EVERETT, Wash., Oct. 28, 2024 (GLOBE NEWSWIRE) — Coastal Financial Corporation (Nasdaq: CCB) (the “Company”, “Coastal”, “we”, “our”, or “us”), the holding company for Coastal Community Bank (the “Bank”), through which it operates a community-focused bank with an industry leading banking as a service (“BaaS”) segment, today reported unaudited financial results for the quarter ended September 30, 2024, including net income of $13.5 million, or $0.97 per diluted common share, compared to $11.6 million, or $0.84 per diluted common share, for the three months ended June 30, 2024.
Management Discussion of the Quarter
“The third quarter demonstrated strong momentum across both our community bank and CCBX operating segments, despite a still challenging operating environment,” said CEO Eric Sprink. “We saw high quality net loan growth of $92.4 million despite selling $423.7 million in loans. We are implementing strategies to increase fee income and we continue to build out and invest in an infrastructure that is scalable, and that we believe will enable us to be innovative leaders in financial services.”
Key Points for Third Quarter and Our Go-Forward Strategy
Balance Sheet Well Positioned for Lower Rates. Our balance sheet stands in a modestly liability sensitive position as of September 30, 2024, with $1.95 billion of CCBX deposits that contractually reprice lower immediately upon any reduction in the Federal Funds Rate, with $1.09 billion of CCBX loans repricing in 90 days or less following such reduction. The Federal Open Market Committee recently lowered the targeted Federal Funds rate 0.50% on September 19, 2024; a reduction of 0.50% compared to June 30, 2024 and September 30, 2023. The rate decrease came late in the quarter, so the full impact of this and any subsequent rate changes will be reflected in future periods. Expanding Relationships with CCBX Partners. We continue to focus on expanding product offerings with existing CCBX partners. We believe that launching new products with existing partners positions us to reach a wide and established customer base with modest increase in enterprise risk. Products launched in 2024 with existing partners have gained traction and are growing the balance sheet and increasing income. The pipeline for CCBX is active, although we expect to remain selective in adding new partners to manage risk and capital.On-going Loan Sales. We sold $423.7 million loans in the quarter ended September 30, 2024 as part of our strategy to balance credit risk, manage partner and lending limits, protect capital levels and move credit card balances to an off balance sheet fee generating model. We are retaining a portion of the fee income for our role in processing transactions on sold credit card balances. This provides an on-going and passive revenue stream with no on balance sheet risk.Continued Regulatory and Compliance Infrastructure Investments Position Us Well for Next Phase of Growth. We continue to utilize co-sourced personnel as a component of our risk and compliance efforts. This flexible co-sourcing approach allows us to manage the growth of our internal team while also ensuring CCBX has the resources it needs. While we remain 100% indemnified against partner fraud losses, we were encouraged to see fraudulent activity amongst our partners remains low during the current quarter, compared to the same period last year, a positive indicator of our continued investments in our risk infrastructure.Reorganization and Strengthening of Talent to Accommodate Growth and Plans for the Future. We recently announced the bifurcation of the President of the Bank into two roles, appointing Brian Hamilton as President of CCBX, the Fintech and BaaS segment of the Bank, with Curt Queyrouze serving as President of the community bank and corporate credit.
Third Quarter 2024 Financial Highlights
The tables below outline some of our key operating metrics.
Three Months Ended(Dollars in thousands, except share and per share data; unaudited) September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023Income Statement Data: Interest and dividend income $105,079 $97,487 $90,472 $88,243 $88,331 Interest expense 32,892 31,250 29,536 28,586 26,102 Net interest income 72,187 66,237 60,936 59,657 62,229 Provision for credit losses 70,257 62,325 83,158 60,789 27,253 Net interest (expense)/ income after provision for credit losses 1,930 3,912 (22,222) (1,132) 34,976 Noninterest income 80,068 69,918 86,955 64,694 34,579 Noninterest expense 65,616 58,809 56,018 51,703 56,501 Provision for income tax 2,926 3,425 1,915 2,847 2,784 Net income 13,456 11,596 6,800 9,012 10,270 As of and for the Three Month Period September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023Balance Sheet Data: Cash and cash equivalents $484,026 $487,245 $515,128 $483,128 $474,946 Investment securities 48,620 49,213 50,090 150,364 141,489 Loans held for sale 7,565 — 797 — — Loans receivable 3,418,832 3,326,460 3,199,554 3,026,092 2,967,035 Allowance for credit losses (170,263) (147,914) (139,258) (116,958) (101,085)Total assets 4,065,821 3,961,546 3,865,258 3,753,366 3,678,265 Interest bearing deposits 3,047,861 2,949,643 2,888,867 2,735,161 2,637,914 Noninterest bearing deposits 579,427 593,789 574,112 625,202 651,786 Core deposits (1) 3,190,869 3,528,339 3,447,864 3,342,004 3,269,082 Total deposits 3,627,288 3,543,432 3,462,979 3,360,363 3,289,700 Total borrowings 47,847 47,810 47,771 47,734 47,695 Total shareholders’ equity 331,930 316,693 303,709 294,978 284,450 Share and Per Share Data (2): Earnings per share – basic $1.00 $0.86 $0.51 $0.68 $0.77 Earnings per share – diluted $0.97 $0.84 $0.50 $0.66 $0.75 Dividends per share — — — — — Book value per share (3) $24.51 $23.54 $22.65 $22.17 $21.38 Tangible book value per share (4) $24.51 $23.54 $22.65 $22.17 $21.38 Weighted avg outstanding shares – basic 13,447,066 13,412,667 13,340,997 13,286,828 13,285,974 Weighted avg outstanding shares – diluted 13,822,270 13,736,508 13,676,917 13,676,513 13,675,833 Shares outstanding at end of period 13,543,282 13,453,805 13,407,320 13,304,339 13,302,449 Stock options outstanding at end of period 198,370 286,119 309,069 354,969 356,359 See footnotes that follow the tables below As of and for the Three Month Period September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023Credit Quality Data: Nonperforming assets (5) to total assets 1.34% 1.34% 1.42% 1.43% 1.18%Nonperforming assets (5) to loans receivable and OREO 1.60% 1.60% 1.71% 1.78% 1.47%Nonperforming loans (5) to total loans receivable 1.60% 1.60% 1.71% 1.78% 1.47%Allowance for credit losses to nonperforming loans 311.5% 278.1% 253.8% 217.2% 232.2%Allowance for credit losses to total loans receivable 4.98% 4.45% 4.35% 3.86% 3.41%Gross charge-offs $53,305 $55,207 $58,994 $47,652 $37,879 Gross recoveries $4,069 $1,973 $1,776 $2,781 $1,045 Net charge-offs to average loans (6) 5.65% 6.57% 7.34% 5.92% 4.77% Capital Ratios: Company Tier 1 leverage capital 8.40% 8.31% 8.24% 8.10% 8.03%Common equity Tier 1 risk-based capital 9.26% 9.03% 8.98% 9.10% 9.00%Tier 1 risk-based capital 9.35% 9.13% 9.08% 9.20% 9.11%Total risk-based capital 11.90% 11.70% 11.70% 11.87% 11.80%Bank Tier 1 leverage capital 9.29% 9.24% 9.19% 9.06% 8.99%Common equity Tier 1 risk-based capital 10.36% 10.15% 10.14% 10.30% 10.21%Tier 1 risk-based capital 10.36% 10.15% 10.14% 10.30% 10.21%Total risk-based capital 11.65% 11.44% 11.43% 11.58% 11.48%
(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.
