Coastal Financial Corporation Announces Second Quarter 2022 Results

Jul 27th, 2022 13:25 EST

Second Quarter 2022 Highlights:

  • Record quarterly net income of $10.2 million, or $0.76 per diluted common share, for the three months ended June 30, 2022, compared to $6.2 million, or $0.46 per diluted common share for the three months ended March 31, 2022.
  • Total assets increased $136.0 million, or 4.8%, to $2.97 billion for the quarter ended June 30, 2022, compared to $2.83 billion at March 31, 2022.
  • Loan growth of $461.2 million, or 24.0%, excluding PPP loan forgiveness/repayments of $31.1 million and including $60.0 million in loans held for sale, for the three months ended June 30, 2022, compared to the three months ended March 31, 2022.
    • CCBX loans increased $288.6 million, or 56.0%
    • Community bank loans increased $112.7 million, or 8.0%, excluding PPP loan forgiveness/repayments
    • PPP loans decreased $31.1 million, or 65.5%, to $16.4 million
    • CCBX loans held for sale of $60.0 million as of June 30, 2022, previously there were no loans held for sale.
  • Deposit growth of $120.8 million, or 4.7%, to $2.70 billion for the three months ended June 30, 2022, compared to $2.58 billion at March 31, 2022.
    • CCBX deposit growth of $166.6 million, or 18.5%
      • Additional $269.5 million in CCBX deposits transferred off balance sheet
    • Community bank deposits decreased $45.8 million, or 2.7%, and community bank cost of deposits remained at 0.08%.
  • Total revenue increased $14.1 million, or 27.6% for the three months ended June 30, 2022, compared to March 31, 2022.
    • Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements * increased $11.1 million, or 33.0%, for the three months ended June 30, 2022, compared to March 31, 2022.

EVERETT, Wash., July 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 June 30, 2022. Record quarterly net income for the second quarter of 2022 was $10.2 million, or $0.76 per diluted common share, compared with net income of $6.2 million, or $0.46 per diluted common share, for the first quarter of 2022, and $7.0 million, or $0.56 per diluted common share, for the quarter ended June 30, 2021.  

Total assets increased $136.0 million, or 4.8%, during the second quarter of 2022 to $2.97 billion, from $2.83 billion at March 31, 2022. Loan growth for the three months ended June 30, 2022 was $461.2 million, or 24.0%, excluding PPP loan forgiveness/repayments of $31.1 million and including $60.0 million in loans held for sale. Loan growth, net of $31.1 million in PPP loan forgiveness and repayments during the quarter was $430.1 million. Solid deposit growth of $120.8 million, or 4.7%, during the three months ended June 30, 2022.

“Our CCBX segment, which provides Banking as a Service (“BaaS”), has grown to $1.1 billion in deposits, or 39.5% of total deposits, and to $804.0 million in loans, or 34.4% of total loans receivable, excluding $60.0 million in loans held for sale, as of June 30, 2022. Our community bank segment continues to grow as we build new relationships within the communities that we are located. Contemporaneously, our CCBX partnerships, enable us to extend our reach and build relationships in diverse communities throughout the country.

“For the quarter ended June 30, 2022, we had record quarterly net income of $10.2 million, an increase of $3.9 million, or 63.3%, over the quarter ended March 31, 2022. As we continue to grow in the BaaS space, we are choosing to work with larger, more established fintech partners, so the number of new partnerships is not increasing as quickly as in the past, but these newer, larger partners are expected to have a significant impact on our financial growth”, stated Eric Sprink, the CEO of the Company and the Bank.

Results of Operations Overview

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 $39.9 million for the quarter ended June 30, 2022, an increase of $10.6 million, or 36.3%, from $29.3 million for the quarter ended March 31, 2022, and an increase of $21.3 million, or 114.3%, from $18.6 million for the quarter ended June 30, 2021.   Yield on loans receivable was 7.34% for the three months ended June 30, 2022, compared to 6.80% for the three months ended March 31, 2022 and 4.44% for the three months ended June 30, 2021. The increase in net interest income compared to March 31, 2022 and June 30, 2021, was largely related to increased yield on loans resulting from growth in higher yielding loans, primarily from CCBX. Total average loans receivable for the three months ended June 30, 2022 was $2.19 billion, compared to $1.77 billion for the three months ended March 31, 2022, and $1.75 billion for the three months ended June 30, 2021.

Interest and fees on loans totaled $40.2 million for the three months ended June 30, 2022 compared to $29.6 million and $19.4 million for the three months ended March 31, 2022 and June 30, 2021, respectively. Loan growth of $461.2 million, or 24.0%, included $60.0 million in loans held for sale and excluded PPP loan forgiveness/repayments of $31.1 million, during the quarter ended June 30, 2022. Loan growth included $288.6 million increase in CCBX loans; part of that loan growth was in capital call lines, which increased $6.3 million, or 2.9%, during the quarter ended June 30, 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 June 30, 2022, compared to March 31, 2022 and June 30, 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 (0.25%), early May (0.50%) and again in mid-June 2022 (0.75%), interest rates on $460.9 million variable rate loans are affected, the impact of these increases in interest rates will be fully seen in future quarters.

As of June 30, 2022, there were $16.4 million in PPP loans, compared to $47.5 million as of March 31, 2022, and $398.0 million as of June 30, 2021. In the three months ended June 30, 2022, a total of $31.1 million in PPP loans were forgiven or repaid. Net deferred fees recognized on PPP loans contributed $969,000 for the three months ended June 30, 2022, compared to $2.3 million for the three months ended March 31, 2022, and $3.6 million for the three months ended June 30, 2021. As of June 30, 2022 97.9% of PPP loans have been paid off or forgiven as of June 30, 2022. The future impact of PPP loans is expected to be minimal with just $16.4 million, or 2.1% of total PPP originated loans remaining, and $396,000 in corresponding net deferred fees left to be recognized, as of June 30, 2022.

PPP loans in rounds 1 and 2 were originated in 2020, and were predominately two year loans, and only $2.2 million, or 0.50%, of these loans remain at June 30, 2022. PPP loans in round 3 were originated in 2021 and are all five-year loans, and $14.2 million, or 4.6%, of these loans remain outstanding at June 30, 2022.

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

  Total PPP Loan Origination 
  Round 1 & 22020 Round 32021 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 June 30, 2022 
Loans outstanding $2,199 $14,199 $16,398 
Deferred fees, net $- $396 $396 

Interest income from interest earning deposits with other banks was $956,000 at June 30, 2022, an increase of $554,000 due to increased interest rates compared to March 31, 2022, and an increase of $882,000 due to higher balances and an increase in interest rates compared to June 30, 2021. The average balance of interest earning deposits with other banks for the three months ended June 30, 2022 was $499.9 million, compared to $843.9 million and $235.2 million for the three months ended March 31, 2022 and June 30, 2021, respectively. Interest earning deposits with other banks decreased as a result of increased loan demand. Those deposits were used to fund higher yielding loans receivable. Additionally, the yield on these interest earning deposits with other banks increased to 0.77% for the quarter ended June 30, 2022, compared to 0.19% and 0.13% for the quarters ended March 31, 2022 and June 30, 2021, respectively.

Interest expense was $1.9 million for the quarter ended June 30, 2022, a $1.1 million increase from the quarter ended March 31, 2022 and a $974,000 increase from the quarter ended June 30, 2021. Interest expense on borrowed funds was $260,000 for the quarter ended June 30, 2022, compared to $321,000 and $331,000 for the quarters ended March 31, 2022 and June 30, 2021, respectively. Interest expense on borrowed funds decreased $61,000 compared to the three months ended March 31, 2022, primarily because we paid off $25.0 million in Federal Home Loan Bank (“FHLB”) borrowings late in the quarter ended March 31, 2022 without a prepayment penalty for early repayment. The $71,000 decrease in interest expense on borrowed funds from the quarter ended June 30, 2021 is the result of a decrease in average Paycheck Protection Program Liquidity Facility (“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 is higher as a result of increased subordinated debt outstanding. Interest expense on interest bearing deposits increased $1.1 million for the quarter ended June 30, 2022, compared to the quarter ended March 31, 2022 as a result of the FOMC increasing rates 0.25% in mid-March 2022, 0.50% in early May and 0.75% in June 2022. In addition, as a result of the Fed Funds rate increases, CCBX deposits that were not earning interest were reclassed to interest bearing deposits from noninterest bearing deposits. Reclassification of $690.4 million, balances as of March 31, 2022, in CCBX deposits from noninterest bearing to interest bearing deposits occurred mid-March 2022 with the 0.25% interest rate increase, and an additional $86.4 million, balances as of June 30, 2022, were reclassified in the second quarter 2022 as a result of the rate increases totaling 1.25% in the second quarter of 2022. The impact of the March 2022 increase in interest rates by the FOMC was fully reflected in the second quarter interest expense. The more recent rate increases in May and June 2022 by the FOMC did not have as significant impact on the second quarter interest expense, but the impact of that change and the change on loan rates is expected to be seen in future quarters. Currently, we do not expect that any additional CCBX deposits will be reclassified as a result of any future rate increases that may be implemented by the FOMC.

Interest expense on interest bearing deposits increased $1.0 million for the quarter ended June 30, 2022, as a result of increased balances and higher interest rates, compared to the quarter ended June 30, 2021. Total cost of deposits was 0.25% for the three months ended June 30, 2022, 0.09% for the three months ended March 31, 2022, and 0.14%, for the three months ended June 30, 2021. We anticipate additional rate increases in 2022, which will increase our cost of deposits and result in higher interest expense on interest bearing deposits.

