COASTAL FINANCIAL CORP

Previous wording

primary focus 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 has 21 partners as of June 30, 2024. The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

Current wording

We are a bank holding company that operates through our wholly owned subsidiaries, Coastal Community Bank (“Bank”) and Arlington Olympic LLC. We are headquartered in Everett, Washington, which by population is the largest city in, and the county seat of, Snohomish County, which has an estimated population in 2024 of over 849,000. Our business is conducted through three reportable segments: The community bank, CCBX and treasury & administration. The community bank segment includes all community banking activities, with a primary focus 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 has 22 partners as of September 30, 2024. The treasury & administration segment includes investments, debt and other reporting items that are not specific to the community bank or CCBX segments. The Bank’s deposits are insured in whole or in part by the Federal Deposit Insurance Corporation (“FDIC”). The Bank is subject to regulation by the Federal Reserve and the Washington State Department of Financial Institutions Division of Banks. The Federal Reserve also has supervisory authority over the Company.

Previous 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.

Current wording

As of September 30, 2024, we had total assets of $4.07 billion, total loans receivable of $3.42 billion, total deposits of $3.63 billion and total shareholders’ equity of $331.9 million.

Previous wording

On July 25, 2024, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency released a joint statement discussing potential risks related to arrangements between banks and third parties to deliver bank deposit products and services to end users, as well as examples of effective practices for the management of those risks. Additionally, the agencies issued a request for information and comment on the nature of banks’ relationships with financial technology companies and effective risk management practices for those relationships. The agencies also indicated that they are considering whether additional steps, such as enhancements to supervisory guidance, could help ensure that banks effectively manage risks associated with these various types of arrangements.

Current wording

On July 25, 2024, the Federal Reserve, FDIC, and Office of the Comptroller of the Currency released a joint statement discussing potential risks related to arrangements between banks and third parties to deliver bank deposit products and services to end users, as well as examples of effective practices for the management of those risks. Additionally, the agencies issued a request for information and comment on the nature of banks’ relationships with financial technology companies and effective risk management practices for those relationships. The agencies also indicated that they are considering whether additional steps, such as enhancements to supervisory guidance, could help ensure that banks effectively manage risks associated with these various types of arrangements. These developments suggest that the agencies are increasing their focus on third-party deposit arrangements and may expect financial institutions involved in these arrangements, such as us, to change their risk management and compliance practices, which may increase the costs of operating a BaaS business.

Previous 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.

Current wording

Total loans, net of deferred fees, increased $92.4 million, or 2.8%, during the three months ended September 30, 2024 to $3.42 billion, compared to $3.33 billion at June 30, 2024. Community bank loans decreased $14.5 million, or 0.8%, and CCBX loans increased $106.9 million, or 7.6%. CCBX loan growth is net of $423.7 million in CCBX loans sold during the quarter ended September 30, 2024. We continue to monitor and manage the CCBX loan portfolio, and will continue to sell CCBX loans to the originating partner in the coming months as part of our strategy to optimize our CCBX portfolio, manage credit quality, portfolio limits and partner limits. At the same time we will be focused on increasing our efficiency and using technology to reduce future expense growth. Deposits increased $83.8 million, or 2.4% to $3.63 billion as of September 30, 2024 compared to $3.54 billion as of June 30, 2024. 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 September 30, 2024 we had $484.0 million in cash on the balance sheet and the capacity to borrow up to $656.3 million from Federal Home Loan Bank and the Federal Reserve Bank discount window. Cash on the balance sheet and borrowing capacity total $1.14 billion and represented 31.4% of total deposits and exceeded our $542.2 million in uninsured deposits as of September 30, 2024. Our AFS securities portfolio of $38,000 has a weighted average remaining maturity of just 3.3 years. Unrealized losses on the AFS securities portfolio were $2,000, or 0.001%, of shareholders' equity as of September 30, 2024.

Previous 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.”

Current wording

Additionally, BaaS credit enhancement income increased $44.2 million, which is directly related to and offsets the increase in provision for credit losses of $43.0 million for the quarter ended September 30, 2024. 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 income for the six months ended June 30, 2024 was $18.4 million, or $1.34 per diluted share, compared to $25.3 million, or $1.86 per diluted share, for the six months ended June 30, 2023. The decrease in net income over the comparable period in the prior year was primarily attributable to an increase in the provision for credit losses - loans of $49.5 million, related primarily to CCBX loan growth, $23.8 million increase in interest expense and $18.3 million more in noninterest expense. These were partially offset by a $34.2 million increase in interest income and $49.0 million increase in noninterest income. The increase in noninterest income, provision expense and noninterest expense are largely related to CCBX loan and deposit growth. The increase in interest expense is related to higher average interest bearing deposits and an increase in cost of deposits as a result of higher interest rates.

