-----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, Nvqq1naCjepkno3VSCxc9hZwtwv+LLzRytFD3A/5bfwtN0oJCMwXjMaw94vr5Vs9 pCZtXOZPn3XC3Dfnh7TKrA== 0000841074-97-000005.txt : 19971117 0000841074-97-000005.hdr.sgml : 19971117 ACCESSION NUMBER: 0000841074-97-000005 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19970930 FILED AS OF DATE: 19971114 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: SEC FILE NUMBER: 001-10264 FILM NUMBER: 97720663 BUSINESS ADDRESS: STREET 1: 1000 WILSHIRE BLVD CITY: LOS ANGELES STATE: CA ZIP: 90017-2457 BUSINESS PHONE: 2133622000 MAIL ADDRESS: STREET 1: 8433 FALLBROOK AVENUE CITY: WEST HILLS STATE: CA ZIP: 91304 10-Q 1 SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q/A No. 1 (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, 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 Section 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 6, 1997, the registrant had 18,631,297 shares of common stock, $.01 par value, outstanding. The shares of common stock represents 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, 1997 and December 31, 1996. Consolidated Statement of Operations for the Three Months Ended September 30, 1997 and 1996, and for the Nine Months Ended September 30, 1997 and 1996. Consolidated Statement of Cash Flows for the Nine Months Ended September 30, 1997 and 1996. Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
September 30, December 31, 1997 1996 ------------- ------------ (In thousands) Assets - ------ Cash and due from banks $ 124,356 $ 138,861 Federal funds sold and other short term investments 333,429 198,795 Investment securities held to maturity (fair value of $34.6 million and $36.0 million) 34,434 35,833 Loans receivable, net 5,978,735 5,749,985 Loans receivable held for sale, at the lower of cost or fair value (fair value of $92.3 million and $109.6 million) 89,587 106,122 Mortgage-backed securities held to maturity (fair value of $1.79 billion and $1.74 billion) 1,780,121 1,731,268 Mortgage-backed securities available for sale, at fair value 288,202 312,002 Real estate held for sale 46,886 41,259 Federal Home Loan Bank stock 99,512 90,882 Land and depreciable assets 86,588 95,010 Interest receivable and other assets 173,122 198,697 Goodwill 5,441 6,238 ---------- ---------- $9,040,413 $8,704,952 ========== ========== Liabilities and Stockholders' Equity - ------------------------------------ Liabilities: Deposits 6,445,844 6,356,448 Federal Home Loan Bank advances 1,394,900 1,104,200 Other borrowings 537,417 643,521 Other liabilities 127,003 115,508 Income taxes 9,091 4,747 Capital notes 56,185 55,997 ---------- ---------- 8,570,440 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 18,644,177 and 18,584,717 shares issued and outstanding at September 30, 1997, and December 31, 1996, respectively 186 186 Additional paid-in capital 266,673 265,055 Unrealized gain on securities available for sale, net of taxes 1,470 2,778 Retained earnings 201,644 156,512 ---------- ---------- 469,973 424,531 ---------- ---------- $9,040,413 $8,704,952 ========== ==========
See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENT OF OPERATIONS
Three Months Ended Nine Months Ended September 30, September 30, ------------------- ------------------- 1997 1996 1997 1996 -------- -------- -------- -------- (In thousands except per share amounts) Interest income: Loans receivable $121,188 $112,684 $358,511 $335,159 Mortgage-backed securities 33,145 31,651 97,016 99,108 Investment securities 6,299 5,398 17,892 15,624 -------- -------- -------- -------- 160,632 149,733 473,419 449,891 -------- -------- -------- -------- Interest expense: Deposits 73,945 71,070 220,162 212,737 Borrowings 30,526 25,931 87,011 76,118 -------- -------- -------- -------- 104,471 97,001 307,173 288,855 -------- -------- -------- -------- Net interest income 56,161 52,732 166,246 161,036 Provision for loan losses 6,000 10,000 21,000 30,000 -------- -------- -------- -------- Net interest income after provision for loan losses 50,161 42,732 145,246 131,036 -------- -------- -------- -------- Noninterest income: Loan servicing fees and charges 2,914 3,087 8,929 9,671 Other 9,711 9,355 