Coastal Financial Corporation Announces Second Quarter 2023 Results

Second Quarter 2023 Highlights:

• Net income of $12.9 million, or $0.95 per diluted common share, for the three months ended June 30, 2023, compared to $12.4 million, or $0.91 per diluted common share for the three months ended March 31, 2023.
  • Return on average assets ("ROA") of 1.52% for the three months ended June 30, 2023.
  • Return on average equity ("ROE") of 19.53% for the three months ended June 30, 2023.
• Total assets increased $84.3 million, or 2.4%, to $3.54 billion for the quarter ended June 30, 2023, compared to $3.45 billion at March 31, 2023.
• Loan growth, net of deferred fees of $170.3 million, or 6.0%, to $3.01 billion for the quarter ended June 30, 2023.
  • CCBX loans increased $128.3 million, or 11.0%, to $1.29 billion.
  • Community bank loans increased $42.0 million, or 2.5%, to $1.71 billion.
• Deposits increased $67.3 million, or 2.2%, to $3.16 billion for the quarter ended June 30, 2023.
  • CCBX deposit growth of $89.3 million, or 5.7%, to $1.65 billion.
    • Additional $9.9 million in CCBX deposits transferred off balance sheet.
  • Community bank deposits decreased $21.9 million, or 1.4%, to $1.51 billion.
    • Includes noninterest bearing deposits of $621.0 million or 41.1% of total community bank deposits
    • Community bank cost of deposits was 0.98%.
  • Uninsured deposits of $632.1 million, or 20.0% of total deposits as of June 30, 2023, compared to $768.3 million, or 24.8% of total deposits as of March 31, 2023.
• Total revenue increased $17.1 million, or 16.5%, for the three months ended June 30, 2023, compared to the three months ended March 31, 2023
• Total revenue excluding Banking as a Service ("BaaS") credit enhancements and BaaS fraud enhancements increased $8.9 million, or 15.0%, to $68.4 million for the three months ended June 30, 2023, compared to the three months ended March 31, 2023. (A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.)
• Liquidity/Borrowings as of June 30, 2023:
  • Capacity to borrow up to $559.8 million from Federal Home Loan Bank and the Federal Reserve Bank discount window with no borrowings taken under these facilities since the first quarter of 2022.
• Investment Portfolio as of June 30, 2023 :
  • Available for sale ("AFS") investments of $98.2 million, compared to $98.0 million as of March 31, 2023, of which 99.7% are U.S. Treasuries, with a weighted average remaining duration of 8 months as of June 30, 2023.
  • Held to maturity ("HTM") investments of $12.6 million, of which 100% are U.S. Agency mortgage backed securities held for CRA purposes, with a fair value of $404,000 less than the carrying value and a weighted average remaining duration of 6.7 years as of June 30, 2023.
    

EVERETT, Wash., July 27, 2023 (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 ended June 30, 2023. 

Quarterly net income for the second quarter of 2023 was $12.9 million, or $0.95 per diluted common share, compared with net income of $12.4 million, or $0.91 per diluted common share, for the first quarter of 2023, and $10.2 million, or $0.76 per diluted common share, for the quarter ended June 30, 2022. 

Total assets increased $84.3 million, or 2.4%, during the second quarter of 2023 to $3.54 billion, from $3.45 billion at March 31, 2023. Loan growth of $170.3 million, or 6.0%, during the three months ended June 30, 2023 to $3.01 billion, compared to $2.84 billion at March 31, 2023. Loan growth included CCBX loan growth of $128.3 million, or 11.0%, and an increase of $42.0 million, or 2.5% in community bank loans, which is net of $196,000 in PPP loan forgiveness/repayments. Deposits increased $67.3 million, or 2.2%, during the three months ended June 30, 2023 and included CCBX deposit growth of $89.3 million, or 5.7%, and a decrease in community bank deposits of $21.9 million, or 1.4%. The slight decrease in community bank deposits was a result of pricing disciplines as some customers sought higher rate products. Our cost of deposits for the community bank was 0.98% for the three months ended June 30, 2023, compared to 0.66% for the three months ended March 31, 2023.