Key Performance Ratios
Return on average assets (“ROA”) was 1.34% for the quarter ended September 30, 2024 compared to 1.21% and 1.13% for the quarters ended June 30, 2024 and September 30, 2023, respectively. ROA for the quarter ended September 30, 2024, increased 0.13% and 0.21% compared to June 30, 2024 and September 30, 2023, respectively. Noninterest expenses were higher for the quarter ended September 30, 2024 compared to the quarters ended June 30, 2024 and September 30, 2023 largely due to an increase in BaaS loan expense, which is directly related to the increase in the amount of interest earned on CCBX loans.
The following table shows the Company’s key performance ratios for the periods indicated.
Three Months Ended(unaudited) September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023 Return on average assets (1) 1.34% 1.21% 0.73% 0.97% 1.13%Return on average equity (1) 16.67% 15.22% 9.21% 12.35% 14.60%Yield on earnings assets (1) 10.79% 10.49% 10.07% 9.77% 10.08%Yield on loans receivable (1) 11.43% 11.23% 10.85% 10.71% 10.84%Cost of funds (1) 3.62% 3.60% 3.52% 3.39% 3.18%Cost of deposits (1) 3.59% 3.58% 3.49% 3.36% 3.14%Net interest margin (1) 7.41% 7.13% 6.78% 6.61% 7.10%Noninterest expense to average assets (1) 6.54% 6.14% 6.04% 5.56% 6.23%Noninterest income to average assets (1) 7.98% 7.30% 9.38% 6.95% 3.81%Efficiency ratio 43.10% 43.19% 37.88% 41.58% 58.36%Loans receivable to deposits (2) 94.46% 93.88% 92.42% 90.05% 90.19%
(1) Annualized calculations shown for quarterly periods presented.
(2) Includes loans held for sale.
Management Outlook; CEO Eric Sprink
“As we look ahead to the fourth quarter and 2025, we remain laser focused on building out our technology and risk management infrastructure to more efficiently support our next phase of growth within CCBX. While the balance sheet re-mix earlier this year resulted in a short-term reduction to income, we continue to make strategic decisions which are enhancing credit quality, generating passive fee income, strengthening our talent and growing relationships with established and prospective CCBX partners all of which are expected to position Coastal to be more profitable in 2025.”
Coastal Financial Corporation 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 all of 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.
CCBX Performance Update
Our CCBX segment continues to evolve, and we have 22 relationships, at varying stages, as of September 30, 2024. We continue to refine the criteria for CCBX partnerships, are exiting relationships where it makes sense for us to do so and are focusing on larger more established partners, with experienced management teams, existing customer bases and strong financial positions.
We are expanding product offerings with our existing CCBX partners. We believe that launching new products with existing partners positions us to reach a wide and established customer base with a modest increase in regulatory risk given we have already vetted these partners and have operational history. Products launched earlier in the year with existing partners have gained traction and are growing the balance sheet and increasing income. We continue to sell loans as part of our strategy to balance partner and lending limits, and manage the loan portfolio and credit quality. We retain a portion of the fee income for our role in processing transactions on sold credit card balances. This is expected to provide an on-going and passive revenue stream with no on balance sheet risk.
The following table illustrates the activity and evolution in CCBX relationships for the periods presented.
As of(unaudited) September 30,
2024June 30,
2024September 30,
2023Active 191918Friends and family / testing 111Implementation / onboarding 111Signed letters of intent 101Wind down – active but preparing to exit relationship 001Total CCBX relationships 222122
CCBX loans increased $106.9 million, or 7.6%, despite selling $423.7 million loans during the three months ended September 30, 2024 to $1.52 billion, while we continued to enhance credit standards on new CCBX loan originations. In accordance with the program agreement for one partner, effective April 1, 2024, the portion of the CCBX portfolio that we are responsible for losses on decreased from 10% to 5%. At September 30, 2024 the portion of this portfolio for which we are responsible represented $19.8 million in loans.
The following table details the CCBX loan portfolio:
CCBX As of September 30, 2024 June 30, 2024 September 30, 2023(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to TotalCommercial and industrial loans: Capital call lines $103,924 6.8% $109,133 7.7% $114,174 9.6%All other commercial & industrial loans 36,494 2.4 41,731 3.0 58,869 5.0 Real estate loans: Residential real estate loans 265,402 17.5 287,950 20.4 251,775 21.3 Consumer and other loans: Credit cards 633,691 41.6 549,241 38.7 440,993 37.3 Other consumer and other loans 482,228 31.7 426,809 30.2 316,987 26.8 Gross CCBX loans receivable 1,521,739 100.0% 1,414,864 100.0% 1,182,798 100.0%Net deferred origination (fees) costs (447) (438) (424) Loans receivable $1,521,292 $1,414,426 $1,182,374 Loan Yield – CCBX (1)(2) 17.35% 17.77% 17.05%
(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.
The increase in CCBX loans in the quarter ended September 30, 2024, includes an increase of $139.9 million or 14.3%, in consumer and other loans, partially offset by a $22.5 million, or 7.8%, decrease in residential real estate loans and a decrease of $5.2 million, or 4.8%, 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 $423.7 million in CCBX loans during the quarter ended September 30, 2024 compared to sales of $155.2 million in the quarter ended June 30, 2024. We continue to reposition ourselves by managing CCBX credit and concentration levels in an effort to optimize our loan portfolio and generate off balance sheet fee income.
Our credit card program through CCBX continues to grow in dollars and number of active cards as shown in the graph below:
The following table details the CCBX deposit portfolio:
CCBX As of September 30, 2024 June 30, 2024 September 30, 2023(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to TotalDemand, noninterest bearing $60,655 2.9% $62,234 3.0% $67,782 3.9%Interest bearing demand and money market 1,991,858 94.6 1,989,105 96.7 1,679,921 95.9 Savings 5,204 0.3 5,150 0.3 4,529 0.2 Total core deposits 2,057,717 97.8 2,056,489 100.0 1,752,232 100.0 Other deposits 47,046 2.2 — 0.0 — — Total CCBX deposits $2,104,763 100.0% $2,056,489 100.0% $1,752,232 100.0%Cost of deposits (1) 4.82% 4.92% 4.80%
(1) Cost of deposits is annualized for the three months ended for each period presented.
CCBX deposits increased $48.3 million, or 2.3%, in the three months ended September 30, 2024 to $2.10 billion. This excludes the $214.5 million in CCBX deposits that were transferred off balance sheet for increased Federal Deposit Insurance Corporation (“FDIC”) insurance coverage purposes, compared to $117.7 million for the quarter ended June 30, 2024. Amounts in excess of FDIC insurance coverage are transferred, using a third party facilitator/vendor sweep product, to participating financial institutions.
Community Bank Performance Update
In the quarter ended September 30, 2024, the community bank saw net loans decrease $14.5 million, or 0.8%, to $1.90 billion.
The following table details the Community Bank loan portfolio:
Community Bank As of September 30, 2024 June 30, 2024 September 30, 2023(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to TotalCommercial and industrial loans $152,161 8.0% $144,436 7.5% $158,232 8.8%Real estate loans: Construction, land and land development loans 163,051 8.6 173,064 9.0 167,686 9.4 Residential real estate loans 212,467 11.2 229,639 12.0 225,372 12.6 Commercial real estate loans 1,362,452 71.5 1,357,979 70.8 1,237,849 69.1 Consumer and other loans: Other consumer and other loans 14,173 0.7 14,220 0.7 2,483 0.1 Gross Community Bank loans receivable 1,904,304 100.0% 1,919,338 100.0% 1,791,622 100.0%Net deferred origination fees (6,764) (7,304) (6,961) Loans receivable $1,897,540 $1,912,034 $1,784,661 Loan Yield(1) 6.64% 6.52% 6.20%
(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.
