Coastal Financial Q2 2026 Earnings Call Transcript

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Provided by Quartr
July 30, 2026

Key Takeaways

  • Negative Sentiment: Coastal reported a $42.1 million GAAP net loss, driven primarily by $68.8 million of pre-tax adjustments tied to a specific CCBX partner’s approximately $500 million consumer-loan portfolio, including a $46 million credit-enhancement valuation adjustment and $22.8 million provision.
  • Neutral Sentiment: Management said the affected portfolio has been isolated and that reviews found no comparable issue in the remaining approximately $1.7 billion CCBX portfolio, but the resolution could take one to two quarters or as long as 12–18 months and final recoveries may differ from current estimates.
  • Positive Sentiment: Underlying operating trends were strong, with record net interest income of $89.4 million, a 7.27% net interest margin, 9% quarterly loan growth, and 10.3% sequential growth in BaaS program fee income.
  • Positive Sentiment: Coastal remained well-capitalized and liquid, ending the quarter with a 10.86% CET1 ratio, approximately $1.01 billion of cash, more than $1.1 billion in contingent borrowing capacity, and no short-term borrowings outstanding.
  • Negative Sentiment: Management acknowledged that expense growth and operating leverage need improvement, launching a review of vendors, contractors, organizational duplication, technology spending, and partner-level profitability; CFO Brandon Soto is also departing, with former CFO Joel Edwards returning as interim CFO.
AI Generated. May Contain Errors.
Earnings Conference Call
Coastal Financial Q2 2026
00:00 / 00:00

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Operator

Welcome to Coastal Financial Corporation's second quarter 2026 earnings conference call. At this time, all participants have been placed in listen-only mode. Following the prepared remarks portion of this morning's call, the management team will take questions. Before we begin, I would like to point all of you to the disclosure near the end of the company's earnings release for information about any forward-looking statements that may be made or discussed on this call. The earnings release is posted on Coastal's website. Please review the information along with our filings with the SEC for a disclosure of factors that may impact the subjects discussed in this morning's call. The company will also be discussing one or more non-GAAP financial measures. Please look at the company's investor presentation and website for all of the disclosures required by the SEC, including reconciliations to the most comparable GAAP numbers.

Operator

I would now like to turn the call over to Eric Sprink, Chief Executive Officer. Please go ahead.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Thank you. Good morning, everyone. I'm joined today by Chris Adams, our newly appointed Executive Chairman, and Brandon Soto, our CFO. This is our first quarterly earnings call. As our company has grown, we believe it is important to provide investors and the broader community with more direct access to management and greater context around our financial performance, go-forward strategy, and key developments across both CCBX and Coastal Community Bank. We also recognize that this quarter includes significant and unusual items that warrant a direct explanation. We're here to walk through those, detail the nuances, and answer your questions. I'm pleased to announce that effective today, the board has appointed Chris Adams as the Executive Chair of Coastal Financial Corporation. Chris has served on the board since 2016 and as Chair since 2019.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

As Executive Chair, he will devote additional time to long-term strategy, external engagement, leadership development, as well as a focus on operating leverage and profitability. This does not change management accountability. I will continue to serve as CEO and remain responsible for the company's day-to-day operations, financial performance, risk management, and execution. Today, rather than start with our operating results, it's important that I highlight the items that occurred during the quarter. I'll be very direct and transparent about what it is, what it means, and how we have actively addressed it. This morning, we reported a GAAP net loss of $42.1 million, or a loss of $2.76 per diluted share for the second quarter. That result was driven almost entirely by $68.8 million in pre-tax accounting adjustments associated with a defined CCBX portfolio company and its consumer loan portfolio.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

