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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(MARK ONE)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1995
OR
[_] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from______________________ to _______________________
COMMISSION FILE NUMBER 1-10264
COAST SAVINGS FINANCIAL, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
DELAWARE
(STATE OR OTHER JURISDICTION OF INCORPORATION OR ORGANIZATION)
95-4196764
(I.R.S. EMPLOYER IDENTIFICATION NUMBER)
1000 WILSHIRE BOULEVARD
LOS ANGELES, CALIFORNIA
(ADDRESS OF PRINCIPAL EXECUTIVE OFFICES)
90017-2457
(ZIP CODE)
Registrant's telephone number, including area code: (213) 362-2000
Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE
TITLE OF EACH CLASS ON WHICH REGISTERED
------------------- ---------------------
Common Stock, $.01 par value New York Stock Exchange
(including related Stock Purchase Rights) Pacific Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
INDICATE BY CHECK MARK WHETHER THE REGISTRANT (1) HAS FILED ALL REPORTS
REQUIRED TO BE FILED BY SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934 DURING THE PRECEDING 12 MONTHS (OR FOR SUCH SHORTER PERIOD THAT THE
REGISTRANT WAS REQUIRED TO FILE SUCH REPORTS), AND (2) HAS BEEN SUBJECT TO
SUCH FILING REQUIREMENTS FOR THE PAST 90 DAYS. YES [X] NO [_]
The aggregate market value of the voting stock held by nonaffiliates of the
registrant based upon the closing sale price of its Common Stock on the New
York Stock Exchange on March 15, 1996, was approximately $529,624,535.
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of the Form 10-K or any
amendment to this Form 10-K. [X]
The number of shares of Common Stock outstanding as of March 15, 1996:
18,583,317.
DOCUMENTS INCORPORATED BY REFERENCE
PART III--portions of the Proxy Statement to be filed with the Securities
and Exchange Commission for the Annual Meeting of Stockholders to be held on
April 24, 1996, are incorporated by reference into Part III hereof.
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COAST SAVINGS FINANCIAL, INC. 1995 ANNUAL REPORT ON FORM 10-K
TABLE OF CONTENTS
PART I
PAGE
----
Item 1. Business........................................................ 1
General......................................................... 1
Operating Strategy.............................................. 1
Yields Earned and Rates Paid.................................... 3
Lending Activities.............................................. 8
Risk Elements................................................... 14
Credit Concentration and Letters of Credit...................... 19
Nonperforming Assets............................................ 20
Other Investments............................................... 21
Subsidiaries.................................................... 22
Deposits and Other Sources of Funds............................. 23
Competition..................................................... 27
Regulation...................................................... 28
Taxation........................................................ 37
Employees....................................................... 39
Item 2. Properties...................................................... 39
Item 3. Legal Proceedings............................................... 39
Item 4. Submission of Matters to a Vote of Security Holders............. 39
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters............................................. 40
Item 6. Selected Financial Data......................................... 41
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations.......................................... 42
General......................................................... 42
Results of Operations........................................... 42
Asset/Liability Management...................................... 44
Nonperforming Assets............................................ 45
Capital Resources and Liquidity................................. 46
Item 8. Financial Statements and Supplementary Data..................... 47
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure........................................... 86
PART III
Item 10. Directors and Executive Officers of the Registrant.............. 86
Item 11. Executive Compensation.......................................... 86
Item 12. Security Ownership of Certain Beneficial Owners and Management.. 86
Item 13. Certain Relationships and Related Transactions.................. 86
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K. 87
PART I
ITEM 1. BUSINESS
GENERAL
Coast Savings Financial, Inc. (the "Company"), a Delaware corporation, was
organized in 1988 and is the holding company for Coast Federal Bank, Federal
Savings Bank ("Coast" or the "Bank"). 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, 1995. Coast was organized as a federal mutual
savings and loan association in 1935 and converted to stock form in 1985.
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, 1995, Coast
operated 89 retail banking offices in California.
Coast is regulated by the Director ("OTS Director") of the Office of Thrift
Supervision ("OTS"), and by the Federal Deposit Insurance Corporation ("FDIC")
which, through the Savings Association Insurance Fund ("SAIF"), insures the
deposit accounts of savings institutions such as Coast that are regulated by
the OTS. Coast is also a member of the Federal Home Loan Bank ("FHLB") of San
Francisco, which is one of the twelve regional banks for federally insured
savings institutions and certain other residential lending entities comprising
the Federal Home Loan Bank System.
OPERATING STRATEGY
In recent years, Coast's primary objective has been to enhance franchise
value by (i) reducing balance sheet risk and enhancing asset quality, (ii)
increasing core profitability, (iii) improving the Bank's overall capital
adequacy and (iv) developing primary retail banking relationships with
customers.
Reducing balance sheet risk and enhancing asset quality. Coast has reduced
its investment in "high-risk" assets (which it defines to include foreclosed
real estate owned, real estate held for development, construction and
commercial real estate loans, and high yield and derivative securities) from
$3.0 billion as of December 31, 1987, to $916.0 million as of December 31,
1995. With the exception of the first quarter of 1994 (when an earthquake
resulted in increased nonperforming assets), Coast's program of liquidating
nonperforming assets has resulted in eighteen quarters of reductions in total
nonperforming assets, from $410.1 million as of March 31, 1991 (or 4.20% of
total assets), to $113.0 million as of December 31, 1995 (or 1.37% of total
assets). During that same period the level of Coast's general valuation
allowance ("GVA") has increased from 24% of total nonperforming assets to 73%
of total nonperforming assets, respectively, at such dates. Moreover, during
the fourth quarter of 1994, the Bank exercised its option to eliminate its
exposure to all potential future credit losses related to $1 billion of
multifamily loans sold with recourse. Coast intends to continue to emphasize
the origination of one-to-four family residential, adjustable rate mortgage
loans and has not originated multifamily, commercial real estate or
construction loans since 1989 (other than to finance the sale of foreclosed
real estate owned or to facilitate loan assumptions as permitted by the
provisions of the respective mortgage notes).
Increasing core profitability. As a result of the reduced level of general
and administrative expenses (from $180.2 million for 1989 to $161.7 million
for 1995), the improved ratio of interest-earning assets to interest-bearing
liabilities (from 97% at December 31, 1989, to 103% at December 31, 1995), the
increased effective net spread (from 1.63% for 1989 to 2.47% for 1995), the
increased amounts of loan servicing fees and charges and retail banking and
other fee income (from $27.2 million for 1989 to $40.4 million for 1995), and
numerous actions to enhance branch network profitability, Coast's pretax core
profitability (defined as net interest income before provision for loan
losses, less general and administrative expenses, plus loan servicing fees and
charges and the recurring portion of noninterest income) increased from $20.9
million in 1989 to $89.3 million in 1995.
1
Improving overall capital adequacy. During the past five years, Coast's
overall capital adequacy has been enhanced by reducing the amount of capital
required under the tangible, core and risk-based capital requirements
specified in the OTS capital regulations and by increasing the amount of
capital available to satisfy these requirements. At December 31, 1995, Coast's
tangible, core and risk-based capital ratios were 5.47%, 5.47% and 10.86%,
respectively, each of which was in excess of the regulatory thresholds
necessary to be deemed a "well-capitalized" institution.
Strategies Coast has employed to reduce the amount of capital required under
these requirements include downsizing the balance sheet (from total assets of
$12.4 billion at December 31, 1988, to $8.3 billion at December 31, 1995),
generally eliminating originations of loans other than one-to-four family
residential loans, reducing capital-intensive and nonperforming assets,
securitizing mortgage loans into nonrecourse mortgage-backed securities
("MBS"), and eliminating the recourse exposure associated with $1 billion of
multifamily credit extensions.
Coast has increased the amount of its stockholders' equity and regulatory
capital by retaining internally-generated capital and by completing various
capital market transactions. During 1991 the Company completed an exchange of
$10.7 million of its convertible subordinated debentures for common stock;
during 1992 Coast issued $57.5 million of subordinated debt (the proceeds of
which are included in risk-based capital); and during 1993 the Company issued
2,300,000 shares of common stock at $17.75 per share and $57.5 million of
senior notes, contributing the majority of the resulting net proceeds to Coast
as equity capital. See "Regulation--Regulatory Capital Requirements."
Developing primary retail banking relationships with customers. The Company
has significantly broadened its financial services related product offerings
over the past five years to include a wide array of deposit, investment, and
insurance products as well as other complementary financial services. The sale
of these financial services and products has been facilitated by the sales and
service excellence initiatives that have been implemented throughout the
retail network. All retail bank employees have undergone comprehensive sales
training and integrated marketing support and incentive-based compensation
programs have been installed. Reflecting the success of these initiatives, the
dollar balance of checking accounts has increased from $464.3 million at
December 31, 1994, to $632.0 million at December 31, 1995, and retail banking
fee income has increased from $13.9 million in 1989 to $26.9 million for the
year ended December 31, 1995.
The following table sets forth certain information with respect to Coast's
operations during the periods or at the dates indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31,
------------------------------------------
1995 1994 1993 1992 1991
------- ------- ------- ------- -------
Return on assets(1)(7)............. .39% (.08)% .21% .57% .45%
Return on equity(2)(7)............. 8.36 (1.70) 4.72 16.09 16.81
Equity-to-assets ratio(3)(7)....... 4.61 4.76 4.48 3.55 2.68
Dividend pay-out ratio(4).......... -- -- -- -- --
Effective net spread(5)............ 2.47 2.48 2.67 2.69 2.41
Noninterest expense to average as-
sets(7)........................... 1.96 2.13 2.41 2.47 2.43
Total nonperforming assets ra-
tio(6)............................ 1.37 1.73 2.72 3.82 4.28
Total general valuation allowance
(in millions)..................... $ 82.0 $ 85.0 $ 120.0 $ 140.0 $ 140.0
- --------
(1) Net earnings (loss) divided by average total assets.
(2) Net earnings (loss) divided by average stockholders' equity.
(3) Average stockholders' equity divided by average total assets.
(4) Dividends paid per share divided by primary earnings per share.
(5) Net interest income divided by average total interest-earning assets.
(6) Total nonperforming assets (as defined under "Risk Elements--Nonperforming
Assets") divided by total assets at the end of period.
(7)Average balances used in the calculation are based on month-end balances.
2
YIELDS EARNED AND RATES PAID
Net interest income results from the difference between the interest income
earned on interest-earning assets and the interest expense incurred on
interest-bearing liabilities, and can be significantly affected by changes in
the relative amounts of, and the interest rates associated with, these assets
and liabilities. The ability to maintain yields on interest-earning assets
which are greater than the costs of interest-bearing liabilities during
periods of fluctuating interest rates is determined principally by the
relative maturities of, together with the relative frequency of rate changes
("Repricing Mechanisms") on, such assets and liabilities.
During periods of declining interest rates, such as occurred during 1991,
1992 and 1993, the combined yield on Coast's loan, MBS and investment
securities portfolios generally does not fall as rapidly as its cost of funds.
Conversely, during periods of rising interest rates, such as occurred during
1994 and early 1995, the cost of interest-bearing liabilities can be expected
to rise more rapidly than the yield on interest-earning assets. The primary
reason that the changes in rates on Coast's assets lag the changes in rates on
its liabilities is that the majority of Coast's loans are adjustable rate
mortgage loans ("ARMs") tied to the FHLB Eleventh District cost of funds index
("COFI"). This index, which is published monthly by the FHLB of San Francisco,
is calculated as the average actual cost of deposits and borrowings of all
member institutions of the Eleventh District for the preceding month. The
published index generally becomes effective, for loans tied thereto, in the
month following publication. As a result, there is generally a two-month delay
between the change in effective interest costs and the time the change is
reflected in COFI ARM yields.
During 1991 and 1992, in an effort to reduce the impact of the inherent lag
in the Repricing Mechanism of ARMs tied to COFI, Coast originated ARM products
which are tied to the London Interbank Offered Rate ("LIBOR") index in 1991.
This index is generally more responsive to changes in prevailing market rates
of interest and, as a result, interest rates on ARMs tied to LIBOR generally
respond more quickly to changes in market interest rates than do ARMs tied to
COFI. As of December 31, 1995, Coast had $323.9 million (6%) of loans and
$248.8 million (11%) of MBS tied to LIBOR, and $4.47 billion (82%) of loans
and $1.85 billion (85%) of MBS tied to COFI included in the loan and MBS
portfolios, which totaled $5.47 billion and $2.17 billion, respectively.
Coast has emphasized the origination of ARMs in order to improve the
interest rate sensitivity of its loan portfolio. Of Coast's loan originations
since January 1991, 90% have been ARMs, the majority of which bear interest
rates that fluctuate monthly in response to changes in COFI. ARMs, including
assets tied to COFI, LIBOR and other indices, accounted for 95% of Coast's
loan portfolio and 98% of its MBS portfolio at December 31, 1995. Coast's
ability to continue to originate a substantial volume of loans with an
interest rate sensitivity or a Repricing Mechanism matching that of its
liabilities may be limited by economic factors, including the general level of
interest rates, and by consumer preferences for alternative ARM indices or
fixed rate mortgage loan products.
3
Coast measures its exposure to interest rate risk using a variety of
techniques. One commonly used measure of such exposure is the difference
between the amounts of assets and liabilities maturing or repricing over
various periods (the "maturity gap"). The following table illustrates the
contractual maturities, as adjusted for estimates of prepayments and Repricing
Mechanisms, of the major interest-bearing asset and liability categories of
the Company as of December 31, 1995. The table also reports the maturity gap
between Coast's repricing or maturing assets and liabilities. The interest
rate sensitivity of Coast's assets and liabilities illustrated in the
following table could vary substantially if different assumptions were used or
if actual experience differs from the assumptions utilized. See "Regulation--
Regulatory Capital Requirements" and Item 7. "Management's Discussion and
Analysis of Financial Condition and Results of Operations--Asset/Liability
Management."
ANALYSIS OF REPRICING MECHANISMS
OVER ONE OVER FIVE
WITHIN TO FIVE TO TEN OVER TEN
DECEMBER 31, 1995 ONE YEAR YEARS YEARS YEARS TOTAL
----------------- -------- -------- --------- -------- ------
(DOLLARS IN MILLIONS)
Interest-earning assets:
Cash and investment securities:
Cash and due from banks....... $ 120 $ -- $ -- $ -- $ 120
Investment securities(1,2).... 184 1 -- 4 189
Loans:
ARMs(3)....................... 5,102 110 -- -- 5,212
Fixed rate(4)................. 68 104 63 19 254
MBS:
ARMs(3)....................... 2,125 12 -- -- 2,137
Fixed rate(4)................. 6 18 7 4 35
------ ------ ----- ----- ------
Total....................... $7,605 $ 245 $ 70 $ 27 $7,947
====== ====== ===== ===== ======
Interest-bearing liabilities:
Deposits:
Checking accounts............. $ 632 $ -- $ -- $ -- $ 632
Money market accounts......... 666 -- -- -- 666
Certificates of deposit(1).... 4,289 536 -- -- 4,825
Borrowings:
FHLB advances(1).............. 779 25 -- -- 804
Other(1)...................... 677 56 56 -- 789
------ ------ ----- ----- ------
Total....................... $7,043 $ 617 $ 56 $ -- $7,716
====== ====== ===== ===== ======
Maturity gap...................... $ 562 $ (372) $ 14 $ 27 $ 231
====== ====== ===== ===== ======
Cumulative maturity gap........... $ 562 $ 190 $ 204 $ 231 $ 231
====== ====== ===== ===== ======
Cumulative maturity gap as a
percentage of total assets....... 7% 2% 2% 3% 3%
====== ====== ===== ===== ======
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(1) Repricing terms are based upon the contractual maturities of the
instruments.
(2) Includes FHLB stock.
(3) Repricing terms of ARMs are based upon the interest rate reset periods
called for under the terms of the respective notes.
(4) Repricing terms are based upon contractual maturities adjusted for
projected repayments and prepayments of principal, based upon Coast's
historical experience.
4
Because of the inherent lag in the Repricing Mechanism of the ARM loans tied
to COFI, interest rate spreads can be generally expected to increase as the
index falls and to decrease as the index rises. However, a positive gap, such
as that reflected in the table above in the "within one year" column, has the
effect of repricing more assets (primarily loans and MBS tied to COFI) than
liabilities during a given period. This tends to moderate both the increase in
spread in a falling interest rate environment and the decrease in spread in a
rising interest rate environment.
The effect on net interest income of changes in interest rates and in the
amounts of interest-earning assets and interest-bearing liabilities is shown
in the following table. Information is provided on changes for the periods
indicated attributable to (i) changes in rates (change in weighted average
rate multiplied by prior period average portfolio balance), (ii) changes in
volume (change in average portfolio balance multiplied by prior period
weighted average rate) and (iii) the combined effect of changes in rates and
volume (change in weighted average rate multiplied by change in average
portfolio balance).
INCREASE (DECREASE) DUE TO
----------------------------------------
RATE VOLUME RATE/VOLUME TOTAL
-------- -------- ----------- --------
(IN THOUSANDS)
YEAR ENDED DECEMBER 31, 1995 VS 1994:
Income from interest-earning
assets:
Loans............................ $49,491 $ 33,647 $4,355 $ 87,493
MBS.............................. 20,939 4,375 981 26,295
Investment securities............ 5,089 (257) (69) 4,763
-------- -------- ------- --------
75,519 37,765 5,267 118,551
-------- -------- ------- --------
Expense of interest-bearing
liabilities:
Deposits......................... 54,958 6,073 1,529 62,560
FHLB advances and other
borrowings...................... 18,407 20,230 4,214 42,851
-------- -------- ------- --------
73,365 26,303 5,743 105,411
-------- -------- ------- --------
Change in net interest income...... $ 2,154 $ 11,462 $ (476) $ 13,140
======== ======== ======= ========
YEAR ENDED DECEMBER 31, 1994 VS 1993:
Income from interest-earning
assets:
Loans............................ $(30,086) $ 25,407 $(1,965) $ (6,644)
MBS.............................. (5,262) (16,200) 748 (20,714)
Investment securities............ 6,869 (342) (186) 6,341
-------- -------- ------- --------
(28,479) 8,865 (1,403) (21,017)
-------- -------- ------- --------
Expense of interest-bearing
liabilities:
Deposits......................... (13,581) (2,234) 130 (15,685)
FHLB advances and other
borrowings...................... 6,130 2,037 156 8,323
-------- -------- ------- --------
(7,451) (197) 286 (7,362)
-------- -------- ------- --------
Change in net interest income...... $(21,028) $ 9,062 $(1,689) $(13,655)
======== ======== ======= ========
5
The following table sets forth information concerning the balances and
interest rates of Coast's interest-earning assets and interest-bearing
liabilities for the periods and at the dates indicated.
SPREAD
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1995 1994
---------------------------------------- ----------------------------------------
AVERAGE AVERAGE
AVERAGE INCOME/ YIELD/ RATE-END AVERAGE INCOME/ YIELD/ RATE-END
BALANCE(2) EXPENSE COST(3) OF PERIOD BALANCE(2) EXPENSE COST(3) OF PERIOD
---------- -------- ------- --------- ---------- -------- ------- ---------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans(1)................ $5,850,093 $469,864 8.03% 7.95% $5,376,946 $382,371 7.11% 7.18%
MBS..................... 1,880,350 119,629 6.36 6.60 1,796,164 93,334 5.20 5.68
Federal funds sold...... 64,901 4,399 6.78 3.77 59,578 2,732 4.59 --
FHLB stock.............. 83,908 4,467 5.32 5.16 68,916 3,259 4.73 5.69
Other investment
securities............. 246,336 14,822 6.02 6.32 272,094 12,934 4.75 6.08
---------- -------- ----- ----- ---------- -------- ----- -----
Total interest-earning
assets................ $8,125,588 $613,181 7.55% 7.51% $7,573,698 $494,630 6.53% 6.82%
========== ======== ===== ===== ========== ======== ===== =====
INTEREST-BEARING
LIABILITIES:
Deposits:
Checking............... $ 553,763 $ 5,675 1.02% 1.27% $ 469,035 $ 3,380 0.72% 0.65%
Money market........... 724,281 18,190 2.51 2.59 1,060,119 24,317 2.29 2.47
Time certificates of
deposit............... 4,793,347 257,030 5.36 5.41 4,377,920 190,638 4.35 4.83
---------- -------- ----- ----- ---------- -------- ----- -----
Total deposits......... 6,071,391 280,895 4.63 4.67 5,907,074 218,335 3.70 4.15
---------- -------- ----- ----- ---------- -------- ----- -----
Borrowings:
FHLB advances.......... 902,159 56,632 6.28 6.10 767,890 40,621 5.29 6.20
Short-term............. 985,164 59,677 6.06 5.81 737,065 32,677 4.43 6.02
Long-term.............. 129,669 14,926 11.51 11.15 136,354 15,086 11.06 11.02
---------- -------- ----- ----- ---------- -------- ----- -----
Total borrowings....... 2,016,992 131,235 6.51 6.40 1,641,309 88,384 5.38 6.47
---------- -------- ----- ----- ---------- -------- ----- -----
Total interest-bearing
liabilities.......... $8,088,383 $412,130 5.10% 4.95% $7,548,383 $306,719 4.06% 4.63%
========== ======== ===== ===== ========== ======== ===== =====
DIFFERENCE BETWEEN
AVERAGE BALANCE OF
INTEREST-EARNING ASSETS
AND INTEREST-BEARING
LIABILITIES............ $ 37,205 $ 25,315
========== ==========
NET SPREAD.............. $201,051 2.47%(4) 2.56% $187,911 2.48%(4) 2.19%
======== ===== ===== ======== ===== =====
- --------
(1) Includes Nonaccrual and Modified Loans in the "average balance", but only
includes actual interest recognized on such loans in "income/expense."
Interest income on loans includes amortization of net deferred loan
origination fees of $.3 million, $.8 million, $3.7 million, $4.9 million
and $4.1 million for the years ended December 31, 1995, 1994, 1993, 1992
and 1991, respectively.
(2) Average of daily balances during the year.
(3) Income/expense divided by average balance.
(4) Net spread (dollars) divided by average total interest-earning assets (the
"effective net spread").
6
TABLE
AT OR FOR THE YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------------------------------------------------------------------
1993 1992 1991
- ----------------------------------------- ----------------------------------------- -----------------------------------------
AVERAGE AVERAGE AVERAGE
AVERAGE INCOME/ YIELD RATE-END AVERAGE INCOME/ YIELD/ RATE-END AVERAGE INCOME/ YIELD/ RATE-END
BALANCE(2) EXPENSE COST(3) OF PERIOD BALANCE(2) EXPENSE COST(3) OF PERIOD BALANCE(2) EXPENSE COST(3) OF PERIOD
- ---------- -------- ------- --------- ---------- -------- ------- --------- ---------- -------- ------- ---------
(DOLLARS IN THOUSANDS)
$5,047,296 $389,015 7.71% 7.08% $5,541,517 $479,807 8.66% 7.95% $6,460,304 $645,706 9.99% 9.73%
2,093,535 114,048 5.45 5.22 1,809,785 125,294 6.92 5.92 1,541,980 145,150 9.41 8.14
43,268 886 2.05 3.09 167,643 5,676 3.39 2.90 316,187 18,709 5.92 --
68,158 2,483 3.64 3.75 81,784 1,061 1.30 3.14 89,273 5,297 5.93 5.50
300,341 9,215 3.07 3.27 185,218 7,335 3.96 2.49 171,403 8,958 5.23 3.97
- ---------- -------- ----- ----- ---------- -------- ----- ----- ---------- -------- ----- -----
$7,552,598 $515,647 6.83% 6.28% $7,785,947 $619,173 7.95% 7.02% $8,579,147 $823,820 9.60% 9.06%
========== ======== ===== ===== ========== ======== ===== ===== ========== ======== ===== =====
$ 448,000 $ 4,895 1.09% 0.83% $ 465,000 $ 7,769 1.67% 0.97% $ 474,000 $ 17,401 3.67% 2.45%
1,416,000 35,334 2.50 2.27 1,926,000 69,012 3.58 2.77 1,662,000 90,557 5.45 4.62
4,100,000 193,791 4.73 4.01 4,320,000 260,104 6.02 5.39 5,617,000 424,917 7.56 6.50
- ---------- -------- ----- ----- ---------- -------- ----- ----- ---------- -------- ----- -----
5,964,000 234,020 3.92 3.65 6,711,000 336,885 5.02 4.30 7,753,000 532,875 6.87 5.74
- ---------- -------- ----- ----- ---------- -------- ----- ----- ---------- -------- ----- -----
512,050 30,900 6.03 4.92 567,390 40,081 7.06 5.20 672,919 55,901 8.31 7.15
936,800 31,551 3.37 3.39 456,616 17,402 3.81 3.58 262,719 16,221 6.17 4.84
151,727 17,610 11.61 10.35 94,245 15,128 16.05 12.70 78,315 12,159 15.53 12.35
- ---------- -------- ----- ----- ---------- -------- ----- ----- ---------- -------- ----- -----
1,600,577 80,061 5.00 4.61 1,118,251 72,611 6.49 5.42 1,013,953 84,281 8.31 7.04
- ---------- -------- ----- ----- ---------- -------- ----- ----- ---------- -------- ----- -----
$7,564,577 $314,081 4.15% 3.79% $7,829,251 $409,496 5.23% 4.54% $8,766,953 $617,156 7.04% 5.91%
========== ======== ===== ===== ========== ======== ===== ===== ========== ======== ===== =====
$ (11,979) $ (43,304) $ (187,806)
========== ========== ==========
$201,566 2.67%(4) 2.49% $209,677 2.69%(4) 2.48% $206,664 2.41%(4) 3.15%
======== ===== ===== ======== ===== ===== ======== ===== =====
7
LENDING ACTIVITIES
Types of Loans
Coast's loan portfolio consists principally of long-term loans secured by
residential real estate and Coast's MBS portfolio, 98% of which is comprised
of securities which were created utilizing Coast-originated mortgage loans. At
December 31, 1995, 95% and 98% of Coast's loan and MBS portfolios,
respectively, consisted of adjustable rate assets. The loans made by Coast
enable borrowers to purchase, refinance, or improve the security properties.
Most of Coast's single family residential loan contracts provide for
amortization of principal over 30 years. The majority of Coast's single family
residential loans have generally remained outstanding for less time than such
contractual periods because the borrowers refinanced them or prepaid the loans
in full upon sale of the properties securing the loans. The following table
shows the composition of Coast's loan and MBS portfolios, net of unearned
discounts, undisbursed loan proceeds, deferred loan origination fees and
valuation allowances, as of the dates indicated.
DECEMBER 31,
---------- -------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Loans:
Real estate:
1 to 4 units........ $3,217,683 $3,278,371 $2,457,860 $2,328,405 $2,856,758
More than 4 units... 1,316,559 1,387,656 1,407,295 1,504,530 1,492,292
Commercial.......... 845,439 897,255 936,141 963,812 1,053,089
---------- ---------- ---------- ---------- ----------
5,379,681 5,563,282 4,801,296 4,796,747 5,402,139
VA-guaranteed and
FHA-insured........ 12,354 15,825 20,782 28,132 35,269
Construction........ -- -- -- 6,298 1,890
Second mortgage..... 51,268 53,478 54,497 85,803 164,446
---------- ---------- ---------- ---------- ----------
Total real estate
loans............ 5,443,303 5,632,585 4,876,575 4,916,980 5,603,744
Commercial business. 2,177 146,122 114,693 133,537 120,271
Secured by deposits. 8,557 8,880 10,903 13,054 16,004
Overdraft line of
credit............. 12,459 5,595 5,025 5,707 7,171
---------- ---------- ---------- ---------- ----------
Total loans....... 5,466,496 5,793,182 5,007,196 5,069,278 5,747,190
---------- ---------- ---------- ---------- ----------
MBS:
1 to 4 units.......... 2,079,888 1,632,172 1,847,662 2,097,051 1,674,000
More than 4 units..... 91,913 101,556 124,639 119,850 87,511
---------- ---------- ---------- ---------- ----------
2,171,801 1,733,728 1,972,301 2,216,901 1,761,511
---------- ---------- ---------- ---------- ----------
$7,638,297 $7,526,910 $6,979,497 $7,286,179 $7,508,701
========== ========== ========== ========== ==========
The types of loans which Coast may originate are specified in federal
regulations. Although Coast may originate or purchase whole loans or loan
participations secured by real estate located in any part of the United
States, as of December 31, 1995, 96% of Coast's mortgage loan portfolio is
secured by real estate located in California. Coast also has authority to make
various kinds of secured and unsecured consumer and commercial business loans,
but has not originated or purchased significant amounts of such loans. Coast
offers credit card accounts as an agent for an unaffiliated entity but
currently extends no credit in connection with such activities.
