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Coastal Financial Corporation Announces Third Quarter 2022 Results

Coastal Financial Corporation
Coastal Financial Corporation

Third Quarter 2022 Highlights:

  • Second consecutive quarter of record net income. Quarterly net income of $11.1 million, or $0.82 per diluted common share, for the three months ended September 30, 2022, compared to $10.2 million, or $0.76 per diluted common share for the three months ended June 30, 2022.

  • Total assets increased $164.0 million, or 5.5%, to $3.13 billion for the quarter ended September 30, 2022, compared to $2.97 billion at June 30, 2022.

  • Loan growth of $173.5 million, or 7.4%, to $2.51 billion for the three months ended September 30, 2022.

    • CCBX loans increased $111.6 million, or 13.9%, to $915.6 million.

    • Community bank loans increased $61.9 million, or 4.0%, to $1.59 billion.

      • PPP loans decreased $10.6 million, or 64.7%, to $5.8 million.

  • CCBX loans held for sale decreased $16.7 million as of September 30, 2022, to $43.3 million

  • Deposit growth of $139.8 million, or 5.2%, to $2.84 billion for the three months ended September 30, 2022.

    • CCBX deposit growth of $136.2 million, or 12.8%, to $1.20 billion.

      • Additional $266.7 million in CCBX deposits transferred off balance sheet

    • Community bank deposits increased $3.6 million, or 0.2%, to $1.63 billion and community bank cost of deposits was 0.16%.

  • Total revenue increased $18.2 million, or 27.8% for the three months ended September 30, 2022, compared to June 30, 2022.

  • Total revenue excluding BaaS credit enhancements and BaaS fraud enhancements(1) increased $9.2 million, or 20.7%, to $53.9 million for the three months ended September 30, 2022.

EVERETT, Wash., Oct. 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 September 30, 2022.  Record quarterly net income for the third quarter of 2022 was $11.1 million, or $0.82 per diluted common share, compared with net income of $10.2 million, or $0.76 per diluted common share, for the second quarter of 2022, and $6.7 million, or $0.54 per diluted common share, for the quarter ended September 30, 2021.

Total assets increased $164.0 million, or 5.5%, during the third quarter of 2022 to $3.13 billion, from $2.97 billion at June 30, 2022. Loan growth of $173.5 million, or 7.4%, for the three months ended September 30, 2022 to $2.51 billion. Loan growth included CCBX loan growth of $111.6 million, or 13.9%, and an increase of $61.9 million, or 4.0% in community bank loans, which is net of $10.6 million in PPP loan forgiveness/repayments. Deposits grew $139.8 million, or 5.2%, during the three months ended September 30, 2022 and included CCBX deposit growth of $136.2 million, or 12.8%, and an increase of $3.6 million, or 0.2%, in community bank deposits.

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

“Loans increased $173.5 million, or 7.4%, in the three months ended September 30, 2022, with $111.6 million of that growth in our CCBX segment, which provides Banking as a Service (“BaaS”). Our CCBX segment has grown to $915.6 million in loans, or 36.5% of total loans receivable, excluding $43.3 million in loans held for sale and our community bank loans have grown to $1.6 billion in loans receivable, as of September 30, 2022.  Additionally, deposits grew $139.8 million, or 5.2%, during the three months ended September 30, 2022.

“We achieved record net income for the second consecutive quarter. For the quarter ended September 30, 2022 we had net income of $11.1 million, an increase of $925,000, or 9.1%, over the quarter ended June 30, 2022.  Additionally, the Bank was recently named to the Piper Sandler Bank & Thrift Sm-All Stars Class of 2022 and was one of just two banks to receive the award for the fourth consecutive year. The recognition as a top performing bank is a huge honor and accomplishment and is reflective of the strong commitment our team has to our customers, communities and shareholders”, 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 $49.2 million for the quarter ended September 30, 2022, an increase of $9.3 million, or 23.3%, from $39.9 million for the quarter ended June 30, 2022, and an increase of $30.4 million, or 161.5%, from $18.8 million for the quarter ended September 30, 2021.  Yield on loans receivable was 8.46% for the three months ended September 30, 2022, compared to 7.34% for the three months ended June 30, 2022 and 4.57% for the three months ended September 30, 2021.  The increase in net interest income compared to June 30, 2022 and September 30, 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 September 30, 2022 was $2.45 billion, compared to $2.19 billion for the three months ended June 30, 2022, and $1.68 billion for the three months ended September 30, 2021.