Net Interest Margin

Net interest margin was 5.66% for the three months ended June 30, 2022, compared to 4.45% and 3.70% for the three months ended March 31, 2022 and June 30, 2021, respectively. The increase in net interest margin compared to the three months ended March 31, 2022 and June 30, 2021, was largely a result of an increase in higher rate loans.   Loans receivable increased $401.2 million and $1.1 billion, excluding PPP loan forgiveness/repayments, compared to March 31, 2022 and June 30, 2021, respectively. Additionally, the Fed Funds rate increases have resulted in existing, variable rate loans repricing at higher interest rates. Interest on loans receivable increased $10.6 million, or 35.5%, to $40.2 million for the three months ended June 30, 2022, compared to $29.6 million for the three months ended March 31, 2022, and $19.4 million for the three months ended June 30, 2021. Also contributing to the increase in net interest margin compared to the three months ended March 31, 2022 and June 30, 2021, was $554,000 and $882,000 increase in interest on interest earning deposits, respectively. These interest earning deposits earned an average rate of 0.77% for the quarter ended June 30, 2022, compared to 0.19% and 0.13% for the quarters ended March 31, 2022 and June 30, 2021, respectively.   Average investment securities of $121.3 million for the three months ended June 30, 2022 increased $75.5 million compared to the three months ended March 31, 2022, and $96.3 million compared to the three months ended June 30, 2021. Interest on investment securities increased $492,000 and $539,000 for the three months ended June 30, 2022 compared to the three months ended March 31, 2022 and June 30, 2021, respectively, as a result of the increase in average outstanding balance coupled with increased yield, which also positively impacted net interest margin. These increases in interest income were partially offset by increases in interest expense on interest bearing deposits, as previously discussed.

Cost of funds was 0.29% for the quarter ended June 30, 2022, an increase of 15 basis points from the quarter ended March 31, 2022 and an increase of nine basis points from the quarter ended June 30, 2021. Cost of deposits for the quarter ended June 30, 2022 was 0.25%, compared to 0.09% for the quarter ended March 31, 2022, and 0.14% for the quarter ended June 30, 2021. The increased cost of funds and deposits compared to March 31, 2022 and June 30, 2021 was largely due to the increase in interest rates compared to the previous periods. Noninterest bearing deposits of $818.1 million for the quarter ended June 30, 2022 decreased $20.0 million, or 2.4%, compared to the quarter ended March 31, 2022, and decreased $69.8 million, or 7.9%, compared to the quarter ended June 30, 2021 due to the aforementioned reclassification of CCBX noninterest bearing deposits to interest bearing deposits, partially offset by noninterest deposit growth.

During the quarter ended June 30, 2022, total loans receivable increased by $370.1 million, to $2.33 billion, compared to $1.96 billion for the quarter ended March 31, 2022. Loans receivable increased $401.2 million, or 20.9%, excluding PPP loan forgiveness/repayments, for the quarter ended June 30, 2022, compared to the quarter ended March 31, 2022. The increase consists of $288.6 million in CCBX loans and $112.7 million in community bank loan growth partially offset by a decrease in PPP loans of $31.1 million as a result of forgiveness and repayments. Total loans receivable, excluding PPP loan forgiveness/repayments, increased $1.1 billion as of June 30, 2022, compared to the quarter ended June 30, 2021.   CCBX loans increased $700.4 million and community bank loans increased $357.4 million, or 30.9%, excluding PPP loan forgiveness/repayments, as of June 30, 2022, compared June 30, 2021. These increases were partially offset by a decrease of $381.6 million in PPP loans as a result of forgiveness/repayments, and ended the quarter with $16.4 million in outstanding PPP loans, compared to $398.0 million as of June 30, 2021. During the quarter ended June 30, 2022 $80.1 million in CCBX loans were transferred to loans held for sale, with $20.1 million in loans sold during the quarter and $60.0 million remaining in loans held for sale as of June 30, 2022; previously we did not have any loans held for sale.

Total yield on loans receivable for the quarter ended June 30, 2022 was 7.34%, compared 6.80% for the quarter ended March 31, 2022, and 4.44% for the quarter ended June 30, 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 June 30, 2022, CCBX loans outstanding increased 56.0%, or $288.6 million, with an average CCBX yield of 12.35% and community bank loans increased 5.6%, or $81.6 million, net of $31.1 million in forgiven/repaid PPP loans, with an average yield of 5.04%. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. Net BaaS loan income divided by average CCBX loans outstanding was 5.25% and is impacted by the $224.9 million in capital call lines that are priced at prime minus 0.50%.

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   For the Six Months Ended 
 June 30, 2022  March 31, 2022  June 30, 2021   June 30, 2022  June 30, 2021 
 Yield on Cost of  Yield on Cost of  Yield on Cost of   Yield on Cost of  Yield on Cost of 
 Loans Deposits  Loans Deposits  Loans Deposits   Loans Deposits  Loans Deposits 
Community Bank5.04% 0.08%  5.16% 0.11%  4.52% 0.16%   5.10% 0.09%  4.56% 0.17% 
CCBX (1)12.35% 0.56%  12.73% 0.06%  3.14% 0.03%   12.48% 0.34%  2.90% 0.05% 
Consolidated7.34% 0.25%  6.80% 0.09%  4.44% 0.14%   7.10% 0.18%  4.47% 0.16% 
(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 enhancements and servicing CCBX loans. To determine Net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at Net BaaS loan income which can be compared to interest income on the Company’s community bank loans. 

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

 For the Three Months Ended
 June 30, 2022  March 31, 2022  June 30, 2021  
(Dollars in thousands)Income / Expense Income / expense divided by average CCBX loans  Income / Expense Income / expense divided by average CCBX loans  Income / Expense Income / expense divided by average CCBX loans  
BaaS loan interest income$21,281  12.35% $11,992  12.73% $879  3.14% 
Less: BaaS loan expense 12,229  7.10%  8,290  8.80%  99  0.35% 
Net BaaS loan income*$9,052  5.25% $3,702  3.93% $780  2.79% 
Average BaaS Loans$691,294     $382,153     $112,210     

 For the Six Months Ended 
 June 30, 2022   June 30, 2021 
(Dollars in thousands)Income / Expense Income / expense divided by average CCBX loans   Income / Expense Income / expense divided by average CCBX loans 
BaaS loan interest income$33,273  12.48%  $1,290  2.90%
Less: BaaS loan expense 20,519  7.70%   189  0.43%
Net BaaS loan income*$12,754  4.78%  $1,101  2.48%
Average BaaS Loans$537,577      $89,656    

Key Performance Ratios

Return on average assets (“ROA”) was 1.41% for the quarter ended June 30, 2022 compared to 0.93% and 1.36% for the quarters ended March 31, 2022 and June 30, 2021, respectively. ROA for the quarter ended March 31, 2022, was impacted by increased demand deposits and cash on the balance sheet, which are lower yielding earning assets and produced a lower loan to deposit ratio, and combined with increased costs related to the CCBX segment, which increased expenses, compared to the quarters ended June 30, 2022 and June 30, 2021

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  Six Months Ended 
(unaudited) June 30,2022 March 31,2022 December 31,2021 September 30,2021 June 30,2021  June 30,2022 June 30,2021 
                        
Return on average assets (1)  1.41% 0.93% 1.14% 1.21% 1.36%  1.18% 1.32%
Return on average equity (1)  18.86% 12.12% 16.80% 16.77% 18.60%  15.57% 17.75%
Yield on earnings assets (1)  5.94% 4.58% 4.09% 3.63% 3.89%  5.28% 3.94%
Yield on loans receivable (1)  7.34% 6.80% 5.92% 4.57% 4.44%  7.10% 4.47%
Yield on loans receivable, excluding PPP loans (1)(2)  7.26% 6.52% 4.98% 4.53% 4.65%  6.93% 4.71%
Yield on loans receivable, excluding earned fees (1)(2)  7.12% 6.17% 4.37% 3.74% 3.46%  6.70% 3.49%
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans, as adjusted (1)(2)  7.21% 6.41% 4.78% 4.36% 4.42%  6.86% 4.47%
Cost of funds (1)  0.29% 0.14% 0.14% 0.16% 0.20%  0.22% 0.22%
Cost of deposits (1)  0.25% 0.09% 0.09% 0.10% 0.14%  0.18% 0.16%
Net interest margin (1)  5.66% 4.45% 3.95% 3.48% 3.70%  5.08% 3.73%
Noninterest expense to average assets (1)  5.29% 4.52% 3.29% 2.91% 2.65%  4.92% 2.64%
Efficiency ratio  58.38% 59.34% 54.08% 64.68% 58.69%  58.80% 59.70%
Loans receivable to deposits (3)  86.54% 76.24% 73.73% 76.71% 92.03%  86.54% 92.03%
                        
(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. 
(3) Excluding loans held for sale.                       

