<PAGE>
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 June 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 August 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.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
--------------------
Consolidated Statement of Financial Condition at June 30, 1997
and December 31, 1996.
Consolidated Statement of Operations for the Three Months
Ended June 30, 1997 and 1996, and for the Six Months Ended
June 30, 1997 and 1996.
Consolidated Statement of Cash Flows for the Six Months Ended
June 30, 1997 and 1996.
Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
<TABLE>
<CAPTION>
June 30, December 31,
1997 1996
------------ ------------
(In thousands)
Assets
- ------
<S> <C> <C>
Cash and due from banks $ 127,884 $ 138,861
Federal funds sold and other short
term investments 316,041 198,795
Investment securities held to
maturity (fair value of $39.2
million and $36.0 million) 39,076 35,833
Loans receivable, net 6,002,202 5,749,985
Loans receivable held for sale, at
the lower of cost or fair value
(fair value of $68.3 million
and $109.6 million) 66,632 106,122
Mortgage-backed securities held to
maturity (fair value of $1.84
billion and $1.74 billion) 1,839,260 1,731,268
Mortgage-backed securities available
for sale, at fair value 294,551 312,002
Real estate held for sale 49,112 41,259
Federal Home Loan Bank stock 98,063 90,882
Land and depreciable assets 93,313 95,010
Interest receivable and other assets 170,910 198,697
Goodwill 5,699 6,238
---------- ----------
$9,102,743 $8,704,952
========== ==========
Liabilities and Stockholders' Equity
- ------------------------------------
Liabilities:
Deposits $6,412,740 $6,356,448
Federal Home Loan Bank advances 1,416,300 1,104,200
Other borrowings 655,049 643,521
Other liabilities 109,195 115,508
Income taxes 5,382 4,747
Capital notes 56,122 55,997
---------- ----------
8,654,788 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
18,615,847 and 18,584,717 shares
issued and outstanding at June 30,
1997, and December 31, 1996,
respectively 186 186
Additional paid-in capital 265,635 265,055
Unrealized gain on securities
available for sale, net of taxes 718 2,778
Retained earnings 181,416 156,512
---------- ----------
447,955 424,531
---------- ----------
$9,102,743 $8,704,952
========== ==========
</TABLE>
See accompanying Notes to Consolidated Financial Statements.<PAGE>
<PAGE>
CONSOLIDATED STATEMENT OF OPERATIONS
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
------------------- -------------------
1997 1996 1997 1996
-------- -------- -------- --------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Interest income:
Loans receivable $119,846 $111,307 $237,323 $222,475
Mortgage-backed securities 31,846 32,833 63,871 67,457
Investment securities 6,015 5,036 11,593 10,226
-------- -------- -------- --------
157,707 149,176 312,787 300,158
-------- -------- -------- --------
Interest expense:
Deposits 73,542 70,381 146,217 141,667
Borrowings 29,799 24,767 56,485 50,187
-------- -------- -------- --------
103,341 95,148 202,702 191,854
-------- -------- -------- --------
Net interest income 54,366 54,028 110,085 108,304
Provision for loan losses 7,000 10,000 15,000 20,000
-------- -------- -------- --------
Net interest income after
provision for loan losses 47,366 44,028 95,085 88,304
-------- -------- -------- --------
Noninterest income:
Loan servicing fees and charges 2,883 3,126 6,015 6,584
Other 9,545 9,258 18,797 18,832
-------- -------- -------- --------
12,428 12,384 24,812 25,416
-------- -------- -------- --------
Noninterest expense:
Compensation and benefits 16,005 15,993 33,643 32,401
Office occupancy, net 9,409 12,430 19,283 22,353
Federal deposit insurance premiums 1,477 4,391 2,941 8,812
Other general and administrative
expenses 9,691 9,012 18,550 17,833
-------- -------- -------- --------
Total general and administrative
expenses 36,582 41,826 74,417 81,399
Real estate operations, net 1,140 1,318 2,003 2,940
Amortization of goodwill 269 277 539 553
-------- -------- -------- --------
37,991 43,421 76,959 84,892
