Coastal Financial Corporation Stock

Welcome to Coastal Financial Corporation's Third Quarter 2026 Earnings Conference Call.

[Operator Instructions]

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, me, 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 initiatives that we are applying across the business, and I am already encouraged by our 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 scale with them. 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 fintechs 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 2 partners in onboarding and 3 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 pretax charges related to Partners' 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 3 months, we have remained focused on updating our assessment of the One Partners portfolio, reassessing the broader CCBX partner portfolio, and continuing to evolve our 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 $0.89 per diluted share.

BaaS 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 1 ratio of 11.5%. So let's get into the details.

I'll start with an update on one of the partners' consumer loan portfolios and the rest of our BaaS partner portfolio, including Bluevine, 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 BaaS model is structured so that the partners provide credit enhancement losses on the programs they originate. That structure continues to perform across our partner base. And today, approximately 96.7% of BaaS nonperforming 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 collectibility of amounts due under the specific partner's indemnification agreement.

The results substantially support the estimate we established at June 30, 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 30, projected cash flows under the specific Partners program agreement continue to support our accounting treatment to record all of the corresponding incremental credit enhancement amounts substantially.

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 30, compared to $46 million at June 30.

The $22.8 million specific allowance established in the second quarter remains 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 30, the specific partner portfolio had $511 million in loans outstanding compared with $507.5 million at quarter close for the second quarter on June 30.

Annualized net charge-offs were 9.81% compared with 11.46% for the second quarter, which has markedly improved since the third quarter of 2025.

Loans 30 or more days past due were 3.41% compared with 4.06% for the 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 30, which covers 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 nonperforming loans decreased from $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 BaaS originations during the quarter, which partially explains why our gross BaaS loan yields declined this quarter.

Every partner operates under different portfolio limits we have set, and we test underwriting on a recurring basis for our partners with the largest exposures.

As of September 30, we had 30 CCBX relationships at varying stages, including 21 active partners, 1 in testing, 2 in onboarding, 3 signed letters of intent, and 4 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 of the 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 30, Bluevine-related deposits on our balance sheet were approximately $452.4 million, and another $1.85 billion in deposits was swept off the balance sheet to other banks.

We also held $3 million of Bluevine-originated loans at quarter end. Separately, the Community Bank held a $6.8 million commercial loan to Bluevine at quarter end.

As of September 30, we held $3.04 billion of BaaS deposits on the balance sheet across 21 active partners, with another $6.29 billion swept off the balance sheet.

Our funding alternatives include the ability to bring sweep deposits back onto our balance sheet, which gives us flexibility to replace Bluevine-related deposits.

We ended the quarter with $803 million of cash and $827 million of additional contingent borrowing capacity.

We do not expect the transaction or any resulting changes to the Bluevine 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. BaaS program fee income of $14.1 million grew from higher transaction and interchange fees and servicing fees. 8 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 BaaS 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 the balance sheet rose to $6.29 billion from $4.26 billion at June 30 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 BaaS loan expense, net interest margin was 3.93% compared with 3.98% in the second quarter, and loan income net of BaaS 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 0. 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 $0.89 per diluted share compared with a net loss of $42.1 million or $2.76 per diluted share in the second quarter and net income of $13.6 million or $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 BaaS loans, which is largely offset by $41.8 million of BaaS credit enhancements recorded in noninterest income.

$372,000 of the provision was for the Community Bank loans. $1.4 million was 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.

Noninterest 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.

Noninterest expense was $84.8 million compared with $141.1 million in the second quarter. This included the $46 million credit enhancement valuation adjustment.

Excluding BaaS loan and fraud expense, noninterest 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 noninterest 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 $4.4 million of accelerated depreciation in the prior quarter.

These reductions in noninterest expense were partially offset by a $1.6 million increase in legal and professional expenses and a $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 out.

Total deposits were $4.68 billion at September 30, and the cost of deposits 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 13.2% 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.

Thank you, Joel, and good morning. When I became Executive Chair in July, I said one of my priorities would be helping Coastal improve operating leverage and profitability.

Operating leverage means growing revenue faster than controllable expenses over the long term, and we recognize that a resilient CapEx structure is something that we need to establish and prove to our shareholders over time.

Over the past quarter, we've begun translating these priorities into initiatives and specific actions. Coastal has built a scalable, regulated platform through significant investment in people, technology, compliance, data, and risk management infrastructure.

Those investments are critical to the growth Eric described. One of our key objectives now is to run that platform more efficiently while continuing to grow revenue and convert that growth into more consistent profitability.

We're scrutinizing vendors, contractors, personnel, and discretionary spending, eliminating duplication across rules and processes, replacing legacy systems with more efficient technology, and holding every partner program, product, and service to a clear standard for risk-adjusted return.

We are also using AI to improve employee effectiveness and productivity and reduce future costs. Expense results from the quarter show early progress as well as where our work remains.

Data processing and software costs declined $1.5 million from the second quarter after removing the $4.4 million of accelerated depreciation recorded in the second quarter for software assets no longer in use, and salaries and benefits declined $1.6 million from the second quarter.

This work is not about indiscriminate cost cutting.

Our focus is on removing low ROI products or services and duplicative spending and redirecting our people, capital and technology toward our partners, products and services, and capabilities where Coastal is best positioned to win.

That focus is designed to support our customers and partners and produce appropriate risk-adjusted returns. We have identified over $20 million in potential annualized savings in noninterest expenses and expect to achieve these potential savings over the next 4 to 6 quarters.