The $68.8 million consists of a $46 million valuation adjustment to the related credit enhancement asset and a separate $22.8 million provision for credit losses related to the partner's indemnification agreement. We also recorded a $4.4 million of capitalized software amortization due to shortened useful lives associated with technology modernization. On the partner-related item, we regularly assess our relationships on the balance sheet, portfolio performance, collection information, recovery expectations, and counterparty financial information. As part of this evaluation, we changed our assessment in the second quarter as it relates to a specific non-public company partner and its consumer loan portfolio. In accordance with our prudent framework, we appropriately recognized the exposure and took decisive action.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Our focus is on being transparent with you about what directly matters to Coastal, the exposure, the impact on our financial results, and the action we have and will continue to take. We are working with the relevant parties to exercise our contractual rights under the agreement. Most importantly, this is not a read-through to the broader portfolio of partners, our view of the BaaS model, or our underwriting discipline. Let me be precise about how investors should reconcile the indemnification protection with the $68.8 million charge. The partner remains responsible for losses covered by the indemnification, and recording a valuation adjustment does not change or waive those rights. It reflects our current assessment and provisioning based on the facts available at quarter end.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

What changed is our assessment, which prompted us to recognize the economic losses today, even as we continue to pursue the amounts we are entitled to recover. We believe we have taken the necessary steps to identify the potential exposure, to isolate it, and recognize our estimate of the potential loss as of quarter end. We'll continue to provide updates on this specific portfolio as we move forward. As part of this work, we also engaged independent third-party advisors to conduct an external assessment of the partner's loan-level data. That review did not identify any evidence of impropriety on part of the partner and the customers. Three important points. First, the affected population is identified and separately monitored. It consists of the defined portfolio of approximately $500 million in underlying loans and the related reimbursement exposure.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Second, we reflected our current estimate of the impact in our June 30 financial results. The ultimate outcome could differ from the amount we recognize today favorably if recoveries and collections come in ahead of our current expectations or of course, unfavorably based on the quarterly CECL review and indemnification asset valuation. Third, we conducted a review of the remaining CCBX portfolio. That review included credit performance, delinquencies, and charge-off trends, partner liquidity, cash collateral funding, reimbursement obligations, and individual and aggregate exposure, amongst other things. Based on that review, we did not identify a comparable issue within the remaining CCBX portfolio. The data supports this conclusion as the remaining core CCBX portfolio was approximately $1.7 billion at quarter end, with improvements in net charge-offs as well as early and late-stage delinquency measures. Also, every partner we reviewed was current on its contractual cash collateral funding obligations.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

This data underscores the defined portfolio matter is not present in the credit and collateral funding trends of the remaining portfolio. We are actively managing the defined portfolio through servicing, collections, recovery, contractual remediations, and an evaluation of all strategic alternatives. Zooming out for a second, the reason we built this framework is so that it would do its job precisely during an event like this. This is consistent operating philosophy that informs us how we run this company to identify issues, assess them based on the facts in front of us, and take appropriate, decisive action. That's what we've done here, and we'll continue to do moving forward. Importantly, we entered this period and remain well-capitalized with substantial cash, meaningful contingent liquidity, and no short-term borrowings outstanding. Let me move forward and talk about the strengths of the underlying business for a second.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Apart from the defined portfolio adjustments and the accelerated software amortization charge, several positive developments and metrics underscore the strength and momentum of the underlying business during the quarter. Across the Community Bank and CCBX, the results showed this hybrid model we've deliberately built over the years. A well-capitalized, disciplined community bank paired with a growing capital-efficient Banking-as-a-Service platform that allows us to monetize partner relationships through growing fee income on and off the balance sheet. Supporting a digital banking ecosystem of our scale takes compliance, risk, and operating infrastructure that has been built carefully over years. When we set out to develop our Banking-as-a-Service platform, we did so with a clear vision about what it would require and to establish an infrastructure like the one we run on today.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Our investments and institutional knowledge with learnings over history in this space have put Coastal at the table with some of the best-run programs in the country. During the quarter, some individual highlights. Net interest income reached a record $89.4 million, up 16.4% year-over-year on a net interest margin of 7.27, which is stable and slightly improving. We grew loans 9% during the quarter. Our CCBX segment continued to build momentum with BaaS program fee income of $12 million, up approximately ten quarter from first quarter. 10% growth from first quarter. Our off-balance sheet credit card program now includes approximately 881,000 fee-earning accounts, an increase of 32% from first quarter. Debit cards were up $1.5 million over the quarter.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Deposit sweep activity continued to expand, creating fee income growth while supporting liquidity and FDIC insurance coverage to the benefit of our consumers. Brandon will give you some updates on the amounts we have swept during the quarter and the increases. These are exactly the kinds of fee-generating, non-balance sheet activities central to our strategy. Growing revenue with balance sheet light, growing with less Risk-weighted assets going forward. Chris will discuss board oversight, and I've asked him to expand on his new role as Executive Chair, including our go-forward focus on capital allocation, operating expenses, and profitability. Brandon will provide a more detailed review of the quarter. Chris, I hand it over to you.