Current wording

Net income for the nine months ended September 30, 2024 was $31.9 million, or $2.32 per diluted share, compared to $35.6 million, or $2.61 per diluted share, for the nine months ended September 30, 2023. The decrease in net income over the comparable period in the prior year was primarily attributable to a $23.9 million increase in BaaS loan expense offset by an increase of $20.3 million in net interest income, resulting in a decrease of $3.6 million in net interest income adjusted for BaaS loan expense. The increase in interest income and BaaS loan expense is largely related to growth in CCBX loans. The increase in interest expense is related to higher average interest bearing deposits and an increase in cost of deposits as a result of higher interest rates.

Previous 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.

Current wording

Total interest and fees on loans totaled $99.6 million for the three months ended September 30, 2024 compared to $83.7 million for the three months ended September 30, 2023. The $15.9 million increase in interest and fees on loans for the quarter ended September 30, 2024, compared to the quarter ended September 30, 2023, was largely due to growth in higher yielding loans, primarily from CCBX. Total loans receivable was $3.42 billion at September 30, 2024, compared to $2.97 billion at September 30, 2023. CCBX average loans receivable was $1.55 billion for the quarter ended September 30, 2024, compared to $1.31 billion for the quarter ended September 30, 2023, an increase of $243.1 million, or 18.6%. Average CCBX yield of 17.35% was earned on CCBX loans for the quarter ended September 30, 2024, compared to 17.05% for the quarter ended September 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. As previously mentioned, the FOMC recently lowered the targeted Federal Funds rate by 0.50%, the rate decrease came late in the quarter, so the full impact of this and any subsequent rate changes will be reflected in future periods.

Previous 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.

Current wording

Interest income from interest earning deposits with other banks was $4.8 million for the quarter ended September 30, 2024, an increase of $897,000, or 23.1%, due to an increase in balances compared to the quarter ended September 30, 2023. The average balance of interest earning deposits invested with other banks for the three months ended September 30, 2024 was $350.9 million, compared to $285.6 million for the three months ended September 30, 2023. The yield on these interest earning deposits with other banks increased 0.02%, to 5.42% compared to 5.40% at September 30, 2023. Interest income on investment securities decreased $91,000 to $675,000 at September 30, 2024, compared to $766,000 at September 30, 2023. Average investment securities decreased $69.0 million from $118.0 million for the three months ended September 30, 2023, to $49.0 million for the three months ended September 30, 2024 as a result of $100.0 million in AFS U.S. Treasury securities that matured earlier in the year, partially offset by an increase 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 5.48% for the three months ended September 30, 2024, compared to 2.58% for the three months ended September 30, 2023.

Previous 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.

Current wording

Net interest margin was 7.41% for the three months ended September 30, 2024, compared to 7.10% for the three months ended September 30, 2023. The increase in net interest margin compared to the three months ended September 30, 2023 was largely due to an increase in loan yield partially offset by an increase in cost of deposits. Increases in rates offered 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.

Previous 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.

Current wording

Cost of funds was 3.62% for the quarter ended September 30, 2024, which is an increase of 0.44% from the quarter ended September 30, 2023. Cost of deposits for the quarter ended September 30, 2024 was 3.59%, which was a 0.45% increase, from 3.14% for the quarter ended September 30, 2023. These increases were largely due to growth in higher cost CCBX deposits and a continued higher interest rate environment compared to September 30, 2023. The recent FOMC decrease in the Fed funds rate of 0.50% on September 19, 2024 is expected to help lower these deposits costs in future periods.

Previous 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.

Current wording

Total yield on loans receivable for the quarter ended September 30, 2024 was 11.43%, compared to 10.84% for the quarter ended September 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 September 30, 2023. For the quarter ended September 30, 2024, average CCBX loans increased $243.1 million, or 18.6%, with an average CCBX yield of 17.35%, compared to 17.05% at the quarter ended September 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 $159.6 million, or 9.1%. Average yield on community bank loans for the three months ended September 30, 2024 was 6.64% compared to 6.20% for the three months ended September 30, 2023.

