Fourth Quarter 2022 Highlights:

Quarterly net income of $13.1 million, or $0.96 per diluted common share, for the three months ended December 31, 2022, compared to $11.1 million, or $0.82 per diluted common share for the three months ended September 30, 2022.
Total assets increased $10.7 million, or 0.3%, to $3.14 billion for the quarter ended December 31, 2022, compared to $3.13 billion at September 30, 2022.
Loan growth of $119.4 million, or 4.8%, to $2.63 billion for the three months ended December 31, 2022.
- CCBX loans increased $96.9 million, or 10.6%, to $1.0 billion.
- Community bank loans increased $22.4 million, or 1.4%, to $1.61 billion.
  - PPP loans decreased $1.1 million, or 18.9%, to $4.7 million.
Deposits decreased $19.5 million, or 0.7%, to $2.82 billion for the three months ended December 31, 2022.
- CCBX deposit growth of $77.0 million, or 6.4%, to $1.28 billion.
  - Additional $225.0 million in CCBX deposits transferred off balance sheet.
- Community bank deposits decreased $96.6 million, or 5.9%, to $1.54 billion and community bank cost of deposits was 0.37%.
Total revenue increased $12.7 million, or 15.2%, for the three months ended December 31, 2022, compared to September 30, 2022.
Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements^(*) increased $4.3 million, or 8.0%, to $58.3 million for the three months ended December 31, 2022.
On November 1, 2022 the Company completed its private placement of $20.0 million in fixed-to-floating rate subordinated notes due November 1, 2032; the intention is to use net proceeds from the offering for general corporate purposes.

2022 Highlights:

Total assets increased $509.0 million, or 19.3%, to $3.14 billion for the year ended December 31, 2022, compared to $2.64 billion at December 31, 2021.
Total deposits increased $453.7 million, or 19.2%, to $2.82 billion for the year ended December 31, 2022, compared to $2.36 billion at December 31, 2021.
- CCBX deposits increased $563.0 million, or 78.6%, during the year ended December 31, 2022.
- Community bank deposits decreased $109.3 million, or 6.6%, during the year ended December 31, 2022
Loan growth of $884.5 million, or 50.8%, to $2.63 billion for the year ended December 31, 2022, compared to $1.74 billion for the year ended December 31, 2021.
- CCBX loans increased $665.8 million, or 192.1%.
- Community bank loans increased $218.7 million, or 15.7%.
  - PPP loans decreased $107.1 million, or 95.8%, to $4.7 million.
Net income increased $13.6 million, or 50.4%, to $40.6 million for the year ended December 31, 2022, or $3.01 per diluted common share, compared to $27.0 million, or $2.16 per diluted common share, for the year ended December 31, 2021.
Total revenue increased $57.3 million, or 147.3% for the year ended December 31, 2022, compared to the year ended December 31, 2021.
Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements^(*) increased $29.6 million, or 103.5%, to $190.5 million for the year ended December 31, 2022, compared to $97.0 million for the year ended December 31, 2021.
Loan losses (net charge-offs) for the year ended December 31, 2022:
- Community bank: $32,000.
- Holding Company: $350,000.
- CCBX: $33.3 million; $33.1 million covered by credit enhancements.

EVERETT, Wash., Jan. 27, 2023 (GLOBE NEWSWIRE) -- Coastal Financial Corporation (NASDAQ:CCB) (the "Company"), the holding company for Coastal Community Bank (the "Bank"), today reported unaudited financial results for the quarter ended December31, 2022. Quarterly net income for the fourth quarter of 2022 was $13.1 million, or $0.96 per diluted common share, compared with net income of $11.1 million, or $0.82 per diluted common share, for the third quarter of 2022, and $7.3 million, or $0.57 per diluted common share, for the quarter ended December 31, 2021.

Total assets increased $10.7 million, or 0.3%, during the fourth quarter of 2022 to $3.14 billion, from $3.13 billion at September 30, 2022. Loan growth of $119.4 million, or 4.8%, during the three months ended December 31, 2022 to $2.63 billion, compared to $2.51 billion at September 30, 2022 . Loan growth included CCBX loan growth of $96.9 million, or 10.6%, and an increase of $22.4 million, or 1.4% in community bank loans, which is net of $1.1 million in PPP loan forgiveness/repayments. Deposits decreased $19.5 million, or 0.7%, during the three months ended December 31, 2022 and included CCBX deposit growth of $77.0 million, or 6.4%, and a decrease in community bank deposits of $96.6 million, or 5.9%.

"Loans increased $119.4 million, or 4.8%, in the three months ended December 31, 2022, with $96.9 million of that growth in our CCBX segment, which provides Banking as a Service ("BaaS"). Our CCBX segment has grown to $1.0 billion in loans receivable, or 38.5% of total loans receivable, and our community bank loans have grown to $1.6 billion in loans receivable, as of December 31, 2022. Additionally, we sold excess loans back to our partners to help partners manage credit and interest rate risk. During the quarter ended December 31, 2022 we allowed some community bank deposits to run off in order to manage our our deposit costs, resulting in deposits decreasing $19.5 million, or 0.7%, during the three months ended December 31, 2022. Community bank cost of deposits was 0.37% for the quarter ended December 31, 2022. For the quarter ended December 31, 2022 we had net income of $13.1 million, an increase of $2.0 million, or 18.2%, over the quarter ended September 30, 2022.

"We are so proud to have recently received the Everett Herald Readers Choice Best of Snohomish County in three categories; Best Place to Work, Best Mortgage, and Best Bank. This recognition reflects our strong commitment to our community bank roots. We are also pleased that Coastal World, www.coastalworld.com, an immersive 3D web platform that promotes, educates and informs visitors about digital banking solutions through our fintech partners is garnering recognition, and was awarded site of the day and site of the month from three major outlets and was nominated as site of the year as well," stated Eric Sprink, the CEO of the Company and the Bank.

