Coastal Financial Corporation Announces Third Quarter 2023 Results

Third Quarter 2023 Highlights:

• Net income of $10.3 million, or $0.75 per diluted common share, for the three months ended September 30, 2023, compared to $12.9 million, or $0.95 per diluted common share for the three months ended June 30, 2023.
  • Return on average assets ("ROA") of 1.13% for the three months ended September 30, 2023.
  • Return on average equity ("ROE") of 14.60% for the three months ended September 30, 2023.
• Total assets increased $145.0 million, or 4.1%, to $3.68 billion for the quarter ended September 30, 2023, compared to $3.54 billion at June 30, 2023.
• Total loans, net of deferred fees decreased $40.5 million, or 1.3%, to $2.97 billion for the quarter ended September 30, 2023 as management sold loans as part of our strategy to reduce risk, optimize the CCBX loan portfolio and strengthen the balance sheet through enhanced credit standards.
  • Community bank loans increased $71.6 million, or 4.2%, to $1.78 billion.
  • CCBX loans decreased $112.1 million, or 8.7%, to $1.18 billion.
    • $320.9 million in CCBX loans were sold.
• Deposits increased $127.1 million, or 4.0%, to $3.29 billion for the quarter ended September 30, 2023.
  • CCBX deposit growth of $99.1 million, or 6.0%, to $1.75 billion.
    • CCBX deposit growth is net of an additional $51.9 million in CCBX deposits that were transferred off balance sheet for increased FDIC insurance coverage.
  • Community bank deposits increased $28.0 million, or 1.9%, to $1.54 billion.
    • Includes noninterest bearing deposits of $584.0 million or 38.0% of total community bank deposits
    • Community bank cost of deposits was 1.31%.
  • Uninsured deposits of $599.0 million, or 18.2% of total deposits as of September 30, 2023, compared to $632.1 million, or 20.0% of total deposits as of June 30, 2023.
• Liquidity/Borrowings as of September 30, 2023:
  • Capacity to borrow up to $577.9 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 September 30, 2023 :
  • Available for sale ("AFS") investments of $98.9 million, compared to $98.2 million as of June 30, 2023, of which 99.7% are U.S. Treasuries, with a weighted average remaining duration of 5 months as of September 30, 2023.
  • Held to maturity ("HTM") investments of $42.6 million, of which 100% are U.S. Agency mortgage backed securities held for CRA purposes. The carrying value of the HTM investments is $1.7 million more than the fair value, the weighted average remaining life is 18.6 years as of September 30, 2023 and the weighted average yield is 5.00% for the quarter ended September 30, 2023.

EVERETT, Wash., Oct. 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 September 30, 2023. 

Quarterly net income for the third quarter of 2023 was $10.3 million, or $0.75 per diluted common share, compared with net income of $12.9 million, or $0.95 per diluted common share, for the second quarter of 2023, and $11.1 million, or $0.82 per diluted common share, for the quarter ended September 30, 2022. 

Total assets increased $145.0 million, or 4.1%, during the third quarter of 2023 to $3.68 billion, from $3.54 billion at June 30, 2023. Total loans, net of deferred fees decreased $40.5 million, or 1.3%, during the three months ended September 30, 2023 to $2.97 billion, compared to $3.01 billion at June 30, 2023. Community bank loans increased $71.6 million, or 4.2%, and offset a $112.1 million decrease in CCBX loans. We continue to monitor and manage the CCBX loan portfolio, and sold $320.9 million in CCBX loans during the quarter ended September 30, 2023. We intentionally reduced the CCBX other consumer and other loans portfolio in an effort to strengthen our balance sheet. We currently expect to sell additional loans in the coming months as we continue working to optimize our CCBX portfolio through new partners, products and building on our existing relationships. Deposits increased $127.1 million, or 4.0%, during the three months ended September 30, 2023. CCBX deposits grew $99.1 million, or 6.0%. Community bank deposits increased $28.0 million, or 1.9%. Our cost of deposits for the community bank was 1.31% for the three months ended September 30, 2023, compared to 0.98% for the three months ended June 30, 2023.

We saw solid deposit growth in the third quarter, with deposits increasing $127.1 million, or 4.0%, compared to June 30, 2023. Fully insured IntraFi network reciprocal deposits increased $56.1 million to $296.4 million as of September 30, 2023, compared to $240.3 million as of June 30, 2023. These fully insured reciprocal deposits allow our larger deposit customers to fully insure their deposits through a reciprocal agreement with other banks. Loans receivable was deliberately decreased $40.5 million, or 1.3%, during the three months ended September 30, 2023 as part of our plan to optimize and strengthen the balance sheet. 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 September 30, 2023, we had $474.9 million in cash on the balance sheet and the capacity to borrow up to $577.9 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. Cash on the balance sheet and borrowing capacity totaled $1.05 billion, which represented 32.0% of total deposits and exceeded our $599.0 million in uninsured deposits as of September 30, 2023.

"At Coastal we pride ourselves on being proactive in how we serve our customers, manage risk and position the Bank for shareholders. We continue to focus on our BaaS business by concentrating on working with larger partners and optimizing our CCBX loan portfolio so we can grow and advance our presence in the BaaS space. Over the last two years we have deliberately reduced the number of partners that we work with, focusing on larger partners and companies. We are being more intentional in our selection of products and partnerships that best serve our customers and shareholders in order to achieve our long term profitability objective. We only want to work with the best and quite frankly, our expertise and strength has attracted a more established partner set which we are leaning into. During the quarter ended September 30, 2023 we started the process of optimizing our CCBX loan portfolio by selling higher yielding loans that have a greater potential for credit deterioration. As we work to optimize our CCBX loan portfolio through enhanced credit standards, we expect lower earnings in the short term with lower loan yields and compressed margins but we continue to focus on strengthening the portfolio with new loans that we believe will provide for long term stability and profitability. For us to continue to grow and succeed, we cannot be static. We can always be better. We will continue to look for opportunities to grow our Company and will focus on the long term, holding down deposits costs when possible and managing expense through efficient use of technology. We will work to do all that while keeping our un-Bankey 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 $62.2 million for the quarter ended September 30, 2023, a decrease of $121,000, or 0.2%, from $62.4 million for the quarter ended June 30, 2023, and an increase of $13.0 million, or 26.5%, from $49.2 million for the quarter ended September 30, 2022.  Yield on loans receivable was 10.84% for the three months ended September 30, 2023, compared to 10.85% for the three months ended June 30, 2023 and 8.46% for the three months ended September 30, 2022.  Cost of deposits was 3.14% for the three months ended September 30, 2023, compared to 2.72% for the three months ended June 30, 2023 and 0.82% for the three months ended September 30, 2022. The decrease in net interest income compared to June 30, 2023, was a result of increased interest expense due to an increase in average interest bearing deposits and an increase in cost of deposits as a result of higher interest rates. The increase in net interest income compared to September 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 September 30, 2023 was $3.06 billion, compared to $2.97 billion for the three months ended June 30, 2023, and $2.45 billion for the three months ended September 30, 2022.

Interest and fees on loans totaled $83.7 million for the three months ended September 30, 2023 compared to $80.2 million and $52.3 million for the three months ended June 30, 2023 and September 30, 2022, respectively.  Total loans, net of deferred fees decreased $40.5 million, or 1.3%, during the quarter ended September 30, 2023, which included a $112.1 million decrease in CCBX loans partially offset by an increase of $72.3 million in community bank loans. The decrease in CCBX loans includes a decrease of $87.0 million, or 10.3%, in consumer and other loans and a decrease of $24.3 million, or 17.5%, in capital call lines as a result of normal balance fluctuations and business activities. We continue to monitor and manage the CCBX loan portfolio, and sold $320.9 million in CCBX loans during the quarter ended September 30, 2023. We repositioned ourselves by reducing our CCBX consumer installment loans in an effort to optimize our loan portfolio and we will work to continue growing the CCBX portfolio in future quarters with loans that have lower potential risk of credit deterioration and are more aligned with our long term objectives. The increase in interest and fees on loans for the quarter ended September 30, 2023, compared to June 30, 2023 and September 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 July 26, 2023. We continue to monitor the impact of these increases in interest rates.

Interest income from interest earning deposits with other banks was $3.9 million for the quarter ended September 30, 2023 an increase of $1.2 million compared to June 30, 2023 and an increase of $1.6 million compared to September 30, 2022 primarily due to an increase in interest rates.  The average balance of interest earning deposits with other banks for the three months ended September 30, 2023 was $285.6 million, compared to $211.4 million and $397.6 million for the three months ended June 30, 2023 and September 30, 2022, respectively.  The average yield on these interest earning deposits with other banks increased to 5.40% for the quarter ended September 30, 2023, compared to 5.08% and 2.27% for the quarters ended June 30, 2023 and September 30, 2022, respectively.

Total interest expense was $26.1 million for the quarter ended September 30, 2023, a $4.8 million increase from the quarter ended June 30, 2023 and a $20.1 million increase from the quarter ended September 30, 2022. Interest expense on deposits was $25.5 million for the quarter ended September 30, 2023, compared to $20.7 million for the quarter ended June 30, 2023 and $5.7 million for the quarter ended September 30, 2022. Interest expense on interest bearing deposits increased $4.8 million for the quarter ended September 30, 2023, compared to the quarter ended June 30, 2023, and $19.7 million compared to the quarter ended September 30, 2022 as a result an increase in CCBX deposits that are tied to, and reprice when the FOMC raises rates. Similarly, most of our CCBX loans also reprice when the FOMC raises interest rates. Interest expense on borrowed funds was $651,000 for the quarter ended September 30, 2023, compared to $661,000 and $273,000 for the quarters ended June 30, 2023 and September 30, 2022, respectively. The $378,000 increase in interest expense on borrowed funds from the quarter ended September 30, 2022 is the result of an increase of $19.8 million in subordinated debt and an increase in interest rates.

