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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, 1996
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 10, 1997, was approximately $906,326,704.
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 10, 1997:
18,591,317.
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 23, 1997, are incorporated by reference into Part III hereof.
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COAST SAVINGS FINANCIAL, INC. 1996 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.................................. 2
Lending Activities............................................ 8
Risk Elements................................................. 14
Credit Concentration and Letters of Credit.................... 17
Nonperforming Assets.......................................... 18
Subsidiaries.................................................. 19
Other Investments............................................. 19
Deposits and Other Sources of Funds........................... 20
Competition................................................... 24
Regulation.................................................... 25
Taxation...................................................... 34
Employees..................................................... 34
Item 2. Properties.................................................... 35
Item 3. Legal Proceedings............................................. 35
Item 4. Submission of Matters to a Vote of Security Holders........... 35
PART II
Item 5. Market for the Registrant's Common Equity and Related
Stockholder Matters........................................... 36
Item 6. Selected Financial Data....................................... 37
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of
Operations................................................... 38
General....................................................... 38
Results of Operation.......................................... 38
Asset/Liability Management.................................... 39
Nonperforming Assets.......................................... 41
Capital Resources and Liquidity............................... 41
Item 8. Financial Statements and Supplementary Data................... 42
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial
Disclosure................................................... 81
PART III
Item 10. Directors and Executive Officers of the Registrant............ 81
Item 11. Executive Compensation........................................ 81
Security Ownership of Certain Beneficial Owners and
Item 12. Management.................................................... 81
Item 13. Certain Relationships and related Transactions................ 81
PART IV
Exhibits, Financial Statement Schedules and Reports on Form 8-
Item 14. K............................................................. 82
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, 1996. 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, 1996, Coast
operated 90 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 comprising the Federal Home Loan Bank System.
OPERATING STRATEGY
Since 1987, 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 Coast's overall capital adequacy, and (iv)
developing primary retail banking relationships with new and existing
customers.
Reducing balance sheet risk and enhancing asset quality. The credit risk
profile of Coast's loan portfolio has been substantially reduced largely due
to management's redirection of Coast's origination efforts to the single-
family residential sector. Coast ceased originating loans outside California
in 1987 and has not originated multifamily, commercial real estate, or
construction loans since 1989 (other than to finance the sale of foreclosed
real estate or to facilitate loan assumptions). In addition, Coast eliminated
its asset allocations in the real estate development and high yield securities
sectors at the beginning of the decade and has also aggressively liquidated
nonperforming assets since the early 1990's.
Increasing core 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) has grown from $80.5 million in 1994,
to $89.3 million in 1995 and $106.4 million in 1996. This increase was a
result of reducing the level of general and administrative expenses, improving
the ratio of interest-earning assets to interest-bearing liabilities,
increasing the amounts of loan servicing related fees and charges and retail
banking and other fee income, and implementing numerous productivity enhancing
process changes to improve loan origination efficiency and branch network
profitability.
Improving overall capital adequacy. 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. Strategies Coast has employed to reduce the amount of capital
required under these requirements include downsizing the balance sheet,
eliminating originations of loans other than one-to-four family residential
loans, reducing capital-intensive and nonperforming assets, and eliminating
the recourse exposure associated with $1 billion of multifamily credit
extensions. Moreover, Coast has increased the amount of its stockholders'
equity and regulatory capital by retaining internally-generated capital and by
completing various capital market transactions.
1
Developing primary retail banking relationships with new and existing
customers. The Company has significantly broadened its financial services
related product offerings in recent 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. Retail bank employees have
undergone comprehensive sales training and integrated marketing support and
incentive-based compensation programs have been installed.
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,
------------------------------------
1996 1995 1994 1993 1992
----- ----- ----- ------ ------
Return on assets(1)(8)................... .13% .39% (.08)% .21% .57%
Return on equity(2)(8)................... 2.56 8.36 (1.70) 4.72 16.09
Equity-to-assets ratio(3)(8)............. 5.00 4.61 4.76 4.48 3.55
Dividend pay-out ratio(4)................ -- -- -- -- --
Effective net spread(5).................. 2.68 2.47 2.48 2.67 2.69
Noninterest expense to average assets(6). 1.93 1.96 2.13 2.41 2.47
Total nonperforming assets ratio(7)...... 1.43 1.37 1.73 2.72 3.82
Total general valuation allowance (in
millions)............................... $93.0 $82.0 $85.0 $120.0 $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) Noninterest expense for 1996 excludes SAIF special assessment.
(7) Total nonperforming assets (as defined under "Risk Elements--Nonperforming
Assets") divided by total assets at the end of period.
(8) Average balances used in the calculation are based on month-end balances.
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 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 Coast's interest-bearing liabilities can be
expected to rise more rapidly than the yield on its 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. As of December 31, 1996,
Coast had $5.16 billion (88%) of loans and $1.78 billion (87%) of MBS tied to
COFI included in the loan and MBS portfolios, which portfolios totaled $5.86
billion and $2.04 billion, respectively.
2
Coast has emphasized the origination of ARMs in order to improve the
interest rate sensitivity of its loan and MBS portfolios. 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, the London Interbank Offered Rate
("LIBOR") and other indices, accounted for 97% of Coast's loan portfolio and
98% of its MBS portfolio at December 31, 1996. 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.
The Company 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-earning asset and interest-bearing liability
categories of the Company as of December 31, 1996, and also the maturity gap
between such repricing or maturing assets and liabilities. The interest rate
sensitivity of the Company'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."
3
ANALYSIS OF REPRICING MECHANISMS
OVER ONE OVER FIVE
WITHIN TO FIVE TO TEN OVER TEN
ONE YEAR YEARS YEARS YEARS TOTAL
-------- -------- --------- -------- ------
(DOLLARS IN MILLIONS)
Interest-earning assets:
Cash and investment securities:
Cash and due from banks....... $ 139 $ -- $-- $-- $ 139
Investment securities(1,2).... 318 4 -- 4 326
Loans:
ARMs(3)....................... 5,444 240 10 -- 5,694
Fixed rate(4)................. 49 51 49 13 162
MBS:
ARMs(3)....................... 2,011 -- -- -- 2,011
Fixed rate(4)................. 7 14 7 4 32
------ ----- ---- ---- ------
Total....................... $7,968 $ 309 $ 66 $ 21 $8,364
====== ===== ==== ==== ======
Interest-bearing liabilities:
Deposits:
Checking accounts............. $ 782 $ -- $-- $-- $ 782
Money market accounts......... 621 -- -- -- 621
Certificates of deposit(1).... 4,499 422 32 -- 4,953
Borrowings:
FHLB advances(1).............. 1,029 75 -- -- 1,104
Other(1)...................... 537 107 56 -- 700
------ ----- ---- ---- ------
Total....................... $7,468 $ 604 $ 88 $-- $8,160
====== ===== ==== ==== ======
Maturity gap...................... $ 500 $(295) $(22) $ 21 $ 204
====== ===== ==== ==== ======
Cumulative maturity gap........... $ 500 $ 205 $183 $204 $ 204
====== ===== ==== ==== ======
Cumulative maturity gap as a
percentage of total assets....... 6% 2% 2% 2% 2%
====== ===== ==== ==== ======
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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.
Because of the inherent lag in the Repricing Mechanism of the ARMs tied to
COFI, interest rate spreads can be generally expected to increase as the index
begins to fall and to decrease as the index begins to rise. 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 accentuate
the increase in spread in a falling interest rate environment and to moderate
the decrease in spread in a rising interest rate environment.
4
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, 1996 VS 1995:
Income from interest-earning
assets:
Loans............................ $ (4,095) $(15,489) $ (138) $(19,722)
MBS.............................. 1,316 11,060 93 12,469
Investment securities............ 2,924 (4,800) (602) (2,478)
-------- -------- ------- --------
145 (9,229) (647) (9,731)
-------- -------- ------- --------
Expense of interest-bearing
liabilities:
Deposits......................... (2,429) 7,108 190 4,869
FHLB advances and other
borrowings...................... (9,076) (20,778) 1,505 (28,349)
-------- -------- ------- --------
(11,505) (13,670) 1,695 (23,480)
-------- -------- ------- --------
Change in net interest income...... $ 11,650 $ 4,441 $(2,342) $ 13,749
======== ======== ======= ========
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
======== ======== ======= ========
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 TABLE
AT OR FOR THE YEAR ENDED DECEMBER 31,
-------------------------------------------------------------------------------
1996 1995
--------------------------------------- ---------------------------------------
AVERAGE RATE-END AVERAGE RATE-END
AVERAGE INCOME/ YIELD/ OF AVERAGE INCOME/ YIELD/ OF
BALANCE(2) EXPENSE COST(3) PERIOD BALANCE(2) EXPENSE COST(3) PERIOD
---------- -------- ------- -------- ---------- -------- ------- --------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans(1)................ $5,657,206 $450,142 7.96% 7.60% $5,850,093 $469,864 8.03% 7.95%
MBS..................... 2,054,246 132,098 6.43 6.42 1,880,350 119,629 6.36 6.60
Federal funds sold...... 55,995 2,639 4.71 5.61 64,901 4,399 6.78 3.77
FHLB stock.............. 88,866 5,186 5.84 6.50 83,908 4,467 5.32 5.16
Other Investment
securities............. 170,153 13,385 7.87 6.50 246,336 14,822 6.02 6.32
---------- -------- ----- ----- ---------- -------- ----- -----
Total interest-earning
assets................ $8,026,466 $603,450 7.52% 7.25% $8,125,588 $613,181 7.55% 7.51%
========== ======== ===== ===== ========== ======== ===== =====
Interest-Bearing
Liabilities:
Deposits:
Checking............... $ 706,554 $ 9,720 1.38% 1.46% $ 553,763 $ 5,675 1.02% 1.27%
Money market........... 650,211 17,211 2.65 2.68 724,281 18,190 2.51 2.59
Time certificates of
deposit............... 4,868,144 258,833 5.32 5.32 4,793,347 257,030 5.36 5.41
---------- -------- ----- ----- ---------- -------- ----- -----
Total deposits......... 6,224,909 285,764 4.59 4.59 6,071,391 280,895 4.63 4.67
---------- -------- ----- ----- ---------- -------- ----- -----
Borrowings:
FHLB advances.......... 753,752 42,052 5.58 5.58 902,159 56,632 6.28 6.10
Short-term............. 805,973 46,348 5.75 5.74 985,164 59,677 6.06 5.81
Long-term.............. 138,101 14,486 10.49 11.10 129,669 14,926 11.51 11.15
---------- -------- ----- ----- ---------- -------- ----- -----
Total borrowings....... 1,697,826 102,886 6.06 6.03 2,016,992 131,235 6.51 6.40
---------- -------- ----- ----- ---------- -------- ----- -----
Total interest-bearing
liabilities........... $7,922,735 $388,650 4.91% 4.91% $8,088,383 $412,130 5.10% 4.95%
========== ======== ===== ===== ========== ======== ===== =====
DIFFERENCE BETWEEN
AVERAGE BALANCE OF
INTEREST-EARNING ASSETS
AND INTEREST-BEARING
LIABILITIES............ $ 103,731 $ 37,205
========== ==========
NET SPREAD.............. $214,800 2.68%(4) 2.35% $201,051 2.47%(4) 2.56%
======== ===== ===== ======== ===== =====
- --------
(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 $(.8) million, $.3 million, $.8 million, $3.7 million,
$4.9 million for the years ended December 31, 1996, 1995, 1994, 1993 and
1992, 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
SPREAD TABLE
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------------------------------
1994 1993
---------------------------------------- ----------------------------------------
RATE-END RATE-END
AVERAGE INCOME/ YIELD/ OF AVERAGE INCOME/ YIELD/ OF
BALANCE(2) EXPENSE COST(3) PERIOD BALANCE(2) EXPENSE COST(3) PERIOD
---------- -------- ------- -------- ---------- -------- ------- --------
(DOLLARS IN THOUSANDS)
INTEREST-EARNING ASSETS:
Loans(1)................ $5,376,946 $382,371 7.11% 7.18% $5,047,296 $389,015 7.71% 7.08%
MBS..................... 1,796,164 93,334 5.20 5.68 2,093,535 114,048 5.45 5.22
Federal funds sold...... 59,578 2,732 4.59 -- 43,268 886 2.05 3.09
FHLB stock.............. 68,916 3,259 4.73 5.69 68,158 2,483 3.64 3.75
Other Investment
securities............. 272,094 12,934 4.75 6.08 300,341 9,215 3.07 3.27
---------- -------- ----- ----- ---------- -------- ----- -----
Total interest-earning
assets................ $7,573,698 $494,630 6.53% 6.82% $7,552,598 $515,647 6.83% 6.28%
========== ======== ===== ===== ========== ======== ===== =====
Interest-Bearing
Liabilities:
Deposits:
Checking............... $469,035 $ 3,380 0.72% 0.65% $ 448,000 $ 4,895 1.09% 0.83%
Money market........... 1,060,119 24,317 2.29 2.47 1,416,000 35,334 2.50 2.27
Time certificates of
deposit............... 4,377,920 190,638 4.35 4.83 4,100,000 193,791 4.73 4.01
---------- -------- ----- ----- ---------- -------- ----- -----
Total deposits......... 5,907,074 218,335 3.70 4.15 5,964,000 234,020 3.92 3.65
---------- -------- ----- ----- ---------- -------- ----- -----
Borrowings:
FHLB advances.......... 767,890 40,621 5.29 6.20 512,050 30,900 6.03 4.92
Short-term............. 737,065 32,677 4.43 6.02 936,800 31,551 3.37 3.39
Long-term.............. 136,354 15,086 11.06 11.02 151,727 17,610 11.61 10.35
---------- -------- ----- ----- ---------- -------- ----- -----
Total borrowings....... 1,641,309 88,384 5.38 6.47 1,600,577 80,061 5.00 4.61
---------- -------- ----- ----- ---------- -------- ----- -----
Total interest-bearing
liabilities........... $7,548,383 $306,719 4.06% 4.63% $7,564,577 $314,081 4.15% 3.79%
========== ======== ===== ===== ========== ======== ===== =====
DIFFERENCE BETWEEN
AVERAGE BALANCE OF
INTEREST-EARNING ASSETS
AND INTEREST-BEARING
LIABILITIES............ $ 25,315 $ (11,979)
========== ==========
NET SPREAD.............. $187,911 2.48%(4) 2.19% $201,566 2.67%(4) 2.49%
======== ===== ===== ======== ===== =====
AT OR FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------------
1992
----------------------------------------
RATE-END
AVERAGE INCOME/ YIELD/ OF
BALANCE(2) EXPENSE COST(3) PERIOD
---------- -------- ------- --------
INTEREST-EARNING ASSETS:
Loans(1)................ $5,541,517 $479,807 8.66% 7.95%
MBS..................... 1,809,785 125,294 6.92 5.92
Federal funds sold...... 167,643 5,676 3.39 2.90
FHLB stock.............. 81,784 1,061 1.30 3.14
Other Investment
securities............. 185,218 7,335 3.96 2.49
---------- -------- ----- -----
Total interest-earning
assets................ $7,785,947 $619,173 7.95% 7.02%
========== ======== ===== =====
Interest-Bearing
Liabilities:
Deposits:
Checking............... $ 465,000 $ 7,769 1.67% 0.97%
Money market........... 1,926,000 69,012 3.58 2.77
Time certificates of
deposit............... 4,320,000 260,104 6.02 5.39
---------- -------- ----- -----
Total deposits......... 6,711,000 336,885 5.02 4.30
---------- -------- ----- -----
Borrowings:
FHLB advances.......... 567,390 40,081 7.06 5.20
Short-term............. 456,616 17,402 3.81 3.58
Long-term.............. 94,245 15,128 16.05 12.70
---------- -------- ----- -----
Total borrowings....... 1,118,251 72,611 6.49 5.42
---------- -------- ----- -----
Total interest-bearing
liabilities........... $7,829,251 $409,496 5.23% 4.54%
========== ======== ===== =====
DIFFERENCE BETWEEN
AVERAGE BALANCE OF
INTEREST-EARNING ASSETS
AND INTEREST-BEARING
LIABILITIES............ $ (43,304)
==========
NET SPREAD.............. $209,677 2.69%(4) 2.48%
======== ===== =====
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.
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 the 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,
------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Loans:
Real estate:
1 to 4 units........ $3,969,881 $3,217,683 $3,278,371 $2,457,860 $2,328,405
More than 4 units... 1,171,826 1,316,559 1,387,656 1,407,295 1,504,530
Commercial.......... 630,040 845,439 897,255 936,141 963,812
---------- ---------- ---------- ---------- ----------
5,771,747 5,379,681 5,563,282 4,801,296 4,796,747
VA-guaranteed and
FHA-insured........ 9,184 12,354 15,825 20,782 28,132
Construction........ -- -- -- -- 6,298
Second mortgage..... 47,122 51,268 53,478 54,497 85,803
---------- ---------- ---------- ---------- ----------
Total real estate
loans............ 5,828,053 5,443,303 5,632,585 4,876,575 4,916,980
Commercial business. 3,098 2,177 146,122 114,693 133,537
Secured by deposits. 6,838 8,557 8,880 10,903 13,054
Overdraft line of
credit............. 18,118 12,459 5,595 5,025 5,707
---------- ---------- ---------- ---------- ----------
Total loans....... 5,856,107 5,466,496 5,793,182 5,007,196 5,069,278
---------- ---------- ---------- ---------- ----------
MBS:
1 to 4 units.......... 1,961,142 2,079,888 1,632,172 1,847,662 2,097,051
More than 4 units..... 82,128 91,913 101,556 124,639 119,850
---------- ---------- ---------- ---------- ----------
2,043,270 2,171,801 1,733,728 1,972,301 2,216,901
---------- ---------- ---------- ---------- ----------
$7,899,377 $7,638,297 $7,526,910 $6,979,497 $7,286,179
========== ========== ========== ========== ==========
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, 1996, 97% 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,
including $145.2 million, $654.2 million and $434.2 million in 1996, 1995 and
1994, respectively, for several reasons. First, MBS are more efficient as
collateral for borrowings than are whole mortgage loans and thus have the
effect of reducing Coast's borrowing costs. Second, a large portion of the MBS
created by Coast 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
8
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 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 unless the
private mortgage insurance, guarantees and/or the subordinated interests are
exhausted. At December 31, 1996, the balance of Coast's MBS consisting of
loans originated by Coast was $2.0 billion. Coast has eliminated or mitigated
credit risk as described above on $852.9 million 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
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, including credit extensions
effected under prior regulations. Pursuant to the current regulation, the
maximum amount which Coast could have loaned to any one borrower (and related
entities) was $92.1 million as of December 31, 1996.
At December 31, 1996, Coast's largest concentration of credit was to five
limited partnerships all of which are affiliates of Lehman Brothers, Inc. At
that date, $241.0 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. These
extensions of credit are excepted from the present OTS loans to one borrower
limitations.
Loan Activity
Single Family Residential Real Estate Lending. In 1996, 1995 and 1994, Coast
originated $1.45 billion, $1.03 billion and $1.74 billion, respectively, of
single family loans. Such loans represented 97%, 91% and 94% of total real
estate loans originated in 1996, 1995 and 1994, respectively, and are all
secured by properties located in California. During 1996, 1995 and 1994,
originations of single family ARMs totaled $1.39 billion, $.99 billion and
$1.71 billion, respectively, and such originations represented 96%, 97% and
98%, respectively, of total single family loans originated.
