-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, I6eebIAyDP+HWQLk2GJZX2T31ovDA/uxwQ+wWcd2kgNW2MVjkmu7Tq5+4LURD1Py FoFpVqccOzjmn9jVyv0YaQ== 0000841074-97-000001.txt : 19970515 0000841074-97-000001.hdr.sgml : 19970515 ACCESSION NUMBER: 0000841074-97-000001 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970331 FILED AS OF DATE: 19970514 SROS: NYSE FILER: COMPANY DATA: COMPANY CONFORMED NAME: COAST SAVINGS FINANCIAL INC CENTRAL INDEX KEY: 0000841074 STANDARD INDUSTRIAL CLASSIFICATION: SAVINGS INSTITUTION, FEDERALLY CHARTERED [6035] IRS NUMBER: 954196764 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 001-10264 FILM NUMBER: 97604199 BUSINESS ADDRESS: STREET 1: 1000 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90017-2457 BUSINESS PHONE: 2133622000 MAIL ADDRESS: STREET 1: 1000 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90017-5624 10-Q 1 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 EX-11 2 EXHIBIT 11.1 COAST SAVINGS FINANCIAL, INC. COMPUTATION OF EARNINGS PER SHARE Three Months Ended March 31, 1997 1996 Fully Fully Primary Diluted Primary Diluted (In thousands except per share amounts) Net earnings applicable to common stock and common stock equivalents ("CSEs") $12,258 $12,258 $ 9,502 $ 9,502 Weighted average common shares outstanding 18,588 18,588 18,583 18,583 Dilutive CSEs on stock options 860 860 585 601 Weighted average shares 19,448 19,448 19,168 19,184 Net earnings per share of common stock $.63 $.63 $.50 $.50 EX-27 3
9 3-MOS DEC-31-1997 MAR-31-1997 133,031 0 66,000 0 303,601 1,931,700 1,927,199 6,119,708 84,000 8,797,075 6,493,244 1,582,153 129,358 156,402 0 0 186 435,732 8,797,075 117,477 5,578 32,025 155,080 72,675 99,361 55,719 8,000 (46) 38,968 21,135 12,258 0 0 12,258 .63 .63 2.67 81,799 9,134 0 0 93,000 9,000 1,000 93,000 93,000 0 0
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