Securitization
Coast has securitized portions of its loan portfolio in recent years ($654.2
million, $434.2 million and $343.0 million in 1995, 1994 and 1993,
respectively) for several reasons. First, Coast's strategic downsizing, which
was largely accomplished during the period of 1989 through 1991 in response to
revised capital
8
requirements mandated by federal law, was facilitated by the creation and sale
of a large amount of MBS which are generally more liquid than whole mortgage
loans. Second, MBS are more efficient as collateral for borrowings than are
whole mortgage loans and thus have the effect of reducing Coast's borrowing
costs. Third, a substantial majority of the MBS created by Coast's have been
nonrecourse or credit-enhanced securities. Such MBS have the advantages of
mitigating credit risk and requiring less capital under the risk-based capital
regulation than nonsecuritized mortgage loans (see "Regulation--Regulatory
Capital Requirements" below). Mitigating credit risk on MBS is accomplished by
purchasing private mortgage insurance, paying higher guarantee fees and/or by
splitting the securities into a senior/subordinated structure wherein Coast
retains the senior interest and sells the subordinate interests, which
generally bear any initial credit losses from the mortgage pools. Coast
generally bears no credit losses related to these senior interests until the
private mortgage insurance, guarantees and/or the subordinated interests are
extinguished. At December 31, 1995, the balance of Coast's MBS consisting of
loans originated by Coast was $2.13 billion. Coast has eliminated or mitigated
credit risk as described above on $1.53 billion of these MBS.
Loans to One Borrower Limitations
With certain limited exceptions, the maximum amount that a savings
institution may lend to one borrower (including certain entities related to
such borrower) is an amount equal to 15% of the savings institution's
unimpaired capital and unimpaired surplus, plus an additional 10% for loans
fully secured by readily marketable collateral. Real estate is not included
within the definition of "readily marketable collateral" for this purpose.
Under prior law (changed in 1988), a savings institution could generally lend
an amount equal to its federal regulatory capital to one borrower. The OTS
recently amended its lending limit regulations to define the term "unimpaired
capital and unimpaired surplus" based upon an institution's regulatory capital
and to include in the basic 15% of capital lending limit that portion of an
institution's allowances for loan and lease losses that is not includable in
regulatory capital as calculated for other regulatory purposes. OTS
regulations provide that certain credit extensions may be excepted from the
described loans to one borrower limitations. Pursuant to the current
regulation, the maximum amount which Coast could have loaned to any one
borrower (and related entities) was $87.4 million as of December 31, 1995.
At December 31, 1995, Coast's largest concentration of credit was to four
limited partnerships all of which are affiliates of Lehman Brothers Holdings
Inc. At that date, $225.3 million of collateralized direct pay letters of
credit were outstanding in connection with housing revenue bonds used to
finance multifamily residential properties owned by these partnerships. At
December 31, 1995, Coast's second largest concentration of loans and
extensions of credit was to Coast's former co-equal partner in CoastFed
Properties and his affiliated entities in connection with the real estate
development activities of CoastFed Properties. At that date, such extensions
of credit totaled $95.3 million, which includes $53.8 million of letters of
credit, $30.7 million of loans collateralized by multifamily residential units
and $10.8 million of other credit extensions. These credit extensions are
excepted from the present OTS loans to one borrower limitations. See "Credit
Concentration and Letters of Credit".
Loan Activity
Since 1988 Coast has emphasized originations of single family (one-to-four
unit) residential real estate loans and has virtually eliminated originations
of other types of loans. All multifamily and commercial real estate loans
originated in 1995 were to finance the sale of foreclosed real estate or to
facilitate the assumption of loans as permitted by the respective mortgage
notes.
Single Family Residential Real Estate Lending. In 1995, 1994 and 1993, Coast
originated $1.03 billion, $1.74 billion and $1.07 billion, respectively, of
single family loans. Such loans represented 91%, 94% and 88% of total real
estate loans originated in 1995, 1994 and 1993, respectively, and are all
secured by properties located in California. During 1995, 1994 and 1993,
originations of single family ARMs totaled $.99 billion, $1.71 billion and
$.90 billion, respectively, and such originations represented 97%, 98% and
84%, respectively, of total single family loans originated.
9
Coast offers ARMs that have a fixed interest rate for periods ranging from
one month to three years and thereafter provide for interest rates that adjust
either monthly or semiannually based on changes in COFI or LIBOR, plus a
contractual margin which ranged from 2.30% to 3.60% at December 31, 1995. At
December 31, 1995, $4.53 billion of single family ARMs in Coast's loan and MBS
portfolio had interest rates tied to COFI, and $.57 billion had interest rates
tied to LIBOR. Coast generally discontinued offering second lien mortgage
loans in 1991. In 1995, Coast began offering home equity credit lines, which
are generally secured by second mortgage liens, to its first mortgage
customers. On all home equity credit lines originated, Coast acts as an agent
for an unaffiliated entity that is the actual lender.
Coast currently offers fixed rate first lien mortgage loans which provide
for maturities of either 15 or 30 years, with the 30-year loan bearing a
slightly higher rate of interest. The general terms of these loans conform to
the guidelines established by the Federal Home Loan Mortgage Corporation
("FHLMC"), the Federal National Mortgage Association ("FNMA") and other
securitization conduits. Substantially all of the fixed rate loans originated
in recent years have been sold in the secondary mortgage market.
Multifamily Residential Lending. In recent years Coast's originations of
multifamily loans have been substantially reduced. Since 1989, Coast has
originated multifamily mortgage loans solely to provide financing in
connection with the sale of foreclosed multifamily properties or to facilitate
loan assumptions as permitted by the provisions of the respective mortgage
notes.
Commercial and Construction Real Estate Lending. OTS Regulations generally
limit the amount that any federal savings institution may invest in
nonresidential real estate loans to 400% of regulatory capital. Coast
eliminated virtually all commercial and construction real estate loan
originations in 1988. Such originations are made solely to finance the sale of
foreclosed properties of this type or to facilitate loan assumptions as
permitted by the provisions of the respective mortgage notes.
Commercial Business Lending. Coast is permitted to originate loans not
secured by real estate up to an aggregate amount of 10% of its total assets.
Until September 30, 1995, Coast engaged in asset-based commercial lending
primarily through its subsidiary, CoastFed Business Credit Corporation
("CBCC"). See "Subsidiaries--Asset-Based Lending." Coast currently does not
originate unsecured commercial loans other than to its subsidiaries.
10
The following table sets forth certain information with respect to activity
in Coast's loan and MBS portfolios during the periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- -----------
(IN THOUSANDS)
Real estate loans
originated:
Conventional:
1 to 4 units.......... $1,026,233 $1,740,587 $1,072,704 $1,315,964 $ 1,419,115
More than 4 units..... 56,304 95,554 106,944 108,063 108,999
Commercial............ 40,341 19,212 34,875 30,297 75,376
---------- ---------- ---------- ---------- -----------
Total conventional
real estate loans
originated......... 1,122,878 1,855,353 1,214,523 1,454,324 1,603,490
Construction.......... -- -- -- 6,171 145
Second mortgage....... 201 55 68 2,800 5,534
---------- ---------- ---------- ---------- -----------
Total real estate
loans originated... 1,123,079 1,855,408 1,214,591 1,463,295 1,609,169
Commercial business
loans originated....... 10,169 45,442 28,635 28,000 24,305
Loans exchanged for MBS,
net.................... (654,238) (434,156) (342,961) (965,193) (2,223,811)
Loans sold.............. (44,197) (28,398) (130,062) (286,834) (180,851)
Principal repayments and
other decreases of
loans.................. (761,499) (652,310) (832,285) (917,180) (1,004,095)
---------- ---------- ---------- ---------- -----------
Net increase
(decrease) in
loans.............. (326,686) 785,986 (62,082) (677,912) (1,775,283)
---------- ---------- ---------- ---------- -----------
Loans exchanged for MBS,
net.................... 654,238 434,156 342,961 965,193 2,223,811
MBS purchased........... -- 18,574 10,340 38,091 47,641
MBS sold................ (35,335) (334,617) (241,886) (222,990) (2,045,761)
Principal repayments and
other decreases of MBS. (180,830) (356,686) (356,015) (324,904) (63,028)
---------- ---------- ---------- ---------- -----------
Net increase
(decrease) in MBS.. 438,073 (238,573) (244,600) 455,390 162,663
---------- ---------- ---------- ---------- -----------
Net increase
(decrease)....... $ 111,387 $ 547,413 $ (306,682) $ (222,522) $(1,612,620)
========== ========== ========== ========== ===========
General
Loan Portfolio Composition. The following table sets forth the amounts of
each of the indicated categories of loans and MBS held by Coast at the dates
indicated.
DECEMBER 31,
--------------------------------------------------------------
1995 1994 1993
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Loans:
ARMs.................. $5,213,333 69% $5,508,066 73% $4,648,458 67%
Fixed rate............ 253,163 3 285,116 4 358,738 5
---------- --- ---------- --- ---------- ---
5,466,496 72 5,793,182 77 5,007,196 72
---------- --- ---------- --- ---------- ---
MBS:
ARMs.................. 2,136,777 28 1,695,412 22 1,917,007 27
Fixed rate............ 35,024 -- 38,316 1 55,294 1
---------- --- ---------- --- ---------- ---
2,171,801 28 1,733,728 23 1,972,301 28
---------- --- ---------- --- ---------- ---
Total loans and MBS. $7,638,297 100% $7,526,910 100% $6,979,497 100%
========== === ========== === ========== ===
11
The following table presents the contractual maturities of Coast's loans and
MBS in the periods indicated as of December 31, 1995.
AFTER 1 AFTER 2 AFTER 3 AFTER 5 AFTER 10
WITHIN THROUGH THROUGH THROUGH THROUGH THROUGH AFTER
1 YEAR 2 YEARS 3 YEARS 5 YEARS 10 YEARS 15 YEARS 15 YEARS TOTAL
------ ------- ------- ------- -------- -------- -------- ------
(IN MILLION)
Real estate... $197 $131 $126 $191 $570 $ 84 $4,144 $5,443
Commercial.... -- 2 -- -- -- -- -- 2
Other......... 20 1 -- -- -- -- -- 21
MBS........... -- 1 -- 3 -- 14 2,154 2,172
---- ---- ---- ---- ---- ---- ------ ------
$217 $135 $126 $194 $570 $ 98 $6,298 $7,638
==== ==== ==== ==== ==== ==== ====== ======
At December 31, 1995, loans due after one year included $5.05 billion with
adjustable interest rates and $198.0 million with fixed interest rates. At
December 31, 1995, MBS due after one year included $2.14 billion with
adjustable interest rates and $35.0 million with fixed interest rates.
ARMs. Coast's ARMs generally provide for a 3.30% to 9.00% limit or "cap" on
increases or decreases from their initial interest rates, thereby protecting
borrowers from unlimited interest rate increases. Coast's ARMs are generally
originated with rates of interest that remain fixed during the initial one-
month to three-year period at a level that is less than the rate determined by
adding the contractual margin to the index at the time of origination. Coast's
ARMs also provide for either a 1% cap on the semi-annual interest rate
adjustments for LIBOR-based loans and six-month COFI loans without negative
amortization or, for Coast's monthly COFI loans, a 7.5% cap on the amount by
which monthly payments can increase or decrease from one annual payment
adjustment to the next, except that at the end of each five-year interval
monthly payments may be adjusted by more than 7.5% in order to provide for
amortization of the ARMs by their maturity. Because of the initial period
rates, the payment cap provided on Coast's monthly COFI loans and the
different times at which interest rate adjustments and payment adjustments are
made, contractual monthly payments may not be sufficient to pay the interest
accruing on an ARM. The amount of any shortfall ("negative amortization") is
added to the principal balance of the loan to be repaid through future monthly
payments, which could cause increases in the amount of principal owed to
Coast. Significant negative amortization can have the effect of increasing the
loss ultimately realized by Coast upon the disposition of foreclosed
properties, and may also have the effect, under certain circumstances, of
increasing the associated risk of default, especially on loans originated with
relatively high loan-to-value ("LTV") ratios. Because interest rates have
generally declined in recent years, Coast's ARMs have generally experienced
reductions in negative amortization and, as a result, negative amortization
has not been a significant factor in actual credit losses. During 1995,
however, the net amount of negative amortization on Coast's ARMs increased by
$11.6 million primarily as a result of the origination of single family ARMs
for which first-year payments are fixed, based on initial rates, while
interest accruals are at fully-indexed rates. Also contributing to greater
negative amortization in 1995 were increases in COFI, which moved from the
4.589% level, published as of December 31, 1994, to the December 31, 1995
level of 5.059%.
The following table sets forth the cumulative amounts of negative
amortization included in the real estate loan portfolio at the dates
indicated.
DECEMBER 31,
---------------
1995 1994
------- -------
(IN THOUSANDS)
Single family mortgage................................... $13,623 $ 1,771
Multifamily mortgage..................................... 632 982
Commercial mortgage...................................... 200 75
------- -------
$14,455 $ 2,828
======= =======
12
Loan Underwriting. The loan underwriting process is intended to assess both
the prospective borrower's credit standing and ability to repay, and the value
and adequacy of the real property security as collateral for the mortgage
loan. Prospective borrowers complete an application that includes information
with respect to the applicant's bank accounts, assets, liabilities, income,
credit history, employment history, and personal information. The application
also includes the amount of, and reason for, the loan being requested. Coast
generally obtains verifications of an applicant's employment and income, and
appraisals of the security property, which are part of the application
process, are performed by qualified staff appraisers or Coast-approved fee
appraisers. All outside fee appraisals are reviewed either by a Coast
appraiser or by a retained appraisal review company. The loan must be approved
by various levels of management and/or authorized underwriter(s) based on the
loan amount. Coast's salaried loan underwriters analyze the loan application,
the credit information and the appraisal, and, depending on the underwriter's
approval limit, either approve a requested loan or make a recommendation to
Coast's loan committee concerning approval of a requested loan. Prior to July
1991, borrowers were generally qualified at the initial interest rate plus 1%
on single family ARMs unless the initial interest rate was below 7.5%, in
which case the borrowers were qualified at that initial rate plus 1.5%. In
July 1991, as interest rates declined, this guideline was modified to
generally qualify borrowers at a minimum of 7.5% for single family ARMs.
Coast's current general practice is to qualify borrowers at the fully indexed
rate. This guideline may be modified based on changing market conditions,
compensating factors and other considerations.
For all real estate loans, Coast requires title insurance insuring the
priority of its lien, fire and extended coverage casualty insurance, and may
also require flood insurance if appropriate in order to protect Coast's
interest in the security property.
Loan-to-Value Ratios. Subject to certain restrictions, federal savings banks
are generally permitted to make loans with LTV ratios up to 100% on single
family mortgage loans. See "Regulation--Lending Standards" for a discussion of
additional lending limitations. However, Coast generally limits the LTV ratios
of first lien single family mortgage loans to 90% and obtains private mortgage
insurance on mortgage loans with LTV ratios in excess of 80%. Coast began
offering home equity credit lines to its first mortgage customers during 1995.
All of the home equity credit lines which Coast originates are sold to an
unaffiliated entity. The maximum combined LTV (based on both the amount of the
first mortgage loan and the maximum amount of the home equity credit line) on
a Coast home equity credit line is 90%. In early 1994, Coast began originating
single family loans with LTV ratios up to 95% under the FNMA Low-to-Moderate
Income Programs. These loans are insured through private mortgage insurance
and are originated for immediate sale to either FHLMC or FNMA. Coast also
offers a six-month COFI ARM without negative amortization for loans to
purchase single family properties with LTV ratios up to 95% and private
mortgage insurance.
Due on Sale Clauses. Substantially all fixed rate loans in Coast's loan
portfolio contain a "due on sale" clause providing that Coast may declare the
unpaid principal amount due and payable upon the sale of the property securing
the loan. While the enforceability of due on sale clauses in certain mortgage
instruments has been restricted in some states, including California, federal
law generally preempts certain of these state restrictions. Although the ARMs
in Coast's portfolio contain a due on sale clause, an ARM is generally
transferable to a purchaser of the security property, if the purchaser meets
Coast's creditworthiness standards.
Sales and Servicing of Mortgage Loans
In addition to originating and purchasing loans for its own portfolio, Coast
participates in secondary mortgage market activities by selling whole loans
and participations in loans to FHLMC, FNMA and various institutional investors
such as other savings banks, savings and loan associations and insurance
companies. Sales of mortgage assets function primarily to fund lending
operations, manage interest rate risk and increase the loan servicing
portfolio. The marketability of loans, loan participations and MBS, however,
depends on the purchasers' investment limitations, general market and
competitive conditions, mortgage loan demand and other factors. At December
31, 1995, Coast held $221.0 million of loans designated as held for sale,
whose fair value was approximately $230.0 million.
13
Prior to 1990, Coast generally sold loans with various subordination or
recourse (together, "recourse") provisions which provide a remedy against
Coast, as the seller, by the purchaser if the borrower fails to make payments
on a sold loan. OTS regulations require the maintenance of risk-based capital
for loans sold with recourse. See "Regulation--Regulatory Capital
Requirements--General Capital Requirements." Accordingly, since 1990 it has
generally been Coast's practice to sell loans without recourse and Coast had
no recourse sales in 1995, 1994 or 1993. For additional information on loans
sold with recourse, see Notes 13 and 17 of Notes to Consolidated Financial
Statements.
Coast sells mortgage loans and loan participations for cash proceeds
calculated as a percentage of the principal amount of the loans or
participations which will yield the buyer a current market return at the time
of the sale, over the term of the loans or participations sold. Gain or loss
is recognized based upon the difference between these proceeds and the book
value of the loans or participations sold. If Coast retains the servicing of
the loans sold, which it typically does, an additional gain or loss is
recognized and a receivable or payable is recorded at the time of sale based
upon the net present value of the expected amounts to be received or paid
resulting from the difference between the contractual interest rates received
from borrowers, less a normal servicing fee, and the rate to be paid to the
buyer.
Servicing of loans sold by Coast includes the responsibility for collecting
and remitting loan payments, taking steps to ensure that insurance and tax
payments are made on a timely basis, and otherwise administering the loans,
for which Coast receives a fee. Coast was servicing loans for investors of
$3.42 billion, $3.96 billion and $4.18 billion at December 31, 1995, 1994 and
1993, respectively. The amount of annual servicing fees collected by Coast is
recognized as servicing fee income over the life of the loan and varies, but
generally is calculated as an amount equal to a rate ranging from .125% to
.25% (for multifamily loans), and .25% to .375% (for single family loans),
based on the outstanding principal amount of the loans serviced. During 1995
the average annual servicing fee on Coast's portfolio of serviced loans was
.27%.
For additional information on Coast's sales and servicing of mortgage loans,
see Note 17 of Notes to Consolidated Financial Statements.
Fees and Discounts
In addition to the interest earned on loans, Coast may charge fees for
services such as originating loans, making loan commitments, receiving loan
prepayments and late payments and processing changes of property ownership.
The income realized from such services varies with the volume of loans
originated, purchased or prepaid, and the rates of fees vary from time to time
depending on various factors including competitive conditions in the mortgage
markets.
Loan origination fees and the incremental direct costs relating to loans
originated are deferred and amortized over the lives of the related loans.
Deferred loan origination fees and costs are amortized into interest income
utilizing the interest method. Discounts on loans acquired are amortized using
the interest method over the remaining contractual terms of the loans as
adjusted for estimated prepayments.
Coast's current origination fees on its single family ARMs generally range
from none to 2% of the principal amount of the loan plus up to $700 of
ancillary fees.
RISK ELEMENTS
California Real Estate
Approximately 96% of Coast's loans and MBS are secured by properties located
in California, which experienced rising unemployment, declining occupancy and
rental rates, and declining property values from 1990 through 1992. Since
1993, however, unemployment has declined, and the decline in occupancy rates,
rental rates and property values appears to have moderated. As a result of
these factors, Coast's loans secured by properties located in California which
are 90 days or more delinquent increased from $137.1 million at December 31,
1991,
14
to $151.1 million at December 31, 1992, but decreased to $106.4 million at
December 31, 1993, $92.3 million at December 31, 1994, and $80.2 million at
December 31, 1995. There can be no assurance that the California economy will
continue to improve, nor can there be any assurance that there will not be
additional delinquencies and/or further declines in property values in
California. For additional information with respect to the California economy,
see Item 7. "Management's Discussion and Analysis of Financial Condition and
Results of Operation--Nonperforming Assets."
During 1994, the greater Los Angeles area experienced a strong earthquake,
followed by a series of significant aftershocks, which caused damage to
property and infrastructure over a widespread area of Los Angeles and
surrounding communities. As a result, the GVA was increased by $15 million
during the first quarter of 1994 to absorb potential losses from the damaged
properties. This portion of the GVA was subsequently charged off in its
entirety.
Nonperforming Loans
Coast defines nonperforming loans to include (i) loans on which it has
ceased to accrue interest ("Nonaccrual Loans") and (ii) loans whose terms have
been modified such that the interest rates charged to the borrowers have been
reduced to levels below the original contract rates and below market rates of
interest at both the time of modification and the reporting date ("Modified
Loans"). It is Coast's policy to discontinue the recognition of income and to
reverse previously accrued and uncollected interest on loans when there is
reasonable doubt as to collectibility of the loans. Generally, interest
accruals are discontinued when loans become 90 days past due, or earlier when
other conditions warrant. If Nonaccrual Loans at December 31, 1995, had been
interest-earning throughout the year, interest income of $6.3 million would
have been earned on these loans at their respective contractual rates. For the
year ended December 31, 1995, actual interest earned on such loans was $2.6
million. Nonaccrual Loans totaled $81.4 million, $96.7 million, $117.1
million, $156.7 million and $142.0 million at December 31, 1995, 1994, 1993,
1992 and 1991, respectively. See "Business--Nonperforming Assets" below.
The following table sets forth certain loan delinquency information, which
includes information on Nonaccrual Loans, at the dates indicated and by the
period of delinquency.
DECEMBER 31, 1995 DECEMBER 31, 1994
---------------------------- -----------------------------
OVER 60 OVER 90 OVER 60 OVER 90
TO 90 DAYS DAYS TOTAL TO 90 DAYS DAYS TOTAL
---------- ------- -------- ---------- -------- --------
(DOLLARS IN THOUSANDS)
Single family mortgage.. $ 7,196 $43,792 $ 50,988 $ 6,999 $ 53,421 $ 60,420
Multifamily mortgage.... 6,218 25,646 31,864 16,297 30,145 46,442
Commercial mortgage..... 9,609 11,619 21,228 10,464 13,052 23,516
Other................... 179 294 473 67 95 162
------- ------- -------- -------- -------- --------
$23,202 $81,351 $104,553 $ 33,827 $ 96,713 $130,540
======= ======= ======== ======== ======== ========
Percent of total loans.. .42% 1.49% 1.91% .58% 1.67% 2.25%
======= ======= ======== ======== ======== ========
15
The following table stratifies the multifamily residential and commercial
loan portfolios by geographical location, by type of loan and by the range of
the loans' original principal balances, and compares these strata to their
respective proportions of nonperforming loans as of December 31, 1995.
ORIGINAL PRINCIPAL BALANCE RANGE CALIFORNIA OTHER STATES TOTAL
- -------------------------------- ------------------------ ---------------------- ------------------------
TOTAL NONPERFORMING TOTAL NONPERFORMING TOTAL NONPERFORMING
FROM THROUGH LOANS LOANS LOANS LOANS LOANS LOANS
- ---- --------------------------- ------------- -------- ------------- ---------- -------------
(IN THOUSANDS)
LOANS:
Multifamily:
$ 0 $ 1 million $ 662,070 $14,441 $ 5,175 $ -- $ 667,245 $14,441
$ 1 million $ 2 million 260,930 2,470 15,066 -- 275,996 2,470
$ 2 million $ 5 million 163,624 8,735 55,854 -- 219,478 8,735
$ 5 million $ 10 million 68,973 -- 44,828 -- 113,801 --
$10 million $ 15 million 41,269 -- 25,764 -- 67,033 --
$15 million and greater 15,168 -- -- -- 15,168 --
---------- ------- -------- ------ ---------- -------
1,212,034 25,646 146,687 -- 1,358,721 25,646
---------- ------- -------- ------ ---------- -------
Commercial and other:
$ 0 $ 1 million 260,363 2,673 3,899 40 264,262 2,713
$ 1 million $ 2 million 131,249 3,479 20,725 1,000 151,974 4,479
$ 2 million $ 5 million 168,026 4,721 44,083 -- 212,109 4,721
$ 5 million $ 10 million 118,799 -- 44,828 -- 163,627 --
$10 million $ 15 million 10,446 -- 37,735 -- 48,181 --
$15 million and greater 68,314 -- -- -- 68,314 --
---------- ------- -------- ------ ---------- -------
757,197 10,873 151,270 1,040 908,467 11,913
---------- ------- -------- ------ ---------- -------
Total multifamily and commercial
loans: 1,969,231 36,519 297,957 1,040 2,267,188 37,559
---------- ------- -------- ------ ---------- -------
MBS:
Multifamily:
$ 0 $ 1 million 72,084 -- -- -- 72,084 --
$ 1 million $ 2 million 12,186 -- -- -- 12,186 --
$ 2 million $ 5 million 7,643 -- -- -- 7,643 --
---------- ------- -------- ------ ---------- -------
Total multifamily MBS 91,913 -- -- -- 91,913 --
---------- ------- -------- ------ ---------- -------
Total $2,061,144 $36,519 $297,957 $1,040 $2,359,101 $37,559
========== ======= ======== ====== ========== =======
Although the historical loss rates have been lower among the strata with
smaller principal balances, there can be no assurance that this experience
will continue, or that Coast will not experience additional delinquencies
and/or credit losses in any of the strata shown above.
Impaired Loans
Effective January 1, 1994, the Company adopted Statement of Financial
Accounting Standards ("SFAS") No. 114, Accounting by Creditors for Impairment
of a Loan ("SFAS 114"), which, during the fourth quarter of 1994 was
subsequently amended by SFAS No. 118, Accounting by Creditors for Impairment
of a Loan--Income Recognition and Disclosures. SFAS 114 does not apply to
large groups of smaller-balance homogeneous loans that are collectively valued
for impairment. A loan is impaired when, based on current information and
events, a creditor will be unable to collect all amounts contractually due
under a loan agreement. Loans are evaluated for impairment as part of Coast's
normal internal asset review process. When a loan is determined to be
impaired, a valuation allowance is established based upon the difference
between Coast's investment in the loan and the fair value of the collateral
securing the loan. Coast's impaired loans totaled $135.2 million and $112.6
million at December 31, 1995 and 1994, respectively, and for the years then
ended the average investment in impaired loans was $109.9 million and $85.7
million, respectively. Interest income on such loans totaled $8.1 million in
1995 and $6.4 million in 1994, and was recognized utilizing the cash-basis
method of accounting. As of December 31, 1995 and 1994, Nonaccrual Loans
included $37.6 million and $43.3 million, respectively, of impaired loans.
16
Impaired loans at December 31, 1995, included $127.2 million of loans for
which valuation allowances of $25.6 million had been established and $33.6
million of loans for which no allowance was considered necessary. At December
31, 1994 Coast had $92.9 million of impaired loans for which valuation
allowances of $18.5 million had been established and $38.2 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 provision for
loan losses in the accompanying consolidated statement of operations. Coast
had recoveries of zero and $.1 million of previously established allowances
during the years ended December 31, 1995 and 1994, respectively. Cash payments
received on impaired loans which are performing under their contractual terms
are allocated to principal and interest in accordance with the terms of the
respective loan.
Restructured Loans
Coast has reached agreements with certain borrowers that provide for
restructuring existing loans secured by income-producing properties.
Restructurings, which include Modified Loans (as defined under "Nonperforming
Loans" above), are generally in the form of interest rate adjustments,
extensions of maturities or deferred payments of principal or interest.
Restructured loans totaled $30.5 million, $37.3 million, $76.4 million, $96.5
million and $38.7 million at December 31, 1995, 1994, 1993, 1992 and 1991,
respectively. The restructured loans had effective yields of 8.00% and 7.87%
at December 31, 1995 and 1994, respectively. The loans identified as
restructured loans at December 31, 1995, represent loans that were modified
prior to the Company's implementation of SFAS 114 in 1994 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, 1995, 1994 and 1993, $2.4 million, $2.9 million and $5.2
million, respectively, was earned on these restructured loans which 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, 1995, 1994 and 1993, would have totaled $3.2 million, $3.8
million and $7.8 million, respectively, under their original terms. At
December 31, 1995, Coast had no commitments to lend additional funds to these
borrowers.
General Valuation Allowance
Coast maintains a GVA to absorb credit losses related to its assets and off-
balance sheet items. The GVA is reviewed and adjusted quarterly and based upon
a number of factors, including asset classifications, 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 and Coast's underwriting practices. Economic conditions, especially
those affecting real estate markets, may change, which could result in the
need for an increased GVA in future periods. In addition, regulatory agencies,
as an integral part of their examination process, periodically review Coast's
GVA. These agencies may require Coast to establish additional allowances based
on their judgments of the information available at the time of the
examination.
17
The table shown below reflects the changes in the GVA for the periods
indicated.