These expenses exclude BaaS loans and fraud expenses, which are generally reimbursed by our CCBX partners and recognized in noninterest income in accordance with GAAP.

The Board also continues to receive rigorous reporting on the specific partners' performance, collections, collateral, remaining exposure and capital impacts, and counterparty conditions as management pursues recoveries and evaluates the strategic alternatives at its disposal.

The development of our operating efficiency plan during the third quarter was an important step, and we expect operating leverage to improve as the plan is implemented.

Coastal returned to profitability while preserving strong capital and liquidity, along with growing fee income from our off-balance sheet loan sales and deposit sweep activity.

Our responsibility now is to build on that performance with the balance sheet and operating model that supports durable earnings, lower volatility, and stronger shareholder returns.

With that, I'll turn it back to Eric for some closing remarks.

Thank you, Chris. The third quarter reflects the strength and earnings potential of our business.

We returned to profitability, group 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.

The specific partner matter we had in the second quarter was a challenging moment for Coastal, and we have treated it with the seriousness it required. We have made progress in each of the areas we discussed in July.

Our priorities moving forward are clear: maintain disciplined portfolio oversight, manage transitions across our vast partner portfolio, including Valley's anticipated acquisition of Bluevine while maintaining a strong funding profile, expand the products and partnerships that yield appropriate risk-adjusted returns, and convert revenue growth into greater operating leverage and more consistent profitability.

We recognize that 1 quarter does not encompass the breadth of our work ahead, but our capital, liquidity, and operating momentum provide a strong foundation, and we are focused on operating with discipline.

Open for questions.

Your first question comes from the line of Janet Lee with TD Cowen.

Without getting into the specifics of the relationship, based on what you've seen since the second quarter, has the probability of recovering some of the provision and/or credit enhancement valuation adjustment improved, deteriorated, or remained broadly unchanged?

Yes, thanks. I think it's materially stayed the same, as you say. We're monitoring it. We've got great open dialogue with the partner.

We still remain hopeful for their progress. We are monitoring our profile, our portfolio. I do want to call out our comments again. The past-due amounts are improving. The charge-offs are improving.

During the quarter, interest rates moved, and that can affect the CECL models on a fixed-rate portfolio. So, consequently, weighted average lives played a big part in needing to increase that allowance, and since we've deemed it unrecoverable, that shouldn't reflect on the underlying analysis of the model, which we think is very consistent with our second-quarter perspective.

And overall CCBx credit, you said you're not seeing other trouble relationships. But given higher rates and a few recent consumer finance headlines, are there any areas you're watching more closely?

Yes. One, we're watching all of it very closely. You can imagine internally how much scrutiny all of the portfolios are receiving.

No, we are not seeing anything else stick out or cause any undue attention. We will draw your attention to the overall delinquency and charge-off rates in CCBX, which improved pretty nicely during the quarter and over the last year.

So internally, we also would draw attention to the gross yields going down. That's a product of both product mix changes, but also a higher class of underwriting credits resulting in lower gross yields, while we were able to basically maintain the net yields to Coastal.

So those are 2 indications I draw your attention to, to say, no, we feel confident right now that our oversight and our comments are accurate.

And lastly, on the $20 million annualized savings. Should expenses start stepping down further in the fourth quarter? And is the benefit fairly linear from here?

As we think about '27, is there any efficiency ratio you believe the business can operate at once these actions are further along?

Janet, it's Chris Adams. We feel very confident about the potential $20 million that we have targeted. And the work has just started.

So I think that's the way to think about it in terms of on a go-forward basis. So we are digging into all vendors, all contractors, and duplication internally.

We'll continue that work in the fourth quarter and continue to give an update on how it flows through the P&L. On a go-forward basis, we're not giving any projections in terms of how different ratios will work out yet.

But the potential $20 million, we feel like, is a good number to share. We feel very confident in that.

Your next question comes from the line of Andrew Terrell with Stephens.

Chris, if I could maybe tickle that last line of questioning just on the expenses and the announced $20 million. Just to level set expectations, is $20 million a gross or a net number?

So if we look at your operating expenses, excluding the BaaS expense and partner fraud, this quarter was $45 million, basically on the nose. 4 to 6 quarters from now, should you step down $5 million a quarter in the run rate?

Or is there a reinvestment we should be contemplating that you maybe don't see a true kind of $20 million drop in the run rate over the next 4 to 6 quarters?

Yes, that's a great question. So we certainly see that as a pretax number, and there will be potentially reinvestment that can happen at different stages as we evaluate the business and the needs and everything on a go forward.

But from a vendor/contractor and the duplication side of things, we do think right now, just on a go-forward basis, that we will see that run rate over the next 4 to 6.

So I think the way that you're thinking about it is probably correct.

Just on the Bluevine relationship, I appreciate the color you guys provided. It looks like you can just pull separate deposits back on to replace what you'd be losing here.

Do you just have a net estimate on how losing this partner impacts your net revenue or net earnings? And then more broadly, just as you've, I'm sure, sifted through the partner base at the bank, do you feel like there's any risk that we see any more of this action going forward within your current partner base?

Yes. Good questions all the way around. So yes, well, first off, let me just complement Valley and Bluevine.

I think it's a good step for both of them. And I know both the CEOs extremely well, and we wish them nothing but the best. And we see this as not a surprising development.

In the maturing fintech ecosystem, et cetera, we all forget X1 was purchased by Robinhood. We forget that Bridget was bought by Upbound. Ownership changes happen.

