SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended September 30, 1996
OR
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ___________ to ____________
Commission file number 1-10264
COAST SAVINGS FINANCIAL, INC.
------------------------------------------------------
(Exact name of registrant as specified in its charter)
DELAWARE 95-4196764
- ------------------------------- -------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
1000 Wilshire Boulevard, Los Angeles, California 90017-2457
------------------------------------------------------------
(Address of principal executive offices) (Zip code)
(213) 362-2000
------------------------------------------------------------
(Registrant's telephone number, including area code)
------------------------------------------------------------
(Former name, former address and former fiscal year, if
changed since last report.)
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to
file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes (X) No ( )
As of November 8, 1996, the registrant had 18,583,917
shares of common stock, $.01 par value, outstanding. The shares
of common stock represent the only class of common stock of the
registrant.
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
Consolidated Statement of Financial Condition at September 30,
1996 and December 31, 1995.
Consolidated Statement of Operations for the Three Months
Ended September 30, 1996 and 1995, and for the Nine Months
Ended September 30, 1996 and 1995.
Consolidated Statement of Cash Flows for the Nine Months Ended
September 30, 1996 and 1995.
Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
September 30, December 31,
1996 1995
------------ ------------
(In thousands)
Assets
- ------
Cash and due from banks $ 140,236 $ 119,717
Federal funds sold and other short
term investments 101,342 30,394
Investment securities held to
maturity (fair value of $67.7
million and $73.2 million) 67,492 72,785
Loans receivable, net 5,615,709 5,245,464
Loans receivable held for sale, at
the lower of cost or fair value
(fair value of $237.6 million
and $230.0 million) 234,354 221,032
Mortgage-backed securities held to
maturity (fair value of $1.63
billion and $1.83 billion) 1,637,323 1,817,403
Mortgage-backed securities available
for sale, at fair value 318,943 354,398
Real estate held for sale 50,286 31,696
Federal Home Loan Bank stock 89,464 85,837
Land and depreciable assets 97,314 92,920
Interest receivable and other assets 190,061 172,702
Goodwill 6,508 7,332
---------- ----------
$8,549,032 $8,251,680
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $6,240,519 $6,123,472
Federal Home Loan Bank advances 852,000 804,250
Other borrowings 812,381 733,340
Other liabilities 164,396 104,754
Income taxes 10,479 12,684
Capital notes 55,931 55,746
---------- ----------
8,135,706 7,834,246
---------- ----------
Stockholders' Equity:
Serial preferred stock, without
par value; 50,000,000 shares
authorized, none outstanding - -
Common stock, $.01 par value;
100,000,000 shares authorized
18,583,617 and 18,582,917 shares
issued and outstanding at
September 30, 1996, and
December 31, 1995, respectively 186 186
Additional paid-in capital 265,033 265,018
Unrealized gain on securities
available for sale, net of taxes 1,234 6,554
Retained earnings 146,873 145,676
---------- ----------
413,326 417,434
---------- ----------
$8,549,032 $8,251,680
========== ==========
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended
September 30, September 30,
------------------- -------------------
1996 1995 1996 1995
-------- -------- -------- --------
(In thousands except per share amounts)
Interest income:
Loans receivable $112,684 $120,364 $335,159 $353,884
Mortgage-backed securities 31,651 32,275 99,108 86,678
Investment securities 5,398 5,954 15,624 17,768
-------- -------- -------- --------
149,733 158,593 449,891 458,330
-------- -------- -------- --------
Interest expense:
Deposits 71,070 73,843 212,737 208,338
Borrowings 25,931 32,344 76,118 101,080
-------- -------- -------- --------
97,001 106,187 288,855 309,418
-------- -------- -------- --------
Net interest income 52,732 52,406 161,036 148,912
Provision for loan losses 10,000 10,000 30,000 30,000
-------- -------- -------- --------
Net interest income after
provision for loan losses 42,732 42,406 131,036 118,912
-------- -------- -------- --------
Noninterest income:
Gain on sale of subsidiary - 7,549 - 7,549
Loan servicing fees and charges 3,087 3,382 9,671 10,175
Other 9,355 9,434 28,187 26,777
-------- -------- -------- --------
12,442 20,365 37,858 44,501
-------- -------- -------- --------
Noninterest expense:
Compensation and benefits 15,097 17,553 47,498 55,247
Office occupancy, net 10,064 10,384 32,417 30,170
Federal deposit insurance
premiums 4,013 4,348 12,825 12,942
Other general and adminis-
trative expenses 9,929 7,670 27,762 24,407
-------- -------- -------- --------
Total general and adminis-
trative expenses 39,103 39,955 120,502 122,766
SAIF special assessment 41,978 - 41,978 -
Real estate operations, net 433 933 3,373 2,948
Amortization of goodwill 271 313 824 944
-------- -------- -------- --------
81,785 41,201 166,677 126,658
-------- -------- -------- --------
Earnings (loss) before income
tax expense (benefit) (26,611) 21,570 2,217 36,755
Income tax expense (benefit) (10,511) 6,808 1,020 12,882
-------- -------- -------- --------
Net earnings (loss) $(16,100) $ 14,762 $ 1,197 $ 23,873