“We saw solid deposit growth in the second quarter, with deposits increasing $67.3 million, or 2.2%, compared to March 31, 2023. Fully insured IntraFi network sweep deposits increased $146.0 million to $240.3 million as of June 30, 2023, compared to $94.3 million as of March 31, 2023. These fully insured sweep deposits allow our larger deposit customers to fully insure their deposits through a sweep to other banks. Loans receivable increased $170.3 million, or 6.0%, during the three months ended June 30, 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 June 30, 2023 we had $275.1 million in cash on the balance sheet and the capacity to borrow up to $559.8 million from Federal Home Loan Bank and the Federal Reserve Bank discount window, which we did not draw down at any point in the second quarter of 2023. Cash on the balance sheet and borrowing capacity totaled $834.8 million, which represented 26.4% of total deposits and exceeded our $632.1 million in uninsured deposits as of June 30, 2023.

We understand that there continues to be uncertainty and concern surrounding the current economic environment; and as such we work hard to ensure that we are serving our customers and shareholders in the best way possible. Building a company that we believe can withstand the challenges of our time, growing in strength and size, through thoughtful and strategic management of growth, resources and opportunities. Net income for the quarter ended June 30, 2023 was adversely impacted by elevated legal & professional fees which increased $1.6 million compared to the quarter ended March 31, 2023. Nearly all of the increase in professional fees is related to enhancing or expanding our CCBX business, which we view as a strategic priority, by further developing our risk management system to support growth of the CCBX business as well as evaluating new Fintech partnerships and acquisitions of technology platforms and related assets. We anticipate that our legal and professional fees will remain elevated through the third quarter of 2023 then start to decline as projects are completed and initiatives are achieved, with legal and professional fees leveling off to approximate first quarter 2023 levels by first quarter 2024. We continue to remain true to our "un-Bankey" roots by looking for and finding new opportunities to survive and thrive in the changing banking world, while still maintaining the community bank mentality and feel," 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 $62.4 million for the quarter ended June 30, 2023, an increase of $7.9 million, or 14.4%, from $54.5 million for the quarter ended March 31, 2023, and an increase of $22.5 million, or 56.3%, from $39.9 million for the quarter ended June 30, 2022.  Yield on loans receivable was 10.85% for the three months ended June 30, 2023, compared to 9.95% for the three months ended March 31, 2023 and 7.34% for the three months ended June 30, 2022.  The increase in net interest income compared to March 31, 2023 and June 30, 2022, was largely related to increased yield on loans resulting from higher interest rates and growth in higher yielding loans, primarily from CCBX.  Total average loans receivable for the three months ended June 30, 2023 was $2.97 billion, compared to $2.71 billion for the three months ended March 31, 2023, and $2.19 billion for the three months ended June 30, 2022.

Interest and fees on loans totaled $80.2 million for the three months ended June 30, 2023 compared to $66.4 million and $40.2 million for the three months ended March 31, 2023 and June 30, 2022, respectively.  Loan growth of $170.3 million, or 6.0%, during the quarter ended June 30, 2023 included a $128.3 million increase in CCBX loans. The increase in CCBX loans includes an increase of $95.3 million, or 12.7%, in consumer and other loans and an increase of $19.6 million, or 16.5%, in capital call lines as a result of normal balance fluctuations and business activities.  Capital call lines bear a lower rate of interest, but have less credit risk due to the way the loans are structured compared to other commercial loans.  The increase in interest and fees on loans for the quarter ended June 30, 2023, compared to March 31, 2023 and June 30, 2022, was largely due to growth in higher yielding loans and increased interest rates.  As a result of the Federal Open Market Committee (“FOMC”) raising the target Federal Funds rate 0.25% during the quarter, interest rates on our existing variable rate loans were affected, as are the rates on new loans. The FOMC last raised the target Federal Funds rate 0.25% on May 3, 2023. We continue to monitor the impact of these increases in interest rates.