Noninterest Income

The following table details noninterest income for the periods indicated:

  Three Months Ended 
  June 30,  March 31,  June 30, 
(Dollars in thousands) 2022  2022  2021 
Deposit service charges and fees $988  $884  $949 
Loan referral fees  208   602   806 
Mortgage broker fees  85   123   253 
Gain on sale of branch including deposits and loans, net  -   -   1,263 
Gain on sales of loans, net  -   -   31 
Other  311   265   56 
Subtotal  1,592   1,874   3,358 
Servicing and other BaaS fees  1,159   1,169   1,029 
Transaction fees  814   493   93 
Interchange fees  628   432   110 
Reimbursement of expenses  618   372   192 
BaaS program income  3,219   2,466   1,424 
BaaS credit enhancements  14,207   13,075   - 
BaaS fraud enhancements  6,474   4,571   - 
BaaS indemnification income  20,681   17,646   - 
Total noninterest income $25,492  $21,986  $4,782 

Noninterest income was $25.5 million for the three months ended June 30, 2022, an increase of $3.5 million from $22.0 million for the three months ended March 31, 2022, and an increase of $20.7 million from $4.8 million for the three months ended June 30, 2021. The increase in noninterest income over the quarter ended March 31, 2022 was primarily due to an increase of $3.8 million in BaaS income partially offset by a $394,000 decrease in loan referral fees.   The $3.8 million increase in BaaS income included $1.1 million increase in BaaS credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, $1.9 million increase in BaaS fraud enhancements, and an increase of $753,000 in BaaS program income (see “Appendix B” for more information on the accounting for BaaS allowance for loan losses, reserve for unfunded commitments and credit and fraud enhancements). The $20.7 million increase in noninterest income over the quarter ended June 30, 2021 was primarily due to a $22.5 million increase in BaaS income partially offset by a decrease of $598,000 in loan referral fees and the absence of the $1.3 million gain on sale branch which was recognized in the quarter ended June 30, 2021. The $22.5 million increase in BaaS income included a $14.2 million increase in BaaS credit enhancements, $6.5 million increase in BaaS fraud enhancements and $1.8 million increase in other BaaS program income.

Our CCBX segment continues to grow, and now has 29 relationships, at varying stages, as of June 30, 2022. As of June 30, 2022, we increased our active relationships to 23, compared to 20 as of March 31, 2022 and 12 as of June 30, 2021. As we continue to grow in the BaaS space, we continue to refine the criteria for CCBX partnerships and are focusing on selecting larger and more established partners, with experienced management teams.

The following table illustrates the activity and growth in CCBX relationships for the periods presented and includes the removal of a smaller partner during the quarter ended June 30, 2022.

 As of
 June 30, 2022March 31, 2022June 30, 2021
Active232012
Friends and family / testing213
Implementation / onboarding057
Signed letters of intent422
Total CCBX relationships292824

Noninterest Expense

The following table details noninterest expense for the periods indicated:

  Three Months Ended 
  June 30,  March 31,  June 30, 
(Dollars in thousands) 2022  2022  2021 
Salaries and employee benefits $12,238  $11,085  $8,913 
Software licenses, maintenance and subscriptions  1,108   1,052   543 
Occupancy  1,083   1,136   990 
Data processing  1,010   809   734 
Legal and professional fees  1,002   708   626 
FDIC assessments  855   604   225 
Excise taxes  564   349   388 
Director and staff expenses  377   344   318 
Marketing  74   99   132 
Other  1,155   1,368   763 
Subtotal  19,466   17,554   13,632 
BaaS loan expense  12,229   8,290   99 
BaaS fraud expense  6,474   4,571   - 
BaaS expense  18,703   12,861   99 
Total noninterest expense $38,169  $30,415  $13,731 

Total noninterest expense increased to $38.2 million for the three months ended June 30, 2022, compared to $30.4 million for the three months ended March 31, 2022 and $13.7 million for the three months ended June 30, 2021. The increase in noninterest expense for the quarter ended June 30, 2022, as compared to the quarter ended March 31, 2022, was primarily due to a $5.8 million increase in BaaS expense ($3.9 million of which is related to partner loan expense and $1.9 million of which is related to partner fraud expense). Partner loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. Partner fraud expense represents non-credit fraud losses on partner’s customer loan and deposit accounts, a portion of this expense is realized during the quarter, and a portion is estimated based on historical or other information from our partner. Also contributing to the increase in noninterest expense compared to March 31, 2022 is a $1.2 million increase in salaries and employee benefits which is related to the hiring in CCBX and additional staff for our ongoing growth initiatives. In the second quarter of 2022 compared to the first quarter of 2022, legal and professional fees increased $294,000 and Federal Deposit Insurance Corporation (“FDIC”) assessments increased $251,000. The increase in legal and professional expenses is due to increased fees related to new hires in data and risk management, and increased regulatory consulting expenses. 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, 2022.

The increased noninterest expenses for the quarter ended June 30, 2022 compared to the quarter ended June 30, 2021 were largely due to an increase of $18.6 million in BaaS partner expense ($12.1 million of which is related to partner loan expense and $6.5 million of which is related to partner fraud expense), $3.3 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives, $630,000 increase in FDIC assessments and $565,000 increase in software licenses, maintenance and subscriptions. The increase in FDIC assessments is largely the result of an increase in assets combined with other factors that impact the FDIC assessment calculation compared to the quarter ended June 30, 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 $2.9 million for the three months ended June 30, 2022, $1.7 million for the three months ended March 31, 2022 and $2.3 million for the second 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 Overview

Total assets increased $136.0 million, or 4.8%, to $2.97 billion at June 30, 2022 compared to $2.83 billion at March 31, 2022. The increase is primarily due to loans receivable increasing $370.1 million even after receiving $31.1 million in PPP loan forgiveness and paydowns during the quarter ended June 30, 2022. Loans held for sale increased $60.0 million, with no balance in previous periods. Those increases were partially offset by a $284.5 million decrease in interest earning deposits with other banks, as a result of those deposits being utilized to fund loans. Total assets increased $926.6 million, or 48.0%, at June 30, 2022, compared to $2.01 billion at June 30, 2021. The increase is primarily due to loans receivable increasing $676.2 million. Also contributing to the increase is a $113.5 million increase in interest earning deposits with other banks, primarily from increased deposits, and an increase of $83.2 million in investment securities, both compared to June 30, 2021.

Loans Receivable

Total loans receivable increased $370.1 million to $2.33 billion at June 30, 2022, from $1.96 billion at March 31, 2022, and increased $676.2 million from $1.66 billion at June 30, 2021. The increase in loans receivable over the quarter ended March 31, 2022 was the result of $288.6 million in CCBX loan growth and $112.7 million in community bank loan growth partially offset by $31.1 million in PPP loan forgiveness and paydowns. Along with an increase in loans receivable as of June 30, 2022 compared to March 31, 2022, unused commitments also increased during the same period, with the unused commitments on capital call lines increasing $151.0 million to $704.5 million at June 30, 2022 compared to $553.5 million at March 31, 2022, which should translate into future loan growth as the commitments are utilized.   The increase in loans receivable over the quarter ended June 30, 2021 includes CCBX loan growth of $700.4 million and $357.4 million in community bank loan growth, partially offset by a $381.6 million decrease in PPP loans as of June 30, 2022.

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

  As of 
  June 30, 2022  March 31, 2022  June 30, 2021 
(Dollars in thousands; unaudited) Balance % to Total  Balance % to Total  Balance % to Total 
                      
Commercial and industrial loans:                     
PPP loans $16,398  0.7% $47,467  2.4% $398,038  23.8%
Capital call lines  224,930  9.6   218,675  11.1   98,905  5.9 
All other commercial & industrial loans  160,636  6.9   128,181  6.5   102,775  6.1 
Real estate loans:                     
Construction, land and land development loans  225,512  9.6   208,108  10.6   116,733  7.0 
Residential real estate loans  326,661  14.0   268,716  13.6   143,574  8.6 
Commercial real estate loans  956,320  40.8   889,483  45.1   807,711  48.2 
Consumer and other loans  430,083  18.4   210,343  10.7   7,161  0.4 
Gross loans receivable  2,340,540  100.0%  1,970,973  100.0%  1,674,897  100.0%
Net deferred origination fees - PPP loans  (396)     (1,365)     (12,363)   
Net deferred origination fees - Other loans  (5,790)     (5,399)     (4,385)   
Loans receivable $2,334,354     $1,964,209     $1,658,149    
Loan Yield (1)  7.34%     6.80%     4.44%   
                      
(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans. 

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

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

Community Bank As of 
  June 30, 2022  March 31, 2022  June 30, 2021 
(Dollars in thousands; unaudited) Balance % to Total  Balance % to Total  Balance % to Total 
Commercial and industrial loans:                     
PPP loans $16,398  1.1% $47,467  3.3% $398,038  25.3%
All other commercial & industrial loans  142,569  9.3   124,160  8.5   102,775  6.5 
Real estate loans:                     
Construction, land and land development loans  225,512  14.7   208,108  14.3   116,733  7.4 
Residential real estate loans  193,518  12.6   184,485  12.7   143,574  9.1 
Commercial real estate loans  956,320  62.2   889,483  61.1   807,711  51.4 
Consumer and other loans:                     
Other consumer and other loans  2,325  0.2   1,959  0.1   2,590  0.2 
Gross Community Bank loans receivable  1,536,642  100.0%  1,455,662  100.0%  1,571,421  100.0%
Net deferred origination fees  (6,240)     (6,842)     (16,790)   
Loans receivable $1,530,402     $1,448,820     $1,554,631    
Loan Yield (1)  5.04%     5.16%     4.52%   
(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans. 

