COASTAL FINANCIAL CORP

Previous wording

As of March 31, 2024, we had total assets of $3.87 billion, total loans receivable of $3.20 billion, total deposits of $3.46 billion and total shareholders’ equity of $303.7 million.

Current wording

As of June 30, 2024, we had total assets of $3.96 billion, total loans receivable of $3.33 billion, total deposits of $3.54 billion and total shareholders’ equity of $316.7 million.

Previous wording

Below are a select number of financial highlights from our first quarter.

Current wording

Below are a select number of financial highlights from our second quarter.

Previous wording

•Total of $100.5 million CCBX loans sold during the quarter ended March 31, 2024 as management continued to sell loans as part of our strategy to reduce risk, optimize the CCBX loan portfolio through higher quality new loan originations and strengthen our balance sheet through enhanced credit standards.

Current wording

•Total of $155.2 million in CCBX loans sold back to partners during the quarter ended June 30, 2024 as management continued to sell loans as part of our strategy to reduce risk, optimize the CCBX loan portfolio, maintain strong credit quality, and manage portfolio and partner limits.

Previous wording

•Deposits increased $102.6 million, or 3.1%, to $3.46 billion as of March 31, 2024 compared to $3.36 billion as of December 31, 2023.

Current wording

•Deposits increased $80.5 million, or 2.3%, to $3.54 billion as of June 30, 2024 compared to $3.46 billion as of March 31, 2024.

Previous wording

▪CCBX deposit growth is net of an additional $92.2 million in CCBX deposits that were transferred off balance sheet to provide increased Federal Deposit Insurance Corporation ("FDIC") insurance coverage purposes, compared to $69.4 million for the quarter ended December 31, 2023. Amounts in excess of FDIC insurance coverage are transferred, using a third party facilitator/vendor sweep product, to participating financial institutions.

Current wording

▪CCBX deposit growth is net of an additional $117.7 million in CCBX deposits that were transferred off balance sheet to provide increased Federal Deposit Insurance Corporation ("FDIC") insurance coverage purposes, compared to $92.2 million for the quarter ended March 31, 2024. Amounts in excess of FDIC insurance coverage are transferred, using a third party facilitator/vendor sweep product, to participating financial institutions.

Previous wording

▪Includes noninterest bearing deposits of $515.4 million or 35.9% of total community bank deposits.

Current wording

▪Includes noninterest bearing deposits of $531.6 million or 35.7% of total community bank deposits.

Previous wording

▪Community bank cost of deposits was 1.66%.

Current wording

▪Community bank cost of deposits was 1.77%.

Previous wording

◦Uninsured deposits of $495.6 million, or 14.3% of total deposits as of March 31, 2024, compared to $558.6 million, or 16.6% of total deposits as of December 31, 2023.

Current wording

◦Uninsured deposits of $532.9 million, or 15.0% of total deposits as of June 30, 2024, compared to $495.6 million, or 14.3% of total deposits as of March 31, 2024.

Previous wording

◦Capacity to borrow up to $659.5 million from Federal Home Loan Bank and the Federal Reserve Bank discount window with no borrowings taken under these facilities during the quarter or three months ended March 31, 2024.

Current wording

◦Capacity to borrow up to $650.1 million from Federal Home Loan Bank and the Federal Reserve Bank discount window with no borrowings taken under these facilities during the quarter or six months ended June 30, 2024 and only minimal borrowings, taken to test the lines, under these facilities since the first quarter of 2022.

Previous wording

Deposits increased $102.6 million, or 3.1% to $3.46 billion as of March 31, 2024 compared to $3.36 billion as of December 31, 2023. Fully insured IntraFi network reciprocal deposits decreased $3.4 million to $336.8 million as of March 31, 2024, compared to $340.1 million as of December 31, 2023. These fully insured sweep deposits allow the Bank to fully insure their larger customer deposits through a sweep and exchange of deposits with other financial institutions. Total loans, net of deferred fees increased $173.5 million, or 5.7%, during the three months ended March 31, 2024 to $3.20 billion, compared to $3.03 billion at December 31, 2023. Community bank loans increased $53.1 million, or 2.9%, and CCBX loans increased $120.3 million, or 10.1%. The size of our CCBX loan portfolio increased during the quarter ended March 31, 2024 and we expect it to continue increasing as we work to grow the portfolio with loans that are subject to increased underwriting standards. CCBX loan growth is net of $100.5 million in CCBX loans sold during the quarter ended March 31, 2024. We continue to monitor and manage the CCBX loan portfolio, and will continue to sell CCBX loans in the coming months as we work to strengthen the balance sheet by optimizing our CCBX portfolio through new partners, products and building on our existing relationships. At the same time we will be focused on increasing our efficiency and using technology to reduce future expense growth. Our liquidity position is supported by diligent management of our liquid assets and liabilities as well as maintaining access to alternative sources of funds. As of March 31, 2024 we had $515.1 million in cash on the balance sheet and the capacity to borrow up to $659.5 million from Federal Home Loan Bank and the Federal Reserve Bank discount window. We did not draw down on either facility at any point in the three months ending March 31, 2024. Cash on the balance sheet and borrowing capacity total $1.17 billion and represented 33.9% of total deposits and exceeded our $495.6 million in uninsured deposits as of March 31, 2024. Our AFS securities portfolio of $41,000 has a weighted average remaining maturity of just 4 years, 4 months. Unrealized losses on the AFS securities portfolio were $3,374, or 0.001%, of shareholders' equity as of March 31, 2024.