Interest and fees on loans totaled $52.3 million for the three months ended September 30, 2022 compared to $40.2 million and $19.4 million for the three months ended June 30, 2022 and September 30, 2021, respectively.  Loan growth of $173.5 million, or 7.4%, during the quarter ended September 30, 2022 included $111.6 million increase in CCBX loans; this includes capital call lines, which decreased $50.6 million, or 22.5%, during 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 September 30, 2022, compared to June 30, 2022 and September 30, 2021, was largely due to growth in higher yielding loans.  As a result of the Federal Open Market Committee (“FOMC”) raising rates 3.0% 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 rates 0.75% on September 21, 2022.

Interest income from interest earning deposits with other banks was $2.3 million at September 30, 2022, an increase of $1.3 million compared to June 30, 2022, and an increase of $2.1 million compared to September 30, 2021 due to an increase in interest rates.  The average balance of interest earning deposits with other banks for the three months ended September 30, 2022 was $397.6 million, compared to $499.9 million and $419.7 million for the three months ended June 30, 2022 and September 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 average yield on these interest earning deposits with other banks increased to 2.27% for the quarter ended September 30, 2022, compared to 0.77% and 0.16% for the quarters ended June 30, 2022 and September 30, 2021, respectively.

Interest expense was $6.0 million for the quarter ended September 30, 2022, a $4.0 million increase from the quarter ended June 30, 2022 and a $5.2 million increase from the quarter ended September 30, 2021. Interest expense on borrowed funds was $273,000 for the quarter ended September 30, 2022, compared to $260,000 and $278,000 for the quarters ended June 30, 2022 and September 30, 2021, respectively. Interest expense on borrowed funds increased $13,000 compared to the three months ended June 30, 2022, as a result of the increase in interest rates. The $5,000 decrease in interest expense on borrowed funds from the quarter ended September 30, 2021 is the result of 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 $4.0 million for the quarter ended September 30, 2022, compared to the quarter ended June 30, 2022, and $5.2 million compared to the quarter ended September 30, 2021 as a result an increase in CCBX deposits that are tied to and reprice when the FOMC raises 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 September 30, 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 0.82% for the three months ended September 30, 2022, 0.25% for the three months ended June 30, 2022, and 0.10%, for the three months ended September 30, 2021. Community bank and CCBX cost of deposits were 0.16% and 1.79% respectively, for the three months ended September 30, 2022, compared to 0.08% and 0.56%, for the three months ended June 30, 2022, and 0.13% and 0.02% for the three months ended September 30, 2021. The increase in cost of deposits for the three months ended September 30, 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 6.58% for the three months ended September 30, 2022, compared to 5.66% and 3.48% for the three months ended June 30, 2022 and September 30, 2021, respectively.  The increase in net interest margin compared to the three months ended June 30, 2022 and September 30, 2021, was largely a result of an increase in higher rate loans.  Loans receivable increased $173.5 million and $802.2 million, compared to June 30, 2022 and September 30, 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 $12.2 million, or 30.3%, to $52.3 million for the three months ended September 30, 2022, compared to $40.2 million for the three months ended June 30, 2022, and $19.4 million for the three months ended September 30, 2021.  Also contributing to the increase in net interest margin compared to the three months ended June 30, 2022 and September 30, 2021, was $1.3 million and $2.1 million increase in interest on interest earning deposits, respectively.  These interest earning deposits earned an average rate of 2.27% for the quarter ended September 30, 2022, compared to 0.77% and 0.16% for the quarters ended June 30, 2022 and September 30, 2021, respectively.  Average investment securities decreased $17.6 million to $103.7 million for the three months ended September 30, 2022 compared to the three months ended June 30, 2022, and increased $69.9 million compared to the three months ended September 30, 2021. Interest on investment securities decreased $9,000 for the three months ended September 30, 2022 compared to the three months ended June 30, 2022 due to lower average outstanding balance on investments and increased $530,000 compared to September 30, 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 0.85% for the quarter ended September 30, 2022, an increase of 56 basis points from the quarter ended June 30, 2022 and an increase of 69 basis points from the quarter ended September 30, 2021. Cost of deposits for the quarter ended September 30, 2022 was 0.82%, compared to 0.25% for the quarter ended June 30, 2022, and 0.10% for the quarter ended September 30, 2021. The increased cost of funds and deposits compared to June 30, 2022 and September 30, 2021 was largely due to the increase in interest rates compared to the previous periods. Noninterest bearing deposits of $813.2 million for the quarter ended September 30, 2022 decreased $4.8 million, or 0.59%, compared to the quarter ended June 30, 2022, and decreased $483.2 million, or 37.3%, compared to the quarter ended September 30, 2021 due to the aforementioned reclassification of CCBX noninterest bearing deposits to interest bearing deposits.

