Coastal Financial Returns to Q3 Profit as BaaS Fees Rise

Coastal Financial Corporation (NASDAQ: CCB) returned to profitability in the third quarter of 2026 as provisions and expenses declined sharply from the prior quarter’s elevated levels, while fee income from its banking-as-a-service platform continued to grow. Net income was $13.8 million, or $0.89 per diluted share, compared with a second-quarter net loss of $42.1 million, or $2.76 per share.

The prior-quarter loss was primarily tied to charges involving one CCBX partner, including a valuation adjustment to a credit enhancement receivable and a higher provision for credit losses. Third-quarter net income was 1.4% below the $13.6 million reported a year earlier, while diluted earnings per share edged above the prior-year figure of $0.88.

Revenue declined 16.1% sequentially to $149.3 million, largely because BaaS credit enhancement income fell alongside the provision for credit losses. Excluding BaaS credit and fraud enhancements, expense reimbursements and BaaS loan expense, non-GAAP core net revenue rose 7.9% from the second quarter and 23.1% from a year earlier to $65.1 million. Non-GAAP core pre-tax, pre-provision net revenue was $22.7 million, compared with a $33.8 million loss in the preceding quarter and $19.1 million a year earlier.

Partner credit costs ease

The consolidated provision for credit losses fell to $46.0 million from $92.2 million in the second quarter. Within CCBX, provision expense declined to $43.9 million from $94.3 million because the $22.8 million specific provision recorded for the partner identified in the second quarter required no additional increase.

The credit indemnification valuation allowance associated with that relationship was $45.6 million, down $433,000 from the prior quarter. However, $3.1 million of the incremental third-quarter provision related to the partner was not offset by credit enhancement income because the amount was determined to be uncollectable.

CCBX net charge-offs as a percentage of average CCBX loans declined to 7.98% from 9.37% in the second quarter and 11.07% a year earlier. Total nonperforming assets fell 19.6% sequentially to $60.5 million. Coastal said CCBX partners were contractually responsible for 98.4% of the segment’s $49.9 million in third-quarter net charge-offs, although reimbursement arrangements remain subject to periodic collectability assessments.

Expenses fall as BaaS fee income grows

Noninterest expense decreased by $56.3 million from the second quarter to $84.8 million. The decline mainly reflected the absence of the prior quarter’s $46.0 million credit enhancement receivable valuation adjustment. Data processing and software license costs fell by $5.9 million, BaaS loan expense declined by $4.7 million, and salaries and employee benefits decreased by $1.6 million.

Those reductions were partly offset by a $1.6 million increase in legal and professional fees, primarily related to the partner credit matter, and a $440,000 increase in Federal Deposit Insurance Corp. assessments.

BaaS program fee income increased 17.6% sequentially and 79.6% year over year to $14.1 million. Transaction and interchange income rose to $8.0 million, up 64.5% from the prior-year quarter. Off-balance-sheet credit card accounts reached 1.3 million, increasing 51% from June and 236% from a year earlier, while active CCBX debit cards increased 20% sequentially and 118.7% year over year.

Coastal had 21 active CCBX partners at quarter-end, with six more in testing, implementation or signed-letter-of-intent stages and four relationships winding down. Eight partner programs were expanding into additional products.

Margin narrows as loan mix changes

Net interest income was $88.3 million, compared with $89.4 million in the second quarter. The GAAP net interest margin declined to 6.59% from 7.27%, primarily because of a lower average loan yield resulting from a change in loan mix. Net interest margin excluding BaaS loan expense, a non-GAAP measure, was comparatively stable at 3.93%, down from 3.98%.

Total loans receivable declined 0.5% sequentially to $4.19 billion as Coastal increased loan sales. CCBX sold $5.99 billion of loans during the quarter, including $961.8 million previously held on the balance sheet and $4.69 billion of activity on credit card receivables that had already been sold. The company said it plans to continue selling loans to manage credit quality, capital and partner concentration limits while retaining transaction fee income on sold credit card balances.

Community bank gross loans were nearly unchanged at $1.98 billion, while deposits in the segment increased 4% from June to $1.64 billion. Community bank net charge-offs remained at 0.00% for the year to date.

Total deposits declined 3.8% sequentially to $4.68 billion, primarily because of greater use of off-balance-sheet sweep arrangements rather than a reduction in underlying partner activity. Coastal had swept $6.29 billion of deposits off its balance sheet for insurance and liquidity purposes, up $2.03 billion from the previous quarter. The arrangements generated $1.4 million of third-quarter noninterest income.

The company ended September with $803.6 million in cash and $827.4 million of immediately available borrowing capacity, with no outstanding borrowings under those facilities. Coastal Financial Corporation reported a Common Equity Tier 1 ratio of 11.47% and a total risk-based capital ratio of 13.82%.

Cost initiatives and partner transition

Management identified up to $20 million of potential annualized noninterest expense savings and expects any savings to be achieved gradually over the next four to six quarters. Planned measures include vendor and contractor reviews, reduced discretionary spending, elimination of duplicated work, replacement of legacy systems and the use of artificial intelligence to improve productivity. The estimate excludes BaaS loan and fraud expenses that are generally reimbursed by CCBX partners.

Coastal also expects its relationship with Bluevine to end when Bluevine’s acquisition by Valley National Bancorp closes, which Valley indicated is expected in the second quarter of 2027. At September 30, Bluevine accounted for $452.4 million of on-balance-sheet deposits and $1.85 billion swept off balance sheet. Coastal said it expects to replace the related funding without a material adverse effect on liquidity or funding.

Risks remain centered on the company’s ability to assess and manage CCBX counterparty exposure, including the collectability of partner reimbursement obligations. Deposit costs could also rise following the quarter’s increase in the federal funds rate and any additional rate increases. Coastal said it continues to monitor partner liquidity, collateral, portfolio performance and concentrations against board-approved risk limits.