Coast Financial Holdings Inc. has lost more than 80% of its market value for the year, and recent events suggest that its problems are nowhere near resolution.
In the past month, investors have been spooked by news that it lost $2.4 million in the first quarter, and its disclosure that it expects to be hit with an enforcement order relating to its recent loan troubles and has been named as a defendant in three class actions.
The shares have dropped more than 50% this month and closed at $3 Thursday. They were trading at around $16 in mid-January, before Coast warned that hundreds of borrowers could have trouble repaying loans for construction of their homes.
The most recent stock drop signals a cleanup at the $834 million-asset Bradenton, Fla., company may be "more difficult and more protracted" than was previously believed, said James Schutz, an analyst at Sterne, Agee & Leach Inc. in Birmingham, Ala.
Tramm Hudson, a veteran banker who was brought in as an adviser to Coast after the loan problems surfaced, said in an interview last week that it is working diligently to resolve the issues, but "the problem wasn't created overnight, and the solution is longer-term."
In January, Coast warned that 482 property owners who had contracted with Construction Compliance Inc. of St. Petersburg might have trouble repaying their loans after the builder stopped construction on the projects as a result of financial difficulties.
Coast had already disbursed more than $55 million before it discovered the problems at Construction Compliance, which has since filed for bankruptcy protection.
Coast's largest investor, the New Orleans mutual fund company St. Denis J. Villere & Co. LLC, is still standing by the company. St. Denis J. Villere 3rd, a portfolio manager and partner at the fund company, which owns 18.6% of Coast's shares, acknowledged the troubles but said it is more stable than the recent selloff would indicate.
"They've been working with regulators this whole time," Mr. Villere said.
One long-term solution Coast is considering is selling itself. It hired Sandler O'Neill & Partners LP in late January to advise it on its strategic alternatives, and Mr. Hudson said last week that a sale is "one of the alternatives that's being explored."
But Mr. Schutz questioned how much Coast could hope to fetch. Beyond its credit troubles, it does not have a good source of core deposits, and the Florida real estate market is in the midst of a slowdown, he said.
"It's very difficult to put a finger on what the value of the company is," Mr. Schutz said. "There is an awful lot of uncertainty, so your traditional kind of buyer is probably not totally enthusiastic about buying this thing."
A May 10 filing with the Securities and Exchange Commission certainly could have scared off potential buyers. In the filing, Coast said that the Federal Deposit Insurance Corp and the Florida Office of Financial Regulation are continuing to investigate its operations, and that it anticipates "regulatory action will be taken against the bank in the near future." Mr. Hudson said that the regulatory action could range from a memorandum of understanding to a cease-and-desist order.
"The bank clearly has suffered an erosion of capital … [and] it has a loan problem that it is trying to deal with," he said. "So I think this enforcement action is going to deal with all those kind of issues."
The filing also said Coast is a defendant in three class actions accusing it of defrauding investors by not disclosing potential problems in its loan portfolio.
Credit quality also remains a top concern. In the first quarter nonperforming assets rose more than sixfold from the previous quarter, to $38.3 million. Coast also said that it had taken a $1.4 million loan-loss provision primarily related to another commercial real estate credit that has fallen into foreclosure.
Mr. Hudson insists that Coast remains a valuable company, despite its problems.
"The bank has an attractive franchise in the Tampa Bay region," he said. "Tampa Bay is one of the strongest regions in Florida and it's very attractive to a number of different institutions that might want to have operations here."