CCBX As of 
  June 30, 2022  March 31, 2022  June 30, 2021 
(Dollars in thousands; unaudited) Balance % to Total  Balance % to Total  Balance % to Total 
Commercial and industrial loans:                     
Capital call lines $224,930  28.0% $218,675  42.5% $98,905  95.6%
All other commercial & industrial loans  18,067  2.2   4,021  0.8   -  0.0 
Real estate loans:                     
Residential real estate loans  133,143  16.5   84,231  16.3   -  0.0 
Consumer and other loans:                     
Credit cards  139,501  17.4   55,090  10.7   1,850  1.8 
Other consumer and other loans  288,257  35.9   153,294  29.7   2,721  2.6 
Gross CCBX loans receivable  803,898  100.0%  515,311  100.1%  103,476  100.0%
Net deferred origination costs  54      78      42    
Loans receivable $803,952     $515,389     $103,518    
Loan Yield - CCBX (1)(2)  12.35%     12.73%     3.14%   
(1) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. 
(2) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans. 

Deposits

Total deposits increased $120.8 million, or 4.7%, to $2.70 billion at June 30, 2022 from $2.58 billion at March 31, 2022. The increase was due to a $123.9 million increase in core deposits, partially offset by a $3.9 million decrease in time deposits. Our increase in deposits is primarily the result of growth in CCBX partners. Deposits in our CCBX segment increased $166.6 million, from $899.5 million at March 31, 2022, to $1.07 billion at June 30, 2022 and community bank deposits decreased $45.8 million to $1.63 billion at June 30, 2022 from $1.68 billion at March 31, 2022. The deposits from our CCBX segment are predominately classified as interest 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 June 30, 2022, noninterest bearing deposits decreased $20.0 million, or 2.4%, to $818.1 million from $838.0 million at March 31, 2022, largely due to the 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 first and second quarter 2022 Fed Funds rate increases. We do not currently expect to have any additional CCBX deposits that will be reclassified as a result of any future Fed Funds rate increases that may be implemented. In the second quarter of 2022 compared to the first quarter of 2022, NOW and money market accounts increased $143.8 million. That increase includes $57.4 million as a result of growth and $86.4 million as a result of a reclassification from noninterest bearing deposits to interest bearing deposits. Savings and BaaS-brokered deposits increased $100,000 and $856,0000, respectively, and time deposits decreased $3.9 million, compared to the first quarter of 2022.

Total deposits increased $895.6 million, or 49.7%, to $2.70 billion at June 30, 2022 compared to $1.80 billion at June 30, 2021. The increase in deposits is largely the result of growth in CCBX and is also due to expanding and growing banking relationships with community bank customers. Noninterest bearing deposits decreased $69.8 million, or 7.9%, to $818.1 million at June 30, 2022 from $887.9 million at June 30, 2021. NOW and money market accounts increased $917.3 million, or 123.5%, to $1.66 billion at June 30, 2022, and savings accounts increased $13.2 million, or 14.2%, and BaaS-brokered deposits increased $48.6 million, or 177.5% while time deposits decreased $13.8 million, or 27.3%, in the second quarter of 2022 compared to the second quarter of 2021. Additionally, as of June 30, 2022 we have access to $269.5 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 for the periods indicated.

  As of 
  June 30, 2022  March 31, 2022  June 30, 2021 
(Dollars in thousands, unaudited) Balance % to Total  Balance % to Total  Balance % to Total 
Demand, noninterest bearing $818,052  30.3% $838,044  32.5% $887,896  49.3%
NOW and money market  1,660,315  61.6   1,516,546  58.9   743,014  41.2 
Savings  106,464  3.9   106,364  4.1   93,224  5.2 
Total core deposits  2,584,831  95.8   2,460,954  95.5   1,724,134  95.7 
BaaS-brokered deposits  76,001  2.8   75,145  2.9   27,388  1.5 
Time deposits less than $250,000  26,676  1.0   29,200  1.2   34,809  1.9 
Time deposits $250,000 and over  9,797  0.4   11,171  0.4   15,347  0.9 
Total deposits $2,697,305  100.0% $2,576,470  100.0% $1,801,678  100.0%
Cost of deposits (1)  0.25%     0.09%     0.14%   
(1) Cost of deposits is for the three months ended for each period presented.      

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

Community Bank As of 
  June 30, 2022  March 31, 2022   June 30, 2021 
(Dollars in thousands, unaudited) Balance % to Total  Balance % to Total   Balance % to Total 
Demand, noninterest bearing $729,436  44.7% $724,723  43.2%  $657,710  42.9%
NOW and money market  759,704  46.6   805,858  48.1    734,560  47.8 
Savings  105,576  6.5   106,050  6.3    91,869  6.0 
Total core deposits  1,594,716  97.8   1,636,631  97.6    1,484,139  96.7 
Brokered deposits  1  0.0   2  0.0    1  0.0 
Time deposits less than $250,000  26,676  1.6   29,200  1.7    34,809  2.3 
Time deposits $250,000 and over  9,797  0.6   11,171  0.7    15,347  1.0 
Total Community Bank deposits $1,631,190  100.0% $1,677,004  100.0%  $1,534,296  100.0%
Cost of deposits (1)  0.08%     0.11%      0.16%   
(1) Cost of deposits is for the three months ended for each period presented.       

CCBX As of 
  June 30, 2022  March 31, 2022   June 30, 2021 
(Dollars in thousands, unaudited) Balance % to Total  Balance % to Total   Balance % to Total 
Demand, noninterest bearing $88,616  8.3% $113,321  12.6%  $230,186  86.1%
NOW and money market  900,611  84.5   710,688  79.0    8,454  3.2 
Savings  888  0.1   314  0.0    1,355  0.5 
Total core deposits  990,115  92.9   824,323  91.6    239,995  89.8 
BaaS-brokered deposits  76,000  7.1   75,143  8.4    27,387  10.2 
Total CCBX deposits $1,066,115  100.0% $899,466  100.0%  $267,382  100.0%
Cost of deposits (1)  0.56%     0.06%      0.03%   
(1) Cost of deposits is for the three months ended for each period presented.       

Shareholders’ Equity

During the quarter ended June 30, 2022, the Company contributed $9.0 million in capital to the Bank, bringing the year-to-date capital contribution to $21.0 million. The Company has a cash balance of $2.5 million as of June 30, 2022, which is retained for general operating purposes, including debt repayment, and for equity fund commitments.

Total shareholders’ equity increased $9.7 million since March 31, 2022. The increase in shareholders’ equity was primarily due to $10.2 million in net earnings for the three months ended June 30, 2022, partially offset by a $1.1 million decrease in accumulated other comprehensive income, related to the market adjustment on available for sale securities.

Capital Ratios

The Company and the Bank remain well capitalized at June 30, 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 8.33%  7.68%  5.00%
Adjusted Tier 1 leverage capital ratio, excluding PPP loans (*) 8.43%  7.77% N/A 
Common Equity Tier 1 risk-based capital 9.39%  8.51%  6.50%
Tier 1 risk-based capital 9.39%  8.65%  8.00%
Total risk-based capital 10.65%  10.88%  10.00%

Asset Quality

The total allowance for loan losses was $49.4 million and 2.11% of loans receivable at June 30, 2022 compared to $38.8 million and 1.97% at March 31, 2022 and $20.0 million and 1.20% at June 30, 2021. The allowance for loan loss allocated to the CCBX portfolio was $28.6 million and 3.55% of CCBX loans receivable at June 30, 2022, with $20.8 million of allowance for loan loss allocated to the community bank or 1.36% of total community bank loans receivable. At June 30, 2022, there was $16.4 million in PPP loans, which are 100% guaranteed by the SBA. Adjusted allowance for loan losses to loans receivable, excluding PPP loans* was 2.13% for the quarter ended June 30, 2022.

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

  As of  As of  As of 
  June 30, 2022  March 31, 2022  June 30, 2021 
(Dollars in thousands) Community Bank CCBX Total  Community Bank CCBX Total  Community Bank CCBX Total 
Loans receivable $1,530,402 $803,952 $2,334,354  $1,448,820 $515,389 $1,964,209  $1,554,631 $103,518 $1,658,149 
Allowance for loan losses  (20,785) (28,573) (49,358)  (20,643) (18,127) (38,770)  (19,867) (99) (19,966)
Allowance for loan losses to total loans receivable  1.36% 3.55% 2.11%  1.42% 3.52% 1.97%  1.28% 0.10% 1.20%

Provision for loan losses totaled $14.1 million for the three months ended June 30, 2022, $12.9 million for the three months ended March 31, 2022, and $361,000 for the three months ended June 30, 2021. Net charge-offs totaled $3.5 million for the quarter ended June 30, 2022, compared to $2.8 million for the quarter ended March 31, 2022 and $5,000 for the quarter ended June 30, 2021. Net charge-offs are up due to CCBX partner loans and deposits. CCBX partner agreements provide for a credit enhancement that covers the net-charge-offs on CCBX loans and deposits.

