First Quarter 2023 Highlights:
- Quarterly net income of $12.4 million, or $0.91 per diluted common share, for the three months ended March 31, 2023, compared to $13.1 million, or $0.96 per diluted common share for the three months ended December 31, 2022.
- Total assets increased $306.6 million, or 9.7%, to $3.45 billion for the quarter ended March 31, 2023, compared to $3.14 billion at December 31, 2022.
- Loan growth of $209.9 million, or 8.0%, to $2.84 billion for the three months ended March 31, 2023.
- CCBX loans increased $153.7 million, or 15.2%, to $1.17 billion.
- Community bank loans increased $56.3 million, or 3.5%, to $1.67 billion.
- PPP loans decreased $0.9 million, or 19.3%, to $3.8 million.
- Deposits increased $277.7 million, or 9.9%, to $3.10 billion as of March 31, 2023.
- CCBX deposit growth of $284.5 million, or 22.2%, to $1.56 billion.
- Additional $36.9 million in CCBX deposits transferred off balance sheet.
- Community bank deposits decreased $6.8 million, or 0.4%, to $1.53 billion and community bank cost of deposits was 0.66%.
- CCBX deposit growth of $284.5 million, or 22.2%, to $1.56 billion.
- Total revenue increased $7.6 million, or 7.8%, for the three months ended March 31, 2023, compared to the three months ended December 31, 2022
- Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements increased $1.2 million, or 2.0%, to $59.4 million for the three months ended March 31, 2023, compared to the three months ended December 31, 2022. (A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.)
EVERETT, Wash., April 27, 2023 (GLOBE NEWSWIRE) -- Coastal Financial Corporation (Nasdaq: CCB) (the “Company”), the holding company for Coastal Community Bank (the “Bank”), today reported unaudited financial results for the quarter ended March 31, 2023.
Quarterly net income for the first quarter of 2023 was $12.4 million, or $0.91 per diluted common share, compared with net income of $13.1 million, or $0.96 per diluted common share, for the fourth quarter of 2022, and $6.2 million, or $0.46 per diluted common share, for the quarter ended March 31, 2022.
Total assets increased $306.6 million, or 9.7%, during the first quarter of 2023 to $3.45 billion, from $3.14 billion at December 31, 2022. Loan growth of $209.9 million, or 8.0%, during the three months ended March 31, 2023 to $2.84 billion, compared to $2.63 billion at December 31, 2022. Loan growth included CCBX loan growth of $153.7 million, or 15.2%, and an increase of $56.3 million, or 3.5% in community bank loans, which is net of $908,000 in PPP loan forgiveness/repayments. Deposits increased $277.7 million, or 9.9%, during the three months ended March 31, 2023 and included CCBX deposit growth of $284.5 million, or 22.2%, and a decrease in community bank deposits of $6.8 million, or 0.4%. The slight decrease in community bank deposits was a result of pricing disciplines as some customers sought higher rate products. Our cost of deposits for the community bank was 0.66% for the three months ended March 31, 2023, compared to 0.37% for the three months ended December 31, 2022.
“The disruption from the bank failures in the first quarter of 2023 was unsettling to the broader financial services industry, but Coastal remains on solid footing with a diversified, stable deposit base. Deposits increased $277.7 million, or 9.9%, during the three months ended March 31, 2023. Fully insured IntraFi network sweep deposits increased to $94.3 million as of March 31, 2023, compared to $12.5 million as of December 31, 2022. These fully insured sweep deposits allow our larger deposit customers to fully insure their deposits through a sweep to other banks. Our liquidity position is supported by careful management of our liquid assets and liabilities as well as access to alternative sources of funds. As of March 31, 2023 we had $393.9 million in cash on the balance sheet and the capacity to borrow up to $575.1 million from Federal Home Loan Bank and the Federal Reserve Bank discount window, which we did not draw down at any point in the first quarter of 2023. Cash on the balance sheet and borrowing capacity totaled $969.0 million, which represented 31.3% of total deposits and exceeded our $768.3 million in uninsured deposits as of March 31, 2023. Our AFS securities portfolio has a weighted average remaining duration of just 11 months and U.S. Treasury securities represent 99.7% of that portfolio. Unrealized losses on the AFS securities portfolio were just $2.3 million, or 0.88%, of shareholders’ equity as of March 31, 2023, which we expect to accrete back into equity at approximately $500,000 a quarter for the next three quarters.
As we move forward in the year, we are well equipped to handle the challenges that may come from this uncertain economic environment. In addition to our well-established community bank base, which includes our 14 branch network and strong local economy, we also have three rings of defense to mitigate credit and counterparty risk with our CCBX partners: (1) well-funded partner cash reserve accounts, (2) partners we believe have the underlying financial strength to replenish and maintain cash reserve balances, and (3) if cash reserves are not replenished then we receive full economic benefit and retention of all interest and fee revenue from the loans. As we continue to evolve and explore new opportunities for growth, our commitment to the safety and soundness of the Company and the Bank continues to be our top priority,” stated Eric Sprink, the CEO of the Company and the Bank.
Highlights in Light of Recent Banking Events:
- Deposits:
- Deposits increased $277.7 million, or 9.9%, to $3.10 billion during the three months ended March 31, 2023
- Includes $94.3 million in fully insured IntraFi network negotiable orders of withdrawal (“NOW”) and money market sweep deposits as of March 31, 2023, compared to $12.5 million as of December 31, 2022.
- Deposits increased $258.0 million, or 9.09%, from March 10, 2023, the date Silicon Valley Bank was put into receivership, to March 31, 2023.
- Deposits increased $277.7 million, or 9.9%, to $3.10 billion during the three months ended March 31, 2023
- Reduction in Uninsured Deposits:
- Uninsured deposits of $768.3 million, or 24.8% of total deposits as of March 31, 2023, compared to $835.8 million, or 29.7% of total deposits as of December 31, 2022.
- Coastal has a lower percent of uninsured deposits than every bank over $10.0 billion in assets as of December 31, 20221.
- Liquidity/Borrowings:
- Cash and interest bearing deposits of $393.9 million, of which 89.3% is held at the Federal Reserve Bank, at March 31, 2023 compared to $342.1 million as of December 31, 2022.
- As of March 31, 2023 we had the capacity to borrow up to $575.1 million from Federal Home Loan Bank and the Federal Reserve Bank discount window.
- We had no outstanding borrowings under these facilities as of March 31, 2023.
- We had no outstanding borrowings under these facilities during the quarter ended March 31, 2023.
- Net Interest Margin:
- Net interest margin of 7.15% for the quarter ended March 31, 2023 compared to 6.91% for the month ended March 31, 2023.
- Cost of Deposits:
- Cost of deposits of 2.13% for the quarter ended March 31, 2023,
- Cost of deposits of 2.36% for the month ended March 31, 2023.
- Investment Portfolio:
- Available for sale (“AFS”) investments of $98.0 million, compared to $97.3 million as of December 31, 2022, of which 99.7% are U.S. Treasuries, with a weighted average remaining duration of 11 months as of March 31, 2023.
- Held to maturity (“HTM”) investments of $3.7 million, of which 100% are U.S. Agency mortgage backed securities held for CRA purposes, with a fair value of $108,000 less than the carrying value as of March 31, 2023.
1 Source: S&P Global Market Intelligence as of December 31, 2022
Results of Operations Overview
Beginning in 2023, the Company changed the structure for how it reports segment activity. The Company has one main subsidiary, the Bank which consists of three segments: CCBX, the community bank and treasury & administration. The CCBX segment includes our BaaS activities, the community bank segment includes all community banking activities and treasury & administration includes treasury management, overall administration and all other aspects of the Company. Net interest income was $54.5 million for the quarter ended March 31, 2023, an increase of $1.1 million, or 2.0%, from $53.4 million for the quarter ended December 31, 2022, and an increase of $25.2 million, or 86.2%, from $29.3 million for the quarter ended March 31, 2022. Yield on loans receivable was 9.95% for the three months ended March 31, 2023, compared to 9.33% for the three months ended December 31, 2022 and 6.80% for the three months ended March 31, 2022. The increase in net interest income compared to December 31, 2022 and March 31, 2022, was largely related to increased yield on loans resulting from higher interest rates and growth in higher yielding loans, primarily from CCBX. Total average loans receivable for the three months ended March 31, 2023 was $2.71 billion, compared to $2.60 billion for the three months ended December 31, 2022, and $1.77 billion for the three months ended March 31, 2022.
