Coastal Financial Corporation Announces Third Quarter 2024 Results
EVERETT, Wash., Oct. 28, 2024 (GLOBE NEWSWIRE) -- Coastal Financial Corporation (NASDAQ:CCB) (the "Company", "Coastal", "we", "our", or "us"), the holding company for Coastal Community Bank (the "Bank"), through which it operates a community-focused bank with an industry leading banking as a service ("BaaS") segment, today reported unaudited financial results for the quarter ended September 30, 2024, including net income of $13.5 million, or $0.97 per diluted common share, compared to $11.6 million, or $0.84 per diluted common share, for the three months ended June 30, 2024.
Management Discussion of the Quarter
"The third quarter demonstrated strong momentum across both our community bank and CCBX operating segments, despite a still challenging operating environment," said CEO Eric Sprink. "We saw high quality net loan growth of $92.4 million despite selling $423.7 million in loans. We are implementing strategies to increase fee income and we continue to build out and invest in an infrastructure that is scalable, and that we believe will enable us to be innovative leaders in financial services."
Key Points for Third Quarter and Our Go-Forward Strategy
Balance Sheet Well Positioned for Lower Rates. Our balance sheet stands in a modestly liability sensitive position as of September 30, 2024, with $1.95 billion of CCBX deposits that contractually reprice lower immediately upon any reduction in the Federal Funds Rate, with $1.09 billion of CCBX loans repricing in 90 days or less following such reduction. The Federal Open Market Committee recently lowered the targeted Federal Funds rate 0.50% on September 19, 2024; a reduction of 0.50% compared to June 30, 2024 and September 30, 2023. 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.
Expanding Relationships with CCBX Partners. We continue to focus on expanding product offerings with existing CCBX partners. We believe that launching new products with existing partners positions us to reach a wide and established customer base with modest increase in enterprise risk. Products launched in 2024 with existing partners have gained traction and are growing the balance sheet and increasing income. The pipeline for CCBX is active, although we expect to remain selective in adding new partners to manage risk and capital.
On-going Loan Sales. We sold $423.7 million loans in the quarter ended September 30, 2024 as part of our strategy to balance credit risk, manage partner and lending limits, protect capital levels and move credit card balances to an off balance sheet fee generating model. We are retaining a portion of the fee income for our role in processing transactions on sold credit card balances. This provides an on-going and passive revenue stream with no on balance sheet risk.
Continued Regulatory and Compliance Infrastructure Investments Position Us Well for Next Phase of Growth. We continue to utilize co-sourced personnel as a component of our risk and compliance efforts. This flexible co-sourcing approach allows us to manage the growth of our internal team while also ensuring CCBX has the resources it needs. While we remain 100% indemnified against partner fraud losses, we were encouraged to see fraudulent activity amongst our partners remains low during the current quarter, compared to the same period last year, a positive indicator of our continued investments in our risk infrastructure.
Reorganization and Strengthening of Talent to Accommodate Growth and Plans for the Future. We recently announced the bifurcation of the President of the Bank into two roles, appointing Brian Hamilton as President of CCBX, the Fintech and BaaS segment of the Bank, with Curt Queyrouze serving as President of the community bank and corporate credit.
Third Quarter 2024 Financial Highlights
The tables below outline some of our key operating metrics.