Community bank loans had a $10.0 million decrease in construction, land and land development loans, partially offset by an increase of $7.7 million in commercial and industrial loans and an increase in commercial real estate loans of $4.5 million during the quarter ended September 30, 2024; consumer and other loans were flat.
The following table details the community bank deposit portfolio:
Community Bank As of September 30, 2024 June 30, 2024 September 30, 2023(dollars in thousands; unaudited) Balance % to Total Balance % to Total Balance % to TotalDemand, noninterest bearing $518,772 34.1% $531,555 35.6% $584,004 37.9%Interest bearing demand and money market 552,108 36.3 876,668 59.0 852,747 55.5 Savings 62,272 4.1 63,627 4.3 80,099 5.2 Total core deposits 1,133,152 74.5 1,471,850 98.9 1,516,850 98.6 Other deposits 373,681 24.5 1 0.0 1 0.0 Time deposits less than $100,000 6,305 0.4 6,741 0.5 8,635 0.6 Time deposits $100,000 and over 9,387 0.6 8,351 0.6 11,982 0.8 Total Community Bank deposits $1,522,525 100.0% $1,486,943 100.0% $1,537,468 100.0%Cost of deposits(1) 1.92% 1.77% 1.31%
(1) Cost of deposits is annualized for the three months ended for each period presented.
Community bank deposits increased $35.6 million, or 2.4%, during the three months ended September 30, 2024 to $1.52 billion. This is the second consecutive quarter of growth after allowing higher rate balances to run-off earlier in the year. The community bank segment includes noninterest bearing deposits of $518.8 million, or 34.1%, of total community bank deposits, resulting in a cost of deposits of 1.92%, which compared to 1.77% for the quarter ended June 30, 2024.
Net Interest Income and Margin Discussion
Net interest income was $72.2 million for the quarter ended September 30, 2024, an increase of $5.9 million, or 9.0%, from $66.2 million for the quarter ended June 30, 2024, and an increase of $10.0 million, or 16.0%, from $62.2 million for the quarter ended September 30, 2023. The increase in net interest income compared to June 30, 2024, was a result of increased interest income due to an increase in average loans receivable partially offset by an increase in cost of funds. The increase in net interest income compared to September 30, 2023 was largely related to increased yield on loans resulting from higher interest rates and growth in higher yielding loans partially offset by an increase in cost of funds relating to higher interest rates and growth in interest bearing deposits.
Net interest margin was 7.41% for the three months ended September 30, 2024, compared to 7.13% for the three months ended June 30, 2024, with the increase primarily due to higher loan yields. Net interest margin was 7.10% for the three months ended September 30, 2023. The increase in net interest margin for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was largely due to an increase in loan yield partially offset by higher interest rates on interest bearing deposits. Interest and fees on loans receivable increased $8.6 million, or 9.5%, to $99.6 million for the three months ended September 30, 2024, compared to $90.9 million for the three months ended June 30, 2024, and increased $15.9 million, or 19.1%, compared to $83.7 million for the three months ended September 30, 2023, due to an increase in outstanding balances and higher interest rates.
Average investment securities decreased $795,000 to $49.0 million compared to the three months ended June 30, 2024 and decreased $69.0 million compared to the three months ended September 30, 2023 as a result of maturing securities.
Cost of funds was 3.62% for the quarter ended September 30, 2024, an increase of 2 basis points from the quarter ended June 30, 2024 and an increase of 44 basis points from the quarter ended September 30, 2023. Cost of deposits for the quarter ended September 30, 2024 was 3.59%, compared to 3.58% for the quarter ended June 30, 2024, and 3.14% for the quarter ended September 30, 2023. The increased cost of funds and deposits compared to June 30, 2024 and September 30, 2023 was due to the continued high interest rate environment. The late September reduction in the Fed funds rate is expected to help to lower our cost of deposits in future periods.
The following table summarizes the average yield on loans receivable and cost of deposits:
For the Three Months Ended September 30, 2024 June 30, 2024 September 30, 2023 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 6.64% 1.92% 6.52% 1.77% 6.20% 1.31%CCBX (1) 17.35% 4.82% 17.77% 4.92% 17.05% 4.80%Consolidated 11.43% 3.59% 11.23% 3.58% 10.84% 3.14%
(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, 2024 June 30, 2024 September 30, 2023(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 $67,692 17.35% $60,203 17.77% $56,279 17.05%Less: BaaS loan expense 32,612 8.36% 29,076 8.58% 23,003 6.97%Net BaaS loan income (1) $35,080 8.99% $31,127 9.19% $33,276 10.08%Average BaaS Loans(3) $1,552,443 $1,362,343 $1,309,380
(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.
Noninterest Income Discussion
Noninterest income was $80.1 million for the three months ended September 30, 2024, an increase of $10.2 million from $69.9 million for the three months ended June 30, 2024, and an increase of $45.5 million from $34.6 million for the three months ended September 30, 2023. The increase in noninterest income over the quarter ended June 30, 2024 was primarily due to an increase of $9.9 million in total BaaS income. The $9.9 million increase in total BaaS income included a $9.3 million increase in BaaS credit enhancements related to the provision for credit losses, a $300,000 increase in BaaS fraud enhancements, and an increase of $340,000 in BaaS program income. The increase in BaaS program income is largely due to higher servicing and other BaaS fees, transaction fees and interchange fees and our primary BaaS source for recurring fee income (see “Appendix B” for more information on the accounting for BaaS allowance for credit losses and credit and fraud enhancements). Additionally, other income increased $229,000 largely due to increased incoming ACH activity.
The $45.5 million increase in noninterest income over the quarter ended September 30, 2023 was primarily due to a $43.4 million increase in BaaS credit and fraud enhancements, and an increase of $2.0 million in BaaS program income.
Noninterest Expense Discussion
Total noninterest expense increased $6.8 million to $65.6 million for the three months ended September 30, 2024, compared to $58.8 million for the three months ended June 30, 2024, and increased $9.1 million from $56.5 million for the three months ended September 30, 2023. The increase in noninterest expense for the quarter ended September 30, 2024, as compared to the quarter ended June 30, 2024, was primarily due to a $3.8 million increase in BaaS expense (including a $300,000 increase in BaaS fraud expense and a $3.5 million increase in BaaS loan expense). 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 in which the loss occurs, and a portion is estimated based on historical or other information from our partners, partially offset by a $1.5 million increase in excise taxes (due to the recording of $1.2 million business and occupation tax credit from the State of Washington which resulted in the recognition of a net credit of $706,000 for the quarter ended June 30, 2024, compared to expense of $762,000 for the quarter ended September 30, 2024). We also recorded an increase of $587,000 in data processing and software licenses as a result of our continued investment in our infrastructure and the automation of our processes so that they are scalable and an increase of $499,000 in point of sale expenses as a result of increased partner transaction activity.
The increase in noninterest expenses for the quarter ended September 30, 2024 compared to the quarter ended September 30, 2023 was largely due to an increase of $8.8 million in BaaS partner expense (including a $9.6 million increase in BaaS loan expense partially offset by a decrease of $766,000 in BaaS fraud expense), a $1.1 million increase in data processing and software licenses due to enhancements in technology, and a $526,000 increase in occupancy expense, largely due to higher software depreciation/amortization expense, partially offset by a $986,000 decrease in salary and employee benefits largely as a result of some one-time costs that were expensed in the quarter ended September 30, 2023 for which there was no similar expense in the current quarter, and an $850,000 decrease in legal and professional expenses as a result of risk management and projects being completed.