Interest and fees on loans totaled $66.4 million for the three months ended March 31, 2023 compared to $61.2 million and $29.6 million for the three months ended December 31, 2022 and March 31, 2022, respectively. Loan growth of $209.9 million, or 8.0%, during the quarter ended March 31, 2023 included a $153.7 million increase in CCBX loans of which capital call lines form a part. Capital call lines decreased $27.2 million, or 18.6%, during the quarter ended March 31, 2023, compared to the quarter ended December 31, 2022 as a result of normal balance fluctuations and business activities. Capital call lines bear a lower rate of interest, but have less credit risk due to the way the loans are structured compared to other commercial loans. The increase in interest and fees on loans for the quarter ended March 31, 2023, compared to December 31, 2022 and March 31, 2022, was largely due to growth in higher yielding loans and increased interest rates. As a result of the Federal Open Market Committee (“FOMC”) raising the target Federal Funds rate two times during the quarter for a total increase of 0.50%, interest rates on our existing variable rate loans were affected, as are the rates on new loans. We continue to monitor the impact of these increases in interest rates. The FOMC last raised the target Federal Funds rate 0.25% on March 23, 2023.
Interest income from interest earning deposits with other banks was $3.1 million at March 31, 2023 and December 31, 2022, and an increase of $2.7 million compared to March 31, 2022 due to an increase in interest rates. The average balance of interest earning deposits with other banks for the three months ended March 31, 2023 was $271.7 million, compared to $329.4 million and $843.9 million for the three months ended December 31, 2022 and March 31, 2022, respectively. Interest earning deposits with other banks decreased as a result of increased loan demand compared to the three months ended December 31, 2022 and March 31, 2022. Additionally, the average yield on these interest earning deposits with other banks increased to 4.62% for the quarter ended March 31, 2023, compared to 3.73% and 0.19% for the quarters ended December 31, 2022 and March 31, 2022, respectively.
Interest expense was $15.6 million for the quarter ended March 31, 2023, a $3.9 million increase from the quarter ended December 31, 2022 and a $14.7 million increase from the quarter ended March 31, 2022. Interest expense on deposits was $15.0 million for the quarter ended March 31, 2023, compared to $553,000 for the quarter ended March 31, 2022. Interest expense on borrowed funds was $662,000 for the quarter ended March 31, 2023, compared to $537,000 and $321,000 for the quarters ended December 31, 2022 and March 31, 2022, respectively. Interest expense on borrowed funds increased $125,000 compared to the three months ended December 31, 2022, as a result of an increase of $20.0 million in subordinated debt, which closed on November 1, 2022, combined with the increase in interest rates. The $341,000 increase in interest expense on borrowed funds from the quarter ended March 31, 2022 is the result of an increase in subordinated debt and increase in interest rates partially offset by a decrease in Federal Home Loan Bank borrowings, which were paid off in the first quarter of 2022. Interest expense on interest bearing deposits increased $3.9 million for the quarter ended March 31, 2023, compared to the quarter ended December 31, 2022, and $14.4 million compared to the quarter ended March 31, 2022 as a result an increase in CCBX deposits that are tied to and reprice when the FOMC raises rates, just like our CCBX loans which also reprice when the FOMC raises interest rates. Additionally, as a result of the interest rate increases, in the first and second quarter of 2022 a significant portion of CCBX deposits that were not earning interest were reclassified to interest bearing deposits from noninterest bearing deposits, which also contributed to the increase in interest expense compared to March 31, 2022. These CCBX deposits were reclassified because the current interest rate exceeded the minimum interest rate set in their respective program agreements, as a result of the first and second quarter 2022 interest rate increases. We do not expect additional CCBX deposits will be reclassified as a result of future rate increases.
Total cost of deposits was 2.13% for the three months ended March 31, 2023, compared to 1.56% for the three months ended December 31, 2022, and 0.09%, for the three months ended March 31, 2022. Community bank and CCBX cost of deposits were 0.66% and 3.89% respectively, for the three months ended March 31, 2023, compared to 0.37% and 3.13%, for the three months ended December 31, 2022, and 0.11% and 0.06% for the three months ended March 31, 2022. The increase in cost of deposits for the three months ended March 31, 2023 compared to the prior periods for both segments is a result of increased interest rates and increased CCBX deposits. Also impacting CCBX cost of deposits was the reclassification of deposits from noninterest bearing to interest bearing in the first two quarters of 2022. Any additional FOMC interest rate increases will increase our cost of deposits and result in higher interest expense on interest bearing deposits.
Net Interest Margin
Net interest margin was 7.15% for the three months ended March 31, 2023, compared to 6.96% and 4.45% for the three months ended December 31, 2022 and March 31, 2022, respectively. The increase in net interest margin compared to the three months ended December 31, 2022 and March 31, 2022, was largely a result of increased volume and an increase in higher interest rates on new loans and on existing variable rate loans as they reprice. Loans receivable increased $209.9 million and $873.0 million, compared to December 31, 2022 and March 31, 2022, respectively. Additionally, the Fed Funds interest rate increases have resulted in existing, variable rate loans repricing to higher interest rates. Interest on loans receivable increased $5.2 million, or 8.5%, to $66.4 million for the three months ended March 31, 2023, compared to $61.2 million for the three months ended December 31, 2022, and $29.6 million for the three months ended March 31, 2022. Also contributing to the increase in net interest margin compared to the three months ended March 31, 2022, was a $2.7 million increase in interest on interest earning deposits. These interest earning deposits earned an average rate of 4.62% for the quarter ended March 31, 2023, compared to 3.73% and 0.19% for the quarters ended December 31, 2022 and March 31, 2022, respectively. Average investment securities increased $724,000 to $102.2 million for the three months ended March 31, 2023 compared to the three months ended December 31, 2022, and increased $56.5 million compared to the three months ended March 31, 2022. Interest on investment securities decreased $4,000 for the three months ended March 31, 2023 compared to the three months ended December 31, 2022. Interest on investment securities increased $482,000 compared to March 31, 2022, as a result of the increase in average outstanding balance coupled with increased yield, which also positively impacted net interest margin. These increases in interest income were partially offset by increases in interest expense on interest bearing deposits, as previously discussed.
Cost of funds was 2.19% for the quarter ended March 31, 2023, an increase of 58 basis points from the quarter ended December 31, 2022 and an increase of 205 basis points from the quarter ended March 31, 2022. Cost of deposits for the quarter ended March 31, 2023 was 2.13%, compared to 1.56% for the quarter ended December 31, 2022, and 0.09% for the quarter ended March 31, 2022. The increased cost of funds and deposits compared to December 31, 2022 and March 31, 2022 was largely due to the increase in interest rates compared to the previous periods and growth in higher cost CCBX deposits compared to March 31, 2022.
During the quarter ended March 31, 2023, total loans receivable increased by $209.9 million, or 8.0%, to $2.84 billion, compared to $2.63 billion for the quarter ended December 31, 2022. The increase consists of $153.7 million in CCBX loan growth and $56.3 million in community bank loan growth. Community bank loan growth is net of $0.9 million in PPP loan forgiveness/repayments. Total loans receivable grew $873.0 million as of March 31, 2023, compared to the quarter ended March 31, 2022. This increase includes CCBX loan growth of $650.8 million and community bank loan growth of $222.2 million. Community bank loan growth is net of $43.7 million in PPP loan forgiveness/repayments as of March 31, 2023 compared to March 31, 2022. During the quarter ended March 31, 2023, $101.2 million in CCBX loans were transferred into loans held for sale, with $73.9 million in loans sold during the quarter and $27.3 million remaining in loans held for sale as of March 31, 2023; compared to zero held for sale as of December 31, 2022.
Total yield on loans receivable for the quarter ended March 31, 2023 was 9.95%, compared to 9.33% for the quarter ended December 31, 2022, and 6.80% for the quarter ended March 31, 2022. This increase in yield on loans receivable is a combination of an overall increase in interest rates, repricing of variable rate loans as well as additional volume in higher rate consumer loans from CCBX partners. During the quarter ended March 31, 2023, CCBX loans outstanding increased 15.2%, or $153.7 million, compared to December 31, 2022, with an average CCBX yield of 16.09% and community bank loans increased 3.5%, or $56.3 million, December 31, 2022, with an average yield of 5.97%. The yield on CCBX loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans.
The following table summarizes the average yield on loans receivable and cost of deposits for our community bank and CCBX segments for the periods indicated:
| For the Three Months Ended | |||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||||||
| Yield on Loans (2) | Cost of Deposits (2) | Yield on Loans (2) | Cost of Deposits (2) | Yield on Loans (2) | Cost of Deposits (2) | ||||||
| Community Bank | 5.97% | 0.66% | 5.70% | 0.37% | 5.16% | 0.11% | |||||
| CCBX (1) | 16.09% | 3.89% | 15.20% | 3.13% | 12.73% | 0.06% | |||||
| Consolidated | 9.95% | 2.13% | 9.33% | 1.56% | 6.80% | 0.09% | |||||
(1) CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit and fraud enhancements and servicing CCBX loans. To determine Net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at Net BaaS loan income which can be compared to interest income on the Company’s community bank loans.