Three Months Ended
(Dollars in thousands, except share and per share data; unaudited)
September 30,2024
June 30,2024
March 31, 2024
December 31,2023
September 30,2023
Income Statement Data:
Interest and dividend income
$
105,079
$
97,487
$
90,472
$
88,243
$
88,331
Interest expense
32,892
31,250
29,536
28,586
26,102
Net interest income
72,187
66,237
60,936
59,657
62,229
Provision for credit losses
70,257
62,325
83,158
60,789
27,253
Net interest (expense)/ income after provision for credit losses
1,930
3,912
(22,222
)
(1,132
)
34,976
Noninterest income
80,068
69,918
86,955
64,694
34,579
Noninterest expense
65,616
58,809
56,018
51,703
56,501
Provision for income tax
2,926
3,425
1,915
2,847
2,784
Net income
13,456
11,596
6,800
9,012
10,270
As of and for the Three Month Period
September 30,2024
June 30,2024
March 31,2024
December 31,2023
September 30,2023
Balance Sheet Data:
Cash and cash equivalents
$
484,026
$
487,245
$
515,128
$
483,128
$
474,946
Investment securities
48,620
49,213
50,090
150,364
141,489
Loans held for sale
7,565
—
797
—
—
Loans receivable
3,418,832
3,326,460
3,199,554
3,026,092
2,967,035
Allowance for credit losses
(170,263
)
(147,914
)
(139,258
)
(116,958
)
(101,085
)
Total assets
4,065,821
3,961,546
3,865,258
3,753,366
3,678,265
Interest bearing deposits
3,047,861
2,949,643
2,888,867
2,735,161
2,637,914
Noninterest bearing deposits
579,427
593,789
574,112
625,202
651,786
Core deposits (1)
3,190,869
3,528,339
3,447,864
3,342,004
3,269,082
Total deposits
3,627,288
3,543,432
3,462,979
3,360,363
3,289,700
Total borrowings
47,847
47,810
47,771
47,734
47,695
Total shareholders' equity
331,930
316,693
303,709
294,978
284,450
Share and Per Share Data (2):
Earnings per share, basic
$
1.00
$
0.86
$
0.51
$
0.68
$
0.77
Earnings per share, diluted
$
0.97
$
0.84
$
0.50
$
0.66
$
0.75
Dividends per share
—
—
—
—
—
Book value per share (3)
$
24.51
$
23.54
$
22.65
$
22.17
$
21.38
Tangible book value per share (4)
$
24.51
$
23.54
$
22.65
$
22.17
$
21.38
Weighted avg outstanding shares, basic
13,447,066
13,412,667
13,340,997
13,286,828
13,285,974
Weighted avg outstanding shares, diluted
13,822,270
13,736,508
13,676,917
13,676,513
13,675,833
Shares outstanding at end of period
13,543,282
13,453,805
13,407,320
13,304,339
13,302,449
Stock options outstanding at end of period
198,370
286,119
309,069
354,969
356,359
See footnotes that follow the tables below
As of and for the Three Month Period
September 30,2024
June 30,2024
March 31,2024
December 31,2023
September 30,2023
Credit Quality Data:
Nonperforming assets (5) to total assets
1.34
%
1.34
%
1.42
%
1.43
%
1.18
%
Nonperforming assets (5) to loans receivable and OREO
1.60
%
1.60
%
1.71
%
1.78
%
1.47
%
Nonperforming loans (5) to total loans receivable
1.60
%
1.60
%
1.71
%
1.78
%
1.47
%
Allowance for credit losses to nonperforming loans
311.5
%
278.1
%
253.8
%
217.2
%
232.2
%
Allowance for credit losses to total loans receivable
4.98
%
4.45
%
4.35
%
3.86
%
3.41
%
Gross charge-offs
$
53,305
$
55,207
$
58,994
$
47,652
$
37,879
Gross recoveries
$
4,069
$
1,973
$
1,776
$
2,781
$
1,045
Net charge-offs to average loans (6)
5.65
%
6.57
%
7.34
%
5.92
%
4.77
%
Capital Ratios:
Company
Tier 1 leverage capital
8.40
%
8.31
%
8.24
%
8.10
%
8.03
%
Common equity Tier 1 risk-based capital
9.26
%
9.03
%
8.98
%
9.10
%
9.00
%
Tier 1 risk-based capital
9.35
%
9.13
%
9.08
%
9.20
%
9.11
%
Total risk-based capital
11.90
%
11.70
%
11.70
%
11.87
%
11.80
%
Bank
Tier 1 leverage capital
9.29
%
9.24
%
9.19
%
9.06
%
8.99
%
Common equity Tier 1 risk-based capital
10.36
%
10.15
%
10.14
%
10.30
%
10.21
%
Tier 1 risk-based capital
10.36
%
10.15
%
10.14
%
10.30
%
10.21
%
Total risk-based capital
11.65
%
11.44
%
11.43
%
11.58
%
11.48
%
(1) Core deposits are defined as all deposits excluding brokered and all time deposits. (2) Share and per share amounts are based on total actual or average common shares outstanding, as applicable. (3) We calculate book value per share as total shareholders' equity at the end of the relevant period divided by the outstanding number of our common shares at the end of each period.(4) Tangible book value per share is a non-GAAP financial measure. We calculate tangible book value per share as total shareholders' equity at the end of the relevant period, less goodwill and other intangible assets, divided by the outstanding number of our common shares at the end of each period. The most directly comparable GAAP financial measure is book value per share. We had no goodwill or other intangible assets as of any of the dates indicated. As a result, tangible book value per share is the same as book value per share as of each of the dates indicated. (5) Nonperforming assets and nonperforming loans include loans 90+ days past due and accruing interest. (6) Annualized calculations.
