Call it guilt by association.
On Jan. 25, TierOne Corp. in Lincoln, Neb., reported strong fourth-quarter earnings and record annual profits of $41.3 million, but by the day's end its stock price had dropped nearly 7%.
Shares fell on TierOne's disclosure of higher delinquencies on loans to homebuyers on Florida's west coast.
Investors were spooked because six days earlier Coast Financial Holdings Inc. in Bradenton, Fla., announced that hundreds of borrowers might have difficulty repaying loans on their new homes. Mike McMahon, an analyst who covers TierOne for Sandler O'Neill & Partners LP, said the concern among investors and analysts was that the two companies' problem loans were somehow connected.
"The lack of more detailed information on … [TierOne's] problem in Florida led many of us to speculate as to whether or not this was related to Coast," he said. "We had just seen all the news from Coast days prior, and then here's another … [problem] on the west coast of Florida."
To assuage concerns, TierOne said late Tuesday that it is not associated with Coast "in any manner," and that its construction activity is "in a distinctly different area" of Florida's west coast.
TierOne said the problem loans resulted from a glut of residential construction permits that delayed the home-building process for certain borrowers.
"About the only similarities between what Coast and TierOne have done is that they've both made some residential loans in southwest Florida. That's it," said Edward J. Swotek, TierOne's senior vice president for strategic planning and investor relations.
TierOne's stock price has rebounded, but Coast's problems continue. Its stock is down 50% since its problem loans were disclosed in a Jan. 19 filing with the Securities and Exchange Commission. The $676 million-asset company has hired Sandler O'Neill to help it review strategic options, including a possible sale.
In the SEC filing, Coast said it had committed about $110 million to 482 individual property owners who had agreements with a home builder and its affiliates to construct single-family homes on their land.
Financial problems forced the home builder to stop construction. Though Coast's loans are to the property owners - not to the home builder - it warned investors that it was "reasonably likely" that its portfolio will take a hit.
In the wake of the revelations, Coast's decision to commit $110 million of loans - 21% of its total portfolio - to a single builder has been questioned.
"Part of the fear that investors have, and rightfully so, is that there either was a breakdown in controls or there were no controls on how they were managing concentrations," said Chris Marinac, an analyst at FIG Partners LLC in Atlanta.
Additionally, investors are left to wonder if the problem loans are limited to a single project or are more widespread, Mr. Marinac said.
Brian F. Grimes, Coast's president and chief executive officer, did not return phone calls requesting comment. In a Jan. 26 press release, he said that his company is "still reviewing these loans in order to finalize our estimate of any resultant financial impact," and that he is "confident that we can work through these problems and remain a strong institution."
Mr. Grimes took over in July after Brian Peters was fired as the CEO.
Coast has struggled with profitability as it has expanded rapidly. In the first nine months of last year it lost $2.5 million while adding eight branches, increasing its branch network to 20.
In the 12 months that ended Sept. 30, Coast's loans grew 45%, to $531 million, and assets increased 40%, to $676 million.
Despite its recent problems, analysts expect Coast to be able to find a buyer if it can get its problem loans under control.
"Here's an opportunity to get 20 physical branches in Florida," Mr. Marinac said. "This is interesting to me as a buyer, because I can get 20 offices, and I can get it at a fire sale."
James Schutz, an analyst at Sterne, Agee & Leach Inc. in Birmingham, Ala., agreed with that assessment.
"They are not going to get a top-dollar price, no question about that, but I think that there would be some appeal," he said.
"The real key is that this issue has to be cleared up or quarantined," Mr. Schutz added. "Any buyer is going to go through that portfolio with a fine-toothed comb."
According to Mr. Marinac, a realistic price would be book value, or perhaps a little above.