During the quarter ended September 30, 2022, total loans receivable increased by $173.5 million, or 7.4%, to $2.51 billion, compared to $2.33 billion for the quarter ended June 30, 2022.  The increase consists of $111.6 million in CCBX loan growth and $61.9 million in community bank loan growth. Community bank loan growth includes a decrease of $10.6 million in PPP loans from forgiveness and repayments.  Total loans receivable grew $802.2 million as of September 30, 2022, compared to the quarter ended September 30, 2021.  This increase includes CCBX loan growth of $725.4 million and community bank loan growth of $76.9 million. Community bank loan growth is net of $261.5 million in PPP loan forgiveness/repayments, as of September 30, 2022, compared September 30, 2021.  During the quarter ended September 30, 2022, $48.1 million in CCBX loans were transferred into loans held for sale, with $64.8 million in loans sold during the quarter and $43.3 million remaining in loans held for sale as of September 30, 2022; compared to $60.0 million held for sale as of June 30, 2022.

Total yield on loans receivable for the quarter ended September 30, 2022 was 8.46%, compared 7.34% for the quarter ended June 30, 2022, and 4.57% for the quarter ended September 30, 2021. This increase in yield on loans receivable is a combination of an overall increase in interest rates as well as additional volume in higher rate consumer loans from CCBX partners.  During the quarter ended September 30, 2022, CCBX loans outstanding increased 13.9%, or $111.6 million, with an average CCBX yield of 13.96% and community bank loans increased 4.0%, or $61.9 million, with an average yield of 5.31%.   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 7.05% for the quarter ended September 30, 2022 and was impacted by the $50.6 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 Nine Months Ended

 

September 30, 2022

 

June 30, 2022

 

September 30, 2021

 

September 30, 2022

 

September 30, 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

5.31

%

 

0.16

%

 

5.04

%

 

0.08

%

 

4.67

%

 

0.13

%

 

5.17

%

 

0.11

%

 

4.60

%

 

0.15

%

CCBX (1)

13.96

%

 

1.79

%

 

12.35

%

 

0.56

%

 

3.65

%

 

0.02

%

 

13.16

%

 

0.91

%

 

3.26

%

 

0.04

%

Consolidated

8.46

%

 

0.82

%

 

7.34

%

 

0.25

%

 

4.57

%

 

0.10

%

 

7.63

%

 

0.41

%

 

4.51

%

 

0.14

%

(1)  CCBX yield on loans does not include the impact of BaaS loan expense.  BaaS loan expense represents the amount paid or payable to partners for credit and fraud enhancements and 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

 

 

September 30, 2022

 

June 30, 2022

 

September 30, 2021

(dollars in thousands, unaudited)

 

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

 

$

31,449

 

13.96

%

 

$

21,281

 

12.35

%

 

$

1,471

 

3.65

%

Less: BaaS loan expense

 

 

15,560

 

6.91

%

 

 

12,229

 

7.10

%

 

 

419

 

1.04

%

Net BaaS loan income (1)

 

$

15,889

 

7.05

%

 

$

9,052

 

5.25

%

 

$

1,052

 

2.61

%

Average BaaS Loans

 

$

893,655

 

 

 

$

691,294

 

 

 

$

160,022

 

 


 

 

For the Nine Months Ended

 

 

September 30, 2022

 

September 30, 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

 

$

64,721

 

13.16

%

 