Current wording

Deposits increased $80.5 million, or 2.3% to $3.54 billion as of June 30, 2024 compared to $3.46 billion as of March 31, 2024. Fully insured IntraFi network reciprocal deposits increased $15.5 million to $352.3 million as of June 30, 2024, compared to $336.8 million as of March 31, 2024. These fully insured sweep deposits allow the Bank to fully insure their larger customer deposits through a sweep and exchange of deposits with other financial institutions. Total loans, net of deferred fees increased $126.9 million, or 4.0%, during the three months ended June 30, 2024 to $3.33 billion, compared to $3.20 billion at March 31, 2024. Community bank loans increased $28.8 million, or 1.5%, and CCBX loans increased $98.1 million, or 7.4%. CCBX loan growth is net of $155.2 million in CCBX loans sold during the quarter ended June 30, 2024. We continue to monitor and manage the CCBX loan portfolio, and will continue to sell CCBX loans in the coming months as we work to reduce risk, optimize the CCBX loan portfolio, maintain strong credit quality, and manage portfolio and partner limits. At the same time we will be focused on increasing our efficiency and using technology to reduce future expense growth. Our liquidity position is supported by diligent management of our liquid assets and liabilities as well as maintaining access to alternative sources of funds. As of June 30, 2024 we had $487.2 million in cash on the balance sheet and the capacity to borrow up to $650.1 million from Federal Home Loan Bank and the Federal Reserve Bank discount window. We did not draw down on either facility at any point in the six months ending June 30, 2024. Cash on the balance sheet and borrowing capacity total $1.14 billion and represented 32.1% of total deposits and exceeded our $532.9 million in uninsured deposits as of June 30, 2024. Our AFS securities portfolio of $39,000 has a weighted average remaining maturity of just 2.7 years. Unrealized losses on the AFS securities portfolio were $2,000, or 0.001%, of shareholders' equity as of June 30, 2024.

Previous wording

As we continue to focus on our BaaS business, we intend to concentrate on working with larger partners and optimizing our CCBX loan portfolio so we can grow and advance our presence in the BaaS space. Our strategy for new CCBX partnerships is to focus on larger, more established partners, including national and publicly-traded companies with experienced management teams, existing customer bases and strong financial positions. This strategy will likely yield fewer, but larger, CCBX partnerships moving forward. We are being more intentional in our selection of products and partnerships that best serve our customers and shareholders in order to achieve our long term profitability objectives. We anticipate continuing to look for opportunities to grow our Company and will focus on the long term, holding down deposits costs when possible and managing expense through efficient use of technology.

Current wording

As we continue to focus on our BaaS business, we intend to concentrate on working with larger partners and optimizing our CCBX loan portfolio so we can grow and advance our presence in the BaaS space. Our strategy for new CCBX partnerships is to focus on larger, more established partners, including national and publicly-traded companies with experienced management teams, existing customer bases and strong financial positions. This strategy will likely yield fewer, but larger, CCBX partnerships moving forward. We are being more intentional in our selection of products and partnerships that best serve our customers and shareholders in order to achieve our long term profitability objectives. We anticipate continuing to look for opportunities to grow our Company and will focus on the long term, holding down deposits costs when possible and managing expense through efficient use of technology. We launched two new lending products through our CCBX segment in the first quarter of 2024 that can reach wide, established customer bases. One was a point-of-sale installment loan program. These loans are fully disclosed and offered as standard credit products, which we believe will minimize the concerns raised with respect to more typical point of sale "Buy Now Pay Later" offerings. The second product was a new credit card that will be marketed to CCBX partner customers who satisfy heightened underwriting standards.

Previous wording

Net income for the three months ended March 31, 2024 was $6.8 million, or $0.50 per diluted share, compared to $12.4 million, or $0.91 per diluted share, for the three months ended March 31, 2023. The decrease in net income over the comparable period in the prior year was primarily attributable to a $13.9 million increase in interest expense due to an increase in average interest bearing deposits and an increase of in cost of deposits as a result of higher interest rates, an increase in the provision for credit losses - loans of $39.5 million, related to CCBX loan growth, and $11.4 million more in noninterest expense, also largely related to CCBX loan growth, increases in salary expense and professional fees and a number of unanticipated expenses incurred during the quarter ended March 31, 2024 described in more detail below. These increases in expense were partially offset by a $20.4 million increase in interest income and $37.6 million increase in noninterest income. The increase in noninterest income, provision expense and noninterest expense are all largely related to increased CCBX loan and deposit activity. In accordance with GAAP, we recognize as revenue (1) the right to be indemnified or reimbursed for fraud losses on CCBX customer loans and deposits and (2) the right to be indemnified for credit losses by our partners for expected credit losses related to loans they originate and unfunded commitments from such loans. CCBX customer credit losses are recognized in the allowance for credit loss and fraud loss is recognized in BaaS noninterest expense. For more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