Chris Adams
Chris Adams
Executive Chairman at Coastal Financial Corporation

Thank you, Eric, and good morning. I appreciate the Board's confidence in appointing me Executive Chair. As Eric noted, my increased role will focus on long-term strategy, external engagement, leadership development, operating leverage, and profitability. Eric remains CEO, and I look forward to working alongside him and the rest of the team, as the independent directors of the Board continue to provide strong and independent oversight. The Board has been engaged throughout management's assessment of the defined portfolio. The management team meticulously reviews the portfolios on an ongoing basis, and they bring it to the Board for it to review the analysis, challenging the assumptions, and consider the accounting and capital implications. That is precisely what happened in this matter. We supported management's decision to recognize the quarter-end estimate in the period in which the assessment changed.

Chris Adams
Chris Adams
Executive Chairman at Coastal Financial Corporation

Taking a decisive action now and being transparent with our shareholders is the behavior that our management team and this Board expects. I would make three points to shareholders. First, the Board's review was not limited to whether June 30th accounting estimates for just the defined portfolio was supportable. We also asked whether the exposure was separately identified and monitored, and whether the remainder of the CCBX portfolio has been reviewed using the same standards. The Board has required enhanced reporting regarding portfolio performance, collections, collateral, remaining exposure, and capital impact, counterparty conditions, and progress on strategic alternatives. We are not treating the June 30th accounting action as the end of the work. Second, Coastal remains well-capitalized and highly liquid. As of June 30th, the company's Common Equity Tier 1 ratio was 10.86%, the Tier 1 leverage ratio was 9.11%, and its Total risk-based capital ratio was 13.30%.

Chris Adams
Chris Adams
Executive Chairman at Coastal Financial Corporation

The quarter's adjustments reduced capital ratios by approximately 1 percentage point. The company retained approximately $1.01 billion of cash and more than $1.1 billion of additional contingent borrowing capacity, with no short-term borrowing outstanding. The company's capital-efficient model, including ongoing loan sales and off-balance sheet deposit and card programs, continues to support liquidity and internal capital generation. Third, my focus is increasingly growing on profitability and operating leverage. Coastal has made substantial investments in people, technology, compliance, data, risk management, and ongoing infrastructure. Many of those investments were necessary to support the company's growth and build a durable, regulated platform. The next phase, though, must translate that investment and revenue growth into stronger and more consistent profitability. Management has begun a review of vendor spending, contractor usage, discretionary expenses, organizational duplication, technology priorities, and partner and product-level profitability. The objective is not to just cut costs.

Chris Adams
Chris Adams
Executive Chairman at Coastal Financial Corporation

We will continue to invest in compliance, credit, audit, cybersecurity, data, and risk management. The objective is to reduce lower value and duplication in spending and direct our people and capital and technology towards activities that produce appropriate risk-adjusted returns. As we continue to grow, we will place greater emphasis on the revenue, capital usage, liquidity, operating expenses, and risk-adjusted profitability for each product and relationship. The Board continues to have confidence in the long-term value of Coastal's model. Our responsibility is to translate the company's underlying earnings power into strong operating leverage, lower volatility, and improving shareholder returns. With that, I am going to turn it over to Brandon to talk through his part of the presentation. Brandon?