$

2,761

 

3.26

%

Less: BaaS loan expense

 

 

36,079

 

7.34

%

 

 

609

 

0.72

%

Net BaaS loan income (1)

 

$

28,642

 

5.82

%

 

$

2,152

 

2.54

%

Average BaaS Loans

 

$

657,574

 

 

 

$

113,369

 

 

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

Key Performance Ratios

Return on average assets (“ROA”) was 1.45% for the quarter ended September 30, 2022 compared to 1.41% and 1.21% for the quarters ended June 30, 2022 and September 30, 2021, respectively.  ROA for the quarter ended September 30, 2022, was impacted by an increase in loan volume and overall higher interest rates on interest earning assets, compared to the quarters ended June 30, 2022 and September 30, 2021.

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

 

 

Three Months Ended

 

Nine Months Ended

(unaudited)

 

September 30,
2022

 

June 30,
2022

 

March 31,
2022

 

December 31,
2021

 

September 30,
2021

 

September 30,
2022

 

September 30,
2021

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Return on average assets (1)

 

1.45

%

 

1.41

%

 

0.93

%

 

1.14

%

 

1.21

%

 

1.18

%

 

1.28

%

Return on average equity (1)

 

19.36

%

 

18.86

%

 

12.12

%

 

16.80

%

 

16.77

%

 

16.90

%

 

17.40

%

Yield on earnings assets (1)

 

7.38

%

 

5.94

%

 

4.58

%

 

4.09

%

 

3.63

%

 

6.03

%

 

3.83

%

Yield on loans receivable (1)

 

8.46

%

 

7.34

%

 

6.80

%

 

5.92

%

 

4.57

%

 

7.63

%

 

4.51

%

Cost of funds (1)

 

0.85

%

 

0.29

%

 

0.14

%

 

0.14

%

 

0.16

%

 

0.44

%

 

0.20

%

Cost of deposits (1)

 

0.82

%

 

0.25

%

 

0.09

%

 

0.09

%

 

0.10

%

 

0.41

%

 

0.14

%

Net interest margin (1)

 

6.58

%

 

5.66

%

 

4.45

%

 

3.95

%

 

3.48

%

 

5.61

%

 

3.64

%

Noninterest expense to average assets (1)

 

6.66

%

 

5.29

%

 

4.52

%

 

3.29

%

 

2.91

%

 

5.54

%

 

2.74

%

Noninterest income to average assets (1)

 

4.48

%

 

3.53

%

 

3.27

%

 

2.22

%

 

1.11

%

 

3.79

%

 

0.90

%

Efficiency ratio

 

61.12

%

 

58.38

%

 

59.34

%

 

54.08

%

 

64.68

%

 

59.77

%

 

61.51

%

Loans receivable to deposits (2)

 

89.92

%

 

86.54

%

 

76.24

%

 

73.73

%

 

76.71

%

 

89.92

%

 

76.71

%

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

Noninterest Income

The following table details noninterest income for the periods indicated:

 

Three Months Ended

 

September 30,

 

June 30,

 

September 30,

(dollars in thousands; unaudited)

2022

 

2022

 

2021

Deposit service charges and fees

$

986

 

 

$

988

 

 

$

956

 

Mortgage broker fees

 

24

 

 

 

85

 

 

 

187

 

Loan referral fees

 

 

 

 

208

 

 

 

723

 

Unrealized (loss) gain on equity securities, net

 

(133

)

 

 

(2

)

 

 

1,472

 

Gain on sales of loans, net

 

 

 

 

 

 

 

206

 

Other

 

236

 

 

 

313

 

 

 

302

 

Noninterest income, excluding BaaS program income and BaaS indemnification income

 

1,113

 

 

 

1,592

 

 

 

3,846

 

Servicing and other BaaS fees

 

1,079

 

 

 

1,159

 

 

 

1,313

 

Transaction fees

 

940

 

 

 

814

 

 

 

146

 

Interchange fees

 

738

 

 

 

628

 

 

 

188

 

Reimbursement of expenses

 

885

 

 

 

618

 

 

 

333

 

BaaS program income

 

3,642

 

 

 

3,219

 

 

 

1,980

 

BaaS credit enhancements

 

17,928

 

 

 

