Coastal Financial Corporation Announces First Quarter 2022

First Quarter 2022 Highlights:

  • Total assets increased $198.2 million, or 7.5%, to $2.83 billion for the quarter ended March 31, 2022, compared to $2.64 billion at December 31, 2021.
  • Non-PPP loan growth of $283.8 million, or 17.3%, for the three months ended March 31, 2022, compared to the three months ended December 31, 2021.
    • CCBX loans increased $168.7 million, or 48.7%,
    • Community bank loans increased $115.1 million, or 8.9%, excluding PPP loan forgiveness/repayments
    • PPP loans decreased $64.3 million, or 57.5%
  • Deposit growth of $212.7 million, or 9.0%, to $2.58 billion for the three months ended March 31, 2022, compared to $2.36 billion at December 31, 2021.
    • CCBX deposit growth of $183.2 million, or 25.6%
      • Additional $276.4 million in CCBX deposits transferred off balance sheet
    • Community bank deposit growth of $29.5 million, or 1.8%
  • Total revenue increased $12.3 million, or 31.7% for the three months ended March 31, 2022, compared to December 31, 2021.
    • Total revenue excluding BaaS credit enhancements, BaaS fraud recovery and reimbursement of expenses* increased $4.9 million, or 17.3%, for the three months ended March 31, 2022, compared to December 31, 2021.
  • Net income of $6.2 million, or $0.46 per diluted common share, for the three months ended March 31, 2022, compared to $7.3 million, or $0.57 per diluted common share for the three months ended December 31, 2021.

EVERETT, Wash., April 27, 2022 (GLOBE NEWSWIRE) — Coastal Financial Corporation (Nasdaq: CCB) (the “Company”), the holding company for Coastal Community Bank (the “Bank”), today reported unaudited financial results for the quarter ended March 31, 2022. Net income for the first quarter of 2022 was $6.2 million, or $0.46 per diluted common share, compared with net income of $7.3 million, or $0.57 per diluted common share, for the fourth quarter of 2021, and $6.0 million, or $0.49 per diluted common share, for the quarter ended March 31, 2021.

Total assets increased $198.2 million, or 7.5%, during the first quarter of 2022 to $2.83 billion, compared to $2.64 billion at December 31, 2021. Deposit growth was strong, increasing $212.7 million, or 9.0%, during the three months ended March 31, 2022. Non-PPP loan growth of $283.8 million, or 17.3%, for the three months ended March 31, 2022. Even with PPP loans decreasing $64.3 million, or 57.5% as a result of PPP loan forgiveness and repayments, total loans receivable increased $221.5 million during the three months ended March 31, 2022.

“Our CCBX segment, which provides Banking as a Service (“BaaS”), continues to grow, providing additional fee and interest income, and expenses. We are pleased with how this segment of the Company compliments the community bank services that our Bank was built upon. Through our CCBX segment we are able to extend our reach and provide banking products and services, through our CCBX partners, to a broader spectrum of consumers as well as small businesses. Working with our partners we are able to develop unique offerings for specific under-served or under-banked populations that would be difficult to achieve for a bank our size without these partnerships. We are very pleased with the deposit growth in CCBX during the quarter ended March 31, 2022, which increased $183.2 million, or 25.6%, to $899.5 million of as of March 31, 2022, not including an additional $276.4 million in CCBX deposits that are transferred off the balance sheet as of March 31, 2022. CCBX loans also increased during the first quarter of 2022, to $515.3 million as of March 31, 2022, compared to $346.6 million as of December 31, 2021, an increase of $168.7 million, or 48.7%. Our community bank segment continues to be a source of strength for the Company as well, with $115.1 million in loan growth, excluding PPP loan forgiveness/repayments, and $29.5 million in deposit growth during the first quarter of 2022,” stated Eric Sprink, the President and CEO of the Company and the Bank.

Results of Operations

The Company has two segments, both of which are included in the Bank: CCBX and the community bank. The CCBX segment includes our BaaS activities and the community bank segment includes all other banking activities. Net interest income was $29.3 million for the quarter ended March 31, 2022, an increase of $4.6 million, or 18.5%, from $24.7 million for the quarter ended December 31, 2021, and an increase of $12.0 million, or 69.0%, from $17.3 million for the quarter ended March 31, 2021. Yield on loans receivable was 6.80% for the three months ended March 31, 2022, compared to 5.92% for the three months ended December 31, 2021 and 4.51% for the three months ended March 31, 2021. The increase in net interest income compared to December 31, 2021 and March 31, 2021, was largely related to increased yield on loans resulting from growth in higher yielding loans, primarily in CCBX. Average loans receivable for the three months ended March 31, 2022 was $ 1.77 billion, compared to $1.68 billion for the three months ended December 31, 2021, and $1.64 billion for the three months ended March 31, 2021.

Interest and fees on loans totaled $29.6 million for the three months ended March 31, 2022 compared to $25.1 million and $18.2 million for the three months ended December 31, 2021 and March 31, 2021, respectively. Net non-PPP loan growth of $283.8 million, or 17.3%, during the quarter ended March 31, 2022, offset a decrease of $64.3 million in PPP loans that were forgiven or repaid, which resulted in the recognition of $2.3 million in net deferred fees on PPP loans. Part of our loan growth was in capital call lines, which increased $15.8 million, or 7.8%, during the quarter ended March 31, 2022. These loans bear a lower rate of interest, but have less credit risk due to the way the loans are structured compared to other commercial loans. The increase in interest and fees on loans for the quarter ended March 31, 2022, compared to March 31, 2021, was largely due to growth in higher yielding loans, and a decrease in low yielding PPP loans. As a result of the Federal Open Market Committee (“FOMC”) raising rates in mid-March 2022, interest rates on $473.6 million variable rate loans are affected, the impact of this increase in interest rates will be fully seen in future quarters.

As of March 31, 2022, there were $47.5 million in PPP loans, compared to $111.8 million as of December 31, 2021, and $543.8 million as of March 31, 2021. In the three months ended March 31, 2022, a total of $64.3 million in PPP loans were forgiven or repaid. Net deferred fees recognized on PPP loans contributed $2.3 million for the three months ended March 31, 2022, compared to $5.8 million for the three months ended December 31, 2021, and $3.2 million for the three months ended March 31, 2021.

As of March 31, 2022, $1.4 million in net deferred fees on PPP loans remains to be recognized in interest income in future periods along with interest earned on loans. Net deferred fees on PPP loans are earned over the life of the loan, as a yield adjustment in interest income. Forgiveness of principal, early paydowns and payoffs on PPP loans will increase interest income earned in those periods from the recognition of PPP deferred fees. PPP loans in rounds 1 and 2 were originated in 2020, and were predominately two year loans, and only $2.9 million of these loans remaining at March 31, 2022. PPP loans in round 3 were originated in 2021 and are all five-year loans, and $44.6 million of these loans remaining at March 31, 2022.

Interest income from interest earning deposits with other banks was $402,000 at March 31, 2022, an increase of $108,000 and $332,000 due primarily to higher balances compared to December 31, 2021, and March 31, 2021, respectively. The average balance of interest earning deposits with other banks for the three months ended March 31, 2022 was $843.9 million, compared to $751.8 million and $195.3 million for the three months ended December 31, 2021 and March 31, 2021, respectively. Additionally, the yield on these interest earning deposits with other banks increased three basis points and four basis points, compared to December 31, 2021 and March 31, 2021, respectively.

Interest expense was $874,000 for the quarter ended March 31, 2022, a $31,000 increase from the quarter ended December 31, 2021 and a $169,000 decrease from the quarter ended March 31, 2021. Interest expense on borrowed funds was $321,000 for the quarter ended March 31, 2022, compared to $327,000 and $383,000 for the quarters ended December 31, 2021 and March 31, 2021, respectively. Interest expense on borrowed funds decreased $6,000 compared to the three months ended December 31, 2021, partly because there were fewer days in this quarter than the previous quarter. Additionally, we paid off $25.0 million in Federal Home Loan Bank (“FHLB”) borrowings late in the quarter ended March 31, 2022. The borrowings were no longer needed, and there was no prepayment penalty for early repayment. The $62,000 decrease in interest expense on borrowed funds from the quarter ended March 31, 2021 is the result of a decrease in average PPPLF borrowings, which were paid off in full as of June 30, 2021, partially offset by an increase in interest expense related to subordinated debt, which increased during the quarter ended September 30, 2021. Interest expense on interest bearing deposits increased $37,000 for the quarter ended March 31, 2022, compared to December 31, 2021 as a result of the FOMC increasing rates 0.25% in mid-March 2022. In addition, as a result of the FOMC rate increase, $690.4 million in CCBX deposits that were not earning interest were reclassed to interest bearing deposits from noninterest bearing deposits. This reclassification occurred mid-March 2022, therefore the impact of this change will not be fully realized until next quarter. We anticipate additional rate increases in 2022, which will result in higher interest expense on interest bearing deposits. Interest expense on interest bearing deposits decreased $107,000 compared to March 31, 2021, because of management lowering interest rates in 2021 on interest bearing deposits resulting in lower interest rates on interest bearing deposits compared to March 31, 2021. Cost of deposits was 0.09% for the three months ended March 31, 2022 and December 31, 2021, and improved from 0.17%, a decrease of 47.2%, compared to the three months ended March 31, 2021.