Brandon Soto
Brandon Soto
CFO at Coastal Financial Corporation

All right. Thank you, Chris. I'm going to provide a narrow overview of the quarter. As Eric discussed, Coastal reported a GAAP net loss of $42.1 million for the second quarter. The quarter included the $22.8 million specific provision and the $46.0 million valuation adjustment associated with the defined portfolio. The underlying quarter included several positive financial trends. Net interest income increased by $6.0 million, or 7.2%, from the first quarter to a record $89.4 million. Net interest margin increased to 7.27%. Net interest margin after BaaS loan expense increased to 3.98% from 3.90% in the first quarter. Total loans increased $348.9 million or 9% to approximately $4.21 billion. BaaS program income increased $1.1 million or 10.3% from the first quarter.

Brandon Soto
Brandon Soto
CFO at Coastal Financial Corporation

We sold approximately $4.56 billion of CCBX loans during the quarter, including ongoing balances generated on previously sold credit card accounts. These sales help manage capital, liquidity, and credit concentrations while allowing Coastal to retain certain processing and transaction economics. Total deposits ended the quarter approximately $4.86 billion. The decrease from the first quarter primarily reflected increased use of off-balance sheet sweep arrangements and did not reflect a comparable decrease in underlying partner deposit activity. We swept approximately $4.26 billion of deposits off balance sheet at quarter end and generated approximately $1.2 million of sweep income during the quarter. Community Bank credit quality remained strong. Annualized Community Bank net charge-offs as a percentage of average loans were approximately 0.01%. Reported non-interest expense was $14.1 million, which included the $46.0 million valuation adjustment and the $4.4 million software charge.

Brandon Soto
Brandon Soto
CFO at Coastal Financial Corporation

Beyond those identified items, we remain focused on managing the expense base more effectively. That includes technology spending, vendor and contractor costs, organizational efficiency, and ensuring that expenses are tied to revenue, measurable efficiencies, or appropriate risk-adjusted returns. It is also important to understand how the reserve affects future reporting. The $22.8 million provision increased the allowance available to absorb the future related credit losses. The $46.0 million valuation adjustment reduced the carrying value of the related credit enhancement asset. Finally, the company and the bank remained well-capitalized after the quarter's adjustments, and our liquidity position remains strong. I'll turn it over to Eric for the conclusion.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Thank you both, Chris and Brandon. Before I close, I do want to recognize Brandon, who, as we announced last week, will be departing to take on the CEO role of another financial institution that is not a competitor or current partner of ours. Brandon has brought invaluable insights since joining us last September. He deserves this opportunity, and I and our company are very excited for him. At Coastal, our longtime CFO, Joel Edwards, who has been serving as an advisor since his retirement last year, will return as interim CFO while we conduct a search for our next permanent CFO. Joel brings deep familiarity and continuity to our team. I'll close this with where I began. We took a significant accounting impact in the quarter, and we are not minimizing it.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

The current estimate of the defined portfolio has been reflected in the June 30 financial results, and we are actively managing the relationship. As we mentioned, we and the board separately reviewed the remaining CCBX portfolio and did not identify a comparable issue as of quarter end. Underneath this defined portfolio matter is a strong and well-capitalized core business. Excluding the credit expense and software charge, we delivered record Net interest income, stable to increasing net interest margin, continued loan growth, increased BaaS program fee income, significant growth in off-balance sheet fee income-generating activity, stable deposit cost, and strong Community Bank credit performance. We're focused on continuing to strengthen partner monitoring and portfolio oversight, improving the economics of balance sheet usage, growing capital-efficient fee income, and taking a more direct approach to operating expenses and operating leverage.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

At this time, we're also making the announcement that we are no longer actively pursuing the acquisition of assets and deposits from Evolve Bank & Trust. Chris's appointment as Executive Chairman adds additional time and resources and attention to strategy, profitability, and leadership. We remain all about a balanced approach to discipline and sustainable growth. We will continue thoughtfully expanding our products and investing in the risk management and technology capabilities that make this platform doable. Our operating momentum, capital, and liquidity position, increased focus on profitability leaves us confident in our ability to execute and create long-term value for shareholders. With that said, we'll end the prepared remarks and open it for question and answers from the analysts. Please proceed.