Results of Operations Overview

The Company has one main subsidiary, the Bank which consists of two segments: 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 $53.4 million for the quarter ended December 31, 2022, an increase of $4.2 million, or 8.6%, from $49.2 million for the quarter ended September 30, 2022, and an increase of $28.7 million, or 116.3%, from $24.7 million for the quarter ended December 31, 2021. Yield on loans receivable was 9.33% for the three months ended December 31, 2022, compared to 8.46% for the three months ended September 30, 2022 and 5.92% for the three months ended December 31, 2021. The increase in net interest income compared to September 30, 2022 and December 31, 2021, was largely related to increased yield on loans resulting from higher interest rates and growth in higher yielding loans, primarily from CCBX. Total average loans receivable for the three months ended December 31, 2022 was $2.60 billion, compared to $2.45 billion for the three months ended September 30, 2022, and $1.68 billion for the three months ended December 31, 2021.

Interest and fees on loans totaled $61.2 million for the three months ended December 31, 2022 compared to $52.3 million and $25.1 million for the three months ended September 30, 2022 and December 31, 2021, respectively. Loan growth of $119.4 million, or 4.8%, during the quarter ended December 31, 2022 included $96.9 million increase in CCBX loans; this includes capital call lines, which decreased $28.3 million, or 16.2%, during the quarter ended December 31, 2022, compared to the quarter ended September 30, 2022. Capital call lines bear a lower rate of interest, but have less credit risk due to the way the loans are structured compared to other commercial loans. The increase in interest and fees on loans for the quarter ended December 31, 2022, compared to September 30, 2022 and December 31, 2021, was largely due to growth in higher yielding loans and increased interest rates. As a result of the Federal Open Market Committee ("FOMC") raising the target Federal Funds rate 4.25% in 2022, interest rates on our existing variable rate loans are affected, as are the rates on new loans. We continue to monitor the impact of these increases in interest rates. The FOMC last raised the target Federal Funds rate 0.50% on December 14, 2022.

Interest income from interest earning deposits with other banks was $3.1 million at December 31, 2022, an increase of $824,000 compared to September 30, 2022, and an increase of $2.8 million compared to December 31, 2021 due to an increase in interest rates. The average balance of interest earning deposits with other banks for the three months ended December 31, 2022 was $329.4 million, compared to $397.6 million and $751.8 million for the three months ended September 30, 2022 and December 31, 2021, respectively. Interest earning deposits with other banks decreased as a result of increased loan demand and decreased deposits compared to the three months ended September 30, 2022. Interest earning deposits with other banks decreased as a result of increased loan demand compared to the three months ended December 31, 2021. Additionally, the average yield on these interest earning deposits with other banks increased to 3.73% for the quarter ended December 31, 2022, compared to 2.27% and 0.16% for the quarters ended September 30, 2022 and December 31, 2021, respectively.

Interest expense was $11.6 million for the quarter ended December 31, 2022, a $5.3 million increase from the quarter ended September 30, 2022 and a $10.8 million increase from the quarter ended December 31, 2021. Interest expense on borrowed funds was $537,000 for the quarter ended December 31, 2022, compared to $273,000 and $327,000 for the quarters ended September 30, 2022 and December 31, 2021, respectively. Interest expense on borrowed funds increased $264,000 compared to the three months ended September 30, 2022, as a result of an increase of $20.0 million in subordinated debt, which closed on November 1, 2022, combined with the increase in interest rates. The $210,000 increase in interest expense on borrowed funds from the quarter ended December 31, 2021 is the result of an increase in interest rates partially offset by a decrease in Federal Home Loan Bank borrowings, which were paid off in the first quarter of 2022. Interest expense on interest bearing deposits increased $5.3 million for the quarter ended December 31, 2022, compared to the quarter ended September 30, 2022, and $10.5 million compared to the quarter ended December 31, 2021 as a result an increase in CCBX deposits that are tied to and reprice when the FOMC raises rates, just like our CCBX loans which also reprice when the FOMC raises interest rates. Additionally, as a result of the interest rate increases, a significant portion of CCBX deposits that were not earning interest were reclassified to interest bearing deposits from noninterest bearing deposits during the first and second quarters of 2022, which also contributed to the increase in interest expense compared to December 31, 2021. These CCBX deposits were reclassified because the current interest rate exceeded the minimum interest rate set in their respective program agreements, as a result of the first and second quarter 2022 interest rate increases. We do not expect additional CCBX deposits will be reclassified as a result of future rate increases.

Total cost of deposits was 1.56% for the three months ended December 31, 2022, 0.82% for the three months ended September 30, 2022, and 0.09%, for the three months ended December 31, 2021. Community bank and CCBX cost of deposits were 0.37% and 3.13% respectively, for the three months ended December 31, 2022, compared to 0.16% and 1.79%, for the three months ended September 30, 2022, and 0.12% and 0.02% for the three months ended December 31, 2021. The increase in cost of deposits for the three months ended December 31, 2022 compared to the prior periods for both segments is a result of increased interest rates. Also impacting CCBX cost of deposits was the reclassification of deposits from noninterest bearing to interest bearing in the first two quarters of 2022. Any additional interest rate increases will increase our cost of deposits and result in higher interest expense on interest bearing deposits.