Coast offers ARMs that have fixed interest rates for periods ranging from
one month to five years and thereafter provide for interest rates that adjust
either monthly or semiannually based on changes in COFI, plus a contractual
margin which ranged from 2.35% to 4.37% at December 31, 1996. At December 31,
1996, $5.33 billion of single family ARMs in Coast's loan and MBS portfolio
had interest rates tied to COFI, and $.43 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.
9
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. Originations of such loans are now 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 20% of its total assets,
provided that amounts in excess of 10% of total assets may be used only for
small business loans. 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.
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,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Real estate loans
originated:
Conventional:
1 to 4 units.......... $1,445,891 $1,026,233 $1,740,587 $1,072,704 $1,315,964
More than 4 units..... 34,233 56,304 95,554 106,944 108,063
Commercial............ 8,146 40,341 19,212 34,875 30,297
---------- ---------- ---------- ---------- ----------
Total conventional
real estate loans
originated......... 1,488,270 1,122,878 1,855,353 1,214,523 1,454,324
Construction.......... -- -- -- -- 6,171
Second mortgage....... 29 201 55 68 2,800
---------- ---------- ---------- ---------- ----------
Total real estate
loans originated... 1,488,299 1,123,079 1,855,408 1,214,591 1,463,295
Commercial business
loans originated....... -- 10,169 45,442 28,635 28,000
Loans exchanged for MBS,
net.................... (145,165) (654,238) (434,156) (342,961) (965,193)
Loans sold.............. (105,329) (44,197) (28,398) (130,062) (286,834)
Principal repayments and
other decreases of
loans.................. (848,194) (761,499) (652,310) (832,285) (917,180)
---------- ---------- ---------- ---------- ----------
Net increase
(decrease) in
loans.............. 389,611 (326,686) 785,986 (62,082) (677,912)
---------- ---------- ---------- ---------- ----------
Loans exchanged for MBS,
net.................... 145,165 654,238 434,156 342,961 965,193
MBS purchased........... -- -- 18,574 10,340 38,091
MBS sold................ -- (35,335) (334,617) (241,886) (222,990)
Principal repayments and
other decreases of MBS. (273,696) (180,830) (356,686) (356,015) (324,904)
---------- ---------- ---------- ---------- ----------
Net increase
(decrease) in MBS.. (128,531) 438,073 (238,573) (244,600) 455,390
---------- ---------- ---------- ---------- ----------
Net increase
(decrease)....... $ 261,080 $ 111,387 $ 547,413 $ (306,682) $ (222,522)
========== ========== ========== ========== ==========
10
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,
--------------------------------------------------------------
1996 1995 1994
-------------------- -------------------- --------------------
PERCENT PERCENT PERCENT
OF TOTAL OF TOTAL OF TOTAL
AMOUNT PORTFOLIO AMOUNT PORTFOLIO AMOUNT PORTFOLIO
---------- --------- ---------- --------- ---------- ---------
(DOLLARS IN THOUSANDS)
Loans:
ARMs.................. $5,693,019 72% $5,213,333 68% $5,508,066 73%
Fixed rate............ 163,088 2 253,163 3 285,116 4
---------- --- ---------- --- ---------- ---
5,856,107 74 5,466,496 72 5,793,182 77
---------- --- ---------- --- ---------- ---
MBS:
ARMs.................. 2,012,121 26 2,136,777 28 1,695,412 22
Fixed rate............ 31,149 -- 35,024 -- 38,316 1
---------- --- ---------- --- ---------- ---
2,043,270 26 2,171,801 28 1,733,728 23
---------- --- ---------- --- ---------- ---
Total loans and MBS. $7,899,377 100% $7,638,297 100% $7,526,910 100%
========== === ========== === ========== ===
The following table presents the contractual maturities of Coast's loans and
MBS in the periods indicated as of December 31, 1996.
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 MILLIONS)
Real estate... $160 $ 74 $111 $183 $416 $ 73 $4,811 $5,828
Commercial.... -- -- -- 3 -- -- -- 3
Other......... 24 1 -- -- -- -- -- 25
MBS........... 1 -- -- -- -- 13 2,029 2,043
---- ---- ---- ---- ---- ---- ------ ------
$185 $ 75 $111 $186 $416 $ 86 $6,840 $7,899
==== ==== ==== ==== ==== ==== ====== ======
At December 31, 1996, loans due after one year included $5.55 billion with
adjustable interest rates and $123.0 million with fixed interest rates. At
December 31, 1996, MBS due after one year included $2.01 billion with
adjustable interest rates and $30.0 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 five-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 respective maturity dates. 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
11
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. During 1996, the net amount of negative
amortization on Coast's ARMs increased by $10.3 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.
The following table sets forth the cumulative amounts of negative
amortization included in the real estate loan portfolio at the dates indicated.
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS)
Single family mortgage................................... $23,862 $13,623
Multifamily mortgage..................................... 714 632
Commercial mortgage...................................... 194 200
------- -------
$24,770 $14,455
======= =======
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 secured as collateral for the mortgage loan.
Prospective borrowers complete an application that includes information with
respect to the applicant's bank accounts, other 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
this guideline was modified to generally qualify borrowers at a minimum rate of
7.5% for single family ARMs. Since December 1993, Coast's general practice has
been 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 owner
occupied 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 the amounts
of both the first mortgage loan and the maximum amount of the home equity
credit line) on a Coast home equity credit line is 90%. Coast originates single
family loans with LTV ratios up to 97% 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%, for which private mortgage
insurance is required.
12
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. In recent years, the primary reasons Coast has sold mortgage loans
have been to reduce asset size or constrain asset growth and to liquidate
newly originated fixed rate product. The marketability of loans, loan
participations and MBS depends on the purchasers' investment limitations,
general market and competitive conditions, mortgage loan demand and other
factors. At December 31, 1996, Coast held $106.1 million of loans designated
as held for sale, which loans had a fair value of approximately $109.6
million.
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 has
had no recourse sales since 1992. 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 which
will yield current market rates of return for the buyers. Gains or losses are
recognized based upon the difference between the proceeds received and the
book values of the loans or participations sold. If Coast retains the
servicing of the loans sold, which it typically does, additional gains or
losses are recognized and receivables or payables are recorded at the time of
sale based upon the net present value of the expected amounts to be received
or paid, which receivables or payables generally result from the difference
between the contractual interest rates received from borrowers and the rates
to be paid to the buyers.
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 periodic fees. Coast was servicing loans for
investors of $3.07 billion, $3.42 billion and $3.96 billion at December 31,
1996, 1995 and 1994, 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 1996 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.
13
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 97% of Coast's loans and MBS are secured by properties located
in California and the performance of it's loan and MBS portfolios can be
significantly impacted by economic conditions and trends in the state. In the
early 1990's California experienced an economic recession which included high
levels of unemployment, declining occupancy and rental rates, and declining
property values. Since 1993, there has been a modest recovery, resulting in
declining unemployment and improving occupancy and rental rates, and
stabilization of property values. Largely due to these factors, and the
reduced risk orientation of Coast's lending policy as discussed previously,
Coast's loans secured by properties located in California which are 90 days or
more delinquent decreased from $151.1 million at December 31, 1992, to $106.4
million at December 31, 1993, $92.3 million at December 31, 1994, $80.2
million at December 31, 1995, and then increased slightly to $82.6 million at
December 31, 1996. 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."
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
conditions warrant. If Nonaccrual Loans at December 31, 1996, had been
interest-earning throughout the year, interest income of $5.2 million would
have been earned on these loans at their respective contractual rates. For the
year ended December 31, 1996, actual interest earned on such loans was $2.2
million. Nonaccrual Loans totaled $82.8 million, $81.4 million, $96.7 million,
$117.1 million and $156.7 million at December 31, 1996, 1995, 1994, 1993 and
1992, 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, 1996 DECEMBER 31, 1995
--------------------------- ----------------------------
OVER 60 OVER 90 OVER 60 OVER 90
TO 90 DAYS DAYS TOTAL TO 90 DAYS DAYS TOTAL
---------- ------- ------- ---------- ------- --------
(DOLLARS IN THOUSANDS)
Single family mortgage.. $ 7,310 $56,740 $64,050 $ 7,196 $43,792 $ 50,988
Multifamily mortgage.... 3,464 19,295 22,759 6,218 25,646 31,864
Commercial mortgage..... 1,796 6,484 8,280 9,609 11,619 21,228
Other................... 346 285 631 179 294 473
------- ------- ------- ------- ------- --------
$12,916 $82,804 $95,720 $23,202 $81,351 $104,553
======= ======= ======= ======= ======= ========
Percent of total loans.. .22% 1.41% 1.63% .42% 1.49% 1.92%
======= ======= ======= ======= ======= ========
14
Impaired Loans
Loans are evaluated for impairment in accordance with the provisions of
Statement of Financial Accounting Standards ("SFAS") No. 114, Accounting by
Creditors for Impairment of a Loan. A loan is impaired when, based on current
information and events, it is probable that a creditor will be unable to
collect all amounts contractually due under a loan agreement. Loans are
evaluated for impairment as part of Coast's normal internal asset review
process. When a loan is determined to be impaired, a valuation allowance is
established based upon the difference between Coast's investment in the loan
and the fair value of the collateral securing the loan. Coast's impaired loans
totaled $116.2 million and $135.2 million at December 31, 1996 and 1995,
respectively, and for the years ended December 31, 1996, 1995 and 1994, the
average investment in impaired loans was $135.5 million, $109.9 million and
$85.7 million, respectively, and for the years then ended, interest income on
such loans totaled $7.3 million, $8.8 million and $6.6 million, respectively.
Interest income on impaired loans which are performing is generally recognized
on the accrual basis. As of December 31, 1996 and 1995, Nonaccrual Loans
included $42.0 million and $37.6 million, respectively, of impaired loans.
Impaired loans at December 31, 1996, included $93.9 million of loans for
which valuation allowances of $16.3 million had been established and $38.6
million of loans for which no allowance was considered necessary. At December
31, 1995, Coast had $127.2 million of impaired loans for which valuation
allowances of $25.6 million had been established and $33.6 million of such
loans for which no allowance was considered necessary. All such allowances and
recoveries of allowances are recorded as adjustment to the allowance for loan
losses. Coast had $1.2 million and no recoveries of previously established
allowances on impaired loans during the years ended December 31, 1996 and
1995, respectively. The provisions of SFAS No. 114 do not apply to large
groups of smaller-balance homogeneous loans that are collectively valued for
impairment.
Restructured Loans
Coast has reached agreements with certain borrowers that provide for
restructuring existing loans secured by income-producing properties.
Restructurings are generally in the form of interest rate adjustments,
extensions of maturities or deferred payments of principal or interest.
Restructured loans totaled $30.2 million, $30.5 million, $37.3 million, $76.4
million and $96.5 million at December 31, 1996, 1995, 1994, 1993 and 1992,
respectively. The restructured loans had effective yields of 8.00% at both
December 31, 1996 and 1995. The loans identified as restructured loans at
December 31, 1996, 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,
1996, 1995 and 1994, $2.4 million, $2.4 million and $2.9 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,
1996, 1995 and 1994, would have totaled $3.2 million $3.2 million and $3.8
million, million, respectively, under their original terms. At December 31,
1996, Coast had no commitments to lend additional funds to these borrowers.
General Valuation Allowance
Coast maintains a general valuation allowance ("GVA") to absorb credit
losses related to its assets and off-balance sheet items. The GVA is reviewed
and adjusted quarterly and based upon a number of factors, including economic
trends, industry experience, industry and geographic concentrations, estimated
collateral values, management's assessment of credit risk inherent in the
portfolio, delinquency migration analysis, historical loss experience, ratio
analysis, asset classifications, and Coast's underwriting practices. Economic
conditions, especially those affecting real estate markets, may change, which
could result in the need for an increased GVA in future periods. In addition,
the OTS, as an integral part of its examination process, periodically reviews
Coast's GVA and may require Coast to establish additional allowances based on
its judgment of information available at the time of the examination.
15
The table shown below reflects the changes in the GVA for the periods
indicated.
RESIDENTIAL COMMERCIAL REAL
REAL ESTATE ESTATE MORTGAGE OFF-BALANCE
MORTGAGE AND OTHER SHEET ITEMS TOTAL
----------- --------------- ----------- -----
(IN MILLIONS)
Balance at December 31,
1991................... $ 61 $ 40 $ 39 $ 140
Additions charged 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 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 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
Additions charged to
operations............. 51 8 11 70
Recoveries.............. 8 -- -- 8
Losses charged.......... (43) (5) (19) (67)
---- ---- ---- -----
Balance at December 31,
1996................... $ 64 $ 20 $ 9 $ 93
==== ==== ==== =====
During 1992 and into 1993, California experienced an economic recession,
fueled in particular by defense industry cutbacks, that was both the broadest
and deepest in more than 50 years. During the latter part of 1993 and through
1996, California has experienced a modest economic recovery, with marginal
improvement in many areas of California. The reductions in the GVA from
December 31, 1991, to December 31, 1996, generally reflect the impact of the
improving California economy and the reduction of risk inherent in the loan
portfolio and overall balance sheet.
During each period, Coast adjusts the balance of the GVA 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 potential
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, 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.
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
16
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
mortgage servicing rights, with such write-off, entitled Elimination of Excess
Mortgage Servicing Rights, included as a reduction of noninterest income in
the accompanying Consolidated Statement of Operations.
Net loans charged off as a percentage of average loans outstanding were
.71%, .68%, 1.77%, 1.57% and .78% for the years ended December 31, 1996, 1995,
1994, 1993 and 1992, respectively. The 1994 net loan charge-offs and their
percentage of average loans were greater than those recorded in other years
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, 1996, Coast had letters of credit outstanding aggregating
$377.6 million. The letters of credit were issued primarily in 1984 and 1985
to enhance the rating 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.
At December 31, 1996, 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. If 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 $15 million.
Coast's largest concentration of credit at December 31, 1996, was to five
limited partnerships all of which are affiliates of Lehman Brothers, Inc. At
that date, $241.0 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.
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 $2.4 million, $5.9 million and $9.2 million in 1996,
1995 and 1994, respectively, and are included in other noninterest income in
the accompanying consolidated statement of operations. The decrease of $3.5
million from 1995 to 1996 in servicing fee income related to housing bonds
resulted primarily from management's decision to defer recognition of a
portion of such fee income for the last half of 1996.
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.
17
NONPERFORMING ASSETS
Coast defines nonperforming assets to include foreclosed real estate owned,
Nonaccrual Loans, 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,
1996 1995 1994 1993 1992
------ ------ ------ ------ ------
(DOLLARS IN MILLIONS)
Foreclosed real estate owned........... $ 41 $ 32 $ 44 $ 101 $ 161
Nonaccrual Loans....................... 83 81 97 117 157
Modified Loans......................... -- -- 1 2 1
------ ------ ------ ------ ------
Total nonperforming assets............. $ 124 $ 113 $ 142 $ 220 $ 319
====== ====== ====== ====== ======
Total assets........................... $8,705 $8,252 $8,197 $8,095 $8,352
====== ====== ====== ====== ======
Ratio of total nonperforming assets to
total assets.......................... 1.43% 1.37% 1.73% 2.72% 3.82%
====== ====== ====== ====== ======
The following table highlights certain overall ratios with respect to
Coast's GVA as of the dates indicated.
AS OF DECEMBER 31,
----------------------------
1996 1995 1994 1993 1992
---- ---- ---- ---- ----
GVA to Nonaccrual Loans........................ 112% 101% 88% 103% 89%
GVA to nonperforming assets.................... 75 73 60 55 44
Management believes the historical progress in reducing nonperforming assets
is generally attributable to the marginally improved economy in California,
the now generally stabilized property values in Coast's primary market areas,
the diminished risk profile of the overall loan portfolio, and the continued
adherence to 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 widely-publicized improvement in the economic outlook for
California.
The following table sets forth the components of nonperforming assets as of
December 31, 1996.
PERCENT
NONPERFORMING
ASSETS OF
NONPERFORMING ASSETS TOTAL TOTAL
-------------------- -------------- -------------
(IN THOUSANDS)
Nonaccrual Loans:
Single family residential................... $ 56,740 45.7%
Multifamily residential..................... 19,295 15.6
Commercial and other........................ 6,769 5.4
-------- -----
82,804 66.7
Foreclosed real estate owned:
Single family residential................... 22,708 18.3
Multifamily residential..................... 6,324 5.1
Commercial and other........................ 12,227 9.9
-------- -----
41,259 33.3
-------- -----
Total nonperforming assets.................... $124,063 100.0%
======== =====
18
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 also provides a range of trustee services, including
acting as trustee on deeds of trust held by Coast. CFS reported pretax
earnings of $11.4 million and $11.0 million for the years ended December 31,
1996 and 1995, respectively, which results include commissions earned on
investment, insurance and related products of $13.1 million and $12.7 million,
respectively. For segment reporting related to CFS, see Note 18 of Notes to
Consolidated Financial Statements.
Asset-Based Lending
On September 30, 1995, Coast terminated its asset-based lending activity
through the sale of its former subsidiary, CBCC. At the date of sale, CBCC had
a loan portfolio of $135.8 million. The consolidated statement of operations
for the year ended December 31, 1995, includes a pretax gain of $7.5 million
resulting from the sale of CBCC.
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 ordinary operations. Such investments
are summarized in the following table as of the dates indicated.
DECEMBER 31,
---------------------------------------------
1996 1995 1994
--------------- -------------- --------------
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:
Repurchase agreements.......... $100.0 $100.0 $ -- $ -- $ -- $ --
Federal funds sold............. 94.0 94.0 28.0 28.0 -- --
------ ------ ----- ----- ----- -----
194.0 194.0 28.0 28.0 -- --
------ ------ ----- ----- ----- -----
Not qualifying for regulatory
liquidity:
Commercial paper............... 4.8 4.8 2.4 2.4 2.4 2.4
------ ------ ----- ----- ----- -----
Federal funds sold and other
short term investments........ 198.8 198.8 30.4 30.4 2.4 2.4
------ ------ ----- ----- ----- -----
Investment securities:
Qualifying for regulatory
liquidity:
U.S. Treasury securities....... -- -- -- -- 4.8 4.8
------ ------ ----- ----- ----- -----
Not qualifying for regulatory
liquidity:
Commercial paper, custodial.... 24.6 24.6 24.3 24.3 32.6 32.6
Repurchase agreements,
custodial..................... 2.3 2.3 3.4 3.4 -- --
Other marketable securities,
custodial..................... .4 .4 .4 .4 .1 .1
------ ------ ----- ----- ----- -----
27.3 27.3 28.1 28.1 32.7 32.7
------ ------ ----- ----- ----- -----
Investment securities.......... 27.3 27.3 28.1 28.1 37.5 37.5
------ ------ ----- ----- ----- -----
$226.1 $226.1 $58.5 $58.5 $39.9 $39.9
====== ====== ===== ===== ===== =====
As of December 31, 1996, the weighted average yield on the short-term
investment securities listed above was 6.12%.