Previous 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.

Current wording

For the three months ended September 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 7.41% and 6.46%, respectively, compared to 7.10% and 6.04%, respectively, for the three months ended September 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 $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.

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 $2.0 million for the three months ended September 30, 2024 and 2023, respectively. For the three months ended September 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 $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.

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 $4.6 million increase in loan interest income that is attributed to an increase in loan rates and $11.3 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

Net interest income for the six months ended June 30, 2024, was $127.2 million, compared to $116.8 million for the six months ended June 30, 2023, an increase of $10.4 million, or 8.9%. Yield on loans receivable was 11.04% for the six months ended June 30, 2024, compared 10.42% for the six months ended June 30, 2023. The increase in net interest income compared to the six months ended June 30, 2023 was largely related to increased yield on loans from growth in higher yielding loans primarily from CCBX combined with overall higher interest rates. Total average loans receivable for the six months ended June 30, 2024 was $3.20 billion, compared to $2.84 billion for the six months ended June 30, 2023.

Current wording

Net interest income for the nine months ended September 30, 2024, was $199.4 million, compared to $179.1 million for the nine months ended September 30, 2023, an increase of $20.4 million, or 11.4%. Yield on loans receivable was 11.18% for the nine months ended September 30, 2024, compared 10.57% for the nine months ended September 30, 2023. The increase in net interest income compared to the nine months ended September 30, 2023 was largely related to growth in higher yielding loans primarily from CCBX combined with overall higher interest rates.

Previous wording

Interest income from interest earning deposits with other banks was $10.5 million for the six months ended June 30, 2024, an increase of $4.7 million due to higher interest rates, combined with an increase in balances, compared to the six months ended June 30, 2023. The average balance of interest earning deposits invested with other banks for the six months ended June 30, 2024 was $384.5 million, compared to $241.4 million for the six months ended June 30, 2023. Additionally, the yield on these interest earning deposits with other banks increased 0.64%, compared to the six months ended June 30, 2023. Interest income on investment securities increased $514,000 to $1.7 million, with a yield of 4.19% at June 30, 2024, compared to $1.2 million, and a yield of 2.29%, at June 30, 2023. Average investment securities decreased $23.7 million from $106.3 million for the six months ended June 30, 2023 to $82.6 million for the six months ended June 30, 2024 as a result of $100.0 million in AFS U.S. Treasury securities that matured on February 29, 2024, partially offset by an increase of $36.6 million in HTM securities resulting from securities purchased for CRA purposes in the second half of 2023.

Current wording

Interest income from interest earning deposits with other banks was $15.2 million for the nine months ended September 30, 2024, an increase of $5.6 million due to higher interest rates, combined with an increase in balances, compared to the nine months ended September 30, 2023. The average balance of interest earning deposits invested with other banks for the nine months ended September 30, 2024 was $373.2 million, compared to $256.3 million for the nine months ended September 30, 2023. Additionally, the yield on these interest earning deposits with other banks increased 0.41%, compared to the nine months ended September 30, 2023. Interest income on investment securities increased $423,000 to $2.4 million, with a yield of 4.49% at September 30, 2024, compared to $2.0 million, and a yield of 2.39%, at September 30, 2023. Average investment securities decreased $38.9 million from $110.2 million for the nine months ended September 30, 2023 to $71.3 million for the nine months ended September 30, 2024 as a result of AFS U.S. Treasury securities that matured earlier in the year, partially offset by an increase in HTM securities resulting from securities purchased for CRA purposes.

Previous wording

Interest expense was $60.8 million for the six months ended June 30, 2024, a $23.8 million increase from the six months ended June 30, 2023. Interest expense on deposits was $59.4 million for the six months ended June 30, 2024, compared to $35.6 million for the six months ended June 30, 2023. The $23.8 million increase in interest expense on deposits was due to an increase in average interest bearing deposits of $592.6 million and an increase in interest rates. Interest on borrowed funds was $1.3 million for the six months ended June 30, 2024 and June 30, 2023. The $18,000 increase in interest expense on borrowed funds from the six months ended June 30, 2023 is the result of an increase in interest rates on the junior subordinated debt, which increased 0.76%, to 7.95% for the six months ended June 30, 2024 compared to 7.19% for the six months ended June 30, 2023.