28,508 28,187 -------- -------- -------- -------- 12,625 12,442 37,437 37,858 -------- -------- -------- -------- Noninterest expense: Compensation and benefits 22,153 15,097 55,796 47,498 Office occupancy, net 8,672 10,064 27,955 32,417 Federal deposit insurance premiums 1,472 4,013 4,413 12,825 Other general and adminis- trative expenses 9,684 9,929 28,234 27,762 -------- -------- -------- -------- Total general and adminis- trative expenses 41,981 39,103 116,398 120,502 SAIF special assessment - 41,978 - 41,978 Real estate operations, net 1,189 433 3,192 3,373 Amortization of goodwill 258 271 797 824 -------- -------- -------- -------- 43,428 81,785 120,387 166,677 -------- -------- -------- -------- Earnings (loss) before income tax expense (benefit) 19,358 (26,611) 62,296 2,217 Income tax expense (benefit) (870) (10,511) 17,164 1,020 -------- -------- -------- -------- Net earnings (loss) $ 20,228 $(16,100) $ 45,132 $ 1,197 ======== ======== ======== ======== Net earnings (loss) per share of common stock: Primary $1.04 $(.87) $2.32 $.06 ===== ===== ===== ==== Fully diluted $1.03 $(.87) $2.30 $.06 ===== ===== ===== ====
See accompanying Notes to Consolidated Financial Statements. CONSOLIDATED STATEMENT OF CASH FLOWS
Nine Months Ended September 30, ------------------------- 1997 1996 ----------- --------- (In thousands) Cash flows from operating activities: Net earnings $ 45,132 $ 1,197 ----------- --------- Adjustments to reconcile net earnings to net cash provided by operating activities: Sale of loans held for sale 28,296 95,725 Increase in accrued expense - SAIF special assessment - 41,978 Provision for loan losses 21,000 30,000 Net increase in accounts payable 20,400 14,888 Net decrease in accounts receivable 10,604 2,196 Deferred income tax expense 11,338 1,020 Loans originated for sale, net of refinances and principal payments (80,057) (102,814) Other (6,471) (19,588) ----------- --------- Total adjustments 5,110 63,405 ----------- --------- Net cash provided by operations 50,242 64,602 ----------- --------- Cash flows from investing activities: Loans originated for investment, net of refinances (1,107,869) (815,137) Repurchase of loans (12,152) - Sale of loans receivable 174,662 - Principal repayments on loans 560,436 384,018 Principal repayments on mortgage-backed securities ("MBS") held to maturity 164,710 168,196 Principal repayments on MBS available for sale 21,876 27,061 Maturities and principal repayments on investment securities 19,043 30,043 Net decrease (increase) in short term investment securities (2,478) 4,133 Purchase of investment securities (15,165) (29,152) Purchase of land and depreciable assets, net (82) (12,909) Sale of real estate held for sale 20,841 32,092 Purchase of FHLB stock (4,358) - ----------- --------- Net cash used by investing activities (180,536) (211,655) ----------- ---------
Continued CONSOLIDATED STATEMENT OF CASH FLOWS
Continued Nine Months Ended September 30, ----------- --------- 1997 1996 ----------- --------- (In thousands) Cash flows from financing activities: Net increase in deposits 159,422 117,047 Net increase in FHLB advances 290,700 47,750 Net (decrease) increase in short-term borrowings (131,291) 73,708 Deposits of branches sold, net (70,026) - Common stock options exercised 1,618 15 ----------- ---------- Net cash provided by financing activities 250,423 238,520 ----------- ---------- Net increase in cash and cash equivalents 120,129 91,467 Cash and cash equivalents at beginning of year 337,656 150,111 ----------- ---------- Cash and cash equivalents at end of period $ 457,785 $ 241,578 =========== ========== Supplemental disclosures of cash flow information: Cash payments of interest $ 111,185 $ 108,436 Cash payments of income taxes, net 30 1,391 Supplemental schedule of noncash investing and financial activities: Interest credited to deposits 194,494 183,055 Loans exchanged for MBS, net 209,189 1,119 Additions to loans resulting from the sale of real estate acquired in settlement of loans 30,088 38,418 Additions to real estate, acquired in settlement of loans 65,229 98,006 Decrease in unrealized gain on securities available for sale, net of taxes (1,308) (5,320)