-------- -------- -------- --------
Net earnings (loss) per share
of common stock:
Primary $(.87) $.77 $.06 $1.26
----- ---- ---- -----
Fully diluted $(.87) $.77 $.06 $1.25
----- ---- ---- -----
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended
September 30,
-----------------------
1996 1995
--------- ---------
(In thousands)
Cash flows from operating activities:
Net earnings $ 1,197 $ 23,873
--------- ---------
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Proceeds from the sale of loans held for
sale 95,725 15,105
Increase in accrued expense - SAIF
special assessment 41,978 -
Provision for loan losses 30,000 30,000
Net increase in accounts payable 14,888 1,765
Net decrease in accounts receivable 2,196 40,634
Deferred income tax expense 1,020 12,882
Gain on sale of subsidiary - (7,549)
Loans originated for sale, net of
refinances and principal payments (102,814) (119,121)
Other (19,588) (12,710)
--------- ---------
Total adjustments 63,405 (38,994)
--------- ---------
Net cash provided (used) by operations 64,602 (15,121)
--------- ---------
Cash flows from investing activities:
Loans originated for investment, net of
refinances (815,137) (665,140)
Repurchase of loans - (15,533)
Principal repayments on loans 384,018 308,884
Principal repayments on mortgage-backed
securities ("MBS") held to maturity 168,196 119,291
Principal repayments on MBS available for
sale 27,061 20,307
Maturities and principal repayments on
investment securities 30,043 5,023
Sale of MBS available for sale - 16,532
Net decrease in short term investment
securities 4,133 2,060
Purchase of investment securities (29,152) (143)
Proceeds from sale of subsidiary - 146,000
Purchase of land and depreciable assets, net (12,909) (10,651)
Sale of real estate held for sale 32,092 28,388
Purchase of FHLB stock - (2,450)
--------- ---------
Net cash used by investing activities (211,655) (47,432)
--------- ---------
Continued
CONSOLIDATED STATEMENT OF CASH FLOWS
Continued
Nine Months Ended
September 30,
-----------------------
1996 1995
--------- ---------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 117,047 299,407
Net increase (decrease) in FHLB advances 47,750 (286,200)
Net increase in short-term borrowings 73,708 211,004
Common stock options exercised 15 1,001
--------- ---------
Net cash provided by financing activities 238,520 225,212
--------- ---------
Net increase in cash and cash equivalents 91,467 162,659
Cash and cash equivalents at beginning of year 150,111 102,021
--------- ---------
Cash and cash equivalents at end of period $ 241,578 $ 264,680
--------- ---------
Supplemental disclosures of cash flow
information:
Cash payments of interest $ 108,436 $ 131,401
Cash payments (refunds) of income taxes, net 1,391 (526)
Supplemental schedule of noncash investing
and financial activities:
Loans exchanged for MBS, net 1,119 373,516
Additions to loans resulting from the
sale of real estate acquired in
settlement of loans 38,418 26,816
Additions to real estate acquired in
settlement of loans 98,006 69,473
Increase (decrease) of unrealized gain
on securities available for sale, net
of taxes (5,320) 4,393
See accompanying Notes to Consolidated Financial Statements.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Coast Savings Financial, Inc. (the "Company") is the
holding company for Coast Federal Bank, Federal Savings Bank
("Coast" or the "Bank"). The unaudited consolidated financial
statements of the Company and subsidiaries included herein
reflect all adjustments, consisting only of normal recurring
adjustments, which are, in the opinion of management,
necessary to present a fair statement of the results for the
interim periods indicated. Certain reclassifications have been
made to the consolidated financial statements for 1995 to
conform to the 1996 presentation. Certain information and note
disclosures normally included in consolidated financial
statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant
to the rules and regulations of the Securities and Exchange
Commission. The results of operations for the nine months
ended September 30, 1996, are not necessarily indicative of
the results of operations to be expected for the remainder of
the year.
These consolidated financial statements should be read in
conjunction with the consolidated financial statements and
notes thereto included in the Company's annual report on Form
10-K for the year ended December 31, 1995.
2. In May 1995, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards ("SFAS")
No. 122, Accounting for Mortgage Servicing Rights, which is
an amendment to SFAS No. 65, Accounting for Certain
Mortgage Banking Activities. SFAS No. 122 amends SFAS No.
65 to remove the distinction of accounting for mortgage
servicing rights resulting from originated loans and those
resulting from purchased loans. Additionally, SFAS No. 122
requires that a mortgage banking enterprise assess its
capitalized mortgage servicing rights for impairment based
on the fair value of those rights. Effective January 1,
1996, Coast adopted SFAS No. 122. There was no material
effect on the Company's financial condition as of September
30, 1996, or results of operations for the nine-month
period then ended, resulting from the adoption of SFAS
No. 122.
3. During the third quarter of 1996, federal legislation was
enacted which, among other things, will recapitalize the
Savings Association Insurance Fund ("SAIF") through a one-
time special assessment for SAIF members, such as Coast.