LOANS
---------------------------
RESIDENTIAL COMMERCIAL REAL
REAL ESTATE ESTATE MORTGAGE OFF-BALANCE
MORTAGAGE AND OTHER SHEET ITEMS TOTAL
----------- --------------- ----------- -----
(IN MILLIONS)
Balance at December 31, 1990..... $ 34 $ 42 $ 20 $ 96
Additions charged to operations.. 37 26 19 82
Recoveries....................... 3 1 -- 4
Losses charged................... (13) (29) -- (42)
---- ---- ---- ----
Balance at December 31, 1991..... 61 40 39 140
Additions charged (reductions
credited) to operations......... 19 31 (4) 46
Recoveries....................... 4 3 -- 7
Losses charged................... (35) (15) (3) (53)
---- ---- ---- ----
Balance at December 31, 1992..... 49 59 32 140
Additions charged (reductions
credited) to operations......... 69 8 (16) 61
Recoveries....................... 2 5 -- 7
Losses charged................... (67) (19) (2) (88)
---- ---- ---- ----
Balance at December 31, 1993..... 53 53 14 120
Additions charged (reductions
credited) to operations......... 68 (2) 9 75
Recoveries....................... 6 1 -- 7
Losses charged................... (78) (24) (15) (117)
---- ---- ---- ----
Balance at December 31, 1994..... 49 28 8 85
Additions charged to operations.. 40 -- -- 40
Recoveries....................... 1 1 -- 2
Losses charged................... (38) (4) -- (42)
Sale of subsidiary............... -- (3) -- (3)
Reallocations.................... (4) (5) 9 --
---- ---- ---- ----
Balance at December 31, 1995..... $ 48 $ 17 $ 17 $ 82
==== ==== ==== ====
In 1990 and earlier years, various parts of the country (particularly the
Northeastern and Southeastern regions) experienced an economic recession that
generally resulted in significant reductions in real estate values throughout
those regions. During 1990, California began to experience an economic
recession and, fueled in particular by defense industry cutbacks, the
California recession grew during the succeeding years and into 1993 to a level
that was both the broadest and deepest in more than 50 years. During the
latter part of 1993 and through 1995 the economic conditions in California
have generally stabilized, and marginal improvement has been observed in many
areas of California.
Coast began to establish its GVA in 1989 and, during each subsequent period,
adjusted the balance of such allowance to a level believed appropriate based
on available information with respect to economic and other factors, and the
changing credit risk profiles of its assets and off-balance sheet items.
During 1994 Coast experienced losses on residential real estate mortgage loans
that exceeded the beginning of the year balance of the related portion of the
GVA, primarily as a result of two factors described below--the January 1994
earthquake and the 1994 elimination of certain recourse liability. While Coast
believes it has adequately provided for the possible credit loss exposure
based on current conditions and the information currently available to it,
deterioration of economic conditions or other circumstances could result in a
need for Coast to record additional loss provisions.
1994 Earthquake--During 1994 the greater Los Angeles area experienced a
significant earthquake (see "California Real Estate" above), one result of
which was the necessity for Coast to provide $15 million of additional GVA for
the resulting losses. This portion of the GVA was subsequently charged off in
its entirety.
18
Elimination of certain recourse liability--During 1994, Coast exercised its
option to eliminate the recourse liability associated with $977 million of
multifamily loans that had been securitized into FNMA pools. The results of
this transaction included the following: (i) Coast eliminated all future
exposure to credit losses (write-downs and holding costs) related to the loans
and foreclosed real estate owned, relinquished the related spread account
asset and reduced the GVA allocated to such exposure by $20 million, (ii)
Coast recorded an increase in its provision for losses of approximately $6
million, and (iii) Coast wrote off approximately $10 million of its excess
servicing asset, with such write-off, entitled Elimination of Excess Spread
Servicing Asset, included as a reduction of noninterest income in the
accompanying consolidated statement of operations.
While management believes that the balance of the GVA is adequate, there can
be no assurance that increases in the GVA will not be required in the future,
or that losses charged will not exceed the beginning of the period allowance
for any future period.
Net loans charged off as a percentage of average loans outstanding were
.73%, 1.77%, 1.60%, .78% and .46% for the years ended December 31, 1995, 1994,
1993, 1992, and 1991, respectively. The 1994 net loan charge-offs and their
percentage of average loans were greater than those recorded in 1993 due to
the factors noted above. For additional information on valuation allowances,
see "Nonperforming Assets", Item 7. "Management's Discussion and Analysis of
Financial Condition and Results of Operations -Nonperforming Assets" and Note
3 of Notes to Consolidated Financial Statements.
CREDIT CONCENTRATION AND LETTERS OF CREDIT
At December 31, 1995, Coast had letters of credit outstanding aggregating
$382.6 million (see "Lending Activities--Loans to One Borrower Limitations").
The letters of credit were issued primarily in 1984 and 1985 to enhance the
rating of $394.6 million of housing revenue bonds issued to finance the
construction of multifamily residential projects developed by CoastFed
Properties and owned by various limited partnerships. In these transactions,
the proceeds of the respective housing revenue bond issues were loaned by the
bond trustees to the limited partnerships to finance the respective projects.
Prior to 1990, Coast was involved in real estate development activities as a
co-equal partner in CoastFed Properties, a real estate development
partnership. During 1990, Coast withdrew from CoastFed Properties and ceased
all involvement in such real estate development activities; however, various
extensions of credit to Coast's former general partner and his affiliates
generally resulting from these activities remain outstanding and represent
Coast's second largest credit concentration, totaling $95.3 million, comprised
of $53.8 million of letters of credit, $30.7 million of loans collateralized
by multifamily residential units and $10.8 million of other credit extensions.
At December 31, 1995, the loan payable to the housing bond trustee associated
with one of the letters of credit issued to the respective borrower was in
default. Coast has installed a court-appointed receiver to manage the
property. In the event the default is not remedied by the borrower and Coast
forecloses on the property, it would become a component of Coast's foreclosed
real estate owned and would increase nonperforming assets by approximately $32
million. All other extensions of credit to this borrower and his affiliates
are performing in accordance with their terms.
At December 31, 1995, the loan payable to the housing revenue bond trustee
associated with another letter of credit was in default. Coast has installed a
court-appointed receiver to manage the property. In the event the default is
not remedied by the borrowing entity and Coast forecloses on the property, it
would become a component of Coast's foreclosed real estate owned and would
increase nonperforming assets by approximately $19 million.
19
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 $5.9 million, $9.2 million and $7.8 million in 1995,
1994 and 1993, respectively, and are included in other noninterest income in
the accompanying consolidated statement of operations. The decrease of $3.3
million from 1994 to 1995 in servicing fee income related to housing bonds
resulted primarily from decreases in the spread between fixed rates received
from the borrowers and adjustable rates paid to the bondholders.
Any draws against the letters of credit not reimbursed by the project owners
generally are advanced under subordinate deed of trust notes held by Coast on
the projects, and such advances are generally charged off as disbursed. The
risks to Coast under the letters of credit are generally similar to those of
permanent financing of multifamily residential properties. In evaluating the
overall adequacy of Coast's GVA, management has considered various aspects of
these credit extensions. While Coast believes it has adequately provided for
the possible credit loss exposure based on current conditions and the
information currently available to it, deterioration of economic conditions or
other circumstances could result in a need for Coast to record additional loss
provisions with respect to these letters of credit.
NONPERFORMING ASSETS
Coast defines nonperforming assets to include foreclosed real estate owned,
Nonaccrual Loans, nonaccrual high yield bonds and Modified Loans. The
following table sets forth the components of nonperforming assets at the dates
indicated.
DEC DEC DEC DEC DEC
31, 31, 31, 31, 31,
1995 1994 1993 1992 1991
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
Foreclosed real estate owned........... $ 32 $ 44 $ 101 $ 161 $ 187
Nonaccrual Loans....................... 81 97 117 157 142
Modified Loans......................... -- 1 2 1 38
Nonaccrual high yield bonds............ -- -- -- -- 3
------ ------ ------ ------ ------
Total nonperforming assets........... $ 113 $ 142 $ 220 $ 319 $ 370
====== ====== ====== ====== ======
Total assets........................... $8,252 $8,197 $8,095 $8,352 $8,635
====== ====== ====== ====== ======
Ratio of total nonperforming assets to
total assets.......................... 1.37% 1.73% 2.72% 3.82% 4.28%
====== ====== ====== ====== ======
The following table highlights certain ratios with respect to Coast's GVA as
of the dates indicated.
AS OF DECEMBER 31,
----------------------------
1995 1994 1993 1992 1991
---- ---- ---- ---- ----
GVA to Nonaccrual Loans........................... 101% 88% 103% 89% 99%
GVA to Nonperforming Assets....................... 73% 60% 55% 44% 38%
As of December 31, 1995, Coast's ratios of Nonaccrual Loans to total loans
and nonperforming assets to total assets declined to 1.49% and 1.37%,
respectively, from 1.67% and 1.73%, respectively, as of December 31, 1994.
Management believes the historical progress in reducing nonperforming assets
is generally attributable to a slowly improving economy in California,
stabilizing property values in Coast's market areas and a continuation of
management's policy of aggressively resolving delinquencies and disposing of
foreclosed real estate owned. In that the incidence of delinquencies and
foreclosures is influenced by many variables, there can be no assurance that
Coast will not experience increased levels of nonperforming assets, despite
the apparently improving economic outlook for California.
20
The following table sets forth the December 31, 1995, components of
nonperforming assets by geographic location.
OTHER PERCENT
NONPERFORMING ASSETS CALIFORNIA STATES TOTAL OF TOTAL
- -------------------- ---------- ------ -------- --------
(DOLLARS IN THOUSANDS)
Nonaccrual Loans:
Single family residential................. $ 43,633 $ 159 $ 43,792 38.8%
Multifamily residential................... 25,646 -- 25,646 22.7
Commercial and other...................... 10,873 1,040 11,913 10.5
-------- ------ -------- -----
80,152 1,199 81,351 72.0
-------- ------ -------- -----
Foreclosed real estate owned:
Single family residential................. 15,030 47 15,077 13.3
Multifamily residential................... 6,652 -- 6,652 5.9
Commercial and other...................... 7,672 2,295 9,967 8.8
-------- ------ -------- -----
29,354 2,342 31,696 28.0
-------- ------ -------- -----
Total nonperforming assets.................. $109,506 $3,541 $113,047 100.0%
======== ====== ======== =====
SUBSIDIARIES
Insurance and Investment Services
Coast Fed Services ("CFS"), a wholly owned subsidiary of Coast, provides
hazard and other insurance and investment products as an agent for insurers
and mutual funds and a range of trustee services, including acting as trustee
on deeds of trust held by Coast. CFS reported pretax earnings of $11.0 million
and $9.9 million for the years ended December 31, 1995 and 1994, respectively,
which results include commissions earned on investment, insurance and related
products of $12.7 million and $13.2 million, respectively. For segment
reporting related to CFS, see Note 18 of Notes to Consolidated Financial
Statements.
Asset-Based Lending
On September 30, 1995 the Bank 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.
21
OTHER INVESTMENTS
In addition to loans and MBS, Coast invests in other securities. These
investments, a majority of which have maturities of less than ninety days,
satisfy regulatory requirements that Coast maintain minimum average balances
of liquid assets and also serve to fund normal operational requirements. Such
investments are summarized in the following table as of the dates indicated.
DECEMBER 31,
---------------------------------------------
1995 1994 1993
-------------- -------------- ---------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ----- -------- ----- -------- ------
(IN MILLIONS)
Federal funds sold and other
short term investments:
Qualifying for regulatory
liquidity:
Federal funds sold.............. $28.0 $28.0 $ -- $ -- $120.0 $120.0
Repurchase agreements........... -- -- -- -- 340.0 340.0
----- ----- ----- ----- ------ ------
28.0 28.0 -- -- 460.0 460.0
----- ----- ----- ----- ------ ------
Not qualifying for regulatory
liquidity:
Commercial paper................ 2.4 2.4 2.4 2.4 4.1 4.1
----- ----- ----- ----- ------ ------
Federal funds sold and other
short term investments......... 30.4 30.4 2.4 2.4 464.1 464.1
----- ----- ----- ----- ------ ------
Investment securities:
Qualifying for regulatory
liquidity:
U.S. Treasury securities........ -- -- 4.8 4.8 -- --
----- ----- ----- ----- ------ ------
Not qualifying for regulatory
liquidity:
Commercial paper, custodial..... 24.3 24.3 32.6 32.6 39.0 39.0
Repurchase agreements,
custodial...................... 3.4 3.4 -- -- 5.8 5.8
Other marketable securities,
custodial...................... .4 .4 .1 .1 .5 .5
----- ----- ----- ----- ------ ------
28.1 28.1 32.7 32.7 45.3 45.3
----- ----- ----- ----- ------ ------
Investment securities.......... 28.1 28.1 37.5 37.5 45.3 45.3
----- ----- ----- ----- ------ ------
$58.5 $58.5 $39.9 $39.9 $509.4 $509.4
===== ===== ===== ===== ====== ======
As of December 31, 1995, the weighted average yield on the short-term
investment securities listed above was 4.79%.
22
The carrying and fair values of long-term investment securities are shown in
the following table at the dates indicated.
DECEMBER 31,
--------------------------------------------
1995 1994 1993
-------------- -------------- --------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ----- -------- ----- -------- -----
(IN MILLIONS)
Qualifying for regulatory
liquidity:
U.S. Treasury securities:
Held to maturity................. $40.3 $40.5 $40.7 $39.8 $ -- $ --
----- ----- ----- ----- ----- -----
Not qualifying for regulatory
liquidity:
States of the U.S. and political
subdivisions thereof:
Held to maturity................. 3.6 3.7 3.7 3.7 4.1 4.4
Corporate debt and equity
securities:
Available for sale............... -- -- -- -- .5 .5
Money market trust accounts:
Held to maturity................. -- -- -- -- 29.1 29.1
Other marketable securities:
Held to maturity................. .8 .8 .6 .6 .5 .5
----- ----- ----- ----- ----- -----
4.4 4.5 4.3 4.3 34.2 34.5
----- ----- ----- ----- ----- -----
$44.7 $45.0 $45.0 $44.1 $34.2 $34.5
===== ===== ===== ===== ===== =====
Following is a table which describes the amounts of Coast's long-term
investment securities which mature in the periods indicated, and their
weighted average yields as of December 31, 1995.
WEIGHTED
REMAINING MATURITY AMOUNT AVERAGE YIELD
------------------ ------ -------------
(DOLLARS IN
MILLIONS)
Within one year...................................... $40.3 6.17%
After one through two years.......................... .8 7.00
After ten years...................................... 3.6 7.21
----- ----
$44.7 6.27%
===== ====
DEPOSITS AND OTHER SOURCES OF FUNDS
General
In addition to deposits, Coast obtains funds from payments on loans and MBS,
positive cash flows generated from its operations, from borrowings and
securities sold under agreements to repurchase ("Reverse Repurchase
Agreements"), from FHLB of San Francisco advances, and from sales of loans and
MBS. Scheduled loan payments are a relatively stable source of funds, while
deposit inflows and outflows and the related cost of such funds vary widely.
(See "Management's Discussion and Analysis of Financial Condition and Results
of Operations--Results of Operations.")
Deposits
Coast's primary source of funding is retail deposits obtained through its 89
retail banking offices. Coast attracts deposits from the general public by
offering a wide assortment of accounts and rates. Coast offers regular deposit
accounts, checking accounts, various money market accounts, fixed interest
rate certificates with varying maturities and individual retirement and Keogh
retirement accounts.
23
Another potential source of funding is broker-originated deposits, although
in recent years Coast has not utilized broker-originated deposits as interest
rates on such deposits have been higher than on comparable branch-originated
deposits. At December 31, 1995 Coast had remaining broker-originated deposits
of $34.7 million.
The variety of deposit accounts offered by Coast has allowed it to be
competitive in obtaining retail funds and has allowed it to mitigate the
effect of disintermediation (the flow of funds away from depository
institutions into alternate investments such as mutual funds and money market
accounts as well as into direct investment vehicles including government and
corporate securities). However, Coast has become more subject to short-term
fluctuations in deposit flows in recent years as customers have become more
interest rate sensitive. The ability of Coast to attract and maintain deposits
and to minimize its cost of funds has been and will continue to be
significantly affected by money market conditions. The following table sets
forth Coast's deposit flows during the periods indicated.
1995 1994 1993 1992 1991
-------- -------- -------- -------- --------
(IN MILLIONS)
Deposits..................... $ 14,758 $ 13,922 $ 12,146 $ 12,269 $ 17,614
Withdrawals.................. (14,693) (14,128) (12,521) (13,172) (18,617)
-------- -------- -------- -------- --------
Net cash deposits flow..... 65 (206) (375) (903) (1,003)
Accounts obtained through
acquisitions of branches.... 149 -- -- -- --
Accounts disposed of through
sales of branches........... (209) -- (35) (314) (1,027)
Interest credited............ 239 177 182 253 422
-------- -------- -------- -------- --------
Net increase (decrease) in
deposits.................. $ 244 $ (29) $ (228) $ (964) $ (1,608)
======== ======== ======== ======== ========
24
The following table shows the amounts of Coast's deposits by type of account
at the dates indicated.
DECEMBER 31,
------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Demand:
Checking accounts..... $ 632,025 $ 464,321 $ 448,325 $ 475,170 $ 476,855
---------- ---------- ---------- ---------- ----------
Savings:
Money market.......... 666,019 866,569 1,186,787 1,760,187 1,963,336
---------- ---------- ---------- ---------- ----------
Time:
Currently offered:
Less than 90-day.... 9,551 19,471 29,331 62,837 100,753
90-day.............. 21,158 35,424 74,628 202,155 459,653
Six-month........... 76,050 238,496 1,465,925 561,196 376,567
Seven-month......... 1,689,716 1,324,501 94,878 138,010 137,085
Eight-month......... 74,831 458,358 63,620 129,456 653,448
Nine-month.......... 34,754 213,575 915,276 129,298 456,913
Ten-month........... 670,174 38,959 -- -- --
One-year and
fourteen-month..... 1,433,381 1,080,919 295,336 923,709 591,479
Eighteen-month and
two-year........... 412,105 686,503 777,703 1,284,973 1,496,475
Three-year.......... 39,478 89,915 139,329 130,895 109,666
Four-year........... 23,689 32,665 54,684 37,305 37,625
More than four-year. 280,739 281,723 293,285 230,506 102,218
Public agency
deposits........... 100 297 4,150 642 6,040
Broker-originated... 34,724 40,874 55,290 60,369 128,708
---------- ---------- ---------- ---------- ----------
4,800,450 4,541,680 4,263,435 3,891,351 4,656,630
---------- ---------- ---------- ---------- ----------
Discontinued products:
Less than one-year.. 1,676 4,099 6,728 3,528 1,859
One-year to two-
year............... 500 2,817 2,503 5,370 742
Over two-year to
four-year.......... 350 195 501 377 617
Over four years..... 22,452 127 280 147 77
---------- ---------- ---------- ---------- ----------
24,978 7,238 10,012 9,422 3,295
---------- ---------- ---------- ---------- ----------
Total time........ 4,825,428 4,548,918 4,273,447 3,900,773 4,659,925
---------- ---------- ---------- ---------- ----------
$6,123,472 $5,879,808 $5,908,559 $6,136,130 $7,100,116
========== ========== ========== ========== ==========
The following table sets forth the amounts of deposits as of the dates
indicated by interest rate categories.
DECEMBER 31,
--------------------
1995 1994 1993
------ ------ ------
(IN MILLIONS)
0.00- 1.99%.......................................... $ 480 $ 489 $ 501
2.00- 2.99%.......................................... 398 606 1,241
3.00- 3.99%.......................................... 574 1,193 2,190
4.00- 4.99%.......................................... 1,442 1,780 1,395
5.00- 5.99%.......................................... 2,358 1,263 172
6.00- 6.99%.......................................... 723 414 171
7.00- 7.99%.......................................... 100 85 160
8.00-13.99%.......................................... 48 50 79
------ ------ ------
$6,123 $5,880 $5,909
====== ====== ======
25
The following table presents the amount of deposits by interest rate
categories at December 31, 1995, which mature during the periods indicated.
ACCOUNTS WHICH MATURE IN
----------------------------------
AFTER
1996 1997 1998 1999 1999 TOTAL
------ ---- ---- ---- ----- ------
(IN MILLIONS)
0.00-1.99%................................ $ 480 $ -- $ -- $ -- $ -- $ 480
2.00-2.99%................................ 398 -- -- -- -- 398
3.00-3.99%................................ 574 -- -- -- -- 574
4.00-4.99%................................ 1,424 13 4 1 -- 1,442
5.00-5.99%................................ 2,086 212 36 24 -- 2,358
6.00-6.99%................................ 582 85 22 34 -- 723
7.00-9.99%................................ 43 52 19 34 -- 148
------ ---- ---- ---- ---- ------
$5,587 $362 $ 81 $ 93 $ -- $6,123
====== ==== ==== ==== ==== ======
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,
1995.
REMAINING TERM TO MATURITY (IN MONTHS) AMOUNT
-------------------------------------- -------------
(IN MILLIONS)
Three or less................................................ $ 445
Over three to six............................................ 238
Over six to twelve........................................... 304
Over twelve.................................................. 120
------
$1,107
======
Borrowings and Other Financing Transactions
Other potential sources of funds available to Coast include a line of credit
with the FHLB of San Francisco, revenue repurchase agreements and, if other
sources are not available, direct access to borrowings from the Federal
Reserve System. In addition, Coast has access to the capital markets for
issuing debt or equity securities; however, access can be limited from time to
time by various external factors including market conditions, Coast's credit
rating and general economic conditions.
At December 31, 1995, FHLB advances were $804.3 million, and the amount of
additional credit available from the FHLB was $1.26 billion.
The reverse repurchase agreements used by Coast involve the sale of
securities owned by Coast with a commitment to repurchase the same securities
at a predetermined price at a future date, typically within three months,
depending on the type of collateral, from the date of the initial sale. These
transactions are borrowings collateralized by the securities sold and are
included as other borrowings in Coast's consolidated statement of financial
condition. See Note 8 of Notes to Consolidated Financial Statements.
At December 31, 1995, Coast had capital notes outstanding with a face amount
of $57.5 million due in 2002, and the Company had senior notes outstanding
with a face amount of $57.5 million due in 2000. The capital notes are
redeemable at the option of Coast, in whole or in part, after December 31,
1997, and the senior notes are redeemable at the option of the Company, in
whole or in part, after April 1, 1998.
At December 31, 1995, Coast had pledged $3.19 billion of loans receivable,
MBS, and FHLB of San Francisco stock to secure its advances from the FHLB of
San Francisco and other borrowings. See Note 8 of Notes to Consolidated
Financial Statements. Changes in the collateralization levels due to changes
in market interest rates or other factors could require Coast to add
collateral to secure its outstanding borrowings.
26
The following table sets forth certain information with respect to Coast's
borrowings at the dates indicated.
DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
FHLB advances........... $ 804,250 $ 954,450 $ 704,200 $1,094,950 $ 712,750
Reverse repurchase
agreements (1)......... 546,153 714,689 742,196 401,478 198,912
Federal funds purchased
(1).................... 110,120 19,822 80,581 58,513 60,623
Capital notes........... 55,746 55,495 55,244 112,577 57,380
Senior notes............ 56,227 55,922 55,616 -- --
Convertible subordinated
debentures............. -- -- -- 593 594
Other................... 20,840 19,183 19,544 35,837 33,833
---------- ---------- ---------- ---------- ----------
Total borrowings...... $1,593,336 $1,819,561 $1,657,381 $1,703,948 $1,064,092
========== ========== ========== ========== ==========
Weighted average inter-
est rate............... 6.28% 6.47% 4.61% 5.42% 7.04%
========== ========== ========== ========== ==========
- --------
(1) The period-end amounts are not necessarily reflective of Coast's activity
in these borrowings during the periods.
Certain information with respect to Coast's significant short-term
borrowings is set forth below.
AT OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1995 1994 1993
-------- ------ --------
(DOLLARS IN MILLIONS)
Reverse repurchase agreements:
Balance........................................... $ 546.2 $714.7 $ 742.2
Average amount outstanding (1).................... 856.7 668.1 816.9
Maximum amount outstanding (2).................... 1,123.3 766.0 1,033.5
Weighted average rate:
At end of year.................................. 5.80% 6.05% 3.42%
During year (1)................................. 5.97 4.42 3.33
Federal funds purchased:
Balance........................................... $ 110.1 $ 19.8 $ 80.6
Average amount outstanding (1).................... 70.6 62.8 73.2
Maximum amount outstanding (2).................... 110.1 96.0 103.8
Weighted average rate:
At end of year.................................. 5.37% 5.06% 3.10%
During year (1)................................. 6.08 4.31 3.29
- --------
(1) Weighted average based upon end of month balances and rates.
(2) Based upon end of month balances.
COMPETITION
Coast faces significant competition both in its lending activities and in
attracting deposits. Competition in originating loans comes primarily from
other savings banks, savings and loan associations, commercial banks and
mortgage bankers. Coast competes for loans principally on the basis of the
interest rates and loan fees it charges, the types of loans it originates and
the quality of services it provides borrowers.
Coast faces substantial competition for deposits from other savings banks,
savings and loan associations, commercial banks, money market mutual funds,
credit unions and others providing investment opportunities. The ability of
Coast to attract and retain deposits depends on its ability to provide an
investment opportunity meeting the requirements of investors as to rate of
return, liquidity, risk and other factors. Coast attracts deposits through its
retail banking offices primarily from the communities in which such offices
are located. Coast competes for
27
deposits by offering a variety of deposit accounts at competitive rates and by
maintaining convenient business hours and retail banking office locations with
interbranch deposit and withdrawal privileges at each and access to automated
teller machines which provide 24-hour facilities for the convenience of its
customers.
Many states, including California, have adopted legislation which permits,
subject to various conditions and restrictions, banking on an interstate
basis. Additionally, federal legislation enacted in 1994 eliminates certain
federal restrictions, and preempts certain state law restrictions, on
interstate banking by banks. Certain key provisions of this legislation do not
become effective until 1997. With the advent of interstate branching,
competitors of Coast may be able to conduct extensive interstate banking
operations and thereby gain competitive advantages. In addition, the OTS has
removed prior regulatory restrictions on the branching authority of federal
savings institutions and now permits nationwide branching by institutions
meeting certain capital and other requirements.
REGULATION
General
The Company is registered with the OTS as a savings and loan holding company
and is subject to regulation and examination as such by the OTS. Coast is a
federally chartered savings bank and a member of the FHLB of San Francisco.
Coast's deposits are insured by the FDIC through the SAIF. Coast is subject to
examination and regulation by the OTS and the FDIC with respect to most of its
business activities, including, among others, lending activities, capital
standards, general investment authority, deposit taking and borrowing
authority, mergers and other business combinations, establishment of branch
offices, and permitted subsidiary investments and activities. The OTS's
operations, including examination activities, are funded by assessments levied
on its regulated institutions.
Coast is further subject to regulations of the Board of Governors of the
Federal Reserve System (the "Federal Reserve Board") concerning reserves
required to be maintained against deposits, consumer lending requirements and
certain other matters. Financial institutions, including Coast, may also be
subject, under certain circumstances, to potential liability under various
statutes and regulations applicable to property owners generally, including
statutes and regulations relating to the environmental condition of real
property and potential liability for the costs of remediation thereof.
The descriptions of the statutes and regulations applicable to the Company
and Coast set forth below and elsewhere herein do not purport to be complete
descriptions of such statutes and regulations and their effects on the Company
and Coast. Such descriptions also do not purport to identify every statute and
regulation that may apply to the Company or Coast.
The OTS's enforcement authority over savings institutions and their holding
companies includes, among other things, the ability to assess civil money
penalties, to issue cease and desist orders and to initiate removal and
prohibition orders against officers, directors and certain other persons. In
general, these enforcement actions may be initiated for violations of laws and
regulations and unsafe or unsound conditions or practices.
The FDIC has authority to recommend that the OTS take any authorized
enforcement action with respect to any federally insured savings institution.
If the OTS does not take the recommended action or provide an acceptable plan
for addressing the FDIC's concerns within 60 days after receipt of the
recommendation from the FDIC, the FDIC may take such action if the FDIC Board
of Directors determines that the institution is in an unsafe or unsound
condition or that failure to take such action will result in the continuation
of unsafe or unsound practices in conducting the business of the institution.
The FDIC may also take action prior to the expiration of the 60-day time
period in exigent circumstances after notifying the OTS.
The FDIC may terminate the deposit insurance of any insured depository if
the FDIC determines, after a hearing, that the institution has engaged or is
engaging in unsafe or unsound practices, is in an unsafe or unsound condition
to continue operations or has violated any applicable law, regulation or order
or any condition imposed
28
in writing by the FDIC. In addition, FDIC regulations provide that any insured
institution that falls below a 2% minimum leverage ratio will be subject to
FDIC deposit insurance termination proceedings unless it has submitted, and is
in compliance with, a capital plan with its primary federal regulator and the
FDIC. The FDIC may also suspend deposit insurance temporarily during the
hearing process if the institution has no tangible capital.