So I can't sit here and say, hey, this isn't going to happen. Quite the opposite. We've been the direct benefactor of changes of ownership over time. I can tell you that specifically, we're not aware today of any other events, bank charters and/or changes in ownership.

What I can say is, on Bluevine specifically, we have plenty of funding, alternative sources to sweep back on the balance sheet. And our flexibility really plays into this structure.

I think it's often undercredited that having a diversified portfolio allows us to absorb these shocks. The second quarter event, unfortunate, is an example, but even change of ownership events.

I will say this to you, though, we haven't done the final calculations on a net income impact, but we're looking at everything. We've given you the numbers around it.

So I think what we're also trying to work out internally, Andrew, is our cost to oversee this. So there's puts and takes when you get to the net income number. And as there are some internal costs, what can actually be reduced due to losing the relationship or what will be reinvested. But thank you for the question.

Now that 2Q is a little less fresh, you've had time to digest. Any shift in how you're thinking about managing partner credit?

I'm specifically asking around the credit enhancement asset versus a harder dollar cash pledge deposit guarantee. Is there any shift in how you're thinking about managing the credit indemnity structure with partners moving forward?

Yes. I mean we humbly admit we're a learning organization, and we're going to take all events and continually update and monitor how we look at partners, how we look at the indemnification ability capability.

You heard us talk about that, including liquidity, cash pledge accounts, how we look at the partners' earnings.

Some interesting context is the diversity of revenue streams of our partners has become an interesting topic internally to try to figure out the redundancy of the partners versus monoline fintechs.

We've started looking at a lot of different metrics to say, how can we improve this? And going forward, we want to be better today than we were yesterday, and we want to be better in a year than we are today.

And if I could sneak one more in, just on the CCBX loan balances down a little bit this quarter.

I'm assuming some of that was impacted by -- it sounds like some portfolio mix change happened this quarter, maybe there's some higher quality credit.

Should we expect loan portfolio growth out of CCBX going forward? Or are we in a period of kind of just continued remix?

Well, Andrew, thank you for sneaking in our first pro forma question of the day. And I'm going to try my best to successfully not answer it.

Look at average balances versus end of period first off. Average balances were up $300 million. So there's quite a lot of variability in the day-to-day management of the balance sheet.

And I wouldn't read too much into quarter end. We have a robust pipeline. We have new products coming online. We have new partners coming online.

We're always going to be constantly managing the portfolio. And we're still a growth company. We did sell a larger block than normal of on-balance sheet credit cards, and you'll see that in the period-end balances by product mix.

So it's worth calling that out. You could see in one of the graphs we gave you that sold credit cards went up versus on-balance sheet credit cards, working with our partners and their risk tolerances, our risk tolerances played into that a little bit, but we enjoyed great discussions with our partners all quarter about risk appetites.

And it's just going to be a constantly fluctuating thing that Joel today and our new CFO will have to optimize the balance sheet going forward. But I do want to reiterate, we're still a growth company, and we have a robust pipeline, and we're going to manage that appropriately.

Your next question comes from the line of Tim Switzer with KBW.

Putting the cost saves aside for a second, how has your efficiency improved over the last year or so to onboard partners and service current ones due to things like AI investments and stuff like that?

And the obvious follow-up to that is your ability to continue onboarding new partners and meeting the pipeline out there while still achieving these cost saves and keeping good expense discipline.

Yes. I'm going to answer it this way. The AI technology that's being put in place is definitely on the oversight. That was our main target over the last 12 months.

We're using it a lot in compliance, anti-money laundering as well as some other maintenance vehicles as compared to what you asked about AI and onboarding.

So I just want to draw a small distinction there. But I do think Tara Herger, our Chief Operating Officer, who helped us start CCBX many moons ago.

She was our first employee in that group is still running it today, and she has continued to refine her team techniques and I would say, if you look at the pipeline today versus some prior aspirational onboarding comments has been more rationalized for the attempt to be giving consistent earnings to the company.

So you've got a balance of all of that working forward that we think we're managing it appropriately, still a growth organization, keeping and maintaining the appropriate oversight to do it safely and soundly with great controls while getting those growth and income targets we're targeting.

Got it. Okay. For the provision on the specific partner, are you able to maybe break down like what portion of that provision was due to loan growth versus macro changes in your CECL model and then also for like the charge-offs?

Yes. So the loan growth was nominal. I mean, 507 versus 511, that's a timing difference, if you ask me personally. We worked with the partner to maintain. So that's just a statement.

So I don't think loan growth played into the provisioning. You're right, we try to be as transparent as possible in our comments. And so that's why there's a little bit of a qualitative comment, my opinion, that the attorneys has allowed me to sneak in there saying, hey, charge-offs were a little bit different than what I was expecting, not materially, but modestly, I think, was the word I used.

But we did call it out to say, hey, we've got our targets inside that's built into the CECL models. But it was really close, but it wasn't better than what we were projecting.

So we want to just make that statement. But with that said, the charge-offs was down pretty dramatically quarter-over-quarter. And year-over-year, it's down from 15% down to 9% or really dramatically different and improving.

And we see the improving comment come through the delinquency status. That's why we added that in there, so you can get some color.

So I think what really, in my mind, and of course, we can dive into this more, but is the macro changes in the rate environment really, when you're talking about the CECL model, drives prepayment speeds and it extended our weighted average life or the wall in our warm method and CECL looks at lifetime and the lifetime extends and the losses extend.

And at this time, we deemed that we can't rely on the partner to reimburse us for those CECL expenses. So that $3.1 million is unfortunate. At the end of second quarter, we said, hey, we got to evaluate it every quarter.

