COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
Consolidated Financial Statements
December 31, 1997 and 1996
(With Independent Auditors' Report Thereon)
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Coast Savings Financial, Inc.:
We have audited the consolidated statement of financial condition of Coast
Savings Financial, Inc. and subsidiaries as of December 31, 1997 and 1996 and
the related consolidated statements of operations, stockholders' equity and cash
flows for each of the years in the three-year period ended December 31, 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Coast Savings
Financial, Inc. and subsidiaries as of December 31, 1997 and 1996 and the
results of their operations and their cash flows for each of the years in the
three-year period ended December 31, 1997 in conformity with generally accepted
accounting principles.
January 21, 1998, except for note 19
to the consolidated financial statements,
which is as of February 12, 1998.
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
December 31,
1997 1996
(In thousands)
ASSETS
Cash and due from banks $ 142,811 $ 138,861
Federal funds sold and other short term investments 135,729 198,795
Investment securities held to maturity (fair value of $48.3
million and $36.0 million) 48,127 35,833
Loans receivable, net 5,875,496 5,749,985
Loans receivable held for sale, at the lower of cost or fair value (fair value
of $73.3 million and $109.6
million) 71,148 106,122
Mortgage-backed securities held to maturity (fair value of
$1.91 billion and $1.74 billion) 1,898,230 1,731,268
Mortgage-backed securities available for sale, at fair
value 282,104 312,002
Real estate held for sale 43,174 41,259
Federal Home Loan Bank stock 101,120 90,882
Land and depreciable assets 83,940 95,010
Interest receivable and other assets 156,345 198,697
Goodwill 5,182 6,238
$8,843,406 $8,704,952
LIABILITY AND STOCKHOLDERS' EQUITY
Deposits 6,418,194 6,356,448
Federal Home Loan Bank advances 1,321,500 1,104,200
Other borrowings 413,555 643,521
Other liabilities 115,836 115,508
Income taxes payable 7,830 4,747
Capital notes 56,248 55,997
8,333,163 8,280,421
Commitments and contingent liabilities
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, 19,420,931 and 18,584,717 shares issued and
outstanding at December 31, 1997 and 1996, respectively 194 186
Additional paid-in capital 293,423 265,055
Unrealized gain on securities available for sale, net of
taxes 2,887 2,778
Retained earnings, substantially restricted 213,739 156,512
Total stockholders' equity 510,243 424,531
$8,843,406 $8,704,952
<FN>
See accompanying notes to consolidated financial statements.
</FN>
1
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
Year Ended December 31,
1997 1996 1995
(In thousands except per share amounts)
Interest income:
Loans receivable $ 478,641 $ 450,142 $ 469,864
Mortgage-backed securities ("MBS") 130,103 132,098 119,629
Investment securities 23,837 21,210 23,688
632,581 603,450 613,181
Interest expense:
Deposits 294,095 285,764 280,895
Borrowings 116,045 102,886 131,235
410,140 388,650 412,130
Net interest income 222,441 214,800 201,051
Provision for loan losses 25,000 70,000 40,000
Net interest income after provision for loan
losses 197,441 144,800 161,051
Noninterest income:
Loan servicing fees and charges 11,702 12,671 13,518
Gain on sale of subsidiary - - 7,549
Gain (loss) on sale of loans 257 (304) 403
Loss on sale of MBS - - (287)
Other 38,927 37,738 36,436
50,886 50,105 57,619
Noninterest expense:
Compensation and benefits 80,119 63,283 71,302
Office occupancy, net 37,626 42,524 40,633
Federal deposit insurance premiums 5,884 16,818 17,333
Other general and administrative expenses 37,232 35,976 32,454
Total general and administrative expenses 160,861 158,601 161,722
SAIF special assessment - 41,978 -
Real estate operations, net 3,260 3,881 4,090
Amortization of goodwill 1,056 1,094 1,221
165,177 205,554 167,033
Earnings (loss) before income tax 83,150 (10,649) 51,637
expense(benefit)
Income tax expense (benefit) 25,923 (21,485) 18,835
Net earnings $ 57,227 $ 10,836 $ 32,802
Basic net earnings per share of common stock $3.06 $ .58 $1.77
Diluted net earnings per share of common stock $2.97 $ .57 $1.74
<FN>
See accompanying notes to consolidated financial statements.
</FN>
2
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
Unrealized
Gain (Loss)
on
Securities Retained
Serial Additional Available Earnings Total
Preferred Common Paid-in For Sale, (substantially Stockholders'
Stock Stock Capital Net of Taxes restricted) Equity
(In thousands)
Balance at December 31, 1994 -- 185 263,161 (1,006) 112,874 375,214
Exercise of stock options -- 1 1,857 -- -- 1,858
Changes in unrealized gain
on securities available
for sale, net of taxes -- -- -- 7,560 -- 7,560
Net earnings for the year 1995 -- -- -- -- 32,802 32,802
Balance at December 31, 1995 -- 186 265,018 6,554 145,676 417,434
Exercise of stock options -- -- 37 -- -- 37
Changes in unrealized loss
on securities available
for sale, net of taxes -- -- -- (3,776) -- (3,776)
Net earnings for the year 1996 -- -- -- -- 10,836 10,836
Balance at December 31, 1996 -- 186 265,055 2,778 156,512 424,531
Exercise of stock options -- 8 28,368 -- -- 28,376
Changes in unrealized loss
on securities available
for sale, net of taxes -- -- -- 109 -- 109
Net earnings for the year 1997 -- -- -- -- 57,227 57,227
Balance at December 31, 1997 $ -- $194 $293,423 $2,887 $213,739 $510,243
<FN>
See accompanying notes to consolidated financial statements.
</FN>
3
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
(in thousands)
Cash flows from operating activities:
Net earnings $ 57,227 $ 10,836 $ 32,802
Adjustments to reconcile net earnings to net
cash provided (used) by operating activities:
Sale of loans held for sale 44,658 105,329 44,197
Net decrease (increase) in accounts receivable 25,118 (4,889) 71,651
Provision for loan losses 25,000 70,000 40,000
Deferred income tax expense (benefit) 24,397 (21,485) 18,835
Principal repayments on loans held for sale 21,325 19,473 14,562
Net increase (decrease) in accounts payable 14,391 128 (27,068)
Depreciation and amortization 11,321 11,793 11,500
Net decrease (increase) in interest receivable 6,066 2,500 (7,179)
Amortization of discounts and premiums, net 3,029 3,554 5,146
Amortization of goodwill 1,056 1,094 1,221
Net decrease in prepaid expenses 865 191 794
Gain on sale of subsidiary - - (7,549)
Provision for losses on real estate held for sale - - 293
Net present value gain on sale of loans and MBS - (58) (284)
Net decrease in interest payable (855) (3,318) (137)
Net decrease in deferred income (1,552) (1,445) (1,731)
Federal Home Loan Bank stock dividends (5,924) (5,186) (4,467)
Loans originated for sale, net of refinances (126,061) (150,151) (146,024)
Other (42,481) 11,651 (8,022)
Total adjustments 353 39,171 5,738
Net cash provided by operations 57,580 50,007 38,540
Cash flows from investing activities:
Loans originated for investment, net of refinances (1,438,528) (1,151,853) (846,230)
Repurchase of loans (14,544) (19,927) (18,937)
Sale of loans receivable 174,662 - -
Principal repayments on loans 835,802 547,469 441,452
Principal repayments on MBS held to maturity 233,543 214,892 163,614
Principal repayments on MBS available for sale 29,100 37,216 29,169
Sale of MBS available for sale - - 35,335
Net (increase) decrease in short-term investment
securities (15,852) 827 9,411
Purchase of long-term investment securities (15,500) (4,206) (193)
Purchase of FHLB stock (4,358) - (2,450)
Maturities and principal repayments on investment
securities 19,059 40,063 53
Net increase in land and depreciable assets (181) (13,596) (16,129)
Sale of real estate held for sale 30,109 41,708 47,317
Proceeds from sale of subsidiary - - 150,054
Net cash used by investing activities (166,688) (307,407) (7,534)
Cash flows from financing activities:
Net increase in deposits 131,772 232,976 303,733
Deposits disposed of in branch sales, net (70,026) - (60,069)
Net increase (decrease) in FHLB advances 217,300 299,950 (150,200)
Net decrease in short-term borrowings (257,430) (88,018) (78,238)
Common stock options exercised 28,376 37 1,858
Net cash provided by financing activities 49,992 444,945 17,084
Net increase (decrease) in cash and cash
equivalents (59,116) 187,545 48,090
Cash and cash equivalents at beginning of year 337,656 150,111 102,021
Cash and cash equivalents at end of year $ 278,540 $ 337,656 $ 150,111
Supplemental disclosures of cash flow information:
Cash payments of interest $ 149,344 $ 145,564 $ 173,354
Cash payments (refunds) of income taxes, net 2,975 1,421 (496)
Supplemental schedule of noncash investing and
financing activities:
4
Year Ended December 31,
1997 1996 1995
(in thousands)
Interest credited to depositors' accounts $ 261,944 $ 247,376 $ 239,438
Loans exchanged for MBS, net 394,886 145,165 654,238
Additions to loans resulting from the sale of real
estate acquired in settlement of loans 41,200 54,151 35,627
Additions to real estate acquired in settlement of loans 79,449 114,918 89,979
Unrealized gain (loss) on securities available for sale,
net of taxes 109 (3,776) 7,560
<FN>
See accompanying notes to consolidated financial statements.