19
The carrying and fair values of long-term investment securities are shown in
the following table at the dates indicated.
DECEMBER 31,
--------------------------------------------
1996 1995 1994
-------------- -------------- --------------
CARRYING FAIR CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE VALUE VALUE
-------- ----- -------- ----- -------- -----
(IN MILLIONS)
Qualifying for regulatory
liquidity:
U.S. Agency securities:
Held to maturity................ $ 4.0 $ 4.0 $ -- $ -- $ -- $ --
U.S. Treasury Securities:
Held to maturity................ -- -- 40.3 40.5 40.7 39.8
----- ----- ----- ----- ----- -----
4.0 4.0 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................ 3.5 3.7 3.6 3.7 3.7 3.7
Other marketable securities:
Held to maturity................ 1.0 1.0 .8 .8 .6 .6
----- ----- ----- ----- ----- -----
4.5 4.7 4.4 4.5 4.3 4.3
----- ----- ----- ----- ----- -----
$ 8.5 $ 8.7 $44.7 $45.0 $45.0 $44.1
===== ===== ===== ===== ===== =====
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, 1996.
WEIGHTED
REMAINING MATURITY AMOUNT AVERAGE YIELD
------------------ ------------- -------------
(IN MILLIONS)
Within one year................................ $1.0 7.00%
After one through two years.................... 4.0 6.36
After ten years................................ 3.5 7.21
---- ----
$8.5 6.79%
==== ====
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. (See "Management's Discussion and Analysis of Financial Condition and
Results of Operations--Results of Operations.")
Deposits
Coast's primary source of funds is retail deposits obtained through its 90
retail banking offices. Coast attracts deposits from the general public and
offers a wide assortment of accounts and rates. Coast offers checking
accounts, various money market accounts, fixed interest rate certificates with
varying maturities and individual retirement and Keogh retirement accounts.
Another potential source of funding is broker-originated deposits, although
in recent years Coast has not utilized such deposits as interest rates on them
have been higher than on comparable retail deposits and alternative wholesale
sources of funds. At December 31, 1996 Coast's residential broker-originated
deposits totaled $30.6 million.
20
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 and into alternative 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
retain 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.
FOR THE YEAR ENDED DECEMBER 31, 1996
------------------------------------------------
1996 1995 1994 1993 1992
-------- -------- -------- -------- --------
(IN MILLIONS)
Deposits..................... $ 16,796 $ 14,758 $ 13,922 $ 12,146 $ 12,269
Withdrawals.................. (16,810) (14,693) (14,128) (12,521) (13,172)
-------- -------- -------- -------- --------
Net cash deposits flow..... (14) 65 (206) (375) (903)
Accounts obtained through
acquisitions of branches.... -- 149 -- -- --
Accounts disposed of through
sales of branches........... -- (209) -- (35) (314)
Interest credited............ 247 239 177 182 253
-------- -------- -------- -------- --------
Net increase (decrease) in
deposits.................. $ 233 $ 244 $ (29) $ (228) $ (964)
======== ======== ======== ======== ========
21
The following table shows the amounts of Coast's deposits by type of account
at the dates indicated.
DECEMBER 31,
------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(IN THOUSANDS)
Demand:
Checking accounts..... $ 782,416 $ 632,025 $ 464,321 $ 448,325 $ 475,170
---------- ---------- ---------- ---------- ----------
Savings:
Money market.......... 621,410 666,019 866,569 1,186,787 1,760,187
---------- ---------- ---------- ---------- ----------
Time:
Currently offered:
Less than 90-day.... 3,260 9,551 19,471 29,331 62,837
90-day.............. 11,342 21,158 35,424 74,628 202,155
Six-month........... 98,375 76,050 238,496 1,465,925 561,196
Seven-month......... 2,297,414 1,689,716 1,324,501 94,878 138,010
Eight-month......... 24,907 74,831 458,358 63,620 129,456
Nine-month.......... 17,468 34,754 213,575 915,276 129,298
Ten-month........... 115,264 670,174 38,959 -- --
One-year and
fourteen-month..... 1,743,239 1,433,381 1,080,919 295,336 923,709
Eighteen-month and
two-year........... 299,827 412,105 686,503 777,703 1,284,973
Three-year.......... 26,935 39,478 89,915 139,329 130,895
Four-year........... 17,101 23,689 32,665 54,684 37,305
More than four-year. 261,453 280,739 281,723 293,285 230,506
Public agency
deposits........... -- 100 297 4,150 642
Broker-originated... 30,570 34,724 40,874 55,290 60,369
---------- ---------- ---------- ---------- ----------
4,947,155 4,800,450 4,541,680 4,263,435 3,891,351
---------- ---------- ---------- ---------- ----------
Discontinued products:
Less than one-year.. 828 1,676 4,099 6,728 3,528
One-year to two-
year............... 300 500 2,817 2,503 5,370
Over two-year to
four-year.......... 405 350 195 501 377
Over four years..... 3,934 22,452 127 280 147
---------- ---------- ---------- ---------- ----------
5,467 24,978 7,238 10,012 9,422
---------- ---------- ---------- ---------- ----------
Total time........ 4,952,622 4,825,428 4,548,918 4,273,447 3,900,773
---------- ---------- ---------- ---------- ----------
$6,356,448 $6,123,472 $5,879,808 $5,908,559 $6,136,130
========== ========== ========== ========== ==========
The following table sets forth the amounts of deposits as of the dates
indicated by interest rate categories.
DECEMBER 31,
----------------------
1996 1995 1994
------ ------ ------
(DOLLARS IN
MILLIONS)
0.00- 1.99%....................................... $ 520 $ 480 $ 489
2.00- 2.99%....................................... 339 398 606
3.00- 3.99%....................................... 608 574 1,193
4.00- 4.99%....................................... 550 1,442 1,780
5.00- 5.99%....................................... 4,083 2,358 1,263
6.00- 6.99%....................................... 135 723 414
7.00-10.99%....................................... 121 148 135
------ ------ ------
$6,356 $6,123 $5,880
====== ====== ======
Weighted average interest rate.................... 4.59% 4.67% 4.15%
====== ====== ======
22
The following table presents the amount of deposits by interest rate
categories at December 31, 1996, which mature during the periods indicated.
ACCOUNTS WHICH MATURE IN
----------------------------------
AFTER
1997 1998 1999 2000 2000 TOTAL
------ ---- ---- ---- ----- ------
(IN MILLIONS)
0.00- 1.99%............................. $ 520 $-- $-- $-- $-- $ 520
2.00- 2.99%............................. 339 -- -- -- -- 339
3.00- 3.99%............................. 608 -- -- -- -- 608
4.00- 4.99%............................. 533 15 1 1 -- 550
5.00- 5.99%............................. 3,764 293 18 5 3 4,083
6.00- 6.99%............................. 87 22 13 7 6 135
7.00-10.99%............................. 52 20 10 3 36 121
------ ---- ---- ---- ---- ------
$5,903 $350 $ 42 $ 16 $ 45 $6,356
====== ==== ==== ==== ==== ======
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,
1996.
REMAINING TERM TO MATURITY (IN MONTHS) AMOUNT
-------------------------------------- ------
(IN MILLIONS)
Three or less................................................ $ 496
Over three to six............................................ 341
Over six to twelve........................................... 286
Over twelve.................................................. 91
------
$1,214
======
Borrowings and Other Financing Transactions
Other potential sources of funds available to Coast include a line of credit
with the FHLB of San Francisco, reverse 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, such access can be limited from
time to time by various external factors including market conditions, Coast's
credit ratings and general economic conditions.
At December 31, 1996, FHLB advances were $1.10 billion, and the amount of
additional credit available from the FHLB was $1.39 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 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, 1996, 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, 1996, Coast had pledged $3.6 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.
23
The following table sets forth certain information with respect to Coast's
borrowings at the dates indicated.
DECEMBER 31,
----------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
FHLB advances (1)....... $1,104,200 $ 804,250 $ 954,450 $ 704,200 $1,094,950
Reverse repurchase
agreements (1)......... 418,789 546,153 714,689 742,196 401,478
Federal funds purchased
(1).................... 149,466 110,120 19,822 80,581 58,513
Capital notes........... 55,997 55,746 55,495 55,244 112,577
Senior notes............ 56,532 56,227 55,922 55,616 --
Convertible subordinated
debentures............. -- -- -- -- 593
Other................... 18,734 20,840 19,183 19,544 35,837
---------- ---------- ---------- ---------- ----------
Total borrowings...... $1,803,718 $1,593,336 $1,819,561 $1,657,381 $1,703,948
========== ========== ========== ========== ==========
Weighted average
interest rate.......... 5.91% 6.28% 6.47% 4.61% 5.42%
========== ========== ========== ========== ==========
- --------
(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 borrowings is set
forth below.
1996 1995 1994
-------- -------- --------
(DOLLARS IN MILLIONS)
FHLB Advances:
Balance......................................... $1,104.2 $ 804.3 $ 954.5
Average amount outstanding (1).................. 757.0 881.7 808.7
Maximum amount outstanding (2).................. 1,104.2 1,190.1 1,059.5
Weighted average rate:
At end of year................................ 5.51% 6.04% 6.19%
During year (1)............................... 5.66 6.31 5.30
Reverse repurchase agreements:
Balance......................................... $ 418.8 $ 546.2 $ 714.7
Average amount outstanding (1).................. 650.7 856.7 668.1
Maximum amount outstanding (2).................. 959.9 1,123.3 766.0
Weighted average rate:
At end of year................................ 5.40% 5.80% 6.05%
During year (1)............................... 5.39 5.97 4.42
Federal funds purchased:
Balance......................................... $ 149.5 $ 110.1 $ 19.8
Average amount outstanding (1).................. 144.1 70.6 62.8
Maximum amount outstanding (2).................. 202.7 110.1 96.0
Weighted average rate:
At end of year................................ 6.39% 5.37% 5.06%
During year (1)............................... 5.70 6.08 4.31
- --------
(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.
24
Coast faces substantial competition for deposits from other savings banks,
savings and thrift institutions, commercial banks, money market mutual funds,
credit unions and others providing alternative 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 deposits by offering a variety of
deposit accounts at competitive rates, maintaining convenient business hours
at its retail banking offices, offering telephonic banking services, and
providing automated teller machines at its retail banking offices and selected
other locations which provide 24-hour banking 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 June 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
25
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 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 $90.9 million in
FHLB of San Francisco stock at December 31, 1996.
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. During 1996, 1995 and 1994, Coast
recorded dividend income of $5.2 million, $4.5 million and $3.3 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
Federal Savings and Loan Insurance Corporation ("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 implemented a risk-based federal deposit insurance
premium system under which savings institutions were previously assigned a
deposit insurance premium rate ranging from 0.23% to 0.31%. Coast paid $16.8
million, $17.3 million and $16.4 million in deposit insurance premiums to the
SAIF in 1996, 1995 and 1994, respectively.
26
During the third quarter of 1996, federal legislation was enacted which,
among other things, recapitalized the SAIF through a one-time special
assessment for SAIF members, such as Coast. The special assessment was at an
assessment rate of .657% on Coast's assessment base as of March 31, 1995.
Coast recorded a one-time charge of $42.0 million for the special assessment.
The federal legislation also provided that, beginning January 1, 1997, the
same risk-based assessment schedule applies to both SAIF members and BIF
members-- $0.00 to $0.27 per $100 of deposits. The recapitalization of the
SAIF is expected to result in lower deposit insurance premiums in the future
for most SAIF-insured institutions, including Coast.
Additionally, the new federal legislation enacted in the third quarter of
1996 provides for full pro rata sharing by all federally-insured institutions
by January 1, 2000, of the obligation, now borne entirely by SAIF-insured
institutions, to pay the interest on the bonds (commonly referred to as the
"FICO Bonds") that were issued by a specially created federal corporation for
the purpose of funding the resolution of failed thrift institutions. Beginning
on January 1, 1997 through January 1, 2000 (or January 1, 1999 if the bank and
savings institution charters are then merged), FICO premiums for the BIF and
SAIF insured deposits are $0.013 and $0.064 per $100 of deposits,
respectively. The legislation provides for the merger of the BIF and the SAIF
on January 1, 1999, into a newly created Deposit Insurance Fund, provided that
the bank and savings association charters are combined by that date. If the
charters have been merged and the Deposit Insurance Fund created, pro rata
FICO premium sharing will begin on January 1, 1999.
On August 20, 1996, the President signed the Small Business Job Protection
Act (the "Act") into law. The Act contains a number of provisions affecting
financial institutions including the repeal of the reserve method of
accounting for bad debts for savings institutions, effective for taxable years
beginning after 1995. Coast will be required to recapture its "applicable
excess reserves", which are its federal tax bad debt reserves in excess of the
base year reserve amount described below. Coast will include one-sixth of its
applicable excess reserves in taxable income in each year from 1996 through
2001. As of December 31, 1995, Coast had approximately $6.0 million of
"applicable excess reserves." As of December 31, 1996, Coast had fully
provided for the tax related to this recapture. The base year reserves will
continue to be subject to recapture, and Coast could be required to recognize
a tax liability if: (i) Coast fails to qualify as a "bank" for federal income
tax purposes; (ii) certain distributions are made with respect to the stock of
the bank; (iii) the bad debt reserves are used for any purpose other than to
absorb bad debt losses; or (iv) there is a change in tax law. The enactment of
this legislation is expected to have no material impact on Coast's operations
or financial position.
In accordance with SFAS No. 109, "Accounting for Income Taxes", a deferred
liability has not been established for the tax bad debt base year reserves of
Coast. The base year reserves are generally the balance of reserves as of
December 31, 1987, reduced proportionately for reductions in Coast's loan
portfolio since that date. At December 31, 1996, the amount of those reserves
was approximately $103 million. The amount of the unrecognized deferred tax
liability at December 31, 1996, was approximately $36 million. This deferred
tax liability could be recognized in the future under the conditions described
in the preceding paragraph.
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, 1996, were 5.13% and 4.61%, respectively, which exceeded the
applicable requirements.
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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 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 most
recent 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.
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.
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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, 1996, the outstanding principal balances of loans Coast had sold with
recourse or subordination totaled $359.4 million, and the amount of capital
required to be maintained against such off-balance sheet items was $19.0
million, which included $.9 million determined based on recourse amounts
representing recourse percentages which are less than the applicable risk-
based capital percentage, and $18.1 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 then-existing 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, 1996, 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.
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, (ii) that the institution is not adequately
managing these risks, or (iii) significant exposure to market risk. For this
purpose, however, the agencies have
29
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 ("Central") 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 and not included as capital. In June 1992,
Coast filed an action in the United States Court of Federal Claims seeking
monetary damages for breach of the contractual agreement with the FSLIC. In
three cases with similar contractual issues, the Court of Federal Claims ruled
in favor of the plaintiff thrift institutions on the issue of liability of the
federal government for breach of contract. On July 8, 1996, the United States
Supreme Court affirmed the Court of Federal Claims ruling in these cases (the
"Winstar Decision"). Coast has pending with the Court of Federal Claims a
motion for partial summary judgment with respect to the issue of liability of
the federal government for breach of the contractual agreement with the FSLIC.
In the event that the Court of Federal Claims grants such motion in accordance
with the Winstar Decision, the Court of Federal Claims must then determine the
amount of damages owing to Coast. No prediction can be made as what damages
might be awarded to Coast. See Item 3. "Legal Proceedings" for additional
information concerning Coast's lawsuit.
The following table reflects, in both dollars and ratios, Coast's regulatory
capital position as of December 31, 1996, as well as the requirements at that
date.
ACTUAL REQUIRED
------------ ------------
AMOUNT RATIO AMOUNT RATIO
------ ----- ------ -----
(DOLLARS IN MILLIONS)
Risk-based....................................... $584 10.87% $430 8.00%
Core............................................. 461 5.33 259 3.00
Tangible......................................... 461 5.33 130 1.50
See Note 11 of Notes to Consolidated Financial Statements for additional
regulatory capital amounts and ratios.
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
30
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.
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 date
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, 1996 and 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.
31
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 restrictions 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. The FDIC is
authorized to restrict the activities of any critically undercapitalized
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, and small business loans, credit card
loans and student loans. At December 31, 1996, Coast's qualified thrift
investments were approximately 90% of portfolio assets, calculated on a
monthly average, rolling 12-month "look-back" basis as prescribed in the
applicable regulations. 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.
32
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 (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, 1996, Coast met its minimum capital requirements.
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 insurance for single
family loans with a loan-to-value ratios higher than 80%.
33
TAXATION
General
Federal Income Tax. On August 20, 1996, the President signed the Small
Business Job Protection Act (the "Act"), under which "large" thrifts ($500
million or more in assets) will be required to use the specific charge-off
method to compute their bad debt deductions for tax years beginning after
1995. Under prior law a savings institution that met certain definitional
tests relating to the composition of its assets and the sources of its income
(a "Qualifying Savings Institution") was permitted to establish reserves for
bad debts and to make annual additions thereto under the experience method
("Experience Deduction") which qualified as deductions from taxable income.
Alternatively, a Qualifying Savings Institution could have elected 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
deductions ("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.
The availability of the Percentage Deduction, 8% of taxable income prior to
repeal by the Act, had permitted qualifying savings institutions or thrifts to
be taxed at a lower effective federal income tax rate (32.2%) than that
generally applicable to corporations (35%), for tax years beginning prior to
1996. For the period from 1981 through 1995, however, Coast claimed Experience
Deductions since this method was more favorable.
The Act also requires a thrift to include in income its "applicable excess
reserves," which are the excess of federal tax bad debt reserves at December
31, 1995, over its base year reserve amount. The base year reserve is
generally the balance of reserves as of December 31, 1987, reduced
proportionately for reductions in Coast's loan portfolio since that date.
Coast will include one-sixth of its applicable excess reserves in taxable
income in each year from 1996 through 2001.
If Coast's base year 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 so used, plus an amount equal to the tax
attributable thereto, would be subject to federal income tax at the then
applicable rates.
Coast is also 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 preferences common to savings institutions such as
Coast include 75% of the excess of Coast's "adjusted current earnings" over
its regular taxable income. For any taxable year in which its regular taxable
income is fully offset by net operating loss carryforwards, Coast will incur
an alternative minimum tax liability equal to approximately 2% of its
alternative minimum taxable income.
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. The Internal Revenue Service
is currently examining the Company's tax returns for the years 1992 and 1993.
The Company does not anticipate that the examinations will result in any
material adverse effect on its financial condition or results of operations.
EMPLOYEES
At December 31, 1996, Coast had approximately 1,465 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.
34
ITEM 2. PROPERTIES
Coast owns 13 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 2033.
Lease payments were $19.2 million in 1996 and $19.4 million in 1995. Coast's
net investment in branch offices, premises, equipment and leaseholds was $95.0
million at December 31, 1996.