Total cost of deposits was 3.14% for the three months ended September 30, 2023, compared to 2.72% for the three months ended June 30, 2023, and 0.82%, for the three months ended September 30, 2022. Community bank and CCBX cost of deposits were 1.31% and 4.80% respectively, for the three months ended September 30, 2023, compared to 0.98% and 4.42%, for the three months ended June 30, 2023, and 0.16% and 1.79% for the three months ended September 30, 2022. The increase in cost of deposits for the three months ended September 30, 2023 compared to the prior periods for both segments is a result of increased interest rates. While we continue working to hold down deposit costs, 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 7.10% for the three months ended September 30, 2023, compared to 7.58% and 6.58% for the three months ended June 30, 2023 and September 30, 2022, respectively.  The decrease in net interest margin compared to the three months ended June 30, 2023 was largely due to an increase in cost of deposits and selling higher yielding consumer loans. Higher interest rates on interest bearing deposits compressed net interest margin as a result of our decision to increase our rates to rival our competitors raising rates and CCBX deposit pricing being tied to the Fed Funds rate. Additionally, the actions we took in an effort to strengthen the balance sheet by selling higher risk and higher yielding loans during the quarter ended September 30, 2023 will continue to impact net interest margin in future quarters. The increase in net interest margin compared to the three months ended September 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 decreased $40.5 million and increased $459.1 million, compared to June 30, 2023 and September 30, 2022, respectively.  Additionally, the Fed Funds interest rate increases have resulted in existing, variable rate loans repricing to higher interest rates.  Interest and fees on loans receivable increased $3.5 million, or 4.3%, to $83.7 million for the three months ended September 30, 2023, compared to $80.2 million for the three months ended June 30, 2023, and $52.3 million for the three months ended September 30, 2022.  Also contributing to the increase in net interest margin compared to the three months ended September 30, 2022, was a $1.6 million increase in interest on interest earning deposits.  These interest earning deposits earned an average rate of 5.40% for the quarter ended September 30, 2023, compared to 5.08% and 2.27% for the quarters ended June 30, 2023 and September 30, 2022, respectively.  Average investment securities increased $7.7 million to $118.0 million due to the purchase of $30.1 million in securities during the three months ended September 30, 2023 compared to the three months ended June 30, 2023, and increased $14.3 million compared to the three months ended September 30, 2022. Interest on investment securities increased $113,000 for the three months ended September 30, 2023 compared to the three months ended June 30, 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 $212,000 compared to September 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 3.18% for the quarter ended September 30, 2023, an increase of 41 basis points from the quarter ended June 30, 2023 and an increase of 233 basis points from the quarter ended September 30, 2022. Cost of deposits for the quarter ended September 30, 2023 was 3.14%, compared to 2.72% for the quarter ended June 30, 2023, and 0.82% for the quarter ended September 30, 2022. The increased cost of funds and deposits compared to June 30, 2023 and September 30, 2022 was due to the increase in interest rates compared to the previous periods and growth in higher cost CCBX deposits compared to September 30, 2022.

During the quarter ended September 30, 2023, total loans receivable decreased by $40.5 million, or 1.3%, to $2.97 billion, compared to $3.01 billion for the quarter ended June 30, 2023.  This decrease consists of a $112.1 million decrease in CCBX loans partially offset by $71.6 million in community bank loan growth. CCBX loans were sold in an effort to strengthen the loan portfolio and we will work to continue growing the CCBX portfolio with enhanced credit standards and lower potential for future credit deterioration. Total loans receivable as of September 30, 2023 increased $459.1 million compared to September 30, 2022.  This increase includes community bank loan growth of $192.3 million and an increase in CCBX loans of $266.8 million. During the quarter ended September 30, 2023, $320.9 million in loans were sold during the quarter and no loans were held for sale as of September 30, 2023; compared to $35.9 million in loans held for sale as of June 30, 2023. 

Total yield on loans receivable for the quarter ended September 30, 2023 was 10.84%, compared to 10.85% for the quarter ended June 30, 2023, and 8.46% for the quarter ended September 30, 2022. This slight decrease in yield on loans receivable compared to the quarter ended June 30, 2023 is a combination of an overall increase in interest rates, repricing of variable rate loans as well as change in mix of CCBX partner loans.  During the quarter ended September 30, 2023, community bank loans increased 4.2%, or $71.6 million, compared to the quarter ended June 30, 2023, with an average yield of 6.20% and CCBX loans outstanding decreased 8.7%, or $112.1 million, compared to June 30, 2023, with an average CCBX yield of 17.05%. The yield on CCBX loans does not include the impact of BaaS loan expense.  BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and originating & servicing CCBX loans.  

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

	For the Three Months Ended																		For the Nine Months Ended
	September 30, 2023						June 30, 2023						September 30, 2022						September 30, 2023						September 30, 2022
	Yield on Loans (2)			Cost of Deposits (2)			Yield on Loans (2)			Cost of Deposits (2)			Yield on Loans (2)			Cost of Deposits (2)			Yield on Loans (2)			Cost of Deposits (2)			Yield on Loans (2)			Cost of Deposits (2)
Community Bank	6.20	%		1.31	%		6.28	%		0.98	%		5.31	%		0.16	%		6.15	%		0.99	%		5.17	%		0.11	%
CCBX (1)	17.05	%		4.80	%		16.95	%		4.42	%		13.96	%		1.79	%		16.74	%		4.41	%		13.16	%		0.91	%
Consolidated	10.84	%		3.14	%		10.85	%		2.72	%		8.46	%		0.82	%		10.57	%		2.69	%		7.63	%		0.41	%

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

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

		For the Three Months Ended
		September 30, 2023						June 30, 2023						September 30, 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		$	56,279		17.05	%		$	53,632		16.95	%		$	31,449		13.96	%
Less: BaaS loan expense			23,003		6.97	%			22,033		6.96	%			15,560		6.91	%
Net BaaS loan income(1)		$	33,276		10.08	%		$	31,599		9.99	%		$	15,889		7.05	%
Average BaaS Loans(3)		$	1,309,380					$	1,269,406					$	893,655

		For the Nine Months Ended
		September 30, 2023						September 30, 2022
(dollars in thousands; unaudited)		Income / Expense			Income / expense divided by average CCBX loans(2)			Income / Expense			Income / expense divided by average CCBX loans(2)
BaaS loan interest income		$	152,131		16.74	%		$	64,721		13.16	%
Less: BaaS loan expense			62,590		6.89	%			36,079		7.34	%
Net BaaS loan income(1)		$	89,541		9.85	%		$	28,642		5.82	%
Average BaaS Loans(3)		$	1,215,224					$	657,574

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

Key Performance Ratios

ROA was 1.13% for the quarter ended September 30, 2023 compared to 1.52% and 1.45% for the quarters ended June 30, 2023 and September 30, 2022, respectively.  ROA for the quarter ended September 30, 2023, was down 0.39% and 0.32%, respectively, as a result of lower margin and higher expenses compared to June 30, 2023 and September 30, 2022.

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

		Three Months Ended															Nine Months Ended
(unaudited)		September 30, 2023			June 30, 2023			March 31, 2023			December 31, 2022			September 30, 2022			September 30, 2023			September 30, 2022
Return on average assets(1)		1.13	%		1.52	%		1.58	%		1.66	%		1.45	%		1.40	%		1.27	%
Return on average equity(1)		14.60	%		19.53	%		19.89	%		21.86	%		19.36	%		17.90	%		16.90	%
Yield on earnings assets(1)		10.08	%		10.18	%		9.19	%		8.47	%		7.38	%		9.84	%		6.03	%
Yield on loans receivable(1)		10.84	%		10.85	%		9.95	%		9.33	%		8.46	%		10.57	%		7.63	%
Cost of funds(1)		3.18	%		2.77	%		2.19	%		1.61	%		0.85	%		2.73	%		0.44	%
Cost of deposits(1)		3.14	%		2.72	%		2.13	%		1.56	%		0.82	%		2.69	%		0.41	%
Net interest margin(1)		7.10	%		7.58	%		7.15	%		6.96	%		6.58	%		7.27	%		5.61	%
Noninterest expense to average assets(1)		6.23	%		6.11	%		5.69	%		5.97	%		6.66	%		6.02	%		5.54	%
Noninterest income to average assets(1)		3.81	%		6.90	%		6.28	%		5.43	%		4.48	%		5.61	%		3.79	%
Efficiency ratio		58.36	%		42.92	%		43.03	%		48.94	%		61.12	%		47.60	%		59.77	%
Loans receivable to deposits(2)		90.19	%		96.23	%		92.55	%		93.25	%		89.92	%		90.19	%		89.92	%

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

Noninterest Income

The following table details noninterest income for the periods indicated:

	Three Months Ended
	September 30,			June 30,			September 30,
(dollars in thousands; unaudited)		2023			2023			2022
Deposit service charges and fees	$	998		$	989		$	986
Loan referral fees		1			682			—
Unrealized gain on equity securities, net		5			155			(133	)
Gain on sales of loans, net		107			23			—
Other		291			234			260
Noninterest income, excluding BaaS program income and BaaS indemnification income		1,402			2,083			1,113
Servicing and other BaaS fees		997			895			1,079
Transaction fees		1,036			1,052			940
Interchange fees		1,216			975			738
Reimbursement of expenses		1,152			1,026			885
BaaS program income		4,401			3,948			3,642
BaaS credit enhancements		25,926			51,027			17,928
Baas fraud enhancements		2,850			1,537			11,708
BaaS indemnification income		28,776			52,564			29,636
Total BaaS income		33,177			56,512			33,278
Total noninterest income	$	34,579		$	58,595		$	34,391

Noninterest income was $34.6 million for the three months ended September 30, 2023, a decrease of $24.0 million from $58.6 million for the three months ended June 30, 2023, and an increase of $188,000 from $34.4 million for the three months ended September 30, 2022.  The decrease in noninterest income over the quarter ended June 30, 2023 was primarily due to a decrease of $23.3 million in total BaaS income. The $23.3 million decrease in total BaaS income included a $25.1 million decrease in BaaS credit enhancements related to the allowance for credit losses, a $1.3 million increase in BaaS fraud enhancements, and an increase of $453,000 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 $188,000 increase in noninterest income over the quarter ended September 30, 2022 was primarily due to a $138,000 increase in gain on sale of equity securities and $107,000 increase in gain on sale of loans partially offset by a $101,000 decrease in BaaS income. The $101,000 decrease in BaaS income included a $8.0 million increase in BaaS credit enhancements, a $8.9 million decrease in BaaS fraud enhancements and a $759,000 increase in BaaS program income. The decrease in BaaS credit enhancement compared to the prior period is a result of lower CCBX loan balances increased underwriting standards and change in mix of CCBX loans.

Our CCBX segment continues to evolve, and we now have 22 relationships, at varying stages, as of September 30, 2023.  We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense and are focusing on larger more established partners, with experienced management teams, existing customer bases and strong financial positions. The sale of $320.9 million in CCBX loans during the quarter ended September 30, 2023 is part of our strategy to strengthen the balance sheet and lower the overall potential credit risk in our loan portfolio. We expect net interest margin will tighten as higher quality loans yield less than higher risk loans and we also expect the size of our CCBX loan portfolio will be smaller than in previous quarters while we work to grow the portfolio with loans that are subject to increased underwriting standards. We expect this process to take 2 to 3 quarters. At the same time we will be focused on increasing our efficiency and using technology to reduce future expense growth.