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

  Three Months Ended 
  June 30, 2022  March 31, 2022  June 30, 2021 
(Dollars in thousands) Community Bank CCBX Total  Community Bank CCBX Total  Community Bank CCBX Total 
Gross charge-offs $3 $3,539 $3,542  $4 $2,804 $2,808  $8 $4 $12 
Gross recoveries  (36) -  (36)  (4) -  (4)  (3) (4) (7)
Net charge-offs $(33)$3,539 $3,506  $- $2,804 $2,804  $5 $- $5 
Net charge-offs to average loans  -0.01% 2.05% 0.64%  0.00% 2.98% 0.64%  0.00% 0.00% 0.00%

The increase in the Company’s provision for loan losses during the quarter ended June 30, 2022, is largely related to the provision for CCBX partner loans. During the quarter ended June 30, 2022, a $14.0 million provision for loan losses was recorded for CCBX partner loans based on management’s analysis, compared to the $12.6 million provision for loan losses that was recorded for CCBX for the quarter ended March 31, 2022. CCBX loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. In accordance with accounting guidance, we estimate and record a provision for probable losses for these CCBX loans and deposits. When the provision for loan losses and provision for unfunded commitments is recorded, a receivable is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). Incurred losses are recorded in the allowance for loan losses, and as the credit enhancement recoveries are received from the CCBX partner, the receivable is relieved. Although 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 then the bank would be exposed to additional loan losses, as a result of this counterparty risk. The factors used in management’s analysis for community bank loan losses indicated that a provision for loan losses of $109,000 and $344,000 was needed for the quarters ended June 30, 2022 and March 31, 2022, respectively. The economic environment is continuously changing, with increased inflation, global unrest, the war in Ukraine, trade issues 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  Six Months Ended 
(Dollars in thousands) June 30, 2022 March 31, 2022 June 30, 2021  June 30, 2022 June 30, 2021 
Community bank $109 $344 $364  $452 $685 
CCBX  13,985  12,598  (3)  26,584  33 
Total provision expense $14,094 $12,942 $361  $27,036 $718 

At June 30, 2022, our nonperforming assets were $5.8 million, or 0.20% of total assets, compared to $2.3 million, or 0.08%, of total assets, at March 31, 2022, and $648,000, or 0.03% of total assets, at June 30, 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 $3.5 million during the quarter ended June 30, 2022, compared to the quarter ended March 31, 2022, due to the addition of $3.4 million in CCBX loans that are past due 90 days or more and still accruing combined with $47,000 more in community bank nonaccrual loans.   There were no repossessed assets or other real estate owned at June 30, 2022. Our nonperforming loans to loans receivable ratio was 0.25% at June 30, 2022, compared to 0.12% at March 31, 2022, and 0.04% at June 30, 2021.

For the quarter ended June 30, 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, increased inflation, 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 June 30, 2022, $3.5 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 and deposit partners provide for a credit enhancement against loan and fraud losses.

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

  As of 
  June 30, March 31, June 30, 
(Dollars in thousands, unaudited) 2022 2022 2021 
Nonaccrual loans:          
Commercial and industrial loans $111 $130 $482 
Real estate:          
Construction, land and land development  67  -  - 
Residential real estate  53  54  166 
Total nonaccrual loans  231  184  648 
           
Accruing loans past due 90 days or more:          
Total accruing loans past due 90 days or more  5,580  2,161  - 
Total nonperforming loans  5,811  2,345  648 
Other real estate owned  -  -  - 
Repossessed assets  -  -  - 
Total nonperforming assets $5,811 $2,345 $648 
Troubled debt restructurings, accruing  -  -  - 
Total nonperforming loans to loans receivable  0.25% 0.12% 0.04%
Total nonperforming assets to total assets  0.20% 0.08% 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 
  June 30, March 31, June 30, 
(Dollars in thousands, unaudited) 2022 2022 2021 
Nonaccrual loans:          
Commercial and industrial loans $111 $130 $482 
Real estate:        - 
Construction, land and land development  67  -  - 
Residential real estate  53  54  166 
Total nonaccrual loans  231  184  648 
         - 
Accruing loans past due 90 days or more:  -  -  - 
Total accruing loans past due 90 days or more  -  -  - 
Total nonperforming loans  231  184  648 
Other real estate owned  -  -  - 
Repossessed assets  -  -  - 
Total nonperforming assets $231 $184 $648 
           
           
CCBX As of 
  June 30, March 31, June 30, 
(Dollars in thousands, unaudited) 2022 2022 2021 
Nonaccrual loans: $- $- $- 
           
Accruing loans past due 90 days or more:          
Total accruing loans past due 90 days or more  5,580  2,161  - 
Total nonperforming loans  5,580  2,161  - 
Other real estate owned  -  -  - 
Repossessed assets  -  -  - 
Total nonperforming assets $5,580 $2,161 $- 

  
 
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 $2.97 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, Chief Executive Officer, (425) 357-3659Joel 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 CORPORATIONCONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION(Dollars in thousands; unaudited)

ASSETS 
  June 30,  March 31,  June 30, 
  2022  2022  2021 
Cash and due from banks $40,750  $32,705  $31,473 
Interest earning deposits with other banks  364,939   649,404   251,416 
Investment securities, available for sale, at fair value  108,560   134,891   25,341 
Investment securities, held to maturity, at amortized cost  1,261   1,286   2,101 
Other investments  10,379   9,931   6,839 
Loans held for sale  60,000   -   - 
Loans receivable  2,334,354   1,964,209   1,658,149 
Allowance for loan losses  (49,358)  (38,770)  (19,966)
Total loans receivable, net  2,284,996   1,925,439   1,638,183 
Premises and equipment, net  18,670   18,135   17,207 
Operating lease right-of-use assets  5,565   5,836   6,637 
Accrued interest receivable  12,430   8,824   8,108 
Bank-owned life insurance, net  12,485   12,342   12,056 
Deferred tax asset, net  11,709   6,892   3,808 
Other assets  37,978   28,065   3,969 
Total assets $2,969,722  $2,833,750  $2,007,138 
             
LIABILITIES AND SHAREHOLDERS’ EQUITY 
LIABILITIES            
Deposits $2,697,305  $2,576,470  $1,801,678 
Federal Home Loan Bank advances  -   -   24,999 
Subordinated debt, net  24,324   24,306   10,000 
Junior subordinated debentures, net  3,587   3,587   3,585 
Deferred compensation  680   712   803 
Accrued interest payable  330   149   179 
Operating lease liabilities  5,786   6,054   6,845 
Other liabilities  20,049   14,552   4,949 
Total liabilities  2,752,061   2,625,830   1,853,038 
             
SHAREHOLDERS’ EQUITY            
Common stock  123,226   122,592   88,699 
Retained earnings  95,779   85,603   65,399 
Accumulated other comprehensive (loss) income, net of tax  (1,344)  (275)  2 
Total shareholders’ equity  217,661   207,920   154,100 
Total liabilities and shareholders’ equity $2,969,722  $2,833,750  $2,007,138 

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

 Three Months Ended 
 June 30, March 31, June 30, 
 2022 2022 2021 
INTEREST AND DIVIDEND INCOME         
Interest and fees on loans$40,166 $29,632 $19,365 
Interest on interest earning deposits with other banks 956  402  74 
Interest on investment securities 563  71  24 
Dividends on other investments 134  37  108 
Total interest and dividend income 41,819  30,142  19,571 
INTEREST EXPENSE         
Interest on deposits 1,673  553  628 
Interest on borrowed funds 260  321  331 
Total interest expense 1,933  874  959 
Net interest income 39,886  29,268  18,612 
PROVISION FOR LOAN LOSSES 14,094  12,942  361 
Net interest income after provision for loan losses 25,792  16,326  18,251 
NONINTEREST INCOME         
Deposit service charges and fees 988  884  949 
Loan referral fees 208  602  806 
Gain on sales of loans, net -  -  31 
Mortgage broker fees 85  123  253 
Gain on sale of branch, including deposits and loans -  -  1,263 
Other income 311  265  56 
Subtotal 1,592  1,874  3,358 
Servicing and other BaaS fees 1,159  1,169  1,029 
Transaction fees 814  493  93 
Interchange fees 628  432  110 
Reimbursement of expenses 618  372  192 
BaaS program income 3,219  2,466  1,424 
BaaS credit enhancements 14,207  13,075  - 
BaaS fraud enhancements 6,474  4,571  - 
BaaS indemnification income 20,681  17,646  - 
Total noninterest income 25,492  21,986  4,782 
NONINTEREST EXPENSE         
Salaries and employee benefits 12,238  11,085  8,913 
Occupancy 1,083  1,136  990 
Software licenses, maintenance and subscriptions 1,108  1,052  543 
Legal and professional fees 1,002  708  626 
Data processing 1,010  809  734 
Excise taxes 564  349  388 
Federal Deposit Insurance Corporation assessments 855  604  225 
Director and staff expenses 377  344  318 
Marketing 74  99  132 
Other expense 1,155  1,368  763 
Subtotal 19,466  17,554  13,632 
BaaS loan expense 12,229  8,290  99 
BaaS fraud expense 6,474  4,571  - 
BaaS expense 18,703  12,861  99 
Total noninterest expense 38,169  30,415  13,731 
Income before provision for income taxes 13,115  7,897  9,302 
PROVISION FOR INCOME TAXES 2,939  1,667  2,289 
NET INCOME$10,176 $6,230 $7,013 
          
Basic earnings per common share$0.79 $0.48 $0.59 
Diluted earnings per common share$0.76 $0.46 $0.56 
Weighted average number of common shares outstanding:         
Basic 12,928,061  12,898,746  11,984,927 
Diluted 13,442,013  13,475,337  12,459,467 