Operator

Thank you. We will now begin the question-and-answer session. If you have dialed in and would like to ask a question, please press star one on your telephone keypad to raise your hand and join the queue. If you would like to withdraw your question, simply press star one again. If you are called upon to ask your question and are listening via speakerphone in your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star one to join the queue. Our first question comes from the line of Andrew Terrell with Stephens Inc. Your line is open.

Andrew Terrell
Andrew Terrell
Analyst at Stephens Inc

Hey, good morning.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Good morning, Andrew.

Andrew Terrell
Andrew Terrell
Analyst at Stephens Inc

Morning. Maybe I could start just on the core expenses. If I back out the valuation adjustment and the amortization as well as the typical kind of BaaS loan, it looks like you're in around $46 million or so of core operating expense this quarter, up double digits sequentially, call it 22% year-on-year. I think the sense was this year you'd be able to maybe right-size expenses a bit or at least keep growth in check, which doesn't seem to be the case this quarter. I'm curious, when you look out to the back half of the year, what are you doing to keep expense growth contained from here? Is there potential to moderate, right-size the expense base at all just to improve profitability? Yeah, we can just start there.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Yeah. I think you can tell from our prepared remarks, we did highlight four or five times that expense growth and making sure that we're focused on profitability is going to be a top priority of this bank going forward. I'll ask Chris to intercede here a little bit. I know that's one of the directives the board has asked him to do.

Chris Adams
Chris Adams
Executive Chairman at Coastal Financial Corporation

Yeah. Great question, you're exactly right, Eric. To be clear, and I obviously talked about it in the remarks, but operating leverage profitability, huge focus of the board. That's what I'm going to come in and work on. We've got great people. We spent a lot of money on technology, building out the platform that we have. We are certainly going to focus on getting the efficiency out of what we've put into the company right now. We've got a really good talented group of people, and we're going to be able to get a lot more out of it as we make the next steps in our growth journey.

Andrew Terrell
Andrew Terrell
Analyst at Stephens Inc

Okay. Maybe while just on the topic, Chris, can you talk about just either efficiency or profitability expectations that you're kind of working towards currently?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Yeah. Andrew, I'll intervene here real quick. Just nothing has changed in our approach to communications with outside parties. We don't give pro formas, we don't give estimates. We're unable to give guidance. At this time, I think what we'd like to reinforce is our comments in the opening piece and Chris's comments that this is going to be one of the top priorities of the bank going forward.

Andrew Terrell
Andrew Terrell
Analyst at Stephens Inc

Okay.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Yeah.

Andrew Terrell
Andrew Terrell
Analyst at Stephens Inc

Fair enough.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Yeah.

Andrew Terrell
Andrew Terrell
Analyst at Stephens Inc

If I could move over just to some of the actions this quarter. I guess just I heard all the prepared remarks. I'm hoping to get some more comfort on why this is a one-off situation. I understand you've conducted what sounds like a pretty thorough review of all the other partners, I'm assuming you pretty actively monitor this partner as well. What's unique about this situation? What's different about the collateral underlying the $500 million loan pool here? I guess just what's different at this partner or this loan pool versus others that should give us incremental comfort that this isn't something that could happen again?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Our assessment changed for this one partner based on a combination of factors that we monitor continuously across every partner relationship. Portfolio performance, collection results, recovery experience, the partner's own financial condition. For this specific relationship, that combination of signals moved such that under the current credit protection framework, we concluded we needed to recognize that exposure with actions taken today. We can't disclose specific partner financial information. What we can say to you is we reviewed the rest of the CCBX books against the same standards and did not see a comparable pattern, which tells us this isn't a read-through to the consumer credit trends broadly or the rest of the partners. We do monitor this continuously. We're going to continue, as we have always been, to be a learning organization.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

We are applying the lessons we learned from this matter across all relevant exposures to ensure we remain disciplined. Right now, we don't see this as a read-through to the rest of the portfolio.

Andrew Terrell
Andrew Terrell
Analyst at Stephens Inc

Okay, thanks. Were these credit card loans or something else?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

The $500 million is a mix of term consumer debt. I want to be careful that we don't give too many specifics that it could in turn identify the partner. I'll just leave it at that.