We're going to continue to evaluate it. But we're trying to give you as much color as we can, Tim.

Yes. No, that was really helpful. And I mean, is there any, I guess, aspect of this provision in terms of like roll forward where we should expect maybe smaller than this quarter, but like a modest amount of provision expense each quarter as the CECL model continues to move forward and you originate new loans?

Good backdoor to a pro forma question. What I can say is we're going to evaluate it every quarter. We've got our models in place. The partner is extremely cooperative.

We are talking with the investment bankers. We are talking with the potential investors on that side. We are talking with our accounting group, our finance group, our credit group.

All parties are at the table looking at everything constantly, and then the Board then comes over top and ask 50 new questions. So it's all eyes on everything right now.

We understand the sensitivity of it. We, of course, didn't want to have to come with this messaging today, but we think it's appropriate in the context to be as transparent as possible.

And one last one for me. You talked about this a little bit, the higher core NIM and CCBX. It's moved higher the last 2 quarters, obviously, a pretty good trend to see with the gross loan yields also moving down.

How much of that is like loan mix and program mix versus better pricing on your lending programs?

Yes. I think there's a couple of slides that, in the earnings release, I think you're referencing, or I'm referencing in my comments, Page 29, Page 35, that kind of gives you the loan mix; cash secured installment loans go up $50 million during the quarter.

Well, cash secured consumer loans does get a lower gross yield than unsecured cards. So the mix did change, and it's just worth calling that out. Our cash secured installment loans now is about $265 million.

But if you look at Page 29 in the earnings release, you can see that the net yield to us was pretty moderated and controlled. But the gross yield is a mix question as well as an underwriting question. And we're seeing that our partners are very disciplined.

Our credit groups and their credit groups and management and management teams are talking all the time. We're tightening underwriting, and they are in a cooperative nature.

And we're starting to see that manifest itself in lower charge-offs, lower delinquencies, and lower gross yields while we're maintaining our yield.

Your last question comes from the line of Joe Yanchunis with Raymond James.

Most of them might have been answered, but I do have a few I'd like to bounce off you. So you talked about the significant investments Coastal has made in technology compliance, or risk infrastructure.

And as you work through the expense initiatives, how much additional revenue do you think the existing platform can support without requiring another meaningful increase in spending?

No. I mean this is where Chris will talk a little bit about the inflection point. So I'll give it to Chris.

Thank you, Joe. Yes, we have been building the platform here for a number of years. And so we feel really good about where it is.

The technology build, the vendors that we put in place, the opportunity now to go back and turn off older vendors and look for duplication. I don't think there's any limitation in terms of how we've constructed it on our growth side of things.

I mean we remain a growth company. This is about building a leaner organization on a go-forward basis to really focus on efficiency and profitability.

So we feel really good about our growth path right now.

And then just bouncing around here. So you talked about the big step-up in credit cards sold this quarter. Can you talk about how the market's appetite for that paper has changed over the past few months or quarters?

I'm probably not as close to answering that. Let me just say we were very successful. There was a very large transaction that I was involved with during the quarter that the team shepherded through with one of our partners.

It was larger than normal and very successful. So I'm just going to confirm by saying, hey, the market is liquid. The market is able to absorb this. We, of course, maintain liquidity and capital buffers if there is any type of slowdown.

That's part of our resiliency of our plan, but I haven't heard any pushback from the teams that the secondary markets aren't operating efficiently.

And then last one for me. So obviously, part of the BaaS model involves potentially some of your largest and most successful partners eventually becoming acquisition targets or pursuing their own charters.

This isn't a new phenomenon, but has your thinking around the optimal size of any individual relationship changed?

No. I mean, over the last 3-plus years, we have skewed towards much larger companies. So that's evident in the list that we have there.

We still look for, in totality, the highest probability of success both for the partners' TAM as well as the bank's risk-adjusted return.

We do weigh, hey, when you sign some of these larger ones, the on-balance-sheet margin might be slightly less, but you get the off-balance-sheet upside potential with maybe a moderate-sized or middle-sized company that has slightly better operating margins, but maybe not as much upside because of their preexisting distribution network or what have you.

I think it's about diversification, Joe. When again, it comes back down to it, we believe in product diversification, program diversification, industry diversification and managing concentrations behind that.

So any type of Bluevine announcement shouldn't scare the markets too much because they know we're disciplined on how we manage the portfolios behind the scenes.

That concludes our Q&A session. I will now turn the call back over to Eric for closing remarks.

Well, thank you all, and thank you to the team members on the call and to all of our friends and supporters that woke up at 5:00 to hear this call today.

So we do appreciate the team and everything that they have done, and we are very excited about our future, and we appreciate everybody's attention and coming on the call today, and we'll talk to you all soon. Have a wonderful day.

This concludes our call for today. Thank you all for joining. You may now disconnect. Everyone, have a great day.

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. look at the company's investor presentation and website for all of the disclosures required by the SEC, including reconciliations to the most comparable GOP numbers.

I would now like to turn the call over to Eric Spring, 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 CC CBX 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 gap net loss of 42.1 million, or a loss of $2.76 per share. her 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 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 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 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 investments 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 average. 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. 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. Thank you, Eric, and good morning. I appreciate the board's confidence in appointing the executive chair. As Eric noted, my increased role will focus on long-term strategy, external engagement, leadership development, operating leverage, and profitability. Eric remains CEO, and I look forward to working alongside him and the rest of the team as the independent directors of the board continue to provide strong and independent oversight. The board has been engaged throughout management's assessment of the defined portfolio. The management team meticulously reviews the portfolios on an ongoing basis and they bring it to the board for it to review the analysis, challenging the assumptions, and consider the accounting and capital implement implications.