Net interest margin was 4.45% for the three months ended March 31, 2022, compared to 3.95% and 3.76% for the three months ended December 31, 2021 and March 31, 2021, respectively. The increase in net interest margin compared to the three months ended December 31, 2021 and March 31, 2021, was largely a result of an increase in higher rate loans. Non-PPP loans increased $283.8 million and $682.3 million, compared to December 31, 2021 and March 31, 2021, respectively. Also contributing to the increase in net interest margin compared to the three months ended December 31, 2021 and March 31, 2021, was $92.1 million and $648.6 million increase in average interest earning deposits, respectively. These interest earning deposits earned an average rate of 19 basis points for the quarter ended March 31, 2022.

Cost of funds was 0.14% for the quarter ended March 31, 2022 which is unchanged from the quarter ended December 31, 2021 and decreased 10 basis points from the quarter ended March 31, 2021. The decreased cost of funds compared to March 31, 2021 is largely due to the increase in noninterest bearing low interest bearing CCBX deposits compared to the three months ended March 31, 2021. Cost of deposits for the quarter ended March 31, 2022 was 0.09%, which was unchanged from the quarter ended December 31, 2021, and a 8 basis point decrease, from 0.17% for the quarter ended March 31, 2021, largely due to an increase in noninterest bearing deposits and a lower interest rate environment. Deposit growth from CCBX in noninterest bearing and low interest bearing accounts contributed to the reduced cost of funds in conjunction with rate reductions on our community bank deposits. The recent 25 basis point increase in rates by the FOMC did not have a significant impact on the first quarter interest expense, but the impact of that change and the change on loan rates will be seen in future quarters. Noninterest bearing deposits decreased $517.9 million, or 38.2%, compared to the quarter ended December 31, 2021 due to a reclassification of $690.4 million in CCBX deposits from noninterest bearing to interest bearing, partially offset by an increase of $172.5 million in new deposits during the quarter. Noninterest bearing deposits increased $69.4 million, or 9.0%, compared to the quarter ended March 31, 2021 due to an increase of $759.8 million in deposits, partially offset by the aforementioned reclassification of $690.4 million in CCBX noninterest bearing deposits to interest bearing deposits. Market conditions for deposits continued to be competitive during the quarter ended March 31, 2022; however, historically we have been able to keep our cost of deposits down by increasing low interest bearing and noninterest bearing deposits and allowing high cost deposits to run-off when appropriate, replacing them with lower cost core deposits.

During the quarter ended March 31, 2022, total loans receivable increased by $221.5 million, to $1.96 billion, compared to $1.74 billion for the quarter ended December 31, 2021. Non-PPP loans increased $283.8 million, or 17.3%, for the quarter ended March 31, 2022, compared to the quarter ended December 31, 2021. PPP loans decreased $64.3 million as a result of forgiveness and repayments and totaled $47.5 million as of March 31, 2022 compared to $111.8 million as of December 31, 2021. Total loans receivable increased $197.5 million as of March 31, 2022, compared to the quarter ended March 31, 2021. Non-PPP loans increased $693.8 million, or 56.7%, for the quarter ended March 31, 2022, compared to the quarter ended March 31, 2021. PPP loans decreased $496.4 million as a result of forgiveness and repayments, totaling $47.5 million as of March 31, 2022, compared to $543.8 million for the quarter ended March 31, 2021.

Total yield on loans receivable for the quarter ended March 31, 2022 was 6.80%, compared to 5.92% for the quarter ended December 31, 2021, and 4.51% for the quarter ended March 31, 2021. This increase in yield on loans receivable is largely attributed to an increase in higher rate consumer loans from CCBX partners. During the quarter ended March 31, 2022, CCBX loans outstanding increased $168.7 million, or 48.7%, with an average CCBX gross yield of 12.73% and community bank loans increased $50.8 million, or 3.6%, with an average yield of 5.16%. CCBX gross does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. Net BaaS loan income divided by average CCBX loans outstanding was 3.93% and is impacted by the $218.7 million in capital call lines that are priced at prime minus 0.50%.

Yield on loans receivable, excluding earned fees* approximated 6.17% for the quarter ended March 31, 2022, compared to 4.37% for the quarter ended December 31, 2021, and 3.53% for the quarter ended March 31, 2021 and were higher primarily due to the decline in PPP loans which have a 1.0% stated rate. Net deferred fees recognized on loans were $2.7 million (includes $2.3 million on PPP loans), $6.6 million (includes $5.8 million on PPP loans) and $4.0 million (includes $3.2 million on PPP loans) for the quarters ended March 31, 2022, December 31, 2021 and March 31, 2021, respectively.

Return on average assets (“ROA”) was 0.93% for the quarter ended March 31, 2022 compared to 1.14% and 1.28% for the quarters ended December 31, 2021 and March 31, 2021, respectively. ROA for the quarters ended March 31, 2022 and December 31, 2021, were impacted by increased demand deposits and cash on the balance sheet, which are lower yielding earning assets and produce a lower loan to deposit ratio, combined with increased costs related to the CCBX segment, which increase expenses, compared to the quarter ended March 31, 2021.

The PPP loans originated in the first and second rounds during 2020 and in the third round in 2021 have had a significant impact on our financial statements. As the remaining $47.5 million in PPP loans continue to paydown they will have less impact on our results in the future. Any estimated adjusted ratios that exclude the impact of this activity are non-GAAP measures. For more information about non-GAAP financial measures, please see the end of this earnings release.

The table below summarizes information about total PPP loans originated in 2020 and 2021.

    Total PPP Loan Origination
 
    Round 1 & 2
2020
  Round 3
2021
  Total
 
(Dollars in thousands; unaudited)                    
Loans Originated   $ 452,846   $ 311,012   $ 763,858  
Deferred fees, net     12,933     13,334   $ 26,267  
Outstanding loans and deferred fees as of March 31, 2022
Loans outstanding   $ 2,927   $ 44,540   $ 47,467  
Deferred fees, net     7     1,358   $ 1,365  

As of March 31, 2022 there was $47.5 million in PPP loans, this includes $2.9 million from round 1 & 2 and $44.6 million from round 3. The table below summarizes key information about the remaining PPP loans originated in 2020 and 2021 as of the period indicated:

    Outstanding PPP Loans  
    Original Loan Size  
    As of and for the Three Months Ended March 31, 2022  
    $0.00 –
$50,000.00
  $50,0000.01 –
$150,000.00
  $150,000.01 –
$350,000.00
  $350,000.01 –
$2,000,000.00
  > 2,000,000.01   Totals  
(Dollars in thousands; unaudited)                          
Principal outstanding:                                      
Round 1 & 2   $ 134   $ 367   $ 84   $ 1,578   $ 764   $ 2,927  
Round 3     2,133     2,963     13,492     25,952         44,540  
Total principal outstanding     2,267     3,330     13,576     27,530     764     47,467  
Net deferred fees outstanding                                      
Round 1 & 2   $   $ 1   $ 1   $ 4   $ 1   $ 7  
Round 3     185     98     493     582         1,358  
Total net deferred fees outstanding   $ 185   $ 99   $ 494   $ 586   $ 1   $ 1,365  
Number of loans:                                      
Round 1 & 2     7     7     3     6     1     24  
Round 3     122     31     55     31         239  
Total loan count     129     38     58     37     1     263  
Percent of total     49.0 %   14.5 %   22.0 %   14.1 %   0.4 %   100.0 %
                                       
Forgiveness/Payoffs/Paydowns in Three Months Ended March 31, 2022                    
Dollars   $ 4,960   $ 7,880   $ 18,827   $ 31,741   $ 938   $ 64,346  
Deferred fee recognized     394     286     768     811     9     2,268  

The following table shows the Company’s key performance ratios for the periods indicated. The table also includes ratios that were adjusted by removing the impact of the PPP loans as described above. The adjusted ratios are non-GAAP measures. For more information about non-GAAP financial measures, see the end of this earnings release.

          Three Months Ended  
(unaudited)   March31,
2022
  December31,
2021
  September30,
2021
  June 30,
2021
  March31,
2021
 
                                 
Return on average assets (1)     0.93 %   1.14 %   1.21 %   1.36 %   1.28 %
Return on average equity (1)     12.12 %   16.80 %   16.77 %   18.60 %   16.84 %
Yield on earnings assets (1)     4.58 %   4.09 %   3.63 %   3.89 %   3.99 %
Yield on loans receivable (1)     6.80 %   5.92 %   4.57 %   4.44 %   4.51 %
Yield on loans receivable,
excluding PPP loans (1)(2)
    6.52 %   4.98 %   4.53 %   4.65 %   4.78 %
Yield on loans receivable,
excluding earned
fees (1)(2)
    6.17 %   4.37 %   3.74 %   3.46 %   3.53 %
Yield on loans receivable,
excluding earned fees on
all loans and interest on PPP
loans, as adjusted (1)(2)
    6.41 %   4.78 %   4.36 %   4.42 %   4.52 %
Cost of funds (1)     0.14 %   0.14 %   0.16 %   0.20 %   0.24 %
Cost of deposits (1)     0.09 %   0.09 %   0.10 %   0.14 %   0.17 %
Net interest margin (1)     4.45 %   3.95 %   3.48 %   3.70 %   3.76 %
Noninterest expense to average
assets (1)
    4.52 %   3.29 %   2.91 %   2.65 %   2.62 %
Efficiency ratio     59.34 %   54.08 %   64.68 %   58.69 %   60.85 %
Loans receivable to deposits     76.24 %   73.73 %   76.71 %   92.03 %   105.68 %
                                 
(1) Annualized calculations shown for quarterly periods presented.  
(2) A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.  