ITEM 3. LEGAL PROCEEDINGS
On April 10, 1987, Coast acquired substantially all of the assets and
liabilities of Central 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. In three cases
with similar contractual issues, the Court of Federal Claims ruled in favor of
the plaintiff thrift institutions on the issue of liability of the federal
government for breach of contract. On July 8, 1996, the United States Supreme
Court affirmed the Court of Federal Claims ruling in these cases (the "Winstar
Decision"). Coast has pending with the Court of Federal Claims a motion for
partial summary judgment with respect to the issue of liability of the federal
government for breach of the contractual agreement with the FSLIC. In the
event that the Court of Federal Claims grants such motion in accordance with
the Winstar Decision, the Court of Federal Claims must then determine the
amount of damages owing to Coast. No prediction can be made as what damages
might be awarded to Coast.
There are various actions pending against Coast or the Company but, in the
opinion of management, the probable liability resulting from such suits is
unlikely, individually or in the aggregate, to have a material effect on Coast
or the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Not applicable.
35
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 3,803 stockholders of record at
December 31, 1996. 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, 1996, and the aforementioned indenture
restrictions, the Company had approximately $1.2 million available for
dividend distributions at December 31, 1996. 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 $71.4 million available for distribution at December 31, 1996.
In addition, payment of dividends in excess of Coast's accumulated earnings
and profits as calculated for tax purposes (approximately $144 million at
December 31, 1995) 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.
36
ITEM 6. SELECTED FINANCIAL DATA
COAST SAVINGS FINANCIAL INC. AND SUBSIDIARIES
FIVE YEAR CONSOLIDATED FINANCIAL SUMMARY
AT OR FOR THE YEAR ENDED DECEMBER 31,
---------------------------------------------------------
1996 1995 1994 1993 1992
---------- ---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
FINANCIAL CONDITION
Total assets............ $8,704,952 $8,251,680 $8,196,517 $8,094,817 $8,351,826
Loans receivable,
net(1)................. 5,856,107 5,466,496 5,793,182 5,007,196 5,069,278
MBS(1).................. 2,043,270 2,171,801 1,733,728 1,972,301 2,216,901
Investment securities,
short-term investments,
federal funds sold and
FHLB stock(1).......... 325,510 189,016 164,181 607,471 496,811
Goodwill................ 6,238 7,332 11,504 12,927 13,841
Deposits................ 6,356,448 6,123,472 5,879,808 5,908,559 6,136,130
FHLB advances and other
borrowings............. 1,747,721 1,537,590 1,764,066 1,602,137 1,590,778
Capital notes and other
subordinated debt...... 55,997 55,746 55,495 55,244 113,170
Stockholders' equity(2). 424,531 417,434 375,214 393,568 325,745
========== ========== ========== ========== ==========
OPERATIONS
Net interest income..... $ 214,800 $ 201,051 $ 187,911 $ 201,566 $ 209,677
Provision for loan
losses................. 70,000 40,000 75,000 61,000 46,000
---------- ---------- ---------- ---------- ----------
Net interest income
after provision for
loan losses........... 144,800 161,051 112,911 140,566 163,677
---------- ---------- ---------- ---------- ----------
Noninterest income:
Loan servicing fees and
charges............... 12,671 13,518 15,231 19,155 21,306
Gain on sale of
subsidiary............ -- 7,549 -- -- --
Gain (loss) on sale of
loans and securities.. (304) 116 (540) 6,653 7,539
Other.................. 37,738 36,436 28,233 34,485 35,824
---------- ---------- ---------- ---------- ----------
50,105 57,619 42,924 60,293 64,669
---------- ---------- ---------- ---------- ----------
Noninterest expense:
General and
administrative........ 158,601 161,722 160,278 160,950 153,732
SAIF special
assessment............ 41,978 -- -- -- --
Real estate operations. 3,881 4,090 10,088 34,259 52,779
Amortization of
goodwill.............. 1,094 1,221 1,424 1,413 1,467
---------- ---------- ---------- ---------- ----------
205,554 167,033 171,790 196,622 207,978
---------- ---------- ---------- ---------- ----------
Earnings (loss) from
continuing operations
before income tax
expense (benefit) and
cumulative effect of
change in accounting
for income taxes...... (10,649) 51,637 (15,955) 4,237 20,368
Income tax expense
(benefit).............. (21,485) 18,835 (9,417) (12,999) (16,746)
---------- ---------- ---------- ---------- ----------
Earnings (loss) before
cumulative effect of
change in accounting
for income taxes...... 10,836 32,802 (6,538) 17,236 37,114
Cumulative effect of
change in accounting
for income taxes....... -- -- -- -- 10,914
---------- ---------- ---------- ---------- ----------
Net earnings (loss)... $ 10,836 $ 32,802 $ (6,538) $ 17,236 $ 48,028
========== ========== ========== ========== ==========
Per share data:
Stockholders' equity... $ 22.84 $ 22.46 $ 20.33 $ 21.32 $ 20.24
Fully diluted earnings
(loss):
Before cumulative
effect of change in
accounting for income
taxes................. .56 1.71 (.35) .94 2.25
Cumulative effect of
change in accounting
for income taxes...... -- -- -- -- .67
---------- ---------- ---------- ---------- ----------
Net earnings (loss)... $ .56 $ 1.71 $ (.35) $ .94 $ 2.92
========== ========== ========== ========== ==========
Dividends declared..... $ -- $ -- $ -- $ -- $ --
========== ========== ========== ========== ==========
Number of full service
retail banking offices. 90 89 92 88 89
- --------
(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."
37
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, 1996. See Item
1. "Business--Operating Strategy."
The Company reported net earnings of $10.8 million and $32.8 million, and a
net loss of $6.5 million, for the years ended December 31, 1996, 1995 and
1994, respectively. Primary and fully diluted earnings per share of common
stock were $.56 for 1996. The primary and fully diluted earnings per share of
common stock were $1.72 and $1.71, respectively, for 1995. Primary and fully
diluted loss per share of common stock was $.35 for 1994.
RESULTS OF OPERATIONS
Interest Income and Expense
Interest income was $603.5 million, $613.2 million and $494.6 million for
the years ended December 31, 1996, 1995 and 1994, respectively. The decrease
of $9.7 million in 1996 compared to 1995 resulted from a decrease of $99.1
million in the average amount of interest-earning assets. The $118.6 million
increase in interest income in 1995 compared to 1994 resulted from a 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.
During 1996, Coast received $5.2 million of dividends on an average balance
of FHLB stock of $88.9 million, compared to $4.5 million of dividends on an
average balance of FHLB stock of $83.9 million, and $3.3 million of dividends
on an average balance of such stock of $68.9 million during 1995 and 1994,
respectively. The effective yield on FHLB of San Francisco stock was 5.84%,
5.32% and 4.73% for the years ended December 31, 1996, 1995 and 1994,
respectively. At December 31, 1996, Coast held $90.9 million of FHLB of San
Francisco stock as compared to $85.8 million and $79.3 million of such stock
at December 31, 1995 and 1994, respectively.
Interest expense was $388.7 million, $412.1 million and $306.7 million for
the years ended December 31, 1996, 1995 and 1994, respectively. The $23.4
million decrease in 1996 compared to 1995 resulted primarily from a decrease
of $165.6 million in average interest-bearing liabilities, as well as from a
decrease in the average cost of interest-bearing liabilities of .19%, to
4.91%. The $105.4 million increase in interest expense 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. See discussion below under
"Capital Resources and Liquidity."
The average cost of deposits for the years ended December 31, 1994 and 1995,
increased from 3.70% to 4.63%, respectively. During 1996, the average cost of
deposits decreased to 4.59%. The increase during 1995 and the decrease in the
cost of deposits during 1996 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 1996, 1995 and 1994, Coast established $70.0 million, $40.0 million
and $75.0 million, respectively, of provisions for loan losses. The increase
in the provision for loan losses from 1995 to 1996 was attributable to the
establishment of a specific valuation allowance of $10 million on a
multifamily project in default that is guaranteed by a Coast letter of credit,
and to management's decision to increase the loan-related GVA by approximately
$20 million. (See Item 1. "Business--Risk Elements--General Valuation
Allowance.")
38
Noninterest Income
Noninterest income decreased by $7.5 million in 1996 compared to 1995 and
increased by $14.7 million in 1995 compared to 1994. Noninterest income for
1995 included a $7.5 million gain on the sale of CBCC, and for 1994 included a
nonrecurring charge of $9.9 million related to the elimination of the recourse
on approximately $1 billion of multifamily loans. (For additional information,
see Item 1. "Business--Subsidiaries--Asset-Based Lending.")
Loan servicing fees and charges were $12.7 million, $13.5 million and $15.2
million for the years ended December 31, 1996, 1995 and 1994, respectively.
This element of other income arises principally from servicing loans sold to
investors (the outstanding balances of which were $3.07 billion, $3.42 billion
and $3.96 billion at December 31, 1996, 1995 and 1994, respectively),
prepayment and late fees charged to borrowers, and escrow fees.
Other income in 1996 was $37.4 million compared to $36.7 million in 1995 and
$38.1 million in 1994. 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 $32.1 million for 1996 and $26.9 million and $23.1 million for
the years ended December 31, 1995 and 1994, respectively, and servicing fee
income related to housing bonds was $2.4 million, $5.9 million and $9.2
million for the same respective periods. The decrease of $3.5 million from
1995 to 1996 in servicing fee income related to housing bonds resulted
primarily from management's decision to defer recognition of a portion of such
fee income for the last half of 1996.
Noninterest Expense
Noninterest expense totaled $205.6 million, $167.0 million and $171.8
million in 1996, 1995 and 1994, respectively. The increase of $38.6 million
from 1995 to 1996 was substantially due to a nonrecurring SAIF special
assessment of $42.0 million. The decrease of $4.8 million from 1994 to 1995
was 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 $44.2 million at December 31, 1994, to $31.7
million at December 31, 1995.
Income Tax Benefit
The effective tax rates for 1996, 1995 and 1994 were less than the
applicable statutory rates for each of the periods. During the last quarter of
1996 Coast completed a comprehensive review of its overall tax position and
future tax planning strategies which resulted in a recognition of a $17.6
million tax benefit. The primary cause of the lower effective tax rate for
1995 was the sale of CBCC, previously a subsidiary of Coast. The effective tax
rate on this transaction was lower than the statutory rate due to a difference
in the book and tax bases of Coast's investment in CBCC.
In 1994, the valuation allowance for deferred tax assets was reduced by $1.7
million, decreasing tax expense for that period. This reduction in the
valuation allowance was 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, is responsible for directing the allocation of Coast'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
39
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 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, 1996, Coast's estimated one-year gap between the maturities
or repricing of financial assets and financial liabilities was approximately a
positive $500 million, representing 6% of total assets, compared to $562
million, or 7% of total assets, at December 31, 1995. 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 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 and MBS. However, because of the
inherent lag in the reset mechanism of these loans and MBS, Coast's interest
rate spreads generally can be expected to increase as COFI begins to fall and
to decrease as COFI begins to rise. (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
$1.43 billion and $1.10 billion of ARMs during the years ended December 31,
1996 and 1995, 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 asset/liability management strategy utilized by Coast is the sale of
mortgage-related assets. In recent years, Coast has sold loans and MBS to
reduce asset size or constrain asset growth, and to liquidate newly originated
fixed rate product. The marketability of such assets depends on the
purchasers' investment limitations, general market and competitive conditions,
mortgage loan demand and other factors. 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, 1996, such loans totaled $106.1 million, comprised
primarily of single family ARMs. MBS classified as available for sale are
carried at fair value. At December 31, 1996, such MBS totaled $312.0 million,
which was comprised of adjustable-rate securities issued by either FNMA or
FHLMC. During the year ended December 31, 1996, Coast sold $105.3 million of
loans from its available for sale portfolio, of which $36.2 million were
adjustable rate and $69.1 million were fixed rate loans. Coast sold no MBS
during 1996.
40
NONPERFORMING ASSETS
The control and disposition of nonperforming assets (Nonaccrual Loans,
foreclosed real estate owned ("REO") and Modified Loans) is one of the
Company's primary objectives. During 1995 and 1996 Coast continued its
strategy of aggressively liquidating its REO portfolio, with $108 million and
$89 million of REO sales in 1996 and 1995, respectively. Nonperforming assets
increased from $113.0 million at December 31, 1995, to $124.1 million at
December 31, 1996, largely a result of an increase of $9.6 million in REO.
As a result of economic conditions and other factors, delinquencies
increased during 1992 and, as the economy experienced a modest recovery,
delinquencies decreased during 1993, 1994 and 1995 and were relatively stable
in 1996. 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."
Further improvements in the level of nonperforming assets and future
reductions in the aggregate level of credit losses are dependent upon
continued emphasis on sales of REO but are also largely dependent on the
California economy, where the majority of Coast's loan portfolio is based. The
California economy entered 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 have been positive signs for
the California economy. Unemployment in California has improved and median
home prices and sales have increased modestly. 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. 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
based upon a number of factors, including economic trends, industry
experience, industry and geographic concentrations, estimated collateral
values, management's assessment of credit risk inherent in the portfolio,
delinquency migration analysis, historical loss experience, ratio analysis,
asset classifications, and Coast's underwriting practices. Economic
conditions, especially those affecting real estate markets, may change, which
could result in the need for an increased balance in the GVA in future
periods. In addition, the OTS, as an integral part of its examination process,
periodically reviews Coast's GVA and may require Coast to establish additional
allowances based on its judgment of 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, 1996 and 1995, Coast's regulatory liquidity ratios
were 5.13% and 5.57%, respectively.
Sales of and principal repayments on loans and MBS have been a primary
source of funds for Coast. During 1996, 1995 and 1994, sales proceeds amounted
to $105.3 million, $79.5 million and $363.0 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 were originated during the
period and being so designated. Principal repayments on loans and MBS amounted
to $819.1 million, $648.8 million and $795.9 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 $1.30 billion, $992.3 million and
$1.61 billion during 1996, 1995 and 1994, respectively. Additionally,
$18.6 million of MBS were purchased during 1994; no MBS were purchased during
1995 or 1996.
41
During 1996 and 1995, Coast experienced a net increase in deposits of $233.0
million and $243.7 million, respectively. These increases are primarily
attributable to Coast's efforts to market its transaction accounts which
resulted in an increases of $150.4 million and $167.7 million in checking
account balances during 1996 and 1995, respectively.
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, 1996, the amount of additional credit
available from the FHLB of San Francisco was $1.39 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.
At December 31, 1996, the Company's total of approved commitments to
originate or purchase loans and MBS amounted to $104.2 million, and the
Company had $1.9 million of commitments to sell loans and MBS. Outstanding
letters of credit at December 31, 1996, which were primarily related to the
former real estate development activities of CoastFed Properties, totaled
$377.6 million. Scheduled repayments of FHLB of San Francisco advances for the
year ended December 31, 1997, are $954.2 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, 1996, Coast's tangible capital
ratio was 5.33%, $330.9 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, 1996, Coast's core capital ratio was 5.33%, $201.2 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, 1996, Coast's risk-based capital ratio was 10.87%,
$154.1 million in excess of the requirement at that date. See Item 1.
"Business--Regulation--Regulatory Capital Requirements" and "Note 11 of Notes
to Consolidated Financial Statements."
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO FINANCIAL STATEMENTS
PAGE
----
Independent Auditors' Report............................................... 43
Consolidated Statement of Financial Condition.............................. 44
Consolidated Statement of Operations....................................... 45
Consolidated Statement of Stockholders' Equity............................. 46
Consolidated Statement of Cash Flows....................................... 47
Notes to Consolidated Financial Statements................................. 49
All supplemental schedules are omitted as inapplicable or because the
required information is included in the financial statements or notes thereto.
42
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, 1996 and 1995, 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,
1996. 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, 1996 and 1995, and
the results of their operations and their cash flows for each of the years in
the three-year period ended December 31, 1996, in conformity with generally
accepted accounting principles.
KPMG Peat Marwick LLP
Los Angeles, California
January 23, 1997
43
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF FINANCIAL CONDITION
DECEMBER 31,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
ASSETS
Cash and due from banks.................................. $ 138,861 $ 119,717
Federal funds sold and other short term investments...... 198,795 30,394
Investment securities held to maturity (fair value of
$36.0 million
and $73.2 million)...................................... 35,833 72,785
Loans receivable, net.................................... 5,749,985 5,245,464
Loans receivable held for sale, at the lower of cost or
fair value (fair value of
$109.6 million and $230.0 million)...................... 106,122 221,032
Mortgage-backed securities held to maturity (fair value
of $1.74 billion
and $1.83 billion)...................................... 1,731,268 1,817,403
Mortgage-backed securities available for sale, at fair
value................................................... 312,002 354,398
Real estate held for sale................................ 41,259 31,696
Federal Home Loan Bank stock............................. 90,882 85,837
Land and depreciable assets.............................. 95,010 92,920
Interest receivable and other assets..................... 198,697 172,702
Goodwill................................................. 6,238 7,332
---------- ----------
$8,704,952 $8,251,680
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits................................................. $6,356,448 $6,123,472
Federal Home Loan Bank advances.......................... 1,104,200 804,250
Other borrowings......................................... 643,521 733,340
Other liabilities........................................ 115,508 104,754
Income taxes payable..................................... 4,747 12,684
Capital notes............................................ 55,997 55,746
---------- ----------
8,280,421 7,834,246
---------- ----------
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,
18,584,717 and 18,582,917 shares issued and
outstanding at
December 31, 1996 and 1995, respectively.............. 186 186
Additional paid-in capital............................. 265,055 265,018
Unrealized gain on securities available for sale, net
of taxes.............................................. 2,778 6,554
Retained earnings, substantially restricted............ 156,512 145,676
---------- ----------
Total stockholders' equity........................... 424,531 417,434
---------- ----------
$8,704,952 $8,251,680
========== ==========
See accompanying notes to consolidated financial statements.
44
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS EXCEPT PER
SHARE AMOUNTS)
Interest income:
Loans receivable............................... $450,142 $469,864 $382,371
Mortgage-backed securities ("MBS")............. 132,098 119,629 93,334
Investment securities.......................... 21,210 23,688 18,925
-------- -------- --------
603,450 613,181 494,630
-------- -------- --------
Interest expense:
Deposits....................................... 285,764 280,895 218,335
Borrowings..................................... 102,886 131,235 88,384
-------- -------- --------
388,650 412,130 306,719
-------- -------- --------
Net interest income.......................... 214,800 201,051 187,911
Provision for loan losses...................... 70,000 40,000 75,000
-------- -------- --------
Net interest income after provision for loan
losses...................................... 144,800 161,051 112,911
-------- -------- --------
Noninterest income:
Loan servicing fees and charges................ 12,671 13,518 15,231
Gain on sale of subsidiary..................... -- 7,549 --
Gain (loss) on sale of loans................... (304) 403 (2,352)
Elimination of Excess Mortgage Servicing
Rights........................................ -- -- (9,891)
Gain (loss) on sale of MBS..................... -- (287) 1,812
Other.......................................... 37,738 36,436 38,124
-------- -------- --------
50,105 57,619 42,924
-------- -------- --------
Noninterest expense:
Compensation and benefits...................... 63,283 71,302 77,063
Office occupancy, net.......................... 42,524 40,633 38,423
Federal deposit insurance premiums............. 16,818 17,333 16,359
Other general and administrative expenses...... 35,976 32,454 28,433
-------- -------- --------
Total general and administrative expenses.... 158,601 161,722 160,278
SAIF special assessment........................ 41,978 -- --
Real estate operations, net.................... 3,881 4,090 10,088
Amortization of goodwill....................... 1,094 1,221 1,424
-------- -------- --------
205,554 167,033 171,790
-------- -------- --------
Earnings (loss) before income tax expense
(benefit)................................... (10,649) 51,637 (15,955)
Income tax expense (benefit)..................... (21,485) 18,835 (9,417)
-------- -------- --------
Net earnings (loss).......................... $ 10,836 $ 32,802 $ (6,538)
======== ======== ========
Primary net earnings (loss) per share of common
stock........................................... $ .56 $ 1.72 $ (.35)
======== ======== ========
Fully diluted net earnings (loss) per share of
common stock.................................... $ .56 $ 1.71 $ (.35)
======== ======== ========
See accompanying notes to consolidated financial statements.