(2) Annualized calculations for periods shown.
The following tables illustrates how BaaS loan interest income is affected by BaaS loan interest expense resulting in net BaaS loan income and the associated yield:
| For the Three Months Ended | ||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | ||||||||||||||||
| (dollars in thousands, unaudited) | Income / Expense | Income / expense divided by average CCBX loans (2) | Income / Expense | Income / expense divided by average CCBX loans(2) | Income / Expense | Income / expense divided by average CCBX loans (2) | ||||||||||||
| BaaS loan interest income | $ | 42,220 | 16.09 | % | $ | 38,086 | 15.20 | % | $ | 11,992 | 12.73 | % | ||||||
| Less: BaaS loan expense | 17,554 | 6.69 | % | 17,215 | 6.87 | % | 8,290 | 8.80 | % | |||||||||
| Net BaaS loan income (1) | $ | 24,666 | 9.40 | % | $ | 20,871 | 8.33 | % | $ | 3,702 | 3.93 | % | ||||||
| Average BaaS Loans | $ | 1,064,192 | $ | 994,080 | $ | 382,153 | ||||||||||||
(1) A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.
(2) Annualized calculations shown for quarterly periods presented.
Key Performance Ratios
Return on average assets (“ROA”) was 1.58% for the quarter ended March 31, 2023 compared to 1.66% and 0.93% for the quarters ended December 31, 2022 and March 31, 2022, respectively. ROA for the quarter ended March 31, 2023, was impacted by an increase in deposits, loans and overall higher interest rates on interest earning assets, compared to the quarters ended December 31, 2022 and March 31, 2022.
The following table shows the Company’s key performance ratios for the periods indicated.
| Three Months Ended | |||||||||||||||
| (unaudited) | March 31, 2023 | December 31, 2022 | September 30, 2022 | June 30, 2022 | March 31, 2022 | ||||||||||
| Return on average assets (1) | 1.58 | % | 1.66 | % | 1.45 | % | 1.41 | % | 0.93 | % | |||||
| Return on average equity (1) | 19.89 | % | 21.86 | % | 19.36 | % | 18.86 | % | 12.12 | % | |||||
| Yield on earnings assets (1) | 9.19 | % | 8.47 | % | 7.38 | % | 5.94 | % | 4.58 | % | |||||
| Yield on loans receivable (1) | 9.95 | % | 9.33 | % | 8.46 | % | 7.34 | % | 6.80 | % | |||||
| Cost of funds (1) | 2.19 | % | 1.61 | % | 0.85 | % | 0.29 | % | 0.14 | % | |||||
| Cost of deposits (1) | 2.13 | % | 1.56 | % | 0.82 | % | 0.25 | % | 0.09 | % | |||||
| Net interest margin (1) | 7.15 | % | 6.96 | % | 6.58 | % | 5.66 | % | 4.45 | % | |||||
| Noninterest expense to average assets (1) | 5.69 | % | 5.97 | % | 6.66 | % | 5.29 | % | 4.52 | % | |||||
| Noninterest income to average assets (1) | 6.28 | % | 5.43 | % | 4.48 | % | 3.53 | % | 3.27 | % | |||||
| Efficiency ratio | 43.03 | % | 48.94 | % | 61.12 | % | 58.38 | % | 59.34 | % | |||||
| Loans receivable to deposits (2) | 92.55 | % | 93.25 | % | 89.92 | % | 86.54 | % | 76.24 | % | |||||
(1) Annualized calculations shown for quarterly periods presented.
(2) Includes loans held for sale.
Noninterest Income
The following table details noninterest income for the periods indicated:
| Three Months Ended | |||||||||
| March 31, | December 31, | March 31, | |||||||
| (dollars in thousands; unaudited) | 2023 | 2022 | 2022 | ||||||
| Deposit service charges and fees | $ | 910 | $ | 946 | $ | 884 | |||
| Gain on sales of loans, net | 123 | — | — | ||||||
| Loan referral fees | — | — | 602 | ||||||
| Unrealized gain on equity securities, net | 39 | (18 | ) | — | |||||
| Mortgage broker fees | 19 | 25 | 123 | ||||||
| Other | 280 | 273 | 265 | ||||||
| Noninterest income, excluding BaaS program income and BaaS indemnification income | 1,371 | 1,226 | 1,874 | ||||||
| Servicing and other BaaS fees | 948 | 1,001 | 1,169 | ||||||
| Transaction fees | 917 | 964 | 493 | ||||||
| Interchange fees | 789 | 785 | 432 | ||||||
| Reimbursement of expenses | 921 | 857 | 372 | ||||||
| BaaS program income | 3,575 | 3,607 | 2,466 | ||||||
| BaaS credit enhancements | 42,362 | 31,164 | 13,075 | ||||||
| Baas fraud enhancements | 1,999 | 6,818 | 4,571 | ||||||
| BaaS indemnification income | 44,361 | 37,982 | 17,646 | ||||||
| Total BaaS income | 47,936 | 41,589 | 20,112 | ||||||
| Total noninterest income | $ | 49,307 | $ | 42,815 | $ | 21,986 | |||
Noninterest income was $49.3 million for the three months ended March 31, 2023, an increase of $6.5 million from $42.8 million for the three months ended December 31, 2022, and an increase of $27.3 million from $22.0 million for the three months ended March 31, 2022. The increase in noninterest income over the quarter ended December 31, 2022 was primarily due to an increase of $6.3 million in total BaaS income. The $6.3 million increase in total BaaS income included a $11.2 million increase in BaaS credit enhancements related to the allowance for credit losses and reserve for unfunded commitments, a $4.8 million decrease in BaaS fraud enhancements, and a decrease of $32,000 in BaaS program income. The decrease in BaaS program income is a result of seasonality and lower implementation fees (see “Appendix B” for more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments and credit and fraud enhancements). The $27.3 million increase in noninterest income over the quarter ended March 31, 2022 was primarily due to a $27.8 million increase in BaaS income. The $27.8 million increase in BaaS income included a $29.3 million increase in BaaS credit enhancements, a $2.6 million decrease in BaaS fraud enhancements and a $1.1 million increase in BaaS program income.
Our CCBX segment continues to evolve, and we now have 25 relationships, at varying stages, as of March 31, 2023. We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense for both parties and are focusing more on selecting larger and more established partners, with experienced management teams, existing customer bases and strong financial positions.
The following table illustrates the activity and evolution in CCBX relationships for the periods presented. During the quarter ended March 31, 2023, two partners wound down their CCBX programs; these programs were not material in terms of income and sources of funds or loans.
| As of | |||
| (unaudited) | March 31, 2023 | December 31, 2022 | March 31, 2022 |
| Active | 18 | 19 | 20 |
| Friends and family / testing | 1 | 1 | 1 |
| Implementation / onboarding | 1 | 0 | 5 |
| Signed letters of intent | 4 | 5 | 2 |
| Wind down - preparing to exit relationship | 1 | 2 | 0 |
| Total CCBX relationships | 25 | 27 | 28 |
The following table details noninterest expense for the periods indicated:
Noninterest Expense
| Three Months Ended | |||||||||
| March 31, | December 31, | March 31, | |||||||
| (dollars in thousands; unaudited) | 2023 | 2022 | 2022 | ||||||
| Salaries and employee benefits | $ | 15,575 | $ | 14,399 | $ | 11,085 | |||
| Legal and professional expenses | 3,062 | 2,799 | 708 | ||||||
| Data processing and software licenses | 1,840 | 1,768 | 1,861 | ||||||
| Occupancy | 1,219 | 1,182 | 1,136 | ||||||
| Point of sale expense | 753 | 710 | 248 | ||||||
| Director and staff expenses | 626 | 515 | 344 | ||||||
| FDIC assessments | 595 | 550 | 604 | ||||||
| Excise taxes | 455 | 702 | 349 | ||||||
| Marketing | 95 | 109 | 99 | ||||||
| Other | 890 | 335 | 1,120 | ||||||
| Noninterest expense, excluding BaaS loan and BaaS fraud expense | 25,110 | 23,069 | 17,554 | ||||||
| BaaS loan expense | 17,554 | 17,215 | 8,290 | ||||||
| BaaS fraud expense | 1,999 | 6,819 | 4,571 | ||||||
| BaaS loan and fraud expense | 19,553 | 24,034 | 12,861 | ||||||
| Total noninterest expense | $ | 44,663 | $ | 47,103 | $ | 30,415 | |||
Total noninterest expense decreased $2.4 million to $44.7 million for the three months ended March 31, 2023, compared to $47.1 million for the three months ended December 31, 2022 and increased $14.3 million from $30.4 million for the three months ended March 31, 2022. The decrease in noninterest expense for the quarter ended March 31, 2023, as compared to the quarter ended December 31, 2022, was primarily due to a $4.5 million decrease in BaaS expense (of which $4.8 million is related to a decrease in partner fraud expense partially offset by an increase of $339,000 in partner loan expense). Partner loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, and servicing CCBX loans. Partner fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts. A portion of this expense is realized during the quarter during which the loss occurs, and a portion is estimated based on historical or other information from our partners.