Provision for Income Taxes
The provision for income taxes was $2.9 million for the three months ended September 30, 2024, $3.4 million for the three months ended June 30, 2024 and $2.8 million for the third quarter of 2023. The income tax provision was lower for the three months ended September 30, 2024 compared to the quarter ended June 30, 2024 as a result of the deductibility of certain equity awards which reduced tax expense despite net income being higher and higher than the quarter ended September 30, 2023, primarily due to higher net income compared to that quarter.
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 income taxes.
Financial Condition Overview
Total assets increased $104.3 million, or 2.6%, to $4.07 billion at September 30, 2024 compared to $3.96 billion at June 30, 2024. The increase is primarily due to stronger loan growth partially offset by lower cash balances. Total loans receivable increased $92.4 million to $3.42 billion at September 30, 2024, from $3.33 billion at June 30, 2024.
As of September 30, 2024, the Company had the capacity to borrow up to a total of $656.3 million from the Federal Reserve Bank discount window and Federal Home Loan Bank, and an additional $50.0 million from a correspondent bank no borrowings outstanding on these lines as of September 30, 2024.
The Company had a cash balance of $5.9 million as of September 30, 2024, which is retained for general operating purposes, including debt repayment, and for funding $530,000 in commitments to bank technology funds.
Uninsured deposits were $542.2 million as of September 30, 2024, compared to $532.9 million as of June 30, 2024.
Total shareholders’ equity increased $15.2 million since June 30, 2024. The increase in shareholders’ equity was primarily due to $13.5 million in net earnings, combined with an increase of $1.8 million in common stock outstanding as a result of equity awards exercised during the three months ended September 30, 2024.
The Company and the Bank remained well capitalized at September 30, 2024, as summarized in the following table.
(unaudited) Coastal
Community
Bank Coastal
Financial
Corporation Minimum Well
Capitalized
Ratios under
Prompt
Corrective
Action (1)Tier 1 Leverage Capital (to average assets) 9.29% 8.40% 5.00%Common Equity Tier 1 Capital (to risk-weighted assets) 10.36% 9.26% 6.50%Tier 1 Capital (to risk-weighted assets) 10.36% 9.35% 8.00%Total Capital (to risk-weighted assets) 11.65% 11.90% 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
The total allowance for credit losses was $170.3 million and 4.98% of loans receivable at September 30, 2024 compared to $147.9 million and 4.45% at June 30, 2024 and $101.1 million and 3.41% at September 30, 2023. The allowance for credit loss allocated to the CCBX portfolio was $150.1 million and 9.87% of CCBX loans receivable at September 30, 2024, with $20.1 million of allowance for credit loss allocated to the community bank or 1.06% 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, 2024 As of June 30, 2024 As of September 30, 2023(dollars in thousands; unaudited) Community
Bank CCBX Total Community
Bank CCBX Total Community
Bank CCBX TotalLoans receivable $1,897,540 $1,521,292 $3,418,832 $1,912,034 $1,414,426 $3,326,460 $1,784,661 $1,182,374 $2,967,035 Allowance for credit losses (20,132) (150,131) (170,263) (21,045) (126,869) (147,914) (21,316) (79,769) (101,085)Allowance for credit losses to total loans receivable 1.06% 9.87% 4.98% 1.10% 8.97% 4.45% 1.19% 6.75% 3.41%
Net charge-offs totaled $49.2 million for the quarter ended September 30, 2024, compared to $53.2 million for the quarter ended June 30, 2024 and $36.8 million for the quarter ended September 30, 2023. Net charge-offs as a percent of average loans decreased to 5.65% for the quarter ended September 30, 2024 compared to 6.57% for the quarter ended June 30, 2024, which we believe is a result of the steps we took manage our credit quality. CCBX partner agreements provide for a credit enhancement that covers the net-charge-offs on CCBX loans and negative deposit accounts by indemnifying or reimbursing incurred losses, except in accordance with the program agreement for one partner where the Company was responsible for credit losses on approximately 5% of a $400.8 million loan portfolio. At September 30, 2024, our portion of this portfolio represented $19.8 million in loans. Net charge-offs for this $19.8 million in loans were $1.1 million for the three months ended September 30, 2024, compared to $1.3 million for the three months ended June 30, 2024 and $579,000 for the three months ended September 30, 2023.
The following table details net charge-offs for the community bank and CCBX for the period indicated:
Three Months Ended September 30, 2024 June 30, 2024 September 30, 2023(dollars in thousands; unaudited) Community
Bank CCBX Total Community
Bank CCBX Total Community
Bank CCBX TotalGross charge-offs $398 $52,907 $53,305 $2 $55,205 $55,207 $3 $37,876 $37,879 Gross recoveries (3) (4,066) (4,069) (4) (1,969) (1,973) (3) (1,042) (1,045)Net charge-offs $395 $48,841 $49,236 $(2) $53,236 $53,234 $— $36,834 $36,834 Net charge-offs to average loans (1) 0.08% 12.52% 5.65% 0.00% 15.72% 6.57% 0.00% 11.16% 4.77%
(1) Annualized calculations shown for periods presented.
During the quarter ended September 30, 2024, a $72.1 million provision for credit losses – loans was recorded for CCBX partner loans based on management’s analysis, compared to the $62.2 million provision for credit losses – loans that was recorded for CCBX for the quarter ended June 30, 2024. 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. 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 factors used in management’s analysis for community bank credit losses indicated that a provision recapture of $519,000 and was needed for the quarter ended September 30, 2024 compared to a provision recapture of $341,000 and provision of $664,000 for the quarters ended June 30, 2024 and September 30, 2023, respectively. The recapture in the current period was largely due to a change in remaining average lives of community bank loans.
The following table details the provision expense/(recapture) for the community bank and CCBX for the period indicated:
Three Months Ended(dollars in thousands; unaudited) September 30,
2024 June 30,
2024 September 30,
2023Community bank $(519) $(341) $664CCBX 72,104 62,231 26,493Total provision expense $71,585 $61,890 $27,157
At September 30, 2024, our nonperforming assets were $54.7 million, or 1.34%, of total assets, compared to $53.2 million, or 1.34%, of total assets, at June 30, 2024, and $43.5 million, or 1.18%, of total assets, at September 30, 2023. These ratios are impacted by nonperforming CCBX loans that are covered by CCBX partner credit enhancements. As of September 30, 2024, $52.0 million of the $53.6 million in nonperforming CCBX loans were covered by CCBX partner credit enhancements described above.
Nonperforming assets increased $1.5 million during the quarter ended September 30, 2024, compared to the quarter ended June 30, 2024. This change is largely due to an increase in CCBX nonaccrual loans partially offset by a decrease in community bank nonaccrual loans. CCBX nonaccrual loans increased $8.0 million as a result of a new collection practice that places certain loans on nonaccrual status to improve collectability, $5.3 million of these loans are less than 90 days past due as of September 30, 2024. CCBX loans that are past due 90 days or more and still accruing was $45.6 million for the quarter ended September 30, 2024 compared to $45.2 million for the quarter ended June 30, 2024. 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 generally 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. There were no repossessed assets or other real estate owned at September 30, 2024. Our nonperforming loans to loans receivable ratio was 1.60% at September 30, 2024, compared to 1.60% at June 30, 2024, and 1.47% at September 30, 2023.
