2)
  Income / Expense   Income / expense divided by average CCBX loans (2)
BaaS loan interest income   $ 52,327   17.36 %   $ 56,279   17.05 %   $ 38,086   15.20 %
Less: BaaS loan expense     24,310   8.06 %     23,003   6.97 %     17,215   6.87 %
Net BaaS loan income (1)   $ 28,017   9.30 %   $ 33,276   10.08 %   $ 20,871   8.33 %
Average BaaS Loans(3)   $ 1,196,137       $ 1,309,380       $ 994,080    

    For the Twelve Months Ended
    December 31, 2023   December 31, 2022
(dollars in thousands; unaudited)   Income / Expense   Income / expense divided by average CCBX loans (2)   Income / Expense   Income / expense divided by average CCBX loans (2)
BaaS loan interest income   $ 204,458   16.89 %   $ 102,808   13.85 %
Less: BaaS loan expense     86,900   7.18 %     53,294   7.18 %
Net BaaS loan income (1)   $ 117,558   9.71 %   $ 49,514   6.67 %
Average BaaS Loans(3)   $ 1,210,413       $ 742,392    

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

Key Performance Ratios

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

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

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

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

Noninterest Income

The following table details noninterest income for the periods indicated:

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

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

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

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

  As of
(unaudited) December 31,
2023
  September 30,
2023
  December 31,
2022
Active 19   18   19
Friends and family / testing 1   1   1
Implementation / onboarding 1   1   0
Signed letters of intent 0   1   5
Wind down – preparing to exit relationship 0   1   2
Total CCBX relationships 21   22   27

The following table details noninterest expense for the periods indicated:

Noninterest Expense

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

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

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

Provision for Income Taxes

The provision for income taxes was $2.8 million for the three months ended December 31, 2023, $2.8 million for the three months ended September 30, 2023 and $2.4 million for the fourth quarter of 2022.  The provision for income tax was higher, relative to net income, as a result of less deductible items, lower net income, and slightly higher provision for CCBX loans without credit enhancement for the three months ended December 31, 2023 compared to September 30, 2023. The Company is subject to various state taxes that are assessed as CCBX activities and employees expand into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods. The Company uses a federal statutory tax rate of 21.0% as a basis for calculating provision for federal income taxes and 2.62% for calculating the provision for state taxes.

Financial Condition Overview

Total assets increased $75.1 million, or 2.0%, to $3.75 billion at December 31, 2023 compared to $3.68 billion at September 30, 2023.  The increase is primarily due to a $59.1 million increase in loans receivable combined with a $16.1 million increase in the credit enhancement asset, an $8.3 million increase in held to maturity investments as a result of purchases, and a $6.8 million increase in interest earning deposits with other banks. During the quarter ended December 31, 2023, we sold $125.1 million in CCBX loans as part of our strategy to optimize our CCBX portfolio, reduce credit exposure in certain loan categories and strengthen the balance sheet through enhanced credit standards, compared to $320.9 million sold during the quarter ended September 30, 2023. There were no loans held for sale at December 31, 2023 and September 30, 2023.  

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

Loans Receivable

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

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

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

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

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

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

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

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

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

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

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

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

Additionally, as of December 31, 2023, $69.4 million in CCBX customer deposits were transferred off the Bank’s balance sheet to other financial institutions on a daily basis for additional FDIC insurance coverage. Efforts to retain and grow core deposits are evidenced by the high ratios in these categories when compared to total deposits.