Current wording

Interest expense was $93.7 million for the nine months ended September 30, 2024, a $30.6 million increase from the nine months ended September 30, 2023. Interest expense on deposits was $91.5 million for the nine months ended September 30, 2024, compared to $61.1 million for the nine months ended September 30, 2023. The $30.4 million increase in interest expense on deposits was due to an increase in average interest bearing deposits of $544.8 million and an increase in interest rates. Interest on borrowed funds was $2.2 million for the nine months ended September 30, 2024 and $2.0 million for the nine months ended September 30, 2023. The $176,000 increase in interest expense on borrowed funds from the nine months ended September 30, 2023 is the result of an increase in interest rates on the junior subordinated debt, which increased 0.47%, to 7.89% for the nine months ended September 30, 2024 compared to 7.41% for the nine months ended September 30, 2023.

Previous wording

Net interest margin was 6.96% for the six months ended June 30, 2024, compared to 7.37% for the six months ended June 30, 2023. The decrease in net interest margin compared to the six months ended June 30, 2023 was largely a result of an increase of 1.10% for cost of deposits, partially offset by an increase of 0.62% for yield on loans. Interest expense has increased and net interest margin was compressed as a result of the continued higher interest rate environment, requiring us to increase the interest rates on interest bearing deposits to compete with rates offered by our competitors and due to CCBX deposit pricing increasing as a result of interest rates being tied to the Fed Funds rate, which is 0.25% higher than it was at June 30, 2023. Additionally, the sale of higher risk and higher yielding loans during the quarters ended September 2023, December 2023 and March 2024 in an effort to optimize and strengthen the balance sheet impacted net interest margin in the current quarter and will continue to impact future quarters.

Current wording

Net interest margin was 7.12% for the nine months ended September 30, 2024, compared to 7.27% for the nine months ended September 30, 2023. The decrease in net interest margin compared to the nine months ended September 30, 2023 was largely a result of an increase of 0.86% for cost of deposits, primarily due to growth in CCBX deposits, partially offset by an increase of 0.61% for yield on loans. Interest expense has increased and net interest margin was compressed as a result of growth in higher rate CCBX deposits. Interest bearing deposits increased an average of $544.8 million for the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, and these deposits were tied to a higher Fed Funds rate for all nine months of 2024. Also contributing is the continued higher interest rate environment has required us to increase the interest rates on interest bearing deposits to compete with rates offered by our competitors. Additionally, the sale of higher risk and higher yielding loans during the quarters ended September 2023, December 2023 and March 2024 in an effort to optimize and strengthen the balance sheet decreased year to date net interest margin.

Previous wording

Cost of funds was 3.56% for the six months ended June 30, 2024, compared to 2.49% for the six months ended June 30, 2023. Cost of deposits for the six months ended June 30, 2024 was 3.53%, which was a 1.09% increase, from 2.44% for the six months ended June 30, 2023. These increases were largely due to an increase in interest rates and an increase in interest bearing deposits. CCBX deposit growth also contributed to the increase in interest expense.

Current wording

Cost of funds was 3.58% for the nine months ended September 30, 2024, compared to 2.73% for the nine months ended September 30, 2023. Cost of deposits for the nine months ended September 30, 2024 was 3.55%, which was a 0.85% increase, from 2.69% for the nine months ended September 30, 2023. These increases were largely due to growth in CCBX interest bearing deposits tied to a higher Fed Funds rate for a full nine months in 2024, compared to the nine months ended September 30, 2023. The recent decrease in the Fed Funds rate will help to decrease cost of deposits.

Previous wording

Total yield on loans receivable for the six months ended June 30, 2024 was 11.04%, compared to 10.42% for the six months ended June 30, 2023. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. For the six months ended June 30, 2024, average CCBX loans increased $146.7 million, or 12.6%, with an average CCBX yield of 17.56%, compared to 16.56% for the six months 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. In light of our recent efforts to optimize and strengthen the balance sheet by selling higher yield CCBX loans, total yield on loans have and may continue to flatten out as new CCBX loans are replacing higher risk and higher yielding loans that were sold or allowed to mature during the quarters ended September 30, 2023, December 31, 2023 and March 31, 2024. There was an increase in average community bank loans of $213.5 million, or 12.8%, compared to the six months ended June 30, 2023. Average yield on community bank loans for the six months ended June 30, 2024 was 6.49%. compared to 6.13% for the six months ended June 30, 2023.

