Coastal Financial Corporation 2026 Q3 Earnings Call

Please go ahead. Thank you, and good morning, everyone.

With me today are Chris Adams, our Executive Chairman, and Joel Edwards, our interim Chief Financial Officer. Many of you are familiar with Joel from his 13 years as Coastal CFO. Joel has provided that same steady leadership over these last few months and has helped ensure continuity during a transition period. Our search for a permanent CFO is in its final stages, and we look forward to providing an update in the near future. I also want to share a leadership update. As part of the ongoing efficiency work Chris will discuss, our management team has worked together to realign roles and responsibilities. As part of that realignment, Brian Hamilton has stepped down as President of Coastal and moved into a strategic advisory role.

Brian has played an important role in modernizing CCBX's technology platform and leading investments in the CCBX infrastructure that have positioned our business for growth. Mr. Hamilton will remain on the company's board of directors and continue to be a partner to Chris, myself, and the rest of the board and team. More broadly, we are focused on creating a more agile organization and aligning our cost structure with the needs of the business. That effort starts with leadership. As part of this work, I am voluntarily reducing my compensation. I believe it is important that I participate directly in the expense discipline initiative that we are applying across the business and am already encouraged by our progress to date on this front.

Consumers and businesses continue to move more of their financial lives to the digital channels, and the financial ecosystem continues to produce innovative products, business models, and operators. These companies rely on a bank partner with the technology, compliance, and risk infrastructure to support them as we scale. Coastal has spent years building exactly that, and we have worked hard to become a partner of choice in this market. We made a deliberate decision well before FinTechs broadly turned to bank partners to gain exposure to this fast-growing landscape, and we did the early legwork to establish a strong foothold in the ecosystem. Our systems allow us to onboard, monitor, and grow partner programs with discipline, and our model is structured so that the partners provide credit enhancements against losses on the programs they originate. That combination is not easy to replicate.

You can see that in our pipeline with two partners in onboarding and three signed letters of intent, and in the growth of our program fee income this quarter. We are super excited about the opportunities in front of us. Turning to the quarter, I want to begin where we left off in July. in the second quarter, we recorded $68.8 million in pre-tax charges related to one partner's consumer loan portfolio, resulting in a net loss of $42.1 million. We know that this was a disappointing result for our shareholders and that it raised questions about our broader partner portfolio. Over the past three months, we have remained focused on updating our assessment of the one partner's portfolio, reassessing the broader CCBX partner portfolio, and continuing to evolve our credit risk appetite as we always do.

Results for the third quarter better reflect the underlying earnings power of the business. We return to profitability with net income of $13.8 million or $0.89 per diluted share. BaaS program fee income grew to $14.1 million, up 17.6% from the second quarter and 79.6% from a year earlier, reflecting the strength and stability of our broader partner portfolio. Importantly, we ended the quarter well-capitalized with a Common Equity Tier 1 ratio of 11.5%. Let's get into the details. I'll start with an update on one of the partners' consumer loan portfolio and the rest of our BaaS partner portfolio, including Bluevine, which in September agreed to be acquired by Valley National Bancorp, and then conclude with the performance of the underlying business. Joel will then take you through the financials, and Chris will discuss our work on expense discipline and operating leverage.

I want to spend a few moments discussing the specific partner-related portfolio that weighed heavily on our results for the second quarter. As we had said, we do not see similar issues with the broader CCBX portfolio. But we recognize the significance of this matter and the questions it raised about our partner model. Our BaaS model is structured so that the partners provide credit enhancements against losses on the programs they originate. That structure continues to perform across our partner base, and today approximately 96.7% of BaaS non-performing loans are covered by partner credit enhancements. What set last quarter apart were circumstances specific to one partner and its portfolio under that structure. We absorbed that impact, returned to profitability in the following quarter, and strengthened our capital ratios. That is what a resilient model looks like.

In the third quarter, we updated our assessment of the specific portfolio, including loan portfolio performance, expected credit losses, and our assessment of the collectibility of amounts due under the specific partner's indemnification agreement. The results substantially support the estimate we established at June 30. Although actual charge-offs were modestly above projections, actual net charge-offs as a percent of average loans decreased from the second quarter, reflecting a positive directional trend. Based on our assessment as of September 30, projected cash flows under the specific partner's program agreement continues to support our accounting treatment to record substantially all of the corresponding incremental credit enhancement amounts. Approximately $3.1 million of the quarter's additional provision expense was not offset by credit enhancement income because collection of that portion was not considered probable.

The valuation allowance against the credit enhancement asset decreased modestly to $45.6 million as of September 30, compared to $46 million at June 30. The $22.8 million specific allowance established in the second quarter remained unchanged, and we expect any required charge-off of that balance to be recognized by year-end. Any such charge-off would not affect our ongoing remediation efforts or ability to pursue recovery. As of September 30, the specific partner portfolio had $511 million in loans outstanding, compared with $507.5 million at quarter close for the second quarter on June 30. Annualized net charge-offs were 9.81% compared with 11.46% for second quarter, which have markedly improved since third quarter of 2025.

Loans 30 or more days past due were 3.41% compared with 4.06% for second quarter. We continue to closely monitor the performance of the specific portfolio and the specific partner's ability to satisfy its obligations and will update our estimates as additional information becomes available in future quarters. We have not yet reached a complete resolution, though our discussions are ongoing and have many moving parts. Given the commercially sensitive nature of this matter for both parties, I won't go into more detail, but I can confirm that we continue to pursue and evaluate available pathways to maximize recovery. Based on our review as of September 30, which covered credit performance, delinquencies, charge-off trends, partner liquidity, collateral funding, and reimbursement obligations across 21 active partners, we did not identify a comparable issue. The data for the quarter is consistent with that assessment.

Banking-as-a-Service non-performing loans decreased $14.3 million to $54.6 million, and $52.8 million of that balance is covered by the partner credit enhancements. We also continue to tighten underwriting standards on new BaaS originations during the quarter, which partially explains why our gross BaaS loan yields declined this quarter. Every partner operates under different portfolio limits we have set, and we test underwriting on a reoccurring basis for our partners with the largest exposures. At September 30, we had 30 CCBX relationships at varying stages, including 21 active partners, one in testing, two in onboarding, three signed letters of intent, and four winding down. The caliber of the FinTechs business in our pipeline demonstrates that our approach to risk and partnership continues to resonate in the market.

At the same time, we expect to regularly move deposits on and off the balance sheet as our deposit base grows and our partner businesses evolve. Valley Bank's recent announcement acquisition of one of our partners, Bluevine, represents one dynamic of the evolving FinTech ecosystem. We expect these companies to mature and, in some cases, change ownership over time, and our business model is built to manage those realities. As of September 30th, Bluevine-related deposits on our balance sheet was approximately $452.4 million, and another $1.85 billion in deposits was swept off balance sheet to other banks. We also held $3 million of Bluevine-originated loans at quarter end. Separately, the community bank held a $6.8 million commercial loan to Bluevine at quarter end. At September 30th, we held $3.04 billion of BaaS deposits on balance sheet across 21 active partners, with another $6.29 billion swept off balance sheet.