14,207

 

 

 

10

 

Baas fraud enhancements

 

11,708

 

 

 

6,474

 

 

 

296

 

BaaS indemnification income

 

29,636

 

 

 

20,681

 

 

 

306

 

Total noninterest income

$

34,391

 

 

$

25,492

 

 

$

6,132

 

Noninterest income was $34.4 million for the three months ended September 30, 2022, an increase of $8.9 million from $25.5 million for the three months ended June 30, 2022, and an increase of $28.3 million from $6.1 million for the three months ended September 30, 2021.  The increase in noninterest income over the quarter ended June 30, 2022 was primarily due to an increase of $9.4 million in BaaS income partially offset by a $208,000 decrease in loan referral fees.  The $9.4 million increase in BaaS income included a $3.7 million increase in BaaS credit enhancements related to the allowance for loan losses and reserve for unfunded commitments, $5.2 million increase in BaaS fraud enhancements, and an increase of $423,000 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 $28.3 million increase in noninterest income over the quarter ended September 30, 2021 was primarily due to a $31.0 million increase in BaaS income partially offset by a decrease of $1.6 million in unrealized gain on equity securities and a decrease of $723,000 in loan referral fees. The $31.0 million increase in BaaS income included a $17.9 million increase in BaaS credit enhancements, $11.4 million increase in BaaS fraud enhancements and $1.7 million increase in other BaaS program income. BaaS program income is steadily growing, with an increase of 13.1% compared to the quarter ended June 30, 2022, and an increase of 83.9% compared to the quarter ended September 30, 2021.

Our CCBX segment continues to evolve, and we now have 29 relationships, at varying stages, as of September 30, 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.

The following table illustrates the activity and evolution in CCBX relationships for the periods presented. During the quarter ended September 30, 2022 a few partners wound down their CCBX programs; these programs were not material in terms of income and sources of funds.

 

As of

(unaudited)

September 30, 2022

June 30, 2022

September 30, 2021

Active

19

23

16

Friends and family / testing

2

2

0

Implementation / onboarding

0

0

7

Signed letters of intent

5

4

3

Wind down - preparing to exit relationship

3

0

0

Total CCBX relationships

29

29

26

Noninterest Expense

The following table details noninterest expense for the periods indicated:

 

 

Three Months Ended

 

 

September 30,

 

June 30,

 

September 30,

(dollars in thousands; unaudited)

 

2022

 

2022

 

2021

Salaries and employee benefits

 

$

14,506

 

$

12,238

 

$

9,961

Legal and professional fees

 

 

2,251

 

 

1,002

 

 

796

Data processing and software licenses

 

 

1,670

 

 

1,546

 

 

1,333

Occupancy

 

 

1,147

 

 

1,083

 

 

1,037

FDIC assessments

 

 

850

 

 

855

 

 

400

Point of sale expense

 

 

742

 

 

409

 

 

212

Excise taxes

 

 

588

 

 

564

 

 

407

Director and staff expenses

 

 

475

 

 

377

 

 

274

Marketing

 

 

69

 

 

74

 

 

130

Other

 

 

1,522

 

 

1,318

 

 

865

Noninterest expense, excluding BaaS loan and BaaS fraud expense

 

 

23,820

 

 

19,466

 

 

15,415

BaaS loan expense

 

 

15,560

 

 

12,229

 

 

419

BaaS fraud expense

 

 

11,707

 

 

6,474

 

 

296

BaaS loan and fraud expense

 

 

27,267

 

 

18,703

 

 

715

Total noninterest expense

 

$

51,087

 

$

38,169

 

$

16,130

Total noninterest expense increased to $51.1 million for the three months ended September 30, 2022, compared to $38.2 million for the three months ended June 30, 2022 and $16.1 million for the three months ended September 30, 2021. The increase in noninterest expense for the quarter ended September 30, 2022, as compared to the quarter ended June 30, 2022, was primarily due to a $8.6 million increase in BaaS expense ($3.3 million of which is related to partner loan expense and $5.2 million of which is related to partner fraud 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 partner.  Also contributing to the increase in noninterest expense compared to June 30, 2022 is a $2.3 million increase in salaries and employee benefits which is related to hiring in CCBX and additional staff for our ongoing growth initiatives.  In the quarter ended September 30, 2022 compared to the quarter ended June 30, 2022, legal and professional fees increased $1.2 million, point of sale expenses increased   $333,000 and data processing and software license expense increased $124,000  The increase in legal and professional expenses is due to increased fees related to building our regulatory compliance infrastructure, our data management capabilities, and risk management, and increased consulting expenses. The increase in point of sale expenses is primarily a result of increased activity in CCBX; CCBX BaaS program income in noninterest income also increased as a result of this activity. Data processing and software license fees are expected to increase as we invest in software related to CCBX, information technology and risk management.