Noninterest income was $22.0 million for the three months ended March 31, 2022, an increase of $7.8 million from $14.2 million for the three months ended December 31, 2021, and an increase of $19.0 million from $3.0 million for the three months ended March 31, 2021. The increase in noninterest income over the quarter ended December 31, 2021 was primarily due to an increase of $7.5 million in BaaS fees and a $602,000 increase in loan referral fees. The $7.5 million increase in BaaS fees included $4.0 million in BaaS fees – credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, $3.4 million in BaaS fees – fraud recovery, and an increase of $102,000 in other BaaS fees (see “Appendix B” for more information on the accounting for BaaS allowance for loan losses, reserve for unfunded commitments, credit enhancements and fraud recovery). The $19.0 million increase in noninterest income over the quarter ended March 31, 2021 was primarily due to a $19.2 million increase in BaaS fees partially offset by a decrease of $130,000 in gain on sale of loans and $139,000 decrease in mortgage broker fees. The $19.2 million increase in BaaS fees included $13.1 million related to credit enhancements, $4.6 million related to fraud recovery and $1.5 million in other BaaS fees.

Our CCBX segment continues to grow, and now has 28 relationships, at varying stages, as of March 31, 2022. As of March 31, 2022, we had 20 active CCBX relationships, one relationship in friends and family/testing, five relationships in onboarding/implementation, two signed letters of intent and we believe we have a strong pipeline of potential new CCBX relationships. We are more selective in our new CCBX relationships and are focused on only selecting the relationships which are well-capitalized, are already established, and have experienced management teams.

The following table summarizes the average yield on loans receivable and cost of deposits for each segment for the periods indicated:

  For the Three Months Ended  
  March 31, 2022     December 31, 2021     March 31, 2021  
  Yield on   Cost of     Yield on   Cost of     Yield on   Cost of  
  Loans   Deposits     Loans   Deposits     Loans   Deposits  
Community Bank 5.16 %   0.11 %     5.89 %   0.12 %     4.59 %   0.18 %  
CCBX – gross yield(1) 12.73 %   0.06 %     6.13 %   0.02 %     2.50 %   0.09 %  
                                         
(1) CCBX – gross yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. To determine net revenue (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.  
                                         
  For the Three Months Ended  
  March 31, 2022     December 31, 2021     March 31, 2021  
(Dollars in thousands) Interest / Expense   Interest / expense divided by average CCBX loans     Interest / Expense   Interest / expense divided by average CCBX loans     Interest / Expense   Interest / expense divided by average CCBX loans  
BaaS loan interest income $ 11,992     12.73 %   $ 3,771     6.13 %   $ 412     2.50 %
Less: BaaS loan expense   8,290     8.80 %     2,368     3.85 %     90     0.55 %
Net BaaS loan income*   3,702     3.93 %     1,403     2.28 %     322     1.95 %
Average BaaS Loans   382,153             244,038             66,850        

The following table illustrates the activity and growth in CCBX relationships for the periods presented and includes the addition of a large, established strategic partner and the removal of a smaller partner during the quarter ended March 31, 2022.

  As of
  March 31, 2022 December 31, 2021 March 31, 2021
Active 20 19 10
Friends and family / testing 1 1
Implementation / onboarding 5 5 5
Signed letters of intent 2 3 6
Total CCBX relationships 28 28 21

Total noninterest expense increased to $30.4 million for the three months ended March 31, 2022, compared to $21.1 million for the three months ended December 31, 2021 and $12.4 million for the three months ended March 31, 2021. Increase in noninterest expense for the quarter ended March 31, 2022, as compared to the quarter ended December 31, 2021, was primarily due to a $9.3 million increase in BaaS expense, $5.9 million of which is related to partner loan expense and $3.4 million of which is related to partner fraud expense. Partner loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans. Partner fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts, a portion of this expense is realized and a portion is estimated. Also contributing to the increase in noninterest expense compared to December 31, 2021 is a $544,000 increase in salaries and employee benefits which is related to the hiring in CCBX and additional staff for our ongoing growth initiatives. In the first quarter of 2022 compared to the fourth quarter of 2021, Federal Deposit Insurance Corporation (“FDIC”) assessments decreased $208,000, legal and professional fees decreased $243,000. The decrease in legal and professional expenses is related to fluctuating costs associated with CCBX contract reviews as well as the timing of legal and accounting work related to financial reporting.

The increased noninterest expenses for the quarter ended March 31, 2022 compared to the quarter ended March 31, 2021 were largely due to an increase of $12.8 million in BaaS partner expense ($8.2 million of which is related to partner loan expense and $4.6 million of which is related to partner fraud expense), $3.4 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing banking growth initiatives, $647,000 increase in other expenses, which includes $361,000 increase in provision for unfunded commitments, which is related to CCBX loans, $72,000 increase in operational/mobile losses, $64,000 increase in office supply and equipment expenses, and $50,000 increase in FRB and other bank service charges. Also contributing to the increase is a $568,000 increase in software licenses, maintenance and subscriptions, and a $409,000 increase in FDIC assessments. The increase in FDIC assessments is largely the result of an increase in deposits combined with other factors that impact the FDIC assessment calculation compared to the quarter ended March 31, 2021. The increase in software license, maintenance and subscription expenses increased as a result of implementing software that aids in the reporting of CCBX activities and monitoring of transactions that helps to automate and create other efficiencies in reporting.

The provision for income taxes was $1.7 million for the three months ended March 31, 2022, $1.6 million for the three months ended December 31, 2021 and $1.6 million for the first quarter of 2021. 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 1.0% for calculating the provision for state taxes.

Financial Condition

Total assets increased $198.2 million, or 7.5%, to $2.83 billion at March 31, 2022 compared to $2.64 billion at December 31, 2021. Interest earning deposits with other banks decreased $149.3 million, primarily a result of using such deposits to purchase $135.0 million in U.S. Treasury securities during the quarter ended March 31, 2022, partially offset by $35.0 million in US Treasury security maturities. Management decided to invest a portion of excess cash into two-year Treasury securities which yield 2.15%, compared to 0.38%, on overnight cash at the Federal Reserve. The Treasury securities will increase income compared to current overnight rates. Loans receivable increased $221.5 million even after experiencing $64.3 million in PPP loan forgiveness and paydowns during the quarter ended March 31, 2022. Total assets increased $804.4 million, or 39.6%, at March 31, 2022, compared to $2.03 billion at March 31, 2021. Interest earning deposits with other banks including the Federal Reserve increased $461.9 million primarily from increased deposits, loans receivable increased $197.5 million, and investment securities increased $113.3 million compared to March 31, 2021.

Total loans receivable increased $221.5 million to $1.96 billion at March 31, 2022, from $1.74 billion at December 31, 2021, and increased $197.5 million from $1.77 billion at March 31, 2021. The increase in loans receivable over the quarter ended December 31, 2021 was the result of $283.8 million in non-PPP loan growth partially offset by $64.3 million in PPP loan forgiveness and paydowns. The $283.8 million increase in non-PPP loans includes CCBX loan growth of $168.7 million, and community bank loan growth of $115.1 million, excluding PPP loan forgiveness/repayments, for the three months ended March 31, 2022. CCBX gross loans totaled $515.3 million at March 31, 2022 compared to $346.6 million at December 31, 2021 and $103.1 million at March 31, 2021. Total loans receivable as of March 31, 2022 is net of $6.8 million in net deferred origination fees, $1.4 million of which is attributed to PPP loans. Along with an increase in loans receivable as of March 31, 2022 compared to December 31, 2021, unused commitments also increased during the same period, with the unused commitments on capital call lines increasing $137.5 million to $553.5 million at March 31, 2022 compared to $416.0 million at December 31, 2021, which should translate into future loan growth as the commitments are utilized. The increase in loans receivable over the quarter ended March 31, 2021 includes growth of $682.3 million in non-PPP loans, partially offset by a $496.4 million decrease in PPP loans as of March 31, 2022. Non-PPP loan growth consists of $116.5 million in capital call lines, $95.9 million in commercial real estate loans, $103.5 million in construction, land and land development loans, $132.3 million in residential real estate loans, and $27.9 million in other commercial and industrial loans. Consumer loans increased $101.5 million over the quarter ended December 31, 2021 and $206.2 million over the quarter ended March 31, 2021, primarily due to growth in CCBX.

The following table summarizes the loan portfolio at the periods indicated.

