jdoms – stock.adobe.com
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.
A Coastal spokesperson had not responded to a reporter’s request for comment at deadline.
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
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.
Coastal investors appeared to take the news in stride. Shares were trading up about 1% midday Tuesday at $84.01.
Rabatin remains optimistic about Coastal’s future prospects. In a March 4 research note, Rabatin projected “solid” first-quarter revenue trends. Rabatin also raised the possibility of the company’s return on assets reaching 2% late this year or early in 2026.
“We believe CCB will eventually be a data company with access to more customers than almost all commercial banks,” Rabatin wrote.
Coastal wasn’t the only bank to disclose accounting missteps in recent days. The Helena, Montana-based Eagle Bancorp Montana revealed Monday it erred in classifying certain Federal Home Loan Bank borrowings during a nine-month period ended Sept. 30, 2024. The $2.1 billion-asset Eagle opted not to restate any of its financial reports, instead including corrected disclosures in the 2024 10-K report it filed with the Securities and Exchange Commission.