Current wording

Net income for the three months ended June 30, 2024 was $11.6 million, or $0.84 per diluted share, compared to $12.9 million, or $0.95 per diluted share, for the three months ended June 30, 2023. The decrease in net income over the comparable period in the prior year was primarily attributable to a $9.9 million increase in interest expense due to an increase in average interest bearing deposits and an increase of in cost of deposits as a result of higher interest rates, an increase in the provision for credit losses - loans of $10.1 million, related to CCBX loan growth, and $6.9 million more in noninterest expense, also largely related to CCBX loan growth, increases in salary expense and professional fees. These increases in expense were partially offset by a $13.8 million increase in interest income and $11.3 million increase in noninterest income. The increase in noninterest income, provision expense and noninterest expense are all largely related to increased CCBX loan and deposit activity. In accordance with GAAP, we recognize as revenue (1) the right to be indemnified or reimbursed for fraud losses on CCBX customer loans and deposits and (2) the right to be indemnified for credit losses by our partners for expected credit losses related to loans they originate and unfunded commitments from such loans. CCBX customer credit losses are recognized in the allowance for credit loss and fraud loss is recognized in BaaS noninterest expense. For more information on the accounting for BaaS allowance for credit losses, reserve for unfunded commitments, credit enhancements and fraud enhancements see the section titled “CCBX – BaaS Reporting Information.”

Previous wording

Net interest income for the three months ended March 31, 2024 was $60.9 million, compared to $54.5 million for the three months ended March 31, 2023, an increase of $6.4 million, or 11.8%. Yield on loans receivable was 10.85% for the three months ended March 31, 2024, compared to 9.95% for the three months ended March 31, 2023. The increase in net interest income compared to the quarter ended March 31, 2023 was largely related to increased yield on loans from growth in higher yielding loans, primarily from CCBX, and the overall increase in interest rates resulting from the Federal Open Market Committee (“FOMC”) raising rates 0.50% since March 31, 2023 to 5.50%, with the last increase during such period on July 26, 2023. As of March 31, 2023, the FOMC had set the interest rates at 5.00%. This increase in interest rates since then impacts our existing variable rate loans as well as rates on new loans. We continue to monitor the impact of these increases in interest rates. Total average loans receivable for the three months ended March 31, 2024 was $3.14 billion, compared to $2.71 billion for the three months ended March 31, 2023.

Current wording

Net interest income for the three months ended June 30, 2024 was $66.2 million, compared to $62.4 million for the three months ended June 30, 2023, an increase of $3.9 million, or 6.2%. Yield on loans receivable was 11.23% for the three months ended June 30, 2024, compared to 10.85% for the three months ended June 30, 2023. The increase in net interest income compared to the quarter ended June 30, 2023 was largely related to increased yield on loans from growth in higher yielding loans, primarily from CCBX, and the overall increase in interest rates resulting from the Federal Open Market Committee (“FOMC”) raising rates 0.25% since June 30, 2023 to 5.50%, with the last increase during such period on July 26, 2023. As of June 30, 2023, the FOMC had set the interest rates at 5.25%. The increase in interest rates impacts our existing variable rate loans as well as rates on new loans. Total average loans receivable for the three months ended June 30, 2024 was $3.26 billion, compared to $2.97 billion for the three months ended June 30, 2023.

Previous wording

Total interest and fees on loans totaled $84.6 million for the three months ended March 31, 2024 compared to $66.4 million for the three months ended March 31, 2023. The $18.2 million increase in interest and fees on loans for the quarter ended March 31, 2024, compared to the quarter ended March 31, 2023, was largely due to increased yield on loans from growth in higher yielding loans, primarily from CCBX, combined with the overall increase in interest rates. After several quarters of selling loans with higher credit risk, we expect total interest and fees on loans to increase as volume increases, despite yields stabilizing, as we build back our CCBX portfolio with loans that have enhanced credit standards but lower yields, compared to previous periods when credit risk and loan yields were higher. Total loans receivable was $3.20 billion at March 31, 2024, compared to $2.84 billion at March 31, 2023. CCBX average loans receivable was $1.27 billion for the quarter ended March 31, 2024, compared to $1.06 billion for the quarter ended March 31, 2023, an increase of $201.7 million, or 19.0%. Average CCBX yield of 17.34% was earned on CCBX loans for the quarter ended March 31, 2024, compared to 16.09% for the quarter ended March 31, 2023. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Also impacting the increase in loan interest is the increase in interest rates on variable rate loans resulting from the continued high interest rate environment. The FOMC has increased interest rates from 5.00% as of March 31, 2023 to 5.50% as of March 31, 2024. We continue to monitor the impact of these increases in interest rates.

Current wording

Total interest and fees on loans totaled $90.9 million for the three months ended June 30, 2024 compared to $80.2 million for the three months ended June 30, 2023. The $10.7 million increase in interest and fees on loans for the quarter ended June 30, 2024, compared to the quarter ended June 30, 2023, was largely due to increased yield on loans from growth in higher yielding loans, primarily from CCBX, combined with the overall increase in interest rates. After several quarters of selling loans with higher credit risk, interest and fees on loans have increased as volume increased. Total loans receivable was $3.33 billion at June 30, 2024, compared to $3.01 billion at June 30, 2023. CCBX average loans receivable was $1.36 billion for the quarter ended June 30, 2024, compared to $1.27 billion for the quarter ended June 30, 2023, an increase of $92.9 million, or 7.3%. Average CCBX yield of 17.77% was earned on CCBX loans for the quarter ended June 30, 2024, compared to 16.95% for the quarter ended June 30, 2023. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Also impacting the increase in loan interest is the increase in interest rates on variable rate loans resulting from the continued high interest rate environment. The FOMC has increased interest rates from 5.25% as of June 30, 2023 to 5.50% as of June 30, 2024. We continue to monitor the impact of these increases in interest rates.