Key Performance Ratios
Return on average assets ("ROA") was 1.34% for the quarter ended September 30, 2024 compared to 1.21% and 1.13% for the quarters ended June 30, 2024 and September 30, 2023, respectively. ROA for the quarter ended September 30, 2024, increased 0.13% and 0.21% compared to June 30, 2024 and September 30, 2023, respectively. Noninterest expenses were higher for the quarter ended September 30, 2024 compared to the quarters ended June 30, 2024 and September 30, 2023 largely due to an increase in BaaS loan expense, which is directly related to the increase in the amount of interest earned on CCBX loans.
The following table shows the Company's key performance ratios for the periods indicated.
Three Months Ended
(unaudited)
September 30,2024
June 30,2024
March 31,2024
December 31,2023
September 30,2023
Return on average assets (1)
1.34
%
1.21
%
0.73
%
0.97
%
1.13
%
Return on average equity (1)
16.67
%
15.22
%
9.21
%
12.35
%
14.60
%
Yield on earnings assets (1)
10.79
%
10.49
%
10.07
%
9.77
%
10.08
%
Yield on loans receivable (1)
11.43
%
11.23
%
10.85
%
10.71
%
10.84
%
Cost of funds (1)
3.62
%
3.60
%
3.52
%
3.39
%
3.18
%
Cost of deposits (1)
3.59
%
3.58
%
3.49
%
3.36
%
3.14
%
Net interest margin (1)
7.41
%
7.13
%
6.78
%
6.61
%
7.10
%
Noninterest expense to average assets (1)
6.54
%
6.14
%
6.04
%
5.56
%
6.23
%
Noninterest income to average assets (1)
7.98
%
7.30
%
9.38
%
6.95
%
3.81
%
Efficiency ratio
43.10
%
43.19
%
37.88
%
41.58
%
58.36
%
Loans receivable to deposits (2)
94.46
%
93.88
%
92.42
%
90.05
%
90.19
%
(1) Annualized calculations shown for quarterly periods presented.(2) Includes loans held for sale.
Management Outlook; CEO Eric Sprink
"As we look ahead to the fourth quarter and 2025, we remain laser focused on building out our technology and risk management infrastructure to more efficiently support our next phase of growth within CCBX. While the balance sheet re-mix earlier this year resulted in a short-term reduction to income, we continue to make strategic decisions which are enhancing credit quality, generating passive fee income, strengthening our talent and growing relationships with established and prospective CCBX partners all of which are expected to position Coastal to be more profitable in 2025."
Coastal Financial Corporation Overview
The Company has one main subsidiary, the Bank which consists of three segments: CCBX, the community bank and treasury & administration. The CCBX segment includes all of our BaaS activities, the community bank segment includes all community banking activities, and the treasury & administration segment includes treasury management, overall administration and all other aspects of the Company.