The special assessment, payable in November 1996, will be
at an assessment rate of .657% on Coast's assessment base
as of March 31, 1995. During the third quarter of 1996,
Coast accrued $42.0 million for the special assessment.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. Cash and cash equivalents includes:
September 30,
--------------------
1996 1995
-------- --------
(In thousands)
Cash and due from banks $140,236 $260,017
Federal funds sold 34,000 -
Repurchase agreements 60,000 -
Commercial paper 7,342 4,663
-------- --------
$241,578 $264,680
======== ========
/TABLE
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
General
- -------
The Company is the sole stockholder of Coast. Substantially
all of the Company's consolidated revenues are derived from the
operations of Coast, and Coast represented substantially all of
the Company's consolidated assets and liabilities at
September 30, 1996. Coast's business is that of a financial
intermediary and consists primarily of attracting deposits from
the general public and using such deposits, together with
borrowings and other funds, to make mortgage loans secured by
residential real estate located in California. At September 30,
1996, Coast operated 90 retail banking offices in California
providing consumer banking services as well as residential real
estate loans. Coast is subject to significant competition from
other financial institutions, and is also subject to regulation
by certain federal agencies and undergoes periodic examinations
by those regulatory agencies.
Results of Operations
- ---------------------
Net earnings for the nine months ended September 30, 1996,
were $1.2 million compared to net earnings of $23.9 million for
the first nine months of 1995. The decrease in net earnings
from 1995 to 1996 was due primarily to the SAIF special
assessment (see Note 3 of Notes to Consolidated Financial
Statements) of $42.0 million, partially offset by increased net
interest income as described below. The net loss for the third
quarter of 1996 was $16.1 million compared to net earnings of
$14.8 million for the third quarter of 1995.
NET INTEREST INCOME. The effect on net interest income of
changes in interest rates and balances of interest-earning
assets and interest-bearing liabilities is illustrated in the
following tables. Information is provided on changes for the
periods indicated attributable to (i) changes in rates (changes
in the weighted average rate multiplied by the prior period
average portfolio balance), (ii) changes in volume (changes in
the average portfolio balance multiplied by the prior period
weighted average rate) and (iii) the combined effect of changes
in rates and volume (changes in the weighted average rate
multiplied by the change in the average portfolio balance).
Three Months Ended
September 30, 1996
Versus
Three Months Ended
September 30, 1995
-----------------------------------
Amount of increase
(decrease) due to change in:
-----------------------------------
Average Average Average
Rate Volume Rate/Vol. Total
------- ------- -------- -----
(In thousands)
Interest Income:
Loans $(5,117) $(2,695) $ 132 $(7,680)
MBS (840) 181 35 (624)
Investment securities (210) (357) 11 (556)
------- ------- ----- -------
Total interest income (6,167) (2,871) 178 (8,860)
------- ------- ----- -------
Interest Expense:
Deposits (2,790) 140 (123) (2,773)
Borrowings (3,036) (3,755) 378 (6,413)
------- ------- ----- -------
Total interest expense (5,826) (3,615) 255 (9,186)
------- ------- ----- -------
Change in net interest income $ (341) $ 744 $ (77) $ 326
======= ======= ===== =======
Interest income for the quarter ended September 30, 1996,
decreased by $8.9 million from the amount reported for the third
quarter of 1995. This was caused by a decrease in the average
rate earned on interest-earning assets of 31 basis points, to
7.41%, and by a decrease in the average balance of such assets
totaling approximately $144 million.
Interest expense recorded during the third quarter of 1996
decreased by $9.2 million from the amount recorded during the
corresponding quarter of 1995. This decrease resulted from a
decrease in the average balance of interest-bearing liabilities
of approximately $219 million, and by a decrease in the average
rate paid on such liabilities of 32 basis points, to 4.87%. The
decrease in the average balance of liabilities included a
decrease in the average balance of borrowings of approximately
$231 million offset in part by an increase in average deposits
of approximately $12 million.
Nine Months Ended
September 30, 1996
Versus
Nine Months Ended
September 30, 1995
-----------------------------------
Amount of increase
(decrease) due to change in:
-----------------------------------
Average Average Average
Rate Volume Rate/Vol. Total
------- ------- -------- -----
(In thousands)
Interest Income:
Loans $ 2,670 $(21,178) $ (217) $(18,725)
MBS 1,789 10,436 205 12,430
Investment securities (1,158) (1,051) 65 (2,144)
------- -------- ------- --------
Total interest income 3,301 (11,793) 53 (8,439)
------- -------- ------- --------
Interest Expense:
Deposits - 4,448 (49) 4,399
Borrowings (8,684) (17,864) 1,586 (24,962)
------- -------- ------- --------
Total interest expense (8,684) (13,416) 1,537 (20,563)
------- -------- ------- --------
Change in net interest income $11,985 $ 1,623 $(1,484) $ 12,124
======= ======== ======= ========
Interest income for the nine months ended September 30,
1996, decreased by $8.4 million from the amount reported during
the corresponding period of 1995. This decrease was primarily
due to a decrease in the average balance of interest-earning
assets of approximately $158 million.