45
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
UNREALIZED
GAIN (LOSS)
ON
SECURITIES RETAINED
SERIAL ADDITIONAL AVAILABLE EARNINGS TOTAL
PREFERRED COMMON PAID-IN FOR SALE, (SUBSTANTIALLY STOCKHOLDERS'
STOCK STOCK CAPITAL NET OF TAXES RESTRICTED) EQUITY
--------- ------ ---------- ------------ -------------- -------------
(IN THOUSANDS)
Balance at December 31,
1993................... $-- $185 $263,150 $ 10,821 $119,412 $393,568
Exercise of stock
options................ -- -- 11 -- -- 11
Changes in 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
Changes in unrealized
gain on securities
available for sale, net
of taxes............... -- -- -- 7,560 -- 7,560
Net earnings for the
year 1995.............. -- -- -- -- 32,802 32,802
---- ---- -------- -------- -------- --------
Balance at December 31,
1995................... -- 186 265,018 6,554 145,676 417,434
Exercise of stock
options................ -- -- 37 -- -- 37
Changes in unrealized
loss on securities
available for sale, net
of taxes............... -- -- -- (3,776) -- (3,776)
Net earnings for the
year 1996.............. -- -- -- -- 10,836 10,836
---- ---- -------- -------- -------- --------
Balance at December 31,
1996................... $-- $186 $265,055 $ 2,778 $156,512 $424,531
==== ==== ======== ======== ======== ========
See accompanying notes to consolidated financial statements.
46
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- --------- -----------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)..................... $ 10,836 $ 32,802 $ (6,538)
----------- --------- -----------
Adjustments to reconcile net earnings
(loss) to net cash provided (used) by
operating activities:
Sale of loans held for sale........... 105,329 44,197 28,398
Principal repayments on loans held for
sale................................. 19,473 14,562 23,296
Provision for loan losses............. 70,000 40,000 75,000
Depreciation and amortization......... 11,793 11,500 10,079
Amortization of discounts and
premiums, net........................ 3,554 5,146 8,244
Net decrease (increase) in interest
receivable........................... 2,500 (7,179) 1,160
Amortization of goodwill.............. 1,094 1,221 1,424
Net decrease in prepaid expenses...... 191 794 459
Net increase (decrease) in accounts
payable.............................. 128 (27,068) (46,626)
Gain on sale of subsidiary............ -- (7,549) --
Elimination of Excess Mortgage
Servicing Rights..................... -- -- 9,891
Provision for losses on real estate
held for sale........................ -- 293 2,132
Net present value gain on sale of
loans and MBS........................ (58) (284) (6,176)
Net decrease in deferred income....... (1,455) (1,731) (7,209)
Net increase (decrease) in interest
payable.............................. (3,318) (137) 4,765
Net decrease (increase) in accounts
receivable........................... (4,889) 71,651 (38,964)
Federal Home Loan Bank stock
dividends............................ (5,186) (4,467) (3,259)
Deferred income tax expense (benefit). (21,485) 18,835 (9,417)
Loans originated for sale, net of
refinances........................... (150,151) (146,024) (516,343)
Other................................. 11,651 (8,022) (2,781)
----------- --------- -----------
Total adjustments................... 39,171 5,738 (465,927)
----------- --------- -----------
Net cash provided (used) by
operations......................... 50,007 38,540 (472,465)
----------- --------- -----------
Cash flows from investing activities:
Loans originated for investment, net of
refinances............................. (1,151,853) (846,230) (1,097,250)
Repurchase of loans..................... (19,927) (18,937) (113,146)
Principal repayments on loans........... 547,469 441,452 429,655
Purchase of MBS......................... -- -- (18,574)
Principal repayments on MBS held to
maturity............................... 214,892 163,614 266,907
Principal repayments on MBS available
for sale............................... 37,216 29,169 76,081
Sale of MBS available for sale.......... -- 35,335 334,617
Net decrease in short-term investment
securities............................. 827 9,411 14,473
Purchase of investment securities....... (4,206) (193) (48,864)
Purchase of FHLB stock.................. -- (2,450) (13,226)
Maturities and principal repayments on
investment securities.................. 40,063 53 55
Net increase in land and depreciable
assets................................. (13,596) (16,129) (18,361)
Sale of real estate held for sale....... 41,708 47,317 43,895
Proceeds from sale of subsidiary........ -- 150,054 --
----------- --------- -----------
Net cash used by investing activities. (307,407) (7,534) (143,738)
----------- --------- -----------
(continued)
47
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS (CONTINUED)
YEAR ENDED DECEMBER 31,
-----------------------------------
1996 1995 1994
----------- --------- -----------
(IN THOUSANDS)
Cash flows from financing activities:
Net increase (decrease) in deposits...... $ 232,976 $ 303,733 $ (28,751)
Deposits disposed of in branch sales,
net..................................... -- (60,069) --
Net increase (decrease) in FHLB advances. 299,950 (150,200) 250,250
Net decrease in short-term borrowings.... (88,018) (78,238) (88,266)
Common stock options exercised........... 37 1,858 11
----------- --------- -----------
Net cash provided by financing
activities............................ 444,945 17,084 133,244
----------- --------- -----------
Net increase (decrease) in cash and
cash equivalents.................... 187,545 48,090 (482,959)
Cash and cash equivalents at beginning of
year...................................... 150,111 102,021 584,980
----------- --------- -----------
Cash and cash equivalents at end of year... $ 337,656 $ 150,111 $ 102,021
=========== ========= ===========
Supplemental disclosures of cash flow
information:
Cash payments of interest................ $ 145,564 $ 173,354 $ 119,615
Cash payments (refunds) of income taxes,
net..................................... 1,421 (496) 52
=========== ========= ===========
Supplemental schedule of noncash investing
and financing activities:
Interest credited to depositors'
accounts................................ $ 247,376 $ 239,438 $ 176,991
Loans exchanged for MBS, net............. 145,165 654,238 434,156
Additions to loans resulting from the
sale of real estate acquired in
settlement of loans..................... 54,151 35,627 88,366
Additions to real estate acquired in
settlement of loans..................... 114,918 89,979 141,499
Reductions to real estate acquired
through in-substance foreclosure, net... -- -- (2,217)
Unrealized gain (loss) on securities
available for sale, net of taxes........ (3,776) 7,560 (11,827)
See accompanying notes to consolidated financial statements.
48
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, 1996.
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, 1996, Coast
operated 90 retail banking offices in California. Coast is subject to
significant competition from other financial institutions, and is also subject
to regulation by certain federal agencies and undergoes periodic examinations
by those regulatory authorities.
These consolidated financial statements have been prepared in conformity
with generally accepted accounting principles. In preparing the consolidated
financial statements, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities as of the date of
the statement of financial condition, and revenues and expenses for the
periods reported in the statement of operations. Actual results could differ
from those estimates.
The majority-owned and controlled subsidiaries have been consolidated and
all significant intercompany balances and transactions have been eliminated in
consolidation. Certain reclassifications have been made to the financial
statements for 1995 and 1994 to conform to the 1996 presentation.
Recent Accounting Pronouncements
In June 1996, the Financial Accounting Standards Board (the "FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 125, Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities
("SFAS 125"). SFAS 125 provides accounting and reporting standards for
transfers and servicing of financial assets, and distinguishes transfers of
financial assets that are sales from transfers that are secured borrowings.
This statement supersedes SFAS 122, although the general concepts of SFAS 122
are retained in it. Implementation of SFAS 125 is not expected to have a
material adverse effect on the Company's financial condition or results of
operation.
Cash and Cash Equivalents
For purposes of reporting cash flows, cash and cash equivalents includes
cash, amounts due from banks, certain short-term investments, certificates of
deposit and federal funds sold. Federal funds are generally sold for one-day
periods, and short-term investment securities and certificates of deposit have
maturities of less than three months.
Assets Held or Available for Sale
The Company identifies those loans, MBS and investment securities for which
at the time of origination or acquisition it does not have the positive intent
and ability to hold to maturity. Securities that are to be held for indefinite
periods of time and not intended to be held to maturity are classified as
available for sale and are carried at fair value, with unrealized gains and
losses excluded from earnings and reported as a separate component of
stockholders' equity, net of income taxes. Loans held for sale are carried at
the lower of amortized historical cost or fair value. Assets 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.
49
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. Declines in fair value of securities held to
maturity or available for sale below amortized cost that are other than
temporary would result in write-downs to fair value.
Premiums and Discounts on Investment Securities, Loans and MBS
Premiums and discounts on investment securities, loans and MBS purchased are
amortized utilizing the interest method over the contractual terms of the
assets.
General Valuation Allowance
Coast maintains a general valuation allowance ("GVA") to absorb future
losses that may be realized on its loan-related assets and off-balance sheet
items. The GVA is reviewed and adjusted quarterly based upon a number of
factors, including economic trends, industry experience, industry and
geographic concentrations, estimated collateral values, management's
assessment of credit risk inherent in the portfolio, delinquency migration
analysis, historical loss experience, ratio analysis, asset classifications,
and Coast's underwriting practices. Economic conditions, especially those
affecting real estate markets, may change, which could result in the need for
an increased balance in the GVA in future periods. In addition, the Office of
Thrift Supervision ("OTS"), as an integral part of its examination process,
periodically reviews Coast's GVA and may require Coast to increase the amount
of the GVA based on its judgment of the information available at the time of
the examination. (See Notes 3 and 13 for additional information regarding the
GVA.)
Goodwill
Goodwill is generally amortized at a constant rate based on the anticipated
end-of-period remaining principal balance of long-lived interest-earning
assets acquired in various savings and loan acquisitions.
Loan Sales and Servicing
Coast sells loans and participations in loans for cash proceeds equal to the
market value of the loans and participations sold, with yield rates to the
investors based upon current market rates. Gain or loss is recognized equal to
the difference between the cash proceeds received and the carrying value of
the loans and participations sold. In addition, gain or loss is recognized and
a premium or discount is recorded at the time of sale based upon the 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 Mortgage Servicing Rights") are capitalized and
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 the
Mortgage Servicing Rights (described below) and any periodic or recurring
expenses. In addition to the Excess Mortgage Servicing Rights described above,
Mortgage Servicing Rights, which represent the value of the contractual rights
to service the respective mortgage loans, are recorded as a separate asset in
accordance with the provisions of SFAS 122, Accounting for Mortgage Servicing
Rights.
Coast's policy regarding the allocation of cost when a loan or part of a
loan is sold is to allocate the recorded investment, based on relative fair
values on the date that the loan was acquired, adjusted for principal
repayments and other activity from the date of acquisition to the date of
sale.
50
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest Income on Loans
Interest income on loans is accrued as it is earned. Coast defers and
amortizes both the loan origination fees and the incremental direct costs
relating to loans originated. The deferred origination fees and costs are
amortized into interest income utilizing the interest method over the lives of
the related loans. Loans are placed on a nonaccrual status after being
delinquent 90 days, or earlier if the ultimate collectibility of the accrual
is in doubt. Whenever the accrual of interest is stopped, previously accrued
but uncollected interest income is reversed. Thereafter, interest is
recognized only as cash is received until the loan is reinstated. Accretion of
discounts and amortization of net deferred loan origination fees are
discontinued when loans are placed on nonaccrual status.
Real Estate Held for Sale
Real estate held for sale, which represents real estate acquired through
foreclosure, is carried at the lower of cost or estimated fair value less
costs of disposition. Income recognition resulting from the disposition of
real estate is dependent upon the transaction having met certain criteria
relating to the nature of the property sold and the terms of sale.
Depreciation and Amortization
Depreciation is computed utilizing the straight-line method over the
estimated useful lives of the assets. Amortization of leasehold improvements
is computed utilizing the straight-line method over the shorter of the
estimated useful life of the assets or the terms of the respective leases.
Fair Value of Financial Instruments
Pursuant to the requirements of SFAS No. 107, Disclosures about Fair Value
of Financial Instruments ("SFAS 107"), the Company has included in the
following Notes to Consolidated Financial Statements information about the
fair values of Coast's financial instruments, whether or not such instruments
are recognized in the accompanying consolidated statement of financial
condition. In cases where quoted market prices are not available, fair values
are estimated based upon discounted cash flows. Those techniques are
significantly affected by the assumptions utilized, including the assumed
discount rates and estimates of future cash flows. In this regard, the derived
fair value estimates cannot be substantiated by comparison to independent
markets and, in many cases, could not be realized in an immediate sale or
other disposition of the instrument. SFAS 107 excludes certain financial
instruments and all nonfinancial instruments from its disclosure requirements.
All components of accrued interest receivable and payable are presumed to have
approximately equal book and fair values because the periods over which such
amounts are realized are relatively short. As a result of the assumptions
utilized, the aggregate fair value estimates presented herein do not
necessarily represent the Company's aggregate underlying fair value.
The fair values of investment securities and MBS are generally obtained from
market bids for similar or identical securities, or are quotes from
independent securities brokers or dealers.
The fair values of loans are estimated for portfolio segments with similar
characteristics (e.g.--single family, multifamily, commercial and other, and
are further segmented into fixed and adjustable rate categories: London
Interbank Offered Rate ("LIBOR"), COFI and Treasury indices). The fair values
of performing loans are calculated using an option-based approach which values
the prepayment options contained in the loans. Prepayment options introduce
significant uncertainty into the timing of loan cash flows. When loan rates
fall significantly, prepayments typically accelerate, forcing lenders to
reinvest the proceeds of the prepayments at lower rates. An important aspect
of valuing a loan, therefore, is determining the appropriate value of the
option component of the loan. The fair values of significant nonperforming
loans are based on recent appraisals, or if not available, on estimated cash
flows, discounted using a rate commensurate with the risk associated with the
specific properties. Assumptions regarding credit risk, cash flows, and
discount rates are judgmentally determined
51
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
utilizing available market information and specific borrower information. The
fair value of the Excess Mortgage Servicing Rights 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 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.
52
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(2) CASH AND DUE FROM BANKS, FEDERAL FUNDS SOLD AND OTHER SHORT TERM
INVESTMENTS AND INVESTMENT SECURITIES
The carrying and fair values of cash and due from banks, federal funds sold
and other short term investments and investment securities are shown in the
following table at the dates indicated.
DECEMBER 31,
-----------------------------------
1996 1995
----------------- -----------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
-------- -------- -------- --------
(IN THOUSANDS)
Cash and due from banks.................... $138,861 $138,861 $119,717 $119,717
======== ======== ======== ========
Federal funds sold and other short term
investments:
Repurchase agreements.................... $100,000 $100,000 $ -- $ --
Federal funds sold....................... 94,000 94,000 28,000 28,000
Commercial paper......................... 4,795 4,795 2,394 2,394
-------- -------- -------- --------
198,795 198,795 30,394 30,394
-------- -------- -------- --------
Investment securities:
Held to maturity:
Short term:
Commercial paper, custodial.......... 24,567 24,567 24,344 24,344
Repurchase agreements, custodial..... 2,277 2,277 3,392 3,392
Other marketable securities,
custodial........................... 439 439 374 374
-------- -------- -------- --------
27,283 27,283 28,110 28,110
-------- -------- -------- --------
Long term:
United States agency securities...... 3,998 4,001 -- --
Securities of states of the U.S. and
political subdivisions thereof...... 3,512 3,656 3,569 3,717
Other marketable securities.......... 1,040 1,040 831 831
United States Treasury securities.... -- -- 40,275 40,528
-------- -------- -------- --------
8,550 8,697 44,675 45,076
-------- -------- -------- --------
35,833 35,980 72,785 73,186
-------- -------- -------- --------
$234,628 $234,775 $103,179 $103,580
======== ======== ======== ========
Repurchase agreements totaled $100.0 million (with a weighted average yield
of 6.68%) and none at December 31, 1996 and 1995, respectively. Average
balances of repurchase agreements were $91.2 million and $93.2 million during
the years ended December 31, 1996 and 1995, respectively, and the maximum
amount owned at any month end during such periods was $160.0 million and
$185.0 million, respectively.
At December 31, 1996 and 1995, there were gross unrealized gains of $147,000
and $401,000, respectively, and no gross unrealized losses at either date.
53
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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,
--------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Cash and due from banks.......................... $138,861 $119,717 $ 99,578
Repurchase agreements............................ 100,000 -- --
Federal funds sold............................... 94,000 28,000 --
Commercial paper................................. 4,795 2,394 2,443
-------- -------- --------
$337,656 $150,111 $102,021
======== ======== ========
The amounts included above in cash and cash equivalents and qualifying
investment securities generally constitute Coast's liquidity portfolio. Coast
maintains liquidity to satisfy regulatory requirements which mandate that
Coast maintain minimum average balances of liquid assets to fund normal
operational requirements. The liquidity portfolio is managed in a manner
intended to maximize flexibility and yield, while minimizing interest rate
risk, credit risk and the cost of the capital required to be maintained for
such assets.
There were no sales of investment securities during 1996, 1995 or 1994.
The following is a summary of the contractual terms to maturity of long-term
investment securities as of December 31, 1996. The fair values of the
securities listed below are approximately equal to their carrying values.
AFTER 1 AFTER 5
WITHIN THROUGH THROUGH AFTER
1 YEAR 5 YEARS 10 YEARS 10 YEARS TOTAL
------ ------- -------- -------- -----
(IN MILLIONS)
U.S. agency securities.................. $ -- $ 4.0 $ -- $-- $4.0
Securities of states of the U.S. and
political subdivisions thereof......... -- -- -- 3.5 3.5
Other marketable securities............. 1.0 -- -- -- 1.0
----- ----- ----- ---- ----
$ 1.0 $ 4.0 $ -- $3.5 $8.5
===== ===== ===== ==== ====
The combined weighted average yield on federal funds sold, other short term
investments and investment securities was 6.15% and 5.43% at December 31, 1996
and 1995, respectively. At December 31, 1996 and 1995, Coast had accrued
interest receivable on these investment securities totaling $118,000 and
$974,000, respectively, which is included in interest receivable and other
assets in the accompanying consolidated statement of financial condition.
Coast, as a member institution of the Federal Home Loan Bank ("FHLB") of San
Francisco, is required to own capital stock in the FHLB of San Francisco based
generally upon Coast's balance of residential mortgage loans and the
combination of FHLB advances and letters of credit. At December 31, 1996,
Coast owned $90.9 million of FHLB stock, $11.3 million in excess of the
minimum requirement. At December 31, 1995, Coast owned $85.8 million of FHLB
stock, $18.4 million in excess of the minimum requirement. The yield on FHLB
stock was 6.45% and 5.16% at December 31, 1996 and 1995, respectively.