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

	As of
(unaudited)	September 30, 2023	June 30, 2023	September 30, 2022
Active	18	18	19
Friends and family / testing	1	1	2
Implementation / onboarding	1	1	0
Signed letters of intent	1	1	5
Wind down - preparing to exit relationship	1	1	3
Total CCBX relationships	22	22	29

The following table details noninterest expense for the periods indicated:

Noninterest Expense

		Three Months Ended
		September 30,			June 30,			September 30,
(dollars in thousands; unaudited)			2023			2023			2022
Salaries and employee benefits		$	18,087		$	16,309		$	14,506
Legal and professional expenses			4,447			4,645			2,251
Data processing and software licenses			2,366			1,972			1,670
Occupancy			1,224			1,143			1,147
Point of sale expense			1,068			814			742
Director and staff expenses			529			519			475
FDIC assessments			694			570			850
Excise taxes			541			531			588
Marketing			169			115			69
Other			1,523			1,722			1,522
Noninterest expense, excluding BaaS loan and BaaS fraud expense			30,648			28,340			23,820
BaaS loan expense			23,003			22,033			15,560
BaaS fraud expense			2,850			1,537			11,707
BaaS loan and fraud expense			25,853			23,570			27,267
Total noninterest expense		$	56,501		$	51,910		$	51,087

Total noninterest expense increased $4.6 million to $56.5 million for the three months ended September 30, 2023, compared to $51.9 million for the three months ended June 30, 2023 and increased $5.4 million from $51.1 million for the three months ended September 30, 2022. The increase in noninterest expense for the quarter ended September 30, 2023, as compared to the quarter ended June 30, 2023, was primarily due to a $2.3 million increase in BaaS expense (of which $1.0 million is related to an increase in BaaS loan expense and $1.3 million is due to an increase in BaaS fraud expense) and a $1.8 million increase in salaries and employee benefits. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, and originating & servicing CCBX loans. BaaS fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts. A portion of this expense is realized during the quarter during which the loss occurs, and a portion is estimated based on historical or other information from our partners.  The $1.8 million increase in salaries and employee benefits is related to the full quarter effect of hiring staff for our ongoing growth initiatives. Salaries and benefits included one time expenses of $494,000 as part of our initiative to manage costs going forward. Additionally, data processing and software licenses increased $394,000 as a result of enhancements in technology.

The increase in noninterest expenses for the quarter ended September 30, 2023 compared to the quarter ended September 30, 2022 were largely due to a decrease of $1.4 million in BaaS partner expense (of which $7.4 million is related to an increase in BaaS loan expense offset by a decrease of $8.9 million in BaaS fraud expense), $3.6 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives and $2.2 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. We anticipate that our legal and professional fees will decline as projects have been completed and initiatives are achieved, with legal and professional fees leveling off to approximate first quarter 2023 levels staring in fourth quarter 2023. Additionally, there was a $696,000 increase in data processing and software licenses due to enhancements in technology and a $326,000 increase in point of sale expenses which is attributed to increased CCBX activity.

Provision for Income Taxes

The provision for income taxes was $2.8 million for the three months ended September 30, 2023, $3.9 million for the three months ended June 30, 2023 and $3.0 million for the third quarter of 2022. The provision for income taxes was lower for the three months ended September 30, 2023 compared to June 30, 2023 as a result of lower taxable income. 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 $145.0 million, or 4.1%, to $3.68 billion at September 30, 2023 compared to $3.54 billion at June 30, 2023. The increase is primarily due to $199.7 million increase in interest earning deposits with other banks partially offset by loans receivable decreasing $40.5 million. We deliberately decreased loans as part of our strategy to optimize our CCBX portfolio and strengthen the balance sheet through enhanced credit standards. Additionally, there were no loans held for sale at September 30, 2023, compared to $35.9 million at June 30, 2023.  

Total assets increased $546.5 million, or 17.4%, at September 30, 2023, compared to $3.13 billion at September 30, 2022.  The increase is primarily due to loans receivable increasing $459.1 million, and an increase of $42.6 million in investment securities and a $71.7 million increase in interest earning deposits with other banks compared to September 30, 2022.

Loans Receivable

Total loans receivable decreased $40.5 million to $2.97 billion at September 30, 2023, from $3.01 billion at June 30, 2023, and increased $459.1 million from $2.51 billion at September 30, 2022. The decrease in loans receivable over the quarter ended June 30, 2023 was the result of a decease of $112.1 million in CCBX loans from loan sales to optimize our CCBX loan portfolio and a $71.6 million increase in community bank loans. We continue to monitor and manage the CCBX loan portfolio, and sold $320.9 million in CCBX loans during the quarter ended September 30, 2023. CCBX other consumer and other loans were reduced by $148.4 million to $317.0 million at September 30, 2023 from $465.4 million at June 30, 2023 as part of our optimizing strategy to strengthen the balance sheet. The change in loans receivable over the quarter ended September 30, 2022 includes CCBX loan growth of $266.8 million and community bank loan growth of $192.3 million as of September 30, 2023.  

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

	As of September 30, 2023							As of June 30, 2023							As of September 30, 2022
(dollars in thousands; unaudited)	Amount				Percent			Amount				Percent			Amount				Percent
Commercial and industrial loans:
PPP loans	$	3,310			0.1	%		$	3,595			0.1	%		$	5,794			0.2	%
Capital call lines		114,174			3.8				138,428			4.6				174,311			6.9
All other commercial & industrial loans		213,791			7.2				211,806			7.0				159,823			6.4
Total commercial and industrial loans:		331,275			11.1				353,829			11.7				339,928			13.5
Real estate loans:
Construction, land and land development		167,686			5.6				186,706			6.2				224,188			8.9
Residential real estate		477,147			16.1				463,179			15.4				402,781			16.0
Commercial real estate		1,237,849			41.6				1,164,088			38.6				1,024,067			40.7
Consumer and other loans		760,463			25.6				846,459			28.1				523,536			20.9
Gross loans receivable		2,974,420			100.0	%			3,014,261			100.0	%			2,514,500			100.0	%
Net deferred origination fees - PPP loans		(52	)						(60	)						(111	)
Net deferred origination fees - all other loans		(7,333	)						(6,648	)						(6,500	)
Loans receivable	$	2,967,035						$	3,007,553						$	2,507,889
Loan Yield(1)		10.84	%						10.85	%						8.46	%

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

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

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

Community Bank		As of
		September 30, 2023							June 30, 2023							September 30, 2022
(dollars in thousands; unaudited)		Balance				% to Total			Balance				% to Total			Balance				% to Total
Commercial and industrial loans:
PPP loans		$	3,310			0.2	%		$	3,595			0.2	%		$	5,794			0.4	%
All other commercial & industrial loans			154,922			8.6				151,483			8.8				143,808			9.0
Real estate loans:
Construction, land and land development loans			167,686			9.4				186,706			10.9				224,188			14.0
Residential real estate loans			225,372			12.6				211,966			12.3				198,871			12.5
Commercial real estate loans			1,237,849			69.1				1,164,088			67.7				1,024,067			64.0
Consumer and other loans:
Other consumer and other loans			2,483			0.1				1,457			0.1				2,220			0.1
Gross Community Bank loans receivable			1,791,622			100.0	%			1,719,295			100.0	%			1,598,948			100.0	%
Net deferred origination fees			(6,961	)						(6,261	)						(6,628	)
Loans receivable		$	1,784,661						$	1,713,034						$	1,592,320
Loan Yield(1)			6.20	%						6.28	%						5.31	%

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

CCBX		As of
		September 30, 2023							June 30, 2023							September 30, 2022
(dollars in thousands; unaudited)		Balance				% to Total			Balance				% to Total			Balance				% to Total
Commercial and industrial loans:
Capital call lines		$	114,174			9.6	%		$	138,428			10.7	%		$	174,311			19.0	%
All other commercial & industrial loans			58,869			5.0				60,323			4.7				16,015			1.8
Real estate loans:
Residential real estate loans			251,775			21.3				251,213			19.4				203,910			22.3
Consumer and other loans:
Credit cards			440,993			37.3				379,642			29.3				216,995			23.7
Other consumer and other loans			316,987			26.8				465,360			35.9				304,321			33.2
Gross CCBX loans receivable			1,182,798			100.0	%			1,294,966			100.0	%			915,552			100.0	%
Net deferred origination (fees) costs			(424	)						(447	)						17
Loans receivable		$	1,182,374						$	1,294,519						$	915,569
Loan Yield - CCBX(1)(2)			17.05	%						16.95	%						13.96	%

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

Deposits

Total deposits increased $127.1 million, or 4.0%, to $3.29 billion at September 30, 2023 from $3.16 billion at June 30, 2023. The increase was due to a $131.3 million increase in core deposits, partially offset by a $4.2 million decrease in time deposits. Deposits in our CCBX segment increased $99.1 million, from $1.65 billion at June 30, 2023, to $1.75 billion at September 30, 2023 and community bank deposits increased $28.0 million from $1.51 billion at June 30, 2023, to $1.54 billion at September 30, 2023. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts. During the quarter ended September 30, 2023, noninterest bearing deposits decreased $73.8 million, or 10.2%, to $651.8 million from $725.6 million at June 30, 2023. Community bank noninterest bearing deposits totaled $584.0 million or 38.0% of total community bank deposits and CCBX noninterest bearing deposits totaled $67.8 million, or 3.9% of total CCBX deposits. In the quarter ended September 30, 2023 compared to the quarter ended June 30, 2023, NOW and money market accounts increased $209.5 million, savings deposits decreased $4.4 million, and time deposits decreased $4.2 million. Included in total deposits is $296.4 million in IntraFi network reciprocal NOW and money market accounts as of September 30, 2023, which provides our larger deposit customers with fully insured deposits through a reciprocal agreement with other banks. Uninsured deposits decreased to $599.0 million as of September 30, 2023, compared to $632.1 million as of June 30, 2023.