Current wording

Total yield on loans receivable for the nine months ended September 30, 2024 was 11.18%, compared to 10.57% for the nine months ended September 30, 2023. This increase in yield on loans receivable is primarily attributed to an increase in higher rate CCBX loans. For the nine months ended September 30, 2024, average CCBX loans increased $178.9 million, or 14.7%, with an average CCBX yield of 17.48%, compared to 16.74% for the nine months ended September 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. In light of our recent efforts to optimize and strengthen the balance sheet by selling higher yield CCBX loans back to the originating partner, combined with the recent decrease in the Fed Funds rate, total yield on loans have and may continue to flatten out as new CCBX loans are replacing higher risk and higher yielding loans that were sold or allowed to mature during the quarters ended September 30, 2023, December 31, 2023 and March 31, 2024. There was an increase in average community bank loans of $195.3 million, or 11.5%, compared to the nine months ended September 30, 2023. Average yield on community bank loans for the nine months ended September 30, 2024 was 6.54%. compared to 6.15% for the nine months ended September 30, 2023.

Previous wording

For the six 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 6.96% and 5.98%, respectively, compared to 7.37% and 6.39%, respectively, for the six months ended June 30, 2023.

Current wording

For the nine months ended September 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 7.12% and 6.15%, respectively, compared to 7.27% and 6.26%, respectively, for the nine months ended September 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 loan fees, included in interest income totaled $4.2 million and $2.3 million for the six months ended June 30, 2024 and 2023, respectively. For the six months ended June 30, 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 loan fees, included in interest income totaled $6.5 million and $4.4 million for the nine months ended September 30, 2024 and 2023, respectively. For the nine months ended September 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 $8.8 million increase in loan interest income that is attributed to an increase in loan rates and $20.2 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 $14.2 million increase in loan interest income that is attributed to an increase in loan rates and $30.7 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, 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.

Current wording

The economic environment is continuously changing, due to the pace of economic growth, inflation, changing interest rates, unemployment, global unrest, the war in Ukraine, conflicts in the Middle East, political uncertainty, natural disasters, and trade issues that may impact the provision and therefore the allowance. Gross loans, excluding loans held for sale, totaled $3.42 billion at September 30, 2024. The allowance for credit losses as a percentage of loans was 4.98% at September 30, 2024, compared to 3.41% at September 30, 2023.

Previous wording

Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying or reimbursing incurred losses. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and reclassified negative deposit accounts. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner's legal commitment to indemnify or reimburse losses. The credit enhancement asset is relieved as credit enhancement payments are received from the CCBX partner or taken from the partner's cash reserve account.

Current wording

Agreements with our CCBX partners provide for a credit enhancement provided by the partner which protects the Bank by indemnifying or reimbursing incurred losses. CCBX partners bear most of the responsibility for credit losses incurred which consequently gives them a vested interest in the performance of the portfolio. We believe that this alignment of interests ensures that CCBX partners are motivated to implement robust risk management practices and maintain the overall health of the portfolio. In accordance with accounting guidance, we estimate and record a provision for expected losses for these CCBX loans and reclassified negative deposit accounts. When the provision for credit losses - loans and provision for unfunded commitments is recorded, a credit enhancement asset is also recorded on the balance sheet through noninterest income (BaaS credit enhancements) in recognition of the CCBX partner's legal commitment to indemnify or reimburse losses. The credit enhancement asset is relieved as credit enhancement payments are received from the CCBX partner or taken from the partner's cash reserve account.

Previous 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

Current wording

The provision for credit losses - loans for the three months ended September 30, 2024 was $71.6 million, compared to $27.2 million for the three months ended September 30, 2023. The increase in the Company’s provision for credit losses - loans during the quarter ended September 30, 2024, is largely related to the provision for CCBX partner loans. During the quarter ended September 30, 2024, a $72.1 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 $519,000 was needed for the quarter ended September 30, 2024, largely due to the recapture of a specific allowance and a change in remaining average lives of community bank loans.

Previous 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.