Net Interest Margin

Net interest margin was 6.96% for the three months ended December 31, 2022, compared to 6.58% and 3.95% for the three months ended September 30, 2022 and December 31, 2021, respectively. The increase in net interest margin compared to the three months ended September 30, 2022 and December 31, 2021, was largely a result of increased volume and an increase in higher interest rates on new loans and on existing variable rate loans as they reprice. Loans receivable increased $119.4 million and $884.5 million, compared to September 30, 2022 and December 31, 2021, respectively. Additionally, the Fed Funds interest rate increases have resulted in existing, variable rate loans repricing to higher interest rates. Interest on loans receivable increased $8.9 million, or 17.0%, to $61.2 million for the three months ended December 31, 2022, compared to $52.3 million for the three months ended September 30, 2022, and $25.1 million for the three months ended December 31, 2021. Also contributing to the increase in net interest margin compared to the three months ended September 30, 2022 and December 31, 2021, was $824,000 and $2.8 million increase in interest on interest earning deposits, respectively. These interest earning deposits earned an average rate of 3.73% for the quarter ended December 31, 2022, compared to 2.27% and 0.16% for the quarters ended September 30, 2022 and December 31, 2021, respectively. Average investment securities decreased $2.2 million to $101.5 million for the three months ended December 31, 2022 compared to the three months ended September 30, 2022, and increased $64.5 million compared to the three months ended December 31, 2021. Interest on investment securities increased $3,000 for the three months ended December 31, 2022 compared to the three months ended September 30, 2022. Investment securities increased $554,000 compared to December 31, 2021, 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 1.61% for the quarter ended December 31, 2022, an increase of 76 basis points from the quarter ended September 30, 2022 and an increase of 147 basis points from the quarter ended December 31, 2021. Cost of deposits for the quarter ended December 31, 2022 was 1.56%, compared to 0.82% for the quarter ended September 30, 2022, and 0.09% for the quarter ended December 31, 2021. The increased cost of funds and deposits compared to September 30, 2022 and December 31, 2021 was largely due to the increase in interest rates compared to the previous periods and growth in deposits compared to December 31, 2021.

During the quarter ended December 31, 2022, total loans receivable increased by $119.4 million, or 4.8%, to $2.63 billion, compared to $2.51 billion for the quarter ended September 30, 2022. The increase consists of $96.9 million in CCBX loan growth and $22.4 million in community bank loan growth. Community bank loan growth is net of $1.1 million in PPP loan forgiveness/repayments. Total loans receivable grew $884.5 million as of December 31, 2022, compared to the quarter ended December 31, 2021. This increase includes CCBX loan growth of $665.8 million and community bank loan growth of $218.7 million. Community bank loan growth is net of $107.1 million in PPP loan forgiveness/repayments as of December 31, 2022 compared to December 31, 2021. During the quarter ended December 31, 2022, $24.4 million in CCBX loans were transferred into loans held for sale, with $67.7 million in loans sold during the quarter and no loans remaining in loans held for sale as of December 31, 2022; compared to $43.3 million held for sale as of September 30, 2022.

Total yield on loans receivable for the quarter ended December 31, 2022 was 9.33%, compared 8.46% for the quarter ended September 30, 2022, and 5.92% for the quarter ended December 31, 2021. This increase in yield on loans receivable is a combination of an overall increase in interest rates, repricing of variable rate loans as well as additional volume in higher rate consumer loans from CCBX partners. During the quarter ended December 31, 2022, CCBX loans outstanding increased 10.6%, or $96.9 million, compared to September 30, 2022, with an average CCBX yield of 15.20% and community bank loans increased 1.4%, or $22.4 million, September 30, 2022, with an average yield of 5.70%. The yield on CCBX loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. Net BaaS loan income⁽^*⁾ divided by average CCBX loans outstanding was 8.33% for the quarter ended December 31, 2022 and was impacted by the $28.3 million decline in capital call lines during the quarter 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 Twelve Months Ended
	December 31, 2022				September 30, 2022				December 31, 2021				December 31, 2022				December 31, 2021
	Yield on Loans		Cost of Deposits		Yield on Loans		Cost of Deposits		Yield on Loans		Cost of Deposits		Yield on Loans		Cost of Deposits		Yield on Loans		Cost of Deposits
Community Bank	5.70	%	0.37	%	5.31	%	0.16	%	5.89	%	0.12	%	5.32	%	0.18	%	4.90	%	0.14	%
CCBX ⁽¹⁾	15.20	%	3.13	%	13.96	%	1.79	%	6.13	%	0.02	%	13.85	%	1.57	%	4.46	%	0.03	%
Consolidated	9.33	%	1.56	%	8.46	%	0.82	%	5.92	%	0.09	%	8.12	%	0.71	%	4.86	%	0.12	%

⁽¹⁾

CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit and fraud enhancements and servicing CCBX loans. To determine Net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at Net BaaS loan income which can be compared to interest income on the Company's community bank loans.

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
	December 31, 2022				September 30, 2022				December 31, 2021
(dollars in thousands, unaudited)	Income / Expense		Income / expense divided by average CCBX loans ⁽²⁾		Income / Expense		Income / expense divided by average CCBX loans⁽²⁾		Income / Expense		Income / expense divided by average CCBX loans ⁽²⁾
BaaS loan interest income	$	38,086	15.20	%	$	31,449	13.96	%	$	3,771	6.13	%
Less: BaaS loan expense		17,215	6.87	%		15,560	6.91	%		2,368	3.85	%
Net BaaS loan income⁽¹⁾	$	20,871	8.33	%	$	15,889	7.05	%	$	1,403	2.28	%
Average BaaS Loans	$	994,080			$	893,655			$	244,038

	For the Twelve Months Ended
	December 31, 2022				December 31, 2021
(dollars in thousands; unaudited)	Income / Expense		Income / expense divided by average CCBX loans		Income / Expense		Income / expense divided by average CCBX loans
BaaS loan interest income	$	102,808	13.85	%	$	6,532	4.46	%
Less: BaaS loan expense		53,294	7.18	%		2,976	2.03	%
Net BaaS loan income ⁽¹⁾	$	49,514	6.67	%	$	3,556	2.43	%
Average BaaS Loans	$	742,392			$	146,304

⁽¹⁾A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.