54
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Interest income on investment securities includes the following for the
periods indicated.
YEAR ENDED DECEMBER 31,
-----------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Federal funds sold.................................. $ 2,639 $ 4,399 $ 2,732
Short-term investment securities.................... 10,677 11,966 8,891
Long-term investment securities..................... 2,708 2,856 4,043
FHLB stock.......................................... 5,186 4,467 3,259
------- ------- -------
$21,210 $23,688 $18,925
======= ======= =======
(3) LOANS RECEIVABLE
The following is a summary of loans receivable at the dates indicated.
DECEMBER 31,
----------------------
1996 1995
---------- ----------
(IN THOUSANDS)
Held for investment:
Real estate:
Residential:
One to four units ("single family")............ $3,907,131 $3,054,334
Five or more units ("multifamily")............. 1,219,940 1,355,394
---------- ----------
5,127,071 4,409,728
Commercial....................................... 670,847 876,889
---------- ----------
5,797,918 5,286,617
Commercial business................................ 3,098 3,177
Secured by deposits................................ 6,838 8,557
Overdraft lines of credit.......................... 18,118 12,459
---------- ----------
5,825,972 5,310,810
Deferred loan origination fees and costs, net...... 11,185 6,292
Other unamortized net discounts.................... (3,172) (6,638)
GVA................................................ (84,000) (65,000)
---------- ----------
5,749,985 5,245,464
Held for sale........................................ 106,122 221,032
---------- ----------
$5,856,107 $5,466,496
========== ==========
The combined contractual weighted average interest rate of loans receivable
was 7.96% and 7.95% at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, Coast had accrued interest receivable on
loans receivable of $33.1 million and $34.6 million, respectively, which is
included in interest receivable and other assets in the accompanying
consolidated statement of financial condition.
At December 31, 1996 and 1995, Coast had approved commitments to originate
loans totaling $104.2 million and $77.7 million, respectively, substantially
all of which were for adjustable rate single family residential loans. Coast
had $1.9 million of commitments to sell loans at December 31, 1996, and had
$16.4 million of commitments to sell loans at December 31, 1995.
55
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
On September 30, 1995, Coast terminated its asset-based lending activity
through the sale of its former subsidiary, CBCC. At the date of sale, CBCC had
a loan portfolio of $135.8 million. The consolidated statement of operations
for the year ended December 31, 1995, includes a pretax gain of $7.5 million
resulting from the sale of CBCC.
See Note 8 for a summary of loans and other assets which were pledged as
security for borrowings.
The following table presents carrying and fair values of loans receivable at
the dates indicated.
DECEMBER 31,
---------------------------------------------------
1996 1995
------------------------- -------------------------
CARRYING VALUE FAIR VALUE CARRYING VALUE FAIR VALUE
-------------- ---------- -------------- ----------
(IN THOUSANDS)
Held for investment:
Real estate:
Residential:
Single family--
adjustable rates.... $3,831,230 $3,863,027 $2,954,136 $3,026,338
Single family--fixed
rates............... 82,208 84,115 102,618 105,844
---------- ---------- ---------- ----------
3,913,438 3,947,142 3,056,754 3,132,182
---------- ---------- ---------- ----------
Multifamily--
adjustable rates.... 1,184,062 1,170,724 1,314,960 1,327,223
Multifamily--fixed
rates............... 37,240 35,789 39,654 39,598
---------- ---------- ---------- ----------
1,221,302 1,206,513 1,354,614 1,366,821
---------- ---------- ---------- ----------
5,134,740 5,153,655 4,411,368 4,499,003
---------- ---------- ---------- ----------
Commercial:
Adjustable rates..... 636,570 613,579 788,995 795,228
Fixed rates.......... 34,621 34,779 85,908 84,081
---------- ---------- ---------- ----------
671,191 648,358 874,903 879,309
---------- ---------- ---------- ----------
5,805,931 5,802,013 5,286,271 5,378,312
Commercial business...... 3,098 3,217 3,177 3,499
Secured by deposits...... 6,838 6,884 8,557 8,613
Overdraft lines of
credit.................. 18,118 18,875 12,459 12,968
---------- ---------- ---------- ----------
5,833,985 5,830,989 5,310,464 5,403,392
---------- ---------- ---------- ----------
Held for sale.............. 106,122 109,566 221,032 229,955
---------- ---------- ---------- ----------
5,940,107 5,940,555 5,531,496 5,633,347
GVA........................ (84,000) -- (65,000) --
---------- ---------- ---------- ----------
$5,856,107 $5,940,555 $5,466,496 $5,633,347
========== ========== ========== ==========
The following table presents nonaccrual loans included in loans receivable
at the dates indicated.
DECEMBER 31,
---------------
1996 1995
------- -------
(IN THOUSANDS)
Nonaccrual loans:
Single family............................................ $56,740 $43,792
Multifamily.............................................. 19,295 25,646
Commercial and other..................................... 6,769 11,913
------- -------
$82,804 $81,351
======= =======
56
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
If nonaccrual loans at December 31, 1996, had been interest-earning
throughout the year, interest income of $5.2 million would have been earned on
these loans at their respective contractual rates. For the year ended December
31, 1996, actual interest earned on such loans was $2.2 million.
The table shown below reflects the changes in the GVA attributable to loan-
related assets for the periods indicated. See also the GVA attributable to
off-balance sheet items described in Note 13.
RESIDENTIAL COMMERCIAL REAL
REAL ESTATE ESTATE MORTGAGE
MORTGAGE AND OTHER TOTAL
----------- --------------- -----
(IN MILLIONS)
Balance at December 31, 1993.............. $ 53 $ 53 $ 106
Additions charged to operations........... 68 (2) 66
Recoveries................................ 6 1 7
Losses charged............................ (78) (24) (102)
---- ---- -----
Balance at December 31, 1994.............. 49 28 77
Additions charged to operations........... 40 -- 40
Recoveries................................ 1 1 2
Losses charged............................ (38) (4) (42)
Sale of subsidiary........................ -- (3) (3)
Reallocation to off-balance sheet items... (4) (5) (9)
---- ---- -----
Balance at December 31, 1995.............. 48 17 65
Additions charged to operations........... 51 8 59
Recoveries................................ 8 -- 8
Losses charged............................ (43) (5) (48)
---- ---- -----
Balance at December 31, 1996.............. $ 64 $ 20 $ 84
==== ==== =====
A loan is impaired when, based on current information and events, management
believes it will be unable to collect all amounts contractually due under a
loan agreement. Loans are evaluated for impairment as part of Coast's normal
internal asset review process. When a loan is determined to be impaired, a
valuation allowance is established based upon the difference between Coast's
investment in the loan and the fair value of the collateral securing the loan.
Coast's impaired loans totaled $116.2 million and $135.2 million at December
31, 1996 and 1995, respectively, and for the years ended December 31, 1996,
1995 and 1994, the average investment in impaired loans was $135.5 million,
$109.9 million and $85.7 million, respectively, and for the years then ended,
interest income on such loans totaled $7.3 million, $8.8 million and $6.6
million, respectively. Interest income on impaired loans which are performing
is generally recognized on the accrual basis. As of December 31, 1996 and
1995, nonaccrual loans included $42.0 million and $37.6 million, respectively,
of impaired loans.
Impaired loans at December 31, 1996, included $93.9 million of loans for
which valuation allowances of $16.3 million had been established and $38.6
million of loans for which no allowance was considered necessary. At December
31, 1995, Coast had $127.2 million of impaired loans for which valuation
allowances of $25.6 million had been established and $33.6 million of such
loans for which no allowance was considered necessary. All such provisions for
losses and any related recoveries are recorded as part of the allowance for
loan losses. Coast had $1.2 million and no recoveries of previously
established allowances on impaired loans during the years ended December 31,
1996 and 1995, respectively. Coast evaluates large groups of smaller-balance
homogeneous loans collectively for impairment.
Coast has reached agreements with certain borrowers that provide for
restructuring existing loans secured by income-producing properties.
Restructurings are generally in the form of interest rate adjustments,
extensions
57
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
of maturities or deferred payments of principal or interest. Restructured
loans totaled $30.2 million and $30.5 million at December 31, 1996 and 1995,
respectively. The restructured loans had effective yields of 8.00% at both
December 31, 1996 and 1995. The loans identified as restructured loans at
December 31, 1996, 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,
1996 and 1995, $2.4 million and $2.4 million, respectively, was earned on
restructured loans and is included in interest income on loans in the
accompanying consolidated statement of operations. Interest income on these
loans for the years ended December 31, 1996 and 1995, would have totaled $3.2
million and $3.2 million, respectively, under their original terms. At
December 31, 1996, 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, 1996
Held to maturity:
Adjustable rate:
MBS issued by Coast............ $ 774,612 $ 3,120 $(10,256) $ 767,476
FNMA securities................ 639,171 12,134 -- 651,305
FHLMC securities............... 246,558 5,077 -- 251,635
Issued by other financial
institutions ................. 39,779 -- (611) 39,168
---------- ------- -------- ----------
1,700,120 20,331 (10,867) 1,709,584
---------- ------- -------- ----------
Fixed rate:
FNMA securities................ 31,111 135 (791) 30,455
Other securities............... 37 -- (1) 36
---------- ------- -------- ----------
31,148 135 (792) 30,491
---------- ------- -------- ----------
$1,731,268 $20,466 $(11,659) $1,740,075
========== ======= ======== ==========
Available for sale:
Adjustable rate:
FNMA securities................ $ 153,919 $ 2,783 $ (5) $ 156,697
FHLMC securities............... 154,542 850 (87) 155,305
---------- ------- -------- ----------
$ 308,461 $ 3,633 $ (92) $ 312,002
========== ======= ======== ==========
58
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
========== ======= ======== ==========
As of December 31, 1996, $2.04 billion of Coast's MBS included in the table
above have contractual terms to maturity of more than ten years, $36 thousand
have contractual maturities of from five to ten years, $296 thousand have
contractual maturities of one to five years and $622 thousand have contractual
maturities of less than one year.
The combined contractual weighted average interest rate of MBS was 6.42% and
6.60% at December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, Coast had accrued interest receivable on MBS
of $13.2 million and $13.7 million, respectively, which is included in
interest receivable and other assets in the accompanying consolidated
statement of financial condition.
At December 31, 1996 and 1995, Coast had no commitments to sell MBS.
Principal proceeds from sales of MBS available for sale were none, $35.3
million and $334.6 million during 1996, 1995 and 1994, respectively.
See Note 8 for a summary of MBS and other assets which were pledged as
security for borrowings and Note 13 for a discussion of MBS which were pledged
as security for certain letters of credit issued by Coast.
(5) REAL ESTATE HELD FOR SALE
Real estate held for sale, which represents real estate acquired through
foreclosure, totaled $41.3 million and $31.7 million at December 31, 1996 and
1995, respectively.
59
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,
---------------------
1996 1995 1994
------ ------ -------
(IN THOUSANDS)
Net expense from operations of foreclosed real estate
owned............................................... $3,158 $3,564 $ 7,407
Write downs and provisions for estimated losses...... 723 526 2,681
------ ------ -------
$3,881 $4,090 $10,088
====== ====== =======
(6) LAND AND DEPRECIABLE ASSETS AND LEASE COMMITMENTS
The following is a summary of land and depreciable assets at the dates
indicated.
DECEMBER 31,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
Furniture, fixtures, equipment and automobiles.............. $ 71,885 $ 80,064
Leasehold improvements...................................... 42,559 43,966
Buildings, parking lots and building improvements........... 35,562 21,921
Land........................................................ 16,711 16,594
Construction in progress.................................... 1,515 6,463
-------- --------
168,232 169,008
Accumulated depreciation.................................... (73,222) (76,088)
-------- --------
$ 95,010 $ 92,920
======== ========
Depreciation expense totaled $11.8 million, $11.5 million and $10.1 million
for the years ended December 31, 1996, 1995 and 1994, respectively, and is
included in office occupancy, net in the accompanying consolidated statement
of operations.
Coast leases certain property and equipment under operating leases which
expire in various years. All leases expire by the year 2033.
Certain of these leases contain renewal options and require Coast to pay
property taxes and insurance. Lease expense for office facilities and
equipment amounted to $19.2 million, $19.4 million and $19.8 million for the
years ended December 31, 1996, 1995 and 1994, respectively.
The total annual minimum lease commitment under non-cancelable operating
leases at December 31, 1996, 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,
1997...................................................... $ 12,719
1998...................................................... 12,945
1999...................................................... 13,242
2000...................................................... 13,138
2001...................................................... 8,790
Thereafter................................................ 43,518
--------
$104,352
========
60
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(7) DEPOSITS
Deposit balances by type of account are summarized in the following table as
of the dates indicated.
WEIGHTED AVERAGE
INTEREST RATE AT
DECEMBER 31, 1996 1996 1995
----------------- ---------- ----------
(IN THOUSANDS)
Checking and other demand deposits.. 1.46% $ 782,416 $ 632,025
Money market deposits............... 2.68 621,410 666,019
Time deposits:
One to 31 days.................... 2.68 2,842 6,704
32 days to six months............. 4.68 110,863 101,331
Over six months to one year....... 5.21 3,943,860 2,964,483
Over one year to two years........ 5.49 554,658 1,351,379
Over two years.................... 6.52 324,399 385,431
Housing bond certificates of
deposit.......................... 7.00 16,000 16,000
Public funds...................... -- -- 100
---------- ----------
$6,356,448 $6,123,472
========== ==========
The combined weighted average interest rate of deposits at December 31, 1996
was 4.59%. The combined weighted average interest rate of deposits, including
the effects of interest rate exchange agreements ("Swaps") described in Note
13 below, was 4.67% at December 31, 1995. Coast had no remaining Swaps at
December 31, 1996.
Broker-originated deposits totaled $30.6 million and $34.7 million at
December 31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, Coast had accrued interest payable on
deposits of $1.5 million and $1.4 million, respectively, which is included in
other liabilities in the accompanying consolidated statement of financial
condition.
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,
1996.
REMAINING TERM TO MATURITY (IN MONTHS) AMOUNT
-------------------------------------- --------------
(IN THOUSANDS)
Three or less................................................. $ 495,714
Over three to six............................................. 341,031
Over six to twelve............................................ 285,675
Over twelve................................................... 91,481
----------
$1,213,901
==========
61
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Deposits at December 31, 1996, mature as indicated in the following table.
AMOUNT
--------------
(IN THOUSANDS)
Immediately withdrawable..................................... $1,403,826
Year Ending December 31,
1997....................................................... 4,499,642
1998....................................................... 350,539
1999....................................................... 42,400
2000....................................................... 15,855
2001....................................................... 12,577
Thereafter................................................. 31,609
----------
$6,356,448
==========
Interest expense by type of deposit account is summarized in the following
table for the periods indicated.
YEAR ENDED DECEMBER 31,
----------------------------
1996 1995 1994
-------- -------- --------
(IN THOUSANDS)
Checking and other demand deposits............. $ 9,720 $ 5,694 $ 3,230
Money market deposits.......................... 17,211 18,250 22,855
Time deposits.................................. 259,453 257,820 192,885
Early withdrawal penalties..................... (620) (869) (635)
-------- -------- --------
$285,764 $280,895 $218,335
======== ======== ========
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
$19.0 million, $14.2 million and $9.9 million for the years ended December 31,
1996, 1995 and 1994, 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, 1996.
CARRYING FAIR
VALUE VALUE
---------- ----------
(IN THOUSANDS)
Demand deposits........................................ $ 782,416 $ 782,416
Money market deposits.................................. 621,410 621,410
Time deposits.......................................... 4,952,622 4,962,360
---------- ----------
$6,356,448 $6,366,186
========== ==========
62
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, 1996 DECEMBER 31, 1995
----------------------------------------- --------------------------------------
RATES RATES
------------------- --------------------
RANGE RANGE
CARRYING WEIGHTED ---------- CARRYING FAIR WEIGHTED -----------
VALUE FAIR VALUE AVERAGE LOW HIGH VALUE VALUE AVERAGE LOW HIGH
---------- ---------- -------- ---- ---- -------- -------- -------- ---- -----
(DOLLARS IN THOUSANDS)
FHLB advances, due at
various dates through
1999................... $1,104,200 $1,102,783 5.51% 4.70% 8.70% $804,250 $808,300 6.04% 4.95% 10.03%
========== ========== ======== ========
Other borrowings:
Short-term:
Securities sold under
agreements to
repurchase, secured,
due in 1997........... $ 418,789 $ 418,150 5.40 5.18 5.63 $546,153 $546,335 5.80 5.74 6.00
Federal funds
purchased............. 149,466 149,465 6.39 6.00 7.00 110,120 110,120 5.37 4.73 6.00
---------- ---------- -------- --------
568,255 567,615 656,273 656,455
---------- ---------- -------- --------
Long-term:
Senior notes, due in
2000.................. 56,532 62,010 10.00 -- -- 56,227 59,944 10.00 -- --
Housing bond borrowings
secured, due in 1998,
2006 and 2010......... 18,734 17,919 3.96 3.55 4.00 20,840 19,242 4.73 4.40 4.80
---------- ---------- -------- --------
75,266 79,929 77,067 79,186
---------- ---------- -------- --------
$ 643,521 $ 647,544 $733,340 $735,641
========== ========== ======== ========
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,
---------------------
1996 1995
---------- ----------
(IN THOUSANDS)
Loans receivable..................................... $2,010,861 $1,964,570
MBS.................................................. 1,475,656 1,134,695
FHLB stock........................................... 90,882 85,837
---------- ----------
$3,577,399 $3,185,102
========== ==========
63
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, 1996, was as follows for the years indicated.
FHLB OTHER
ADVANCES BORROWINGS TOTAL
---------- ---------- ----------
(IN THOUSANDS)
Year Ending December 31, 1997.............. $ 954,200 $518,255 $1,472,455
1998..................................... 125,000 56,917 181,917
1999..................................... 25,000 -- 25,000
2000..................................... -- 56,532 56,532
2001..................................... -- -- --
Thereafter............................... -- 11,817 11,817
---------- -------- ----------
$1,104,200 $643,521 $1,747,721
========== ======== ==========
Securities sold under agreements to repurchase (commonly referred to as
reverse repurchase agreements) totaled $418.8 million and $546.2 million at
December 31, 1996 and 1995, respectively. During the term of the reverse
repurchase agreements, the underlying securities were not under Coast's
control, but, rather, the control of a primary securities dealer. The weighted
average interest rate of reverse repurchase agreements was 5.40% at December
31, 1996. Average balances of reverse repurchase agreements were $650.7
million and $856.7 million during the years ended December 31, 1996 and 1995,
respectively, and the maximum amount outstanding at any month end during the
years ended December 31, 1996 and 1995 was $959.9 million and $1.12 billion,
respectively.
Reverse repurchase agreements were secured by MBS with a carrying value of
$431.1 million and $566.3 million (included in the table above) at December
31, 1996 and 1995, respectively. These MBS had a fair value of $438.1 million
and $580.9 million at December 31, 1996 and 1995, respectively.
The following table describes the Company's Senior Notes and Coast's Capital
Notes as of December 31, 1996.