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

       
 Six Months Ended 
 June 30, June 30, 
 2022 2021 
INTEREST AND DIVIDEND INCOME      
Interest and fees on loans$69,798 $37,595 
Interest on interest earning deposits with other banks 1,358  144 
Interest on investment securities 634  52 
Dividends on other investments 171  138 
Total interest and dividend income 71,961  37,929 
INTEREST EXPENSE      
Interest on deposits 2,226  1,288 
Interest on borrowed funds 581  714 
Total interest expense 2,807  2,002 
Net interest income 69,154  35,927 
PROVISION FOR LOAN LOSSES 27,036  718 
Net interest income after provision for loan losses 42,118  35,209 
NONINTEREST INCOME      
Deposit service charges and fees 1,872  1,812 
Loan referral fees 810  1,403 
Gain on sales of loans, net -  161 
Mortgage broker fees 208  515 
Gain on sale of branch, including deposits and loans -  1,263 
Other income 576  240 
Subtotal 3,466  5,394 
Servicing and other BaaS fees 2,328  1,613 
Transaction fees 1,307  239 
Interchange fees 1,060  145 
Reimbursement of expenses 990  375 
BaaS program income 5,685  2,372 
BaaS credit enhancements 27,282  - 
BaaS fraud enhancements 11,045  - 
BaaS indemnification income 38,327  - 
Total noninterest income 47,478  7,766 
NONINTEREST EXPENSE      
Salaries and employee benefits 23,323  16,599 
Occupancy 2,219  2,048 
Software licenses, maintenance and subscriptions 2,160  1,027 
Legal and professional fees 1,710  1,386 
Data processing 1,819  1,431 
Excise taxes 913  747 
Federal Deposit Insurance Corporation assessments 1,459  420 
Director and staff expenses 721  538 
Marketing 173  214 
Other expense 2,523  1,484 
Subtotal 37,020  25,894 
BaaS loan expense 20,519  189 
BaaS fraud expense 11,045  - 
BaaS expense 31,564  189 
Total noninterest expense 68,584  26,083 
Income before provision for income taxes 21,012  16,892 
PROVISION FOR INCOME TAXES 4,606  3,861 
NET INCOME$16,406 $13,031 
       
Basic earnings per common share$1.27 $1.09 
Diluted earnings per common share$1.22 $1.05 
Weighted average number of common shares outstanding:      
Basic 12,913,485  11,972,916 
Diluted 13,458,706  12,423,659 

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

   
 June 30, 2022  March 31, 2022  June 30, 2021 
 Average Interest & Yield /  Average Interest & Yield /  Average Interest & Yield / 
 Balance Dividends Cost (1)  Balance Dividends Cost (1)  Balance Dividends Cost (1) 
Assets                             
Interest earning assets:                             
Interest earning deposits$499,918 $956  0.77% $843,931 $402  0.19% $235,187 $74  0.13%
Investment securities (2) 121,255  563  1.86   45,762  71  0.63   25,000  24  0.39 
Other investments 10,225  134  5.26   9,227  37  1.63   6,835  108  6.34 
Loans receivable (3) 2,194,761  40,166  7.34   1,768,283  29,632  6.80   1,750,825  19,365  4.44 
Total interest earning assets 2,826,159  41,819  5.94   2,667,203  30,142  4.58   2,017,847  19,571  3.89 
Noninterest earning assets:                             
Allowance for loan losses (46,354)        (30,668)        (19,733)      
Other noninterest earning assets 115,788         92,401         76,727       
Total assets$2,895,593        $2,728,936        $2,074,841       
                              
Liabilities and Shareholders’ Equity 
Interest bearing liabilities:                             
Interest bearing deposits$1,792,119 $1,673  0.37% $1,131,984 $553  0.20% $901,120 $628  0.28%
Subordinated debt, net 24,313  231  3.81   24,295  230  3.84   9,998  146  5.86 
Junior subordinated debentures, net 3,587  29  3.24   3,586  22  2.49   3,585  21  2.35 
PPPLF borrowings -  -  0.00   -  -  0.00   107,047  94  0.35 
FHLB advances and other borrowings -  -  0.00   24,443  69  1.14   24,999  70  1.12 
Total interest bearing liabilities 1,820,019  1,933  0.43   1,184,308  874  0.30   1,046,749  959  0.37 
Noninterest bearing deposits 839,562         1,320,144         863,962       
Other liabilities 19,550         16,009         12,887       
Total shareholders' equity 216,462         208,475         151,243       
Total liabilities and                             
shareholders' equity$2,895,593        $2,728,936        $2,074,841       
Net interest income   $39,886        $29,268        $18,612    
Interest rate spread       5.51%        4.28%        3.52%
Net interest margin (4)       5.66%        4.45%        3.70%
                              
(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 CORPORATIONSELECTED AVERAGE BALANCES, YIELDS, AND RATES – BY SEGMENT - QUARTERLY(Dollars in thousands; unaudited)

                              
 For the Three Months Ended 
 June 30, 2022  March 31, 2022  June 30, 2021 
 Average Interest & Yield /  Average Interest & Yield /  Average Interest & Yield / 
 Balance Dividends Cost (1)  Balance Dividends Cost (1)  Balance Dividends Cost (1) 
Community Bank                             
Assets                             
Loans receivable (2)$1,503,467 $18,885  5.04% $1,386,130 $17,640  5.16% $1,638,615 $18,486  4.52%
Liabilities 
Interest bearing deposits 921,499  317  0.14   935,784  435  0.19   873,320  608  0.28 
Noninterest bearing deposits 740,575         718,760         658,757       
                              
CCBX                             
Assets                             
Loans receivable (2)(3)$691,294 $21,281  12.35% $382,153 $11,992  12.73% $112,210 $879  3.14%
Liabilities 
Interest bearing deposits 870,620  1,356  0.62   196,200  118  0.24   27,800  20  0.29 
Noninterest bearing deposits 98,987         601,384         205,205       
                              
(1) Yields and costs are annualized. 
(2) Includes loans held for sale and nonaccrual loans. 
(3) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. 

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

 For the Six Months Ended 
 June 30, 2022  June 30, 2021 
 Average Interest & Yield /  Average Interest & Yield / 
 Balance Dividends Cost (1)  Balance Dividends Cost (1) 
Assets                   
Interest earning assets:                   
Interest earning deposits$670,974 $1,358  0.41% $215,358 $144  0.13%
Investment securities (2) 83,717  634  1.53   24,595  52  0.43 
Other Investments 9,729  171  3.54   6,460  138  4.31 
Loans receivable (3) 1,982,700  69,798  7.10   1,695,772  37,595  4.47 
Total interest earning assets$2,747,120 $71,961  5.28  $1,942,185 $37,929  3.94 
Noninterest earning assets:                   
Allowance for loan losses (38,554)        (19,563)      
Other noninterest earning assets 104,159         71,349       
Total assets$2,812,725        $1,993,971       
                    
Liabilities and Shareholders’ Equity                   
Interest bearing liabilities:                   
Interest bearing deposits$1,463,875 $2,226  0.31% $878,740 $1,288  0.30%
Subordinated debt, net 24,304  461  3.83   9,996  291  5.87 
Junior subordinated debentures, net 3,587  51  2.87   3,585  42  2.36 
PPPLF borrowings -  -  0.00   138,536  240  0.35 
FHLB advances and other borrowings 12,154  69  1.14   24,999  141  1.14 
Total interest bearing liabilities$1,503,920 $2,807  0.38  $1,055,856 $2,002  0.38 
Noninterest bearing deposits 1,078,525         777,693       
Other liabilities 17,790         12,336       
Total shareholders' equity 212,490         148,086       
Total liabilities and                   
shareholders' equity$2,812,725        $1,993,971       
Net interest income   $69,154        $35,927    
Interest rate spread       4.90%        3.56%
Net interest margin (4)       5.08%        3.73%
                    
(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 CORPORATIONSELECTED AVERAGE BALANCES, YIELDS, AND RATES – BY SEGMENT – YEAR-TO-DATE(Dollars in thousands; unaudited)

                    
 For the Six Months Ended 
 June 30, 2022  June 30, 2021 
 Average Interest & Yield /  Average Interest & Yield / 
 Balance Dividends Cost (1)  Balance Dividends Cost (1) 
Community Bank                   
Assets                   
Loans receivable (2)$1,445,123 $36,525  5.10% $1,606,116 $36,305  4.56%
Liabilities 
Interest bearing deposits 928,602  752  0.16   850,026  1,246  0.30 
Noninterest bearing deposits 729,728         642,407       
                    
CCBX                   
Assets                   
Loans receivable (2)(3)$537,577 $33,273  12.48% $89,656 $1,290  2.90%
Liabilities 
Interest bearing deposits 535,273  1,474  0.56   28,714  42  0.29 
Noninterest bearing deposits 348,797         135,286       
                    
(1) Yields and costs are annualized. 
(2) Includes loans held for sale and nonaccrual loans. 
(3) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and servicing CCBX loans. 