Total deposits increased $452.6 million, or 16.0%, to $3.29 billion at September 30, 2023 compared to $2.84 billion at September 30, 2022. The increase is largely the result of growth in CCBX deposits. Noninterest bearing deposits decreased $161.4 million, or 19.9%, to $651.8 million at September 30, 2023 from $813.2 million at September 30, 2022 as a result of customer movement from noninterest to interest bearing accounts. NOW and money market accounts increased $725.6 million, or 40.2%, to $2.53 billion at September 30, 2023, and savings deposits decreased $22.9 million, or 21.3%, and time deposits decreased  $13.3 million, or 39.1%, in the third quarter of 2023 compared to the third 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 $269.2 million as of September 30, 2023, compared to $75.4 million as of September 30, 2022. Deposits in our CCBX segment increased $550.0 million, from $1.20 billion at September 30, 2022, to $1.75 billion at September 30, 2023 and community bank deposits decreased $97.3 million, from $1.63 billion at September 30, 2022, to $1.54 billion at September 30, 2023. The deposits from our CCBX segment are predominately classified as interest bearing, or NOW and money market accounts. Uninsured deposits decreased to $599.0 million as of September 30, 2023, compared to $867.7 million as of September 30, 2022.

Additionally, as of September 30, 2023 $51.9 million in CCBX customer deposits were transferred off the Bank’s balance sheet to other financial institutions on a daily basis for additional FDIC insurance coverage. Efforts to retain and grow core deposits are evidenced by the high ratios in these categories when compared to total deposits.

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

	As of September 30, 2023							As of June 30, 2023							As of September 30, 2022
(dollars in thousands; unaudited)	Amount				Percent of Total Deposits			Balance				Percent of Total Deposits			Balance				Percent of Total Deposits
Demand, noninterest bearing	$	651,786			19.8	%		$	725,592			22.9	%		$	813,217			28.7	%
NOW and money market		2,532,668			77.0				2,323,164			73.5				1,807,105			63.7
Savings		84,628			2.6				88,991			2.8				107,508			3.8
Total core deposits		3,269,082			99.4				3,137,747			99.2				2,727,830			96.2
Brokered deposits		1			0.0				1			0.0				75,363			2.6
Time deposits less than $100,000		8,635			0.2				9,741			0.3				13,296			0.5
Time deposits $100,000 and over		11,982			0.4				15,083			0.5				20,577			0.7
Total	$	3,289,700			100.0	%		$	3,162,572			100.0	%		$	2,837,066			100.0	%
Cost of deposits(1)		3.14	%						2.72	%						0.82	%

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

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

Community Bank		As of
		September 30, 2023							June 30, 2023							September 30, 2022
(dollars in thousands; unaudited)		Balance				% to Total			Balance				% to Total			Balance				% to Total
Demand, noninterest bearing		$	584,004			38.0	%		$	621,012			41.1	%		$	746,516			45.6	%
NOW and money market			852,747			55.5				778,475			51.6				748,347			45.8
Savings			80,099			5.2				85,146			5.7				106,059			6.5
Total core deposits			1,516,850			98.7				1,484,633			98.4				1,600,922			97.9
Brokered deposits			1			0.0				1			0.0				1			0.0
Time deposits less than $100,000			8,635			0.5				9,741			0.6				13,296			0.8
Time deposits $100,000 and over			11,982			0.8				15,083			1.0				20,577			1.3
Total Community Bank deposits		$	1,537,468			100.0	%		$	1,509,458			100.0	%		$	1,634,796			100.0	%
Cost of deposits(1)			1.31	%						0.98	%						0.16	%

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

CCBX		As of
		September 30, 2023							June 30, 2023							September 30, 2022
(dollars in thousands; unaudited)		Balance				% to Total			Balance				% to Total			Balance				% to Total
Demand, noninterest bearing		$	67,782			3.9	%		$	104,580			6.3	%		$	66,701			5.5	%
NOW and money market			1,679,921			95.9				1,544,689			93.5				1,058,758			88.1
Savings			4,529			0.2				3,845			0.2				1,449			0.1
Total core deposits			1,752,232			100.0				1,653,114			100.0				1,126,908			93.7
BaaS-brokered deposits			—			0.0				—			0.0				75,362			6.3
Total CCBX deposits		$	1,752,232			100.0	%		$	1,653,114			100.0	%		$	1,202,270			100.0	%
Cost of deposits(1)			4.80	%						4.42	%						1.79	%

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

Borrowings

As of September 30, 2023 the Company had the capacity to borrow up to a total of $577.9 million from the Federal Reserve Bank discount window and Federal Home Loan Bank, with no borrowings outstanding on these lines as of September 30, 2023.

Shareholders’ Equity

During the nine months ended September 30, 2023, the Company contributed $15.0 million in capital to the Bank.  The Company had a cash balance of $6.5 million as of September 30, 2023, which is retained for general operating purposes, including debt repayment, and for funding $713,000 in commitments to bank technology funds.  

Total shareholders’ equity increased $11.8 million since June 30, 2023.  The increase in shareholders’ equity was primarily due to $10.3 million in net earnings, a $918,000 increase from the amortization of equity awards, combined with a decrease in the unrealized loss on available-for-sale securities of $589,000 during the three months ended September 30, 2023.

Capital Ratios

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

(unaudited)		Coastal Community Bank			Coastal Financial Corporation			Minimum Well Capitalized Ratios under Prompt Corrective Action(1)
Tier 1 Leverage Capital (to average assets)		8.99	%		8.03	%		5.00	%
Common Equity Tier 1 Capital (to risk-weighted assets)		10.20	%		8.99	%		6.50	%
Tier 1 Capital (to risk-weighted assets)		10.20	%		9.10	%		8.00	%
Total Capital (to risk-weighted assets)		11.47	%		11.79	%		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 $101.1 million and 3.41% of loans receivable at September 30, 2023 compared to $110.8 million and 3.68% at June 30, 2023 and $59.3 million and 2.36% at September 30, 2022. The allowance for credit loss allocated to the CCBX portfolio was $79.8 million and 6.75% of CCBX loans receivable at September 30, 2023, with $21.3 million of allowance for credit loss allocated to the community bank or 1.19% 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 September 30, 2023												As of June 30, 2023												As of September 30, 2022
(dollars in thousands; unaudited)		Community Bank				CCBX				Total				Community Bank				CCBX				Total				Community Bank				CCBX				Total
Loans receivable		$	1,784,661			$	1,182,374			$	2,967,035			$	1,713,034			$	1,294,519			$	3,007,553			$	1,592,320			$	915,569			$	2,507,889
Allowance for credit losses			(21,316	)			(79,769	)			(101,085	)			(20,653	)			(90,109	)			(110,762	)			(20,139	)			(39,143	)			(59,282	)
Allowance for credit losses to total loans receivable			1.19	%			6.75	%			3.41	%			1.21	%			6.96	%			3.68	%			1.26	%			4.28	%			2.36	%

Provision for credit losses - loans totaled $27.2 million for the three months ended September 30, 2023, $52.6 million for the three months ended June 30, 2023, and $18.4 million for the three months ended September 30, 2022. Net charge-offs totaled $36.8 million for the quarter ended September 30, 2023, compared to $31.0 million for the quarter ended June 30, 2023 and $8.5 million for the quarter ended September 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 $231.9 million loan portfolio. At September 30, 2023, our portion of this portfolio represented $23.2 million in loans.

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

		Three Months Ended
		September 30, 2023												June 30, 2023												September 30, 2022
(dollars in thousands; unaudited)		Community Bank				CCBX				Total				Community Bank				CCBX				Total				Community Bank				CCBX				Total
Gross charge-offs		$	3			$	37,023			$	37,026			$	9			$	32,290			$	32,299			$	411			$	8,102			$	8,513
Gross recoveries			(3	)			(189	)			(192	)			—				(1,340	)			(1,340	)			(3	)			(6	)			(9	)
Net charge-offs		$	—			$	36,834			$	36,834			$	9			$	30,950			$	30,959			$	408			$	8,096			$	8,504
Net charge-offs to average loans(1)			0.00	%			11.16	%			4.77	%			0.00	%			9.78	%			4.19	%			0.10	%			3.59	%			1.38	%

⁽¹⁾ Annualized calculations shown for periods presented.

The decrease in the Company’s provision for credit losses - loans during the quarter ended September 30, 2023, is a result of a decrease in CCBX loans receivable. During the quarter ended September 30, 2023, a $26.5 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis, compared to the $52.6 million provision for credit losses - loans that was recorded for CCBX for the quarter ended June 30, 2023, as a result of a decrease in CCBX loans receivable. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by indemnifying or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and reclassified negative deposit accounts. When the provision for CCBX credit losses and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). Expected losses are recorded in the allowance for credit losses. The credit enhancement asset is relieved when credit enhancement recoveries are received from the CCBX partner. CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses. If our partner is unable to fulfill their contracted obligations then the bank could be exposed to additional credit losses. Management regularly evaluates and manages this counterparty risk. The Company is responsible for credit losses on approximately 10% of a $231.9 million CCBX loan portfolio. At September 30, 2023, 10% of this portfolio represented $23.2 million in loans. The factors used in management’s analysis for community bank credit losses indicated that a provision of $664,000 and was needed for the quarter ended September 30, 2023 and a small adjustment (recapture) of $47,000 and $238,000 was needed for the quarters ended June 30, 2023 and September 30, 2022, respectively.

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

		Three Months Ended											Nine Months Ended
(dollars in thousands; unaudited)		September 30, 2023			June 30, 2023				September 30, 2022				September 30, 2023			September 30, 2022
Community bank		$	664		$	(47	)		$	(238	)		$	1,045		$	214
CCBX			26,493			52,645				18,666				122,254			45,250
Total provision expense		$	27,157		$	52,598			$	18,428			$	123,299		$	45,464

At September 30, 2023, our nonperforming assets were $43.5 million, or 1.18% of total assets, compared to $33.7 million, or 0.95%, of total assets, at June 30, 2023, and $22.9 million, or 0.73% of total assets, at September 30, 2022. These ratios are impacted by CCBX loans over 90 days delinquent that are covered by CCBX partner credit enhancements. As of September 30, 2023, $34.7 million of the $36.2 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 $9.8 million during the quarter ended September 30, 2023, compared to the quarter ended June 30, 2023, due to a $9.9 million increase in CCBX loans that are past due 90 days or more and still accruing combined with a $76,000 decrease in community bank nonaccrual loans. As a result of the type of loans (primarily consumer loans) originated through our CCBX partners we anticipate that balances 90 days past due or more and still accruing will increase as those loan portfolios grow. Installment/closed-end and revolving/open-end consumer loans originated through CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively and are reported as substandard, 90 days or more days past due and still accruing. Community bank nonaccrual loans decreased due to principal reductions. There were no repossessed assets or other real estate owned at September 30, 2023. Our nonperforming loans to loans receivable ratio was 1.47% at September 30, 2023, compared to 1.12% at June 30, 2023, and 0.91% at September 30, 2022.

