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 March 31 1997
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 May 5, 1997, the registrant had 18,592,567 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 March 31,
1997 and December 31, 1996.
Consolidated Statement of Operations for the Three Months
Ended March 31, 1997 and 1996.
Consolidated Statement of Cash Flows for the Three Months
Ended March 31, 1997 and 1996.
Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
March 31, December 31,
1997 1996
------------ ------------
(In thousands)
Assets
- ------
Cash and due from banks $ 133,031 $ 138,861
Federal funds sold and other short
term investments 184,140 198,795
Investment securities held to
maturity (fair value of $39.8
million and $36.0 million) 39,695 35,833
Loans receivable, net 5,907,224 5,749,985
Loans receivable held for sale, at
the lower of cost or fair value
(fair value of $131.6 million
and $109.6 million) 128,484 106,122
Mortgage-backed securities held to
maturity (fair value of $1.68
billion and $1.74 billion) 1,681,514 1,731,268
Mortgage-backed securities available
for sale, at fair value 303,601 312,002
Real estate held for sale 36,371 41,259
Federal Home Loan Bank stock 92,351 90,882
Land and depreciable assets 93,324 95,010
Interest receivable and other assets 191,372 198,697
Goodwill 5,968 6,238
---------- ----------
$8,797,075 $8,704,952
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $6,493,244 $6,356,448
Federal Home Loan Bank advances 1,022,500 1,104,200
Other borrowings 659,996 643,521
Other liabilities 126,129 115,508
Income taxes 3,229 4,747
Capital notes 56,059 55,997
---------- ----------
8,361,157 8,280,421
---------- ----------
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
18,592,567 and 18,584,717 shares
issued and outstanding at
March 31, 1997, and December 31,
1996, respectively 186 186
Additional paid-in capital 265,343 265,055
Unrealized gain on securities
available for sale, net of taxes 1,619 2,778
Retained earnings 168,770 156,512
---------- ----------
435,918 424,531
---------- ----------
$8,797,075 $8,704,952
========== ==========
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended
March 31,
---------------------
1997 1996
-------- --------
(In thousands
except per share amounts)
Interest income:
Loans receivable $117,477 $111,168
Mortgage-backed securities 32,025 34,624
Investment securities 5,578 5,190
-------- --------
155,080 150,982
-------- --------
Interest expense:
Deposits 72,675 71,286
Borrowings 26,686 25,420
-------- --------
99,361 96,706
-------- --------
Net interest income 55,719 54,276
Provision for loan losses 8,000 10,000
-------- --------
Net interest income after provision
for loan losses 47,719 44,276
-------- --------
Noninterest income:
Loan servicing fees and charges 3,132 3,458
Other 9,252 9,574
-------- --------
12,384 13,032
-------- --------
Noninterest expense:
Compensation and benefits 17,638 16,408
Office occupancy, net 9,874 9,923
Federal deposit insurance premiums 1,464 4,421
Other general and administrative
expenses 8,859 8,821
-------- --------
Total general and administrative
expenses 37,835 39,573
Real estate operations, net 863 1,622
Amortization of goodwill 270 276
-------- --------
38,968 41,471
-------- --------
Earnings before income tax expense 21,135 15,837
Income tax expense 8,877 6,335
-------- --------
Net earnings $ 12,258 $ 9,502
======== ========
Net earnings per share of common stock:
Primary $ .63 $.50
===== ====
Fully diluted $ .63 $.50
===== ====
See accompanying Notes to Consolidated Financial Statements.
