COASTAL FINANCIAL Q2 FY26 earnings call CCB

Coastal Financial recognized a $68.8 million pre-tax accounting adjustment in Q2 FY26, comprising a $46 million valuation adjustment to a credit enhancement asset and a $22.8 million provision for credit losses related to a specific non-public CCBX partner. This action was taken due to a change in assessment of the partner's consumer loan portfolio, reflecting the company's current estimate of potential loss as of quarter-end. Management stated that the partner remains contractually responsible for losses covered by indemnification, and the company is actively pursuing recovery.

Following the issue with one partner, Coastal conducted a thorough review of its remaining CCBX portfolio, totaling approximately $1.7 billion. This review found no comparable issues, with improvements noted in net charge-offs and early/late-stage delinquency measures across the core CCBX portfolio. All other partners were current on cash collateral funding obligations. The company remains committed to its Banking-as-a-Service model, viewing it as a long-term growth driver, but will place greater emphasis on discipline, risk-adjusted growth, and continuous partner monitoring.

Chris Adams was appointed Executive Chair, focusing on long-term strategy, external engagement, leadership development, operating leverage, and profitability. This move aims to translate the company's investments in people, technology, and compliance into stronger, more consistent profitability. Management has initiated a review of vendor spending, contractor usage, and discretionary expenses to reduce lower-value spending and direct resources towards more efficient, risk-adjusted activities.

Excluding the specific credit expense and software charge, Coastal reported strong underlying performance. Net interest income reached a record $89.4 million, up 16.4% year-over-year, with a stable net interest margin of 7.27%. Loans grew 9% to $4.21 billion, and BAS program fee income increased 10% quarter-over-quarter to $12 million. Off-balance sheet activities, such as the credit card program (881,000 accounts, up 32%) and deposit sweeps ($4.26 billion swept), continued to generate significant fee income.

Despite the quarter's adjustments, Coastal Financial remains well-capitalized, with a Common Equity Tier 1 ratio of 10.86%, Tier 1 leverage ratio of 9.11%, and total risk-based capital ratio of 13.30%. The company retained approximately $1.01 billion of cash and over $1.1 billion of additional contingent borrowing capacity, with no short-term borrowings outstanding. The capital-efficient model, including ongoing loan sales, continues to support liquidity and internal capital generation.

Coastal Financial announced that it is no longer actively pursuing the acquisition of assets and deposits from Evolve Bank and Trust. This decision aligns with the company's increased focus on internal profitability and operating leverage, allowing resources to be directed towards optimizing its existing platform and partnerships.