Federal Home Loan Bank System
As a member of the FHLB System, Coast is required to own capital stock in
its regional FHLB, the FHLB of San Francisco, in a minimum amount determined
at the end of each year based on the greatest of (i) 1% of the aggregate
principal amount of its unpaid residential mortgage loans, home purchase
contracts and similar obligations, (ii) 5% of its outstanding borrowings and
letters of credit from the FHLB, or (iii) 0.3% of its total assets. Coast was
in compliance with this requirement, with an investment of $85.8 million in
FHLB of San Francisco stock at December 31, 1995.
The FHLB of San Francisco serves as a reserve or central bank for the member
institutions within its assigned region, the Eleventh FHLB District. It is
funded primarily from proceeds derived from the sale of consolidated
obligations of the FHLB System. It makes advances to members in accordance
with policies and procedures established by the Federal Housing Finance Board
and the Board of Directors of the FHLB of San Francisco. See "Deposits and
Other Sources of Funds--Borrowings and Other Financing Transactions" above.
Each FHLB is required to transfer a certain portion of its reserves and
undivided profits to the Resolution Funding Corporation ("REFCORP"), the
entity established to raise funds to resolve troubled thrift cases, to fund
the principal and a portion of the interest on bonds issued by the REFCORP and
certain other obligations. In addition, each FHLB is required to transfer a
percentage of its annual net earnings, now 10%, to fund an affordable housing
program mandated by applicable federal law. As a result of these requirements
and other factors, the FHLB of San Francisco has experienced reduced earnings
since the enactment of FIRREA. It is anticipated that this may continue and
that Coast will continue to receive a relatively low level of dividends on its
FHLB of San Francisco stock in future periods. During 1995, 1994 and 1993,
Coast recorded dividend income of $4.5 million, $3.3 million and $2.5 million
respectively, on its FHLB of San Francisco Stock.
Insurance of Accounts
The FDIC administers two separate deposit insurance funds. The Bank
Insurance Fund (the "BIF") insures the deposits of commercial banks and other
institutions that were insured by the FDIC prior to the enactment of the
Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA"). The SAIF insures the deposits of savings institutions that were
insured by the FSLIC prior to the enactment of FIRREA. The FDIC is authorized
to increase deposit insurance premiums if it determines such increases are
appropriate to maintain the reserves of either the SAIF or the BIF or to fund
the administration of the FDIC. In addition, the FDIC is authorized to levy
emergency special assessments on BIF and SAIF members.
Pursuant to the Federal Deposit Insurance Corporation Improvement Act of
1991 ("FDICIA"), the FDIC has implemented a risk-based federal deposit
insurance premium system under which savings institutions are assigned a
deposit insurance premium rate ranging from 0.23% to 0.31%. Coast paid $17.3
million, $16.4 million and $18.5 million in deposit insurance premiums to SAIF
in 1995, 1994 and 1993, respectively, compared to $15.5 million in 1992.
Prior to 1995, the risk-based deposit insurance premiums paid by savings
institutions insured by the SAIF and by commercial banks and other
institutions insured by the BIF, which, together with earnings on investments,
are the principal funding sources for the respective insurance funds, had been
assessed based on identical rate schedules having the above range of premium
assessment rates (that is, from 0.23% to 0.31%). The SAIF and the BIF are each
required by statute to attain and thereafter to maintain a reserve to deposits
ratio of 1.25%. The BIF has reached the required reserve level, whereas, based
upon projections by the FDIC, the SAIF is not
29
expected to reach its targeted ratio until at least the year 2002, or later.
This disparity arises from the BIF's greater premium revenues and the
requirement that a substantial portion of the SAIF premiums be used to repay
bonds (commonly referred to as the "FICO Bonds") that were issued by a
specially created federal corporation for the purpose of funding the
resolution of failed thrift institutions. In November 1995, the FDIC reduced
its deposit insurance premiums for BIF member institutions to a range of from
none to $.27 per $100 of deposits (subject to a statutory minimum of $2,000 in
annual assessments), with an historical low average of approximately $.043 per
$100 of deposits, effective beginning with the semiannual period commencing
January 1, 1996. The FDIC maintained the current range of deposit insurance
premiums assessable against SAIF member institutions at $.23 to $.31 per $100
of deposits.
The current deposit rate premium disparity between BIF-insured institutions
and SAIF-insured institutions resulting from the recently implemented BIF
premium reduction places SAIF-insured institutions at a competitive
disadvantage due to higher premium costs and may worsen the financial
condition of the SAIF by leading to a shrinkage in its deposit base. A number
of proposals for assisting the SAIF in attaining its required reserve level,
and thereby permitting SAIF deposit insurance premiums to be reduced to levels
at or near those paid by BIF-insured institutions, have been under discussion
in Congress and among various of the affected parties and relevant government
agencies. Congress proposed, as part of the budget reconciliation bill
submitted to and vetoed by the President in late 1995, a one-time, special
assessment on all savings institutions to recapitalize the SAIF. The proposal
would have required SAIF-insured institutions to pay a one-time special
assessment (estimated to be between approximately 80 and 90 basis points on
deposits) and would provide for a pro rata sharing by all federally insured
institutions of the obligation, now borne entirely by SAIF-insured
institutions, to pay the interest on the FICO Bonds. If the proposed
legislation were ultimately to become law, the special assessment would be
reported in Coast's consolidated statement of operations in the quarter during
which the budget reconciliation bill (or such other bill to which such
legislation may be attached) is finally enacted.
Also included in the budget reconciliation bill were provisions that would
eliminate the deduction for additions to tax bad debt reserves available to
qualifying thrift institutions under existing provisions of the Internal
Revenue Code. The bill would also generally have required "recapture" (i.e.,
inclusion in taxable income) of the balance of such reserve accounts to the
extent they exceed a base year amount (generally the balance of reserves as of
December 31, 1987. (Coast's tax bad debt reserves at December 31, 1995,
exceeded the base year amount by approximately $5.8 million and the related
liability for recapture has been accrued.) The Company cannot predict whether
or in what form the above described legislation will be enacted or the effect
of such legislation, if adopted, on Coast's operations and financial
condition.
Liquidity
Federal regulations currently require a savings institution to maintain a
monthly average daily balance of liquid assets (including cash, certain time
deposits, bankers' acceptances and specified United States government, state
or federal agency obligations) equal to at least 5% of the average daily
balance of its net withdrawable accounts and short-term borrowings during the
preceding calendar month. This liquidity requirement may be changed from time
to time by the OTS to any amount within the range of 4% to 10% of such
accounts and borrowings depending upon economic conditions and the deposit
flows of member institutions. Federal regulations also require each member
institution to maintain a monthly average daily balance of short-term liquid
assets (generally those having maturities of 12 months or less) equal to at
least 1% of the average daily balance of its net withdrawable accounts and
short term borrowings during the preceding calendar month. Monetary penalties
may be imposed for failure to meet these liquidity ratio requirements. Coast's
liquidity and short-term liquidity ratios for the calculation period ended
December 31, 1995, were 5.57% and 4.89%, respectively, which exceeded the
applicable requirements.
Community Reinvestment Act
The Community Reinvestment Act ("CRA") requires each savings institution, as
well as commercial banks and certain other lenders, to identify the
communities served by the institution and to identify the types of credit
30
the institution is prepared to extend within those communities. The CRA also
requires the OTS to assess an institution's performance in meeting the credit
needs of its identified communities as part of its examination of the
institution, and to take such assessments into consideration in reviewing
applications with respect to branches, mergers and other business
combinations, and savings and loan holding company acquisitions. An
unsatisfactory CRA rating may be the basis for denying such an application and
community groups have successfully protested applications on CRA grounds. The
OTS assigns CRA ratings of "outstanding", "satisfactory", "needs to improve"
or "substantial noncompliance." Coast was rated "outstanding" in its last CRA
examination.
Classification of Assets
Federal regulations require savings institutions to review their assets on a
regular basis and to classify them as "substandard", "doubtful" or "loss" if
warranted. Adequate valuation allowances for loan losses, consistent with
generally accepted accounting principles, are required to be established for
assets classified as "substandard" or "doubtful". If an asset is classified as
"loss", the institution must either charge it off or establish a specific
allowance for loss in an amount equal to the amount classified as "loss". An
asset which currently does not warrant classification as "substandard" but
which possesses weaknesses or deficiencies deserving close attention is
required to be designated as "special mention". The institution's OTS District
Director has the authority to approve, disapprove or modify any asset
classification and any amounts established as allowances for loan losses.
Regulatory Capital Requirements
General Capital Requirements. Federal law and the regulatory capital
provisions of the OTS regulations promulgated thereunder (the "Capital
Regulations") established three capital requirements -a "core capital
requirement" (referred to as the "leverage limit" in the Capital Regulations),
a "tangible capital requirement" and a "risk-based capital requirement." The
capital standards established by the OTS are required, with certain
exceptions, to be no less stringent than the capital standards applicable to
national banks. The OTS may also establish, on a case by case basis,
individual minimum capital requirements for a savings institution which vary
from the requirements that would otherwise apply under the Capital
Regulations.
The core capital requirement currently included in the Capital Regulations
mandates that a savings institution maintain "core capital" of not less than
3% of adjusted total assets. "Core capital" generally includes common
stockholders' equity, noncumulative perpetual preferred stock, including any
related surplus, and minority interests in the equity accounts of fully
consolidated subsidiaries. The amount of an institution's core capital is, in
general, calculated in accordance with generally accepted accounting
principles ("GAAP"), but with certain exceptions. Among other exceptions,
adjustments to an institution's GAAP equity accounts that are required under
GAAP to reflect changes in the fair value of certain securities held by the
institution that are categorized as "available for sale" are not to be
included in the calculation of core capital for regulatory capital purposes.
Intangible assets (not including purchased or originated mortgage servicing
rights, purchased credit card relationships and qualifying supervisory
goodwill as described below) must be deducted from core capital.
Under the Capital Regulations, core capital may include purchased or
originated mortgage servicing rights and purchased credit card relationships,
subject to certain limitations. In addition, prior to January 1, 1995,
qualifying supervisory goodwill was permitted to be included by an eligible
savings institution in core capital in an amount up to .375% of adjusted total
assets. The amount of qualifying supervisory goodwill which may be included in
core capital was completely eliminated beginning January 1, 1995. At December
31, 1994, the amount of qualifying supervisory goodwill included in Coast's
core capital was $31 million. This amount represents a portion of the $299
million contribution that Coast received from the Federal Savings and Loan
Insurance Corporation ("FSLIC") to induce Coast's 1987 acquisition of Central
Savings and Loan Association's ("Central") assets and liabilities as further
described below in this section, and that the FSLIC agreed was to have been
considered a permanent capital contribution. After subsequent amendment of
applicable federal law, the OTS characterized the contribution as qualifying
supervisory goodwill.
31
The tangible capital requirement adopted by the OTS Director requires a
savings institution to maintain "tangible capital" in an amount not less than
1.5% of adjusted total assets. "Tangible capital" means core capital less any
intangible assets (including supervisory goodwill), plus purchased or
originated mortgage servicing rights, subject to certain limitations.
The risk-based capital requirements provide, among other things, that the
capital ratios applicable to various classes of assets are to be adjusted to
reflect the degree of credit risk deemed to be associated with such assets. In
addition, the asset base for computing a savings institution's risk-based
capital requirement includes off-balance sheet items, including letters of
credit, and loans or other assets sold with subordination or other recourse
arrangements. Generally, the Capital Regulations require savings institutions
to maintain "total capital" equal to 8% of risk-weighted assets. "Total
capital" for these purposes consists of core capital and supplementary
capital. Supplementary capital includes, among other things, certain types of
preferred stock and subordinated debt and, subject to certain limitations,
loan and lease general valuation allowances. A savings institution's
supplementary capital may be used to satisfy the risk-based capital
requirement only to the extent of that institution's core capital.
The Capital Regulations substantially changed the capital requirements for
asset sales with recourse or the retention of the subordinated portion of a
senior/subordinated loan participation or interest in a package of loans sold.
Essentially, the Capital Regulations treat asset sales with recourse as if
they had not occurred, and generally require a savings institution to maintain
capital against the entire amount of assets sold with recourse, even if the
recourse is for less than the full amount of assets sold, with one limited
exception. The exception is that assets sold with recourse with respect to
which the recourse percentage is less than the applicable risk-based capital
requirement are not included in risk-weighted assets; however, capital is
required to be maintained in an amount equal to such recourse amount. A
savings institution's retention of the subordinated portion of a
senior/subordinated loan participation or interest in a package of loans sold
is treated in the same manner as an asset sale with recourse. As of December
31, 1995, the outstanding principal balances of loans Coast had sold with
recourse or subordination totaled $398.5 million, and the amount of capital
required to be maintained against such off-balance sheet items was $14.2
million, which included $13.1 million determined based on recourse amounts
representing recourse percentages which are less than the applicable risk-
based capital percentage, and $1.1 million determined by applying the
applicable risk-based capital percentage to the risk-weighted principal
balance of the respective loans sold with recourse. The federal banking
regulatory authorities and the OTS are currently considering revising the
definition and treatment of recourse for purposes of the risk-based capital
requirement. There can be no assurance that any new rules ultimately adopted
will not be more restrictive than the recourse-related provisions of the
current Capital Regulations or that past transactions will be "grandfathered"
under any new rules.
The Capital Regulations state that OTS regulated institutions are required
to maintain additional risk-based capital equal to one-half of the amount by
which the decline in the institution's "net portfolio value" that would result
from a hypothetical 200 basis point increase or decrease in interest rates
exceeds 2% of the estimated "economic value" of its assets. The one exception
to this general rule is that if the three-month Treasury bond equivalent yield
falls below 4%, an institution would measure the hypothetical downward change
at one-half of that Treasury yield. An institution's "net portfolio value" is
defined for this purpose as the difference between the aggregate expected
future cash inflows from an institution's assets and the aggregate expected
future cash outflows on its liabilities, plus the net expected cash flows from
existing off-balance sheet contracts, each discounted to present value. The
estimated "economic value" of an institution's assets is defined as the
discounted present value of the estimated future cash flows from its assets.
Both the "net portfolio value" and the "economic value" include, as specified
in the regulation, the book value of assets and liabilities that are not
interest rate sensitive. The OTS has stated that implementation of this
amendment to its regulations will require additional capital to be maintained
only by institutions having "above normal" interest rate risk and, based on
Coast's balance sheet as of December 31, 1995, there would be no increase in
Coast's minimum capital requirement as of that date. The OTS has to date
deferred implementation of this regulation.
32
The risk-based capital rules of the OTS, FDIC and other federal banking
agencies provide that an institution must hold capital in excess of regulatory
minimums to the extent that examiners find either (i) significant exposure to
concentration of credit risk such as risks from high interest rates,
prepayments, significant off-balance sheet items or risks arising from
nontraditional activities, or (ii) that the institution is not adequately
managing these risks. For this purpose, however, the agencies have stated
that, in view of the statutory requirements relating to permitted lending and
investment activities of savings institutions, the general concentration by
such institutions in real estate lending activities would not, by itself, be
deemed to constitute an exposure to concentration of credit risk that would
require greater capital levels.
On April 10, 1987, Coast acquired substantially all of the assets and
liabilities of Central Savings and Loan Association from the FSLIC in a
supervisory-assisted transaction. As part of the transaction, Coast entered
into a contractual agreement with the FSLIC under which the FSLIC made a cash
contribution to Coast of approximately $299 million which, pursuant to the
agreement, was to be reflected as a permanent addition to Coast's regulatory
capital. FIRREA eliminated the FSLIC and replaced it (and the Federal Home
Loan Bank Board) for supervisory and regulatory purposes with the OTS. The OTS
has taken the position that the FSLIC contribution should be classified as
supervisory goodwill, thereby excluding it from regulatory capital. In June
1992, Coast filed an action in the United States Court of Federal Claims
seeking monetary damages for breach of the contractual agreement with the
FSLIC. No prediction can be made as to whether this lawsuit will be
successful, or if successful, what damages might be awarded to Coast. In three
cases with similar issues the Court of Federal Claims ruled in favor of the
plaintiff thrift institutions on the issue of liability of the federal
government for breach of contract. The Court of Appeals for the Federal
Circuit, sitting en banc, affirmed the Court of Federal Claims ruling in these
cases. The federal government was granted a review of the Court of Appeals
decision by the United States Supreme Court with oral arguments scheduled for
April 1996.
The following table reflects, in both dollars and ratios, Coast's regulatory
capital position as of December 31, 1995, as well as the requirements at that
date.
ACTUAL REQUIRED
------------ ------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN MILLIONS)
December 31, 1995:
Risk-based..................................... $567 10.86% $418 8.00%
Core........................................... 449 5.47 246 3.00
Tangible....................................... 449 5.47 123 1.50
33
Following is a reconciliation of Coast's stockholder's equity to the minimum
federal regulatory capital requirements as of December 31, 1995 and 1994.
DECEMBER 31,
-----------------------------------------------
1995 1994
----------------------- -----------------------
RISK- RISK-
TANGIBLE BASED TANGIBLE BASED
CORE CAPITAL CAPITAL CORE CAPITAL CAPITAL
----- -------- ------- ----- -------- -------
(IN MILLIONS)
Stockholder's equity of Coast.. $ 463 $ 463 $ 463 $ 420 $ 420 $ 420
Excluded items:
Long-term foreclosed real
estate owned................ (2) --
Unrealized (gain) loss on
securities available for
sale, net of taxes.......... (7) (7) (7) 1 1 1
Goodwill..................... (7) (7) (7) (12) (12) (12)
Fully capitalized items...... (1) (1)
Supplementary capital:
Subordinated debt............ 56 55
General valuation allowance.. 65 67
Qualifying supervisory
goodwill.................... -- -- -- 31 -- 31
----- ----- ----- ----- ----- -----
449 449 567 440 409 561
Minimum requirement............ (246) (123) (418) (245) (122) (427)
----- ----- ----- ----- ----- -----
Excess..................... $ 203 $ 326 $ 149 $ 195 $ 287 $ 134
===== ===== ===== ===== ===== =====
FIRREA requires a savings institution which fails to meet its capital
standards to submit a capital restoration plan to the OTS Director which
describes the manner in which the institution proposes to increase its capital
and the activities in which it will engage, and requires that any increase in
its assets be met with a commensurate increase in tangible capital and risk-
based capital. As part of the submission of a capital plan, a savings
institution is required to certify that, during the pendency of its
application for approval of its capital plan, it will adhere to certain growth
restrictions, and will not make any capital distributions or engage in certain
other prohibited or restricted activities. The OTS must, with certain limited
exceptions, limit the asset growth of any such institution.
Upon approval of a capital plan by the OTS, the submitting savings
institution is not generally subject to enforcement sanctions for failure to
meet its statutory capital standards as long as it is in compliance with the
approved capital plan. However, there is no limit on the authority of the OTS
to take any appropriate action with respect to any unsafe or unsound practice
or condition of a savings institution, other than the failure to comply with
the capital standards. As a result, approval of a capital plan by the OTS does
not limit any authority of the Director of the OTS under any other provisions
of law.
The OTS has the authority to issue a capital directive to a savings
institution that does not satisfy its minimum capital requirements. The
capital directive may also specify corrective actions to be taken and a
capital directive, including any plan submitted pursuant to a capital
directive, is directly enforceable in a court of law. The Capital Regulations
provide that material failure of a savings institution to comply with any
plan, regulation, written agreement, undertaking, order or directive issued
pursuant to the Capital Regulations, including a material noncompliance with
the capital requirements, shall be treated by the Director as an unsafe and
unsound practice. The existence of an unsafe and unsound practice authorizes
the OTS to take enforcement or supervisory action against a savings
institution, including the appointment of a conservator or receiver. Moreover,
other regulations restrict growth and prohibit savings institutions not
meeting minimum capital requirements from paying dividends and from making
certain types of investments without the prior approval of the OTS. The FDIC
may also terminate a savings institution's deposit insurance upon failure to
meet applicable capital requirements and may temporarily suspend a savings
institution's deposit insurance if the FDIC finds that the institution has no
tangible capital (which may be calculated under certain conditions by
including goodwill). If such termination were to occur, accounts outstanding
at the time of such termination would continue to be insured for a period of
at least six months.
34
Prompt Corrective Action. FDICIA contains "prompt corrective action"
provisions pursuant to which insured depository institutions are to be
classified into one of five categories based primarily upon capital adequacy,
ranging from "well capitalized" to "critically undercapitalized" and which
require, subject to certain exceptions, the appropriate federal banking agency
to take prompt corrective action with respect to an institution which becomes
"undercapitalized" and to take additional actions if the institution becomes
"significantly undercapitalized" or "critically undercapitalized." These
provisions expand the powers and duties of the OTS and the FDIC and expressly
authorize, or in many cases direct, regulatory intervention at an earlier
state than was previously the case.
The OTS regulations implementing the "prompt corrective action" provisions
of FDICIA define the five capital categories as follows: (i) a savings
institution is "well capitalized" if it has a total risk-based capital ratio
of 10% or greater, has a Tier 1 risk-based capital ratio (Tier 1 capital to
total assets) of 6% or greater, has a core capital ratio of 5% or greater and
is not subject to any written capital order or directive to meet and maintain
a specific capital level or any capital measure; (ii) a savings institution is
"adequately capitalized" if it has a total risk-based capital ratio of 8% or
greater, has a Tier 1 risk-based capital ratio of 4% or greater and has a core
capital ratio of 4% or greater (3% for certain highly rated institutions);
(iii) a savings institution is "undercapitalized" if it has a total risk-based
capital ratio of less than 8% or has either a Tier 1 risk-based or a core
capital ratio that is less than 4%; (iv) a savings institution is
"significantly undercapitalized" if it has a total risk-based capital ratio
that is less than 6%, or has either a Tier 1 risk-based or a core capital
ratio that is less than 3%; and (v) a savings institution is "critically
undercapitalized" if its "tangible equity" (defined in the prompt corrective
action regulations to mean core capital plus cumulative perpetual preferred
stock) is equal to or less than 2% of its total assets. The OTS also has
authority, after an opportunity for a hearing, to downgrade a savings
institution from "well capitalized" to "adequately capitalized", or to subject
an "adequately capitalized" or "undercapitalized" savings institution to the
supervisory actions applicable to the next lower category, for supervisory
concerns. At December 31, 1995, Coast's regulatory capital exceeded the
thresholds necessary to be considered well capitalized.
Generally, FDICIA requires that an undercapitalized institution submit an
acceptable capital restoration plan to the appropriate federal banking agency.
The appropriate federal banking agency may not accept a capital restoration
plan unless, among other requirements, each company having control of the
institution has guaranteed that the institution will comply with the plan
until the institution has been adequately capitalized on average during each
of four consecutive calendar quarters and has provided adequate assurances of
performance. The aggregate liability under this provision of all companies
having control of an institution is limited to the lesser of (i) 5% of the
institution's total assets at the time the institution became undercapitalized
or (ii) the amount which is necessary, or would have been necessary, to bring
the institution into compliance with all capital standards applicable to the
institution as of the time the institution fails to comply with a plan filed
pursuant to FDICIA.
An undercapitalized institution may not acquire an interest in any company
or any other insured depository institution, establish or acquire additional
branch offices or engage in any new business unless the appropriate federal
banking agency has accepted its capital restoration plan, the institution is
implementing the plan and the agency determines that the proposed action is
consistent with and will further the achievement of the plan, or the FDIC
determines the proposed action will further the purpose of the "prompt
corrective action" sections of FDICIA.
Under FDICIA, the OTS must place a "critically undercapitalized,"
institution in conservatorship or receivership within 90 days after it becomes
"critically undercapitalized" or take such other actions as the OTS, with the
concurrence of the FDIC, deems appropriate. In addition, the institution must
comply with the restriction described above and must discontinue, beginning 60
days after becoming critically undercapitalized, any payment of principal and
interest on its subordinated debt unless the FDIC determines that an exception
to this provision would further the purposes of FDICIA. Until July 15, 1996,
these provisions do not apply to subordinated debt outstanding on July 15,
1991, and unpaid interest may continue to accrue on any subordinated debt
affected by the provisions. The FDIC is authorized to restrict the activities
of any critically undercapitalized
35
institution and to prohibit such an institution, without the FDIC's prior
written approval, from: (i) entering into any material transaction other than
in the usual course of business; (ii) engaging in any covered transaction (as
defined in Section 23A(b) of the Federal Reserve Act) with affiliates; (iii)
paying excessive compensation or bonuses; and (iv) paying interest on new or
renewed liabilities at a rate that would increase the institution's weighted
average cost of funds to a level significantly exceeding the prevailing rates
of interest on insured deposits in the institution's normal market areas.
Qualified Thrift Lender Test
Under the qualified thrift lender ("QTL") test, as revised by FDICIA, a
savings institution generally is required to invest at least 65% of its
portfolio assets (as defined) in "qualified thrift investments." Qualified
thrift investments include, in general, loans, securities and other
investments that are related to housing. At December 31, 1995, Coast's
qualified thrift investments were 86% of portfolio assets, calculated on a
monthly average, rolling 12-month "look-back" basis. A savings institution's
failure to remain a QTL may result in: (i) limitations on new investments and
activities; (ii) imposition of branching restrictions; (iii) loss of FHLB
borrowing privileges; and (iv) limitations on the payment of dividends.
Savings and Loan Holding Company Regulations
As a savings and loan holding company, the Company is subject to certain
restrictions with respect to its activities and investments. Among other
things, the Company is generally prohibited, either directly or indirectly,
from acquiring more than 5% of the voting shares of any savings association or
savings and loan holding company which is not a subsidiary of the Company.
Similarly, OTS approval must be obtained prior to any person acquiring
control of the Company or Coast. Control is conclusively presumed to exist if,
among other things, a person acquires more than 25% of any class of voting
stock of the institution or holding company or controls in any manner the
election of a majority of the directors of the insured institution or the
holding company.
The Company is considered an "affiliate" of Coast for regulatory purposes.
Savings associations are subject to the rules relating to transactions with
affiliates and loans to insiders generally applicable to commercial banks that
are members of the Federal Reserve System and certain additional limitations.
In addition, savings associations are generally prohibited from extending
credit to an affiliate, other than the association's subsidiaries, unless the
affiliate is engaged only in activities which the Federal Reserve Board has
determined to be permissible for bank holding companies and which the OTS has
not disapproved.
Savings and loan holding companies which control only one savings
association are exempt, if the association meets its QTL test, from
restrictions on the conduct of unrelated business activities that are
applicable to other savings and loan holding companies and that are similar to
the restrictions on the conduct of unrelated business activities applicable to
bank holding companies under the Bank Holding Company Act.
Restrictions on Dividends and Other Capital Distributions.
Savings association subsidiaries of holding companies generally are required
to provide not less than thirty days' advance notice to their OTS District
Director of any proposed declaration of a dividend on the association's stock.
Any dividend declared within the notice period, or without giving the
prescribed notice, is invalid.
Limitations are imposed under OTS regulations upon "capital distributions"
by savings associations, including cash dividends, payments to repurchase or
otherwise acquire an association's shares, payments to stockholders of another
association in a cash-out merger and other distributions charged against
capital.
An institution that meets its fully phased-in capital requirements is
permitted to make capital distributions during a calendar year of up to the
greater of (i) 100% of its net income during the calendar year, plus the
amount that would reduce by not more than one-half its "surplus capital ratio"
at the beginning of the calendar year
36
(the amount by which the institution's actual capital exceeded its fully
phased-in capital requirement at that date) and (ii) 75% of its net income
over the most recent four-quarter period. An institution that meets its
current minimum capital requirements but not its fully phased-in capital
requirements may make capital distributions up to 75% of its net income over
the most recent four-quarter period, as reduced by the amounts of any capital
distributions previously made during such period. An institution that does not
meet its minimum regulatory capital requirements immediately prior to, or on a
pro forma basis after giving effect to, a proposed capital distribution is not
authorized to make any capital distributions unless it receives prior written
approval from the OTS or the distributions are in accordance with the express
terms of an approved capital plan. As of December 31, 1995, Coast met its
fully phased-in capital requirement.
The OTS has proposed an amendment to its capital distribution regulation to
conform to its "prompt corrective action" regulations by replacing the current
"tiered" approach summarized above with one that would allow savings
institutions to make capital distributions that would not result in the
institution falling below the "adequately capitalized" capital category. Under
this proposal, a savings institution would be able to make a capital
distribution (i) without notice or application, if the institution is not held
by a savings and loan holding company and received a composite CAMEL rating
(the CAMEL rating is assigned by federal financial institution examiners to
summarize an institution's condition by reference to five key components of
the examination process: capital, asset quality, management, earnings and
liquidity) of 1 or 2, (ii) by providing notice to the OTS if, after the
capital distribution, the institution would remain at least "adequately
capitalized," or (iii) by submitting an application to the OTS.
The OTS retains the authority to prohibit any capital distribution otherwise
authorized under the regulation if the OTS determines that the capital
distribution would constitute an unsafe or unsound practice. The regulation
also states that the capital distribution limitations apply to direct and
indirect distributions to affiliates, including those occurring in connection
with corporate reorganizations.