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

  As of December 31, 2023   As of September 30, 2023   As of December 31, 2022
(dollars in thousands; unaudited) Amount   Percent of
Total
Deposits
  Balance   Percent of
Total
Deposits
  Balance   Percent of
Total
Deposits
Demand, noninterest bearing $ 625,202     18.6 %   $ 651,786     19.8 %   $ 775,012     27.5 %
NOW and money market   2,640,240     78.6       2,532,668     77.0       1,804,399     64.0  
Savings   76,562     2.3       84,628     2.6       107,117     3.8  
Total core deposits   3,342,004     99.5       3,269,082     99.4       2,686,528     95.3  
Brokered deposits   1     0.0       1     0.0       101,546     3.6  
Time deposits less than $100,000   8,109     0.2       8,635     0.2       12,596     0.5  
Time deposits $100,000 and over   10,249     0.3       11,982     0.4       16,851     0.6  
Total $ 3,360,363     100.0 %   $ 3,289,700     100.0 %   $ 2,817,521     100.0 %
Cost of deposits (1)   3.36 %         3.14 %         1.56 %    

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

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

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

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

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

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

Borrowings

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

Shareholders’ Equity

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

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

Capital Ratios

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

(unaudited)   Coastal Community Bank   Coastal Financial Corporation   Minimum Well Capitalized Ratios under Prompt Corrective Action (1)
Tier 1 Leverage Capital (to average assets)   9.06 %   8.10 %   5.00 %
Common Equity Tier 1 Capital (to risk-weighted assets)   10.30 %   9.10 %   6.50 %
Tier 1 Capital (to risk-weighted assets)   10.30 %   9.20 %   8.00 %
Total Capital (to risk-weighted assets)   11.58 %   11.87 %   10.00 %

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

Asset Quality

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

The total allowance for credit losses was $117.0 million and 3.86% of loans receivable at December 31, 2023 compared to $101.1 million and 3.41% at September 30, 2023 and $74.0 million and 2.82% at December 31, 2022. The allowance for credit loss allocated to the CCBX portfolio was $95.4 million and 7.97% of CCBX loans receivable at December 31, 2023, with $21.6 million of allowance for credit loss allocated to the community bank or 1.18% of total community bank loans receivable.

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

    As of December 31, 2023   As of September 30, 2023   As of December 31, 2022
(dollars in thousands; unaudited)   Community Bank   CCBX   Total   Community Bank   CCBX   Total   Community Bank   CCBX   Total
Loans receivable   $ 1,830,154     $ 1,195,938     $ 3,026,092     $ 1,784,661     $ 1,182,374     $ 2,967,035     $ 1,614,752     $ 1,012,504     $ 2,627,256  
Allowance for credit losses     (21,595 )     (95,363 )     (116,958 )     (21,316 )     (79,769 )     (101,085 )     (20,636 )     (53,393 )     (74,029 )
Allowance for credit losses to total loans receivable     1.18 %     7.97 %     3.86 %     1.19 %     6.75 %     3.41 %     1.28 %     5.27 %     2.82 %

Provision for credit losses – loans totaled $60.7 million for the three months ended December 31, 2023, $27.2 million for the three months ended September 30, 2023, and $33.6 million for the three months ended December 31, 2022. Net charge-offs totaled $44.9 million for the quarter ended December 31, 2023, compared to $36.8 million for the quarter ended September 30, 2023 and $18.9 million for the quarter ended December 31, 2022. Net charge-offs increased due to CCBX loans. CCBX partner agreements provide for a credit enhancement that covers the net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company is responsible for credit losses on approximately 10% of a $288.1 million loan portfolio. At December 31, 2023, our portion of this portfolio represented $29.1 million in loans. The provision on this $29.1 million in loans was $2.1 million for the three months ended December 31, 2023 compared to $664,000 for the three months ended September 30, 2023 and $783,000 for the three months ended December 31, 2022. This $29.1 million portfolio of partner loans with full loss responsibility remains profitable but the provision has increased both from growth in the portfolio and a higher loss rate. In response, and working with the partner, we have increased our underwriting standards.

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

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

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

(1) Annualized calculations shown for periods presented.

The increase in the Company’s provision for credit losses – loans during the quarter ended December 31, 2023, is a result of an increase in loans receivable. During the quarter ended December 31, 2023, a $60.5 million provision for credit losses – loans was recorded for CCBX partner loans based on management’s analysis, compared to the $26.5 million provision for credit losses – loans that was recorded for CCBX for the quarter ended September 30, 2023, as a result of an increase in CCBX loans receivable. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses.

