Coasting into the black: Coast Federal Bank chief Ray Martin pioneered in turning around his thrift.

In September 1990, Coast Federal Bank was severely undercapitalized and a couple of million dollars away from being taken over by the federal regulators, according to Ray Martin, chairman and chief executive officer.

The thrift had $12 billion in assets at the time, and its problem assets exceeded the amount of capital and loan loss reserves that Coast had on hand. Its stock plummeted to $1.625 a share from about $12.125 a share earlier in the year.

Because of a sour real estate market and new federal capital rules, the institution which then employed about 3,000 was on the brink of takeover.

Martin, who with six months of college education worked his way up from starting as a teller at Coast's San Pedro branch in 1959, says he knew somehow he would be able to turn Coast around. "I knew it would be hard work," he says.

Three years later, the Los Angeles-based thrift is not only adequately capitalized, but well capitalized. It has recorded profits for 10 consecutive quarters. Coast's stock was trading on July 12 for $14.625 a share.

Coast Federal Bank is one of a number of California financial institutions which have clawed back from near seizure to financial strength. But Coast's is considered by many experts to be the fastest, first and best turnaround.

The Coast story "is probably the most dramatic turnaround story in the history of banking," says Joe Jolson, analyst with Montgomery Securities in San Francisco.

James Montgomery, chairman and chief executive officer of Chatsworth-based Great Western Financial Corp., observes, "I do know they have made a marvelous recovery." The company had a high level of nonperforming loans which was brought to "a reasonable level" in a short period of time, he says.

"They have done a great job in a relatively weak real estate market. I have to give Ray and his team an awful lot of credit," Montgomery says. "I'm happy it happened to Ray because he's a first-class guy."

Montgomery, who has known Martin for years, says he likes him because "he's not a grandstander," but rather a "thoughtful" and "sincere" individual who likes to give credit to the people around him.

In his interview with the Business Journal, Martin insisted on bringing members of his team, Coast President and Chief Operating Officer Robert L. Hunt II and Chief Financial Officer James F. Barritt to tell the story of the turnaround.

Despite the institution's success, Coast has not sought a lot of publicity, Martin admits. "We have not hired a public relations company to tell the story," he says. "We have not tooted our horn."

Hunt says what makes Coast's turnaround "unique" among financial institutions which boosted capital under regulatory pressure is that Coast was able to do it without asking shareholders to pay for it in a rights offering. "We left shareholders' equity intact."

CFO Barritt says if you look at Coast's financial statements over the last few years "what you see is steady and consistent progress." The numbers tell the story of Coast's success, he says:

* The company reduced so-called risk assets, a S&L industry term which describe assets considered to be risky, such as real estate held for development, foreclosed real estate, commercial real estate loans, construction loans and high yield and derivative securities by $1.9 billion from 1987 to 1993. Total risk assets were at $3 billion in 1987 and are at $1.1 billion in 1993.

* Since 1990, Coast has improved its capital position from significantly being under capitalized to well capitalized.

The thrift's tangible capital ratio, which measures stockholder's equity minus goodwill divided by total assets minus goodwill, was at 4.74 percent at March 31, 1993, up from 1.52 percent in September 1991. The minimum federal standard for tangible capital is 1.50 percent.

Coast's risk based ratio, which measures total capital divided by assets, which are given more weight for the amount of risk the asset holds, improved from 6.74 percent in September 1991 to 10.68 percent at March 31, 1993. The minimum federal standard is 8 percent.

* Core earnings, which are recurring sources of income minus operating expenses, have increased steadily over the last four years despite the fact that Coast has downsized from about $12 billion in assets in 1990 to $8.3 billion in 1993.

Core earnings were at $41 million in 1989 and increased to $110 million in 1992.

Campbell Chaney, a financial institutions analyst with Dakin Securities in San Francisco, says he was particularly impressed with Coast's ability to reduce nonperforming assets for eight consecutive quarters. Nonperforming assets have been reduced from $410 million at March 31, 1991 to $308 million at March 31, 1993.