</FN>
5
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Presentation
Coast Savings Financial, Inc., a Delaware corporation (the "Company"), was
organized in 1988 and is the parent company of Coast Federal Bank, Federal
Savings Bank ("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 December 31, 1997.
Coast's business is that of a financial intermediary and consists primarily
of attracting deposits from the general public and using such deposits, together
with borrowings and other funds, to make mortgage loans secured by residential
real estate located in California. At December 31, 1997, Coast operated 91
retail banking offices in California. 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 authorities.
These consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of the
statement of financial condition, and revenues and expenses for the periods
reported in the statement of operations. Actual results could differ from those
estimates.
The majority-owned and controlled subsidiaries have been consolidated and
all significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the financial
statements for 1996 and 1995 to conform to the 1997 presentation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash, amounts due from banks, certain short-term investments, certificates of
deposit and federal funds sold. Federal funds are generally sold for one-day
periods, and short-term investment securities and certificates of deposit have
maturities of less than three months.
Assets Held or Available for Sale
The Company identifies those loans, MBS and investment securities for which
at the time of origination or acquisition it does not have the positive intent
and ability to hold to maturity. Securities that are to be held for indefinite
periods of time and not intended to be held to maturity are classified as
available for sale and 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 held for sale are carried at
the lower of amortized historical cost or fair value. Assets
6
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
held for indefinite periods of time include assets that management intends to
use as part of its asset/liability management strategy and that may be sold in
response to changes in interest rates, resultant prepayment risk and other
factors.
Assets Held to Maturity
Investment securities, loans and MBS, excluding those held or available for
sale, are carried at amortized historical cost, adjusted for amortization of
premiums and discounts utilizing the interest method over the contractual terms
of the assets. The carrying value of these assets is not adjusted for temporary
declines in market value since Coast intends and has the ability to hold them to
their maturities. Declines in fair value of securities held to maturity or
available for sale below amortized cost that are other than temporary would
result in write-downs to fair value.
Premiums and Discounts on Investment Securities, Loans and MBS
Premiums and discounts on investment securities, loans and MBS purchased
are amortized utilizing the interest method over the contractual terms of the
assets.
General Valuation Allowance
Coast maintains a general valuation allowance ("GVA") to absorb future
losses that may be realized on its loan-related 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, asset classifications, and Coast's underwriting
practices. Economic conditions, especially those affecting real estate markets,
may change, which could result in the need for an increased balance in the 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 increase the amount of the GVA based on its judgment of the
information available at the time of the examination. (See Notes 3 and 13 for
additional information regarding the GVA.)
Goodwill
Goodwill is generally amortized at a constant rate based on the anticipated
end-of-period remaining principal balance of long-lived interest-earning assets
acquired in various savings and loan acquisitions.
Loan Sales and Servicing
Coast sells loans and participations in loans for cash proceeds equal to
the market value of the loans and participations sold, with yield rates to the
investors based upon current market rates. Gain or loss is recognized equal to
the difference between the cash proceeds received and the carrying value of the
loans and participations sold. In addition, gain or loss is recognized and a
premium or discount is recorded at the time of sale based upon the present value
7
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
of the net amounts expected to be received or paid resulting primarily from the
difference between the contractual interest rates received from the borrowers
and the rates paid to the investors. The resulting premium or discount (the
"Mortgage Servicing Rights") is capitalized and amortized utilizing the interest
method.
Coast's policy regarding the allocation of cost when a loan or part of a
loan is sold is to allocate the recorded investment, based on relative fair
values on the date that the loan was acquired, adjusted for principal repayments
and other activity from the date of acquisition to the date of sale.
Interest Income on Loans
Interest income on loans is accrued as it is earned. Coast defers and
amortizes both the loan origination fees and the incremental direct costs
relating to loans originated. The deferred origination fees and costs are
amortized into interest income utilizing the interest method over the lives of
the related loans. Loans are placed on a nonaccrual status after being
delinquent 90 days, or earlier if the ultimate collectibility of the accrual is
in doubt. Whenever the accrual of interest is stopped, previously accrued but
uncollected interest income is reversed. Thereafter, interest is recognized only
as cash is received until the loan is reinstated. Accretion of discounts and
amortization of net deferred loan origination fees are discontinued when loans
are placed on nonaccrual status.
Real Estate Held for Sale
Real estate held for sale, which represents real estate acquired through
foreclosure, is carried at the lower of cost or estimated fair value less costs
of disposition. Income recognition resulting from the disposition of real estate
is dependent upon the transaction having met certain criteria relating to the
nature of the property sold and the terms of sale.
Depreciation and Amortization
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the assets. Amortization of leasehold improvements is
computed utilizing the straight-line method over the shorter of the estimated
useful life of the assets or the terms of the respective leases.
Fair Value of Financial Instruments
Pursuant to the requirements of SFAS No. 107, Disclosures about Fair Value
of Financial Instruments ("SFAS 107"), the Company has included in the following
Notes to Consolidated Financial Statements information about the fair values of
Coast's financial instruments, whether or not such instruments are recognized in
the accompanying consolidated statement of financial condition. In cases where
quoted market prices are not available, fair values are estimated based upon
discounted cash flows. Those techniques are significantly affected by the
assumptions utilized, including the assumed discount rates and estimates of
future cash flows. In this regard, the derived fair value estimates cannot be
substantiated by comparison to independent markets and, in many cases, could not
be realized in an immediate sale or other disposition of the instrument. SFAS
107 excludes certain financial instruments and all nonfinancial instruments from
its
8
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
disclosure requirements. All components of accrued interest receivable and
payable are presumed to have approximately equal book and fair values because
the periods over which such amounts are realized are relatively short. As a
result of the assumptions utilized, the aggregate fair value estimates presented
herein do not necessarily represent the Company's aggregate underlying fair
value.
The fair values of investment securities and MBS are generally obtained
from market bids for similar or identical securities, or are quotes from
independent securities brokers or dealers.
The fair values of loans are estimated for portfolio segments with similar
characteristics (e.g. - single family, multifamily, commercial and other, and
are further segmented into fixed and adjustable rate categories: London
Interbank Offered Rate ("LIBOR"), COFI and Treasury indices). The fair values of
performing loans are calculated using an option-based approach which values the
prepayment options contained in the loans. Prepayment options introduce
significant uncertainty into the timing of loan cash flows. When loan rates fall
significantly, prepayments typically accelerate, forcing lenders to reinvest the
proceeds of the prepayments at lower rates. An important aspect of valuing a
loan, therefore, is determining the appropriate value of the option component of
the loan. The fair values of significant nonperforming loans are based on recent
appraisals, or if not available, on estimated cash flows, discounted using a
rate commensurate with the risk associated with the specific properties.
Assumptions regarding credit risk, cash flows, and discount rates are
judgmentally determined utilizing available market information and specific
borrower information.
The fair values of deposits are estimated based upon the type of deposit
product. Demand and money market deposits are presumed to have equal book and
fair values. The estimated fair values of time deposits are determined by
discounting the cash flows of segments of deposits having similar maturities and
rates, utilizing a yield curve that approximated the rates offered as of the
reporting date. No value has been estimated for Coast's long term relationships
with depositors (commonly known as the core deposit intangible) since such
intangible asset is not a financial instrument pursuant to the definitions
contained in SFAS 107.
The fair values of borrowings are generally obtained from market bids for
similar or identical financial instruments, or are quotes from independent
securities brokers or dealers. When such information is not available, the fair
values are determined by discounting the cash flows called for thereunder at
rates available for similar instruments as of the reporting date.
The fair values of off-balance sheet financial instruments are determined
in several ways: (i) the value of interest rate cap contracts ("Caps") is
determined by discounting the cash flows called for under the respective
agreements at rates available as of the reporting date, (ii) the value of the
letters of credit is determined by measuring the potential liability under the
letters against the underlying security properties, (iii) the fair value of the
potential liability associated with loans sold with recourse is based upon an
estimate of the future losses likely to be realized under such recourse
arrangements, and (iv) the fair values of commitments to extend credit and
purchase assets are based on rates for similar transactions as of the reporting
date.
9
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(2) CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD AND OTHER SHORT TERM
INVESTMENTS AND INVESTMENT SECURITIES
The carrying and fair values of cash and due from banks, federal funds sold
and other short term investments and investment securities are shown in the
following table at the dates indicated.