For the quarter ended September 30, 2023, there were zero community bank net charge-offs and $7.3 million nonperforming community bank loans, including a multifamily loan for $6.9 million which we believe is currently well secured. For the quarter ended September 30, 2023, $36.8 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 $231.9 million loan portfolio. At September 30, 2023, our portion of this portfolio represented $23.2 million in loans.

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

(dollars in thousands; unaudited)	As of September 30, 2023				As of June 30, 2023				As of September 30, 2022
Nonaccrual loans:
Commercial and industrial loans	$	2			$	5			$	94
Real estate loans:
Construction, land and land development		—				66				66
Residential real estate		176				186				—
Commercial real estate		7,145				7,142				6,901
Total nonaccrual loans		7,323				7,399				7,061
Accruing loans past due 90 days or more:
Commercial & industrial loans		1,387				808				138
Real estate loans:
Residential real estate loans		1,462				1,722				638
Consumer and other loans:
Credit cards		24,807				18,306				4,777
Other consumer and other loans		8,561				5,492				10,268
Total accruing loans past due 90 days or more		36,217				26,328				15,821
Total nonperforming loans		43,540				33,727				22,882
Real estate owned		—				—				—
Repossessed assets		—				—				—
Modified loans for borrowers experiencing financial difficulty		—				—				—
Total nonperforming assets	$	43,540			$	33,727			$	22,882
Total nonaccrual loans to loans receivable		0.25	%			0.25	%			0.28	%
Total nonperforming loans to loans receivable		1.47	%			1.12	%			0.91	%
Total nonperforming assets to total assets		1.18	%			0.95	%			0.73	%

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)	September 30, 2023			June 30, 2023			September 30, 2022
Nonaccrual loans:
Commercial and industrial loans	$	2		$	5		$	94
Real estate:
Construction, land and land development		—			66			66
Residential real estate		176			186			—
Commercial real estate		7,145			7,142			6,901
Total nonaccrual loans		7,323			7,399			7,061
Accruing loans past due 90 days or more:
Total accruing loans past due 90 days or more		—			—			—
Total nonperforming loans		7,323			7,399			7,061
Other real estate owned		—			—			—
Repossessed assets		—			—			—
Total nonperforming assets	$	7,323		$	7,399		$	7,061

CCBX	As of
(dollars in thousands; unaudited)	September 30, 2023			June 30, 2023			September 30, 2022
Nonaccrual loans	$	—		$	—		$	—
Accruing loans past due 90 days or more:
Commercial & industrial loans		1,387			808			138
Real estate loans:
Residential real estate loans		1,462			1,722			638
Consumer and other loans:
Credit cards		24,807			18,306			4,777
Other consumer and other loans		8,561			5,492			10,268
Total accruing loans past due 90 days or more		36,217			26,328			15,821
Total nonperforming loans		36,217			26,328			15,821
Other real estate owned		—			—			—
Repossessed assets		—			—			—
Total nonperforming assets	$	36,217		$	26,328		$	15,821

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 $3.68 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, [phone]
Joel Edwards, Executive Vice President & Chief Financial Officer, [phone]

Forward-Looking Statements

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

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

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

ASSETS
	September 30, 2023				June 30, 2023				September 30, 2022
Cash and due from banks	$	29,984			$	29,783			$	37,482
Interest earning deposits with other banks		444,962				245,277				373,246
Investment securities, available for sale, at fair value		98,939				98,167				97,621
Investment securities, held to maturity, at amortized cost		42,550				12,563				1,250
Other investments		11,898				12,037				10,581
Loans held for sale		—				35,923				43,314
Loans receivable		2,967,035				3,007,553				2,507,889
Allowance for credit losses		(101,085	)			(110,762	)			(59,282	)
Total loans receivable, net		2,865,950				2,896,791				2,448,607
CCBX credit enhancement asset		91,867				96,928				48,228
CCBX receivable		13,847				19,113				6,145
Premises and equipment, net		20,543				18,903				18,467
Operating lease right-of-use assets		6,126				6,216				5,293
Accrued interest receivable		22,208				21,581				13,114
Bank-owned life insurance, net		12,970				12,873				12,576
Deferred tax asset, net		4,404				25,764				13,997
Other assets		14,020				3,364				3,820
Total assets	$	3,680,268			$	3,535,283			$	3,133,741
LIABILITIES AND SHAREHOLDERS’ EQUITY
LIABILITIES
Deposits	$	3,289,700			$	3,162,572			$	2,837,066
Subordinated debt, net		44,106				44,069				24,343
Junior subordinated debentures, net		3,589				3,589				3,588
Deferred compensation		513				547				648
Accrued interest payable		1,056				766				153
Operating lease liabilities		6,321				6,413				5,514
CCBX payable		40,233				27,714				15,191
Other liabilities		10,300				16,951				18,505
Total liabilities		3,395,818				3,262,621				2,905,008
SHAREHOLDERS’ EQUITY
Common stock		129,244				128,315				123,944
Retained earnings		156,299				146,029				106,880
Accumulated other comprehensive loss, net of tax		(1,093	)			(1,682	)			(2,091	)
Total shareholders’ equity		284,450				272,662				228,733
Total liabilities and shareholders’ equity	$	3,680,268			$	3,535,283			$	3,133,741

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

	Three Months Ended
	September 30, 2023			June 30, 2023				September 30, 2022
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	83,652		$	80,199			$	52,328
Interest on interest earning deposits with other banks		3,884			2,678				2,273
Interest on investment securities		766			653				554
Dividends on other investments		29			156				24
Total interest income		88,331			83,686				55,179
INTEREST EXPENSE
Interest on deposits		25,451			20,675				5,717
Interest on borrowed funds		651			661				273
Total interest expense		26,102			21,336				5,990
Net interest income		62,229			62,350				49,189
PROVISION FOR CREDIT LOSSES - LOANS		27,157			52,598				18,428
PROVISION (RECAPTURE) FOR UNFUNDED COMMITMENTS		96			(345	)			—
Net interest income after provision for credit losses - loans and unfunded commitments		34,976			10,097				30,761
NONINTEREST INCOME
Deposit service charges and fees		998			989				986
Loan referral fees		1			682				—
Gain on sales of loans, net		107			23				—
Unrealized (loss) gain on equity securities, net		5			155				(133	)
Other income		291			234				260
Noninterest income, excluding BaaS program income and BaaS indemnification income		1,402			2,083				1,113
Servicing and other BaaS fees		997			895				1,079
Transaction fees		1,036			1,052				940
Interchange fees		1,216			975				738
Reimbursement of expenses		1,152			1,026				885
BaaS program income		4,401			3,948				3,642
BaaS credit enhancements		25,926			51,027				17,928
BaaS fraud enhancements		2,850			1,537				11,708
BaaS indemnification income		28,776			52,564				29,636
Total noninterest income		34,579			58,595				34,391
NONINTEREST EXPENSE
Salaries and employee benefits		18,087			16,309				14,506
Occupancy		1,224			1,143				1,147
Data processing and software licenses		2,366			1,972				1,670
Legal and professional expenses		4,447			4,645				2,251
Point of sale expense		1,068			814				742
Excise taxes		541			531				588
Federal Deposit Insurance Corporation ("FDIC") assessments		694			570				850
Director and staff expenses		529			519				475
Marketing		169			115				69
Other expense		1,523			1,722				1,522
Noninterest expense, excluding BaaS loan and BaaS fraud expense		30,648			28,340				23,820
BaaS loan expense		23,003			22,033				15,560
BaaS fraud expense		2,850			1,537				11,707
BaaS loan and fraud expense		25,853			23,570				27,267
Total noninterest expense		56,501			51,910				51,087
Income before provision for income taxes		13,054			16,782				14,065
PROVISION FOR INCOME TAXES		2,784			3,876				2,964
NET INCOME	$	10,270		$	12,906			$	11,101
Basic earnings per common share	$	0.77		$	0.97			$	0.86
Diluted earnings per common share	$	0.75		$	0.95			$	0.82
Weighted average number of common shares outstanding:
Basic		13,285,974			13,275,640				12,938,200
Diluted		13,675,833			13,597,763				13,536,823

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

	Nine Months Ended
	September 30, 2023				September 30, 2022
INTEREST AND DIVIDEND INCOME
Interest and fees on loans	$	230,282			$	122,126
Interest on interest earning deposits with other banks		9,659				3,631
Interest on investment securities		1,972				1,188
Dividends on other investments		215				195
Total interest income		242,128				127,140
INTEREST EXPENSE
Interest on deposits		61,084				7,943
Interest on borrowed funds		1,974				854
Total interest expense		63,058				8,797
Net interest income		179,070				118,343
PROVISION FOR CREDIT LOSSES - LOANS		123,299				45,464
PROVISION (RECAPTURE) FOR UNFUNDED COMMITMENTS		(96	)			—
Net interest income after provision for credit losses - loans and unfunded commitments		55,867				72,879
NONINTEREST INCOME
Deposit service charges and fees		2,897				2,858
Loan referral fees		683				810
Gain on sales of loans, net		253				—
Unrealized (loss) gain on equity securities, net		199				(135	)
Other income		824				1,046
Noninterest income, excluding BaaS program income and BaaS indemnification income		4,856				4,579
Servicing and other BaaS fees		2,840				3,407
Transaction fees		3,005				2,247
Interchange fees		2,980				1,798
Reimbursement of expenses		3,099				1,875
BaaS program income		11,924				9,327
BaaS credit enhancements		119,315				45,210
BaaS fraud enhancements		6,386				22,753
BaaS indemnification income		125,701				67,963
Total noninterest income		142,481				81,869
NONINTEREST EXPENSE
Salaries and employee benefits		49,971				37,829
Occupancy		3,586				3,366
Data processing and software licenses		6,178				4,719
Legal and professional expenses		12,154				3,961
Point of sale expense		2,635				1,399
Excise taxes		1,527				1,501
Federal Deposit Insurance Corporation ("FDIC") assessments		1,859				2,309
Director and staff expenses		1,674				1,196
Marketing		379				242
Other expense		4,135				4,318
Noninterest expense, excluding BaaS loan and BaaS fraud expense		84,098				60,840
BaaS loan expense		62,590				36,079
BaaS fraud expense		6,386				22,752
BaaS loan and fraud expense		68,976				58,831
Total noninterest expense		153,074				119,671
Income before provision for income taxes		45,274				35,077
PROVISION FOR INCOME TAXES		9,707				7,570
NET INCOME	$	35,567			$	27,507
Basic earnings per common share	$	2.68			$	2.13
Diluted earnings per common share	$	2.61			$	2.04
Weighted average number of common shares outstanding:
Basic		13,253,184				12,921,814
Diluted		13,627,939				13,484,950

