Coast Financial Warns of Impairments

[EJ]

Coast Financial Warns of Impairments
January 19, 2007 (AP)

Coast Financial Stock Dives After $110 Million Construction Projects Stop

Stock in Coast Financial Holdings Inc. plummeted to a new 52-week low Friday after the bank said borrowers of $110 million in mortgage loans may not be able to repay their debt.

A local builder contracted by 482 borrowers halted construction on single-family residential properties, for which the bank has committed funding, due to insufficient resources. More than half of the loans had already been paid out to the borrowers. Liens were placed on some of the projects.

Bradenton, Fla.-based Coast Financial is the holding company for Coast Bank of Florida. The bank is investigating the results of the loans, but the company expects to take a material charge for the bad debt.

At Sept. 30, the company had net loans of $531.4 million.

AntiSpin: In real estate busts, banks with loan problems are like cockroaches–there's never just one.

The reason was explained to us by Dr. James Galbraith in his interview with us, "...a banker's job is not to avoid risk, but to make sure that if he's making a mistake he's making the same mistake as everyone else, so that he's positioned to go down with everyone else and not stand out."

The tops of banking cycles are always created by the same dynamic. As long as every bank has the same access to capital to lend, victory is to the swift, those that get more creative and aggressive than the other guy.

iTulip's Aaron Krowne is doing a bang-up job tracking lenders going belly-up over here, now at 13 and counting. Our Sean O'Toole is tracking lenders loading up on properties and taking on bad loans at foreclosure (REO) here. I f you haven't checked Sean's comments since the DataQuick data came out early last week, I recommend you check in on his latest comments. Sean's service reported 3,241 REO's two weeks ago while Dataquick, due to a less rigorous methodology, reported only 600-650 REO's, and not until last week. Oops. Less accurate data. And late, too!

[Ishmael]

Re: Coast Financial Warns of Impairments

Hey, I thought the housing downturn has bottomed out and is expected to turn up at any minute. I think I have read that a dozen places and seen it on TV at least another half a dozen times including CNBC. Surely, they can not be wrong can they.

Having lived through the Oklahoma and Texas downturn, I can tell you this is a long drawn out process. The bubble this time is larger than anything ever imagined.

I had a lot of involvment with Penn Square Bank during the early 80's. I was an audit manager with Arthur Andersen and my clients were continually going over to PSB to get loans. They would tell me that they would go in and ask for $10 million and get $20. I kept wondering where all the money was coming from at a shopping center bank. Then I started seeing Continental and SeaFirst's name showed up. My clients' record keeping was terrible and then to my surprise I found that Penn Square Banks was just as bad. Imagine some times they would not know how much my clients had borrowed. It all had a surreal feeling to it. I went into a bar one night for a drink and there was a helicopter sitting in the parking log. I asked what was going on and this poor white trash lady with a nugget gold Rolex who was standing there looked at me and said, "It is just a toy son." Then it all fell apart and it happened swiftly. One day the OKC had the biggest Rolls Royce dealership in the world and the next day everything was BK.

I have the same feeling now as I see builders driving Rolls and etc. It will happend swiftly and terribly. Bernache and all the 30ish whiz bank bankers (both Investment and Commercial) in NYC will be standing there with their $#%$ in their hands wondering what the hell happened.

Until you have been through it, you have no understanding what a debt collapse is like. It happens in waves and is almost psychopahtic in nature since it feels like it will never stop.

Ladies and gentlemen, fasten your seat belt because I am sure it is going to be a rough ride.

[akrowne]

Re: Coast Financial Warns of Impairments

An impatient soul recently asked me the other day on my blog when it was all going to start happening -- it seems like no one is talking about it; there's no news about it, etc.

I replied saying in essence that it will be quite sudden because a financial crisis is predicated on the fact that very few people expect it, talk about it, or think about it. If they did, it might even be avoided (like Y2K).

Interestingly, there are plenty of empirical signs it has already begun, but they are simply being ignored in the zeitgeist: real and nominal decline in median property values (worst since the Great Depression), building activity has all but ceased, builder write-downs (and bankruptcies in some cases, e.g. Kara), lenders folding, Fannie and Freddie deep in solvency problems, and risk premiums shooting back up.

But until Kudlow or Cramer are talking about it, we might as well be in never-neverland.

[Ishmael]

Re: Coast Financial Warns of Impairments

Aaron:

As a continuation of my previous story and a follow up to your point, all the signs of the collapse were there in the oil patch in the 80's but everyone ignored them there also.

I would sit with clients and tell them it was costing $50 a barrel excluding dry hole cost to find oil when oil was selling for only $35. The attitude was kind of who cares -- everyone knows oil was going to $100. One of the most cited studies was a study by the CIA projecting oil would hit a $100.

Now I was a young pup at 25 but I was wondering how this was going to work. I could already see places like Michigan (by the way I got a note from a friend of mine -- MD with a Phd in psychology -- who lives in Michigan and told me Michigan was now in a depression) was suffering. NYC and the east coast was dying from the cost of oil (an audit staff person in OKC was being paid significantly more than a staff person in NYC - go figure) so my thought was how can this continue. At $100 a barrel of oil the economy would just collapse.

I went to Europe for my first vacation in 5 years. Penn Square was building a 20 plus story building to move out of its strip mall and the only thing built so far was a 20 foot elevator shaft built into the air. As we drove by I told my dad who was taking me to the airport that the elevator shaft represented what Penn Square would be known for giving OKC -- the shaft when it failed. At that time there was nothing in the news but I was seeing all of the loans sitting on companies and nowing that the companies had no way of repaying them with the under lying reserves in the ground.

When I stepped off of the plane coming back from Europe the first words out of my father's mouth meeting me at the airport was Penn Square failed while you were gone. I was not surprised. What I was surprised about was how long it took to happen. That was the beginning of the end. Two of the top ten banks in the US then failed due to loans upstreamed to them from Penn Square. In a similar manner as many of these MBS, the banks never did any due diligence on the loans they bought from PSB and the loans were just crap (that is an accounting technical term). Later all the significant banks in Oklahoma and Texas failed and the area suffered through an unspoken of depression for 10 years.

Now we are seeing all of the same but on a far larger and national scale. Loans being originated and upstreamed to people who are not performing their due diligence. CDO being sold to people who also are not performing their due diligence or do not have the technical ability to perform due diligence.

My thinking is the thing will really tip when one of the large financial institutions goes sideways. Could be Fannie or Freddie. Could be someone like JP Morgan in some derivative blow up. Could be something in the Middle East which will result in a change in risk assessment which then causes major losses when Mark to Market accounting is applied. Or maybe a big hurricane hits Florida. Who knows but it will be swift then. There will be points when people think it has bottomed (a bunch of people dove into oil when it hit $12 including the exGovenor of Texas -- Conway and were driven into BK when it then dove further).

[synchro]

Re: Coast Financial Warns of Impairments

Coast Financial Holdings could be the start of a contagion. This is the first financial institution w/ a FDIC-insured deposit base that is in trouble. If you have deposits w/ Coast Bank, and you heard the news splattered on your local paper about the bank in trouble, could you be lining up on Monday morning to take your money out, FDIC insurance notwithstanding?

[akrowne]

Re: Coast Financial Warns of Impairments

Good comments, folks.

I've added Coast to a new "ailing lenders" section on the ml-implode page.