Andrew Terrell
Andrew Terrell
Analyst at Stephens Inc

Okay. Thanks for taking the questions. I'll step back.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Thank you, Andrew.

Operator

Our next question comes from the line of Joe Yankunis with Raymond James. Your line is open.

Joe Yankunis
Joe Yankunis
Analyst at Raymond James

Hey, thank you for taking my questions. Wanted to kind of piggyback off some of Andrew's questions. You emphasized a greater focus on operating leverage and profitability. Does that change your approach to partner growth? Should we expect you to be more selective in adding new partners going forward?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Joe, first off, thanks for being on the call. Good to talk to you, and thanks for asking the questions. Let me answer the question. We are going to focus on profitability, operational efficiency, leveraging this platform that we've built. I want to make that abundantly clear. With that said, the board is absolutely committed to this growth business, and Banking-as-a-Service. We think we're at a very unique inflection point in society with digital adoption, more brands getting into delivering financial services. We think we are expertly positioned to continue to do this. CCBX and the business strategy remain strong. This is related to one out of more than 25 partnerships and should not be extrapolated. BaaS is an important part of our strategy. We are focused on disciplined risk-adjusted growth.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

This event reinforces the importance of continuous monitoring and making sure our parameters are defined in advance and that we're picking the right partners. But we absolutely believe this platform still has long-term potential, and we're going to be deliberate in how we onboard and scale partnerships, but we're excited about this platform going forward.

Joe Yankunis
Joe Yankunis
Analyst at Raymond James

Okay, that's helpful. And just kind of going back to this problem partner, what's the expected timeline for resolving the situation? Should we think in terms of quarters or potentially years before this portfolio is worked through?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

The board is reviewing all alternatives and all remediations, and the partner is exploring all of their options still. The partner engaged. We're hopeful, but accounting-wise, we can't rely on hope. They are well-established and are exploring opportunities themselves as well as us. There could be a wide gap between remediation and potential outcomes that could be anywhere from one to two quarters to 12-18 months, based upon the continued evolution of the relationship and how everything pans out.

Joe Yankunis
Joe Yankunis
Analyst at Raymond James

Okay. Has this event changed the appetite of potential buyers of your paper to purchase these loans? Have you seen any changes in pricing, due diligence or buyer demand since identifying the issue?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

I would say we were very successful in the first quarter working with our partners on loan sales, credit card receivable sales. The market continues, in my opinion, to be vibrant. The capital markets, in talking to some outside providers, including last week, said that the markets are still open. We will continue to look at all strategies, including the sales network. Right now, we believe that the secondary markets are performing. We have seen some tightening on pricing for risk-based spread premiums across the board. Nothing that's deterring the framework and the markets from working.

Joe Yankunis
Joe Yankunis
Analyst at Raymond James

Okay, perfect. Last one from me here. You noted you shortened the useful life of certain capitalized software assets resulting in the accelerated amortization. What new capabilities are replacing these legacy systems? Are we expected to see any tangible benefits, either through improved partner onboarding, operating efficiency, scalability, or anything in that realm?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Albeit it's difficult and we're taking it very serious whenever you announce an accelerating of the amortization of technology. The hidden message is there that we now have newer, better technologies that are supplanting the old technologies on average, and the useful life of the older technologies is being supplanted. This is one exactly that it's a mixed message. It's unfortunate that it comes through the earnings statement as presented, in my opinion, but it's exciting at the same time. I think as we talk about operating efficiencies and leveraging going forward, we're real excited about what the teams have built in our technology group that's going to start to give us those efficiencies across multiple fronts, broadly in compliance and oversight and risk management, but also in partner data management, et cetera.

Joe Yankunis
Joe Yankunis
Analyst at Raymond James

All right, perfect. I appreciate you taking my questions.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Thanks, Joe.

Operator

Next question comes from the line of Janet Lee with TD Cowen. Your line is open.

Janet Lee
Janet Lee
Analyst at TD Cowen

Good morning.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Good morning, Janet.