That's precisely what In this matter, we supported management's decision to recognize the quarter-end estimate in the period in which the assessment changed. Making a decisive action now and being transparent with our shareholders is the behavior that our management team and this board expects. I would make three points to shareholders. First, the board's review was not limited to whether June 30th accounting estimates for just the defined portfolio was supportable. We also asked whether the exposure was separately identified and monitored, and whether the remainder of the CCBX portfolio has been reviewed using the same standards. The board has required enhanced reporting regarding portfolio performance, collections, collateral, remaining exposure, and capital impact, counterparty conditions, and progress on strategic alternatives. We are not treating the June 30th accounting action as the end of the work.

Coastal remains well capitalized and highly liquid. As of June 30th, the company's common equity tier one ratio was 10.86%. The tier one leverage ratio was 9.11%. And its total risk-based capital ratio was 13.30%. The quarter's adjustments reduced capital ratios by approximately one percentage point. The company retained approximately $1.01 billion of cash and more than $1.1 billion of additional contingent borrowing capacity, with no short-term borrowing outstanding. The company's capital efficient model, including ongoing loan sales and off balance sheet deposit and card programs, continues to support liquidity and internal capital generation.

I've heard my focus is increasingly growing on profitability and operating leverage. COSO has made substantial investments in people, technology, compliance, data, risk management, and ongoing infrastructure. Many of those investments were necessary to support the company's growth and build a durable, regulated platform. The next phase, though, must translate that investment and revenue growth into stronger and more consistent profitability. Management has begun a review of vendor spending, contractor usage, discretionary expenses, organizational duplication, technology priorities, and partner and product level profitability. The objective is not to just cut costs. We'll continue to invest in compliance, credit, audit, cybersecurity, data, and risk management.

The objective is to reduce lower value and duplication in spending and direct our people and capital and technology towards activities that are more efficient. that produce appropriate risk-adjusted returns. As we continue to grow, we'll place greater emphasis on the revenue, capital usage, liquidity, operating expenses, and risk-adjusted profitability for each product and relationship. The board continues to have confidence in the long-term value of Coastal's model. Our responsibility is to ensure to translate the company's underlying earnings power into strong operating leverage, lower volatility, and improving shareholder returns. With that, I'm going to turn it over to Brandon to talk through his part of the presentation. Brandon?.

All right, thank you, Chris. I'm going to provide a narrow overview of the quarter. As Eric discussed, Coastal reported a gap net loss of 42.1 million for the second quarter. The quarter included the 22.8 million specific provision and the 46.0 million valuation adjustment associated with the defined portfolio. The underlying quarter included several positive financial trends. Net interest income increased by 6.0 million or 7.2% from the first quarter to a record 89.4 million. Net interest margin increased to 7.27%. Net interest margin after BAS loan expense increased to 3.98% from 3.90%. in the first quarter.

Total loans increased 348.9 million, or 9%, to approximately 4.21 billion. Fast program income increased 1.1 million, or 10.3% from the first quarter. We sold approximately 4.56 billion of CCBX loans during the quarter. including ongoing balances generated on previously sold credit card accounts. These sales help manage capital, liquidity, and credit concentrations while allowing Coastal to retain certain processing and transaction economics. Total deposits end of the quarter, approximately 4.86 billion. The decrease from the first quarter primarily reflected increased use of off-balance sheet sweep arrangements and did not reflect a comparable decrease in underlying partner deposit activity. We swept approximately 4.26 billion of deposits off balance sheet at quarter end and generated approximately 1.2 million of sweep income during the quarter.

Community bank credit quality remained strong. Annualized community bank net charge offs as a percentage of average loans were approximately 0.01%. Reported non-interest expense was 14.1 million, which included the 46.0 million valuation adjustment and the 4.4 million. software charge. Beyond those identified items, we remain focused on managing the expense base more effectively. That includes technology spending, vendor and contractor costs, organizational efficiency, and ensuring that expenses are tied to revenue, measurable efficiencies, or appropriate risk-adjusted returns. It is also important to understand how the reserve affects future reporting. The $22.8 million provision increased the allowance available to absorb the future related credit losses.

The $46.0 million valuation adjustment reduced the carrying value of the related credit enhancement asset. Finally, the company and the bank remained well capitalized after the quarter's adjustments, and our liquidity position remained strong.

I'll turn it over to Eric for the conclusion. Thank you both, Chris and Brandon. Before I close, I do want to recognize Brandon, who, as we announced last week, will be departing to take on the CEO role of another financial institution that is not a competitor or current partner of ours. Brandon has brought invaluable insights since joining us last September. He deserves this opportunity, and I and our company are very excited for him. At Coastal, our long-time CFO, Joel Edwards, who has been serving as an advisor since his retirement last year, will return as interim CFO while we conduct a search for our next permanent CFO. Joel brings deep familiarity. and continuity to our team.

I'll close this with where I began. We took a significant accounting impact in the quarter, and we are not minimizing it. The current estimate of the defined portfolio has been reflected in the June 30 financial results, and we are actively managing the relationship. As we mentioned, we and the board separately reviewed the remaining CCBX portfolio and did not identify a comparable issue as of quarter end. Underneath this defined portfolio matter is a strong and well-capitalized core business. Excluding the credit expense and software charge, we delivered record net interest income, stable to increasing net interest margin, continued loan growth, increased BAS program fee income, significant growth in off-balance sheet fee income generating activity, stable deposit cost, and strong community bank credit performance. We're focused on continuing to strengthen partner monitoring and partner and portfolio oversight, improving the economics of balance sheet usage. growing capital-efficient fee income, and taking a more direct approach to operating expenses and operating leverage.