Lending Standards
The OTS and the other federal banking agencies have jointly adopted uniform
rules on real estate lending and related Interagency Guidelines for Real
Estate Lending Policies. The uniform rules require that institutions adopt and
maintain comprehensive written policies for real estate lending. Although the
final rule did not impose specific maximum loan-to-value ratios, the related
Interagency Guidelines state that such ratio limits established by individual
institutions' boards of directors should not exceed levels set forth in the
Interagency Guidelines, which range from a maximum of 65% for loans secured by
raw land to 85% for loans secured by improved property other than owner-
occupied single family residences. No limit is set for loans secured by owner-
occupied single family residence loans, but the Interagency Guidelines state
that such loans exceeding a 90% loan-to-value ratio should have private
mortgage insurance or some form of credit enhancement. The Interagency
Guidelines further permit a limited amount of loans that do not conform to
these criteria. Coast has adopted lending policies in accordance with the
Interagency Guidelines, and requires private mortgage insurances for single
family loans with a loan-to-value ratio higher than 80%.
TAXATION
General
Federal Income Tax. Under applicable provisions of the Internal Revenue Code
of 1986, as amended, a savings institution that meets certain definitional
tests relating to the composition of its assets and the sources of its income
(a "Qualifying Savings Institution") is permitted to establish reserves for
bad debts and to make annual additions thereto under the experience method
("Experience Deduction") which qualify as deductions from taxable income.
Alternatively, a Qualifying Savings Institution may elect annually to compute
its deduction for allowable additions to its bad debt reserves on qualifying
real property loans as a percentage of taxable income before such deduction
("Percentage Deduction"), regardless of its actual bad debt experience,
subject to certain limitations based upon the amount of its deposits and
qualifying real property loans.
37
The availability of the Percentage Deduction, presently 8% of taxable
income, has permitted Qualifying Savings Institutions to be taxed at a lower
effective federal income tax rate (32.2%) than that generally applicable to
corporations (35.0%). For the period from 1981 through 1994, however, Coast
claimed an Experience Deduction because such deduction was higher than that
allowed under the Percentage Deduction method. Coast anticipates it will have
a tax-basis loss and therefore will claim an Experience Deduction for its 1995
taxable year as well.
If Coast's accumulated bad debt reserves are deemed to have been used for
any purpose other than to absorb bad debt losses, such as for the payment of
dividends in excess of its current and accumulated earnings and profits (as
calculated for federal income tax purposes) or for the redemption of Coast's
common stock, all or a portion of the amount used, and an amount equal to the
tax attributable thereto, may both be subject to federal income tax at then
applicable rates.
Coast will also be subject to an alternative minimum tax computed with
respect to Coast's regular taxable income (with certain adjustments) as
increased by its tax preference items, if such alternative minimum tax exceeds
Coast's regular tax liability. The tax preference items common to savings
institutions such as Coast include the excess (if any) of its annual tax bad
debt deduction over the deduction that would have been available under the
experience method and 75% of the excess of Coast's "adjusted current earnings"
over its regular taxable income. For any taxable years in which its regular
taxable income is fully offset by net operating loss carry-forwards, Coast
will incur an alternative minimum tax liability equal to approximately 2% of
its alternative minimum taxable income.
The Omnibus Budget Reconciliation Act of 1993 generally provides that FSLIC
assistance is to be taken into account as compensation in determining the loss
deductible on the disposition of a "covered asset." This provision applies to
assistance credited on or after March 4, 1991. Certain assets acquired in
Coast's acquisition of Central are subject to this provision. This provision
of the 1993 legislation did not have any adverse impact on Coast because,
under Coast's agreement with the FSLIC relating to the Central acquisition,
federal tax benefits related to affected FSLIC assistance are payable to the
FDIC as successor to the FSLIC.
Pending Legislation. The Revenue Reconciliation Act of 1995, which was
vetoed by President Clinton, contained certain provisions that, if enacted
into law, (1) would repeal the special rules of existing law that enable
savings banks and other thrift institutions to claim a deduction for additions
to a reserve for bad debts, and (2) would require thrift institutions to
recapture into income their post-1987 bad debt reserves over a six-year
period. The thrift tax provisions were proposed to be effective for taxable
years beginning after December 31, 1995. There can be no assurance as to
whether the thrift tax provisions will be enacted into law and, if so, whether
the provisions will be modified in any material respect; therefore, the
Company cannot predict the impact of the pending legislation. See "Business--
Regulation--Insurance of Accounts."
California Franchise Tax. The California franchise tax applicable to Coast
is a variable rate tax, computed under a formula which results in a rate
higher than the rate applicable to nonfinancial corporations because it
reflects an amount "in lieu" of local personal property and business license
taxes paid by such corporations, which taxes generally are not paid by banks
or financial corporations such as Coast. Coast and its California subsidiaries
file California state franchise tax returns on a combined reporting basis.
Examinations. Coast's federal income tax returns have been examined by the
Internal Revenue Service through December 31, 1986, and by the California
Franchise Tax Board through December 31, 1987. The Franchise Tax Board is
currently examining the years 1988 through 1990. It is expected that the
Franchise Tax Board will challenge the taxability of income earned by Coast's
former Nevada financing subsidiaries, the last of which was liquidated in
1989. While there can be no assurance as to the outcome of this matter, the
management of Coast believes the position taken by Coast on its franchise tax
returns will most likely be sustained. The Internal Revenue Service has
recently commenced an examination of the Company's tax returns for the years
1992 and 1993. The Company does not anticipate any material changes to its
federal tax returns as previously filed.
38
EMPLOYEES
At December 31, 1995, Coast had approximately 1,441 full-time equivalent
employees, none of whom was represented by a union or other collective
bargaining group or agent. Coast believes its relations with its employees are
satisfactory.
ITEM 2. PROPERTIES
Coast owns 12 of its branch offices and its administrative offices. The
remaining branch offices and the office building in which its executive
offices are located are leased under leases which expire by the year 2032.
Lease payments were $19.4 million in 1995 and $19.8 million in 1994. Coast's
net investment in branch offices, premises, equipment and leaseholds was $92.9
million at December 31, 1995.
ITEM 3. LEGAL PROCEEDINGS
On April 10, 1987, Coast acquired substantially all of the assets and
liabilities of Central Savings and Loan Association from the FSLIC in a
supervisory-assisted transaction. As part of the transaction, Coast entered
into a contractual agreement with the FSLIC under which the FSLIC made a cash
contribution to Coast of approximately $299 million which, pursuant to the
agreement, was to be reflected as a permanent addition to Coast's regulatory
capital. FIRREA eliminated the FSLIC and replaced it (and the Federal Home
Loan Bank Board) for supervisory and regulatory purposes with the OTS. The OTS
has taken the position that the FSLIC contribution should be classified as
supervisory goodwill, thereby excluding it from regulatory capital. In June
1992, Coast filed an action in the United States Court of Federal Claims
seeking monetary damages for breach of the contractual agreement with the
FSLIC. No prediction can be made as to whether this lawsuit will be
successful, or if successful, what damages might be awarded to Coast. In three
cases with similar issues the Court of Federal Claims ruled in favor of the
plaintiff thrift institutions on the issue of liability of the federal
government for breach of contract. The Court of Appeals for the Federal
Circuit, sitting en banc, affirmed the Court of Federal Claims ruling in these
cases. The federal government was granted a review of the Court of Appeals
decision by the United States Supreme Court with oral arguments scheduled for
April 1996.
There are various other 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
39
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Company's common stock is traded on the New York and Pacific stock
exchanges under the symbol "CSA." There were 4,259 stockholders of record at
December 31, 1995. See Note 15 of Notes to Consolidated Financial Statements
for information regarding the market price of the Company's common stock. The
Company's ability to pay cash dividends primarily depends upon cash dividends
it receives from Coast and is also subject to limitations 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, 1995, and the aforementioned indenture
restrictions, the Company had approximately $.3 million available for dividend
distributions at December 31, 1995. 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 $79.8
million available for distribution at December 31, 1995. In addition, payment
of dividends in excess of Coast's accumulated earnings and profits as
calculated for tax purposes (approximately $156 million at December 31, 1994)
would have significant negative tax consequences to Coast. See Item 1.
"Business--Regulation--Restrictions on Dividends and Other Capital
Distributions" and Item 7. "Management's Discussion and Analysis of Financial
Condition and Results of Operations--Capital Resources and Liquidity." The
Company has paid no dividends to its stockholders since 1990 and does not
anticipate paying dividends on its common stock in the foreseeable future. See
Note 10 of Notes to Consolidated Financial Statements.
40
ITEM 6. SELECTED FINANCIAL DATA
COAST SAVINGS FINANCIAL INC. AND SUBSIDIARIES
FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY
AT OR FOR THE YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1995 1994 1993 1992 1991
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
FINANCIAL CONDITION
Total assets............ $8,251,680 $8,196,517 $8,094,817 $8,351,826 $8,635,014
Loans receivable,
net(1)................. 5,466,496 5,793,182 5,007,196 5,069,278 5,747,190
MBS(1).................. 2,171,801 1,733,728 1,972,301 2,216,901 1,761,511
Investment securities,
short-term investments,
federal funds sold and
FHLB stock(1).......... 189,016 164,181 607,471 496,811 460,569
Goodwill................ 7,332 11,504 12,927 13,841 15,631
Deposits................ 6,123,472 5,879,808 5,908,559 6,136,130 7,100,116
FHLB advances and other
borrowings............. 1,537,590 1,764,066 1,602,137 1,590,778 1,006,118
Capital notes and other
subordinated debt...... 55,746 55,495 55,244 113,170 57,974
Stockholders' equity(2). 417,434 375,214 393,568 325,745 278,627
========== ========== ========== ========== ==========
OPERATIONS
Net interest income..... $ 201,051 $ 187,911 $ 201,566 $ 209,677 $ 206,664
Provision for loan
losses................. 40,000 75,000 61,000 46,000 82,000
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses........... 161,051 112,911 140,566 163,677 124,664
---------- ---------- ---------- ---------- ----------
Noninterest income:
Loan servicing fees and
charges............... 13,518 15,231 19,155 21,306 23,233
Gain on sale of
subsidiary............ 7,549 -- -- -- --
Gain (loss) on sale of
loans and securities.. (110) (540) 6,653 7,539 52,180
Other.................. 36,662 28,233 34,485 35,824 71,153
---------- ---------- ---------- ---------- ----------
57,619 42,924 60,293 64,669 146,566
---------- ---------- ---------- ---------- ----------
Noninterest expense:
General and
administrative........ 161,722 160,278 160,950 153,732 168,686
Real estate operations. 4,090 10,088 34,259 52,779 52,190
Amortization of
goodwill.............. 1,221 1,424 1,413 1,467 1,509
Debt conversion
expense............... -- -- -- -- 2,185
---------- ---------- ---------- ---------- ----------
167,033 171,790 196,622 207,978 224,570
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
before income tax
expense (benefit) and
cumulative effect of
change in accounting
for income taxes...... 51,637 (15,955) 4,237 20,368 46,660
Income tax expense
(benefit).............. 18,835 (9,417) (12,999) (16,746) 4,946
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
cumulative effect of
change in accounting
for income taxes...... 32,802 (6,538) 17,236 37,114 41,714
Cumulative effect of
change in accounting
for income taxes....... -- -- -- 10,914 --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)... $ 32,802 $ (6,538) $ 17,236 $ 48,028 $ 41,714
========== ========== ========== ========== ==========
Per share data:
Stockholders' equity... $ 22.46 $ 20.33 $ 21.32 $ 20.24 $ 17.41
Fully diluted earnings
(loss):
Before cumulative
effect of change in
accounting for income
taxes................. 1.71 (.35) .94 2.25 2.62
Cumulative effect of
change in accounting
for income taxes...... -- -- -- .67 --
---------- ---------- ---------- ---------- ----------
Net earnings (loss)... $ 1.71 $ (.35) $ .94 $ 2.92 $ 2.62
========== ========== ========== ========== ==========
Dividends declared..... $ -- $ --- $ --- $ -- $ --
========== ========== ========== ========== ==========
Number of full service
retail banking offices. 89 92 88 89 100
- --------
(1) Includes assets identified as being held or available for sale.
(2) For a discussion of Coast's regulatory capital, see Item 1. "Business--
Regulation--Regulatory Capital Requirements."
41
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
GENERAL
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, 1995. See Item
1. "Business--Operating Strategy."
The Company reported net earnings of $32.8 million, a net loss of $6.5
million and net earnings of $17.2 million for the years ended December 31,
1995, 1994 and 1993, respectively. Primary and fully diluted earnings per
share of common stock were $1.72 and $1.71, respectively, for 1995. The
primary and fully diluted loss per share of common stock was $.35 for 1994.
Primary and fully diluted earnings per share of common stock were $.94 for
1993.
RESULTS OF OPERATIONS
Interest Income and Expense
Interest income was $613.2 million, $494.6 million and $515.6 million for
the years ended December 31, 1995, 1994 and 1993, respectively. The increase
of $118.6 million in 1995 compared to 1994 resulted primarily from an increase
in the average yield on interest-earning assets of 1.02%, to 7.55%, as well as
an increase of $551.9 million in average interest-earning assets. The $21.0
million decline in interest income in 1994 compared to 1993 resulted from a
decrease in the average yield on interest-earning assets of .30%, to 6.53%,
partially offset by an increase of $21.1 million in average interest-earning
assets. The lower yield on loans during 1994 reflects declines in prevailing
market rates of interest throughout 1993 and the first quarter of 1994. After
the first quarter of 1994, market rates and yields on interest-earning assets
and the rates paid on interest-bearing liabilities showed steady increases
through early 1995. During the latter half of 1995, such yields and rates
declined slightly.
During 1995, Coast received $4.5 million of dividends on an average balance
of FHLB stock of $83.9 million, compared to $3.3 million on an average balance
of FHLB stock of $68.9 million and $2.5 million on an average balance of such
stock of $68.2 million during 1994 and 1993, respectively. The effective yield
on FHLB of San Francisco stock was 5.32%, 4.73% and 3.64% for the years ended
December 31, 1995, 1994 and 1993, respectively. At December 31, 1995, Coast
held $85.8 million of FHLB of San Francisco stock as compared to $79.3 million
and $63.9 million of such stock at December 31, 1994 and 1993, respectively.
Interest expense was $412.1 million, $306.7 million and $314.1 million for
the years ended December 31, 1995, 1994 and 1993, respectively. The $105.4
million increase in 1995 compared to 1994 resulted primarily from an increase
in the average cost of interest-bearing liabilities of 1.04%, to 5.10%, as
well as to an increase of $540.0 million in average interest-bearing
liabilities. The $7.4 million decrease in interest expense in 1994 compared to
1993 resulted primarily from a decrease of 9 basis points in the average cost
of interest-bearing liabilities as well as a decrease of $16.2 million in the
average balance of such liabilities. See discussion below under "Capital
Resources and Liquidity."
The average cost of deposits for the years ended December 31, 1993 and 1994,
decreased from 3.92% to 3.70%, respectively. During 1995, the average cost of
deposits increased to 4.63%. The decreases during 1993 and 1994 followed by an
increase during 1995 are reflective of fluctuations in the interest rate
environment during the years under discussion, due, in part, to Federal
Reserve Bank policy actions. For additional information relating to net
interest income, see Item 1. "Business--Yields Earned and Rates Paid."
Provision for Loan Losses
During 1995, 1994 and 1993, Coast established $40.0 million, $75.0 million
and $61.0 million, respectively, of provisions for loan losses. The increase
from 1993 to 1994 was primarily a result of $15.0 million of losses
42
related to damage to security properties resulting from the January 17, 1994,
earthquake experienced in the greater Los Angeles area. This portion of the
GVA was subsequently charged off in its entirety as losses were realized. In
addition, the 1994 provision included approximately $6 million related to a
transaction eliminating certain recourse liability relating to multifamily
loans. The decrease in the provision for loan losses from $75.0 million for
1994 to $40.0 million for 1995 is due to lower realized losses and reflects
decreased portfolio risk, as evidenced by the lower level of nonperforming
assets, which declined from $142 million at December 31, 1994, to $113 million
at December 31, 1995. Additionally, the California economy has experienced
gradual improvement throughout 1994 and 1995 and real estate prices have
generally stabilized. (See Item 1. "Business--Risk Elements--General Valuation
Allowance.") Despite the positive trends, management has continued concern
over general economic conditions and property values in California and
maintained a balance in Coast's GVA of $82 million as of December 31, 1995.
During 1995, the GVA was reduced by $3 million, reflecting the allocation of
allowances to Coast's asset-based lending subsidiary, CoastFed Business Credit
Corporation ("CBCC"), which was sold in September 1995. (See Item 1.
"Business--Subsidiaries--Asset-Based Lending.")
Noninterest Income
Noninterest income increased by $14.7 million in 1995 compared to 1994 and
decreased by $17.4 million in 1994 compared to 1993. The $14.7 million
increase for 1995 included the $7.5 million gain on the sale of CBCC. (For
additional information, see Item 1. "Business--Subsidiaries--Asset-Based
Lending.") The $17.4 million decrease in 1994 resulted primarily from the
writeoff of $9.9 million of the Excess Spread Servicing Asset related to the
elimination of the multifamily recourse discussed above, and a lower level of
gains on the sale of MBS and loans.
Losses on sales of loans and MBS were $.1 million and $.5 million for the
years ended December 31, 1995 and 1994, respectively. Gains on sales of loans
and MBS were $10.5 million during the year ended December 31, 1993. These
results reflect sales totaling $79.5 million, $363.0 million and $371.9
million occurring in these respective periods. The losses on sales in 1994
were attributable primarily to depressed pricing for adjustable rate MBS.
Sales were from the portfolios of loans and MBS either previously identified
as being available for sale or originated during the respective period and
being so-designated.
Loan servicing fees and charges were $13.5 million, $15.2 million and $19.2
million for the years ended December 31, 1995, 1994 and 1993, respectively.
This generally recurring element of other income arises principally from
servicing loans sold to investors (the outstanding balances of which were
$3.42 billion, $3.96 billion and $4.18 billion at December 31, 1995, 1994 and
1993 respectively), prepayment and late charges assessed against borrowers,
and commitment and escrow fees.
The $3.8 million loss on sale of investment securities during 1993 primarily
resulted from the sales of two issues of equity securities and the write-off
of a third, which net book values, in the aggregate, totaled $6.5 million.
Other income in 1995 was $36.7 million compared to $38.1 million in 1994 and
$34.5 million in 1993. This category of Noninterest income primarily consists
of retail banking fees (deposit-related fee income plus commissions earned on
insurance and related products sold largely through Coast's retail banking
offices) and service fees earned on housing bond transactions. Retail banking
fees totaled $26.9 million for 1995 and $23.1 million for each of the years
ended December 31, 1994 and 1993, respectively, and servicing fee income
related to housing bonds was $5.9 million, $9.2 million and $7.8 million for
the same respective periods. The decrease of $3.3 million from 1994 to 1995 in
servicing fee income related to housing bonds resulted primarily from
decreases in the spread between fixed rates received from borrowers and
adjustable rates paid to bondholders.
43
Noninterest Expense
Noninterest expense totaled $167.0 million, $171.8 million and $196.6
million in 1995, 1994 and 1993, respectively. The decreases from the previous
years of $4.8 million and $24.8 million in 1995 and 1994, respectively, were
primarily caused by improvements in the real estate operations component
resulting primarily from lower write-downs and reduced losses on sales of
foreclosed real estate owned, and to the lower level of foreclosed real estate
owned, which declined from $101 million at December 31, 1993, to $32 million
at December 31, 1995.
Federal deposit insurance premium expense for 1995 increased $1.0 million
from 1994 and such expense for 1994 decreased $2.2 million over 1993. The
fluctuations in premium expense resulted primarily from changes in the deposit
balances subject to premium assessment rather than to rate changes. For a
further discussion related to deposit insurance rates, see Item 1. "Business--
Regulation--Insurance of Accounts."
Income Tax Benefit
The effective tax rates for 1995, 1994 and 1993 were less than the
applicable statutory rates for each of the periods. The primary cause of this
in 1995 was the income tax rate related to 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 basis of Coast's
investment in CBCC.
In 1994 and 1993, the valuation allowance for deferred tax assets was
reduced by $1.7 million and $14.2 million, respectively, decreasing tax
expense for those periods. These reductions in the valuation allowances were
pursuant to management's periodic evaluation of the realizability of the
deferred tax asset.
ASSET/LIABILITY MANAGEMENT
The Asset/Liability Management Committee ("ALCO") of Coast, consisting of
senior management of the Bank, is responsible for directing the allocation of
the Bank's assets and liabilities. ALCO continuously reviews the significant
components of Coast's assets and liabilities to ensure that investment and
funding activities are consistent with the Company's strategic objectives and
business plans.
Substantially all of Coast's assets and liabilities are comprised of
interest-earning assets including loans, MBS and short-term investments, and
interest-bearing liabilities including deposits and borrowings. The risks
associated with interest-earning assets can be generally categorized as credit
risk, market risk and interest rate risk. Credit risk is, generally, the risk
that a loan or other credit-related instrument will not be repaid in
accordance with its terms, and is discussed in more detail in the preceding
sections entitled Item 1. "Business--Lending Activities, Risk Elements, Credit
Concentration and Letters of Credit, and Nonperforming Assets." Market risk
is, generally, the risk that the market value of an asset could decline in
response to changes in various factors, including prevailing rates of
interest, demand for that type of asset, and others. Interest rate risk is
generally associated with the degree to which interest-earning assets and
interest-bearing liabilities mature or reprice at different frequencies (e.g.,
maturities) and/or on different bases (e.g., indices to which specific assets
or groups of assets are tied). In order to mitigate the impact of interest
rate risk, management places a significant emphasis on seeking to match the
maturities and repricing characteristics of Coast's interest-earning assets
and interest-bearing liabilities ("financial assets" and "financial
liabilities," respectively).
At December 31, 1995, Coast's estimated one-year gap between maturities or
repricing of financial assets and financial liabilities was approximately a
positive $562 million, representing 7% of total assets, compared to $478
million, or 6% of total assets, at December 31, 1994. For a more detailed
discussion of the interest rate sensitivity of Coast's interest-earning assets
and interest-bearing liabilities, see Item 1. "Business--Yields Earned and
Rates Paid."
The most significant strategy Coast has employed to match the interest rate
sensitivities of its financial assets and liabilities has been its emphasis on
the origination of ARMs. Except for the utilization of interest rate
44
exchange agreements ("Swaps") from time to time, Coast has generally not
utilized derivative financial instruments to manage interest rate or other
risks. (See Notes 1 and 13 of Notes to Consolidated Financial Statements.)
Historically, Coast's cost of funds has closely matched COFI, with the
result that increases in Coast's cost of funds are accompanied by increases in
interest rates on its COFI-based loans. However, because of the inherent lag
in the reset mechanism of these loans, Coast's interest rate spreads generally
can be expected to increase as COFI falls and to decrease as COFI rises (See
Item 1. "Business--Yields Earned and Rates Paid"). Changes in interest rates
also can affect the amount of loans originated by an institution, as well as
the value of its loans and other interest-earning assets, and the resultant
ability to realize gains on the sale of assets carried in the available for
sale portfolios. Coast originated $1.1 billion and $1.87 billion of ARMs
during the years ended December 31, 1995 and 1994, respectively.
Coast's lending activity is focused on the origination of single family ARM
loans on properties located within California. Coast does not currently lend
or anticipate lending on other types of properties for the foreseeable future
except to finance sales of foreclosed real estate or to facilitate loan
assumptions as permitted by the provisions of the respective mortgage notes.
Another strategy Coast has employed to match interest rate sensitivities, as
well as to constrain asset growth and increase its loan servicing portfolio,
is the sale of mortgage-related assets (loans and MBS). This strategy is,
however, limited, based upon other factors including the purchasers'
investment limitations, general market and competitive conditions and mortgage
loan demand. Loans which have been classified as held for sale are carried at
the lower of amortized historical cost or fair value. As of December 31, 1995,
such loans totaled $221.0 million, comprised primarily of single family ARMs.
MBS classified as available for sale are carried at fair value. At December
31, 1995, such MBS totaled $354.4 million which was comprised of adjustable-
rate securities issued by either FNMA or FHLMC. During the year ended December
31, 1995, Coast sold $44.2 million of loans, from its available for sale
portfolio, of which $11.4 million were adjustable rate and $4.8 million were
fixed rate loans. In addition, Coast sold $35.3 million of adjustable rate MBS
from its available for sale portfolio.
NONPERFORMING ASSETS
Obtaining control and disposing of nonperforming assets (Nonaccrual Loans,
foreclosed real estate owned and Modified Loans) has been one of the Company's
primary objectives for several years. During 1994 and 1995 Coast continued its
strategy of aggressively liquidating its foreclosed real estate portfolio.
Approximately $89 million and $159 million of foreclosed assets were sold in
1995 and 1994, respectively, approximately $.1 million and $7 million of which
were located outside of California. As a result of these sales and a
$15 million reduction in Nonaccrual Loans, total nonperforming assets declined
from $141.9 million at December 31, 1994, to $113.0 million at December 31,
1995.
Changes in Coast's portfolio mix and in the economic well-being of different
states in which Coast has originated loans have resulted in shifts in the
types and locations of assets included in total nonperforming assets. At
December 31, 1992, California nonperforming assets accounted for approximately
90% of total nonperforming assets, and California residential nonperforming
assets comprised approximately 74% of California nonperforming assets included
in total nonperforming assets. At December 31, 1995, the percentage of
California nonperforming assets included in total nonperforming assets had
risen to 97%, and the percentage of California residential nonperforming
assets to total California nonperforming assets had increased to 83%. As a
result of economic conditions and other factors, delinquencies increased
during 1992 and, as the economy generally stabilized, with certain sectors and
regions experiencing marginal improvement in recent quarters, delinquencies
have decreased during 1993, 1994 and 1995; however, property values have
continued to decline somewhat in some regions of California. There can be no
assurance that there will not be additional delinquencies and/or further
declines in property values in California and in other states. See Item 1.
"Business--Risk Elements--Nonperforming Loans."
45
Further improvements in the level of nonearning assets and future reductions
in the aggregate level of credit losses are dependent upon continued emphasis
on sales of foreclosed real estate owned, but are also largely dependent on
the California economy, where the majority of Coast's loan portfolio is based.
The California economy began experiencing the recession later than other
regions of the country and has also lagged in the economic recovery which has
been experienced elsewhere. Despite the severity and the relatively long term
of the recession experienced in California, there were positive signs for the
California economy during 1994. Unemployment in California improved
significantly in 1994, but has remained relatively stable during 1995. Nonfarm
employment in California has increased by over 2% in 1995, a rate in excess of
that experienced nationwide. While improvement in the California economy has
been experienced throughout most sectors of the economy, construction and real
estate have continued to lag in most areas of California. Housing starts
remain at relatively low levels and, while real estate prices have not
experienced the significant declines experienced in earlier years, real estate
appreciation has been modest and present only in selected areas of the state.
Economists generally anticipate continued low inflation, relatively stable
interest rates and continued improvement in the California economy for the
immediate future; however, unforeseen events could result in a slowing of such
progress, or could result in a deterioration of the current economic climate.
Coast maintains a GVA to absorb credit losses related to its loan-related
assets and off-balance sheet items. The GVA is reviewed and adjusted quarterly
and based upon a number of factors, including asset classifications, 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 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,
various regulatory agencies, as an integral part of their examination process,
periodically review Coast's GVA. These agencies may require Coast to establish
additional allowances based on their judgments of the information available at
the time of the examination.
CAPITAL RESOURCES AND LIQUIDITY
OTS regulations require a savings association to maintain a specified ratio
of cash and short-term United States government and other specified investment
securities to net withdrawable deposits and borrowings payable in one year or
less. This liquidity requirement is based upon average liquidity balances
maintained during each month and may vary from time to time, depending upon
economic conditions and deposit flows, and is currently 5%. For calculation
periods ended December 31, 1995 and 1994, Coast's regulatory liquidity ratios
were 5.57% and 5.07%, respectively.
Sales of and principal repayments on loans and MBS have been a primary
source of funds for Coast. During 1995, 1994 and 1993, sales proceeds amounted
to $79.5 million, $363.0 million and $371.9 million, respectively. The sales
of loans and MBS were from the portfolios of loans and MBS either previously
identified as being held or available for sale, or originated during the
period and being so designated. Principal repayments on loans and MBS amounted
to $648.8 million, $795.9 million and $809.4 million, respectively, for these
periods. A primary use of funds was the origination of loans (net of
refinances of loans in Coast's portfolio) of $992.3 million, $1.61 billion and
$851.7 million during 1995, 1994 and 1993, respectively. Additionally, none,
$18.6 million and $10.3 million of MBS were purchased during 1995, 1994 and
1993, respectively.
During 1995, Coast experienced a net increase in deposits of $243.7 million.
This increase is primarily attributable to Coast's focused efforts to market
its transaction accounts which resulted in an increase of $167.7 million in
checking account balances during 1995. During 1994 and 1993, Coast experienced
net decreases in deposits of $28.8 million and $227.6 million, respectively,
of which none and $35.4 million, respectively, were the result of branch
sales.
46
Other potential sources of funds available to Coast include secured
borrowings (securities sold under agreements to repurchase), a line of credit
with the FHLB of San Francisco and direct access to borrowings from the
Federal Reserve System. At December 31, 1995, the amount of additional credit
available from the FHLB was $1.26 billion. In addition, Coast has access to
the capital markets for issuing debt or equity securities; however, access can
be limited from time to time by various factors including market conditions,
Coast's credit rating and general economic conditions.