Current wording

Net charge-offs for the quarter ended September 30, 2024 totaled $49.2 million, or 5.65% of total average loans, compared to $36.8 million, or 4.77% of total average loans, for the quarter ended September 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 $400.8 million loan portfolio; prior to April 1, 2024, the Company was responsible for 10% of that portfolio. At September 30, 2024, our portion of this portfolio represented $19.8 million in loans. For the three months ended September 30, 2024, $48.8 million of net charge-offs were recognized for CCBX loans and $395,000 net charge-offs were recognized on community bank loans. For the three months ended September 30, 2023, $36.8 million of net charge-offs were recognized on CCBX loans and zero net charge-offs were recognized for community bank loans.

Previous wording

Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligation then the Bank would be exposed to additional loan and deposit losses if the cash flows on the loans were not sufficient to fund the reimbursement of loan losses, as a result of this counterparty risk. If a CCBX partner does not replenish their cash reserve account the Bank may consider an alternative plan for funding the cash reserve. This may involve the possibility of adjusting the funding amounts or timelines to better align with the partner's specific situation. If a mutually agreeable funding plan is not achieved then the Bank could declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would evaluate any remaining credit enhancement asset from the CCBX partner in the event the partner failed to determine if a write-off is appropriate. If a write-off occurs, the Bank would retain the full yield and any fee income on the loan portfolio going forward, and our BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.

Current wording

Although agreements with our CCBX partners provide for credit enhancements that provide protection to the Bank from credit and fraud losses by indemnifying or reimbursing incurred credit and fraud losses, if our partner is unable to fulfill their contracted obligation then the Bank would be exposed to additional loan and deposit losses (counterparty risk) if the cash flows on the loans were not sufficient to fund the reimbursement of loan losses. If a CCBX partner does not replenish their cash reserve account the Bank may consider an alternative plan for funding the cash reserve. This may involve the possibility of adjusting the funding amounts or timelines to better align with the partner's specific situation. If a mutually agreeable funding plan is not achieved then the Bank could declare the agreement in default, take over servicing and cease paying the partner for servicing the loan and providing credit enhancements. The Bank would evaluate any remaining credit enhancement asset from the CCBX partner in the event the partner failed to determine if a write-off is appropriate. If a write-off occurs, the Bank would retain the full yield and any fee income on the loan portfolio going forward, and our BaaS loan expense would decrease once default occurred and payments to the CCBX partner were stopped.

Previous wording

The provision for credit losses - loans for the six months ended June 30, 2024 was $141.4 million, compared to $96.1 million for the six 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 due to significant loan growth, a change in the mix of loans and an increase in loan balances with higher loss rates. During the six months ended June 30,

Current wording

The provision for credit losses - loans for the nine months ended September 30, 2024 was $213.0 million, compared to $123.3 million for the nine months ended September 30, 2023. The increase in the Company’s provision for credit losses - loans during the quarter ended September 30, 2024, is largely related to the provision for CCBX partner loans due to significant loan growth, a change in the mix of loans and an increase in loan balances with higher loss rates. During the nine months ended September 30, 2024, a $214.1 million provision for credit losses - loans was recorded for loans originated through CCBX partners based on management’s analysis. The factors used in management’s analysis for community bank credit losses indicated that a recapture of $1.1 million was needed for the nine months ended September 30, 2024, due in part to a change in remaining average lives on community bank loans.

Previous wording

Net charge-offs for the six months ended June 30, 2024 totaled $110.5 million, or 6.95% of total average loans, as compared to net charge-offs of $63.3 million, or 4.50% of total average loans, for the six months ended June 30, 2023. Net charge-offs increased in the first six months of 2024 compared to the same period of 2023 as a result of the growth in loans originated through CCBX partners, which have higher loss rates than community bank loans. In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for a credit enhancement that indemnifies, and CCBX partners reimburse 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 is responsible for credit losses on approximately 5% of a $353.6 million loan portfolio. At June 30, 2024, our portion of this portfolio represented $17.7 million in loans. For the six months ended June 30, 2024, $110.4 million of net charge-offs were recognized for CCBX loans and $9,000 of net charge-offs recognized for community bank loans. For the six months ended June 30, 2023, $63.2 million of net charge-offs were recognized for CCBX and $54,000 of net charge-offs were recognized for community bank loans.