CONSOLIDATED STATEMENT OF CASH FLOWS
Three Months Ended
March 31,
-----------------------
1997 1996
--------- ---------
(In thousands)
Cash flows from operating activities:
Net earnings $ 12,258 $ 9,502
--------- ---------
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Proceeds from the sale of loans held for
sale 10,261 46,825
Net increase in accounts payable 9,942 545
Deferred income tax expense 8,877 5,937
Provision for loan losses 8,000 10,000
Net decrease (increase) in accounts receivable 3,305 (8,764)
Loans originated for sale, net of
refinances and principal payments (26,471) (12,920)
Other (8,871) (11,352)
--------- ---------
Total adjustments 5,043 30,271
--------- ---------
Net cash provided by operations 17,301 39,773
--------- ---------
Cash flows from investing activities:
Loans originated for investment, net of
refinances (319,265) (196,518)
Repurchase of loans (4,825) (4,838)
Principal repayments on loans 154,356 123,901
Principal repayments on mortgage-backed
securities ("MBS") held to maturity 50,226 53,513
Principal repayments on MBS available for
sale 6,331 8,458
Maturities and principal repayments on
investment securities 4,015 14
Net decrease in short term investment
securities 2,177 2,081
Purchase of investment securities (10,054) (51)
Purchase of land and depreciable assets, net (1,392) (6,016)
Sale of real estate held for sale 8,863 11,627
--------- ---------
Net cash used by investing activities (109,568) (7,829)
--------- ---------
Continued
CONSOLIDATED STATEMENT OF CASH FLOWS
Continued
Three Months Ended
March 31,
-----------------------
1997 1996
--------- ---------
(In thousands)
Cash flows from financing activities:
Net increase in deposits 136,796 126,598
Net decrease in FHLB advances (81,700) (77,250)
Net increase in short-term borrowings 16,398 (68,063)
Common stock options exercised 288 6
--------- ----------
Net cash provided (used) by financing activities 71,782 (18,709)
--------- ----------
Net increase (decrease) in cash and cash
equivalents (20,485) 13,235
Cash and cash equivalents at beginning of year 337,656 150,111
--------- ----------
Cash and cash equivalents at end of period $ 317,171 $ 163,346
========= ==========
Supplemental disclosures of cash flow
information:
Cash payments of interest $ 35,477 $ 37,397
Cash payments of income taxes, net 30 30
Supplemental schedule of noncash investing
and financial activities:
Interest credited to depositors' accounts 63,356 60,688
Loans exchanged for MBS, net - -
Additions to loans resulting from the
sale of real estate acquired in
settlement of loans 12,745 7,307
Additions to real estate acquired in
settlement of loans 16,776 19,147
Decrease of unrealized gain on securities
available for sale, net of taxes (1,159) (1,584)
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 1996 to conform to the 1997
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 three months
ended March 31, 1997, 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, 1996.
2. In June 1996, the Financial Accounting Standards Board (the
"FASB") issued Statement of Financial Accounting Standards
("SFAS") No. 125, Accounting for Transfers and Servicing of
Financial Assets and Extinguishments of Liabilities ("SFAS
125"). SFAS 125 provides accounting and reporting
standards for transfers and servicing of financial assets,
and distinguishes transfers of financial assets that are
sales from transfers that are secured borrowings. This
statement supersedes SFAS 122, although the general
concepts of SFAS 122 are retained in it. Effective
January 1, 1997, Coast adopted SFAS No. 125. There was no
material effect on the Company's financial condition as of
March 31, 1997, or results of operations for the three-
month period then ended, resulting from the adoption of
SFAS No. 125.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. In February 1997, the FASB issued SFAS No. 128, Earnings
per Share ("SFAS 128"). SFAS 128 provides revised
reporting standards for earnings per share and is effective
for financial statement periods ending after December 15,
1997, with earlier application not permitted. SFAS 128
eliminates primary and fully diluted earnings per share
disclosures and adds new disclosures of basic and diluted
earnings per share. Had the Company applied SFAS 128 to
the accompanying consolidated financial statements, basic
earnings per share would have been $.66 and $.51 for the
three months ended March 31, 1997 and 1996, respectively,
and diluted earnings per share would have been $.64 and
$.50 for the same periods, respectively.
4. Cash and cash equivalents includes:
March 31,
--------------------
1997 1996
-------- --------
(In thousands)
Cash and due from banks $133,031 $145,602
Repurchase agreements 110,000 -
Federal funds sold 66,000 12,000
Commercial paper 8,140 5,744
-------- --------
$317,171 $163,346
======== ========
/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 March 31,
1997. 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 March 31, 1997, Coast operated
92 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 first quarter of 1997, were $12.3
million compared to net earnings of $9.5 million for the first
quarter of 1996. The increase in net earnings from 1996 to 1997
was due primarily to a reduction in the provision for loan
losses and a decrease in federal deposit insurance premiums.