During the first quarter of 1993, the Company issued 2,300,000 shares of
common stock at $17.75 per share and contributed the net proceeds, totaling
$38.2 million, to Coast as equity capital. During the second quarter of 1993,
the Company issued $57.5 million of 10% Senior Notes due 2000. The majority of
the proceeds from that offering were also contributed to Coast as equity
capital. Also during the second quarter of 1993, Coast redeemed the remaining
$40.6 million of its 16% capital notes due 1994. During the third quarter of
1993, Coast redeemed the remaining $18.0 million of its 15.75% capital notes
due 2000.
At December 31, 1995, the Company's total of approved commitments to
originate or purchase loans and MBS amounted to $77.7 million, and the Company
had $16.4 million of commitments to sell loans and MBS. Outstanding letters of
credit at December 31, 1995, which were primarily related to the former real
estate development activities of CoastFed Properties, totaled $386.5 million.
Scheduled repayments of FHLB of San Francisco advances for the year ended
December 31, 1996, are $729.3 million.
Under OTS capital regulations Coast must meet three capital tests. First,
the tangible capital requirement mandates that Coast's stockholder's equity
less intangible assets (as defined) be at least 1.5% of adjusted total assets
as defined in the regulation. At December 31, 1995, Coast's tangible capital
ratio was 5.47%, $326.1 million in excess of the requirement at that date.
Second, the core capital requirement currently mandates core capital to be at
least 3% of adjusted total assets as defined in the regulation. At December
31, 1995, Coast's core capital ratio was 5.47%, $203.0 million in excess of
the requirement at that date. Third, the risk-based capital requirement
presently mandates that core capital plus supplementary capital as defined in
the OTS capital regulations be at least 8% of risk-adjusted assets as defined
therein. At December 31, 1995, Coast's risk-based capital ratio was 10.86%,
$149.4 million in excess of the requirement at that date. See Item 1.
"Business--Regulation--Regulatory Capital Requirements."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................... 48
Consolidated Statement of Financial Condition.............................. 49
Consolidated Statement of Operations....................................... 50
Consolidated Statement of Stockholders' Equity............................. 51
Consolidated Statement of Cash Flows....................................... 52
Notes to Consolidated Financial Statements................................. 54
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes thereto.
47
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, 1995 and 1994, 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,
1995. 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, 1995 and 1994, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1995, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 23, 1996
48
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31,
---------------------
1995 1994
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks............................. $ 119,717 $ 99,578
Federal funds sold and other short term investments. 30,394 2,443
Investment securities held to maturity (fair value
of $73.2 million and
$81.6 million)..................................... 72,785 82,477
Loans receivable, net............................... 5,245,464 5,632,517
Loans receivable held for sale, at the lower of cost
or fair value (fair value of $230.0 million and
$161.3 million).................................... 221,032 160,665
Mortgage-backed securities held to maturity (fair
value of $1.83 billion
and $1.37 billion)................................. 1,817,403 1,404,815
Mortgage-backed securities available for sale, at
fair value......................................... 354,398 328,913
Real estate held for sale........................... 31,696 44,168
Federal Home Loan Bank stock........................ 85,837 79,261
Land and depreciable assets......................... 92,920 87,493
Interest receivable and other assets................ 172,702 262,683
Goodwill............................................ 7,332 11,504
---------- ----------
$8,251,680 $8,196,517
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits............................................ $6,123,472 $5,879,808
Federal Home Loan Bank advances..................... 804,250 954,450
Other borrowings.................................... 733,340 809,616
Other liabilities................................... 104,754 113,346
Income taxes payable................................ 12,684 8,588
Capital notes....................................... 55,746 55,495
---------- ----------
7,834,246 7,821,303
---------- ----------
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,
18,582,917 and 18,457,454 shares issued and
outstanding at
December 31, 1995 and 1994, respectively......... 186 185
Additional paid-in capital........................ 265,018 263,161
Unrealized gain (loss) on securities available for
sale, net of taxes............................... 6,554 (1,006)
Retained earnings, substantially restricted....... 145,676 112,874
---------- ----------
Total stockholders' equity...................... 417,434 375,214
---------- ----------
$8,251,680 $8,196,517
========== ==========
See accompanying notes to consolidated financial statements.
49
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
Interest income:
Loans receivable............................... $469,864 $382,371 $389,015
Mortgage-backed securities ("MBS")............. 119,629 93,334 114,048
Investment securities.......................... 23,688 18,925 12,584
-------- -------- --------
613,181 494,630 515,647
-------- -------- --------
Interest expense:
Deposits....................................... 280,895 218,335 234,020
Borrowings..................................... 131,235 88,384 80,061
-------- -------- --------
412,130 306,719 314,081
-------- -------- --------
Net interest income.......................... 201,051 187,911 201,566
Provision for loan losses........................ 40,000 75,000 61,000
-------- -------- --------
Net interest income after provision for loan
losses...................................... 161,051 112,911 140,566
-------- -------- --------
Noninterest income:
Loan servicing fees and charges................ 13,518 15,231 19,155
Gain on sale of subsidiary..................... 7,549 -- --
Gain (loss) on sale of loans................... 177 (2,352) 1,978
Loss on sale of investment securities.......... -- -- (3,815)
Elimination of Excess Spread Servicing Asset... -- (9,891) --
Gain (loss) on sale of MBS..................... (287) 1,812 8,490
Other.......................................... 36,662 38,124 34,485
-------- -------- --------
57,619 42,924 60,293
-------- -------- --------
Noninterest expense:
Compensation and benefits...................... 71,302 77,063 76,385
Office occupancy, net.......................... 40,633 38,423 39,511
Federal deposit insurance premiums............. 17,333 16,359 18,545
Other general and administrative expenses...... 32,454 28,433 26,509
-------- -------- --------
Total general and administrative expenses.... 161,722 160,278 160,950
Real estate operations, net.................... 4,090 10,088 34,259
Amortization of goodwill....................... 1,221 1,424 1,413
-------- -------- --------
167,033 171,790 196,622
-------- -------- --------
Earnings (loss) before income tax expense
(benefit)................................... 51,637 (15,955) 4,237
Income tax expense (benefit)..................... 18,835 (9,417) (12,999)
-------- -------- --------
Net earnings (loss).......................... $ 32,802 $ (6,538) $ 17,236
======== ======== ========
Primary net earnings (loss) per share of common
stock........................................... $ 1.72 $ (.35) $ .94
======== ======== ========
Fully diluted net earnings (loss) per share of
common stock.................................... $ 1.71 $ (.35) $ .94
======== ======== ========
See accompanying notes to consolidated financial statements.
50
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNREALIZED
GAIN (LOSS)
ON UNREALIZED
SECURITIES LOSS ON
SERIAL ADDITIONAL AVAILABLE MARKETABLE TOTAL
PREFERRED COMMON PAID-IN FOR SALE, EQUITY RETAINED STOCKHOLDERS'
STOCK STOCK CAPITAL NET OF TAXES SECURITIES EARNINGS EQUITY
--------- ------ ---------- ------------ ---------- -------- -------------
(IN THOUSANDS)
Balance at December 31,
1992................... $-- $161 $224,658 $ -- $(1,250) $102,176 $325,745
Common stock issuance... -- 23 38,148 -- -- -- 38,171
Exercise of stock
options................ -- 1 344 -- -- -- 345
Realization of loss on
marketable equity
securities............. -- -- -- -- 1,250 -- 1,250
Unrealized gain on
securities available
for sale, net of taxes. -- -- -- 10,821 -- -- 10,821
Net earnings for the
year 1993.............. -- -- -- -- -- 17,236 17,236
---- ---- -------- -------- ------- -------- --------
Balance at December 31,
1993................... -- 185 263,150 10,821 -- 119,412 393,568
Exercise of stock
options................ -- -- 11 -- -- -- 11
Unrealized loss on
securities available
for sale, net of taxes. -- -- -- (11,827) -- -- (11,827)
Net loss for the year
1994................... -- -- -- -- -- (6,538) (6,538)
---- ---- -------- -------- ------- -------- --------
Balance at December 31,
1994................... -- 185 263,161 (1,006) -- 112,874 375,214
Exercise of stock
options................ -- 1 1,857 -- -- -- 1,858
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
==== ==== ======== ======== ======= ======== ========
See accompanying notes to consolidated financial statements.
51
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------------
1995 1994 1993
--------- ----------- ---------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)....................... $ 32,802 $ (6,538) $ 17,236
--------- ----------- ---------
Adjustments to reconcile net earnings to
net cash provided (used) by operating
activities:
Net decrease (increase) in accounts
receivable............................. 71,651 (38,964) (3,574)
Sale of loans held for sale............. 44,197 28,398 130,062
Provision for loan losses............... 40,000 75,000 61,000
Deferred income tax expense (benefit)... 18,835 (9,417) (12,999)
Principal repayments on loans held for
sale................................... 14,562 23,296 3,310
Depreciation and amortization........... 11,500 10,079 9,940
Amortization of discounts and premiums,
net.................................... 5,146 8,244 5,301
Amortization of goodwill................ 1,221 1,424 1,413
Net decrease in prepaid expenses........ 794 459 696
Provision for losses on real estate held
for sale............................... 293 2,132 15,584
Elimination of Excess Spread Servicing
Asset.................................. -- 9,891 --
Net increase (decrease) in interest
payable................................ (137) 4,765 1,835
Net present value gain on sale of loans
and MBS................................ (284) (6,176) (4,571)
Net decrease in deferred income......... (1,731) (7,209) (5,739)
Federal Home Loan Bank stock dividends.. (4,467) (3,259) (2,483)
Net decrease (increase) in interest
receivable............................. (7,179) 1,160 2,085
Gain on sale of subsidiary.............. (7,549) -- --
Net decrease in accounts payable........ (27,068) (46,626) (19,743)
Loans originated for sale, net of
refinances............................. (146,024) (516,343) (625,401)
Other................................... (7,137) (2,781) (9,363)
--------- ----------- ---------
Total adjustments..................... 6,623 (465,927) (452,647)
--------- ----------- ---------
Net cash provided (used) by
operations........................... 39,425 (472,465) (435,411)
--------- ----------- ---------
Cash flows from investing activities:
Loans originated for investment, net of
refinances............................... (846,230) (1,097,250) (226,257)
Repurchase of loans....................... (18,937) (113,146) (88,367)
Principal repayments on loans............. 441,452 429,655 425,094
Purchase of MBS........................... -- (18,574) (10,340)
Principal repayments on MBS............... 163,614 266,907 283,020
Principal repayments on MBS available for
sale..................................... 29,169 76,081 97,930
Sale of MBS available for sale............ 35,335 334,617 241,886
Net decrease (increase) in short-term
investment securities.................... 9,411 14,473 (7,832)
Purchase of investment securities......... (193) (48,864) (3,604)
Purchase of FHLB stock.................... (2,450) (13,226) --
Maturities and principal repayments on
investment securities.................... 53 55 46
Sale of investment securities available
for sale................................. -- -- 6,495
Net increase in land and depreciable
assets................................... (16,129) (18,361) (16,309)
Sale of real estate held for sale......... 47,317 43,895 68,170
FHLB stock redeemed....................... -- -- 20,368
Proceeds from sale of subsidiary.......... 150,054 -- --
--------- ----------- ---------
Net cash provided (used) by investing
activities........................... (7,534) (143,738) 790,300
--------- ----------- ---------
(continued)
52
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
-------------------------------
1995 1994 1993
--------- --------- ---------
(IN THOUSANDS)
Cash flows from financing activities:
Net increase (decrease) in deposits.......... $ 303,733 $ (28,751) $(192,205)
Deposits disposed of in branch sales, net.... (60,069) -- (35,366)
Net increase (decrease) in FHLB advances..... (150,200) 250,250 (390,750)
Net increase (decrease) in short-term
borrowings.................................. (78,238) (88,266) 362,786
Net decrease in long-term borrowings......... -- -- (17,823)
Common stock options exercised............... 973 11 345
Issuance of common stock..................... -- -- 38,171
--------- --------- ---------
Net cash provided (used) by financing
activities................................ 16,199 133,244 (234,842)
--------- --------- ---------
Net increase (decrease) in cash and cash
equivalents............................. 48,090 (482,959) 120,047
Cash and cash equivalents at beginning of year. 102,021 584,980 464,933
--------- --------- ---------
Cash and cash equivalents at end of year....... $ 150,111 $ 102,021 $ 584,980
========= ========= =========
Supplemental disclosures of cash flow
information:
Cash payments of interest.................... $ 173,354 $ 119,615 $ 118,237
Cash payments (refunds) of income taxes, net. (496) 52 6,942
========= ========= =========
Supplemental schedule of noncash investing and
financing activities:
Loans exchanged for MBS, net................. $ 654,238 $ 434,156 $ 342,961
Additions to loans resulting from the sale of
real estate acquired in settlement of loans. 35,627 88,366 136,302
Additions to real estate acquired in
settlement of loans......................... 89,979 141,499 231,923
Reductions to real estate acquired through
in-substance foreclosure, net............... -- (2,217) (26,055)
Unrealized gain (loss) on securities
available for sale, net of taxes............ 7,560 (11,827) 10,821
See accompanying notes to consolidated financial statements.
53
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, 1995.
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, 1995, Coast
operated 89 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 condition, and revenues and expenses for the period. 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 1994 and 1993
to conform to the 1995 presentation.
Recent Accounting Pronouncements
In March 1995, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 121, Accounting for
the Impairment of Long-lived Assets and for Long-lived Assets to be Disposed
Of ("SFAS 121"). SFAS 121 establishes accounting standards for the impairment
of long-lived assets and certain identifiable intangibles which are to be
disposed of. SFAS 121 requires that long-lived assets and certain identifiable
intangibles held and used by an entity be reviewed for impairment whenever
events or changes in circumstances indicate that the carrying amount of an
asset may not be recoverable. In the event that a long-lived asset is
determined to be impaired, an impairment loss shall be recognized. SFAS 121
prescribes that impairment losses for long-lived assets shall be measured as
the amount by which the carrying amount of the asset exceeds its fair value.
Additionally, SFAS 121 provides that long-lived assets that are to be disposed
of by sale or abandonment shall be reported at the lower of carrying amount or
fair value less cost of disposition. This statement is effective for financial
statements for fiscal years beginning after December 15, 1995. It is not
expected that SFAS 121 will have a material adverse effect on the Company's
financial condition or results of operations.
In May 1995, the FASB issued SFAS No. 122, Accounting for Mortgage Servicing
Rights ("SFAS 122"), which is an amendment to SFAS No. 65, Accounting for
Certain Mortgage Banking Activities ("SFAS 65"). SFAS 122 amends SFAS 65 to
remove the distinction of accounting for mortgage servicing rights resulting
from originated loans and those resulting from purchased loans. Additionally,
SFAS 122 requires that a mortgage banking enterprise assess its capitalized
mortgage servicing rights for impairment based on the fair value of those
rights. SFAS 122 is to be applied prospectively to fiscal years beginning
after December 16, 1995. It is not expected that SFAS 122 will have a material
adverse effect on the Company's financial condition or results of operations.
54
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In November 1995 the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation" ("SFAS 123"). This statement establishes financial accounting
standards for stock-based employee compensation plans. SFAS 123 permits the
Company to choose either a new fair-value-based method or the current APB
Opinion 25 intrinsic value-based method of accounting for its stock-based
compensation arrangements with pro forma disclosures of net earnings and
earnings per share computed as if the fair-value-based method had been
applied. SFAS 123 is effective for fiscal years beginning after December 15,
1995. It is not expected that SFAS 123 will have a material adverse effect on
the Company's financial condition or results of operations.
Loan Impairment
During 1993, the FASB issued SFAS No. 114 entitled Accounting by Creditors
for Impairment of a Loan ("SFAS 114"). Effective January 1, 1994, the Company
adopted SFAS 114, which, during the fourth quarter of 1994 was subsequently
amended by SFAS No. 118 entitled Accounting by Creditors for Impairment of a
Loan--Income Recognition and Disclosures. A loan is impaired when, based on
current circumstances and events, it is probable that a creditor will be
unable to collect all amounts contractually due under a loan agreement. If a
loan is determined to be impaired, a writedown is taken or an allowance is
established based upon the difference between Coast's investment in the loan
and the fair value of the loan's underlying collateral.
Where impairment is considered to be permanent, a charge-off is recorded;
where impairment may be temporary, an allowance is established. Impaired loans
which are performing under the contractual terms are reported as performing
loans, and cash payments are allocated to principal and interest in accordance
with the terms of the loan.
At December 31, 1995, Coast had $31.5 million of troubled debt
restructurings which were modified prior to the implementation of SFAS 114 and
which were performing in accordance with their modified terms. Coast accounts
for such loans under the provisions of SFAS No. 15 entitled Accounting by
Debtors and Creditors for Troubled Debt Restructurings, as permitted under
SFAS 114.
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 acquisition it does not have the positive intent and ability to
hold to maturity. If management has the positive intent and the Company has
the ability at the time of acquisition to hold such assets until maturity,
they are classified as held to maturity and are carried at amortized
historical cost. 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 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.
55
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
In November 1995, the FASB issued a Special Report as an aid in
understanding and implementing SFAS No. 115, Accounting for Certain
Investments in Debt and Equity Securities ("SFAS 115"). The Special Report
included guidance that allowed Coast to review the appropriateness of the
classifications of all securities held. Any reclassifications would be
accounted for at fair value in accordance with SFAS 115. In accordance with
the Special Report, during the fourth quarter of 1995, Coast transferred $18.8
million of MBS from the held-to-maturity portfolio to the available-for-sale
portfolio.
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 asset classifications, 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 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, various
regulatory agencies, as an integral part of their examination process,
periodically review Coast's GVA. These agencies may require Coast to increase
the amount of the GVA, based on their judgments 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-term 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 net
present value of the amounts expected to be received or paid resulting 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 "Excess Spread Servicing Asset") is amortized utilizing the
interest method. Excluded from the net present value portion of the gain or
loss is an amount equal to the present value of a normal loan servicing fee
and any periodic or recurring expenses.
56
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Coast's policy regarding the allocation of cost when a loan or part of a
loan is sold is to allocate the recorded investment, excluding any amount
included in the GVA, 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 deferred loan fees is discontinued when loans are placed on a
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 Statement of Financial Accounting Standards
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 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
57
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 value of the Excess
Spread Servicing Asset is equal to its carrying value because such asset is
adjusted quarterly based upon current portfolio and market factors.
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 exchange agreements ("Swaps") and
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.
Swaps
Swaps are undertaken in order to reduce the interest rate risk associated
with certain assets and liabilities having fixed or floating interest rate
provisions (matched Swaps). When these Swaps are sold simultaneously with the
disposition of the related assets or liabilities, any resulting gain or loss
is recognized. When Swaps are terminated without the simultaneous disposition
of the related assets or liabilities, any resulting gain or loss is deferred
and amortized over the remaining life of the Swap upon termination. The net
interest income or expense resulting from the differential between exchanging
floating rate and fixed rate interest payments is recorded on a current basis.
58
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 fund sold
and other short term investments and investment securities are shown in the
following table at the dates indicated.
DECEMBER 31,
----------------------------------
1995 1994
----------------- ----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- -------
(IN THOUSANDS)
Cash and due from banks..................... $119,717 $119,717 $99,578 $99,578
======== ======== ======= =======
Federal funds sold and other short term
investments:
Federal funds sold........................ $ 28,000 $ 28,000 $ -- $ --
Commercial paper.......................... 2,394 2,394 2,443 2,443
-------- -------- ------- -------
30,394 30,394 2,443 2,443
-------- -------- ------- -------
Investment securities:
Held to maturity:
Short term:
Commercial paper, custodial........... 24,344 24,344 32,636 32,636
Repurchase agreements, custodial...... 3,392 3,392 -- --
United States Treasury securities..... -- -- 4,825 4,787
Other marketable securities,
custodial............................ 374 374 60 60
-------- -------- ------- -------
28,110 28,110 37,521 37,483
-------- -------- ------- -------
Long term:
United States Treasury securities..... 40,275 40,528 40,695 39,768
Securities of states of the U.S. and
political subdivisions thereof....... 3,569 3,717 3,622 3,667
Other marketable securities........... 831 831 639 639
-------- -------- ------- -------
44,675 45,076 44,956 44,074
-------- -------- ------- -------
72,785 73,186 82,477 81,557
-------- -------- ------- -------
$103,179 $103,580 $84,920 $84,000
======== ======== ======= =======
At December 31, 1995 and 1994, there were gross unrealized gains of $401,000
and $45,000, respectively, and gross unrealized losses of none and $965,000,
respectively.
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,
--------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Cash and due from banks....................... $119,717 $ 99,578 $120,840
Repurchase agreements......................... -- -- 340,000
Federal funds sold............................ 28,000 -- 120,000
Commercial paper.............................. 2,394 2,443 4,140
-------- -------- --------
$150,111 $102,021 $584,980
======== ======== ========
59
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 require Coast to
maintain minimum average balances of liquid assets and 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 long-term investment securities during 1995 or 1994.
During 1993, proceeds from sales of long-term investment securities available
for sale were $5.7 million, gross gains from such sales were $28,000 and gross
losses were $3.8 million.
The following is a summary of the contractual terms to maturity of long-term
investment securities, excluding securities available for sale, as of December
31, 1995. The fair values of the securities listed below are approximately
equal to their book values.
CONTRACTUAL MATURITY
----------------------------------
AFTER 5
AFTER 1 THROUGH AFTER
WITHIN THROUGH 10 10
1 YEAR 5 YEARS YEARS YEARS TOTAL
------ ------- ------- ----- -----
(IN MILLIONS)
U.S. Treasury securities.................... $40.3 $-- $ -- $-- $40.3
Securities of states of the U.S. and politi-
cal subdivisions thereof................... -- -- -- 3.6 3.6
Other marketable securities................. -- .8 -- -- .8
----- ---- ----- ---- -----
$40.3 $ .8 $ -- $3.6 $44.7
===== ==== ===== ==== =====
The combined weighted average yield on federal funds sold, other short term
investments and investment securities was 5.43% and 6.09% at December 31, 1995
and 1994, respectively. At December 31, 1995 and 1994, Coast had accrued
interest receivable on these investment securities totaling $974,000 and
$952,000, 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 common 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, 1995,
Coast owned $85.8 million of FHLB stock, $18.4 million in excess of the
minimum requirement. At December 31, 1994, Coast owned $79.3 million of FHLB
stock, $8.8 million in excess of the minimum requirement. The yield on FHLB
stock was 5.16% and 5.69% at December 31, 1995 and 1994, respectively.
See Notes 8 and 13 for a summary of assets which were pledged as security
for borrowings and Swaps.
Interest income on investment securities includes the following for the
periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Federal funds sold............................... $ 4,399 $ 2,732 $ 886
Short-term investment securities................. 11,966 8,891 8,176
Long-term investment securities.................. 2,856 4,043 1,039
FHLB stock....................................... 4,467 3,259 2,483
------- ------- -------
$23,688 $18,925 $12,584
======= ======= =======
60
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(3) LOANS RECEIVABLE
The following is a summary of loans receivable at the dates indicated.
DECEMBER 31,
----------------------
1995 1994
---------- ----------
(IN THOUSANDS)
Held to maturity:
Real estate:
Residential:
One to four units ("single family")......... $3,054,334 $3,180,847
Five or more units ("multifamily").......... 1,355,394 1,430,892
---------- ----------
4,409,728 4,611,739
Commercial.................................... 876,889 941,988
---------- ----------
5,286,617 5,553,727
Commercial business............................. 3,177 149,298
Secured by deposits............................. 8,557 8,880
Overdraft lines of credit....................... 12,459 5,595
---------- ----------
5,310,810 5,717,500
Deferred loan origination fees and costs, net... 6,292 3,435
Other unamortized net discounts................. (6,638) (11,380)
General valuation allowance..................... (65,000) (77,038)
---------- ----------
5,245,464 5,632,517
Held for sale..................................... 221,032 160,665
---------- ----------
$5,466,496 $5,793,182
========== ==========
The combined contractual weighted average interest rate of loans receivable
was 7.95% and 7.18% at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, Coast had accrued interest receivable on
loans receivable of $34.6 million and $31.5 million, respectively, which is
included in interest receivable and other assets in the accompanying
consolidated statement of financial condition.
At December 31, 1995 and 1994, Coast had approved commitments to originate
loans totaling $77.7 million and $143.1 million, respectively, substantially
all of which were for adjustable rate single family residential loans. Coast
had $16.4 million of commitments to sell loans at December 31, 1995, and had
no commitments to sell loans at December 31, 1994.
On September 30, 1995 the Bank 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.
61
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table presents carrying and fair values of loans receivable at
the dates indicated.
DECEMBER 31,
---------------------------------------------------
1995 1994
------------------------- -------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(IN THOUSANDS)
Held for Investment:
Real estate:
Residential:
Single family--
adjustable rates.... $2,954,136 $3,026,338 $3,047,975 $2,940,599
Single family--fixed
rates............... 102,618 105,844 123,520 118,602
---------- ---------- ---------- ----------
3,056,754 3,132,182 3,171,495 3,059,201
---------- ---------- ---------- ----------
Multifamily--
adjustable rates.... 1,314,960 1,327,223 1,378,613 1,328,296
Multifamily--fixed
rates............... 39,654 39,598 53,275 50,405
---------- ---------- ---------- ----------
1,354,614 1,366,821 1,431,888 1,378,701
---------- ---------- ---------- ----------
4,411,368 4,499,003 4,603,383 4,437,902
---------- ---------- ---------- ----------
Commercial:
Adjustable rates..... 788,995 795,228 842,991 806,505
Fixed rates.......... 85,908 84,081 99,408 96,152
---------- ---------- ---------- ----------
874,903 879,309 942,399 902,657
---------- ---------- ---------- ----------
5,286,271 5,378,312 5,545,782 5,340,559
Commercial business...... 3,177 3,499 149,298 153,046
Secured by deposits...... 8,557 8,613 8,880 8,889
Overdraft lines of
credit.................. 12,459 12,968 5,595 5,826
---------- ---------- ---------- ----------
5,310,464 5,403,392 5,709,555 5,508,320
Held for sale.............. 221,032 229,955 160,665 161,325
---------- ---------- ---------- ----------
5,531,496 5,633,347 5,870,220 5,669,645
GVA........................ (65,000) -- (77,038) --
---------- ---------- ---------- ----------
$5,466,496 $5,633,347 $5,793,182 $5,669,645
========== ========== ========== ==========
At December 31, 1995, loans receivable included nonaccrual loans as indicated
below.
OTHER
CALIFORNIA STATES TOTAL
---------- ------ -------
(IN THOUSANDS)
Nonaccrual loans:
Single family.................................... $43,633 $ 159 $43,792
Multifamily...................................... 25,646 -- 25,646
Commercial and other............................. 10,873 1,040 11,913
------- ------ -------
$80,152 $1,199 $81,351
======= ====== =======
If nonaccrual loans at December 31, 1995, had been interest-earning
throughout the year, interest income of $6.3 million would have been earned on
these loans at their respective contractual rates. For the year ended December
31, 1995, actual interest earned on such loans was $2.6 million.
62
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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.
RESIDENTIAL COMMERCIAL REAL
REAL ESTATE ESTATE MORTGAGE
MORTGAGE AND OTHER TOTAL
----------- --------------- -----
(IN MILLIONS)
Balance at December 31, 1992.............. $ 49 $ 59 $108
Additions charged (reductions credited) to
operations............................... 69 8 77
Recoveries................................ 2 5 7
Losses charged............................ (67) (19) (86)
---- ---- ----
Balance at December 31, 1993.............. 53 53 106
Additions charged (reductions credited) to
operations............................... 68 (2) 66
Recoveries................................ 6 1 7
Losses charged............................ (78) (24) (102)
---- ---- ----
Balance at December 31, 1994.............. 49 28 77
Additions charged (reductions credited) 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
==== ==== ====
A loan is impaired when, based on current information and events, a creditor
will be unable to collect all amounts contractually due under a loan
agreement. 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 $135.2 million and $112.6 million at December 31, 1995 and 1994,
respectively, and for the years then ended the average investment in impaired
loans was $109.9 million and $85.7 million, respectively. Interest income on
such loans totaled $8.1 million in 1995 and $6.4 million in 1994, and was
recognized utilizing the cash-basis method of accounting. As of December 31,
1995 and 1994, nonaccrual loans included $37.6 million and $43.3 million,
respectively, of impaired loans.
Impaired loans at December 31, 1995, included $127.2 million of loans for
which valuation allowances of $25.6 million had been established and $33.6
million of loans for which no allowance was considered necessary. At December
31, 1994 there were $92.9 million of impaired loans for which valuation
allowances of $18.5 million had been established and $38.2 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 provision for
loan losses in the accompanying consolidated statement of operations. There
were recoveries of zero and $.1 million of previously established allowances
during the years ended December 31, 1995 and 1994, respectively. Cash payments
received on impaired loans which are performing under their contractual terms
are allocated to principal and interest in accordance with the terms of the
respective loan.