    As of  
    March 31, 2022     December 31, 2021     March 31, 2021  
(Dollars in thousands; unaudited)   Balance   % to Total     Balance   % to Total     Balance   % to Total  
                                           
Commercial and industrial loans:                                          
PPP loans   $ 47,467     2.4 %   $ 111,813     6.4 %   $ 543,827     30.5 %
Capital call lines     218,675     11.1       202,882     11.5       102,195     5.7  
All other commercial &
industrial loans
    128,181     6.5       104,365     6.0       100,252     5.5  
Real estate loans:                                          
Construction, land and
land development loans
    208,108     10.6       183,594     10.5       104,596     5.9  
Residential real estate loans     268,716     13.6       204,389     11.7       136,417     7.7  
Commercial real estate loans     889,483     45.1       835,587     47.7       793,633     44.5  
Consumer and other loans     210,343     10.7       108,871     6.2       4,114     0.2  
Gross loans receivable     1,970,973     100.0 %     1,751,501     100.0 %     1,785,034     100.0 %
Net deferred origination fees –
     PPP loans
    (1,365 )           (3,633 )           (14,279 )      
Net deferred origination fees –
     Other loans
    (5,399 )           (5,133 )           (4,032 )      
Loans receivable   $ 1,964,209           $ 1,742,735           $ 1,766,723        
Loan Yield     6.80 %           5.92 %           4.51 %      

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

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

Community Bank   As of  
    March 31, 2022     December 31, 2021     March 31, 2021  
(Dollars in thousands; unaudited)   Balance   % to Total     Balance   % to Total     Balance   % to Total  
Commercial and industrial loans:                                          
PPP loans   $ 47,467     3.3 %   $ 111,813     8.0 %   $ 543,827     32.3 %
All other commercial & industrial loans     124,160     8.5       104,365     7.4       100,252     6.0  
Real estate loans:                                          
Construction, land and land development loans     208,108     14.3       183,594     13.1       104,596     6.2  
Residential real estate loans     184,485     12.7       167,502     11.9       136,417     8.1  
Commercial real estate loans     889,483     61.1       835,587     59.5       793,633     47.2  
Consumer and other loans:                                          
Other consumer and other loans     1,959     0.1       2,034     0.1       3,245     0.2  
Gross Community Bank loans receivable     1,455,662     100.0 %     1,404,895     100.0 %     1,681,970     100.0 %
Net deferred origination fees     (6,842 )           (8,835 )           (18,345 )      
Loans receivable   $ 1,448,820           $ 1,396,060           $ 1,663,625        
Loan Yield     5.16 %           5.89 %           4.59 %      
CCBX   As of  
    March 31, 2022     December 31, 2021     March 31, 2021  
(Dollars in thousands; unaudited)   Balance   % to Total     Balance   % to Total     Balance   % to Total  
Commercial and industrial loans:                                          
Capital call lines   $ 218,675     42.5 %   $ 202,882     58.6 %   $ 102,195     99.2 %
All other commercial & industrial loans     4,021     0.8           0.0           0.0  
Real estate loans:                                          
Residential real estate loans     84,231     16.3       36,887     10.6           0.0  
Consumer and other loans:                                          
Credit cards     55,090     10.7       11,429     3.3           0.0  
Other consumer and other loans     153,294     29.7       95,408     27.5       869     0.8  
Gross CCBX loans receivable     515,311     100.0 %     346,606     100.0 %     103,064     100.0 %
Net deferred origination costs     78             69             34        
Loans receivable   $ 515,389           $ 346,675           $ 103,098        
Loan Yield – CCBX gross(1)     12.73 %           6.13 %           2.50 %      
(1) CCBX gross yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans.  

Total deposits increased $212.7 million, or 9.0%, to $2.58 billion at March 31, 2022 from $2.36 billion at December 31, 2021. The increase was due primarily to a $211.4 million increase in core deposits, which is primarily the result of growth in CCBX partners and expanding and growing banking relationships with new customers. Deposits in our CCBX segment increased $183.2 million, from $716.3 million at December 31, 2021, to $899.5 million at March 31, 2022. The deposits from our CCBX segment are predominately classified as noninterest bearing, or NOW and money market accounts, but a portion of such CCBX deposits may be classified as brokered deposits as a result of the relationship agreement. During the quarter ended March 31, 2022, noninterest bearing deposits decreased $517.9 million, or 38.2%, to $838.0 million from $1.36 billion at December 31, 2021, as a result of a $690.4 million reclassification of noninterest bearing CCBX deposits to interest bearing. This reclassification is because the current rate exceeds the minimum interest rate set in their respective program agreements, as a result of the recent 0.25% increase in interest rates by the FOMC. Excluding the reclassification, noninterest deposits increased $172.5 million in the three months ended March 31, 2022, compared to December 31, 2021. In the first quarter of 2022 compared to the fourth quarter of 2021, NOW and money market accounts increased $726.8 million, due in part to the CCBX reclassification combined with $36.4 million in growth, and savings accounts increased $2.4 million. BaaS-brokered deposits increased $4.4 million, or 6.2%, while time deposits decreased $3.1 million, or 7.1% in the first quarter of 2022 compared to the fourth quarter of 2021.

Total deposits increased $904.8 million, or 54.1%, to $2.58 billion at March 31, 2022 compared to $1.67 billion at March 31, 2021. Noninterest bearing deposits increased $69.4 million, or 9.0%, to $838.0 million at March 31, 2022 from $768.7 million at March 31, 2021. NOW and money market accounts increased $788.3 million, or 108.2%, to $1.52 billion at March 31, 2022, and savings accounts increased $12.4 million, or 13.3%, and BaaS-brokered deposits increased $49.5 million, or 193.6% while time deposits decreased $14.9 million, or 26.9%, in the first quarter of 2022 compared to the first quarter of 2021. Additionally, as of March 31, 2022 we have access to $276.4 million in CCBX customer deposits that are currently being transferred off the Bank’s balance sheet to other financial institutions on a daily basis. The Bank could retain these deposits for liquidity and funding purposes if needed. If a portion of these deposits are retained, they would be classified as brokered deposits, however if the entire available balance is retained, they would be non-brokered deposits. 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 at the periods indicated.

    As of  
    March 31, 2022     December 31, 2021     March 31, 2021  
(Dollars in thousands, unaudited)   Balance   % to Total     Balance   % to Total     Balance   % to Total  
                                           
Demand, noninterest bearing   $ 838,044     32.5 %   $ 1,355,908     57.4 %   $ 768,690     46.0 %
NOW and money market     1,516,546     58.9       789,709     33.4       728,243     43.6  
Savings     106,364     4.1       103,956     4.4       93,917     5.6  
Total core deposits     2,460,954     95.5       2,249,573     95.2       1,590,850     95.2  
BaaS-brokered deposits     75,145     2.9       70,757     3.0       25,597     1.5  
Time deposits less than $250,000     29,200     1.2       31,057     1.3       38,986     2.3  
Time deposits $250,000 and over     11,171     0.4       12,400     0.5       16,282     1.0  
Total deposits   $ 2,576,470     100.0 %   $ 2,363,787     100.0 %   $ 1,671,715     100.0 %
Cost of deposits     0.09 %           0.09 %           0.17 %      

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

Community Bank   As of  
    March 31, 2022     December 31, 2021     March 31, 2021  
(Dollars in thousands, unaudited)   Balance   % to Total     Balance   % to Total     Balance   % to Total  
Demand, noninterest bearing   $ 724,723     43.2 %   $ 719,233     43.7 %   $ 658,997     43.0 %
NOW and money market     805,858     48.1       780,884     47.4       725,825     47.4  
Savings     106,050     6.3       103,954     6.3       92,561     6.0  
Total core deposits     1,636,631     97.6       1,604,071     97.4       1,477,383     96.4  
Brokered deposits     2     0.0       1     0.0       1     0.0  
Time deposits less than $250,000     29,200     1.7       31,057     1.8       38,986     2.5  
Time deposits $250,000 and over     11,171     0.7       12,400     0.8       16,282     1.1  
Total Community Bank deposits   $ 1,677,004     100.0 %   $ 1,647,529     100.0 %   $ 1,532,652     100.0 %
Cost of deposits     0.11 %           0.12 %           0.18 %      
CCBX   As of  
    March 31, 2022     December 31, 2021     March 31, 2021  
(Dollars in thousands, unaudited)   Balance   % to Total     Balance   % to Total     Balance   % to Total  
Demand, noninterest bearing   $ 113,321     12.6 %   $ 636,675     88.9 %   $ 109,693     78.9 %
NOW and money market     710,688     79.0       8,825     1.2       2,418     1.7  
Savings     314     0.0       2     0.0       1,356     1.0  
Total core deposits     824,323     91.6       645,502     90.1       113,467     81.6  
BaaS-brokered deposits     75,143     8.4       70,756     9.9       25,596     18.4  
Total CCBX deposits   $ 899,466     100.0 %   $ 716,258     100.0 %   $ 139,063     100.0 %
Cost of deposits     0.06 %           0.02 %           0.09 %      

The FHLB allows us to borrow against our line of credit, which is collateralized by certain loans. During the quarter ended March 31, 2022, we repaid a total of $25.0 million in FHLB term advances. This included a $10.0 million advance that matures in March of 2023 and $15.0 million advance that matures in March 2025. We have sufficient liquidity for our current loan demand, and with no prepayment penalty for early repayment, management opted to repay these term advances and save the unnecessary interest expense. Although there are no immediate plans to borrow additional funds, FHLB borrowing capacity of $98.3 million was available under this arrangement as of March 31, 2022.

During the quarter ended March 31, 2022, the Company contributed $12.0 million in capital to the Bank. The Company has a cash balance of $11.2 million as of March 31, 2022. After deducting cash for general operating purposes, including debt repayment, for two years and for equity fund commitments, the Company could contribute $7.1 million more to the Bank if needed.