At this time, we're also making the announcement that we are no longer actively pursuing the acquisition of assets and deposits from Evolve Bank and Trust. Chris's appointment as executive chair adds additional time and resources and attention to strategy, profitability, and leadership. We remain all about a balanced approach to discipline and sustainable growth. We will continue thoughtfully expanding our products and investing in the risk management and technology capabilities that make this platform doable. Our operating momentum, capital, and liquidity position, increased focus on profitability, leaves us confident in our ability to execute and create long-term value for shareholders. With that said, we'll end the prepared marks and open it for question and answers from the analyst. Please proceed.

Thank you. We will now begin the question and answer session. If you have dialed in and would like to ask a question, please press star 1 on your telephone keypad to raise your hand and join the queue. If you would like to re-draw your question, simply press star 1 again. If you are called upon to ask your question and are listening via speakerphone in your device, please pick up your handset to ensure that your phone is not on mute when asking your question. Again, press star 1 to join the queue. And our first question comes from the line of Andrew Terrell with Stephens Inc. Your line is open.

Hey, good morning. Good morning, Andrew. Good morning. Maybe I could start just on the core expenses. If I back out the valuation adjustment and the amortization as well as the typical kind of fast loan. It looks like you're at around 46 million or so of core operating expenses quarter, up double digits sequentially, 22% year on year. I think the sense was this year you'd be able to maybe right-size expenses a bit or at least keep growth in check, which doesn't seem to be the case this quarter. I'm curious, when you look out to the back half of the year, what are you doing to keep expense growth contained from here? Is there potential to moderate right-size the expense space at all, just to improve profitability. Yes, we can just start there.

Yes. So I think you can tell from our prepared remarks we did highlight four or five times that expense uh... growth and making sure that we're focused on profitability is going to be a top priority of of this bank going forward and uh... You know, I'll ask Chris to intercede here a little bit. I know that's one of the directives the board has asked him to do.

You're exactly right, Eric. So to be clear, and I obviously talked about it in the remarks, but operating, leverage, profitability, huge focus of the board. That's what I'm going to come in and work on. We have – we've got great people. We spend a lot of money on technology, building out the platform that we have. We are certainly going to focus on getting the efficiency. out of what we've put into the company right now. We've got a really good, talented group of people, and we're going to be able to get a lot more out of it as we make the next steps in our growth pattern.

Okay, and then maybe while just on the topic, Chris, Can you talk about just either efficiency or profitability expectations that you're kind of working towards currently?.

Yes, and Andrew, I'll intervene here real quick. Nothing has changed in our approach to communications with outside parties. We don't give pro formas. We don't give estimates. and we're unable to give guidance. So at this time, I think what we'd like to reinforce is our comments in the opening piece and Chris's comments that this is going to be one of the top priorities of the bank going forward.

Okay, fair enough. If I could move over just to the, you know, some of the reactions this quarter. I guess just, you know, I heard all the prepared remarks. I'm hoping to get some more comfort on why this is, you know, a one-off situation. You know, I understand, you know, you've conducted what sounds like a pretty thorough review of, you know, all the other partners, but, you know, I'm assuming you've pretty actively monitored this partner as well. What's unique about this situation? What's different about the collateral underlying the $500 million loan pool here? I guess just what's different at this partner or this loan pool versus others that should give us incremental comfort that this isn't something that could happen again?.

Yes, so, you know, our assessment changed for this one partner based on a combination of factors that we monitor continuously across every partner relationship. portfolio performance, collection results, recovery experience, the partner's own financial condition For this specific relationship, that combination of signals moved such that, you know, under the current credit protection framework, we concluded we needed to recognize that exposure with actions taken today. You know, we can't disclose specific partner financial information, but What we can say to you is we reviewed the rest of the CCBX books against the same standards and did not see a comparable pattern, which tells us this isn't a read-through to the consumer credit trends broadly or the rest of the partners' standards. We do monitor this continuously. We're going to continue as we have always been to be a learning organization. And we are applying the lessons we learned from this matter across all relevant exposures to ensure we remain disciplined. And right now we don't see this as a read through to the rest of the portfolio.

Okay, thanks. And then were these credit card loans or support.

THE 500 MILLION IS A MIX OF and I want to be careful that we don't give too many specifics that it could in turn identify the partner. So I'll just leave it at that. Okay, thanks for taking the questions. I'll step back. Thank you, Andrew.

Our next question comes from the line of Joe Yanchunis with Raymond James. Your line is open.

Hey, thank you for taking my questions. Wanted to kind of piggyback off some of Andrew's questions. So you emphasized a greater focus on, you know, operating leverage and profitability. Does that change your approach to partner growth? And should we expect you to be more selective in adding new partners going forward?.

Joe, well, first off, thanks for being on the call. Good to talk to you, and thanks for asking the questions. No, let me answer the question. We are going to focus on profitability, operational efficiency, leveraging this platform that we've built. So I want to make that abundantly clear. With that said, the board is absolutely committed to this growth business and banking as a service. We think we're at a very unique inflection point in society with digital adoption, more brands getting into delivering financial services, and we think we are expertly positioned to continue to do this.