In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and reclassified negative deposit accounts. When the provision for CCBX credit losses and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). Expected losses are recorded in the allowance for credit losses. The credit enhancement asset is relieved when credit enhancement recoveries are received from the CCBX partner. CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses. If our partner is unable to fulfill their contracted obligations then the Bank could be exposed to additional credit losses. Management regularly evaluates and manages this counterparty risk. The Company is responsible for credit losses on approximately 10% of a $288.1 million CCBX loan portfolio. At December 31, 2023, 10% of this portfolio represented $29.1 million in loans.

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

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

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

At December 31, 2023, our nonperforming assets were $53.8 million, or 1.43% of total assets, compared to $43.5 million, or 1.18%, of total assets, at September 30, 2023, and $33.2 million, or 1.06% of total assets, at December 31, 2022. These ratios are impacted by CCBX loans over 90 days delinquent that are covered by CCBX partner credit enhancements. As of December 31, 2023, $44.3 million of the $46.5 million in nonperforming CCBX loans were covered by CCBX partner credit enhancements. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses. Under the agreement, CCBX partners will indemnify or reimburse the Bank for its loss/charge-off on these loans. Nonperforming assets increased $10.3 million during the quarter ended December 31, 2023, compared to the quarter ended September 30, 2023, due to a $10.3 million increase in CCBX loans that are past due 90 days or more and still accruing combined with a $8,000 decrease in community bank nonaccrual loans. As a result of the type of loans (primarily consumer loans) originated through our CCBX partners we anticipate that balances 90 days past due or more and still accruing will increase as those loan portfolios grow. Installment/closed-end and revolving/open-end consumer loans originated through CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively and are reported as substandard, 90 days or more days past due and still accruing. Community bank nonaccrual loans decreased due to principal reductions. There were no repossessed assets or other real estate owned at December 31, 2023. Our nonperforming loans to loans receivable ratio was 1.78% at December 31, 2023, compared to 1.47% at September 30, 2023, and 1.26% at December 31, 2022.

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

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

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

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

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

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


About Coastal Financial

Coastal Financial Corporation (Nasdaq: CCB) (the “Company”), is an Everett, Washington based bank holding company whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC.  The $3.75 billion Bank provides service through 14 branches in Snohomish, Island, and King Counties, the Internet and its mobile banking application.  The Bank provides banking as a service to broker-dealers, digital financial service providers, companies and brands that want to provide financial services to their customers through the Bank’s CCBX segment.  To learn more about the Company visit www.coastalbank.com.

CCB-ER

Contact

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

Forward-Looking Statements

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

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

COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
(Dollars in thousands; unaudited)

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

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

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

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

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

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

  For the Three Months Ended
  December 31, 2023   September 30, 2023   December 31, 2022
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
Assets                                  
Interest earning assets:                                  
Interest earning deposits with other banks $ 413,127     $ 5,687   5.46 %   $ 285,596     $ 3,884   5.40 %   $ 329,354     $ 3,097   3.73 %
Investment securities, available for sale (2)   100,204       546   2.16       100,283       543   2.15       100,269       550   2.18  
Investment securities, held to maturity (2)   49,469       679   5.45       17,703       223   5.00       1,235       7   2.25  
Other investments   11,683       172   5.84       11,943       29   0.96       10,592       150   5.62  
Loans receivable (3)   3,007,289       81,159   10.71       3,062,214       83,652   10.84       2,603,962       61,226   9.33  
Total interest earning assets   3,581,772       88,243   9.77       3,477,739       88,331   10.08       3,045,412       65,030   8.47  
Noninterest earning assets:                                  
Allowance for credit losses   (95,391 )             (100,329 )             (58,440 )        
Other noninterest earning assets   204,052               220,750               141,624          
Total assets $ 3,690,433             $ 3,598,160             $ 3,128,596          
                                   