Coast has reached agreements with certain borrowers that provide for the
restructuring of 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. At
December 31, 1995 and 1994, Coast had $30.5 million and $37.3 million,
respectively, of loans which were performing in accordance with their
restructuring agreements. The restructured loans had effective yields of 8.00%
and 7.87% at December 31, 1995
63
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
and 1994, respectively. For the years ended December 31, 1995, 1994 and 1993,
$2.4 million, $2.9 million and $5.2 million, respectively, was earned on these
restructured loans which 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, 1995, 1994 and 1993, would have totaled
$3.2 million, $3.8 million and $7.8 million, respectively, under their
original terms. At December 31, 1995, Coast had no commitments to lend
additional funds to these borrowers.
(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, 1995
Held to maturity:
Adjustable rate:
MBS issued by Coast............ $ 898,713 $ 2,012 $(16,232) $ 884,493
FNMA securities................ 711,371 24,672 (249) 735,794
FHLMC securities............... 128,687 4,024 -- 132,711
Issued by other financial
institutions.................. 43,609 -- (1,088) 42,521
---------- ------- -------- ----------
1,782,380 30,708 (17,569) 1,795,519
---------- ------- -------- ----------
Fixed rate:
FNMA securities................ 34,975 170 (72) 35,073
Other securities............... 48 -- -- 48
---------- ------- -------- ----------
35,023 170 (72) 35,121
---------- ------- -------- ----------
$1,817,403 $30,878 $(17,641) $1,830,640
========== ======= ======== ==========
Available for sale:
Adjustable rate:
FNMA securities................ $ 169,575 $ 5,215 $ -- $ 174,790
FHLMC securities............... 175,127 4,481 -- 179,608
---------- ------- -------- ----------
$ 344,702 $ 9,696 $ -- $ 354,398
========== ======= ======== ==========
64
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
AMORTIZED UNREALIZED UNREALIZED FAIR
COST GAINS LOSSES VALUE
---------- ---------- ---------- ----------
(IN THOUSANDS)
DECEMBER 31, 1994
Held to maturity:
Adjustable rate:
MBS issued by Coast............ $1,014,847 $-- $(21,464) $ 993,383
FNMA securities................ 138,264 -- (4,127) 134,137
FHLMC securities............... 163,894 -- (2,595) 161,299
Issued by other financial
institutions.................. 49,494 -- (1,488) 48,006
---------- ---- -------- ----------
1,366,499 -- (29,674) 1,336,825
---------- ---- -------- ----------
Fixed rate:
FNMA securities................ 38,254 107 (3,074) 35,287
Other securities............... 62 -- (8) 54
---------- ---- -------- ----------
38,316 107 (3,082) 35,341
---------- ---- -------- ----------
$1,404,815 $107 $(32,756) $1,372,166
========== ==== ======== ==========
Available for sale:
Adjustable rate:
FNMA securities................ $ 198,169 $585 $ (2,215) $ 196,539
FHLMC securities............... 134,640 -- (2,266) 132,374
---------- ---- -------- ----------
$ 332,809 $585 $ (4,481) $ 328,913
========== ==== ======== ==========
As of December 31, 1995, $2.17 billion of Coast's MBS included in the table
above have contractual terms to maturity of more than ten years, $46 thousand
have contractual maturities of from five to ten years, $4.0 million have
contractual maturities of one to five years and none have contractual
maturities of less than one year.
The combined contractual weighted average interest rate of MBS was 6.60% and
5.66% at December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, Coast had accrued interest receivable on MBS
of $13.7 million and $9.9 million, respectively, which is included in interest
receivable and other assets in the accompanying consolidated statement of
financial condition.
At December 31, 1995 and 1994, Coast had no commitments to sell MBS.
Principal proceeds from sales of MBS available for sale were $35.3 million,
$334.6 million and $241.9 million during 1995, 1994 and 1993, 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 and Swaps issued by Coast.
(5) REAL ESTATE HELD FOR SALE
Real estate held for sale, which represents real estate acquired through
foreclosure, totaled $31.7 million and $44.2 million at December 31, 1995 and
1994, respectively.
65
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,
-----------------------
1995 1994 1993
------- ------- -------
(IN THOUSANDS)
Net expense (income) from operations:
Operations of foreclosed real estate owned........ $ 3,797 $ 7,956 $19,050
Real estate held for development.................. -- -- (375)
------- ------- -------
3,797 7,956 18,675
Write downs and provisions for estimated losses..... 293 2,132 15,584
------- ------- -------
$ 4,090 $10,088 $34,259
======= ======= =======
(6) LAND AND DEPRECIABLE ASSETS AND LEASE COMMITMENTS
The following is a summary of land and depreciable assets at the dates
indicated.
DECEMBER 31,
------------------
1995 1994
-------- --------
(IN THOUSANDS)
Furniture, fixtures, equipment and automobiles........... $ 80,064 $ 77,388
Leasehold improvements................................... 43,966 40,088
Buildings, parking lots and building improvements........ 21,921 16,562
Land..................................................... 16,594 16,594
Construction in progress................................. 6,463 6,427
-------- --------
169,008 157,059
Accumulated depreciation................................. (76,088) (69,566)
-------- --------
$ 92,920 $ 87,493
======== ========
Depreciation expense totaled $11.5 million, $10.1 million and $9.9 million
for the years ended December 31, 1995, 1994 and 1993, 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. Substantially all the leases expire by the year 2032.
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 $19.4 million, $19.8 million and $20.6 million for the
years ended December 31, 1995, 1994 and 1993, respectively.
66
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The total annual minimum lease commitment under non-cancelable operating
leases at December 31, 1995, including estimated increases due to rising
levels of the Consumer Price Index for leases contractually tied thereto, was
as follows for the periods indicated.
AMOUNT
--------------
(IN THOUSANDS)
Year Ending December 31,
1996........................................................ $ 16,228
1997........................................................ 15,477
1998........................................................ 15,886
1999........................................................ 16,136
2000........................................................ 15,946
Thereafter.................................................. 58,510
--------
$138,183
========
(7) DEPOSITS
Deposit balances by type of account are summarized in the following table as
of the dates indicated.
WEIGHTED AVERAGE DECEMBER 31,
INTEREST RATE AT ---------------------
DECEMBER 31, 1995 1995 1994
----------------- ---------- ----------
(IN THOUSANDS)
Checking and other demand deposits.. 1.27% $ 632,025 $ 464,321
Money market deposits............... 2.59 666,019 866,569
Time deposits:
One to 31 days.................... 3.38 6,704 16,837
32 days to six months............. 3.49 101,331 276,554
Over six months to two years...... 5.34 4,315,862 3,809,858
Over two years.................... 6.54 385,431 429,372
Housing bond certificates of
deposit.......................... 7.00 16,000 16,000
Public funds...................... 4.90 100 297
---------- ----------
$6,123,472 $5,879,808
========== ==========
The combined weighted average interest rate of deposits, including the
effects of Swaps described in Note 13 below, was 4.67% and 4.15% at December
31, 1995 and 1994, respectively.
Public funds are deposits obtained from governmental agencies within
California and were secured by loans receivable of $12.7 million, at December
31, 1994. Public funds held at December 31, 1995, did not require collateral.
Broker-originated deposits totaled $34.7 million and $40.9 million at
December 31, 1995 and 1994, respectively.
At December 31, 1995 and 1994, Coast had accrued interest payable on
deposits of $1.4 million and $1.3 million, respectively, which is included in
other liabilities in the accompanying consolidated statement of financial
condition.
67
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,
1995.
REMAINING TERM TO MATURITY (IN MONTHS) AMOUNT
-------------------------------------- -------------
(IN MILLIONS)
Three or less.................................................. $ 445
Over three to six.............................................. 238
Over six to twelve............................................. 304
Over twelve.................................................... 120
------
$1,107
======
Deposits at December 31, 1995, mature as indicated in the following table.
AMOUNT
--------------
(IN THOUSANDS)
Immediately withdrawable...................................... $1,298,044
Year Ending December 31, 1996................................. 4,289,244
1997........................................................ 361,770
1998........................................................ 80,957
1999........................................................ 93,091
2000........................................................ 152
Thereafter.................................................. 214
----------
$6,123,472
==========
Interest expense by type of deposit account is summarized in the following
table for the periods indicated.
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Checking and other demand deposits............. $ 5,694 $ 3,230 $ 4,895
Money market deposits.......................... 18,250 22,855 35,334
Time deposits.................................. 257,820 192,885 194,467
Early withdrawal penalties..................... (869) (635) (676)
-------- -------- --------
$280,895 $218,335 $234,020
======== ======== ========
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 $14.2
million, $9.9 million and $9.7 million for the years ended December 31, 1995,
1994 and 1993, respectively, and is included in other noninterest income in
the accompanying Consolidated Statement of Operations.
The following table presents the carrying and fair values of deposits as of
December 31, 1995.
CARRYING FAIR
VALUE VALUE
---------- ----------
(IN THOUSANDS)
Demand deposits........................................ $ 632,025 $ 632,025
Savings deposits....................................... 666,019 666,019
Time deposits.......................................... 4,825,428 4,836,586
---------- ----------
$6,123,472 $6,134,630
========== ==========
68
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(8) BORROWINGS
A summary of FHLB advances and other borrowings follows.
DECEMBER 31, 1995 DECEMBER 31, 1994
-------------------------------------- --------------------------------------
RATES RATES
-------------------- --------------------
RANGE RANGE
----------- -----------
CARRYING FAIR WEIGHTED CARRYING FAIR WEIGHTED
VALUE VALUE AVERAGE LOW HIGH VALUE VALUE AVERAGE LOW HIGH
-------- -------- -------- ---- ----- -------- -------- -------- ---- -----
FHLB advances, due at
various dates through
1999................... $804,250 $808,300 6.04% 4.95% 10.03% $954,450 $952,317 6.19% 3.93% 10.03%
======== ======== ===== ==== ===== ======== ======== ===== ==== =====
Other borrowings:
Short-term:
Securities sold under
agreements to
repurchase, secured,
due in 1996........... $546,153 $546,335 5.80 5.74 6.00 $714,689 $714,689 6.05 5.68 6.30
Federal funds
purchased............. 110,120 110,120 5.37 4.73 6.00 19,822 19,822 5.06 4.94 5.13
-------- -------- ----- ---- ----- -------- -------- ----- ---- -----
656,273 656,455 734,511 734,511 -- -- --
-------- -------- -------- --------
Long-term:
Senior notes, due in
2000.................. 56,227 59,944 10.00 -- -- 55,922 57,500 10.00 -- --
Housing bond
borrowings, secured,
due in 1998, 2006 and
2010.................. 20,840 19,242 4.73 -- -- 17,458 17,458 5.50 -- --
Capital lease, due in
2000.................. -- -- -- -- -- 1,725 1,725 11.85 -- --
-------- -------- -------- -------- -----
77,067 79,186 75,105 76,683
-------- -------- -------- --------
$733,340 $735,641 $809,616 $811,194
======== ======== ======== ========
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,
---------------------
1995 1994
---------- ----------
(IN THOUSANDS)
Loans receivable.................................... $1,964,570 $1,527,104
MBS................................................. 1,134,695 998,595
FHLB stock.......................................... 85,837 79,261
---------- ----------
$3,185,102 $2,604,960
========== ==========
69
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, 1995, was as follows for the years indicated.
FHLB OTHER
ADVANCES BORROWINGS TOTAL
-------- ---------- ----------
(IN THOUSANDS)
Year Ending December 31,
1996..................................... $729,250 $656,273 $1,385,523
1997..................................... 50,000 -- 50,000
1998..................................... -- 6,992 6,992
1999..................................... 25,000 -- 25,000
2000..................................... -- 56,227 56,227
Thereafter............................... -- 13,848 13,848
-------- -------- ----------
$804,250 $733,340 $1,537,590
======== ======== ==========
Securities sold under agreements to repurchase (commonly referred to as
reverse repurchase agreements) totaled $546.2 million and $714.7 million at
December 31, 1995 and 1994, respectively. The weighted average interest rate
of reverse repurchase agreements was 5.80% at December 31, 1995. Average
balances of reverse repurchase agreements were $856.7 million and $668.1
million during the years ended December 31, 1995 and 1994, respectively, and
the maximum amount outstanding at any month end during the years ended
December 31, 1995 and 1994 was $1.12 billion and $766.0 million, respectively.
Reverse repurchase agreements were secured by MBS with a carrying value of
$566.3 million and $776.8 million (included in the table above) at December
31, 1995 and 1994, respectively. These MBS had a fair value of $580.9 million
and $764.9 million at December 31, 1995 and 1994, respectively.
The following table describes the Company's Senior Notes and Coast's Capital
Notes as of December 31, 1995.
AT DECEMBER 31, 1995
----------------------
CARRYING FAIR INTEREST AMOUNT DATE
DESCRIPTION VALUE VALUE RATE DATE DUE ISSUED ISSUED
- ----------- ----------- ---------- -------- ------------- ------------ ---------
(IN MILLIONS) (IN MILLIONS)
Senior Notes (1)........ $ 56.2 $ 59.9 10% Mar. 01, 2000 $57.5 Apr. 1993
Capital Notes (2)....... 55.7 65.4 13 Dec. 31, 2002 57.5 Dec. 1992
========== ==========
$ 111.9 $ 125.3
========== ==========
- --------
(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 any
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 debentures, was 6.28% and 6.47% at December 31,
1995 and 1994, respectively.
At December 31, 1995 and 1994, the Company had accrued interest payable on
FHLB advances, other borrowings, capital notes and debentures of $10.8 million
and $11.2 million, respectively, which is included in other liabilities in the
accompanying consolidated statement of financial condition.
70
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A tabulation of interest expense on borrowings for the periods indicated
follows.
YEAR ENDED DECEMBER 31,
------------------------
1995 1994 1993
-------- ------- -------
(IN THOUSANDS)
FHLB advances.................................... $ 56,632 $40,621 $30,900
Short-term borrowings............................ 59,677 32,677 31,551
Long-term borrowings............................. 14,926 15,086 17,610
-------- ------- -------
$131,235 $88,384 $80,061
======== ======= =======
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, 1995, FHLB advances were $804.3
million, and the amount of additional credit available from the FHLB was $1.26
billion.
(9) INCOME AND OTHER TAXES
The following table summarizes the elements of income tax expense (benefit)
for the years endedDecember 31, 1995, 1994 and 1993.
FEDERAL STATE TOTAL
-------- ------- --------
(IN THOUSANDS)
1995:
Current.................................... $ -- $ -- $ --
Deferred................................... 15,767 3,068 18,835
-------- ------- --------
$ 15,767 $ 3,068 $ 18,835
======== ======= ========
1994:
Current.................................... $ -- $ -- $ --
Deferred................................... (7,676) (1,741) (9,417)
-------- ------- --------
$ (7,676) $(1,741) $ (9,417)
======== ======= ========
1993:
Current.................................... $ -- $ -- $ --
Deferred................................... (12,999) -- (12,999)
-------- ------- --------
$(12,999) $ -- $(12,999)
======== ======= ========
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. Based on a re-evaluation of the realizability of the
deferred tax asset, the valuation allowance was reduced which had the effect
of recognizing $1.7 million and $14.2 million of the subject tax benefits in
1994 and 1993, respectively.
71
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,
--------------------------
1995 1994 1993
Statutory federal income tax rate............... 35% 35% 35%
======= ======= ========
(IN THOUSANDS)
Expected federal income tax expense (benefit)... $18,073 $(5,584) $ 1,483
Increases (reductions) in income taxes resulting
from:
Change in the beginning-of-the-year valuation
allowance for deferred tax assets allocated
to income tax expense........................ -- (1,669) (14,178)
State tax expense (benefit), net of federal
income tax effect............................ 3,502 (646) --
Basis in stock of subsidiary.................. (1,732) -- --
Prior year underaccrual....................... (916) (887) --
Increase in base year reserve amount.......... (519) (1,129) --
Amortization of goodwill...................... 427 498 495
Adjustment to deferred tax assets and
liabilities for enacted changes in tax laws
and rates.................................... -- -- (799)
------- ------- --------
$18,835 $(9,417) $(12,999)
======= ======= ========
Savings banks that meet certain definitional tests and other conditions
prescribed by the Internal Revenue Code are allowed to deduct, within
limitations, a bad debt deduction computed as a percentage of taxable income
before such deduction. The deduction percentage is 8% for the years ended
December 31, 1995, 1994 and 1993. Alternatively, a qualified savings bank may
compute its bad debt deduction based upon actual loan loss experience (the
"Experience Method"). Coast computed its bad debt deduction utilizing the
Experience Method in all years presented.
Due to the increase in the amount of qualifying loans for tax purposes at
December 31, 1995 and 1994, as compared to December 31, 1987, the amount of
the bad debt deduction was restored by $1.5 million and $3.6 million,
respectively. Qualifying loans decreased at December 31, 1993, and,
accordingly, the bad debt deduction was limited by $2.9 million. The
cumulative amount of the limit on bad debts was $13.4 million at December 31,
1995. Should qualifying loans further increase in future periods, the bad debt
amounts previously limited may be restored.
The significant components of deferred income tax expense (benefit)
attributable to income from continuing operations are detailed in the
following table.
1995 1994 1993
------- ------- --------
(IN THOUSANDS)
Deferred tax expense (exclusive of the effects of
the other components listed below).............. $18,835 $(7,748) $ 1,978
Adjustments to deferred tax assets and
liabilities for enacted changes in tax laws and
rates........................................... -- -- (799)
Decrease in beginning-of-the-year balance of the
valuation allowance for deferred tax assets..... -- (1,669) (14,178)
------- ------- --------
$18,835 $(9,417) $(12,999)
======= ======= ========
72
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The tax effects of temporary differences that give rise to significant
portions of the deferred tax assets and deferred tax liabilities are presented
below.
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Deferred tax assets:
Loan loss allowances deferred for tax purposes... $ 41,632 $ 74,845 $ 62,176
Net operating loss carryforwards................. 19,597 13,571 6,604
Tax credit carryforwards......................... 5,942 5,942 5,535
Deferred compensation not yet deducted for tax
purposes........................................ 3,352 2,758 2,600
Interest income on nonaccrual loans for book
purposes, recognized for tax purposes........... 3,032 1,850 --
Branch sale gains recognized for tax purposes and
amortized for
financial statement purposes.................... 1,387 1,921 2,222
Securities marked to market for tax purposes
only............................................ 1,246 -- 1,948
Loan discounts arising from acquisitions......... 541 664 883
Investments and real estate writedowns for
financial statement purposes not recognized for
tax purposes.................................... -- -- 7,278
Securities marked to market for financial
statement purposes only......................... -- 646 --
Other............................................ 608 366 --
-------- -------- --------
Total gross deferred tax assets................ 77,337 102,563 89,246
Less valuation allowance......................... -- -- (1,669)
-------- -------- --------
Deferred tax assets............................ 77,337 102,563 87,577
-------- -------- --------
Deferred tax liabilities:
FHLB stock dividends deferred for tax purposes... 18,267 16,369 15,015
Guaranteed payments recognized when received for
tax purposes.................................... 8,278 8,278 7,347
Loan fees and origination costs capitalized for
financial statement purposes only............... 7,038 3,788 --
Excess Spread Servicing Asset, not recognized for
tax purposes.................................... 5,097 8,674 14,705
Securities marked to market for financial
statement purposes only......................... 4,082 -- 8,015
Depreciation for tax purposes in excess of such
amount for financial statement purposes......... 3,939 3,896 4,558
Securities marked to market for tax purposes
only............................................ -- 4,638 --
Interest income on loans recognized on the cash
basis for tax
purposes only................................... -- 757 1,749
Other............................................ -- -- 327
-------- -------- --------
Deferred tax liabilities....................... 46,701 46,400 51,716
-------- -------- --------
Net deferred tax asset....................... $ 30,636 $ 56,163 $ 35,861
======== ======== ========
At December 31, 1995, the Company had net operating loss carryforwards
("NOLs") for federal income tax purposes of $51.3 million which are available
to offset future federal taxable income through 2010. The Company also had
alternative minimum tax credit carryforwards of approximately $5.5 million as
of December 31, 1995, which are available to reduce future regular federal
income taxes, if any, over an indefinite period.
The consolidated financial statements at December 31, 1995, 1994 and 1993,
did not include a tax liability of $34.4 million, $33.9 million and $32.6
million, respectively, related to the adjusted base year bad debt reserve
amounts since these reserves are not expected to reverse until indefinite
future periods, and may never reverse. Circumstances that would require an
accrual of a portion or all of this unrecorded tax liability are a further
73
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 Company's tax returns have been audited by the Internal Revenue Service
through December 31, 1986 and by the California Franchise Tax Board through
December 31, 1987. The Franchise Tax Board is currently examining the years
1988 through 1990. It is expected that the Franchise Tax Board will challenge
the taxability of income earned by Coast's former Nevada financing
subsidiaries, the last of which was liquidated in 1989. While there can be no
assurance as to the outcome of this matter, management believes the position
taken by Coast on its franchise tax returns will be sustained. The Internal
Revenue Service has recently commenced an examination of the Company's tax
returns for the years 1992 and 1993. The Company does not anticipate any
material changes to its federal tax returns as previously filed.
(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, 1995, and the aforementioned indenture
restrictions, the Company had approximately $.3 million available for
distribution at December 31, 1995. 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 $79.8
million available for distribution at December 31, 1995. In addition, payment
of dividends in excess of Coast's accumulated earnings and profits as
calculated for tax purposes (approximately $156 million at December 31, 1994)
would have significant negative tax consequences to Coast.
Earnings (loss) 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,
-------------------------------------------------
1995 1994 1993
--------------- ---------------- ---------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net earnings (loss).......... $32,802 $32,802 $(6,538) $(6,538) $17,236 $17,236
Interest on the convertible
subordinated debentures, net
of taxes.................... -- -- -- -- -- 15
------- ------- ------- ------- ------- -------
Net earnings (loss)
applicable to common stock,
dilutive CSEs and
securities.................. $32,802 $32,802 $(6,538) $(6,538) $17,236 $17,251
======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding.......... 18,511 18,511 18,457 18,457 17,880 17,880
Dilutive CSEs on stock
options..................... 507 629 -- -- 383 383
Assumed conversion of the
convertible subordinated
debentures.................. -- -- -- -- -- 17
------- ------- ------- ------- ------- -------
Weighted average shares...... 19,018 19,140 18,457 18,457 18,263 18,280
======= ======= ======= ======= ======= =======
Net earnings (loss) per share
of common stock............. $ 1.72 $ 1.71 $ (.35) $ (.35) $ .94 $ .94
======= ======= ======= ======= ======= =======
74
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 15% 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 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
Coast is required by federal law and OTS regulations to maintain minimum
levels of capital that are measured by three ratios. The tangible capital
standard requires savings institutions to maintain tangible capital of at
least 1.5 percent of tangible assets. Tangible capital consists principally of
stockholders' equity, but excludes most intangible assets such as goodwill.
The core capital standard requires savings institutions to maintain core
capital of at least 3.0 percent of adjusted tangible assets. Core capital
consists of tangible capital and certain other intangible assets. At December
31, 1995 there were no differences in the calculation of tangible and core
capital for Coast. The risk-based capital standard requires savings
institutions to maintain risk-based capital equal to 8.0 percent of risk-
weighted assets. Risk-based capital consists of core capital plus certain
subordinated debt and, subject to certain limitations, general valuation
allowances on loans receivable.
The following table reflects in both dollars and ratios, Coast's regulatory
capital position as ofDecember 31, 1995, as well as the requirements at that
date:
ACTUAL REQUIRED
------------ ------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN MILLIONS)
December 31, 1995:
Risk-based.................................. $567 10.86% $418 8.00%
Core........................................ 449 5.47 246 3.00
Tangible.................................... 449 5.47 123 1.50
The Federal Deposit Insurance Corporation Act of 1991 contains "prompt
corrective action" provisions pursuant to which insured depositiory
institutions are to be classified into one of five categories based primarily
upon capital adequacy, ranging from "well capitalized" to "critically
undercapitalized" and which require, subject to certain exceptions, the
appropriate federal banking agency to take prompt corrective action with
respect to an institution which becomes "undercapitalized" and to take
additional actions if the institution becomes "significantly undercapitalized"
or "critically undercapitalized." At December 31, 1995, Coast's regulatory
capital exceeded the thresholds necessary to be considered well capitalized.
75
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, 1995 and 1994, 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,
--------------------
1995 1994
--------- ---------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested.............................................. $ 38,143 $ 34,969
Non-vested.......................................... 1,963 1,231
--------- ---------
Accumulated benefit obligations................... $ 40,106 $ 36,200
========= =========
Pension plan assets at fair value (primarily listed
stocks, U.S. government obligations, corporate
obligations and Coast deposits)...................... $ 46,974 $ 39,847
Projected benefit obligations for service rendered to
date................................................. (45,256) (37,308)
--------- ---------
Pension plan assets in excess of projected benefit
obligation........................................... 1,718 2,539
Activity not recognized in net pension plan cost:
Net gain............................................ (1,555) (1,352)
Unrecognized prior service cost..................... 194 285
Net asset at December 31, 1985, being amortized over
15 years........................................... (1,508) (1,809)
--------- ---------
Accrued pension plan costs........................ $ (1,151) $ (337)
========= =========
Net pension plan cost:
Interest on projected benefit obligations........... $ 3,040 $ 2,944
Service costs....................................... 1,428 2,049
Return on pension plan assets....................... (10,004) (365)
Amortization and deferral, net...................... 6,350 (3,054)
--------- ---------
$ 814 $ 1,574
========= =========
For the years ended December 31, 1995 and 1994, the weighted average
discount rates used in determining the actuarial present value of the
accumulated and projected benefit obligations were 7.25% and 8.75%,
respectively. The rate of increase in future compensation was projected to be
3.75% and 4.00% for the years ended December 31, 1995 and 1994, respectively.
The expected long-term rate of return on assets was 9% for the years ended
December 31, 1995 and 1994. Total pension plan expenses were $2.5 million,
$2.7 million and $1.5 million for the years ended December 31, 1995, 1994 and
1993, respectively.
76
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Pursuant to the 1985 Stock Option and Stock Appreciation Rights Plan (the
"Plan"), options having lives of up to ten years are 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 on the date the options are
granted. The table below reflects option activity for the periods indicated.
AT OR FOR THE YEAR ENDED
DECEMBER 31,
-----------------------------
1995 1994 1993
--------- ------- ---------
Balance at beginning of period................ 968,406 976,186 881,072
Granted....................................... -- -- 318,947
Canceled or expired........................... (10,000) (6,780) (162,717)
Exercised..................................... (125,463) (1,000) (61,116)
--------- ------- ---------
Balance at end of period...................... 832,943 968,406 976,186
========= ======= =========
Options exercisable........................... 832,943 968,406 976,186
Shares available for grant.................... 98,346 88,346 81,566
========= ======= =========
Weighted average option price per share:
Under option................................ $ 8.71 $ 8.63 $ 8.68
Exercisable................................. 8.71 8.63 8.68
Exercised................................... 7.92 11.28 5.63
========= ======= =========
Pursuant to the Plan, stock appreciation rights ("SARs") having lives of up
to ten years are granted which give the owner 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 table below reflects SARs activity for the periods indicated.
AT OR FOR THE YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1995 1994 1993
------------------- ------------------- -------------------
SARS AVERAGE SARS AVERAGE SARS AVERAGE
OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE
----------- ------- ----------- ------- ----------- -------
Balance at beginning of
period................. 181,907 $11.25 201,130 $11.54 510,906 $13.55
Canceled or expired..... -- -- (17,467) 14.60 (253,645) 14.99
Exercised............... (1,200) 11.28 (1,756) 11.28 (56,131) 14.25
------- ------- --------
Balance at end of
period................. 180,707 11.25 181,907 11.25 201,130 11.54
======= ======= ========
(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 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 notional amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
At December 31, 1995, Coast had issued $386.5 million of letters of credit
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
77
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
in connection with real estate development activities. The letters of credit
were collateralized by $26.4 million of Coast's MBS and $378.7 million of FHLB
of San Francisco letters of credit (which letters of credit were in turn
collateralized by $504.5 million of Coast's loans and securities), to support
$371.2 million of housing revenue bonds at December 31, 1995. 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
$5.9 million, $9.2 million and $7.8 million in 1995, 1994 and 1993,
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, 1995, Coast had $77.7 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 $2.9 million as of
December 31, 1995.
At December 31, 1995, Coast had $66.5 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.
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 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. In that the credit exposure of these
Swaps is limited to the potential default of the Swap counterparty, the
potential credit risks associated with such Swaps are substantially less than
the notional principal amounts of these Swaps.
At December 31, 1995, Coast had $195.0 million of Swaps on which Coast paid
a floating rate and received a fixed rate of interest. These Swaps were
entered into during 1994 and have remaining maturities ranging from 3 to 6
months. The Swaps are matched with specific certificates of deposit and
effectively convert the matched fixed rate deposits to floating rate
liabilities. These Swaps are comprised of $115 million based on LIBOR and $80
million based on COFI. These Swaps provide a discrete funding source which
directly matches portions of Coast's earning asset base (COFI- and LIBOR-based
loans), and result in a fixed spread between the interest rates paid on the
Swaps and the yield on the related portion of the loan portfolio.