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

 Three Months Ended 
 June 30, March 31, December 31, September 30, June 30, 
 2022 2022 2021 2021 2021 
Income Statement Data:               
Interest and dividend income$41,819 $30,142 $25,546 $19,608 $19,571 
Interest expense 1,933  874  843  801  959 
Net interest income 39,886  29,268  24,703  18,807  18,612 
Provision for loan losses 14,094  12,942  8,942  255  361 
Net interest income after               
provision for loan losses 25,792  16,326  15,761  18,552  18,251 
Noninterest income 25,492  21,986  14,220  6,132  4,782 
Noninterest expense 38,169  30,415  21,050  16,130  13,731 
Provision for income tax 2,939  1,667  1,641  1,870  2,289 
Net income 10,176  6,230  7,290  6,684  7,013 
 As of and for the Three Month Period 
 June 30, March 31, December 31, September 30, June 30, 
 2022 2022 2021 2021 2021 
Balance Sheet Data:               
Cash and cash equivalents$405,689 $682,109 $813,161 $669,725 $282,889 
Investment securities 109,821  136,177  36,623  34,924  27,442 
Loans held for sale 60,000  -  -  -  - 
Loans receivable 2,334,354  1,964,209  1,742,735  1,705,682  1,658,149 
Allowance for loan losses (49,358) (38,770) (28,632) (20,222) (19,966)
Total assets 2,969,722  2,833,750  2,635,517  2,451,568  2,007,138 
Interest bearing deposits 1,879,253  1,738,426  1,007,879  927,097  913,782 
Noninterest bearing deposits 818,052  838,044  1,355,908  1,296,443  887,896 
Core deposits (1) 2,584,831  2,460,954  2,249,573  2,148,445  1,724,134 
Total deposits 2,697,305  2,576,470  2,363,787  2,223,540  1,801,678 
Total borrowings 27,911  27,893  52,873  52,854  38,584 
Total shareholders’ equity 217,661  207,920  201,222  161,086  154,100 
                
Share and Per Share Data (2):               
Earnings per share – basic$0.79 $0.48 $0.60 $0.56 $0.59 
Earnings per share – diluted$0.76 $0.46 $0.57 $0.54 $0.56 
Dividends per share -  -  -  -  - 
Book value per share (3)$16.81 $16.08 $15.63 $13.41 $12.83 
Tangible book value per share (4)$16.81 $16.08 $15.63 $13.41 $12.83 
Weighted avg outstanding shares – basic 12,928,061  12,898,746  12,144,452  11,999,899  11,984,927 
Weighted avg outstanding shares – diluted 13,442,013  13,475,337  12,701,464  12,456,674  12,459,467 
Shares outstanding at end of period 12,948,623  12,928,548  12,875,315  12,012,107  12,007,669 
Stock options outstanding at end of period 655,844  666,774  694,519  710,182  714,620 
                
See footnotes on following page               
                
 As of and for the Three Month Period 
 June 30, March 31, December 31, September 30, June 30, 
 2022 2022 2021 2021 2021 
Credit Quality Data:               
Nonperforming assets (5) to total assets 0.09% 0.08% 0.07% 0.03% 0.03%
Nonperforming assets (5) to loans receivable and OREO 0.11% 0.12% 0.10% 0.04% 0.04%
Nonperforming loans (5) to total loans receivable 0.11% 0.12% 0.10% 0.04% 0.04%
Allowance for loan losses to nonperforming loans 849.4% 1653.3% 1657.9% 2732.7% 3081.2%
Allowance for loan losses to total loans receivable 2.11% 1.97% 1.64% 1.19% 1.20%
Adjusted allowance for loan losses to loans receivable, excluding PPP loans (6) 2.13% 2.02% 1.75% 1.40% 1.57%
Gross charge-offs$3,542 $2,808 $579 $31 $12 
Gross recoveries$36 $4 $47 $32 $7 
Net charge-offs to average loans (7) 0.64% 0.64% 0.13% 0.00% 0.00%
Credit enhancement income (8)$3,539 $2,804 $363 $18 $4 
                
Capital Ratios (9):               
Tier 1 leverage capital 7.68% 7.75% 8.07% 7.48% 8.00%
Common equity Tier 1 risk-based capital 8.51% 9.71% 11.06% 9.94% 10.92%
Tier 1 risk-based capital 8.65% 9.88% 11.26% 10.15% 11.16%
Total risk-based capital 10.88% 12.30% 13.89% 12.95% 13.12%
                
(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) 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 receivable is also recorded on the balance sheet through noninterest income (BaaS credit enhancements). This is the amount of CCBX incurred losses that were recorded and are covered by the partner’s credit enhancements. 
(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 theCompany’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 GAAPmeasures. As other companies may use different calculations for these adjusted measures, this presentation may not becomparable to other similarly titled adjusted measures reported by other companies.

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

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

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

  As of and for the Three Months Ended  As of and for theSix Months Ended 
(Dollars in thousands, unaudited) June 30,2022 March 31,2022 June 30,2021  June 30,2022 June 30,2021 
Revenue excluding BaaS credit enhancements and BaaS fraud enhancements: 
Total net interest income $39,886 $29,268 $18,612  $69,154 $35,927 
Total noninterest income  25,492  21,986  4,782   47,478  7,766 
Total Revenue $65,378 $51,254 $23,394  $116,632 $43,693 
Less: BaaS credit enhancements  (14,207) (13,075) -   (27,282) - 
Less: BaaS fraud enhancements  (6,474) (4,571) -   (11,045) - 
Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements $44,697 $33,608 $23,394  $78,305 $43,693 

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

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

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

  As of and for the Three Months Ended  As of and for the Six Months Ended 
(Dollars in thousands, unaudited) June 30,2022 March 31,2022 June 30,2021  June 30,2022 June 30,2021 
Net BaaS loan income divided by average CCBX loans:        
Total average CCBX loans receivable $691,294 $382,153 $112,210  $537,577 $89,656 
Interest and earned fee income on CCBX loans  21,281  11,992  879   33,273  1,291 
Less: loan expense on CCBX loans  (12,229) (8,290) (99)  (20,519) (189)
Net BaaS loan income (1) $9,052 $3,702 $780  $12,754 $1,102 
Net BaaS loan income divided by average CCBX loans  5.25% 3.93% 2.79%  4.78% 2.48%
CCBX loan yield  12.35% 12.73% 3.14%  12.48% 2.90%
(1) Non-GAAP measure, see above for more information.        

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  As of and for theSix Months Ended 
(Dollars in thousands, unaudited) June 30,2022 March 31,2022 December 31,2021 September 30,2021 June 30,2021  June 30,2022 June 30,2021 
Yield on loans receivable, excluding earned fees :        
Total average loans receivable $2,194,761 $1,768,283 $1,683,310 $1,681,069 $1,750,825  $1,982,700 $1,695,772 
Interest and earned fee income on loans  40,166  29,632  25,134  19,383  19,365   69,798  37,595 
Less: earned fee income on all loans  (1,227) (2,729) (6,572) (3,533) (4,274)  (3,956) (8,248)
Adjusted interest income on loans $38,939 $26,903 $18,562 $15,850 $15,091  $65,842 $29,347 
Yield on loans receivable  7.34% 6.80% 5.92% 4.57% 4.44%  7.10% 4.47%
Yield on loans receivable, excluding earned fees:  7.12% 6.17% 4.37% 3.74% 3.46%  6.70% 3.49%
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans (1):  7.21% 6.41% 4.78% 4.36% 4.42%  6.86% 4.47%
(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  Six Months Ended 
(Dollars in thousands, unaudited) June30,2022 March31,2022 December31,2021 September30,2021 June30,2021  June30,2022 June30,2021 
Adjusted allowance for loan losses to loans receivable, excluding PPP loans:        
Total loans, net of deferred fees $2,334,354 $1,964,209 $1,742,735 $1,705,682 $1,658,149  $2,334,354 $1,658,149 
Less: PPP loans  (16,398) (47,467) (111,813) (267,278) (398,038)  (16,398) (398,038)
Less: net deferred fees on PPP loans  396  1,365  3,633  9,417  12,363   396  12,363 
Adjusted loans, net of deferred fees $2,318,351 $1,918,107 $1,634,555 $1,447,821 $1,272,474  $2,318,351 $1,272,474 
Allowance for loan losses $(49,358)$(38,770)$(28,632)$(20,222)$(19,966) $(49,358)$(19,966)
Allowance for loan losses to loans receivable  2.11% 1.97% 1.64% 1.19% 1.20%  2.11% 1.20%
Adjusted allowance for loan losses to loans receivable, excluding PPP loans  2.13% 2.02% 1.75% 1.40% 1.57%  2.13% 1.57%
Yield on loans receivable, excluding PPP loans:        
Total average loans receivable $2,194,761 $1,768,283 $1,683,310 $1,681,069 $1,750,825  $1,982,700 $1,695,772 
Less: average PPP loans  (33,653) (79,828) (186,267) (322,595) (509,265)  (56,613) (492,695)
Plus: average deferred fees on PPP loans  894  2,453  6,370  11,639  14,213   1,669  12,510 
Adjusted total average loans receivable $2,162,002 $1,690,908 $1,503,413 $1,370,113 $1,255,773  $1,927,756 $1,215,587 
Interest income on loans $40,166 $29,632 $25,134 $19,383 $19,365  $69,798 $37,595 
Less: interest and deferred fee income recognized on PPP loans  (1,050) (2,460) (6,245) (3,744) (4,821)  (3,510) (9,199)
Adjusted interest income on loans $39,116 $27,172 $18,889 $15,639 $14,544  $66,288 $28,396 
Yield on loans receivable  7.34% 6.80% 5.92% 4.57% 4.44%  7.10% 4.47%
Yield on loans receivable, excluding PPP loans:  7.26% 6.52% 4.98% 4.53% 4.65%  6.93% 4.71%
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans:        
Total average loans receivable $2,194,761 $1,768,283 $1,683,310 $1,681,069 $1,750,825  $1,982,700 $1,695,772 
Less: average PPP loans  (33,653) (79,828) (186,267) (322,595) (509,265)  (56,613) (492,695)
Plus: average deferred fees on PPP loans $894 $2,453 $6,370 $11,639 $14,213  $1,669 $12,510 
Adjusted total average loans receivable $2,162,002 $1,690,908 $1,503,413 $1,370,113 $1,255,773  $1,927,756 $1,215,587 
Interest and earned fee income on loans $40,166 $29,632 $25,134 $19,383 $19,365  $69,798 $37,595 
Less: earned fee income on all loans $(1,227)$(2,729)$(6,572)$(3,533)$(4,274) $(3,956)$(8,248)
Less: interest income on PPP loans  (81) (192) (461) (796) (1,257)  (273) (2,426)
Adjusted interest income on loans $38,858 $26,711 $18,101 $15,054 $13,834  $65,569 $26,921 
Yield on loans receivable  7.34% 6.80% 5.92% 4.57% 4.44%  7.10% 4.47%
Yield on loans receivable, excluding earned fees on all loans (1):  7.12% 6.17% 4.37% 3.74% 3.46%  6.70% 3.49%
Yield on loans receivable, excluding earned fees on all loans and interest on PPP loans:  7.21% 6.41% 4.78% 4.36% 4.42%  6.86% 4.47%
(1) Non-GAAP measure - see previous table of "Non-GAAP Financial Measures" for more information. 