Previous wording

Interest income from interest earning deposits with other banks was $4.8 million for the quarter ended March 31, 2024, an increase of $1.7 million, or 54.3%, due to an increase in balances and higher interest rates, compared to the quarter ended March 31, 2023. The average balance of interest earning deposits invested with other banks for the three months ended March 31, 2024 was $350.9 million, compared to $271.7 million for the three months ended March 31, 2023. The yield on these interest earning deposits with other banks increased 0.86%, to 5.48% compared to 4.62% at March 31, 2023. Interest income on investment securities increased $481,000 to $1.0 million at March 31, 2024, compared to $553,000 at March 31, 2023. Average investment securities increased $13.1 million from $102.2 million for the three months ended March 31, 2023, to $115.4 million for the three months ended March 31, 2024, and, as a result of higher interest rates, average yield increased to 3.60% for the three months ended March 31, 2024, compared to 2.19% for the three months ended March 31, 2023. The increase in average investment securities is a result of purchasing additional U.S. Agency mortgage backed securities for CRA purposes. CRA securities are designated held-to-maturity ("HTM") and the weighted average yield of those securities was 5.46% for the quarter ended March 31, 2024.

Current wording

Interest income from interest earning deposits with other banks was $5.7 million for the quarter ended June 30, 2024, an increase of $3.0 million, or 112.2%, due to an increase in balances and higher interest rates, compared to the quarter ended June 30, 2023. The average balance of interest earning deposits invested with other banks for the three months ended June 30, 2024 was $418.2 million, compared to $211.4 million for the three months ended June 30, 2023. The yield on these interest earning deposits with other banks increased 0.38%, to 5.47% compared to 5.08% at June 30, 2023. Interest income on investment securities increased $33,000 to $686,000 at June 30, 2024, compared to $653,000 at June 30, 2023. Average investment securities decreased $60.5 million from $110.3 million for the three months ended June 30, 2023, to $49.8 million for the three months ended June 30, 2024 as a result of $100.0 million in AFS U.S. Treasury securities that matured near the end of the quarter ended March 31, 2024, partially offset by an increase of $39.7 million in held-to-maturity ("HTM") securities due to purchasing additional U.S. Agency mortgage backed securities for CRA purposes. Average yield on investment securities increased to 5.55% for the three months ended June 30, 2024, compared to 2.37% for the three months ended June 30, 2023.

Previous wording

Interest expense was $29.5 million for the quarter ended March 31, 2024, a $13.9 million increase from the quarter ended March 31, 2023. Interest expense on deposits was $28.9 million for the quarter ended March 31, 2024, compared to $15.0 million for the quarter ended March 31, 2023. The $13.9 million increase in interest expense on deposits was due to an increase of $658.7 million in interest bearing deposits as well as a 1.32% increase in interest rates on deposit accounts. While we continue working to hold down deposit costs, higher short-term interest rates for longer and future interest rate changes will impact our cost of deposits. Interest on borrowed funds was $669,000 for the quarter ended March 31, 2024, compared to $662,000 for the quarter ended March 31, 2023. Interest expense on interest bearing deposits increased compared to the quarter ended March 31, 2023 as a result of an increase in CCBX deposits that are tied to, and reprice when, the FOMC raises rates. Similarly, most of our CCBX loans also reprice when the FOMC raises interest rates. Interest expense will be impacted by any additional FOMC interest rate changes in future periods.

Current wording

Interest expense was $31.3 million for the quarter ended June 30, 2024, a $9.9 million increase from the quarter ended June 30, 2023. Interest expense on deposits was $30.6 million for the quarter ended June 30, 2024, compared to $20.7 million for the quarter ended June 30, 2023. The $9.9 million increase in interest expense on deposits was due to an increase of $527.9 million in interest bearing deposits as well as a 0.74% increase in interest rates on deposit accounts. Interest expense on interest bearing deposits increased compared to the quarter ended June 30, 2023 largely as a result of an increase in higher rate CCBX deposits that are tied to FOMC rate changes. Additionally, we saw an increase in community bank interest rates as a result of exception pricing tactics that were added as a strategy at the end of the first quarter of 2024 to retain and more effectively compete in the market. Interest expense will be impacted by any additional FOMC interest rate changes in future periods. While we continue working to hold down deposit costs, higher short-term interest rates for longer and future interest rate changes will impact our cost of deposits. Interest on borrowed funds was $672,000 for the quarter ended June 30, 2024, compared to $661,000 for the quarter ended June 30, 2023.

Previous wording

Net interest margin was 6.78% for the three months ended March 31, 2024, compared to 7.15% for the three months ended March 31, 2023. The decrease in net interest margin compared to the three months ended March 31, 2023 was largely due to an increase in cost of deposits. Increases in rates on interest bearing deposits by our competitors and the growth in higher cost CCBX deposits contributed to an overall increase in interest expense on interest bearing deposits. Additionally, the actions we took in an effort to strengthen our balance sheet by selling higher risk and higher yielding loans or letting such loans mature during the quarters ended September 30, 2023, December 31, 2023 and March 31, 2024 will continue to impact net interest margin in future quarters.