-------- -------- -------- --------
Earnings before income tax expense 21,803 12,991 42,938 28,828
Income tax expense 9,157 5,196 18,034 11,531
-------- -------- -------- --------
Net earnings $ 12,646 $ 7,795 $ 24,904 $ 17,297
======== ======== ======== ========
Net earnings per share of common stock:
Primary $ .65 $.41 $1.28 $.90
===== ==== ===== ====
Fully diluted $ .65 $.41 $1.28 $.90
===== ==== ===== ====
</TABLE>
See accompanying Notes to Consolidated Financial Statements.<PAGE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 24,904 $ 17,297
--------- ---------
Adjustments to reconcile net earnings to net
cash provided by operating activities:
Proceeds from the sale of loans held for
sale 19,035 89,128
Deferred income tax expense 16,272 7,005
Provision for loan losses 15,000 20,000
Net decrease (increase) in accounts receivable 11,296 (4,889)
Net increase in accounts payable 6,198 15,042
Loans originated for sale, net of
refinances and principal payments (53,279) (70,822)
Other (7,528) (3,973)
--------- ---------
Total adjustments 6,994 51,491
--------- ---------
Net cash provided by operations 31,898 68,788
--------- ---------
Cash flows from investing activities:
Loans originated for investment, net of
refinances (759,634) (451,117)
Repurchase of loans (8,988) (13,666)
Principal repayments on loans 369,562 260,251
Principal repayments on mortgage-backed
securities ("MBS") held to maturity 103,496 115,924
Principal repayments on MBS available for
sale 13,142 19,170
Maturities and principal repayments on
investment securities 4,031 29
Net decrease in short term investment
securities 2,838 280
Purchase of investment securities (10,110) (15,102)
Purchase of land and depreciable assets, net (4,430) (10,332)
Purchase of FHLB stock (4,358) -
Sale of real estate held for sale 13,558 23,653
--------- ---------
Net cash used by investing activities (280,893) (70,910)
--------- ---------
</TABLE>
Continued<PAGE>
<PAGE>
CONSOLIDATED STATEMENT OF CASH FLOWS
Continued
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-----------------------
1997 1996
--------- ---------
(In thousands)
<S> <C> <C>
Cash flows from financing activities:
Net increase in deposits 77,708 84,958
Deposits sold, net (21,416) -
Net increase (decrease) in FHLB advances 312,100 (203,250)
Net increase (decrease) in short-term borrowings (13,708) 162,587
Common stock options exercised 580 15
--------- ---------
Net cash provided by financing activities 355,264 44,310
--------- ---------
Net increase in cash and cash equivalents 106,269 42,188
Cash and cash equivalents at beginning of year 337,656 150,111
--------- ---------
Cash and cash equivalents at end of period $ 443,925 $ 192,299
========= ==========
Supplemental disclosures of cash flow
information:
Cash payments of interest $ 73,335 $ 71,503
Cash payments of income taxes, net 30 1,361
Supplemental schedule of noncash investing
and financial activities:
Interest credited to depositors' accounts 128,575 121,556
Loans exchanged for MBS, net 209,189 -
Additions to loans resulting from the
sale of real estate acquired in
settlement of loans 22,377 19,463
Additions to real estate acquired in
settlement of loans 50,101 74,743
Decrease of unrealized gain on securities
available for sale, net of taxes (2,060) (4,863)
</TABLE>
See accompanying Notes to Consolidated Financial Statements.
<PAGE>
<PAGE>
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 six months
ended June 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 June 30, 1997, or
results of operations for the six-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 <PAGE>
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 $.68 and $.42 for the
three months ended June 30, 1997 and 1996, respectively,
and diluted earnings per share would have been $.66 and
$.41 for the same periods, respectively. Basic earnings
per share would have been $1.34 and $.93 for the six months
ended June 30, 1997 and 1996, respectively, and diluted
earnings per share would have been $1.30 and $.91 for the
same periods.
4. The composition of cash and cash equivalents is as set
forth in the table below.