So CCBX and the business strategy remains strong. This is related to one out of more than 25 partnerships and should not be extrapolated. BAS is an important part of our strategy, but we are focused on discipline, risk-adjusted growth. This event reinforces the importance of continuous monitoring and making sure our parameters are defined in advance and that we're picking the right partners. But we absolutely believe this platform still has long-term potential, and we are going to be deliberate in how we onboard and scale partnerships, but we're excited about this platform going forward.

Okay, that's helpful. And just kind of going back to this problem partner. What's the expected timeline for resolving the situation? Should we think in terms of quarters or, you know, potentially years before this portfolio is worked through?.

THE BOARD IS REVIEWING ALL ALTERNATIVES AND ALL REMEDIATIONS AND THE PARTNER IS exploring all of their options still the the partner engaged We're hopeful, but accounting-wise we can't rely on hope, but they are well-established and are exploring opportunities themselves as well as us. And so there could be a wide gap between remediation and potential outcomes that could be anywhere from one to two quarters to 12 to 18 months. based upon the continued evolution of the relationship and how everything pans out.

Okay, and has this event changed the appetite of potential buyers of your paper to purchase these loans? I mean, have you seen any change in pricing due diligence or buyer demand since identifying the issue?.

I would say we were very successful in the first quarter. working with our partners on loan sales, credit card receivable sales, and the market continues, in my opinion, to be vibrant. The capital markets in talking to some outside providers, including last week, said that the markets are still open. We will continue to look at all strategies, including the sales network, but right now, We believe that the secondary markets are performing. We have seen some tightening on pricing for risk-based spread premiums across the board. But nothing that's deterring the framework and the markets from working.

Okay, perfect. And then last one from me here. You noted the short and useful life of certain capitalized software assets resulting in the accelerated amortization. What new capabilities are replacing these legacy systems? And, I mean, are we expected to see any tangible benefits, you know, either through improved partner onboarding, operating efficiency, scalability, or, you know, anything in that realm?.

Yes, albeit it's difficult and we're taking it very serious whenever you announce an accelerating of the amortization of technology. But the hidden message is there that we now have newer, better technologies that are supplanting the old technologies on average, and the useful life of the older technologies is... you know, is being supplanted. And so this is one exactly that. It's a mixed message. It's unfortunate that it comes through the earnings statement as presented, in my opinion, but it's exciting at the same time. And I think as we talk about operating efficiencies and leveraging going forward, we're really, excited about what the teams have built in our technology group. That's going to start to give us those efficiencies, um, uh, across multiple fronts, broadly in compliance and oversight and risk management, but also in partner development.

data management, etc. All right, perfect. I appreciate you taking my questions.

Thanks, Joe. Next question comes from the line of Janet Lee with TD Cowan. Your line is open.

Good morning. Good morning, Janet. You said you reviewed the remaining CCBX portfolio and did not identify a comparable issue as of quarter end. Could you talk about when you found out the issue? about this troubled partner? And did you review the rest of the CCBX portfolio after there? Or how frequently do you do those kind of reviews?.

Yes, so what I want to make absolutely clear is our assessment process did not change during the quarter. THE RESULTS THAT CAME OUT OF THE CONTINUOUS MONITORING AND ASSESSMENT IS WHAT CHANGED DURING THE QUARTER. And as discussed previously, that's market conditions. It's the partner financial conditions as reported real time. It is the underlying credit metrics of the portfolios that are on our balance sheet, which includes delinquency, charge-offs, recoveries. RECOVERIES, YIELDS, ALL OF THAT IS TAKEN INTO ACCOUNT WHEN MANAGEMENT ASCERTAINS THE ACCOUNTING TREATMENT OF THE RESERVE RECOMMENDATION THAT WE SENT TO THE BOARD. THE BOARD THEN, AS MENTIONED, INDEPENDENTLY reviewed our assessment, all of those factors that are broad-based going into it, and determined that they supported our recommendation on this one partner.

As Chris mentioned, We did also do a very thorough secondary look at all other programs at the board's request and determined that none of the other programs were exhibiting similar situations to this partner and we felt comfortable that this was isolated.

Okay, got it. So your provision, quarterly provision, typically was in that 50 million range in recent quarters. Are you saying it can go back to that level or should we expect a little bit higher step up in provision as you're doing more enhanced reviews going forward, like how should we that as we go into the second half of 26 and seven.

Yes, so first and foremost, as loans continue to grow, I would anticipate that provisioning expense would go up. And then the counterparty benefit for the remaining programs would go up alongside that. For this individual program, we are going to continuously be monitoring the $500 million worth of loans that under, you know, is the underpinning of our CECL program. perspective on this provisioning. So I really want to bifurcate the two and call out that this portfolio and this partner will receive continuous monitoring and our provisioning expense will be real time as you would expect for us to do. And the remaining programs that have counterparty benefit that, right, is a part of our provisioning expense going forward will continue as we've done in the past.

Okay, got it. Your deposit growth in the quarter was impacted by the off balance sheet sweep arrangements. Is that something that's going to, like, what is the strategy around that and what kind of deposit growth should we, on balance sheet deposit growth, should we expect?.

into the rest of 26? Great question. So as we remind you about first quarter, I believe we grew close to 980 million of deposits on the balance sheet and we wrote a comment in the release that basically said, hey, we grew faster than what we wanted as we were setting up some sweep networks for some specific partners that did not occur in first quarter. It was delayed the second quarter. So we told everybody in first quarter that we expected that the sweep networks would kick in, which they have done in the second quarter, which would lower the balance sheet growth by approximately $500 million. million as compared to first quarter. So I think what I'd ask you to do is automate a couple data points that would say, yes, the net growth first quarter to second quarter was down, but the off-balance sheet deposits were up significantly, $2 billion plus, and managed those three topics together. general business statement. We are very excited about our partners performance. We're humbled to be a part of their business, and the results speak for themselves over the trends that we've given you.