Interest income from interest earning deposits with other banks was $2.7 million for the quarter ended June 30, 2023 a decrease of $419,000 compared to March 31, 2023 as a result of lower average balances, and an increase of $1.7 million compared to June 30, 2022 due to an increase in interest rates.  The average balance of interest earning deposits with other banks for the three months ended June 30, 2023 was $211.4 million, compared to $271.7 million and $499.9 million for the three months ended March 31, 2023 and June 30, 2022, respectively.  Interest earning deposits with other banks decreased as a result of increased loan demand compared to the three months ended March 31, 2023 and June 30, 2022.  Additionally, the average yield on these interest earning deposits with other banks increased to 5.08% for the quarter ended June 30, 2023, compared to 4.62% and 0.77% for the quarters ended March 31, 2023 and June 30, 2022, respectively.

Total interest expense was $21.3 million for the quarter ended June 30, 2023, a $5.7 million increase from the quarter ended March 31, 2023 and a $19.4 million increase from the quarter ended June 30, 2022. Interest expense on deposits was $20.7 million for the quarter ended June 30, 2023, compared to $1.7 million for the quarter ended June 30, 2022. Interest expense on interest bearing deposits increased $5.7 million for the quarter ended June 30, 2023, compared to the quarter ended March 31, 2023, and $19.0 million compared to the quarter ended June 30, 2022 as a result an increase in CCBX deposits that are tied to, and reprice when the FOMC raises rates just like our most of our CCBX loans which also reprice when the FOMC raises interest rates. Interest expense on borrowed funds was $661,000 for the quarter ended June 30, 2023, compared to $662,000 and $260,000 for the quarters ended March 31, 2023 and June 30, 2022, respectively. The $401,000 increase in interest expense on borrowed funds from the quarter ended June 30, 2022 is the result of an increase of $19.7 million in subordinated debt and an increase in interest rates.

Total cost of deposits was 2.72% for the three months ended June 30, 2023, compared to 2.13% for the three months ended March 31, 2023, and 0.25%, for the three months ended June 30, 2022. Community bank and CCBX cost of deposits were 0.98% and 4.42% respectively, for the three months ended June 30, 2023, compared to 0.66% and 3.89%, for the three months ended March 31, 2023, and 0.08% and 0.56% for the three months ended June 30, 2022. The increase in cost of deposits for the three months ended June 30, 2023 compared to the prior periods for both segments is a result of increased interest rates and increased interest bearing deposits at higher rates. Any additional FOMC interest rate increases will increase our cost of deposits and result in higher interest expense on interest bearing deposits.

Net Interest Margin

Net interest margin was 7.58% for the three months ended June 30, 2023, compared to 7.15% and 5.66% for the three months ended March 31, 2023 and June 30, 2022, respectively.  The increase in net interest margin compared to the three months ended March 31, 2023 and June 30, 2022, was largely a result of increased volume and an increase in higher interest rates on new loans and on existing variable rate loans as they reprice.  Loans receivable increased $170.3 million and $673.2 million, compared to March 31, 2023 and June 30, 2022, respectively.  Additionally, the Fed Funds interest rate increases has resulted in existing, variable rate loans repricing to higher interest rates.  Interest and fees on loans receivable increased $13.8 million, or 20.7%, to $80.2 million for the three months ended June 30, 2023, compared to $66.4 million for the three months ended March 31, 2023, and $40.2 million for the three months ended June 30, 2022.  Also contributing to the increase in net interest margin compared to the three months ended June 30, 2022, was a $1.7 million increase in interest on interest earning deposits.  These interest earning deposits earned an average rate of 5.08% for the quarter ended June 30, 2023, compared to 4.62% and 0.77% for the quarters ended March 31, 2023 and June 30, 2022, respectively.  Average investment securities increased $8.1 million to $110.3 million due to the purchase of $8.9 million in securities during the three months ended June 30, 2023 compared to the three months ended March 31, 2023, and decreased $10.9 million compared to the three months ended June 30, 2022. Interest on investment securities increased $100,000 for the three months ended June 30, 2023 compared to the three months ended March 31, 2023 as a result of the increase in average outstanding balance coupled with increased yield, which also positively impacted net interest margin. Interest on investment securities increased $90,000 compared to June 30, 2022, as a result of increased yield.  These increases in interest income were partially offset by increases in interest expense on interest bearing deposits, as previously discussed.