CCBX Performance Update
Our CCBX segment continues to evolve, and we have 22 relationships, at varying stages, as of September 30, 2024. We continue to refine the criteria for CCBX partnerships, are exiting relationships where it makes sense for us to do so and are focusing on larger more established partners, with experienced management teams, existing customer bases and strong financial positions.
We are expanding product offerings with our existing CCBX partners. We believe that launching new products with existing partners positions us to reach a wide and established customer base with a modest increase in regulatory risk given we have already vetted these partners and have operational history. Products launched earlier in the year with existing partners have gained traction and are growing the balance sheet and increasing income. We continue to sell loans as part of our strategy to balance partner and lending limits, and manage the loan portfolio and credit quality. We retain a portion of the fee income for our role in processing transactions on sold credit card balances. This is expected to provide an on-going and passive revenue stream with no on balance sheet risk.
The following table illustrates the activity and evolution in CCBX relationships for the periods presented.
As of
(unaudited)
September 30, 2024
June 30,2024
September 30, 2023
Active
19
19
18
Friends and family / testing
1
1
1
Implementation / onboarding
1
1
1
Signed letters of intent
1
0
1
Wind down - active but preparing to exit relationship
0
0
1
Total CCBX relationships
22
21
22
CCBX loans increased $106.9 million, or 7.6%, despite selling $423.7 million loans during the three months ended September 30, 2024 to $1.52 billion, while we continued to enhance credit standards on new CCBX loan originations. In accordance with the program agreement for one partner, effective April 1, 2024, the portion of the CCBX portfolio that we are responsible for losses on decreased from 10% to 5%. At September 30, 2024 the portion of this portfolio for which we are responsible represented $19.8 million in loans.
The following table details the CCBX loan portfolio:
CCBX
As of
September 30, 2024
June 30, 2024
September 30, 2023
(dollars in thousands; unaudited)
Balance
% to Total
Balance
% to Total
Balance
% to Total
Commercial and industrial loans:
Capital call lines
$
103,924
6.8
%
$
109,133
7.7
%
$
114,174
9.6
%
All other commercial & industrial loans
36,494
2.4
41,731
3.0
58,869
5.0
Real estate loans:
Residential real estate loans
265,402
17.5
287,950
20.4
251,775
21.3
Consumer and other loans:
Credit cards
633,691
41.6
549,241
38.7
440,993
37.3
Other consumer and other loans
482,228
31.7
426,809
30.2
316,987
26.8
Gross CCBX loans receivable
1,521,739
100.0
%
1,414,864
100.0
%
1,182,798
100.0
%
Net deferred origination (fees) costs
(447
)
(438
)
(424
)
Loans receivable
$
1,521,292
$
1,414,426
$
1,182,374
Loan Yield - CCBX (1)(2)
17.35
%
17.77
%
17.05
%
(1) CCBX yield does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit enhancements and originating & servicing CCBX loans. See reconciliation of the non-GAAP measures at the end of this earnings release for the impact of BaaS loan expense on CCBX loan yield.(2) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.
The increase in CCBX loans in the quarter ended September 30, 2024, includes an increase of $139.9 million or 14.3%, in consumer and other loans, partially offset by a $22.5 million, or 7.8%, decrease in residential real estate loans and a decrease of $5.2 million, or 4.8%, in capital call lines as a result of normal balance fluctuations and business activities. We continue to monitor and manage the CCBX loan portfolio, and sold $423.7 million in CCBX loans during the quarter ended September 30, 2024 compared to sales of $155.2 million in the quarter ended June 30, 2024. We continue to reposition ourselves by managing CCBX credit and concentration levels in an effort to optimize our loan portfolio and generate off balance sheet fee income.