December 31,
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
Cash and due from banks $ 142,811 $ 142,811 $ 138,861 $ 138,861
Federal funds sold and other short
term investments:
Repurchase agreements $ 80,000 $ 80,000 $ 100,000 $ 100,000
Federal funds sold 49,000 49,000 94,000 94,000
Commercial paper 6,729 6,729 4,795 4,795
135,729 135,729 198,795 198,795
Investment securities:
Held to maturity:
Short term:
Commercial paper, custodial 26,454 26,454 24,567 24,567
Repurchase agreements, custodial 521 521 2,277 2,277
Other marketable securities, custodial 17,702 17,702 439 439
44,677 44,677 27,283 27,283
Long term:
Securities of states of the U.S. and
political subdivisions thereof 3,450 3,591 3,512 3,656
United States agency securities -- -- 3,998 4,001
Other marketable securities -- -- 1,040 1,040
3,450 3,591 8,550 8,697
48,127 48,268 35,833 35,980
$ 183,856 $ 183,997 $ 234,628 $ 234,775
10
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Repurchase agreements totaled $80.0 million (with a weighted average yield
of 7.31%) and $100.0 million (with a weighted average yield of 6.68%) at
December 31, 1997 and 1996, respectively. Average balances of repurchase
agreements were $148.4 million and $91.2 million during the years ended December
31, 1997 and 1996, respectively, and the maximum amount owned at any month end
during such periods was $160.0 million and $160.0 million, respectively. During
the term of the repurchase agreements the underlying securities were not under
Coast's control, but rather, the control of a primary securities dealer.
At December 31, 1997 and 1996, there were gross unrealized gains of
$141,000 and $147,000, respectively, and no gross unrealized losses at either
date.
The following table summarizes cash and cash equivalents, as reported in
the accompanying Consolidated Statement of Cash Flows, as of the dates
indicated.
December 31,
1997 1996 1995
(In Thousands
Cash and due from banks $142,811 $138,861 $119,717
Repurchase agreements 80,000 100,000 -
Federal funds sold 49,000 94,000 28,000
Commercial paper 6,729 4,795 2,394
$278,540 $337,656 $150,111
The amounts included above in cash and cash equivalents and qualifying
investment securities generally constitute Coast's liquidity portfolio. Coast
maintains liquidity to satisfy regulatory requirements which mandate that Coast
maintain minimum average balances of liquid assets to fund normal operational
requirements. The liquidity portfolio is managed in a manner intended to
maximize flexibility and yield, while minimizing interest rate risk, credit risk
and the cost of the capital required to be maintained for such assets.
There were no sales of investment securities during 1997, 1996 or 1995.
The following is a summary of the contractual terms to maturity of
long-term investment securities as of December 31, 1997. The fair values of the
securities listed below are approximately equal to their carrying values.
AFTER 1 AFTER 5
WITHIN THROUGH THROUGH 10 AFTER 10
1 YEAR 5 YEARS YEARS YEARS TOTAL
(In millions)
Securities of states of the U.S.
and political subdivisions thereof $ - $ - $ - $3.5 $3.5
The combined weighted average yield on federal funds sold, other short term
investments and investment securities was 6.11% and 6.15% at December 31, 1997
11
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
and 1996, respectively. At December 31, 1997 and 1996, Coast had accrued
interest receivable on these investment securities totaling $41,000 and
$118,000, respectively, which is included in interest receivable and other
assets in the accompanying consolidated statement of financial condition.
Coast, as a member institution of the Federal Home Loan Bank ("FHLB") of
San Francisco, is required to own capital stock in the FHLB of San Francisco
based generally upon Coast's balance of residential mortgage loans and the
combination of FHLB advances and letters of credit. At December 31, 1997, Coast
owned $101.1 million of FHLB stock, $17.4 million in excess of the minimum
requirement. At December 31, 1996, Coast owned $90.9 million of FHLB stock,
$11.3 million in excess of the minimum requirement. The yield on FHLB stock was
5.88% and 6.45% at December 31, 1997 and 1996, respectively.
Interest income on investment securities includes the following for the
periods indicated.
Year Ended December 31,
1997 1996 1995
(In thousands)
Federal funds sold $ 6,954 $ 2,639 $ 4,399
Short-term investment securities 10,367 10,677 11,966
Long-term investment securities 592 2,708 2,856
FHLB stock 5,924 5,186 4,467
$23,837 $21,210 $23,688
(3) LOANS RECEIVABLE
The following is a summary of loans receivable at the dates indicated.
12
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
1997 1996
(In thousands)
Held for investment:
Real estate:
Residential:
One to four units ("single family") $4,476,652 $3,907,131
Five or more units ("multifamily") 1,031,532 1,219,940
5,508,184 5,127,071
Commercial 406,820 670,847
5,915,004 5,797,918
Commercial business 3,146 3,098
Secured by deposits 6,674 6,838
Overdraft lines of credit 18,134 18,118
5,942,958 5,825,972
Deferred loan origination fees and costs, net 18,092 11,185
Other unamortized net discounts (1,554) (3,172)
GVA (84,000) (84,000)
5,875,496 5,749,985
Held for sale 71,148 106,122
$5,946,644 $5,856,107
The combined contractual weighted average interest rate of loans receivable
was 7.93% and 7.96% at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, Coast had accrued interest receivable on
loans receivable of $33.0 million and $33.1 million, respectively, which is
included in interest receivable and other assets in the accompanying
consolidated statement of financial condition.
At December 31, 1997 and 1996, Coast had approved commitments to originate
loans totaling $216.5 million and $104.2 million, respectively, substantially
all of which were for adjustable rate single family residential loans. Coast had
$1.9 million of commitments to sell loans at December 31, 1997, and had $1.9
million of commitments to sell loans at December 31, 1996.
On September 30, 1995, Coast terminated its asset-based lending activity
through the sale of its former subsidiary, CBCC. At the date of sale, CBCC had a
loan portfolio of $135.8 million. The consolidated statement of operations for
the year ended December 31, 1995, includes a pretax gain of $7.5 million
resulting from the sale of CBCC.
See Note 8 for a summary of loans and other assets which were pledged as
security for borrowings.
The following table presents carrying and fair values of loans receivable
at the dates indicated.
13
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
December 31,
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
(In thousands)
Held for investment:
Real estate:
Residential:
Single family - adjustable rates $ 4,429,430 $ 4,410,082 $ 3,831,230 $ 3,863,027
Single family - fixed rates 66,777 69,544 82,208 84,115
4,496,207 4,479,626 3,913,438 3,947,142
Multifamily - adjustable rates 1,020,362 1,034,557 1,184,062 1,170,724
Multifamily - fixed rates 9,388 11,676 37,240 35,789
1,029,750 1,046,233 1,221,302 1,206,513
5,525,957 5,525,859 5,134,740 5,153,655
Commercial:
Adjustable rates 389,807 394,108 636,570 613,579
Fixed rates 15,778 19,792 34,621 34,779
405,585 413,900 671,191 648,358
5,931,542 5,939,759 5,805,931 5,802,013
Commercial business 3,146 3,293 3,098 3,217
Secured by deposits 6,674 6,680 6,838 6,884
Overdraft lines of credit 18,134 18,077 18,118 18,875
5,959,496 5,967,809 5,833,985 5,830,989
Held for sale 71,148 73,307 106,122 109,566
6,030,644 6,041,116 5,940,107 5,940,555
GVA (84,000) -- (84,000) --
$ 5,946,644 $ 6,041,116 $ 5,856,107 $ 5,940,555
The following table presents nonaccrual loans included in loans receivable
at the dates indicated.
December 31,
1997 1996
(In thousands)
Nonaccrual loans:
Single family $45,363 $56,740
Multifamily 8,794 19,295
Commercial and other 1,922 6,769
$56,079 $82,804
If nonaccrual loans at December 31, 1997, had been interestearning
throughout the year, interest income of $3.7 million would have been earned on
these loans at their respective contractual rates. For the year ended December
31, 1997, actual interest earned on such loans was $1.6 million.
The table shown below reflects the changes in the GVA attributable to
loan-related assets for the periods indicated. See also the GVA attributable to
off-balance sheet items described in Note 13.
14
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Residential Commercial Real
Real Estate Estate Mortgage
Mortgage and Other Total
(In millions)
Balance at December 31, 1994 $49 $28 $77
Additions charged to operations 40 -- 40
Recoveries 1 1 2
Losses charged (38) (4) (42)
Sale of subsidiary -- (3) (3)
Reallocation to off-balance sheet items (4) (5) (9)
Balance at December 31, 1995 48 17 65
Additions charged to operations 51 8 59
Recoveries 8 -- 8
Losses charged (43) (5) (48)
Balance at December 31, 1996 64 20 84
Additions charged to operations 18 7 25
Recoveries 7 -- 7
Losses charged (25) (7) (32)
Balance at December 31, 1997 $64 $20 $84
A loan is impaired when, based on current information and events,
management believes it 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 $94.0 million and $116.2 million at December 31,
1997 and 1996, respectively, and for the years ended December 31, 1997, 1996 and
1995, the average investment in impaired loans was $109.5 million, $135.5
million and $109.9 million, respectively, and for the years then ended, interest
income on such loans totaled $6.3 million, $7.3 million and $8.8 million,
respectively. Interest income on impaired loans which are performing is
generally recognized on the accrual basis. As of December 31, 1997 and 1996,
nonaccrual loans included $13.0 million and $42.0 million, respectively, of
impaired loans.