Liabilities and Shareholders’ Equity                                  
Interest bearing liabilities:                                  
Interest bearing deposits $ 2,660,235     $ 27,916   4.16 %   $ 2,515,093     $ 25,451   4.01 %   $ 2,006,679     $ 11,061   2.19 %
FHLB advances and borrowings   1                             5          
Subordinated debt   44,121       598   5.38       44,084       580   5.22       37,455       484   5.13  
Junior subordinated debentures   3,590       72   7.96       3,589       71   7.85       3,588       53   5.86  
Total interest bearing liabilities   2,707,947       28,586   4.19       2,562,766       26,102   4.04       2,047,727       11,598   2.25  
Noninterest bearing deposits   640,424               698,532               807,794          
Other liabilities   52,450               57,865               34,944          
Total shareholders’ equity   289,612               278,997               238,131          
Total liabilities and shareholders’ equity $ 3,690,433             $ 3,598,160             $ 3,128,596          
Net interest income     $ 59,657           $ 62,229           $ 53,432    
Interest rate spread         5.59 %           6.04 %           6.22 %
Net interest margin (4)         6.61 %           7.10 %           6.96 %

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

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

  For the Three Months Ended
  December 31, 2023   September 30, 2023   December 31, 2022
(dollars in thousands, unaudited) Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
Community Bank                                  
Assets                                  
Interest earning assets:                                  
Loans receivable (2) $ 1,811,152   $ 28,832   6.32 %   $ 1,752,834   $ 27,373   6.20 %   $ 1,609,882   $ 23,140   5.70 %
Total interest earning assets   1,811,152     28,832   6.32       1,752,834     27,373   6.20       1,609,882     23,140   5.70  
Liabilities                                  
Interest bearing liabilities:                                
Interest bearing deposits   951,148     6,090   2.54 %     920,707     5,067   2.18 %     864,001     1,502   0.69 %
Intrabank liability   275,995     3,799   5.46       223,221     3,036   5.40       8,069     76   3.74  
Total interest bearing liabilities   1,227,143     9,889   3.20       1,143,928     8,103   2.81       872,070     1,578   0.72  
Noninterest bearing deposits   584,009             608,906             737,812        
Net interest income     $ 18,943           $ 19,270           $ 21,562    
Net interest margin(3)         4.15 %           4.36 %           5.31 %
                                   
CCBX                                  
Assets                                  
Interest earning assets:                                  
Loans receivable (2)(4) $ 1,196,137   $ 52,327   17.36 %   $ 1,309,380   $ 56,279   17.05 %   $ 994,080   $ 38,086   15.20 %
Intrabank asset   569,365     7,837   5.46       374,632     5,095   5.40       218,581     2,055   3.73  
Total interest earning assets   1,765,502     60,164   13.52       1,684,012     61,374   14.46       1,212,661     40,141   13.13  
Liabilities                                  
Interest bearing liabilities:                            
Interest bearing deposits   1,709,087     21,826   5.07 %     1,594,386     20,384   5.07 %     1,142,678     9,559   3.32 %
Total interest bearing liabilities   1,709,087     21,826   5.07       1,594,386     20,384   5.07       1,142,678     9,559   3.32  
Noninterest bearing deposits   56,415             89,626             69,982        
Net interest income     $ 38,338           $ 40,990           $ 30,582    
Net interest margin(3)         8.62 %           9.66 %           10.01 %
Net interest margin, net of Baas loan expense (5)         3.15 %           4.24 %           4.37 %