The increased noninterest expenses for the quarter ended September 30, 2022 compared to the quarter ended September 30, 2021 were largely due to an increase of $26.6 million in BaaS partner expense ($15.1 million of which is related to partner loan expense and $11.4 million of which is related to partner fraud expense), $4.5 million increase in salary and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives and $1.5 million increase in legal and professional fees due to increased fees related to data and risk management, and increased regulatory consulting expenses. Additionally, there was a $530,000 increase in point of sale expenses, $450,000 increase in FDIC assessments and $337,000 increase in data processing and software licenses.  The increase in point of sale expenses is attributed to increased CCBX activity; CCBX BaaS program income in noninterest income also increased as a result of this activity. 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 September 30, 2021.  The increase in data processing and software licenses expenses was a result of implementing software to monitor and assist in the reporting of CCBX activities and monitoring of transactions to automate and improve efficiency.

The provision for income taxes was $3.0 million for the three months ended September 30, 2022, $2.9 million for the three months ended June 30, 2022 and $1.9 million for the third 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 $164.0 million, or 5.5%, to $3.13 billion at September 30, 2022 compared to $2.97 billion at June 30, 2022.  The increase is primarily due to loans receivable increasing $173.5 million during the quarter ended September 30, 2022.  Loans held for sale decreased $16.7 million, to $43.3 million during the quarter ended September 30, 2022.  Also contributing to the increase in assets for the quarter ended September 30, 2022 was a $8.3 million increase in interest earning deposits with other banks, as a result of higher deposit totals.  Total assets increased $682.2 million, or 27.8%, at September 30, 2022, compared to $2.45 billion at September 30, 2021.  The increase is primarily due to loans receivable increasing $802.2 million, and an increase of $64.8 million in investment securities.  Partially offsetting the increase is a $264.8 million decrease in interest earning deposits with other banks, resulting from increased loan demand, compared to September 30, 2021.

Loans Receivable

Total loans receivable increased $173.5 million to $2.51 billion at September 30, 2022, from $2.33 billion at June 30, 2022, and increased $802.2 million from $1.71 billion at September 30, 2021.  The increase in loans receivable over the quarter ended June 30, 2022 was the result of $111.6 million in CCBX loan growth and $61.9 million in community bank loan growth. Community bank loan growth includes $10.6 million in PPP loan forgiveness and paydowns for the quarter ended September 30, 2022.  The change in loans receivable over the quarter ended September 30, 2021 includes CCBX loan growth of $725.4 million and $76.9 million in community bank loan growth as of September 30, 2022.  Community bank loan growth is net of $261.5 million in PPP loan forgiveness and paydowns since September 30, 2021.

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

 

As of September 30, 2022

 

As of June 30, 2022

 

As of September 30, 2021

(dollars in thousands; unaudited)

Amount

 

Percent

 

Amount

 

Percent

 

Amount

 

Percent

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

PPP loans

$

5,794

 

 

0.2

%

 

$

16,398

 

 

0.7

%

 

$

267,278

 

 

15.5

%

Capital call lines

 

174,311

 

 

6.9

 

 

 

224,930

 

 

9.6

 

 

 

161,457

 

 

9.4

 

All other commercial & industrial loans

 

159,823

 

 

6.4

 

 

 

160,636

 

 

6.9

 

 

 

108,120

 

 

6.3

 

Total commercial and industrial loans:

 

339,928

 

 

13.5

 

 

 

401,964

 

 

17.2

 

 

 

536,855

 

 

31.2

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development

 

224,188

 

 

8.9

 

 

 

225,512

 

 

9.6

 

 

 