Impaired loans at December 31, 1997, included $76.7 million of loans for
which valuation allowances of $11.6 million had been established and $28.9
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 provisions for losses
and any related recoveries are recorded as part of the allowance for loan
losses. Coast had no and $1.2 million recoveries of previously established
allowances on impaired loans during the years ended December 31, 1997 and 1996,
respectively.
15
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Coast evaluates large groups of smaller-balance homogeneous loans collectively
for impairment.
Coast has reached agreements with certain borrowers that provide for
restructuring existing loans secured by income-producing properties.
Restructurings are generally in the form of interest rate adjustments,
extensions of maturities or deferred payments of principal or interest.
Restructured loans totaled $29.9 million and $30.2 million at December 31, 1997
and 1996, respectively. The restructured loans had effective yields of 8.00% at
both December 31, 1997 and 1996. The loans identified as restructured loans at
December 31, 1997, represent loans that were modified prior to the Company's
implementation of SFAS 114 in 1995 and which are performing in accordance with
their modified terms. Coast accounts for such loans under the provisions of SFAS
No. 15, Accounting by Debtors and Creditors for Troubled Debt Restructurings, as
permitted under SFAS 114. For the years ended December 31, 1997 and 1996, $2.4
million and $2.4 million, respectively, was earned on restructured loans and is
included in interest income on loans in the accompanying consolidated statement
of operations. Interest income on these loans for the years ended December 31,
1997 and 1996, would have totaled $3.1 million and $3.2 million, respectively,
under their original terms. At December 31, 1997, Coast had no commitments to
lend additional funds to these borrowers.
Approximately 98% of Coast's loans are secured by properties located in
California and the performance of its loan portfolio can be significantly
impacted by economic conditions and trends in the state.
(4) MORTGAGE-BACKED SECURITIES ("MBS")
The amortized cost and fair values of MBS are shown in the following tables
at the dates indicated.
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
DECEMBER 31, 1997
Held to maturity:
Adjustable rate:
MBS issued by Coast $ 668,802 $ 1,532 $ (324) $ 670,010
FNMA securities 772,420 19,503 - 791,923
FHLMC securities 395,878 5,878 (1,732) 400,024
Issued by other financial institutions 36,115 - (725) 35,390
1,873,215 26,913 (2,781) 1,897,347
Fixed rate:
FMNA securities 24,986 132 (211) 24,907
Other securities 29 - (1) 28
25,015 132 (212) 24,935
$1,898,230 $27,045 $ (2,993) $1,922,282
Available for sale:
Adjustable rate:
FNMA securities $ 141,574 $ 2,138 $ (10) $ 143,702
FHLMC securities 136,785 1,642 (25) 138,402
$ 278,359 $ 3,780 $ (35) $ 282,104
16
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
(In thousands)
DECEMBER 31, 1996
Held to maturity:
Adjustable rate:
MBS issued by Coast $ 774,612 $ 3,120 $ (10,256) $ 767,476
FNMA securities 639,171 12,134 - 651,305
FHLMC securities 246,558 5,077 - 251,635
Issued by other financial institutions 39,779 - (611) 39,168
$1,700,120 20,331 (10,867) 1,709,584
Fixed rate:
FNMA securities 31,111 135 (791) 30,455
Other securities 37 - (1) 36
31,148 135 (792) 30,491
$1,731,268 $20,466 $(11,659) $1,740,075
Available for sale:
Adjustable rate:
FNMA securities $ 153,919 $ 2,783 $ (5) $ 156,697
FHLMC securities 154,542 850 (87) 155,305
$ 308,461 $ 3,633 $ (92) $ 312,002
As of December 31, 1997, $2.18 billion of Coast's MBS included in the table
above have contractual terms to maturity of more than ten years, $372 thousand
have contractual maturities of from five to ten years, $5 thousand have
contractual maturities of one to five years and $150 thousand have contractual
maturities of less than one year. Included in mortgage-backed securities at
December 31, 1997, are $986.9 million of mortgage-backed securities for which
Coast has substantially all the credit risk. This credit risk is substantially
the same as that of loans and is considered in Coast's determination of its
general valuation allowance.
The combined contractual weighted average interest rate of MBS was 6.43%
and 6.42% at December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, Coast had accrued interest receivable on MBS
of $13.6 million and $13.2 million, respectively, which is included in interest
receivable and other assets in the accompanying consolidated statement of
financial condition.
At December 31, 1997 and 1996, Coast had no commitments to sell MBS.
Principal proceeds from sales of MBS available for sale were none, none and
$35.3 million during 1997, 1996 and 1995, respectively.
See Note 8 for a summary of MBS and other assets which were pledged as
security for borrowings and Note 13 for a discussion of MBS which were pledged
as security for certain letters of credit issued by Coast.
(5) REAL ESTATE HELD FOR SALE
Real estate held for sale, which represents real estate acquired through
foreclosure, totaled $43.2 million and $41.3 million at December 31, 1997 and
1996, respectively.
17
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The components of real estate operations, net are presented in the
following table for each of the periods indicated.
Year Ended December 31,
1997 1996 1995
(In thousands)
Net expense from operations of foreclosed
real estate owned $1,482 $3,158 $3,564
Write downs and provisions for estimated losses 1,778 723 526
$3,260 $3,881 $4,090
(6) LAND AND DEPRECIABLE ASSETS AND LEASE COMMITMENTS
The following is a summary of land and depreciable assets at the dates
indicated.
December 31,
1997 1996
(In thousands)
Furniture, fixtures, equipment and automobiles $ 49,592 $ 71,885
Leasehold improvements 27,302 42,559
Buildings, parking lots and building improvements 37,223 35,562
Land 17,534 16,711
Construction in progress 896 1,515
132,547 168,232
Accumulated depreciation (48,607) (73,222)
$ 83,940 $ 95,010
Depreciation expense totaled $11.3 million, $11.8 million and $11.5 million
for the years ended December 31, 1997, 1996 and 1995, respectively, and is
included in office occupancy, net in the accompanying consolidated statement of
operations.
Coast leases certain property and equipment under operating leases which
expire in various years. All leases expire by the year 2033.
Certain of these leases contain renewal options and require Coast to pay
property taxes and insurance. Lease expense for office facilities and equipment
amounted to $17.1 million, $19.2 million and $19.4 million for the years ended
December 31, 1997, 1996 and 1995, respectively.
The total annual minimum lease commitment under non-cancelable operating
leases at December 31, 1997, including estimated increases due to rising levels
of the Consumer Price Index for leases contractually tied thereto, was as
follows for the periods indicated.
18
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Amount
------
(In thousands)
Year Ending December 31,
1998 $14,412
1999 15,516
2000 15,350
2001 10,365
2002 7,754
Thereafter $32,236
-------
$95,633
=======
(7) DEPOSITS
Deposit balances by type of account are summarized in the following table
as of the dates indicated.
Weighted average
Interest rate at
December 31, 1997 1997 1996
Checking and other demand deposits 1.49% $919,873 $782,416
Money market deposits 2.86 635,040 621,410
Time deposits:
One to 31 months 2.47 2,092 2,842
32 days to six months 5.07 844,376 110,863
Over six months to one year 5.24 3,342,151 3,943,860
Over one year to two years 5.52 488,856 554,658
Over two years 6.32 185,806 324,399
Housing bond certificates of deposit - - 16,000
$6,418,194 $6,356,448
The combined weighted average interest rate of deposits at December 31,
1997 and 1996 was 4.50% and 4.59%, respectively.
Broker-originated deposits totaled $1.5 million and $30.6 million at
December 31, 1997 and 1996, respectively.
At December 31, 1997 and 1996, Coast had accrued interest payable on
deposits of $.5 million and $1.5 million, respectively, which is included in
other liabilities in the accompanying consolidated statement of financial
condition.
19
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the amounts of deposits with balances
greater than or equal to $100,000 by remaining term to maturity as of December
31, 1997.
Remaining Term to Maturity (in months) Amount
(In thousands)
Three or less $ 1,211,483
Over twelve 17,655
$ 1,229,138
Deposits at December 31, 1997 mature as indicated in the following table.
Amount
(In thousands)
Immediately withdrawable $ 1,554,913
Year Ending December 31,
1998 4,712,112
1999 77,608
2000 22,588
2001 13,526
2002 29,725
Thereafter 7,722
$ 6,418,194
Interest expense by type of deposit account is summarized in the following
table for the periods indicated.
Year Ended December 31,
1997 1996 1995
(In thousands)
Checking and other demand deposits $ 12,763 $ 9,720 $ 5,694
Money market deposits 16,731 17,211 18,250
Time deposits 265,147 259,453 257,820
Early withdrawal penalties (546) (620) (869)
$294,095 $285,764 $280,895
Coast receives a variety of fees from customers for providing various
services including fees on checking accounts, fees for returned items, and fees
for various other services. Fee income from these sources totaled $20.7 million,
$19.0 million and $14.2 million for the years ended December 31, 1997, 1996 and
1995, respectively, and is included in other noninterest income in the
accompanying Consolidated Statement of Operations.