⁽²⁾ Annualized calculations shown for quarterly periods presented.

The following table illustrates the net BaaS loan income spread for the periods indicated:

	For the Three Months Ended
(unaudited)	December 31, 2022		September 30, 2022		December 31, 2021
Net BaaS loan income⁽¹⁾⁽²⁾	8.33	%	7.05	%	2.28	%
CCBX cost of deposits⁽²⁾	3.13	%	1.79	%	0.02	%
Net BaaS loan income interest rate spread ⁽¹⁾	5.20	%	5.26	%	2.26	%

	For the Twelve Months Ended
(unaudited)	December 31, 2022		December 31, 2021
Net BaaS loan income⁽¹⁾	6.67	%	2.43	%
CCBX cost of deposits	1.57	%	0.03	%
Net BaaS loan income interest rate spread ⁽¹⁾	5.10	%	2.40	%

⁽¹⁾ A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.

⁽²⁾Annualized calculations shown for quarterly periods presented.

Key Performance Ratios

Return on average assets ("ROA") was 1.66% for the quarter ended December 31, 2022 compared to 1.45% and 1.14% for the quarters ended September 30, 2022 and December 31, 2021, respectively. ROA for the quarter ended December 31, 2022, was impacted by an increase in loan volume and overall higher interest rates on interest earning assets, compared to the quarters ended September 30, 2022 and December 31, 2021.

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

	Three Months Ended										Twelve Months Ended
(unaudited)	December 31, 2022		September 30, 2022		June 30, 2022		March 31, 2022		December 31, 2021		December 31, 2022		December 31, 2021

Return on average assets ⁽¹⁾	1.66	%	1.45	%	1.41	%	0.93	%	1.14	%	1.38	%	1.24	%
Return on average equity ⁽¹⁾	21.86	%	19.36	%	18.86	%	12.12	%	16.80	%	18.24	%	17.24	%
Yield on earnings assets ⁽¹⁾	8.47	%	7.38	%	5.94	%	4.58	%	4.09	%	6.68	%	3.90	%
Yield on loans receivable⁽¹⁾	9.33	%	8.46	%	7.34	%	6.80	%	5.92	%	8.12	%	4.86	%
Cost of funds⁽¹⁾	1.61	%	0.85	%	0.29	%	0.14	%	0.14	%	0.75	%	0.18	%
Cost of deposits ⁽¹⁾	1.56	%	0.82	%	0.25	%	0.09	%	0.09	%	0.71	%	0.12	%
Net interest margin ⁽¹⁾	6.96	%	6.58	%	5.66	%	4.45	%	3.95	%	5.97	%	3.73	%
Noninterest expense to average assets ⁽¹⁾	5.97	%	6.66	%	5.29	%	4.52	%	3.29	%	5.65	%	2.90	%
Noninterest income to average assets⁽¹⁾	5.43	%	4.48	%	3.53	%	3.27	%	2.22	%	4.23	%	1.29	%
Efficiency ratio	48.94	%	61.12	%	58.38	%	59.34	%	54.08	%	56.26	%	58.82	%
Loans receivable to deposits ⁽²⁾	93.25	%	89.92	%	86.54	%	76.24	%	73.73	%	93.25	%	73.73	%

⁽¹⁾Annualized calculations shown for quarterly periods presented.

⁽²⁾Includes loans held for sale.

The following table details noninterest income for the periods indicated:

Noninterest Income

	Three Months Ended
	December 31,			September 30,			December 31,
(dollars in thousands; unaudited)		2022			2022			2021
Deposit service charges and fees	$	946		$	986		$	930
Mortgage broker fees		25			24			218
Unrealized (loss) gain on equity securities, net		(18	)		(133	)		(3	)
Gain on sales of loans, net		—			—			29
Other		273			236			397
Noninterest income, excluding BaaS program income and BaaS indemnification income		1,226			1,113			1,571
Servicing and other BaaS fees		1,001			1,079			1,421
Transaction fees		964			940			280
Interchange fees		785			738			368
Reimbursement of expenses		857			885			295
BaaS program income		3,607			3,642			2,364
BaaS credit enhancements		31,164			17,928			9,076
Baas fraud enhancements		6,818			11,708			1,209
BaaS indemnification income		37,982			29,636			10,285
Total noninterest income	$	42,815		$	34,391		$	14,220

Noninterest income was $42.8 million for the three months ended December 31, 2022, an increase of $8.4 million from $34.4 million for the three months ended September 30, 2022, and an increase of $28.6 million from $14.2 million for the three months ended December 31, 2021. The increase in noninterest income over the quarter ended September 30, 2022 was primarily due to an increase of $8.3 million in BaaS income. The $8.3 million increase in BaaS income included a $13.2 million increase in BaaS credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, a $4.9 million decrease in BaaS fraud enhancements, and a decrease of $35,000 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 $28.6 million increase in noninterest income over the quarter ended December 31, 2021 was primarily due to a $28.9 million increase in BaaS income. The $28.9 million increase in BaaS income included a $22.1 million increase in BaaS credit enhancements, a $5.6 million increase in BaaS fraud enhancements and a $1.2 million increase in other BaaS program income.

Our CCBX segment continues to evolve, and we now have 27 relationships, at varying stages, as of December 31, 2022. We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense for both parties and are focusing more on selecting larger and more established partners, with experienced management teams, existing customer bases and strong financial positions.

The following table illustrates the activity and evolution in CCBX relationships for the periods presented. During the quarter ended December 31, 2022, a couple partners wound down their CCBX programs; these programs were not material in terms of income and sources of funds or loans.