158,710

 

 

9.2

 

Residential real estate

 

402,781

 

 

16.0

 

 

 

326,661

 

 

14.0

 

 

 

170,167

 

 

9.9

 

Commercial real estate

 

1,024,067

 

 

40.7

 

 

 

956,320

 

 

40.8

 

 

 

837,342

 

 

48.7

 

Consumer and other loans

 

523,536

 

 

20.9

 

 

 

430,083

 

 

18.4

 

 

 

17,140

 

 

1.0

 

Gross loans receivable

 

2,514,500

 

 

100.0

%

 

 

2,340,540

 

 

100.0

%

 

 

1,720,214

 

 

100.0

%

Net deferred origination fees - PPP loans

 

(111

)

 

 

 

 

(396

)

 

 

 

 

(9,417

)

 

 

Net deferred origination fees - all other loans

 

(6,500

)

 

 

 

 

(5,790

)

 

 

 

 

(5,115

)

 

 

Loans receivable

$

2,507,889

 

 

 

 

$

2,334,354

 

 

 

 

$

1,705,682

 

 

 

Loan Yield (1)

 

8.46

%

 

 

 

 

7.34

%

 

 

 

 

4.57

%

 

 

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

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

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

Community Bank

 

As of

 

 

September 30, 2022

 

June 30, 2022

 

September 30, 2021

(dollars in thousands; unaudited)

 

Balance

 

% to Total

 

Balance

 

% to Total

 

Balance

 

% to Total

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

PPP loans

 

$

5,794

 

 

0.4

%

 

$

16,398

 

 

1.1

%

 

$

267,278

 

 

17.5

%

All other commercial & industrial loans

 

 

143,808

 

 

9.0

 

 

 

142,569

 

 

9.3

 

 

 

108,120

 

 

7.1

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

Construction, land and land development loans

 

 

224,188

 

 

14.0

 

 

 

225,512

 

 

14.7

 

 

 

158,710

 

 

10.4

 

Residential real estate loans

 

 

198,871

 

 

12.5

 

 

 

193,518

 

 

12.6

 

 

 

156,128

 

 

10.2

 

Commercial real estate loans

 

 

1,024,067

 

 

64.0

 

 

 

956,320

 

 

62.2

 

 

 

837,342

 

 

54.7

 

Consumer and other loans:

 

 

 

 

 

 

 

 

 

 

 

 

Other consumer and other loans

 

 

2,220

 

 

0.1

 

 

 

2,325

 

 

0.1

 

 

 

2,492

 

 

0.1

 

Gross Community Bank loans receivable

 

 

1,598,948

 

 

100.0

%

 

 

1,536,642

 

 

100.0

%

 

 

1,530,070

 

 

100.0

%

Net deferred origination fees

 

 

(6,628

)

 

 

 

 

(6,240

)

 

 

 

 

(14,602

)

 

 

Loans receivable

 

$

1,592,320

 

 

 

 

$

1,530,402

 

 

 

 

$

1,515,468

 

 

 

Loan Yield(1)

 

 

5.31

%

 

 

 

 

5.04

%

 

 

 

 

4.67

%

 

 

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

CCBX

 

As of

 

 

September 30, 2022

 

June 30, 2022

 

September 30, 2021

(dollars in thousands; unaudited)

 

Balance

 

% to Total

 

Balance

 

% to Total

 

Balance

 

% to Total

Commercial and industrial loans:

 

 

 

 

 

 

 

 

 

 

 

 

Capital call lines

 

$

174,311

 

 

19.0

%

 

$

224,930

 

 

28.0

%

 

$

161,457

 

 

84.9

%

All other commercial & industrial loans

 

 

16,015

 

 

1.8

 

 

 

18,067

 

 

2.2

 

 

 

 

 

0.0

 

Real estate loans:

 

 

 

 

 

 

 

 

 

 

 

 

Residential real estate loans

 

 

203,910

 

 

22.3

 

 

 

133,143

 

 

16.5

 

 

 

14,039

 

 

7.4

 

Consumer and other loans:

 

 

 

 

 

 

 

 

 

 

 

 

Credit cards

 

 

216,995

 

 

23.7

 

 

 

139,501

 

 

17.4

 

 

 