Current wording

Net interest margin was 7.13% for the three months ended June 30, 2024, compared to 7.58% for the three months ended June 30, 2023. The decrease in net interest margin compared to the three months ended June 30, 2023 was largely due to an increase in cost of deposits. Increases in rates on interest bearing deposits by our competitors and the growth in higher cost CCBX deposits contributed to an overall increase in interest expense on interest bearing deposits. Additionally, the actions we took in an effort to strengthen our balance sheet by selling higher risk and higher yielding loans or letting such loans mature during the quarters ended September 30, 2023, December 31, 2023 and March 31, 2024 impacted net interest margin this quarter and we expect it to continue to impact net interest margin in future quarters.

Previous wording

Cost of funds was 3.52% for the quarter ended March 31, 2024, which is an increase of 1.33% from the quarter ended March 31, 2023. Cost of deposits for the quarter ended March 31, 2024 was 3.49%, which was a 1.36% increase, from 2.13% for the quarter ended March 31, 2023. These increases were largely due to an increase in higher cost CCBX deposits and a higher interest rate environment compared to March 31, 2023 as the FOMC raised the Fed funds rate 0.50% from March 31, 2023 to March 31, 2024.

Current wording

Cost of funds was 3.60% for the quarter ended June 30, 2024, which is an increase of 0.83% from the quarter ended June 30, 2023. Cost of deposits for the quarter ended June 30, 2024 was 3.58%, which was a 0.85% increase, from 2.72% for the quarter ended June 30, 2023. These increases were largely due to an increase in higher cost CCBX deposits and a continued higher interest rate environment compared to June 30, 2023 as the FOMC raised the Fed funds rate 0.25% from June 30, 2023 to June 30, 2024.

Previous wording

Total yield on loans receivable for the quarter ended March 31, 2024 was 10.85%, compared to 9.95% for the quarter ended March 31, 2023. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. For the quarter ended March 31, 2024, average CCBX loans increased $201.7 million, or 19.0%, with an average CCBX yield of 17.34%, compared to 16.09% at the quarter ended March 31, 2023. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Average community bank loans increased $227.4 million, or 13.8%. Average yield on community bank loans for the three months ended March 31, 2024 was 6.46% compared to 5.97% for the three months ended March 31, 2023.

Current wording

Total yield on loans receivable for the quarter ended June 30, 2024 was 11.23%, compared to 10.85% for the quarter ended June 30, 2023. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX and community bank loans compared to June 30, 2023. For the quarter ended June 30, 2024, average CCBX loans increased $92.9 million, or 7.3%, with an average CCBX yield of 17.77%, compared to 16.95% at the quarter ended June 30, 2023. CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements and servicing CCBX loans. The tables later in this section illustrate the impact of BaaS loan expense on CCBX loan yield. Average community bank loans increased $199.8 million, or 11.8%. Average yield on community bank loans for the three months ended June 30, 2024 was 6.52% compared to 6.28% for the three months ended June 30, 2023.

Previous wording

For the three months ended March 31, 2024, net interest margin (net interest income divided by the average total interest earning assets) and net interest spread (average yield on total interest earning assets minus average cost of total interest bearing liabilities) were 6.78% and 5.79%, respectively, compared to 7.15% and 6.20%, respectively, for the three months ended March 31, 2023.

Current wording

For the three months ended June 30, 2024, net interest margin (net interest income divided by the average total interest earning assets) and net interest spread (average yield on total interest earning assets minus average cost of total interest bearing liabilities) were 7.13% and 6.17%, respectively, compared to 7.58% and 6.57%, respectively, for the three months ended June 30, 2023.

Previous wording

The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan costs, net of fees included in interest income totaled $1.9 million and $1.1 million for the three months ended March 31, 2024 and 2023, respectively. For the three months ended March 31, 2024 and 2023, the amount of interest income not recognized on nonaccrual loans was not material.

Current wording

The following table presents an analysis of the average balances of net interest income, net interest spread and net interest margin for the periods indicated. Loan costs, net of fees included in interest income totaled $2.3 million and $1.2 million for the three months ended June 30, 2024 and 2023, respectively. For the three months ended June 30, 2024 and 2023, the amount of interest income not recognized on nonaccrual loans was not material.

Previous wording

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. The table illustrates the $6.1 million increase in loan interest income that is attributed to an increase in loan rates and $12.1 million increase in loan interest income that is attributed to an increase in loan volume. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.

Current wording

The following table presents information regarding the dollar amount of changes in interest income and interest expense for the periods indicated for each major component of interest earning assets and interest bearing liabilities and distinguishes between the changes attributable to changes in volume and changes attributable to changes in interest rates. The table illustrates the $2.8 million increase in loan interest income that is attributed to an increase in loan rates and $7.9 million increase in loan interest income that is attributed to an increase in loan volume. For purposes of this table, changes attributable to both rate and volume that cannot be segregated have been allocated to volume.

Previous wording

The economic environment is continuously changing, due to the pace of economic growth, inflation, higher interest rates, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment and trade issues that may impact the provision and therefore the allowance. Gross loans, excluding loans held for sale, totaled $3.20 billion at March 31, 2024. The allowance for credit losses as a percentage of loans was 4.35% at March 31, 2024, compared to 3.14% at March 31, 2023.

Current wording

The economic environment is continuously changing, due to the pace of economic growth, inflation, higher interest rates, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, the political environment, upcoming elections in the United States, and trade issues that may impact the provision and therefore the allowance. Gross loans, excluding loans held for sale, totaled $3.33 billion at June 30, 2024. The allowance for credit losses as a percentage of loans was 4.45% at June 30, 2024, compared to 3.68% at June 30, 2023.

