In This Article:
This story was updated with comments from Coastal CEO Eric Sprink.
Coastal Financial Corp. disclosed a material weakness in its financial reporting tied to variances in the treatment of interest income and expense between the company and unnamed banking-as-a-service partners.
The accounting issue forced Coastal to restate full-year 2023 earnings, along with quarterly reports for the three months ended March 31, June 30 and Sept. 30 in 2024. While the restatements did not alter any bottom-line results, they're still something of a public relations black eye for the $4.1 billion-asset Coastal, according to one analyst.
Coastal, based in Everett, Washington, is one of the industry's most active BaaS banks, providing embedded banking services to about two dozen fintechs.
"We typically view this sort of announcement with trepidation," Brett Rabatin, who covers Coastal for Hovde, wrote Tuesday in a research note.
Rabatin, however, added the resulting adjustments to the company's revenue and expense lines didn't impact his overall assessment, which forecasts a double-digit increase in Coastal's share price. "The bottom line is, while the adjustment looks bad optically, we believe it will have minimal to no effect on [Coastal] and its financial reporting," Rabatin wrote, adding that management self-reported the issues.
The material weakness disclosure on Monday interrupted what had been a string of positive communications from Coastal, which earlier this month revealed it finalized a deal to serve as sponsor for the neobank Dave, including support of Dave's popular and growing ExtraCash cash advance program. Dave reported ExtraCash originations totaling $1.5 billion in the quarter ended Dec. 31, up 44% from the same period in 2023.
Dave had been using the $1.8 billion-asset Evolve Bank & Trust in West Memphis, Arkansas, as its sponsor bank.
In February, T-Mobile chose Coastal to serve as sponsor bank for its T-Mobile MONEY checking accounts. Two months earlier, in December 2024, Coastal completed a $98 million equity raise.
According to Coastal, the reporting differences with its BaaS partners were centered on reimbursement of expenses for interchange fees. In short, the BaaS partners were splitting items into noninterest income and noninterest expense components. Proper treatment should have involved reporting only a net figure as part of noninterest expenses. The restatements involved reductions in revenue that were balanced by offsetting reductions in expense.
"The important takeaway is that these adjustments relate to accounting matters and were offsetting," Coastal CEO Eric Sprink wrote Monday in an email to American Banker. "They have no impact on our net income, earnings per share, or the core performance metrics our stakeholders closely follow. 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."