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 nine months ended September 30, 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 as of September 30, 1997, or results of operations for the nine-month period then ended, resulting from the adoption of SFAS No. 125. 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 (loss) per share would have been $1.09 and $(.87) NOTES TO CONSOLIDATED FINANCIAL STATEMENTS for the three months ended September 30, 1997 and 1996, respectively, and diluted earnings (loss) per share would have been $1.06 and $(.87) for the same periods, respectively. Basic earnings per share would have been $2.43 and $.06 for the nine months ended September 30, 1997 and 1996, respectively, and diluted earnings per share would have been $2.36 and $.06 for the same periods. 4. The composition of cash and cash equivalents is as set forth in the table below. September 30, -------------------- 1997 1996 -------- ------- (In thousands) Cash and due from banks $124,356 $140,236 Federal funds sold 264,000 34,000 Repurchase agreements 60,000 60,000 Commercial paper 9,429 7,342 -------- -------- $457,785 $241,578 ======== ======== 5. On October 6, 1997, H. F. Ahmanson & Company ("Ahmanson"), the parent company of Home Savings of America, FSB, and the Company jointly announced the signing of a definitive agreement for Ahmanson to acquire the Company. Under the terms of the agreement, the Company's stockholders will receive, on a one-for-one bases, in a tax-free exchange, 0.8082 shares of Ahmanson common stock for each share of the Company's common stock owned. In addition, the Company's stockholders will receive tradable certificates representing the right to receive an amount equal to 100 percent of any after-tax proceeds (net of expenses) from the Company's pending "goodwill" litigation against the U. S. government on the same one-for-one basis. The acquisition is contingent upon regulatory approval and stockholders' approval, and is expected to be completed in the first quarter of 1998. 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, 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 September 30, 1997, Coast operated 91 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, 1997, were $45.1 million compared to net earnings of $1.2 million for the first nine months of 1996. The increase in net earnings from 1996 to 1997 was primarily due to the increase in net interest income, the reduction in the provision for loan losses, and the $42.0 million SAIF special assessment in 1996. 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 September 30, 1997 Versus Three Months Ended September 30, 1996 ------------------------------------ Amount of increase (decrease) due to change in: ------------------------------------ Average Average Average Rate Volume Rate/Vol. Total ------- ------- --------- ----- (In thousands) Interest Income: Loans $ 857 $ 7,667 $ (20) $ 8,504 MBS (199) 1,728 (35) 1,494 Investment securities (19) 925 (5) 901 ------- ------- ----- ------- Total interest income 639 10,320 (60) 10,899 ------- ------- ----- ------- Interest Expense: Deposits - 2,795 80 2,875 Borrowings 1,232 3,217 146 4,595 ------- ------- ----- ------- Total interest expense 1,232 6,012 226 7,470 ------- ------- ----- ------- Change in net interest income $ (593) $ 4,308 $(286) $ 3,429 ======= ======= ===== =======
Interest income for the quarter ended September 30, 1997, increased by $10.9 million from the amount reported for the third quarter of 1996. This was caused by an increase in the average balance of interest-earning assets totaling approximately $562 million, and by an increase in the average rate earned on such assets of 3 basis points, to 7.44%. Interest expense recorded during the third quarter of 1997 increased by $7.5 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 $463 million, and an increase in the average rate paid on such liabilities of 9 basis points, to 4.96%. The increase in the average balance of interest-bearing liabilities included an increase in the average balance of borrowings of approximately $219 million and an increase in the average balance of deposits of approximately $244 million.