<TABLE>
<CAPTION>
June 30,
--------------------
1997 1996
-------- --------
(In thousands)
<S> <C> <C>
Cash and due from banks $127,884 $153,910
Repurchase agreements 160,000 -
Federal funds sold 150,000 35,000
Commercial paper 6,041 3,389
-------- --------
$443,925 $192,299
======== ========
/TABLE
<PAGE>
<PAGE>
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 June 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 June 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 six months ended June 30, 1997, were
$24.9 million compared to net earnings of $17.3 million for the
first six 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
reduction in noninterest expense.
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).
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Three Months Ended
June 30, 1997
Versus
Three Months Ended
June 30, 1996
-----------------------------------
Amount of increase
(decrease) due to change in:
-----------------------------------
Average Average Average
Rate Volume Rate/Vol. Total
------- ------- --------- -----
(In thousands)
<S> <C> <C> <C> <C>
Interest Income:
Loans $(2,357) $11,058 $(162) $8,539
MBS 205 (1,218) 26 (987)
Investment securities 437 502 40 979
------- ------- ----- ------
Total interest income (1,715) 10,342 (96) 8,531
------- ------- ----- ------
Interest Expense:
Deposits 466 2,670 25 3,161
Borrowings 1,253 3,588 191 5,032
------- ------- ----- ------
Total interest expense 1,719 6,258 216 8,193
------- ------- ----- ------
Change in net interest income $(3,434) $ 4,084 $(312) $ 338
======= ======= ===== ======
</TABLE>
Interest income for the quarter ended June 30, 1997,
increased by $8.5 million from the amount reported for the
second quarter of 1996. This was caused by an increase in the
average balance of interest-earning assets totaling
approximately $512 million, partially offset by a decrease in
the average rate earned on such assets of 5 basis points, to
7.44%.
Interest expense recorded during the second quarter of 1997
increased by $8.2 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 $478 million, and an increase in the average
rate paid on such liabilities of 11 basis points, to 4.94%. The
increase in the average balance of interest-bearing liabilities
included an increase in the average balance of borrowings of
approximately $242 million and an increase in the average
balance of deposits of approximately $236 million.
<PAGE>
<PAGE>
<TABLE>
<CAPTION>
Six Months Ended
June 30, 1997
Versus
Six Months Ended
June 30, 1996
--------------------------------------
Amount of increase
(decrease) due to change in:
--------------------------------------
Average Average Average
Rate Volume Rate/Vol. Total
------- ------- --------- -----
(In thousands)
<S> <C> <C> <C> <C>
Interest Income:
Loans $(4,684) $20,135 $(603) $14,848
MBS (523) (3,080) 17 (3,586)
Investment securities 241 1,100 26 1,367
------- ------- ----- -------
Total interest income (4,966) 18,155 (560) 12,629
------- ------- ----- -------
Interest Expense:
Deposits (310) 4,923 (63) 4,550
Borrowings 167 6,094 37 6,298
------- ------- ----- -------
Total interest expense (143) 11,017 (26) 10,848
------- ------- ----- -------
Change in net interest income $(4,823) $ 7,138 $(534) $ 1,781
======= ======= ===== =======
</TABLE>
Interest income for the six months ended June 30, 1997,
increased $12.6 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 $443 million, partially offset by a decrease in
the rate earned on interest-earning assets of 10 basis points to
7.43%.
Interest expense for the six months ended June 30, 1997
increased $10.8 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 $419
million, comprised of an increase in the average balance of
deposits of approximately $216 million and an increase in the
average balance of borrowings totaling approximately $203
million. The average rate paid on interest-bearing liabilities
increased by 1 basis point to 4.88% from the 1996 period to the
1997 period.
<PAGE>
Noninterest expense. Noninterest expense for the six
months ended June 30, 1997, decreased by $7.9 million from the
corresponding period of 1996. The decrease was primarily due to
decreases of $5.9 million in federal deposit insurance premiums
and $3.1 million in office occupancy, 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, and the
reduction in occupancy cost was largely due to the renegotiation
or termination of various facilities-related leases in recent
periods.