We're going to continue to support our partners going forward. That's it. Thank you. Thank you, Janet. Next question.

Next question comes from the line of Tim Swizer with KBW. Your line is open.

Hey, good morning, Eric. Thanks for taking my questions. I'm going to go back a little bit to the credit enhancement here. Can you help us understand, is this company still operating? And if so, why can they not fulfill their credit enhancement obligation? Do you have a claim on the partner's assets or cash flows beyond just the loans on your balance sheet?.

Yes, Tim, thank you for joining today and just for the call overview and decorum, Tim will be the last set of questions that we're able to answer. time-wise today. So multiple parts to your question. So the partner remains contractually responsible for losses covered by the indemnification and the recording of this valuation does not change or waive any of the responsibilities. Further, the borrower has not defaulted with us. THE RESERVE REFLECTS OUR UPDATED ASSESSMENT OF THE RISK AND EXPECTED ELECTIBILITY BASED ON THE CURRENTLY AVAILABLE INFORMATION THAT WE GOT. AND I CAN'T STRESS THAT ENOUGH, IT'S REAL TIME, JUNE 30 INFORMATION, THE PARTNER IS STILL IN BUSINESS, AS I ALLUDED TO EARLIER. So we want to continue to monitor the exposure closely and take action as the situation continues to unfold.

But yes, this is a dynamic unfolding and as I mentioned earlier, as an example, with any given CECL expectation you may have, you have to monitor it continuously and we are very hopeful that the resolution will be positive over time to us.

Okay, that's really helpful. And then in your press release, it mentions that many CCBX partners pledge a cash reserve to the bank. Why is that many, not all? Like, are there some that do not have a cash reserve? And then for this program specifically, was there a cash reserve here? Or like, was it a full cash reserve or some gap? between expected losses or what was required in the partnership agreement.

So, yes, the many title is, I believe, a catch-all comment. To be specific, we do have programs that are not required to have cash pledge reserves. Some of those are going to be obvious when I state it. We have some programs that are purely cash-secured lending at the consumer level. So instead of being corporately requiring a cash collateral account, it's at the consumer level, they're cash secured loans or cash secured credit cards, thus at the corporate level we don't require. There are some other programs that we have deemed the risk of the lending activities does not require us or require the partner to maintain a cash collateral account. That is different than they still indemnify us for any losses for fraud or net credit losses.

So the two pieces are broken up. The specific reserve for this partner is geared towards the gap, your words Tim, in the cash collateral account and the expectations under the indemnification agreement, looking at all the specific facts.

Hopefully those answer your questions. Okay, yes, yes, that makes sense. And the last one for me on this topic, I don't think it's been asked yet, but what is the expected revenue benefit from CCB now collecting all the interest income on these associated loans? And is this enough to potentially overcome the associated losses you expect in the future?.

I WANT TO BE VERY CAREFUL. CECIL AND ANY TYPE OF ESTIMATES OR ASSUMPTIONS THAT WE'RE USING ARE SIMPLY THAT. WE ARE EVALUATING THE FINANCIAL POSITIVES, NEGATIVES, partner indemnification, and it's a very complicated go-forward assessment. So I'm really not able to answer your question right now, Tim, but I think over time that would be a good topic to revisit.

Okay fair enough um If I can move topics real quick the the bass men now of loan expense. You know, it moved up pretty nicely this quarter. We also know over the last year it's kind of been impacted by the partner agreements changes and the pricing there. Do you think we're kind of through that repricing impact right now? And was any of the upside this quarter driven by that additional yield you recognize on this portfolio we've been discussing?.

So, two questions in there, I believe. So the first question is, yes, my opening comments geared towards stable to improving BAS net interest margin, I'd remind everybody that that is driven by product mix, some products we get better margin than other products. Some of our lower-yielding products include the aforementioned cash-secured, individual consumer-level cash-secured loans have a lower yield than other products. But it was nice, really. to be able to show the market the stability of the NIM, which I do believe alludes to your second question of... There have been, to my knowledge, no repricings that would adversely affect the portfolio in second quarters NIM. And we continue to manage the overall portfolio concentrations to manage NIM. And then what I would say is there was no...

NIM benefit based on these reserves that we've taken today in Q2, Tim?.

Okay, all right, understood. And the last question for me, Are you able to help us understand how much of the experience in space right now is related to due diligence of Evolve and the other programs not currently generating revenue.

I AM NOT ABLE TO PROVIDE THAT TO YOU TODAY. I CAN CONFIRM THAT WE DID HAVE EXPENSE IN QUARTER 2 REVOLVING concerning the Evolve opportunity. I don't have those for this call, I apologize. And of course, we're going to look at all partner level product and programs and expense that is associated with any programs or products that we may be exiting. And if we can give you further clarity on those going forward, we will do so. But with that said, I appreciate your involvement in this, Tim, Janet, Joe, Andrew, and your questions. But at this time, we are going to be ending this conference call and we will be migrating separately to individual calls and we want to thank everybody for joining, especially my West Coast friends and family that got up super early today.

And everybody have a wonderful day. This concludes my presentation.

Ladies and gentlemen, that concludes today's call. Thank you all for joining. You may now disconnect.

This live transcript is auto-generated without human intervention or review.

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