Coast Bank’s substantial losses expose bad loans

July 25, 2008


Coast National Bank is operating at a loss after projecting first-quarter profits, partly because of $9.3 million in non-performing loans.

Bank officials originally reported earnings of $168,000 for the first quarter of 2008, down from $291,000 for the same period in 2007. Bank officials recently reported an adjustment in Coast’s financial statements portraying an after-tax loss of $733,000, and cited questionable loans to developers as one reason.

In a letter to customers and shareholders, bank chairman and CEO Jack Wauchope places blame for the company’s financial woes on the “national fallout from the sub-prime mortgage debacle.”

Coast National Bank did not participate in the sub-prime mortgage industry. However, the institution did provide loans to developers with ties to local hard money lenders being investigated for alleged fraudulent activities.

Started in 1998, Coast National operates five branches in San Luis Obispo County and lists $183 million in assets.

According to a Coast National Bank letter to shareholders, the bank’s regulators, the Office of the Comptroller of the Currency, asked Coast National Bank to reclassify three loans to “non-performing.” That raised the bank’s previously reported $4.3 million in bad loans to $9.3 million for the first quarter of 2008. As a result of the increase in non-performing loans, bank officials announced plans to add $1.5 million to a current $1.6 million loan loss cushion account.

In stock market trading as of July 23, Coast Bancorp shares were selling at $14. Shares were near $25 about a year ago.

“It is important to note that even after taking these actions, the bank is still financially sound and our regulatory capital ratio after the changes will be 10.23 percent which is more than double the five percent ratio required to meet the regulatory definition of ‘well capitalized,’” Wauchope added.

Public concern about commercial and construction loan concentrations at smaller locally-owned banks has the Federal Deposit Insurance Corp. planning enlargement of staff by as much as 60 percent to handle anticipated bank closings.

Coast’s new Executive Vice President Gwen Pelfrey said as examinations of local banks continue, those exams will show more non-performing locals with all the banks.”

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By: Anonymous on 7/30/08

What I don't understand is how does recognizing bad loans affect profit. If they were not performing they would not be part of the profit anyway. Help.

By: Anonymous on 7/30/08

Well it was the Ventura Star who broke the story RW Hertel & Sons are in big trouble, the Tribune was late as usual. More News to come is they are under a Criminal Investigation

By: Anonymous on 7/27/08

Its ignorant people like you and the Tribune that mislead the public telling all of us that this is nothing and its just the result of a downturn in the economy. This won't get better by hiding your head in the sand and attacking the messengers.

Thank You Karen and Dan. Keep us informed this is a very important story.

By: Anonymous on 7/26/08

"Born in the USA"

By: Anonymous on 7/26/08

"Community banks don't make "sub-prime" loans. These are just bad loans."

But that's the scariest thing: institutions and even countries that steered clear of sub-prime lending are being hit. Fannie Mae and Freddie Mac didn't buy sub-prime mortgages and yet mere whispers about their soundness just triggered a financial earthquake. Iceland is facing serious difficulties despite avoiding sub-prime debt. The crash is affecting every kind of debt and every kind of borrower.

It's no longer accurate to call this a "sub-prime" scandal. It's becoming clear now that we've just been through a huge credit bubble, of which the housing bubble was only a central feature, driven by runaway financial "innovation," mis-rating of debt, lax regulation, and a liquidity glut in which too much money was chasing too few worthwhile investments. It's no accident that this debacle came right after the stockmarket crash, when equities were no longer a good investment and interest rates were being held low to cushion that blow.

So, saying "these are just bad loans" reminds one of Japan in the late 80s and early 90s, when banks had huge piles of "just bad loans" on property, some of which is still, today, under water from its peak at the height of that bubble

By: Anonymous on 7/26/08

FDIC website for obtaining call reports (current financial data) is

It's all right there and available quarterly.

By: Anonymous on 7/26/08

"fallout from national sub-prime mortgage debacle"? Community banks don't make "sub-prime" loans. These are just bad loans. All this data and including info for all other local banks can be viewed on the FDIC website. There are still a few banks with minimal or no problems.

