Coastal Financial Q3 Earnings Call Highlights

Key Points

• Coastal Financial returned to profitability in Q3 2026, reporting $13.8 million in net income, or $0.89 per diluted share, versus a $42.1 million loss in Q2. Results benefited from higher BaaS program fees, loan sales and deposit-sweep activity.
• The consumer-loan portfolio tied to one BaaS partner remains under review, with $511 million outstanding and a $45.6 million valuation allowance. Portfolio charge-offs and delinquencies improved sequentially, but Coastal expects to recognize a potential $22.8 million charge-off by year-end.
• Management is targeting more than $20 million in annualized expense savings over the next four to six quarters, while capital strengthened with the Common Equity Tier 1 ratio rising to 11.47% from 10.86%.

Coastal Financial NASDAQ: CCB returned to profitability in the third quarter of 2026, reporting net income of $13.8 million, or $0.89 per diluted share, after a $42.1 million net loss in the second quarter tied to charges involving one Banking-as-a-Service partner’s consumer loan portfolio.

Chief Executive Officer Eric Sprink said third-quarter results reflected the company’s underlying earnings potential, with growth in program fee income, off-balance-sheet loan sales and deposit sweep activity. He also said the company strengthened capital ratios while continuing to assess and pursue recoveries related to the specific partner portfolio that affected second-quarter results.

“We returned to profitability, grew BaaS program fee income and capital-efficient off-balance sheet activity, maintained strong community bank credit performance, and ended the quarter with stronger capital ratios,” Sprink said.

Partner portfolio remains under review

Coastal recorded $68.8 million in pretax charges in the second quarter related to one partner’s consumer loan portfolio. During the third quarter, management updated its assessment of that portfolio, including loan performance, expected credit losses and the collectibility of amounts due under the partner’s indemnification agreement.

Sprink said the updated assessment “substantially” supported the estimate established at June 30, although actual charge-offs were modestly above the company’s projections. Annualized net charge-offs in the portfolio declined to 9.81% in the third quarter from 11.46% in the second quarter, while loans at least 30 days past due fell to 3.41% from 4.06%.

The portfolio had $511 million in loans outstanding at Sept. 30, compared with $507.5 million at June 30. Coastal said the valuation allowance against its credit enhancement asset declined modestly to $45.6 million from $46 million. A $22.8 million specific allowance established in the second quarter remained unchanged, and management expects any required charge-off of that balance to be recognized by year-end.

During the quarter, Coastal recorded approximately $3.1 million of additional provision expense that was not offset by credit enhancement income because collection was not considered probable. In response to analyst questions, Sprink said the company’s expectation for recovery from the partner has “materially stayed the same.”

Management said it did not identify comparable concerns elsewhere in its broader partner portfolio following a review of credit performance, delinquencies, charge-off trends, partner liquidity, collateral funding and reimbursement obligations across 21 active partners.

At quarter-end, Banking-as-a-Service nonperforming loans totaled $54.6 million, down $14.3 million from the prior quarter. Coastal said $52.8 million of that amount was covered by partner credit enhancements, and approximately 96.7% of BaaS nonperforming loans were covered overall.

Fee income and capital-light activity expand

BaaS program fee income rose to $14.1 million, up 17.6% from the second quarter and 79.6% from a year earlier. The increase reflected higher transaction, interchange and servicing fees, according to the company.

Coastal sold $5.99 billion of BaaS loans during the quarter, up from $4.56 billion in the second quarter. Its off-balance-sheet credit card accounts reached 1.3 million, while active CCBX debit cards increased by 1.8 million, or 20% sequentially, and by 6 million, or 118.7%, from a year earlier.

Deposits swept off Coastal’s balance sheet rose to $6.29 billion from $4.26 billion at June 30, generating $1.4 million in fee income, up 16.4% from the second quarter. The company held $3.04 billion of BaaS deposits on its balance sheet across 21 active partners at Sept. 30.

Net interest income was $88.3 million, down 1.2% from the second quarter but up 13.4% from the prior year. Net interest margin fell to 6.59% from 7.27%, primarily due to a shift in loan mix. Net interest margin excluding BaaS loan expense was 3.93%, compared with 3.98% in the prior quarter.

Sprink said Coastal continued to tighten underwriting standards for new BaaS originations. He attributed lower gross BaaS loan yields partly to product mix and partly to “a higher class of underwriting credits,” while net yields to Coastal remained relatively stable.

Bluevine acquisition seen as manageable

Coastal also addressed Valley National Bancorp’s planned acquisition of Bluevine, one of Coastal’s partners. Bluevine-related on-balance-sheet deposits totaled approximately $452.4 million at Sept. 30, while another $1.85 billion of deposits had been swept to other banks. Coastal held $3 million of Bluevine-originated loans and a separate $6.8 million commercial loan to Bluevine.

Management said it does not expect the transaction, or a potential termination of the Bluevine relationship after the acquisition closes, to have a material adverse effect on its liquidity or funding profile. Coastal cited its ability to bring sweep deposits back onto its balance sheet as an alternative funding source.

The company ended the quarter with $803 million of cash, $827 million of additional contingent borrowing capacity and no borrowings outstanding on contingent funding lines.

Expense initiative targets more than $20 million in savings

Executive Chairman Chris Adams said Coastal has identified more than $20 million in potential annualized savings in non-interest expenses and expects to achieve those savings over the next four to six quarters. The target excludes BaaS loan and fraud expenses, which are generally reimbursed by partners.

Adams said the company is reviewing vendors, contractors, personnel, discretionary spending, duplicative processes and legacy technology systems. Coastal is also using artificial intelligence to improve productivity and reduce future costs.

Third-quarter non-interest expense totaled $84.8 million, down from $141.1 million in the second quarter, which included a $46 million credit enhancement valuation adjustment. Salaries and employee benefits declined $1.6 million sequentially, while data processing and software costs decreased $5.9 million, partly due to the absence of $4.4 million in accelerated depreciation recorded in the prior quarter.

“This work is not about indiscriminate cost-cutting,” Adams said, describing the effort as a plan to remove low-return products, services and duplicative spending while maintaining investment in areas where Coastal is positioned to grow.

Coastal’s Common Equity Tier 1 ratio improved to 11.47% at Sept. 30 from 10.86% at June 30. Its Tier 1 leverage ratio was 8.81%, and total risk-based capital was 13.82%.

Separately, Sprink said the company’s search for a permanent chief financial officer is in its final stages. Interim CFO Joel Edwards, who previously served as Coastal’s CFO for 13 years, continues in the role. The company also said Brian Hamilton stepped down as president and moved into a strategic advisory role while remaining on Coastal’s board.

About Coastal Financial (NASDAQ:CCB)

Coastal Financial Corporation is a bank holding company headquartered in Everett, Washington. Its principal subsidiary, Coastal Community Bank, provides banking services to individuals, families, and businesses in the Pacific Northwest, with a focus on communities in the Puget Sound region.

Coastal Community Bank offers consumer and commercial deposit accounts, residential and commercial real estate lending, business loans, lines of credit, treasury management, online and mobile banking, and other traditional banking products.

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