Nine Months Ended September 30, 1997 Versus Nine Months Ended September 30, 1996 --------------------------------------- Amount of increase (decrease) due to change in: --------------------------------------- Average Average Average Rate Volume Rate/Vol. Total -------- ------- --------- ----- (In thousands) Interest Income: Loans $ (9,205) $33,464 $ (907) $23,352 MBS (1,542) (595) 45 (2,092) Investment securities - 2,276 (8) 2,268 -------- ------- ------- ------- Total interest income (10,747) 35,145 (870) 23,528 -------- ------- ------- ------- Interest Expense: Deposits (466) 7,722 169 7,425 Borrowings 766 10,011 116 10,893 -------- ------- ------- ------- Total interest expense 300 17,733 285 18,318 -------- ------- ------- ------- Change in net interest income $(11,047) $17,412 $(1,155) $ 5,210 ======== ======= ======= =======
Interest income for the nine months ended September 30, 1997, increased $23.5 million from the amount reported during the corresponding period of 1996. This increase resulted from an increase in the average balance of interest-earning assets of approximately $599 million, partially offset by a decrease in the rate earned on interest-earning assets of 16 basis points to 7.33%. Interest expense for the nine months ended September 30, 1997 increased $18.3 million from the amount recorded in the similar period of 1996, primarily due to an increase in the average balance of interest-bearing liabilities. Average balances of interest-bearing liabilities increased by approximately $449 million, comprised of an increase in the average balance of deposits of approximately $225 million and an increase in the average balance of borrowings totaling approximately $224 million. The average rate paid on interest- bearing liabilities increased by 3 basis point to 4.90% from the 1996 period to the 1997 period. NONINTEREST EXPENSE. Noninterest expense for the nine months ended September 30, 1997, decreased by $46.3 million from the corresponding period of 1996. The decrease was primarily due to decreases of $8.4 million in federal deposit insurance premiums and $4.5 million in office occupancy, net and the $42.0 million SAIF special assessment in 1996, partially offset by an increase of $8.3 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, and the reduction in occupancy cost was largely due to the renegotiation or termination of various facilities-related leases in recent periods. The increase in the latest quarter's compensation expense was primarily due to a $5.8 million charge to reflect the increased liability associated with the Company's stock performance-based incentive plans as a result of the substantial increase in the Company's stock price associated with the proposed merger with Ahmanson. Income taxes. Income tax expense of $17.2 million and $1.0 million was recorded for the first nine 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 28% and 46% for the first nine months of 1997 and 1996, respectively. The lower effective income tax rate for the 1997 period resulted from the Company's third quarter review of its overall tax position in conjunction with the completion of audits by taxing authorities. Based on this review, the Company determined that certain tax liabilities accrued in prior years were no longer required. Accordingly, the provision for income taxes has been reduced by $9.0 million for the third quarter and the nine months ended September 30, 1997. 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 financial 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 Coast's financial assets and financial liabilities as of September 30, 1997. The table also reports the maturity gap between Coast's repricing or maturing financial assets and financial liabilities. The interest rate sensitivity of Coast's financial assets and financial 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 $ 124 $ - $ - $ - $ 124 Investment securities 364 - - 3 367 Loans and MBS: ARMs 7,747 241 - - 7,988 Fixed rate 49 53 43 3 148 FHLB stock 100 - - - 100 ------ ---- ---- --- ------ Total $8,384 $294 $ 43 $ 6 $8,727 ====== ==== ==== === ====== Interest-bearing liabilities: Deposits: Checking accounts $ 870 $ - $ - $ - $ 870 Money market accounts 612 - - - 612 Certificate of deposits 4,780 172 12 - 4,964 Borrowings: FHLB advances 1,370 25 - - 1,395 Other 480 57 56 - 593 ------ ---- ---- --- ------ Total 8,112 254 68 - 8,434 ------ ---- ---- --- ------ Maturity gap $ 272 $ 40 $(25) $ 6 $ 293 ====== ==== ==== === ====== Cumulative maturity gap $ 272 $312 $287 $293 $ 293 ====== ==== ==== === ====== Cumulative maturity gap as a percentage of total assets 3% 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. In recent years, Coast's liability acquisition choices and retail deposit composition and pricing have generally tracked those of its major competitors, with the