	As of
(unaudited)	December 31, 2022	September 30, 2022	December 31, 2021
Active	19	19	19
Friends and family / testing	1	2	1
Implementation / onboarding	0	0	5
Signed letters of intent	5	5	3
Wind down - preparing to exit relationship	2	3	0
Total CCBX relationships	27	29	28

Noninterest Expense

The following table details noninterest expense for the periods indicated:

	Three Months Ended
	December 31,		September 30,		December 31,
(dollars in thousands; unaudited)		2022		2022		2021
Salaries and employee benefits	$	14,399	$	14,506	$	10,541
Legal and professional fees		2,799		2,251		951
Data processing and software licenses		1,768		1,670		1,494
Occupancy		1,182		1,147		1,043
Point of sale expense		710		742		195
FDIC assessments		550		850		812
Director and staff expenses		515		475		393
Marketing		109		69		107
Excise taxes		702		588		435
Other		335		1,522		1,502
Noninterest expense, excluding BaaS loan and BaaS fraud expense		23,069		23,820		17,473
BaaS loan expense		17,215		15,560		2,368
BaaS fraud expense		6,819		11,707		1,209
BaaS loan and fraud expense		24,034		27,267		3,577
Total noninterest expense	$	47,103	$	51,087	$	21,050

Total noninterest expense decreased to $47.1 million for the three months ended December 31, 2022, compared to $51.1 million for the three months ended September 30, 2022 and increased from $21.1 million for the three months ended December 31, 2021. The decrease in noninterest expense for the quarter ended December 31, 2022, as compared to the quarter ended September 30, 2022, was primarily due to a $3.2 million decrease in BaaS expense (of which $4.9 million is related to a decrease in partner fraud expense partially offset by an increase of $1.7 million in partner loan expense). Partner loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, and servicing CCBX loans. Partner fraud expense represents non-credit fraud losses on partner's customer loan and deposit accounts, a portion of this expense is realized during the quarter, and a portion is estimated based on historical or other information from our partners. Also contributing to the decrease in noninterest expense compared to September 30, 2022 is a $1.2 million decrease in other expenses, which is related to reduction in the unfunded commitment reserve of $1.1 million.

The increase in noninterest expenses for the quarter ended December 31, 2022 compared to the quarter ended December 31, 2021 were largely due to an increase of $20.5 million in BaaS partner expense ($14.8 million of which is related to partner loan expense and $5.6 million of which is related to partner fraud expense), $3.9 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives and $1.8 million increase in legal and professional fees due to increased fees related to data and risk management, and increased consulting expenses for projects and enhanced monitoring. Additionally, there was a $515,000 increase in point of sale expenses which is attributed to increased CCBX activity. Partially offsetting the increase in noninterest expense compared to December 31, 2021 is a $1.2 million decrease in other expenses, which is related to reduction in the unfunded commitment reserve of $1.5 million.

The provision for income taxes was $2.4 million for the three months ended December 31, 2022, $3.0 million for the three months ended September 30, 2022 and $1.6 million for the fourth 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 effective tax rate was lower for the three months ended December 31, 2022 due to an update in the state apportionment of the revenues in the states in which we operate combined with tax benefits that resulted from the exercise of stock awards. The Company uses a federal statutory tax rate of 21.0% as a basis for calculating provision for federal income taxes and 2.62% for calculating the provision for state taxes.

Financial Condition Overview

Total assets increased $10.7 million, or 0.3%, to $3.14 billion at December 31, 2022 compared to $3.13 billion at September 30, 2022. The increase is primarily due to loans receivable increasing $119.4 million during the quarter ended December 31, 2022. Partially offsetting the increase in loans for the quarter ended December 31, 2022 was a $63.8 million decrease in interest earning deposits with other banks, resulting from increased loan demand and decreased customer deposits. Additionally, there were no loans held for sale at December 31, 2022, a decrease of $43.3 million, compared to the quarter ended September 30, 2022.

Total assets increased $509.0 million, or 19.3%, at December 31, 2022, compared to $2.64 billion at December 31, 2021. The increase is primarily due to loans receivable increasing $884.5 million, and an increase of $61.7 million in investment securities. Partially offsetting the increase is a $489.2 million decrease in interest earning deposits with other banks, resulting from increased loan demand and funds being shifted from interest earning deposits with other banks to loans, compared to December 31, 2021.

Loans Receivable

Total loans receivable increased $119.4 million to $2.63 billion at December 31, 2022, from $2.51 billion at September 30, 2022, and increased $884.5 million from $1.74 billion at December 31, 2021. The increase in loans receivable over the quarter ended September 30, 2022 was the result of $96.9 million in CCBX loan growth and $22.4 million in community bank loan growth. Community bank loan growth is net of $1.1 million in PPP loan forgiveness/repayments compared to the quarter ended September 30, 2022. The change in loans receivable over the quarter ended December 31, 2021 includes CCBX loan growth of $665.8 million and $218.7 million in community bank loan growth as of December 31, 2022. Community bank loan growth is net of $107.1 million in PPP loan forgiveness and paydowns since December 31, 2021.