For the quarter ended September 30, 2024, there were $395,000 community bank net charge-offs and $1.1 million nonperforming community bank loans. For the quarter ended September 30, 2024 $48.8 million in net charge-offs were recorded on CCBX loans. These CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for credit losses.
The following table details the Company’s nonperforming assets for the periods indicated.
Consolidated As of(dollars in thousands; unaudited) September 30,
2024 June 30,
2024 September 30,
2023Nonaccrual loans: Commercial and industrial loans $198 $— $2 Real estate loans: Construction, land and land development — — — Residential real estate 44 213 176 Commercial real estate 831 7,731 7,145 Consumer and other loans: Credit cards 7,987 — — Total nonaccrual loans 9,060 7,944 7,323 Accruing loans past due 90 days or more: Commercial & industrial loans 1,593 1,278 1,387 Real estate loans: Residential real estate loans 3,025 2,722 1,462 Consumer and other loans: Credit cards 34,562 36,465 24,807 Other consumer and other loans 6,412 4,779 8,561 Total accruing loans past due 90 days or more 45,592 45,244 36,217 Total nonperforming loans 54,652 53,188 43,540 Real estate owned — — — Repossessed assets — — — Total nonperforming assets $54,652 $53,188 $43,540 Total nonaccrual loans to loans receivable 0.27% 0.24% 0.25%Total nonperforming loans to loans receivable 1.60% 1.60% 1.47%Total nonperforming assets to total assets 1.34% 1.34% 1.18%
The following tables detail the CCBX and community bank nonperforming assets which are included in the total nonperforming assets table above.
CCBX As of(dollars in thousands; unaudited) September 30,
2024 June 30,
2024 September 30,
2023Nonaccrual loans: Consumer and other loans: Credit cards $7,987 $— $— Total nonaccrual loans 7,987 — — Accruing loans past due 90 days or more: Commercial & industrial loans 1,593 1,278 1,387 Real estate loans: Residential real estate loans 3,025 2,722 1,462 Consumer and other loans: Credit cards 34,562 36,465 24,807 Other consumer and other loans 6,412 4,779 8,561 Total accruing loans past due 90 days or more 45,592 45,244 36,217 Total nonperforming loans 53,579 45,244 36,217 Other real estate owned — — — Repossessed assets — — — Total nonperforming assets $53,579 $45,244 $36,217 Total CCBX nonperforming assets to total consolidated assets 1.32% 1.14% 0.98% Community Bank As of(dollars in thousands; unaudited) September 30,
2024 June 30,
2024 September 30,
2023Nonaccrual loans: Commercial and industrial loans $198 $— $2 Real estate: Construction, land and land development — — — Residential real estate 44 213 176 Commercial real estate 831 7,731 7,145 Total nonaccrual loans 1,073 7,944 7,323 Accruing loans past due 90 days or more: Total accruing loans past due 90 days or more — — — Total nonperforming loans 1,073 7,944 7,323 Other real estate owned — — — Repossessed assets — — — Total nonperforming assets $1,073 $7,944 $7,323 Total community bank nonperforming assets to total consolidated assets 0.03% 0.20% 0.20%
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 $4.07 billion Bank provides service through 14 branches in Snohomish, Island, and King Counties, the Internet and its mobile banking application. The Bank provides banking as a service to broker-dealers, digital financial service providers, companies and brands that want to provide financial services to their customers through the Bank’s CCBX segment. To learn more about the Company visit www.coastalbank.com.
CCB-ER
Contact
Eric Sprink, Chief Executive Officer, (425) 357-3659
Joel Edwards, Executive Vice President & Chief Financial Officer, (425) 357-3687
Forward-Looking Statements
This earnings release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements reflect our current views with respect to, among other things, future events and our financial performance. Any statements about our management’s expectations, beliefs, plans, predictions, forecasts, objectives, assumptions or future events or performance are not historical facts and may be forward-looking. These statements are often, but not always, made through the use of words or phrases such as “anticipate,” “believes,” “can,” “could,” “may,” “predicts,” “potential,” “should,” “will,” “estimate,” “plans,” “projects,” “continuing,” “ongoing,” “expects,” “intends” and similar words or phrases. Any or all of the forward-looking statements in this earnings release may turn out to be inaccurate. The inclusion of or reference to forward-looking information in this earnings release should not be regarded as a representation by us or any other person that the future plans, estimates or expectations contemplated by us will be achieved. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, results of operations, business strategy and financial needs. Our actual results could differ materially from those anticipated in such forward-looking statements as a result of risks, uncertainties and assumptions that are difficult to predict. Factors that could cause actual results to differ materially from those in the forward-looking statements include, without limitation, the risks and uncertainties discussed under “Risk Factors” in our Annual Report on Form 10-K for the most recent period filed 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,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023Cash and due from banks $45,327 $59,995 $32,790 $31,345 $29,984 Interest earning deposits with other banks 438,699 427,250 482,338 451,783 444,962 Investment securities, available for sale, at fair value 38 39 41 99,504 98,939 Investment securities, held to maturity, at amortized cost 48,582 49,174 50,049 50,860 42,550 Other investments 10,757 10,664 10,583 10,227 11,898 Loans held for sale 7,565 — 797 — — Loans receivable 3,418,832 3,326,460 3,199,554 3,026,092 2,967,035 Allowance for credit losses (170,263) (147,914) (139,258) (116,958) (101,085)Total loans receivable, net 3,248,569 3,178,546 3,060,296 2,909,134 2,865,950 CCBX credit enhancement asset 167,251 143,485 137,276 107,921 91,867 CCBX receivable 16,060 11,520 10,369 9,088 10,623 Premises and equipment, net 25,833 24,526 22,995 22,090 20,543 Lease right-of-use assets 5,427 5,635 5,756 5,932 6,126 Accrued interest receivable 23,664 23,617 24,681 26,819 23,428 Bank-owned life insurance, net 13,255 13,132 12,991 12,870 12,970 Deferred tax asset, net 3,083 2,221 2,221 3,806 4,404 Other assets 11,711 11,742 12,075 11,987 14,021 Total assets $4,065,821 $3,961,546 $3,865,258 $3,753,366 $3,678,265 LIABILITIES AND SHAREHOLDERS’ EQUITYLIABILITIES Deposits $3,627,288 $3,543,432 $3,462,979 $3,360,363 $3,289,700 Subordinated debt, net 44,256 44,219 44,181 44,144 44,106 Junior subordinated debentures, net 3,591 3,591 3,590 3,590 3,589 Deferred compensation 369 405 442 479 513 Accrued interest payable 1,070 999 1,061 892 1,056 Lease liabilities 5,609 5,821 5,946 6,124 6,321 CCBX payable 39,188 34,536 33,095 33,651 38,229 Other liabilities 12,520 11,850 10,255 9,145 10,301 Total liabilities 3,733,891 3,644,853 3,561,549 3,458,388 3,393,815 SHAREHOLDERS’ EQUITY Common Stock 134,769 132,989 131,601 130,136 129,244 Retained earnings 197,162 183,706 172,110 165,311 156,299 Accumulated other comprehensive loss, net of tax (1) (2) (2) (469) (1,093)Total shareholders’ equity 331,930 316,693 303,709 294,978 284,450 Total liabilities and shareholders’ equity $4,065,821 $3,961,546 $3,865,258 $3,753,366 $3,678,265 COASTAL FINANCIAL CORPORATION