Janet Lee
Janet Lee
Analyst at TD Cowen

You said that you reviewed the remaining CCBX portfolio and did not identify a comparable issue as of quarter end. Could you talk about when you found out the issue? About this troubled partner. Did you review the rest of the CCBX portfolio after that? How frequently do you do those kind of reviews?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

What I want to make absolutely clear is our assessment process did not change during the quarter. The results that came out of the continuous monitoring and assessment is what changed during the quarter. As discussed previously, that's market conditions, it's the partner financial conditions as reported real time. It is the underlying credit metrics of the portfolios that are on our balance sheet, which includes delinquency, charge-offs, recoveries, yields. All of that is taken into account when management ascertains the accounting treatment of the reserve recommendation that we sent to the Board. The Board then, as mentioned, independently reviewed our assessment, all of those factors that are broad-based going into it, and determined that they supported our recommendation on this one partner.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

As Chris mentioned, we did also do a very thorough secondary look at all other programs at the Board's request and determined that none of the other programs were exhibiting similar situations to this partner, we felt comfortable that this was isolated.

Janet Lee
Janet Lee
Analyst at TD Cowen

Okay, got it. Your quarterly provision typically was in that $50 million range in recent quarters. Are you saying it can go back to that level, or should we expect a little bit higher step up in provision as you're doing more enhanced reviews going forward? How should we read that as we go into the second half of 2026 and 2027?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Yeah. First and foremost, as loans continue to grow, I would anticipate that provisioning expense would go up, and then the counterparty benefit for the remaining programs would go up alongside that. For this individual program, we are going to continuously be monitoring the $500 million worth of loans that is the underpinning of our CECL perspective on this provisioning. I really want to bifurcate the two and call out that this portfolio and this partner will receive continuous monitoring, and our provisioning expense will be real time as you would expect for us to do. The remaining programs that have counterparty benefit that is a part of our provisioning expense going forward will continue as we've done in the past.

Janet Lee
Janet Lee
Analyst at TD Cowen

Okay, got it. Your deposit growth in the quarter was impacted by the off-balance sheet sweep arrangement. What is the strategy around that, and what kind of on-balance sheet deposit growth should we expect into the rest of 2026?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Great question. As we remind you about first quarter, I believe we grew close to $980 million of deposits on the balance sheet, and we wrote a comment in the release that basically said, "Hey, we grew faster than what we wanted as we were setting up some sweep networks for some specific partners that did not occur in first quarter. It was delayed to second quarter." We told everybody in first quarter that we expected that the sweep networks would kick in, which they have done in the second quarter, which would lower the balance sheet growth by approximately $500 million as compared to first quarter.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

I think what I'd ask you to do is amalgamate a couple data points that would say, yes, the net growth first quarter to second quarter was down, but the off-balance sheet deposits were up significantly, $2 billion+, and manage those three topics together. As a general business statement, we are very excited about our partner's performance. We're humbled to be a part of their business, and the results speak for themselves over the trends that we've given you, and we're going to continue to support our partners going forward.

Janet Lee
Janet Lee
Analyst at TD Cowen

Okay. That's it. Thank you.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Thank you, Janet.

Operator

Next question. Next question comes from the line of Tim Switzer with KBW. Your line is open.

Tim Switzer
Tim Switzer
Analyst at KBW

Hey, good morning, Eric. Thanks for taking my questions. I'm going to go back a little bit to the credit enhancement here. Can you help us understand, is this company still operating? If so, why can they not fulfill their credit enhancement obligation? Do you have a claim on the partner's assets or cash flows beyond just the loans on your balance sheet?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Yeah. Tim, thank you for joining today. Just for the call overview and decorum, Tim will be the last set of questions that we're able to answer time-wise today. Multiple parts to your question. The partner remains contractually responsible for losses covered by the indemnification, and the recording of this valuation does not change or waive any of the responsibilities. Further, the borrower has not defaulted with us. The reserve reflects our updated assessment of the risk and expected collectibility based on the currently available information that we got. I can't stress this enough; it's real-time June 30 information. The partner is still in business, as I alluded to earlier. We want to continue to monitor the exposure closely and take action as the situation continues to unfold.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Yeah, this is a dynamic unfolding and, as I mentioned earlier, as an example, with any given CECL expectation you may have, you have to monitor it continuously. We are very hopeful that the resolution will be positive over time to us.