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

	As of December 31, 2022					As of September 30, 2022					As of December 31, 2021
(dollars in thousands; unaudited)	Amount			Percent		Amount			Percent		Amount			Percent
Commercial and industrial loans:
PPP loans	$	4,699		0.2	%	$	5,794		0.2	%	$	111,813		6.4	%
Capital call lines		146,029		5.5			174,311		6.9			202,882		11.5
All other commercial & industrial loans		161,900		6.1			159,823		6.4			104,365		6.0
Total commercial and industrial loans:		312,628		11.8			339,928		13.5			419,060		23.9
Real estate loans:
Construction, land and land development		214,055		8.1			224,188		8.9			183,594		10.5
Residential real estate		449,157		17.1			402,781		16.0			204,389		11.7
Commercial real estate		1,048,752		39.8			1,024,067		40.7			835,587		47.7
Consumer and other loans		608,771		23.2			523,536		20.9			108,871		6.2
Gross loans receivable		2,633,363		100.0	%		2,514,500		100.0	%		1,751,501		100.0	%
Net deferred origination fees - PPP loans		(82	)				(111	)				(3,633	)
Net deferred origination fees - all other loans		(6,025	)				(6,500	)				(5,133	)
Loans receivable	$	2,627,256				$	2,507,889				$	1,742,735
Loan Yield ⁽¹⁾		9.33	%				8.46	%				5.92	%

⁽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
	December 31, 2022					September 30, 2022					December 31, 2021
(dollars in thousands; unaudited)	Balance			% to Total		Balance			% to Total		Balance			% to Total
Commercial and industrial loans:
PPP loans	$	4,699		0.3	%	$	5,794		0.4	%	$	111,813		8.0	%
All other commercial & industrial loans		146,982		9.1			143,808		9.0			104,365		7.4
Real estate loans:
Construction, land and land development loans		214,055		13.2			224,188		14.0			183,594		13.1
Residential real estate loans		204,581		12.6			198,871		12.5			167,502		11.9
Commercial real estate loans		1,048,752		64.7			1,024,067		64.0			835,587		59.5
Consumer and other loans:
Other consumer and other loans		1,725		0.1			2,220		0.1			2,034		0.1
Gross Community Bank loans receivable		1,620,794		100.0	%		1,598,948		100.0	%		1,404,895		100.0	%
Net deferred origination fees		(6,042	)				(6,628	)				(8,835	)
Loans receivable	$	1,614,752				$	1,592,320				$	1,396,060
Loan Yield⁽¹⁾		5.70	%				5.31	%				5.89	%

⁽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
	December 31, 2022					September 30, 2022					December 31, 2021
(dollars in thousands; unaudited)	Balance			% to Total		Balance			% to Total		Balance			% to Total
Commercial and industrial loans:
Capital call lines	$	146,029		14.4	%	$	174,311		19.0	%	$	202,882		58.6	%
All other commercial & industrial loans		14,918		1.5			16,015		1.8			—		0.0
Real estate loans:
Residential real estate loans		244,576		24.2			203,910		22.3			36,887		10.6
Consumer and other loans:
Credit cards		279,644		27.6			216,995		23.7			11,429		3.3
Other consumer and other loans		327,402		32.3			304,321		33.2			95,408		27.5
Gross CCBX loans receivable		1,012,569		100.0	%		915,552		100.0	%		346,606		100.0	%
Net deferred origination (fees) costs		(65	)				17					69
Loans receivable	$	1,012,504				$	915,569				$	346,675
Loan Yield - CCBX ⁽¹⁾⁽²⁾		15.20	%				13.96	%				6.13	%

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

Deposits

Total deposits decreased $19.5 million, or 0.7%, to $2.82 billion at December 31, 2022 from $2.84 billion at September 30, 2022. The decrease was due to a $41.3 million decrease in core deposits, combined with a $4.4 million decrease in time deposits, partially offset by a $26.2 million increase in BaaS-brokered deposits. We believe our decrease in deposits is primarily the result of significantly higher deposit rates being offered by competitors and depositors investing in the market. Deposits in our CCBX segment increased $77.0 million, from $1.20 billion at September 30, 2022, to $1.28 billion at December 31, 2022 and community bank deposits decreased $96.6 million to $1.54 billion at December 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 December 31, 2022, noninterest bearing deposits decreased $38.2 million, or 4.7%, to $775.0 million from $813.2 million at September 30, 2022. In the quarter ended December 31, 2022 compared to the quarter ended September 30, 2022, NOW and money market accounts decreased $2.7 million, savings deposits decreased $391,000, and time deposits decreased $4.4 million. Partially offsetting those decreases is an increase of $26.2 million in BaaS-brokered deposits.

Total deposits increased $453.7 million, or 19.2%, to $2.82 billion at December 31, 2022 compared to $2.36 billion at December 31, 2021. The increase is largely the result of growth in CCBX deposits. Noninterest bearing deposits decreased $580.9 million, or 42.8%, to $775.0 million at December 31, 2022 from $1.4 billion at December 31, 2021. NOW and money market accounts increased $1.01 billion, or 128.5%, to $1.80 billion at December 31, 2022, and savings accounts increased $3.2 million, or 3.0%, and BaaS-brokered deposits increased $30.8 million, or 43.5% while time deposits decreased $14.0 million, or 32.2%, in the fourth quarter of 2022 compared to the fourth quarter of 2021. Additionally, as of December 31, 2022 we have access to $225.0 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 December 31, 2022					As of September 30, 2022					As of December 31, 2021
(dollars in thousands; unaudited)	Amount			Percent of Total Deposits		Balance			Percent of Total Deposits		Balance			Percent of Total Deposits
Demand, noninterest bearing	$	775,012		27.5	%	$	813,217		28.7	%	$	1,355,908		57.4	%
NOW and money market		1,804,399		64.0			1,807,105		63.7			789,709		33.4
Savings		107,117		3.8			107,508		3.8			103,956		4.4
Total core deposits		2,686,528		95.3			2,727,830		96.2			2,249,573		95.2
BaaS-brokered deposits		101,546		3.6			75,363		2.6			70,757		3.0
Time deposits less than $100,000		12,596		0.5			13,296		0.5			14,961		0.6
Time deposits $100,000 and over		16,851		0.6			20,577		0.7			28,496		1.2
Total	$	2,817,521		100.0	%	$	2,837,066		100.0	%	$	2,363,787		100.0	%
Cost of Deposits ⁽¹⁾		1.56	%				0.82	%				0.09	%