Income taxes. Income tax expense of $18.0 million and
$11.5 million was recorded for the first six 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 six 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).
<PAGE>
<PAGE>
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 June 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.
<TABLE>
<CAPTION>
Over Over
One Five Over
Within to Five to Ten Ten
One Year Years Years Years Total
-------- ------- ------ ----- ----
(Dollars in millions)
<S> <C> <C> <C> <C> <C>
Interest-earning assets:
Cash and investment securities:
Cash and due from banks $ 128 $ - $ - $ - $ 128
Investment securities 342 10 - 3 355
Loans and MBS:
ARMs 7,788 242 - - 8,030
Fixed rate 49 56 53 15 173
FHLB stock 98 - - - 98
------ ----- ---- --- ------
Total $8,405 $ 308 $ 53 $18 $8,784
====== ===== ==== === ======
Interest-bearing liabilities:
Deposits:
Checking accounts $ 862 $ - $ - $ - $ 862
Money market accounts 595 - - - 595
Certificate of deposits 4,647 293 16 - 4,956
Borrowings:
FHLB advances 1,391 25 - - 1,416
Other 598 57 56 - 711
------ ----- ---- --- ------
Total $8,093 $ 375 $ 72 $ - $8,540
====== ===== ==== === ======
Maturity gap $ 312 $ (67) $(19) $ 18 $ 244
====== ===== ==== === ======
Cumulative maturity gap $ 312 $ 245 $226 $244 $ 244
====== ===== ==== === ======
Cumulative maturity gap as a
percentage of total assets 3% 3% 2% 3% 3%
== == == == ==
</TABLE>
<PAGE>
<PAGE>
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 June 30, 1997, Coast had
$5.49 billion (89%) of loans and $1.91 billion (89%) of MBS tied
to COFI in its loan and MBS portfolios, which totaled $6.15
billion and $2.13 billion, respectively. Coast originates other
ARM products tied to the London Interbank Offered Rate ("LIBOR")
and U.S. Treasury rates and Coast's portfolio included such
loans and MBS of $521.7 million and $198.4 million,
respectively, at June 30, 1997. Coast originated $911.2 million
and $572.3 million of ARMs during the six month periods ended
June 30, 1997 and 1996, respectively. At June 30, 1997, ARMs
and adjustable rate MBS totaled $6.01 billion and $2.11 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.
<PAGE>
<PAGE>
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 six months ended June 30, 1997, Coast sold $16.5
million of 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.
<TABLE>
<CAPTION>
June 30, 1997 December 31, 1996
------------------ -------------------
Percent Percent
Balance of Total Balance of Total
------- -------- ------- -------
(Dollars in thousands)
<S> <C> <C> <C> <C>
Nonaccrual Loans:
Single family residential $ 52,031 41% $ 56,740 46%
Multifamily residential 20,253 16 19,295 16
Commercial and other 6,454 5 6,769 5
-------- --- -------- ---
78,738 62 82,804 67
-------- --- -------- ---
Foreclosed real estate owned:
Single family residential 23,413 18 22,708 18
Multifamily residential 21,061 16 6,324 5
Commercial and other 4,638 4 12,227 10
-------- --- -------- ---
49,112 38 41,259 33
-------- --- -------- ---
Nonperforming assets $127,850 100% $124,063 100%
======== === ======== ===
Ratio of nonperforming assets
to total assets 1.40% 1.43%
</TABLE>
As of June 30, 1997, Coast's ratio of Nonaccrual Loans to
total loans decreased to 1.30% from 1.41% at December 31, 1996,
and its ratio of nonperforming assets to total assets decreased
to 1.40% 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.
<PAGE>
<PAGE>
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
$104.2 million at June 30, 1997, $116.2 million at December 31,
1996, and $142.2 million at June 30, 1996. For the six months
ended June 30, 1997 and 1996, the average investment in impaired
loans was $108.3 million and $142.4 million, respectively, and
interest income on such loans totaled $3.5 million and $1.7
million for the same periods, respectively. Interest income on
impaired loans which are performing is generally recognized on
the accrual basis. As of June 30, 1997 and December 31, 1996,
nonaccrual loans included $26.7 million and $42.0 million,
respectively, of impaired loans.