result that increases in Coast's cost of funds are generally accompanied by increases in the Eleventh District cost of funds index ("COFI") and, correspondingly, in the yields earned on its COFI-indexed 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. The majority of ARMs originated by Coast in recent years have been COFI-based products. As of September 30, 1997, Coast had $5.63 billion (92%) of loans and $1.86 billion (90%) of MBS tied to COFI in its loan and MBS portfolios, which totaled $6.15 billion and $2.07 billion, respectively. Coast originates other ARM products tied to the London Interbank Offered Rate ("LIBOR") and U.S. Treasury rates, and Coast's portfolios included such loans and MBS of $394.0 million and $186.0 million, respectively, at September 30, 1997. Coast originated $1.33 billion and $1.02 billion of ARMs during the nine month periods ended September 30, 1997 and 1996, respectively. At September 30, 1997, ARMs and adjustable rate MBS totaled $6.03 billion and $2.04 billion, respectively, or a combined 98% of Coast's total loans and MBS. Management determines the appropriate portfolio designation of loans, MBS and investment securities at the time of acquisition. If management has the 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, 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 loans or MBS 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 loans. The marketability of loans and MBS depends on the purchasers' investment limitations, general market and competitive conditions, mortgage loan demand and other factors. During the nine months ended September 30, 1997, Coast sold $200.4 million of loans. 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.
September 30, 1997 December 31, 1996 ------------------ ------------------- Percent Percent Balance of Total Balance of Total ------- -------- ------- -------- (Dollars in thousands) Nonaccrual Loans: Single family residential $ 45,433 41% $56,740 46% Multifamily residential 14,750 13 19,295 16 Commercial and other 4,544 4 6,769 5 -------- --- -------- --- 64,727 58 82,804 67 -------- --- -------- --- Foreclosed real estate owned: Single family residential 22,916 20 22,708 18 Multifamily residential 19,793 18 6,324 5 Commercial and other 4,177 4 12,227 10 -------- --- -------- --- 46,886 42 41,259 33 -------- --- -------- --- Nonperforming assets $111,613 100% 124,063 100% ======== === ======== === Ratio of nonperforming assets to total assets 1.23% 1.43%
As of September 30, 1997, Coast's ratio of Nonaccrual Loans to total loans decreased to 1.07% from 1.41% at December 31, 1996, and its ratio of nonperforming assets to total assets decreased to 1.23% 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 $94.8 million at September 30, 1997, $116.2 million at December 31, 1996, and $141.3 million at September 30, 1996. For the nine months ended September 30, 1997 and 1996, the average investment in impaired loans was $99.5 million and $140.3 million, respectively, and interest income on such loans totaled $5.0 million and $2.1 million for the same periods, respectively. Interest income on impaired loans which are performing is generally recognized on the accrual basis. As of September 30, 1997 and December 31, 1996, Nonaccrual Loans included $25.0 million and $42.0 million, respectively, of impaired loans. Impaired loans at September 30, 1997, included $75.0 million of loans for which valuation allowances of $13.1 million had been established and $32.9 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 none and $1.2 million of recoveries of previously established allowances on impaired loans during the nine months ended September 30, 1997 and 1996, respectively. At September 30, 1997, Coast had letters of credit outstanding aggregating $356.4 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 extending credit on real estate loans. During May 1997, Coast foreclosed on the underlying collateral property of a letter of credit in default and has included its $13.3 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 its examination process, periodically reviews Coast's GVA and may require Coast to establish additional allowances based on its judgments during its examination. At September 30, 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 nine months ended September 30, 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 17 4 - 21 Losses charged (17) (4) - (21) ---- --- --- ---- GVA allocation at September 30, 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 September 30, 1997, were 5.13% and 4.72%, 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, 1997 and 1996, principal repayments on loans and MBS amounted to $760.2 million and $595.6 million, respectively, and proceeds from loan and MBS sales totaled $203.0 million and $95.7 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 $1.20 billion and $934.3 million for these two periods, respectively. At September 30, 1997, there were commitments to sell $2.1 million of loans, no commitments to sell MBS or investment securities and there were no commitments to purchase loans, MBS or investment securities. At September 30, 1997, outstanding letters of credit totaled $356.4 million. Scheduled repayments of FHLB of San Francisco advances for the twelve months ending September 30, 1998, totaled $1.37 billion. For the nine months ended September 30, 1997 and 1996, Coast experienced net increases in deposits of $89.4 million and $117.0 million, respectively. These increases are primarily attributable to Coast's focused efforts to market its transaction accounts, which resulted in increases of $87.4 million and $105.4 million in checking account balances during the first nine months of 1997 and 1996, respectively, partially offset in 1997 by a $70.0 million reduction in deposits resulting from branch sales. 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, 1997, the amount of additional credit available from the FHLB of San Francisco was approximately $1.43 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 defined in the regulations). Second, the core capital requirement currently mandates that core capital (as defined in the regulations) be at least 3% of adjusted total assets (as defined in the regulations). Third, the risk-based capital requirement currently mandates that core capital plus supplementary capital (as defined in the regulations) be at least 8% of risk-adjusted assets (as defined in the regulations). The following table reflects, in both dollars and ratios, Coast's regulatory capital positions as of September 30, 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 $626 11.36% $441 8.00% $185 3.36% Core 501 5.57 270 3.00 231 2.57 Tangible 501 5.57 135 1.50 366 4.07
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" and which require, subject to certain exceptions, the appropriate federal banking agency to take prompt corrective action with respect to an institution which becomes "undercapitalized" and to take additional action if the institution becomes "significantly undercapitalized" or "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). At September 30, 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, formerly 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." Since December 31, 1996, Coast has maintained reserves 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 September 30, 1997, the amount of those reserves was approximately $103 million and the amount of the associated, unrecognized deferred tax liability at September 30, 1997, was approximately $36 million. Under certain conditions described in the preceding paragraph, this potential tax liability could be triggered in the future which would result in the need for a tax liability accrual at that time. 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 to what damages might be awarded to Coast. There are various actions pending against Coast or the Company for which, 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 be 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, 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 September 30, --------------------------------------- 1997 1996 ----------------- ------------------- Fully Fully Primary Diluted Primary Diluted ------- ------- ------- ------- (In thousands except per share amounts) Net earnings (loss) applicable to common stock and common stock equivalents ("CSEs") $20,228 $20,228 $(16,100) $(16,100) ======= ======= ======== ======== Weighted average common shares outstanding 18,630 18,630 18,584 18,584 Dilutive CSEs on stock options 913 980 - - ------- ------- -------- -------- Weighted average shares 19,543 19,610 18,584 18,584 ======= ======= ======== ======== Net earnings (loss) per share of common stock $1.04 $1.03 $(.87) $(.87) ===== ===== ===== =====
Nine Months Ended September 30, ------------------------------------- 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") $45,132 $45,132 $ 1,197 $ 1,197 ======= ======= ======= ======= Weighted average common shares outstanding 18,607 18,607 18,583 18,583 Dilutive CSEs on stock options 858 980 599 607 ------- ------- ------- ------- Weighted average shares 19,465 19,587 19,182 19,190 ======= ======= ======= ======= Net earnings per share of common stock $2.32 $2.30 $.06 $.06 ===== ===== ==== ====
EX-27 3
9 9-MOS DEC-31-1997 SEP-30-1997 124,356 0 264,000 0 288,202 1,983,496 1,992,734 6,152,322 84,000 9,040,413 6,445,844 1,806,863 136,094 181,639 0 0 186 469,787 9,040,413 358,511 17,892 97,016 473,419 220,162 307,173 166,246 21,000 57 120,387 62,296 45,132 0 0 45,132 2.32 2.30 2.60 64,727 11,550 0 0 93,000 25,000 4,000 93,000 93,000 0 0
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