EVERETT, Wash. — Coastal Financial Corp. reported a $42.1 million second-quarter loss after taking a $68.8 million pretax credit expense tied to a single partner in its banking-as-a-service business, an exposure that Fintech Business Weekly has identified as consumer lender LendingPoint.
Coastal, the parent company of Coastal Community Bank, reported a net loss of $42.1 million, or $2.76 per diluted share, for the quarter ended June 30, compared with net income of $12 million, or 78 cents per share, in the first quarter and $11 million, or 71 cents per share, a year earlier, according to the company’s earnings release reported by Yahoo Finance.
The loss was primarily attributable to $68.8 million in credit expenses involving a single partner in Coastal’s CCBX banking-as-a-service, or BaaS, division, according to Coastal.
The charge consisted of a $46 million valuation adjustment to a credit-enhancement asset and a $22.8 million provision for credit losses related to the partner’s indemnification agreement. Coastal said both charges followed an individual assessment of collectability and reflected amounts the company no longer expected to recover fully under the indemnification arrangement.
Publication Identifies Company
Coastal did not identify the partner in its earnings release or during its earnings call. However, Fintech Business Weekly reported that the partner is LendingPoint, an Atlanta-based consumer lender that has originated loans through Coastal’s CCBX platform.
Fintech Business Weekly based its identification in part on an analysis of Coastal’s regulatory filings and LendingPoint’s relationship with the bank. The publication reported that LendingPoint’s financial difficulties drove the credit charges Coastal recognized during the quarter.
What’s in Portfolio
The affected portfolio includes approximately $500 million in underlying consumer loans, according to management comments during Coastal’s earnings call as reported by Yahoo Finance.
Coastal CEO Eric Sprink characterized the problem as isolated to one partner rather than evidence of broader deterioration within the company’s BaaS business.
“Our 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,” Sprink said in the company’s earnings release. “Based on our assessment, we recorded the potential impact fully and in accordance with our credit protection framework.”
Sprink said Coastal believes the issue is limited to that relationship and does not change the company’s view of its broader partner portfolio or BaaS business model.
Continuous Monitoring
During the company’s earnings call, Sprink said Coastal continuously monitors factors including portfolio performance, collections, recoveries and the financial condition of its partners. Management reviewed the rest of the CCBX portfolio using the same standards and did not find a comparable pattern, according to a summary of the call reported by Yahoo Finance.
Coastal also said the partner remains contractually responsible for losses covered by its indemnification agreement and that recording the valuation adjustment does not waive those obligations. The partner remains in business, and Coastal is pursuing its contractual remedies and evaluating potential recovery options, according to management comments reported by Yahoo Finance.
Resolution of the exposure could take anywhere from one or two quarters to as long as 12 to 18 months, management said during the earnings call.
Record Net Income
Despite the credit hit, Coastal reported record net interest income of $89.4 million, up 7.2% from $83.4 million in the first quarter and 16.4% from $76.7 million a year earlier, according to the company’s earnings release. Loans grew 9% during the quarter, while BaaS program income increased 10.3% from the first quarter.
Coastal also sold $4.56 billion in CCBX loans during the second quarter, up from $3.28 billion during the first quarter. The company said the loan sales are part of its strategy to manage CCBX credit and concentration levels while generating off-balance-sheet fee income.
The company remained well capitalized as of June 30, 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%, according to Coastal. The second-quarter charges reduced its capital ratios by approximately 1 percentage point.
Coastal Financial, based in Everett, operates Coastal Community Bank and CCBX, its BaaS division that provides banking infrastructure and services to fintech and other financial-services companies.