Cost of funds was 2.77% for the quarter ended June 30, 2023, an increase of 58 basis points from the quarter ended March 31, 2023 and an increase of 248 basis points from the quarter ended June 30, 2022. Cost of deposits for the quarter ended June 30, 2023 was 2.72%, compared to 2.13% for the quarter ended March 31, 2023, and 0.25% for the quarter ended June 30, 2022. The increased cost of funds and deposits compared to March 31, 2023 and June 30, 2022 was largely due to the increase in interest rates compared to the previous periods and growth in higher cost CCBX deposits compared to June 30, 2022.

During the quarter ended June 30, 2023, total loans receivable increased by $170.3 million, or 6.0%, to $3.01 billion, compared to $2.84 billion for the quarter ended March 31, 2023.  This increase consists of $128.3 million in CCBX loan growth and $42.0 million in community bank loan growth. Community bank loan growth is net of $196,000 in PPP loan forgiveness/repayments since March 31, 2023.  Total loans receivable as of June 30, 2023 increased $673.2 million compared to June 30, 2022.  This increase includes CCBX loan growth of $490.6 million and community bank loan growth of $182.6 million. Community bank loan growth is net of $12.8 million in PPP loan forgiveness/repayments since June 30, 2022.  During the quarter ended June 30, 2023, $88.6 million in CCBX loans were transferred into loans held for sale, with $80.0 million in loans sold during the quarter and $35.9 million remaining in loans held for sale as of June 30, 2023; compared to $27.3 million in loans held for sale as of March 31, 2023. 

Total yield on loans receivable for the quarter ended June 30, 2023 was 10.85%, compared to 9.95% for the quarter ended March 31, 2023, and 7.34% for the quarter ended June 30, 2022. This increase in yield on loans receivable is a combination of an overall increase in interest rates, repricing of variable rate loans as well as additional volume in higher rate consumer loans from CCBX partners.  During the quarter ended June 30, 2023, CCBX loans outstanding increased 11.0%, or $128.3 million, compared to March 31, 2023, with an average CCBX yield of 16.95% and community bank loans increased 2.5%, or $42.0 million, compared to the quarter ended March 31, 2023, with an average yield of 6.28%.   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:

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

Key Performance Ratios

ROA was 1.52% for the quarter ended June 30, 2023 compared to 1.58% and 1.41% for the quarters ended March 31, 2023 and June 30, 2022, respectively.  ROA for the quarter ended June 30, 2023, was down 0.06% as a result of higher expenses compared to March 31, 2023 and was up 0.11% due to increases in deposits, loans and overall higher interest rates on interest earning assets, compared to the quarter ended June 30, 2022.

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

Noninterest Income

The following table details noninterest income for the periods indicated:

Noninterest income was $58.6 million for the three months ended June 30, 2023, an increase of $9.3 million from $49.3 million for the three months ended March 31, 2023, and an increase of $33.1 million from $25.5 million for the three months ended June 30, 2022.  The increase in noninterest income over the quarter ended March 31, 2023 was primarily due to an increase of $8.6 million in total BaaS income.  The $8.6 million increase in total BaaS income included a $8.7 million increase in BaaS credit enhancements related to the allowance for credit losses, a $462,000 decrease in BaaS fraud enhancements, and an increase of $373,000 in BaaS program income. The increase in BaaS program income is largely the result of higher transaction and interchange fees (see “Appendix B” for more information on the accounting for BaaS allowance for credit losses and credit and fraud enhancements). The $33.1 million increase in noninterest income over the quarter ended June 30, 2022 was primarily due to a $32.6 million increase in BaaS income. The $32.6 million increase in BaaS income included a $36.8 million increase in BaaS credit enhancements, a $4.9 million decrease in BaaS fraud enhancements and a $729,000 increase in BaaS program income.