(Dollars in thousands, unaudited) As ofJune 30, 2022 As ofMarch 31, 2022 As ofJune 30, 2021 
Adjusted Tier 1 leverage capital ratio, excluding PPP loans: 
Company:          
Tier 1 capital $222,399 $211,580 $157,450 
Average assets for the leverage capital ratio $2,895,487 $2,728,833 $1,967,646 
Less: Average PPP loans  (33,653) (79,828) (509,265)
Plus: Average PPPLF borrowings  -  -  107,047 
Adjusted average assets for the leverage capital ratio $2,861,833 $2,649,005 $1,565,428 
Tier 1 leverage capital ratio  7.68% 7.75% 8.00%
Adjusted Tier 1 leverage capital ratio, excluding PPP loans  7.77% 7.99% 10.06%
Bank:          
Tier 1 capital $240,870 $220,829 $161,368 
Average assets for the leverage capital ratio $2,892,173 $2,725,606 $1,966,528 
Less: Average PPP loans  (33,653) (79,828) (509,265)
Plus: Average PPPLF borrowings  -  -  107,047 
Adjusted average assets for the leverage capital ratio $2,858,519 $2,645,778 $1,564,310 
Tier 1 leverage capital ratio  8.33% 8.10% 8.21%
Adjusted Tier 1 leverage capital ratio, excluding PPP loans  8.43% 8.35% 10.32%

APPENDIX A - As of June 30, 2022

Industry Concentration

We have a diversified loan portfolio, representing a wide variety of industries. Four of our largest categories of loans are commercial real estate, consumer and other loans, commercial and industrial, and construction, land and land development loans. Together they represent $2.0 billion in outstanding loan balances, or 85.9% of total gross loans outstanding, excluding PPP loans of $16.4 million. When combined with $1.62 billion in unused commitments the total of these four categories is $3.62 billion, or 82.5% of total outstanding loans and loan commitments, excluding PPP loans.

Commercial real estate loans represent the largest segment of our loans, comprising 41.1% of our total balance of outstanding loans excluding PPP loans, as of June 30, 2022. Unused commitments to extend credit represents an additional $33.3 million, and the combined total exposure in commercial real estate loans represents $989.6 million, or 22.6% 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 June 30, 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 $188,436  $5,390  $193,826   4.4% $2,416   78 
Hotel/Motel  156,667   2,479   159,146   3.6   5,802   27 
Office  100,615   3,930   104,545   2.4   1,027   98 
Retail  81,327   2,978   84,305   1.9   904   90 
Convenience Store  76,730   6,386   83,116   1.9   1,871   41 
Mixed use  78,008   4,332   82,340   1.9   886   88 
Warehouse  72,335   102   72,437   1.7   1,418   51 
Manufacturing  42,454   1,907   44,361   1.1   1,213   35 
Mini Storage  38,872   984   39,856   0.9   2,777   14 
Groups < 0.70% of total  120,876   4,806   125,682   2.9   1,389   87 
Total $956,320  $33,294  $989,614   22.6% $1,570   609 

Consumer loans comprise 18.4% of our total balance of outstanding loans excluding PPP loans, as of June 30, 2022. Unused commitments to extend credit represents an additional $682.1 million, and the combined total exposure in consumer and other loans represents $1.11 billion, or 25.4% of our total outstanding loans and loan commitments, excluding PPP loans. 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 of just $1,200.

The following table summarizes our exposure by industry, excluding PPP loans, for our consumer and other loan portfolio as of June 30, 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 
CCBX consumer loans                        
Installment loans $279,015  $-  $279,015   6.4% $1.5   181,602 
Credit cards  139,456   680,342   819,798   18.7   1.2   117,870 
Lines of credit  6,831   258   7,089   0.2   0.2   34,492 
Other loans  2,456   -   2,456   0.1   0.2   12,853 
Community bank consumer loans 
Lines of credit  1,463   1,501   2,964   0.1   20.9   70 
Installment loans  423   -   423   0.0   28.2   15 
Other loans  439   -   439   0.0   1.2   373 
Total $430,083  $682,101  $1,112,184   25.4% $1.2   347,275 

Commercial and industrial loans comprise 16.6% of our total balance of outstanding loans excluding PPP loans, as of June 30, 2022. Unused commitments to extend credit represents an additional $777.4 million, and the combined total exposure in commercial and industrial loans represents $1.16 billion, or 26.6% of our total outstanding loans and loan commitments, excluding PPP loans. Included in commercial and industrial loans is $224.9 million in outstanding capital call lines, with an additional $704.5 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 June 30, 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 $224,930  $704,523  $929,453   21.2% $1,372   164 
Construction/Contractor Services  19,170   30,891   50,061   1.1   116   165 
Financial Institutions  40,149   -   40,149   0.9   4,015   10 
Manufacturing  17,269   5,064   22,333   0.5   270   64 
Medical / Dental / Other Care  11,960   4,926   16,886   0.4   260   46 
Groups < 0.30% of total  72,088   32,010   104,098   2.5   68   1,058 
Total $385,566  $777,414  $1,162,980   26.6% $256   1,507 

Construction, land and land development loans comprise 9.7% of our total balance of outstanding loans excluding PPP loans, as of June 30, 2022. Unused commitments to extend credit represents an additional $126.9 million, and the combined total exposure in construction, land and land development loans represents $352.4 million, or 8.0% 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 June 30, 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 $115,452  $76,448  $191,900   4.4% $4,276   27 
Residential construction  36,192   35,699   71,891   1.6   823   44 
Undeveloped land loans  39,684   3,440   43,124   1.0   2,835   14 
Developed land loans  20,173   6,664   26,837   0.6   593   34 
Land development  14,011   4,629   18,640   0.4   737   19 
Total $225,512  $126,880  $352,392   8.0% $1,634   138 

APPENDIX B -As of June 30, 2022

CCBX – BaaS Reporting Information

During the quarter ended June 30, 2022, $14.2 million was recorded in BaaS credit enhancements related to the provision for loan losses and reserve for unfunded commitments for CCBX partner loans and deposits. 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 and deposits. When the provision for loan losses and provision for unfunded commitments is recorded, a receivable is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) 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 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 enhancement received from the CCBX partner is recorded in noninterest income, resulting in a net impact of zero to the income statement. CCBX partners also pledge a cash reserve account at the Bank which the Bank can collect from when losses occur that is then replenished by the partner on a regular interval. Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by 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 and deposit 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 enhancements 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  Six Months Ended 
  June 30,  March 31,  June 30,  June 30,  June 30, 
(Dollars in thousands) 2022  2022  2021  2022  2021 
BaaS loan interest income $21,281  $11,992  $879  $33,273  $1,290 
Less: BaaS loan expense  12,229   8,290   99   20,519   189 
Net BaaS loan income  9,052   3,702   780   12,754   1,101 
Net BaaS loan income divided by average BaaS loans  5.25%  3.93%  2.79%  4.78%  2.48%

The addition of new CCBX partners has resulted in increases in interest, direct fees and expenses for the quarter ended June 30, 2022 compared to the quarters ended March 31, 2022 and June 30, 2021. 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  Six Months Ended 
  June 30,  March 31,  June 30,  June 30,  June 30, 
(Dollars in thousands) 2022  2022  2021  2022  2021 
Loan interest income $21,281  $11,992  $879  $33,273  $1,290 
Total BaaS interest income $21,281  $11,992  $879  $33,273  $1,290 
Interest expense Three Months Ended  Six Months Ended 
  June 30,  March 31,  June 30,  June 30,  June 30, 
(Dollars in thousands) 2022  2022  2021  2022  2021 
BaaS interest expense $1,356  $118  $20  $1,474  $42 
Total BaaS interest expense $1,356  $118  $20  $1,474  $42 

  Three Months Ended  Six Months Ended 
  June 30,  March 31,  June 30,  June 30,  June 30, 
(Dollars in thousands) 2022  2022  2021  2022  2021 
Program income:                    
Servicing and other BaaS fees $1,159  $1,169  $1,029  $2,328  $1,613 
Transaction fees  814   493   93   1,307   239 
Interchange fees  628   432   110   1,060   145 
Reimbursement of expenses  618   372   192   990   375 
Program income  3,219   2,466   1,424   5,685   2,372 
Indemnification income:                    
Credit enhancements  14,207   13,075   -   27,282   - 
Fraud enhancements  6,474   4,571   -   11,045   - 
Indemnification income  20,681   17,646   -   38,327   - 
Total BaaS income $23,900  $20,112  $1,424  $44,012  $2,372 

Noninterest expense Three Months Ended  Six Months Ended 
  June 30,  March 31,  June 30,  June 30,  June 30, 
(Dollars in thousands) 2022  2022  2021  2022  2021 
BaaS loan expense $12,229  $8,290  $99  $20,519  $189 
BaaS fraud expense  6,474   4,571   -   11,045   - 
Total BaaS expense $18,703  $12,861  $99  $31,564  $189 

 

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