Our credit card program through CCBX continues to grow in dollars and number of active cards as shown in the graph below:
The following table details the CCBX deposit portfolio:
CCBX
As of
September 30, 2024
June 30, 2024
September 30, 2023
(dollars in thousands; unaudited)
Balance
% to Total
Balance
% to Total
Balance
% to Total
Demand, noninterest bearing
$
60,655
2.9
%
$
62,234
3.0
%
$
67,782
3.9
%
Interest bearing demand and money market
1,991,858
94.6
1,989,105
96.7
1,679,921
95.9
Savings
5,204
0.3
5,150
0.3
4,529
0.2
Total core deposits
2,057,717
97.8
2,056,489
100.0
1,752,232
100.0
Other deposits
47,046
2.2
—
0.0
—
—
Total CCBX deposits
$
2,104,763
100.0
%
$
2,056,489
100.0
%
$
1,752,232
100.0
%
Cost of deposits (1)
4.82
%
4.92
%
4.80
%
(1) Cost of deposits is annualized for the three months ended for each period presented.CCBX deposits increased $48.3 million, or 2.3%, in the three months ended September 30, 2024 to $2.10 billion. This excludes the $214.5 million in CCBX deposits that were transferred off balance sheet for increased Federal Deposit Insurance Corporation ("FDIC") insurance coverage purposes, compared to $117.7 million for the quarter ended June 30, 2024. Amounts in excess of FDIC insurance coverage are transferred, using a third party facilitator/vendor sweep product, to participating financial institutions.
Community Bank Performance Update
In the quarter ended September 30, 2024, the community bank saw net loans decrease $14.5 million, or 0.8%, to $1.90 billion.
The following table details the Community Bank loan portfolio:
Community Bank
As of
September 30, 2024
June 30, 2024
September 30, 2023
(dollars in thousands; unaudited)
Balance
% to Total
Balance
% to Total
Balance
% to Total
Commercial and industrial loans
$
152,161
8.0
%
$
144,436
7.5
%
$
158,232
8.8
%
Real estate loans:
Construction, land and land development loans
163,051
8.6
173,064
9.0
167,686
9.4
Residential real estate loans
212,467
11.2
229,639
12.0
225,372
12.6
Commercial real estate loans
1,362,452
71.5
1,357,979
70.8
1,237,849
69.1
Consumer and other loans:
Other consumer and other loans
14,173
0.7
14,220
0.7
2,483
0.1
Gross Community Bank loans receivable
1,904,304
100.0
%
1,919,338
100.0
%
1,791,622
100.0
%
Net deferred origination fees
(6,764
)
(7,304
)
(6,961
)
Loans receivable
$
1,897,540
$
1,912,034
$
1,784,661
Loan Yield(1)
6.64
%
6.52
%
6.20
%
(1) Loan yield is annualized for the three months ended for each period presented and includes loans held for sale and nonaccrual loans.Community bank loans had a $10.0 million decrease in construction, land and land development loans, partially offset by an increase of $7.7 million in commercial and industrial loans and an increase in commercial real estate loans of $4.5 million during the quarter ended September 30, 2024; consumer and other loans were flat.
The following table details the community bank deposit portfolio:
Community Bank
As of
September 30, 2024
June 30, 2024
September 30, 2023
(dollars in thousands; unaudited)
Balance
% to Total
Balance
% to Total
Balance
% to Total
Demand, noninterest bearing
$
518,772
34.1
%
$
531,555
35.6
%
$
584,004
37.9
%
Interest bearing demand and money market
552,108
36.3
876,668
59.0
852,747
55.5
Savings
62,272
4.1
63,627
4.3
80,099
5.2
Total core deposits
1,133,152
74.5
1,471,850
98.9
1,516,850
98.6
Other deposits
373,681
24.5
1
0.0
1
0.0
Time deposits less than $100,000
6,305
0.4
6,741
0.5
8,635
0.6
Time deposits $100,000 and over
9,387
0.6
8,351
0.6
11,982
0.8
Total Community Bank deposits
$
1,522,525
100.0
%
$
1,486,943
100.0
%
$
1,537,468
100.0
%
Cost of deposits(1)
1.92
%
1.77
%
1.31
%
(1) Cost of deposits is annualized for the three months ended for each period presented.Community bank deposits increased $35.6 million, or 2.4%, during the three months ended September 30, 2024 to $1.52 billion. This is the second consecutive quarter of growth after allowing higher rate balances to run-off earlier in the year. The community bank segment includes noninterest bearing deposits of $518.8 million, or 34.1%, of total community bank deposits, resulting in a cost of deposits of 1.92%, which compared to 1.77% for the quarter ended June 30, 2024.
