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What will Coast Financial do to weather this crisis?

By JAMES THORNER
Published February 10, 2007

Coast Financial Holdings is finishing a turbulent three weeks in which it transformed from a fast-expanding community bank to a candidate for acquisition under scrutiny of state and federal regulators.

The source of recent troubles was 482 loans for customers of St. Petersburg builder Construction Compliance Inc. CCI ran out of money last fall while building investment homes in the city of North Port in Sarasota County.

CCI tapped about $70-million in construction loans from Coast but left customers with unpaid debts on vacant lots and unfinished houses. To the detriment of Coast, many customers vow to walk away from the deals, accusing Coast of failing to monitor and correct CCI's slide into insolvency.

What's next for Coast? The Bradenton bank has eight branches in Pinellas County, two in Hillsborough County and one in Pasco County. The Times talked Friday with Tramm Hudson, 54, a Sarasota banker and former candidate for Congress hired to be Coast's "special adviser" two weeks ago.

What is Coast doing to work its way out of its problems? Will it include the bank being bought out?

"All options are on the table. The bank is looking at being able to work through this and emerge from this successfully. It may be able to do this on its own; it may need a merger partner."

This week a St. Louis banker, James Dierberg, bought nearly 10 percent of Coast's stock. Is he a prospective buy-out partner?

"He's well known in banking circles as an active investor in bank stocks. What his intentions are, we don't know. This is not uncommon for banks to purchase shares. But we've had no conversations with Mr. Dierberg."

Coast fired executive vice president Phil Coon. He ran the residential lending program that cut the deal with CCI. Where did he go wrong?

"'That's a matter for the employer and the employee. The board has hired an independent investigator to investigate the circumstances. It's an ongoing investigation. We hope to have it here soon."

A lot of people express skepticism that Coon could have loaned so much to one builder - about 20 percent of the bank's assets - without the board of directors having known. What's the story?

"You have to understand the relationship between a board and management. Bankers view residential loans as the safest loans since they're secured by somebody's home. It doesn't have the same scrutiny as commercial loans and other, larger loans. The concentration with the same builder was either overlooked or not readily apparent. But from a banking perspective, you can't get around the fact that there was a high degree of concentration with one builder."

Some customers fear the bank will fail. How are you steadying their nerves?

For customers with CCI we've set up a 800-number staffed by people familiar with those loans. We've contacted every one of those borrowers. For our depositors we're retitling CDs so that customers with accounts of more than $100,000 (the maximum amount insured by the federal government) will be covered by the FDIC. We're working really hard with employees, officers and branches."

[Last modified February 9, 2007, 23:59:51]