20
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents the carrying and fair values of deposits as of
December 31, 1997.
Carrying
Value Fair Value
(In thousands)
Demand deposits $ 919,873 $ 919,873
Money market deposits 635,040 635,040
Time deposits 4,863,281 4,870,013
$ 6,418,194 $ 6,424,926
(8) BORROWINGS
A summary of FHLB advances and other borrowings follows.
December 31, 1997 December 31, 1996
Carrying Fair Weighted Range Carrying Fair Weighted Range
Value Value Average Low High Value Value Average Low High
FHLB advances, due at various
dates through 1999 $1,321,500 $1,322,230 5.83 5.67 8.70 $1,104,200 $1,102,783 5.51% 4.70% 8.70%
Other borrowings:
Short-term:
Securities sold under
agreements to repurchase,
secured, due in 1998 $ 310,825 $ 310,825 5.76 5.72 5.95 $ 418,789 $ 418,150 5.40 5.18 5.63
Federal Funds purchased - - - - - 149,466 149,465 6.39 6.00 7.00
310,825 310,825 568,255 567,615
Long-term:
Senior notes, due in 2000 56,838 60,375 10.00 - - 56,532 62,010 10.00 - -
Housing bond borrowings
secured, due in 1998,
2006 and 2010 45,892 45,892 3.73 3.45 3.85 18,734 17,919 3.96 3.55 4.00
102,730 106,267 75,266 79,929
$ 413,555 $ 417,092 $ 643,521 $ 647,544
The composition of assets pledged as security for collateralized FHLB and
other borrowings was as set forth in the table below as of the indicated dates.
December 31,
1997 1996
(In thousands)
Loans receivable $ 3,098,215 $ 2,010,861
MBS 981,617 1,475,656
FHLB stock 101,120 90,882
$ 4,180,952 $ 3,577,399
21
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The carrying value of principal maturities of FHLB advances and other
borrowings at December 31, 1997, was as follows for the years indicated.
FHLB Other
Advances Borrowings Total
(In thousands)
Year Ending December 31,
1998 1,296,500 310,825 1,607,325
1999 25,000 - 25,000
2000 - 56,838 56,838
2001 - - -
2002 - - -
Thereafter - 45,892 45,892
$1,321,500 $ 413,555 $1,735,055
Securities sold under agreements to repurchase (commonly referred to as
reverse repurchase agreements) totaled $310.8 million and $418.8 million at
December 31, 1997 and 1996, respectively. During the term of the reverse
repurchase agreements, the underlying securities were not under Coast's control,
but, rather, the control of a primary securities dealer. The weighted average
interest rate of reverse repurchase agreements was 5.76% at December 31, 1997.
Average balances of reverse repurchase agreements were $394.3 million and $650.7
million during the years ended December 31, 1997 and 1996, respectively, and the
maximum amount outstanding at any month end during the years ended December 31,
1997 and 1996 was $765.5 million and $959.9 million, respectively.
Reverse repurchase agreements were secured by MBS with a carrying value of
$324.9 million and $431.1 million (included in the table above) at December 31,
1997 and 1996, respectively. These MBS had a fair value of $331.5 million and
$438.1 million at December 31, 1997 and 1996, respectively.
The following table describes the Company's Senior Notes and Coast's
Capital Notes as of December 31, 1997.
Carrying Fair Interest Amount
Description Value Value Rate Date due Issued Date Issued
(In millions) (In millions)
Senior Notes (1) 56.8 60.4 10% Mar. 01, 2000 57.5 Apr. 1993
Capital Notes (2) 56.2 60.7 13 Dec. 31, 2002 57.5 Dec. 1992
113.0 121.1
22
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(1) Interest is payable semiannually on April 1 and October 1. The Senior
Notes are redeemable at any time after April 1, 1998 at the option of the
Company as a whole or from time to time in part, at the redemption price plus
accrued interest to the redemption date.
(2) Interest is payable quarterly on March 31, June 30, September 30 and
December 31. The Capital Notes are redeemable by Coast in whole or in part at
any time after December 31, 1997 at the redemption price plus accrued interest
to the redemption date.
The combined weighted average interest rate of FHLB advances, other
borrowings, Capital Notes and Senior Notes, was 6.12% and 5.91% at December 31,
1997 and 1996, respectively.
At December 31, 1997 and 1996, the Company had accrued interest payable on
FHLB advances, other borrowings, Capital Notes and Senior Notes of $7.5 million
and $7.4 million, respectively, which is included in other liabilities in the
accompanying consolidated statement of financial condition.
A tabulation of interest expense on borrowings for the periods indicated
follows.
Year Ended December 31,
1997 1996 1995
(In thousands)
FHLB advances $ 68,036 $ 42,052 $ 56,632
Short-term borrowings 32,679 46,348 59,677
Long-term borrowings 15,330 14,486 14,926
$116,045 $102,886 $131,235
Other potential sources of funds available to Coast include a line of
credit with the FHLB of San Francisco and direct access to borrowings from the
Federal Reserve System. At December 31, 1997, FHLB advances were $1.32 billion,
and the amount of additional credit available from the FHLB was $1.48 billion.
23
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(9) INCOME AND OTHER TAXES
The following table summarizes the elements of income tax expense (benefit)
for the years ended December 31, 1997, 1996 and 1995.
Federal State Total
(In thousands)
1997:
Current $ 651 $ 875 $ 1,526
Deferred 18,791 5,606 24,397
$ 19,442 $ 6,481 $ 25,923
1996:
Current $ -- $ -- $ --
Deferred (17,689) (3,796) (21,485)
$ (17,689) $ (3,796) $ (21,485)
1995
Current $ -- $ -- $ --
Deferred 15,767 3,068 18,835
$ 15,767 $ 3,068 $ 18,835
Deferred tax assets are initially recognized for net operating loss and tax
credit carryforwards and differences between the financial statement carrying
amount and the tax bases of assets and liabilities which will result in future
deductible amounts. A valuation allowance is then established to reduce that
deferred tax asset to the level at which it is "more likely than not" that the
tax benefits will be realized. A taxpayer's ability to realize the tax benefits
of deductible temporary differences and operating loss or credit carryforwards
depends on having sufficient taxable income of an appropriate character within
the carryback and carryforward periods. Sources of taxable income that may allow
for the realization of tax benefits include (i) taxable income in the current
year or prior years that is available through carryback, (ii) future taxable
income that will result from the reversal of existing taxable temporary
differences, and (iii) future taxable income generated by future operations.
24
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A reconciliation from expected federal income tax expense (benefit) to
consolidated effective income tax expense (benefit) for the periods indicated
follows.
Year Ended December 31,
1997 1996 1995
(Dollars in thousands)
Statutory federal income tax rate 35% 35% 35%
Expected federal income tax expense (benefit) $ 29,103 $ (3,727) $ 18,073
Increases (reductions) in income taxes resulting from:
State tax expense (benefit), net of federal income
tax effect 5,633 (259) 3,502
Basis in stock of subsidiary -- -- (1,732)
Reduction of liabilities from prior years (9,000) (17,620) (916)
Increase in base year reserve amount -- -- (519)
Amortization of goodwill 369 382 427
Other (182) (261) --
$ 25,923 $ (21,485) $ 18,835
In 1996 and again in 1997, Coast performed a comprehensive review of its overall
tax position and future tax planning strategies resulting in the recognition of
a $17.6 million tax benefit in the year ended December 31, 1996 and $9.0 million
in the year ended December 31, 1997. The results of recent audits by taxing
authorities were considered in this review. The primary cause of the lower
effective tax rate for 1995 was the sale of CBCC, previously a subsidiary of
Coast. The effective tax rate on this transaction was lower than the statutory
rate due to a difference in the book and tax bases of Coast's investment in
CBCC.
On August 20, 1996, the President signed the Small Business Job Protection
Act (the "Act") into law. The Act repeals the reserve method of accounting for
bad debts for savings institutions, effective for taxable years beginning after
1995. Coast, therefore, is required to use the specific charge-off method on its
1996 and subsequent federal income tax returns. Prior to 1996, savings
institutions that met certain definitional tests and other conditions prescribed
by the Internal Revenue Code were allowed to deduct, within limitations, a bad
debt deduction computed as a percentage of taxable income before such deduction.
The deduction percentage was 8% for the year ended December 31, 1995.
Alternatively, a qualified savings institution could have computed its bad debt
deduction based upon its actual loan loss experience (the "Experience Method").
Coast computed its bad debt deduction utilizing the Experience Method in 1995.
Due to the increase in the amount of qualifying loans for tax purposes at
December 31, 1995, as compared to December 31, 1987, the amount of the bad debt
deduction was restored by $1.5 million.