78
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes certain information regarding Swaps
outstanding at the dates indicated.
DECEMBER 31, 1995
------------------------------------------------------------------------
NOTIONAL WEIGHTED AVERAGE
TYPE AMOUNT INTEREST RATE MATURITY DATES
- ---- ---------------------- -------------------- ---------------------------
PAID RECEIVED
-------- ----------
(DOLLARS IN THOUSANDS)
Pay variable/receive
fixed.................. $195,000 5.58% 5.35% March 1996 to June 1996
======== ========
DECEMBER 31, 1994
------------------------------------------------------------------------
NOTIONAL WEIGHTED AVERAGE
TYPE AMOUNT INTEREST RATE MATURITY DATES
- ---- ---------------------- -------------------- ---------------------------
PAID RECEIVED
-------- ----------
(DOLLARS IN THOUSANDS)
Pay variable/receive
fixed.................. $245,000 5.01% 5.18% September 1995 to June 1996
======== ========
As described above, these Swaps were entered into for the purpose of
converting the interest rate characteristics of certain liabilities,
therefore, "hedge accounting" rules apply and there is no requirement to mark
the values of the Swaps to market under generally accepted accounting
principles. The fair values of Swaps represent the estimated amounts Coast
would receive or pay to terminate the agreements, taking into consideration
current interest rates. As of December 31, 1995, the fair value of the Swaps
approximated a loss of $66,000.
The net effect of the Swaps, exclusive of interest on the related deposits,
was to record $.8 million, $6.2 million and $11.2 million of interest expense
during 1995, 1994 and 1993, respectively, which is included in interest
expense on deposits in the accompanying consolidated statement of operations.
Coast has pledged $3.7 million and $6.4 million of MBS at December 31, 1995
and 1994, respectively, to guarantee its performance under swap agreements.
During 1985, Coast entered into a Cap which expires in 1997. The notional
balance of the Cap is $75.0 million and the agreement provides for payments of
interest to Coast if the three-month LIBOR index, upon which the Cap is based,
exceeds a ceiling rate of 12.38%. Amortization of the fees Coast paid to
acquire the Caps was $.8 million for the year ended December 31, 1993, and is
included in interest expense on deposits in the accompanying consolidated
statement of operations. There were no remaining unamortized fees at
December 31, 1993, or thereafter. No payments were made to Coast under the Cap
for the periods presented, and, in the current interest rate environment,
management does not anticipate that the interest rate ceiling will be reached
prior to the Cap's maturity.
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,
--------------------------
1995 1994 1993
------- -------- --------
(IN THOUSANDS)
Balance at beginning of period.................. $ 7,962 $ 14,185 $ 31,860
Additions charged (reductions credited) to
operations..................................... -- 9,012 (16,275)
Losses charged.................................. -- (15,235) (1,400)
Reallocation from loan-related assets........... 9,038 -- --
------- -------- --------
Balance at end of period........................ $17,000 $ 7,962 $ 14,185
======= ======== ========
79
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
At December 31, 1995, $12 million of the GVA attributable to off-balance
sheet activity related to Coast's letters of credit and $5 million related to
loans sold with recourse. Based on currently available information, Coast
believes it has adequately provided for losses which might emanate from these
sources, however, 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.
(15) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER YEAR
-------- -------- -------- -------- --------
(IN THOUSANDS EXCEPT PER SHARE DATA)
1995
Interest income............... $145,034 $154,703 $158,593 $154,851 $613,181
Interest expense.............. 97,624 105,607 106,187 102,712 412,130
Net interest income........... 47,410 49,096 52,406 52,139 201,051
Provision for loan losses..... 10,000 10,000 10,000 10,000 40,000
Net earnings.................. 3,478 5,633 14,762 8,929 32,802
Primary earnings per share of
common stock:
Net earnings(1)............. .18 .30 .77 .47 1.72
Fully diluted earnings per
share of common stock:
Net earnings(1)............. .18 .30 .77 .47 1.71
Market range:
High bid.................... 16.375 21.250 28.125 34.625
Low bid..................... 13.625 16.500 19.375 25.500
1994
Interest income............... $117,714 $117,817 $126,244 $132,855 $494,630
Interest expense.............. 68,685 70,803 79,212 88,019 306,719
Net interest income........... 49,029 47,014 47,032 44,836 187,911
Provision for loan losses..... 32,000 14,000 14,000 15,000 75,000
Net earnings (loss)........... (6,719) 1,881 2,292 (3,992) (6,538)
Primary earnings (loss) per
share of common stock:
Net earnings (loss)(1)...... (.36) .10 .12 (.22) (.35)
Fully diluted earnings (loss)
per share of common stock:
Net earnings (loss)(1)...... (.36) .10 .12 (.22) (.35)
Market range:
High bid.................... 17.375 17.250 18.750 17.375
Low bid..................... 13.375 13.000 16.875 12.625
- --------
(1) The sum of the quarterly earnings per share amounts may not equal the
amount for the year because per share amounts are computed independently
for each quarter and the full year based upon respective weighted average
shares of common stock outstanding. Another factor affecting fully diluted
earnings per share is that, for certain periods, the fully diluted
computed amounts would be antidilutive; primary earnings per share are
shown above in such cases.
80
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(16) PARENT COMPANY FINANCIAL INFORMATION
This information should be read in conjunction with the other Notes to
Consolidated Financial Statements. During the first quarter of 1993 the
Company issued $40.8 million of common stock at $17.75 per share and
contributed the net proceeds of $38.2 million to Coast as equity capital.
During the second quarter of 1993, the Company issued $57.5 million of 10%
Senior Notes due 2000. The majority of the proceeds from the offering were
contributed to Coast as equity capital. See Note 8.
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31,
-----------------
1995 1994
-------- --------
(IN THOUSANDS)
ASSETS
Cash......................................................... $ 25 $ 106
Short term investments....................................... 2,394 2,443
Mortgage-backed securities ("MBS") available for sale........ 9,363 10,068
Interest receivable and other assets......................... 431 515
Investment in subsidiary..................................... 463,077 419,668
-------- --------
$475,290 $432,800
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior notes................................................. $ 56,227 $ 55,922
Other liabilities............................................ 1,629 1,664
-------- --------
57,856 57,586
-------- --------
Stockholders' equity:
Common stock............................................... 186 185
Additional paid-in capital................................. 265,018 263,161
Unrealized gain (loss) on securities available for sale.... 6,554 (1,006)
Retained earnings.......................................... 145,676 112,874
-------- --------
Total stockholders' equity............................... 417,434 375,214
-------- --------
$475,290 $432,800
======== ========
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------- -------- -------
(IN THOUSANDS)
Dividends received from subsidiary................. $ 6,000 $ 2,000 $ --
------- -------- -------
Interest Income:
MBS.............................................. 560 504 359
Investment securities............................ 291 156 148
------- -------- -------
851 660 507
------- -------- -------
Equity in undistributed net earnings (loss) of
subsidiary........................................ 30,038 (5,401) 19,678
Interest expense on borrowings..................... (6,105) (6,102) (4,469)
General and administrative expense................. (140) (29) (112)
Income tax benefit................................. 2,158 2,334 1,632
------- -------- -------
Net earnings (loss)............................ $32,802 $ (6,538) $17,236
======= ======== =======
81
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
----------------------------
1995 1994 1993
-------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)............................ $ 32,802 $ (6,538) $ 17,236
-------- -------- --------
Adjustments to reconcile net earnings to net
cash provided (used) by operations:
Amortization of premiums and discounts....... 346 346 230
Net increase in interest payable............. -- -- 1,438
Net (increase) decrease in interest
receivable.................................. (119) 10 (100)
Deferred income tax benefit.................. (2,158) (2,334) (1,632)
Equity in net (earnings) loss of subsidiary.. (30,038) 5,401 (19,678)
Other........................................ 21 43 (126)
-------- -------- --------
Total adjustments.......................... (31,948) 3,466 (19,868)
-------- -------- --------
Net cash provided (used) by operating
activities................................ 854 (3,072) (2,632)
-------- -------- --------
Cash flows from investing activities:
Purchase of MBS available for sale........... -- -- (12,817)
Principal repayments on MBS available for
sale........................................ 1,043 1,444 726
Equity investment in subsidiary.............. (3,000) -- (75,558)
-------- -------- --------
Net cash provided (used) by investing
activities................................ (1,957) 1,444 (87,649)
-------- -------- --------
Cash flows from financing activities:
Net proceeds from issuance of senior notes... -- -- 55,387
Issuance of common stock..................... -- -- 38,171
Common stock options exercised............... 973 11 345
-------- -------- --------
Net cash provided by financing activities.. 973 11 93,903
-------- -------- --------
Net increase (decrease) in cash and cash
equivalents............................... (130) (1,617) 3,622
Cash and cash equivalents at beginning of year... 2,549 4,166 544
-------- -------- --------
Cash and cash equivalents at end of year......... $ 2,419 $ 2,549 $ 4,166
======== ======== ========
Supplemental schedule of noncash investing
activities:
Unrealized gain (loss) on securities available
for sale, net of taxes........................ $ 7,560 $(11,827) $ 10,821
82
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) MORTGAGE BANKING ACTIVITIES
Sales of mortgage assets held or available for sale function primarily to
constrain asset growth, fund lending operations, manage interest rate risk and
increase the loan servicing portfolio. The following table represents
components of the Company's mortgage banking activities for each of the
periods indicated.
AT OR FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1995 1994 1993
---------- ---------- ----------
(IN THOUSANDS)
Loans receivable held for sale:
Loans originated, net of refinances....... $ 146,024 $ 516,343 $ 625,401
Sale of loans............................. 44,197 28,398 130,062
Gain (loss) on sales...................... 177 (2,352) 1,978
Balance at end of period, at the lower of
amortized historical cost or fair value.. 221,032 160,665 175,391
MBS available for sale:
Sale of MBS............................... 35,335 334,617 241,886
Gain (loss) on sales...................... (287) 1,812 8,490
Balance at end of period, at fair value... 354,398 328,913 586,482
Loans serviced for others................... 3,416,880 3,960,564 4,175,682
Loan servicing fee income................... 9,829 10,715 12,620
The following table summarizes the activity in the Excess Spread Servicing
Asset, which is included in interest receivable and other assets in the
accompanying consolidated statement of financial condition, for the periods
indicated.
YEAR ENDED DECEMBER 31,
--------------------------
1995 1994 1993
------- ------- --------
(IN THOUSANDS)
Balance at beginning of period..................... $38,849 $52,290 $ 59,499
Additions from sales of loans and MBS.............. 284 6,176 4,571
Amortization....................................... (5,021) (7,968) (11,505)
Adjustments due to prepayments exceeding expected
levels............................................ ( 540) (1,758) (275)
Elimination of Excess Spread Servicing Asset....... -- (9,891) --
------- ------- --------
Balance at end of period........................... $33,572 $38,849 $ 52,290
======= ======= ========
During the years ended December 31, 1995, 1994 and 1993, Coast did not sell
loans with recourse or subordination. At December 31, 1995, 1994 and 1993, the
principal balances of loans sold prior to 1992 with recourse or subordination
totaled $.40 billion, $.44 billion and $1.52 billion, respectively, and the
amount of recourse or subordination against Coast totaled $78.5 million, $84.4
million and $121.9 million, respectively. The decrease in principal balances
of loans sold with recourse or subordination from 1993 to 1994 is primarily
due to Coast exercising its option to eliminate the recourse liability on
$977.1 million of multifamily loans during 1994. These pools were guaranteed
by FNMA, which increased the ongoing guarantee fee paid to FNMA by .30%,
thereby reducing the future excess spread and its resultant Excess Servicing
Spread Asset. Losses on loans sold with recourse or subordination totaled $4.4
million, $2.2 million and $4.7 million in 1995, 1994 and 1993, respectively.
83
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(18) FINANCIAL HIGHLIGHTS BY BUSINESS SEGMENT
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. CoastFed Services ("CFS"), a
wholly owned subsidiary of Coast, provides hazard and other insurance and
investment products as an agent for insurers and mutual funds, and also
provides a range of trustee services, including acting as trustee in deeds of
trust held by Coast. The following table represents financial highlights, net
of intercompany transactions, concerning the Company's principal business
segments for the periods indicated.
AT OR FOR THE YEAR ENDED
DECEMBER 31,
--------------------------------
1995 1994 1993
---------- ---------- ---------
(IN THOUSANDS)
Revenues:
Retail banking............................. $ 655,795 $ 521,152 $ 559,191
---------- ---------- ---------
CFS:
Insurance/annuity/mutual fund sales
commissions............................. 12,675 13,226 13,460
Trustee and reconveyance fees and other.. 2,330 3,176 3,289
---------- ---------- ---------
15,005 16,402 16,749
---------- ---------- ---------
Consolidated revenues.................... $ 670,800 $ 537,554 $ 575,940
========== ========== =========
Earnings (loss) before income tax expense
(benefit):
Retail banking............................. $ 41,291 $ (27,582) $ (7,890)
CFS........................................ 10,346 11,627 12,127
---------- ---------- ---------
Consolidated earnings (loss) before
income tax expense (benefit)............ $ 51,637 $ (15,955) $ 4,237
========== ========== =========
Assets:
Retail banking............................. $8,248,619 $8,194,433
CFS........................................ 3,061 2,084
---------- ----------
Consolidated assets...................... $8,251,680 $8,196,517
========== ==========
84
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(19) 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,
--------------------------------------------------
1995 1994
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
ASSETS
Cash and due from banks
(Note 2).................. $ 119,717 $ 119,717 $ 99,578 $ 99,578
Federal funds sold and
other short term
investments (Note 2)...... 30,394 30,394 2,443 2,443
Investment securities (Note
2)........................ 72,785 73,186 82,477 81,557
Loans receivable, net (Note
3)........................ 5,245,464 5,403,392 5,632,517 5,508,320
Loans receivable held for
sale (Note 3)............. 221,032 229,955 160,665 161,325
Mortgage-backed securities
(Note 4).................. 1,817,403 1,830,640 1,404,815 1,372,166
Mortgage-backed securities
available for sale
(Note 4).................. 354,398 354,398 328,913 328,913
Federal Home Loan Bank
stock (Note 2)............ 85,837 85,837 79,261 79,261
LIABILITIES
Deposits (Note 7).......... (6,123,472) (6,134,630) (5,879,808) (5,773,224)
Federal Home Loan Bank
advances (Note 8)......... (804,250) (808,300) (954,450) (952,317)
Other borrowings (Note 8).. (733,340) (735,641) (809,616) (811,194)
Capital Notes (Note 8)..... (55,746) (65,406) (55,495) (60,375)
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS (NOTE 13)
Swaps...................... -- 310 -- (4,446)
Caps....................... -- -- -- --
Commitments to originate
mortgage loans............ -- 2,194 -- (6,642)
Letters of credit.......... -- (12,000) -- (6,260)
Loans sold with recourse... -- (5,000) -- (1,702)
85
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10.DIRECTORS AND OFFICERS OF THE REGISTRANT
Those portions of the registrant's definitive Proxy Statement to be filed
with the Securities and Exchange Commission pursuant to Regulation 14A in
connection with registrant's Annual Meeting of Stockholders to be held on
April 24, 1996 ("Proxy Statement"), appearing under the captions "Election of
Directors", "Executive Officers Who are Not Directors," and, to the extent
required by 17 C.F.R. 229.405, "Security Ownership of Management," are
incorporated herein by reference.
ITEM 11.EXECUTIVE COMPENSATION
The portion of the Proxy Statement appearing under the caption "Executive
Compensation" is incorporated herein by reference.
ITEM 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Those portions of the Proxy Statement appearing under the captions "Security
Ownership of Management" and "Principal Stockholders" are incorporated herein
by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
That portion of the Proxy Statement appearing under the caption "Certain
Transactions of Management with Coast" is incorporated herein by reference.
86
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
EXHIBITS*
EXHIBIT
NUMBER EXHIBIT
------- -------
3.1 Current Certificate of Incorporation of the Registrant (Exhibit 3.0 to
Form 8-K dated September 1, 1989)
3.2 Bylaws of the Registrant (Exhibit 3.1 to Form 8-K dated September 1,
1989)
4.1 Section 4 of the Registrant's Certificate of Incorporation and
Articles III and IX of the Registrant's Bylaws (page 5 of Exhibit 3.0
and pages 1-5 and 13-14 of Exhibit 3.1 to Form 8-K dated September 1,
1989)
Shareholder Rights Plan (Exhibit 1.1 to Form 8-A dated September 1,
4.2 1989)
4.3 Copies of instruments defining the rights of holders of long-term debt
of the Registrant or any of its subsidiaries are, under Item
601(b)(4)(iii)(A) of Regulation S-K, not required to be filed, but
will be filed upon request of the Commission.
10.1** Deferred Compensation Plan Agreement between Harold B. Starkey, Jr.
and First Federal Savings and Loan Association and assumed by Coast
(Exhibit 10.16 to Form 8-K dated September 1, 1989)
10.2** Board of Directors Retirement Plan of Coast (Exhibit 10.21 to Form 8-K
dated September 1, 1989)
10.3** Pension Plan of Coast (Exhibit 10.22 to Form 8-K dated September 1,
1989)
10.4** First Amendment to Pension Plan of Coast (Exhibit 10.23 to Form 8-K
dated September 1, 1989)
10.5** Form of Post-Retirement Compensation Arrangement of Coast (Exhibit
10.9 to Form 10-K dated March 30, 1990)
10.6** Executive and Senior Management Short-Term Compensation Incentive
Plans of Coast, effective January 1, 1996
10.7** Amended and Restated Executive Supplemental Retirement Plan of Coast,
dated February
28, 1996
10.8** Form of Deferred Compensation Agreement of Coast, effective January
24, 1996
10.9** 1985 Stock Option and Stock Appreciation Rights Plan of Coast as
amended through February 22, 1989 (Exhibit 10.5 to Form 8-K dated
September 1, 1989)
10.10** Coast Federal Bank, Federal Savings Bank Performance Share Plan for
Key Employees dated July 22, 1992 (Exhibit 10.16 to Form 10-K dated
March 6, 1993)
10.11** Amended and Restated Employment Agreement between Ray Martin and Coast
dated as of January 1, 1996
10.12** Amended and Restated Employment Agreement between Robert L. Hunt II
and Coast dated as of January 1, 1996
10.13** Amended and Restated Employment Agreement between Norman H. Raiden and
Coast dated as of January 1, 1996
10.14** Amended and Restated Employment Agreement between James R. Boyle and
Coast dated as of January 1, 1996
10.15** Deferred Compensation Death Benefit Plan between Leon S. Angvire and
Coast (Exhibit 10.24 to Form 10-K dated March 30, 1990)
10.16** Amended and Restated Employment Agreement between James F. Barritt and
Coast dated as of January 1, 1996
87
EXHIBIT
NUMBER EXHIBIT
------- -------
10.17** Severance Agreement between Gerald I. Rich and Coast dated January 20,
1995 (Exhibit 10.27 to Form 10-K filed March 28, 1995)
10.18** Severance Agreement between Mark T. Neal and Coast dated January 20,
1995 (Exhibit 10.28 to Form 10-K filed March 28, 1995)
10.19** Coast Director Share Purchase Plan adopted April 27, 1994 (Exhibit
10.29 to Form 10-K dated March 28, 1995)
11.1 The statement regarding computation of per share earnings is included
in Note 10 to Registrant's Consolidated Financial Statements and
incorporated herein by this reference
13.1 Not Applicable
22.1 Subsidiaries (Exhibit 22.1 to Form 10-K dated March 28, 1995)
24.1 Consent of KPMG Peat Marwick LLP
- --------
* Exhibits followed by a parenthetical reference are incorporated by reference
herein from the document described therein.
** Indicates employment or compensation agreements affecting past or present
executive officers and directors.
FINANCIAL STATEMENT SCHEDULES
All financial statement schedules have been omitted because they are not
applicable or the required information is shown in the body of this Form 10-K.
REPORTS ON FORM 8-K
No Current Reports on Form 8-K were filed for the three months ended December
31, 1995.
88
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED
ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.
Coast Savings Financial, Inc.
/s/ Ray Martin
By: _________________________________
RAY MARTIN
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER
Date: March 27, 1996
89
SIGNATURES
PURSUANT TO THE REQUIREMENTS OF THE SECURITIES EXCHANGE ACT OF 1934, THIS
REPORT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS ON BEHALF OF THE
REGISTRANT AND IN THE CAPACITIES AND ON THE DATES INDICATED.
NAME CAPACITY DATE
/s/ Ray Martin Chairman of the March 27, 1996
- ------------------------------------- Board, Chief
(RAY MARTIN) Executive Officer
and Director
(Principal
Executive Officer)
/s/ Robert L. Hunt II President, Chief March 27, 1996
- ------------------------------------- Operating Officer
(ROBERT L. HUNT II) and Director
/s/ James F. Barritt Senior Executive March 27, 1996
- ------------------------------------- Vice President and
(JAMES F. BARRITT) Chief Financial
Officer (Principal
Financial and
Accounting Officer)
/s/ Leon S. Angvire Director March 27, 1996
- -------------------------------------
(LEON S. ANGVIRE)
/s/ John C. Argue Director March 27, 1996
- -------------------------------------
(JOHN C. ARGUE)
/s/ Gerald D. Barrone Director March 27, 1996
- -------------------------------------
(GERALD D. BARRONE)
/s/ Joan Milke Flores Director March 27, 1996
- -------------------------------------
(JOAN MILKE FLORES)
/s/ Jack P. Libby Director March 27, 1996
- -------------------------------------
(JACK P. LIBBY)
/s/ James P. Miscoll Director March 27, 1996
- -------------------------------------
(JAMES P. MISCOLL)
/s/ Keith W. Renken Director March 27, 1996
- -------------------------------------
(KEITH W. RENKEN)
/s/ Harold B. Starkey, Jr. Director March 27, 1996
- -------------------------------------
(HAROLD B. STARKEY, JR.)
90
DIRECTORS AND OFFICERS
LEON S. ANGVIRE
JOHN C. ARGUE
GERALD D. BARRONE
JOAN MILKE FLORES
ROBERT L. HUNT II*
President and Chief Operating Officer
JACK P. LIBBY
RAY MARTIN*
Chairman and Chief Executive Officer
JAMES P. MISCOLL
KEITH W. RENKEN
HAROLD B. STARKEY, JR.
Officers
RAY MARTIN*
Chairman and Chief Executive Officer
ROBERT L. HUNT II*
President and Chief Operating Officer
JAMES R. BOYLE*
Senior Executive Vice President Loan Group
NORMAN H. RAIDEN*
Senior Executive Vice President Legal/Appraisal/MIS Group
JAMES F. BARRITT*
Chief Financial Officer and Senior Executive Vice President
HOWARD BENNETT, JR.
Senior Vice President Branch Division
RON FOX
Chief Appraiser and Senior Vice President Appraisal Division
RICHARD E. KREMER
Senior Vice President Marketing/Training Division
MARK T. NEAL
Senior Vice President Corporate Planning/Investor Relations Division
GEOFFREY G. OLSEN
Senior Vice President Legal Division
CHARLES E. O'NEIL
Senior Vice President Savings Operations/Human Resources Division
CAROLYN PHILMON
Senior Vice President Loan Service Division
MICHAEL C. PIERCE
Senior Vice President General Services Division
GERALD I. RICH*
Senior Vice President Controller/Treasurer Division
LEON SCALES
Senior Vice President Wholesale Lending Division
THELMA SHOUSE
Senior Vice President MIS Division
ALAN D. ORECHWA
Senior Vice President Internal Audit/Security/Compliance
ELDON L. RICHARDSON II
Senior Vice President Loan Production/ Mortgage Banking Division
PRISCILLA FINCH*
Corporate Secretary
Assistant Vice President Investor Relations
* Also Officers of Coast Savings Financial, Inc.
91
CORPORATE INFORMATION
Executive Offices
COAST SAVINGS FINANCIAL, INC.
1000 Wilshire Boulevard Los Angeles, CA 90017-2457 (213) 362-2000
Stockholder Information
INVESTOR RELATIONS DEPARTMENT
1000 Wilshire Boulevard Los Angeles, CA 90017-2457 (213) 362-2134
Common Stock
Coast's stock is traded on the New York and Pacific Stock Exchanges under the
ticker symbol CSA.
Stock Transfer Agent and Registrar
CHEMICAL BANK
P.O. Box 7708 San Francisco, CA 94120 (415) 954-9540
Independent Auditors
KPMG PEAT MARWICK LLP
725 South Figueroa Street Los Angeles, CA 90017 (213) 972-4000
Annual Meeting
Sierra Room of the Omni Los Angeles Hotel 930 Wilshire Boulevard Los Angeles,
CA 90017 Wednesday, April 24, 1996, 2:00 pm
Principal Subsidiaries and Affiliates
COAST FEDERAL BANK, FSB
Administrative Offices 8433 Fallbrook Avenue West Hills, CA 91304-3226 (818)
316-8000
COAST FED SERVICES
19900 Plummer Street Chatsworth, CA 91311 (818) 701-7016
92
EXHIBIT INDEX
SEQUENTIALLY
EXHIBIT NUMBERED
NUMBER EXHIBIT PAGE
------- ------- ------------
3.1 Current Certificate of Incorporation of the Registrant (Exhibit 3.0 to
Form 8-K dated September 1, 1989)
3.2 Bylaws of the Registrant (Exhibit 3.1 to Form 8-K dated September 1,
1989)
4.1 Section 4 of the Registrant's Certificate of Incorporation and
Articles III and IX of the Registrant's Bylaws (page 5 of Exhibit 3.0
and pages 1-5 and 13-14 of Exhibit 3.1 to Form 8-K dated September 1,
1989)
Shareholder Rights Plan (Exhibit 1.1 to Form 8-A dated September 1,
4.2 1989)
4.3 Copies of instruments defining the rights of holders of long-term debt
of the Registrant or any of its subsidiaries are, under Item
601(b)(4)(iii)(A) of Regulation S-K, not required to be filed, but
will be filed upon request of the Commission.
10.1** Deferred Compensation Plan Agreement between Harold B. Starkey, Jr.
and First Federal Savings and Loan Association and assumed by Coast
(Exhibit 10.16 to Form 8-K dated September 1, 1989)
10.2** Board of Directors Retirement Plan of Coast (Exhibit 10.21 to Form 8-K
dated September 1, 1989)
10.3** Pension Plan of Coast (Exhibit 10.22 to Form 8-K dated September 1,
1989)
10.4** First Amendment to Pension Plan of Coast (Exhibit 10.23 to Form 8-K
dated September 1, 1989)
10.5** Form of Post-Retirement Compensation Arrangement of Coast (Exhibit
10.9 to Form 10-K dated March 30, 1990)
10.6** Executive and Senior Management Short-Term Compensation Incentive
Plans of Coast, effective January 1, 1996
10.7** Amended and Restated Executive Supplemental Retirement Plan of Coast,
dated February 28, 1996
10.8** Form of Deferred Compensation Agreement of Coast, effective January
24, 1996
10.9** 1985 Stock Option and Stock Appreciation Rights Plan of Coast as
amended through February 22, 1989 (Exhibit 10.5 to Form 8-K dated
September 1, 1989)
10.10** Coast Federal Bank, Federal Savings Bank Performance Share Plan for
Key Employees dated July 22, 1992 (Exhibit 10.16 to Form 10-K dated
March 6, 1993)
10.11** Amended and Restated Employment Agreement between Ray Martin and Coast
dated as of January 1, 1996
10.12** Amended and Restated Employment Agreement between Robert L. Hunt II
and Coast dated as of January 1, 1996
10.13** Amended and Restated Employment Agreement between Norman H. Raiden and
Coast dated as of January 1, 1996
10.14** Amended and Restated Employment Agreement between James R. Boyle and
Coast dated as of January 1, 1996
10.15** Deferred Compensation Death Benefit Plan between Leon S. Angvire and
Coast (Exhibit 10.24 to Form 10-K dated March 30, 1990)
10.16** Amended and Restated Employment Agreement between James F. Barritt and
Coast dated as of January 1, 1996
10.17** Severance Agreement between Gerald I. Rich and Coast dated January 20,
1995 (Exhibit 10.27 to Form 10-K filed March 28, 1995).
10.18** Severance Agreement between Mark T. Neal and Coast dated January 20,
1995 (Exhibit 10.28 to Form 10-K filed March 28, 1995)
10.19** Coast Director Share Purchase Plan adopted April 27, 1994 (Exhibit
10.29 to Form 10-K dated March 28, 1995)
11.1 The statement regarding computation of per share earnings is included
in Note 10 to Registrant's Consolidated Financial Statements and
incorporated herein by this reference
13.1 Not Applicable
22.1 Subsidiaries (Exhibit 22.1 to Form 10-K dated March 28, 1995)
24.1 Consent of KPMG Peat Marwick LLP
- --------
* Exhibits followed by a parenthetical reference are incorporated by reference
herein from the document described therein.
** Indicates employment or compensation agreements affecting past or present
executive officers and directors.