The increase in noninterest expenses for the quarter ended March 31, 2023 compared to the quarter ended March 31, 2022 were largely due to an increase of $6.7 million in BaaS partner expense (increase of $9.3 million of which is related to partner loan expense and a decrease of $2.6 million of which is related to partner fraud expense), $4.5 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives and $2.4 million increase in legal and professional fees due to increased fees related to data and risk management, and increased consulting expenses for projects and enhanced monitoring. Additionally, there was a $505,000 increase in point of sale expenses which is attributed to increased CCBX activity.
Provision for Income Taxes
The provision for income taxes was $3.0 million for the three months ended March 31, 2023, $2.4 million for the three months ended December 31, 2022 and $1.7 million for the first quarter of 2023. The provision for income taxes was higher for the three months ended March 31, 2023 due to fewer favorable tax deductions related to the exercise of equity awards compared to December 31, 2022. The Company is subject to various state taxes that are assessed as CCBX activities and employees expand into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods. The Company uses a federal statutory tax rate of 21.0% as a basis for calculating provision for federal income taxes and 2.62% for calculating the provision for state taxes. The effective tax rate was lower for the three months ended March 31, 2023 due to tax benefits that resulted from the exercise and deductibility of equity awards.
Financial Condition Overview
Total assets increased $306.6 million, or 9.7%, to $3.45 billion at March 31, 2023 compared to $3.14 billion at December 31, 2022. The increase is primarily due to loans receivable increasing $209.9 million during the quarter ended March 31, 2023 coupled with a $46.8 million increase in interest earning deposits with other banks. Additionally, there were $27.3 million in loans held for sale at March 31, 2023, compared to zero at December 31, 2022.
Total assets increased $617.3 million, or 21.8%, at March 31, 2023, compared to $2.83 billion at March 31, 2022. The increase is primarily due to loans receivable increasing $873.0 million, and a decrease of $34.5 million in investment securities and a $293.2 million decrease in interest earning deposits with other banks, resulting from increased loan demand and funds being shifted from interest earning deposits with other banks to loans, compared to March 31, 2022.
Loans Receivable
Total loans receivable increased $209.9 million to $2.84 billion at March 31, 2023, from $2.63 billion at December 31, 2022, and increased $873.0 million from $1.96 billion at March 31, 2022. The increase in loans receivable over the quarter ended December 31, 2022 was the result of $153.7 million in CCBX loan growth and $56.3 million in community bank loan growth. Community bank loan growth is net of $908,000 in PPP loan forgiveness/repayments compared to the quarter ended December 31, 2022. The change in loans receivable over the quarter ended March 31, 2022 includes CCBX loan growth of $650.8 million and $222.2 million in community bank loan growth as of March 31, 2023. Community bank loan growth is net of $43.7 million in PPP loan forgiveness and paydowns since March 31, 2022.
The following table summarizes the loan portfolio at the period indicated:
| As of March 31, 2023 | December 31, 2022 | As of March 31, 2022 | ||||||||||||||||||
| (dollars in thousands; unaudited) | Amount | Percent | Amount | Percent | Amount | Percent | ||||||||||||||
| Commercial and industrial loans: | ||||||||||||||||||||
| PPP loans | $ | 3,791 | 0.1 | % | $ | 4,699 | 0.2 | % | $ | 47,467 | 2.4 | % | ||||||||
| Capital call lines | 118,796 | 4.2 | 146,029 | 5.5 | 218,675 | 11.1 | ||||||||||||||
| All other commercial & industrial loans | 203,751 | 7.2 | 161,900 | 6.1 | 128,181 | 6.5 | ||||||||||||||
| Total commercial and industrial loans: | 326,338 | 11.5 | 312,628 | 11.8 | 394,323 | 20.0 | ||||||||||||||
| Real estate loans: | ||||||||||||||||||||
| Construction, land and land development | 206,635 | 7.3 | 214,055 | 8.1 | 208,108 | 10.6 | ||||||||||||||
| Residential real estate | 455,507 | 16.0 | 449,157 | 17.1 | 268,716 | 13.6 | ||||||||||||||
| Commercial real estate | 1,102,771 | 38.8 | 1,048,752 | 39.8 | 889,483 | 45.1 | ||||||||||||||
| Consumer and other loans | 752,528 | 26.4 | 608,771 | 23.2 | 210,343 | 10.7 | ||||||||||||||
| Gross loans receivable | 2,843,779 | 100.0 | % | 2,633,363 | 100.0 | % | 1,970,973 | 100.0 | % | |||||||||||
| Net deferred origination fees - PPP loans | (63 | ) | (82 | ) | (1,365 | ) | ||||||||||||||
| Net deferred origination fees - all other loans | (6,512 | ) | (6,025 | ) | (5,399 | ) | ||||||||||||||
| Loans receivable | $ | 2,837,204 | $ | 2,627,256 | $ | 1,964,209 | ||||||||||||||
| Loan Yield (1) | 9.95 | % | 9.33 | % | 6.80 | % | ||||||||||||||
(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.
Please see Appendix A for additional loan portfolio detail regarding industry concentrations.
The following tables detail the community bank and CCBX loans which are included in the total loan portfolio table above.
| Community Bank | As of | ||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||||||||||||||||
| (dollars in thousands; unaudited) | Balance | % to Total | Balance | % to Total | Balance | % to Total | |||||||||||||||
| Commercial and industrial loans: | |||||||||||||||||||||
| PPP loans | $ | 3,791 | 0.2 | % | $ | 4,699 | 0.3 | % | $ | 47,467 | 3.3 | % | |||||||||
| All other commercial & industrial loans | 155,082 | 9.3 | 146,982 | 9.1 | 124,160 | 8.5 | |||||||||||||||
| Real estate loans: | |||||||||||||||||||||
| Construction, land and land development loans | 206,635 | 12.3 | 214,055 | 13.2 | 208,108 | 14.3 | |||||||||||||||
| Residential real estate loans | 206,140 | 12.3 | 204,581 | 12.6 | 184,485 | 12.7 | |||||||||||||||
| Commercial real estate loans | 1,102,771 | 65.7 | 1,048,752 | 64.7 | 889,483 | 61.1 | |||||||||||||||
| Consumer and other loans: | |||||||||||||||||||||
| Other consumer and other loans | 2,860 | 0.2 | 1,725 | 0.1 | 1,959 | 0.1 | |||||||||||||||
| Gross Community Bank loans receivable | 1,677,279 | 100.0 | % | 1,620,794 | 100.0 | % | 1,455,662 | 100.0 | % | ||||||||||||
| Net deferred origination fees | (6,265 | ) | (6,042 | ) | (6,842 | ) | |||||||||||||||
| Loans receivable | $ | 1,671,014 | $ | 1,614,752 | $ | 1,448,820 | |||||||||||||||
| Loan Yield(1) | 5.97 | % | 5.70 | % | 5.16 | % | |||||||||||||||
(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.
| CCBX | As of | ||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||||||||||||||||
| (dollars in thousands; unaudited) | Balance | % to Total | Balance | % to Total | Balance | % to Total | |||||||||||||||
| Commercial and industrial loans: | |||||||||||||||||||||
| Capital call lines | $ | 118,796 | 10.2 | % | $ | 146,029 | 14.4 | % | $ | 218,675 | 42.5 | % | |||||||||
| All other commercial & industrial loans | 48,669 | 4.1 | 14,918 | 1.5 | 4,021 | 0.8 | |||||||||||||||
| Real estate loans: | |||||||||||||||||||||
| Residential real estate loans | 249,367 | 21.4 | 244,576 | 24.2 | 84,231 | 16.3 | |||||||||||||||
| Consumer and other loans: | |||||||||||||||||||||
| Credit cards | 318,187 | 27.3 | 279,644 | 27.6 | 55,090 | 10.7 | |||||||||||||||
| Other consumer and other loans | 431,481 | 37.0 | 327,402 | 32.3 | 153,294 | 29.7 | |||||||||||||||
| Gross CCBX loans receivable | 1,166,500 | 100.0 | % | 1,012,569 | 100.0 | % | 515,311 | 100.0 | % | ||||||||||||
| Net deferred origination fees | (310 | ) | (65 | ) | 78 | ||||||||||||||||
| Loans receivable | $ | 1,166,190 | $ | 1,012,504 | $ | 515,389 | |||||||||||||||
| Loan Yield - CCBX (1)(2) | 16.09 | % | 15.20 | % | 12.73 | % | |||||||||||||||
(1) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. See reconciliation of the non-GAAP measures at the end of this earnings release for the impact of BaaS loan expense on CCBX loan yield.