Previous wording

The provision for credit losses - loans for the three months ended March 31, 2024 was $79.5 million, compared to $43.5 million for the three months ended March 31, 2023. The increase in the Company’s provision for credit losses - loans during the quarter ended March 31, 2024, is largely related to the provision for CCBX partner loans. During the quarter ended March 31, 2024, a $79.7 million provision for credit losses - loans was recorded for CCBX partner loans based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a recapture for credit losses - loans of $199,000 was needed for the quarter ended March 31, 2024.

Current wording

The provision for credit losses - loans for the three months ended June 30, 2024 was $61.9 million, compared to $52.6 million for the three months ended June 30, 2023. The increase in the Company’s provision for credit losses - loans during the quarter ended June 30, 2024, is largely related to the provision for CCBX partner loans. During the quarter ended

Previous wording

Net charge-offs for the quarter ended March 31, 2024 totaled $57.2 million, or 7.34% of total average loans, compared to $32.3 million, or 4.84% of total average loans, for the quarter ended March 31, 2023. Net charge-offs were up in 2024 compared to 2023 due to an increase in loans originated through CCBX partners which have a a higher level of expected losses than our community bank loans as reflected in the factors for allowance for credit losses. In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for a credit enhancement that indemnifies or reimburses the Bank for net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where the Company was responsible for credit losses on approximately 10% of a $317.8 million loan portfolio. At March 31, 2024, our portion of this portfolio represented $32.0 million in loans. Effective April 1, 2024 the agreement was modified and the Company is now responsible for 5% of the credit losses on this loan portfolio. For the three months ended March 31, 2024, $57.2 million of net charge-offs were recognized for CCBX loans and $11,000 net charge-offs were recognized on community bank loans. For the three months ended March 31, 2023, $32.3 million of net charge-offs were recognized on CCBX loans and $45,000 of net charge-offs were recognized for community bank loans.

Current wording

Net charge-offs for the quarter ended June 30, 2024 totaled $53.2 million, or 6.57% of total average loans, compared to $31.0 million, or 4.19% of total average loans, for the quarter ended June 30, 2023. Net charge-offs were up in 2024 compared to 2023 due to an increase in loans originated through CCBX partners which have a higher level of expected losses than our community bank loans as reflected in the factors for allowance for credit losses. In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for a credit enhancement that indemnifies or reimburses the Bank for net-charge-offs on CCBX loans and negative deposit accounts, except in accordance with the program agreement for one partner where, effective April 1, 2024, the Company was responsible for credit losses on approximately 5% of a $353.6 million loan portfolio instead of 10%. At June 30, 2024, our portion of this portfolio represented $17.7 million in loans. For the three months ended June 30, 2024, $53.2 million of net charge-offs were recognized for CCBX loans and $2,000 net recoveries were recognized on community bank loans. For the three months ended June 30, 2023, $31.0 million of net charge-offs were recognized on CCBX loans and $9,000 of net charge-offs were recognized for community bank loans.

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Summary of significant noninterest income for the three months ended March 31, 2024 compared to the three months ended March 31, 2023

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Summary of significant noninterest income for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023

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Our CCBX segment continues to evolve, and we now have 21 relationships, at varying stages, as of March 31, 2024. We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense and are focusing on expanding and developing relationships with larger and more established partners, with experienced management teams, existing customer bases and strong financial positions. The sale of certain CCBX loans during the third and fourth quarters of 2023 and first quarter of 2024 is part of our strategy to strengthen the balance sheet and lower the overall potential credit risk in our loan portfolio. These sales resulted in a tighter interest margin in the quarter ended March 31, 2024, as higher quality loans yield less than higher risk loans. The size of our CCBX loan portfolio increased during the quarter ended March 31, 2024 and we expect it to continue increasing as we work to grow the portfolio with loans that are subject to increased underwriting standards.

Current wording

Our CCBX segment continues to evolve, and we now have 21 relationships, at varying stages, as of June 30, 2024. We continue to refine the criteria for CCBX partnerships and are exiting relationships where it makes sense and are focusing on expanding and developing relationships with larger and more established partners, with experienced management teams, existing customer bases and strong financial positions.

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Unrealized (loss)/gain on equity securities, net. During the three months ended March 31, 2024, we recognized an unrealized gain on equity securities of $15,000, compared to the same period ended March 31, 2023, when there was an unrealized gain of $39,000 recognized. We hold $3.0 million in equity securities focused on entities providing products to the BaaS and financial services space.

Current wording

Unrealized (loss)/gain on equity securities, net. During the three and six months ended June 30, 2024, we recognized an unrealized gain on equity securities of $9,000 and $24,000 respectively, compared to the same period ended June 30, 2023, when there was an unrealized gain of $155,000 and $194,000 respectively, recognized. We hold $3.0 million in equity securities of entities that are focused on providing products to the BaaS and financial services space.

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Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest components of noninterest expense are BaaS loan and fraud expense and salaries and employee benefits. Noninterest expense also includes operational expenses, such as legal and professional expenses, data processing and software licenses, occupancy, points of sale expense, FDIC assessment, excise taxes, director and staff expenses, marketing and other expenses.

Current wording

Generally, noninterest expense is composed of all employee expenses and costs associated with operating our facilities, obtaining and retaining customer relationships and providing bank services. The largest components of noninterest expense are BaaS loan and fraud expense and salaries and employee benefits. Noninterest expense also includes operational expenses, such as legal and professional expenses, data processing and software licenses, occupancy, points of sale expense, FDIC assessment, director and staff expenses, marketing, excise taxes and other expenses.