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 table. 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
March 31, 1997
Versus
Three Months Ended
March 31, 1996
-----------------------------------
Amount of increase
(decrease) due to change in:
-----------------------------------
Average Average Average
Rate Volume Rate/Vol. Total
------- ------- --------- -----
(In thousands)
Interest Income:
Loans $(2,464) $ 9,058 $(285) $ 6,309
MBS (798) (1,868) 67 (2,599)
Investment securities (203) 615 (24) 388
------- ------- ----- -------
Total interest income (3,465) 7,805 (242) 4,098
------- ------- ----- -------
Interest Expense:
Deposits (775) 2,254 (90) 1,389
Borrowings (1,090) 2,482 (126) 1,266
------- ------- ----- -------
Total interest expense (1,865) 4,736 (216) 2,655
------- ------- ----- -------
Change in net interest income $(1,600) $ 3,069 $ (26) $ 1,443
======= ======= ===== =======
Interest income for the quarter ended March 31, 1997,
increased by $4.1 million from the amount reported for the first
quarter of 1996. This was caused by an increase in the average
balance of interest-earning assets totaling approximately $375
million, partially offset by a decrease in the average rate
earned on such assets of 15 basis points, to 7.43%.
Interest expense recorded during the first quarter of 1997
increased by $2.7 million from the amount recorded during the
corresponding quarter of 1996. This increase resulted from an
increase in the average balance of interest-bearing liabilities
of approximately $360 million, partially offset by a decrease in
the average rate paid on such liabilities of 8 basis points, to
4.83%. The increase in the average balance of liabilities
included an increase in the average balance of borrowings of
approximately $164 million and by an increase in average
deposits of approximately $196 million.
NONINTEREST INCOME. Noninterest income decreased for the
three months ended March 31, 1997, by $648 thousand from the
amount recorded in the corresponding period of 1996 due to a
$326 thousand decrease in loan servicing fees and charges and a
$322 thousand decrease in other noninterest income.
Noninterest expense. Noninterest expense for the three
months ended March 31, 1997, decreased by $2.5 million from the
corresponding period of 1996. The decrease was primarily due to
decreases of $3.0 million in federal deposit insurance premiums
and $.8 million in real estate operations, net, partially offset
by an increase of $1.2 million in compensation expense. The
reduction in federal deposit insurance premiums reflects
decreased insurance rates due to the recapitalization of the
Savings Association Insurance Fund ("SAIF") in 1996.
INCOME TAXES. Income tax expense of $8.9 million and $6.3
million was recorded for the first three months of 1997 and
1996, respectively. 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 42% and 40% for the first three months of
1997 and 1996, respectively.
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 financial
assets and liabilities maturing or repricing over various
periods (the "maturity gap"). The following table illustrates
the contractual maturities, as adjusted for estimates of
prepayments and for the frequency of rate changes ("Repricing
Mechanisms") of the financial assets and liabilities of Coast as
of March 31, 1997. 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 $ 133 $ - $ - $ - $ 133
Investment securities 211 5 - 8 224
Loans and MBS:
ARMs 7,594 241 - - 7,835
Fixed rate 53 63 53 17 186
FHLB stock 92 - - - 92
------ ----- ---- --- ------
Total $8,083 $ 309 $ 53 $25 $8,470
====== ===== ==== === ======
Interest-bearing liabilities:
Deposits:
Checking accounts $ 835 $ - $ - $ - $ 835
Money market accounts 609 - - - 609
Certificate of deposits 4,610 414 25 - 5,049
Borrowings:
FHLB advances 998 25 - - 1,023
Other 603 57 56 - 716
------ ----- ---- --- ------
Total $7,655 $ 496 $ 81 $ - $8,232
====== ===== ==== === ======
Maturity gap $ 428 $(187) $(28) $ 25 $ 238
====== ===== ==== === ======
Cumulative maturity gap $ 428 $ 241 $213 $238 $ 238
====== ===== ==== === ======
Cumulative maturity gap as a
percentage of total assets 5% 3% 2% 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.
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.
Substantially all ARMs originated in recent years have been
COFI-based products. As of March 31, 1997, Coast had $5.38
billion (88%) of loans and $1.74 billion (88%) of MBS tied to
COFI in its loan and MBS portfolios, which totaled $6.12 billion
and $1.99 billion, respectively. Coast originated $392.3
million and $226.7 million of ARMs during the three month
periods ended March 31, 1997 and 1996, respectively. At March
31, 1997, ARMs and adjustable rate MBS totaled $5.96 billion and
$1.95 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 in
recent years, have been undertaken primarily to reduce asset
size or constrain asset growth and to liquidate newly originated
fixed rate product. The marketability of loans, loan
participations and MBS depends on the purchasers' investment
limitations, general market and competitive conditions, mortgage
loan demand and other factors. During the three months ended
March 31, 1997, Coast sold $10.3 million of mortgage loans from
its held for sale portfolio.
