Key Takeaways:
Coastal Financial Corp. (Nasdaq: CCB) reported a second-quarter net loss of $42.1 million, or $2.76 a share, driven by $68.8 million in pre-tax accounting adjustments tied to a single Banking-as-a-Service partner's consumer loan portfolio. Revenue reached $178.07 million, topping the $148.5 million consensus estimate, according to data compiled by the company.
"The second quarter results reflect continued performance of our core franchise, which was offset by decisive action we took on a single non-public company partner relationship," Chief Executive Officer Eric Sprink said. "We believe this is an isolated issue pertaining to one partner and does not reflect a change in our view of our broader partner portfolio or BaaS model."
The $68.8 million charge comprised a $46 million valuation adjustment to a credit enhancement asset, a $22.8 million provision for credit losses tied to the partner's indemnification agreement, and $4.4 million in accelerated software amortization from technology modernization. The affected portfolio contains about $500 million in underlying consumer loans, management said. The company has engaged independent third-party advisers to assess loan-level data and found no evidence of impropriety by the partner or its customers.
Excluding the partner-related charges, core operations showed momentum. Net interest income rose 7.2% from the first quarter to a record $89.4 million, with net interest margin expanding to 7.27% from 7.00%. Total loans grew 9% to approximately $4.21 billion, while BaaS program income increased 10.3% to $12 million. The company sold $4.56 billion of CCBX loans during the quarter and swept $4.26 billion of deposits off balance sheet, generating $1.2 million in sweep income.
The company and its bank subsidiary remained well capitalized, with a Common Equity Tier 1 ratio of 10.86%, a Tier 1 leverage ratio of 9.11%, and a total risk-based capital ratio of 13.30%. The quarter's charges reduced capital ratios by about one percentage point. Coastal held $1.01 billion in cash and more than $1.1 billion in additional contingent borrowing capacity with no short-term borrowings outstanding.
Management said it reviewed the remaining CCBX portfolio of approximately $1.7 billion and did not identify a comparable issue. Every partner reviewed was current on contractual cash collateral funding obligations, and the remaining portfolio showed improvements in net charge-offs and delinquency metrics.
The company also announced leadership changes. Christopher D. Adams, chairman since 2019, was appointed executive chairman effective immediately, focusing on long-term strategy, operating leverage, and profitability. CFO Brandon Soto will depart to become CEO of another financial institution, with former CFO Joel Edwards returning as interim CFO while the company searches for a permanent successor. Coastal also said it is no longer actively pursuing the acquisition of assets and deposits from Evolve Bank & Trust.
Shares fell 13.5% in premarket trading to $61.11 from the previous close of $70.66, pushing the stock below its 52-week low of $66.50. The loss puts pressure on management to demonstrate that the partner issue is contained. Investors will watch for updates on the defined portfolio's resolution, which management said could take one to two quarters or as long as 12 to 18 months.
This article is for informational purposes only and does not constitute investment advice.