Total shareholders’ equity increased $6.7 million since December 31, 2021. The increase in shareholders’ equity was primarily due to $6.2 million in net earnings for the three months ended March 31, 2022.

Capital Ratios

The Company and the Bank remain well capitalized at March 31, 2022, as summarized in the following table.

Capital Ratios: Coastal
Community
Bank
    Coastal
Financial
Corporation
    Financial
Institution
Basel III
Regulatory
Guidelines
 
(unaudited)                      
Tier 1 leverage capital   8.10 %     7.75 %     5.00 %
Adjusted Tier 1 leverage capital ratio, excluding PPP loans(*)   8.35 %     7.99 %     N/A  
Common Equity Tier 1 risk-based capital   10.33 %     9.71 %     6.50 %
Tier 1 risk-based capital   10.33 %     9.88 %     8.00 %
Total risk-based capital   11.59 %     12.30 %     10.00 %


Asset Quality

The total allowance for loan losses was $38.8 million and 1.97% of loans receivable at March 31, 2022 compared to $28.6 million and 1.64% at December 31, 2021 and $19.6 million and 1.11% at March 31, 2021. The allowance for loan loss allocated to the CCBX portfolio was $18.1 million and 3.52% of CCBX loans receivable at March 31, 2022, with $20.6 million of allowance for loan loss allocated to the community bank or 1.42% of total community bank loans receivable. At March 31, 2022, there was $47.5 million in PPP loans, which are 100% guaranteed by the SBA. Adjusted allowance for loan losses to loans receivable, excluding PPP loans* was 2.02% for the quarter ended March 31, 2022.

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

    As of  
    March 31, 2022  
(Dollars in thousands)   Community Bank     CCBX     Total  
Loans receivable   $ 1,448,820     $ 515,389     $ 1,964,209  
Allowance for loan losses     (20,643 )     (18,127 )     (38,770 )
Allowance for loan losses to total loans receivable     1.42 %     3.52 %     1.97 %

Provision for loan losses totaled $12.9 million for the three months ended March 31, 2022, $8.9 million for the three months ended December 31, 2021, and $357,000 for the three months ended March 31, 2021. Net charge-offs totaled $2.8 million for the quarter ended March 31, 2022, compared to $532,000 for the quarter ended December 31, 2021 and $9,000 for the quarter ended March 31, 2021. Net charge-offs are up due to CCBX partner loans.

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

    Three Months Ended  
    March 31, 2022  
(Dollars in thousands)   Community Bank     CCBX     Total  
Gross charge-offs   $ 4     $ 2,804     $ 2,808  
Gross recoveries     (4 )           (4 )
Net charge-offs   $     $ 2,804     $ 2,804  

The increase in the Company’s provision for loan losses during the quarter ended March 31, 2022, is largely related to the provision for CCBX partner loans. During the quarter ended March 31, 2022, a $12.6 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis, compared to the $8.5 million provision for loan losses that was recorded for CCBX for the quarter ended December 31, 2021. The factors used in management’s analysis for community bank loan losses indicated that a provision for loan losses of $344,000 and $398,000 was needed for the quarters ended March 31, 2022 and December 31, 2021, respectively. The economic environment is continuously changing and has shown some signs of improvement from the ongoing vaccination of its population and increased re-opening of economic activities, tempered by increased inflation, global unrest, the war in Ukraine and a rise in new COVID-19 variants that have resulted in some economic uncertainty. The Company is not required to implement the provisions of the Current Expected Credit Loss accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model.

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

         
    Three Months Ended  
(Dollars in thousands)   March 31, 2022  
Community bank   $ 344  
CCBX     12,598  
Total provision expense   $ 12,942  

At March 31, 2022, our nonperforming assets were $2.3 million, or 0.08% of total assets, compared to $1.7 million, or 0.07%, of total assets, at December 31, 2021, and $661,000, or 0.03% of total assets, at March 31, 2021. These ratios are impacted by the increase in CCBX loans over 90 days delinquent that are covered by CCBX partner credit enhancements. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. Under the agreement, the CCBX partner will reimburse the Bank for its loss/charge-off on these loans. Nonperforming assets increased $617,000 during the quarter ended March 31, 2022, compared to the quarter ended December 31, 2021, due to the addition of $655,000 in CCBX loans that are past due 90 days or more and still accruing combined with $37,000 less in community bank nonaccrual loans. There were no repossessed assets or other real estate owned at March 31, 2022. Our nonperforming loans to loans receivable ratio was 0.12% at March 31, 2022, compared to 0.10% at December 31, 2021, and 0.04% at March 31, 2021.

For the quarter ended March 31, 2022, we have not seen a significant change in our credit quality metrics, as demonstrated by the low level of community bank charge-offs and nonperforming loans. The long-term economic impact of the COVID-19 pandemic, political gridlock, global unrest, the war in Ukraine and trade issues remains unknown; however, the Company remains diligent in its efforts to communicate and proactively work with borrowers to help mitigate potential credit deterioration. For the quarter ended March 31, 2022, $2.8 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 loan losses. Agreements with our CCBX loan partners provide for a credit enhancement against losses.

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

          As of  
    March 31,   December 31,   March 31,  
(Dollars in thousands, unaudited)   2022   2021   2021  
                     
Nonaccrual loans:                    
Commercial and industrial loans   $ 130   $ 166   $ 488  
Real estate:                    
Residential real estate     54     55     173  
Total nonaccrual loans     184     221     661  
                     
Accruing loans past due 90 days or more:                    
Total accruing loans past due 90 days or more     2,161     1,506      
Total nonperforming loans     2,345     1,727     661  
Other real estate owned              
Repossessed assets              
Total nonperforming assets   $ 2,345   $ 1,727   $ 661  
Troubled debt restructurings, accruing              
Total nonperforming loans to loans receivable     0.12 %   0.10 %   0.04 %
Total nonperforming assets to total assets     0.08 %   0.07 %   0.03 %

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  
    March 31,   December 31,   March 31,  
(Dollars in thousands, unaudited)   2022   2021   2021  
                     
Nonaccrual loans:                    
Commercial and industrial loans   $ 130   $ 166   $ 488  
Real estate:                  
Residential real estate     54     55     173  
Total nonaccrual loans     184     221     661  
                   
Accruing loans past due 90 days or more:              
Total accruing loans past due 90 days or more              
Total nonperforming loans     184     221     661  
Other real estate owned              
Repossessed assets              
Total nonperforming assets   $ 184   $ 221   $ 661  
                     
                     
CCBX   As of  
    March 31,   December 31,   March 31,  
(Dollars in thousands, unaudited)   2022   2021   2021  
                     
Nonaccrual loans:   $   $   $  
                     
Accruing loans past due 90 days or more:                    
Total accruing loans past due 90 days or more     2,161     1,506      
Total nonperforming loans     2,161     1,506      
Other real estate owned              
Repossessed assets              
Total nonperforming assets   $ 2,161   $ 1,506   $  
   
* A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.
   

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 $2.83 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 and digital financial service providers through its CCBX segment. To learn more about the Company visit www.coastalbank.com.

CCB-ER

Contact

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

Forward-Looking Statements

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

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

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

ASSETS  
    March 31,     December 31,     March 31,  
    2022     2021     2021  
Cash and due from banks   $ 32,705     $ 14,496     $ 16,842  
Interest earning deposits with other banks     649,404       798,665       187,472  
Investment securities, available for sale, at fair value     134,891       35,327       20,378  
Investment securities, held to maturity, at amortized cost     1,286       1,296       2,515  
Other investments     9,931       8,478       6,829  
Loans receivable     1,964,209       1,742,735       1,766,723  
Allowance for loan losses     (38,770 )     (28,632 )     (19,610 )
Total loans receivable, net     1,925,439       1,714,103       1,747,113  
Premises and equipment, net     18,135       17,219       17,194  
Operating lease right-of-use assets     5,836       6,105       6,900  
Accrued interest receivable     8,824       8,105       8,597  
Bank-owned life insurance, net     12,342       12,254       7,133  
Deferred tax asset, net     6,892       6,818       3,802  
Other assets     28,065       12,651       4,584  
Total assets   $ 2,833,750     $ 2,635,517     $ 2,029,359  
                         
LIABILITIES AND SHAREHOLDERS’ EQUITY  
LIABILITIES                        
Deposits   $ 2,576,470     $ 2,363,787     $ 1,671,715  
Federal Home Loan Bank advances           24,999       24,999  
Paycheck Protection Program Liquidity Facility                 158,519  
Subordinated debt, net     24,306       24,288       9,996  
Junior subordinated debentures, net     3,587       3,586       3,585  
Deferred compensation     712       744       833  
Accrued interest payable     149       357       538  
Operating lease liabilities     6,054       6,320       7,105  
Other liabilities     14,552       10,214       5,330  
Total liabilities     2,625,830       2,434,295       1,882,620  
                         
SHAREHOLDERS’ EQUITY                        
Common stock     122,592       121,845       88,329  
Retained earnings     85,603       79,373       58,386  
Accumulated other comprehensive (loss) income, net of tax     (275 )     4       24  
Total shareholders’ equity     207,920       201,222       146,739  
Total liabilities and shareholders’ equity   $ 2,833,750     $ 2,635,517     $ 2,029,359  

