COASTAL FINANCIAL CORP Q3 FY2026 earnings call

Executive Leadership Updates:

• Brian Hamilton stepped down as President to take a strategic advisory role; the search for a permanent CFO is in final stages.
• CEO Eric Sprink voluntarily reduced compensation to align with the new expense discipline initiative.

Strategic Focus on Efficiency:

• Management is prioritizing operating leverage by growing revenues faster than controllable expenses.
• Initiatives include scrutinizing vendors, eliminating role duplication, replacing legacy systems, and leveraging AI for productivity.
• Identified over $20 million in potential annualized savings, expected to be realized over 4-6 quarters.

CCBX Partner Portfolio Health:

• Returned to profitability with net income of $13.8 million ($0.89 diluted EPS).
• Program fee income grew 17.6% sequentially, reflecting strength in the broader partner base.
• Active debit cards increased 20% sequentially (1.8 million cards), demonstrating strong interchange growth.
• Loan sales scaled significantly, with $5.99 billion sold in Q3 compared to $4.56 billion in Q2.

Specific Partner Issue Resolution:

• Addressed the Q2 losses related to one specific partner’s consumer loan portfolio.
• Annualized net charge-offs improved markedly from 11.46% in Q2 to 9.81% in Q3.
• Delinquency rates decreased from 4.06% to 3.41%.
• Approximately 96.7% of BAS non-performing loans are covered by partner credit enhancements.
• Valuation allowance against the credit enhancement asset decreased modestly to $45.6 million.
• No comparable issues identified across the remaining 20 active partners after rigorous review.

Liquidity and Capital Position:

• Ended Q3 well-capitalized with a Common Equity Tier 1 ratio of 11.5%.
• Held $803 million in cash and $827 million in contingent borrowing capacity.
• Blue Vine acquisition by Valley National Bancorp is not expected to materially impact liquidity or funding profiles due to diversified sweep deposit alternatives.

The company reports two primary segments: Banking as a Service (CCBX/BAS) and Community Bank. CCBX segment fee income grew to $14.1 million, up 79.6% year-over-year, driven by transaction, interchange, and servicing fees. Net interest income for the quarter was $88.3 million, with a net interest margin of 6.59%, though this declined from 7.27% in Q2 due to a shift in loan mix toward lower-yielding cash-secured installment loans. The Community Bank segment generated stable performance with deposits growing 4% to $1.64 billion at a cost of 1.54%, and net charge-offs were effectively zero. Total non-interest expense was $84.8 million, significantly down from $141.1 million in Q2, primarily due to the absence of the $46 million credit enhancement valuation adjustment recorded previously.

• Management targets $20 million in annualized expense savings, expected to be achieved over the next four to six quarters.
• Savings are described as pre-tax and may involve some reinvestment as the business evaluates future needs.
• No official efficiency ratio projections have been provided for the post-savings run rate.
• Management reaffirms confidence in returning to consistent profitability while preserving strong capital and liquidity ratios.
• Forward-looking statements emphasize converting revenue growth into greater operating leverage through disciplined cost management.

• Specific Partner Credit Risk: One partner's consumer loan portfolio experienced higher-than-projected charge-offs, though trends are improving. There is a risk that certain CECL-related provision expenses may not be recoverable from the partner if reimbursement is deemed improbable.
• Fintech Ecosystem Volatility: Changes in ownership among fintech partners (e.g., Blue Vine’s acquisition) create operational uncertainty regarding deposit stability and partnership continuity, although the model is designed to absorb such shocks.
• Underwriting and Yield Pressure: Tightening underwriting standards and a shift toward lower-yielding cash-secured loans have compressed gross loan yields, potentially impacting future revenue growth if not offset by volume increases.
• Regulatory and Compliance Costs: Increased legal, professional, and FDIC charges reflect ongoing monitoring and remediation efforts related to the specific partner issue and general regulatory scrutiny.
• Execution Risk on Cost Savings: Achieving the targeted $20 million in savings depends on successful elimination of duplicative spending and vendor renegotiations without compromising platform capabilities or growth pipelines.

Q: Janet Lee asked if the probability of recovering provisions/credit enhancements for the specific troubled partner has changed since Q2, and whether other CCBX relationships show distress given macro headwinds. / A: CEO Eric Sprink stated recovery prospects remain materially unchanged, noting that while CECL models adjusted for rate-driven prepayment speeds, the underlying credit analysis is consistent with Q2. He highlighted improving delinquency and charge-off trends as evidence of portfolio health. Regarding other partners, he confirmed no additional trouble spots, attributing lower gross yields to tighter underwriting and better credit quality rather than risk deterioration, while net yields to Coastal remained stable.

Q: Analyst Andrew Terrell asked if the $20M savings target is gross or net, whether it implies a linear step-down, and how the Blue Vine acquisition impacts net earnings or reveals broader partner concentration risks. / A: Chairman Chris Adams clarified the $20M is a pre-tax number, achievable over 4-6 quarters, but noted reinvestment may occur. On Blue Vine, CEO Sprink emphasized the ecosystem naturally evolves via M&A, citing past acquisitions of other partners. He stressed diversification mitigates single-point failure risks. While final net income impact calculations are pending, he affirmed sufficient alternative funding sources exist to replace swept deposits, ensuring no material adverse effect on liquidity.

Q: Tim Switzer requested a breakdown of the specific partner’s provision drivers (loan growth vs. macro/CECL changes) and asked if quarterly provision expenses will persist as the CECL model evolves. / A: Sprink explained loan growth was nominal; the provision increase stemmed primarily from macro rate changes extending weighted average lives in the CECL model, leading to unrecoverable incremental costs. He noted charge-offs are improving dramatically year-over-year. He confirmed the bank evaluates the partner’s performance and recoverability every quarter, with continuous engagement between management, accountants, and the board to monitor sensitivity and update estimates accordingly.

Q: Joe Yanchunis asked how much additional revenue the existing tech/compliance platform can support without significant new spending, and inquired about market appetite for sold credit card paper and optimal partner size strategies. / A: Adams stated the built platform has no inherent limitation on growth; the focus now is on running it more efficiently to boost profitability. Sprink confirmed secondary markets for credit card paper remain liquid and able to absorb large transactions. Regarding partner strategy, he reiterated a preference for larger companies with high upside potential, balanced by product and industry diversification to manage concentrations, viewing partner acquisitions as manageable operational events rather than strategic failures.