Net Interest Income and Margin Discussion
Net interest income was $72.2 million for the quarter ended September 30, 2024, an increase of $5.9 million, or 9.0%, from $66.2 million for the quarter ended June 30, 2024, and an increase of $10.0 million, or 16.0%, from $62.2 million for the quarter ended September 30, 2023. The increase in net interest income compared to June 30, 2024, was a result of increased interest income due to an increase in average loans receivable partially offset by an increase in cost of funds. The increase in net interest income compared to September 30, 2023 was largely related to increased yield on loans resulting from higher interest rates and growth in higher yielding loans partially offset by an increase in cost of funds relating to higher interest rates and growth in interest bearing deposits.
Net interest margin was 7.41% for the three months ended September 30, 2024, compared to 7.13% for the three months ended June 30, 2024, with the increase primarily due to higher loan yields. Net interest margin was 7.10% for the three months ended September 30, 2023. The increase in net interest margin for the three months ended September 30, 2024 compared to the three months ended September 30, 2023 was largely due to an increase in loan yield partially offset by higher interest rates on interest bearing deposits. Interest and fees on loans receivable increased $8.6 million, or 9.5%, to $99.6 million for the three months ended September 30, 2024, compared to $90.9 million for the three months ended June 30, 2024, and increased $15.9 million, or 19.1%, compared to $83.7 million for the three months ended September 30, 2023, due to an increase in outstanding balances and higher interest rates.
Average investment securities decreased $795,000 to $49.0 million compared to the three months ended June 30, 2024 and decreased $69.0 million compared to the three months ended September 30, 2023 as a result of maturing securities.
Cost of funds was 3.62% for the quarter ended September 30, 2024, an increase of 2 basis points from the quarter ended June 30, 2024 and an increase of 44 basis points from the quarter ended September 30, 2023. Cost of deposits for the quarter ended September 30, 2024 was 3.59%, compared to 3.58% for the quarter ended June 30, 2024, and 3.14% for the quarter ended September 30, 2023. The increased cost of funds and deposits compared to June 30, 2024 and September 30, 2023 was due to the continued high interest rate environment. The late September reduction in the Fed funds rate is expected to help to lower our cost of deposits in future periods.
The following table summarizes the average yield on loans receivable and cost of deposits:
For the Three Months Ended
September 30, 2024
June 30, 2024
September 30, 2023
Yield onLoans (2)
Cost ofDeposits (2)
Yield onLoans (2)
Cost ofDeposits (2)
Yield onLoans (2)
Cost ofDeposits (2)
Community Bank
6.64
%
1.92
%
6.52
%
1.77
%
6.20
%
1.31
%
CCBX (1)
17.35
%
4.82
%
17.77
%
4.92
%
17.05
%
4.80
%
Consolidated
11.43
%
3.59
%
11.23
%
3.58
%
10.84
%
3.14
%
(1) CCBX yield on loans does not include the impact of BaaS loan expense. BaaS loan expense represents the amount paid or payable to partners for credit and fraud enhancements and originating & servicing CCBX loans. To determine Net BaaS loan income earned from CCBX loan relationships, the Company takes BaaS loan interest income and deducts BaaS loan expense to arrive at Net BaaS loan income which can be compared to interest income on the Company's community bank loans. See reconciliation of the non-GAAP measures at the end of this earnings release for the impact of BaaS loan expense on CCBX loan yield.(2) Annualized calculations for periods shown.