Interest expense for the nine months ended September 30,
1996 decreased $20.6 million from the amount recorded in the
similar period of 1995 due to decreases in both the average
balances and the interest rates associated with the interest-
bearing liabilities. Average balances of interest-bearing
liabilities decreased by approximately $236 million, comprised
of a decrease in the average balance of borrowings of
approximately $366 million, partially offset by an increase in
the average balance of deposits totaling approximately $130
million. The average rate paid on the interest-bearing
liabilities decreased from the 1995 period to the 1996 period by
19 basis points, to 4.87%.
Noninterest income. Noninterest income decreased for the
nine months ended September 30, 1996, by $6.6 million from the
amount recorded in the corresponding period of 1995 due
primarily to a $7.5 million gain on the sale of a subsidiary
recorded in 1995, partially offset by higher fee income on
deposits, primarily attributable to an increase in the number of
checking accounts in 1996. (For further discussions of checking
accounts, see "Capital Resources and Liquidity" below.)
Noninterest expense. Noninterest expense for the nine
months ended September 30, 1996, increased by $40.0 million over
the corresponding period of 1995. The increase was primarily
due to the $42.0 million SAIF special assessment and increases
of $2.2 million in office occupancy expenses and $3.4 million in
other general and administrative expenses, partially offset by
a decrease of $7.7 million in compensation expense. Noninterest
expense for the third quarter of 1996 increased by $40.6 million
from the third quarter of 1995. The increase was primarily due
to a $42.0 million SAIF special assessment. Decreases in
compensation expense noted above generally reflects reduced
staffing levels.
Income taxes. Income tax expense of $1.0 million and $12.9
million was recorded for the first nine months of 1996 and 1995,
respectfully. This represented accruals of federal income and
California franchise taxes on adjusted pretax earnings. The
"effective income tax rate" (the ratio of income tax expense to
pretax earnings) was 46% and 35% for the first nine months of
1996 and 1995, respectively. The lower effective tax rate
reflected in 1995 was due substantially to the income tax
consequences of the sale of a subsidiary.
Asset/Liability Management
Substantially all of Coast's assets and liabilities are
comprised of interest-earning assets, including loans, MBS and
short-term investments, and interest-bearing liabilities,
including deposits and borrowings. The risks associated with
interest-earning assets can be generally categorized as credit
risk, market risk and interest rate risk. Credit risk is,
generally, the risk that a loan or other credit-related
instrument will not be repaid in accordance with its terms, and
is discussed below in the section entitled "Loan Portfolio and
Off-balance Sheet Risk Elements and Nonperforming Assets."
Market risk is, generally, the risk that the market value
of an asset could decline in response to changes in various
factors, including prevailing rates of interest, demand for that
type of asset, and other factors.
Interest rate risk is generally associated with the degree
to which interest-earning assets and interest-bearing
liabilities mature or reprice at different frequencies (e.g.,
maturities) and/or on different bases (e.g., indices to which
specific assets or groups of assets are tied). In order to
mitigate the impact of interest rate risk, management places a
significant emphasis on seeking to match the maturities and
repricing characteristics of Coast's interest-earning assets and
interest-bearing liabilities ("financial assets" and "financial
liabilities," respectively).
Coast measures its exposure to interest rate risk using a
variety of techniques. One commonly used measure of such
exposure is the difference between the amounts of assets and
liabilities maturing or repricing over various periods (the
"maturity gap"). The following table illustrates the con-
tractual maturities, as adjusted for estimates of prepayments
and for the frequency of rate changes ("Repricing Mechanisms")
of the financial assets and financial liabilities of Coast as of
September 30, 1996. The table also reports the maturity gap
between Coast's repricing or maturing financial assets and
liabilities. The interest rate sensitivity of Coast's financial
assets and liabilities illustrated in the following table could
vary substantially if different assumptions were used or if
actual experience differs from the assumptions utilized.
Over Over
One Five Over
Within to Five to Ten Ten
One Year Years Years Years Total
-------- ------- ------ ----- -----
(Dollars in millions)
Interest-earning assets:
Cash and investment securities:
Cash and due from banks $ 140 $ - $ - $ - $ 140
Investment securities 135 31 - 4 170
Loans and MBS:
ARMs 7,362 249 - - 7,611
Fixed rate 46 77 54 18 195
FHLB stock 89 - - - 89
------ ----- ---- --- ------
Total $7,772 $ 357 $ 54 $22 $8,205
====== ===== ==== === ======
Interest-bearing liabilities:
Deposits:
Checking accounts $ 737 $ - $ - $ - $ 737
Money market accounts 629 - - - 629
Certificate of deposits 4,497 337 41 - 4,875
Borrowings:
FHLB advances 777 75 - - 852
Other 706 106 56 - 868
------ ----- ---- --- ------
Total $7,346 $ 518 $ 97 $ - $7,961
====== ===== ==== === ======
Maturity gap $ 426 $(161) $(43) $ 22 $ 244
====== ===== ==== === ======
Cumulative maturity gap $ 426 $ 265 $222 $244 $ 244
====== ===== ==== === ======
Cumulative maturity gap as a
percentage of total assets 5% 3% 3% 3% 3%
== == == == ==
The Bank has matched interest rate sensitivities primarily
through the origination of adjustable rate mortgage loans
("ARMs"), the sale of fixed rate mortgage loans and the
acquisition of term funding. Except for the utilization of
interest rate exchange agreements ("Swaps") from time to time,
Coast has generally not utilized derivative financial
instruments to manage interest rate or other risks. (See
discussion of Swaps below.) Historically, Coast's cost of funds
has closely matched the Eleventh District cost of funds index
("COFI"), with the result that increases in Coast's cost of
funds are accompanied by increases in interest rates on its
COFI-based loans and MBS. However, because of the inherent lag
in the reset mechanism of these assets, Coast's interest rate
spreads generally can be expected to initially increase as COFI
begins to decline and to initially decrease as COFI begins to
rise.