Our CCBX segment continues to evolve, and we now have 22 relationships, at varying stages, as of June 30, 2023.  We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense and are focusing more on selecting larger and more established partners, with experienced management teams, existing customer bases and strong financial positions.

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

The following table details noninterest expense for the periods indicated:

Noninterest Expense

Total noninterest expense increased $7.2 million to $51.9 million for the three months ended June 30, 2023, compared to $44.7 million for the three months ended March 31, 2023 and increased $13.7 million from $38.2 million for the three months ended June 30, 2022. The increase in noninterest expense for the quarter ended June 30, 2023, as compared to the quarter ended March 31, 2023, was primarily due to a $4.0 million increase in BaaS expense (of which $4.5 million is related to an increase in partner loan expense partially offset by a decrease of $462,000 in partner fraud expense).  Partner loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, and originating & servicing CCBX loans. Partner fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts. A portion of this expense is realized during the quarter during which the loss occurs, and a portion is estimated based on historical or other information from our partners.  Legal and professional fees increased $1.6 million for the quarter ended June 30, 2023, as compared to the quarter ended March 31, 2023 due to increased fees related to data and risk management, building out our infrastructure and increased consulting expenses for projects and enhanced monitoring. Additionally, there was a $734,000 increase in salaries and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives. We anticipate that our legal and professional fees will remain elevated through the third quarter of 2023 then start to decline as projects are completed and initiatives are achieved, with legal and professional fees leveling off to approximate first quarter 2023 levels by first quarter 2024.

The increase in noninterest expenses for the quarter ended June 30, 2023 compared to the quarter ended June 30, 2022 were largely due to an increase of $4.9 million in BaaS partner expense (of which $9.8 million is related to an increase in partner loan expense partially offset by a decrease of $4.9 million in partner fraud expense), $4.1 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives and $3.6 million increase in legal and professional fees due to increased fees related to data and risk management, building out our infrastructure and increased consulting expenses for projects and enhanced monitoring. Additionally, there was a $405,000 increase in point of sale expenses which is attributed to increased CCBX activity, and $404,000 increase in other operational losses.

Provision for Income Taxes

The provision for income taxes was $3.9 million for the three months ended June 30, 2023, $3.0 million for the three months ended March 31, 2023 and $2.9 million for the second quarter of 2022.  The provision for income taxes was higher for the three months ended June 30, 2023 compared to March 31, 2023 as a result of higher stock equity award deductions in the quarter ended March 31, 2023, which lowered the effective tax rate as well. 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 $84.3 million, or 2.4%, to $3.54 billion at June 30, 2023 compared to $3.45 billion at March 31, 2023.  The increase is primarily due to loans receivable increasing $170.3 million during the quarter ended June 30, 2023 partially offset by a $111.0 million decrease in interest earning deposits with other banks during the quarter ended June 30, 2023.  Additionally, there were $35.9 million in loans held for sale at June 30, 2023, compared to $27.3 million at March 31, 2023.  

Total assets increased $565.6 million, or 19.0%, at June 30, 2023, compared to $2.97 billion at June 30, 2022.  The increase is primarily due to loans receivable increasing $673.2 million, and an increase of $909,000 in investment securities and a $119.7 million decrease in interest earning deposits with other banks, resulting from increased loan demand and funds being shifted from interest earning deposits with other banks to loans, compared to June 30, 2022.