Previous wording

Summary of significant noninterest expense for the three months ended March 31, 2024 compared to the three months ended March 31, 2023

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Summary of significant noninterest expense for the three and six months ended June 30, 2024 compared to the three and six months ended June 30, 2023

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Salaries and Employee Benefits. Salaries and employee benefits are one of the largest components of noninterest expense and include payroll expense, incentive compensation costs, equity compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits continue to increase primarily due to continued hiring staff for our CCBX segment and additional staff for our ongoing growth initiatives. As our CCBX activities grow, we expect to continue to add employees to support these lines of business and to also automate our processes to reduce or slow future growth in hiring. During the three months ended March 31, 2024 salaries and employee benefits included one-time expenses of $344,000 for certain retirement costs and other expenses incurred as part of our long-term strategy for enhanced efficiencies while holding staffing fairly level in 2024. As of March 31, 2024, we had 486 full-time equivalent employees, compared to 461 at March 31, 2023, a 5.4% increase.

Current wording

Salaries and Employee Benefits. Salaries and employee benefits are one of the largest components of noninterest expense and include payroll expense, incentive compensation costs, equity compensation, benefit plans, health insurance and payroll taxes. Salaries and employee benefits expense growth has slowed and continues to increase primarily due to hiring staff for our CCBX segment and additional staff for our ongoing growth initiatives. As our CCBX activities grow, and we invest more in technology we expect some continued growth in employees to support these lines of business but we are also working to automate our processes to reduce and/or slow future growth in hiring.

Previous wording

Legal and Professional Expenses. Legal and professional costs include legal, audit and accounting expenses, consulting fees, fees for recruiting and hiring employees, and IT related security expenses. These expenses fluctuate with the consulting costs related to risk management, development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services. The expenses also reflect the costs associated with our infrastructure enhancement projects to improve our processing, automate processes, reduce compliance costs and enhance our data management. The increase in legal and professional fees was related to data and risk management, building out our infrastructure and increased consulting expenses for projects.

Current wording

Legal and Professional Expenses. Legal and professional costs include legal, audit and accounting expenses, consulting fees, fees for recruiting and hiring employees, and IT related security expenses. These expenses fluctuate with the consulting costs related to risk management, development of contracts for CCBX customers, audit and accounting needs, and are impacted by our reporting cycle and timing of legal and professional services. The expenses also reflect the costs associated with our infrastructure enhancement projects to improve our processing, automate processes, reduce compliance costs and enhance our data management.

Previous wording

Data Processing and Software Licenses. Data processing ands oftware licenses includes expenses related to obtaining and maintaining software required for our various functions. Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs. Data processing costs grow as we grow and add new products, customers and branches and enhance technology. Additionally, CCBX data processing expenses and software that aids in the reporting of CCBX activities and monitoring of transactions that helps to automate and create other efficiencies in reporting have resulted in increased expenses in the category. These expenses are expected to increase as we invest more in automated processing and as we grow product lines and our CCBX segment.

Current wording

Data Processing and Software Licenses. Data processing ands oftware licenses includes expenses related to obtaining and maintaining software required for our various functions. Data processing costs include all of our customer transaction processing and data storage, computer processing, and network costs. Data processing costs grow as we grow and add new products, customers and enhance technology. Additionally, CCBX data processing expenses and software that aids in the reporting of CCBX activities and monitoring of transactions that helps to automate and create other efficiencies in reporting have resulted in increased expenses in the category. These expenses are expected to increase as we invest more in automated processing and as we grow product lines and our CCBX segment.

Previous wording

FDIC Assessments. FDIC assessments are assessed to fund the Deposit Insurance Fund (“DIF”) to insure and protect the depositors of insured banks and to resolve failed banks. The assessment rate is based on a number of factors and recalculated each quarter. As deposits increase, the FDIC assessment expense will generally increase. On October 18, 2022 the FDIC finalized an increase of 2 basis points in the initial base deposit insurance assessment rates schedules, beginning with the first quarterly assessment period of 2023. The rise is intended to increase the reserve ratio of the Deposit Insurance Fund to 1.35%, the statutory requirement. The increase in the base rates will remain in place until the reserve ratio reaches or exceeds 2.0%. The reserve ratio is 1.15% as of December 31, 2023. The reserve ratio is negatively affected by growth in assets and bank failures.

Current wording

FDIC Assessments. FDIC assessments are assessed to fund the Deposit Insurance Fund (“DIF”) to insure and protect the depositors of insured banks and to resolve failed banks. The assessment rate is based on a number of factors and recalculated each quarter. As deposits increase, the FDIC assessment expense will generally increase. On October 18, 2022 the FDIC finalized an increase of 2 basis points in the initial base deposit insurance assessment rates schedules, beginning with the first quarterly assessment period of 2023. The rise is intended to increase the reserve ratio of the Deposit Insurance Fund to 1.35%, the statutory requirement. The increase in the base rates will remain in place until the reserve ratio reaches or exceeds 2.0%. The reserve ratio is 1.17% as of March 31, 2024. The reserve ratio is negatively affected by growth in assets and bank failures.

Previous wording

Director and Staff Expenses. Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses. As conferences and other professional events have resumed we have seen increased expenses related to employee travel, and continuing education.