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

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

Community Bank	As of
	December 31, 2022					September 30, 2022					December 31, 2021
(dollars in thousands; unaudited)	Balance			% to Total		Balance			% to Total		Balance			% to Total
Demand, noninterest bearing	$	694,179		45.2	%	$	746,516		45.7	%	$	719,233		43.7	%
NOW and money market		709,490		46.1			748,347		45.8			780,884		47.4
Savings		105,101		6.8			106,059		6.4			103,954		6.3
Total core deposits		1,508,770		98.1			1,600,922		97.9			1,604,071		97.4
Brokered deposits		1		0.0			1		0.0			1		0.0
Time deposits less than $100,000		12,596		0.8			13,296		0.8			14,961		0.9
Time deposits $100,000 and over		16,851		1.1			20,577		1.3			28,496		1.7
Total Community Bank deposits	$	1,538,218		100.0	%	$	1,634,796		100.0	%	$	1,647,529		100.0	%
Cost of deposits⁽¹⁾		0.37	%				0.16	%				0.12	%

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

CCBX	As of
	December 31, 2022					September 30, 2022					December 31, 2021
(dollars in thousands; unaudited)	Balance			% to Total		Balance			% to Total		Balance			% to Total
Demand, noninterest bearing	$	80,833		6.3	%	$	66,701		5.5	%	$	636,675		88.9	%
NOW and money market		1,094,909		85.6			1,058,758		88.1			8,825		1.2
Savings		2,016		0.2			1,449		0.1			2		—
Total core deposits		1,177,758		92.1			1,126,908		93.7			645,502		90.1
BaaS-brokered deposits		101,545		7.9			75,362		6.3			70,756		9.9
Total CCBX deposits	$	1,279,303		100.0	%	$	1,202,270		100.0	%	$	716,258		100.0	%
Cost of deposits ⁽¹⁾		3.13	%				1.79	%				0.02	%

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

Borrowings

On November 1, 2022, the Company completed its private placement of $20.0 million in fixed-to-floating rate subordinated notes due November 1, 2032 (the "Notes"). The Notes bear interest at a fixed annual rate of 7.00% for the first five years and will reset quarterly thereafter to the then-current three-month Secured Overnight Financing Rate ("SOFR") plus 290 basis points. The Company may redeem the Notes, in whole or in part, on any interest payment date on or after November 1, 2027, or at any time, in whole but not in part, upon certain other specified events prior to the Notes' maturity on November 1, 2032.

Shareholders' Equity

During the twelve months ended December 31, 2022, the Company contributed $21.0 million in capital to the Bank. The Company has a cash balance of $22.9 million as of December 31, 2022, which is retained for general operating purposes, including debt repayment, and for funding $988,000 in commitments to bank technology funds.

Total shareholders' equity increased $14.8 million since September 30, 2022. The increase in shareholders' equity was primarily due to $13.1 million in net earnings and $1.2 million increase from stock options being exercised for the three months ended December 31, 2022.

Capital Ratios

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

(unaudited)	Coastal Community Bank		Coastal Financial Corporation		Financial Institution Basel III Regulatory Guidelines
Tier 1 leverage capital	8.56	%	7.97	%	5.00	%
Common Equity Tier 1 risk-based capital	9.77	%	8.95	%	6.50	%
Tier 1 risk-based capital	9.77	%	9.08	%	8.00	%
Total risk-based capital	11.04	%	11.99	%	10.00	%

Asset Quality

The total allowance for loan losses was $74.0 million and 2.82% of loans receivable at December 31, 2022 compared to $59.3 million and 2.36% at September 30, 2022 and $28.6 million and 1.64% at December 31, 2021. The allowance for loan loss allocated to the CCBX portfolio was $53.4 million and 5.27% of CCBX loans receivable at December 31, 2022, with $20.6 million of allowance for loan loss allocated to the community bank or 1.28% of total community bank loans receivable.

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

	As of December 31, 2022									As of September 30, 2022									As of December 31, 2021
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total			Community Bank			CCBX			Total
Loans receivable	$	1,614,751		$	1,012,505		$	2,627,256		$	1,592,320		$	915,569		$	2,507,889		$	1,396,060		$	346,675		$	1,742,735
Allowance for loan losses		(20,636	)		(53,393	)		(74,029	)		(20,139	)		(39,143	)		(59,282	)		(20,299	)		(8,333	)		(28,632	)
Allowance for loan losses to total loans receivable		1.28	%		5.27	%		2.82	%		1.26	%		4.28	%		2.36	%		1.45	%		2.40	%		1.64	%

Provision for loan losses totaled $33.6 million for the three months ended December 31, 2022, $18.4 million for the three months ended September 30, 2022, and $8.9 million for the three months ended December 31, 2021. Net charge-offs totaled $18.9 million for the quarter ended December 31, 2022, compared to $8.5 million for the quarter ended September 30, 2022 and $532,000 for the quarter ended December 31, 2021. Net charge-offs increased due to CCBX partner loans and the reclassification and charge-off of negative deposit accounts. CCBX partner agreements provide for a credit enhancement that covers the net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company is responsible for credit losses on approximately 10% of a $114.5 million loan portfolio. At December 31, 2022, 10% of this portfolio represented $11.5 million in loans.