(2) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.
Deposits
Total deposits increased $277.7 million, or 9.9%, to $3.10 billion at March 31, 2023 from $2.82 billion at December 31, 2022. The increase was due to a $381.6 million increase in core deposits, combined with a $2.4 million decrease in time deposits and includes BaaS-brokered deposits that are now classified as NOW accounts due to a change in the relationship agreement with one of our partners; these deposits increased to $275.4 million as of March 31, 2023 compared to $101.5 million as of December 31, 2022. Deposits in our CCBX segment increased $284.5 million, from $1.28 billion at December 31, 2022, to $1.56 billion at March 31, 2023 and community bank deposits decreased $6.8 million to $1.53 billion at March 31, 2023. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts. During the quarter ended March 31, 2023, noninterest bearing deposits decreased $13.2 million, or 1.7%, to $761.8 million from $775.0 million at December 31, 2022. In the quarter ended March 31, 2023 compared to the quarter ended December 31, 2022, NOW and money market accounts increased $402.7 million, savings deposits decreased $7.9 million, and time deposits decreased $2.4 million. Included in total deposits is $94.3 million in IntraFi network NOW and money market sweep accounts as of March 31, 2023, which provides our customers with fully insured deposits through a sweep to other banks. Uninsured deposits decreased to $768.3 million as of March 31, 2023, compared to $835.8 million as of December 31, 2022.
Total deposits increased $518.8 million, or 20.1%, to $3.10 billion at March 31, 2023 compared to $2.58 billion at March 31, 2022. The increase is largely the result of growth in CCBX deposits. Noninterest bearing deposits decreased $76.2 million, or 9.1%, to $761.8 million at March 31, 2023 from $838.0 million at March 31, 2022. NOW and money market accounts increased $690.6 million, or 45.5%, to $2.21 billion at March 31, 2023, and savings accounts decreased $7.1 million, or 6.7%, and time deposits decreased $13.3 million, or 33.0%, in the first quarter of 2023 compared to the first quarter of 2022 and includes BaaS-brokered deposits that are now classified as NOW accounts due to a change in the relationship agreement with one of our partners; these deposits increased to $275.4 million as of March 31, 2023, compared to $75.1 million as of March 31, 2022. These deposits increased as a result of sweeping them back on the balance sheet. Additionally, as of March 31, 2023 we have access to $36.9 million in CCBX customer deposits that are currently being transferred off the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. If a portion of these deposits are retained, they would be classified as NOW accounts. Efforts to retain and grow core deposits are evidenced by the high ratios in these categories when compared to total deposits.
The following table summarizes the deposit portfolio for the periods indicated.
| As of March 31, 2023 | As of December 31, 2022 | As of March 31, 2022 | ||||||||||||||||||
| (dollars in thousands; unaudited) | Amount | Percent of Total Deposits | Balance | Percent of Total Deposits | Balance | Percent of Total Deposits | ||||||||||||||
| Demand, noninterest bearing | $ | 761,800 | 24.6 | % | $ | 775,012 | 27.5 | % | $ | 838,044 | 32.5 | % | ||||||||
| NOW and money market | 2,207,121 | 71.3 | 1,804,399 | 64.0 | 1,516,546 | 58.9 | ||||||||||||||
| Savings | 99,241 | 3.2 | 107,117 | 3.8 | 106,364 | 4.1 | ||||||||||||||
| Total core deposits | 3,068,162 | 99.1 | 2,686,528 | 95.3 | 2,460,954 | 95.5 | ||||||||||||||
| Brokered deposits | 1 | — | 101,546 | 3.6 | 75,145 | 2.9 | ||||||||||||||
| Time deposits less than $100,000 | 11,343 | 0.4 | 12,596 | 0.5 | 14,856 | 0.6 | ||||||||||||||
| Time deposits $100,000 and over | 15,717 | 0.5 | 16,851 | 0.6 | 25,515 | 1.0 | ||||||||||||||
| Total | $ | 3,095,223 | 100.0 | % | $ | 2,817,521 | 100.0 | % | $ | 2,576,470 | 100.0 | % | ||||||||
| Cost of deposits (1) | 2.13 | % | 1.56 | % | 0.09 | % | ||||||||||||||
(1) Cost of deposits is annualized for the three months ended for each period presented.
The following tables detail the community bank and CCBX deposits which are included in the total deposit portfolio table above.
| Community Bank | As of | ||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||||||||||||||||
| (dollars in thousands; unaudited) | Balance | % to Total | Balance | % to Total | Balance | % to Total | |||||||||||||||
| Demand, noninterest bearing | $ | 664,452 | 43.4 | % | $ | 694,179 | 45.2 | % | $ | 724,723 | 43.2 | % | |||||||||
| NOW and money market | 743,548 | 48.6 | 709,490 | 46.1 | 805,858 | 48.1 | |||||||||||||||
| Savings | 96,330 | 6.3 | 105,101 | 6.8 | 106,050 | 6.3 | |||||||||||||||
| Total core deposits | 1,504,330 | 98.3 | 1,508,770 | 98.1 | 1,636,631 | 97.6 | |||||||||||||||
| Brokered deposits | 1 | 0.0 | 1 | 0.0 | 2 | 0.0 | |||||||||||||||
| Time deposits less than $100,000 | 11,343 | 0.7 | 12,596 | 0.8 | 14,856 | 0.9 | |||||||||||||||
| Time deposits $100,000 and over | 15,717 | 1.0 | 16,851 | 1.1 | 25,515 | 1.5 | |||||||||||||||
| Total Community Bank deposits | $ | 1,531,391 | 100.0 | % | $ | 1,538,218 | 100.0 | % | $ | 1,677,004 | 100.0 | % | |||||||||
| Cost of deposits(1) | 0.66 | % | 0.37 | % | 0.11 | % | |||||||||||||||
(1) Cost of deposits is annualized for the three months ended for each period presented.
| CCBX | As of | ||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||||||||||||||||
| (dollars in thousands; unaudited) | Balance | % to Total | Balance | % to Total | Balance | % to Total | |||||||||||||||
| Demand, noninterest bearing | $ | 97,348 | 6.2 | % | $ | 80,833 | 6.3 | % | $ | 113,321 | 12.6 | % | |||||||||
| NOW and money market | 1,463,573 | 93.6 | 1,094,909 | 85.6 | 710,688 | 79.0 | |||||||||||||||
| Savings | 2,911 | 0.2 | 2,016 | 0.2 | 314 | — | |||||||||||||||
| Total core deposits | 1,563,832 | 100.0 | 1,177,758 | 92.1 | 824,323 | 91.6 | |||||||||||||||
| BaaS-brokered deposits | — | — | 101,545 | 7.9 | 75,143 | 8.4 | |||||||||||||||
| Total CCBX deposits | $ | 1,563,832 | 100.0 | % | $ | 1,279,303 | 100.0 | % | $ | 899,466 | 100.0 | % | |||||||||
| Cost of deposits (1) | 3.89 | % | 3.13 | % | 0.06 | % | |||||||||||||||
(1) Cost of deposits is annualized for the three months ended for each period presented.
Borrowings
As of March 31, 2023 the Company has the capacity to borrow up to a total of $575.1 million from the Federal Reserve Bank discount window and Federal Home Loan Bank, with no borrowings outstanding as of March 31, 2023.
Shareholders’ Equity
During the three months ended March 31, 2023, the Company contributed $15.0 million in capital to the Bank. The Company had a cash balance of $7.7 million as of March 31, 2023, which is retained for general operating purposes, including debt repayment, and for funding $820,000 in commitments to bank technology funds.
Total shareholders’ equity increased $15.3 million since December 31, 2022. The increase in shareholders’ equity was primarily due to $12.4 million in net earnings, $954,000 net credit adjustment to retained earnings from implementing CECL on January 1, 2023 and $567,000 increase from stock options being exercised during the three months ended March 31, 2023.
Capital Ratios
The Company and the Bank remained well capitalized at March 31, 2023, as summarized in the following table.
| (unaudited) | Coastal Community Bank | Coastal Financial Corporation | Minimum Well Capitalized Ratios under Prompt Corrective Action (1) | ||||||
| Tier 1 leverage capital | 9.35 | % | 8.29 | % | 5.00 | % | |||
| Common Equity Tier 1 risk-based capital | 9.76 | % | 8.61 | % | 6.50 | % | |||
| Tier 1 risk-based capital | 9.76 | % | 8.73 | % | 8.00 | % | |||
| Total risk-based capital | 11.03 | % | 11.49 | % | 10.00 | % | |||
(1) Presents the minimum capital ratios for an insured depository institution, such as the Bank, to be considered well capitalized under the Prompt Corrective Action framework. The minimum requirements for the Company to be considered well capitalized under Regulation Y include to maintain, on a consolidated basis, a total risk-based capital ratio of 10.0 percent or greater and a tier 1 risk-based capital ratio of 6.0 percent or greater.