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

  Three Months Ended  
  March 31,
    December 31,
    March 31,  
  2022
    2021
    2021  
INTEREST AND DIVIDEND INCOME                      
Interest and fees on loans $ 29,632     $ 25,134     $ 18,230  
Interest on interest earning deposits with other banks   402       294       70  
Interest on investment securities   71       3       28  
Dividends on other investments   37       115       30  
Total interest and dividend income   30,142       25,546       18,358  
INTEREST EXPENSE                      
Interest on deposits   553       516       660  
Interest on borrowed funds   321       327       383  
Total interest expense   874       843       1,043  
Net interest income   29,268       24,703       17,315  
PROVISION FOR LOAN LOSSES   12,942       8,942       357  
Net interest income after provision for loan losses   16,326       15,761       16,958  
NONINTEREST INCOME                      
BaaS fees   20,112       12,649       948  
Unrealized holding (loss) gain on equity securities, net         (3   )    
Deposit service charges and fees   884       930       863  
Loan referral fees   602             597  
Gain on sales of loans, net         29       130  
Mortgage broker fees   123       218       262  
Other income   265       397       184  
Total noninterest income   21,986       14,220       2,984  
NONINTEREST EXPENSE                      
Salaries and employee benefits   11,085       10,541       7,686  
Occupancy   1,136       1,043       1,058  
Software licenses, maintenance and subscriptions   1,052       983       484  
Legal and professional fees   708       951       760  
Data processing   809       767       697  
BaaS expense   12,861       3,577       90  
Excise taxes   349       435       359  
Federal Deposit Insurance Corporation assessments   604       812       195  
Director and staff expenses   344       393       220  
Marketing   99       107       82  
Other expense   1,368       1,441       721  
Total noninterest expense   30,415       21,050       12,352  
Income before provision for income taxes   7,897       8,931       7,590  
PROVISION FOR INCOME TAXES   1,667       1,641       1,572  
NET INCOME $ 6,230     $ 7,290     $ 6,018  
                       
Basic earnings per common share $ 0.48     $ 0.60     $ 0.50  
Diluted earnings per common share $ 0.46     $ 0.57     $ 0.49  
Weighted average number of common shares outstanding:                      
Basic   12,898,746       12,144,452       11,960,772  
Diluted   13,475,337       12,701,464       12,393,493  

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

     
  March 31, 2022     December 31, 2021     March 31, 2021  
  Average   Interest &   Yield /     Average   Interest &   Yield /     Average   Interest &   Yield /  
  Balance   Dividends   Cost (4)     Balance   Dividends   Cost (4)     Balance   Dividends   Cost (4)  
Assets                                                          
Interest earning assets:                                                          
Interest earning deposits $ 843,931   $ 402     0.19 %   $ 751,805   $ 294     0.16 %   $ 195,308   $ 70     0.15 %
Investment securities (1)   45,762     71     0.63       37,024     3     0.03       24,185     28     0.47  
Other investments   9,227     37     1.63       8,411     115     5.42       6,080     30     2.00  
Loans receivable (2)   1,768,283     29,632     6.80       1,683,310     25,134     5.92       1,640,108     18,230     4.51  
Total interest earning assets   2,667,203     30,142     4.58       2,480,550     25,546     4.09       1,865,681     18,358     3.99  
Noninterest earning assets:                                                          
Allowance for loan losses   (30,668 )                 (20,242 )                 (19,391 )            
Other noninterest earning assets   92,401                   76,343                   65,912              
Total assets $ 2,728,936                 $ 2,536,651                 $ 1,912,202              
                                                           
Liabilities and Shareholders’ Equity  
Interest bearing liabilities:                                                          
Interest bearing deposits $ 1,131,984   $ 553     0.20 %   $ 962,128   $ 516     0.21 %   $ 856,111   $ 660     0.31 %
Subordinated debt, net   24,295     230     3.84       24,276     234     3.82       9,994     145     5.88  
Junior subordinated debentures, net   3,586     22     2.49       3,586     21     2.32       3,585     21     2.38  
PPPLF borrowings           0.00               0.00       170,376     147     0.35  
FHLB advances and other borrowings   24,443     69     1.14       25,000     72     1.14       24,999     70     1.14  
Total interest bearing liabilities   1,184,308     874     0.30       1,014,990     843     0.33       1,065,065     1,043     0.40  
Noninterest bearing deposits   1,320,144                   1,336,161                   690,465              
Other liabilities   16,009                   13,308                   11,778              
Total shareholders’ equity   208,475                   172,192                   144,894              
Total liabilities and                                                          
shareholders’ equity $ 2,728,936                 $ 2,536,651                 $ 1,912,202              
Net interest income       $ 29,268                 $ 24,703                 $ 17,315        
Interest rate spread               4.28 %                 3.76 %                 3.59 %
Net interest margin (3)               4.45 %                 3.95 %                 3.76 %
                                                           
(1) 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.  
(2) Includes nonaccrual loans.  
(3) Net interest margin represents net interest income divided by the average total interest earning assets.  
(4) Yields and costs are annualized.  

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

     
  March 31, 2022     December 31, 2021     March 31, 2021  
  Average   Interest &   Yield /     Average   Interest &   Yield /     Average   Interest &   Yield /  
  Balance   Dividends   Cost (2)     Balance   Dividends   Cost (2)     Balance   Dividends   Cost (2)  
Community Bank                                                          
Assets                                                          
Loans receivable (1) $ 1,386,130   $ 17,640     5.16 %   $ 1,439,272   $ 21,363     5.89 %   $ 1,573,258   $ 17,818     4.59 %
Liabilities  
Interest bearing deposits   935,784     435     0.19       920,125     483     0.21       826,471     638     0.31  
Noninterest bearing deposits   718,760                   715,267                   625,876              
                                                           
CCBX                                                          
Assets                                                          
Loans receivable (1)(3) $ 382,153   $ 11,992     12.73 %   $ 244,038   $ 3,771     6.13 %   $ 66,850   $ 412     2.50 %
Liabilities  
Interest bearing deposits   196,200     118     0.24       42,003     33     0.31       29,640     22     0.30  
Noninterest bearing deposits   601,384                   620,894                   64,589              
                                                           
(1) Includes nonaccrual loans.  
(2) Yields and costs are annualized.  
(3) CCBX gross yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancement and servicing CCBX loans.  

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

  Three Months Ended  
  March 31,   December 31,   September 30,   June 30,   March 31,  
  2022   2021   2021   2021   2021  
Income Statement Data:                              
Interest and dividend income $ 30,142   $ 25,546   $ 19,608   $ 19,571   $ 18,358  
Interest expense   874     843     801     959     1,043  
Net interest income   29,268     24,703     18,807     18,612     17,315  
Provision for loan losses   12,942     8,942     255     361     357  
Net interest income after                              
provision for loan losses   16,326     15,761     18,552     18,251     16,958  
Noninterest income   21,986     14,220     6,132     4,782     2,984  
Noninterest expense   30,415     21,050     16,130     13,731     12,352  
Provision for income tax   1,667     1,641     1,870     2,289     1,572  
Net income   6,230     7,290     6,684     7,013     6,018  
  As of and for the Three Month Period  
     
  March 31,   December 31,   September 30,   June 30,   March 31,  
  2022   2021   2021   2021   2021  
Balance Sheet Data:                              
Cash and cash equivalents $ 682,109   $ 813,161   $ 669,725   $ 282,889   $ 204,314  
Investment securities   136,177     36,623     34,924     27,442     22,893  
Loans receivable   1,964,209     1,742,735     1,705,682     1,658,149     1,766,723  
Allowance for loan losses   (38,770 )   (28,632 )   (20,222 )   (19,966 )   (19,610 )
Total assets   2,833,750     2,635,517     2,451,568     2,007,138     2,029,359  
Interest bearing deposits   1,738,426     1,007,879     927,097     913,782     903,025  
Noninterest bearing deposits   838,044     1,355,908     1,296,443     887,896     768,690  
Core deposits (1)   2,460,954     2,249,573     2,148,445     1,724,134     1,590,850  
Total deposits   2,576,470     2,363,787     2,223,540     1,801,678     1,671,715  
Total borrowings   27,893     52,873     52,854     38,584     197,099  
Total shareholders’ equity   207,920     201,222     161,086     154,100     146,739  
                               
Share and Per Share Data (2):                              
Earnings per share – basic $ 0.48   $ 0.60   $ 0.56   $ 0.59   $ 0.50  
Earnings per share – diluted $ 0.46   $ 0.57   $ 0.54   $ 0.56   $ 0.49  
Dividends per share                    
Book value per share (3) $ 16.08   $ 15.63   $ 13.41   $ 12.83   $ 12.24  
Tangible book value per share (4) $ 16.08   $ 15.63   $ 13.41   $ 12.83   $ 12.24  
Weighted avg outstanding shares – basic   12,898,746     12,144,452     11,999,899     11,984,927     11,960,772  
Weighted avg outstanding shares – diluted   13,475,337     12,701,464     12,456,674     12,459,467     12,393,493  
Shares outstanding at end of period   12,928,548     12,875,315     12,012,107     12,007,669     11,988,636  
Stock options outstanding at end of period   666,774     694,519     710,182     714,620     728,492  
                               