CARRYING FAIR INTEREST DATE
DESCRIPTION VALUE VALUE RATE DATE DUE AMOUNT ISSUED ISSUED
- ----------- -------- ------ -------- ------------- ------------- ---------
(IN MILLIONS) (IN MILLIONS)
Senior Notes (1)........ $ 56.5 $ 62.0 10% Mar. 01, 2000 $57.5 Apr. 1993
Capital Notes (2)....... 56.0 64.1 13 Dec. 31, 2002 57.5 Dec. 1992
------ ------
$112.5 $126.1
====== ======
- --------
(1) Interest is payable semiannually on April 1 and October 1. The Senior
Notes are redeemable at any time after April 1, 1998 at the option of the
Company as a whole or from time to time in part, at the redemption price
plus accrued interest to the redemption date.
(2) Interest is payable quarterly on March 31, June 30, September 30 and
December 31. The Capital Notes are redeemable by Coast in whole or in part
at any time after December 31, 1997 at the redemption price plus accrued
interest to the redemption date.
The combined weighted average interest rate of FHLB advances, other
borrowings, Capital Notes and Senior Notes, was 5.91% and 6.28% at December
31, 1996 and 1995, respectively.
At December 31, 1996 and 1995, the Company had accrued interest payable on
FHLB advances, other borrowings, Capital Notes and Senior Notes of $7.4
million and $10.8 million, respectively, which is included in other
liabilities in the accompanying consolidated statement of financial condition.
64
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,
-------------------------
1996 1995 1994
-------- -------- -------
(IN THOUSANDS)
FHLB advances...................................... $ 42,052 $ 56,632 $40,621
Short-term borrowings.............................. 46,348 59,677 32,677
Long-term borrowings............................... 14,486 14,926 15,086
-------- -------- -------
$102,886 $131,235 $88,384
======== ======== =======
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, 1996, FHLB advances were $1.10
billion, and the amount of additional credit available from the FHLB was $1.39
billion.
(9) INCOME AND OTHER TAXES
The following table summarizes the elements of income tax expense (benefit)
for the years ended December 31, 1996, 1995 and 1994.
FEDERAL STATE TOTAL
-------- ------- --------
(IN THOUSANDS)
1996:
Current....................................... $ -- $ -- $ --
Deferred...................................... (17,689) (3,796) (21,485)
-------- ------- --------
$(17,689) $(3,796) $(21,485)
======== ======= ========
1995:
Current....................................... $ -- $ -- $ --
Deferred...................................... 15,767 3,068 18,835
-------- ------- --------
$ 15,767 $ 3,068 $ 18,835
======== ======= ========
1994:
Current....................................... $ -- $ -- $ --
Deferred...................................... (7,676) (1,741) (9,417)
-------- ------- --------
$ (7,676) $(1,741) $ (9,417)
======== ======= ========
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 of the subject tax benefits in 1994.
65
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
A reconciliation from expected federal income tax expense (benefit) to
consolidated effective income tax expense (benefit) for the periods indicated
follows.
YEAR ENDED DECEMBER 31,
--------------------------
1996 1995 1994
-------- ------- -------
(DOLLARS IN THOUSANDS)
Statutory federal income tax rate............... 35% 35% 35%
======== ======= =======
Expected federal income tax expense (benefit)... $ (3,727) $18,073 $(5,584)
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)
State tax expense (benefit), net of federal
income tax effect............................ (259) 3,502 (646)
Basis in stock of subsidiary.................. -- (1,732) --
Reduction of liabilities from prior years..... (17,620) (916) (887)
Increase in base year reserve amount.......... -- (519) (1,129)
Amortization of goodwill...................... 382 427 498
Other......................................... (261) -- --
-------- ------- -------
$(21,485) $18,835 $(9,417)
======== ======= =======
During the last quarter of 1996 Coast completed a comprehensive review of
its overall tax position and future tax planning strategies which resulted in
a recognition of a $17.6 million tax benefit. The primary cause of the lower
effective tax rate for 1995 was the sale of CBCC, previously a subsidiary of
Coast. The effective tax rate on this transaction was lower than the statutory
rate due to a difference in the book and tax bases of Coast's investment in
CBCC.
On August 20, 1996, the President signed the Small Business Job Protection
Act (the "Act") into law. The Act repeals the reserve method of accounting for
bad debts for savings institutions, effective for taxable years beginning
after 1995. Coast, therefore, will be required to use the specific charge-off
method on its 1996 and subsequent federal income tax returns. Prior to 1996,
savings institutions that met certain definitional tests and other conditions
prescribed by the Internal Revenue Code were allowed to deduct, within
limitations, a bad debt deduction computed as a percentage of taxable income
before such deduction. The deduction percentage was 8% for the years ended
December 31, 1995 and 1994. Alternatively, a qualified savings institution
could have computed its bad debt deduction based upon its actual loan loss
experience (the "Experience Method"). Coast computed its bad debt deduction
utilizing the Experience Method in 1995 and 1994.
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.
Under the Act, Coast will be required to recapture its "applicable excess
reserves," which are its federal tax bad debt reserves at the end of 1987,
reduced proportionately for reductions in the Coast's loan portfolio since
that date (the "base year reserves"). Coast will include one-sixth of its
applicable excess reserves in taxable income in each year from 1996 through
2001. Coast has fully provided for the tax related to this recapture. As of
December 31, 1995, Coast had approximately $6.0 million of applicable excess
reserves and has fully provided for the tax related to this recapture. The
base year reserves will continue to be subject to recapture. At December 31,
1996, the amount of those reserves was approximately $103 million.
Circumstances that would require an accrual of a portion of or all of this
unrecorded tax liability are a significant reduction in qualifying loan levels
relative to the end of 1987, failure to meet the tax definition of a savings
institution, dividend payments in excess of current year or accumulated tax
earnings and profits, or other distributions in dissolution, liquidation or
redemption of Coast's stock.
66
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.
DECEMBER 31,
------------------------
1996 1995 1994
------- ------- --------
(IN THOUSANDS)
Deferred tax assets:
Loan loss allowances deferred for tax purposes...... $59,662 $41,632 $ 74,845
Net operating loss carryforwards.................... 23,839 19,597 13,571
Tax credit carryforwards............................ 6,095 5,942 5,942
Deferred compensation not yet deducted for tax
purposes........................................... 2,837 3,352 2,758
Branch sale gains recognized for tax purposes and
amortized for financial statement purposes......... 1,241 1,387 1,921
Interest income on nonaccrual loans for book
purposes, recognized for tax purposes.............. 897 3,032 1,850
Loan discounts arising from acquisitions............ 442 541 664
Securities marked to market for tax purposes only... -- 1,246 --
Securities marked to market for financial statement
purposes only...................................... -- -- 646
Other............................................... 231 608 366
------- ------- --------
Total deferred tax assets......................... 95,244 77,337 102,563
------- ------- --------
Deferred tax liabilities:
FHLB stock dividends deferred for tax purposes...... 20,471 18,267 16,369
Loan fees and origination costs capitalized for
financial statement purposes only.................. 10,043 7,038 3,788
Excess Mortgage Servicing Rights, not recognized for
tax purposes....................................... 9,585 5,097 8,674
Guaranteed payments recognized when received for tax
purposes........................................... 3,046 8,278 8,278
Securities marked to market for financial statement
purposes only...................................... 2,275 4,082 --
Depreciation for tax purposes in excess of such
amount for financial statement purposes............ 2,213 3,939 3,896
Securities marked to market for tax purposes only... 464 -- 4,638
Interest income on loans recognized on the cash
basis for tax purposes only........................ -- -- 757
------- ------- --------
Deferred tax liabilities.......................... 48,097 46,701 46,400
------- ------- --------
Net deferred tax asset.......................... $47,147 $30,636 $ 56,163
======= ======= ========
At December 31, 1996, the Company had net operating loss carryforwards
("NOLs") for federal income tax purposes of $65.8 million which are available
to offset future federal taxable income through 2011. The Company also had
alternative minimum tax credit carryforwards of approximately $5.4 million as
of December 31, 1996, which are available to reduce future regular federal
income taxes, if any, over an indefinite period.
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. The Internal Revenue Service is currently examining the
Company's returns for the years 1992 and 1993. The Company does not anticipate
that the examinations will result in any material adverse effect on its
financial condition or results of operations.
67
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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, 1996, and the aforementioned indenture
restrictions, the Company had approximately $1.2 million available for
distribution at December 31, 1996. 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 $71.4
million available for distribution at December 31, 1996. In addition, payment
of dividends in excess of Coast's accumulated earnings and profits as
calculated for tax purposes (approximately $144 million at December 31, 1995)
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,
------------------------------------------------
1996 1995 1994
--------------- --------------- ----------------
FULLY FULLY FULLY
PRIMARY DILUTED PRIMARY DILUTED PRIMARY DILUTED
------- ------- ------- ------- ------- -------
(IN THOUSANDS EXCEPT PER SHARE AMOUNTS)
Net earnings (loss)
applicable to common stock,
dilutive CSEs and
securities.................. $10,836 $10,836 $32,802 $32,802 $(6,538) $(6,538)
======= ======= ======= ======= ======= =======
Weighted average common
shares outstanding.......... 18,583 18,583 18,511 18,511 18,457 18,457
Dilutive CSEs from stock
options..................... 601 721 507 629 -- --
------- ------- ------- ------- ------- -------
Weighted average shares...... 19,184 19,304 19,018 19,140 18,457 18,457
======= ======= ======= ======= ======= =======
Net earnings (loss) per
share of common stock..... $ .56 $ .56 $ 1.72 $ 1.71 $ (.35) $ (.35)
======= ======= ======= ======= ======= =======
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
68
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
Exercise Price. A majority of the independent directors of the Company may
authorize the redemption of the Rights in whole at a price of $.01 per Right
at any time before the tenth business day following the date of public
announcement that any person has become a Control Person.
(11) REGULATORY CAPITAL
The Financial Institutions Reform Recovery and Enforcement Act of 1989
("FIRREA") and the regulations promulgated thereunder established certain
minimum levels of regulatory capital for savings institutions subject to OTS
supervision. Coast must follow specific capital guidelines established by the
OTS which involve quantitative measures of Coast's assets, liabilities and
certain off-balance sheet items. An institution that fails to comply with its
regulatory capital requirements must obtain OTS approval of a capital plan and
can be subject to a capital directive and certain restrictions on its
operations. At December 31, 1996, Coast's regulatory capital requirements
were:
. Tangible and core capital of 1.5 percent and 3 percent, respectively,
consisting principally of stockholders' equity, but excluding most
intangible assets such as goodwill and any net unrealized holding gains
or losses on debt securities available for sale.
. Risk-based capital consisting of core capital plus certain subordinated
debt and other capital instruments and, subject to certain limitations,
the portion of the GVA related to loans receivable, equal to 8 percent of
the value of risk-weighted assets.
At December 31, 1996, Coast was classified as "well capitalized" under the
prompt corrective action ("PCA") regulations adopted by the OTS pursuant to
the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").
To be categorized as "well capitalized", Coast must maintain minimum core
capital Tier 1 risk-based capital and risk-based capital ratios as set forth
in the table below. Coast's capital amounts and classifications are subject to
review by federal regulators. There are no conditions or events since December
31, 1996, that management believes have changed Coast's PCA category.
69
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes Coast's actual and required regulatory
capital as of December 31, 1996 and 1995:
TIER 1
TANGIBLE CORE RISK-BASED RISK-BASED
CAPITAL CAPITAL CAPITAL CAPITAL
-------- -------- ---------- ----------
(DOLLARS IN THOUSANDS)
DECEMBER 31, 1996:
Actual capital:
Amount......................... $460,621 $460,621 $460,621 $584,201
Ratio.......................... 5.33% 5.33% 8.57% 10.87%
Minimum required capital:
Amount......................... $129,727 $259,454 N/A $430,094
Ratio.......................... 1.50% 3.00% N/A 8.00%
Minimum PCA well-capitalized
capital:
Amount......................... N/A $432,424 $322,571 $536,467
Ratio.......................... N/A 5.00% 6.00% 10.00%
DECEMBER 31, 1995:
Actual capital:
Amount......................... $449,242 $449,242 $449,242 $568,415
Ratio.......................... 5.47% 5.47% 8.58% 10.85%
Minimum required capital:
Amount......................... $123,135 $246,271 N/A $419,017
Ratio.......................... 1.50% 3.00% N/A 8.00%
Minimum PCA well-capitalized
capital:
Amount......................... N/A $410,451 $314,263 $522,434
Ratio.......................... N/A 5.00% 6.00% 10.00%
(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.
70
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table sets forth the status of funding of Coast's pension plan
at December 31, 1996 and 1995, 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,
------------------
1996 1995
-------- --------
(IN THOUSANDS)
Actuarial present value of benefit obligations:
Vested................................................ $ 41,102 $ 38,143
Non-vested............................................ 1,656 1,963
-------- --------
Accumulated benefit obligations..................... $ 42,758 $ 40,106
======== ========
Pension plan assets at fair value (primarily listed
stocks, U.S. government obligations, corporate
obligations and Coast deposits)........................ $ 51,693 $ 46,974
Projected benefit obligations for service rendered to
date................................................... (48,243) (45,256)
-------- --------
Pension plan assets in excess of projected benefit
obligation............................................. 3,450 1,718
Activity not recognized in net pension plan cost:
Net gain.............................................. (6,720) (1,555)
Unrecognized prior service cost....................... 1,727 194
Net asset at December 31, 1985, being amortized over
15 years............................................. (1,206) (1,508)
-------- --------
Accrued pension plan costs.......................... $ (2,749) $ (1,151)
======== ========
Net pension plan cost:
Interest on projected benefit obligations............. $ 3,300 $ 3,040
Service costs......................................... 1,888 1,428
Return on pension plan assets......................... (7,174) (10,004)
Amortization and deferral, net........................ 3,584 6,350
-------- --------
$ 1,598 $ 814
======== ========
For the years ended December 31, 1996 and 1995, the weighted average
discount rates used in determining the actuarial present value of the
accumulated and projected benefit obligations were 7.50% and 7.25%,
respectively. The rate of increase in future compensation was projected to be
4.00% and 3.75% for the years ended December 31, 1996 and 1995, respectively.
The expected long- term rate of return on assets was 9% for the years ended
December 31, 1996 and 1995. Total pension plan expenses were $4.1 million,
$2.5 million and $2.7 million for the years ended December 31, 1996, 1995 and
1994, respectively.
Effective January 1, 1996, the Company adopted SFAS No. 123, Accounting for
Stock-Based Compensation, which permits a company to account for stock options
granted under either the fair-value-based or the intrinsic-value-based (as
described in Accounting Principles Bulletin Opinion No. 25) method of
accounting; however, if the company elects to account for options granted
under the intrinsic-value-based method, it must make certain disclosures with
respect thereto. The Company has elected to account for stock options granted
under the intrinsic-value-base method of accounting.
71
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
In the second quarter of 1996, the stockholders of the Company approved the
1996 Coast Savings Financial, Inc. Equity Incentive Plan (the "1996 Plan"),
under which the Company could award options to purchase up to 929,196 shares
of its common stock, at exercise prices equal to the market price of the stock
on the date the stock options were awarded, and with lives of up to ten years.
The following table contains certain information with respect to the stock
options granted in 1996 under the 1996 Plan.
OPTIONS GRANTED DURING 1996 ASSUMPTIONS USED IN DETERMINING OPTIONS' VALUES
- -------------------------------------------------------- -------------------------------------------------- CALCULATED
EXPECTED VALUE OF
AMOUNT EXERCISE EXPECTED RISK-FREE EXPECTED DIVIDEND EACH
GRANT DATE GRANTED PRICE DATE VESTING TERM TERM(1) RATE(2) VOLATILITY(3) RATE(4) OPTION
- ---------- ------- -------- -------------- -------- -------- --------- ------------- -------- ----------
April 24................ 40,000 $31.00 April 24, 1997 10 years 8 years 6.4% 53% 0% $21
May 23.................. 817,500 33.00 Immediately 10 years 8 years 6.7 52 0 20
June 26................. 5,000 31.75 June 26, 1997 10 years 10 years 6.9 55 0 26
December 4.............. 2,500 35.00 Immediately 10 years 10 years 6.1 55 0 25
- --------
(1) The expected terms of the options are based on the Company's historical
experience with its outstanding options.
(2) The risk-free rate is the market rate for U.S. Government securities with
the same maturities as the options, determined as of the dates the options
were granted.
(3) The volatility of the company's stock is based on historical information.
(4) There is no dividend rate assumed, as the Company has not paid a dividend
since 1990, nor does it anticipate declaring a dividend in the foreseeable
future.
If the Company had accounted for the effects of the issuance of the stock
options utilizing the fair-value-based method of accounting, after-tax
earnings for the year ended December 31, 1996 would have been $.7 million, or
$.03 per share of common stock. It is not likely that the pro forma effects of
the options issued during 1996 are representative of the effects, if any, of
any awards of stock options that could be issued by the Company in the future.
Pursuant to the 1985 Stock Option and Stock Appreciation Rights Plan (the
"1985 Plan") which had an approved term of ten years, stock options having
lives of up to ten years were granted which give the owner of the options the
right to purchase shares of the Company's common stock at a price equal to
their fair market value on the date the options were granted.
The table below reflects, for the periods indicated, the activity in the
Company's stock options issued under both the 1985 and the 1996 Plans.
AT FOR THE YEAR ENDED
DECEMBER 31,
----------------------------
1996 1995 1994
--------- -------- -------
Balance at beginning of period................. 832,943 968,406 976,186
Granted........................................ 865,000 -- --
Canceled or expired............................ (5,000) (10,000) (6,780)
Exercised...................................... (1,800) (125,463) (1,000)
--------- -------- -------
Balance at end of period....................... 1,691,143 832,943 968,406
========= ======== =======
Options exercisable............................ 1,646,143 832,943 968,406
Shares available for grant..................... 64,146 98,346 88,346
========= ======== =======
Weighted average option price per share:
Under option................................. $ 21.01 $ 8.71 $ 8.63
Exercisable.................................. 20.74 8.71 8.63
Exercised.................................... 11.12 7.92 11.28
========= ======== =======
72
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
The following table summarizes information with respect to the Company's
stock options outstanding as of December 31, 1996.
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
RANGE ------------------------------------------------ -------------------------------
OF NUMBER WEIGHTED-AVERAGE WEIGHTED- NUMBER WEIGHTED-
EXERCISE OUTSTANDING REMAINING AVERAGE OUTSTANDING AVERAGE
PRICES AT DEC. 31, 1996 CONTRACTUAL LIFE EXERCISE PRICE AT DEC. 31, 1996 EXERCISE PRICE
-------- ---------------- ---------------- -------------- ---------------- --------------
$2 to 5................. 276,780 4.2 years $ 3.27 276,780 $ 3.27
$5 to 10................ 163,305 3.5 years 6.78 163,305 6.78
$10 to 15............... 391,058 5.7 years 13.36 391,058 13.36
$30 to 35............... 860,000 9.4 years 32.91 815,000 33.01
--------- ---------
1,691,143 7.1 years 21.01 1,646,143 20.74
========= =========
Pursuant to the 1985 Plan, stock appreciation rights ("SARs") having lives
of up to ten years were granted which give the owners of the SARs the right,
upon exercise of the SARs, to receive an amount equal to the excess of the
fair market value of the Company's common stock over the price assigned to the
SARs. The Company recorded expenses for SARs totaling $1.2 million, $1.1
million and $1.2 million for the years ended December 31, 1996, 1995 and 1994,
respectively. The table below reflects SARs activity for the periods
indicated.