The following tables illustrates how BaaS loan interest income is affected by BaaS loan expense resulting in net BaaS loan income and the associated yield:
For the Three Months Ended
September 30, 2024
June 30, 2024
September 30, 2023
(dollars in thousands, unaudited)
Income / Expense
Income / expense divided by average CCBX loans (2)
Income / Expense
Income / expense divided byaverage CCBX loans(2)
Income / Expense
Income / expense divided by average CCBX loans (2)
BaaS loan interest income
$
67,692
17.35
%
$
60,203
17.77
%
$
56,279
17.05
%
Less: BaaS loan expense
32,612
8.36
%
29,076
8.58
%
23,003
6.97
%
Net BaaS loan income (1)
$
35,080
8.99
%
$
31,127
9.19
%
$
33,276
10.08
%
Average BaaS Loans(3)
$
1,552,443
$
1,362,343
$
1,309,380
(1) A reconciliation of the non-GAAP measures are set forth at the end of this earnings release.(2) Annualized calculations shown for quarterly periods presented.(3) Includes loans held for sale.
Noninterest Income Discussion
Noninterest income was $80.1 million for the three months ended September 30, 2024, an increase of $10.2 million from $69.9 million for the three months ended June 30, 2024, and an increase of $45.5 million from $34.6 million for the three months ended September 30, 2023. The increase in noninterest income over the quarter ended June 30, 2024 was primarily due to an increase of $9.9 million in total BaaS income. The $9.9 million increase in total BaaS income included a $9.3 million increase in BaaS credit enhancements related to the provision for credit losses, a $300,000 increase in BaaS fraud enhancements, and an increase of $340,000 in BaaS program income. The increase in BaaS program income is largely due to higher servicing and other BaaS fees, transaction fees and interchange fees and our primary BaaS source for recurring fee income (see "Appendix B" for more information on the accounting for BaaS allowance for credit losses and credit and fraud enhancements). Additionally, other income increased $229,000 largely due to increased incoming ACH activity.
The $45.5 million increase in noninterest income over the quarter ended September 30, 2023 was primarily due to a $43.4 million increase in BaaS credit and fraud enhancements, and an increase of $2.0 million in BaaS program income.
Noninterest Expense DiscussionTotal noninterest expense increased $6.8 million to $65.6 million for the three months ended September 30, 2024, compared to $58.8 million for the three months ended June 30, 2024, and increased $9.1 million from $56.5 million for the three months ended September 30, 2023. The increase in noninterest expense for the quarter ended September 30, 2024, as compared to the quarter ended June 30, 2024, was primarily due to a $3.8 million increase in BaaS expense (including a $300,000 increase in BaaS fraud expense and a $3.5 million increase in BaaS loan expense). BaaS loan expense represents the amount paid or payable to partners for credit enhancements, fraud enhancements, and originating & servicing CCBX loans. BaaS fraud expense represents non-credit fraud losses on partner's customer loan and deposit accounts. A portion of this expense is realized during the quarter in which the loss occurs, and a portion is estimated based on historical or other information from our partners, partially offset by a $1.5 million increase in excise taxes (due to the recording of $1.2 million business and occupation tax credit from the State of Washington which resulted in the recognition of a net credit of $706,000 for the quarter ended June 30, 2024, compared to expense of $762,000 for the quarter ended September 30, 2024). We also recorded an increase of $587,000 in data processing and software licenses as a result of our continued investment in our infrastructure and the automation of our processes so that they are scalable and an increase of $499,000 in point of sale expenses as a result of increased partner transaction activity.
The increase in noninterest expenses for the quarter ended September 30, 2024 compared to the quarter ended September 30, 2023 was largely due to an increase of $8.8 million in BaaS partner expense (including a $9.6 million increase in BaaS loan expense partially offset by a decrease of $766,000 in BaaS fraud expense), a $1.1 million increase in data processing and software licenses due to enhancements in technology, and a $526,000 increase in occupancy expense, largely due to higher software depreciation/amortization expense, partially offset by a $986,000 decrease in salary and employee benefits largely as a result of some one-time costs that were expensed in the quarter ended September 30, 2023 for which there was no similar expense in the current quarter, and an $850,000 decrease in legal and professional expenses as a result of risk management and projects being completed.