Under the Act, Coast will be required to recapture its "applicable excess
reserves," which are its federal tax bad debt reserves at the end of 1987,
reduced proportionately for reductions in the Coast's loan portfolio since that
date (the "base year reserves"). 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 and has fully provided for the tax related to this recapture. The base
year reserves will continue to be subject to recapture. At December 31, 1997,
the
25
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
amount of those reserves was approximately $103 million. Circumstances that
would require an accrual of a portion of or all of this unrecorded tax liability
are a significant reduction in qualifying loan levels relative to the end of
1987, failure to meet the tax definition of a savings institution, dividend
payments in excess of current year or accumulated tax earnings and profits, or
other distributions in dissolution, liquidation or redemption of Coast's stock.
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below.
December 31,
1997 1996 1995
(In thousands)
Deferred tax assets:
Loan loss allowances deferred for tax purposes $ 60,669 $ 59,662 $ 41,632
Net operating loss carryforwards 11,689 23,839 19,597
Tax credit carryforwards 7,324 6,095 5,942
Deferred compensation not yet deducted for tax purposes 3,338 2,837 3,352
Branch sale gains recognized for tax purposes and
amortized for financial statement purposes 939 1,241 1,387
Interest income on nonaccrual loans for book purposes,
recognized for tax purposes 504 897 3,032
Loan discounts arising from acquisitions 255 442 541
Securities marked to market for tax purposes only 341 -- 1,246
Other 139 231 608
Total deferred tax assets 85,198 95,244 77,337
Deferred tax liabilities:
FHLB stock dividends deferred for tax purposes 19,847 20,471 18,267
Loan fees and origination costs capitalized for
financial statement purposes only 15,251 10,043 7,038
Mortgage Servicing Rights, not recognized for
tax purposes 7,129 9,585 5,097
Guaranteed payments recognized when received for
tax purposes 983 3,046 8,278
Securities marked to market for financial statement
purposes only 2,282 2,275 4,082
Depreciation for tax purposes in excess of such
amount for financial statement purposes 2,130 2,213 3,939
Securities marked to market for tax purposes only -- 464 --
Total deferred tax liabilities 47,622 48,097 46,701
Net deferred tax asset $ 37,576 $ 47,147 $ 30,636
At December 31, 1997, the Company had net operating loss carryforwards
("NOLs") for federal income tax purposes of $31.8 million which are available to
offset future federal taxable income through 2011. The Company also had
alternative minimum tax credit carryforwards of approximately $5.4 million as of
December 31, 1997, which are available to reduce future regular federal income
taxes, if any, over an indefinite period. Based upon the projections for future
taxable income over the periods which the deferred tax assets are deductible,
management believes that it is more likely than not the Company will realize the
benefits of these deductible differences.
The Company's tax returns have been audited by the Internal Revenue Service
through December 31, 1993, and by the California Franchise Tax Board through
December 31, 1990. The Franchise Tax Board is currently examining the years 1991
26
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
through 1993. The Internal Revenue Service is currently examining the Company's
returns for the years 1994 through 1996. The Company does not anticipate that
the examinations will result in any material adverse effect on its financial
condition or results of operations.
(10) STOCKHOLDERS' EQUITY AND EARNINGS PER SHARE
The Company's ability to pay cash dividends primarily depends upon cash
dividends it receives from Coast, and is also subject to limitation based on
liquidity and other factors set forth in the indenture relating to outstanding
debt securities of the Company. Based on the level of liquid assets maintained
by the Company as of December 31, 1997, and the aforementioned indenture
restrictions, the Company had approximately $1.7 million available for
distribution at December 31, 1997. Coast's ability to pay cash dividends to the
Company is subject to limitations contained in applicable federal regulations
and to additional limitations based on earnings and other factors set forth in
an indenture relating to outstanding debt securities of Coast. Under the most
restrictive of these limitations, Coast had approximately $128.8 million
available for distribution at December 31, 1997. In addition, payment of
dividends in excess of Coast's accumulated earnings and profits as calculated
for tax purposes (approximately $126 million at December 31, 1996) would have
significant negative tax consequences to Coast.
Earnings per share of common stock are based upon the weighted average
number of common shares, which include common stock, dilutive common stock
equivalent shares ("CSEs") and other potentially dilutive securities,
outstanding during each period.
The calculations of earnings per share of common stock are as follows for
the periods indicated.
Year Ended December 31,
1997 1996 1995
Basic Diluted Basic Diluted Basic Diluted
(In thousands except per share amounts)
Net earnings (loss) applicable to
common stock, dilutive CSEs
and securities $ 57,227 $ 57,227 $ 10,836 $ 10,836 $ 32,802 $ 32,802
Weighted average common shares
outstanding 18,672 18,672 18,584 18,584 18,511 18,511
Dilutive CSEs from stock options -- 596 -- 347 -- 320
Weighted average shares 18,672 19,268 18,584 18,931 18,511 18,831
Net earnings (loss) per share
of common stock $3.06 $2.97 $.58 $.57 $1.77 $1.74
On August 23, 1989, the Company's Board of Directors adopted a stockholder
rights plan (the "Rights Plan") pursuant to which the Company distributed one
Right (collectively, the "Rights") for each outstanding share of common stock.
Each Right will entitle the holder (other than certain persons who have
acquired, or have obtained the right to acquire, the beneficial ownership of at
least 25% of the common stock ("Control Persons") and certain related persons or
entities) to purchase one one-hundredth of a share of a newly issued series of
preferred stock at an exercise price of $50 (the "Rights Exercise Price"),
subject to
27
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
certain adjustments. Each one one-hundredth of a share of preferred stock is
designed to have a value approximately equal to the value of one share of common
stock. If any person becomes the beneficial owner of 15% or more of the
outstanding common stock without complying with a specified procedure designed
to provide fair treatment to all holders of the common stock, then holders of
Rights not previously exercised or redeemed by the Company (other than Rights
held by Control Persons and certain related persons or entities) will be
entitled upon payment of the Rights Exercise Price to receive common stock
having a fair market value equal to two times the Rights Exercise Price. If the
Company is merged into another corporation or 50% or more of the Company's
assets are sold, each previously unexercised Right will entitle the holder
(other than a Control Person and certain related persons or entities) upon
payment of the Rights Exercise Price to purchase common stock of the acquiring
corporation or corporations or certain related corporations having a market
value equal to two times the Rights Exercise Price. A majority of the
independent directors of the Company may authorize the redemption of the Rights
in whole at a price of $.01 per Right at any time before the tenth business day
following the date of public announcement that any person has become a Control
Person.
(11) REGULATORY CAPITAL
The Financial Institutions Reform Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions subject to OTS
supervision. Coast must follow specific capital guidelines established by the
OTS which involve quantitative measures of Coast's assets, liabilities and
certain off-balance sheet items. An institution that fails to comply with its
regulatory capital requirements must obtain OTS approval of a capital plan and
can be subject to a capital directive and certain restrictions on its
operations. At December 31, 1997, Coast's regulatory capital requirements were:
o Tangible and core capital of 1.5 percent and 3 percent, respectively,
consisting principally of stockholders' equity, but excluding most
intangible assets such as goodwill and any net unrealized holding gains or
losses on debt securities available for sale.
o Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations, the
portion of the GVA related to loans receivable, equal to 8 percent of the
value of risk-weighted assets.
At December 31, 1997 and 1996, Coast was classified as "well capitalized"
under the prompt corrective action ("PCA") regulations adopted by the OTS
pursuant to the Federal Deposit Insurance Corporation Improvement Act of 1991
("FDICIA"). To be categorized as "well capitalized", Coast must maintain minimum
core capital Tier 1 risk-based capital and risk-based capital ratios as set
forth in the table below. Coast's capital amounts and classifications are
subject to review by federal regulators. There are no conditions or events since
December 31, 1997, that management believes have changed Coast's PCA category.
28
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes Coast's actual and required regulatory
capital as of December 31, 1997 and 1996:
Tier 1
Tangible Core Risk-based Risk-based
Capital Capital Capital Capital
(Dollars in thousands)
DECEMBER 31, 1997 Actual capital:
Amount $ 526,112 $ 526,112 $ 526,112 $ 648,260
Ratio 5.96% 5.96% 9.98% 12.30%
Minimum required capital:
Amount $ 132,371 $ 264,743 N/A $ 421,575
Ratio 1.50% 3.00% N/A 8.00%
Minimum PCA well-capitalized capital:
Amount N/A $ 441,238 $ 316,181 $ 525,992
Ratio N/A 5.00% 6.00% 10.00%
DECEMBER 31, 1996 Actual capital:
Amount $ 460,621 $ 460,621 $ 460,621 $ 584,201
Ratio 5.33% 5.33% 8.57% 10.87%
Minimum required capital:
Amount $ 129,727 $ 259,454 N/A $ 430,094
Ratio 1.50% 3.00% N/A 8.00%
Minimum PCA well-capitalized capital:
Amount N/A $ 432,424 $ 322,571 $ 536,467
Ratio N/A 5.00% 6.00% 10.00%
29
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(12) PENSION AND STOCK OPTION PLANS
The Company sponsors a pension plan covering substantially all of its
employees. The benefits are based upon an employee's length of service and the
employee's average compensation during the five consecutive years of the last 10
years in which the greatest compensation was paid to the employee.
