Coasting Out

Coasting Out

banking by Mark Gordon | Managing Editor

Coast Bank finds a buyer, but losses are plentiful. The bank's chairman is out more than $4 million, while a Naples investment firm is down more than $2 million.

The pending sale of Bradenton-based Coast Bank to a $10-billion St. Louis-based financial holding company ends months of speculation about the future of the troubled bank. The story now shifts to how the new owners will repair the damages wrought by more than $100 million worth of bad loans revealed since January.

First Banks Inc. agreed to buy Coast for $22.1 million, or $3.40 a share, a 49% premium over the $2.28 closing price the day the deal was announced, Aug. 3. The deal is 5.54 times book value and represents 40.2% of book and tangible book values, according to SNL Financial, a Charlottesville, Va.-based research firm.

Given the plethora of problems Coast has, the price isn't unreasonably low, SNL and other analysts say. But in comparison to the two most recent bank deals in the Sarasota-Bradenton market, the book value is significantly off.

The banks that bought Sarasota-based SunCoast in 2006 and People's Community Bank earlier this year, for example, paid 2.59 times book value and 3.2 times book value, respectively. Neither of those local banks had any loan problems, plus People's was one of the highest performing banks in the region.

What's more, offers for banks and thrifts in the Southeast U.S. over the last year have averaged 252.6% of book and 267.4% of tangible book values - more than five times what First Banks is paying for Coast , according to SNL.

First Banks is getting a mixed bag in Coast. It's taking on the bank's positives, such as its $834.1 million in assets, its 20 offices in Hillsborough, Manatee, Pasco and Pinellas counties and its workforce of cheery, polo-shirt wearing employees.

But it's also buying the negatives, including a $20-million second quarter loss, the looming $60 million remaining in bad loans and several pending class-action lawsuits stemming from the loan problems.

"We are an active acquirer of banks," says First Banks Chief Executive Terry McCarthy of the company, which has nearly 200 offices in four states. "We have a long track record of acquiring banks and fixing them up."

McCarthy declined to elaborate on specific plans the company has for Coast. But in a statement announcing the deal, McCarthy says he expects the bank to expand Coast's "commercial segment," including offering more commercial loans and other financial services to small and mid-sized businesses. First Banks also has units for trusts, brokerage and investment management, products that haven't been available at Coast.

While many Coast employees celebrated the news of the sale - some were hugging and high-fiving in the hallways after the late Friday afternoon announcement - the deal leaves a lingering sour taste for most investors.

For starters, there's the financial free-fall most investors endured. Jim Toomey, the chairman of the board of Coast Financial Holdings Inc., was the biggest individual loser, on paper, in the deal. His 325,000 shares were worth about $5.27 million Jan. 18, the day before the bank disclosed its loan problems.

With the First Banks sale, Toomey's shares are now worth about $900,000, according to Coast officials, giving him a loss of more than $4 million. Toomey was traveling in the days after the sale announcement, a Coast spokesman says, and he couldn't be reached to comment specifically on his personal loss.

Other investors, both institutional and individuals, lost significantly in the deal, too. Naples-based Private Capital Management is Coast's second biggest institutional shareholder, with 646,900 shares, or 9.9% of all the bank's shares as of March 31, according to SEC documents. On that day, Private Capital had a $4.46 million investment in Coast.

With a sale price of $3.40 a share, Private Capital's shares total $2.19 million, a loss of at least $2.27 million.

New Orleans-based investment firm St. Denis J. Villere & Co. is Coast's biggest institutional shareholder, with 1.2 million shares of the bank's stock as of March 31, according to the SEC. Those shares were worth $8.35 million that day, as opposed to $4.11 million the day of the sale.

Most of the individual shareholders with large stakes in Coast are board members and former and current executives.

The fall and subsequent sale of Coast, once one of the region's fastest growing banks, became inevitable Jan. 18. That was the day of the bank's SEC filing that 482 home borrowers of $110 million worth of mortgages might not be able to repay debts because the customers' primary home builder, St. Petersburg-based Construction Compliance Inc., failed to finish the homes.