1,711

 

 

0.9

 

Other consumer and other loans

 

 

304,321

 

 

33.2

 

 

 

288,257

 

 

35.9

 

 

 

12,937

 

 

6.8

 

Gross CCBX loans receivable

 

 

915,552

 

 

100.0

%

 

 

803,898

 

 

100.0

%

 

 

190,144

 

 

100.0

%

Net deferred origination costs

 

 

17

 

 

 

 

 

54

 

 

 

 

 

70

 

 

 

Loans receivable

 

$

915,569

 

 

 

 

$

803,952

 

 

 

 

$

190,214

 

 

 

Loan Yield - CCBX(1)(2)

 

 

13.96

%

 

 

 

 

12.35

%

 

 

 

 

3.65

%

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(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 increased $139.8 million, or 5.2%, to $2.84 billion at September 30, 2022 from $2.70 billion at June 30, 2022. The increase was due to a $143.0 million increase in core deposits, partially offset by a $2.6 million decrease in time deposits. Our increase in deposits is primarily the result of growth in CCBX. Deposits in our CCBX segment increased $136.2 million, from $1.07 billion at June 30, 2022, to $1.20 billion at September 30, 2022 and community bank deposits increased $3.6 million to $1.63 billion at September 30, 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 September 30, 2022, noninterest bearing deposits decreased $4.8 million, or 0.6%, to $813.2 million from $818.1 million at June 30, 2022. In the quarter ended September 30, 2022 compared to the quarter ended June 30, 2022, NOW and money market accounts increased $146.8 million and savings deposits increased $1.0 million. Partially offsetting those increases is a decrease of $638,000 in BaaS-brokered deposits and a decrease of $2.6 million in time deposits.

Total deposits increased $613.5 million, or 27.6%, to $2.84 billion at September 30, 2022 compared to $2.22 billion at September 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 $483.2 million, or 37.3%, to $813.2 million at September 30, 2022 from $1.3 billion at September 30, 2021. NOW and money market accounts increased $1.05 billion, or 139.1%, to $1.81 billion at September 30, 2022, and savings accounts increased $11.3 million, or 11.8%, and BaaS-brokered deposits increased $47.0 million, or 165.4% while time deposits decreased   $12.8 million, or 27.5%, in the third quarter of 2022 compared to the third quarter of 2021. Additionally, as of September 30, 2022 we have access to $266.7 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 September 30, 2022

 

As of June 30, 2022

 

As of September 30, 2021

(dollars in thousands; unaudited)

Amount

 

Percent of
Total
Deposits

 

Balance

 

Percent of
Total
Deposits

 

Balance

 

Percent of
Total
Deposits

Demand, noninterest bearing

$

813,217

 

 

28.7

%

 

$

818,052

 

 

30.3

%

 

$

1,296,443

 

 

58.3

%

NOW and money market

 

1,807,105

 

 

63.7

 

 

 

1,660,315

 

 

61.6

 

 

 

755,810

 

 

34.0

 

Savings

 

107,508

 

 

3.8

 

 

 

106,464

 

 

3.9

 

 

 

96,192

 

 

4.3

 

Total core deposits

 

2,727,830

 

 

96.2

 

 

 

2,584,831

 

 

95.8

 

 

 

2,148,445

 

 

96.6

 

BaaS-brokered deposits

 

75,363

 

 

2.6

 

 

 

76,001

 

 

2.8

 

 

 

28,396

 

 

1.3

 

Time deposits less than $100,000

 

13,296

 

 

0.5

 

 

 

14,009

 

 

0.5

 

 

 

15,701

 

 

0.7

 

Time deposits $100,000 and over

 

20,577

 

 

0.7

 

 

 

22,464

 

 

0.8

 

 

 

30,998

 

 

1.4

 

Total

$

2,837,066

 

 

100.0

%

 

$

2,697,305

 

 

100.0

%

 

$

2,223,540

 

 

100.0

%

Cost of Deposits(1)

 

0.82

%

 

 

 

 

0.25

%

 

 

 

 

0.10

%

 

 

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

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

Community Bank

 

As of

 

 

September 30, 2022

 

June 30, 2022

 

September 30, 2021

(dollars in thousands; unaudited)

 

Balance