The following table sets forth the status of funding of Coast's pension
plan at December 31, 1997 and 1996, and related amounts appearing in Coast's
consolidated financial statements at or for the years then ended.
At or for the Year Ended
December 31,
1997 1996
(In thousands)
Actuarial present value of benefit obligations:
Vested $ 48,179 $ 41,102
Non-vested 1,629 1,656
Accumulated benefit obligations $ 49,808 $ 42,758
Pension plan assets at fair value (primarily
listed stocks, U.S. government obligations,
corporate obligations and Coast deposits) $ 58,327 $ 51,693
Projected benefit obligations for service
rendered to date (56,396) (48,243)
Pension plan assets in excess of projected
benefit obligation 1,931 3,450
Activity not recognized in net pension plan
cost:
Net gain (7,193) (6,720)
Unrecognized prior service cost 1,460 1,727
Net asset at December 31, 1985, being
amortized over 15 years (905) (1,206)
Accrued pension plan costs $ (4,707) $ (2,749)
Net pension plan cost:
Interest on projected benefit obligations $ 3,527 $ 3,300
Service costs 2,208 1,888
Return on pension plan assets (9,354) (7,174)
Amortization and deferral, net 5,577 3,584
$ 1,958 $ 1,598
For the years ended December 31, 1997 and 1996, the weighted average
discount rates used in determining the actuarial present value of the
accumulated and projected benefit obligations were 6.75% and 7.50%,
respectively. The rate of increase in future compensation was projected to be
3.50% and 4.00% for the years ended December 31, 1997 and 1996, respectively.
The expected long-term rate of return on assets was 9% for the years ended
December 31, 1997 and 1996. Total pension plan expenses were $3.9 million, $4.1
million and $2.5 million for the years ended December 31, 1997, 1996 and 1995,
respectively.
30
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Effective January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits a company to account for stock options
granted under either the fair-value-based or the intrinsic-value-based (as
described in Accounting Principles Bulletin Opinion No. 25) method of
accounting; however, if the company elects to account for options granted under
the intrinsic-value-based method, it must make certain disclosures with respect
thereto. The Company has elected to account for stock options granted under the
intrinsic-value-based method of accounting.
In the second quarter of 1996, the stockholders of the Company approved the
1996 Coast Savings Financial, Inc. Equity Incentive Plan (the "1996 Plan"),
under which the Company could award options to purchase up to 929,196 shares of
its common stock, at exercise prices equal to the market price of the stock on
the date the stock options were awarded, and with lives of up to ten years. The
following table contains certain information with respect to the stock options
granted in 1997 and 1996 under the 1996 Plan.
Options Granted During 1997 and 1996 Assumptions Used in Determining Options' Values
Expected Calculated
Grant Amount Exercise Vesting Expected Risk-Free Expected Dividend Value of
Date Granted Price Date Term Term(1) Rate(2) Volatility(3) Rate(4) Each Option
June 25, 1997 7,500 $45.75 Immediately 10 years 10 years 6.4% 55% 0% $34
April 24, 1996 40,000 31.00 April 24, 1997 10 years 8 years 6.4 53 0 21
May 23, 1996 817,500 33.00 Immediately 10 years 8 years 6.7 52 0 20
June 26, 1996 5,000 31.75 June 26, 1997 10 years 10 years 6.9 55 0 26
December 4, 1996 2,500 35.00 Immediately 10 years 10 years 6.1 55 0 25
<FN>
- -----------------------
(1) The expected term of the options is based on the Company's historical
experience with its outstanding options.
(2) The risk-free rate is the market rate for U.S. Government securities with
the same maturity as the options, determined as of the date the options
were granted.
(3) The volatility of the Company's stock is based on historical information.
(4) There is no dividend rate assumed, as the Company has not paid a dividend
since 1990, nor does it anticipate declaring a dividend in the foreseeable
future.
</FN>
If the Company had accounted for the effects of the issuance of the stock
options utilizing the fair-value-based method of accounting, after-tax earnings
for the year ended December 31, 1997 and 1996 would have been $57.1 million and
$.7 million, respectively, or $2.96 and $.03 per share of common stock on a
diluted basis, respectively. It is not likely that the pro forma effects of the
options issued during 1997 are representative of the effects, if any, of any
awards of stock options that could be issued by the Company in the future.
Pursuant to the 1985 Stock Option and Stock Appreciation Rights Plan (the
"1985 Plan") which had an approved term of ten years stock options having lives
of up to ten years were granted which give the owner of the options the right to
purchase shares of the Company's common stock at a price equal to their fair
market value.
31
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The table below reflects, for the periods indicated, the activity in the
Company's stock options issued under both the 1985 and the 1996 Plans.
At or for the Year Ended
December 31,
1997 1996 1995
Balance at beginning of period 1,691,143 832,943 968,406
Granted 7,500 865,000 --
Canceled or expired -- (5,000) (10,000)
Exercised (836,214) (1,800) (125,463)
Balance at end of period 862,429 1,691,143 832,943
Options exercisable 862,429 1,646,143 832,943
Shares available for grant 56,646 64,146 98,346
Weighted average option price per share:
Under option $22.93 $21.01 $8.71
Exercisable 22.93 20.74 8.71
Exercised 19.25 11.12 7.92
The following table summarizes information with respect to the Company's
stock options outstanding as of December 31, 1997.
Options Outstanding Options Exercisable
Range of Number Weighted-Average Number
Exercise Outstanding Remaining Weighted-Average Outstanding Weighted-Average
Prices at Dec. 31, 1997 Contractual Life Exercise Price at Dec. 31, 1997 Exercise Price
$ 2 to 5 55,250 3.2 years $ 3.25 55,250 $ 3.25
$ 5 to 10 76,095 2.5 years 6.76 76,095 6.76
$10 to 15 256,609 5.2 years 13.48 256,609 13.48
$30 to 35 471,475 8.3 years 32.85 471,475 32.85
$45 to 50 3,000 9.5 years 47.75 2,000 47.75
Pursuant to the 1985 Plan, stock appreciation rights ("SARs") having lives
of up to ten years were granted which give the owners of the SARs the right,
upon exercise of the SARs, to receive an amount equal to the excess of the fair
market value of the Company's common stock over the price assigned to the SARs.
The Company recorded expenses for SARs totaling $14.7 million, $1.2 million and
$1.1 million for the years ended December 31, 1997, 1996 and 1995, respectively.
The table below reflects SARs activity for the periods indicated.
Year Ended December 31,
1997 1996 1995
SARs Average SARs Average SARs Average
Outstanding Price Outstanding Price Outstanding Price
Balance at beginning of period 180,707 $11.25 180,707 $11.25 181,907 $11.25
Canceled or expired -- -- -- -- -- --
Exercised (50,256) 11.28 -- -- (1,200) 11.28
Balance at end of period 130,451 11.24 180,707 11.25 180,707 11.25
32
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(13) OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Coast is a party to off-balance sheet financial instruments containing
certain types of risk in the normal course of business in order to meet the
borrowing needs of its customers and to reduce its own exposure to fluctuations
in interest rates. These financial instruments may include commitments to extend
credit in the form of loans or through letters of credit, Swaps and Caps. These
instruments involve, to varying degrees, elements of credit and interest rate
risk in excess of the dollar amount of liability set forth in the accompanying
consolidated statement of financial condition. The contractual or notational
amounts of those instruments reflect the extent of involvement the Company has
in particular classes of financial instruments.
At December 31, 1997, Coast had letters of credit outstanding aggregating
$355.8 million which are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved in these
letters of credit is essentially the same as that involved in making real estate
loans. Coast's letters of credit generally expire from one to twelve years after
the date of issuance. The outstanding letters of credit were issued in
connection with real estate development activities. The letters of credit were
collateralized by $24.8 million of Coast's MBS and $336.9 million of FHLB of San
Francisco letters of credit (which letters of credit were in turn collateralized
by $361.8 million of Coast's loans and securities) at December 31, 1997. Coast
receives periodic fees for providing the letters of credit supporting the
housing revenue bonds represented by the positive difference, if any, between
the rates of interest paid to the bondholders and the rates of interest received
from the owners of the various projects. The rates of interest on the tax-exempt
housing revenue bonds are reset each week. In the event the rates of interest on
the bonds were to exceed the rates of interest on the respective notes, Coast
would pay the difference and would not, therefore, receive the periodic fee
income described above. These letters of credit fees amounted to none, $2.4
million and $5.9 million, in 1997, 1996 and 1995, respectively, and are included
in other noninterest income in the accompanying consolidated statement of
operations.
Commitments to originate mortgage loans are agreements to lend to a
customer provided there is no violation of any condition established in the
contract. At December 31, 1997, Coast had $216.5 million of such commitments
outstanding, the majority of which were to fund adjustable rate mortgages on
single family residences. Commitments generally have fixed expiration dates or
other termination clauses, and may require payment of a fee. Since certain of
the commitments are expected to expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash requirements. The
fair value of commitments to originate mortgage loans was $1.9 million as of
December 31, 1997.