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Dollars in thousands, except per share amounts; unaudited) Three Months Ended September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023INTEREST AND DIVIDEND INCOME Interest and fees on loans $99,590 $90,944 $84,621 $81,159 $83,652Interest on interest earning deposits with other banks 4,781 5,683 4,780 5,687 3,884Interest on investment securities 675 686 1,034 1,225 766Dividends on other investments 33 174 37 172 29Total interest income 105,079 97,487 90,472 88,243 88,331INTEREST EXPENSE Interest on deposits 32,083 30,578 28,867 27,916 25,451Interest on borrowed funds 809 672 669 670 651Total interest expense 32,892 31,250 29,536 28,586 26,102Net interest income 72,187 66,237 60,936 59,657 62,229PROVISION FOR CREDIT LOSSES 70,257 62,325 83,158 60,789 27,253Net interest income/(expense) after provision for credit losses 1,930 3,912 (22,222) (1,132) 34,976NONINTEREST INCOME Deposit service charges and fees 952 946 908 957 998Loan referral fees — — 168 — 1Gain on sales of loans, net — — — — 107Unrealized gain (loss) on equity securities, net 2 9 15 80 5Other income 486 257 308 60 291Noninterest income, excluding BaaS program income and BaaS indemnification income 1,440 1,212 1,399 1,097 1,402Servicing and other BaaS fees 1,044 1,525 1,131 1,015 997Transaction fees 1,696 1,309 1,122 1,006 1,036Interchange fees 1,853 1,625 1,539 1,272 1,216Reimbursement of expenses 1,843 1,637 1,033 1,076 1,152BaaS program income 6,436 6,096 4,825 4,369 4,401BaaS credit enhancements 70,108 60,826 79,808 58,449 25,926BaaS fraud enhancements 2,084 1,784 923 779 2,850BaaS indemnification income 72,192 62,610 80,731 59,228 28,776Total noninterest income 80,068 69,918 86,955 64,694 34,579NONINTEREST EXPENSE Salaries and employee benefits 17,101 17,005 17,984 16,490 18,087Occupancy 1,750 1,686 1,518 1,340 1,224Data processing and software licenses 3,511 2,924 2,892 2,417 2,366Legal and professional expenses 3,597 3,631 3,672 2,649 4,447Point of sale expense 1,351 852 869 899 1,068Excise taxes 762 (706) 320 449 541Federal Deposit Insurance Corporation (“FDIC”) assessments 740 690 683 665 694Director and staff expenses 559 470 400 478 529Marketing 67 14 53 138 169Other expense 1,482 1,383 1,867 1,089 1,523Noninterest expense, excluding BaaS loan and BaaS fraud expense 30,920 27,949 30,258 26,614 30,648BaaS loan expense 32,612 29,076 24,837 24,310 23,003BaaS fraud expense 2,084 1,784 923 779 2,850BaaS loan and fraud expense 34,696 30,860 25,760 25,089 25,853Total noninterest expense 65,616 58,809 56,018 51,703 56,501Income before provision for income taxes 16,382 15,021 8,715 11,859 13,054PROVISION FOR INCOME TAXES 2,926 3,425 1,915 2,847 2,784NET INCOME $13,456 $11,596 $6,800 $9,012 $10,270Basic earnings per common share $1.00 $0.86 $0.51 $0.68 $0.77Diluted earnings per common share $0.97 $0.84 $0.50 $0.66 $0.75Weighted average number of common shares outstanding: Basic 13,447,066 13,412,667 13,340,997 13,286,828 13,285,974Diluted 13,822,270 13,736,508 13,676,917 13,676,513 13,675,833 COASTAL FINANCIAL CORPORATION
AVERAGE BALANCES, YIELDS, AND RATES – QUARTERLY
(Dollars in thousands; unaudited) For the Three Months Ended September 30, 2024 June 30, 2024 September 30, 2023 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 $350,915 $4,781 5.42% $418,165 $5,683 5.47% $285,596 $3,884 5.40%Investment securities, available for sale (2) 40 — — 43 — 3.13 100,283 543 2.15 Investment securities, held to maturity (2) 48,945 675 5.49 49,737 686 5.55 17,703 223 5.00 Other investments 11,140 33 1.18 10,592 174 6.61 11,943 29 0.96 Loans receivable (3) 3,464,871 99,590 11.43 3,258,042 90,944 11.23 3,062,214 83,652 10.84 Total interest earning assets 3,875,911 105,079 10.79 3,736,579 97,487 10.49 3,477,739 88,331 10.08 Noninterest earning assets: Allowance for credit losses (151,292) (138,472) (100,329) Other noninterest earning assets 268,903 255,205 220,750 Total assets $3,993,522 $3,853,312 $3,598,160 Liabilities and Shareholders’ Equity Interest bearing liabilities: Interest bearing deposits $2,966,527 $32,083 4.30% $2,854,575 $30,578 4.31% $2,515,093 $25,451 4.01%FHLB advances and other borrowings 9,717 140 5.73 1,648 3 0.73 — — — Subordinated debt 44,234 598 5.38 44,197 598 5.44 44,084 580 5.22 Junior subordinated debentures 3,591 71 7.87 3,590 71 7.95 3,589 71 7.85 Total interest bearing liabilities 3,024,069 32,892 4.33 2,904,010 31,250 4.33 2,562,766 26,102 4.04 Noninterest bearing deposits 588,178 584,661 698,532 Other liabilities 60,101 58,267 57,865 Total shareholders’ equity 321,174 306,374 278,997 Total liabilities and shareholders’ equity $3,993,522 $3,853,312 $3,598,160 Net interest income $72,187 $66,237 $62,229 Interest rate spread 6.46% 6.17% 6.04%Net interest margin (4) 7.41% 7.13% 7.10%
(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, 2024 June 30, 2024 September 30, 2023(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) $1,912,428 $31,898 6.64% $1,895,699 $30,741 6.52% $1,752,834 $27,373 6.20%Total interest earning assets 1,912,428 31,898 6.64 1,895,699 30,741 6.52 1,752,834 27,373 6.20 Liabilities Interest bearing liabilities: Interest bearing deposits 982,280 7,264 2.94% 938,033 6,459 2.77% 920,707 5,067 2.18%Intrabank liability 406,641 5,540 5.42 429,452 5,836 5.47 223,221 3,036 5.40 Total interest bearing liabilities 1,388,921 12,804 3.67 1,367,485 12,295 3.62 1,143,928 8,103 2.81 Noninterest bearing deposits 523,507 528,214 608,906 Net interest income $19,094 $18,446 $19,270 Net interest margin(3) 3.97% 3.91% 4.36% CCBX Assets Interest earning assets: Loans receivable (2)(4) $1,552,443 $67,692 17.35% $1,362,343 $60,203 17.77% $1,309,380 $56,279 17.05%Intrabank asset 496,475 6,764 5.42 610,646 8,299 5.47 374,632 5,095 5.40 Total interest earning assets 2,048,918 74,456 14.46 1,972,989 68,502 13.96 1,684,012 61,374 14.46 Liabilities Interest bearing liabilities: Interest bearing deposits 1,984,247 24,819 4.98% 1,916,542 24,119 5.06% 1,594,386 20,384 5.07%Total interest bearing liabilities 1,984,247 24,819 4.98 1,916,542 24,119 5.06 1,594,386 20,384 5.07 Noninterest bearing deposits 64,671 56,447 89,626 Net interest income $49,637 $44,383 $40,990 Net interest margin(3) 9.64% 9.05% 9.66%Net interest margin, net of Baas loan expense (5) 3.31% 3.12% 4.24% For the Three Months Ended September 30, 2024 June 30, 2024 September 30, 2023(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 $350,915 $4,781 5.42% $418,165 $5,683 5.47% $285,596 $3,884 5.40%Investment securities, available for sale (6) 40 — — 43 — 3.13 100,283 543 2.15 Investment securities, held to maturity (6) 48,945 675 5.49 49,737 686 5.55 17,703 223 5.00 Other investments 11,140 33 1.18 10,592 174 6.61 11,943 29 0.96 Total interest earning assets 411,040 5,489 5.31% 478,537 6,543 5.50% 415,525 4,679 4.47%Liabilities Interest bearing liabilities: FHLB advances and borrowings $9,717 $140 5.73% 1,648 3 0.73% — — —%Subordinated debt 44,234 598 5.38% 44,197 598 5.44% 44,084 580 5.22%Junior subordinated debentures 3,591 71 7.87 3,590 71 7.95 3,589 71 7.85 Intrabank liability, net (7) 89,834 1,224 5.42 181,194 2,463 5.47 151,411 2,059 5.40 Total interest bearing liabilities 147,376 2,033 5.49 230,629 3,135 5.47 199,084 2,710 5.40 Net interest income $3,456 $3,408 $1,969 Net interest margin(3) 3.34% 2.86% 1.88%
(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.