Asset Quality
Effective January 1, 2023 the Company implemented the CECL allowance model which calculates reserves over the life of the loan and is largely driven by portfolio characteristics, economic outlook, and other key methodology assumptions versus the incurred loss model, which is what we were previously using. As a result of implementing CECL, there was a one-time adjustment to the 2023 opening allowance balance of $3.9 million. The day 1 CECL adjustment for community bank loans included a reduction of $310,000 to the community bank allowance driven by the reversal of the unallocated balance and a reduction of $340,000 related to the community bank unfunded commitment reserve also driven by the reversal of the unallocated balance. This was offset by an increase to the CCBX allowance for $4.2 million. With the mirror image approach accounting related to the contingent receivable for CCBX partner loans, there was a CECL day 1 increase to the indemnification asset in the amount of $4.5 million. Net, the day 1 impact to retained earnings for the Bank’s transition to CECL was an increase of $954,000, excluding the impact of income taxes.
The total allowance for credit losses was $89.1 million and 3.14% of loans receivable at March 31, 2023 compared to $74.0 million and 2.82% at December 31, 2022 and $38.8 million and 1.97% at March 31, 2022. The allowance for credit loss allocated to the CCBX portfolio was $68.4 million and 5.87% of CCBX loans receivable at March 31, 2023, with $20.7 million of allowance for credit loss allocated to the community bank or 1.24% of total community bank loans receivable.
The following table details the allocation of the allowance for credit loss as of the period indicated:
| As of March 31, 2023 | As of December 31, 2022 | As of March 31, 2022 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands; unaudited) | Community Bank | CCBX | Total | Community Bank | CCBX | Total | Community Bank | CCBX | Total | |||||||||||||||||||||||||||
| Loans receivable | $ | 1,671,014 | $ | 1,166,190 | $ | 2,837,204 | $ | 1,614,751 | $ | 1,012,505 | $ | 2,627,256 | $ | 1,448,820 | $ | 515,389 | $ | 1,964,209 | ||||||||||||||||||
| Allowance for credit losses | (20,708 | ) | (68,415 | ) | (89,123 | ) | (20,636 | ) | (53,393 | ) | (74,029 | ) | (20,643 | ) | (18,127 | ) | (38,770 | ) | ||||||||||||||||||
| Allowance for credit losses to total loan receivable | 1.24 | % | 5.87 | % | 3.14 | % | 1.28 | % | 5.27 | % | 2.82 | % | 1.42 | % | 3.52 | % | 1.97 | % | ||||||||||||||||||
Provision for credit losses - loans totaled $43.5 million for the three months ended March 31, 2023, $33.6 million for the three months ended December 31, 2022, and $12.9 million for the three months ended March 31, 2022. Net charge-offs totaled $32.3 million for the quarter ended March 31, 2023, compared to $18.9 million for the quarter ended December 31, 2022 and $2.8 million for the quarter ended March 31, 2022. Net charge-offs increased due to CCBX partner loans and the reclassification and charge-off of negative deposit accounts. CCBX partner agreements provide for a credit enhancement that covers the net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company is responsible for credit losses on approximately 10% of a $137.4 million loan portfolio. At March 31, 2023, our 10% of this portfolio represented $13.9 million in loans.
The following table details net charge-offs for the core bank and CCBX for the period indicated:
| Three Months Ended | ||||||||||||||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | ||||||||||||||||||||||||||||||||||
| (dollars in thousands; unaudited) | Community Bank | CCBX | Total | Community Bank | CCBX | Total | Community Bank | CCBX | Total | |||||||||||||||||||||||||||
| Gross charge-offs | $ | 50 | $ | 34,117 | $ | 34,167 | $ | 10 | $ | 18,876 | $ | 18,886 | $ | 4 | $ | 2,804 | $ | 2,808 | ||||||||||||||||||
| Gross recoveries | (5 | ) | (1,860 | ) | (1,865 | ) | (3 | ) | (30 | ) | (33 | ) | (4 | ) | — | (4 | ) | |||||||||||||||||||
| Net charge-offs | $ | 45 | $ | 32,257 | $ | 32,302 | $ | 7 | $ | 18,846 | $ | 18,853 | $ | — | $ | 2,804 | $ | 2,804 | ||||||||||||||||||
| Net charge-offs to average loans (1) | 0.01 | % | 12.29 | % | 4.84 | % | 0.00 | % | 7.52 | % | 2.87 | % | 0.00 | % | 2.98 | % | 0.64 | % | ||||||||||||||||||
The increase in the Company’s provision for credit losses - loans during the quarter ended March 31, 2023, is largely related to the provision for loan growth in CCBX partner loans. During the quarter ended March 31, 2023, a $43.1 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis, compared to the $33.1 million provision for credit losses - loans that was recorded for CCBX for the quarter ended December 31, 2022. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and reclassified negative deposit accounts. When the provision for CCBX credit losses and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). Expected losses are recorded in the allowance for credit losses. The credit enhancement asset is relieved when credit enhancement recoveries are received from the CCBX partner. CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by absorbing incurred credit and fraud losses. If our partner is unable to fulfill their contracted obligations then the bank could be exposed to additional credit losses. Management regularly evaluates and manages this counterparty risk. The Company is responsible for credit losses on approximately 10% of a $137.4 million CCBX loan portfolio. At March 31, 2023, 10% of this portfolio represented $13.9 million in loans. The factors used in management’s analysis for community bank credit losses indicated that a provision of $428,000 and $504,000 was needed for the quarters ended March 31, 2023 and December 31, 2022, respectively.
The following table details the provision expense for the community bank and CCBX for the period indicated:
| Three Months Ended | |||||||||
| (dollars in thousands; unaudited) | March 31, 2023 | December 31, 2022 | March 31, 2022 | ||||||
| Community bank | $ | 428 | $ | 504 | $ | 344 | |||
| CCBX | 43,116 | 33,096 | 12,598 | ||||||
| Total provision expense | $ | 43,544 | $ | 33,600 | $ | 12,942 | |||
At March 31, 2023, our nonperforming assets were $31.5 million, or 0.91% of total assets, compared to $33.2 million, or 1.06%, of total assets, at December 31, 2022, and $2.3 million, or 0.08% of total assets, at March 31, 2022. These ratios are impacted by CCBX loans over 90 days delinquent that are covered by CCBX partner credit enhancements. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. Under the agreement, the CCBX partner will reimburse the Bank for its loss/charge-off on these loans. Nonperforming assets decreased $1.6 million during the quarter ended March 31, 2023, compared to the quarter ended December 31, 2022, due to $1.5 million less in CCBX loans that are past due 90 days or more and still accruing combined with $98,000 less in community bank nonaccrual loans. As a result of the type of loans (primarily consumer loans) originated through our CCBX partners we anticipate that balances 90 days past due or more and still accruing will increase as those loans grow. Installment/closed-end and revolving/open-end consumer loans originated through CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively and are reported as substandard, 90 days or more days past due and still accruing. Community bank nonaccrual loans decreased as a result of nonaccrual principal reductions/charge-offs. There were no repossessed assets or other real estate owned at March 31, 2023. Our nonperforming loans to loans receivable ratio was 1.11% at March 31, 2023, compared to 1.26% at December 31, 2022, and 0.12% at March 31, 2022.
For the quarter ended March 31, 2023, there were $45,000 of community bank net charge-offs and $7.0 million of nonperforming community bank loans. The $6.9 million nonaccrual balance in commercial real estate loans shown below consists of one loan that is well secured with an original loan to value of 62%, and an updated loan to value of 75% as of January 2023. Management anticipates this loan being resolved in the first half of 2023. For the quarter ended March 31, 2023, $32.3 million in net charge-offs were recorded on CCBX loans. These loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. The Company is responsible for credit losses on approximately 10% of a $137.4 million loan portfolio. At March 31, 2023, 10% of this portfolio represented $13.9 million in loans.