  For the Three Months Ended
  December 31, 2023   September 30, 2023   December 31, 2022
(dollars in thousands, unaudited) Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
Treasury & Administration                            
Assets                                  
Interest earning assets:                                  
Interest earning deposits with other banks $ 413,127   $ 5,687   5.46 %   $ 285,596   $ 3,884   5.40 %   $ 329,354   $ 3,097   3.73 %
Investment securities, available for sale (6)   100,204     546   2.16       100,283     543   2.15       100,269     550   2.18  
Investment securities, held to maturity (6)   49,469     679   5.45       17,703     223   5.00       1,235     7   2.25  
Other investments   11,683     172   5.84       11,943     29   0.96       10,592     150   5.62  
Total interest earning assets   574,483     7,084   4.89 %     415,525     4,679   4.47 %     441,450     3,804   3.42 %
Liabilities                                  
Interest bearing liabilities:                                  
FHLB advances and borrowings $ 3   $   %           %     5       %
Subordinated debt   44,121     598   5.38 %     44,084     580   5.22 %     37,455     484   5.13 %
Junior subordinated debentures   3,590     72   7.96       3,589     71   7.85       3,588     53   5.86  
Intrabank liability, net (7)   293,370     4,038   5.46       151,411     2,059   5.40       210,511     1,979   3.73  
Total interest bearing liabilities   341,084     4,708   5.48       199,084     2,710   5.40       251,559     2,516   3.97  
Net interest income     $ 2,376           $ 1,969           $ 1,288    
Net interest margin(3)         1.64 %           1.88 %           1.16 %

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

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

  For the Twelve Months Ended
  December 31, 2023   December 31, 2022
(dollars in thousands; unaudited) Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
Assets                      
Interest earning assets:                      
Interest earning deposits with other banks $ 295,808     $ 15,346   5.19 %   $ 515,967     $ 6,728   1.30 %
Investment securities, available for sale (2)   100,260       2,158   2.15       91,970       1,710   1.86  
Investment securities, held to maturity (2)   19,918       1,039   5.22       1,266       35   2.76  
Other investments   11,512       387   3.36       10,146       345   3.40  
Loans receivable (3)   2,936,908       311,441   10.60       2,257,787       183,352   8.12  
Total interest earning assets   3,364,406       330,371   9.82       2,877,136       192,170   6.68  
Noninterest earning assets:                      
Allowance for credit losses   (91,194 )             (46,769 )        
Other noninterest earning assets   198,071               119,817          
Total assets $ 3,471,283             $ 2,950,184          
                       
Liabilities and Shareholders’ Equity                      
Interest bearing liabilities:                      
Interest bearing deposits $ 2,395,012     $ 89,000   3.72 %   $ 1,724,020     $ 19,004   1.10 %
FHLB advances and borrowings                 6,029       69   1.14  
Subordinated debt   44,066       2,373   5.39       27,626       1,179   4.27  
Junior subordinated debentures   3,589       271   7.55       3,587       143   3.99  
Total interest bearing liabilities   2,442,667       91,644   3.75       1,761,262       20,395   1.16  
Noninterest bearing deposits   707,641               942,087          
Other liabilities   49,271               24,097          
Total shareholders’ equity   271,704               222,738          
Total liabilities and shareholders’ equity $ 3,471,283             $ 2,950,184          
Net interest income     $ 238,727           $ 171,775    
Interest rate spread         6.07 %           5.52 %
Net interest margin (4)         7.10 %           5.97 %

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

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

    For the Twelve Months Ended
    December 31, 2023   December 31, 2022
(dollars in thousands; unaudited)   Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
Community Bank                        
Assets                        
Interest earning assets:                        
Loans receivable (2)   $ 1,726,495   $ 106,983   6.20 %   $ 1,515,395   $ 80,544   5.32 %
Intrabank asset                 123,156     796   0.65  
Total interest earning assets     1,726,495     106,983   6.20       1,638,551     81,340   4.96  
Liabilities                        
Interest bearing liabilities:                        
Interest bearing deposits     900,516     17,354   1.93 %     905,447     2,896   0.32 %
Intrabank liability     198,176     10,404   5.25              
Total interest bearing liabilities     1,098,692     27,758   2.53       905,447     2,896   0.32  
Noninterest bearing deposits     627,803             733,104        
Net interest income       $ 79,225           $ 78,444    
Net interest margin(3)           4.59 %           4.79 %
                         
