Coastal Financial Corporation

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

Thank you and 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 is Chair since 2019. 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. 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. 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 BAS 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 evaluation adjustment does not change or waive those rights. It reflects our current assessment and provisioning based on the facts available at quarter end. 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 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. 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. and also every partner we reviewed was current on its contractual cash collateral funding obligations. 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 will 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. 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. Our investment 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 BAS program fee income of 12 million, up approximately 10 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. 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 then provide a more detailed review of the quarter.

Chris, I hand it over to you.