That in turn led to the company's stock falling nearly 80%; the firing of two officials who worked in the bank's construction loan department; the hiring of a New York investment firm to find a buyer; the filing of the lawsuits; and more recently, the firing of the bank's CEO, Brian Grimes, after a federal cease and desist order, that among other issues, pointed out Grimes' inexperience with a bank as big as Coast.

"This was the best solution to a difficult problem," says Tramm Hudson, the former RBC Centura Bank executive and congressional candidate who was brought in by Coast in February to serve as an adviser and spokesman for the company. "The bank was under a lot of strain."

The proposed deal still needs to be approved by bank shareholders and federal regulators. Coast and First Banks officials don't expect any hold-ups on either end and the deal could be final by the end of 2007.

Money

and wine

When James Dierberg took the job as president of Creve Coeur Farmers Bank in 1966, five years removed from the U.S. Air Force and law school, the ambitious 29-year-old thought the one-branch, $10 million asset bank had some major growth opportunities.

Just over 40 years later, the growth potential has been more than realized. The company, which changed its name to First Banks in the early 1970s, now has $10.5 billion in assets, making it one of the largest privately owned bank holding companies in the country.

What's more, Dierberg, who is still active with the company as the chairman of the board, says the private part is a key success component and he has no plans to put the company up for sale or take it public. (First Banks does file standard SEC reports for public companies, through a trust, but the bank doesn't trade shares on the open market).

The bank was initially formed in 1910 by Jim Dierberg's grandfather. When Jim Dierberg joined the company 56 years later, it only had the one branch. Since then, it has expanded into Illinois, California and Texas, as well as growing in its home state.

First Banks hasn't stuck to just banks when it goes shopping, either. Over the last 10 years, in addition to 26 banks, it has also bought an insurance brokerage, an insurance premium financing firm and a loan origination business.

By 2001, the bank had 135 offices and $5.2 billion is assets. The bank recently doubled the latter number, passing $10.5 billion in assets earlier this year. It now has 197 offices.

The Dierberg name is known in Greater St. Louis for more than banks, too. Jim Dierberg and his family run a popular winery in the area and Dierberg's two brothers run a family-named grocery chain.

AT A GLANCE

First Banks, Inc.

CEO: Terry McCarthy

Assets, 2006: $10.16 billion

Income, 2006: $11.7 million

Stockholders Equity, 2006: $800.4 million

Loans, 2006: $7.67 million

Branches: 197 (59 in California; 72 in Illinois; 46 in Missouri; 20 in Texas).

Employees: 3,161

Web site: www.firstbanks.com

Assets

Year Assets %Growth

2003 $711 million

2004 873 million 23%

2005 917 million 5%

2006 10.16 billion 10.8%

Income

Year Income %Growth

2003 $62.8 million

2004 82.9 million 32%

2005 96.9 million 17%

2006 111.7 million 15.3%

Stockholders Equity

Year Equity %Growth

2003 $549.8 million

2004 600.9 million 9%

2005 678.9 million 13%

2006 800.4 million 17.9%

Total Loans, Net

of Unearned Discount

Year Total Loans %Growth

2003 $5.33 million

2004 6.14 million 15%

2005 7.02 million 14%

2006 7.67 million 9.2%

Source: First Banks, Inc. 2006 Business Review

first banks/coast COMPARISON

First Banks, Inc. Coast

Period Ending: 6/30/07 3/31/07

Assets ($000): 10,478,735 $834,054

Tangible Equity/Tangible Assets: 5.06% 6.60%

Regulatory Leverage Ratio: NA 5.53%

Earnings per share growth, last twelve months: 0.8% NA Return on average assets, last twelve months: 0.99 -2.84%

Return on average equity, last twelve months: 12.63% -28.61%

Efficiency ratio, last twelve months: 64.97% 136.38%

Net interest margin, last twelve months: 4.24% 2.59%

Non-performing assets/overall assets: .68% 4.59%

Reserves/Loans: 1.79% 4.52%

Source: SNL Financial, www.snl.com

REVIEW SUMMARY

Industry. Banking

Who. Coast Bank, Bradenton

Key. A $10.5 billion St. Louis-based bank agreed to buy Coast almost seven months after the Bradenton-based bank disclosed major loan problems.