Coastal Financial Corporation

Welcome to Coastal Financial Corporation's third 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 that 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 reconciliation to the most comparable GAAP numbers. I would like to now turn the call over to the company. 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 a 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 FinTech's 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 are credit risk appetite as we always do. Results for the third quarter better reflect the underlying earnings power of the business. We returned to profitability with net income of 13.8 million or 89 cents per diluted share. Bass 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 one ratio of 11.5%. So let's get into the details. I'll start with an update on one of the partner's consumer loan portfolio and the rest of our vast partner portfolio, including Blue Vine, 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 have 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 BAS model is structured so that the partners provide credit enhancement against losses on the programs they originate. That structure continues to perform across our partner base, and today approximately 96.7% of BAS 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 collectability of amounts due under the specific partners' indemnification agreement. The results substantially support the estimate we established at June 30th, although actual charge-offs were modestly above projections. However, 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 30th, projected cash flows under the Specific Partners Program Agreement continue 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 30th, compared to $46 million at June 30th. The $22.8 million specific allowance established in the second quarter remain 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 30th, the specific partner portfolio had $511 million in loans outstanding compared with $507.5 million at quarter close for the second quarter on June 30th. 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 we'll 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 30th, 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 BAS originations during the quarter, which partially explains why our gross BAS 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 30th, 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 FinTech 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, Blue Vine 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 Blue Vine originated loans at quarter end. Separately, the community bank held a $6.8 million commercial loan to Blue Vine at quarter end. At September 30th, we held $3.04 billion of BAS deposits on balance sheet across 21 active partners with another $6.29 billion swept off balance sheet. Our funding alternatives include the ability to bring sweep deposits back onto our balance sheet, give the flexibility to replace Blue Vine related deposits, We ended the quarter with $803 million of cash, $827 million of additional contingent borrowing capacity. We do not expect the transaction or any resulting changes to the Blue Vine deposit relationship to have a material or adverse effect on our liquidity or funding profile even if our relationship with BlueVine is terminated following the consummation of their transaction. Now to the underlying business. VAST program fee income of $14.1 million grew from higher transaction and interchange fees and servicing fees. Eight partner programs were in various stages of expanding into additional products with us, A sign that our partners see Coastal as a platform to grow. Our capital light activity continued to scale. We sold $5.99 billion of vast loans during the quarter compared with $4.56 billion of loan sales in the second quarter. Our off-balance sheet credit card accounts now stand at $1.3 million. CCBX active debit cards, a key source of interchange, increased by 1.8 million cards, or 20% quarter over quarter, and by 6 million cards, or 118.7% year over year. Deposits swept off balance sheet rose to $6.29 billion from $4.26 billion at June 30th and generated 1.4 million of fee income up 16.4% from the second quarter. Net interest income was 88.3 million down 1.2% from the second quarter and up 13.4% from a year ago. Net interest margin was 6.59% compared with 7.27% in the second quarter. primarily reflecting a shift in loan mix. Net of BAS loan expense, net interest margin was 3.93 compared with 3.98 from the second quarter and loan income, net of BAS loan expense was 6.86 of average loans up from 6.83. In the community bank, Deposits grew $63.2 million for the second quarter, or 4%, to $1.64 billion at a cost of deposits of 1.54%. Community bank loans were $1.98 billion. Net charge-offs were effectively zero. With that, I'll turn it over to Joel for the financial overview.

Thank you and good morning. I'll keep my remarks brief and focus on a few key figures. More detail is in the release. Third quarter net income was 13.8 million or 89 cents per diluted share compared with a net loss of 42.1 million or 276 per diluted share in the second quarter and net income of 13.6 million are $0.88 per diluted share a year ago. The provision for credit losses was $46 million compared with $92.2 million in the second quarter. The $46 million provision expense included $43.9 million for BAS loans, which is largely offset by $41.8 million of BAS credit enhancements recorded in non-interest income. $372,000 of the provision was for the community bank loans, $1.4 million for unfunded commitments, and $319,000 related to accrued interest receivables. The allowance for credit losses was $208.1 million or 4.97% of loans compared with $213 million or 5.07% in the second quarter. Non-interest income included a $502,000 unrealized loss on equity securities which included a $565,000 downward adjustment to the value of one of our strategic equity investments as of September 30. Non-interest expense was $84.8 million compared with $141.1 million in second quarter, which included the $46 million credit enhancement valuation adjustment. including BAS loan and fraud expense. Non-interest expense was 45 million compared with 96.4 million in the second quarter, which included the 46 million credit enhancement valuation adjustment. We started to see positive movement on non-interest expense in the quarter, including a 1.6 million reduction in salaries and employee benefits. and a 5.9 million reduction in data processing and software, partially reflecting the absence of a 4.4 million of accelerated depreciation in the prior quarter. These reductions in non-interest expense were partially offset by a 1.6 million increase in legal and professional expenses and 440,000 increase in FDIC charges, both related to the second quarter net loss, while other expenses had smaller changes and effectively netted each other up. Total deposits were 4.68 billion at September 30, and the cost of deposit was 2.61 compared with 2.57% in the second quarter. Turning to capital at September 30, our common equity Tier 1 ratio was 11.47%. Our Tier 1 leverage ratio was 8.81%. And our total risk-based capital was 13.82% compared with 10.86%, 9.11%, and 13.3% at June 30. We had no borrowings outstanding on our contingent funding lines at quarter end. With that, I'll hand it over to Chris.