See footnotes on following page                              
                               
  As of and for the Three Month Period  
     
  March 31,   December 31,   September 30,   June 30,   March 31,  
  2022   2021   2021   2021   2021  
Credit Quality Data:                              
Nonperforming assets (5) to total assets   0.08 %   0.07 %   0.03 %   0.03 %   0.03 %
Nonperforming assets (5) to loans receivable and OREO   0.12 %   0.10 %   0.04 %   0.04 %   0.04 %
Nonperforming loans (5) to total loans receivable   0.12 %   0.10 %   0.04 %   0.04 %   0.04 %
Allowance for loan losses to nonperforming loans   1654.0 %   1657.9 %   2732.7 %   3081.2 %   2966.7 %
Allowance for loan losses to total loans receivable   1.97 %   1.64 %   1.19 %   1.20 %   1.11 %
Adjusted allowance for loan losses to loans receivable, excluding PPP loans (6)   2.02 %   1.75 %   1.40 %   1.57 %   1.59 %
Gross charge-offs $ 2,808   $ 579   $ 31   $ 12   $ 18  
Gross recoveries $ 4   $ 47   $ 32   $ 7   $ 9  
Net charge-offs to average loans (7)   0.64 %   0.13 %   0.00 %   0.00 %   0.00 %
Credit enhancement recovery (8) $ 2,804   $ 363   $ 18   $ 4   $  
                               
Capital Ratios (9):                              
Tier 1 leverage capital   7.75 %   8.07 %   7.48 %   8.00 %   8.62 %
Common equity Tier 1 risk-based capital   9.71 %   11.06 %   9.94 %   10.92 %   10.89 %
Tier 1 risk-based capital   9.88 %   11.26 %   10.15 %   11.16 %   11.15 %
Total risk-based capital   12.30 %   13.89 %   12.95 %   13.12 %   13.15 %
                               
(1) Core deposits are defined as all deposits excluding brokered and all time deposits.  
(2) Share and per share amounts are based on total common shares outstanding.  
(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) A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.  
(7) Annualized calculations.                              
(8) Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans. When the provision for loan losses and provision for unfunded commitments is recorded, a recovery receivable is also recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement). This is the amount of CCBX incurred losses that were recorded and are covered by the partner’s credit enhancement.  
(9) 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, BaaS fraud recovery and reimbursement of expenses on revenue.

Revenue excluding BaaS credit enhancements, BaaS fraud recovery and reimbursement of expenses is a non-GAAP measure that excludes the impact of BaaS credit enhancements, BaaS fraud recovery and reimbursement of expenses 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  
(Dollars in thousands, unaudited)   March 31,
2022
  December31,
2021
  March 31,
2021
 
Revenue excluding BaaS credit enhancements, BaaS fraud recovery and reimbursement of expenses:  
Total net interest income   $ 29,268   $ 24,703   $ 17,315  
Total noninterest income     21,986     14,220     2,984  
Total Revenue   $ 51,254   $ 38,923   $ 20,299  
Less: BaaS credit enhancements     (13,075 )   (9,076 )    
Less: BaaS fraud recovery     (4,571 )   (1,209 )    
Less: Reimbursement of expenses     (372 )   (295 )   (183 )
Total revenue excluding BaaS credit enhancements, BaaS fraud recovery and reimbursement of expenses   $ 33,236   $ 28,343   $ 20,116  

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 gross yield on CCBX loans. The most directly comparable GAAP measure is (gross) yield on CCBX loans.

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

    As of and for the Three Months Ended  
(Dollars in thousands, unaudited)   March 31,
2022
  December 31,
2021
  March31,
2021
 
Net BaaS loan income divided by average CCBX loans:  
Total average CCBX loans receivable   $ 382,153   $ 244,038   $ 66,850  
Interest and earned fee income on CCBX loans     11,992     3,771     412  
Less: loan expense on CCBX loans     (8,290 )   (2,368 )   (90 )
Net BaaS loan income   $ 3,702   $ 1,403   $ 322  
Net BaaS loan income divided by average
  CCBX loans
    3.93 %   2.28 %   1.95 %
CCBX gross loan yield     12.73 %   6.13 %   2.50 %

The following non-GAAP measure is presented to illustrate the impact of loan fees on contractual loan yield.

Yield on loans receivable, excluding earned fees is a non-GAAP measure that excludes the impact of earned loan fees on the contractual interest rate yield. The most directly comparable GAAP measure is yield on loans.

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

    As of and for the Three Months Ended  
(Dollars in thousands, unaudited)   March 31,
2022
  December 31,
2021
  September 30,
2021
  June 30,
2021
  March31,
2021
 
Yield on loans receivable, excluding earned fees :  
Total average loans receivable   $ 1,768,283   $ 1,683,310   $ 1,681,069   $ 1,750,825   $ 1,640,108  
Interest and earned fee income on loans     29,632     25,134     19,383     19,365     18,230  
Less: earned fee income on all loans     (2,729 )   (6,572 )   (3,533 )   (4,274 )   (3,974 )
Adjusted interest income on loans   $ 26,903   $ 18,562   $ 15,850   $ 15,091   $ 14,256  
Yield on loans receivable     6.80 %   5.92 %   4.57 %   4.44 %   4.51 %
Yield on loans receivable, excluding earned fees:     6.17 %   4.37 %   3.74 %   3.46 %   3.53 %
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans (1):     6.41 %   4.78 %   4.36 %   4.42 %   4.52 %
(1) Non-GAAP measure – see next table of “Non-GAAP Financial Measures” for more information.  

The following non-GAAP financial measures are presented to illustrate and identify the impact of PPP loans on loans receivable related measures. By removing these items and showing what the results would have been without them, we are providing investors with the information to better compare results with periods that did not have these items. These measures include the following:

Adjusted allowance for loan losses to loans receivable is a non-GAAP measure that excludes the impact of PPP loans on balance sheet. The most directly comparable GAAP measure is allowance for loan losses to loans receivable.

Yield on loans receivable, excluding PPP loans is a non-GAAP measure that excludes the impact of PPP loans on balance sheet and income statement. The most directly comparable GAAP measure is yield on loans.

Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans is a non-GAAP measure that excludes the impact of earned fees and PPP loans on the balance sheet and income statement. The most directly comparable GAAP measure is yield on loans.

Adjusted Tier 1 leverage capital ratio, excluding PPP loans is a non-GAAP measure that excludes the impact of PPP loans on balance sheet. The most directly comparable GAAP measure is Tier 1 leverage capital ratio.

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

    As of and for the Three Months Ended  
(Dollars in thousands, unaudited)   March 31,
2022
  December 31,
2021
  March 31,
2021
 
Adjusted allowance for loan losses to loans receivable, excluding PPP loans:  
Total loans, net of deferred fees   $ 1,964,209   $ 1,742,735   $ 1,766,723  
Less: PPP loans     (47,467 )   (111,813 )   (543,827 )
Less: net deferred fees on PPP loans     1,365     3,633     14,279  
Adjusted loans, net of deferred fees   $ 1,918,106   $ 1,634,555   $ 1,237,175  
Allowance for loan losses   $ (38,770 ) $ (28,632 ) $ (19,610 )
Allowance for loan losses to loans receivable     1.97 %   1.64 %   1.11 %
Adjusted allowance for loan losses to loans receivable, excluding PPP loans     2.02 %   1.75 %   1.59 %
Yield on loans receivable, excluding PPP loans:        
Total average loans receivable   $ 1,768,283   $ 1,683,310   $ 1,640,108  
Less: average PPP loans     (79,828 )   (186,267 )   (475,941 )
Plus: average deferred fees on PPP loans     2,453     6,370     10,788  
Adjusted total average loans receivable   $ 1,690,908   $ 1,503,413   $ 1,174,955  
Interest income on loans   $ 29,632   $ 25,134   $ 18,230  
Less: interest and deferred fee income recognized on PPP loans     (2,460 )   (6,245 )   (4,378 )
Adjusted interest income on loans   $ 27,172   $ 18,889   $ 13,852  
Yield on loans receivable     6.80 %   5.92 %   4.51 %
Yield on loans receivable, excluding PPP loans:     6.52 %   4.98 %   4.78 %
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans:  
Total average loans receivable   $ 1,768,283   $ 1,683,310   $ 1,640,108  
Less: average PPP loans     (79,828 )   (186,267 )   (475,941 )
Plus: average deferred fees on PPP loans   $ 2,453   $ 6,370   $ 10,788  
Adjusted total average loans receivable   $ 1,690,908   $ 1,503,413   $ 1,174,955  
Interest and earned fee income on loans   $ 29,632   $ 25,134   $ 18,230  
Less: earned fee income on all loans   $ (2,729 ) $ (6,572 ) $ (3,974 )
Less: interest income on PPP loans     (192 )   (461 )   (1,169 )
Adjusted interest income on loans   $ 26,711   $ 18,101   $ 13,087  
Yield on loans receivable     6.80 %   5.92 %   4.51 %
Yield on loans receivable, excluding earned fees on all loans (1):     6.17 %   4.37 %   3.53 %
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans:     6.41 %   4.78 %   4.52 %
(1) Non-GAAP measure – see previous table of “Non-GAAP Financial Measures” for more information.  
(Dollars in thousands, unaudited)   As of
March 31, 2022
  As of
December 31, 2021
  As of
March 31, 2021
 
