Coastal Financial Corp., the parent company of Coastal Community Bank, identified a material weakness in its internal controls over financial reporting related to interest income and banking-as-a-service expenses for certain BaaS partner loans, it disclosed this week.
Additionally, the company noted incorrect accounting for expense reimbursements, where it functions as an agent, according to a Securities and Exchange Commission filing Monday.
The Everett, Washington-based company’s audit committee determined this month that while the accounting errors had no impact on consolidated pre-tax income, net income, or retained earnings, they caused an overstatement of assets and liabilities on the balance sheet and affected the cash flow statement's operating and investing activities.
“The important takeaway is that these adjustments relate to accounting matters and were offsetting,” Coastal CEO Eric Sprink told American Banker via email, noting that the adjustments have no impact on the company’s net income, earnings per share, or the core performance metrics. “Additionally, we've implemented enhanced policies to ensure clearer alignment in accounting treatment going forward, and we're confident this will simplify future financial reporting.”
“We consider these actions our final resolution of this matter,” Sprink told the publication.
After consulting management and independent auditors, the board of directors concluded that previously issued financial statements should no longer be relied upon due to accounting errors. That includes 2023’s annual report and quarterly reports for the first three quarters of 2024.
The accounting errors included misstatements in interest income and BaaS loan expenses due to policy differences between the company and its BaaS lending partners. Coastal Community adjusted by decreasing both interest and fees on loans and BaaS loan expenses, along with related balance sheet accounts.
Additionally, the company reported BaaS partner interchange fees on point-of-sale transactions on a gross basis in both non-interest income and non-interest expense when they should have been recorded on a net basis in non-interest expense only, as the company was acting as an agent.
Coastal Community corrected this by reducing reimbursement of expenses in non-interest income and correspondingly decreasing point-of-sale expenses in non-interest expense, according to the SEC filing.
“We see immaterial impacts of this announcement, from either a perception or operational perspective, and do not view this announcement as a material event,” analysts at Raymond James wrote in their research note Monday.
Coastal Community Bank recently inked a deal to become fintech Dave’s partner bank in a pivot away from Evolve Bank & Trust.
Coastal will partner with Dave for the fintech's ExtraCash and banking products. ExtraCash originations increased 44% year over year, to $1.5 billion, supported by increased member growth and average origination per member, Dave said when reporting quarterly earnings.
“We selected Coastal based on their customer-first mission, deep knowledge across both credit and banking products, strong risk management, and our shared ambition to drive innovation and continue leveling the financial playing field for everyday Americans,” Dave’s CFO, Kyle Beilman, said when the company reported 2024 financial results.
The roughly $4 billion-asset Coastal, which has 14 branches across the greater Seattle metro area, completed a $98 million common equity raise during the fourth quarter of 2024. The proceeds from the raise will be used for general corporate purposes and in the bank's growth, including its fintech unit, Sprink said in January.
“We continue to believe [Coastal Community Bank] will be a winner within the BaaS space, as evidence[d] by its robust partner pipeline and the significant opportunity to increase scale from cross-selling products to its existing partners,” Raymond James analysts said.