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 measures are presented to illustrate the impact of BaaS loan expense on net loan income and yield on CCBX loans and the impact of BaaS loan expense on net interest income and net interest margin.
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.
Net interest income net of BaaS loan expense is a non-GAAP measure that includes the impact BaaS loan expense on net interest income. The most directly comparable GAAP measure is net interest income.
Net interest margin, net of BaaS loan expense is a non-GAAP measure that includes the impact of BaaS loan expense on net interest rate margin. The most directly comparable GAAP measure is net interest margin.
Reconciliations of the GAAP and non-GAAP measures are presented below.
As of and for the Three Months Ended (dollars in thousands; unaudited) September 30,
2024 June 30,
2024 September 30,
2023Net BaaS loan income divided by average CCBX loans:CCBX loan yield (GAAP)(1) 17.35% 17.77% 17.05%Total average CCBX loans receivable $1,552,443 $1,362,343 $1,309,380 Interest and earned fee income on CCBX loans (GAAP) 67,692 60,203 56,279 BaaS loan expense (32,612) (29,076) (23,003)Net BaaS loan income $35,080 $31,127 $33,276 Net BaaS loan income divided by average CCBX loans (1) 8.99% 9.19% 10.08%Net interest margin, net of BaaS loan expense: CCBX interest margin (1) 9.64% 9.05% 9.66%CCBX earning assets 2,048,918 1,972,989 1,684,012 Net interest income 49,637 44,383 40,990 Less: BaaS loan expense (32,612) (29,076) (23,003)Net interest income, net of BaaS loan expense $17,025 $15,307 $17,987 CCBX net interest margin, net of BaaS loan expense (1) 3.31% 3.12% 4.24%
(1) Annualized calculations for periods presented.
APPENDIX A –
As of September 30, 2024
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 $3.43 billion in outstanding loan balances. When combined with $2.29 billion in unused commitments the total of these categories is $5.72 billion.
Commercial real estate loans represent the largest segment of our loans, comprising 39.8% of our total balance of outstanding loans as of September 30, 2024. Unused commitments to extend credit represents an additional $41.5 million, and the combined total in commercial real estate loans represents $1.40 billion, or 24.6% 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, 2024:
(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
LoansApartments $382,498 $5,685 $388,183 6.8% $3,714 103Hotel/Motel 155,441 189 155,630 2.7 6,758 23Convenience Store 142,366 614 142,980 2.5 2,296 62Office 123,423 8,204 131,627 2.3 1,371 90Warehouse 102,818 2,000 104,818 1.8 1,743 59Retail 107,934 620 108,554 1.9 1,018 106Mixed use 93,490 5,273 98,763 1.7 1,154 81Mini Storage 79,395 14,330 93,725 1.7 3,452 23Strip Mall 44,089 — 44,089 0.8 6,298 7Manufacturing 34,599 1,200 35,799 0.6 1,193 29Groups < 0.70% of total 96,393 3,392 99,785 1.8 1,205 80Total $1,362,446 $41,507 $1,403,953 24.6% $2,055 663
Consumer loans comprise 33.0% of our total balance of outstanding loans as of September 30, 2024. Unused commitments to extend credit represents an additional $1.07 billion, and the combined total in consumer and other loans represents $2.20 billion, or 38.4% 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 $900. CCBX consumer loans are underwritten to CCBX credit standards and underwriting of these loans is regularly tested, including quarterly testing for partners with portfolio balances greater than $10.0 million.
The following table summarizes our loan commitment by industry for our consumer and other loan portfolio as of September 30, 2024:
(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
LoansCCBX consumer loansCredit cards $633,691 $1,055,684 $1,689,375 29.5% $1.7 369,404Installment loans 471,813 7,112 478,925 8.4 0.9 513,897Lines of credit 1,362 — 1,362 0.0 2.4 558Other loans 9,053 — 9,053 0.2 — 365,834Community bank consumer loans
Installment loans 1,291 1 1,292 0.0 51.6 25Lines of credit 194 365 559 0.0 6.1 32Other loans 12,688 3,000 15,688 0.3 32.5 390Total $1,130,092 $1,066,162 $2,196,254 38.4% $0.9 1,250,140
(1) Total exposure on CCBX loans is subject to CCBX partner/portfolio maximum limits.
Residential real estate loans comprise 13.9% of our total balance of outstanding loans as of September 30, 2024. Unused commitments to extend credit represents an additional $522.8 million, and the combined total in residential real estate loans represents $1.00 billion, or 17.5% 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, 2024:
(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
LoansCCBX residential real estate loans Home equity line of credit $265,402 $472,385 $737,787 12.9% $25 10,742Community bank residential real estate loans Closed end, secured by first liens 176,066 2,961 179,027 3.1 555 317Home equity line of credit 25,427 46,515 71,942 1.3 106 239Closed end, second liens 10,974 925 11,899 0.2 366 30Total $477,869 $522,786 $1,000,655 17.5% $42 11,328
(1) Total exposure on CCBX loans is subject to CCBX partner/portfolio maximum limits.
Commercial and industrial loans comprise 8.5% of our total balance of outstanding loans as of September 30, 2024. Unused commitments to extend credit represents an additional $598.4 million, and the combined total in commercial and industrial loans represents $891.0 million, or 15.6% of our total outstanding loans and loan commitments. Included in commercial and industrial loans is $103.9 million in outstanding capital call lines, with an additional $504.6 million in available loan commitments which is limited to a $350.0 million portfolio maximum. Capital call lines are provided to venture capital firms through one of our CCBX BaaS clients. These loans are secured by the capital call rights and are individually underwritten to the Bank’s credit standards and the underwriting is reviewed by the Bank on every capital call line.
The following table summarizes our loan commitment by industry for our commercial and industrial loan portfolio as of September 30, 2024:
(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
LoansConsolidated C&I loansCapital Call Lines $103,924 $504,561 $608,485 10.6% $764 136Construction/Contractor Services 27,463 34,658 62,121 1.1 136 202Financial Institutions 48,648 — 48,648 0.9 4,054 12Retail 33,003 5,725 38,728 0.7 15 2,247Manufacturing 6,124 5,460 11,584 0.2 149 41Medical / Dental / Other Care 6,864 2,731 9,595 0.2 528 13Groups < 0.20% of total 66,553 45,299 111,852 2.0 58 1,143Total $292,579 $598,434 $891,013 15.6% $77 3,794
(1) Total exposure on CCBX loans is subject to CCBX partner/portfolio maximum limits.