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

	Three Months Ended
	December 31, 2022									September 30, 2022									December 31, 2021
(dollars in thousands; unaudited)	Community Bank			CCBX			Total			Community Bank			CCBX			Total			Community Bank			CCBX			Total
Gross charge-offs	$	10		$	18,876		$	18,886		$	411		$	8,102		$	8,513		$	215		$	364		$	579
Gross recoveries		(3	)		(30	)		(33	)		(3	)		(6	)		(9	)		(47	)		—			(47	)
Net charge-offs	$	7		$	18,846		$	18,853		$	408		$	8,096		$	8,504		$	168		$	364		$	532
Net charge-offs to average loans ⁽¹⁾		—	%		7.52	%		2.87	%		0.10	%		3.59	%		1.38	%		0.05	%		0.59	%		0.13	%

The increase in the Company's provision for loan losses during the quarter ended December 31, 2022, is largely related to the provision for loan growth in CCBX partner loans. During the quarter ended December 31, 2022, a $33.1 million provision for loan losses was recorded for CCBX partner loans based on management's analysis, compared to the $18.7 million provision for loan losses that was recorded for CCBX for the quarter ended September 30, 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 reclassified negative deposit accounts. When the provision for CCBX 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. The receivable is relieved when credit enhancement recoveries are received from the CCBX partner. 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 of $504,000 and recapture/adjustment for loan losses of $238,000 was needed for the quarters ended December 31, 2022 and September 30, 2022, respectively. In accordance with the program agreement and for this CCBX partner only, the Company is responsible for credit losses on approximately 10% of a $114.5 million loan portfolio. At December 31, 2022, 10% of this portfolio represented $11.5 million in loans. The partner is responsible for credit losses on approximately 90% of this portfolio and for fraud losses on 100% of this portfolio. The Company earns 100% of the revenue on the aforementioned $11.5 million of loans. The economic environment is continuously changing, due to increased inflation, global unrest, the war in Ukraine, political environment, trade issues that may impact the provision and therefore the allowance. The Company is not required to implement the provisions of the Current Expected Credit Loss ("CECL") accounting standard until January 1, 2023 and continues to account for the allowance for credit losses under the incurred loss model. The Company is on track with its migration and adoption plan for CECL.

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

	Three Months Ended							Twelve Months Ended
(dollars in thousands; unaudited)	December 31, 2022		September 30, 2022			December 31, 2021		December 31, 2022		December 31, 2021
Community bank	$	504	$	(238	)	$	243	$	719	$	1,275
CCBX		33,096		18,666			8,699		78,345		8,640
Total provision expense	$	33,600	$	18,428		$	8,942	$	79,064	$	9,915

At December 31, 2022, our nonperforming assets were $33.2 million, or 1.06% of total assets, compared to $22.9 million, or 0.73%, of total assets, at September 30, 2022, and $1.7 million, or 0.07% of total assets, at December 31, 2021. These ratios are impacted by the increase in CCBX loans over 90 days delinquent that are covered by CCBX partner credit enhancements. Agreements with our CCBX partners provide for a credit enhancement which protects the Bank by absorbing incurred losses. Under the agreement, the CCBX partner will reimburse the Bank for its loss/charge-off on these loans. Nonperforming assets increased $10.3 million during the quarter ended December 31, 2022, compared to the quarter ended September 30, 2022, due to the addition of $10.3 million in CCBX loans that are past due 90 days or more and still accruing combined with $19,000 more in community bank nonaccrual loans. As a result of the type of loans (primarily consumer loans) originated through our CCBX partners we anticipate that balances 90 days past due or more and still accruing will increase as those loans grow. Installment/closed-end and revolving/open-end consumer loans originated through CCBX lending partners will continue to accrue interest until 120 and 180 days past due, respectively and are reported as substandard, 90 days or more days past due and still accruing. Community bank nonaccrual loans increased with the addition of one new nonaccrual loan partially offset by other nonaccrual principal reductions/charge-offs. There were no repossessed assets or other real estate owned at December 31, 2022. Our nonperforming loans to loans receivable ratio was 1.26% at December 31, 2022, compared to 0.91% at September 30, 2022, and 0.10% at December 31, 2021.

For the quarter ended December 31, 2022, there were $7,000 of community bank net charge-offs and $7.1 million of nonperforming community bank loans. The $6.9 million nonaccrual balance in commercial real estate loans shown below consists of one loan, is well secured with an original loan to value of 62%, and an updated loan to value of 75% as of January 2023. Management anticipates this loan being resolved in the first half of 2023. For the quarter ended December 31, 2022, $18.8 million in net charge-offs were recorded on CCBX loans. These loans have a higher level of expected losses than our community bank loans, which is reflected in the factors for the allowance for loan losses. In accordance with the program agreement and for this CCBX partner only, the Company is responsible for credit losses on approximately 10% of a $114.5 million loan portfolio. At December 31, 2022, 10% of this portfolio represented $11.5 million in loans. The partner is responsible for credit losses on approximately 90% of this portfolio and for fraud losses on 100% of this portfolio.

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

(dollars in thousands; unaudited)	As of December 31, 2022			As of September 30, 2022			As of December 31, 2021
Nonaccrual loans:
Commercial and industrial loans	$	113		$	94		$	166
Real estate loans:
Construction, land and land development		66			66			—
Residential real estate		—			—			55
Commercial real estate		6,901			6,901			—
Total nonaccrual loans		7,080			7,061			221
Accruing loans past due 90 days or more:
Commercial & industrial loans		404			138			—
Real estate loans:
Residential real estate loans		876			638			39
Consumer and other loans:
Credit cards		10,570			4,777			155
Other consumer and other loans		14,245			10,268			1,312
Total accruing loans past due 90 days or more		26,095			15,821			1,506
Total nonperforming loans		33,175			22,882			1,727
Real estate owned		—			—			—
Repossessed assets		—			—			—
Troubled debt restructurings, accruing		—			—			—
Total nonperforming assets	$	33,175		$	22,882		$	1,727
Total nonaccrual loans to loans receivable		0.27	%		0.28	%		0.01	%
Total nonperforming loans to loans receivable		1.26

Coastal Financial Corporation Announces Fourth Quarter 2022 Results