Coastal Financial Corp., the parent company of Coastal Community Bank, has recently unveiled a material weakness in its internal controls over financial reporting, specifically regarding its accounting practices. This revelation emerged in a Securities and Exchange Commission (SEC) filing, highlighting inconsistencies related to interest income and banking-as-a-service (BaaS) expenses associated with particular partner loans. Additionally, errors were identified in the accounting for expense reimbursements where the company acted as an agent.
Impact of Accounting Errors on Financial Statements
Identified Inconsistencies and Corrections
The audit committee at Coastal Financial meticulously examined the accounting discrepancies and confirmed that these errors did not affect consolidated pre-tax income, net income, or retained earnings. Nevertheless, the issues led to an overstatement of assets and liabilities on the balance sheet, which also influenced the cash flow statement’s operating and investing activities. According to CEO Eric Sprink, the adjustments were related to accounting matters and were offsetting, thus ensuring no impact on net income, earnings per share, or core performance metrics. To prevent similar issues in the future, enhanced policies and procedures have been implemented for greater clarity in accounting treatment.
Coastal Financial’s board of directors and independent auditors also determined that the financial statements previously issued for 2023 and the first three quarters of 2024 should no longer be relied upon due to these inaccuracies. The misstatements primarily involved variations in interest income and BaaS loan expenses, arising from differing policies between Coastal Community Bank and its BaaS lending partners. The corrections required adjustments, including reducing both interest and fees on loans and BaaS loan expenses while making corresponding changes in related balance sheet accounts.
Detailed Examination of Specific Errors
Another notable error involved the accounting treatment of BaaS partner interchange fees on point-of-sale transactions. Initially, Coastal Financial had recorded these fees grossly in both non-interest income and non-interest expense, rather than netting them in non-interest expense only. This mistake was rectified by adjusting the reimbursement of expenses in non-interest income and reducing point-of-sale expenses in non-interest expense. These corrective measures have been crucial in ensuring the accuracy of the financial statements and maintaining investor confidence.
Despite these identified challenges, analysts at Raymond James expressed that the impact of the disclosed errors is immaterial from both perception and operational standpoints. This sentiment is reinforced by Coastal Community Bank’s recent collaboration with fintech company Dave, aimed at supporting Dave’s ExtraCash and banking products. The bank’s strong partnerships and growth trajectory in the BaaS sector have fortified its position in the industry.
Strategic Partnerships and Growth Prospects
Leveraging Fintech Collaborations
Coastal Community Bank, holding approximately $4 billion in assets and operating 14 branches across the Seattle metro area, recently conducted a significant common equity raise of $98 million. This capital infusion is strategically aimed at bolstering the bank’s growth initiatives, including the expansion of its fintech unit. The partnership with Dave, a burgeoning fintech firm, serves as a testament to Coastal Community Bank’s commitment to innovative growth and product diversification.
Raymond James analysts remain bullish about Coastal Financial’s future prospects in the BaaS space, highlighting the bank’s extensive partner pipeline and the substantial opportunities for product cross-selling. By leveraging its fintech collaborations, Coastal Community Bank is well-positioned to offer a wide range of tailored financial services to its partners and end-users, thereby solidifying its competitive edge in a rapidly evolving marketplace.
Investor Confidence and Market Position
The proactive steps taken by Coastal Financial to address and rectify the accounting errors have been well-received by the market, contributing to sustained investor confidence. The bank’s transparent communication regarding the discrepancies and subsequent corrections underscores its commitment to maintaining high standards of corporate governance and financial integrity. This approach has resonated positively with stakeholders, reaffirming Coastal Financial’s reputation as a reliable and forward-thinking financial institution.
Looking ahead, Coastal Financial’s strategic focus on expanding its fintech partnerships is expected to drive further growth and innovation. The bank’s robust network of partners and its agility in adapting to industry trends provide a solid foundation for continued success. As the financial services landscape evolves, Coastal Community Bank’s emphasis on technological integration and customer-centric solutions will likely play a pivotal role in shaping its future trajectory.
Future Considerations and Summary
Coastal Financial Corp., the parent company of Coastal Community Bank, recently revealed a significant weakness in its internal controls over financial reporting, specifically focusing on its accounting practices. This issue came to light in a Securities and Exchange Commission (SEC) filing, pointing out inconsistencies concerning interest income and banking-as-a-service (BaaS) expenses related to particular partner loans. Further examination uncovered errors in accounting for expense reimbursements. In these cases, Coastal Financial acted as an agent, which added another layer of complexity to their financial reporting process. This disclosure raises concerns about the accuracy and reliability of the bank’s financial statements and the effectiveness of its internal controls. Addressing these weaknesses is crucial to restoring stakeholder confidence and ensuring compliance with financial reporting standards.