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

	For the Three Months Ended
	September 30, 2023										June 30, 2023										September 30, 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	$	285,596			$	3,884		5.40	%		$	211,369			$	2,678		5.08	%		$	397,621			$	2,273		2.27	%
Investment securities, available for sale(2)		100,283				543		2.15				100,278				534		2.14				102,438				545		2.11
Investment securities, held to maturity(2)		17,703				223		5.00				10,047				119		4.75				1,257				9		2.84
Other investments		11,943				29		0.96				11,773				156		5.31				10,520				24		0.91
Loans receivable(3)		3,062,214				83,652		10.84				2,965,287				80,199		10.85				2,452,815				52,328		8.46
Total interest earning assets		3,477,739				88,331		10.08				3,298,754				83,686		10.18				2,964,651				55,179		7.38
Noninterest earning assets:
Allowance for credit losses		(100,329	)									(87,713	)									(51,259	)
Other noninterest earning assets		220,750										194,747										128,816
Total assets	$	3,598,160									$	3,405,788									$	3,042,208
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	2,515,093			$	25,451		4.01	%		$	2,326,702			$	20,675		3.56	%		$	1,953,170			$	5,717		1.16	%
Subordinated debt		44,084				580		5.22				44,047				596		5.43				24,331				234		3.82
Junior subordinated debentures		3,589				71		7.85				3,589				65		7.26				3,587				39		4.31
Total interest bearing liabilities		2,562,766				26,102		4.04				2,374,338				21,336		3.60				1,981,088				5,990		1.20
Noninterest bearing deposits		698,532										717,256										807,952
Other liabilities		57,865										49,085										25,662
Total shareholders' equity		278,997										265,109										227,506
Total liabilities and shareholders' equity	$	3,598,160									$	3,405,788									$	3,042,208
Net interest income					$	62,229									$	62,350									$	49,189
Interest rate spread								6.04	%									6.58	%									6.18	%
Net interest margin(4)								7.10	%									7.58	%									6.58	%

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

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

	For the Three Months Ended
	September 30, 2023									June 30, 2023									September 30, 2022
(dollars in thousands, unaudited)	Average Balance			Interest & Dividends			Yield / Cost(1)			Average Balance			Interest & Dividends			Yield / Cost(1)			Average Balance			Interest & Dividends			Yield / Cost(1)
Community Bank
Assets
Interest earning assets:
Loans receivable(2)	$	1,752,834		$	27,373		6.20	%		$	1,695,881		$	26,567		6.28	%		$	1,559,160		$	20,879		5.31	%
Intrabank asset		—			—		—				—			—		—				77,217			441		2.27
Total interest earning assets		1,752,834			27,373		6.20				1,695,881			26,567		6.28				1,636,377			21,320		5.17
Liabilities
Interest bearing liabilities:
Interest bearing deposits		920,707			5,067		2.18	%			875,760			3,663		1.68	%			901,339			642		0.28	%
Intrabank liability		223,221			3,036		5.40				196,552			2,490		5.08				—			—		—
Total interest bearing liabilities		1,143,928			8,103		2.81				1,072,312			6,153		2.30				901,339			642		0.28
Noninterest bearing deposits		608,906									623,570									735,038
Net interest income				$	19,270								$	20,414								$	20,678
Net interest margin(3)							4.36	%								4.83	%								5.01	%
CCBX
Assets
Interest earning assets:
Loans receivable(2)(4)	$	1,309,380		$	56,279		17.05	%		$	1,269,406		$	53,632		16.95	%		$	893,655		$	31,449		13.96	%
Intrabank asset		374,632			5,095		5.40				275,222			3,487		5.08				231,090			1,321		2.27
Total interest earning assets		1,684,012			61,374		14.46				1,544,628			57,119		14.83				1,124,745			32,770		11.56
Liabilities
Interest bearing liabilities:
Interest bearing deposits		1,594,386			20,384		5.07	%			1,450,942			17,012		4.70	%			1,051,831			5,075		1.91	%
Total interest bearing liabilities		1,594,386			20,384		5.07				1,450,942			17,012		4.70				1,051,831			5,075		1.91
Noninterest bearing deposits		89,626									93,686									72,914
Net interest income				$	40,990								$	40,107								$	27,695
Net interest margin(3)							9.66	%								10.41	%								9.77	%
Net interest margin, net of Baas loan expense(5)							4.24	%								4.69	%								4.28	%

	For the Three Months Ended
	September 30, 2023									June 30, 2023									September 30, 2022
(dollars in thousands, unaudited)	Average Balance			Interest & Dividends			Yield / Cost(1)			Average Balance			Interest & Dividends			Yield / Cost(1)			Average Balance			Interest & Dividends			Yield / Cost(1)
Treasury & Administration
Assets
Interest earning assets:
Interest earning deposits with other banks	$	285,596		$	3,884		5.40	%		$	211,369		$	2,678		5.08	%		$	397,621		$	2,273		2.27	%
Investment securities, available for sale(6)		100,283			543		2.15				100,278			534		2.14				102,438			545		2.11
Investment securities, held to maturity(6)		17,703			223		5.00				10,047			119		4.75				1,257			9		2.84
Other investments		11,943			29		0.96				11,773			156		5.31				10,520			24		0.91
Total interest earning assets		415,525			4,679		4.47	%			333,467	—		3,487		4.19	%			511,836			2,851		2.21	%
Liabilities
Interest bearing liabilities:
Subordinated debt		44,084			580		5.22	%			44,047			596		5.43	%			24,331			234		3.82	%
Junior subordinated debentures		3,589			71		7.85				3,589			65		7.26				3,587			39		4.31
Intrabank liability, net(7)		151,411			2,059		5.40				78,670			997		5.08				308,307			1,762		2.27
Total interest bearing liabilities		199,084			2,710		5.40				126,306			1,658		5.27				336,225			2,035		2.40
Net interest income				$	1,969								$	1,829								$	816
Net interest margin(3)							1.88	%								2.20	%								0.63	%

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

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

	For the Nine Months Ended
	September 30, 2023										September 30, 2022
(dollars in thousands; unaudited)	Average Balance				Interest & Dividends			Yield / Cost(1)			Average Balance				Interest & Dividends			Yield / Cost(1)
Assets
Interest earning assets:
Interest earning deposits with other banks	$	256,272			$	9,659		5.04	%		$	578,855			$	3,631		0.84	%
Investment securities, available for sale(2)		100,278				1,612		2.15				89,173				1,160		1.74
Investment securities, held to maturity(2)		9,959				360		4.83				1,276				28		2.93
Other investments		11,455				215		2.51				9,996				195		2.61
Loans receivable(3)		2,913,189				230,282		10.57				2,141,127				122,126		7.63
Total interest earning assets		3,291,153				242,128		9.84				2,820,427				127,140		6.03
Noninterest earning assets:
Allowance for credit losses		(89,780	)									(42,836	)
Other noninterest earning assets		196,065										112,468
Total assets	$	3,397,438									$	2,890,059
Liabilities and Shareholders’ Equity
Interest bearing liabilities:
Interest bearing deposits	$	2,305,634			$	61,084		3.54	%		$	1,628,765			$	7,943		0.65	%
FHLB advances and borrowings		—				—		—				8,058				69		1.14
Subordinated debt		44,047				1,775		5.39				24,313				695		3.82
Junior subordinated debentures		3,589				199		7.41				3,587				90		3.35
Total interest bearing liabilities		2,353,270				63,058		3.58				1,664,723				8,797		0.71
Noninterest bearing deposits		730,292										987,343
Other liabilities		48,206										20,442
Total shareholders' equity		265,670										217,551
Total liabilities and shareholders' equity	$	3,397,438									$	2,890,059
Net interest income					$	179,070									$	118,343
Interest rate spread								6.26	%									5.32	%
Net interest margin(4)								7.27	%									5.61	%

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

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

		For the Nine Months Ended
		September 30, 2023									September 30, 2022
(dollars in thousands; unaudited)		Average Balance			Interest & Dividends			Yield / Cost(1)			Average Balance			Interest & Dividends			Yield / Cost(1)
Community Bank
Assets
Interest earning assets:
Loans receivable(2)		$	1,697,965		$	78,151		6.15	%		$	1,483,553		$	57,405		5.17	%
Intrabank asset			—			—		—				167,379			872		0.70
Total interest earning assets			1,697,965			78,151		6.15				1,650,932			58,277		4.72
Liabilities
Interest bearing liabilities:
Interest bearing deposits			883,454			11,264		1.70	%			919,415			1,394		0.20	%
Intrabank liability			171,950			6,605		5.14				—			—		—
Total interest bearing liabilities			1,055,404			17,869		2.26				919,415			1,394		0.20
Noninterest bearing deposits			642,561									731,517
Net interest income					$	60,282								$	56,883
Net interest margin(3)								4.75	%								4.61	%
CCBX
Assets
Interest earning assets:
Loans receivable(2)(4)		$	1,215,224		$	152,131		16.74	%		$	657,574		$	64,721		13.16	%
Intrabank asset			294,687			11,234		5.10				307,602			2,051		0.89
Total interest earning assets			1,509,911			163,365		14.47				965,176			66,772		9.25
Liabilities
Interest bearing liabilities:
Interest bearing deposits			1,422,180			49,820		4.68	%			709,350			6,549		1.23	%
Total interest bearing liabilities			1,422,180			49,820		4.68				709,350			6,549		1.23
Noninterest bearing deposits			87,731									255,826
Net interest income					$	113,545								$	60,223
Net interest margin(3)								10.05	%								8.34	%
Net interest margin, net of Baas loan expense(5)								4.51	%								3.34	%

		For the Nine Months Ended
		September 30, 2023									September 30, 2022
(dollars in thousands; unaudited)		Average Balance			Interest & Dividends			Yield / Cost(1)			Average Balance			Interest & Dividends			Yield / Cost(1)
Treasury & Administration
Assets
Interest earning assets:
Interest earning deposits with other banks		$	256,272		$	9,659		5.04	%		$	578,855		$	3,631		0.84	%
Investment securities, available for sale(6)			100,278			1,612		2.15				89,173			1,160		1.74
Investment securities, held to maturity(6)			9,959			360		4.83				1,276			28		2.93
Other investments			11,455			215		2.51				9,996			195		2.61
Total interest earning assets			377,964			11,846		4.19				679,300			5,014		0.99
Liabilities
Interest bearing liabilities:
FHLB advances and borrowings			—			—		—	%			8,058			69		1.14	%
Subordinated debt			44,047			1,775		5.39				24,313			695		3.82
Junior subordinated debentures			3,589			199		7.41				3,587			90		3.35
Intrabank liability, net(7)			122,737			4,629		5.04				474,981			2,923		0.82
Total interest bearing liabilities			170,373			6,603		5.18				510,939			3,777		0.99
Net interest income					$	5,243								$	1,237
Net interest margin(3)								1.85	%								0.24	%