During 1991 through 1993, Coast originated ARM products
which are tied to the London Interbank Offered Rate ("LIBOR")
index. This index is generally more responsive to changes in
prevailing market rates of interest and, as a result, interest
rates on ARMs tied to LIBOR generally respond more quickly to
changes in market interest rates than do ARMs tied to COFI.
With the increase in prevailing interest rates experienced
during 1994, consumer demand for LIBOR-based ARMs substantially
declined, and as a result, substantially all ARMs originated
during 1994, 1995 and 1996 have been COFI-based products. As of
September 30, 1996, Coast had $251.0 million (4%) of loans and
$207.3 million (11%) of MBS tied to LIBOR, and $5.12 billion
(87%) of loans and $1.68 billion (86%) of MBS tied to COFI in
its loan and MBS portfolios, which totaled $5.91 billion and
$1.96 billion, respectively. Coast originated $1.02 billion and
$875.4 million of ARMs during the nine month periods ended
September 30, 1996 and 1995, respectively. At September 30,
1996, ARMs and adjustable rate MBS totaled $5.74 billion and
$1.92 billion, respectively, or a combined 98% of Coast's total
loans and MBS.
Management determines the appropriate portfolio designation
of loans receivable, MBS and investment securities at the time
of acquisition. If management has the positive intent and the
Bank has the ability at the time of acquisition to hold such
assets until maturity, they are classified as held to maturity
and are carried at amortized historical cost. Assets that are
to be held for indefinite periods of time, but not necessarily
held to maturity, are classified as held or available for sale.
Such assets include those which management intends to use as
part of its asset/liability management strategy and which may be
sold in response to changes in interest rates, resultant
prepayment risk and other factors. MBS and investment
securities identified as being available for sale are carried at
fair value, with unrealized gains and losses excluded from
earnings and reported as a separate component of stockholders'
equity, net of income taxes. Loans identified as being held for
sale are carried at the lower of amortized historical cost or
fair value, with any required adjustment being reported in
current operations.
Sales of mortgage assets held or available for sale
function primarily to fund new loan originations, manage
interest rate risk and add to the loan servicing portfolio.
This strategy is, however, limited, based upon other factors
including the purchasers' investment limitations, general market
and competitive conditions, mortgage loan demand and other
factors. During the nine months ended September 30, 1996, Coast
sold $95.7 million of mortgage loans from its held for sale
portfolio.
Coast may, at times, be party to off-balance sheet
financial instruments acquired in the normal course of business
in order to meet the borrowing needs of its customers and to
reduce its own exposure to fluctuations in interest rates.
During 1995 and part of 1996 Coast owned certain Swaps, the
effect of which was to synthetically convert fixed rate deposits
to a variable rate of interest. The net effect of the Swaps,
exclusive of interest on the related deposits, was to record a
$38 thousand reduction of interest expense during the first nine
months of 1996, and to record $637 thousand of interest expense
during the first nine months of 1995, which amounts are included
in interest expense on deposits in the accompanying consolidated
statement of operations. At September 30, 1996, Coast had no
remaining Swap positions.
Loan Portfolio and Off-balance Sheet Risk Elements and Non-
- -----------------------------------------------------------
performing Assets
- -----------------
Coast defines nonperforming assets to include (i) loans on
which it has ceased to accrue interest ("Nonaccrual Loans"),
(ii) foreclosed real estate owned, and (iii) those loans whose
terms have been modified such that the interest rates charged to
the borrowers have been reduced to levels below the original
contract rates and below market rates of interest at both the
time of modification and the reporting date ("Modified Loans").
Following is a table which sets forth the components of
nonperforming assets at the dates indicated. (There were no
Modified Loans at September 30, 1996, or December 31, 1995.)
September 30, 1996 December 31, 1995
------------------ -------------------
Percent Percent
Balance of Total Balance of Total
------- -------- ------- --------
(Dollars in thousands)
Nonaccrual Loans:
Single family residential $ 46,240 35% $ 43,792 39%
Multifamily residential 20,549 16 25,646 23
Commercial and other 13,953 11 11,913 10
-------- --- -------- ---
80,742 62 81,351 72
-------- --- -------- ---
Foreclosed real estate owned:
Single family residential 23,198 17 15,077 13
Multifamily residential 11,440 9 6,652 6
Commercial and other 15,648 12 9,967 9
-------- --- -------- ---
50,286 38 31,696 28
-------- --- -------- ---
Total nonperforming assets $131,028 100% $113,047 100%
======== === ======== ===
/TABLE
Following is a table which sets forth the components of
nonperforming assets at the dates indicated.