Impaired loans at June 30, 1997, included $89.3 million of
loans for which valuation allowances of $17.6 million had been
established and $32.5 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 and
$1.2 million of recoveries of previously established allowances
on impaired loans during the six months ended June 30, 1997 and
1996, respectively.
At June 30, 1997, Coast had letters of credit outstanding
aggregating $356.6 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. During May 1997,
Coast foreclosed on the underlying collateral property of a
letter of credit in default and has included its $15 million
fair value in real estate held for sale.
<PAGE>
<PAGE>
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
reviews Coast's GVA and may require Coast to establish
additional allowances based on its judgments during its
examination.
At June 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 six months ended June 30, 1997.
<TABLE>
<CAPTION>
Commercial Off-
Residential Real Estate Balance
Real Estate Mortgage Sheet
Mortgage and Other Items Total
----------- ----------- ------- -----
(In millions)
<S> <C> <C> <C> <C>
GVA allocation at
December 31, 1996 $ 64 $20 $ 9 $ 93
Additions charged
to operations 12 3 - 15
Losses charged (12) (3) - (15)
---- --- --- ----
GVA allocation at
June 30, 1997 $ 64 $20 $ 9 $ 93
==== === === ====
</TABLE>
<PAGE>
<PAGE>
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 June 30, 1997,
were 5.13% and 4.56%, 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 six months
ended June 30, 1997 and 1996, principal repayments on loans and
MBS amounted to $497.1 million and $391.8 million,
respectively, and proceeds from loan and MBS sales totaled
$19.0 million and $89.1 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 $823.8
million and $532.2 million for these two periods, respectively.
At June 30, 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 June 30, 1997,
outstanding letters of credit totaled $356.6 million. Scheduled
repayments of FHLB of San Francisco advances for the twelve
months ending June 30, 1998, totaled $1.39 billion.
For the six months ended June 30, 1997 and 1996, Coast
experienced net increases in deposits of $56.3 million and $85.0
million, respectively. These increases are primarily
attributable to Coast's focused efforts to market its
transaction accounts, which resulted in increases of $79.8
million and $76.0 million in checking account balances during
the first half of 1997 and 1996, respectively, partially offset
in 1997 by a $21.4 million reduction in deposits resulting from
a branch sale.
<PAGE>
<PAGE>
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 June 30, 1997, the amount
of additional credit available from the FHLB of San Francisco
was approximately $1.29 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 June 30, 1997, the
minimum requirements at that date, and the amounts by which such
capital exceeded the required amounts.
<TABLE>
<CAPTION>
Minimum
Actual Requirements Excess
-------------- -------------- --------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in millions)
<S> <C> <C> <C> <C> <C> <C>
Risk-based $608 11.07% $439 8.00% $169 3.07%
Core 483 5.33 272 3.00 211 2.33
Tangible 483 5.33 136 1.50 347 3.83
</TABLE>
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
<PAGE>
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 June 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,
<PAGE>
<PAGE>
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 June 30, 1997, the amount of
those reserves was approximately $103 million and the amount of
the associated, unrecognized deferred tax liability at June 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.
<PAGE>
<PAGE>
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 $229 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 and 3 are not applicable or the answers are negative.
<PAGE>
<PAGE>
Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
---------------------------------------------------
On April 23, 1997, the Company held its Annual Meeting of
Stockholders (the "Annual Meeting"). At the Annual Meeting,
Robert L. Hunt II, Thomas V. McKernan, Jr. Keith W. Renken and
Harold B. Starkey, Jr. were each reelected to serve a three year
term on the Company's Board of Directors (the "Board") and the
appointment of KPMG Peat Marwick LLP to serve as the Company's
independent auditing firm for 1997 was approved. Set forth
below are the votes cast for or against, as well as the number
of abstentions, with respect to each nominee and matter voted
upon at the Annual Meeting.
