8-K: Coastal Financial Corporation to Restate Prior Financial Statements Due to Accounting Errors

Coastal Financial Corporation announced it will restate its financial statements for 2023 and interim periods of 2024 due to accounting errors related to fintech partner loans.

Summary

• Coastal Financial Corporation will restate its previously issued financial statements for the year ended December 31, 2023, and the interim periods ended March 31, 2024, June 30, 2024, and September 30, 2024.
• The restatement is due to errors in accounting related to certain fintech partner loans that were determined to be material.
• The errors primarily involve misstatements of interest income and Banking as a Service (BaaS) loan expenses, as well as the accounting for reimbursement of expenses related to interchange fees.
• These errors did not impact the company's net income or earnings per share for any of the affected periods.
• The adjustments to the company's balance sheets for the Affected Periods were deemed necessary for the reconciliation between cash received by the Company and reporting provided by one of the Company's fintech partners that resulted in an overstatement of assets by $3.4 million, $2.2 million, $2.0 million and $1.3 million for the year ended December 31, 2023, the three months ended March 31, 2024, the three months ended June 30, 2024, and the three months ended September 30, 2024, respectively.
• Management identified material weaknesses in the company's internal control over financial reporting (ICFR) as of December 31, 2024, and determined that the material weakness existed as of December 31, 2023 as well.
• The company plans to include the restated financial statements in its Annual Report on Form 10-K for the year ended December 31, 2024.

Sentiment

Score: 3

Explanation: The sentiment is negative due to the restatement of financial statements and the identification of material weaknesses in internal control. While the company claims no impact on net income, the restatement itself raises concerns.

Positives

• The company states that the errors did not impact net income or earnings per share for the affected periods.

Negatives

• The company is restating its financial statements for 2023 and interim periods of 2024.
• Material weaknesses in internal control over financial reporting were identified.

Risks

• The restatement could lead to a loss of investor confidence.
• The material weaknesses in internal control over financial reporting could indicate further issues.
• The company's remediation plan may not be effective in addressing the identified weaknesses.

Future Outlook

The company plans to restate its consolidated financial statements for the affected periods and include them in its 2024 Annual Report, which it expects to file with the SEC as soon as practicable.

Management Comments

• The Audit Committee concluded that the Affected Financials should no longer be relied upon.
• The Company will provide further specifics on the material weakness in its ICFR and its remediation plan in its Annual Report on Form 10-K for the year ended December 31, 2024.

Industry Context

Restatements due to accounting errors, particularly those related to fintech partnerships, can raise concerns about the overall quality of financial reporting in the banking sector, especially as banks increasingly engage with fintech companies.

Comparison to Industry Standards

• It is difficult to compare this situation directly to industry standards without knowing the specific nature of the fintech partnerships and the accounting policies involved.
• However, restatements are generally viewed negatively and can lead to increased scrutiny from regulators and investors.
• Companies like Discover Financial Services and Capital One, which also have significant credit card and lending operations, are often benchmarked against regional banks like Coastal Financial, but their scale and complexity are significantly different.

Stakeholder Impact

• Shareholders may experience a decline in stock value due to the restatement.
• Employees may face increased scrutiny and workload related to the restatement process.
• Customers may lose confidence in the company's financial stability.
• Suppliers and creditors may reassess their relationships with the company.

Next Steps

• The company plans to restate its consolidated financial statements for each of the Affected Periods.
• The company will include the restated financial statements in its 2024 Annual Report.
• The company expects to file the 2024 Annual Report with the SEC as soon as it is practicable to do so.

Key Dates