By: Anonymous on 7/26/08

"commentards"…. That is pretty petty and hateful. Oh wait… You are probably a SLO native.. My bad.

By: Anonymous on 7/26/08

It is god to see Gwen Pelfrey land on her feet after getting screwed by Larry Ward (the cowardly CEO of Heritage Oaks Bank) after over 20 years of dedicated service.

Best of luck Qwen!

By: Anonymous on 7/26/08

"Bank officials recently reported an adjustment in Coast's financial statements portraying an after-tax loss of $733,000, and cited questionable loans to developers as one reason."

This paragraph isn't clear: is this a Q1 2008 loss and a restatement for Q1?

To the commentards who don't think this is newsworthy: of course it is, and this is more good work from UncoveredSLO. The bursting credit and housing bubbles are touching everything, even local banks in a relatively strong property market that didn't touch sub-prime mortgages. And especially given the Tribune's incredible laziness, it hasn't been very clear how the crash is playing out locally. Stories like this fill out the picture.

By: Anonymous on 7/26/08

Funny, I wonder how many of the people and businesses in their "As local as the…" advertising campaign got the 'bad' loans.

By: Anonymous on 7/26/08

Coast National Bank.

Is that the same Coast National Bank which is stuck with the dafaulted $2.6 million loan on Mission Gardens Estates in San Miguel??? Oh… Lordy! Lordy!

By: Anonymous on 7/26/08

I'll add that it is exactly because journalism has gotten so weak and stories like this were ignored that we suddenly find, too late, that there has been so much questionable dealing with banks and mortgages.

As Thomas Jefferson stated so stridently, a strong press is necessary to maintain a strong and healthy country.

By: Anonymous on 7/26/08

This is another legitimate business story. Just because there is a story written shouldn't automatically imply a "scandal."

What has been presented are interesting facts about a a local financial institution that many folks around here are connected with. It is an absolutely legitimate news story.

Perhaps what has happened is that our other local news sources have been so incredibly soft, so fearful of reporting on anything that might put a business in any type of unfavorable light, that now run-of-the-mill business reporting is considered extreme and sensational.

Why are people objecting to this kind of basic story? Are they connected? Do they have something to hide? Is there more to the story that they hope won't be revealed?

By: Anonymous on 7/26/08

My $$ isn't going to be jeopardized because of their greedy practices. I'm taking my money and running.

By: Anonymous on 7/26/08

How can this not be newsworthy?? The FDIC took over two other banks this afternoon. Remember people lining up to get their deposits from Indy Mac Bank? That's what happens when you put your head in the sand and say it won't happen here because its a local community bank. A $5 Million difference is newsworthy. The OCC making an adjustment says that their reporting was mismanaged. That is newsworthy. If you haven't noticed, a wave of banks are starting to fail. I'm surprised that no one else has reported on this. The Tribune did a report on the local banks and asked the bank presidents how their bank was doing. Of course, they all said things were great. That's not newsworthy. The fact that the numbers says that most local banks are hurting, however, is newsworthy. Look it up at 2nd QTR numbers will be reported soon, and I suspect that it will look even worse.

By: Anonymous on 7/25/08

Why is it that you never report anything positive. This is a true community bank that does everything it can to contribute to our community. Why not give them credit for being the only bank that has people dedicated to helping non-profits? Their situation is no different than any other bank big or small in this economy.

By: Anonymous on 7/25/08

Karen – I thought you are supposed to be reporting on things that matter. Why are you always trying to make something out of nothing? Look at the national news this is happening to banks all across the country. Shame on you for trying to create a story out of nothing and picking on our local banks because you think there is some big scandal in your backyard.

By: Anonymous on 7/25/08

By: Anonymous on 7/25/08

Didn't these guys take over a loan that estate had in San Miguel thats now in default. The guys who grade over some historical parts of the mission that housed native americans.

By: Anonymous on 7/25/08

There are some interesting default notices this week – more of the same from the usual debtors and lenders

Just click on my name for the link.