YEAR ENDED DECEMBER 31,
-----------------------------------------------------------
1996 1995 1994
------------------- ------------------- -------------------
SARS AVERAGE SARS AVERAGE SARS AVERAGE
OUTSTANDING PRICE OUTSTANDING PRICE OUTSTANDING PRICE
----------- ------- ----------- ------- ----------- -------
Balance at beginning of
period................. 180,707 $11.25 181,907 $11.25 201,130 $11.54
Canceled or expired..... -- -- -- -- (17,467) 14.60
Exercised............... -- -- (1,200) 11.28 (1,756) 11.28
------- ------- -------
Balance at end of
period................. 180,707 11.25 180,707 11.25 181,907 11.25
======= ======= =======
(13) OFF-BALANCE SHEET FINANCIAL INSTRUMENTS
Coast is a party to off-balance sheet financial instruments containing
certain types of risk in the normal course of business in order to meet the
borrowing needs of its customers and to reduce its own exposure to
fluctuations in interest rates. These financial instruments may include
commitments to extend credit in the form of loans or through letters of
credit, Swaps and Caps. These instruments involve, to varying degrees,
elements of credit and interest rate risk in excess of the dollar amount of
liability set forth in the accompanying consolidated statement of financial
condition. The contractual or notational amounts of those instruments reflect
the extent of involvement the Company has in particular classes of financial
instruments.
At December 31, 1996, Coast had letters of credit outstanding aggregating
$377.6 million which are conditional commitments issued to guarantee the
performance of a customer to a third party. The credit risk involved in these
letters of credit is essentially the same as that involved in making real
estate loans. Coast's letters of credit generally expire from one to twelve
years after the date of issuance. The outstanding letters of credit were
issued in connection with real estate development activities. The letters of
credit were collateralized by $26.4 million of Coast's MBS and $362.3 million
of FHLB of San Francisco letters of credit (which letters of credit were in
turn collateralized by $427.9 million of Coast's loans and securities) at
December 31, 1996. 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
73
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
described above. These letters of credit fees amounted to $2.4 million, $5.9
million and $9.2 million, in 1996, 1995 and 1994, 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, 1996, Coast had $104.2 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 $2.3 million as of
December 31, 1996.
At December 31, 1996, Coast had $79.2 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 has at times utilized off-balance sheet financial instruments in order
to reduce its own exposure to fluctuations in interest rates. These financial
instruments include Swaps and Caps, both of which are considered derivative
financial instruments held for purposes other than trading. Swaps generally
involve the exchange of fixed and floating rate interest payment obligations
without the exchange of the underlying notional principal amounts. At December
31, 1996, Coast had no remaining Swaps.
The net effect of the Swaps, exclusive of interest on the related deposits,
was to record $38 thousand of interest income in 1996 and $.8 million and $6.2
million of interest expense during 1995 and 1994, respectively, which is
included in interest expense on deposits in the accompanying consolidated
statement of operations.
During 1985, Coast entered into a Cap which expires in 1997. The notational
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%. No payments were made to Coast under the Cap
for the periods presented, and 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,
---------------
1996 1995 1994
---- ---- ----
(IN MILLIONS)
Balance at beginning of period.............................. $ 17 $ 8 $ 14
Additions charged to operations............................. 11 -- 9
Losses charged.............................................. (19) -- (15)
Reallocation from loan-related assets....................... -- 9 --
---- ---- ----
Balance at end of period.................................... $ 9 $ 17 $ 8
==== ==== ====
At December 31, 1996, $5 million of the GVA attributable to off-balance
sheet activity related to Coast's letters of credit and $4 million related to
loans sold with recourse. While based on currently available information,
Coast believes it has adequately provided for losses which might emanate from
these sources, deterioration of economic conditions or other circumstances
could result in the need for additional allowances.
74
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(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 AMOUNTS)
1996
Interest income................. $150,982 $149,176 $149,733 $153,559 $603,450
Interest expense................ 96,706 95,148 97,001 99,795 388,650
Net interest income............. 54,276 54,028 52,732 53,764 214,800
Provision for loan losses....... 10,000 10,000 10,000 40,000 70,000
Net earnings.................... 9,502 7,795 (16,100) 9,639 10,836
Primary earnings per share of
common stock:
Net earnings (1).............. .50 .41 (.87) .50 .56
Fully diluted earnings per share
of common stock:
Net earnings (1).............. .50 .41 (.87) .50 .56
Market range:
High bid...................... 33.750 34.000 35.125 37.375
Low bid....................... 26.500 29.250 29.250 37.375
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
- --------
(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.
75
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.
STATEMENT OF FINANCIAL CONDITION
DECEMBER 31,
-----------------
1996 1995
-------- --------
(IN THOUSANDS)
ASSETS
Cash......................................................... $ 42 $ 25
Short term investments....................................... 4,795 2,394
Mortgage-backed securities ("MBS") available for sale........ 7,847 9,363
Interest receivable and other assets......................... 332 431
Investment in subsidiary..................................... 469,682 463,077
-------- --------
$482,698 $475,290
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Senior Notes................................................. $ 56,532 $ 56,227
Other liabilities............................................ 1,635 1,629
-------- --------
58,167 57,856
-------- --------
Stockholders' equity:
Common stock............................................... 186 186
Additional paid-in capital................................. 265,055 265,018
Unrealized gain on securities available for sale........... 2,778 6,554
Retained earnings.......................................... 156,512 145,676
-------- --------
Total stockholders' equity............................... 424,531 417,434
-------- --------
$482,698 $475,290
======== ========
STATEMENT OF OPERATIONS
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Dividends received from subsidiary.................. $ 6,000 $ 6,000 $ 2,000
------- ------- -------
Interest Income:
MBS............................................... 485 560 504
Investment securities............................. 216 291 156
------- ------- -------
701 851 660
------- ------- -------
Equity in undistributed net earnings (loss) of
subsidiary......................................... 7,918 30,038 (5,401)
Interest expense on borrowings...................... (6,105) (6,105) (6,102)
General and administrative expense.................. (68) (140) (29)
Income tax benefit.................................. 2,390 2,158 2,334
------- ------- -------
Net earnings (loss)............................. $10,836 $32,802 $(6,538)
======= ======= =======
76
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
STATEMENT OF CASH FLOWS
YEAR ENDED DECEMBER 31,
---------------------------
1996 1995 1994
------- -------- --------
(IN THOUSANDS)
Cash flows from operating activities:
Net earnings (loss)............................. $10,836 $ 32,802 $ (6,538)
Adjustments to reconcile net earnings (loss) to
net cash provided (used) by operations:
Amortization of premiums and discounts........ 345 346 346
Net (increase) decrease in interest
receivable................................... 116 (119) 10
Deferred income tax benefit................... (2,390) (2,158) (2,334)
Equity in net (earnings) loss of subsidiary... (7,918) (30,038) 5,401
Other......................................... 48 (864) 43
------- -------- --------
Total adjustments........................... (9,799) (32,833) 3,466
------- -------- --------
Net cash provided (used) by operating
activities................................. 1,037 (31) (3,072)
------- -------- --------
Cash flows from investing activities:
Principal repayments on MBS available for
sale......................................... 1,344 1,043 1,444
Equity investment in subsidiary............... -- (3,000) --
------- -------- --------
Net cash provided (used) by investing
activities................................. 1,344 (1,957) 1,444
------- -------- --------
Cash flows from financing activities:
Common stock options exercised................ 37 1,858 11
------- -------- --------
Net cash provided by financing activities... 37 1,858 11
------- -------- --------
Net increase (decrease) in cash and cash
equivalents................................ 2,418 (130) (1,617)
Cash and cash equivalents at beginning of year.... 2,419 2,549 4,166
------- -------- --------
Cash and cash equivalents at end of year.......... $ 4,837 $ 2,419 $ 2,549
======= ======== ========
Supplemental schedule of noncash investing
activities:
Unrealized gain (loss) on securities available
for sale, net of taxes......................... $(3,776) $ 7,560 $(11,827)
77
COAST SAVINGS FINANCIAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
(17) MORTGAGE BANKING ACTIVITIES
In recent years, the primary reasons Coast has sold mortgage loans have been
to reduce asset size or constrain asset growth and to liquidate newly
originated fixed rate product. The following table represents components of
the Company's mortgage banking activities for each of the periods indicated.
AT OR FOR THE YEAR ENDED
DECEMBER 31,
----------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Loans receivable held for sale:
Loans originated, net of refinances...... $ 130,678 $ 146,024 $ 516,343
Sale of loans............................ 105,329 44,197 28,398
Gain (loss) on sales..................... (304) 403 (2,352)
Balance at end of period, at the lower of
amortized historical cost or fair value. 106,122 221,032 160,665
MBS available for sale:
Sale of MBS.............................. -- 35,335 334,617
Gain (loss) on sales..................... -- (287) 1,812
Balance at end of period, at fair value.. 312,002 354,398 328,913
Loans serviced for others.................. 3,067,843 3,416,880 3,960,564
Loan servicing fee income.................. 8,847 9,829 10,715
The following table summarizes the activity in the capitalized Excess
Mortgage Servicing Rights, which are included in interest receivable and other
assets in the accompanying consolidated statement of financial condition, for
the periods indicated.
YEAR ENDED DECEMBER 31,
-------------------------
1996 1995 1994
------- ------- -------
(IN THOUSANDS)
Balance at beginning of period...................... $33,572 $38,849 $52,290
Additions........................................... 2,776 284 6,176
Amortization........................................ (4,229) (5,021) (7,968)
Adjustments due to prepayments exceeding expected
levels............................................. (442) (540) (1,758)
Elimination of Excess Mortgage Servicing Rights..... -- -- (9,891)
------- ------- -------
Balance at end of period............................ $31,677 $33,572 $38,849
======= ======= =======
There were no Mortgage Servicing Rights capitalized during 1996.
During the years ended December 31, 1996, 1995 and 1994, Coast did not sell
loans with recourse or subordination. At December 31, 1996, 1995 and 1994, the
principal balances of loans sold with recourse or subordination totaled $359.4
million, $398.5 million and $437.9 million, respectively, and the amount of
recourse or subordination against Coast totaled $73.8 million, $78.5 million
and $84.4 million, respectively. Losses on loans sold with recourse or
subordination totaled $1.9 million, $4.4 million and $2.2 million in 1996,
1995 and 1994, respectively.
78
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 on 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,
---------------------------------
1996 1995 1994
---------- ---------- ----------
(IN THOUSANDS)
Revenues:
Coast..................................... $ 638,119 $ 655,795 $ 521,152
---------- ---------- ----------
CFS:
Insurance/annuity/mutual fund sales
commissions............................ 13,106 12,675 13,226
Trustee and reconveyance fees and other. 2,330 2,330 3,176
---------- ---------- ----------
15,436 15,005 16,402
---------- ---------- ----------
Consolidated revenues................... $ 653,555 $ 670,800 $ 537,554
========== ========== ==========
Earnings (loss) before income tax expense
(benefit):
Coast..................................... $ (21,100) $ 41,291 $ (27,582)
CFS....................................... 10,451 10,346 11,627
---------- ---------- ----------
Consolidated earnings (loss) before
income tax expense (benefit)........... $ (10,649) $ 51,637 $ (15,955)
========== ========== ==========
Assets:
Coast..................................... $8,702,259 $8,248,619 $8,194,433
CFS....................................... 2,693 3,061 2,084
---------- ---------- ----------
Consolidated assets..................... $8,704,952 $8,251,680 $8,196,517
========== ========== ==========
79
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, 1996
--------------------------------------------------
1996 1995
------------------------ ------------------------
CARRYING FAIR CARRYING FAIR
VALUE VALUE VALUE VALUE
----------- ----------- ----------- -----------
(IN THOUSANDS)
ASSETS
Cash and due from banks
(Note 2).................. $ 138,861 $ 138,861 $ 119,717 $ 119,717
Federal funds sold and
other short term
investments (Note 2)...... 198,795 198,795 30,394 30,394
Investment securities (Note
2)........................ 35,833 35,980 72,785 73,186
Loans receivable, net (Note
3)........................ 5,749,985 5,830,989 5,245,464 5,403,392
Loans receivable held for
sale (Note 3)............. 106,122 109,566 221,032 229,955
MBS (Note 4)............... 1,731,268 1,740,075 1,817,403 1,830,640
MBS available for sale
(Note 4).................. 312,002 312,002 354,398 354,398
FHLB stock (Note 2)........ 90,882 90,882 85,837 85,837
LIABILITIES
Deposits (Note 7).......... (6,356,448) (6,366,186) (6,123,472) (6,134,630)
FHLB advances (Note 8)..... (1,104,200) (1,102,783) (804,250) (808,300)
Other borrowings (Note 8).. (643,521) (647,544) (733,340) (735,641)
Capital Notes (Note 8)..... (55,997) (64,113) (55,746) (65,406)
OFF-BALANCE SHEET FINANCIAL
INSTRUMENTS (NOTE 13)
Swaps...................... -- -- -- 310
Caps....................... -- -- -- --
Commitments to originate
mortgage loans............ -- 2,252 -- 2,194
Letters of credit.......... -- (5,000) -- (12,000)
Loans sold with recourse... -- (4,000) -- (5,000)
80
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 23, 1997 ("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.
81
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 laws (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)
4.2 Shareholder Rights Plan (Exhibit 1.1 to Form 8-A dated September 1,
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** 1996 Coast Savings Financial, Inc., Equity Incentive Plan (Exhibit 4.1
to Form S-8 dated June 20, 1996)
10.2** Board of Directors Retirement Plan of Coast (Exhibit 10.21 to Form 8-K
dated September 1, 1989)
10.3** Form of Deferred Compensation Plan, effective January 29, 1996, as
amended
10.4** Pension Plan of Coast (Exhibit 10.22 to Form 8-K dated September 1,
1989)
10.5** First Amendment to Pension Plan of Coast (Exhibit 10.23 to Form 8-K
dated September 1, 1989)
10.6** Form of Post-Retirement Compensation Arrangement of Coast (Exhibit
10.9 to Form 10-K dated March 30, 1990)
10.7** Executive and Senior Management Short-Term Compensation Incentive
Plans of Coast, effective January 1, 1996 (Exhibit 10.6 to Form 10-K
dated March 27, 1996)
10.8** Executive and Senior Management Short-term Compensation Incentive Plan
effective January 1, 1997.
10.9** Amended and Restated Executive Supplemental Retirement Plan of Coast,
dated February 28, 1996 (Exhibit 10.7 to Form 10-K dated March 27,
1996)
10.10** 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)
10.11** 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)
10.12** Amended and Restated Employment Agreement between Ray Martin and Coast
dated as of January 1, 1996 (Exhibit 10.11 to Form 10-K dated March
27, 1996)
10.13** Amended and Restated Employment Agreement between Robert L. Hunt II
and Coast dated as of January 1, 1996 (Exhibit 10.12 to Form 10-K
dated March 27, 1996)
10.14** Amended and Restated Employment Agreement between Norman H. Raiden and
Coast dated as of January 1, 1996 (Exhibit 10.13 to Form 10-K dated
March 27, 1996)
82
EXHIBIT
NUMBER EXHIBIT
------- -------
10.15** Amended and Restated Employment Agreement between James R. Boyle and
Coast dated as of January 1, 1996 (Exhibit 10.14 to Form 10-K dated
March 27, 1996)
10.16** Amended Restated Employment Agreement between James F. Barritt and
Coast dated as of January 1, 1996 (Exhibit 10.16 to Form 10-K dated
March 27, 1996)
10.17** 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).
10.18** Deferred Compensation Death Benefit Plan between Leon S. Angvire and
Coast (Exhibit 10.24 to Form 10-K dated March 30, 1990)
10.19** Severance Agreement between Gerald I. Rich and Coast dated January 20,
1995 (Exhibit 10.27 to Form 10-K dated March 28, 1995)
10.20** Severance Agreement between Mark T. Neal and Coast dated January 20,
1995 (Exhibit 10.28 to Form 10-K dated March 28, 1995)
10.21** 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)
23.1 Consent of KPMG Peat Marwick LLP
27.1 Financial Data Schedule
- --------
* 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, 1996.
83
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.
By: /s/ Ray Martin
--------------------------------
RAY MARTIN
CHAIRMAN OF THE BOARD
AND CHIEF EXECUTIVE OFFICER
Date: March 25, 1997
84
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 DATE INDICATED.
NAME CAPACITY DATE
---- -------- ----
/s/ Ray Martin Chairman of the Board, March 25, 1997
____________________________________ Chief Executive Officer
(RAY MARTIN) and Director (Principal
Executive Officer)
/s/ Robert L. Hunt II President, Chief Operating March 25, 1997
____________________________________ Officer and Director
(ROBERT L. HUNT II)
/s/ James F. Barritt Senior Executive Vice March 25, 1997
____________________________________ President and Chief
(JAMES F. BARRITT) Financial Officer
(Principal Financial and
Accounting Officer)
/s/ Leon S. Angvire Director March 25, 1997
____________________________________
(LEON S. ANGVIRE)
/s/ John C. Argue Director March 25, 1997
____________________________________
(JOHN C. ARGUE)
/s/ Gerald D. Barrone Director March 25, 1997
____________________________________
(GERALD D. BARRONE)
/s/ Joan Milke Flores Director March 25, 1997
____________________________________
(JOAN MILKE FLORES)
/s/ Jack P. Libby Director March 25, 1997
____________________________________
(JACK P. LIBBY)
/s/ Thomas V. McKernan, Jr. Director March 25, 1997
____________________________________
(THOMAS V. MCKERNAN, JR.)
/s/ James P. Miscoll Director March 25, 1997
____________________________________
(JAMES P. MISCOLL)
/s/ Keith W. Renken Director March 25, 1997
____________________________________
(KEITH W. RENKEN)
/s/ Harold B. Starkey, Jr. Director March 25, 1997
____________________________________
(HAROLD B. STARKEY, JR.)
85
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 of the Board and Chief Executive Officer
THOMAS V. MCKERNAN, JR.
JAMES P. MISCOLL
KEITH W. RENKEN
HAROLD B. STARKEY, JR.
Officers
RAY MARTIN*
Chairman of the Board and Chief Executive Officer
ROBERT L. HUNT II*
President and Chief Operating Officer
JAMES F. BARRITT*
Chief Financial Officer and Senior Executive
Vice President
JAMES R. BOYLE*
Senior Executive Vice President
Loan Group
NORMAN H. RAIDEN*
Senior Executive Vice President
Legal/Appraisal/MIS Group
HOWARD BENNETT, JR.
Senior Vice President
Branch Division
RON FOX
Senior Vice President and Chief Appraiser
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.
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
CHEMICALMELLON SHAREHOLDER SERVICE
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 23, 1997, 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
8433 Fallbrook Avenue, West Hills, CA 91304-3226 (818) 316-8800