Tim Switzer
Tim Switzer
Analyst at KBW

Okay. That's really helpful. In your press release, it mentions that many CCBX partners pledge a cash reserve to the bank. Why is that many, not all? Are there some that do not have a cash reserve? For this program specifically, was there a cash reserve here, and was it a full cash reserve or some gap between expected losses or what was required in the partnership agreement?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Yes, the indemnity title is, I believe, a catch-all comment. To be specific, we do have programs that are not required to have cash pledge reserves. Some of those are going to be obvious when I state it. We have some programs that are purely cash-secured lending at the consumer level. Instead of being corporately requiring a cash collateral account, it's at the consumer level. They're cash-secured loans or cash-secured credit cards. Thus, at the corporate level, we don't require. There are some other programs that we have deemed the risk of the lending activities does not require us or require the partner to maintain a cash collateral account. That is different than they still indemnify us for any losses for fraud or net credit losses. The two pieces are broken up.

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

The specific reserve for this partner is geared towards the gap, your words, Tim, in the cash collateral account and the expectations under the indemnification agreement, looking at all the specific facts. Hopefully those answer your questions.

Tim Switzer
Tim Switzer
Analyst at KBW

Okay. Yeah. That makes sense. And then last one for me on this topic. I don't think it's been asked yet, but what is the expected revenue benefit from CCBX now collecting all the interest income on these associated loans? And is this enough to potentially overcome the associated losses you expect in the future?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

I want to be very careful. CECL and any type of estimates or assumptions that we're using are simply that. We are evaluating the financial positives, negatives, assessments, trends, partner indemnification, it's a very complicated go-forward assessment. I'm really not able to answer your question right now, Tim, I think over time that would be a good topic to revisit.

Tim Switzer
Tim Switzer
Analyst at KBW

Okay, fair enough. If I can move topics real quick. The BaaS NIM, net of loan expense, we know it moved up pretty nicely this quarter. We also know over the last year it's kind of been impacted by the partner agreements changes and the pricing there. Do you think we're kind of through that repricing impact right now? Was any of the upside this quarter driven by that additional yield you recognize on this portfolio we've been discussing?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

Two questions in there, I believe. The first question is, yeah, my opening comments geared towards stable to improving BaaS net interest margin. I'd remind everybody that that is driven by product mix. Some products we get better margin than other products. Some of our lower-yielding products include the aforementioned cash-secured individual consumer-level cash-secured loans have a lower yield than other products. It was nice to be able to show the market the stability of the NIM which I do believe alludes to your second question of there have been, to my knowledge, no repricings that would adversely affect the portfolio in second quarter's NIM. We continue to manage the overall portfolio concentrations to manage NIM. What I would say is there was no NIM benefit based on these reserves that we've taken today in Q2, Tim.

Tim Switzer
Tim Switzer
Analyst at KBW

Okay. All right. Understood. The last question from me, are you able to help us understand how much of the expense base right now is related to due diligence of Evolve and the other programs not currently generating revenue?

Eric Sprink
Eric Sprink
CEO at Coastal Financial Corporation

I am not able to provide that to you today. I can confirm that we did have expense in quarter two concerning the Evolve opportunity. I don't have those for this call. I apologize. Of course, we're going to look at all partner-level product and programs and expense that is associated with any programs or products that we may be exiting. If we can give you further clarity on those going forward, we will do so. With that said, I appreciate your involvement in this, Tim, Janet, Joe, Andrew, and your questions. At this time, we are going to be ending this conference call and we will be migrating separately to the analyst individual calls. We want to thank everybody for joining, especially my West Coast friends and family that got up super early today. Everybody have a wonderful day. This concludes my presentation.

Operator

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

Executives
    • Eric Sprink
      Eric Sprink
      CEO
    • Chris Adams
      Chris Adams
      Executive Chairman
    • Brandon Soto
      Brandon Soto
      CFO
Analysts
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