The following table details the Company’s nonperforming assets for the periods indicated.
| (dollars in thousands; unaudited) | As of March 31, 2023 | As of December 31, 2022 | As of March 31, 2022 | ||||||||
| Nonaccrual loans: | |||||||||||
| Commercial and industrial loans | $ | 15 | $ | 113 | $ | 130 | |||||
| Real estate loans: | |||||||||||
| Construction, land and land development | 66 | 66 | — | ||||||||
| Residential real estate | — | — | 54 | ||||||||
| Commercial real estate | 6,901 | 6,901 | — | ||||||||
| Total nonaccrual loans | 6,982 | 7,080 | 184 | ||||||||
| Accruing loans past due 90 days or more: | |||||||||||
| Commercial & industrial loans | 187 | 404 | 22 | ||||||||
| Real estate loans: | |||||||||||
| Residential real estate loans | 946 | 876 | 40 | ||||||||
| Consumer and other loans: | |||||||||||
| Credit cards | 17,772 | 10,570 | 708 | ||||||||
| Other consumer and other loans | 5,657 | 14,245 | 1,391 | ||||||||
| Total accruing loans past due 90 days or more | 24,562 | 26,095 | 2,161 | ||||||||
| Total nonperforming loans | 31,544 | 33,175 | 2,345 | ||||||||
| Real estate owned | — | — | — | ||||||||
| Repossessed assets | — | — | — | ||||||||
| Modified loans for borrowers experiencing financial difficulty, accruing | — | — | — | ||||||||
| Total nonperforming assets | $ | 31,544 | $ | 33,175 | $ | 2,345 | |||||
| Total nonaccrual loans to loans receivable | 0.25 | % | 0.27 | % | 0.01 | % | |||||
| Total nonperforming loans to loans receivable | 1.11 | % | 1.26 | % | 0.12 | % | |||||
| Total nonperforming assets to total assets | 0.91 | % | 1.06 | % | 0.08 | % | |||||
The following tables detail the community bank and CCBX nonperforming assets which are included in the total nonperforming assets table above.
| Community Bank | As of | |||||||
| (dollars in thousands; unaudited) | March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||
| Nonaccrual loans: | ||||||||
| Commercial and industrial loans | $ | 15 | $ | 113 | $ | 130 | ||
| Real estate: | ||||||||
| Construction, land and land development | 66 | 66 | — | |||||
| Residential real estate | — | — | 54 | |||||
| Commercial real estate | 6,901 | 6,901 | — | |||||
| Total nonaccrual loans | 6,982 | 7,080 | 184 | |||||
| Accruing loans past due 90 days or more: | ||||||||
| Total accruing loans past due 90 days or more | — | — | — | |||||
| Total nonperforming loans | 6,982 | 7,080 | 184 | |||||
| Other real estate owned | — | — | — | |||||
| Repossessed assets | — | — | — | |||||
| Total nonperforming assets | $ | 6,982 | $ | 7,080 | $ | 184 | ||
| CCBX | As of | |||||||
| (dollars in thousands; unaudited) | March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||
| Nonaccrual loans | $ | — | $ | — | $ | — | ||
| Accruing loans past due 90 days or more: | ||||||||
| Commercial & industrial loans | 187 | 404 | 22 | |||||
| Real estate loans: | ||||||||
| Residential real estate loans | 946 | 876 | 40 | |||||
| Consumer and other loans: | ||||||||
| Credit cards | 17,772 | 10,570 | 708 | |||||
| Other consumer and other loans | 5,657 | 14,245 | 1,391 | |||||
| Total accruing loans past due 90 days or more | 24,562 | 26,095 | 2,161 | |||||
| Total nonperforming loans | 24,562 | 26,095 | 2,161 | |||||
| Other real estate owned | — | — | — | |||||
| Repossessed assets | — | — | — | |||||
| Total nonperforming assets | $ | 24,562 | $ | 26,095 | $ | 2,161 | ||
About Coastal Financial
Coastal Financial Corporation (Nasdaq: CCB) (the “Company”), is an Everett, Washington based bank holding company whose wholly owned subsidiaries are Coastal Community Bank (“Bank”) and Arlington Olympic LLC. The $3.45 billion Bank provides service through 14 branches in Snohomish, Island, and King Counties, the Internet and its mobile banking application. The Bank provides banking as a service to broker-dealers, digital financial service providers, companies and brands that want to provide financial services to their customers through the Bank’s CCBX segment. To learn more about the Company visit www.coastalbank.com.
CCB-ER
Contact
Eric Sprink, Chief Executive Officer, (425) 357-3659
Joel Edwards, Executive Vice President & Chief Financial Officer, (425) 357-3687
Forward-Looking Statements
This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our management’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Any or all of the forward-looking statements in this earnings release may turn out to be inaccurate. The inclusion of or reference to forward-looking information in this earnings release should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, the risks and uncertainties discussed under “Risk Factors” in our Annual Report on Form 10-K for the most recent period filed, our Quarterly Report on Form 10-Q for the most recent quarter, and in any of our subsequent filings with the Securities and Exchange Commission.
If one or more events related to these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may differ materially from what we anticipate. You are cautioned not to place undue reliance on forward-looking statements. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as required by law.
| COASTAL FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (Dollars in thousands; unaudited) | |||||||||||
| ASSETS | |||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||||||
| Cash and due from banks | $ | 37,676 | $ | 32,722 | $ | 32,705 | |||||
| Interest earning deposits with other banks | 356,240 | 309,417 | 649,404 | ||||||||
| Investment securities, available for sale, at fair value | 97,999 | 97,317 | 134,891 | ||||||||
| Investment securities, held to maturity, at amortized cost | 3,705 | 1,036 | 1,286 | ||||||||
| Other investments | 11,346 | 10,555 | 9,931 | ||||||||
| Loans held for sale | 27,292 | — | — | ||||||||
| Loans receivable | 2,837,204 | 2,627,256 | 1,964,209 | ||||||||
| Allowance for credit losses | (89,123 | ) | (74,029 | ) | (38,770 | ) | |||||
| Total loans receivable, net | 2,748,081 | 2,553,227 | 1,925,439 | ||||||||
| CCBX credit enhancement asset | 76,395 | 53,377 | 20,283 | ||||||||
| CCBX receivable | 13,681 | 10,416 | 4,875 | ||||||||
| Premises and equipment, net | 18,030 | 18,213 | 18,135 | ||||||||
| Operating lease right-of-use assets | 4,812 | 5,018 | 5,836 | ||||||||
| Accrued interest receivable | 19,321 | 17,815 | 8,824 | ||||||||
| Bank-owned life insurance, net | 12,761 | 12,667 | 12,342 | ||||||||
| Deferred tax asset, net | 20,527 | 18,458 | 6,892 | ||||||||
| Other assets | 3,167 | 4,229 | 2,907 | ||||||||
| Total assets | $ | 3,451,033 | $ | 3,144,467 | $ | 2,833,750 | |||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | |||||||||||
| LIABILITIES | |||||||||||
| Deposits | $ | 3,095,223 | $ | 2,817,521 | $ | 2,576,470 | |||||
| Subordinated debt, net | 44,031 | 43,999 | 24,306 | ||||||||
| Junior subordinated debentures, net | 3,588 | 3,588 | 3,587 | ||||||||
| Deferred compensation | 582 | 616 | 712 | ||||||||
| Accrued interest payable | 874 | 684 | 149 | ||||||||
| Operating lease liabilities | 5,022 | 5,234 | 6,054 | ||||||||
| CCBX payable | 30,794 | 20,419 | 5,284 | ||||||||
| Other liabilities | 12,156 | 8,912 | 9,268 | ||||||||
| Total liabilities | 3,192,270 | 2,900,973 | 2,625,830 | ||||||||
| SHAREHOLDERS’ EQUITY | |||||||||||
| Common stock | 127,447 | 125,830 | 122,592 | ||||||||
| Retained earnings | 133,123 | 119,998 | 85,603 | ||||||||
| Accumulated other comprehensive (loss) income, net of tax | (1,807 | ) | (2,334 | ) | (275 | ) | |||||
| Total shareholders’ equity | 258,763 | 243,494 | 207,920 | ||||||||
| Total liabilities and shareholders’ equity | $ | 3,451,033 | $ | 3,144,467 | $ | 2,833,750 | |||||