Provision for Income Taxes
The provision for income taxes was $2.9 million for the three months ended September 30, 2024, $3.4 million for the three months ended June 30, 2024 and $2.8 million for the third quarter of 2023. The income tax provision was lower for the three months ended September 30, 2024 compared to the quarter ended June 30, 2024 as a result of the deductibility of certain equity awards which reduced tax expense despite net income being higher and higher than the quarter ended September 30, 2023, primarily due to higher net income compared to that quarter.
The Company is subject to various state taxes that are assessed as CCBX activities and employees expand into other states, which has increased the overall tax rate used in calculating the provision for income taxes in the current and future periods. The Company uses a federal statutory tax rate of 21.0% as a basis for calculating provision for federal income taxes and 2.62% for calculating the provision for state income taxes.
Financial Condition Overview
Total assets increased $104.3 million, or 2.6%, to $4.07 billion at September 30, 2024 compared to $3.96 billion at June 30, 2024. The increase is primarily due to stronger loan growth partially offset by lower cash balances. Total loans receivable increased $92.4 million to $3.42 billion at September 30, 2024, from $3.33 billion at June 30, 2024.
As of September 30, 2024, the Company had the capacity to borrow up to a total of $656.3 million from the Federal Reserve Bank discount window and Federal Home Loan Bank, and an additional $50.0 million from a correspondent bank no borrowings outstanding on these lines as of September 30, 2024.
The Company had a cash balance of $5.9 million as of September 30, 2024, which is retained for general operating purposes, including debt repayment, and for funding $530,000 in commitments to bank technology funds.
Uninsured deposits were $542.2 million as of September 30, 2024, compared to $532.9 million as of June 30, 2024.
Total shareholders' equity increased $15.2 million since June 30, 2024. The increase in shareholders' equity was primarily due to $13.5 million in net earnings, combined with an increase of $1.8 million in common stock outstanding as a result of equity awards exercised during the three months ended September 30, 2024.
The Company and the Bank remained well capitalized at September 30, 2024, as summarized in the following table.
(unaudited)
Coastal Community Bank
Coastal Financial Corporation
Minimum Well Capitalized Ratios under Prompt Corrective Action (1)
Tier 1 Leverage Capital (to average assets)
9.29
%
8.40
%
5.00
%
Common Equity Tier 1 Capital (to risk-weighted assets)
10.36
%
9.26
%
6.50
%
Tier 1 Capital (to risk-weighted assets)
10.36
%
9.35
%
8.00
%
Total Capital (to risk-weighted assets)
11.65
%
11.90
%
10.00
%
(1) Presents the minimum capital ratios for an insured depository institution, such as the Bank, to be considered well capitalized under the Prompt Corrective Action framework. The minimum requirements for the Company to be considered well capitalized under Regulation Y include to maintain, on a consolidated basis, a total risk-based capital ratio of 10.0 percent or greater and a tier 1 risk-based capital ratio of 6.0 percent or greater.
Asset Quality
The total allowance for credit losses was $170.3 million and 4.98% of loans receivable at September 30, 2024 compared to $147.9 million and 4.45% at June 30, 2024 and $101.1 million and 3.41% at September 30, 2023. The allowance for credit loss allocated to the CCBX portfolio was $150.1 million and 9.87% of CCBX loans receivable at September 30, 2024, with $20.1 million of allowance for credit loss allocated to the community bank or 1.06% of total community bank loans receivable.
The following table details the allocation of the allowance for credit loss as of the period indicated:
As of September 30, 2024
As of June 30, 2024
As of September 30, 2023
(dollars in thousands; unaudited)
Community Bank
CCBX
Total
Community Bank
CCBX
Total
Community Bank
CCBX
Total
Loans receivable
$
1,897,540