Sept 30, Jun 30, Mar 31, Dec 31, Sept 30, Jun 30, Mar 31,
1996 1996 1996 1995 1995 1995 1995
------- ------ ------- ------ ------- ------ ------
(Dollars in millions)
Nonaccrual loans $ 81 $ 74 $ 93 $ 81 $ 81 $ 90 $ 82
Foreclosed real estate
owned 50 58 40 32 39 39 51
Modified loans - - - - 1 1 1
------ ------ ------ ------ ------ ------ ------
Total nonperforming
assets $ 131 $ 132 $ 133 $ 113 $ 121 $ 130 $ 134
====== ====== ====== ====== ====== ====== ======
Total assets $8,549 $8,351 $8,240 $8,252 $8,440 $8,585 $8,540
====== ====== ====== ====== ====== ====== ======
Ratio of total
nonperforming assets
to total assets 1.53% 1.59% 1.62% 1.37% 1.43% 1.52% 1.57%
As of September 30, 1996, Coast's ratio of Nonaccrual Loans
to total loans decreased to 1.38% from 1.49% at December 31,
1995. As of September 30, 1996, Coast's ratio of nonperforming
assets to total assets increased to 1.53% from 1.37% at December
31, 1995. In that the incidence of delinquencies and
foreclosures is influenced by many variables beyond management's
control, there can be no assurance that Coast will not
experience increased levels of nonperforming assets in the
future.
A loan is impaired when, based on current information and
events, a creditor will be unable to collect all amounts
contractually due under a loan agreement. If a loan is
determined to be impaired, an allowance is established based
upon the difference between the investment in the loan and the
fair value of the loan's underlying collateral. Subsequent to
classification as impaired, the fair values of the impaired
loans are periodically reviewed. If there is a change in the
fair value of a loan, the allowance is adjusted accordingly.
All such provisions and any related recoveries are recorded as
adjustments to the valuation allowance for impaired loans.
Coast's impaired loans totaled $141.3 million at
September 30, 1996, $135.2 million at December 31, 1995, and
$152.8 million at September 30, 1995. Impaired loans at
September 30, 1996, included $79.0 million of loans for which
valuation allowances of $13.6 million had been established, and
$75.9 million of loans for which no allowance was considered
necessary. For the nine months ended September 30, 1996 and
1995, the average investment in impaired loans was $140.3
million and $103.5 million, respectively. As of September 30,
1996, Nonaccrual Loans included $44.1 million of impaired loans.
Interest income on impaired loans which are performing is
generally recognized on the accrual basis. Interest income
recognized on impaired loans for the first nine months of 1996
and 1995 was $2.1 million and $6.9 million, respectively.
At September 30, 1996, Coast had letters of credit
outstanding aggregating $385.4 million. The letters of credit
were issued primarily in 1984 and 1985 to enhance the rating of
$394.6 million of housing revenue bonds issued to finance the
construction of multifamily residential projects. The credit
risk involved in these letters of credit is essentially the same
as that involved in making real estate loans. At September 30,
1996, a loan payable to the housing revenue bond trustee
associated with a letter of credit approximating $32 million was
in default, and Coast has installed a court-appointed receiver
to manage the property. In the event the default is not
remedied and Coast forecloses on the property, it would become
a component of Coast's foreclosed real estate owned.
Coast maintains a general valuation allowance ("GVA") to
absorb credit losses related to its assets and off-balance sheet
items. The GVA is reviewed and adjusted quarterly based upon a
number of factors, including asset classifications, economic
trends, industry experience, industry and geographic
concentrations, estimated collateral values, management's
assessment of credit risk inherent in the portfolio, delinquency
migration analysis, historical loss experience, ratio analysis
and Coast's underwriting practices. Economic conditions,
especially those affecting real estate markets, may change,
which could result in the need for an increased GVA in future
periods. In addition, regulatory agencies, as an integral part
of their examination process, periodically review Coast's GVA.
These agencies may require Coast to establish additional
allowances based on their judgments of the information available
at the time of the examination.
At September 30, 1996, the GVA totaled $73 million and
included $64 million allocated to loans and $9 million
attributable to off-balance sheet items. The portion of the GVA
attributable to off-balance sheet items is included in other
liabilities in the accompanying consolidated statement of
financial condition, and relates to the letters of credit
discussed above and to loans sold with recourse.
The following table sets forth the amount, allocation and
activity in the GVA for the nine months ended September 30,
1996.