| COASTAL FINANCIAL CORPORATION CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Dollars in thousands, except per share amounts; unaudited) | |||||||||
| Three Months Ended | |||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||||
| INTEREST AND DIVIDEND INCOME | |||||||||
| Interest and fees on loans | $ | 66,431 | $ | 61,226 | $ | 29,632 | |||
| Interest on interest earning deposits with other banks | 3,097 | 3,097 | 402 | ||||||
| Interest on investment securities | 553 | 557 | 71 | ||||||
| Dividends on other investments | 30 | 150 | 37 | ||||||
| Total interest income | 70,111 | 65,030 | 30,142 | ||||||
| INTEREST EXPENSE | |||||||||
| Interest on deposits | 14,958 | 11,061 | 553 | ||||||
| Interest on borrowed funds | 662 | 537 | 321 | ||||||
| Total interest expense | 15,620 | 11,598 | 874 | ||||||
| Net interest income | 54,491 | 53,432 | 29,268 | ||||||
| PROVISION FOR CREDIT LOSSES - LOANS | 43,544 | 33,600 | 12,942 | ||||||
| PROVISION FOR UNFUNDED COMMITMENTS | 153 | — | — | ||||||
| Net interest income after provision for credit losses - loans and unfunded commitments | 10,794 | 19,832 | 16,326 | ||||||
| NONINTEREST INCOME | |||||||||
| Deposit service charges and fees | 910 | 946 | 884 | ||||||
| Loan referral fees | — | — | 602 | ||||||
| Gain on sales of loans, net | 123 | — | — | ||||||
| Mortgage broker fees | 19 | 25 | 123 | ||||||
| Unrealized (loss) gain on equity securities, net | 39 | (18 | ) | — | |||||
| Other income | 280 | 273 | 265 | ||||||
| Noninterest income, excluding BaaS program income and BaaS indemnification income | 1,371 | 1,226 | 1,874 | ||||||
| Servicing and other BaaS fees | 948 | 1,001 | 1,169 | ||||||
| Transaction fees | 917 | 964 | 493 | ||||||
| Interchange fees | 789 | 785 | 432 | ||||||
| Reimbursement of expenses | 921 | 857 | 372 | ||||||
| BaaS program income | 3,575 | 3,607 | 2,466 | ||||||
| BaaS credit enhancements | 42,362 | 31,164 | 13,075 | ||||||
| BaaS fraud enhancements | 1,999 | 6,818 | 4,571 | ||||||
| BaaS indemnification income | 44,361 | 37,982 | 17,646 | ||||||
| Total noninterest income | 49,307 | 42,815 | 21,986 | ||||||
| NONINTEREST EXPENSE | |||||||||
| Salaries and employee benefits | 15,575 | 14,399 | 11,085 | ||||||
| Occupancy | 1,219 | 1,182 | 1,136 | ||||||
| Data processing and software licenses | 1,840 | 1,768 | 1,861 | ||||||
| Legal and professional expenses | 3,062 | 2,799 | 708 | ||||||
| Point of sale expense | 753 | 710 | 248 | ||||||
| Excise taxes | 455 | 702 | 349 | ||||||
| Federal Deposit Insurance Corporation ("FDIC") assessments | 595 | 550 | 604 | ||||||
| Director and staff expenses | 626 | 515 | 344 | ||||||
| Marketing | 95 | 109 | 99 | ||||||
| Other expense | 890 | 335 | 1,120 | ||||||
| Noninterest expense, excluding BaaS loan and BaaS fraud expense | 25,110 | 23,069 | 17,554 | ||||||
| BaaS loan expense | 17,554 | 17,215 | 8,290 | ||||||
| BaaS fraud expense | 1,999 | 6,819 | 4,571 | ||||||
| BaaS loan and fraud expense | 19,553 | 24,034 | 12,861 | ||||||
| Total noninterest expense | 44,663 | 47,103 | 30,415 | ||||||
| Income before provision for income taxes | 15,438 | 15,544 | 7,897 | ||||||
| PROVISION FOR INCOME TAXES | 3,047 | 2,426 | 1,667 | ||||||
| NET INCOME | $ | 12,391 | $ | 13,118 | $ | 6,230 | |||
| Basic earnings per common share | $ | 0.94 | $ | 1.01 | $ | 0.48 | |||
| Diluted earnings per common share | $ | 0.91 | $ | 0.96 | $ | 0.46 | |||
| Weighted average number of common shares outstanding: | |||||||||
| Basic | 13,196,960 | 13,030,726 | 12,898,746 | ||||||
| Diluted | 13,609,491 | 13,603,978 | 13,475,337 | ||||||
| COASTAL FINANCIAL CORPORATION AVERAGE BALANCES, YIELDS, AND RATES – QUARTERLY (Dollars in thousands; unaudited) | |||||||||||||||||||||||||||||
| For the Three Months Ended | |||||||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | |||||||||||||||||||||||||||
| Average Balance | Interest & Dividends | Yield / Cost (1) | Average Balance | Interest & Dividends | Yield / Cost (1) | Average Balance | Interest & Dividends | Yield / Cost (1) | |||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||
| Interest earning assets: | |||||||||||||||||||||||||||||
| Interest earning deposits with other banks | $ | 271,700 | $ | 3,097 | 4.62 | % | $ | 329,354 | $ | 3,097 | 3.73 | % | $ | 843,931 | $ | 402 | 0.19 | % | |||||||||||
| Investment securities, available for sale (2) | 100,273 | 535 | 2.16 | 100,269 | 550 | 2.18 | 44,470 | 61 | 0.56 | ||||||||||||||||||||
| Investment securities, held to maturity (2) | 1,955 | 18 | 3.73 | 1,235 | 7 | 2.25 | 1,292 | 10 | 3.14 | ||||||||||||||||||||
| Other investments | 10,633 | 30 | 1.14 | 10,592 | 150 | 5.62 | 9,227 | 37 | 1.63 | ||||||||||||||||||||
| Loans receivable (3) | 2,708,177 | 66,431 | 9.95 | 2,603,962 | 61,226 | 9.33 | 1,768,283 | 29,632 | 6.80 | ||||||||||||||||||||
| Total interest earning assets | 3,092,738 | 70,111 | 9.19 | 3,045,412 | 65,030 | 8.47 | 2,667,203 | 30,142 | 4.58 | ||||||||||||||||||||
| Noninterest earning assets: | |||||||||||||||||||||||||||||
| Allowance for credit losses | (81,086 | ) | (58,440 | ) | (30,668 | ) | |||||||||||||||||||||||
| Other noninterest earning assets | 172,161 | 141,624 | 92,401 | ||||||||||||||||||||||||||
| Total assets | $ | 3,183,813 | $ | 3,128,596 | $ | 2,728,936 | |||||||||||||||||||||||
| Liabilities and Shareholders’ Equity | |||||||||||||||||||||||||||||
| Interest bearing liabilities: | |||||||||||||||||||||||||||||
| Interest bearing deposits | $ | 2,070,217 | $ | 14,958 | 2.93 | % | $ | 2,006,679 | $ | 11,061 | 2.19 | % | $ | 1,131,984 | $ | 553 | 0.20 | % | |||||||||||
| FHLB advances and borrowings | — | — | — | 5 | — | — | 24,443 | 69 | 1.14 | ||||||||||||||||||||
| Subordinated debt | 44,010 | 599 | 5.52 | 37,455 | 484 | 5.13 | 24,295 | 230 | 3.84 | ||||||||||||||||||||
| Junior subordinated debentures | 3,588 | 63 | 7.12 | 3,588 | 53 | 5.86 | 3,586 | 22 | 2.49 | ||||||||||||||||||||
| Total interest bearing liabilities | 2,117,815 | 15,620 | 2.99 | 2,047,727 | 11,598 | 2.25 | 1,184,308 | 874 | 0.30 | ||||||||||||||||||||
| Noninterest bearing deposits | 775,940 | 807,794 | 1,320,144 | ||||||||||||||||||||||||||
| Other liabilities | 37,448 | 34,944 | 16,009 | ||||||||||||||||||||||||||
| Total shareholders’ equity | 252,610 | 238,131 | 208,475 | ||||||||||||||||||||||||||
| Total liabilities and shareholders’ equity | $ | 3,183,813 | $ | 3,128,596 | $ | 2,728,936 | |||||||||||||||||||||||
| Net interest income | $ | 54,491 | $ | 53,432 | $ | 29,268 | |||||||||||||||||||||||
| Interest rate spread | 6.20 | % | 6.22 | % | 4.28 | % | |||||||||||||||||||||||
| Net interest margin (4) | 7.15 | % | 6.96 | % | 4.45 | % | |||||||||||||||||||||||
(1) Yields and costs are annualized.
(2) For presentation in this table, average balances and the corresponding average rates for investment securities are based upon historical cost, adjusted for amortization of premiums and accretion of discounts.
(3) Includes loans held for sale and nonaccrual loans.
(4) Net interest margin represents net interest income divided by the average total interest earning assets.
| COASTAL FINANCIAL CORPORATION SELECTED AVERAGE BALANCES, YIELDS, AND RATES – BY SEGMENT - QUARTERLY (Dollars in thousands; unaudited) | ||||||||||||||||||||||||||
| For the Three Months Ended | ||||||||||||||||||||||||||
| March 31, 2023 | December 31, 2022 | March 31, 2022 | ||||||||||||||||||||||||
| (dollars in thousands, unaudited) | Average Balance | Interest & Dividends | Yield / Cost (1) | Average Balance | Interest & Dividends | Yield / Cost (1) | Average Balance | Interest & Dividends | Yield / Cost (1) | |||||||||||||||||
| Community Bank | ||||||||||||||||||||||||||
| Assets | ||||||||||||||||||||||||||