Nominee or Matter For Against Abstain
- ----------------- ---------- ------- -------
Robert L. Hunt II 16,355,953 - 65,086
Thomas V. McKernan, Jr. 16,356,279 - 64,760
Keith W. Renken 16,354,227 - 66,812
Harold B. Starkey, Jr. 16,348,954 - 72,085
Appointment of KPMG
Peat Marwick LLP 16,391,631 11,679 17,729
In addition to the above nominees who were elected at the
Annual Meeting, Leon S. Angvire, John C. Argue, Ray Martin,
James P. Miscoll, Gerald D. Barrone, Joan Milke Flores and Jack
P. Libby continue to serve on the Board.
Item 5 is 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.
<PAGE>
<PAGE>
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: August 12, 1997
<PAGE>
<PAGE>
EXHIBIT INDEX
Exhibit Sequentially
Number Description Numbered Pages
- ------- ----------- --------------
11.1 Computation of Earnings Per Share
<PAGE>
EXHIBIT 11.1
COAST SAVINGS FINANCIAL, INC.
COMPUTATION OF EARNINGS PER SHARE
<TABLE>
<CAPTION>
Three Months Ended June 30,
-------------------------------------
1997 1996
----------------- -----------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Net earnings applicable to
common stock and common stock
equivalents ("CSEs") $12,646 $12,646 $ 7,795 $ 7,795
======= ======= ======= =======
Weighted average common
shares outstanding 18,603 18,603 18,583 18,583
Dilutive CSEs on stock options 829 889 606 614
------- ------- ------- -------
Weighted average shares 19,432 19,492 19,189 19,197
======= ======= ======= =======
Net earnings per share
of common stock $.65 $.65 $.41 $.41
==== ==== ==== ====
</TABLE>
<TABLE>
<CAPTION>
Six Months Ended June 30,
-------------------------------------
1997 1996
----------------- -----------------
Fully Fully
Primary Diluted Primary Diluted
------- ------- ------- -------
(In thousands except per share amounts)
<S> <C> <C> <C> <C>
Net earnings applicable to
common stock and common stock
equivalents ("CSEs") $24,904 $24,904 $17,297 $17,297
======= ======= ======= =======
Weighted average common
shares outstanding 18,595 18,595 18,583 18,583
Dilutive CSEs on stock options 836 889 595 613
------- ------- ------- -------
Weighted average shares 19,431 19,484 19,178 19,196
======= ======= ======= =======
Net earnings per share
of common stock $1.28 $1.28 $.90 $.90
===== ===== ==== ====
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 127,884
<INT-BEARING-DEPOSITS> 0
<FED-FUNDS-SOLD> 150,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 294,551
<INVESTMENTS-CARRYING> 2,142,440
<INVESTMENTS-MARKET> 2,139,576
<LOANS> 6,152,834
<ALLOWANCE> 84,000
<TOTAL-ASSETS> 9,102,743
<DEPOSITS> 6,412,740
<SHORT-TERM> 1,945,847
<LIABILITIES-OTHER> 114,577
<LONG-TERM> 181,624
0
0
<COMMON> 186
<OTHER-SE> 447,769
<TOTAL-LIABILITIES-AND-EQUITY> 9,102,743
<INTEREST-LOAN> 237,323
<INTEREST-INVEST> 11,593
<INTEREST-OTHER> 63,871
<INTEREST-TOTAL> 312,787
<INTEREST-DEPOSIT> 146,217
<INTEREST-EXPENSE> 202,702
<INTEREST-INCOME-NET> 110,085
<LOAN-LOSSES> 15,000
<SECURITIES-GAINS> 6
<EXPENSE-OTHER> 76,959
<INCOME-PRETAX> 42,938
<INCOME-PRE-EXTRAORDINARY> 24,904
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 24,904
<EPS-PRIMARY> 1.28
<EPS-DILUTED> 1.28
<YIELD-ACTUAL> 2.56
<LOANS-NON> 78,738
<LOANS-PAST> 11,510
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 93,000
<CHARGE-OFFS> 18,000
<RECOVERIES> 3,000
<ALLOWANCE-CLOSE> 93,000
<ALLOWANCE-DOMESTIC> 93,000
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