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

  

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

	Three Months Ended
	September 30, 2023				June 30, 2023				March 31, 2023				December 31, 2022				September 30, 2022
Income Statement Data:
Interest and dividend income	$	88,331			$	83,686			$	70,111			$	65,030			$	55,179
Interest expense		26,102				21,336				15,620				11,598				5,990
Net interest income		62,229				62,350				54,491				53,432				49,189
Provision for credit losses - loans		27,157				52,598				43,544				33,600				18,428
Provision (recovery) for unfunded commitments		96				(345	)			153				—				—
Net interest income after provision for credit losses - loans and unfunded commitments		34,976				10,097				10,794				19,832				30,761
Noninterest income		34,579				58,595				49,307				42,815				34,391
Noninterest expense		56,501				51,910				44,663				47,103				51,087
Provision for income tax		2,784				3,876				3,047				2,426				2,964
Net income		10,270				12,906				12,391				13,118				11,101
	As of and for the Three Month Period
	September 30, 2023				June 30, 2023				March 31, 2023				December 31, 2022				September 30, 2022
Balance Sheet Data:
Cash and cash equivalents	$	474,946			$	275,060			$	393,916			$	342,139			$	410,728
Investment securities		141,489				110,730				101,704				98,353				98,871
Loans held for sale		—				35,923				27,292				—				43,314
Loans receivable		2,967,035				3,007,553				2,837,204				2,627,256				2,507,889
Allowance for credit losses		(101,085	)			(110,762	)			(89,123	)			(74,029	)			(59,282	)
Total assets		3,680,268				3,535,283				3,451,033				3,144,467				3,133,741
Interest bearing deposits		2,637,914				2,436,980				2,333,423				2,042,509				2,023,849
Noninterest bearing deposits		651,786				725,592				761,800				775,012				813,217
Core deposits(1)		3,269,082				3,137,747				3,068,162				2,686,528				2,727,830
Total deposits		3,289,700				3,162,572				3,095,223				2,817,521				2,837,066
Total borrowings		47,695				47,658				47,619				47,587				27,931
Total shareholders’ equity		284,450				272,662				258,763				243,494				228,733
Share and Per Share Data(2):
Earnings per share – basic	$	0.77			$	0.97			$	0.94			$	1.01			$	0.86
Earnings per share – diluted	$	0.75			$	0.95			$	0.91			$	0.96			$	0.82
Dividends per share		—				—				—				—				—
Book value per share(3)	$	21.38			$	20.50			$	19.48			$	18.50			$	17.66
Tangible book value per share(4)	$	21.38			$	20.50			$	19.48			$	18.50			$	17.66
Weighted avg outstanding shares – basic		13,285,974				13,275,640				13,196,960				13,030,726				12,938,200
Weighted avg outstanding shares – diluted		13,675,833				13,597,763				13,609,491				13,603,978				13,536,823
Shares outstanding at end of period		13,302,449				13,300,809				13,281,533				13,161,147				12,954,573
Stock options outstanding at end of period		356,359				357,999				360,119				438,103				644,334

	As of and for the Three Month Period
	September 30, 2023				June 30, 2023				March 31, 2023				December 31, 2022				September 30, 2022
Credit Quality Data:
Nonperforming assets(5)to total assets		1.18	%			0.95	%			0.91	%			1.06	%			0.73	%
Nonperforming assets(5)to loans receivable and OREO		1.47	%			1.12	%			1.11	%			1.26	%			0.91	%
Nonperforming loans(5)to total loans receivable		1.47	%			1.12	%			1.11	%			1.26	%			0.91	%
Allowance for credit losses to nonperforming loans		232.2	%			328.4	%			282.5	%			224.4	%			259.1	%
Allowance for credit losses to total loans receivable		3.41	%			3.68	%			3.14	%			2.82	%			2.36	%
Gross charge-offs	$	37,026			$	32,299			$	34,167			$	18,886			$	8,513
Gross recoveries	$	192			$	1,340			$	1,865			$	33			$	9
Net charge-offs to average loans(6)		4.77	%			4.19	%			4.84	%			2.87	%			1.38	%
Capital Ratios(7):
Tier 1 leverage capital		8.03	%			8.16	%			8.29	%			7.97	%			7.70	%
Common equity Tier 1 risk-based capital		8.99	%			8.36	%			8.61	%			8.92	%			8.49	%
Tier 1 risk-based capital		9.10	%			8.47	%			8.73	%			9.04	%			8.62	%
Total risk-based capital		11.79	%			11.12	%			11.49	%			11.94	%			10.80	%

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

Non-GAAP Financial Measures

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

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

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

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

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

		As of and for the Three Months Ended												As of and for the Nine Months Ended
(dollars in thousands, unaudited)		September 30, 2023				June 30, 2023				September 30, 2022				September 30, 2023				September 30, 2022
Revenue excluding BaaS credit enhancements and BaaS fraud enhancements:
Total net interest income		$	62,229			$	62,350			$	49,189			$	179,070			$	118,343
Total noninterest income			34,579				58,595				34,391				142,481				81,869
Total Revenue		$	96,808			$	120,945			$	83,580			$	321,551			$	200,212
Less: BaaS credit enhancements			(25,926	)			(51,027	)			(17,928	)			(119,315	)			(45,210	)
Less: BaaS fraud enhancements			(2,850	)			(1,537	)			(11,708	)			(6,386	)			(22,753	)
Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements		$	68,032			$	68,381			$	53,944			$	195,850			$	132,249

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

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

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

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

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

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

		As of and for the Three Months Ended												As of and for the Nine Months Ended
(dollars in thousands; unaudited)		September 30, 2023				June 30, 2023				September 30, 2022				September 30, 2023				September 30, 2022
Net BaaS loan income divided by average CCBX loans:
CCBX loan yield (GAAP)(1)			17.05	%			16.95	%			13.96	%			16.74	%			13.16	%
Total average CCBX loans receivable		$	1,309,380			$	1,269,406			$	893,655			$	1,215,224			$	657,574
Interest and earned fee income on CCBX loans (GAAP)			56,279				53,632				31,449				152,131				64,721
BaaS loan expense			(23,003	)			(22,033	)			(15,560	)			(62,590	)			(36,079	)
Net BaaS loan income		$	33,276			$	31,599			$	15,889			$	89,541			$	28,642
Net BaaS loan income divided by average CCBX loans(1)			10.08	%			9.99	%			7.05	%			9.85	%			5.82	%
Net interest margin, net of BaaS loan expense:
CCBX interest margin(1)			9.66	%			10.41	%			9.77	%			10.05	%			8.34	%
CCBX earning assets			1,684,012				1,544,628				1,124,745				1,509,911				965,176
Net interest income			40,990				40,107				27,695				113,545				60,223
Less: BaaS loan expense			(23,003	)			(22,033	)			(15,560	)			(62,590	)			(36,079	)
Net interest income, net of BaaS loan expense		$	17,987			$	18,074			$	12,135			$	50,955			$	24,144
Net interest margin, net of BaaS loan expense(1)			4.24	%			4.69	%			4.28	%			4.51	%			3.34	%

⁽¹⁾ Annualized calculations for periods presented.

APPENDIX A -
As of September 30, 2023

Industry Concentration

We have a diversified loan portfolio, representing a wide variety of industries. Our major categories of loans are commercial real estate, consumer and other loans, residential real estate, commercial and industrial, and construction, land and land development loans. Together they represent $2.97 billion in outstanding loan balances. When combined with $2.35 billion in unused commitments the total of these categories is $5.33 billion.

Commercial real estate loans represent the largest segment of our loans, comprising 41.6% of our total balance of outstanding loans as of September 30, 2023. Unused commitments to extend credit represents an additional $31.8 million, and the combined total in commercial real estate loans represents $1.27 billion, or 23.8% of our total outstanding loans and loan commitments.

The following table summarizes our loan commitment by industry for our commercial real estate portfolio as of September 30, 2023:

(dollars in thousands; unaudited)		Outstanding Balance			Available Loan Commitments			Total Outstanding Balance & Available Commitment			% of Total Loans (Outstanding Balance & Available Commitment)			Average Loan Balance			Number of Loans
Apartments		$	333,685		$	10,653		$	344,338		6.5	%		$	3,178		105
Hotel/Motel			164,501			1,328			165,829		3.1				6,327		26
Convenience Store			118,821			1,286			120,107		2.2				2,085		57
Mixed use			90,423			2,666			93,089		1.7				1,064		85
Warehouse			108,568			2,203			110,771		2.1				1,939		56
Office			85,214			3,469			88,683		1.7				926		92
Retail			96,287			675			96,962		1.8				953		101
Mini Storage			60,387			2,942			63,329		1.2				3,019		20
Strip Mall			45,657			—			45,657		0.9				5,707		8
Manufacturing			38,038			1,800			39,838		0.7				1,153		33
Groups < 0.70% of total			96,268			4,772			101,040		1.9				1,174		82
Total		$	1,237,849		$	31,794		$	1,269,643		23.8	%		$	1,861		665

Consumer loans comprise 25.6% of our total balance of outstanding loans as of September 30, 2023. Unused commitments to extend credit represents an additional $1.00 billion, and the combined total in consumer and other loans represents $1.76 billion, or 33.1% of our total outstanding loans and loan commitments. As illustrated in the table below, our CCBX partners bring in a large number of mostly smaller dollar loans, resulting in an average consumer loan balance of just $1,400. CCBX consumer loans are underwritten to CCBX credit standards and underwriting of these loans is regularly tested.