Current wording

Net charge-offs for the nine months ended September 30, 2024 totaled $159.7 million, or 6.49% of total average loans, as compared to net charge-offs of $100.1 million, or 4.59% of total average loans, for the nine months ended September 30, 2023. Net charge-offs increased in the first nine months of 2024 compared to the same period of 2023 as a result of the growth in loans originated through CCBX partners, which have higher loss rates than community bank loans. In accordance with GAAP, CCBX losses are recorded as charge-offs, but CCBX partner agreements provide for a credit enhancement that indemnifies, and CCBX partners reimburse 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 is responsible for credit losses on approximately 5% of a $400.8 million loan portfolio. At September 30, 2024, our portion of this portfolio represented $19.8 million in loans. For the nine months ended September 30, 2024, $159.3 million of net charge-offs were recognized for CCBX loans and $404,000 of net charge-offs recognized for community bank loans. For the nine months ended September 30, 2023, $100.0 million of net charge-offs were recognized for CCBX and $54,000 of net charge-offs were recognized for community bank loans.

Previous wording

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

Current wording

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

Previous 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.

Current wording

Our CCBX segment continues to evolve, and we now have 22 relationships, at varying stages, as of September 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.

Previous 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.

Current wording

Unrealized (loss)/gain on equity securities, net. During the three and nine months ended September 30, 2024, we recognized an unrealized gain on equity securities of $2,000 and $26,000 respectively, compared to the same period ended September 30, 2023, when there was an unrealized gain of $5,000 and $199,000 respectively, recognized. We hold $3.1 million in equity securities of entities that are focused on providing products to the BaaS and financial services space.

Previous wording

For the three months ended June 30, 2024, noninterest expense totaled $58.8 million, an increase of $6.9 million, or 13.3%, compared to $51.9 million for the three months ended June 30, 2023. The increase was primarily the result of an increase of $7.0 million in BaaS loan expense. Compared to the three months ended June 30, 2023, there was a $1.2 million decrease in excise taxes due to the recording of $1.2 million refund from the State of Washington as a result of an apportionment study we completed to quantify revenue earned outside of the state of Washington. 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. While we continue to invest in our infrastructure and the automation of our processes so that they are scalable there was also a $1.0 million decrease in legal and professional expenses as some of our risk management infrastructure projects are being completed. Partially offsetting these decreases is a $1.0 million increase in data processing and software licenses due to enhancements in technology and a $696,000 increase in salaries and employee benefits related to hiring staff for CCBX and additional staff for our ongoing growth initiatives.

Current wording

For the three months ended September 30, 2024, noninterest expense totaled $65.6 million, an increase of $9.1 million, or 16.1%, compared to $56.5 million for the three months ended September 30, 2023. The increase was primarily the result of an increase of $9.6 million in BaaS loan expense. Compared to the three months ended September 30, 2023, data processing and software licenses increased $1.1 million due to enhancements in technology as we continue to invest in our infrastructure and the automation of our processes so they are scalable. Partially offsetting these increases was a $986,000 decrease in salaries and employee benefits and an $850,000 decrease in legal and professional expenses as some of our risk management infrastructure projects are being completed.

Previous wording

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

Current wording

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

Previous 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.

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 but 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

Occupancy. Occupancy expenses include rent, utilities, janitorial and other maintenance expenses, property insurances and taxes. Also included is depreciation on building, leasehold, furniture, fixtures and equipment. Although our hybrid and remote workforce is increasing, which helps keep some occupancy expenses down, we do expect occupancy expenses to increase as we continue to grow.

Current wording

Occupancy. Occupancy expenses include rent, utilities, janitorial and other maintenance expenses, property insurances and taxes. Also included is depreciation on building, leasehold, furniture, fixtures and equipment, and the amortization of software development that we capitalize. Although our hybrid and remote workforce is increasing, which helps keep some occupancy expenses down, we do expect occupancy expenses to increase as we make additional investments in software development and amortize those investments.

Previous wording

Point of Sale Expenses. Point of sale expenses are incurred as part of the process that allows businesses to accept payment for goods or services. Generally, point of sale expense increases as point of sale activity increases, as does point of sale income which is recognized in other income.

Current wording

Point of Sale Expenses. Point of sale expenses are incurred as part of the process that allows businesses to accept payment for goods or services. Generally, point of sale expense increases as point of sale activity increases, as does point of sale income which is recognized in other income. Point of sale expenses are incurred for both the community bank and CCBX.

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 1.17% as of March 31, 2024. 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 1.21% as of June 30, 2024. The reserve ratio is negatively affected by growth in assets and bank failures.

Previous 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.

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 where the partner does business, 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.