"That's the longest-standing string of quarterly reductions among any financial institution in California," Chaney notes.

He says the key to Coast's success is that it was the first financial institution which began dumping nonperforming and risky assets. Chaney notes Coast was "the first" to dump its real estate development company.

"It's not so much what they did, but when they did it," Chaney says. "They did it first."

Martin says he and his top managers first realized there was a big problem in 1987 when some Coast loans on out-of-state commercial real estate started going bad. At first, he says, he was in a state of "denial."

"You made these loans and you can't believe it when your managers come to you and say, 'We've got to sell these loans and we're going to get 50 cents on the dollar,'" Martin says.

But the thrift chief says he decided to bite the bullet even as others were holding onto nonperforming loans and foreclosed real estate, hoping that the real estate market would turn around. "I just figured that the first one out would be in the best position," Martin says.

Coast sold $478 million worth of foreclosed real estate from 1988 to 1992, dumping the riskiest assets -- such as commercial real estate -- first.

Coast also reduced its work force from 2,900 in the late 1980s to 2,100 now. Much of the employee and asset reductions came when Coast sold its San Diego network of branches to Home Savings of America.

Starting in 1987 Coast stopped investing in out-of-state lending, commercial real estate and construction lending and high yield securities. In 1989 it ceased making loans on apartment houses and the focus has been exclusively on one-to-four-family home loans, Martin said.

Even though Coast began getting out of the go-go 1980s risky investments first, its problems peaked in 1990 because Congress passed the Financial Institutions Reform Recovery and Enforcement Act in 1989.

FIRREA requires that banks and thrifts keep more capital on hand as a buttress for assets. But worse than that for Coast, FIRREA phased out supervisory goodwill, an intangible asset that thrifts were allowed to count as capital.

Thrifts received goodwill when they bought failed savings and loans from the U.S. government in the 1980s. Coast, as well as Los Angeles-based California Federal Bank and Glendale-based Glendale Federal Bank, were stripped of hundreds of millions of dollars in capital in 1989 when goodwill was discounted.

"In one day they took $300 million in capital away from me," says Martin. Coast, California Federal and Glendale Federal are among about 30 U.S. thrifts pursuing lawsuits against the U.S. government, alleging breach of contract.

Back in 1990 "when people talked about who was not going to survive, Coast was the one they mentioned most," recalls Babette Heimbuch, president of Santa Monica-based First Federal Bank.

But in the end Coast "was one of the really big turnarounds," she says. "They've really done a fantastic job."

Diana Martin, Ray's wife of 33 years, says at one point a few years ago, "we talked about what we would do if worse came to worst, if he couldn't get a job, if he became persona non grata in this industry."

She says they figured they could be happy even if they had to sell their home in Rancho Palos Verdes and their vacation home in Rancho Mirage.

Diana says her husband is able to find happiness in simple things, like reading a Louis L'Amour novel or watering the lawn. Despite enjoying the quiet things in life, Diana says, her husband has "incredible drive."

Martin was born in Nogales, Ariz., but grew up in the San Pedro area. He only had six months of college, at Los Angeles Harbor College, and served four years in the Air Force before starting at Coast in 1959 as a teller.

His entire career has been at Coast, where he moved up the ladder steadily to become president in 1980, chief executive officer in 1984 and chairman of the board in 1987.

When asked to explain his success, Martin says he "hit an industry in a growth mode. ... You get into a growing industry and you have a lot of mentors and a lot of opportunities to advance."

Martin says he is very proud of Hunt, Barritt and all the members of his management team -- and of the fact that none of his young, smart managers left Coast when the going got tough.

Analyst Jolson says ultimately the fate of a company lies with its CEO.

"The job of the CEO is to anticipate change and position his company in light of that," Jolson says. "Ray positioned his company before the others did and he deserves credit. Take a bow, Ray."

Snapshot

Ray Martin

Age: 57

Born in: Nogales, Ariz.

Resident of: Palos Verdes

Education: six months at Los Angeles Harbor College