The following table summarizes our loan commitment by industry for our consumer and other loan portfolio as of September 30, 2023:

(dollars in thousands; unaudited)		Outstanding Balance			Available Loan Commitments			Total Outstanding Balance & Available Commitment(1)			% of Total Loans (Outstanding Balance & Available Commitment)			Average Loan Balance			Number of Loans
CCBX consumer loans
Credit cards		$	440,993		$	1,000,320		$	1,441,313		27.1	%		$	1.6		279,714
Installment loans			310,719			—			310,719		5.8				1.5		213,011
Lines of credit			3,934			1,689			5,623		0.1				0.1		39,614
Other loans			2,334			—			2,334		0.1				0.1		17,577
Community bank consumer loans
Installment loans			1,232			—			1,232		0.0				51.3		24
Lines of credit			150			573			723		0.0				3.7		41
Other loans			1,101			—			1,101		0.0				3.6		309
Total		$	760,463		$	1,002,582		$	1,763,045		33.1	%		$	1.4		550,290

⁽¹⁾  Total exposure on CCBX loans is subject to portfolio maximum limits

Residential real estate loans comprise 16.1% of our total balance of outstanding loans as of September 30, 2023. Unused commitments to extend credit represents an additional $477.2 million, and the combined total in residential real estate loans represents $954.4 million, or 17.9% of our total outstanding loans and loan commitments.

The following table summarizes our loan commitment by industry for our residential real estate loan portfolio as of September 30, 2023:

(dollars in thousands; unaudited)		Outstanding Balance			Available Loan Commitments			Total Outstanding Balance & Available Commitment(1)			% of Total Loans (Outstanding Balance & Available Commitment)			Average Loan Balance			Number of Loans
CCBX residential real estate loans
Home equity line of credit		$	251,775		$	429,893		$	681,668		12.8	%		$	24		10,384
Community bank residential real estate loans
Closed end, secured by first liens			194,696			3,740			198,436		3.7				620		314
Home equity line of credit			21,342			41,943			63,285		1.2				100		214
Closed end, second liens			9,334			1,667			11,001		0.2				301		31
Total		$	477,147		$	477,243		$	954,390		17.9	%		$	44		10,943

⁽¹⁾  Total exposure on CCBX loans is subject to portfolio maximum limits.

Commercial and industrial loans comprise 11.1% of our total balance of outstanding loans as of September 30, 2023. Unused commitments to extend credit represents an additional $706.5 million, and the combined total in commercial and industrial loans represents $1.04 billion, or 19.5% of our total outstanding loans and loan commitments. Included in commercial and industrial loans is $114.2 million in outstanding capital call lines, with an additional $630.7 million in available loan commitments which is limited to a $350.0 million portfolio maximum. Capital call lines are provided to venture capital firms through one of our CCBX BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every line.

The following table summarizes our loan commitment by industry for our commercial and industrial loan portfolio as of September 30, 2023:

(dollars in thousands; unaudited)		Outstanding Balance			Available Loan Commitments			Total Outstanding Balance & Available Commitment(1)			% of Total Loans (Outstanding Balance & Available Commitment)			Average Loan Balance			Number of Loans
Capital Call Lines		$	114,174		$	630,668		$	744,842		14.0	%		$	723		158
Retail			58,586			6,131			64,717		1.2				19		3,063
Construction/Contractor Services			24,988			25,743			50,731		1.0				134		186
Financial Institutions			48,648			—			48,648		0.9				4,054		12
Medical / Dental / Other Care			19,249			8,045			27,294		0.5				802		24
Manufacturing			8,479			5,093			13,572		0.3				193		44
Groups < 0.30% of total			57,151			30,776			87,927		1.6				107		534
Total		$	331,275		$	706,456		$	1,037,731		19.5	%		$	82		4,021

⁽¹⁾  Total exposure on CCBX loans is subject to portfolio maximum limits.

Construction, land and land development loans comprise 5.6% of our total balance of outstanding loans as of September 30, 2023. Unused commitments to extend credit represents an additional $133.7 million, and the combined total in construction, land and land development loans represents $301.4 million, or 5.7% of our total outstanding loans and loan commitments.

The following table details our loan commitment for our construction, land and land development portfolio as of September 30, 2023:

(dollars in thousands; unaudited)		Outstanding Balance			Available Loan Commitments			Total Outstanding Balance & Available Commitment			% of Total Loans (Outstanding Balance & Available Commitment)			Average Loan Balance			Number of Loans
Commercial construction		$	91,396		$	106,144		$	197,540		3.7	%		$	5,376		17
Undeveloped land loans			8,310			6,281			14,591		0.3				554		15
Residential construction			33,971			13,095			47,066		0.9				1,415		24
Developed land loans			21,369			3,732			25,101		0.5				763		28
Land development			12,640			4,443			17,083		0.3				843		15
Total		$	167,686		$	133,695		$	301,381		5.7	%		$	1,694		99

Exposure and and risk in our construction, land and land development portfolio is lower in the current period compared to previous periods as demonstrated by the declining outstanding balance for the periods indicated in the following table:

		Outstanding Balance as of
(dollars in thousands; unaudited)		September 30, 2023			June 30, 2023			March 31, 2023			December 31, 2022			September 30, 2022
Commercial construction		$	91,396		$	78,079	`	$	97,987		$	100,714		$	109,874
Residential construction			33,971			35,032			32,268			32,879			38,795
Undeveloped land loans			8,310			42,530			41,951			44,578			41,373
Developed land loans			21,369			18,735			19,130			20,167			19,436
Land development			12,640			12,330			15,299			15,717			14,710
Total		$	167,686		$	186,706		$	206,635		$	214,055		$	224,188

We have portfolio limits with our each of our partners to manage loan concentration risk, liquidity risk, and counter-party partner risk. For example, as of September 30, 2023, capital call lines outstanding balance totaled $114.2 million, and while commitments totaled $630.7 million the commitments are limited to a maximum of $350.0 million by agreement with the partner.

APPENDIX B -
As of September 30, 2023

CCBX – BaaS Reporting Information

During the quarter ended September 30, 2023, $25.9 million was recorded in BaaS credit enhancements related to the provision for credit losses - loans and reserve for unfunded commitments for CCBX partner loans and negative deposit accounts. Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans, unfunded commitments and negative deposit accounts. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner legal commitment to indemnify or reimburse losses. The credit enhancement asset is relieved as credit enhancement payments and recoveries are received from the CCBX partner or taken from the partner's cash reserve account. Agreements with our CCBX partners also provide protection to the Bank from fraud by indemnifying or reimbursing incurred fraud losses. BaaS fraud includes noncredit fraud losses on loans and deposits originated through partners. Fraud losses are recorded when incurred as losses in noninterest expense, and the enhancement received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. CCBX partners also pledge a cash reserve account at the Bank which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations to replenish their cash reserve account then the bank would be exposed to additional loan and deposit losses, as a result of this counterparty risk. If a CCBX partner does not replenish their cash reserve account then the Bank can declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit and fraud enhancements. The Bank would write-off any remaining credit enhancement asset from the CCBX partner not covered by the cash pledge account but would retain the full yield and any fee income on the loan going forward, and BaaS loan expense for that CCBX partner would cease once default occurred and payments to the CCBX partner were stopped.

For CCBX partner loans the Bank records contractual interest earned from the borrower on loans in interest income, adjusted for origination costs which are paid or payable to the CCBX partner. BaaS loan expense represents the amount paid or payable to partners for credit and fraud enhancements and originating & servicing CCBX loans. To determine net revenue (Net BaaS loan income) earned from CCBX loan relationships, the Bank takes BaaS loan interest income and deducts BaaS loan expense to arrive at Net BaaS loan income (A reconciliation of the non-GAAP measures are set forth in the preceding section of this earnings release.) which can be compared to interest income on the Company’s community bank loans.

The following table illustrates how CCBX partner loan income and expenses are recorded in the financial statements:

Loan income and related loan expense		Three Months Ended												Nine Months Ended
(dollars in thousands; unaudited)		September 30, 2023				June 30, 2023				September 30, 2022				September 30, 2023				September 30, 2022
Yield on loans(1)			17.05	%			16.95	%			13.96	%			16.74	%			13.16	%
BaaS loan interest income		$	56,279			$	53,632			$	31,449			$	152,131			$	64,721
Less: BaaS loan expense			23,003				22,033				15,560				62,590				36,079
Net BaaS loan income(2)			33,276				31,599				15,889				89,541				28,642
Net BaaS loan income divided by average BaaS loans(1)(2)			10.08	%			9.99	%			7.05	%			9.85	%			5.82	%

(1) Annualized calculation for quarterly periods shown.
(2) A reconciliation of the non-GAAP measures are set forth in the preceding section of this earnings release.

Increased interest rates and growth in CCBX loans and deposits has resulted in increases in interest income and expense for the quarter ended September 30, 2023 compared to the quarters ended June 30, 2023 and September 30, 2022. The following tables are a summary of the interest components, direct fees, and expenses of BaaS for the periods indicated and are not inclusive of all income and expense related to BaaS.

Interest income		Three Months Ended									Nine Months Ended
(dollars in thousands; unaudited)		September 30, 2023			June 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
Loan interest income		$	56,279		$	53,632		$	31,449		$	152,131		$	64,721
Total BaaS interest income		$	56,279		$	53,632		$	31,449		$	152,131		$	64,721

Interest expense		Three Months Ended									Nine Months Ended
(dollars in thousands; unaudited)		September 30, 2023			June 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
BaaS interest expense		$	20,384		$	17,012		$	5,075		$	49,820		$	6,549
Total BaaS interest expense		$	20,384		$	17,012		$	5,075		$	49,820		$	6,549

BaaS income		Three Months Ended									Nine Months Ended
(dollars in thousands; unaudited)		September 30, 2023			June 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
BaaS program income:
Servicing and other BaaS fees		$	997		$	895		$	1,079		$	2,840		$	3,407
Transaction fees			1,036			1,052			940			3,005			2,247
Interchange fees			1,216			975			738			2,980			1,798
Reimbursement of expenses			1,152			1,026			885			3,099			1,875
BaaS program income			4,401			3,948			3,642			11,924			9,327
BaaS indemnification income:
BaaS credit enhancements			25,926			51,027			17,928			119,315			45,210
BaaS fraud enhancements			2,850			1,537			11,708			6,386			22,753
BaaS indemnification income			28,776			52,564			29,636			125,701			67,963
Total BaaS income		$	33,177		$	56,512		$	33,278		$	137,625		$	77,290

BaaS loan and fraud expense:		Three Months Ended									Nine Months Ended
(dollars in thousands; unaudited)		September 30, 2023			June 30, 2023			September 30, 2022			September 30, 2023			September 30, 2022
BaaS loan expense		$	23,003		$	22,033		$	15,560		$	62,590		$	36,079
BaaS fraud expense			2,850			1,537			11,707			6,386			22,752
Total BaaS loan and fraud expense		$	25,853		$	23,570		$	27,267		$	68,976		$	58,831