Current wording

Director and Staff Expenses. Director and staff expenses includes compensation for director service, continuing education for employees and other director and staff related expenses. Expenses will fluctuate depending upon conferences and other professional events that are attended by employees as well as expenses related to employee travel, and continuing education.

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Excise Taxes. Excise taxes are assessed on Washington state income and are based on gross income. Gross income is reduced by certain allowed deductions and income attributed to other states is also removed to arrive at the taxable base. Excise taxes increased as a result of increased income subject to excise taxes.

Current wording

Excise Taxes. Excise taxes are assessed on Washington state income and are based on gross income. Gross income is reduced by certain allowed deductions and income attributed to other states is also removed to arrive at the taxable base. Excise taxes increased as a result of increased income subject to excise taxes. We completed an apportionment study to quantify revenue earned outside the state of Washington that resulted in a $1.2 million refund during the second quarter of 2024. CCBX income is sourced to the state the partner is headquartered, and the majority of partners are located outside the state of Washington, therefore taxes we paid on CCBX income sourced to other states was in excess of what was actually owed.

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Marketing. Marketing and promotion costs are starting to increase as we deploy more branding and targeted advertising for the community bank and CCBX. We are using more cost-effective advertising options, but expect costs to increase as we expand our marketing plan.

Current wording

Marketing. Marketing and promotion costs will vary depending upon the deployment of branding and targeted advertising for the community bank and CCBX. We are using more cost-effective advertising options, but expect costs to increase as we expand our marketing plan.

Previous wording

For the three months ended March 31, 2024, income tax expense totaled $1.9 million, compared to $3.0 million for the three months ended March 31, 2023. The $1.1 million decrease in income tax expense is the result of lower net income. The effective tax rate was 22.0% for the three months ended March 31, 2024, compared to 19.7% for the three months ended March 31, 2023. The effective tax rate was higher for the three months ended March 31, 2024 due to the addition of various state taxes that are being assessed as CCBX activities and employees expand into other states.

Current wording

For the three months ended June 30, 2024, income tax expense totaled $3.4 million, compared to $3.9 million for the three months ended June 30, 2023. The $451,000 decrease in income tax expense is the result of lower net income. The effective tax rate was 22.8% for the three months ended June 30, 2024, compared to 23.1% for the three months ended June 30, 2023. The effective tax rate was higher for the three months ended June 30, 2024 due to impact of stock equity award deductions which fluctuates based on activity.

Previous wording

Based on the criteria of ASC 280, Segment Reporting, we have identified three segments: the community bank, CCBX and treasury & administration. The primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment provides banking as a service (“BaaS”) that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 21 partners as of March 31, 2024, 19 that are active with two more currently in the testing or implementation stage as of March 31, 2024. The treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.

Current wording

Based on the criteria of ASC 280, Segment Reporting, we have identified three segments: the community bank, CCBX and treasury & administration. The primary focus of the community bank is on providing a wide range of banking products and services to consumers and small to medium sized businesses in the broader Puget Sound region in the state of Washington and through the Internet and our mobile banking application. We currently operate 14 full-service banking locations, 12 of which are located in Snohomish County, where we are the largest community bank by deposit market share, and two of which are located in neighboring counties (one in King County and one in Island County). The CCBX segment provides BaaS that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment provides BaaS that allows our broker-dealer and digital financial service partners to offer their customers banking services. The CCBX segment has 21 partners as of June 30, 2024, 19 that are active with two more currently in the testing or implementation stage as of June 30, 2024. The treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.

Previous wording

Community bank total assets as of March 31, 2024 increased $52.8 million, or 2.9%, to $1.90 billion, compared to $1.84 billion as of December 31, 2023. Loans receivable net of deferred fees for the community bank segment increased $53.1 million, or 2.9%, to $1.88 billion as of March 31, 2024, compared to $1.83 billion as of December 31, 2023. The increase in community bank loans receivable is the result of gross loan growth of $53.2 million. Total community bank deposits decreased $63.6 million, or 4.24%, to $1.43 billion, as of March 31, 2024, compared to $1.50 billion as of December 31, 2023. The decrease in community bank deposits was a result of pricing disciplines as some customer sought higher rate products elsewhere. Additional exception pricing tactics were added as a strategy at the end of the first quarter of 2024 to retain deposits and more effectively compete in the market. Our cost of deposits for the community bank was 1.66% for the three months ended March 31, 2024.

Current wording

Community bank total assets as of June 30, 2024 increased $81.7 million, or 4.4%, to $1.93 billion, compared to $1.84 billion as of December 31, 2023. Loans receivable net of deferred fees for the community bank segment increased $81.9 million, or 4.5%, to $1.91 billion as of June 30, 2024, compared to $1.83 billion as of December 31, 2023. The increase in community bank loans receivable is the result of gross loan growth of $82.2 million. Total community bank deposits decreased $10.7 million, or 0.71%, to $1.49 billion, as of June 30, 2024, compared to $1.50 billion as of December 31, 2023. The overall decrease in community bank deposits was a result of pricing disciplines as some customers sought higher rate products elsewhere and we let higher rate deposits run off as they matured. Additional exception pricing tactics were added as a strategy at the end of the first quarter of 2024 to retain deposits and more effectively compete in the market and community bank deposits increased in the second quarter of 2024, compared to the first quarter of 2024. Our cost of deposits for the community bank increased to 1.77% for the three months ended June 30, 2024 partially as a result of such measures.