Commercial Off-
Residential Real Estate Balance
Real Estate Mortgage Sheet
Mortgage and Other Items Total
----------- ----------- ------- -----
(In millions)
GVA allocation at
December 31, 1995 $ 48 $17 $17 $ 82
Additions charged
to operations 29 - 1 30
Recoveries 6 - - 6
Losses charged (32) (4) (9) (45)
---- --- --- ----
GVA allocation at
September 30, 1996 $ 51 $13 $ 9 $ 73
==== === === ====
The reduction of $9 million in the GVA balance reflects
allowances allocated to the letters of credit discussed above.
Capital Resources and Liquidity
Federal regulations currently require a savings institution
to maintain a daily average balance, on a monthly basis, of
liquid assets (including cash, certain time deposits, bankers'
acceptances and specified United States government, state or
federal agency obligations) equal to at least 5% of the average
daily balance of its net withdrawable accounts and short-term
borrowings during the preceding calendar month. This liquidity
requirement may be changed from time to time by the Office of
Thrift Supervision ("OTS") to any amount within the range of 4%
to 10% of such accounts and borrowings depending upon economic
conditions and the deposit flows of member institutions. Federal
regulations also require each member institution to maintain a
monthly average daily balance of short-term liquid assets
(generally those having maturities of 12 months or less) equal
to at least 1% of the average daily balance of its net
withdrawable accounts and short- term borrowings during the
preceding calendar month. Monetary penalties may be imposed for
failure to meet these liquidity ratio requirements. Coast's
liquidity and short-term liquidity ratios for the calculation
period ended September 30, 1996, were 5.10% and 4.27%,
respectively, which exceeded the applicable requirements.
Principal repayments on and sales of loans and MBS have
been a primary source of funds for Coast. For the nine months
ended September 30, 1996 and 1995, principal repayments on loans
and MBS amounted to $595.6 million and $458.6 million,
respectively, and proceeds from loan and MBS sales totaled
$95.7 million and $31.6 million, respectively, for the same
periods. In addition, proceeds from the sale of a subsidiary in
the third quarter of 1995 were $146.0 million. A primary use of
funds was the origination of loans (net of refinances of loans
in Coast's portfolios) of $934.3 million and $794.4 million for
these two periods, respectively.
At September 30, 1996, there were $5 million in commitments
to sell loans, MBS or investment securities and there were $10
million commitments to purchase loans, MBS or investment
securities. At September 30, 1996, outstanding letters of
credit totaled $385 million. Scheduled repayments of FHLB of
San Francisco advances for the twelve months ending
September 30, 1997, totaled $702 million.
For the nine months ended September 30, 1996 and 1995,
Coast experienced net increases in deposits of $117.0 million
and $299.4 million, respectively. These increases are primarily
attributable to Coast's focused efforts to market its
transaction accounts, which resulted in increases of $105.4
million and $134.2 million in checking account balances during
the first nine months of 1996 and 1995, respectively.
Other potential sources of funds available to Coast include
securities sold under agreements to repurchase, a line of credit
with the FHLB of San Francisco and direct access to borrowings
from the Federal Reserve System. At September 30, 1996, the
amount of additional credit available from the FHLB of San
Francisco was approximately $1.53 billion. In addition, the
Company and Coast have access to the capital markets for issuing
debt or equity securities; however, access can be limited from
time to time by various factors including market conditions,
credit ratings and general economic conditions.
Under OTS capital regulations, Coast must meet three
capital tests. First, the tangible capital requirement mandates
that Coast's stockholder's equity less intangible assets (as
defined in the regulations) be at least 1.5% of adjusted total
assets (as so defined in the regulation). Second, the core
capital requirement currently mandates that core capital be at
least 3% of adjusted total assets as defined. Third, the risk-
based capital requirement currently mandates that core capital
plus supplementary capital as defined be at least 8% of risk-
adjusted assets as defined.
The following table reflects, in both dollars and ratios,
Coast's regulatory capital positions as of September 30, 1996,
the minimum requirements at that date, and the amounts by which
such capital exceeded the required amounts.
Minimum
Actual Requirements Excess
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in millions)
Risk-based $570 10.84% $421 8.00% $149 2.84%
Core 449 5.28 255 3.00 194 2.28
Tangible 449 5.28 127 1.50 322 3.78
In addition to the capital requirements noted above, the
Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA") contains "prompt corrective action" provisions
pursuant to which insured depository institutions are to be
classified into one of five categories, based primarily upon
capital adequacy, ranging from "well capitalized" to "critically
undercapitalized." Under the OTS regulations implementing these
provisions, a savings institution is considered (i) "well
capitalized" if it has a total risk-based capital ratio of 10%
or greater, has a Tier 1 risk-based capital ratio (Tier 1
capital to total assets) of 6% or greater, has a core capital
ratio of 5% or greater and is not subject to any written capital
order or directive to meet and maintain a specific capital level
or any capital measure, and (ii) "adequately capitalized" if it
has a total risk-based capital ratio of 8% or greater, has a
Tier 1 risk-based capital ratio of 4% or greater and has a core
capital ratio of 4% or greater (3% for certain highly rated
institutions). The OTS also has the authority, after an
opportunity for a hearing, to downgrade a savings institution
from "well capitalized" to "adequately capitalized," or to
subject an "adequately capitalized" or "undercapitalized"
savings institution to the supervisory actions applicable to the
next lower category, for supervisory concerns. At September 30,
1996, Coast's regulatory capital exceeded the thresholds
necessary to be considered well capitalized.