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"), and
(ii) foreclosed real estate owned. Following is a table which
sets forth the composition of nonperforming assets by underlying
collateral type at the dates indicated.
March 31, 1997 December 31, 1996
------------------ -------------------
Percent Percent
Balance of Total Balance of Total
------- -------- ------- --------
(Dollars in thousands)
Nonaccrual Loans:
Single family residential $ 54,601 46% $ 56,740 46%
Multifamily residential 22,222 19 19,295 16
Commercial and other 4,976 4 6,769 5
-------- --- -------- ---
81,799 69 82,804 67
-------- --- -------- ---
Foreclosed real estate owned:
Single family residential 26,874 23 22,708 18
Multifamily residential 5,815 5 6,324 5
Commercial and other 3,682 3 12,227 10
-------- --- -------- ---
36,371 31 41,259 33
-------- --- -------- ---
Nonperforming assets $118,170 100% $124,063 100%
======== === ======== ===
Ratio of nonperforming assets
to total assets 1.34% 1.43%
As of March 31, 1997, Coast's ratio of Nonaccrual Loans to
total loans decreased to 1.36% from 1.41% at December 31, 1996,
and its ratio of nonperforming assets to total assets decreased
to 1.34% from 1.43% at December 31, 1996. 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.
Loans are evaluated for impairment in accordance with the
provisions of Statement of Financial Accounting Standards
("SFAS") No. 114, Accounting by Creditors for Impairment of a
Loan. A loan is impaired when, based on current information and
events, it is probable that a creditor will be unable to collect
all amounts contractually due under a loan agreement. Loans are
evaluated for impairment as part of Coast's normal internal
asset review process. When a loan is determined to be impaired,
a valuation allowance is established based upon the difference
between Coast's investment in the loan and the fair value of the
collateral securing the loan. Coast's impaired loans totaled
$112.4 million at March 31, 1997, $116.2 million at December 31,
1996, and $142.7 million at March 31, 1996. For the three
months ended March 31, 1997 and 1996, the average investment in
impaired loans was $114.3 million and $138.9 million,
respectively, and interest income on such loans totaled $1.9
million and $2.5 million for the same periods, respectively.
Interest income on impaired loans which are performing is
generally recognized on the accrual basis. As of March 31, 1997
and December 31, 1996, nonaccrual loans included $27.2 million
and $42.0 million, respectively, of impaired loans.
Impaired loans at March 31, 1997, included $91.8 million
of loans for which valuation allowances of $16.3 million had
been established and $36.9 million of loans for which no
allowance was considered necessary. At December 31, 1996, Coast
had $93.9 million of impaired loans for which valuation
allowances of $16.3 million had been established and $38.6
million of such loans for which no allowance was considered
necessary. All such allowances and recoveries of allowances
are recorded as adjustments to the allowance for loan losses.
Coast had no recoveries and $1.2 million of recoveries of
previously established allowances on impaired loans during the
three months ended March 31, 1997 and 1996, respectively.
At March 31, 1997, Coast had letters of credit outstanding
aggregating $380.0 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 December 31,
1996 and continuing at March 31, 1997, a loan payable to the
housing revenue bond trustee associated with a letter of credit
was in default. During May 1997, Coast foreclosed on the
underlying collateral property and has included its $15 million
fair value in real estate held for sale.
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 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, Coast's underwriting
practice and asset classifications. 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, the Office of Thrift Supervision ("OTS"),
as an integral part of their examination process, periodically
review Coast's GVA and may require Coast to establish additional
allowances based on its judgments of the information available
at the time of the examination.
At March 31, 1997, the GVA totaled $93 million and included
$84 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 three months ended March 31, 1997.