Construction, land and land development loans comprise 4.8% of our total balance of outstanding loans as of September 30, 2024. Unused commitments to extend credit represents an additional $63.5 million, and the combined total in construction, land and land development loans represents $226.6 million, or 4.0% 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, 2024:
(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
LoansCommercial construction $97,798 $41,521 $139,319 2.5% $7,523 13Residential construction 35,822 16,846 52,668 0.9 1,990 18Developed land loans 14,863 723 15,586 0.3 743 20Undeveloped land loans 8,606 4,086 12,692 0.2 574 15Land development 5,968 345 6,313 0.1 597 10Total $163,057 $63,521 $226,578 4.0% $2,145 76
Exposure and risk in our construction, land and land development portfolio is in line with our average historically, compared to June 30, 2024 when the balance was elevated as indicated in the following table:
Outstanding Balance as of(dollars in thousands; unaudited) September 30,
2024 June 30,
2024 March 31,
2024 December 31,
2023 September 30,
2023Commercial construction $97,798 $110,372 $102,099 $81,489 $91,396Residential construction 35,822 34,652 28,751 34,213 33,971Undeveloped land loans 8,606 8,372 8,190 7,890 8,310Developed land loans 14,863 13,954 14,307 20,515 21,369Land development 5,968 5,714 7,515 12,993 12,640Total $163,057 $173,064 $160,862 $157,100 $167,686
Commitments to extend credit total $2.29 billion at September 30, 2024, however we do not anticipate our customers using the $2.29 billion that is showing as available.
The following table presents outstanding commitments to extend credit as of September 30, 2024:
Consolidated (dollars in thousands; unaudited) As of September
30, 2024Commitments to extend credit: Commercial and industrial loans $93,873Commercial and industrial loans – capital call lines 504,561Construction – commercial real estate loans 46,007Construction – residential real estate loans 17,514Residential real estate loans 522,786Commercial real estate loans 41,507Credit cards 1,055,684Consumer and other loans 10,478Total commitments to extend credit $2,292,410
We have individual CCBX partner 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, 2024, capital call lines outstanding balance totaled $103.9 million, and while commitments totaled $504.6 million, the commitments are limited to a maximum of $350.0 million by agreement with the partner. If a CCBX partner goes over their individual limit, it would be a breach of their contract and the Bank may impose penalties and would not be required to fund the loan.
See the table below for CCBX portfolio maximums and related available commitments:
CCBX (dollars in thousands; unaudited) Balance Percent
of CCBX
loans
receivableAvailable
Commitments (1) Maximum
Portfolio
Size Cash
Reserve/
Pledge
Account
Amount (2)Commercial and industrial loans: Capital call lines $103,924 6.8%$504,561 $350,000$—All other commercial & industrial loans 36,494 2.4 16,922 285,153 675Real estate loans: Home equity lines of credit (3) 265,402 17.5 472,385 375,000 35,597Consumer and other loans: Credit cards – cash secured 180 — —Credit cards – unsecured 633,511 1,055,684 37,065Credit cards – total 633,691 41.6 1,055,684 807,263 37,065Installment loans – cash secured 129,138 7,112 —Installment loans – unsecured 342,675 — 2,222Installment loans – total 471,813 31.0 7,112 1,630,027 2,222Other consumer and other loans 10,415 0.7 — 7,557 383Gross CCBX loans receivable 1,521,739 100.0% 2,056,664 3,455,000$75,942Net deferred origination fees (447) Loans receivable $1,521,292
(1) Remaining commitment available, net of outstanding balance.
(2) Balances are as of October 4, 2024.
(3) These home equity lines of credit are secured by residential real estate and are accessed by using a credit card, but are classified as 1-4 family residential properties per regulatory guidelines.
APPENDIX B –
As of September 30, 2024
CCBX – BaaS Reporting Information
During the quarter ended September 30, 2024, $70.1 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. Many 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 obligation then the bank would be exposed to additional loan and deposit losses if the cash flows on the loans were not sufficient to fund the reimbursement of loan losses, as a result of this counterparty risk. If a CCBX partner does not replenish their cash reserve account the Bank may consider an alternative plan for funding the cash reserve. This may involve the possibility of adjusting the funding amounts or timelines to better align with the partner’s specific situation. If a mutually agreeable funding plan is not agreed to, the Bank could declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would evaluate any remaining credit enhancement asset from the CCBX partner in the event the partner failed to determine if a write-off is appropriate. If a write-off occurs, the Bank would retain the full yield and any fee income on the loan portfolio going forward, and our BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.
The Bank records contractual interest earned from the borrower on CCBX partner 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(dollars in thousands; unaudited) September 30,
2024 June 30,
2024 September 30,
2023Yield on loans (1) 17.35% 17.77% 17.05%BaaS loan interest income $67,692 $60,203 $56,279 Less: BaaS loan expense 32,612 29,076 23,003 Net BaaS loan income (2) $35,080 $31,127 $33,276 Net BaaS loan income divided by average BaaS loans (1)(2) 8.99% 9.19% 10.08%
(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.
An increase in average CCBX loans receivable resulted in increased interest income on CCBX loans during the quarter ended September 30, 2024 compared to the quarter ended June 30, 2024. The increase in average CCBX loans receivable was primarily due to growth in the CCBX loan portfolio as part of our strategy to optimize the CCBX loan portfolio and strengthen our balance sheet through originating higher quality new loans and enhanced credit standards. 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, 2024 compared to the quarter ended September 30, 2023.
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(dollars in thousands; unaudited) September 30,
2024 June 30,
2024 September 30,
2023Loan interest income $67,692 $60,203 $56,279Total BaaS interest income $67,692 $60,203 $56,279 Interest expense Three Months Ended(dollars in thousands; unaudited) September 30,
2024 June 30,
2024 September 30,
2023BaaS interest expense $24,819 $24,119 $20,384Total BaaS interest expense $24,819 $24,119 $20,384 BaaS income Three Months Ended(dollars in thousands; unaudited) September 30,
2024 June 30,
2024 September 30,
2023BaaS program income: Servicing and other BaaS fees $1,044 $1,525 $997Transaction fees 1,696 1,309 1,036Interchange fees 1,853 1,625 1,216Reimbursement of expenses 1,843 1,637 1,152BaaS program income 6,436 6,096 4,401BaaS indemnification income: BaaS credit enhancements 70,108 60,826 25,926BaaS fraud enhancements 2,084 1,784 2,850BaaS indemnification income 72,192 62,610 28,776Total noninterest BaaS income $78,628 $68,706 $33,177
Servicing and other BaaS fees decreased $481,000 in the quarter ended September 30, 2024 compared to the quarter ended June 30, 2024 while transaction fees and interchange fees increased $387,000 and $228,000, respectively. We expect servicing and other BaaS fees to decrease and transaction and interchange fees to increase as partner activity grows and contracted minimum fees are replaced with recurring fees and then exceed those minimum fees.
BaaS loan and fraud expense: Three Months Ended(dollars in thousands; unaudited) September 30,
2024 June 30,
2024 September 30,
2023BaaS loan expense $32,612 $29,076 $23,003BaaS fraud expense 2,084 1,784 2,850Total BaaS loan and fraud expense $34,696 $30,860 $25,853
A photo accompanying this announcement is available at https://www.globenewswire.com/NewsRoom/AttachmentNg/2d50cba0-18d9-4c78-8e96-0418250a8658