At December 31, 1997, Coast had $80.8 million of approved undisbursed
overdraft lines of credit associated with retail checking accounts. Since the
majority of the undisbursed amount is not expected to be drawn upon, the total
undisbursed amount does not necessarily represent future credit exposure.
Loans sold with recourse are loans for which the purchaser has partial or
full recourse against Coast if any borrower should fail to perform on a loan.
See Note 17 for further discussion of loans sold with recourse.
33
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Coast has at times utilized off-balance sheet financial instruments in
order to reduce its own exposure to fluctuations in interest rates. These
financial instruments include Swaps and Caps, both of which are considered
derivative financial instruments held for purposes other than trading. Swaps
generally involve the exchange of fixed and floating rate interest payment
obligations without the exchange of the underlying notional principal amounts.
At December 31, 1996, Coast had no remaining Swaps, nor were any Swaps entered
into during 1997.
The net effect of the Swaps, exclusive of interest on the related deposits,
was to record $38 thousand of interest income in 1996 and $.8 million of
interest expense during 1995, which is included in interest expense on deposits
in the accompanying consolidated statement of operations.
The following table summarizes the allocation of the GVA attributable to
Coast's off-balance sheet items for the periods indicated.
Year Ended December 31,
1997 1996 1995
(In millions)
Balance at beginning of period $ 9 $ 17 $ 8
Additions charged to operations -- 11 --
Losses charged -- (19) --
Reallocation from loan-related assets -- -- 9
Balance at end of period $ 9 $ 9 $ 17
At December 31, 1997, $5 million of the GVA attributable to off-balance
sheet activity related to Coast's letters of credit and $4 million related to
loans sold with recourse. While based on currently available information, Coast
believes it has adequately provided for losses which might emanate from these
sources, deterioration of economic conditions or other circumstances could
result in the need for additional allowances.
(14) CONTINGENT LIABILITIES
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.
34
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(15) PARENT COMPANY FINANCIAL INFORMATION
This information should be read in conjunction with the other Notes to
Consolidated Financial Statements.
STATEMENT OF FINANCIAL CONDITION
December 31,
1997 1996
(In thousands)
ASSETS
Cash $ 26 $ 42
Short term investments 6,729 4,795
Mortgage-backed securities ("MBS")
available for sale 6,450 7,847
Accounts receivable and other assets 16,498 325
Investment in subsidiary 538,930 469,682
$568,633 $482,691
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior Notes $ 56,838 $ 56,532
Other liabilities 1,552 1,628
58,390 58,160
Stockholders' equity:
Common stock 194 186
Additional paid-in capital 293,423 265,055
Unrealized gain on securities
available for sale 2,887 2,778
Retained earnings 213,739 156,512
Total stockholders' equity 510,243 424,531
$568,633 $482,691
STATEMENT OF OPERATIONS
Year Ended December 31,
1997 1996 1995
(In thousands)
Dividends received from subsidiary $ 6,000 $ 6,000 $ 6,000
Interest Income:
MBS 397 485 560
Investment securities 342 216 291
739 701 851
Equity in undistributed net earnings
of subsidiary 54,550 7,918 30,038
Interest expense on borrowings (6,096) (6,105) (6,105)
General and administrative expense (345) (68) (140)
Income tax benefit 2,379 2,390 2,158
Net earnings $57,227 $10,836 $32,802
35
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
STATEMENT OF CASH FLOWS
Year Ended December 31,
1997 1996 1995
(In thousands)
Cash flows from operating activities:
Net earnings $ 57,227 $ 10,836 $ 32,802
Adjustments to reconcile net earnings
to net cash provided (used) by operations:
Amortization of premiums and discounts 343 345 346
Net (increase) decrease in accounts receivable (16,254) 116 (119)
Deferred income tax benefit (2,379) (2,390) (2,158)
Equity in net earnings of subsidiary (54,550) (7,918) (30,038)
Other (12,296) 48 (864)
Total adjustments (85,136) (9,799) (32,833)
Net cash provided (used) by operating activities (27,909) 1,037 (31)
Cash flows from investing activities
Principal repayments on MBS available for sale 1,451 1,344 1,043
Equity investment in subsidiary -- -- (3,000)
Net cash provided (used) by investing activities 1,451 1,344 (1,957)
Cash flows from financing activities:
Common stock options exercised 28,376 37 1,858
Net cash provided by financing activities 28,376 37 1,858
Net increase (decrease) in cash and cash
equivalents 1,918 2,418 (130)
Cash and cash equivalents at beginning of year 4,837 2,419 2,549
Cash and cash equivalents at end of year $ 6,755 $ 4,837 $ 2,419
Supplemental schedule of noncash investing activities:
Unrealized gain (loss) on securities available
for sale, net of taxes $ 109 $ (3,776) $ 7,560
36
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(16) MORTGAGE BANKING ACTIVITIES
In recent years, the primary reasons Coast has sold mortgage loans have
been to reduce asset size or constrain asset growth and to liquidate newly
originated fixed rate product. The following table represents components of the
Company's mortgage banking activities for each of the periods indicated.
Year Ended December 31,
1997 1996 1995
(In thousands)
Loans receivable held for sale:
Loans originated, net of refinances $126,061 $150,151 $146,024
Sale of loans 44,658 105,329 44,197
Gain (loss) on sales 257 (304) 403
Balance at end of period, at the lower of 71,148 106,122 221,032
amortized historical cost or fair value
MBS available for sale:
Sale of MBS - - 35,335
Gain (loss) on sales - - (287)
Balance at end of period, at fair value 282,104 312,002 354,398
Loans serviced for others 2,721,590 3,067,843 3,416,880
Loan servicing fee income 7,975 8,847 9,829
The following table summarizes the activity in the capitalized Excess
Mortgage Servicing Rights, which are included in interest receivable and other
assets in the accompanying consolidated statement of financial condition, for
the periods indicated.
Year Ended December 31,
1997 1996 1995
(In thousands)
Balance at beginning of period $ 31,677 $ 33,572 $ 38,849
Additions 692 2,776 284
Amortization (3,856) (4,229) (5,021)
Adjustments due to prepayments
exceeding expected levels (172) (442) (540)
Balance at end of period $ 28,341 $ 31,677 $ 33,572
There were no Mortgage Servicing rights capitalized during 1997.
During the year ended December 31, 1997, Coast sold $54.5 million of
commercial and multifamily loans with limited recourse expiring November 3,
1998. During the years ended December 31, 1996 and 1995, Coast did not sell
loans with recourse or subordination. At December 31, 1997, 1996 and 1995, the
principal balances of loans sold with recourse or subordination totaled $307.0
million, $359.4 million and $398.5 million, respectively, and the amount of
recourse or
37
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
subordination against Coast totaled $104.5 million, $73.8 million and $78.5
million, respectively. Losses on loans sold with recourse or subordination
totaled $1.3 million, $1.9 million and $4.4 million in 1997, 1996 and 1995,
respectively.
(17) FAIR VALUE OF FINANCIAL INSTRUMENTS
The following table presents the carrying amounts and fair values of the
Company's financial instruments at the dates indicated. For further detail of
fair value information, see the notes referenced in the table. See Note 1 to the
Consolidated Financial Statements for a discussion of the accounting policies
followed in determining fair value information.
December 31,
1997 1996
Carrying Fair Carrying Fair
Value Value Value Value
ASSETS
Cash and due from banks (Note 2) $ 142,811 $ 142,811 $ 138,861 $ 138,861
Federal funds sold and other short term
investments (Note 2) 135,729 135,729 198,795 198,795
Investment securities (Note 2) 48,127 48,268 35,833 35,980
Loans receivable, net (Note 3) 5,875,496 5,967,809 5,749,985 5,830,989
Loans receivable held for sale (Note 3) 71,148 73,307 106,122 109,566
MBS (Note 4) 1,898,230 1,922,282 1,731,268 1,740,075
MBS available for sale (Note 4) 282,104 282,104 312,002 312,002
FHLB stock (Note 2) 101,120 101,120 90,882 90,882
LIABILITIES
Deposits (Note 7) (6,418,194) (6,424,926) (6,356,448) (6,336,186)
FHLB advances (Note 8) (1,321,500) (1,322,230) (1,104,200) (1,102,783)
Other borrowings (Note 8) (413,555) (417,092) (643,521) (647,544)
Capital Notes (Note 8) (56,248) (60,703) (55,997) (64,113)
OFF-BALANCE SHEET FINANCIAL INSTRUMENTS (NOTE 13)
Swaps - - - -
Caps - - - -
Commitments to originate mortgage loans - 1,946 - 2,252
Letters of credit - (5,000) - (5,000)
Loans sold with recourse - (4,000) - (4,000)
(18) SUBSEQUENT EVENT
On January 2, 1998, Coast redeemed the 13% Capital Notes described in Note
8 for their face value of $57.5 million plus an early redemption premium of $3.2
million.
38
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
(19) ACQUISITION
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 basis, 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. On February 12, 1998, the Company
received shareholder and regulatory approval for the acquisition. It is expected
that the acquisition will be completed on February 13, 1998.
39