Commercial Off-
Residential Real Estate Balance
Real Estate Mortgage Sheet
Mortgage and Other Items Total
----------- ----------- ------- -----
(In millions)
GVA allocation at
December 31, 1996 $64 $20 $ 9 $ 93
Additions charged
to operations 6 2 - 8
Recoveries 1 - - 1
Losses charged (7) (2) - (9)
--- --- --- ---
GVA allocation at
March 31, 1997 $64 $20 $ 9 $93
=== === === ===
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 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 March 31,
1997, were 5.07% and 4.60%, 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 three months
ended March 31, 1997 and 1996, principal repayments on loans and
MBS amounted to $214.0 million and $185.9 million,
respectively, and proceeds from loan and MBS sales totaled
$10.3 million and $46.8 million, respectively, for the same
periods. A primary use of funds was the origination of loans
(net of refinances of loans in Coast's portfolios) of $348.9
million and $214.3 million for these two periods, respectively.
At March 31, 1997, there were no commitments to sell loans,
MBS or investment securities and there were no commitments to
purchase loans, MBS or investment securities. At March 31,
1997, outstanding letters of credit totaled $380.0 million.
Scheduled repayments of FHLB of San Francisco advances for the
twelve months ending March 31, 1998, totaled $997.5 million.
For the three months ended March 31, 1997 and 1996, Coast
experienced net increases in deposits of $136.8 million and
$126.6 million, respectively. These increases are primarily
attributable to Coast's focused efforts to market its
transaction accounts, which resulted in increases of $53.1
million and $58.9 million in checking account balances during
the first three months of 1997 and 1996, 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 March 31, 1997, the amount
of additional credit available from the FHLB of San Francisco
was approximately $1.51 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 March 31, 1997, 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 $593 10.93% $434 8.00% $159 2.93%
Core 468 5.36 262 3.00 206 2.36
Tangible 468 5.36 131 1.50 337 3.86
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 March 31,
1997, Coast's regulatory capital exceeded the thresholds
necessary to be considered well capitalized.
On September 30, 1996, President Clinton signed legislation
which, among other things, provides for full pro rata sharing by
all federally-insured institutions by January 1, 2000, of the
obligation, now borne entirely by SAIF-insured institutions, to
pay the interest on the bonds (commonly referred to as the "FICO
Bonds") that were issued by a specially created federal
corporation for the purpose of funding the resolution of failed
thrift institutions. Beginning on January 1, 1997 through
January 1, 2000 (or January 1, 1999 if the bank and savings
institution charters are then merged), FICO premiums for the BIF
and SAIF insured deposits are $0.013 and $0.064 per $100 of
deposits, respectively. The legislation provides for the merger
of the BIF and the SAIF on January 1, 1999, into a newly created
Deposit Insurance Fund, provided that the bank and savings
association charters are combined by that date. If the charters
have been merged and the Deposit Insurance Fund created, pro
rata FICO premium sharing will begin on January 1, 1999.
On August 20, 1996, the President signed the Small Business
Job Protection Act (the "Act") into law. The Act contains a
number of provisions affecting financial institutions including
the repeal of the reserve method of accounting for bad debts for
savings institutions, effective for taxable years beginning
after 1995. Coast will be required to recapture its "applicable
excess reserves", which are its federal tax bad debt reserves in
excess of the base year reserve amount described below. Coast
will include one-sixth of its applicable excess reserves in
taxable income in each year from 1996 through 2001. As of
December 31, 1995, Coast had approximately $6.0 million of
"applicable excess reserves." As of December 31, 1996, Coast
had fully provided for the tax related to this recapture. 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 the bank; (iii) the bad debt reserves are used for
any purpose other than to absorb bad debt losses; or (iv) there
is a change in tax law. The enactment of this legislation is
expected to have no material impact on Coast's operations or
financial position.
In accordance with SFAS No. 109, "Accounting for Income
Taxes", a deferred liability has not been established for the
tax bad debt base year reserves of Coast. The base year
reserves are generally the balance of reserves as of December
31, 1987, reduced proportionately for reductions in Coast's loan
portfolio since that date. At March 31, 1997, the amount of
those reserves was approximately $103 million. The amount of
the unrecognized deferred tax liability at March 31, 1997, was
approximately $36 million. This deferred tax liability could be
recognized in the future under the conditions described in the
preceding paragraph.
PART II - OTHER INFORMATION
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: May 12, 1997
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Pages
- ------- ----------- --------------
11.1 Computation of Earnings Per Share