On September 30, 1996, President Clinton signed legislation
providing for a special assessment of thrift institutions whose
customer deposits are insured by the SAIF of the FDIC. Pursuant
to the new law, a one-time fee is payable by all SAIF-insured
institutions at the rate of $0.657 per $100 (or 65.7 basis
points) of assessment bases held by such institutions at March
31, 1995. The money collected will recapitalize the SAIF
reserve to the level required by law. In September 1996, Coast
recorded an accrual of $42.0 million for this assessment.
The new law provides for the merger, subject to certain
conditions, of the SAIF into the BIF by 1999 and also requires
BIF-insured institutions to share in the payment of interest on
the bonds issued by a specially created government entity
("FICO"), the proceeds of which were applied toward resolution
of the thrift industry crisis in the 1980s. Beginning on
January 1, 1997, BIF-insured institutions will pay 1.3 basis
points of their insured deposits and SAIF-insured institutions
will pay 6.4 basis points of their insured deposits towards the
payment of interest on the FICO bonds. The recapitalization of
the SAIF is expected to result in lower deposit insurance
premiums in the future for most SAIF-insured financial
institutions, including Coast.
On August 20, 1996, the President signed legislation which
repealed the reserve method of accounting for bad debts for
savings institutions effective for taxable years beginning after
1995. Coast, therefore, will be required to use the specific
charge-off method on its 1996 and subsequent federal income tax
returns. Coast will also be required to recapture its
"applicable excess reserves", which are its federal tax bad debt
reserves in excess of the base year reserve amount. The base
year reserves are generally the balance of reserves as of
December 31, 1987, reduced proportionately for the reduction in
Coast's loan portfolio since that date. As of December 31,
1995, Coast had approximately $4.4 million of applicable excess
reserves. One-sixth of the amount will be included in taxable
income in each tax year from 1996 through 2001. The deferred
tax liability for this recapture had been recorded as of
December 31, 1995.
The base year reserves will continue to be subject to
recapture and Coast could be required to recognize a tax
liability if: (i) Coast fails to qualify as a "bank" for federal
income tax purposes; (ii) certain distributions are made with
respect to the stock of Coast; (iii) the bad debt reserves are
used for any purpose other than to absorb bad debt losses; or
(iv) there is a change in federal tax law.
Item 1. LEGAL PROCEEDINGS
-----------------
On April 10, 1987, Coast acquired substantially all of the
assets and liabilities of Central Savings and Loan Association
from the Federal Savings and Loan Insurance Corporation
("FSLIC") in a supervisory-assisted transaction. As part of the
transaction, Coast entered into a contractual agreement with the
FSLIC under which the FSLIC made a cash contribution to Coast of
approximately $299 million which, pursuant to the agreement, was
to be reflected as a permanent addition to Coast's regulatory
capital. The Financial Institutions Reform, Recovery and
Enforcement Act of 1989 eliminated the FSLIC and replaced it
(and the Federal Home Loan Bank Board) for supervisory and
regulatory purposes with the OTS. The OTS has taken the
position that the FSLIC contribution should be classified as
supervisory goodwill, thereby excluding it from regulatory
capital. In June 1992, Coast filed an action in the United
States Court of Federal Claims seeking monetary damages for
breach of the contractual agreement with the FSLIC. In three
cases with similar contractual issues, the Court of Federal
Claims ruled in favor of the plaintiff thrift institutions on
the issue of liability of the federal government for breach of
contract. On July 8, 1996, the United States Supreme Court
affirmed the Court of Federal Claims ruling in these cases (the
"Winstar Decision"). Coast has pending with the Court of
Federal Claims a motion for summary judgment with respect to the
issue of liability of the federal government for breach of the
contractual agreement with the FSLIC. In the event that the
Court of Federal Claims grants such motion in accordance with
the Winstar Decision, the Court of Federal Claims must then
determine the amount of damages owing to Coast. No prediction
can be made as what damages might be awarded to Coast.
There are various actions pending against Coast or the
Company but, in the opinion of management, the probable
liability resulting from such suits is unlikely, individually or
in the aggregate, to have a material effect on Coast.
Items 2 through 5 are not applicable or the answers are
negative.
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
--------------------------------
Exhibits Required
- -----------------
Exhibit
Number Exhibit
- ------- -------
11.1 Computation of Earnings Per Share
Reports on Form 8-K
- -------------------
No reports on Form 8-K were filed during the quarter for
which this report is filed.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.
COAST SAVINGS FINANCIAL, INC.
- -----------------------------
(Registrant)
/s/ Ray Martin
- -------------------------------
Ray Martin
Chairman of the Board and
Chief Executive Officer
(Authorized Officer)
/s/ James F. Barritt
- -------------------------------
James F. Barritt
Senior Executive Vice President
and Chief Financial Officer
(Principal Financial Officer)
Dated: November 12, 1996
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Pages
- ------- ----------- --------------
11.1 Computation of Earnings Per Share