Loans Receivable

Total loans receivable increased $170.3 million to $3.01 billion at June 30, 2023, from $2.84 billion at March 31, 2023, and increased $673.2 million from $2.33 billion at June 30, 2022.  The increase in loans receivable over the quarter ended March 31, 2023 was the result of $128.3 million in CCBX loan growth and $42.0 million in community bank loan growth. Community bank loan growth is net of $196,000 in PPP loan forgiveness/repayments since March 31, 2023.  The change in loans receivable over the quarter ended June 30, 2022 includes CCBX loan growth of $490.6 million and $182.6 million in community bank loan growth as of June 30, 2023.  Community bank loan growth is net of $12.8 million in PPP loan forgiveness/repayments since June 30, 2022.

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

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.

Deposits

Total deposits increased $67.3 million, or 2.2%, to $3.16 billion at June 30, 2023 from $3.10 billion at March 31, 2023. The increase was due to a $69.6 million increase in core deposits, partially offset by a $2.2 million decrease in time deposits. BaaS-brokered deposits are now classified as NOW accounts due to a change in the relationship agreement with one of our partners. Deposits in our CCBX segment increased $89.3 million, from $1.56 billion at March 31, 2023, to $1.65 billion at June 30, 2023 and community bank deposits decreased $21.9 million from $1.53 billion at March 31, 2023, to $1.51 billion at June 30, 2023. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts. During the quarter ended June 30, 2023, noninterest bearing deposits decreased $36.2 million, or 4.8%, to $725.6 million from $761.8 million at March 31, 2023. Community bank noninterest bearing deposits totaled $621.0 million or 41.1% of total community bank deposits and CCBX noninterest bearing deposits totaled $104.6 million, or 6.3% of total CCBX deposits. In the quarter ended June 30, 2023 compared to the quarter ended March 31, 2023, NOW and money market accounts increased $116.0 million, savings deposits decreased $10.3 million, and time deposits decreased $2.2 million. Included in total deposits is $240.3 million in IntraFi network NOW and money market sweep accounts as of June 30, 2023, which provides our larger deposit customers with fully insured deposits through a sweep to other banks. Uninsured deposits decreased to $632.1 million as of June 30, 2023, compared to $768.3 million as of March 31, 2023.

Total deposits increased $465.3 million, or 17.2%, to $3.16 billion at June 30, 2023 compared to $2.70 billion at June 30, 2022. The increase is largely the result of growth in CCBX deposits. Noninterest bearing deposits decreased $92.5 million, or 11.3%, to $725.6 million at June 30, 2023 from $818.1 million at June 30, 2022. NOW and money market accounts increased $662.8 million, or 39.9%, to $2.32 billion at June 30, 2023, and savings deposits decreased $17.5 million, or 16.4%, and time deposits decreased   $11.6 million, or 31.9%, in the second quarter of 2023 compared to the second 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 $275.2 million as of June 30, 2023, compared to $76.0 million as of June 30, 2022. These deposits increased as a result of sweeping them back on the balance sheet. Deposits in our CCBX segment increased $587.0 million, from $1.07 billion at June 30, 2022, to $1.65 billion at June 30, 2023 and community bank deposits decreased $121.7 million, from $1.63 billion at June 30, 2022, to $1.51 billion at June 30, 2023. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts. Uninsured deposits decreased to $632.1 million as of June 30, 2023, compared to $812.1 million as of June 30, 2022.

Additionally, as of June 30, 2023 we have access to $9.9 million in CCBX customer deposits that are currently being transferred off the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. If a portion of these deposits are retained, they would be classified as NOW accounts. Efforts to retain and grow core deposits are evidenced by the high ratios in these categories when compared to total deposits.

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

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

Borrowings

As of June 30, 2023 the Company has the capacity to borrow up to a total of $559.8 million from the Federal Reserve Bank discount window and Federal Home Loan Bank, with no borrowings outstanding on these lines as of June 30, 2023.