Adjusted Tier 1 leverage capital ratio, excluding PPP loans:  
Company:                    
Tier 1 capital   $ 211,580   $ 204,585   $ 150,055  
Average assets for the leverage capital ratio   $ 2,728,833   $ 2,536,512   $ 1,741,666  
Less: Average PPP loans     (79,828 )   (186,267 )   (475,941 )
Plus: Average PPPLF borrowings             170,376  
Adjusted average assets for the leverage capital ratio   $ 2,649,005   $ 2,350,245   $ 1,436,101  
Tier 1 leverage capital ratio     7.75 %   8.07 %   8.62 %
Adjusted Tier 1 leverage capital ratio, excluding PPP loans     7.99 %   8.70 %   10.45 %
Bank:                    
Tier 1 capital   $ 220,829   $ 201,783   $ 153,844  
Average assets for the leverage capital ratio   $ 2,725,606   $ 2,533,749   $ 1,740,660  
Less: Average PPP loans     (79,828 )   (186,267 )   (475,941 )
Plus: Average PPPLF borrowings             170,376  
Adjusted average assets for the leverage capital ratio   $ 2,645,778   $ 2,347,482   $ 1,435,095  
Tier 1 leverage capital ratio     8.10 %   7.96 %   8.84 %
Adjusted Tier 1 leverage capital ratio, excluding PPP loans     8.35 %   8.60 %   10.72 %


APPENDIX A –

As of March 31, 2022

Industry Concentration

We have a diversified loan portfolio, representing a wide variety of industries. Three of our largest categories of loans are commercial real estate, commercial and industrial, and construction, land and land development loans. Together they represent $1.44 billion in outstanding loan balances, or 75.1% of total gross loans outstanding, excluding PPP loans of $47.5 million. When combined with $1.54 billion in unused commitments the total of these three categories is $2.22 billion, or 64.2% of total outstanding loans and loan commitments, excluding PPP loans.

Commercial real estate loans represent the largest segment of our loans, comprising 46.2% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2022. Unused commitments to extend credit represents an additional $28.9 million, and the combined total exposure in commercial real estate loans represents $918.4 million, or 26.6% of our total outstanding loans and loan commitments, excluding PPP loans.

The following table summarizes our exposure by industry for our commercial real estate portfolio as of March 31, 2022:

(Dollars in thousands, unaudited)   Outstanding
Balance
    Available Loan
Commitments
    Total Exposure     % of Total
Loans

(Outstanding
Balance &
Available
Commitment)
    Average Loan
Balance
    Number
of Loans
 
Apartments   $ 166,442     $ 3,372     $ 169,814       4.9 %   $ 2,280       73  
Hotel/Motel     137,907       228       138,135       4.0       5,108       27  
Office     93,849       4,401       98,250       2.8       929       101  
Warehouse     71,630       102       71,732       2.1       1,462       49  
Convenience Store     72,309       7,125       79,434       2.3       1,808       40  
Mixed use     74,357       4,411       78,768       2.3       855       87  
Retail     78,587       2,435       81,022       2.3       914       86  
Manufacturing     38,719       2,007       40,726       1.2       1,106       35  
Mini Storage     32,617       400       33,017       1.0       2,330       14  
Groups < 1.4% of total     123,066       4,392       127,458       3.7       1,483       83  
Total   $ 889,483     $ 28,873     $ 918,356       26.6 %   $ 1,495       595  


Commercial and industrial loans
comprise 18.0% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2022. Unused commitments to extend credit represents an additional $630.1 million, and the combined total exposure in commercial and industrial loans represents $976.9 million, or 28.2% of our total outstanding loans and loan commitments, excluding PPP loans. Included in commercial and industrial loans is $218.7 million in outstanding capital call lines, with an additional $553.5 million in available loan commitments, which is 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 exposure by industry, excluding PPP loans, for our commercial and industrial loan portfolio as of March 31, 2022:

(Dollars in thousands, unaudited)   Outstanding Balance     Available Loan Commitments     Total Exposure     % of Total Loans
(Outstanding Balance & Available Commitment)
    Average Loan Balance     Number of Loans  
Capital Call Lines   $ 218,675     $ 553,534     $ 772,209       22.3 %   $ 1,508       145  
Construction/Contractor
Services
    19,401       29,847       49,248       1.4       115       168  
Financial Institutions     35,150             35,150       1.0       3,906       9  
Manufacturing     13,129       5,436       18,565       0.5       208       63  
Medical / Dental /
Other Care
    12,928       5,436       18,364       0.5       249       52  
Family and Social Services     7,057       2,987       10,044       0.3       504       14  
Groups < 0.40% of total     40,516       32,808       73,324       2.2       151       268  
Total   $ 346,856     $ 630,048     $ 976,904       28.2 %   $ 482       719  


Construction, land and land development loans
comprise 10.8% of our total balance of outstanding loans, excluding PPP loans, as of March 31, 2022. Unused commitments to extend credit represents an additional $116.8 million, and the combined total exposure in construction, land and land development loans represents $324.9 million, or 9.4% of our total outstanding loans and loan commitments, excluding PPP loans.

The following table details our exposure for our construction, land and land development portfolio as of March 31, 2022:

(Dollars in thousands, unaudited)   Outstanding Balance     Available Loan Commitments     Total Exposure     % of Total Loans
(Outstanding Balance & Available Commitment)
    Average Loan Balance     Number of Loans  
Commercial construction   $ 105,023     $ 80,282     $ 185,305       5.4 %   $ 4,039       26  
Residential construction     30,229       20,530       50,759       1.5       720       42  
Undeveloped land loans     38,233       3,440       41,673       1.2       2,941       13  
Developed land loans     18,723       7,140       25,863       0.7       535       35  
Land development     15,900       5,382       21,282       0.6       757       21  
Total   $ 208,108     $ 116,774     $ 324,882       9.4 %   $ 1,519       137  


APPENDIX B –

As of March 31, 2022

CCBX – BaaS Reporting Information

During the quarter ended March 31, 2022, $13.1 million was recorded in BaaS fees – credit enhancements related to the provision for loan losses and reserve for unfunded commitments for CCBX partner loans. Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans. When the provision for loan losses and provision for unfunded commitments is recorded, a recovery receivable is also recorded on the balance sheet through noninterest income (BaaS fees -credit enhancement) in recognition of the CCBX partner legal commitment to cover losses. Incurred losses are recorded in the allowance for loan losses, and as the credit enhancement recoveries are received from the CCBX partner, the recovery receivable is relieved. Agreements with our CCBX partners also provide protection to the Bank from fraud by absorbing incurred fraud losses. Fraud losses are recorded when incurred as losses in noninterest expense, and the recovery 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 many agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by absorbing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligations beyond their cash reserve account then the bank would be exposed to additional loan losses, as a result of this counterparty risk.

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 enhancement and servicing CCBX loans. To determine net revenue (Net BaaS loan income) earned from CCBX loan relationships, one 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.

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  
    March 31,     December 31,     March 31,  
(Dollars in thousands)   2021     2021     2021  
BaaS loan interest income   $ 11,992     $ 3,771     $ 412  
Less: BaaS loan expense     8,290       2,368       90  
Net BaaS loan income     3,702       1,403       322  
Net BaaS loan income divided by average BaaS loans     3.93 %     2.28 %     1.95 %

The addition of new CCBX partners has resulted in increases in direct fees, expenses and interest for the quarter ended March 31, 2022 compared to the quarters ended December 31, 2021 and March 31, 2021. The following tables are a summary of the direct fees, expenses and interest components of BaaS for the periods indicated and are not inclusive of all income and expense related to BaaS.

Interest income   Three Months Ended  
    March 31,     December 31,     March 31,  
(Dollars in thousands)   2022     2021     2021  
Loan interest income   $ 11,992     $ 3,771     $ 412  
Total BaaS interest income   $ 11,992     $ 3,771     $ 412  
Interest expense   Three Months Ended  
    March 31,     December 31,     March 31,  
(Dollars in thousands)   2022     2021     2021  
BaaS interest expense   $ 118     $ 34     $ 22  
Total BaaS interest expense   $ 118     $ 34     $ 22  
Noninterest income   Three Months Ended  
    March 31,     December 31,     March 31,  
(Dollars in thousands)   2022     2021     2021  
Program income:                        
Servicing and other BaaS fees   $ 1,169     $ 1,421   (1) $ 584  
Transaction fees     493       280       146  
Interchange fees     432       368       35  
Total program income     2,094       2,069       765  
Reimbursements and guarantees:                        
Credit enhancement recovery     13,075       9,076        
Fraud recovery     4,571       1,209        
Reimbursement of expenses     372       295       183  
Total reimbursements and guarantees     18,018       10,580       183  
Total BaaS fees   $ 20,112     $ 12,649     $ 948  
(1) Includes one-time, nonrecurring lump-sum fees of $197,000 from two partners.  
Noninterest expense   Three Months Ended  
    March 31,     December 31,     March 31,  
(Dollars in thousands)   2022     2021     2021  
BaaS loan expense   $ 8,290     $ 2,368     $ 90  
BaaS fraud expense     4,571       1,209        
Total BaaS expense   $ 12,861     $ 3,577     $ 90  

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