CCBX                        
Assets                        
Interest earning assets:                        
Loans receivable (2)(4)   $ 1,210,413   $ 204,458   16.89 %   $ 742,392   $ 102,808   13.85 %
Intrabank asset     363,921     19,071   5.24       285,164     4,106   1.44  
Total interest earning assets     1,574,334     223,529   14.20       1,027,556     106,914   10.40  
Liabilities                        
Interest bearing liabilities:                        
Interest bearing deposits     1,494,496     71,646   4.79 %     818,573     16,108   1.97 %
Total interest bearing liabilities     1,494,496     71,646   4.79       818,573     16,108   1.97  
Noninterest bearing deposits     79,838             208,983        
Net interest income       $ 151,883           $ 90,806    
Net interest margin(3)           9.65 %           8.84 %
Net interest margin, net of Baas loan expense (5)           4.13 %           3.65 %

    For the Twelve Months Ended
    December 31, 2023   December 31, 2022
(dollars in thousands; unaudited)   Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
  Average
Balance
  Interest &
Dividends
  Yield /
Cost (1)
Treasury & Administration                        
Assets                        
Interest earning assets:                        
Interest earning deposits with other banks   $ 295,808   $ 15,346   5.19 %   $ 515,967   $ 6,728   1.30 %
Investment securities, available for sale (6)     100,260     2,158   2.15       91,970     1,710   1.86  
Investment securities, held to maturity (6)     19,918     1,039   5.22       1,266     35   2.76  
Other investments     11,512     387   3.36       10,146     345   3.40  
Total interest earning assets     427,498     18,930   4.43       619,349     8,818   1.42  
Liabilities                        
Interest bearing liabilities:                        
FHLB advances and borrowings           %     6,029     69   1.14 %
Subordinated debt     44,066     2,373   5.39       27,626     1,179   4.27  
Junior subordinated debentures     3,589     271   7.55       3,587     143   3.99  
Intrabank liability, net (7)     165,745     8,667   5.23       408,320     4,902   1.20  
Total interest bearing liabilities     213,400     11,311   5.30       445,562     6,293   1.41  
Net interest income       $ 7,619           $ 2,525    
Net interest margin(3)           1.78 %           0.41 %

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

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

  Three Months Ended
  December 31,
2023
  September 30,
2023
  June 30,
2023
  March 31,
2023
  December 31,
2022
Income Statement Data:                  
Interest and dividend income $ 88,243     $ 88,331     $ 83,686     $ 70,111     $ 65,030  
Interest expense   28,586       26,102       21,336       15,620       11,598  
Net interest income   59,657       62,229       62,350       54,491       53,432  
Provision for credit losses – loans   60,744       27,157       52,598       43,544       33,600  
Provision (recovery) for unfunded commitments   45       96       (345 )     153        
Net interest income after provision for credit losses – loans and unfunded commitments   (1,132 )     34,976       10,097       10,794       19,832  
Noninterest income   64,694       34,579       58,595       49,307       42,815  
Noninterest expense   51,703       56,501       51,910       44,663       47,103  
Provision for income tax   2,847       2,784       3,876       3,047       2,426  
Net income   9,012       10,270       12,906       12,391       13,118  
                   
  As of and for the Three Month Period
  December 31,
2023
  September 30,
2023
  June 30,
2023
  March 31,
2023
  December 31,
2022
Balance Sheet Data:                  
Cash and cash equivalents $ 483,128     $ 474,946     $ 275,060     $ 393,916     $ 342,139  
Investment securities   150,364       141,489       110,730       101,704       98,353  
Loans held for sale               35,923       27,292        
Loans receivable   3,026,092       2,967,035       3,007,553       2,837,204       2,627,256  
Allowance for credit losses   (116,958 )     (101,085 )     (110,762 )     (89,123 )     (74,029 )
Total assets   3,753,366       3,678,265       3,535,283       3,451,033       3,144,467  
Interest bearing deposits   2,735,161       2,637,914       2,436,980       2,333,423       2,042,509  
Noninterest bearing deposits   625,202       651,786       725,592       761,800       775,012  
Core deposits (1)   3,342,004       3,269,082       3,137,747       3,068,162       2,686,528  
Total deposits   3,360,363       3,289,700       3,162,572       3,095,223       2,817,521  
Total borrowings   47,734       47,695