Shareholders’ Equity

During the six months ended June 30, 2023, the Company contributed $15.0 million in capital to the Bank.  The Company had a cash balance of $6.8 million as of June 30, 2023, which is retained for general operating purposes, including debt repayment, and for funding $763,000 in commitments to bank technology funds.  

Total shareholders’ equity increased $13.9 million since March 31, 2023.  The increase in shareholders’ equity was primarily due to $12.9 million in net earnings, a $846,000 increase from the amortization of equity awards, combined with a decrease in the unrealized loss on available-for-sale securities of $125,000 and $22,000 increase from stock options being exercised during the three months ended June 30, 2023.

Capital Ratios

The Company and the Bank remained well capitalized at June 30, 2023, as summarized in the following table.

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 $110.8 million and 3.68% of loans receivable at June 30, 2023 compared to $89.1 million and 3.14% at March 31, 2023 and $49.4 million and 2.11% at June 30, 2022. The allowance for credit loss allocated to the CCBX portfolio was $90.1 million and 6.96% of CCBX loans receivable at June 30, 2023, with $20.7 million of allowance for credit loss allocated to the community bank or 1.21% of total community bank loans receivable.

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

Provision for credit losses - loans totaled $52.6 million for the three months ended June 30, 2023, $43.5 million for the three months ended March 31, 2023, and $14.1 million for the three months ended June 30, 2022. Net charge-offs totaled $31.0 million for the quarter ended June 30, 2023, compared to $32.3 million for the quarter ended March 31, 2023 and $3.5 million for the quarter ended June 30, 2022. Net charge-offs increased primarily due to CCBX partner 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 $180.5 million loan portfolio. At June 30, 2023, our portion of this portfolio represented $18.0 million in loans.

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

The increase in the Company’s provision for credit losses - loans during the quarter ended June 30, 2023, is a result of loan growth in CCBX partner loans and to replenish reserves as a result of loan charge-off activity, which has resulted in increased charge-off rates impacting the allowance calculation. During the quarter ended June 30, 2023, a $52.6 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis, compared to the $43.1 million provision for credit losses - loans that was recorded for CCBX for the quarter ended March 31, 2023. 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 $180.5 million CCBX loan portfolio. At June 30, 2023, 10% of this portfolio represented $18.0 million in loans. The factors used in management’s analysis for community bank credit losses indicated that a small adjustment (recapture) of $47,000 and provision of $428,000 was needed for the quarters ended June 30, 2023 and March 31, 2023, respectively.

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

At June 30, 2023, our nonperforming assets were $33.7 million, or 0.95% of total assets, compared to $31.5 million, or 0.91%, of total assets, at March 31, 2023, and $5.8 million, or 0.20% of total assets, at June 30, 2022. These ratios are impacted by CCBX loans over 90 days delinquent that are covered by CCBX partner credit enhancements. As of June 30, 2023, $25.2 million of the $26.3 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 $2.2 million during the quarter ended June 30, 2023, compared to the quarter ended March 31, 2023, due to a $1.8 million increase in CCBX loans that are past due 90 days or more and still accruing combined with a $417,000 increase 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 increased due to the addition of three loans partially offset by principal reductions. There were no repossessed assets or other real estate owned at June 30, 2023. Our nonperforming loans to loans receivable ratio was 1.12% at June 30, 2023, compared to 1.11% at March 31, 2023, and 0.25% at June 30, 2022.

For the quarter ended June 30, 2023, there were $9,000 of community bank net charge-offs and $7.4 million of nonperforming community bank loans. For the quarter ended June 30, 2023, $31.0 million in net charge-offs were recorded on CCBX loans. These loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. The Company is responsible for credit losses on approximately 10% of a $180.5 million loan portfolio. At June 30, 2023, our portion of this portfolio represented $18.0 million in loans.

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

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

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 $3.54 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.